The opinion of the court was delivered by: LASKER
Plaintiff sues representatively and derivatively on behalf of Virginia Iron, Coal and Coke Company (hereinafter "Virginia Iron") and its stockholders.
On November 18, 1963, defendants Valentine, Weininger, and Gregory and Sons, acting for themselves and on behalf of other stockholders of Virginia Iron (friends, relatives and customers), executed a Stock Purchase Agreement providing for the sale to Bates and Company of 400,000 shares of Virginia Iron common stock at the price of $12.00 per share. The parties have stipulated in the pre-trial order that these 400,000 shares, representing approximately 29 percent of the outstanding shares of the company, constituted working control of Virginia Iron. The closing date of the Stock Purchase Agreement was December 12, 1963, and on that date defendants delivered 400,000 shares of Virginia Iron common stock to Bates and Company, with defendants Valentine, Weininger, Taeni and Aylward concurrently resigning as directors of Virginia Iron.
The complaint, as filed on March 25, 1964, contained two causes of action. The first cause of action alleged a violation of Section 16(b) of the Securities Exchange Act of 1934,
and sought to recover from defendants short-swing profits allegedly made by them between June 1 and December 31, 1963, in the course of their dealings in the common stock of Virginia Iron. The second cause of action alleged that the directors-defendants breached their fiduciary duties as directors of Virginia Iron (defendant Gregory and Sons allegedly acting in concert with these directors) by selling their shares in Virginia Iron to Bates and Company for a premium of $2.00 per share above the market price. As part of the sales agreement, the defendants agreed to resign from Virginia Iron's board of directors and vote to install as directors individuals designated by Bates and Company.
Defendants contend that the original federal cause of action has been abandoned, that under the special circumstances of this case plaintiff should not be allowed to amend his pleadings to establish new federal causes of action, and that the court should decline to exercise its pendent jurisdiction as to the state cause of action.
Heretofore defendants Taeni and Gregory and Sons moved, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for summary judgment on the first cause of action, and for an order pursuant to Rule 12(b) dismissing the second cause of action for lack of jurisdiction of the subject matter. On May 25, 1964, Judge Cashin denied both motions in an unreported opinion. Defendant Aylward thereafter made an identical motion, and in Rogers v. Valentine, 37 FRD 231 (S.D.N.Y. 1964), Judge Cannella granted the motion for summary judgment as to the first cause of action, but denied the prayer to dismiss the second cause of action. Subsequently, on January 22, 1965, an order was signed by Judge Edelstein, upon consent of counsel for the plaintiff, dismissing the first cause of action under Section 16(b), with prejudice, as against defendants Gregory and Sons and Taeni. A motion identical to the two above was thereafter made on behalf of defendants Weininger and Premier Investing Corporation. Judge McLean denied this motion on June 6, 1966.
On April 19, 1968, the parties to this action filed a joint pre-trial memorandum, which included a statement by plaintiff's counsel that the first cause of action under Section 16(b) was abandoned, plaintiff's counsel stating that "on the basis of his investigation no cause of action exists against the defendants." Paragraph No. 2 of the pre-trial order, filed April 19, 1968, incorporated the above language and finalized the abandonment of the Section 16(b) cause of action. As of April 1968, then, only the second cause of action, for breach of fiduciary duty under state law, remained to be litigated.
A. Attempted Addition of a New Cause of Action
On February 24, 1969, almost one year after the pre-trial order was signed, plaintiff filed a supplemental pre-trial memorandum. By this document plaintiff attempted to interject a cause of action under Section 10(b) of the Securities Exchange Act of 1934,
and Rule 10b-5 promulgated thereunder. The only enlightenment as to plaintiff's position contained in the memorandum is the bald statement that: "It is plaintiff's present intention, upon the trial of this action, to proceed in accordance with the changes contained herein."
Although noting the irregular manner in which this request was put before the court, as well as before the opposing parties, the court nonetheless deemed it appropriate to treat it as a motion to amend the complaint pursuant to Rule 15(a) of the Federal Rules of Civil Procedure. The lack of edifying papers, coupled with the fact that the case was assigned for trial a very short time before the scheduled trial date, made it advisable, in order to afford the opposing parties an opportunity to make their position clear, to proceed to trial prior to decision as to the propriety of plaintiff's attempt to amend his pleadings.
As the facts emerged, it became known to the court that counsel for plaintiff had previously indicated a desire to add a cause of action under Section 10(b) of the Securities Exchange Act. At that time (at the pre-trial conference in April 1968) the pre-trial examiner informed plaintiff's counsel that the proper manner in which to proceed was to move formally to amend the complaint. Such a motion was never subsequently made. To the contrary, plaintiff's counsel assured the defendants that he had no intention of pursuing the Section 10(b) theory.
It is settled that leave to amend pleadings should be liberally granted. Rule 15(a), FRCP. Middle Atlantic Utilities Co. v. S.M.W. Development Corp., 392 F.2d 380, 384 (2d Cir. 1968). As the Court there stated:
"Narrow pleading rules should not be applied to foil an honest plaintiff's efforts to gain redress. In examining the circumstances which might justify not granting plaintiff this opportunity to be heard on the merits, the trial courts should normally focus on the resultant prejudice to defendant."
Applying this test, it is clear that to allow the plaintiff to amend his complaint under the special and unusual circumstances described above would be prejudicial to the defendants. The plaintiff sought to amend his complaint a full five years after it was filed. This delay, though not conclusive, is a factor which must be weighed in determining the matter. Middle Atlantic Utilities Co. v. S.M.W. Development Corp., supra, at 384. As the court in Portsmouth Baseball Corp. v. Frick, 21 FRD 318, 319 (S.D.N.Y. 1958), stated:
"Where there has been an unreasonable delay in amendment by the plaintiff to the prejudice of the defendant, a refusal to permit amendment is warranted."
Here the plaintiff compounded the prejudice that the passage of time alone imposed by affirmatively assuring his adversaries that he would not seek to interject a Section 10(b) cause of action, and taking no action to do so until the midnight hour. The defendants were entitled to rely upon this representation, especially since the plaintiff did not broach the subject again until the eve of trial. The proposed cause of action under Section 10(b), which is basically an anti-fraud statute, would have interjected into the case fresh elements which the defendants were assured they would not have to litigate at trial. It can certainly be said here that
". . . this is not a situation where the proposed amendment adds little to the claim as originally stated, so that the defendants, having from the beginning had notice of the general nature of the claim asserted, would not be ...