Midgett v. Hardcastle

JOHN T. MIDGETT, TRUSTEE OF THE HARDCASTLECHARITABLE REMAINED ANNUITY TRUST U/A AUGUST 6, 2007, Plaintiff, v. MAILE SUSAN HARDCASTLE. Defendant.

CIVIL ACTION NO. 2:17-cv-663

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA Norfolk Division

October 3, 2018

MEMORANDUM OPINION AND ORDER

Before the Court is Maile Susan Hardcastle's ("Defendant" or "Maile") August 3, 2018 Motion for Reconsideration regarding the Court's ruling on Defendant's Motions to Amend Answer and Amend Scheduling Order. ECF No. 24. John T. Midgett ("Trustee" or "Midgett") filed his memorandum in opposition, ECF No. 26, and Defendant replied. ECF No. 28.

For the reasons set forth below, Defendant's Motion for Reconsideration is GRANTED IN PART AND DENIED IN PART.

I. FACTUAL AND PROCEDURAL HISTORY

In early 2013 and late 2014, Captain William H. Hardcastle, Jr. ("Captain Hardcastle") and his wife Mary V.M. Hardcastle ("Mrs. Hardcastle," collectively "Decedents") passed away. ECF No. 1 at ¶ 13. Prior to their deaths, on August 6, 2007, Decedents established a Charitable Remainder Annuity Trust ("CRAT") valued at just over $4 million. Id. at ¶ 7; see ECF No. 1-1. The CRAT allows "payment of a fixed annuity amount equal to [five percent] of the fair market value of the initial trust corpus to be paid over a term certain of [twenty] years" to the survivor of the Decedents, and then to the non-charitable beneficiaries for the remaining years of the twenty- year term. ECF No. 1 at ¶¶ 8-9. After the twenty years are up, the remaining value of the trust goes to the charitable beneficiaries. ECF No. 1-1 at 3. The annuity payments are valued at $203,448 annually. ECF No. 1 at ¶ 8. Defendant and her half-sister Mary Lee Hardcastle ("Mary Lee") were the two non-charitable beneficiaries. Id. at ¶ 9. The American Red Cross of Southeastern Virginia and the Judeo-Christian Outreach Shelter, Inc. were the two charitable beneficiaries. Id.

After her death, the executor of Mrs. Hardcastle's estate, Kevin B. Rack ("Rack"), filed an estate tax return stating that her interest in the contributed assets of the CRAT and the tax implications of how the CRAT was set up required an estate tax of $859,244. Id. at ¶ 14. On September 16, 2016, Mr. Rack demanded full reimbursement from Mr. Midgett plus six percent interest. Id. at ¶ 15. When Mr. Rack refused to accept that the Trustee did not owe him anything, the two men filed separate actions against each other. Id. at ¶¶ 16-18.

In preparing for the suits against Mr. Rack, the Trustee discovered that Captain Hardcastle had contributed 93% of the assets of the CRAT, while Mrs. Hardcastle only contributed 7%. Id. at ¶ 18. As result, in order for the CRAT to continue receiving tax benefits, Mr. Midgett amended the CRAT to require Maile and Mary Lee to pay any federal estate taxes or state death taxes for the CRAT, or else they could no longer receive the annuity payments. Id. at ¶¶ 19-20; see ECF No. 1-2. The amendment also applied retroactively, meaning that Maile and Mary Lee were liable for the $859,244 Mr. Rack paid to the federal government. Id. at 1. Mr. Midgett gave notice to the two women on September 22, 2017. ECF No. 1 at ¶¶ 21-22. Mary Lee accepted Mr. Midgett's amendment, but Defendant refused to pay anything. Id. at ¶ 23. As such, the Trustee has stopped sending annuity payments to Defendant, and due to the retroactive nature of the amendment, he also demands she refund all past annuity payments. Id.

In seeking to recover these previous annuity payments, the Trustee filed the instant action on December 27, 2017. Id. Defendant filed her answer on January 23, 2018. ECF No. 4. The Court issued a Scheduling Order on February 23, 2018. ECF No. 6. In May 2018, Mary Lee sought to intervene in the lawsuit. See ECF Nos. 7-10. The Court denied her motion to intervene on July 19, 2018. ECF No. 22.

Meanwhile, on February 15, 2018, Defendant filed an action against the Trustee in Virginia Beach Circuit Court. ECF No. 26 at 2; see ECF No. 13-2. In that state action, Maile asserted four claims against Mr. Midgett for allegedly violating his fiduciary duties. Id. at 15-21; see ECF No. 13 at 3-4. On March 9, 2018, the Trustee moved to stay the state proceedings because Defendant's claims were compulsory counterclaims in the federal lawsuit before this Court. ECF No. 13-3 at 2-5. A hearing was to be held on March 26, 2018. ECF No. 13 at 4. However, on April 2, 2018, the Chief Judge of the Virginia Beach Circuit Court ordered that all the judges in that court were disqualified from presiding over Defendant's state court action because Mr. Midgett "is a local attorney who practices regularly before this Court." ECF No. 13-4 at 2. That case remained on the Virginia Beach Circuit Court docket but stagnated because there was no judge to preside over it. ECF No. 13 at 5. The parties have since informed the Court that the state proceedings have been assigned to a senior state judge who, on August 28, 2018, granted the Trustee's motion to stay those proceedings in favor of the instant action.

With respect to the motion at hand, Defendant filed two motions at the beginning of June 2018. On June 1, 2018, Defendant moved to amend her answer to add four counterclaims that paralleled the five claims she raised in her state court action. ECF Nos. 12-13. On June 3, 2018, she moved to amend the scheduling order to allow the parties adequate time to draft responsive pleadings and conduct requisite discovery. ECF Nos. 14-15. The Trustee opposed bothmotions. ECF Nos. 16, 18. Defendant filed her replies near the end of June 2018. ECF Nos. 19-20.

On July 19, 2018, in the same order denying Mary Lee's motion to intervene, the Court denied both of Defendant's motions. ECF No. 22. The Court found that Maile had raised compulsory counterclaims after she had already filed her responsive pleadings, but she could not amend her answer to include them because none of them fell within the exceptions of Federal Rule of Civil Procedure 13(a)(2). Id. at 18-20. The Court then denied Defendant's Motion to Amend Scheduling Order since without an amended complaint there was no longer good cause to change the schedule. Id. at 22.

On August 3, 2018, Defendant filed her instant Motion for Reconsideration as to her Motion to Amend Answer and Motion to Amend Scheduling Order. ECF No. 24-25. Defendant argues that the Court misapplied Rule 13, and she should be allowed to amend her answer to include the counterclaims. Defendant also requests in the alternative that the Court revise its July 19, 2018 Order to allow her to file an interlocutory appeal. ECF No. 25 at 15-16. The Trustee filed his opposition on August 16, 2018. ECF No. 26. Defendant replied on August 22, 2018. ECF No. 28.

II. LEGAL STANDARD

A. Motions for Reconsideration under Rule 54(b)

Under Federal Rule of Civil Procedure 54(b), an interlocutory order is subject to revision "at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities." The decision to modify an interlocutory ruling is within the sound discretion of the court. See U.S. Tobacco Coop. Inc. v. Big S. Wholesale of Va., L.L.C., 899 F.3d 236, 256 (4th Cir. 2018) (citing Carlson v. Bos. Sci. Corp., 856 F.3d 320, 325 (4th Cir. 2017)). In otherwords, "a district court retains the power to reconsider and modify its interlocutory judgments." Id. (quoting Am. Canoe Ass'n v. Murphy Farms, Inc., 326 F.3d 505, 514-15 (4th Cir. 2003)). The district judge may exercise the discretion to afford relief from interlocutory orders "as justice requires." Cobell v. Jewell, 802 F.3d 12, 25-26 (4th Cir. 2015). A district court may grant a motion for reconsideration under Rule 54(b): (1) to accommodate an intervening change in controlling law; (2) to account for new evidence not available earlier; or (3) to correct a clear error of law or prevent manifest injustice. Robinson v. Wix Filtration Corp. L.L.C., 599 F.3d 403, 420 (4th Cir. 2010) (quoting Pac. Ins. Co. v. Am. Nat'l Fire Ins. Co., 148 F.3d 396, 403 (4th Cir. 1998)); see also Gordon v. ArmorGroup, N.A., Inc., No. 1:10-cv-002, 2010 WL 4272979, at *1 (E.D. Va. Oct. 19, 2010); Moore v. United States, No. 2:05-cv-244, 2006 WL 763656, at *1 (E.D. Va. Mar. 23, 2006) ("[S]uch motion should not be used to 'rehash' arguments previously presented or to submit evidence which should have been previously submitted.").

B. Motions to Amend Answer under Rules 13 and 15

Federal Rule of Civil Procedure 15 provides that a party may amend its pleading after the time limit specified in Rule 15(a)(1) "only with the opposing party's written consent or the court's leave." Rule 15(a)(2) further provides that "[t]he court should freely give leave when justice so requires." Id. The Fourth Circuit allows parties to liberally amend "in keeping with the spirit of [Rule] 15(a)." Galustian v. Peter, 591 F.3d 724, 729 (4th Cir. 2010). Consistent with this policy, "compulsory counterclaims should be granted freely." Barnes Grp. Inc. v. C&C Prods., Inc., 716 F.2d 1023, 1035 n.35 (4th Cir. 1983) (citing 3 J. Moore, MOORE'S FEDERAL PRACTICE ¶ 13.33, at 13-196 (2d ed. 1983)).

A compulsory counterclaim is a claim that "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim" and does not require the addition of athird party over whom the court lacks jurisdiction. Fed. R. Civ. P. 13(a)(1). To help determine if a counterclaim is compulsory, the Fourth Circuit considers whether (1) the counterclaim involves largely the same issues of fact and law as the original claim, (2) res judicata would bar subsequent suit on the counterclaim, absent this rule, (3) the counterclaim would be supported or refuted by substantially the same evidence as the original claim, and (4) there is some logical relationship between the counterclaim and the original claim. Painter v. Harvey, 863 F.2d 329, 331 (4th Cir. 1988) (citing Sue & Sam Mfg. Co. v. B-L-S Constr...