Krafsur v. UOP (In re El Paso Refinery, LP)
196 B.R. 58 (1996)
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Rule of Law:
A seller of a specialized, site-specific product or license is not a 'lost volume seller' if the subsequent sale to a new buyer was a direct replacement for the breached contract and would not have been possible but for the original buyer's breach.
Facts:
- UOP, a developer of petroleum refining technology, entered into licensing agreements allowing El Paso Refinery, L.P. ('L.P.') to use UOP's patented technologies at L.P.'s refinery.
- L.P. breached the agreements by failing to make required royalty payments to UOP.
- Subsequently, L.P.'s lenders foreclosed upon the refinery's assets.
- The lenders then conveyed ownership of the refinery to a newly formed entity, Refinery Holding Company, L.P. ('RHC').
- RHC, through its operator Chevron, began using UOP's technology to operate the refinery.
- After negotiations, UOP entered into a new licensing agreement with RHC for approximately $3.7 million, allowing RHC to use essentially the same technology at the same refinery.
Procedural Posture:
- El Paso Refinery, L.P. filed for voluntary Chapter 11 bankruptcy in the U.S. Bankruptcy Court.
- UOP filed a proof of claim against the bankruptcy estate for approximately $4 million for unpaid royalties and other services.
- The Trustee of the bankruptcy estate initiated an adversary proceeding (a lawsuit within the bankruptcy case) against UOP.
- The Trustee's complaint objected to UOP's claim, arguing that it had been satisfied by a subsequent transaction with a third party, RHC.
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Issue:
Is a licensor of specialized, site-specific technology a 'lost volume seller' entitled to recover damages for unpaid royalties from a breaching licensee's bankruptcy estate, after the licensor sold a new, similar license to the entity that took over the breaching licensee's specific assets?
Opinions:
Majority - Leif M. Clark
No. A licensor is not a lost volume seller when the second sale is a mere replacement for the first, made possible only by the original buyer's breach. The 'lost volume seller' doctrine is intended to compensate a seller who would have made two sales absent the breach, not to provide a double recovery. Here, UOP's sale to RHC was not an independent event but a direct consequence of L.P.'s breach and subsequent foreclosure. The court distinguished this case from precedents like Wired Music, where the seller had an unlimited supply of a fungible service and a vast market of potential customers. UOP's licenses were highly specialized and unit-specific to the El Paso refinery, meaning its market for that specific license was limited to the operator of that refinery. But for L.P.'s breach, RHC would not have existed as a potential customer. Therefore, the sale to RHC mitigated, and in this case exceeded, the damages from L.P.'s breach, as L.P.’s breach eliminated one customer and created another. Allowing UOP's claim would result in an impermissible double recovery.
Analysis:
This decision significantly refines the application of the 'lost volume seller' doctrine in the context of intellectual property and other specialized, non-fungible assets. The court emphasizes that a theoretical 'unlimited supply' of licenses does not automatically confer lost volume status; the practical limitations of the market and the nature of the asset are critical. By focusing on a 'but for' causation analysis—whether the second sale would have occurred independently of the first breach—the case provides a crucial precedent for disputes involving site-specific or customer-specific contracts. It makes it more difficult for sellers of unique or specialized goods to recover lost profits if the resale is merely a replacement transaction made possible by the original breach.
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