Bubble Up Delaware, Inc., In re, 81-5168

• Citation: 684 F.2d 1259
• Decision Date: 23 August 1982
• Docket Number: No. 81-5168,81-5168
• Parties: 30 Cont.Cas.Fed. (CCH) 70,299 In re BUBBLE UP DELAWARE, INC., a Delaware corporation, Debtor. Irving SULMEYER and Arnold Kupetz, Co-Trustees, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1259

684 F.2d 1259

30 Cont.Cas.Fed. (CCH) 70,299

In re BUBBLE UP DELAWARE, INC., a Delaware corporation, Debtor.

Irving SULMEYER and Arnold Kupetz, Co-Trustees, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 81-5168.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 2, 1982.

Decided Aug. 23, 1982.

Clifford J. Meyer, Buchalter, Nemer, Fields, Chrystie & Younger, Los Angeles, Cal., for plaintiffs-appellants.

Philip Malinsky, Asst. U. S. Atty., Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before ELY, NELSON and CANBY, Circuit Judges.

NELSON, Circuit Judge:

The controversy in this case centers around the proper characterization of a damages clause in a government contract. Specifically, the main issue is whether the clause is an allowable liquidated damages clause or a non-allowable penalty provision. We affirm the district court's conclusion that the clause was one for liquidated damages. We also affirm the district court's holding that the government did not fail to perform any condition precedent which would affect its entitlement to liquidated damages.

I. BACKGROUND

In 1970, the debtor, Bubble Up Delaware, Inc. ("Bubble Up"), filed a Chapter X petition in bankruptcy. In 1976, the United States Department of Labor ("Labor") filed a final proof of claim against Bubble Up in the amount of $700,000. That claim was based upon a breach of a contract that had been entered into by the debtor and the United States acting through the Secretary of Labor.

The original contract provided that Labor would provide $1,000,000 to Bubble Up. In return, Bubble Up was to employ 275 hard-core unemployed residents of South Los Angeles for a period of six months. The final amended version of the contract provided that Bubble Up was to employ 300 persons for a period of nine months. ¹ At the center of the present dispute is the proper characterization of the following damages provision in the amended contract:

(a) If the Contractor defaults in its performance of any part of the program described in ARTICLE I of this contract, the Contractor shall be liable to the Government for liquidated damages as follows:

....

(2) If such default by the Contractor occurs with respect to its employment structured training and stock participation plans at its said production facility as provided hereinabove the Contractor shall refund to the government for each employment opportunity short of 300, the sum of Twenty Five Hundred Dollars ($2,500); PROVIDED, HOWEVER, that no such refund shall be required by the Contractor unless the number of persons certified by CEP ... is at least three (3) for each of the 300 employment opportunities which the Contractor has agreed to provide hereunder at its aforesaid facility.

The co-trustees objected that the above provision was a penalty or forfeiture to be disallowed under § 57(j) of the Bankruptcy Act ², 11 U.S.C. § 93(j). ³

The bankruptcy judge disallowed Labor's claim, finding that the damages provisions did not reasonably forecast just compensation for any harm which might be caused by a breach, and held the provision was a penalty. The bankruptcy judge also held that Labor, having failed to satisfy a condition precedent to the recovery of liquidated damages, was thereby precluded from recovering such damages.

We turn now to the issues that must be confronted here: first, whether the damages provision in the amended contract was a valid liquidated damages clause rather than an invalid penalty clause, and second, whether Labor is precluded from recovering liquidated damages by having failed to perform a condition precedent to recovery.

II. LIQUIDATED DAMAGES CLAUSE

A. Standard of Review

The bankruptcy judge's findings of fact can only be reversed on appeal to the district court if they are clearly erroneous. In this case, the district court reversed certain of the bankruptcy judge's findings of fact under the clearly erroneous standard. Therefore, we would review the bankruptcy judge's findings of fact under the same standard. Rose Pass Mines, Inc. v. Howard, 615 F.2d 1088, 1091 (5th Cir. 1980); Clancy v. First Nat'l Bank, 408 F.2d 899, 903 (10th Cir.), cert. denied 396 U.S. 958, 90 S.Ct. 430, 24 L.Ed.2d 422 (1969); Potucek v. Cordeleria Lourdes, 310 F.2d 527, 530 & n.9 (10th Cir. 1962), cert. denied 372 U.S. 930, 83 S.Ct. 875, 9 L.Ed.2d 734 (1963). ⁴ Under the "clearly erroneous" standard of review, a finding of fact is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746, 766 (1948).

The limitation that the clearly erroneous standard imposes on appellate review does not apply to review of conclusions of law. In re Howell, 638 F.2d 81, 82 (9th Cir. 1980); Lama Co. v. Union Bank, 315 F.2d 750, 752 (9th Cir. 1963). Where the facts in the record are not in significant dispute, our task is to determine whether a legal conclusion is contrary to law. Cf. In Re Amex-Protein Development Corp., 504 F.2d 1056, 1058 (9th Cir. 1974) (adopting district court's opinion reviewing referee's findings). The fact that a court labels determinations "Findings of Fact" does not make them so if they are in reality conclusions of law. Poyner v. Lear Siegler, Inc., 542 F.2d 955, 959 (6th Cir. 1976), cert. denied 430 U.S. 969, 97 S.Ct. 1653, 52 L.Ed.2d 361 (1977).

In the instant case, the bankruptcy judge, under the heading "Findings of Fact," determined that the damages provisions of the amended contract were not a reasonable forecast of just compensation for any harm that might be caused by Bubble Up's breach. The district court reversed this finding as clearly erroneous. For reasons stated below we agree that the bankruptcy court's determination was clearly erroneous. Because of this holding, we need not decide whether such a determination is a question of law or fact; nor need we decide whether the appropriate standard of review is de novo review or the clearly erroneous standard. Suffice it to say that since the bankruptcy court's conclusion cannot stand up under the clearly erroneous test, ipso facto it would fall if review were de novo.

B. Reasonableness of Damages

Under the principles of general contract law that apply to the construction of government contracts, Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411, 68 S.Ct. 123, 125-26, 92 L.Ed. 32, 38 (1947), liquidated damages provisions are not penalties "(w)hen they are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of contract." 332 U.S. at 411, 68 S.Ct. at 126, 92 L.Ed. at 38. Thus, a basic requirement for a valid liquidated damages clause is that the liquidated amount be reasonable. ⁵

In the instant case, the inclusion of the liquidated damages clause served to limit Bubble Up's potential liability. Under the clause, the debtor's maximum liability for complete failure to perform was $750,000, whereas, without the clause, the debtor could have been liable for more. ⁶ The sum of $2,500 was purposefully chosen as an estimate of government costs for training persons under another government program. ⁷ Furthermore, the employment period was believed necessary to rehabilitate a hard-core unemployed worker. The liquidated damages amount was less per worker than the amount Labor intended to pay Bubble Up under the contract. ⁸

Finally, at the time the contract was entered into, it would have been very difficult to calculate actual damages in advance of breach. This is an important consideration for recovery of liquidated damages since such damages are most useful where "damages are uncertain in nature or amount or are unmeasurable, as in the case of many government contracts." Priebe & Sons v. United States, 332 U.S. at 411, 68 S.Ct. at 126, 92 L.Ed. at 38. ⁹

In light of these circumstances, we hold it was fair and reasonable for the parties to set $2,500 as the amount of liquidated damages for each worker employed less than nine months. ¹⁰

The bankruptcy judge believed that:

Perhaps the most significantly unreasonable factor in the Government's application of an indiscriminate $2,500 figure to the Bubble Up contracts was its failure to acknowledge the benefits to the Government and the detriment to Bubble Up inherent in training an employee who did not remain on the job for the full 6 or 9 month period.

This analysis, however, misconceives the nature of the contract, which required an extended period of employment to rehabilitate the chronically unemployed. The parties bargained for a nine-month term and the contract explicitly includes such a term.

The damages are commensurate with the injury. The liquidated damages are proportionate to the number of employees not hired for the requisite period. A finer calibration is not necessary where the parties have bargained for a period of employment and where the value of less than full performance is questionable and difficult to calculate.

III. LABOR DID NOT FAIL TO PERFORM A CONDITION PRECEDENT TO THE RECOVERY OF LIQUIDATED DAMAGES

Bubble Up contends that there was a condition precedent to its performance with which Labor failed to comply. According to Bubble Up, the condition precedent to its performance, and hence, to the government's entitlement to liquidated damages, was that the government first had to certify three persons for each employment opportunity that the contract required Bubble Up to supply.

Whether the contract, by its terms, contained such a condition is a matter of contract interpretation. The question of interpretation of a contract is a question of law subject to de novo review, and not a question of fact. In re Beverly Hills Bancorp, 649 F.2d 1329, 1334 (9th...