Opinion
Civil Action No. 3:01-CV-1343-M
March 4, 2003
FINDINGS, CONCLUSIONS, AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Pursuant to the provisions of 28 U.S.C. § 636 (b), and an Order of the Court in implementation thereof, the subject cause has been referred to the United States Magistrate for hearing, if necessary, and for recommendation. Before the Court is Plaintiffs Motion for Leave to File Third Amended Complaint ("M. for Leave"), filed August 6, 2002, Defendant's Response to Motion for Leave to File Third Amended Complaint ("Resp."), filed August 15, 2002, and Plaintiffs Reply to Defendant's Response to Plaintiffs Motion for Leave to File Third Amended Complaint ("Reply"), filed August 30, 2002. Having reviewed the pertinent pleadings and the law applicable to the issues raised, the Court recommends that the Motion for Leave to File Third Amended Complaint be GRANTED.
I. BACKGROUND
A. Factual History
Millbrook Corporation ("Millbrook") designs and markets billing and scheduling software for use by physicians, clinics, and medical practice groups ("End Users"). On September 10, 1997, Millbrook entered into a Value Added Reseller Agreement ("Contract") with Exigent Management Company, Inc., d/b/a Clinisoft ("Clinisoft"). The Contract granted Clinisoft a non-exclusive right to market licenses to use one or more of Millbrook's programs to End Users. Clinisoft either sold an application service provider ("ASP") license, which allowed an End User to utilize all of the software's applications, or they sold a billing services license, with which End Users used the product in a more limited manner and therefore received significant pricing discounts.
Sometime in 2001, Millbrook learned that Clinisoft was billing End Users for Renewals and collecting Renewal fees without forwarding payments to Millbrook. On June 7, 2001, Millbrook notified Clinisoft that it was in default of the Contract due to Clinisoft's failure to make payments as required by the Contract. Millbrook also cited additional breaches of the Contract, including misrepresentations to customers and failure to meet certain requirements in the Contract. Millbrook terminated the Contract on July 2, 2001, citing Clinisoft's failure to pay Millbrook sums due as required.
B. Procedural History
On June 13, 2001, Millbrook filed suit against Clinisoft in state court. On July 12, 2001, the action was removed to federal court on the basis of diversity. Shortly thereafter, on July 18, 2001, Millbrook filed its First Amended Complaint, claiming breach of contract and unjust enrichment, and seeking an accounting, declaratory judgment, and injunctive relief. (Pl.'s First Am. Compl. at 7-9.) The case was administratively closed on August 29, 2001, based on Clinisoft's Notice of Bankruptcy and Automatic Stay. On December 11, 2001, the parties entered into a Memorandum Agreement ("Agreement") with respect to the bankruptcy proceeding, and the bankruptcy proceeding was subsequently dismissed in accordance with the Agreement. (Mem. in Supp. of M. to Reopen Administratively Closed Case at 1-2.) Millbrook filed a Motion for Partial Summary Judgment on its breach of contract claim on February 13, 2002. As a result of the Agreement, Millbrook believed its equitable claims to be moot, and it filed a Second Amended Complaint on February 21, 2002. (Second Am. Compl. at 2.) Millbrook's Second Amended Complaint omitted much of the factual background contained in the First Amended Complaint, including any mention of Clinisoft's misrepresentations, and alleged only one cause of action for breach of the Contract against Clinisoft. Id. On March 5, 2002, Clinisoft filed an Answer and Counterclaim seeking, among other things, damages for breach of contract. (Def.'s Answer and Countercl. at 3.) The District Court denied Millbrook's Motion for Partial Summary Judgment on April 29, 2002. On July 3, 2002, Clinisoft filed a motion for partial summary judgment, seeking summary judgment on Millbrook's claim of breach of contract and on Clinisoft's counterclaim for breach of contract. Subsequently, on August 6, 2002, Millbrook filed a Motion for Leave to File Third Amended Complaint, seeking to add as defendants, Douglas E. Kassab ("Kassab"), Medical Financial Services, Inc. ("MFS"), and Laura Klien ("Klien"), and to add claims of fraud and conspiracy to commit fraud. (M. for Leave to File Amended Compl. at 8-9.) In its proposed Third Amended Complaint, Millbrook alleges that Clinisoft, Kassab, MFS, and Klien conspired to submit a fraudulent VAR Order Form describing MES as a Billing Service, rather than as an End User seeking ASP licenses, in order to obtain software licenses at discounted prices, which were subsequently sold by Clinisoft to End Users as ASP licenses. (Third Am. Comp. at 8-9.) On March 3, 2003, this Court recommended that Clinisoft be granted summary judgment on Millbrook's breach of contract claim, leaving only Clinisoft's counterclaims for trial. To date, no scheduling order has been entered in this case.
II. STANDARD OF REVIEW
Leave to amend "shall be freely given when justice so requires." FED. R. CIV. P. 15(a). In the absence of bad faith, undue delay, or dilatory motive on the part of the movant, or undue prejudice to the opposing party, a court should grant leave to file an amended pleading. Martin's Herend Imports, Inc. v. Diamond Gem Trading, 195 F.3d 765, 770 (5th Cir. 1999). A court may consider repeated failure to cure deficiencies by amendments previously allowed and futility of amendment in deciding whether to grant leave to amend. Wimm v. Jack Eckerd Corp., 3 F.3d 137, 139 (5th Cir. 1993). "It contravenes the liberal pleading presumption of Rule 15(a) and constitutes an abuse of discretion for a district court to deny a timely motion to amend where the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief." Coghlan v. Wellcraft Marine Corp., 2140 F.3d 449, 452 (5th Cir. 2001). The grant or denial of leave to amend is with the discretion of the court, but the court must have a substantial reason to deny leave. Jamieson v. Shaw, 772 F.2d 1205, 1208 (5th Cir. 1985).
III. ANALYSIS
Millbrook seeks leave to amend to add three defendants, Kassab, MFS, and Klien, and to add claims of fraud against Clinisoft and Kassab and of conspiracy to commit fraud against Clinisoft, Kassab, MFS, and Klien. (M. for Leave to File Am. Compl. at 8-9.)
A. Previously dismissed claims
Clinisoft maintains that Millbrook was previously granted leave to amend to raise its fraud and conspiracy claims in its First Amended Complaint and that Millbrook's omission of the previously asserted fraud claims from its Second Amended Complaint amounted to a dismissal of those claims. (Resp. at 2-3.) Clinisoft asserts that Millbrook may not now seek to amend its complaint to add those previously dismissed claims. Id.
In support of its assertion that the fraud claims were dismissed and that Millbrook may not now amend to add those claims, Clinisoft cites Cox v. Leander Independent School District, 2000 WL 33348248, at *2 (W.D. Tex. June 30, 2000). However, in Cox, the court merely held that an amendment under Rule 15 was a proper method of dismissing a claim. Contrary to Clinisoft's assertion, leave to amend may be granted to assert a claim previously dismissed without prejudice, when justice so requires. Woodfork v. Marine Cooks Stewards Union, 342 F.2d 966, 976 (5th Cir. 1981) (finding an abuse of discretion when the district court denied leave to amend to restore the plaintiffs federal claim because the plaintiff withdrew that claim in an earlier amendment).
In addition, Millbrook's prior pleadings did not assert any fraud-based causes of action. In its First Amended Complaint, in a section entitled "Background Facts," Millbrook stated:
Additionally, in at least one instance, . . . Clinisoft represented that it was selling a billing services license to an End User, when in fact, the End User was promised an application services provider ("ASP") model. The ASP license is more expensive to the reseller than a billing services license. Thus, Clinisoft misrepresented to Millbrook that the End User ordered a lower costing billing services license. This misrepresentation caused disruption in service to the End User, who was not provided the service it needed, and was an intentional attempt to circumvent its duties to pay the proper, costlier, ASP license fee to Millbrook.
(First Am. Compl. at 4.) In the section entitled "Causes of Action," Millbrook asserted claims against Clinisoft for breach of contract and unjust enrichment and, in addition to damages, sought declaratory judgment with respect to Millbrook's remaining duties under the Contract, an accounting, a temporary restraining order, and preliminary and permanent injunctions. Id. at 7-11. Millbrook's allegation in the "Background Facts" section of a single instance of misrepresentation concerning billing services licenses did not state a cause of action for fraud and its subsequent omission did not result in dismissal of any claims. The Motion for Leave to File Third Amended Complaint is Millbrook's first attempt to add fraud-based claims to the suit. Also notable is the fact that the factual allegation noted above did not mention the involvement of Kassab, MFS, and Klien and that Clinisoft does not assert that any fraud claim against those proposed defendants was dismissed by Millbrook.
B. Previously known facts
Clinisoft maintains that leave to amend should be denied because Millbrook was aware of the facts that form the basis of its fraud-based allegations before it filed its Second Amended Complaint and that seeking to amend at this late date is indicative of Millbrook's dilatory motive and bad faith. (Resp. at 3-5.) Millbrook responds that since filing its First Amended Complaint, it "has learned more" about the facts surrounding its claim of fraud and that the amendment was not proposed in an attempt to avoid summary judgment. (Reply at 3-4.)
Courts have denied leave to amend when the plaintiff knew of the facts underlying his claim before the action commenced and filed a motion for leave to amend in an obvious attempt to avoid summary judgment. In this case, it is clear that at the time of filing the First Amended Complaint, Millbrook knew that Clinisoft had, in at least one instance, misrepresented to Millbrook the type of license it was selling to an End User. (First Am. Compl. at 4.) However, the factual allegation made in the First Amended Complaint is not the equivalent of the claims Millbrook now seeks to assert, which detail a complex scheme in which Clinisoft, Kassab, and Klein set up MFS as a straw company with the intent of systematically defrauding Millbrook by purchasing billing service licenses and selling them as ASP licenses. (Third Am. Compl. at 5-6.) Millbrook's brief allusion to a similar misrepresentation is insufficient to support the conclusion that Millbrook was previously aware of the facts which form the basis of its fraud and conspiracy to commit fraud claims.
See Wimm v. Jack Eckerd Corp., 3 F.3d 137 (5th Cir. 1993) (holding that denial of leave to amend was proper when the facts underlying the new claim were known 20 months prior to filing the action and leave to amend was sought nine months later, after the defendant sought summary judgment); Barrett v. Independent Order of Foresters, 625 F.2d 73 (5th Cir. 1980) (finding that denial of leave to amend was not an abuse of discretion when the proposed amendment adding new parties and additional counts was sought nearly 10 months after the original complaint was filed and there were no matters that could not have been raised initially); Layfield v. Bill Heard Chevrolet Co., 607 F.2d 1097 (5th Cir. 1979) (finding no abuse of discretion in denying leave to amend when all the relevant facts were known at the time of filing the original complaint); Agar Corp. v. Multi-Fluid Inc., 47 U.S.P.Q.2d 1375 (S.D. Tex. 1998) (holding that where the facts relevant to the defendants' proposed amendments were known at the time prior answers were filed, leave to amend to allege a counterclaim was properly denied).
More troubling is the timing of the motion for leave to amend. The motion was filed one month after Clinisoft filed its motion for summary judgment on Millbrook's only claim. In Wimm v. Jack Eckerd Corp., the Fifth Circuit held that the plaintiffs' bad faith and dilatory motive was evident when they were aware of the facts supporting their claims before they initiated suit but failed to present those claims until summary judgment was imminent. 3 F.3d 137, 141 (5th Cir. 1993). Two factors distinguish this case from Wimm. First, as noted above, it is not evident that Millbrook was aware of the facts supporting its claims of fraud and conspiracy to commit fraud at an earlier date. Second, while this Court did recommend that summary judgment be granted in favor of Clinisoft on Millbrook's breach of contract claim, it does not appear that Millbrook believed that summary judgment was imminent. Indeed, in its proposed Third Amended Complaint, Millbrook continued to assert its breach of contract claim.
C. Breach of the Memorandum Agreement
Lastly, Clinisoft argues that Millbrook should not be permitted to amend its complaint to allege a breach of contract claim for breach of the Agreement. In the "Factual Background" section of the proposed Third Amended Complaint, Millbrook states that in the Agreement, Clinisoft "agreed to cease its business activity and pay Millbrook certain undisputed Renewal fees owing" and that "Clinisoft has since breached the terms of this Agreement by failing to make the payments required therein and in continuing to act as a Reseller." (Third Am. Compl. at 7.) However, in the section entitled "Causes of Action," when detailing its cause of action for breach of contract, Millbrook asserts that "Clinisoft . . . breached the Contract." Id. at 8. Thus, Millbrook does not assert a cause of action for breach of the Agreement and the Court need not consider Clinisoft's objection.
IV. CONCLUSION
The motion for leave to amend does not appear to have been filed in bad faith, or with an intent to create undue delay or a dilatory motive. No trial date has been set in this case, no deadlines have been imposed with respect to pretrial matters, and Clinisoft has failed to allege that allowing amendment would cause it undue prejudice.
V. RECOMMENDATION
Based on the foregoing reasons, this Court recommends that Plaintiffs Motion for Leave to File Third Amended Complaint be GRANTED.