Opinion
Civil Action 20-cv-01566-WJM-MEH
06-22-2021
TRUEFORCE GLOBAL SERVICES, INC., Plaintiff, v. TRUEFFECT, INC., a Delaware corporation, DAVID HINTON, an individual, and DOES 1-20, Defendants.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Michael E. Hegarty, United States Magistrate Judge.
Before the Court is Plaintiff's Motion to Modify Scheduling Order. ECF 66. Plaintiff seeks leave of court to amend its complaint and add Carlos Sala (“Sala”) as a defendant. The Motion is fully briefed, and the Court finds that oral argument would not materially assist in its adjudication. For the reasons that follow, the Court recommends that the Motion be granted.
ALLEGED FACTS
The following factual summary is drawn from Plaintiff's proposed Third Amended Complaint (“TAC”). The TAC alleges new facts pertaining to Sala's involvement with TruEffect and the claim that Sala made a fraudulent statement to Plaintiff.
Plaintiff is an IT service and software consulting company located in California. ECF 66 at ¶ 11. Defendant TruEffect is a data analytics company whose primary place of business is in Colorado. Id. at ¶ 12. Defendant David Hinton (“Hinton”) is the Chief Executive Officer of TruEffect. Id. at ¶ 3. The TAC alleges that Sala is the “defacto [sic] CEO of TruEffect” and exercised “authority over TruEffect's management, business and financial affairs.” Id. at ¶ 4.
On May 31, 2013, Plaintiff entered into a contract to provide services to TruEffect in exchange for an agreed upon compensation structure. Id. at ¶¶ 13-15. Around November 2016, TruEffect failed to provide payment on two invoices. Id. at ¶ 19. Following TruEffect's failure to pay, Plaintiff had a conversation with TruEffect's Chief Financial Officer, Tony DiPaolo (“DiPaolo”), in which TruEffect “promised to send three (3) payments each month until all outstanding invoices totaling $140,560 were paid in full.” Id. at ¶ 20.
In 2017, after previously serving on TruEffect's Board of Directors, Hinton became TruEffect's CEO. Id. at ¶ 21. The TAC alleges that, from August 2015 to February 2018, Hinton and Sala “were regularly advised of TruEffect's financial position and status.” Id. at ¶ 22. Further, from 2017 to 2018, Hinton and Sala engaged in conversations with Plaintiff, in which Hinton and Sala promised to keep making payments for Plaintiff's services. Id. at ¶ 24. These payments were made “in amounts and frequency that did not satisfy TruEffect's obligations to [Plaintiff] Trueforce.” Id. The TAC further alleges that DiPaolo “regularly communicated to the officers and directors (including Hinton and Sala) TruEffect's financial position and status.” Id. at ¶ 25.
On September 20, 2017, Plaintiff requested a meeting with Sala. Id. at ¶ 26. The TAC alleges that, at this meeting, “Sala explained that he was involved operationally with TruEffect as Executive Chairman” and “promised . . . that [Plaintiff] Trueforce would be paid in full (‘for every penny') on all of Trueforce's invoices.” Id. Later, on October 9, 2017, Sala emailed Plaintiff's principal, Gus Laredo (“Laredo”), requesting another meeting. Id. at ¶ 30. On October 17, 2017, Sala, Hinton, and Laredo met in Colorado and discussed a “possible partnership and Trueforce's outstanding invoices.” Id. at ¶ 31. More specifically, Hinton offered Plaintiff “equity in TruEffect for all or part of the outstanding invoices.” Id. Later, on November 1, 2017, Laredo received an email from Hinton “offering an ownership stake in TruEffect in exchange for Trueforce services.” Id. at ¶ 35.
Beginning in January 2018, Hinton was briefed on TruEffect's weekly cash budgets. Id. at ¶ 38. The TAC alleges that it then became “known to Hinton, Sala, and TruEffect that TruEffect was in serious risk of failing financially” and “Hinton and Sala had knowledge of . . . TruEffect's dire financial situation.” Id. at ¶ 39. In January or February 2018, DiPaolo notified TruEffect's creditors, with the exception of Plaintiff, “that TruEffect was insolvent, had significant judgments against it, had a massive negative working capital position, that its largest lender had cut it off, it did not have any significant assets to sell and it was unable to pay its bills.” Id. at ¶ 40. The TAC alleges that, on February 1, 2018, Sala held an employee meeting and informed the employees that “he was faced with a decision to either shut the company down completely or make deep cuts in headcount, payroll and other expenses.” Id. at ¶ 43. Further, on February 7, 2018, Hinton and Sala “were informed that TruEffect was in the zone of insolvency.” Id. at ¶ 44.
In May 2018, Hinton was informed that TruEffect would run out of money by July 2018 and was internally considering bankruptcy. Id. at ¶ 45. On May 21, 2018, Hinton sent an e-mail to Laredo that included a payment schedule with already due invoices and projected invoices that would be paid October 31, 2018. Id. at ¶ 46. Later that day, Hinton called Laredo and “specifically and expressly promised Laredo that TruEffect would . . . mak[e] all payments as set forth in the payment schedule attached to Hinton's May 21, 2018 e-mail.” Id. At ¶¶ 46-47. Pursuant to this payment schedule, TruEffect was to make its first payment to Plaintiff on June 15, 2018. Id. at ¶ 49. Plaintiff did not receive this payment on the specified date. Id.
On November 14, 2018, Laredo had a phone call with Hinton and DiPaolo. Id. At ¶ 52. During this call, Hinton informed Laredo that TruEffect was in the late stages of either selling or divesting the company and was looking to close a deal as soon as possible. Id. at ¶ 53. Plaintiff stated that it would terminate its services with TruEffect “unless TruEffect put together a plan to pay current and past invoices every two weeks.” Id. at ¶ 53. Hinton promised to pay Plaintiff the remaining invoices. Id. at ¶ 54. On January 31, 2019, Hinton informed Plaintiff that “TruEffect had ceased operations” and was “unable to pay any amount to its creditors and was shutting down its business without plans to go through dissolution or bankruptcy.” Id. at ¶ 60.
LEGAL STANDARD
Under Rule 16, “[a] schedule may be modified only for good cause and with the judge's consent.” Fed.R.Civ.P. 16(b)(4). If a party is seeking to modify after a scheduling order deadline, then the “party seeking leave to amend must demonstrate (1) good cause for seeking modification under Fed.R.Civ.P. 16(b)(4) and (2) satisfaction of the Rule 15(a) standard.” Birch v. Polaris Indus., Inc., 812 F.3d 1238, 1247 (10th Cir. 2015) (quoting Gorsuch, Ltd., B.C. v. Wells Fargo Nat'l Bank Ass'n, 771 F.3d 1230, 1240 (10th Cir. 2014)).
Rule 16(b)'s “good cause” standard “does not focus on the bad faith of the movant, or the prejudice to the opposing party. Rather, it focuses on the diligence of the party seeking leave to modify the scheduling order. Properly construed, ‘good cause' means that scheduling deadlines cannot be met despite a party's diligent efforts.” Colo. Visionary Acad. v. Medtronic, Inc., 194 F.R.D. 684, 687 (D. Colo. 2000) (quoting Dilmar Oil Co., v. Federated Mut. Ins. Co., 986 F.Supp. 959, 980 (D.S.C. 1997)). “Rule 16's good cause requirement may be satisfied, for example, if a plaintiff learns new information through discovery.” Gorsuch, 771 F.3d at 1240. However, “[a] litigant's failure to assert a claim as soon as he could have is properly a factor to be considered in deciding whether to grant leave to amend.” Perez v. Denver Fire Dep't., 243 F.Supp.3d 1186, 1200 (D. Colo. 2017). “To demonstrate good cause pursuant to Rule 16, the moving party must . . . ‘provide an adequate explanation for any delay.'” Lehman Bros. Holdings Inc. v. Universal Am. Mortg. Co., LLC, 300 F.R.D. 678, 681 (D. Colo. 2014) (quoting Strope v. Collins, 315 Fed.Appx. 57, 61 (10th Cir. 2009)).
Rule 15 states that if the deadline for amending a pleading has passed, then “a party may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2). “The grant or denial of an opportunity to amend is within the discretion of the Court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules.” Maloney v. City of Pueblo, 323 F.R.D. 358, 360 (D. Colo. 2018) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). “Refusing leave to amend is generally only justified upon a showing of undue delay, undue prejudice to the opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments previously allowed, or futility of amendment.” Id. (quoting Frank v. U.S. West, Inc., 3 F.3d 1357, 1365 (10th Cir. 1993)).
Prejudice in this context arises when the amendment unfairly affects the opposing party “‘in terms of preparing their defense to the amendment.'” Minter, 451 F.3d at 1208 (quoting Patton v. Gayer, 443 F.2d 79, 86 (10th Cir. 1971)). Prejudice occurs “when the amended claims arise out of a subject matter different from what was set forth in the complaint and raise significant new factual issues.” Id. Moreover, “[i]f a party opposes a motion to amend or to supplement on the grounds of futility, the court applies the same standard to its determination of the motion that governs a motion to dismiss under Fed.R.Civ.P. 12(b)(6).” Conkleton v. Zavaras, No. 08-cv-02612-WYD-MEH, 2010 WL 6089079, at *3 (D. Colo. Oct. 6, 2010), R. & R. adopted by 2011 WL 839282 (D. Colo. Mar. 7, 2011).
DISCUSSION
Plaintiff seeks to add Sala as a defendant in this case. Plaintiff contends that Sala's promise in September 2017 was false because Sala knew at that time that TruEffect lacked the financial means to pay Plaintiff. TruEffect and Hinton (together “Defendants”) object on three grounds: first, Plaintiff's false promise claim against Sala is time-barred by the statute of limitations; second, Plaintiff has not demonstrated the requisite “good cause” necessary to modify the scheduling order past the deadline; and third, Plaintiff's proposed amendment would prejudice Defendants.
I. Futility
Defendants argue that the addition of Sala as a defendant is futile because the statute of limitations to assert a fraud claim against Sala has run. Defendants set forth two possible dates when the statute of limitations could have started: first, in September 2017, when Sala made his allegedly false promise and second, in October 2017, when Plaintiff could have accessed TruEffect's financial information. ECF 68 at 13. Plaintiff counters that it did not have the necessary facts to know Sala's promise was false until Spring 2021. ECF 70 at 6.
A party has three years to bring a fraud claim under Colorado law. Colo. Rev. Stat. § 13-80-101(c). The three-year statute of limitations for a fraud claim begins to run on the date the fraud is discovered or should have been discovered by exercise of reasonable diligence. Colo. Rev. Stat. § 13-80-108(3).
First, Defendants contend that Plaintiff's fraud claim against Sala is futile because Sala made the promise in September 2017. ECF 68 at 13. However, the law is clear that “the statute of limitations begins to run when the defrauded person has knowledge of facts which . . . would enable him to discover the fraud.” Hansen v. Lederman, 759 P.2d 810, 812 (1988) (citing Grecco v. Pullara, 166 Colo. 465, 467 (1968)). Therefore, the sole act of making the false promise does not trigger the three-year statute of limitations period if the defrauded person did not know the statement was false at the time the statement was made. Defendants have not explained how Plaintiff should have known Sala's statement was false when he made it. Thus, Plaintiff has presented facts supporting its allegation that the fraud claim did not accrue in September 2017.
Regarding the October 2017 date, Defendants contend that Plaintiff's fraud claim against Sala is futile “[b]ecause Plaintiff was offered full access to TruEffect's financial information” and could have “discovered for itself whether Sala made [the] statement knowing TruEffect could not perform.” ECF 68 at 4, 13. However, Plaintiff was only able to access TruEffect's financial information “[if] it was interested in becoming an investor.” ECF 70 at 5. Because Plaintiff was not interested in becoming an investor, it did not gain access to Defendant's financial records. Further, the statute of limitations begins to run the date the fraudulent statement should have been discovered by reasonable diligence. Colo. Rev. Stat. § 13-80-108(3). Plaintiff does not appear to have acted without diligence when it refused to become an investor in TruEffect. Thus, because Plaintiff presents evidence that it had no reason to doubt Sala's promise in 2017, its fraud claim against him did not necessarily accrue at that time. Defendants raise no other argument that would support this Court finding an accrual date more than three years ago. This may be a fact issue that will have to be tried to a jury.
II. Good Cause and Undue Delay
Defendants next argue that the Motion should be denied because Plaintiff has not demonstrated “good cause” for adding a defendant after the deadline to do so. ECF 68 at 11. Specifically, Defendants contend that, prior to filing this case in November 2019, Plaintiff already was aware of and had access to information that it needed to bring a claim against Sala. Id. at 5.
The “good cause” requirement of Rule 16(b) requires a party to “provide an adequate explanation for any delay.” Lehman, F.R.D. at 681 (quoting Strope, 315 Fed.Appx. at 61) (internal quotations omitted). This requirement can be satisfied if a party learns new information during discovery. Gorsuch, 771 F.3d at 1240. However, “[a] litigant's failure to assert a claim as soon as he could have is properly a factor to be considered in deciding whether to grant leave to amend.” Perez, 243 F.Supp.3d at 1200. Also relevant to this case are the elements by which Colorado law defines fraud. The cause of action for a fraud claim consists of: (1) the defendant made a false representation of material fact; (2) the one making the representation knew it was false; (3) the person to whom the representation was made was ignorant of the falsity; (4) the representation was made with the intention that it be acted upon; and (5) the reliance resulted in damages. Bristol Bay Prods., LLC v. Lampack, 312 P.3d 1155, 1160 (Colo. 2013). The fraud claim does not accrue until Plaintiff has knowledge of sufficient facts to be aware that the claim exists. Sulca v. Allstate Ins. Co., 77 P.3d 897, 900 (Colo.App. 2003).
As Defendants note, Plaintiff has been conducting “targeted discovery” for potential claims against Sala since November 2019. ECF 68 at 7. However, merely conducting “targeted discovery” does not guarantee that Plaintiff will receive the information it is looking for. Such is the case here. Plaintiff did not receive “sufficiently reliable and specific evidence” to establish that Sala knew his promise was false (the second element of fraud) until documents were produced during discovery. ECF 66 at 4. Specifically, Plaintiff cites the DiPaolo Declaration (“the Declaration”), which it needed to know that Sala received “regular briefings on TruEffect's financial position” and had “detailed knowledge of [TruEffect's] true financial condition.” Id. at 3-4. Plaintiff explains that it did not receive this critical item of evidence until April 8, 2021 because it was not until then that DiPaolo was willing to provide this signed declaration. ECF 70 at 4. Plaintiff erred on the side of caution, waiting until it had a clear basis to proceed with its claim against Sala. Therefore, because Plaintiff bases its Motion on the new information it received during discovery, Plaintiff provides an adequate explanation for delay under Gorsuch and satisfies the “good cause” requirement of Rule 16(b).
III. Undue Prejudice
Defendants' final contention is that adding Sala would prejudice them because the case is at the end of discovery. ECF 68 at 19. Prejudice arises when the amendment unfairly affects the opposing party “‘in terms of preparing their defense to the amendment.'” Minter, 451 F.3d at 1208 (quoting Patton, 443 F.2d at 86 (10th Cir. 1971)). Prejudice occurs most often “when the amended claims arise out of a subject matter different from what was set forth in the complaint and raise significant new factual issues.” Id.
An amendment in this case would not prejudice Defendants because it arises out of the same subject matter as the original complaint and does not raise significant new factual issues. Additionally, Defendants have known that Sala could be a potential party in this case because, as they acknowledge, “Plaintiff has been considering claims against Sala . . . since before the lawsuit was even filed in November 2019.” ECF 68 at 2. A claim against a known party that arises out of the same subject matter of the case is not unduly prejudicial. Further, Plaintiff seeks the extension of pretrial dates and deadlines so that “all parties [can] properly prepare for trial.” ECF 66 at 8. The parties may move for a new discovery and dispositive motion deadline at the later appropriate time.
CONCLUSION
Plaintiff seeks to amend its complaint well after the August 7, 2020 deadline to do so. Moreover, the period for discovery closed on May 17, 2021, and the case is nearing the dispositive motion deadline of July 1, 2021, after several extensions of both. However, Plaintiff explains why it was not until recently, after the pursuit of relevant information, when it had a basis to add Sala as a defendant. Whether Plaintiff will prevail on the merits of that claim is beyond the scope of this ruling.
Accordingly, the Court respectfully recommends to Judge Martinez that the Motion [filed May 6, 2021; ECF 66] be granted.
Be advised that all parties shall have fourteen (14) days after service hereof to serve and file any written objections in order to obtain reconsideration by the District Judge to whom this case is assigned. Fed.R.Civ.P. 72. The party filing objections must specifically identify those findings or recommendations to which the objections are being made. The District Court need not consider frivolous, conclusive or general objections. A party's failure to file such written objections to proposed findings and recommendations contained in this report may bar the party from a de novo determination by the District Judge of the proposed findings and recommendations. United States v. Raddatz, 447 U.S. 667, 676-83 (1980); 28 U.S.C. § 636(b)(1). Additionally, the failure to file written objections to the proposed findings and recommendations within fourteen (14) days after being served with a copy may bar the aggrieved party from appealing the factual findings and legal conclusions of the Magistrate Judge that are accepted or adopted by the District Court. Duffield v. Jackson, 545 F.3d 1234, 1237 (10th Cir. 2008) (quoting Moore v. United States, 950 F.2d 656, 659 (10th Cir. 1991)).