The opinion of the court was delivered by: Yvette Kane, Chief Judge United States District Court
Before the Court is Plaintiff Western Surety Co.'s motion to dismiss Defendants' amended counterclaim for failure to state a claim upon which relief can be granted. (Doc. No. 11.) For the reasons that follow, Plaintiff's motion will be denied.
Plaintiff Western Surety Co. ("Western") brought this action against Defendants WGG, Inc., IBE Construction Inc., and Robert Carlson (collectively "WGG") for indemnification based upon a general agreement of indemnity entered into by the parties in December 2001. (Compl. ¶ 7.) Pursuant to that indemnity agreement, Western issued a bond for a construction project, naming WGG as a principal and Donohoe Construction Co. as an obligee, and in exchange for Western's issuance of the bond, WGG agreed to "indemnify and save [Western] harmless from and against every claim, demand, liability, cost, charge, suit, judgment and expense which [Western] may pay or incur" in connection with the bond. (Compl. Ex. A.) In addition, the indemnity agreement provided that Western had "the exclusive right to determine for itself and [WGG] whether any claim or suit brought against [Western] or [WGG] upon any such bond shall be settled or defended and its decision shall be binding and conclusive upon [WGG]." (Id.)
A. The Northern Building Products Cases
In 2003 and 2004, Northern Building Products (Northern is not a party to this action) filed separate lawsuits against WGG and Western. In the first, on August 12, 2003, Northern sued WGG in New Jersey state court for outstanding sums owed by WGG for services performed and materials furnished by Northern in connection with the construction project. After WGG removed the case to the United States District Court for the District of New Jersey, the case was transferred to this Court and docketed as Northern Building Products, Inc. v. WGG, Inc., Civil Action No. 1:04-CV-913 (hereinafter the "WGG lawsuit"). In the second action, in April 2004, Northern sued Western directly in this Court, alleging that Western was liable as WGG's surety. That action was docketed as Northern Building Products, Inc. v. Western Surety Company, Civil Action No. 1:04-CV-926 (hereinafter the "Western lawsuit"). Northern sought damages in the amount of approximately $176,000 in each suit.
According to WGG, when Northern filed the WGG lawsuit, WGG retained Robert P. Ewing as counsel. In April 2004, after Northern filed the Western lawsuit, Western tendered its defense of the suit to WGG pursuant to the Indemnity Agreement. Under the terms of a separate agreement signed on May 11, 2004 (the "tendering agreement"), Western and WGG agreed that Ewing would enter an appearance on Western's behalf in the Western lawsuit, and that Western would "rely upon [Ewing's] professional opinion that [Western] has a meritorious defense to the claim." (Am. Answer and Counterclaim ("A&C") Ex. C.) Western and WGG further agreed that if Ewing learned of a potential conflict of interest he would "immediately advise [Western] of [the conflict] and provide [Western] an opportunity to determine whether it wishe[d] to select other counsel to represent it." (Id.)
The tendering agreement notwithstanding, Ewing failed to file a response to the complaint in the Western Lawsuit on Western's behalf. Accordingly, on Northern's motion, the Court granted default judgment against Western. Thereafter, Western filed a motion to set aside default judgment, which the Court granted, though the Court ordered Western to pay Northern $10,916.60 for costs and attorney's fees. Western then filed an answer to Northern's complaint. (Western Lawsuit, Doc. No. 45.)
Meanwhile, in the WGG lawsuit, the case proceeded routinely. On October 26, 2004, WGG filed an answer to the complaint and asserted a counterclaim based on more than $285,187 in damages that WGG allegedly incurred "as a direct result of breaches of contract by [Northern] in connection with the [construction project]." (WGG Lawsuit, Doc. No. 16.) According to WGG, it belatedly learned that its counterclaim failed to account for approximately $172,193 in additional damages, though the counterclaim was never amended in the WGG lawsuit despite Ewing's knowledge of the additional damages. (A&C ¶ 56.) Moreover, in the answer filed in the Western lawsuit, Ewing did not present a counterclaim.
B. The Settlement Conference
Eventually, after some further proceedings in both cases, at the request of counsel, the Western and WGG lawsuits were consolidated for the purposes of a settlement conference to be conducted by Magistrate Judge Mannion on June 2, 2006, at which WGG and Western were represented by Ewing, Robert Carlson on behalf of WGG, and David Matthews, a representative of Western. At the conference, Ewing and Matthews asserted that they had authority-over Carlson's objection-to settle both the WGG and Western lawsuits in the amount of $150,000, and a settlement was reached and ultimately approved by Magistrate Judge Mannion. According to WGG, Carlson objected to the settlement because WGG's counterclaim against Northern would be forfeited by the agreement.
On July 21, 2006, Western submitted a letter to WGG stating a demand for $150,000. (A&C Ex. D.) In response, WGG responded that under its interpretation of the indemnity agreement, Western could settle claims brought against Western and WGG, but it had no authority to settle claims brought by WGG against Northern. WGG further argued that "Mr. Ewing ha[d] an inherent conflict of interest and the matter should not have been settled without a resolution of said conflict and WGG's separate and independent rights to his counterclaim. Even though Mr. Carlson signed a Waiver of the conflict, he did so without the advice of counsel and without the understanding how the Waiver ...