R.E. Monks Construction Co., LLC v. Telluride Regional Airport Authority
Filing
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ORDER Denying 6 Defendant's Motion to Dismiss for Failure to State a Claim; Denying as moot 34 Defendants Motion to Stay Discovery and Extension of Deadlines, by Judge William J. Martinez on 5/2/2012.(ervsl, )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 11-CV-01658-WJM-MEH
R.E. MONKS CONSTRUCTION CO., LLC,
an Arizona limited liability company, on behalf of,
FISHER SAND & GRAVEL CO., an Arizona Corp., d/b/a DBA Arizona Drilling &
Blasting,
Plaintiff,
v.
TELLURIDE REGIONAL AIRPORT AUTHORITY,
a political subdivision of the State of Colorado,
Defendant.
_____________________________________________________________________
ORDER DENYING DEFENDANT’S MOTION TO DISMISS
AND MOTION TO STAY DISCOVERY
_____________________________________________________________________
In this civil action, Plaintiff R.E. Monks Construction Company, LLC (“R.E.
Monks”), on behalf of Arizona Drilling & Blasting (“AD&B”), brings claims of breach of
contract and unjust enrichment under Colorado law against Defendant Telluride
Regional Airport Authority (“TRAA”) alleging that Plaintiff was damaged when it suffered
increased costs due to a differing site condition while building a runway for the TRAA.
(ECF No. 1.) Before the Court are Defendant’s Motion to Dismiss (“Motion”) (ECF No.
6) and Motion to Stay Discovery and Extension of Deadlines (ECF No. 34).
For the reasons set forth below, the Motions are denied.
I. BACKGROUND
On June 24, 2011, Plaintiff filed its Complaint bringing claims of breach of
contract and unjust enrichment against Defendant. (Compl. (ECF No. 1.)) Plaintiff R.E.
Monks, a general contractor, alleges that the TRAA, a political division of the state of
Colorado, failed to pay Plaintiff additional costs accumulated over the amount bid and
accepted for the construction of an airport runway. (Id. ¶¶ 1, 2, 10-24.) AD&B, on
whose behalf R.E. Monks brings this action, is an Arizona corporation that R.E. Monks
sub-contracted to perform the drilling and blasting operations of the airport runway. (Id.
¶¶ 3, 11.) Plaintiff alleges that, despite assurances from Defendant’s expert that the
runway construction would not encounter wet conditions, AD&B unexpectedly
encountered such wet conditions during its drilling and blasting operations (the “wet
hole blasting claim”), resulting in additional work and costs to Plaintiff. (Id. ¶¶ 13-19.)
On July 26, 2011, Defendant filed its Motion to Dismiss requesting that the Court
dismiss all claims: (1) for failure to join a necessary and indispensable party pursuant
to Federal Rules of Civil Procedure 12(b)(7) and 19; and (2) for failure to state a claim
pursuant to Federal Rule of Civil Procedure 12(b)(6). (Motion (ECF No. 6.))
Specifically, Defendant argues that AD&B was a required party without whom the
litigation cannot proceed, and that because AD&B’s interests are adverse to R.E.
Monks’ interests, AD&B must be joined as a Defendant, which would destroy diversity
jurisdiction. (Id. at 2-6.)
On August 16, 2011, Plaintiff filed its Response in Opposition to Defendant’s
Motion to Dismiss. (Response (ECF No. 7.)) In its Response, Plaintiff asserts that
AD&B is not an indispensable party to this action because prior to filing suit, R.E.
Monks and AD&B entered into a Liquidation Agreement (the “Liquidation Agreement”),
described in detail below, wherein AD&B agreed not to sue R.E. Monks for costs
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associated with the wet hole blasting claim in exchange for R.E. Monks agreeing to
allow AD&B to bring the claim against TRAA in the name of R.E. Monks. (Id. at 4-5.)
On September 6, 2011, Defendant filed its Reply to Plaintiff’s Response. (Reply
(ECF No. 13.)) In its Reply, Defendant, in light of the Liquidation Agreement, withdrew
its argument that AD&B was a required party, but argues that: (1) provisions in the
Liquidation Agreement are unenforceable against TRAA because of the prohibition
against assignment in the TRAA/R.E. Monks contract; and (2) any claim R.E. Monks
might have had against TRAA has been extinguished as a consequence of AD&B
releasing R.E. Monks from any liability to it. (Id. at 5-9.) With the Court’s permission,
Plaintiff filed a Sur-Reply on October 10, 2011. (ECF No. 20.)
On March 28, 2012, Defendant filed a Motion to Stay Discovery and Extension of
Deadlines requesting the Court to stay discovery until after Defendant’s Motion to
Dismiss has been decided. (ECF No. 34.) On March 29, 2012, Plaintiff filed its
Response in Opposition to Defendant’s Motion to Stay Discovery (ECF No. 25), and
Defendant filed its Reply in Support of its Motion to Stay Discovery (ECF No. 36).
These Motions are now ripe for resolution.
II. LEGAL STANDARDS
The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test “the
sufficiency of the allegations within the four corners of the complaint after taking those
allegations as true.” Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994). To
survive a Rule 12(b)(6) motion, “[t]he complaint must plead sufficient facts, taken as
true, to provide ‘plausible grounds’ that discovery will reveal evidence to support the
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plaintiff’s allegations.” Shero v. City of Grove, Okla., 510 F.3d 1196, 1200 (10th Cir.
2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “The court’s
function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties
might present at trial, but to assess whether the plaintiff’s complaint alone is legally
sufficient to state a claim for which relief may be granted.” Sutton v. Utah State Sch. for
the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999) (citation omitted).
The concept of “plausibility” at the dismissal stage refers not to whether the
allegations are likely to be true; the court must assume them to be true. See Christy
Sports, LLC v. Deer Valley Resort Co., Ltd., 555 F.3d 1188, 1192-93 (10th Cir. 2009).
The question is whether, if the allegations are true, it is plausible and not merely
possible that the plaintiff is entitled to relief under the relevant law. See Robbins v.
Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008).
III. ANALYSIS
Before the Court are: (1) Defendant’s Motion to Dismiss, and (2) Defendant’s
Motion to Stay Discovery and Extension of Deadlines. The Court will address each in
turn below.
A.
Motion to Dismiss
Defendant argues that the Court should grant its Motion to Dismiss because
provisions in the Liquidation Agreement are unenforceable, and because any claim
R.E. Monks might have had against the TRAA has been extinguished. Defendant also
argues that Plaintiff has failed to state claims for breach of contract and unjust
enrichment.
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1.
The Liquidation Agreement
Defendant argues that Plaintiff’s claims should be dismissed because:
(1) provisions in the AD&B/R.E. Monks Liquidation Agreement are unenforceable
against TRAA because of the prohibition against assignment in the TRAA/R.E. Monks
contract, and (2) any claim R.E. Monks might have had against TRAA has been
extinguished as a consequence of AD&B releasing R.E. Monks from any liability to it.
(Reply at 5-9.) Plaintiff refutes these arguments.
a. Pass-Through Claim vs. Assignments
Prior to commencing this litigation, R.E. Monks and AD&B entered into a
Liquidation Agreement wherein they agreed to resolve any underlying wet hole blasting
claim as between R.E. Monks and AD&B. (Liquidation Agreement, attached to
Response, Ex. E.) Generally, such liquidating agreements have three basic elements:
(1) the imposition of liability upon a party for a third party’s increased costs, thereby
providing the first party with a basis for legal action against the party at fault, (2) a
liquidation of liability in the amount of the first party’s recovery against the party at fault,
and (3) a provision for the pass-through of that recovery to the third party. See North
Moore Street Developers, LLC v. Meltzer/Mandl Architects, P.C., 23 A.D.3d 27, 31 (N.Y.
App. Div. 2005); Interstate Contracting Corp. v. City of Dallas, 135 S.W.3d 605, 610
(Tex. 2004) (citing Carl A. Calvert, Pass Through Claims and Liquidation Agreements,
CONSTRUCTION LAW YER ,
LAW
Oct. 18, 1998, at 29; 3 BRUNER AND O’CONNER ON CONSTRUCTION
§ 8:51 (2003)). Essentially, instead of one lawsuit between a subcontractor and
general contractor, and another lawsuit between the general contractor and an owner, a
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liquidation agreement with pass-through recovery provisions permits a general
contractor to pursue its subcontractor’s claims directly against the owner. See
Interstate Contracting Corp., 135 S.W.3d at 610 (internal citation omitted). Under such
a liquidation agreement, the subcontractor releases all claims it may have against the
general contractor in exchange for the general contractor’s promise to pursue those
claims against the owner and remit any recovery to the subcontractor. Id. (citing Henry
R. Kates, Note: Facilitating Subcontractors' Claims Against the Government Through
the Prime Contractor as the Real Party In Interest, 52 GEO . W ASH . L. REV . 146, 154
(1983)). Thus, a contractor remains liable to the subcontractor, but only to the extent
the contractor receives payment from the owner. Id.
Contractors bringing suit against the federal government have long been
permitted to present subcontractors’ claims based on pass-through arrangements, even
though the no-privity rule would otherwise bar subcontractors from recovering directly
against the government. See, e.g., Interstate Contracting Corp. v. City of Dallas, Tex.,
320 F.3d 539, 543 (5th Cir. 2003). As long as the general contractor remains liable to
the subcontractor for the subcontractor’s damages, courts have generally upheld such
pass-through arrangements. See Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co.,
175 F.3d 1221, 1251 (10th Cir. 1999); W.G. Yates & Sons Constr. Co., Inc. v. Caldera,
192 F.3d 987, 991 (Fed. Cir. 1999). Federal courts have construed these pass-through
agreements as giving the general contractor standing to pass the subcontractor’s
claims through to the government. See Interstate Contracting Corp., 135 S.W.3d at
610 (citing W.G. Yates, 192 F.3d at 991)).
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Numerous states have also expressly or implicitly recognized pass-through
claims. “Otherwise, the owner could receive a windfall because the subcontractor
lacked privity with the owner and the contractor lacked standing to sue the owner for
damages suffered by the subcontractor.” Interstate Contracting Corp., 135 S.W.3d at
615 (collecting cases).
As the Texas Supreme Court noted:
The pass-through claim [resulting from a Liquidation Agreement] certainly does
not increase litigation and even tends to reduce it by rendering unnecessary a
suit between the subcontractor and the contractor for the damages caused by
the owner. Furthermore, in a pass-through situation, any settlement by the
owner is a full and final settlement because the subcontractor promises to
release the contractor from liability to the extent the contractor presents the
subcontractor’s claim and renders any recovery to the subcontractor.
Pass-through claims also avoid the problem presented when one defendant
settles while the other remains partially liable, necessitating an additional
settlement or further litigation.
Id. at 616.
Defendant argues that the Liquidation Agreement here violated the prohibition
against assignment contained in the TRAA/R.E. Monks contract. The Court disagrees,
and specifically finds that the Liquidation Agreement does not impermissibly assign
R.E. Monks’ claim to AD&B.
An “effective assignment is one by which the assignor’s right to performance by
the obligor is extinguished and the assignee acquires a right to such performance.”
Restatement of Contracts, Section 150, and 3 Williston on Contracts, Section 404, n. 2,
p. 3 (3rd Ed. 1960). Here, RE. Monks’ right to performance from the TRAA has not
been extinguished. Indeed, the Liquidation Agreement specifically states that it does
not constitute “a release or reduction of the Wet Hole Blasting Claim against the Owner
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[TRAA].” (Liquidation Agreement ¶ 6.) It states that “[t]he Wet Hole Blasting Claim
shall, in all respects, remain a viable legal and equitable claim against the Owner
[TRAA].” (Id.) Further, the Liquidation Agreement states that R.E. Monks grants AD&B
“the authority to prosecute, litigate and/or negotiate, settle or compromise the Wet Hole
Blasting Claim in the name of Monks.” (Id. ¶ 1.) In exchange for R.E. Monks granting
AD&B the right to prosecute its claim against Defendant in the name of R. E. Monks,
AD&B covenanted to not sue R.E. Monks for increased costs resulting for the alleged
wet blasting conditions. (Id. ¶ 8.) Also pursuant to the Liquidation Agreement, R.E.
Monks is required to “pass-through” any financial recovery in that must “pay any
recovered amounts, less the amount of any taxes or bond payments, to AD&B.” (Id. ¶
4.)
If the Liquidation Agreement was an assignment of rights, any amounts
recovered in this matter would have to be paid directly by TRAA to AD&B, a party with
whom TRAA has no direct contractual relationship. See Sterling Consulting Corp. v.
Credit Managers Ass’n of Cal., 05-cv-01573, 2006 WL 3641009, at *8 (D. Colo. Dec.
12, 2006). However, since the Liquidation Agreement specifically describes the
pass-through arrangement between the parties, it does not contain an impermissible
assignment of contractual rights. See Interstate Contracting Corp., 135 S.W.3d at
616-617. The Court holds, therefore, that the Liquidation Agreement is enforceable in
this case.
b. The Severin Doctrine
Defendant next assets that, under the “Severin Doctrine,” any claim “R.E. Monks
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might have had against TRAA has been nullified and extinguished as a consequence of
AD&B releasing Monks from any liability to it.” (Reply at 2.)
Under the “Severin Doctrine,” a contractor suing on behalf of its subcontractor
cannot recover from the government if the subcontract contains a clause that
completely exculpates the contractor from liability. See Severin v. U.S., 99 Ct. Cl. 435,
442-44 (Ct. Cl. 1943). Thus, a contractor can be barred from pursuing a claim on its
subcontractor’s behalf because the exculpatory clause extinguishes any claim the
contractor could have asserted for damages resulting from the government’s alleged
breach of contract. Id.
Federal courts, however, have expressly limited the Severin doctrine. See
Morrison Knudsen, 175 F.3d at 1251 (“[c]ourts have strictly limited the Severin doctrine,
out of reluctance to leave [subcontractors] with valid claims out in the cold”); E.R.
Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1371 (Fed. Cir. 1999) (internal quotation
omitted) (“application of the Severin doctrine has been narrowly construed”). “In
practically every case where [the Severin Doctrine’s] application has been urged, an
exception has been created or recognized.” Mitsui & Co., Inc. v. Puerto Rico Water
Res. Auth., 528 F. Supp. 768, 781 (D.P.R. 1981).
Moreover, in order to preclude recovery by a subcontractor under the Severin
Doctrine, there must be an “iron-bound release or contract provision immunizing the
prime contractor completely from any liability to the sub [contractor].” Id. at 782
(internal quotation omitted); see also Morrison Knudsen, 175 F.3d at 1251 (“Courts
have applied Severin only if the government proves that a sub [contractor] has
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executed an ironclad, unconditional release of a prime [contractor].”). Such an
“iron-bound release” must also be expressly stated. Mitsui, 528 F. Supp. at 781.
The Court finds that the Serverin Doctrine is inapplicable here because the
Liquidity Agreement between R.E. Monks and AD&B contains no “iron-bound” release
absolving R.E. Monks from liability. Under the Liquidation Agreement, R.E. Monks
agreed to pass-through any recovery to AD&B after pursuing its own claim against the
TRAA. (Liquidation Agreement ¶ 4.) The Liquidation Agreement contains a “general
release, final waiver of lien, and if appropriate obtain from its surety a consent to final
payment” upon receipt of any funds recovered by R.E. Monks for AD&B. (Id. ¶ 11.) As
such, the Severin Doctrine does not extinguish Plaintiff’s claims. See Metric
Constructors, Inc. v. U.S., 314 F.3d 578 (Fed. Cir. 2002) (holding that a general
contractor could bring a suit against the government for damages suffered by its
subcontractor because there was no “iron-clad release” sufficient to trigger application
of the Severin doctrine).
c. The Real Party In Interest
Defendant also argues that Plaintiff’s claims must be dismissed because AD&B,
not R.E. Monks, is the real party in interest. (Reply at 8-9.) Pursuant to Rule 17(a) of
the Federal Rules of Civil Procedure, “every action shall be prosecuted in the name of
the real party in interest.” Rule 17(a) “directs attention to whether plaintiff has a
significant interest in the particular action he has instituted.” Mitsui, 528 F. Supp. at
776. However, “[t]he action does not have to be brought by one who will ultimately
benefit from the recovery.” Id.
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The Court finds that R.E. Monks is a real party in interest for purposes of
asserting the wet hole blasting claim against Defendant. While AD&B will ultimately
benefit if any damages are recovered from Defendant, R.E. Monks also benefits since it
has received a release of liability from AD&B. Id. Thus, it cannot be seriously disputed
that R.E. Monks is a real party interest.
Accordingly, for the reasons stated above, Defendant’s Motion to Dismiss
Plaintiff’s claims based on arguments that provisions in the Liquidation Agreement are
unenforceable and that R.E. Monks’ claims have been extinguished is denied.
2.
Breach of Contract Claim
Defendant also argues that Plaintiff has failed to state a claim for breach of
contract because Plaintiff has not been damaged. (Motion at 10-11.)
To state a breach of contract claim under Colorado law, Plaintiff must sufficiently
allege: (1) the existence of a contract; (2) performance by the plaintiff or some
justification for nonperformance; (3) failure to perform the contract by a party to the
contract; and (4) resulting damages to the plaintiff. See W. Distrib. Co. v. Diodosio, 841
P.2d 1053, 1058 (Colo. 1992). The only prong Defendant challenges here is whether
Plaintiff suffered damages as a result of the alleged breach.
Plaintiff’s Complaint states that Defendant’s refusal to pay for extra costs
associated with the differing site condition resulted in damages to R.E. Monks in excess
of $874,676.98. (Compl. ¶ 28.) Further, Plaintiff alleges that R.E. Monks was
responsible for performing the drilling and blasting operations on the runway project and
is entitled to be paid for such work. (Id. ¶¶ 9-11.) As such, the Court finds that
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Plaintiff’s allegations, for purposes of the Motion to Dismiss, sufficiently state that
Plaintiff has suffered damages as a result of Defendant’s breach of contract.
Therefore, Defendant’s Motion to Dismiss Plaintiff’s breach of contract claim is denied.
3.
Unjust Enrichment Claim
Finally, Defendant asserts that Plaintiff’s unjust enrichment claim must be
dismissed because such a claim cannot exist when Plaintiff’s cause of action is
governed by an express written contract. (Motion at 11-12.) In response, Plaintiff
argues that it should be permitted to pursue its unjust enrichment claim at this early
stage of the litigation because Defendant has denied that Plaintiff’s claim for the cost
overruns is covered by their written contract. (Response at 14-15.)
To state a claim for unjust enrichment, Plaintiff must allege that: (1) at plaintiff’s
expense, (2) defendant received a benefit, (3) under circumstances that would make it
unjust for defendant to retain the benefit without paying. See Robinson v. Colorado
State Lottery Div., 179 P.3d 998, 1007 (Colo. 2008). “[I]n general, a party cannot
recover for unjust enrichment by asserting a quasi-contract when an express contract
covers the same subject matter because the express contract precludes any
implied-in-law contract.” Interbank Investments, LLC. V. Eagle River Water &
Sanitation Distr., 77 P.3d 814, 816 (Colo. Ct. App. 2003). To that extent, Defendant’s
contention is an accurate statement of the law. This position ignores, however, the fact
that a plaintiff which is party to an express contract can nonetheless bring an unjust
enrichment claim when it “will have no right under an enforceable contract.” Id.; see
also Dudding v. Norton Frickey & Assocs., 11 P.3d 441, 447-48 (Colo. 2000).
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While there is an express contract between R.E. Monks and the TRAA,
Defendant has denied that Plaintiff’s claim for the cost overruns is covered by such
contract. (Motion at 8-12.) Thus, it is unclear at this stage of the proceedings if
Plaintiff’s claim can proceed under an breach on contract theory or an unjust
enrichment theory. Until such course of action has been decided, the Court interprets
Plaintiff to have brought these theories in the alternative, and Defendant’s Motion to
Dismiss Plaintiff’s unjust enrichment claim is denied. See Ice Corp. v. Hamilton
Sundstrand Inc., 444 F. Supp. 2d 1165, 1171 (D. Kan. 2006) (plaintiff’s “unjust
enrichment claim[] [is an] alternative[] to its claim for breach of written contract . . .
[a]lternative claims are sanctioned by the Federal Rules of Civil Procedure, and
[plaintiff’s] alternative claims are adequately pled.”); Fed. R. Civ. P. 8(d)(2) (“A party
may set out 2 or more statements of a claim or defense alternatively or hypothetically
. . . If a party makes alternative statements, the pleading is sufficient if any one of them
is sufficient.”).
B.
Motion to Stay Discovery and Extension of Deadlines
Defendant has also filed a Motion to Stay Discovery and Extension of Deadlines
requesting the Court to stay discovery until Defendant’s Motion to Dismiss has been
decided. (ECF No. 34.) Given the Court’s instant disposition of the Motion to Dismiss,
Defendant’s Motion to Stay Discovery and Extension of Deadlines is now moot, and will
be denied on that basis.
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IV. CONCLUSION
For the reasons set forth above, the Court ORDERS as follows:
1.
Defendant’s Motion to Dismiss (ECF No. 6) is DENIED; and
2.
Defendant’s Motion to Stay Discovery and Extension of Deadlines (ECF No. 34)
is DENIED AS MOOT.
Dated this 2nd day of May, 2012.
BY THE COURT:
William J. Martínez
United States District Judge
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