International Fidelity Insurance Company v. Waterfront Group NC, LLC et al

Filing 25

ORDER denying 13 Motion to Dismiss for Lack of Jurisdiction. Signed by Senior Judge Graham Mullen on 7/11/2011. (tmg)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
DOCKET NO. 3:11-CV-00116-FDW
INTERNATIONAL FIDELITY
INSURANCE COMPANY,
Plaintiff,
vs.
WATERFRONT GROUP NC, LLC;
WATERFRONT GROUP, INC.;
WATERFRONT GROUP FL, LLC;
WATERFRONT GROUP, LLC.;
FOUR SEASONS LANDSCAPING OF
NORTH CAROLINA, INC.;
LANDSTAR DEVELOPMENT, LLC;
WILLIAM N. ADKINS; and
MARK R. ADKINS
Defendants.

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ORDER

THIS MATTER is before the Court on Defendants Waterfront Group NC, Inc.’s; Waterfront
Groups, Inc.’s; Waterfront Group, Inc.’s; Waterfront Group FL, LLC’s; Waterfront Group, LLC’s;
Four Seasons Landscaping of North Carolina, Inc.’s; William N. Adkins’; and Mark R. Adkins’
(collectively “Defendants”) Motion to Dismiss pursuant to Fed. R. Civ. P. 12(b)(1) for Lack of
Subject Matter Jurisdiction, (Doc. No. 13), with supporting memoranda. (Doc. Nos. 14, 24). This
Motion is ripe for decision. For the reasons set forth, the Court DENIES Defendants’ Motion to
Dismiss.
I. Background
Plaintiff, International Fidelity Insurance Company, filed suit on March 8, 2011, against
above-named Defendants alleging two claims under North Carolina law for breach of contract.
(Doc. No. 1). This matter arises out of a series of surety agreements for subdivision bonds to build

the Riversound Development in Chowan County, North Carolina. Plantiff, the surety, guaranteed
these bonds for Defendants, the principles, to Chowan County, the obligee. (Doc. No. 1).
Defendants were to complete the work on the Riversound Development in several phases for which
bonds worth in excess of $10 million in total were issued. (Doc. No. 1). Plaintiff issued the bonds
for Phase 1, with a penal sum of $9,376,250, to Defendants on June 4, 2007. (Exhs. B-G). The
contract of suretyship incorporated an indemnity agreement containing a collateral security
provision. (Exh. A). The relevant portion of this indemnity agreement provides:
The Contractor and Indemnitors shall deposit with the Surety on demand an amount
of money or other collateral security acceptable to the surety, as soon as liability
exists or is asserted against the Surety, whether or not the Surety shall have made any
payment therefor. Such payment shall be equal to the amount of the reserve set by
the Surety. The Surety shall have right to use the deposit, or any portion thereof, in
payment or settlement of any liability, loss, or expense for which the Contractor and
Indemnitors shall deposit with the Surety, immediately upon the Surety’s demand,
and additional amount of collateral security equal to such increase.
(Exh. A).
On December 11, 2009, Plaintiff sent Defendants a letter demanding that Defendants post
$1,209,954.00 in collateral because Defendants had failed to complete the developments required
by the bonds for Phase 1. (Exh. H). In response to this demand, Defendants posted funds totaling
$150,000 with Plaintiff. (Doc. No. 1). On January 25, 2011, after Defendants failed to post the
amount requested and failed to complete the necessary improvements, Plaintiff again demanded that
Defendants post $1,032,802.00 in collateral within seven days. (Exh. I). Defendants did not post
any additional collateral, and on March 8, 2011, Plaintiffs filed this suit asserting two claims for
breach of contract for (1) failure to post collateral security and (2) failure to exonerate and
indemnify. (Doc. No. 1). On April, 19, 2011, Defendants filed a Motion to Dismiss for Lack of
Subject Matter Jurisdiction asserting that Plaintiff lacked standing and/or ripeness. (Doc. No. 13).
To date, Chowan County has not asserted liability against the surety.

II. DISCUSSION
It is well established that before a federal court can decide the merits of a claim, the
claim must invoke the jurisdiction of the court. Whitmore v. Arkansas, 495 U.S. 149,
155 (1990). Article III gives federal courts jurisdiction only over “cases and
controversies,” U.S. Const. art. III, § 2, cl. 1, and the doctrine of standing identifies
disputes appropriate for judicial resolution. Valley Forge Christian Coll. v. Ams.
United for Separation of Church and State, Inc., 454 U.S. 464, 471-76, (1982). A
claim is justiciable if the “conflicting contentions of the parties . . . present a real,
substantial controversy between parties having adverse legal interests, a dispute
definite and concrete, not hypothetical or abstract.” Babbitt v. United Farm Workers
Nat'l Union, 442 U.S. 289, 298,(1979) (quoting Ry. Mail Ass'n v. Corsi, 326 U.S. 88,
93(1945)).
Miller v. Brown, 462 F.3d 312, 316 (4th Cir., 2006).
Both standing and ripeness concern whether an actual case-or-controversy exists for the
Court to address. See 13B Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper Federal
Practice and Procedure § 3531.2 (3d ed. 2010). Standing requires that the party asserting federal
jurisdiction demonstrate (1) it has suffered an injury-in-fact, (2) the injury is fairly traceable to the
actions of the defendant, and (3) the likelihood that a favorable ruling will redress the injury. Lujan
v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). The “[r]ipeness doctrine reflects the
determination that courts should decide only ‘a real, substantial controversy,’ not a mere
hypothetical question.” 13B Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal
Practice and Procedure § 3532.2 (3d ed. 2010)(quoting Longway v. Jefferson County Bd. Of Sup’rs,
24 F.3d 397, 400 (2d Cir. 1994)).. Because of the great degree of overlap between these two
doctrines in determining whether an actual injury exists, the analysis for these two doctrines is very
similar and “[s]ome . . . cases expressly recognize that standing and ripeness theories often merge
so closely that there is no reason to attempt separation.” Id. For this reason, the sole inquiry
presented by this Motion is whether Plaintiff asserted a cognizable injury.
Defendants maintain that Plaintiff has not alleged a cognizable injury. (Doc. No. 13).

Defendants argue that the collateral security clause contained in the indemnity agreement requires
Chowan County to assert liability against the surety before Plaintiff may make a demand for
collateral. Id. Since Chowan County has not asserted liability against the surety, Defendants
contend that the demand was improper and therefore Plaintiff’s asserted injury for breach of contract
would be a hypothetical injury until: (1) Chowan County asserted liability, (2) Plaintiff made a
proper demand for collateral, and (3) Defendants did not properly post the required collateral in
accordance with that demand. Id.
In response, Plaintiff argues that the collateral security clause does not require that liability
be asserted by Chowan County, but rather only that Plaintiff make a demand that Defendants post
collateral security for the demand to be valid. (Doc. No. 22). Alternatively, Plaintiff contends that
the collateral security clause only requires that liability exist against the surety, rather than requiring
that Chowan County assert liability against the surety, and that such liability exists. Id. Plaintiff
alleges that the Defendant’s breach of contract constitutes an actual injury, because Plaintiff asserts
that it has lost the security of the position that it bargained for in the indemnity agreement.
“Sureties are ordinarily entitled to specific performance of collateral security clauses. If a
creditor is to have the security position for which he bargained, the promise to maintain the security
must be specifically enforced.” Safeco Insurance Company of America v. Schwab, 739 F.2d 431,
433 (9th Cir. 1984)(quotations omitted). A principal’s failure to post collateral in accordance with
a collateral security provision in a surety agreement has been found to be an actual injury. See
American Motorists Insurance Company v. United Furnace Co. Inc., 876 F.2d 293 (2nd Cir. 1989).
In the instant case, Plaintiff’s assertion that Defendants breached the indemnification agreement by
failing to post the necessary collateral is a cognizable injury because Plaintiff asserts that it has lost
the benefit of the position for which it bargained in the indemnity agreement. Defendants’ assertion

that the indemnity agreement requires that liability be asserted before Plaintiff may demand
collateral goes to the merits of this case, specifically the interpretation of the disputed provision, and
thus further demonstrates that an actual injury has been asserted. This determination of the
requirements of this provision is one to be made by the trier-of-fact.
III. CONCLUSION
IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss for Lack of Subject
Matter Jurisdiction (Doc. No. 13) is DENIED.
IT IS SO ORDERED.
Signed: July 11, 2011