HC4, Inc. v. Travelers Cas. & Sur. Co. of Am.
| Decision Date | 09 February 2017 |
| Docket Number | CIVIL ACTION NO. 4:16-CV-00090 |
| Parties | HC4, INC. EMPLOYEE STOCK OWNERSHIP PLAN, Plaintiff, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant. |
| Court | U.S. District Court — Southern District of Texas |
Pending before the Court in the above-referenced cause are the following motions: (1) Defendant's Motion for Summary Judgment, Doc. 17; (2) Plaintiff's Motion to Defer Pursuant to Rule 56(d), Doc. 18; (3) Plaintiff's Motion for Leave to Amend Complaint, Doc. 20; and (4) Defendant's Motion to Strike, Doc. 37. Having considered the motions, responses, replies, relevant law, and for reasons discussed fully below, the Court grants both of Defendant's motions and denies both of Plaintiff's motions.
This case arises from Plaintiff HC4, Inc. Employee Stock Ownership Plan's ("ESOP" or "Plaintiff"), request for reimbursement from its insurer, Defendant Travelers Casualty and Surety Company of America ("Travelers" or "Defendant"), for losses allegedly caused by the fraudulent acts of a former officer of HC4, Inc. ("HC4"). The primary issue raised is whether an insured ERISA stock ownership plan can seek reimbursement under a crime policy limiting recovery to "direct losses" for a loss of its stock portfolio value when a shareholder's actions against the corporation's assets caused a devaluation of the corporation, which in turn, led to the loss in value of corporate stock within the portfolio. The Court finds that it cannot.
HC4 is a Texas corporation. Doc. 17-4 at 2-4. During the events culminating in this lawsuit, the corporation had four equal shareholders: (1) Esther Francis ("Francis"); (2) Monique Freeman; (3) Jason Freeman ("Freeman"); and (4) Plaintiff ESOP. Doc. 17-7 at 5-6.
HC4 entered into two insurance policies with Defendant during the relevant time period: (1) the ERISA Compliance Bond, No. 105769724 ("Bond"); and (2) the Wrap Plus Insurance Policy, Policy No. 105873737 ("Policy"), (collectively the "Policies"). Docs. 17-2, 17-5. Both Policies contained provisions that insured Plaintiff and HC4 against "direct" losses of "property" caused by "dishonest or fraudulent acts" or "theft or forgery" of an "employee." Docs. 17-2 at 2, 17-5 at 35.
On April 27, 2014, HC4 terminated Francis after discovering that she had committed fraud in her role as President of HC4 during the period from December 31, 2012, through at least April 30, 2014. Doc. 17-7 at 2, 11. HC4 and the ESOP then sought reimbursement of the losses under the Policies. Id. To this end, on behalf of HC4 and the ESOP, Freeman reported Francis's actions to Defendant by letter dated July 9, 2014. Id. at 2.
This letter, and the Proof of Loss that Freeman submitted to Defendant along with it, stated that Francis: (1) made HC4 responsible for pre-existing tax liabilities; (2) paid non-employees (i.e., "ghost" employees); (3) paid personal debts with HC4's credit card; (4) obtained funding or proceeds for her own companies using HC4's name; (5) stole HC4's property; (6) failed to pay for labor and materials to subcontractors; and (7) reimbursed herself for fraudulent expenses using HC4's funds. Id. at 6-12. Lastly, Plaintiff alleged that as a result of these actions the value of shares in HC4 plummeted from $40 per share to $0 per share, costing the ESOP $700,000. Id. at 12-13.
In the motions, responses, and replies currently pending before this Court, Defendantcontends that (1) Plaintiff's initial claimed loss for the value of HC4 stock is barred by the plain language and policy exclusions of the Policies; (2) Plaintiff's attempt to amend and supplement to allege additional damages is untimely; and (3) even if the Court finds Plaintiff's tardiness in requesting amendment excusable, amendment is futile because the additional damages are also barred by language contained within the Policies. Docs. 17, 19, 25, 37, 40. Plaintiff argues that (1) it has not had enough time to complete discovery; (2) there are additional losses that support its claim and it should be allowed to amend its complaint to add these losses; and (3) Plaintiff's recovery is not barred by the language of the Policies. Docs. 18, 20, 34, 38. The motions are now ripe for adjudication.
"[T]he grant or denial of an opportunity to amend is within the discretion of the District Court." Foman v. Davis, 371 U.S. 178, 182 (1962). "Ordinarily, Rule 15(a) of the Federal Rules of Civil Procedure governs the amendment of pleadings." Filgueira v. U.S. Bank Nat. Ass'n, 734 F.3d 420, 422 (5th Cir. 2013) (per curiam) (unpublished). Rule 15(a) allows a party to amend its pleadings once as a matter of course within 21 days of serving it or, if a responsive pleading is required, 21 days after service of a responsive pleading. Fed. R. Civ. P. 15(a)(1). "In all other cases, a party may amend its pleading only with the opposing party's written consent or the court's leave" and courts must "freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2).
The standard of 15(a) is a liberal one, and there is generally a presumption in favor of granting leave to amend. See U.S. ex rel. Willard v. Humana Health Plan of Tex. Inc., 336 F.3d 375, 386 (5th Cir. 2003). As a result, a motion for leave to amend should not be denied unlessthere is "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, [or] futility of amendment." Foman, 371 U.S. at 182.
Once a trial court imposes a scheduling order, however, Federal Rules of Civil Procedure 15 and 16 operate together to govern the amendment of pleadings. Tex. Indigenous Council v. Simpkins, 544 Fed. App'x 418, 420 (5th Cir. 2013) (per curiam) (unpublished). Under Rule 16(b), once a scheduling order's deadline has passed, that scheduling order may be modified "only for good cause and with the judge's consent." Fed. R. Civ. P. 16(b)(4). Accordingly, in order for the more liberal standard of Rule 15(a) to apply to a post-deadline amendment, a party "must show good cause for not meeting the deadline." Fahim v. Marriott Hotel Servs., Inc., 551 F.3d 344, 348 (5th Cir. 2008) (citation and internal quotation marks omitted). "The good-cause standard requires the 'party seeking relief to show that the deadlines [could not] reasonably [have been] met despite the diligence of the party needing extension.'" S&W Enters., LLC v. SouthTrust Bank of Ala., NA, 315 F.3d 533, 535 (5th Cir. 2003) (). Four factors are relevant in determining whether the movant has good cause: "(1) the explanation for the failure to timely move for leave to amend; (2) the importance of the amendment; (3) potential prejudice in allowing the amendment; and (4) the availability of a continuance to cure such prejudice." Id. at 536 (citation and internal quotation marks omitted).
Because Plaintiff filed its Motion for Leave on May 12, 2016—almost a month after the amendment deadline contained in the Scheduling Order expired—Rule 16(b) applies to Plaintiff's request. Accordingly, the Court must address each of the 16(b) factors. It does so inturn.
Plaintiff argues that it should be granted leave to amend because the new damage accusations it seeks to assert in its amended complaint are based on information contained in documents that were not produced to Plaintiff until April 13, 2016—only two days before the deadline to amend. Doc. 20 at 1. However, Plaintiff provides no evidence to support this claim. It does not specify what these documents were, what new information these documents revealed, or how such revelations support its case. In fact, the record demonstrates that Plaintiff was—or should have been—aware of the new damage allegations it seeks to assert long before April 13, 2016. This is because the Proof of Loss lists the additional losses Plaintiff now seeks to recover, and that document was submitted to Defendant on Plaintiff's behalf on July 9, 2014—before the suit was even filed. Doc. 17-7. Even if Plaintiff was somehow not notified that this document had been submitted on its behalf or was in its possession, the record also indicates that Plaintiff received the Proof of Loss back from Defendant during discovery on January 4, 2016. Doc. 25-1 at ¶ 3. In light of this, the Court concludes that Plaintiff should have known of the facts upon which its proposed amendment is based long before the amendment deadline. Accordingly, the first factor favors denial. See Clayton v. ConocoPhillips Co., 2010 U.S. Dist. LEXIS 36003, at *6-7 (S.D. Tex. Apr. 12, 2010) .
The second factor of the inquiry also weighs against Plaintiff. If a proposed amendmentwould be futile, the district court is free to deny it. Marucci Sports, LLC v. Nat'l Collegiate Athletic Ass'n, 751 F.3d 368, 378 (5th Cir. 2014) (citation omitted); Stewart v. City of Houston Police Dept., 372 Fed. App'x 475, 478 (5th Cir. 2010) (per curiam) (unpublished); Briggs v. Mississippi, 331 F.3d 499, 508 (5th Cir. 2003) (citation omitted). Here, the Court believes that the amendment would be futile because it seeks damages for losses that were suffered by HC4, not the ESOP itself. As discussed further in the context of Defendant's Motion for Summary Judgment, such damages are not compensable under the plain language of the Policy and Bond at issue here.
The third factor also...
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