Opinion
CIVIL NO. JKB-11-1708.
August 22, 2011
MEMORANDUM and ORDER
International Fidelity Insurance Company ("Plaintiff") brought this suit against Mahogany, Inc., Mahogany Interiors, Inc., THR, LLC, Jeffrey Hargrave, and Beneak Hargrave ("Defendants"), seeking injunctive relief and specific performance of alleged contractual obligations. Defendants filed a counterclaim against Plaintiff, alleging breach of contract and fraud in the inducement. Plaintiff now moves to dismiss Defendants' counterclaim. The issues have been briefed and no oral argument is required. Local Rule 105.6. For the reasons set out below, Plaintiff's Motion to Dismiss (ECF No. 27) is GRANTED.
I. BACKGROUND
Plaintiff is a commercial surety that issues payment and performance bonds on behalf of construction contractors. Defendants Mahogany and Mahogany Interiors are construction contracting companies, owned by individual Defendants Jeffrey and Beneak Hargrave.
On or about April 11, 2007, Plaintiff and Defendants entered into an Agreement of Indemnity ("Agreement") in which Plaintiff agreed to issue payment and performance bonds on behalf of Defendants in exchange for indemnification against claims on those bonds, plus payment of premiums. Among other things, the Agreement allegedly obligated Defendants, upon Plaintiff's request, to: (1) either procure Plaintiff's release from any bonds it had issued or post collateral sufficient to cover Plaintiff's liability; and (2) open a trust account to hold monies received in connection with bonded projects. Between December of 2007 and March of 2010, Plaintiff issued payment and performance bonds on five of Defendants' construction projects, with a total penal sum of $12,225,474.00.
In early 2011, after reviewing Defendants' books and records, Plaintiff determined that Defendants were in poor financial condition and became concerned about their ability to complete the bonded projects. Plaintiff initially requested that Defendants enter into an escrow agreement with regard to funds on those projects. When Defendants refused, Plaintiff requested that Defendants arrange for it to be released from the bonds and to deposit the revenue from the bonded projects into a trust account. After some negotiation, Defendants refused to agree to Plaintiff's demands, and Plaintiff filed this suit seeking injunctive relief and specific performance of the Agreement of Indemnity.
Defendants have filed a counterclaim alleging that Plaintiff itself breached the Agreement when it demanded that Defendants place funds in an escrow account and when it "cancelled" the bonds by demanding to be released from liability. It also alleges that Plaintiff committed fraud in the inducement by promising not to "cancel" the bonds even though it allegedly intended to cancel the bonds if Defendants' financial condition deteriorated.
II. STANDARD OF REVIEW
A motion to dismiss under Rule 12(b)(6) is a test of the legal sufficiency of a complaint. Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999). In evaluating the complaint's sufficiency, the court must view all well-pled factual allegations as true and construe them in the light most favorable to the Plaintiff. Ibarra v. United States, 120 F.3d 472, 474 (4th Cir. 1997). To survive the motion, the complaint need only present enough factual content to render the claim "plausible on its face" by enabling the court to "draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). The plaintiff may not, however, rely on naked assertions, speculation, or legal conclusions. Bell Atlantic v. Twombly, 550 U.S. 544, 556-57 (2007). If after taking all factual allegations as true the court determines that it cannot infer more than "the mere possibility of misconduct," the motion should be granted and the complaint dismissed. Iqbal, 129 S.Ct. at 1950.
III. ANALYSIS
A. Breach of Contract
Under Maryland law, a plaintiff suing for breach of contract must show simply "that the defendant had a contractual obligation and that the obligation was breached." Mathis v. Hargrove, 888 A.2d 377, 396 (Md. Ct. Spec. App. 2005).
Defendants allege that Plaintiff was under a contractual obligation not to "cancel" any bonds that it issued on their behalf and that it breached this duty by: (1) demanding to be discharged from bonds it had issued; (2) demanding that Defendants deposit an amount of collateral equal to Plaintiff's exposure on the bonds; and (3) demanding that Defendants "enter into additional agreements which are not part of the Agreement." (Def.s' Countercl. 3-4 ¶¶ 17-19, ECF No. 12). However, even assuming that Plaintiff had a duty to refrain from "cancelling" the bonds, none of the facts alleged in Defendants' counterclaim could plausibly be construed as a breach of this duty.
First, The Agreement specifically gives Plaintiff the right to demand discharge from any bonds it issues on Defendants' behalf. The third paragraph reads, in pertinent part, "The Contractor and Indemnitors will, upon the written request of the Surety, promptly procure the full and complete discharge of the Surety from any Bonds specified in such request and all potential liability by reason of such Bonds." (Agreement of Indemnity 3). Defendants make no attempt to explain how Plaintiff's demand to be discharged could constitute a breach in view of this language.
Second, the counterclaim does not allege any facts showing that Plaintiff's alleged demands for collateral and "other agreements" constitute "cancellation" of the bonds. Instead, Defendants merely allege that the condition precedent to Plaintiff's right to require a deposit of collateral (i.e., an assertion of liability under the bonds) has not occurred. This fact, however, even assuming it to be true, does not suggest that Plaintiff "cancelled" any bonds, but only that it asked Defendants to do something that they were not contractually obligated to do. Unless Plaintiff conditioned further performance of its obligations under The Agreement on Defendants' acceding to this request (which Defendants have not alleged), the request itself does not constitute breach.
Defendants' counterclaim for breach of contract must therefore be dismissed.
B. Fraud in the Inducement
Under Mayland law, a plaintiff claiming either fraud or fraudulent inducement must prove: (1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation. CapitalSource Finance, LLC v. Delco Oil, Inc., 608 F.Supp.2d 655, 666 (D. Md. 2009) (citing Nails v. S R, Inc., 334 Md. 398, 415, 639 A.2d 660 (1994); Rozen v. Greenberg, 165 Md.App. 665, 674-75, 886 A.2d 924 (2005)).
Defendants allege that Plaintiff made representations that it would not "cancel" the bonds it issued, that it knew the representations to be false, that it made them with the intent to defraud Defendants by inducing them to pay money under The Agreement, and that they did in fact rely on the representations and have suffered injury as a result of having to replace the bonds. Defendants' counterclaim, however, amounts to little more than a recitation of the elements of fraud, with almost no supporting factual allegations. Specifically, it contains no facts whatsoever that would allow an inference that Plaintiff knew any of its alleged representations to be false or that it had any intent to defraud Defendants. Although Rule 9(b) allows a plaintiff to plead conditions of mind generally, this allowance does not alter the normal pleading standard of Rule 8, which requires a plaintiff to allege sufficient facts to allow a plausible inference of the misconduct alleged. U.S. ex rel. Wilson v. Kellogg Brown Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008) (internal quotation marks and citation omitted).
For these reasons, Defendants counterclaim for fraudulent inducement must be dismissed.
IV. ORDER
Accordingly, it is ORDERED that:
(1) Plaintiff's Motion To Dismiss (ECF No. 27) is GRANTED; and
(2) Defendants' Counterclaim (ECF No. 12) is DISMISSED.