) In re: ) Chapter 11 ) CHEMTURA CORPORATION, et al., 1 ) Case No (REG) ) Debtors. ) Jointly Administered )

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1 Hearing Date: December 7, :45 a.m. (ET) Richard M. Cieri M. Natasha Labovitz Craig A. Bruens KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York Telephone: (212) Facsimile: (212) David J. Zott, P.C. Nader R. Boulos, P.C. Benjamin T. Kurtz KIRKLAND & ELLIS LLP 300 North LaSalle Street Chicago, IL Telephone: (312) Facsimile: (312) Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) In re: ) Chapter 11 ) CHEMTURA CORPORATION, et al., 1 ) Case No (REG) ) Debtors. ) Jointly Administered ) DEBTORS BRIEF IN SUPPORT OF THEIR MOTION FOR ORDER PURSUANT TO 11 U.S.C. 502(C) ESTIMATING THE CLAIMS FILED BY SPARTECH POLYCOM, INC. (CLAIM NOS AND 11587) 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal taxpayer identification number, are: Chemtura Corporation (3153); A&M Cleaning Products, LLC (4712); Aqua Clear Industries, LLC (1394); ASCK, Inc. (4489); ASEPSIS, Inc. (6270); BioLab Company Store, LLC (0131); BioLab Franchise Company, LLC (6709); Bio-Lab, Inc. (8754); BioLab Textile Additives, LLC (4348); Chemtura Canada Co./Cie (5047); CNK Chemical Realty Corporation (5340); Crompton Colors Incorporated (3341); Crompton Holding Corporation (3342); Crompton Monochem, Inc. (3574); GLCC Laurel, LLC (5687); Great Lakes Chemical Corporation (5035); Great Lakes Chemical Global, Inc. (4486); GT Seed Treatment, Inc. (5292); HomeCare Labs, Inc. (5038); ISCI, Inc. (7696); Kem Manufacturing Corporation (0603); Laurel Industries Holdings, Inc. (3635); Monochem, Inc. (5612); Naugatuck Treatment Company (2035); Recreational Water Products, Inc. (8754); Uniroyal Chemical Company Limited (Delaware) (9910); Weber City Road LLC (4381); and WRL of Indiana, Inc. (9136).

2 TABLE OF CONTENTS Page INTRODUCTION...1 FACTUAL BACKGROUND...1 A. The Toll Manufacturing and Sales Agreement...1 B. The Spartech Litigation...2 C. Rejection of Agreement...3 D. The Spartech Claim and Debtors Estimation Position...4 LEGAL STANDARD...6 A. Spartech s Damages Are Overstated And Should Be Estimated At No More Than $660, (i) Spartech Incorrectly Claims $1.3 Million In Lost Profits On Products That It Did Toll Manufacture From 2005 to (ii) Spartech Fails To Reduce Its Damages By $92,000 In Repackaging Profit....9 (iii) Spartech Erroneously Includes $10,000 In Profit On Sales By Crompton Prior To The July 1, 2005 Merger (iv) Debtors Have Made a $170,000 Adjustment In Spartech s Favor (v) Summary Of Calculation...11 B. Spartech s Potential Damages Should Be Estimated At No More Than $445, (i) Spartech s Historical Profits Approach Is Factually Inaccurate (ii) Spartech s Minimum Fee Approach Is Factually And Legally Incorrect (iii) Debtors Analysis Is Consistent With The Facts And The Law C. The So-Called Rejection Damages Are Consequential Damages That Spartech Waived Under The Agreement And Therefore Should Be Estimated At $ (i) (ii) (iii) Spartech s Alleged Fixed Asset Write-Off Is An Improper Damage Calculation And Does Not Flow Necessarily From the Alleged Breach Of The Agreement Spartech s Alleged Severance Claim Is An Improper Damage Calculation And Does Not Flow Necessarily From The Rejection Of The Agreement Spartech s Alleged Early Lease Termination Payments Do Not Flow Necessarily From the Alleged Breach Or Rejection Of The Agreement i

3 CONCLUSION...24 ii

4 TABLE OF AUTHORITIES Page(s) CASES Arthur Anderson & Co. v. Perry Equip. Co., 945 S.W. 2d 812 (Tex. 1997)... 20, 21, 23, 24 Birdwell v. Ferrell, 746 S.W. 2d 338 (Tex. App. 1988) Burke v. Union Pac. Res. Co., 138 S.W. 3d 46 (Tex. App. 2004)... 23, 24 Continental Holdings, Ltd. v. Leahy, 132 S.W.3d 471 (Tex. App. 2003)... 22, 24 Employees Ret. Sys v. Putnam, LLC, 294 S.W. 3d 309 (Tex. App. 2009)... 14, 15, 20 Frost Nat l Bank v. Heafner, 12 S.W. 3d 104 (Tex. App. 1999)... 21, 23, 24 In re Adelphia Business Solutions, Inc., et al., (Gerber, J.)... 7 In re Adelphia Commc ns. Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007)... 6 In re Chateaugay Corp., 10 F.3d 944 (2d Cir. 1993)... 6 In re Enron Corp., No (AJG), 2006 Bankr. LEXIS 4294 (Bankr. S.D.N.Y. Jan. 17, 2006)... 6, 7 In re G-I Holdings, Inc., 2006 WL (Bankr. D.N.J. August 11, 2006)... 6 In re Lionel L.L.C., 2007 WL (Bankr. S.D.N.Y. August 3, 2007)... 7 In re Ralph Lauren Womenswear, Inc., 197 B.R. 771 (Bankr. S.D.N.Y. 1996)... 7 In re Seaman s Furniture Co. of Union Square, Inc., 160 B.R. 40 (S.D.N.Y. 1993)... 6, 7 iii

5 TABLE OF AUTHORITIES (CONT'D) Page(s) In re Thompson McKinnon Securities, Inc., 143 B.R. 612 (Bankr. S.D.N.Y. 1992)... 7 In re Thompson McKinnon Securities, Inc., 191 B.R. 976 (Bankr. S.D.N.Y. 1996)... 7 Kellam v. Hampton, 124 S.W. 970 (Tex. App. 1910) Little Darling Corp. v. Ald, Inc., 566 S.W. 2d 347 (Tex. App. 1978)... 14, 15, 20 USX Corp. v. Union Pacific Resources Co., 753 S.W.2d 845 (Tex. App. 1988)... 22, 24 STATUTES 11 U.S.C. 502(c)... 1, 6, U.S.C. 502(c)(1)... 6 iv

6 Chemtura Corporation ( Chemtura ) and its affiliated debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the Debtors ), by and through their undersigned counsel, and in support of their Motion for Order Pursuant to 11 U.S.C. 502(c) Estimating the Claims Filed by Spartech, request entry of an Order estimating proofs of claim numbers ( Claim ) and ( Claim 11587, and together with Claim 10812, the Spartech Claim ) filed by Spartech Polycom, Inc. ( Spartech ) against Great Lakes Chemical Corporation ( GLCC ) and Chemtura, respectively (the Brief ). Debtors now seek the entry of an Order from this Court estimating the Spartech Claim at $1,106,686. In support of their Brief, Debtors respectfully state as follows: INTRODUCTION The underlying dispute in this Estimation Hearing arises from a Toll Manufacturing and Sales Agreement between GLCC and Spartech. The parties have different interpretations of the scope of that Agreement and whether GLCC breached it, and are litigating those issues in an action in Texas state court that is currently stayed. Although the Debtors are confident that they will prevail in that action, negating Spartech s claim in its entirety, for purposes of this Estimation Hearing (and solely for that purpose) the Debtors will not ask this Court to address the underlying scope and breach issues. Instead, the Debtors will show that even if Spartech were to prevail in the Texas action, its potential damages are, at most, $1,106,686. As shown below, the damages estimates Spartech presents in its Brief ranging from six to ten times that amount are the product of several factual errors and fail to accord with black-letter Texas law. FACTUAL BACKGROUND A. The Toll Manufacturing and Sales Agreement On September 6, 2002, GLCC and Spartech entered into a Toll Manufacturing and Sales Agreement (the Agreement ). Toll manufacturing is the process of converting a raw or semi-

7 finished product into a saleable product. Manufacturers like GLCC often hire toll manufacturing companies to extend or improve their own production capabilities. Under the Agreement, GLCC supplied Spartech with raw or semi-finished materials which Spartech then, in turn, blended, granulated, pelletized, or repackaged according to GLCC s specifications at its facility in Arlington, Texas (the Arlington Facility ). More specifically, the Agreement required GLCC to purchase all of its requirements for Finished Product, a defined term, from Spartech through the term of the Agreement, which ran to December 31, (Ex. 1, Agreement at 2.1). The Agreement is governed by Texas law. (Id. at 15.5). Spartech charged GLCC for each pound toll manufactured, at different prices for each manufacturing operation. B. The Spartech Litigation On August 21, 2007, Spartech asserted that Chemtura, GLCC s parent company, 2 was in breach of the Agreement for stating its intention to purchase certain materials from Ciba Specialty Chemicals Corporation ( Ciba ). (See Ex. 2, 8/21/2007 Letter to GLCC). Although Chemtura was not a party to the Agreement, Spartech asserted that as GLCC s successor, Chemtura was bound by the Agreement. (Id). Spartech argued that the potential purchase of the materials in question by Chemtura from Ciba violated the provision of the Agreement that required GLCC to purchase all of its requirements for Finished Product from Spartech. Less than two months later, on October 11, 2007, Spartech filed a lawsuit in Texas state court against Chemtura claiming breach of the Agreement and seeking damages in connection 2 On July 1, 2005, GLCC merged with Copernicus Merger Corporation ( Copernicus ), a wholly owned subsidiary of Crompton Corporation ( Crompton ). Also, on July 1, 2005, Crompton changed its name to Chemtura Corporation. GLCC is today a wholly-owned subsidiary of its parent company, Chemtura. 2

8 with Chemtura s alleged purchase of Finished Product from Ciba. (Ex. 3, Spartech Complaint). 3 The parties do not dispute that the Agreement requires GLCC to purchase 100% of GLCC s North American requirements for Finished Product from Spartech. However, the parties do take different positions regarding the meaning of Finished Product and thus the scope of GLCC s purchase obligation under the Agreement. The parties also dispute whether the requirements of post-merger Chemtura over and above those of the GLCC subsidiary i.e., business that was not part of GLCC at the time of contracting are subject to the Agreement. Spartech s brief correctly notes that the Texas state court has decided one summary judgment motion in the action. However, it fails to mention that GLCC filed a second summary judgment motion prior the automatic stay, which is fully briefed and awaiting decision. In that motion, GLCC showed that the Texas court s first ruling did not resolve the dispute over the meaning of Finished Products or the scope of the Agreement, and sought judgment as a matter of law on both issues. While Debtors believe they will ultimately prevail on both issues, they will not raise those arguments for purposes of this Estimation Hearing. Instead, Debtors will take Spartech s interpretation of both issues and demonstrate that Spartech s damages are greatly overstated. C. Rejection of Agreement In April 2009, Spartech began failing to meet historical lead times in completing the various toll manufacturing operations that it performed for GLCC. (See Ex. 5, 4/17/2009 Letter to Spartech). As a result, GLCC experienced an inability to obtain enough products in a timely manner to satisfy its customers demands. (Ex. 6, Duebel Dec. at 6). In an exercise of its business judgment, GLCC moved to reject the Agreement. The Court approved Debtors Motion 3 Spartech eventually substituted GLCC as the defendant in place of Chemtura. (Ex. 4, Spartech Amended Petition). 3

9 to Reject the Agreement on May 5, (Ex. 7, Order Granting Debtors Motion to Reject Agreement). D. The Spartech Claim and Debtors Estimation Position On October 29, 2009, Spartech filed Claim against GLCC. The next day, Spartech filed Claim against Chemtura, asserting the same claims. 4 As described in Spartech s estimation brief, its damages claim includes the following components: (1) Spartech s alleged lost profit on five products that GLCC or Chemtura paid other parties to toll manufacture from 2005 to 2008 (the Damages ); (2) Spartech s alleged lost profits from 2009 to 2012 had it performed 100% of GLCC and Chemtura s toll manufacturing requirements in North America (the Damages ); and (3) damages from Spartech s alleged fixed asset write-offs, the early termination of its lease obligations, and severance payments made as a result of GLCC s or Chemtura s rejection or alleged breach of the Agreement (which Spartech refers to as the Rejection Damages ). The Estimation Hearing positions of Spartech and Debtors on each category of damages are as follows: Category Spartech s Claim Debtors Calculation Damages Lost Profit = $1,903,408 Lost Profit $660, Damages Lost Profit = $6,750,408 Or Minimum Payment = $6,575,806 Lost Profit $445,906 4 On November 10, 2010, Debtors filed an objection (the Claims Objection ) to the Spartech Claim seeking an Order disallowing and expunging the Spartech Claim, except for $57, of Claim See Dkt. No The Debtors have reached Agreement with Spartech on the Accounts Receivable Claim. The payment by Debtors of $57, will fully resolve this claim. 4

10 Rejection Damages Fixed Asset Write Off = $1,646,211 Severance Payments = $172, Early Termination of Lease = $256, Fixed Asset Write Off = $0 Severance Payments = $0 Early Termination of Lease = $0 Total $10,729, $1,106,686 Spartech overstates its damages for each category of damages: First, as shown in section A of this Brief, Spartech s calculation of its Damages is inflated because (1) Spartech has improperly included lost profits on products that it did toll manufacture for GLCC from 2005 to 2008; (2) Spartech failed to offset its damages by the profit it received for repackaging a portion of the allegedly lost manufacturing business (thus double-counting for this portion of work); and (3) Spartech includes damages attributable to products not possibly covered by the Agreement under even Spartech s interpretation of the Agreement. Second, as shown in section B, Spartech s calculation of its Damages is factually and legally unfounded. Spartech fails to consider the Debtors actual requirements for 2009 and the first three quarters of 2010, and likewise ignores their projected requirements through 2012 under the forecast and Long Range Plan. The Minimum Fee claim which Spartech heavily relies upon in its brief cannot sweep that failing under the rug, because under black-letter Texas law the Minimum Fee is neither a direct damages provision nor a liquidated damages clause, as Spartech attempts to portray it. Third, as a matter of Texas law the damage items that Spartech euphemistically labels Rejection Damages are in fact consequential damages excluded from recovery under the express terms of the Agreement, and are incorrectly calculated to boot. 5

11 LEGAL STANDARD Section 502(c) of the Bankruptcy Code provides that [t]here shall be estimated for purposes of allowance under this section any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case[.] 11 U.S.C. 502(c)(1). See also In re Chateaugay Corp., 10 F.3d 944, 957 (2d Cir. 1993); In re G-I Holdings, Inc., Nos , , 2006 WL , *3 (Bankr. D.N.J. Aug. 11, 2006) ( Section 502(c) of the Bankruptcy Code is drafted in mandatory terms. That is, any contingent or unliquidated claim shall be estimated so long as the liquidation of the particular claim would unduly delay the administration of the case. ). Estimation pursuant to Section 502(c) is an expedient method for setting the amount of a claim that may receive a distributive share from the estate. In re Seaman Furniture Co. of Union Square, Inc., 160 B.R. 40, 42 (S.D.N.Y. 1993). While Section 502(c) refers to the estimation of claims for the purposes of allowance, courts have frequently estimated claims for other purposes including, as here, to set a limit on recovery and establish claims reserves with respect to disputed claims against a debtor s estate. See, e.g. In re Adelphia Commc ns. Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007) (estimating creditor claim for the purpose of establishing a claims reserve); In re Enron Corp., No , 2006 Bankr. LEXIS 4294 at *3 (Bankr. S.D.N.Y. Jan. 17, 2006) (approving debtor s motion to estimate claims for purposes of establishing claims reserves). In approving motions to estimate claims for this purpose, courts acknowledge that the release of funds held on account of individual claims creates distributable value, which benefits the creditor body as a whole, and have found that delaying distribution to other creditors while claim disputes are adjudicated constitutes a sufficient disruption of the administration of the estate such as warrants estimation under Section 502(c) of the Bankruptcy Code. See In re Lionel L.L.C., No , 6

12 2007 WL , *2 (Bankr. S.D.N.Y. Aug. 3, 2007) (estimation warranted to avoid delayed distributions, which in turn, greatly devalue the claims of all creditors as they cannot use the assets until they receive them. ); Enron Corp, 2006 Bankr. LEXIS 4294 at *23 (because a delay or deferral of a distribution impacts the efficient administration of a case, the possibility of such deferral provides a justification for estimation of a claim. ). In estimating claims, this Court has broad discretion. See Seaman Furniture Co., 160 B.R. at 42; In re Thompson McKinnon Securities, Inc., 143 B.R. 612, 619 (Bankr. S.D.N.Y. 1992). Neither the Code nor the Rules prescribe any method for estimating a claim, and it is therefore committed to the reasonable discretion of the court... which should employ whatever method is best suited to the circumstances of the case. In re Adelphia Business Solutions, Inc., et al., (Gerber, J.), Bench Decision regarding ACC Objection to Plan Feasibility, pp (citing In re Ralph Lauren Womenswear, Inc., 197 B.R. 771, 775 (Bankr. S.D.N.Y. 1996, In re Thompson McKinnon Securities, Inc., 191 B.R. 976, 979 (Bankr. S.D.N.Y. 1996)). A. Spartech s Damages Are Overstated And Should Be Estimated At No More Than $660,780. After reviewing the Debtors records, Spartech has identified five products that it claims should have been toll manufactured at its Arlington Facility, but which GLCC obtained elsewhere: Alkanox 240 Granular, Anox 20 Granular, Anox 70 Granular, Anox NDB CP3367L, and Naugard 445 Granular (the Relevant Products ). 5 Spartech calculated its damages on the Relevant Products in two steps. First, Spartech multiplied the Debtors 2005 to 2008 North American sales volumes of the Relevant Products by the price of the tolling operation(s) 5 Spartech asserts, without explanation, that it has not thoroughly investigate[d] and reviewe[d] all of Chemtura s information and hypothesizes that it may have a claim in respect of other products. (Spartech Brief at 45.) This speculation is entirely unfounded and affords no basis to affix a higher value to Spartech s Claim. 7

13 associated with each product to arrive at a gross revenue figure. Next, Spartech applied a 24.5% profit margin to each year of alleged lost revenue, yielding $1,903,408 in lost profit on the Relevant Products from 2005 through Spartech s calculation of its Damages is incorrect for at least four reasons: (1) Spartech has incorrectly claimed lost profits on volumes of Relevant Products that it did toll manufacture for GLCC, an error of approximately $1.3 million; (2) Spartech double-counted by failing to offset the profit it made by repackaging certain volumes of Relevant Products that Spartech claims it should have been manufacturing and packaging, an error of nearly $92,000; (3) Spartech includes some $10,000 in damages attributable to pre-merger products not possibly covered by the Agreement under even Spartech s interpretation; and (4) Spartech neglected to include approximately $170,000 in profits that correspond to its theory of the claim. Even with the benefit of this upward adjustment applied by the Debtors (and saving for another day the Debtors arguments regarding the scope of the contract), Spartech s Damages amount to no more than $660,780. (i) Spartech Incorrectly Claims $1.3 Million In Lost Profits On Products That It Did Toll Manufacture From 2005 to To calculate its damages, Spartech applies its pricing structure and alleged profit margin to the entire 2005 to 2008 GLCC North American sales volumes for the Relevant Products. During that time period, however, Spartech actually toll manufactured millions of kilograms of the Relevant Products for GLCC. (See Ex. 6, Duebel Dec. at 12). As a result, Spartech is claiming lost profits on work that Spartech actually performed. To back out the volumes that Spartech actually manufactured, Debtors used data from the SAP system that Spartech and Chemtura use in the ordinary course to record volumes of product 8

14 purchased and manufactured. Those records demonstrate that Spartech toll manufactured the following volumes of Relevant Product for GLCC from 2005 to 2008: [REDACTED] Applying the same pricing structure Spartech used to calculate its lost revenue, these volumes indicate that Spartech has included in its damage claim $5,350,085 in gross revenue that Spartech did not lose at all. (See Ex. 6, Duebel Dec. at 14). Applying Spartech s alleged 24.5% profit margin, Spartech s profit on that work was $1,310,771. Thus, even assuming GLCC was required to send the entire North American sales volumes of the Relevant Products to Spartech for toll manufacturing, Spartech s alleged lost profits must be reduced by the $1,310,771 in profit that it did earn from GLCC on Relevant Products from 2005 to (ii) Spartech Fails To Reduce Its Damages By $92,000 In Repackaging Profit. Spartech s second error is failing to offset its lost manufacturing profit claim by the profit it made repackaging some of the same volumes. Debtors do not dispute that from 2005 to 2008, they purchased certain volumes of Alkanox 240 Granular in semi-finished form from other sources rather than having Spartech granulate them. However, the Debtors also paid Spartech to repackage more than [REDACTED] kilograms of the Alkanox 240 Granular that Spartech claims it should have granulated. (See Ex. 6, Duebel Dec. at 15). 9

15 Spartech s granulating operation includes packaging. In other words, Spartech would not be able to charge Chemtura to both granulate and package the same volume. Thus, assuming for sake of argument that Spartech had the right to granulate every kilogram of Alkanox 240 Granular sold by GLCC in North America, Spartech must still reduce its alleged damages by the amount of profit it made by repackaging some of that very product. According to the SAP system, those volumes totaled [REDACTED] kg from (See Ex. 6, Duebel Dec. at 15). Applying the same pricing structure Spartech used to calculate its lost profit, these volumes represent $375,211 in gross revenue and $91,927 in profit that Spartech actually earned from repackaging Alkanox 240 Granular in 2005 to (See Ex. 6, Duebel Dec. at 16). Thus, Spartech s alleged lost profits from 2005 to 2008 must be further reduced by its actual repackaging profit of $91,927. (iii) Spartech Erroneously Includes $10,000 In Profit On Sales By Crompton Prior To The July 1, 2005 Merger. In the underlying Texas litigation, Spartech argues that all Crompton manufacturing facilities became subject to the Agreement after the July 1, 2005 merger between GLCC and Crompton. Debtors disagree. There is no dispute, however, regarding whether the Agreement extends to products manufactured by Crompton before the July 1, 2005 merger. Naugard 445 Granular, one of the Relevant Products is a Crompton legacy product; GLCC never produced it. Thus, any volumes produced before the July 1, 2005 merger cannot possibly be subject to the Agreement under even Spartech s interpretation. Spartech fails to account for this factor, and incorrectly claims lost profits based on Crompton s entire 2005 North American sales volumes of Naugard 445 Granular. To correct this error, Debtors have removed the two pre-merger quarters of sales volume ([REDACTED] 10

16 kg) from 2005 sales of Naugard 445 Granular. (See Ex. 6, Duebel Dec. at 18). This reduction in sales volumes reduces Spartech s alleged lost gross revenue by $40,197 and its lost profit by $9,848, as calculated under the pricing structure and profit margin set forth in Spartech s brief. (iv) Debtors Have Made a $170,000 Adjustment In Spartech s Favor. While reviewing Spartech s calculation, Debtors observed that Spartech used a 2008 North American sales volume of zero kg to calculate its lost revenue on Alkanox 240 Granular. Debtors have checked their records and determined that, in fact, GLCC sold [REDACTED] kg of Alkanox 240 Granular in North America during (See Ex. 6, Duebel Dec. at 19). The result of this correction is a significant adjustment in Spartech s favor. It increases Spartech s alleged lost gross revenue by $693, and thus its alleged lost profit by $169, Debtors analysis has adjusted for this error in Spartech s calculation. (v) Summary Of Calculation The adjustment of Spartech s calculation by each of the factors described above yields potential damages of, at most, $660,780 under Spartech s own interpretation of the Agreement: Lost Profits Spartech Lost Profit Claim $1,903, Less Actual Spartech Manufacturing Profit - $1,310, Less Actual Spartech Repackaging Profit - $91, Less Profit from Pre-Merger Crompton Business - $9, Plus 2008 Adjustment + $169, Maximum Potential Damages = $660,

17 B. Spartech s Potential Damages Should Be Estimated At No More Than $445,906. Spartech proposes two alternative theories to calculate its Damages. One theory relies on Spartech s 2005 to 2008 profits (the Historical Profits Approach ). Conceptually, this approach assumes that the Debtors business, and thus Spartech s profit, would have been exactly the same in 2009 to 2012 as it was in 2005 to Spartech thus takes $4,847,000 that it claims to have actually made in 2005 to 2008; assumes that as profit in 2009 to 2012; and then adds the $1,903,408 of profit allegedly lost to other manufacturers in 2005 to 2008 as a proxy for incremental profit it would have made in 2009 to 2012 had the Debtors performed under Spartech s theory of the Agreement s scope. This results in a total lost profit claim of $6,750,408 for 2009 to Spartech s alternative approach to the post-2009 damages claim and the one it features heavily throughout its brief does not look to actual or projected work under the Agreement at all. Instead, Spartech asserts that it is entitled to a lump-sum damages award under section 5.7 of the Agreement, which states that GLCC will pay Spartech a minimum quarterly fee of $450,000 for each calendar quarter to the expiration or termination of the Agreement (the Minimum Fee Approach ). (See Ex. 1, Agreement at 5.7). Because there were 14 full calendar quarters and one partial quarter remaining from the date the Agreement was rejected until the expiration of the Agreement, Spartech calculates its damages by multiplying the minimum quarterly fee of $450,000 by the remaining quarters yielding alleged damages of $6,575, Neither of Spartech s damages calculations is appropriate. As shown below, the Historical Profits Approach relies on assumptions about the Debtors 2009 to 2012 business that are inconsistent with the Long Range Plan they have developed for the same period. The Minimum Fee Approach is contrary to Texas law on damages in general and liquidated damages 12

18 in particular. The Debtors analysis, in contrast, is founded in actual and projected volumes and consistent with Texas law. (i) Spartech s Historical Profits Approach Is Factually Inaccurate. The starting point for determining Spartech s lost profits in 2009 to 2012 is to determine what Chemtura s requirements would have been over that time. 6 Spartech does this by relying solely on past volumes from 2005 to That approach is flawed for two reasons. First, for 2009 and the first three quarters of 2010, there is no need to assume or project at all; those periods are in the books, and there is no reason to use anything other than actual volumes. Second, using past volumes to project volumes in the fourth quarter of 2010 through 2012 ignores the Debtors forecast and Long Range Plan ( LRP ) as well as the economic reality that underpins it. As this Court is aware, the Debtors management developed a comprehensive bottoms-up business plan representing an achievable, but aggressive outlook for 2009 to The LRP volumes for 2011 through 2012 are far below the 2005 to 2008 volumes on which Spartech relies for its 2009 to 2012 claim. The decline in projected sales volume is driven by a number of factors including, significantly, Debtors increasing cost position in an environment of declining market prices. (See Ex. 6, Duebel Dec. at 22). As a result, a number of products that Spartech argues should have been toll manufactured at its Arlington Facility are projected to see significant declines or to disappear completely. (Id.) These market forces combined with the sustained global recession has significantly impacted the Debtors projected volumes on the products allegedly subject to the Agreement. (Id.) 6 The relevant products for this portion of the claim are those identified in Exhibits 23 and 24 to the December 12, 2008 William Murrell Deposition taken in Cause No Spartech has admitted that it believes that Exhibit 23 and 24 offered at the deposition [of] William Murrell encompass the universe of polymer stabilizer products currently at issue in this lawsuit. (See Ex. 8, 2/9/2009 Spartech Objections and Responses to GLCC s First Set of Interrogatories). 13

19 The reduced volumes of products directly impacts the potential revenue and profits that Spartech would have earned from 2009 to 2012 had the Agreement been fully performed. As shown in B(iii), Spartech would have earned approximately $446,000 in 2009 and failed to earn any profits from 2010 to (ii) Spartech s Minimum Fee Approach Is Factually And Legally Incorrect. Whether the Minimum Fee Approach is characterized as a supposed direct damage calculation or a liquidated damages clause a phrase Spartech carefully avoids using, but which is exactly what it argues the approach is in direct conflict with Texas law. The Minimum Fee Approach is not an appropriate calculation of direct damages because it does not calculate Spartech s financial position had the contract been fully performed. Under Texas law, contract damages are measured as the amount necessary to place plaintiffs in a financial position equivalent to that in which it would have had if the contract had been fully performed by both parties. Little Darling Corp. v. Ald, Inc., 566 S.W. 2d 347, 349 (Tex. App. 1978); see also Employees Ret. Sys v. Putnam, LLC, 294 S.W. 3d 309, 321 (Tex. App. 2009) (refusing to award damages that would violate the principle of contract law that a non-breaching party may not be placed in a better position than if the contract had been performed. ). Debtors do not dispute that had the Agreement not been terminated, GLCC would have been required to pay Spartech a minimum of $450,000 per quarter through the expiration of the Agreement. Had the Agreement not been terminated, though, Spartech would have also continued to incur its costs and expenses of operation. Even in quarters where one hypothesizes no work whatsoever, Spartech would have continued to incur its fixed costs a fact that Spartech omits entirely from its argument for a lump sum payment based on the Minimum Fee. The connection between the minimum quarterly payment and Spartech s fixed costs is expressed in 14

20 the Agreement. Section 5.7 states that the minimum quarterly payment is [i]n consideration of the fixed costs incurred by SPARTECH in establishing and maintaining the Facility[.] (Ex. 1, Agreement at 5.7). Spartech s Minimum Fee Approach is flawed because it only considers the revenue (not profit) Spartech would have received through the duration of the Agreement, without contemplating the costs Spartech would have continued to incur. As a result, the Minimum Fee Approach does not accurately calculate Spartech s financial position had the Agreement been fully performed, and an award of direct damages calculated under the Minimum Fee Approach would provide Spartech with a windfall recovery that would violate the fundamental principle of contract law that a non-breaching party may not be placed in a better position than if the contract had been performed. See Little Darling Corp., 566 S.W. 2d at 349; see also Employees Ret. Sys., 294 S.W. 3d at 321. Although Spartech carefully sidesteps the issue, it is plain that it is asking this Court to interpret the Minimum Fee as recoverable liquidated damages. This argument has no merit. The axiomatic quality of a liquidated damages provision is that it is expressed as such. A liquidated damages provision must be expressed, and in the absence of an express agreement for liquidated damages the court will not make one for the parties. See Birdwell v. Ferrell, 746 S.W. 2d 338, 341 (Tex. App. 1988) (citing Kellam v. Hampton, 124 S.W. 970, 971 (Tex. App. 1910)). Section 5.7 does not mention the word liquidated or damages. To the contrary, the intent of the provision and its express language provides that the payment is [i]n consideration of the fixed costs incurred by SPARTECH[.] (Ex. 1, Agreement at 5.7). The provision provides Spartech with minimum revenue for the duration of the Agreement, not minimum profit. The minimum payments are not a pre-determined estimation by the parties of Spartech s lost earnings in the event of a breach and therefore not liquidated damages. 15

21 Because it is not a liquidated damages clause, under Texas law, the minimum fee payment is only relevant to the extent that Spartech would not have received sales revenue exceeding the quarterly payments. As demonstrated in Debtors analysis below, GLCC s payment to Spartech from 2009 to 2012 would have exceeded the $1.8 million annual minimum payment required under the Agreement. Therefore, the minimum fee is irrelevant to the damage calculation. (iii) Debtors Analysis Is Consistent With The Facts And The Law. As explained above, Debtors have determined their 2009 to 2012 sales volumes for each product Spartech contends to be within the scope of the Agreement by looking to their actual sales experience for 2009 through September 2010, their product forecasts for the remainder of 2010, and the LRP for the remaining period of the Agreement. 7 Debtors then used the pricing for the toll manufacturing operation associated with each product during the given quarter or year and determined the amount that would have been paid to Spartech. (See Ex. 6, Duebel Dec. at 23). Because Debtors are not asking this Court to resolve the fundamental contractual dispute regarding the definition of Finished Product which could further reduce Spartech s claim Debtors have included every product that could potentially be covered by Spartech s interpretation of the Agreement. This includes products that Spartech may not possess the capacity or capability to produce, making the estimate inherently conservative. (Id.) This calculation yields gross revenue to Spartech of $10,304,088. To derive Spartech s projected profit, Debtors applied Spartech s costs and expenses from 2008 to its gross revenues in each of 2009 through This represents the last full year 7 Debtors analysis includes the 2009 to 2012 sales volumes for the Relevant Products considered in the 2005 to 2008 discussion. Thus, these damages do not need to be separately accounted for in the 2009 to 2012 damage calculation. 16

22 of cost and expense data that Spartech has provided, and is the lowest level of costs and expenses that Spartech incurred at any point in the 2005 to 2008 period. (See Ex. 9, Spartech P&L Summary). The use of Spartech s 2008 costs and expenses for each remaining year of the Agreement is therefore a conservative estimate of Spartech s future costs had the Agreement been fully performed. (See Ex. 6, Duebel Dec. at 23). It is true that, to some degree, as volume levels increase, Spartech s costs increased as well. (See Ex. 6, Duebel Dec. at 24; Ex. 10, Spartech P&L). However, the converse is not true beyond a certain point. (Id.) For example, for the portion of 2009 that Spartech operated, it received $1,243,000 in gross sales, but took a loss because it also and incurred costs and expenses of $1,303,000 during that period. (Id.) In order to satisfy the reasonable lead time requirement of the Agreement, Spartech would have had to incur costs substantially similar to those incurred in 2008 even as volumes reduced from 2009 to (Id.) Thus, 2008 costs and expenses are appropriately applied to 2009 through 2012 volumes. Even with all of these favorable assumptions for Spartech, Debtors analysis demonstrates that Spartech would not have earned a profit in any year beyond 2009 (and would only have turned a profit in 2009 had there been a full year of performance). Had the contract been performed through the duration of 2012, Spartech would have actually lost more than half a million dollars. Nevertheless, consistent with their conservative approach, Debtors analysis assumes, for purposes of the Estimation Hearing, that the parties would have terminated the Agreement once it became apparent that Spartech was operating at a loss. Thus, Debtors calculation does not tag Spartech with the 2010, 2011, and 2012 losses of $342,534, $215,629, and $403,655 respectively. Debtors analysis therefore yields total Damages of, at most, $445,906, as illustrated below: 17

23 [REDACTED] C. The So-Called Rejection Damages Are Consequential Damages That Spartech Waived Under The Agreement And Therefore Should Be Estimated At $0. In addition to its claims for lost profits, Spartech seeks three additional categories of damages for losses it allegedly incurred. These categories of damages, which Spartech labels Rejection Damages, are both improperly calculated and, by their nature, consequential damages prohibited by the Agreement. The damages include (1) $1,646,211 for Spartech s alleged fixed asset write off; (2) $172, for Spartech s alleged payment of severance to terminated employees; and (3) $256, for Spartech s alleged payment to its landlord for the early termination of its lease on the Arlington Facility. (i) Spartech s Alleged Fixed Asset Write-Off Is An Improper Damage Calculation And Does Not Flow Necessarily From the Alleged Breach Of The Agreement. Spartech s fixed asset write-off claim is premised on the theory that Spartech has taken an accounting write-off of approximately $1.6 million of assets as a result of GLCC s alleged breach of the Agreement. 8 To support its claim, Spartech has produced a list of the fixed assets in question (the Alleged Fixed Assets ) that provides the purchase cost of the asset, the depreciation incurred on the asset since the date of purchase, and the remaining net book value of 8 Spartech s fixed asset write-off claim is not specifically stated on either Claim or Claim Spartech has produced a chart that expresses its fixed asset write-off claim as part of its breach of contract claim. (See Ex. 11, Spartech Proof of Claim Detail). 18

24 the asset. (See Ex. 12, Alleged Fixed Assets List). Spartech claims that its damages are equal to the remaining net book value of the Alleged Fixed Assets. Spartech s calculation is flawed for two reasons. First, for the remaining net book value of the Alleged Fixed Assets to be an appropriate measure of Spartech s actual damages, the assets would have to be valueless. They are not. Second, even if the Alleged Fixed Assets were valueless, their diminution in value would have to result necessarily from the breach to be considered a direct damage as opposed to a consequential damage. This is also not the case. The Alleged Fixed Assets still have value. The net book value that Spartech has calculated accounts for the depreciation of these assets and yields a rough calculation of their present day value. Spartech contends that the closure of its Arlington Facility renders the Alleged Fixed Assets valueless. Although Spartech has closed its Arlington Facility, it still owns the machinery and equipment that comprise its Alleged Fixed Assets. Spartech s toll manufacturing machinery still has value. Office equipment such as its file cabinets, tote bins and phone routers are also not rendered valueless by the alleged breach of the Agreement. (See Ex. 12, Alleged Fixed Assets List). To the contrary, Spartech continues to hold itself out to the public as a major supplier of toll compounding services, further underscoring that the Alleged Fixed Assets still have value and potential use in Spartech s business. 9 Moreover, the Alleged Fixed Assets still have value on the open market. Included in Spartech s fixed assets damage calculation is a $200,000 deduction for chilsonator machinery that it has held for sale. (See Ex. 13, Alleged Fixed Assets Damages Summary). There is no reason to believe that the other assets at issue could not be sold. As it is evident that the value of the Alleged Fixed Assets is not zero, a damage award of the net book value of the assets would impermissibly grant Spartech a 9 See Spartech Website at 19

25 windfall recovery. See Little Darling Corp., 566 S.W. 2d at 349; see also Employees Ret. Sys., 294 S.W. 3d at 321. For sake of argument, if one assumes that the net book value did represent an appropriate calculation of Spartech s damages, they would still not be recoverable due to the Agreement s express waiver of consequential damages. (See Ex. 1, Agreement at 17.1). The Agreement expressly provides that [i]n no event shall either party be liable for any indirect, incidental, special, consequential, or punitive damages. (Id.) Spartech attempts to avoid the broad and express limitation of liability provided for by section 17.1 of the Agreement by asserting that its damages are direct damages. This argument is contrary to Texas law, under which direct damages flow naturally and necessarily from the wrong while consequential damages result naturally, but not necessarily, from the defendant s wrongful acts. Arthur Anderson & Co. v. Perry Equip. Co., 945 S.W. 2d 812, 816 (Tex. 1997). For the damages to be recoverable as direct damages, they must flow necessarily from the breach. Id. ( Direct damages compensate the plaintiff for the loss that is conclusively presumed to have been foreseen by the defendant from his wrongful act. ). Spartech attempts to blur the issue by suggesting that its Rejection Damages are foreseeable, but that is not the law (nor was it the case). As the very case Spartech quotes states, under Texas law a plaintiff must show not hypothetical foreseeability but rather that specific damage items can be conclusively presumed to have been foreseen or contemplated by the parties. (Spartech Brief at 55, citing Tenn Gas. & Pipeline Co. v. Technip USA Corp. (emphasis added).) The decision by Spartech to take an accounting write-off of approximately $1.6 million did not flow necessarily from the alleged breach of the Agreement and there is no evidence that either party actually foresaw it. It is therefore not an item of direct damage. Spartech asserts that 20

26 Chemtura violated the Agreement by failing to send Spartech 100% of its requirements for Finished Product. Spartech theorizes that the breach of the Agreement led to the closure of the Arlington Facility, which in turn led to the Alleged Fixed Assets losing all value. For that alleged total loss in value to be recoverable, it would need to be a necessary and conclusive result of the alleged breach, and not simply a natural result of the alleged breach. See Frost Nat l Bank v. Heafner, 12 S.W. 3d 104, 111 n.5 (Tex. App. 1999); Arthur Anderson & Co., 945 S.W. 2d at 816. There is no evidence that this was the case, and Spartech offers nothing beyond conclusory assertion. In reality, the Agreement expressly contemplates that the equipment and machinery owned and operated by Spartech at the Arlington Facility would have value following the termination of the Agreement. In fact, an entire provision of the Agreement is dedicated to determining the fair market value of the Spartech Equipment as well as Spartech s interest in the Arlington Facility (the Spartech Business ) following termination of the Agreement. (See Ex. 1, Agreement at 7.3). In the event either party had exercised the call option to purchase or sell the Spartech Business, the parties would have either agreed on a fair market value for the Spartech Business or they would have retained independent appraisers to make the determination. (Id.) This contractual arrangement comports with common sense: when a plant or factory closes, the equipment and machinery inside does not necessarily lose all value. Spartech s decision to take an accounting write-off of $1.6 million was therefore not a conclusive result of the breach or the closure of the Arlington Facility. Accordingly, it is an item of consequential damages and unrecoverable under the Agreement. See Frost Nat l Bank, 12 S.W. 3d at 111 n.5; Arthur Anderson & Co., 945 S.W. 2d at

27 (ii) Spartech s Alleged Severance Claim Is An Improper Damage Calculation And Does Not Flow Necessarily From The Rejection Of The Agreement. Spartech seeks $172, for severance payments it allegedly made as a result of GLCC s rejection of the Agreement. During discovery, Spartech produced a list of 19 employees that allegedly were paid severance as a result of the rejection of the Agreement and the closure of the Arlington Facility. (See Ex. 14, Severance Employee List). But Spartech has not shown that any, much less all, of these employees were terminated as a result of the rejection of the Agreement. In fact, the first 10 employees included on Spartech s list of employees were all terminated before the May 5, 2009 rejection of the Agreement. (See id.) Irrespective of its amount, the severance claim fails because, like the fixed asset claim, it seeks consequential damages. It is black-letter law that damages are not direct if they are premised on a party s contractual obligations or relationships with parties outside the contract itself. See Continental Holdings, Ltd. v. Leahy, 132 S.W.3d 471, 475 (Tex. App. 2003) (noting that damages resulting from contracts or relationships outside the contract itself are indirect damages); USX Corp. v. Union Pacific Resources Co., 753 S.W.2d 845, 856 (Tex. App. 1988) (upholding jury instruction that [c]onsequential damages are those which do not arise within the scope of the immediate buyer-seller transaction, but rather stem from losses incurred by the non[-]breaching party in its dealings, often with third parties which were an approximate result of the breach. ). Here, Spartech s severance payments were either required under contracts it undertook with its employees, or were payments that Spartech chose to make on a voluntary basis. In either case, they did not result necessarily from the rejection of the Agreement and closure of the facility, but occurred as a result of Spartech s relationships to its employees. Nor can severance payments be construed as a necessary result of rejection of the Agreement. Simply put, Spartech could have avoided the payments had it not voluntarily paid or 22

28 contracted to pay its employees severance. Where, as here, the alleged damages hinge on the variable circumstances of whether Spartech chose or agreed to pay its employees severance following their termination, the damages are, by their nature, not conclusive or necessary and thus consequential damages. See Burke v. Union Pac. Res. Co., 138 S.W. 3d 46, 66 (Tex. App. 2004) (holding that damages were not direct damages since they are of a nature that would normally vary with the circumstances of the individual case in which they occur. ). Thus, to the extent the Severance Claim represents actual damages at all, 10 they are consequential damages. See Frost Nat l Bank, 12 S.W. 3d at 111 n.5; Arthur Anderson & Co., 945 S.W. 2d at 816. The severance claim therefore is not recoverable under the Agreement. (See Ex. 1, Agreement at 17.1). (iii) Spartech s Alleged Early Lease Termination Payments Do Not Flow Necessarily From the Alleged Breach Or Rejection Of The Agreement. Spartech seeks $256, for lease termination expenses as a result of GLCC s rejection of the Agreement. 11 To support its claim, Spartech has produced its June 6, 2008 lease for the Arlington Facility with its landlord AMB Property II, L.P. (See Ex. 16, Arlington Facility Lease). This lease allegedly evidences Spartech s obligation to pay a lease termination fee in the event Spartech decides to end the lease prior to its termination The Severance Claim is also deficient because it incorrectly presumes that the closure of the Arlington Facility was a foreseeable (and foreseen) result of the rejection of the Agreement. It is true that section 2.2 of the Agreement prohibited Spartech from using the Arlington Facility or its equipment for any other client or customer of Spartech without the prior approval of GLCC. (See Ex. 1, Agreement at 2.2). However, on July 13, 2006, GLCC granted approval to Spartech to pursue business opportunities with Ciba and Cytec Industries at the Arlington Facilities. (See Ex. 15, 7/13/2006 Letter to Spartech). Furthermore, following the rejection of the Agreement, Spartech was free of any contractual restriction on its ability to use the Arlington Facility to serve other clients and customers. The decision to pay its terminated employees severance was a Spartech business decision and not a foreseeable result of the rejection of the Agreement. It is therefore not a recoverable actual damage under Texas law. See Arthur Anderson & Co., 945 S.W. 2d at 816 Spartech s Lease Termination Claim is included on both Claim and Claim and is said to have resulted due to the closing of the Arlington Facility. Spartech has produced a chart that expresses its Lease Termination Claim as part of its Rejection Claim. (See Ex. 11, Spartech Proof of Claim Detail). 23