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United Cable Television of Baltimore Limited Partnership v. Louis Burch et al., No. 82, September Term, 1998.

[Contracts - Liquidated Damages versus Penalty - Subscription contract for cable t.v. services provides for late charge of $5.00 when full payment of monthly billing not made by due date. Held: Subscriber's promise is a contract for the payment of money. Under common law, damages for breach are interest at lawful rate. No statute changes common law rule for transactions involved, so that rate is set by Maryland Constitution. Attempt to collect in excess of lawful rate is unenforceable as a penalty.]

UNITED CABLE TELEVISION OF BALTIMORE LTD. PARTNERSHIP v. LOUIS BURCH et al.

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In the Court of Appeals of Maryland Case No. 82 September Term 1998

ORDER
The Court having considered the two motions for reconsideration and the four motions for leave to file amicus curiae memoranda or briefs, it is this 26TH day of July, 1999,

ORDERED, by the Court of Appeals of Maryland, that the motion for reconsideration filed by the appellees, Louis Burch, et al., be, and it is hereby, granted, and, it is further ORDERED that the opinion of the Court filed on June 8, 1999 be, and it is hereby, withdrawn, and the opinion filed with the date of this Order is substituted in lieu of the opinion filed on June 8, 1999, and, it is further ORDERED that the motion for reconsideration filed by the appellant, United Cable Television of Baltimore Ltd. Partnership, be, and it is hereby, denied, and, it is further ORDERED, that the motions of amici curiae to file memoranda, the first filed collectively Seniors by National Vehicle Leasing Maryland Association; National Multi-Housing Council; National Apartment Association; American Housing Association; Retailers Association; International Furniture Rental Association; and Self-Storage Association, the second filed by the Maryland Chamber of Commerce, and the third filed by Telecommunications

Association of Maryland, Delaware and the District of Columbia, be, and they are, hereby, granted, and it is further ORDERED, that the motion of amicus curiae, Maryland Bankers Association for leave to file a brief in support of Appellant's motion for reconsideration, with accompanying memorandum of law in support thereof, be, and it is hereby, denied.

/s/Robert M. Bell Chief Judge

Opinion follows:

Circuit Court for Baltimore City - Case #95311038/CL204287

IN THE COURT OF APPEALS OF MARYLAND No. 82 September Term, 1998 _________________________________________

UNITED CABLE TELEVISION OF BALTIMORE LIMITED PARTNERSHIP

v.

LOUIS BURCH et al.

_________________________________________ Bell, C.J. Eldridge Rodowsky Chasanow Raker Wilner Cathell, JJ. _________________________________________ Opinion by Rodowsky, J. Dissenting Opinion by Chasanow, J. _________________________________________

Filed: July 26, 1999

This class action is brought on behalf of consumer subscribers to the cable television service in Baltimore City. The action challenges the five dollar per month late fee that is charged subscribers. The Circuit Court for Baltimore City concluded that this late fee was a penalty and not an enforceable liquidated damages provision, because it unreasonably overestimated the supplier's costs resulting from late payment. We agree that the charge is a penalty, but we arrive at that conclusion because a subscriber's undertaking is a contract to pay money, damages for the breach of which are the principal balance due, with lawful interest. The respondent, and defendant below, is United Cable Television of Baltimore Limited Partnership (United) which does business as TCI of Baltimore. United is a subsidiary of Telecommunications, Inc. (TCI), a Denver-based company, which owns and operates approximately forty cable franchises. TCI indirectly owns a majority interest in United. For the purpose of providing management support to its various local cable affiliates (cable systems), TCI is divided into geographical divisions. Each division is wholly owned by TCI. The management support provided to United and the other cable systems by the divisions includes legal, human resources, marketing, and accounting. Approximately 112,000 residents of Baltimore are provided cable services by United. United offers its services on a month-to-month basis. During the period with which we are concerned, namely, November 7, 1992, to the present, United offered a variety of channel service combinations and selections for which

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the respective monthly subscription prices varied at different times during the relevant period. The basic plan furnishes the fewest number of channels, and the circuit court used a figure of approximately twenty dollars as the subscription price for basic service. When first instituted in June 1990, United's late fee was three dollars. The fee was increased to four dollars in February 1992, and it reached the present five dollar level in January 1993. Each time United increased its late fees, it notified customers of the changes by billing inserts. In billing its customers, United operates on billing cycles which run somewhat in advance of the period of cable service that is being billed. Any given customer's billing cycle begins three days in advance of the approximately thirty day service period for which the bill is sent. Bills become due and payable six days after the commencement of the then current service period. The bills indicate that the late fee is assessed on the fifteenth day of the then current service period. There was testimony that, as a matter of general practice, United did not impose its late fee until a few days after the fifteenth day of the service period. The next succeeding billing cycle begins on the twenty-seventh day of the then current service period. In addition to the subscription price for the immediately forthcoming service period, a bill from United will include any balance carried forward from the prior billing cycle, any payments and credits, any late charge, and the new balance. The contract between United and a subscriber is illustrated by a document entitled, "IMPORTANT NOTICES TO OUR CUSTOMERS," which reads:

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"Charges for service start within 24 hours after service is installed. The charges for one month's service, any deposits, and any installation or equipment-lease fees, are payable when service is installed. After that, we will bill you each month in advance for service .... "The bills you receive will show the total amount due and the payment due date. You agree to pay us monthly by the payment due date for that service and for any other charges due us, including any administrative fees due to late payments or any returned check fees. "If you do not pay your bill by the due date, you agree to pay us an administrative fee for late payment. The administrative fee is intended to be a reasonable advance estimate of our costs which result from customers' late payments and non-payments. Other fees or charges may also be assessed by your local cable system. "We do not anticipate that you will pay your bill late and the administrative fee is set in advance because it would be difficult to determine the costs associated with any one particular late payment. We do not extend credit to our customers and the administrative fee is not interest, a credit service charge or a finance charge." The document further provides that customers are permitted to cancel their cable service at any time without penalty by giving notice. Both the brochure and a rate card were provided to customers when they subscribed to United's cable services. Rate cards also were printed each month in United's program guide, which is sent to existing customers who order that service. Further, a statement of United's late fee policy was included in an annual customer mailing, and disclosures made on United's standard billing form apprised customers that late charges would be imposed for late payment. If a customer does not pay a bill when due, United begins its collection process by including a statement in the late-payer's next bill that the account is delinquent and that

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service will be disconnected if payment is not received. Upon receiving this notification, customers frequently call United in an attempt to clear up their delinquent accounts. United is required to maintain a customer service department, in part, to field the calls that result from the late fee notices. If a customer's account remains delinquent, United programs an automatic dialing system, called the "automatic response unit," to place telephone calls to the customer's residence. At about the same time, United mails a written reminder notice to the late-paying customer. These efforts result in more calls to United's headquarters. If an account remains delinquent after the phone calls and mailings, the company's employees perform a "soft" disconnection which prevents the late-paying customer from taking advantage of United's cable services and provides a message on the customer's screen to call United. This step generally leads to a third round of calls from customers who wish to reactivate their cable services. Subsequent to soft disconnection, the customer receives two final telephone calls from collection representatives employed by United. During the first call, the representative attempts to make payment arrangements with the customer. The second call warns the customer that hard disconnection is imminent and that the call is the customer's last opportunity to avoid that result. If the customer's bill remains unpaid, a technician employed by United drives to the customer's residence to seek payment of the bill. If the customer refuses to pay the overdue bill, the technician permanently interrupts the customer's cable service. United employees continue to make telephone calls to the customers after hard disconnect in an attempt to

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obtain payment of the bills. If these are unsuccessful United at some point writes the account off as a bad debt and turns it over to an outside collection agency. The complaint in the instant matter was filed in November 1995. The matter was tried for a period of three weeks in the spring and summer of 1997. The testimony of many witnesses was produced, and many exhibits were introduced. To a considerable degree the case was a battle of experts over quantifying the costs incurred by TCI when an account was not paid in full by the due date under the United-subscriber contract, and over which of those costs properly were to be included in computing a late charge. For example, after this action was instituted, United retained an accounting firm, Deloitte & Touche, to calculate the monthly cost of delinquencies per delinquent customer, and the author of that study concluded that the cost was $16.14. The Plaintiffs' expert opined that that cost was thirtyeight cents. After analyzing all of this evidence the circuit court concluded that the fee for late payment should be no more than fifty cents per month. The court concluded that five dollars was not a reasonable estimate of the damages that would be incurred by United if a customer failed to pay in full by the due date. Hence, the five dollar late charge could not be sustained as a valid liquidated damages provision; rather, it was a penalty. Accordingly, United was entitled only to its actual damages which, under the circuit court's analysis, was fifty cents per month. The court entered judgment against United for the "excessive" late fees collected by it from November 7, 1992, through September 20, 1997, in the amount of $6,701,503.60 and simple prejudgment interest calculated at six

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percent per annum in the amount of $897,015.11. Counsel fees were awarded on the theory that the efforts on behalf of the Plaintiffs had created a common fund. The court awarded counsel for the Plaintiffs one-third of the fund recovered in counsel fees and $85,615.60 in reimbursement for litigation expenses. The fees and litigation expenses were to be paid out of that fund. The circuit court further ordered, effective after all appeals had been determined or exhausted, that notice be given by mail and by newspaper advertisement to customers/subscribers advising those who had paid a late fee that they have six months within which to file a proof of claim for a pro rata share of the net common fund. The court then directed that the unclaimed remainder of the net common fund be divided into two equal shares, one of which is to be paid to the Baltimore City Mayor's Office of Cable and Communication and the other of which is to be paid to a charitable fund to be established per the court's order. United appealed to the Court of Special Appeals, and this Court, on its own motion, issued the writ of certiorari.1 I The essence of United's position is that it is entitled to recover as damages "six categories of late payment costs: (1) local office handling, mailing, and notification; (2) cost

The Plaintiffs' complaint alleged theories of liability other than the penalty versus liquidated damages theory. The Plaintiffs did not prevail in the circuit court on those other theories.

1

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of funds; (3) data processing and billing; (4) field collections; (5) in-house/outside collection; and (6) bad debt." Brief of Appellant at 14. Under United's theory, if United brought suit against a subscriber, after United's collection efforts had failed, United would have a right to produce proof as to each of the foregoing enumerated items of cost and, if that proof were accepted by the trier of fact, United would be entitled to a judgment for the principal balance due on the account plus damages reimbursing United for its additional costs. Inasmuch as proof of those costs is extremely difficult, particularly because United cannot predict when an account will go into default and how long it will remain delinquent, United asserts that it is entitled to make a reasonable estimate of its damages and include it in the contract as a liquidated sum or late charge which the subscriber agrees to pay. The short answer to United's contention is that it is not entitled to prove costs of collection as damages under a contract of the type at issue here. Under the contract, a subscriber promises to pay the account balance which is a specific amount appearing on the face of the bill and which is determined by the services rendered by United at agreed prices. A subscriber also promises to pay that amount by a specified date that also appears on the billing. Under Maryland law a United customer's promises are a contract to pay money. From this conclusion, two consequences flow that are relevant to this case. First, the measure of damages for the breach of a contract to pay money is the amount promised to be paid plus interest at the lawful rate from the due date to the date of judgment. Second, because this measure of damages is simply a matter of calculation, it

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may not be increased by a contractual liquidated damages provision requiring payment of a greater amount. The result is that the liquidated damages provision is a penalty. A Prejudgment interest comes in two varieties, discretionary and of right. Both versions are "in the nature of an element of damages." Maryland State Highway Admin. v. Kim, 353 Md. 313, 327, 726 A.2d 238, 245 (1999). There we said that "those instances in which pre-judgment interest is allowed as a matter of course [are] because 'the obligation to pay and the amount due had become certain, definite, and liquidated by a specific date prior to judgment so that the effect of the debtor's withholding payment was to deprive the creditor of the use of a fixed amount as of a known date.'" Id. at 326, 726 A.2d at 245 (quoting First Virginia Bank v. Settles, 322 Md. 555, 564, 588 A.2d 803, 807 (1991), in turn quoting David Sloane, Inc. v. Stanley G. House & Assocs., Inc., 311 Md. 36, 53-54, 532 A.2d 694, 702-03 (1987)). The contract to pay money is a subset of the class of cases described in Maryland State Highway Administration in that, in the contract to pay money, it is known at contract formation that "the obligation to pay and the amount due [would be] certain, definite, and liquidated by a specific date." As we said in Crystal v. West & Callahan, Inc., 328 Md. 318, 614 A.2d 560 (1992), "[t]he ordinary rule in contract cases, if the contract requires payment of a sum certain on a date certain, is [that] prejudgment interest typically is allowed as a matter of right." Id. at 343, 614 A.2d at 572. The rule has been applied in actions for past due rent, see Eidelman v. Walker & Dunlop, Inc., 265 Md. 538, 545, 290 A.2d 780, 784 (1972) ("Interest is recoverable as of

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right upon a contract to pay money upon a day certain."); Brown v. Bradshaw, 245 Md. 524, 539, 226 A.2d 565, 573 (1967); Dennison v. Lee, 6 G. & J. 383, 386 (1833); Newson's Adm'r v. Douglass, 7 H. & J. 417, 453-54 (1826). The rule has also been recognized in I.W. Berman Properties v. Porter Brothers, Inc., 276 Md. 1, 18, 344 A.2d 65, 76-77 (1995); Atlantic States Constr. Co. v. Drummond & Co., 251 Md. 77, 85, 246 A.2d 251, 255 (1968); and Affiliated Distillers Brands Corp. v. R.W.L. Wine & Liquor Co., 213 Md. 509, 516, 132 A.2d 582, 586 (1957). Of significance here is that "[w]here the contract or obligation is for the payment of a definite sum of money[,] the measure of damages is the amount of money promised to be paid, with legal interest, the allowance of interest being [a] matter of legal right." 1 J.P. Poe, Pleading and Practice in the Courts of Law in Maryland

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