Opinion
17-CV-2987 (JPO)(KHP)
11-21-2022
IN RE LIFETRADE LITIGATION
HONORABLE J. PAUL OETKEN, UNITED STATED DISTRICT JUDGE
OPINION AND AND REPORT AND RECOMMENDATION ON MOTION TO AMEND
KATHARINE H. PARKER UNITED STATES MAGISTRATE JUDGE
Before this Court is the Wells Fargo Defendants' motion for leave to assert third-party claims pursuant to Federal Rules of Civil Procedure 14 and 15 against John Marcum and HB Management, N.V. (“HBM”) and to amend their answer. (Def. Mots. for Leave, ECF No. 804.) Wells Fargo seeks to (i) assert third party-claims for contribution against Marcum and HBM under Rule 14(a); and (ii) amend Wells Fargo's answer to assert a defense for set-off rights pursuant to agreements between each of Marcum and HBM and the Plaintiffs under Rule 15(a). (Id.) For the reasons set forth below, Wells Fargo's motion for leave to assert third-party claims for contribution against Marcum and HBM is granted as to Marcum, but I recommend that it be denied as to HBM. The motion to amend the pleading to add/clarify the set-off defense is granted.
The “Wells Fargo Defendants” include Wells Fargo Bank, N.A., Wells Fargo Bank Northwest, N.A., Wells Fargo Delaware Trust Company, N.A., and ATC Realty Fifteen, Inc.
BACKGROUND
The Court presumes a familiarity with the nature and procedural history of this case. For a fuller recitation of the facts underlying this litigation see Ramiro Aviles v. S & P Glob., Inc., 380 F.Supp.3d 221 (S.D.N.Y. 2019). Solely for purposes of this decision on the motion to amend, the facts alleged in the fourth amended complaint (ECF No. 290) and, to the extent applicable here, the proposed amended pleading of Wells Fargo are accepted as true.
Plaintiffs are investors in three funds (“Lifetrade”). The funds invested in life insurance policies issued to individuals but later were taken up by third-party settlement providers, which paid the insureds a lump sum during their lifetime less than the value of the policy and then continued to pay the premium with the right to collect the full value of the policy upon the insureds' death. The funds closed in 2012 because of alleged mismanagement by former Defendant Roy Smith, Lifetrade's founder and CEO, and former Defendant Marcum, a consultant to the funds. Plaintiffs also assert Lifetrade management had undisclosed conflicts of interest because certain entities in which Smith and Marcum had an interest were service providers to the funds and received excessive fees and commissions from the funds. Smith died during the course of this litigation and his estate (the “Smith Estate”) was substituted as a Defendant.
In the years before Lifetrade's demise, Lifetrade obtained financing from a Wells Fargo predecessor to ensure sufficient funds to satisfy investors' requests to redeem shares and pay premiums on the policies. By 2012, Lifetrade had an outstanding debt of $205 million but insufficient funds to pay the debt. In March 2012, in light of a June 2012 deadline for repaying its outstanding debt to Wells Fargo, Lifetrade suspended redemptions and called a shareholder meeting to discuss the pending repayment date and expiring credit line. The Investors chose to seek long-term financing to pay off the debt and continue operating the funds. However, Lifetrade was unable to secure long-term financing. Although Wells Fargo announced it would foreclose on the debt, instead of a formal foreclosure proceedings, the parties entered into settlement negotiations. Ultimately, in August 2012, a settlement was reached (“2012 Settlement”). Under the terms of the settlement, Wells Fargo acquired all of the funds' assets and released the funds and Smith and Marcum from individual liability. At the time of the 2012 Settlement with Wells Fargo, HBM was a newly appointed director of Lifetrade Management Company N.V. and Lifetrade Asset Management N.V. and, along with Smith, a signatory to the 2012 Settlement.
Plaintiffs assert that the value of the portfolio transferred to Wells Fargo under the settlement exceeded the debt due and seek to recover their losses through this action. They also assert that Wells Fargo knew that the value of the funds exceeded the debt but took advantage of the situation to take over the portfolio and earn a handsome profit. They allege that the full terms of the settlement were concealed to investors to the benefit of Smith, Marcum, and Wells Fargo, resulting in a total loss to investors.
B. RELEVANT PROCEDURAL HISTORY
The first complaint in this action was filed on April 25, 2017. (ECF No. 5.) The original complaint asserted claims against various persons and entities including S&P Global, Inc., Roy Smith, various Lifetrade entities, and Wells Fargo. (Id.) Plaintiffs amended the complaint for the first time on August 10, 2017 to join Marcum and others, including TMF Curacao N.V. (“Equity Trust”) as parties. (ECF No. 34.) The complaint was further amended three more times. The Plaintiffs initially asserted seven common law claims against Wells Fargo. The Court granted Wells Fargo's motion to dismiss in large part, leaving only claims for unconscionability of the Settlement Agreement and aiding and abetting Smith and Marcum's alleged fiduciary breach. Aviles, 380 F.Supp.3d at 298-307. Wells Fargo Defendants filed their Answer on May 15, 2020. (ECF No. 289.) Their Answer included defenses of contribution and setoff but did not assert any cross claims. (See ECF No. 289, Sixteenth and Nineteenth Defenses.)
On November 14, 2017, as part of their investigation into this case, Plaintiffs entered an agreement-not-to-sue with HBM in exchange for HBM cooperating with Plaintiffs' request for documents relevant to this matter. Wells Fargo received a copy of this agreement on June 3, 2022. (Carrero Decl., Exh. 4.)
Later, Plaintiffs reached settlement agreements or settlements in principle with various Defendants including Equity Trust, S&P and Marcum. The settlement with Marcum was reached on May 20, 2021. (Carrero Decl., Exh. 3.) Wells Fargo was aware of the settlement shortly after it was reached and did not object to Marcum being dismissed from this action. Wells Fargo received a copy of the settlement agreement on December 31, 2021 as part of ongoing discovery. (ECF No. 598.) The settlement with Marcum did not include payment of any money but contained an agreement that Marcum would cooperate with Plaintiffs by providing information relevant to this action, including by making himself available for a deposition. (ECF No. 793.)
Currently, Wells Fargo and the Smith Estate are the only remaining defendants in the action. Fact discovery, including depositions, has been extensive and ongoing for three years and is scheduled to be completed in early January 2023.
DISCUSSION
A. LEGAL STANDARD
1. Standard for Impleading a Non-Party
Under Rule 14(a) of the Federal Rules of Civil Procedure, a defendant may “serve a . . . complaint on a nonparty who is or may be liable to it for all or part of the claim against it.” Fed.R.Civ.P. 14(a)(1). The third-party plaintiff must “obtain the court's leave if it files the third-party complaint more than 14 days after serving its original answer.” Id. However, “[t]imely motions for leave to implead non-parties should be freely granted to promote [judicial] efficiency unless to do so would prejudice the plaintiff, unduly complicate the trial, or would foster an obviously unmeritorious claim.” Fortunato v. Chase Bank USA, N.A., 2011 WL 5574884, at *1 (S.D.N.Y. Nov. 16, 2011) (quoting Shafarman v. Ryder Truck Rental, Inc., 100 F.R.D. 454, 459 (S.D.N.Y. 1984)) (internal quotations omitted). Impleader is appropriate when the third party's liability is dependent on the outcome of the main claim or the third party is liable as a contributor to the defendant. Id. (citing Kenneth Leventhal & Co. v. Joyner Wholesale Co., 736 F.2d 29 (2d Cir. 1984)). “The decision to permit a defending party to implead a third-party defendant rests in the trial court's discretion.” Nova Prod., Inc. v. Kisma Video, Inc., 220 F.R.D. 238, 240 (S.D.N.Y. 2004) (citing Kenneth Leventhal & Co., 736 F.2d at 31. The relevant factors for determining whether to permit the third-party complaint are: “(1) whether the movant deliberately delayed or was derelict in filing the motion; (2) whether impleading would delay or unduly complicate the trial; (3) whether impleading would prejudice the third-party defendant; and (4) whether the proposed third-party complaint states a claim upon which relief can be granted.” Too, Inc. v. Kohl's Dep't Stores, Inc., 213 F. R.D. 138 (S.D.N.Y. 2003) (citing Fashion-in-Prints, Inc. v. Salon, Marrow & Dyckman, L.L.P., 1999 WL 500149, at *6 (S.D.N.Y. July 15, 1999).
2. Standard for Amending a Pleading
Under Rule 15(a) of the Federal Rules of Civil Procedure, “a party may amend its pleading once as a matter of course within . . . 21 days after serving it, or . . . if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.” Fed.R.Civ.P. 15(a)(1). “In all other cases, 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 Second Circuit has stated that “[t]his permissive standard is consistent with our strong preference for resolving disputes on the merits.” Williams v. Citigroup Inc., 659 F.3d 208, 212-13 (2d Cir. 2011) (citation omitted). Under Rule 15, leave to amend should be given “absent evidence of undue delay, bad faith or dilatory motive on the part of the movant, undue prejudice to the opposing party, or futility.” Monahan v. N.Y.C. Dep't of Corrs., 214 F.3d 275, 283 (2d Cir. 2000). The party opposing the amendment has the burden of demonstrating futility. United States ex rel. Raffington v. Bon Secours Health Sys., Inc., 567 F.Supp.3d 429, 438 (S.D.N.Y. 2021).
B. ANALYSIS
1. Application To Marcum
Wells Fargo has little excuse for only now moving to assert a claim against Marcum. Marcum was a party to this action, and Wells Fargo did not assert a cross claim as part of its original answer. Wells Fargo did not object to dismissal of Marcum as a party when Plaintiffs reached a settlement with him, even though it had included the defenses of contribution and set-off in its answer. Wells Fargo's assertion that this motion is timely because it made this motion seven months after receiving an unredacted version of the settlement agreement with Marcum is unpersuasive. Wells Fargo has long known about Marcum and his role and long asserted the defenses of contribution and set-off. Moreover, nothing in the settlement agreement itself informs Wells Fargo's late move to now bring Marcum back into this action. Nevertheless, the Court is not persuaded by Plaintiffs' argument that allowing Wells Fargo to bring Marcum back into this action to assert a contribution claim against him would delay or unduly complicate the progress of this case, and considerations of efficiency can outweigh even unreasonable delays in asserting a third-party claim. See Bridge Cap. Invs. v. Coated Sales, Inc., 1991 WL 190552, at *2 (S.D.N.Y. Sept. 16, 1991) (finding that a defendant may assert a third-party claim even after three years elapsed from the defendant's answer when considerations of efficiency were sufficiently strong).
Although Marcum was dismissed as a Defendant, he has remained involved in this case by producing documents and providing testimony. Indeed, because the case against Wells Fargo is in part contingent on a demonstration that Marcum and/or Smith breached their fiduciary duty to the Lifetrade funds, Marcum's testimony will be needed at trial. Marcum denies liability-a position that assists Wells Fargo with its defense. Wells Fargo has aggressively pursued discovery in a way that is more comprehensive than Marcum, as an individual, could. Additionally, the Smith Estate (which was represented by the same lawyers that represented Marcum when he was in the action) has sought extensive discovery to defend against the claims of fiduciary breach - the same discovery that Marcum was pursuing for a time. In other words, there is no new discovery that is unique to Marcum that he would have to produce or pursue that has not yet been produced or pursued in this case. Thus, the re-introduction of Marcum as a party will not change the scope of discovery or impact the discovery schedule in any meaningful way. Courts have permitted motions to implead in similar circumstances. See Farrell Fam. Ventures, LLC v. Sekas & Assocs., LLC, 863 F.Supp.2d 324, 335 (S.D.N.Y. 2012) (finding impleader would not constitute an undue delay of trial even when a third-party claim would require an additional deposition of the third-party defendant); Nova Prod., Inc., 220 F.R.D. at 240-41 (granting a motion for impleader even where adding another party would add another layer of complexity to a multi-party proceeding when additional discovery as to the third-party defendant would not be significant).
Additionally, impleader would not prejudice Marcum. Marcum is involved in the litigation already, has produced all documents that he has and voluntarily agreed to be deposed. If Plaintiffs are unsuccessful in demonstrating fiduciary breach by Marcum, the contribution claim will be moot. Given Marcum's contemplated extensive involvement through trial, regardless of whether he is a party, it will be more efficient to resolve liability and contribution issues in one action. See Bridge Cap. Invs., 1991 WL 190552, at *3 (finding that there was no prejudice when a third-party defendant had previously been involved since shortly after the suit commenced).
Lastly, the third-party complaint is not plainly without factual and legal merit. The third-party complaint for contribution arises from the same aggregate facts as the claims currently at issue, and Wells Fargo's liability is premised on Marcum's liability for the same actions related to the 2012 Settlement. See, e.g., Too, Inc., 213 F.R.D. at 141 (finding a third-party contribution claim stated a claim upon which relief can be granted where the proposed third-party individual defendant's actions were alleged to create liability for a corporate defendant).
For the above reasons, the motion is granted as to Marcum.
2. Application to HBM
The Court reaches the opposite conclusion as to HBM. Wells Fargo unreasonably delayed filing its motion as to HBM and considerations of efficiency do not outweigh the unreasonable delays in asserting this third-party claim. This action has been ongoing since 2017, so Wells Fargo has had over five years to implead HBM-an entity it has known about since the beginning of this case. Wells Fargo also knew that HBM had documents because Plaintiffs produced documents from HBM and told Wells Fargo that the documents had been obtained from HBM.When Wells Fargo stated it wanted more documents from HBM, this Court also explicitly informed Wells Fargo that it could reach out to HBM itself to obtain documents or utilize The Hague process to obtain any additional documents from HBM it deemed necessary. Wells Fargo did not, to this Court's knowledge, initiate any process to obtain additional documents from HBM. It is curious that at the end of a multi-year discovery process in which Wells Fargo did not independently pursue discovery against HBM that it now seeks to add HBM as a party. Wells Fargo's argument that it timely moved to add HBM because it only just learned of the agreement between Plaintiffs and HBM rings hollow - it has known about HBM for a long time and nothing about the settlement agreement informs its purported contribution or set-off claim against HBM. See Ecommission Sols., LLC v. CTS Holdings, Inc., 2016 WL 6901318, at *3 (S.D.N.Y. Nov. 23, 2016) (finding that settlement was not the appropriate date to measure timeliness where settlement did not materially alter the mix of information available to defendants).
Plaintiffs brought a separate legal action in Curacao against HBM to obtain documents from it.
Courts may in their discretion deny a motion to amend when the defendant was unreasonable and derelict in delaying asserting a third-party claim. See Ispat Inland, Inc. v. Kemper Env't, Ltd., 2006 WL 3420654 (S.D.N.Y. Nov. 28, 2006) (denying leave to implead where defendant filed a motion over a year after the action commenced and shortly before the close of fact discovery); Ecomission Sols., LLC, 2016 WL 6901318, at *3 (denying leave to implead where the information for impleader was available for 16 months).
Moreover, unlike Wells' Fargo's impleader of Marcum, Wells Fargo's impleader of HBM would delay and unduly complicate the progress of this case. HBM has not been involved in this case like Marcum has. Although it did provide documents to Plaintiffs because of a legal proceeding Plaintiffs brought in Curacao, it has never appeared in this action or attended any court conferences, and no party has ever indicated a desire to take a deposition of any witness from HBM. Unlike Marcum, who is a U.S. citizen and lives in Connecticut, HBM is a foreign entity - a complicating factor. Time will be needed to serve HBM in Curacao. HBM will have to engage counsel and might move to dismiss the claims against it on jurisdictional or other bases, which could delay the case. HBM's counsel would undoubtedly need time to review all of the extensive discovery in this action, and its lawyers likely would require additional discovery from Plaintiffs, Wells Fargo and other parties and non-parties specific to it. This too would delay discovery, as the Court would need to stay the remaining two months of discovery and allow for all of the above process for HBM. Wells Fargo waited until the absolute last moment to file this motion - discovery is nearly complete and already has been extended multiple times. It is simply too late in the game to add HBM as a party now because it would substantially delay resolution of this case, which is prejudicial to Plaintiffs and the other remaining parties. See Morgan Art Found. Ltd. v. McKenzie, 2021 WL 863264 (S.D.N.Y. Jan. 22, 2021) (denying leave to amend and assert cross-claims where discovery was not closed but had been extended numerous times); Oliner v. McBride'sIndustries, Inc., 106 F.R.D. 14 (S.D.N.Y.1985) (finding prejudice to proposed third-party defendants even where they were previously defendants in main action but had settled with plaintiff six years earlier).
Wells Fargo is not prejudiced by denial of its motion to implead HBM since it is free to commence a separate contribution action if it is found liable to Plaintiffs. See Ispat Inland, Inc., 2006 WL 3420654, at *4 (citing Embassy Elecs., Ltd. v. Lumbermens Mut. Cas. Co., 108 F.R.D. 418, 419-20 (S.D.N.Y.1985)). Therefore, I recommend the motion for leave to amend as to HBM be denied.
3. Addition of Set-Off Defense
The standard for granting leave to amend a pleading is permissive. Williams, 659 F.3d at 208, 212-13. Although Wells Fargo filed their Answer on May 15, 2020, the addition of this defense does not change the scope of discovery and is not the result of bad faith or dilatory motive on the part of Wells Fargo. Indeed, its answer encompassed the defense of set-off already, and the defense Wells Fargo seeks to add is merely a clarification of its existing defense. Further, delay on its own is generally “an insufficient reason to deny a motion to amend.” Rotter v. Leahy, 93 F.Supp.2d 487, 499 (S.D.N.Y. 2000). Instead, Plaintiffs must make a showing of substantial and undue prejudice. See Rachman Bag Co. v. Liberty Mut. Ins. Co., 46 F.3d 230, 234-35 (2d Cir. 1995) (granting leave to amend pleadings four years after complaint was filed).
Plaintiffs have not shown that an amendment to the answer would constitute substantial and undue prejudice. As noted above, Wells Fargo has already asserted a set-off defense and clarification of those defenses do not amount to undue delay. Plaintiffs do not assert any facts indicating they would be unduly prejudiced by an amendment of Wells Fargo's answer. In these circumstances, Courts will permit an amendment. See Rotter, 93 F.Supp.2d at 499 (granting motion to leave where the non-movant did not assert any facts related to prejudice); Vasto v. Credico (USA) LLC, 2016 WL 3926466, at *2 (S.D.N.Y. July 18, 2016) (granting motion to leave where the amendment would not delay the progress of the case and no prejudice to the Plaintiffs was shown).
Plaintiffs' assertion that a set-off defense under New York's GOL § 15-108 is futile is unpersuasive. To start, Plaintiffs focus their argument on the set-off defense as it might apply to Marcum and HBM; however, Wells Fargo's defense is general and not limited to these defendants. It is premature to resolve whether set-off could ever apply. Additionally, while the Plaintiffs argue that New York GOL § 15-108 does not apply when a zero-dollar settlement was reached with another defendant, Wells Fargo argues that application of foreign law and/or exceptions to application of New York GOL § 15-108 apply. Further, in assessing futility, the Court must accept all factual allegations and draw all inferences in favor of the pleader. See Rotter, 93 F.Supp.2d at 497-98 (“the futility of amendment indicates that . . . a proposed amendment should be reviewed under a standard analogous to the standard of review applicable to a motion brought under Rule 12(b)(6)[.]”); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). Under this standard, Plaintiffs' assertion of futility is insufficient, because Plaintiff's assertion of futility relies on the Court's assuming Plaintiffs' allegations to be true. The Court makes no judgment at this juncture of the strength or merits of Wells Fargo's proposed clarified defense, but rather finds that Plaintiffs have failed to show the defense, which is merely being clarified, is entirely futile. Thus, this amendment will be permitted.
CONCLUSION
For the reasons set forth above, Defendants' motion for leave to assert third-party claims is GRANTED as to Marcum but I recommend that it be DENIED as to HBM. Also, Wells Fargo's motion for leave to amend its answer to assert an additional set-off defense is GRANTED.
The Clerk of the Court is respectfully directed to terminate the motion at ECF No. 803.
Dated: November 21, 2022
New York, New York
So ordered.