VSI Sales LLC v. International Fidelity Insurance Company

Filing 9

MEMORANDUM. Signed by Judge Gregory M. Sleet on 9/22/2015. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

VSI SALES, LLC,
Plaintiff,
v.

INTERNATIONAL FIDELITY INSURANCE
COMPANY,

)
)
)
)
)
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)
)
)

Civil Action No. 15-507-GMS

)
Defendant.

)

MEMORANDUM
I.

INTRODUCTION
On June 16, 2015, plaintiff VSI Sales, LLC ("VSI") filed this lawsuit against defendant

International Fidelity Insurance Company ("IFIC"). (D.I. 1.) In its complaint, VSI alleges that IFIC
acted in bad faith and breached the implied covenant of good faith and fair dealing. (Id. at 13.)
Presently before the court is IFIC's motion to dismiss the complaint for failure to state a claim,
pursuant to Federal Rule of Civil Procedure 12(b)(6). (D.I. 5.) For the reasons that follow, the court
will grant the motion.

II.

BACKGROUND
The facts underlying this case are the same as in a case VSI earlier filed in this court, YSI

Sales LLC v. Griffin Sign, Inc., No. 13-1970-GMS ("Pending Litigation"). The Delaware
Department of Transportation awarded Cherry Hill Construction, Inc. ("Cherry Hill") a contract
to act as general contractor on a highway construction project in New Castle County, Delaware
("Project"). (D.I. 1 at

if 9.) In June 2011, Cherry Hill entered into a subcontract ("Cherry Hill

Subcontract") with Griffin Sign, Inc. ("Griffin"). (Id. at

if 10.) IFIC, as surety, issued a

Subcontractor Labor and Material Payment Bond ("Bond") on behalf of Griffin as principal and
Cherry Hill as obligee. (D.1. 1, Ex. A.)
Griffin subsequently entered into a contract with VSI for VSI to supply certain construction
materials for the Project ("Griffin-VS! Contract"). (D.I. 1 at~ 10.) A dispute arose between Griffin
and VSI, and on November 1, 2013, VSI submitted a proof of claim to IFIC for payment under the
Bond. (Id at

~

43.) On November 22, 2013, VSI filed suit against Griffin and IFIC seeking

recovery of unpaid invoices, and Griffin asserted a counterclaim for breach of contract. (Pending
Litigation, D.I. 1; D.I. 23.) On June 16, 2015, VSI brought the current action against IFIC, alleging
that IFIC acted in bad faith and breached the covenant of good faith and fair dealing by improperly
handling VSI's claim under the Bond. (D.I. 1 at~~ 89, 93.)

III.

STANDARD OF REVIEW
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for dismissal where the

plaintiff "fail[s] to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). In
considering a motion to dismiss, the court "accept[ s] all factual allegations as true, construe [s] the
complaint in the light most favorable to the plaintiff, and determine[s] whether, under any
reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. Cnty. of

Allegheny, 515 F.3d 224, 233 (3d Cir. 2008). The issue for the court is "not whether the plaintiff
will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims."

Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). As such, the touchstone of the pleading standard is
plausibility. Bistrian v. Levi, 696 F.3d 352 365 (3d Cir. 2012). Pl.aintiffs must provide sufficient
factual allegations "to state a claim to relief that is plausible on its face." Bell At!. Corp. v.

Twombly, 550 U.S. 544, 570 (2007). "Determining whether a complaint states a plausible claim

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for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial
experience and common sense." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

IV.

DISCUSSION
The parties dispute whether the court should apply Pennsylvania or Delaware law. 1 The

court must follow the conflict-of-laws rules applied by Delaware state courts. Klaxon Co. v. Stentor
Electric Mfg. Co., 313 U.S. 487, 496 (1941). Delaware courts apply the "most significant
relationship" test to determine which state's laws should apply. 2 Travelers Indemnity Co. v. Lake,
594 A.2d 38, 47 (Del. 1991). But "Delaware courts will generally honor a contractually-designated
choice-of-law provision so long as the jurisdiction selected bears some material relationship to the
transaction." JS. Alberici Construction Co., Inc. v. Mid-West Conveyor Co., Inc., 750 A.2d 518,
520 (Del. 2000).
VSI asserts that Delaware law applies because the Cherry Hill Subcontract includes a
Delaware choice-of-law provision. According to VSI, its claims are brought under the Bond, and
the Bond incorporates the Cherry Hill Subcontract (and all of its provisions) by reference. IFIC,
on the other hand, argues that Bond does not include a choice-of-law provision, and that the

1

IFIC argues that VSI's claim should be dismissed because Pennsylvania law does not recognize 1) a claim
of bad faith brought against a surety; or 2) a claim for the breach of the implied covenant of good faith and fair dealing.
See Bd. Of Trustees, Roofers Union Local 30 Combined Health & Welfare Fundv. Liberty Mutual Ins. Co., C.A. 152820, 2015 WL 4273584, at *3 (E.D. Pa. July 14, 2015) ("A common law bad faith tort claim does not exist in
Pennsylvania; rather, parties alleging bad faith on the part of an insurer may bring such claims only under 42 Pa.C.S.A.
§ 8371."); E. Steel Connectors, Inc. v. St. Paul Mercury Ins. Co., Nos. 972, 973, 989, 1003 WDA 2001, at 5 (Pa.
Super. Ct. August 2, 2002) (affirming trial court's dismissal of statutory bad faith claim against surety because "a
surety contract is not an 'insurance policy' within the meaning of[§ 8371]."); Blue Mountain Mushroom Co., Inc. v.
Monterey Mushroom, Inc., 246 F. Supp. 2d 3 94, 400 (E.D. Pa. 2002) ("Pennsylvania law does not recognize a separate
claim for breach of implied covenant of good faith and fair dealing.").
VSI argues that Delaware law should apply to its claims, and that there is no prohibition against its claims in
Delaware. See Int'!. Fid. Ins. Co. v. Delmarva Sys. Corp., No. 99C-I0-065, 2001WL541469 (Del. Super. Ct. May 9,
2001) (holding a bad faith claim may be brought by a principal against a surety).
2
Under the most significant relationship test, the court applies the law of the state which has the most
significant relationship to the occurrence and the parties. Restatement (Second) of Conflict of Laws, §§ 145(1 ), 188(1 ).

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provision from the Cherry Hill Subcontract does not apply to this dispute. 3 The court agrees with
IFIC.
Several courts have recognized that "the incorporation by reference of a contract into a
bond is not intended to bring the substantive provisions of the contract into the bond. Instead, as
these courts have held, incorporating the contract by reference merely establishes the limits of the
surety's obligation and aids in ascertaining the measure of performance required." US. Pac.

Builders, Inc. v. Mitsui Trust & Banking Co., 57 F. Supp. 2d 1018, 1026 n.6 (D. Haw. 1999)
(internal quotations omitted). 4 Further, neither VSI nor IFIC are parties to the Cherry Hill
Subcontract. The court finds the Bond does not incorporate the choice-of-law provision.
Even assuming the choice-of-law provision is imported by reference from the subcontract
to the bond, its terms do not apply to this case. Before applying a choice-of-law provision to a
claim, Delaware courts examine whether the contracting parties drafted the provision broadly or
narrowly. See Gloucester Holding Corp. v. US. Tape and Sticky Products, LLC, 832 A.2d 116,
124 (Del. Ch. 2003). Courts have held that choice-of-law provisions that explicitly apply to "any
claim arising out of or relating to" a contract are broad enough to cover quasi-contract and tort
claims arising from contractual agreements. See id.; Eby v. Thompson, No. 03C-10-010, 2005 WL
1653988, at *3 (Del. Super. Ct. April 20, 2005). Courts have held that narrow choice-of-law

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IFIC also notes that according to VSI, the relationship and agreement between VSI and Griffin-which
underlie VSI's claims against IFIC-are governed by VSI's Terms & Conditions. (D.I. 1 at irl[ 12-14.) VSI's Terms
& Conditions include a Pennsylvania choice-of-law provision. (Pending Litigation, D.I. 1, Ex. F.)
4
See, e.g., AgGrow Oils, LLC v. Nat'! Union Fire Ins. Co., 242 F.3d 777, 781 (8th Cir. 2001) (declining to
import a construction contract's arbitration clause into a performance bond because the purpose of the incorporation
clause "was to clarify the extent of the surety's secondary obligation."); Transamerica Ins. Co. v. Yonkers Contracting
Co., 49 Misc. 2d 512, 513-14 (N.Y. Sup. Ct. 1966) (finding no evidence that surety intended to be bound by arbitration
agreement in subcontract that was incorporated into bond by reference); Downington Area School Dist. v. Int' l Fidelity
Ins. Co., 671 A.2d 782, 788 (Pa. Cornrow. Ct. 1996) (finding the "clause incorporating the Contract into the
Performance Bond only sets out the condition of [the surety's] liability rather than the scope of that liability.").

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provisions that do not include such expansive language apply only to claims directly arising from
the contracts themselves. See Gloucester, 832 A.2d at 124; Huffington v. TC. Group, LLC, No.
NllC-01-030, 2012 WL 1415930, at *11 (Del. Super. Ct. April 18, 2012) ("The choice of law
provision, without language such as arises out of or relates to," only requires the Court to apply
Delaware law to claims challenging the terms and provisions of the Subscription Agreement."
(emphasis in original)). 5
Here, the Bond itself does not include a choice-of-law provision, but states that the Cherry
Hill Subcontract "is by reference incorporated herein." (D.I. 1, Ex. A.) The Subcontract states that

"[t]his subcontract shall be governed by and construed in accordance with the laws of the State
where the Project is located." 6 (D.I. 28, Ex. 2 at 6 (emphasis added).) The narrowness of this
provision restricts its application to contractual disputes arising directly from the Subcontract. The
provision does not apply more broadly to conflicts arising from the Bond. Accordingly, no
contractual choice-of-law provision applies to this lawsuit. 7

5 See also Yarger v. ING Bank, fsb, 285 F.R.D 208, 322 (D. Del. 2012) (finding choice-of-law provision in
mortgage instruments did not cover claims arising from subsequent false advertising of mortgagor); Eby, 2005 WL
1653988, at *3 (holding that narrowly drawn rental agreement was "not broad enough to cover torts arising out of the
rental agreement."); Underhill Inv. Corp. v. Fixed Income Discount Advisory Co., 319 Fed. Appx. 137, 141 (3d Cir.
2009) ("[B]y its express terms, the Letter limits the choice-of-law provision to claims arising from 'this Agreement.'
[Appellant] pursues quasi-contract claims, not a pure contract claim arising under the Letter, and, therefore, the
Letter's choice oflaw provision does not apply to this action.").
The court notes that some Delaware courts have disagreed with the analysis in Gloucester. In Abry Partners
V, LP v. F & W Acquisition LLC, the court declined to examine whether the choice-of-law provision was narrow or
broad, and instead reasoned that the law chosen to apply to contract claims should also apply to related tort claims.
891 A.2d 1032, 1046--48 (Del. Ch. 2006) ("Parties operating in interstate and international commerce seek, by a choice
of law provision, certainty as to the rules that govern their relationship. To hold that their choice is only effective as
to the determination of their contract claims, but not as to tort claims ... would create uncertainty of precisely the
kind that the parties' choice oflaw provision sought to avoid."). See also Transdigm Inc. v. Alcoa Global Fasteners,
Inc., No. 7135, 2013 WL 2326881, at *5 (declining to narrowly construe contract's choice-of-law provision). The
Delaware Supreme Court has not yet ruled on the differing approaches.
6 Because the Project was located in Delaware, Delaware law applies to the Cherry Hill Subcontract.
7 Even ifthe court were to follow the line of cases which expanded narrow choice-of-law provisions to cover
tort or quasi-contractual claims, the court would reach the same result. See Abry Partners V, LP v. F & W Acquisition
LLC, 891 A.2d 1032 (Del. Ch. 2006). This case is distinguishable. Unlike cases where the claims arose from the
relationship between the parties to the contract, this suit involves a conflict between two parties that were not parties

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The court briefly turns to the "most significant relationship" test to determine whether
Delaware or Pennsylvania should apply. 8 VSI alleges that IFIC mishandled its claim for payment
for its work on the Project. The Project was located in Delaware (D.I. 1 at

if 6), but neither VSI

nor IFIC is based in Delaware. VSI is a Pennsylvania limited liability company with its principal
place of business in Hazelton, PA. (D .I. 1 at if 1.) IFI C is a New Jersey corporation with a regional
office in Norristown, PA. (Id. at if 2.) IFIC underwrote and issued the Bond from its Pennsylvania
office. (Id., Ex J; D.I. 6 at 9.) VSI's claim under the Bond was submitted to IFIC's Pennsylvania
office, and all of the communications between VSI and IFIC regarding the claim were transmitted
to and from IFIC's Pennsylvania office. (D.I. 1, Exs. 0, P.) Based on these facts, the court
concludes that Pennsylvania has the most significant relationship to the parties. Because
Pennsylvania does not recognize VSI' s claims (see infra n. l ), the court must dismiss VSI' s case.

V.

CONCLUSION
For the foregoing reasons, IFIC's motion to dismiss is GRANTED.

Dated: September _21-2015
DISTRICT

to the original agreement, regarding rights and responsibilities that arise independently from the original agreement.
The court declines to stretch the Subcontract's choice-of-law provision to cover the Bond.
8 Factors to be considered for the "most significant relationship" test include: "(a) the place the injury
occurred, (b) the place where the conduct causing the injury occurred, (c) the domicile, residence, nationality, place
of incorporation and place of business of the parties, and ( d) the place where the relationship, if any, between the
parties is centered." Restatement (Second) of Conflict of Laws,§ 145(2).

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