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Ad Astra Recovery Services, Inc. v. Heath

United States District Court, D. Kansas

December 26, 2019

JOHN CLIFFORD HEATH, ESQ., et al., Defendants.


          Angel D. Mitchell U.S. Magistrate Judge.

         This matter comes before the court on Plaintiff's Motion for Leave to Amend the Complaint to Join Parties (ECF No. 104). Plaintiff Ad Astra Recovery Service, Inc. (“Ad Astra”) seeks leave to file an amended complaint that adds corporate defendant entities related to some of the existing defendants as well as those entities' chief executive officer. Defendants oppose the motion on the grounds that it is untimely under the scheduling order; that they would suffer undue prejudice if the court allows the amendment; and that the amendment is futile. For the reasons explained below, the court disagrees and grants the motion.

         I. BACKGROUND

         Ad Astra is a debt collector and credit agency that alleges the “defendants engaged in a fraudulent credit-repair scheme designed to bombard debt collectors with false credit dispute letters with the intention of deceiving debt collectors . . . and frustrating their efforts to collect legitimate debts.” (Compl. ¶ 3 (ECF No. 1).) Ad Astra filed this case on June 17, 2018, asserting mail fraud, wire fraud, and conspiracy claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§1962(c) and (d). Ad Astra also asserts Kansas common law claims for fraud and tortious interference with existing contractual relationships. The current defendants are John C. Heath, Attorney at Law, PLLC, doing business as Lexington Law Firm; Lexington Consumer Advocacy, LLC; Lexington Consumer Advocacy, Inc.; John Clifford Heath; Kevin Jones; Adam C. Fullman; Progrexion Teleservices, Inc.; and Progrexion Holdings, Inc. The individual defendants are attorneys with Lexington Law. The original complaint alleges that the Progrexion defendants are the law firm's printer and mass mailer. Ad Astra's motion to amend explains that it learned through discovery that the Progrexion defendants and their related corporate entities played a more significant role in the alleged fraudulent credit-repair scheme than originally pleaded.

         Ad Astra now seeks to amend to add defendants related to the existing Progrexion defendants-namely, PGX Holdings, Inc.; Progrexion ASG, Inc.; Progrexion Marketing, Inc.; Progrexion IP, Inc; and Jeffrey R. Johnson, the CEO of the existing and proposed Progrexion defendants. Ad Astra's proposed amended complaint alleges that Progrexion Teleservices (current defendant) employs telephone service representatives who provide telemarketing, telephone sales, and corresponding services to Lexington Law, including handling Lexington Law's initial client intake and facilitating clients signing engagement agreements. Ad Astra's proposed amended complaint now also alleges that Progrexion Marketing (proposed defendant) is responsible for marketing to potential Lexington Law clients; that Progrexion IP (proposed defendant) owns and licenses the tradename “Lexington Law” and provides Lexington Law with proprietary credit report error correction services software, among other things; and Progrexion ASG (proposed defendant) is responsible for managing funds, administering employee benefits, managing human resources, and handling other routine business operations. Ad Astra further alleges that Progrexion entities' staff is housed in Lexington Law's offices and that some Lexington Law and Progrexion entities have offices in the same buildings. Ad Astra seeks to add Mr. Johnson as a defendant because he is the CEO of each Progrexion entity and because he allegedly developed, controlled, and ratified the conduct at issue, with fraudulent intent. Ad Astra's proposed amended complaint would also remove Lexington Consumer Advocacy, Inc. as a defendant, add more detailed factual allegations about defendants' letter volume and processes, and clarify each defendant's alleged role in the scheme.

         The scheduling order established a deadline of November 20, 2018, for motions to amend the pleadings. (ECF No. 21, at 9.) Ad Astra filed this motion on December 11, 2019. Ad Astra contends that it only recently learned sufficient information through discovery to amend and that it could not have amended sooner because of repeated discovery delays and inaccurate information provided by the current defendants that obscured the Progrexion entities' corporate structure. For example, Ad Astra points out that defendants' corporate disclosure statement filed on July 11, 2018, states that Progrexion Holdings, Inc. and Progrexion Teleservices, Inc. have no parent company. (ECF No. 11.) But Ad Astra learned at the Progrexion defendants' corporate depositions on November 4 and 6, 2019, that the Progrexion entities' corporate structure differed from the corporate disclosure statement. (ECF No. 105, at 2-3.) Furthermore, Ad Astra states that it learned about Mr. Johnson's alleged role in the business operations at Kevin Jones' deposition on October 3, 2019. After these depositions, defendants filed an amended corporate disclosure statement on December 11, 2019, that identifies (1) PGX Holdings, Inc. as the parent company of Progrexion Holdings, Inc. and (2) Progrexion Holdings as the parent company of Progrexion Teleservices. (ECF No. 103.)

         In arguing against the proposed amendment, Defendants focus on Progrexion Holdings's response to an interrogatory that asked Progrexion Holdings to “[i]dentify all corporate parents, subsidiaries, divisions, affiliates, and any other entities related to Progrexion.” (ECF No. 114-1, at 3.) Progrexion Holdings points out that its response to this interrogatory on November 14, 2018, identified the various Progrexion entities that Ad Astra now seeks to join. Defendants also note that Progrexion's own website lists Mr. Johnson as the CEO, and that Ad Astra's amended initial disclosures (served on August 19, 2019) listed Mr. Johnson and corporate representatives for each of the proposed Progrexion defendants as potential witnesses. (ECF No. 114-2.)

         Separately, discovery disputes and delays have marked this case-most of them involving Ad Astra's efforts to obtain discovery. On April 4, 2019, the court granted in large part Ad Astra's motion to compel, overruling numerous boilerplate and improper objections, including a broad and largely unsupported attorney-client privilege objection. (ECF Nos. 41-44.) Similarly, on June 12, 2019, the court granted in large part Ad Astra's motion to compel production of defendants' financial information. (ECF No. 55.) On September 18, 2019, the court granted in part Ad Astra's motion to compel, ordered Lexington Law to produce a sampling of audio recordings between Lexington Law and its clients, and later granted Ad Astra's motion to compel a larger sampling. (ECF No. 70.) All the while, the undersigned held numerous discovery conferences to resolve disputes and to set and reset deadlines after defendants delayed in serving timely discovery responses. (ECF Nos. 45, 53, 59, 62, 75, 84, 96, 109.) At one point, the court even ordered defendants to show cause why they should not be held in contempt for failing to comply with court orders to provide discovery. (ECF No. 57.) Although the undersigned declined to sanction defendants based on their response to the order, defendants never disputed that they failed to provide the discovery by the deadline ordered. (ECF No. 58.)

         I. ANALYSIS

         When a party moves to amend after the deadline set in the scheduling order, the moving party must (1) demonstrate good cause for modifying the scheduling order under Federal Rule of Civil Procedure 16(b)(4), and (2) satisfy the standards for amendment under Rule 15(a). Gorsuch, Ltd., B.C. v. Wells Fargo Nat. Bank Ass'n, 771 F.3d 1230, 1240 (10th Cir. 2014). A motion to amend to join additional parties also implicates the Federal Rules governing mandatory or permissive joinder. See Fed. R. Civ. P. 19 & 20.

         A. Good Cause Pursuant Rule 16(b)(4)

         A scheduling order “may be modified only for good cause and with the judge's consent.” Fed.R.Civ.P. 16(b)(4). To establish good cause, the moving party must show that it could not have met the motion-to-amend deadline despite “diligent efforts.” Husky Ventures, Inc. v. B55 Invs., Ltd., 911 F.3d 1000, 1020 (10th Cir. 2018). Because Rule 16 requires diligence, if a party knows of “the underlying conduct but simply failed to raise [its] claims, . . . the claims are barred.” Gorsuch, 771 F.3d at 1240. On the other hand, “Rule 16's good cause requirement may be satisfied . . . if a [party] learns new information through discovery or if the underlying law has changed.”

         Although Ad Astra does not specifically address the good-cause requirement to modify a scheduling order deadline, [1] the court finds good cause based on the arguments set forth in Ad Astra's brief. Ad Astra contends that prolonged meet-and-confer efforts and frequent discovery disputes stymied Ad Astra's efforts to take depositions (which did not begin to occur until the fall of 2019) and essentially delayed Ad Astra discovering the facts that gave rise to the motion to amend. Moreover, defendants filed an inaccurate corporate disclosure statement that did not properly identify the current Progrexion defendants' parent companies, which further confused the matter. Ad Astra argues that it is reasonable that the appropriate parties were not apparent from the outset given the inaccurate corporate disclosure statement.[2] On the other hand, defendants focus on the fact that they identified the various Progrexion entities in their interrogatory responses served on November 14, 2018; that Mr. Johnson's identify as CEO was publicly available on Progrexion's website; and that Ad Astra identified Mr. Johnson and corporate representatives from the proposed Progrexion defendants in Ad Astra's amended initial disclosures served on August 19, 2019. In other words, defendants contend that Ad Astra could have amended sooner.

         The record demonstrates that Ad Astra knew of the existence of the corporate entities and Mr. Johnson before it moved to amend, but it does not demonstrate that Ad Astra knew of (or could have known of) the scope of their alleged involvement any sooner than it did. Although defendants point to their November 2018 interrogatory response, they do not address their inaccurate corporate disclosure statement, which they only recently amended. The crux of Ad Astra's argument is that repeated document-production delays resulted in depositions being delayed, and that depositions beginning in the fall of 2019 provided the bulk of the factual allegations supporting the motion to amend. The court credits this characterization of discovery. The proposed amended complaint contains new and detailed factual allegations concerning a complex, sophisticated business operation with interacting and overlapping parts. Although Ad Astra knew of certain information giving rise to the proposed amendments before it moved to amend, the undersigned cannot say that Ad Astra could have brought the entirety of ...

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