Zaki Kulaibee Establishment v. Henry H. McFliker ( 2014 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 11-15207
________________________
D.C. Docket No. 0:08-cv-60296-MGC
ZAKI KULAIBEE ESTABLISHMENT,
a company formed under the laws of
the Kingdom of Saudi Arabia,
Plaintiff - Appellant,
versus
HENRY H. MCFLIKER,
a natural person,
a.k.a. Harris H. McFliker,
a.k.a. Harold McFliker,
AYODH PERSAUD,
a natural person,
a.k.a. Joe Persaud,
SHAMMIE PERSAUD,
a.k.a. Bebe Nafessa Persaud,
a.k.a. Be Be N. Persaud,
a.k.a. Bi Bi N. Persaud,
AIRSPARES NETWORK, INC.,
a Florida corporation,
DAYTONA AEROSPACE, INC.,
a Florida corporation, et al.,
Defendants - Appellees.
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________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(November 18, 2014)
Before TJOFLAT, Circuit Judge, MOORE, * and SCHLESINGER, ** District
Judges.
TJOFLAT, Circuit Judge:
Zaki Kulaibee Establishment (“Zaki”), a Saudi Arabian company, contracted
with Airspares Network, Inc. (“ANI”), a Florida-based aircraft parts dealer, to sell
a large shipment of aircraft parts on consignment. Zaki claims ANI breached the
contract by selling Zaki’s parts without properly accounting for the sales proceeds,
charging Zaki for inflated storage expenses, and failing to return the parts after
Zaki terminated the consignment agreement. Zaki sued for breach of contract and
conversion, among other things. Noting that ANI possessed both the relevant
records and all of Zaki’s remaining parts, Zaki also requested an accounting. The
District Court refused to order ANI to account, holding that Zaki had an adequate
remedy at law. We conclude that this was error and remand for an accounting.
*
Honorable K. Michael Moore, Chief U.S. District Judge for the Southern
District of Florida, sitting by designation.
**
Honorable Harvey E. Schlesinger, U.S. District Judge for the Middle District of
Florida, sitting by designation.
2
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I.
A.
In 1999, Zaki purchased a large collection of new and used military aircraft
parts at an auction held by the Royal Saudi Air Force.1 Zaki then began reselling
the parts online. ANI purchased several of the parts in the course of its business
and eventually contacted Zaki about the possibility of selling parts on consignment
for Zaki in the United States. In June 2003, Zaki al-Kulaibee, Zaki’s owner and
president, and Abdurahman Saud, Zaki’s business director, traveled to Florida to
meet with Henry McFliker, ANI’s founder and past president, and Ayodh Persaud,
ANI’s current president, to discuss the potential relationship. ANI’s lawyers drew
up a draft Consignment Services Agreement (the “CSA”) designating ANI as
Zaki’s “agent and consignee,” and after some negotiation, Mr. Zaki and Mr.
Persaud executed the agreement. In the CSA, Zaki agreed to ship its parts to ANI
in Florida, and ANI promised to store and market the parts. In return, ANI would
retain as its commission 100 percent of the first $1 million in sales, 75 percent of
the next $1 million, and 50 percent of all sales above $2 million. In the CSA, the
parties estimated the aggregate retail value of the parts to be $500 million.
1
The lot included parts for Lockheed C-130 Hercules transport planes, Boeing
KC-135 Stratotankers, and Boeing 707 Airborne Warning and Control System
(“AWACS”) planes.
3
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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, § 9,2 but Zaki retained title to the parts until sold, id.
at 7, § 7. ANI agreed to segregate Zaki’s parts from its other products, id. at 3,
§ 4(a); to insure the parts and include Zaki as an additional named insured on the
policy, id.; and to “diligently and in good faith use its best efforts” to sell the parts
at fair market value, id. at 4, § 4(c). The CSA also tasked ANI with several
reporting obligations: to provide a sales report “each month during the Term” for
all sales of its parts from the preceding month, id. at 4–5, § 4(e); to maintain
records of all sales of Zaki’s parts, id., § 4(g); to open its books and records to
Zaki’s inspection on request “to ensure correct computation of the payments due
[Zaki],” id.; to provide regular sales and inventory reports to Zaki on reasonable
request, id.; and to allow Zaki “to conduct an audit of any such reports and records
relating to [Zaki’s parts]” on reasonable notice, id.
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 8, § 8(a). Section 4(f) of the CSA provided that if, after the initial term, Zaki
2
All docket citations refer to the District Court docket, Zaki Kulaibee
Establishment v. Henry H. McFliker, No. 08-cv-60296 (S.D. Fla.).
4
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wanted all or substantially all of the parts returned, it must first terminate the
agreement.3 Section 8(c) further provided, in some tension with § 4(f), that if
either party terminated the relationship, ANI had the option to continue selling any
consigned parts still in its possession. 4
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
3
Section 4(f) of the CSA reads in pertinent part:
After the Initial Term, [Zaki] may demand that [ANI] return any, but not all or
substantially all, unsold Consigned Goods in its possession, in which case [ANI]
shall promptly return such requested Consigned Goods to [Zaki] at [Zaki’s]
expense. If [Zaki] desires after the Initial Term that [ANI] return all or
substantially all unsold Consigned Goods in its possession, it may do so only by
terminating this Agreement pursuant to Section 8(b) hereof [setting out the
procedures for termination]. This Section 4(f) shall survive the expiration or
termination of the Agreement, for any reason whatsoever.
Doc. 99-1, at 5.
4
Section 8(c) of the CSA reads in pertinent part:
Each party hereby agrees that in the event of any termination of this Agreement,
[ANI] may, at its sole option, (i) sell any Consigned Goods on hand and unsold
pursuant to the terms and conditions of this Agreement, or (ii) return any such
Consigned Goods to [Zaki] at [Zaki’s] expense. Upon [ANI’s] return to [Zaki] of
all unsold Consigned Goods after termination of this Agreement, all parties shall
be discharged of their obligations under this Agreement.
Doc. 99-1, at 8.
5
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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.
B.
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 pass-
through scheme between ANI and five other companies,5 all selling aircraft parts,
most operated out of the same location by the same people.6 According to Zaki,
ANI had divvied up Zaki’s inventory amongst these affiliated entities and allowed
them to list and sell Zaki’s parts online in their own names. When an affiliated
company sold one of Zaki’s parts, it would purchase the part from ANI, then turn
around and resell it to the actual customer at a higher price. ANI would report
5
These five companies were Daytona Aerospace, Riverside Enterprises, Aircraft
Logic Systems, B.C. Inventories, and Thunderbird Aviation, all co-defendants in this
case. See Doc. 99, at 14.
6
Zaki contends that at various times, ANI, Daytona Aerospace, Riverside
Enterprises, Aircraft Logic Systems, B.C. Inventories, and Thunderbird Aviation all
listed 508 S. Military Trail, Deerfield Beach, Florida as their official address. See Doc.
99, at 3–4. Zaki also contends that ANI, Daytona Aerospace, Aircraft Logic Systems,
and B.C. Inventories were all run, at various times, by some combination of Henry H.
McFliker, Ayodh Persaud, and Shammie Persaud (the individual defendants in this case),
and that Riverside Enterprises was run by Mr. McFliker’s daughter and son-in-law. See
id. at 4–5.
6
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sales made through these affiliated companies to Zaki at the lower price paid by
the affiliated company to ANI, rather than at the price paid by the end customer to
the affiliated company. Zaki also came to believe that ANI was selling some of its
parts without reporting the sales at all.
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.,
7
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§ 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).
8
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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. 7 ANI does not contest Zaki’s assertion that little money
actually changed hands but contends that Zaki’s sales revenue was insufficient to
cover its share of the storage costs, and that ANI was entitled to add these costs to
the $1.275 million settlement figure. In essence, ANI’s perspective is that the total
amount Zaki owed ANI was growing, rather than shrinking.
7
According to an affidavit filed by Zaki’s representative, Zaki received six
payments totaling $57,689.21 in 2005; one payment of $12,844.90 in 2006; and two
payments totaling $16,474.00 in 2007, for a total of $87,008.11. Doc. 52-1, at 4. By way
of comparison, the sales reports that ANI sent to Zaki indicated that Zaki’s overall share
of the sales revenue for that same period was $1.94 million. Doc. 399-1, at 2.
9
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Despite repeated requests by Zaki, ANI provided virtually no documentation
to support this claim. 8 Nor did ANI ever provide any account of how much of the
$1.275 million settlement amount had been paid, or how Zaki’s share of the
proceeds were being applied to the debt. 9 In fact, other than the summary sales
reports, which ANI provided intermittently and only until the end of the initial
consignment period in 2008, it does not appear that ANI allowed Zaki to see any of
its sales, expense, or inventory records.
8
Ayodh Persaud, ANI’s Chief Financial Officer, admitted on deposition that ANI
had provided five or six months of expense reports in 2005, but none beyond that. Doc.
459-1, at 10.
9
In fact, it does not appear that ANI kept any contemporaneous record of the
balance of the settlement amount at all. The following colloquy occurred at Mr.
Persaud’s deposition:
Q: Do you have a ledger of the debt remaining?
A: I am preparing that right now.
Q: Well, you haven’t maintained a ledger up until this point in time, correct?
A. That’s correct.
Q: Okay. Well, then how did you know, for example, say last month before you
began the preparation of the ledger, how much money Mr. Zaki owed of the
$1.275 million?
A: I don’t. I just told you. I’m just having that analyzed right now. I am working
on preparing that right now.
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.
10
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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.
C.
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
11
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ANI. Then, by comparing this data with the sales reports ANI had provided to
Zaki, Zaki would be able to determine whether ANI had concealed any sales.
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.
12
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D.
In March 2008, Zaki filed suit in the United States District Court for the
Southern District of Florida against ANI, its five affiliated entities, 10 and their
principals. 11 In its third amended complaint, Zaki pled claims for breach of
contract, unjust enrichment, civil theft, and conversion, as well as claims under
Florida’s Uniform Fraudulent Transfers Act (“FUFTA”). Zaki sought relief in the
form of a declaratory judgment that it was entitled to immediate possession of its
parts, compensatory and punitive damages, the imposition of a constructive trust,
an injunction against further unauthorized sales, and, relevantly, an accounting.
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
10
Also included in the suit were three other corporate entities run by Mr.
McFliker, Mr. Persaud, and Mrs. Persaud: Joseva Enterprises, Inc., Aerospace Parts
Network, Inc., and DAI, LLC.
11
Federal jurisdiction was based on diversity, per 28 U.S.C. § 1332. Zaki is Saudi
Arabian corporation; all of the defendants are Florida residents.
13
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such a reading would arguably create a contract of indefinite duration, which,
depending on the circumstances, might make it terminable at will.12 Because
resolution of this issue would necessitate a factual inquiry to discover the intended
duration of the contract, the District Court denied Zaki’s motion for summary
judgment.
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 sought access to ANI’s accounting records.13 By analyzing the
records of ANI’s sales and expenses, along with the underlying invoices, purchase
orders, and statements, Zaki hoped to spot any undervalued sales or improperly
apportioned expenses. Second, Zaki continued to try to obtain an inventory of its
parts, requesting permission from ANI to conduct the inventory on ANI’s property,
while ANI continued to sell the parts.
12
See, e.g., Homestead v. Beard, 600 So. 2d 450, 453 (Fla. 1992) (“When a
contract does not contain an express statement as to duration, the court should determine
the intent of the parties by examining the surrounding circumstances and by reasonably
construing the agreement as a whole. . . . If a period of duration can be inferred from the
nature of a contract and the circumstances surrounding its execution, the contract is not
terminable at will and a court should give effect to the manifest intent of the parties.”).
13
Zaki defined “accounting records” as comprising ANI’s “sales journals,
purchase order journals, cash receipts journals, general ledgers[,] and inventory records.”
See Doc. 144, at 6.
14
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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. 14 The records that ANI did finally produce were incomplete. First,
although ANI did apparently provide some documentation in support of the sales
amounts it had reported to Zaki,15 see Doc. 144, at 10, it never allowed Zaki to
review the underlying documentation for all the sales it had not reported to Zaki.
Second, ANI did not identify the expenses for which it claimed offsets, or provide
any of the underlying documents with which Zaki could evaluate the propriety of
those expenses. The latter omission required another twelve months of wrangling
14
The Magistrate Judge granted Zaki’s first motion to compel production of
ANI’s accounting records on August 4, 2009. Doc. 166, at 2–3. On October 5, 2009, the
Magistrate Judge denied ANI’s motion for clarification and again ordered the production
of the records. Doc. 211, at 1 (docketed on October 6, 2009). On October 30, 2009, the
Magistrate Judge granted a concurrent request by Zaki to broaden the scope of its order to
all defendants, and ordered ANI and its co-defendants to produce their accounting
records within ten days. Doc. 238, at 5–6. These materials were subsequently seized
pursuant to an unrelated federal search warrant. Doc. 257, at 2. In January 2010, the
Magistrate Judge again ordered ANI to produce any responsive documents as soon as it
was able to do so. Doc. 272, at 1. ANI finally produced its electronic accounting
records, albeit without the underlying documentation, in March 2010, after Zaki filed yet
another motion to compel. See Doc. 328, at 3.
15
Zaki alleges that for many of the sales, ANI provided the invoice and purchase
order relating to the intermediate sale to an affiliated entity but failed to provide any
documents reflecting the price paid by the outside purchaser. See Doc. 399, at 7.
15
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before ANI finally agreed to identify the relevant expenses—so close to trial that
Zaki was unable to use the information.16
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 sales activity, while still completing the inventory of the millions of
remaining parts in a reasonable period of time. ANI agreed to this plan in
September 2009. Zaki soon discovered that the City of Margate, in which the
warehouse was located, would not issue the necessary permit for the operation
until ANI had cleared up two preexisting code violations and closed four
outstanding permits. But despite multiple court orders to compel ANI to fix the
violations and close the permits so the inventory could go forward, ANI never did
16
After failing to receive this information when ANI produced its electronic
accounting records in March 2010, Zaki first sent another discovery request, specifically
asking ANI to quantify the expenses for which it had claimed offsetting deductions, and
to provide any documents supporting these offsets. When that failed, Zaki moved to
compel on August 2, 2010. Doc. 328. This request was ultimately granted on February
25, 2011, Doc. 405, at 3–4, less than a month and a half before the trial was scheduled to
start, see Doc. 269, at 3.
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.
16
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so.17 Zaki ultimately went to trial with no idea how many of its parts remained in
ANI’s warehouse.
E.
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
17
Zaki first moved to compel ANI to remedy its existing code violations in
October 2009. Doc. 224. In January 2010, the District Court adopted a schedule
proposed by the parties, under which ANI was to clear the violations by February 2010
and Zaki was to complete the inventory by August 2010. Doc. 269, at 2. When ANI had
not yet cleared the violations by April 2010, Zaki filed another motion to compel, Doc.
287, which the Magistrate Judge granted on June 23, 2010, Doc. 312. By this time, the
municipal fire marshal had cited ANI for additional violations and shut down the
warehouse altogether. Id. at 2–3. The violations remained unresolved when the August
2010 deadline ran, which prompted Zaki to move for an extension of the deadline. Doc.
336, at 2–3. The District Court summarily denied this motion on February 24, 2011.
Doc. 404.
17
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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. McFliker, 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 for judgment
18
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as a matter of law on Zaki’s claims for civil theft and FUFTA violations. The jury
thereafter found for the defendants on the remaining claims for civil theft and
FUFTA violations. On Zaki’s breach-of-contact claims against ANI, the jury
found for Zaki and fixed its damages at $312,500.18 The court then entered final
judgment for Zaki on its breach-of-contract claim and for ANI and its co-
defendants on Zaki’s other claims. 19 Zaki now appeals that judgment. It asks this
court to vacate the damages aspect of the judgment on the breach-of-contract claim
18
The jury found for Zaki in its answers to special interrogatories. It answered
“YES” to the following question:
Do you find by a preponderance of the evidence that [ANI] breached the [CSA]
and the [SRA] by (a) failing to . . . pay to [Zaki] all amounts to which it is entitled
under the CSA and the [SRA], (b) failing to account for any insurance proceeds
received relating to [Zaki’s] goods, and failing to turn over [Zaki’s] share of
insurance proceeds, (c) allowing Daytona and other related Defendant-entities to
possess, sell and engage in sham transactions involving [Zaki’s] goods, or (d)
failing to return [Zaki’s] property upon expiration of the CSA and continuing to
control and to sell [Zaki’s] property beyond the expiration of the CSA, June 17,
2008.
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.
19
The total amount of the judgment in Zaki’s favor was $424,163.58: the
$312,500 awarded by the jury plus prejudgment interest in the sum of $111,663.58.
19
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and to remand the case with the instruction that the District Court grant Zaki an
accounting to determine the amount, if any, due from ANI. 20
II.
The accounting remedy 21 is grounded in equity; thus we review the District
Court’s decision to deny the remedy for abuse of discretion. Preferred Sites, LLC
v. Troup Cnty., 296 F.3d 1210, 1220 (11th Cir. 2002). “A district court abuses its
discretion if it applies an incorrect legal standard, follows improper procedures in
making the determination, or makes findings of fact that are clearly erroneous.”
United States v. Ellisor, 522 F.3d 1255, 1273 n.25 (11th Cir. 2008).
A.
In a diversity case, where state law affords the underlying substantive right,
federal courts are generally constrained to look to and follow the remedial
treatment afforded by state courts. See McLeod v. Stevens, 617 F.2d 1038, 1041
20
Zaki alternatively seeks a new trial on its breach-of-contract claim and civil
theft claims on the ground that the District Court’s jury instructions on those claims were
erroneous in several respects. Since we vacate the court’s judgment and remand the case
for an accounting, we need not consider the instructions issues. We likewise do not
consider whether the court erred in granting ANI judgment as a matter of law on Zaki’s
conversion claims.
21
Zaki purports to appeal the dismissal of its accounting “claim.” E.g.,
Appellant’s Br. 27. We note that an accounting is best understood as a remedy for a
cause of action, not as a cause of action in its own right. See Becker v. Davis, 491 F.3d
1292, 1305 (11th Cir. 2007), abrogated on other grounds by Arthur Andersen LLP v.
Carlisle, 556 U.S. 624, 129 S. Ct. 1896, 173 L. Ed. 2d 832 (2009) (“[A]n accounting is a
remedy attached to a separate independent cause of action.”).
20
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(4th Cir. 1980) (“The proper remedy for the harm [the plaintiff] suffered is a
question of substance that is governed by state law.”); 19 Charles Alan Wright &
Arthur R. Miller, Federal Practice and Procedure § 4513 (2d ed. 1996). The parties
agree that Florida law governs their dispute. As a result, to determine whether
Zaki is entitled to an accounting, we must look to the circumstances under which
Florida courts grant an accounting.
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
21
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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, 16 So. 2d
805, 810 (Fla. 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. 22
22
We note that imprecise language in this court’s prior decisions has muddied the
waters as to the necessary showing for an accounting under Florida law. See Am. United
Life Ins. Co. v. Martinez, 480 F.3d 1043, 1071 (11th Cir. 2007) (“Under Florida law, a
party that seeks an equitable accounting must show that: 1) the parties share a fiduciary
relationship or that the questioned transactions are complex, and 2) a remedy at law is
inadequate.” (emphasis added) (citing Kee v. Nat’l Reserve Life Ins. Co., 918 F.2d 1538,
1540 (11th Cir. 1990))).
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))).
22
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B.
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, 879. Generally speaking, however, a fiduciary relationship is
one in which “one person is under a duty to act for the benefit of another on
matters within the scope of the relationship.” Black’s Law Dictionary 1402 (9th
ed. 2009). Florida courts have defined fiduciary obligations quite broadly:
[A] fiduciary duty extends ‘to every possible case . . . in which there is
confidence reposed on one side and the resulting superiority and influence
on the other. . . . The rule embraces both technical fiduciary relations and
those informal relations which exist whenever one man trusts in and relies
upon another.’
Masztal v. City of Miami, 971 So. 2d 803, 808–09 (Fla. 3d Dist. Ct. App. 2007)
(quoting Quinn v. Phipps, 113 So. 419, 421 (Fla. 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, 137 So. 255,
257 (Fla. 1931). The consignee is generally in the business of selling such goods,
23
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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.23 Cf. Neild v. District of Columbia, 110 F.2d 246, 259 (D.C. Cir. 1940).
Consignment relationships promote market efficiency by allowing persons who
have goods, but lack the expertise necessary to attain the best price for those
goods, to benefit from the consignee’s superior experience and connections in the
particular market. Brunswick Leasing Corp. v. Wis. Cent., Ltd., 136 F.3d 521, 529
(7th Cir. 1998).
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
23
A consignee differs from a traditional bailee in that a consignee does not have
an obligation to return the specific goods consigned, but rather to account for his
disposition of the goods. See 8 C.J.S. Bailments § 11 (2005) (“The rule that where a
person receiving property is not bound to return the identical thing received, but may
account therefor in money or other property, or thing of value, the transaction is a sale, is
not applicable to bailments or consignments for sale . . . . A consignment is a type of
bailment where the goods are entrusted for sale . . . .”).
24
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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.
It is little wonder, then, that while not always expressly identified as such,
courts from around the country have long imposed on consignees certain of the
duties of fiduciaries. See, e.g., Ferguson v. Porter, 3 Fla. 27, 30 (1850) (imposing
duty on consignee to follow principal’s instructions); Cusick v. Phillippi, 709 P.2d
1226, 1230 (Wash. Ct. App. 1985) (noting that “[t]he standard of care of a [factor]
has not been expressed in fiduciary terms in Washington, but certain duties have
been recognized” including the duty “to adhere faithfully to all instructions” and
“the rule requiring open disclosure and full accounting . . . .”); see also Union
Stock-Yards Nat’l. Bank v. Gillespie, 137 U.S. 411, 420–21, 11 S. Ct. 118, 121, 34
25
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L. Ed. 724 (1890) (“It cannot be doubted that an element of a fiduciary nature
enters into the obligation of the factor . . . . [T]here is a reliance of a principal on
his agent, a confidence that the agent will do as his principal directs, and be loyal
to the duties springing from such relation.”).
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., 627 S.E.2d 249, 259 (N.C. Ct. App. 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, 112 So. 48 (Fla. 1926) (per curiam); see also State ex rel.
Cockrum v. Southern, 83 S.W.2d 162, 164 (Mo. Ct. App. 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
26
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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
27
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acknowledged that ANI had breached its reporting and accounting obligations
under the contract and even granted summary judgment for Zaki on this point. See
Doc. 495, at 25. Nevertheless, the District Court ultimately directed a verdict for
ANI, finding that Zaki had failed to show how ANI’s omission had caused any
damages. See Doc. 581, at 118. This sequence of events aptly illustrates why a
court-directed accounting was the appropriate remedy here. 24
C.
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
24
A court-directed accounting is the appropriate remedy for this type of breach
because, unlike most other contractual obligations, a consignee’s breach of its obligation
to account cannot be effectively redressed by an action for damages. The raison d’être
for the obligation is to provide consignors with the information necessary to discover
how consignees have disposed of their goods, thus allowing consignors to determine the
existence of any damages. Compliance with this obligation provides the consignor with
an unquantifiable benefit in the form of information that allows him to determine whether
to sue for damages. Failure to provide that information results in an unquantifiable harm
to the consignor in the form of insufficient information to make that decision.
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.
28
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requirement was error. 25 Nevertheless, without the foundational information that
an accounting would have provided, Zaki was incapable of quantifying its
damages, and was thereby precluded from obtaining any meaningful relief. Thus,
even by the District Court’s standard, Zaki was entitled to an accounting.
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—
25
Of course, as a theoretical matter, it is accurate to say that equitable relief may
only be granted in the absence of an adequate remedy at law. See Dairy Queen, Inc. v.
Wood, 369 U.S. 469, 478, 82 S. Ct. 894, 900, 8 L. Ed. 2d 44 (1962). However, the very
reason courts began ordering and overseeing accounting proceedings was to afford relief
to principals who were injured by their fiduciaries, yet, due to the informational
asymmetries and trust inherent in the relationship, were unable to obtain relief via
traditional remedies at law. See generally Joel Eichengrun, Remedying the Remedy of
Accounting, 60 Ind. L.J. 463, 464–67 (1985) (tracing the history of the remedy).
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).
29
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situations in which one party is entrusted with valuable goods, has the exclusive
responsibility to maintain information regarding the disposition of those goods, and
has a substantial incentive to withhold this information from the other party.
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
30
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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.
31
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D.
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). 26
This arrangement largely circumvents the problems detailed above. Instead
of relegating a consignor to a lopsided struggle against a consignee armed with all
the advantages of time and information, a neutral master, invested with the
coercive power of the court, is tasked with obtaining all of the relevant
information, untangling the disputed items, and proposing a resolution that best
affords justice to the parties. This is what Zaki sought, what Zaki was entitled to,
and what Zaki should have received.
26
Rule 53 details the basic procedures to follow when appointing a master to
conduct an accounting. Obviously the issue of who pays for the accounting is an
important consideration. According to Rule 53(g)(3), courts have discretion to allocate
the master’s costs based on “the nature and amount of the controversy, the parties’
means, and the extent to which any party is more responsible than other parties for the
reference to a master.” Fed. R. Civ. P. 53(g)(3).
32
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III.
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.
33