The opinion of the court was delivered by: James C. Francis IV United States Magistrate Judge
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 Of the 35 claims originally contested, Merck has withdrawn two.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.
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 ...