United States District Court, D. Connecticut
MEMORANDUM OF DECISION GRANTING PLAINTIFF'S
MOTION TO DISMISS SECOND AMENDED COUNTERCLAIMS [DKT.
85]
Hon.
Vanessa L. Bryant United States District Judge.
Before
the Court is Plaintiff's / Counterclaim Defendant's
Motion to Dismiss the Second Amended Counterclaims
(“SACC”). On February 16, 2017,
Defendants[1]filed their first responsive pleadings,
asserting counterclaims. Three months later the parties
jointly stipulated to dismissal of the counterclaims without
prejudice. The Court accordingly ordered dismissal of the
counterclaims pursuant to Federal Rule of Civil Procedure
41(a)(1)(A)(ii) on May 30, 2017. Then in July 2017,
Defendants filed an amended answer with counterclaims on
which Plaintiff Arch Insurance Company (“Arch” or
“Plaintiff”) moved to dismiss. The Court granted
the motion without prejudice on November 8, 2017, and allowed
Defendants to replead by November 22, 2017. Defendants timely
filed their SACC, and Plaintiff again moved to dismiss. The
Court hereby GRANTS the motion to dismiss as to all
counterclaims.
Background
I.
The Project
The
following facts are taken from the SACC and from the
contracts relating to the Project referenced therein and
relied upon by Defendants unless otherwise noted.
The
City of Hartford (the “City”) entered into an
agreement with Connecticut Double Play, LLC d/b/a/ Hartford
Yard Goats (the “Ball Club”) to bring a minor
league baseball team to Hartford, and the City agreed to
construct a baseball stadium and parking facilities to host
the team (the “Project”). [Dkt. 77 (SACC) at 8-9,
¶¶ 4, 5]. The team scheduled its inaugural season
in Hartford to begin in April 2016. [Dkt. 77 (SACC) at 26,
¶ 38]. To fulfill its obligation to build a baseball
stadium, the City solicited contracts to construct the
Project. [Dkt. 77 (SACC) at 21, ¶ 19]. To be awarded the
contract for the Project a contractor had to post a payment
and performance bond. [Dkt. 116 (Opp'n Mot. Dismiss SACC)
at 2].
On
February 4, 2015, the City as Owner awarded the contract to
develop the Project to, and entered into a Development
Services Agreement (“DSA”) with, DoNo Hartford
LLC (“DoNo”) as Developer to facilitate
construction of the Project. See [Dkt. 77 (SACC) at
22, ¶ 24]. On the same day, DoNo as Owner entered into a
Design Build Agreement (“DBC”) with Centerplan as
Design Builder of the Hartford Stadium Project. [Dkt. 77 at
22-23, ¶ 25]. The City, DoNo, and Centerplan also
entered into a Direct Agreement that day for which the
purpose “was to provide the City with the ability to
step into the position of DoNo upon the City's
termination of the DSA for default.” Id. at
23, ¶ 26.
As a
condition precedent to being awarded the Hartford Stadium
Project construction contract, Centerplan was required to
post payment and performance surety bonds. [Dkt. No. 1 ¶
14; Dkt. No. 19 ¶ 14]. Arch issued payment and
performance bonds on behalf of Centerplan in favor of the
Obligees (DoNo, the City, and the Hartford Stadium Authority)
for the Project (the “Bonds”). See [Dkt.
77 at 20, ¶ 13; Dkt. 82-12 (Mot. Summ. J., Ex. J,
Payment and Performance Bonds)].[2]
The
drawings for the Hartford Stadium Project were completed in
March of 2015, and the cost of construction was raised by $11
million. [Dkt. 77 at 24, ¶ 30]. The cost of the Project
exceeded the budget for a number of reasons and in late 2015,
Centerplan advised the City that it could not complete the
Project based on the available funds. Id. at 26,
¶ 38.
In
January 2016, the City, DoNo, and Centerplan entered into an
agreement (the “January Agreement”) wherein they
agreed to extend the substantial completion date from March
11, 2016 to May 17, 2016, and to increase the maximum price
by over $10.3 million to accommodate the December 24, 2015
change orders. See Id. at 26, ¶ 41. DoNo and
Centerplan agreed to reduce their price by $2.8 million and
the City agreed to pay the balance of the change orders
submitted on December 24, 2014, minus any amount the City
procured from the Ball Club. [Dkt. 89-4 (Opp'n Summ. J.,
Ex. B (January Agreement)) ¶¶ 1, 11]. The Ball Club
was not a signatory of the January Agreement.
After
the City, Centerplan, and DoNo entered into the January
Agreement, the City issued additional change orders and
construction change directives (“CCDs”)
principally at the request of the Ball Club, which added
substantial work and prevented Centerplan from being able to
complete the Project by the May 17, 2016 substantial
completion date. [Dkt. 77 at 27, ¶¶ 44-45]. Change
orders could only be issued by agreement of the owner and
design builder, in this case Centerplan and DoNO, and only
DoNo had authority to issue a CCD without Centerplan's
approval. [Dkt. 82-10 (Mot. Summ. J., Ex. H (Design Build
Agreement, Ex. A)) §A.7.1.2]. The DBA states the City
must fund change orders before they become part of the
contract which Centerplan and DoNo are obligated to perform.
See [Dkt. 77 at 28, ¶ 48]. The SACC alleges
that Centerplan and DoNo asked the City to assure them that
it would pay for these change orders and CCDs, and because
the City was unable to comply, the SACC concludes
“[t]he City did not have enough money to pay for the
work and as a result before it terminated Centerplan it was
in default of the DSA, the BDA [Ballpark Development
Agreement] and the DBC.” [Dkt. 77 at 28-29,
¶¶ 52-53].
Between
May 9 and June 9 of 2016, the City notified Arch of
Centerplan's and DoNo's alleged defaults on the
Project. See Id. at 29, ¶ 54. “Arch said
it would not perform under the bonds [by constructing the
Project] unless and until the City terminated the DSA and
DBC.” Id. at 29, ¶ 54. On June 6, 2016,
the City terminated the DSA and the DBC. See Id.
Arch later took over the Project. See Id. at 30,
¶ 59. Thereafter, Arch made demands that Defendants hold
harmless and indemnify Arch for all losses it incurred
because of the bonds, and also demanded Defendants put up
collateral security. Id. at 33, ¶¶ 67-69.
When Defendants did not meet its demands, Arch filed this
lawsuit against defendants with claims for contractual
indemnification, common law indemnification, contractual
security, common law exoneration, quia timet, and disclosure
of financial information. See [Dkt. 1 (Complaint)].
Relying
on these facts, the SACC alleges five claims against Arch for
1) breach of contract, 2) breach of the implied covenant of
good faith and fair dealing, 3) surety bad faith, 4) tortious
interference with contractual relations, and 5) violations of
Connecticut Unfair Trade Practices Act (“CUTPA”)
by violating the Connecticut Unfair Insurance Practices Act
(“CUIPA”). See [Dkt. 77].
II.
Bonds and Indemnity Agreements
The
SACC contains an excerpt from the multiple obligee rider of
the performance bond:
Notwithstanding anything contained herein to the contrary,
there shall be no liability on the part of the Principal or
Surety under this Bond to the Obligees, or any of them,
unless the Obligees, or any of them, shall make payments
to the Principal, or to the Surety in case it arranges for
completion of the Contract upon default of the
Principal, strictly in accordance with the terms of said
Contract as to payments, and shall perform all the other
obligations required to be performed under said Contract at
the time and in the manner therein set forth.
Id. at 31, ¶ 60. The Bond expressly
incorporated the Design Build Agreement, or the
“DBC.” See [Dkt. 82-12 at 1, 3]. The
SACC alleges that Arch entered into other payment and
performance bonds with Defendants, which are not connected to
the Project. See [Dkt. 77 at 31, ¶ 60].
Defendants
executed a series of indemnity agreements in consideration
for Arch's issuance of the bonds. Id. at 20,
¶ 14. The three indemnity agreements from July 2010,
October 2010, and January 2016, (collectively the
“Indemnity Agreements”) are attached as exhibits
to Plaintiff's Complaint. See [Dkt. 1-1 (Compl.
Ex. A, July 2010 Indemn. Agreement); Dkt. 1-2 (Compl. Ex. B,
Oct. 2010 Indemn. Agreement); Dkt. 1-3 (Compl. Ex. C, Jan.
2016 Indemn. Agreement)]. Collectively, the
Indemnitors/Principals to all three Indemnity Agreements
comprise the Defendants in this action; Centerplan and the
Landinos are the only Defendants that are parties to all
three agreements.[3] See [Dkt. 1-1 at 6 of PDF; Dkt.
1-2 at 7 of PDF; Dkt. 1-3 at 10 of PDF]. These Indemnity
Agreements were “made by the undersigned Indemnitors
[Defendants] in favor of [Arch] . . . for the purpose of
Indemnifying Surety . . . for any Bonds . . . which
Surety may have issued, or may hereafter issue, or
on which Surety otherwise becomes surety.” See
[Dkt. 1-1 at 2 of PDF; Dkt. 1-2 at 2 of PDF; Dkt. 1-3 at 2 of
PDF (emphasis added)]. Under the Indemnity Agreements, the
Indemnitors “warrant and represent that they have a
material and beneficial interest in Surety's issuance of
Bonds on behalf of the Principal, and acknowledge that Surety
would not issue such Bonds without each Indemnitor's
agreement to reimburse Surety for all losses arising under
the bonds.” See [Dkt. 1-1 at 2 of PDF; Dkt.
1-2 at 2 of PDF; Dkt. 1-3 at 2 of PDF].
The two
2010 Indemnity Agreements are largely identical, but their
language of consideration differs slightly from that of the
January 2016 Indemnity Agreement. The 2010 Indemnity
Agreements state, “IN CONSIDERATION of the execution of
any such Bonds for Principal, from which it is acknowledged
the Indemnitors derive a substantial material benefit,
and as an inducement to such execution or continuation of
suretyship and/or the issuance of Bonds by Surety, the
Indemnitors, jointly and severally agree [to the following
provisions].” [Dkt. 1-1 at 2 of PDF; Dkt. 1-2 at 2 of
PDF (emphasis added)]. In slight contrast, the January 2016
Indemnity Agreement states, “IN CONSIDERATION of the
foregoing premises and the Surety's execution and
delivery of one or more Bonds or its refraining from
canceling the same, and intending to be legally bound
hereby, the Indemnitors, for themselves and their
respective heirs, executors, administrators, successors, and
assigns, hereby agree, jointly and severally, to be obligated
to the Surety, its successors and assigns, [to the following
provisions].” [Dkt. 1-3 at 2 of PDF (emphasis added)].
The
Indemnity Agreements also gave Arch broad unfettered
discretion to compromise claims. The 2010 Indemnity
Agreements state:
Surety shall have the exclusive right to decide and determine
whether any claim, liability, suit or judgment made or
brought against Surety on any Bond shall or shall not be
paid, compromised, resisted, defended, tried or appealed, and
Surety's decision thereon shall be final and binding upon
the Indemnitors. . . . [I]f Principal or Indemnitors desire
that the Surety litigate such claim or demand, or defend such
suit or appeal from such judgment, they shall deposit with
the Surety, at the time of such request, cash or collateral
satisfactory to the Surety in kind and amount to be used in
paying any judgment or judgments rendered, or which might be
rendered, against the Surety, together with interest, costs
and attorneys fees.
[Dkt. 82-5 at 3; Dkt. 82-6 at 3]. The 2016 Indemnity
Agreement, signed after Centerplan indicated that it would
not be able to meet the first Substantial Completion Date
deadline set by the DBC, includes the exact same provision
making Arch's decision not to resist and to adjust and
pay claims binding on the Defendants, but adds a provision in
which Defendants cede all authority to adjust and pay claims
to Arch. [Dkt. 82-7 at 5 (“Surety shall have the
sole and exclusive right . . .”) (emphasis
added)].
Legal
Standard
To
survive a motion to dismiss, a plaintiff must plead
“enough facts to state a claim to relief that is
plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d
929 (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.” Ashcroft v.
Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d
868 (2009). In considering a motion to dismiss for failure to
state a claim, the Court should follow a “two-pronged
approach” to evaluate the sufficiency of the complaint.
Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir.
2010). “A court ‘can choose to begin by
identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of
truth.'” Id. (quoting Iqbal, 556
U.S. at 679). “At the second step, a court should
determine whether the ‘wellpleaded factual
allegations,' assumed to be true, ‘plausibly give
rise to an entitlement to relief.'” Id.
(quoting Iqbal, 556 U.S. at 679). “The
plausibility standard is not akin to a probability
requirement, but it asks for more than a sheer possibility
that a defendant has acted unlawfully.” Iqbal,
556 U.S. at 678 (internal quotations omitted).
In
general, the Court's review on a motion to dismiss
pursuant to Rule 12(b)(6) “is limited to the facts as
asserted within the four corners of the complaint, the
documents attached to the complaint as exhibits, and any
documents incorporated by reference.” McCarthy v.
Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.
2007). The Court may also consider “matters of which
judicial notice may be taken” and “documents
either in plaintiffs' possession or of which plaintiffs
had knowledge and relied on in bringing suit.”
Brass, 987 F.2d at 150; Patrowicz v.
Transamerica HomeFirst, Inc., 359 F.Supp.2d 140, 144 (D.
Conn. 2005).
Analysis
Arch
moves to dismiss the SACC in its entirety. “[A] federal
court exercising diversity jurisdiction must apply the
choice-of-law rules of the state in which that court sits to
determine the rules of decision that would apply if the suit
were brought in state court.” Liberty Synergistics
Inc. v. Microflo Ltd., 718 F.3d 138, 151 (2d Cir. 2013);
Lazard Freres & Co. v. Protective Life Ins. Co.,
108 F.3d 1531, 1538- 39 (2d Cir. 1997); Brown v.
Strum, 350 F.Supp.2d 346, 348 (D. Conn. 2004). It is
undisputed that Connecticut law applies to these various
state claims.
I.
Count One: Breach of Contract
The
elements of a breach of contract claim under Connecticut law
“are the formation of an agreement, performance by one
party, breach of the agreement by the other party, and
damages.” Meyers v. Livingston, Adler, Pulda,
Meiklejohn and Kelly, P.C., 311 Conn. 282, 291 (2014).
Contract language is to be interpreted “with a fair and
reasonable construction of the written words and . . . the
language used must be accorded its common, natural, and
ordinary meaning and usage where it can be sensibly applied
to the subject matter of the contract.” Southington
v. Commercial Union Ins. Co., 71 Conn.App. 715, 84
(Conn. App. Ct. 2002) (citing Rumbin v. Utica Mut. Ins.
Co., 254 Conn. 259, 286, 757 A.2d 526 (2000)). “A
court will not torture words to import ambiguity where the
ordinary meaning leaves no room for ambiguity, and words do
not become ambiguous simply because lawyers or laymen contend
for different meanings.” Id. (citing Downs
v. Nat'l Cas. Co., 146 Conn. 490, 494-95, 152 A.2d
316 (1959)).
Defendants
bring a breach of contract claim against Arch on several
bases.[4]See [Dkt. 77 at 34-35,
¶¶ 71-77]. Defendants assert (1) that “Arch
has breached the Bond and the Indemnity agreements” by
voluntarily performing on the Performance Bond when it had no
obligation to perform, see id at 34, ¶ 72, and
(2) that Arch “further breached its contractual
duties” by (a) directing the City to terminate the DSA
and the DBC, (b) failing to investigate the City's
default and inability to pay for the work, (c) the manner and
extent of Arch's performance after taking over the
Project, and (d) refusing to accept collateral offered by
Defendants. See Id. ¶¶ 74-76. The Court
will address each of the allegations in turn.
1.
Allegation 1: Arch Had No. Obligation Under the Performance
Bond
Defendants'
first breach of contract allegation relates to Arch's
performance under the bond upon the claim by the City.
Defendants argue that Arch was not obligated to perform under
the performance bond because Centerplan was not in default on
the bonded contract and further because the City itself was
in default. See [Dkt. 77 ¶ 57].[5] Arch counters
that it owed no duties to Defendants under the performance
bond because the obligees, not Centerplan, were the entities
receiving the benefit of the bond. See [Dkt. 85-2
(Mot. Dismiss Mem.) at 10]. Before reaching the substance of
the allegation, the Court addresses Arch's position that
a breach of contract action cannot be brought on the
performance bond because Centerplan did not receive the
benefit of the contract.
a)
Arch Owed A Duty to Defendants
“[T]he
general purpose of a surety contract is to ‘guard
against loss in the event of the principal debtor's
default.'” Town of Southington v. Commercial
Union Ins. Co., 254 Conn. 348, 358, 757 A.2d 549 (2000);
see Capstone Bldg Corp. v. Am. Motorists Ins. Co.,
308 Conn. 760, 792, 67 A.3d 961 (2013) (stating the
suretyship's “main purpose is to benefit the owner
upon the default by a general contractor”). A
suretyship is the result of a third party's promise to a
debtor to “assume and pay the debt he owes to a
creditor.” Town of Southington, 254 Conn. at
358. The obligee receives the benefit of the performance
bond, because the surety's obligation operates as
“an additional assurance to the one entitled to
performance of an act that the act will be performed.”
Id.; see also Capstone, 308 Conn. at 791
(describing a suretyship as a “form of credit
enhancement in which [p]remiums . . . are charged in
consideration of the fundamental underwriting assumption that
the surety will be protected against loss by the
principal”). But the Principal receives a benefit as
well.
As
Principal and Surety, Centerplan and Arch are in privity of
contract despite the performance bond being for the benefit
of DoNo, the City, and Hartford Stadium Authority (i.e. the
Obligees). See § 37:1, The nature of
contracts for the benefit of third parties; the effect on
privity of contract, Williston on Contracts
(acknowledging that a contract made for the benefit of third
parties means “the third party is treated no
differently with respect to the enforcement of the promise
than a party in traditional privity of
contract”); Crescent Elec. Supply Co., Inc. of
New York v. Arch Ins. Co., 09 Civ. 3138 (CM) (LMS), 2010
WL 11614253, at *4 (S.D.N.Y. Jan. 4, 2010) (finding the bond
issuer to be in privity with the principal with respect to a
payment bond claim).
The
bond was issued as a condition precedent to the award of the
contract to construct the stadium. [Dkt. 1 ¶ 14; Dkt. 19
¶ 14]. Arch issued the bond at Centerplan's request
so that Centerplan could qualify for an award of the Hartford
Stadium Project by satisfying this condition precedent.
Id. Centerplan was awarded the Hartford Stadium
Project and therefore received a benefit from the bond at the
time it was issued. Centerplan is thus a beneficiary of, a
party to, and can sue for breach of the payment and
performance bonds.[6]
The
other Defendants (the Indemnitors) are also in privity of
contract with Arch, having agreed to indemnify Arch in
consideration for which Arch committed to issue and maintain
surety bonds on behalf of Centerplan. See [Dkt. 1-1
at 3; Dkt. 1-2 at 3; Dkt. 1-3 at 1]; cf. United States v.
Fid. & Guar. Co. v. S.B. Phillips Co., Inc., 359
F.Supp.2d 189, 199 (D. Conn. 2005) (dismissing
plaintiffs' breach of contract claims because they were
not parties to the insurance policies or indemnity agreement
and were therefore not in privity of contract with
defendant). The 2010 Indemnity Agreements executed by the
Indemnitors specify this consideration and the benefit they
receive, stating that the Indemnity Agreements are executed
“IN CONSIDERATION of the execution of any such Bonds
for Principal, from which it is ...