McFall v. Stacy and Witbeck, Inc. et al

Filing 81

ORDER RE: PLAINTIFF'S MOTION TO AMEND COMPLAINT AND MOTION TO EXTEND DISCOVERY DEADLINE. Signed by Magistrate Judge Jacqueline Scott Corley on 5/16/2016.(ahmS, COURT STAFF) (Filed on 5/16/2016)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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KEVIN MCFALL,
Plaintiff,

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United States District Court
Northern District of California

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Case No. 14-cv-04150-JSC

v.
STACY AND WITBECK, INC., et al.,
Defendants.

ORDER RE: PLAINTIFF’S MOTION
TO AMEND COMPLAINT AND
MOTION TO EXTEND DISCOVERY
DEADLINE
Re: Dkt. Nos. 61 & 70

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Plaintiff Kevin McFall alleges that Defendants Stacy and Witbeck, Inc., and John Bollier,

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the CEO of Stacy and Witbeck, (collectively “Defendants”) breached their respective duties to him

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regarding the valuation of the company’s stock. Plaintiff now seeks to amend his complaint to add

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Houlihan Lokey, Inc.—Stacy and Witbeck’s independent valuation firm—as a defendant. (Dkt.

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No. 70.) Plaintiff contends that documents recently produced by Houlihan Lokey demonstrate that

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it aided and abetted Defendants’ improper stock evaluation. Plaintiff has also filed a related

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motion to extend the discovery deadline pending disposition of the motion to amend. (Dkt. No.

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61.) After carefully considering the arguments and briefing submitted, the Court concludes that

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oral argument is unnecessary, see Civ. L.R. 7-1(b), and GRANTS the motions. Under the liberal

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standard of Rule 15, amendment of the complaint is appropriate; there is thus necessarily good

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cause to modify the discovery deadline.

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BACKGROUND

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A. Allegations of the First Amended Complaint

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Plaintiff was a long-time senior level employee and member of the board of directors of

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Stacy and Witback. (Dkt. No. 31 ¶¶ 7-8.) In March of 2012, Plaintiff announced his plan to retire

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in June 2013. (Id. at ¶ 19.) Plaintiff alleges that from 2010 through 2013 John Bollier, Stacy and

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Witbeck’s CEO, improperly manipulated Stacy and Witbeck’s stock price. (Id. at ¶¶ 15-24.) As a

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result, when Plaintiff sold his shares in March 2013, they were significantly undervalued despite

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2012 being a record year for profits at Stacy and Witbeck. (Id. at ¶¶ 20-34.) While the fiscal year

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2012 (the year at issue) stock price was valued at only 1.48% of the prior year, the fiscal year 2013

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(the year Bollier liquidated his holdings) stock price was set at rate that was 22% higher than the

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prior year. (Id. at ¶¶ 22-23.) Plaintiff alleges that he suffered $3 million in damages as a result of

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the manipulation of the stock price.
B. Procedural History

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United States District Court
Northern District of California

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In September 2014, Plaintiff filed this action alleging two claims for relief for breach of

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contract, breach of good faith and fair dealing, and breach of fiduciary duty against Defendant

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Stacy & Witbeck and John Bollier.1 (Dkt. No. 31.) Defendants moved to dismiss which the Court

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granted in part and denied in part. (Dkt. No. 23.) Plaintiff thereafter filed the now operative First

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Amended Complaint which Defendants answered. (Dkt. Nos. 31 & 32.) The parties delayed

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much of their discovery to pursue mediation in September 2015; however, mediation was

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ultimately unsuccessful. (Dkt. No. 41 at 2:14-16.2)
In October 2015, the parties filed a joint discovery dispute regarding written discovery

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responses and the Court ordered Defendants to produce documents (1) regarding the stock

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valuation and (2) that Defendants provided to its independent valuation firm, Houlihan Lokey.

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(Dkt. No. 48.) The parties were ordered to meet and confer and file a proposed case schedule by

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November 5, 2015. The parties failed to do so and on December 14, 2015, the Court issued an

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order noting that the deadlines under the current case management schedule, including the

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dispositive motion deadline, had run and ordered the parties to file a joint statement regarding the

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The first claim for relief has three “counts”: one for breach of contract, and two for breach of the
duty of good faith and fair dealing as each defendant separately.
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Record citations are to material in the Electronic Case File (“ECF”); pinpoint citations are to the
ECF-generated page numbers at the top of the documents.
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case schedule. (Dkt. No. 49.) The parties did so and on January 6, 2016, the Court issued the

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governing amended case schedule which set the discovery cut-off as April 15, 2016, the

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dispositive motion deadline for August 15, 2016, and the trial for October 31, 2016. (Dkt. No.

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51.) In March, Plaintiff filed a motion seeking to compel Houlihan Lokey to respond to a

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document subpoena issued a year earlier (Defendants had been attempting to facilitate this

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document production). (Dkt. No. 54.) At the hearing on the unopposed motion, the parties

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advised the Court that the at-issue documents had been produced.

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Shortly thereafter, Plaintiff filed the now pending motion to extend the discovery deadline,
and a week later, a motion to amend the complaint. (Dkt. Nos. 61 & 70.)
DISCUSSION

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United States District Court
Northern District of California

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Plaintiff seeks to amend the complaint to add Houlihan Lokey as a defendant and add a

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third claim for relief for aiding and abetting a breach of a fiduciary obligation as to Houlihan

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Lokey and breach of fiduciary obligations as to Defendant Bollier. Plaintiff also moves to extend

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the discovery deadline (which has since past). Defendants oppose both motions as untimely,

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without factual basis, and as prejudicial.

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A. Plaintiff’s Motion to Amend

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Federal Rule of Civil Procedure 15 provides that leave to amend the pleadings before trial

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should be given freely “when justice so requires.” Fed. R. Civ. P. 15(a)(2). Leave to amend is to

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be granted with “extreme liberality.” Sonoma County Ass’n of Retired Employees v. Sonoma

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County, 708 F.3d 1109, 1117 (9th Cir. 2013). In determining whether justice requires leave to

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amend, courts consider the five factors initially identified in Foman v. Davis, 371 U.S. 178, 182

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(1962): “bad faith, undue delay, prejudice to the opposing party, futility of amendment, and

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whether the plaintiff has previously amended the complaint.” Johnson v. Buckley, 356 F.3d 1067,

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1077 (9th Cir. 2004). “[I]t is the consideration of prejudice to the opposing party that carries the

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greatest weight.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003)

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(citation omitted). The decision to grant or deny a request for leave to amend rests in the

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discretion of the trial court. California v. Neville Chem. Co., 358 F.3d 661, 673 (9th Cir. 2004).

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Defendants’ opposition to Plaintiff’s motion is best construed as alleging undue delay,
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prejudice, and futility.3 Defendants’ sole argument regarding prejudice is that because the amount

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in dispute in this action is relatively small, adding a defendant “could be used to tip the balance of

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cost/benefit to leverage a settlement.” (Dtk. No. 73 at 7:21-22.) However, Defendants offer no

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support for this argument. The party sought to be added—Houlihan Lokey—has participated in

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the discovery process; indeed, the bulk of the parties’ discovery efforts to date have involved

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obtaining documents Defendants either provided to Houlihan Lokey or exchanged with Houlihan

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Lokey. No depositions have taken place. It is thus unclear how costs will escalate with the

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addition of Houlihan Lokey given that the outstanding discovery costs would be incurred

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regardless of whether Houlihan Lokey was added as a party. Further, given the nature of the
allegations here, while the addition of Houlihan Lokey as a defendant may have come as a surprise

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United States District Court
Northern District of California

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to Defendants, Houlihan Lokey’s involvement in the actions alleged here cannot have. Cf.

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AmerisourceBergen Corp. v. Dialysist W., Inc., 465 F.3d 946, 953 (9th Cir. 2006) (affirming

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denial of leave to amend where the proposed amendments “drastically changed [plaintiff's]

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litigation theory”). Finally, there is a sizable dispute as to the valuation of this case given that

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Plaintiff alleges damages of more than $3 million.
Defendants’ arguments regarding undue burden—styled as untimeliness—fare no better.

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Defendants contend that Plaintiff has always known about Houlihan Lokey’s involvement and that

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nothing in the recent email production made a material difference. The Court disagrees. The

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emails attached to the Declaration of Serena Morones reflect considerable discussion within

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Houlihan Lokey regarding the stock valuation for fiscal year 2012 and concerns Houlihan Lokey

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had regarding the valuation. That Plaintiff knew prior to these emails that Houlihan Lokey had

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increased its recommended price per share after consultation with Defendants and Stacy and

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Witbeck’s board of directors is not the same as knowing how Houlihan Lokey accomplished the

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ultimate stock valuation from that year and the process it went through to get there. That the

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proposed amendment came at the close of discovery is not enough to establish undue delay. See

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United States v. Webb, 655 F.2d 977, 980 (9th Cir.1981) (“[t]he mere fact that an amendment is

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Defendants cite to the California Rules of Civil Procedure and California case law; however, the
Federal Rules of Civil Procedure govern the Court’s analysis.
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offered late in the case ... is not enough to bar it.”). The undue delay inquiry focuses on whether

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the plaintiff knew of the facts or legal bases for the amendments at the time the operative pleading

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was filed and nevertheless failed to act promptly to add them to the pleadings. See

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AmerisourceBergen Corp, 465 F.3d at 953 (finding untimely and prejudicial a motion to amend

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filed fifteen months after discovery of new facts). In other words, undue delay is “dilatory

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motive.” In re: Facebook Privacy Litig., No.C–10–02389–RMW, 2015 WL 632329, at *2 (N.D.

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Cal. Feb. 13, 2015) (citation omitted). Because Plaintiff moved expeditiously to amend upon

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receipt of the emails and he did so prior the expiration of any case deadlines (other than the

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discovery deadline which he sought to extend prior to its expiration), there was no undue delay.

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Finally, Defendants’ argument that Plaintiff’s claim against Houlihan Lokey is factually

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United States District Court
Northern District of California

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unsupported, does not persuade the Court that amendment would be futile. Defendants contend

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that Plaintiff has failed to make an adequate evidentiary showing with respect to his proposed

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claim for aiding and abetting a breach of fiduciary obligation, but this misapprehends the

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requirements of Rule 15. “[A] proposed amendment is futile only if no set of facts can be proved

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under the amendment to the pleadings that would constitute a valid and sufficient claim or

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defense.” Miller v. Rykoff–Sexton, Inc., 845 F.2d 209, 214 (9th Cir.1988). Thus, “[t]he merits or

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facts of a controversy are not properly decided in a motion for leave to amend and should instead

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be attacked by a motion to dismiss for failure to state a claim or for summary judgment.’ ” Allen v.

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Bayshore Mall, No. 12–cv–02368–JST, 2013 WL 6441504, at *5 (N.D. Cal. Dec. 9, 2013)

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(internal citation and quotation marks omitted). Under Rule 15(a), “[i]f the underlying facts or

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circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded

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an opportunity to test his claim on the merits.” Foman, 371 U.S. at 182. Accordingly, denial of a

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motion for leave to amend on the basis of futility “is rare and courts generally defer consideration

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of challenges to the merits of a proposed amended pleading until after leave to amend is granted

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and the amended pleading is filed.” Clarke v. Upton, 703 F.Supp.2d 1037, 1043 (E.D. Cal. 2010)

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(citing Netbula, LLC v. Distinct Corp., 212 F.R.D. 534, 539 (N.D. Cal. 2003)). The Court thus

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declines to deny the motion on this basis.

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In sum, although Plaintiff’s request to amend comes at the close of discovery, there is no
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evidence of prejudice, bad faith, or futility.4 As delay alone does not provide sufficient grounds

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for denying leave to amend, see Hurn v. Retirement Fund Trust, 648 F.2d 1252, 1254 (9th Cir.

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1981), the motion to amend must be granted. See Howey v. United States, 481 F.2d 1187,1190-91

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(9th Cir. 1973) (“Where there is lack of prejudice to the opposing party and the amended

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complaint is obviously not frivolous, or made as a dilatory maneuver in bad faith, it is an abuse of

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discretion to deny such a motion.”).
Plaintiff’s Motion to Extend the Discovery Deadline

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B.

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Rule 16 governs modification of a case schedule, and states that “[a] schedule should not

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be modified except upon a showing of good cause.” Fed. R. Civ. P. 16(b). Unlike Rule 15’s liberal
amendment policy, Rule 16 predominantly focuses on the moving party’s reasons for seeking

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United States District Court
Northern District of California

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modification, its diligence, and the prejudice to the party opposing modification. The district court

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may modify the schedule “if it cannot reasonably be met despite the diligence of the party seeking

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the extension.” Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 609 (9th Cir.1992).
Under the current case management schedule, discovery closed on April 16, 2016—the day

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after Plaintiff filed his motion to extend the discovery deadline. (Dkt. No. 51.) Under Rule 16,

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“[a] schedule should not be modified except upon a showing of good cause.” Fed. R. Civ. P. 16(b).

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Given that the Court has granted Plaintiff’s motion to amend the complaint to add a new party and

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claim for relief, there is necessarily good cause to amend the scheduling order with respect to the

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case management deadlines.
CONCLUSION

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For the reasons stated above, Plaintiff’s motions to amend the complaint and extend the

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discovery deadline are GRANTED. (Dkt. Nos. 61 & 70.) Plaintiff shall file and serve the Second

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Amended Complaint forthwith. Plaintiff shall also provide the newly added Defendant with a

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copy of the Magistrate Judge Consent/Declination Form.

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The current discovery deadline is VACATED. The parties shall appear for a Joint Case

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Management Conference on June 30, 2016 at 1:30 p.m. in Courtroom F, 450 Golden Gate Ave.,

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Defendants have not alleged bad faith.
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San Francisco, California. A Joint Case Management Conference Statement with a new proposed

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case schedule shall be filed by June 23, 2016.

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IT IS SO ORDERED.
Dated: May 16, 2016

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JACQUELINE SCOTT CORLEY
United States Magistrate Judge

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United States District Court
Northern District of California

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