DMS Drywall & Interior Systems, Inc. et al v. Patriot Construction et al

Filing 33

ORDER GRANTING LEAVE TO FILE FIRST AMENDED ANSWER AND COUNTER COMPLAINT by Judge William H. Orrick re: 26 Administrative Motion to File Under Seal and 28 Motion for Leave to File. (jmd, COURT STAFF) (Filed on 5/13/2024)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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DMS DRYWALL & INTERIOR
SYSTEMS, INC., et al.,

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Plaintiffs,

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PATRIOT CONSTRUCTION, et al.,

United States District Court
Northern District of California

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Re: Dkt. Nos. 26, 28

Defendants.

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ORDER GRANTING LEAVE TO FILE
FIRST AMENDED ANSWER AND
COUNTER COMPLAINT

v.

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Case No. 23-cv-04743-WHO

Defendants Patriot Construction (“Patriot”) and Fidelity and Deposit Company of
Maryland (“F&D”) (together, the “defendants”), move for leave to file a First Amended Answer to
add a Compulsory Counter Complaint against Plaintiff DMS Drywall & Interior Systems, Inc.

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(“DMS”). See Application for Leave to File a First Amended Answer and Counter Complaint

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(“Motion” or “Mot.”) [Dkt. No. 28-1]. DMS opposes because the motion is untimely under the

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court’s scheduling order and the defendants offer no valid excuse for their delay in requesting

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leave to amend. There is no need for further argument, and the hearing set for May 15, 2024 is
VACATED. Good cause exists for the amendment, and DMS will suffer no prejudice from it.
Defendants’ motion is GRANTED.

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BACKGROUND

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Patriot was hired by the Veterans Administration to construct a laboratory (the “Lab”) in

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San Francisco, California. See First Amended Complaint (“FAC”) [Dkt. No. 26-5] ¶ 7 (sealed).1

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DMS requests leave to file a first-amended complaint to state an additional cause of action for
violation of the False Claims Act arising from Patriot’s alleged “misrepresentations concerning
payments made to DMS on the construction project at issue in the action.” See Memorandum in
Support of Application for Leave to File FAC Under Seal [Dkt. No. 26-1]. DMS’s request is
GRANTED, as is its request to file the FAC under seal, as is required by the False Claims Act, 31
U.S.C. § 3730(b)(2).

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Patriot then subcontracted with DMS for some of the work. Id. ¶ 9. The subcontract provided that

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DMS would furnish and install framing, drywall, and other related work to the Lab for a contract

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price of $1,274,067.00, subject to increase for extra work. Id. ¶¶ 8-9; see also Declaration of D.

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Ruiz (“Ruiz Decl.”) [Dkt. No. 28-2] Ex. A (the Subcontract). DMS alleges that it performed “all

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obligations required to be performed by it under the Subcontract and under the Payment Bond,”

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and that “all of the conditions precedent to performance on the part of Patriot and/or Fidelity have

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occurred.” FAC ¶¶ 34, 42. It claims that the defendants have “failed and refused to perform their

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obligations under the Payment Bond,” resulting in DMS not being paid in full under the

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Subcontract. Id. ¶ 35. It says that the defendants owe it at least $214,527.76 “for the value of its

United States District Court
Northern District of California

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labor, services, materials, equipment and supplies furnished by it to the Project.” Id.

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DMS filed suit on September 14, 2023, alleging three causes of action: (1) Recovery on the

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Miller Act Payment Bond against Patriot and F&D; (2) Breach of Contract against Patriot; and (3)

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Reasonable Value against Patriot. See Complaint (“Compl.”) [Dkt. No. 1]. It filed a first

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amended complaint adding a cause of action for alleged violations of the False Claims Act by

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Patriot. See generally FAC.

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The defendants claim that DMS failed to perform on its contract. They seek to file an

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amended answer and counter complaint asserting: Breach of Contract, Breach of the Implied

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Covenant of Good Faith and Fair Dealing, Breach of the Implied Duty to Perform with

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Reasonable Care, and Declaratory Judgment. See Defendants’ First Amended Answer and

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Counter Complaint [Dkt. No. 28-3]. The counter complaint is compulsory because it arises out of

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the same transaction or occurrence as DMS’s complaint, it does not seek to add another party to

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the action, the claims are not pending in another action, and the court has already found that it has

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jurisdiction over the defendants. See Fed. R. Civ. P. Rule 13; see also Pl. Opposition to

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Defendants’ Application for Leave to File a First Amended Answer and Counter Complaint

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(“Oppo.”) [Dkt. No. 29] 6:14-15.

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DISCUSSION

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THERE IS GOOD CAUSE TO AMEND THE SCHEDULING ORDER UNDER RULE 16
AND ADD THE COMPULSORY COUNTER COMPLAINT TO THE ANSWER UNDER
RULE 15

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A.

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If a scheduling order has been entered, as is the case here, see Dkt. No. 22, Rule 16

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United States District Court
Northern District of California

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mandates a showing of good cause for modifying the schedule. Fed. R. Civ. P. 16(b)(4). DMS
opposes the defendants’ motion because it is late-filed in violation of the court’s scheduling order,
and the defendants cannot show good cause under Rule 16 justifying this delay. See Oppo. 11-16.
The district court “is given broad discretion in supervising the pretrial phase of litigation, and its
decisions regarding the preclusive effect of a pretrial order . . . will not be disturbed unless they
evidence a clear abuse of discretion.” Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 607
(9th Cir.1992) (omission in original) (internal quotation marks omitted).
Patriot claims that at the time it filed its answer, it was “uncertain if its damages exceeded

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Rule 16

the amount of the final payment withheld from DMS” and that it did not want to “unnecessarily,
or inappropriately file a counter claim.” Ruiz Decl. ¶ 14. It states that it “now knows the extent of
its damages are far beyond the amount of the final payment and are not less than $305,000.” Id.;
see also id. Ex. G. The underlying issue, whether as a set off or for damages, has been in the case
from the outset, and the defendants point out that after the Early Neutral Evaluation Conference in
March 2024, their counsel “requested DMS stipulate an order allowing Patriot leave to file a
counter claim” but that DMS refused to do so. Mot. 5; see also Ruiz Decl. ¶¶ 7, 14; see id. Ex. G.
In light of those facts and the ones I discuss below in consideration of the good cause standard
under Rule 15, there is good cause to modify the scheduling order.2

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After filing their Reply, the defendants filed a Motion to Withdraw their Application for Leave to
File a First Amended Answer and Counter Complaint. See Dkt. No. 32-1. The defendants
explained that they had filed their reply brief under the impression that DMS had not filed an
opposition to their motion; as a result, they did not directly respond to DMS’s Rule 16 argument.
Because I am granting the defendants’ motion to amend despite their oversight, I DENY their
motion to withdraw as moot.
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B.

Rule 15

Under Rule 15, parties are entitled to amend pleadings once within 21 days of service;
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beyond that, a party can only amend its pleading “with the opposing party’s written consent or the
court’s leave.” Fed. R. Civ. P. 15(2). Courts are encouraged to “give leave when justice so
requires,” see id., and courts’ discretion must be guided by the strong federal policy favoring the
disposition of cases on the merits and permitting amendments with “extreme liberality.” DCD
Programs Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). In exercising its discretion “a court

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must be guided by the underlying purpose of Rule 15—to facilitate decision on the merits rather
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than on the pleadings or technicalities.” Id. Leave is not granted automatically, and a trial court

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may deny it if permitting an amendment would prejudice the opposing party, produce an undue
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delay in the litigation, or result in futility for lack of merit. See Foman v. Davis, 371 U.S. 178,
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United States District Court
Northern District of California

182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962) (listing these factors among others to be considered).
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Prejudice to the opposing party is the most important factor. Zenith Radio Corp. v. Hazeltine
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Research, Inc., 401 U.S. 321, 330–31, 91 S.Ct. 795, 802–03, 28 L.Ed.2d 77 (1971). And delay by
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itself is “insufficient to justify denial of leave to amend.” See DCD Programs, 833 F.2d at 186.
DMS argues that because the counter complaint arises from the “same set of facts” as
DMS’s original claims, of which the defendants have been aware for over a year, I should deny
the defendants’ request as untimely. See Oppo. 13-14. It argues that “[the] [d]efendants knew
they had incurred ‘not less than $305,430’ in remediation costs well before the deadline to amend
the pleadings.” Oppo. 15; see also Proposed Counter Complaint [Dkt. No. 28-3] ¶¶ 12-13.

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The defendants respond that they did not know the amount of their damages when they
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filed their Answer in October 2023. See Mot. 4:22-5:2 (“At the time Defendants filed their answer

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they were still in the process of determining the extent of the damages they incurred on the Project
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due to DMS’s failure to perform, and if those damages exceeded the amount of the final payment
that would have been due to DMS . . . and thus, if the damages could be dealt with as an offset.”).
They attribute their delay in filing the counter complaint to “not want[ing] to file a counter
complaint unnecessarily or inappropriately.” See id. 5:2-3.

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Regardless of when the defendants knew definitively what their remediation costs were, it
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United States District Court
Northern District of California

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is in the interest of justice to allow them to file their compulsory counterclaims now. The risk of

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prejudice to DMS is low because the counter complaint arises from the same set of facts as DMS’s

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claims against the defendants: It will not require DMS to commence or defend against new or

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burdensome discovery. The defendants do not seek to add additional parties to the litigation. And

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res judicata will foreclose Patriot from pursuing these claims if it is not allowed to add them.

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Discovery does not close for another three months. If DMS requires more time to address the

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counterclaims, it may request it from the court; it does not seem likely that it will. All of these

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facts distinguish this case from the ones DMS cites where leave to amend was denied because of

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the risk of prejudice to the non-moving party. See e.g., Morongo Band of Mission Indians v. Rose,

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893 F.2d 1074, 1079 (9th Cir. 1990) (leave to amend denied where two years had passed since the

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initial complaint was filed and where the new claims “would have greatly altered the nature of the

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litigation and would have required defendants to have undertaken, at a late hour, an entirely new

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course of defense.”); Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387-88 (9th Cir. 1990) (leave to

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amend denied where the proposed additional claims would “advance different legal theories and

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require proof of different facts” and where the moving party informed the court of their intention

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to file an amended complaint three times but failed to do so until over a year after their first notice

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of intent); Janicki Logging Co. v. Mateer, 42 F.3d 561, 566-67 (9th Cir. 1994) (leave to amend

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denied where the moving party sought to add a defendant to the case after the district court had

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already issued its judgment, and sought to allege a new cause of action against that new

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defendant).

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This case is just getting started and involves a limited set of facts and questions. There is

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good cause to amend the scheduling order and add the compulsory counterclaims, and DMS will

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not suffer prejudice from the modification.
CONCLUSION

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The defendants’ motion is GRANTED.

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IT IS SO ORDERED.

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Dated: May 13, 2024
William H. Orrick
United States District Judge

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