Walsh v. Reliance Trust Company

Opinion

1 WO 2 3 4 IN THE UNITED STATES DISTRICT COURT 5 FOR THE DISTRICT OF ARIZONA

7 Martin J. Walsh, No. CV-19-03178-PHX-JJT

8 Plaintiff, ORDER

9 v.

10 Reliance Trust Company, et al.,

11 Defendants.

12 13 At issue are Plaintiff Secretary of Labor Martin J. Walsh’s Motion to Amend the 14 Complaint (Doc. 117, PMA), to which Defendants, Eric Bensen, Randall Smalley and 15 Robert Smalley, Jr. (the Individual Defendants), the Family Trust, Marital Trust and 16 Survivor’s Trust all created under the Smalley Revocable Trust Dated July 8, 2004 (the 17 Trust Defendants), and RVR, Inc., filed a Response (Doc. 123) and Plaintiff filed a Reply 18 (Doc. 128); and Defendants’ Motion to Amend the Answer (Doc. 116, DMA), to which 19 Plaintiff filed a Response (Doc. 122), and Defendants filed a Reply (Doc. 125). For the 20 reasons that follow, the Court grants Plaintiff’s Motion and denies as moot Defendants’ 21 Motion. 22 I. BACKGROUND 23 Plaintiff filed the present action against four fiduciaries of the RVR Employee Stock 24 Ownership Plan (“Plan”) for breaching their fiduciary duties when they allegedly caused 25 the Plan to purchase 100% of the stock of RVR, Inc. (“RVR”) for more than fair market 26 value. The Complaint alleges seven causes of action under the Employee Retirement 27 Income Security Act of 1974 (“ERISA”). The third claim for relief, against Randall 28 Smalley, Robert Smalley, Jr., and Eric Bensen, is for a breach of fiduciary duties of loyalty, 1 prudence, and adherence to monitor Reliance Trust Company (“Reliance”) in violation of 2 ERISA sections 404(a)(1)(A), (B), and (D), 29 U.S.C. §§ 1104(A)(1)(A), (B), and (D). As 3 discovery progressed, Plaintiff uncovered that Mr. Bensen was an officer of RVR but not 4 a member of its board. As a result, Plaintiff now seeks leave to file an Amended Complaint 5 primarily to clarify that Mr. Bensen’s fiduciary duty to monitor Reliance arose from 6 Mr. Bensen’s “various capacities as an officer of RVR, an officer of Cruise America, Inc., 7 and a director of Cruise America, Inc.” (PMA at 3.) 8 II. LEGAL STANDARD 9 When a scheduling order setting a deadline to amend pleadings has already been 10 entered in a case and a party moves to amend after the deadline, the request for leave to 11 amend is in effect a request to modify the case schedule and must first be evaluated under 12 Federal Rule of Civil Procedure 16. See Coleman v. Quaker Oats Co., 232 F.3d 1271, 1294 13 (9th Cir. 2000). Under Rule 16(b)(4), a party must show “good cause for not having 14 amended their complaint[] before the time specified in the scheduling order expired.” Id. 15 This standard “primarily considers the diligence of the party seeking the amendment.” Id. 16 Once the moving party establishes good cause under Rule 16, the Court considers 17 whether to grant leave to amend under Rule 15(a)(2). Although the decision to grant or 18 deny a motion to amend is within the trial court's discretion, “Rule 15(a) declares that leave 19 to amend shall be freely given when justice so requires.” Foman v. Davis, 371 U.S. 178, 20 182 (1962) (citation and internal quotation marks omitted). “In exercising its discretion 21 with regard to the amendment of pleadings, a court must be guided by the underlying 22 purpose of Rule 15—to facilitate a decision on the merits rather than on the pleadings or 23 technicalities.” Eldridge v. Block, 832 F.2d 1132, 1135 (9th Cir. 1987) (citation and internal 24 quotation marks omitted). 25 However, the policy in favor of allowing amendments is subject to limitations. After 26 a defendant files a responsive pleading, leave to amend is not appropriate if the 27 “amendment would cause prejudice to the opposing party, is sought in bad faith, is futile, 28 1 or creates undue delay.” Madeja v. Olympic Packers, 310 F.3d 628, 636 (9th Cir. 2002) 2 (citation and internal quotation marks omitted). 3 III. ANALYSIS 4 There are two motions before the Court, Plaintiff’s Motion to Amend the Complaint 5 and Defendants’ Motion to Amend its Answer. The Court’s analysis begins and ends with 6 Plaintiff’s Motion to Amend the Complaint. 7 A. Plaintiff’s Motion to Amend the Complaint 8 Plaintiff argues his proposed amendment does not change the legal basis for the 9 claim but rather amends the factual basis for the claim to conform to information learned 10 through discovery. Defendants, on the other hand, argue Plaintiff is asserting a new legal 11 theory and as such Plaintiff should be precluded from amending the Complaint because 12 allowing “a new theory of liability at this late stage of the litigation can only serve to 13 prejudice Defendants.” (Doc. 125 at 4-5.) 14 1. Plaintiff Has Shown Good Cause Exists 15 Rule 16 states, “[a] schedule may be modified only for good cause and with the 16 judge’s consent.” Fed. R. Civ. P. 16(b)(4). “What constitutes good cause ‘necessarily varies 17 with the circumstances of the case.’” Gonzales v. Douglas, 2016 WL 4530442, at *8 18 (D. Ariz. Aug. 30, 2016) (internal citation omitted). According to the Plaintiff, the 19 proposed Amended Complaint clarifies that: (1) Mr. Smalley and Mr. Smalley Jr. were 20 directors of RVR; (2) Mr. Smalley, Mr. Smalley Jr., and Mr. Bensen were officers and 21 directors of Cruise America, Inc., RVR’s wholly owned subsidiary; (3) through the 22 April 15, 2014 Reliance Engagement Letter, Cruise America, Inc. technically engaged 23 Reliance to act as the Plan Trustee on RVR’s behalf; (4) Mr. Bensen signed the Reliance 24 Engagement Letter in his capacity as CFO of Cruise America, Inc.; and (5) through 25 May 22, 2014 resolutions of the Cruise America, Inc. Board of Directors Mr. Smalley, 26 Mr. Smalley Jr., and Mr. Bensen ratified, confirmed, adopted, and approved Mr. Bensen’s 27 engagement of Reliance in his capacity as CFO of Cruise America, Inc. (See Doc. 122 28 1 at 3.) The Court finds these proposed changes do not change Plaintiff’s legal theory but 2 clarify the factual basis for certain claims. 3 Since the original Complaint, Plaintiff has pursued a theory that Mr. Smalley, 4 Mr. Smalley Jr., and Mr. Bensen violated their fiduciary duties. (Doc. 5, Comp. ¶ 72.) In 5 pursuit of this theory, Plaintiff sought discovery to prove his claim. To do so required, 6 among other things, requesting information related to Mr. Bensen’s relationship with 7 Cruise America, Inc. and RVR. Eventually, after confirming facts related to the 8 appointment of Reliance as the Plan Trustee and understanding Mr. Bensen’s alleged role 9 in the arrangement, Plaintiff seeks to amend the Complaint to incorporate information 10 learned during discovery. Defendants argue Plaintiff’s late amendment should not be 11 allowed because Plaintiff had information that confirmed the board members of both RVR 12 and Cruise America, Inc. prior to commencing litigation. (Doc. 125 at 3.) Thus, according 13 to the Defendants, Plaintiff was on notice and should have amended the Complaint prior to 14 the deadline set by the Scheduling Order. The Court is not persuaded by Defendants’ 15 argument.1 Even if Plaintiff had documents that listed the board members of both RVR and 16 Cruise America, Inc., it is reasonable for Plaintiff to confirm such information during 17 discovery to resolve any ambiguities. Once confirmed, it is sensible for Plaintiff to seek to 18 amend the Complaint to clarify the factual basis for some claims. 19 In the present case, Plaintiff’s attempts to confirm Mr. Bensen’s relationship with 20 Cruise America, Inc. were not successful until June 6, 2021. Days later, during depositions 21 of the Individual Defendants on June 8, 10, and 11 of 2021, Plaintiff was able to further

22 1 Defendants also cite several cases in support of their argument that Plaintiff unduly 23 delayed seeking to amend. (Doc. 123 at 7-8.) However, as Plaintiff correctly asserts, these cases can be distinguished as they involve attempts by plaintiffs to either add new legal 24 claims, Zivkovic v. S. Cal. Edison Co., 302 F.3d 1080, 1087 (9th Cir. 2002); Jackson v. 25 Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990); Acri v. Int’l Ass’n of Machnists & Aerospace Workers, 781 F.2d 1393, 1395 (9th Cir. 1986); Sako v. Wells Fargo Bank, Nat’l 26 Ass’n, 2015 WL 5022326, at *1 (S.D. Cal. Aug. 24, 2015), or add new defendants, MiCamp 27 Sols. LLC v. Nat’l Processing LLC, 2021 WL 289661, at *1 (D. Ariz. Jan. 28, 2021); Ogier v. KC Care, LLC, 2019 WL 3210089, at *1 (D. Or. June 17, 2019). Here, Plaintiff is neither 28 adding a new legal claim nor adding a new defendant. 1 understand Mr. Bensen’s role at RVR and Cruise America, Inc. Within a fortnight of 2 receiving this information, Plaintiff sought to amend the Complaint. Because Plaintiff was 3 not able to confirm Mr. Bensen’s role at RVR or Cruise America, Inc. until June 6, 2021, 4 it is understandable why Plaintiff did not amend the Complaint prior to the deadline set in 5 the Scheduling Order. Plaintiff then sought leave to amend the Complaint quickly after 6 confirming Mr. Bensen’s role. As a result, given the specific circumstances of this case, 7 Plaintiff has shown good cause. 8 2. Plaintiff Has Shown Justice Requires He Be Granted Leave to Amend the Complaint 9 10 “Rule 15(a) declares that leave to amend shall be freely given when justice so 11 requires.” Foman, 371 U.S. at 182 (internal citations omitted). However, after a defendant 12 files a responsive pleading, leave to amend is not appropriate if the “amendment would 13 cause prejudice to the opposing party, is sought in bad faith, is futile, or creates undue 14 delay.” Madeja, 310 F.3d at 636 (9th Cir. 2002) (citation and internal quotation marks 15 omitted). Defendants take issue with Plaintiff’s argument that Mr. Bensen violated his 16 fiduciary duty to monitor Reliance in his capacity as an “officer of RVR, an officer of 17 Cruise America, Inc., and a director of Cruise America, Inc.,” claiming Plaintiff never 18 asserted this argument in the original Complaint. (Doc. 125 at 4-5.) It is true that a 19 plaintiff’s failure to plead a particular theory may preclude him from asserting that theory 20 after the time specified in a scheduling order has expired. See Coleman 232 F.3d at 1294. 21 However, the concern in Coleman is over the prejudice to a defendant who has no notice 22 of the claimed theories or underlying facts until after discovery closes and therefore cannot 23 defend itself. See Coleman, 232 F.3d at 1292. 24 Here, it is clear Defendant had notice of Plaintiff’s argument that Mr. Bensen 25 violated his fiduciary duties regarding Reliance. As stated earlier, Defendants have been 26 on notice of Plaintiff’s allegation that Mr. Smalley, Mr. Smalley Jr., and Mr. Bensen 27 violated their fiduciary duties since the original Complaint was filed. (Comp. ¶ 72.) Further, 28 in March of 2021, months before the close of discovery, Plaintiff provided a factual 1 analysis in support of his position that Mr. Bensen was a functional fiduciary due to his 2 discretion “in selecting and retaining Reliance, including that he ‘signed in his capacity as 3 Chief Financial officer of Cruise America, Inc. the engagement agreement with Reliance 4 for Reliance to serve as the Plan Trustee.’” (PMA at 11) (internal citations omitted). Thus, 5 Defendants have had notice of Plaintiff’s claimed theories. 6 Additionally, Mr. Smalley, Mr. Smalley Jr., and Mr. Bensen are aware of their status 7 on the Boards of Cruise America, Inc. and RVR. Any facts related to RVR or Cruise 8 America, Inc. are in Defendants’ possession. Accordingly, the proposed amendment will 9 not necessitate additional discovery. 10 Finally, Defendants argue the Court should deny Plaintiff’s Motion because 11 amending the Complaint would be futile. As stated earlier, Plaintiff is not changing legal 12 theories but clarifying the factual basis for certain claims. The proposed changes to some 13 factual claims in the Complaint do not render Plaintiff’s third claim for relief futile. A 14 “proposed amendment is futile only if no set of facts can be proved under the amendment 15 to the pleadings that would constitute a valid and sufficient claim or defense.” Miller v. 16 Rykoff–Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1998), overruled on other grounds by 17 Ashcroft v. Iqbal, 556 U.S. 662 (2009). On February 18, 2020, the Court denied 18 Defendants’ motion to dismiss the Complaint (Doc. 22). The Court’s ruling would not 19 change due to the proposed amendment. For the foregoing reasons the Court grants 20 Plaintiff leave to amend the Complaint. 21 B. Defendants’ Motion to Amend the Answer 22 Because the Court grants Plaintiff’s motion to Amend the Complaint, the Individual 23 Defendants will have the opportunity to assert any new factual or legal defenses when they 24 answer the new operative Complaint. As a result, Defendants’ Motion to Amend the 25 Answer is denied as moot. 26 IV. CONCLUSION 27 In sum, Plaintiff has shown good cause to amend the Complaint. Accordingly, 28 IT IS ORDERED granting Plaintiff’s Motion to Amend the Complaint (Doc. 117). IT IS FURTHER ORDERED denying Defendants’ Motion to Amend the Answer || (Doc. 116) as moot. 3 Dated this 14th day of March, 2022. CN 4 “wok: Unie State#District Judge 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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