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#2268 signed 9-11-96

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

MACK EXCAVATING, INC.,

DEBTOR(S)

NO. 91-42654-7

CHAPTER 7

DARCY D. WILLIAMSON, Trustee,

PLAINTIFF(S),

v.

CITY OF TOPEKA, KANSAS,

DEFENDANT(S)

ADV. NO. 93-7200



MEMORANDUM OF DECISION

This proceeding is before the Court for decision following a bench trial. Plaintiff Darcy D. Williamson, the chapter 7 trustee for debtor Mack Excavating, Inc., appears by counsel James S. Kreamer, Stacy L. Cook, and Robert A. Babcock of Baker Sterchi Cowden & Rice, L.L.C. Defendant City of Topeka, Kansas, appears by counsel Ann L. Hoover of Bennett & Dillon. Having heard the evidence and arguments of counsel, the Court is now ready to rule.

FACTS

The trustee sued the City of Topeka, Kansas, and Stephen W. Dultmeier for breach of contract. In April 1995, the trustee won a partial summary judgment for prejudgment interest on $24,000 which the City did not pay until after the trustee commenced this proceeding. The trustee settled with Mr. Dultmeier just before trial.

At the end of the trial, the Court ruled against the trustee on her remaining claims, leaving one final question to be resolved. The trustee contends she is entitled to recover additional damages for business profits and equipment equity which Mack Excavating allegedly lost as a result of the City's failure to pay the $24,000 when it was due and owing in January 1991. The Court asked the parties to brief the issue of the foreseeability of such damages, which they have now done.

The following is a summary of the facts found and rulings made at trial. Some time before filing for bankruptcy, debtor Mack Excavating entered into a contract with the City and Mr. Dultmeier to install curbs, gutters, streets, and storm drains in a residential development known as Colly Creek. The debtor performed the grading but hired subcontractors for the rest of the work. One subcontractor agreed to install the curbs and gutters. During construction, that subcontractor sought to deviate from the specifications shown in the plans, which called for a one-inch drop from the streetside curb edge to the curb trough. Without modification, the subcontractor's equipment would create an extra one-half-inch drop, so he wanted to slant his equipment toward the street to create the specified drop. The debtor's president stopped the subcontractor, and they approached the City's inspector for the job to ask whether the requested deviation would constitute a breach of the debtor's contract with the City. The inspector indicated that he thought the deviation would not affect the end product which the City required under the contract but that he would check with the project engineer. Although the debtor could have insisted the subcontractor follow the plans precisely, its president expressed no objection to the change except his concern it might be unacceptable to the city. The project engineer determined that the change would not affect the end result that the city desired, because the street would still have the correct amount of drop from its crown, the curb would have the correct amount of drop to the gutter, and the street, curbs, and gutters would be the appropriate thickness and depth. The engineer approved the change, stating that it would have no effect on the project.

Apparently misconstruing the debtor's and the City's obligations, the debtor's president understood the City's approval to indicate not only that the City's requirements would still be met but also that the debtor's planned method of performing its part of the contract would not be affected. This clearly was not the City's intent nor was it reasonable for the debtor's president to have thought it was. The City had a contract with the debtor, not with the subcontractor. The subcontractor's contract was with the debtor, although the debtor's contract with the City supplied the overall specifications and requirements for the subcontractor's performance. So long as the ultimate product met the City's requirements, the subcontractor's manner of performance was the debtor's concern, not the City's. In approaching the City with the subcontractor, the debtor's president at least should have realized he could find out only whether the change his company was apparently willing to let the subcontractor make would breach the debtor's duties to the City under the contract, not whether the change would interfere with the debtor's performance of its other obligations under the contract.

Ultimately, the debtor's president discovered that the deviation which he allowed the subcontractor to seek and obtain from the City did hamper the debtor's ability to perform its portion of the contract. The way the subcontractor had skewed the curbs toward the street made it more difficult and time-consuming for the debtor to grade and compact the roadbed before asphalt was applied. The change forced the debtor to redo much of the grading and to grade more slowly and carefully than normal in an attempt (which proved futile) not to damage the curbs with the blade of the grader, all of which caused an unplanned delay in completing the job. Although the debtor contended that the City was responsible for the delay and curb damage because it had allowed the subcontractor to deviate from the plans, the Court concluded: (1) the debtor was responsible for its subcontractor's actions; (2) the debtor had the authority to deny the subcontractor the deviation; and (3) substantial credible evidence presented at trial indicated that by modifying the blade on its grader, the debtor could have accomplished the job without substantial delay and damage to the curbs even after the subcontractor deviated from the plans.

The trustee contends the debtor is entitled to recover from the City extensive lost future profits and losses from the foreclosure on and subsequent sale of its equipment as a result of the City's unjustified refusal to pay the $24,000 when it was due and owing in January 1991. The trustee presented evidence of over $1,600,000 in damages allegedly caused by the City's breach of the contract. Primarily, the damages consist of profits the debtor's business allegedly lost through the year 2005 and equity in the debtor's equipment allegedly lost through the foreclosure and sale at less than full market value. The debtor continued in business for some time after the City refused to pay the $24,000 unconditionally. About one year after the City should have paid the money, the debtor's lender foreclosed on its equipment and the debtor filed for bankruptcy. The lender sold the equipment over a period of time during the following year.

DISCUSSION AND CONCLUSIONS

The trustee relies on four cases to support her position that the debtor is entitled to recover lost profits from the City. W-V Enterprises v. Federal Savings and Loan Ins. Corp., 234 Kan. 354 (1983); Royal College Shop v. Northern Ins. Co., 895 F.2d 670 (10th Cir. 1990); State Office Systems v. Olivetti Corp., 762 F.2d 843 (10th Cir. 1985); Vickers v. Wichita State University, 213 Kan. 614 (1974). None of them involve facts similar to the present case.

Not surprisingly, the trustee most stresses W-V Enterprises, the only one of the four cases in which the court allowed recovery of lost profits which the plaintiff would have realized from activities other than continued performance of the contract that was breached. That case involved a situation where the president of a financial institution induced one of the plaintiffs, who already had a successful business and distributorship, to establish a new business (the other plaintiff, W-V Enterprises) to enter into a construction project with promises of (1) financing from the institution, (2) the ultimate sale of the project to the institution's contacts or affiliated businesses, and (3) further assurances of both as the project progressed. The president failed to satisfy either promise, causing the plaintiff to lose not only the new business but his previously-existing business and distributorship as well. 234 Kan. at 355-60. Although the trustee wants to characterize the case as involving a mere failure to pay $24,000, the supreme court actually concluded substantial evidence supported the jury's finding that the plaintiff had shown the defendants committed fraud which caused him to lose his business and distributorship. Id. at 364-66. The court found it unnecessary to consider whether the evidence was sufficient to support the plaintiff's claim for "tortious breach of contract." Id. at 366-67. Despite indicating fraud had caused the plaintiff's losses, in discussing the appellant's claim the damage award for loss of future profits was speculative and not supported by the record, the court quoted a rule concerning the recovery of lost profits for a breach of contract, and then allowed the plaintiff to recover profits lost through the loss of his old business and distributorship. Id. at 367-68. Consequently, it is less than clear but appears the court meant only that the award of future profits was not speculative and was sufficiently supported by the evidence, not that profits lost due to the failure of the plaintiff's business could be recovered for a mere breach of contract. In any event, it does seem clear that the financial institution's president was aware early on that the new business was putting the plaintiff's other interests in jeopardy.

Royal College Shop involved an insurance company's refusal to pay benefits, including lost earnings, under a policy following a fire that caused extensive damages to the insured business and the subsequent failure of the business. 895 F.2d at 672. There, the Tenth Circuit concluded that Kansas law allowed the insured to recover not only the lost earnings covered by the contract but also the lost going-concern value of the business as consequential damage which the jury could have found either: (1) to be a natural and probable consequence of the refusal to honor the contract; or (2) was reasonably assumed to have been within the contemplation of the contracting parties as a probable result of such a refusal. Id. at 678-80.

State Office Systems involved a claim for lost profits under a contract to buy mini-computers for resale. The reseller sued for breach of warranty, breach of contract, and fraud, alleging the computers were defective. 762 F.2d at 845. The Tenth Circuit concluded Kansas law permitted the reseller to recover as consequential damages the profits it would have made through additional sales but for the manufacturer's breach of contract. Id. at 846-47.

Vickers involved the breach of a right of first refusal to televise basketball games for a particular season. The trial court had ruled the plaintiff could only present proof of his past profits under similar contracts in order to prove the profits he lost as a result of the failure to honor his right to televise those games under the terms offered to the third party who obtained the contract. 213 Kan. at 616-18. The supreme court reversed and ordered a new trial, saying past profitability is not the only method of proving lost future profits with reasonable certainty, or else new or untried businesses would be placed at a substantial disadvantage and those contracting with them would be encouraged to breach their contracts. Id. at 620. Thus, the plaintiff was allowed to present evidence in an effort to try to prove the profits he would have made had he been awarded the contract to televise the games.

Here, the trustee is not asking for future profits the debtor would have made under its contract with the City, but future profits the debtor might have made under unspecified contracts it might have been able to obtain and perform if the City had paid on time. The City made no promises to induce the debtor to enter into a new or substantially expanded business, committed no fraud, did not insure the debtor's business, and provided no assurances that it would provide financing to help the debtor conduct its business. The trustee seeks to extend the foreseeability of lost future profits at least a step beyond the circumstances of these cases. In both W-V Enterprises and Royal College Shop, it is clear the defendant knew the plaintiff's loss of a business enterprise would be a probable consequence of the defendant's actions, and in State Office Systems and Vickers, the recovered profits were only those which would have been derived from the specific contract that was breached.

In the instant case, there is no credible evidence that the City was aware of the debtor's financial strength. At most, the City may have been aware that the debtor had not bid on such an extensive contract with the City before. This knowledge, though, is well short of the knowledge necessary to make it reasonable to assume the City contemplated that its refusal to pay the $24,000 would be likely to cause the debtor's business to fail. A review of the evidence presented clearly shows the City had no reason to know its failure to pay would put the debtor out of business. There was some testimony that many construction businesses have difficulty weathering an inability to collect accounts receivable. The debtor's president testified that the debtor would often use money received on new jobs to pay bills from past jobs and that he believed this was normal in the construction business. He also said the debtor sometimes borrowed money from its bank for a specific job and then repaid the loan with the proceeds of that job. He did not claim that the City was aware of these practices of the debtor nor was there any other evidence to that effect.

Furthermore, the evidence did not establish that the debtor's business would have avoided financial difficulty if the City had paid the money timely. The debtor's banker testified that if the $24,000 the City owed had been paid on the loan the bank made for the Colly Creek job, the bank would then have loaned the debtor money for later jobs for which the debtor successfully bid. Had the City paid the debtor timely, the debtor would not necessarily have paid all the money to the bank. A subcontractor that sued the debtor for failing to pay for its work on this job was owed and obtained a judgment for $41,500, which the debtor's bonding company paid. The debtor was obliged to indemnify its bonding company for that judgment, and also for over $50,000 in attorney fees incurred in lawsuits over the Colly Creek job. In February 1991, shortly after the City should have paid the money, the debtor owed its bank over $385,000, including over $44,000 on the Colly Creek job. Thus, in addition to the cost of the extra work it had to perform after it allowed its subcontractor to change the curb construction method, the Colly Creek job left the debtor with large unpaid bills besides its debt to the bank.

The evidence also failed to show that the City should be held responsible for the alleged losses suffered from the foreclosure and sale of the debtor's equipment. The trustee suggests Augusta Bank & Trust v. Broomfield, 231 Kan. 52 (1982), arose from "facts surprisingly similar" to those now before the Court. The Court cannot agree. In that case, the plaintiff made contracts were several businesses at least partly owned by the founder of a bank, who was also a director and member of the bank's loan committee. Id. at 54-57. The founder set up the bank's financing of the plaintiff's purchase of equipment to perform the contracts. The founder's businesses then failed to pay the plaintiff for the work he did, so he was unable to pay the bank. The plaintiff assigned the accounts receivable to the bank as extra security. However, the businesses did not pay the bank, either, and the bank foreclosed on the equipment and sold it for much less than its fair market value. Under these circumstances, the supreme court upheld a jury's award of damages against the bank, its founder, and one of his businesses for some of the loss claimed from the forced equipment sale. Id. at 61-62. In the case before this Court, the City had nothing to do with the debtor's loans on its equipment or the bank's decision to foreclose and sell the equipment.

Furthermore, although the debtor had reported on loan applications what was then believed to be the fair market value of its equipment, the debtor's president testified that by the time the equipment was sold, the market had declined and the prices received for the equipment reflected the then-current market. In addition, in May 1991, when the debtor was trying to resolve its financial problems with its bank, the debtor's president sent a letter to the bank indicating that much of its equipment was underutilized, so the debtor was thinking about or attempting to sell some of it and to limit its business to storm sewer installation. This equipment surplus was not attributable to the losses on the Colly Creek job, but to a downturn in the local construction business. Thus, while the Colly Creek job contributed to the debtor's financial difficulties, it appears an economic downturn was the main cause of the loss of its equipment.

The Court would also note that the trustee's economic expert did not take this economic downturn into account in calculating the effects of the City's alleged breaches of the Colly Creek contract, but instead relied on the debtor's unaudited records and what the debtor's president told him. Therefore, even if the City had been shown to be liable for all the debtor's losses, the expert's calculations overstated them.

For these reasons, the Court concludes the trustee has not shown that the debtor's bankruptcy estate is entitled to recover lost profits or any other additional damages due to the City's failure to pay the $24,000 timely. Instead, the estate is entitled only to the $24,000 which the City has now paid plus the prejudgment interest that was previously awarded.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of September, 1996.











_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS









In Re: )

)

MACK EXCAVATING, INC., ) NO. 91-42654-7

) CHAPTER 7

DEBTOR(S). )

)

DARCY D. WILLIAMSON, Trustee, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 93-7200

)

CITY OF TOPEKA, KANSAS, )

)

DEFENDANT(S). )

JUDGMENT ON DECISION

This proceeding was before the Court for decision following a bench trial. Plaintiff Darcy D. Williamson, the chapter 7 trustee for debtor Mack Excavating, Inc., appeared by counsel James S. Kreamer, Stacy L. Cook, and Robert A. Babcock of Baker Sterchi Cowden & Rice, L.L.C. Defendant City of Topeka, Kansas, appeared by counsel Ann L. Hoover of Bennett & Dillon. Having heard the evidence and arguments of counsel, the Court issued its Memorandum of Decision resolving this dispute.

For the reasons stated in that Memorandum, judgment is hereby entered that the trustee is entitled to recover from the City only the $24,000 which has already been paid plus the prejudgment interest on that amount which the Court granted by partial summary judgment. Judgment is hereby entered denying all the trustee's other claims.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of September, 1996.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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