U.S. For ex rel. Deepali Co. v. Futurenet Grp., Inc.
| Decision Date | 19 March 2019 |
| Docket Number | Case No. 17-12911 |
| Parties | UNITED STATES FOR USE OF DEEPALI CO., LLC, Plaintiff, v. FUTURENET GROUP, INC., and WESTERN SURETY COMPANY, Defendants. |
| Court | U.S. District Court — Eastern District of Michigan |
HON. GEORGE CARAM STEEH
This matter comes before the court on the parties' cross-motions for summary judgment, which have been extensively briefed. The court heard oral argument on March 11, 2019, and took the motions under advisement.
This case involves the construction of the visitor center at the Detroit River International Wildlife Refuge in Trenton, Michigan. The visitor center project was initiated by the United States Department of Interior, Fish and Wildlife Service. Defendant FutureNet Group, Inc., was the general contractor for the project and obtained payment and performance bonds from Defendant Western Surety Company. Plaintiff Deepali Co., LLC, a subcontractor, alleges that it was not paid for labor and materials it provided for the project. Deepali alleges that Western is liable to it in the amount of $320,751.54 under its contract with FutureNet and the payment bond.1
In September 2013, FutureNet entered into its contract with the U.S. Fish and Wildlife Service ("USFWS") to construct the visitor center project, with a completion date of December 18, 2016. As required by law, FutureNet obtained payment and performance bonds from Western. In early 2015, Western began receiving claims against the payment bond. According to Western, FutureNet had been receiving payments from USFWS but had not been paying its subcontractors. USFWS agreed to allow FutureNet to continue as the general contractor, but began submitting payments to an escrow account, to be disbursed to subcontractors by Western at FutureNet's direction.
In December 2015, FutureNet and Deepali entered into a subcontract agreement in the amount of $44,252 for the insulation work. See Doc. 24-3. The master agreement provided that Deepali shall comply with the Davis-Bacon Act, including by paying its employees and subcontractors thelocally prevailing wage rate and fringe benefits. Id. at ¶ 6. Deepali was to maintain payroll records and provide certified payroll records to the project manager on a monthly basis. Id. at ¶ 7. The contract provided a "no-escalation" clause: "[FutureNet] shall not be required to pay Subcontractor any increased cost for 'escalation' of material or escalated procurement costs." Id. at ¶ 11. Change orders "are only executed if a modification from the Government Client has been provided to [FutureNet]." Id. at ¶ 26. Deepali further agreed that "the price awarded in the Scope Review Checklist is a firm-fixed price and will not be adjusted unless a corresponding Government Modification exists." Id. The subcontract permitted FutureNet to terminate the agreement "for its convenience." Id. at ¶ 30.1. "In such event, Subcontractor will be entitled to compensation for services properly performed up to the date of termination." Id.
Subsequently, FutureNet and Deepali executed seven change orders that substantially expanded the scope of the work and the contract price. Each change order provided that all the terms of the original agreement "shall remain in full force and effect with the exception of the changes expressly provided for herein." See Docs. 24-4 - 24-10. Change Order 1, dated December 24, 2015, is for the acoustic ceiling work in the amount of$23,500. Doc. 24-4. Change Order 2, dated April 28, 2016, is for the installation of a vapor barrier, in the amount of $97,023. Doc. 24-5. Change Order 3, dated June 10, 2016, is for the installation of drywall, for an additional cost of $193,753. Doc. 24-6. Change Order 4, dated September 12, 2016, is for the installation of a shade system, flag pole, fireplace, and exterior sign, in the amount of $29,572. Doc. 24-7. Change Order 5, dated September 21, 2016, is for rough carpentry/framing work, in the amount of $60,350.05. Doc. 24-8. Change Order 6, dated September 30, 2016, provides for an additional $39,949.26 for "Equipment & Materials" and $120,922.51 for "Additional Labor." Doc. 24-9. Change Order 7, dated January 9, 2017, is an "Addition for Department of Labor Wage [claim]: $98,812.00." Doc. 24-10. Deepali alleges that the total contract price, including the change orders, amounts to $640,381.82.
According to Deepali, it began working on the project in May 2016, and last furnished labor and/or materials on September 22, 2016. During this time, at FutureNet's direction, Western made payments from the escrow account to Deepali and its subcontractors.
On December 13, 2016, Deepali submitted a claim to Western against the payment bond. In support, Deepali attached its subcontract and Change Orders 1-5. Deepali claimed $124,481.02 for work performedthrough September 2016. Western acknowledged receipt of the claim and requested additional information and documentation from Deepali. Western noted that Deepali and/or its subcontractors had already been paid a total of $314,635.67, which Western believed exceeded Deepali's claim. Doc. 38-27. According to Western, Deepali did not provide the documentation requested, but sent emails seeking immediate payment.
Meanwhile, Deepali sought additional change orders from FutureNet after September 2016, when it last performed work on the project. On October 6, 2016, Deepali sent an email to FutureNet, seeking a change order because it "spent more than contract amount on Drywall project." Doc. 38-37. Deepali provided FutureNet some documentation and a summary of its calculations in January and February 2017. See Doc. 38-40, 38-41. Subsequently, FutureNet agreed to Change Order 6, which seeks $39,949.26 for "Equipment & Materials" and $120,922.51 for "Additional Labor." Doc. 24-9. Deepali claims that FutureNet calculated these figures, while FutureNet representatives could not explain how the parties arrived at the numbers. Doc. 38-2 at 93-94; Doc. 38-4 at 71-72; Doc. 38-5 at 57, 108-110. Deepali's documentation supporting Change Order 6 adds up to only $63,099.84, rather the total amount of ChangeOrder 6 ($160,871.77).2 Docs. 38-40, 44-3. Although Change Order 6 was issued in March or April 2017, it was backdated to September 30, 2016. Doc. 38-2 at 62.
Around the same time, Deepali also obtained Change Order 7, dated January 9, 2017, which adds $98,812 to the contract price for "Department of Labor Wage [claim]." Doc. 24-10. The Department of Labor ("DOL") had investigated Deepali in 2016 for failing to pay its workers the prevailing wage. The DOL assessed Deepali in the amount of $98,812. Western paid this amount to the DOL on behalf of Deepali, in exchange for a waiver executed by Deepali. In signing the waiver, Deepali agreed that "the funds paid to Wage and Hours Division of the Department of Labor have reduced any amount which may be owed to Deepali Company, now or in the future, by the amount of $98,812.09 taken to pay the backwages owed to its individual employees." Doc. 37-35. Deepali waived its rights against Western in the amount of $98,812.09 and directed Western to pay $98,876.73 to the DOL "to satisfy Deepali's obligations to DOL and Deepali's laborers/employees for unpaid wages and/or benefits." Doc. 37-36.
Deepali's owner, Dharmen Patel, testified that he signed the waiver because FutureNet told him that it would give him a change order for the amount Western paid the DOL. Doc. 38-2 (). FutureNet agreed to a change order because "this money is over the amount that [Deepali] estimated to perform the work." Doc. 38-5 at 125-27. At the time FutureNet agreed to Change Orders 6 and 7, the project was "underwater" and FutureNet knew that Deepali would seek these payments from Western, not FutureNet. FutureNet agreed that Change Order 7 essentially reflected a request that Western incur the penalty for Deepali's failure to pay the prevailing wage, as required by statute and its contract. Id. On May 10, 2017, Deepali submitted a new claim against the payment bond, asserting that it was now owed $327,555.47, although it had not done any additional work on the project since September 2016. With this claim, Deepali sought payment for Change Orders 6 and 7. Doc. 38-43. Western responded by refusing to pay Change Order 7, which it found was an attempt to "compensate Deepali Co., Inc. for its own failure to pay its own laborers." Doc. 38-44. Western sought additional detailed information about Change Order 6, noting that there was no documentation supporting the proposition that Deepali completed work on the project in2017, and that Change Order 6 was not supported by a detailed breakdown of the labor and materials allegedly supplied. Doc. 38-45. Deepali did not provide the information requested by Western, but referred Western to its accountant. Deepali's accountant, however, did not have any information regarding the project. Docs. 38-48 - 38-51.
On May 12, 2017, USFWS declared FutureNet to be in default and terminated the contract. FutureNet terminated Deepali's subcontract "for convenience" on May 18, 2017. On July 21, 2017, Western took over the project pursuant to a demand by USFWS on the performance bond. Western hired John DeMattia Construction as its completion contractor. DeMattia continues to work on the project, which remains unfinished to date.
Deepali received payments from FutureNet and/or Western in the amount of $319,630.28. Deepali alleges that it is owed $320,751.54. Western contends that Deepali has failed to substantiate its claims under some of the change orders, obtained change orders through fraud and collusion with FutureNet, and provided substandard work that has not been accepted by USFWS. According to Western, DeMattia has incurred...
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