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In re Community Medical Center

decided: June 19, 1980.



Before Aldisert, Weis and Higginbotham, Circuit Judges.

Author: Weis


In this appeal from the allowance of a claim in a bankruptcy proceeding, we must pass upon the proper measure of damages for breach of an executory contract. Although charges would normally be assessed on the basis of services provided, the agreement in this case also contained a minimum monthly charge. We conclude that the debtor could satisfy its obligation by tendering the minimum monthly payment and this establishes the proper measure of damages. Accordingly, the district court erred in utilizing the anticipated profits, a greater amount, in valuing the damages. We therefore vacate the order with directions to substitute the lesser total.

The Community Medical Center filed a petition for an arrangement under Chapter XI of the Bankruptcy Act. In the course of the proceedings, the debtor sought to reduce a claim for $71,472.00 filed by the claimant, InfoMed, as a result of the rejection of their executory contract. The bankruptcy judge reduced the claim to $56,762.81, and the district court affirmed.

The record establishes that in September 1977, the debtor signed a three-year contract to purchase data processing services from InfoMed. The claimant leased the required machines from the manufacturer and installed them in the medical center. This equipment was connected to a large, central computer on InfoMed's premises that serviced the needs of its customers, including the debtor. In addition to providing the equipment, InfoMed maintained the data processing units, trained the debtor's personnel to operate them, and furnished programming services.

The data processing was used by the medical center to prepare such matters as patient billing, financial reports, payrolls, tax reports, daily census reports, and other statistical data necessary for the operation of a modern hospital. Charges to the debtor were computed on the basis of several variables, such as number of in-patient days, out-patient visits, and payroll checks written. The contract was on a form prepared by InfoMed, and under the terms and conditions, which appeared on the back of the agreement, there was language stating, "Charges are a minimum of $1500 per month, starting with the delivery of the items in the Equipment Schedule . . . . Processing charges are based on the Customer's actual number of transactions, as stated in the processing charges section of this Agreement."

The bankruptcy judge found that InfoMed provided the services until July 31, 1978, when the contract was rejected. To that point, the average monthly billings had been $3,411.45. The time remaining under the contract was 24.326 months,*fn1 and the total anticipated billings for the remainder of the contract term was $82,066.93 (24.326 months X $3,411.45).*fn2 From this amount the bankruptcy judge deducted $22,939.00, representing savings in rental fees and other costs that InfoMed could avoid by not completing its performance under the contract. Another discount of $2,365.12 for early payment was allowed, making the total claim $56,762.81.

In the proceedings before the bankruptcy judge, the debtor contended either that the reductions should have been greater than those ultimately allowed or that the claim should have been limited to $1500 per month, the minimum charge stated in the contract. The bankruptcy judge did not discuss the minimum charge contention, stating simply that "the rejection of an executory contract is a breach of contract giving rise to the contractual measure of damages." On appeal, the district judge found "no error in the method or in the calculation" utilized by the bankruptcy judge and affirmed the order.

In this court, the debtor renews its contention that the damages should be computed on the basis of the $1500 minimum charge provision. Accepting the factual findings of the bankruptcy judge, the debtor nevertheless argues that the agreement was a contract for alternative performances. InfoMed, however, asserts that the controversy is a factual one, and that the allowance of the claim did no more than place the creditor in the position it would have been had the contract been fulfilled.

The agreement provides that it be interpreted under the law of New Jersey and the parties have proceeded in accordance with that understanding. New Jersey follows several general rules in the construction of contracts. The most fair and reasonable interpretation imputing the least hardship on either of the contracting parties should be adopted so that neither will have an unfair or unreasonable advantage over the other. Tessmar v. Grosner, 23 N.J. 193, 201, 128 A.2d 467, 471 (1957). But the court will not make a different or better contract than the parties themselves have seen fit to enter into, and all parts of the writing will be given effect if possible. Washington Construction Co. v. Spinella, 8 N.J. 212, 217-18, 84 A.2d 617, 619 (1951). Finally, where there is ambiguity, the words are construed against the drafter. Bullowa v. Thermoid Co., 114 N.J.L. 205, 215, 176 A. 596, 602 (1935).

Absent the provision for a minimum monthly payment, it is clear that the formula utilized by the bankruptcy judge would be correct. Where profits are anticipated from the performance of an executory contract, damages in the event of a breach consist of the total amount to be received, less any expenses, excluding fixed overhead, saved by the plaintiff by not being required to complete his part of the agreement. See Buono Sales, Inc. v. Chrysler Motors Corp., 449 F.2d 715, 719-20 (3d Cir. 1971); Apex Metal Stamping Co. v. Alexander & Sawyer, Inc., 48 N.J.Super. 476, 484-86, 138 A.2d 568, 572-73 (App.Div.1958).

In this case, however, there is another consideration the provision for minimum monthly payments which presents additional issues. The questions that must be answered are whether the contract constitutes an agreement for alternative performances and, if so, whether that would alter the amount of the claim allowed by the district court.

In an alternative contract, either one of two performances may be given by the promisor and received by the promisee as the agreed exchange for the return performance by the promisee. This may be so even though one of the alternative performances is the payment of a fixed sum of money that fact alone does not make the contract one for single performance with a liquidated damage provision for a breach. 5 A. Corbin, Contracts ยง 1082 (1964). If "either alternative operates as a complete discharge of the promisor's duty and prevents any further remedy against him," the ...

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