Arch Insurance Co. v. Centerplan Construction Co., LLC

          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 ...