Little Mountain Precision, LLC v. DR Guns LLC

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Little Mountain Precision, LLC, Plaintiff, v. DR Guns, LLC, Defendant.

No. 1:22 CV 1471

United States District Court, N.D. Ohio, Eastern Division

August 31, 2023

MEMORANDUM OF OPINION AND ORDER

PATRICIA A. GAUGHAN, UNITED STATES DISTRICT JUDGE.

INTRODUCTION

This matter is before the Court upon Defendant DR Guns, LLC's Motion for Leave to File Amended Answer Instanter (Doc. 89). This is a breach of contract case. For the reasons that follow, the motion is GRANTED. The deposition of John Habe must be completed by September 29, 2023. Any supplement to the pending motions for summary judgment are due by October 16, 2023. Briefs in opposition to both the pending motions and any supplements thereto are due on November 17, 2023, and reply briefs are due by December 8, 2023.

FACTS

Only those facts necessary for a resolution of the instant motion are set forth herein.

This case involves the alleged breaches of a number of agreements. DR Guns, LLC (“DRG” or “defendant”) filed its answer to the amended complaint on October 14 2022. Defendant asserted neither fraudulent inducement nor illegality as an affirmative defense. Nor did defendant assert “unenforceability of the liquidated damages provision” as an affirmative defense, although defendant denied that Little Mountain sustained damages in excess of $20,850,215.15 as alleged in the amended complaint.

During discovery, an issue arose with respect to John Habe's (“Habe”) felony conviction. Habe is the principal negotiator on behalf of plaintiff with respect to the parties' various agreements. Plaintiff, as a manufacturer and/or seller of certain firearm parts, holds a Federal Firearms License (“FFL”). The Upper & Lower Agreement (“Agreement”) requires an FFL because the “lower” is a serialized part. The remaining agreements do not appear to require an FFL. Federal law requires that an applicant for an FFL identify all “responsible persons” associated with the license. A “responsible person” is defined as “[a]n individual who has the power to direct the management and policies of the applicant pertaining to explosive materials. Generally, the term includes partners sole proprietors, site managers, corporate officers and directors, and majority shareholders.” 27 C.F.R. § 555.11. It appears that a “responsible person” cannot have certain felony convictions on his record.

The Agreement was not signed by Habe. Rather, Habe's brother Doug signed it on behalf of plaintiff. Plaintiff deposed David Rybacki, who negotiated the agreement on behalf defendant. According to his testimony, Rybacki questioned why Habe did not sign the Agreement. Habe informed Rybacki that the arrangement involved a family business and it was “set up to balanc[e] the flow of money” among family members. Rybacki testified that he did not know of Habe's felony conviction at the time he signed the Agreement. Had he known, he would not have entered into any transactions with plaintiff. Rybacki testified that he learned of the felony conviction by mid-April 2023. Counsel for defendant indicates that the felony conviction came to light “shortly before [Habe's] deposition,” which occurred on May 30, 2023. In its status report dated June 12, 2023, defendant indicated that it became aware of the felony conviction approximately one month prior. During the deposition of Habe, it appears that Habe refused to testify regarding the felony. Fact discovery closed on June 30, 2023. Thereafter, on July 5, 2023, defendant filed a timely motion to compel seeking to complete the deposition. Approximately two weeks later, defendant filed the instant motion requesting leave to amend its answer. In the context of the current motion, defendant indicates that completion of the deposition will require approximately 30 minutes.

Defendant did not expressly identify “unenforceability of the liquidated damages clause” as a defense in its answer. Defendant did, however, deny that plaintiff is entitled to the approximately $20 million it seeks. On May 12, 2023, defendant expressly informed plaintiff that the damages clause is an unenforceable penalty. Defendant notes that no additional discovery is needed on this issue. The Court notes that the parties recently filed summary judgment motions in which plaintiff addressed the merits as to whether the damages clause is enforceable.

Defendant moves to file an amended answer to assert the affirmative defenses of fraudulent inducement, illegality, and unenforceability. Plaintiff opposes the motion.

ANALYSIS

Defendant argues that leave to amend should be freely given. According to defendant, no prejudice will result if the amendments to the answer are allowed. Defendant claims that it needs only 30 minutes of deposition time to complete discovery. No trial date is set. Defendant also argues that plaintiff was aware of the challenge to the liquidated damages clause during the course of the litigation. According to defendant, it only recently learned of Habe's felony conviction. The issue of Habe's felony conviction arose after defendant filed its answer.

In response, plaintiff argues that defendant must satisfy the “good cause” requirement set forth in Fed.R.Civ Proc. 16. Plaintiff claims that defendant cannot satisfy this standard because it waited too long to assert these affirmative defenses. According to plaintiff, defendant has known for some time about the felony issue, but waited months before filing the instant motion. Plaintiff also argues that leave to amend would be futile. Plaintiff claims that the liquidated damages clause is valid. As such, an affirmative defense of unenforceability fails. Plaintiff further argues that Habe had no duty to disclose the felony conviction, which has little to do with the agreements in any event. Nor does Habe have any formal affiliation with plaintiff. Plaintiff also claims that defendant fails to assert any harm as a result of any alleged fraud.

Upon review, the Court finds defendant's motion to be well-taken. The Court will address each issue in turn.

A. Fraudulent inducement and illegality

Consideration of a motion to amend filed after the deadline set in the Court's scheduling order entails a two step process under Rules 16(b) and 15(a). Leary v. Daeschner, 349 F.3d 888, 906 (6th Cir. 2003). Under Rule 16(b), the “schedule shall not be modified except upon a showing of good cause and by leave of the district judge . . . .” Only after the movant shows good cause may the Court consider whether to grant leave under Rule 15(a)'s directive that “leave shall be freely given when justice so requires.” Cooke v. AT&T Corp., 2007 U.S. Dist. LEXIS 4325, *3 (S.D. Ohio Jan. 22, 2007); Kaylor v. Raddle, 2005 U.S. Dist. LEXIS 1523, *6, 9 (N.D. Ohio Feb. 3, 2005).

The primary factor under Rule 16(b)'s “good cause” standard is the movant's diligence in meeting the deadlines set by the scheduling order. Andretti v. Borla Performance Indus., 426 F.3d 824, 830 (6th Cir. 2005); Inge v. Rock Fin. Corp., 281 F.3d 613, 625 (6th Cir. 2002). Diligence implies a lack of fault or carelessness on the part of the moving party. Cooke, 2007 U.S. Dist. LEXIS 4325, *6-7. “[T]he determination of the potential prejudice to the nonmovant also is required when a district court decides whether or not to amend a scheduling order.” Leary, 349 F.3d at 909.

The Court finds that defendant satisfies the “good cause” requirement with respect to the affirmative defenses of fraudulent inducement and illegality. Although Rybacki testified that he learned of the felony by mid-April, defense counsel indicates that defendant learned of Habe's felony conviction some time in May when counsel began preparing for Habe's deposition. At the deposition, counsel questioned Habe regarding the conviction, but counsel for plaintiff cut the deposition short. Approximately five weeks later, defendant filed a motion to compel. And, within seven weeks of Habe's deposition, defendant filed the instant motion seeking leave to amend its answer. During this time period, the fact discovery cutoff was approaching, a number of motions to compel had been filed, and defendant filed two briefs in opposition to the pending motions for judgment on the pleadings. Defendant also informed plaintiff and the Court that the felony conviction would be an issue in this case. Given the complexity of this matter, the Court finds that defendant meets the “good cause” requirement set forth in Rule 16. Defendant filed its motion for leave to add these affirmative defenses within seven weeks of Habe's deposition. Moreover, the pleading amendment deadline passed on May 15, 2023, two weeks before the deposition of John Habe even occurred. In all, the Court cannot say that defendant acted with fault or carelessly by failing to file the affirmative defenses of fraudulent inducement or illegality prior to May 15, 2023.

Nor can the Court say that allowing the amendment will cause prejudice to plaintiff. Defendant argues that the only additional discovery necessary is the completion of the deposition of Habe, which defendant estimates will take 30 minutes. Plaintiff does not identify any additional discovery. Although the parties filed their summary judgment motions, the Court will permit supplementation of the briefs to address these affirmative defenses. No trial date has been set, and the affirmative defenses raise discreet issues that will not significantly increase the complexity of this case.

For these reasons, the Court finds that defendant satisfies Rule 16(b). Once Rule 16(b) is satisfied, the Court moves to Rule 15(a). Despite the “freely given” language of Rule 15(a), the Court is to measure a motion to amend against certain well-settled standards. Factors to consider include undue delay, bad faith or...