Bankruptcy Judge Lori V. Vaughan of Orlando, Fla., explained when damages for breach of contract are “noncontingent liquidated” debts for inclusion in deciding whether the debtor has too much debt for Subchapter V.

A provider of regulatory compliance services, the debtor was under contract with a wholesaler of handwipes. Evidently, the debtor’s job was to determine whether the handwipes to be purchased abroad by the wholesaler would comply with state and federal regulations.

The debtor bought four million handwipe containers and sold one million to a retailer. The retailer soon received a cease and desist order from the State of California declaring that the handwipes could not be sold in the state.

The wholesaler sued the debtor in federal court in California seeking damages for breach of contract, contending that the debtor gave bad advice. The wholesaler sought $14 million in damages, mostly representing lost revenue had it sold all of the handwipes it had bought abroad.

The district court ruled that damages would be measured by lost profits, not lost revenue.

Later, the debtor filed a chapter 11 petition and elected treatment as a small business debtor under Subchapter V. The debtor listed the debt to the wholesaler as unknown, contingent and unliquidated.

In the chapter 11 case, the wholesaler filed a proof of claim for $14 million, including about $11 million as “expected revenue.” The debtor filed a plan for pro rata payment to unsecured creditors, including the wholesaler.

What Does ‘Liquidated’ Mean?

Contending that the debtor had more than $7.5 million in “noncontingent liquidated” debts, the maximum then permissible under Section 1182(1)(A), the wholesaler filed motion for summary judgment on the debtor’s eligibility for relief in Subchapter V.

In her June 14 decision, Judge Vaughan characterized the wholesaler as contending that “its claim is liquidated because the amounts can be readily and precisely determined by looking at its agreements with” the retailer to whom it sold the handwipes.

Judge Vaughan said that “liquidated” is not defined in the Bankruptcy Code but is generally understood to mean readily and precisely determinable by agreement or operation of law. She added that a dispute over liability does not render a debt unliquidated.

Citing the Ninth Circuit Bankruptcy Appellate Panel, Judge Vaughan said that “the focus for liquidity is on the calculation or computation of the debt.” A liquidated claim “is one capable of simple calculation or computation where no judgment or discretion is involved.”

“Contractual claims,” Judge Vaughan said, are “generally” liquidated because “the parties can refer to the contract to determine the amount of damages.” On the other hand, tort claims are “generally unliquidated.”

In the case at hand, the contractual claim was not liquidated because the contract contained “no financial terms” and nothing “that would allow one to calculate a claim for breach,” Judge Vaughan said. The wholesaler countered by arguing that damages could be easily calculated by reference to the contract under which the wholesaler resold handwipes to the retailer.

Judge Vaughan rejected the argument, because the debtor was not a party to the contract with the retailer, nor was the contract with the retailer even mentioned in the consulting agreement with the debtor.

Furthermore, the district court had already ruled that “expected revenue” was not the measure of damages. Rather, damages were lost profits.

Indeed, Judge Vaughan said, net profits could be nothing depending on the wholesaler’s cost of performance. Moreover, lost profits might be offset by sale of the handwipes to another customer.

Concluding that the claim was unliquidated, Judge Vaughan denied the wholesaler’s motion for summary judgment aimed at ejecting the debtor from Subchapter V, because lost profits “are not capable of simple calculation or computation but instead require the exercise of judgment or discretion.”

Judge Vaughan also confirmed the debtor’s plan and granted the debtor’s motion to cram down the plan on the wholesaler.