Law School Case Brief
In re WorldCom, Inc. - 361 B.R. 675 (Bankr. S.D.N.Y. 2007)
A lost volume seller is one who has the capacity to perform the contract that was breached in addition to other potential contracts due to unlimited resources or production capacity. A lost volume seller does not minimize its damages by entering into another contract because it would have had the benefit of both contracts even if the first were not breached. The lost volume seller has two expectations, the profit from the breached contract and the profit from one or more other contracts that it could have performed at the same time as the breached contract. The philosophical heart of the lost volume theory is that the seller would have generated a second sale irrespective of the buyer's breach and that it follows that the lost volume seller cannot possibly mitigate damages. The lost volume seller theory applies to contracts for services as well as goods.
Michael Jordan and bankruptcy debtor MCI, which was affiliated with bankruptcy debtor WorldCom, Inc. (Collectively, "MCI"), entered into an endorsement agreement ("Agreement"). At that time, Jordan was considered to be one of the most popular athletes in the world. The Agreement granted MCI a ten-year license to use Jordan's name, likeness, "other attributes," and personal services to advertise and promote MCI's telecommunications products and services beginning in Sept. 1995 and ending in Aug. 2005. The Agreement did not prevent Jordan from endorsing most other products or services, although he could not endorse the same products or services that MCI produced. In addition to a $ 5 million signing bonus, the Agreement provided an annual base compensation of $ 2 million for Jordan per year. The Agreement provided that Jordan would be treated as an independent contractor and that MCI would not withhold any amount from Jordan's compensation for tax purposes. The Agreement further provided that Jordan was to make himself available for four days, not to exceed four hours per day, during each contract year to produce television commercials and print advertising and for promotional appearances. The parties agreed that the advertising and promotional materials would be submitted to Jordan for his approval, which could not be unreasonably withheld, fourteen days prior to their release to the general public. From 1995 to 2000, Jordan appeared in several television commercials and a large number of print ads for MCI.
In 2002, MCI filed for bankruptcy protection in federal bankruptcy court. Jordan filed claims in the amount of $ 2 million, plus contingent and unliquidated amounts, allegedly due under the Agreement. In July 2003, MCI rejected the Agreement as of that date, pursuant to § 365(a) of the Bankruptcy Code. Following that rejection of the Agreement, Jordan filed a claim in the amount of $ 8 million—seeking $ 2 million for each of the payments that were due in June of 2002, 2003, 2004, and 2005. MCI did not object to the claim to the extent Jordan sought $ 4 million for the 2002 and 2003 payments under the Agreement. As of the rejection in July 2003, two years remained under the Agreement. The parties filed competing motions for summary judgment.
Was Jordan entitled to recover $8 million from MCI under the parties' Agreement?
The court held that the Agreement was not an employment contract pursuant to § 502(b)(7) of the Bankruptcy Code because the Agreement explicitly stated that Jordan would be treated as an independent contractor and he was, in fact, treated as an independent contractor. The court, however, held that Jordan failed to mitigate his damages after MCI terminated the agreement. The court held that Jordan was not a lost volume seller, for whom mitigation did not apply, because he lacked a nearly limitless supply and had no intention of continuing to market his services as a product endorser because he had implemented a strategy of not accepting new endorsements because of a belief that new deals would jeopardize his ability to achieve his primary goal of owning a National Basketball Association franchise. Thus, the court held that creditor failed to mitigate damages but an evidentiary hearing was necessary to determine what creditor could have received had he made reasonable efforts to mitigate.
To the extent Jordan moved to overrule MCI's objection to his bankruptcy claim on the ground that the Agreement was an employment agreement under section 502(b)(7), Jordan's motion for summary judgment was granted. To the extent Jordan moved to overrule MCI's objection based on MCI's argument that Jordan failed to mitigate damages, Jordan's motion was denied. MCI's motion for summary judgment was granted in part and denied in part. To the extent MCI sought to disallow Jordan's bankruptcy claim in full, MCI's motion for summary judgment was denied. To the extent MCI moved for a ruling that § 502(b)(7) limited his claim, MCI's motion was denied. To the extent MCI claimed that Jordan failed to mitigate damages, MCI's motion was granted in part. The court found that while Jordan failed to mitigate damages, a further evidentiary hearing was necessary to determine what Jordan could have received had he made reasonable efforts to mitigate, a determination that consequently would affect his claim.
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