United States District Court, N.D. Illinois, Eastern Division
December 2, 2004.
UNITED STATES OF AMERICA for the Use and Benefit of JAMES CAPE & SONS COMPANY, a Wisconsin Corporation, Plaintiff,
AMERICAN HOME ASSURANCE CO., a New York corporation, et al., Defendants and Third Party Plaintiff.
The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff/third-party defendant, James Cape & Sons Company
("Cape"), filed an Amended Complaint under the Miller Act,
40 U.S.C. § 3131, against defendant/third-party plaintiff, American
Home Assurance Company ("American Home"), seeking payment for
work performed under a payment bond issued by American Home. Cape
also claims that American Home breached an indemnity agreement
executed by the parties and acted negligently or in bad faith by
failing to act to insure Cape and other subcontractors would be
paid for work performed. A number of these other subcontractors
also filed claims against the payment bond. American Home
consolidated these suits and filed a counterclaim against all
known bond claimants, including Cape, seeking a determination of
each claimant's rights, if any, against the payment bond. In
addition, American Home filed a Third-Party Complaint against
Cape seeking an order requiring Cape to indemnify American Home
from all claims against the payment bond. Cape filed its answer
and affirmative defenses to American Home's indemnity complaint.
Before the court are American Home's motions to dismiss Cape's Amended
Complaint and to strike Cape's affirmative defenses to American
Home's Counterclaim and Third-Party Complaint. For the reasons
stated below, the court denies American Home's motion to dismiss
and grants in part and denies in part American Home's motion to
strike Cape's affirmative defenses.
On or about July 22, 1999, Bowles Construction Services, Inc.
("Bowles") entered into a contract with the United States Army
Corps of Engineers ("Army") to perform certain construction
improvements on a project commonly referred to as the Chicago
Shoreline Improvements in Chicago, Illinois (the "Project").
Pursuant to its contract with the Army and the Miller Act,
40 U.S.C. § 3131, Bowles was required to obtain a performance bond
guaranteeing its performance of its obligations under the
contract and a payment bond guaranteeing Bowles' payments to
persons or entities providing labor or materials to the project.
On or about August 25, 1999, Bowles and Cape entered into a
written subcontract whereby Cape agreed to perform certain work
on the Project. To assist Bowles in obtaining the payment bond
for the Project, Cape requested that American Home issue the
payment bond on behalf of Bowles. To secure issuance of the
payment bond, Cape, Curkeet Services, Inc., Cape Brothers Realty
& Equipment Co., Christopher C. Cape, W. Robert Cape, William R.
Cape, and Amy Cape (collectively, the "Cape Indemnitors")
executed a General Contract of Indemnity ("Indemnity Agreement")
for the benefit of American Home. The Indemnity Agreement
provided that Cape would "save harmless and indemnify" American
Home "from and against any and all liability, loss, damages,
costs, counsel and attorney fees . . . which it or they shall or
may at any time for any cause incur, sustain or be put to for or
by reason or in consequence of executing any of the said bonds or suretyship instruments." In
the Indemnity Agreement, Cape also assigned American Home, among
other things, Cape's rights and claims arising out of its
subcontract with Bowles for the Project. Additionally, Cape
granted American Home a power of attorney to execute and perform
all acts under the Cape/Bowles subcontract "including . . .
making demand and bringing suit therefor in its, or his or their
names, at its option, and settling and compromising the same."
American Home then executed and provided a payment bond pursuant
to the Miller Act, 40 U.S.C. §§ 270(a)-(d), in the amount of
$2,500,000 (the "Payment Bond").
Beginning in or around August, 2000, Bowles ceased to pay Cape
for its labor or materials, except for two miscellaneous fund
transfers. Despite not paying Cape, Bowles continued to submit
pay applications to the Army for reimbursement and continued to
receive payment for Cape's work. Cape notified American Home of
Bowles' failure to pay and requested American Home to intercede
with Bowles to compel Bowles to make payments to Cape. Cape
thereafter advised American Home that Bowles had falsely
certified and was continuing to falsely certify its applications
for payment to the Army by certifying that it was making and had
previously made payments to subcontractors from payments received
by Bowles from the Army when it was not and had not. Cape advised
American Home that, instead of paying Cape, Bowles was
dissipating corporate funds for purposes such as "casino gambling
sprees, strip club charges, personal expenses and payments to
entities affiliated with its principals." (Am. Compl. ¶ 24.) Cape
also advised American Home that further payments would be
forthcoming to Bowles from the Army and requested that American
Home intercede to insure Cape's payment under the subcontract. Cape claims that, instead
of interceding, American Home encouraged or acceded to the Army's
payment of the remaining funds in the contract to Bowles.
On February 21, 2001, Cape filed against Bowles a Demand for
Arbitration with the American Arbitration Association to resolve
the dispute arising out of Bowles' failure to pay Cape. The
arbitrators found in favor of Cape and awarded compensatory
damages, equitable remedies, and attorneys' fees in the amount of
$2,560,279.62. On June 21, 2002, the Circuit Court of Cook
County, Illinois confirmed the arbitration award, which was
subsequently modified in other respects on October 21, 2002. To
date, Bowles has failed to pay.
On March 15, 2002, while the matter between Cape and Bowles was
pending in state court, Cape filed its initial Complaint against
American Home seeking payment for its work on the Project under
the Payment Bond. Between April 24, 2002, and November 26, 2002,
several other subcontractors filed claims against the Payment
Bond. Since the total sum of the pending claims against the
Payment Bond exceeded the total limit of American Home's exposure
of $2,500,000, American Home consolidated several of the suits
and filed a counterclaim against all known Bond claimants seeking
a determination of each claimant's rights, if any, against the
Payment Bond. In addition, American Home filed a Third Party
Complaint against the Cape Indemnitors seeking an order requiring
the Cape Indemnitors to indemnify American Home from all claims
against the Payment Bond. On September 17, 2002, Cape filed its
answer and affirmative defenses to American Home's indemnity
On May 28, 2004, Cape filed an Amended Complaint against
American Home, adding counts for breach of contract and
negligence or bad faith. DISCUSSION
American Home moves to dismiss Cape's Amended Complaint
pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure. American Home also moves to strike Cape's Affirmative
Defenses to American Home's Counterclaim and Third-Party
A. American Home's Motion to Dismiss
American Home argues that Cape's Miller Act claim against the
Payment Bond (Count I) should be dismissed because either (a)
Cape's claim is void because Cape must indemnify American Home
for Cape's own claim; (b) if Cape's claim is later found to be
valid, American Home would be entitled to recover for Cape's
claim directly from Cape; or (c) American Home can exercise its
right of set off (indemnification by Cape) against Cape's Bond
claim. American Home also argues that Cape has failed to plead
the requisite elements for breach of contract (Count II) and bad
faith or negligence (Count III). For reasons that will become
apparent, the court will address American Home's arguments
regarding Counts II and III before proceeding to Count I.
A motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) challenges the sufficiency of the complaint for failure
to state a claim upon which relief may be granted. General Elec.
Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080
(7th Cir. 1997). Dismissal is appropriate only if it appears
beyond doubt that the plaintiff can prove no set of facts in
support of its claim that would entitle it to relief. Conley v.
Gibson, 355 U.S. 41, 45-46 (1957); Kennedy v. Nat'l Juvenile
Det. Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). In ruling on
the motion, the court accepts as true all well pleaded facts
alleged in the complaint, and it draws all reasonable inferences from those facts in favor of the plaintiff.
Jackson v. E.J. Brach Corp., 176 F.3d 971, 977 (7th Cir.
1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7th
I. Counts II and III
Counts II of Cape's Amended Complaint alleges that American
Home breached its duty of good faith and fair dealing under the
Payment Bond and the Indemnity Agreement by "failing, in a
timely, adequate and good faith manner, to investigate, process
and intercede to prevent further continuing defaults by Bowles
and losses to Cape." Count III alleges that American Home, by
essentially the same actions, breached its duty, as an indemnitee
and payment bond surety, to act without negligence, bad faith or
in a way that would prejudice the rights of Cape, as bond
claimant and indemnitor.
American Home makes three arguments in support of its motion to
dismiss Counts II and III. First, American Home asserts that any
actions it could have taken to intercede to prevent further
defaults by Bowles and losses to Cape would have subjected
American Home to liability from Bowles. Second, American Home
argues that it had no right to take any such actions, because the
Army has the discretion to make payments to a contractor with
financial problems. Finally, American Home argues that Cape has
failed to plead that American Home's actions were either
unreasonable, arbitrary, capricious, or otherwise not in a manner
consistent with the reasonable expectations of the parties.
First, American Home argues that any action it could have taken
to intercede would have subjected it to liability from Bowles,
because Bowles had not been declared in default by the Army.
American Home contends that a surety "cannot take action and
intervene with the principal's contractual rights until the
obligee has triggered the surety's bond obligations by declaring the principal in default or terminating the principal.
If a surety takes any action prior to the surety's bond
obligations being triggered, the surety will be potentially
liable for interfering with the principal's contract with the
obligee." (Memo. in Supp., at 9.) In support of this argument,
American Home cites L&A Contracting Co. v. Southern Concrete
Service, Inc., 17 F.3d 106 (5th Cir. 1994), and Lambert v.
Maryland Cas. Co., 403 So.2d 739 (La.Ct.App. 1981). Neither of
these cases supports American Home's argument. In L&A
Contracting, the court held that a surety's liability to a
contractor under a performance bond is not triggered until the
contractor declares the subcontractor to be in material breach of
the subcontract. 17 F.3d at 110. The court makes no mention of
the surety's potential liability for actions taken to protect its
interests before such a declaration. The holding in Lambert,
moreover, is precisely the opposite of American Home's
proposition. There, the court upheld the right of a
dual-obligation payment and performance bond surety to notify the
Louisiana Department of Highways and other public agencies of the
surety's claim to payments due to an insolvent contractor prior
to the formal recordation of the contractor's default. The court
cited approvingly numerous cases holding that "exposure to claims
under payment obligation of a public works bond is sufficient in
itself to justify a surety's notification to the owner under a
public works contract of its interest in the contract balances."
403 So.2d at 753-54 (citing, inter alia, Gerstner Elec., Inc.
v. American Ins. Co., 520 F.2d 790 (8th Cir. 1975) (holding
that a surety, after becoming aware of a single claim for labor
and materials by a subcontractor, acted reasonably by directing
the owner to withhold further payments from the contractor even
though contractor had not been declared in default by the owner);
American Fidelity Fire Ins. v. United States, 513 F.2d 1375
(Ct.Cl. 1975) (holding that the United States was liable to a
surety under a Miller Act payment bond for payments made to a contractor after the United States received notice from the
surety that the contractor was in default or was about to be in
default in paying subcontractor)). American Home has failed to
cite a single case of a payment bond surety being subjected to
liability from its principal for interceding in the principal's
contract with the obligee before the obligee declared the
principal in default. Thus, American Home's motion to dismiss on
this ground is denied.
Second, American Home argues that it had no right to take any
action with the Army, because the Army has the discretion to make
payments to a contractor with financial problems. American Home
is correct that the Army had the discretion to make payments to
Bowles despite American Home's objections. See Argonaut Ins.
Co. v. United States, 434 F.2d 1362, 1367-68 (Ct.Cl. 1970)
(holding that the Government has discretion, despite a surety's
objection, to make payments to a contractor with financial
problems as long as it follows its own procurement regulation);
United States v. Continental Casualty Co., 346 F.Supp. 1239,
1243 (N.D. Ill. 1972) (holding that Argonaut's discretionary
standard applies to the Government in withholding progress
payments at the request of the surety). This does not mean,
however, that American Home could sit idly by while the Army
continued to pay Bowles. The Army had a "duty to exercise its
discretion responsibly and to consider the surety's interest in
conjunction with other problems encountered in the administration
of the contract." Argonaut, 434 F.2d at 1368. The Army's duty
to consider American Home's interest gave rise to a concomitant
duty on the part of American Home, as Cape's indemnitee, to make
its interest known to the Army. American Home seems to recognize
this, and argues that it "did in fact notify the Army that Bowles
had financial problems and that American Home objected to the
Army releasing payment to Bowles." (Reply, at 5-6.) However,
these alleged actions by American Home are not mentioned in
Cape's Amended Complaint, and American Home has not attached any
documents verifying those actions to its motion to dismiss (which
would allow the court to convert American Home's motion to
dismiss into a motion for summary judgment, see R.J. Corman
Derailment Services, LLC v. Int'l Union of Operating Engineers,
Local Union 150, 335 F.3d 643, 647 (7th Cir. 2003)). Thus,
American Home's motion to dismiss on this ground is denied.
Finally, American Home argues that Cape has failed to plead
that American Home's actions were either unreasonable, arbitrary,
capricious, or otherwise not in a manner consistent with the
reasonable expectations of the parties. First, American Home
again recites the actions it claims it took with the Army,
arguing that these actions demonstrate that American Home did not
act in bad faith. However, as explained above, none of those
actions are mentioned in Cape's Amended Complaint. The Amended
Complaint only alleges that American Home "acted negligently or
in bad faith when it failed to investigate, process and intercede
in a timely, good faith manner" (Am. Compl. ¶¶ 33-36) and instead
"encouraged or acceded to the Government's payment of the
remaining funds in the contract to Bowles and others by joint
checks or otherwise, which arrangement excluded Cape from any
payments. . . ." (Id. ¶ 36.) These allegations are sufficient
to state a claim for negligence and/or bad faith.
American Home's second argument is somewhat muddled. First,
American Home argues that a payment bond surety is only subject
to liability for vexatious delay in investigating a claim,
citing 215 ILCS 5/155. However, American Home fails to cite any
authority supporting the assertion that section 155 is the only
basis for a surety's liability under a payment bond, and the
court's own research reveals none. American Home continues, "Cape
is unable to plead any set of facts that meet the requisite legal
standards to support its claims for Breach of Contract and Bad Faith." (Memo. in Support, at 13.) However, Cape is not
required to plead facts. Pleading in federal court is governed by
Rule 8 of the Federal Rules of Civil Procedure. Unlike Illinois'
fact-pleading requirements, Rule 8 requires only notice pleading,
that is, "a short and plain statement of the claim." See
Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 761, 764
(7th Cir. 1999) ("The courts keep reminding plaintiffs that
they don't have to file long complaints, don't have to plead
facts, don't have to plead legal theories."); Sanyo Laser Prod.,
Inc. v. Royal Ins. Co. of America, 2003 WL 23101793, at *5
(S.D. Ind. Nov. 7, 2003) (notice-pleading standard applies to
allegations of bad faith). Cape has clearly met this requirement.
Thus, American Home's motion to dismiss is denied as to Counts II
II. Count I
Count I of Cape's Amended Complaint is a Miller Act claim
seeking payment under the payment bond issued by American Home.
American Home moves to dismiss this claim, arguing that either
(a) Cape's claim is void because Cape must indemnify American
Home for Cape's own claim; (b) if Cape's claim is later found to
be valid, American Home would be entitled to recover for Cape's
claim directly from Cape; or (c) American Home can exercise its
right of set off (indemnification by Cape) against Cape's Bond
claim. Cape argues in response that the indemnification agreement
is void because it violates public policy.
Assuming arguendo that the indemnity agreement is valid,
American Home is correct that Cape's claim is essentially a claim
against itself. Under Illinois law, there is a "presumed identity
of interests between [an] indemnitor and indemnitee." Cowan v.
Ins. Co. of North America, 318 N.E.2d 315, 321 (Ill.App.
1st Dist. 1974). Thus, Cape is legally interested in each
side of the action. This is not permitted under Illinois law.
See McElhanon v. McElhanon, 62 Ill. 457 (1872) ("It is an answer to an action that a party is legally
interested in each side of the question. A party cannot be both
plaintiff and defendant in an action."); City of Chicago v.
Board of Education of the City of Chicago, 246 Ill. App. 405
(Ill.App. 1st Dist. 1927) (A party with a "substantial
interest in the defense" may not prosecute an action.); see also
Siler v. Northern Trust Co., Inc., 80 F.Supp.2d 906, 908
(N.D.Ill. 2000) (applying Minnesota law and holding, "A circuitry
of obligation will defeat a plaintiff's claim as a matter of law.
A circuitry of obligation is created when, by virtue of
pre-existing indemnity agreements or obligations, the plaintiff
is in effect obligated to indemnify the defendant for claims
including the plaintiff's own claim.").
Cape's only response is to argue that the Indemnity Agreement
is void as a matter of public policy. Cape correctly points out
that the Miller Act is "entitled to a liberal construction and
application in order to properly effectuate the Congressional
intent to protect those whose labor and materials go into public
projects." Clifford F. McEvoy Co. v. United States ex rel.
Calvin Tompkins Co., 322 U.S. 102, 107 (1944). From this, Cape
concludes that to deny its right to recover under the payment
bond would violate the clear purpose of the Miller Act. However,
Cape was not just a subcontractor on the Project; it was also
American Home's indemnitor, a role Cape voluntarily assumed to
insure that American Home would issue payment bonds on behalf of
Bowles. In doing so, Cape assumed the risk that Bowles would not
pay its subcontractors. Cape cannot now escape its responsibility
to indemnify American Home by claiming the protection of the
In support of its argument, Cape cites Cal's A/C and Electric
v. Famous Constr. Corp., 982 F. Supp. 1219 (W.D. La. 1997).
This case is inapplicable here. Cal's A/C addresses the validity of a venue selection clause in a subcontract. The
defendant contractor sought to dismiss the subcontractor's case
for improper venue or to transfer the case to the court specified
in the subcontract's venue selection clause. The court denied the
defendant's motion, holding that the Miller Act "lays exclusive,
non-waivable venue in the federal district court in which the
project is located." Id. at 1219 (citing 40 U.S.C. § 270b
("Every suit instituted under this section shall be brought in
the name of the United States for the use of the person suing, in
the United States District Court for any district in which the
contract was to be performed and executed and not elsewhere.")).
In contrast, nothing in the Miller Act prohibits a subcontractor
from indemnifying a surety in return for the surety issuing
payment bonds to the contractor, and the court sees no reason why
public policy would forbid a subcontractor from doing so. While
the Miller Act is intended to protect subcontractors, there is a
strong public policy favoring freedom of contract. Liberty Mut.
Fire Ins. Co. v. Statewide Ins. Co., 352 F.3d 1098, 1101
(7th Cir. 2003). Thus, the court holds that the Indemnity
Agreement does not violate public policy.
This, however, does not resolve the matter. Cape alleges in
Count II that American Home breached the Indemnity Agreement.
Under Illinois contract law, a material breach by one party to a
contract discharges the other from performing its obligations
under the contract. Kel-Keef Enters. Inc. v. Quality
Components Corp., 738 N.E.2d 524, 537 (Ill.App. 1st Dist.
2000). Thus, if Cape succeeds in proving that American Home
breached the indemnity agreement, it would be discharged from its
obligation to indemnify American Home for claims against the
payment bond. Consequently, Cape would no longer be legally
interested in both sides of the action and could pursue its claim
for payment under the payment bond. Thus, the court denies
American Home's motion to dismiss Count I. B. American Home's Motion to Strike Cape's Affirmative
On May 14, 2004, this court granted in part Cape's motion for
leave to file an amended complaint and consolidated and amended
affirmative defenses adding counts and affirmative defenses of
breach of contract and bad faith. Cape now asserts the following
30. American Home's claims are barred by waiver and
31. American Home's claims are barred on the grounds
32. American Home's claims are barred to the extent
that the claims are offset by competing claims.
33. American Home's claims are barred by lack of
34. American Home's claims are barred due to its
breach of its contractual duty of good faith and fair
35. American Home's claims are barred because it
acted in bad faith by failing to mitigate the claims
against the payment bond.
American Home moves to strike Cape's Amended Affirmative
Because affirmative defenses are pleadings, they are subject to
the pleading requirements of the Federal Rules of Civil
Procedure. See Heller Fin., Inc. v. Midwhey Powder Co., Inc.,
883 F.2d 1286, 1294 (7th Cir. 1989). Therefore, affirmative
defenses must set forth a "short and plain statement" of the
defense. Fed.R.Civ.P. 8(a). The court evaluates a motion to
strike affirmative defenses under Rule 12(f), which provides
"upon motion made by a party before responding to a pleading . . .
the court may order stricken from any pleading any insufficient
defense or any redundant, immaterial, impertinent, or scandalous
matter." Fed.R.Civ.P. 12(f). Motions to strike are not favored,
and affirmative defenses will only be stricken when they "are
patently defective and could not succeed under any
circumstances." Mobley v. Kelly Kean Nissan, Inc.,
864 F.Supp. 726, 732 (N.D.Ill. 1993). Defenses should, however, be
stricken when their effect is to add unnecessary clutter to a case. Heller Fin., Inc. v. Midwhey
Powder Co., Inc., 883 F.2d 1286, 1295 (7th Cir. 1989).
As in its motion to dismiss, American Home seems to
misunderstand the pleading requirements of Rule 8(a). American
Home repeatedly argues that Cape's affirmative defenses should be
stricken because Cape fails to allege "any facts supporting its
defense." Again, Cape does not have to allege facts. See
Kirksey, 168 F.3d at 764; see also Hoskins v. Poelstra,
320 F.3d 761, 764 (7th Cir. 2003) ("The complaint does not contain
all of the facts that will be necessary to prevail, but a filing
under Rule 8 is not supposed to do that.") (emphasis in
original). Cape need only set forth a "short and plain statement"
of the defense. It has done so. Thus, American Home's motion to
strike Cape's affirmative defenses is denied as to paragraphs
31-35 and as to the defense of waiver in paragraph 30 of Cape's
Amended Affirmative Defenses.
However, because an affirmative defense of estoppel is
"premised on a showing of intentional deception or gross
negligence amounting to constructive fraud, this defense (like
fraud) requires a recitation of adequate factual underpinnings
for considerations of the applicability of the doctrine; mere
conclusions and puffery will not suffice."*fn1 Household
Financial Services, Inc. v. Northeastern Mortg. Inv. Corp.,
2000 WL 816795, at *2 (N.D. Ill. Jun. 22, 2002). The elements of
equitable estoppel in Illinois are (1) words or conduct by the
party against whom the estoppel is alleged amounting to a
misrepresentation or concealment of material facts; (2) knowledge
by the party against whom estoppel is asserted at the time the
representations were made that the representations were false, or
that the representation was made with gross negligence as to their truth; (3) the truth
respecting the representations was unknown to the party asserting
estoppel at the time the representations were made and when they
were acted upon; (4) the party against whom estoppel is claimed
must intend or reasonably expect that the representations or
concealment would be acted upon by the party asserting estoppel
or the public generally; (5) the party asserting estoppel must
have relied upon the representation in good faith to its
detriment; and (6) the party claiming the benefit of the estoppel
would be prejudiced if the other party is permitted to deny the
falsity of the misrepresentation or concealment. Id. (citing
Vaughan v. Speaker, 533 N.E.2d 885, 890 (Ill. 1988)). Cape
has failed to allege any specific acts of misrepresentation or
concealment in which American Home engaged. Cape's only response
is to claim that American Home "failed to disclose to Cape that
it never intended to pay out a dime under the Payment Bond."
(Resp., at 8.) This is clearly insufficient under the heightened
pleading requirements. It fails to provide any details of this
alleged concealment the "who, what, when, where, and how"
required by Rule 9(b). See DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990). Thus, American Home's motion to
strike Cape's affirmative defense is granted as to the defense of
For the reasons stated above, American Home's Motion to Dismiss
is denied [#84]. American Home's Motion to Strike Cape's
affirmative defenses is granted in part and denied in part [#85].
Cape's Affirmative Defense of estoppel is stricken.