In re WorldCom, Inc., 361 B.R. 675

United States Bankruptcy Court

2007

Chapter

20

Title

Contract Remedies

Page

754

Topic

Limitations on Recovery of Expectation Damages

Quick Notes

This is the second analysis of the cause directly referring to Michael Jordans obligation to mitigate damages.

Issue

o         Whether Jordans had an obligation to mitigate damages whether he was or was not a lost volume seller?  Yes.

Procedure

B.R

o         In the last analysis, Jordan was not established as a lost volume seller.

o         The Court finds that Jordan failed to mitigate damages but a further evidentiary hearing is necessary to determine what Jordan could have received had he made reasonable efforts to mitigate, a determination that consequently will affect the Claim

Facts

Rules

Reason

o         Pl - Jordan

o         Df - In re WorldCom

What happened?

o         Jordan and the Debtors entered into an endorsement agreement.

o         Jordan was considered to be one of the most popular athletes in the world.

o         The Agreement granted MCI a ten-year license to use Jordan's name, likeness.

o         The Agreement did not prevent Jordan from endorsing most other products or services.

o         Could not endorse the same products or services that MCI produced.

o         $5 million signing bonus,

o         Annual base compensation of $2 million for Jordan.

o         The Agreement provided that Jordan would be treated as an independent contractor

o         Four days, not to exceed four hours per day, for commercials.

WorldCom Chapter 11 Bankruptcy

o         MCI Rejected agreement with Jordan with 2 years left.

o         Jordan filed a claim for $4 million.

 MCI Argues

o         Jordan had an obligation to mitigate his damages and failed to do so.

o         Because of this, MCI is under not obligation to pay Jordan.

Jordan Argues

o         The objection should be overruled and dismissed for three independent reasons:

1.         Jordan was a "lost volume seller" and thus mitigation does not apply,

2.         There is no evidence that Jordan could have entered into a "substantially similar" endorsement agreement, and

3.         Jordan acted reasonably when he decided not to pursue other endorsements after MCI's rejection of the Agreement.

Duty to Mitigate Damages

o         The doctrine of avoidable consequences, which has also been referred to as the duty to mitigate damages, bars recovery for losses suffered by a non-breaching party that could have been avoided by reasonable effort and without risk of substantial loss or injury.

o         The burden of proving that the damages could have been avoided or mitigated rests with the party that committed the breach. The efforts to avoid or mitigate the damages do not have to be successful, as long as they are reasonable.

Jordan Argues Lost Volume Seller

o         Jordan is a lost volume seller and any additional endorsement contracts would not have been substitutes and would not have mitigated the damages for which MCI is liable.

o         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.

Lost Volume Seller Two Expectations

1.       The profit from the breached contract

2.       The profit from one or more other contracts that it could have performed at the same time as the breached contract.

Courts Conclusion (Lost Volume Seller)

o         Court concludes that Jordan was not a lost volume seller.

o         If Jordan had been seeking additional endorsement agreements independent of the Agreement's rejection, the Court could conclude that Jordan was a lost volume seller and irretrievably lost the money from the MCI Agreement.

Jordan Argues MCI must show .

o         MCI must show that Jordan could have entered a "substantially similar" endorsement contract in order to mitigate damages.

Courts (Substantially Similar Analysis)

o         This is not the law of mitigation of damages.

o         This stems from federal employment cases concerning back pay which this is not.

First Point

• This standard was to ensure an employees future advancement.
• This does not apply because Jordan is not an employee.

Second Point

• To require acceptance of inferior employment can mean "that one who has been discriminated against would be obliged, in order to mitigate damages, to submit to the very discrimination of which he complains.  Has no application here.

Third Point

• Duty of employee to find substantially equivalent employment.
• MCI must show the absence of reasonable effort by Jordan to avoid consequence or minimize his damages.

Movie Star Case

o        The substitute movie that the movie star refused could not be applied because the second offer was different and inferior.

Other Points

• Jordan was changing his strategy to not be a pitchman and buy an NBA franchise.
• Jordan says he was talking with Nextel.
• MCI says that talking with accompany does not mean you are in contract with them.
• Court:  MCI has established that Jordan did not take affirmative step to mitigate damages.

Jordans Argument Dilute impact as an endorser.

o         Court says this was not convincing.

o         MCI says replacing a lost endorsement is the status quo, no a dilution of Jordans impact.

o         Previously, Jordan has 16 endorsements, which further weakens the argument.

o         Also Jordan not wanting endorsement to damage his changes of become an NBA owner was irrelevant to his duties to mitigate damages.

Jordans Argument - Risk to reputation Theory

o         An injured party is not allowed to recover from a wrongdoer those damages that the injured party "could have avoided without undue risk, burden or humiliation."

Courts Response Harm to Reputation

o         Flawed because the envisioned harm to Jordan's reputation does not rise to the level of harm found in the cited case law.

o         No factual assertions of how Jordans passing up endorsements is akin to the below cases.

Kodak Case Cite

o        Kodak was not required to mitigate damage by selling damaged merchandize that could harm its reputation.

Sony Case Cite

o        Sony was not required to sell damaged products that harm their reputation.

Bernstein Case

o        Ripping out concrete slab could damage reputation.

o        A celebrity endorser has nothing to do with the company failing.

Citizen Bank Case

o        Where a choice has been required between two reasonable courses, the person whose wrong forced the choice can not complain that one rather than the other was chosen."

o        Ct:  MCI is not complaining about the choice between "two reasonable courses" of mitigation. MCI is arguing that choosing to take no steps to mitigate is not a reasonable course.

Jordan Argues Goal of owning NBA Franchise

Novelty Textile Mills Case

o         If the course of conduct chosen by the plaintiff was reasonable, the plaintiff can recover despite the existence of another reasonable course of action that would have further lessened the plaintiff's damages".

o         The Pl attempt to salvage the goods the damaged fabric instead of clean it was reasonable.

o         Ct:  Focus on owning an NBA franchise was not done to lessen the damage.

Courts Response - Goal of owning NBA Franchise

o         It may have been reasonable for Jordan to focus on becoming an NBA team owner in the scope of Jordan's overall future desires but that does not mean it can support a determination that he was relieved of his obligation to mitigate damages in response to MCI's rejection of the Agreement.

o         Jordan failed to mitigate.

Conclusion

o         To the extent Jordan moved to overrule MCI's objection to the Claim that the "Agreement" is an employment agreement under section 502(b)(7), Jordan's motion is granted.

o         To the extent Jordan moved to overrule MCI's objection based on MCI's argument that Jordan failed to mitigate damages, Jordan's motion is denied.

o         MCI's motion for summary judgment is granted in part and denied in part.

o         To the extent MCI sought to disallow the Claim in full, MCI's motion is denied.

o         To the extent MCI moved for a ruling that section 502(b)(7) limits the Claim, MCI's motion is denied.

o         To the extent MCI claimed that Jordan failed to mitigate damages, MCI's motion is granted in part.

o         The Court finds that Jordan failed to mitigate damages but a further evidentiary hearing is necessary to determine what Jordan could have received had he made reasonable efforts to mitigate, a determination that consequently will affect the Claim.

Class Notes

Contracts Law > Remedies >  Avoidable Consequences (Duty to Mitigate Damages)

Duty to Mitigate Damages

o         The doctrine of avoidable consequences, which has also been referred to as the duty to mitigate damages, bars recovery for losses suffered by a non-breaching party that could have been avoided by reasonable effort and without risk of substantial loss or injury.

o         The burden of proving that the damages could have been avoided or mitigated rests with the party that committed the breach. The efforts to avoid or mitigate the damages do not have to be successful, as long as they are reasonable