Kvassay v. Murray
808 P.2d 896, 15 Kan. App. 2d 426 (1991)
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Rule of Law:
Under the Uniform Commercial Code (UCC), the reasonableness of a liquidated damages clause is determined by its relation to the anticipated or actual harm from the specific contract breach, not by comparison to the seller's prior income. Furthermore, a new business is not precluded as a matter of law from recovering lost profits, provided they can be proven with reasonable certainty.
Facts:
- On February 22, 1984, Michael Kvassay entered into a contract to sell 24,000 cases of baklava at $19.00 per case to Great American Foods, Inc. (Great American) over a one-year period.
- The contract designated Great American as Kvassay's sole customer for his new baklava business.
- The agreement contained a liquidated damages clause stating that if Great American refused delivery, Kvassay would be entitled to damages of $5.00 per case for each case remaining.
- Kvassay had previously worked as an independent insurance adjuster, earning about $20,000 per year.
- Great American experienced financial issues, and its principals, Albert and Deana Murray, often had to issue personal checks to cover payments after corporate checks were dishonored.
- After Kvassay had produced approximately 3,000 cases, the Murrays refused to purchase any more baklava, causing Kvassay to cease production.
- The Murrays operated Great American and several other entities with a disregard for corporate formalities, such as commingling funds, paying personal expenses with corporate money, and failing to maintain proper corporate records.
Procedural Posture:
- In April 1985, Michael Kvassay sued Great American Foods, Inc., and its principals, the Murrays, in a Kansas trial court for breach of contract.
- Great American filed a counterclaim against Kvassay.
- The trial court bifurcated the case, holding separate bench hearings on the issues of liquidated damages and piercing the corporate veil.
- The trial court ruled that the liquidated damages clause was unenforceable but that Great American's corporate veil could be pierced.
- The trial court also ruled as a matter of law that Kvassay could not recover lost profits because his business was new and any profit calculation would be too speculative.
- A jury trial was held on the remaining issues of breach and damages.
- During the trial, the court barred Kvassay from presenting any evidence related to his lost profits.
- The jury found in Kvassay's favor and awarded him $35,673.99 in damages.
- Kvassay appealed the trial court's rulings on liquidated damages and lost profits to the Court of Appeals of Kansas, and Great American cross-appealed the ruling on piercing the corporate veil.
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Issue:
Under the Uniform Commercial Code, are (1) a liquidated damages clause unenforceable for being unreasonable by comparing it to the seller's prior income, and (2) lost profits for a new business unrecoverable as a matter of law?
Opinions:
Majority - Walker, J.
No. The reasonableness of a liquidated damages clause under UCC § 2-718 must be measured against the anticipated or actual harm from the breach of the contract at issue, not the seller's income from a prior, unrelated business. No. Lost profits for a new business are not unrecoverable as a matter of law; under UCC § 2-708, a new venture must be given the opportunity to prove its lost profits with reasonable certainty. The trial court erred by applying an improper standard to evaluate the liquidated damages clause. The UCC test for reasonableness under K.S.A. 84-2-718 involves three factors: the anticipated or actual harm, the difficulty of proving loss, and the difficulty of obtaining another adequate remedy. Comparing the $105,000 liquidated damages claim to Kvassay's prior $20,000 income was an incorrect legal analysis. Regarding lost profits, the trial court incorrectly ruled that the UCC did not apply and that a business must have an established history to claim them. K.S.A. 84-2-708(2) and its official comment explicitly allow for the recovery of lost profits, even for a new venture, to put the seller in as good a position as if the contract had been performed. Kvassay presented substantial evidence of his production costs and capacity, which should have been considered to determine if lost profits could be proven with reasonable certainty. Finally, the court affirmed piercing the corporate veil, finding sufficient evidence that the Murrays operated Great American as their alter ego, disregarded corporate formalities, and used the corporate structure to work an injustice on Kvassay.
Analysis:
This decision clarifies the application of key UCC damages provisions in Kansas, particularly for new business ventures. By rejecting the trial court's comparison of liquidated damages to prior income, the court reinforces that the reasonableness analysis under UCC § 2-718 must be tethered directly to the economics of the contract itself. More significantly, the ruling establishes a protective precedent for entrepreneurs, affirming that under UCC § 2-708, the lack of an earnings history does not automatically bar a new business from recovering lost profits. This lowers the risk for new businesses entering into contracts, as it prevents parties from breaching early with impunity, knowing that damages might be considered too speculative.
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