The opinion of the court was delivered by: (Magistrate Judge Smyser)
I. Background and Procedural History
The plaintiffs, National Recovery Agency, Inc. (NRA) and Diversified Billing Services, Inc. (DBS), commenced this action by filing a complaint on January 6, 2005. On September 30, 2005, the plaintiffs filed an amended complaint. The defendants named in the amended complaint are AIG Technical Services, Inc. (AIGTS) and Illinois National Insurance Company (Illinois National).*fn1
The amended complaint contains three counts. In Count I, the plaintiffs are seeking a declaratory judgment that, pursuant to an insurance policy issued by defendant Illinois National, Illinois National must provide the plaintiffs a defense in a case filed against them by Forward Thinking, Inc. (Forward Thinking) in New Jersey Superior Court as well as a declaratory judgment that defendant Illinois National must indemnify them for the claims of Forward Thinking. In Count II, the plaintiffs are seeking damages on a claim that defendant Illinois National breached the insurance contract by failing to provide them a defense or indemnification in the case filed by Forward Thinking. In Count III, the plaintiffs claim that defendants Illinois National and AIGTS acted in bad faith in violation of 42 Pa.C.S.A. § 8371 and Pennsylvania common law by failing to provide them a defense or indemnification in the case filed by Forward Thinking.
The parties consented to proceed before a magistrate judge pursuant to 28 U.S.C. § 636(c). The case is scheduled for trial in July of 2006.
On October 20, 2005, the defendants filed an answer to the amended complaint.
By an Order dated November 22, 2006, the plaintiffs' claim in Count I of the amended complaint seeking a declaratory judgment that Illinois National must indemnify the plaintiffs for the claims of Forward Thinking, the plaintiffs' claim in Count II for damages against defendant Illinois National for breach of the insurance contract based on a failure to indemnify the plaintiffs from the claims of Forward Thinking, and the plaintiffs' claim in Count III for damages against defendants Illinois National and AIGTS for a bad faith failure to indemnify the plaintiffs in the case filed by Forward Thinking were dismissed because those claims were not ripe.
By an Order dated February 22, 2006, based on a motion filed by the plaintiffs and concurred in by the defendants, AIG Domestic Claims, Inc. (AIGDC) was substituted as a defendant for AIGTS and the caption of the case was amended accordingly.
There are currently three motions pending: 1) the defendants' motion for leave to amend their answer to the amended complaint; 2) the defendants' motion for partial summary judgment; and 3) the plaintiffs' motion for partial summary judgment.
II. Defendants' Motion for Leave to Amend their Answer
On October 20, 2005, the defendants filed an answer to the amended complaint. On February 24, 2006, the defendants filed a motion for leave to amend their answer to the amended complaint. The defendants are seeking leave to amend their answer to plead the statute of limitations as a defense to the plaintiffs' bad faith claims.
The statute of limitations is an affirmative defense, and therefore under Fed.R.Civ.P. 8(c) it should be asserted in the answer. However, the failure to plead an affirmative defense in the answer does not automatically result in a waiver. Eddy v. Virgin Islands Water & Power Auth., 256 F.3d 204, 209 (3d Cir. 2001). Under Fed.R.Civ.P. 15(a), an answer may be amended at any time by leave of court to include an affirmative defense. Id.
Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend a pleading "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). "[M]otions to amend pleadings should be liberally granted," Long v. Wilson, 393 F.3d 390, 400 (3d Cir. 2004), and "[l]eave to amend must generally be granted unless equitable considerations render it otherwise unjust," Arthur v. Maersk, Inc., 434 F.3d 196, 204 (3d Cir. 2006). "The liberal right to amend extends to an answer to the complaint." Long, supra, 393 F.3d at 400. "Among the factors the may justify denial of leave to amend are undue delay, bad faith, and futility." Arthur, supra, 434 F.3d at 204. However, in this Circuit prejudice to the non-moving party is the touchstone for denial of leave to amend. Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993). "Unless the opposing party will be prejudiced, leave to amend should generally be allowed." Charpentier v. Godsil, 937 F.3d 859, 864 (3d Cir. 1991).
The plaintiffs contend that they will suffer substantial prejudice if the defendants are granted leave to amend their answer to raise the statute of limitations defense. The plaintiffs assert that they have expended substantial time, effort, and expense inquiring into the defendants' alleged bad faith insurance practices including the expense of obtaining an expert report. They also assert that they would be substantially prejudiced if the focus of the litigation were allowed to shift at this late date to the defendants' statute of limitations defense.
"The passage of time factors into the analysis of whether a plaintiff has suffered prejudice by a delay in amending an answer to assert an affirmative defense." Long, supra, 393 F.3d at 399. However, "[d]elay alone is not sufficient to justify denial of leave to amend." Arthur, supra, 434 F.3d at 204. But at some point "delay will become 'undue,' placing an unwarranted burden on the court... [and] an unfair burden on the opposing party." Id. The longer the unexplained delay, the less the plaintiff must show in terms of prejudice.
Long, supra, 393 F.3d at 400. In determining what constitutes prejudice, the court should consider whether the assertion of the new defense would: 1) require the plaintiff to expend significant additional resources to conduct discovery and prepare for trial; 2) significantly delay the resolution of the dispute; or 3) prevent the plaintiff from bringing a timely action in another jurisdiction. Id.
We conclude that the plaintiffs have not established that they will be substantially prejudiced if the defendants' motion for leave to amend is granted. The fact that the plaintiffs' bad faith claims may be determined to be barred by the statute of limitations does not amount to prejudice sufficient to defeat an amendment. Long, supra, 393 F.3d at 399 ("The frustrated expectation of not having an untimely habeas petition heard on the merits does not establish prejudice sufficient to defeat an amendment to an answer."). Nor is the time, effort, and money that the plaintiff expended in litigating their case to this point substantial prejudice. See Block v. First Blood Associates, 988 F.2d 344, 351 (2nd Cir. 1993)(holding that district court did not abuse its discretion in granting defendants leave to amend their answer to raise statute of limitations defense and concluding that the time, effort, and money expended by the plaintiffs in litigating the case did not arise to substantial prejudice).
The statute of limitations defense in this case raises questions of law and questions of application of the law to facts which are not in dispute. The plaintiffs have not asserted that they need to conduct additional discovery to respond to the statute of limitations defense.
Allowing the defendants to amend their answer to plead the statute of limitations will not delay the resolution of this case. The parties have fully briefed the statute of limitations defense in connection with the defendants' motion for partial summary judgment. If the court grants leave to amend, it can decide the statute of limitations defense without delaying the trial.
The plaintiffs have not argued that the defendants' delay in raising the statute of limitations defense has prevented them from bringing a timely action in another jurisdiction. The plaintiffs' bad faith claims would be subject to the same statute of limitations if the plaintiff had brought those claims in state court.
Although prejudice is the touchstone of the inquiry whether to allow amendment, other factors such as undue delay, bad faith, and futility may justify denial of leave to amend. Arthur, supra, 434 F.3d at 204.
There is no evidence that the defendants acted in bad faith or with a dilatory motive in failing to raise the statute of limitations at an earlier point. It does not appear that the defendants had any strategic reason to delay raising the statute of limitations defense in this case. The plaintiff has not argued that allowing the amendment would be futile. Thus the only remaining factor to consider is whether leave to amend should be denied because of undue delay.
The plaintiffs contend that the defendants have unduly delayed in raising the statute of limitations defense and have not provided an adequate justification for their delay. The plaintiffs point out that the defendants knew the dates they denied the requests for coverage from the beginning of this case and, thus, they could and should have raised the statute of limitations defense earlier.
Although we agree with the plaintiffs that the defendants should have raised the statute of limitations defense earlier, we can not conclude that the defendants' delay amounted to undue delay justifying denial of leave to amend.
"There is, of course, no presumptive period in which a motion for leave to amend is deemed 'timely' or in which delay becomes 'undue.'" Arthur, supra, 434 F.3d at 205. Whether delay is undue depends on the facts and circumstance of the case.
The defendants filed their answer to the amended complaint on October 20, 2005. On February 24, 2006, they filed their motion for leave to amend their answer. The delay involved was only about four months.
Four months does not amount to undue delay in the absence of prejudice to the other party. See Long, supra, 393 F.3d at (holding that raising statute of limitations defense in habeas corpus case 14 months after petition filed not a reason to deny leave to amend the answer). See also Arthur, supra, 434 F.3d at 205 (holding that eleven month delay in amending complaint not so egregious as to warrant refusal of leave to amend and noting that its research uncovered only one appellate case which has approved denial of leave to amend based on a delay of less than one year).
Even assuming that we should measure the delay from the date (March 1, 2005) that the defendants filed their answer to the original complaint, the delay involved was less than a year and, in the absence of prejudice, does not amount to undue delay justifying denial of leave to amend.
The plaintiffs contend that the defendants have not proffered an adequate justification for their delay in raising the statute of limitations. The defendants in explaining their delay merely state that "[b]ecause defense counsel up to that time [the time of filing their answer to the amended complaint] had focused principally on the question of whether coverage for Plaintiffs' claims existed and, by extension, Plaintiffs' breach of contract claims, a statute of limitations defense was not pleaded with respect to the bad faith claim." Doc. 74 at 2. The delay in this case appears to have resulted from the neglect of defense counsel.
Although that defendants have not supplied a compelling reason for their delay, in the absence of prejudice to the plaintiffs they are not required to do so. Long, supra, 393 F.3d at 401. To require the defendants to supply a compelling reason for their delay in the absence of prejudice to the plaintiffs "would certainly run counter to the well-established rule that amendments should be liberally allowed." Id. "The liberality of Rule 15(a) counsels in favor of amendment even when a party has been less than perfect in the preparation and presentation of a case." Arthur, supra, 434 F.3d at 206. "It allows for misunderstandings and good-faith lapses in judgment, so long as the party thereafter acts reasonably and diligently." Id.
The defendants most certainly should have exercised greater diligence in raising the statute of limitations. Nevertheless, "[l]awyers - who, like judges, operate under the pressures of time and demanding schedules - sometimes, however, fall short of perfection." Kiser v. General Elec. Corp., 831 F.2d 423, 428 (3d Cir. 1987). "Recognizing this fact of legal life, Rule 15(a) was enacted to ...