Opinion
CIVIL NO. 2:19cv565
2021-05-21
Phyllis V. CARLISLE and Phyllis V. Carlisle IRA, Plaintiffs, v. ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, Defendant.
W. Scott Greco, Frederick Dominick Greco, Greco & Greco PC, McLean, VA, for Plaintiffs. Dawn Bell Williams, Faegre Drinker, Biddle & Reath LLP, Washington, DC, for Defendant.
W. Scott Greco, Frederick Dominick Greco, Greco & Greco PC, McLean, VA, for Plaintiffs.
Dawn Bell Williams, Faegre Drinker, Biddle & Reath LLP, Washington, DC, for Defendant.
MEMORANDUM ORDER
REBECCA BEACH SMITH, SENIOR UNITED STATES DISTRICT JUDGE
This matter comes before the court on Plaintiffs’ (1) Motion to Amend the Complaint, ECF No. 34; (2) Motion to Remove Confidentially Designation, ECF No. 36; and (3) Motion to Seal, ECF No. 37.
I. BACKGROUND
On October 21, 2019, Plaintiffs Phyllis V. Carlisle and Phyllis V. Carlisle IRA ("Plaintiffs") filed a Complaint, ECF No. 1, against Defendant Allianz Life Insurance Company ("Allianz") for numerous state law claims based on the sale and surrender of two Allianz annuities, and the subsequent transfer of proceeds from one of the surrendered annuities into a Ponzi scheme. Central to Ms. Carlisle's claims against Allianz is the argument that her financial advisor, Byron Delavan, acted under Allianz's actual or apparent authority to surrender the annuities and transfer Ms. Carlisle's funds into the Ponzi scheme, such that Allianz is vicariously liable for Delavan's actions. However, Plaintiffs also allege that Allianz is directly liable to Ms. Carlisle for, inter alia, negligently retaining Delavan as an agent, failing to diligently supervise him, and failing to prevent the surrender and transfer of her funds with adequate internal procedures. See Compl. ¶¶ 34, 42, 66.
On December 30, 2019, Allianz filed a Motion to Dismiss the Complaint. ECF No. 3. The court referred the Motion to Dismiss to Magistrate Judge Lawrence Leonard, who recommended granting Allianz's motion and dismissing the Complaint in its entirety. See Report and Recommendation ("R&R") at 47, ECF No. 13. After reviewing Plaintiffs’ objections to the R&R, and holding a hearing thereon, this court granted in part and denied in part the Motion to Dismiss on November 20, 2020. See ECF Nos. 22, 23 at 9-10. Relevant here, the court denied the Motion to Dismiss claims based on Allianz's vicarious liability for Delavan's conduct in connection with the annuity surrenders and subsequent transfer of funds into the Ponzi scheme. ECF No. 23 at 9. The court dismissed claims based on Allianz's direct liability, including negligent supervision and negligent retention, but granted leave to amend the Complaint within twenty-one days of the entry of that Order. Id. at 10.
On January 15, 2021, the court entered a Rule 16(b) Scheduling Order that set the deadlines for completing discovery on May 11, 2021, for Plaintiffs, and June 8, 2021 for Defendant, and set a jury trial for July 20, 2021. ECF No. 27 at 1-2. The Scheduling Order did not provide a deadline for motions to amend pleadings because this court's November 20, 2020, Order granted Plaintiffs leave to amend within twenty-one days of that Order. See ECF No. 23 at 9-10.
On March 29, 2021, Plaintiffs filed the instant Motion to Amend, ECF No. 34, and allege that information obtained through discovery supports their claims regarding Allianz's direct liability. Plaintiffs assert that they did not have access to this information within twenty-one days of the November 20, 2020, Order, and therefore could not file a motion for leave to amend within that timeframe. ECF No. 35 at 2, 7.
The related Motion to Remove Confidentially Designation and Motion to Seal pertain to a two-paged, internal Allianz document disclosed to Plaintiffs in discovery and relevant to the Motion to Amend. On April 8, 2021, Allianz filed a Response in support of Plaintiffs’ Motion to Seal, ECF No. 41, and on April 12, 2021, Allianz filed a Response in opposition to Plaintiffs’ Motion to Amend, ECF No. 42. Plaintiffs filed a reply to Allianz's Response in opposition on April 16, 2021. ECF No. 43.
II. Motion to Seal and Motion to Remove Confidentiality Designation
One document that is particularly relevant to Plaintiffs’ Motion to Amend is a two-paged, corporate manual that outlines Allianz's former "conservation" procedures, which are used by Allianz employees after a customer opts to surrender a policy. See ECF No. 40-1 at 57-58. Because the procedures are non-public and concern Allianz's attempt to retain clients, Allianz wants the document and specific references to its contents kept confidential. See ECF No. 41 at 1-2; Kunde Decl. ¶¶ 4-6, ECF No. 41-1. Therefore, pursuant to the Stipulation and Protective Order agreed to by the parties and issued by the court on March 17, 2021, ECF No. 32, Allianz designated the document "confidential" when the company disclosed it to Plaintiffs during discovery, see ECF No. 38 at 1-2. Allianz wishes to retain the "confidential" designation and keep the document sealed, whereas Plaintiffs argue that the document does not warrant confidentiality.
The Protective Order allows the parties to designate as "confidential" and prevent public disclosure of "competitively sensitive, confidential, and proprietary business information," such as "[t]rade secrets" and materials "that qualify for protection under Federal Rule of Civil Procedure 26(c)." ECF No. 32 at 2; see Fed. R. Civ. P. 26(c) ("The court may, for good cause, issue an order ... requiring that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a specified way"). The party designating a document "confidential" must have "a good faith belief that is has been maintained in a confidential, non-public manner, and there is good cause why it should not be part of the public record." ECF No. 32 at 2. When a confidentially designation is challenged, the burden is on the designating party to show "good cause" requiring the designation. Id. at 7. To demonstrate "good cause," the designating party must show that the information is confidential within the scope of Rule 26(c) and that a " ‘specific prejudice or harm ... will result’ if disclosure is allowed." NewMarket Corp. v. Innospec Inc., No. 3:10CV503, 2011 WL 2144695, at *4 (E.D. Va. May 25, 2011) (Lauck, J.).
Although a company's policies and procedures are not protected under Rule 26(c) when those procedures recite generic, industry-wide standards, the document at issue here outlines the narrowly tailored process Allianz implemented when a client requests to surrender an annuity. Compare Motto v. Corr. Med. Servs., No. 5:06-CV-00163, 2009 WL 347432, at *2 (S.D.W. Va. Feb. 9, 2009) (holding that the relevant documents were not considered confidential under Rule 26(c) because they were too similar to industry-standard policies created by third parties) with Sheets v. Caliber Home Loans, Inc., No. 3:15-CV-72, 2015 WL 7756156, at *6 (N.D. W. Va. Dec. 1, 2015) (distinguishing Motto and holding that a company's internal policies and procedures qualified as confidential commercial information because they were "not based on general guidelines published by a third party," but instead, were created by the party). Allianz has attempted to keep the conservation manual confidential in the course of business by only making it available to employees and not sharing it outside the company. Kunde Decl. ¶ 6; see Deford v. Schmid Prod. Co., 120 F.R.D. 648, 653 (D. Md. 1987) (considering "[t]he extent of measures taken by [a party] to guard the secrecy of the information" to determine if information constitutes a trade secret). Public disclosure of these procedures could economically disadvantage Allianz because, if disclosed, competitors could circumvent the procedures or else copy them, thereby directly undermining Allianz's attempts to retain clients. Kunde Decl. ¶ 6.
Moreover, Allianz has not challenged the disclosure of the document to opposing counsel, but only requests that it not be disseminated publicly. See Sheets, 2015 WL 7756156, at *6 (finding good cause to issue a protective order in part because the designating party was "not seeking to protect its internal policies and procedures from disclosure but only from dissemination outside of this litigation"). Thus, Allianz has established good cause that warrants sealing and a confidentiality designation for its conservation procedures at this juncture to prevent dissemination of its policy outside of this litigation.
Moreover, if for some reason the policy is admitted at trial, appropriate measures can be taken to preserve its confidentiality outside of this litigation. See infra Part III.B.2.
III. MOTION TO AMEND
Additionally, Plaintiffs seek leave to amend the Complaint because they contend that newly discovered facts lend additional support for claims regarding Allianz's direct liability for the surrender and transfer of Ms. Carlisle's funds into a Ponzi scheme.
A.
Typically, the "court should freely give leave [to amend] when justice so requires." Fed. R. Civ. P. 15(a)(2). However, once a court has entered a scheduling order, it may only be modified for good cause. Fed. R. Civ. P. 16(b)(4) ; McMillan v. Cumberland Cnty. Bd. of Educ., 734 F. App'x 836, 845–46 (4th Cir. 2018) ; see Nourison Rug Corp. v. Parvizian, 535 F.3d 295, 298 (4th Cir. 2008) ("[A]fter the deadlines provided by a scheduling order have passed, the good cause standard must be satisfied to justify leave to amend the pleadings."). Rule 16(b)(4) ’s "good cause" requirement "dampens" Rule 15(a)(2) ’s mandate to liberally grant leave to amend. Moore v. Equitrans, L.P., 818 F. App'x 212, 218 (4th Cir. 2020). "Good cause" under Rule 16 "focuses on the timeliness of the amendment," particularly "the diligence of the moving party." Montgomery v. Anne Arundel Cnty., Md., 182 F. App'x 156, 162 (4th Cir. 2006).
As is the case here, when a scheduling order does not impose a specific deadline to amend pleadings, Rule 16 nevertheless applies if granting leave to amend would interfere with the timeline set in the applicable scheduling order. See, e.g., Thorpe v. Mechanicsville Concrete, LLC, No. 3:10-CV-797, 2011 WL 3820809, at *2 (E.D. Va. Aug. 29, 2011) (Spencer, J.) (holding that plaintiffs must show "good cause" under Rule 16 to justify leave to amend because the proposed amendments would "disrupt" the litigation timeline set in a scheduling order, even though the order did not set a deadline for amendments). Here, Plaintiffs moved to amend shortly after discovering the new evidence upon which the Motion is based. See ECF No. 35 at 2, 7. Although this supports that Plaintiffs were diligent in filing the instant Motion under Rule 16, they must also satisfy Rule 15 ’s standard for amending pleadings, which they fail to do. See Cook v. Howard, 484 F. App'x 805, 814–15 (4th Cir. 2012) (explaining that a party that files a motion to amend pleadings after the entry of a scheduling order "must first demonstrate ‘good cause’ to modify the scheduling order deadlines, before also satisfying the Rule 15(a)(2) standard for amendment").
See infra Part III. B.
B.
Under Rule 15, a motion to amend "should be denied only when the amendment would be prejudicial to the opposing party, there has been bad faith on the part of the moving party, or the amendment would have been futile." Laber v. Harvey, 438 F.3d 404, 426 (4th Cir. 2006) (quoting Johnson v. Oroweat Foods Co., 785 F.2d 503, 509 (4th Cir. 1986) ). "A court should deny a motion to amend as futile if the amended complaint could not survive a motion to dismiss." Cappetta v. GC Servs. Ltd. P'ship, 2009 WL 482474, at *4 (E.D. Va. Feb. 24, 2009) (Lauck, J.) (citing Perkins v. United States, 55 F.3d 910, 917 (4th Cir. 1995) ).
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Facial plausibility means that a "plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ). The court accepts facts alleged in the complaint as true and views those facts in the light most favorable to the plaintiff. Venkatraman v. REI Sys., Inc., 417 F.3d 418, 420 (4th Cir. 2005).
Plaintiffs contend that leave to amend is warranted because discovery has revealed that Allianz violated its own policies with respect to executing the surrenders of Ms. Carlisle's annuities, and Allianz terminated Delavan for cause without notifying Ms. Carlisle. Plaintiffs seek to amend the complaint with these additional facts to support claims regarding Allianz's direct liability, including negligence, negligent supervision, negligent retention, and conversion.
Plaintiffs do not specify any legal duty to do so to support this factual allegation. See infra Part III.B.2.
As a general matter, the newly discovered facts buttress Plaintiffs’ negligence and conversion claims, but they do not alter the court's analysis when previously dismissing those claims. When the court dismissed claims based on Allianz's direct liability, as opposed to vicarious liability through Delavan's conduct, the court construed the underlying facts regarding Allianz's liability as true. See ECF No. 23 at 2 (reciting the standard of review on a motion to dismiss). In their original Complaint, Plaintiffs alleged, inter alia, that Allianz was directly liable to Ms. Carlisle for negligently retaining Delavan as an agent, for failing to diligently supervise him, for failing to prevent the surrender and transfer of her funds through adequate procedures, and for failing to ensure that the annuity withdrawal was authorized by Ms. Carlisle. Compl. ¶¶ 34, 42, 66. Plaintiffs’ proposed amended complaint would additionally allege that Allianz breached a duty of care to Ms. Carlisle by failing to ensure that Ms. Carlisle authorized the withdrawal in accordance with Allianz's internal policies and procedures, and by allowing Delavan to serve as Ms. Carlisle's representative despite terminating his contract with Allianz for cause in 2017, and not warning Ms. Carlisle of the facts surrounding the contract termination. Proposed Am. Compl. ¶¶ 24, 25, 30, 52, ECF Nos. 35-1, 40-1. But these claims are not so unique from Plaintiffs’ allegations in the original Complaint that they would alter the court's analysis on a motion to dismiss.
1. Negligent Supervision and Negligent Retention
As to the negligent supervision and negligent retention claims, Plaintiffs failed to object to the R&R's recommendation that those claims be dismissed as a matter of law, and the court agrees with the R&R's legal conclusions on those claims. See R&R at 20-22, 44-47. For negligent retention claims, the Fourth Circuit and courts in Virginia "have construed Virginia law to require Plaintiff to allege that she suffered serious and significant physical injury." Ingleson v. Burlington Med. Supplies, Inc., 141 F. Supp. 3d 579, 585 (E.D. Va. 2015) (Davis, J.); see R&R at 45 (collecting cases). Financial harm, absent coexistent physical injury, cannot sustain such a claim. Snapp v. Lincoln Fin. Sec. Corp., No. 5:17-CV-00059, 2018 WL 1144383, at *8 (W.D. Va. Mar. 2, 2018) (agreeing that "financial damage alone is not sufficient to establish a prima facie claim of negligent retention"), aff'd, 767 F. App'x 452 (4th Cir. 2019). Because Plaintiffs have not alleged physical injury in this matter, the newly discovered evidence would not sustain their negligent retention claim, and leave to amend on this basis is therefore futile. See Elrod v. Busch Ent. Corp., 479 F. App'x 550, 551 (4th Cir. 2012) (holding that district court did not abuse its discretion in finding that amendment to negligent retention claim would be futile since plaintiffs did not allege any physical injury).
Similarly, most courts have not recognized a cause of action under Virginia law for negligent supervision. See Eley v. Evans, 476 F. Supp. 2d 531, 532 n.3 (E.D. Va. 2007) (Smith, J.) ("[F]ederal and Virginia courts have held that Virginia does not recognize negligent supervision as a valid cause of action."); Chesapeake & Potomac Tel. Co. of Va. v. Dowdy, 235 Va. 55, 61, 365 S.E.2d 751, 754 (1988) ("In Virginia, there is no duty of reasonable care imposed upon an employer in the supervision of its employees under these circumstances and we will not create one here."). The Virginia Supreme Court has never recognized a situation creating a duty of reasonable care on employers in the supervision of employees, and has recently suggested that such a duty does not exist under Virginia law. See A.H. v. Church of God in Christ, Inc., 297 Va. 604, 630, 831 S.E.2d 460, 475 (2019) (citing cases concluding that Virginia does not recognize negligent supervision causes of action, and holding that plaintiff's "allegations of negligence ... cannot be predicated upon a stand-alone [negligent supervision] theory").
In a rare instance where a Virginia court allowed a negligent supervision claim to proceed, the court concluded that a duty of supervision "may" attach when an employer "directs its employees to engage in activity that foreseeably creates a danger of harm to others." Hernandez v. Lowe's Home Centers, Inc., 83 Va. Cir. 210, 2011 WL 8964944, at *4 (2011). In contrast, although the existence of an agency relationship between Delavan and Allianz is disputed, the parties in this matter have never considered Delavan an Allianz "employee". See Cook v. John Hancock Life Ins. Co., No. 7:12-CV-00455, 2015 WL 178108, at *14 (W.D. Va. Jan. 14, 2015) (dismissing negligent supervision claim because the failure to supervise an independent contractor is not sufficient to support such a claim). Moreover, Plaintiffs do not contend that Allianz directed employees to engage in extremely reckless behavior that could foreseeably create a danger of physical harm to others. Cf. Hernandez, 83 Va. Cir. 210 (allowing negligent supervision claim to proceed against employer that "direct[ed] its employees to climb ladders to reach heavy items on high shelves in the aisles where its customers shop"). Therefore, this court would not "break new ground" in regard to Virginia law and allow a negligent supervision claim to go forward on these facts. See Courtney v. Ross Stores, Inc., 45 Va. Cir. 429 (Cir. Ct. 1998) (dismissing negligent supervision claim and noting that the court will not "break new ground" because the Virginia Supreme Court had never recognized a duty on employers to supervise employees).
2. General Negligence and Conversion
Nor can Plaintiffs’ direct claims of general negligence or conversion withstand a motion to dismiss because, under Virginia's economic loss doctrine, if a duty arises solely by contract, a breach does not give rise to an independent tort claim. Augusta Mut. Ins. Co., 274 Va. 199, 645 S.E.2d 290, 293–94 (2007) ; see also Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004) ("[L]osses suffered as a result of the breach of a duty assumed only by agreement, rather than a duty imposed by law, remain the sole province of the law of contracts."). Therefore, a party cannot maintain tort claims against an insurance company for duties that arise from a contractual relationship between the insurance company and the insured. See R&R at 20; see also Snapp, 2018 WL 1144383, at *7 (granting motion to dismiss as to negligence claims because plaintiffs failed to show that defendant insurance companies "owed them an independent legal duty of care" concerning annuities); Cook, 2015 WL 178108, at *22 (dismissing negligence claims against insurance companies because "any duty owed to [plaintiff] to not allow the withdrawal arises only because of [a] contractual relationship"); Condo. Servs., Inc. v. First Owners’ Ass'n of Forty Six Hundred Condo., Inc., 281 Va. 561, 574, 709 S.E.2d 163, 171 (2011) ("To recover for the tort of conversion, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract.").
In sum, it would be futile to allow Plaintiffs to amend to go forward on the general negligence or conversion tort claims, because "the Supreme Court of Virginia has never recognized the existence of a separate tort duty that an insurer owes to the insured" and the direct claims against Allianz are merely for violations that arise solely by contract, and therefore cannot be sustained in a tort cause of action. Selective Ins. Co. of the Se. v. Williamsburg Christian Acad., 458 F. Supp. 3d 409, 416 (E.D. Va. 2020) (Davis, J.) (quoting Metro. Life Ins. Co. v. Gorman-Hubka, No. 1:15-CV-1200, 2016 WL 10489865, at *3 (E.D. Va. Mar. 28, 2016) (Ellis, J.)).
However, "[t]his is not to say that an insurer cannot owe the insured a common law duty that could support a professional negligence claim, merely that the insurance relationship alone does not create such a common law duty." Selective Ins. Co., 458 F. Supp. 3d at 416 (emphasis in original). Thus, this court allowed claims based on Allianz's vicarious liability through Delavan's conduct to proceed because an independent, "common law duty may arise from the relationship between an insurance agent and the insured ... that is separate and distinct from that derived from a contract between the parties." Id. (quoting Filak v. George, 58 Va. Cir. 500, 505, 2002 WL 31431890 (Chesterfield Cty. Cir. Ct. 2002) ). The court allowed this issue to go to discovery to determine the parameters of Delavan's relationship with Allianz and Ms. Carlisle, and the court makes no determination at this juncture whether those allegations can survive Virginia's economic loss doctrine and whether discovery evidence can go forward on this ground.
See supra note 1 and accompanying text.
Finally, under Virginia law, "whether a given course of conduct is negligent ... must be determined by the standard fixed by law, without regard to any private rules of the party." Virginia Ry. & Power Co. v. Godsey, 117 Va. 167, 168, 83 S.E. 1072, 1073 (1915). Thus, even if Plaintiffs could show that Allianz directly owed Ms. Carlisle some non-contractual duty, Plaintiffs would not be able to establish the requisite standard of care with Allianz's internal procedures. See Hottle v. Beech Aircraft Corp., 47 F.3d 106, 110 (4th Cir. 1995) (affirming district court's decision to exclude evidence of a party's internal rules to show negligence based on Godsey ). Therefore, the newly discovered fact that Allianz violated its own procedures does not alter the court's analysis in previously dismissing claims based on Allianz's direct liability.
IV. CONCLUSION
For the foregoing reasons, the Motion to Seal, ECF No. 37, is GRANTED ; the Motion to Remove Confidentiality Designation, ECF No. 36, is DENIED ; and the Motion to Amend the Complaint, ECF No. 34, is DENIED . The court will not disrupt the timeline set in the Scheduling Order to allow Plaintiffs to allege claims that will necessarily fail on a motion to dismiss. The court DIRECTS the Clerk to forward a copy of this Memorandum Order to counsel for all parties.
After a full examination of the briefs and the record, the court has determined that a hearing is unnecessary because the facts and legal arguments are adequately presented, and the decisional process would not be aided significantly by oral argument. See E.D. Va. Local Civ. R. 7 (J).