United States District Court, S.D. Indiana, Indianapolis Division
HENMAN ENGINEERING AND MACHINE, INC., THOMAS HENMAN, SR, THOMAS HENMAN, JR, Plaintiffs,
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
Baker United States Magistrate Judge
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
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.]
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.
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.
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.
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.
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.
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.
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. 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.
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, ...