Opinion
Civil Action No. 98-2450-KHV
May 2, 2000
MEMORANDUM AND ORDER
This matter comes before the Court on plaintiffs Motion For Substitution of Plaintiff And For Leave To File Amended Complaint (Doc. # 140) filed April 7, 2000 and Defendants' Request For Oral Argument On Plaintiff's Motion For Leave To Substitute Plaintiff And File An Amended Complaint (Doc. #170) filed April 25, 2000. Plaintiff seeks to substitute the Estate of John L. Flake as plaintiff under Rule 25(a)(1), Fed.R.Civ.P. He also seeks leave to amend his complaint to add a claim underRevlon, Inc. v. MacAndrews Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985), to add a claim for punitive damages, and to advance new allegations regarding his claims under Unocal Corp. v. Mesa Petrol, Co., 493 A.2d 946 (Del. 1985), and Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 77n. For reasons stated below, the Court sustains plaintiffs motion to substitute the Estate of John L. Flake as plaintiff in this action and denies the balance of plaintiffs motion for leave to amend the complaint.
1. Substitution of Plaintiff
Rule 25(a)(1), Fed.R.Civ.P. provides that "if a party dies and the claim is not thereby extinguished, the court may order substitution of the proper parties." John Flake died on April 2, 2000, and plaintiff asks the Court to substitute his estate as lead plaintiff in this litigation. Defendants do not oppose this request, and the Court finds that it should be sustained.
2. Leave to Amend
Rule 15 of the Federal Rules of Civil Procedure allows one amendment of the pleadings before a responsive pleading is served or within 20 days after service. Subsequent amendments are allowed by leave of court or by written consent of an adverse party. Fed.R.Civ.P. 15(a). In this case defendants have served a responsive pleading and opposed the amendment. Subsequent amendments should be "freely given when justice so requires."Woolsey v. Marion Labs., Inc., 934 F.2d 1452, 1462 (10th Cir. 1991). "The decision to grant leave to amend a complaint, after the permissive period, is within the trial court's discretion, Fed.R.Civ.P. 15(a), and will not be disturbed absent an abuse of that discretion." Id. The district court should deny leave to amend only when it finds "undue delay, undue prejudice to the opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments previously allowed, or futility of amendment." Frank v. U.S. West, Inc., 3 F.3d 1357, 1365 (10th Cir. 1993).
Untimeliness alone is a sufficient reason to deny leave to amend, however, especially when the party filing the motion has no adequate explanation for the delay. Pallottino v. City of Rio Rancho, 31 F.3d 1023, 1027 (10th Cir. 1994). The Court has the discretion to deny leave to amend for untimeliness or undue delay without a showing of prejudice to the other party after looking to the reasons for the delay and the presence of excusable neglect. Steinert v. The Winn Group, Inc., 190 F.R.D. 680, 683 (D.Kan. 2000). If movant has been aware of the facts on which the amendment is based for some time prior to the motion to amend, the Court may properly deny the motion for failure to demonstrate excusable neglect. Braintree Labs., Inc. v. Nephro-Tech, Inc., 31 F. Supp.2d 921, 923 (D.Kan. 1998).
Plaintiff filed suit on October 2, 1998 and litigation has been underway for nearly two years. While the Court stayed discovery until it ruled on defendants' motion to dismiss, it lifted the stay on May 25, 1999 — shortly before it ruled on defendants' motion on June 17, 1999. See Order (Doc. # 38) (staying discovery); Scheduling Order (Doc. # 58) at 6 (lifting stay). The Court initially set a deadline of September 15, 1999 for amending the complaint. Plaintiff sought an extension of this deadline, however, noting that he had been "dingently pursuing written discovery from defendants and third parties since the Court's stay of discovery was lifted." See Plaintiffs Unopposed Motion To Extend Scheduling Order Deadline For Amendments To Pleadings (Doc. # 81). The Court therefore extended the deadline until October 15, 1999. On October 14, 1999, plaintiff filed a motion for leave to file an amended complaint. See (Doc. # 94). In that motion, plaintiff stated that his amended complaint attempted to replead portions of the complaint which the Court had dismissed under Rule 12(b)(6), Fed.R.Civ.P. See id. at 1. Plaintiff specifically noted, however, that he did not seek to replead his Revlon claim and did not seek to advance any new legal theories. Id. at 2 see Flake v. Hoskins, 55 F. Supp.2d 1196, 1216 (D. Kan. 1999) (dismissing plaintiffs original Revlon claim). Plaintiff did not suggest that he would later seek to add new claims or replead the Revlon claims. Now — some ten months after discovery began, some six months after the lapse of the extended deadline for filing an amended complaint, four business days before the pretrial conference, and two weeks before the dispositive motion deadline — plaintiff seeks to do exactly that.
Plaintiff argues that he bases his amendment on newly discovered evidence. Plaintiffdoes not cite any new evidence regarding his punitive damage claim, however, and the parties focus on the Revlon claim. UnderRevlon, corporate directors have an enhanced fiduciary duty to maximize shareholder value once they decide to sell or break up a corporation. This duty arises
(1) "when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company;" (2) "where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company;" or (3) when approval of a transaction results in a "sale or change of control."In re Santa Fe Pac. Corp. Shareholder Litig., 669 A.2d 59, 71 (Del. 1995) (quoting Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (citations omitted)). Plaintiff alleges that he has new evidence that the board of directors of the J.C. Nichols Company ("JCN") initiated an active bidding process for JCN and that it abandoned the long-term strategy for the company. Plaintiff alleges that he discovered this evidence in minutes of JCN board meetings, as well as depositions and third-party documents. Plaintiff has not shown excusable neglect, however, with respect to (1) his failure to discover the evidence at an earlier time or (2) his failure to more timely seek leave to amend.
Plaintiff first alleges that discovery had barely begun on October 15, 1999, the original deadline for seeking leave to amend. This argument is curious, because discovery had begun on May 25, 1999 — some five months earlier. Plaintiff provides no explanation for his alleged failure to promptly conunence discovery. Furthermore, plaintiff's current claim that discovery had barely begun by October 15, 1999 is directly contradicted by his prior assurances (in September of 1999) that he was dingently undertaking discovery. In a normal case, discovery would have ended on September 25, 1999. See D. Kan. Local Rule 26.1 ("discovery should be completed within four months"). Because of the complex nature of this litigation, however, the Court granted the parties a substantially longer time for discovery. Plaintiff has not shown a valid reason for late discovery of the evidence on which the purported amendment is based.
Even assuming that plaintiff had dingently pursued discovery, he has offered no convincing argument why he had to wait until April 7, 2000 to seek leave to amend. While plaintiff cites numerous depositions which occurred in late 1999 and early 2000 and various documents which came to light about that time, this citation misses the mark. From the parties' briefing it is apparent that even before October 15, 1999 — the deadline for seeking leave to amend — plaintiff had sufficient information to allege a Revlon claim. As newly-discovered support for hisRevlon claim, plaintiff specifically cites the minutes ofJCN board meetings and complains that he did not receive unredacted copies of the minutes until October 25, 1999. As defendants point out, however, the so-called "new evidence" was in the redacted copies which plaintiff had received by September 2, 1999. See Defendants' Memorandum of Law In Opposition To Plaintiffs Motion For Leave To File A Second Amended Complaint (Doc. # 143) filed April 12, 2000 at 10-12. Plaintiff does not deny that the redacted minutes contained the relevant evidence, but emphasizes that he relies more heavily on later documents than on the board meeting minutes. See Plaintiffs Reply Memorandum In Further Support of His Motion For Leave To Substitute Plaintiff And File A Second Amended Complaint (Doc. # 149) at 12-13 n. 7. Notably, when making this argument, plaintiff does not cite the specific evidence to which he refers. Without such information, the Court cannot find that plaintiffs inability to earlier get the later documents resulted from excusable neglect. Further, upon reading the proposed amended complaint, it appears to the Court that most of the facts alleged in support of plaintiffs Revlon claim were contained in the board meeting minutes. Plaintiff therefore had the information a month and a half before the expiration of the extended deadline for seeking leave to amend — and more than eight months before he attempted to replead his Revlon claim.
Plaintiff asserts that defendants bear the burden of proving undue delay. While defendants bear the burden of establishing prejudice as a reason to deny leave to amend, see Lange v. Cigna Individual Fin. Servs. Co., 759 F. Supp. 764, 769 (D. Kan. 1991). plaintiff must provide an adequate explanation for his delay. See Pallottino, 31 F.3d at 1027.
The same flaw infects plaintiffs claim for punitive damages. Plaintiff wholly fails to cite any new evidence which allows him to seek punitive damages or to explain why he could not have brought this claim earlier. The Court therefore cannot find that plaintiffs failure to timely allege a claim for punitive damages resulted from excusable neglect. Other courts have found far shorter delays to be undue. See Frank v. U.S. West, Inc., 3 F.3d 1357, 1366 (10th Cir. 1993) (upholding district court finding of undue delay of four months); Allen v. Menninger Clinic. Inc., 1999 WL 381560 at *2 (D. Kan. 1999) (two month delay undue). Given the circumstances of this case, especially the extended period of discovery, the time when plaintiff discovered the evidence he allegedly relies upon, the length of time beyond plaintiffs requested deadline for leave to amend the complaint, and the late stage of this litigation, the Court finds that plaintiff has unduly delayed and not provided a reasonable justification for seeking leave to amend at this late date.
Even assuming that plaintiff relies on documents and depositions after October 15, 1999, most of the late discovery which plaintiff cites occurred before the end of 1999. See Memorandum In Support of Plaintiffs Motion For Leave To Substitute Plaintiff And File A Second Amended Complaint (Doc. # 141) at 3-4, n. 2. In other words, plaintiff still delayed over four months before seeking leave to amend.
Further, the Court finds that leave to assert a Revlon claim would be futile because plaintiffs new allegations do not allege that defendants fall within any of the three categories which implicate a duty to maximize shareholder value. Plaintiff now argues that the JCN board abandoned its longterm strategy and initiated a bidding process. The new allegations of the proposed complaint, even when viewed in the light most favorable to plaintiff, do not establish that the JCN board did either. To support the allegation that JCN abandoned its long-term strategy, plaintiff cites a few projects which defendants did not complete or pursue after the Highwoods acquisition. This is hardly a fundamental change in the nature of JCN's business. See Marcel Kahan, Paramount or Paradox: The Delaware Supreme Court's Takeover Jurisprudence, 19 J. Corp. L. 583, 592 (1994). More importantly, the Court previously found that plaintiff had failed to allege that defendants sought to break up the corporation, and plaintiff adds nothing new in that regard. Therefore, even assuming that defendants abandoned their long-term strategy, they did not invoke a duty to maximize shareholder value, See Santa Fe, 669 A.2d at 71 (duty arises when "a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company"). Likewise, plaintiff still does not allege that the JCN board initiated an active bidding process seeking to sell the corporation. The complaint still fails to discuss what bids, other than from Highwoods, the board solicited or received. Rather, the complaint continues to focus on bids made to the trustee ofthe JCN Employee Stock Ownership Plan, which would allow the buyer to obtain a significant portion of JCN stock and which the JCN board had no power to prevent. The complaint does not suggest that the board engaged in any bidding process for JCN before it began to work with Highwoods. More importantly, the complaint does not allege that the JCN board sought to sell control of the company or break it up. Plaintiff must make such an allegation to fall within the first prong ofRevlon. See Santa Fe, 669 A.2d at 71 ("invoking the duty [by initiating an active bidding process] requires that the Board also seek to sell control of the company or take other actions which would result in a break-up of the company").
The facts of this case are far too substantial to list in this memorandum and order. For a detailed discussion of the facts, see Flake, 55 F. Supp.2d 1196.
The Court notes that the proposed amended complaint contains conclusory allegations that the JCN board decided to sell the company, engaged an active bidding process and abandoned its long term strategy. The substantive allegations throughout the complaint, however, do not support these conclusory statements and the Court therefore need not accept them. See Southern Disposal, Inc. v. Texas Waste Mgmt., 161 F.3d 1259, 1262 (10th Cir. 1998).
Plaintiff argues that the Court should not apply Revlon so rigidly and that, instead, it should focus on whether a change in control occurred. Plaintiff argues that control changed to Highwoods and that Revlon therefore applies. The Court has previously discussed whether a change in control occurred and, after extensive consideration, concluded that it had not. See Flake, 55 F. Supp.2d at 1215-16. Plaintiffs new complaint contains no allegations which change that result. Control of Highwoods, like control of JCN, "`remain[s] in a large, fluid, changeable and changing market.'" Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270, 1289 (Del. 1994) (quoting Paramount Communications, Inc. v. OVC Network, Inc., 637 A.2d 34, 47 (Del. 1994)). Even assuming that the Court should focus on control, plaintiffs new Revlon claim remains futile.
IT IS THEREFORE ORDERED that plaintiffs Motion For Substitution of Plaintiff And For Leave To File Amended Complaint (Doc. # 140) filed April 7, 2000 be and hereby is SUSTAINED in part and DENIED in part. The Court sustains plaintiffs motion to substitute the Estate of John L. Flake as plaintiff in this action. The Court denies plaintiffs motion for leave to amend his complaint.
IT IS FURTHER ORDERED that Defendants' Request For Oral Arnument On Plaintiffs Motion For Leave To Substitute Plaintiff And File A Second Amended Complaint (Doc. # 170) filed April 25, 2000 be and hereby is OVERRULED as moot.