Zee-Bar Inc v. Kaplan CV-88-60-B 01/22/93 P UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Zee-Bar, Inc., et al.

v. Civil No. 88-60-B

Gerald N. Kaplan, et al.

O R D E R

Plaintiffs appeal from the Magistrate Judge's order denying

their motion to amend their accountant malpractice complaint by

adding a claim of negligence between 1976 and 1983 to their

existing claim of negligence between 1983 and 1985. The

Magistrate Judge denied the motion because he determined that it

was barred by the statute of limitations. Plaintiffs disagree

and contend that the proposed amendment should "relate back" to

the complaint pursuant to Fed. R. Civ. P. 15(c) (2) because it

arises from the same conduct, transactions, or occurrences

described in the complaint.

For the reasons discussed below, I accept plaintiffs' Rule

15(c)(2) argument insofar as it applies to the specific conduct

identified in the complaint. Nevertheless, I deny the motion to

amend on other grounds. PROCEDURAL HISTORY

This case has a complex procedural history which merits

extended discussion.

Plaintiffs Zee-Bar, Inc. - New Hampshire, T & Z Realty,

Inc., R.Z., Inc., Zee-Bar, Inc. of Vermont, and Robert R.

Zabarsky commenced this action by filing an 80-paragraph

complaint against their former accountants on February 17, 1988

("the 1988 complaint"). The complaint alleges that one of the

defendants, Gerald Kaplan, began providing accounting services to

some of the Zee-Bar plaintiffs in 1971. Plaintiffs' first

contact with the other defendants was allegedly in 1983, when

Kaplan formed a partnership with defendant Stanley L. Shuman.

Defendant, Lynne Norton, was the office manager of the resulting

partnership, defendant Kaplan and Shuman, C.P.A.

The 1988 complaint contains five counts. Count I alleges a

claim pursuant to

(c) ("civil RICO"). In this

count, plaintiffs claim that Kaplan engaged in a pattern of

racketeering activity dating back to 1976. Count II alleges a

civil RICO conspiracy beginning after Kaplan and Shuman, C.P.A.

was formed. Count III alleges violations of New Hampshire's

Consumer Protection statute, also beginning after the formation

of Kaplan and Shuman, C.P.A. Count IV alleges fraud and

2 includes all of the specific conduct identified in the complaint.

Count V alleges negligence. Although the fact section of the

complaint states that Kaplan engaged in "gross and willful

neglect of plaintiffs' accounting matters as well as misleading

financial and tax advice" beginning in 1976, the negligence count

itself is expressly limited to conduct which occurred on or after

1983.

On April 25, 1989, the court (Devine, J.) dismissed the RICO

counts (Counts I and II). As a result, plaintiffs commenced a

separate action against the same defendants by filing a 223-

paragraph complaint restating and expanding the civil RICO claims

("the 1989 complaint"). Count I of the 1989 complaint alleges

civil RICO violations beginning in 1976. Counts II and III

allege civil RICO violations beginning in 1983, after the

formation of Kaplan and Shuman, C.P.A.

The defendants moved to strike the 1989 complaint on the

ground that it was precluded by the court's earlier order

dismissing the civil RICO counts from the 1988 complaint. On

January 12, 1990, the court, relying on Fleet Credit Corp. v.

Sion,

(1st Cir. 1990), concluded that the RICO

counts in the 1988 complaint should have been allowed.

3 Accordingly, the court denied the motion to strike and

consolidated the 1988 and 1989 complaints.

Plaintiffs later abandoned Count III of the 1989 complaint

and all of their claims against Shuman and Norton. The court

dismissed the Consumer Protection Act count (Count III of the

1988 complaint) and all claims against Kaplan and Shuman, C.P.A.

Finally, the court granted summary judgment with respect to all

of the civil RICO counts except the allegations in Count I of the

1989 complaint that Kaplan had engaged in mail fraud arising from

the improper payment of certain New England Telephone bills.

This left Kaplan as the only defendant and the limited civil RICO

claim, the fraud claim, and the negligence claim as the only

active causes of action.

The discovery deadline passed on August 15, 1991. Pretrial

Statements were filed by Kaplan on October 25, 1991 and by the

plaintiffs on November 1, 1991. Neither plaintiffs' expert

disclosure statement nor their pretrial materials suggest that

they would be seeking to hold Kaplan liable for negligence which

occurred prior to 1983. However, at a pretrial conference on

October 15, 1992, plaintiffs' counsel informed the Magistrate

Judge that plaintiffs intended to argue that Kaplan negligently

prepared and filed plaintiffs' tax returns between 1975 and 1983.

4 On October 19, 1992, plaintiffs moved to amend the complaint to

include Kaplan's allegedly negligent conduct prior to 1983.

STANDARD OF REVIEW

Because I am asked to reconsider an order of the Magistrate

Judge pursuant to

(b)(1)(A), I will not reverse

the order unless plaintiffs demonstrate that the order was

clearly erroneous or contrary to law. See generally Quaker State

Oil Refining Corp. v. Garritv Oil Co.,

(1st

Cir. 1989). However, I may affirm the order on any ground

supported by the record. See generally Acheu v. United States,

(1st Cir. 1990) (appellate court can affirm a

decision on any ground preserved by the record) ; Bergen v. F/V

St. Patrick,

(D. Alaska 1988) (affirming a

magistrate judge's decision on other grounds).

DISCUSSION

The command of Fed. R. Civ. P. 15(a) that leave to amend

"shall be freely given when justice so reguires . . ." is

consistent with a broad policy underlying the Federal Rules of

Civil Procedure that in most instances disputes should be decided

on their merits. See generally Forman v. Davis,

,

5 182 (1962); United States v. Houqham,

(1960),

reh'q denied,

(1961). Nevertheless, a court

considering a motion to amend should consider the totality of

circumstances and balance the equitable considerations which bear

on the motion. Whether the proposed amendment would unfairly

prejudice the opposing party, whether the party seeking to amend

has exercised due diligence, and whether the proposed amendment

would be an exercise in futility are all factors which may be

considered when ruling on a motion to amend. Quaker State Oil

Refining Corp.,

; Correa-Martinez v. Arrillaqa-

Belendez,

(1st Cir. 1990); Carter v. Supermarkets

General Corp.,

(1st Cir. 1982) . The fact that

a proposed amendment is barred by the statute of limitations is a

proper ground to deny a motion to amend because such an amendment

would be futile. 3 James W. Moore & Richard D. Freer, Moore's

Federal Practice, 515.08[4] (2d ed. 1992); Sackett v. Beaman, 399

F .2d 884, 889 (9th Cir. 1968).

I. RULE 15 (c) .

The Magistrate Judge denied the motion to amend because he

concluded that the proposed amendment was barred by

, the applicable six-year statute of

6 limitations. In reaching this conclusion, the Magistrate Judge

also determined that the "relation back" provisions of Fed. R.

Civ. P. 15(c)(2) did not save the proposed amendment from the

statute of limitations because the proposed amendment did not

arise from the same "conduct, transaction or occurrence" as the

conduct at issue in the complaint. Although the parties disagree

as to when the six-year statute of limitations began to run, the

plaintiffs concede that the statute of limitations would bar the

proposed amendment unless it is deemed to relate back to the

complaint. Moreover, the plaintiffs do not argue that the

amendment should be allowed under state relation back law

pursuant to Rule 15(c)(1). Thus, plaintiffs' only argument is

that the proposed amendment is saved by the relation back

provisions of Rule 15(c) (2) .1

1The parties assume that this matter is governed by federal law. Nevertheless, because jurisdiction is based upon diversity of citizenship between the parties, I must first determine whether to apply state or federal relation back law. See Erie R.R. Co. v. Tomkins,

(1937); see also Hanna v. Plumer,

(1965). Rule 15(c)(1) now provides that an amendment should be allowed to relate back if state relation back law would permit the amendment. Accordingly, the choice of law issue is moot in such circumstances. The issue, however, must still be addressed where an amendment would relate back to the complaint under Rule 1 5 (c) but not under state relation back law. In Marshall v. Mulrenin,

(1st Cir. 1974), which was decided before the adoption of Rule 15(c)(1), the First Circuit Court of Appeals applied state relation back law to allow an amendment that would not have been

7 Plaintiffs make several arguments to support their claim.

First, they argue that the proposed amendment merely provides

further definition to the 1988 negligence claim. This argument

plainly has no merit. The 1988 negligence count is expressly

limited to negligence which occurred after 1983, when Kaplan

formed his partnership with Shuman. The proposed amendment seeks

to recover for negligence arising prior to 1983, when Kaplan was

working on his own. Accordingly, the conduct implicated by the

proposed amendment is different from the conduct which forms the

basis for the negligence count in the 1988 complaint. In such

circumstances, relation back is not permitted by Rule 15(c) (2) .

O'Loughlin v. National R.R. Passenger Corp.,

(1st Cir. 1991).

Plaintiffs also claim that the proposed amendment should be

allowed because the 1988 and 1989 complaints contain a general

allegation that Kaplan was guilty of "gross and willful neglect"

between 1976 and 1985. I reject this argument because,

notwithstanding the general allegation of willful neglect prior

saved from the statute of limitations by Rule 15. In Freund v. Fleetwood Enterprises, Inc.,

(1st Cir. 1992), the court declared that federal law governs relation back guestions in diversity of citizenship cases. Because I cannot reconcile Marshall and Freund, I conclude that Marshall has been overruled by implication and apply federal law. to 1983, the negligence count is expressly limited to conduct

which occurred on or after 1983. Having chosen to rely on

specific conduct in their negligence claim, plaintiffs cannot now

fall back on a more general allegation of negligence elsewhere in

the complaint to save the proposed amendment from the statute of

limitations.

Plaintiffs' only meritorious argument is their claim that

the proposed amendment should be allowed because it merely seeks

to apply a new legal theory to specific conduct identified in

Count I of the 1989 complaint. In making this argument,

plaintiffs correctly note that Rule 15(c) (2) is directed to

conduct rather than causes of action. As long as conduct is

placed in issue in the complaint, a proposed amendment applying a

new legal theory to the identified conduct should ordinarily be

permitted to relate back to the original complaint. Both the

1988 complaint and the 1989 complaint identify several specific

instances of misconduct which Kaplan allegedly engaged in prior

to 1983. Although these instances of alleged misconduct were

cited in support of plaintiffs' civil RICO theories rather than

their negligence claims, this should not prevent plaintiffs from

claiming the benefit of Rule 15(c)(2) since they are merely

attempting to alter the legal theory which applies to conduct identified in the complaint. Thus, I must respectively disagree

with the Magistrate Judge's conclusion that the proposed

amendment does not relate back to the 198 9 complaint.

In reaching this conclusion, I reject Kaplan's argument that

I cannot rely on facts placed in issue in the 1989 complaint to

permit an amendment of the 1988 complaint. The case he cites for

this proposition, Morgan Distribution Co. v. Unidvnamic Corp,

(8th Cir. 1989), is distinguishable. In the present

case, the 1988 complaint only became necessary because the court

dismissed the civil RICO claims from the 1988 complaint. When

the court later concluded that the civil RICO claims should have

been allowed, the court for all practical purposes allowed the

1989 complaint to serve as an amendment to the 1988 complaint.

Thus, this case is unlike Morgan Distribution Co., where the

plaintiff sought to invoke Rule 15 (c) to save one action by

arguing that it should be deemed to relate back because of

allegations made in an entirely separate action.

II. RULE 1 5 (a).

Although I reach a different conclusion from the Magistrate

Judge on the applicability of Rule 15(c)(2), I nevertheless

10 affirm his decision because I conclude that the amendment should

not be allowed under Rule 15 (a) .

Notwithstanding the liberal amendment policy underlying Rule

15, I need not allow an amendment if, in balancing the eguities,

I conclude that the proposed amendment should be denied. Quaker

State Oil Refining Corp.,

; Haves v. New England

Millwork Distrib., Inc.,

(1st Cir. 1979). In

the present case, the plaintiffs concede that they became aware

of Kaplan's alleged negligence more than two years before they

filed the 1988 complaint, and more than six years before they

first sought permission to amend. By the time plaintiffs moved

to amend, discovery had been closed for more than a year, expert

reports had been disclosed, and pretrial statements had been

filed. None of the pretrial materials identify the negligence

theory which plaintiffs now seek to advance. Astonishingly under

these circumstances, plaintiffs have failed to offer any credible

explanation for their long delay in moving to amend.

Egually important is the prejudicial effect of the

plaintiffs' delay on the defendant. The proposed amendment seeks

to apply a new legal theory to conduct which occurred as long as

16 years ago. Memories undoubtedly have faded in the intervening

years and the court has already determined that documents which

11 bear on plaintiffs' claims have been destroyed. See Order, May

15, 1992. Under these circumstances, Kaplan's ability to rebut

the new allegations cannot help but be unfairly hampered.

Moreover, discovery has been closed for some time. If the

amendment is allowed, Kaplan will have to incur substantial

additional costs to reopen discovery and investigate plaintiffs'

new legal theory. The April 1993 trial date could well be in

jeopardy. Under these circumstances, the balance of eguities

tips substantially in favor of the defendants. Accordingly,

albeit on different grounds, I affirm the Magistrate Judge's

decision denying the motion to amend.

SO ORDERED.

Paul Barbadoro United States District Judge

January 22, 1993

cc: James P. Bassett, Esg. Randolph J. Reis, Esg. Robert Reis, Esg.

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