By Daniel Brown and Victoria Lee

In Deephaven Distressed Opportunities Tradings, Ltd. v. 3V Capital Master Fund Ltd., Index No. 600610/08 (Sup. Ct., NY County, Jun. 26, 2012), Judge Melvin L. Schweitzer denied the plaintiffs’ motion for summary judgment on its damages claims. The case arose from a dispute over the trade of distressed claims in the Sea Container, Inc. bankruptcy. Deephaven and 3V Capital executed trade confirmations that would convey “allowed” claims to 3V Capital subject to a negotiated assignment agreement. The parties signed confirmations on three trades, two of which led to this dispute. In February 2008, Deephaven commenced this action for breach of contract. In October 2011, the court granted Deephaven’s motion for summary judgment against 3V Capital on the issue of breach of contract and ordered that damages would be clarified at a hearing with a special referee report. In April 2012, both parties agreed to cancel the damages hearing and vacate the order of reference. 3V Capital moved to cancel the damages hearing on the basis that it was entitled to a jury trial on the damages. Deephaven cross-moved for an award of damages in connection with a motion for summary judgment.

Noting that awarding summary judgment on damages would deprive the defendants of their day in court, Judge Schweitzer held that both the issues of damages and reasonable mitigation would be submitted to the jury due to outstanding issues of fact. Under New York law, the measure of damages is a question of law but the value of damages may be a question of fact. Deephaven asked the court to calculate the damages as the contract price (plus prejudgment interest at the statutory rate of nine percent per year), less the amount for which Deephaven ultimately sold the distressed claims. Relying on New York common law, Judge Schweitzer rejected Deephaven’s suggestion, stating that under New York law, damages are the difference between the contract price for the asset and the fair market value of the asset at the time of breach. Judge Schweitzer also noted that using Deephaven’s method of calculation would go farther than making the non-breaching seller whole at the time of breach, because at the time of breach Deephaven still retained ownership of the claims, which had some economic value.

In addition, Judge Schweitzer held that when it is difficult to determine the value of the claims at the time of the breach, determining the value of such assets through the use of expert testimony is favored over awarding the plaintiff the purchase price. He found that, in the present case, disputes existed over whether the value of the claims at the time of breach could be determined and whether there was a market for the claims. Hence, he held that the calculation of the damages would be decided by the jury.

Deephaven also suggested that UCC 2-709(1)(b) could provide an alternative measure of damages, arguing that since the buyer failed to pay the contract price, the seller can recover the price of goods identified in the contract. Again, Judge Schweitzer held that whether Deephaven tried to resell the claims at a reasonable price, which is required in order to apply the measure of damages afforded by UCC 2-709(1)(b), was a matter for the jury to resolve.

Finally, Judge Schweitzer held that a jury trial would be required to determine whether Deephaven reasonably attempted to mitigate any damages from the breach of contract. It was not enough that Deephaven established that it had asked a broker to try to resell the claims and eventually resold the shares for $0.11/share more than the price for acquisition. Judge Schweitzer held that in order to prove that a non-breaching party took reasonable steps to mitigate a breach of contract, he would have to establish more than just that he found an alternative buyer. He pointed out that reasonable steps included negotiating with reasonable prices at appropriate times. Since Deephaven had only established that it had found an alternative buyer for the shares, whether Deephaven had taken reasonable steps to mitigate had to be evaluated by the jury.

Thus, even when case is appropriate for summary judgment on liability and the measure of damages, in order to avoid a trial, litigants must still be prepared to establish that there are no material issues of fact regarding the value of any such damages or reasonable mitigation.