DCD Programs, Ltd. v. Leighton

Decision Date27 November 1987
Docket NumberNo. 86-6546,86-6546
Citation833 F.2d 183
PartiesFed. Sec. L. Rep. P 93,543, 9 Fed.R.Serv.3d 823 DCD PROGRAMS, LTD., et al., Plaintiffs-Appellants, v. Michael W. LEIGHTON, et al., Defendants, Hill, Farrer & Burrill, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Stein, Sanger & Rick M. Stein, Palm Springs, Cal., for plaintiffs-appellants.

William P. Kannow, Clinnin, Siracuse & Belcher, Los Angeles, Cal., for defendant-appellee Hill, Farrer & Burrill.

Appeal from the United States District Court for the Central District of California.

Before ANDERSON, FERGUSON and NOONAN, Jr., Circuit Judges.

FERGUSON, Circuit Judge:

This appeal comes from the Central District of California where the court denied a motion for leave to submit a fourth amended complaint. Appellants seek to amend their complaint to add appellee, the law firm of Hill, Farrer & Burrill, as a defendant to the suit.


This case was brought by a number of limited partnerships seeking damages from numerous individual and corporate defendants. Hill, Farrer & Burrill (HFB), was not named as a defendant in the original complaint. The original complaint alleged violations of both federal and state securities laws. More specifically, it was alleged that the corporate defendants offered and sold "investment contracts" to the limited partnerships in derogation of the registration and anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The limited partnerships fall into two categories. First are the 1982 partnerships which were research and development partnerships formed to develop "state-of-the-art" commodities trading programs. Second are the 1983 partnerships which purchased an investment contract called the "Futures Market Advisor Program" from a defendant corporation and its affiliated companies. The 1983 partnerships would serve as commodity trading advisors for licensees of the programs developed by the 1982 partnerships. These advisors were to form commodity trading pools for the trade of commodities in accordance with signals generated to the advisors from the corporate defendant-licensor of the Futures Market Advisor Program. Substantial revenues were expected to be produced through this scheme.

HFB issued numerous tax opinions to the limited partnerships discussing aspects of the proposed investment scheme. At various times throughout the period covering the events relevant to this suit, HFB represented both the corporate defendants and the limited partnerships. Appellants (the limited partnerships) believe that HFB violated federal and state securities laws through material misrepresentations and omissions in the tax opinions they authored. Appellants also believe that HFB was professionally negligent in regard to its representation of the appellants. Consequently appellants seek to join HFB as a defendant to the action.


The original complaint in this suit was filed February 13, 1985. In June 1985 the appellants filed for and were subsequently granted leave to amend their original complaint to delete a party plaintiff and add a new party defendant. The first amended complaint was filed September 30, 1985. A second amended complaint was filed March 7, 1986. As of this point HFB had not been named a party to the suit. In April 1986, appellants brought a motion again seeking leave to amend, this time to add appellee as a defendant. After a hearing on the motion was conducted in May 1986, appellants were given permission to file their third amended complaint.

After service of this complaint, HFB brought a motion to dismiss the claims against them under Federal Rule of Civil Procedure 12(b)(6). The motion was heard on July 14, 1986 and on July 21, 1987 the district court issued an order dismissing the third amended complaint as to HFB "without prejudice". The parties dispute what was said at the hearing as to whether the court encouraged or discouraged appellants' suggestion that they submit a motion for leave to file a fourth amended complaint.

On July 31, 1986 appellants again filed a motion for leave to amend. 1 The district court denied the motion without explanation or findings.

The only issue raised on appeal is whether the district court abused its discretion in denying appellants leave to file a fourth amended complaint. 2


Federal Rule of Civil Procedure 15(a) provides that a party may amend their complaint once "as a matter of course" before a responsive pleading is served, after that the "party may amend the party's pleading only by leave of court or by written consent of the adverse party and leave shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Thus "after a brief period in which a party may amend as of right," leave to amend lies "within the sound discretion of the trial court." United States v. Webb, 655 F.2d 977, 979 (9th Cir.1981).

The denial of a motion to amend is reviewed for abuse of discretion. Loehr v. Ventura County Community College Dist., 743 F.2d 1310, 1313 (9th Cir.1984); Klamath-Lake Pharm. v. Klamath Med. Serv. Bureau, 701 F.2d 1276, 1292 (9th Cir.1983). In exercising its discretion "a court must be guided by the underlying purpose of Rule 15--to facilitate decision on the merits rather than on the pleadings or technicalities." Webb, 655 F.2d at 979.

This court has noted "on several occasions ... that the 'Supreme Court has instructed the lower federal courts to heed carefully the command of Rule 15(a), F[ed].R.Civ.P., by freely granting leave to amend when justice so requires.' " Gabrielson v. Montgomery Ward & Co., 785 F.2d 762, 765 (9th Cir.1986) (quoting Howey v. United States, 481 F.2d 1187, 1190 (9th Cir.1973) (citations omitted). Thus "[r]ule 15's policy of favoring amendments to pleadings should be applied with 'extreme liberality.' " Webb, 655 F.2d at 979 (citing Rosenberg Brothers & Co. v. Arnold, 283 F.2d 406 (9th Cir.1960) (per curiam)).

This liberality in granting leave to amend is not dependent on whether the amendment will add causes of action or parties. It is, however, subject to the qualification that amendment of the complaint does not cause the opposing party undue prejudice, Acri v. International Ass'n of Machinists, 781 F.2d 1393, 1398-99 (9th Cir.), cert. denied, --- U.S. ----, 107 S.Ct. 73, 93 L.Ed.2d 29 (1986); United States v. City of Twin Falls, 806 F.2d 862, 876 (9th Cir.1986), is not sought in bad faith, Howey, 481 F.2d at 1190-91, and does not constitute an exercise in futility. Klamath, 701 F.2d at 1293.

Four factors are commonly used to determine the propriety of a motion for leave to amend. These are: bad faith, undue delay, prejudice to the opposing party, and futility of amendment. Loehr, 743 F.2d at 1319; Howey, 481 F.2d at 1190. These factors, however, are not of equal weight in that delay, by itself, is insufficient to justify denial of leave to amend. Webb, 655 F.2d at 980; Hurn v. Retirement Fund Trust of Plumbing, 648 F.2d 1252, 1254 (9th Cir.1981). 3

This court has also held that "an action should not be dismissed for lack of jurisdiction without giving the plaintiff an opportunity to be heard unless it is clear the deficiency cannot be overcome by amendment." Jones v. Community Redevelopment Agency, 733 F.2d 646, 650 (9th Cir.1984) (quoting May Department Store v. Graphic Process Co., 637 F.2d 1211, 1216 (9th Cir.1980)); see Kelson v. City of Springfield, 767 F.2d 651, 656 (9th Cir.1985); Dan Caputo Co. v. Russian River County Sanitation, 749 F.2d 571, 574 (9th Cir.1984). Thus a motion to make an "[a]mendment is to be liberally granted where from the underlying facts or circumstances, the plaintiff may be able to state a claim." McCartin v. Norton, 674 F.2d 1317, 1321 (9th Cir.1982).

If a district court believes the plaintiff is not able to state a claim, it should provide written findings explaining this. Such action is advisable because, in the absence of written findings or a record which clearly indicates reasons for the district court's denial, this court will reverse a denial of leave to amend. Klamath, 701 F.2d at 1292; Hurn, 648 F.2d at 1254. Denials of motions for leave to amend have been reversed when lacking a contemporaneous specific finding by the district court of prejudice to the opposing party, bad faith by the moving party, or futility of amendment. See, e.g., Howey, 481 F.2d at 1191 (no contemporaneous finding of prejudice, bad faith or futility of amendment). The party opposing amendment bears the burden of showing prejudice. Beeck v. Aqua-slide 'N' Dive Corp., 562 F.2d 537, 540 (8th Cir.1977).

In Hurn v. Retirement Fund Trust of Plumbing, the plaintiff's complaint was dismissed for failure to state a claim and his motion for leave to amend to add a new cause of action was denied without explanation. The Hurn panel reversed the district court holding that "a denial without stated reasons, where the reasons are not readily apparent, constitutes an abuse of discretion." 648 F.2d at 1254 (citing Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962)); see Klamath, 701 F.2d at 1292-93 (Ninth Circuit "unwilling to affirm absent written findings, and [has] reversed findings that were merely conclusory.") (citations omitted). Upon HFB's motion, the district court dismissed the third amended complaint as to HFB. However, the court avoided the more harsh alternative by specifically dismissing "without prejudice". This would imply that the court did not believe the defects in the complaint were unremediable. Yet appellants' motion for leave to file a fourth amended complaint was denied. This order, like the dismissal of the third amended complaint, was unaccompanied by an explanation or specific findings. Since the district court offered no express rationale for its actions, the court must make the four-factored inquiry to determine the propriety of appellant's motion for leave to amend,...

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