Summary
finding that caselaw addressing defendant's right to assert new affirmative defense in response to amended complaint was "all over the map"
Summary of this case from Menapace v. Alaska Nat'l Ins. Co.Opinion
00 Civ. 619 (RWS)
August 7, 2002
LeBOEUF, LAMB, GREENE, MacRAE, L.L.P., New York, NY, By: JOHN P. CAMPO, ESQ., THEODORE J. FISCHKIN, ESQ., ALISON J. CHEN, ESQ., Attorneys for Plaintiff.
SALOMON GREEN OSTROW, P.C., Attorneys for Defendant Marshall S. Cogan, New York, NY, By: ALEC P. OSTROW, ESQ., Attorneys for Defendants.
MORVILLO, ABRAMOWITZ, GRAND, IASON SILBERBERG, Attorneys for Defendant Marshall S. Cogan New York, NY, By: ELKAN ABRAMOWITZ, ESQ.
SWIDLER, BERLIN, SHEREFF, FRIEDMAN, Attorneys for Defendant Saul S. Sherman, New York, NY, By: GUY PETRILLO, ESQ.
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.
OPINION
Plaintiff John S. Pereira, as Chapter 7 Trustee (the "Trustee") of Trace International Holdings, Inc. ("Trace International") and Trace Foam Sub Inc. (collectively "Trace") has moved to strike the Thirteenth Affirmative Defense of defendant Frederick Marcus ("Marcus").
For the following reasons, that motion 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.
Facts
The Third Amended Complaint and Marcus's Answer
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 preexisting 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 Thirteenth Affirmative Defense, in which Marcus claims 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. The offset presents no issue of liability. If proven, it would lessen the damages, if any, that may be recovered against Marcus in the event of a finding of liability on one or more of the causes of action. The Trustee seeks more than $40 million from Marcus. Marcus is one of the defendants in the case who is not accused of receiving any improper benefit from Trace.
Prior to this amendment as of right, Marcus sought the Trustee's consent to amend his Answer to include the Affirmative Defense. By letter dated April 5, 2002, Marcus requested the Trustee's consent to add his new offset defense and represented that "[w]e will seek leave to amend Mr. Marcus' Answer in the absence of consent." By letter of April 16, 2002, the Trustee declined such consent. By letter that same day, Marcus specified, as an open Rule 16 Pretrial Order issue: "may Mr. Marcus amend his answer to add the two deferred benefit defenses?"
Discovery Relating to Thirteenth Affirmative Defense
On October 6, 2000, the Trustee served a request for production of documents on Marcus. Request No. 9 called for production of "[a]ll documents concerning any contract or agreement entered into between Marcus and . . . Trace . . . ." Marcus produced documents on January 25, 2001. He did not produce the two agreements that form the basis of his purported amendment as of right, the 1985 and 1986 Agreements.
Marcus's deposition was held on August 16 and 17, 2001. On the evening of August 16, after the day's session was concluded and the Trustee's counsel had gone home, Marcus's counsel first delivered the 1985 and 1986 Agreements by a letter that identified the documents being produced but that did not give notice of any intent to amend the Answer. Because Marcus had not asserted a claim under these agreements, the Trustee claims that his counsel had no reason to, and did not, question Marcus about them at the conclusion of his deposition on August 17.
On October 15, 2001, Marcus's counsel questioned Ron Mamary, the Controller of Trace ("Mamary"), who was represented by the Trustee's counsel, about the existence of the Agreements.
During the deposition of Robert Nelson, the former Chief Financial Officer of Trace ("Nelson") on November 21, 2001, Marcus's counsel marked the Agreements for identification and distributed them to all counsel. Further, Marcus's counsel questioned Nelson concerning the Agreements.
Fact discovery closed in mid-December. At that time, Marcus still had neither sought to amend his Answer to add offset defenses nor given any notice of his intention to do so.
Behavior of Other Defendants With Offset Claims
The Trustee notes that other defendants with offset claims included them in their original Answers, which were served well prior to Marcus's Answer and deposition. In addition, on July 5 and 6, 2001, the Trustee and defendant Marshall Cogan exchanged correspondence putting each other on notice of potential amendments and consenting, in advance of depositions, that discovery might be had on these matters as if they were already pleaded.
The Trustee filed the instant motion by letter dated April 29, 2002. A hearing was held on June 19, 2002, and the motion was considered fully submitted at that time.
Discussion
I. Amendment as of Right Pursuant to Rule 15
Under Rule 15(a) of the Federal Rules of Civil Procedure, "[a] party shall plead in response to an amended pleading . . . within 10 days after service of the amended pleading . . . unless the court otherwise orders." Fed.R.Civ.P. 15(a) (emphasis supplied).
The Trustee received permission from the defendants to file an amended complaint, which was so filed on April 15, 2002. There is no question that Marcus and the other defendants then had the right to file an answer "in response" to the complaint within 10 days and that Marcus timely filed his amended answer. The Trustee contends, however, that Marcus's Thirteenth Affirmative Defense in his Amended Answer should be stricken as it was not responsive to the changes in the Amended Complaint.
The case law addressing this particular situation, even within this district alone, is all over the map. The Trustee cites Wechsler v. Hunt Health Sys. Ltd., 186 F. Supp.2d 402 (S.D.N.Y. 2002). There, the plaintiff pleaded a breach of contract claim and was afforded leave to amend, late in the case, to add allegations that the defendants had engaged in various improper acts during performance. Id. at 416. The defendants then sought to amend their answer as of right to allege that the contract was invalid ab initio because of illegality and fraud. Id. Because the defenses were "not in response to the Amended Complaint" and instead went "above and beyond responding to" the amended complaint, the Court held that the defendants could not amend as of right. Id. at 416. A similar result was reached in Nolan v. City of Yonkers, 1996 WL 120685, at *4 (S.D.N.Y. March 19, 1996), which concerned the defendants' addition of counterclaims as of right. The defendants argued that "plaintiffs amended their complaint at their peril, opening themselves up to any and all counterclaims that defendants chose to assert." Id. The Court rejected this notion, finding that the "defendants did not have a right to assert new counterclaims unrelated to the amendment in their answers to the Second Amended Complaint in the same way that they had the right to assert counterclaims in their original answer." Id. (citing Chrysler Corp. v. Fedders Corp., 540 F. Supp. 706, 713 (S.D.N.Y. 1982)).
Another sister court held oppositely in an analogous situation. however. In American Home Products Corp. v. Johnson Johnson, 111 F.R.D. 448, 453 (S.D.N.Y. 1986), the Court found that the defendants could amend their answer as of right. There, plaintiff AHP requested and received the permission of a defendant, McNeil, to file an amended complaint. That stipulation "placed no restrictions on the permissible scope of either side's pleading." Id. As a result, McNeil did not require the court's permission to file an additional counterclaim or revise its prayer for relief on six counterclaims to include damages. Id. See also Veronico v. Pastapunto, 1999 WL 1216951 (S.D.N.Y. Dec. 17, 1999) (finding that Rule 15(a)'s "in response to" language does not limit the scope of amendments that defendants may make due to the "liberal standard for the amendment of pleadings" under the rule and Second Circuit case law).
Other courts have established a rule between the two apparent extremes above. The rule was most succinctly enunciated in Tralon Corp. v. Cedarapids, Inc., 966 F. Supp. 812, 832 (N.D. Iowa 1997), aff'd 2000 WL 84400 (8th Cir. Jan. 21, 2000):
[W]hen a plaintiff files an amended complaint which changes the theory or scope of the case, the defendant is allowed to plead anew as though it were the original complaint filed by the Plaintiff. . . . The obvious corollary is that if an amended complaint does not change the theory or scope of the case, a [defendant] must seek leave of court pursuant to Rule 15(a) before it can amend its answer to assert a counterclaim.
Id. (quoting Brown v. E.F. Hutton Co., 610 F. Supp. 76, 78 (S.D. Fla. 1985)).
A number of other district courts are in agreement with Tralon. E.g., Digital Privacy, Inc. v. RSA Sec. Inc., 199 F. Supp.2d 457, 459 (E.D. Va. 2002) (finding defendant was entitled to include five new counterclaims in its answer to amended complaint because answer expanded scope of case and that plaintiff "chose to amend its complaint six weeks before the scheduled trial date at its own peril"); E.I. Dupont De Nemours Co. v. Millennium Chems., Inc., 1999 WL 615164, at *4 (D. Del. Aug. 2, 1999); Salomon, S.A. v. Alpina Sports Corp., 737 F. Supp. 720, 722 (D. N.H. 1990) ("It seems somewhat inequitable to allow Salomon to revise their theory of the case yet deny defendants the same opportunity."); Synermed Int'l Inc. v. Laboratory Corp. of Am. Holdings, 1999 WL 1939253, at *1 (M.D. N.C. March 3, 1999) ("[B]ecause Synermed's second amended complaint expanded the theory or scope of its claims, the court finds that LabCorp had a right to assert its additional counterclaims without obtaining leave of the court."). See also 3 James W. Moore, et al., Moore's Fed. Prac. § 15.17[6] (3d ed. 1997) ("[W]hen a plaintiff's amended complaint changes the theory of the case, it would be inequitable to require leave of court before the defendant could respond with appropriate counterclaims."). But see Veronico, 1999 WL 1216951 (noting that Tralon was limited to "prohibiting a defendant from amending an answer late in the litigation to assert a new counterclaim against the defendant" and did not apply to the presented situation of adding defenses as to whether the plaintiff had asserted subject matter jurisdiction and stated a claim upon which relief can be granted).
Yet another theory evolved in Refuse Fuels Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 139 F.R.D. 576 (D. Mass. 1991), in which the Court determined that defendants could assert new counterclaims and new defenses as of right in response to complaints amended pursuant to Fed.R.Civ.P. 15(a), but could not do so to complaints amended pursuant to Fed.R.Civ.P. 15(d). Id. See also 27A Fed. Proc., L.Ed. § 62:267 ("When a complaint is filed pursuant to FRCP 15(a), defendants do not need leave to serve new counterclaims and to assert new defenses.") (citing Refuse).
The "in response to" language of Rule 15(a) supports the views expressed both by the Wechsler and by the Tralon line of cases. A defendant who is responding to an amended complaint cannot amend his answer as of right without any regard to the amendments taken by his adversary. However, the Wechsler-type cases take too narrow a view of what "responsive" answers may be. It is not enough that a defendant could, for instance, admit or deny the veracity of new allegations. If the plaintiff expands its case by adding new theories or claims, it cannot complain if the defendant seeks to do the same by averring new counterclaims.
The instant case does not fit into the Tralon paradigm, even though the Trustee has arguably expanded the scope of his claims by adding an alternative theory for relief under a previously pleaded claim, because this case involves the assertion of an affirmative defense about which Marcus had knowledge for a long period of time, instead of a counterclaim. As the Trustee notes, parties are required to act promptly to assert affirmative defenses rather than "`lie behind a log' and ambush a plaintiff with an unexpected defense." Venters v. City of Delphi, 123 F.3d 956, 967-68 (7th Cir. 1997).
In addition, Marcus has failed to demonstrate that the amendment was responsive to the change in the Complaint in order to comply with Wechsler. Marcus states that his amendment is responsive because it "relates to damages sought by Plaintiff" and the Trustee's amendment provided another route by which he could obtain a damages award. This is not sufficiently responsive. As the Trustee notes, every defense goes to damages sought by plaintiffs, either by stating that no damages should be had or that they should be offset. Such a rule would therefore vitiate any limitation on the ability to amend an answer as of right.
Marcus has failed to demonstrate that his addition of the Thirteenth Affirmative Defense was as of right in response to the Trustee's Amended Complaint. The affirmative defense therefore shall be stricken.
Conclusion
For the foregoing reasons, the Trustee's motion is granted and Marcus's Thirteenth Affirmative Defense is stricken.
It is so ordered.