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 ...