Appleyard v. Douglass

USCA1 Opinion [NOT FOR PUBLICATION--NOT TO BE CITED AS PRECEDENT] United States Court of Appeals For the First Circuit No. 98-1890 LUCY APPLEYARD, Plaintiff, Appellee, v. JOHN W. DOUGLASS, JR., Defendant, Appellant. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Zachary R. Karol, U.S. Magistrate Judge] Before Torruella, Chief Judge, Bownes, Senior Circuit Judge, and Lynch, Circuit Judge. Philip R. Olenick for appellant. John A. James, Jr. for appellee. March 10, 1999 BOWNES, Senior Circuit Judge. Lucy Appleyard, a citizen of New Hampshire, brought this action to obtain the alleged balance due of $367,352.29 on a promissory note executed by the J.W. Douglass Corporation (JWD) and guaranteed by defendant J.W. Douglass, Jr., a citizen of Massachusetts. This is the second time this case is before us. On March 6, 1998, in an unpublished opinion, we upheld the determination of the district court that Lucy Appleyard had standing to bring suit but remanded for a new determination of damages. The case was tried by agreement of the parties before a United States Magistrate Judge. The same magistrate judge handled the remand. I This opinion is concerned only with the determination of damages on remand. We rehearse the relevant facts. Appleyard Motor transported gasoline and other petroleum products. Its annual revenue approximated $2.5 million. Its sole stockholder was John Appleyard, husband of plaintiff. JWD was also in the trucking business. In addition to gasoline and petroleum products it transported ready mix concrete and sand and gravel. JWD's annual revenues were approximately $20 million. Sometime before September 16, 1988, the two corporations entered into negotiations for the sale of Appleyard Motor's business and assets to JWD. John Appleyard died on September 16, 1988. Negotiations between the two companies continued after John Appleyard's death. On November 23, 1988, Lucy Appleyard, as the new president of Appleyard Motor, executed a purchase and sale agreement with JWD. Under the agreement Appleyard Motor sold its business and tangible assets to JWD for $800,000. JWD paid $500,000 cash and gave Appleyard Motor a non-negotiable promissory note for the balance of $300,000 payable monthly with interest at 10%. This broke down to thirty-five monthly payments in the amount of $9,680.16 each. John W. Douglass, Jr., defendant, personally guaranteed the note. JWD made eleven monthly payments directly to plaintiff for a total of $106,481.76. The purchase and sale agreement contained the following representation: "[T]o the best of its knowledge and belief, [Appleyard Motor] is in full compliance with all laws and regulations which apply to the conduct of its business, including all laws and regulations relating to employment." JWD stopped payments on the note as of November, 1989. In January of 1990, JWD filed a chapter 11 bankruptcy petition. On January 4, 1991, the Massachusetts Secretary of State involuntarily dissolved Appleyard Motor under chapter 156, section 101 of the Massachusetts General Laws. The complaint in this action was filed on January 19, 1995. II In our first opinion we made holdings and rulings on the damages evidence intended as a guide for the magistrate judge on remand. We start with the finding and ruling of the magistrate judge that are the genesis of the damages issue. The magistrate judge found that "AMT's [Appleyard's] drivers were driving an excessive number of hours and that AMT must have known this. This constitutes a false representation or breach of warranty." There was unrebutted testimony by Gerald Felise, vice president and chief financial officer of JWD, along the following lines. Felise had extensive experience in the trucking industry. The Department of Transportation has a long-standing requirement mandating that truck drivers keep a record of all hours spent "on duty" and "off duty." The time records must be kept in what is called a log. It is the responsibility of the trucking employer to see to it that the logs are accurate. The logs are required to be kept at the terminal of origin and at the corporate office. After he took over at JWD in 1989, Felise conducted an audit of the Appleyard Motor site in Methuen, Massachusetts. He found that although the logs kept by the truck drivers appeared to be in compliance with Department of Transportation hour requirements, they did not check out with the trip tickets issued at the points of origin and delivery. Trip tickets are stamped with the time the truck leaves the terminal and another ticket shows the time of delivery of the load. Unlike the logs, the truckers had no control over the times stamped on trip tickets. Appleyard Motor had a large percentage of independent truckers hauling for it. Independent truckers own their own tractors and lease containers furnished by the trucking company. It is to the financial advantage of independent truckers to carry as many loads as possible, which may mean working more hours than allowed by the Department of Transportation. Based on Felise's testimony we concluded that the finding and ruling of the magistrate judge were neither clearly erroneous nor legal error insofar as they involved an interpretation of paragraph 7J of the purchase and sale agreement. This paragraph stated: Seller, to the best of its knowledge and belief, is in full compliance with all laws and regulations which apply to the conduct of its business, including all laws and regulations relating to employment. We next reviewed the relevant part of the magistrate judge's opinion on damages. He found first: Upon discovering that AMT's [Appleyard Motor's] drivers had been driving excessive hours, Gerald Felise, Vice President and Chief Operating officer of JWD [Douglass Corp.], issued a directive to the drivers to bring their hours into compliance with the law. In order to compensate the drivers for the loss of driving time, AMT had to raise the rates it charged its customers. This, in turn, resulted in a loss of customers and a $300,000 annual decline in revenue associated with the former AMT operation. We found no fault with this finding. It was amply supported by the record. We held the findings and rulings that followed to be clearly erroneous. The magistrate judge found and ruled: Starting from an annual revenue base of $2.5 million, this amounts to a 12% decline. Although Douglas [sic] presented no evidence that purported to address directly the issue of damages or even to quantify JWD's loss in profits as a result of this decline in revenue, I infer that, if JWD had known that annual revenue from the AMT operation would decline 12% as a result of JWD having to bring that operation into compliance with law, the fair price JWD would have been willing to pay for AMT would have been at least 12% (or $96,000) below the $800,000 it agreed to pay. On this basis, I find that the difference between the value of the assets as represented or warranted and their actual value was at least $96,000. Based upon his finding of a 12% (or $96,000) offset, the magistrate judge found that Douglass owed Lucy Appleyard "a total of $206,270," which included interest. In our remand opinion we concluded that there was no evidentiary basis for the analysis and findings. We noted first that the statement by the magistrate judge that "Douglas presented no evidence that purported to address directly the issue of damages or even to quantify JWD's loss in profits as a result of this decline in revenue" was contrary to the record. Gerard Felise, vice president and chief financial officer of JWD, testified directly on this. His testimony can be summarized as follows. Appleyard Motor's operations at the Methuen, Massachusetts, site grossed $2.5 million annually. Its operating cost was 87 cents on the dollar; this meant that its profit was 13 cents on the dollar. This translated into roughly between $200,000 and $400,000 worth of cash flow profits annually. In order to operate in compliance with the Department of Transportation's hourly requirements the rates charged customers were increased by 18%. The customers refused to pay the additional 18%. This resulted in a "negative revenue stream" of $300,000, or to put it another way, there was a $300,000 annualized decline in revenue based on a $2.5 million starting point. This contributed to an overall decline in revenue of 40% for JWD. The result was the filing of a chapter 11 petition in bankruptcy by JWD on January 27, 1990. In answer to a question by the magistrate judge, Felise stated that the $300,000 loss in annual revenue was due solely to the mandatory compliance with the reduced hours required by the Department of Transportation. The magistrate judge did not question the credibility of Felise; indeed, he relied on his testimony in finding a false representation by Appleyard Motor. There was also testimony by Michael Pierce, accountant for Appleyard Motor, that prior to the sale of its assets its profits were $200,000-$300,000 a year. Thus, it appears from the evidence that the entire profit margin of Appleyard Motor was wiped out when the driving hours violation was corrected. We further held that there was no evidentiary basis for the magistrate judge's finding that if JWD had known that the annual revenue from the Appleyard Motor operation would decline 12% because customer rates had to be raised 18% to bring the operation into compliance with the law, "the fair price JWD [Douglass] would have been willing to pay for AMT [Appleyard] would have been at least 12% (or $96,000) below the $800,000 it agreed to pay." We pointed out that there was no testimony as to what a willing seller would have paid a willing buyer under these circumstances. We then stated: Moreover, the magistrate judge gave no consideration to the inescapable fact that a reduction of $300,000.00 in annual earnings effectively eliminated Appleyard Motor's profits. We cannot conjecture without evidence what Douglass Corp. would have paid if the hour violations had been brought to its attention prior to the sale. Douglass may well have decided not to purchase Appleyard Motor. We further held that it was clearly established that the "hours violation resulted directly in an annual loss of revenue to Douglass Corp. of $300,000," and that this violated the offset provision in the note and purchase and sale agreement. The offset agreement is no longer a factor in the case, however, because defendant has expressly waived any sums due under the offset provision. All he seeks is a ruling that he is not liable for any further payments on the note. Footnote 1, First Opinion. At the conclusion of our first opinion we reiterated: The district court clearly erred when it inferred that Douglass Corp. would have paid only 12% less for Appleyard Motor in the total absence of any evidence to that effect. This is especially so in light of the fact that bringing Appleyard Motor into compliance with Department of Transportation requirements obliterated the profit margin of the purchased entity. III On remand the magistrate judge concluded that the evidence in the trial record is insufficient to enable a rational factfinder to determine with a reasonable degree of certainty what damages defendant suffered as a result of plaintiff's misrepresentation or breach of warranty. Therefore, I have decided to reopen the record to permit defendant to present additional evidence on the subject. Defendant declined to present any further evidence on the ground that under the law of the case doctrine, the magistrate judge had a duty to follow our rulings and findings and decide the case on the evidence already addressed. The magistrate judge then ordered the clerk to enter judgment in favor of plaintiff, Lucy Appleyard, in the amount of $369,288, being the amount of principal, interest, and late charges to which plaintiff proved she was entitled, before any offset for damages suffered by JWD as a result of the misrepresentation of breach of warranty by plaintiff's predecessor. This was $163,018 more than the first judgment. This appeal followed. The magistrate judge agreed with us that there was no evidence of what a willing buyer would have paid a willing seller if the buyer had known that the truck driver's records had been misrepresented to the extent of causing a reduction in Appleyard's earnings of $300,000. Quite inexplicably the magistrate judge then discusses at length how he arrived at the 12% ($96,000) discounted value. The magistrate judge rejected our ruling that he had erred in stating that defendant had "presented no evidence that purported to address directly the issue of damages or even to quantify JWD's loss in profits as a result of the decline in review." We pointed out that Gerard Felise, vice president and chief financial officer of JWD, testified directly on this. We also summarized Felise's testimony. The magistrate judge mounts a complex seven-page argument involving fixed and variable costs rejecting the testimony of Felise. He concludes this part of his opinion by stating, "it cannot be said with reasonable certainty what happened to AMT's profits as rates increased and rates declined." We stated in our first opinion: "Moreover, the magistrate judge gave no consideration to the inescapable fact that a reduction of $300,000 in annual earnings effectively eliminated Appleyard Motor's profits." We think this clearly was binding on the magistrate judge under the "law of the case" doctrine. The magistrate judge thought otherwise: This brings me back to the very troubling "law of the case" issue and to my reasons for rejecting defendant's argument that the First Circuit's decision mandates a finding that the $300,000 decline in revenues produced by the 18% rate increase in fact wiped out AMT's profits. IV We next consider "the law of the case" doctrine as it applies to this case. We recently held that "[f]or a bar to exist, an issue must have been 'actually considered and decided by the appellate court' or . . . be 'necessarily inferred from the disposition on appeal.'" Field v. Mans, 157 F.3d 35, 40 (1st Cir. 1998); see also Commercial Union Ins. Co. v. Walbrook Ins. Co., 41 F.3d 764, 770 (1st Cir. 1994). While a future court is not bound by non-essential dicta, it "must implement both the letter and spirit of the mandate, taking into account the appellate court's opinion and the circumstances it embraces." United States v. Connell, 6 F.3d 27, 30 (1st Cir. 1993). Our conclusion in our first opinion that Appleyard Motor's profits were "effectively eliminated" was based on the testimony of Gerard Felise, vice president and chief financial officer of JWD and the testimony of the accountant for Appleyard that prior to its sale to JWD, Appleyard Motor's profits were $200,000-$300,000 a year. The magistrate judge did not question the credibility of either of these witnesses. The law of the case established that all profits were eliminated. Given the law of the case, the undisputed evidence, and the conclusion that the value of the business was the sum of its equipment value and goodwill, we disagree with the magistrate's determination that there was insufficient evidence to decide the case. It follows that we disagree with the magistrate judge's ruling that the record was "insufficient to enable a rational factfinder to determine with a reasonable degree of certainty what damages defendant suffered as a result of plaintiff's misrepresentation or breach of warranty." Moreover, after reading the magistrate judge's opinion carefully, we have difficulty understanding how defendant could have proven to the magistrate judge's satisfaction that JWD had suffered any damages by reason of the false representation. We, therefore, rule that it was error for the magistrate judge to, in effect, penalize defendant for not producing additional evidence. This means that we reject plaintiff's argument that defendant waived his right to proceed on the merits when he elected not to provide additional evidence after he was invited to do so. The magistrate judge did not in fact rule that defendant had waived his claim. After summarizing the reasons why he could not decide the damages without additional evidence, he stated: Accordingly, for the reasons stated in the Decision on Remand, and in light of defendant's decision not to present additional evidence regarding damages, the clerk is hereby ORDERED to enter judgment in favor of plaintiff, Lucy Appleyard, in the amount of $369,288, being the amount of principal, interest, and late charges to which plaintiff proved she was entitled, before any offset for damages suffered by JWD as a result of the misrepresentation or breach of warranty by plaintiff's predecessor. Because of the magistrate judge's refusal to follow our clear holdings and rulings, we rule that defendant had the right to appeal the judgment of the magistrate judge and proceed on the record before the court. The final issue is: in light of our rulings and findings on the applicability of the "law of the case" doctrine, how should we proceed. We are reluctant to remand the case again to another judge for another determination of damages. There are certain circumstances where remand can be dispensed with, such as where the record permits only one rational answer or where repeated efforts at factfinding have resulted in confused or unsupportable findings. See, e.g., Knapp Shoes, Inc. v. Sylvania Shoe Mfg. Corp., 72 F.3d 190, 198 (1st Cir. 1995) (in lieu of remand, sorting through record to distinguish findings as to which deference is due and tainted findings as to which deference is not owed); Williams v. Poulos, 11 F.3d 271, 280 (1st Cir. 1993) (describing conditions under which "court of appeals [itself] can, and often should," fix an error). This is such a situation. There is evidence in the record sufficiently clear and uncontested to allow us to make the necessary findings to terminate the case at the appellate level. The following facts are uncontroverted. Appleyard Motor and JWD executed a purchase and sale agreement on November 23, 1988. Under its terms JWD purchased the business and tangible assets of Appleyard for $800,000. Five hundred thousand dollars of the purchase price was paid in cash. The balance of $300,000 was to be made in thirty-five monthly payments. A total of $106,481.76 was paid on the note. JWD had paid a total of $606,481.76 to Appleyard before it stopped payments on the note as of November 1989. In January of 1990 JWD filed a chapter 11 bankruptcy petition. The magistrate judge found in his first opinion, based upon the testimony of Gerard Felise, that the false representation "resulted in a loss of customers and a $300,000 annual decline in revenue associated with the former AMT operation." See infra at 5. This finding was clearly correct. The evidence is that Felise took over the operation of both companies in 1989. We make the following rulings: Because of the raise in rates put into effect by Felise, JWD received $300,000 less in revenue from its Appleyard operation. This was due to the fact that when the rates were raised in 1989 to meet federal work-hour requirements, Appleyard lost customers. Appleyard's annual profits had ranged between $200,000 to $300,000 a year. After the rates had been raised but rejected by its customer, Appleyard could no longer operate at a profit. After JWD filed for bankruptcy in January of 1990, Appleyard also ceased to exist as an operating business. The false representation by Appleyard caused the demise of both businesses. Based on these undisputed facts, we conclude that defendant has no obligation to make any further payments to plaintiff. Defendant has expressly waived any sums that might be due under the offset provision of the purchase and sale agreement. This means, of course, that he cannot attempt to collect any money that might theoretically be due from plaintiff either individually or as a former officer of Appleyard Motors. The judgment below is reversed and remanded with directions to the district court to enter judgment in favor of defendant, John W. Douglass, Jr. No costs to either party on appeal.