Opinion
97 Civ. 4978 (LMM) (HBP)
December 14, 2001
MEMORANDUM OPINION AND ORDER
I. Introduction
Defendants move for leave to amend their answers to assert counterclaims against plaintiffs Sami Khoury and Omar Salhab. For the reasons set forth below, the motion is granted.
II. Facts
The allegations that give rise to this action are set forth in detail in Judge McKenna's April 1, 1998 Memorandum and Order, A.I.A. Holdings. S.A. v. Lehman Bros., Inc., 97 Civ. 4978 (LMM), 1998 WL 159059 (S.D.N.Y. April 1, 1998), familiarity with which is assumed. This is, in principal part, a common law fraud action in which jurisdiction is predicated on diversity. The approximately 250 plaintiffs in this action allege that they were defrauded by Ahmad Ihsan El-Daouk, a former Lebanese securities/commodities broker and investment adviser. The defendants in this action, Lehman Brothers, Inc. ("Lehman") and Bear, Stearns Co. Inc. ("Bear Stearns"), served primarily as clearing brokers for Daouk.
According to plaintiffs, from 1988 through 1992, Daouk, through investment companies formed and controlled by him, induced plaintiffs to open accounts at Lehman. Daouk either altered or completed the account opening forms in such a manner that all correspondence from Lehman to a plaintiff would actually be sent to an address controlled by Daouk. Daouk also had his own accounts at Lehman.
Daouk allegedly churned plaintiffs' accounts to generate commissions for both himself and Lehman, and effected a number of unauthorized inter-account transfers by which he shifted losses to plaintiffs' accounts and transferred profits to his own accounts. Daouk was able to continue the fraud by, among other things, intercepting the genuine account statements and substituting forged account statements that showed fictitious trading activity and consistent net profits of approximately twenty percent per year.
In 1992, Lehman allegedly discovered some of Daouk's activities. Thereafter, Daouk allegedly transferred his activities to Bear Stearns where he continued them through 1995.
Defendants deny all the material allegations against them.
In addition to the action pending in this Court, plaintiffs have also initiated liquidation proceedings in the United Kingdom against several companies formerly controlled by Daouk.
Defendants claim that they learned during the course of discovery that Khoury and Salhab were longtime friends of Daouk who recommended Daouk to certain entities that are plaintiffs in this matter (Affidavit of Steven Shiffman, sworn to January 18, 2001 ("Shiffman Aff."), ¶ 5). Specifically, defendants claim that Khoury recommended Daouk to others, including, Nelan Finance Inc. and Flaps Foundation, for which he acted as investment adviser (Shiffman Aff. ¶ 5). Defendants further claim that Salhab recommended Daouk to others including Bodo Foundation, Cendi Foundation, Tiwi Holdings, Intaj S.A.L. and Seamar S.A.R.L., for which he acted as investment adviser (Shiffman Aff. ¶ 5).
Defendants claim that Khoury and Salhab made these recommendations without fully investigating Daouk and in breach of their duty to the entities for whom they served as investment advisers (Shiffman Aff. ¶¶ 7-8).
Based on the foregoing, Lehman and Bear Stearns seek to assert counterclaims against Khoury and Salhab for contribution based on the theories that Khoury and Salhab were negligent and/or reckless in recommending Daouk to their respective clients and that they breached their fiduciary duties to their respective clients.
Plaintiffs here oppose the proposed amendment on two grounds: delay and futility. First they claim that defendants have long known of the facts giving rise to the proposed counterclaims and that they have unduly delayed asserting those counterclaims. Second, plaintiffs claim that the proposed counterclaims are doomed to failure.
III. Analysis
The standards applicable to a motion to amend a pleading are well settled and require only brief review. Leave to amend a pleading should be freely granted when justice so requires. Fed.R.Civ.P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962); Dluhos v. The Floating Abandoned Vessel. Known as "New York", 162 F.3d 63, 69 (2d Cir. 1998); Gumer v. Shearson, Hammill Co., 516 F.2d 283, 287 (2d Cir. 1974). "Nonetheless, the Court may deny leave if the amendment (1) has been delayed unduly, (2) is sought for dilatory purposes or is made in bad faith, (3) the opposing party would be prejudiced, or (4) would be futile." Lee v. Regal Cruises, Ltd., 916 F. Supp. 300, 303 (S.D.N.Y. 1996), aff'd, 116 F.3d 465 (2d Cir. 1997). Accord American Home Assur. Co. v. Jacky Maeder (Hong Kong) Ltd., 969 F. Supp. 184, 187-88 (S.D.N.Y. 1997).
Delay alone, in the absence of bad faith or prejudice, is usually not sufficient reason for denying a motion to amend. Rachman Bag Co. v. Liberty Mut. Ins. Co., 46 F.3d 230, 234-35 (2d Cir. 1995); State Teachers Ret. Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981); Middle Atlantic Utils. Co. v. S.M.W. Dev. Corp., 392 F.2d 380, 384 (2d Cir. 1968). "The court also has discretion to deny leave to amend `where the motion is made after an inordinate delay, no satisfactory explanation is offered for the delay, and the amendment would prejudice' other parties."Grace v. Rosenstock, 228 F.3d 40, 53-54 (2d Cir. 2000), cert. denied, 121 S.Ct. 1362(2001), quoting Cresswell v. Sullivan Cromwell, 922 F.2d 60, 72 (2d Cir. 1990) (emphasis added). See also Commander Oil Corp. v. Barlo Equip. Corp., 215 F.3d 321, 333 (2d Cir.), cert. denied, 531 U.S. 979(2000) (permitting amendment of answer to assert additional affirmative defense after a seven-year delay does not constitute an abuse of discretion in the absence of prejudice).
A proposed amendment is futile when it fails to state a claim.Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990) ("Although Fed.R.Civ.P. 15(a) provides that leave to amend should be given freely when justice so requires, where, as here, there is no merit in the proposed amendments, leave to amend should be denied."); Mina Inv. Holdings Ltd. v. Lefkowitz, 184 F.R.D. 245, 257 (S.D.N.Y. 1999); Parker v. Sony Pictures Entm't. Inc., 19 F. Supp.2d 141, 156 (S.D.N.Y. 1998),aff'd in pertinent part, vacated in part on other grounds sub nom., Parker v. Columbia Pictures Indus., 204 F.3d 326 (2d Cir. 2000); Yaba v. Cadwalader, Wickersham Taft, 931 F. Supp. 271, 274 (S.D.N Y 1996);Prudential Ins. Co. v. BMC Indus., Inc., 655 F. Supp. 710, 711 (S.D.N.Y. 1987) (Although leave to amend should be freely given, "it is inappropriate to grant leave when the amendment would not survive a motion to dismiss."). See generally Dluhos v. Floating Abandoned Vessel known as "New York", supra, 162 F.3d at 69-70. "The proposed Amended Complaint may therefore be scrutinized as if defendant's objections to the amendments constituted a motion to dismiss under Fed.R.Civ.P. 12(b)(6)." Journal Publ'g Co. v. American Home Assur. Co., 771 F. Supp. 632, 635 (S.D.N.Y. 1991).
The Court of Appeals has repeatedly noted that the trial court has "broad" discretion in ruling on a motion to amend. Local 802, Associated Musicians v. Parker Meridien Hotel, 145 F.3d 85, 89 (2d Cir. 1998);Krumme v. Westpoint Stevens Inc., 143 F.3d 71, 88 (2d Cir. 1998). See generally Grace v. Rosenstock, supra, 228 F.3d at 53-54.
A. Undue Delay
Plaintiffs claim that defendant knew of the facts underlying the proposed counterclaims as early as 1998 and that their delay of more than two years in seeking to assert the counterclaims is sufficient reason, without more, to deny the motion.
To the extent plaintiffs argue that delay alone is sufficient reason to deny leave to amend, I conclude that their argument is contrary to the decisions of the Court of Appeals cited on pages 4-5, above. The majority of the cases on which plaintiffs rely in connection with this argument are either more than fifteen (15) years old, or are from other jurisdictions. See Imperial Enters., Inc. v. Fireman's Fund Ins. Co., 535 F.2d 287, 293 (5th Cir. 1976); Richardson Greeenshields Sec., Inc. v. Mui-Hin Lau, 113 F.R.D. 608, 610-11 (S.D.N.Y. 1986); Church of Scientology v. Siegeleman, 94 F.R.D. 735 (S.D.N.Y. 1982); Inland Steel Prod. Co. v. MPH Mfg. Corp., 25 F.R.D. 236, 237-38 (N.D. Ill. 1959);Upper Lakes Shipping v. International Longshoremen's Ass'n, 293 F. Supp. 207 (S.D.N.Y. 1968), cited on pages 5-6 of Plaintiff's Memorandum of Law, dated March 1, 2001 ("Plaintiffs' Mem. of Law"). The only recent case in this Circuit cited by plaintiffs in this regard isValley Disposal, Inc. v. Central Vermont Solid Waste Mgmt. Dist., 113 F.3d 357 (2d Cir. 1997). That case, however, is distinguishable because the motion to amend there was not made until after judgment had been entered; Vermont Disposal is not contrary to the weight of authority cited above that holds delay alone is an insufficient basis on which to deny a motion to amend.
As a fall back, plaintiffs argue that permitting the amendment would prejudice them by resulting in a new wave of discovery (Plaintiffs' Mem. of Law at 7). However, defendants have committed in their reply not to seek additional discovery if their motion is granted (Defendants' Reply Memorandum of Law, dated May 11, 2001 ("Defendants' Reply Mem."), at 2). Plaintiffs also claim that permitting the amendment would necessitate additional discovery by them concerning choice of law issues (Plaintiffs' Mem. of Law at 7-8). This argument does not make sense. Plaintiffs are, presumably, already in possession of the details concerning where Khoury and Salhab spoke to the other plaintiffs that they allegedly advised; certainly defendants will not have information that will shed light on these issues. Finally, plaintiffs' contention that permitting the counterclaim will delay the Group One trial (Plaintiffs' Mem. of Law at 8) is unconvincing. A summary judgment motion concerning the Group One Plaintiffs is still pending, the Pretrial Order has not yet been prepared and a trial date has not been set. There is no reason to believe that permitting the amendment will delay the Group One trial.
Because of the large number of plaintiffs, the divergent factual issues involved in each plaintiff's claim and the practical limitations of juries, I have previously divided the case into fourteen groups of plaintiffs, each of which will proceed to trial separately.
Thus, plaintiffs have not demonstrated that the proposed amendment should be denied on the ground of undue delay.
B. Futility
Plaintiffs' futility argument is cryptic, at best. Without taking a position on what law is applicable to the proposed counterclaims, plaintiffs seem to argue that the counterclaims are untenable as a matter of logic. Specifically, plaintiffs contend:
The Proposed Counterclaims rest on the allegation that, by recommending the investment with the Defendants [sic] to the entity Plaintiffs, Khoury and Salhab negligently or recklessly advised the Plaintiff entities because they should have known or unreasonably failed to investigate so called warnings of improprieties. . . . But the very same facts relevant to this inquiry are the facts relevant to whether Khoury and Salhab (and therefore the Plaintiff entities through Khoury's and Salhab's knowledge) justifiably and reasonably relied upon the representations of Daouk and the Defendants (an element of Plaintiffs' fraud claims). . . . Thus, if the jury concludes that Khoury's and Salhab's reliance on Defendants' representations were justifiable, there would be no basis for concluding that Khoury and Salhab either negligently or recklessly advised the Plaintiff entities to invest with Defendants, or breached fiduciary duties (if any) owed to those entities. On the other hand, if the jury concludes that Khoury and Salhab should have made further investigation into Daouk's conduct, the Plaintiff entities would not be entitled to recover (because they could not establish reliance) and accordingly there would be no recovery on which to base a claim for contribution.
(Plaintiffs' Mem. of Law at 9-10) (citations omitted). There are several difficulties with this argument.
As noted at pages 5-6, above, in the context of a motion to amend, a claim is futile when it cannot survive a motion to dismiss, i.e. "`it appears beyond doubt that the [claimant] can prove no set of facts in support of [its] claim[s] which would entitle [it] to relief.'" Tarshis v. Riese Org., 211 F.3d 30, 35 (2d Cir. 2000), quoting Conley v. Gibson, 355 U.S. 41, 45-46(1957). Where, as here, the parties do not even take a position as to which jurisdiction's law applies, it is impossible to determine whether the claim has legal viability, and futility is not established.
Second, plaintiffs' argument seems to assume that Khoury and Salhab's knowledge and mental state must be attributed to the entities that each advised. Although the basis for this assumption is not entirely clear, it appears to rest on the theory that Khoury and Salhab were agents for the respective entities that each advised. However, an agent's knowledge is not invariably attributed to his or her principal. As the Appellate Division for the Second Department recently noted:
In general, knowledge acquired by an agent acting within the scope of his or her agency is imputed to the principal and the latter is bound by that knowledge even if the information is never actually communicated (see, Center v. Hampton Affiliates, 66 N.Y.2d 782, 497 N.Y.S.2d 898, 488 N.E.2d 828; Farr v. Newman, 14 N.Y.2d 183, 250 N.Y.S.2d 272, 199 N.E.2d 369). An exception to this rule occurs when the agent has abandoned his or her principal's interests and is acting entirely for his or her own or another's purposes (see, Center v. Hampton Affiliates. supra).Christopher S. v. Douglaston Club, 275 A.D.2d 768, 769-70, 713 N.Y.S.2d 542, 543 (2d Dep't 2000). See also Marine Midland Bank v. John E. Russo Produce Co., 50 N.Y.2d 31, 43-44, 427 N.Y.S.2d 961, 969, 405 N.E.2d 205, 212(1980); Lippes v. Atlantic Bank, 69 A.D.2d 127, 134, 419 N.Y.S.2d 505, 509 (1st Dep't 1979). Since it does not appear that Khoury's or Salhab's knowledge must be attributed to the respective entities that each advised, there does not appear to be an absolute legal impediment to the proposed counterclaims, and there is no reason to conclude that they are futile.
IV. Conclusion
Accordingly, for all the foregoing reasons, defendants' application to amend their answer to assert counterclaims against Khoury and Salhab is granted.
SO ORDERED