BNSF Railway Company v. San Joaquin Valley Railroad Company, No. 1:2008cv01086 - Document 204 (E.D. Cal. 2011)
Court Description: MEMORANDUM OPINION and ORDER signed by Chief Judge Anthony W. Ishii on 2/9/2011 regarding 197 Motion for Reconsideration. (Lundstrom, T)
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BNSF Railway Company v. San Joaquin Valley Railroad Company Doc. 204 1 2 3 4 5 6 7 IN THE UNITED STATES DISTRICT COURT FOR THE 8 EASTERN DISTRICT OF CALIFORNIA 9 10 11 12 13 14 15 ) ) Plaintiff, ) ) v. ) ) SAN JOAQUIN VALLEY RAILROAD ) COMPANY, et al., ) ) Defendants. ) ____________________________________ ) BNSF RAILWAY COMPANY, CV F 08 - 1086 AWI SMS MEMORANDUM OPINION AND ORDER ON DEFENDANT SJVR’s MOTION FOR RECONSIDERATION OF MAGISTRATE JUDGE’S DECISION DENYING LEAVE TO AMEND COUNTERCLAIMS Doc. # 194 16 17 This is an action for breach of contract by plaintiff BNSF Railway Company 18 (“BNSF”) against defendants San Joaquin Valley Railroad Company (“SJVR”) and Tulare 19 Valley Railroad Company (“TVR”) (collectively, “Defendant’s”). The currently-operative 20 First Amended Complaint (“FAC”) was filed by BNSF on November 6, 2009. On November 21 30, 2009, SJVR filed an answer to the FAC that incorporated counterclaims against BNSF for 22 breach of contract. Thereafter, SJVR has sought to amend its counterclaims to include 23 additional tort claims for fraud and negligent misrepresentation; first by way of direct 24 amendment on January 11, 2010, and then by motion for leave to amend pursuant to F.R.C.P. 25 15(b) filed on September 30, 2010. In the instant motion, SJVR seeks reconsideration of the 26 Magistrate Judge’s denial of its motion for leave to amend. 27 For the reasons that follow the court will grant the motion for reconsideration, vacate 28 the Magistrate Judge’s order and remand for further proceedings consistent with this order. Dockets.Justia.com 1 2 FACTUAL BACKGROUND AND PROCEDURAL HISTORY This action commenced on July 25, 2007. Originally, the action included claims and 3 counterclaims seeking damages and declaratory judgment and alleging breach of a 1992 4 contract that set rates payable by BNSF to Defendants for transportation of BNSF’s rail 5 freight over portions of track that were sold by BNSF to TVR and were operated by SJVR. 6 Discovery revealed the existence of a letter executed in 1994 (the “1994 Letter”) that 7 purportedly changed the payment and/or calculation of rates. The parties stipulated to grant 8 BNSF leave to amend its original complaint to include its claims relating to the 1994 Letter 9 and BNSF filed its FAC on November 6, 2009. SJVR answered BNSF’s FAC and asserted 10 supplemental counterclaims on November 30, 2009 (hereinafter SJVR’s “SCC”). The 11 counterclaims alleged by SJVR against BNSF in the SCC were substantially the same as the 12 counterclaims asserted in SJVR’s answer to the original complaint. BNSF answered SJVR’s 13 counterclaim on December 14, 2009. 14 The Magistrate Judge’s Order of December 12, 2010, Denying Defendant’s Motion 15 for Leave to File amended counterclaims (the “December 12 Order”) noted that on November 16 20, 2009, Plaintiff deposed Mike Haeg (“Haeg”), a vice-president for sales for Rail America, 17 a holding company that has owned SJVR since 2002. During the deposition, Haeg recounted 18 a conversation that had transpired between himself and Mike Galassi, a former short-line 19 marketing representative. The conversation is alleged to have occurred sometime “in the late 20 ‘90's, ‘98 or’99.” Doc. # 193 at 4:4-7. The gist of the conversation was that Haeg asked (or 21 intended to ask) Galassi for a rate increase but was told by Galassi that rail rates had gone 22 down over the time period in question and that no increase in rates would be forthcoming. 23 SJVR alleges that Galassi’s statement misrepresented the actual movement in rail freight 24 rates during the time period and that Galassi knew at the time the statement was made that it 25 was false. Discovery ended on November 30, 2009. 26 Based on Haeg’s deposition statements, SJVR filed a document titled “First Amended 27 Supplemental Counterclaim against BNSF (hereinafter “FASCC") on January 11, 2010. The 28 FASCC reiterated the counterclaims set forth in SJVR’s SCC and added two tort 2 1 counterclaims, one for fraud and the other for negligent misrepresentation. On January 21, 2 2010, BNSF moved to strike the FASCC arguing that the pleading was filed without leave of 3 the court to amend a complaint in violation of Rule 15(b) of the Federal Rules of Civil 4 Procedure. During the pendency of BNSF’s motion to strike, all three parties filed motions 5 for summary judgment. The motions for summary judgment were filed on March 8, 2010. 6 On September 16, 2010, the court issued an order granting BNSF’s motion to strike. 7 In the order, the court construed SJVR’s SCC as an amended pleading filed as a matter of 8 course pursuant to Rule 15(a)(1) of the Federal Rules of Civil Procedure. Therefore, the 9 court construed SJVR’s FASCC as a further amendment of the SCC therefore deemed it 10 improperly filed. The court noted that, pursuant to Rule 15(a)(2), SJVR would need to 11 procure either permission of BNSF or leave of the court under before any further amended 12 counterclaim could be filed. SJVR moved for leave to amend its SCC on September 30, 13 2010. Doc. # 179. SJVR’s motion to amend was opposed by BNSF. SJVR’s motion to 14 amend was denied by an order filed by the Magistrate Judge on December 14, 2010 (the 15 “December 14 Order”). SJVR’s motion for reconsideration of the December 14 Order was 16 filed on December 30, 2010. BNSF’s opposition was filed on January 4, 2011, and SJVR’s 17 reply was filed on January 5, 2011. 18 19 THE DECEMBER 14 ORDER The Magistrate Judge’s December 14 Order extensively set forth the legal standards 20 that pertain to consideration of a motion for leave to amend. For the most part, those 21 standards need not be repeated here. Of significance to the issues presented here, the 22 December 14 Order noted that a policy of granting leave to amend when justice requires 23 should “be applied with extreme liberality.” Doc. # 193 at 5 (citing Foman v. Davis, 371 24 U.S. 178, 182 (1962); Owens v. Kaiser Foundation Health Plain, Inc., 244 F.3d 708, 712 (9th 25 Cir. 2001); Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990). 26 As the Magistrate Judge noted, “‘a district court may deny leave to amend where there is any 27 apparent or declared reason for doing so, including undue delay, undue prejudice to the 28 opposing party or futility of the amendment.’” Doc. # 193 at 6:5-7 (quoting Lockman 3 1 Foundation v. Evangelical Alliance Mission, 930 F.2d 764, 772 (9th Cir. 1991). The 2 December 14 Order also noted that SJVR’s motion to amend was filed during the pendency 3 of motions for summary judgment that had been filed by all parties. The December 14 Order 4 noted that although a motion to amend may be granted after a summary judgment motion has 5 been filed, the motion to amend should be denied unless the moving party makes a 6 “substantial showing” to support its proposed amendment. See Doc. # 193 at 7:21-24 (citing 7 Oncology Therapeutics Network Connection v. Virginia Hematology Oncology PLLC, 2006 8 WL 334532 at *13). 9 The December 14 Order noted that futility of amendment is, by itself, sufficient 10 reason to deny a motion to amend under Rule 15. See Doc. # 193 at 8"18-19 (citing Baker v. 11 Pacific Far East Lines, Inc., 451 F.Supp. 84, 89 (N.D. Cal. 1978)). The December 14 Order 12 then proceeded to discuss the sufficiency of SJVR’s amended pleading with regard to the tort 13 claims for fraud and negligent misrepresentation in light of the requirement that such claims 14 be pled with particularity pursuant to Rule 9(b). After laying out the pleading standards for 15 claims that sound in fraud under Rule 9(b) in some detail, the court examined the allegations 16 set forth in SJVR’s FASCC.1 After quoting and examining the factual allegations set forth in 17 the FASCC, the December 14 Order concluded that the SJVR’s proposed amended pleading 18 alleged “‘on information and belief’ that Galassi falsely represented that rates had 19 increased2.” Doc. # 193 at 12:17-18. The December 14 Order noted that “A claim based on 20 information and belief is ‘fundamentally defective.’” Id. (citing Comwest Inc. v. American 21 Operator Services, Inc.], 765 F.Supp. 1467, 1471 (C.D. Cal. 1991)). The December 14 Order 22 concluded that SJVR failed “to plead its fraud claim with the specificity required by Rules 8 23 and 9,” and accordingly found that leave to amend the counterclaim would be inappropriate. 24 25 26 1 It appears to the court that SJVR did not submit a proposed amended counterclaim with its motion to amend but instead referenced the allegations set forth in their First Amended Supplemental Counterclaim, Document # 100, which had been stricken by the court’s order of September 16, 2010. 27 2 28 The court recognizes that the word “increased” is a typographical error. The referenced portion of SJVR’s FASCC alleges Galassi falsely represented that rates had decreased. 4 1 2 3 4 5 6 7 8 9 10 11 Doc. # 193 at 13: 12-14. With regard to SJVR’s proposed amended claim for negligent misrepresentation, the December 14 Order opined: Although the elements of a cause of action for fraud and a cause of action for negligent misrepresentation are similar, the state of mind requirements differ. Negligent misrepresentation “sounds in fraud” and is also subject to F.R.Civ.P.’s heightened pleading standard. [Errico v. Pacific Capital Bank, N.A., ___ F.Supp.2d ___, 2010 WL 4699394 at *13 (N.D. Cal. 2010).] Negligent misrepresentation differs from fraud in that it does not require “intent to deceive or defraud,” but only an “assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true” (Cal. Civ. Code § 1572(2)). Oakland Raiders v. Oakland-Alameda County Coliseum, Inc., 144 Cal.App.4th 1175, 1184 (2006). If a party alleges sufficient facts to establish a fraud claim, it also alleges sufficient facts to establish a negligent misrepresentation claim. Errico, 2010 WL 4699394 at *13. Having failed to specifically allege facts supporting its fraud claim, SJVR also fails to specifically allege facts supporting its claim for negligent misrepresentation. Accordingly, granting leave to amend the counter-claims to include a claim for negligent misrepresentation is also inappropriate. 12 Doc. # 193 at 13:15-14:5. 13 LEGAL STANDARD 14 Motions to reconsider are committed to the discretion of the trial court. Rodgers v. 15 Watt, 722 F.2d 456, 460 (9th Cir. 1983) (en banc); Combs v. Nick Garin Trucking, 825 F.2d 16 437, 441 (D.C.Cir. 1987). To succeed, a party must set forth facts or law of a strongly 17 convincing nature to induce the court to reverse its prior decision. See, e.g., Kern-Tulare 18 Water Dist. v. City of Bakersfield, 634 F.Supp. 656, 665 (E.D.Cal. 1986), aff’d in part and 19 rev’d in part on other grounds, 828 F.2d 514 (9th Cir. 1987). When filing a motion for 20 reconsideration, Local Rule 78-230(k) requires a party to show the “new or different facts or 21 circumstances claimed to exist which did not exist or were not shown upon such prior 22 motion, or what other grounds exist for the motion.” The court reviews a motion to 23 reconsider a Magistrate Judge’s ruling under the “clearly erroneous or contrary to law” 24 standard set forth in 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. P. 72(a). As such, the court may 25 only set aside those portions of the Magistrate Judge’s order that are either clearly erroneous 26 or contrary to law. Fed.R.Civ.P. 72(a). 27 28 5 1 2 DISCUSSION SJVR’s contentions with regard to its motion for reconsideration are straightforward. 3 SJVR essentially contends that the standards pertaining to amendment of pleadings under 4 Rule 15 require that they be permitted to correcte what they contend is a pleading error 5 pertaining to their allegation “on information and belief” of Galassi’s allegedly false 6 statement. SJVR also contends that it should be permitted to amend its counterclaims to 7 include the allegations of untruthful statement and reliance because the issue is already before 8 the court in the context of SJVR’s claims concerning when it became aware of BNSF’s 9 alleged breach. BNSF’s points briefly to the bases for its opposition to SJVR’s motion to 10 amend and contends that SJVR failed to carry its burden for the reasons set forth in the 11 Magistrate Judge’s December 14 Order. 12 The court begins its analysis by noting that BNSF opposed SJVR’s motion to amend 13 on grounds of prejudice, bad faith and undue delay, futility, and on the ground the statute of 14 limitations had passed. BNSF also opposed SJVR’s motion to amend on the ground that the 15 action at bar is an action in contract and that such an action will not support tort claims that 16 essentially restate the breach of contract claims. The December 14 Order briefly mentions 17 the issues of unjust delay but confines its discussion to the issue of whether SJVR’s pleadings 18 with regard to the fraud and negligent misrepresentation claims were adequately pled. For 19 present purposes, the court will confine itself to the issues raised by the December 14 Order. 20 The court has three concerns regarding the December 14 Order that pertain more to 21 the order itself than to the relative merits of the parties’ contentions. First, the court is 22 concerned that the December 14 Order conveys at least the impression that the Magistrate 23 Court employed a higher standard than may have been warranted. The December 14 Order 24 noted that SJVR’s motion was filed during the pendency of the parties’ motions and counter- 25 motions for summary judgment. The court feels it is important to point out that it is the 26 court, rather than SJVR that bears a good deal of the responsibility for the fact that their 27 motion for leave to amend was filed September 30, 2010, rather than earlier. BNSF’s motion 28 to strike the FASCC was filed on January 11, 2010. As it happened, there was a shuffle of 6 1 pleadings between the Magistrate Court and this court during which BNSF’s motion to strike, 2 and subsequent pleadings related to that motion, were misplaced. As a result the court’s 3 decision on the motion to strike was delayed until September 30, 2010, – more than eight 4 months later and more than six months after BNSF filed its motion for summary judgment. It 5 is significant that SJVR filed its motion for leave to amend within fifteen days of the court’s 6 order granting BNSF’s motion to strike. Given that SJVR first attempted to file its amended 7 counterclaims including the tort claims approximately 60 days after BNSF filed its FAC and 8 given that delay between the time SJVR’s amended pleading was stricken and the time they 9 moved for leave to amend was only 15 days, it cannot be fairly said that SJVR was dilatory in 10 its efforts to bring its amended tort claims. The concern expressed in Oncology Therapeutics 11 Network Connection is the concern that a party facing an unfavorable outcome of a motion 12 against it for summary judgment may attempt to delay an unfavorable conclusion of its case 13 by filing motions to amend. However where, as here, the party seeking to amend shows 14 diligent pursuit of amendment so that any concern of seeking unreasonable delay is 15 precluded, there is no justification in demanding a showing any more substantial than would 16 ordinarily be required in a motion for leave to amend. 17 The second of the court’s concerns pertains to whether the focus of BNSF, and 18 consequently the Magistrate Court, on the sufficiency of SJVR’s factual pleadings for fraud 19 and negligent misrepresentation was correct. The correct focus in denying a motion to amend 20 is whether further amendment of the pleading would be futile, not whether the pleading 21 before the court is factually insufficient. The Magistrate Court correctly noted that “[i]f the 22 proposed amendment is insufficient in law and would be a futile act, it is proper to deny leave 23 to amend. [Citation.] ‘A motion for leave to amend may be denied if it appears to be futile or 24 legally insufficient.’ [Citation.]” Doc. # 193 at 8:18-21 (citing Baker v. Pacific Far East 25 Lines, Inc, 451 F.Supp. 84, 89 (N.D. Cal. 1978); and Miller v. Rykoff-Sexton, Inc., 845 F.2d 26 209, 214 (9th Cir. 1988). The problem with the parties’ and the Magistrate Court’s focus on 27 the sufficiency of SJVR’s pleadings under Rule 9(b) is that the inquiry goes to the factual 28 sufficiency of SJVR’s claim, not the legal sufficiency. As the Miller court further explained, 7 1 “a proposed amendment is only futile if no set of facts can be proved under the amendment to 2 the pleadings that would constitute a valid and sufficient claim or defense.” Id.; see also, 3 Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1051 (9th Cir. 2008) (motion to amend is a 4 situation where “it is clear that the complaint cannot be saved by amendment”) . 5 The clarity that is necessary to sustain the conclusion that amendment would be futile 6 arises principally in two circumstances. The first circumstance arises where the claim for 7 relief itself alleges a fact or circumstance that prohibits relief as a matter of law. See, e.g., 8 Chaset v. Fleer/Skybox Int’l, LP, 300 F.3d 1083, 1087-1088 (9th Cir. 2002) (amendment of 9 RICO claim futile as a matter of law where the claim itself alleges the claimant received the 10 benefit of his bargain). The second circumstance arises where the proposed amended 11 complaint alleges the same flaw or flaws that caused the claim to be dismissed in the first 12 instance. See, e.g., Kendall, 518 F.3d at 1051-1052 (amendment futile where proposed 13 amended complaint contains same defects as original complaint); Sanford v. Mamberworks, 14 Inc., 625 F.3d 550, 558-559 (9th Cir. 2010) (further amendment held futile where court 15 informed pleading party prior to amendment to specifically include particular facts available to 16 pleading party and those facts were not included in proposed amended pleading). 17 Neither of these circumstances are apparent in the facts of this case. It is clear from 18 both BNSF’s pleadings and the Magistrate Court’s analysis that the parties were focused on 19 factual, rather than legal, sufficiency. There is nothing apparent in either the December 14 20 Opinion or the pleadings pertaining to it that would support the contention that there exists no 21 set of facts that could possibly constitute a sufficient claim. From this court’s appraisal of the 22 FASCC, the distance from the facts pled and a set of facts that would be sufficient to state a 23 claim for fraud is not necessarily insurmountable. Second, it bears noting that prior to the 24 December 14 Order, neither this court or the Magistrate Court had ever addressed the 25 substance of SJVR’s fraud and negligent misrepresentation claims. Thus, it cannot be held 26 that SJVR’s amended claims were ever found to be factually deficient and then re-pled with 27 the same deficiencies that had been previously determined by the court. 28 The distinction between factual and legal insufficiency can be subtle and errors such as 8 1 the one evident here may be expected; particularly where, as here, both parties have 2 improvidently latched onto the issue of factual sufficiency without due consideration of its 3 relevance to amendment of pleadings. Nonetheless, where a finding of futility of amendment 4 is based on factual insufficiency of the pleading and there is no basis to conclude that an 5 adequate set of facts could not be alleged, the denial of leave to amend is an abuse of 6 discretion. Miller, 845 F.2d at 214. 7 The third and final concern raised by the December 14 Order requires little discussion 8 in light of the court’s determination that the Magistrate Court’s finding of futility of 9 amendment must be corrected. This concern arises from the Magistrate Court’s comments 10 regarding futility of amendment with regard to SJVR’s claim for negligent misrepresentation. 11 In the above-quoted paragraph, the December 14 Order correctly notes that a pleading that 12 sufficiently alleges a claim for fraud also sufficiently alleges a claim for negligent 13 misrepresentation since the legal elements of negligent misrepresentation are the same as for 14 fraud except without the requirement of intent to deceive. Unfortunately, it does not follow 15 that a pleading that does not adequately allege the elements of fraud also does not adequately 16 allege the elements of negligent misrepresentation. If a pleading attempts to allege a claim for 17 fraud but fails because the intent element is inadequately pled, the pleading may nonetheless 18 sufficiently allege a claim for negligent misrepresentation. In view of the fact the court has 19 found clear error with regard to the determination of futility of amendment on SJVR’s fraud 20 claim, this observation has no bearing on the outcome of the motion for reconsideration. The 21 court merely offers the observation to help avoid similar errors in the future. 22 The court concludes that the Magistrate Court’s December 14 Order must be vacated 23 for clear error and abuse of discretion. This, however, does not fully settle the issue of 24 whether further amendment of SJVR’s counterclaims to include the tort claims should be 25 allowed. BNSF alleged additional grounds for opposition to SJVR’s motion to amend, 26 including prejudice, untimeliness, and futility arising from the general California rule that a 27 breach of contract will not give rise to a tort claim. All that is before this court at this time is 28 the Magistrate Court’s December 14 Order. The court does not know whether the Magistrate 9 1 Court has given consideration to BNSF’s other contention and whether or not the Magistrate 2 Court has reached any conclusions with regard to those issues. The court is also aware that 3 other issues unknown to this court may arise with respect to discovery that may create 4 prejudice to one or more parties. Finally, this court realizes that additional hearings and/or 5 conferences may be required to fully settle whether and/or how amendment of SJVR’s 6 pleadings should be managed. For these reasons, the court will vacate the Magistrate Court’s 7 December 14 Order and will refer the matter back to the Magistrate Court for further action 8 consistent with this memorandum order and opinion. 9 10 THEREFORE, in consideration of the foregoing discussion, it is hereby ORDERED 11 that SJVR’s motion for reconsideration is hereby GRANTED to the following extent: 12 1. 13 14 amend is hereby VACATED. 2. 15 16 The Magistrate Judge’s December 14 Order denying SJVR’s motion for leave to The matter is hereby returned to the Magistrate Court for further proceedings not inconsistent with this memorandum opinion and order. 3. In no event shall amendment of any counterclaims alleged by SJVR in the proposed 17 FASCC filed on January 11, 2011, be permitted, except that they may be voluntarily 18 dismissed by SJVR. 19 IT IS SO ORDERED. 20 21 Dated: 0m8i78 February 9, 2011 CHIEF UNITED STATES DISTRICT JUDGE 22 23 24 25 26 27 28 10
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