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HIGHLAND CAPITAL MANAGEMENT v. SCHNEIDER

United States District Court, S.D. New York


HIGHLAND CAPITAL MANAGEMENT, L.P., Plaintiff,
v.
LEONARD SCHNEIDER, LESLIE SCHNEIDER, SCOTT SCHNEIDER, and SUSAN SCHNEIDER, Defendants.

The opinion of the court was delivered by: PETER LEISURE, District Judge

OPINION AND ORDER

Plaintiff Highland Capital Management L.P. ("Highland") brings this action against defendants Leonard Schneider, Leslie Schneider, Scott Schneider, and Susan Schneider (the "Schneiders") to recover the profit it would have made had an alleged deal between the parties reached fruition. Highland claims that the Schneiders agreed to sell to it promissory notes issued by McNaughton Apparel Group, Inc. ("McNaughton"), but then reneged on the agreement upon receiving confidential information from insiders at McNaughton. (First Amended Petition ¶¶ 10-26.) Highland brings claims for breach of contract, tortious interference with contractual relations, and third-party beneficiary breach of contract. (First Amended Petition ¶¶ 27-45.) The Schneiders have answered Highland's claims, denying that they ever made any agreement with Highland and asserting, among other things, a defense of Statute of Frauds. (Answer ¶¶ 1-32, 39.) The Schneiders also bring a third-party complaint against third-party defendant RBC-Dominion Securities Corp. ("RBC"), a broker/dealer that acted as an intermediary in the alleged transaction between Highland and the Schneiders. RBC has answered the Schneiders' third-party complaint, denying the Schneiders' allegations and asserting counterclaims against the Schneiders for breach of duty to negotiate in good faith, breach of contract, and fraud. (Third-Party Answer.)

  The parties have brought four motions to the Court. First, the Schneiders have moved pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure to dismiss all of RBC's counterclaims. Second, the Schneiders have moved pursuant to Rule 12(c) to dismiss Highland's complaint. Third, Highland has moved pursuant to Rule 15(a) for leave to file a second amended complaint. In this motion Highland seeks to add the law firm representing the Schneiders, Jenkens & Gilchrist Parker Chapin LLP ("Jenkens & Gilchrist"), as a defendant to assert against it claims for tortious interference with contractual relations and prospective contractual and business relations. And fourth, Highland has moved again pursuant to Rule 15(a) for leave to file a third amended complaint.*fn1 In this motion Highland seeks leave to file a complaint similar to its proposed second amended complaint, which adds Jenkens & Gilchrist as a defendant.*fn2 Highland's proposed third amended complaint adds no new parties or claims to its proposed second amended complaint, but, according to Highland, conforms to evidence obtained during discovery in this case.

  The Court takes up in this opinion and order the last of these motions, Highland's motion for leave to file a third amended complaint. For the reasons set forth below, the Court grants in part Highland's motion for leave to amend the complaint.

  Background

  I. Factual Background

  A. Allegations of the Initial Pleading

  Highland alleges the following in its first amended petition, which is the current pleading of record. The Schneiders owned an apparel company called "Jeri-Jo." On or about April 15, 1998, the Schneiders sold Jeri-Jo to McNaughton Apparel Group, Inc. ("McNaughton"). In exchange, the Schneiders received from McNaughton earn-out payments, the calculation of which would be based on Jeri-Jo's performance. Once the earn-out payments became due, McNaughton and the Schneiders agreed that part of the payment would be issued in the form of promissory notes. As a result, McNaughton issued approximately $69 million in promissory notes (the "Notes") to the Schneiders. These Notes were considered high-risk debt because of uncertainty about McNaughton's ability to pay them off.

  In late 2000 and early 2001 the Schneiders sought to sell the Notes. They engaged Rauch Securities for this purpose, which in turn engaged RBC as an agent and exclusive broker for the purpose of selling the Notes. RBC found a buyer for the Notes, plaintiff Highland, and negotiations between RBC and Highland ensued. RBC informed Rauch and the Schneiders about the status of the negotiations. Highland ultimately agreed to purchase $45.6 million of the Notes at a price of 52.5 cents on the dollar, and on or about March 14, 2001, Rauch informed RBC that the Schneiders had agreed to the transaction.

  The following week the Schneiders decided not to go through with the deal, and the transaction never took place. Highland alleges that Jones Apparel Group, Inc. ("Jones") and McNaughton were negotiating a merger in early 2001 which would improve McNaughton's credit rating and thus the value of the Notes. Highland alleges that the Schneiders became aware of these negotiations on or about March 8, 2001, and/or March 13, 2001, and alleges that the Schneiders backed out of the deal with Highland upon learning about the merger and thereby received a windfall.

  The Schneiders deny these allegations.

  B. Allegations of the Proposed Third Amended Complaint

  Highland's Proposed Third Amended Complaint (the "New Complaint") sets forth significantly lengthier and more detailed allegations. It is written in an almost narrative form, and includes two attachments. The first attachment is a copy of a memorandum written by Bradley P. Cost, McNaughton's general counsel and a member of its board of directors, and an attorney at Torys, that Highland obtained during discovery. (New Compl., Exh. A.) The second attachment is the report of Highland's proposed expert Sean F. O'Shea, a former Assistant United States Attorney for the Eastern District of New York. (New Compl., Exh. B.)

  In addition to allegations substantively similar to those set forth in the original complaint, the New Complaint adds detailed allegations about the role played by the Schneiders' lawyers at Jenkens & Gilchrist in communicating inside information from McNaughton to the Schneiders. Highland alleges in the New Complaint that a series of conversations and negotiations between itself, RBC, Rauch, and the Schneiders in January, February, and early March 2001 led to an agreement to sell the Notes on March 12, 2001. Highland alleges that McNaughton's CEO, Peter Boneparth, while negotiating a merger with Jones, learned that the Schneiders sought to trade the Notes. As the Schneiders' sale of the Notes could interfere with the merger, Boneparth met with other McNaughton insiders on March 8, 2001, and determined to inform the Schneiders of the merger negotiations with Jones. A McNaughton insider thereafter contacted lawyers at Jenkens & Gilchrist on March 9, 2001, and informed them of the merger negotiations in a conversation characterized by Highland as a "Tip." The lawyers at Jenkens & Gilchrist thereafter communicated the information about the merger negotiations to the Schneiders on March 9 and March 13, 2001. Jenkens & Gilchrist lawyers then contacted Rauch on March 14, 2001, and told Rauch not to proceed on the transaction to sell the Notes, several hours after the parties had agreed to the trade. Highland alleges that Jones then acquired McNaughton on April 16, 2001, and paid the Schneiders in full for the Notes on June 19, 2001.

  After setting forth these allegations of wrongdoing by the Schneiders and Jenkens & Gilchrist, Highland includes a series of allegations (New Compl. ¶¶ 56-68) in which it claims that its proposed expert is of the opinion that the conduct of the Schneiders and Jenkens & Gilchrist is criminal. Highland attaches the report of this proposed expert, former Assistant United States Attorney for the Eastern District of New York Sean F. O'Shea, to its New Complaint.

  Upon these new allegations Highland seeks to bring the following seven claims: (A) breach of contract against the Schneiders; (B) breach of a binding preliminary agreement against the Schnediers; (C) tortious interference with contractual relations against the Schneiders; (D) tortious interference with prospective contractual relations and business relations against the Schneiders; (E) tortious interference with contractual relations against Jenkens & Gilchrist; (F) tortious interference with prospective contractual and business relations against Jenkens & Gilchrist; and (G) third-party beneficiary breach of contract against the Schneiders. Two broad allegations, or theories, underlie each of these claims. First, Highland claims that it had reached an agreement, or was about to reach an agreement, with the Schneiders to transact the Notes, and it never has received the benefit of that agreement. Second, Highland claims that the Schneiders backed out of the agreement, or near-agreement, once it received insider information, via Jenkens & Gilchrist, that McNaughton and Jones were negotiating a merger that would increase the value of the shares.

  Discussion

  I. Rule 15(a)

  Rule 15(a) of the Federal Rules of Civil Procedure permits a party to amend its complaint upon leave of the Court, and such "leave shall be freely given when justice so requires." To determine whether "justice so requires" permitting leave to amend a complaint, the Court considers whether leave to amend would cause undue delay or prejudice to defendant, whether leave is sought in bad faith, and whether leave to amend would be futile. See Dougherty v. Town of North Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002); Wechsler v. Hunt Health Systems, Ltd., 186 F. Supp. 2d 402, 415 (S.D.N.Y. 2002); see generally Foman v. Davis, 371 U.S. 178 (1962).

  When a party moves to add a new defendant, Rule 21 of the Federal Rules of Civil Procedure applies. Rule 21 provides that "[p]arties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just." Fed.R. Civ. P. 21. "In deciding whether to allow joinder, the Court is guided by the same standard of liberality afforded to motions to amend pleadings under Rule 15." Momentum Luggage and Leisure Bags v. Jansport, Inc., No. 00 Civ. 7909, 2001 WL 58000, at *1-2 (S.D.N.Y. Jan. 23, 2001) (internal quotations omitted) (collecting cases).

  Here, the Schneiders do not contend that granting leave to plaintiff to file the bulk of the New Complaint will cause undue delay or prejudice, or that leave is sought in bad faith. Rather, the Schneiders make essentially the following two sets of arguments. First, the Schneiders argue that inclusion of allegations in the New Complaint that the Schneiders' and Jenkens & Gilchrist's conduct was criminal renders the New Complaint violative of Rules 12(f), 8 and 10(c)*fn3 of the Federal Rules of Procedure. The Schneiders' first argument therefore applies to a limited section of the New Complaint. Second, the Schneiders argue that granting leave would be futile because all of plaintiff's claims lack merit and should be dismissed. The Schneiders' second argument applies to the entire New Complaint. II. Plaintiff's Inclusion of Paragraphs 56-68 of the New Complaint and the Attached Report of Plaintiff's Proposed Expert Contravene Proper Pleading Procedure

  The Court finds that the inclusion of paragraphs 56-68 of the New Complaint and the attached report of plaintiff's proposed expert contravene proper pleading procedure as governed by Rule 8 of the Federal Rules of Civil Procedure. Rule 8 provides that a pleading "shall contain a short and plain statement of the grounds upon which the court's jurisdiction depends . . ., a short and plain statement of the claim . . ., and a demand for judgment." The Second Circuit has clarified that Rule 8 "requires only that plaintiff's charges be set forth in a short and concise statement, detailed only to the extent necessary to enable defendant to respond and to raise the defense of res judicata if appropriate. The pleading of additional evidence is not only unnecessary, but in contravention of proper pleading procedure." Geisler v. Petrocelli, 616 F.2d 636, 640 (2d Cir. 1980); see Politico v. Promus Hotels, Inc. 184 F.R.D. 232, 233-34 (E.D.N.Y. 1999) ("A complaint should not be a preview of counsel's argument to the jury at the end of the case. The complaint should not plead evidence. Such information is available through discovery.").

  Highland's addition of allegations that simply set forth the opinions of its proposed expert about the alleged criminality of the Schneiders and Jenkens & Gilchrist serves no permissible purpose in the New Complaint. See Salahuddin v. Cuomo, 861 F.2d 40, 42 (2d Cir. 1988) ("[T]he principal function of pleadings under the Federal Rules is to give the adverse party fair notice of the claim asserted so as to enable him to answer and prepare for trial."). The report of plaintiff's proposed expert and the allegations in the New Complaint summarizing the report are neither short nor concise allegations of wrongdoing, and do not serve to place the Schneiders on notice of the claims asserted. Rather, the allegations simply state that plaintiff's proposed expert characterizes the elsewhere-alleged conduct of the Schneiders and Jenkens & Gilchrist as criminal. The report of plaintiff's proposed expert is merely a discovery tool, and the allegations set forth in paragraphs 56-68 only reiterate the opinions of the proposed expert. See Fed. Rule Civ. P. 26. Plaintiff's inclusion of the expert report and the allegations set forth in paragraphs 56-68, merely constitutes an attempt to plead additional evidence, the inclusion of which thwarts the purpose of concise, answerable, notice pleading. The Court denies plaintiff's motion for leave to amend its pleading insofar as plaintiff seeks to add paragraphs 56-68 and the attached expert report to the New Complaint.

  To the extent that the Schneiders argue to strike additional allegations in the complaint related to the allegedly criminal conduct of the Schneiders and Jenkens & Gilchrist (other than paragraphs 56-68 and the expert report) pursuant to Rule 12(f), the Court finds this argument without merit. Rule 12(f) of the Federal Rules of Civil Procedure provides that "the court may order stricken from any pleading . . . any redundant, immaterial, impertinent, or scandalous matter." See Emmpresa Cubana Del Tabaco v. Culbro Corp., 213 F.R.D. 151, 155 (S.D.N.Y. 2003). Motions to strike are "generally disfavored." Id. (internal quotations and citations omitted). "`The courts should not tamper with pleadings unless there is a strong reason for so doing.'" Pena v. Guzman, 2004 WL 253331, at *3 (S.D.N.Y. 2004) (quoting Lipsky v. Commonwealth United Corp., 551 F.2d 887, 893 (2d Cir. 1976)). Thus, "`unless it is clear that the allegations in question can have no possible bearing on the subject matter of the litigation,'" motions to strike allegations in the pleadings should be denied. Id. (quoting Ulla-Maija, Inc. v. Kivmaki, No. 02 Civ. 3604, 2003 WL 169777, at *4 (S.D.N.Y. Jan. 23, 2003)).

  Here, the Court need not consider the redundancy, materiality, pertinence, or scandalousness of the allegations set forth in paragraphs 56-68 of the New Complaint as these allegations contravene proper pleading procedure set forth in Rule 8. As to the remainder of the New Complaint, the Court does not find any strong reason for tampering with the proposed pleading. It is not clear that plaintiff's allegations of wrongdoing by the Schneiders and Jenkens & Gilchrist, particularly those allegations about the alleged criminality of their respective conduct, have no possible bearing on the subject matter of the litigation. Rather, plaintiff claims, for example, that Jenkens & Gilchrist tortiously interfered with contractual relations, and sets forth Jenkens & Gilchrist's alleged violations of securities law as the underlying wrongful conduct by which it interfered. (New Compl. ¶¶ 95, 96.) On the face of the complaint such allegations appear to bear on the subject matter of the litigation. The Court does not find such allegations redundant, immaterial, impertinent, or scandalous at this time, and declines to strike such allegations from the New Complaint.

  III. The Court Does not Address Whether Leave to Amend Would Be Futile

  The Schneiders oppose plaintiff's motion for leave to amend on a second ground, correctly observing that when filing an amended complaint would be futile the Court need not grant leave to make such a filing. See Nettis v. Levitt, 241 F.3d 186, 193 (2d Cir. 2001) ("One appropriate basis for denying leave to amend is that the proposed amendment would be futile because it fails to state a claim."); Hayden v. County of Nassau, 180 F.3d 42, 53 (2d Cir. 1999) ("[W]here the [moving party] is unable to demonstrate that he would be able to amend his [pleading] in a manner which would survive dismissal, opportunity to replead is rightfully denied."). When considering whether a proposed amendment is "meritless" or "futile," the Court conducts an inquiry comparable to the analysis governing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001). If a proposed claim would be subject to dismissal under Rule 12(b)(6), the Court should "refuse to grant leave to amend rather than assent and then await a motion to dismiss." Bank of New York v. Sasson, 786 F.Supp. 349, 352 (S.D.N.Y. 1992).

  Here, in light of the procedural posture of this action, the Court finds that addressing the merits of the case on plaintiff's motion for leave to determine whether leave is futile would be imprudent and inefficient. Before the Court are the parties' arguments on the Schneiders' motion to dismiss the original complaint, the bulk of which remain applicable to the New Complaint, and the parties' abbreviated arguments on the merits of the case set forth in the current motion papers. Typically the Court would now turn to these arguments to determine whether permitting leave to plaintiff would be futile, thereby avoiding further needless delay awaiting a motion to dismiss the New Complaint. As discovery nears its completion, however, all parties have expressed to the Court an intention to seek summary judgment, and seemingly await only clarification about which complaint constitutes the operative pleading to make such a motion. Both Highland and the Schneiders have indicated that, should the Court permit plaintiff to file an amended pleading, they would each seek summary judgment on the New Complaint, essentially consolidating arguments based on information produced in discovery with arguments set forth in support of and opposition to the Schneiders' motion to dismiss. As the parties have expressed this intention to the Court, addressing here the merits of the dispute without first conferring with the parties would be imprudent. The more prudent, and likely the more efficient course given the action's procedural posture is to confer with the parties, now that the Court has permitted leave to plaintiff to file the New Complaint as the operative pleading.*fn4 Finally, the Court's decision to permit plaintiff leave under Rules 15(a) and 21, without addressing whether leave would be futile, does not itself prejudice defendants. The mere addition at this time of Jenkens & Gilchrist as a party, and of allegations against them in a pleading, does not cause any prejudice that would not be occasioned by the inclusion of Jenkens & Gilchrist as a defendant in the original complaint. Moreover, the Court's ruling in this opinion and order does not constitute any imprimatur of Highland's allegations against Jenkens & Gilchrist or the Schneiders. The statements set forth in the New Complaint are allegations, not evidence. To the extent that Highland makes these allegations in bad faith, Jenkens & Gilchrist and the Schneiders find protection in Rule 11, 28 U.S.C. § 1927, and the Court's "inherent power" to issue sanctions. To the extent that Highland makes these allegations without legal support, Jenkens & Gilchrist and the Schneiders find protection in Rule 12. And to the extent that Highland makes these allegations without factual support, Jenkens & Gilchrist and the Schneiders find protection in Rule 56. While Rule 15(a) permits the Court to examine the merits of a proposed pleading, the Court finds that because the briefing on the merits of Highland's allegations remains at an inchoate stage, ruling on the merits at this time would be premature.

  Conclusion

  For the reasons set forth above, the Court grants in part Highland's motion for leave to file a third amended complaint. Plaintiff's inclusion of the allegations set forth in paragraphs 56-68 of the third amended complaint, and of the attached expert report, contravenes proper pleading procedure, and the Court does not permit leave to plaintiff to include these allegations and attachment in its filing. The Court permits plaintiff leave to file its third amended complaint without these allegations and attachment. Moreover, the Court grants leave in part without addressing whether leave to amend would be futile, as doing so without first conferring with the parties about the procedural posture of the action would be imprudent and inefficient. The Court orders the parties to appear for a status conference on September 30, 2004, at 2:00 p.m.

  SO ORDERED.


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