Opinion ID: 2334569
Heading Depth: 3
Heading Rank: 2

Heading: Fixed and Variable Expenses

Text: Hauler argues that Owner failed to deduct certain fixed and variable expenses in calculating its lost profits damages. Missouri courts agree that lost profits are recoverable in a variety of breach of contract, tort, and business interruption cases. See Coonis, 429 S.W.2d at 714; Meridian, 910 S.W.2d at 332. In general, in calculating lost profits damages, lost revenue is estimated, and overhead expenses tied to the production of that income are deducted from the estimated lost revenue. Id. Overhead expenses include both fixed and variable expenses. Universal Power Sys., Inc. v. Godfather's Pizza, Inc., 818 F.2d 667, 673 (8th Cir.1987) (applying Missouri law). Fixed expenses are the continuous expenses of the business that are incurred regardless of the loss of a portion of the business, for example rent, taxes, and administrative salaries. Id. ; H. Kent Munson, Fixed Overhead Expenses: Gremlins of Lost Profits Damages, 56 J. MO. B. 104 (March-April 2000). Variable expenses, also called direct expenses, are costs directly linked to the volume of business. Universal Power Sys., 818 F.2d at 673. The Missouri appellate cases are split on whether fixed expenses should be deducted from estimated lost revenues in the calculation of lost profits damages. This Court granted transfer of this case to resolve this conflict. The Meridian case illustrates one approach. In Meridian , a travel agency claimed lost profits damages because the defendant wrongfully deprived it of the business of handling a 1990 trip to Hawaii. Meridian, 910 S.W.2d at 330-31. The court affirmed the trial court's grant of a directed verdict in favor of the defendants because the plaintiff failed to present evidence regarding its overhead expenses to support its claim for lost profits damages. Id. at 329. The court required the plaintiff to deduct both fixed and variable expenses in calculating lost profits. Id. at 332. In explaining its holding, the court stated that [t]he cost and expense of operation is a considerable item and in an action for loss of profits is an essential item in the proof of damages. Id. (citing Coonis, 429 S.W.2d at 714). The court further explained that [a]lthough `it is not necessary to show the income and expenses of the entire business where only a portion thereof has been lost, it is still necessary to offset the expenses attributable to that portion from the revenues derived from such portion in order to reach a net profit amount which can be recovered in damages.' Id. (quoting All Star Amusement, Inc. v. Jones, 727 S.W.2d 930, 932 (Mo.App.1987)). In another case, Skinner v. Thomas, 982 S.W.2d 698 (Mo.App.1998), the court required evidence of all overhead expenses. In Skinner, the plaintiff restaurant owners brought a breach of contract action against the defendant co-owner for failing to share business profits. Id. at 698-99. The court held that a plaintiff fails to make a submissible case of damages if plaintiff does not introduce evidence of overhead expenses such as mortgage or rent, utilities, and salaries attributable to the business producing the income [and that] plaintiff's failure to produce evidence of overhead expenses prevents them from making a submissible case. Id. at 700. Other Missouri appellate cases have held that fixed expenses should not be deducted in the calculation of lost profits damages. In Forney, the plaintiff subcontractor sought lost profits damages in a breach of contract suit against the defendant contractor after the contractor prevented it from performing its work under the construction contract. Forney v. Mo. Bridge & Concrete, Inc., 112 S.W.3d 471, 473 (Mo.App.2003). The court held that only variable expenses, those expenses associated directly with the contract at issue and actually incurred, should be deducted from estimated lost revenues to determine lost profits damages. Id. at 474-45. The court explained that [o]verhead expenses are included in the contractor's total cost saved by nonperformance and, thus, deducted from the contract price only where the owner/defendant proves that such expenses were actually saved by the breach. Id. at 474. In MFA Coop. Ass'n No. 86 v. Stone, 971 S.W.2d 885, 886-87 (Mo.App.1998), the defendant milk producers alleged that certain ingredients found in the feed they purchased from the plaintiff farm supply dealer caused their cattle to produce less milk, which resulted in decreased milk sales. The court discussed the deduction of overhead expenses and affirmed a jury verdict for lost profits damages without evidence of the deduction of any overhead expenses. Id. at 889-93. In its attempt to distinguish MFA from Coonis and Meridian , the court stated: Nothing in the record suggests Defendants' operating costs during the period in dispute would have been higher had the herd produced the customary amount of milk. Said another way, there was no evidence that it would have cost Defendants any more to produce the lost milk plus the actual milk than it did to produce the actual milk alone. Consequently, the jurors could have reasonably concluded that the profits Defendants lost could be readily ascertained from the evidence adduced at trial. Id. at 890. This Court holds that in tort actions, variable expenses, not fixed expenses, should be deducted from estimated lost revenues in the calculation of lost profits damages. These variable expenses are expenses that are tied directly to the unit of business or property damaged as a result of the defendant's actions. These variable expenses may include expenses for fuel, maintenance, depreciation, interest, insurance, salaries and benefits for particular employees and rental of storage space so long as the party claiming lost profits damages can produce evidence of the estimated lost revenue of the unit of business or property damaged and all ascertainable variable expenses directly tied to it. Hauler argues that the following overhead costs should be deducted from lost profits damages: salaries and benefits and training for the pilot and co-pilot to fly the airplane; hangar rental for parking of the airplane; advertising; telephone; salaries and benefits for filing, accounting, clerical and administrative staff involved in scheduling cargo shipments and billing and collecting related revenue; the expense of office space, furniture and equipment used in generating revenues; and depreciation of such capital assets used in generating revenues and interest expense. Owner's president testified that these costs were fixed expenses and should not have been deducted from its estimated lost revenue to determine its lost profits damages. Owner's evidence was that it would have incurred these expenses in the operation of its business, regardless of its loss of the use of this airplane in its fleet. Although this Court finds these expenses to be fixed under the facts of this case, under different factual scenarios these overhead costs could be variable expenses that should be deducted from estimated lost revenues to determine lost profits damages. Hauler also argues that Owner failed to produce evidence or failed to deduct all variable expenses associated with the loss of operation of the damaged airplane. The only variable expenses Owner deducted from its estimate of lost revenue were the expenses for fuel and maintenance of the airplane. Specific variable expenses of which Owner should have produced evidence and deducted from its estimated lost revenue are those expenses that are ascertainable and directly related to the operation of this airplane. Hauler specifically complains about the following expenses: depreciation on the airplane; debt service or interest on financing the airplane; and premiums for hull insurance and liability insurance on the airplane. Although Owner's president provided limited testimony about these expenses, the record is insufficient for this Court to determine what these expenses were and if they are fixed expenses that are not to be deducted, or are variable expenses that should be deducted from estimated lost revenues in the calculation of lost profits damages. Therefore, this Court reverses the judgment in part and remands the case for a new trial on the issue of damages or other relief consistent with this opinion.