HomeMy WebLinkAbout2021-cv-2063-CNS-MEH - City Of Fort Collins V. Open International, Et Al. - 191 - OrderIN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
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ORDER
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Michael E. Hegarty, United States Magistrate Judge
Plaintiff has filed a “Motion for Leave to Amend Complaint and, if Necessary, Amend its
Affirmative Defenses to Defendants’ Counterclaim” (“Motion”). ECF 101, 102 Plaintiff seeks to
add a claim for negligent misrepresentation and, potentially, to assert an affirmative defense. Id.
A brief history of this lawsuit is relevant.
I. Background
Plaintiff filed this case on July 2, 2021, in Larimer County, Colorado District Court.
Compl., ECF 6. Defendants removed the case to federal court on July 30, 2021. ECF 1. The
Complaint contains claims for fraudulent inducement, breach of contract, breach of the implied
covenant of good faith and fair dealing, and declaratory judgment. See Compl. at 14-20. It its
Answer and Counterclaim, ECF 13, Defendant Open International, LLC asserts counterclaims for
Civil Action No. 21-cv-02063-CNS-MEH
CITY OF FORT COLLINS,
Plaintiff/Counterclaim Defendant,
v.
OPEN INTERNATIONAL, LLC
Defendant/Counterclaim Plaintiff,
and
OPEN INVESTMENTS, LLC,
Defendant.
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breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory
judgment.
The dispute stems from an effort of the Plaintiff to provide broadband and
telecommunication services for its residents and to combine billing for those new services with
existing utilities that the Plaintiff offered. Id. at 6. Plaintiff published a request for proposal
(“RFP”) on February 10, 2018. Id. Defendant Open International, LLC submitted a proposal on
March 12, 2018. Id. at 7. The parties entered into a Master Professional Services Agreement on
August 9, 2018. Id. at 9. The relationship did not go as planned, and Plaintiff sent a notice of
default to Defendants on May 25, 2021. Id. at 13. This lawsuit resulted.
As grounds for adding a claim of negligent misrepresentation, in simple terms, Plaintiff
asserts that discovery in this case disclosed evidence that Defendants may have been negligent in
their representations concerning the efficacy of their proposed billing system (intended to handle
billing services for both the new broadband services and existing utilities provided by Plaintiff
such as electric, water, wastewater, and stormwater), rather than intentionally misleading as
originally pleaded. Mot. at 2. This potential divergence centers around a “functional matrix” that
Defendants used to indicate to the Plaintiff what functionalities were already part of Defendants’
billing software (titled “Smartflex”) and what functionalities remain to be developed. As Plaintiff
puts it, Defendants represented, in their response to the RFP, that 89.7% of Smartflex’s
functionality was already developed and part of the product, but in reality, only 59.4% was already
there and the rest remaining to be developed. Id. at 5. Although Plaintiff asserts in its motion that
Defendants knew they were misrepresenting the facts (which would undergird a fraudulent
inducement claim), during depositions in September 2022, Plaintiff alleges that Defendants’
representatives interpreted the functional matrix’s definition of functionality (and its current
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versus currently planned for the future but yet to be developed status) differently than Plaintiff. Id.
at 6. Plaintiff contends that under Defendants’ paradigm, Defendants, at the very least, should have
known that their representations concerning functionality would be interpreted by the Plaintiff as
“currently available” rather than planned but not yet available. Id. at 6-7. Plaintiff also relies on
deposition testimony from a former project manager, who testified, in essence, that Defendants
were out of their league in promising a functional product; did not understand utilities in the United
States; and were overly optimistic in a hope to gain a foothold in the United States. Id. at 8.
As grounds for adding an affirmative defense, Plaintiff contends the parties’ contract limits
damages on Defendants’ counterclaims to funds appropriated by the city council, and the funds
appropriated here are nearly exhausted (about $100,000.00 left to spend, while Defendants seek
over $3 million in damages). Id. at 8-9. Plaintiff is uncertain whether the law would treat this as
an affirmative defense or simply as a limitation on the available damages and, in an abundance of
caution, seeks leave to assert that defense if the Court believes it is required. Id. at 9.
Defendants’ opposition to the added claim is multifaceted. See ECF 116, 117. First, they
claim Plaintiff knew at the time the contract was executed that Defendants’ product included
proposed functionalities and Plaintiff would be the first customer, particularly since the product
was not even released and still under development. Resp. at 2, 10. Second, they contend an
amendment would be futile because the product’s “version 8” was delivered to the Plaintiff in
February 2019. Id. Defendants argue that Plaintiff should have known at or shortly after the
delivery about the product’s alleged deficiencies, and that any claim of negligent misrepresentation
had to be brought within two years under Colorado law; this case being filed in July 2021. Id. at
2, 15-16. Third, Defendants allege any amendment at this “late” date would be unduly prejudicial,
requiring Defendants to substantially revise the way it has approached discovery in this case. Id.
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at 2, 17. Finally, they claim Plaintiff’s negligent misrepresentation claim is barred by the economic
loss rule. Resp. at 12; Town of Alma v. AZCO Const., Inc., 10 P.3d 1256, 1264 (Colo. 2000) (“[A]
party suffering only economic loss from the breach of an express or implied contractual duty may
not assert a tort claim for such a breach absent an independent duty of care under tort law.”).
Defendants oppose the added affirmative defense (and they strongly believe it must be so
pleaded), arguing that permitting it to be asserted now would be prejudicial, and that under the
statute upon which Plaintiff relies on for its defense to damages, Defendants are not barred from a
recovery that exceeds the Plaintiff’s appropriated funds. Resp. at 20-21.
II. Legal Standards
The Scheduling Order in this case set the deadline for joinder of parties and amendment of
pleadings as November 1, 2021. ECF 21 at 12. Plaintiff filed its motion over a year after the
expiration of that deadline. Therefore, a modification of the Scheduling Order will be necessary to
grant Plaintiff’s Motion. Accordingly, Plaintiff’s Motion implicates both Fed. R. Civ. P. 15 and
16.
Rule 16 dictates that “[a] schedule may be modified only for good cause and with the
judge’s consent.” Fed. R. Civ. P. 16(b)(4). “After a scheduling order deadline, a party seeking
leave to amend must demonstrate (1) good cause for seeking modification under Fed. R. Civ. P.
16(b)(4) and (2) satisfaction of the Rule 15(a) standard.” Birch v. Polaris Indus., Inc., 812 F.3d
1238, 1247 (10th Cir. 2015) (quoting Gorsuch, Ltd., B.C. v. Wells Fargo Nat’l Bank Ass’n, 771
F.3d 1230, 1240 (10th Cir. 2014)). “To demonstrate good cause pursuant to Rule 16, the moving
party must . . . ‘provide an adequate explanation for any delay.’” Lehman Bros. Holdings Inc. v.
Universal Am. Mortg. Co., LLC, 300 F.R.D. 678, 681 (D. Colo. 2014) (quoting Strope v. Collins,
315 F. App’x 57, 61 (10th Cir. 2009)).
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Rule 15 states that after the deadline for amending a pleading as a matter of course, “a party
may amend its pleading only with the opposing party’s written consent or the court’s leave. The
court should freely give leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). “Refusing leave
to amend is generally only justified upon a showing of undue delay, undue prejudice to the
opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments previously
allowed, or futility of amendment.” Maloney v. City of Pueblo, 323 F.R.D. 358, 360 (D. Colo.
2018) (quoting Frank v. U.S. West, Inc., 3 F.3d 1357, 1365 (10th Cir. 1993)).
III. Analysis
A. Proposed Negligent Misrepresentation Claim
1. Rule 16
The Court begins by examining whether there is good cause to amend the Scheduling
Order. Plaintiff argues that good cause exists because it recently received documents or
information from the Defendants in discovery that demonstrate Defendants’ understanding of what
occurred in advance of and during the submission of their response to the RFP. Mot. at 12.
Defendants contend, in relevant part, that Plaintiff knew “version 8.0.0” of the product
“was still ‘in development’ and ‘planned for’ future release, . . . . and every single grade
[Defendants] assigned in its response to the functional matrix was for the yet-to-be-released
version 8.0.” Resp. at 9, ECF 116. But this statement begs a question of fact. Plaintiff does not
dispute it knew some of the product was under development. It may have even known that the
functional matrix was for a “yet-to-be-released” product. But believing Plaintiff’s version, it
reasonably believed that nearly 90% of the yet-to-be-released product was ready to go, while
Defendants assert that “yet-to-be-released” means "mostly under development.” This is a fact
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question, and one that cannot be resolved by the Court on this Motion. Each side is entitled to
present its position, if made in good faith, and I see nothing contrary here.
For this reason, I find good cause exists to amend the Scheduling Order unless another
ground counsels against it, such as undue delay, futility, or prejudice.
2. Rule 15
Defendants argue undue delay. Resp. at 17. In the Tenth Circuit, untimeliness alone may
be a sufficient basis for denying a party leave to amend. See Hayes v. Whitman, 264 F.3d 1017,
1026 (10th Cir. 2001); Las Vegas Ice & Cold Storage Co. v. Far West Bank, 892 F.2d 1182, 1185
(10th Cir. 1990). Denial of leave to amend is appropriate “when the party filing the motion has no
adequate explanation for the delay.” Frank, 3 F.3d 1357, 1365-66 (10th Cir. 1993); see also
Durham v. Xerox Corp., 18 F.3d 836, 840 (10th Cir. 1994) (“[t]he unexplained delay alone justifies
the district court's discretionary decision.”).
Here, I find Plaintiff’s explanation to be adequate. The initial Complaint was limited to a
claim of intentional wrongdoing. I do not fault a party for conservative pleading, which tends to
cause more efficient motions practice. Waiting to amend until obtaining facts that support a claim
is no vice. Otherwise, it places a plaintiff in a “darned if you do, darned if you don’t”
situation. No judicial doctrine of which I am aware requires all possible claims against two
adversaries to be asserted in an initial complaint. Moreover, as to the limitations argument
discussed above, I find this would require the Court to decide disputed issues of material fact.
What Plaintiff knew or should have known in February 2019 is hotly disputed. See Murry v.
GuideOne Specialty Mut. Ins. Co., 194 P.3d 489, 491 (Colo. App. 2008) (stating that unless the
undisputed facts clearly show when a party should have discovered the damage or conduct, the
point of accrual is usually a question of fact). Finally, the several weeks between the allegedly
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surprising testimony of witnesses under deposition and the Motion do not constitute undue delay,
especially when viewed in light of the complexity of this case and the numerous document
discovery issues the parties have had (even necessitating the appointment of a Master).
Defendants also claim prejudice. Resp. at 17. Undoubtedly, Plaintiff’s additional claim
broadens the scope of this lawsuit to some extent. This might be a different analysis if Plaintiff
originally pleaded a negligence claim and now is trying to convert it to intentional conduct. Going
in the present direction, however, does not so fundamentally alter the case as to establish legal
prejudice. Moreover, I find no sandbagging by Plaintiff here. Discovery should already have
logically encompassed investigation into the knowledge and understanding of both parties when
they entered into the contract, especially in connection with Plaintiff’s fraudulent inducement
claim. If the Scheduling Order needs any tweaking, the parties may request it.
Finally, concerning the economic loss rule, I agree with Plaintiff that under Colorado law,
if a company “wrongfully induced a party . . . into entering a contractual relationship knowing that
it did not have the capability to perform any of the promised web-related services[,] . . . [it] state[s]
a violation of a tort duty that is independent of the contract.” Van Rees v. Unleaded Software, Inc.,
373 P.3d 603, 607 (Colo. 2016). Thus, when “tort claims are based on misrepresentations made
prior to the formation of the contract[], which [Plaintiff] alleges induced [it] to enter into the
contract[] and therefore violated an independent duty in tort to refrain from such conduct[,] . . .
the claims are not barred by the economic loss rule.” Id. That is Plaintiff’s allegation here. Whether
it should go to trial depends on a likely motion for summary judgment in this case.
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B. Additional Affirmative Defense
Colorado law has no clear precedent concerning whether the damages defense raised by
Plaintiff must be brought as an affirmative defense. I agree with Defendants that Colorado views
such defenses as generally needing to be pleaded, especially when they may turn on the application
of a statute rather than simply the contract itself. Here, the Plaintiff relies in part on the Colorado
Constitution, the City Charter, and Colo. Rev. Stat. § 29-1-110(1), which all prohibit multiple-year
financial obligations that are not subject to a specific appropriation. Mot. at 17.
First, “whether a statute provides an affirmative defense or a pleading requirement is a
question of substantive state law.” Racher v. Westlake Nursing Home Ltd. P'ship, 871 F.3d 1152,
1163 (10th Cir. 2017). Second, under Colo. R. Civ. P. 8(c), “[a]ny mitigating circumstances to
reduce the amount of damage shall be affirmatively pleaded.” Hildebrand v. New Vista Homes II,
LLC, 252 P.3d 1159, 1171 (Colo. App. 2010).
To the extent Defendants claim prejudice, and they need discovery on Plaintiff’s assertions
concerning appropriations and expenditures, I will allow it. Defendants also argue that Section 29-
1-110(1) actually permits it to recover damages beyond an appropriation “so long as the contractor
has complied with all provisions of the contract applicable to the dispute.” Colo. Rev. Stat. § 24-
91-103.6(4); see Town of Alma v. AZCO Const., Inc., 10 P.3d 1256, 1266 (Colo. 2000). The parties
disagree as to whether this statute applies in these circumstances. Again, that dispute is better left
to a dispositive motion. Finally, Defendants do not raise a timeliness objection, and I do not sua
sponte address it.
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IV. Conclusion
For these reasons, Plaintiff’s Motion [filed November 4, 2022; ECF 101 & 102] is granted.
Plaintiff shall file a clean copy (i.e., no strikethroughs or underlines) of its amended pleadings on
or before February 2, 2023.
Entered and dated this 26th day of January, 2023, at Denver, Colorado.
BY THE COURT:
Michael E. Hegarty
United States Magistrate Judge
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