DMS Drywall & Interior Systems, Inc. v. Patriot Construction

Background

Patriot Construction was hired by the Veterans Administration to construct a laboratory in San Francisco, California, and subcontracted some of the work to DMS Drywall & Interior Systems, Inc. The subcontract covered framing, drywall, and related work for a contract price of $1,274,067.00, subject to increases for extra work. DMS alleged that it performed its obligations but was not paid in full, and it sued Patriot and Fidelity and Deposit Company of Maryland on claims including recovery under a Miller Act payment bond, breach of contract, reasonable value, and alleged False Claims Act violations.

The defendants asserted that DMS had failed to perform its contract. They sought leave to file a first amended answer and compulsory counter complaint asserting breach of contract, breach of the implied covenant of good faith and fair dealing, breach of the implied duty to perform with reasonable care, and declaratory judgment. The defendants stated that they had determined their damages were at least $305,000. DMS opposed the motion as untimely under the scheduling order.

Rule 16: Good Cause to Modify the Schedule

Because the court had entered a scheduling order, the defendants had to show “good cause” under Federal Rule of Civil Procedure 16(b)(4) to modify it. The court found good cause. The defendants said they had not known when they filed their answer whether their damages would exceed the final payment withheld from DMS. The issue had been present in the case from the beginning, and after a March 2024 Early Neutral Evaluation Conference, the defendants’ counsel asked DMS to agree to an order allowing the counterclaim, but DMS refused.

Rule 15: Leave to Amend

Under Federal Rule of Civil Procedure 15, a party generally needs the opposing party’s written consent or the court’s permission to amend after the initial amendment period. Courts should generally allow amendment when justice requires, but may deny leave because of prejudice, undue delay, or lack of merit.

The court concluded that allowing the counterclaims would cause little or no prejudice to DMS. The proposed claims arose from the same facts as DMS’s claims, did not require new parties, and were not expected to require new or burdensome discovery. Discovery would remain open for another three months, and the court stated that res judicata would prevent Patriot from pursuing the claims in a later case if it could not add them here.

Ruling

The court held that there was good cause to modify the scheduling order and that the defendants could add their compulsory counterclaims. Judge William H. Orrick granted the defendants’ motion. The court vacated the May 15, 2024 hearing.