Opinion ID: 396525
Heading Depth: 1
Heading Rank: 2

Heading: RICH v. THE GOVERNMENT

Text: 12 Because it was Rich's 1973 agreement with the Government which precipitated both actions, we begin with Rich's claims against the Government rather than Heyl's breach of contract action against Rich. A. The Pleadings Maze 13 At the outset we are confronted with a strenuously pressed procedural objection that either the Government did not move to amend its answer to assert the defenses on which it ultimately won below, or that it was an abuse of discretion by the trial court to allow belatedly the challenged amendments. The pleading style and trial tactics of the Government were not a model of expedition and clarity, but apparently the trial judge grasped the issues and the appellant should have as well. Nevertheless we must trace the maze through which the pleadings flowed to reach the final judgment. 14 Heyl initiated a breach of contract action against Rich in December, 1975. Rich responded by asserting a third party claim against the Virgin Islands Government for indemnification for any liability it might have to Heyl and in a separate action sued the Government for breach of contract. In answer to appellant's claim the Government pleaded two affirmative defenses, neither of which alleged any illegality in the agreement between Rich and the Government. Three years later in January, 1979, the Government sought leave to amend its answer pursuant to Fed.R.Civ.P. 15(a), in order to assert a third affirmative defense alleging that the Agreement was void and unenforceable 2 and a fourth defense alleging its illegality. Rich agreed to withhold any objections to the Government's motion to amend if the court in granting leave to amend required the Government to clarify in detail the basis of its new defenses. The Government's response to Rich stated that the Agreement was illegal because it involved the expenditure of substantial local revenues for which there was no appropriation and no authority by law, in violation of V.I.Code Ann. tit. 33 § 3101. 15 In his Memorandum and Order of March 6, 1979, the district court judge denied the Government's Motion for Summary Judgment, but granted it leave to amend its answer. The Government's clarification of its illegality defense was deemed by the court a satisfactory response to Rich's vagueness objection. 16 Although in its Pretrial Statement the Government alleged only that the Agreement was void and unenforceable inasmuch as it was not authorized by law and an appropriation adequate to its fulfillment was never made, in its opening statement at trial it specified three additional illegality defenses: (1) failure of the project to comply with the requirement of Act No. 3088, V.I.Sess.Laws 1971 for an approved housing development plan; (2) failure of the project to meet the cost limitations set forth in V.I.Code Ann. tit. 29 § 191n; and (3) failure of the Department of Housing and Urban Renewal to make an authorized transfer of land to Rich. 3 17 Appellant argues that the Government waived all illegality defenses except inadequate prior appropriations which was specifically pleaded in response to Rich's objections about the vagueness of the Government's illegality defense. Rich also argues that when the court permitted the Government to amend and then clarify its Fourth Affirmative Defense, no other illegality defenses could be pleaded and that absent a request for further leave to amend, the court improperly treated the Government's opening statement on defenses as amendments to the answer. B. The Standard for Amendment 18 Leave to amend pleadings out of time under Rule 15(a) of the Federal Rules of Civil Procedure is generally at the discretion of the trial court, Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962), Zenith Radio Corporation v. Hazeltine Research, Inc., 401 U.S. 321, 330, 91 S.Ct. 745, 802, 28 L.Ed.2d 77 (1971), and (c)ourts have shown a strong liberality ... in allowing amendments under Rule 15(a), 3 Moore's Federal Practice P 15.08(2) at 15-59 (2d ed. 1980), (footnote omitted), which specifically states that leave to amend shall be freely given when justice so requires. 19 In Foman v. Davis the Supreme Court observed: 20 Rule 15(a) declares that leave to amend shall be freely given when justice so requires; this mandate is to be heeded. If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason-such an 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, futility of amendment, etc.-the leave sought should, as the rules require, be freely given. Of course, the grant or denial of an opportunity to amend is within the discretion of the District Court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules. 21 Id. 371 U.S. at 182, 83 S.Ct. at 230. Accord, U.S. v. Hougham, 364 U.S. 310, 81 S.Ct. 13, 5 L.Ed.2d 8 (1960); S. S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28 (2d Cir. 1979); Skehan v. Trustees of Bloomsburg State College, 590 F.2d 470 (3d Cir. 1978), cert. denied, 444 U.S. 832, 100 S.Ct. 61, 62 L.Ed.2d 41 (1979); Cornell and Company, Inc. v. Occupational Safety and Health Review Commission, 573 F.2d 820 (3d Cir. 1978); Thomas v. E. I. DuPont de Nemours & Co., 574 F.2d 1324 (5th Cir. 1978); Mertens v. Hummell, 587 F.2d 862 (7th Cir. 1978); Bireline v. Seagondollar, 567 F.2d 260 (4th Cir. 1977). 22 The trial court's discretion under Rule 15, however, must be tempered by considerations of prejudice to the non-moving party, for undue prejudice is the touchstone for the denial of leave to amend. Cornell, 573 F.2d at 823. Accord, Foman 371 U.S. at 182, 83 S.Ct. at 230; Zenith Radio Corp., 401 U.S. at 330-31, 91 S.Ct. at 802; Skehan, 590 F.2d at 492. See also, 3 Moore's Federal Practice, P 15.08(4) at 15-85 to 91. In the absence of substantial or undue prejudice, denial must be grounded in bad faith or dilatory motives, truly undue or unexplained delay, repeated failure to cure deficiency by amendments previously allowed or futility of amendment. Foman, 371 U.S. at 182, 83 S.Ct. at 230. See also, Goodman v. Mead Johnson & Co., 534 F.2d 566 (3d Cir. 1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977); Mertens v. Hummell, 587 F.2d 862 (7th Cir. 1978); Matlack, Inc. v. Hupp Corporation, 57 F.R.D. 151 (E.D.Pa.1973); 3 Moore's Federal Practice P 15.08(4) at 15-91 to 100. The decision of the trial court to grant or deny leave to amend is not subject to reversal except for abuse of discretion. Foman, 371 U.S. at 182, 83 S.Ct. at 230; Zenith Radio Corp. 401 U.S. at 330-31, 91 S.Ct. at 802; Cornell, 573 F.2d at 823; Canister Co. v. Leahy, 191 F.2d 255, 257 (3d Cir. 1951), cert. denied, 342 U.S. 893, 72 S.Ct. 201, 96 L.Ed. 669 (1951). 23 Although formal motion for leave to amend was never made after the trial had begun, the trial court's treatment of the Government's opening statement on their defenses as further amendments to the pleadings does not constitute reversible error. 4 The procedure for obtaining leave to amend pleadings set forth in Rule 8 of the Fed.R.Civ.P. should generally be heeded, but rigid adherence to formalities and technicalities must give way before the policies underlying Rule 15. (T)he federal rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits, Conley v. Gibson, 355 U.S. 41, 48, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957). 24 Appellant's abuse of discretion claim is grounded in its assertion that prior to trial the Government was granted a conditional leave to amend and thus waived the right to plead further defenses. We agree with the district court's conclusion, however, that in its Memorandum and Order of March 6, 1979 granting the Government leave to amend, there was no preclusion from further amendments. 5 25 Appellant claims that there was no justification proffered for the delay in making the amendments and further that the pleadings were deliberately misleading. Appellant seems to suggest that such conduct constitutes reversible error because it is prejudice per se. However, appellant has a heavier burden than merely claiming prejudice, it must show that it was unfairly disadvantaged or deprived of the opportunity to present facts or evidence which it would have offered had the Government's amendments been timely. Deakyne v. Commissioners of Lewes, 416 F.2d 290, 300 n. 19 (3d Cir. 1969). 26 Though Rich argues that the opening statement of the Government constituted an unexpected change in theory which Rich, because of time restraints, was unable effectively to meet during trial, Rich failed either to seek a continuance to enable it to offer such rebuttal evidence or to present such evidence of prejudice in post-trial briefing. Even to this hour appellant has not indicated what evidence it would have presented in view of the Government's alleged change in theory. Furthermore, Rich could not have been entirely surprised by the Government's opening statement, because in the Government's Answer to Interrogatories Propounded by Plaintiff of September 29, 1976, the Government, through the Commissioner of Housing, stated that the contract between Rich and the Government was not binding for the reasons later given in the Government's opening statement at trial. 27 While the niceties of precise, timely and unambiguous pleadings are preferable, we must note that trial judges are somewhat like quarterbacks in that they have a broad range of options for their game plan, and the losing party is not entitled to a new trial even when the trial judge's ruling approaches the maximum latitude of the rules. Since the trial judge did not find that the Government's action rose to the level of deliberate deception or flagrant abuse and there was no prejudice proven, we do not believe on this record that the trial judge committed an abuse of discretion in allowing the amendments. C. The Validity of the Agreement 28 On a substantive level, several issues were raised challenging or supporting the validity of the October 1, 1973 agreement. In short, the Government claims the Agreement was invalid because: (1) the Agreement was not supported by adequate prior appropriations and thus violated V.I.Code Ann. tit. 33 § 3101; (2) a government-approved housing development plan, required by Act 3088, 1971 V.I.Sess.Laws, was not obtained; and (3) the agreement violated moderate income housing cost limitations established by V.I.Code Ann. tit. 29 § 191n. 29 Appellant claims that the Agreement was valid and enforceable because: (1) there was no appropriations gap, and even if there were, it did not render the Agreement void ab initio; (2) the Agreement was authorized by law and thus enforceable under both V.I.Code Ann. tit. 33 § 3101 and V.I.Code Ann. tit. 31 § 248; (3) legislative approval of a housing development plan was not required for this Agreement and (4) moderate income housing cost limitations established by V.I.Code Ann. tit. 29 § 191n are inapplicable to the development at Estate Nazareth. 1. The Appropriations Gap 30 Anyone who manages a budget recognizes the possible nightmare when expenditures significantly exceed income. Such problems could be particularly disastrous if governmental officials could obligate their government when the legislature had not appropriated the prerequisite funds. To prevent such calamities, at least since 1870 there has been a federal statute which makes it unlawful for any department of the (federal) government to spend in any one fiscal year any sum in excess of appropriations made by Congress for that fiscal year, or to involve the government in any contract for the future payment of money in excess of such appropriations. 16 Stat. 251 (July 12, 1870). Since 1870 the original federal statute has had several modifications but, with few exceptions, officers or employees of the United States have been prohibited from making expenditures or contract obligations in excess of appropriated funds. In 1957, the Legislature of the Virgin Islands adopted verbatim the federal statute as embodied in 31 U.S.C. § 665. See V.I.Code Ann. tit. 33 § 3101. In reliance on this statute the Government raised its first illegality defense-that in substance the agreement of 1973 was a nullity because it attempted to commit the Government of the Virgin Islands to financial obligations in excess of any funds appropriated. 31 Despite all of the fanfare of initiating a project to build housing for the poor and those of moderate income, despite the expenditure of at least $50,000 in government appropriations, despite the authorization of $950,000 for this project, despite the fact that preliminary road construction was started, despite the fact that there was testimony that in excess of $500,000 had already been expended on the project, Rich lost its entire case on the basis of a mathematical calculation that there was a $150,000 shortfall in the total appropriations. According to the trial judge $1.1 million was necessary for the site work required under the contract 6 and by his calculation only $950,000 7 was appropriated. Thus the major issue for our review is whether, as of October 1973, the Legislature had appropriated sufficient funds for the cost of these site improvements or whether there was a shortfall of such a magnitude to make the original agreement null and void ab initio. 32 The relevant statutes on adequacy of appropriations provide: 33 Expenditures or contracts in excess of appropriations. 34 No officer or employee of the Virgin Islands shall make or authorize an expenditure from, or create or authorize an obligation under, any appropriation or fund in excess of the amount available therein; nor shall any such officer or employee involve the government in any contract or obligation for the payment of money for any purpose, in advance of appropriations made for such purpose, unless such contract or obligation is authorized by law. 35