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United States v. Continental Casualty Co.

United States District Court, D. Maryland

August 23, 2018



          Ellen Lipton Hollander United States District Judge

         This case arises under the Miller Act, 40 U.S.C. § 3131 et seq. The plaintiff is the United States of America f/u/b/o Aarow Electrical Solutions, LLC (“Aarow”). Pursuant to a subcontract agreement entered in December 2013, Aarow provided labor and materials to Grunley Construction Company, Inc. (“Grunley”), the general contractor for a construction project (the “Project”) at the Social Security Administration complex in Woodlawn, Maryland. See ECF 1, ¶ 8; ECF 1-2.

         Aarow maintains that it has not been paid in full for the labor and materials it contributed to the Project. See ECF 1. Therefore, pursuant to the Miller Act, plaintiff filed suit against Grunley's sureties, Continental Casualty Company (“Continental”) and Liberty Mutual Insurance Company (“Liberty”) (collectively, the “Sureties”), to recover on the payment bond that the Sureties had issued for the Project. Id. It seeks $246, 093.00, plus interest and costs. Id. at 6.

         Grunley intervened as a defendant. See ECF 14 (“Motion to Intervene”); ECF 37 (Order of August 24, 2017, granting Motion to Intervene). In addition, Grunley filed a counterclaim against Aarow for breach of contract (Count I) and damages related to Aarow's alleged overcharging on the Project (Count II). ECF 46 (Amended Counterclaim).

         Three motions are pending. First, Aarow has moved to dismiss Count I of Grunley's Amended Counterclaim, for breach of contract. ECF 51. Aarow's motion is supported by a memorandum of law. ECF 55 (collectively, “Motion to Dismiss”). Grunley opposes the Motion to Dismiss. ECF 56. Aarow replied. ECF 59.

         Thereafter, Aarow moved for summary judgment in its favor on its Miller Act claim and as to Count II of Grunley's Amended Counterclaim. ECF 60. The motion for summary judgment is supported by a memorandum of law (ECF 60-1) (collectively, “Aarow Motion”) and several exhibits. Defendants oppose the Aarow Motion (ECF 64) and have submitted several exhibits. Aarow replied. ECF 68.

         On the same day that the Aarow Motion was filed, defendants filed a motion for partial summary judgment. ECF 61. Defendants' motion is supported by a memorandum of law (ECF 61-1) (collectively, “Defendants' Motion”) and numerous exhibits. Aarow opposes Defendants' Motion (ECF 65) and defendants replied. ECF 67.

         No hearing is necessary to resolve the motions. See Local Rule 105.6. For the reasons that follow, I shall grant the Motion to Dismiss. And, I shall grant the Aarow Motion and Defendants' Motion in part and deny them in part.

         I. Factual and Procedural Background[1]


         In October 2013, Grunley entered into a Prime Contract with the General Services Administration (“GSA, ” the “United States, ” or the “Government”) in connection with a construction project at the Social Security Administration headquarters in Woodlawn, Maryland. ECF 61-2 (Declaration of B.H. Scott, II), ¶ 3. As a condition of the Prime Contract, Grunley delivered to the Government, as Owner, a labor and material payment bond (the “Bond”), with Liberty and Continental as the joint and several Sureties. Id. ¶ 4; ECF 1-1 (Bond). On or about December 26, 2013, Grunley entered into a subcontract agreement with Aarow by which Aarow was to perform electrical work for the Project. Id. ¶ 5; see also ECF 1-2 (the “Subcontract”). Some of Aarow's work could only occur during scheduled power outages at the site of the Project. ECF 61-2, ¶ 6. Two of these planned outages (“Outage 1” and “Outage 3”) were rescheduled by GSA, which delayed Aarow's work on the Project. Id.[2]

         As a result of these delays, in December 2014, Aarow and Grunley submitted several change order requests to GSA, seeking additional time and compensation for the delays. Id. ¶¶ 7-8. In total, the change order requests sought $349, 606 in additional compensation from GSA, with $252, 101 of that amount for Aarow. Id. ¶ 8. GSA granted the requests only in part, and issued a unilateral contract modification to Grunley, increasing the contract price by $143, 882. Id. ¶¶ 9-10. Of this amount, Grunley passed through $103, 235 to Aarow. Id. ¶ 11.

         In April 2015, GSA declared that the Project had reached “substantial completion” on March 9, 2015. See ECF 61-8 at 4 (Aarow's claim for compensation after substantial completion). Aarow's work on the Project was fully completed by May 16, 2016. Id. According to Aarow, it incurred further delay-related damages after the date of substantial completion. Id. at 9-11. However, Aarow also signed partial releases dated April 30, 2015, and December 31, 2015, in exchange for payments from Grunley. See ECF 61-2, ¶ 14; see also ECF 61-7 at 1 (April 2015 Release); id. at 2 (December 2015 Release). Under the terms of the partial releases, Aarow waived and released any unauthorized claims against Grunley or the Sureties as of the dates of the releases. See ECF 61-7 at 1, 2.

         On June 15, 2016, Aarow submitted a claim to Grunley, seeking additional compensation for the delays, in the amount of $246, 093. ECF 61-2, ¶ 15; see also ECF 61-8 (“Aarow Claim”). Grunley submitted a claim to GSA, seeking the amount requested by Aarow, plus roughly $100, 000 in other payments. ECF 61-2, ¶ 16; ECF 61-9 (“Grunley Claim”). This suit by Aarow followed on September 1, 2016. ECF 1.

         Thereafter, on March 30, 2017, GSA denied the Grunley Claim, and instead sought $43, 194.15 in repayment from Grunley. ECF 61-2, ¶ 17; see ECF 61-10 (“Government Claim”). The Government Claim consisted of a demand for $26, 778.78 in liquidated damages and $16, 415.37 for “labor overcharging.” ECF 61-2, ¶ 17. Grunley appealed the denial to the U.S. Civilian Board of Contract Appeals (“CBCA”) on June 26, 2017. Id. ¶ 18. On November 27, 2017, Grunley and GSA settled both the Grunley Claim and the Government Claim with a payment of $105, 000 from GSA to Grunley. Id. ¶ 23. According to Grunley, Aarow's share of this recovery is $25, 957, minus Aarow's pro rata share of the costs of the claim. Id.[3]


         As noted, Aarow filed this suit against the Sureties on September 1, 2016. ECF 1. In January 2017, Grunley moved to intervene (ECF 14, “Motion to Intervene”) and concurrently moved to stay the case pending the resolution of its appeal before the CBCA. ECF 16 (“Motion to Stay”). One of the central arguments of Grunley's Motion to Stay was that the Subcontract contained two clauses that Grunley asserted would limit Aarow's recovery.

         In particular, the Subcontract provided, in regard to payments due to Aarow, ECF 1-2, ¶ 6: “Payment from the Owner [i.e., the Government] is a specific condition precedent to the Contractor's obligation to pay the Subcontractor . . . .” This clause is known as a “pay-if-paid” or “pay-when-paid” clause. Furthermore, the Subcontract also specified, id. ¶ 12:

The Contractor shall not be independently liable to Subcontractor for any unforeseeable delay or interference occurring beyond the Contractor's control or for delay or interference caused by Owner or other subcontractors or suppliers. Subcontractor shall only be entitled to reimbursement for any damages for delays recovered on its behalf by the Contractor from the Owner or others.

         This clause is known as a “no-damages-for-delay” clause.

         Grunley argued in its Motion to Stay that the case must be stayed while Grunley's appeal with the Government was pending because, under these clauses of the Subcontract, “Aarow has no damages unless and until Grunley recovers the sum from the Government.” ECF 16 at 11.

         In a Memorandum Opinion (ECF 36) and Order (ECF 37) of August 24, 2017, this Court granted the Motion to Intervene but denied the Motion to Stay. The Court ruled that, if a stay were granted and the Subcontract clauses in question were enforced, Aarow could be effectively denied its rights under the Miller Act. See ECF 36 at 24-26. As a result, the Court concluded that “Grunley may not rely on the conditional payment clauses of the Subcontract to delay the Miller Act suit against its sureties.” Id. at 27.[4]

         II. Legal Standards

         A. Choice of Law

         Defendants maintain that the Subcontract is governed by Virginia law. ECF 61-1 at 15; see also ECF 1-2, ¶ 39 (providing that “[t]his Agreement shall be governed by the laws of the Commonwealth of Virginia”). Aarow appears to agree. See ECF 65 at 10. Where the question is one of contract interpretation and not the construction of the Miller Act itself, courts look to state law. See United States for Use & Benefit of Shields, Inc. v. Citizens & S Nat. Bank of Atlanta, Ga., 367 F.2d 473, 477 (4th Cir. 1966); see also United States v. Hartford Accident & Indem. Co., 168 F.Supp.3d 824, 832 (D. Md. 2016).

         “In Maryland, choice of law provisions in contracts are enforceable unless the choice of law jurisdiction has no substantial relationship to the transaction, or there is a fundamental policy difference in the laws of another jurisdiction with a more substantial interest in the parties or the transaction.” United States for use & benefit of Tusco, Inc. v. Clark Constr. Grp., LLC, 235 F.Supp.3d 745, 753 (D. Md. 2016). Observing no such considerations here, I shall apply Virginia law to the State-law claims.

         However, “[f]ederal law, not state statute or common law principles, controls in Miller Act suits.” Tusco, 235 F.Supp.3d at 756 n.13; see also F. D. Rich Co. v. U.S. for Use of Indus. Lumber Co., 417 U.S. 116, 127 (1974) (“The Miller Act provides a federal cause of action, and the scope of the remedy as well as the substance of the rights created thereby is a matter of federal not state law.”). As a result, for all questions relating to the interpretation and application of the Miller Act, I shall apply federal law.

         B. Rule 12(b)(6)

         As noted, Aarow has moved to dismiss Count II of Grunley's Amended Counterclaim. ECF 51. A defendant may test the legal sufficiency of a complaint, or a counterclaim, by way of a motion to dismiss under Rule 12(b)(6). In re Birmingham, 846 F.3d 88, 92 (4th Cir. 2017); Goines v. Valley Cmty. Servs. Bd., 822 F.3d 159, 165-66 (4th Cir. 2016); McBurney v. Cuccinelli, 616 F.3d 393, 408 (4th Cir. 2010), aff'd sub nom. McBurney v. Young, 569 U.S. 221 (2013); Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999). A Rule 12(b)(6) motion constitutes an assertion by a defendant that, even if the facts alleged by a plaintiff are true, the complaint fails as a matter of law “to state a claim upon which relief can be granted.”

Whether a complaint states a claim for relief is assessed by reference to the pleading requirements of Fed.R.Civ.P. 8(a)(2). That rule provides that a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” The purpose of the rule is to provide the defendant with “fair notice” of the claims and the “grounds” for entitlement to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007).

         To survive a motion under Fed.R.Civ.P. 12(b)(6), a complaint must contain facts sufficient to “state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570; see Ashcroft v. Iqbal, 556 U.S. 662, 684 (2009) (“Our decision in Twombly expounded the pleading standard for ‘all civil actions' ..... (citation omitted)); see also Willner v. Dimon, 849 F.3d 93, 112 (4th Cir. 2017). But, a plaintiff need not include “detailed factual allegations” in order to satisfy Rule 8(a)(2). Twombly, 550 U.S. at 555. Moreover, federal pleading rules “do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.” Johnson v. City of Shelby, Miss., U.S., 135 S.Ct. 346, 346 (2014) (per curiam).

         Nevertheless, the rule demands more than bald accusations or mere speculation. Twombly, 550 U.S. at 555; see Painter's Mill Grille, LLC v. Brown,716 F.3d 342, 350 (4th Cir. 2013). If a complaint provides no more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action, ” it is insufficient. Twombly, 550 U.S. at 555. Rather, to satisfy the minimal requirements of Rule 8(a)(2), the complaint must set forth “enough factual matter (taken as true) to suggest” a cognizable cause of action, “even if . . . ...

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