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Walsh Construction Co. II, LLC v. United States Surety Co.

United States District Court, District of Columbia

September 25, 2018

WALSH CONSTRUCTION COMPANY II, LLC, Plaintiff,
v.
UNITED STATES SURETY COMPANY, et al., Defendants.

          MEMORANDUM OPINION

          JOHN D. BATES, UNITED STATES DISTRICT JUDGE

         Two parties to a construction bond each claim that the other breached the bond first and thus should be liable for costs and damages. Plaintiff Walsh Construction Company II, LLC (“Walsh”) is a general contractor that was hired in 2015 to construct a hotel in the District of Columbia. Defendants United States Surety Company and U.S. Specialty Insurance Company (together, “the Surety”) jointly issued a performance bond to one of Walsh's subcontractors, Mid-Atlantic Air, Inc. (“MAA”), which guaranteed completion of the subcontract work.

         The underlying controversy arose when Walsh declared MAA to be in default on the subcontract. Initially, the Surety financed the performance of MAA's subcontract work, but after investigating Walsh's declaration of default the Surety denied liability and stopped performing under the bond. Walsh then sued the Surety, and the Surety counterclaimed, alleging that Walsh had breached both the bond and the underlying subcontract. See Answer & Countercl. (“Countercl.”) [ECF No. 12]. Walsh now moves to dismiss the counterclaim. See Walsh Constr. Co. II, LLC's Mem. in Supp. of Its Mot. to Dismiss Countercl. (“Walsh's Mot.”) [ECF No. 14]. For the following reasons, Walsh's motion will be granted in part and denied in part.

         BACKGROUND[1]

         In 2015, a company called Adams Morgan Hotel Owner, LLC (the “Owner”) hired Walsh to construct the Adams Morgan Historic Hotel in northwestern Washington, D.C. See Countercl. ¶ 4.[2] Shortly thereafter, MAA subcontracted with Walsh to perform heating, ventilation, air conditioning, and plumbing work on the hotel. See Compl. [ECF No. 2] ¶ 7. In addition to that work, the subcontract required MAA to perform “any and all changes [to its] Work” that Walsh might later order, for which MAA would be paid “an amount equal to the direct cost of labor and materials actually and reasonably used . . ., plus mark up for overhead and profit.” See Ex. 2 to Walsh's Mot. (“Subcontract Agreement”) [ECF No. 14-3] ¶¶ 4.1-4.2. As a condition of the subcontract, MAA and the Surety executed a performance bond, which guaranteed MAA's performance of the subcontract and named Walsh as an obligee. Countercl. ¶¶ 6-7. MAA and the Surety also entered into a payment bond, which required the Surety to compensate MAA's subcontractors and suppliers in the event of MAA's default. Id. ¶¶ 6, 93.

         MAA performed its obligations under the subcontract until April 6, 2017, when MAA notified Walsh in writing that it would not complete any further change-order or overtime work because of several unpaid change-order invoices totaling more than $2 million. See Ex. B. to Countercl. [ECF No. 12].[3] Two weeks later, on April 20, 2017, Walsh declared MAA to be in default of the subcontract and terminated the agreement, alleging that MAA had breached by failing to complete its work on time. See Ex. 4. to Compl. at 2-3.

         After declaring MAA to be in default, Walsh issued a demand to the Surety under the performance bond. See id. at 1. The Surety began investigating Walsh's claim of default, and the Surety later exercised its option to extend its deadline to respond to Walsh's claim by financing performance of the subcontract during the extension period. Countercl. ¶ 44. The Surety financed performance from May 5, 2017 through July 28, 2017 (“the financing period”) and retained a replacement subcontractor for MAA during that time. Countercl. ¶¶ 45, 54. During this period, the Surety alleges that it spent more than $6.2 million on the project: over $4 million to finance the subcontract work itself, and an additional $2.2 million to compensate MAA's subcontractors and suppliers for work and materials tendered before Walsh's declaration of default. See Countercl. ¶ 93. On July 28, the Surety completed its investigation, denied liability under the bond, and ceased financing the subcontract work. Countercl. ¶ 92; see Ex. O to Countercl.

         Following the Surety's denial of liability, Walsh filed a complaint against the Surety seeking damages for its alleged breach of the performance bond. See Compl. ¶¶ 36-44. The Surety answered Walsh's complaint, see Countercl. at 1-11, and filed a ten-count counterclaim, id. at 11-38. The Surety's counterclaim alleges that if MAA's work was delayed at all, such delays were attributable to design defects and Walsh's poor administration of the project. See Countercl. ¶¶ 28-32; U.S. Surety Co.'s & U.S. Specialty Ins. Co.'s Opp'n to Mot. to Dismiss (“Surety's Opp'n”) [ECF No. 16] at 4. The Surety further alleges that Walsh failed to pay MAA on time, so any delays-as well as MAA's ultimate refusal to continue performing change orders and overtime work-were justified. See Countercl. ¶ 35. Additionally, the Surety claims that Walsh intentionally obstructed the Surety's investigation of Walsh's claim by failing timely and accurately to respond to requests for information, see Surety's Opp'n at 6-7 (citing Countercl. ¶¶ 47, 55-61, 77), and by failing timely to provide its estimate of the subcontract balance, see id. at 7-8 (citing Countercl. ¶¶ 85-86, 88-89, 92).

         The Surety's counterclaim initially asserted ten counts, although the Surety later withdrew two.[4] Counts One and Four allege that the Surety is entitled to recover more than $4 million that the Surety allegedly spent on the project during the financing period pursuant to Paragraph 8 of the performance bond, which requires Walsh to reimburse the Surety for its “losses, expenses[, ] and reasonable attorney's fees” in the event of an unjustified declaration of default. Countercl. ¶ 101; see id. ¶¶ 94-102, ¶¶ 115-123. Count One alleges that Walsh's declaration of default was unjustified because Walsh had already materially breached the subcontract by failing to pay MAA, see id. ¶ 97, and Count Four claims that even if MAA had delayed the project, Walsh was estopped from relying on those delays for its declaration of default because it had not objected to them before the preceding week, see id. ¶¶ 119, 121.

         Counts Six and Seven also allege that Walsh materially breached the subcontract. The Surety seeks to recover approximately $2.6 million that Walsh allegedly owes MAA under the subcontract, as well as the $2.2 million that the Surety claims it paid to MAA's subcontractors and suppliers following Walsh's declaration of default. See id. ¶¶ 130-39, 140-152. Count Six claims that the Surety is eligible to recover these sums because of an indemnity agreement that assigned to the Surety all of MAA's rights against Walsh under both bonds. See id. ¶¶ 137-39. Count Seven claims that the Surety is entitled to recover under the doctrine of equitable subrogation, see id. ¶¶ 147-152, which allows a party to recover in equity when it has “paid the debt of another, ” Nat'l Union Fire Ins. Co. of Pittsburgh v. Riggs Nat'l Bank of Wash., D.C., 646 A.2d 966, 968 (D.C. 1994).

         Counts Two, Nine, and Ten allege various other breaches of the performance bond. Specifically, Count Two alleges that Walsh failed to cooperate with the Surety's investigation, see id. ¶¶ 103-108; Count Nine alleges that Walsh repudiated the bond by refusing to disclose its estimate of the subcontract balance, see id. ¶¶ 157-162; and Count Ten alleges several breaches of the covenant of good faith and fair dealing, see id. ¶¶ 163-165. Finally, Count Eight alleges that the Surety is entitled to recover the sums it paid during the financing period under the doctrines of promissory estoppel and unjust enrichment. See id. ¶¶ 153-156.

         Walsh has moved to dismiss each count of the Surety's counterclaim on grounds that are explained more fully below. Walsh's motion to dismiss is now fully briefed and ripe for decision.

         LEGAL STANDARD

         To survive a Rule 12(b)(6) motion to dismiss for failure to state a claim, 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)). Plausibility means that the claim at issue rises “above the speculative level.” Twombly, 550 U.S. at 555. The Court must “accept all the well-pleaded factual allegations of the complaint as true and draw all reasonable inferences from those allegations in the plaintiff's favor.” Banneker Ventures, LLC v. Graham, 798 F.3d 1119, 1129 (D.C. Cir. 2015) (citing Iqbal, 556 U.S. at 678)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice, ” and 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.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555-556).

         ANALYSIS

         I. Claims Alleging a Breach of Paragraph 8 of the Performance Bond

         In Counts One and Four of its counterclaim, the Surety seeks to recover under Paragraph 8 of the performance bond more than $4 million that it spent during the financing period. See Ex. 2 to Compl. (“Bond”) [ECF No. 2-2] ¶ 8. That paragraph states: “If it is determined that [Walsh's] declaration of [MAA's] default was not justified under the Subcontract, [Walsh] shall pay Surety an amount equal to Surety's losses, expenses and reasonable attorneys' fees in performing under this Bond.” Id. Paragraph 8.1 of the Subcontract Agreement sets forth the specific grounds on which Walsh could declare MAA to be in default, which include MAA's failure “to supply enough properly skilled workers, proper materials, or maintain the Schedule of Work, ” to “make prompt payment for . . . its workers, subcontractors[, ] or suppliers, ” or to heed “Laws or orders of any public authority having jurisdiction.”

         To state a claim for breach of contract[5] under District of Columbia law, [6] a pleading must allege that: “(1) a valid contract existed between the parties; (2) the contract created an obligation or duty; (3) the other party breached that duty; and (4) the moving party was damaged as a result of the breach.” United States ex rel. Am. Civil Constr., LLC v. Hirani Eng'g & Land Surveying, P.C., 263 F.Supp.3d 99, 116 (D.D.C. 2017). Here, the parties do not dispute that the performance bond was a valid contract or that the sums spent by the Surety during the financing period were “losses” or “expenses” that the Surety was required to incur under the bond and that Walsh would therefore have to reimburse in the event of an unjustified declaration of default. At this stage of the proceedings, moreover, the Court assumes the truth of the Surety's allegations that its expenses during the financing period totaled more than $4 million. See Countercl. ¶ 93. Hence, the Surety has adequately pleaded the first, second, and fourth elements of its breach-of-contract claims, and all that remains for the Surety to plead is that Walsh breached a duty to reimburse the Surety.

         Walsh first raises a threshold argument on the issue of breach that applies to both Count One and Count Four. See Walsh's Mot. at 11. Walsh argues that any recovery under Paragraph 8 is barred by Paragraph 4(e) of the bond, which provides that if the Surety elects to extend its response deadline by financing the subcontract work for a period of time (as the Surety did here), Walsh “shall have no obligation to reimburse Surety or otherwise pay for the work performed until Surety has committed to remedy the default . . . and then only from funds earned under the Subcontract.” Here, Walsh argues, the Surety never “committed to remedy [MAA's] default” because it ultimately denied Walsh's claim. Walsh's Mot. at 11. Thus, under Paragraph 4(e), Walsh need not “reimburse Surety or otherwise pay for the work [it] performed” during the financing period. Id. (quoting Bond ¶ 4(e)).

         But this reasoning is flawed. Read in context, this sentence of Paragraph 4(e) simply specifies that Walsh need not reimburse the Surety for its expenditures until after the Surety's investigation is concluded; it does not bar the Surety from recovering those sums entirely if the Surety ultimately denies Walsh's claim. Indeed, Walsh's reading would render Paragraph 8 a nullity: Paragraph 8 applies only where Walsh's declaration of default is “not justified, ” and Walsh does not explain why the Surety would ever “commit[] to remedy” a nonexistent default. Bond ¶ 8; see Hunt Const. Group, Inc. v. Natl. Wrecking Corp., 587 F.3d 1119, 1121 (D.C. Cir. 2009) (“In reading contract provisions we take the contract's entirety into account, seeking to give all its provisions effect.”). The Court therefore concludes that the performance bond obligated Walsh to reimburse the Surety in any case where Walsh's declaration of default was unjustified, regardless of whether the Surety committed to remedy the alleged default. And because Walsh does not dispute that it never reimbursed the Surety for the expenses at issue here, whether Walsh breached that obligation depends only on whether its declaration of default was “justified under the Subcontract.” Bond ¶ 8.

         A. Count One: The Surety's Claim That Walsh Breached the Subcontract First by Failing to Pay MAA

         Count One asserts that Walsh's declaration of MAA's default was unjustified because Walsh's previous failure to pay MAA approximately $2.6 million for subcontract and change-order work had released MAA from its obligations under the subcontract. See Countercl. ¶¶ 23- 24, 94-102; Surety's Opp'n at 14. In its motion to dismiss, Walsh does not challenge the sufficiency of the Surety's allegations that it failed to pay MAA; rather, it relies on the subcontract's “pay-when-paid” clause to argue that its duty to pay MAA never matured because it never received payment for MAA's invoices from the Owner. See Walsh's Mot. at 12; Subcontract Agreement ¶ 3.6 (stating, in relevant part, that “if, and only if, Owner pays [Walsh], which is an express condition precedent to [Walsh's] duty to pay [MAA], Progress Payments shall be due to [MAA] no later than fifteen (15) days after receipt of payment from Owner”). The Surety responds by alleging that Walsh wrongfully delayed in seeking payment from the Owner, see Countercl. ¶ 35, and that these delays negated the Owner's payments as a condition precedent to Walsh's duty to pay MAA under the so-called “prevention doctrine.” Surety's Opp'n at 14-17.

         The prevention doctrine provides that “if a promisor is himself the cause of the failure of . . . a condition upon which his own liability depends, he cannot take advantage of the failure.” Aronoff v. Lenkin Co., 618 A.2d 669, 682 (D.C. 1992) (citation omitted); see Restatement (Second) of Contracts § 245 (1981) (“Where a party's breach by non-performance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.”). It applies where the promisor either “‘completely forecloses occurrence of the condition' or ‘substantially hinders its occurrence.'” Dist.-Realty Title Ins. Corp. v. Ensmann, 767 F.2d 1018, 1023 (D.C. Cir. 1985) (citation and emphasis omitted). Thus, as one court has explained, “[t]he prevention doctrine does not require proof that the condition would have occurred ‘but for' the wrongful ...


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