Rachman Bag Co. v. Liberty Mut. Ins. Co.

• Decision Date: 08 September 1994
• Docket Number: D,No. 214,214
• Citation: 46 F.3d 230
• Parties: RACHMAN BAG COMPANY, a partnership composed of Plains Bag and Bagging Co., Inc., and Rachman Bag Co., Inc., Plaintiff-Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee. ocket 94-7115.
• Court: U.S. Court of Appeals — Second Circuit

Page 230

46 F.3d 230

31 Fed.R.Serv.3d 1393

RACHMAN BAG COMPANY, a partnership composed of Plains Bag and Bagging Co., Inc., and Rachman Bag Co., Inc., Plaintiff-Appellant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 214, Docket 94-7115.

United States Court of Appeals, Second Circuit.

Argued Sept. 8, 1994. ^*

Decided Feb. 1, 1995.

Neal Factor, Factor & Shweky, New York City, for plaintiff-appellant.

Kimberly S. Penner, Sedgwick, Detert, Moran, & Arnold, New York City (David J. Daly, Lecomte, Emanuelson, Tick, & Doyle, Boston, MA, on the brief), for defendant-appellee.

Before: MESKILL, MAHONEY, and WALKER, Circuit Judges.

WALKER, Circuit Judge:

This action is brought by Rachman Bag Company ("Rachman"), an obligee on a surety bond, against the surety Liberty Mutual Insurance Company ("Liberty") for payment of the bond. Plaintiff appeals a judgment of the United States District Court for the Eastern District of New York (Edward R. Korman, Judge ) granting defendant summary judgment on its defense of fraudulent concealment and denying plaintiff summary judgment on its claim. Rachman contends that the district court abused its discretion in allowing Liberty to amend its amended answer to include the defense and that there are genuine issues of material fact as to For the reasons explained below, we reverse the order of the district court and remand.

whether Rachman engaged in fraudulent concealment.

BACKGROUND

On December 9, 1988, Textiles of America ("TOA") obtained a bond from defendant Liberty naming Rachman as obligee and Liberty as surety. The bond purported to secure a normal business transaction between TOA and Rachman. Unbeknownst to Liberty, however, the bond actually secured an arrangement whereby TOA would repay through services over $400,000 stolen from Rachman by TOA's president, Ronald Halpern. Liberty's refusal to honor the bond after learning of the true nature of the underlying transaction led to this suit.

Rachman and TOA began doing business in 1987. During that year, TOA both purchased textiles from Rachman and solicited orders from others to be filled by Rachman. Within a few months, Rachman's attorney and partners learned that Halpern had used a variety of shady practices to pilfer money and goods from Rachman. In particular, Halpern paid Rachman with bad checks, retained payments destined for Rachman from customers, and kept goods rejected by Rachman customers who were repaid by Rachman.

Rachman confronted TOA with its discovery in late 1987 and served Halpern with a civil complaint. After intensive negotiations, the two parties reached an agreement under which Rachman would refrain from prosecuting the complaint and Halpern would repay his debt by obtaining business for Rachman. A few months later, however, Rachman learned that Halpern had continued his unseemly practices and had defaulted on the agreement. As a result, TOA's obligation to Rachman stemming from Halpern's thievery had risen to over $400,000. Upon learning this information, Rachman ceased its dealings with Halpern and TOA.

Halpern approached Rachman to make amends in November, 1988. After acknowledging his wrongdoing, Halpern proposed another arrangement under which he would solicit orders for Rachman's textiles and return a portion of TOA's profit as repayment for the thefts. As part of the deal, Halpern requested an additional loan from Rachman. When Rachman's partners expressed reluctance, Halpern offered to obtain a surety bond to secure his performance. The two parties reached an oral agreement on December 9, 1988; the same day, Halpern obtained a $350,000 bond from Liberty as security.

When obtaining the bond from Liberty, Halpern did not explain the true nature of the arrangement between TOA and Rachman. Halpern told Liberty representatives only that the bond was needed to secure a contract for delivery of textiles. He did not explain that the contract was for the repayment of an antecedent debt, much less that the obligation arose from Halpern's admittedly wrongful conduct. He also did not disclose that he had defaulted on a nearly identical prior agreement. Halpern told Liberty that the bond was to secure a "written agreement ... for Delivery of Institutional Textiles" at a time when Rachman and TOA had yet to put the arrangement in writing. Liberty had previously provided bonds to TOA and, taking Halpern at his word, conducted essentially no investigation beyond interviewing Halpern before issuing the bond to TOA on December 9.

While the foregoing facts are not in dispute, the same cannot be said of the subsequent communications between Rachman and Liberty. Glendora Harris, a Liberty representative, testified that she called Rachman in late December, 1988 to inquire about the status of the transaction and was referred to Rachman's attorney, Neal Factor. She recounted that Factor asked whether Liberty had a copy of the contract and then mentioned a loan. Harris testified that Factor, upon learning that Liberty knew very little about the underlying transaction, did not explain its true nature but simply agreed to provide Liberty with a copy of the contract. At that time, a written contract still had not been executed.

Factor, on the other hand, testified that he told someone from Liberty that the contract On January 12, 1989, Rachman and TOA finally executed a written contract. The contract for "repayment of the indebtedness" specified that TOA was to repay Rachman $10,000 per month for the first two years of the contract and approximately $13,000 per month for the third year. At TOA's option, payment would be either in cash, textiles, or profits from new sales contracts solicited for Rachman by TOA. It is unclear whether this contract replaced, amended, or merely memorialized the earlier oral agreement. In any event, Halpern and Factor persuaded a Liberty representative to attach a copy of the contract to the bond and Factor then convinced Liberty to alter the face of the bond to refer to the new contract.

involved an antecedent debt. Factor further stated that he contacted Liberty in January to explore why the bond had not been prorated, as is customary for bonds that guarantee debts. He found that the Liberty representative, Adrian Marshall, did not understand either his question or the nature of the contract that the bond guaranteed. When he asked to speak to the underwriting department in order to clear up the misunderstanding, Liberty refused to permit him to do so.

In its attempt to secure Liberty's cooperation in this matter, Rachman revealed little about the arrangement that the bond secured. When Liberty's Adrian Marshall asked Factor whether the contract involved repayment of a loan, Factor responded that TOA owed Rachman some money "from business." TOA was even less candid; when Liberty asked Halpern about the antecedent debt mentioned in the January 12 contract, Halpern responded that it merely referred to the fact that Rachman had prepaid for goods under the agreement.

TOA defaulted under the January 12 contract in early March, 1989. On April 12, Rachman informed Liberty of the default. Liberty refused to pay on the bond, and, on November 2, 1989, Rachman commenced this action. In June, 1993, after almost three years of extensive discovery, Liberty asked for and was granted leave to amend its amended answer to include a defense of fraudulent concealment. Both parties subsequently moved for summary judgment. The district court granted summary judgment in favor of Liberty on its fraudulent concealment defense and denied summary judgment to Rachman. Rachman appealed.

DISCUSSION

Rachman raises three principal points on appeal. First, Rachman argues that the district court abused its discretion in granting Liberty leave to amend its answer to add the defense of fraudulent concealment. Second, Rachman challenges the district court's conclusion that Rachman engaged in fraudulent concealment as a matter of law. Finally, Rachman argues that it is entitled to summary judgment in its favor since it did not have the opportunity to communicate information to Liberty. We address each contention in turn.

I. Leave to Amend

Under the Federal Rules of Civil Procedure, a party may amend its pleading once as a matter of right before a responsive pleading is served or, if no responsive pleading is permitted and the case has not yet been placed on the trial calendar, within twenty days after the pleading is served. After that point, absent written consent from the opposing party, leave to amend must be obtained from the district court. Fed.R.Civ.P. 15(a). However, Rule 15(a) specifies that "leave shall be freely given when justice so requires." Id. The Supreme Court has emphasized that amendment should normally be permitted, and has stated that refusal to grant leave without justification is "inconsistent with the spirit of the Federal Rules." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). Accordingly,

[i]n the absence of any apparent or declared reason--such as 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 ..., etc.--the leave sought should, as the rules require, be "freely given."

Id. Delay alone unaccompanied by such a "declared reason" does not usually warrant Here, Liberty moved to amend its answer more than four years after the complaint was filed. While Liberty's reasons for the delay are not entirely clear, Rachman has offered no reason, such as prejudice or bad faith on Liberty's part, to call the district court's decision into question. Liberty apparently included the defense of fraud in its original answer, and only withdrew it after stating that it still suspected fraud but required discovery to substantiate its claim. In addition, the principal issue in the case changed several times during the four years of...