Thomas Kmak v. American Century Companies

United States Court of Appeals
For the Eighth Circuit
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No. 15-3920
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Thomas Kmak
lllllllllllllllllllll Plaintiff - Appellant
v.
American Century Companies, Inc.
lllllllllllllllllllll Defendant - Appellee
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Appeal from United States District Court
for the Western District of Missouri - Kansas City
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Submitted: June 8, 2017
Filed: October 19, 2017
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Before LOKEN, MURPHY, and MELLOY, Circuit Judges.
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LOKEN, Circuit Judge.
In 2003 and 2005, Thomas Kmak exercised options to purchase restricted
shares of American Century Companies, Inc. (American Century), common stock. At
the time of purchase, he signed Stock Restriction Agreements (SRAs) providing, as
relevant here, that American Century “will have the right to call any of the Shares for
repurchase . . . at any time following the Purchaser’s disability, death, or termination
of, or retirement from, the Company’s employment.” Kmak terminated his employ
in September 2007. American Century called his shares for repurchase in December
2011, timing that denied him regular and special year-end dividends. Kmak filed this
diversity action, alleging that American Century violated its implied covenant of good
faith and fair dealing for two reasons: (i) because Kmak reasonably expected he would
retain the stock as long as he did not work for a competitor, and (ii) because American
Century “arbitrarily and vindictively exercis[ed] its discretion . . . for the purpose of
retaliating for his . . . testimony” on behalf of JP Morgan Chase & Co. in arbitration
proceedings to resolve a dispute between the two companies.
Initially, the district court dismissed Kmak’s Second Amended Complaint for
failure to state a claim. The court concluded (i) the SRAs allowed American Century
to repurchase at any time, and “there can be no breach of the implied [covenant] where
the contract expressly permits the actions being challenged,” quoting Bishop v. Shelter
Mut. Ins. Co., 129 S.W.3d 500, 505 (Mo. App. 2004); (ii) under Missouri law, if the
second party receives his expected contractual benefits, “the implied covenant does
not bar the first party from exercising its discretionary rights out of ill will, spite, or
the like”; and (iii) repurchase did not deprive Kmak of benefits he reasonably
expected at the time the SRAs were signed because “they do not concern testimony
in an arbitration arising years later” and indefinite annual dividends were not
promised. Kmak v. Amer. Century Cos., Inc., 2013 WL 12075740, at *2-4 (W.D. Mo.
Feb. 6, 2013). On appeal, we reversed in part and remanded. Kmak v. Amer. Century
Cos., Inc, 754 F.3d 513, 518 (8th Cir. 2014) (“Kmak I”). Unlike the district court, we
interpreted the Missouri Court of Appeals decision in Bishop as deciding that conduct
that violates public policy breaches the implied covenant of good faith and fair
dealing. Therefore:
To the extent the district court dismissed Kmak’s Complaint for merely
alleging American Century acted arbitrarily, vindictively, or contrary to
Kmak’s reasonable expectations about matters other than public policy,
such dismissal was proper. Cf. Bishop, 129 S.W.3d at 506-07 (stating
the implied covenant does not apply to allegations in the at-will
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employment context when an employer allegedly terminates a contract
in bad faith or because of ill will). But, to the extent Kmak has alleged
retaliation in violation of public policy, he has sufficiently alleged a
breach of the implied covenant at this stage, and, thus, the district court
erred in dismissing Kmak’s Complaint.
On remand, extensive discovery proceeded under a Scheduling and Trial Order
setting deadlines of December 1, 2014, for motions to amend pleadings and July 20,
2015, for pretrial discovery. On July 3, 2015, seven months after the former deadline,
Kmak moved for leave to file a Third Amended Complaint asserting new claims for
breach of contract, fraud, and negligent misrepresentation. In lengthy separate
Opinions and Orders issued in November 2015, the district court1 denied the motion
for leave to amend and granted summary judgment dismissing Kmak’s sole claim
remaining on remand -- that American Century breached the implied covenant of good
faith and fair dealing by taking discretionary action to retaliate in violation of public
policy. Kmak appeals both orders. We affirm.
I. The Grant of Summary Judgment.
Because our decision turns on an intervening decision of the Supreme Court of
Missouri and does not require detailed review of the factual record, we refer the reader
to our prior opinion for a brief summary of the events that led to this litigation. Kmak
I, 754 F.3d at 515-16. On remand, after the parties developed the facts in extensive
detail, American Century moved for summary judgment on Kmak’s public policy
retaliation claim. In analyzing the summary judgment record, the district court
continued our “useful” analogy to employment discrimination cases. See id. at 518.
First, the court assumed that Kmak established a prima facie case of public policy
retaliation “based on the temporal proximity between the call of his stock and the
1
The Honorable Beth Phillips, United States District Judge for the Western
District of Missouri.
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arbitration award and payment.” Second, the court concluded that American Century
established non-retaliatory reasons for delaying its call to repurchase until after JP
Morgan paid the substantial arbitration award -- first because of unusual economic
conditions, and then because American Century “did not want calling [Kmak’s] stock
to become an issue in the dispute with JP Morgan.” Third, the court concluded that
Kmak failed to present evidence suggesting that American Century’s explanation was
a pretext for public policy retaliation.
On appeal, Kmak argues that he set forth “substantial evidence from which a
reasonable jury could infer that [American Century] called Kmak’s shares in
retaliation for his testimony.” However, following oral argument, the Supreme Court
of Missouri issued its decision in Bishop & Assocs., LLC, v. Ameren Corp., 520
S.W.3d 463 (Mo. banc. 2017). In Kmak I, we cited the Missouri Court of Appeals
decision in an earlier Bishop case for the proposition that “a plaintiff properly pleads
a breach of the implied covenant of good faith and fair dealing when he alleges the
defendant’s action violated public policy or a statute.” 754 F.3d at 517.
In Ameren, the Supreme Court of Missouri ruled that we “rel[ied] on an
erroneous interpretation of the [Missouri] court of appeals’ holding in Bishop.” 520
S.W.3d at 472 n.3. Reaffirming that there can be no breach of the implied covenant
“where the contract expressly permits the actions being challenged,” the Court
rejected the contention “that a cause of action for breach of the implied covenant . . .
exists when the defendant alleges a violation of public policy.” Id. at 471 (quotation
omitted). Returning the breach-of-covenant cause of action to well-established
Missouri precedents, the Court explained that “a plaintiff must establish that the
defendant ‘exercised a judgment conferred by the express terms of the agreement in
such a manner as to evade the spirit of the transaction or so as to deny [the plaintiff]
the expected benefit of the contract.’ Mo. Consol. Health Care Plan v. Cmty. Health
Plan, 81 S.W.3d 34, 46 (Mo. App. 2002).” Id. at 472 n.3.
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The Supreme Court of Missouri’s decision in Ameren limits Kmak’s claim for
breach of American Century’s implied covenant of good faith and fair dealing to the
“reasonable expectation” ground that was dismissed with prejudice in Kmak I.
Accordingly, the district court’s grant of summary judgment dismissing the only claim
asserted in the Second Amended Complaint must be affirmed.
II. Denial of the Motion To Amend.
Seven months after the Scheduling Order’s deadline to amend any pleadings,
and nearly three years after initiating the lawsuit, Kmak sought leave to file a Third
Amended Complaint asserting new causes of action. Two were claims that the call
provisions American Century inserted in the SRAs Kmak signed in 2003 and 2005
were a breach of the 1998-2000 stock option agreements which granted Kmak the
stock options he was exercising. The new fraud and negligent misrepresentation
claims alleged breach of American Century’s duty to disclose its decision to
repurchase Kmak’s shares after the arbitration when that decision was made in 2009.
Kmak alleged that he did not discover the breach of contract claims until American
Century’s tardy production of the contract documents after the deadline to amend, and
that he did not know when American Century made the decision to repurchase his
shares until deposition testimony in June 2015 that contradicted American Century’s
September 2014 interrogatory answers.
The district court denied the motion in a lengthy opinion, carefully explaining
(i) the tendered Third Amended Complaint “would greatly expand the scope of this
case, extending it to transactions that have not been at issue previously and raising
claims that have not been previously advanced”; (ii) Kmak was not diligent in
asserting the two breach of contract claims, and both were futile; and (iii) whether
Kmak was diligent in asserting the fraud and misrepresentation claims was a “close
question,” but in any event those claims were futile. On appeal, Kmak argues the
district court abused its discretion because he had good cause to amend the complaint
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based on newly discovered facts, the new claims are not futile, and American Century
would not suffer prejudice.
“[A] motion for leave to amend filed outside the district court’s Rule 16(b)
scheduling order requires a showing of good cause.” Williams v. TESCO Servs., Inc.,
719 F.3d 968, 977 (8th Cir. 2013); see Fed. R. Civ. P. 16(b)(4). “The primary
measure of good cause is the movant’s diligence.” Harris v. FedEx Nat’l LTL, Inc.,
760 F.3d 780, 786 (8th Cir. 2014) (quotation omitted). “We generally will not
consider prejudice [to the nonmovant] if the movant has not been diligent in meeting
the scheduling order’s deadlines.” Hartis v. Chi. Title Ins. Co., 694 F.3d 935, 948 (8th
Cir. 2012) (quotation omitted). We review the district court’s denial of the motion to
amend for abuse of discretion, but we review de novo whether the proposed
amendments would have been futile. United States ex rel. Joshi v. St. Luke’s Hosp.,
Inc., 441 F.3d 552, 555 (8th Cir.), cert. denied, 549 U.S. 881 (2006).
Here, the district court’s conclusion that Kmak was not diligent is well-
supported by the record, and in our view it applies to all the new claims asserted in the
proposed Third Amended Complaint. The new claims were legal variations on a
theme the parties had been litigating for years. In the Second Amended Complaint,
Kmak alleged that American Century’s exercise of discretion to repurchase granted
in the SRAs was in fact a breach of American Century’s contractual duty of good faith
and fair representation. The Third Amended Complaint alleged that the same
contractual discretion to repurchase also breached earlier contracts that had granted
Kmak options to purchase the shares now being repurchased. It further alleged that
the timing and manner of American Century’s decision to repurchase -- previously
cited as evidence of bad faith and unfair representation -- were also a basis to claim
fraud and negligent misrepresentation.
Kmak’s attorneys strive mightily to explain how last minute discovery first
gave them a hint that these new claims existed. The district court explained at length
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why it concluded that these excuses were unpersuasive and did not establish the
diligence and good cause needed to extend this litigation indefinitely on the eve of the
court’s decision to grant summary judgment. We agree. As the Seventh Circuit
explained in affirming on this basis as an alternative ground, “granting [Kmak’s]
motion for leave to amend clearly would result in undue delay, as well as prejudice
to [American Century], forcing [it] to re-litigate the dispute on new bases . . . and to
incur new rounds of additional and costly discovery, and depriving it of the
meaningful value of obtaining summary judgment.” Sanders v. Venture Stores, Inc.,
56 F.3d 771, 774 (7th Cir. 1995). We conclude the district court did not abuse its
discretion in determining that Kmak failed to show good cause to amend. Therefore,
we need not address more complex futility issues addressed by the district court and
the alternative bases to affirm advanced by American Century on appeal.
The judgment of the district court is affirmed.
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