In re John's Insulation, Inc.

• Decision Date: 23 June 1998
• Docket Number: Adversary No. 197-1405-353.,Bankruptcy No. 194-20121-353
• Citation: 221 BR 683
• Parties: In re JOHN'S INSULATION, INC., Debtor. JOHN'S INSULATION, INC., Plaintiff, v. HARTFORD ACCIDENT & INDEMNITY CO., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

221 B.R. 683 (1998)

In re JOHN'S INSULATION, INC., DebtorJOHN'S INSULATION, INC., Plaintiff, v.HARTFORD ACCIDENT & INDEMNITY CO., Defendant.

Bankruptcy No. 194-20121-353, Adversary No. 197-1405-353.

United States Bankruptcy Court, E.D. New York.

June 23, 1998.

COPYRIGHT MATERIAL OMITTED

Finkel Goldstein Berzow Rosenbloom & Nash, LLP, New York City by Harold S. Berzow, S. Stewart Smith, for Debtor.

Stim & Warmuth, P.C., Huntington, NY by Joseph D. Stim, for Creditor.

DECISION ON MOTION TO DISMISS ADVERSARY PROCEEDING FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED

JEROME FELLER, Bankruptcy Judge.

DefendantHartford Accident and Indemnity Co.("Hartford") moves to dismiss this adversary proceeding, brought in the Chapter 11 bankruptcy case of John's Insulation, Inc., for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure("Fed. R. Civ.P."), made applicable hereto by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure("Fed. R. Bankr. P.").The parties agree that New York law governs.

In its complaint, John's Insulation seeks an affirmative recovery of damages, as well as a disallowance of Hartford's general unsecured claim.After considering the complaint, the parties' memoranda either in support of or in opposition to the motion, and our own independent inquiry, we find that the complaint forwards no discernible legal basis for an affirmative claim of relief.¹Although the complaint advances cognizable defenses to Hartford's unsecured claim, in the absence of an associated cognizable demand for relief brought pursuant to Fed. R. Bankr.P. 7001, the proper vehicle for such objections is by motion, as provided in Fed. R. Bankr.P. 3007.Accordingly, for the reasons hereafter discussed, the motion is granted and the instant adversary proceeding is dismissed.

I.BACKGROUND

Hartford, as surety, issued a performance bond on behalf of John's Insulation, a construction company located in Long Island City, Queens, as a prerequisite for the award of a $3.5 million construction contract to provide labor and material for the installation of a heat recovery system for the New York City Department of Sanitation("City").The bond ensured completion of construction by binding Hartford to perform in the event of a default by John's Insulation.In order to obtain the performance bond, John's Insulation entered into a General Indemnity Agreement ("Indemnity Agreement") with Hartford, on or about May 20, 1985.²The Indemnity Agreement provided Hartford with a contractual right of indemnification should it incur any loss from completing the construction contract, pursuant to the performance bond, after a default by John's Insulation.

Ultimately, John's Insulation was defaulted by the City, which retained a progress payment of approximately $400,000.00 for work completed by John's Insulation that was "in the pipeline" and awaiting final approval for disbursement.Subsequently, Hartford was called upon to finish the installation work.The City applied the retained progress payment, in addition to the unearned monies remaining under the contract, toward Hartford's completion of construction, which included employing engineers, lawyers, and replacement contractors.Upon approving the completed work, the City owed a final payment under the contract of $408,403.51.

John's Insulation, which had since filed a petition for relief under Chapter 11, initiated an adversary proceeding against both the City and Hartford, blocking Hartford's receipt of the final payment and claiming entitlement to those monies.Hartford, on the other hand, as completing surety, filed a general unsecured claim in the Chapter 11 case based on its indemnification rights, in the amount of $500,113.04.By stipulation entered into between the parties and so ordered by this Court, the $408,403.51 final payment was escrowed in an account jointly held by John's Insulation and Hartford through their respective attorneys.This initial adversary proceeding ended on the grant of a motion to dismiss without prejudice to the filing of a second adversary proceeding, solely against Hartford, to resolve the competing claims to the escrowed funds.

In its second complaint, the one presently before the Court, John's Insulation alleges that there were no disputes regarding any of the work that it had performed on the contract, which at the time of default was roughly 86% completed.After the default, the City requested the performance of extra work by the replacement contractors and the use of additional materials, both of which exceeded the specifications of the original contract.At times, the extra work included scrapping and rebuilding portions of the project previously completed by John's Insulation and approved by the City.However, Hartford failed to demand compensation for these extras.John's Insulation further alleges that Hartford failed to exercise proper care in reviewing and settling payments to the contractors, consulting engineers, and legal counsel that were hired, resulting in exorbitant and exaggerated payouts.

Relying on these factual allegations, the complaint advances three theories of recovery: breach of contract, negligence, and improper accounting.First, the Indemnity Agreement explicitly and impliedly required Hartford to complete the construction reasonably and in good faith.Hartford's breach of the Indemnity Agreement is evidenced by the performance of extra work without demanding adequate compensation and by honoring inflated billing requests.Next, Hartford was negligent in not properly overseeing the construction.Similar to the breach of contract claim, it knew or should have known that the extra work was beyond the terms of the contract and that work was being billed at exorbitant rates.Finally, John's Insulation claims that Hartford improperly accounted for the money it received and expended on the job, which resulted in the assessment of an overcharge on Hartford's indemnity claim.

As a remedy under the breach of contract and negligence causes of action, John's Insulation demands that Hartford's unsecured claim be disallowed.There is no basis for Hartford to seek indemnification because it has already been fully reimbursed for the reasonable costs and expenses of completing the construction.These two causes of action also demand judgment for the $408,403.51 escrowed by the City.John's Insulation claims that but for Hartford's negligence and/or breach of the Indemnity Agreement, the escrowed monies would represent a contract surplus.Therefore, the escrowed monies should be awarded free and clear of any claims of indemnity.Finally, John's Insulation seeks $538,769.00 under the improper accounting cause of action, claiming that it is owed an additional $130,366.00 in excess of the escrow account for monies that Hartford improperly overcharged.

Hartford counters with the instant motion to dismiss for failure to state a claim upon which relief can be granted.Regarding the negligence cause of action, Hartford asserts that absent a violation of a legal duty independent of the contract, New York law does not support such claims.Under the breach of contract claim, neither party questions the fact that John's Insulation was defaulted on the contract with the City.Hartford asserts that, as the completing surety, it is subrogated to the rights of the City.Because John's Insulation as a defaulted party cannot affirmatively seek a recovery of contract monies (including the retained monies that were in the so-called "pipeline") from the City, it similarly cannot demand those monies from Hartford as the City's subrogee.Thus, even though John's Insulation may use claims of bad faith as a shield to Hartford's claim for indemnification, it has no analogous right to wield a sword and assert that it is owed contract proceeds in the form of a surplus.Finally, to the extent that it states any cause of action at all, the improper accounting claim should be considered as merely a defense to claims of indemnification under the same reasoning as the breach of contract cause of action.This Court, in large measure, agrees.

II.DISCUSSION

A.Standard Governing a Rule 12(b)(6) Motion to Dismiss

Rule 12(b)(6) provides that a complaint will be dismissed "for failure to state a claim upon which relief can be granted."Fed.R.Civ.P. 12(b)(6).The purpose of a 12(b)(6) motion is to test the legal sufficiency of a complaint."The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims."Scheuer v. Rhodes,416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90(1974).Therefore, the resolution of such a motion requires viewing a complaint in a light that accepts the truth of all material allegations and draws all reasonable inferences in favor of the plaintiff.SeeHishon v. King & Spalding,467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59(1984);Jenkins v. McKeithen,395 U.S. 411, 421, 89 S.Ct. 1843, 1849, 23 L.Ed.2d 404(1969).As such, a complaint need only meet the liberal requirement of "`a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests."Conley v. Gibson,355 U.S. 41, 47, 78 S.Ct. 99, 103, 2 L.Ed.2d 80(1957)(quotingFed.R.Civ.P. 8(a)(2)).

However, a complaint must be "well pleaded" and contain more than mere conclusory statements that a plaintiff has a valid claim of some type and is thus deserving of relief.SeeChongris v. Board of Appeals,811 F.2d 36, 37(1st Cir.), cert. denied,483 U.S. 1021, 107 S.Ct. 3266, 97 L.Ed.2d 765(1987);Ostrer v. Aronwald,567 F.2d 551, 553(2d Cir.1977).A court is neither required to accept as true "sweeping and unwarranted averments of fact,"Haynesworth v. Miller,820 F.2d 1245, 1254(D.C.Cir.1987), nor "`conclusions of law or...