PETER J. MESSITTE, UNITED STATES DISTRICT JUDGE.
The United States of America, for the use and benefit of Tusco, Inc., and Tusco, Inc. in its own capacity (collectively "Tusco") have sued Clark Construction Group, LLC ("Clark") and Travelers Casualty and Surety Company of America ("Travelers") (collectively "Defendants") based on a dispute over work Tusco performed on a federal construction project. Tusco, a subcontractor on the project, alleges that Clark, the prime contractor, failed to timely pay it for certain change order work performed by Tusco at Clark's request. Tusco's claims include breach of contract against Clark (Count I); quantum meruit against Clark (Count II); and breach of payment bond in violation of the Miller Act, 40 U.S.C. § 3133, against Travelers. Clark has moved to dismiss Counts I and II, and Travelers has moved to stay Count III.
On or about September 27, 2011, Clark contracted with the United States (the "Prime Contract") to provide construction services with respect to a federal project located in Bethesda, Maryland, known as the Intelligence Community Campus-B (ICC-B) North Campus (the "Project"). Compl. ¶ 7, ECF No. 1. On September 28, 2011, Clark secured a payment bond (the "Bond") from Travelers Casualty and Surety Company with a penal sum of $39,912,000.00. Id. ¶ 8. Under the terms of the Bond, Travelers agreed to be bound jointly and severally with Clark to make payment to all persons having a direct contractual relationship with Clark or to any of Clark's subcontractors who furnished labor, material, or both in performing the work for the Prime Contract in the event Clark failed to make prompt payment. Id.; Compl., Ex. A, ECF No. 1-1.
On or about January 16, 2012, Clark entered into a subcontract with Tusco
Compl., Ex. B, Art. 4(j).
In addition to setting forth these payment procedures, the Subcontract contained several clauses governing "changes" in the scope of Tusco's work under the Project. In general, the Subcontract permitted Clark to order such changes unilaterally and without notice, provided that it notified Tusco of the changes in writing.
Id., Art. 9(c). For changes made by Clark autonomously, Article 9(d) directed:
Id., Art. 9(d).
Finally, in the event Clark and the Subcontractor disputed payment, the Subcontract contained several provisions governing settlement of these disputes. For disputes involving the Government, Article 11(b) of the Subcontract stated:
Id., Art. 11(b).
Tusco alleges that it performed all the work it agreed to perform under the original scope of the Project, which it says was
Tusco's last day of work on the Project was on or about August 18, 2014. Id. ¶ 12. Although Clark has paid Tusco for the work performed under the original scope of the Project,
Soon thereafter, Tusco submitted a claim to Travelers for payment. Id. ¶ 15. Although Travelers did not deny the claim, it has failed to provide Tusco with a substantive response or pay it the $100,852.69 Tusco says it is owed. Id. ¶ 16.
On March 24, 2015, Tusco, Clark, Travelers, Fidelity and Deposit Company of Maryland, and Federal Insurance Company entered into a tolling agreement under which the statute of limitations on all claims "arising from or in any way connected with the construction of the ICC-B North Campus Project" would be tolled from March 15, 2015, until September 24, 2015. Id. ¶ 17.
On September 23, 2015, Tusco filed its Complaint in this Court, alleging on the basis of the above facts: breach of contract against Clark (Count I), quantum meruit against Clark (Count II), and breach of payment bond and violation of the Miller Act against Travelers (Count III). See id. Clark has moved to dismiss Counts I and II for failure to state a claim upon which relief may be granted. Defs.' Mot. Dismiss and Stay, ECF No. 7. Travelers has answered the Complaint, but has moved to stay litigation of Count III. Id.; Answer, ECF No. 8. Clark joins in Travelers' Motion to Stay, to the extent its claims are not dismissed for failure to state a claim. Defs.' Mot. Dismiss and Stay.
Federal Rule of Civil Procedure 8(a) prescribes "liberal pleading standards," requiring only that a plaintiff submit a "short and plain statement of the claim showing that [he or she] is entitled to relief." Erickson v. Pardus, 551 U.S. 89, 93-94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (citing Fed. R. Civ. P. 8(a)(2)). To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must plead facts sufficient to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). But this standard requires "more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Although a court will accept factual allegations as true, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id.
Tusco claims in Count I that Clark breached its obligations under the Subcontract when it "failed and refused to pay Tusco in full for labor, services and materials provided by Tusco in performing its scope of work under the Subcontract and pursuant to Clark's direction." Compl. ¶ 20.
In moving to dismiss this claim, Clark points to Article 9(c) of the Subcontract, in which Tusco expressly agreed that receipt of payment by the Government to Clark for change-order work would be a "condition precedent" to Clark's obligation to pay Tusco. Defs.' Mot. Dismiss and Stay, Mem. Supp. 6-7, ECF No. 7-1.
The Court agrees with Tusco.
Clark relies principally on Article 9(c) of the Subcontract which makes payment by the Government to Clark a condition precedent to payment by Clark to Tusco for work per change orders:
Compl., Ex. B, Art. 9(c) (emphasis added). This type of conditional payment clause in a subcontract agreement is commonly referred to by courts as a "pay-if-paid" or "pay-when-paid" clause. See, e.g., Universal Concrete Products v. Turner Const. Co., 595 F.3d 527, 529-32 (4th Cir. 2010) (noting that a clause making payment by the Owner an "express condition precedent" to payment from the prime contractor to subcontractor is a "pay-when-paid" clause under Virginia law); MidAmerica Constr. Mgmt., Inc. v. MasTec N. Am., Inc., 436 F.3d 1257, 1261-64 (10th Cir. 2006) (holding that a provision making "all payments to Subcontractor by Contractor... expressly contingent upon ... payment for the Work by Contractor from Owner" is a "pay-if-paid" clause under Texas law); see also Steven J. Koprince, The Slow Erosion of Suretyship Principles: An Uncertain Future for "Pay-When-Paid" and "Pay-If-Paid" Clauses in Public Construction Subcontracts, 38 Pub. Cont. L.J. 47, 53-54 (2008).
In Maryland,
First, at this stage of the litigation, sufficient facts have not been developed to determine whether Article 9(c)'s condition precedent has or has not been satisfied. In a contract dispute, plaintiffs are not required to expressly plead satisfaction of a condition precedent to allege a breach of contract claim — an allegation is sufficient if it alleges that the claimant "has at all times performed all its proper and legitimate duties and obligations under its contract." Howard Robson, Inc. v. Town of Rising Sun, CIV.A. ELH-14-2003, 2015 WL 424773, at *12 (D. Md. Jan. 30, 2015) (quoting 2 Moore's Federal Practice, § 9.04[1] (3d ed. 1997)). Instead, failure to satisfy a condition precedent is ordinarily considered an affirmative defense. See Howard, 2015 WL 424773, at *12-13; Nat'l Labor Coll., Inc. v. Hillier Grp. Architecture N.J., Inc., CIV.A. No. DKC 09-1954, 2012 WL 3264959, at *6 (D. Md. Aug. 9, 2012). An affirmative defense is usually not appropriate at the motion to dismiss stage unless the facts necessary to establish it are available on the face of the pleadings. See Cezair v. JPMorgan Chase Bank, N.A., CIV.A. DKC-13-2928, 2014 WL 4295048, at *3 (D. Md. Aug. 29, 2014) (citing Alexander v. City of Greensboro, 801 F.Supp.2d 429, 445 (M.D.N.C. 2011) ("[A]n affirmative defense ... may only be reached at the [motion to dismiss] stage if the facts necessary to deciding the issue clearly appear on the face of the pleadings.")). Courts in this jurisdiction have therefore rejected defendants' premature attempts to dismiss a lawsuit based on the presence of conditions precedent clauses when crucial facts have not yet been developed. Howard Robson, 2015 WL 424773, at *12-13; Hillier, 2012 WL 3264959, at *6.
With respect to the change-order work at issue, Tusco pleads that it was Clark that "requested additional work be performed" and that Clark did not pay Tusco for that additional work. Compl. ¶¶ 11, 14. Tusco states that it has performed all of its obligations under the Subcontract. Id. ¶ 19. Although Tusco does not allege that Clark has been paid by the Government for the change order work, Tusco does not have an obligation to do so: Tusco's claim is sufficient if the subcontractor alleges that it "has at all times performed all its proper and legitimate duties and obligations under its contract," Howard Robson, 2015 WL 424773, at *12, which Tusco does here. Tusco therefore plausibly states a claim without expressly pleading that Article 9(c)'s condition precedent has been satisfied.
In response, Clark contends that the Government ordered the additional work and therefore Article 9(c), not Article 9(d), applies. Clark states that it has "submitted a Request for Equitable Adjustment ("REA"), seeking an adjustment of the contract time and contract sum and included costs incurred by Tusco," but that, "[t]o date, the owner has not accepted or rejected the REA." Defs.' Mot. Dismiss and Stay, Mem. Supp. 1-2. As an Exhibit to its Motion, Clark attaches a June 2015 letter from Clark to Travelers apparently discussing the change orders at issue. Defs.' Mot. Dismiss and Stay, Ex. 1, ECF No. 7-2. This letter purports to "prove" that the Government was the source of the change orders, and that Clark has not yet been paid by the Government for these change orders. See id.
The Court is not disposed to grant Clark's Motion based on these contentions and this single exhibit. The veracity vel non of Clark's assertions is not properly before the Court at this juncture. At the motion to dismiss stage, a court must accept all factual allegations in the complaint (and exhibits attached to the complaint, if any, see Fed. R. Civ. P. 10(c)) as true; a court does not ordinarily accept as true, much less as dispositive, the factual contentions a defendant makes in response. See Twombly, 550 U.S. at 555, 127 S.Ct. 1955. Clark is asking the Court to find, prior to any discovery, and as a matter of law, that the Government was the source of the change orders. Clark's two-page letter clearly does not prove (1) that the Government actually directed the change orders, or (2) that Clark has not yet been paid by the Government for the change order work. See Defs.' Mot. Dismiss and Stay, Ex. 1.
For these reasons, Clark's Motion to Dismiss Count I is denied without prejudice.
In Count II, Tusco seeks to recover against Clark based on quantum meruit, stating that it "provided valuable labor, services, and materials that were necessary for Clark to perform and complete its obligations under the Prime Contract," that Clark "acknowledged" and "accept[ed]" the work, but that Clark "failed and refused to pay Tusco" and "has been unjustly enriched." Compl. ¶¶ 23-27. Clark moves to dismiss this Count, arguing that quantum meruit is not a legally permissible claim when a contract governs the dispute at issue. Defs.' Mot. Dismiss and Stay, Mem. Supp. 7-8. Tusco responds that quantum meruit is merely an alternative theory of recovery, and it argues that it should not be barred from pleading this theory at this point in the litigation. Plfs.' Resp. Opp'n 6-7.
On the other hand, "[p]arties may plead alternative theories of liability, indeed as many theories as the facts will fit." Swedish Civil Aviation Admin. v. Project Mgmt. Enterprises, Inc., 190 F.Supp.2d 785, 792 (D. Md. 2002) (internal citations and quotations omitted). In its response to Clark's motion, Tusco says that the relationship of the Subcontract to the change order work it performed is currently in dispute. If Tusco ultimately shows that it performed the change order work, but did so outside the scope of the Subcontract, a quantum meruit theory of recovery would potentially lie. Clark's Motion to Dismiss Count II will therefore be denied without prejudice.
"Whether to stay a case is a decision made in the exercise of discretion by the district court as part of its inherent power to control its own docket." Elite Const. Team, Inc. v. Wal-Mart Stores, Inc., No. CIV. JKB-14-2358, 2015 WL 925927, at *3 (D. Md. Mar. 2, 2015) (citing Landis v. North American Co., 299 U.S. 248, 254, 57 S.Ct. 163, 81 S.Ct. 153 (1936)). The party moving to stay "must demonstrate a pressing need for one" and must show "that the need for a stay outweighs any possible harm to the nonmovant." Elite Const., 2015 WL 925927, at *3 (internal quotations and citations omitted).
When considering a motion to stay, the court takes into consideration "[e]conomy of time and effort for the court, counsel, and litigants" and weighs "competing interests" to "maintain an even balance." Id. (citing Landis, 299 U.S. at 254-55, 57 S.Ct. 163). In particular, the court should weigh the following factors in evaluating a motion to stay: "(1) the interests of judicial economy; (2) hardship and equity to the moving party if the action is not stayed; and (3) potential prejudice to the non-moving party." Elite Constr., 2015 WL 925927, at *3 (quoting Davis v. Biomet Orthopedics, LLC, No. CIV. JKB-12-3738, 2013 WL 682906 (D. Md. Feb. 22, 2013)).
Travelers' asks the Court to stay Count III, Tusco's Miller Act claim. The Court declines to do so.
The Miller Act (or "the Act") requires a general contractor on a federal construction project to furnish a payment bond "for the protection of all persons supplying labor and material in the prosecution of work provided for in [the] contract." 40 U.S.C. § 3131(b)(2). The Act is designed to achieve certain policy objectives. As the Supreme Court has stated:
U.S. for Benefit & on Behalf of Sherman v. Carter, 353 U.S. 210, 216-17, 77 S.Ct. 793, 1 L.Ed.2d 776 (1957).
To achieve its purpose, the Act creates a cause of action in favor of "[e]very person who has furnished labor or material in carrying out work provided for in [the] contract." 40 U.S.C. § 3133(b). Persons "who [have] not been paid in full within 90 days after the day on which the person did or performed the last of the labor or furnished... the material ... may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought." Id. As the Ninth Circuit has explained, "by the express terms of the Miller Act a subcontractor's right of recovery on a Miller Act payment bond is conditioned on the passage of time from completion of work or provision of materials." U.S. for Use and Benefit of Walton Tech., Inc. v. Weststar Engineering, Inc., 290 F.3d 1199, 1205 (9th Cir. 2002).
As a result of this unambiguous language, federal courts have enforced the right of subcontractors to collect on payment bonds after they have completed their work on a federal project, especially in the face of attempts by sureties to delay litigation. A principal context in which this has arisen is in connection with conditional payment clauses (or "pay-if-paid" and "pay-when-paid" clauses) in subcontracts.
When a surety attempts to enforce its principal's (the prime contractor's) conditional payment clause, federal courts that have addressed the issue have unanimously held that a surety is not entitled to the benefits of its principal's pay-when-paid or pay-if-paid clause. See e.g., Walton Tech., 290 F.3d 1199; U.S. for Use & Benefit of T.M.S. Mech. Contractors, Inc. v. Millers Mut. Fire Ins. Co. of Texas, 942 F.2d 946 (5th Cir. 1991); U.S. ex rel. Straightline Corp. v. Am. Cas. Co. of Reading, PA, CIV.A. 5:06-00011, 2007 WL 2050323 (N.D. W. Va. July 12, 2007); U.S.
Courts that have held conditional payment clauses unenforceable have emphasized the Miller Act's unambiguous right to sue after completion of a project and the passage of time. As the Ninth Circuit explained in Walton Tech.:
290 F.3d at 1208.
Consistent with this view, federal courts have also held that a surety may only enforce a conditional payment clause in the subcontract if there is a clear and explicit waiver of Miller Act rights in the subcontract. Walton Tech., 290 F.3d at 1208-09 (noting that a waiver of Miller Act rights must be "clear and explicit"); DDC Interiors, 895 F.Supp. at 272 ("Right to sue under the Miller Act may be waived by clear and express provisions in the contract between the prime contractor and the subcontractor.") (citing U.S. for Use of B's Co. v. Cleveland Elec. Co. of S.C., 373 F.2d 585, 588 (4th Cir. 1967)).
Pursuant to the Miller Act, Tusco has sued Travelers for payment on the Bond, alleging in Count III that "Travelers is obligated, pursuant to the Bond, to pay Tusco for labor, materials, and services it provided in performing its scope of work under the Subcontract" and that "Travelers has failed to fulfill its obligation under the Bond." Compl. ¶¶ 29-30. Travelers argues for a stay of the Miller Act claim, pointing to Article 11(b) of the Subcontract, which sets forth certain dispute resolution procedures as between Clark and Tusco "relating to or arising from any act or omission of the Owner or involving the Contract Documents." Defs.' Mot. Dismiss and Stay, Mem. Supp. 8-9 (quoting Compl., Ex. B., Art. 11(b)). Travelers asserts that Tusco is obligated to exhaust these same dispute resolution procedures, and submits that Tusco expressly agreed to a stay of any litigation pending exhaustion of these procedures. Defs.' Mot. Dismiss and Stay, Mem. Supp. 8-9. Travelers also claims that allowing Tusco to proceed would lead to inefficiency, duplication of effort, and possibly "anomalous results." Id. 10 (internal citations and quotations
In response, Tusco contends that, to the extent that Article 11(b) (or any other provisions of the Subcontract) requires Tusco to wait for an indefinite period prior to suing on the Bond, such provisions are unenforceable because they contravene the purpose of the Miller Act. Plfs.' Resp. Opp'n 8-9. Obligating Tusco to wait until a final determination has been made under the Subcontract's dispute resolution procedure harms Tusco, not only because it trifles with Miller Act rights, see id.; it also fails to acknowledge that Tusco has already been waiting almost two years to be paid for the change order work.
Tusco is right.
In arguing for a stay, Travelers suggests that, because its liability for payment of the bond is derivative of Clark's, and because Tusco agreed in Article 11(b) to "be bound to Clark to the same extent that Clark is bound to the Owner," the dispute resolution procedures set forth in Article 11(b) must or should be followed prior to the initiation of any claims against Travelers.
Travelers' argument ignores established case law to the effect that "the principal's and the surety's liability are only coextensive to the extent permitted by the terms of the Miller Act." United States, et al. v. Zurich Am. Ins. Co., 99 F.Supp.3d 543, 550 (E.D. Pa. 2015) (citing Sherman, 353 U.S. at 216-17, 77 S.Ct. 793; Walton, 290 F.3d at 1206; T.M.S. Mech. Contractors, 942 F.2d at 951). Indeed, a federal court rejected this exact argument in the context of circumstances similar to those at bar.
United States, et al. v. Zurich Am Ins. Co. involved a payment dispute between a government contractor, Nason Construction, Inc. ("Nason"), its surety, Zurich American Insurance Company ("Zurich"), and a subcontractor, Marenalley Construction, LLC ("Marenally"), with respect to a construction project for the Veterans Administration ("VA"). 99 F.Supp.3d at 545. Marenalley claimed that it was owed compensation for additional work performed on a project. Id. at 546. Nason was pursuing additional payment from the VA for those claims through a statutorily mandated administrative dispute resolution process set out in its contract with the VA. At the time of the lawsuit, the VA had not approved payment for the additional work. Id. Nason and Zurich argued that the action should be stayed until the completion of the dispute resolution process set forth in the prime contract between Nason and the VA, a provision which was incorporated by reference in the subcontract. Id. at 549. The prime contractor and surety reasoned that, because Zurich's liability was derivative of Nason's, and Nason's liability was being determined in the administrative proceeding, the court had to stay Marenally's Miller Act claim against Zurich. Id. at 550. The court disagreed:
Id. (internal citations omitted).
Nason and Zurich protested that they would be prejudiced in the absence of a stay due to the costs of dual litigation and
The Court agrees with the reasoning of Zurich Am.
The Miller Act gives a subcontractor the right to sue a payment bond's surety based "on the passage of time," not on the payment from the federal government to a prime contractor. Walton, 290 F.3d at 1205. Here, allowing Article 11(b) of the Subcontract to preclude Tusco's ability to sue Travelers until after Clark has completed its dispute resolution process with the Government — simply because this clause provides that "Subcontractor agrees to be bound to Clark to the same extent that Clark is bound to the Owner" — would contravene the rights afforded to subcontractors under the Miller Act. See Walton, 290 F.3d at 1208 ("A subcontractor's right of recovery on a Miller Act payment bond accrues ninety days after the subcontractor has completed its work, not `when and if' the prime contractor is paid by the government."); T.M.S. Mech. Contractors, 942 F.2d at 949 n. 6 ("[T]he `pay-when-paid' clause in the Subcontract does not preclude TMS's recovery on its contract work and change order claim because under the Miller Act, the liability of the contractor is to the subcontractor, despite non-payment by the government to the contractor."); Zurich Am., 99 F.Supp.3d at 550 ("[A] subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond.").
The Court is not "overly troubled" by Travelers' arguments that allowing the litigation to proceed could lead to inconsistent decisions and duplicative, costly litigation. See id. There is no reason why a dispute resolution process between Clark and the
Far more troubling to the Court, quite frankly, is the potential effect of a lengthy dispute resolution process on Tusco's right to reimbursement for the change order work.
As Clark has represented, this dispute resolution process currently involves only the Government and Clark, and neither of these parties has an economic interest in how much Tusco is ultimately reimbursed for the change order work. See id. at 551 (noting that the VA has "no interest in how that amount [paid to Nason, the subcontractor] is determined" in declining to stay litigation pending an administrative dispute resolution process). This arrangement is especially troubling given the possibility of a settlement between the two entities. If, for example, the Government agrees to pay Clark less than the total amount claimed by Tusco for the change order work, there is no provision in the Subcontract that obligates Clark to negotiate favorable terms for Tusco, nor does the Government have any particular interest in the amount of Tusco's ultimate payments. In the event of a settlement which, hypothetically, leaves Tusco with fifty, twenty-five, or even zero percent of what it claims it is owed, Tusco may be able to contest this result against Clark in some forum, but must it wait an indefinite amount of time (until the dispute resolution process is complete) to do so?
It has been nearly two years since Tusco completed work on the project. As a matter of fairness, the Court finds it concerning that the subcontractor might be forced to wait months or even years to get paid for its work. Tusco has not waived its Miller Act rights.
For the foregoing reasons, Clark's Motion to Dismiss and Defendants' Motion to Stay (ECF No. 7) are
