Opinion
Civ. No:99-3313, SECTION: "G" (2).
March 9, 2001.
MEMORANDUM AND ORDER
Background
Plaintiffs, Allyson May Sanderson and David Israel, are co-trustees for the Sanderson Children's Trust, created to benefit the four children of Michael Sanderson. Plaintiffs seek to file a second amended complaint, which defendants oppose. The underlying facts of this action have been recited in other rulings, and need not be repeated here.
For the most recent statement, see Minute Entry denying in part and granting in part the defendants' motion for summary judgment, dated March 7, 2001.
Discussion
Plaintiffs' proposed second amended complaint purports to assert three new claims: 1) that they are entitled to assert the claims of Co-Source against the defendants because Co-Source assigned these claims to plaintiffs; 2) that the May 20, 1999 Release Agreement between the parties should be annulled because the Trust, acting through David Israel, was fraudulently induced to sign the agreement, and/or because the Release Agreement was signed only by Israel, rather than by both trustees as allegedly required by Louisiana law; and 3) that they are entitled to punitive damages.
No statutes or case law have been cited for this proposition by plaintiffs in any of their several briefs.
1. Assignment of Co-Source's Claims
Plaintiffs named H.I.G. P-XI Holding, Inc. (now, Co-Source), as a defendant in the original complaint. On January 4, 2001, Co-Source assigned to plaintiffs all of their "rights, claims., complaints, demands and causes of action" against H.I.G. Capital Management, Inc., H.I.G. Capital, LLC, and H.I.G. Investment Group, L.P., as well as against their respective officers, directors, managers and partners, and the officers and directors of Co-Source. The assignment was made "for good and valuable consideration." The nature and value of the consideration has not been revealed. However, it appears that at least part of the consideration was the dismissal of Co-Source from the lawsuit, since plaintiffs did not include Co-Source as a defendant in the first amended and restated complaint.
Assignment of Rights, Exhibit 1 to plaintiffs proposed second amended complaint.
Defendants argue that plaintiffs' motion for leave to amend their complaint to assert Co-Source's rights pursuant to the assignment should be denied on the grounds of futility. They claim that the assignment is "nothing more than an invalid assignment of litigious rights."
Defendants' opposition to plaintiffs' motion for leave to file second amended complaint, p. 13.
Under Louisiana law, a right is litigious "when it is contested in a suit already filed." La.Civ. Code Art. 2652. Co-Source did not assert any rights against any of the H.I.G. entities or their directors or officers in this lawsuit, nor was the court directed to any other lawsuit in which Co-Source has asserted any right against any of these defendants. Accordingly, there was no assignment of a litigious right. Rather, there was an assignment of a "nascent cause of action for a tort that is nothing more than a dispute between two parties. . . ." Parich v. State Farm Mutual Auto. Ins. Co., 919 F.2d 906 (5th Cir. 1990). Defendants claim that a nascent dispute is not transferable under Louisiana law.
In Parich, the Fifth Circuit ruled that an attempted assignment of a litigious right was invalid because the claim had not been sued upon until ten days after execution of the assignment. The court stated in a footnote that Louisiana law provides that a nascent cause of action for a tort is nothing more than a dispute between two parties and is not transferable. It is only when the dispute develops into an actual lawsuit that it becomes a litigious right that is assignable. Id. at p. 917, fn. 34.
The Fifth Circuit cited three Louisiana cases in Parich. In the first case, Clement v. Sneed Bros., 116 So.2d 169 (1959), plaintiffs sued for cancellation of an oil and gas lease, then sold their cause of action to a third party, who was substituted as the plaintiff. The Supreme Court, finding that this was the assignment of a litigious right, was required to construe the defendants' rights under La.Civ. Code Art. 2652, which entitles an obligor to obtain release by paying the transferee the price of the transfer. The court noted that the object of Art. 2652 is "to prevent the purchasing of claims from avarice or to injure the debtor" and "to favor the party against whom the matter in litigation is transferred over one who speculates in lawsuits." Id., at 622, citing Smith v. Cook, 180 So. 469 (La. 1938). Although the case does reflect that the sale of litigious rights is subject to certain rules, it does not suggest that a nascent dispute is not assignable.
The second case cited by the Fifth Circuit is Hawthorne v. Humble Oil Refining Co., 210 So.2d 110 (La.App. 1st Cir. 1968), cert. den'd. InHawthorne, as in Clement, supra, the plaintiffs filed for cancellation of a mineral lease, then assigned a portion of its rights to a third party. Humble, the defendant, sought to invoke the provisions of La.Civ. Code Art. 2652 by depositing the amount paid by the third party to the lessee and requesting redemption of the property. The court, noting that the transfer took place after the petition was filed but before an answer, found that the assignment was not the transfer of a litigious right, since there was no contest in the suit at the time of assignment. Accordingly, the court found that Humble was not entitled to the benefits of Art. 2652. However, the court does not hold that a nascent dispute is not assignable.
In the third case cited by the Fifth Circuit, U.S. Fidelity Guaranty Co. v. Richardson, 486 So.2d 929 (La.App. 1st Cir. 1986), a child injured another child while at school. USF G, the insurer of the School Board, paid the injured child's family and was subrogated to the family's rights. The tortfeasor's homeowner's insurer claimed that USF G was suing under the assignment of a litigious right, and that the homeowner's insurer should therefore be entitled to the benefits of La.Civ. Code 2652. The court disagreed, since no suit had been filed. Further, the transaction was clearly a conventional subrogation which occurs when a third person pays the debt of another and becomes subrogated to the creditor's rights.
None of the three cases referred to in dicta by the Fifth Circuit in the Parich decision were essential to the holding in that case, and they do not support the present defendants' claim that a nascent dispute is not assignable. In fact, Louisiana jurisprudence is to the contrary. InWood v. Zor, Inc., 154 So.2d 632, 635 (La.App. 4th Cir. 1963), the court held that "a right which is not yet in litigation, even though it cannot be enforced unless contested in a law suit [sic], is not a litigious right under Art. 2562 and may be validly purchased."
Since I find that Co-Source's assignment of its rights against the HIG entities and their officers and directors is a valid assignment, I do not address the plaintiffs' alternative argument that the assignment was a conventional subrogation.
However, although I find that the assignment is valid and plaintiffs should be entitled to assert Co-Source's claims against the HIG entities, their officers and directors, plaintiffs have failed to specifically allege in their second amended complaint the nature of the claims they intend to assert. Thus, I grant plaintiffs until March 20, 2001 to amend their second amended complaint to reflect not only the assignment but the nature of the claims which they assert in the position of Co-Source. I grant this time reluctantly, since plaintiffs have already had substantial latitude to amend their pleadings. The second amended complaint must appropriately be revised within ten days, or plaintiffs' motion to amend will be dismissed.
2. The Release Agreement
Plaintiffs also seek to amend their complaint to claim, for the first time, that the Release Agreement they entered into with Co-Source on May 20, 1999, is invalid. Their claim of fraudulent inducement has already been fully addressed and dismissed in my Minute Entry of March 7, 2001, in which the defendants' motion for summary judgment was granted in part. Plaintiffs are not entitled under Pennsylvania law to seek invalidation of their agreement on the theory of fraudulent inducement. However, they also claim that the Release Agreement is invalid for the reason that only one of the two trustees signed the agreement, and Louisiana law provides that both must sign.
See Minute Entry of March 7, 2001, at pp. 10-14.
Plaintiffs have failed to direct me to any statute or case law that suggests that where there are two trustees, both must sign all documents. La. R.S. 9: 2113, not cited by plaintiffs, does provide that where there are two trustees, the powers shall be exercised only by both of them or unless otherwise provided by the trust instrument. I have not been provided with a copy of the trust instrument. Further, I do not necessarily interpret this statute to require signature by both trustees, where both have concurred between themselves that the Release Agreement should be signed. However, I do not need to reach this issue, since it is clear that the Trust ratified or confirmed the purported relative nullity by accepting payment of the $6.4 million received upon execution of the Release Agreement. The plaintiffs have not suggested that these funds were not deposited into the Trust account, and used or invested for the benefit of the Trust.
If the Release Agreement should have been signed with the signature of both trustees, then the agreement is a relative nullity. A relatively null contract may be confirmed. La.Civ. Code Art. 2031; Hessick v. Petro Publications, Inc., 684 So.2d 466 (La. 1st Cir. 1997); writ den'd; Dugas v. Adoption of Dugas, 614 So.2d 228 (La.App. 3d Cir. 1993). The trust confirmed the Release Agreement by accepting and retaining the $6.4 million payment.
Since plaintiffs' claim that the Release Agreement is invalid would be futile, I deny their request for leave to amend their complaint to invalidate the Release Agreement.
3. Punitive Damages
On October 29, 1999, plaintiffs' complaint was removed to federal court. Now, approximately sixteen months later, they seek to amend their complaint to allege a claim for punitive damages. Plaintiff provide no reason as to why they did not assert this claim in their original or first amended and restated complaint.
Federal Rule of Civil Procedure 15(a) provides that leave to amend pleadings "shall be freely given when justice so requires." This language reflects a bias in favor of granting leave to amend. However, this bias is not automatic. Southmark Corporation v. Schulte Roth Zabel, 88 F.3d 311 (5th Cir. 1996).
In deciding whether to grant leave to amend, a court may consider "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of amendment."Southmark, at 314; quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).
Defendants argue that the amendment would be futile, for the reason that punitive damages are not permissible under Louisiana law. Plaintiffs have responded by pointing out that the proposed amendment does not state whether the punitive damage claim is under Louisiana law or the law of other states a Clearly, they cannot assert a claim for punitive damages under the Louisiana tortious interference with contract claim. Plaintiffs have failed to state in either their proposed amended complaint or in their several memoranda whether there are any other remaining claims in this litigation for which punitive damages may be sought.
I further note that there appears to be undue delay in bringing this claim for punitive damages. Their failure to assert a claim as soon as they could have "is properly a factor to be considered in deciding whether to grant a leave to amend." Carson v. Polley, 689 F.2d 562, 584 (5th Cir. 1982). However, the mere fact that a claim was not presented as soon as possible "does not vest the district court with authority to punish the litigant." Id.
Discovery in this matter is in its earliest phase. Defendants filed a motion to dismiss the original complaint, which was granted in part. When the plaintiffs filed their first amended and restated complaint, defendants filed new dispositive motions, which have only recently been decided. Although I find that the plaintiffs have been dilatory in making their claim for punitive damages, I do not find that defendants are prejudiced by this late filing. Accordingly, I will allow plaintiffs to assert their claim for punitive damages, if they are able to amend their second amended complaint to assert a claim for such damages under the appropriate state law in connection with whichever remaining claims they feel entitle them to punitive damages.
Accordingly,
Considering the foregoing,
IT IS ORDERED that plaintiffs are granted until March 20, 2001, to submit a second amended complaint which alleges the specific claims which they are asserting under their assignment from Co-Source;
IT IS FURTHER ORDERED, that plaintiffs' motion to amend their complaint to allege the invalidity of the Release Agreement is DENIED;
IT IS FURTHER ORDERED, that plaintiffs are granted until March 20, 2001, to submit in their second amended complaint a claim for punitive damages under the appropriate state law in connection with any remaining claims which they allege entitle them to punitive damages.