In re Lammers

• Decision Date: 30 October 1962
• Docket Number: No. LR-60-B-170.,LR-60-B-170.
• Citation: 211 F. Supp. 448
• Parties: In the Matter of John LAMMERS, d/b/a Lammers Rice Mill and Lammers Drier, Bankrupt.
• Court: U.S. District Court — Eastern District of Arkansas

211 F. Supp. 448

In the Matter of John LAMMERS, d/b/a Lammers Rice Mill and Lammers Drier, Bankrupt.

No. LR-60-B-170.

United States District Court E. D. Arkansas, W. D.

October 30, 1962.

Robert D. Smith, U. S. Atty., for the Eastern District of Arkansas and Charles Mott, Jr., Asst. U. S. Atty., Little Rock, Ark., for petitioner.

H. Murray Claycomb, of Gregory & Claycomb, Pine Bluff, Ark., for respondent.

YOUNG, District Judge.

Commodity Credit Corporation filed its claim for $99,207.00 alleging that it was entitled to priority against the assets of the estate under 11 U.S.C.A. § 104 by virtue of 31 U.S.C.A. § 191. The Trustee objected to this claim; it was the Trustee's major contention that the claim by the Government was in fact a penalty, which is not entitled to priority under § 57, sub. j of the Bankruptcy Act, as amended. The Referee correctly, I think, states the problem to be whether or not the claim of Commodity Credit is a penalty.

The facts which gave rise to this litigation occurred in the following manner. On December 14, 1959 the Bankrupt and Commodity Credit entered into a contract whereby the Bankrupt would furnish rice to the Indonesian Relief Mission, and the Department of Agriculture and the Commodity Credit Corporation would subsidize Bankrupt for the difference in the domestic price and the foreign price (i. e., the price paid by the Indonesian Relief Mission). The subsidy which the Bankrupt would have received, had he not breached the contract, was to be negotiable payment-in-kind certificates which are redeemable (at market price) only for Commodity Credit rice or feed-grain. This contract provided that:

"* * * Inasmuch as failure of the exporter to export will cause serious and substantial losses to CCC, such as damages to CCC's export and price support programs, and the incurrence of storage, administrative and other costs, and it will be difficult, if not impossible, to prove the exact amount of such damage, the exporter shall pay to CCC liquidated damages promptly upon demand for each hundredweight of rice * * * not exported at the rate of $1.50 per hundredweight. The foregoing rate is agreed by the exporter and CCC to be a reasonable estimate of the probable actual damages that would be incurred by CCC."

However, the Bankrupt never availed himself of this subsidy; within a month after the first contract was entered into, Lammers notified the Indonesian Relief Mission that he would be unable to fulfill the contract, and these two parties negotiated a mutual release. Lammers, however, did not contact Commodity Credit in regard to canceling the contract but relied on his conversations with the Relief Mission (Transcript pp. 33 and 34) (Lammers testified that "it was all worked out at the Indonesian Supply Office"; I assume that he meant that the Indonesian Relief Mission received approval for the release from the Department of Agriculture and Commodity Credit, but the testimony here is very weak and not at all convincing.) This claim was filed by Commodity Credit after Bankruptcy proceedings had begun; the Bankrupt had received no notice of the claim before this time. Commodity Credit had attempted to notify him by mail; this letter was sent to the Bankrupt's California address (Mr. Lammers' broker, who handled the present transaction, had his place of business in California).

The only problem which must be solved is whether the Commodity Credit's claim is for liquidated damages or penalty. The mere fact that the term "liquidated damages" is used in the contract is not controlling; it is necessary that we analyze the facts in light of their legal meaning to determine the issue. The general rule which governs is comparatively simple. "* * * where the damages arising on a breach of a contract are uncertain and difficult of ascertainment, a stipulation for the payment of a designated sum, if reasonable, will be sustained as for liquidated damages." (emphasis supplied) Annot., 59 A.L.R. 1135 (1929) quoting Kimbro v. Wells, 112 Ark. 126, 165 S.W. 645 (1914); for other authority see Priebe & Sons, Inc. v. United States, 332 U.S. 407, 68 S.Ct. 123, 92 L.Ed. 32 (1947); United States v. Le Roy Dyal Co., 186 F.2d 460 (3rd Cir. 1950); Kirkland Distrib. Co. of Columbia, S. C. v. United States, 276 F.2d 138 (4th Cir. 1960); United States v. Kanter, 137 F.2d 828 (8 Cir. 1943); Annot., 38 A.L.R. 595 (1942). Cf. Annot., 59 A.L.R. 1135 (1929) and Annot., 6 A.L.R.2d 1401.

There is no doubt in my mind that the first requirement for liquidated damages is met; if ever the damages arising from a breach of a contract would be "uncertain and difficult of ascertainment" this case is it.¹ The whole transcript before the Referee is replete with testimony that it would be very difficult if not impossible to ascertain the damages which the breach of this contract caused the Government.

The problem that remains to be solved then is whether the so-called liquidated damages provided for in the contract were reasonable. The Referee stated that the C.C.C. cannot produce any "credible testimony indicating that the C.C.C. sustained any actual loss as a result of the mutual cancellation of the I.R.M. contract * * *." The Referee then went on to say: "I disallow its claim because, inter alia, this Court may not bottom a judgment on conjecture and speculation but must have credible testimony." It is my opinion that as a matter of law the actual loss by the Government is not controlling, and the fact that the Government witnesses failed to prove an actual damage is not justification for a disallowance of the claim. Priebe & Sons v. United States, Supra; United States v. Le Roy Dyal Co., Supra; United States v. Walkof, 144 F.2d 75 (2nd Cir. 1944); 3 Collier on Bankruptcy 347 (1961).² To determine whether or not liquidated damages are reasonable the provision should be analyzed as of the time which the parties entered into the contract. Priebe & Sons v. United States, Supra. The fact that the Government cannot now prove how much damage the breach involved in this action has caused is nothing more than an indication of the difficulty or impossibility of determining actual damages. The time which the Referee should have looked to in determining reasonableness was the time in which the contract was entered into, and as I have already stated, the fact that the actual pecuniary loss was not as much as the contract called for does not mean that the "liquidated damages" are in reality a penalty.

We are fortunate to have two very similar cases which can serve as guides. In United States v. Walkof, Supra, Judge Augustus Hand held that where the United States had entered into a contract with the bankrupt in July 1940 for the...