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C & I Entertainment, LLC v. Fidelity and Deposit Co. of Maryland

United States District Court, N.D. Mississippi, Aberdeen Division

July 22, 2014

C & I ENTERTAINMENT, LLC, Plaintiff,
v.
FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant.

MEMORANDUM OPINION AND ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

DEBRA M. BROWN, District Judge.

In this construction bond case, Defendant Fidelity & Deposit Company of Maryland ("Fidelity") has filed its second motion for summary judgment seeking a ruling that it is not liable as a matter of law to Plaintiff C&I Entertainment, LLC ("C&I"), for breach of contract and bad faith. For the reasons that follow, summary judgment is denied.

I

Factual and Procedural Background

On or about August 7, 2001, C&I contracted with Ralph McKnight & Son Construction, Inc. ("McKnight"), to build a movie theater and skating rink ("Project") in Kosciusko, Mississippi. McKnight obtained a performance bond ("Bond") from Fidelity. The Bond, an AIA A312 standard bond, named C&I as Owner, McKnight as Contractor, and Fidelity as Surety. In addition, McKnight and Fidelity signed an indemnity agreement obligating McKnight to repay to Fidelity any sums Fidelity may pay to C&I under the Bond.

After a significant portion of the Project was complete, a dispute arose between C&I and McKnight over the quality of the construction.[1] C&I withheld final payment, consisting of retainage only. The summary judgment record indicates that on June 16, 2003, C&I, through one of its owners, Emma Ivester, sent Fidelity a letter describing McKnight's deficient work and failed repair attempts, and asked Fidelity to "discuss and resolve a satisfactory solution to us." In the letter, which referenced and attached multiple letters that C&I had sent to McKnight complaining about deficiencies in the work, Ivester stated, among other things, that the Project reached substantial completion on November 15, 2002, as to the movie theater and January 23, 2003, as to the skating rink. Fidelity claims it has no record of ever receiving this letter.

On June 19, 2003, McKnight filed a construction lien against the Project. On August 29, 2003, McKnight filed a complaint against C&I in the Circuit Court of Attala County, Mississippi ("State Court Action"), to enforce the construction lien, seeking the unpaid retainage. C&I filed an answer and counterclaim, [2] asserting that McKnight breached the construction contract.

On December 9, 2003, Glenda Burton-Horne, then counsel for C&I, wrote Fidelity advising that a negotiation with McKnight was in progress toward a proposed settlement of damages and lost revenues, and that "if a full settlement does not occur relief may be sought under the Bond as issued in this matter." The letter also stated that the Project's completion date was February 23, 2003. However, facsimiles from McKnight to Fidelity indicate that McKnight performed work on the Project as late as April 2003. Fidelity took no action upon receipt of Burton-Horne's letter.

On May 24, 2004, Paul Koerber, C&I's new attorney, wrote Fidelity making a demand on the Bond. Pointing out that notice had been previously provided to Fidelity of McKnight's failure to perform the construction contract and advising that "[t]he owner, C&I Entertainment, has declared the contractor's default and has terminated its services, " Koerber asked that Fidelity contact C&I within fourteen days.

A copy of Koerber's May 24 demand letter to Fidelity was provided to McKnight's counsel, Robert Dambrino. After reviewing the letter, Dambrino wrote McKnight's insurance agent on June 1, 2004, disputing the accusations made against McKnight in Koerber's letter. Dambrino's letter stated that C&I had unilaterally declared McKnight in default and unilaterally locked McKnight out of the Project. The letter also stated, among other things, that C&I had not complied with certain provisions of Paragraph 3 of the Bond.

A copy of Dambrino's June 1 letter was sent to Thomas Finley, claims counsel for Fidelity. On June 3, 2004, Finley responded to Koerber's May 24 letter and requested documents to assist with his claim investigation. Finley's letter also stated:

Our activities are undertaken with a full reservation of our rights and defenses as well as our Principal's rights and defenses under the terms of the bond, the contract, at law and in equity. This reservation of rights shall remain in full force and effect unless expressly revoked in writing by F&D.

On August 26, 2004, Koerber replied to Finley's June 3 letter, enclosing documents in response to Finley's request. The documents included multiple items of correspondence from C&I to McKnight regarding deficiencies with the construction project. Koerber also invited Fidelity to inspect the Project as soon as possible, advising that severe problems still remained with McKnight's workmanship, and again demanded that Fidelity perform under the Bond. The letter ended, "No claims, causes of action, rights or interests are waived by this correspondence."

On November 5, 2004, Koerber wrote Finley inquiring about the status of C&I's bond claim. Koerber advised that, due to McKnight's faulty construction and Fidelity's failure to perform under the Bond, potential risks to C&I's patrons, and potential liability to C&I, were causing C&I to consider ceasing operations.

A week later, on November 12, 2004, Finley responded to Koerber by letter, asking that he call to discuss a date for inspection of the Project. Referring to the ongoing litigation between McKnight and C&I, Finley advised that he would like McKnight to participate in the inspection. Also informing Koerber that under Paragraph 3.1 of the Bond, a meeting must occur between the contractor, surety and owner, Finley stated that the "inspection could also serve to satisfy Section 3.1 of the performance bond." On November 23, 2004, representatives of Fidelity and C&I inspected the Project. No representative of McKnight attended the inspection. The parties disagree as to whether McKnight was invited.

By letter dated March 3, 2005, Fidelity denied C&I's claim on the Bond. The one paragraph letter stated as the sole basis for the denial:

Section 9 of the performance bond provides a two year statute of limitations. Ralph McKnight & Son Construction Company ceased working on the project more than two years ago. Accordingly, we must respectfully deny C&I Entertainment's claim.
On March 28, 2005, Koerber wrote Finley about Fidelity's denial of the claim, asking Finley to produce "specific information, documents and/or witness statements" supporting the determination that McKnight had not worked on the Project for over two years, and information supporting Fidelity's determination that a two-year statute of limitations applied. Also, in over three pages of his five-page letter, Koerber asked Fidelity to preserve and not destroy certain specified data, communications, and evidence related to the bond claim.

Fidelity formally retained counsel, Alberta L. Adams, to respond to Koerber's March 28, 2005, letter. Adams wrote Koerber on May 11, 2005, enclosing documentation received from McKnight that McKnight claimed showed it had last worked on the Project on February 7, 2003, and last performed warranty work on April 24, 2003. Adams also requested certain documentation from C&I "under a full reservation of rights and defenses." The letter further directed C&I to Paragraph 3.3 of the Bond, which Adams stated "requires that the owner agree to pay the balance of the contract price to the surety to trigger any obligation of the surety under the Bond." C&I did not respond to Adams' May 11 letter. Emma Ivester testified at deposition that she never saw the letter.

On December 27, 2007, C&I filed suit against Fidelity in the Circuit Court of Attala County, Mississippi, alleging breach of contract and bad faith denial of a claim, and seeking compensatory damages, punitive damages, and attorney's fees and expenses. On January 18, 2008, Fidelity removed the action to this Court.[3] On March 28, 2008, Fidelity filed its first motion for summary judgment, arguing that the three-year statute of limitations in Miss. Code Ann. ยง 15-1-49 barred C&I's claim. Through order dated October 27, 2008, summary judgment was denied.[4] Subsequently, on March 20, 2009, the case was stayed pending the outcome of the State Court Action between McKnight and C&I. The State Court Action was tried on March 8-10, 2011, and resulted in a jury verdict against McKnight in the amount of $300, 845.67, which verdict was upheld on appeal on November 13, 2012. McKnight paid the judgment, and C&I filed a satisfaction and release of judgment on December 22, 2012. On January 1, 2013, the stay in this action was lifted.

Fidelity filed the instant motion for summary judgment on all claims on November 20, 2013. Doc. #86. The Court held oral argument on the fully-briefed motion[5] on July 2, 2014, and is now prepared to rule.

II

Standard of Review

Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Fed.R.Civ.P. 56(a) ("The Court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law"). "[T]here is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). In reviewing the evidence, the Court must draw all reasonable inferences in favor of the nonmoving party, and avoid credibility determinations and weighing of the evidence. Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150 (2000). "[W]hen a properly supported motion for summary judgment is made, the adverse party must set forth specific facts showing that there is a genuine issue for trial.'" Anderson, 477 U.S. at 250.

III

Analysis

Fidelity argues that it is entitled to summary judgment on C&I's breach of contract claim and C&I's bad faith claim. Each ...


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