B. Fernandez & Hnos, Inc. v. Kellogg USA, Inc.

United States Court of Appeals
For the First Circuit

Nos. 07-1317, 07-1318

B. FERNÁNDEZ & HNOS, INC.; CARIBBEAN WAREHOUSE LOGISTICS, INC.,
Plaintiffs-Appellants/Cross-Appellants,

v.

KELLOGG USA, INC.; KELLOGG CARIBBEAN SERVICES COMPANY, INC.,
Defendants-Appellees/Cross-Appellants.

ABC INSURANCE; XYZ SURETY COMPANY;
PREFERRED INSURANCE; JOHN DOE; RICHARD ROE,

Defendants.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO

[Hon. Jaime Pieras, Jr., Senior U.S. District Judge]

Before

Torruella and Howard, Circuit Judges,

and Smith,* District Judge.

Gael Mahony, with whom Holland & Knight LLP, Alfredo Fernández
Martinez and Delgado & Fernández, LLP were on brief, for
appellants.
Ricardo F. Casellas, with whom Casellas Alcover & Burgos,
P.S.C. was on brief, for appellees.

February 14, 2008

*
Of the District of Rhode Island, sitting by designation.
 HOWARD, Circuit Judge. Before us are an appeal and

cross-appeal arising from an action brought by B. Fernández &

Hnos., Inc. ("BFH") and Caribbean Warehouse Logistics ("CWL")

against Kellogg USA, Inc. ("Kellogg USA") in the United States

District Court for the District of Puerto Rico. Jurisdiction was

based on diversity of citizenship. The district court dismissed

the case, finding that Kellogg Caribbean Services, Inc. ("Kellogg

Caribbean"), a non-party entitled to intervene in the matter, was

an indispensable party to the action under Federal Rule of Civil

Procedure 19 whose joinder would destroy complete diversity.

In the appeal, plaintiff BFH challenges the district

court's indispensability determination. BFH argues that the court

erroneously denied two motions that would have rendered Kellogg

Caribbean dispensable to its action against Kellogg USA. In the

cross-appeal, Kellogg USA and Kellogg Caribbean protest the court's

decision, upon dismissal of BFH's action, to deny them costs and

attorneys' fees.

We conclude that, even had the court granted BFH's

motions, consideration of the Rule 19 factors guiding the

indispensability analysis continue to support the dismissal.

Additionally, we find no error in the district court's denial of

costs and fees. Thus, we affirm the district court's judgment.

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 I. Background

We have previously discussed in detail the relevant

background facts of this case. See B. Fernández & Hnos., Inc. v.

Kellogg USA, Inc., 440 F.3d 541 (1st Cir. 2006) ("Kellogg I"). We

provide a similar rehearsal here, gleaned from the record as it

stands.

This dispute involves four players: Kellogg USA, a

Michigan company that manufactures cereal products in the United

States. Kellogg Caribbean, a Puerto Rico company that promotes,

sells and distributes Kellogg products in Puerto Rico;1 BFH, a

Puerto Rico company that distributes Kellogg products in Puerto

Rico; and CWL, a Puerto Rico company and affiliate of BFH that

provides logistical and warehousing services.

For a number of years, BFH was Kellogg Company's

exclusive agent in Puerto Rico. BFH purchased certain Kellogg

brand cereal products for resale to customers in Puerto Rico,

acting pursuant to written distribution agreements with various

Kellogg entities. BFH also developed and implemented marketing

plans for Kellogg products in Puerto Rico.

In 1992, BFH's relationship with the Kellogg family of

companies began to change. In that year, BFH signed a non-

exclusive, written distribution agreement with Kellogg USA ("the

1
Kellogg USA and Kellogg Caribbean are affiliates of each other
and subsidiaries of non-party Kellogg Company.

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1992 agreement"). The 1992 agreement would serve as the last

written distribution agreement between BFH and a Kellogg entity.

Further, Kellogg Caribbean was incorporated in 1993 and took over

BFH's duties of developing and implementing marketing plans for

Kellogg cereal products in Puerto Rico. Sometime after Kellogg

Caribbean's incorporation, Kellogg USA assigned its rights and

obligations under the 1992 agreement to Kellogg Caribbean.

During and after these developments, BFH continued to

purchase Kellogg products for resale in Puerto Rico. In 1996, BFH

established a distribution center to house its inventory of Kellogg

products and, at Kellogg Caribbean's urging, created an affiliate

company, CWL, to provide logistic and warehousing services at the

center.

In October 2004, Kellogg Caribbean and BFH signed an

Inventory Repurchase agreement ("the 2004 agreement") under which

Kellogg Caribbean purchased BFH's inventory of Kellogg products.

A purpose of this agreement was to allow Kellogg Caribbean to

consolidate its warehouse and administrative functions into one

facility. The 2004 agreement also notified BFH that Kellogg

Caribbean had been assigned Kellogg USA's interest in the 1992

agreement and provided that the 2004 agreement and "the activities

it contemplates do not extinguish, supersede, or terminate the

[1992 agreement], which, except as expressly modified by this [2004

agreement], continues in full force and effect." The 1992

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agreement, however, contained terms indicating that it expired in

December of 1992.

After purchasing BFH's inventory of Kellogg products,

Kellogg Caribbean hired CWL to manage Kellogg Caribbean's warehouse

operation. There was no written contract for these services.

In November of 2004, Kellogg Caribbean informed BFH that

it was exercising a provision in the 1992 agreement entitling

Kellogg Caribbean to sell Kellogg's "Cereal in a Cup" and "Fruit

Snacks" products directly to Puerto Rico retailers. BFH would

remain the distributor of other Kellogg products.

BFH, contending that Kellogg Caribbean's decision

violated its exclusive right to distribute Kellogg products in

Puerto Rico, sued Kellogg USA in the United States District Court

for the District of Puerto Rico. Jurisdiction was premised on

diversity of citizenship. Specifically, BFH claimed that Kellogg

USA, by permitting "it or its affiliates" to sell "Cereal in a Cup"

and "Fruit Snacks" directly to retailers, had violated Puerto Rico

Law 75 (P.R. Laws Ann. tit. 10 § 278), a statute prohibiting a

principal from terminating a distribution agreement with a dealer

without just cause. BFH claimed that its exclusive right to

distribute Kellogg products derived from an unwritten, longstanding

exclusive distribution agreement with Kellogg USA.

While the action was pending, Kellogg Caribbean notified

CWL that it was ending their warehouse services agreement. As a

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result of this decision, BFH moved to join CWL as a plaintiff and

to amend its complaint to add a count alleging that Kellogg USA

"and/or its affiliates" violated Law 75 by terminating the

warehouse services agreement. The district court granted the

motions. The plaintiffs sought declaratory and injunctive relief,

as well as damages.

After BFH and CWL secured a temporary restraining order

requiring CWL's reinstatement at the distribution center, Kellogg

Caribbean moved "to intervene and dismiss for lack of an

indispensable party." The district court denied Kellogg

Caribbean's motion to intervene and, after an evidentiary hearing,

entered a preliminary injunction requiring Kellogg USA "and/or its

affiliates" to specifically perform the agreements with BFH and CWL

pending trial. Kellogg Caribbean appealed from the denial of its

motion to intervene, and Kellogg USA and Kellogg Caribbean filed an

interlocutory appeal from the entry of the preliminary injunction.

In that appeal we concluded that Kellogg Caribbean met

the requirements for intervention. Kellogg I, 440 F.3d at 547.2

We noted, however, that intervention was not feasible because it

2
The district court had denied intervention after concluding that
Kellogg Caribbean's interests were sufficiently represented by
Kellogg USA. We disagreed noting, among other things, that "The
potential for this litigation to have a greater adverse impact on
Kellogg Caribbean is a sufficient basis for concluding that Kellogg
USA may not serve as an adequate proxy." Id. (citing Nat. Union
Fire Ins. Co. v. Rite Aid of S. Carolina, Inc., 210 F.3d 246, 251
(4th Cir. 2000)).

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would destroy the district court's diversity jurisdiction (Kellogg

Caribbean, like BFH and CWL, is a Puerto Rico company). Id.

Accordingly, we vacated the preliminary injunction and remanded to

the district court with instructions to determine whether Kellogg

Caribbean was indispensable to BFH's action against Kellogg USA.

If Kellogg Caribbean was indispensable, then the action could not

proceed in federal court. Fed. R. Civ. P. 19(b); see id. We

observed that Kellogg Caribbean would be considered indispensable

if BFH and CWL continued to seek injunctive relief requiring

Kellogg Caribbean to perform under certain agreements. Kellogg I,

440 F.3d at 548.

On remand, BFH sought both to remove CWL as a party and

to file an amended complaint. Taking its cue from our opinion in

Kellogg I, BFH's proposed amended complaint excluded all claims

relating to CWL and requested only money damages against Kellogg

USA rather than injunctive relief.

The district court denied both BFH's motion to drop CWL

and the motion to amend the complaint. The court concluded that

Kellogg Caribbean was indispensable to BFH's action against Kellogg

USA and consequently dismissed BFH's action without prejudice. Sua

sponte, the court also denied Kellogg USA and Kellogg Caribbean

costs and attorneys' fees.

II. Discussion

Both sides appeal. BFH challenges the district court's

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dismissal of the action, arguing that the court erroneously

concluded that Kellogg Caribbean was indispensable to BFH's action

against Kellogg USA. In their cross-appeal Kellogg USA and Kellogg

Caribbean assert error in the district court's decision to deny

them costs and attorneys' fees.

A. Indispensability

We determined in Kellogg I that Kellogg Caribbean could

not intervene in BFH's action against Kellogg USA because its

intervention would destroy diversity jurisdiction. Kellogg I, 440

F.3d at 548. Further, it was clear to us that Kellogg Caribbean

was an indispensable party insofar as the requested injunctive

relief applied to it. Id. Now, BFH attempts to modify the action

so as to render Kellogg Carribean dispensable. The critical

question in this round, then, is "whether in equity and good

conscience" the action may proceed in Kellogg Caribbean's absence.

Fed. R. Civ. P. 19(b). If we conclude that it cannot, the action

must be dismissed and Kellogg Caribbean labeled an "indispensable"

party. See 4 Moore's Federal Practice § 19.05(1)(a) (3d ed. 2000)

(noting that on dismissal of a case for non-joinder of the absentee

under Rule 19(b) the absentee is then retroactively labeled

"indispensable").

Federal Rule of Civil Procedure 19(b) specifies four

factors to guide the indispensability inquiry. These include:

(1) To what extent a judgment rendered in the
person's absence might be prejudicial to the

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 person or those already parties; (2) the
extent to which, by protective provisions in
the judgment, by the shaping of relief, or
other measures, the prejudice can be lessened
or avoided; (3) whether a judgment rendered in
the person's absence will be adequate; (4)
whether the plaintiff will have an adequate
remedy if the action is dismissed for
nonjoinder.

Fed. R. Civ. P. 19(b). The Second Circuit has observed that no set

weight is afforded to any of the factors, Associated Dry Goods

Corp. v. Towers Fin. Corp., 920 F.2d 1121, 1124 (2d Cir. 1990).

Moreover, the specified factors do not constitute an exhaustive

canvass, and a court may take into account other considerations in

determining whether or not to proceed without the absentee as long

as they are relevant to the question of whether to proceed in

"equity and good conscience." In re Cambridge Biotech Corp., 186

F.3d 1356, 1369 (Fed. Cir. 1999) (citation omitted); Fed. R. Civ.

P. 19, advisory committee note ("The factors . . . are not intended

to exclude other considerations which may be applicable in

particular situations."). In the end, the indispensability

analysis involves "the balancing of competing interests" and "must

be steeped in pragmatic considerations." In re Olympic Mills

Corp., 477 F.3d 1, 9 (1st Cir. 2007) (citing Travelers Indem. Co.

v. Dingwell, 884 F.2d 629, 635 (1st Cir. 1989)).

The foundation of BFH's argument is its claim that the

district court erroneously denied its motions to drop CWL as a

party and to amend the complaint. As a result, the court analyzed

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the indispensability issue as if CWL were still a party to the

action and as framed by the first amended complaint.3 Had BFH's

motion been granted, the argument continues, Kellogg Caribbean

would be dispensable because the motions served to eliminate any

prejudice Kellogg Caribbean might suffer as a result of BFH's

action against Kellogg USA proceeding in Kellogg Caribbean's

absence.

We need not determine whether the district court

erroneously denied BFH's motions to amend because, even had the

court granted the motions, Kellogg Caribbean would remain

indispensable to the action.4 There are two reasons for this

conclusion.

3
BFH appears to concede that with CWL as co-plaintiff, and under
its first amended complaint which requested injunctive relief,
Kellogg Caribbean is an indispensable party. As noted, we stated
as much in Kellogg I. See Kellogg I, 440 F.3d at 548.
4
We have no hesitation in proceeding to answer the
indispensability question. Although a district court is generally
in the preferred position to make an indispensability
determination, and should normally be given the first opportunity
to analyze the question, we have noted that some situations favor
us deciding the joinder issue on appeal. See Olympic Mills Corp.,
477 F.3d at 9 (citing Takeda v. Nw. Nat'l Life. Ins. Co., 765 F.2d
815, 818 n.2 (9th Cir. 1985) ("Although in some cases it might be
desirable to remand to allow a district court to determine whether
a non-diverse party is indispensable, we have the power to decide
the joinder issue on appeal")). The record being clear and
complete, and because we have already remanded this matter once
before, for reasons of economy we proceed to analyze the question
ourselves on the basis of the proposed second amended complaint.

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 1.

First, all four 19(b) factors still militate in favor of

finding Kellogg Caribbean indispensable to BFH's action against

Kellogg USA. The first factor concerns the potential prejudice to

the absentee if the action goes forward. BFH appears to suggest

that dropping CWL as a party and removing claims relating to CWL

would eliminate a potential source of prejudice to Kellogg

Caribbean's interests because BFH's action against Kellogg USA will

not require any interpretation of CWL's warehouse services

agreement with Kellogg Caribbean.

But this course, at most, would only eliminate one

potential source of prejudice. If BFH secures a judgment against

Kellogg USA, the judgment could still harm Kellogg Caribbean's

interest in an entirely different agreement -- its 2004 agreement

with BFH. The judgment would effectively stand for the proposition

that BFH and Kellogg USA have an exclusive, unwritten distribution

agreement. Although the judgment may not have collateral estoppel

effect against Kellogg Caribbean as a non-party, such a judgment

would serve as persuasive precedent that the 2004 agreement Kellogg

Caribbean reached with BFH is invalid to the extent that the 2004

agreement established that Kellogg USA assigned a non-exclusive,

written distribution agreement with BFH to Kellogg Caribbean. That

precedent could prejudice Kellogg Caribbean in future litigation

whether Kellogg Caribbean is attempting to enforce or defend the

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2004 agreement.5 See Acton Co. of Mass. v. Bachman Foods, Inc.,

668 F.2d 76, 78 (1st Cir. 1982) ("Even if . . . [the absent party]

would not be legally bound [by the prior ruling], an adverse ruling

would be a persuasive precedent in a subsequent proceeding, and

would weaken . . . [the absent party's] bargaining position for

settlement purposes"); NLRB v. Doug Neal Mgmt. Co., 620 F.2d 1133,

1139 (6th Cir. 1980) ("It is not necessary that an absent person

would be bound by the judgment in a technical sense. It is enough

that as a practical matter his rights will be affected.") (citation

omitted)).

Nonetheless, BFH points to 19(b)'s second factor and

argues that a court could shape relief in this case to minimize or

eliminate the prejudicial effect of proceeding without Kellogg

Caribbean. During our first examination of this case we did state

that on remand the district court could consider shaping relief in

such a manner so as to avoid prejudicing Kellogg Caribbean's

interests. Kellogg I, 440 F.3d at 548 (noting money damages may

5
BFH contends that this potential source of prejudice is a
chimera. It argues that Kellogg USA could not have assigned any
interest in the 1992 agreement because the agreement, according to
its terms, had expired in 1992. Its argument misses the point.
Kellogg Caribbean argues that the 2004 agreement explicitly
establishes that the 1992 agreement is still in operation. There
is language in the 2004 agreement that arguably supports this
contention. If BFH prevails in establishing that it has an
exclusive, unwritten distribution agreement with Kellogg USA,
however, the judgment would serve to substantially weaken Kellogg
Caribbean's argument regarding the validity of the 2004 agreement
and, thus, its ability to enforce or defend the agreement itself.

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prove an appropriate alternative). BFH argues that because its

proposed amended complaint seeks money damages rather than

injunctive relief, the possibility of prejudice to Kellogg

Caribbean is eliminated. It contends that money damages, unlike

injunctive relief, will not compel Kellogg USA to sell exclusively

to BFH and consequently, that Kellogg Caribbean in no way will be

forced to perform under BFH's agreement with Kellogg USA.

The argument is unconvincing. As an initial matter, it

is not at all clear that money damages could be awarded in this

case. In its proposed amended complaint, BFH states that Kellogg

USA has breached an exclusive, unwritten distribution agreement.

Unsurprisingly, BFH does not, however, suggest that this agreement

has any set expiration date. Moreover, although BFH suggested at

oral argument that it is willing to limit the damage request, it

also acknowledges that damages it has suffered as a result of

Kellogg USA's alleged breach are "not easily calculable . . . and

increase on a daily basis." Given the apparent recurring nature of

the alleged breach, and the admitted difficulty in quantifying

money damages, some form of injunctive relief may be necessary.

See 12 Corbin on Contracts § 1142 at 194 (interim ed. 2002) (noting

money damages may be inadequate and specific performance necessary

if, among other things, there is a recurring injury which requires

"multiple actions for damages" and there is "difficulty in

determining the amount of damages to be awarded for defendant's

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breach").

But even assuming an award of money damages could be

fashioned pursuant to a judgment in favor of BFH, as we have said

the judgment itself could still prejudice Kellogg Caribbean.

Although an award of money damages would not require Kellogg

Caribbean to perform under BFH's agreement with Kellogg USA, the

judgment itself would still serve as persuasive precedent that

Kellogg Caribbean's 2004 agreement with BFH, at least to the extent

that it extends the 1992 agreement, is invalid. The potential for

prejudice remains no matter how relief is sliced. See Picciotto v.

Cont'l Cas. Co., 2008 U.S. App. LEXIS 206, at *22 (1st Cir. January

7, 2008) (noting that "the prejudice to [the absentee] would result

from the potential outcome of the litigation itself, not the

specific terms of any judgment"); Schutten v. Shell Oil Co., 421

F.2d 869, 875 (5th Cir. 1970) ("[W]e are unable to envision a

decree which would effectively settle any controversy between the

appellants and the present defendant . . . without doing

substantial practical injury to the [absentee.]").

The third and fourth 19(b) factors also favor finding

Kellogg Caribbean indispensable. The third factor concerns

whether, if the action proceeds without the absentee, the judgment

rendered will be adequate. A judgment is "adequate" if it furthers

the public interest in "complete, consistent, and efficient"

resolution of controversies. See Provident Tradesmens Bank & Trust

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Co. v. Patterson, 390 U.S. 102, 111 (1968) (noting third factor

concerns "public stake in settling disputes by wholes, whenever

possible").

Here, proceeding without Kellogg Caribbean would not

further this public interest for two reasons. First, it would not

efficiently resolve the dispute in this case. As we have

emphasized, and as BFH acknowledges, the question of whether or not

BFH has an exclusive agreement with Kellogg USA depends in

significant part on the meaning and effect of the 2004 agreement

that BFH reached with Kellogg Caribbean. That is a question with

which Kellogg Caribbean's rights are inextricably bound. See

Envirotech v. Bethlehem Steel Corp., 729 F.2d 70, 75 (2d Cir. 1984)

(affirming district court's finding of indispensability where court

concluded absentee possessed rights that were "inextricably

intertwined" with issues bound to be raised in action against

defendant).

Second, proceeding without Kellogg Caribbean would

unnecessarily create the possibility of inconsistent judgments.

For example, BFH could secure a judgment against Kellogg USA after

proving that it has an exclusive, unwritten agreement with Kellogg

USA that Kellogg USA breached. We explained that such a judgment

could practically prejudice Kellogg Caribbean, but we have also

noted that the judgement may not have a collateral estoppel effect

against Kellogg Caribbean. Therefore, it remains possible that in

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a different action another court could conclude that BFH has a non-

exclusive, written agreement with Kellogg Caribbean by virtue of a

valid assignment of the 1992 agreement by Kellogg USA.

With respect to the fourth and final 19(b) factor, we do

not see why BFH will be without an adequate remedy if we uphold the

district court's dismissal of the action. We are aware of no

impediment, not of its own making, preventing BFH from pursuing its

asserted cause of action in the courts of the Commonwealth of

Puerto Rico. See Picciotto, 2008 U.S. App. LEXIS 206, at *22

(noting that court's indispensability finding would remain

unchanged even if party was barred from pursuing a remedy in an

alternative forum because bar resulted from party's litigation

strategy).

2.

Turning to the second reason, in Kellogg I we foresaw the

possibility that Kellogg Caribbean could be so central to this

dispute as to render it indispensable to any action concerning the

dispute. See Kellogg I, 440 F.3d at 548 (noting district court

"could decide that Kellogg Caribbean's involvement in the

underlying dispute is so extensive that it is indispensable to a

proper adjudication of the case and therefore dismiss the action

entirely"). The prediction has come to pass.

In H.D. Corp. of Puerto Rico v. Ford Motor Co., 791 F.2d

987 (1st Cir. 1986), we noted that one of the interests Rule 19(b)

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concerns is “the interest of the outsider whom it would have been

desirable to join.” Id. at 992 (citing Provident Tradesmans, 390

U.S. at 108). In H.D. Corp., the plaintiff had not sued an

affiliate, the defendant’s parent company. In analyzing the

interest of the absentee, we observed that the parent was alleged,

inter alia, to have been a signatory to agreements that were

central to the dispute, and as well to have wrongfully induced a

breach of a key agreement. In light of these observations, we said

that it would impractical to proceed without the absentee. So too,

here.

As was true of the absentee in H.D. Corp., Kellogg

Caribbean's alleged role here is apparent from the face of the

proposed second amended complaint. One count alleges with respect

to the October 2004 agreement that an "affiliate [of Kellogg USA]

used words and insidious machinations to induce BFH to execute the

October 15, 2004 [sic] purported amendment. Without such words and

insidious machinations BFH would not have executed the amendment."

Beyond this, even ignoring BFH's 2004 agreement with

Kellogg Caribbean entirely, a close reading of the proposed amended

complaint reveals that BFH identifies Kellogg Caribbean as playing

a significant role throughout the course of Kellogg USA's alleged

legal violations. The complaint contains over twenty references to

an unnamed affiliate that carried out the actions which BFH

contends constituted a violation of Law 75. The unnamed affiliate

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is Kellogg Caribbean. For example, the proposed complaint states

that on November 1, 2004 Kellogg Company and Kellogg USA "acting

through their affiliate notified BFH in writing that . . . the

affiliate would begin selling directly to customers." It is

uncontested that Kellogg Caribbean was the entity that notified BFH

in writing that it would begin selling Kellogg's "Cereal in a Cup"

and Kellogg's "Fruit Snacks" direct to customers via its own sales

force.

Given that Kellogg Caribbean was a central player -–

perhaps even the primary actor –- in the alleged breach, the

practical course here, as it was in H.D. Corp., is to proceed in a

forum where the absentee may be joined. See Freeman v. Northwest

Acceptance Corp., 754 F.2d 553, 559 (5th Cir. 1985) (finding

absentee indispensable where absentee "'becomes more than a key

witness whose testimony would be of inestimable value [and]

[i]nstead emerges as an active participant'" in alleged legal

violation) (quoting Hass v. Jefferson Nat'l Bank, 442 F.2d 394, 398

(5th Cir. 1971)); Circle Indus., Div. of Nastasi-White, Inc. v.

City Fed. Sav. Bank, 749 F. Supp. 447, 456 (E.D.N.Y. 1999) (finding

absentee indispensable where plaintiff's claims of fraud were

grounded on actions taken by absentee party).

In sum, considering especially the potential prejudice to

Kellogg Caribbean if the federal action proceeds in its absence and

the centrality of Kellogg Caribbean's alleged role in the dispute,

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the interests weigh decidedly toward finding Kellogg Caribbean

indispensable. Consequently, we affirm the district court's

dismissal of the action.6

B. Costs and attorneys' fees

In their cross-appeal, Kellogg USA and Kellogg Caribbean

contend that the district court's sua sponte denial of costs and

attorneys' fees without explanation constituted an abuse of

discretion. We note that it appears neither party had the

opportunity to file a bill of costs or a motion for attorneys'

fees.

As to the denial of costs, the contention is that,

because the court dismissed BFH's action against Kellogg USA, the

Kellogg entities are prevailing parties and are presumptively

entitled to recover their costs of suit under Federal Rule of Civil

Procedure 54(d). The Kellogg entities identify two grounds in

support of their request for attorneys' fees. First, they assert

that when a party prevails under Law 75 a court may grant that

party attorneys' fees. Second, they claim that BFH made baseless

6
Although the district court properly dismissed this action
without prejudice, we may quibble with the manner in which it did
so. The court appeared to add Kellogg Caribbean to the action and
then dismiss the action, on the ground that it no longer possessed
subject matter jurisdiction over the case. More likely, Kellogg
Caribbean should not have been joined in the first place precisely
because joining Kellogg Caribbean as a party would destroy subject
matter jurisdiction. See 7C Charles Alan Wright, Arthur R. Miller
& Mary Kay Kane, Federal Practice & Procedure § 1917, at 477-78 (2d
ed. 1986). Thus, the the action should have been dismissed for
non-joinder of Kellogg Caribbean pursuant to Rule 19(b).

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factual allegations in its pleadings. As a result, attorneys' fees

are warranted under 28 U.S.C. § 1927, which permits a court to

grant fees as a sanction for abusive litigation tactics.

We review the denial of both costs and attorneys' fees

for abuse of discretion. See Janeiro v. Urological Surgery Prof'l

Ass'n, 457 F.3d 130, 143 (1st Cir. 2006). There is a background

presumption favoring cost recovery for prevailing parties. In Re

Two Appeals Arising Out of the San Juan Dupont Plaza Hotel Fire

Litig., 994 F.2d 956, 963 (1st Cir. 1993). When denying costs, a

district court must offer an explanation for doing so unless the

basis for denying costs is "readily apparent on the face of the

record." Id. (concluding district court abused its discretion in

denying costs without explanation where basis for denial was not

apparent from the record); see also Templeman v. Chris Craft Corp.,

770 F.2d 245, 249 (1st Cir. 1985) (reversing district court's

denial of costs to prevailing party where court failed to give

valid explanation for denial and record supported an award of

costs).

Assuming that Kellogg USA and Kellogg Caribbean can be

considered prevailing parties within the ambit of cost recovery

doctrine, the district court's unexplained decision to deny costs

does not constitute an abuse of discretion because the reason for

its denial is readily apparent from the record. This case, like

many other cases calling for an indispensability determination

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under Rule 19(b), presented a close question that required

considered balancing. As such, the record supports the district

court's determination that each side should bear its own costs.

See San Juan Dupont Plaza Hotel Fire Litig., 994 F.2d at 963

(citing White & White, Inc. v. Am. Hosp. Supply Corp., 786 F.2d

728, 730 (6th Cir. 1986) (noting where case proves "close and

difficult" district court's denial of costs may be appropriate

exercise of discretion)).

As to attorneys' fees, Kellogg USA and Kellogg Caribbean

do not explain in their opening brief why they should be entitled

to fees, but rather make the argument in their reply brief.

Accordingly, the argument is waived. Willis v. Brown University,

184 F.3d 20, 27 (1st Cir. 1999). In any event, the district court

did not abuse its discretion in denying attorneys' fees.

Attorneys' fees are recoverable in diversity cases where a state

law provides the right to recover such fees. See McLane, Graf,

Raulerson & Middleton, P.A. v. Rechberger, 280 F.3d 26, 42 (1st

Cir. 2002) (quoting Alyeska Pipeline Serv. Co. v. The Wilderness

Soc'y, 421 U.S. 240, 260 n.31 (1974)). But to the extent that

Kellogg USA and Kellogg Caribbean prevailed, they did so under Rule

19(b) and not under Law 75. Therefore, the section of Law 75,

(P.R. Laws Ann. tit. 10 § 278e), which purportedly entitles a

prevailing party to recover attorneys' fees, is simply not

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operable.7 Additionally, we find no merit in Kellogg USA and

Kellogg Caribbean's charge that BFH engaged in abusive litigation

tactics that would warrant a fee award under 28 U.S.C. § 1927.

AFFIRMED

7
We additionally note that an award of attorneys' fees under Law
75 is within the district court's discretion. P.R. Laws Ann. Tit.
10 § 278e.

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