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Joseph Oats Holdings, Inc. v. RCM Digesters

March 27, 2008



This matter is before the Court on defendants' Motion for Leave to File an Amended Counterclaim and a Third Party Complaint [Doc. No. 49]. The Court has received plaintiffs' opposition [Doc. No. 54] and defendants' reply [Doc. No. 56]. For the reasons to be discussed defendants' motion is GRANTED. The Court exercises its discretion pursuant to Fed. R. Civ. P. 78 and L. Civ. R. 78.1 to decide defendants' motion without oral argument.


This case arises out of a failed business arrangement between plaintiffs and defendants. Prior to April 2005, defendant Mark Moser ("Moser") did business as RCM Digesters ("RCMD"). RCMD designed and sold agricultural waste treatment systems that used an anaerobic digestion technology. In 2005, plaintiffs and defendants formed RCMB Biothane, L.L.C. ("RCMB"). The majority owner of RCMB is plaintiff Joseph Oats Holding, Inc. ("JOHI"). Before RCMB was formed plaintiff Biothane Corporation ("Biothane") was in the business of designing, building and selling anaerobic digester systems primarily for wastewater treatment and manufacturing purposes. Pursuant to an April 21, 2005 Asset Purchase Agreement, Moser's assets in RCMD were sold to RCMB. JOHI held an 80% ownership interest in RCMB and Moser held the remaining 20%. On April 21, 2005, RCMB also entered into an Employee Agreement with Moser pursuant to which Moser was appointed as the "Managing Director" of RCMB. Each of the six (6) individual plaintiffs was a Manager of RCMB. Except for Moser each of the managers also worked for and/or had a direct or indirect interest in Biothane. Moser had no interest in Biothane. Defendants' Brief ("DB") at 3, Doc. No. 49.

The business relationship between plaintiffs and defendants deteriorated to the point that on August 7, 2006, the parties executed a "Separation Agreement." Plaintiffs allege in their complaint that Moser failed to comply with his contractual obligations, continuously refused to comply with the directives of RCMB's Board of Managers, and conducted business using the RCMD trade name while employed by RCMB. See Complaint at ¶¶29-31, Doc. No. 1. In response, defendants claim the individual plaintiffs intentionally took actions to divert business away from RCMB and toward Biothane and to assure that monies owed to RCMB from Biothane were not paid to it. See Defendants' Counterclaim at ¶¶88-99, Doc. No. 10. Defendants also claim that plaintiffs prevented RCMB from succeeding as an independent and viable business. Id. at ¶¶110-124. In addition, Moser claims that $200,000 owed to him pursuant to the Asset Purchase Agreement was placed into escrow for his benefit but that the money was eventually paid over to and improperly obtained by the proposed third-party defendant, Joseph Oat Companies, Inc. ("JOCI"). DB at 8.

Plaintiffs filed their complaint on September 20, 2006. On September 29, 2006, the Honorable Noel L. Hillman entered an Order for Preliminary Injunction [Doc. No. 6] which preliminarily enjoined defendants from using the "Biothane Trademark" except as necessary "to wind down the affairs of RCM Biothane, LLC, and except for the inadvertent use by defendants of the name 'Biothane' as a result of the parties' joint computer systems...." On November 6, 2006, defendants filed their answer to plaintiffs' complaint with their sixteen count counterclaim.

Defendants' proposed amended counterclaims seek to add "allegations regarding Plaintiffs' illegal accessing and copying of Defendants' computer files and to conform the allegations to the evidence and Plaintiffs' admissions." See DB at 1. The amended counterclaims also seek to add state derivative claims on behalf of RCMB, of which Moser is a minority shareholder. In addition, the amended counterclaims seek to add allegations regarding the $200,000 placed into escrow for Moser that was paid to JOCI. Id. at 1-2. Moser also seeks leave to file a third-party complaint against JOCI regarding the escrow payment.

Plaintiffs deny all allegations of liability and contend that defendants' motion should be denied for four reasons. First, plaintiffs argue defendants' new counterclaims are untimely and prejudicial. Second, plaintiffs argue defendants' claims regarding the alleged illegal accessing of their computer system are futile because plaintiffs' actions were taken pursuant to a "litigation hold that the defendants themselves requested." See Plaintiffs' Brief ("PB") at 7. Third, plaintiffs argue that Moser cannot assert derivative claims on behalf of RCMB because he has a conflict of interest. Fourth, plaintiffs argue that Moser's proposed third-party complaint naming JOCI is futile because it does not set forth a claim for contribution or indemnity.


Defendants' Motion is Not Untimely and Prejudicial

The Court rejects plaintiffs' argument that defendants' motion is untimely and prejudicial. Unless there is "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 amendments, [or] futility of the amendment," leave to amend should be "freely given." Foman v. Davis, 372 U.S. 178, 182 (1962); Long v. Wilson, 393 F.3d 390, 400 (3d Cir. 2004). Leave to amend a complaint on the ground of undue delay should only occur where the delay causes prejudice to the non-moving party. It is well-settled that prejudice to the non-moving party is the touchstone for the denial of a request to amend a pleading. Cincerella v. Egg Harbor Tp. Police Dept., C.A. No. 06-1183 (RBK), 2007 WL 2682965, *2 (D.N.J. Sept. 6, 2007)(citations omitted). A non-moving party is found to be prejudiced when it faces an undue burden or difficulty in proceeding with the litigation. Id. In order to claim undue prejudice a party "must show that it was unfairly disadvantaged or deprived of the opportunity to present facts or evidence which it would have offered had the ... amendments been timely." Id. (citations omitted). The Third Circuit has stated that "[p]rejudice under the rule means undue difficulty in prosecuting a lawsuit as a result of a change of facts or theories on the part of the other party." Deakyne v. Commissioners of Lewes, 416 F.2d 290, 300 (3d Cir. 1969).

Defendants' motion was not filed unduly late and if granted will not cause plaintiffs to suffer undue prejudice. Plaintiffs have not alleged that the delay in asserting the new counterclaims resulted in the loss of relevant evidence. In addition, the Court regrettably notes that the close of fact discovery in the case is not imminent. Therefore, plaintiffs will have an adequate opportunity to conduct discovery relevant to the new legal claims in the case. In addition, as set forth in defendants' moving papers, they only recently discovered the facts upon which the amended counterclaims are based. (See Defendants' Reply Brief ("DRB") at 4-6, Doc. No. 56). Promptly after learning these facts in discovery defendants filed their motion. Accordingly, the Court rejects plaintiffs' argument that defendants' motion is untimely and prejudicial.

Defendants' Computer Related Counterclaims are not Futile

Counts 18-24 of defendants' amended counterclaims address their contention that plaintiffs illegally accessed their computer system after the parties' Separation Agreement was signed. Defendants contend that in November 2006, plaintiffs accessed RCMD's computer system in Oakland, California, and copied trade secrets and other proprietary information for their own use. See Amended Counterclaims at ¶¶204-212, Exhibit B to Defendants' Motion. Plaintiffs argue that these counterclaims are futile. According to plaintiffs, since they were "legally obligated under Fed. R. Civ. P. 34 and ... case law to preserve all potentially relevant documents in the [parties'] joint computer system, regardless of what tentacle of that system contained the data," they cannot be liable for accessing RCMD's computers. PB at 8. Plaintiffs also argue that defendants should be judicially estopped from asserting these new counterclaims because defendants asked them to preserve relevant documents which they knew were located on RCMD's computers. Plaintiffs also argue defendants' exclusive means of redress for the breach of their computers is to file a discovery motion, not to file a counterclaim. Id. at 8-9.

As interpreted by the Third Circuit, "[f]utility means that the complaint, as amended, would fail to state a claim on which relief could be granted." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997)(internal quotations omitted). In determining whether an amendment is futile, "the district court applies the same standard of legal sufficiency as applies under Rule 12(b)(6)." Id. The standard of review for a Rule 12(b)(6) motion requires the court to accept as true all allegations in the complaint, construe the complaint in the light most favorable to the plaintiff, and determine ...

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