Eldridge v. Gordon Brothers Group, LLC

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.
- 2 -
 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).
- 3 -
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.
- 8 -
 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
- 9 -
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

- 10 -
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.
- 16 -
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)."
- 17 -
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.
- 18 -
"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.
- 20 -
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.
- 22 -
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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