Summary
denying leave to amend after finding prejudice under Rule 15 where the motion to amend was filed 5 days before trial
Summary of this case from In re Interest Rate Swaps Antitrust Litig.Opinion
00 Civ. 619 (RWS)
November 8, 2002
Attorneys for Plaintiff: LeBOEUF, LAMB, GREENE, MacRAE, L.L.P., New York, NY, By: JOHN P. CAMPO, ESQ., THEODORE J. FISCHKIN, ESQ., ALISON J. CHEN, ESQ., Of Counsel.
Attorneys for Defendants: SALOMON GREEN OSTROW, P.C., Attorneys for Defendant Marshall S. Cogan, New York, NY, By: ALEC P. OSTROW, ESQ., Of Counsel.
MORVILLO, ABRAMOWITZ, GRAND, IASON SILBERBERG, Attorneys for Defendant Marshall S. Cogan, New York, NY, By: ELKAN ABRAMOWITZ, ESQ., Of Counsel.
SWIDLER, BERLIN, SHEREFF, FRIEDMAN, Attorneys for Defendant Saul S. Sherman, New York, NY, By: GUY PETRILLO, ESQ., Of Counsel.
PIPER MARBURY RUDNICK WOLFE, LLP, Attorneys for Defendants Robert H. Nelson, Philip Smith, Karl Winters, and Tambra King, New York, NY, By: ROBERT A. MEISTER, ESQ., MICHAEL S. ETRA, ESQ., Of Counsel.
OPINION
Two months after a thwarted attempt to amend his answer as of right, defendant Frederick Marcus ("Marcus") has moved pursuant to Rule 15(a) of the Federal Rules of Civil Procedure for leave to amend his answer to the amended complaint of plaintiff John S. Pereira, as Chapter 7 Trustee (the "Trustee") of Trace International Holdings, Inc. ("Trace International") and Trace Foam Sub Inc. (collectively "Trace").
For the following reasons, Marcus's motion for leave to amend his answer to include a Thirteenth Affirmative Defense, related to certain alleged offsets, is denied and his motion to include a Fourteenth Affirmative Defense based on the statute of limitations for the purposes of appeal is granted.
Parties
Trace International is a Delaware corporation. It and its subsidiary Trace Foam filed for protection under Chapter 11 of the Bankruptcy Code on July 21, 1999. The cases were converted into proceedings under Chapter 7 on January 24, 2000, and the Trustee was appointed on January 25, 2000.
Marcus was a former director/officer of Trace.
Prior Proceedings
The parties and events discussed herein are described in greater detail in previous opinions, including Pereira v. Cogan, No. 00 Civ. 619, 2001 WL 243537 (S.D.N.Y. March 8, 2001) and Pereira v. Cogan, 267 B.R. 500 (S.D.N.Y. 2001), familiarity with which is presumed.
The Deferred Compensation Agreements
On March 21, 1985 and December 19, 1986, Marcus entered into separate Defined Benefit Deferred Compensation and Salary Continuation Agreements (the "Agreements"), which provided for certain benefits upon Marcus's severance, retirement, disability or death. The signatories to the Agreements were Marcus and General Felt Industries ("GFI"). It is disputed as to whether GFI was a predecessor to Trace.
In the initial phase of discovery in this case, Marcus failed to produce copies of the Agreements in response to the Trustee's document requests. This fact was noted on August 16, 2001, after the conclusion of the first day of Marcus's deposition in this matter. Accordingly, Marcus provided copies of the Agreements to the Trustee before Marcus's second day of testimony. The Trustee already possessed copies of the Agreements prior to this time, and had produced copies thereof to the defendants.
Marcus was the first party deposed in the case, and fact discovery closed in mid-December 2001.
The Amended Complaint and Answer
In January 2002, the Trustee informed Marcus of his wish to amend his complaint to include a new cause of action. During that communication, Marcus stated that he would like to amend his answer in order to add a defense arising from the Agreements. The Trustee reserved his right to oppose the proposed amendment or seek further discovery.
On April 15, 2002, the Trustee filed the Third Amended Complaint (the "Complaint"). The Complaint was amended to add an alternative theory concerning an already pleaded 1998 corporate governance issue. The pre-existing complaint had alleged that, in violation of defendant's fiduciary duties and a Delaware statute, Trace was caused to redeem certain preferred shares in 1998 while its capital was impaired. The Complaint added an allegation that this same redemption also violated Trace's certificate of incorporation and another Delaware statute.
On April 22, 2002, Marcus submitted his amendment, purportedly as of right, including the newly pled Thirteenth Affirmative Defense, in which Marcus claimed a damages offset of less than $2 million (present discounted value) based on separate 1985 and 1986 deferred compensation/severance agreements with a predecessor to Trace International Holdings, Inc.
On motion of the Trustee, the Court struck the new defense as one that could not be added as of right. Pereira v. Cogan, 00 Civ. 619 (Aug. 7, 2002).
Marcus now seeks leave to amend his answer to include the Thirteenth Affirmative Defense, which would allege an offset based upon benefits not received but owed pursuant to the Agreements and, for purposes of appeal, a Fourteenth Affirmative Defense alleging that the Trustee's claims are barred by the applicable statute of limitations.
Marcus filed the instant motion on October 31, 2002, and in light of a stipulation between the parties, it was considered fully submitted on November 7, 2002.
Discussion I. Standard of Review
Rule 15(a) of the Federal Rules of Civil Procedures provides that leave to amend a pleading "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Absent a substantial reason to deny such a motion, courts interpreting Rule 15(a) ordinarily grant motions to amend. Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (1971); Foman v. Davis, 371 U.S. 178, 182 (1962).
The Rule in this Circuit has been to allow a party to amend its pleadings in the absence of a showing by the nonmovant of prejudice or bad faith. Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993) (citing State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981)). However, "the longer the period of an unexplained delay, the less will be required of the nonmoving party in terms of a showing of prejudice." Id. (citing Evans v. Syracuse City Sch. Dist., 704 F.2d 44, 47 (2d Cir. 1983)). In determining what constitutes prejudice, a court should consider whether the assertion of the new claim or defense would "(1) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (2) significantly delay the resolution of the dispute; or (3) prevent the plaintiff from bringing a timely action in another jurisdiction." Monahan v. New York City Dep't of Corrections, 214 F.3d 275, 284 (2d Cir. 2000) (citing Block, 988 F.2d at 350). "Mere delay, however, absent a showing of bad faith or undue prejudice, does not provide a basis for a district court to deny the right to amend." Fluor, 654 F.2d at 856.
II. Marcus May Not Add His Thirteenth Affirmative Defense At the Eleventh Hour Due to Prejudice to the Trustee
The Trustee opposes Marcus's attempt to amend his answer to include the Thirteenth Affirmative Defense on the basis of undue prejudicial delay, bad faith, and futility.
Marcus has the "burden of showing a compelling reason for the delay" in seeking to amend his answer until the eve of trial. Evans, 704 F.2d at 47. Marcus has failed to provide any such compelling reason — and in fact has elided over the question in his moving papers. He briefly touches on the issue when discussing whether the proposed amendment was in bad faith, blaming the delay on the depositions of Robert H. Nelson (November 21, 2001) and Ronald A. Mamary (October 15, 2001). Marcus does not make clear why these particular depositions were important in encouraging him to make a claim on the Agreements, the existence of which he was aware by August 2001. "The longer a period of unexplained delay, the less will be required of the nonmoving party in terms of a showing of prejudice." Id. at 46-47.
The Trustee claims that he would require substantial additional discovery to address Marcus's new defense and that such discovery efforts would be unduly disruptive of the Trustee's preparation for trial, which is set to begin on November 12, 2002 — a mere five days after this motion was fully submitted. The Trustee points to three areas of inquiry that would be necessary. First, the Agreements at issue are with a supposed predecessor of Trace, GFI. However, the Trustee states that other evidence has established that GFI was sold in the late 1980's and thus may not be Trace's predecessor. Second, the Trustee states that to test the issue, he would require a new round of document discovery followed by the depositions of Marcus and at least two other individuals who may have knowledge of the corporate legal history but who are both hostile to the Trustee and not under control of Marcus's counsel. Finally, the Trustee is entitled to contest the reasonableness of Marcus's deferred compensation claim under the Bankruptcy Code, 11 U.S.C. § 502 (b)(4), and that too would require a new round of document discovery followed by the depositions of witnesses. Even if the Trustee is overstating the amount of discovery that would be required, he certainly would need to partake in some testing of the newly proposed affirmative defense and therefore such discovery is not "unnecessary or frivolous." Yurman Design, Inc. v. Chaindom Enters. Inc., 2001 U.S. Dist. LEXIS 8606, at *10 (S.D.N.Y. June 26, 2001) (rejecting argument that amendment should be granted because party should have conducted discovery because "[c]ivil defendants are not required to conduct discovery with an eye towards defending against all possible legal actions that might be brought against them based on the facts in the Complaint . . . ."). Given that the trial is days away, there would be no time to accomplish this discovery except at great prejudice to the Trustee.
Marcus contends that, because this is a non-jury trial, there would be no prejudice if the Trustee were not allowed time for depositions or discovery, because he will have the opportunity to question the witnesses that will be called at trial. Such a solution harkens back to the days of "trial by surprise" and must therefore be rejected.
Moreover, Marcus's actions raise the spectre of bad faith. Marcus waited until October 31, 2002 to file his motion for leave to amend his answer even though he knew as early as August 7, 2002 that his attempt to amend his answer as of right had been rejected. If he had promptly filed this motion for leave to amend his answer at that time, the parties and the Court would not have had to deal with it in such an expedited manner, and the Trustee would have had a greater window of time in which to conduct any necessary discovery. Further, his failure to elucidate his rationale in delaying to seek this amendment, beyond a reference to two depositions that occurred in October and November of 2001, adds to this inference.
In light of the above, Marcus's motion for leave to amend his answer to add the Thirteenth Affirmative Defense is denied.
III. Marcus May Add the Fourteenth Affirmative Defense For the Purposes of Appeal
Because the Trustee does not oppose Marcus's motion to amend his answer to add the Fourteenth Affirmative Defense for the purposes of appeal, and because such addition will not prejudice the Trustee as it will not be part of the trial and is an issue already briefed in this case, such request is granted.
Conclusion
Marcus's motion for leave to amend his answer is denied with respect to the Thirteenth Affirmative Defense and granted with respect to the Fourteenth Affirmative Defense.