ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF THE VIRGIN ISLANDS: DIVISION OF ST. THOMAS
Before Seitz, Chief Judge, and Higginbotham and Van Dusen, Circuit Judges.
With flare and kindled hope, on October 1, 1973, the Government of the Virgin Islands signed a contract with a developer to build up to 300 houses "for families of low and moderate income" at Estate Nazareth. The parties stressed that the "need for housing in St. Thomas, Virgin Islands" was so acute that it must be "constructed as expeditiously as possible." Now more than eight years later, instead of having at the site housing for the poor and those of moderate income, there has been built this extensive law suit, which some would call either a "lawyer's paradise" or a "litigation nightmare." After a gubernatorial election and resulting changes of government administrations, the parties now, instead of laying bricks for housing, are espousing subtle theories of contract, procedural, constitutional, and municipal law while placing the blame on the "other person" in this breach of contract action. There are claims now for hundreds of thousands of dollars because of purported breaches of contract by either the Government and/or the developer. During the eight year interim, not one house has been built pursuant to this contract, not one poor or moderate income person has benefitted by the Government's past expenditures, and in recent years the major project has been an intense legal skirmish in the district courthouse between the developer, the contractor and the Government. Because of the multi-faceted claims, charges and defenses, we are now obligated to sort out esoteric legal doctrines and probably to write with too much detail. Yet, in doing so, we probably thereby mask the tragic consequences which failures of this type cause the intended beneficiaries-families of low and moderate income, for in many ways the latter are the victims of what has been at best a fiasco.
This case involves an appeal from the consolidated trial of two breach of contract actions. In Heyl & Patterson International, Inc. v. F. D. Rich Housing of the Virgin Islands, Inc., and F. D. Rich Housing Corporation, Memorandum Opinion, No. 75-785 (D.V.I. May 23, 1980), (hereafter Heyl and Rich), the district court entered judgment in favor of appellee Heyl and against appellant Rich in the amount of $262,398.01, plus costs of $2,668.25, attorney's fees of $21,000.00 and prejudgment interest of $841.50, and dismissed all third party claims by appellant Rich against the Virgin Islands Government. In F. D. Rich Housing of the Virgin Islands, Inc. as Assignee of F. D. Rich Housing of Puerto Rico v. Government of the Virgin Islands, Memorandum Opinion, No. 76-62 (D.V.I. May 23, 1980), (hereafter Rich and The Government), the district court granted judgment in favor of appellee Government and dismissed all claims by appellant Rich against the Government.
Appellant's arguments are clearly not frivolous and appellant has sustained a significant economic loss. Nevertheless appellant has failed to tip the scales sufficiently in its favor to warrant reversal. With some disquietude we will affirm the district court's judgments in both cases.
On October 1, 1973, the Government of the Virgin Islands, in pursuit of its goal to provide much needed moderate income housing for the Virgin Islands, entered into a written agreement with appellant Rich for the development and construction of a moderate income housing project (hereafter the Agreement) under Title 29 of the Virgin Islands Code, Public Planning and Development.
The Agreement, executed by the Commissioner of Housing and Community Renewal (hereafter the Commissioner of Housing) and signed by the Governor of the Virgin Islands, Melvin H. Evans, called for the construction, in two phases, of 320 housing units at Estate Nazareth, St. Thomas, Virgin Islands. One hundred units were designated for immediate construction during Phase I. The 220 unit Phase II was scheduled to be under way within two years of the contract date. Each phase was scheduled for completion two years after the start of construction. The Government was to sell the land at Estate Nazareth to Rich for $7,000 per acre, including the cost of stipulated site improvements. Site improvements were specified as all work more than five feet from the exterior of constructed units, including but not limited to sewers, paved roads, parking areas, grading, walks, lighting, electrical service, drainage, and sewer systems.
The selling price of two-bedroom units was set at $22,050.00, three-bedroom units at $23,525.00 and four-bedroom units at $25,200.00. To secure its obligation to buy unsold units, the Government agreed to set up a $250,000.00 escrow fund for purchasing such units and making site improvements. The $92,400.00 which Rich agreed to pay for the land at Estate Nazareth also was to be deposited in this fund. An escrow fund, however, was never actually established by the Government.
Quit claim deeds for Estate Nazareth were delivered by the Government to Rich on August 21, 1974. Rich received a Notice to Proceed with Phase I from the Commissioner of Housing on August 22, 1974. Thereafter, on August 28, 1974 Rich engaged Heyl to act as general contractor for Phase I of the proposed development. The agreement between Heyl and Rich required Heyl to "substantially complete" all work within one year of receiving a Notice to Proceed from Rich. If Heyl failed to do so liquidated damages of $150.00 per day were to be paid by Heyl to Rich.
Rich's contractual obligation required it to pay Heyl monthly progress payments which were set at ninety per cent of the contract sums allocable monthly to labor and materials and equipment used and in storage. Payments were contingent upon Rich receiving certificates of payment from the project architect after he had approved Heyl's applications for payment. Heyl began billing Rich in November, 1974 and by April 30, 1975 had billed Rich for $270,848.31. No payments in fact were ever made by Rich to Heyl.
Several weeks after concluding its agreement with Rich, Heyl received Notice to Proceed as of September 20, 1974. Although Heyl assembled labor, equipment and materials to begin work on the project, construction could not proceed because the requisite building permit was not issued by the Government. The Virgin Islands Planning Office cited insufficient design information as its reason for rejecting efforts by Rich and subsequently Heyl to obtain the permit.
In December, 1974 Rich agreed to delay Heyl's "proceed date" until January 6, 1975, and received from the Government an indefinite extension of its own proceed date until a building permit was issued. Rich then notified Heyl that the Government's delay in processing the building permit was affecting its financial arrangements and causing a delay in its processing of contract payments. Despite approval of the housing development plan by the Virgin Islands Planning Office on January 2, 1975, and its recommendation that a building permit be issued, the permit remained unissued. Citing unresolved questions about Government funding for project improvements, the Commissioner of Public Works informed Heyl in a letter dated April, 1975 that no permit could be issued.
Meetings in April and August, 1975 between Rich and the Government, including then Governor Cyril King, who, in January, 1975, had succeeded Governor Evans in office, failed to move forward what until then, with the exception of $50,000.00 advanced by the Department of Housing to the Department of Public Works for preliminary road construction, was largely a "paper" project. Realization of the project became even more unsure when Governor King objected to certain design features of the units, the density of the project and a number of contract provisions which he thought unfairly burdened the Government. In September, 1975, the Government of Cyril King disavowed responsibility for "alleged "unobserved' agreements consummated years prior to assuming office."*fn1 Shortly thereafter Heyl, having received no payments on its contract, brought suit against Rich in district court for breach of contract. Rich followed by asserting third party claims and a separate breach of contract action against the Government.
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.
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.
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*fn2 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.
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.
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.*fn3
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
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. 795, 802, 28 L. Ed. 2d 77 (1971), and "(courts) 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."
In Foman v. Davis the Supreme Court observed:
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.
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).
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).
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.*fn4 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 ...