United States Court of Appeals

For the First Circuit

No. 05-2323

ITV DIRECT, INC.; DIRECT FULFILLMENT, LLC,

Plaintiffs, Appellants.

__________

CAPPSEALS, INC.,

Intervenor-Plaintiff, Appellee,

v.

HEALTHY SOLUTIONS, LLC, A California Limited Liability Corp.,

d/b/a Direct Business Concepts; HEALTH SOLUTIONS, INC., A

California Corp.; ALEJANDRO GUERRERO, individually and as a

Member of Healthy Solutions, LLC, and as Officer and Director of

Health Solutions, Inc., MICHAEL HOWELL, individually and as a

Member of Healthy Solutions, LLC, and as Officer and Director of

Health Solutions, Inc.; GREG GEREMESZ, individually and as a

Member of Healthy Solutions, LLC, and as Officer and Director of

Health Solutions, Inc.; DOES 1-10, INCLUSIVE,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Joseph L. Tauro, U.S. District Judge]

Before

 Boudin, Chief Judge,

Torruella and Lipez, Circuit Judges.

Christopher F. Robertson with whom Peter S. Brooks, Susan W.

Gelwick and Seyfarth Shaw LLP were on brief for appellants.
Daniel J. Kelly with whom Scott A Silverman, Peter Antonelli

and Gadsby Hannah LLP were on brief for intervenor-plaintiff,

appellee. 

April 17, 2006
-3-

BOUDIN, Chief Judge. This case grows out of contractual

arrangements and transactions involving three different companies:

plaintiff-appellant ITV Direct, Inc. ("ITV")--essentially a

promoter-distributer; Healthy Solutions, LLC ("Healthy Solutions"),

defendant in the district court but not a party to this appeal,

which created a food supplement called Supreme Greens; and

Cappseals, Inc., intervenor-appellee, which undertook to

manufacture Supreme Greens for Healthy Solutions to sell to ITV.

ITV and Healthy Solutions entered into a distribution

agreement in April 2003. The agreement provided that ITV would

market the product primarily through television infomercials, and

that Alex Guerrero, developer of Supreme Greens and associated with

Healthy Solutions--and purportedly a doctor of some kind--would

participate and appear in the infomercials. The agreement provided

inter alia: 

During the term of this Agreement, [ITV] shall

issue purchase orders to [Healthy Solutions]

for the Products, which purchase orders shall

state: "This purchase order is placed under

the terms and conditions of the Distributor

Agreement between [ITV] and [Healthy

Solutions], dated March __, 2003."

In the event, purchase orders placed by ITV did not

include this stipulated language. The purchase order at issue in

this case--for a quantity of Supreme Greens for which ITV has not

yet paid Healthy Solutions and Healthy Solutions has not yet paid

Cappseals--contained price, quantity, and delivery terms, and was
-4-

a "standing" order for a weekly shipment of Supreme Greens,

"subject to change or cancellation upon 30 day written notice."

 Thereafter, ITV learned of an investigation by the Food

and Drug Administration ("FDA") and the Federal Trade Commission

("FTC") concerning unsupported health claims made about Supreme

Greens by Guerrero--claims found in the product packaging and

labeling and repeated in the infomercials. In February 2004, ITV

suspended all future product shipments, stopped payment on its most

recent check, and told Healthy Solutions that it would not pay any

of the outstanding invoices until future notice.

At that time, ITV owed Healthy Solutions $931,680.91 (now

at least $1,086,672.80 with interest) for the Supreme Greens

already shipped and received. Healthy Solutions was apparently

unable to pay Cappseals without the payments from ITV, and owed

Cappseals $890,183.09 (now at least $1,041,684.49 with interest).

In March 2004, ITV followed up by suing Healthy Solutions and

Guerrero, as well as other Healthy Solutions executives, named and

unnamed, in federal district court based on diversity of

citizenship. 28 U.S.C. § 1332 (2000).

ITV eventually sought to recover against Healthy

Solutions for, among other things, breach of contract, fraud, and

violations of the Massachusetts consumer protection act, Mass. Gen.

Laws ch. 93A (2002). Healthy Solutions counterclaimed against ITV

for, among other things, breach of contract, unfair competition,
"Reach and apply" is a statutory remedy under Massachusetts 1

law typically used to prevent the transfer of intangible assets in

the hands of the debtor through an injunction ("reach"), and to use

those assets to satisfy a debt owed to the plaintiff that has not

yet been reduced to a judgment ("apply"). 6 Smith & Zobel,

Massachusetts Practice § 4.1.6 (1974); In re Borofsky, 138 B.R.

345, 347 (Bankr. D. Mass. 1992). 

-5-

and account stated. Cappseals, still unpaid, was granted leave to

intervene and asserted its own claims for breach of contract

against both Healthy Solutions and ITV, and sought to reach and

apply any judgment Healthy Solutions obtained against ITV under

Mass. Gen. Laws ch. 214 § 3(6) (2002).1

When Cappseals moved to intervene in this action, it also

moved for a preliminary injunction against Healthy Solutions, which

the district court granted on April 14, 2004, preventing Healthy

Solutions from "selling, compromising, transferring, assigning, or

otherwise disposing of . . . its interest in any and all monies due

or to become due to [Healthy Solutions] from ITV Direct."

Cappseals' concern, apparently now a reality, was that Healthy

Solutions would be judgment-proof and its most valuable asset would

be its own claims against ITV.

In May 2004, the FTC filed a separate action in the same

district court against ITV and Healthy Solutions seeking injunctive

relief and restitution for false claims made in the infomercials.

The FTC entered into a permanent injunction and stipulated final

order with Healthy Solutions; the case is apparently still ongoing
-6-

as to ITV, against whom the FTC has obtained a preliminary

injunction.

In June 2004, Cappseals moved for partial summary

judgment, which the district court denied. Discovery closed on

February 1, 2005. In March 2005, Healthy Solutions (although

seemingly unable to pay) offered to consent to judgment in

Cappseals' favor for the entire amount owed and to have the

preliminary reach and apply injunction made permanent; the district

court entered the permanent injunction on April 1, 2005. The

consent to judgment was later reduced to a judgment in Cappseals'

favor in the amount of $890,182.09 (plus interest).

At virtually the same time, and unknown to Cappseals, ITV

and Healthy Solutions privately agreed to dismiss their claims

against each other and filed a joint motion requesting the district

court approve their stipulation of dismissal. The district court

granted the motion but then immediately withdrew approval on

learning that Cappseals--its reach and apply injunction against

Healthy Solutions still in place--had not consented to Healthy

Solutions' release of its own claims against ITV.

In July 2005, on Cappseals' motion, the district court

granted summary judgment against Healthy Solutions in Cappseals'

favor for the latter's unpaid-for deliveries of Supreme Greens.

Separately, the court granted summary judgment first against ITV

for failing to pay Healthy Solutions for the same goods and then
-7-

against ITV in favor of Cappseals on the latter's reach and apply

claim. Thus, ITV became obligated to pay directly to Cappseals

most of what ITV owed to Healthy Solutions in order to satisfy

Cappseals' own judgment against Healthy Solutions.

In granting summary judgment, the district judge refused

to allow ITV to set off against its debt to Healthy Solutions

whatever might be owed to ITV by Healthy Solutions; this left still

pending the claim by ITV for Healthy Solutions' alleged breach of

the distribution agreement. The court also accelerated the

finality of the July 2005 judgments, certifying them under Fed. R.

Civ. P. 54(b). ITV appealed, and ITV and Healthy Solutions also

entered a stipulated dismissal, with prejudice, under Fed. R. Civ.

P. 41(a), of their remaining respective claims against each other.

On this appeal, ITV argues that the district court

should have allowed the original motion of ITV and Healthy

Solutions to dismiss their respective claims against each other.

ITV also says that the district court should not have granted

summary judgment in Cappseals' favor on the reach and apply claim

against ITV. Finally, ITV contends that the district court further

erred in certifying the July 2005 judgments as final under Fed. R.

Civ. P. 54(b).

In response, Cappseals defends the district court on the

merits and also urges that the case is moot and the appeal should

be dismissed; it says that ITV voluntarily released its claims
-8-

against Healthy Solutions, so its alleged right to setoff is lost

anyway. The release does complicate ITV's position, but (as we

will see), were ITV right on the merits, the possibility of some

relief would exist as to certain aspects of its appeal, so the

appeal as a whole is not moot.

ITV's first claim is that the district court erred in

refusing to dismiss the case in April 2005 as between ITV and

Healthy Solutions based on their first voluntary dismissal under

Rule 41(a)(2). If this were error, the error might undermine the

subsequent July 2005 judgment entered by the district court for

Healthy Solutions and against ITV, which in turn underpins the

reach and apply judgment against ITV. So the possibility of

affording relief to ITV would remain.

However, the district court's refusal to allow the

voluntary dismissal was not error. An answer having been filed and

all parties not having consented, Rule 41(a)(1) (which allows

voluntary dismissal without approval of the court) did not apply

and ITV and Healthy Solutions could only move to dismiss under Rule

41(a)(2), which requires the court's approval. Ordinarily, a

refusal to dismiss in such a case would be reviewed for abuse of

discretion. Doe v. Urohealth Sys., Inc., 216 F.3d 157, 160 (1st

Cir. 2000).

ITV says that the court has to allow a plaintiff to

dismiss its claim if it agrees to do so with prejudice, the theory
County of Santa Fe v. Pub. Serv. Co. of N.M., 311 F.3d 1031, 2

1049 (10th Cir. 2002); Wheeler v. Am. Home Prods. Corp., 582 F.2d

891, 896 (5th Cir. 1977); see also 8 Moore's Federal Practice §

41.40[3] (3d ed. 2005).

-9-

being that the plaintiff should not be forced to go on if the

adversary is fully protected. Smoot v. Fox, 340 F.2d 301, 302-03

(6th Cir. 1964); Shepard v. Egan, 767 F. Supp. 1158, 1165 (D. Mass.

1990). We might share this view if no other interests were

involved, but, as other cases make clear, a third-party

intervenor's interests should also be considered.2

In this case, Cappseals had already become a party and

asserted its own reach and apply claim against ITV, which would

clearly have been prejudiced by a dismissal releasing the predicate

claim of Healthy Solutions against ITV. Further, the discharge of

that claim was specifically forbidden by the injunction that

Cappseals had secured against Healthy Solutions in this very

action, forbidding it to compromise its claims against ITV without

court permission.

To allow the motion would, effectively, have given ITV

priority over Cappseals as to one of Healthy Solutions' few assets,

namely, Healthy Solutions' claim against ITV for payment for goods

sold and delivered. Whatever ITV might have said in favor of such

a priority, the district court was not obliged to let ITV obtain it

through self-help prior to an adjudication. In denying the motion
This is perhaps the most common distinction, but the two 3

terms are not always used with precision, practice varies from

place to place and time to time, and the doctrines have been much

affected by statutes. James & Hazard, Civil Procedure § 9.9 (3d

ed. 1985); Loyd, The Development of Set-Off, 64 U. Pa. L. Rev. 541

(1916).

-10-

for a stipulated dismissal of claims between ITV and Healthy

Solutions, the district court did not abuse its discretion.

ITV next contests the district court's entry of summary

judgment holding it liable to Healthy Solutions and allowing

Cappseals to reach and apply that judgment in its own favor.

Unsurprisingly, ITV denies that it had any net liability to Healthy

Solutions, citing a provision of the Massachusetts Uniform

Commercial Code which states that a buyer "may deduct all or any

part of the damages resulting from any breach of the contract from

any part of the price still due under the same contract." Mass.

Gen. Laws ch. 106 § 2-717 (2002) (emphasis added).

Although the parties refer to this as a setoff provision,

the statute appears closer to what is often called recoupment.

Broadly speaking, recoupment allows the reduction by defendant of

an amount otherwise due the plaintiff based on defendant's own

claim against plaintiff, whether liquidated or unliquidated,

growing out of the same contract; setoff allows the reduction for

cross debts due to unrelated transactions, but the debt used as the

setoff must be liquidated or easily ascertainable in amount. See

Black's Law Dictionary 1302, 1404 (8th ed. 2004).3
-11-

Anyway, in invoking section 2-717, ITV's theory is that

its own claims against Healthy Solutions grew out of breaches by

the latter of the distribution agreement between the two parties;

that the (unliquidated) amount Healthy Solutions owed in damages to

ITV was far larger than the unpaid account for goods sold and

delivered; and that there was no net amount due in Healthy

Solutions' favor for Cappseals to reach and apply to satisfy its

own claim against Healthy Solutions. Our review as to the

correctness of summary judgment is de novo. Carmona v. Toledo, 215

F.3d 124, 131 (1st Cir. 2000).

The difficulty for ITV is that its most pertinent claims

against Healthy Solutions arose under the distribution agreement,

while Healthy Solutions' claim against ITV arose out of ITV's

purchase order for the goods in question. Under governing

Massachusetts precedent, the two are not "the same contract" for

purposes of section 2-717. Travenol Labs., Inc. v. Zotal, Ltd.,

474 N.E.2d 1070 (Mass. 1985), dealing with similar contractual

arrangements (distribution contract versus purchase order), so

holds. Id. at 1073. 

Travenol is controlling law in Massachusetts. See also

ECHO, Inc. v. Whitson Co., 52 F.3d 702, 705-08 (7th Cir. 1995). To

the extent that dicta in an earlier decision by us looked favorably

upon a more liberal approach, Gutor Int'l AG v. Raymond Packer Co.,

493 F.2d 938, 943 (1st Cir. 1974), our supposition is superceded by
-12-

Travenol. Similarly, it does not matter whether other

jurisdictions might be more liberal in their policy as to

recoupment or setoff. E.g. RPJ Sportswear, Inc. v. Xylo Tex, Ltd.,

681 F. Supp. 225, 228-29 (S.D.N.Y. 1988).

ITV seeks in a footnote to distinguish Travenol by saying

that it did not involve purchase orders that were "expressly

incorporated" into the distribution agreement or an affirmative

defense of fraud in the inducement. But the purchase orders in

this case did not in fact incorporate language merging them into

the distribution agreement, and, as for an "affirmative defense of

fraud," that is not a claim for "damages resulting from any breach

of the [same] contract" which section 2-717 allows as a deduction.

To modern ears, the distinctions between recoupment,

setoff and modern statutory variations are hoary and largely

arbitrary. Much that underlay the distinctions (such as the

division between law and equity) is no longer of much concern and

does not correspond well to the kind of functional distinctions

(e.g., the proper priority among competing creditors) that are of

more modern interest. But section 2-717 builds on the historical

distinctions and we are bound by Massachusetts law.

ITV also invokes a different provision of the

Massachusetts UCC, section 2-721, Mass. Gen. Laws ch. 106 § 2-721,

but this is of no help to it. The provision simply provides that

"[r]emedies for material misrepresentation or fraud include all
-13-

remedies available under this Article for nonfraudulent breach."

Id. But the netting-out remedy of section 2-717 is not available

for non-fraudulent breach of contract unless the contract is the

same--and here it is not.

The most interesting question is presented by ITV's final

claim: that the district court erred by entering judgment under

Rule 54(b) on Cappseals' reach and apply claim and the underlying

predicate claim by Healthy Solutions against ITV. This made the

judgment effective, as well as appealable, in advance of the

adjudication of ITV's own claims against Healthy Solutions. In

practical effect, it gave Cappseals priority over ITV as to a

valuable asset of the apparently depleted target company.

Normally, we review decisions to grant or deny 54(b)

certifications under an abuse of discretion standard. CurtissWright Corp. v. Gen. Elec. Co., 446 U.S. 1, 10 (1980). CurtissWright said that Rule 54(b) could be used even if a transactionally

related counterclaim was waiting in the wings and might, if

adjudicated simultaneously, offset some or all of the damages

awarded on the actual earlier judgment. Id. at 11-13. We have so

acknowledged. Pahlavi v. Palandjian, 744 F.2d 902, 904-05 (1st

Cir. 1984).

Yet in Curtiss-Wright neither side was insolvent and, as

the Supreme Court showed, the equities arguably justified giving

Curtiss-Wright immediate judgment against GE and letting GE pursue
-14-

its counterclaim later. 446 U.S. at 11-12. By contrast, once

Cappseals collects from ITV what ITV owes Healthy Solutions, that

asset of Healthy Solutions is gone and ITV, even if it established

its own claims against Healthy Solutions, would likely be left with

no way to collect.

In invoking Rule 54(b), the district court did not

address this concern, even though the objection was raised by ITV

in its opposition to summary judgment. An explanation for this

deficiency may be that the district court had earlier been told by

both Cappseals and ITV that if Cappseals prevailed on its reach and

apply claim, ITV and Healthy Solutions would proceed with the

earlier thwarted dismissal of their claims against each other. In

fact, this is just what happened.

Although we are not certain that we would uphold the

54(b) certification if it now made any difference, the outcome

would be the same whether we affirmed the district court or

remanded and set aside the 54(b) certification to await the outcome

of ITV's claims against Healthy Solutions. The reason is obvious:

ITV has now surrendered its remaining claims against Healthy

Solutions and has nothing with which to counter Cappseals' reach

and apply judgment. 

ITV was not compelled to dismiss its claims against

Healthy Solutions simply because the district court ruled against

it on the 54(b) certification. See Fed. R. Civ. P. 62(h). It was
-15-

perfectly free to preserve those claims, argue on appeal (as it

has) that the 54(b) certification was error, and upon remand pursue

its remaining claims against Healthy Solutions. If it prevailed,

ITV could then have argued that its claims should take priority

over Cappseals' reach and apply claim. 

We have no clear notion as to how such a conflict in

priority would be resolved. On the one hand, there does seem to be

an impulse to go beyond strict setoff doctrine in certain

instances, see F.D.I.C. v. Mademoiselle of Cal., 379 F.2d 660, 664

(9th Cir. 1967); on the other, there is some indication that courts

treat a reach and apply claim, properly filed, as creating an

equitable lien, see In re Borofsky, 138 B.R. 345, 347-48 (Bankr. D.

Mass. 1992). No one has briefed the priority issue, and we do not

have reason to resolve it. 

It is enough that ITV gave up its opportunity to argue

for priority by dismissing its claims against Healthy Solutions.

No doctrine comes to mind which would allow ITV to undo or escape

the consequences of its own dismissal, made with the full knowledge

that ITV could instead have pursued its appeal here while

preserving its potential claims against Healthy Solutions. Nor has

ITV made any such argument. 

Affirmed.