Charbonneau v. Mortgage Lenders of America, LLC
Filing
181
MEMORANDUM AND ORDER denying 163 defendants Mortgage Lenders of America, LLC, Bradley Ives, and Philip Kneibert's Motion for Leave to Amend Answers. The court schedules a final pretrial conference for August 19, 2020 at 10:00 a.m. by phone (888-363-4749; access code 3977627) before the undersigned. The parties' proposed pretrial order is due by August 12, 2020. See text of order for further details. Signed by Magistrate Judge Angel D. Mitchell on 7/28/20. (ks)
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 1 of 17
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
BEAU CHARBONNEAU, on behalf of himself
and others similarly situated,
Plaintiff,
Case No. 18-2062-HLT-ADM
v.
MORTGAGE LENDERS OF AMERICA, LLC, et
al.,
Defendants.
MEMORANDUM AND ORDER
This matter comes before the court on defendants Mortgage Lenders of America, LLC
(“MLOA”), Bradley Ives, and Philip Kneibert’s Motion for Leave to Amend Answers. (ECF 163.)
By way of this motion, defendants seek to amend their answers to plaintiff Beau Charbonneau’s
(“Charbonneau”) Third Amended Complaint to add an additional defense that the collective-action
plaintiffs are exempt from overtime under the “retail sales exemption” of the Fair Labor Standards
Act (“FLSA”), Section 7(i).
Defendants seek to assert this defense belatedly because the
Department of Labor (“DOL”) changed its interpretive regulations relating to Section 7(i) on May
19, 2020, to formally withdraw the partial list of establishments that do not qualify for the retail
sales exemption. Because of this, defendants argue they now have a “new good faith defense” that
plaintiffs qualify for the retail sales exemption.
For the reasons discussed below, defendants’ motion is denied. The deadline set forth in
the scheduling order for motions to amend the pleadings expired almost one year ago. Defendants
have not met the good-cause standard for amending the pleadings after that deadline because the
DOL’s change to the interpretive regulations was not a change in the governing law. Furthermore,
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 2 of 17
defendants’ undue delay in seeking to assert this defense would prejudice plaintiffs at this late
stage of the litigation. And, defendants have not articulated any reason why their proposed
amendment is not futile under the Supreme Court’s decision in Mitchell and its progeny. Thus,
the court sees no legitimate reason to allow defendants to belatedly amend the pleadings—only to
put plaintiffs to significant time and expense, and to delay the ultimate resolution of this case—all
to assert a defense that will be futile.
I.
BACKGROUND
MLOA provides online mortgage lending services. MLOA employed Charbonneau as a
Team Lead and Loan Officer, originating loans for individual customers. In both positions,
Charbonneau received commission payments. Charbonneau filed this lawsuit against MLOA in
February of 2018. His complaint alleges, on behalf of himself and others similarly situated, that
defendants failed to pay Team Leads and Loan Officers overtime compensation and failed to pay
Loan Officers minimum wage for all hours worked in violation of the FLSA, the Kansas Wage
Payment Act (“KWPA”), and Kansas common law. He brought this case as a putative FLSA
collective action as to the FLSA claims and as a putative Rule 23 class action as to the KWPA and
common law claims.
The court convened the initial scheduling conference on June 13, 2018, and issued a
scheduling order targeted at an initial round of discovery and early mediation pending the court’s
ruling on plaintiff’s then-anticipated motion for conditional certification of the collective action.
(ECF 34.) On December 6, 2018, the court granted conditional certification of two separate FLSA
collective classes (ECF 45), and the FLSA opt-in plaintiffs subsequently filed their consents (ECF
52-55, 58, 61-62, 64-65, 67-69, 71, 74, 76, 81-82). On April 18, 2019, the court reconvened a
Phase II scheduling conference and entered a scheduling order that set the remaining case
2
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 3 of 17
management deadlines. (ECF 77.) Among other things, the schedule set a deadline for motions
to amend the pleadings of August 7, 2019 (id. at 2),1 which the court later extended to August 16,
2019 (ECF 90). Charbonneau filed the operative Third Amended Complaint on August 22, 2019,
adding defendants Bradley Ives and Philip Kneibert. (ECF 93.) Defendants then filed their
answers to the Third Amended Complaint. (ECF 94 & 104.)
In December of 2019, the parties moved for an approximately three-month extension of all
remaining pretrial deadlines because of complications associated with ESI productions. (ECF
106.) The court granted the motion in part and denied it in part. Specifically, the court set the
following key deadlines: plaintiff’s motion for Rule 23 class certification by February 21, 2020;
substantial completion of fact discovery by March 6; expert disclosures by March 6 and April 3;
completion of all discovery by April 17; final pretrial conference on May 1; and dispositive
motions and motions to decertify any class by May 7. (ECF 110.) Plaintiffs filed their motion for
Rule 23 class certification and defendants filed a motion for partial summary judgment on
plaintiffs’ KWPA and common law claims.
On April 21, the parties filed a joint motion to continue various case management deadlines
because of disruptions associated with the COVID pandemic, because this case had been recently
reassigned to a different district judge, and because the court’s ruling on the then-pending motions
could impact remaining case management deadlines. (ECF 154.) The court granted the parties’
1
The chart on page 2 of the scheduling order states that the deadline was August 7, 2019, but
page 6 mistakenly states that the deadline was April 9, 2020. (ECF 163 ¶ 8, at 2.) The latter date
is incorrect. The Report of Parties’ Planning Meeting requested August 7, 2019, as the deadline
for motions to amend and, as court recalls, this was the date the court and the parties discussed
during the scheduling conference. As such, the correct deadline was August 7, 2019. This was
reflected in subsequent court filings. (ECF 89, 90 (recognizing the scheduling order set a deadline
of August 7, 2019, for the parties to file any motions to amend their pleadings).)
3
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 4 of 17
joint motion to continue and vacated the pretrial conference deadlines and the May 7 motions
deadline. (ECF 155.)
On June 1, plaintiffs filed a motion for partial summary judgment on the FLSA exemptions
that defendants had previously asserted as defenses in this action. (ECF 161.) Defendants filed
their response on June 26, and plaintiffs filed their reply on July 14. Thus, this motion is now ripe
for the court to decide. Meanwhile, on June 20, the court granted defendants’ motion for partial
summary judgment on plaintiffs’ KWPA and common law claims and, as a result, denied
plaintiffs’ motion for Rule 23 class certification as moot. (ECF 172.) Thus, the current procedural
posture of the case is as follows: (1) discovery was (or should have been) complete by April 17;
(2) defendants already filed and the court already decided defendants’ summary judgment motion;
(3) the only claims remaining are plaintiffs’ FLSA collective action claims; and (4) plaintiffs’
motion for summary judgment on defendants’ asserted FLSA exemption defenses is ripe.
Against this backdrop, the court turns to the timing of the present motion. Defendants filed
the current motion to amend on June 9—nearly ten months after the deadline for motions to amend
the pleadings, nearly two months after the April 17 close of all discovery, and approximately one
week after plaintiffs filed a motion for partial summary judgment on defendants’ other asserted
FLSA exemption defenses. By way of the instant motion, defendants seek leave to amend their
answers to add a defense under Section 7(i) of the FLSA. That section exempts retail or service
establishments from paying overtime if “(1) the regular rate of pay of such employee is in excess
of one and one-half times the minimum [wage], and (2) more than half his compensation for a
representative period (not less than one month) represents commissions on goods or services.” 29
U.S.C. § 207(i). In 1961, the DOL first promulgated two interpretive rules listing establishments
that it viewed were lacking a retail concept and establishments that “may be recognized as retail.”
4
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 5 of 17
See Partial List of Establishments Lacking “Retail Concept,” 26 Fed. Reg. 8355 (Sept. 2, 1961)
(codified at 29 C.F.R. § 779.317); Partial List of Establishments Whose Sale or Service May Be
Recognized as Retail, 26 Fed. Reg. 8356 (Sept. 2, 1961) (codified at 29 C.F.R. § 779.320). In the
most recent version of 29 C.F.R. § 779.317, the DOL listed “loan offices,” “finance companies,”
and “credit companies, including small loan and personal loan companies” as establishments
lacking a retail concept. On May 19, 2020, the DOL withdrew both interpretive rules. See Partial
Lists of Establishments that Lack or May Have a “Retail Concept” Under the Fair Labor Standards
Act, 85 Fed. Reg. 29867-70 (May 19, 2020) [hereinafter Withdrawal Rule] (removing and
reserving 29 C.F.R. §§ 779.317, 779.320).
Because the DOL withdrew 29 C.F.R. § 779.317 on May 19, defendants argue they may
now assert in good faith that they qualify for the Section 7(i) exemption. In response, plaintiffs
argue the DOL’s withdrawal of this interpretive rule had no effect on the exemption. Plaintiffs
point out that the statute remains the same, and many courts have previously held that loan
companies like MLOA do not qualify as retail or service establishments under Section 7(i).
Plaintiffs therefore ask the court to deny defendants’ leave to amend their answers.
II.
ANALYSIS
Before applying the legal standards governing leave to amend, the court turns first to an
overview of the Section 7(i) exemption and its history.
A.
The Section 7(i) Exemption
The FLSA generally requires employers to pay overtime, i.e. one and one-half the
employee’s normal wage rate, for each hour the employee works over forty in a work week. 29
U.S.C. § 207(a)(1). The FLSA also sets forth certain exemptions to this requirement, including
Section 7(i). Under Section 7(i), a “retail or service establishment” is not required to pay an
5
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 6 of 17
employee overtime if “(1) the regular rate of pay of such employee is in excess of one and onehalf times the minimum [wage], and (2) more than half his compensation for a representative
period (not less than one month) represents commissions on goods or services.” 29 U.S.C. §
207(i). To establish that the exemption applies, an employer must show that it is a “retail or service
establishment.” See Chessin v. Keystone Resort Mgmt., Inc., 184 F.3d 1188, 1192 (10th Cir. 1999)
(“[A]n employer bears the burden of proving both the nature of the ‘establishment’ it operates and
the applicability of an FLSA exemption . . . .”).
Section 7(i) does not include a definition for the term “retail or service establishment.”
However, when Congress enacted Section 7(i) in 1961, a separate FLSA provision—29 U.S.C. §
213(a)(2)—wholly exempted certain retail or service establishments from the statute’s coverage.
See Fair Labor Standards Amendments of 1961, Pub. L. 87-30, § 6, 75 Stat. 65, 71 (1961) (setting
forth amendments to 29 U.S.C. § 213). Section 13(a)(2) defined a “retail or service establishment”
to mean “an establishment 75 per centum of whose annual dollar volume of sales of goods or
services (or both) is not for resale and is recognized as retail sales or services in the particular
industry.” Id. Congress repealed Section 13(a)(2) in 1989, but most courts have determined that
the identical term in Section 7(i) has the same meaning. The Eighth Circuit explained:
When Congress passed § 207(i) in 1961, it specifically stated that
the term “retail or service establishment” was to have the same
meaning in that section as it did in § 213(a)(2). See 29 C.F.R.
§ 779.411 (1992). Thus, any construction of the term as defined in
§ 213(a)(2) became a part of the definition of the term as found in
§ 207(i). Nothing in the 1990 amendments changed § 207(i). The
term “retail or service establishment” still remains, and there is no
expression of congressional intent that it should be construed any
differently. Absent specific congressional intent, we will not
conclude that Congress retained the term “retail or service
establishment” in § 207(i) yet at the same time discarded thirty years
of established meaning.
6
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 7 of 17
Reich v. Delcorp, Inc., 3 F.3d 1181, 1183 (8th Cir. 1993); see also Gieg v. DDR, Inc., 407 F.3d
1038, 1050 (9th Cir. 2005) (applying Section 13(a)(2)’s definition of “retail or service
establishment” and the accompanying regulations to the Section 7(i) exemption); Diggs v. Ovation
Credit Servs., Inc., --- F.Supp.3d ----, 2020 WL 1492793, at *4-*5 (M.D. Fla. Mar. 27, 2020)
(same). The DOL also interprets the term “retail or service establishment” in Section 7(i) to have
the definition set forth in Section 13(a)(2). See 29 C.F.R. § 779.411.
In 1959, the Supreme Court concluded that a personal loan company and “other financial
institutions” including banks, insurance companies, and credit companies were not “retail or
service establishments” within the meaning of Section 13(a)(2) because “there is no concept of
retail selling or servicing in these industries.” Mitchell v. Kentucky Finance Co., 359 U.S. 290,
295 (1959). When the DOL first issued 29 C.F.R. § 779.317 in 1961, it cited Mitchell as its
authority for including “credit companies, including small loan and personal loan companies” on
the list of establishments the agency believed lacked a “retail concept.” In construing the Section
7(i) exemption since, courts have cited Mitchell in determining that employers selling financial
products, including personal loans, are not retail or service establishments eligible for the
exemption. See, e.g., In re Wells Fargo Home Mortg. Overtime Pay Litig., No. C 06-01770 MHP,
2008 WL 2441930, at *3-*6 (N.D. Cal. June 13, 2008) (finding exemption did not apply to bank
that provides a variety of financial products and services, including mortgages); Pontius v. Delta
Fin. Corp., No. 04-1737, 2007 WL 1496692, at *4-*6 (W.D. Pa. Mar. 20, 2007) (same, mortgage
lender), report and recommendation adopted, No. CIV.A. 04-1737, 2007 WL 1412034 (W.D. Pa.
May 10, 2007); Barnett v. Wash. Mut. Bank, FA, No. C 03-00753 CRB, 2004 WL 1753400, at *4*6 (N.D. Cal. Aug. 5, 2004) (same, where plaintiffs were call center employees that sold mortgages
and home equity loans); Casas v. Conseco Fin. Corp., No. CIV.00-1512(JRT/SRN), 2002 WL
7
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 8 of 17
507059, at *3-*5 (D. Minn. Mar. 31, 2002) (same, where plaintiffs were loan originators for
lending products such as home improvement loans, home equity loans, and manufactured and
mobile home mortgages).
B.
Defendants’ Motion to Amend
Defendants now seek leave to amend their answers to add a Section 7(i) defense. Where,
as here, the scheduling order deadline to file a motion to amend the pleadings has passed, the party
seeking leave to amend must (1) demonstrate good cause for modifying the scheduling order under
FED. R. CIV. P. 16(b)(4), and (2) satisfy the standards for amendment under FED. R. CIV. P 15(a).
Gorsuch, Ltd., B.C. v. Wells Fargo Nat. Bank Ass’n, 771 F.3d 1230, 1240 (10th Cir. 2014).
Whether to grant a motion to amend is within the court’s sound discretion. See id.
1.
Defendants Have Not Shown Good Cause Under Rule 16
A scheduling order “may be modified only for good cause and with the judge’s consent.”
FED. R. CIV. P. 16(b)(4). To establish good cause, the moving party must show that it could not
have met the motion to amend deadline despite “diligent efforts.” Husky Ventures, Inc. v. B55
Invs., Ltd., 911 F.3d 1000, 1020 (10th Cir. 2018). Because Rule 16 requires diligence, if a party
knows of “the underlying conduct but simply failed to raise [its] claims, . . . the claims are barred.”
Gorsuch, 771 F.3d at 1240. On the other hand, “Rule 16’s good cause requirement may be satisfied
. . . if a [party] learns new information through discovery or if the underlying law has changed.”
Id.
Defendants argue that they could not have complied with the motion to amend deadline
because the DOL did not withdraw 29 C.F.R. § 779.317 until May 19, 2020. Thus, defendants
contend that they did not have a good-faith basis to assert a Section 7(i) defense prior to that date.
In response, plaintiffs contend that defendants do not demonstrate good cause under Rule 16
8
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 9 of 17
because there has been no real change in the law. Plaintiffs argue that courts have long concluded
that loan companies are not retail or service establishments based on the statute itself and
congressional intent, not the DOL’s interpretive regulations. Plaintiffs further argue that courts
did not afford any deference to 29 C.F.R. § 779.317 and its withdrawal has no impact on whether
a business qualifies as a retail or service establishment under Section 7(i).
The court agrees with plaintiffs. Defendants have not shown good cause for the belated
amendment because there has been no change in the controlling law. Although the DOL recently
withdrew 29 C.F.R. § 779.317, the definition of “retail or service establishment” remains the same.
Mitchell and its progeny govern whether companies like MLOA qualify as a retail or service
establishment, and that body of case law remains good law. In an attempt to argue otherwise,
defendants rely heavily on the DOL’s statement in the Withdrawal Rule that “[e]stablishments
which had been listed as lacking a retail concept may now assert under part 779 that they have a
retail concept and may be able to qualify as retail or service establishments.” Withdrawal Rule,
85 Fed. Reg. 29868. But defendants admit that 29 C.F.R. § 779.317 was merely an interpretive
rule. “Interpretive rules ‘do not have the force and effect of law . . . .’” Perez v. Mortg. Bankers
Ass’n, 575 U.S. 92, 97 (2015) (quoting Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995)).
Rather, they are “issued by an agency to advise the public of the agency’s construction of the
statutes and rules which it administers.” Shalala, 514 U.S. at 99. The DOL’s statement therefore
simply opens up an avenue for an employer to make an assertion to the DOL. But it does not
change the law that this court must apply.
Whether defendants may in good faith claim a Section 7(i) defense before the courts has
never been dependent on the DOL’s interpretive rules. Indeed, the DOL withdrew 29 C.F.R. §
779.317 in part because multiple courts had criticized the incomplete list and declined to accord
9
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 10 of 17
the rule any deference. See Withdrawal Rule, 85 Fed. Reg. 29868. The Seventh Circuit described
the rule as an “incomplete, arbitrary, and essentially mindless catalog.” Alvarado v. Corp.
Cleaning Servs., Inc., 782 F.3d 365, 371 (7th Cir. 2015); see also Matrai v. DirecTV, LLC, 168 F.
Supp. 3d 1347, 1361 (D. Kan. 2016) (discussing Alvarado and stating that the rationale for 29
C.F.R. § 779.317 was “neither obvious nor stated”). The Ninth Circuit also criticized the rule,
stating that the DOL’s incomplete list “does not appear to flow from any cohesive criteria for retail
and non-retail establishments.” Martin v. Refrigeration Sch., Inc., 968 F.2d 3, 7 n.2 (9th Cir.
1992). When the DOL withdrew the rule, it explained that it would rely on a “generally applicable
analysis set forth in § 779.318 and elsewhere in part 779” to determine whether a business is a
retail or service establishment going forward, rather than a static list. Withdrawal Rule, 85 Fed.
Reg. 29868.
The DOL’s withdrawal of 29 C.F.R. § 779.317 is not a true change in the law governing
the Section 7(i) exemption. Therefore, the court cannot find that defendants had good cause to file
their motion late. Defendants have offered no other explanation to justify the untimeliness of their
motion. Because the court cannot find good cause to extend the scheduling order deadline, the
court denies defendants’ motion as untimely. See Husky Ventures, 911 F.3d at 1019 (stating that
a court can deny a motion to amend for failure to show good cause within the meaning of Rule
16(b)(4)).
2.
Defendants Also Do Not Meet the Rule 15(a) Standards for Leave to
Amend
The court also denies defendants’ motion for leave to amend under Rule 15(a) standards.
When a party can no longer amend its pleading as a matter of course under Rule 15(a)(1),
amendment is allowed “only with the opposing party’s written consent or the court’s leave.” FED.
R. CIV. P. 15(a)(2). “The court should freely give leave [to amend pleadings] when justice so
10
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 11 of 17
requires.” Id. In freely allowing leave to amend, the court provides litigants with “the maximum
opportunity for each claim to be decided on its merits rather than on procedural niceties.” Hardin
v. Manitowoc–Forsythe Corp., 691 F.2d 449, 456 (10th Cir. 1982). A court may only withhold
leave to amend for reasons such as “undue delay, bad faith or dilatory motive on the part of the
movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice
to the opposing party by virtue of allowance of the amendment, [or] futility of [the] amendment.”
U.S. ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161, 1166 (10th Cir. 2009) (alteration in
original) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).
a.
Undue Delay, Bad Faith, or Dilatory Motive
A court may deny leave to amend based on undue delay. While “[l]ateness does not of
itself justify the denial of the amendment,” a party that “delays in seeking an amendment is acting
contrary to the spirit of the rule and runs the risk of the court denying permission because of the
passage of time.” Minter v. Prime Equip. Co., 451 F.3d 1196, 1205 (10th Cir. 2006) (quoting
R.E.B., Inc. v. Ralston Purina Co., 525 F.2d 749, 751 (10th Cir. 1975); 6 CHARLES ALAN WRIGHT
ET AL., FEDERAL PRACTICE AND PROCEDURE
§ 1488 (2d ed. 1990)). “[P]rotracted delay, with its
attendant burdens on the opponent and the court, is itself a sufficient reason for the court to
withhold permission to amend.” Id. (quoting Steir v. Girl Scouts of the USA, 383 F.3d 7, 12 (1st
Cir. 2004)). In evaluating what constitutes undue delay sufficient to deny a motion to amend, the
district court must focus “primarily on the reasons for the delay.” Id. at 1206. Denial is appropriate
where the party seeking amendment “has no adequate explanation for the delay.” Frank v. U.S.
West, 3 F.3d 1357, 1365-66 (10th Cir. 1993); see also Fed. Ins. Co. v. Gates Learjet Corp., 823
F.2d 383, 387 (10th Cir. 1987) (noting that courts have “denied leave to amend in situations where
the moving party cannot demonstrate excusable neglect,” including “where the moving party was
11
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 12 of 17
aware of the facts on which the amendment was based for some time prior to the filing of the
motion to amend”).
The parties’ arguments here are similar to those discussed above with respect to the Rule
16 good-cause standard. Defendants argue there is no undue delay because they sought leave to
amend soon after the DOL issued the Withdrawal Rule on May 19 and “open[ed] the door to the
Defendants’ good faith assertion of the retail sales exemption.” (ECF 180, at 9.) In response,
plaintiffs contend that defendants have no adequate explanation for their delay in seeking leave to
amend because the law has not changed. Plaintiffs argue that defendants could have asserted a
Section 7(i) defense at any time, although plaintiffs believe that such an assertion would be
meritless under existing law.
Again, the court agrees with plaintiffs. As discussed above, the DOL’s withdrawal of 29
C.F.R. § 779.317—an interpretive rule that courts had previously criticized—did not bar
defendants from asserting the Section 7(i) exemption sooner. Courts have not blindly followed
the DOL’s positions on which particular establishments constitute “retail or service
establishments” so as to foreclose any argument otherwise. See, e.g., Reich, 3 F.3d at 1184-86
(concluding that a laundry can qualify as a retail or service establishment for purposes of Section
7(i), despite the DOL’s position otherwise). And, employers similar to MLOA have previously
made good-faith arguments that they qualify for the Section 7(i) exemption. See, e.g., Gatto v.
Mortg. Specialists of Ill., Inc., 442 F. Supp. 2d 529, 537-42 (N.D. Ill. 2006) (distinguishing
Mitchell and finding that a mortgage broker employer was a retail or service establishment); Casas,
2002 WL 507059, at *3-*6 (discussing, but ultimately rejecting, the finance company employer’s
argument that Mitchell should be reconsidered due to changes in the financial industry). The fact
that the DOL recently withdrew the rule does not justify defendants’ delay in asserting the Section
12
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 13 of 17
7(i) defense. Defendants have offered no other explanation for their delay. Therefore, the court
denies defendants’ motion based on undue delay in seeking to amend.
b.
Undue Prejudice
The most important factor in considering a motion to amend is “whether the amendment
would prejudice the nonmoving party.” Minter, 451 F.3d at 1207. “Courts typically find prejudice
only when the amendment unfairly affects the [opposing parties] ‘in terms of preparing their
defense to the amendment.’” Id. at 1208 (quoting Patton v. Guyer, 443 F.2d 79, 86 (10th Cir.
1971)). “Most often, this occurs when the amended claims arise out of a subject matter different
from what was set forth in the [original pleading] and raise significant new factual issues.” Id.
Plaintiffs argue that allowing defendants’ proposed amendment would cause them undue
prejudice. Discovery opened in June 2018. The First Amended Scheduling Order required the
parties to substantially complete fact discovery by March 6, 2020, and to complete all discovery
by April 17, 2020. (ECF 110 ¶¶ (b), (d).) During discovery, plaintiffs reportedly served written
discovery directed to MLOA’s exemption decisions; “engaged in exhaustive, time-consuming and
very costly ESI discovery” targeting issues framed by the pleadings; and deposed seven current or
former MLOA employees (including the individual defendants) and an MLOA corporate
representative. (ECF 171, at 17-18.) Plaintiffs contend that if defendants are allowed to belatedly
assert a Section 7(i) defense, they will need to “re-depos[e] several witnesses, identify[] additional
search terms for ESI discovery, and issu[e] new document requests pertaining to the elements of
the . . . exemption.” (Id.) In reply, defendants argue that plaintiffs are exaggerating and that they
really only need discovery on the dollar volume percentage of funded loans MLOA sold on the
secondary market. Defendants believe this discovery can be completed through a brief set of
interrogatories and/or document requests.
13
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 14 of 17
The court does not believe that plaintiffs are exaggerating the discovery they will require
if defendants were permitted to assert the Section 7(i) exemption. Whether MLOA qualifies as a
retail or service establishment turns on whether 75 percent of its “annual dollar volume of sales of
goods or services (or of both) is not for resale” and whether it is “recognized as retail sales or
services in the particular industry.” See Reich, 3 F.3d at 1183. While the first element may be
more amenable to discovery through limited written requests, the second element requires a more
nuanced factual inquiry. See Brennan v. Great Am. Disc. & Credit Co., 477 F.2d 292, 296 (5th
Cir. 1973) (recognizing that “[d]etermination of whether a business fits the retail concept is not
without difficulty”). Plaintiffs did not conduct any discovery on either element. Defendants are
not entitled to belatedly assert this defense, and then unilaterally dictate the scope of discovery.
Moreover, the need for further discovery is only one consideration on the issue of undue
prejudice. At this point, the case has been pending for approximately two-and-a-half years. It
took the parties an inordinate length of time to complete discovery, and discovery has now been
closed for over three months. Plaintiff’s partial summary judgment motion on defendants’ FLSA
exemption defenses is fully briefed. If the court were to allow defendants to belatedly assert this
defense, plaintiffs would be put not only to the time and expense of conducting discovery on this
defense, but also an additional round of summary judgment briefing. In addition, further briefing
will delay the trial setting and, hence, the ultimate resolution of this case. Thus, plaintiffs would
be unduly prejudiced if defendants were allowed to amend their answers at this late stage of the
litigation. See, e.g., Flores v. 2K Clevelander, LLC, No. 1:16-CV-24083-UU, 2017 WL 5054565,
at *4 (S.D. Fla. May 4, 2017) (finding plaintiff would be prejudiced by defendant amending its
answer to plead the Section 7(i) defense where the case had progressed to dispositive motions and
discovery was closed); Wade v. Cycle Mart, L.P., No. A-14-CV-00427-ML, 2015 WL 4404876,
14
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 15 of 17
at *4 (W.D. Tex. July 17, 2015) (denying a defendant leave to amend where the plaintiff was
prejudiced because she did not conduct discovery on the elements necessary to establish that the
employer was a retail establishment under Section 7(i)).
c.
Futility
“A proposed amendment is futile if the [pleading], as amended, would be subject to
dismissal.” Jefferson Cty. Sch. Dist. No. R-1 v. Moody’s Inv’r’s Servs., Inc., 175 F.3d 848, 859
(10th Cir. 1999). When a defendant moves to amend an answer to add an affirmative defense, “the
appropriate standard for determining the viability of a defense lies within Fed. R. Civ. P. 12(f),
which permits a party to move to strike ‘an insufficient defense’ from a pleading.” Layne
Christensen Co. v. Bro-Tech Corp., No. 09-CV-2381-JWL-GLR, 2011 WL 3847076, at *6 (D.
Kan. Aug. 29, 2011). “A defense is insufficient if it cannot succeed, as a matter of law, under any
circumstances.” Hayne v. Green Ford Sales, Inc., 263 F.R.D. 647, 648-49 (D. Kan. 2009). A
district court has discretion to strike a defense where the insufficiency is “clearly apparent” and
“no factual issues exist that should be determined in a hearing on the merits.” Id. at 649. The
party seeking to strike a defense has a demanding burden to establish adequate grounds under Rule
12(f). Layne Christensen, 2011 WL 3847076, at *6. In determining whether striking a defense is
warranted, the court should consider that “Rule 12(f) is intended to minimize delay, prejudice and
confusion by narrowing the issues for discovery and trial.” Hayne, 263 F.R.D. at 649.
Plaintiffs argue that defendants’ proposed amendment is “unquestionably futile” because
“as a matter of long-standing Congressional intent and confirmed by the Supreme Court, loan
companies like MLOA are not ‘retail or service establishments’ within the meaning of [Section
7(i)].” (ECF 171, at 16.) In contrast, defendants contend that their proposed amendment is not
futile and, in arguing otherwise, plaintiffs are “rely[ing] on outdated case law regarding the proper
15
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 16 of 17
scope of interpretation of the FLSA’s exemptions, misstatements about the deference owed to the
DOL’s regulations, and selective misstatements about the purpose of the DOL [Withdrawal]
Rule.” (ECF 180, at 10.)
Again, the court agrees with plaintiffs. The proposed amendment is futile. As discussed
in detail above, courts confronted with the question of whether employers in the financial industry
selling personal loans like MLOA are “retail or service establishments” have continually
concluded that they are not—based on the Supreme Court’s decision in Mitchell and its progeny.
Defendants vaguely contend that they may now assert, in good faith, that they qualify for the
Section 7(i) exemption. But defendants do not argue that the DOL’s Withdrawal Rule somehow
overrules prior controlling case law. Astoundingly, defendants do not address Mitchell at all.
Defendants do not provide the court with any details as to why MLOA’s business might be
distinguishable from the employers discussed in Mitchell or subsequent analogous cases applying
Mitchell. Perhaps most tellingly, defendants do not articulate any “good faith” reasons why they
supposedly now qualify for Section 7(i) exemption.
III.
CONCLUSION
The DOL’s withdrawal of the interpretive regulation did not change the governing law that
applies in this case. As such, defendants’ motion to amend is untimely under the scheduling order,
and they have not shown good cause for an extension of the deadline to allow the belated motion.
Defendants also unduly delayed in moving to amend in that the underlying law has not changed.
Thus, defendants could have moved to amend their answers earlier if they truly believed they had
a good-faith argument that MLOA is a retail or service establishment. Plaintiffs would be unduly
prejudiced by the belated amendment because discovery is closed and the parties have fully briefed
dispositive motions (including plaintiffs’ motion for partial summary judgment on FLSA
16
Case 2:18-cv-02062-HLT-ADM Document 181 Filed 07/28/20 Page 17 of 17
exemptions). This case is on the brink of being ready for trial. Allowing the belated amendment
would unfairly put plaintiffs to significant time and expense re-doing discovery and dispositive
motions—and all for no apparent reason because the defense defendants now seek to assert would
be futile.
Mitchell still dictates that companies like MLOA are not “retail or service
establishments” as that term is used in the FLSA.
This case is now ready for a pretrial conference. Pursuant to Fed. R. Civ. P. 16(a), the
court schedules a final pretrial conference for August 19, 2020 at 10:00 a.m. by phone (888-3634749; access code 3977627) before the undersigned. The court may require the parties to appear
in person if the court believes the pretrial order requires substantial work or that there are other
issues such that the case would benefit from having the pretrial conference in person rather than
by phone. The parties may also request to appear in person when they submit the proposed pretrial
order. No later than August 12, 2020, defense counsel must submit the parties’ proposed pretrial
order
in
Word
format
as
an
attachment
to
an
email
sent
to
ksd_mitchell_chambers@ksd.uscourts.gov. The proposed pretrial order must not be filed with the
clerk’s office. It must be in the form available on the court’s website:
http://ksd.uscourts.gov/index.php/forms/?open=CivilForms
IT IS THEREFORE ORDERED that defendants Mortgage Lenders of America, LLC,
Bradley Ives, and Philip Kneibert’s Motion for Leave to Amend Answers (ECF 163) is denied.
IT IS SO ORDERED.
Dated July 28, 2020, at Topeka, Kansas.
s/ Angel D. Mitchell
Angel D. Mitchell
U.S. Magistrate Judge
17
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?