Hartford Fire Insurance Company v. Henry Bros. Construction Management Services, LLC
Filing
151
MEMORANDUM OPINION AND ODER: Before the Court is a motion to dismiss 140 , in part, Hartford Fire Insurance Company's second amended complaint 98 , filed by Defendant Arcon Associates. For the reasons set forth below, the Court denies Defendants motion 140 . Status hearing set for 9/23/2014 at 09:00 AM. Signed by the Honorable Robert M. Dow, Jr on 8/28/2014:Mailed notice(tbk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
HARTFORD FIRE INSURANCE, CO.,
Plaintiff,
v.
HENRY BROS. CONSTRUCTION
MANAGEMENT SERVICES, LLC and
ARCON ASSOCIATES, INC.,
Defendants.
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Case No. 10-cv-4746
Judge Robert M. Dow, Jr.
MEMORANDUM OPINION AND ORDER
Before the Court is a motion to dismiss [140], in part, Hartford Fire Insurance Company’s
second amended complaint [98], filed by Defendant Arcon Associates. For the reasons set forth
below, the Court denies Defendant’s motion [140].
I.
Background1
In February 2007, Illinois’s Northfield Township High School District #225 (“SD225”)
contracted with various construction companies to remodel Glenbrook South High School in
Glenview. SAC ¶ 8. Among them, Henry Bros. Construction Management Services, LLC
(“HBC”) agreed to manage the construction project, and Arcon Associates (“Arcon”) executed a
contract in which it agreed to provide the project’s architectural services. SAC ¶¶ 9-10, 13, 23.
Relevant to Arcon’s motion to dismiss, Plaintiff alleges that Arcon’s contract required Arcon to
(a) “Be a representative of and advise and consult with SD225 during the administration of the
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For the purposes of Defendant’s motion to dismiss, the Court assumes as true all well-pleaded
allegations set forth in the second amended complaint. See Killingsworth v. HSBC Bank Nevada, N.A.,
507 F.3d 614, 618 (7th Cir. 2007).
project,” (b) “Visit the Project to become generally familiar with and keep SD225 informed
about the progress and quality of the work completed on the Project,” (c) “Use reasonable efforts
to guard SD225 against defects and deficiencies in the work of SD225’s contractors,” (d)
“Determine if the work on the project was being performed in a manner indicating that the work,
when fully completed, would be in accordance with the contract documents,” (e) “Report to
SD225 deviations from the contract documents and the Project schedule,” and (f) “Review and
certify the amounts due [sic] contractors and issue certificates in such amounts.” SAC ¶ 26.
According to Plaintiff, Arcon’s contract imposed on Arcon an “affirmative obligation to
investigate the work performed by the contractors on the Project and make certifications to
SD225 that the contractor requesting payment is entitled to the payment in the amount certified
under the contract documents.”
SAC ¶ 27.
In Plaintiff’s view, “Arcon’s certification of
payments constituted a representation by Arcon that (1) the work in question had progressed to
the point indicated in the payment request, (2) the quality of the work was in accordance with the
contract documents, and (3) that the contractor requesting payment was entitled to payment
under the contract documents in the amount certified by Arcon.” SAC ¶ 28. Plaintiff further
alleges that, under the contract, Arcon “had the authority to reject work performed by contractors
which did not conform to the requirements of the contract documents” and “had a duty to gather
mechanics lien waivers and sworn statements from contractors listing subcontractors and
materialmen before issuing payment certificates.” SAC ¶¶ 30-31.
In May 2007, roughly five months after contracting with HBC and Arcon, SD225 entered
into a contract with Grace Electrical Construction Corporation (“Grace”), in which Grace agreed
to provide electrical construction services for the project in exchange for $1,120,000. SAC ¶¶
28, 47. According to Plaintiff, Grace’s contract entitled Grace “to be paid according to its
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progress and the progress of its subcontractors and suppliers.” SAC ¶ 33. To be paid, the
contract required Grace to submit payment applications to HBC and Arcon that identified the
work it had performed as of the date of its application. SAC ¶¶ 34-35. Specifically, Grace’s
contract stated that “[b]ased upon Applications for Payment submitted by the Contractor to the
Construction Manager, and upon Project Applications and Certificates for Payment issued by the
Construction Manager and Architect, the Owner shall make progress payments on account of the
Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents.”
SAC ¶ 36. The contract provided a method by which to calculate the amount due upon the
submission of a certified progress payment. SAC ¶¶ 37-38.
Plaintiff contends that, “[i]n connection with Grace’s execution of [the contract] and in
accordance with Illinois law,” Grace was required to provide a performance and payment surety
bond to secure its performance of the contract and payment of certain subcontractors, laborers,
and materialmen. SAC ¶ 39. Accordingly, on May 29, 2007, Hartford Fire Insurance Company
(“Hartford”) issued Performance and Payment Bond number 83BCSEJ1947 on behalf of Grace,
and in return, Hartford required Grace to execute a General Indemnity Agreement. SAC ¶¶ 4041.
In performance of its contractual obligations to SD225, Grace contracted with
subcontractors, laborers, and suppliers. SAC ¶ 43. Grace’s contract with SD225 called for
substantial completion of the electrical work by August 10, 2007, a deadline which Grace
ultimately did not meet. SAC ¶ 46. And, due to financial troubles, Grace ceased work on the
project completely on December 4, 2007 without ever achieving substantial completion. SAC ¶
55. Before that time, Grace had submitted three payment applications to HBC and Arcon,
totaling $731,880, which HBC and Arcon had approved and certified. SAC ¶¶ 48-49, 51.
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SD225 paid Grace on account of HBC’s and Arcon’s respective certifications, but Plaintiff
alleges that HBC and Arcon certified work that “Grace and its subcontractors and suppliers
either did not perform, performed defectively, and performed in an untimely manner.” SAC ¶¶
50, 52. Plaintiff further alleges that “Grace failed to pay numerous of its project vendors and
failed to provide the required lien waivers pursuant to the [contract].” SAC ¶ 58.
When Grace defaulted on the project, SD225 asserted a claim against the performance
bond, and consequently, Hartford entered into a “Takeover Agreement” with SD225, by which
Hartford agreed to complete performance under Grace’s contract. SAC ¶¶ 59, 62. Hartford
spent $742,480.29 to complete Grace’s work. SAC ¶ 67. On top of that, numerous vendors of
Grace asserted claims under the Payment Bond for work the vendors had performed for which
Grace had failed to pay. SAC ¶¶ 64-65. These vendor claims totaled $447,662.21. SAC ¶ 66.
In the end, the performance and payment bond required Hartford to (1) complete Grace’s
unfinished work, (2) redo any work that Grace or its subcontractors performed defectively, and
(3) pay the vendors and sub-contractors that had completed work for Grace, but which Grace had
failed to pay. Offsetting some of costs incurred by Hartford was the $307,038.29 unpaid portion
of Grace’s $1,120,000 contract.
SAC ¶ 97.
Subtracting that amount, which SD225 was
contractually obligated to pay Hartford, Hartford spent $883,104.21 completing Grace’s work
and paying Grace’s subcontractors pursuant to the performance and payment bond. SAC ¶¶ 81,
97.
According to Plaintiff, “by operation of law, Hartford subrogated to the rights of Grace’s
project vendors, Grace and SD225” after it fulfilled its obligations under the bonds. SAC ¶ 85.
Consistent with that contention, Hartford brought suit against HBC and Arcon on July 29, 2010,
and filed the two-count second amended complaint (“SAC”) at issue here on August 9, 2013
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[98]. Count I alleges that HBC breached its construction management contract with SD225 and
seeks the $883,104.21 (plus costs and prejudgment interest) that Hartford incurred in
performance of its bond obligations. Count II seeks the same relief, but from Arcon, on the
theory that Arcon breached its architectural services contract with SD225. Only Count II is
relevant to Arcon’s motion to dismiss.
Count II primarily rests on allegations that Arcon failed “to visit the project site in
appropriate intervals to become familiar with and to keep SD225 informed about the progress
and quality of Grace’s work,” to guard against defects in Grace’s work, to reject work that did
not conform to Grace’s contract documents, to bring such deficiencies to SD225’s attention, and
to properly certify Grace’s payment applications. SAC ¶ 103. Arcon moves to dismiss [140]
only the portion of Plaintiff’s complaint that seeks the $447,662.21 Hartford paid to Grace’s
subcontractors pursuant to the payment bond. At this juncture, Arcon does not take issue with
Hartford’s pursuit of the costs that it incurred to finish Grace’s work in accordance with the
performance bond.
II.
Legal Standard
The purpose of a Rule 12(b)(6) motion to dismiss is not to decide the merits of the case; a
Rule 12(b)(6) motion tests the sufficiency of the complaint. Gibson v. City of Chi., 910 F.2d
1510, 1520 (7th Cir. 1990). As previously noted, reviewing a motion to dismiss under Rule
12(b)(6), the Court takes as true all factual allegations in Plaintiff’s complaint and draws all
reasonable inferences in its favor. Killingsworth, 507 F.3d at 618. To survive a Rule 12(b)(6)
motion to dismiss, the claim first must comply with Rule 8(a) by providing “a short and plain
statement of the claim showing that the pleader is entitled to relief” (Fed. R. Civ. P. 8(a)(2)),
such that the defendant is given “fair notice of what the . . . claim is and the grounds upon which
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it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355
U.S. 41, 47 (1957)). Second, the factual allegations in the claim must be sufficient to raise the
possibility of relief above the “speculative level,” assuming that all of the allegations in the
complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007)
(quoting Twombly, 550 U.S. at 555). “A pleading that offers ‘labels and conclusions’ or a
‘formulaic recitation of the elements of a cause of action will not do.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). However, “[s]pecific facts are not
necessary; the statement need only give the defendant fair notice of what the . . . claim is and the
grounds upon which it rests.” Erickson v. Pardus, 551 U.S. 89, 93 (2007) (citing Twombly, 550
U.S. at 555) (ellipsis in original). The Court reads the complaint and assesses its plausibility as a
whole. See Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir. 2011); cf. Scott v. City of Chi., 195
F.3d 950, 952 (7th Cir. 1999) (“Whether a complaint provides notice, however, is determined by
looking at the complaint as a whole.”).
III.
Analysis
Arcon seeks dismissal of a portion of Plaintiff’s complaint pursuant to Rule 12(b)(6) of
the Federal Rules of Civil Procedure, arguing that Hartford cannot legally collect from Arcon the
$447,662.21 that Hartford paid to Grace’s subcontractors under the payment bond. Arcon
contends that Hartford’s pursuit of these monies from it is an improper attempt to assert the
contract rights of Grace’s subcontractors, to which Hartford has not equitably subrogated. Arcon
maintains that Hartford only may sue Arcon for the costs that Hartford incurred to complete
Grace’s work in conjunction with the performance bond, because, by fulfilling its obligation
under that bond, Hartford stepped into the shoes of SD225, which had a contract with Arcon. By
fulfilling its obligations under the payment bond, Arcon argues, Hartford stepped into the shoes
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of Grace’s unpaid subcontractors, which had contracts with Grace but no contractual relationship
with Arcon. Hartford, therefore, cannot sue Arcon for Grace’s failure to pay its subcontractors,
Arcon argues, due to a lack of privity between those subcontractors and Arcon.
Arcon premises its argument on basic principles of subrogation, an area of construction
law in which both parties recognize BRUNER
AND
O’CONNOR
ON
CONSTRUCTION LAW as a
leading authority. “Subrogation is a term used by the law to describe the remedy by which,
when the property of one person is used to discharge a duty of another . . . under such
circumstances that the other will be unjustly enriched by the retention of the benefit just
conferred, the former is placed in the position of the obligee . . . .” 4A PHILIP P. BRUNER AND
PATRICK J. O’CONNOR JR., BRUNER AND O’CONNOR ON CONSTRUCTION LAW, § 12:100 (2013).
Subrogation “is a rule that the law adopts to compel the eventual satisfaction of an obligation by
the one who ought to pay it. In the suretyship context, subrogation provides a secondary obligor
who performs a secondary obligation with the obligee’s rights with respect to the underlying
obligation as though the obligation had not been satisfied.” Id. “Subrogation is often called an
equitable assignment or an assignment by operation of law.” Id.
A surety’s right of equitable subrogation is based on “standing in the shoes” of another,
and so “the invocation of the right requires careful analysis as to just whose shoes the surety is
standing in.” 4A BRUNER
AND
O’CONNOR, § 12:100. “Payments made under a performance
bond typically place the surety in the shoes of the obligee for whom payments are made, the
contractor whose debts are satisfied, and the subcontractors and other creditors whose claims are
paid.” Id. “Payments made solely under a payment bond, however, typically place the surety in
the shoes of the contractor whose debts are satisfied and subcontractors and other creditors
whose claims are paid.” Id.
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Arcon insists that Hartford’s performance under the performance bond allows Hartford to
step into SD225’s shoes only for the purpose of recovering the cost of performance, while
Hartford’s payments to Grace’s subcontractors under the payment bond only permit Hartford to
step into the shoes of those subcontractors to retrieve those monies. And by that logic, because
Grace’s subcontractors did not have contracts with Arcon, Hartford cannot seek payment bondrelated damages from Arcon in the subcontractors’ shoes. Hartford disagrees with Arcon’s
subrogation analysis, criticizing it as rooted in a “too-elementary distinction between
performance bonds and payment bonds without any regard whatsoever for the precise terms of
the Payment Bond and the Performance Bond at issue in this case or the impact of the Illinois
Mechanic’s Lien Act, 770 ILCS 60/23, and Trust Fund Act, 770 ILCS 60/21.02, on the
obligation to ensure that public funds are paid to the parties who earned those funds through their
performance.” Opp. Br. at 11. According to Hartford, because the performance and payment
bonds were issued for SD225’s benefit, Hartford owed obligations under both bonds directly to
SD225. Consequently, Hartford contends, it can step into SD225’s shoes to recover losses that it
incurred under either bond. At bottom, the parties agree that Hartford can step into SD225’s
shoes, but disagree as to the scope of the remedy that it can pursue while wearing them.
“It is widely recognized that the performing surety is subrogated for its losses (1) to the
rights of the obligee in the contract funds, (2) to the obligee’s rights against the contractor and
third parties, (3) to any properties securing performance of the bonded contract, and (4) to the
rights of third parties whose claims it has paid.” 4A BRUNER AND O’CONNOR, § 12:28. How
that translates with respect to the instant case is that Hartford (the performing surety) subrogates
(1) to the rights of the obligee (SD225) in the contract funds, (2) to SD225’s rights against the
contractor (Grace) and third parties (Arcon and HBC), (3) to any properties securing
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performance of the bonded contract (none here, as far as the Court can tell), and (4) to the rights
of third parties whose claims Hartford paid (subcontractors of Grace). Presumably, Grace is
insolvent, and so, in all likelihood, Hartford wants to try to recover as much of their losses as it
can from Arcon and HBC, which also had contracts with SD225. Arcon does not contest
Hartford’s ability to do so, presumably because the second subrogation right above suggests that
Hartford may sue not only Grace, but any other third party that breached a contract with SD225
and caused Hartford’s losses. And since Arcon concedes that Hartford may step into SD225’s
shoes and sue it for breaching its architectural contract with SD225, Arcon’s arguments
concerning the scope of Hartford’s subrogation rights seem to be a red herring. Once in those
shoes, the terms of the architectural contract, not abstract subrogation law or the terms of the
bonds, govern the relief that Hartford may seek. Indeed, Plaintiff sues Hartford for one count –
breach of the architectural contract.
Arcon implicitly recognizes that, arguing that Plaintiff’s SAC “is devoid of any
allegations establishing a link between Arcon’s contractual obligations, the unpaid
subcontractors, and the amounts Plaintiff allegedly paid in payment bond claims.” MTD at 7.
Arcon contends that it had “no contractual obligation to pay or ensure payment to
subcontractors” and maintains that “[n]othing Arcon did or failed to do caused Grace’s failure to
pay [its subcontractors] or the payment bond claims that ensued.” Id. In support, Arcon points
to the section of the architectural contract that explicitly states that:
The issuance of a Certificate for Payment shall not be a representation that the
Architect has (1) made exhaustive or continuous on-site inspections to check the
quality or quantity of the Work, (2) reviewed construction means, methods,
techniques, sequences or procedures, (3) reviewed copies of requisitions received
from Subcontractors and material suppliers and other data requested by the Owner
to substantiate the Contractor’s right to payment, and (4) ascertained how or for
what purpose the Contractor has used money previously paid on account of the
Contract sum.
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SAC Ex. B § 2.6.9.3.
In its opposition brief, Hartford argues that Arcon, in fact, did cause SD225’s losses with
respect to the unpaid subcontractors. In Hartford’s words, Arcon’s “fail[ure] in its performance
of its contract . . . rendered the public funds unavailable when needed to both complete the
project and to pay unpaid subcontractors, laborers and suppliers in accordance with contract
documents and Illinois law.” Opp. Br. at 1. Hartford contends that “[a]s a direct result of
Arcon’s actions Arcon caused SD225 damages by depleting public construction funds by, among
other things, certifying payment applications and representing to SD225 that it should pay for
electrical work that was either not performed or performed incorrectly by [Grace], Grace’s
subcontractors and suppliers (“Vendors”), and without regard for Grace’s failure to make
payments to vendors.” Id. at 2. Arcon argues that its contract did not obligate it to ensure that
Grace paid its subcontractors, and that’s true. But Plaintiff’s SAC alleges more than that.
Hartford alleges that, in addition to requiring Arcon to “investigate the work performed,” “make
certifications to SD225 that the contractor requesting payment is entitled to payment in the
amount certified,” and “guard SD225 against defects and deficiencies in the work performed,”
the architectural contract imposed on Arcon “a duty to gather mechanics lien waivers and sworn
statements from contractors listing subcontractors and materialmen before issuing payment
certificates.” Opp. Br. at 4. But instead, “Grace failed to pay numerous vendors and failed to
provide the required lien waivers pursuant to [its contract with SD225].” SAC ¶ 58. Read in the
light most favorable to Plaintiff, Arcon failed to obtain lien waivers from Grace’s subcontractors
prior to certifying Grace’s progress payments, exposing SD225 to future demands for payment
from subcontractors that SD225 believed, at the time it made the progress payments, had been
paid by Grace and/or had waived its right to do so.
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The contract’s lone section concerning mechanic’s lien waivers states that “[t]he
Architect administratively shall obtain contractor’s mechanic’s lien waivers and contractor’s
sworn statements listing subcontractors and materialmen before issuing payment certificates, and
if such waivers or sworn statements cannot be obtained, then the Architect’s Certificate shall be
conditional on the receipt of such waivers. In no event shall the Architect be responsible for
verifying that mechanic’s lien waivers or sworn statements are complete, sufficient, or valid.”
SAC Ex. B § 2.6.10. This section supports Hartford’s allegations. If Arcon certified Grace’s
requests for payments without obtaining mechanic’s lien waivers and sworn statements, as
required by the architectural agreement, Arcon may be liable for causing SD225 to issue
payments for Grace’s subcontractors whom SD225 reasonably believed had been paid (or could
not have known existed).
Accordingly, the Court concludes that Hartford’s SAC states a claim for breach of
contract regarding the money that it paid to Grace’s subcontractors pursuant to the payment
bond. At this stage, the contract language alone is insufficient to resolve whether Arcon’s
allegedly deficient payment certifications constituted breaches of its contract with SD225.
Discovery is needed to, among other things, determine what Grace represented to Arcon, what
Arcon represented to SD225, and what Arcon obtained before making such representations.
Hartford alleges that when it paid Grace’s unpaid subcontractors, it satisfied an obligation of
SD225, which was required by Illinois’s Mechanic’s Lien Act to compensate those
subcontractors. Based on its allegations, Hartford therefore equitably subrogated to SD225’s
rights in the architectural contract, and may sue Arcon for breaches of that agreement.
IV.
Conclusion
For the reasons stated above, Defendant’s motion to dismiss [140] is denied.
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Dated: August 28, 2014
__________________________
Robert M. Dow, Jr.
United States District Judge
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