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Wow Logistics Co. v. Pro-Pac, Inc.
Citations: 477 B.R. 92; 83 Fed. R. Serv. 3d 784; 2012 WL 3495391; 2012 U.S. Dist. LEXIS 114365Docket: No. 11-CV-1075-JPS
Court: District Court, E.D. Wisconsin; August 14, 2012; Federal District Court
On November 22, 2011, WOW Logistics Company (WOW) appealed a ruling from the U.S. Bankruptcy Court for the Eastern District of Wisconsin, which favored Pro-Pac, Inc. (Pro-Pac). The bankruptcy court found WOW liable for aiding and abetting a former Pro-Pac employee’s breach of loyalty, resulting in an award of $385,000 in damages for unjust enrichment and $50,000 in punitive damages. WOW's appeal challenges the procedural validity of the court's post-trial amendment, the appropriateness of the unjust enrichment award, and the punitive damages. Background details reveal that Pro-Pac was founded by Linda and David Sarna, who hired George Chapes as vice president of sales in June 2005. Pro-Pac subleased a warehouse from WOW in August 2005. In 2006, discussions between Sarna and WOW regarding Chapes working for WOW failed to reach an agreement. In August 2006, Chapes referred the Vangard Distribution to WOW for a warehouse lease, which resulted in WOW securing the account. Pro-Pac filed for bankruptcy in November 2006, still owing back rent to WOW. In the adversary proceeding, Pro-Pac accused WOW of aiding Chapes' breach of fiduciary duty and tortious interference, but the latter claim was dismissed. The aiding and abetting claim was limited to Vangard. Pro-Pac's recovery theories centered on either earning a 10% commission on Vangard's rent to WOW or subleasing other warehouse space for profit. Sarna confirmed these theories during testimony and depositions, yet Pro-Pac's pretrial filings did not mention unjust enrichment and focused solely on the 10% fee. During the trial, objections arose regarding the scope of claims being discussed, which were not explicitly pled. At the closing, the bankruptcy court requested post-trial briefs on damages. Pro-Pac asserted that WOW was unjustly enriched by avoiding rent concessions that would have been necessary to secure Chapes’ services. In response to WOW's opposition, Pro-Pac only reiterated that WOW benefited from Chapes’ breach without substantiating the unjust enrichment claim. The bankruptcy court found that Pro-Pac did not prove entitlement to a 10% commission but awarded unjust enrichment damages under Federal Rule of Bankruptcy Procedure 7015. On appeal, it was determined that the bankruptcy court misapplied Rule 15 and erred in its unjust enrichment award, leading to a reversal of the award and remand for dismissal of the claims. The appellate court reviews factual findings for clear error and legal conclusions de novo. WOW contended that the bankruptcy court improperly amended the pleadings under both Rule 15(b)(1) and Rule 15(b)(2), arguing that there was no objection, motion to amend, and potential for prejudice. Under Rule 15(b)(1), amendments are permitted during and after trial only if there is a specific objection that evidence is outside the issues raised in the pleadings. The Tenth Circuit has emphasized that a party must explicitly object at trial to the introduction of evidence beyond the pleadings, and such objections must be made alongside a motion to amend. In this case, WOW did not properly object under Rule 15(b)(1), as its objections were general and did not specify the nature of the issues raised in the pleadings. Pro-Pac's argument that WOW's general objection sufficed was rejected, as it did not meet the requirements set forth in relevant case law. Pro-Pac's arguments regarding unjust enrichment claims are deemed irrelevant since the evidence must relate to issues explicitly pled. Pro-Pac did not seek to amend the pleadings, and the bankruptcy court did not provide WOW the chance to demonstrate prejudice or request a continuance to defend against the unjust enrichment claim. Rule 15(b)(1) was not applicable at trial, and thus the bankruptcy court erred in attempting to justify a post-trial amendment based on it. Rule 15(b)(2) allows for issues tried by consent to be treated as if they were in the pleadings, enabling amendments even after judgment. However, there was no express or implied consent to try an unjust enrichment claim. Testimony relevant to Pro-Pac's aiding and abetting claim did not imply consent to an unjust enrichment claim, as it focused on whether Pro-Pac benefited from WOW's actions, not the reverse. Furthermore, WOW explicitly objected to trying any unpled issues, which would have invoked Rule 15(b)(1) if there were an awareness of the unjust enrichment claim. The lack of notice regarding the claim’s introduction and the manner of objections support that WOW was not afforded proper procedural rights, making any subsequent amendment based on implied consent improper. WOW did not implicitly consent to the trial of an unjust enrichment claim, even if Rule 15(b)(2) was applicable. Pro-Pac contends that the bankruptcy court acted within its discretion to award relief under Rule 54(c), arguing that the court should apply a deferential abuse of discretion standard. However, this assumes the bankruptcy court correctly applied the rule. Rule 54(c) states that a final judgment should grant relief to which a party is entitled, irrespective of whether that relief was explicitly demanded in the pleadings. The rule allows relief to be awarded only when liability on the claim has been established and does not permit the district court to award relief based on an unraised theory. Relief may only be granted on issues presented to the court for resolution, and Rule 54(c) restricts courts from ordering undemanded relief unless it is based on a proven claim. Here, although the bankruptcy court decided to consider Pro-Pac's unjust enrichment claim due to lack of prejudice, it is crucial to differentiate between a cause of action and the relief available from it. In Wisconsin, unjust enrichment is recognized as a legal cause of action governed by equitable principles, requiring restitution for benefits retained unjustly. Conversely, the tort of aiding and abetting a breach of fiduciary duty requires intentional misconduct. As unjust enrichment is a cause of action, Pro-Pac could only be entitled to relief if this claim was properly before the bankruptcy court, which it was not. Consequently, Rule 54(c) was inapplicable without a proper application of Rule 15, leading to the conclusion that the bankruptcy court erred in awarding unjust enrichment damages. Regarding punitive damages, they are contingent upon the awarding of compensatory damages; since the unjust enrichment claim was deemed improper, punitive damages are also not justified. The bankruptcy court incorrectly applied Rule 15(b)(1) to amend Pro-Pac’s complaint after the trial, leading to an unjust enrichment claim that was not properly before the court, thus rendering the associated damages award improper. Rule 54(c) does not allow for considering this claim independently of Rule 15(b)(1), and Rule 15(b)(2) also does not support its consideration. The award of punitive damages was improper due to the absence of any compensatory damages. The court has reversed and remanded the bankruptcy court's decision with instructions to dismiss the claims against the appellant. It clarifies that while Rule 7015 incorporates Rule 15, any post-trial amendments are not applicable, as the rule allows for amendments only if objections are made during trial. Pro-Pac's arguments attempting to differentiate its case from precedent, including the Tenth Circuit’s insights and the Cioffe case, are insufficient to change this conclusion. Pro-Pac's assertion that this court can amend the pleadings, despite the bankruptcy court's errors, is also unpersuasive, as any amendment process still falls under Rule 15(b), which has been deemed improper in this case.