Opinion
No. COA12–612.
2013-02-5
Henry B. KOPF and Henry Kopf, III, Plaintiffs v. SMARTFLOW TECHNOLOGIES, INC., f/k/a NCSRT, Inc., Defendant.
The Shanahan Law Group, PLLC, by Kieran J. Shanahan, Brandon S. Neuman, and John E. Branch, III, for plaintiff-appellees. Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, by Rosemary G. Kenyon, Michael W. Mitchell, Francisco J. Benzoni and Katten Muchin Rosenman, LLP by Bonita L. Stone, pro hac vice, for defendant-appellant.
Appeal by defendant from order entered 2 February 2012 by Judge Calvin E. Murphy in Wake County Superior Court. Heard in the Court of Appeals 24 October 2012. The Shanahan Law Group, PLLC, by Kieran J. Shanahan, Brandon S. Neuman, and John E. Branch, III, for plaintiff-appellees. Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, by Rosemary G. Kenyon, Michael W. Mitchell, Francisco J. Benzoni and Katten Muchin Rosenman, LLP by Bonita L. Stone, pro hac vice, for defendant-appellant.
CALABRIA, Judge.
SmartFlow Technologies, Inc., f/k/a NCSRT, Inc. (“SmartFlow”) appeals from an order denying its Motion for Leave to File a Second Amended Answer and Counterclaims against Henry B. Kopf and Henry Kopf, III (collectively, “plaintiffs”). We affirm.
I. Background
Plaintiffs founded SmartFlow in 2003. At all times during their employment, plaintiffs served as officers and directors of the company. In 2005, plaintiffs sought and secured financing from Inverness Capital Partners, LP (“Inverness”). After a short time, Inverness acquired a significant ownership interest in the company. As a result of this change of control, plaintiffs were no longer the sole owners of the company. However, plaintiffs continued as employees of SmartFlow under Employment Agreements that were executed 11 July 2005 and amended on 10 April 2008.
Over time, significant discord grew between plaintiffs and the new members of SmartFlow's board of directors. After a particularly contentious board meeting on 11 May 2009, SmartFlow notified plaintiffs that their Employment Agreements would not be renewed when the terms expired on 11 July 2009. Seven days later, plaintiffs informed SmartFlow that they were terminating their employment with SmartFlow immediately for “Good Reason.” Under their Employment Agreements, termination for “Good Reason” entitled plaintiffs to substantial severance packages. SmartFlow rejected plaintiffs' claim to any such entitlement and disputed plaintiffs' grounds to terminate their employment for “Good Reason.”
On 30 March 2010, plaintiffs filed individual complaints alleging claims of failure to pay wages in violation of the North Carolina Wage and Hour Act, breach of contract and unfair and deceptive practices. The cases were designated as complex business cases and assigned to the North Carolina Business Court. On 3 May 2010, SmartFlow filed its answer alleging seventeen different defenses and counterclaimed that the company was entitled to damages because plaintiffs had materially breached the contractual obligations under their Employment Agreements. On 18 May 2010, plaintiffs' individual cases were consolidated. By mutual consent of the parties, SmartFlow filed an Amended Answer and Counterclaim on 29 October 2010.
On 15 March 2011, SmartFlow filed a Motion for Leave to File a Second Amended Answer and Counterclaims (“Second Amended Answer”), seeking to expand the basis of its existing claim for breach of contract and add counterclaims for breach of fiduciary duty, indemnification under the employment agreement, conversion and unfair and deceptive practices. SmartFlow contended that its basis for the Second Amended Answer was newly discovered evidence. Specifically, SmartFlow learned that plaintiffs had “deleted, destroyed, copied and misappropriated massive amounts of [SmartFlow's] proprietary and confidential business records, both electronic and paper” and that plaintiffs had engaged in “abusive and harassing conduct towards employees and customers.” SmartFlow argued that this Second Amended Answer was promptly filed upon discovering forensic evidence had been deleted from plaintiffs' business laptops. In addition, hundreds of SmartFlow's proprietary documents had been destroyed and that this evidence was critical to its defense.
On 2 February 2012, the trial court denied SmartFlow's Second Amended Answer. According to the trial court's analysis, SmartFlow should have known about the deletion and destruction of evidence at the time the Answer was filed on 3 May 2010 and “certainly by the time” the Second Amended Answer was filed on 29 October 2010. In addition, the trial court stated that allowing the Second Amended Answer would “(a) greatly expand the scope and complexity of this litigation; (b) result in undue delay; (c) inordinately prolong the discovery process, protract the trial of this matter, and result in unjustified litigation costs to the parties.” The trial court further held that SmartFlow had “unduly delayed” filing the Second Amended Answer and had “more than ample time and opportunity to cure any defect or omission.” SmartFlow appeals.
II. Rule 15(a) Motion to Amend
SmartFlow argues that the trial court abused its discretion under Rule 15(a) by denying the Second Amended Answer. Specifically, SmartFlow contends there was no undue delay filing the Second Amended Answer and that the amendment would not expand the complexity of the litigation because the additional claims are simply derivatives of affirmative defenses already asserted. We disagree.
As an initial matter, we must determine whether we can hear SmartFlow's appeal, as the appeal is not from a final judgment and is therefore interlocutory. Interlocutory orders and judgments are those “made during the pendency of an action which do not dispose of the case, but instead leave it for further action by the trial court in order to settle and determine the entire controversy.” Carriker v. Carriker, 350 N.C. 71, 73, 511 S.E.2d 2, 4 (1999). Generally, a party has no right of immediate appeal from interlocutory orders or judgments as there has been no final resolution of the case. Sharpe v. Worland, 351 N.C. 159, 161, 522 S.E.2d 577, 578 (1999). However, there are at least two exceptions: (1) “when the trial court enters a final judgment as to one or more, but fewer than all, claims or parties and certifies there is no just reason for delay ...” and (2) if “an interlocutory order or judgment ... affects a substantial right.” Id. at 161–62, 522 S.E.2d at 579 (quotation marks omitted).
This Court has held that “denial of a motion to amend the answer to allege a compulsory counterclaim affects a substantial right and is immediately appealable.” Hudspeth v. Bunzey, 35 N.C.App. 231, 234, 241 S.E.2d 119, 121 (1978). Rule 13(a) of the North Carolina Rules of Civil Procedure provides that a compulsory counterclaim is one that “at the time of serving the pleading ... arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.” N.C. Gen.Stat. § 1A–1, Rule 13(a) (2012). Our Supreme Court has adopted a three-part test to determine whether two or more claims arose out of the same transaction or occurrence under Rule 13(a): “(1) whether the issues of fact and law raised by the claim and counterclaim are largely the same; (2) whether substantially the same evidence bears on both claims; and (3) whether any logical relationship exists between the two claims.” Jonesboro United Methodist Church v. Mullins–Sherman Architects, L.L.P., 359 N.C. 593, 599–600, 614 S.E.2d 268, 272 (2005) (citation and internal brackets omitted).
In the instant case, SmartFlow sought to amend its answer to include new tort-based counterclaims, including breaches of fiduciary duties, indemnification, conversion and unfair and deceptive practices. Using the framework adopted by our Supreme Court in Jonesboro, we must determine whether the counterclaims SmartFlow sought to add are compulsory. SmartFlow's original claim and counterclaims both arise out of disputes regarding and conduct related to whether plaintiffs breached their Employment Agreements, thus the issues of fact and law raised by the claim and counterclaims are essentially the same. In addition, the evidence that bears on both the original claim and counterclaims is substantially the same, as both relate to alleged misconduct on the part of plaintiffs that constitutes breach of their Employment Agreements. Finally, there is a strong logical connection between SmartFlow's original claim and proposed counterclaims, because they both serve as a defense to and present evidence of the alleged breach by plaintiffs.
To deny SmartFlow the opportunity to appeal the trial court's order may deny SmartFlow the opportunity to present evidence that is critical to its defense. Since these counterclaims address the determinative issue in the instant case, plaintiffs' conduct regarding the provisions of their Employment Agreements, they are compulsory counterclaims. Therefore, the order denying SmartFlow's Motion to File a Second Amended Answer and Counterclaims affects a substantial right and is immediately appealable.
Generally, Rule 15(a) of the North Carolina Rules of Civil Procedure provides that after a responsive pleading is served, “a party may amend his pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.” N.C. Gen.Stat. § 1A–1, Rule 15(a) (2011). “Liberal amendment of pleadings is encouraged by the Rules of Civil Procedure in order that decisions be had on the merits and not avoided on the basis of mere technicalities.” Miller v. B.H.B. Enters., Inc., 152 N.C.App. 532, 543, 568 S.E.2d 219, 227 (2002). Amendments should be freely allowed unless some material prejudice to the other party is demonstrated. Mangum v. Surles, 281 N.C. 91, 98–99, 187 S.E.2d 697, 702 (1972). “A motion for leave to amend is addressed to the sound discretion of the trial judge and the denial of such motion is not reviewable absent a clear showing of abuse of discretion.” Chicopee, Inc. v. Sims Metal Works, Inc., 98 N.C.App. 423, 430, 391 S.E.2d 211, 216 (1990) (emphasis added). Clear abuse of discretion requires a showing that a decision was “so arbitrary that it could not have been the result of a reasoned decision.” White v. White, 312 N.C. 770, 777, 324 S.E.2d 829, 833 (1985).
This Court has held, “[i]f the trial court articulates a clear reason for denying [a] motion to amend, then [appellate] review ends .” NationsBank of North Carolina, N.A. v. Baines, 116 N.C.App. 263, 268, 447 S.E.2d 812, 815 (1994). Acceptable reasons for denying the motion are “undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies, undue prejudice, and futility of the amendment.” Id. (quoting Coffey v. Coffey, 94 N.C.App. 717, 722, 381 S.E.2d 467, 471 (1989)); see also, Chicopee, 98 N.C.App. at 430, 391 S.E.2d at 216. In NationsBank, this Court found no abuse of discretion where the trial court declared “undue delay and undue prejudice” and “[material] prejudice ...” as its reasons for denying defendants' motion to amend. NationsBank, 116 N.C.App. at 268–69, 447 S.E.2d at 815.
In the instant case, the trial court articulated reasons for denying the motion to amend: expanse in the scope and complexity of litigation, undue delay, prolongation of the discovery process, and unjustified litigation costs to the parties. It also found that SmartFlow had “unduly delayed” in filing its motion and had “more than ample time and opportunity to cure any defect or omission.” As the trial court articulated acceptable reasons for denying SmartFlow's Second Amended Answer, we find that the trial court did not abuse its discretion in denying SmartFlow's motion.
SmartFlow contends that the trial court abused its discretion because its findings are “without support in the record or based on a misapprehension of applicable law.” SmartFlow requests that we delve into the trial court's findings and examine whether 1) SmartFlow unduly delayed filing its motion, 2) it had any way of knowing plaintiffs had engaged in such misconduct at the time of filing its original Answer and, finally, 3) there was any evidence to support the claim that allowing the amendment would significantly expand the scope or the litigation or prejudice plaintiffs in any way.
In the absence of any stated reasons, the appellate court may examine the record for any apparent reasons for denying a motion to amend. Kinnard v. Mecklenburg Fair, 46 N.C.App. 725, 727, 266 S.E.2d 14, 16 (1980); Chicopee, 98 N.C.App. at 431, 391 S.E.2d at 216. SmartFlow cites several cases where this Court has found that the trial court abused its discretion in denying the motion to amend. However, in each of these cases, the trial court either failed to articulate a reason for denying the motion, or denied the motion on a clearly improper basis. See Coffey, 94 N.C.App. at 722, 381 S.E.2d at 471;Madry v. Madry, 106 N.C.App. 34, 36–37, 415 S.E.2d 74, 76–77 (1992); Ledford v. Ledford, 49 N.C.App. 226, 233–34, 271 S.E.2d 393, 398–99 (1980); Gladstein v. South Square Associates, 39 N.C.App. 171, 177–78, 249 S.E.2d 827, 830–31 (1978). SmartFlow has failed to cite any cases where the trial court articulated clearly acceptable reasons for denying a motion to amend and this Court found that the trial court abused its discretion.
Furthermore, there is a factual basis in the record for denying SmartFlow's motion to amend. SmartFlow contends that it did not unduly delay in filing the motion because it should have been able to rely on the plaintiffs' representations that they were turning over all their tangible property. However, given the nature of the claims and allegations asserted by SmartFlow against plaintiffs, particularly that plaintiffs had engaged in a “pattern of misconduct,” it was not “so improbable or unreasonable” for SmartFlow to suspect that a representation by plaintiffs might be false or require a further investigation. Therefore, there is factual support that SmartFlow should have known about the deletion and destruction of documents before filing its Second Amended Answer.
SmartFlow argues that there are no facts to suggest that the motion would expand the scope of the litigation or prejudice plaintiffs. Though SmartFlow contends that the new causes of action are essentially derivatives of its original defenses and counterclaims, this Court has held that the addition of new legal theories could change a party's approach to discovery. Freese v. Smith, 110 N.C.App. 28, 33, 428 S.E.2d 841, 845 (1993). In addition, this Court has found no abuse of discretion when the trial court denied a motion to amend to assert unfair and deceptive practices for the first time, as it subjected the parties to treble damages and thus “greatly increased the stakes of the lawsuit.” Kinnard, 46 N.C.App. at 727, 266 S.E.2d at 16;House Healers Restorations, Inc. v. Ball, 112 N.C.App. 783, 787, 437 S.E.2d 383, 386 (1993).
III. Conclusion
The trial court clearly articulated reasons for denying SmartFlow's Motion for Leave to File a Second Amended Answer, including great expanse of the scope and complexity of the litigation, undue delay, prolongation of the discovery process, and unjustified litigation costs to the parties. The record further shows that there was competent factual support for the trial court's reasons. Therefore, there was no abuse of discretion. The order denying SmartFlow's Motion for Leave to File a Second Amended Answer is affirmed.
Affirmed. Judges HUNTER, ROBERT C. and HUNTER, JR., ROBERT N. concur.
Report per Rule 30(e).