UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
September 24, 2004
AMERICAN HOME ASSURANCE COMPANY, PLAINTIFF,
MERCK & CO. INC., DEFENDANT.
The opinion of the court was delivered by: James C. Francis IV United States Magistrate Judge
MEMORANDUM AND ORDER
Merck & Co., Inc. ("Merck") is a major manufacturer and distributor of pharmaceutical products. In 2000, it obtained a transit insurance policy (the "Transit Policy") from the American Home Assurance Company ("American Home"), a commercial insurance provider. Since the issuance of the policy, American Home has declined to pay on some 35 claims, generally on the grounds that Merck failed to provide proof of damage or to segregate damaged from salvageable product. The aggregate value of these 35 claims is approximately $18 million.
American Home initiated this action seeking a declaratory judgment that its denial of these claims was proper under the Transit Policy. Of the 35 claims originally contested, Merck has withdrawn two. Merck has asserted counterclaims alleging breach of contract, negligence, fraud, breach of fiduciary duty, and violation of other statutory and common law obligations.
Merck now moves pursuant to Rule 15 of the Federal Rules of Civil Procedure to amend its Answer, Defenses and Counterclaims to the Second Amended Complaint (the "Answer") to add AI Marine Adjusters as a defendant, withdraw its fraud counterclaim, and withdraw its seventh claim for breach of contract, relating to one specific shipment of vaccine. (Amended Answer, Defenses, and Counterclaims of Defendant Merck & Co. Inc. to the Second Amended Complaint (the "Amended Answer"), attached as Exh. 3 to Affidavit of Joseph Francis Fields dated March 31, 2004). American Home opposes the joinder of AI Marine Adjusters, arguing that the proposed amendment is futile and that allowing it would cause prejudice to American Home by significantly delaying resolution of this action. American Home has also moved for sanctions pursuant to Rule 11, arguing that allegations contained in Merck's Answer and, to some extent, retained in its proposed amended pleading, are false and not based on any reasonable investigation of the facts.
For the following reasons, Merck's motion to amend is granted and American Home's motion for sanctions is denied. Additional facts will be discussed in connection with the analysis of each issue.
Motion to Amend
A. Analytical Framework
A motion to amend is governed by Rule 15(a) of the Federal Rules of Civil Procedure, which states that leave to amend "shall be freely given when justice so requires." Fed. R. Civ. P. 15(a); see Oneida Indian Nation of New York v. City of Sherrill, New York, 337 F.3d 139, 168 (2d Cir. 2003). Notwithstanding the liberality of the general rule, "it is within the sound discretion of the court whether to grant leave to amend," John Hancock Mutual Life Insurance Co. v. Amerford International Corp., 22 F.3d 458, 462 (2d Cir. 1994) (citation omitted), and for the proper reasons, a court may deny permission to amend in whole or in part. See Krumme v. WestPoint Stevens Inc., 143 F.3d 71, 88 (2d Cir. 1998). In discussing the use of this discretion, the Supreme Court has stated:
In the absence of any apparent or declared reason -- such as 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, futility of amendment, etc. -- the leave sought should... be "freely given." Foman v. Davis, 371 U.S. 178, 182 (1962).
American Home does not object to the proposed amendments insofar as Merck seeks to withdraw its fraud claim and one breach of contract claim. It does contest the addition of AI Marine Adjusters as a counterclaim defendant, and to that extent other rules come into play. Rule 13(h) provides that "[p]ersons other than those made parties to the original action may be made parties to a counterclaim or cross-claim in accordance with the provisions of Rules 19 and 20." Those rules, in turn, relate to compulsory and permissive joinder, respectively. American Home argues that AI Marine is not a necessary party and is therefore not subject to compulsory joinder. That issue need not be decided, however, since AI Marine is an appropriate party for permissive joinder under Rule 20. That rule provides that joinder is warranted if the right to relief against the party to be added arises "out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all defendants will arise in the action." Fed. R. Civ. P. 20(a). Here, AI Marine was the third party adjuster in connection with each of the contested claims, and so Merck's claims against it arise out of the same constellation of facts as its claims against American Home. As with Rule 15, the requirements of Rule 20(a) should be interpreted liberally in order "to enable the court to promote judicial economy by permitting all reasonably related claims for relief by or against different parties to be tried in a single proceeding." A.I.A. Holdings, S.A. v. Lehman Brothers, Inc., No. 97 Civ. 4978, 1998 WL 159059, at *5 (S.D.N.Y. April 1, 1998) (internal quotation marks and citation omitted); see Abner Realty, Inc v. Administrator of General Services Administration, No. 97 Civ. 3075, 1998 WL 410958, at *2 (S.D.N.Y. July 22, 1998) (commenting on the "great liberality of Rule 20(a)").
American Home nevertheless argues that the request to add AI Marine as a counterclaim defendant should be denied because such an amendment would be futile. A motion to amend may be denied on this ground if the amendment could not withstand a motion to dismiss. See Oneida Indian Nation, 337 F.3d at 168; Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001); Smith v. CPC International, Inc., 104 F. Supp. 2d 272, 274 (S.D.N.Y. 2000).
In the Amended Answer, Merck alleges that under the terms of the Transit Policy, it was required to engage AI Marine Adjusters, a wholly-owned subsidy of American Home, to administer claims. (Amended Answer, Counterclaims, ¶¶ 15, 127, 132). Merck charges AI Marine Adjusters with breach of contract, negligence, and violation of fiduciary duty on the grounds that it miscalculated the erosion of self-insured retention ("SIR") aggregate limits in the Transit Policy, failed to maintain adequate records concerning erosion of the SIR limits, delayed in processing and resolving claims, and misinformed Merck regarding the status of claims. (Amended Answer, Counterclaims, ¶¶ 124, 129, 134).
American Home argues that the legal relationship between Merck and AI Marine Adjusters was too attenuated to support these claims. According to American Home, "[t]here is no direct contract between Merck and AI Marine. While Merck has failed to present any evidence to support its claim that there was/is a contractual relationship between itself and AI Marine, we have, in opposition, provided the Court with the actual evidence, which refutes Merck's erroneous allegation." (American Home Assurance Company's Memorandum of Law in Opposition to Motion for Leave to Amend ("American Home Memo."), at 2). But this argument relies on a standard appropriate to summary judgment, not to the determination of a motion to amend. And, in any event, the facts on which American Home relies are in dispute.
American Home contends, for example, that the Transit Policy provided for adjustment of Merck's claims by a different subsidiary, AIMA, and that it was AIMA that appointed AI Marine Adjusters as its subagent to act as third-party administrator of the claims at issue. (Affidavit of Charles D. Capozzoli dated April 16, 2004 ("Capozzoli Aff."), ¶¶ 5, 6, 9, 15). According to American Home, the provision in the Transit Policy's Self Insured Retention Endorsement requiring Merck to "employ the firm of A.I.A.C., for the purpose of providing claims service" is a typographical error, and was intended to refer to AIMA. (Capozzoli Aff., ¶ 12 & Exh. 2). But another American Home witness testified at deposition that, while the allusion to A.I.A.C. was indeed incorrect, the intended reference was to AI Marine Adjusters. (Deposition of John Cella, attached as Exh. 2 to Affidavit of Joseph Francis Fields dated May 7, 2004, at 426-27).
American Home also contends that, as a matter of law, "independent claim adjusters retained by an insurance company owe no duty to the insured." (American Home Memo. at 6). This argument is unpersuasive for two reasons. First, American Home has relied exclusively on New York law, citing Bardi v. Farmers Fire Insurance Co., 260 A.D.2d 783, 787, 687 N.Y.S.2d 768, 772 (3d Dep't 1999), Schunk v. New York Central Mutual Fire Insurance Co., 237 A.D.2d 913, 915, 655 N.Y.S.2d 210, 212-13 (4th Dep't 1997), Velastequi v. Exchange Insurance Co., 132 Misc. 2d 896, 899, 505 N.Y.S.2d 779, 781-82 (N.Y. Civ. Ct. 1986), and T & R Carriers, Inc. v. Yorkshire Insurance Co. of New York, 28 Misc. 2d 631, 631-32, 217 N.Y.S.2d 349, 349-50 (Sup. Ct. N.Y. Co. 1961). However, after American Home filed its brief, Judge Marrero determined that Pennsylvania law, not New York law, governs this case. While it appears that the law of these two jurisdictions may be similar on this point, see Ruthardt v. Sandmeyer Steel Co., No. Civ. A. 94-6105, 1995 WL 649142, at *3 (E.D. Pa. Nov. 3, 1995); Bleday v. OUM Group, 435 Pa. Super. 395, 404, 645 A.2d 1358, 1363 (Pa. Super. Ct. 1994), it would be inappropriate to deny amendment without giving the parties a full opportunity to address controlling law.
More importantly, even if American Home has cited the correct legal principle, the proposed amendment would not be futile. As discussed above, it is disputed whether AI Marine Adjusters had a contractual relationship with Merck and so would have been more than merely American Home's agent. See Ruthardt, 1995 WL 649142, at *3 (denying summary judgment where nature of relation between insured and adjuster had not been fully developed, while recognizing that "[i]n the absence of a contract with the insured, [an adjuster] owes no duty of good faith to the insured"). Moreover, none of the cases cited by American Home address the potentially critical feature of this case: the fact that AI Marine Adjusters was adjusting claims that were subject to a self-insured retention. In these circumstances, Merck, not American Home, would have been the primary beneficiary of claims services for which there was no coverage under the self-insured retention. The counterclaims against AI Marine Adjusters are therefore not barred on grounds of futility.
American Home maintains that amendment should be denied because of the prejudice it would entail. According to American Home, denial of the requested amendment would cause no harm to Merck, since American Home would ultimately be responsible for any judgment against its agent and is fully capable of satisfying any damage award. By contrast, American Home asserts that it would be prejudiced if amendment is permitted, since the ultimate resolution of the action will be delayed by the need for AI Marine Adjusters to retain its own counsel and engage in discovery.
In evaluating a claim of prejudice by a party opposing a motion to amend, courts generally consider whether the assertion of the new claim or defense would "(i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction." Monahan v. New York City Department of Corrections, 214 F.3d 275, 284 (2d Cir. 2000) (quoting Block v. First Blood Associates, 988 F.2d 344, 350 (2d Cir. 1993)). However, an "adverse party's burden of undertaking discovery, standing alone, does not suffice to warrant denial of a motion to amend a pleading." Dennis v. Dillard Department Stores, Inc., 207 F.3d 523, 526 (8th Cir. 2000) (quoting United States v. Continental Illinois National Bank & Trust Co., 889 F.2d 1248, 1255 (2d Cir. 1989)); see also Wells v. Harris, 185 F.R.D. 128, 133 (D. Conn. 1999).
By these standards, the reasonably forseeable prejudice to American Home is not a sufficient basis to deny amendment. Witnesses from AI Marine Adjusters have already been deposed, and AI Marine Adjusters has retained its own counsel, thus minimizing the need for further discovery or delay. To be sure, AI Marine Adjusters must have the opportunity to review the discovery already taken that may be relevant to the claims against it, but any additional disclosure that will be necessary should be modest. Given the absence of prejudice to American Home, the fact that Merck may not need to implead AI Marine Adjusters in order to obtain full relief is of little significance. The request to amend is therefore granted.
Motion for Sanctions
American Home has moved for Rule 11 sanctions on the ground that Merck's Answer: (1) makes false representations concerning the operation of the self-insured retention endorsement in the Transit Policy, and (2) falsely claims that American Home did not disclose its relationship with AI Marine Adjusters. The first of these issues arises primarily from paragraph 141 of Merck's counterclaims as set forth in the Answer, where Merck alleges:
In an "AIMA Schedule of Reimbursible Deductibles" ("Schedule") sent to Merck on a monthly basis, American Home and AI Marine Adjusters falsely and fraudulently miscalculated the erosion of the SIR aggregate limit with regard to loss amounts in excess of $500,000. Although the Transit Policy expressly provides that "all loss amounts in excess of the first $100,000 (retained by the Assured) will erode the aggregate limit," American Home and AI Marine Adjusters did not erode the SIR aggregate limit by loss amounts in excess of $500,000. Specifically, claims where the erosion was miscalculated are American Home Claim Nos. 0020548A, 0023564A, and 0025330A, listed on the Spreadsheet.
According to American Home, this assertion was false, since the SIR endorsement provides that loss amounts erode the SIR aggregate limit to the extent they exceed $100,000 and are less than $500,000. Thus, according to American Home, on a total loss of $700,000, the SIR aggregate limit would be eroded by $400,000 (i.e., $500,000 - $100,000), not $600,000 ($700,000 - $100,000). American Home Assurance Company's Memorandum of Law in Support of Motion for Sanctions Pursuant to Rule 11 at 3-5).
While continuing to argue that the plain language of the SIR endorsement, together with other extrinsic evidence, supports its interpretation, Merck nevertheless deleted paragraph 141 from the Amended Answer. It did so within the 21-day safe harbor provision of Rule 11. See Fed. R. Civ. P. 11(c)(1)(A). This precludes an award of sanctions with respect to the withdrawn claim, as the advisory committee notes to the 1993 amendments to Rule 11 make plain: "[u]nder the former rule, parties were sometimes reluctant to abandon a questionable contention lest that be viewed as evidence of a violation of Rule 11; under the revision, the timely withdrawal of a contention will protect the party against a motion for sanctions." Fed. R. Civ. P. 11(c) advisory committee's note.
American Home nevertheless argues that the Amended Answer fails to cure all the defects of the original pleading because, while the critical (and purportedly false) factual predicate has been deleted, the related legal claims have been retained. Merck responds that it has not received the benefit of the safe harbor provision with respect to what is, in effect, a new Rule 11 motion. Merck's argument is unavailing. Under the safe harbor provision, a Rule 11 motion may be filed 21 days after it is served only if the pleading or other document at issue "is not withdrawn or appropriately corrected." Fed. R. Civ. P. 11(c)(1)(A).
The question arises whether, if a correction is made but deemed unsatisfactory by the movant, the movant must serve another Rule 11 motion challenging the correction or, instead, may simply file the original motion. The language of the Rule seems to contemplate the latter alternative - i.e., that the original paper may be filed. Any other reading of the Rule could conceivably lead to a series of motions, each followed by an inadequate correction, precipitating yet another motion.
Gregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse § 17(A)(2)(a), at 316 (3d ed. 2000).
Nevertheless, Merck's conduct in retaining its claims that American Home miscalculated the SIR annual aggregate and delayed in processing and paying claims is not sanctionable. These claims were not based only on the withdrawn factual assertions. According to Merck, even if American Home's interpretation of the SIR endorsement is correct, there remain independent grounds for each of its causes of action. Whether Merck is correct is a matter to be tested on summary judgment or at trial.
Finally, American Home argues that Merck should be sanctioned for falsely arguing that American Home failed to disclose its relationship with AI Marine Adjusters. The allegation at issue is contained in paragraph 150 of Merck's counterclaims as set forth in its Answer:
Upon information and belief, American Home has engaged in a general business practice of requiring policyholders to retain AI Marine Adjusters or its other affiliates for the purpose of handling claims under American Home policies, without providing full or appropriate disclosure of the inherent conflict of interest presented to the claims-handler as a result of this practice, or obtaining a fully-informed waiver from its policyholders regarding the conflict. As part of this practice, American Home profits from AI Marine Adjusters' or its other affiliates' inherent conflict of interest by colluding with AI Marine Adjusters or its other affiliates -- to American Home's own benefit and to the detriment of its policyholders -- by fraudulently misrepresenting the insurance coverage available under its policies, in the manner described in subparagraphs a through e of Paragraph 149, and otherwise.
Merck reincorporated this allegation in substance as paragraph 139 of its counterclaims in the Amended Answer.
The issue here is a semantic one. Merck concedes that it knew that there was a corporate relationship between American Home and AI Marine Adjusters. It contends, however, that it was unaware that AI Marine Adjusters would not act independently but would, instead, capitulate to American Home's interests in the processing of Merck's claims. (Merck & Co., Inc.'s Memorandum of Law in Opposition to Motion for Sanctions at 15-17). This is a plausible construction of Merck's claim that, again, is subject to being proven at trial or tested on summary judgment. It is not the basis for sanctions.*fn1
For the reasons set forth above, Merck's motion to amend is granted and American Home's motion for sanctions is denied.
JAMES C. FRANCIS IV UNITED STATES MAGISTRATE JUDGE