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State Construction Corp. v. Slone Associates, Inc.

United States District Court, D. Maryland

April 22, 2019


v.
SLONE ASSOCIATES, INC. et al., Defendants.

          MEMORANDUM OPINION

          PAUL W. GRIMM UNITED STATES DISTRICT JUDGE

         State Construction Corp. ("State Construction") has brought this federal lawsuit seeking compensation for labor, materials, and services it provided in the course of a protracted construction project on a military facility in Maryland. It accuses Defendants, including the project's prime contractor, of scheming to deny it the protections accorded under the Miller Act, a law that shields certain classes of subcontractors and suppliers on federally funded construction sites from the risk they will not be paid for their work. Defendants argue this Court lacks jurisdiction over the suit and that, even if jurisdiction does exist, the Amended Complaint fails to state a claim upon which relief may be granted.

         I agree with Defendants that, under the express terms of State Construction's subcontract, the company is a "third-tier" subcontractor without standing to bring suit under the Miller Act. I find, though, that the Amended Complaint adequately pleads a claim that the prime contractor breached an implied-in-fact contract to pay State Construction for costs associated with delays on the project and that this claim supplies a basis for federal jurisdiction. I also conclude that Defendants are not entitled to a dismissal of State Construction's Miller Act bond claim, nor of its claims for breach of the implied-in-fact contract and unjust enrichment. I also am permitting the fraud claim against the prime contractor to proceed but am ordering State Construction to further amend its complaint to indicate precisely where the alleged misrepresentations were made and whether they were oral or in writing. The fraud claim against the putative first-tier subcontractor will, however, be dismissed.

         FACTUAL BACKGROUND

         This case involves five companies, all of which were involved, to varying extents, in a federally funded construction project at Fort Meade, a military installation in Anne Arundel County, Maryland.[1] The differing roles each of these companies played in the project is critical to the resolution of the matter before me, and so, for the reader's sake, I will pause a moment to introduce them.

         I start with the defendants. Slone Associates, Inc. ("Slone") was the prime contractor on the project. Am. Compl. ¶ 11, ECF No. 29. U.S. Specialty Insurance Co. ("U.S. Specialty") was the surety that provided the payment bond required under the Miller Act to protect the subcontractor and a limited class of construction companies and labor and material suppliers involved in the project. Id. ¶ 12; see 40 U.S.C. § 3131(b)(2) (requiring the prime contractor on certain federal construction projects to furnish a payment bond "for the protection of all persons supplying labor and material in carrying out the work provided for in the contract"). C&S Aircraft Service, Inc. ("C&S Aircraft"), based in Georgia, was the putative subcontractor (though, as will soon be made clear, the Amended Complaint alleges its only true function was to shield Slone and U.S. Specialty from Miller Act claims like the ones asserted here). See Id. ¶ 3. Two Rivers Site Development ("Two Rivers") was the putative second-tier subcontractor (or sub-subcontractor). Id. ¶ 23. And, at the end of this chain, there is the Plaintiff, State Construction, which at one time identified itself as a third-tier subcontractor but here seeks to reclassify itself as either a second-tier subcontractor or, under an alternative legal theory, a subcontractor. See Id. ¶ 25.

         The Federal Highway Administration, an agency within the U.S. Department of Transportation, awarded the prime contract to Slone on May 9, 2013, for a price of just under $8.1 million. Id. ¶ 11. The agreement called for Slone to design and build an "access control point" at the entrance to Fort Meade. Id. ¶¶ 10-11. Slone furnished the required Miller Act payment bond on May 13, 2013, with U.S. Specialty serving as surety. See Id. ¶ 15.

         Slone soon entered into a subcontract with C&S Aircraft, under which the latter company would "perform erosion control, clearing/site demolition, earthwork, surveying and layout, and maintenance of traffic work." Id. ¶ 16. The contract price was $992, 473.29. See Id. In its Amended Complaint, State Construction asserts it is "unaware of what line of business C&S engages in, although the name suggests 'aircraft services.'" Id. ¶3. The sole shareholders, it states, "are Charles Adon Clark and his wife, and according to the internet, it has one employee and had $5, 000 annual income before entering into the purported Subcontract Agreement with Slone" on July 15, 2015. Id. Under these circumstances, it is hardly surprising that State Construction views the bona fides of the Sloane-C&S "subcontract" with considerable skepticism.

         C&S Aircraft and Two Rivers entered into a sub-subcontract agreement one week later, on July 21, 2015. Id. ¶ 23. This agreement delegated to Two Rivers the entirety of C&S Aircraft's performance obligations under the July 15, 2015 subcontract, further strengthening State Construction's suspicions. See id.

         As the summer progressed, Slone and Two Rivers forged ahead with negotiations on an agreement with State Construction (the plaintiff in this case) for "storm drainage, water and sanitary sewer utility work." Id. ¶ 18. C&S Aircraft did not participate in the negotiations. Id. The talks culminated on September 24, 2015, when State Construction and Two Rivers entered into a written agreement. Id. ¶ 24. The deal, worth $670, 000, called for State Construction to install the underground water, storm, and sewer utilities for the project.[2] See id.; State-Two Rivers Agreement 12, ECF No. 34-7.

         The September 24, 2015 contract was later supplemented by a "Joint Check Agreement," which authorized Slone to pay C&S Aircraft, Two Rivers, and State Construction "by check made jointly" to those three companies.[3] State-Two Rivers Agreement 17; see Am. Compl. ¶ 25. This agreement, signed by representatives of all four parties (including C&S Aircraft), listed Slone as the project's "general contractor," C&S Aircraft as the "first tier subcontractor," Two Rivers as the "second tier subcontractor," and State Construction as the "third tier subcontractor." State-Two Rivers Agreement 17; see Am. Compl. ¶ 25.

         State Construction's responsibilities under the September 24, 2015 contract fell outside of the scope of work that Slone had outlined in its July 2015 subcontract with C&S Aircraft. That changed, though, on November 2, 2015, when Slone issued a change order awarding C&S Aircraft an additional $728, 079.25 "to perform the underground storm drainage, water, and sanitary sewer work for the Project, the same scope of underground utility work to be performed by State [Construction]." Am. Compl. ¶ 17. That same month, C&S Aircraft issued an "identical" change order adding these duties to Two Rivers's scope of work. Id. ¶ 18.

         A similar sequence of events soon followed, when another change order expanded State Construction's scope of work to include "some miscellaneous curb and gutter work." Id. ¶ 24. The change order, dated December 2, 2015, entitled State Construction to $22, 000 for this work. Id. One month later, Slone issued a change order inserting this same curb and gutter work, among other "miscellaneous paving work," into its subcontract with C&S Aircraft for the added sum of $33, 808.34. Id. ¶ 19.

         As the work proceeded, State Construction personnel never saw anyone from C&S Aircraft on thejobsite. Seeid.¶2\. No one from C&S Aircraft ever attended any project meetings. Id. And daily reports prepared by Slone or Two Rivers made no mention of C&S Aircraft workers. Id. The company's "only known activity," according to the Amended Complaint, "was to sign checks written by Slone [in return] for a nominal fee." Id.

         State Construction began to experience delays on site as early as the fall and winter of 2015. See Id. ¶ 28. Though the company had expected to complete its work by April 2016, poor coordination and other failures it attributes to Slone and Two Rivers left it unable to complete more than 20 percent of its work by that time. See Id. ¶ 30. To ensure that State Construction would "keep its major equipment and manpower on site," Slone Vice President William Slone and two State Construction executives "entered into an agreement... on or about April 1, 2016, for Slone to be directly responsible for the additional costs stemming from the delays and impacts in performing and completing the remaining eighty percent of the underground utility work." Id. ¶ 32. The Amended Complaint characterizes this agreement as an "implied-in-fact agreement," saying it was "based upon conversations and conduct." Id. ¶¶ 32-33.

         With this agreement in place, Slone "resumed" making interim progress payments for State Construction's work during the spring and summer of 2016. Id. ¶ 33. State Construction kept its excavation equipment and personnel on site, but the progress payments ceased. See Id. At some point (the Amended Complaint is unclear on when), State Construction President Joaquim Mendez reached out to Slone VP William Slone to seek overdue payments. See Id. ¶ 39. William Slone told him to seek payment from Two Rivers. See Id. Subsequent communication with Two Rivers revealed that Slone had withheld progress payments from that company as well. See id.

         State Construction ceased working on the site on May 24, 2017. Id. ¶ 38. The company ended up taking in $354, 954.94 for its work but estimates that because of the "substantial cost overruns" it incurred, it is entitled to an additional $550, 000 under the implied-in-fact agreement with Slone. M¶¶35, 37.

         Under the Miller Act, a company with a "direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond" must, before bringing suit on the payment bond, give "written notice to the contractor within 90 days from the date on which the [company] performed the last of the labor" for which the claim is made. 40 U.S.C. § 3133(b)(2). State Construction did not send any such written notice to Slone. However, on August 22, 2017, its project manager, Ernest J. Clemens, sent a letter to Two Rivers President Stephen Allen in which he asserted that State Construction had "incurred significant increased costs" because of the project's various delays. August 22, 2017 Letter, ECF No. 34-24; see Am. Compl. ¶¶ 40-41. The letter concluded:

It is imperative that, you give notice . . . pursuant to the Miller Act to the Prime Contractor Slone Associates Inc. . . . and its Miller Act Surety, U.S. Specialty Insurance Company, for these unpaid costs of State Construction Corp. for the utility work as well as any costs incurred by your firm that remains unpaid in order to maintain the protection of the Miller Act bond, by August 22, 2017 close of business.

         August 22, 2017 Letter, ECF No. 34-24; see Am. Compl. ¶ 40. Two Rivers forwarded the letter to Slone that same day. See Am. Compl. ¶¶ 41, 43.

         The government terminated Slone's prime contract on November 24, 2017, for default. See Id. ¶ 13. One week later, Two Rivers sent State Construction an email, to which was attached a letter from Slone. See Id. ¶ 44. The letter, which featured Two Rivers's letterhead, asserted that State Construction could not bring a Miller Act claim against Slone because State Construction was a mere third-tier subcontractor. See id.

         State Construction brought this lawsuit on February 14, 2018, naming Slone, C&S Aircraft, Two Rivers, and U.S. Specialty as defendants. See Compl., ECF No. 1. Its Amended Complaint, filed on June 19, 2018, asserted five claims in all: (1) breach of contract against Two Rivers (Count I); (2) breach of implied-in-fact contract against Slone (Count II); (3) quantum meruit against Slone and Two Rivers (Count III); (4) Miller Act bond claim against U.S. Specialty (Count IV); and (5) fraud against Slone, C&S Aircraft, and Two Rivers (Count V).

         Two Rivers filed an answer to the Amended Complaint and is not presently seeking dismissal of any of the claims against it (Counts I, III, and V). ECF No. 31. However, the other three defendants (to whom I will refer, collectively, as "Defendants," for the sake of simplicity) have filed a Consolidated Motion to Dismiss the Amended Complaint. Mot. to Dismiss, ECF No. 32. The motion first seeks a dismissal under Rule 12(b)(1) of the Federal Rules of Civil Procedure, arguing that this Court lacks subject matter jurisdiction over the Amended Complaint. See Id. at 6-12. It next seeks to dismiss Counts II through V under Rule 12(b)(6) for failure to state a claim upon which relief may be granted. See Id. at 13-28.

         The parties have fully briefed their arguments. See ECF Nos. 32-37. No hearing is necessary. See Loc. R. 105.6.

         STANDARD OF REVIEW

         Defendants seek a dismissal under either Rule 12(b)(1) or 12(b)(6) of the Federal Rules of Civil Procedure. A 12(b)(1) motion challenges the district court's subject matter jurisdiction, asserting, in effect, that the plaintiff lacks any "right to be in the district court at all." Holloway v. Pagan River Dockside Seafood, Inc., 669 F.3d 448, 452 (4th Cir. 2012). The burden of establishing the court's subject matter jurisdiction rests with the plaintiff. Evans v. B.F. Perkins Co., 166 F.3d 642, 647 (4th Cir. 1999).

         The Fourth Circuit has recognized that a defendant may challenge the district court's subject matter jurisdiction in either of two ways. See Kerns v. United States, 585 F.3d 187, 192 (4th Cir. 2009). He may, for one, mount a facial challenge, in which he "contend[s] 'that a complaint simply fails to allege facts upon which subject matter jurisdiction can be based.'" Id. (quoting Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir. 1982)). In that situation, the court takes the complaint's allegations as true and denies the motion "if the complaint alleges sufficient facts to invoke subject matter jurisdiction." Id. Alternatively, the defendant may mount a factual challenge, asserting that the complaint's jurisdictional allegations are not true. See Id. In that case, the court '"may go beyond the allegations of the complaint and in an evidentiary hearing determine if there are facts to support the jurisdictional allegations,' without converting the motion to a summary judgment proceeding." Id. (quoting Adams, 697 F.2d at 1219).

         Here, the Consolidated Motion to Dismiss asks me to "assume that the factual allegations in the complaint are true" for purposes of ruling on the jurisdictional issues under Rule 12(b)(1). Mot. to Dismiss 4. It further explains that the Court must "grant a motion to dismiss for lack of subject matter jurisdiction where the plaintiff Fails to plead fads that meet 'the plausibility standard of Rule 12(b)(6) and Iqbal/Twombly.`"` Id. (emphasis added). I infer from this language that Defendants' invocation of Rule 12(b)(1) presents a facial challenge, and so in ruling on their motion I will assume all allegations in the Amended Complaint are true.

         A 12(b)(6) motion, in contrast with a motion to dismiss for lack of jurisdiction, "tests the sufficiency" of the plaintiffs complaint. Vance v. CHF Int'l, 914 F.Supp.2d 669, 677 (D. Md. 2012). Under Rule 8(a)(2), the complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Beyond that, the Supreme Court has held that claims for relief must be "plausible," specifying that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678.

         DISCUSSION

         The Consolidated Motion to Dismiss begins by questioning this Court's power to hear this case. This is a threshold question, and I will start my analysis there. Because, in the end, I conclude that State Construction has pleaded sufficient facts to survive a Rule 12(b)(1) motion, I will proceed to review Defendants' arguments for a dismissal under Rule 12(b)(6).

         A.

         "Federal courts are courts of limited jurisdiction. They possess only that power authorized by the Constitution and statute." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994); see Hagans v. Lavine, 415 U.S. 528, 538 (1974). Here, State Construction has sought to invoke this Court's jurisdiction under 28 U.S.C. § 1331 and the Miller Act, 40 U.S.C. § 3133(b). The latter statute authorizes suits by two classes of claimants: "(1) those materialmen, laborers and subcontractors who deal directly with the prime contractor and (2) those materialmen, laborers and sub-contractors who, lacking [an] express or implied contractual relationship with the prime contractor, have [a] direct contractual relationship with a subcontractor and who give the statutory notice of their claims to the prime contractor." Clifford F. MacEvoy Co. v. United States ex rel. Calvin Tomkins Co., 322 U.S. 102, 107-08 (1944); see 40 U.S.C. § 3l33(b)(1)-(2). As I will discuss in more detail below, the statute does not allow would-be claimants with "more remote relationships" to recover on the payment bond. Clifford F. MacEvoy, 332 U.S. at 108.

         State Construction does not deny that its status as a "third-tier subcontractor" (as the company was expressly labeled in the Joint Check Agreement) would ordinarily preclude it from bringing claims under the Miller Act. It nevertheless asks this Court to disregard that label for either of two reasons. First, it urges the Court to treat the company as a second-tier subcontractor and allow its recovery under § 3133(b)(2) on the ground that the putative subcontract between Slone and C&S Aircraft was a "sham" - that is, a ploy to shield Slone from Miller Act claims like the ones asserted here. Alternatively, State Construction asserts the Court may treat it as a first-tier subcontractor on the theory that it formed an implied-in-fact contract with Slone in April 2016.

         Defendants challenge both of these contentions. They further argue that, should I accept State Construction's contention that it ought to be treated as a second-tier contractor, it would nevertheless be statutorily barred from bringing a Miller Act claim ...


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