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Developers Surety and Indemnity Co v. Carothers Construction, Inc.

United States District Court, D. Connecticut

March 19, 2018

DEVELOPERS SURETY AND INDEMNITY CO., Plaintiff,
v.
CAROTHERS CONSTRUCTION, INC., Defendant.

          RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT

          Janet Bond Arterton, U.S.D.J.

         March 19, 2018 In this insurance coverage dispute, Plaintiff Developers Surety and Indemnity Company (“DSI”), a surety, seeks a declaratory judgment and injunctive relief providing that DSI is not bound by the arbitration provision in the subcontract between DSI's principal, subcontractor Seven Hills Construction, LLC (“Seven Hills”), and Defendant general contractor Carothers Construction, Inc. (“Carothers”), to arbitrate disputes with Carothers that have arisen under the Project Performance and Payment Bonds issued by DSI. Plaintiff moves [Doc. # 27] for summary judgment, and also seeks, in the alternative, a judgment that if DSI is bound by the arbitration provision, that such arbitration should take place in Connecticut, under Connecticut law. Defendant cross-moves [Doc. # 32] for summary judgment and seeks a stay of this action and transfer to the United States District Court for the Southern District of Mississippi, so that an order compelling arbitration can be entered by that court. If Plaintiff prevails and the Court issues a declaratory judgment that DSI is not bound by the arbitration provision, Defendant has moved in the alternative to transfer venue to the United States District Court for the Middle District of Georgia. For the reasons set forth below, the Court GRANTS Plaintiff's Motion for Summary Judgment, DENIES Defendant's Motion for Summary Judgment, and DENIES Defendant's requested transfer to the Middle District of Georgia.

         I. Background

         Plaintiff DSI originally filed this action, arising out of a construction project in Branford, Connecticut, known as the Roofing System for the Bridgeport Army Reserve Center, in the Connecticut Superior Court, Judicial District of New Haven on May 5, 2017.[1] (Ex. A (Compl.) to Not. Removal [Doc. # 1-1] ¶ 3.) On May 25, 2017, Defendant Carothers removed the action to federal court on the grounds of diversity jurisdiction. (Not. Removal [Doc. # 1] at 1.)

         Plaintiff DSI is a California corporation with offices in Irvine, CA, while Defendant Carothers is a Mississippi corporation with offices in Taylor, Mississippi. (Joint Stmt. Undisputed Facts and Documents (hereinafter “Joint Stmt.”) [Doc. # 28] at 1.) Carothers' subcontractor, Seven Hills Construction, LLC, is a limited liability company with offices in Virginia and North Carolina. (Id.) This case involves “commerce” within the meaning of the Federal Arbitration Act. (Id.) On or about February 3, 2015, DSI, as surety, issued a Subcontract Performance Bond and a Subcontract Payment Bond, Bonds No. 505470P for the Project on behalf of its principal, Seven Hills, which was a subcontractor to Carothers, the Obligee under the Project Bonds and the general contractor on the Project. (Id. at 2.)

         The Project Bonds are comprised of the Subcontract Performance Bond, the Subcontract Payment Bond, and the Surety Bond Rider, and were issued in conjunction with the Subcontract for the roofing system for the Project between Seven Hills and Carothers. (Id.) The Subcontract was executed in September 2014. (Id.)

         During the course of performance on the Project, disputes arose between Seven Hills and Carothers that resulted in Carothers declaring Seven Hills in default and in Carothers making claims against DSI. (Id.) DSI has denied Carothers' claims. (Id.) In April 2017, Carothers filed a Demand for Arbitration with the American Arbitration Association naming DSI as the sole Respondent. (Id.) In the Demand, Carothers sought to arbitrate its disputes with DSI as to the Project and three other projects. (Id. at 3.)

         This case involves the interpretation of a contractual provision that three different federal district courts outside of the Second Circuit have separately construed in the last year, reaching divided conclusions. Compare DSI v. Carothers, No. CV 9:17-1419-RMG, 2017 WL 3054646, at *4 (D.S.C. July 18, 2017) (finding DSI bound by the arbitration provision) with DSI v. Carothers, No. 17-2292-JWL, 2017 WL 3674975, at *4 (D. Kan. Aug. 24, 2017) (finding DSI was not bound by the same arbitration provision) and DSI v. Carothers, No. 1:17-CV-1979-SCJ, at *4-5 (N.D.Ga. Feb. 27, 2018) (finding DSI was not bound by same arbitration provision but was estopped from avoiding arbitration).

         The two sets of documents at issue here are the Project Bonds-which are comprised of the Subcontract Performance Bond, the Subcontract Payment Bond, and the Surety Bond Rider-and the Subcontract. The Subcontract Performance Bond, which was executed by both principal Seven Hills and surety DSI (Plaintiff), incorporates the Subcontract executed by Seven Hills and contractor Carothers (Defendant). The Subcontract Performance Bond provides that the “Subcontract is incorporated by reference herein in its entirety and made an integral part of this Subcontract Performance Bond[.]” (Ex. A (Subcontract Performance Bond) to Joint Stmt. [Doc. # 28-1] at 1.)

         The Subcontract Performance Bond contains two other relevant provisions. Paragraph 5, “Enforcement by Obligee[, ]” provides that:

This Subcontract Performance Bond shall be governed by the laws of the place of the Project which shall be interpreted insofar as possible to require Surety to perform fully the Subcontract Work and to satisfy completely all of Principal's responsibilities under its Subcontract with Obligee for so long as the Obligee may be held liable with respect to the Subcontract Work, such that, to the fullest extent allowed by law, if any claim arising from or related to the Principal's alleged failure to comply strictly with the Subcontract or if any claim with respect to Obligee's liability pertaining to the Subcontract Work is asserted against the Obligee, against any bond or other security furnished by the Obligee, or against persons or entities to whom Obligee may be liable, such claim is also covered by the Subcontract Performance Bond, subject only to the penal sum hereof.

(Id. at 2.) Paragraph 6, “Right of Action[, ]” provides that:

No right of action shall accrue on this Subcontract Performance Bond to or for the use of any person or entity other than the Obligee and Obligee's heirs, executors, administrators, assigns, and legal successors. Obligee is entitled to bring an action against Surety on this Subcontract Performance Bond, including specific performance of Surety's obligations hereunder, without being required to name the Principal.

(Id.) The Subcontractor Payment Bond, which was executed by both principal Seven Hills and Plaintiff DSI, similarly incorporates the Subcontract executed by Seven Hills and Defendant Carothers. (Ex. A (Subcontractor Payment Bond) to Joint Stmt. at 1.) The Subcontractor Payment Bond also includes an analogous choice-of-law provision, under which the Bond shall be “governed by the law of the place of the Project[.]” (Id. at 2.)

         Finally, the Surety Bond Rider, which was also executed by both Seven Hills and Plaintiff DSI, amends two provisions of the Subcontractor Performance and Payment bonds-neither of which is relevant here-and also incorporates the Subcontract by reference. (Ex. A (Surety Bond Rider) to Joint Stmt.) In incorporating the Subcontract, however, the Surety Bond Rider makes clear that “in the event and to the extent that any terms and conditions of the incorporated contract documents conflict or are inconsistent with the terms of this Performance and Payment Bond and Rider, the terms of this Performance and Payment Bond and Rider shall take precedent [sic] and shall control.” (Id.)

         The Subcontract contains five paragraphs focused on dispute resolution, located in Section 19 of the agreement. (Ex. B (Subcontract) to Joint Stmt. at 5-6.) Section 19 is discussed at greater length below, but its first paragraph, reproduced here, delineates the arbitration procedure to be followed in the event of a dispute between “Contractor” and “Subcontractor”:

Except as otherwise specifically provided therein, all claims, disputes, and other matters in controversy between the Contractor and the Subcontractor arising out of or relating to this Subcontract shall be decided by binding arbitration in accordance with the current and applicable Construction Industry Rules of the American Arbitration Association, unless the parties both agree to different rules and procedures. The sole exception to binding arbitration between the Contractor and Subcontractor is as follows: If the Contractor in good faith believes that any claim, dispute, or matter in controversy with the Subcontractor also involves rights or liabilities of the Owner, Architect, or other third party, then, at the Contractor's sole election, the Subcontractor agrees to resolve such issues in the same forum or proceeding, including arbitration, court, or administrative authority, which has jurisdiction over some or all claims, disputes, and matters in controversy involving the Owner, Architect, or other third party so as to promote economy and avoid inconsistent results.

(Id. at 5) (emphasis added.)

         II. Discussion

         Legal Standard Summary judgment is appropriate where, “resolv[ing] all ambiguities and draw[ing] all permissible factual inferences in favor of the party against whom summary judgment is sought, ” Holcomb v. Iona Coll., 521 F.3d 130, 137 (2d Cir. 2008), “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law, ” Fed.R.Civ.P. 56(a). “A dispute regarding a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Williams v. Utica Coll. of Syracuse Univ., 453 F.3d 112, 116 (2d Cir. 2006) (quotation marks omitted). “The substantive law governing the case will identify those facts that are material, and ‘[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.'” Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 59 (2d Cir. 2006) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). In ...


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