Bond Opportunity Fund II, LLC v. Heffernan

Page 146

340 F.Supp.2d 146

BOND OPPORTUNITY FUND II, LLC and Steven Gidumal v. Michael T. HEFFERNAN, H. Loy Anderson, Abraham D. Gosman, Gary S. Gillheeney, Frederick R. Leathers, Lisa P. McAlister, Eric Moskow, M.D., and Stephen E. Ronai.

C.A. No. 00-609-T.

United States District Court, D. Rhode Island.

October 22, 2004.

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Thomas S. McNamara, Indik & McNamara, P.C., Philadelphia, PA, William A. Jacobson, Providence, RI, for plaintiffs.

John F. Dolan, Anthony R. Leone, Rice Dolan & Kershaw, Providence, RI, Lisa M. Cameron, John F. Batter, III, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, Joseph V. Cavanagh, Jr., Staci L. Kolb, Blish & Cavanagh, Thomas C. Angelone, Hodosh, Spinella & Angelone, Providence, RI, Sanford F. Remz, Esq., Yurko & Salvesen, P.C., Boston, MA, Robert M. Duffy, Esq., Christine K. Bush, Duffy Sweeney & Scott, Ltd., Providence, RI, Marjorie S. Cooke, Edward S. Cheng, Esq., Cooke, Clancy & Gruenthal, LLP, Boston, MA, Richard Daniel Prentiss Robin-Lee Main, Holland & Knight LLP, Providence, RI, for defendants.

MEMORANDUM AND ORDER

TORRES, Chief Judge.

Bond Opportunity Fund II, Ltd. and Steven Gidumal (the "plaintiffs") purchased convertible debentures issued by Innovative Clinical Solutions, Ltd. ("ICS"). They brought this action against various directors and/or officers of ICS, charging violations of the Securities Exchange Act of 1934 ("SEA"); Securities Exchange Commission ("SEC") Rule 10b-5; and the Rhode Island Uniform Securities Act, as well as common law fraud.

The plaintiffs have moved for leave to file a Second Amended Complaint. The principal issues are whether the proposed amendment is timely; and, if so, whether it would be futile. For the reasons hereinafter stated, the motion to amend is granted in part and denied in part.

Background

Most of the background facts relevant to the plaintiffs' motion to amend are set forth in the Court's Memorandum & Order dated November 14, 2002 (hereinafter, "Memo & Order").

In their memorandum, the plaintiffs do not clearly or specifically explain the nature of their proposed amendment or the reasons why it should be permitted. Rather, they leave it to the Court to parse through the proposed Second Amended Complaint in order to determine whether their motion to amend should be granted. The plaintiffs describe the proposed amendment generally as being intended inter alia:

(1) to "drop" Abraham D. Gosman as a defendant because he has filed a bankruptcy petition (Pl. Mem. Supp. Mot. Am., at 1);

(2) to "amplify" the facts relating to claims that the defendants "made material misrepresentations concerning the pretax income of the businesses ... designated for sale" and that they "made misleading representations in its Schedule 14-A, filed on January 12, 1999, concerning the nature, terms and status of the advances made to unidentified shareholders in 1998." (Pl. Mem. in Support of Mot. to Am., at 2); and

(3) to "further support" the claim of "misrepresentations concerning the $10.9 million in advances made by ICS to Chancellor Development Corp.," a company owned by Gosman, by adding an allegation that, when those advances were made, defendant Heffernan "owed an undisclosed $1.5 million personal obligation to Gosman." (Pl. Mem. in Support of Mot. to Am., at 2).

The defendants argue that the motion should be denied on the grounds that the proposed amendment is both "futile and untimely." (Def. Heffernan's Mem. in Obj., at 1). They do not address the aspect of the proposed amendment that would dismiss the claims against Gosman.

Standard re Motion to Amend

In the First Circuit, the dismissal of a complaint, in toto without leave to amend, is a final judgment that precludes leave to amend unless the plaintiff first obtains relief from the judgment pursuant to Fed.R.Civ.P. 59 or 60. See Acevedo-Villalobos v. Hernandez, 22 F.3d 384, 388-89 (1st Cir.1994) (dismissal of a complaint in its entirety bars the trial court from considering a motion for leave to amend because it "`ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'") (quoting Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 373-374, 101 S.Ct. 669, 66 L.Ed.2d 571 (1981)); Mirpuri v. ACT Manufacturing, Inc., 212 F.3d 624, 629 (1st Cir.2000) (district court lacked jurisdiction to permit filing of amended complaint after memorandum decision dismissed entire complaint without leave to amend where such amended complaint alleged "several new facts ..."). However, an order dismissing some, but not all, of a plaintiff's claims does not constitute a final judgment barring amendment even if the amendment seeks to revive a claim that previously was dismissed. See Acevedo-Villalobos, 22 F.3d at 389 (holding that the court must dismiss the entire complaint without expressly granting leave to amend in order to constitute a "final decision"); Union Carbide Corp. v. Siemens Westinghouse Power Corp., No. 99 Civ. 12003(LMM), 2002 WL 31387269 at *1-2 (S.D.N.Y. October 23, 2002) (granting plaintiff's motion for leave to file a second amended complaint re-pleading claims previously dismissed by the court).

Fed.R.Civ.P. 15(a) requires that, after a responsive pleading has been served, a complaint may not be amended without leave of the court. However, the Rule provides that "leave shall be freely given when justice so requires." Fed.R.Civ.P. 15(a); Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).

In Foman, the Supreme Court identified some of the reasons for denying a motion to amend. Those reasons include "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc." 371 U.S. at 182, 83 S.Ct. 227.

The Foman factors are especially applicable in cases where the proposed amendment seeks to revive a previously dismissed claim. See Hester v. Int'l Union of Operating Eng'rs, 941 F.2d 1574, 1978-9 (11th Cir.1991) (affirming denial of leave to resurrect previously dismissed claim where plaintiff waited two years through two appeals before moving to amend); Union Carbide, 2002 WL 31387269 at *2 (granting leave to amend and to reinstate previously dismissed claims in light of "new facts"); Litman v. George Mason Univ., 156 F.Supp.2d 579, 588 (E.D.Va.2001) (denying amendment that would reinstate § 1983 claims with respect to which summary judgment had been granted two years earlier on grounds that amendment would result in prejudice and undue delay); DeLuca v. Winer Industries, Inc., 857 F.Supp. 606, 608 (N.D.Ill.1994) (granting leave to amend and reinstate claims previously dismissed on grounds that extension of discovery deadline would remedy any prejudice to defendants and amended complaint would not inject radically new issues); State of New York v. Cedar Park Concrete Corp., 741 F.Supp. 494, 497 (S.D.N.Y.1990) (denying leave to amend and reinstate damages claims on ground that counsel's alleged misunderstanding of applicable law did not excuse a two-year delay in filing motion).

Analysis

I. The Claims Against Gosman

Although the defendants have objected to the motion to amend, they have failed to advance any reason why the plaintiffs should not be allowed to drop the claims against Gosman. Since Gosman's bankruptcy automatically stays any claims against him; and, since elimination of those claims would not result in any discernible prejudice to the defendants, the motion to amend is granted to the extent that the proposed second amended complaint drops any claims against Gosman.

II. "Amplification" of the Facts

The plaintiffs seek to "amplify" the facts relating to the claims asserted in their Amended Complaint, that various filings made by ICS contained false and/or misleading statements.

A. The 1999 2Q 10-Q and 3Q 10-Q

The Amended Complaint alleged that the 1999 2Q 10-Q and 3Q 10-Q misrepresented the income earned by the businesses being divested by ICS. This Court dismissed that claim for reasons set forth in its previous Memorandum and Order. Memo & Order at 7-9.

The plaintiffs' proposed Second Amended Complaint does not allege any significant new facts in support of that claim. Instead, the plaintiffs attempt to rehash their argument that, under GAAP, the facts previously alleged are sufficient to support those claims. That argument is no more persuasive the second time around; and therefore, to the extent that the motion to amend seeks to revive those claims, it is denied.

B. The 1999 10-K

In their amended complaint, the plaintiffs claimed that ICS's 1999 10-K also misrepresented the income earned by the divested businesses. That claim, too, was dismissed. Memo & Order at 7-9.

The plaintiffs, now, seek to "revive" their claim with respect to the 1999 10-K by rehashing the same arguments that this Court previously rejected and by alleging that the 1999 10-K was misleading because it failed to disclose that, at the time that ICS agreed to advance $10.9 million to Chancellor Corporation, Heffernan, ICS's CEO, owed Gosman, Chancellor's principal shareholder, $1.5 million.¹

To the extent that the attempt to revive the claim with respect to the 1999 10-K is based on allegations of misrepresentations regarding the income earned by the divested businesses, it is no more than a rehash of the argument that was previously rejected. Therefore, in that respect the motion to amend is denied.

Whether the proposed amendment should be allowed in order to assert a claim that the 1999 10-K was misleading because it failed to disclose the Gosman-Heffernan loan turns on whether the proposed amendment is timely and whether it would be futile. Those questions are addressed in Sections III and IV.

C. Schedule 14-A

The Amended Complaint alleged that ICS's Schedule 14-A was misleading...