Gemco Latinoamerica, Inc. v. Seiko Time Corp.

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 94-1186

GEMCO LATINOAMERICA, INC.,

Plaintiff.

v.

SEIKO TIME CORPORATION,

Defendant, Appellee.

ROYAL BANK OF CANADA,

Appellant.

No. 94-1671

GEMCO LATINOAMERICA, INC.,

Plaintiff.

v.

SEIKO TIME CORPORATION,

Defendant, Appellant.

ROYAL BANK OF CANADA,

Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Raymond L. Acosta, U.S. District Judge]

Before

Boudin, Circuit Judge,

Campbell, Senior Circuit Judge,

and Boyle,* Senior District Judge.

Mildred Caban with whom Jorge Souss and Goldman Antonetti &

Cordova were on brief for Royal Bank of Canada.

John M. Newell with whom John E. Tardera, Richard A. Levine,

Whitman Breed Abbott & Morgan, Rafael Perez-Bachs, Vivian Nunez and

McConnell Valdes were on brief for Seiko Time Corporation.

August 2, 1995

*Of the District of Rhode Island, sitting by designation.

BOUDIN, Circuit Judge. Royal Bank of Canada ("Royal

Bank") appeals from an order of the district court finding it

in civil contempt for violating an attachment order and

assessing damages of $1.63 million plus attorney's fees and

costs. The district court found that Royal Bank had assisted

in frustrating the application of an attachment order to

assets that Royal Bank claimed for its own. Because Royal

Bank was not a party to the underlying execution proceedings,

the contempt order is considered a final decision appealable

by Royal Bank under 28 U.S.C. 1291. Appeal of Licht &

Semonoff, 796 F.2d 564, 568 (1st Cir. 1986).

I.

The attachment order at issue here was entered on

January 13, 1987, to execute a New York judgment for Seiko

Time Corporation ("Seiko") against Gemco Latinoam rica, Inc.

("Gemco") in the amount of $3.16 million plus interest.

Earlier Gemco had been the exclusive distributor for Seiko

watches and clocks in Puerto Rico. Initially Gemco was

wholly owned and operated by Jos and Carmen Pascual, as was

a related company, the Watch and Gem Palace, Inc. ("Watch and

Gem"); later Jos Pascual ("Pascual") became the sole owner.

Gemco served as a wholesale distributor for jewelry and time

pieces, while Watch and Gem operated two retail stores

specializing in jewelry and time pieces (the Plaza Las

Americas store and the Old San Juan Store).

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Beginning in 1981, Royal Bank began extending credit to

Gemco secured by a factor's lien on Gemco's inventory and

accounts receivable under Puerto Rico's Factor's Lien Act, 10

L.P.R.A. 551 et seq. Gemco thereafter transferred most of

the funds it borrowed from Royal Bank to Watch and Gem in

order to finance Watch and Gem's retail operations; these

transfers were recorded in Watch and Gem's books as

intercompany accounts payable and in Gemco's books as

intercompany accounts receivable. By early 1986 Royal Bank

had extended credit to Gemco which exceeded $1.4 million, and

Gemco's books showed an account receivable due from Watch and

Gem of $2.15 million.

In March 1986, Royal Bank sought to restructure and

resecure Gemco's debt, as well as a much smaller debt then

owed to the bank by Watch and Gem. To this end, Royal Bank

obtained new factor's liens from both Gemco and Watch and

Gem, assignments of Gemco's and Watch and Gem's accounts

receivable including all "intercompany receivables," cross-

guaranties from Gemco, Watch and Gem and the Pascuals, and

mortgages on various properties owned by the Pascuals. The

amount owing to the bank from Gemco at the time of

restructuring was $1.25 million, while Watch and Gem owed the

bank just $125,000.

In October 1986, Seiko obtained a $2.85 million

arbitration award against Gemco in New York, stemming from

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Gemco's failure to pay for goods that Seiko had provided to

Gemco. The award was confirmed by the district of New York

on November 4, 1986, and judgment was entered for Seiko on

November 12, 1986, for $3,167,946.49. The New York judgment

was registered in the district court in Puerto Rico on

December 16, 1986, and on January 13, 1987, that court issued

an attachment order and accompanying writ of execution to

satisfy Seiko's $3.16 million judgment against Gemco. The

order attached the following assets of Gemco:

1) All debts and accounts receivable belonging to
Gemco, including those owing from The Watch and Gem
Palace, Inc. and Timekeepers, Inc.

2) The bank accounts in the name of Gemco in the
Royal Bank of Canada (Current Account No. 132-420-
1) and the Plaza Scotia Bank (Current Account No.
006-1919-14).

3) Merchandise inventory consisting of Seiko
watches and clocks and Colirbr brand lighters,
located at the fourth floor of the building at 204
San Jos Street, Old San Juan, Puerto Rico.

4) An IBM System 36 Computer with peripheral
equipment located at the second floor of the
building at 204 San Jos Street, Old San Juan.

The order also instructed Gemco's various debtors to

remit any amounts owed to Gemco into court:

The Marshal shall also be instructed to notify the
present order to The Watch and Gem Palace, Inc.;
Timekeepers, Inc.; The Royal Bank of Canada, and
the Plaza Scotiabank, and to instruct said parties
to refrain, upon penalty of contempt, from making
any other payments to Gemco by concept of monies
owed from any of the attached debts, accounts
receivable or bank accounts. The Marshal shall
collect any amounts belonging to Gemco presently
deposited in any of the aforementioned bank

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accounts. Any other amounts owed to Gemco by any
of the aforementioned under any of the attached
debts, accounts receivable or bank accounts shall
be henceforth remitted to this Court . . ., where
in due course, it shall be claimed by Seiko Time
Corporation.

At the time of execution, Gemco's primary asset was the

account receivable arising from the various intercompany

loans it had made to Watch and Gem over the years; the

account then stood at around $2 million. Also at the time of

execution, Gemco still owed Royal Bank around $1.05 million,

while Watch and Gem owed the bank nothing.

Royal Bank was served with a copy of the order of

attachment on January 20, 1987. The very next day the bank

obtained from Pascual an assignment of any proceeds derived

from the contemplated sale of Watch and Gem's Plazas Las

Americas store, purportedly as further security for Watch and

Gem's guaranty of Gemco's debt. On April 27, 1987, Watch and

Gem sold its Plazas Las Americas store for $850,000. By

agreement, the purchase price was disbursed directly to Royal

Bank--minus back rent due Watch and Gem's landlord.

Of the $850,000 purchase price, Royal Bank received

$797,219.73, which was fully credited against Gemco's

indebtedness, ostensibly under Watch and Gem's March 1986

guaranty. This reduced Gemco's total debt to Royal Bank to

$300,357.71 as of June 30, 1987. On that day, Watch and Gem

then assumed the balance of Gemco's indebtedness by taking a

$300,357.71 loan from Royal Bank. According to Royal Bank,

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this loan simply erased Gemco's debt and created an

equivalent debt in Watch and Gem's name; Watch and Gem never

received any money.

At the same time, Royal Bank also extended a line of

credit to Watch and Gem for "working capital". Through

December 1987, Watch and Gem borrowed a total of $200,000

from the bank. Watch and Gem used the proceeds from this new

loan to pay off Gemco's creditors other than Seiko, in order

to maintain Gemco as a viable entity so that it could

continue a New York lawsuit that Gemco had brought against

Seiko.1 During this time, Royal Bank also made some direct

payments to Watch and Gem's creditor. At no point did Watch

and Gem pay into court the amount originally owing on the

intercompany debt.

Seiko eventually learned of Watch and Gem's payments to

Gemco's other creditors and Watch and Gem's satisfaction of

Gemco's debt to Royal Bank. On July 10, 1987, Seiko moved

for a finding of contempt against Gemco, Watch and Gem and

the Pascuals. After a hearing, the Puerto Rico district

court on January 21, 1988, held Gemco, Watch and Gem and the

Pascuals in contempt for violating the attachment order and

diverting Gemco assets away from Seiko. On March 18, 1988,

1This litigation by Gemco was ultimately unsuccessful.
See Gemco Latinoamerica, Inc. v. Seiko Time Corp. 671 F.

Supp. 972 (S.D.N.Y. 1987), 685 F. Supp. 400 (S.D.N.Y. 1988).

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Seiko filed a motion for contempt against Royal Bank and

request for damages.

Shortly thereafter, on March 22, 1988, Pascual moved for

court permission to sell the inventory from Watch and Gem's

Old San Juan store in order "to apply the proceeds to the

indebtedness [Watch and Gem] owes to the Royal Bank of

Canada." In late June, before any sale took place, Royal

Bank seized the inventory of the Old San Juan store--

purportedly acting under an order issued by a local court--to

protect its collateral for the loans it had extended to Watch

and Gem starting in June 1987. Royal Bank's seizure occurred

shortly before its show cause hearing in the district court

on the contempt charge, which took place on July 15, 1988.

On January 27, 1994, the district court issued an 18-

page order finding Royal Bank in contempt. The court found

that Royal Bank had aided and abetted a violation of the

January 13, 1987, attachment order by utilizing Watch and Gem

funds to repay Gemco's debts instead of paying that money

into court. The district court then assessed damages against

Royal Bank, reasoning that if not improperly diverted, the

funds would have eventually gone to Seiko. The court

calculated damages to be $1.63 million (plus attorney's fees

and costs later fixed at $64,954.25) as follows:

1. $797,219.73 from the sale of Watch and Gem's
Plazas Las Americas store, the proceeds of which
were paid directly to Royal Bank;

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2. $52,780.27 that Royal Bank directed to the
landlord for Watch and Gem's Plazas Las Americas
store;

3. $250,000 that had constituted a "loan" to
Watch and Gem from Royal Bank, which Watch and Gem
had used to pay Gemco's third-party creditors and
which Royal Bank had used to pay Watch and Gem's
creditors directly;

4. $530,000 from Royal Bank's seizure of
inventory from Watch and Gem's Old San Juan store,
which blocked the sale of the store to a willing
buyer for the purchase price of that amount.

II.

In reviewing a district court's contempt order, we

accept the district court's factual findings and reasonable

inferences if not clearly erroneous. Project B.A.S.I.C. v.

Kemp, 947 F.2d 11, 15-16 (1st Cir. 1991). A civil contempt

must be established by clear and convincing evidence and the

underlying order must be clear and unambiguous in its terms.

Id. at 16. A nonparty, although not directly bound by the

order, may be held in civil contempt if it knowingly aids or

abets a party in violating the court order. G. & C. Merriam

Co. v. Webster Dictionary Co., Inc., 639 F.2d 29, 34-35 (1st

Cir. 1980).

On appeal, Royal Bank argues that the payments from

Watch and Gem to Royal Bank did not violate the specific

terms of the order, and even if they did, Royal Bank says

that it did not aid or abet the violation. Alternatively,

Royal Bank argues that it had a superior claim to seize the

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Gemco and Watch and Gem assets in question despite Seiko's

attachment. We will address each of these issues, and one

other, in turn.

1. By its terms the January 13, 1987, order attached

"[a]ll debts and accounts receivable belonging to Gemco . . .

owing from [Watch and Gem]" and directed that apart from

Gemco bank accounts (which the marshal was to collect),

"[a]ny other amounts owed to Gemco by [Watch and Gem] . . .

shall be henceforth remitted to this Court . . . ." We

think that a reasonably straightforward reading of this order

required Watch and Gem to pay over to the district court the

amount that Watch and Gem then owed to Gemco, which was well

over $1 million.

Instead, there followed a series of payments to

recipients other than the court--primarily by Watch and Gem,

or out of its assets--to the advantage of Royal Bank. The

first and largest of these payments was the diversion of

proceeds from the sale of Watch and Gem's Plazas Las Americas

store; the bank received $797,219.73, which it used to reduce

Gemco's outstanding debt to the bank, and by pre-arrangement

over $50,000 went to Gemco's landlord. This transaction

occurred in April 1987, well after the bank had been notified

of the attachment order.

Although the bank has filed a 45-page brief, it is not

easy to discern from that document precisely why the bank

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thinks that these payments were consistent with the

"henceforth remitted" directive in the court's order. The

brief explains why the bank cannot be deemed to have violated

other provisions of the order but it largely ignores the

provision directing Watch and Gem to pay what it owed to

Gemco directly to the court, a provision stressed in the

district court's contempt order. Queen Victoria's famous

phrase, "We are not amused," is remarkably apt.

The bank does argue that Watch and Gem's payment to the

bank was made to discharge Watch and Gem's own allegedly

legitimate guaranty of Gemco's obligations to the bank. But

paying the bank instead of the court, when there is not

enough money for both, still violates the attachment order.

The bank says that the attachment order did not forbid Watch

and Gem from paying its own debts, but an $800,000 payment of

another debt patently frustrated the clear intent of the

order that Watch and Gem's money be held for Seiko. Cf.

General Motors Acceptance Corp. v. Superior Court, 85 P.R.R.

314, 319 (1962) ("[garnished] funds are symbolically in the

custody of the law").

Similarly, we reject the bank's contention, offered as a

defense to the charge of contempt, that its claims against

Watch and Gem assets had priority. As the district court

correctly explained:

Watch & Gem was ordered to remit to the Court the
amount owed GEMCO, for the ultimate benefit of

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SEIKO TIME. The court did not limit or restrict
its Order to the payment of funds which were free
of third-party claims; rather, the Court ordered
that such funds were to be paid into Court so that
the Court could then resolve any question of
priorities.

If Watch and Gem's assets were subject to claims prior to the

attachment order, the proper course was to pay the money into

court and then litigate the matter or, possibly, to ask the

district court to modify its attachment. See 32 L.P.R.A.

App. III, R. 21.5 (right to intervene of third parties

claiming property attached by order of the court); R. 21.6

(motion to release property). But self-help, in the teeth of

the court's order, was not permissible. See Matter of

Providence Journal Co., 820 F.2d 1342, 1346 (1st Cir. 1986),

cert. dismissed, 485 U.S. 693 (1988).

Lastly, the bank says that, even if the attachment order

were violated, the bank did not aid or abet the wrong. Here

the bank not only fostered but appears to have orchestrated

the violations. The district court found that the bank had

worked "hand in glove" with Pascual, Gemco and Watch and Gem,

"controll[ed] all flow of monies to and from those parties,"

and "determin[ed] the corporate strategy of those parties" in

order "to avoid the scrutiny of the courts and maximize [the

bank's] collections on its loans to [Gemco]." Royal Bank's

brief in this court makes no serious effort to show that

these finding were clearly erroneous.

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2. The district court ruled that Seiko was damaged not

only by the diversion of proceeds to the bank from the Plazas

Las Americas sale but also by the diversion of about $50,000

from the same sale to Watch and Gem's landlord; by the later

disbursements of about $250,000 to other Gemco and Watch and

Gem creditors; and still later by the bank's seizure of

inventory from the Old San Juan store, frustrating a planned

sale of that store to a third party for about $530,000.

Implicit in this damage calculation is the view that each of

these payments (or, in the last case, frustration of payment)

was also a violation of the court's attachment order.

This is easy enough a conclusion as to the $52,000 paid

to the landlord. This payment was part of a prearranged

allocation of the proceeds of the sale; the bank, which took

the lion's share for itself, was clearly involved in the

allocation, and the allocation of the $52,000 violated the

court's "henceforth remitted" directive for reasons already

discussed in connection with the $797,000 payment. Having

helped arrange these diversions, the bank is responsible for

the full effect.

It less clear that the same view should be taken of the

$250,000 in payments to third-party creditors of Gemco and

Watch and Gem or the $530,000 loss that occurred when the

bank frustrated the sale of the Old San Juan store. The

former were apparently included on the theory that they

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represented funds belonging to Watch and Gem that, like the

$850,000 in proceeds from the original sale, were diverted to

creditors of Gemco and Watch and Gem instead of being paid

into court. The $250,000 was a loan by the bank to Watch and

Gem which, by prearrangement with the bank, was designed to

pay off various Gemco creditors other than Seiko, thereby

forestalling an involuntary bankruptcy petition.

If the $250,000 is treated as Watch and Gem's money,

then the analysis is the same as with the $850,000. The bank

might have argued that the $250,000 actually represented bank

money to which Watch and Gem had no claim and that there is

something odd about treating the bank's own decision to pay

off Gemco creditors with the bank's own funds as depriving

Seiko of Watch and Gem assets. Still, having structured the

transaction as a loan to Watch and Gem--presumably to give

the bank a claim for repayment--the bank may have thought it

dangerous to describe the loan as a sham. Anyway, it does

not try to distinguish the $250,000 payment.

As for the $530,000 loss, this was charged to the bank

because it frustrated the sale of the Old San Juan store by

seizing Watch and Gem assets, effectively violating the

attachment order. Although it appears that the bank did

cause the loss, it might have argued that the proposed sale

was its own creation (it had proposed to finance the third-

party buyer) and that, without its cooperation, there would

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have been no sale even without its seizure of the inventory.

But again the bank makes no such argument, and instead

implies (quite incorrectly) that the local court's alleged

approval of the seizure trumped the district court's

attachment order.

In all events, the bank has chosen to fight on a broader

front--primarily by denying that anyone's action violated the

attachment order or that it aided and abetted any such

violation. Absent extraordinary circumstances, we confine

ourselves in civil cases to the arguments made by the

parties. FDIC v. Fedders Air Conditioning, USA, Inc., 35

F.3d 18, 21 (1st Cir. 1994). Whether or not the bank might

have distinguished among the damage items and sought to limit

its exposure, it has not done so here.

3. Even though Royal Bank's conduct violated the

attachment order and diverted or blocked the funds that would

otherwise have been paid into court, Royal Bank is liable in

a civil contempt proceeding only for actual damages. In re

Power Recovery Systems, Inc., 950 F.2d 798, 802 (1st Cir.

1991). In this instance, the bank could arguably defeat the

damage award--although not the finding of contempt--by

showing that the money paid into court would ultimately have

been awarded to the bank rather than Seiko.

Neither in the district court nor in this court has the

bank ever made this argument in a straightforward fashion.

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Although there are a number of references to its priorities,

these occur in the course of its various arguments that no

contempt occurred. Perhaps as a result, the district court's

brief discussion of priority issues is also directed not to

damages but to contempt. For this purpose, the district

court's discussion is strictly speaking unnecessary, for

reasons already given both by it and by us.

An appellant waives arguments not made or only cursorily

developed, e.g., Grella v. Salem Five Cent Sav. Bank, 42 F.3d

26, 36 (1st Cir. 1994), and in this instance the bank can be

reproached on both grounds: it makes no argument assuming

contempt arguendo but challenging the computation of damages;

and to the extent it discusses the priority issues, the

discussion is episodic, incomplete and (in certain respects)

quite unpersuasive.

Nevertheless, there are scattered fragments out of which

one might well try to build a case that the 1981 factor's

lien or the 1986 liens and assignments gave the bank a

priority as to amounts owing to Gemco. The law in this area-

-both as to the Puerto Rico factor's lien statute and the

assignment of accounts receivable statute--is at the same

time both sparse (in explanatory case law) and complex (in

statutory language). See 10 L.P.R.A. 551 et seq.

(Factor's Lien Act); 10 L.P.R.A. 581 et seq. (Assignment

of Accounts Receivable Act). The security transactions in

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this case are multiple, interrelated and in certain respects

peculiar.

We have now spent an undue amount of time seeking a

clear path through this morass in a futile effort to

determine whether or not the bank possessed valid priorities

that could be used to reduce or even eliminate the damage

claims against it. Although we spare the reader a

description of false starts and dead ends and remaining

perplexities, the conclusion is clear: there is no way to

answer the central question, short of a remand, extensive

further briefing and probably further fact-finding.

Given the bank's effective waiver of the damages

argument, no such remand can be justified. We cannot require

the district court or Seiko to engage in further litigation

based on a mere suspicion that the bank might have an

argument for curtailing damages. It is ironic that, had the

bank permitted the funds to be paid into court instead of

diverting them to its own uses, the ensuing litigation would

likely have focused on its priority rights rather than its

contempt.

Affirmed.

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