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U.S. v. AMERICAN HOME ASSURANCE CO.

December 2, 2004.

UNITED STATES OF AMERICA for the Use and Benefit of JAMES CAPE & SONS COMPANY, a Wisconsin Corporation, Plaintiff,
v.
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.

BACKGROUND

  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 complaint.

  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 Complaint.

  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 ...


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