Motion to Dismiss in Allied Cleaning Services, Inc., Guardian Building Services, Llc v. Christopher Doody, Kohlberg Kravis Roberts & Co., L.P. A/K/A Kohlberg Kravis & Roberts, Kkr Capital Markets Holdings L.P. A/K/A Kohlberg Kravis & Roberts, Kohlberg Kravis Roberts & Co., John Doe #1 Through John Doe #10| Trellis.Law

On April 20, 2017 a Motion-Secondary was filed involving a dispute between Allied Cleaning Services, Inc., Guardian Building Services, Llc, and Christopher Doody, John Doe #1 Through John Doe #10, Kkr Capital Markets Holdings L.P. A K A Kohlberg Kravis & Roberts, Kohlberg Kravis Roberts & Co., Kohlberg Kravis Roberts & Co., L.P. A K A Kohlberg Kravis & Roberts, for Commercial Division in the District Court of New York County.

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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
----------------------------------------------------------------- x
:
ALLIED CLEANING SERVICES, INC., sometimes : Index No. 652103/2017
d/b/a ALLIED CLEANING SERVICES and/or :
GUARDIAN BUILDING SERVICES, and :
GUARDIAN BUILDING SERVICES, LLC, :
sometimes d/b/a ALLIED CLEANING SERVICES, :
:
Plaintiffs, :
:
– against – :
:
CHRISTOPHER DOODY, KOHLBERG KRAVIS
:
ROBERTS & CO., L.P. a/k/a KOHLBERG KRAVIS
:
& ROBERTS, KKR CAPITAL MARKETS
:
HOLDINGS L.P. a/k/a KOHLBERG KRAVIS &
:
ROBERTS, KOHLBERG KRAVIS ROBERTS &
:
CO. and “JOHN DOE #1 through JOHN DOE #10,”
:
said names being fictitious and not presently known
:
to Plaintiffs, the person or parties intended being the
:
persons, parties, corporations, partnerships or entities,
:
if any, which are or may be a party to the contracts
:
with Plaintiffs,
:
Defendants. :
:
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DEFENDANTS’ REPLY MEMORANDUM OF LAW IN SUPPORT OF THEIR
MOTION TO DISMISS PORTIONS OF THE AMENDED COMPLAINT

COHEN & GRESSER LLP
Daniel H. Tabak
800 Third Avenue, 21st Floor
New York, NY 10022
(212) 957-7600

Attorneys for Defendants Kohlberg Kravis
Roberts & Co., L.P., KKR Capital Markets
Holdings L.P. and Kohlberg Kravis Roberts
& Co.

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .......................................................................................................... ii

PRELIMINARY STATEMENT .................................................................................................... 1

ARGUMENT .................................................................................................................................. 3

I. PLAINTIFFS’ FIRST AND SECOND CAUSES OF ACTION SHOULD BE
DISMISSED BECAUSE THE LIQUIDATED DAMAGE PROVISIONS
VIOLATE PUBLIC POLICY AND THERE IS NO ALLEGATION OF ACTUAL
DAMAGES ......................................................................................................................... 3

A. The Liquidated Damage Provisions Fail the First Requirement Because
Damages Can Be Readily Determined ................................................................... 3

B. The Liquidated Damage Provisions Fail the Second Requirement Because a
Seventy-Five Percent Recovery Is a Penalty That Is Disproportionate to
Actual Damages ...................................................................................................... 7

C. The Amended Complaint Still Does Not Allege Actual Damages Resulting
from Termination of the Contracts ....................................................................... 10

CONCLUSION ............................................................................................................................. 11

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TABLE OF AUTHORITIES

Page(s)

Cases

172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assoc., Inc.,
24 N.Y.3d 528, 2 N.Y.S.3d 39 (2014) ........................................................................................ 9

Adams v. Lindblad Travel, Inc.,
730 F.2d 89 (2d Cir. 1984) ......................................................................................................... 5

Addressing Systems & Products, Inc. v. Friedman,
59 A.D.3d 359, 874 N.Y.S.2d 430 (1st Dep’t 2009) ................................................................ 10

Ames Linen Serv. v. Katz,
8 A.D.3d 945, 779 N.Y.S.2d 600 (3d Dep’t 2004) ..................................................................... 6

BDO Seidman v. Hirshberg,
93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999) .................................................................................. 5

Crown IT Services, Inc. v. Koval-Olson,
11 A.D.3d 263, 782 N.Y.S.2d 708 (1st Dep’t 2004) .............................................................. 5, 6

J.R. Loftus, Inc. v. White,
85 N.Y.2d 874, 626 N.Y.S.2d 52 (1995) .................................................................................... 5

JMD Holding Corp. v. Congress Financial Corp.,
4 N.Y.3d 373, 795 N.Y.S.2d 502 (2005) .................................................................................... 6

Lexington 360 Assocs. v. First Union Nat’l Bank of N. Carolina,
234 A.D.2d 187, 651 N.Y.S.2d 490 (1st Dep’t 1996) .............................................................. 11

Morgan Servs., Inc. v. Lavan Corp.,
59 N.Y.2d 796, 464 N.Y.S.2d 733 (1983) .................................................................................. 6

Rattigan v. Commodore Int'l Ltd.,
739 F. Supp. 167 (S.D.N.Y. 1990) ........................................................................................... 10

Sage Realty Corp. v. Proskauer Rose LLP,
251 A.D.2d 35, 675 N.Y.S.2d 14 (1st Dep’t 1998) .................................................................... 1

Sebastian Holdings, Inc. v. Deutsche Bank AG,
78 A.D.3d 446, 912 N.Y.S.2d 13 (1st Dep’t 2010) .................................................................... 8

Truck Rent-A-Center, Inc. v. Puritan Farms 2nd Inc.,
41 N.Y.2d 420, 393 N.Y.S.2d 365 (1977) .................................................................................. 6

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Page(s)

Vernitron Corp. v. CF 48 Assocs.,
104 A.D.2d 409, 478 N.Y.S.2d 933 (2d Dep’t 1984) ................................................................. 4

Willner v. Willner,
145 A.D.2d 236, 538 N.Y.S.2d 599 (2d Dep’t 1989) ................................................................. 4

iii

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Defendants Kohlberg Kravis Roberts & Co. L.P., KKR Capital Markets Holdings L.P.

and Kohlberg Kravis Roberts & Co. (a non-existent entity) (collectively, “KKR”) respectfully

submit this memorandum of law and the accompanying supplemental affirmation of Daniel H.

Tabak (“Tabak Supp. Aff.”) in further support of their motion to dismiss portions of the

Amended Complaint (“Am. Compl.”) pursuant to CPLR 3211(a)(1) and 3211(a)(7). 1

PRELIMINARY STATEMENT

Plaintiffs do not dispute that under applicable law the 75% liquidated damage provisions

they inserted into five ordinary course contracts to clean office space are invalid penalty

provisions if either damages could be reasonably estimated or, alternatively, if the 75% payment

is not reasonably proportionate to anticipated damages. Nor do Plaintiffs dispute that both

independent tests are questions of law that this Court can resolve on a motion to dismiss. And

Plaintiffs also do not dispute that their contractual damages fail under both tests; instead they

contend that they can meet the tests because in addition to contractual damages they also

suffered “additional damages.” However, those “additional damages” are not as a matter of law

proper damages under those contracts with penalty clauses, so they cannot rescue the improper

penalty clauses. As a result, this Court should invalidate the unenforceable liquidated damage

provisions and permit Plaintiffs to proceed to the extent that they can allege actual damages.

As to the reasonable estimation test, Plaintiffs cannot and do not dispute that the contracts

with liquidated damage clauses lay out both the exact revenue that Plaintiffs would make under

those contracts and their labor costs, which Plaintiffs concede are their only material costs under

1
In response to KKR’s pending motion to dismiss the original Complaint, Plaintiffs simultaneously filed an
opposition brief and an Amended Complaint. Because Plaintiffs’ amendments fail to correct the pleading
deficiencies on the relevant claims and issues, KKR requests that the Court apply KKR’s pending motion to dismiss
to the Amended Complaint. See Sage Realty Corp. v. Proskauer Rose LLP, 251 A.D.2d 35, 38, 675 N.Y.S.2d 14, 17
(1st Dep’t 1998) (recognizing that “the moving party has the option to decide whether its motion [to dismiss the
original pleading] should be applied to the new pleadings”); Mem. of Law in Opp. to Defs’ Mot. to Dismiss (“Opp.
Mem.”) at 4 n.3 (consenting to the court directing KKR’s pending motion to dismiss to the Amended Complaint).

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those contracts. In addition, as to the proportionality test, Plaintiffs cannot and do not dispute

that (1) no New York State court has ever permitted a 75% penalty provision, much less for an

ordinary services contract, such as a cleaning contract; (2) the accelerated payment of 75% of

Plaintiffs’ fees for the remaining years on a five-year cleaning contract would lead to a windfall

if Plaintiffs received the stipulated damages and obtained any new cleaning service contract to

replace the contracts with KKR; and (3) the 75% liquidated damages recovery can be considered

proportionate only when “additional damages” are added to contractual damages. But these

“additional damages,” which Plaintiffs rely on to survive both tests, cannot be recovered under

the contracts at issue as a matter of law. For example, Plaintiffs claim they missed out on

overtime payments under the five contracts with liquidated damages clauses, but Plaintiffs’

claims for overtime payments rest on a sixth contract – dedicated exclusively to overtime – that

does not contain a liquidated damages provision. Indeed, since the five contracts with liquidated

damage clauses set out Plaintiffs’ revenue to the penny, it is illogical to assert that those

contracts could somehow have given rise to additional revenues from overtime payments.

Similarly, Plaintiffs argue that they also suffered damages from an alleged conversion of

cleaning equipment but, even if the allegation were true, 2 conversion damages are not available

for a breach of contract. In sum, Plaintiffs’ arguments about damages they are not entitled to

obtain under the contracts at issue cannot alter the fact that the 75% damage provisions are

improper penalties because they fail both the reasonable estimation test and the proportionality

test (and failing either one would invalidate the 75% damage provisions).

2
KKR first learned of the facts underlying Plaintiffs’ conversion claim in April 2017, when Plaintiffs filed their
original Complaint seeking $35,461.63 for allegedly unreturned cleaning equipment. KKR arranged for Plaintiffs to
pick up and sign for the cleaning equipment, which Plaintiffs did on July 6, 2017. Nevertheless, Plaintiffs’
September 12, 2017 Amended Complaint repeats the conversion claim for the same $35,461.63 in alleged damages
even though KKR has returned the allegedly-converted equipment. Plaintiffs should promptly withdraw this claim.

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Additionally, while Plaintiffs amended their Complaint in part to cure its failure to allege

actual damages, the Amended Complaint still fails to allege that Plaintiffs suffered any actual

damages as a result of the alleged early termination of the contracts. The first and second causes

of action should therefore be dismissed. 3

ARGUMENT

I. Plaintiffs’ First and Second Causes of Action Should Be Dismissed Because the
Liquidated Damage Provisions Violate Public Policy and There Is No Allegation of
Actual Damages

Plaintiffs cannot and do not dispute that a liquidated damage clause is enforceable only if

two requirements are both met: (1) the actual loss suffered is difficult to estimate; and (2) the

amount fixed is a reasonable measure of the probable actual loss in the event of a breach. Mem.

of Law in Supp. of Mot. to Dismiss (“KKR Mem.”) at 5-6. Nor do Plaintiffs dispute that the

determination of whether these requirements are met is a question of law. Id. at 4. The

liquidated damage clauses here fail both requirements, and while any damages of Plaintiffs

should be readily estimable, Plaintiffs still do not allege actual damages in their Amended

Complaint. As a result, the First and Second Causes of Action in the Amended Complaint

should be dismissed.

A. The Liquidated Damage Provisions Fail the First Requirement Because Damages
Can Be Readily Determined

Plaintiffs cannot and do not dispute that the five contracts with liquidated damage clauses

expressly set out Guardian’s monthly revenue under those contracts to the penny and also set out

3
In its opening brief, KKR moved to dismiss Allied’s claims on the basis that Allied was not a party to any of the
contracts. KKR Mem. at 4. In light of Plaintiffs’ amended pleading alleging that Allied is a proper corporate entity
whose name was written incompletely on the contracts, KKR is no longer pursuing this argument for the pending
motion to dismiss but reserves the right to pursue it later if appropriate.
In any event, Plaintiffs’ claims against Mr.
Doody should be dismissed on this very same basis, because regardless of the incorrect corporate name on the
contracts (an error that highlights the obvious fact that the contracts were entered without the proper oversight and
approval processes by KKR), there is no dispute that it was Kohlberg Kravis Roberts & Co. L.P., not Mr. Doody,
that paid the invoices and terminated the contracts after raising many complaints regarding poor service.

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a formula to determine its labor costs, which Plaintiffs do not dispute are their only material

costs under the relevant contracts. Thus, Guardian’s contractual damages are very easy to

estimate, so the liquidated damage clauses are unenforceable penalties. Plaintiffs offer a laundry

list of assertions (which basically amount to customary overhead costs and lost opportunity

costs) to avoid this conclusion, but none have any merit.

First, Plaintiffs argue that KKR has not “present[ed] any evidentiary proof” that damages

were readily ascertainable. Opp. Mem. at 14. But Plaintiffs ignore that the contracts themselves,

which are properly considered under CPLR 3211(a)(1), provide (1) full information on total

revenue, including exact dollar amounts for fees, as well as formulae to calculate fee increases

for the entire duration of the agreements; and (2) full information on the only material cost under

the contracts – the cost of labor, including the increases in labor costs over time. See Am.

Compl. Exs. 1-5 (Fee and Duration Sections). And, more fundamentally, Plaintiffs overstate

KKR’s burden: KKR does not need to carry out a full calculation of actual damages at this

stage, but instead need only demonstrate that Plaintiffs’ actual damages “are capable of

calculation.” Vernitron Corp. v. CF 48 Assocs., 104 A.D.2d 409, 409, 478 N.Y.S.2d 933, 934

(2d Dep’t 1984) (emphasis added). Here, the contracts – which detail, among other things, the

precise types of cleaning services and tasks to be provided, the frequency of performance, and

the specific office floors to be serviced (Am. Compl. Exs. 1-5 (Services Sections)) – demonstrate

that the number of employees and any other attendant costs needed to service the contracts are

ordinary, typical costs that can be readily determined, particularly since Plaintiffs admit they had

been working with KKR for over a decade. John Kiely Aff. in Opp. (“Kiely Aff.”) ¶ 6. See

Willner v. Willner, 145 A.D.2d 236, 240, 538 N.Y.S.2d 599, 602 (2d Dep’t 1989) (“Whether the

sum stipulated represents a liquidation of the anticipated damages or a penalty is a question of

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law, with due consideration for the nature of the contract and the attendant circumstances.”

(emphasis added)).

Second, Plaintiffs argue, without citing any authority, that damages somehow cannot be

readily estimated because Plaintiffs also incurred “overhead” costs and other fixed costs,

including rent, insurance, and unspecified equipment costs. Opp. Mem. at 14. But Plaintiffs

cannot and do not allege that these overhead and fixed costs were caused by KKR’s alleged

breach, so any such costs would be irrelevant to determining Plaintiffs’ actual damages. See,

e.g., J.R. Loftus, Inc. v. White, 85 N.Y.2d 874, 877, 626 N.Y.S.2d 52, 54 (1995) (“[P]laintiff

would not ordinarily be entitled to recover overhead expenses unless they were caused by

defendants’ breach.”); Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92-93 (2d Cir. 1984)

(recognizing that fixed expenses are not a part of damage calculations where plaintiff “would

have paid the same amount of fixed costs regardless of [the breach]”). Moreover, even if

Plaintiffs had improperly alleged that any costs for cleaning supplies and equipment were

material amounts and were caused by KKR’s alleged early termination of the contracts, Plaintiffs

fail to allege that any such costs would be difficult to estimate, especially based on Plaintiffs’

prior experience working with KKR. Kiely Aff. ¶ 6.

Third, Plaintiffs suggest they allegedly suffered lost opportunity costs because they could

not undertake other business “in order to provide the level of services requested by KKR.” Opp.

Mem. at 15. Plaintiffs’ argument misses the mark because, by definition, they lost opportunities

only while providing services to KKR prior to the termination of the contracts, not after the

contracts were terminated and Plaintiffs were no longer obligated to provide KKR with any

services. The two cases Plaintiffs cite regarding lost opportunities being impossible to quantify,

BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999) and Crown IT Services,

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Inc. v. Koval-Olson, 11 A.D.3d 263, 782 N.Y.S.2d 708 (1st Dep’t 2004), are irrelevant because

they involved former employees or consultants breaching non-compete obligations that were

applicable after a contract was terminated. And Plaintiffs’ citation to JMD Holding Corp. v.

Congress Financial Corp., 4 N.Y.3d 373, 795 N.Y.S.2d 502 (2005), offers them no support

because the lost fees in that case resulted from the early termination of a revolving $40 million

line of credit, which by its nature involved constantly-changing loan amounts and thus uncertain

fees. As a result, the parties in that case “could not readily forecast the credit facilities for which

[the borrower] would qualify under the Agreement’s asset-based formula, which would fluctuate

over its term; how much [the borrower] would actually borrow; whether the Agreement would be

terminated early; and how much [the borrower] would have borrowed if the Agreement had not

been terminated early.” Id. at 383, 795 N.Y.S. at 509. Here, by contrast, the fees were fixed by

amount and formula for the duration of the term of the contracts. 4

Fourth, Plaintiffs seize on boilerplate language in the contracts that damages would be

“impossible to compute and ascertain with certainty” (Opp. Mem. at 15); however, the Court of

Appeals has rejected this sort of argument to support a liquidated damage provision because it

places “too much faith in form and too little in substance.” See Truck Rent-A-Center, Inc. v.

Puritan Farms 2nd Inc., 41 N.Y.2d 420, 425, 393 N.Y.S.2d 365, 369 (1977) (recognizing that “it

is not material whether the parties themselves have chosen to call the provision one for

4
Plaintiffs also cite two cases in support of the proposition that “damages are not predictable when resources may
not be fully utilized during the remainder of the contract term” (Opp. Mem. at 14), but both are inapplicable here
because they involved the supply of specialized, unique goods, as opposed to the routine, ordinary cleaning services
at issue here.See Morgan Servs., Inc. v. Lavan Corp., 59 N.Y.2d 796, 797, 464 N.Y.S.2d 733, 734 (1983)
(upholding liquidated damage provision where there was “uncertainty concerning the re-rental or sale value of the
uniforms supplied by plaintiff under the contract”); Ames Linen Serv. v. Katz, 8 A.D.3d 945, 947, 779 N.Y.S.2d 600,
601 (3d Dep’t 2004) (finding plaintiff’s damages were not easily ascertainable where “additional red bib aprons . . .
were purchased to supply defendant prior to his breach and that none of plaintiff’s other restaurant customers used
red bib aprons”).

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‘liquidated damages’ . . . or have styled it as a penalty”). The entire point of invalidating penalty

clauses is to prevent parties from trying to contract around public policy.

Finally, Plaintiffs’ contention that damages cannot be estimated because Plaintiffs’

“overtime” revenue was uncertain and varied over time (Opp. Mem. at 16) is without merit.

Plaintiffs were not entitled to obtain any overtime payments under the five contracts with

liquidated damage provisions. Those contracts spell out Plaintiffs’ revenues to the penny, and

those revenues do not include overtime payments. Instead, there was a sixth contract, whose

subject line is “Overtime,” that governs all overtime payments. That contract does not contain a

liquidated damage provision. Compare Am. Compl. Exs. 1-5 (five cleaning service contracts

containing a “Liquidated Damages” sections) with id. Ex. 6 (overtime contract containing no

analogous section); accord id. ¶ 25 (alleging that only five of the six contracts had a liquidated

damage provisions); id. ¶ 34 (seeking liquidated damages on only five of the six contracts). The

uncertainty of overtime revenue thus has no effect on the ability to estimate damages under the

five fixed-fee contracts with liquidated damage provisions.

B. The Liquidated Damage Provisions Fail the Second Requirement Because a
Seventy-Five Percent Recovery Is a Penalty That Is Disproportionate to Actual
Damages

Plaintiffs do not dispute that the contracts’ liquidated damage provisions are enforceable

only if the amount fixed bears a reasonable proportion to the probable loss. But Plaintiffs not

only do not deny that their probable loss from an early termination of the contracts for ordinary

cleaning services would be far less than the 75% profit they put into the liquidated damages

clauses, they expressly acknowledge that they can only create proportionality by adding in

inapplicable non-contractual damages. Plaintiffs also fail to distinguish a recent Court of

Appeals decision instructing that liquidated damage clauses permitting windfall profits are

improper penalty provisions. And, despite being challenged to do so, Plaintiffs fail to identify

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even a single case that has actually enforced a provision setting liquidated damages at 75% or

more of total contract value; indeed, Plaintiffs also fail to address, much less distinguish, the

cases cited by KKR that rejected liquidated damage provisions with much lower damage ratios.

Plaintiffs effectively concede that liquidated damages of 75% are grossly

disproportionate to actual damages by pointing to purported “damages attributable to lost profits,

lost business, lost business opportunities, the conversion of [Plaintiffs’] equipment, lost

additional contract revenue and overtime” and arguing that “[t]hese additional damages, taken

together with the damages associated with the Contract revenue, place the actual damages in

proportion to the Liquidated Damages.” Kiely Aff., ¶ 10 (emphasis added); accord Opp. Mem.

at 19 (same). 5 In other words, Plaintiffs concede that a 75% recovery is disproportionate to

actual damages absent the “additional damages.” But these “additional damages” are not

recoverable under the five fixed-fee contracts that contain the liquidated damage clauses. As

described above, overtime was covered by a different contract that did not contain a liquidated

damages provision, and Plaintiffs are not entitled to damages for lost overhead costs and lost

opportunity costs. See Section I.A., supra. That leaves only the conversion allegation, but that

alleges non-contractual damages covered by Plaintiffs’ conversion claim, not their contract

claim. See Sebastian Holdings, Inc. v. Deutsche Bank AG, 78 A.D.3d 446, 447, 912 N.Y.S.2d 13,

15 (1st Dep’t 2010) (explaining that conversion claim was independent of breach of contract

claim where “plaintiff ha[d] not alleged any breach of agreement that directly relates to the

allegedly converted funds”). Plaintiffs’ admission that their contract damages can be made

proportionate to the liquidated damage provisions only by adding non-contractual damages

should by itself end the inquiry.

5
As with the estimation test, Defendants properly relied on the contracts themselves as evidentiary support. The
Kiely Affidavit provides an additional evidentiary basis for finding that the liquidated damage clauses fail the
proportionality test.

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Plaintiffs follow up their admission that the liquidated damage provisions are

disproportionate to genuine contract damages by ignoring KKR’s cases that rejected liquidated

damage provisions that were excessively disproportionate to contact price. Instead, Plaintiffs

baldly state that “Defendants’ comparison of the ratio of the stipulated damages to the contract

price is simply not the applicable test.” Opp. Mem. at 17. But Plaintiffs provide no citation

whatsoever for this contention. Instead, they later cite cases for the different point that courts

cannot simply compare the stipulated damages to a “post-breach calculation of damages,” id., but

that is an entirely separate issue from the unquestionably appropriate comparison of liquidated

damages to anticipated damages. See id. at 12, 16-17 (recognizing test of liquidated damages to

anticipated damages); accord KKR Memo at 9-10 (citing cases comparing contract price to

liquidated damages).

Having argued that a post-breach calculation of damages is irrelevant, Plaintiffs then rely

on post-breach events in an effort to refute another defect of the liquidated damage clauses here.

Specifically, Plaintiffs cannot and do not dispute that the Court of Appeals recently explained

that a liquidated damages clause should be invalidated if the plaintiff could in theory get “a

windfall” by obtaining its profit in a lump-sum payment undiscounted to present value while also

retaining the ability to re-use its resources for an additional profit. 172 Van Duzer Realty Corp.

v. Globe Alumni Student Assistance Assoc., Inc., 24 N.Y.3d 528, 536-37, 2 N.Y.S.3d 39, 44

(2014). 6 That is exactly the situation here – Plaintiffs could in theory obtain the amount of their

profit from the liquidated damages clauses as well as a “double dip” by providing cleaning

services to another customer. Plaintiffs argue in response that they “have not been able to

replace the KKR contracts and no windfall has occurred” in practice. Opp. Mem. at 20. But this

6
Plaintiffs suggest that the Court of Appeals all but abandoned the prohibition on penalty clauses in 2005 in JMD
Holding, but the Court’s more recent decision in 172 Van Duzer makes clear that the pendulum has swung back and
this long-standing rule of law is alive and well.

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factual argument about actual damages is exactly what Plaintiffs themselves have explained is

not a proper consideration.

As to addressing the lack of any precedent supporting a 75% recovery on the contract

price, Plaintiffs point only to Rattigan v. Commodore Int'l Ltd., 739 F. Supp. 167 (S.D.N.Y.

1990), and suggest it “enforced liquidated damages in excess of the total remaining contract

price.” Opp. Mem. at 18. But the court in Rattigan actually found that the employee “would

have received other forms of compensation under the contract not conferred by the liquidated

damages provision,” so the liquidated damages were not in excess of the remaining contract

price. 739 F. Supp. at 170. Moreover, Plaintiffs’ reading of Rattigan, a federal district court

case that has been cited by a New York State court only once (and for a different point) in 27

years, cannot be reconciled with the Court of Appeals’ subsequent disapproval in 172 Van Duzer

of acceleration clauses that could permit windfall profits. 7

C. The Amended Complaint Still Does Not Allege Actual Damages Resulting from
Termination of the Contracts

KKR sought dismissal of the original Complaint’s first cause of action because Plaintiffs

only sought recovery under the liquidated damage provisions and did not allege any actual

damages. KKR Mem. at 11. In response, Plaintiffs have added a second cause of action (and

boilerplate language about an “amount to be determined” in the Wherefore clause) to the

Amended Complaint. See Am. Compl. ¶¶ 35-39, Wherefore clause; Opp. Mem. at 20-21.

However, while any damages of Plaintiffs should be readily estimable, the Amended Complaint

7
Plaintiffs also repeat their mistaken argument that contractual language governs over substance, and they
selectively (and misleadingly) quote from Addressing Systems & Products, Inc. v. Friedman, 59 A.D.3d 359, 874
N.Y.S.2d 430 (1st Dep’t 2009), in arguing that the contracts are enforceable solely on the basis that “KKR are
sophisticated parties.”Opp. Mem. at 18. Plaintiffs deliberately excised from their quotation of Addressing Systems
the requirement that “each party [be] represented by experienced counsel,” 59 A.D.3d at 360, 874 N.Y.S.2d at 432,
because Plaintiffs cannot and do not allege that legal counsel approved a contract signed on behalf of a non-existent
legal entity.In any event, Addressing Systems does not bear the weight Plaintiffs seek to place on it.Neither
Addressing Systems nor any other case of which we are aware upheld an otherwise improper liquidated damages
clause simply because the parties to the contract were sophisticated.

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still fails to allege that Plaintiffs in fact suffered any actual damages as a result of the early

termination of the contracts. The first and second causes of action should therefore be dismissed.

See Lexington 360 Assocs. v. First Union Nat’l Bank of N. Carolina, 234 A.D.2d 187, 189-90,

651 N.Y.S.2d 490, 492 (1st Dep’t 1996) (“In the absence of any allegations of fact showing

damage, mere allegations of breach of contract are not sufficient to sustain a complaint.”)

(internal quotation omitted).

CONCLUSION

For the foregoing reasons, KKR respectfully requests that the Court strike Plaintiffs’

demand for liquidated damages in the First Cause of Action and dismiss the First and Second

Causes of Action in their entirety.

Dated: October 3, 2017
New York, New York

Respectfully submitted,

COHEN & GRESSER LLP

By: /s/ Daniel H. Tabak
Daniel H. Tabak
800 Third Avenue, 21st Floor
New York, NY 10022
(212) 957-7600

Attorneys for Defendants Kohlberg
Kravis Roberts & Co., L.P., KKR
Capital Markets Holdings L.P. and
Kohlberg Kravis Roberts & Co.

15 of 15

Case Info

Judge

O. Peter Sherwood Req Track Judge’s New Case

Case No.

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Document Filed Date

October 03, 2017

Case Filing Date

April 20, 2017

County

Parties

Allied Cleaning Services, Inc. Plaintiff
Christopher Doody Defendant
GRIFFIN, JAMES MICHAEL Attorney for the Defendants
Guardian Building Services, LLC Plaintiff
HALPERN, PHILIP M Attorney for the Plaintiff
HOCHBERG, SHARI B. Attorney for the Plaintiff
John Doe #1 through John Doe #10 Defendant
KKR Capital Markets Holdings L.P. a/k/a Kohlberg Kravis & Roberts Defendant
Kohlberg Kravis Roberts & Co. Defendant
Kohlberg Kravis Roberts & Co., L.P. a/k/a Kohlberg Kravis & Roberts Defendant
NICOLAY, HARRY JOSEPH Attorney for the Plaintiff
TABAK, DANIEL H Attorney for the Defendants

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