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The Hanover Insurance Group, A Delaware Corporation v. Singles Roofing Co.

June 21, 2012

THE HANOVER INSURANCE GROUP, A DELAWARE CORPORATION, PLAINTIFF,
v.
SINGLES ROOFING CO., INC., AND ILLINOIS CORPORATION, UNITED STATES OF AMERICA ROOFING CO., INC. AN ILLINOIS CORPORATION, AND ROBERT DURCHSLAG, AN ILLINOIS CITIZEN, DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiff The Hanover Insurance Group ("Hanover") filed suit against Defendants Singles Roofing Company, Incorporated ("Singles Roofing"), United States of America Roofing Company, Incorporated ("USA Roofing" and together with Singles Roofing, the "Company Defendants"), and Robert Durchslag ("Durchslag" and together with the Company Defendants, "Defendants") for breach of contract, exoneration and quia timet, specific performance of an indemnity agreement, and a preliminary injunction. Plaintiffs also moved for a preliminary injunction, and brought a rule to show cause against Defendants for failing to comply with this Court's Temporary Restraining Order (the "TRO"). Defendants objected to a magistrate judge's recommendation that Defendants be sanctioned for their failure to comply with the TRO. Following briefing on all of the above motions, each of the Defendants filed voluntary petitions for bankruptcy, at which time these proceedings were stayed. In December 2011, Hanover advised this Court that Durchslag had been denied a discharge in bankruptcy pursuant to 11 U.S.C. § 727(a)(8), and therefore neither the agreement to stay this case nor the automatic stay protected Durchslag. Hanover requests that this Court rule on all of the above motions solely with respect to Durchslag. For the reasons stated below, the Court -- in each case solely as to Durchslag -- denies Defendants' Motion to Dismiss, denies Hanover's Motion to Strike Defendants' Untimely Response, grants Hanover's Motion for a Preliminary Injunction, and adopts the magistrate judge's Report and Recommendation for sanctions.

These rulings do not apply to the Company Defendants, whose proceedings before this Court remain stayed by agreement of the parties, and by application of 11 U.S.C. § 362. The impact of this ruling on the Company Defendants is addressed at the close of this Opinion.

I. PROCEDURAL HISTORY

Shortly after filing suit in January 2010, Hanover filed motions for issuance of both a temporary restraining order ("TRO") and a preliminary injunction (the "Preliminary Injunction") against Defendants, in each case seeking to require Defendants to post collateral sufficient to protect Hanover from losses attributable to claims asserted against performance bonds.

The Court granted Hanover's TRO on February 25, 2010, and ordered Defendants to tender $2.6 million to Hanover as collateral security (the "Collateral"). On March 1, 2010, Hanover filed its first motion for rule to show cause why the Defendants should not be held in contempt for failing to tender the Collateral. On March 18, 2010, the Court voided the first TRO and entered a new TRO, ordering Defendants to provide Collateral to Hanover in the amount of $2.6 million by 5:00 p.m. on March 19, 2010. Defendants failed to do so, and Hanover filed a second motion for rule to show cause on March 23, 2010. Defendants responded with an emergency motion to vacate the TRO, which was denied; however, the Court granted Defendants until March 29, 2010 to tender the Collateral. Defendants again failed to do so. The Court granted Hanover's oral motion for a rule to show cause at a status hearing on March 29, 2010 and referred the show cause hearing to Magistrate Judge Kim for hearing.

The Court heard oral argument on the Motion for Preliminary Injunction on April 13, 2010. Hanover also moved on April 8, 2010 to strike Defendants' untimely responses to its Motion for a Preliminary Injunction, and the Court took that motion under advisement at the hearing on April 13, 2010, to be determined along with the Motion for Preliminary Injunction. On April 19, 2010, Defendants filed a Motion to Dismiss Hanover's First Amended Complaint, raising many of the same issues set forth in Defendants' response to the Motion for Preliminary Injunction.

On May 26, 2010, Magistrate Judge Kim held a hearing on the motion for sanctions, and announced a ruling date of July 1, 2010. On June 29, 2010, each of the Defendants filed for bankruptcy. Magistrate Judge Kim issued his Recommendation on July 1, 2010 that Defendants be sanctioned for failing to comply with the TRO. (R. 95, the "Recommendation"). On July 8, 2010, Defendants filed an objection to the Recommendation (the "Objection"). The only basis for the Objection was the impact of the bankruptcy filings and the application of the automatic stay, 11 U.S.C. § 362, to the proceedings in this Court. On August 5, 2010, the Court stayed the proceedings by agreement of the parties, pending conclusion of the bankruptcy proceedings.

On February 8, 2011, the United States Bankruptcy Court for the Northern District of Illinois (Sonderby, J.) (the "Bankruptcy Court") denied Durchslag a discharge in bankruptcy, on the grounds that Durchslag had filed a previous petition for bankruptcy less than eight years prior to the petition he filed in June 2010, in violation of 11 U.S.C. § 727(a)(8). On October 20, 2011, the Bankruptcy Court dismissed as moot the related adversary proceeding that Hanover had filed against Durchslag. Pursuant to the joint stay agreement between the parties, the Court lifted the stay of these proceedings as to Durchslag and the Motion to Dismiss, Motion for Preliminary Injunction, and Recommendation are now properly before this Court with respect to Durchslag (but not with respect to the Company Defendants, who remain in Chapter 7 bankruptcy and for whom the stay remains in effect). On December 23, 2011, Hanover filed its brief in opposition to the Objection solely with respect to Durchslag, and urged this Court to adopt the Recommendation as to Durchslag, and to issue a ruling on the Motion for Preliminary Injunction, the Motion to Dismiss, and the Motion to Strike with respect to Durchslag only.

II. DEFENDANT'S MOTION TO DISMISS

The Court first considers Defendants' Motion to Dismiss because, if granted, it would moot Hanover's Motion for a Preliminary Injunction.

A. BACKGROUND

The following facts are taken from Hanover's Amended Complaint and are assumed to be true for purposes of this Motion to Dismiss. See Murphy v. Walker, 51 F.3d 714, 717 (7th Cir. 1995). Singles Roofing is a construction company that performs construction projects throughout the United States. (Am. Compl. ¶ 7.) At the request of Singles Roofing, Hanover, as a surety, issued numerous payment and performance surety bonds (the "Bonds") on behalf of Singles Roofing for a number of projects. (Am. Compl. ¶ 8.)

As consideration for Hanover's issuance of these Bonds on behalf of Singles Roofing, Hanover required Defendants to enter into an Agreement of Indemnity for Contractors ("Indemnity Agreement"), which was executed by Defendants on November 18, 2008. The Indemnity Agreement required Defendants to indemnify and hold Hanover harmless from all liability under the Bonds, providing, in relevant part, that:

The Indemnitors shall exonerate, indemnify, and save harmless the Surety from and against every claim, demand, liability, cost, charge, suit, judgment, and expense which the Surety may pay or incur, including, but not limited to, loss, interest, court costs and consultant and attorney fees: (a) by having executed or procured the execution of the bonds; or (b) in making an independent investigation of any claim, demand, or suit; or (c) in defendant any suit, action, mediation or any other proceeding to obtain release from liability whether the Surety, in its sole discretion, elects to employ its own attorney or permits or requires Indemnitors to defend the Surety; or (d) in enforcing any of the covenants, terms and conditions of this Agreement. (Am. Compl. ¶ 9.) Moreover, the Indemnity Agreement requires Indemnitors to post collateral upon Hanover's demand to cover any loss, stating that:

Payment shall be made to the Surety by the Indemnitors as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor . . . . The Surety shall have the right to hold such funds as collateral (without any obligation to earn interest on the collateral for the Indemnitors) until the Indemnitors serve evidence satisfactory to the Surety of its discharge from all bonds and all liability by reason thereof, and to use such funds or any part thereof, at any time, in payment or settlement of any judgment, claim, liability, loss, damage, fees, or any other expense. (Am. Compl. ¶ 12.) As of January 27, 2010, Hanover had received bond claims in a total of over $1.5 million against the bonds. (Am. Compl. ¶ 14.) Hanover has since notified Defendants of these claims on multiple occasions and requested Defendants to indemnify Hanover from the claims and to post collateral. (Am. Compl. ¶ 15.)

Also pursuant to the Indemnity Agreement, Defendants agreed to provide Hanover "or its designated agents . . . full and free access to the Indemnitors' books and records at any and all reasonable times until the liability of the Surety under any bond is completely terminated and the claims of the Surety against any Indemnitor are fully satisfied." (Am. Compl. ¶ 16.) Although Hanover and its construction consultant Mark Lee attempted to inspect the books and records, Defendants have failed to provide access to these books and records. (Am. Compl. ¶ 17.) Hanover's exposure under the Bonds (including fees and expenses) as of January 2010 totaled $1,749,771.73 and it faces additional exposure for bonds subsequently asserted. (Am. Compl. ¶ 18.)

B. STANDARD OF REVIEW

When considering a motion to dismiss under Rule 12(b)(6), a court must accept as true all facts alleged in the complaint and construe all reasonable inferences in favor of the plaintiff. See Murphy, 51 F.3d at 717. To state a claim upon which relief can be granted, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). "Detailed factual allegations" are not required, but the plaintiff must allege facts that, when "accepted as true, . . . 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In analyzing whether a complaint has met this standard, the "reviewing court [must] draw on its judicial experience and common sense." Iqbal, 129 S.Ct. at 1950. A claim has facial plausibility when the factual content in the pleadings allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged. See id. at 1949.

C. DISCUSSION

As an initial matter, neither Durchslag nor Hanover "contends that Illinois's choice of law rules require [the Court] to apply the substantive law of another state." See Southern Illinois Riverboat Casino Cruises, Inc. v. Triangle Insulation and Sheet Metal Co., 302 F.3d 667, 672 (7th Cir. 2002) (internal citations omitted). Because Durchslag is an Illinois citizen and the Indemnity Agreement at issue was executed in Illinois and signed by a notary public in Illinois (see R. 80 ¶ 2; R. 80 Ex. 1, p.3), "there is a reasonable relation between the dispute and the forum whose law has been selected" such that it is appropriate to "apply Illinois law in this case." See id. More specifically, the Court will "apply the law that [it] believe[s] the Supreme Court of Illinois would apply if the case were before that tribunal rather than before this court." See, e.g., Help at Home, Inc. v. Med. Capital, L.L.C., 260 F.3d 748, 753 (7th Cir. 2001).

Durchslag' principal objection to Counts I, II, and III of Hanover's Amended Complaint is that"[t]here is simply no connection between the description of the claims" for damages, specific performance, and exoneration and quia timet "and the relief requested." (R. 73, p. 2.) Durchslag then argues that Count IV for a preliminary injunction should be dismissed because a preliminary injunction is a request for relief, not a separate cause of action, and because all of the other Counts should be dismissed and a claim for a preliminary injunction cannot stand alone. The Court considers the adequacy of each count of the Amended Complaint in turn.

i. Count I

Count I alleges a breach of contract claim against Durchslag. "Under Illinois law, a plaintiff looking to state a colorable breach of contract claim must allege four elements: '(1) the existence of a valid and enforceable contract; (2) substantial performance by the plaintiff; (3) a breach by the defendant; and (4) resultant damages.'" Reger Development LLC v. Nat. City Bank, 592 F.3d 759, 764 (7th Cir. 2010) (quoting W.W. Vincent & Co. v. First Colony Life Ins. Co., 814 N.E.2d 960, 967 (Ill. App. 2004)). Durchslag contends that the Amended Complaint fails to allege three of the four required elements of breach of contract, and that its allegations about the existence of a contract "constitute the entire statement of the claim for breach of contract." (R. 84, ¶ 3.) Durchslag ignores, however, the final two paragraphs of Count I of the Amended Complaint. (R. 80, ¶¶ 22-23.) After setting forth Durchslag's contractual obligations under the Indemnity Agreement in Paragraph 21, Hanover explicitly alleges in Paragraphs 22 that Durchslag breached the express terms of the Indemnity Agreement by "failing and refusing to indemnify and hold Hanover harmless from the Bond claims, to post collateral in the amount of Hanover's initial estimated contingent Bond exposure and to allow Hanover free access to their books and records." (R. 80, ¶ 22.) In Paragraph 23, Hanover also alleges damages incurred as a result of this breach. (R. 80, ¶ 23.) Although Hanover goes on to specify damages in the amount of $1,749,771.73, or the amount of its collateral demand, all that is necessary to state a claim for breach of contract, under notice pleading requirements, is to allege the existence of damages, which Hanover has done. See Allstate Ins. Co. v. Winnebago Co. Fair Ass'n, Inc., 475 N.E.2d 230 (Ill. App. 1985) ("An adequate complaint based upon breach of contract must allege the existence of damages as a consequence of the breach."). The precise nature of the expectancy damages recoverable for this breach of contract, whether they be for costs or attorneys fees incurred in bringing this action, amounts paid by Hanover that it would not have paid, or particular losses for lack of access to books and records, can be precisely calculated at a later stage. Finally, within Hanover's factual assertions incorporated into each Count of the Amended Complaint, it alleges its own performance under the Indemnity Agreement by issuing bonds on behalf of Singles Roofing for multiple construction projects. (Am. Compl. ¶¶ 8-9.)Thus, Hanover in fact satisfactorily pled each element of a breach of contract.

Durchslag further argues that the claim for breach of contract is not ripe because the Indemnity Agreement only requires indemnification for liabilities and costs that Hanover "may pay or incur," but the Amended Complaint makes no allegation that any liabilities, losses, costs, or expenses were incurred. The Indemnity Agreement explicitly provides, however, that "payment shall be made to the Surety by the Indemnitors as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor." (Am. Compl. ΒΆ 12.) (emphasis added). The Court must give unambiguous terms their clear and ordinary meaning in construing the contract in order to determine the intent of the contracting parties. See Reger, 592 F.3d at 764. Thus, under the clear terms of the Indemnity Agreement, Durchslag's breach occurred when the Defendants did not make payments "as soon as" liability was "asserted against" Hanover by the different companies described in the Amended Complaint--in other words, the condition precedent to Durchslag's obligation to make payments was that claims be "asserted ...


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