Travelers Casualty and Surety Company of America v. R.J. Lanthier Company, Inc., et al, No. 3:2013cv02962 - Document 56 (S.D. Cal. 2014)
Court Description: ORDER Granting in part and Denying in part 32 33 Motions to Dismiss; Granting Leave to Amend. The Court grants Travelers' motion to dismiss the breach of the covenant of good faith and fair dealing counterclaims and the breach of contract co unterclaims brought by Counter-claimants RJL, the Boyds, and the Racettes. The court also denies Travelers' motion to dismiss the declaratory relief claim and defers ruling on this claim until the Counter claimants file amended counterclaims, if any. The court also grants RJL, the Boyds, and the Racettes 15 days leave to amend from the date of entry of this order. Signed by Judge Jeffrey T. Miller on 9/2/2014. (rlu) Modified on 9/3/2014 to correct filed date (rlu).
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Travelers Casualty and Surety Company of America v. R.J. Lanthier Company, Inc., et al Doc. 56 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TRAVELERS CASUALTY AND ) SURETY COMPANY OF AMERICA, ) ) Plaintiff, ) v. ) ) R.J. LANTHIER COMPANY, INC., a ) California corporation; BRENT L. ) BOYD, an individual; NANCY K. ) BOYD, an individual; RICHARD ) RACETTE, an individual; ) KATHLEEN SUE RACETTE, an ) individual; BOYD FAMILY TRUST; ) G.I. BECHTHOLD CORPORATION, ) a California corporation; DONNA ) BECHTHOLD, an individual; GLENN ) BECHTHOLD, an individual, ) ) Defendants. ) ) ) RICHARD RACETTE, an individual, ) and KATHLEEN SUE RACETTE, an ) individual, ) ) Counter-claimants, ) v. ) ) TRAVELERS CASUALTY AND ) SURETY COMPANY OF AMERICA; ) G.I. BECHTHOLD CORPORATION, ) a California corporation ; DONNA ) BECHTHOLD , an individual; ) GLENN BECHTHOLD, an individual ) ) Counter-defendants. ) ) Case No. 13cv2962 JM(WVG) ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS; GRANTING LEAVE TO AMEND 1 13cv2962 Dockets.Justia.com R.J. LANTHIER COMPANY, INC., a California corporation; BOYD 2 FAMILY TRUST; BRENT L. BOYD, an individual and trustee of the BOYD 3 FAMILY TRUST; NANCY K. BOYD, an individual and trustee of the BOYD 4 FAMILY TRUST, 1 5 6 7 v. Counter-claimants, TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, a Connecticut corporation, 8 Counter-defendant. 9 R.J. LANTHIER COMPANY, INC., a California corporation; BOYD 11 FAMILY TRUST; BRENT L. BOYD, an individual and trustee of the BOYD 12 FAMILY TRUST; NANCY K. BOYD, an individual and trustee of the BOYD 13 FAMILY TRUST, 10 14 v. Cross-claimants, 15 G.I. BECHTHOLD CORPORATION, a California corporation; DONNA BECHTHOLD, an individual; and 17 GLENN BECHTHOLD, an individual, 16 Cross-defendants. 18 19 G.I. BECHTHOLD CORPORATION, a California corporation; DONNA BECHTHOLD, an individual; and 21 GLENN BECHTHOLD, an individual, 20 22 23 24 25 26 v. Counter-claimants, TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, a Connecticut corporation, Counter-defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 27 28 2 13cv2962 G.I. BECHTHOLD CORPORATION, a California corporation; DONNA 2 BECHTHOLD, an individual; and GLENN BECHTHOLD, an individual, 1 3 4 5 6 7 8 9 10 11 ) ) ) ) ) Cross-claimants, ) ) v. ) ) R.J. LANTHIER COMPANY, INC., a ) California corporation; BOYD ) FAMILY TRUST; BRENT L. BOYD, ) an individual and trustee of the BOYD ) FAMILY TRUST; NANCY K. BOYD, ) an individual and trustee of the BOYD ) FAMILY TRUST; RICHARD RACETTE, ) an individual; KATHLEEN SUE ) RACETTE, an individual; and DOES 1 ) through 10, inclusive, ) ) Cross-defendants. ) ) 12 13 Plaintiff Travelers Casualty and Surety Company of America (“Travelers”) moves to 14 dismiss portions of the counterclaims filed by Counter-claimants, Cross-Claimants and 15 Defendants R. J. Lanthier Company, Inc. (“RJL”), Boyd Family Trust, Brent L. Boyd, and 16 Nancy K. Boyd (the “Boyds”) and the counterclaims filed by Counter-claimants, Cross- 17 defendants, and Defendants Richard Racette and Kathleen Sue Racette (collectively the 18 “Racettes”). All motions are opposed. Pursuant to Local Rule 7.1(d)(1), the court finds the 19 matters presented appropriate for decision without oral argument. For reasons set forth 20 below, the court grants Travelers’ motion to dismiss the breach of the covenant of good faith 21 and fair dealing counterclaim and the breach of contract claim counterclaim, denies and 22 defers ruling on the motion to dismiss the declaratory relief counterclaim, and grants moving 23 Counter-claimants 15 days leave to amend from the date of entry of this order. BACKGROUND 24 25 The Complaint 26 On December 10, 2013, Travelers commenced this diversity action alleging five 27 claims for relief: (1) Statutory Indemnity, (2) Breach of Contract, (3) Quia Timet, 28 (4) Declaratory Relief; and (5) Specific Performance. On October 3, 2001, Defendants RJL 3 13cv2962 1 and the Boyds executed an indemnity agreement promising Travelers “to exonerate, 2 indemnify and save [Travelers] harmless from and against every claim, loss, damage, 3 demand” arising from the execution of certain construction bonds issued on behalf of 4 Lanthier as the bond principal (the “RJL Bonds”). (Compl. ¶16). On March 1, 2010, 5 Defendants RJL, the Boyds, and the Racettes executed the General Agreement of Indemnity 6 (“GAI”) at issue. Under the GAI, Defendants are obligated to “exonerate, indemnify, and 7 save [Travelers] from and against all Loss.” (Compl. ¶17, Exh. B). Also on or about March 8 1, 2010, Defendants Bechthold Corporation, Donna Bechthold, and Glenn Bechthold 9 (collectively the “Bechtholds”) executed a General Agreement of Indemnity Additional 10 Indemnitor Rider (“GAIR”). The GAIR also provided that the Bechtholds would 11 “exonerate, indemnify, and save [Travelers] from and against all Loss.” (Compl. ¶18, 12 Exh. B). At the heart of Travelers’ complaint is the allegation that, following RJL’s default 13 on the bonded projects, it paid about $6,751,915.58 on its surety obligations. (Compl. ¶21). 14 On November 21, 2013, Travelers sent a demand letter to the Defendants seeking 15 $6,751,915.58 to recover Travelers’ anticipated losses on the RJL Bonds. Defendants “have 16 failed to comply with Travelers’ demands.” (Compl. ¶23). 17 Racettes’ Counter and Cross Claims 18 On March 5, 2014, the Racettes filed an answer and counterclaim against Travelers. 19 (Ct. Dkts. 14, 15). The answer generally denies the complaint’s allegations. In their 20 counterclaim, the Racettes allege that in early 2013 RJL experienced cash-flow problems 21 and needed additional financing to help the company cover overhead expenses such as 22 payroll. (Counterclaim “CC” ¶16). On January 17, 2013, Richard Racette, a 2% owner of 23 RJL, and Brent Boyd met with Travelers and discussed the possibility of Travelers 24 providing RJL with cash flow assistance. After several conversations with Travelers, the 25 Racettes allege Travelers indicated a willingness to provide financial assistance and required 26 27 28 4 13cv2962 1 a 50% collateral for any loan.1 (CC ¶22). The parties discussed financial assistance in the 2 range of $750,000 to $1,00,000. 3 On February 15, 2013, Brent Boyd believed that Travelers was willing to reduce the 4 collateral requirements and provide RJL with overhead assistance. On February 19, 2013, 5 Travelers “informed RJL that it required a minimum of $500,000 collateral to provide 6 overhead assistance on bonded projects only.” (CC ¶24). The Racettes allege that “had 7 Travelers been more upfront in its collateral requests, RJL and Counter-Claimants would 8 have been able to refocus its efforts into seeking alternative sources of funding, keep the 9 projects going and the bonding intact.” (CC ¶26). Thereafter, Travelers allegedly refused 10 to issue bonds on new projects or to issue bonds on future projects without RJL providing 11 additional capital or a substantial security deposit. 12 The Racettes allege that “[w]ithout the capability to obtain bonds on future projects, 13 RJL was unable to obtain and complete work” on existing projects, thereby defaulting on 14 existing projects. (CC ¶27). After RJL defaulted on the bonded projects, on November 29, 15 2013, Travelers demanded payment in the amount of $6,751,915.58. At some unidentified 16 point in time, Travelers cancelled three issued bonds. Id. 17 Based upon the above generally described conduct, the Racettes allege four counter- 18 claims for (1) breach of the covenant of good faith and fair dealing; (2) breach of contract; 19 (3) negligent misrepresentation; and (4) contribution against all Cross-defendants. The 20 court notes that the only Cross-defendants identified in the CC are the Bechtholds. 21 RJL and the Boyds’ Counter and Crossclaims 22 On March 7, 2014, RJL and the Boyds filed an answer to the complaint, a 23 counterclaim against Travelers, and a crossclaim against the Bechtholds. RJL and the Boyds 24 assert the same counterclaims against Travelers as the Racettes in addition to a declaratory 25 relief claim based upon the same general allegations as the Racettes. In addition, RJL and 26 the Boyds seek contribution from the Bechthold Cross-defendants. 27 28 1 Travelers also allegedly performed an analysis of RJL’s financial condition and determined that RJL would experience a $1.6 million shortfall. 5 13cv2962 1 Bechtholds’ Counter and Crossclaims 2 On March 8, 2014, the Bechtholds filed an answer and eight counterclaims and cross- 3 claims for: (1) reformation of contract; (2) express indemnity; (3) compel performance of 4 indemnity agreements; (4) quia timet; (5) equitable indemnity; (6) contribution; (7) implied 5 contractual indemnity; and (8) declaratory relief. In broad brush, the Bechtholds allege that 6 Travelers, the Racettes, RJL, and the Boyds “are in some manner legally responsible for the 7 acts and omissions alleged.” (CC ¶12). The reformation counterclaim seeks to reform the 8 March 2010 GAIR between Travelers and the Bechtholds to reflect the parties alleged 9 original intent of the parties that only G. I. Bechthold Corporation is bound by the GAIR. 10 (CC ¶21). The second crossclaim seeks indemnity from RJL to indemnify the Bechtholds 11 against any and all losses arising from the underlying transactions. The third claim seeks 12 to compel performance of the indemnity agreement against RJL. The fourth claim for quia 13 timet alleges that RJL is wrongfully using funds for purposes other than to hold the 14 Bechtholds harmless from Travelers’ claims. The fifth claim seeks indemnity against all 15 Cross-defendants, the sixth claim seeks contribution against all Cross-defendants, the 16 seventh claim seeks implied contractual indemnity against all Cross-defendants, and the 17 eighth claim seeks a declaration that the Bechtholds are not obligated to indemnify 18 Travelers. DISCUSSION 19 20 Legal Standards 21 Federal Rule of Civil Procedure 12(b)(6) dismissal is proper only in "extraordinary" 22 cases. United States v. Redwood City, 640 F.2d 963, 966 (9th Cir. 1981). Courts should 23 grant 12(b)(6) relief only where a plaintiff's complaint lacks a "cognizable legal theory" or 24 sufficient facts to support a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 25 F.2d 696, 699 (9th Cir. 1990). Courts should dismiss a complaint for failure to state a claim 26 when the factual allegations are insufficient “to raise a right to relief above the speculative 27 level.” Bell Atlantic Corp v. Twombly, 550 U.S. 544, 555 (2007) (the complaint’s 28 allegations must “plausibly suggest[]” that the pleader is entitled to relief); Ashcroft v. Iqbal, 6 13cv2962 1 556 U.S. 662 (2009) (under Rule 8(a), well-pleaded facts must do more than permit the court 2 to infer the mere possibility of misconduct). “The plausibility standard is not akin to a 3 ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has 4 acted unlawfully.” Id. at 678. Thus, “threadbare recitals of the elements of a cause of 5 action, supported by mere conclusory statements, do not suffice.” Id. The defect must 6 appear on the face of the complaint itself. Thus, courts may not consider extraneous 7 material in testing its legal adequacy. Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482 8 (9th Cir. 1991). The courts may, however, consider material properly submitted as part of 9 the complaint. Hal Roach Studios, Inc. v. Richard Feiner and Co., 896 F.2d 1542, 1555 n.19 10 (9th Cir. 1989). 11 Finally, courts must construe the complaint in the light most favorable to the plaintiff. 12 Concha v. London, 62 F.3d 1493, 1500 (9th Cir. 1995), cert. dismissed, 116 S. Ct. 1710 13 (1996). Accordingly, courts must accept as true all material allegations in the complaint, 14 as well as reasonable inferences to be drawn from them. Holden v. Hagopian, 978 F.2d 15 1115, 1118 (9th Cir. 1992). However, conclusory allegations of law and unwarranted 16 inferences are insufficient to defeat a Rule 12(b)(6) motion. In Re Syntex Corp. Sec. Litig., 17 95 F.3d 922, 926 (9th Cir. 1996). 18 The Counterclaims of RJL and the Boyds 19 The Covenant of Good Faith and Fair Dealing Counterclaim 20 RJL and the Boyds explain that this claim for breach of the covenant of good faith and 21 fair dealing is based upon the alleged breach of the GAI. These Defendants allege that 22 Travelers failed to “fully investigate claims made by subcontractors prior to paying out such 23 claims.” (CC ¶57). Travelers allegedly paid claims “that should not have been paid.” 24 (Oppo. at p.6:21). RJL and the Boyds shed no further light on the nature of this claim. 25 “‘Every contract imposes upon each party a duty of good faith and fair dealing in its 26 performance and its enforcement.”’ [] The covenant of good faith finds particular 27 application in situations where one party is invested with a discretionary power affecting the 28 rights of another. Such power must be exercised in good faith.” Carma Developers (Cal.), 7 13cv2962 1 Inc. v. Marathon Development California, Inc., 2 Cal. 4th 342, 371–372 (1992) (internal 2 citations omitted). The covenant provides that one party may not frustrate the ability of the 3 other party to obtain the contemplated benefits of the contract. As noted in Carma. 4 The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing. ... [¶] This is in accord with the general principle that, in interpreting a contract 'an implication ... should not be made when the contrary is indicated in clear and express words.' 3 Corbin, Contracts, § 564, p. 298 (1960). ... [¶] As to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct. And if defendants were given the right to do what they did by the express provisions of the contract there can be no breach.” 5 6 7 8 9 10 Id. at 374. 11 In broad brush, these Counter-claimants allege that Travelers breached the covenant 12 by failing to (1) mitigate damages, (2) adequately investigate the claims of RJL’s 13 subcontractors, (3) pursue claims for work performed beyond the scope of RJL’s 14 subcontracts (4) pursue claims for design changes and delays, (5) provide RJL with 15 financing, and (6) issue new payment and performance bonds. (CC ¶57). 16 Here, as currently pled, the court grants the motion to dismiss this counterclaim. RJL 17 and the Boyds expressly permitted Travelers to act with broad discretion once RJL breached 18 its performance and payment obligations to obligees. The primary difficulty with Counter- 19 claimants allegations is that the GAI specifically permits Travelers to exercise sole 20 discretion to determine how to respond to bond claims. With respect to the handling of the 21 bond claims (points (1) through (4) above), the GAI provides: 22 23 24 25 26 27 28 4. Claim Settlement: [Travelers] shall have the right, in its sole discretion to determine for itself and the Indemnitor whether any claim or suit brought against the Company or the Indemnitor upon any such Bond shall be paid, compromised, settled, defended or appealed, and its decision shall be binding and conclusive upon the Indemnitor. An itemized statement thereof sworn to by an employee fo the Company or a copy of the voucher of payment shall be prima facie evidence of the propriety and existence of Indemnitor’s liability. [Travelers] shall be entitled to reimbursement for any and all payments made by it under the belief it was necessary or expedient to make such payments. In light of the broad discretion given by RJL and the Boyds to Travelers to resolve claims, Counter-claimants’ generalized allegations to the effect that Travelers failed to “fully 8 13cv2962 1 investigate claims made by subcontractors prior to paying out such claims,” (CC ¶57), or 2 that Travelers allegedly paid claims “that should not have been paid” (Oppo. at p.6:21), fail 3 to state a claim for breach of the covenant of good faith and fair dealing. The conclusory 4 allegations are insufficient to state a claim for breach of the covenant of good faith and fair 5 dealing. 6 RJL and the Boyds’ allegation that Travelers should have provided RJL with financial 7 assistance to complete the projects to enable RJL to extricate itself from cash flow 8 difficulties, (CC ¶57(5); Oppo. at p.7:19-22), fails as a matter of law. Counter-claimants 9 simply fail to identify any provision requiring Travelers to provide financing to RJL in order 10 to conduct its business. Similarly, the allegation that Travelers was obligated to provide 11 performance and payment bonds on future projects is contrary to the express terms of the 12 GAI which provides, “Travelers has the right to refuse to provide any Bond [] without 13 incurring any liability whatsoever to Indemnitor.” (Compl. Exh. A ¶8). 14 The court grants the motion to dismiss the breach of the covenant of good faith and 15 fair dealings claim in its entirety. While the present allegations do not come close to stating 16 a claim, the court grants RJL and the Boyds’s request for leave to amend. The court advises 17 the parties that the failure to state this claim in an amended pleading will result in the 18 dismissal of this claim with prejudice. 19 In sum, the motion to dismiss this counterclaim is granted with leave to amend. 20 The Breach of Contract Claim 21 The threshold issue is whether Counter-claimants have standing to bring a breach of 22 contract claim based upon the RJL Bonds.2 The RJL Bonds expressly state that “[n]o right 23 of action shall accrue on this bond to any person or entity other than the named Obligee 24 and/or Claimants.” The term “Claimant” is limited to those who (1) have direct contract 25 with either the bond principal, RJL, or RJL’s subcontractors, and (2) provide labor and/or 26 27 28 2 To state a claim for breach of contract, Counter-claimants must allege (1) a contract, (2) the Counter-claimants performance or excuse for nonperformance, (3) the Counter-defendant’s breach, and (4) damages. Walsh v. West Valley Mission Community College Dist., 66 Cal. App. 4th 1532, 1545 (1998). 9 13cv2962 1 material in the performance of the bonded work. (Compl. Exh. D ¶10). Counter-claimants 2 allege, in conclusory fashion, that Travelers breached the RJL Bonds by “making payments 3 for labor and/or material that were not actually used, consumed, or incorporated in the 4 performance of the work under the subcontract,” (CC ¶64). The court concludes, by the 5 express terms of the RJL Bond, that Counter-claimants are not, under the current allegations, 6 claimants authorized to bring a claim because Counter-claimants fail to identify a “direct 7 contract” with the principal, RJL. 8 Further, the court concludes that Counter-claimants’ conclusory allegation that 9 Travelers paid for labor and/or materials that were not actually used, consumed, or 10 incorporated in the performance of the work is insufficient to state a claim. Under Rule 11 8(a), well-pleaded facts must do more than permit the court to infer the mere possibility of 12 misconduct. Iqbal, 556 U.S. at 678. “The plausibility standard is not akin to a ‘probability 13 requirement,’ but it asks for more than a sheer possibility that a defendant has acted 14 unlawfully.” Id. at 678. Thus, “threadbare recitals of the elements of a cause of action, 15 supported by mere conclusory statements, do not suffice.” Id. Here, under the particular 16 circumstances of this case, Counter-claimants must set forth additional allegations to 17 support a breach of contract claim. 18 19 In sum, the court grants the motion to dismiss the breach of contract claim with leave to amend. 20 The Declaratory Relief Claim 21 Travelers contends that this claim must be dismissed because Counter-claimants fail 22 to allege an actual controversy. As Counter-claimants seek leave to amend, the court denies 23 the motion without prejudice and defers ruling on this claim until a first amended 24 counterclaim is filed, if any. 25 The Counterclaims of the Racettes 26 Travelers moves to dismiss the breach of the covenant of good faith and fair dealing 27 counterclaim and the breach of contract counterclaim on the same grounds raised by RJL 28 10 13cv2962 1 and the Boyds. For the same reasons set forth above, the court grants the motion to dismiss 2 these claims and grants the Racettes leave to amend. 3 In sum, the court grants Travelers’ motion to dismiss the breach of the covenant of 4 good faith and fair dealing counterclaims and the breach of contract counterclaims brought 5 by Counter-claimants RJL, the Boyds, and the Racettes. The court also denies Travelers’ 6 motion to dismiss the declaratory relief claim and defers ruling on this claim until the 7 Counter-claimants file amended counterclaims, if any. The court also grants RJL, the 8 Boyds, and the Racettes 15 days leave to amend from the date of entry of this order. 9 IT IS SO ORDERED. 10 DATED: September 2, 2014 11 Hon. Jeffrey T. Miller United States District Judge 12 cc: All parties 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 13cv2962
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