Caseflicks

Court of Appeals of Kansas • 1993

Jetz Service Co. v. Salina Properties

865 P.2d 1051 | 19 Kan. App. 2d 144 | 1993 Kan. App. LEXIS 145

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Takeaway

In short, this case recognizes that a service lessor with sufficient capacity to perform both the breached lease and later leases may recover the profit lost on the breached agreement as a lost-volume lessee.

Background

Jetz Service supplied and maintained coin-operated laundry equipment at roughly 2,000 locations across eight states. It kept about 1,500 used washers and dryers available in warehouses and continually sought new places to lease equipment.

In 1987, Salina Properties’ predecessor leased Jetz 175 square feet in an apartment complex for a six-year coin-operated laundry facility. Jetz installed five washers and five dryers, paid a $3,000 decorating allowance, and was entitled to receive the first $300 per month or 50 percent of the machines’ gross receipts, whichever was greater.

With 16 months left on the lease, Salina Properties disconnected Jetz’s equipment and replaced it with its own machines. Jetz retrieved the equipment for $187.50 and stored it. Six months later, it used four sets of the equipment in a Kansas City lease, though it had other suitable machines available for that transaction.

Jetz sued for the profits it expected during the remaining 16 months. The trial court found that Jetz was a lost-volume lessee, awarded $6,383.08 in damages after crediting Salina Properties for one month of unpaid rent, and awarded $2,165 in attorney fees. Salina Properties did not dispute its breach, but argued that Jetz failed to mitigate and did not adequately prove lost profits.

Issues

Issue #1

Whether Jetz had a duty to mitigate its damages by re-leasing the repossessed laundry equipment before leasing other equipment from its inventory.

Holding

No. Jetz was a lost-volume lessee, so its later use of the recovered equipment did not reduce the profits lost from Salina Properties’ breach.

Reasoning

Contract damages aim to put the injured party in the position it would have occupied had the contract been performed. Although an injured party must make reasonable efforts to avoid avoidable loss, mitigation does not require it to surrender profits from independent transactions that it could have completed even without the breach.

The court adopted the lost-volume principle for an appropriate service-oriented business, even though the Uniform Commercial Code’s lost-volume-seller provision did not directly govern this lease. A later transaction is not a substitute transaction when the injured party could and would have performed both the original contract and the later one absent the breach.

Substantial evidence supported Jetz’s lost-volume status. Jetz maintained a large inventory of laundry equipment, regularly pursued new leasing locations, and could have supplied the Kansas City customer using other machines. Thus, the Kansas City lease was business Jetz could have earned in addition to—not instead of—the Salina lease.

Because the breach did not create the Kansas City opportunity, requiring Jetz to use the Salina machines there in mitigation would improperly deprive Jetz of the benefit of its bargain. Salina Properties therefore remained liable for the lost profits throughout the unexpired lease term, despite Jetz’s later use of eight of the ten machines.

Issue #2

Whether Jetz proved its lost profits with reasonable certainty and showed that those profits were within the parties’ contemplation when they made the lease.

Holding

Yes. Jetz established its anticipated profits through the facility’s actual operating history, and lost profits naturally flowed from this revenue-sharing lease.

Reasoning

Kansas permits recovery of lost profits when they are proved with reasonable certainty and were within the parties’ contemplation. A history of past profitability is a recognized and reliable way to establish projected profits.

Jetz calculated its future lost profits from the gross receipts generated during the seven months immediately preceding Salina Properties’ breach. That historical data gave the trial court a reasonable basis to estimate the profits Jetz would have earned during the final 16 months.

Although the parties did not expressly discuss lost profits when signing the lease, the lease itself made the parties’ payments depend on laundry revenue. The expected profitability of the equipment was therefore central to the agreement, and lost profits were a natural and foreseeable result of Salina Properties’ premature termination.

Issue #3

Whether the lost-profit award had to be reduced by maintenance and insurance costs Jetz allegedly saved after the breach.

Holding

No. The claimed maintenance and insurance expenses were fixed overhead costs that were not affected by the breach and therefore were not deductible from lost profits.

Reasoning

Lost-profit damages account for costs that the injured party actually avoids because performance did not occur. But continuous business expenses, or fixed overhead, are not subtracted merely because a particular contract was breached.

The record showed that Jetz’s maintenance and insurance expenses were fixed costs rather than expenses eliminated by losing the Salina lease. Since the breach did not save Jetz those costs, the trial court properly declined to reduce the damages award.