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McNally v. Eye Dog Foundation for the Blind

November 15, 2010

MONTRY MCNALLY; RUBY BELL; AND KENNETH BALES, PLAINTIFFS,
v.
EYE DOG FOUNDATION FOR THE BLIND, INC.; EYE DOG FOUNDATION PROFIT SHARING PLAN; GWEN BROWN, AN INDIVIDUAL, AND DOES 1 THROUGH 50, DEFENDANTS.



The opinion of the court was delivered by: Sheila K. Oberto United States Magistrate Judge

ORDER DENYING DEFENDANTS' MOTION TO AMEND PLEADINGS TO JOIN ADDITIONAL PARTIES AND ADD NEW CLAIMS

(Docket No. 84)

I. PROCEDURAL AND FACTUAL BACKGROUND

Filed on July 8, 2009, this is an action concerning whether Plaintiffs are entitled to benefits pursuant to the Employment Retirement Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1131, et seq. Plaintiffs Montry McNally, Ruby Bell, and Kenneth Bales ("Plaintiffs") are the beneficiaries of the estate of Lequita McKay, who was employed by Defendant Eye Dog Foundation for the Blind, Inc. Plaintiffs allege violations of ERISA and several state tort claims, naming Eye Dog Foundation for the Blind, Inc. ("Foundation"), Eye Dog Foundation Profit Sharing Plan ("Profit Sharing Plan"), and Gwen Brown (collectively "Defendants") as Defendants. (See Doc. 17.)

On August 17, 2009, Defendants filed an answer to the complaint in which they repeatedly deny the legal validity "of the Defendant Foundation's purported profit sharing plan and contend that such purported plan was never properly authorized or established by the Foundation but, rather[,] that the purported plan was ostensibly established, directed, dominated, controlled and used for the primary purpose and benefit of the Foundation's founder, Ms. McKay... " (Doc. 12 at ¶6.)

On October 23, 2009, the court issued a scheduling order allowing the parties until November 25, 2009, to amend the pleadings, "after which time no further joinder of parties or amendments to pleadings is permitted, except with[] leave of court." (Doc. 16 at ¶3B.) On November 25, 2009, Plaintiffs filed a First Amended Complaint ("FAC"). (Doc. 17.) On December 15, 2009, Defendants filed an answer to the FAC. (Doc. 18.) In the answer to the FAC, Defendants repeatedly stated the following:

Defendants, on information and belief, deny the legal validity of the Defendant Foundation's purported profit sharing plan and contend that such purported plan was never properly authorized or established by the Foundation but, rather[,] that the purported plan was ostensibly established, directed, dominated, controlled and used for the self-serving and primary purpose, personal benefit and interest of the Foundation's founder Ms. McKay and not in the best interests of the Foundation; Defendants further allege that any contributions to the purported profit sharing plan were not properly authorized by the Foundation. (Doc. 18 at ¶¶ 2, 7, 9, 10, 11, 16, 17, 19, 20, 21-24, 26-33, 35-41, 43-47, 49-51, 53-54, 56-61, 63-66, 68-73, 76-83.)

On March 16, 2010, Defendants' counsel, the law firm of Rosoff, Schiffres & Barta, filed a motion to withdraw as Defendants' attorneys of record. (Doc. 19.)*fn1 On April 26, 2010, Defendants' counsel's motion was granted. (Doc. 27.) The Court noted, however, that the Foundation and the Profit Sharing Plan were entity defendants that required representation in federal court and could not proceed pro se. Accordingly, these Defendants were given 60 days to retain counsel or file a status report regarding their intention to obtain counsel. (Doc. 27.)

On May 4, 2010, Plaintiffs filed a motion for a temporary restraining order and preliminary injunction with regard to the Profit Sharing Plan's assets. (Doc. 28.) Defendants did not file an opposition to this motion. (Doc. 32.)On May 28, 2010, Chief Judge Ishii granted Plaintiffs' motion for a preliminary injunction. (Doc. 34.)

On June 9, 2010, Defendants' former counsel, Howard Rosoff,*fn2 filed a certificate of service of the Court's April 26, 2010, order on Defendants that granted his firm's withdrawal as attorneys of record. (Doc. 36.) On July 15, 2010, Plaintiffs filed a Request for Entry of Default as to the Foundation, which the Clerk of Court entered on July 15, 2010. (Docs. 38, 39.) As grounds for the entry of default, Plaintiffsstated that the Court's April 26, 2010, order required the Foundation to obtain counsel, which it had not done, and, thus, Plaintiffs were entitled to default against it. (See Doc. 38.)

On August 12, 2010, a notice of appearance by attorney John Vukmanovic was filed on behalf of Gwen Brown and the Foundation, but not on behalf of the Profit Sharing Plan. (Doc. 40.)

On August 13, 2010, Plaintiffs filed a Motion for Summary Judgment and scheduled a hearing on the motion for September 27, 2010. (Doc. 41.) On September 3, 2010, Mr. Vukmanovic filed a "Motion to Withdraw as Attorney of Record for Defendants." (Doc. 48.) This motion was deficient in procedural aspects and was denied by the Court. (Doc. 50.) On September 8, 2010, Mr. Vukmanovic and Plaintiffs' counsel stipulated to a continuance of the summary judgment motion hearing date until October 12, 2010. (Doc. 51.) Mr. Vukmanovic refiled his motion to withdraw as counsel, but Defendants filed a request that the Court substitute in Mr. Ralph Harrison as new counsel of record for Defendants, replacing Mr. Vukmanovic. This request for substitution was granted. (Doc. 59.) Mr. Vukmanovic then withdrew his motion for withdrawal as it was moot in light of the ordered substitution. (Doc. 60.)

On September 24, 2010, Defendants filed a "Motion to Continue [the] Trial and Corresponding Cut-Off and Hearing Dates" and requested that the Court entertain the motion on shortened time. (Docs. 61, 63.) The Court granted Defendants' request for an order shortening time and heard the motion on October 6, 2010. (Doc. 66.) At the hearing, the Court ordered supplemental briefing from the parties, held the matter over until October 13, 2010, and required the parties to again appear at that time. (Doc. 71.)

In Defendants' papers and in oral argument presented to the Court, they asserted that their prior counsel's failure to: (1) propound any discovery, (2) undertake any factual investigation, and (3) notify them of various dates in the case had prevented them from adequately and timely participating in the litigation. (See Docs. 67, 70, 72.) Defendants specifically asserted that they did not receive notice from their former attorney until June 9, 2010, that the Court had granted his withdrawal as attorney of record on April 26, 2010. (Doc. 72 at ¶ 39.) Further, Defendants stressed that they had been in search of replacement counsel following notice of his withdrawal, but had not been able to secure a referral due, in part, to the complex nature of the ERISA litigation pending against them. (Doc. 72 at ¶¶ 43-54.) The Court found sufficient diligence on the part of Defendants in seeking replacement counsel, such that some modification of the schedule was warranted. However, the Court also specifically noted one of the strong factors weighing in favor of such a modification was the public policy of adjudicating cases on their merits. Without an amendment to the schedule, discovery was closed, and the motion for summary judgment hearing was pending, leaving Defendants no time to properly prepare their case. The Court modified the schedule by allowing a three-month extension of almost all the applicable dates. The Court issued its order from the bench and requested that the parties file a conforming proposed order. (Doc. 74.) The parties submitted a proposed order on October 15, 2010, which was signed by the Court on October 18, 2010.

While Defendants' request for a modification of the scheduling order did include a proposed date for amendment of the pleadings, the Court indicated at the hearing that it was not inclined to grant any amendment to the pleadings that would join parties or add claims given that discovery, purely by virtue of the modification of the schedule,*fn3 was only open for another three (3) months. Defendants' counsel requested that the Court again consider the request, and the Court granted Defendants until October 18, 2010, to file a motion seeking leave to amend the pleadings for the Court's consideration.

On October 18, 2010, Defendants filed a "First Amended Scheduling Report" seeking leave of Court to file an amended pleading, but also filed a counterclaim.*fn4 (See Docs. 78, 79, 80.) The Court struck the filed counterclaim and ordered Defendants to refile their motion to amend the scheduling order and the pleadings and caption the filing as a "motion." (Doc. 82.) Defendants refiled their motion on October 20, 2010, as ordered and attached a copy of the proposed counterclaim as an exhibit. (Doc. 84.)

Defendants' proposed counterclaim seeks to join new parties to the action and states five causes of action. The counterclaim names all Plaintiffs as counter-defendants and purports to add Morgan Stanley Smith Barney and its agent/employee David Young as counter-defendants. Five causes of action are set forth against all of these counter-defendants, including: (1) breach of fiduciary duty, (2) negligence, (3) unjust enrichment, (4) negligent misrepresentation, and (5) declaratory relief. (Doc. 84-1.)

In general, the basic allegations of the counterclaim assert that Ms. McKay, while alive and acting as the Executive Director of the Foundation "hatched and instituted a plan to benefit well beyond her salary... [and] [a]s part of this plan, she hired and employed members of her family and associates to conduct business on behalf of [the] FOUNDATION and thereafter compensated them well beyond that which was reasonable and fair at the expense of [the] FOUNDATION." (Doc. 84-1 at ¶ 17.) The counterclaim asserts that Ms. McKay initiated the profit sharing and retirement plan without proper authority "through which she and members of her family would be disproportionately compensated." (Doc. 84-1 at ¶ 18.) Thereafter, Ms. McKay and Plaintiffs McNally, Bell, and Bales (Ms. McKay's siblings) purportedly began signing checks and depositing funds into the retirement or profit sharing plans. (Doc. 84-1 at ¶ 19.) The counterclaim also asserts that Ms. McKay and her siblings designated themselves as beneficiaries under the plan and used Morgan Stanley and its agent/employee David Young, who handled Ms. McKay's personal accounts, to "funnel money into the plans." (Doc. 84-1 at ¶ 20.)

On October 28, 2010, Plaintiffs filed an opposition to Defendants' motion to modify the scheduling order and amend their pleadings to include a counterclaim against Plaintiffs and two new parties. Plaintiffs assert that Defendants' proposed amendment is prejudicial, offered in bad faith, futile, and that Defendants' unduly delayed in ...


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