Rockwood Select v Devine Millimet Branch

2016 DNH 024

• Court: District Court, D. New Hampshire
• Decided: February 8, 2016
• Docket: Civil No. 14-cv-303-JL
• Status: Published

Opinion

UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

Rockwood Select Asset Fund XI, (6)-1, LLC

v. Civil No. 14-cv-303-JL Opinion No. 2016 DNH 024 Devine, Millimet & Branch, PA, and Karen S. McGinley, Esq.

CORRECTED MEMORANDUM ORDER

As the court has discussed previously,1 this action pits a

disgruntled lender against the law firm that represented the

defaulting borrower in the deal gone sour. Plaintiff Rockwood

Select Asset Fund XI, (6)-1, LLC (“Rockwood”), now seeking to

expand the scope of this litigation, asks the court’s leave to

amend its complaint to add a civil conspiracy claim under the

Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.

§ 1965(d), against defendants Devine, Millimet & Branch, PA, and

Karen McGinley. The court denies Rockwood’s request to

significantly expand the scope of this litigation at so late a

date.

The parties also brought several discovery disputes before

the court pursuant to its informal discovery dispute resolution

procedure2 on January 22, 2015. To the extent that those issues

1 See Order July 9, 2015 (document no. 26). 2 See Order of November 7, 2014 (document no. 19). were not resolved at the chambers conference that followed, they

are disposed of as outlined below.

I. Background

Rockwood filed this action in this court on July 8, 2014,

alleging, in a one-count complaint, that the defendants failed to

disclose material facts to Rockwood before Rockwood issued its

$1.6 million loan to defendants’ client, Martha McAdam.

Specifically, in that complaint, Rockwood alleged that defendants

failed to disclose the existence of litigation pending against

McAdam in an opinion letter drafted and supplied to Rockwood

shortly before the loan closed. Instead, Rockwood claimed -- and

defendants admit -- that defendants issued an opinion letter

stating that there was no litigation pending against McAdam as of

July 21, 2011. Rockwood also contended that defendants similarly

misrepresented to it that a tenant in McAdam’s building, whose

rent would be used to pay back the loan, was “a legitimate

operating company which was independent of [McAdam] and entities

owned and controlled by her” when, in fact, Rockwood alleges, it

was not. To round out its original claim, Rockwood asserted that

it relied on these representations when it agreed to make the

loan.

The court held a preliminary pretrial conference on October

30, 2014, and subsequently issued an order, see document no. 19,

2 by which it set a January 5, 2015 deadline for any amendments to

pleadings and ordered discovery to close on September 17, 2015.

The latter deadline was later extended, upon the parties’ joint

motion, until December 2, 2015. See document no. 33. Precisely

two weeks before that deadline -- and some ten and a half months

after the deadline to amend pleadings -- Rockwood moved for leave

to amend its complaint.

Rockwood now seeks to add a claim for a civil RICO

violation, alleging that Devine and Attorney McGinley, along with

McAdam and several businesses under her control, conspired to

conduct a pattern of racketeering activity. See 28 U.S.C.

§ 1962(d). Specifically, Rockwood contends that McAdam and her

various associated corporate entities engaged in a pattern of

racketeering activity intended to defraud her various creditors

between 2000 and 2012. Proposed Amended Complaint (document no.

39-1) ¶¶ 6-8. In support of these allegations, Rockwood details

several acts of fraud allegedly perpetrated by McAdam prior to

the loan currently at issue in this case and accuses McAdam of

making fraudulent representations about the use of the funds from

the loan and trying to avoid repaying the loan through a series

of fraudulent activity targeting Rockwood and various courts in

Vermont and New Hampshire. Rockwood then alleges that defendants

Devine and Attorney McGinley furthered this conspiracy by

3 engaging in various acts of wire fraud, see 18 U.S.C. § 1343, and

mail fraud, see 18 U.S.C. § 1341, in connection with their

representation of McAdam during that time period. See Proposed

Amended Complaint (document no. 39-1) ¶¶ 9, 266-286.

II. Applicable legal standard

The court’s scheduling order, which set a deadline for

amending the pleadings, removed the standard for resolving this

motion from the “freely given” rubric of Rule 15 to the “good

cause” requirement of Rule 16. Rule 15 provides that, outside of

the opportunities afforded a party to amend its pleading as a

matter of course, “a party may amend its pleading only with the

opposing party’s written consent or the court’s leave. The court

should freely give leave when justice so requires.”3 Fed. R.

Civ. P. 15(a)(2).

However, as the parties here acknowledge, Rule 16 requires a

party seeking to amend its pleadings after the relevant deadline

has passed to also seek a modification of the court’s scheduling

order. United States ex rel D’Agostino v. EV3, Inc., 802 F.3d

188, 192 (1st. Cir. 2015). The court’s imposed schedule “may be

modified only for good cause and with the judge’s consent.” Fed.

R. Civ. P. 16(b)(4). The “good cause” standard “focuses on the

3 Defendants did not consent to -- and, indeed, vigorously oppose -- Rockwood’s motion.

4 diligence (or lack thereof) of the moving party more than it does

on any prejudice to the party-opponent,” Steir v. Girl Scouts of

the USA, 383 F.3d 7, 12 (1st Cir. 2004), though “prejudice to the

opposing party remains relevant,” O'Connell v. Hyatt Hotels of

P.R., 357 F.3d 152, 155 (1st Cir. 2004). The length of

Rockwood’s delay in seeking to amend its complaint counsels

against granting Rockwood’s motion, especially in light of the

prejudice that injecting a RICO claim into the suit at the tail

end of the discovery would impose on the defendants.

III. Analysis

A. Delay

Rockwood’s motion to amend comes over ten months after the

deadline to file amended pleadings, and a little over sixteen

months after it filed its initial complaint. This significant

passage of time, during which Rockwood never even raised the

spectre of a potential amendment to its complaint, weighs against

allowing Rockwood to insert a new cause of action into the case

at this juncture. See Steir v. Girl Scouts of the USA, 383 F.3d

7, 12 (1st Cir. 2004) (“[T]he longer a plaintiff delays, the more

likely the motion to amend will be denied, as protracted delay,

with its attendant burdens on the opponent and the court, is

itself a sufficient reason for the court to withhold permission

to amend.”); Cruz v. Bristol-Myers Squibb Co., PR, 699 F.3d 563,

5 570 (1st Cir. 2012) (affirming denial of motion to amend brought

nine months after scheduling order deadline).

There is, really, no dispute that Rockwood was or should

have been aware of the vast majority of the predicate acts of

fraud that underpin its proposed RICO claim. Many of these

predicate acts are frauds that Rockwood alleges McAdam committed

against Rockwood itself, or upon courts in the context of actions

to which Rockwood was a party, in 2011 and 2012. See Proposed

Amended Complaint (document no. 39-1) ¶¶ 140-265. During those

actions, Rockwood repeatedly accused McAdam of falsifying

documents relating to her use of the loan funds and documents

submitted to Vermont and New Hampshire courts. See Chabot Aff’t

Ex. A (document no. 50-7) ¶ 25; Proposed Amended Complaint

(document no. 39) ¶¶ 168-169. On August 22, 2012, Rockwood

informed defendants that it possessed “hard evidence of numerous

instances in which Ms. McAdam has falsified documents . . .

misappropriated lender, tenant, and vendor funds, and engaged in

a continuing pattern of misrepresentation and fraud . . . .”

Chabot Aff’t Ex. E (document no. 50-7) at 3-4.

Rockwood also knew or had ample opportunity to learn about

McAdam’s alleged fraud on Citigroup in 2005 and the fraud that

the court in Hamilton County, Ohio found that McAdam had

practiced upon it. In its proposed amended complaint, Rockwood

6 alleges that McAdam obtained the 2005 loan from Citigroup by

invoking a fraudulent lease with a tenant that she controlled,

Monster Storage. Proposed Amended Complaint (document no. 39-1)

¶¶ 31-35. But defendants’ failure to disclose Monster’s lack of

independence is one of the misrepresentations that Rockwood also

alleged in its original complaint. See Complaint (document

no. 1) ¶¶ 15-18. Rockwood also appears to have possessed the

closing binder for McAdam’s loan through Citigroup no later than

August 2012, see Chabot Aff’t (document no. 50-2) ¶ 14, and so

was aware of that loan to McAdam before it brought this action.

As for the Ohio court’s findings as to McAdam, and the Ohio

appellate court’s affirmation of those findings, Rockwood was

aware of those no later than August 2012 as well. See Chabot

Aff’t Ex. A (document no. 50-3) ¶ 25(e). Neither party has

suggested that the documents filed with the Ohio courts in

connection with that action were not a matter of public record.

Though it may have known about McAdam’s ongoing fraudulent

behavior before it filed its complaint in this action, Rockwood

contends, it was only through discovery that Rockwood learned

about Devine’s and Attorney McGinley’s intent to conspire with

McAdams to further her alleged racketeering activity. See Motion

(document no. 44) at 1-2; Reply (document no. 60) at 2-9. But

Rockwood knew of McAdam’s activities, as described above, no

7 later than 2012. And Rockwood was further aware at that time

that the defendants had represented McAdam at least from 2005

through mid-2012, including in connection with the Ohio action,

the Rockwood loan in 2011, and the post-loan proceedings with

Rockwood.4 In no small part, Rockwood’s proposed amended

complaint infers the defendants’ alleged knowledge and intent to

conspire with McAdam from events that occurred during the course

of that representation. Rockwood could as easily have drawn most

of these inferences from its knowledge of McAdam’s activity, the

Ohio action, the Rockwood loan, and its own post-closing

interactions with McAdam and her counsel. And in a civil RICO

claim, as in a claim for fraud, the “intent, knowledge, and other

conditions of a person’s mind may be alleged generally” in the

complaint. Fed. R. Civ. P. 9(b). The court is therefore not

convinced that Rockwood could not have attempted to raise its

RICO claim much earlier in this action -- if not, indeed, at the

outset.

4 Some six weeks after briefing on plaintiff’s motion to amend was complete, defendants moved to supplement their opposition with several years’ worth of defendants’ invoices to McAdam that were in Rockwood’s possession. See Emergency Motion (document no. 73). The court did consider these documents, as well as Rockwood’s arguments in response, see Response to Emergency Motion (document no. 75), and can only conclude that Rockwood was, or ought to have been, well aware that defendants represented McAdam in a series of transactions and litigation beginning at least in 2001.

8 B. Prejudice

Belated motions to amend the complaint are “[p]articularly

disfavored” when their “timing prejudices the opposing party by

requiring a re-opening of discovery with additional costs, a

significant postponement of the trial, and a likely major

alteration in trial tactics and strategy.” Steir, 383 F.3d at 12

(quotations omitted). Here, plaintiff moved to amend a mere two

weeks before the close of the discovery period5 -- a deadline

already extended once by the parties. The defendants would

suffer at least some prejudice if the scope of the action were so

significantly expanded as injecting a civil RICO conspiracy claim

would require at this late stage in the litigation. First, as

both parties acknowledge, this action -- brought by a lender not

against the defaulting party, but against her attorneys -- has

required a somewhat painstaking approach to discovery in light of

the privilege that generally protects communications between

attorneys and their clients made for the purpose of obtaining

legal advice.6 The discovery that would need to be revisited in

5 A deadline that, the court notes, passed nearly two months before the parties brought the discovery disputes discussed below to its attention. 6 During this process, the parties have sought the court’s assistance in resolving several discovery-related issues. For example, the court has conducted four conferences, both telephonic and in chambers, to resolve discovery disputes in accordance with the procedure outlined in its November 7, 2014

9 light of Rockwood’s proposed new claim may not be quite so broad

as the defendants allege, but it would require at least some

reconsideration of the discovery already conducted.

Second, and of great concern to the court, is the potential

that the interests of the two defendants, who have until this

time been represented by the same counsel, may diverge in the

face of a civil RICO conspiracy allegation of this scope.

Injecting such a potential for conflict after the majority of

discovery in this action has been taken -- including after

Attorney McGinley’s deposition -- would prejudice the defendants,

as would the resulting “major alteration in trial tactics and

strategy.” Id.

Nor is the court convinced by Rockwood’s suggestion7 that,

if it had sufficient knowledge to assert its RICO claim earlier

in the action, then the defendants -- who knew more about their

order. Procedural Order of April 29, 2015, Minute Entry of August 10, 2015, Minute Entry of November 19, 2015, and Minute Entry of January 22, 2016. On plaintiff’s motion, the court has, further, conducted multiple in camera reviews of documents under the crime-fraud exception to the attorney-client privilege and work product doctrine, and issued four orders on the subject. Order of July 9, 2015 (document no. 26); Order of August 10, 2015 (document no. 27); Order of August 14, 2015 (document no. 28); Order of September 15, 2015 (document no. 35). And more is ordered infra. 7 “Nor do Defendants attempt to reconcile their argument that they did not realize a RICO claim was possible prior to depositions, and were prejudiced as a result, with their argument that Rockwood should have realized it had a RICO claim sooner.” Response to Emergency Mot. (document no. 75) at 1.

10 history with McAdam than Rockwood -- ought to have arranged their

defense accordingly ab initio. The plaintiff is obligated, by

its complaint, to put the defendant on notice of its asserted

claims. See Ruiz Rivera v. Pfizer Pharm., LLC, 521 F.3d 76, 84

(1st Cir. 2008) (“The fundamental purpose of our pleadings rules

is to protect a defendant's ‘inalienable right to know in advance

the nature of the cause of action being asserted against him.’”)

(citations omitted). This allows the defendant to answer, and

then defend himself against, those asserted claims. And that

happened here. Rockwood brought this action claiming

misrepresentation by the defendants. The defendants arranged

their litigation strategy in response to the claim of which it

was notified by Rockwood’s complaint. Regardless of whether the

defendants knew, at the outset, that Rockwood could have brought

a civil RICO conspiracy claim -- and the court takes no position

on whether they did -- the defendants would suffer prejudice if

required to substantially change their litigation strategy at the

tail end of discovery in response to a claim that could have been

asserted, but was not, at the beginning of the litigation. This

is especially true where a newly introduced conflict of interest

may require the defendants to seek separate counsel.

11 Accordingly, the court DENIES Rockwood’s motion for leave to

amend its complaint.8

IV. Sealed documents

By its order of November 18, 2015, the court allowed

documents related to Rockwood’s motion to amend the complaint to

be filed under seal. Acknowledging, as this court often has, the

public’s right to access judicial proceedings, see In re

Providence Journal Co., 293 F.3d 1, 13 & n.5 (1st Cir. 2002), the

court orders that these documents9 be unsealed.

V. Discovery issues

On January 22, 2016, the court and the parties, utilizing

the informal discovery dispute resolution procedure elected by

the parties and outlined in the court’s order of November 7,

2014,10 held a chambers conference to discuss a number of

disputes between the parties that arose near the end of the

discovery period. Based upon the court’s discussion with counsel

during that conference, the court orders as follows:

8 Document no. 37. 9 This includes document nos. 39, 44, 46, 51, 53, 60, 61, 64 and 75. 10 Document no. 19.

12 1. Defendants will produce Matthew Johnson for deposition.

2. Devine will prepare and produce a witness pursuant to

Rule 30(b)(6) on the topic of Devine’s knowledge of

lawsuits brought by Attorney Jack Donenfeld against

McAdam.

3. Defendants will deliver to the court for in camera

review, on or before February 15, 2016: (a) the email

concerning the allegedly forged trustee process

paperwork and (b) the disputed documents concerning the

lease referenced in Attorney McGinley’s August 7, 2012

affidavit.

4. The court denies Rockwood’s request that the court

order the defendants to supplement their responses to

certain requests for admission propounded by Rockwood.

5. Rockwood has requested, and defendants resist,

production of Devine’s invoices for work done on behalf

of McAdam and her associated entities since 2000. The

court understands that Rockwood has, since the

discovery conference, produced such invoices already in

its possession. See Defendants’ Emergency Motion

(document no. 73) Ex. A. On or before February 15,

2016, Rockwood will produce to defendants any remaining

such invoices. On or before February 22, 2016,

13 defendants will produce to Rockwood any invoices not

already produced by Rockwood, with appropriate

redactions for privilege and a privilege log reflecting

the bases for those redactions.

6. Rockwood will produce the documents requested

concerning the 2001 FINRA finding about Dan Purjes on

or before February 15, 2016.

7. Defendants allege that certain communications described

on Rockwood’s privilege log were improperly withheld

because the communications were sent to certain third

parties, including Todd Enright. This issue is not

amenable to resolution through the court’s informal

process. If the parties have not already resolved it

among themselves, defendants may move to compel the

production of these communications and the parties may

brief the issue in accordance with the Federal Rules of

Civil Procedure and this district’s Local Rules.

8. Rockwood will either (a) separately produce those

documents previously excluded from its production of

Dan Purjes’ file on grounds that they were previously

produced, or (b) provide defendants with the

information necessary to identify those previously-

produced documents, such as the Bates numbers thereof.

14 SO ORDERED.

____________________________ Joseph N. Laplante United States District Judge

Dated: February 8, 2016

cc: Matthew B. Byrne, Esq. Norman Williams, Esq. Robert F. O’Neill, Esq. David A. Boyd, Esq. Finis E. Williams, III, Esq. James C. Wheat, Esq. Pierre A. Chabot, Esq.