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Associated Construction v. Hanover Insurance Co.

United States District Court, D. Connecticut

March 30, 2017

ASSOCIATED CONSTRUCTION / AP CONSTRUCTION, LLC Plaintiff,
v.
THE HANOVER INSURANCE COMPANY, ET. AL. Defendants.

          RULING ON MOTIONS TO DISMISS

          Michael P. Shea, U.S.D.J.

         I. Introduction

         This lawsuit arises out of surety bonds issued for a construction project in Stamford, Connecticut. Associated Construction / A.P. Construction, LLC (“Associated Construction”), a construction contractor, alleges that the issuer of the bonds, Hanover Insurance Company (“Hanover” or the “Surety”), and its alleged agents, Scott Adams, Avalon Risk, LLC (“Avalon”), and Lighthouse Management, LLC (“Lighthouse”), failed to perform under the bonds and other related contracts and made misrepresentations in connection with the project. Associated Construction brings claims for (i) breach of contract (count one), (ii) violation of the Connecticut Unfair Trade Practices Act, Conn. Gen. Stat. § 42-110a et seq. (“CUTPA”) (count two), (iii) breach of the covenant of good faith and fair dealing (count three), and (iv) violation of the Connecticut Unfair Insurance Practices Act, Conn. Gen. Stat. § 38a-815 et seq. (“CUIPA”) (count four).

         Lighthouse has moved to dismiss Associated Construction's amended complaint under Fed.R.Civ.P. 12(b)(1) and Fed.R.Civ.P. 12(b)(6), arguing that Associated Construction lacks standing and has failed to state a claim against Lighthouse. Adams and Avalon (the “Avalon Defendants”) have moved to dismiss the amended complaint under Fed.R.Civ.P. 12(b)(6), arguing it does not plead a cognizable claim against them. For the reasons set forth below, both motions to dismiss are GRANTED IN PART AND DENIED IN PART. All claims against Avalon are dismissed. The breach of contract (count one), breach of the covenant of good faith and fair dealing (count three), and CUIPA (count four) claims against Lighthouse and Scott Adams are dismissed. The CUTPA (count two) claims against Lighthouse and Adams survive, together with all of the claims against Hanover, which has not moved to dismiss.

         II. The Amended Complaint

         The following allegations are taken from the amended complaint and assumed to be true.

         A. The Project

         Associated Construction “was hired to construct a residential housing project in Stamford, Connecticut known as Park Square West Phase 2 (the ‘Project').” (ECF No. 43 at ¶ 8.) Associated Construction sought to hire a subcontractor to “furnish, deliver and erect certain cold rolled structural framing, light gauge metal studs, sheetrock, taping and other related work” for the Project (the “Sheetrock Work”). (Id. at ¶ 9.) The “Sheetrock Work was a critical trade for the Project.” (Id. at ¶ 11.) “Any delay to the Sheetrock Work would translate into a day-for-day delay in the overall [p]roject [c]ompletion [d]ate.” (Id.) Associated Construction received a bid for the Sheetrock Work from Intext. (Id. at ¶ 10.)

         B. The Performance Bonds and the Subcontracts

         Before Associated Construction would accept Intext's bid, Associated Construction “required that Intext furnish a payment bond and performance bond.” (Id. at ¶ 12.) “[P]erformance bonds and payments bonds are undertakings by an insurance company based on written documents…which in effect guarantee the subcontractor will perform its work and make payment to all its subcontractors and suppliers who contracted directly with Intext to complete the Sheetrock Work.” (Id.) Associated Construction required Intext to furnish bonds in the amount of approximately $4, 600, 000. (Id. at ¶ 16.)

         Intext was referred to Mr. Adams, who was an “administrator of a program established by [Hanover] to serve higher risk clients.” (Id. at ¶¶ 13, 14.) Mr. Adams proposed “that he, through his two companies [Avalon and Lighthouse] and through Hanover could provide payment and performance bonds and provide other ancillary professional project oversight, accounting and bookkeeping” to Intext “so that the Sheetrock Work would be performed according to” Associated Construction's schedule. (Id. at ¶¶ 15, 17.) Mr. Adams, “for the Adams Defendants”[1] and “as an agent of Hanover”, pitched a specific proposal to Associated Construction “[a]t a meeting on October 9, 2013 in Stamford, Connecticut.” (Id. at ¶ 19.) He represented to Associated Construction that Hanover “would provide three performance bonds which would perform as if a single performance bond had been issued for all the work.” (Id.) He proposed the issuance of three bonds because “he did not have the authority from [Hanover] to issue a single bond for the entire amount” sought by Associated Construction. (Id.) Associated Construction “accepted Hanover's and the Adams Defendants' proposal.” (Id. at ¶ 18.)

         Following the October 9 meeting, Hanover issued three performance bonds to Intext for the Sheetrock Work, which Mr. Adams delivered to Associated Construction. (Id. at ¶¶ 20, 22.) Two of the bonds - bond number 1026020 and bond number 1026021 - named Hanover as the “Surety, ” Associated Construction as the “Owner” and “Obligee, ” and Intext as the “Principal.” (Id. at ¶ 20.) The final bond - bond number 1026022 - named Hanover as the “Surety, ” Associated Construction as the “Owner” and “Obligee, ” and IBS Contracting, LLC (“IBS”) as the “Principal.” (Id.)[2] The bonds are attached to the amended complaint. See Fed. R. Civ. P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is part of the pleading for all purposes.”)

         Also after the October 9 meeting, “Intext and [Associated Construction] signed the [s]ubcontracts” - one for each of the bonds. (Id. at ¶ 24)[3] Associated Construction signed the subcontracts based “upon the representations made by Mr. Adams at the October [9], 2013 meeting.” (Id.)[4]

         C. The Disbursement Control Agreements

         In connection with issuing the bonds, Hanover “required Intext and [Associated Construction] to use the services of Lighthouse as a ‘Disbursement Agent.'” (Id. at ¶ 26.) As a Disbursement Agent, Lighthouse would “account for and pay bills arising from the Project with the money earned and paid as the Sheetrock Work progressed.” (Id. at ¶ 26.) Three disbursement control agreements (the “DCAs”) were executed, one for each of the bonds issued, and each is attached to the complaint. (Id. at ¶¶ 26-27.) Intext and Lighthouse entered into two of the DCAs. (ECF No. 43-2 at 63, ECF No. 43-4 at 3.) IBS and Lighthouse entered into the final DCA. (ECF No. 43-4 at 52.)[5] The purpose of the DCAs was “to assure the proper handling of the funds for the benefit of [Intext, Associated Construction, and Hanover]…” (ECF No. 43-2 at 63, ECF No. 43-4 at 3, id. at 52.)

         The recitals in the DCAs stated that “[a]s a condition to issuing the Bonds, the Surety requires the Contractor [i.e., Intext] to execute an Agreement of Indemnity…” (ECF No. 43-2 at 63, ECF No. 43-4 at 3, id. at 52.) They also contained an acknowledgement from Intext that the “issuance of the Bonds by the Surety and the provisions in the [DCAs] [are] to assure the proper handling of the funds for the benefit of…[Associated Construction] and the Surety…” (ECF No. 43-2 at 63, ECF No. 43-4 at 3, id. at 52.) The DCAs required Intext to “assign to [Lighthouse] the right to receive all monies payable by [Associated Construction]” under the subcontract. (ECF No. 43-2 at 63, ECF No. 43-4 at 3, id. at 52.) Further, under the DCAs, Intext agreed to “direct [Associated Construction] to pay all” monies due to Intext from Associated Construction into a disbursement account that would be controlled by Lighthouse. (ECF No. 43-2 at 63, ECF No. 43-4 at 3, ECF No. 43-4 at 52.) The DCAs also designated Hanover as “the third-party beneficiary under the agreement.” (ECF No. 43-2 at 72, ECF No. 43-4 at 12, id. at 61.) Moreover, the DCAs provided that “if the amount of money held by Lighthouse was less than necessary to complete the Project, considering the value of the balance of work and money to be paid on account…Lighthouse could demand that Intext deposit sufficient funds with Lighthouse to cover the anticipated expenses.” (ECF No. 43 at ¶ 33.) The DCAs also contained an applicable law provision stating that “the laws of the State of New Jersey shall govern all aspects of the [DCA].” (ECF No. 43-2 at 73, ECF No. 43-4 at 13, id. at 62.)[6]

         D. Intext's Default

         Intext's “[w]ork began as expected, and [Associated Construction] made payments as required” under the subcontracts. (Id. at ¶ 25.) But “[d]uring the winter of 2013-2014, the Adams Defendants became aware that without additional management and financial support, Intext would not be able to complete the Sheetrock Work.” (Id. at ¶ 29.) The Adams Defendants, however, “failed to…advise [Associated Construction]” of Intext's difficulties and “continued to request payments from [Associated Construction] on account for the Sheetrock Work.” (Id. at ¶ 30.) Intext continued to “struggle[] with the Sheetrock Work.” (Id. at ¶ 31.) On April 8, 2014, “Intext was formally notified in writing, in accordance with the [s]ubcontracts, that its progress and quality of work were unacceptable.” (Id.)

         Due to Intext's challenges with the Sheetrock Work, on May 8, 2014, “a meeting was held in Stamford, Connecticut between the Adams Defendants as representatives for the Surety and [Associated Construction].” (Id. at ¶ 32.) Associated Construction was represented by “Mr. Walsh, Mr. Orlando, Mr. Ashforth and Mr. Jankowski.” (Id.) “Mr. Adams attended as a representative of the Surety.” (Id.) The parties discussed the “importance of the Sheetrock Work.” (Id.) At the meeting, Mr. Adams represented “that there were adequate funds to complete the project.” (Id. at ¶ 62(k).)

         After the May 8, 2014 meeting, “Intext made promises to [Associated Construction] to increase its labor force.” (Id. at ¶ 34.) But “Intext did not increase its labor force and fell further behind schedule by three more weeks.” (Id.) Then, on “June 2, 2014, [Associated Construction] declared Intext in default of the [s]ubcontracts and so advised [Hanover] and the Adams Defendants.” (Id. at ¶ 35.) Further, on “June 12, 2014, [Associated Construction] asserted claims against each and every [bond].” (Id. at ¶ 36.) “On June 18, 2014, [Associated Construction] advised the Adams Defendants, Intext and the Surety of further defaults in accordance with the [Bonds] and [s]ubcontracts.” (Id. at ¶ 37.) “Intext, the Adams Defendants and the Surety, again, failed to cure the defaults.” (Id.) Subsequently, “Intext fell further behind schedule[, ] which forced [Associated Construction] to incur additional expenses as Intext's performance required [Associated Construction] to supplement Intext's labor and otherwise address Intext's defaults.” (Id. at ¶ 38.) On July 15, 2014, Associated Construction terminated Intext. (Id. at ¶ 40.)

         Associated Construction demanded that Hanover perform under the bonds. (Id. at ¶ 41.) Hanover refused. (Id.) Then, “in October 2014, [Hanover] made a payment of $2, 356, 733.27” for Associated Construction's claims. (Id. at ¶ 42.) Associated Construction claims that it incurred “damages of $6, 000, 000 in excess of [Hanover's] partial payment” because “[Hanover], the Adams Defendants and Intext failed to perform under the [s]ubcontract[s] and [bonds].” (Id. at ¶ 43.)

         III. Legal Standards

         A. Rule 12(b)(1)

         “A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it.” Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000). In reviewing a motion to dismiss under Rule 12(b)(1), a court “must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff, but jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it.” Morrison v. Nat'l Austl. Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008)(internal quotation marks and citation omitted). Moreover, a court “may consider affidavits and other materials beyond the pleadings to resolve the jurisdictional issue...” J.S. ex rel. N.S. v. Attica Cent. Schs., 386 F.3d 107, 110 (2d Cir. 2004). “The plaintiff bears the burden of proving subject matter jurisdiction by a preponderance of the evidence.” Aurecchione v. Schoolman Tranp. Sys, Inc., 426 F.3d 635, 638 (2d Cir. 2005).

         B. Rule 12(b)(6)

         In deciding a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the court must accept as true all of the factual allegations in the complaint and draw all reasonable inferences from those allegations in favor of the plaintiff. Miller Auto Corp. v. Jaguar Land Rover North America, L.L.C., 812 F.Supp.2d 133, 135 (D. Conn. 2011). To survive such a motion, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal,556 U.S. 662, 678 (2009)(quoting Bell Atl. Corp. v. Twombly,550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (internal quotation marks and citations omitted). The complaint must contain more than “‘naked assertion[s]' devoid of ‘further factual enhancement.'” Id. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. “A complaint is deemed to include any written instrument attached to it as an exhibit, materials incorporated in it by reference, and documents that, although not incorporated by reference, are ‘integral' to the ...


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