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South Dallas Water Authority v. Guarantee Co. of North America, USA
Citations: 767 F. Supp. 2d 1284; 2011 WL 586083Docket: Civil Action 10-0604-CG-C
Court: District Court, S.D. Alabama; February 9, 2011; Federal District Court
The United States District Court for the Southern District of Alabama, under the direction of Judge Callie V.S. Granade, ruled on February 9, 2011, regarding the South Dallas Water Authority's legal action against The Guarantee Company of North America, USA. The court adopted the Magistrate Judge William E. Cassady's recommendation, granting the plaintiff's motion to remand the case to the Circuit Court of Dallas County, Alabama, while denying the motion to tax costs and expenses. The underlying dispute arose from a construction contract awarded in 2008 to W.D. Wainwright, Sons, Inc. for the installation of water infrastructure. Wainwright was required to secure a performance bond from The Guarantee Company, ensuring fulfillment of the contract terms. Due to Wainwright's failure to complete the work by the April 16, 2009 deadline, a meeting was held on April 24, 2009, where Wainwright requested additional time to fulfill the contract. The South Dallas Water Authority subsequently notified both Wainwright and The Guarantee Company that it would allow Wainwright to complete the project but reserved the right to impose liquidated damages for delays. The Authority stated it would enforce a $500 per day liquidated damages provision for each day beyond the completion deadline until the contract was fulfilled and announced it would cease any further progress payments to Wainwright. Upon Wainwright's fulfillment of its contractual obligations, the Authority will issue a Final Payment to Wainwright and its guarantor, The Guarantee Company, directly. If Wainwright seeks any portion of these funds, it must pursue satisfaction from The Guarantee Company. Following Wainwright's notification that it could not complete the contract until September 2, 2009, the Water Authority issued a letter on August 17, 2009, declaring that no further delays would be tolerated and demanding completion by the specified date. Wainwright failed to meet this deadline and subsequently requested an additional month on September 17, 2009. The following day, the Water Authority terminated Wainwright for breach of contract, citing dissatisfaction with its performance and the substantial work still pending. The Water Authority reserved its rights to seek indemnity from Wainwright and The Guarantee Company for costs incurred due to Wainwright's breach. On September 21, 2009, the Water Authority notified The Guarantee Company of Wainwright's termination, demanding it fulfill Wainwright’s obligations under the Performance Bond, and indicated plans to obtain proposals from other contractors for the completion of the project. The Authority also reserved rights for costs and damages, including liquidated damages of $500 per day for delays beyond the scheduled completion date. As of the current date, approximately $79,000 in liquidated damages is due. The plaintiff provided The Guarantee Company with three contractor proposals during the week of September 28, 2009, fulfilling a prior commitment. The Water Authority recommended accepting Cardinal Contracting, Inc.'s proposal due to its ongoing work at the water treatment plant and its status as the lowest bidder. Subsequently, the Water Authority sought a status update from The Guarantee Company, which, on October 9, 2009, refused to fulfill its obligations under the Performance Bond. As a result, the Water Authority engaged Cardinal Contracting to complete the work initially assigned to Wainwright, incurring additional costs and discovering numerous deficiencies in Wainwright's work that required further remediation. The plaintiff initiated a breach of contract, misrepresentation, and suppression action against Wainwright and The Guarantee Company on April 16, 2010, in the Circuit Court of Dallas County, Alabama. The complaint asserts that both defendants failed to meet their responsibilities under the construction contract and Performance Bond, resulting in ongoing damages and additional costs to the Water Authority. The Authority claims that a Performance Bond exists, binding the defendants to indemnify the Authority for damages incurred due to Wainwright's failure to complete the contract. The defendants are alleged to have breached both the construction contract and the Performance Bond by refusing to complete the work and to reimburse the Authority for resulting expenses. The Authority seeks judgment for damages, attorneys' fees, pre-judgment interest, court costs, and any other relief deemed appropriate. Additionally, the Authority restates its allegations for a misrepresentation claim as an alternative count. Defendants assured the Authority that if Wainwright was employed for the Water Main Improvements Construction Contract, the contract would be completed according to its terms, and they would indemnify the Authority for any damages incurred. Relying on these assurances, the Authority awarded the contract to Wainwright. However, Wainwright subsequently failed to complete the contract on time, and the Defendants did not fulfill their promises to indemnify the Authority for resulting damages, costs, and expenses. Despite the Authority's demands for the Defendants to uphold their representations, they refused, leading to injuries and financial losses for the Authority. Defendants’ misrepresentations were made negligently and intentionally to induce reliance by the Authority, which suffered detriment as a result. In an alternative count for suppression, the Authority claims the Defendants had a duty to disclose that the Performance Bond was merely a means to secure the contract award for Wainwright, and they did not intend to fulfill their representations made in the bond. The Authority relied on this nondisclosure, awarding the contract to Wainwright, who has since failed to perform. The Defendants' failure to disclose these material facts resulted in further harm to the Authority. The Authority seeks compensatory and punitive damages, along with costs and attorney fees. Additionally, it is noted that Wainwright filed for bankruptcy, suggesting an automatic stay of the action, and that The Guarantee Company did not timely remove the case to federal court, leading to a motion for remand filed by the Plaintiff. Plaintiff argues that the defendant waived its right to remove the case, that removal was untimely, that diversity of citizenship does not exist, and that The Guarantee Company failed to prove that the amount in controversy exceeds $75,000, exclusive of interest and costs. The Guarantee Company responded, asserting that the plaintiff's arguments lack merit. In reply, the plaintiff reiterated claims of waiver, lack of diversity, and untimeliness, requesting remand to state court. Federal courts have limited jurisdiction, and there is a presumption against the exercise of federal jurisdiction. All uncertainties regarding removal jurisdiction must be resolved in favor of remand. Narrow construction of removal statutes is required, with any doubts about jurisdiction favoring state court remand. The burden of establishing federal jurisdiction lies with the removing defendants, who must prove, by a preponderance of the evidence, that complete diversity exists and that the amount in controversy exceeds $75,000. If complete diversity is not established, the court need not consider further arguments regarding jurisdiction. Complete diversity of citizenship is essential for federal diversity jurisdiction, meaning all plaintiffs must be from different states than all defendants. In this case, both Wainwright and the plaintiff, South Dallas Water Authority, are Alabama entities, indicating a lack of complete diversity. The removing party recognizes this, suggesting that the case is likely doomed to remand. Established case law, such as Corfield v. Dallas Glen Hills LP, supports that diversity jurisdiction cannot exist if any plaintiff shares citizenship with a defendant. Courts have consistently ruled that the determination of diversity relies on the citizenship of all parties named in the action, regardless of whether defendants have been served. Key points include: - A defendant cannot remove a case if any co-defendant's citizenship destroys diversity, regardless of service status. - The expiration of service time under state law does not provide grounds for removal. - The removing party has the burden of proving diversity at the time of removal; if the initial complaint does not show a controversy between diverse parties, the case is not removable. - Fictitious defendants that are residents cannot be ignored for diversity purposes if the complaint does not specify their roles distinctly. In this context, the original complaint did not allege a controversy between diverse parties, and therefore, it was concluded that the case was not removable based on the pleadings at the time of the removal petition. The Guarantee Company argues that complete diversity exists between the Plaintiff and the only active Defendant, Wainwright, due to a stay on proceedings against Meadows resulting from its bankruptcy filing. The Plaintiff contends that diversity is not present, citing bankruptcy principles and relevant case law, asserting that Meadows' bankruptcy stay does not equate to a dismissal from the case but merely suspends the proceedings. The Court agrees, stating that the absence of diversity at the beginning of the state court action cannot be remedied by the removal process unless there is a voluntary dismissal by the Plaintiff of the non-diverse defendant. Consequently, the action is remanded to the Court of Common Pleas in South Carolina. The removing party claimed that the bankruptcy petitions in prior cases were filed after the state actions, thus differing from this case, and argued that only its citizenship should be considered to avoid jurisdictional evasion by the Plaintiff. The Plaintiff, unaware of Wainwright's bankruptcy at the time of filing, intends to pursue claims against it once the stay is lifted. The discussion highlights that the removal bar created by the non-diverse defendant can only be lifted through a confirmed dismissal, and an administrative closing does not constitute such a dismissal. The Court acknowledges that while the case against the non-diverse defendant may be inactive, it remains legally unresolved and could resume post-bankruptcy. If the court were to exercise diversity jurisdiction, the emergence of Defendant Dietzel from bankruptcy without discharging the Plaintiffs' claims could destroy complete diversity and eliminate subject matter jurisdiction. A case against a non-diverse party must be fully dismissed, rather than just temporarily closed due to bankruptcy, before federal diversity jurisdiction applies. Mereen-Johnson argues that Group Seven is a nominal party, improvidently joined to defeat federal jurisdiction, asserting that its bankruptcy and the Plaintiffs' claims against Mereen-Johnson imply that Group Seven's role is not substantial. However, the court finds that the record does not support Mereen-Johnson's claim that Group Seven is not a real party in interest for diversity purposes. Mereen-Johnson's assertion that Group Seven became a nominal party post-bankruptcy does not establish diversity or allow for removal based on diversity jurisdiction, as the automatic stay from the bankruptcy filing does not equate to a dismissal from the case. The document outlines the procedural history, noting that the Plaintiffs filed their action against Abercrombie and Dietzel in Michigan, followed by Dietzel's bankruptcy filing. The timeline also includes the Plaintiffs' civil action filed in North Carolina and Group Seven's subsequent bankruptcy petition. McDowell asserted three claims: a construction lien foreclosure against United States Gypsum (USG), the Port of St. Helens, and EC Company (which was later dismissed); a breach of contract claim against B.E.K.; and a quantum meruit claim against both B.E.K. and USG. USG filed for voluntary bankruptcy on June 25, 2001, which triggered an automatic stay under the Bankruptcy Code, preventing any actions against USG. McDowell subsequently amended his complaint on July 16, 2001, dismissing EC Company and acknowledging the automatic stay. The timing of Wainwright’s Chapter 11 filing before South Dallas initiated its action is significant, as it distinguishes this case from others cited by the plaintiff, where the bankruptcy petitions were filed after the state-court actions. The filing against Wainwright after its bankruptcy petition was deemed void ab initio, as any action taken against a debtor under bankruptcy protections is invalid without permission from the bankruptcy court. The automatic stay applies universally, regardless of whether the plaintiff had knowledge of the bankruptcy. Consequently, the action against Wainwright was found to violate the automatic stay and was void, thus its citizenship does not affect the court's diversity jurisdiction. The focus now shifts to whether the removal of this action from state court was timely, as addressed in the subsequent sections of 28 U.S.C. 1446(b). Removal of a civil action is governed by 28 U.S.C. § 1446(b), which establishes a procedure with two main conditions for filing a notice of removal. First, if the initial pleading indicates a removable case, the notice must be filed within 30 days of the defendant receiving that initial pleading. Second, if the initial pleading does not indicate a removable case, the notice can be filed within 30 days after the defendant receives an amended pleading, motion, order, or other document that reveals the case has become removable. The time limit for removal is mandatory and must be strictly adhered to, commencing when the defendant can intelligently ascertain that the case is removable. The language in the first paragraph allows for a broader range of evidence to trigger the removal period, while the second paragraph requires a more precise ascertainment of removability. The terms "set forth" and "ascertain" differ significantly; "set forth" implies a wider array of information that may indicate removability, while "ascertain" demands a higher level of certainty regarding the facts supporting removal. This distinction is crucial as it highlights the more stringent requirements imposed by the second paragraph of § 1446(b), thereby limiting the pathways for defendants to remove a case to federal court. A removing defendant can submit its own affidavits, declarations, or other evidence to establish federal removal jurisdiction, and the types of evidence allowed are not limited by the substantive jurisdictional requirements. Courts of appeal support the notion that defendants may use a variety of evidence to meet the preponderance of the evidence standard for removal jurisdiction. The "receipt from the plaintiff" rule does not apply to removals under the initial paragraph of Section 1446(b), and deductions, inferences, or extrapolations regarding the amount in controversy are permissible. A removing defendant is not required to prove the amount in controversy with absolute certainty, as reasonable inferences and deductions are recognized in legal determinations. In this case, the undersigned finds that The Guarantee Company’s removal was untimely, as it did not occur within 30 days of service of the summons and complaint, specifically by June 28, 2010. The recommendation is to remand the case to Dallas County Circuit Court due to this untimeliness, as The Guarantee Company could have reasonably determined the case was removable within that timeframe. The undersigned notes that the evidence available to The Guarantee Company—specifically the complaint and the attached Performance Bond—suggested that the amount in controversy likely exceeded $75,000, despite the complaint's general language regarding damages. The plaintiff’s broader claim for damages related to breach of the Performance Bond adequately informed the defendant of potential claims for both liquidated damages and additional recovery for costs incurred in rectifying deficiencies in the work. The Performance Bond, referenced in the plaintiffs' complaint, incorporates the Contract between South Dallas and Wainwright, mandating that The Guarantee Company is liable for specific damages and costs, including liquidated damages outlined in the Contract. The Contract stipulates a liquidated damage assessment of $500 for each day past the substantial completion deadline, which was April 16, 2009. The Guarantee Company was aware that the contractor, Cardinal, completed the necessary work by December 19, 2009, and that South Dallas held it accountable for deficiencies in Wainwright's prior work. Additionally, as of August 17, 2009, The Guarantee Company recognized a remaining contract balance of $79,578.27, which could offset liquidated damages if Wainwright completed the work by September 2, 2009. However, Wainwright was terminated on September 18, 2009, with significant unfinished work, diminishing the likelihood of an offset. The Guarantee Company had ample opportunity to calculate and respond to the plaintiff's claim for $120,000 in liquidated damages before the complaint was filed, specifically by June 28, 2010. It also knew the plaintiff's position that Wainwright was not entitled to further payment, as the remaining balance was used to compensate Cardinal for the incomplete work and necessary corrections. Therefore, The Guarantee Company could have recognized the case as removable to federal court prior to the June deadline. The Guarantee Company failed to present sufficient evidence to support a timely removal of the case within thirty days after receiving the initial complaint, leading the Court to consider the removal petition as untimely. The plaintiff moved for costs and expenses under 28 U.S.C. § 1447(c) related to the preparation and prosecution of the motion to remand. This statute allows for the award of costs and expenses if the case is remanded due to removal; however, the decision to grant such costs is at the Court's discretion. It is established that costs and fees should only be awarded if the removing party lacked an objectively reasonable basis for seeking removal. The Magistrate Judge concluded that The Guarantee Company did have a reasonable basis for the removal given the complexities of removal law in the circuit and recommended denying the plaintiff's motion for costs and expenses while granting the motion to remand the case back to the Circuit Court of Dallas County, Alabama. Parties wishing to object to the recommendation must do so in writing within fourteen days, as outlined by procedural rules, or risk waiving their right to further review. The objecting party must submit a brief to the district judge alongside their objection, detailing why the magistrate judge's recommendation should undergo de novo review and warrant a different outcome. Merely resubmitting the original brief to the magistrate judge is insufficient; however, it can be referenced or incorporated into the new brief. Failure to include this supporting brief may be viewed as abandoning the objection. Appeals can only be made from the district judge's order or judgment, not directly from the magistrate judge's recommendation. Regarding the transcript of proceedings, under 28 U.S.C. 1915 and FED.R.CIV.P. 72(b), the magistrate judge deems the existing tapes and original records adequate for review. Any party wishing to object but unable to afford a transcript must obtain a judicial determination that transcription is necessary for the United States to cover the cost. The excerpt also includes references to interactions between the parties involved in a construction contract dispute, specifically highlighting that Wainwright was aware of the completion deadline of April 16, 2009. Correspondence between the plaintiff's counsel and The Guarantee Company's counsel is documented, revealing ongoing communication about the status of the contract and the financial implications of incomplete work. The remaining work includes laying approximately 4,000 feet of line, testing, and cleanup, with a remaining contract balance of $79,578.27. It is noted that if Wainwright completes the work by September 2, 2009, liquidated damages exceeding $68,000 will be deducted, leaving a potential final payment to Wainwright of around $12,000. Additional documentation and correspondence were exchanged between the parties, with the plaintiff reserving all legal rights regarding the contract. Federal courts have diversity jurisdiction in civil actions exceeding $75,000 where parties are from different states, according to 28 U.S.C. § 1332(a)(1). This case has been stayed concerning Wainwright due to an active bankruptcy petition, under 11 U.S.C. § 362, which halts all actions against the debtor. The term "void ab initio" indicates that certain actions are null from the beginning. The plaintiff's violation of the automatic stay prevents any viable claims against Wainwright in state court, leading to his dismissal based on the fraudulent joinder doctrine. Additionally, as the plaintiffs filed an adversary proceeding against Lanier in U.S. Bankruptcy Court for the same issues, they cannot pursue similar claims against Lanier's corporate entity, Tropical Pools, in state court without violating the automatic stay. Consequently, claims against Tropical Pools are also dismissed. A co-defendant can be deemed fraudulently joined if there is no possibility of a cause of action against them or if jurisdictional facts are fraudulently pled. The court notes that suing Wainwright was ineffective, reinforcing the dismissal of his claims. Lastly, the timeliness of the removal process is procedural, not jurisdictional, and prior communications indicated the plaintiffs' intention to seek damages from The Guarantee Company for breach of a performance bond. The Performance Bond stipulates that the surety's obligations arise under specific conditions, provided there is no owner default. First, the owner must notify both the contractor and the surety of the intent to declare a contractor default and attempt to arrange a conference within 15 days to discuss contract performance. If all parties agree, the contractor is allowed a reasonable time to perform, but this does not waive the owner's right to declare a default later. Second, the owner must formally declare a contractor default and terminate the contractor's rights, which cannot occur until at least 20 days after the notice is received. Third, the owner must agree to pay the remaining contract balance either to the surety or to another contractor selected to complete the contract. The Guarantee Company was aware that the plaintiff would not pay the remaining contract balance to Wainwright directly but only to both Wainwright and The Guarantee Company upon full completion of the contract. The Guarantee Company also knew the amount of Cardinal's bid to complete the contract. It could have attached relevant documents to the removal petition or included them in an affidavit. The Performance Bond indicates that the surety's obligations arise only after the owner agrees to pay the contract balance to another contractor and acknowledges that significant work was completed by that contractor after Wainwright's termination. The plaintiff's refusal to make payments directly to Wainwright supports the assertion that the case meets federal jurisdictional requirements, aligning with the legal precedent that reasonable inferences can be drawn without needing to eliminate all uncertainty. The Guarantee Company had the opportunity to establish the jurisdictional threshold within thirty days of the complaint's filing, particularly considering the plaintiff's claims for compensatory and punitive damages in Counts II and III. In diversity cases, punitive damages are included in the jurisdictional amount unless it is legally certain that they cannot be obtained. The undersigned rejects all other arguments supporting the remand that the plaintiff has not already withdrawn and notes that the plaintiff has effectively withdrawn claims regarding The Guarantee Company's failure to timely remove the case and the assertion that the amount in controversy does not exceed $75,000. The undersigned agrees with The Guarantee Company that it did not waive its right to removal; the forum selection clause pertains solely to venue and personal jurisdiction, not to the statutory right to remove. Furthermore, the argument regarding the lack of consent from Wainwright for removal is deemed unacceptable, as the plaintiff's initial lawsuit against Wainwright was void from the beginning. The deadline for filing written objections to the recommended disposition has been extended to fourteen days after service of the copy, effective December 1, 2009.