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Henman Engineering and Machine, Inc. v. JD Norman Muncie, LLC

United States District Court, S.D. Indiana, Indianapolis Division

December 11, 2018

HENMAN ENGINEERING AND MACHINE, INC., THOMAS HENMAN, SR, THOMAS HENMAN, JR, Plaintiffs,
v.
JD NORMAN MUNCIE, LLC, JD NORMAN WINCHESTER, LLC, JD NORMAN MUNCIE BUILDING, LLC, JD NORMAN WINCHESTER BUILDING, LLC JUSTIN D NORMAN, Defendants.

          ORDER ON DEFENDANTS' MOTION TO AMEND COUNTERCLAIM AND DEFENDANTS' MOTION TO STAY

          Tim A. Baker United States Magistrate Judge

         I. Introduction

         In January of 2016, Plaintiffs and Defendants entered into an asset purchase agreement through which Defendants would buy Henman Engineering & Machine, Inc. from Plaintiffs. The parties agreed to a base purchase price of $11 million, which was paid at the closing. Because Henman Engineering's 2015 earnings were not then known, the asset purchase agreement included provisions to adjust the price after Plaintiffs' accounting firm determined the final earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Plaintiffs bring this action alleging Defendants owe more than $4.4 million based on the final EBITDA. Defendants deny they owe anything and countersue for $4.8 million, claiming fraud, breach of contract, and unjust enrichment.

         This order addresses two motions: Defendants' motion for leave to file an amended counterclaim against Plaintiffs [Filing No. 59], and Defendants' motion to stay the proceedings and compel resolution by an independent accounting firm. [Filing No. 60.] Defendants' proposed amendment gets rid of several large chunks of their counterclaim, but it also changes the basis of one of the key counterclaims. Defendants' motion to stay seeks to exercise a dispute resolution provision of the agreement that would put the case on hold until an independent accounting firm reviews the work of Plaintiffs' accounting firm. Both of these motions come very late in the game. In order for these motions to be resolved, the Court granted Defendants' motion to postpone the final pre-trial conference and corresponding deadlines, as well as Defendants' motion to vacate the December 3, 2018, trial date. [Filing No. 76.]

         As discussed below, the Court grants Defendants' motion for leave to amend [Filing No. 59] because the amendment removes large portions of Defendants' counterclaim and Plaintiffs' have time to conduct additional discovery if needed. Defendants shall file and serve their amended counterclaim within seven days, and, if necessary, the parties shall file a joint motion within 14 days proposing a timeline for any additional discovery. The Court denies Defendants' motion to stay [Filing No. 60] because Defendants waited too long to try to exercise the dispute resolution provision and because legal issues would need to be resolved before the provision could be exercised.

         II. Discussion

         a. Leave to Amend

          Defendants seek leave to amend their counterclaim to prune their arguments. Defendants argue that discovery shows they need to narrow their counterclaims. Defendants seek to eliminate some claims altogether, reduce the amount of damages, and adjust one of the claims from breach of contract through fraud to breach by failing to abide by generally accepted accounting principles. Plaintiffs object to the amendments on several grounds, but the key contention is that changing the fraud claim to a simple breach claim is a significant shift that amounts to replacing the fraud claim with an entirely new claim and theory of the case.

         Contrary to Defendants' arguments, they must show good cause to amend the pleadings at this late stage. The Court set a deadline to amend the pleading in its scheduling order, and parties must show good cause to amend the scheduling order. Fed.R.Civ.P. 16(b)(4). The Seventh Circuit has repeatedly held that the heightened standard to amend a scheduling order trumps the liberal standard from Rule 15(a)(2) for amending the pleadings. Adams v. City of Indianapolis, 742 F.3d 720, 734 (7th Cir. 2014); Trustmark Ins. Co. v. Gen. & Cologne Life Re of Am., 424 F.3d 542, 553 (7th Cir. 2005). Because the deadline to amend the pleadings has passed, Defendants' necessarily seek to amend the Case Management Plan and must, at least, meet the heightened standard from Rule 16.[1]

         Defendants assert they are amending their counterclaim “for one simple purpose: to streamline the issues for trial in an effort to conserve resources of the parties' and the Court by conforming their claims to the evidence developed through discovery.” [Filing No. 66, at ECF p. 2.] Defendants want to entirely eliminate their claims of fraudulent inducement and breach of contract due to failure to maintain equipment and machinery; to drop a portion of a breach claim regarding a dispute over accounts payable; and to reduce their claimed damages from $4.8 million to $2.8 million, which is a more than 40% reduction. Purging such a large portion of the dispute provides good cause for amending the complaint, and Plaintiffs agree with respect to these amendments.

         Plaintiffs disagree, however, that another of Defendants' amendments narrow the counterclaim, and instead argue the change substitutes a new, futile counterclaim. Both the counterclaim and the proposed amended counterclaim allege Plaintiffs breached the representations and warranties of the asset purchase agreement by inflating Plaintiffs' accounts receivable, which made Plaintiffs appear to have more money coming in than they actually did, driving up the final EBITDA, and correspondingly, the final purchase price. The current counterclaim alleges Plaintiffs inflated the accounts receivable through fraud. The amendment gets rid of the fraud aspect and claims the “inflations of [the accounts receivable] were primarily the result of bad debt expense and invoices that were either uncollectable or had significant risk of being uncollectable . . . that were nevertheless included . . . as viable and appropriate [accounts receivable].” [Filing No. 59-1, at ECF p. 9.] In other words, Defendants' new theory is that Plaintiff inflated the final EBITDA by failing to adhere to generally accepted accounting principles.

         Plaintiffs argue this amendment should not be permitted for three reasons: (1) it is untimely and the product of undue delay, (2) it is prejudicial to Plaintiffs, and (3) it is futile. Defendants argue the amendment is neither untimely nor unduly delayed because they are merely adjusting their counterclaims after a long discovery process where they and their experts reviewed thousands of pages of documents. Plaintiffs counter that Defendants had all the information they needed regarding the allegedly bad debt or uncollectable accounts over two years ago, so there is no reason for Defendants to just now be pivoting to the theory in the proposed amended complaint. In hindsight, Defendants could have expressly included both potential sources of EBITDA inflation from the beginning. However, it is not uncommon for parties to reach a new understanding of their case after all the evidence is obtained from discovery. After all, that is why this process is called “discovery.” While the delay is unfortunate, it is outweighed by the significant reduction in the issues to be resolved.

         Plaintiffs' concerns about prejudice are not sufficient to deny the amendment. Many of Plaintiffs' concerns can be cured through additional discovery. Plaintiffs argue they did not get a chance to ask Defendants' two principals, Justin D. Norman and Gary Wilhite, about the theory that the accounts receivable were inflated through improper accounting practices because Defendants did not advance the theory until after their depositions. Though additional depositions seem unnecessary, Plaintiffs can ask additional questions through written discovery. Plaintiffs also point to Defendants' responses to Interrogatory No. 11 and Request for Production No. 17. [Filing No. 63, at ECF pp. 7-8.] These responses are not adequate in light of the reshaping of Defendants' counterclaim theory.[2] However, these insufficiencies can be cured though limited additional discovery. The Court has vacated the trial date and related deadlines, eliminating what likely would have been a prejudicial time crunch for Plaintiffs to conduct additional discovery by the previously set December 3 trial. The delayed trial provides ample time for additional discovery.

         Plaintiffs' other claims of prejudice are unpersuasive. Plaintiffs argue that they lost the chance to file a motion for partial summary judgment on Defendants' new theory, but summary judgment outcomes are uncertain and thus any prejudice is undeterminable. Plaintiffs also emphasize the length and expense of this litigation, noting they have already spent tens of thousands of dollars in response to the fraud claim and do not want to spend even more on Defendants' new approach. Plaintiffs further note that Thomas Henman, ...


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