ERIC F. MELGREN, District Judge.
Defendant Engineered Systems Company ("ESC") performs construction work in Kansas and Missouri. Plaintiff RLI Insurance Company ("RLI") acted as ESC's surety on three separate construction projects. RLI brings this suit against ESC and several of its officers, members, and managers. RLI seeks indemnification for losses it incurred as ESC's surety, and damages for fraud allegedly committed by several ESC representatives. Each Defendant now moves for dismissal of the claims against it for failure to state a claim upon which relief may be granted. Defendant Betty Russell also moves individually for a judgment on the pleadings. For the reasons discussed below, the Court largely denies but grants in small part the Defendants' motions.
On three occasions, RLI executed contract bonds as part of ESC's construction contracts. As surety, RLI was liable for any contractual obligations that ESC failed to meet. For that reason, RLI and ESC executed a General Indemnity Agreement ("GIA"). The GIA was signed by ESC, Paul Russell, and Betty Russell. The GIA named all three as indemnitors. They were obligated to indemnify RLI against any liabilities arising from the construction contracts. Paul Russell signed the GIA both as ESC's managing member and in his individual capacity. Betty Russell signed the GIA in her individual capacity.
RLI acted as ESC's surety for three separate construction contracts. ESC contracted with the Missouri Department of Transportation ("MoDOT") for construction at the Three Trails Development project in Kansas City, Missouri. The contract for the Three Trails Project was in the amount of $1,021,782.26. ESC also contracted with Public Works of Kansas City, Missouri for construction along a Trolley Trail. The Trolley Trail contract amount was $756,349.50. And ESC contracted with the City of Lake Quivira, Kansas to provide construction services on a dam retaining wall project. The contract for the Lake Quivira project was in the amount of $389,186.01.
All three of the projects required that ESC provide a contract bond. So RLI executed contract bonds for each project in the full contract amount. RLI has received claims on the bonds for the Three Trails and Trolley Trail Projects. As a result, RLI is incurring costs, expenses, and legal fees in an attempt to resolve the claims. The Lake Quivira Project culminated in a lawsuit. A subcontractor that worked on the Lake Quivira project, Performance Contracting Incorporated ("PCI"), sued ESC, RLI, and the City of Lake Quivira, Kansas in Kansas District Court for payment for work performed. ESC refused RLI's request for indemnification regarding the suit. Ultimately, RLI settled PCI's claim for $100,761.36 after incurring significant costs.
RLI contends it is entitled to indemnification under the GIA, and seeks a judgment against the ESC, Paul Russell, and Betty Russell for its fees and costs arising from the three construction contracts.
Paul Russell, Paul Russell Jr., Joshua Allenbrand, and Jane Valentine ("the Fraud Defendants") were officers, members, or managers of ESC. They made false representations to RLI regarding ESC's line of credit and intent to pay its debts. Based on these misrepresentations, RLI refrained from enforcing the GIA, filing an indemnity lawsuit, or demanding collateralization. And the Fraud Defendants breached their fiduciary duty by using contract funds from the projects for improper purposes. They received $100,761.36 as part of the Lake Quivira project to pay for rock, materials, and labor. But the Fraud Defendants diverted those funds for other purposes, such as their own payroll, overhead, and other personal expenses.
In addition, ESC was scheduled to receive a progress payment of $92,650 on November 20, 2014, as part of the Three Trails Project. The payment would reflect the work that had been done on the project by various subcontractors. RLI opposed this payment because ESC was not properly using the progress payments on labor and supplies. But the Fraud Defendants falsely stated that ESC would use the November 20 progress payment for its proper purpose. In reliance on this assurance, RLI consented to the progress payment. Instead, the funds from the progress payment were diverted to cover salaries and overhead expenses. All told, ESC failed to pay four different subcontractors for services rendered on the Three Trails Project. These unpaid debts have imposed losses of more than $117,037 on RLI as ESC's surety.
RLI seeks damages and further indemnification for the losses it has suffered as a result of the Fraud Defendants' misrepresentations.
Under Rule 12(b)(6), a defendant may move for dismissal of any claim for which the plaintiff has failed to state a claim upon which relief can be granted. Upon such a motion, the Court must decide "whether the complaint contains enough facts to state a claim to relief that is plausible on its face."
RLI seeks enforcement of the GIA against ESC, Paul Russell, and Betty Russell. ESC and Paul Russell move to dismiss for improper venue, failure to file a compulsory claim, and failure to state a claim upon which relief can be granted. They also contend that RLI's claim is not ripe because RLI does not yet know the full amount of damages. Betty Russell moves to dismiss for failure to state a claim upon which relief can be granted and also moves for a judgment on the pleadings. Incredibly, not one shred of authority is cited in support of these various arguments for dismissal of the contractual indemnification claims.
ESC and Paul Russell contend that the contractual indemnification claims against them should be dismissed because venue is improper pursuant to a forum selection clause. Venue is improper, they claim, because the bond for the Lake Quivira project dictates that venue shall lie exclusively in the District Court of Johnson County, Kansas for "any legal action filed upon this Statutory Bond."
Because RLI's action does not arise from the Lake Quivira bond, the Court denies the motion to dismiss for improper venue. RLI is seeking to enforce the GIA, which does not contain a forum selection clause. RLI is not suing for breach of the Lake Quivira statutory bond, which is entirely distinct from the GIA. The GIA dictates that ESC and the Russells would indemnify RLI for any losses it incurred in relation to their construction contracts. And the Lake Quivira Project was one of those contracts. But this action does not arise from a breach of the Lake Quivira bond. Rather, RLI is alleging that it incurred losses from all three projects, and that the indemnitors breached their obligations under the GIA. This is not a "legal action filed upon" the Lake Quivira statutory bond. As such, the forum selection clause contained in the Lake Quivira bond is irrelevant.
ESC and Paul Russell also argue that the allegations against them should be dismissed because RLI failed "to plead a compulsory counter or cross claim against ESC" in earlier state court actions. They contend that "pursuant to Fed. R. Civ. P. 13, RLI should have filed a cross claim against ESC" when both parties were sued by PCI in Kansas state court. In addition, ESC and Russell claim that RLI and ESC are both defendants in Missouri cases arising from the Three Trails and Trolley Trail projects. They argue that RLI was required to file cross claims in the Missouri cases as well. The argument seems to be that somehow, RLI is barred from bringing the instant case because it failed to comply with the Federal Rules of Civil Procedure in the various state court actions.
While it should go without saying, the Federal Rules of Civil Procedure do not govern actions in state courts, and are irrelevant to the question of what RLI should have done when sued in Missouri and Kansas.
But more to the point, RLI complied with both the Missouri and Kansas Rules of Civil Procedure in not filing cross claims in the state court actions. In Missouri, cross claims are always permissive, and never compulsory.
Because both state and federal rules of civil procedure permit RLI to file an independent claim for indemnity, the Court denies ESC and Paul Russell's motion to dismiss under Rule 13.
Lastly, ESC and Russell take issue with the fact that RLI does not yet know the exact amount of its damages. They contend that the case is not yet ripe because damages are unknown, and move to dismiss because RLI failed "to state with particularity the measure of damages it has allegedly sustained."
In their motion to dismiss, ESC and Paul Russell argue in two sentences that the claims against them are not ripe because RLI does not know the exact amount of its damages. As with all of their arguments, this assertion is not supported by any binding or persuasive authority. "The ripeness doctrine aims to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements."
The argument that RLI failed to state a claim because it did not give an exact amount of damages is also misplaced. Nowhere in Rule 8 is a plaintiff required to plead an exact amount of damages. And, once again, the Defendants do not point to any authority supporting such a claim. In reality, plaintiffs regularly allege imprecise amounts in their demands for relief. For example, in diversity cases a plaintiff is only required to allege damages in an amount greater than $75,000.
Betty Russell also moves to dismiss the contractual indemnification claim against her. She argues that RLI fails to state a claim upon which relief may be granted because her signature is not acknowledged or notarized as required on the GIA. So she contends that RLI cannot enforce the GIA against her and therefore fails to state a claim for contractual indemnification. She does not support this assertion with any legal authority.
Here, RLI states a plausible claim that Betty Russell was bound by the GIA. No Kansas statute requires that this agreement be notarized. The parties simply included this requirement in the agreement. Ultimately, whether an enforceable contract exists turns on the intent of the parties and is a question of fact for the jury.
Relying on the un-notarized signature, Betty Russell also moves for a judgment on the pleadings pursuant to Rule 12(c). Under Rule 12(c), a defendant may move for a judgment on the pleadings after the pleadings are closed. A "defendant may not move under Rule 12(c) prior to filing an answer."
ESC, Paul Russell, and Betty Russell next move to dismiss RLI's claim against them for noncontractual indemnification. They contend that RLI fails to state a claim upon which relief may be granted because RLI fails to adequately allege the acts and omissions that gave rise to the need for indemnification. The arguments advanced in this motion are not supported by any legal authority.
Although RLI uses the phrase "noncontractual indemnification," this claim is really based on a theory of implied contract.
In Kansas, "an action for implied contractual indemnity arises when one party without fault is compelled to pay for the tortious acts of another."
While RLI can maintain an action for noncontractual indemnification against ESC, it may not do so against Paul or Betty Russell. As stated above, an action for implied indemnification arises "when one party without fault is compelled to pay for the tortious acts of another."
For the reasons stated above, the Court dismisses RLI's claim for implied indemnity against Paul and Betty Russell.
Paul Russell, Paul Russell Jr., Joshua Allenbard, and Jane Valentine ("the Fraud Defendants") move for dismissal of the fraud claim against them. They argue that RLI fails to state with particularity the circumstances constituting as required by Rule 9. They also move to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.
Under Rule 9(b)'s heightened pleading requirements, a plaintiff must "set forth the time, place, and contents of the false representation, the identity of the party making the false statements and the consequences thereof."
The Fraud Defendants argue that RLI fails to satisfy the "who" prong of Rule 9(b) because it does not identify which of the four individuals actually made false representations. The Court agrees. "Rule 9 must be read to prevent plaintiffs from lumping defendants together in making accusations of fraud."
There is an exception to this principle when a group of defendants is responsible for a single document or statement that contains fraudulent misrepresentations.
The Fraud Defendants also claim that RLI fails to satisfy the "when" prong by only giving the date for one of the many allegations of fraudulent conduct. The purpose of Rule 9(b) is to give a defendant fair notice of the plaintiff's claims and the factual grounds upon which they are based.
But RLI's other allegations of fraud fail to satisfy the "when" prong of Rule 9(b). RLI's first allegation is that the Fraud Defendants made false representations to RLI about ESC's credit and their intent to repay their debts. This bare allegation is deficient under Rule 9. RLI fails to state a date, or general time range, as to when the Fraud Defendants made these false representations. RLI's other fraud allegations also fall short of Rule 9's requirements. RLI generally alleges fraudulent conduct arising from each of the three projects. But RLI does not identify even a broad period of time when the fraud could have occurred. The complaint notes that all of the projects began in 2013, but no more other dates are given. RLI does not allege that the fraud occurred in a given month, or even a given year. And so the Fraud Defendants are only put on notice that the alleged fraud occurred between February 2013, when the first project began, and March 2015, when the first amended complaint was filed. That time frame is not specific enough.
RLI does not state the circumstances of fraud with particularity as required by Rule 9(b). Recognizing the possibility that RLI can cure these defects by adding more particular details to its complaint, the Court grants RLI leave to amend its pleadings and denies the Fraud Defendants' motion to dismiss. But the Fraud Defendants may renew their motion upon a failure to timely or adequately amend the pleadings.
The Fraud Defendants advance two additional arguments for dismissal of the claims against them. They are both without merit and do not warrant dismissal under Rule 12(b)(6). First, they contend that they are shielded from liability pursuant to Kan. Stat. Ann. § 17-7688. Second, they argue that the fraud claims should be dismissed because it is actually a claim for breach of contract.
The Fraud Defendants do not elaborate on their blanket assessment that § 17-7688 shields them from liability. Nor do they cite any authority illustrating the applicability of that statute to these particular facts. In fact, § 17-7688 does not shield the Fraud Defendants from personal liability if they committed fraud. In Kansas, a member or manager of a limited liability company generally cannot be held personally liable for the company's torts. But it is well established that an individual is personally liable for corporate wrongs if he willfully participated in acts of fraud or deceit.
Equally fruitless is the Fraud Defendants' assertion that RLI's fraud claim is actually a breach of contract action. They rely on Wade v. EMCASCO Ins. Co. in arguing that RLI's fraud claims should be dismissed because the allegedly fraudulent conduct is no different from the conduct on which it alleges a breach of contract.
Unlike the plaintiff in Wade, RLI is not alleging that the Fraud Defendants committed both breach of contract and fraud with the same conduct. Only one of the Fraud Defendants, Paul Russell, is facing both contract and fraud claims. And the conduct underlying the fraud claim is distinguishable from the contract action against Paul Russell. In the claim under the GIA, RLI asserts that Paul Russell breached his contractual duty as indemnitor. In the fraud claim, RLI alleges that the Fraud Defendants breached their fiduciary duties and made false representations with regards to its funds. And the conduct that RLI is alleging is properly brought as a tort, and not as a breach of contract claim. In the fraud claim, RLI alleges a breach of duties imposed by law, not by contract. In such cases, a tort claim, and not a breach of contract claim, is proper.
If RLI is able to plead fraud with sufficient particularity, the claim will not be barred by either Kan. Stat. Ann. § 17-7688 or the argument that it is actually an action for breach of contract.
For the reasons stated above, the Court largely denies but grants in small part the Defendants' motions. Specifically, the Court grants Paul and Betty Russell's motions to dismiss the implied indemnification claims against them. Additionally, the Court finds that RLI failed to plead the circumstances of fraud with sufficient particularity, and grants RLI leave to amend its fraud claim. The Court denies the rest of the Defendants' motions to dismiss and request for a judgment on the pleadings.
