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FRIEDLANDER v. DOHERTY

May 11, 1994

TOMAS FRIEDLANDER, Plaintiff,
v.
FRANCIS H. DOHERTY and PATRICIA DOHERTY MARONEY, Defendants.


MUNSON


The opinion of the court was delivered by: HOWARD G. MUNSON

MEMORANDUM-DECISION AND ORDER

 This action is brought by plaintiff in his capacity as trustee of two employee benefit plans qualified under the Employee Retirement Income Security Act of 1974 ("ERISA"), against two former trustees, one of whom is alleged to have made substantial cash withdrawals from the plans without adhering to plan documents. Plaintiff seeks declaratory and equitable relief pursuant to 28 U.S.C. § 2201 and 2202, and ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3). Presently before the court are defendant Doherty's motions for leave to amend his answer to raise the newly acquired defense of discharge in bankruptcy, and to dismiss plaintiff's claim against Doherty in its entirety. Doherty also moves for an order of contempt and sanctions against plaintiff. *fn1"

 I. BACKGROUND

 Defendant Francis Doherty was president of F.H. Doherty Associates, Inc. ("the Company") until February 21, 1990. Along with defendant Patricia Doherty Maroney, Doherty also served as trustee of the Company's Pension and Profit Sharing Plans ("the Plans") until October 9, 1990, when they both were replaced by plaintiff pursuant to a resolution of the Company's Board of Directors.

 Plaintiff filed the instant complaint on July 25, 1991, seeking a declaration of the parties' respective rights and obligations, an accounting by Doherty of funds received from the Plans, an award of damages to the Plans, and a declaration that plaintiff is entitled to charge the full amount of damages against the remainder of Doherty's vested benefit in the Pension Plan. Doherty admits that while he was a trustee of the Plans he withdrew $ 75,000 from the Pension Plan in four transactions between February 5, 1990 and April 23, 1990. Doherty further admits making withdrawals from the Profit Sharing Plan in the amount of $ 99,000 between May 22, 1989 and October 27, 1989. Plaintiff alleges that such withdrawals constituted prohibited transfers under ERISA and violated Doherty's fiduciary responsibilities as trustee of the Plans. Doherty disputes only plaintiff's contention that his withdrawals were unauthorized, claiming that the withdrawals were in fact authorized and thus not violative of § 9.2 of the Pension Plan.

 On March 27, 1990 Doherty filed a petition in bankruptcy under Chapter 11 of the Bankruptcy Code. His bankruptcy action was converted to a Chapter 7 proceeding under the Bankruptcy Code on August 8, 1991, and Doherty was granted a discharge in bankruptcy on November 27, 1991.

 II. DISCUSSION

 A. Doherty's Bankruptcy Argument

 Defendant Doherty moves for leave to amend his answer in order to plead the defense of discharge in bankruptcy. Doherty further moves to dismiss plaintiff's claim against him in its entirety, arguing that any debt Doherty may owe to plaintiff was discharged through the bankruptcy proceeding, and that under section 524(a)(2) of the Bankruptcy Code plaintiff is enjoined from seeking relief in the instant action. Finally, because plaintiff continued to prosecute this action in the face of the discharge in bankruptcy, Doherty moves for an order of contempt and an award of attorney's fees and costs against plaintiff.

 In response to Doherty's motion for leave to amend, plaintiff asserts that the proposed amendment to Doherty's pleadings would be futile, and therefore should be denied. Plaintiff argues that section 553 of the Bankruptcy Code preserves plaintiff's right to seek an offset in this case, and on that basis that the instant action is not barred by Doherty's discharge. Therefore, plaintiff concludes, Doherty's motion for leave to amend must be denied because his new defense will not affect the outcome of these proceedings.

 When more than twenty days have elapsed since an original answering pleading was served, Federal Rule of Civil Procedure 15(a) allows amendment of a pleading only by leave of court or by written consent of the adverse party. Fed. R. Civ. P. 15(a). While as a general matter the trial court has discretion whether or not to grant leave to amend, in exercising its discretion the court is required to heed the command of Rule 15(a) that leave should be "freely given when justice so requires." Id.; Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962); Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993). Courts liberally grant motions for leave to amend, because where the movant "has at least colorable grounds for relief, justice . . . so require[s] unless [the movant] is guilty of undue delay or bad faith or unless permission to amend would unduly prejudice the opposing party." S.S. Silberblatt, Inc., v. East Harlem Pilot Block, 608 F.2d 28, 42 (2d Cir. 1979) (citing Foman, 371 U.S. at 182). Nonetheless, where it appears that granting leave to amend will not be productive, the trial court is well within its discretion to deny leave to amend on the ground of futility. Ruffolo, 987 F.2d at 131 (citing Foman, 371 U.S. at 182).

 In the instant case, plaintiff refused to consent to Doherty's request to amend his answer. Doherty thus moves the court for leave to amend, claiming that his discharge in bankruptcy is dispositive of plaintiff's claim. See Proposed Amended Answer, Exhibit ("Exh.") C attached to Doherty's Notice of Motion, Document ("Doc.") 8. Doherty bases his motion for leave to amend on section 524(a)(2) of the Bankruptcy Code, which provides that a discharge in bankruptcy "operates as an injunction against the . . . continuation of an action . . . to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived." 11 U.S.C. § 524(a)(2). Doherty submits a copy of his discharge in bankruptcy, which was granted on November 27, 1991, and a letter to plaintiff's counsel explaining Doherty's position that the discharge mandates dismissal of the instant action. See Discharge, Exh. D attached to Doherty's Notice of Motion, Doc. 8; Letter dated December 13, 1991 from Attorney Predmore to Attorney Watkins, Exh. E attached to Doherty's Notice of Motion, Doc. 8. Because plaintiff declined to stipulate to a dismissal of his action despite Doherty's discharge in bankruptcy, Doherty further moves for an order holding plaintiff in contempt, and imposing upon him the costs and attorney's fees incurred in defending the action.

 Unfortunately for Doherty, the instant suit is largely unaffected by his discharge in bankruptcy. Section 553 of the Bankruptcy ...


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