Peekskill City School District v. Colonial Surety Co.
Docket: No. 11 Civ. 341(SHS)
Court: District Court, S.D. New York; March 18, 2014; Federal District Court
Peekskill City School District filed a breach of contract claim against Colonial Surety Company regarding Colonial's obligation as surety for electrical work on a new middle school construction project. Colonial moved for summary judgment, which the Court granted, determining that Peekskill's claims were time-barred.
The Performance Bond, established in February 2006, stipulated that any legal action must be initiated within two years after a contractor defaulted, ceased work, or Colonial failed to perform its obligations. In June 2008, All Phase Electrical Contracting, the contractor, filed for bankruptcy and stopped work. Following this, the U.S. Bankruptcy Court allowed Peekskill to pursue a claim against Colonial. Subsequently, Peekskill’s board terminated its contract with All Phase.
Negotiations between Colonial and Peekskill regarding Colonial assuming its obligations under the bond stalled in September 2008. Colonial's counsel indicated that Peekskill's insistence on choosing the replacement electrical contractor discharged Colonial's obligations under the bond.
On October 3, 2008, Colonial initiated a declaratory judgment action against Peekskill in the U.S. District Court for the Southern District of New York, asserting it had met its obligations under a Bond and that Peekskill had breached both the Bond and the implied duties of good faith and fair dealing. Peekskill requested and received an extension to respond to the complaint, subsequently moving to dismiss it on December 19, 2008, based on a forum-selection clause that affected subject-matter jurisdiction and venue, as well as a failure to state a claim. A hearing on this motion was scheduled for January 5, 2011. Before the hearing, Colonial voluntarily dismissed the action under Federal Rule of Civil Procedure 41(a)(1)(A)(i), with no answers or counterclaims filed by Peekskill at that time.
On January 18, 2011, Peekskill filed a new lawsuit against Colonial for breach of contract. Colonial sought summary judgment, arguing that the action was time-barred by the surety bond's stipulation that any proceedings must commence within two years of specified triggering events. New York law, which governs this case due to diversity jurisdiction, generally allows a six-year statute of limitations for breach of contract claims but permits parties to agree to a shorter period. The bond's two-year limitation is enforceable, and the clock began on June 6, 2008, when construction work ceased. Peekskill's claims, filed over two years later, are therefore untimely unless the statute of limitations has been tolled.
Peekskill's legal action against All Phase was filed after a delay of two years, seven months, and twelve days following All Phase's cessation of work. The central issue is whether Peekskill’s claims were tolled during this period. Peekskill argues that the time to file its claims was tolled while its motion to dismiss Colonial's declaratory judgment action was pending, from December 19, 2008, to January 5, 2011, citing Federal Rules of Civil Procedure 12(a)(4)(A) and 13(a)(1). Rule 12(a)(4)(A) allows an extension for serving an answer post-motion dismissal denial, while Rule 13(a)(1) mandates including counterclaims in responsive pleadings related to the same transaction.
Peekskill contends it wasn't required to respond to Colonial's complaint until the court ruled on its motion to dismiss, which never occurred since Colonial withdrew the action. While Peekskill correctly observes it did not miss any deadlines for filing a responsive pleading or counterclaims under the Federal Rules, this does not imply that the applicable New York statute of limitations was also tolled. According to New York Civil Practice Law and Rule 203(d), a defense or counterclaim is considered interposed when a pleading is served, and any counterclaim would be timely if not barred when the complaint was filed. However, Peekskill did not serve an answer or counterclaims in Colonial’s action.
The court referenced Gazza v. United California Bank International, where a bank failed to interpose a counterclaim in a prior declaratory judgment action and later attempted to file a separate action after the statute of limitations had expired. The court ruled that since no counterclaim was properly pleaded in the initial action, the bank could not claim tolling, supporting the conclusion that Peekskill's claims were never tolled.
Gazza indicates that the bank, Peekskill, failed to capitalize on the opportunity to assert counterclaims during the declaratory judgment action against Colonial. Despite the voluntary withdrawal of this action before a ruling on a motion to dismiss, Peekskill could have preserved its claims by serving an answer that included both defenses and counterclaims within the limitations period of the surety bond. By doing so, it would not have waived defenses such as improper venue or failure to state a claim, which remain valid if included in a responsive pleading. Peekskill could also have raised subject-matter jurisdiction and forum non conveniens defenses even after serving its answer. Alternatively, it could have initiated a new action within the two-year limitations period of the bond. However, Peekskill chose to file a motion to dismiss instead of serving an answer, which did not toll its claims under New York law.
Regarding the district court’s December 8, 2008 order, Peekskill argued that the order granted an extension for answering Colonial’s complaint and acted as a tolling agreement. However, the court noted that Peekskill’s letter requesting an adjournment referenced Rule 12(a)(4), which governs response times but does not toll statutes of limitations for state-law claims. The district court’s order merely extended Peekskill's deadline to respond and did not affect the timeliness of any unasserted counterclaims. Thus, it provided no basis for tolling claims that Peekskill failed to assert.
No basis exists for equitable tolling of Peekskill’s claims against Colonial. Peekskill argues that Colonial should be equitably estopped from invoking the bond’s statute of limitations due to its consent to Peekskill’s request for an extension to respond to the complaint. Peekskill believes this led them to think they were not required to answer until after the Court's ruling on the motion. Under New York law, equitable estoppel requires proof of three elements: 1) conduct that constitutes a false representation or concealment of material facts, 2) intention for the other party to rely on that conduct, and 3) knowledge of the true facts. For equitable estoppel to apply, Peekskill must demonstrate that Colonial's actions prevented them from timely filing suit. However, Peekskill’s request for an extension did not address how the bond’s limitations might impact any potential counterclaims. Had the court granted Peekskill’s motion for dismissal, they would still face the same situation, as no counterclaims would have been filed. Since Peekskill itself sought dismissal of Colonial’s action, it cannot assert that Colonial's actions hindered its ability to assert claims. Consequently, Peekskill has not shown any conduct by Colonial that constitutes a false representation or concealment of facts, and thus has failed to create a genuine dispute regarding Colonial's statute of limitations defense.
Peekskill's arguments against Colonial's dismissal of the declaratory judgment action are unpersuasive. Peekskill contends that Colonial improperly dismissed its action without court approval after the bond's limitations period expired, asserting that the dismissal should have been treated as a motion for summary judgment, which would require judicial consent. The Court assumes, for argument's sake, that such a dismissal without approval was improper under Rule 41(a)(1). However, there is no basis to excuse the timeliness of Peekskill's claims since it did not challenge Colonial’s dismissal until its opposition to Colonial's motion for summary judgment. Peekskill fails to provide authority supporting its claim that the Court can toll the limitations period due to an erroneous dismissal. Additionally, Peekskill argues that New York law does not allow for a voluntary dismissal to retroactively nullify a tolling of the limitations period, but this argument is flawed. Peekskill never contested the dismissal in the appropriate forum and did not assert counterclaims in the declaratory judgment action, meaning the claims it seeks to bring now were never tolled. The Court concludes that Peekskill has not validly argued for tolling the limitations period and has introduced no evidence of Colonial misleading Peekskill, leading to a misunderstanding of the implications of its litigation choices. Consequently, Colonial is entitled to judgment as a matter of law based on the statute of limitations, and the Court grants Colonial's motion for summary judgment without addressing its alternative arguments.
