Summary
overruling objections to determination of Magistrate Judge Katz denying leave to file an amended complaint
Summary of this case from In re Adelphia Communications Corp.Opinion
02 Civ. 1230 (LMM).
August 3, 2006
MEMORANDUM AND ORDER
Plaintiff Nairobi Holdings Limited ("NHL")'s appeal from the Order of Magistrate Judge Katz dated March 10, 2006 is denied. NHL has failed to show that Judge Katz's denial of Plaintiff's Motion for Leave to File a Third Amended Complaint was clearly erroneous or contrary to law. 28 U.S.C. § 636(b)(1)(A) (2006); Fed.R.Civ.P. 72(a).
I. Facts
Plaintiff commenced this action on February 14, 2002 against Brown Brothers Harriman Co. ("BBH") and Lawrence Tucker (collectively, "defendants") claiming federal securities fraud under Section 10(b) of the Securities Act of 1934, violations of the Investment Advisors Act of 1940, and various state tort claims.
A more complete background and procedural history can be found in prior opinions issued in this case. See Nairobi Holdings Ltd. v. Brown Bros. Harriman Co., No. 02-civ-1230, 2002 WL 31027550 (S.D.N.Y. Sept. 10, 2002) ("NHL I"); Nairobi Holdings Ltd. v. Brown Bros. Harriman Co., No. 02-civ-1230, 2003 WL 21088506 (S.D.N.Y. May 14, 2003) ("NHL II"); Nairobi Holdings Ltd. v. Brown Bros. Harriman Co., No. 02-civ-1230, 2004 WL 1124660 (S.D.N.Y. May 20, 2004) ("NHL III"); Nairobi Holdings Ltd. v. Brown Bros. Harriman Co., No. 02-civ-1230, 2005 WL 742617 (S.D.N.Y. Mar. 18, 2005) ("NHL IV"); Nairobi Holdings Ltd. v. Brown Bros. Harriman Co., No. 02-civ-1230, 2006 WL 617977 (S.D.N.Y. Mar. 10, 2006) ("NHL V"). The facts provided here are a summary relevant to the instant motion.
In April 2002, defendants moved to dismiss NHL's Complaint. This Court dismissed NHL's Section 10(b) fraud claims, but allowed NHL leave to replead. NHL I, 2002 WL 31027550, at *10. In October 2002, plaintiff filed an Amended Complaint. In November 2003, defendants moved to dismiss the Amended Complaint. In May 2003, this Court dismissed NHL's federal statutory claims relating to the February 2000 investment in World Access, Inc. as time-barred, but did not dismiss NHL's statutory claims based on its post-September 2000 investment. The Court found plaintiff improperly pled scienter for purposes of its common law claim based on the February 2000 investment, but gave plaintiff leave to replead. NHL II, 2003 WL 21088506, at *8. This Court did caution, however, that this would be plaintiff's last chance to replead as "`[t]hree bites at the apple is enough.'" NHL II, 2003 WL 21088506, at *8 (quoting Salinger v. Projectavision, Inc., 972 F. Supp. 222, 236 (S.D.N.Y. July 31, 1997)).
See NHL II, 2003 WL 21088506, at *1 (S.D.N.Y. May 14, 2003) (detailing new claims of First Amended Complaint).
In June 2003, NHL filed its Second Amended Complaint. It added four new paragraphs to the common law fraud claim that alleged motive and opportunity, and pleaded a common law claim for fraudulent retention. Defendants filed a motion to dismiss, and this Court dismissed NHL's common law claim, but did not dismiss plaintiff's statutory and common law claims relating to NHL's post-September 2000 investments and the new claim of fraudulent retention. NHL III, 2004 WL 1124660, at *1-2.
See NHL III, 2004 WL 1124660, at *2 (S.D.N.Y. May 20, 2004) (detailing new claims of Second Amended Complaint).
On August 4, 2004, this Court issued a Scheduling Order setting a discovery deadline for January 31, 2006. However, because discovery did not commence until October 2004, Judge Katz amended the discovery deadline to March 31, 2006. NHL V, 2006 WL 617977, at *2. A few months into the discovery process, plaintiff complained to this Court that defendants were not cooperating in the discovery process. In March 2005, this Court issued an Order compelling defendants to comply with discovery efforts. NHL IV, 2005 WL 742617, at *1.
On January 17, 2006, plaintiff filed a Motion for Leave to File a Third Amended Complaint. This would be plaintiff's fourth complaint. Plaintiff contended it could now allege scienter against defendants with new documents obtained in discovery. Plaintiff asserted that, absent these documents, it could not in good faith amend the complaint earlier based only on the elaborate fraudulent scheme profiled in the 2001 Abbott Litigation. NHL V, 2006 WL 617977, at *4. Plaintiff asserted that during summer and fall 2005, it discovered evidence that corroborated and substantiated the allegations made in theAbbott litigation that World Access and WorldCom had entered into a sham "Take-or-Pay" contract that accounted for almost all of World Access's reported profits and was used to artificially inflate World Access's revenue to meet market expectations. Through discovery, plaintiff received a memorandum written by defendant, and a World Access board member, Lawrence Tucker (the "Tucker Memorandum"), which showed that, as early as fall 1998, Tucker was aware that the contract was not being performed according to its terms and that World Access's management was "gilding the lily" regarding the company's relationship with WorldCom. This prompted plaintiff to conduct its own research. Consequently, plaintiff uncovered deposition testimony by World Access's former CEO indicating that at a World Access board meeting he had objected to disclosing that the contract was not being performed. NHL V, 2006 WL 617977, at *4. (Pl.'s Mem. at 17.)
On March 10, 2006, Judge Katz ruled that plaintiff failed to show good cause for its untimely filing of its Third Amended Complaint as required by Federal Rule of Civil Procedure Rule 16(b). Judge Katz also ruled that plaintiff had failed to comply with the particularity requirement in pleading scienter under Rule 9(b). He therefore denied plaintiff's Motion to File a Third Amended Complaint. NHL V, 2006 WL 617977, at *8. Plaintiff has now filed a Rule 72 Motion appealing this Order.
II. Discussion
Magistrate judges are afforded broad discretion in their rulings and district courts may reverse their decisions only if magistrates abuse that discretion. Credit Suisse First Boston LLC v. Coeur D'Alene Mines Corp., No. 03-9457, 2005 WL 323714, at *2 (S.D.N.Y. Feb. 10, 2005). A magistrate judge abuses his discretion when a district court judge finds the magistrate judge's order, or any portion thereof, clearly erroneous or contrary to law. Fed.R.Civ.P. 72(a). This Court finds that Magistrate Judge Katz did not abuse his discretion in denying plaintiff's Motion to File a Third Amended Complaint.
A. Rule 15(a) versus Rule 16(b)
Plaintiff contends that Judge Katz should have applied Rule 15(a) of the Federal Rules of Civil Procedure rather than Rule 16(b) to its Motion to File a Third Amended Complaint. (Pl.'s Mem. at 12.)
"Motions for leave to amend are governed by one of two standards, Rule 15(a) or Rule 16(b)." In re Wireless Tel. Servs. Antitrust Litig., No. 02-civ-2637, 2004 WL 2244502, at *4 (S.D.N.Y. Oct. 6, 2004). Rule 16(b) governs leave to amend after a scheduling order has been entered in the case. Id. at *5. However, if the scheduling order does not specify a deadline, then a court should not apply Rule 15(a), but rather should balance both Rules 15(a) and 16(b).Grochowski v. Phoenix Constr., 318 F.3d 80, 86 (2d Cir. 2003). A court can find that a deadline has been set during a pre-trial conference. See In re Wireless Tel. Servs., 2004 WL 2244502, at *5.
B. Choice of Rule 16(b)
The central issue is whether the Scheduling Order issued by this Court on August 4, 2004 contained a deadline for filing amendments. Plaintiff argues there was no explicit deadline stated in the Order. (Pl.'s Mem. at 12.) In denying leave to amend, Judge Katz found that the Scheduling Order set a clear deadline because this Court had "stated in NHL II that the Second Amended Complaint would be NHL's last chance to replead."NHL V, 2006 WL 617977, at *6. Although there was no explicit date deadline set by the Court in the Scheduling Order, Judge Katz is correct that the Court did set a deadline as to how many times plaintiff could amend its complaint. This Court clearly stated that plaintiff had only one more opportunity to replead after its Second Amended Complaint as "three bites at the apple was enough." NHL II, 2003 WL 21088506, at *8. This Court "explicitly limited the plaintiff's ability to amend [its] complaint," which is what is required to invoke Rule 16(b). In re Wireless Tel. Servs., 2004 WL 2244502, at *5. Additionally, when this Court dismissed plaintiff's Second Amended Complaint it specifically did not grant plaintiff leave to replead. NHL III, 2004 WL 1124660, at *5. This Court agrees with Judge Katz that the Court did set a deadline when it specifically stated that NHL had only one more chance to replead.
Because there was a Scheduling Order in the present case that limited plaintiff's ability to amend, Judge Katz was correct to apply Rule 16(b). "`[D]espite the lenient standard of Rule 15(a), a district court does not abuse its discretion in denying leave to amend the pleadings after the deadline set in the scheduling order where the moving party has failed to establish good cause.'" In re Wireless Tel. Servs., 2004 WL 2244502, at *5 (quoting Parker v. Columbia Pictures Indus., 204 F.3d 326, 340 (2d Cir. 2000)). Rule 16(b) ensures certainty in pretrial proceedings and disregarding a scheduling order would undermine the "`court's ability to control its docket, disrupt the agreed-upon course of the litigation, and reward the indolent and the cavalier.'" Id. (quoting Parker, 204 F.3d at 340). The standards of Rule 16(b) must be met first and can not "`be short-circuited by an appeal to those of Rule 15(a).'" Id. (quoting Parker, 204 F.3d at 340). Thus, Judge Katz's reliance on Rule 16(b) alone was correct.
C. Application of Rule 16(b)
Under Rule 16(b), a finding of good cause, which inquires into the diligence of the movant, must be met. Id. (citingGrochowski, 318 F.3d at 86). Judge Katz's decision was based on the finding that plaintiff failed to meet this standard of good cause because it had failed to act with due diligence. Plaintiff could have filed an amendment sooner, since it had obtained the Tucker Memorandum seven months prior to plaintiff filing its Motion for Leave to File a Third Amended Complaint. Plaintiff had access to all the materials it claimed necessary and essential to alleging scienter at the time it filed its Second Amended Complaint. NHL V, 2006 WL 617977, at *6. It presented no adequate reason excusing its delay in obtaining these documents at the time it requested leave to amend. Id. It was sufficient for leave to amend to be denied on these grounds. See Urban Box Office Network, Inc. v. Interface Managers, L.P., 232 F.R.D. 169, 172 (S.D.N.Y. Sept. 27, 2004).
Because Rule 16(b) requires that plaintiff show good cause and Judge Katz found it did not, Judge Katz had no reason to engage in an analysis under Rule 15(a). Moreover, Judge Katz's reliance on Parker, 204 F.3d 326, and In re Wireless Tel. Servs., 2004 WL 2244502, was neither misplaced nor contrary to law. A district court may deny a plaintiff leave to amend where it finds that a plaintiff has failed to show good cause. See Parker, 204 F.3d at 340. Plaintiff provided no adequate explanation for its delay in obtaining the documents it claimed were essential to pleading scienter. NHL V, 2006 WL 617977, at *7-8. Plaintiff now asserts that its lead counsel was engaged in a two month trial in another state. This Court, however, is not conducting a de novo review of the evidence, but is reviewing the record only to determine if Judge Katz abused his discretion in applying the law to the evidence known to him at the time he made his ruling. Even so, courts have found that this does not constitute excusable neglect. See Mason v. Schriver, No. 96-cv-6924, 1999 WL 498221, at *3 (S.D.N.Y. July 13, 1999). Judge Katz was within his discretion to find that plaintiff had not acted with due diligence in filing the Third Amended Complaint under Rule 16(b) alone.
Plaintiff contends that Judge Katz incorrectly applied Rule 9(b) in denying the proposed amendment on the grounds that plaintiff failed to prove knowledge and complicity on the part of defendants. (Pl.'s Mem. at 16.) Because this Court does not find Judge Katz's ruling under Rule 16(b) clearly erroneous, it need not consider the validity of plaintiff's Rule 9(b) argument.
Judge Katz's decision in this regard was correct, and there was neither an abuse of discretion nor a clearly erroneous application of law.
D. Alternative Application of 15(a)
Even if this Court found that the Scheduling Order did not specify a deadline, and this Court did balance Rules 15(a) and 16(b), it would still agree with Judge Katz in denying plaintiff's Motion to File a Third Amended Complaint.
Prior to deciding whether Rule 15(a) is met, Rule 16(b) must be met first. In re Wireless Tel. Servs., 2004 WL 2244502, at *5. Even if Judge Katz ruled that plaintiff had shown good cause under Rule 16(b), NHL still would have failed under Rule 15(a) had Judge Katz engaged in such an analysis. When considering whether an amendment should be granted under Rule 15(a), courts look toward a series of factors that include: delay in the filing of the amendment, undue prejudice from which the defendant would suffer, and whether the pleading would be futile. Foman v. Davis, 371 U.S. 178, 182 (1962).
Delay can act as a predicate for a finding of bad faith, and bad faith is a sufficient reason to deny leave to amend. Green v. Wolf Corp., 50 F.R.D. 220, 223 (S.D.N.Y. July 10, 1970). As mentioned before, Judge Katz found that NHL could have alleged scienter in 2003, at the time it filed its Second Amended Complaint, but that even if in good faith it felt it could not, NHL still waited seven additional months before filing its Third Amended Complaint. NHL V, 2006 WL 617977, at *6.
Courts also look to the resulting prejudice suffered by a defendant when considering leave to amend. See Middle Atlantic Util. Co. v. S.M.W. Dev. Corp., 392 F.2d 380, 384 (2d Cir. 1968). Prejudice occurs when a defendant would need to expend additional resources for discovery and trial preparation, which would delay resolution of the dispute at hand. In re Wireless Tel. Servs., 2004 WL 2244502, at *4 (citing Block v. First Blood Ass'n, 988 F.2d 344, 350 (2d Cir. 1993)). In the instant matter, defendants claim they would need to expend additional resources by engaging in additional discovery because the proposed amendment would change the scope of the litigation. (Defs.' Opp'n at 20.) Plaintiff argues that defendants' claim moot because the parties had not yet engaged in a significant amount of discovery although they were just short of their deadline. (Pl.'s Mem. at 19.) Defendants intended to file another motion to dismiss if leave to amend were granted, which would only further delay the resolution of the dispute. Judge Katz found that the amendment would cause defendants undue prejudice. See NHL V. 2006 WL 617977, at *8. This is not a clearly erroneous finding.
III. Conclusion
There is nothing in the record to show that Judge Katz's ruling was clearly erroneous or contrary to law. Though there are two viewpoiints on this issue, the fact that Judge Katz adopted one of these viewpoints, doe snot mean he abused his discretion.Anderson v. Bessemer City, 470 U.S. 564, 574 (1985) ("[W]here there are two permissible views of th evidence, the factfinder's choice cannot be clearly erroneous."). Moreover, this Court argues with Judge Katz's use and application of Rule 16(b) to plaintiff's Motion for Leave to File a Third Amended Complaint.
For the aforementioned reasons, plaintiff's Rule 72 Motion is denied.
So ordered.