KARUM HOLDINGS LLC, et al., and KARUM LATIN AMERICA S. DE R.L. DE C.V. v. LOWE‘S COMPANIES, INCORPORATED, et al.
Nos. 18-1007 & 18-1074
United States Court of Appeals For the Seventh Circuit
ARGUED MAY 29, 2018 – DECIDED JULY 13, 2018
Before BAUER, BARRETT, and ST. EVE, Circuit Judges.
The focus of this appeal is Karum‘s proof of damages and expert disclosures, or lack thereof. Early on, Karum disclosed its summary “damages model,” a 37-page estimate of damages with hundreds of figures contained in charts and graphs. Karum intended to have its Chairman and former CEO Peter Johnson and/or its current CEO and CFO Russell Ouchida present the damages model at trial as lay opinion testimony; Karum never retained a damages expert. Two months before trial, Lowe‘s filed a motion in limine to preclude Johnson and Ouchida from testifying as to the damages model because any testimony regarding the model required the
I. BACKGROUND
A. The Agreements Between Lowe‘s and Karum
Lowe‘s Inc. is the second largest home improvement store in the United States, and in 2010, it expanded its North American presence into Mexico by opening two stores. Prior to opening those stores, Lowe‘s Mexico entered into the “Private Label Credit Card Program Agreement” (“Program Agreement“) with Karum. The term of the agreement was seven years, and it could only be terminated if certain conditions were met, or by mutual consent. The parties initially agreed to jointly fund the credit portfolio 50/50, but changed course in 2014 resulting in the “Profit Sharing and Funding Agreement” (the “Funding Agreement“), whereby Lowe‘s Mexico agreed to fund 99%. Karum Card Services was an entity created as a joint venture by Lowe‘s Mexico and Karum Group to manage and operate the program, i.e., issue credit cards to customers in Mexico. In turn, Karum Card Services also had a separate “Masters Credit Services Agreement” (the “Services Agreement“) with Karum Latin America S. de L.A. de C.V. (Karum LA), a subsidiary of Karum Group, to further carry out the program in Mexico.
The arrangement failed to meet Lowe‘s expectations, and Lowe‘s sought to terminate its relationship with Karum in 2014. After mediation proved unsuccessful, Karum and Karum LA filed this lawsuit on January 14, 2015. Karum alleged that a contractual relationship between Lowe‘s and Karum was reflected in all three agreements described above, and that Lowe‘s had unilaterally terminated the agreements. Lowe‘s filed a motion to dismiss all claims relating to the Services Agreement since Lowe‘s was not a party to that particular agreement, and dismiss Karum LA, because it was not a party to any agreement to which Lowe‘s was a party. The district court granted Lowe‘s motion without prejudice, and Karum‘s amended complaint removed Karum LA as a party and any claims for breach of contract of the Services Agreement.
B. Karum‘s Witness Disclosures, Damages Model, and Procedural History
Karum made its initial
In April 2015, Karum produced a 37-page summary “damages model,” as required by
Following the grant of partial summary judgment in favor of Lowe‘s, the district court held a status hearing on April 12, 2017, in order to set expert disclosure deadlines and a trial date. During the hearing, Karum sought to supplement a revised damages model in order to conform to the court‘s summary judgment ruling, which the court granted. The court then asked Karum‘s counsel whether it intended to offer “an affirmative expert on damages” to which Karum‘s counsel replied “No, Your Honor. The plaintiff will testify to it himself. He is the expert on it.” Relying on this statement, the court set a deadline for Lowe‘s expert disclosures under
Karum‘s supplemental damages model substantially altered the Portfolio Component and added a new component that had not been previously disclosed or subject to discovery. Lowe‘s swiftly moved to strike the supplemental model as untimely under
Johnson can opine as a lay witness under
Federal Rule of Evidence 701 on the subject of Karum‘s estimated damages by virtue of his perception of Karum‘s business gained through his management of that business. But he might also qualify as an expert underFederal Rule of Evidence 702 , through the knowledge and experience he has gathered from decades in the credit business. In fact, Johnson has served on the audit committees of multiple public companies, and as such, is recognized by the SEC to have financial expertise. Either way, Lowe‘s knows Johnson and will not be surprised by his testimony.
(emphasis added).
The court granted Lowe‘s motion to strike the supplemental damages model on September 6, 2017, and Karum‘s damages model for trial was reduced to the original Portfolio Component from April 2015. During a status hearing the following day, the parties updated the court on their expert disclosures. Lowe‘s counsel stated that its retained expert would produce a report by the end of the month. In the court‘s minute entry, the court reconfirmed that Karum‘s counsel “[did] not anticipate offering an expert at trial but may offer a rebuttal expert after [reviewing Lowe‘s] experts report.”
C. Lowe‘s Motion In Limine To Exclude Johnson‘s Expert Testimony
On October 4, 2017, with the trial date approaching, Lowe‘s filed “Motion In Limine No. 1 to Exclude Evidence of Plaintiffs’ Damages Model.” In that motion, Lowe‘s advanced a number of arguments, only one of which is relevant to this appeal: that no Karum witness, including
Karum conceded that no witness could provide lay opinion testimony as to the damages model, but rather asserted that it had “unambiguously” disclosed Johnson as an expert witness pursuant to
On November 21, 2017, the district court granted Lowe‘s motion in limine to exclude Johnson from offering expert testimony on the damages model. The court found that “Karum‘s purported disclosure of Johnson as an expert witness was plainly inadequate” and consequently, the failure to disclose Johnson as an expert was a
neither substantially justified nor harmless, particularly in light of the upcoming trial date. Thus, exclusion of Johnson‘s expert testimony was automatic under
Karum filed a motion to reconsider the court‘s ruling, arguing that the exclusion of Johnson‘s expert testimony amounted to a case-dispositive sanction by eliminating its ability to present evidence of damages. Karum also requested a variety of alternatives to the court‘s ruling, from bifurcating the trial to filing an interlocutory appeal. On November 28, 2017, the court held a lengthy hearing and affirmed its previous ruling. The court questioned the parties on other ways to introduce evidence of damages without Johnson relying on the damages model, and explored the alternative remedies proposed by Karum. However, the court found “that there is no lesser remedy available at this point,” and “that no other alternatives ... would be available to Karum that would not otherwise inflict undue prejudice to Lowe‘s.” According to the court, the exclusion of Johnson‘s expert testimony was “proportionate not only to Karum‘s failure to abide by Rule 26(a)(2), but also to the substantial prejudice to Lowe‘s if the Court would allow his testimony to proceed.”
The court allowed Karum to go back through the discovery to identify any other evidence of damages it might be able to introduce. The following day, Karum wrote a letter explaining its alternative method of proving damages. Lowe‘s filed a motion in limine to exclude that method, and the court held another lengthy hearing on December 4, 2017. Applying the same
D. Lowe‘s “Setoff” and Permissive Counterclaim
In its answer to the complaint, Lowe‘s set forth an affirmative defense stating that it was entitled to a setoff against any relief sought by Karum in light of the monies owed to Lowe‘s. It explained the affirmative defense as follows:
Lowe‘s provided the funding to [Karum Card Services] to provide the various credit services under the Program Agreement and Funding Agreement. Lowe‘s provided that funding in the form of debt, including promissory notes executed by [Karum Card Services] and Karum Group. There remains an outstanding balance owed to Lowe‘s (the exact amount to be proven at trial), and these payments and loans made to Karum should be set off from any damages that Karum might obtain.
Lowe‘s made three separate loans in 2014 and 2015 secured by promissory notes to Karum Card Services which were scheduled to mature in 2019 and 2020 absent a default. Karum Card Services continued to operate throughout the litigation, providing monthly statements to Lowe‘s. However, in early 2017, Karum informed Lowe‘s that it intended to shut down Karum Card Services. Concerned about the status of its loans, Lowe‘s sent a letter on August 30, 2017, notifying Karum that it had defaulted on the notes, pursuant to a section in the note that allows Lowe‘s to declare a default where it believes the prospect of payment or performance is impaired. Lowe‘s sought payment of approximately $6.28 million which Karum refused to pay.
On September 28, 2017, Karum filed a motion in limine to exclude Lowe‘s setoff affirmative defense and any evidence it intended to offer to support it. Before the district court ruled on that motion, Lowe‘s filed a motion to convert its setoff affirmative defense into a counterclaim under
II. DISCUSSION
Karum‘s main contention on appeal is that the district court erred in excluding Johnson‘s expert testimony on the damages model. Karum also argues that the court made a variety of errors prior to its ruling on Johnson‘s testimony.
A. Karum‘s Rule 26(a) Violation and Exclusion Under Rule 37(c)(1)
Karum contends that it complied with
A district court‘s discovery rulings, including a decision to exclude expert testimony, are reviewed for an abuse of discretion. Musser v. Gentiva Health Servs., 356 F.3d 751, 755 (7th Cir. 2004). “A court does not abuse its discretion unless (1) the record contains no evidence upon which the court could have
If a party fails to provide information or identify a witness as required by
Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless.
We first assess the court‘s application of
We agree with the district court that Karum‘s purported expert disclosure of Johnson was plainly inadequate; in fact, it was non-existent. The plain meaning of
At two separate status hearings after the close of discovery, Karum affirmed that it did not intend to offer an affirmative expert at trial. Karum told Lowe‘s and the district court that Johnson would testify on the damages model, and in a footnote contained in a brief, stated that Johnson could “opine as a lay witness” under
Moreover, the damages model alone was insufficient to constitute “a summary of the facts and opinions” on which Johnson would testify to regarding the model. The
Karum stresses that Lowe‘s was aware that Johnson would provide expert testimony. Lowe‘s had deposed Johnson about the model and knew Karum intended to call him to testify about its content. However, Lowe‘s should not have to assume a particular witness will testify as an expert. See Musser, 356 F.3d at 757. As we have reiterated before, “[f]ormal disclosure of experts is not pointless. Knowing the identity of the opponent‘s expert witnesses allows a party to properly prepare for trial.” Id. Simply put, the district court correctly found Karum violated
Karum does not try to justify its
The district court did not abuse its discretion in finding that Karum‘s
Karum maintains that the court could have reopened discovery and allowed Lowe‘s one day to re-depose Johnson about his qualifications while maintaining the December 11 trial date. But again, the district court expressly rejected that idea. The court found that excusing Karum‘s
Finally, Karum asserts that the court erred by imposing what amounted to be a case-dispositive sanction instead of a less drastic measure. We have stated before that when a district court‘s discovery sanction “necessarily entails dismissal of the case, the sanction ‘must be one that a
We are satisfied that the district court‘s sanction was reasonable and made with careful consideration of the circumstances. After issuing its decision, the court held a lengthy hearing on a motion to reconsider its ruling, and heard arguments from both parties over a variety of alternative remedies. At that hearing, the court invoked the correct legal standards and concluded that there was “no lesser remedy available” with the trial date weeks away, and that the exclusion of Johnson‘s testimony was proportionate to the
B. Karum‘s Other Arguments
Karum argues that, prior to excluding Johnson‘s expert testimony, the court erred in (1) striking both the Services Component of the damages model and the supplemental model it provided in April 2017; (2) dismissing Karum LA and claims related to the Services Agreement; and (3) finding Lowe‘s counterclaim permissive.
Karum‘s first argument cannot overcome our decision above to affirm the district court‘s exclusion of Johnson‘s expert testimony under
Next, Karum attacks the district court‘s early ruling to dismiss, without prejudice, all claims related to the Services Agreement and Karum LA as a party to the lawsuit. “We review de novo a district court‘s ruling that a complaint fails to state a claim upon which relief may be granted under
Karum argues that even though Lowe‘s was not a party to the Services Agreement, it was a necessary part of the parties’ relationship. In other words, Karum
both the Program and Funding Agreements, which state they “constitute the entire agreement.”
As it relates to Karum LA, Karum advances a different argument than it raised below: that Karum LA is a third-party beneficiary under New York law.4 Leaving aside the fact that this argument was waived, Karum did not plead in the complaint that Karum LA is a third-party beneficiary, nor could it have since the Program Agreement specifically contained a clause titled “No Third Party Beneficiaries.”
Finally, Karum asserts that the court erred in finding that Lowe‘s counterclaim was permissive rather than compulsory.
However, as
Lowe‘s to declare a default on the notes in August 2017. Since the counterclaim did not exist at the time Lowe‘s served its answer, the district court correctly found that Lowe‘s counterclaim is permissive.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment in favor of Lowe‘s.