United States Court of Appeals
For the First Circuit
Nos. 01-2513, 01-2521
KPS & ASSOCIATES, INC.,
Plaintiff, Appellee,
v.
DESIGNS BY FMC, INC.,
Defendant, Appellant.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Lynch, Circuit Judge,
Bownes, Senior Circuit Judge,
and Lipez, Circuit Judge.
Nathan Lewin, with whom Alyza D. Lewin and Lewin & Lewin, LLP
were on brief, for appellant.
Karen D. Hurvitz, with whom Theresa A. O'Loughlin was on
brief, for appellee.
January 28, 2003
LIPEZ, Circuit Judge. This acrimonious dispute between
defendant-appellant Designs by FMC, Inc. ("Designs") and plaintiff-
appellee KPS & Associates, Inc. ("KPS") is a diversity breach of
contract action that comes to us following the entry of a default
judgment against Designs and a damages award of $367,154 plus
prejudgment interest. Designs challenges the entry of default and
the subsequent determination of damages, assigning error to several
rulings of the district court. These rulings include a denial of
Designs' motion to dismiss (arguing that the federal action should
be dismissed in favor of parallel state litigation) and a refusal
to set aside the entry of default. Designs also appeals the
district court's assessment of $5,000 in sanctions.1
For the reasons stated below, we affirm the district
court in all respects save one — the computation of the base
quantum of damages after the entry of default. In fixing that
amount, the district court erred in its application of Rule
55(b)(2) of the Federal Rules of Civil Procedure (dealing with the
determination of damages after an entry of default).
I.
A. The Relationship Between the Parties
Since these appeals come to us following the entry of a
default judgment, we derive the following factual background from
1
In these consolidated appeals, Designs challenges the entry
of default in No. 01-2513 and the award of sanctions in No. 01-
2521.
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the well-pleaded factual allegations contained in the complaint and
the attachments thereto. Where appropriate, however, we note the
factual contentions advanced by KPS and Designs on appeal, and we
further elaborate on the facts as necessary in our discussion of
the applicable law. See infra Section II.
KPS, an independent jewelry manufacturers' sales
representative, is a Florida corporation registered to do business
in Massachusetts, which is also its principal place of business.
Its "principal in charge" is Kenneth Sayles. As KPS's counsel put
it during the initial pretrial conference, KPS "is basically one
person, Kenneth P. Sayles." Designs is an importer, seller, and
distributor of silver jewelry to retail and department stores
throughout the United States. It is a New York corporation with
its principal place of business in Brooklyn. Its president and
sole shareholder is William Nussen.
In 1987 KPS and Designs entered into an oral agreement
whereby KPS agreed to secure new accounts for Designs. The parties
dispute whether this relationship was to be exclusive. The
complaint alleges that it was not, and that KPS was free to
represent other jewelry distributors. KPS goes on to allege in its
complaint that it secured new accounts for Designs with several
different retailers, and that each time it secured a new account,
Designs and KPS would agree on a commission schedule. Each month
Designs would send KPS a statement detailing items shipped to
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retailers, and then KPS would send Designs a statement detailing
the commissions due arising out of those orders. According to the
complaint, KPS became so successful in developing business for
Designs that Designs agreed to forward $17,500 to KPS each month on
account. This agreement was confirmed in a letter from Nussen to
Sayles dated June 23, 1995, and attached to the complaint as an
exhibit.
According to the complaint, Designs stopped sending
statements to KPS in November 1995. By the end of 1995, Designs
had fallen far behind in its payments to KPS — to the tune of
$146,016 — and Designs remained behind in its payments through
1996. The complaint goes on to allege that in December 1996
Designs issued a statement purporting to reflect the commissions
due KPS for 1996 sales. That printout failed to include
significant sales of KPS, and the printout used erroneously low
commission percentages.
At some point in 1997, KPS began representing Jasco,
Inc., another jewelry distributor. According to the complaint,
Jasco and Designs were not in direct competition since Jasco sold
a "more limited, and somewhat different, product." KPS made no
effort to conceal its relationship with Jasco. Upon learning of
KPS's representation of Jasco in July 1998, Nussen contacted
Sayles, demanding that KPS terminate its relationship with Jasco.
Sayles refused because, according to the complaint, exclusive
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representation had never been part of KPS's agreement with Designs.
Shortly thereafter, Nussen sent Sayles a letter terminating the
business relationship between Designs and KPS. The letter cited
"irreconcilable differences" as the basis for this termination and
indicated that KPS would be provided with a final accounting. The
letter unilaterally limited the payment of unpaid commissions on
future sales to those sales occurring within ninety days of the
date of the letter. According to the complaint, given the
purchasing timeline under which retailers operate, KPS was entitled
to commissions on sales that occurred after that ninety-day period
had expired. In any event, Designs never provided KPS with a final
accounting, nor did Designs pay KPS the commissions it was
claiming.
On April 27, 1999, KPS's counsel, Karen Hurvitz, sent a
demand letter to Nussen seeking $131,035.37 in unpaid commissions.
The demand letter indicated that KPS intended to proceed to
litigation if Designs failed to meet its obligations. Three days
later Nussen telephoned Hurvitz, leaving a message on her answering
machine that he had no intention of paying any commissions to KPS.
Approximately two weeks later Hurvitz received a call from David
Schrader who identified himself as counsel for Designs. At this
point there were some communications between Hurvitz and Schrader,
the nature and extent of which are in dispute. In any event,
Designs failed to pay the commissions as demanded.
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On September 13, 1999, Designs filed a lawsuit in New
York state court naming KPS and Sayles as defendants, and asserting
eleven different causes of action, including breach of contract,
fraud, breach of fiduciary duty, conversion, tortious interference,
and "prima facie tort." The complaint sought over $5,000,000 in
compensatory damages and $5,000,000 in punitive damages. The
unverified complaint, however, lacked pertinent dates, did not
detail KPS's alleged wrongdoings with any specificity, and did not
indicate how Designs had calculated its enormous damages. The
complaint also sought to enjoin KPS and Sayles from representing
"any other merchants" despite the fact that Nussen had terminated
Designs' relationship with KPS over a year earlier.
On September 22, 1999, Schrader faxed a copy of Designs'
yet-to-be-served complaint to Hurvitz, together with a cover letter
asking her to accept service on behalf of KPS and Sayles. In a
separate letter faxed at the same time, Schrader indicated to
Hurvitz that Designs would be willing to withdraw its suit if the
parties could agree to "sign general releases in favor of each
other releasing any claims they may have."
Two days later Hurvitz filed the instant lawsuit against
Designs on behalf of KPS in the United States District Court for
the District of Massachusetts. The complaint and its supporting
affidavits detailed sales accounts with six different retailers and
included copies of invoices from each of those retailers. The
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complaint and the affidavit listed specific commissions due based
on figures contained in those invoices. Although there are some
inconsistencies and computational errors in the numbers, there
appears to have been an attempt to draft the complaint and
affidavit with some degree of specificity — in contrast to Designs'
complaint filed in New York, which, as KPS describes it, was
replete with generalized "boilerplate." KPS's complaint sounded in
contract and quantum meruit, and also sought multiple damages
pursuant to Chapter 93A of the Massachusetts General Laws
(prohibiting "[u]nfair methods of competition and unfair or
deceptive acts or practices in the conduct of any trade or
commerce"). KPS's complaint also listed four local customers of
Designs as trustees and requested attachments against each of them
in the amount of $65,000. See Mass. Gen. Laws Ann. ch. 246, § 1
(West 2002).
B. Procedural History
Following the filing of the complaint in this case, the
litigation quickly bogged down in a messy motion practice. Both
parties and their attorneys accused each other of misconduct and
filed numerous motions for sanctions, to strike, to quash, to
compel, and to disqualify. We recount only that portion of this
sorry procedural history which is pertinent on appeal.
On October 19, 1999, an initial conference was held via
telephone among counsel and the district court. Schrader, counsel
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for Designs, had indicated to the court the day before that he did
not oppose the entry of an order authorizing the trustee process.
At the hearing, however, Schrader claimed that the district judge's
courtroom deputy had erroneously led him to believe that the
trustee process was "a question of getting authorization to serve
papers, as opposed to an ex parte or on-notice attachment
proceeding." He therefore asked for an extension of time in which
to respond to the request for trustee process. The district court
gave the parties until October 22 to file papers regarding the
trustee process.
On October 25, after that deadline had expired without a
filing by Schrader, he sought a further extension of time, citing
difficulty in obtaining local counsel as the reason for the delay.
The next day, Schrader faxed an affidavit from Nussen to the court,
in which Nussen indicated that the reason for the delay in
responding was the fact that "my daughter is being married tonight"
(original emphasis). The next day, in lieu of a formal motion,
Schrader faxed a "letter brief" to chambers in which he (a)
indicated once again his difficulty in obtaining local counsel, (b)
opposed the trustee process, and (c) argued that the court should
dismiss or stay the proceedings in light of the New York
litigation. On October 29, the district court, finding that KPS
had demonstrated a reasonable likelihood of success on the merits,
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issued an order allowing the trustee process and attaching the
trustees' accounts payable to Designs.
At some point in November, Designs obtained an ex parte
temporary restraining order in its New York lawsuit from a New York
state criminal court judge sitting in an emergency civil part. The
TRO restrained two of KPS's main customers from making payments to
KPS. When the TRO was subsequently vacated on December 17, the New
York court denied a further attempt by Designs to obtain an
attachment against KPS. According to KPS's New York counsel,
Schrader admitted to him and the New York court that the reason
Schrader had sought the restraining order was because "if Sayles
obtained an injunction in Boston, he wanted to obtain a similar one
in New York." Also, according to KPS's New York counsel, Designs
repeatedly failed to meet its discovery obligations in the New York
litigation and failed to diligently prosecute its case.
Back in the Massachusetts litigation, KPS filed a motion
on January 14, 2000, to compel Designs to retain local counsel.
KPS and Designs also filed additional papers with regard to
Designs' motion to dismiss. On February 3 the court granted KPS's
motion to compel Designs to retain local counsel, ordering Designs
to do so within seven days. Designs' local counsel, Brian Banks,
did not file his appearance until five days after the seven-day
deadline had passed. Banks, Schrader, and Hurvitz all appeared at
a status conference on February 17, 2000, at which time the
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district court announced that it would soon rule on Designs' motion
to dismiss. When it did, Designs would then have ten days in which
to file its answer to KPS's complaint. The next day, the district
court, without opinion, endorsed as "denied" Designs' motion to
dismiss.
Ten calendar days later, on March 1, 2000, Hurvitz
submitted to the court a request for an entry of default since
Designs had yet to file its answer.2 This request was served on
Designs' New York and local counsel. On March 10, 2000, the clerk
entered a notice of default against Designs pursuant to Rule 55(a)
of the Federal Rules of Civil Procedure. Copies of the notice were
served on all counsel. On March 17, 2000, KPS filed a request for
the entry of default judgment, which was likewise served on all
counsel.
On March 21, 2000, Schrader finally took action, faxing
a letter to the court in which he asserted that he had sent a
timely answer on March 1, 2000, by Federal Express. Shortly
thereafter, Designs filed a motion to set aside the default, and
the district court conducted a hearing on May 17, 2000. At the
close of the hearing, the district court ruled from the bench,
2
This request was premature. Under Rule 6(a) of the Federal
Rules of Civil Procedure, Designs had until March 3, 2000, to file
its answer since intervening Saturdays and Sundays would not have
been included in the computation of time. Designs, however, did
not attempt to file its answer until almost three weeks later,
rendering the question of the due date academic.
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denying Designs' motion to set aside the entry of default. The
court characterized Schrader's behavior over the course of the
litigation as "stonewalling" and explicitly disbelieved Schrader's
proffered explanation with regard to the filing of the answer. She
told Schrader: "We have had trouble with you from the very
beginning." She concluded: "And because I do not credit these
stories, because I do not find there to be good cause to remove the
default, the motion to remove the default is denied." One month
later, on June 14, Designs filed a motion for reconsideration —
styled as a motion pursuant to Rule 60(b). The court agreed to
reconsider its prior ruling and then once again denied the request
to set aside the entry of default.
Subsequently, on July 27, 2000, the court issued a brief
written order on damages which stated, in part:
No further hearing is necessary to ascertain
the compensatory damages claimed as the
verified complaint and plaintiff's affidavit
attached thereto set forth a sum certain based
on sales and commission figures there
detailed, Pope v. United States, 323 US 1, 12
(1944); Brockton Sav. Bank v. Peat, Marwick,
Mitchell & Co., 771 F.2d 5 (1st Cir. 1985),
and, a default having been entered, each of
plaintiff's allegations of fact are
established as a matter of law.
The district court then referred the matter to a magistrate judge
for the sole purpose of determining whether Designs should be held
liable for double or treble damages under Chapter 93A — i.e., to
determine whether Designs' unlawful conduct was "willful or
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knowing." The magistrate judge permitted no evidence on the base
quantum of damages, which the court had fixed as the "sum certain"
contained in the complaint and a supporting affidavit.
Following the hearing on 93A liability, the magistrate
judge issued a Report and Recommendation finding that Designs had
willfully and knowingly engaged in conduct prohibited by Chapter
93A and that KPS should be awarded double damages. Designs filed
its objections to the Report and Recommendation with the district
judge, who overruled those objections. Judgment was entered on
September 28, 2001, for $367,154 — twice the $183,577 recited in
the ad damnum clause of KPS's complaint — plus prejudgment
interest. On October 23, 2001, Designs filed a timely notice of
appeal.
In the days leading up to the Chapter 93A hearing,
Designs had served subpoenas duces tecum on KPS's "custodian of
records," KPS's "resident agent," KPS's bank, and Jasco. Copies
were not served on KPS's counsel, and KPS's counsel only learned of
them from the witnesses involved. KPS immediately moved to quash
the subpoenas and also moved for sanctions, arguing that voluminous
documents had been improperly sought and that they were irrelevant
to the determination of Designs' liability under Chapter 93A. The
motions were granted and the magistrate judge recommended a
sanction of $5,000. Designs lodged its objections with the
district judge, who overruled them on September 28, 2002. On
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October 25, 2002, Designs filed a timely notice of appeal with
regard to this imposition of sanctions.
II.
A. The Motion to Dismiss
Designs claims that the district court erred in denying
its motion to dismiss or stay the proceedings in light of the
ongoing New York litigation. The decision to dismiss or stay
proceedings in light of parallel litigation is "necessarily left to
the discretion of the district court in the first instance." Moses
H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 19 (1983).
The district court's decision may be reversed only for an abuse of
that discretion. Elmendorf Grafica, Inc. v. D.S. Am. (E.), Inc.,
48 F.3d 46, 50 (1st Cir. 1995). The exercise of that discretion,
however, is greatly constrained by what the Supreme Court has
labeled an "exceptional-circumstances test." Cone, 460 U.S. at 19
(citing Colo. River Water Conservation Dist. v. United States, 424
U.S. 800 (1976)); Elmendorf, 48 F.3d at 50. Pursuant to this test,
"[t]here must be some extraordinary circumstances for a federal
court to shrink from 'the virtually unflagging obligation of the
federal courts to exercise the jurisdiction given them.'" Currie
v. Group Ins. Comm'n, 290 F.3d 1, 10 (1st Cir. 2002) (quoting Colo.
River, 424 U.S. at 817).
Drawing on Colorado River and its progeny, courts look to
a variety of factors to determine whether "exceptional
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circumstances" exist which counsel the abdication of jurisdiction
in favor of parallel state court litigation. Always keeping in
mind the "heavy presumption favoring the exercise of jurisdiction,"
Villa Marina Yacht Sales, Inc. v. Hatteras Yachts, 915 F.2d 7, 13
(1st Cir. 1990), a court may consider: (1) whether either court
has assumed jurisdiction over a res; (2) the inconvenience of the
federal forum; (3) the desirability of avoiding piecemeal
litigation; (4) the order in which the forums obtained
jurisdiction; (5) whether state or federal law controls; (6) the
adequacy of the state forum to protect the parties' interests; (7)
the vexatious or contrived nature of the federal claim; and (8)
respect for the principles underlying removal jurisdiction. Burns
v. Watler, 931 F.2d 140, 146 (1st Cir. 1991). This list is by no
means exhaustive, nor is any one factor necessarily determinative.
Villa Marina, 915 F.2d at 12. Rather, "'a carefully considered
judgment taking into account both the obligation to exercise
jurisdiction and the combination of factors counseling against that
exercise is required.'" Id. (quoting Colo. River, 424 U.S. at
818–19).
Designs concedes that neither the first nor the second
factor (jurisdiction over a res or inconvenience of the federal
forum) weighs in favor of dismissal. We conclude that none of the
others do either.
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As for the concern about piecemeal litigation,
"[d]ismissal is not warranted simply because related issues
otherwise would be decided by different courts, or even because two
courts otherwise would be deciding the same issues." Id. at 16.
Rather, concerns about piecemeal litigation "should focus on the
implications and practical effects of litigating suits deriving
from the same transaction in two separate fora," Gonzales v. Cruz,
926 F.2d 1, 4 (1st Cir. 1991), and weigh in favor of dismissal only
if there is some "exceptional basis" for dismissing one action in
favor of the other. Burns,931 F.2d at 146; see, e.g., Colo. River,
424 U.S. at 819–20 (finding that "clear federal policy [against
piecemeal litigation] evinced in legislation" weighed in favor of
dismissal); Liberty Mut. Ins. Co. v. Foremost-McKesson, Inc., 751
F.2d 475, 477 (1st Cir. 1985) (finding exceptional circumstances
when there was "real possibility" that insurance policy might be
interpreted differently in each forum, leaving insured with
insufficient coverage after years of paying premiums). This case
does not involve any such exceptional circumstances or implicate
broad policy considerations. Rather, this dispute between a vendor
and its sales representative over sales commissions presents "a
straightforward application of state . . . laws," Burns, 931 F.2d
at 143, and is of primary importance only to the immediate parties.
It is true that the New York lawsuit commenced several
days before the instant case. However, the fourth factor relating
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to the order of the lawsuits "should not be measured exclusively by
which complaint was filed first, but rather in terms of how much
progress has been made in the two actions." Cone, 460 U.S. at 21;
Currie, 290 F.3d at 10. At the time the court heard Designs'
motion to dismiss, the New York litigation was proceeding
anemically, whereas KPS was prosecuting the instant case at an
appreciable pace. This factor therefore does not weigh in favor of
dismissal.
Designs notes correctly that no federal substantive law
is implicated in this dispute. However, the presence of state law
issues weighs in favor of dismissal in only rare circumstances —
namely, "when a case presents 'complex questions of state law that
would best be resolved by a state court.'" Villa Marina, 915 F.2d
at 15 (quoting Am. Bankers Ins. Co. v. First State Ins. Co., 891
F.2d 882, 886 (11th Cir. 1990)); see, e.g., Currie, 290 F.3d at 11
(staying federal proceeding when "state law question [was] not
clear" and court unsure "how the state ultimately would balance the
important policy interests"). Hence, this factor does not weigh in
favor of dismissal.
Designs insists that the instant litigation is "vexatious
and reactive," and "a contrived, defensive reaction" to the New
York lawsuit. We are unpersuaded. KPS sent a demand letter to
Designs for $131,035.37 in unpaid commissions four months prior to
the filing of the New York lawsuit by Designs. In that letter, KPS
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declared its intention to file suit should the demand not be met.
If anything, Designs' lawsuit against KPS for over $5,000,000 in
compensatory damages and $5,000,000 in punitive damages could be
viewed as a "contrived, defensive reaction" to KPS's demand letter.
Citing Villa Marina, Designs finally claims that the
district court's summary denial of the motion to dismiss without
opinion means that we must at least remand to the district court so
that the court can justify its denial on the record. We disagree.
This case concerns the denial of a motion to dismiss. In Villa
Marina, the district court had granted the motion to dismiss
without "balanc[ing] the factors in favor of dismissal against [the
court's] obligation to exercise jurisdiction even in the face of
duplication and judicial inefficiency." Villa Marina, 915 F.2d at
13. Given the heavy presumption in favor of exercising
jurisdiction and the lack of merit in Designs' arguments, the
district court was justified in summarily denying Designs' motion.
B. The Entry of Default
Designs argues that the district court erred in denying
its motion to set aside the entry of default. See Fed. R. Civ. P.
55(c). Designs also maintains that the default judgment should be
vacated under Rule 60(b). We will address these two contentions in
turn.
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1. The Rule 55(c) Motion
a. Legal Standards
Rule 55(c) provides that a court may set aside an entry
of default "for good cause shown." We review the district court's
denial of a Rule 55(c) motion for abuse of discretion, while we
review any factual findings underlying that decision for clear
error. Conetta v. Nat'l Hair Care Ctrs., Inc., 236 F.3d 67, 75
(1st Cir. 2001); Gen. Contracting & Trading Co. v. Interpole, Inc.,
899 F.2d 109, 112 (1st Cir. 1990). We will not disturb the
district court's decision unless it is "clearly wrong." Bond
Leather Co. v. Q.T. Shoe Mfg. Co., 764 F.2d 928, 938 (1st Cir.
1985).
Citing Coon v. Grenier, 867 F.2d 73 (1st Cir. 1989),
Designs argues that we must look to three factors in scrutinizing
the district court's ruling: (1) whether the default was willful;
(2) whether setting aside the default would have prejudiced KPS;
and (3) whether Designs has a meritorious defense. See id. at 76.
Since the district court did not comment in detail upon these three
considerations, Designs argues that the district court abused its
discretion.
The three factors cited by Designs are cited frequently
in the cases as elements of the "good cause" analysis under Rule
55(c). However, as we said in Coon, we would not "set forth any
precise formula [for the good cause analysis], because we recognize
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that each case must necessarily turn on its own unique
circumstances." Id. As another court has put it, the three
factors cited by Designs are not "talismanic," and we will consider
others. CJC Holdings, Inc. v. Wright & Lato, Inc., 979 F.2d 60, 64
(5th Cir. 1992). In McKinnon v. Kwong Wah Restaurant, 83 F.3d 498
(1st Cir. 1996), we identified no fewer than seven factors a
district court may consider:
(1) whether the default was willful; (2)
whether setting it aside would prejudice the
adversary; (3) whether a meritorious defense
is presented; (4) the nature of the
defendant's explanation for the default; (5)
the good faith of the parties; (6) the amount
of money involved; (7) the timing of the
motion [to set aside entry of default].
Id. at 503. Thus Rule 55(c), as an "express[ion of] the
traditional inherent equity power of the federal courts," 10A
Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d §
2692 (1998), permits the consideration of a panoply of "relevant
equitable factors." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96
(2d Cir. 1993). The "Rule 55(c) determinations are case-specific"
and "must, therefore, be made in a practical, commonsense manner,
without rigid adherence to, or undue reliance upon, a mechanical
formula." Gen. Contracting & Trading, 899 F.2d at 112. While the
three factors identified by Designs are certainly "important" and
"familiar," Conetta, 236 F.3d at 75, and a district court "should"
consider them, Coon, 867 F.2d at 76, the failure of a district
court to expressly consider them does not necessarily constitute an
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abuse of discretion. Likewise, the decision of the district court
to accord dispositive weight to one of the familiar factors or
other relevant equitable factors does not necessarily mean an abuse
of discretion.
This flexibility is necessitated by the competing
policies and values that underlie the concept of default. On the
one hand, it "provide[s] a useful remedy when a litigant is
confronted by an obstructionist adversary," and "play[s] a
constructive role in maintaining the orderly and efficient
administration of justice." Enron, 10 F.3d at 96. It furnishes an
invaluable incentive for parties to comply with court orders and
rules of procedure. See Fed. R. Civ. P. 37(b)(2)(C). It
encourages the expeditious resolution of litigation and promotes
finality. See Wright, Miller & Kane, supra, § 2693. On the other
hand, countervailing considerations include the goals of
"resol[ving] cases on the merits," Key Bank of Me. v. Tablecloth
Textile Co., 74 F.3d 349, 356 (1st Cir. 1996), and avoiding "harsh
or unfair result[s]." Enron, 10 F.3d at 96. Since "default
judgments implicate sharply conflicting policies . . . the trial
judge, who is usually the person most familiar with the
circumstances of the case and is in the best position to evaluate
the good faith and credibility of the parties, is entrusted with
the task of balancing these competing considerations." Eagle
Assocs. v. Bank of Montreal, 926 F.2d 1305, 1307 (2d Cir. 1991)
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(internal quotation marks omitted); see Bond Leather Co., 764 F.2d
at 938 (noting that "the district court, familiar with the parties
and circumstances, is best situated to weigh the reasons for and
against setting aside a default judgment" (internal quotation marks
omitted)).
b. The District Court's Findings
Eleven days after the clerk had entered the default
against Designs, Schrader faxed a letter to the court in which he
asserted that he had submitted a timely answer via Federal Express.
In that letter, Schrader stated that the answer had been sent by a
"temporary secretary" and that he had been told by Federal Express
that "the packages were likely rejected because the federal express
[sic] slip filled out was an International Air Waybill" (original
emphasis). Schrader indicated that he had been trying to get an
affidavit from the temporary secretary who had been working that
day. He also told the court that he would submit to the clerk that
same day a motion to vacate the default, along with an explanatory
affidavit. The motion and affidavit were not filed until one week
later.
In response, KPS filed an affidavit from its New York
counsel, Brian Schrader (no relation to David, Designs' counsel),
in which he asserted that Federal Express would not have destroyed
or lost the two packages sent to Boston. He stated that he had
tested David Schrader's explanation by sending a package to Hurvitz
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in Boston with an international airbill instead of a domestic one,
and that the package had arrived one day late. He also stated that
the name of the "temporary secretary" who had allegedly made the
error had not been produced by Designs, even in response to a
subpoena. Hurvitz also submitted an affidavit stating that she had
contacted Federal Express herself, and that Federal Express had
assured her that they never destroy or dispose of a package.
Rather, if a package has the wrong type of waybill, Federal Express
will either change the waybill itself or return the package to the
sender to make the change; at most, a delay of one day would be
incurred. Brian Schrader's affidavit also included several
representations concerning Designs' conduct in the New York
litigation. Designs had allegedly failed to comply with numerous
discovery demands and engaged in bad-faith dilatory tactics.
The district court held a hearing on May 17, 2000, on
Designs' motion to remove the default. The court heard from
Hurvitz and David Schrader. Although Schrader had informed the
court earlier that he would not be able to personally attend
because of a conflict, he nevertheless managed to appear. At the
hearing, Schrader argued that the default should be set aside
because (a) the default was not willful, (b) Designs had a
meritorious defense, and (c) KPS could not show any prejudice.
Schrader focused on the willfulness factor. Schrader also stuck to
his story concerning the temporary secretary. However, he provided
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no affidavit from any temporary secretary despite his prior
representation that he was attempting to obtain one. He now
claimed that there was no way he could determine who the temporary
secretary was because his firm had used "20 different secretaries
over the course of the last two months." Moreover, he represented
that, contrary to the affidavit filed by Brian Schrader, Designs
had been complying with its responsibilities in the New York
litigation and that the New York case was proceeding apace.
The district court was not impressed. First, commenting
on the procedural history to that point, the court characterized
Schrader's behavior as "stonewalling," and she admonished him in
open court: "We have had trouble with you from the beginning."
She noted his previous failures to meet deadlines and remarked on
his duplicitousness, referencing his earlier representation that he
could not attend the hearing and then his sudden appearance. She
noted inconsistencies and implausibilities in Schrader's
representations during the hearing about the late answer, and she
found other representations he had made in affidavits to be
incredible. The court explicitly disbelieved Schrader's story
concerning the temporary secretary while believing the affidavit of
the other attorney Schrader concerning Designs' intransigence in
the New York litigation. These findings led to the dispositive
ruling from the bench: "And because I do not credit these stories,
-23-
because I do not find there to be good cause to remove the default,
the motion to remove the default is denied."
c. Application of the Legal Standards
In making its ruling, the district court did not
expressly cite the three factors emphasized by Designs
(willfulness, a meritorious defense, and prejudice). We have
already concluded, however, that the lack of such an analysis does
not necessarily mean that the district court abused its discretion.
Indeed, we think that the district court's ruling was entirely
defensible.
By the time the district court denied Designs' motion to
set aside the default, it had become well acquainted with the
parties and circumstances in this case. It had conducted two
motion hearings and one pretrial conference. It had received
numerous written communications from counsel and had taken several
motions (with supporting materials) under advisement. Given the
district court's familiarity with the case, and on the record
developed in connection with the hearing, we cannot say that the
district court clearly erred in its assessment of Schrader's
credibility, nor did it clearly err in rejecting his proffered
explanation for the default.
The burden of demonstrating good cause for the removal of
a default rested with Designs. See Bond Leather, 764 F.2d at 938.
Thus, Designs had the burden to demonstrate a lack of willfulness.
-24-
When the district court rejected Schrader's explanation, Designs
was effectively left with no explanation for the default. Hence
Designs' argument that the default was not willful lacked any
factual predicate and was properly disregarded by the district
court. Cf. id. (finding that "district court was within its
rights" when it "expressly rejected [defendant's] proffered
explanation of its failure to answer").
At the default hearing, Schrader also argued that Designs
had a meritorious defense which weighed in favor of setting aside
the default. The district court, however, had once before taken a
dim view of Designs' asserted defenses when it granted KPS's
request to issue trustee process. Thus we take the district
court's comment on "stonewalling" to imply that it adhered to her
prior skepticism about the defenses, and that it felt that Designs
was merely trying to postpone the inevitable. Cf. Marziliano v.
Heckler, 728 F.2d 151, 156 (2d Cir. 1984) ("[W]e infer from the
court's emphasis on its duty to do justice to the litigants before
it that the court was unpersuaded as to the merits of the . . .
defense."). We cannot say that the court erred in its evaluation
of Designs' defense. All of the materials offered by Designs in
support of its defense were internally generated balance sheets,
reports, and the like. KPS, on the other hand, attached copies of
actual customer invoices and purchase orders to its complaint.
Moreover, over the course of this dispute, the amount Designs
-25-
claims it is due from KPS has varied wildly: at one time nothing
("a wash"), at another $6,000, at another $30,000, at another
$60,000, and finally over $74,000 (not including the $10 million
claimed in the New York lawsuit).
Schrader also argued before the district court that KPS
would suffer no prejudice if the default were to be set aside.
Schrader was correct on this point. In response, KPS directs us to
Chuang Investments v. Eagle Inns, Inc., 81 F.3d 13, 14 (1st Cir.
1996)(per curiam), for the proposition that prejudice is "inherent
in needless delays and postponements." Chuang, however, concerned
the dismissal of a plaintiff's case (and an entry of default on
counter-claims) for failure to comply with discovery orders. See
id. at 14 ("The grounds stated [in defendant's motion to dismiss]
were the repeated failures of the [plaintiffs] to respond to
discovery requests."). We have stated elsewhere that in the
context of a Rule 55(c) motion, delay in and of itself does not
constitute prejudice. "The issue is not mere delay, but rather its
accompanying dangers: loss of evidence, increased difficulties of
discovery, or an enhanced opportunity for fraud or collusion."
FDIC v. Francisco Inv. Corp., 873 F.2d 474, 479 (1st Cir. 1989).
There is no indication that any of these dangers were present or
considered by the district judge when she ruled on the Rule 55(c)
motion.
-26-
The district court, however, correctly gave significant
weight to two other factors — the nature of Designs' explanation
for the default, and the good faith of the parties. See McKinnon,
83 F.3d at 503. The district court determined that Schrader had
fabricated his explanation regarding the filing of an answer — a
finding that goes to the nature of the explanation as well as to
Designs' good faith. We have noted before that "courts have
inherent power to dismiss an action when a party has willfully
deceived the court and engaged in conduct utterly inconsistent with
the orderly administration of justice." Aoude v. Mobil Oil Corp.,
892 F.2d 1115, 1119 (1st Cir. 1989) (quoting Wyle v. R.J. Reynolds
Indus., 709 F.2d 585, 589 (9th Cir. 1983)); see also id. (quoting
Link v. Wabash R.R. Co., 370 U.S. 626, 630–31 (1962)) ("It is
apodictic that federal courts possess plenary authority 'to manage
their own affairs so as to achieve the orderly and expeditious
disposition of cases.'"). In light of these determinations of
fabrication and bad faith, and its consideration of other salient
factors, the district court did not abuse its discretion in
refusing to set aside the default.
2. Rule 60(b) Relief
On June 15, 2000, Designs filed "a motion pursuant to
FRCP 60(b) for reargument and reconsideration of [the district
court's] May 17, 2000 bench decision denying Designs' motion to
vacate the default entered against it." In support of this motion,
-27-
Designs argued the same points it had argued previously — a lack of
willfulness, a lack of prejudice, and a meritorious defense. On
July 26, the court endorsed the cover of Designs' Rule 60(b)
motion: "Motion for reconsideration allowed. Upon
reconsideration, the court affirms its decision denying the motion
to vacate default."
Designs' Rule 60(b) motion sought relief from the
district court's order denying its request to set aside the
default.3 Designs' appellate brief makes clear, however, that it
now seeks Rule 60(b) relief from judgment under a theory never
presented to the district court. Relying principally on Community
Dental Services v. Tani, 282 F.3d 1164, 1170 (9th Cir. 2002),
Designs argues that it is entitled to relief under Rule 60(b) on
the basis of "excusable neglect" or "extraordinary circumstances"
— namely, that its attorney Schrader was "grossly negligent in
fabricating a false explanation" and that it would be "grossly
inequitable to sanction the client" who was "victimized" by its
attorney. Thus, according to Designs, the district court "was
obliged to vacate the default judgment against FMC under Rule 60(b)
of the Federal Rules of Civil Procedure." We disagree.
3
A motion filed under Rule 60 permits a party to seek "Relief
From Judgment or Order." Fed. R. Civ. P. 60. Typically, a Rule
60(b) motion seeks relief from judgment. In this case, Designs'
Rule 60(b) motion sought relief from the court's order "denying
[Designs'] motion to vacate the default entered against it." The
motion could not (and did not) seek relief from judgment because
the court had yet to enter judgment.
-28-
In Tani, a trademark infringement case, Tani's lawyer had
repeatedly failed to file and serve a stipulation and answer,
despite representing to the court at an initial conference that he
had done so, and despite being ordered at a subsequent conference
to do so. When the plaintiff later moved for a default judgment
and injunction, Tani's lawyer failed to file a memorandum in
opposition, and the district court granted the plaintiff's motion.
All the while, Tani's lawyer had been assuring his client that he
was handling the litigation and that the case was going well. Tani
only learned of the default judgment entered against him when he
received a copy of it at his office. Tani then dismissed his
derelict attorney, retained new counsel, and filed a Rule 60(b)
motion for relief from judgment. The district court denied the
request, holding that a client is bound by the actions (or
inaction) of his attorney. On appeal, the Ninth Circuit vacated
the judgment, concluding that "conduct on the part of a client's
alleged representative that results in the client's receiving
practically no representation at all clearly constitutes gross
negligence, and vitiating [sic] the agency relationship that
underlies our general policy of attributing to the client the acts
of his attorney." Id. at 1171. According to the Tani court, since
the client was not at fault, the district court erred in imputing
the attorney's conduct to the client. See id. at 1172 ("It is
-29-
clear from the record that any culpable conduct was committed by
[Tani's laywer], not Tani.").
There are two serious flaws in Designs' reliance on the
Ninth Circuit's decision in Tani. First, in this circuit we have
consistently "turned a deaf ear to the plea that the sins of the
attorney should not be visited upon the client." Farm Constr.
Servs., Inc. v. Fudge, 831 F.2d 18, 21 (1st Cir. 1987). We need
not decide, however, whether to make an exception to this widely
accepted rule because of the second defect in Designs' argument:
"It is hornbook law that theories not raised squarely in the
district court cannot be surfaced for the first time on appeal."
Nat'l Amusements, Inc. v. Town of Dedham, 43 F.3d 731, 749 (1st
Cir. 1995).
The cases cited by Designs are not to the contrary. In
Tani the defendant dismissed his "grossly negligent" counsel, and
Tani's new counsel sought 60(b) relief in the first instance in the
district court. See Tani, 282 F.3d at 1167. In Carter v. Albert
Einstein Medical Center, 804 F.2d 805 (3d Cir. 1986), the plaintiff
discharged his attorney and, proceeding pro se, first sought Rule
60(b) relief in the district court under a "gross negligence"
theory prior to making the same argument on appeal. Id. at 806–07;
see also Boughner v. Sec'y of HEW, 572 F.2d 976, 977 (3d Cir. 1978)
(Rule 60(b) claim first raised in district court by new counsel).
The final case cited by Designs, Shepard Claims Service, Inc. v.
-30-
William Darrah & Associates, 796 F.2d 190 (6th Cir. 1986), is
altogether inapposite in that it concerns a Rule 55(c) motion to
set aside the entry of default (not a Rule 60(b) motion to set
aside a default judgment). The appellate courts subscribing to
Designs' "gross negligence" theory of relief have thus required the
claim to be raised first in the district court — properly so, in
our view, given "the superior opportunity for the trial judge to
assess the challenged conduct." Carter, 804 F.2d at 807. We
therefore reject Designs' claim for Rule 60(b) relief.
C. The Calculation of Damages
In its order of July 27, 2000, the district court
indicated that no hearing was necessary to determine the base
quantum of damages4 since "the verified complaint and plaintiff's
affidavit attached thereto set forth a sum certain based on sales
and commission figures there detailed." The order also referred
the matter to the magistrate judge for a hearing on Chapter 93A
liability. The order did not, however, identify the amount of this
"sum certain." The district court subsequently clarified the
amount of damages on September 28, 2001, when it overruled Designs'
objections to the magistrate judge's Report and Recommendation on
the doubling of damages under Chapter 93A: "Judgment may be
entered for plaintiff in double the amount of its damages of
4
By "base quantum" we mean the amount of compensatory damages
to which KPS was entitled prior to any doubling under Chapter 93A.
-31-
$183,577." The district court apparently arrived at this sum by
looking to the ad damnum clause of the complaint.
Designs argues two related points with respect to the
district court's calculation of damages. First, Designs argues
that KPS's claim was not for a "sum certain" and that the district
court erred in thereby fixing the base quantum of damages on the
basis of the complaint, without a hearing. Second, Designs argues
that the district court erred in limiting the scope of the hearing
before the magistrate judge to the issue of liability for multiple
damages under Chapter 93A.5 Designs maintains that it was entitled
to an evidentiary hearing to determine the base quantum of damages,
notwithstanding any admissions made as result of its default or the
amount claimed in the ad damnum clause.
The district court's order of July 27, 2000, as clarified
by its memorandum and order of September 28, 2001, was entered
pursuant to Rule 55(b), which provides in pertinent part:
If, in order to enable the court to enter
judgment or to carry it into effect, it is
necessary to take an account or to determine
the amount of damages or to establish the
truth of any averment by evidence or to make
an investigation of any other matter, the
court may conduct such hearings or order such
references as it deems necessary and proper
and shall accord a right of trial by jury to
5
Designs was not permitted to challenge the base quantum of
damages at the hearing before the magistrate judge. In accordance
with the July 27 order, the magistrate judge limited the scope of
that hearing to the issue of multiple damages under Chapter 93A.
See infra Part II(D).
-32-
the parties when and as required by any
statute of the United States.
Fed. R. Civ. P. 55(b)(2) (emphasis added). On the basis of its
conclusion that "the verified complaint and plaintiff's affidavit
attached thereto set forth a sum certain," the district court
determined that no evidentiary inquiry was necessary to calculate
the amount of damages to be set forth in the default judgment.6 We
review the district court's refusal to inquire further for abuse of
discretion. See HMG Prop. Investors, Inc. v. Parque Indus. Rio
Canas, Inc., 847 F.2d 908, 919 (1st Cir. 1988) ("We review a
determination that a hearing was not compulsory under Rule 55(b)
only for abuse of discretion.").
6
The district court's denomination of KPS's claim as a "sum
certain" uses a phrase found in subsection (b)(1), the only place
in Rule 55 where the term "sum certain" appears:
When the plaintiff's claim against a defendant is for a
sum certain or for a sum which can by computation be made
certain, the clerk upon request of the plaintiff and upon
affidavit of the amount due shall enter judgment for that
amount and costs against the defendant, if the defendant
has been defaulted for failure to appear and is not an
infant or incompetent person.
Fed. R. Civ. P. 55(b)(1). However, by its own terms, this
subsection only applies "if the defendant has been defaulted for
failure to appear." Id. By the time the default had been entered,
Designs had undeniably "appeared" in the action. See N.Y. Life
Ins. Co. v. Brown, 84 F.3d 137, 142 (5th Cir. 1996) (holding that
participation in telephone conference before magistrate judge
constitutes "appearance" for Rule 55 purposes). Thus subsection
(b)(1) is inapplicable in this case to the determination of damages
after the entry of default.
-33-
We conclude that the district court abused its discretion
in failing to conduct further inquiry before fixing the base
quantum of damages. There are two reasons why further inquiry was
required. First, there are obvious discrepancies between the
damages claimed in the body of the complaint and the damages
requested in the ad damnum clause, as well as serious arithmetical
errors in the affidavit filed with the complaint. Second, even
without these errors and discrepancies, there would still be a need
for further inquiry given the nature of KPS's claim.
According to the face of the complaint, KPS claims that
it is entitled to $67,238 in base commissions and $63,795 in "sales
price differentials," i.e., price mark-ups beyond cost. Adding
these two figures results in a total of $131,033. However, in the
enumerated counts and ad damnum clause, the complaint states that
KPS is entitled to judgment against Designs in the amount of
$183,577 — an unexplained difference of over $50,000. Likewise,
KPS's affidavit filed in support of its complaint contains several
computational errors. Signed by Sayles, the affidavit lists
accounts from six different retailers, with commissions calculated
at several different rates depending on the retailer. To take one
account as an example, KPS claims that the cost differential for
Gottschalk's department store was supposed to be calculated at
9.54% based on a sales volume of $196,684, for a total of $18,668.
However, 9.54% of $196,684 is $18,764. More glaringly, the
-34-
affidavit concludes that the "total of the above amounts due from
Designs is $183,577," yet the individual subtotals add up to
approximately $160,000 — an unaccounted-for difference of over
$23,000. Moreover, many of the accountings and purchase orders
attached as exhibits to the complaint's supporting affidavit are
illegible or incomprehensible. Given these inconsistencies and
errors, the district court erred in simply fixing the base quantum
of damages at the amount stated in the complaint's ad damnum
clause. See Transatl. Marine Claims Agency v. Ace Shipping Corp.,
109 F.3d 105, 111 (2d Cir. 1997) ("While the District Court may not
have been obligated to hold an evidentiary hearing, it could not
just accept [plaintiff's] statement of the damages."); Flaks v.
Koegel, 504 F.2d 702, 707 (2d Cir. 1974) ("While a default judgment
constitutes an admission of liability, the quantum of damages
remains to be established by proof unless the amount is . . .
susceptible of mathematical computation.").
Even if KPS's complaint and affidavit were free from the
discrepancies and errors detailed above, the district court could
not have determined damages without a further evidentiary inquiry.
Following the entry of default, a district court can enter a final
judgment without requiring further proof of damages only in limited
situations. For example, no evidentiary inquiry is necessary if
-35-
the claim is for a "sum certain."7 See 10 Moore's Federal Practice
¶ 55.22[1] (2002) ("In cases where the court has entered default
judgment and the claim is for a sum certain, the court can enter
the default judgment for the amount stated in the complaint.");
accord Farm Family Mut. Ins. Co. v. Thorn Lumber Co., 501 S.E.2d
786, 790 (W. Va. 1998) (indicating that "if the damages sought by
the party moving for a default judgment are for a sum certain, or
an amount which can be rendered certain by calculation, no
evidentiary hearing on damages is necessary"); cf. Fed. R. Civ. P.
55(b)(1) (authorizing court clerk to enter default judgment sine
decreto when claim is for sum certain and defendant has failed to
appear).
Contrary to the district court's statement, this is not
a sum certain case.8 In the Rule 55 context, a claim is not a sum
certain unless there is no doubt as to the amount to which a
plaintiff is entitled as a result of the defendant's default. See,
7
As one court has noted, "the cases discussing the sum
certain requirement of Rule 55 are few and far between and rather
exiguous in their reasoning." Collex, Inc. v. Walsh, 74 F.R.D.
443, 450 (E.D. Pa. 1977); see also Byrd v. Keene Corp., 104 F.R.D.
10, 12 (E.D. Pa. 1984) ("Relatively few cases have raised the
question of what qualifies as a 'sum certain' for the purposes of
Rule 55(b)."). Given this paucity of federal case law, we will
look to states whose rules of procedure mirror the Federal Rules of
Civil Procedure in the analysis that follows.
8
As we noted in footnote 6, supra, the phrase "sum certain"
only appears in Fed. R. Civ. 55(b)(1), applicable only "if the
defendant has been defaulted for failure to appear." Nevertheless,
the concept of a "sum certain" is relevant to the question under
Rule 55(b)(2) of whether a further evidentiary inquiry is necessary
before the determination of damages.
-36-
e.g., Reynolds Sec., Inc. v. Underwriters Bank & Trust, Co., 378
N.E.2d 106, 109 (N.Y. 1978) ("The term 'sum certain' in this
context contemplates a situation in which, once liability has been
established, there can be no dispute as to the amount due, as in
actions on money judgments and negotiable instruments."); see also
Interstate Food Processing Corp. v. Pellerito Foods, Inc., 622 A.2d
1189, 1193 (Me. 1993) ("Such situations include actions on money
judgments, negotiable instruments, or similar actions where the
damages sought can be determined without resort to extrinsic
proof."). The First Circuit case cited by the district court in
its July 27 order, Brockton, was just such a case — an action to
collect on an unpaid certificate of deposit. See Brockton, 771
F.2d at 13. The instant appeal is clearly not such a case.9
9
Neither the fact that the complaint identifies a purported
aggregate total, nor the fact that the affidavit attests to such a
sum, automatically converts KPS's claim into a "sum certain."
Courts considering the question are clear that
a claim is not for a "sum certain" merely
because the demand in the complaint is for a
specific dollar amount. A contrary holding
would permit almost any unliquidated amount to
be transformed into a claim for a sum certain
simply by placing a monetary figure on the
item of claimed damage, even though that
amount has not been fixed, settled, or agreed
upon by the parties and regardless of the
nature of the claim.
Farm Family Mut. Ins. Co., 501 S.E.2d at 791; accord Zorach v.
Lenox Oil Co., 1996 Mass. App. Div. 11, 13 (1996) ("Merely
requesting a specific amount in the complaint or statement of
damages does not fulfill the sum certain requirement.").
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As with a "sum certain," a hearing is not normally
required if the claim is "liquidated." See 46 Am. Jur. 2d
Judgments § 313 ("As a general proposition, in the context of a
default judgment, unliquidated damages normally are not awarded
without an evidentiary hearing; that rule, however, is subject to
an exception where the amount claimed is a liquidated sum or one
capable of mathematical calculation."). "'Liquidated' means
adjusted, certain, settled with respect to amount, fixed. A claim
is liquidated when the amount thereof has been ascertained and
agreed upon by the parties or fixed by operation of law."10 Farm
10
Some courts and commentators appear to use the terms "sum
certain" and "liquidated claim" interchangeably. See, e.g., Farm
Family, 501 S.E.2d at 791 ("Other jurisdictions considering the
term 'sum certain' have suggested that its meaning is similar to
'liquidated amount.'"); 46 Am. Jur. 2d Judgments § 291 ("The 'sum
certain' requirement is clearly met where the claim is for
liquidated or statutory damages and clearly not met where the claim
is for unliquidated damages."). Other authorities put a more
distinguishing gloss on the terms. For example, Black's Law
Dictionary (7th ed. 1999) defines "sum certain" as
1. Any amount that is fixed, settled, or exact.
2. Commercial law. In a negotiable instrument, a sum
that is agreed on in the instrument or a sum that can be
ascertained from the document.
Id. at 1449. It defines a "liquidated claim" as "[a] claim for an
amount previously agreed on by the parties or that can be precisely
determined by operation of law or by the terms of the parties'
agreement." Id. at 240. The text of Rule 55 appears to
distinguish between a "sum certain" and "a sum which can by
computation be made certain" (i.e., liquidated damages). See Fed.
R. Civ. P. 55(b)(1). In deciding this appeal, we need not
definitively delineate the respective ambits of the terms "sum
certain" and "liquidated claim." It is enough for us to conclude
that KPS's claim is neither one.
-38-
Family Mut. Ins., 501 S.E.2d at 791 (quoting Hallett Constr. Co. v.
Iowa State Highway Comm'n, 139 N.W.2d 421, 426 (Iowa 1966)). The
classic example is an enforceable liquidated damages clause in a
contract. See 22 Am. Jur. 2d Damages § 683. Another example would
be a delinquent tax assessment. United States v. Raleigh Rest.,
398 F. Supp. 496, 498 (E.D.N.Y. 1975). KPS and Designs, however,
vigorously dispute the issue of damages. Likewise, KPS's damages
have not been fixed by operation of law. Finally, as the
inconsistences and inaccuracies in the complaint and the supporting
affidavit amply demonstrate, KPS's claims are not capable of simple
mathematical computation. Thus, KPS's complaint and its supporting
affidavit do not state a liquidated claim.
Relying on the erroneous conclusion that KPS's claim
stated a claim for a sum certain, the district court did not look
beyond the complaint's ad damnum clause and an internally
inconsistent supporting affidavit in fixing the base quantum of
damages. For the reasons explained above, this limited approach
was an abuse of discretion requiring that we remand the matter to
the district court for further consideration of the damages issue.
However, Designs is not necessarily entitled to an evidentiary
hearing on remand. In limited circumstances we have permitted
district courts to dispense with a Rule 55(b)(2) hearing, even in
the face of apparently unliquidated claims. See e.g., HMG, 847
F.2d at 919 (holding that district court, "intimately familiar with
-39-
the case from years of travail," did not abuse discretion when it
forwent hearing and calculated damages from "mortgage and loan
agreements, certifications by the taxing authorities, and other
documents of record"). Other circuits are in agreement. See,
e.g., Action S.A. v. Marc Rich & Co., Inc., 951 F.2d 504, 508 (2d
Cir. 1991) (holding that full evidentiary hearing not required when
court had been "inundated with affidavits, evidence, and oral
presentations by opposing counsel"); Dundee Cement Co. v. Howard
Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1323 (7th Cir. 1983)
(holding that district court did not abuse discretion by failing to
hold hearing when amount claimed was "capable of ascertainment from
definite figures contained in the documentary evidence or in
detailed affidavits"). We decline to decide whether the instant
case would lend itself to resolution without an evidentiary
hearing, leaving that determination to the sound discretion of the
district court on remand. In making this determination, the
district court may, of course, consider any evidence submitted at
the Chapter 93A hearing.11
D. The Chapter 93A Claim
Section 2 of Chapter 93A of the Massachusetts General
Laws prohibits "[u]nfair methods of competition and unfair or
11
Given the history of misrepresentations from Designs,
Nussen, and their trial counsel, we remind the parties that it is
well within the power of the district court to impose sanctions for
any misrepresentations made on remand as to damages. See Fed. R.
Civ. P. 11(c).
-40-
deceptive acts or practices in the conduct of any trade or
commerce." Mass. Gen. Laws Ann. ch. 93A, § 2 (West 2002). Upon a
finding that a defendant has violated section 2, the court can
award a plaintiff compensatory damages. "[R]ecovery shall be in
the amount of actual damages; or up to three, but not less than
two, times such amount if the court finds that the [conduct] was a
willful or knowing violation of said section two." Id. § 11.
The court's order of July 27, 2000, provided as follows:
Upon consideration of both plaintiff's request
for hearing on assessment of damages on Count
III, and defendant's opposition thereto with
supporting and supplemental memoranda and
documents, plaintiff's request is granted. It
is ordered that this matter be referred to the
Magistrate Judge for a hearing on damages
under Mass. Gen. Laws, ch. 93A, Count III of
the complaint.
On January 29, 2001, after an adverse evidentiary ruling from the
magistrate judge,12 counsel for KPS wrote the magistrate judge,
stating: "I am writing to inform the Court that KPS hereby waives
an evidentiary hearing on assessment of damages under Chapter 93A.
Instead, in pursuing its claim for multiple damages under Chapter
93A, KPS will rely solely on the allegations of the Complaint and
the reasonable inferences to be drawn therefrom." Soon thereafter,
Designs, which only a few months before objected to any sort of
12
The magistrate judge ruled on December 6, 2000, that KPS
would not be permitted to introduce evidence concerning events
which post-dated the activities described in the complaint — in
particular, evidence concerning the New York litigation.
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hearing, demanded an evidentiary hearing on the issue of
willfulness. Designs argued that, even if the default had
established a 93A violation, Designs' conduct was not "knowing or
willful" and that KPS was thus not entitled to any doubling or
trebling of damages. Designs also maintained that the allegations
of the complaint failed to state a claim for relief under Chapter
93A and that the claim should be rejected on that ground as well.
At hearings on May 9 and June 11, 2001, the magistrate
judge made clear his position: the district court had already
determined that the complaint stated a claim for relief under
Chapter 93A, and the sole purpose of the referral was to determine
whether KPS was entitled to a doubling or trebling of damages,
i.e., to determine whether Designs' conduct was "willful or
knowing." The magistrate judge ruled that he would permit
testimony only on that one issue. He then asked counsel for
Designs if Designs, in light of that ruling, still wished to go
forward with the evidentiary hearing. Counsel for Designs
responded in the affirmative.
The magistrate judge then conducted an evidentiary
hearing at which he heard testimony from Nussen and Designs'
accounts receivable clerk. On August 3, 2001, the magistrate judge
issue a Report and Recommendation. In it, he found that Designs,
"by and through its principal, Nussen, knowingly and willfully
refused to pay KPS commissions due and owing in violation of known
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contractual obligations." The magistrate judge therefore
recommended an award of double damages under Chapter 93A. Designs
timely filed objections to the Report and Recommendation, each of
which the district court overruled.
1. Willfulness
We review the magistrate judge's factual determination of
willfulness for clear error. Pepsi-Cola Metro. Bottling Co. v.
Checkers, Inc., 754 F.2d 10, 18–19 (1st Cir. 1985). Designs tries
to paint Nussen as a reasonable businessman who only refused to pay
because he believed "an accounting showed that KPS owed money to
Designs." Designs argues that "uncontradicted" testimony by Nussen
demonstrated that at the time Designs terminated KPS's contract,
Nussen honestly believed that KPS owed Designs money. While we do
not dispute Designs' contention that a "good faith dispute as to
whether money is owed . . . is not the stuff of which a c. 93A
claim is made," Duclersaint v. Fed. Nat'l Mortgage Ass'n, 696
N.E.2d 536, 540 (Mass. 1998), the Massachusetts Supreme Judicial
Court has made clear that "conduct 'in disregard of known
contractual arrangements' and intended to secure benefits for the
breaching party constitutes an unfair act or practice for c. 93A
purposes." Anthony's Pier Four, Inc. v. HBC Assocs., 583 N.E.2d
806, 821 (Mass. 1991) (quoting Wang Labs., Inc. v. Bus. Incentives,
Inc., 501 N.E.2d 1163, 1165 (Mass. 1986)). The magistrate judge
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had ample evidence before him to find that Designs (through Nussen)
had willfully evaded its known contractual obligations to KPS.
In his Report and Recommendation, the magistrate judge
wrote:
[D]efendant's proffered justification was and
is clearly unadorned pretext without any
factual basis whatsoever. Nussen said that he
did not pay the commissions because he thought
it was a "wash." Yet, he never said that in
response to the formal demand. To the
contrary, Nussen's so-called "wash," shortly
after that demand for an accounting and
payment, found new life in a state-filed
complaint in which he alleged that KPS owed
Designs no less than $5,000,000. It is clear
to this court, from the fact that Nussen never
meaningfully responded to plaintiff's formal
demand for payment, and from all that Nussen
said, that his true motivation was, as he so
testified, that he was irked by reason of the
fact that he thought Sayles and KPS served
others as well in the distribution of jewelry
while representing Designs. But that is
hardly justification for evading known
contractual obligations. Even assuming that
KPS should not have represented others while
representing [Designs] (and that is not the
case [by virtue of the well-pleaded allegation
in paragraph 20 of the complaint, admitted by
default]), Nussen's self-help conduct of
simply refusing to pay moneys due and owing to
KPS is simply the inappropriate and
inexcusable response.
The magistrate judge's conclusions are not clearly erroneous. At
the damages hearing Nussen was an evasive witness, repeatedly
refusing to give direct answers to questions posed by opposing
counsel and questions posed by the court. He repeatedly
contradicted himself on the witness stand and was impeached with
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his own affidavit filed that morning in connection with (yet
another) motion to dismiss. Morever, any belief that Nussen had
with regard to the amount KPS allegedly owed Designs could hardly
be considered "honest" in light of Nussen's wildly morphing claims
— over the course of this dispute, Nussen has claimed that KPS owed
Designs $60,000, at another point $30,000, elsewhere $6,000, and
finally, as the magistrate noted in the excerpt quoted above, that
Nussen considered it all "a wash" (leaving aside the claim for over
$5,000,000 in the New York lawsuit). The record clearly supports
the magistrate judge's factual finding on the willfulness of
Nussen's and Designs' conduct.
2. The Sufficiency of the 93A Allegations
Designs argued before the district court, and now argues
here, that the factual allegations deemed admitted by virtue of its
default do not constitute a 93A violation. In effect, Designs
seeks to dismiss the 93A count for failure to state a claim,
notwithstanding the entry of default. See Fed. R. Civ. P.
12(b)(6). The district court assumed it could entertain such an
argument and then summarily disposed of it. We do the same.13
13
Although the authorities are not uniform, the
prevailing view is that an entry of default
prevents the defendant from disputing the
truth of the well-pleaded facts in the
complaint pertaining to liability. But, the
defendant may still contest a claim on the
ground that the complaint does not allege
facts that add up to the elements of a cause
of action.
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a. The Business Relationship
The protections of Chapter 93A are not available to
parties in a strictly private transaction, "where the undertaking
is not 'in the ordinary course of a trade or business.'" Linkage
Corp. v. Trustees of Boston Univ., 679 N.E.2d 191, 207 n.33 (Mass.
1997) (quoting Lantner v. Carson, 373 N.E.2d 973, 975 (Mass.
1978)). Thus "intra-enterprise" transactions do not fall within
the statute's purview. Included in this classification are
"disputes stemming from an employment relationship, disputes
between individual members of a partnership arising from
partnership business, and transactions and disputes between parties
to a joint venture and between fellow shareholders." Id. Designs
tries to avail itself of this "intra-enterprise" exemption by
claiming that KPS's claims constitute a "private grievance," the
result of an "internal business dispute," and not an "arms-length
commercial marketplace transaction." This argument contradicts the
well-pleaded allegations deemed admitted by operation of Designs'
default and defies common sense. The complaint alleged that KPS
was a Florida corporation with its principal place of business in
Massachusetts, and that Designs was a New York corporation with its
principal place of business in Brooklyn. It also alleged that:
(1) KPS was an independent sales representative; (2) certain
Conetta, 236 F.3d at 75–76 (internal quotation marks and citations
omitted). We assume, without deciding, that this case lends itself
to such an argument.
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agreements confirmed that independent status; and (3) the
relationship was not exclusive. On these admitted facts, we can
only conclude that this arrangement constituted "an arm's-length
transaction between two corporations under which [plaintiff]
provided services to [defendant] and received compensation."
Linkage, 679 N.E.2d at 207.
b. The Unfair or Unscrupulous Conduct
Designs next argues that Designs' mere "refusal to pay
Sayles' demand was not an unfair or unscrupulous response," and
thus does not fall within the ambit of Chapter 93A. The complaint,
however, alleged that Designs (1) refused to pay KPS or provide any
statements and accountings, despite repeated demands to do so; (2)
used erroneously low commission rates; (3) demanded, without
justification, that KPS stop dealing with Jasco, threatening to
unilaterally terminate Designs' contract with KPS unless KPS
complied; (4) carried through on that threat; and (5) arbitrarily
decided to limit KPS's commissions to orders received less than
ninety days after Designs had unilaterally terminated its contract
with KPS. All of these allegations were deemed admitted as a
result of Designs' default. As a matter of law, the complaint
alleges conduct sufficiently unscrupulous and unfair to state a 93A
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claim. See Anthony's Pier Four, Inc. 583 N.E.2d at 821. (Mass.
1991).14
c. Primarily and Substantially Within Massachusetts
The conduct proscribed by Chapter 93A will only give rise
to a valid claim if "the actions and transactions constituting the
alleged unfair method of competition or the unfair or deceptive
practice occurred primarily and substantially within the
Commonwealth [of Massachusetts]." Mass. Gen. Laws Ann. ch. 93A, §
11 (West 2002). In determining whether the conduct occurred
"primarily and substantially" in Massachusetts, we will look to
three factors: (1) where the defendant engaged in unfair or
unscrupulous conduct; (2) where the plaintiff was on the receiving
end of the unfair or unscrupulous conduct; and (3) the situs of
plaintiff's losses due to the unfair and unscrupulous conduct.
Roche v. Royal Bank of Can., 109 F.3d 820, 829 (1st Cir. 1997);
Clinton Hosp., 907 F.2d at 1265–66.
As for the first factor, Designs argues that it is a New
York corporation, with no office or showroom in Massachusetts, and
that Sayles would travel to New York to meet with Nussen. This may
be true. The complaint, however, alleged that Designs contracted
with KPS to secure new accounts for Designs with several different
14
The magistrate judge noted that, even if the district court
had not ruled that KPS was entitled to 93A relief as a matter of
law by virtue of Designs' default, he would have still reached the
same conclusion on the evidentiary record before him.
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retailers in Massachusetts. The complaint also alleged that after
KPS had become entitled to commissions on the Massachusetts
accounts, Designs repudiated its contract with KPS and shortchanged
KPS through communications delivered to KPS in Massachusetts.
As for the second and third factors, they both weigh
heavily on the side of KPS. The complaint alleged that KPS had
secured accounts for Designs with retailers whose "usual place[s]
of business" were in Massachusetts. Thus KPS's unpaid commissions
accrued in Massachusetts. The complaint also alleged that KPS's
principal place of business was in Massachusetts when it became the
target of the unfair and unscrupulous conduct. Therefore, for
Chapter 93A purposes, on the basis of the facts deemed admitted, we
conclude that the unfair and unscrupulous conduct at issue occurred
primarily and substantially within the Commonwealth of
Massachusetts.
3. The Remand
Finally, we note that the sole issue before the
magistrate judge was the nature of Designs' conduct and whether it
was "willful or knowing" under Chapter 93A. We affirm the
magistrate judge's "willfulness" determination and his award of
double damages. The fact that we are remanding is unrelated to the
award of double damages, and the issue of "willfulness" under
Chapter 93A should not be revisited on remand. Whatever the
district court finds to be the proper base quantum of damages, that
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amount should be doubled as a result of our affirming the 93A
rulings, and judgment should be entered accordingly.
E. Sanctions
1. In the District Court
Designs has put forward no argument with respect to its
appeal of the district court's order imposing $5,000 in sanctions.
"An appellant waives any issue which it does not adequately raise
in its initial brief." Playboy Enters., Inc. v. Pub. Serv. Comm'n
of P.R., 906 F.2d 25, 40 (1st Cir. 1990). We will therefore affirm
the district court's order imposing sanctions.15
2. On Appeal
The acrimony which permeated the district court
proceedings has spilled over on appeal. Prior to oral argument,
Designs filed a motion for sanctions against KPS pursuant to our
Local Rule 30(e), claiming that KPS unreasonably and vexatiously
increased the costs of litigation through the inclusion of
unnecessary materials in the joint appendix. KPS filed an
opposition brief in which it cross-moved for attorneys' fees and
expenses incurred in responding to Designs' "frivolous motion."
Having duly considered both requests, we find them meritless. They
are denied.
15
For the same reason, we will not consider Designs'
"suggestion" — made in a short footnote on the last page of its
opening brief — that we reassign this case to a different judge on
remand. Such an argument would be baseless in any event.
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III.
For the forgoing reasons, we affirm the district court's
entry of a default judgment against Designs with respect to
liability, and we affirm the doubling of compensatory damages under
Chapter 93A. However, we vacate the district court's calculation
of the base quantum of compensatory damages, and remand for further
proceedings not inconsistent with this opinion.
Designs' motion for sanctions is hereby DENIED. KPS's
cross-motion for attorneys' fees is hereby DENIED.
AFFIRMED in part, VACATED in part, and REMANDED.
Each party to bear its own costs.
SO ORDERED.
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KPS & Associates, Inc. v. Designs by FMC, Inc.
Court: Court of Appeals for the First Circuit
Date filed: 2003-01-28
Citations: 318 F.3d 1
Copy CitationsCombined Opinion