Eldridge et al v. Gordon Brother Group, L.L.C. et al
Filing
103
Judge Douglas P. Woodlock: MEMORANDUM AND ORDER entered detailing GRANT of Defendants' motion for summary judgment (Dkt. No. 69), DENIAL of Plaintiff's motion for summary judgment (Dkt. No. 74), and (3) GRANT IN PART AND DENIED IN PART Defe ndants' motion for sanctions (Dkt. No. 88). Defendants shall file on or before April 1, 2016 a detailed calculation and application for sanction expenses and fees. Plaintiff shall file opposition thereto on or before April 15, 2016. (Woodlock, Douglas) (Main Document 103 replaced on 3/18/2016) (Colman, Claire). Modified on 3/18/2016 (Colman, Claire).
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
DAVID KAY ELDRIDGE, RAY ELDRIDGE,
JR.,D. CHRIS ELDRIGE, as trustee,
not individually, of the C.
ELDRIDGE 1994 GST TRUST, PATRICIA
K. SAMMONS, as trustee, not
individually, of the P.K. SAMMONS
1994 GST TRUST, C. ELDRIDGE 1994
GST TRUST, P.K. SAMMONS 1994 GST
TRUST, and K’S MERCHANDISE MART,
INC.
Plaintiffs.
v.
GORDON BROTHERS GROUP, LLC,
WILLIAM WEINSTEIN, FRANK MORTON,
Defendants.
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CIVIL ACTION NO.
08-11254-DPW
MEMORANDUM AND ORDER
March 18, 2016
Plaintiffs, K’s Merchandise Mart, Inc., (“Old K=s”) and its
shareholders, brought this action against Gordon Brothers Group,
LLC, (“GBG”) and two of its executives, William Weinstein and
Frank Morton, alleging fraud, breach of the implied covenant of
good faith and fair dealing, and breach of contract.
The
lawsuit arises from the formation of New K=s Merchandise, LLC
(“New K’s” or “the LLC”) by the parties and the subsequent
liquidation of the LLC by GBG.
On August 4, 2011, I granted
Defendants partial summary judgment.
The parties thereafter
filed cross-motions for summary judgment regarding the remaining
1
claims.
Additionally, Defendants filed a motion for sanctions
against Old K=s counsel pursuant to Fed. R. Civ. P. 11 and 28
U.S.C. ' 1927 based on Old K=s filing of its motion for summary
judgment.
I.
A.
BACKGROUND
Factual Background
On May 1, 2006, Old K=s and GBG entered into the New K=s
Merchandise LLC Limited Liability Company Agreement (“the LLC
Agreement”) forming New K=s as a Delaware LLC.
Old K=s was a
retail business incorporated in Illinois, while GBG was a
Delaware LLC with its principal place of business in
Massachusetts.
The only members of the LLC are Old K’s and GBG.
Under the agreement, they respectively owned 22.5% and 77.5%
interests in the business.
The LLC Agreement designates GBG as “the sole manager” of
the LLC.
LLC Agreement ' 3(b).
As the manager, GBG is given the
authority to “exercise all the powers and privileges granted to
a limited liability company by the Act or any other law or this
Agreement.”
LLC Agreement ' 3(a).
The LLC Agreement states that
“[t]he Manager shall use its best efforts to consult with K’s
Merchandise regarding the Manager’s conduct of the affairs of
the Company and will also use its best efforts to keep each
2
Member fully informed of any material decisions and activities
of the Manager with respect to the Company.”
1.
Id.
Management of the Furniture Department
New K=s, like Old K=s before it, included a furniture
department.
Gordon Brothers had limited experience running
furniture departments, although GBG employee Joseph McLeish had
some experience with ready-to-assemble furniture departments,
and GBG had run a few store closing sales for furniture
businesses.
However, GBG did not rely on its internal
expertise; it hired High Point Group (AHPG@) to run New K=s
furniture department.
Edward Borowsky, the head of HPG and New K=s furniture
department, stated at his deposition that when HPG took over, it
looked into furniture sales; looked at the inventory; determined
what pieces were mismatched, damaged, or disorganized; compared
inventory levels to sales levels; and discussed the inventory
with the New K=s buying department.
He stated that HPG brought
in independent contractors who were engaged in the field and
gave feedback regarding personnel, attempting to change the
attitudes of a demoralized staff.
He stated that HPG
restructured New K=s warehousing distribution, establishing
satellite warehouses instead of relying on the central
warehouses previously used.
He further stated that HPG did not
3
do market surveys or statistical analysis of the furniture
department.
Kay Eldridge, a shareholder of Old K=s; Richard Powers,
Chief Financial Officer of both Old K=s and New K=s; and Geoff
Clouser, Senior Vice-President in charge of the furniture
department, all opined that the furniture department was
mismanaged.
Mr. Clouser stated that it was his opinion that the
changes made to the furniture department, including changes in
inventory, purchasing furniture for liquidation retailers, and
establishing satellite warehouses, were unreasonable given the
paucity of analysis conducted beforehand. Kay Eldridge stated
that the merchandise purchased was scratched and damaged, which
was “a terrible thing.”
Richard Powers stated that the
merchandise that was brought in was overpriced.
Michael Pakter submitted an expert report on behalf of Old
K=s quantifying the lost profits resulting from the alleged
mismanagement.
He calculated that if the gross margin of
profits were at the level attained in the period of May 1, 2006,
through October 4, 2006, but the sales had remained at the
levels achieved during the period of May 1, 2005, through
September 30, 2005, then the furniture department would have
earned an additional $579,210 in profits.
He also calculated
that the cost of maintaining the new satellite warehouses was
4
$558,579.
Relying on Geoff Clouser=s affidavit, Mr. Pakter
stated that it was his understanding that the establishment of
satellite warehouses increased expenses without adding to
revenues.
He concluded that the total lost profits for New K=s
furniture department was the sum of the lost profits on sales
and the satellite warehouse costs, or $1,137.789.
Peter N. Schaeffer submitted an expert report on behalf of
Defendants that evaluated Mr. Pakter’s analysis of the furniture
department.
Schaeffer stated that it was his opinion that Mr.
Pakter’s conclusions were flawed.
He stated that the assumption
that the sales would have remained at 2005 levels was
unwarranted because “sales for the Company were falling and as
word of the Company=s troubles became public, large price
purchases such as furniture would be jeopardized.”
He further
questioned why Mr. Pakter used the 2005 sales as his revenue
base but retained the 2006 gross margin, which was significantly
higher.
Finally, he stated that Mr. Pakter did not support his
claim that the satellite warehouse program was unnecessary and
that the money spent on it was wasted.
2.
Financial Record Keeping
The LLC Agreement obligates GBG, as the manager, to “keep
or cause to be kept complete and accurate books and records of
the LLC, using the same methods of accounting that are used in
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preparing the federal income tax returns of the LLC to the
extent applicable and otherwise in accordance with generally
accepted accounting principles consistently applied.”
Agreement ' 12(a).
LLC
GBG is also required to “provide such
information respecting the financial condition and operations of
the LLC as either Member may from time to time reasonably
request.”
Id.
Old K’s alleges that Defendants did not consult with it or
keep it informed during the operation or liquidation of the
business.
Old K’s further alleges that its shareholders
requested accounting and financial information regarding New K=s
from GBG numerous times from April 2007 through the discovery
period for this case, and that they were rebuffed or provided
with insufficient information.
Defendants dispute that any
information was delayed or withheld.
3.
Liquidating Distributions
The LLC Agreement addresses distributions on the occasion
of a liquidation of the LLC.
It states that “a distribution
made upon a liquidation or winding up of the LLC (the
“Liquidating Distribution”) shall be made to the members, from
all cash or property available for distribution.”
' 6(b).
LLC Agreement
Under the LLC Agreement, the Members receive liquidating
distributions “on a pro rata based on their respective
6
Percentage Interests,” with a minimum distribution to Old K=s of
three million dollars.1
Id.
The LLC Agreement further specifies
that “[e]xcept as the Manager may otherwise determine, all
distributions to Members shall be made in cash.
If any assets
of the LLC are distributed in kind, such assets shall be
distributed on the basis of their fair market value as
determined by the Manager.”
LLC Agreement ' 6(d).
In March, 2008, New K’s made a payment to Old K’s in the
amount of $1,748,217, which represents the minimum three million
dollar distribution less certain adjustments for monies owed by
Old K=s to New K’s or to GBG or withheld as a reserve for future
expenses expected to be paid on Old K’s behalf.
On May 18,
2009, GBG sent Old K’s a document entitled “Balance Sheet for
Reconciliation” (“Reconciliation”) which provided balance sheets
and explained the distribution amount.
a.
The Reconciliation
The Reconciliation includes a calculation of New K’s
Expected Revenue as follows:
Data From
Assets
Amounts
Balance Sheet
C144
Bank of America
Cash
6,817,471.77
1
Totals
A different minimum would have applied had New K=s filed for
bankruptcy. Neither party asserts that the alternative minimum
applies in this case.
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Balance Sheet
C152
Distribution to
Old K=s
3,000,000
Balance Sheet
C153
Distribution to GB
3,000,000
Davenport Real
Estate Not Sold
0.00
Decatur Land Not
Sold
0.00
Bank of America
and CIB Cash
Account
210,204.19
Balance Sheet
C22
Subtotal Assets
13,027,675.96
Liabilities
Balance Sheet
C147-145
Liabilities from
Balance Sheet
1,059,400.75
Balance Sheet
C55
Old K=s Deduction
Expense (800k,
175l, 100k)
1,075,645.47
Estimated
Accruals E1
Estimated Accruals
for additional 12
months
753,760.00
Subtotal
Liabilities
2,888,806.22
Current
Expected
Revenue
10,138,869.74
The Reconciliation provides a “Calculation of Payout Due”
as follows:
Total Expected
Revenue
Old K=s Merchandise
Share
10,138,869.74
22.50%
2,281,245.69
8
If Old K=s Sharing
Less than $3
million then
Guarantee of $3M is
the floor
3,000,000
Total Due to Old K=s
Merchandise
3,000,000
The Reconciliation provides a “Calculation of Wire” as
follows:
Distribution Made March 2008
3,000,000.00
Less Amounts Due New K=s / GB:
Fee for Busey Guarantee
Agreement
800,000.00 Due to GB
Old Champaign Settlement
175,000.00 Due to GB
Don Oulette Settlement
71,923.00 Reimbursement to New
K=s
Rick Powers Severance Payment
per Contract with Old K=s
45,360.00 Reimbursement to GB
Busey Forbearance Renewal
7,500.00 Reimbursement to New
K=s
Busey Forbearance Renewal
10,000.00 Reimbursement to New
K=s
Busey Forbearance Renewal thru
Oct 2007
10,000.00 Reimbursement to New
K=s
Busey Forbearance Renewal Thru
Jan 2008
10,000.00 Reimbursement to New
K=s
AR Accounts for Kay Eldridge
11,354.53 Payment due to New
K=s for AR
Reserve
100,645.47 Reserve
Subtotal Deductions
1,251,783.00
Total Amount Funded to K=s
Merchandise Mart Inc.
1,748,217.00
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b.
The Real Estate
The Reconciliation lists two pieces of property, the
“Davenport Real Estate” and the “Decatur Land,” which had not
been sold at the time the Reconciliation was prepared.
valued each at “0.00.”
It
After December 31, 2008, the “Decatur
Land” was sold for a net revenue to New K=s of $16,705.47.
Davenport Real Estate remains unsold.
The
Patricia Parent, a
Principal and Managing Director of GBG, stated that it is
currently listed for sale at $1,900,000.
David Coles, who
submitted an expert report on behalf of GBG, estimated that the
property value was $1.5 million.
c.
The $1,075,645.47 Liability
The Reconciliation identifies $1,075,645.47 as a liability.
This number includes $800,000 which was due from Old K=s to GBG
and was paid out of the distribution to Old K=s.
It includes
$175,000 for the settlement of liabilities in connection with
the Old Champaign Store which was due from Old K=s to GBG and was
paid out of the distribution to Old K=s.
Finally, it includes
another $100,645.47 in reserve for payments for preparation of
Old K=s income tax returns, state income taxes owed by Old K=s,
annual report fees owed by Old K=s and other miscellaneous
billings that might be discovered on review.
10
Parent stated in an affidavit that these amounts were
listed as liabilities because they were owed to others (GBG or
third parties) and being held by New K’s.
She stated that the
amounts were also included as assets, because New K=s had not yet
paid the amounts and therefore held them in its accounts.
She
stated that the $1,075,645.47 was a part of the asset line item
identified as “Bank of America Cash,” which totaled
$6,817,471.77.
Regarding the reserve in particular, she stated
that New K=s was only holding the $100,645.17 in cash until Old
K=s expenses were paid, and to the extent that any amounts were
left over, they would be repaid to Old K’s.
d.
The $130,777.53 in Deductions
The Reconciliation provides a calculation of the
distribution made to Old K’s.
The calculation includes
deductions for the payment of a settlement with Don Oulette,
forbearance fees on New K’s on mortgages, and accounts
receivable, which were sums owed by Old K’s and Kay Eldridge (a
principal shareholder of Old K=s) to New K’s.
These deductions
total $130,777.53.
Parent stated that the first two deductions represented
reimbursements for expenses New K=s had already paid out on Old
K=s behalf.
They were not included as either liabilities or
assets because receipt of the reimbursement did not generate
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revenue or a new asset but instead canceled out prior
expenditures.
She stated that the final component, representing
accounts receivable owed by Kay Eldridge, was originally one
asset (accounts receivable), and after payment to New K=s through
the deduction became another asset (cash).
She stated that
because the amount was already considered an asset when it was
accounts receivable, it would not increase New K=s assets after
payment was taken out of the Old K=s distribution.
She stated
that the accounts receivable therefore were reflected in the
cash assets without increasing New K=s gross revenues.
e.
The Inventory Balance
The Reconciliation provides a zero inventory balance as of
December 31, 2008.
Old K=s expert Michael Pakter, however,
provided a report stating that this number was incorrect.
Mr.
Pakter calculated that the ending inventory should be equal to
the opening inventory plus the purchases less the cost of sales.
Into this formula, he plugged numbers derived from (1) the
ending inventory balance of Old K=s as of April 30, 2006 (used as
the opening inventory of New K=s); (2) an “Inventory Update
Summary” report created by GBG (used for the purchases numbers);
and (3) other internal GBG documents.
Using these numbers, he
calculated that the ending inventory should have been
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$13,923,576.
In other words, Pakter concluded that over $13.9
million worth of inventory was unaccounted for by GBG.
Parent stated that the numbers that Pakter plugged into his
formula did not represent opening inventory or purchases.
She
stated that not all of Old K=s inventory balance was brought over
to New K=s on May 1, 2006 when it commenced operations, and that
specific items of inventory were excluded from the transaction.
For this reason, the ending inventory balance of Old K=s was not
the opening inventory of New K=s.
She also stated that the
“Inventory Update” report at GBG, the source of Pakter=s numbers
for monthly “purchases,” was an operational report that did not
reflect “purchases” but instead tracked the total amount of
inventory physically present in the store.
Thus, it included
inventory that was at the stores but was not an asset, much like
consignment inventory that was not owned by New K’s.
Finally,
she stated that at least one data point for ending inventory
(that for December 31, 2006) was taken from the wrong point in
time (namely from the week ending December 17, 2006).
GBG expert Jeffrey Szafran submitted a report criticizing
Pakter=s analysis in much the same way as Parent did.
Szafran
stated that “the basic accounting equation used by Mr. Pakter is
reasonable” but “certain data points used in the analysis were
wrong.”
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Szafran explained that the opening inventory balance was
wrong because it reflected the ending inventory balance of Old
K=s instead of the opening inventory balance of New K=s.
He
stated that Pakter=s use of the wrong balance improperly inflated
his ending inventory calculation by approximately $2 million.
Id.
Szafran cited to work papers produced by Buccino &
Associates, Inc., which was engaged to identify the assets and
liability that were to be transferred from Old K=s to New K=s, and
concluded that a Adownward adjustment of approximately $2.1
million@ should have been made.
Id.
Szafran did not provide Old
K=s with a copy of the Buccino & Associates work papers.
Szafran also stated that the “purchases” data points used
by Pakter were obtained from the “Inventory Update Summary”
produced by GBG, which did not reflect assets correctly but
instead analyzed all orders and perpetual merchandise on hand.
He stated that this did not represent New K=s inventory balance,
because, for example, it included consignment product.
For his
information regarding the numbers in the Inventory Update
Summary, he cited a conversation with GBG employee Rhonda
Hebert.
Szafran stated that Pakter=s cost of goods numbers were also
incorrect, and were taken from New K=s operational “sales
summary” reports instead of from its general ledger accounting
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system, J.D. Edwards.
He noted that the sales summary reports
provided numbers that could not appropriately be used for the
Acost of goods@ data points because they included layaway sales
that were not a part of “cost of goods” prior to the ultimate
purchase by the customer.
He stated at his deposition that he
was able to understand why there was a difference between the
GBG operational data and the accounting records after speaking
with Sherry Wittig, a GBG accounting employee.
Szafran provided his own inventory analysis, relying on the
same accounting principles as those used by Pakter but using
data points from New K=s general ledger accounting system, J.D.
Edwards.
$580,000.
His analysis showed an ending inventory number of
He explained that “[t]he cumulative difference in my
expected ending inventory amount did not differ substantially
from the reported ending inventory, therefore I did not attempt
to reconcile the difference.”
f.
Id.
Updates to the Reconciliation
At her deposition on March 25, 2010, Rhonda Hebert, the GBG
employee responsible for creating the Reconciliation, stated
that GBG was working on updates to particular parts of the
document, namely how an $11.7 million advance to K=s was
documented and updates to a valuation to correct certain
15
estimates.
GBG has not provided Old K=s with an updated version
of the Reconciliation.
4.
The Emails Regarding Financial Projections and
Accounting
On January 19, 2007, Rhonda Hebert emailed Tricia Parent,
Billy Weinstein, and Frank Morton of GBG.
The email stated:
Attached is a revised estimated recovery on the
balance sheet for your review
With the changes implemented, the bottom line is
current showing: 7,937.
Please advise of an changes/reprojections that need to
be made.
On January 20, 2007, Frank Morton forwarded the January 19,
2007, email to Parent and included his own email:
A few weeks we sat done with Rhonda and reviewed the
P&L (12/29 updated) . . . and we also discussed
several circumstances where we felt the P&L was
conservative including the following:
Sales- plan had 178mm, we did $181.2mm (obviously some
COGS here on the memo)
Paduca loss overstated (100k)
Payroll overstated (500k)
G/C liability overstated (300k)
Bessler add back (400k)
Windown overstated (1mm)
VBO (250k)
Obviously, we need a true picture here to see if we
should buy out the back end . . . . Seems like we
should be in the $17.0-$17.5mm range for total JV, not
included the financing of $1.5mm to GB, with a break
of $13.3mm.
Id.
Later that day, Parent responded to Morton with the
following email:
16
As you are probably are aware we have a lot of people
using different numbers not understanding what is in
or what is out. Billy is saying one thing for [Old K=s
attorney] Cobb, we have one set of numbers for Rick
etc...nothing has changed between the numbers we have
published between us. if you want to go over we can
at your convience, but understand we are following on
the same path we have discussed.
On January 21, 2007, Morton responded to Parent with the
following email:
I understand, we just need to get a clear picture of
the numbers, so wan make a judgment on the buyout of
the backend. this has nothing to do what we share
with [Old K=s attorney] Cobb et al...
I want to buy it out but I also don=t want to be
stupid. If you can look at the numbers and give your
opinion, I=d appreciate
Parent stated at her deposition that the reason for the
overstatement of the items listed in Morton=s January 20, 2007,
email was that projections are formulated to leave room for any
unexpected expenses that can be incurred.
She further explained
the chain of emails by stating:
It’s not uncommon that our people that are not close
to the numbers are all using different numbers. For
whatever reason, people that are not looking at
financial statements and what is going through the
books and records have numbers in their heads, okay?
I believe at the time we received something from Rick
Powers, who was actually working on behalf of New K=s,
created a document that was completely incorrect. So
what I=m telling Frank is, you=re saying one thing,
Rick=s saying something else, and we=ve got a set of
books that the company has.
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She stated that she did not know what her understanding was of
what Morton meant when he emailed “this has nothing to do with
what we share with Cobb . . . .”
B.
Procedural Background
Plaintiffs commenced this case on July 22, 2008, filing a
Complaint containing three counts: (1) fraudulent inducement,
(2) accounting, and (3) breach of contract.
Included within the
breach of contract count was a claim for breach of the implied
covenant of good faith and fair dealing.
1.
Damages Disclosures
On December 24, 2008, Plaintiffs filed initial disclosures
pursuant to Fed. R. Civ. P. 26(a)(1)(A).
In response to the
requirement that each party provide “a computation of each
category of damages claimed by the disclosing party,” Fed. R.
Civ. P. 26(a)(1)(A)(iii), Plaintiffs stated:
Plaintiffs have been damaged by Defendants failure to
provide an accounting, compensatory and exemplary
damages as a result of Defendants= breach of the LLC
Agreement, fraud, and their attorney fees and expenses
in bringing this suit. Plaintiffs cannot determine
the amount of the damages until Defendants provide
Plaintiffs their document production responses and an
accounting . . . .
On June 11, 2009, Plaintiffs responded to Defendants= First
Set of Interrogatories, which were served on March 5, 2009.
Interrogatory 13 stated:
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Please describe in detail including exact dollar
amount each and every element of damages the
Plaintiffs are claiming in this action and identify
each and every document that the Plaintiffs rely on in
responding to this interrogatory.
Plaintiffs responded with the following:
The exact dollar amount of damages cannot be
determined at this time prior to the completion of
Defendants= discovery disclosures and expert economic
analysis. Investigation continues and Plaintiffs will
supplement their response to this interrogatory as
information becomes available.
Plaintiffs never supplemented this interrogatory response.
On March 19, 2010, Plaintiffs served Defendants with
supplemental disclosures pursuant to Fed. R. Civ. P.
26(a)(1)(A). Plaintiffs’ response to the requirement to provide
a calculation of damages was unchanged from the response that
they provided on December 24, 2008.
Plaintiffs never served a
further supplemental disclosure.
On June 15, 2010, Plaintiffs served Defendants with Michael
Pakter=s “Expert Report on Lost Profits of New K’s Furniture
Department.”
In the report, Pakter stated that it was his
opinion:
with reasonable degree of certainty, from an
accounting and financial analysis point of view, if
the Court finds that Gordon Brothers Group, LLC
(AGordon Brothers@) failed to act with the standard of
good faith and fair dealing in operating the New K=s
Furniture Department and/or otherwise liable for the
damages Plaintiffs suffered, the measure of Plaintiffs=
damages, assuming New K=s was engaged in normal
business operations from May 1, 2006 through October
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4, 2006, was New K=s Furniture Department lost profits
in the amount of $1,137,789.
On June 15, 2010, Plaintiffs also served Defendants with
Michael Pakter=s “Expert Report on Count II (Accounting).”
In
the report, Pakter evaluated the completeness and quality of the
financial records provided to Plaintiffs by GBG and found the
records wanting.
He did not provide a damages calculation
related to Count II.
He explicitly stated:
Plaintiffs’ legal counsel has not requested that I
compute and/or otherwise determine the monetary amount
of Plaintiffs= direct, incidental and/or consequential
damages sustained as a proximate result of Gordon
Brothers= failure to provide an accounting.
At his subsequent deposition on October 20, 2010, Pakter
reiterated that he was not opining and did not opine about the
damages suffered by Plaintiffs due to GBG=s failure to provide
adequate accounting.
Pakter submitted an additional report, dated August 31,
2010, and entitled “First Supplemental Expert Report on Count II
(Accounting).”
In the report, he provided calculations based on
various GBG financial records and stated that it was his
opinion:
with a reasonable degree of certainty, from an
accounting and financial analysis point of view, that
Gordon Brothers failed to specifically, fully and
completely account for inventory of New K=s in the
amount of approximately $13.9 million from May 2006
through January 2007.
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He further stated:
Plaintiffs’ legal counsel has not requested that I
compute and/or otherwise determine the monetary amount
of Plaintiffs= direct, incidental and/or consequential
damages sustained as a proximate result of Gordon
Brothers= failure to account for this amount of
inventory.
At his subsequent deposition, Pakter stated that the $13.9
million figure “may” be owed as monetary damages to Plaintiffs,
but that he had not been asked to compute whether the figure
constituted damages.
He reiterated: “I=m simply pointing out
that there=s 13.9 million dollars unaccounted for, it would seem
in the inventory.”
Fact discovery terminated on May 15, 2010.
Expert
discovery terminated on December 14, 2010.
On September 9, 2011, after I issued a decision on
Defendants= Motion for Partial Summary Judgment, the parties
submitted a Joint Status Report.
In the report, Old K=s stated:
As set forth in the evidence, the amount improperly
calculated is $5 million, the amount of damages
related to furniture is $1.1 million, and the amount
of missing inventory is $13.9 million. Applica[t]ion
of the LLC Agreement formula yields damages to Old K=s
of $4.5 million.
Old K=s provided additional detail regarding the $5 million
“improper calculations” damages, asserting:
Based on the Complaint and record evidence, Plaintiff
claims that the “Accounting” was off, at least, by $5
million: $231,423 in New K=s assets listed as
liabilities, $1,075,645 in assets of Gordon Brothers
21
to be deducted from the liquidating distribution
listed as liabilities to New K=s, and $3.7 million for
not assigning a value for real estate assets held by
New K=s.
2.
Defendants= Motion for Partial Summary Judgment
On January 14, 2011, Defendants filed a motion for partial
summary judgment pursuant to Fed. R. Civ. P. 56.
Defendants
moved for an order:
(i)
dismissing Count I of the complaint, which asserts
plaintiffs were fraudulently induced into entering
into the New K=s Merchandise LLC Limited Liability
Company Agreement, dated as of May 1, 2006 (the “LLC
Agreement”);
(ii) dismissing Count III of the complaint, to the extent
that it purports to assert a claim for breach of the
implied covenant of good faith and fair dealing
arising out of the LLC Agreement;
(iii)striking plaintiffs= demand for Abenefit of the bargain@
damages; and
(iv) dismissing for lack of standing the claims of
individual plaintiffs David Kay Eldridge, Ray
Eldridge, Jr., D. Chris Eldridge as trustee of the C.
Eldridge 1994 GST Trust, and Patricia K. Sammons as
trustee of the P.K. Sammon 1994 Trust.
In support of the component of the motion moving to dismiss the
claim for a breach of the implied covenant of good faith and
fair dealing, Defendants argued that (1) Plaintiffs did not
allege the breach with sufficient specificity and (2) any
suggestion by Plaintiffs= expert that Defendants had breached an
implied contractual obligation to undertake an operational
turnaround of New K=s failed as a matter of law.
22
In their opposition, Plaintiffs argued that “[i]n the
complaint, K=s identified the obligations imposed on Gordon by
the duty of good faith and fair dealing that were breached and
the resulting damages . . . .”
Plaintiffs did not specify or
otherwise elaborate on what statements in the Complaint
identified these obligations.
Plaintiffs then argued that there
were specific provisions in the LLC Agreement giving rise to
GBG=s duty to undertake an operational turnaround of K=s
Merchandise.
At oral argument on the Motion for Partial Summary
Judgment, after discussing Plaintiffs= claim that Defendants
breached the implied warranty of good faith and fair dealing,
Plaintiffs’ counsel and I had the following exchange:
THE COURT: . . . . You say that they did not use their
discretion properly to effect liquidation. That is
really what it comes down to, right?
MR. PATTERSON: That is one thing, and they also made a
series of operational decisions that were also not in
good faith, the failure to purchase the inventory,
which we have submitted affidavits on, that tended to
drive K=s customers away, ordering furniture that
wouldn=t appeal to K=s market, and that was a subject of
a previous liquidation, that there is no way in heck
anybody operating in good faith could think would sell
in K=s store. There are operational issues as well as
the decision to liquidate.
THE COURT: So, your overarching theory, then, is that
they engaged in a process of willfully making
liquidation inevitable.
MR. PATTERSON: They did that.
THE COURT: Is that what it comes down to?
MR. PATTERSON: I just want to be careful, though,
before I say what it comes down to.
23
THE COURT: It has got to come down to something. What
this is is a vast collection of resentments that are
congealed into a complaint, and I am looking for the
theme.
MR. PATTERSON: The theme is that they misrepresented
us going in, and then operationally guaranteed the
result and failed to exercise good faith and lied to
us throughout . . . .
On August 4, 2011, I issued a Memorandum and Order ruling
on Defendants= Motion for Partial Summary Judgment.
I held that
the Complaint=s statement that GBG “breached the contractual
covenant of good faith and fair dealing implied [in] the LLC
Agreement when it engaged in the [alleged] fraud and
mismanagement” was sufficient to allege a breach of the implied
warranty of good faith and fair dealing.
However, I held that
the implied covenant did not include a warranty not to liquidate
the LLC under the facts presented in the case.
I concluded that
“the implied covenant claim fails as a matter of law.”
I also
granted the other parts of Defendants= motion for summary
judgment on Count I (fraud), striking Plaintiffs= demand for
benefit of the bargain damages, and dismissing David Kay
Eldridge, Ray Eldridge, D. Chris Eldridge, and Patricia Sammons
from the case.
In the parties= Joint Status Report filed on September 9,
2011, the remaining Plaintiff, Old K=s, asserted that among the
remaining claims was a claim that Defendants had Abreach[ed] the
24
contractual duty to consult and the implied covenant of good
faith and fair dealing during the operation of the business.@
3.
Pending Motions
At a status hearing before me on September 22, 2011,
Defendants expressed a desire to file a motion for summary
judgment on the remaining claims, and I set a schedule for that
motion.
Plaintiff expressed no such desire or plans.
However,
on October 5, 2011, Plaintiff filed a motion for leave to file a
cross-motion for summary judgment.
I granted the motion, but in
my order warned that “[c]ounsel . . . is advised to consider the
application of Fed. R. Civ. P. 11 to any such motion if the
motion has no conceivable likelihood of success.”
Electronic
Order of October 7, 2011.
Defendants moved for summary judgment on the following
grounds: (1) the claim for breach of an implied covenant has
already been dismissed; (2) the claim for breach of contract for
failure to consult with Old K’s does not provide any measure of
damages that is not impermissibly speculative; (3) the claim
that Defendants did not keep Old K’s sufficiently apprised of
the financial condition of New K’s is moot, given pre-trial
discovery, and moreover does not provide for calculable damages;
and (4) the claim for breach of contract for failure to pay an
appropriate liquidating distribution should be dismissed because
25
it is based on damages calculations that should be stricken and
does not accord with undisputed facts.
Plaintiff moved for summary judgment on the following
grounds: (1) Defendants have breached the LLC Agreement by
failing to provide Old K=s with the proper liquidating
distribution and (2) Defendants breached the covenant of good
faith and fair dealing during the operation of the LLC by
mismanaging the furniture department.
Following Plaintiff=s filing of its motion for summary
judgment, Defendants filed a motion for sanctions.
Defendants
asserted that Plaintiff=s motion has no conceivable likelihood of
success, was untenable as a matter of law, and was presented for
an improper purpose.
Defendants contended that Plaintiff=s
counsel should be sanctioned pursuant to Fed. R. Civ. P. 11 and
28 U.S.C. ' 1927.
II. CHOICE OF LAW
Federal courts sitting in diversity “apply state
substantive law and federal procedural law.”
380 U.S. 460, 465 (1965).
Hanna v. Plumer,
The numerous procedural issues that
arise in this case are governed by First Circuit and Supreme
Court precedent.
With respect to substantive law “[a]s we are a
federal court sitting in diversity, we apply the forum state=s
choice of law rules.”
Hartford Fire Ins. Co. v. CNA Ins. Co.
26
(Europe) Ltd., 633 F.3d 50, 54 n.7 (1st Cir. 2011).
Here, “the
forum state is Massachusetts, which, absent any contravening
public policy, honors choice-of-law provisions in contracts.”
Id.
The LLC Agreement states that the “[a]greement and the
rights and obligations of the parties hereunder shall be
governed by and interpreted and enforced in accordance with the
laws of the State of Delaware.”
LLC Agreement, ' 16(c).
I
discern no reason and the parties do not present any reason to
reject the parties= contractual choice of Delaware law.
III. STANDARD OF REVIEW
A movant is entitled to summary judgment when “the movant
shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
“A dispute is genuine if the evidence
about the fact is such that a reasonable jury could resolve the
point in the favor of the non-moving party,” and “[a] fact is
material if it has the potential of determining the outcome of
the litigation.” Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777,
782 (1st Cir. 2011) (quoting RodríguezBRivera v. Federico Trilla
Reg'l Hosp., 532 F.3d 28, 30 (1st Cir. 2008)).
In evaluating a motion for summary judgment, a court “must
construe the record in the light most favorable to the nonmovant
and resolv[e] all reasonable inferences in that party=s favor
27
while safely ignoring conclusory allegations, improbable
inferences, and unsupported speculation.”
Collins v. University
of New Hampshire, 2011 WL 6350429, at *4 (1st Cir. 2011).
(“The
presence of cross-motions does not alter this general standard.
When there are cross-motions for summary judgment, the court
must consider each motion separately, drawing all inferences in
favor of each non-moving party in turn.”
D&H Therapy
Associates, LLC v. Boston Mut. Life Ins. Co., 640 F.3d 27, 34
(1st Cir. 2011).
IV. ANALYSIS
A.
Implied Covenant of Good Faith and Fair Dealing
Plaintiff contended that its claim for breach of the
implied covenant of good faith and fair dealing regarding
mismanagement of the furniture department2 was not dismissed by
this Court.
Plaintiff argued that Defendants= motion for partial
summary judgment and its supporting papers never mentioned Old
2
Although Plaintiff does not expressly argue in its own Motion
for Summary Judgment that the alleged inventory accounting
problems provide a third basis for the implied covenant claim,
it somewhat ambiguously appears to do so in its Opposition to
Defendants= Motion for Summary Judgment. To the extent that
Plaintiff is making this argument, any such basis was disposed
of when I dismissed the claim for breach of the implied covenant
of good faith and fair dealing. Furthermore, any such basis is
also subject to dismissal due to Plaintiff=s failure to disclose
the damages calculation related to the claim in a timely manner.
See infra Section III(D)(1).
28
K=s claim as it relates to mismanagement, that Old K’s therefore
did not respond to an argument that was not made, and that I did
not address the issue in my decision because it was not part of
the motion.
Plaintiff mischaracterizes Defendants= earlier motion for
partial summary judgment.
The motion clearly requested the
Court to “dismiss[] Count III of the complaint, to the extent
that it purports to assert a claim for breach of the implied
covenant of good faith and fair dealing arising out of the LLC
Agreement.”
The motion thus addressed the entirety of
Plaintiff’s implied covenant claim.
In its Opposition,
Plaintiff did not raise the mismanagement allegations or argue
that the allegations provided a separate basis on which the
implied covenant claim could (at least partially) be maintained.
The First Circuit requires a litigant to raise all
arguments in its opposition to a dispositive motion or waive the
right to raise them thereafter.
In one leading case, it
observed that:
[t]o cinch matters, the plaintiffs made no mention of
[this] claim in their opposition to the [defendant]=s
dispositive motion. As we wrote in a comparable case,
A[c]ourts are entitled to expect represented parties to
incorporate all relevant arguments in the papers that
directly address a pending motion.@ This branch of the
raise-or-waive rule serves the salutary purpose of
preventing litigants from gaming the system by seeding
complaints with Delphic references in the hope of
facilitating an escape should the district court=s
29
ruling on their advertised claims fail to suit.
Applying that principle, we conclude that the
plaintiffs= failure to mentionB-let alone adequately to
developB-the . . . theory in their opposition to the
[defendant]=s dispositive motion defeats their belated
attempt to advance the theory on appeal.
Iverson v. City of Boston, 452 F.3d 94, 103 (1st Cir. 2006).
Plaintiff did not raise operational decisionmaking as an
independent ground for the good faith and fair dealing claim in
its opposition to Defendants= motion for partial summary
judgment.
Plaintiff may have come to regret that decision, but
it may not belatedly reverse its choice.
To be sure, Plaintiff did mention mismanagement in its
complaint.
Plaintiff=s counsel even raised mismanagement —
albeit briefly — at oral argument on the motion for partial
summary judgment.
However, counsel discussed the mismanagement
in the context of “operationally guarantee[ing]” liquidation —
unwarranted liquidation being the basis of Plaintiff=s original
implied covenant argument.
Counsel did not assert that the
alleged mismanagement constituted an independent ground for the
finding of a breach.
Applying the “raise-or-waive” rule, I hold
that the mismanagement argument was waived and will not consider
it or the implied covenant claim any further.
B.
Accounting
Count II of the Complaint alleged that Defendants did not
provide Plaintiff with an accounting of the financial condition
30
and operations of New K=s as required by the LLC Agreement.
Plaintiffs requested “production of the books and records
requested by Plaintiffs but not yet made available by Defendants
and an accounting and award Plaintiffs such other relief as this
Court deems just and proper.”
After Plaintiff filed the
Complaint, the parties engaged in a period of discovery for
approximately two years, during which Plaintiff could and did
request financial books and records from Defendants in the
course of document production.
Defendants argued that to the extent that Defendants
withheld financial information that it was required to share
under LLC Agreement, the issue is now moot due to extensive
document production.
Defendants further argued that Plaintiff
never articulated any other damages for its “Accounting” claim,
and so the claim should be dismissed.
Plaintiff did not respond
to these arguments.
The discovery conducted in this case has been timeconsuming and comprehensive.
No motion to compel additional
discovery is pending; Plaintiff does not assert that it is
missing any particular document in Defendants= possession.
Plaintiff=s failure to articulate any demands for damages or
equitable relief pursuant to Count II of the Complaint, I
granted Defendants summary judgment on Count II.
31
Given
C.
Failure to Consult with Old K=s
Count III of the Complaint alleged that GBG failed to “use
its best efforts to consult with K=s Merchandise regarding [GBG]=s
conduct of the affairs of the Company and . . . use its best
efforts to keep each Member fully informed of any material
decisions and activities of [GBG] with respect to the Company”
as required by ' 3(a) of the LLC Agreement.
However, Plaintiff
never provided a measure of the damages sought in compensation
for this alleged breach of contract.
Defendants argued not only that Plaintiff has provided no
measure of damages for this claim, but additionally that it is
impossible to imagine a measure of damages that would not be
unduly speculative.
Plaintiff did not respond to this argument.
Plaintiff provided no theory for how a Court, or a jury, might
decide whether consultation would have led to different
decisions in the operation of the business, if those decisions
would have led to different profits, or what those profits might
have been.
I am hard-pressed to imagine what such a theory
might be, and without one, I hold that any claim for damages
based on this breach of contract is unduly speculative.
Additionally, I find that, considering that Plaintiff did not
advance either a number or a theory regarding damages for this
alleged breach and that Plaintiff has not responded to
32
Defendants= argument, Plaintiff has conceded the point and waived
the claim.
Accordingly, I granted summary judgment to Defendants on
Count III of the Complaint to the extent that it asserts a
breach of contract for Defendants= failure to consult adequately
with Plaintiff and keep Plaintiff informed of decisions and
activities with respect to the LLC.
D.
Failure to Disclose Money Damages Claims
Defendants contended that Plaintiff failed to disclose the
money damages that it sought for its breach of contract claim as
required under Fed. R. Civ. P. 26 and as requested in
Defendants’ interrogatories.
Defendants moved that Plaintiff’s
damages evaluations for its breach of contract claims, revealed
generally to Defendants and to the Court for the first time in
the September 9, 2011, Joint Status Report, be stricken.
Such
an order by this Court had the effect of dismissing the claim
for breach of contract, because it eliminated the grounds for
Plaintiff=s request for relief.
Plaintiff was undoubtedly obligated to provide a
calculation of the damages sought.
Under Fed. R. Civ. P. 26(a),
Plaintiff was required to provide initial disclosures to
Defendants, including “a computation of each category of damages
claimed@ and Athe documents or other evidentiary material, unless
33
privileged or protected from disclosure, on which each
computation is based, including materials bearing on the nature
and extent of injuries suffered.”
26(a)(1)(A)(iii).
Fed. R. Civ. P.
Plaintiff was also required to respond to
Defendants= interrogatories, which included an interrogatory
requesting a description of the “exact dollar amount [of] each
and every element of damages the Plaintiffs are claiming in this
action” and an identification of “each and every document that
the Plaintiffs rely on in responding to this interrogatory.”
Plaintiff stated in response to both the initial disclosure
requirement and the interrogatory that it could not yet
determine the amount of damages.
Plaintiff was additionally under an obligation to
supplement those disclosures and responses.
Fed. R. Civ. P.
26(e) provides:
A party who has made a disclosure under Rule 26(a) —
or who has responded to an interrogatory, request for
production, or request for admission — must supplement
or correct its disclosure or response . . . in a
timely manner if the party learns that in some
material respect the disclosure or response is
incomplete or inaccurate, and if the additional or
corrective information has not otherwise been made
known to the other parties during the discovery
process or in writing . . . .
Fed. R. Civ. P. 26(e).
The required Rule 26(e) supplementation
“should be made at appropriate times during the discovery
34
period.@
Rule 26(e), Advisory Committee Note, 1993 Amendments
(emphasis added).
Here, Plaintiff did not supplement either its initial
disclosure or its interrogatory response by providing a measure
of the damages sought.
Moreover, Plaintiff served Defendants
with supplemental initial disclosures on March 19, 2009, and did
not change its response to the damages disclosure requirement.
Providing the calculation of damages for the first time months
after the close of fact and expert discovery is not timely.
The violation of the automatic discovery provisions of Fed.
R. Civ. P 26(a) and 26(e) triggers sanctions pursuant to Fed. R.
Civ. P. 37(c).
See, e.g., Ortiz-Lopez v. Sociedad Espanola de
Auxilio Mutuo, 248 F.3d 29, 33 (1st Cir. 2001) (Rule 37(c)(1)
sanction Ais a >self-executing sanction for failure to make a
disclosure required by Rule 26(a)@).
The Rule states:
If a party fails to provide information or identify a
witness as required by Rule 26(a) or (e), the party is
not allowed to use that information or witness to
supply evidence on a motion, at a hearing, or at a
trial, unless the failure was substantially justified
or is harmless.
Fed. R. Civ. P. 37(c).
In addition to or instead of this
sanction, the court may impose other appropriate sanctions,
including but not limited to ordering payment of reasonable
expenses caused by the failure, informing the jury of the party=s
35
failure, or any of the sanctions listed in Rule 37(b)(2)(A)(i)(vi).
Id.
Preclusion is “not a strictly mechanical exercise.”
Esposito v. Home Depot U.S.A., Inc., 590 F.3d 72, 77 (1st Cir.
2009).
However, “it is the obligation of the party facing
sanctions for belated disclosure to show that its failure to
comply with the Rule was either justified or harmless and
therefore deserving of some lesser sanction.”
Wilson v.
Bradless of New England, Inc., 250 F.3d 10, 21 (1st Cir. 2001).
“‘Substantially justified does not mean ‘justified to a high
degree,’ but only ‘justified in substance or in the main — that
is, justified to a degree that could satisfy a reasonable
person.’”
Sheppard v. River Valley Fitness One, L.P., 428 F.3d
1, 12 (1st Cir. 2005) (internal citation omitted).
The
harmlessness inquiry involves balancing “fairness, burden, and
case management needs.”
Gagnon v. Teledyne Princeton, Inc., 437
F.3d 188, 198 (1st Cir. 2006).
Plaintiff must address its failure to disclose two sets of
damages calculations.
First, Plaintiff must justify its failure
to disclose its damages calculations regarding the alleged
missing inventory.
Second, Plaintiff must justify its failure
to disclose its damages calculations regarding the alleged
36
faulty accounting in the Reconciliation.
I will consider each
set of calculations in turn.
1.
Missing Inventory
Plaintiff claimed that GBG breached its obligations under
the LLC Agreement to share profits because its documents did not
account for $13.9 million of inventory.
It relies on a report
entitled AFirst Supplemental Expert Report on Count II
(Accounting)@ and prepared by its expert, Michael Pakter,
purporting to identify the mistaken (or purposely misleading)
accounting.
However, Pakter denied in his report and at his
deposition that his calculations were intended to serve as a
damages determination.
He did state that the figure “may” be
owed as monetary damages to Plaintiff.
It was not until after
discovery had concluded that in the parties= September 9, 2011
Joint Status Report Plaintiff stated that it was seeking its
share of $13.9 million in missing assets under Count III for
breach of contract.
Plaintiff argued that, for all intents and purposes, it did
provide the damages measure, because Defendants could use simple
arithmetic to determine what damages Defendants would owe
Plaintiff if a jury found that there were $13.9 million in
unaccounted-for assets.
According to the Reconciliation, New K=s
expected revenue was $10,138,869.74.
37
Plaintiff would be due
22.5% of the sum of that expected revenue and the additional
$13.9 million, less the three million minimum already paid.
In
short, under that calculation, Plaintiff would be due somewhat
less than $2.5 million.
Plaintiff missed the heart of the problem.
Pakter=s expert
report asserted a $13.9 million asset shortfall in support of
Count II, the accounting claim.
Pakter did not assert that the
number was the basis of a claim under Count III of the Complaint
for breach of contract.
If Pakter had done so, Plaintiff would
still have had to explain how the $13.9 million figure was
related to the damages sought.
Plaintiff argued that the
damages calculations would be based on the $13.9 million figure,
which was the cost of acquisition of the alleged missing
inventory.
However, in Delaware the standard measure of damages
for a breach of contract is expectation damages.
Comrie v.
Enterasys Networks, Inc., 837 A.2d 1 (Del.Ch. 2003).
Defendants suggest that the proper calculation of
expectation damages would require a determination of the
expected net sales proceeds for this amount and mix of inventory
in a going-out-of-business scenario.
Another possible
measurement of expectation damages might be the fair market
value of Old K=s share of the inventory.
If the inventory had
not disappeared from the LLC=s financial documents (and perhaps
38
from its warehouses; Plaintiff is never quite clear about the
way by which the inventory went “missing”) and had remained as
an asset of the business, it could have been distributed in kind
under ' 6(d) of the LLC Agreement.
Plaintiff would have received
its share of the inventory as distributed based on its fair
market value; it then would have owned assets which could be
evaluated based on fair market value.3
That valuation would
provide a manner of awarding expectation damages without the
speculation contemplated by Defendants regarding how these items
might have been priced and what revenue they might have raised
at a going-out-of-business sale.
While I need not determine the correct measure of
expectation damages here, the discussion underscores the degree
to which Plaintiff omitted even the rudiments of a damages
calculation until the Joint Status Report, and that the omission
was neither substantially justified nor harmless.
Plaintiff
does not claim substantial justification or harmlessness,
3
It is possible that, had this issue gone to trial, the cost of
acquisition would have been the best estimate of fair market
value given the information availableB-that is, it is possible
that the $13.9 million figure ultimately might have served as
the basis for a damages award. However, because Plaintiff did
not claim that the $13.9 million was offered as the basis for
breach of contract damages, Defendants were not afforded the
opportunity to commission an expert report or conduct
depositions with the goal of challenging that figure as the most
convincing measure of fair market value.
39
despite Defendants= statement that the missing inventory claim
should be dismissed from the case due to Plaintiff=s failure to
disclose it as a money damage claim and despite Plaintiff=s
burden to show that Fed. R. Civ. P. 37(c) preclusion does not
apply.
Moreover, even if Plaintiff had attempted to do so, the
attempt would have been unsuccessful.
Because Pakter=s calculations do not directly translate into
damages, and because his calculations were never identified as
damages, Plaintiff=s failure to supplement either the initial
disclosures or the damages interrogatory was not substantially
justified.
Plaintiff had a theory of the case and chose not to
share it until over a year after fact discovery had terminated
and almost nine months after expert discovery had ended.
Plaintiff did not communicate the theory even though it was
based on (1) calculations that were available to it, at the
latest, by the close of expert discovery and (2) GBG financial
documents that were available to it, at latest, by the close of
fact discovery.
Moreover, Plaintiff=s failure is not harmless.
It was not
fair for Plaintiff to surprise Defendants with a money damages
claim so late in the litigation.
The failure placed a burden on
Defendants, who did not have the opportunity to commission their
own expert reports on what expectation damages might be for such
40
a breach, who did not have the opportunity to depose Pakter on
issues that might arise due to the use of his calculations as
the basis of the breach of contract claim instead of the
accounting claim, and who have filed a motion for summary
judgment on the basis of the exclusion of this damages claim.
The failure affected this Court=s docket, because in order to
allow such a damages claim without subverting justice, I would
be required to re-open the discovery period long-since concluded
following which I heard two rounds of motions for summary
judgment.
Despite the passage of time, Plaintiff has failed to
undertake a showing that the delayed training of a damages
theory was neither substantially justified nor harmless;
Plaintiff violated its duty of disclosure.
“[T]he exclusion of
evidence is a standard sanction” for such a violation of case
management protocols.
Pena-Crespo v. Commonwealth of Puerto
Rico, 408 F.3d 10, 13 (1st Cir. 2005) (internal citations
omitted).
Nonetheless, Fed. R. Civ. P. 37(c) provides district
courts with discretion regarding the appropriate sanction.
“The
range of sanctions provided in Rule 37(c), from the most harsh
(total exclusion and dismissal of the case) to more moderate
(limited exclusion and attorney=s fees), gives the district court
leeway to best match the degree of noncompliance with the
41
purpose of Rule 26’s mandatory disclosure requirements.”
Ortiz-
Lopez, 248 F.3d at 34.
A district court should consider a “host of factors,
including: (1) the history of the litigation; (2) the sanctioned
party=s need for the precluded evidence; (3) the sanctioned
party=s justification (or lack of one) for its late disclosure;
(4) the opponent-party=s ability to overcome the late disclosure=s
adverse effects — e.g., the surprise and prejudice associated
with the late disclosure; and (5) the late disclosure=s impact on
the district court=s docket.”
Esposito, 590 F.3d at 78.
In this
case, these factors militate against Plaintiff.
This litigation has been long and hard-fought; the parties
struggled over discovery for approximately two years.
The
financial documents on which Plaintiff=s damages calculations are
based were in Plaintiff=s possession, at the latest, by the end
of fact discovery, on May 15, 2010.
Plaintiff was under an
ongoing obligation pursuant to Fed. R. Civ. P. 26(e) to
supplement its initial disclosures and its interrogatory
responses, and nonetheless it failed to notify Defendants or the
Court of its damage claim for over a year after the close of
fact discovery.
This is not a case of a single missed deadline;
this is a case of continual flouting of an ongoing obligation to
supplement.
That factor weighs against Plaintiff.
42
To be sure, Plaintiff has a great need for the evidence at
issue.
Its damages calculations are necessary for its contract
claim based on missing inventory; without the calculations,
Plaintiff makes no legible demand for relief.
That factor
decidedly might be said to favor Plaintiff except that factor is
a function of Plaintiff’s litigation choice.
Plaintiff, moreover, provides no justification for its
failure to supplement.
It unconvincingly argues that Pakter=s
expert report was sufficient basis to justify a failure formally
to update its damages calculations.
But Pakter=s report
addressed a different Count of the lawsuit and Pakter repeatedly
outlined that his calculations did not constitute a
determination of damages.
That factor weighs against Plaintiff.
As I noted previously, the last two factorsB-Defendants=
ability to overcome the late disclosure=s adverse effects (the
surprise and prejudice associated with the disclosure) and the
late disclosure=s effect on this court=s docketB-weigh against
Plaintiff as well.
The discovery period was closed and
Defendants could not — in some timely fashion — commission an
expert report on damages for the claim.
Nor were Defendants
able to depose Plaintiff=s expert with the knowledge that his
calculation was offered as the basis for a breach of contract
claim.
This is a damages determination that can properly be
43
characterized as a “surprise” because, until the Joint Status
Report was filed, it was not apparent that Plaintiff was even
pursuing a breach of contract claim based on the alleged missing
inventory.
Given the procedural posture of the case, any new
discovery period that would mitigate such a late disclosure
would lead to a singularly disruptive interference with this
Court=s docket.
I selected a sanction for Plaintiff with the knowledge that
because preclusion would “carr[y] the force of a dismissal, the
justification for it must be comparatively more robust.”
Esposito, 590 F.3d at 79.
In Esposito v. Home Depot v. U.S.A,
Inc., the First Circuit reversed a preclusion decision with the
force of a dismissal where, like here, there were no presanction warnings, where the party never offered a legitimate
reason for his late disclosure, where the opposing party
“obviously went through the pains of preparing a dispositive
summary judgment motion premised on” this lack of the precluded
evidence, and where the party=s failure to disclose “had a clear
effect on the district court=s docket.”
Id.
However, in
Esposito the First Circuit was “presented with a fatal sanction
levied for a single oversight;” the party had “missed one
deadline and requested an extension of the pre-trial and trial
dates after missing that deadline, albeit several weeks after
44
the deadline had passed.”
Id.
Here, the oversight was not a
matter of a single missed deadline or a delay of mere weeks.
The failure to disclose in this case was a systematic and
continuing violation of Plaintiff=s obligations under Fed. R.
Civ. P. 26(a) that lasted for over a year.
It was a failure to
inform Defendants not only of the damages calculations, but of
an entire basis for a breach of contract claim never clearly
asserted in the Complaint, during discovery, or in expert
reports.4
I find that a sanction of preclusion of Plaintiff=s
damages calculations as they relate to the $13.9 million of
alleged missing inventory is warranted in this case.
The
preclusion, in turn, necessitates dismissal of Count III to the
extent that it is based on the alleged missing inventory.
4
Plaintiff=s counsel=s remarks at the June 15, 2011, hearing on
the motion for partial summary judgment indicate that, at the
time of the hearing, counsel believed that should Defendants
prevail on the motion, the only Count of the Complaint remaining
would be Count II (Accounting). While Plaintiff=s counsel did
not speak conclusively or carefully on the matter, his remarks
underscore that Plaintiff itself had not conceived of the
theories on which it now seeks damages for breach of contract
until after the motion for partial summary judgment was
litigated and well after the close of the discovery period.
Consequently, it is no coincidence that Plaintiff had not
informed Defendants of those theories and the damages that they
supported. Such failures to develop the case and inform
Defendants of the claims at issue are precisely what Fed. R.
Civ. P. 26(a) seeks to prevent.
45
2.
Reconciliation Calculations
Plaintiff offered a second set of bases for breach of
contract damages.
Plaintiff has moved for summary judgment on
the breach of contract claim alleging that GBG under-reported
its Current Expected Revenue in the Reconciliation by at least
$2,823,773.
Plaintiff claims that GBG failed to list as assets:
(1) the “Decatur Land,” which sold for a net revenue to New K=s
of $16,705.47; (2) the “Davenport Real Estate,” which is
currently listed for sale and was valued by Defendants= expert
David Coles at $1.5 million; (3) $975,000.00 that was being held
by New K=s on behalf of GBG and is listed as a liability on the
Reconciliation; (4) $100,645.57 that was being held by New K’s
as a reserve to pay various fees on behalf of Old K’s and is
listed as a liability on the Reconciliation; and (5) $130,777.53
that was deducted from Old K=s disbursement for expenses New K’s
had already paid on behalf of Old K’s.
Plaintiff again did not disclose the damage calculations
based on these alleged accounting errors until the parties
submitted the September 9, 2011, Joint Status Report.
Nonetheless, Plaintiff contended that it did not violate Fed. R.
Civ. P. 26(e).
Plaintiff argued that the Rule requires that a party
supplement prior disclosure responses only “if the additional or
46
corrective information has not otherwise been made known to the
other parties during the discovery process or in writing,” Fed.
R. Civ. P. 26(e)(1), and that GBG was made aware of the alleged
problems with the Reconciliations=s accounting during the
discovery process.
Plaintiff stated that both Rhonda Hebert and
Patricia Parent were questioned on the miscalculations in the
Reconciliation, and that through those questions the claims and
damages were made known to Defendants.5
Plaintiff=s argument that GBG was somehow made aware of the
specifics of Defendants= damages claims because its counsel asked
two of out of twelve GBG fact witnesses a very limited number of
questions seeking information about why or whether certain
amounts were counted as liabilities is unreasonable.
Counsel
asked hundreds, if not thousands, of questions of the various
deponents.
Almost none of those questions can be said to have
touched on the theories that Plaintiff pursues today.
Plaintiff=s questions about one topic among many during a
deposition did not make damages calculations known meaningfully
to the Defendants or otherwise relieve Plaintiff of its
5
Plaintiff is disingenuous when it suggests that Defendants=
witnesses were asked about the accounts receivable in a way that
indicated some connection to damages claims. Hebert was only
asked what the “AR accounts” for Kay Eldridge were, not about
any uncounted asset or unnecessary liability attached to those
accounts.
47
responsibility to supplement its initial disclosures and
interrogatories.
Plaintiff also argues that it could not provide the damages
calculations pursuant to Fed. R. Civ. P. 26 because it did not
have the information necessary to do so.
Plaintiff states that
it could not have included the calculations based on errors in
the Reconciliation at the time of the initial disclosures
because the disclosures were made before the Reconciliation was
provided by Defendants on May 18, 2009.
Plaintiff states that
at the time that it responded to GBG=s interrogatories, the
Reconciliation had been provided less than one month beforehand
and a complete analysis had not yet been conducted and could not
have been expected.
However, Plaintiff=s violation of Fed. R. Civ. P. 26 does
not stem primarily from its failure to include the damages based
on the alleged errors in the Reconciliation in its initial
disclosures or even in its interrogatory responses.
Instead,
Plaintiff=s violation stems from its failure to supplement those
responses for over two years following its receipt of the
Reconciliation on which its damages theories and calculations
were based.
On March 19, 2010, ten months after Plaintiff
received the Reconciliation, it served Defendants with
supplemental disclosures pursuant to Fed. R. Civ. P.
48
26(a)(1)(A), and it did not identify the damages calculations
based on the Reconciliation.
On May 15, 2010, fact discovery
closed; Plaintiff knew that it would receive no more accounting
documents and would take no more deposition testimony from
Defendants= fact witnesses, and still Plaintiff did not update
its damages calculations.
Plaintiff continually violated its
obligation to supplement its disclosures and interrogatories
under Fed. R. Civ. P. 26(e) by failing to supplement for months
and even years after it received the documents on which its
damages calculations were based.
Finally, Plaintiff argued that it did not violate Fed. R.
Civ. P. 26(e) because the documents supporting the damages
calculation were produced by GBG and “the errors were clear from
the face of the Reconciliation.”
Defendants, unsurprisingly,
dispute that there are any errors in the Reconciliation.
Even
if the errors in accounting were obvious (which they were not),
this would not eliminate Plaintiff’s obligation to disclose its
damages calculations and the evidentiary material on which they
were based.
Fed. R. Civ. P. 26(e) includes an exception to the
ongoing duty to supplement where the information has been made
known to the opposing party in the course of discovery or in
writing, not where the party claiming the damages believes that
the errors on which the damages are based are “obvious.”
49
Plaintiff contended that even if it has violated Fed. R.
Civ. P. 26(e), the violation was substantially justified.
It
argues that Old K’s did not receive the Reconciliation until May
18, 2009, which was five months after Old K=s made its initial
disclosures and less than a month before it answered GBG=s First
Set of Interrogatories.
It states that after receiving the
Reconciliation, Old K’s counsel continued to request financial
information in order to understand the document.
It states that
during her March 25, 2010, deposition, Rhonda Hebert stated that
GBG was working on updates to some parts of the Reconciliation,
and that Old K’s never received those corrections.
Plaintiff
argues that “[i]t would have been premature and potentially
unnecessary for Old K=s to update their 26(a) disclosures and
interrogatory responses based on a document that Gordon Brothers
represented needed correction.”
Plaintiff, however, served Defendants with supplemental
disclosures on March 19, 2009, which was ten months after GBG
sent it the Reconciliation.
While Plaintiff states that its
counsel requested additional financial information after
receiving the Reconciliation, it also asserts that the errors
were plain from the face of the Reconciliation; it is unclear
why Plaintiff did not identify those “obvious” errors in the
supplemental disclosures and provide calculations of the damages
50
that Plaintiffs assert that the errors support.
Ms. Hebert=s
deposition was not conducted until after Plaintiff served its
supplemental disclosures, so her statement that certain elements
of the Reconciliation were being updated could not have affected
the supplemental disclosures.
Plaintiff does not allege that the elements that Ms. Hebert
explained were being updated would change the alleged errors or
the damages calculations in any way.
It is unclear why the
updates would provide a substantial justification for Plaintiff=s
failure.
Moreover, even if Plaintiff did believe that the
updates to the Reconciliation might change the damages
calculation, by the time that fact discovery was closed,
Plaintiff knew exactly what accounting documents it had received
and what materials it possessed on which to base its claims.
Nonetheless, Plaintiff still failed to disclose its damages
calculations based on the alleged faulty accounting in the
Reconciliation for well over a year after fact discovery was
closed.
Plaintiff did not demonstrate a substantial
justification for its failure to make the required Fed. R. Civ.
P. 26(e) disclosures.
Plaintiff argued that its failure to disclose the damages
calculations based on the alleged accounting errors in the
Reconciliation was harmless.
It argued that there is no
51
prejudice to Defendants because the damages were based on
documents provided by GBG, because discovery does not need to be
reopened in order for GBG to address those documents, and
because GBG was able to respond to the disclosure in its summary
judgment motion and in its opposition to Defendants= summary
judgment motion despite the timing of the disclosure.
Defendants argue that there is harm because Plaintiff claims
that the Reconciliation and GBG=s explanations for the
Reconciliation are contrary to the principles of accounting, and
if the disclosure had been made in a timely manner, GBG could
have proffered an expert opinion on accounting to support its
contention that the Reconciliation was correct and Defendants=
criticisms are unwarranted.
Defendants’ response to the allegations of mistaken
accounting in the Reconciliation, however, is not a challenge to
the accounting principles offered by Plaintiff.
Defendants
characterize their arguments as a contention that Plaintiff=s
position “appears to be based on a misunderstanding of the
Accounting entries and basic accounting principles.”
Defendants’ actual response is rooted in factual disputes
regarding the nature of various entries in the Reconciliation6;
6
Defendants’ response is also based on a question of contract
interpretation which similarly makes no call for an expert
52
they do not challenge the accounting principles on which
Plaintiff relies.
Defendants could respond to fact questions about the data
in GBG=s calculations without resorting to experts.
It is
Defendants= own employees who possess the knowledge of what data
was included within what line item when they created the
Reconciliation.
In fact, Defendants responded to Plaintiff=s
motion for summary judgment with an affidavit regarding these
matters of fact submitted by Patricia Parent.
Defendants do not claim that they needed any additional
information from Plaintiff regarding its argument; Plaintiff=s
argument is based solely on the documents that Defendants
provided and not on any expert witness report or on information
outside of Defendants= hands.
Because the argument is completely
fact based and the facts are completely within the possession
and knowledge of Defendants= own employees and witnesses,
Defendants do not require any additional discovery in order to
address the argument.
To be sure, Plaintiff failed to disclose this information
in a timely manner.
However, a balancing of fairness, burden,
and case management needs indicates that Plaintiff=s failure with
witness.
53
regard to these particular damages calculations was harmless.
Defendants did not lose the opportunity to conduct discovery
where discovery is unnecessary.
The late disclosure had no
impact on this Court=s docket because discovery did not need to
be re-opened, because trial had not yet been scheduled, and
because Defendants were able to respond with Parent=s affidavit
to the issue when raised in these cross-motions for summary
judgment.
While the late disclosure comes as a surprise —
given that prior to the Joint Status Report Plaintiff had not
only failed to provide the damages calculation but had
additionally failed to disclose this particular basis for the
breach of contract damages to Defendants at all — the factors
balance out such that the delay is harmless.
Where the late disclosure is harmless, preclusion of the
damages calculation is unwarranted under Fed. R. Civ. P. 37(c).
Given that Defendants fail to articulate any cognizable harm, I
decline to impose any sanction for Plaintiff=s failure to
disclose the damages calculations based on the Reconciliation in
a timely manner.
E.
Breach of Contract
Plaintiff and Defendants both filed for summary judgment
regarding the breach of contract as it relates to the alleged
54
errors in the Reconciliation.7
Plaintiff, however, failed to
raise sufficient evidence in support of its theory to evidence a
genuine dispute.
First, I will address Plaintiff=s attempt to
exclude the affidavit of Patricia Parent supporting Defendants=
explanation of the Reconciliation and its contents.
Then, I
will address in turn each of the five items that Plaintiff
alleges were subject to faulty accounting leading to an improper
revenue calculation and distribution.
1.
Parent=s Affidavit
Plaintiff argued that Parent=s affidavit explaining the
entries within the Reconciliation should be stricken because she
“fails to elaborate her personal knowledge of accounting and
financial statements, consignment inventory, real estate, the
documents created or used, or even the LLC Agreement.”
Parent=s
statements related to the factual substance and basis of the
7
The alleged under-accounting of New K=s profits based on these
errors is insufficient to raise the revenue above
$13,333,333.33, which is necessary in order to justify any
damages for breach of contract. Because the LLC Agreement
entitles Plaintiff to 22.5% of the profits, with a distribution
minimum of $3 million, 22.5% percent of the profits must exceed
the $3 million already distributed (less deductions for debts of
Old K=s and payments to be made on behalf of Old K=s) if Plaintiff
is to collect any additional distribution. However, I address
Plaintiff=s arguments nonetheless, both for the sake of
completeness and because any supplemental distribution warranted
by additional revenues as the liquidation process continues will
be based in part upon the LLC=s current profits.
55
items within the Reconciliation and accompanying accounting
balance sheets.
She did not need to establish personal
knowledge of general accounting principles or the LLC Agreement;
furthermore, I did not rely on Parent=s interpretation of the LLC
Agreement but instead on my own reading of the document itself.
Parent did need to state the basis for her personal knowledge
about the real estate and other entries in the Reconciliation —
and she did so.
Parent stated that she was responsible for
“financial oversight of GBG in the management of the ongoing
business of, and then subsequent and continuing liquidation of,
New K’s Merchandise LLC” (“New K’s” or the “LLC”).
She stated
that she helped prepare the Accounting, including the
Reconciliation.
As one of the preparers of the Reconciliation,
she has demonstrated personal knowledge about its contents.
Plaintiff raises United States ex rel. Jones v. Brigham &
Women=s Hosp., 750 F.Supp.2d 358 (D. Mass. 2010), in support of
the proposition that Parent=s affidavit should not be considered.
In that case, the Relator was rejected as a lay witness because
“almost a hundred percent” of the data he cited came from
another individual, and because his affidavit “contain[ed] no
evidence pertaining to critical issues surrounding the
reliability study; these issues include when and how the
reliability study was conducted, who randomly selected the
56
twenty-five subjects for the study, and who actually conducted
the study.”
Brigham and Women=s Hosp., 750 F.Supp.2d at 368-69.
While Parent=s affidavit could have been more detailed, it was
evident that she financially oversaw New K=s and that she helped
prepare the Reconciliation and the balance sheets supporting it.
That was sufficient to establish personal knowledge about those
financial documents in the absence of any evidence to the
contrary.
2.
The “Decatur Land”
In the Reconciliation, Defendants valued two parcels of
real estate owned by New K=s at zero.
Rhonda Hebert of GBG
stated that this was because the properties had not yet been
sold at the time the Reconciliation was prepared.
Since the
Reconciliation was issued, the parcel labeled the “Decatur Land”
sold, resulting in net revenues to New K=s of $16,705.41.
If these revenues are added to the “Current Expected
Revenues” of $10,138,869.74 reported in the Reconciliation, the
total updated revenues are $10,155,575.21.
22.5% of the total
updated revenues is $2,285,004.42, which remains less than the
$3 million minimum established by ' 6(b) of the LLC Agreement and
already paid out to Old K=s (less deductions for debts of Old K=s
and payments to be made on behalf of Old K=s).
57
The sale of the Decatur Land changes the current revenues;
therefore, it affects the total revenues to be calculated when
the liquidation of the LLC is finally complete and will affect
the amount of any future additional liquidating distribution, if
such an additional distribution becomes necessary.
However, the
sale of the Decatur Land does not sufficiently change the
current revenues of the LLC to warrant an increased liquidating
distribution under the revenues as they stand on the record
before me, and thus does not provide the basis for a breach of
contract claim.
I therefore granted summary judgment to
Defendants on the breach of contract claim to the extent that it
is based on the alleged under-accounting of the Decatur Land.
3.
The “Davenport Real Estate”
The property labeled as the “Davenport Real Estate” and
valued at $0.00 in the Reconciliation remains unsold.
GBG had
been trying to sell the property since at least 2007; on the
record before me it was listed for sale at $1.9 million.
The
property was valued by Defendants= expert David Coles at $1.5
million based on information regarding the value of comparable
properties.
Plaintiff argued that the “Davenport Real Estate” should be
valued at least at $1.5 million for the purposes of calculating
both the LLC=s current expected revenues and the liquidating
58
distribution that should have been paid to Old K=s.
Defendants
argued that because the property had not yet been sold, it has
not generated any proceeds that are available for distribution.
If the property is sold for an amount sufficient to raise Old K=s
liquidating distribution above the minimum $3 million
distribution, Defendants assert that New K=s would at that point
pay out an additional distribution to Old K=s.8
Section 6 of the LLC Agreement governs distributions.
It
states that “a distribution made upon a liquidation or winding
up of the LLC (the “Liquidating Distribution”) shall be made to
the members, from all cash or property available for
distribution.”
LLC Agreement ' 6(b).
It specifies that
“[e]xcept as the Manager may otherwise determine, all
distributions to Members shall be made in cash.
If any assets
of the LLC are distributed in kind, such assets shall be
distributed on the basis of their fair market value as
determined by the Manager.”
LLC Agreement ' 6(d).
Plaintiff does not contend that liquidation is complete; at
a minimum, the Davenport Real Estate remains to be sold.
8
Under
It bears noting that if the Davenport Real Estate generates
profits of either $1.5 million or $1.9 million, these profits
will be insufficient in themselves to entitle Plaintiff to any
additional moneys above and beyond the minimum liquidating
distribution already paid.
59
' 6(d), GBG, as the manager, could decide to distribute the
Davenport Real Estate in kind instead of in cash and to divide
the property into 77.5% and 22.5% pieces.
This could enable GBG
to complete the liquidation without selling the land.
However,
Plaintiff did not contend that GBG was obligated to complete the
liquidation immediately and does not claim a right in 22.5% of
the Davenport Real Estate in kind.
The LLC Agreement does not require that the Liquidating
Distributions be made before liquidation of the LLC is complete.
Plaintiff does not and cannot point to any provision of the LLC
Agreement that requires New K=s to issue such early
distributions.
Moreover, Plaintiff does not and cannot point to
any provision of the LLC Agreement that requires New K=s to make
distributions based on estimated future revenues.
Defendant argues that GBG did issue liquidating
distributions before finishing the winding down and that it did
calculate those distributions at least in part based on expected
revenues and expenses — for example, New K’s retained a Reserve
fund from Old K’s distribution in order to pay projected
expenses on behalf of Old K’s.
However, New K=s might choose to
project certain revenues and expenses that seem fairly certain,
such as tax preparation fees for Old K’s, but choose to wait to
issue any additional distributions based on revenues and fees
60
that seem highly variable, such as the revenues of land sales in
a volatile real estate market.
Moreover, New K’s can remit to
Old K’s any unspent remainder of the Reserve Fund at the
termination of the liquidation, whereas New K’s does not have an
enforcement mechanism under the LLC Agreement to collect from
Old K’s any overpayment of a liquidating distribution made based
on an overestimate of the value of currently unsold land.
The LLC Agreement does not require GBG as manager to pay
out any liquidating distributions prior to the completion of the
liquidation.
Therefore, Plaintiff cannot maintain a breach of
contract claim where GBG chose to pay out partial liquidating
distributions during the course of liquidation and to pay any
supplemental distribution necessary after liquidation is
complete or after additional revenues become certain.9
For these
reasons, I granted summary judgment to Defendants on the breach
of contract claim to the extent that it is based on the alleged
faulty accounting regarding the Davenport Real Estate.
9
Plaintiff does not allege that the distributions were unfair in
the sense that New K=s paid too high a distribution to GBG when
it paid out $3 million (less deductions) to Old K=s. Nor does
Plaintiff allege that the early distributions were paid out in
such a way that Plaintiff could not eventually receive the total
distribution owed to it if it is, after complete liquidation,
entitled to an additional partial distribution.
61
4.
$975,000.00 Held by New K’s on Behalf of GBG
The amounts deducted from Old K’s liquidating distribution
include $975,000.00 that was due to GBG.
The amount was listed
as a liability of New K=s on the Reconciliation because New K’s
had not yet distributed the funds to GBG and was holding the
monies on its behalf.
Plaintiff contends that it should have
also been included as a corresponding asset entry on the
Reconciliation and that it was not, artificially reducing the
total profit calculation by $975,000.00.
Defendants assert that these moneys were included among New
K=s assets as listed on the Reconciliation.
Parent submitted an
affidavit stating that the $975,000.00 was a part of the “Bank
of America Cash” line item, which accounted for a total of
$6,817,471.77.
Plaintiff argued that Defendants= sole support for why there
was no error in the Reconciliation regarding the $975,000.00 is
Parent=s declaration and that the declaration is not competent
evidence to stave off summary judgment because it is
inconsistent with the Reconciliation.
Plaintiff argued that the
balance sheet provided within the reconciliation indicates that
the Bank of America Cash accounts show only $210,204.19.10
10
Plaintiff=s briefing states that “[t]he Bank of America Cash
accounts listed on the Balance Sheet show only $120,204.19 in
cash.” Having checked the balance sheet, I will assume that
62
Plaintiff argued further that accounts bearing cash in this
amount cannot represent an asset of at least $975,000.
However,
Plaintiff relates the line in the balance sheet to the wrong
asset line in the Reconciliation.
The Reconciliation includes
precisely $210,204.19 in the “Bank of America and CIB Cash
Account” line item.
This is a distinct line item from the
$6,817,471.77 “Bank of America Cash” line item that Parent
identifies as the item accounting for the $975,000.00 that New
K=s was holding for GBG.
Plaintiff also argued that “Parent has failed to present
any evidence that the cash account of New K=s includes the
missing asset entries.”
This is untrue. Parent presented an
affidavit in which she declared the truth of her statements
under penalty of perjury.
“Affidavits are the most conventional
means of documenting facts for purposes of advancing, or
opposing, summary judgment.”
1262 (1st Cir. 1991).
Sheinkopf v. Stone, 927 F.3d 1259,
Defendants have marshaled evidence that
the $975,000.00 was properly included within the assets listed
in the Reconciliation.
Plaintiff offered no evidence to refute
Parent=s statements.
this is a typo and Plaintiff=s counsel meant to value the
accounts at $210,204.19.
63
Plaintiff consequently failed to demonstrate that the
$975,000.00 was improperly omitted from the assets as a matter
of law.
Moreover, Plaintiff failed to raise any evidence based
on which a reasonable jury could resolve the point in its favor.
For these reasons, I granted summary judgment to Defendants on
the breach of contract claim to the extent that it is based on
the alleged faulty accounting regarding the $975,000.00 held by
New K=s on behalf of GBG.
5.
$100,645.57 Held by New K=s as a Reserve
Plaintiff raised similar contentions regarding $100,645.57
deducted from Old K=s liquidating distribution, an amount kept as
a “Reserve” being held by New K=s for expenses to be paid on
behalf of Old K=s, such as annual report and tax preparation
fees.
Plaintiff argues that this $100,645.47 was improperly
listed as a liability instead of an asset on the Reconciliation.
Plaintiff argues that the amount should not have been
included as a liability because it “represented amounts to be
paid back to New K=s, not amounts that New K=s anticipated paying
out.”
However, Plaintiff does not identify any evidence that
indicates that the Reserve is a fund for payments made by New K=s
in the past instead of payments anticipated to be made by New K=s
in the future such a retrospective use would, of course, be
counterintuitive for a fund labeled as a “reserve”).
64
Parent
stated in her affidavit that the $100,645.17 would be spent on
“expenses expected to be expended in the future on Old K=s
behalf,” and that to the extent any amounts were left over, it
would be repaid to Old K=s.
Plaintiff marshals no evidence to
counter Parent=s affidavit.
As such, it fails to raise a genuine
dispute about the issue.
Plaintiff further claims that the amount should be listed
as an asset because it is being held by New K=s.
Parent stated
that the amount is reflected as an asset on the balance sheet
and is included within the cash assets listed on the
Reconciliation.
Plaintiff marshals no evidence to counter
Parent=s affidavit.
As such, it failed to raise a genuine
dispute on the issue.
For these reasons, I granted summary judgment to
Defendants on the breach of contract claim to the extent that it
is based on the allegedly improper accounting regarding the
$100,645.47 reserve fund.
6.
$130,777.53 in Expenses Paid on Behalf of Old K=s
The Reconciliation includes a calculation of the payout to
Old K=s showing deductions for, inter alia, (1) $71,923 for the
payment of a settlement with Don Oulette which was paid by New
K=s and which was to be reimbursed by Old K=s, (2) $47,500 in
forbearance fees on mortgages for property belonging to Old K=s
65
due to New K=s from Old K=s, and (3) $11,354.53 in accounts
receivable owed to New K=s from Kay Eldridge.
Plaintiff contends
that these were amounts that New K=s anticipated receiving from
Old K=s and as such should have been listed as assets of New K=s.
Parent stated in her affidavit that the $130,777.53 was
reflected on the Reconciliation in the cash line item.
She
explained that the amount did not increase New K=s revenues
because the settlement and forbearance fees merely reimbursed
New K=s for expenses New K=s had already paid out on Old K=s
behalf and the accounts receivable collection simply replaced
one asset (accounts receivable) with another asset (cash).
Thus, the amounts were listed in the asset line without
increasing New K=s gross revenues.
Plaintiff does not explain why the settlement and
forbearance fees should be counted as separate assets as opposed
to merely credited to the account as reimbursements for payments
already made.
Nor does it marshal any evidence indicating that
the settlement and forbearance fees were not previously paid on
behalf of Old K=s or that the reimbursement was not credited to
the total assets, such that the prior expenditures were canceled
out and the effect of the settlement and reimbursement fees was
a wash.
Plaintiff further fails to marshal any evidence that
66
the accounts receivable sum was not reflected in the cash line
item.
Plaintiff fails to raise a genuine dispute on this issue.
For these reasons, I granted summary judgment to Defendants
on the breach of contract claim to the extent that it is based
on the allegedly improper accounting regarding the $130,777.53
owed by Old K=s to New K=s.
F.
Sanctions Pursuant to Fed. R. Civ. P. 11 and 28 U.S.C.
' 1927
Defendants have moved for sanctions pursuant to Fed. R.
Civ. P. 11 and 28 U.S.C. ' 1927 on the basis that Plaintiff=s
motion for summary judgment had no conceivable likelihood of
success, was untenable as a matter of law, and had the effect of
multiplying these proceedings unreasonably and vexatiously.
A claim is impermissibly frivolous under Rule 11 when it is
“either not well-grounded in fact or unwarranted by existing
law.”
Cruz v. Savage, 896 F.2d 626, 632 (1st Cir. 1990).
Rule
11 states:
By presenting to the court a . . . written motion . . .
any attorney . . . certifies that to the best of the
person=s knowledge, information, and belief, formed after
inquiry reasonable under the circumstances:
(1) it is not being presented for any improper purpose,
such as to harass, cause unnecessary delay, or
needlessly increase the cost of litigation;
(2) the claims, defenses, or other legal contentions are
warranted by existing law or by a nonfrivolous argument
for extending, modifying, or reversing existing law or
for establishing new law;
(3) the factual contentions have evidentiary support or,
if specifically so identified, will likely have
67
evidentiary support after a reasonable opportunity for
further investigation or discovery . . . .
Fed. R. Civ. P. 11(b).
If I find that Plaintiff has violated
Rule 11(b), I may “impose an appropriate sanction on any
attorney [or] law firm . . . that violated the rule or is
responsible for the violation.”
Fed. R. Civ. P. 11(c)(1).
The
sanction “must be limited to what suffices to deter repetition
of the conduct or comparable conduct by others similarly
situated.”
Fed. R. Civ. P. 11(c)(4).
Rule 11 requires a determination separate from my decision
on the Plaintiff=s underlying motion.
“The mere fact that
[Plaintiff]=s arguments proved unavailing does not necessarily
mandate the imposition of Rule 11 sanctions.”
CQ Int=l Co., Inc.
v. Rochem Int=l, Inc., USA, 659 F.3d 53, 61 (1st Cir. 2011).
“[I]n making Rule 11 determinations, judges should not employ
the wisdom of hindsight, but should consider the reasonableness
of the attorney=s conduct at the time the attorney acted.”
896 F.2d at 633.
Cruz,
“Whether a litigant breaches his or her duty
[under Rule 11] to conduct a reasonable inquiry into the facts
and the law depends on the objective reasonableness of the
litigant=s conduct under the totality of the circumstances.”
CQ
Int=l Co., 659 F.3d at 62 (alteration in original).
I do not need to find bad faith on Plaintiff=s attorneys’
part in order to subject them to sanctions. “[S[ubjective good
68
faith is no[t] . . . enough to protect an attorney from Rule 11
sanctions.”
Cruz, 896 F.2d at 631.
Instead, “[a] violation of
Rule 11 . . . might be caused by inexperience, incompetence,
willfulness, or deliberate choice.”
Id.
Sanctions under 28 U.S.C. ' 1927 are governed by a somewhat
different standard.
Section 1927 states that “[a]ny
attorney . . . who so multiplies the proceedings in any case
unreasonably and vexatiously may be required by the court to
satisfy personally the excess costs, expenses, and attorneys=
fees reasonably incurred because of such conduct.”
1927.
28 U.S.C. '
“Behavior is ‘vexatious’ when it is harassing or
annoying, regardless of whether it is intended to be so.”
896 F.2d at 632.
Cruz,
Thus, “while an attorney=s bad faith will
always justify sanctions under section 1927, we do not require a
finding of subjective bad faith as a predicate to the imposition
of sanctions.”
Id. at 631-32.
“It is enough that an attorney
acts in disregard of whether his conduct constitutes harassment
or vexation . . . .”
Id. at 632 (internal citation omitted).
To be vexatious, the attorney’s conduct must “be more than
mere negligence, inadvertence, or incompetence.”
Id.
Sanctions
pursuant to ' 1927 are available “only when [the attorney=s
conduct] displays a serious and studied disregard for the
orderly process of justice.”
Rossello-Gonzalez v. Acevedo-Vilo,
69
483 F.3d 1, 7 (1st Cir. 2007).
“[I]n assessing whether an
attorney acted unreasonably and vexatiously in multiplying
proceedings, the district courts in [the First C]ircuit should
apply an objective standard.”
Cruz, 896 F.2d at 632.
Plaintiff filed a motion for summary judgment on three
issues: (1) mismanagement of the furniture department, (2)
faulty accounting regarding the alleged missing inventory, and
(3) faulty accounting in the Reconciliation.
On none of these
issues was Plaintiff=s motion warranted by the facts and the law.
I will address each in turn.
1.
Mismanagement of the Furniture Department
I did not consider the merits of Plaintiff=s claim based on
mismanagement of the furniture department above because the
claim is based on Defendants= alleged breach of the implied
covenant of good faith and fair dealing, and in my August 4,
2011, Memorandum and Order, I stated that “the implied covenant
claim fails as a matter of law.”
Defendants had moved for an
order “dismissing Count III of the complaint, to the extent that
it purports to assert a claim for breach of the implied covenant
of good faith and fair dealing arising out of the LLC
Agreement.”
Plaintiff had not raised mismanagement as an
independent ground to maintain the claim in its opposition.
Despite the motion, briefing, and ruling, Plaintiff nonetheless
70
filed for summary judgment on the mismanagement claim because
the claim was not specifically addressed in the briefing or in
my memorandum.
It bears emphasizing that Plaintiff had never
raised the argument; consequently, it could not, of course, have
been addressed.
I need not consider whether this alone is a
basis for sanctions because Plaintiff=s argument in favor of
summary judgment itself is legally unreasonable.
Plaintiff makes a nonfrivolous, indeed undisputed, argument
that the implied covenant of good faith and fair dealing applies
where one party is made manager of a business.
“Under Delaware
law, the implied covenant of good faith and fair dealing inheres
in every contract.”
Amirsaleh v. Bd. of Trade of City of New
York, Inc., 2009 WL 3756700, at *4 (Del. Ch. Nov. 9, 2009).
“[T]he implied covenant requires a party in a contractual
relationship to refrain from arbitrary or unreasonable conduct
which has the effect of preventing the other party to the
contract from receiving the fruits of the bargain.”
Dunlap v.
States Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005).
Here, were GBG intentionally to mismanage the LLC, this would be
unreasonable conduct with the effect of preventing Old K=s from
receiving the fruits of the LLC Agreement.
Although the LLC
Agreement did not prescribe detailed requirements for GBG in its
management of the LLC, “[g]ood faith limits the exercise of
71
discretion in performance conferred on one party by the
contract.”
Bay Center Apartments Owner, LLC v. Emery Bay PKI,
LLC, 2009 WL 1124451, at *7 (Del. Ch. April 20, 2009) (quoting
Steven J. Burton, Breach of Contract and the Common Law Duty to
Perform in Good Faith, 94 Harv. L. Rev. 369, 372 (1980)).
However, Plaintiff does not and cannot point to any statute
or case that makes Defendants’ undisputed actions a violation of
the implied covenant of good faith and fair dealing as a matter
of law.
It is undisputed that HPG, which was hired by GBG to
run New K=s furniture department, did not do market surveys or
statistical analyses of the furniture department.
It is
undisputed that HPG established satellite warehouses that cost
New K=s additional rent.
It is undisputed that Geoff Clouser
opined that the changes made to the furniture department were
unreasonable given the paucity of analysis, that Kay Eldridge
opined that the merchandise purchased was scratched and damaged,
which was “a terrible thing,” and that Richard Powers opined
that the merchandise that was brought in was overpriced.
However, none of these facts or opinions establishes that the
department was mismanaged as a matter of law.
Plaintiff=s response to Defendants’ motion for sanctions is
highly suggestive of the gap in Plaintiff=s reasoning.
Plaintiff
puts forth its evidence that the furniture department was
72
mismanaged.
It provides citations for that evidence.
It then
states that “[t]here is no dispute that this falls below
reasonable industry standards.”
It provides no citation for
that statement; nowhere does the evidence conclusively establish
what acts are required in order to meet reasonable industry
standards in the management of a furniture department.
Plaintiff provides no basis for the conclusion that whatever
decisions GBG and HPG made were mismanagement as a matter of
law.
Plaintiff then states that GBG’s “actions therefore could
not have been in good faith.”
Once again, Plaintiff provides no
citation for that statement; nowhere does the evidence
conclusively establish that the management of the department,
even if it was rife with errors, was the product of Defendants=
lack of good faith.
“[T]o prove bad faith a plaintiff must
demonstrate that the defendant=s conduct was motivated by a
culpable mental state.”
Amirsaleh, 2009 WL 3756700, at *5.
Plaintiff provides no basis for the conclusion that any
mismanagement was not in good faith as a matter of law.
The motion was not “warranted by existing law,” Fed. R.
Civ. P. 11, and Plaintiff provides no argument for extending
Delaware state law to provide a basis for its conclusions.
When I gave Plaintiff leave to file a cross-motion for
summary judgment, I warned that counsel was “advised to consider
73
the application of Fed. R. Civ. P. 11 to any such motion if the
motion has no conceivable likelihood of success.”
Order of Oct. 7, 2011.
Electronic
Rule 11 “require[s] litigants to ‘stop
and think’ before initially making legal or factual
contentions.”
Fed. R. Civ. P. 11 Advisory Committee=s note.
Given my warning, counsel should have stopped to think for an
extended period of time.
If an objectively reasonable attorney
had done so, he or she would not have filed a motion for summary
judgment on Plaintiff=s mismanagement claim.
Plaintiff’s choice
to file this motion, especially after a clear warning, descended
to the level of a violation of Fed. R. Civ. P. 11(b).
2.
Inventory
Plaintiff additionally filed for summary judgment based on
the alleged $13.9 million in missing inventory.
I did not
consider the merits of this claim because I precluded Plaintiff=s
damages calculation pursuant to Fed. R. Civ. P. 37(c).
The
preclusion was an exercise of my discretion and Plaintiff=s
failure to anticipate it does not form the basis for Rule 11 or
28 U.S.C. ' 1927 sanctions.
However, even if I had allowed the
damages calculation and Plaintiff had maintained the claim,
Plaintiff=s motion for summary judgment based on the claim would
still have been unwarranted.
74
Plaintiff claims that over $13.9 million in inventory was
unaccounted for in the Reconciliation and, consequently, in the
liquidating distributions.
Plaintiff presents the following
evidence: (1) Pakter=s June 15, 2010 “Expert Report on Lost
Profits of New K=s Furniture Department,” created using figures
from GBG=s operating documents that indicate, when plugged into
an accounting formula, that $13.9 million in inventory is
missing, and (2) a series of emails between various principals
at GBG which ambiguously indicate that GBG may have kept more
than one set of accounting numbers and may not have shared one
of those sets of numbers with Old K=s attorney.
GBG opposes
Plaintiff=s argument with the following evidence: (1) Jeffrey
Szafran=s November 15, 2010, expert report stating that Pakter=s
report used the wrong set of GBG data for both the opening
inventory and purchase and cost of goods figures and explaining
the (non-nefarious and non-fraudulent) difference between the
J.D. Edwards data that should have been used and the operating
documents data that Pakter used in his formula, and (2) Patricia
Parent=s affidavit stating much the same thing.
The evidence presented establishes a clear question of
fact.
A jury could have determined whether Parent, and any
other GBG witness who might testify regarding the same thing,
was telling the truth about how the GBG operating documents and
75
the J.D. Edwards accounting systems numbers were related.
If
the jury were to believe Parent, it would have found that
Pakter=s report used the wrong set of data and that his
calculations showing $13.9 million in missing inventory were
faulty, and it would have found in GBG=s favor.
If the jury were
to disbelieve Parent and instead agree with Old K’s theory that
the J.D. Edwards numbers represented a second set of data
maintained to defraud Old K’s, it would have found in Old K=s
favor.
Much of Plaintiff=s motion for summary judgment was engaged
in an implied motion to strike Szafran=s expert report.
However,
even if Szafran=s report were not considered, Parent=s affidavit
stated the same facts regarding the opening inventory, the GBG
operating documents, and the J.D. Edwards accounting data.
Plaintiff=s counsel emphasizes again and again that no documents
exist to support Parent=s explanation of the difference between
the data in the J.D. Edwards accounting system and in the GBG
operating documents.11
This is an argument for a jury.
11
Parent=s
Plaintiff also argues that the LLC Agreement obligated GBG to
maintain complete financial documents, and so there should have
been documents explaining the difference between the GBG
operating documents and the J.D. Edwards data. That may be so,
but even if GBG failed to keep sufficient accounting documents
in violation with the LLC Agreement, Plaintiff cites no case law
suggesting that this is a reason to exclude testimony by GBG
witnesses explaining what the documents fail to make clear.
76
affidavit explains why the numbers differ (based on the
inclusion of different categories of merchandise in the
operating documents and in J.D. Edwards), and whether the lack
of supporting documents sufficiently undermines her testimony to
render it incredible is a question for a finder of fact.
Had I not precluded Plaintiff=s damages calculation under
Fed. R. Civ. P. 37(c), Parent=s affidavit alone, without
supporting documents and without Szafran=s report, would have
been sufficient to raise a genuine dispute of material fact
regarding the inventory issue.
Plaintiff=s counsel may claim
that, at the time of filing, they could not have known what
Parent would state in her affidavit.
to believe.
Such a claim is difficult
Szafran made the same statements of fact in his
expert report, and employees with personal knowledge of the
information (some of whom were his original sources of that
information) could be anticipated as likely to submit affidavits
that would establish the same dispute.12
12
Moreover, after Parent
Notably, when Plaintiff=s counsel describes deciding whether to
bring this claim in their motion for summary judgment, they
state: AWe talked to Rick Powers. We talked to Kay Eldridge. We
talked to our experts. We searched the J.D. Edwards
information.@ Plaintiff=s counsel does not describe talking to
the GBG employees responsible for keeping the financial records.
They do not describe asking Parent, the Managing Director of
GBG, to explain the basis for the numbers. Counsel explains
that A[t]he inventory shortfall was found late in discovery and
perhaps this is why they did not ask GBG employees about the
starting inventory numbers or about how to reconcile the J.D.
77
submitted her affidavit and after Defendants served the motion
for sanctions, Plaintiff could then have withdrawn its motion
for summary judgment on the issue in recognition of the disputed
facts.
Fed. R. Civ. P. 11 prohibits not only filing but also
Alater advocating@ for an unwarranted legal claim.
P. 11(b).
Fed. R. Civ.
Plaintiff=s counsel chose to maintain the motion for
summary judgment and reply to the opposition in the face of an
affidavit filed establishing a genuine dispute of material fact.
Plaintiff does not and cannot cite to any case law that
establishes that their evidence is superior to Defendants=
evidence as a matter of law.
Objectively reasonable counsel can
be presumed to be aware that a movant is only entitled to
summary judgment when it can show that it “is entitled to
judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
The
failure to acknowledge a genuine dispute of material fact in the
face of my October 7, 2011, warning to counsel represents
conduct descending to the level of a violation of Fed. R. Civ.
P. 11(b).
3.
Accounting in the Reconciliation
I addressed the merits of Plaintiff=s motion for summary
Edwards data with the data in the GBG operating documents.
However, this does not explain why Plaintiff=s counsel would
choose to bring a claim they had not fully investigated as the
basis for part of a motion for summary judgment.
78
judgment regarding the alleged mistakes in accounting in the
Reconciliation supra, Section IV(E).
Plaintiff alleged that the
accounting was faulty with regard to two parcels of land,
certain amounts due from Old K=s to GBG and third parties,
certain amounts due from Old K=s to New K=s in compensation for
amounts previously paid out on Old K=s behalf, and accounts
receivable owed to New K=s from Kay Eldridge.
As I explain, supra Section IV(E), Plaintiff=s arguments
have no basis in the evidence or in the case law.
With regard to the claims related to the real estate,
Plaintiff has no legal basis for its claim that the profits and
projected profits were unaccounted for in the Reconciliation in
a way that led to a breach of contract.
The Decatur Land, which
sold after the Reconciliation was created, only generated
$16,705.41 in revenues; these revenues would not raise the total
profits of the LLC above $13,333,333.33 as necessary in order to
increase Old K=s liquidating distribution above the $3 million
minimum.
The “Davenport Real Estate” has not yet sold and
Plaintiff can point to no clause within the LLC Agreement that
requires GBG to pay out a liquidating distribution based on an
estimate of estimated future revenues instead of based on actual
revenues (or in-kind distributions) once liquidation is
complete.
79
With regard to the claims related to the alleged mistaken
categorization of certain amounts as liabilities, not as assets,
or both, Plaintiff has no factual basis in the evidence
presented.
The only evidence regarding the $100,645.57 reserve
fund is that it is a fund intended for future expenses (and any
remainders will be paid out to Old K=s), not that it is a fund
for expenses already paid.
Parent stated in her affidavit that
the reserve fund, the $975,000.00 held by New K=s on behalf of
GBG, and the $11,354.53 in accounts receivable owed to New K=s
from Kay Eldridge were all included as assets within the
$6,817,471.77 “Bank of America Cash” line item in the
Reconciliation.
She further stated that the amounts to be owed
from Old K=s to New K=s were reimbursements for amounts already
paid out and so did not increase the LLC=s net revenues.
Plaintiff challenges Parent=s affidavit, but its attack on
her personal knowledge of the issues was grasping at straws.
Further, its complaint that there should have been documentary
support of her explanation because of the requirements of the
LLC Agreement is unavailing.
It may well be that GBG breached
its obligations under the LLC Agreement regarding accounting
documentation.
However, such a breach is the grounds of a
separate count of breach of contract (one abandoned by
Plaintiff) and does not provide a ground to exclude the
80
testimony of employees explaining the financial documents that
were provided, however incomplete those documents may have been.
The parties in this case engaged in the discovery process
for approximately two years, during which Plaintiff could have
asked GBG deponents whether certain liabilities and deductions
were counted as assets, how to reconcile the different
accounting documents, and what the sub-parts were of the ABank of
America Cash@ line item.
Plaintiff does not cite to any
deposition testimony or other evidence indicating that the
assets at issue are not included within the ABank of America
Cash@ line item in the Reconciliation.
This may well be because
the theory was too late conceived by counsel to pursue at
depositions (and, evidently, too late conceived or too sloppily
litigated to disclose, in terms of damages calculations, to
Defendants during the discovery period).
In any event,
Defendants are not to be faulted for Plaintiff’s inadequate
litigation initiatives.
Plaintiff=s counsel were no doubt frustrated by confusing
financial documents and insufficient documentary explanation.
However, lack of clarity is a reason to ask more questions
during the discovery phase.
summary judgment.
It is not a reason to move for
Plaintiff had no legal grounds to challenge
the liquidating distribution as it related to the real estate
81
and no factual grounds to challenge the liquidating distribution
as it related to the various deductions, liabilities, and assets
discussed above.
Plaintiff=s counsel were under an obligation
pursuant to Fed. R. Civ. P. 11 to conduct a reasonable inquiry
before filing and maintaining Plaintiff=s motion for summary
judgment, and they did not fulfill that obligation.
4.
Conclusion
Plaintiff=s counsel filed and maintained Plaintiff=s motion
for summary judgment although the claims therein were not
“warranted by existing law or by a nonfrivolous argument for
extending, modifying, or reversing existing law or for
establishing new law.”
Fed. R. Civ. P. 11(b).13
Pursuant to
Fed. R. Civ. P. 11(c), I order the Plaintiff to pay to
Defendants’ the reasonable costs and expenses, including
attorneys= fees, that Defendants incurred in responding to
Plaintiff=s motion for summary judgment and in moving for
sanctions.
I direct Defendants to file a detailed calculation
and application for such expenses and fees to this Court on or
before April 1, 2016.
Given the duplicative nature of much in
13
Because I find that pursuing summary judgment on these grounds
violated Plaintiff=s counsels= obligations pursuant to Fed. R.
Civ. P. 11, I need not address whether it also “display[ed] a
serious and studied disregard for the orderly process of
justice,” Rossello-Gonzalez v. Acevedo-Vilo, 483 F.3d 1, 7 (1st
Cir. 2007), in violation of 28 U.S.C. ' 1927.
82
the cross-motions for summary judgment, I remind Defendants that
this is not an order for Plaintiff to pay Defendants= fees in
prosecuting their own motion for summary judgment.
They should
only address fees and costs that would not have been incurred
but for Plaintiff’s improvident decision to file its own motion
for summary judgment.
Plaintiff may file an opposition to
Defendants’ application for fees and costs on or before April
15, 2016.
V. CONCLUSION
For the reasons set forth above, I (1) GRANTED Defendants=
motion for summary judgment (Dkt. No. 69), (2) DENIED Plaintiff=s
motion for summary judgment (Dkt. No. 74), and (3) GRANTED IN
PART AND DENIED IN PART Defendants= motion for sanctions (Dkt.
No. 88).
Defendants shall file on or before April 1, 2016 a
detailed calculation and application for sanction expenses and
fees.
Plaintiff shall file opposition thereto on or before
April 15, 2016.
/s/ Douglas P. Woodlock______
DOUGLAS P. WOODLOCK
UNITED STATES DISTRICT JUDGE
83
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