318 F.3d 1 (1st Cir. 2003), 01-2513, KPS & Assoc. Inc. v. Designs By FMC, Inc.

Docket Nº:01-2513, 01-2521.
Citation:318 F.3d 1
Party Name:KPS & ASSOCIATES, INC., Plaintiff, Appellee, v. DESIGNS BY FMC, INC., Defendant, Appellant.
Case Date:January 28, 2003
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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318 F.3d 1 (1st Cir. 2003)

KPS & ASSOCIATES, INC., Plaintiff, Appellee,

v.

DESIGNS BY FMC, INC., Defendant, Appellant.

Nos. 01-2513, 01-2521.

United States Court of Appeals, First Circuit

January 28, 2003

Heard: Oct. 10, 2002.

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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.

Before LYNCH, Circuit Judge, BOWNES, Senior Circuit Judge, and LIPEZ, Circuit Judge.

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 the well-pleaded factual allegations contained in the complaint and the attachments

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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 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 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.

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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.

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 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...

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