Court Opinion

ID: 8912029
Source: CourtListenerOpinion
Date Created: 2022-11-27 03:24:11.499083+00
Date Added: 2024-06-11T17:08:36.770208
License: Public Domain

ROSENN, Circuit Judge,
concurring and dissenting.
I join and concur in parts I and II of the majority opinion. I believe, however, that the district court committed reversible error and I therefore dissent from the remainder of the opinion, parts III through V.
I.
This case presents several troublesome issues for our consideration but at the forefront are two questions concerning the district court’s management of the trial. Even a cursory glance at the factual and procedural history of this case reveals the tension existing between the parties and especially between the plaintiffs and the trial judge. Unfortunately, this tension was exacerbated both by the numerous delays in bringing the case to trial, the necessity for counsel to stand by for days in expectation of being called for trial, and the length of the trial. Plaintiffs raise numerous arguments on appeal dealing with legal and evidentiary rulings made at trial, but first argue that the district court erred in denying two pre-trial motions: (1) the motion to amend the pleadings pursuant to Fed.R.Civ.P. 15; and (2) the motion to recuse under 28 U.S.C. § 144. As I have already noted, I concur in the majority’s disposition of the motion to recuse and I will not again allude to this thorny issue. However, I believe the district court’s disposition of the motion to amend the pleadings constituted reversible error.
Before I discuss the motion to amend, it may provide some perspective to recount the tortuous history of advancing the case to trial, especially because the denial of the motion to amend as to liability was on the ground that it might delay the trial. This case, initially set for trial on May 4, 1977, was called and a jury selected. The trial judge granted a mistrial because defendants’ counsel, though previously on notice by a motion of the plaintiffs of the possible impropriety of such conduct, injected prejudicial and improper remarks in their opening arguments to the jury. Although the plaintiffs moved for and. all parties urged the prompt calling of a new jury, the district court did not rule on the request but sometime later set November 30, 1977, as the trial date. The court subsequently vacated this date and several others that were thereafter set and ultimately set August 21, 1978. The parties appeared on that date but the trial judge declined to begin the trial and renewed his extensive efforts to have the parties reach a settlement.
After it became apparent that a settlement could not be achieved, the trial judge reset the trial date for September 6, 1978. Meanwhile, the multi-million dollar shopping center owned by The Village Center, Ltd., was scheduled for a foreclosure sale on August 23, 1978. The foreclosure took place as advertised. The Johnsons had given notice on August 21 that should the shopping center be lost, they would seek amendment of their complaint to include its loss as both grounds for liability and damages. The court had advised plaintiffs’ counsel that they would be permitted to amend their pleadings orally during trial.
The parties returned to court for trial on September 6, 1978. The court did not commence trial on the day fixed and instructed the parties and counsel to be available on *296twenty-four hours’ notice, although principal counsel representing the Johnsons maintained his law offices in Chicago, Illinois, and was not permitted to return meanwhile. On September 18, 1978, the John-sons tendered their proposed amendment to the complaint relating to the loss of the shopping center. This amendment was allowed only on the issue of damages but denied as to liability on the ground that such an allowance might delay the liability phase of the trial. On September 19, 1978, trial finally got underway, but because of numerous interruptions, many at the instance of the court, the trial judge aborted the trial once again. Trial was now fixed for February 20, 1979. The Johnsons once more tendered their proposed amendment to the complaint as to liability but the trial judge held it without disposition for the next three months. On February 7, 1979, the trial judge again rejected the proposed amendment to the complaint on the ground that it might delay the trial.
A. The Post-1975 Claims
Plaintiffs made two motions to amend the pleadings to add additional claims against the defendants. The first of these concerned the loss through foreclosure in August 1978 of the shopping center which was Penn Eastern’s major asset by virtue of its general partnership interest in The Village Center, Ltd. As already adverted to, the written motion to amend was originally submitted on September 18, 1978, one day before trial was to commence. The trial judge denied the motion to amend as to liability because it might unduly delay the liability phase of the trial, but permitted the amendment as to damages. When a mistrial of the liability portion of the trial was declared on September 29, 1978, and the case reset for a February 20, 1979 trial, plaintiffs promptly retendered their amendment as to liability for the loss of the shopping center. The court took no action until February 7,1979, when the retendered amendment was again rejected by the court because of “the severe prejudice that would result to the defendants if the amendment were allowed, as compared with the lack of prejudice to the plaintiffs caused by disallowance, since they may of course proceed to file the claims in a separate cause of action” and because of the “possibility that an amendment would delay the trial. . .” The Johnsons contend that the trial judge erred in rejecting their proposed amendment. I agree.
The governing rule on amendment of the pleadings is Fed.R.Civ.P. 15(a)1 which provides in relevant part:
A party may amend his pleading once as a matter of course at any time before a responsive pleading is served Otherwise a party may amend his pleading only by leave of court or by written consent of the adverse party; and leave shall be granted when justice so requires.
The Johnsons had already amended their complaint as a matter of course to include claims against Harry Salwen as a Penn Eastern director. The grant of their motion to amend the pleadings to include the loss of the shopping center therefore rested within the discretion of the court. Indeed, the Johnsons admit that they must show an abuse of discretion on the part of the district court. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); Cornell & Co. v. OSHRC, 573 F.2d 820, 823 (3d Cir. 1978); 3 Moore’s Federal Practice H 15.08(4) (2d ed. 1979).
Rule 15(a) itself provides that amendments should be “freely given when justice so requires.” The courts have taken a liberal approach to permitting amendments under Rule 15(a). In Foman v. Davis, supra, 371 U.S. at 182, 83 S.Ct. at 230, the Court held:
If the underlying facts or circumstances relied upon by the plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claims *297on the merits. In the absence of any apparent or declared reason — 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, futility of amendment, etc. —the leave sought should, as the rules require, be “freely given.”
Accord, Cornell & Co., supra; 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).
Two grounds were asserted by the district court for the denial of plaintiffs’ motion to amend: (1) severe prejudice to the defendants, and (2) the possibility of trial delay. I find neither of these possibilities sufficiently significant to warrant denial of the motion to amend.
I consider first the possibility of prejudice to the defendants because “[i]t is well-settled that prejudice to the non-moving party is the touchstone for the denial of an amendment.” Cornell & Co., supra, 573 F.2d at 823. The exact nature and degree of prejudice necessary for denial of an amendment is not readily susceptible to a precise formula, but I believe that the defendants must show that the amendment would adversely affect their ability to defend adequately the case. Cf. Deakyne v. Commissioners of Lewes, 416 F.2d 290, 300 (3d Cir. 1969) (prejudice under Rule 15(b) means difficulty in prosecuting a lawsuit as a result of tactical or theoretical change by other party). Otherwise, both the interests of judicial economy and justice might be frustrated by denial of the amendment and resultant second trial. Professor Moore writes that
[rjecognizing that the entire spirit of the [federal] rules is to the effect that controversies shall be decided on the merits, the courts have not been hesitant to allow amendments for the purpose of presenting the real issues of the case, where . . . the opposing party will not be unduly prejudiced. . . .
3 Moore’s, supra, H 15.08[2], at 15-61-62 (footnotes omitted).
The defendants marshal little evidence that the proposed amendment by the plaintiffs would have prejudiced them. The proximity of the original proposed amendment to the trial date in September 1978 conceivably could have made it difficult for the defendants to prepare adequately to counter a claim of corporate mismanagement in the loss of the shopping center. However, as plaintiffs point out, the only witnesses relevant to the issue of the extent of the shopping center’s loss were under the defendant’s control.
We need not be concerned with the issue of whether acceptance of the proposed amendment in September 1978 would have prejudiced defendants in the preparation of their case, for assuming such prejudice existed, it disappeared after the declaration of the September mistrial and subsequent re-tendering of the amendment more than three months prior to the rescheduled trial date in February 1979. Had the district court acted promptly and granted the motion to amend, the defendants certainly would have had ample time to prepare a defense to any claim arising out of the shopping center’s loss. If there were prejudice to the defendants, which we fail to perceive, it was due solely to the failure of the court to act on plaintiffs’ timely filed motion to amend. Indeed, since the foreclosure occurred in August 1978, it is difficult to see how plaintiffs could have tendered their proposed amendment much earlier. I hardly think it befits the spirit of Rule 15(a) for the court to attribute prejudice from a proposed amendment of the pleadings to the plaintiffs, when the root of the inconvenience to the defendants, if any, is the court’s inaction. I perceive no prejudice to the defendants chargeable to the plaintiffs which warrants rejection of their proposed amendment to the pleadings.2
*298The district court both in its September 1978 and February 1979 denial of plaintiffs’ motion to amend, cited adverse delay in the liability phase of the trial as a basis for rejection of the amendment. But this court has specifically indicated that “[djelay alone, however, is an insufficient ground to deny an amendment, unless the delay unduly prejudices the non-moving party.” Cornell & Co., supra, 573 F.2d at 823. See also Deakyne, supra, 416 F.2d at 300 n.19. Although possible interruption of the trial in September to permit discovery on the proposed new claim might have been a sufficient threat of prejudicial delay to warrant rejection of the amendment when first offered, the mistrial and three-month delay in retrial obviated any prejudice to defendants when the amendment was retendered. The delay that followed in the disposition of that amendment was not due in the slightest to the plaintiffs’ lack of diligence or good faith. I therefore believe that the district court erred in denying plaintiffs’ retendered motion to amend under Rule 15(a) to include the post-1975 claim arising out of the foreclosure of the shopping center.
The defendants argue, however, that even if the district court erred in rejecting the amendment, plaintiffs are entitled to a new trial only on the post-1975 claims arising out of the foreclosure because this event was severable from the other claims of fraud and breach of fiduciary duty.3 Defendants argue that the presentation of evidence on the post-1975 claims would have had no impact on the jury’s consideration of the pre-1975 claims in the complaint. I find this argument untenable.
The pre-1975 claims all involved charges of either fraud, mismanagement or breach of fiduciary duty on the part of the defendants in their handling of Penn Eastern’s financial affairs. Central to plaintiffs’ charges was their belief that at the time the defendants acted, they were not motivated by the best interests of Penn Eastern. The basis of the plaintiffs’ complaint was that the loans and sale of stock and other assets by the defendants to meet the financial difficulties of The Village Center, Ltd., were motivated not by the corporation’s best interests but rather by the defendants’ personal motives to maintain corporate control. Conversely, the defendants’ major defense was one of “unclean hands” in that plaintiffs’ motives were similarly the control of Penn Eastern. I believe the loss of Penn Eastern’s major asset, the shopping center, certainly was germane in confirming plaintiffs’ theory that the defendants were not acting in the best interests of Penn Eastern in managing its financial affairs and were breaching their fiduciary duties to the corporation and its shareholders. The jury, without knowledge of the loss of the shopping center, may have been more willing to accept the defendants’ version of their exercise of discretion in the management of Penn Eastern’s affairs. With knowledge of the loss of the shopping center and of plaintiffs’ admonition to the defendants of the need to act to forestall the impending foreclosures, the jury might well have found plaintiffs’ complaint meritorious. With- the complaint amended and the shopping center sold at sheriff’s sale, the jury could well have concluded that the decisions made by the defendants were not in Penn Eastern’s best interests, and were not honest mistakes of judgment, but were dictated solely by personal motives of corporate control.
In sum, the issues would have been drawn more sharply, the basis of plaintiffs’ charges concretized, and the jury might have rendered its verdict for the plaintiffs. Simply put, without the inclusion of the loss of the shopping center, the jury would not have had the full picture of Penn Eastern’s corporate disintegration for the attempts to restore financial health to Penn Eastern by the Pierce loan and sale of stock to Arnold *299Trueblood might have been viewed by the jury as apparently little more than cosmetic stop-gaps. I therefore cannot agree with the majority that the failure to allow the amendment amounted only to harmless error. I believe that the district court’s erroneous denial of the amendment to include post-1975 claims taints the entire trial and that a new trial on all issues is necessary.4
B. The Negligence Claims
The plaintiffs also attempted to amend the pleadings on the forty-third day of the trial to allege negligence on the part of the defendants in their performance of their duties as directors of Penn Eastern. This motion was made pursuant to Fed.R.Civ.P. 15(b) which permits the court to amend the pleadings to conform to the evidence of the trial.5 The district court denied the motion on the grounds of prejudice to the defendants because the allegations of negligence would shift the theory of the trial and force the defendants to prepare a mid-trial defense on a new issue.
I will not deal with the correctness of the court’s ruling on this motion because my conclusion that a new trial is required moots the issue whether the court properly denied the negligence amendment. Given the necessity of preparing for a retrial of this case under my analysis, I perceive little prejudice to the defendants in additionally preparing a defense to a negligence claim, and, unless other prejudice is evident, the court should be liberal in granting the motion to amend.
II.
A major issue in this case is whether the defendants acted in good faith in managing Penn Eastern’s affairs or whether they acted for an improper purpose — namely, the desire to retain control over Penn Eastern when it was not in its best interest. If the defendants acted in good faith, the business judgment rule would insulate them from any losses as a result of their decisions.
The court instructed the jury as follows: [T]he desire to retain control of a corporation in and of itself is an improper motive for decision of a director. Therefore, if you find by a preponderance of the evidence that the defendants acted solely or primarily because of a desire to retain control of Penn Eastern, then the presumption of the sound business judgment rule has been rebutted. However, I further instruct you that a director may properly decline to adopt a course of action which would result in a shift of control, so long as his actions can be attributed to a rational business purpose. In other words, so long as other rational business reasons support a director’s decision, the mere fact that a business decision involves the retention of control does not constitute a showing of bad faith to rebut the business judgment rule. That rule is rebutted only where a director’s sole or primary purpose for adopting a course of action or refusing to adopt another is to retain control. (Emphasis added.)
The plaintiffs complain that the last sentence of the instruction incorrectly sets forth their burden of proof under Delaware law. They claim that to rebut the business judgment rule, they need not demonstrate that the defendants’ “sole or primary” motive was the desire to retain control; only that control was a motive. I am persuaded that an examination of the relevant case law supports the plaintiffs’ view that the district court’s instruction was erroneous. I do not agree with the majority that plaintiffs’ theory is inconsistent with Delaware case law.
I start with the case of Bennett v. Propp, 41 Del.Ch. 14, 187 A.2d 405 (1962), in which *300the plaintiffs-shareholders challenged the purchase of a large quantity of the corporation’s stock on behalf of the corporation by its principal executive, allegedly to dissipate a take-over bid and to retain control over the corporation. The Supreme Court of Delaware invalidated the purchase, noting “the inherent danger in the purchase of shares with corporate funds to remove a threat to corporate policy.” 187 A.2d at 409. Because the court recognized the corporate dangers when directors are confronted with a conflict of interest and the subtleties involved in their decisions under such circumstances, it imposed the burden on the directors of vindicating the transaction, stating: “The directors are of necessity confronted with a conflict of interest, and an-objective decision is difficult. Hence, in our opinion, the burden should be on the directors to justify such a purchase as one primarily in the corporate interest.” Id. (emphasis added).
I read Bennett as holding that when a transaction involving control of a corporation raises a conflict of interest on the part of the board of directors, the burden is then thrust upon the defendants to go forward with proof establishing the fairness of the transaction. In other words, the business judgment presumption is dissipated once the plaintiffs show that an improper purpose — control — was a motive. This result is fully consistent with the purpose of the business judgment rule which is to insulate routine matters of corporate expertise from judicial scrutiny:
The theoretical justification for the business judgment rule is that courts should be reluctant to review the acts of directors in situations where the directors’ expertise is likely to be greater than the court’s; thus the rule may be viewed as a guide for judicial restraint. A strong implication follows that the courts should not apply the rule where the decisions of directors are influenced by forces tending to create conflicts of interest. In such contexts, there is a great danger that the directors will channel their expertise toward pursuit of personal advantage.
R. Gelfond & S. Sebastian, Reevaluating the Duties of Target Management in a Hostile Tender Offer, 60 B.U.L.Rev. 403, 435 (1980) (footnotes omitted).
Placing the burden of justifying the fairness of the transaction on the defendants, once control is implicated as a motive, appears to be confirmed in the case of Cheff v. Mathes, supra, which cites with approval the dispositive holding of Bennett concerning the burden of going forward with proof. See 199 A.2d at 554. The court in Cheff, however, citing Bennett, appears to have introduced an element of ambiguity when it stated: “[I]f the board has acted solely or primarily because of the desire to perpetuate themselves in office, the use of corporate funds for such purposes is improper.” It is the court’s mention of “sole” or “primary” purpose in Cheff which produced the problem in the instant case. This statement made in the court’s discussion of liability, not the burden of proof, nonetheless cites Bennett v. Propp, supra. The district court and the majority read this language as placing an initial burden of proof on the plaintiffs to overcome the business judgment presumption. However, when it reached the question of the burden of proof to show the presence or lack of good faith on the part of the board of directors, the Cheff court fully and unequivocally reiterated the burden of proof rule it announced in Bennett, again stating that the burden is on the directors to justify the transaction “as one primarily in the corporate interest.” Cheff v. Mathes, supra, 199 A.2d at 554. Nothing in Bennett or Cheff suggests that the plaintiff must first prove that the sole or primary purpose of the transaction was the directors’ desire to retain control over the corporation.6 Rather, the unequivocal *301thrust of Bennett is that once the record demonstrates that control is implicated in the transaction, a conflict of interest is ipso facto created. Once a conflict of interest is present, the burden of proof is shifted logically and pragmatically on the defendants “to justify [the transaction] as one primarily in the corporate interest.” Bennett, supra, 187 A.2d at 409. Indeed, the “primary purpose” language of Cheff appears to be directed towards the defendant’s burden in justifying the transaction, i. e., that the sole or primary purpose was not control.
The sole or primary purpose language of Cheff was not utilized in Condec Corp. v. Lunkenheimer Co., 43 Del.Ch. 353, 230 A.2d 769, 776 (1967), where the court stated:
Where, however, the objective sought in the issuance of stock is not merely the pursual of a business purpose but also to retain control, it has been held to be a mockery to suggest that the “control” effect of an agreement in litigation is merely incidental to its primary business objective.
This language supports Bennett’s rule that the issue of control as a motive is so central to the issue of business judgment that the burden is on the defendant to justify the soundness of the transaction as one primarily in the corporate interest.7 Recent Delaware cases reveal a growing trend to impose stricter obligations on management to justify control-related transactions. Cf. Singer v. Magnavox, Co., 380 A.2d 969 (Del. 1977) (freeze-out merger by majority shareholders subject to fairness test); Sinclair Oil Com. v. Levien, 280 A.2d 717, 720 (Del. 1971) (instrinsic fairness test and’ not business judgment rule applies where parent corporation receives benefit to the exclusion and detriment of subsidiary!: Petty v. Penntech Papers, Inc., 347 A.2d 140, 143 (Del.Ch.1975) (a purchase of shares with corporate funds to remove a threat to management policy and control casts the burden on defendant directors to justify the purchase as “one primarily in the corporate interest and not their own”).
Therefore, I believe that a standard requiring plaintiffs to show that control was the sole or primary purpose motivating the defendants’ conduct imposes a burden on the plaintiffs not consistent with Delaware law. Unlike the majority, I believe that under Delaware law, once plaintiff has shown that the desire to retain control was a motive in the particular business decision under challenge, the burden is then on the defendant to move forward with evidence justifying the transaction as primarily in the corporation’s best interest. Accordingly, I believe the district court erred in its charge to the jury and that the case should be remanded for new trial.

. Plaintiffs argue in this court that Fed.R.Civ.P. 15(b) applies. That rule allows a court to amend the pleadings to conform to the evidence. Inasmuch as the instant amendment was made before trial, the applicable rule is Fed.R.Civ.P. 15(a) which governs amendments to the pleadings in general.

. The district court opined and the defendants contend that the plaintiffs could have brought their claims arising out of the loss of the shopping center in a separate action. In the absence of specific demonstrable prejudice to the defendants, alternatives open to the plaintiffs *298are simply not relevant. In any event, both the possibility of collateral estoppel effect on the second trial, the interests of judicial economy and additional expenses of litigation weighed in favor of accepting the proposed amendment.

. This assumes that no reversible error was committed with respect to the pre-1975 claims, an issue which I consider in part, II, infra.

. Although the trial of this case was unnecessarily prolonged, a new trial can be expedited and condensed.

. Fed.R.Civ.P. 15(b) provides in relevant part: When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise those issues may be made upon motion of any party at any time, even after judgment; .

. Indeed, I believe such a test would be exceedingly difficult to apply. For example, if the plaintiff could show that control dominated the corporate decision by 50% or more, would the business judgment presumption disappear; but if he shows only 49% control motive, the presumption remains? Further, we believe it would be difficult to determine exactly what *301subjective motive was involved since any decision may involve a multitude of considerations. Also, under the majority’s reading of Cheff, it is unclear whose motive or purpose is involved: is it the entire board of directors, one director, or a majority of the board?

. Although the court in Condec found that control was the primary purpose of the transaction, see 230 A.2d at 775, nothing in the opinion suggests that plaintiffs must first prove control to be the sole or primary purpose before the business judgment presumption disappears. Indeed, the court in Condec refrained from placing the full burden on the defendants to justify the transaction because it was not established that the directors were acting in their own self-interest. See id. at 776-77.