The opinion of the court was delivered by: Cynthia Reed Eddy United States Magistrate Judge
Judge Cathy Bissoon/Magistrate Judge Cynthia Reed Eddy
MEMORANDUM OPINION AND ORDER
This is a single count diversity action alleging breach of contract. The issue before the Court is whether Defendants should be permitted to file an untimely Amended Answer and Counterclaims. The Court will permit the filing.
Plaintiff, Dominion Retail, Inc. ("Plaintiff" or "Dominion"), contends that four individual Defendants are indebted to Dominion under the terms of an August 2008 Stock Purchase Agreement ("SPA") governing Defendants' sale of stock in Cirro Energy ("Cirro").
According to Plaintiff, after Dominion purchased Defendants' stock, three events occurred that obligated Defendants to incur costs it was not obligated to pay. [ECF No. 26 at 2]. The first took place in April 2009 when the United States Internal Revenue Service conducted an audit, revealing that Cirro's "2007 corporate net income should [have been] increased by $1,826,611." [Id. at ¶16]. The IRS ultimately proposed a settlement setting the increase at $1,340,547. [Id. at 17]. Dominion advised Defendants of the settlement terms, and Defendants recommended that the compromise be accepted. Dominion paid the additional taxes assessed as a result of the income increase, and demanded a share of that payment from Defendants in accordance with the terms of the SPA. [ECF No.1 at ¶¶ 17, 19, 20, 21]. "Dominion did not [immediately] demand the full amount of additional federal income tax actually paid in . . . settlement of the IRS Audit" because it sought "to compromise and settle the claim promptly." [Id. at ¶ 21].
Defendants refused to make any payment to Dominion. [Id. at ¶¶ 22 -25]. After multiple futile demands for payment, Dominion raised its demand by $53,875.89 to include interest due on the additional federal tax. Dominion contends that "[u]nder the terms of the Stock Purchase Agreement, Dominion is entitled to payment from Defendants in the amount of $509,661.89" representing taxes, and interest assessed as a result of the 2007 audit. [Id. at ¶26].
According to Plaintiff, a second event also contributed to the amount Dominion is entitled to recover from Defendants. This was an audit conducted by the Comptroller of Texas Sales and Use Tax which determined that Cirro owed the state $2,780,593.77 in back taxes, interest, and penalties. [ECF No. 26 at 2]. At Defendants' request, Dominion hired a firm to represent all parties in connection with the assessment. "Defendants . . . explicitly stated that by so engaging [the firm], Defendants would be 'formally assuming the defense' of any claims that [arose] from the audit for pre-closing sales taxes." [ECF No. 1 at ¶ 30]. Dominion hired the firm, agreed to share costs, and consented to the firm's recommendation that the state's settlement offer be accepted. As a result, Dominion paid $1,580,942.12 to the state of Texas, and contends that Defendants are liable to it in that amount. [Id. at ¶ 34].
The third occurrence involved a shortfall in Cirro's working capital. Some shortfall had been anticipated, as evidenced by the parties' creation of an escrow account for working capital adjustments. The shortfall, however, "exceeded the funds in escrow by $1,054,217.53." [Id. at ¶ ¶ 42]. Defendants paid Dominion $920,784.53, but, according to Dominion, are liable under the SPA for the full amount of the shortfall.
This action was filed on February 11, 2011. [ECF No. 1]. On July 27, 2011, Defendants filed an Answer. [ECF No. 4]. On July 27, 2011, the Court held a scheduling conference, and the next day entered an order directing that motions to amend the pleadings be filed no later than September 30, 2011. [ECF No. 17]. On November 23, 2011, Defendants filed a Motion for Leave to File an Amended Answer and Original Counterclaim[s]. [ECF No. 24]. The issue now before the Court is whether it should grant that Motion.
Because a scheduling order was set in this case, analysis of the Defendants' Motion begins with Fed. R. Civ. P. 16. Williams v. Sullivan, Civil No. 08-1210, 2011 WL 2119095 at *4 (D.N.J. May 20, 2011). Heightened scrutiny of a motion to amend is warranted when the motion is made after a scheduling order has been entered. Harbor Laundry Sales, Inc. v. Mayflower Textile Serv. Co., Civil Action No. 09-6259, 2011 WL 6303258 at *3 (D.N.J. 2011) . Pursuant to Rule 16, the Court may revise a scheduling order "[o]nly for good cause and with the Judge's consent." Fed. R. Civ. P. 16(b)(4). In order to meet the good cause requirement of this Rule, "the party seeking the extension must show that the deadlines set in the scheduling order '[could not] reasonably be met despite the diligence of the party seeking the extension.'" Williams, 2011 WL 219095 at *4 (quoting Rule 16(b) Advisory Committee Notes to 1983 Amendments). In other words, good cause depends on the diligence of the moving party.
Good cause may also be satisfied if the movant shows that the inability to comply with a scheduling order was "'due to any mistake, excusable neglect or any other factor which might understandably account for failure of counsel to undertake to comply with the Scheduling Order.'" Id. (quoting Newton v. Dana Corp. Parish Div., Civ. No. 94-4958, 1995 WL 368172 at *1 (June 21, 1995). "The Court has broad 'discretion in determining what kind of showing the moving party must make in order to satisfy Rule 16(b)'s good cause requirement.'" Carter v. Estate of Lewis, Civ. Action No. 08-1301, 2011 WL 5416325 at *3 (D.N.J. Nov. 7, 2011) (quoting Phillips v. Greben, Civ. No. 04-5590, 2006 WL 3069475 at *6 (D.N.J. October 27, 2006)). "In the absence of proof of good cause, 'the scheduling order shall control.'" 6A CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 15222.1 (2D ED. 1997). Only where the party has established good cause under Rule 16, will the Court consider the liberal amendment provisions of Rule 15(a). Absent a showing of good cause under Rule 16, the provisions of Rule 15 are irrelevant. Harbor Laundry Sales, Inc., 2011 WL 6303258 at * 3.
In their Motion for Leave to Amend, Defendants do not mention Fed R. Civ. P. 16, but base their argument entirely on Rule 15: "Absent substantial reason, the court's discretion in considering a motion to amend is not broad enough to permit denial." [Id. at 2]. As the Court's review of the law establishes, ...