Eldridge v. Gordon Brothers Group, LLC , 863 F.3d 66 ( 2017 )

United States Court of Appeals
For the First Circuit
Nos. 12-2311
16-1929
DAVID KAY ELDRIDGE; RAY ELDRIDGE, JR.; D. CHRIS ELDRIDGE, as
trustee, not individually, of the C. Eldridge 1994 GST Trust;
PATRICIA K. SAMMONS, as trustee, not individually, of the P.K.
Sammons 1994 Trust; K'S MERCHANDISE MART, INC.,
Plaintiffs, Appellants,
v.
GORDON BROTHERS GROUP, L.L.C.; WILLIAM WEINSTEIN; FRANK MORTON,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Torruella, Thompson, and Kayatta,
Circuit Judges.
Thomas E. Patterson, with whom Kristi L. Browne and The
Patterson Law Firm, LLC were on brief, for appellants.
Theresa A. Foudy, with whom Turner P. Smith, Curtis, Mallet-
Prevost, Colt & Mosle LLP, Richard M. Zielinski, Peter D. Bilowz,
and Goulston & Storrs PC were on brief, for appellees.
July 13, 2017
THOMPSON, Circuit Judge.
PREFACE
Today's case involves a moderately complex business
dispute, rich with issues. On one side is plaintiff K's
Merchandise Mart, Inc., which we call "Old K's" (for reasons that
will soon become clear).1 On the other side is defendant Gordon
Brothers Group, L.L.C., which we call "Gordon," along with two of
its executives, defendants William Weinstein and Frank Morton.
Old K's challenges orders by the district judge granting defendants
summary judgment and requiring it to pay them $35,000 in sanctions.
After studying the briefs, the record, and the applicable law, we
affirm the summary-judgment rulings but vacate the sanctions order
and remand for reconsideration of the sanctions matter, assuming
defendants still wish to pursue it.
BACKGROUND
Consistent with the summary-judgment standard, we set
out the essential facts in the light most complimentary to Old K's
position, see Collazo–Rosado v. Univ. of P.R., 765 F.3d 86, 89, 92
(1st Cir. 2014) — even though the "facts," as accepted for summary-
judgment purposes, may not be the actual facts if the case went to
trial.
1 The judge dismissed the other plaintiffs in our caption.
But Old K's does not contest their dismissal.
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Old K's Precarious Financial Position
Founded by David Kay Eldridge in 1957, Old K's sold
clothing, appliances, sporting goods, jewelry, furniture, and
other merchandise from retail stores in Illinois, Indiana, Iowa,
Florida, Kansas, Kentucky, and Missouri. And Old K's saw many
years of success. But by the early to mid-2000s, competition with
ginormous retailers like Target, Wal-Mart, Best Buy, and Toys "R"
Us caused Old K's financial distress — the company, for example,
suffered a net loss of $1.8 million in 2004.
Faced with mounting losses, Old K's hired the investment
firm William Blair & Co ("Blair") sometime in 2005 to help sell
the company before the end of the year. Blair explained that
because Old K's was "unlikely" to find a buyer, "liquidation" was
the "most logical" way to go.2 Blair later hooked Old K's up with
Gordon, a company known nationwide for its expertise in retail
liquidations. Old K's hired Gordon in July 2005 to "provide
preliminary advice and consultation to [Old K's] in connection
with a possible orderly liquidation of [Old K's] 'big box' format
stores" and to "develop a plan for the disposition of all inventory
in the [s]tores with reference to the optimal timing of a 'store
2 Broadly speaking, liquidation is "[t]he act or process of
converting assets into cash," particularly "to settle debts."
Liquidation, Black's Law Dictionary 1072 (10th ed. 2014).
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closing' or similar themed sale." Eldridge, Old K's president,
would later testify that the reason Old K's retained Gordon was to
get "different viewpoints and evaluate" Old K's "options" in case
Old K's "decide[d] . . . to liquidate."
Asked to analyze the liquidation value of Old K's
merchandise and real estate, Gordon offered to buy Old K's in
August 2005 for about $25 million. Convinced that Old K's was
worth much more, Old K's rejected the offer and asked Gordon to
finish its "[r]eal [e]state appraisal and inventory liquidation"
analysis — adding that if liquidation ended up being the way to
go, Old K's would do the liquidation itself before accepting an
offer like the one Gordon had floated. But unfortunately for Old
K's, its business continued hemorrhaging money in the months
following Gordon's offer, posting losses of between $3.2 and $6.7
million for the fiscal year ending January 2006.
And things turned from bad to worse for Old K's when its
principal lender, LaSalle National Bank ("LaSalle"), sent it a
notice of default for violating financial-performance covenants,
slashed its credit line, and dishonored checks to its vendors.
LaSalle's Robert Barnhard, a former Gordon employee, then met with
folks from Old K's in February 2006. During this confab, Barnhard
flatly disagreed with Old K's proposed plan to improve
profitability by reducing inventory and asked Old K's to prepare
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a 13-week cash-flow projection and business plan. Barnhard also
hired consulting firm Alliance Management, Inc. ("Alliance") to
gauge Old K's performance. Issuing a report in late February 2006,
Alliance noted that Old K's (a) had "[a]ccumulated losses . . .
exceed[ing] $8 million dollars [over] a 3 year period,"
(b) "fac[ed] significant liquidity challenges that are material to
the continuing business operations," and (c) had a "business model"
that was outdated and "not sustainable." After getting Alliance's
report, LaSalle demanded that Old K's liquidate by about mid-April
2006.
Hoping to get LaSalle "off [its] back," Old K's hired
consulting firm Buccino & Associates ("Buccino") in March 2006,
with the aim of convincing LaSalle to extend the liquidation
deadline — Buccino's founder and LaSalle's president were
"personal friend[s]," apparently. But Buccino struck out, meaning
— according to Buccino — that Old K's "would be out of cash by
October [2006], possibly as early as July [2006]," given its then-
current financial and operational situation. A Buccino official
later recounted how LaSalle was pretty ticked off with the state
of affairs, and "they [meaning LaSalle] required quick action to
either replace their loan to take them out or they would
foreclose." That same official added that, given how over-
collateralized the loan was, he "believe[d]" that Buccino "would
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have found a bank" to provide take-out financing — though he also
said that despite having "talked to several lenders," Buccino found
"no interested parties" because of "the conditions that existed"
and so Buccino's feeling was that Old K's "would probably have to
file for bankruptcy." And in fact, Buccino prepared several
liquidation analyses for Old K's.
With no financial savior in sight, Old K's entered into
a forbearance agreement with LaSalle in which Old K's (among other
things) admitted to certain defaults, expressed an intent to hold
a liquidation sale, and agreed to file a voluntary bankruptcy
petition "on or about April 17, 2006." To help it navigate the
complexities of the bankruptcy process, Old K's hired a powerhouse
law firm, Mayer Brown LLP, and a communications consultant, Sitrick
and Company. Old K's also solicited bids to liquidate its assets
from several liquidation companies — Gordon (which had never given
up the idea of acquiring Old K's, it seems), Hilco, American Group,
and Tiger Capital.
Gordon's Representations
With the bankruptcy deadline fast approaching, Old K's
reconnected with Gordon. And Gordon still had interest in
acquiring Old K's. In an email to Gordon employees, Weinstein
outlined his strategy:
Guys, we felt like there was $20 ml of equity in the
deal 6 months ago. It did not erode that quickly. . . .
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This could be a classic out of court deal. We guarantee
the bank to shut them up. We go to a creditor rights
lawyer and hire them to represent the trade in an out of
court. We either propose a pot plan or percentage plan
distribution at less than 100% and more than a bankruptcy
would pay them. We pick up the "equity" in the discount.
We run through x-mas out of court.
And during meetings in early April, Gordon made several
representations to Old K's that are at the heart of this case:
 After achieving a "composition" with Old K's creditors — a
"composition" is "[a]n agreement to settle a dispute or debt
whereby one party abates part of what is due or claimed," see
Composition, Black's Law Dictionary at 346 — Gordon planned
to run the company as a going concern at least through the
Christmas selling season before deciding on whether to
continue operations, sell the company, or liquidate the
company.
 Gordon had the expertise and experience to turn the company
around and to keep it running.
 Gordon would get inventory flowing again by guaranteeing
payment for future shipments from suppliers within a week.
 And Gordon would consult with the company's management before
making any major decision affecting business operations.
By the way, everyone knew at the time that if no creditor
composition happened, Gordon would liquidate the company straight
away.
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Rise and Fall of New K's
After these comments, Old K's — represented by in-house
and outside counsel — developed and executed a multi-step plan
with Gordon:
Step 1. Old K's signed a letter of intent — a document
"detailing the preliminary understanding of parties who plan to
enter into a contract or some other agreement." Letter of Intent,
Black's Law Dictionary at 1044. As pertinent here, the letter of
intent provided that Gordon would become the "exclusive agent" for
Old K's "in connection with the continued operation and/or
liquidation of the Company's business operations and disposition
of assets of the Company, . . . all in [Gordon's] sole discretion"
— though Gordon promised to "use best efforts to keep the Company's
officers reasonably informed of [its] decision-making process."3
Old K's attorneys at Mayer Brown added the words "and/or
liquidation of" during the drafting process.4 Two weeks after
signing the letter of intent, Gordon's Morton emailed a colleague
that he thought Gordon could "do 2 or 3 store wide events during
the next 6 months without taking the juice out of the liquidation."
3 The letter of intent refers to Old K's as the "Company."
4David Kay Eldridge said at a deposition that he voiced no
objection to the "and/or liquidation of" language in the letter of
intent because — to quote his testimony — those words "didn't mean
anything" since Old K's could "fire" Gordon if Gordon wanted to
liquidate the business but Old K's did not.
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Step 2. Gordon paid about $40 million to pay off Old
K's debt to LaSalle, relieving Old K's from the imminent loss of
its financing and from the LaSalle-demanded bankruptcy filing.
Around this same time, Gordon decided to settle with Old K's
creditor-suppliers, thereby avoiding an involuntary-bankruptcy
petition by them. As part of that effort, Gordon's Weinstein
worked with Old K's and its attorneys to draft letters to creditor-
suppliers describing the plans for the new company. In one email,
Weinstein suggested that Old K's tone down the draft:
Where it says [Gordon] desires to run this as a going
concern, I would rather soften this to say that we will
do so as we evaluate whether a restructuring of the
company is feasible. Something like this. I do not
want to sound like we are committing to this.
A few days later, Weinstein returned to this theme, telling Old
K's and its lawyers that the draft should not puff up Gordon's
intentions:
It is clearly our intention to run the company for a
period of time while we determine what the right
configuration/make-up of the business is. We just want
to be clear that this is a broken business that we see
some underlying value in. However, there are no sure
things here and we don't want to over promise.
The letter did not get "softened in response to Weinstein's"
comments (a quote lifted from the brief Old K's filed with us).
Step 3. Gordon and Old K's entered into a Limited
Liability Company Agreement ("LLC Agreement") in May 2006, with
lawyers for Old K's taking part in the negotiations. The LLC
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Agreement created New K's Merchandise LLC ("New K's"), a Delaware
company that inherited the business operations of Old K's. Old
K's got a 22.5% membership interest in New K's, and Gordon got a
77.5% membership interest. The LLC Agreement designated Gordon as
the "sole manager" of New K's. As manager, Gordon had the power
to "exercise all the powers and privileges granted to a limited
liability company" — including the right to liquidate the entity.
But Gordon had to "use its best efforts to consult with [Old K's]
regarding [Gordon's] conduct of the affairs of [New K's]," "keep
[Old K's] fully informed of any material decisions and activities
of [Gordon] with respect to [New K's]," and make documents
available upon "reasonabl[e] request." The LLC Agreement also set
up a "Liquidating Distribution" scheme, allowing Old K's to recover
a minimum distribution of $3 million (subject to certain
deductions) if the creditors were composed without a bankruptcy
filing. The LLC Agreement had a choice-of-law clause specifying
that Delaware law governs the parties' contract — as well as an
integration clause, saying that the "Agreement . . . embodies the
entire agreement and understanding among the parties hereto with
respect to the subject matter hereof and supersedes all prior
agreements and understandings relating to such subject matter."
Gordon started running New K's business operations as of
May 1, 2006 but kept key personnel from Old K's in place — including
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Richard Powers, Old K's chief financial officer, who stayed on as
New K's chief financial officer. Powers later acknowledged that
had Old K's not entered into the LLC Agreement, the most likely
scenario would have been bankruptcy liquidation. And he also
acknowledged that three weeks later, he got a "financial model"
from Buccino (now working for New K's) that contemplated the
company's running normally through October 2006 and then operating
in "liquidation mode."
After taking the reins of New K's, Gordon succeeded in
composing the creditors outside of bankruptcy, getting them to
take 50% of the amount owed and to release the shareholders of Old
K's from potential claims. The creditors' advisor had told them
that Gordon "has indicated that it intends to operate [New K's] at
least through the coming Christmas season." And he later testified
in his deposition that if Gordon "had already concluded as of May
1" that it was "going to liquidate this company," then he was lied
to. Anyway, a few weeks after the LLC Agreement's signing, Gordon
started sending out financial guarantees to suppliers to restock
the company. But it took a while to get the suppliers to start
shipping again because — to quote a letter from Powers — "many of
our vendors" wanted to wait "until the composition [of creditors]
was approved and implemented," which did not happen until mid-July
2006. Apparently some suppliers were still miffed that Old K's
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had stiffed them weeks earlier. And even with a "100 percent rock
solid guarantee" from Gordon, some vendors "wouldn't ship"
inventory to New K's, according to Gordon's Weinstein.
Whether Gordon had tried its best to improve New K's
operations, merchandising, advertising, etc., is a bone of
contention between the parties. But in October 2006, having deemed
the turn-around efforts a failure, Gordon publicly announced it
was liquidating New K's and closing all stores by year's end. And
when Gordon made that announcement, none of the plaintiffs
complained to Gordon or took any action to stop the liquidation.
New K's business operations eventually stopped in January 2007.
And its wind-down phase started after that.
At the beginning of the liquidation phase, Old K's tried
to get financial and performance info from Gordon, but to no avail.
Old K's did get $1,748,217 from Gordon sometime in March 2008 — a
figure Gordon claimed represented the minimum $3 million
distribution promised in the LLC Agreement, minus certain
adjustments. Old K's eventually got some documents but asked for
more because some appeared to be missing. And a bit later, Old
K's received two CDs containing info that caused Old K's to suspect
that Gordon had never intended to run New K's as a going concern.
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Off to Federal Court
Old K's responded with this suit in federal court under
diversity jurisdiction. Count I alleged defendants had
fraudulently induced Old K's to enter into the LLC Agreement by
(among other things) misrepresenting that defendants intended to
turn the company around and that they had the know-how and the
experience to do just that. Count II sought an accounting of New
K's financial condition and operations, plus the handing over of
documents Old K's had requested but had not gotten. And finally,
Count III alleged defendants breached the LLC Agreement — a claim
focused principally on a bunch of accounting, "best efforts," and
payment breaches, though the count included a sentence alleging
defendants breached an implied duty of good faith and fair dealing
inherent in the LLC agreement when they committed "the
aforementioned fraud and mismanagement."
After each party inflicted tons of discovery on the
other, defendants moved for partial summary judgment.
Pertinently, defendants argued that the fraudulent-inducement
claim failed because the complained-of comments (a) were not
actionable misrepresentations and (b) were too vague or immaterial
(or both), so any reliance on the part of Old K's was unreasonable,
especially given express contract terms inconsistent with the
alleged promises and the integration clause that explicitly
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disavowed commitments not included in the contract (and by
contract, defendants meant the LLC Agreement). Defendants also
insisted that the breach-of-contract claim misfired "to the extent
it purport[ed] to assert a claim for breach of the implied covenant
of good faith and fair dealing arising out of the LLC Agreement."
Any such claim, defendants wrote, flopped because Old K's did not
identify "which of the allegations of fraud and/or mismanagement"
infracted the covenant — and, defendants added, any suggestion
that a breach of that covenant occurred because defendants did not
set out to turn New K's around fizzled since the LLC Agreement
gave Gordon the authority to liquidate New K's. Old K's opposed
defendants' partial-summary-judgment motion but did not file its
own summary-judgment motion at that time.
Basically agreeing with defendants' analysis, the judge
granted defendants partial summary judgment on the claims of
fraudulent inducement and breach of an implied covenant of good
faith and fair dealing. The judge then ordered the parties to
file a joint-status report explaining what further action was
needed to get this case to final judgment.
Responding, Old K's pertinently said that what remained
against defendants were (a) an accounting claim; (b) a breach-of-
contract claim for failing "to consult" with Old K's and failing
to correctly "calculat[e] Plaintiff's share in the 'Accounting'"
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that "forms the basis of the distribution made to Plaintiff"; and
(c) a claim for breach of the implied covenant of good faith and
fair dealing given the way defendants "operat[ed]" New K's. Among
other things, defendants insisted that the judge had already
dismissed "the breach of the implied covenant claim." And they
said that they might ask "for permission to file" another summary-
judgment motion — "depending on the exact contours of the elements
of Plaintiff's remaining claims."
At a follow-up conference, the judge said he was "not
going to sort through" whether he had dismissed the "breach of the
implied covenant claim." "[Y]ou can deal" with that in a summary-
judgment motion, the judge added. And then the judge gave
defendants the go-ahead to move for summary judgment on the still-
existing claims. Turning to counsel for Old K's, the judge said
he assumed "from plaintiff['s] musings" that it does not "believe
that [it] can file for summary judgment, so [it] will be opposing
defendants'" summary-judgment motion. The attorney for Old K's
said nothing in response.
Roughly two weeks after the conference, though, Old K's
asked the judge for leave to cross-move for summary judgment on
all the "remaining claims" it had identified. Defendants opposed
this request, insisting Old K's could not point to uncontested
facts establishing its right to judgment as a matter of law — hence
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dealing with a cross-motion for summary judgment would waste
defendants' and the judge's time and energy. The judge ultimately
gave Old K's permission to file a summary-judgment motion — but
the judge "advised" counsel "to consider the application of Fed.
R. Civ. P. 11 to any such motion if the motion has no conceivable
likelihood of success."5
In their second summary-judgment motion, defendants — as
relevant here — argued as follows: The judge had already tossed
out the entire claim for breach of an implied covenant of good
faith and fair dealing, meaning — defendants' argument continued
— that Old K's was dead wrong to suggest that a claim premised on
their "operation" of New K's somehow survived the judge's earlier
edict. Defendants also asserted that the accounting claim got
mooted by the documents they had produced during the many years of
discovery. They also later argued Old K's did not respond to their
accounting-claim arguments and so the judge should dismiss that
claim. As for the breach-of-contract claim, defendants contended
that, as argued by Old K's, this claim basically boiled down to
three theories — (a) defendants had wrongly failed to consult with
Old K's; (b) they had wrongly denied Old K's its share of the
profits because they did not account for $13.9 million in "missing
5 For brevity, we occasionally use "Civil Rule 11" to refer
to Fed. R. Civ. P. 11.
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inventory"; and (c) they had wrongly calculated the liquidating
distribution. And having framed the breach-of-contract claim this
way, defendants said they should prevail because (a) "it is
impossible to imagine a measure of damages" for the failure-to-
consult "breach that would not be unduly speculative"; (b) Old K's
debuted the "missing inventory" damages theory after discovery had
closed, a discovery violation that called for the theory to be
stricken under Fed. R. Civ. P. 37(c); and (c) the evidence showed
defendants had given Old K's the correct liquidating distribution.6
Old K's opposed defendants' motion and cross-moved for
summary judgment in its favor. As Old K's saw it, defendants had
breached the implied covenant of good faith and fair dealing by
mismanaging New K's furniture department and had breached the LLC
Agreement by not making the proper distribution payment.
Defendants, in turn, opposed the motion by Old K's. And
convinced that this motion had "no chance" of succeeding, they
also moved for Civil-Rule-11 sanctions against the attorneys
representing Old K's — a motion opposed by Old K's.
The judge granted defendants' summary-judgment motion
and denied the cross-motion by Old K's. And on top of that, the
judge ordered Old K's to pay defendants $35,000 in sanctions for
6
For simplicity, we sometimes refer to Fed. R. Civ. P. 37(c)
as "Civil Rule 37(c)."
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filing what he thought was a hopeless "tit-for-tat" summary-
judgment motion.
Which takes us to today, with Old K's contesting both
the grants of summary judgment to defendants (Old K's does not
contest the denial of its summary-judgment motion) and the
imposition of sanctions.7
SUMMARY-JUDGMENT ISSUES
The parties fight considerably over the propriety of the
judge's grants of summary judgment to defendants. We have a lot
of ground to cover. But we are up to the challenge.
Standard of Review
We assess the judge's grants of summary judgment de novo,
seeing whether — after taking the facts in the light most
flattering to Old K's — "there is no genuine dispute as to any
material fact and [defendants are] entitled to judgment as a matter
of law." See Belsito Commc'ns, Inc. v. Decker, 845 F.3d 13, 21
(1st Cir. 2016). A dispute is "genuine" if the record permits a
sensible factfinder to decide it in either party's favor. See,
e.g., Chung v. StudentCity.com, Inc., 854 F.3d 97, 101 (1st Cir.
2017). And a fact is "material" if its existence or nonexistence
7 We will note additional details as they become relevant to
the ensuing analysis.
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"might affect the outcome of the suit under the governing law."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
With the standard of review out of the way, we turn to
the issues in play.
Fraudulent Inducement
(a)
Parties' Basic Positions
To hear Old K's tell it, Gordon made the following
representations (which we mentioned earlier) to get Old K's to
sign on to the LLC Agreement:
 After composing the creditors, Gordon intended to operate New
K's as a going concern at least through the 2006 Christmas
selling season before deciding on whether to continue
operations, sell the company, or liquidate the company.
 Gordon had the expertise and experience to make the company
profitable and to save it from bankruptcy.
 Gordon would get inventory flowing again by guaranteeing
payment for future shipments from suppliers within a week of
signing the LLC Agreement.
 And Gordon would consult with New K's management before making
any major decision affecting the company's operations.
Protesting that Gordon never intended to do anything other than
liquidate New K's, Old K's argues that Gordon made these
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representations knowing them to be false or with reckless disregard
for their truth. "Substantial evidence," Old K's adds, "showed
[Gordon's] intent or permitted reasonable inferences of it." And
Old K's reasonably relied on Gordon's representations — or so Old
K's argues. Plus, says Old K's, Gordon's comment about its
turnaround expertise was hardly inactionable "puffery," despite
what the judge said.
Accepting for summary-judgment purposes only that Gordon
actually made these representations, defendants still believe the
judge ruled correctly. And that is because the offending comments
either were "inactionable" (since they were mere predications of
future conduct, puffery, or opinion) or were "matters on which Old
K's had no basis to rely."
(b)
Legal Primer
The parties agree that Illinois law governs the
fraudulent-inducement claim — probably because the representations
occurred there, as the judge found and the parties do not dispute.8
We of course can accept the parties' agreement if it is reasonable,
8 Because fraud is a tort, see Enter. Recovery Sys., Inc. v.
Salmeron, 927 N.E.2d 852, 858 (Ill. App. Ct. 2010), the fraudulent-
inducement claim does not fall within the scope of the LLC
Agreement's Delaware-choice-of-law clause.
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see, e.g., Katz v. Pershing, LLC, 672 F.3d 64, 72 (1st Cir. 2012),
and this one is.
In Illinois, a fraudulent-inducement claim requires
clear and convincing proof that the defendant made (a) a false
statement; (b) of material fact; (c) which the defendant knew or
believed to be false; (d) with the intent to induce the plaintiff
to act; (e) the plaintiff reasonably relied on the false statement;
and (f) the plaintiff suffered damages a result. See, e.g., Jordan
v. Knafel, 880 N.E.2d 1061, 1069 (Ill. App. Ct. 2007). But (and
it is an important "but") a false statement of an "intent[] to
perform future conduct" — what the law calls "promissory fraud" —
is not actionable unless it is part of a "scheme" to defraud. See,
e.g., HPI Health Care Servs. v. Mt. Vernon Hosp., Inc., 545 N.E.2d
672, 682 (Ill. 1989); Desnick v. Am. Broad. Cos., 44 F.3d 1345,
1354 (7th Cir. 1995) (Posner, C.J.) (discussing Illinois law).
The line between "a mere promissory fraud and a scheme
of promissory fraud" will not always be clear. See Desnick, 44
F.3d at 1354. Lots of "promises belong to the realm of puffery,
bragging, 'mere words,' and casual bonhomie, rather than to that
of serious commitment" — "[t]hey are not intended to and ordinarily
do not induce reliance;" and for promises like these, "a healthy
skepticism is a better protection against being fooled by them
than the costly remedies of the law." Id. With this in mind,
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courts hold that "promissory fraud is actionable only if it either
is particularly egregious or, what may amount to the same thing,
it is embedded in a larger pattern of deceptions or enticements
that reasonably induces reliance and against which the law ought
to provide a remedy." Id. Promissory fraud is a "disfavored cause
of action," presumably "because fraud, focusing as it does on a
subjective state of mind, can be very easy to allege and very
difficult to prove or disprove," Hollymatic Corp. v. Holly Sys.,
Inc., 620 F. Supp. 1366, 1369 (N.D. Ill. 1985) (analyzing Illinois
law) — which is why "the burden on a plaintiff claiming promissory
fraud is deliberately high," Bower v. Jones, 978 F.2d 1004, 1012
(7th Cir. 1992) (ditto).
Moving from the general to the specific, we now give our
take on the four alleged misrepresentations.
(c)
Our Take
First up is Gordon's promise to run New K's as a going
concern through the 2006 Christmas selling season before deciding
whether to liquidate the business. To our way of thinking, what
trips Old K's up is the reasonable-reliance requirement. As the
district judge noted, by the time the parties signed the LLC
Agreement — with Old K's represented by white-shoe law firm Mayer
Brown, remember — Old K's knew that a handful of consulting and
investment firms had recommended the liquidation of Old K's ASAP.
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Also and importantly, Gordon's Weinstein had told Old K's just
before the LLC Agreement became final that while Gordon hoped to
run the business "as a going concern," Gordon would do so as it
"evaluate[d] whether a restructuring of the company is feasible."
Weinstein made it crystal clear to Old K's that he did "not want
to sound like" Gordon was "committing to this." And he also
stressed around this time that "this is a broken business that we
see some underlying value in" but that "there are no sure things
here and we don't want to over promise."9 Given the circumstances,
Old K's could not ignore the possibility of a liquidation before
2006's end and so could not reasonably believe that Gordon made a
reliable pledge to run Old K's as a going concern during that
entire period.
Just a minute, says Old K's: we must (to quote its
brief) "consider Buccino's testimony" that it thought it could
find "replacement financing apart from Gordon." But Old K's
ignores how Buccino stressed that it had found "no interested
parties" because of "the conditions that existed" and that it had
9 These quotes came from emails Weinstein had sent to Old K's
(among others) weighing in on a proposed letter to the creditor-
suppliers. Hoping to show reasonable reliance here, Old K's plays
up how the draft "letter was not softened" as Weinstein had
suggested. But what matters for current purposes is that Weinstein
shared these concerns with Old K's — thus this argument does Old
K's no good.
- 23 -
generated liquidation analyses for Old K's. And it ignores how
Alliance pulled no punches in saying that Old K's "business model"
was out-of-date and "not sustainable." Also, we find it passing
strange that Old K's insists it relied on Gordon's no-liquidation
assurance when the LLC Agreement — which top-flight lawyers for
Old K's helped negotiate — specifically mentioned liquidation as
a possibility and left the liquidation decision in Gordon's hands.
So the attempt by Old K's to get around the reasonable-reliance
problem here comes to naught. Cf. generally D.S.A Fin. Corp. v.
County of Cook, 801 N.E.2d 1075, 1081 (Ill. App. Ct. 2003)
(explaining that "the court considers whether the party was
reasonable in relying on his adversary's representation in light
of the facts within his actual knowledge and any he might have
discovered by the exercise of ordinary prudence"); Chic. Exp.
Packing Co. v. Teledyne Indus., Inc., 566 N.E.2d 326, 329 (Ill.
App. Ct. 1990) (noting that "[a] person may not enter into a
transaction with his eyes closed to available information and then
charge that he has been deceived by another").
Next up is Gordon's comment that it had the experience
and expertise to turn the company around. The problem for Old K's
is that this comment falls under the heading of vague or "puffing,"
i.e., "a sales pitch that is intended, and that a reasonable person
in the position of the 'promisee' would understand, to be
- 24 -
aspirational rather than enforceable — an expression of hope rather
than a commitment." Speakers of Sport, Inc. v. ProServ, Inc., 178
F.3d 862, 866 (7th Cir. 1999) (Posner, C.J.) (discussing Illinois
law). It is not like Gordon made a specific factual remark that
could be proven true or false, such as "Gordon has saved 15
businesses from liquidation over the last 10 years." Simply put,
the comment is nonactionable. Cf. Cont'l Bank, N.A. v. Meyer, 10
F.3d 1293, 1299 (7th Cir. 1993) (concluding that a bank's comment
that "competent general partners" would manage the partnership was
"no more than opinion").
Trying to persuade us otherwise, Old K's turns to
Schrager v. North Community Bank, 767 N.E.2d 376 (Ill. App. Ct.
2002). The plaintiff there met with the defendants to discuss a
potential investment in a real-estate venture. Id. at 378. And
he asked them to tell him what they could about the project. Id.
at 379. They responded that the investors were "excellent real
estate developers, very good customers of the bank, and very good
business men [sic]." Id. But in reality the defendants knew
(among other things) that the venture's account was often overdrawn
and that an investor was in bankruptcy. Id. at 383-84. The court
concluded that the defendants had "actual detailed knowledge"
about the investors' "financial and banking history" and so "[t]he
circumstances surrounding [their] statements could reasonably
- 25 -
support the inference that [they] were summarizing their detailed
knowledge" for the plaintiff. Id. at 384. Consequently, a
rational factfinder could — on the basis of this record — conclude
that the statements "were representations of material fact rather
than opinions." Id.The difference between Schrager and our case is one of
night and day, however. For the situation here — as the district
judge below recognized — is not one in which defendants represented
that Gordon had turnaround experience when they knew they had none.
The big reason we say this is because a Gordon employee testified
to having nearly 20 years of retail experience before joining
Gordon in 1997. Old K's tries to downplay the employee's
experience, calling it "sporadic" and not "germane." But that is
a matter of opinion. And so we stand by our conclusion that the
representation concerning Gordon's turnaround experience and
expertise was nonactionable opinion amounting to sales puffery.
Now consider Gordon's next comment that it would beef-
up inventory by offering suppliers "its financial guaranties"
within a week of the LLC Agreement's signing. Gordon did provide
guarantees and did restock the shelves, just not as quickly as Old
K's would have liked. But even one of Old K's officers
acknowledged that "many of [its] vendors" were waiting for the
"approv[al] and implement[ation]" of the creditor composition
- 26 -
before "shipping new merchandise" — and the "approv[al] and
implement[ation]" stuff did not occur until two months after the
LLC Agreement's signing, don't forget. Sure, Gordon did not offer
guarantees within the first week of taking control of the company.
But Gordon did start offering them within that first month. And
despite getting Gordon's "100 percent rock solid guarantee," some
vendors still "wouldn't ship" wares to New K's. So the suppliers'
doubts about doing business with the company was hardly something
Gordon could control. Ultimately, we do not think the alleged
promise concerning future conduct of third-party suppliers that
Gordon could not control is especially "egregious" or "embedded"
in a large scheme inducing reasonable reliance. See Desnick, 44
F.3d at 1354.
The same goes for Gordon's promise to consult with the
management of Old K's before making major decisions. To back up
its argument, Old K's points to testimony showing that Gordon
sometimes held meetings without key members of Old K's. But
Gordon's keeping Old K's out of certain meetings does not mean
that Gordon failed to (in the lingo of the LLC Agreement) "use its
best efforts to consult" with Old K's in other ways, like through
other meetings, perhaps, or by phone (two examples that spring to
mind) — hence our conclusion that the trumpeted evidence does not
- 27 -
show the type of appalling behavior for which Illinois law should
"provide a remedy." See id. Enough said about that.
Having worked our way through these arguments, we
conclude that the summary-judgment ruling for Gordon on the
fraudulent-inducement claim must stand.
Breach of the Implied Covenant of
Good Faith and Fair Dealing
(a)
Parties' Basic Positions
Tucked away in the complaint's breach-of-contract count
(Count III) is a single sentence saying Gordon "breached the
contractual covenant of good faith and fair dealing implied [in]
the LLC Agreement when it engaged in the aforementioned fraud and
mismanagement." In its briefs to us, Old K's argues vigorously
that Gordon violated this implied covenant in two ways: first by
its pre-holiday-season "decision to liquidate"; and second by its
mismanagement of the furniture and jewelry departments — recall
that the mismanagement claim by Old K's surfaced in its cross-
motion for summary judgment. Not to be outdone, defendants
vigorously respond that these breach-of-the-implied-covenant
theories fail, first because the LLC Agreement specifically gave
Gordon the unilateral right to liquidate New K's; and second
because Old K's did not raise the mismanagement issue in opposing
defendants' first summary-judgment motion (a motion that had asked
- 28 -
the judge to enter judgment on the entirety of the breach-of-the-
implied-covenant claim), which — the argument goes — means Old K's
waived that issue.
(b)
Legal Primer
Consistent with the LLC Agreement's choice-of-law
provision, we — like the parties — apply Delaware law to this
contract-related claim.
Delaware law says every contract contains an implied
duty of good faith and fair dealing. See, e.g., Enrique v. State
Farm Mut. Auto. Ins. Co., 142 A.3d 506, 511 (Del. 2016). This
implied covenant forbids a party from acting arbitrarily or
unreasonably so as to prevent the other party "from receiving the
fruits" of the contract. See Dunlap v. State Farm Fire & Cas.
Co., 878 A.2d 434, 442 (Del. 2005) (quoting Wilgus v. Salt Pond
Inv. Co., 488 A.2d 151, 159 (Del. Ch. 1985)). But the point of
the implied covenant is to respect the parties' "reasonable
expectations at the time of contracting," not to stick them with
new ones — it is not a magic wand for reworking a "contract to
appease a party" who now thinks the deal is "bad." See Nemec v.
Shrader, 991 A.2d 1120, 1126 (Del. 2010); see also Blaustein v.
Lord Balt. Capital Corp., 84 A.3d 954, 959 (Del. 2014) (stressing
that "[t]he implied covenant of good faith and fair dealing cannot
be employed to impose new contract terms that could have been
- 29 -
bargained for but were not"). So understood, the implied covenant
provides an "extraordinary legal remedy" that is "limited" to
"extraordinary" circumstances. Nemec, 991 A.2d at 1128. It can
be used as a gap-filler "to handle" situations "neither party
anticipated," id. at 1125 — if and only if "it is clear from the
contract that the parties would have agreed to [the implied] term
had they thought to negotiate the matter." Corp. Prop. Assocs. 14
Inc. v. CHR Holding Corp., C.A. No. 3231–VCS, 2008 WL 963048, at
*5 (Del. Ch. Apr. 10, 2008) (refusing to use the implied covenant
to protect a party from dilution by cash dividends when the parties
did not include that protection in the contract). What this means
is that the implied covenant "does not apply when the contract
addresses the conduct at issue." Nationwide Emerging Managers,
LLC v. Northpointe Holdings, LLC, 112 A.3d 878, 896 (Del. 2015).
We now analyze the parties' arguments (tackling them in
the order in which Old K's briefed them), knowing full well that
under Delaware law it is a "rare" case where a court would be
justified in "imposing an obligation on a contracting party through
the covenant of good faith and fair dealing." Superior Vision
Servs., Inc. v. ReliaStar Life Ins. Co., No. Civ. A. 1668-N, 2006
WL 2521426, at *6 (Del. Ch. Aug. 25, 2006) (quoting Frontier Oil
Corp. v. Holly Corp., No. Civ. A. 20502, 2005 WL 1039027, at *28
(Del. Ch. Apr. 29, 2005)).
- 30 -
(c)
Our Take
Because the LLC Agreement — as negotiated by the parties,
with Old K's represented by top-notch lawyers — specifically gave
Gordon sole discretion to liquidate the company, Old K's is left
to argue that it "rel[ied] on the implied obligation of good faith
to limit [Gordon's] discretion." Old K's cites no authority
supporting its contention. Cf. generally Town of Norwood v. Fed.
Energy Regulatory Comm'n, 202 F.3d 392, 405 (1st Cir. 2000)
(explaining that "developing a sustained argument out of . . .
legal precedents" is the litigants' job, not the court's). But
even putting that problem aside, we think the argument is not a
winner for Old K's.
Old K's and Gordon both foresaw the possibility that New
K's could end up being liquidated. And they — with first-rate
attorneys at their side — explicitly left the liquidation decision
up to Gordon, without limiting the timing of that decision. Cf.
Blaustein, 84 A.3d at 959 (noting that "the implied covenant is
used in limited circumstances to include what the parties would
have agreed to themselves had they considered the issue in their
original bargaining positions at the time of contracting," and
concluding that a shareholder-plaintiff's claim — that the implied
covenant created a duty on the defendant-company's part to
repurchase stock at full price — failed because the shareholder
- 31 -
agreement gave "both parties complete discretion in deciding
whether, and at what price, to execute a redemption transaction,"
without containing "any promise of a full value price" (internal
quotations omitted)). Given these circumstances, the judge
correctly dismissed this claim on summary judgment, see id. — after
all, as we have been at pains to explain, "[t]he implied covenant
of good faith and fair dealing cannot properly be applied to give
the plaintiffs contractual protections that 'they failed to secure
for themselves at the bargaining table,'" Winshall v. Viacom Int'l
Inc., 76 A.3d 808, 816 (Del. 2013) (quoting Aspen Advisors LLC v.
United Artists Theatre Co., 861 A.2d 1251, 1260 (Del. 2004));
accord Nemec, 991 A.2d at 1128 (emphasizing that the implied
covenant "is not an equitable remedy for rebalancing economic
interests after events that could have been anticipated, but were
not, that later adversely affected one party to a contract" and
stressing too that one does not violate the implied covenant "by
relying on contract provisions for which that party bargained where
doing so simply limits advantages to another party").
As for the implied-covenant claim concerning the
mismanagement of the furniture and jewelry departments, we side
with defendants on this issue too. Our reasoning is simple.
Defendants' original partial summary-judgment motion asked the
judge to reject "the entirety" of the implied-covenant claim as a
- 32 -
matter of law. But in its opposition, Old K's did not suggest
that these mismanagement faux pas provided a separate basis for
its implied-covenant claim — the pertinent part of its opposition
focused only on its idea that the liquidation decision violated
the implied covenant. And this omission — as the district judge
himself ruled — constitutes waiver of any implied-covenant claim
premised on the mismanagement of the furniture and jewelry
departments. See Iverson v. City of Boston, 452 F.3d 94, 103 (1st
Cir. 2006) (holding that "plaintiffs' failure to mention — let
alone adequately to develop — the . . . theory in their opposition
to the [defendant]'s dispositive motion defeats their belated
attempt to advance the theory on appeal").
Ever persistent, Old K's argues that it preserved the
mismanagement aspect of the implied-covenant claim in two ways.
It first points to five paragraphs in the complaint as proof that
it properly raised the claim. Here are some snippets from the
paragraphs Old K's highlights:
 "Gordon Brothers had no intent to act quickly to restore
inventory."
 "Gordon Brothers used its control of New K's as a vehicle to
unload unwanted and unsold inventory."
 "Gordon Brothers refused the Edlridges' request to transfer
diamonds from one department to the other."
- 33 -
 "Gordon Brothers used . . . a false cover story to announce
the liquidation sale in October, 2006 . . . after representing
that it intended to operate the business rather than
liquidate . . . ."
 "Gordon Brothers breached the contractual covenant of good
faith and fair dealing implied [in] the LLC Agreement."
Old K's then points to what its lawyer said at the argument on
Gordon's first partial motion for summary judgment. "You say that
[defendants] did not use their discretion properly to effect a
liquidation," the judge said, speaking to counsel for Old K's —
"[t]hat is really what it comes down to, right?" And counsel
responded (and this is the money quote, as far as Old K's is
concerned):
That is one thing, and [defendants] also made a series
of operational decisions that were also not in good
faith, the failure to purchase the inventory, which we
have discussed, overpricing 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 . . . . There are operational issues as
well as the decision to liquidate.
"No intent to waive or any failure to raise can be gleaned from"
what its lawyer said at the argument on Gordon's partial summary-
judgment motion, at least that is what Old K's says.
Color us unconvinced. For one thing, the problem still
remains that Old K's did not raise the mismanagement facet of its
- 34 -
breach-of-the-implied-covenant claim in its opposition paper —
which is a no-no given Iverson. For another thing, counsel
discussed mismanagement at the motion hearing in the context of
suggesting that Gordon "operat[ed]" New K's in such a way as to
"guarantee[]" liquidation would follow — a comment that speaks to
a breach-of-the-implied-covenant claim based on an unjustified
liquidation (i.e., the original and ultimately rejected claim),
not a claim based on mismanagement of the furniture and jewelry
departments. And finally, even supposing that the spotlighted
paragraphs and comments touch on the mismanagement of the furniture
and jewelry departments in some general way, Old K's still cannot
prevail because "a party is not at liberty to articulate specific
arguments for the first time on appeal simply because the general
issue was before the district court." United States v. Slade, 980
F.2d 27, 31 (1st Cir. 1992).
As an "[a]lternative[]" argument, Old K's contends that
the judge "should have exercised [his] discretion to consider the
argument on the merits . . . , there was no impediment to do so,
rather than refuse to do so under waiver." True, "extraordinary
circumstances occasionally may justify an exception to the raise-
or-waive rule" — note the words "extraordinary circumstances,"
"occasionally," and "may." See Farm Credit Bank of Balt. v.
Ferrera–Goitia, 316 F.3d 62, 68 n.6 (1st Cir. 2003); see also Lang
- 35 -
v. Wal-Mart Stores E., L.P., 813 F.3d 447, 455 (1st Cir. 2016)
(discussing some exceptions). But Old K's makes no effort to fit
its case within any exception. So we need not dwell on this
argument any further. See Tutor Perini Corp. v. Banc of Am. Sec.
LLC, 842 F.3d 71, 84-85 (1st Cir. 2016).
Finding no error with the judge's handling of the
implied-covenant claim, we trudge on.
Breach of Contract
Old K's contests the grant of summary judgment to
defendants on its breach-of-contract claim premised on the
allegation that they (a) denied Old K's its share of the "$13.9
million" in "missing inventory" and (b) miscalculated the
liquidating distribution. On the missing-inventory front, the
judge excluded the damages theory — which Old K's first revealed
in the joint-status report, well after the close of discovery — as
a sanction under Civil Rule 37(c). And on the liquidating-
distribution front, the judge concluded that the evidence
established the correctness of the distribution amount. We examine
each issue in turn.
(a)
Missing-Inventory Issue
Taking up the missing-inventory issue first, we note
that Old K's candidly (and commendably) "concedes" that it violated
its "obligation to supplement its discovery" one time by not
- 36 -
disclosing the relevant "damages theory with all calculations"
until the filing of the joint-status report — a filing that
occurred months and months after discovery had closed. Civil Rule
37(c) provides that "[i]f a party fails to provide
information . . . as required . . . the party is not allowed to
use that information . . . 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)(1) (emphasis
added). As the party facing sanctions, Old K's had the burden of
proving substantial justification or harmlessness to get a penalty
less severe than evidence preclusion. See, e.g., Wilson v.
Bradlees of New Eng., Inc., 250 F.3d 10, 21 (1st Cir. 2001). The
briefs of Old K's in this court talk a lot about substantial
justification and harmlessness. But as the district judge found
— and Old K's does not dispute — Old K's "d[id] not claim
substantial justification or harmlessness," even though defendants
argued "that the missing inventory claim should be dismissed from
the case due to [the] failure to disclose it as a money damage
claim" and even though Old K's had the "burden to show that [Civil]
Rule 37(c) preclusion does not apply."10 This is significant
10
Taking a belt-and-suspenders approach, the judge added that
"even if [Old K's] had attempted to do so, the attempt would have
been unsuccessful."
- 37 -
because, as we said, arguments not seasonably advanced below
"cannot be raised for the first time on appeal." Bos.
Redevelopment Auth. v. Nat'l Park Serv., 838 F.3d 42, 50 (1st Cir.
2016). And Old K's gives us no sound reason to think that any of
the "narrowly configured and sparingly dispensed" exceptions to
the raise-or-waive rule apply. See Daigle v. Me. Med. Ctr., Inc.,
14 F.3d 684, 688 (1st Cir. 1994). So we need say no more about
the missing-inventory issue. See id.; see also Tutor Perini Corp.,
842 F.3d at 84-85.
(b)
Liquidating-Distribution Issue
We need not say much about the charge that defendants
miscalculated the liquidating distribution. Here is why. Old K's
helpfully concedes that the fate of this aspect of its damages
model turns on whether "this court permits the claim of inventory
and furniture mismanagement to go forward." Those claims are dead
- 38 -
on arrival. Which means that is that for the liquidating-
distribution issue.
Bottom Line
Though vigorously pursued, none of the attacks on the
summary-judgment rulings succeeds.11 So we shift to the sanctions
ruling.
SANCTIONS ISSUES
As we said a few pages ago, the judge sanctioned Old K's
under Civil Rule 11 for pressing ahead with a cross-motion for
summary judgment. Regarding the judge's analysis, it is enough
for us to say the following:
1. Among the judge's reasons for thinking that the
mismanagement-of-the-furniture-department piece of the
implied-covenant claim failed was his belief that Old K's
"provide[d] no basis for the conclusion that any
mismanagement" on Gordon's part "was motivated by a culpable
mental state."12 And as support for his "culpable mental
11
Given our above conclusions, we need not referee the
parties' disputes over other summary-judgment-based issues, like
whether or how the LLC Agreement's integration clause affects the
fraudulent-inducement claim, or whether the request for benefit-
of-the-bargain damages is too speculative.
12
For anyone wondering, the judge did bring up how he had
earlier deemed waived any claim that defendants had breached the
implied covenant by mismanaging the furniture department — a
decision he had made because Old K's "had not raised mismanagement
as an independent ground to maintain" the breach-of-the-implied-
- 39 -
state" point, the judge cited Amirsaleh v. Board of Trade of
City of New York, Inc., No. 2822-CC, 2009 WL 3756700, at *5
(Del. Ch. Nov. 9, 2009).
2. The judge also said that even if he had not excluded "the
damages calculation" under Civil Rule 37(c), the missing-
inventory part of the breach-of-contract claim would still
fail because an affidavit submitted by defendants' expert —
the "Parent affidavit" — stated that the rival expert hired
by Old K's had used the wrong data in coming up with the
missing-inventory thesis. The judge added that the "failure"
of counsel for Old K's "to acknowledge a genuine dispute of
material fact in the face of my . . . warning . . .
represent[ed] conduct descending to the level of a violation
of [Civil Rule] 11(b)." And the judge criticized Old K's for
citing no "case law that establishes that [its] evidence is
superior to [d]efendants' evidence as a matter of law."
3. Finally, as for the liquidating-distribution piece of the
breach-of-contract claim, the judge ruled that while Old K's
"counsel were no doubt frustrated by confusing financial
covenant claim "in its opposition" to defendants' first summary-
judgment motion. But the judge said in his sanctions decision
that he did "not consider whether this alone is a basis for
sanctions because [p]laintiff's argument in favor of summary
judgment" on the mismanagement issue was "legally unreasonable."
- 40 -
documents and insufficient documentary explanation[,] . . .
lack of clarity is a reason to ask more questions during
discovery" — "not a reason to move for summary judgment."
For easy reference, we label these (unimaginatively) as "ruling
#1," "ruling #2," and "ruling #3."
The parties battle hard over the correctness of the
judge's sanctions decision, unsurprisingly. And we will get to
their arguments in a minute, right after a very brief word about
the standard of review.
Standard of Review
We review the judge's Civil-Rule-11-sanctions order for
abuse of discretion, a deferential standard. See, e.g., Protective
Life Ins. Co. v. Dignity Viatical Settlement Partners, L.P., 171
F.3d 52, 56, 57 (1st Cir. 1999). An abuse of discretion occurs
when a judge makes "a mistake of law" or "a clearly erroneous
finding of fact." Young v. City of Providence ex rel. Napolitano,
404 F.3d 33, 38 (1st Cir. 2005); see also Obert v. Republic W.
Ins. Co., 398 F.3d 138, 143 (1st Cir. 2005). Because sanctions of
this sort can chill counsel's creativity and devastate their
professional reputations, we cannot emphasize enough that the
abuse-of-discretion standard hardly means that we must affirm
every discretionary decision that comes our way — review under
this rubric still involves review, to state the obvious (because
- 41 -
sometimes it's helpful to state the obvious), and deference should
not be confused with total capitulation. See Protective Life Ins.
Co., 171 F.3d at 56; Dopp v. Pritzker, 38 F.3d 1239, 1253 (1st
Cir. 1994).
Analysis
(a)
Parties' Basic Positions
Old K's starts by arguing that because defendants had
asked for sanctions against its counsel, the imposition of
sanctions against Old K's itself violated "due process." As for
its other arguments, this is all that need be said: On the
mismanagement issue — ruling #1 — Old K's believes that the judge
stumbled because (to quote its brief, which cites to Nemec) proving
a breach of "[t]he implied duty to exercise discretion in
accordance with the reasonable expectation of the parties is
breached only by the violation of the reasonable expectation of
the parties" — a culpable state of mind "is not required." On the
missing-inventory issue — ruling #2 — Old K's contends that the
judge slipped because it reasonably believed that the Parent
"affidavit lacked foundation" and "was impeached" by other
evidence. And on the liquidating-distribution issue — ruling #3
— Old K's asserts that the judge erred because "[t]he LLC Agreement
required" that defendants hand over the financial papers, sans
"discovery or deposition questions." Also, writes Old K's,
- 42 -
defendants had to — but did not — produce the needed papers in
response to discovery requests: if documents "are not . . .
provided, the resulting discrepancy with the contract and
discovery obligations allows summary judgment as a remedy." Adding
this all together, Old K's proclaims that its summary-judgment
motion was legally tenable and thus not sanctionable.
Conceding that they directed their sanctions motion
"solely" at counsel for Old K's, defendants respond that at most
we should reverse and remand so that the judge can modify the order
to run only against counsel for Old K's. But defendants then add
— in support of rulings #1, #2, and #3 — that the judge committed
no other errors. And that is so, the theory goes, because Old K's
and its lawyers "had been expressly warned" by the judge "that
they faced [Civil] Rule 11 sanctions if they filed a cross-motion
for summary judgment that was destined to fail" — and they went
ahead and filed one anyway, wasting everyone's time by penning a
motion peppered with disputed issues of material fact.
(b)
Legal Primer
Civil Rule 11 requires that a motion filer "certif[y]
that to the best of the [filer]'s knowledge, information, and
belief, formed after an inquiry reasonable under the
circumstances," the filing does not offend the rule's commands,
two of which are relevant here: the filing's "legal contentions"
- 43 -
must be "warranted by existing law or by a nonfrivolous argument
for extending, modifying, or reversing existing law or for
establishing new law," and the filing's "factual contentions" must
"have evidentiary support" or a "likely" prospect of it. See Fed.
R. Civ. P. 11(b)(2)-(3).13 Whether a filer breached these duties
"depends on the objective reasonableness of the [filer's] conduct
under the totality of the circumstances." See Navarro-Ayala v.
Nunez, 968 F.2d 1421, 1425 (1st Cir. 1992); accord CQ Int'l Co. v.
Rochem Int'l, Inc., USA, 659 F.3d 53, 62 (1st Cir. 2011). Though
13 The entire provision reads as follows:
(b) Representations to the Court. By presenting to the
court a pleading, written motion, or other paper —
whether by signing, filing, submitting, or later
advocating it — an attorney or unrepresented party
certifies that to the best of the person's knowledge,
information, and belief, formed after an 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, and 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
evidentiary support after a reasonable opportunity
for further investigation or discovery; and
(4) the denials of factual contentions are warranted
on the evidence or, if specifically so identified,
are reasonably based on belief or a lack of
information.
- 44 -
we hold filers "to standards of due diligence and objective
reasonableness," we do not require "perfect research or utter
prescience." Me. Audubon Soc'y v. Purslow, 907 F.2d 265, 268 (1st
Cir. 1990).
And make no mistake: Civil Rule 11 "is not a strict
liability provision" — a filer "must, at the very least, be
culpably careless" to get whacked with a sanctions order. See
Young, 404 F.3d at 39; see also Roger Edwards, LLC v. Fiddes & Son
Ltd., 437 F.3d 140, 142 (1st Cir. 2006). Also, because "what is
'existing law' or a 'nonfrivolous' argument for extension is
sometimes debatable," even a "poorly supported and sure to fail"
motion may not be sanctionable:
Counsel every day file motions that are hopeless, just
as they make hopeless objections in trials and hopeless
arguments to the judge. Perhaps a court could sanction
counsel under Rule 11 for many such hopeless motions,
but doing so routinely would tie courts and counsel in
knots.
Obert, 398 F.3d at 146 (emphasis omitted); accord Protective Life
Ins. Co., 171 F.3d at 58. So to get tagged with sanctions, it is
not enough that the filer's "claim lacked merit" — it must be "so
plainly unmeritorious as to warrant the imposition of sanctions."
Protective Life Ins. Co., 171 F.3d at 58 (emphasis added) (noting
that the simple "fact that a claim ultimately proves unavailing,
without more, cannot support the imposition of Rule 11 sanctions"
and adding that "[i]f every failed legal argument were
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sanctionable, sanctions would be the rule rather than the
exception").
(c)
Our Take
Having carefully considered the matter — and with great
respect for the differing view of the very able district judge,
who had to deal with this hotly-contested case for nearly a decade
— we must vacate the sanctions order and remand for further
proceedings (assuming defendants still want sanctions).
Our reasons are simple. For starters — and as both sides
agree — the judge erred when he ordered sanctions against Old K's
rather than against its attorneys. See Fed. R. Civ. P. 11(c)(5)(A)
(proclaiming that "[t]he court must not impose a monetary
sanction . . . against a represented party for violating Rule
11(b)(2)"). Turning next to ruling #1 — that the implied-covenant
claim failed because Old K's did not prove that defendants acted
with "a culpable mental state" — we conclude that the judge based
his decision on a misunderstanding of the relevant law. While
"[t]here are references in Delaware case law to the implied
covenant turning on the breaching party having a culpable mental
state," cases post-Amirsaleh recognize that "[t]he elements of an
implied covenant claim remain those of a breach of contract claim"
— "a specific implied contractual obligation, a breach of that
obligation by the defendant, and resulting damage to the plaintiff"
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— and that "[p]roving a breach of contract claim does not" (repeat,
does not) "depend on the breaching party's mental state." ASB
Allegiance Real Estate Fund v. Scion Breckenridge Managing Member,
LLC, 50 A.3d 434, 442, 444 (Del. Ch. 2012) (internal quotations
omitted), rev'd on other grounds, 68 A.3d 665 (Del. 2013).14 Old
K's actually made that very point in its opening brief, without
being contradicted by defendants in their brief. Anyhow, by using
the culpable-mental-state concept as a building block in his
sanction analysis, the judge committed an error of law, thus
abusing his discretion. See CQ Int'l Co., 659 F.3d at 59. And
because we cannot tell how this error on ruling #1 affected his
overall sanctions decision, we vacate the judge's sanctions order.
Assuming defendants still want Civil-Rule-11 sanctions, the judge
on remand will have the chance to exercise his discretion with an
improved understanding of Delaware law. And given our holding, we
have no need to reach the parties' arguments concerning ruling #2
and ruling #3 — they can take these matters up with the judge on
remand, if necessary. See generally Sharfarz v. Goguen (In re
14 For other cases saying the same thing, please check out
NAMA Holdings, LLC v. Related WMC LLC, C.A. No. 7934-VCL, 2014 WL
6436647, at *17 (Del. Ch. Nov. 17, 2014); Allen v. El Paso Pipeline
GP Co., C.A. No. 7520-VCL, 2014 WL 2819005, at *10 (Del. Ch. June
20, 2014); In re El Paso Pipeline Partners, L.P. Derivative Litig.,
C.A. No. 7141-VCL, 2014 WL 2768782, at *17 (Del. Ch. June 12,
2014).
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Goguen), 691 F.3d 62, 72 (1st Cir. 2012) (noting that "we have a
fair amount of elbow room 'to shape a remand in the interests of
justice'" (quoting United States v. Merric, 166 F.3d 406, 412 (1st
Cir. 1999))).15
15In its opening brief, Old K's makes a one-sentence argument
that we should remand to a different judge because "his
impartiality 'might reasonably be questioned,'" since he had hit
it with sanctions and had taken a long time to rule on the cross-
motions for summary judgment. See generally 28 U.S.C. § 455(a)
(declaring that "[a]ny justice, judge, or magistrate judge of the
United States shall disqualify himself in any proceeding in which
his impartiality might reasonably be questioned"). But
"reassignment to another judge on remand is for the rare and
exceptional case." Candelario Del Moral v. UBS Fin. Servs. Inc.,
699 F.3d 93, 106 (1st Cir. 2012). And having thought about the
matter, we do not think the situation here can be described as
"rare and exceptional." See id. (explaining that opinions that a
judge "form[s] in slogging through cases typically do not provide
'a sound basis either for required recusal or for directing that
a different judge be assigned on remand'" (quoting Hull v.
Municipality of San Juan, 356 F.3d 98, 104 (1st Cir. 2004))); see
also Liteky v. United States, 510 U.S. 540, 555 (1994) (noting
that judicial remarks "critical or disapproving of, or even hostile
to, counsel, the parties, or their cases, ordinarily do not support
a bias or partiality challenge"); Cohesive Techs., Inc. v. Waters
Corp., 543 F.3d 1351, 1374-75 (Fed. Cir. 2008) (applying First
Circuit law and holding that a six-year delay in issuing a ruling
— while "unreasonable and unacceptable" — did not justify remand
to a different judge, because nothing suggested that the judge
"would have substantial difficulty putting his previously
expressed views or findings out of his mind" and because
"reassignment would necessarily entail a great deal of waste and
duplication of effort"). Put bluntly, because we see no indication
that the judge "cannot reapproach the case with an open mind," Old
K's "cannot get the remedy it seeks." Candelario Del Moral, 699
F.3d at 107.
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CONCLUSION
Having slogged through case's twists and turns and
picked through the parties' inventory of issues, we affirm the
grants of summary judgment to defendants but vacate the decision
to impose sanctions under Civil Rule 11 and remand for proceedings
consistent with this opinion (again, that's assuming defendants
still want sanctions).
No costs to either side on this appeal.
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