Ben P. Fyke & Sons, Inc. v. Gunter Co.

Decision Date18 December 1973
Docket NumberNo. 5,O,5
Citation213 N.W.2d 134,390 Mich. 649
PartiesBEN P. FYKE & SONS, INC., a Michigan corporation, Plaintiff-Appellee, v. The GUNTER COMPANY, a Michigan corporation, Defendant-Appellant. ct. Term. 390 Mich. 649, 213 N.W.2d 134
CourtMichigan Supreme Court

Hyman & Rice, Southfield, for plaintiff-appellee, by David F. Simon, Southfield.

Alan G. Greenberg, Clarkston, for defendant-appellant.

Before the Entire Bench.

LEVIN, Justice.

The Court of Appels held that the trial judge was justified in denying the motion of the defendant, The Gunter Company, to amend its answer to set up an affirmative defense based on plaintiff Ben P. Fyke & Sons, Inc.'s failure to file an annual report and pay franchise fees. We reverse.

Fyke is seeking payment for services rendered under an agreement with Gunter. Gunter's answer admits that Fyke performed its obligations under the agreement. Gunter also admitted that it had failed and refused to pay the invoices submitted by Fyke.

Three months after filing its answer, Gunter sought to amend to allege as an affirmative defense under now repealed M.C.L.A. § 450.87; M.S.A. § 21.87 1 that Fyke lacked the capacity to maintain this action because the agreement was entered into and the work performed while Fyke was in default for failure to file its annual report and pay franchise fees.

During oral argument on the motion, Fyke's counsel attributed the greater than six-months lapse in filing the annual report and paying franchise fees to the distraught frame of mind of the person entrusted with the task whose husband was suffering from a serious illness.

The judge, after noting that the services had been performed and finding Fyke's non-filing 'justifiable,' denied Gunter's motion. Responding to GCR 1963, 118.1's standard that 'leave (to amend) shall be freely given when justice so requires,' the judge stated that to permit the amendment, which would possibly allow Gunter to escape a potential liability in excess of $21,000, would constitute a 'mockery of justice.'

Gunter sought and was granted leave to appeal. The Court of Appeals, 43 Mich.App. 144, 204 N.W.2d 79, in upholding the denial of the proposed amendment, said that a trial judge may properly 'evaluate the merits of the parties' respective claims' when deciding whether to permit an amendment.

We granted further leave to consider whether the 'merits' of a claim or defense a party seeks to raise by amendment may properly be considered in deciding whether to allow the amendment.

I

We have acknowledged the federal source of Rule 118 and have been guided by the federal precedents. LaBar v. Cooper, 376 Mich. 401, 405, 137 N.W.2d 136 (1965).

Our rule, as the federal rule, is 'designed to facilitate the amendment of pleadings except where prejudice to the opposing party would result.' United States v. Hougham, 364 U.S. 310, 316, 81 S.Ct. 13, 18, 5 L.Ed.2d 8, 14 (1960). A motion to amend ordinarily should be granted, and denied only for particularized reasons:

'In 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 by virtue of allowance of the amendment, futility of amendment, etc.--the leave sought should, as the rules require, be 'freely given." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222, 226 (1962).

To safeguard and implement the policy favoring amendment, this Court has directed that upon denial of a motion to amend 'such exercise of discretion should be supported by specific findings as to Reasons for the same'. LaBar v. Cooper, Supra, 376 Mich. p. 409, 137 N.W.2d 136, 140. (Emphasis supplied.)

II

Underlying the trial judge's denial of Gunter's motion to amend and the Court of Appeals' affirmance was the stated concern that allowance of the amendment would cause Fyke to lose his otherwise meritorious claim and thereby 'prejudice' him.

The possible impact of allowance of an amendment on the outcome of a case is not the kind of prejudice contemplated by Rule 118.1. The Committee Comment accompanying Rule 118 spells out the particular meaning of the word 'prejudice' in this context:

"Prejudice' refers to matter which would prevent a party from having a fair trial, or matter which he could not properly contest, e.g. when surprised. It does not refer to the effect on the result of the trial otherwise.' (Emphasis supplied.)

A number of courts have held that although allowance of the proffered amendment may cause the opposing party ultimately to lose on the merits this is not a factor to be considered in deciding whether to grant the motion. 2 '(T)he question of prejudice is presented by the Time at which it is offered rather than by the substance of what is offered. The possible prejudice, in other words, must stem from the fact that the new allegations are offered Late rather than in the original pleading, and not from the fact that the opponent may lose his case on the merits if the amendment is allowed, whereas he may win it if the amendment is denied.' James, Civil Procedure, § 5.2, p. 158 (emphasis by the author).

Apart from the immaterial 'prejudice' of ultimately losing its case, neither Fyke in argument nor the trial judge in his findings mentioned any other source of prejudice.

III

Fyke contends that in 'the furtherance of justice' a judge may properly consider the resulting equities of the proffered amendment. This is much like the contention, just discussed, that the meritoriousness of the claim or defense may be considered in deciding whether its allowance would be 'prejudicial.'

Fyke argues that the annual report defense is, or ought to be, 'disfavored' and that a judge may properly disallow a disfavored claim or defense offered by amendment.

The discretion confided to trial judges under the standard, 'leave shall be freely given when justice so requires,' is not boundless. In Burg v. B & B Enterprises, 2 Mich.App. 496, 500, 140 N.W.2d 788, 790 (1966), Judge (now Justice) T. G. Kavanagh wrote, '(W)e believe that (this) language * * * imposes a limitation on the discretion of the court necessitating a finding that justice would not be served by the amendment.' 3

While admittedly the parameters of the judge's discretion are incapable of being precisely delineated, a judge abuses this discretion when he utilizes it to obviate a recognized claim or defense.

The substantive basis of all claims and defense, 'favored' and 'disfavored' alike, are acts of the Legislature and the common-law decisions of this or other appellate courts. The Legislature, not without criticism, 4 concluded that stringent measures were necessary to bring about compliance with the annual report and franchise fee requirements. This Court has steadily enforced that legislative policy. 5

The allowance of an amendment is not an act of grace, but a right of a litigant seeking to amend '(i)n the absence of any apparent or declared reason--such as undue delay, bad faith or dilatory motive * * *, repeated failure to cure deficiencies * * *, undue prejudice * * *, futility of amendment, etc.' Foman v. Davis, Supra, p. 182, 83 S.Ct. p. 230.

If we were to recognize a judge's personal view of a claim or defense as a valid reason for rejecting an amendment, we would find it difficult to explain why his personal view should not also be relevant in assaying a claim or defense raised in the initial pleading.

An individual judge may not properly substitute his personal view of justice and sound public policy for the statutory, or common-law or court rule meant to apply.

There are some early statements, principally in cases where a statute of limitations defense was offered by amendment, that a court may properly deny an amendment which seeks to introduce a 'disfavored plea.' 6 Today a statute of limitations defense can be raised by amendment like any other matter (see fn. 14). Those early statements have thus lost their impulse. For this reason and the other reasons stated, we do not find these statements persuasive.

We observe further that to allow the probable disposition of a case to be a factor in deciding whether to permit an amendment would deny the parties a full hearing on all the issues, facts and law, and inevitably would produce decisions based on scanty records composed of pleadings and moving papers and possibly, as in this case, oral argument.

No witnesses were present at the hearing on Gunter's motion to amend; no testimony was taken. Gunter had no occasion to challenge Fyke's factual assertions justifying its late filing of its annual report. All the 'facts' were gleaned from Fyke's unverified statements.

On a motion to amend, a court should ignore the substantive merits of a claim or defense unless it is legally insufficient on its face and, thus, as expressed in Forman v. Davis, Supra, it would be 'futile' to allow the amendment. See 6 Wright & Miller, Federal Practice & Procedure, § 1487, p. 432.

IV

Fyke, relying on Wilson v. Eubanks, 36 Mich.App. 287, 293, 193 N.W.2d 353 (1971), where the Court of Appeals reversed an allowance of an amendment which sought to introduce a 'technical' foreign statute of limitations defense, argues that Gunter's failure to plead in its answer the arguably technical annual report defense means that it too failed to 'cut square corners' and thus the judge's rejection of the amendment was justified.

In Wilson v. Eubanks, Supra, the judge allowed the amendment two years after the action was commenced. Had the defendant initially raised the defense the plaintiffs would have been spared the two-year cost of prosecuting their action. During this period, the plaintiffs had participated in pretrial discovery, none of which was related to the statute of limitations defense. The costs incurred by the plaintiffs during the two-year delay in the assertion of the defense was a factor in the Court...

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