Opinion
CIVIL ACTION NO. 3:OO-CV-1801-G
July 10, 2002
MEMORANDUM ORDER
Before the court is the motion of the defendants, Matisse Capital Partners, L.L.C. ("Matisse"), Paul Bagley ("Bagley"), and Jack Takacs ("Takacs") (collectively, "the defendants"), to exclude evidence offered by the plaintiffs, American Realty Trust, Inc. ("ART") and Basic Capital Management, Inc. ("BCM") (collectively, "the plaintiffs"), for damages arising from securities liquidated due to margin calls. Also before the court is the plaintiffs' related motion for leave to supplement their discovery responses and to amend their complaint. For the reasons discussed below, the defendants' motion to exclude evidence is granted, and the plaintiffs' motion to supplement their discovery responses and to amend their complaint is denied.
I. BACKGROUND
During the pre-trial conference held May 3, 2002, the defendants moved to exclude any evidence of damages by the plaintiffs for damages arising from securities liquidated due to margin calls. The crux of the defendants' motion is that the plaintiffs are attempting to try this case by ambush. The defendants contend that "[t]hroughout the nearly two years that this case has been pending, Plaintiffs' only claims for damages have been for return of the $400,000 that they paid to Matisse under the contract plus attorneys' fees." Defendants' Motion to Exclude Evidence of Plaintiffs' Claim for Damages Arising from Securities Liquidated Due to Margin Calls and Memorandum in Support ("Motion to Exclude") at 1; Appendix in Support of Defendants' Motion to Exclude Evidence of Plaintiffs' Claim for Damages Arising from Securities Liquidated Due to Margin Calls ("Defendants' Appendix") at 5. Further, as the defendants correctly point out, BCM limited its claim for damages to $200,000 in its Answers to Defendants' First Set of Interrogatories, Defendants' Appendix at 31, which were served on March 1, 2002. Id. at 32.
Pursuant to this court's scheduling order issued November 14, 2001, discovery was to be completed by February 28, 2002. Amended Order Establishing Schedule and Certain Pretrial Requirements ¶ 6, Appendix in Support of American Realty Trust, Inc. and Basic Capital Management, Inc.'s Response to Defendants' Motion to Exclude Evidence of Plaintiffs' Claim for Damages Arising From Securities Liquidated Due to Margin Calls at 3. In ART's Supplemental Responses to Defendants' Second Set of Interrogatories, served March 13, 2002, Defendants' Appendix at 17-18, ART disclosed for the first time a claim for damages for $30 million arising out of the liquidation by ART's margin lenders of the shares securing some of the loans. Id. at 22. Thus, after the close of discovery, and less that two months before trial was set to begin, "ART added an entirely new category of damages and increased its total claim for damages 150-fold." Motion to Exclude at 2. The defendants also point out that in the Joint Pretrial Order, not only has ART included this new claim, but also "BCM, in direct contravention of its sworn interrogatory responses served the month before, has now claimed that it is entitled to some unspecified portion of the $30 million previously claimed by ART." Id.
The defendants maintain that the plaintiffs have violated the disclosure requirements of FED. R. Civ. P. 26 and are attempting to try this case by ambush. Id. Under Rule 26, the plaintiffs were required to provide the defendants with a calculation of damages and all documents related to the damages allegedly suffered by the plaintiffs. FED. R. Civ. P. 26(a)(1)(C). The defendants assert that despite numerous opportunities to do so, the plaintiffs "have failed to make any meaningful disclosure of their $30 million claim for damages." Motion to Exclude at 2.
The plaintiffs' claim at issue is based on losses the plaintiffs allegedly suffered when shares that they owned were sold by margin lenders to satisfy margin calls, but the defendants aver that the plaintiffs have not provided them with any information regarding the specifics of this claim. Id. at 2-3. According to the defendants, the only written disclosure the plaintiffs have provided regarding this claim is a single sentence in ART's supplemental discovery responses:
Lastly, when several of the margin lenders sold ART's margined shares, the Plaintiff suffered damages in the amount of $30,000,000.00 caused by the Defendants' failures to adequately address the margin debt situation, both before and after the indictments.
Defendants' Appendix at 22.
Since the above disclosure, the defendants have deposed two witnesses regarding the plaintiffs' claim for damages: Kenneth Nye ("Nye"), and Gene Phillips ("Phillips"). Motion to Exclude at 3. The defendants claim that not only did these witnesses fail to provide significant information, they actually contradicted one another. Id. Nye, an attorney for ART, has been designated as the corporate representative for both BCM and ART to testify as to damages. Id. When asked about damages to ART or BCM from the liquidation of margin shares, Nye testified that he didn't have a "specific amount," but that he thought it was somewhere between $30 and $40 million. Deposition of Kenneth Francis Nye ("Nye Dep.") at 62-63, Defendants' Appendix at 35-37. Nye did not know how ART or BCM calculated its damages, but he testified that an acceptable method would be to take the difference between the liquidation price and the market value of the shares at the time of sale and multiply that number by the number of shares. Nye Dep. at 64-65, Defendants' Appendix at 38-39. While Nye provided several pages of "what appear to be a summary of purchases and sales by BCM and ART during June 2000, as well as a printout showing the price of each stock during June 2000," (Nye Exhibits 8, 9, 10, Defendants' Appendix at 41-51), "[h]e was unable to describe how [the damage] calculation of $30 to $40 million could be derived from these documents." Motion to Exclude at 4. Furthermore, the defendants contend that they are unable to determine any reasonable calculation based on these documents that "even approaches" $30 million.
As for Phillips, the second deponent, he too was unable to provide an exact calculation but estimated that the damages were approximately $30 million. Deposition of Gene E. Phillips ("Phillips Dep.") at 213, 233, Defendants' Appendix at 52, 53, 67. The defendants point out that, unlike Nye, Phillips testified that the plaintiffs' calculation was based on the difference between the liquidation price and either the price at which the plaintiffs repurchased the shares or the current market price at some point in time following the liquidation. Phillips Dep. at 213, Defendants' Appendix at 53. Further, Phillips could only identify the liquidating margin holder for half of the shares the plaintiffs claim were liquidated. Phillips Dep. at 215-16, Defendants' Appendix at 55-56. Phillips did, however, identify a number of documents he believes contain the information supportive of the plaintiffs' damage calculation. Phillips Dep. at 228-232, Defendants' Appendix at 62-66. The defendants requested these documents at Phillips' deposition, and again by a letter following the deposition. Phillips Dep. at 228-232, Defendants' Appendix at 62-66; April 15, 2002 Letter from Paul Ridley, Defendants' Appendix at 72-74. The defendants claim that additionally, all of the above-mentioned documents are responsive to the defendants' first request for production, No. 26, which requested all documents concerning the existence, amount and calculation of damages, served on December 1, 2000, and by the disclosure requirements of Rule 26. Motion to Exclude at 5. Thus, the defendants maintain, the plaintiffs should have produced them months ago. Id. of these documents, however, only the Gotham Partners option agreement was produced in discovery — and that was allegedly incomplete, missing the page which set forth the price to be paid by ART. Id. Nor have the plaintiffs produced any records or documents showing that the Gotham Partners option was exercised. Id. The defendants have numerous questions regarding the plaintiffs' damages calculation which have not been answered, and without the answers, the defendants claim, they cannot "even begin to prepare a defense against this claim for damages." Motion to Exclude at 6.
These documents include:
1. October 2000 agreement between Gotham Partners and ART for the repurchase of margin stock liquidated by Morgan Stanley;
2. Correspondence between ART and Gotham pertaining to the repurchase of the stock;
3. Company general ledgers and brokerage firm confirmations of sales of the stock by the liquidating margin lenders substantiating the price at which the stock was sold;
4. Trade confirmations, contracts, option agreements or other documents reflecting the price at which the margin shares were repurchased or other shares were purchased in the open market to replace the liquidated shares;
5. Accounting records reflecting the repurchase price.
Phillips Dep. at 228-232, Defendants' Appendix at 62-66.
The defendants pose the following questions:
1. What shares were allegedly liquidated by margin lenders as a result of some misconduct by Defendants — shares of ART, National Realty, LP ("NRLP"), Income Opportunities Realty Investors ("IORI"), Transcontimental Realty Investors ("TCI") or some other entity?
2. How many shares?
3. Who owned the shares — ART, BCM or some other entity?
4. When were the shares liquidated?
5. By which margin lender?
6. How is the alleged loss calculated? Is it the difference between the liquidation price and some value placed on the shares? If so, what was the liquidation price for each sale of securities? How was the value of the shares calculated — average historical price, book value of the shares as shown on Plaintiffs' accounting records, cost of cover, an expert's valuation of the shares as of the time of liquidation, some other method?
7. Do Plaintiffs plan to submit expert testimony on the value of these shares? And, if so, who is the expert? — none has been designated.
8. What conduct of Defendants is alleged to have proximately caused the liquidation of which shares?
9. Plaintiffs sued Gotham Partners and Morgan Stanley Dean Witter alleging that they conspired to convert margined shares belonging to Plaintiffs. Counsel for Plaintiffs informed us at the pretrial conference that the Gotham litigation had been dismissed. Are the shares subject to the Gotham litigation included in Plaintiffs' damage calculation? Did Plaintiffs receive a settlement from Gotham or Morgan Stanley? If so, are Defendants entitled to a settlement credit?
10. Who performed the calculation of damages for Plaintiffs?
11. Who has knowledge of the facts underlying the calculation?
Motion to Exclude at 6.
II. ANALYSIS A. Motion to Exclude Evidence
This court issued an Order Regarding Conduct of Trial (docket entry 233), which states that "the tactic of "trial by ambush' will not be condoned." Id. ¶ 5.4. The plaintiffs were required by FED. R. Civ. P. 26 to provide complete disclosure to the defendants of all relevant facts regarding this latest claim for damages. Rule 26 states, in relevant part:
The court notes that although the court's order on this point discusses exhibits, the same principle applies to the instant issue.
a party must, without awaiting a discovery request, provide to other parties . . . (C) a computation of any category of damages claimed by the disclosing party, making available for inspection and copying as under Rule 34 the documents or other evidentiary material, not privileged or protected from disclosure, on which such computation is based, including materials bearing on the nature and extent of injuries suffered[.]
In addition to the requirements of Rule 26, which imposes a duty to make disclosure without a discovery request, the plaintiffs had discovery obligations that were triggered by specific requests from the defendants. The defendants served interrogatories on each plaintiff requesting that it provide the defendants a complete description of its claim for damages, including the amount claimed and the facts supporting each claim. Defendants' Second Set of Interrogatories to ART, Nos. 3-5, Defendants' Appendix at 7, 12-13; Defendants' First Set of Interrogatories to BCM, No. 3, Defendants' Appendix at 27, 30. Additionally, the defendants requested production of documents from ART related to the existence, amount, and calculation of any damages claimed by ART. Defendants' First Request for Production, No. 26, Defendants' Appendix at 75, 96. Further, the defendants point out that they also noticed the deposition of a corporate representative of each plaintiff on the topic of damages. Motion to Exclude at 8; Notice of Deposition to ART, Defendants' Appendix at 10 1-103; Notice of Deposition to BCM, Defendants' Appendix at 104-107. For all of these reasons, the defendants argue, it is "without question" that the plaintiffs were obligated to disclose the full facts regarding their claim for damages, and it is "equally without question" that the plaintiffs have failed to comply with their discovery obligations. Motion to Exclude at 8. The court agrees.
The plaintiffs disclosed a claim for damages arising out of losses due to liquidation of margin shares for the first time on March 13, 2002, nearly two weeks after the discovery deadline. Since then, the plaintiffs have not complied with their obligation to disclose the facts underlying their damages claim. They have failed to specify the calculation utilized to arrive at their $30 million damage figure. Furthermore, the plaintiffs have failed to provide complete information as to the elements that comprise their damage calculation, including "the number of shares involved, who owned the shares, the price at which each block of shares was liquidated or the price that [the plaintiffs] claim is the true value." Motion to Exclude at 9. Finally, the court agrees with the defendants (Id.) that the plaintiffs have failed to produce a number of documents relevant to this element of damages.
Pursuant to the Federal Rules, information not provided in discovery should be excluded from evidence unless the disclosing party can establish that the failure to disclose was either harmless or justified. FED. R. Civ. P. 37(c)(1). In determining whether the plaintiffs' failure to disclose is harmless, the court should consider the following factors: (1) the importance of the evidence; (2) the prejudice to the opposing party of allowing the evidence to be presented; (3) the possibility of curing such prejudice by granting a continuance; and (4) the explanation, if any, for the party's failure to provide the evidence in discovery. See Sierra Club, Lone Star Chapter v. Cedar Point Oil Company Inc., 73 F.3d 546, 572 (5th Cir.) (discussing a district court's decision to strike expert testimony), cert. denied, 519 U.S. 811 (1996). Each of these factors is discussed separately below.
1. Importance of the Evidence
The evidence regarding the claim for damages arising from securities liquidated due to margin calls and calculation of such damages is undoubtedly significant, given that it potentially transforms the case from one worth roughly $400,000 to one in the $30 to $40 million range. With a transformation of this magnitude, the importance of the evidence cannot be disputed.
2. Prejudice to the Defendants
The court agrees with the defendants (Motion to Exclude at 10) that they have been significantly prejudiced by the plaintiffs' failure to disclose this element of damages, and by their failure to provide the necessary supporting calculations and documentation. The defendants correctly point out that by waiting until after the discovery deadline to disclose this claim, the plaintiffs have "effectively foreclosed [the] [d]efendants from taking discovery as to the lion's share of [the plaintiffs'] claim of damages." Additionally, because the plaintiffs' disclosure was incomplete, the defendants do not have adequate information with which they can prepare for trial on this issue.
3. Possibility of Curing Prejudice by Granting a Continuance
The court likewise agrees with the defendants (Motion to Exclude at 11) that to grant a continuance to allow the plaintiffs to properly disclose their claim for damages arising from liquidation of the margin shares would work further injustice upon the defendants. This case has been pending for almost two years, and the trial setting has already been continued twice: the first time at the instance of third-party defendants Phillips and A. Cal Rossi (docket entry 115), and the second at the instance of the court, for docket management reasons (docket entries 145, 289, and 294). Further delay would only serve to increase the cost to both parties.
4. Reasonable Excuse for Delay
Finally, the court agrees with the defendants that the plaintiffs have not offered a reasonable explanation for the belated and incomplete disclosure of this element of damages. The liquidation of shares and of all of the alleged misconduct by the defendants occurred in 2000. The plaintiffs had ample opportunity to assert a claim for damages arising out of the liquidation of shares, and they have given the court no valid reason for their not doing so before March 13, 2002. Nor have the plaintiffs established that their tardy and incomplete disclosure is harmless to the defendants. The plaintiffs' only explanation for their tardiness appears to be that the parties had agreed in the past to extend discovery deadlines. American Realty Trust, Inc. and Basic Capital Management, Inc.'s Response to Defendants' Motion to Exclude evidence of Plaintiffs' Claim for Damages Arising from Securities Liquidated Due to Margin Calls ("Response to Motion to Exclude") at 4-5. The plaintiffs do not assert, however, that the parties had made such an agreement in this instance. Additionally, the plaintiffs claim that some of the information, namely BCM's brokerage statements, was only obtained by the plaintiffs shortly before it was produced. Id. at 6. The plaintiffs further contend that their "live pleadings contain sufficient factual and legal allegations to put [the defendants] on notice as to the claims they would have to defend." Id. The plaintiffs fail, however, to provide adequate support for this assertion, and instead have filed a motion to supplement their discovery responses and to amend their complaint. The court notes that the documents filed in this case are voluminous, to say the least. For the plaintiffs to argue that the defendants should have put two and two together and guessed that the plaintiffs would make such a claim and guessed at what the damage calculation would be is absurd. All of the events giving rise to the plaintiffs' claims in this case occurred nearly two years ago, and the information necessary to make a calculation of their damages is within the plaintiffs' sole possession. The court finds that the plaintiffs made a tactical decision to ambush the defendants by withholding their main claim for damages until after the close of discovery. This is an example of the plaintiffs simply delaying answering interrogatories until the brink of trial, when all facts are known and theories finalized, before informing the defendants of a key part of the plaintiffs' theory of the case. Cf. Barker v. Bledsoe, 85 F.R.D. 545, 548 (W.D. Old. 1979). The plaintiffs should have disclosed their damage claim based on the information available at the beginning of this case.
In Barker v. Bledsoe, 85 F.R.D. 545, 548 (D.C. Okla. 1979), a district court discussed the duty to supplement discovery responses, and held that parties could not simply delay answering interrogatories until the day or month before trial, merely to gain a tactical advantage. The court takes a similar position today.
On facts similar to those presented here, the court in Texas Instruments, Inc. v. Hyundai Electronics Industries Company, Ltd., 50 F. Supp.2d 619 (E.D. Tex. 1999), excluded evidence and theories disclosed only at the end of discovery. In Texas Instruments, the plaintiff disclosed a new defensive theory and its supporting evidence at the end of the discovery period. Id. at 623. In deciding an argument over whether the disclosure was within the discovery cutoff, the court refused to split hairs in light of the several months that the defendants sat on the knowledge they had. Id. Likewise, the plaintiffs here had all of the necessary facts to disclose their damage theory months ago, and they have never provided proper support for their damage calculations. Therefore, for all of the reasons discussed, the court grants the defendants' motion to exclude the plaintiffs' evidence of damages arising from securities liquidated due to margin calls.
B. Motion to Supplement Discovery and Amend Complaint
In response to the defendants' motion to exclude evidence, the plaintiffs have filed a motion to supplement their discovery responses and to amend their complaint. Despite the requirements of Local Rule 15.1, however, they have not provided the court with the proposed amendment. Federal Rule of Civil Procedure 15(a), which governs the amendment of pleadings, provides that leave to amend should be "freely given when justice so requires." In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, undue prejudice to the opposing party, futility of the amendment, etc. — leave sought should be freely given. Foman v. Davis, 371 U.S. 178, 182 (1962).
Local Civil Rule 15.1 provides in pertinent part:
A party who moves for leave to file an amended pleading must attach a copy of the proposed amended pleading as an exhibit to the motion.
Leave to amend, however, is by no means automatic. Little v. Liquid Air Corporation, 952 F.2d 841, 845-46 (5th Cir. 1992). The above-captioned case is set for trial in this court on July 22, 2002. The plaintiffs have waited too long before bringing their motion to amend. At some point, a claimant's delay can become procedurally fatal. Chitimacha Tribe of Louisiana v. Harry L. Laws Company, Inc., 690 F.2d 1157, 1163 (5th Cir. 1982), cert. denied, 464 U.S. 814 (1983); Gregory v. Mitchell, 634 F.2d 199, 203 (5th Cir. 1981). To allow the plaintiffs to amend their complaint at this late hour would either delay the trial date or impose an undue burden upon the defendants to respond to the newly asserted damage claims. Furthermore, as stated earlier, the court finds that the plaintiffs had a dilatory motive in disclosing their damages claim after the close of discovery and in failing to provide the defendants with supporting calculations for their damages claim.
Little was reheard en banc, but the en banc court endorsed the panel opinion on this point. Little v. Liquid Air Corporation, 37 F.3d 1069, 1073 n. 8 (5th Cir. 1994) (en banc).
Under the court's scheduling order issued March 2, 2001, the deadline for amending pleadings was June 4, 2001. Order Establishing Schedule and Certain Pretrial Requirements ¶ 3(a) (docket entry 39). Although this scheduling order was supplanted in many respects by the scheduling order of November 14, 2001 (docket entry 145), the deadline for amending pleadings was not extended, largely because the movants for continuance of the original trial setting did not ask that it be extended. See generally Third Party Defendants, Gene E. Phillips and A. Cal Rossi's Motion for Continuance, Motion to Modify and Extend Deadlines for Pretrial Requirements and Motion to Extend Mediation Deadline and Brief in Support Thereof (docket entry 115).
Against these factors, the plaintiffs have failed to provide tenable reasons for their delay in seeking to amend their complaint. See Matter of Southmark Corp., 88 F.3d 311, 315-16 (5th Cir. 1996) (in denying leave to amend complaint, a trial court may properly consider (1) an unexplained delay following the original complaint and (2) whether the facts underlying the amended complaint were known to the party when the original complaint was filed), cert. denied, 519 U.S. 1057 (1997); Barrett v Independent Order of Foresters, 625 F.2d 73, 75 (5th Cir. 1980) (affirming denial of leave to amend, although bad faith and dilatory motive were not found, where "amendment sought to add several . . . additional counts" and "[e]ven though the motion was not filed until nearly ten months after the original complaint, there would appear to be no matters . . . which could not have been raised initially"); Layfield v. Bill Heard Chevrolet Co., 607 F.2d 1097, 1099 (5th Cir. 1979) (upholding denial of leave to amend, although bad faith and dilatory motive were not found, where "all of the facts relevant to the proposed amendment were known to the [movant] at the time she filed her original complaint"), cert. denied, 446 U.S. 939 (1980).
Accordingly, the plaintiffs' motion to supplement their discovery responses and to amend their complaint is denied.
III. CONCLUSION
For the reasons discussed above, the motion of the defendants to exclude evidence of damages arising from securities liquidated due to margin calls is GRANTED. The motion of the plaintiffs to supplement their discovery responses and to amend their complaint is DENIED.
SO ORDERED.