In the

United States Court of Appeals

For the Seventh Circuit

Nos. 18-1007 & 18-1074

KARUM HOLDINGS LLC, et al., and

KARUM LATIN AMERICA S. DE R.L.

DE C.V.,

Plaintiffs-Appellants,

v.

LOWE’S COMPANIES, INCORPORATED,

et al.,

Defendants-Appellees.

Appeals from the United States District Court for the 

Northern District of Illinois, Eastern Division.

No. 15 C 380 — John Z. Lee, Judge.

ARGUED MAY 29, 2018 — DECIDED JULY 13, 2018

Before BAUER, BARRETT, and ST. EVE, Circuit Judges.

BAUER,CircuitJudge.When Lowe’s Companies, Inc. (Lowe’s

Inc.) expanded its retailhome improvement stores into Mexico,

Lowe’s Companies Mexico, S. de R.L. de C.V. (Lowe’s Mexico)
2 Nos. 18-1007 & 18-1074

contracted with Karum Holdings LLC and a few of its subsidiaries, Karum Group LLC, and Karum Card Services S.A. de

C.V., SOFOM, E.N.R. (collectively, Karum), to provide privatelabel credit card services there. The program failed to meet

expectations, and Karum brought this lawsuit against both

Lowe’s Inc. and Lowe’s Mexico (collectively, Lowe’s) claiming

breach of contract. 

The focus of this appeal is Karum’s proof of damages

and expert disclosures, or lack thereof. Early on, Karum

disclosed its summary “damages model,” a 37-page estimate

of damages with hundreds of figures contained in charts and

graphs. Karum intended to have its Chairman and former

CEO Peter Johnson and/or its current CEO and CFO Russell

Ouchida present the damages model at trial as lay opinion

testimony; Karum never retained a damages expert. Two

months before trial, Lowe’s filed a motion in limineto preclude

Johnson and Ouchida from testifying as to the damages model

because any testimony regarding the model required the

specialized knowledge of an expert. The district court granted

the motion, finding that Karum had never properly disclosed

an expert pursuant to Federal Rule of Civil Procedure 26(a)(2).

Since this was a case-dispositive sanction, the court granted

judgment in favor of Lowe’s and Karum appealed. We affirm. 

I. BACKGROUND

A. The Agreements Between Lowe’s and Karum

Lowe’s Inc. is the second largest home improvement store

in the United States, and in 2010, it expanded its North

American presence into Mexico by opening two stores. Priorto

opening those stores, Lowe’s Mexico entered into the “Private
Nos. 18-1007 & 18-1074 3

Label Credit Card Program Agreement” (“Program Agreement”) with Karum. The term of the agreement was seven

years, and it could only be terminated if certain conditions

were met, or by mutual consent. The parties initially agreed to

jointly fund the credit portfolio 50/50, but changed course in

2014 resulting in the “Profit Sharing and Funding Agreement”

(the “Funding Agreement”), whereby Lowe’s Mexico agreed

to fund 99%. Karum Card Services was an entity created as a

joint venture by Lowe’s Mexico and Karum Group to manage

and operate the program, i.e., issue credit cards to customers in

Mexico. In turn, Karum Card Services also had a separate

“Masters Credit Services Agreement” (the “Services Agreement”) with Karum Latin America S. de L.A. de C.V. (Karum

LA), a subsidiary of Karum Group, to further carry out the

program in Mexico.

The arrangement failed to meet Lowe’s expectations,

and Lowe’s sought to terminate its relationship with Karum

in 2014. After mediation proved unsuccessful, Karum and

Karum LA filed this lawsuit on January 14, 2015. Karum

alleged that a contractual relationship between Lowe’s and

Karum was reflected in all three agreements described above,

and that Lowe’s had unilaterally terminated the agreements.

Lowe’s filed a motion to dismiss all claims relating to the

Services Agreement since Lowe’s was not a party to that

particular agreement, and dismiss Karum LA, because it was

not a party to any agreement to which Lowe’s was a party. The

district court granted Lowe’s motion without prejudice, and

Karum’s amended complaint removed Karum LA as a party

and any claims for breach of contract of the Services Agreement. 
4 Nos. 18-1007 & 18-1074

B. Karum’s Witness Disclosures, Damages Model, and

Procedural History

Karum made its initial Rule 26(a) disclosures on March 13,

2015. Karum provided Lowe’s, pursuant to Rule 26(a)(1)(A),

with a list of names likely to have “discoverable information

relevant to disputed facts,” which included both Johnson and

Ouchida. Karum’s disclosures did not designate any potential

witnesses as experts under Rule 26(a)(2).

In April 2015, Karum produced a 37-page summary

“damages model,” as required by Rule 26(a)(1)(A)(iii). The

model had two components: (1) the “Portfolio Component,”

which, according to Karum, projected its share of the estimated

value of the portfolio in the absence of Lowe’s breach; and

(2) the “Services Component,” whichprojectedservice fees that

non-party Karum entities, such as Karum LA, would have

received from Karum Card Services pursuant to the Services

Agreement. Karum designated both Johnson and Ouchida as

its Rule 30(b)(6) witnesses on damages, and Lowe’s deposed

both in April 2016. Notably, the damages model neverreferred

to Johnson or Ouchida, nor summarized what they would say

regarding its content.

1 Lowe’s filed a motion for partial

summary judgment with respect to the Services Component,

and the district court granted Lowe’s motion on March 28,

2017, thus striking that component from the damages model.

1

The model was not solely built by Johnson or Ouchida. According to

their depositions, the model was built with the assistance of two “very

talented financial analysts” who had “very significant expertise,” and

Johnson and Ouchida served in a more supervisory role. 
Nos. 18-1007 & 18-1074 5

Following the grant of partial summary judgment in favor

of Lowe’s, the district court held a status hearing on April 12,

2017, in order to set expert disclosure deadlines and a trial

date. During the hearing, Karum sought to supplement a

revised damages model in order to conform to the court’s

summary judgment ruling, which the court granted. The court

then asked Karum’s counsel whether it intended to offer “an

affirmative expert on damages” to which Karum’s counsel

replied “No, Your Honor. The plaintiff will testify to it himself.

He is the expert on it.” Relying on this statement, the court set

a deadline for Lowe’s expert disclosures under Rule 26(a)(2),

but made no similar deadline for Karum. The court set a trial

date for November, but later changed that date to December 11, 2017.

Karum’s supplemental damages model substantially

altered the Portfolio Component and added a new component

that had not been previously disclosed or subject to discovery.

Lowe’s swiftly moved to strike the supplemental model as

untimely underRule 26 and prejudicial. In its memorandum in

opposition to Lowe’s motion to strike, Karum discussed how

it intended to present the damages model at trial. Karum told

the court that it had “advised Lowe’s that it did not intend to

use a retained expert to present damages, but rather would

rely on opinion testimony through ... Johnson.” In a footnote

to that sentence, Karum elaborated further on Johnson’s

testimony:

Johnson can opine as a lay witness under Federal Rule of Evidence 701 on the subject of

Karum’s estimated damages by virtue of his

perception of Karum’s business gained through
6 Nos. 18-1007 & 18-1074

his management of that business. But he might

also qualify as an expert under Federal Rule of

Evidence 702, through the knowledge and

experience he has gathered from decades in the

credit business. In fact, Johnson has served on

the audit committees of multiple public companies, and as such, is recognized by the SEC to

have financial expertise. Either way, Lowe’s

knows Johnson and will not be surprised by his

testimony. 

(emphasis added). 

The court granted Lowe’s motion to strike the supplemental damages model on September 6, 2017, and Karum’s

damages model for trial was reduced to the original Portfolio

Component from April 2015. During a status hearing the

following day, the parties updated the court on their expert

disclosures. Lowe’s counsel stated that its retained expert

would produce a report by the end of the month. In the court’s

minute entry, the court reconfirmed that Karum’s counsel

“[did] not anticipate offering an expert at trial but may offer a

rebuttal expert after [reviewing Lowe’s] experts report.” 

C. Lowe’s Motion In LimineTo Exclude Johnson’s Expert

Testimony

On October 4, 2017, with the trial date approaching, Lowe’s

filed “Motion In Limine No. 1 to Exclude Evidence of Plaintiffs’

Damages Model.” In that motion, Lowe’s advanced a number

of arguments, only one of which is relevant to this appeal: that

no Karum witness, including Johnson and/or Ouchida, could

properly testify as to the damages model because it would
Nos. 18-1007 & 18-1074 7

constitute impermissible lay opinion testimony. Lowe’s noted

that the damages model projected “how the credit portfolio

allegedly would have grown through the end of the parties’

agreements in February 2017 and calculates Karum’s theoretical share.” As such, Johnson and Ouchida could not offer lay

opinion testimony under FRE 701 because the model was

“predicated on dozens of assumptions and projections,

including the number of estimated credit card applications,

approvals, credit card purchases, the timing and amount of

payments, finance charges, and many other variables.”

Karum conceded that no witness could provide lay opinion

testimony as to the damages model, but rather asserted that it

had “unambiguously” disclosed Johnson as an expert witness

pursuant to Rule 26(a)(2)(C).2 Karum contended that by

disclosing Johnson’s identity in its initial disclosures and

providing the damages model, it had complied with the expert

disclosure requirements. It further noted that it “reminded”

Lowe’s of its expert disclosure in the footnote quoted above

from the supplemental damages model briefing.

On November 21, 2017, the district court granted Lowe’s

motion in limine to exclude Johnson from offering expert

testimony on the damages model. The court found that

“Karum’s purported disclosure ofJohnsonas anexpert witness

was plainly inadequate” and consequently, the failure to

disclose Johnson as an expert was a Rule 26(a) violation.

Furthermore, the court concluded that Karum’s violation was

2 Karum did not provide such a vociferous defense as it related to

Ouchida. Instead, Karum only stated that since 2015, it had informed

Lowe’s that “perhaps” Ouchida would testify as to the damages model. 
8 Nos. 18-1007 & 18-1074

neither substantially justified nor harmless,particularly inlight

of the upcoming trial date. Thus, exclusion of Johnson’s expert

testimony was automatic under Rule 37(c)(1). 

Karum filed a motion to reconsider the court’s ruling,

arguing that the exclusion of Johnson’s expert testimony

amounted to a case-dispositive sanction by eliminating its

ability to present evidence of damages. Karum also requested

a variety of alternatives to the court’s ruling, from bifurcating

the trial to filing an interlocutory appeal. On November 28,

2017, the court held a lengthy hearing and affirmed its previous ruling. The court questioned the parties on other ways to

introduce evidence of damages without Johnson relying on the

damages model, and explored the alternative remedies

proposed by Karum. However, the court found “that there is

no lesser remedy available at this point,” and “that no other

alternatives ... would be available to Karum that would not

otherwise inflict undue prejudice to Lowe’s.” According to the

court, the exclusion of Johnson’s expert testimony was

“proportionate not only to Karum’s failure to abide by

Rule 26(a)(2), but also to the substantial prejudice to Lowe’s if

the Court would allow his testimony to proceed.” 

The court allowed Karum to go back through the discovery

to identify any other evidence of damages it might be able to

introduce. The following day, Karum wrote a letter explaining

its alternative method of proving damages. Lowe’s filed a

motion in limine to exclude that method, and the court held

another lengthy hearing on December 4, 2017. Applying the

same Rule 26(a) and Rule 37(c)(1) analysis, the court again

concluded that Karum’s latest submissionwasneither substantially justified nor harmless.
Nos. 18-1007 & 18-1074 9

Karum conceded that in light of the court’s ruling, it could

not prove damages. Thus, the court entered judgment in favor

of Lowe’s. 

D. Lowe’s “Setoff” and Permissive Counterclaim

In its answer to the complaint, Lowe’s set forth an affirmative defense stating that it was entitled to a setoff against any

relief sought by Karum in light of the monies owed to Lowe’s.

It explained the affirmative defense as follows:

Lowe’s provided the funding to [Karum Card

Services] to provide the various credit services

under the Program Agreement and Funding

Agreement. Lowe’s provided that funding inthe

form of debt, including promissory notes executed by [Karum Card Services] and Karum

Group. There remains an outstanding balance

owed to Lowe’s (the exact amount to be proven

at trial), and these payments and loans made to

Karum should be set off from any damages that

Karum might obtain. 

Lowe’s made three separate loans in 2014 and 2015 secured by

promissory notes to Karum Card Services which were scheduled to mature in 2019 and 2020 absent a default. Karum

Card Services continued to operate throughout the litigation,

providing monthly statements to Lowe’s. However, in early

2017, Karum informed Lowe’s that it intended to shut down

Karum Card Services. Concerned about the status of its loans,

Lowe’s sent a letter on August 30, 2017, notifying Karum that

it had defaulted on the notes, pursuant to a section in the note

that allows Lowe’s to declare a default where it believes the
10 Nos. 18-1007 & 18-1074

prospect of payment or performance is impaired. Lowe’s

sought payment of approximately $6.28 million which Karum

refused to pay.

On September 28, 2017, Karum filed a motion in limine to

exclude Lowe’s setoff affirmative defense and any evidence it

intended to offer to support it. Before the district court ruled

on that motion, Lowe’s filed a motion to convert its setoff

affirmative defense into a counterclaim under Rule 8(c)(2), or

in the alternative, for leave, pursuant to Rule 13(e), to assert a

new counterclaim with respect to the notes. The district court

granted Karum’s motion in limine and denied Lowe’s motion

to convert the setoff defense into a counterclaim. The court

concluded that Lowe’s counterclaim was permissive rather

than compulsory because the purported default cited in the

August 2017 letter took place well after the events that gave

rise to Karum’s claims. 

II. DISCUSSION

Karum’s main contention on appeal is that the district court

erred in excluding Johnson’s expert testimony on the damages

model. Karum also argues that the court made a variety of

errors prior to its ruling on Johnson’s testimony. 

A. Karum’s Rule 26(a) Violation and Exclusion Under

Rule 37(c)(1)

Karum contends that it complied with Rule 26(a)(2) and

timely disclosed Johnson as an expert; as it did below, it

concedes that no witness could offer lay opinion testimony as

to the damages model. Even if it failed to properly disclose

Johnson as an expert, Karum argues that Lowe’s suffered no
Nos. 18-1007 & 18-1074 11

prejudice, and that the court could have imposed a less drastic

sanction. 

A district court’s discovery rulings, including a decision to

exclude expert testimony, are reviewed for an abuse of

discretion. Musser v. Gentiva Health Servs., 356 F.3d 751, 755 (7th

Cir. 2004). “A court does not abuse its discretion unless ...

(1) the record contains no evidence upon which the court could

have rationally based its decision; (2) the decision is based on

an erroneous conclusion of law; (3) the decision is based on

clearly erroneous factual findings; or (4) the decision clearly

appears arbitrary.” Sherrod v. Lingle, 223 F.3d 605, 610 (7th Cir.

2000) (internal quotation marks and citation omitted). 

Rule 26(a)(2)(A) requires a party to disclose the identity of

a witness who will present expert testimony under Federal

Rule of Evidence 702. FED. R. CIV. P. 26(a)(2)(A). Since Johnson

was a non-retained expert, Karum was required to disclose

(1) the subject matter of his expert testimony and (2) “a

summary of the facts and opinions” on which Johnson would

have testified. FED.R.CIV.P. 26(a)(2)(C). Karum had to disclose

Johnson’s expert testimony pursuant to a court ordered

deadline, and if no deadline was set, at least 90 days prior to

the start of trial. FED. R. CIV. P. 26(a)(2)(D)(I). Finally, “all

disclosures under Rule 26(a) must be in writing, signed, and

served.” FED. R. CIV. P. 26(a)(4).

Rule 37(c)(1) sets forth the sanction for failing to comply

with Rule 26(a)’s expert disclosure requirements:

If a party fails to provide information oridentify

a witness as required by Rule 26(a) or (e), the

party is not allowed to use that information or
12 Nos. 18-1007 & 18-1074

witness to supply evidence on a motion, at a

hearing, or at a trial, unless the failure was

substantially justified or is harmless.

FED. R. CIV. P. 37(c)(1). Accordingly, “[t]he exclusion of nondisclosed evidence is automatic and mandatory under

Rule 37(c)(1) unless non-disclosure was justified or harmless.”

Musser, 356 F.3d at 758. 

We first assess the court’s application of Rule 26 to ensure

it did not reach an erroneous conclusion of law in finding that

Karum failed to disclose Johnson as an expert. Id. at 755. If the

district court incorrectly found a Rule 26(a) violation, “excluding the evidence would necessarily be an abuse of discretion.”

Id. Then, without substituting our own judgment, we examine

for an abuse of discretion the court’s basis for finding that

Karum’s Rule 26(a) violation lacked substantial justification

and was not harmless. Id.

We agree with the district court that Karum’s purported

expert disclosure of Johnson was plainly inadequate; in fact,

it was non-existent. The plain meaning of Rule 26(a)(2) demands a formal designation for expert disclosures. See id. at

757. Karum disclosed Johnson as a “fact” witness under

Rule 26(a)(1)(A) in its March 2015 disclosures; nothing in

the March 2015 disclosure stated or suggested Johnson

was an expert witness. There is a significant distinction

between disclosing an individual as a fact witness under

Rule 26(a)(1)(A) and disclosing an expert witness under

Rule 26(a)(2). Id. “That duty to disclose a witness as an expert

is not excused when a witness who will testify as a fact witness
Nos. 18-1007 & 18-1074 13

and as an expert witness is disclosed as a fact witness.” Tribble

v. Evangelides, 670 F.3d 753, 759 (7th Cir. 2012).

At two separate status hearings afterthe close of discovery,

Karum affirmed that it did not intend to offer an affirmative

expert at trial. Karum told Lowe’s and the district court that

Johnson would testify on the damages model, andin a footnote

contained in a brief, stated that Johnson could “opine as a lay

witness” under FRE 701. Its equivocal statement that Johnson

“might also qualify as an expert” was woefully insufficient to

constitute a formal expert disclosure. 

Moreover, the damages model alone was insufficient to

constitute “a summary of the facts and opinions” on which

Johnson would testify to regarding the model. The damages

model neverreferred to Johnson, nor did it contain a summary

of what he might have said at trial regarding its hundreds of

figures and assumptions. 

Karum stresses that Lowe’s was aware that Johnson would

provide expert testimony. Lowe’s had deposed Johnson about

the model and knew Karum intended to call him to testify

about its content. However, Lowe’s should not have to assume

a particular witness will testify as an expert. See Musser, 356

F.3d at 757. As we have reiterated before, “[f]ormal disclosure

of experts is not pointless. Knowing the identity of the opponent’s expert witnesses allows a party to properly prepare for

trial.” Id. Simply put, the district court correctly found Karum

violated Rule 26(a). 

Karum does not try to justify its Rule 26(a) violation since

it incorrectly believes it complied with Rule 26(a). Instead,

Karum argues that even if it did violate Rule 26(a), Lowe’s was
14 Nos. 18-1007 & 18-1074

not prejudiced and any error was harmless. The district court

rejected that argument, and on appeal, Karum raises the same

arguments it put forward below: that Lowe’s knew Johnson’s

identity, opinions, and qualifications from the two-day

deposition of Johnson; and that Lowe’s had already hired a

rebuttal expert to attack the damages model. 

The district court did not abuse its discretion in finding that

Karum’s Rule 26(a) violation was not harmless, and accordingly, Johnson’s expert testimony was subject to automatic

exclusion under Rule 37(c)(1). In its analysis, the court stated

that it considered certain factors we enumerated in David v.

Caterpillar, Inc., 324 F.3d 851, 857 (7th Cir. 2003), that weighed

in favor of a finding of prejudice. The court noted that although Lowe’s was familiar with Johnson, it had no reason to

take discovery on his qualifications and expertise, nor could it

then challenge his qualifications or the admissibility of his

expert testimony under the grounds set forth in Daubert v.

Merrell Dow Pharm., Inc., 509 U.S. 579 (1993). Additionally,

Lowe’s rebuttal expert would have prepared a different report

had he been provided Johnson’s expert qualifications and a

summary of his opinions. Finally, as the court correctly noted,

we have previously rejected arguments that a Rule 26(a)

violation is harmless simply because the opposing party knew

the witness would testify in some capacity. See Tribble, 670 F.3d

at 760.

Karum maintains that the court could have reopened

discovery and allowed Lowe’s one day to re-depose Johnson

about his qualifications while maintaining the December 11

trial date. But again, the district court expressly rejected that

idea. The court found that excusing Karum’s Rule 26(a)
Nos. 18-1007 & 18-1074 15

violation would necessarily delay the trial date because Lowe’s

would likely seek not only to re-depose Johnson, but also to

obtain additional discovery regarding his qualifications and

opinions. Moreover, the court predicted that would lead to

Daubert briefing and that Lowe’s would likely seek leave to

amend its rebuttal expert report. Again, we have previously

found these precise circumstances to be prejudicial. See Musser,

356 F.3d at 754–59. And while the court could have delayed the

trial date, it is certainly not an abuse of discretion to find that

Lowe’s would have been prejudiced by the additional cost of

excusing Karum’s Rule 26(a) violation weeks before trial and

continuing the litigation.

Finally, Karum asserts that the court erred by imposing

what amounted to be a case-dispositive sanction instead of a

less drastic measure. We have stated before that when a district

court’s discovery sanction “necessarily entails dismissal of the

case, the sanction ‘must be one that a reasonable jurist, apprised of all the circumstances, would have chosen as proportionate to the infraction.’” Sherrod, 223 F.3d at 612 (quoting

Salgado v. Gen. Motors Corp., 150 F.3d 735, 740 (7th Cir. 1998)).

Indeed, we have “urge[d] district courts to carefully consider

Rule 37(c), including the alternate sanctions available, when

imposing exclusionary sanctions that are outcome determinative.” Musser, 356 F.3d at 760. 

We are satisfied that the district court’s sanction was

reasonable and made with careful consideration of the circumstances. After issuing its decision, the court held a lengthy

hearing on a motion to reconsider its ruling, and heard

arguments from both parties over a variety of alternative

remedies. At that hearing, the court invoked the correct legal
16 Nos. 18-1007 & 18-1074

standards and concluded that there was “no lesser remedy

available” with the trial date weeks away, and that the exclusion of Johnson’s testimony wasproportionate to the Rule 26(a)

violation. Instead of ending the matter there, the court gave

Karum an opportunity to go back through discovery to see

whetherit could present damages evidence without Johnson’s

expert testimony, and then held another lengthy hearing. The

court’s actions assure us that it carefully considered Rule 37(c)

and did not abuse its discretion in imposing a case-determinative sanction. 

B. Karum’s Other Arguments 

Karum argues that, prior to excluding Johnson’s expert

testimony, the court erred in (1) striking both the Services

Component of the damages model and the supplemental

model it provided in April 2017; (2) dismissing Karum LA and

claims related to the Services Agreement; and (3) finding

Lowe’s counterclaim permissive. 

Karum’s first argument cannot overcome our decision

above to affirm the district court’s exclusion of Johnson’s

expert testimony under Rule 37(c)(1). Johnson was Karum’s

Rule 30(b)(6) damages witness, and any testimony from

Johnson as to the Services Component of the damages model

or the supplemental model certainly would have ran into the

same challenge from Lowe’s, i.e., that Johnson’s testimony

would constitute improper lay opinion testimony. Both the

Services Component andthe supplemental model relied on the

same assumptions and projections for the hundreds of figures
Nos. 18-1007 & 18-1074 17

that were used in the Portfolio Component.3 Thus, even if we

were to find that the court erred by striking either the Services

Component or the supplemental model, Karum’s Rule 26(a)

violation and the exclusion of Johnson’s expert testimony on

the damages model rendered any error irrelevant. 

Next, Karum attacks the district court’s early ruling to

dismiss, without prejudice, all claims related to the Services

Agreement and Karum LA as a party to the lawsuit. “We

review de novo a district court’s ruling that a complaint fails to

state a claim upon which relief may be granted under

Rule 12(b)(6).” Haywood v. Massage Envy Franchising, LLC, 887

F.3d 329, 332 (7th Cir. 2018). 

Karum argues that even though Lowe’s was not a party to

the Services Agreement, it was a necessary part of the parties’

relationship. In other words, Karum Card Services had to

execute the Services Agreement with Karum LA in order to

carry out the Program Agreement with Lowe’s. Yet, the district

court correctly dismissed this argument because nothing in the

three agreements suggests that together they form a “master

agreement” where breaching one would constitute a breach of

the other. In fact, the court pointed to the integration clauses in

3 Karum conceded below and on appeal that the Portfolio Component to

the damages model required expert testimony. However, in a footnote to

its reply brief on appeal, Karum suggests that Johnson’s testimony as to

both the Services Component and the supplemental model would be fact

testimony under FRE 701, not experttestimony. This position simply cannot

be reconciled with the fact that the Services Component and supplemental

model rely on the same assumptions and projections as the Portfolio

Component. 
18 Nos. 18-1007 & 18-1074

both the Program and Funding Agreements, which state they

“constitute the entire agreement.” 

As it relates to Karum LA, Karum advances a different

argument than it raised below: that Karum LA is a third-party

beneficiary under New York law.

4 Leaving aside the fact that

this argument was waived, Karum did not plead in the

complaint that Karum LA is a third-party beneficiary, nor

could it have since the Program Agreement specifically

contained a clause titled “No Third Party Beneficiaries.” 

Finally, Karum asserts that the court erred in finding that

Lowe’s counterclaim was permissive rather than compulsory.

Rule 13(a) governs compulsory counterclaims, and states that

“[a] pleading must state as a counterclaim any claim that—at

the time of its service—the pleader has against an opposing

party if the claim ... arises out of the transaction or occurrence

that is the subject matter of the opposing party's claim.” FED.R.

CIV. P. 13(a)(1)(A). Karum contends that the promissory notes

on which Lowe’s sought payment arise out of the same

transaction that forms the basis of Karum’s claims because the

money was loaned as part of the Funding Agreement.

However, as Rule 13(a) makes clear, the counterclaim is

only compulsory if it existed at the time Lowe’s served its

answer on Karum in 2015. As the district court correctly found,

the counterclaim did not exist until sometime in 2017 when

Lowe’s discovered that Karum Card Services would shut

down without any repayment on the loans. This action led

4

Each of the three “agreements” contains a choice of law provision

adopting New York law.
Nos. 18-1007 & 18-1074 19

Lowe’s to declare a default on the notes in August 2017. Since

the counterclaim did not exist at the time Lowe’s served its

answer, the district court correctly found that Lowe’s counterclaim is permissive.

III. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment in

favor of Lowe’s.