Court Opinion

ID: 4294165
Source: CourtListenerOpinion
Date Created: 2018-07-13 21:00:18.566569+00
Date Added: 2024-06-11T13:24:37.288386
License: Public Domain

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, Circuit Judge. When Lowe’s Companies, Inc. (Lowe’s
Inc.) expanded its retail home 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 subsid-
iaries, Karum Group LLC, and Karum Card Services S.A. de
C.V., SOFOM, E.N.R. (collectively, Karum), to provide private-
label 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 limine to 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. Prior to
opening those stores, Lowe’s Mexico entered into the “Private
Nos. 18-1007 & 18-1074                                         3

Label Credit Card Program Agreement” (“Program Agree-
ment”) 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 Agree-
ment”) 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 Agree-
ment.
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,” which projected service 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 never referred
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 Decem-
ber 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 under Rule 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 Fed-
       eral 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 compa-
       nies, 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 supplemen-
tal 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 Limine To 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 theoreti-
cal 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 of Johnson as an expert 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 in light
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 previ-
ous 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 submission was neither substan-
tially 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 affirma-
tive 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 in the
       form of debt, including promissory notes exe-
       cuted 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 sched-
uled 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 or identify
       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 non-
disclosed 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, “exclud-
ing 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) de-
mands 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 after the 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, and in 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 never referred 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 oppo-
nent’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 accord-
ingly, 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 al-
though 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, ap-
prised of all the circumstances, would have chosen as propor-
tionate 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 determina-
tive.” Musser, 356 F.3d at 760.
   We are satisfied that the district court’s sanction was
reasonable and made with careful consideration of the circum-
stances. 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 exclu-
sion of Johnson’s testimony was proportionate 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
whether it 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-determina-
tive 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 and the 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 expert testimony. 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 counter-
claim is permissive.
                    III. CONCLUSION
   For the foregoing reasons, we AFFIRM the judgment in
favor of Lowe’s.