United States Court of Appeals
For the First Circuit
No. 04-1577
EUREKA BROADBAND CORPORATION,
Plaintiff, Appellee,
v.
WENTWORTH LEASING CORPORATION,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
Before
Selya, Circuit Judge,
Stahl, Senior Circuit Judge,
and Lynch, Circuit Judge.
Herbert Lemelman, with whom Kirk Y. Griffin was on brief, for
appellant.
Jeffrey R. Martin, with whom Michael P. Murphy and Burns &
Levinson LLP were on brief, for appellee.
March 7, 2005
SELYA, Circuit Judge. This litigation arises out of a
dispute between the parties to a pair of substantially identical
finance leases. Following a bench trial, the district court found
in favor of the lessee, awarded substantial damages, and dismissed
a counterclaim. Resolving the lessor's appeal requires us to visit
precincts bounded by the Uniform Commercial Code (hereinafter
variously "UCC" or "Code") and to explore the intersection between
the Code and the common law of fraudulent misrepresentation.
Although our analysis differs in some respects from the trial
court's, we nonetheless reach the same ultimate conclusion and
affirm the judgment.
The facts are largely uncontradicted. Plaintiff-appellee
Eureka Broadband Corporation is a Delaware corporation that
maintains its principal place of business in New York.1 Eureka
installs fiber optic systems in large office buildings and
generates revenues by charging access fees to commercial carriers
desirous of providing telecommunication services to tenants. In
June of 2000, Eureka decided that it needed certain equipment in
order to pursue its business interests. Defendant-appellant
Wentworth Leasing Corporation, a Massachusetts firm headquartered
in that state, offered to facilitate acquisition of the equipment
1
Eureka is the corporate successor of Gillette Global Network,
Inc. Some of the events material to this case occurred before
Eureka's succession. For simplicity's sake, we treat Eureka and
Gillette as one and refer to them throughout as Eureka.
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through a finance lease. Stan Pearson — who is Wentworth's sole
shareholder and only employee — personally conducted the
negotiations.
The parties structured the transaction as a conventional
finance lease. Eureka identified the equipment it needed and
Wentworth agreed to purchase that equipment for $841,000 from
CopperCom, Inc., a Florida-based vendor. Eureka would then lease
the equipment from Wentworth for forty-eight months at a monthly
rent of $22,486. At the end of the forty-eight month term, Eureka
would have an option to buy the equipment.
As a condition precedent to the actual execution of the
lease documents, Wentworth required Eureka to demonstrate
creditworthiness and to pay a commitment fee equal to one month's
rent. Eureka sent the commitment fee to Wentworth early on and
forwarded the necessary financial information in August of 2001.
Wentworth agreed to the lease on September 6, 2001, but added the
further condition that Eureka post a security deposit equal to the
first and last months' rent. On the same day that it acquiesced in
this further condition, Eureka accepted delivery of the equipment
from CopperCom and executed a delivery and acceptance agreement in
which it authorized Wentworth to release payment to CopperCom.
On December 20, 2001, the same parties entered into a
second lease for additional equipment, some of which came from
CopperCom and some from Marconi Communications, Inc. The terms of
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the second lease were substantially identical to those of the
first, except that the monthly rent was $17,057. On December 21,
2001, Eureka mailed Wentworth a check for $51,171 to cover the
security deposit and the first month's rent. At about the same
time, Eureka accepted delivery of the additional equipment.
On December 22, 2001, CopperCom sent an invoice to
Wentworth for the agreed purchase price of the equipment covered by
the first lease. It sent another invoice on December 28 for the
equipment covered by the second lease. For reasons that are not
entirely clear from the record, Marconi did not submit an invoice
to Wentworth, but, rather, billed Eureka directly.
Eureka made monthly lease payments to Wentworth through
January 2002. There was a rub, however: Wentworth never paid a
dime to either CopperCom or Marconi. Both vendors soon began
dunning Eureka, which repeatedly requested that Wentworth
remunerate the vendors. Wentworth turned a deaf ear to these
importunings. Eventually, Eureka's patience wore thin. On
February 22, 2002, it advised Wentworth that it would withhold
future rent payments until it received confirmation that Wentworth
had paid CopperCom and Marconi. Despite this warning, Wentworth
remained delinquent.
Matters came to a head in March, when Marconi brought
suit against Eureka for the purchase price of its equipment. To
settle the suit, Eureka returned Marconi's wares and paid it
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$180,000. Eureka separately settled with CopperCom before any
litigation was commenced; to consummate that settlement, it
returned CopperCom's equipment and tendered a "small" payment (the
record is tenebrous as to the precise dollar amount).
On April 11, 2002, Eureka wrote to Wentworth demanding
return of all rent previously paid (totaling $163,601). When
Wentworth demurred, Eureka brought a diversity suit in the federal
district court. See 28 U.S.C. § 1332(a). Its complaint contained
counts sounding in breach of contract, unjust enrichment, and
fraud. Wentworth answered the complaint and counterclaimed for
breach of the lease indentures.
Following a bench trial, the district court reserved
decision. It subsequently handed down a rescript containing
detailed findings of fact and conclusions of law. Eureka Broadband
Corp. v. Wentworth Leasing Corp., No. 02-11068, 2004 WL 344425 (D.
Mass. Feb. 24, 2004).
The court first dismissed Eureka's claim for unjust
enrichment on the ground that an adequate remedy at law existed.
Id. at *3 n.6. Next, it addressed the breach of contract count.
With respect to the Marconi equipment, the court held that no sale
between Marconi and Wentworth had occurred because Marconi had
never invoiced Wentworth. Id. at *4 n.8. Inasmuch as there had
been no sale, Wentworth had no right to charge rent for the Marconi
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equipment and Eureka was entitled to a full refund. Id. Wentworth
has not challenged this ruling on appeal.
As to the CopperCom equipment, the court found that
Wentworth was obligated by the lease terms to purchase the
equipment from CopperCom, but it never paid (nor, for that matter,
had any intention of paying) CopperCom for the equipment. Id. at
*4. That failure constituted a breach of contract and entitled
Eureka to cancel the leases. Id. at *3.
The court then proceeded to the fraudulent
misrepresentation count. In the court's view, Wentworth was liable
to Eureka on this claim because it had fraudulently induced Eureka
to enter into the leases in reliance on its false promise to
purchase and pay for the equipment. Id. at *5.
To wrap up the liability phase, the court ruled in favor
of Eureka on Wentworth's counterclaim. Id. It then turned to
damages and determined that Eureka was entitled to recover the same
damages on both the breach of contract and fraudulent
misrepresentation counts.2 Id. These damages equaled the total
amount of the rental payments Eureka had made to Wentworth. Id.
2
Of course, despite the two bases for recovery, Eureka could
only collect the awarded damages once. See Freeman v. Package
Mach. Co., 865 F.2d 1331, 1345 (1st Cir. 1988) ("[A] plaintiff is
entitled to only one full recovery, no matter how many different
leal grounds may support the verdict."); Szalla v. Locke, 657
N.E.2d 1267, 1270 (Mass. 1995) (refusing to allow duplicitive
recovery for quantum merit and deceit when the two claims arise
from the same facts and compensate the same loss).
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The court also made two other awards, neither of which is
directly challenged in this appeal. First, it awarded
consequential damages of $5,068 for reasonable expenses that Eureka
had incurred in responding to the Marconi suit. See id. at *3 n.7.
Second, it awarded Eureka attorneys' fees for the prosecution of
the action on the ground that Wentworth had acted vexatiously.3
Id. at *5.
This timely appeal ensued. In it, Wentworth raises only
four issues. First, it argues that the district court erred in
finding that it breached the lease agreements with respect to the
CopperCom equipment. Second, it asserts that the fraudulent
misrepresentation count should have been dismissed as a matter of
law. Third, it questions the measure of damages with specific
reference to the rent refund. Finally, it asseverates that the
district court erred in rejecting its counterclaim, which it now
characterizes as sounding in conversion. In mulling these
assignments of error, we review the district court's legal
3
While the case was awaiting trial, Pearson, without Eureka's
knowledge or consent, printed postcards, embossed with Eureka's
corporate logo, and mailed them to roughly 100 of Eureka's clients
(whose names were obtained from the creditworthiness information
originally furnished by Eureka to Wentworth). These postcards
directed the recipients to mail future payments to Eureka at a post
office box. Some of those customers took the postcards at face
value and made remittances accordingly. The post office box had,
however, been rented by Pearson, who pocketed the funds. After the
trial had ended, the district court ordered Wentworth to reimburse
Eureka for these misappropriations. Wentworth has not appealed
from that ukase.
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conclusions de novo and its findings of fact for clear error.
Sierra Fria Corp. v. Donald J. Evans, P.C., 127 F.3d 175, 181 (1st
Cir. 1997). The lease indentures contain choice-of-law provisions
commemorating the parties' agreement that Massachusetts law should
govern any disputes, and we honor that agreement. See, e.g.,
McCarthy v. Azure, 22 F.3d 351, 356 n.5 (1st Cir. 1994) (observing
that "a reasonable choice-of-law provision in a contract generally
should be respected").
While we ultimately approve the district court's
conclusion that Wentworth is liable to Eureka with respect to the
CopperCom equipment, we are skeptical about its rationale. The
district court held that Wentworth breached its obligation to
purchase the equipment by not paying the vendor. But "purchase" is
not a synonym for "pay," and it is at least arguable that, here,
there was a sale (albeit a sale on credit), which was complete upon
delivery of the equipment without regard to payment. See Mass.
Gen. Laws ch. 106, §§ 1-201(32), 2-103(1)(a), 2-103(1)(d), 2-
106(1), 2-401(2). Moreover, the parties dispute whether Wentworth
had an obligation to Eureka to pay the vendors. See Midwest
Precision Servs. v. PTM Indus. Corp., 887 F.2d 1128, 1131-32 (1st
Cir. 1989) (noting that in a finance lease the contracts between
the lessor and the lessee and the lessor and the vendor are
separate and independent).
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In all events, we need not probe the point too deeply, as
we find fully supportable the district court's alternate holding
that Wentworth is liable to Eureka for the same damages on the
fraud count. On appeal, Wentworth does not challenge the substance
of that ruling. Rather, it argues in its brief that the UCC
preempts (and, thus, precludes the maintenance of) a common law
action for fraudulent inducement to contract. At oral argument,
Wentworth's counsel made the additional argument that even if
Eureka were entitled to sue on this theory, it suffered no damages
as a consequence of the fraud. These arguments are bootless.
Wentworth's first contention is clearly incorrect.
Section 1-103 of the Code, Mass. Gen. Laws ch. 106, § 1-103,
provides that "[u]nless displaced by the particular provisions" of
the Code, "the principles of law and equity, including . . . fraud
[and] misrepresentation . . . shall supplement its provisions."
Nothing in the Code explicitly preempts common law actions for
fraudulent misrepresentation, and courts have entertained such
actions in commercial cases. See, e.g., Vision Graphics, Inc. v.
E.I. Du Pont de Nemours & Co., 41 F. Supp. 2d 93, 100 (D. Mass.
1999); see also Nat'l Shawmut Bank v. Vera, 223 N.E.2d 515, 518
(Mass. 1967) (stating that the Code is to be supplemented by the
existing common law "[u]nless displaced by the particular
provisions of the code itself" (citation and internal quotation
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marks omitted)). Consequently, we see no reason why such an action
could not be maintainable in the circumstances of this case.
This conclusion is reinforced by another section of the
Code, which provides that the "[r]ights and remedies for material
misrepresentation or fraud include all rights and remedies
available under this Article for default." Mass. Gen. Laws ch.
106, § 2A-505(4). It would make no sense for the Code to address
the remedies for fraud if, as Wentworth contends, the UCC
pretermits actions for fraud.
Wentworth's position rests entirely on its reading of
section 2-702 of the Code, which limits a seller's right to recover
goods to the procedures described in that section, even in cases of
"fraudulent or innocent misrepresentation of solvency or of intent
to pay." Mass. Gen. Laws ch. 106, § 2-702(2). That provision,
however, deals exclusively with the relationship between buyers and
sellers. As Wentworth vigorously argues when it suits its
perceived advantage, the contracts between Wentworth and CopperCom
and those between Wentworth and Eureka are distinct and
independent. See Midwest Precision Servs., 887 F.2d at 1131-32.
As (i) the relationship between Wentworth and Eureka is not that of
seller and buyer, and (ii) Article 2A of the Code contains no
comparable provision applicable to leases, we are satisfied that
section 2-702 is not an impediment to Eureka's right to bring an
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action for fraudulent inducement. The district court therefore
acted impeccably in allowing the fraud count to proceed.
As said, Wentworth mounts no challenge to the substance
of the district court's holding that it is liable on the fraud
count. Thus, any such argument has been forfeited. Kearney v.
Town of Wareham, 316 F.3d 18, 22 (1st Cir. 2002); United States v.
Zannino, 895 F.2d 1, 17 (1st Cir. 1990). In all events, our review
of the record satisfies us that the district court's conclusion is
amply supported.
To prevail on a claim of fraudulent misrepresentation
under Massachusetts law, the plaintiff must show that the defendant
"made a false representation of a material fact with knowledge of
its falsity for the purpose of inducing the plaintiff to act
thereon, and that the plaintiff reasonably relied upon the
representation as true and acted upon it to his damage." Russell
v. Cooley Dickinson Hosp., Inc., 772 N.E.2d 1054, 1066 (Mass. 2002)
(citation and internal quotation marks omitted). The district
court found that Wentworth intentionally made a false statement of
material fact by holding itself out as a finance lessor when it had
neither the capacity nor the intention to pay for the equipment.
Eureka, 2004 WL 344425, at *5. We agree that, in the context of a
finance lease transaction, a finance lessor implicitly represents
both its ability and its intention to pay for the goods to be
leased. If knowingly false, implicit representations may be
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treated as actionable misrepresentations. See V.S.H. Realty, Inc.
v. Texaco, Inc., 757 F.2d 411, 414-15 (1st Cir. 1985) (applying
Massachusetts law). So it is here.
We hasten to add that Wentworth's misrepresentation was
plainly material. The very purpose of seeking a finance lessor is
to access capital and, thus, facilitate acquisition of desired
equipment. See Shawmut-Canton LLC v. Great Spring Waters of Am.,
Inc., 816 N.E.2d 545, 549 n.6 (Mass. App. Ct. 2004) (holding that
a misrepresentation is material when it is one of the principal
grounds that caused the plaintiff to enter the contract).
The remaining elements of the cause of action also were
proved. The district court found that Eureka relied on Wentworth's
misrepresentation by entering into the finance leases. Eureka,
2004 WL 344425, at *5. It further found that the adverse claims
subsequently lodged by CopperCom and Marconi and the sequelae of
those claims sufficed in combination to demonstrate that this
reliance was detrimental. Id. These findings are clearly correct
and virtually unchallenged.
We say "virtually" because Wentworth's brief might be
read to suggest that Eureka failed to show detrimental reliance
because it got what it bargained for: possession of the equipment
for four years. To accept that suggestion, however, would be to
blink reality. While it is possible that Eureka eventually might
have prevailed in litigation with CopperCom and Marconi, Eureka
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never bargained for the headaches associated with defending itself
against the adverse claims occasioned by Wentworth's fraudulent
misrepresentations.
To cinch matters, the UCC implies in all commercial
leases a warranty of lack of interference with use or enjoyment of
the leased goods. See Mass. Gen. Laws ch. 106, § 2A-211. For this
warranty to be breached, it is not necessary that a third party
have an insuperable claim to possession of the goods; it is
sufficient that the third party's claim is colorable. See Frank
Arnold Contractors, Inc. v. Vilsmeier Auction Co., 806 F.2d 462,
464-65 (3d Cir. 1986). Whether or not the vendors' claims to the
equipment would ultimately have proved to be valid, they were at
least colorable.
That ends this aspect of the case. We hold, without
serious question, that the need to respond to the demands for
payment by CopperCom and Marconi and to defend against the Marconi
litigation were sufficient to establish that Eureka's reliance on
Wentworth's fraudulent misrepresentation redounded to its
detriment. The district court's finding of liability on the fraud
count is, therefore, impervious to attack.
Having found no basis for disturbing the district court's
determination as to liability on the fraud count, we next consider
Eureka's remedy. The UCC provides that in cases of fraud or
misrepresentation, the injured party is entitled to the same
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remedies as are available in cases of default. Mass. Gen. Laws ch.
106, § 2A-505(4). Those remedies include the right to "cancel the
lease contract" and to "recover so much of the rent and security as
has been paid and is just under the circumstances." Id. § 2A-
508(1).
Eureka availed itself of the first of these anodynes by
withholding rent payments after it became clear that Wentworth
intended to stiff the vendors. Wentworth protests that this action
was impermissible under the UCC because of the so-called "hell or
high water" provision. Broadly stated, that provision makes a
finance lessee's obligation to pay rent irrevocable and independent
of any broken promise on the part of the lessor. See id. § 2A-407;
see also AT&T Credit Corp. v. Transglobal Telecom Alliance, Inc.,
966 F. Supp. 299, 303-04 (D.N.J. 1997) (holding, under § 2A-407,
that a finance lessee was not entitled to withhold rent as a remedy
for the lessor's garden-variety breach of contract). Were this a
simple breach of warranty case, Wentworth's protest might have some
bite.4 But there are a few exceptions to the applicability of
section 2A-407, including an exception for cases of fraud. Section
2A-508 of the Code specifically provides that, in cases of fraud,
4
For this reason, we do not rest our holding on Wentworth's
breach of the implied warranty of noninterference. Although we
have little doubt that Wentworth breached that warranty, such a
breach typically gives rise to an action for damages and would
neither defeat the "hell or high water" clause nor entitle the
aggrieved party to cancel the leases. See Mass. Gen. Laws ch. 106,
§ 2A-508(4).
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the victim is entitled to the remedies for default, including
cancellation. See Mass. Gen. Laws ch. 106, § 2A-508(1); see also
id. § 2A-407 cmt. 5 (suggesting that the "hell or high water"
provision is not apposite in cases of fraud). By electing to
cancel the leases, Eureka discharged all remaining executory
obligations of both parties, including any obligation to pay rent.
See id. § 2A-505(1).
Wentworth's fallback position, raised for the first time
at oral argument in this court, is that Eureka suffered no harm
from Wentworth's failure to pay because Eureka still got a valid
right to possess the equipment for the stated lease term. There
are two answers to this belated argument. The short answer is that
the argument was not raised below and, thus, is foreclosed.5 See
United States v. Slade, 980 F.2d 27, 30 (1st Cir. 1992) ("It is a
bedrock rule that when a party has not presented an argument to the
district court, she may not unveil it in the court of appeals.").
The slightly longer, but equally dispositive, answer is
along the lines of the answer to Wentworth's plaint that there was
no detrimental reliance. See supra at 12-13. Whether or not
Eureka had a good right to possession, it nonetheless incurred
unavoidable costs in responding to the vendors' demands for payment
and in defending against Marconi's replevin suit. These costs were
5
Indeed, the argument is doubly foreclosed because Wentworth
failed to advance it in its brief on appeal. See Pratt v. United
States, 129 F.3d 54, 62 (1st Cir. 1997).
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the fruits of Wentworth's fraud, easily foreseeable by Wentworth at
the time it misrepresented its ability and intention to pay for the
goods. See Mut. Fire, Marine & Inland Ins. Co. v. Costa, 789 F.2d
83, 88-90 (1st Cir. 1986).
We also find that the measure of damages employed by the
trial court was reasonable in the circumstances of this case. The
Code provides in pertinent part that a lessee may recover from a
lessor in default "so much of the rent and security as has been
paid and is just under the circumstances." Mass. Gen. Laws ch.
106, § 2A-508(1)(b). Awarding Eureka the full amount of the rent
it had paid — $163,601 — was "just" in the circumstances of this
case. After all, Eureka's costs plainly exceeded the aggregate
rent payments (to cite only one example, it returned the leased
equipment and paid Marconi $180,000 to settle the Marconi suit).
Accordingly, we discern no basis for setting aside the district
court's determination that it was "just" to award Eureka the
entirety of the rent paid, along with other damages, for an
aggregate award of $168,669.
There remains Wentworth's asseveration that the lower
court erred in dismissing its counterclaim. In the court below,
Wentworth cast its counterclaim as one for breach of contract. In
this court, Wentworth shifts gears and maintains that Eureka
converted its property by returning the equipment to the vendors
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without Wentworth's permission. Under either approach, the
district court's ruling is unimpugnable.
Wentworth's breach of contract theory rehashes its
misguided argument about the effect of the "hell or high water"
clause. Citing that clause, it posits that Eureka was required to
continue rent payments to Wentworth regardless of any misconduct on
Wentworth's part. As discussed above, that argument wilts in the
face of the district court's supportable finding that Wentworth
fraudulently induced Eureka to enter into the leases. See supra at
14-15.
Wentworth's conversion theory is forfeit. See Slade, 980
F.2d at 30. Even if it were properly preserved, it would not
profit Wentworth. For one thing, it seems unlikely that Wentworth
could state a valid claim for conversion given the district court's
finding that Wentworth never intended to pay for the equipment.
See Restatement (Second) of Torts § 895 cmt. k (1977) (noting that
a plaintiff cannot maintain an action for conversion against a
defendant who acts on the authorization of another having a
superior claim to the property).
For another thing, Wentworth has adduced no evidence
showing that it was damaged by what it now calls Eureka's
"conversion." Assuming, arguendo, that Wentworth was the rightful
owner of the equipment and that Eureka acted wrongfully in
returning the equipment to the vendors, Wentworth still would owe
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the vendors the purchase price. By returning the equipment, Eureka
settled that debt on Wentworth's behalf and any damage Wentworth
suffered from the alleged conversion would have to be offset by the
benefit so conferred. See Restatement (Second) of Torts, supra §
920 ("When the defendant's tortious conduct has caused harm to the
plaintiff or to his property and in so doing has conferred a
special benefit to the interest of the plaintiff that was harmed,
the value of the benefit conferred is considered in mitigation of
damages, to the extent that this is equitable."); see also Burke v.
Rivo, 551 N.E.2d 1, 6 (Mass. 1990). While it is theoretically
possible that Wentworth's damages as a result of the alleged
conversion exceeded its debt to the vendors, Wentworth has
presented no evidence to that effect. Thus, there is no basis for
disturbing the dismissal of the counterclaim. See McDonald v.
Rockland Trust Co., 798 N.E.2d 323, 325 n.1 (Mass. App. Ct. 2003)
(affirming summary judgment for the defendant in a conversion
action where the plaintiff had failed to adduce evidence of
damages).
We need go no further. Courts must be ever mindful that
the UCC, like other statutes, should be interpreted with common
sense in light of individual circumstances. See Roberts v. Enter.
Rent-A-Car Co., 779 N.E.2d 623, 629 (Mass. 2002). This case
exemplifies that tenet. Whether or not Wentworth may in some
hypertechnical sense be said to have fulfilled its obligations to
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Eureka under the finance leases, its overall conduct was entirely
contrary to the obligations of good faith and fair dealing imposed
on all commercial transactions. See Mass. Gen. Laws ch. 106, § 1-
203. Whether Eureka's response was letter perfect under the
circumstances is not the issue; it is sufficient that Wentworth's
deplorable course of conduct plainly harmed Eureka and that
Eureka's curative actions were reasonable. Thus, as the district
court correctly found, Eureka was entitled to be made whole.
Affirmed.
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