TJOFLAT, Circuit Judge:
Zaki Kulaibee Establishment ("Zaki"), a Saudi Arabian company, contracted with Airspares Network, Inc. ("ANI"), a Florida-based
In 1999, Zaki purchased a large collection of new and used military aircraft parts at an auction held by the Royal Saudi Air Force.
Under the CSA, (which the parties agreed would be construed according to Florida law) ANI would hold the parts for the sole purpose of selling them on Zaki's behalf, Doc. 99-1, at 8, § 9,
The initial consignment term was to last five years, but would continue automatically for one-year intervals absent express termination by either party. Id. at 7, § 8(a). Section 4(f) of the CSA provided
ANI wired an initial deposit to cover shipping costs, and Zaki sent the first lot of parts, contained in 115 forty-foot shipping containers, during the summer of 2003. Because of the sheer number of parts involved — approximately 150,000 line items of inventory, comprising around 5,000,000 individual parts — ANI felt that the time and expense involved in conducting an intake inventory, a process that would entail opening each box and physically verifying the quantity and condition of each part, would be prohibitive. Accordingly, ANI simply adjusted its inventory to reflect the number of parts included on the inventory list Zaki had provided.
Zaki received the first sales report from ANI in December 2003. Noticing that the report appeared to be incomplete, Zaki sent representatives to Florida to inquire further. Upon investigation, Zaki uncovered what it believed to be a passthrough scheme between ANI and five other companies,
Zaki raised these concerns with ANI, and ANI responded by complaining that many of the parts it received were non-conforming and that the money it had advanced for shipping had been used to pay for the shipment of unsellable parts. Zaki then diverted its second shipment of aircraft parts (about eight containers worth) to another consignor in California, prompting ANI to file a lawsuit against the alternate consignor in June 2004. ANI also initiated a simultaneous arbitration proceeding against Zaki in Florida. By November 2004, Zaki and ANI had worked out a Settlement and Release Agreement (the "SRA"), dismissing the litigation and the arbitration and releasing each other from all prior claims. Doc. 99-1, at 26-27. Zaki also agreed to allow ANI to take possession of the second lot of parts that had been diverted to California and to ship a third lot of parts from Saudi Arabia.
The SRA reaffirmed the terms of the CSA with a few changes, which included the following. First, to settle the issue of non-conforming parts, the parties agreed that they would work together to identify any such parts and return them to Zaki. Id. at 22, § 5(a). Second, they agreed to waive all claims related to parts that were "listed on the inventory but not found in the warehouse." Id., § 5(b). Third, Zaki agreed to pay ANI $1.275 million as a settlement and to allow ANI to keep an additional 25 percent of all sales (raising its total commission to 75 percent) until the settlement amount was paid. Id. at 21, § 4(b). Fourth, to address Zaki's concerns that ANI was underreporting the actual prices for which its parts were being sold, ANI agreed to calculate Zaki's share based on the price paid by the final customer, not the intermediate price paid by one of ANI's "Affiliated Entities" (i.e., the other five companies also selling Zaki's parts). Id. at 22, § 4(b)(4). Fifth, Zaki agreed to pay half of ANI's "Warehouse Expenses," which were defined as those non-labor costs associated with storing Zaki's parts incurred between December 1, 2004, and November 30, 2006. Id. at 23-24, § 6. This would be done by allowing ANI to set off half of these expenses from Zaki's share of the sales proceeds (which had been reduced to 25 percent until the settlement amount was paid). Id. at 22, § 4(b)(3).
Finally, the SRA reiterated ANI's reporting obligations, including ANI's duty to provide, on written request, copies of all purchase orders verifying the sale price for all sales by it or any of its affiliated companies, id., § 4(d), and, on reasonable notice, any invoices, policies, or related documents underlying any storage expenses deducted from Zaki's share of the sales, id. at 24, § 6(c). ANI also promised to account separately for each of the three lots Zaki had consigned to it. Id. at 25, § 8(e).
Unfortunately, this fragile détente proved fleeting. Zaki claims that ANI did not completely cease its practice of calculating Zaki's share of the sale amount based on the transfer price paid by the affiliated entity (rather than the price paid by the final customer.) Also, Zaki claims that ANI continued to conceal some sales altogether. Finally, Zaki claims that ANI was manipulating its storage costs to improperly increase the amount it was entitled to set off, and that it continued to take offsets for these expenses beyond the two-year period specified in the SRA.
The combined effect of these actions, Zaki claims, was that Zaki received practically no money from ANI in the years following the execution of the settlement agreement.
Despite repeated requests by Zaki, ANI provided virtually no documentation to support this claim.
Due to these and numerous other issues, Zaki decided not to renew the CSA. In June 2006, Zaki notified ANI of its intent to terminate the CSA effective June 2008, when the initial five-year consignment term expired. When that time came, Zaki again notified ANI that it had exercised its right to terminate the CSA and demanded that ANI cease selling its parts and return the remainder of Zaki's inventory. ANI refused, claiming, essentially, that § 8(c) of the CSA gave it a lien on Zaki's parts, such that it could continue selling the parts until Zaki's debt, consisting of the remainder of the settlement amount and the accruing storage expenses, had been paid.
To summarize, Zaki had three primary claims: (1) ANI was concealing sales; (2) ANI was reporting artificially low sales prices by selling parts through its affiliated companies; and (3) ANI was improperly calculating its storage expense setoffs. To determine the extent of any damages stemming from these alleged acts, Zaki would need three corresponding categories of information.
First, Zaki would need to know the number and value of the parts that remained in ANI's warehouse. By comparing the number of parts remaining in ANI's warehouse with the number of parts initially delivered to ANI, Zaki could calculate how many parts had been sold, damaged, or otherwise disposed of by ANI. Then, by comparing this data with the sales reports ANI had provided to Zaki, Zaki would be
Second, Zaki would need to know the final prices for which its parts were sold to outside purchasers. This information was presumably contained in the sales records of ANI and its affiliated entities. By examining these records, Zaki could determine whether ANI had reported any sales to it at a lower price than what the final purchaser paid.
Finally, Zaki would need to know the nature, amount, and timing of the storage expenses ANI had charged to Zaki. This information could be had from ANI's expense records. By reviewing the records, Zaki would be able to evaluate the validity of ANI's claimed offsets.
Each of these three categories of information was in ANI's exclusive possession. Because ANI refused to honor its contractual obligations to account for the consigned goods, see CSA § 4(g); SRA § 8(e), or to provide documentation supporting its claimed sales and expenses, see CSA § 4(e), 4(g); SRA §§ 4(d), 6(c), Zaki turned to the courts to compel ANI to produce this information.
In March 2008, Zaki filed suit in the United States District Court for the Southern District of Florida against ANI, its five affiliated entities,
Perhaps the most straight-forward way of determining how many parts remained was for Zaki to regain possession of its parts and simply count them. Accordingly, shortly after filing its third amended complaint, Zaki moved for summary judgment on its claim that it was entitled to immediate possession of the parts. The District Court found that § 8(c) of the CSA appeared to grant ANI the exclusive option to decide whether or not to return Zaki's parts after the conclusion of the initial consignment term. The District Court acknowledged, however, that such a reading would arguably create a contract of indefinite duration, which, depending on the circumstances, might make it terminable at will.
Precluded from counting its parts on its own turf, Zaki proceeded to discovery, for which it adopted a two-part strategy to obtain the information it needed. First, it
ANI's response to these inquiries was less than enthusiastic. Zaki initially requested ANI's accounting records in January of 2009; the ensuing dispute spanned fourteen months and produced four separate court orders directing ANI to comply.
Nor was Zaki ever able to find out how many of its parts remained unsold in ANI's warehouse. Zaki proposed to hire a team of twenty people to count the parts in a parking lot outside ANI's warehouse to minimize any interference with ANI's ongoing
After two years of discovery, neither aspect of Zaki's plan to uncover the information necessary to establish its damages had yielded fruit. Zaki had not been able to obtain a complete picture of ANI's accounting practices, nor had it been able to count its parts. Zaki knew little more about the extent of its damages than before it had filed suit.
It was at this point that ANI moved for summary judgment on all counts. Addressing Zaki's request for an accounting, ANI argued that since Zaki had been able to obtain all of the reports ANI had prepared summarizing Zaki's sales through discovery, Zaki did not need an accounting. Essentially, ANI's position was that it had reported every sale of a part belonging to Zaki, had done so accurately, and all of its offsets were warranted and correctly calculated. Zaki's argument in opposition was that it should not be required to accept ANI's reporting at face value, especially since the accuracy of that reporting was the heart of their dispute. Zaki also pointed out that not only had ANI shirked its contractual obligations to account, but ANI had also failed to provide vital information to Zaki during discovery — information that could easily be obtained in a court-directed accounting.
The District Court granted ANI's motion and struck Zaki's request for an accounting. The court found that Zaki failed to meet the requirements under Florida law for an accounting because it had an adequate remedy at law in the form of its breach-of-contract action. The court noted that a court-directed accounting is inappropriate where the plaintiff has had an opportunity to establish its damages through discovery and concluded that "[n]othing in the record indicat[ed] why [Zaki] could not obtain the [information] it need[ed] through discovery." Zaki Kulaibee Establishment v. McFlicker, 788 F.Supp.2d 1363, 1371 (S.D.Fla.2011).
The consequence of the District Court's ruling was that all of Zaki's claims would be tried to a jury. The trial began on July 11, 2011, and lasted seventeen days. At the close of the Zaki's case on July 21, the District Court granted defendants' motions for judgment as a matter of law on Zaki's claims for unjust enrichment and conversion and granted in part defendants' motions
The accounting remedy
In a diversity case, where state law affords the underlying substantive right, federal courts are generally constrained to
Traditionally, Florida courts have granted an accounting in three circumstances: in cases of especially complicated or mutual accounts, where a fiduciary relationship existed between the parties, and in cases where discovery was required. Nayee v. Nayee, 705 So.2d 961, 963 (Fla. 5th Dist. Ct.App.1998). Given the availability of the modern discovery regime, the need for discovery, standing alone, is no longer generally regarded as a sufficient ground for granting an accounting. See 1 Dan B. Dobbs, Law of Remedies § 4.3(5), at 610 (2d ed.1993).
Complexity of accounts and fiduciary relations remain viable grounds for an accounting, however. In the former situation, Florida law provides an accounting where the accounts between the parties are sufficiently complicated and an adequate remedy at law is lacking. See Dahlawi v. Ramlawi, 644 So.2d 523, 524 (Fla.3d Dist.Ct.App.1994) (per curiam) ("[E]quity will [provide an accounting] where the contract demands between litigants involve extensive or complicated accounts and it is not clear that the remedy at law is as full, adequate and expeditious as it is in equity." (quoting F.A. Chastain Constr., Inc. v. Pratt, 146 So.2d 910, 913 (Fla.3d Dist.Ct.App.1962))). In the latter situation, an accounting is appropriate in every case. See Armour & Co. v. Lambdin, 154 Fla. 86, 16 So.2d 805, 810 (1944) ("[I]t may be said generally that whenever there is a fiduciary relationship such as that of trustee, agent, executor, etc., the right to an accounting in equity is undoubted." (quotation marks omitted)).
To obtain an accounting under Florida law, then, a party must show either (1) a sufficiently complicated transaction and an inadequate remedy at law or (2) the existence of a fiduciary relationship.
Zaki contends that by agreeing to hold and sell Zaki's parts as a consignee, ANI assumed the mantle of a fiduciary. The precise nature of the fiduciary relationship is among "the most elusive concepts in Anglo-American law." Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 Duke L.J. 879,
Masztal v. City of Miami, 971 So.2d 803, 808-09 (Fla.3d Dist.Ct.App.2007) (quoting Quinn v. Phipps, 93 Fla. 805, 113 So. 419, 421 (1927)). The characteristics of a consignment relationship place it well within this broad category.
A consignment relationship is one in which one party, the consignor or principal, transfers certain goods to another party, the consignee or factor, who undertakes to sell the goods on the consignor's behalf in exchange for a commission on the sale. E.g., Gadsden Cnty. Tobacco Co. v. Corry, 103 Fla. 217, 137 So. 255, 257 (1931). The consignee is generally in the business of selling such goods, and usually sells consigned goods under his own name. Id. The consignor retains title to the goods, however, and thus the consignee is best understood as a type of bailee.
The essential circumstances under which Florida law imposes fiduciary obligations — where one party delegates power to another to carry out a specific task on his behalf, and in so doing, reposes significant trust and confidence in the other — are inherent in a consignment relationship. The relationship is designed to place both the consignor and the consignee in a better position than either could attain separately. The consignor benefits by being able to sell his goods for a higher price than he would otherwise be able to secure, and the consignee benefits by receiving a commission he would not otherwise have received and by bolstering his reputation as a superior vendor of the type of goods consigned.
But this mutually beneficial result can only be achieved with the exercise of significant trust by the consignor. A consignor must not only entrust possession and control over his goods to the consignee, but also trust the consignee to sell his goods for a fair price and remit the proceeds (less a commission) to him. Furthermore, because a consignee is not tasked with holding the property entrusted to him and returning the same property to the consignor at a later date, but rather with disposing of the property and returning something else (the fungible proceeds of the sales of the goods) to the consignor, the need to impose a fiduciary obligation to account becomes particularly apparent.
Notable among these duties is the consignee's obligation to render a true and accurate account of his stewardship of the consignor's goods. E.g., Wilson v. Burch Farms, Inc., 176 N.C. App. 629, 627 S.E.2d 249, 259 (2006) ("After selling the goods, the consignee must account to the consignor with the proceeds from the sale."); Cusick, 709 P.2d at 1230; 24A Fla. Jur.2d Factors and Commission Merchants § 20 (2011).
Furthermore, it has long been recognized that a court-directed accounting is warranted if a consignee disclaims his or her duty to account. See generally Wilson v. Duncan, 92 Fla. 470, 112 So. 48 (1926) (per curiam); see also State ex rel. Cockrum v. Southern, 229 Mo.App. 749, 83 S.W.2d 162, 164 (1935) ("It is well settled that [a principal-factor] relationship is a fiduciary one and constitutes the factor a quasi trustee for the principal and a suit in equity against the factor for an accounting may be brought when the facts warrant a suit for an accounting."); Mackenzie v. Johnston, (1819) 56 Eng. Rep. 742; 35 C.J.S. Factors § 62 (2009). In fact, as one distinguished scholar recognized, a disputed consignment relationship is a paradigmatic case for an accounting. See Christopher C. Langdell, A Brief Survey of Equity Jurisdiction (pt. 4), 2 Harv. L.Rev. 241, 260 (1889) ("The largest and most important class of persons, however, against whom [an equitable accounting] will lie, are agents who make it their business... to receive the property of others into their possession for the purpose of selling it.... Agents of this class [include] factors or commission merchants....").
ANI admits that it had a consignor-consignee relationship with Zaki. See Doc. 106, at 1. As a consignee, ANI had a fiduciary obligation to account for its handling of Zaki's parts. The contract between the parties contained no provision altering or abridging this common-law duty; in fact, both the CSA and the SRA explicitly spell out ANI's duty to keep complete and accurate records, and Zaki's right to review those records. See CSA §§ 4(e), 4(g); SRA §§ 4(d), 6(c), 8(e).
ANI concededly failed to comply with its accounting and reporting obligations. ANI does not dispute that it failed to provide regular sales reports or the supporting documents for those sales reports. ANI never conducted an inventory of Zaki's parts and thus was unable to furnish any inventory reports. Nor did ANI provide any documentation verifying its claimed storage expense offsets or keep any account of how the $1.275 million settlement amount was being paid off.
Given ANI's manifest failure to account for its stewardship of Zaki's parts, Zaki was, and is, entitled to a court-directed accounting. The District Court acknowledged that ANI had breached its
The District Court reasoned that an accounting was unnecessary because Zaki could obtain adequate relief in an action at law for breach of contract. In light of the fiduciary relationship between the parties, applying this additional requirement was error.
In a perfect world, discovery may have provided the means to force ANI to disgorge all the information necessary for Zaki to quantify its damages, i.e., how many parts remained in ANI's possession; the condition of the remaining parts; how many of the parts had been sold; whether any parts had been discarded or otherwise disposed of; the prices at which the parts were sold; and the expenses for which ANI took offsets. In reality, however, the discovery regime provided by the Federal Rules of Civil Procedure is maladapted to situations such as this — situations in which one party is entrusted with valuable goods, has the exclusive responsibility to maintain
The facts of this case provide compelling support for this point. Over the course of more than two years of discovery, ANI waged a largely successful campaign to avoid providing basic sales and expense information regarding its handling of Zaki's parts, sidestepping at least three separate court orders to produce the information in the process. ANI managed to avoid sanctions by providing enough information to give the appearance of compliance, but not enough to allow Zaki to actually determine the extent of its damages. Due perhaps to the scope of the discovery or a lack of technical accounting expertise, these omissions were not perceived and remedied in a timely fashion, and ultimately Zaki went to trial unable to verify ANI's sales or its claimed setoffs.
ANI also manipulated the discovery procedures to prevent Zaki from discovering how many of its parts remained. ANI retained possession and control of the remainder of Zaki's parts — and along with them, the only conclusive means of determining the existence and extent of any damages. Yet ANI repeatedly stymied Zaki's attempts to conduct an inventory of those parts while simultaneously spinning out the discovery process for as long as possible. As a result, Zaki was forced to involve the District Court in its efforts to obtain the inventory information it needed from ANI. In an attempt to get Zaki this information, the Magistrate Judge was reduced to ordering ANI to fix municipal fire code violations in the hopes that the city would issue a permit allowing Zaki to conduct the inventory, and to intervening in disputes about whether the parties had agreed to conduct the inventory indoors with ten people, or outdoors with twenty people. The Magistrate Judge inevitably became bogged down trying to manage these effectively unenforceable orders. Eventually, the court's inexorable march toward trial overtook Zaki's need for an inventory.
We do not recount these woes to disparage the Magistrate Judge or the District Court. The unfortunate manner in which the pretrial litigation played out in this case simply punctuates our point: a court-directed accounting was the proper remedy here. Zaki's breach of contract action did not constitute an adequate remedy because as a practical matter, even if Zaki constructed an otherwise perfect case for breach, ANI's machinations prevented Zaki from obtaining the requisite information to prove damages. Discovery simply could not provide the kind of close, consistent, and knowledgeable oversight necessary to procure that information from a sophisticated party who both possessed all the relevant details and had substantial motivation to frustrate the discovery process.
A court-directed accounting is ideally tailored to address problems of this nature. When a court grants an accounting, it typically refers the matter to a master to conduct a full inquiry into the accounts and transactions between the parties. See 9C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2605 (3d ed.2008). Based on that inquiry, the master then makes or recommends findings of fact to the court. Fed.R.Civ.P. 53(a)(1).
In conclusion, we hold that the District Court abused its discretion when it refused to grant Zaki an accounting. The District Court failed to recognize that the fiduciary nature of the relationship between the parties alone constituted sufficient grounds for an accounting under Florida law and erroneously concluded that an action for damages afforded an adequate alternative. Accordingly, we REVERSE the judgment of the District Court and REMAND the case for an accounting.
SO ORDERED.
Doc. 99-1, at 5.
Doc. 99-1, at 8.
Id. at 9. At trial, Mr. Persaud testified that he still wasn't sure whether any of the $1.275 million remained unpaid. Doc. 578, at 55.
ANI eventually identified the expenses for which it claimed it was entitled to offsetting deductions, but only after the deadline for making the pre-trial expert disclosures required by Rule 26(a)(2) had passed on March 3, 2011. See Fed.R.Civ.P. 26(a)(2). As a result, Zaki was unable to provide the necessary summary of its expert's expected opinion as to the validity of ANI's claimed offsets by the deadline, and the court ultimately precluded Zaki's expert from offering any testimony as to the propriety of these offsets at trial. See Doc. 475, at 10; Doc. 488.
Doc. 560, at 2. From this answer, it is clear that the jury was persuaded that ANI had breached the contract under at least one of the four grounds. From the amount that the jury awarded Zaki, we can deduce that jury credited Zaki's argument under (b) — that ANI breached the CSA by failing to turn over Zaki's share of the insurance proceeds. Under the CSA, ANI was responsible for obtaining insurance on the parts, and if any proceeds were paid out under the policy, ANI was entitled to the first $1 million. Any recovery above $1 million was to be split equally between ANI and Zaki. See Doc. 99-1, at 5; § 4(h). During the CSA term, ANI received insurance proceeds in the sum of $1,625,000 and admittedly failed to pay any of that amount to Zaki. Zaki's contractual share of those proceeds was $312,500 — precisely the amount of the jury award.
Whatever the state of Florida law at the time of Kee, we believe our statement above accurately reflects current Florida law, as demonstrated by several post-Kee decisions. See Cassedy v. Alland Invs. Corp., 982 So.2d 719, 720 (Fla.1st Dist.Ct.App.2008) ("As fiduciaries, Appellees were required to render a final accounting."); Ashemimry v. Ba Nafa, 778 So.2d 495, 498 (Fla.5th Dist.Ct.App.2001) ("Where a fiduciary or trust relationship exists, an action for an accounting is considered equitable in nature without regard to other considerations." (citing Nayee v. Nayee, 705 So.2d 961, 963 (Fla.5th Dist.Ct.App.1998))).
Because the harm is unquantifiable, it cannot, of itself, provide a basis for more than nominal damages. See Nebula Glass Int'l, Inc. v. Reichhold, Inc., 454 F.3d 1203, 1212 (11th Cir.2006) ("[R]ecovery is denied where the fact of damages and the extent of damages cannot be established within a reasonable degree of certainty." (quoting Miller v. Allstate Ins. Co., 573 So.2d 24, 27-28 (Fla.3d Dist.Ct. App. 1990)) (quotation marks omitted)). Thus, the only meaningful way to vindicate this right is via an accounting.
In essence, then, a principal's right to an accounting vis-à-vis a fiduciary is the result of an ex ante determination that legal remedies are inadequate in these contexts, and that courts should exercise their equitable authority to grant an accounting to administer full justice between the parties. Thus, the rule in Florida that "[w]here a fiduciary or trust relationship exists, an action for an accounting is considered equitable in nature without regard to other considerations." Ashemimry, 778 So.2d, at 498 (emphasis added).