Bild v. Konig

• Decision Date: 03 July 2014
• Docket Number: 09-CV-5576 (ARR) (VVP)
• Parties: RAFAEL BILD, Plaintiff, v. MICHAEL KONIG, Defendant.
• Court: U.S. District Court — Eastern District of New York

RAFAEL BILD, Plaintiff, v. MICHAEL KONIG, Defendant.

09-CV-5576 (ARR) (VVP)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

Dated: July 3, 2014

NOT FOR ELECTRONIC

OR PRINT PUBLICATION

OPINION AND ORDER

ROSS, United States District Judge:

Plaintiff Rafael Bild commenced this action against defendants Abraham Wieder and Michael Konig in 2009, seeking to recover the principal and interest on a $3 million loan that Bild made to Wieder in 1998. Following a bench trial in April 2013, this court found Wieder liable to Bild for the principal and interest on the loan. Now before the court is Bild's claim against Konig. Bild asserts that Konig entered into a contract with Wieder in March 2007 in which Konig assumed responsibility for repaying Wieder's debt to Bild. Through this action, Bild seeks to enforce the March 2007 agreement between Wieder and Konig as a third-party beneficiary. The case is scheduled for a jury trial beginning on August 11, 2014.

Konig has moved to amend his answer to assert a defense of illegality. Bild opposes the motion. At this stage of the litigation, "a party may amend its pleading only with the opposing party's written consent or the court's leave." Fed. R. Civ. P. 15(a)(2). "It is settled that the grant of leave to amend the pleadings pursuant to Rule 15(a) is within the discretion of the trial court." Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330 (1971). "A district court has discretion to deny leave for good reason, including futility, bad faith, undue delay, or undueprejudice to the opposing party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007).

For the reasons set forth below, I find that Konig has shown undue delay in bringing the request to amend his answer. I also find that the proposed amendment would be futile because, as a matter of law, Konig cannot assert an illegality defense. Accordingly, Konig's motion to amend his answer to assert a defense of illegality is denied.

DISCUSSION

I. Proposed Illegality Defense

In the previous trial between Bild and Wieder, this court found that those parties entered into a loan agreement on December 31, 1998. May 15, 2013 Opinion and Order, Dkt. #285, at 7. Wieder executed a promissory note in favor of Bild in the principal amount of $3 million, with interest to accrue at an annual rate of eleven percent. Id. Bild brought suit for breach of the loan agreement and promissory note, and Wieder asserted that Bild's claim was barred by New York's six-year statute of limitations for contract actions. Id. at 1. After a bench trial in April 2013, the court found that Wieder was equitably estopped from asserting the statute of limitations defense and therefore found him liable to Bild for the entire $3 million principal balance on the loan along with interests and costs of collection. Id. at 56.

Bild is now seeking to enforce a March 2007 agreement between Wieder and Konig. The agreement stated, in relevant part: "Wieder and Konig both acknowledge the outstanding loan given by Rafael Bild . . . . Konig agrees to fully satisfy the $3,000,000 outstanding loan." Dkt. #322, Ex. D, at ECF 3. In exchange, the agreement entitled Konig to tax losses related to theloan. Id. Bild argues that he is a third-party beneficiary of the March 2007 agreement and that Konig breached his obligation in it by failing to repay Wieder's debt to Bild.

Konig seeks to amend his answer to assert the defense of illegality. He argues that the underlying 1998 loan between Wieder and Bild was part of an unlawful scheme that renders the March 2007 agreement to repay the loan unenforceable. Konig relies on testimony from Bild's trial against Wieder in April 2013. Bild testified that he funded the loan to Wieder in part by transferring $1.6 million from the account of Commercial Consultants Ltd. (CCL), a corporation that Bild owned in Israel. Dkt. #322, Ex. C, at ECF 3. On cross-examination, Bild testified that he transferred money to CCL's account from Hampton International ("Hampton"), a Liberian corporation with an account in Switzerland. Id. at ECF 5-6. Bild testified that "some" of the money in the Hampton account came from his jewelry business, while "it could have been" that some of the money was inherited from his parents. Id. at ECF 6. He also testified that some of the business proceeds that he transferred to Hampton's account were not reported to the Internal Revenue Service ("IRS"). Id. He testified that "sometimes" when customers of his business paid him with checks, he sent the funds to overseas accounts and did not report the revenue to the IRS. Id. at ECF 11.

Konig asserts that this trial testimony demonstrates that Bild's $3 million loan to Wieder was part of a tax evasion and money laundering scheme. Bild argues that there is "no evidence in the record that Bild's loan served" a purpose of evading taxes or laundering funds. Dkt. #324 at 3. I emphasize that I make no finding regarding the truth of the allegations and consider only whether Konig should be given leave to assert the defense of illegality at trial.¹

II. Undue Delay

Bild argues that Konig's request to amend his answer should be denied because Konig failed to assert an illegality defense at an earlier stage of this four and a half year litigation. I agree with Bild that Konig's request must be denied on the grounds of undue delay.

Under Rule 15(a), when a party seeks leave to amend the pleadings, the court should "freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2). "Mere delay is not, of itself, sufficient to justify denial of a Rule 15(a) motion." Parker v. Columbia Pictures Indus., 204 F.3d 326, 339 (2d Cir. 2000) (internal quotation marks omitted). However, under Rule 16, the court is required to issue scheduling orders that "limit the time to . . . amend the pleadings." Fed. R. Civ. P. 16(b)(3)(A). A district court has discretion to deny leave to amend the pleadings after the deadline set by the scheduling order, unless the moving party can establish "good cause." Parker, 204 F.3d at 339. "[A] finding of 'good cause' depends on the diligence of the moving party." Id. at 340.

In this case, Bild filed the complaint against defendants Konig and Wieder on December 21, 2009. Dkt. #1. Konig filed an answer on March 24, 2010, in which he asserted a number of affirmative defenses but did not assert a defense of illegality. Dkt. #12.² On March 8, 2011, Magistrate Judge Viktor V. Pohorelsky entered a scheduling order setting a deadline of June 1, 2011 to file motions to amend the pleadings to add claims or defenses. Dkt. #76.

Konig has failed to show good cause for requesting to add a defense over three years after the deadline set by the scheduling order. He argues that he was not aware of the factual basis for the illegality defense at earlier stages of the litigation. Dkt. #322 at 2. He asserts that throughout discovery, "Bild repeatedly testified that he had no idea of the source of his funds . . . given toWieder." Id. He also asserts that Bild "claimed he had no knowledge of his own tax returns and whether the [funds] were declared income or part of Bild's tax fraud." Id. Konig argues that he "attempted repeatedly . . . to obtain additional discovery regarding the source of Bild's money and his tax returns, but was repeatedly rebuffed by the Court." Id. at 5. Therefore, he argues, the facts underlying the proposed illegality defense came to light for the first time at Bild's trial against Wieder in April 2013, when Bild testified that he funded the loan from his overseas accounts and that he did not report all of his business income to the IRS. Id.

Konig's assertion that he first learned about facts relevant to an illegality defense from Bild's testimony at trial is simply untrue. The history of the protracted and highly litigious discovery process shows that Konig sought and received information regarding the source of the loan funds and Bild's tax returns. Through this discovery, he gained access to ample facts permitting at least the assertion of an illegality defense well before the summary judgment stage of the proceeding. To the extent that the court denied Konig's requests for additional discovery regarding Bild's offshore accounts or tax records, Konig's asserted justifications for the discovery he sought did not reasonably support his requests.

For example, Konig repeatedly justified his requests for additional discovery by contending that Bild had failed to prove that the $3 million loan was ever made. On June 9, 2011, Judge Pohorelsky granted Konig's request for discovery "concerning the existence of the loan, including how it was funded." Dkt. #96. Specifically, Judge Pohorelsky ordered Bild to disclose all documents relating to the sources of the $3 million paid to Wieder, finding that "the absence of sources would tend to prove that the loan was not made, or not made in the total amount claimed." Id. In a motion to compel on July 22, 2011, Konig asserted that "plaintiff has refused to provide any evidence that he loaned the alleged $3 million" and sought discovery ofBild's tax returns to determine whether they reflected sufficient income to fund the loan. Dkt. #102 at 4. On August 1, 2011, Judge Pohorelsky ordered Bild to disclose tax returns for 1998, the year the loan was made, and 1999. Dkt. #106. Judge Pohorelsky found that "[t]he plaintiff's financial capacity to make a $3 million loan, as he alleges, is a central issue in this case, and as he is unable to demonstrate that capacity by direct evidence, his tax returns would likely disclose income or assets (or the lack thereof) that would bear on his financial capacity." Id. at 2. On September 12, 2011, Judge Pohorelsky ordered Bild to disclose financial statements and credit applications for the years 1998 and 1999. Dkt. #122. Judge Pohorelsky also allowed Konig to conduct a limited deposition of Bild's accountant regarding Bild's 1998 and 1999 tax returns, noting that "[t]...