United States of America, for the use and benefit of Ash Equipment Co., Inc. et al v. Morris, Inc. et al

Filing 39

ORDER granting in part and denying in part 21 Motion to Dismiss. Signed by U.S. District Judge Lawrence L. Piersol on 9/29/15. (DJP)

FILED
SEP 2 9 2015
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION

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UNITED STATES OF AMERICA,
CIV 14-4131
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for the use and benefit of
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Ash Equipment Co., Inc., and
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ASH EQUIPMENT CO., INC.,
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a Maryland corporation,
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d/b/a American Hydro,
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Plaintiffs,
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vs.
MORRIS, INC., a South Dakota
corporation; UNITED FIRE AND
CASUALTY COMPANY, an Iowa
corporation; and RED WILK
CONSTRUCTION, INC., a
South Dakota corporation,
Defendants.

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MEMORANDUM OPINION AND
ORDER ON MOTION TO DISMISS
COUNTERCLAIM

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On August 22, 2014, Plaintiffs filed a three-count complaint against Defendants alleging: (1)
breach of contract; (2) quantum meruit, and; (3) failure to pay under the Miller Act. (Doc. 1.) On
October 2, 2014, Defendant Red Wilk Construction, Inc. (Red Wilk) filed an answer and a
counterclaim against Plaintiff, American Hydro, for breach of contract. (Doc. 14.) Red Wilk
includes requests for relief in the form of damages, liquidated damages and equitable relief. A
supplemental complaint was filed by Plaintiffs which contains additional facts, but the counts remain
the same. (Doc. 32.)

On October 16, 2014, American Hydro moved to dismiss Red Wilk'scounterclaim for failure
to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. 21.) The
motion has been fully briefed. For the following reasons, the motion to dismiss the counterclaim
will be denied in part and granted in part.

BACKGROUND
Plaintiff American Hydro is a national hydrodemolition contractor. On April 9, 2014,
Defendant Red Wilk contracted with American Hydro to provide the labor, equipment and other
facilities for concrete removal by hydrodemolition at the Fort Randall dam in Pickstown, South
Dakota.

The general contractor for the project at the Fort Randall dam is Defendant Morris, a South
Dakota corporation with its principal place of business in Pierre, South Dakota. On September 17,
2013, Morris entered into the Prime Contract for the Fort Randall dam project with the United States
Army Corps of Engineers (USACE). Morris obtained a Miller Act payment bond on September 18,
2013, from Defendant United Fire and Casualty Co. in the amount of$7,472,670.25 as required by
USACE. On October 8, 2013, Morris contracted with Red Wilk to complete certain work, including
the concrete removal using hydrodemolition methods as required by USA CE in its project plans and
specifications. As indicated above, Red Wilk then subcontracted with American Hydro to perform
the hydrodemolition work.

American Hydro began the concrete hydrodemolition work in May, 2014, about a month after
entering into the contract with Red Wilk. American Hydro removed its equipment and labor forces
from the work site as of August 25, 2014. American Hydro alleges it has been paid for some but not
all of the work it provided. Red Wilk contends that American Hydro failed to perform some work
in accordance with the contract specifications and failed to complete other work required by the
contract. Red Wilk asserts that any amounts allegedly owed to American Hydro above and beyond
what has been paid are completely offset because Red Wilk had to hire others to correct or complete
the hydrodemolition work on the project. Both parties seek damages for the other's breach of the
contract in an amount to be proven at trial. Red Wilk also requests liquidated damages and equitable
relief.

2

DISCUSSION
Standard of Review
When reviewing a motion to dismiss under Rule 12(b )( 6), a court must accept as true all
factual allegations contained in the complaint or counterclaim, and review the pleading to determine
whether its allegations show the pleader is entitled to relief. See Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 555 (2007); Fed.R.Civ.P. 8(a)(2). The purpose of a motion to dismiss for failure to state
a claim is to test the legal sufficiency of the pleading. A complaint or counterclaim must be
dismissed under Rule 12(b )( 6) if it does not plead "enough facts to state a claim to relief that is
plausible on its face." Twombly, 550 U.S. at 570 (abrogating the traditional 12(b)(6) "no set of facts"
standard set forth in Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). While the counterclaim need not
provide specific facts in support of the claims contained therein, it must give the defendant fair
notice of the claims and the grounds on which the claims rest. See Erickson v. Pardus, 551 U.S. 89,
93 (2007) (per curiam). This obligation requires a counterclaimant to plead "more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly,
550 U.S. at 555.

The Eighth Circuit elaborated on the standard enunciated in Twombly when addressing a
motion to dismiss under Rule 12(b)(6):
After Twombly, we have said that a plaintiff must assert facts that affirmatively and
plausibly suggest that the pleader has the right he claims rather than facts that are
merely consistent with such a right. While a plaintiff need not set forth detailed
factual allegations or specific facts that describe the evidence to be presented, the
complaint must include sufficient factual allegations to provide the grounds on which
the claim rests. A district court, therefore, is not required to divine the litigant's intent
and create claims that are not clearly raised, and it need not conjure up unpled
allegations to save a complaint.
Gregory v. Dillard's, Inc., 565 F.3d 464, 473 (8th Cir. 2009) (internal citations and quotations
omitted).

Rule 12(b)(6) allows the Court to examine documents incorporated into the counterclaim by
reference, such as the contract in this case. See Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551

3

U.S. 308, 322 (2007) ("[C]ourts must consider the complaint in its entirety, as well as other sources
courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents
incorporated into the complaint by reference, and matters of which a court may take judicial
notice."); see also Stahl v. US. Dep 't of Agric., 327 F.3d 697, 700 (8th Cir. 2003) ("In a case
involving a contract, the court may examine the contract documents in deciding a motion to
dismiss.").

Breach of Contract
American Hydro moves under Rule 12(b)(6) to dismiss Red Wilk's breach of contract
counterclaim for failure to state a claim upon which relief can be granted. It asserts that Red Wilk's
breach of contract counterclaim fails because damages are not pleaded with sufficient specificity. 1
Red Wilk notes that American Hydro filed the lawsuit before the project was complete and asserts
that it could not ascertain the full extent and dollar amount of its damages because the project is
ongoing and American Hydro abandoned the project. Red Wilk contends that it has sufficiently
pleaded the damages arising from the breach of contract claim by identifying in its counterclaim
particular categories of costs that it has incurred or will incur due to American Hydro's alleged
breach of the contract.

Red Wilk is not obligated at the pleading stage to produce evidence of direct pecuniary loss;
it need only plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 550
U.S. at 570. Red Wilk has not merely requested damages, it has also pleaded "factual content that
allows the court to draw the reasonable inference that the [counterdefendant] is liable for the
misconduct alleged." Ashcroft v. Igbal, 556 U.S. 662, 678 (2009). Assuming the truth of the
well-pleaded factual allegations, as the Court must, it may be reasonably inferred that American
1

The contract does not contain a choice oflaw provision but both parties apply South Dakota law
in their briefing. To establish a breach of contract under South Dakota law, Red Wilk must prove:
1) the existence of an enforceable promise; 2) that American Hydro breached the contract; and 3)
that Red Wilk suffered damages as a result of the breach. See, e.g., McKie v. Huntley, 620 N.W.2d
599, 603 (S.D. 2000). Because the first two elements do not appear to be in dispute for purposes of
American Hydro's pending Rule 12(b)(6) motion to dismiss Red Wilk's breach of contract
counterclaim, the Court will limit its analysis to determining the sufficiency of the damages pleaded.
4

Hydro's failure to complete the work could have plausibly caused the economic losses alleged in
paragraph 16 of the counterclaim. The Court therefore concludes that Red Wilk has pleaded
sufficient facts to state a plausible claim that it was economically damaged as a direct result of
American Hydro's alleged breach of the contract. Accordingly, the Court will deny American
Hydro's motion to dismiss the breach of contract counterclaim.

Liquidated Damages
American Hydro asks the Court to find as a matter of law that the liquidated damages
provision in the contract is invalid as an unenforceable penalty. 2 Red Wilk again emphasizes that
American Hydro filed this lawsuit before the project was complete and asserts that it could not
ascertain the full extent and dollar amount of its damages before filing its counterclaim because the
project is ongoing and American Hydro abandoned the project, so Red Wilk is relying on the
liquidated damages clause as a measure of damages, at least for now.

Generally, "when contracting parties specifically provide for a resolution in the event that
contract conditions are not met, then [the court] must defer to their agreement." FB & I Bldg.
Products, Inc. v. Superior Truss & Components, a Div. ofBanks Lumber, Inc., 727 N. W.2d 474, 479

(S.D. 2007). Under South Dakota law, if damages for the prospective breach of a contract are
difficult to measure and the stipulated damages are a reasonable estimate of actual damages, then
such a provision is valid and enforceable as liquidated damages; otherwise it is void as a penalty.
Safari, Inc. v. Verdoorn, 446 N.W.2d 44, 46 (S.D. 1989). Whether a contractual provision is an

enforceable liquidated damages provision or an unenforceable penalty is a question of law. Id.
However, sometimes factual issues must be resolved before the legal question can be decided. See,
e.g., Safari, 446 N.W. 2d at 46.

2

Red Wilk notes that the language is difficult to read in the copy of the contract filed by
American Hydro, but states that section 9. 7 of the contract sets liquidated damages at, "$3,500.00
per Day for the first 10 days - $10,000.00/day for each day after initial 10 days ... " (Doc. 25, Red
Wilk's Brief, at p. 13.) In its Reply Brief, American Hydro does not dispute Red Wilk's
representation of the language of the liquidated damages provision.

5

A liquidated damages clause is enforceable ifthe court finds that: "(I) damages in the event
ofbreach are incapable or very difficult of accurate estimation at the time the contract was made; (2)
there was a reasonable attempt by the parties to fix compensation; and (3) the amount stipulated
bears a reasonable relation to probable damages and is not disproportionate to any damages
reasonably to be anticipated." Safari, 446 N.W.2d at 46 (citations omitted). These factors must be
determined from evidence of the circumstances which existed at the time the parties executed the
agreement. See id. at 48 (Sabers, J., dissenting)("The reasonableness of the liquidated damage
provision must be reviewed at the time of contracting not after default or breach.").

Presently, the Court has only the pleadings and the terms of the contract, which do not show
the circumstances at the time the contract was executed. The Court does not know how the contract
was negotiated, what the parties' intentions were when they agreed to and included the liquidated
damages provision, the difficulties in assessing damages at the time of the contract's formation, or
the actual damages sustained and why the liquidated damages provision might amount to a penalty.
This Court's determination concerning whether the liquidated damages clause will apply in this case
requires consideration and weighing of evidence outside the record, which is improper on a motion
to dismiss under Rule 12(b)(6). Whether the liquidated damages provision is reasonable cannot be
decided at this juncture, and the Court will not dismiss Red Wilk's request for liquidated damages
at this time.

Equitable Relief
Red Wilk asserts that American Hydro has been unjustly enriched by collecting money for
work that it refused to complete under the contract. (Doc. 14, if 22.) American Hydro argues that
the unjust enrichment claim should be dismissed pursuant to Rule 12(b)(6) because Red Wilk's
claims are completely encompassed by the written contract between the partes. See Johnson v.

Larson, 779 N.W.2d 412, 416 ("[T]he equitable remedy of unjust enrichment is unwarranted when
the rights of the parties are controlled by an express contract."). Here, an express contract exists
which governs the obligations and rights of the parties. The validity of the contract is not disputed.

6

In fact, both parties seek to enforce the contract. 3 Because a valid contract exists that governs the
issues between American Hydro and Red Wilk in this case, South Dakota law precludes Red Wilk
from bringing an unjust enrichment claim and the Court will grant American Hydro's motion to
dismiss this claim. See Johnson, 779 N.W.2d at 416; see also Surgical Inst. ofSD, P.C. v. Sorrell,
816 N.W.2d 133, 140-41 (S.D. 2012) (affirming trial court's conclusion that contract and its
amendments "occupied the field," precluding an unjust enrichment claim). The dismissal will be
without prejudice to Red Wilk's right to move to amend and file a counterclaim for unjust
enrichment with more specific allegations if, during the course of construction, a claim for such
relief arises outside the confines of the contract between Red Wilk and American Hydro.
Accordingly,

IT IS ORDERED:
1. That American Hydro's motion to dismiss pursuant to Rule 12(b)(6), doc. 21, is
granted without prejudice as to Red Wilk's claim for unjust enrichment; and
2. That American Hydro's motion to dismiss, doc. 21, is denied as to the remaining
claims.
Dated this ,.q1;day of September, 2015.
BY THE COURT:

awrence L. Piersol
United States District Judge
ATTEST:
JOSEPH HAAS;fLERK
BY:

QJ; (Jj:§!f5~
DEPUTY

3

As discussed above, the one exception is that American Hydro contests the validity of the
liquidated damages clause in the contract.
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