Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc.

• Citation: 98 F.3d 13
• Decision Date: 17 October 1996
• Docket Number: No. 1275,D,1275
• Parties: BRIDGESTONE/FIRESTONE, INC., Plaintiff-Appellee, v. RECOVERY CREDIT SERVICES, INC., Revenue Recovery, Inc. and George Beladino, Defendants-Appellants. ocket 95-7759.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 13

98 F.3d 13

BRIDGESTONE/FIRESTONE, INC., Plaintiff-Appellee, v. RECOVERY CREDIT SERVICES, INC., Revenue Recovery, Inc. and George Beladino, Defendants-Appellants.

No. 1275, Docket 95-7759.

United States Court of Appeals,

Second Circuit.

Argued April 3, 1996.

Decided Oct. 17, 1996.

Norman A. Olch, New York City, for Defendants-Appellants.

Susan T. Dwyer, Herrick, Feinstein LLP, New York City (Steve L. Klepper, of counsel), for Plaintiff-Appellee.

Before WINTER, JACOBS, and CALABRESI, Circuit Judges.

WINTER, Circuit Judge:

This action concerns Bridgestone/Firestone's ("BFI" 's) claim that appellants Recovery Credit Services, Inc. ("RCS"), Revenue Recovery, Inc. ("RRI") (collectively, "the Collection Agencies"), and George Beladino, their principal, fraudulently failed to remit to BFI amounts that the Collection Agencies had collected on BFI accounts. Appellants challenge the district court's piercing of the corporate veil, findings of fraud, quantification of damages, and award of attorney's fees. Finally, they argue that Judge Martin should have recused himself. We affirm in part, reverse in part, and remand.

Since 1986, BFI has administered certain private label credit card programs, first for Society National Bank and then, in 1993, for Credit First National Association. BFI contracted with the Collection Agencies to collect delinquencies on credit card accounts. Under agreements between BFI and the Collection Agencies executed in 1985 and 1991, the Agencies were required to remit on a bi-weekly basis monies collected on BFI accounts. The agreements also required the Collection Agencies to provide a monthly status report and to maintain all records relating to collections for a five-year period.

In February 1992, BFI's H. Paul Binder visited the Collection Agencies' offices to conduct an audit of BFI accounts placed with the Agencies. As part of that audit, Binder inspected Agency "collection cards" that recorded contacts with debtors, current telephone numbers and addresses, dates and amounts of payments, and other debtor data. The only collection cards available were for 1990-91 because the collection cards for earlier years had been destroyed. This disposition of records was in violation of the agreements. Binder instructed Beladino not to destroy any further records required under the agreements. However, during a subsequent audit in October 1992, Binder found that records available during the earlier audit, and collection cards for 1991-92 as well, had been destroyed.

On January 11, 1993, BFI brought this action alleging breach of contract, conversion, breach of fiduciary duty, unjust enrichment, fraud, and tortious interference with contract. It sought an accounting, an order of seizure, and damages. The parties stipulated, inter alia, that the Collection Agencies, Beladino, and their counsel would turn over all records in their possession concerning BFI accounts. Appellants' performance of their obligations under the stipulation was unsatisfactory, and BFI subsequently sought and obtained an order "attach[ing] all assets and property in the possession, custody or control of any of the defendants" and providing "for turnover to Bridgestone of all records in the possession, custody or control of any of the defendants relating to Bridgestone's business." Bridgestone/Firestone, Inc. v. Recovery Credit Servs., 147 F.R.D. 66, 67 (S.D.N.Y.1993). Appellants failed to comply with the order to turn over the records, and in February 1993, BFI moved for a default judgment as a sanction for alleged perjury and flagrant discovery abuse.

Magistrate Judge Fox, to whom the matter had been referred, denied BFI's application without prejudice to allow the Collection Agencies to seek legal representation, but noted that

[i]n the event an attorney admitted to practice before this Court fails to enter an appearance on their behalf on or before March 31, 1994, ... [I], sua sponte, will recommend to [the district court] that a default judgment be entered against them and that the matter be referred ... for an inquest on damages. If counsel does appear, the Defendant corporations will then have fifteen (15) days from the date of filing of the notice of appearance to comply with the Court's directions ... by providing a written statement, signed by a corporate official with knowledge, of when, where and by whom records pertaining to the accounts referred by Plaintiff were destroyed.

Bridgestone/Firestone, Inc. v. Recovery Credit Servs., No. 93 Civ. 0168 (VLB) (MDF), at 3-4 (S.D.N.Y. Feb. 25, 1994) (citations omitted) (order denying motion to strike answer and enter default judgment). Magistrate Judge Fox further cautioned that

[i]n light of the submissions on the Plaintiff's motion and the Court's familiarity with this matter through supervising discovery, it appears that at an inquest Plaintiff may well be able to establish that the strongest of adverse inferences should be drawn against the Defendants in evaluating the proof of damages and in determining the amount of damages.

Id. at 4.

On June 2, 1994, Magistrate Judge Fox issued a careful and thorough Report and Recommendation detailing appellants' record of obfuscation and delay, concluding that "Beladino has behaved in the manner of the quintessential deadbeat." Bridgestone/Firestone, Inc. v. Recovery Credit Servs., No. 93 Civ. 0168 (VLB) (MDF), at 9 (S.D.N.Y. June 2, 1994). As a sanction he recommended entry of a partial grant of summary judgment against the corporate defendants on the issue of liability and referral for an inquest on damages. The order applied only to the corporate defendants because Beladino was then protected by an automatic bankruptcy stay. Judge Broderick adopted the Report and Recommendation and referred the matter for the necessary inquest. See Bridgestone/Firestone, Inc. v. Recovery Credit Servs., No. 93 Civ. 0168 (VLB), 1994 WL 383195, at * 2 (S.D.N.Y. July 20, 1994) (memorandum order).

After the bankruptcy stay was lifted, BFI moved for partial summary judgment against Beladino on the same ground on which it was granted against the corporate defendants. Judge Broderick ruled that unless Beladino provided an affidavit within 30 days establishing that he was not responsible for the destruction of records, partial summary judgment would be entered. Beladino filed a conclusory and argumentative document labeled "affidavit." No judgment was ever entered. This omission probably occurred because of Judge Broderick's unfortunate illness and death.

The case was transferred to Judge Martin for trial. BFI's evidence consisted of affidavits and testimony from three witnesses. Shawn R. Russell, general counsel of the credit card services division of BFI, provided evidence that Beladino, sometimes using the name "John Grasso," owned and operated both Collection Agencies. Russell's evidence on this issue included a page from the American Collectors Association 1992 Membership Roster indicating that "John Grasso" held himself out as President of RCS. Russell also provided a September 16, 1991 transmission letter accompanying the signed 1991 collection agreement, in which Beladino indicated that "[a]t present we are operating under two names, Revenue Recovery, Inc. and Recovery Credit Services, Inc. All collections at present is [sic] being handled under Recovery Credit Services, Inc., so I took the liberty of adding that corporate name to your collection agreement."

Binder's affidavit and testimony traced the relationship between the parties. BFI first placed its accounts with RRI in February 1984. Binder testified that at the outset of the relationship between RRI and BFI, David Storm, president of RRI, advised BFI that it should deal with the New York office run by John Grasso with regard to collections in certain states. Binder further stated that at no time in his experience dealing with the Collection Agencies did he deal with anyone who held himself out as principal other than Beladino. Binder also recounted the events concerning the audits in 1992.

Binder offered evidence of damages derived from records available to BFI, from documents secured as part of his audit of the Collection Agencies' records, and from the scant evidence produced in response to BFI's discovery demands. Binder calculated that 8.78% of the accounts placed in 1992 represented the difference between the sums paid in 1992 by the Collection Agencies to BFI and the actual amounts collected from BFI customers as reported on the Agencies' own collection cards and in contacts with the customers themselves. Because virtually all of the collection cards for the years 1987 through 1991 had been destroyed, Binder was unable to document actual damages for those years. Instead, Binder proffered a calculation of $300,310 in damages for those years based on an 8.78% "rate of recovery" on the accounts, less an appropriate commission on the funds collected. He explained that this approximation of damages was necessary because it was impossible to contact each of the approximately 66,000 debtors referred to the Collection Agencies during the 1987-1991 period. Indeed, the most current addresses for those debtors were in records that had been destroyed.

BFI also called Eli Rosman, a certified public accountant, as a witness. ¹ Rosman reviewed various accounting records and other financial documents of RCS and Eastern Investigative Bureau, Inc. ("Eastern"), a Beladino business operating at the same address. Although a number of crucial financial records, including Eastern's cash receipts and cash disbursement journals, were either missing or unavailable, Rosman documented a pattern of unexplained substantial cash disbursements between RCS and Eastern. In addition, the 1991 corporate income tax return of RCS revealed no capitalization whatsoever for the relevant tax year and a loss of $54,222.54 for the period covered by the return. A December 31, 1992 trial balance for...