Rli Ins. Co. v. Nexus Servs., Inc.

RLI INSURANCE COMPANY, Plaintiff, v. NEXUS SERVICES, INC., Defendant, v. JUAN VALOY, et al., Intervenors.

Civil Action No. 5:18-CV-00066

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF VIRGINIA HARRISONBURG DIVISION

Field: August 27, 2018

August 25, 2018

By: Michael F. Urbanski Chief United States District Judge

MEMORANDUM OPINION

This matter is before the court on defendant Nexus Services, Inc.'s ("Nexus") motion for leave to file a counterclaim and amended answer. ECF No. 43. The matter has been fully briefed. The court dispenses with oral argument because the legal contentions are adequately presented in the materials before the court and argument would not aid the decisional process. For the following reasons, Nexus' motion for leave to file counterclaim and amended answer is GRANTED.

I.

RLI Insurance Company ("RLI") and Nexus entered into an indemnity agreement on January 20, 2016 ("Indemnity Agreement") as consideration for RLI's agreement to issue immigration bonds. As detailed in the court's opinion on the extensively litigated preliminary injunction, RLI alleges that Nexus breached the Indemnity Agreement for a variety of reasons, including failure to provide access to Nexus' books, records and accounts. The court granted RLI a preliminary injunction that required Nexus to give access to a selection of its books, records and accounts. ECF No. 60.

During the course of briefing and argument for the preliminary injunction, Nexus moved to amend its answer and add a counterclaim. ECF No. 43. The counterclaim, brought under both Virginia and Illinois law, alleges RLI breached the Indemnity Agreement under the implied duty of good faith and fair dealing through its demand to access Nexus' books, records and accounts and its request that Nexus discharge all bonds issued or, in the alternative, furnish RLI with collateral security sufficient to secure against anticipated loss and exposure under the bonds.

Nexus argues that Federal Rule of Civil Procedure 15 supports amendment because "the court should freely give leave when justice so requires." ECF No. 44, at 2. According to Nexus, none of the factors that support denial of leave to amend—prejudice to the opposing party, bad faith, or futility—apply, and thus leave should be granted. Trial is set for May 20, 2019, discovery has not commenced (but for the disclosures now ordered by the preliminary injunction), and Nexus claims RLI cannot be surprised by the counterclaim's allegations as they arise from the same transaction and occurrence. Additionally, the counterclaim is made in good faith and separate litigation of this claim would be a waste of time and resources.

RLI, for its part, objects to the amendment and alternatively moves to dismiss the counterclaim under Federal Rule of Civil Procedure 12(b)(6). ECF No. 53. RLI argues that Nexus fails to allege RLI breached a duty established by the Indemnity Agreement or that aninjury resulted. In RLI's view, the Indemnity Agreement does not confer rights upon Nexus nor impose obligations upon RLI, and thus there is no implied duty to act with good faith under these circumstances. RLI further argues that Nexus has no grounds for damages, as the Indemnity Agreement does not provide for attorney's fees to Nexus or confer a right to dispute bond claims to Nexus, and there is no proximate cause between Nexus' injuries and RLI's alleged breach.

II.

Federal Rule of Civil Procedure 15(a) provides that "[a] party may amend its pleading once as a matter of course within 21 days after serving it. . . . In all other cases, a party may amend its pleading only with the opposing party's written consent or the court's leave." Rule 15 allows courts to freely grant leave to amend a pleading "when justice so requires." Id.; see also Johnson v. Oroweat Foods Co., 785 F.2d 503, 511 (4th Cir. 1986). "If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Foman v. Davis, 371 U.S. 178, 182 (1962). The grant or denial of leave lies in the sound discretion of the district court. See Gambelli v. United States, 904 F. Supp. 494, 497 (E.D.Va.1995), aff'd, 87 F.3d 1308 (4th Cir. 1996). Denial of leave to amend constitutes abuse of discretion without sufficient reason, such as futility of amendment, undue delay, bad faith, dilatory motive, undue prejudice, or repeated failure to cure deficiencies by previous amendments. See Foman, 371 U.S. at 182.

"Unless a proposed amendment may clearly be seen to be futile because of substantive or procedural considerations, conjecture about the merits of the litigation shouldnot enter into the decision whether to allow amendment." Davis v. Piper Aircraft Corp., 615 F.2d 606, 613 (4th Cir. 1980) (internal citations and quotations omitted). A proposed amendment is futile when it would not survive a motion to dismiss. See United States ex. Rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008). A district court "determines futility under the standard of Fed. R. Civ. P. 12(b)." Chattery Int'l, Inc. v. JoLida, Inc., No.: WDQ-10-2236, 2011 WL 4527337, at *3 (D. Md. Sep. 27, 2011). "To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 700 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 597 (2007)). A claim is plausible on its face "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. Therefore, a motion to amend pleadings is futile if it does not state a claim to relief that is plausible on its face.

III.

Courts favorably review motions to amend with few exceptions: futility of amendment, undue delay, bad faith, dilatory motive, undue prejudice, or repeated failure to cure deficiencies by previous amendments. See Foman, 371 U.S. at 182. RLI primarily contests the amendment on futility grounds. RLI's arguments fail to persuade the court to diverge from the generally accepted path of permitting amendment early in litigation.

A.

RLI first contends that Illinois and Virginia law do not provide for an independent claim based in the implied duty of good faith and fair dealing, and even if they did, Nexusfails to allege facts supporting such a claim.¹ At this stage of the litigation and accepting the facts as pled, the court finds that Nexus sufficiently alleges that RLI demanded discharge of the bonds or collateral not in good faith as part of a breach of contract claim.

1.

Illinois does not recognize an independent cause of action for breach of the implied duty of good faith and fair dealing. See, e.g., Brooklyn Bagel Boys, Inc. v. Earthgrains Refrigerated Dough Prods., Inc., 212 F.3d 373, 381 (7th Cir. 2000); Voyles v. Sandia Mortg. Corp., 196 Ill.2d 288, 256 Ill. Dec. 289, 751 N.E.2d 1126, 1130-31 (2001). However, Illinois courts have recognized an action for breach of the implied duty when it is based in a breach of contract claim. See LaSalle Bus. Credit, Inc. v. Lapides, No. 00 C 8145, 2003 WL 722237, at *15 (N.D. Ill. Mar. 3, 2003) (citing LaSalle Bank Nat'l Assoc v. Paramont Properties, 588 F. Supp. 2d 840, 857 (N.D. Ill. 2008)); 4536 N. Sheridan Condo Ass'n v. Maduff, 2016 IL App (1st) 152006-U, ¶ 30 ("The duty of good faith and fair dealing is a limitation on the exercise of one party's broad discretion in performing its obligations under the contract. It requires that party to exercise the discretion reasonably and with proper motive, not arbitrarily, capriciously, or in a manner inconsistent with the parties' reasonable expectations under the contract." (internal citation omitted)); cf. Envision Healthcare, Inc. v. Fed. Deposit Ins. Corp., No. 11 CV 6933, 2014 WL 6819991, at *9 (N.D. Ill. Dec. 3, 2014) ("Envision has not pleaded its duty-of-good-faith theory (Count III) as part of its breach-of-contract claim (Count I), as it was required to do."). As explained in Gore v. Indiana Ins. Co., 376 Ill. App. 3d 282, 286, 876 N.E.2d 156, 161 (2007),

It is well established that the duty of good faith and fair dealing is implied in every contract. Its purpose is to ensure that parties do not take advantage of each other in a way that could not have been contemplated at the time the contract was drafted or do anything that will destroy the other party's right to receive the benefit of the contract. Disputes involving the exercise of good faith arise when one party is given broad discretion in performing its obligations under the contract. The duty of good faith and fair dealing is a limitation on the exercise of that discretion, requiring the party vested with discretion to exercise it reasonably and with proper motive, not arbitrarily, capriciously, or in a manner inconsistent with the parties' reasonable expectations. However, in general, it is not an independent source of duties for contracting parties.

Id. (citing Dayan v. McDonald's Corp., 125 Ill. App. 3d 972, 990-91, 81 Ill. Dec. 156, 466 N.E.2d 958, 971-72 (1984); Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 525, 221 Ill. Dec. 473, 675 N.E.2d 897, 903 (1996)).

"Problems relating to good faith performance typically arise where one party to the contract is given broad discretion in performance. The dependent party must then rely on the party in control to exercise that discretion fairly." Dayan, 125 Ill. App. 3d at 990, 466 N.E.2d at 971. Specifically, "[w]here a party acts with improper motive, be it a desire to extricate himself from a contractual obligation by refusing to bring about a condition precedent or a desire to deprive an employee of reasonably anticipated benefits through termination, that party is exercising contractual discretion in a manner inconsistent with the reasonable expectations of the parties and therefore is...