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Flex Financial Holding Company v. Onebeacon Insurance Group, LLC

United States District Court, D. Kansas

September 7, 2017

FLEX FINANCIAL HOLDING COMPANY, Plaintiff,
v.
ONEBEACON INSURANCE GROUP, LLC, and ATLANTIC SPECIALTY INSURANCE COMPANY, Defendants.

          MEMORANDUM AND ORDER

          GWYNNE E. BIRZER UNITED STATES MAGISTRATE JUDGE

         This matter is before the Court on Plaintiff's Motion for Leave to File an Amended Complaint (ECF No. 21). For the reasons set forth below, Plaintiff's motion is GRANTED in part and DENIED in part.

         I. Background[1]

         A hailstorm in 2013 was the impetus for what has been three years of litigation between these parties. In April 2013, a hailstorm damaged two commercial buildings in Merriam, Kansas owned by plaintiff Flex Financial Holding Company. Both buildings were insured under a policy issued by defendant OneBeacon Insurance Group, LLC and/or its member company, defendant Atlantic Specialty Insurance Company. Plaintiff presented a claim to Defendants for loss under the policy, but disputes arose regarding the appropriate coverage, loss payments, and deductible for the claim. Defendants were still reviewing the loss when Plaintiff filed for bankruptcy in 2013. During the bankruptcy case, on September 3, 2014, Plaintiff filed a “Complaint for Declaratory Judgment” against Defendants in the U.S. Bankruptcy Court. In that original Complaint, Plaintiff asked the Bankruptcy Court to determine and resolve the rights and obligations of the parties under the insurance contract.

         In April 2015, Defendants asked that the matter be transferred from the Bankruptcy Court to the U.S. District Court. Over opposition from Plaintiff, the case was transferred to this Court in 2016. Following the transfer, and after the case was referred to the undersigned U.S. Magistrate Judge for case management, a scheduling order was entered in February 2017 (ECF No. 20). That scheduling order established a deadline of May 2, 2017 for amendment of the pleadings.

         Plaintiff then timely filed its Motion for Leave to File an Amended Complaint (ECF No. 21), seeking to add counts for breach of contract and good faith and fair dealing. Defendants oppose the amendment. All related briefing is complete, and the issue of amendment is ripe for decision.

         II. Motion to Amend (ECF No. 21)

         A. Legal Standard for Amendment

         The standard for permitting a party to amend his or her complaint is well established. A party may amend its pleading as a matter of course under Fed.R.Civ.P. 15(a)(1), either before the responding party answers or within 21 days after service of a responsive pleading. However, in cases such as this, where the time to amend as a matter of course has passed, without the opposing party's consent a party may amend its pleading only by leave of the court under Rule 15(a)(2).

         Rule 15(a)(2) provides leave “shall be freely given when justice so requires, ” and the decision to allow an amendment is within the sound discretion of the court.[2] The court considers a number of factors in deciding whether to allow an amendment, including timeliness, prejudice to the other party, bad faith, and futility of amendment.[3]In exercising its discretion, the court must be “mindful of the spirit of the federal rules of civil procedure to encourage decisions on the merits rather than on mere technicalities.”[4]The Tenth Circuit acknowledged that Rule 15 is intended “to provide litigants ‘the maximum opportunity for each claim to be decided on its merits rather than on procedural niceties, '”[5] especially in the absence of bad faith by an offending party or prejudice to a non-moving party.[6] With these standards in mind, the Court evaluates Plaintiff's motion.

         B. Discussion

         After this case was transferred to District Court, Plaintiff retained new legal counsel. Its new counsel seeks to amend its pleading to include not only the original declaratory judgment claim, but to add a second count claiming breach of contract, and a third claim for breach of the covenant of good faith and fair dealing.

         Of the factors analyzed by the Court when considering amendment, Defendants oppose Plaintiff's amendment solely based on the alleged futility of Plaintiff's proposed third claim for breach of the covenant of good faith and fair dealing. Defendants also oppose Plaintiff's addition of claims for attorneys' fees and punitive or exemplary damages as futile. Plaintiff responded by offering to amend several paragraphs in its proposed amendment, and contending its claim for attorneys' fees is valid. Each argument raised by the parties is addressed in turn.

         1. Futility

         Of the factors analyzed by the Court when considering amendment, Defendants oppose Plaintiff's amendment only on the basis of futility. As the party opposing amendment, Defendants bear the burden of establishing its futility.[7] “A proposed amendment is futile if the complaint, as amended, would be subject to dismissal.”[8] The proposed pleading is then analyzed using the same standard as a motion to dismiss under Fed.R.Civ.P. 12(b)(6). When utilizing this standard, “the court must accept as true all well-pleaded factual allegations and view them in the light most favorable to the pleading party.”[9] Only if the court finds “the proposed claims do not contain enough facts to state a claim for relief that are plausible on their face or the claims otherwise fail as a matter of law”[10] should the court find the amendment futile.

         Because this is a diversity action, the court must apply “the substantive law of the forum state, including its choice of law rules.”[11] The parties each cite to Kansas law, and thus apparently agree that Kansas law is applicable to this dispute.

         Defendants focus their futility arguments on the third count of the proposed amendment. They largely contend specific language in the proposed amendment sound in tort, and any proposed tort claims are subject to dismissal. They first contend Kansas law does not recognize the independent torts of bad faith or breach of the covenant of good faith and fair dealing. Additionally, they interpret language in the proposed amendment citing “breach of a non-delegable duty” as asserting a fiduciary relationship between the parties (insured and insurer), which is not recognized under Kansas law. The proposed pleading also claims Defendants knew a denial of benefits “would cause emotional distress and harm”, but as a corporation, Plaintiff cannot suffer emotional distress. Defendants further contend the exemplary damages included in Plaintiff's proposed amended complaint are only recoverable in a tort action, but Plaintiff proposes no viable tort claim. Along with their objections to any tort claims, Defendants argue Plaintiff's request for attorneys' fees and expert witness fees is subject to dismissal, and Plaintiff inappropriately cited the Kansas Unfair Settlement Claims Act in its Reply brief. Plaintiff disputes the futility of its proposed amendment, and maintains it does not intend to assert any tort claims; rather, it intends its claims to sound solely in contract. Plaintiff offers to “clarify any language in the proposed amended complaint that could be interpreted” to bring a tort claim (Pl.'s Reply, ECF No. 24 at 2).[12] Plaintiff further agrees to withdraw its request for exemplary or punitive damages (ECF No. 24, at 2). And although Plaintiff did not specify as such, its purported “emotional distress” claim is included within the paragraphs it ...


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