Knapp Shoes, Inc. v. Sylvania Shoe Mfg. Corp., 93-1527

Decision Date08 October 1993
Docket NumberNo. 93-1527,93-1527
Citation15 F.3d 1222
PartiesKNAPP SHOES, INC., Plaintiff, Appellant, v. SYLVANIA SHOE MANUFACTURING CORPORATION, Defendant, Appellee. . Heard
CourtU.S. Court of Appeals — First Circuit

Timothy C. Blank with whom Bernard J. Bonn III, Dina Warner and Dechert Price & Rhoads were on brief for appellant.

Joseph B. Green with whom Bennett H. Klein and Kotin, Crabtree & Strong were on brief for appellee.

Before BREYER, Chief Judge, BOUDIN and STAHL, Circuit Judges.

BOUDIN, Circuit Judge.

Knapp Shoes Inc., the plaintiff in this commercial dispute, appeals from the district court's order dissolving a preliminary injunction. That injunction had frozen assets of the defendant, Sylvania Shoe Manufacturing Corp., in an amount sufficient to satisfy a potential judgment in Knapp's favor. Because we find that the primary ground of the court's order is a defense that was waived by Sylvania, and that the court's findings were insufficient to support its action on the alternative ground urged by Sylvania, we vacate the order dissolving the preliminary injunction.

I.

Knapp sells work shoes at both the wholesale and retail levels, including a line of shoes with a patented slip-resistant rubber sole. Beginning in 1986 or 1987, Knapp placed orders with Sylvania for the latter to manufacture and supply Knapp with several different styles of shoes incorporating Knapp's slip-resistant sole. Knapp intended to resell the shoes both through its retail outlets and directly to large customers in the restaurant, hotel and other industries. Between 1987 and 1989, Sylvania manufactured and delivered over 250,000 pairs of shoes to Knapp.

Sometime in 1987, Knapp became concerned about the quality of the shoes manufactured by Sylvania. The primary problem was the tendency of the sole to separate from the leather body of the shoe. Although the parties disagreed (both then and now) as to the extent of the problem, Sylvania made a number of changes in construction of the shoes in order to eliminate the problem. According to its later complaint, Knapp was assured by Sylvania on various occasions between 1987 and 1989 that the sole adhesion problem had been remedied. These assurances, Knapp asserts, were untrue; it says that the proportion of defects remained high and in some periods approached 100% for certain styles.

On April 10, 1990, Knapp filed this diversity action under Massachusetts law for breach of contract (count 1), breach of express warranty and implied warranties of merchantability and fitness (counts 2-4), breach of the duty of good faith and fair dealing (count 5), fraud and negligent misrepresentation (counts 6 and 7), and violation of Mass.Gen.Laws Ann. ch. 93A (count 8). 1 The gravamen of all these claims was that too many of the shoes manufactured by Sylvania and sold to Knapp were defective.

Knapp's complaint was quite detailed in setting forth the categories of damages it claimed to have suffered. These included increased costs of inspection and for handling and returning defective shoes; lost profits due to Knapp's inability to fill orders for customers; losses due to Sylvania's refusal to give credit for certain shoes that Knapp did return or attempted to return; increased costs because Knapp was forced to make substitute purchases from other manufacturers credits and price concessions Knapp had to afford its own customers because of their dissatisfaction with defective shoes; and losses in good will and in customer orders due to Sylvania's conduct.

Sylvania filed an answer and counterclaim. The answer denied virtually all of the incriminating allegations. It also asserted 13 affirmative defenses, including estoppel, disclaimer of warranties, unclean hands, laches and contributory negligence. Sylvania's counterclaim alleged that Knapp still owed Sylvania about $277,000 for shoe orders not yet paid (Sylvania also claimed multiple damages and attorney's fees under Chapter 93A). The counterclaim suggested that any defects were due to Knapp's own specification of materials to be used in manufacturing its shoes.

Both parties consented to proceed before a magistrate judge and waived a jury trial. The trial was bifurcated, with the liability phase covering nine trial days in January 1991. At the conclusion of this phase, the magistrate judge on January 31, 1991, entered a four-page memorandum and order that devoted one paragraph each to five of Knapp's eight counts, without discussing Sylvania's counterclaim. The first substantive paragraph reads as follows:

Except to the extent that plaintiff has shown, or can show, that shoes manufactured by defendant and delivered to plaintiff, and/or shoes manufactured by defendant to be delivered to plaintiff, were, in fact, defective, plaintiff has failed to satisfy this court by a preponderance of the evidence that defendant breached an express warranty. None of the parties anticipated, or could, in the circumstances, reasonably anticipate, that each and every shoe manufactured by defendant for the plaintiff would be free of defect. On its part, defendant expressly promised that it would use its best effort to produce a defect-free shoe, and that it would credit plaintiff's account for those defective shoes which plaintiff returned. All parties clearly understood that that was the extent of the express warranty, nothing more, and nothing less.

In the subsequent paragraphs, the magistrate judge found that Knapp had failed to prove fraud, negligent misrepresentation or--"except to the extent that plaintiff has shown, or can show," a refusal by Sylvania to credit returned defective shoes--breach of the duty of good faith and fair dealing. As for Knapp's chapter 93A claim, the order said that Sylvania had not been shown to have engaged in conduct so unscrupulous as to make it liable for multiple damages; it noted, but did not decide, the question whether attorney's fees might be due Knapp under chapter 93A on the theory that a breach of warranty was a violation of chapter 93A under a regulation of the state's attorney general.

In May 1991, prior to the damages phase of trial, Knapp discovered that Sylvania was going out of business and liquidating its assets. Fearful that Sylvania would soon be judgment-proof, Knapp obtained a temporary restraining order precluding Sylvania from dissipating assets in the amount of $3,775,657.22--the amount of damages that Knapp hoped to prove in the next phase of the trial. The magistrate judge modified this order on June 10, 1991, converting it into a preliminary injunction and amending it to allow Sylvania to make limited payments to its creditors and lawyers.

The damages phase of trial took place over five days in June 1991; at Sylvania's behest, an additional day of evidence was heard on November 25, 1991. Proposed findings were filed by both sides in March 1992. It appears that nothing further occurred during the next 12 months until, in March 1993, the magistrate judge issued an order proposing to certify certain questions to the Massachusetts Supreme Judicial Court. Both sides opposed certification, but on April 8, 1993, the magistrate judge certified two questions to the Supreme Judicial Court; both related to the possible application of Chapter 93A to "a simple breach of warranty." 2

In the certification, the magistrate judge prefaced the two certified questions with a ten-page statement. The statement repeated the magistrate judge's rulings on the five counts discussed in its January 31, 1991, order, and then made several additional findings of fact and conclusions of law. These determinations were prefaced by a statement that "only the ultimate findings and conclusions are set forth herein--not the subsidiary findings and conclusions." The magistrate judge determined inter alia that:

1. .... By their express negotiations, by their express understandings, and by their express course of dealings, Sylvania promised Knapp that, in the event that shoes were defectively manufactured, Knapp's remedy, and sole remedy, would be the replacement of [or credit for] those shoes shown to be defective and returned--nothing more, and nothing less [footnote omitted].

2. Because of this clear and express understanding between the respective parties, Knapp's sole remedies, in terms of breach of contract, or under the relevant provisions of the Uniform Commercial Code, are limited to the replacement of [or credit for] those shoes shown to be defective and returned to Sylvania.

Other determinations included a ruling that Sylvania was obliged to give a credit for or replace any defective shoes returned by Knapp; a statement that many of the shoes returned by Knapp's customers were made by an overseas supplier; a finding that Sylvania acted in "the utmost good faith" to correct a problem "not reasonably foreseen" by either side; and a finding in a final footnote that "at best ... approximately three (3) percent of the shoes were allegedly defective ... and as to a majority of those shoes, credit was given to Knapp when those shoes were returned...."

The Supreme Judicial Court has yet to act on the questions certified by the district court. But on the strength of the magistrate judge's findings in the certification order, Sylvania moved on April 8, 1993, to dissolve the preliminary injunction. The magistrate judge granted this motion on May 5, 1993, concluding that its earlier findings left Knapp with so little hope of substantial recovery that the freeze on Sylvania's assets could no longer be justified. The order set forth findings 1 and 2 from the certification, quoted in pertinent part above.

Knapp filed a notice of appeal on May 11, 1993, and this court stayed the magistrate judge's order dissolving the preliminary injunction pending the outcome of this appeal. We have jurisdiction pursuant to 28 U.S.C. Sec. 1292(a)(1), which permits appeals from interlocutory orders...

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