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MORSE/DIESEL v. FIDELITY AND DEPOSIT CO.

May 3, 1991

MORSE/DIESEL, INC., PLAINTIFF AND COUNTERCLAIM DEFENDANT,
v.
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 proceedings.

BACKGROUND

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
D.

  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 counterclaims.

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 claims.

DISCUSSION

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 ...


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