United States Court of Appeals
For the First Circuit
No. 05-2323
ITV DIRECT, INC.; DIRECT FULFILLMENT, LLC,
Plaintiffs, Appellants.
__________
CAPPSEALS, INC.,
Intervenor-Plaintiff, Appellee,
v.
HEALTHY SOLUTIONS, LLC, A California Limited Liability Corp.,
d/b/a Direct Business Concepts; HEALTH SOLUTIONS, INC., A
California Corp.; ALEJANDRO GUERRERO, individually and as a
Member of Healthy Solutions, LLC, and as Officer and Director of
Health Solutions, Inc., MICHAEL HOWELL, individually and as a
Member of Healthy Solutions, LLC, and as Officer and Director of
Health Solutions, Inc.; GREG GEREMESZ, individually and as a
Member of Healthy Solutions, LLC, and as Officer and Director of
Health Solutions, Inc.; DOES 1-10, INCLUSIVE,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Boudin, Chief Judge,
Torruella and Lipez, Circuit Judges.
Christopher F. Robertson with whom Peter S. Brooks, Susan W.
Gelwick and Seyfarth Shaw LLP were on brief for appellants.
Daniel J. Kelly with whom Scott A Silverman, Peter Antonelli
and Gadsby Hannah LLP were on brief for intervenor-plaintiff,
appellee.
April 17, 2006
BOUDIN, Chief Judge. This case grows out of contractual
arrangements and transactions involving three different companies:
plaintiff-appellant ITV Direct, Inc. ("ITV")--essentially a
promoter-distributer; Healthy Solutions, LLC ("Healthy Solutions"),
defendant in the district court but not a party to this appeal,
which created a food supplement called Supreme Greens; and
Cappseals, Inc., intervenor-appellee, which undertook to
manufacture Supreme Greens for Healthy Solutions to sell to ITV.
ITV and Healthy Solutions entered into a distribution
agreement in April 2003. The agreement provided that ITV would
market the product primarily through television infomercials, and
that Alex Guerrero, developer of Supreme Greens and associated with
Healthy Solutions--and purportedly a doctor of some kind--would
participate and appear in the infomercials. The agreement provided
inter alia:
During the term of this Agreement, [ITV] shall
issue purchase orders to [Healthy Solutions]
for the Products, which purchase orders shall
state: "This purchase order is placed under
the terms and conditions of the Distributor
Agreement between [ITV] and [Healthy
Solutions], dated March __, 2003."
In the event, purchase orders placed by ITV did not
include this stipulated language. The purchase order at issue in
this case--for a quantity of Supreme Greens for which ITV has not
yet paid Healthy Solutions and Healthy Solutions has not yet paid
Cappseals--contained price, quantity, and delivery terms, and was
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a "standing" order for a weekly shipment of Supreme Greens,
"subject to change or cancellation upon 30 day written notice."
Thereafter, ITV learned of an investigation by the Food
and Drug Administration ("FDA") and the Federal Trade Commission
("FTC") concerning unsupported health claims made about Supreme
Greens by Guerrero--claims found in the product packaging and
labeling and repeated in the infomercials. In February 2004, ITV
suspended all future product shipments, stopped payment on its most
recent check, and told Healthy Solutions that it would not pay any
of the outstanding invoices until future notice.
At that time, ITV owed Healthy Solutions $931,680.91 (now
at least $1,086,672.80 with interest) for the Supreme Greens
already shipped and received. Healthy Solutions was apparently
unable to pay Cappseals without the payments from ITV, and owed
Cappseals $890,183.09 (now at least $1,041,684.49 with interest).
In March 2004, ITV followed up by suing Healthy Solutions and
Guerrero, as well as other Healthy Solutions executives, named and
unnamed, in federal district court based on diversity of
citizenship. 28 U.S.C. § 1332 (2000).
ITV eventually sought to recover against Healthy
Solutions for, among other things, breach of contract, fraud, and
violations of the Massachusetts consumer protection act, Mass. Gen.
Laws ch. 93A (2002). Healthy Solutions counterclaimed against ITV
for, among other things, breach of contract, unfair competition,
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and account stated. Cappseals, still unpaid, was granted leave to
intervene and asserted its own claims for breach of contract
against both Healthy Solutions and ITV, and sought to reach and
apply any judgment Healthy Solutions obtained against ITV under
Mass. Gen. Laws ch. 214 § 3(6) (2002).1
When Cappseals moved to intervene in this action, it also
moved for a preliminary injunction against Healthy Solutions, which
the district court granted on April 14, 2004, preventing Healthy
Solutions from "selling, compromising, transferring, assigning, or
otherwise disposing of . . . its interest in any and all monies due
or to become due to [Healthy Solutions] from ITV Direct."
Cappseals' concern, apparently now a reality, was that Healthy
Solutions would be judgment-proof and its most valuable asset would
be its own claims against ITV.
In May 2004, the FTC filed a separate action in the same
district court against ITV and Healthy Solutions seeking injunctive
relief and restitution for false claims made in the infomercials.
The FTC entered into a permanent injunction and stipulated final
order with Healthy Solutions; the case is apparently still ongoing
1
"Reach and apply" is a statutory remedy under Massachusetts
law typically used to prevent the transfer of intangible assets in
the hands of the debtor through an injunction ("reach"), and to use
those assets to satisfy a debt owed to the plaintiff that has not
yet been reduced to a judgment ("apply"). 6 Smith & Zobel,
Massachusetts Practice § 4.1.6 (1974); In re Borofsky, 138 B.R.
345, 347 (Bankr. D. Mass. 1992).
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as to ITV, against whom the FTC has obtained a preliminary
injunction.
In June 2004, Cappseals moved for partial summary
judgment, which the district court denied. Discovery closed on
February 1, 2005. In March 2005, Healthy Solutions (although
seemingly unable to pay) offered to consent to judgment in
Cappseals' favor for the entire amount owed and to have the
preliminary reach and apply injunction made permanent; the district
court entered the permanent injunction on April 1, 2005. The
consent to judgment was later reduced to a judgment in Cappseals'
favor in the amount of $890,182.09 (plus interest).
At virtually the same time, and unknown to Cappseals, ITV
and Healthy Solutions privately agreed to dismiss their claims
against each other and filed a joint motion requesting the district
court approve their stipulation of dismissal. The district court
granted the motion but then immediately withdrew approval on
learning that Cappseals--its reach and apply injunction against
Healthy Solutions still in place--had not consented to Healthy
Solutions' release of its own claims against ITV.
In July 2005, on Cappseals' motion, the district court
granted summary judgment against Healthy Solutions in Cappseals'
favor for the latter's unpaid-for deliveries of Supreme Greens.
Separately, the court granted summary judgment first against ITV
for failing to pay Healthy Solutions for the same goods and then
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against ITV in favor of Cappseals on the latter's reach and apply
claim. Thus, ITV became obligated to pay directly to Cappseals
most of what ITV owed to Healthy Solutions in order to satisfy
Cappseals' own judgment against Healthy Solutions.
In granting summary judgment, the district judge refused
to allow ITV to set off against its debt to Healthy Solutions
whatever might be owed to ITV by Healthy Solutions; this left still
pending the claim by ITV for Healthy Solutions' alleged breach of
the distribution agreement. The court also accelerated the
finality of the July 2005 judgments, certifying them under Fed. R.
Civ. P. 54(b). ITV appealed, and ITV and Healthy Solutions also
entered a stipulated dismissal, with prejudice, under Fed. R. Civ.
P. 41(a), of their remaining respective claims against each other.
On this appeal, ITV argues that the district court
should have allowed the original motion of ITV and Healthy
Solutions to dismiss their respective claims against each other.
ITV also says that the district court should not have granted
summary judgment in Cappseals' favor on the reach and apply claim
against ITV. Finally, ITV contends that the district court further
erred in certifying the July 2005 judgments as final under Fed. R.
Civ. P. 54(b).
In response, Cappseals defends the district court on the
merits and also urges that the case is moot and the appeal should
be dismissed; it says that ITV voluntarily released its claims
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against Healthy Solutions, so its alleged right to setoff is lost
anyway. The release does complicate ITV's position, but (as we
will see), were ITV right on the merits, the possibility of some
relief would exist as to certain aspects of its appeal, so the
appeal as a whole is not moot.
ITV's first claim is that the district court erred in
refusing to dismiss the case in April 2005 as between ITV and
Healthy Solutions based on their first voluntary dismissal under
Rule 41(a)(2). If this were error, the error might undermine the
subsequent July 2005 judgment entered by the district court for
Healthy Solutions and against ITV, which in turn underpins the
reach and apply judgment against ITV. So the possibility of
affording relief to ITV would remain.
However, the district court's refusal to allow the
voluntary dismissal was not error. An answer having been filed and
all parties not having consented, Rule 41(a)(1) (which allows
voluntary dismissal without approval of the court) did not apply
and ITV and Healthy Solutions could only move to dismiss under Rule
41(a)(2), which requires the court's approval. Ordinarily, a
refusal to dismiss in such a case would be reviewed for abuse of
discretion. Doe v. Urohealth Sys., Inc., 216 F.3d 157, 160 (1st
Cir. 2000).
ITV says that the court has to allow a plaintiff to
dismiss its claim if it agrees to do so with prejudice, the theory
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being that the plaintiff should not be forced to go on if the
adversary is fully protected. Smoot v. Fox, 340 F.2d 301, 302-03
(6th Cir. 1964); Shepard v. Egan, 767 F. Supp. 1158, 1165 (D. Mass.
1990). We might share this view if no other interests were
involved, but, as other cases make clear, a third-party
intervenor's interests should also be considered.2
In this case, Cappseals had already become a party and
asserted its own reach and apply claim against ITV, which would
clearly have been prejudiced by a dismissal releasing the predicate
claim of Healthy Solutions against ITV. Further, the discharge of
that claim was specifically forbidden by the injunction that
Cappseals had secured against Healthy Solutions in this very
action, forbidding it to compromise its claims against ITV without
court permission.
To allow the motion would, effectively, have given ITV
priority over Cappseals as to one of Healthy Solutions' few assets,
namely, Healthy Solutions' claim against ITV for payment for goods
sold and delivered. Whatever ITV might have said in favor of such
a priority, the district court was not obliged to let ITV obtain it
through self-help prior to an adjudication. In denying the motion
2
County of Santa Fe v. Pub. Serv. Co. of N.M., 311 F.3d 1031,
1049 (10th Cir. 2002); Wheeler v. Am. Home Prods. Corp., 582 F.2d
891, 896 (5th Cir. 1977); see also 8 Moore's Federal Practice §
41.40[3] (3d ed. 2005).
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for a stipulated dismissal of claims between ITV and Healthy
Solutions, the district court did not abuse its discretion.
ITV next contests the district court's entry of summary
judgment holding it liable to Healthy Solutions and allowing
Cappseals to reach and apply that judgment in its own favor.
Unsurprisingly, ITV denies that it had any net liability to Healthy
Solutions, citing a provision of the Massachusetts Uniform
Commercial Code which states that a buyer "may deduct all or any
part of the damages resulting from any breach of the contract from
any part of the price still due under the same contract." Mass.
Gen. Laws ch. 106 § 2-717 (2002) (emphasis added).
Although the parties refer to this as a setoff provision,
the statute appears closer to what is often called recoupment.
Broadly speaking, recoupment allows the reduction by defendant of
an amount otherwise due the plaintiff based on defendant's own
claim against plaintiff, whether liquidated or unliquidated,
growing out of the same contract; setoff allows the reduction for
cross debts due to unrelated transactions, but the debt used as the
setoff must be liquidated or easily ascertainable in amount. See
Black's Law Dictionary 1302, 1404 (8th ed. 2004).3
3
This is perhaps the most common distinction, but the two
terms are not always used with precision, practice varies from
place to place and time to time, and the doctrines have been much
affected by statutes. James & Hazard, Civil Procedure § 9.9 (3d
ed. 1985); Loyd, The Development of Set-Off, 64 U. Pa. L. Rev. 541
(1916).
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Anyway, in invoking section 2-717, ITV's theory is that
its own claims against Healthy Solutions grew out of breaches by
the latter of the distribution agreement between the two parties;
that the (unliquidated) amount Healthy Solutions owed in damages to
ITV was far larger than the unpaid account for goods sold and
delivered; and that there was no net amount due in Healthy
Solutions' favor for Cappseals to reach and apply to satisfy its
own claim against Healthy Solutions. Our review as to the
correctness of summary judgment is de novo. Carmona v. Toledo, 215
F.3d 124, 131 (1st Cir. 2000).
The difficulty for ITV is that its most pertinent claims
against Healthy Solutions arose under the distribution agreement,
while Healthy Solutions' claim against ITV arose out of ITV's
purchase order for the goods in question. Under governing
Massachusetts precedent, the two are not "the same contract" for
purposes of section 2-717. Travenol Labs., Inc. v. Zotal, Ltd.,
474 N.E.2d 1070 (Mass. 1985), dealing with similar contractual
arrangements (distribution contract versus purchase order), so
holds. Id. at 1073.
Travenol is controlling law in Massachusetts. See also
ECHO, Inc. v. Whitson Co., 52 F.3d 702, 705-08 (7th Cir. 1995). To
the extent that dicta in an earlier decision by us looked favorably
upon a more liberal approach, Gutor Int'l AG v. Raymond Packer Co.,
493 F.2d 938, 943 (1st Cir. 1974), our supposition is superceded by
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Travenol. Similarly, it does not matter whether other
jurisdictions might be more liberal in their policy as to
recoupment or setoff. E.g. RPJ Sportswear, Inc. v. Xylo Tex, Ltd.,
681 F. Supp. 225, 228-29 (S.D.N.Y. 1988).
ITV seeks in a footnote to distinguish Travenol by saying
that it did not involve purchase orders that were "expressly
incorporated" into the distribution agreement or an affirmative
defense of fraud in the inducement. But the purchase orders in
this case did not in fact incorporate language merging them into
the distribution agreement, and, as for an "affirmative defense of
fraud," that is not a claim for "damages resulting from any breach
of the [same] contract" which section 2-717 allows as a deduction.
To modern ears, the distinctions between recoupment,
setoff and modern statutory variations are hoary and largely
arbitrary. Much that underlay the distinctions (such as the
division between law and equity) is no longer of much concern and
does not correspond well to the kind of functional distinctions
(e.g., the proper priority among competing creditors) that are of
more modern interest. But section 2-717 builds on the historical
distinctions and we are bound by Massachusetts law.
ITV also invokes a different provision of the
Massachusetts UCC, section 2-721, Mass. Gen. Laws ch. 106 § 2-721,
but this is of no help to it. The provision simply provides that
"[r]emedies for material misrepresentation or fraud include all
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remedies available under this Article for nonfraudulent breach."
Id. But the netting-out remedy of section 2-717 is not available
for non-fraudulent breach of contract unless the contract is the
same--and here it is not.
The most interesting question is presented by ITV's final
claim: that the district court erred by entering judgment under
Rule 54(b) on Cappseals' reach and apply claim and the underlying
predicate claim by Healthy Solutions against ITV. This made the
judgment effective, as well as appealable, in advance of the
adjudication of ITV's own claims against Healthy Solutions. In
practical effect, it gave Cappseals priority over ITV as to a
valuable asset of the apparently depleted target company.
Normally, we review decisions to grant or deny 54(b)
certifications under an abuse of discretion standard. Curtiss-
Wright Corp. v. Gen. Elec. Co., 446 U.S. 1, 10 (1980). Curtiss-
Wright said that Rule 54(b) could be used even if a transactionally
related counterclaim was waiting in the wings and might, if
adjudicated simultaneously, offset some or all of the damages
awarded on the actual earlier judgment. Id. at 11-13. We have so
acknowledged. Pahlavi v. Palandjian, 744 F.2d 902, 904-05 (1st
Cir. 1984).
Yet in Curtiss-Wright neither side was insolvent and, as
the Supreme Court showed, the equities arguably justified giving
Curtiss-Wright immediate judgment against GE and letting GE pursue
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its counterclaim later. 446 U.S. at 11-12. By contrast, once
Cappseals collects from ITV what ITV owes Healthy Solutions, that
asset of Healthy Solutions is gone and ITV, even if it established
its own claims against Healthy Solutions, would likely be left with
no way to collect.
In invoking Rule 54(b), the district court did not
address this concern, even though the objection was raised by ITV
in its opposition to summary judgment. An explanation for this
deficiency may be that the district court had earlier been told by
both Cappseals and ITV that if Cappseals prevailed on its reach and
apply claim, ITV and Healthy Solutions would proceed with the
earlier thwarted dismissal of their claims against each other. In
fact, this is just what happened.
Although we are not certain that we would uphold the
54(b) certification if it now made any difference, the outcome
would be the same whether we affirmed the district court or
remanded and set aside the 54(b) certification to await the outcome
of ITV's claims against Healthy Solutions. The reason is obvious:
ITV has now surrendered its remaining claims against Healthy
Solutions and has nothing with which to counter Cappseals' reach
and apply judgment.
ITV was not compelled to dismiss its claims against
Healthy Solutions simply because the district court ruled against
it on the 54(b) certification. See Fed. R. Civ. P. 62(h). It was
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perfectly free to preserve those claims, argue on appeal (as it
has) that the 54(b) certification was error, and upon remand pursue
its remaining claims against Healthy Solutions. If it prevailed,
ITV could then have argued that its claims should take priority
over Cappseals' reach and apply claim.
We have no clear notion as to how such a conflict in
priority would be resolved. On the one hand, there does seem to be
an impulse to go beyond strict setoff doctrine in certain
instances, see F.D.I.C. v. Mademoiselle of Cal., 379 F.2d 660, 664
(9th Cir. 1967); on the other, there is some indication that courts
treat a reach and apply claim, properly filed, as creating an
equitable lien, see In re Borofsky, 138 B.R. 345, 347-48 (Bankr. D.
Mass. 1992). No one has briefed the priority issue, and we do not
have reason to resolve it.
It is enough that ITV gave up its opportunity to argue
for priority by dismissing its claims against Healthy Solutions.
No doctrine comes to mind which would allow ITV to undo or escape
the consequences of its own dismissal, made with the full knowledge
that ITV could instead have pursued its appeal here while
preserving its potential claims against Healthy Solutions. Nor has
ITV made any such argument.
Affirmed.
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