Eldridge v. Gordon Brothers Group, LLC
863 F.3d 66
1st Cir.2017Background
- Old K's Merchandise, financially distressed, engaged Gordon Brothers to advise on possible liquidation and later formed New K's LLC in May 2006; Gordon took 77.5% control and was named sole manager.
- The LLC Agreement permitted Gordon to liquidate New K's at its sole discretion, required Gordon to "use best efforts to consult" with Old K's, and included an integration and Delaware choice-of-law clause for contract claims.
- Gordon negotiated and obtained a 50% composition from creditors, paid LaSalle's loan (~$40M), and operated New K's through mid-2006 but announced liquidation and store closures in October 2006; New K's operations ceased by January 2007.
- Old K's sued in federal court (diversity): counts for fraudulent inducement (Illinois law), an accounting/document production claim, and breach of the LLC Agreement (including an implied covenant claim).
- The district court granted defendants summary judgment on fraudulent inducement and on the implied covenant theory (in part), excluded a belated "missing inventory" damages theory under Fed. R. Civ. P. 37(c), granted summary judgment for defendants on remaining claims, and imposed $35,000 Rule 11 sanctions against Old K's (later appealed).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Fraudulent inducement (Illinois law) — promises to run New K's through Christmas, consult, restock, and ability to turn company around | Gordon knowingly misrepresented intent/ability to run a going concern and to restock; Old K's reasonably relied and was induced to sign LLC Agreement | Statements were promissory, vague, or puffery; reliance was unreasonable given consultants' warnings and LLC language permitting liquidation | Judgment for Gordon affirmed — statements were nonactionable puffery/opinion or promissory statements where reliance was unreasonable; promissory fraud not shown |
| Breach of implied covenant of good faith and fair dealing (Delaware law) — liquidation decision | Gordon breached implied covenant by liquidating pre-holiday season contrary to Old K's expectations | LLC expressly vested discretion to liquidate in Gordon; implied covenant cannot add terms the parties did not bargain for | Judgment for Gordon affirmed — LLC granted unilateral liquidation authority; implied covenant cannot override express contract terms |
| Breach of implied covenant — operational mismanagement (furniture/jewelry) | Gordon mismanaged departments to guarantee failure and reduce Old K's recovery | Old K's waived this theory by not briefing it in opposition to earlier summary-judgment motion | Waiver affirmed; claim not preserved and properly dismissed |
| Damages: "missing inventory" theory and liquidating distribution calculation | Missing-inventory damages (new theory) and alleged miscalculation of distribution harmed Old K's | Missing-inventory theory was disclosed after discovery close and should be excluded under Rule 37(c); distribution calculation supported by record | Missing-inventory theory precluded under Rule 37(c); distribution calculation supported for defendants — summary judgment affirmed |
Key Cases Cited
- HPI Health Care Servs. v. Mt. Vernon Hosp., Inc., 545 N.E.2d 672 (Ill. 1989) (promissory fraud is actionable only when part of a scheme to defraud)
- Desnick v. Am. Broad. Cos., 44 F.3d 1345 (7th Cir. 1995) (promises often fall into puffery and promissory-fraud limits)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (implied covenant of good faith and fair dealing cannot create contractual protections the parties did not bargain for)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (Sup. Ct. 1986) (standard for summary judgment: genuine dispute as to any material fact)
- Protective Life Ins. Co. v. Dignity Viatical Settlement Partners, L.P., 171 F.3d 52 (1st Cir. 1999) (Rule 11 sanctions standard and abuse-of-discretion review)