Ben P. Fyke & Sons v. Gunter Co.

213 N.W.2d 134, 390 Mich. 649, 1973 Mich. LEXIS 168

• Court: Michigan Supreme Court
• Decided: December 18, 1973
• Docket: 5 October Term 1973, Docket No. 54,414
• Status: Published

Opinions

Levin, J.

The Court of Appeals held that the trial judge was justified in denying the motion of the defendant, The Gunter Company, to amend its answer to set up an affirmative defense based on plaintiff Ben P. Fyke & Sons, Inc.’s failure to file an annual report and pay franchise fees. We reverse.

Fyke is seeking payment for services rendered under an agreement with Gunter. Gunter’s answer admits that Fyke performed its obligations under the agreement. Gunter also admitted that it had failed and refused to pay the invoices submitted by Fyke.

Three months after filing its answer, Gunter sought to amend to allege as an affirmative defense under now repealed MCLA 450.87; MSA 21.87¹ that Fyke lacked the capacity to maintain this action because the agreement was entered into and the work performed while Fyke was in default for failure to file its annual report and pay franchise fees.

During oral argument on the motion, Fyke’s counsel attributed the greater than six-months lapse in filing the annual report and paying franchise fees to the distraught frame of mind of the person entrusted with the task whose husband was suffering from a serious illness.

The judge, after noting that the services had been performed and finding Fyke’s non-filing "justifiable”, denied Gunter’s, motion. Responding to GCR 1963, 118.1’s standard that "leave [to amend] shall be freely given when, justice so requires”, the judge stated that to permit the amendment, which would possibly allow Gunter to escape a potential liability in excess of $21,000, would constitute a "mockery of justice”.

Gunter sought and was granted leave to appeal. The Court of Appeals, in upholding the denial of the proposed amendment, said that a trial judge may properly "evaluate the merits of the parties’ respective claims” when deciding whether to permit an amendment.

We granted further leave to consider whether the "merits” of a claim or defense a party seeks to raise by amendment may properly be considered in deciding whether to allow the amendment.

I

We have acknowledged the Federal source of Rule 118 and have been guided by the Federal precedents. LaBar v Cooper, 376 Mich 401, 405; 137 NW2d 136 (1965).

Our rule, as the Federal rule, is "designed to facilitate the amendment of pleadings except where prejudice to the opposing party would result”. United States v Hougham, 364 US 310, 316; 81 S Ct 13, 18; 5 L Ed 2d 8, 14 (1960). A motion to amend ordinarily should be granted, and denied only for particularized reasons:

"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, as the rules require, be 'freely given.’ ” Foman v Davis, 371 US 178, 182; 83 S Ct 227, 230; 9 L Ed 2d 222, 226 (1962).

To safeguard and implement the policy favoring amendment, this Court has directed that upon denial of a motion to amend "such exercise of discretion should be supported by specific findings as to reasons for the same”. LaBar v Cooper, supra, p 409. (Emphasis supplied.)

II

Underlying the trial judge’s denial of Gunter’s motion to amend and the Court of Appeals’ affirmance was the stated concern that allowance of the amendment would cause Fyke to lose its otherwise meritorious claim and thereby "prejudice” it.

The possible impact of allowance of an amendment on the outcome of a case is not the kind of prejudice contemplated by Rule 118.1. The Committee Comment accompanying Rule 118 spells out the particular meaning of the word "prejudice” in this context:

" 'Prejudice’ refers to matter which would prevent a party from having a fair trial, or matter, which he could not properly contest, e.g. when surprised. It does not refer to the effect on the result of the trial otherwise. ” (Emphasis supplied.)

A number of courts have held that although allowance of the proffered amendment may cause the opposing party ultimately to lose on the merits this is not a factor to be considered in deciding whether to grant the motion.² "[T]he question of prejudice is presented by the time at which it is offered rather than by the substance of what is offered. The possible prejudice, in other words, must stem from the fact that the new allegations are offered late rather than in the original pleading, and not from the fact that the opponent may lose his case on the merits if the amendment is allowed, whereas he may win it if the amendment is denied.” James, Civil Procedure, § 5.2, p 158 (emphasis by the author).

Apart from the immaterial "prejudice” of ultimately losing its case, neither Fyke in argument nor the trial judge in his findings mentioned any other source of prejudice.

Ill

Fyke contends that in "the furtherance of justice” a judge may properly consider the resulting equities of the proffered amendment. This is much like the contention, just discussed, that the meritoriousness of the claim or defense may be considered in deciding whether its allowance would be "prejudicial”.

Fyke argues that the annual report defense is, or ought to be, "disfavored” and that a judge may properly disallow a disfavored claim or defense offered by amendment.

The discretion confided to trial judges under the standard, "leave shall be freely given when justice so requires”, is not boundless. In Burg v B & B Enterprises, 2 Mich App 496, 500; 140 NW2d 788 (1966), Judge (now Justice) T. G. Kavanagh wrote, "[W]e believe that [this] language * * * imposes a limitation on the discretion of the court necessitating a finding that justice would not be served by the amendment.”³

While admittedly the parameters of the judge’s discretion are incapable of being precisely delineated, a judge abuses this discretion when he utilizes it to obviate a recognized claim or defense.

The substantive basis of all claims and defenses, "favored” and "disfavored” alike, are acts of the Legislature and the common-law decisions of this or other appellate Courts. The Legislature, not without criticism,* **⁴ concluded that stringent measures were necessary to bring about compliance with the annual report and franchise fee requirements. This Court has steadily enforced that legislative policy.⁵

The allowance of an amendment is not an act of grace, but a right of a litigant seeking to amend "[i]n the absence of any apparent or declared reason—such as undue delay, bad faith or dilatory motive * * * , repeated failure to cure deficiencies * * * , undue prejudice * * * , futility of amendment, etc.” Foman v Davis, supra, p 182.

If we were to recognize a judge’s personal view of a claim or defense as a valid reason for rejecting an amendment, we would find it difficult to explain why his personal view should not also be relevant in assaying a claim or defense raised in the initial pleading.

An individual judge may not properly substitute his personal view of justice and sound public policy for the statutory, or common-law or court rule meant to apply.

There are some early statements, principally in cases where a statute of limitations defense was offered by amendment, that a court may properly deny an amendment which seeks to introduce a "disfavored plea”.⁶ Today a statute of limitations defense can be raised by amendment like any other matter (see fn 14). Those early statements have thus lost their impulse. For this reason and the other reasons stated, we do not find these statements persuasive.

We observe further that to allow the probable disposition of a case to be a factor in deciding whether to permit an amendment would deny the parties a full hearing on all the issues, facts and law, and inevitably would produce decisions based on scanty records composed of pleadings and moving papers and possibly, as in this case, oral argument.

No witnesses were present at the hearing on Gunter’s motion to amend; no testimony was taken. Gunter had no occasion to challenge Fyke’s factual assertions justifying its late filing of its annual report. All the "facts” were gleaned from Fyke’s unverified statements.

On a motion to amend, a court should ignore the substantive merits of a claim or defense unless it is legally insufficient on its face and, thus, as expressed in Foman v Davis, supra, it would be "futile” to allow the amendment. See 6 Wright & Miller, Federal Practice & Procedure, § 1487, p 432.

IV

Fyke, relying on Wilson v Eubanks; 36 Mich App 287, 293; 193 NW2d 353 (1971), where the Court of Appeals reversed an allowance of an amendment which sought to introduce a "technical” foreign statute of limitations defense, argues that Gunter’s failure to plead in its answer the arguably technical annual report defense means that it too failed to "cut square corners” and thus the judge’s rejection of the amendment was justified.

In Wilson v Eubanks, supra, the judge allowed the amendment two years after the action was commenced. Had the defendant initially raised the defense the plaintiffs would have been spared the two-year cost of prosecuting their action. During this period, the plaintiffs had participated in pretrial discovery, none of which was related to the statute of limitations defense. The costs incurred by the plaintiffs during the two-year delay in the assertion of the defense was a factor in the Court of Appeals’ refusal to permit the amendment.

Even assuming both that Gunter’s amendment asserts a technical defense and that its three-month delay in raising the defense was a failure to "cut square corners”, we discern no similar prejudice in terms of unnecessary expense caused Fyke by Gunter’s tardiness. The only pretrial discovery was Gunter’s submission and Fyke’s response to interrogatories; the focus of the interrogatories was directly related to, indeed the basis of, Gunter’s amendment.⁷

As the author of the opinion in Wilson v Eu-banks, supra, I wish to confess that the opinion goes astray to the extent it appears to rest on a personal view of the Uniform Statute of Limitations on Foreign Claims Act.* *⁸ The opinion reasoned that since borrowing statutes are enacted to prevent forum shopping and to avoid interminable tolling of limitational periods due to non-residence, it is beyond the policy of the Act to apply it to an action commenced in the Wayne Circuit Court by Detroit residents against another Detroit resident.

It would not be appropriate to attempt now to redefine the rule stated in Wilson v Eubanks, supra. Suffice it to say that I am now convinced that a judge, confronted with an imploring factual situation and a statute or rule of law which would appear to require a result contrary to his sense of the reason or justice of the situation, may not properly avoid grappling with the nettlesome problem of applying facts to law by creating a special rule for a case where the claim or defense is raised by amendment.

As mentioned, in Wilson v Eubanks, supra, the Court adverted to but did not rest decision on a possible construction of the controlling statute. Underlying this case too is a question of statutory construction. It appears that if Fyke is to prevail, existing precedent must be reexamined.

The new Business Corporation Act (1972 PA 284; MCLA 450.1101 et seq.; MSA 21.200[101] et seq.) does not bar maintenance of an action on a contract entered into during a period of default in filing an annual report and paying franchise fees. This change in legislative policy might justify reconsideration of existing precedent as the in terrorem purpose of the harsh penalties of the former act are no longer functional.

The constructional question has not been raised, briefed or argued. The factual allegations in support of Fyke’s claim that the late filing of its annual report was justified have not been proven. We could not properly reach this question on the present appeal.

V

In affirming the disallowance of the amendment the Court of Appeals said that Gunter’s failure "timely to present its amendment constituted the primary basis for the trial judge’s denial”.

Delay by a moving party in offering an amendment can be a major source of prejudice to the opposing party. Witnesses may die. Evidentiary material may be lost or destroyed. Unnecessary expense may be incurred during the pretrial proceedings. The litigation may proceed to a point where the opposing party cannot reasonably be expected to defend against the amendment; this is an especially pertinent factor on the eve of, during, or after trial.

Gunter submitted interrogatories seeking information relevant to the annual report defense eight days after filing its answer. No trial date had been set or was even imminent. Fyke’s pretrial preparation was not delayed, nor was it put to unnecessary expenditures by Gunter’s delay in raising the defense.

While "[a]s a general rule, the risk of substantial prejudice increases with the passage of time,”⁹ in the absence of a showing of either bad faith or actual prejudice, mere delay does not warrant denial of a motion to amend.¹⁰ "All amendments have this in common: they are offered later in time than the pleading they seek to amend.” James, Civil Procedure, § 5.2, p 158 (emphasis by the author).

VI

At about the time of filing its answer or shortly thereafter, Gunter learned from a response to an inquiry to the Michigan Department of Treasury that Fyke had been in default in filing its annual report and paying fees. Fyke contends that because of this knowledge, Gunter should have raised the defense in its initial answer and its failure to do so constitutes bad faith and justifies denial of the amendment.

Gunter concedes that it did then have knowledge of the default. It asserts, however, that until Fyke answered the interrogatories seeking to determine when the contract between Fyke and Gunter was entered into it did not, due to the inadequacy of its own records, have sufficient information to plead the defense. The good faith of this assertion by Gunter is attested by its service of the interrogatories within eight days of its answer.

In Standard Insurance Co v Pittsburgh Electrical Insulation, Inc, 29 FRD 185, 187 (WD Pa, 1961), the court allowed an amendment saying, pertinently, a party "should not be required to make allegations on suspicion alone; in fact, the law frowns upon frivolous and unsubstantial claims. It. was time enough to file the claim when it had. gained some substantial evidence.” The defendant had opposed the amendment contending that the plaintiff was acting in bad faith because it had knowledge of the basis for the amendment when its initial pleading was filed. The plaintiff admitted that it "suspected” the possibility of an additional claim but explained that as it had no documentary proof, "it needed the process of the courts and its discovery procedures to ferret out such evidence”.

In Ashland Oil & Refining Co v Phillips, 404 SW2d 449 (Ky, 1966), the facts were again similar to those here. The plaintiff sought to amend the complaint on the basis of information gleaned from the defendant’s answers to interrogatories. The trial court, in denying the motion, ascribed no specific reason for its action. The Court of Appeals, in reversing, noted the absence of any prejudice to the defendant and attributed a large share of the blame for the delay to the defendant’s tardiness in answering the interrogatories.¹¹

Gunter sought leave to amend on August 11. Its interrogatories to Fyke had been served on May 18 and answers were due within 15 days. Fyke failed to respond within that period. On June 16 Gunter moved for and on August .4 obtained a court order compelling answer. On that very day, the answers were served.

VII

Fyke further asserts that Gunter’s proper procedural remedy to obtain the desired information regarding the dates was to move for a more definite statement in accordance with GCR 1963, 115.1 and that Gunter’s failure to so move is another indicium of bad faith and justifies the court’s disallowance of the proposed amendment. Rule 115.1 allows a party to move for a more definite statement before filing its responsive pleading if the opponent’s "pleading is so vague or ambiguous that it fails to comply with the requirements of the rules.” Other information regarding an adversary’s claim or defense is to be obtained through discovery.¹²

Fyke’s complaint properly set forth sufficient facts to state "his cause of action” and "to inform the adverse party of the nature of the cause he is called upon to defend”. GCR 1963, 111.1. In this context, where the judge might properly have refused to grant a motion for a more definite statement, Gunter’s failure to make such a motion does not justify a refusal to allow an amendment based on information obtained through discovery.

A contrary rule would unwisely encourage litigants to routinely move for more definite statements before proceeding with discovery. The resulting proliferation of Rule 115 motions would not be constructive.

VIII

The trial judge also erred in relying on GCR 1963, 111.3 and 111.7 to defeat the amendment. Affirmative defenses, even if not asserted in the initial answer, may be introduced by amendment. The consequence of a failure to include an affirmative defense in an answer is that testimony in support of the defense "may be rejected, unless the defect in the pleadings is cured by amendment”.¹³ (Emphasis supplied.)

We align ourselves with the vast majority of courts in holding that an affirmative defense may be raised by amendment.¹⁴

Reversed and remanded for further proceedings consistent with this opinion. Costs to appellant.

T. M. Kavanagh, C. J., and T. G. Kavanagh, Swainson, and Williams, JJ., concurred with Levin, J.

1 MCLA 450.87; MSA 21.87 was repealed by 1972 PA 284, which became effective January 1,1973. MCLA 450.2098; MSA 21.200(1098).

2 "In a sense the plaintiff, indeed, is prejudiced by the amendment by reason of the fact that if it be . allowed, he must be prepared to meet it upon the trial, and if defendant should establish it to the satisfaction of the trier of fact, it will deprive plaintiff of success in his action. However, this advantage to the defendant and disadvantage to the plaintiff is not sufficient to justify a denial of defendant’s application.” Nebbia v Nebbia, 111 NYS2d 813, 816 (Sup Ct Monroe Co, 1952).

Similarly, see Schwartz v American Stores Co, 22 FRD 38 (ED Pa, 1958); Brink v Central School District No 1, 63 Misc 2d 293; 311 NYS2d 424, 426 (Sup Ct, Trial and Spec Term, Dutchess Co, 1970); Iacono v New York, 136 NYS2d 767, 770 (Sup Ct, Trial Term, Kings Co, 1954).

3 Similarly, the Kentucky Court of Appeals in Ashland Oil & Refining Co v Phillips, 404 SW2d 449, 450 (Ky, 1966), explained the working of its court rule also providing that leave to amend shall be "freely given when justice so requires.” In effect, the Court stated that "justice” "requiring” was not a prerequisite for the filing of an amendment. Rather, such an amendment will be denied only if it would work "an injustice in the particular circumstance”.

See, also, LaBar v Cooper, supra, and Congregation B’nai Sholom v Martin, 382 Mich 659, 669; 173 NW2d 504 (1969); Doan v Chesapeake & O R Co, 18 Mich App 271, 280-281; 171 NW2d 27 (1969).

4 See 7 Wayne L Rev 128, 134 (1960); 16 Wayne L Rev 753, 756-758 (1970).

5 See Dawn Construction Co v Paris Home Builders, Inc, 360 Mich 281, 289; 103 NW2d 410 (1960); Irvine & Meier v Wienner, 212 Mich 199, 202; 180 NW 492 (1920); Detroit United Fruit Auction Co v Kroger Grocery & Baking Co, 227 Mich 412, 414-415; 198 NW 947 (1924).

6 See, e.g., Cooke v Spears, 2 Cal 409 (1852).

7 Contrast Bouas v Sociedad Maritima San Nicholas, S. A., 252 F Supp 286, 287 (SD NY, 1965); cert den 382 US 1025; 86 S Ct 646; 15 L Ed 2d 539 (1966): "The defendants, having burdened the plaintiff with pretrial procedures over the years after the alleged settlement was made without informing plaintiff’s attorneys about it, should not now be allowed to deny the plaintiff his day in court.”

8 MCLA 600.5861; MSA 27A.5861.

9 6 Wright & Miller, Federal Practice & Procedure, § 1488, p 439.

10 See Middle Atlantic Utilities Co v S. M. W. Development Corp, 392 F2d 380, 384 (CA 2, 1968); Public Administrator of New York County v Curtiss-Wright, 224 F Supp 236, 238 (SD NY, 1963); Fli-Fab, Inc v United States, 16 FRD 553, 556 (D RI, 1954); Standard Insurance Co v Pittsburgh Electrical Insulation, Inc, 29 FRD 185, 186 (WD Pa, 1961); 3 Moore’s Federal Practice, § 15.08[4], p 901; 6 Wright & Miller, Federal Practice & Procedure, § 1488, p 438.

11 In accord, see Morgan v Superior Court, 172 Cal App 2d 527; 343 P2d 62 (1959) (when plaintiff filed her complaint for divorce she suspected but did not have positive proof of defendant’s adultery); Spicer v Pennsylvania R Co, 196 P Supp 679 (ED Pa, 1961) (the defendant, a year and a half after the filing of its answer, was allowed to amend to incorporate information gained through interrogatories three months before the motion to amend was filed).

12 See 1 Honigman & Hawkins, Michigan Court Rules Annotated (2d ed), Authors’ Comments concerning the purpose and function of this rule, pp 283-284; Major v Schmidt Trucking Co, 15 Mich App 75, 82; 166 NW2d 517.(1968).

13 See Authors’ Comments, 1 Honigman & Hawkins, Michigan Court Rules Annotated (2d ed), p 201.

5 Wright & Miller, Federal Practice & Procedure, § 1278, p 345, in discussing the comparable federal rule, states:

"Moreover, even if defendant does not assert an affirmative defense in his answer, he may amend his pleading under Rule 15(a) * * * [even after the 20-day grace period during which amendments may be filed as of right] * * * to assert an omitted affirmative defense on the written consent of the adverse party or by leave of the court, which 'shall be freely given when justice so requires.’ ”

14 Groninger v Davison, 364 F2d 638, 640 (CA 8, 1966) (statute of limitations); Emich Motors Corp v General Motors Corp, 229 F2d 714, 716-718 (CA 7, 1956) (statute of limitations); Kraushaar v Leschin, 4 FRD 144, 145 (ED Pa, 1944) (statute of limitations); Systems Inc v Bridge Electronics Co, 335 F2d 465, 466 (CA 3, 1964) (dictum in case where defense was misrepresentation, fraud and economic duress); Villamor v Premier Insurance Co, 13 Mich App 30, 33; 163 NW2d 697 (1968) (statute of limitations); Great Lakes, Inc v Rumery Construction Co, Inc, 23 Mich App 501, 506; 179 NW2d 36 (1970) (suspension of plaintiff’s powers for failure to file annual report at time contract entered into). Contrast Strauss v Douglas Aircraft Co, 404 F2d 1152 (CA 2, 1968).