Lehman Bros. Holdings, Inc. v. Gateway Funding Diversified Mortgage Services, L.P. ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 14-1119
__________
LEHMAN BROTHERS HOLDINGS, INC.
v.
GATEWAY FUNDING DIVERSIFIED MORTGAGE
SERVICES, L.P.,
Appellant
__________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2-11-cv-06089)
District Judge: Honorable Anita B. Brody
__________
Submitted Under Third Circuit LAR 34.1(a)
March 23, 2015
Before: HARDIMAN, GREENAWAY, Jr. and KRAUSE,
Circuit Judges.
(Filed: May 7, 2015)
Paul A. Bucco, Esq.
Matthew I. Sack, Esq.
Davis, Bucco & Ardizzi
10 East 6th Avenue, Suite 100
Conshohocken, PA 19428
Attorneys for Defendant–Appellant
Matthew D. Spohn, Esq.
Norton Rose Fulbright
1200 17th Street, Suite 1000
Denver, CO 80202
Jonathan S. Franklin, Esq.
Norton Rose Fulbright
801 Pennsylvania Avenue, N.W., Suite 500
Washington, DC 20004
Attorneys for Plaintiff–Appellee
__________
OPINION OF THE COURT
__________
HARDIMAN, Circuit Judge.
This appeal presents us with an opportunity to emphasize
the importance of following the rules. At issue is Rule 10 of the
Federal Rules of Appellate Procedure, which imposes certain
duties on counsel in preparing the record on appeal. Appellant
Gateway Funding Diversified Mortgage Services, L.P. violated
Rule 10 when it failed to include in the appellate record a
transcript necessary to evaluate its principal claim. We hold that
claim forfeited. And because we find Gateway’s other claims to
2
lack merit, we will affirm the judgment of the United States
District Court for the Eastern District of Pennsylvania in favor
of Appellee Lehman Brothers Holdings, Inc.
I
In 2011 Lehman brought suit in the District Court,
claiming Gateway was obliged to make good on four mortgage
loans that Lehman’s subsidiary1 purchased almost ten years
earlier from Arlington Capital Mortgage Corporation. One of
the four loans is not at issue on appeal, and the other three were
the subject of two contracts dated May 17, 2007 in which
Arlington agreed to indemnify Lehman for losses on those loans.
The following year, Arlington sold its assets to Gateway.
Because Arlington had no assets to satisfy Lehman’s claims for
indemnification when losses on the loans occurred, Lehman
sought recovery from Gateway as Arlington’s alleged successor
under Pennsylvania’s de facto merger doctrine.
Both parties moved for summary judgment, and the
District Court denied Gateway’s motion while partially granting
Lehman’s. The District Court held that although it was clear
Arlington was liable to Lehman on the three loans, it was
unclear whether Gateway was liable for Arlington’s debts and a
trial was necessary to determine whether a de facto merger had
taken place between Gateway and Arlington.
1
Because the distinction between subsidiary and parent
company is immaterial to this appeal, we refer to both as
Lehman.
3
The District Court held a bench trial to decide the
dispositive question. After making detailed findings of fact
regarding the relationship between Gateway and Arlington and
after considering the relevant state law, the Court concluded that
a de facto merger had occurred. Accordingly, it held Gateway
liable to Lehman for indemnification on the three loans—an
amount totaling around $450,000 plus interest.
II
The District Court had jurisdiction under 28 U.S.C.
§ 1332, as the parties are citizens of different states and the
amount in controversy exceeds $75,000. We have jurisdiction
over the appeal pursuant to 28 U.S.C. § 1291.
Our standard of review is mixed. We review the District
Court’s summary judgment de novo. Indian Brand Farms, Inc.
v. Novartis Crop Prot. Inc., 617 F.3d 207, 213 n.6 (3d Cir.
2010). We review its decision regarding whether a defense has
been waived for abuse of discretion. Sharp v. Johnson, 669 F.3d
144, 158 (3d Cir. 2012). The abuse of discretion standard also
guides our review of the District Court’s decisions to deny
Gateway’s motions for a continuance and to consolidate this
case with another. ZF Meritor, LLC v. Eaton Corp., 696 F.3d
254, 268 (3d Cir. 2012) (“We . . . review a district court’s
decisions regarding discovery and case management for abuse of
discretion.”); see also United States v. Schiff, 602 F.3d 152, 176
(3d Cir. 2010) (“We give a district court broad discretion in its
rulings concerning case management both before and during
trial.”). Finally, “[o]n appeal from a bench trial, our court
reviews a district court’s findings of fact for clear error and its
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conclusions of law de novo.” VICI Racing, LLC v. T-Mobile
USA, Inc., 763 F.3d 273, 282–83 (3d Cir. 2014).
III
Gateway argues that the District Court erred by: (1)
granting partial summary judgment to Lehman on its
indemnification agreement with Arlington; (2) refusing to grant
Gateway a continuance to retain expert witnesses; (3) refusing to
consolidate the case with another; and (4) finding that a de facto
merger occurred between Gateway and Lehman. We consider
each argument in turn.
A
Gateway first contends that the District Court should not
have granted summary judgment because a clause in the
indemnification agreement may have extinguished Arlington’s
(and therefore Gateway’s) liability. The District Court deemed
Gateway to have waived this argument, stating: “In its briefing,
Gateway argued that the indemnification obligation was
extinguished . . . . However, Gateway abandoned this argument
during oral argument held telephonically on April 24, 2013, and
so I will not address it here.” Lehman Bros. Holdings, Inc. v.
Gateway Funding Diversified Mortg. Servs., L.P., 942 F. Supp.
2d 516, 529 n.12 (E.D. Pa. 2013). Gateway now contends it did
not abandon that argument in the District Court.
Instead of ordering a transcript of the April 24 oral
argument and including it in the record on appeal, Gateway
merely asserted that “there is no record to support the [District]
Court’s position that Gateway ‘abandoned’ this argument[.]”
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Gateway Br. 13. This statement was untrue; in fact, there is a
record of that hearing and Lehman filed it with its appellate
brief. Gateway responded that it “did not include the transcript
of oral argument . . . because it was under the impression that
the argument was conducted off the record and that no transcript
existed for the oral argument.” Gateway Reply Br. 1. And
because Lehman filed it, Gateway argued, “the transcript is now
a part of the record” and it is irrelevant that Gateway neglected
to do so. Id. at 2. Gateway’s cavalier argument is wrong.
Rule 10 of the Federal Rules of Appellate Procedure
governs the record on appeal and requires the appellant to
“order . . . a transcript of such parts of the proceedings not
already on file as the appellant considers necessary.” Fed. R.
App. P. 10(b)(1)(A). Moreover, “[i]f the appellant intends to
urge on appeal that a finding or conclusion is unsupported by the
evidence or is contrary to the evidence, the appellant must
include in the record a transcript of all evidence relevant to that
finding or conclusion.” Fed. R. App. P. 10(b)(2). Although Rule
10 does not provide for sanctions for failure to compile the
record, Rule 3 states that failure to comply with the appellate
rules allows “the court of appeals to act as it considers
appropriate, including dismissing the appeal.” Fed. R. App. P.
3(a)(2). Because of its failure to comply with Rule 10, we hold
that Gateway forfeited its first argument, viz., that its
indemnification obligation was extinguished.
We recognize that “[d]ismissal of an appeal for failure to
comply with procedural rules is not favored,” and that the
discretion to dismiss a case afforded by Rule 3 “should be
sparingly used.” Horner Equip. Int’l, Inc. v. Seascape Pool Ctr.,
Inc., 884 F.2d 89, 93 (3d Cir. 1989). After considering “such
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factors as whether the defaulting party’s action is willful or
merely inadvertent, whether a lesser sanction can bring about
compliance and the degree of prejudice the opposing party has
suffered because of the default,” we conclude that Gateway’s
failure to provide a transcript of the April 24 hearing presents
the unusual situation where forfeiture is appropriate.2 Id.
Gateway specifically claimed that “there is no record to support
the [District] Court’s position that Gateway ‘abandoned’ this
argument, thus it was extremely prejudiced by such ruling.”
Gateway Br. 13 (emphasis added). That contention was proven
wrong. Combining that assertion with Gateway’s weak post hoc
justification that it “was under the impression that the [April 24]
argument was conducted off the record,” Gateway Reply Br. 1,
Gateway’s Rule 10 violation at best shows a remarkable lack of
diligence and at worst indicates an intent to deceive this Court.
2
It is unlikely that we would disturb the District Court’s
ruling that Gateway waived its extinguishment argument even if
we did consider the April 24 transcript. That decision would be
reviewed for abuse of discretion, a difficult standard for
Gateway to satisfy. Sharp, 669 F.3d at 158. A review of the
transcript indicates that, rather than hastily find the argument
abandoned, the Court gave Gateway multiple chances to
advance it. For example, after asking several questions about
that argument (in response to which Gateway’s counsel
generally stated that it did not wish to pursue the argument),
Judge Brody said, “Okay . . . . [O]ne last chance. There’s
nothing about [the extinguishment argument] that I should be
concerned with, is that right?” Supp. App. 14. Gateway’s
counsel responded, consistent with previous responses, “Not that
I can see, Your Honor.” Id.
7
In either case, forfeiture is appropriate. See, e.g., Muniz
Ramirez v. P.R. Fire Servs., 757 F.2d 1357, 1358 (1st Cir.
1985); Wrighten v. Glowski, 232 F.3d 119, 120 (2d Cir. 2000)
(per curiam); Alizadeh v. Safeway Stores, Inc., 910 F.2d 234,
237 (5th Cir. 1990); United States v. Johnson, 584 F.2d 148, 156
n.18 (6th Cir. 1978); Woods v. Thieret, 5 F.3d 244, 245–46 (7th
Cir. 1993); Brattrud v. Town of Exline, 628 F.2d 1098, 1099
(8th Cir. 1980) (per curiam); Syncom Capital Corp. v. Wade,
924 F.2d 167, 169–70 (9th Cir. 1991) (per curiam); King v.
Unocal Corp., 58 F.3d 586, 587–88 (10th Cir. 1995); Abood v.
Block, 752 F.2d 548, 550 (11th Cir. 1985) (per curiam).
B
Gateway’s remaining arguments—that the Court erred by
(1) denying Gateway a continuance to obtain expert witnesses;
(2) denying Gateway’s motion to consolidate; and (3) finding
that a de facto merger had occurred—are unpersuasive.
Continuances modifying discovery schedules should be granted
“only for good cause.” Fed. R. Civ. P. 16(b)(4). We “will not
interfere with the discretion of the district court by overturning a
discovery order absent a demonstration that the court’s action
made it impossible to obtain crucial evidence, and implicit in
such a showing is proof that more diligent discovery was
impossible.” Hewlett v. Davis, 844 F.2d 109, 113 (3d Cir. 1988).
Gateway argues that it showed good cause because its counsel
“was unfamiliar with the case” after it decided to change
lawyers before trial. Gateway Br. 19. But counsel’s unfamiliarity
with the case did not make it impossible to obtain evidence—
more diligent discovery was certainly possible, albeit by
previous counsel. Cf. Link v. Wabash R.R. Co., 370 U.S. 626,
633–34 (1962) (parties cannot “avoid the consequences of the
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acts or omissions of [their] freely selected agent[s]. Any other
notion would be wholly inconsistent with our system of
representative litigation, in which each party is deemed bound
by the acts of his lawyer-agent[.]”). The District Court did not
abuse its discretion by denying a continuance on that ground.
Nor was the District Court’s denial of consolidation an
abuse of discretion. Gateway sought to consolidate this case—
which was filed in 2011—with a case it filed in 2013 seeking
contribution and indemnity from Arlington for any liability
Gateway had to Lehman. “If actions before the court involve a
common question of law or fact, the court may . . . consolidate
the actions . . . .” Fed. R. Civ. P. 42(a) (emphasis added). But in
light of the vastly different stages of the cases—Gateway filed
its complaint in the contribution action just eight days before it
moved to consolidate, while discovery had already closed and
Lehman had already submitted its trial brief in this case—the
District Court acted well within its discretion in declining to
consolidate.
Finally, the District Court neither made clearly erroneous
factual findings nor relied on incorrect legal principles when it
held after trial that a de facto merger occurred between Gateway
and Arlington. The Court correctly structured its analysis around
the four factors that apply under Pennsylvania law:
(1) There is a continuation of the enterprise of the
seller corporation, so that there is continuity of
management, personnel, physical location, assets,
and general business operations.
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(2) There is a continuity of shareholders which
results from the purchasing corporation paying for
the acquired assets with shares of its own stock,
this stock ultimately coming to be held by the
shareholders of the seller corporation so that they
become a constituent part of the purchasing
corporation.
(3) The seller corporation ceases its ordinary
business operations, liquidates, and dissolves as
soon as legally and practically possible.
(4) The purchasing corporation assumes those
obligations of the seller ordinarily necessary for
the uninterrupted continuation of normal business
operations of the seller corporation.
Lehman Bros. Holdings, Inc. v. Gateway Funding Diversified
Mortg. Servs., L.P., 989 F. Supp. 2d 411, 431 (E.D. Pa. 2013)
(quoting Fizzano Bros. Concrete Prods., Inc. v. XLN, Inc., 42
A.3d 951, 956 (Pa. 2012)). These factors “are not a
mechanically-applied checklist, but a map to guide a reviewing
court” in deciding whether a de facto merger occurred. Fizzano
Bros., 42 A.3d at 969.
The District Court painstakingly conducted its de facto
merger analysis, providing detailed factual findings and legal
conclusions pertinent to each factor. Regarding the first factor,
continuity of enterprise, it noted that “Arlington’s former offices
continued to operate as the Arlington Branch of Gateway . . . .
[T]he same personnel continued to carry out the same business
operations, in the same markets, using the same assets, and at
the same physical locations as Arlington had prior to the
10
transaction.” Lehman Bros., 989 F. Supp. 2d at 432. “[T]he
transition to Gateway occurred with minimal interruption to
Arlington’s ongoing business.” Id. Regarding the second factor,
continuity of ownership, the Court found that although the
Arlington shareholders had not acquired Gateway stock in the
transition, they “retained an ownership interest in [Arlington]
after the transaction by virtue of . . . contractual profit sharing
entitlements.”3 Id. at 436. “Before the transaction, the Arlington
owners shared in Arlington’s profits as shareholders. After the
transaction, they continued to share in the profits of the
Arlington Branch of Gateway.” Id. at 434. Regarding the third
factor, the cessation of business by the seller company, the Court
stated that “[a]lthough this factor is the most debatable of the
factors, I find that it weighs slightly in favor of [de facto
merger],” because Arlington, as a separate entity, maintained
only a “minimal level of activity” after the asset purchase.4 Id. at
3
The Pennsylvania Supreme Court recently concluded
that an exchange of shares is not essential to a de facto merger,
in part because statutory merger does not require an exchange of
shares in order to be effected. Fizzano Bros., 42 A.3d at 968.
Instead, merely “some sort of continuation of the stockholders’
ownership” must be found. Id. (internal quotation marks and
citation omitted).
4
This factor differs from the first factor by focusing on
whether the seller as an entity continues to exist, while the first
considers whether the operations, management, and assets—in
short, the enterprise, albeit not the entity—of the seller continue
as a part of the buyer company. Here, the first factor weighed in
favor of de facto merger because the “personnel, management,
physical location, assets, and general business operations” of
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437. And regarding the fourth factor, assumption of ordinary
business liabilities by the purchaser, the Court noted that
“Gateway assumed substantially all of Arlington’s debt and
liabilities related to its ongoing loan origination business.” Id. at
438. Thus, “[a]ll four factors of the de facto merger analysis
individually weigh[ed]” in favor of such a finding. Id. at 439.
In sum, we find no error in the District Court’s analysis
of the de facto merger issue. On appeal, Gateway rehashes the
arguments it made to the District Court, essentially asking us to
weigh the evidence anew and make factual findings. We will not
do so because clear error is reserved for findings “completely
devoid of minimum evidentiary support displaying some hue of
credibility.” VICI Racing, 763 F.3d at 298 (internal quotation
marks omitted). The District Court’s decision was guided by the
correct legal principles and supported by significant evidence.
Accordingly, we will affirm its judgment.
Arlington continued to exist—as part of Gateway. Lehman
Bros., 989 F. Supp. 2d at 432. The third factor, by contrast,
weighed only slightly in favor of de facto merger because
Arlington did not formally dissolve as a company, though it did
“essentially devolve[] into an assetless shell.” Id. at 437.
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