Opinion
6:23-bk-04165-LVV
06-14-2024
In re: Burdock and Associates, Inc. Debtor.
Chapter 11
ORDER OVERRULING OBJECTION TO SUBCHAPTER V ELECTION
Lori V. Vaughan, United States District Judge
The Small Business Reorganization Act of 2019 ("SBRA") was designed to provide small-business debtors a new streamlined process for reorganization. For that reason, only businesses with "aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order of relief in an amount not more than $7,500,000" are eligible to proceed under Subchapter V. 11 U.S.C. § 1182. The issue presented here is whether Burdock and Associates, Inc. ("Debtor" or "Burdock") is eligible to proceed under Subchapter V when considering that the claim by Paydirt Gold Company, LLC ("Paydirt") exceeds $14 million. Paydirt contends that because Burdock's debt is based on the parties' contract and capable of simple calculation, it is liquidated even if Burdock disputes liability. Burdock argues the debt is unliquidated because the calculation would require looking beyond the parties' contract and the only damages available to Paydirt would be lost profits which are not capable of ready determination. The Court agrees with Burdock. Paydirt's claim is unliquidated, not because it is disputed by Burdock, but because it is not capable of ready determination. The fact that Paydirt's claim arises out of a contract between the parties is not enough to conclude it is liquidated.
Unless specified otherwise, all references to statutory sections refer to Title 11 of the United States Code.
Factual Background
Debtor is an international safety and regulatory compliance consulting firm. It employs various scientists and toxicologists to provide consulting expertise in food, beverage, dietary supplements, pet food and, as is relevant here, compliance for FDA, USDA, AAFCO and EPA requirements.
Doc. No. 6 at 1.
Id. at 1-2.
Paydirt's dispute with Burdock arises out of allegedly mislabeled handwipe containers.In 2020, Paydirt entered a contract with Target to sell 4 million containers of handwipes for $2.695 per canister. The handwipe containers were being manufactured by an overseas supplier, KK Creative Ltd., with whom Paydirt signed a Manufacturing Supply Agreement (the "MSA").
Doc. No. 61 at 2-3.
Id.
Id.
Paydirt then executed an Engagement Letter with Burdock (the "Consulting Agreement") for general consulting services. The Consulting Agreement does not detail the type or topic of the consulting services. Nor does it detail the cost of such services. According to Paydirt, Burdock was engaged to provide expert advice and guidance to ensure that its handwipe containers would be properly labeled to meet all state and federal requirements and applicable law for consumer use.
Doc. No. 61 at 2-3 and Ex. A. 15-17.
See id.
See id.
Doc. No. 61 at 2-3.
Paydirt alleges that after receiving the 4 million canisters and shipping 1 million to Target stores, the California Air Resources Board sent Target a cease-and-desist letter notifying them that the canisters violated California law and, as such, could not be sold in California. As a result, Target pulled the canisters from its shelves, cancelled orders for the remaining handwipes, and demanded indemnification from Paydirt. Paydirt alleges that due to Burdock's bad advice, it cannot sell the handwipe containers and has been damaged.
Id
Id. at 3.
Id.
Prepetition, Paydirt sued Debtor in the United States District Court for the Central District of California (the "California District Court") seeking damages for breach of contract among other causes of action. In that action, Paydirt sought the same damages it seeks in its proof of claim - expected or lost revenue based on its contract with Target. In fact, the calculation of damages sought by Paydirt is nearly identical to the calculation attached to its proof of claim. Debtor moved for partial summary judgment as to the damages sought by Paydirt arguing that Paydirt was not entitled to contract damages for "expected revenue." The California District Court agreed holding that Paydirt could not recover "expected revenue" as a matter of law but was instead entitled to lost profits under Florida law.
Ex. 3. Paydirt Gold Company, LLC v. Burdock and Associates, Inc. dba Burdock Group, et al, Case No. 2:21-cv-9782-AB-PLA, pending before the United States District Court for the Central District of California.
See Ex. 3 at. 9, 11 and 18.
Debtor filed a voluntary petition for relief under chapter 11 on October 6, 2023. As part of its petition, Debtor indicated it met the definition of debtor found in § 1182(1) and elected to proceed under subchapter V of chapter 11. Accordingly, the case proceeded under subchapter V. In its Schedules of Assets and Liabilities, Debtor listed a debt to Paydirt in an unknown amount. Debtor further indicated the claim was contingent and disputed. Paydirt filed a proof of claim (the "Claim") seeking a total of $14,010,742 in damages. The bulk of Paydirt's claim is characterized as "expected revenue" of $10,780,000 calculated by multiplying 4 million canisters by $2.695 (the price Target agreed to pay for each canister). Debtor filed an Objection to Paydirt's Claim.
Doc. No. 1.
Doc. No. 30.
Id.
Proof of Claim No. 9.
Id.
Doc. No. 65.
On December 13, 2023, Paydirt filed its Objection to Burdock and Associates, Inc.'s Subchapter V Election (the "Objection"). Shortly after, Debtor filed its Chapter 11 Small Business Subchapter V Plan of Reorganization (the "Plan"). In the Plan, Debtor proposes to pay its unsecured litigation claims including Paydirt's Claim pro rata through funds it intends to receive from its lawsuit against Insurance Office of America ("IOA"), which alleges claims of negligence and breach of fiduciary against IOA stemming from the lawsuit by Paydirt. On March 5, 2024, the Court held a final hearing to consider the Objection along with confirmation of Debtor's Plan (the "Confirmation Hearing"). Prior to the Confirmation Hearing Paydirt filed a Motion for Summary Judgment on Objection to Subchapter V Eligibility and Debtor filed its Response to Paydirt Gold Company, LLC's Objection to Burdock and Associate, Inc.'s Subchapter V Election (the "Response").
Doc. No. 61.
Doc. No. 64.
Id.
Doc. No. 79.
Doc. No. 84.
Analysis
Subchapter V is limited to small businesses. To proceed under this streamlined subchapter of chapter 11, one must qualify as "debtor" under § 1182(1) which, among other things, limits an eligible debtor to one with "aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition … in an amount not more than $7,500,000."
Paydirt contends that Debtor is not eligible for relief under subchapter V because its liquidated, noncontingent debts exceed $7,500,000 when the debt to Paydirt is included. Paydirt's filed Claim seeks over $14 million damages, $10 million of which is calculated by multiplying 4,000 containers by the price Target would pay for those containers, in what Paydirt characterizes as lost revenue. Paydirt argues its claim is liquidated because the amounts can be readily and precisely determined by looking at its agreements with Target and KK Creative Ltd. and that no matter how much Debtor disputes liability, the debt is still liquidated.
The term liquidated is not defined in the Bankruptcy Code, but "courts have generally held that a debt is liquidated if its amount is readily and precisely determinable." United States v. May, 211 B.R. 991, 996 (M.D. Fla. 1997). "A liquidated debt is that which has been made certain as to amount due by agreement of the parties or by operation of law." United States v. Verdunn, 89 F.3d 799, 802 (11th Cir. 1996).
Paydirt is correct that a dispute over liability does not render a debt unliquidated. "[T]he concept of a liquidated debt relates to the amount of liability, not the existence of liability." Id.; see also In re Hall, 650 B.R. 595 (Bankr. M.D. Fla. 2023) (rejecting argument that bona fide dispute caused loan debt to be unliquidated). Instead, 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. See Nicholes v. Johnny Appleseed (In re Nicholes), 184 B.R. 82, 89 (B.A.P. 9th Cir. 1995). "[I]f judgment, discretion, or opinion, as distinguished from calculation of computation is required to determine the amount of the claim, it is unliquidated." First Nat'l Bank Co. v. Insurance Co. of North America, 606 F.2d 760, 770 (7th Cir. 1979). Debts of a contractual nature, as opposed to tort claims, are usually liquidated because of the ability to easily and precisely calculate the debt by reference to the contract. Barcal v. Laughlin (In re Barcal), 213 B.R. 1008, 1014 (B.A.P. 8th Cir. 1997); In re Nicholes, 184 B.R. at 89; In re Hall, 650 B.R. at 599.
Paydirt is incorrect, however, that its claim is liquidated. Contractual claims are generally considered liquidated in amount because the parties can refer to the contract to determine the amount of damages. This analysis is aptly applied in to supply contracts where one party provides goods at a fixed price because damages can be calculated by multiplying the price by the amount of goods sold. The simplest example is breach of a promissory note where the face amount of the loan stands as the basis for damages. See Verdunn, 89 F.3d at 802 n. 12. Tort claims, on the other hand, are generally unliquidated because they involve "the future exercise of discretion, not restricted by specific criteria." See id. at 802. In Verdunn, the Eleventh Circuit notes that personal injury claims are unliquidated because defendant does not know the claim amount until proof of damage is presented and awarded by a jury. Id. at 802 n. 13.
While Paydirt's Claim is based on a contract between it and the Debtor, not all contractual disputes result in a liquidated claim. See, e.g., In re Stone, Case No. 16-19400-LMI, 2017 WL 3722689 (Bankr. S.D. Fla. Aug. 28, 2017) (ruling that creditor's contractual claim was unliquidated in part since it required further discretion by the Court on the net recovery of litigation proceeds). The Consulting Agreement includes no financial terms - not even the rate charged by Debtor for its consulting services. There is nothing in the Consulting Agreement that would allow one to calculate a claim for breach or alert Debtor of the magnitude of such claim. Paydirt argues the claim can still be liquidated because it is easily calculated by reference to its contracts with third parties. By looking at what Target agreed to pay for the 4 million containers, Paydirt argues, one can easily calculate damages. Paydirt has two problems with this argument.
First, the contract with Target is not the contract at issue. Debtor was not a party to the Target contract. Nor is the Target contract referenced in the Consulting Agreement. According to Verdunn, a debt is liquidated when its amount is certain by reason of "agreement of the parties or operation of law." 89 F.3d at 802 (emphasis added). In Verdunn, the Eleventh Circuit determined a tax liability was liquidated because the notice of deficiency was analogous to a contract putting the debtor on notice of the amount of the claim which was calculated using fixed legal standards, i.e. the Internal Revenue Code. Id. Here, we have no document to which Debtor was a party that readily establishes what damages would result from breach of the Consulting Agreement. Nor do we have any fixed, legal standards (like the calculation of a tax in Verdunn) that would give us this calculation.
This brings us the second problem with Paydirt's argument. The California District Court has already determined that Paydirt cannot recover "expected revenue" as a matter of law. The California District Court held that the proper measure of damages was not "expected revenue" but "lost profits." The court then went on to describe how a calculation of lost profits must consider Paydirt's savings from the breach which could mean "the proper calculation of net profits may well be zero after taking into account Paydirt's cost of performance, however a dispute over the amount of net lost profits is a question of fact for the jury to decide."
Ex. 3 at 11.
Paydirt then argues that even if "expected revenue" is not the appropriate measure of damages, lost profits are also readily calculable by reference to its contract with KK Creative Ltd., which required the purchase of 4 million canisters at a price of $2.22 each resulting in a claim of $8.88 million which is still above the $7.5 million cap. But again, Paydirt's calculation requires the consideration of a contract with a third-party (a contract that is not part of the record) that is not referenced in the Consulting Agreement. Further, the calculation of lost profits in this case would have to consider whether Paydirt paid for the canisters and whether it was able to sell the canisters to another customer. Under Florida law, lost profits must be established with reasonable certainty. Del Monte Fresh Produce Co. v. Net Results, Inc., 77 So.3d 667, 675 (Fla. 3d DCA 2011). Lost profits based on a contractual breach further requires proof of costs and expenses in performing under the contract including allocation of overhead and personnel expenses. Id. at 673. As such, a lost profits calculation goes beyond consideration of simply the amounts contracted for the sale or purchase of a product especially when, like here, the breaching party was neither the buyer or seller but a third-party. The lost profits Paydirt seeks are not capable of simple calculation or computation but instead require the exercise of judgment or discretion. As such, Paydirt's claim is unliquidated.
The Consulting Agreement provides that Florida law controls. Ex. 4 at 3.
Lastly, Paydirt also argues that its claim is noncontingent. Since the Court already determined Paydirt's claim is unliquidated, it does not matter whether the debt is noncontingent for purposes of subchapter V eligibility.
The Court further finds Burdock has met all the requirements for confirmation under § 1191(b). Accordingly, it is
ORDERED:
1. The Objection (Doc. No. 61) is OVERRULED.
2. The Motion for Summary Judgment (Doc. No. 79) is DENIED.
3. The Motion for Cramdown (Doc. No. 82) is GRANTED.
4. Burdock is directed to submit an order confirming its Subchapter V Plan.
5. Debtor's Objection to Paydirt's Claim (Doc. No. 65) is scheduled for a preliminary hearing on July 23, 2024 at 11:00 a.m. in Courtroom 6C, 6th Floor, George C. Young Courthouse, 400 West Washington Street, Orlando, FL 32801.
Attorney R. Scott Shuker is directed to serve a copy of this order on interested parties who do not receive service by CM/ECF and file a proof of service within three days of entry of this order.