District Court Abused Discretion by Expanding Remedies on Rule 59(e) Post-Judgment Motion to Reconsider, Holds Fourth Circuit

In JTH Tax, Inc. v. Aime, No. 19-1746 (4th Cir. Jan. 4, 2021), the Fourth Circuit holds that the district court erred – on remand from an earlier appeal – in granting the winning plaintiff (1) additional compensatory damages on the grounds of newly discovered evidence, and (2) nominal damages.

Aime operated nine tax franchises from Liberty Tax. Owing to an investigation by the IRS, Aime lost his Electronic Filing Identification Number (EFIN), which “authorizes commercial tax preparers to file their customers’ tax returns electronically and is required by law.” Liberty Tax could have reclaimed Aime’s franchises at this point, but instead entered into a “Purchase and Sale Agreement” (PSA) to allow Aime to redeem his franchises if his EFIN was restored. Yet “[d]espite its obligations to Aime under the PSA, Liberty Tax immediately began to contemplate selling the franchises to another buyer. As the district court put it—making findings from the bench after trial—’the course of conduct of Liberty throughout the dispute and during the trial indicates that they never had any intention of recognizing Aime’s right to repurchase the business.”

The parties sued each other and tried their case to the judge. “[T]he district court found that Liberty Tax breached the PSA first by failing to pay franchise expenses as required. Liberty Tax also breached the covenant of good faith and fair dealing. Further, the court gave effect to the disputed extension of the buyback deadline, finding that Liberty Tax had, in fact, extended the deadline to the end of the year. And because Aime’s EFIN was restored in September, the district court found that he would have invoked his buyback option if not for Liberty Tax’s breach. Therefore, in addition to owing Aime damages for the unpaid expenses, the court held that Liberty Tax owed lost profits damages. The court denied Aime’s remaining claims—for anticipatory breach, fraud, and punitive damages and attorneys’ fees—as covered by the breach of contract claim or as otherwise unavailable. The district court calculated the total damages as $2,736,896.17,” the bulk of which was based on lost profits

On the first appeal, the Fourth Circuit affirmed Liberty Tax’s liability for breach of contract, but vacated the damages, holding that as a matter of law Aime was not entitled to such relief. The parties stipulated on remand to damages “totaling $248,246.27—the amount of unpaid expenses and other liabilities.” Aime sought additional relief as well: additional damages for breach of the implied covenant of good faith, plus unpaid rent that Aime supposedly discovered only after judgment had been entered under Fed. R. Civ. P. 59(e). While substantially denying Aime the relief requested, including relief based on a disgorgement theory, the district court nevertheless granted $5000 nominal damages for breach of good faith and $49,465.94 for the lost rent.

On the second appeal, the Fourth Circuit vacates the post-judgment relief. The panel first affirms the district court’s holding that Aime waited too long to raise disgorgement. “The district court properly concluded that Aime could have raised his disgorgement theory during the litigation, before this Court on appeal, or during the damages proceeding upon remand, but failed to do so. Therefore, on this basis alone, the district court properly denied the motion.” Aime sought refuge in Fed. R. Civ. P. 54(c), which provides that the district court “should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.” But “the rule has no bearing on Aime’s failure to raise his argument prior to a motion for reconsideration. If Rule 54(c) required differently, then Rule 59(e)’s stringent standard would be meaningless.” Such relief was also barred by the “mandate rule” based on the Fourth Circuit’s prior decision, which foreclosed litigation of issues on remand that were or could have been raised previously.

Second, the panel tosses the increased damage award based on newly discovered evidence. “Aime submitted a declaration regarding his initial discovery of the judgment in 2019, stating that he ‘could not have included the . . . judgment [for lost rent] in my damage claim at trial in this case because it did not exist at the time.’ Relying solely on Aime’s declaration, the district court granted the motion to amend the judgment. That decision amounts to error.” The panel holds that the lost rent was already known or knowable by Aime, even if the judgment confirming the rent came later. “Indeed, the declaration attests only to discovery of the judgment and makes no reference to Aime’s knowledge of—or attempts at discovering—evidence of the underlying unpaid rent. Therefore, the district court erred by concluding that Aime had met his burden to show that the evidence qualified as newly discovered.” Aime also argued that Liberty Tax failed to produce relevant discovery that would have disclosed the injury, yet “Aime apparently did not use the tools of discovery to challenge Liberty Tax’s non-responsiveness.”

Finally, the panel vacates the $5000 nominal damage award. “[N]ominal damages were unavailable because Aime was awarded compensatory damages to remedy Liberty Tax’s breach of contract, regardless of the finding that Liberty Tax also breached the contract by breaching the implied covenant.”

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