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Reginella Construction Co., Ltd. v. Travelers Casualty and Surety Co.

United States District Court, Third Circuit

May 30, 2013

REGINELLA CONSTRUCTION COMPANY, LTD., Plaintiff,
v.
TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant.

OPINION

MARK R. HORNAK, District Judge.

This is an action in tort. Plaintiff Reginella Construction Company ("Reginella") asserts claims of breach of fiduciary duty, intentional interference with contractual relations, and tortious bad faith against defendant Travelers Casualty and Surety Company of America ("Travelers") in connection with surety bonds issued for two multi-million dollar construction projects. [ECF No. 1.] Reginella seeks compensatory and punitive damages, interest, attorneys' fees, and costs. Travelers argues that Reginella's fiduciary duty and bad faith claims are not cognizable and that any alleged interference with Reginella's contractual relations was privileged as a matter of law. [ECF No. 7.] This Court's jurisdiction rests on 28 U.S.C. § 1332(a), as Reginella is a Pennsylvania corporation with its principal place of business in Pittsburgh, Travelers is a Connecticut corporation with its principal place of business in New York, and the amount in controversy exceeds $75, 000, exclusive of costs and interest.

Before the Court is Travelers's motion to dismiss all six (6) counts of Reginella's Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, Travelers's Motion to Dismiss will be granted with prejudice.

I. FACTUAL BACKGROUND

The facts set forth below are derived from Reginella's Complaint and the undisputedly authentic documents attached to Travelers's Motion to Dismiss. Reginella is a Pittsburgh-based construction company whose primary business is public construction. Over the past 25 years, Reginella has completed numerous multi-million dollar construction projects for school districts, state universities and agencies, municipalities, and other public owners. Travelers is one of the nation's largest underwriters of insurance and surety contracts.

By way of background, it is common practice in the construction industry for general contractors to purchase surety bonds which guarantee the general contractor's performance of the work and its payment of subcontractors and suppliers. This arrangement is designed to minimize the "enormous business risks" inherent in large-scale and logistically complicated construction projects, "anyone of which could seriously impact the successful completion of the contract and financial solvency of all involved." Philip L. Bruner and Patrick J. O'Connor, Jr., 3 BRUNER & O'CONNOR ON CONSTRUCTION LAW § 12:1 (2012). Even though the principal (in this case, Reginella) obtains and pays the premium due on the bond, it is typically only the project owners (here, the MASD and the OTC), subcontractors, and suppliers who are entitled to make claims and receive payment. The surety company (in this case, Travelers) receives fees and premium in exchange for underwriting the bond and assuming the risk that claims might be filed.

From June 2009 to June 2011, Travelers was Reginella's surety. This cause of action arises out of Travelers's provision of three surety bonds for two separate multi-million dollar construction projects. The first two surety bonds were for Reginella's contract with the Moon Area School District ("the MASD") in Moon, Pennsylvania for the conversion of the district's high school into a middle school. The third surety bond was for Reginella's contract with the Ohio Turnpike Commission ("the OTC") for the re-construction of two service plazas along the Ohio Turnpike. According to Reginella, Travelers's conduct has cost it $15, 607, 000 in lost business, goodwill, future earnings, and residual value of its enterprise.

A. The Moon Area School District Project

On August 10, 2010, Reginella contracted with the MASD to convert its high school into a middle school. The contract price for the project was $19, 297, 000. The construction contract required Reginella to obtain surety bonds guaranteeing Reginella's performance of the work and the payment of its subcontractors and suppliers.

1. Course of Performance of the MASD Project

Between August 2010 and April 2012, Reginella alleges that it performed its contractual obligations without incident. However, sometime in mid-April 2012, relations between the parties began breaking down. On April 26, Travelers sent a letter to the MASD demanding payment on the project for "the entire amount of the contract funds remaining in the custody of [the MASD], including any and all estimates earned by [Reginella] but unpaid at this time." [ECF No. 1, ¶ 44.] Reginella alleges that this demand was unfounded.

In response to Travelers's letter, the MASD informed Reginella that it would not make any further payments to Reginella "until such time that an agreement is reached among the School District, Travelers and your company regarding distribution of future earned contract funds." [Id. at ¶ 46.] While the MASD approved a $554, 702 invoice that Reginella sent immediately following Travelers's April 26 letter, the MASD declined to pay it. On May 24, 2012, Reginella informed the MASD that without payment, the project would come to a halt. Reginella then proposed payment procedures designed to assure its subcontractors that they would be paid in order to keep the project from shutting down. The MASD advised Travelers of Reginella's offer, ostensibly to persuade Travelers to release payment to the subcontractors. Despite these efforts, neither the MASD nor Travelers released payment to either the subcontractors or Reginella.

By mid-June, approximately two weeks after Reginella's warning that the project was in jeopardy, neither the MASD nor Travelers had released payment to Reginella or its subcontractors. Around this time, Reginella alleges that Travelers met privately with the subcontractors and informed them that the MASD was going to terminate the project, which Reginella alleges induced the subcontractors to slow down, stop working, and submit inflated and premature claims against Reginella. These events culminated in the shutdown of the MASD project on June 11, 2012.

2. The MASD Bond Agreements

Travelers issued two surety bonds for the MASD project, a performance bond and a payment bond, together in the full contract price of $19, 297, 000. Under the performance bond agreement, Travelers would be required to step in and guarantee Reginella's performance only in the event that Reginella defaulted. [ECF No. 7, Ex. 2, § 2.] Conversely, if the MASD were to be in default of its obligation under the construction contract to pay Reginella for the work, Travelers would not be obligated to guarantee Reginella's performance.

Travelers's obligations under the performance bond would arise if: (1) the MASD notified Reginella and Travelers of its intention to declare Reginella to be in default and Reginella is given an opportunity to cure, but does not do so; (2) the MASD declared Reginella to be in default and terminated the construction contract; and (3) the MASD agreed to pay the balance of the contract to Travelers in accordance with the construction contract, or to another contractor selected to finish the project. [Id. at § 3-3.3.] Subsequently, Travelers would be required, at its own expense, to either: (1) arrange for Reginella, with the MASD's consent, to perform and complete the contract; (2) undertake to perform and complete the contract itself, through its agents or independent contractors; (3) obtain bids or negotiated proposals from qualified contractors acceptable to the MASD to complete the work; or (4) waive its right to perform and complete the contract and either pay the MASD for any resulting liability or deny liability, citing the reasons therefor. [Id. at § 4-4.4.]

The payment bond agreement provides that "[Travelers] shall have no obligation to [the subcontractors, suppliers, laborers, and other claimants]" until they "have given notice to [Travelers and the MASD] stating that a claim [for payment] is being made under this Bond." [Id. at 3.] Upon receiving a properly submitted claim, Travelers would be obligated to promptly "payor arrange for payment of any undisputed amounts" at its own expense. [Id. at Ex. 3, § 6.2.]

In its Complaint, Reginella alleges that Travelers breached its fiduciary duty to Reginella as its surety on the MASD project (Count Two), that Travelers intentionally interfered with Reginella's business relationships with the MASD and its subcontractors (Counts Three and Four), and that Travelers acted in bad faith in refusing to pay Reginella's subcontractors as required under the terms of the bond agreements on the MASD project (Count Six). Travelers asserts that as a matter of law it had no fiduciary duty to Reginella, that its alleged interference with the MASD and Reginella's subcontractors was privileged, and that Pennsylvania law does not recognize a tort-based bad faith claim by a principal against a surety.

B. The Ohio Turnpike Commission Project

On December 17, 2010, Reginella submitted a bid to the OTC for the reconstruction of two service plazas along the Ohio Turnpike. Travelers issued the necessary bid guarantee and contract bond in the full contract price of $9, 930, 730.

1. Course of Performance of the OTC Project

Following the execution of the contract bond and the construction agreement, Reginella retained subcontractors and began work on the OTC project. In June 2011, six months after construction began, Reginella ended its bonding relationship with Travelers, although the contract bond for the OTC project still remained in place. [ECF No. 1, ¶ 10.] In November 2011, Reginella terminated its contract with one of its subcontractors, 21st Century Concrete Construction, Inc. ("21st Century"). Following its termination, 21 st Century filed a claim in the form of a $533, 226 lien against the project, which under Ohio law enabled the OTC to withhold payment from Reginella in the lien amount until Reginella obtained a lien-over bond[1] to guarantee payment of the claim. Even though Reginella contested the lien in Ohio state court as "bogus and inflated, " the OTC refused to pay Reginella until it obtained the lien-over bond. Reginella alleges that this withholding of payment prevented it from paying other amounts it owed to other subcontractors, suppliers, and laborers.

In January 2012, two months after it fired 21st Century and six months after its active business relationship with Travelers ended, Reginella asked Travelers to issue the lien-over bond in accordance with its continuing obligations under the contract bond. Travelers refused, claiming that the contract bond did not require it to issue lien-over bonds, that Reginella should seek the bond from its new surety, and that the contract bond required the OTC to release payment. The OTC disagreed, and instead claimed that the lien-over bond must be issued before the OTC could release payment of the contested amount to Reginella. Requests for both payment of the claim and the lien-over bond continued into March 2012. Around this time, other subcontractors began filing liens against the project, which Reginella also contested as "bogus and inflated."

On April 20, 2012, Reginella offered to divert all payments from the project to Travelers if it would issue the lien-over bonds, but Travelers refused. Negotiations between Reginella, Travelers, and the OTC stalled until the ...


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