United States District Court, Southern District of New York
May 3, 1991
MORSE/DIESEL, INC., PLAINTIFF AND COUNTERCLAIM DEFENDANT,
FIDELITY AND DEPOSIT COMPANY OF MARYLAND, DEFENDANT, THIRD-PARTY PLAINTIFF AND COUNTERCLAIMANT, V. T. FREDERICK JACKSON, INC., THIRD-PARTY DEFENDANT, AND TIMES SQUARE HOTEL COMPANY AND MARRIOTT CORPORATION, ADDITIONAL DEFENDANTS ON COUNTERCLAIMS.
The opinion of the court was delivered by: Leisure, District Judge.
ORDER AND OPINION
This diversity action is brought by plaintiff for damages
resulting from an alleged overpayment to its subcontractor in
connection with the Marriott Marquis Hotel project. Plaintiff
Morse/Diesel, Inc. ("Morse/Diesel"), alleges, in addition to
its breach of contract claim, fraud and breach of the covenant
of good faith and fair dealing. Defendant Fidelity and Deposit
Company of Maryland ("F & D") has asserted counterclaims of
fraud and bad faith breach against plaintiff and additional
counterclaim defendants, Times Square Hotel Company ("Times
Square") and Marriott Corporation ("Marriott"). Morse/Diesel,
Times Square and Marriott (collectively, the "counterclaim
defendants") now move the Court to: (1) dismiss defendants'
counterclaims pursuant to Fed.R.Civ.P. 12(b)(6), 8(a) and
9(b); (2) strike F & D's ninth affirmative defense pursuant to
Fed.R.Civ.P. 12(f); and (3) impose sanctions upon F & D
pursuant to Fed.R.Civ.P. 11. F & D opposes these motions and
has cross-moved for bifurcation of plaintiff's claims,
pursuant to Fed.R.Civ.P. 42(b), and for a stay of discovery
This dispute concerns events surrounding the construction of
the Marriott Marquis Hotel (the "Project" or the "Hotel") in
midtown Manhattan. The Project was owned by Times Square, a
joint venture composed of Marriott and John Portman, the
Project's architect. Morse/Diesel was the general contractor
for the Project. Under a subcontract executed in 1982, T.
Frederick Jackson, Inc. ("Jackson") agreed to install a
complete electrical system for the Project. F & D issued a
performance bond (the "Bond") on behalf of Jackson, in which
the counterclaim defendants, among others, were named as
obligees. The Bond gave F & D three options for fulfilling its
obligations in the event Jackson was, and was declared to be,
in default on the subcontract: F & D could remedy the default,
complete the subcontract, or arrange for another subcontractor
to complete the work.
In mid-1985, a dispute arose as to whether Jackson's cost of
completion would overrun the amount provided in the
subcontract. On August 6, 1985, a meeting was held at F & D's
Baltimore office, at which Jackson allegedly stated that its
cost of completing the electrical system would be less than
the balance left in the subcontract. Morse/Diesel alleges, and
F & D denies, that F & D joined in Jackson's representation.
Morse/Diesel alleges that, despite its own estimate and
belief that Jackson's cost would exceed the subcontract
balance, it decided to rely on F & D's representation that
Jackson would not exceed that balance, on the ground that F &
D allegedly had superior resources to estimate the costs of
the Project. See Memorandum of Law in Support of Morse/Diesel,
Inc., Marriott Corp. and Times Square Hotel Co.'s Motion to
Dismiss Counterclaims and for Sanctions (hereinafter
"Morse/Diesel Mem.") at 11-12.
On August 8, 1985, Morse/Diesel and F & D entered into a
one-page reimbursement agreement (the "Reimbursement
Agreement"), under which Morse/Diesel agreed to fund Jackson
for the work required to complete the subcontract. F & D
agreed to reimburse Morse/Diesel for any advance payments made
to Jackson that exceeded the adjusted balance of Jackson's
subcontract "as ultimately determined (by litigation or
arbitration or settlement, as the case may be), plus interest
at the legal rate of New York State from the date of each such
payment." Reimbursement Agreement, Morse/Diesel Mem., Exhibit
F & D contends that, as of February 1986, there had been no
ultimate determination that any payments made to or for the
benefit of Jackson exceeded the adjusted subcontract balance,
and that Jackson was still at work on the Project.
Counterclaim ¶ 30. F & D allegedly was awaiting documentation
from Morse/Diesel in support of its claims of overpayment.
Nevertheless, in mid-February 1986, Morse/Diesel instituted
this action against F & D seeking reimbursement for the
purported overpayment to Jackson. After F & D joined Jackson as
third-party defendant, Jackson asserted a claim against
Morse/Diesel alleging that it was owed an additional
$11,000,000 for its work on the Project.
After Morse/Diesel amended its complaint to add claims
against F & D for fraud and for breach of the implied covenant
of good faith and fair dealing,*fn1 F & D filed an answer
containing the counterclaims that are the subject of the
instant motions. F & D alleges that the counterclaim
defendants falsely represented that they believed that
Jackson's cost to complete its work would exceed the remaining
adjusted subcontract balance, and that this misrepresentation
fraudulently induced F & D to enter into the Reimbursement
Agreement. Counterclaim ¶¶ 33, 34. F & D also asserts that this
alleged misrepresentation violated the covenant of good faith
and fair dealing implied in the Bond and deprived F & D of its
rights under the Bond by inducing F & D to assume an additional
obligation. Counterclaim ¶¶ 42, 43, 44.
The counterclaim defendants have now moved to dismiss F &
D's fraud counterclaim on a number of grounds, including
failure to allege essential elements of fraud including
falsity, reliance, and damages; admission by F & D in its
answer that the alleged misrepresentation was true; and
failure to allege specific acts by Marriott or Times Square.
The counterclaim defendants move to dismiss F & D's claim of
breach of the Bond covenant of good faith on the ground that
none of the counterclaim defendants are signatories to the
Bond. Plaintiff also asks the Court to strike F & D's ninth
affirmative defense, which is grounded in the same alleged
misrepresentation. Finally, counterclaim defendants ask the
Court to impose sanctions upon F & D for filing unfounded
In a separate motion, F & D moves the Court to bifurcate the
trial of the issues arising from the contract dispute between
Morse/Diesel and Jackson from that of the claims of bad faith
breach and fraud arising from the subsequent Reimbursement
Agreement between Morse/Diesel and F & D. F & D also seeks a
stay of discovery relating to the fraud and bad faith breach
I. Morse/Diesel's Motions to Dismiss
A motion to dismiss under Fed.R.Civ.P. 12(b)(6) must be
denied "unless it appears beyond a doubt that the
[counterclaim] plaintiff can prove no set of facts in support
of his claim which would entitle him to relief." Scheuer v.
Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90
(1974), (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct.
99, 101-02, 2 L.Ed.2d 80 (1957)); see also Rauch v. RCA Corp.,
861 F.2d 29, 30 (2d Cir. 1988). The Court must accept F & D's
allegations of facts as true, together with such reasonable
inferences as may be drawn in its favor. See Scheuer, supra,
416 U.S. at 236, 94 S.Ct. at 16; Murray v. Milford,
380 F.2d 468, 470 (2d Cir. 1967). Fed.R.Civ.P. 8(a) requires only a
"`short and plain statement of the claim' that will give the
defendant fair notice of what plaintiff's claim is and the
ground upon which it rests." Conley, supra, 355 U.S. at 47, 78
S.Ct. at 103 (quoting Fed.R.Civ.P. 8(a)(2)); see also Hishon v.
King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81
L.Ed.2d 59 (1984). The
Court must analyze F & D's counterclaims under this standard.
A. Fraud Counterclaim
The elements of fraudulent misrepresentation under New York
law are: a false representation, scienter, materiality,
expectation of reliance, justifiable reliance and damage.
See, e.g., Morse/Diesel, Inc. v. Fidelity & Deposit Co.,
715 F. Supp. 578, 585 (S.D.N.Y. 1989). F & D's fraud counterclaim
turns on the sincerity of Morse/Diesel's August 1985
representation of its belief that the cost of completion of the
Hotel would exceed the remaining adjusted subcontract
balance.*fn2 F & D claims that this representation was false
and known by counterclaim defendants to be false, and,
furthermore, was intended to induce F & D to enter the
Reimbursement Agreement, thereby increasing F & D's obligations
beyond those that existed under the Bond. Counterclaim ¶¶ 32,
Among the various grounds on which the counterclaim
defendants base their motion to dismiss F & D's fraud
counterclaim is a single dispositive issue. As the
counterclaim defendants point out, F & D admitted in its
answer to plaintiff's claim of fraud that plaintiff believed
that there would be a cost overrun. Paragraph 30 of F & D's
answer to the amended complaint reads: "It is admitted that
Morse/Diesel believed, as it so stated at the August 6, 1985
meeting, that Jackson's cost to complete its Subcontract would
exceed the Subcontract price," and "it is further specifically
denied that Morse/Diesel relied upon anything other than
Morse/Diesel's own stated position, opinion and belief that
Jackson's cost to complete its Subcontract would exceed the
Subcontract price." Answer ¶ 30.*fn3
It is axiomatic that "[a] party's assertion of fact in a
pleading is a judicial admission by which it normally is bound
throughout the course of the proceeding." Bellefonte re
Insurance Co. v. Argonaut Insurance Co., 757 F.2d 523, 528 (2d
Cir. 1985) (citing White v. Arco/Polymers, Inc., 720 F.2d 1391,
1396 (5th Cir. 1983)); see also R. Dakin & Co. v. Charles
Offset Co., 441 F. Supp. 434, 439 (S.D.N.Y. 1977). "`Under
federal law, . . . admissions in the pleadings are generally
binding on the parties and the Court.' `Having agreed on a set
of facts, the parties . . . and this Court, must be bound by
them; we are not free to pick and choose at will.'" PPX
Enterprises, Inc. v. Audiofidelity, Inc., 746 F.2d 120, 123 (2d
Cir. 1984) (quoting Brown v. Tennessee Gas Pipeline Co.,
623 F.2d 450, 454 (6th Cir. 1980) and Stanley Works v. FTC,
469 F.2d 498, 506 (2d Cir.), cert. denied, 412 U.S. 928, 93 S.Ct.
2750, 37 L.Ed.2d 155 (1973)).
There is an obvious discrepancy between F & D's answer and
counterclaim, which F & D characterizes as "alternative
pleading." Memorandum of Law of Fidelity & Deposit Company of
Maryland in Opposition to Motion of Morse/Diesel, Inc.,
Marriott Corp. and Times Square Hotel Company to Dismiss
Counterclaims and for Sanctions (hereinafter "F & D Mem.") at
18 n. 10. While the Federal Rules of Civil Procedure permit a
party to "set forth two or more statements of a claim or
defense alternatively or hypothetically, . . . subject to the
obligations set forth in Rule 11," Fed.
R.Civ.P. 8(e)(2); see also 5 C. Wright & A. Miller, Federal
Practice and Procedure § 1283 (1990), this does not excuse a
party from being bound by its own explicit admissions of fact.
Nor was it necessary, under the facts of this case, for F & D
to admit the truth of plaintiff's belief as part of an
alternative pleading strategy. In its answer, F & D had the
option of voicing its uncertainty by, e.g., stating that F & D
was without knowledge or information sufficient to form a
belief as to the truth of Morse/Diesel's averment. See
Fed.R.Civ.P. 8(b). Instead, F & D chose to make an admission
and is now bound by it, even though that admission has the
effect of negating an essential element of F & D's fraud
counterclaim. Without an untrue statement by Morse/Diesel, F &
D's counterclaim cannot stand.
While it is unnecessary to reach the counterclaim
defendants' remaining arguments for dismissal, the Court notes
that F & D has failed to plead damages, another essential
element of its counterclaim. F & D alleges that it "has been
damaged in that it agreed to reimburse amounts that it would
otherwise not have been obligated to reimburse, and has
incurred and is continuing to incur substantial legal fees .
. . concerning the Reimbursement Agreement." Counterclaim
¶ 38. In its memorandum of law submitted in connection with the
motion currently before the Court, F & D expands its conception
of its damages to include a deprivation of its "right to elect
one of the three options available to it" under the Bond. F & D
Mem. at 30.
However, F & D does not allege that it has yet incurred a
penny of expenses under the Reimbursement Agreement, other
than legal fees. While the Reimbursement Agreement did reduce
F & D's options to the single obligation of reimbursement, it
also had the effect of causing Morse/Diesel to refrain from
declaring a default and triggering any of F & D's Bond
obligations. It is as yet unclear whether F & D will ever be
required to make any payments under the Reimbursement
Agreement, and the Court fails to see that F & D has been
damaged in any way by this state of affairs.
Furthermore, under New York law, "[d]amages attributable
solely to the existence of litigation are clearly insufficient
to sustain the necessary element of damages" in a fraud claim.
Raymond Corp. v. Coopers & Lybrand, 105 A.D.2d 926, 482
N.Y.S.2d 377, 379 (3d Dep't 1984). F & D's reliance on Fugazy
Travel Bureau, Inc. v. Ernst & Ernst, 31 A.D.2d 924, 298
N.Y.S.2d 519 (1st Dep't 1969), a case involving allegations of
money damages resulting from stock fraud, in addition to a
claim for attorneys' fees, is therefore misplaced.
Accordingly, because F & D has failed sufficiently to plead
at least two of the elements of its fraud counterclaim, the
Court must grant counterclaim defendants' motion to dismiss.
Because F & D's admission of the truth of the alleged
misrepresentation on which its claim depends is binding in
this litigation, the fraud counterclaim is dismissed with
B. Counterclaim for Breach of Covenant of Good Faith and
F & D also alleges a breach of the Bond's implied covenant
of good faith and fair dealing by counterclaim defendants. A
breach of an implied covenant of good faith and fair dealing
the express terms [of a contract] may not have
been technically breached, [but] one party has
nonetheless effectively deprived the other of
those express, explicitly bargained-for benefits.
. . . Viewed another way, the implied covenant of
good faith is breached only when one party seeks
to prevent the contract's performance or to
withhold its benefits.
Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504,
1517 (S.D.N.Y. 1989).
F & D cannot prevail on this counterclaim for two reasons.
First, a party must be subject to a duty of good faith and
fair dealing under a contract before it can be liable for any
alleged breach. As the counterclaim defendants point out, they
are not signatories to the Bond, but are merely named therein
as obligees. F & D has
failed to cite, and this Court's research has failed to
reveal, any authority imposing a positive duty of this kind
running from the obligee of a bond to the surety. While acts of
an obligee may serve to excuse a surety from liability under a
bond, see, e.g., Cam-Ful Indus. v. Fidelity & Deposit Co.,
922 F.2d 156, 161-63 (2d Cir. 1991); 11 N.Y. Jur.2d, Bonds § 68,
the obligee is not thereby rendered liable to the surety.
Although no action has been brought on the Bond itself, F &
D maintains that the Bond's reference to the subcontract
between plaintiff and Jackson transforms plaintiff's duties
under the subcontract into obligations under the Bond. The
Court remains unconvinced that the fulfillment by plaintiff of
its duties under the subcontract is anything more than a
condition precedent to F & D's obligations as surety. As the
Second Circuit admonished F & D in a separate case earlier
this year, "[u]nder New York law, it is well established that
`[a] compensated, corporate surety . . . is not a favorite of
the law and its contract of suretyship will be construed in a
manner most favorable to a claimant.'" Cam-Ful Indus., supra,
922 F.2d at 163 (quoting Timberline Elec. Supply Corp. v.
Insurance Co. of North Am., 72 A.D.2d 905, 906, 421 N.Y.S.2d
987, 988 (1979), aff'd, 52 N.Y.2d 793, 436 N.Y.S.2d 707,
417 N.E.2d 1248 (1980)). Thus, any ambiguity in the language of the
Bond as to the obligees' duties toward F & D must be construed
against F & D.
Second, even if the counterclaim defendants were subject to
an implied duty of good faith and fair dealing under the Bond,
F & D's allegations of bad faith are identical to its
allegations of fraud by the counterclaim defendants.*fn4
Because of the inextricable link between the bad faith breach
of contract counterclaim and the fraud counterclaim, and the
lack of any other basis for the contract claim, the dismissal
of the fraud counterclaim is fatal to the contract claim.
Accordingly, F & D's second counterclaim for breach of the
covenant of good faith and fair dealing is dismissed with
II. Motion to Strike Affirmative Defense
Plaintiff also moves to strike F & D's ninth affirmative
defense, pursuant to Fed. R.Civ.P. 12(f). "A motion to strike
an affirmative defense under Rule 12(f) . . . for legal
insufficiency will not be granted `unless it appears to a
certainty that plaintiffs would succeed despite any state of
the facts which could be proved in support of the defense.'"
William Z. Salcer, Panfield, Edelman v. Envicon Equities Corp.,
744 F.2d 935, 939 (2d Cir. 1984) (quoting Durham Indus. v.
North River Ins. Co., 482 F. Supp. 910, 913 (S.D.N.Y. 1979));
see also Essex Music, Inc. v. ABKCO Music & Record, Inc.,
743 F. Supp. 237, 240 (S.D.N.Y. 1990). F & D's ninth affirmative
defense states that "[i]n the event of any determination that
plaintiff relied upon any purported `representation' by F & D,
which is expressly denied, then plaintiff, among others,
fraudulently induced F & D to enter into the Reimbursement
Agreement." Answer at 9-10.
For the same reasons that F & D's admission renders futile
its fraud counterclaim, F & D will be unable to prove "any
state of the facts . . . in support of [its ninth affirmative]
defense." The Court therefore grants plaintiff's motion to
strike F & D's ninth affirmative defense.
III. Motion for Sanctions
Counterclaim defendants ask the Court to impose sanctions on
F & D for the filing of unfounded counterclaims, pursuant to
Fed.R.Civ.P. 11. The Second Circuit has explained that "a
violation of rule 11 is triggered in either of two situations:
`. . . when it appears that a pleading has been interposed for
any improper purpose, or
where, after reasonable inquiry, a competent attorney could not
form a reasonable belief that the pleading is well grounded in
fact and is warranted by existing law or a good faith argument
for the extension, modification, or reversal of existing law.'"
O'Malley v. New York City Transit Authority, 896 F.2d 704,
705-06 (2d Cir. 1990) (quoting Eastway Construction Corp. v.
City of New York, 762 F.2d 243, 254 (2d Cir. 1985), cert.
denied, 484 U.S. 918, 108 S.Ct. 269, 98 L.Ed.2d 226 (1987)).
In the instant case, although the Court has found F & D's
counterclaims to be without merit, the Court does not consider
them to be altogether frivolous. Therefore, the Court declines
to impose sanctions upon F & D.
IV. F & D's Cross-Motions
F & D asks the Court to bifurcate the trial of Count I of
plaintiff's amended complaint from that of Counts II and III
of that complaint, and to stay discovery related to Counts II
and III. Morse/Diesel alleges three causes of action against
F & D: breach of the Reimbursement Agreement for failure to
reimburse Morse/Diesel for alleged overpayments to Jackson
("Count I"); breach of the implied covenant of good faith and
fair dealing under the Bond ("Count II"); and fraud ("Count
"A motion to sever and stay under Fed. R.Civ.P. 42(b) is
addressed to the discretion of the court, and must be denied
unless it appears that separate trials are necessary `in
furtherance of convenience or to avoid prejudice, or when
separate trials will be conducive to expedition and economy.
. . .'" Barr v. Dramatists Guild, Inc., 573 F. Supp. 555, 561
(S.D.N.Y. 1983) (quoting Fed.R.Civ.P. 42(b); citing In re
Master Key Antitrust Litigation, 528 F.2d 5, 14 (2d Cir.
1975)); cf. Getty Petroleum Corp. v. Island Transp. Corp.,
862 F.2d 10, 15 (2d Cir. 1988), cert. denied, 490 U.S. 1006, 109
S.Ct. 1642, 104 L.Ed.2d 157 (1989); Katsaros v. Cody,
744 F.2d 270, 278 (2d Cir.), cert. denied, 469 U.S. 1072, 105 S.Ct. 565,
83 L.Ed.2d 506 (1984). The "separation of issues for trial is
not to be routinely ordered." Fed.R.Civ.P. 42(b), advisory
Generally speaking, bifurcation is most frequently ordered
when the resolution of one claim or issue may obviate the need
for trial of other, more complicated issues. See, e.g., Sogmose
Realties, Inc. v. Twentieth Century-Fox Film Corp., 15 F.R.D.
496, 497 (S.D.N.Y. 1954) (Rule 42(b) motion granted where trial
of preliminary issue might dispose of multi-million dollar
antitrust suit). Otherwise, "piecemeal litigation is not . . .
favored," and bifurcation is inappropriate "`in cases where the
facts are so inextricably interwoven that [separation] is
impossible or at least manifestly unfair.'" Air King Products
Co. v. Hazeltine Research, Inc., 10 F.R.D. 381, 383 (E.D.N.Y.
1950) (quoting Collins v. Metro-Goldwyn Pictures Corp.,
106 F.2d 83, 87 (2d Cir. 1939)). In deciding a Rule 42(b) motion,
"courts often try to establish if the issues would involve the
same witnesses or not." Organic Chemicals, Inc. v. Carroll
Products, Inc., 86 F.R.D. 468, 470 (W.D.Mich. 1980).
In the instant action, it is not apparent that separate
trials of plaintiff's claims will result in greater efficiency
or economy from the point of view of either the Court or the
litigants. Although Counts II and III primarily concern the
events surrounding the negotiation and execution of the
Reimbursement Agreement, they also involve issues of costs
incurred by Jackson in its work under the subcontract and
payments made by Morse/Diesel to Jackson, issues that will
also be central to Count I. Thus, the issues raised in Counts
I, II, III are interrelated to a certain extent, and there
exists a likelihood of an overlap in trial witnesses and other
evidence. For these reasons, F & D's motion to bifurcate the
trial of plaintiff's claims is denied. Having concluded that
the most practicable way to proceed in this action is to
address all of the issues in a single trial, the Court also
denies F & D's motion for a stay of discovery.
For the reasons set forth above, counterclaim defendants'
motion to dismiss F &
D's counterclaims is granted in its entirety. Plaintiff's
motion to strike F & D's ninth affirmative defense is also
Counterclaim defendants' motion for sanctions is denied.
F & D's cross-motions for bifurcation and a stay of
discovery are denied.