Merchants Bonding Company (Mutual) v. Arkansas Construction Solutions LLC

IN THE UN|TED STATES DlSTRlCT COURT

WESTERN DlSTRlCT OF ARKANSAS

FAYETTEV|LLE DlVlSlON

MERCHANTS BOND|NG COMPANY (MUTUAL)

and MERCHANTS NAT|ONAL BOND|NG, |NC. PLA|NT|FFS

V. CASE NO. 5:18-CV-05078

ARKANSAS CONSTRUCT|ON SOLUT|ONS, LLC;

R.L. STOCKETT & ASSOC|ATES, LLC;

R|CK L. STOCKETT; and D|ANA STOCKETT DEFENDANTS

MEMORANDUM OPlN|ON ANI_J ORI_JER

Now before the Court are a l\/lotion to Dismiss (Doc. 28) and Brief in Support (Doc.

29) filed by Defendants R.L. Stockett & Associates, LLC, Rick L. Stockett, and Diana

Stockett (co||ective|y, “the Stockett Defendants”); a Response in Opposition (Doc. 31)

filed by l\/lerchants Bonding Company (Mutual) and lVlerchants National Bonding, lnc.

(co||ective|y, “Merchants”); a Reply filed by the Stockett Defendants (Doc. 34); and a Sur-

Reply filed by l\/lerchants (Doc. 38).

Counsel for the parties appeared in Court for a hearing on the l\/lotion on November

6, 2018. At that time, the Stockett Defendants advanced two, alternative arguments in

favor of dismissal. The first was brought under Federal Rule of Civil Procedure 12(b)(5)

for failure to serve the Complaint in compliance with Rule 4(m). The second was brought

pursuant to the Co/orado River abstention doctrine, which, if applied to the facts of this

case, would favor staying or dismissing the federal lawsuit due to parallel litigation in state

court and the presence of certain “exceptional circumstances” warranting abstention.

After hearing oral argument on these issues, the Court ruled in part from the bench,

denying the Motion to Dismiss as to the Rule 12(b)(5) argument As to the Co/orado River

abstention argument, the Court took the matter under advisement

Now having considered the abstention argument more thoroughly, the Court finds

it is unpersuaded that abstention is justified in this case and DENlES the Motion to

Dismiss in all respects. Below, the Court will analyze both the Rule 12(b)(5) and

abstention doctrine arguments in greater detail. To the extent the contents of this Order

conflict with statements made from the bench, this Order will control.

|. BACKGROUND

The instant lawsuit, filed on Nlay 14, 2018, involves Merchants’ request for

declaratory and injunctive relief, as well as for damages for breach of contract and

attorneys’ fees, related to an indemnity Agreement (Doc. 1-1) that all Defendants entered

into with Merchants on lVlay 3, 2016. According to the Complaint, separate Defendant

Arkansas Construction Solutionsl LLC (“ACS”) was selected to be the contractor on a

new home construction project in Northwest Arkansas, called the Sunrise Ridge

Subdivision. ACS was required to obtain payment and performance bonds to insure its

work on the project To that end, it approached Merchants, which agreed to act as surety.

However, before Merchants would formally issue the bonds to ACS, it needed certain

assurances that ACS would fully indemnify Merchants against any and all losses that

might be claimed against the bonds, as well as provide Merchants, upon demand, with

collateral security “to cover any liability for any loss or expense for which [l\/lerchants] may

be obligated to indemnify the Company . . . (Doc. 1-1, p. 5).

Since it appears ACS lacked sufficient assets to fully indemnify Merchants on its

own, the Stockett Defendants agreed to serve as indemnitors on the payment and

performance bonds.1 The day after all Defendants signed the indemnity Agreement,

Merchants formally issued the payment and performance bonds on behalf of ACS as

principal, and for the benefit of Sunrise Developers, lnc. (“Sunrise”) as developer of the

home construction project See Doc. 29-1, p. 32. The full penalty sum of the payment

bond was $500,000.00. /d.

ln around Nlarch of 2017, close to a year after Nlerchant issued these bonds and

after construction of the subdivision was well on its way, a subcontractor named Sagely

Construction (“Sagely”) made a claim against the bonds, complaining that ACS had not

paid for certain goods and services that Sagely had provided on the project U|timately,

Merchants settled this claim for $8,820.00. Then, another subcontractor called Del-Sha

Construction, LLC (“Del-Sha”) filed a lawsuit against ACS, Sunrise, and Merchants (as

surety of the bonds) in Benton County Circuit Court on July 28, 2017, also asserting that

Del-Sha had not been paid for its work on the same project2 Things rapidly went from

bad to worse after that On August 4, 2017, ACS filed a mechanics lien against Sunrise

in the amount of $285,240.00. Then, on September 5, 2017, Sunrise filed a cross-claim

(Doc. 29-3) against ACS and Merchants in the state court action, claiming that Sunrise

1 Two other signatories to the indemnity Agreement were Chris and Amy Sanford, whose

relationship to ACS is unknown to the Court The Sanfords were originally named as

Defendants in this action, but Merchants moved to voluntarily dismiss them without

prejudice on September 7, 2018, and the Court granted that motion the same day. See

Doc. 22.

2 The Court takes judicial notice of the complaint and other filings made in the state court

action in Benton County, which appear in the record as attachments to Doc. 29. ln taking

notice of the state court matter, however, the Court does not assume as true the facts

described in the pleadings in that case. lnstead, the Court only observes the procedural

history and claims that have been made to date in the state court matter.

3

was now owed $85,000.00 in damages, and demanding that ACS and Merchants jointly

indemnify Sunrise for its monetary losses associated with the construction project

On l\/larch 27, 2018, Sunrise’s counsel sent a letter to Merchants (Doc. 1-2, pp. 16-

20), making a formal, written claim on the payment bond in the full penalty amount of

$500,000.00 and attaching a statement detailing the full extent of ACS’s alleged failure to

pay construction costs to a number of different companies. Shortly thereafter, on April

19, 2018, Merchants sent all parties to the lndemnity Agreement a written request to

deposit collateral for the bonds and to fully indemnify Merchants for any and all costs and

legal expenses it was currently incurring in the state court lawsuit, as per the terms of the

lndemnity Agreement When ACS and the Stockett Defendants failed to pay the

collateral, Merchants filed the instant lawsuit in May of 2018, along with a Motion for

Preliminary lnjunction seeking specific performance of the indemnity Agreement and an

order directing Defendants to deposit the requested collateral with Merchants. A couple

of months later, on August 22, 2018, separate Defendant Rick Stockett filed a cross-claim

in the state court lawsuit against Merchants, asking the state court to declare the payment

and performance bonds null and void. From what the Court can gather, it appears Mr.

Stockett’s argument in state court is that Merchants and Sunrise allegedly engaged in

misconduct and/or collusion, which had the effect of nullifying the bonds.

With that procedural history now behind us, the Court now turns to the l\/lotion to

Dismiss. The Stockett Defendants first contend that they were served out of time, and

the case should be dismissed on that basis alone. ln the alternative, they maintain that

good cause exists for the Court to exercise its discretion to abstain from ruling on the

federal claims in favor of allowing the state court to rule on those same claims. With

respect to the late-service issue, Merchants admits that it did, in fact, serve the Stockett

Defendants eighteen days late, but contends that it made reasonable and continuous

efforts to effect timely service and only failed to do so because of excusable neglect As

to the more complex federal abstention argument Merchants disagrees with the Stockett

Defendants that the legal claims at issue in the case at bar are also at issue in the state

court lawsuit Merchants believes, instead, that the two cases are not parallel, and that

the resolution of all issues in the state court forum will not necessarily resolve any of the

pending issues here.

||. LEGAL STANDARD

A. Failure to Timely Serve under Rule 4(m)

Rule 4(m) provides that “[i]f a defendant is not served within 90 days after the

complaint is filed, the court-on motion or on its own after notice to the plaintiff-must

dismiss the action without prejudice against that defendant or order that service be made

within a specified time.” Fed. R. Civ. P. 4(m). However, the Rule also provides that “if

the plaintiff shows good cause for the failure, the court must extend the time for service

for an appropriate period.” ld. (emphasis added). Such an extension of time should be

granted if the court concludes there was either good cause or excusable neglect in a

plaintiff’s failure to timely serve. See Kurka v. loWa Cnty., lowa, 628 F.3d 953, 957 (8th

Cir. 2010). ln determining whether excusable neglect has been established, the Eighth

Circuit examines the following four factors: “(1) the possibility of prejudice to the

defendant (2) the length of the delay and the potential impact on judicial proceedings, (3)

the reason for the delay, including whether the delay was within the party’s reasonable

contro|, and (4) whether the party acted in good faith.” ld. at 959.

B. Colorado River Abstention Doctrine

The abstention doctrine at issue here was first discussed by the Supreme Court in

the case of Colorado River Water Conservation District v. United States, 424 U.S. 800

(1976). The doctrine hinges on whether the plaintiff’s causes of action and request for

relief in the federal court action are also at issue and, thus, are likely to be resolved in a

state court proceeding that is already under way. `The federal court must consider two

factors in the abstention analysis: (1) whether the state court and federal cases are

“parallel” and (2) whether there exist “exceptional circumstances” to warrant the federal

court abstaining on the issues. See Fru-Con Const. Corp. v. ControlledAir, lnc., 574 F.3d

527, 534 (8th Cir. 2009).

lf a parallel state-court action exists, the district court must then exercise its

discretion to determine whether to abstain under Colorado River, while keeping in mind

that “[a]||owing the litigation to proceed simultaneously in federal and state courts is

wasteful because ultimately only one of the jurisdictions will actually decide the case."

Fru-Con, 574 F.3d at 544 (internal quotation and citation omitted). Abstention is not a

favored course of action, however, as federal courts “have a virtually unflagging obligation

to exercise the jurisdiction given them, even when there is a pending state court action

involving the same subject matter. Thus, a federal court may divest itself of jurisdiction by

abstaining only when parallel state and federal actions exist and exceptional

circumstances warrant abstention." ld. at 534 (citations omitted and cleaned up).

lll. DlSCUSS|ON

A. Dismissal Due to Untime|y Service

Counsel for Merchants stipulated during the motion hearing that he did, in fact,

serve the Complaint eighteen days past the deadline. The Stockett Defendants do not

argue that they were prejudiced by the delay; rather, they argue only that Merchants failed

to assert sufficient good cause for the delay, and the Complaint should be dismissed

without prejudice on that basis.

During the hearing, the Court construed Merchants’ response (Doc. 23) to the

Clerk’s Order to Show Cause and/or Merchants’ response (Doc. 31) to the Motion to

Dismiss as a request for the Court to retroactively extend the deadline for service by

eighteen days. The Court granted that request from the bench, finding that: (1) the

Stockett Defendants suffered no prejudice due to the delay in service, (2) the length of

the delay was relatively short, (3) the delay did not negatively impact judicial proceedings

in this case, (4) Merchants first attempted service on the Stockett Defendants

approximately sixty days prior to the deadline, and (5) Merchants acted in good faith in

attempting service multiple times prior to the deadline. Accordingly, for these reasons

and the ones stated from the bench, the Stockett Defendants’ request for dismissal under

Rule 12(b)(5) is DENlED.

B. Colorado River Abstention

Before the instant case was filed,.a subcontractor filed a case in Benton County

Circuit Court, demanding payment for work allegedly performed on the Sunrise Ridge

Subdivision, and suing Sunrise as the developer on the project, ACS as the contractor,

and Merchants as the guarantor of ACS’s payment and performance bonds. The parties

agree tha't the defendants in the state court case ultimately filed various cross-claims

against one another. lt is also beyond dispute that the parties in the state court matter

are substantially similar to the parties in the case at bar. That, however, is where the

similarity ends, as the two cases do not concern the same causes of action, and there is

no “substantial likelihood that the state proceeding will fully dispose of the claims

presented in federal court.” Fru-Con, 574 F.3d at 535 (explaining “parallel actions” under

the Colorado River abstention doctrine).

The case at bar concerns the parties’ rights and obligations under the indemnity

Agreement Those issues have not been raised in the state court action, nor will

Merchants have any particular obligation to raise them in that case in the future. lnstead,

the state court matter concerns the payment and performance bonds that Merchants

issued to ACS for the benefit of Sunrise to guarantee ACS’s work on the housing

development project Accordingly, the state court will likely adjudicate the following

issues: (1) Del-Sha’s (a subcontractor) contention that Sunrise and ACS are liable to it

for work performed on the housing development project; (2) ACS’s contention that

Sunrise owes it money for services it performed in furtherance of the project; (3) Sunrise’s

contention that ACS must fully indemnify it for any and all monetary losses associated

with the project; (4) Sunrise’s contention that ACS is merely the alter-ego of several

individuals, including the Stocketts; and (5) Rick Stockett’s contention that the payment

and performance bonds issued by Merchants became null and void at some point after

they were issued.

By contrast, the case at bar has nothing to do with the execution of the payment

and performance bonds. Count One of the instant Complaint is a demand by Merchants

that all Defendants be required, as per the terms of the lndemnity Agreement, to post

collateral security for the penalty value of the payment and performance bonds, plus

collateral sufficient to cover Merchants’ costs incurred in defending itself in the state court

litigation and in bringing the instant matter in federal court Count Two is Merchants’

request for declaratory judgment concerning the parties’ rights under the indemnity

Agreement only, Count Three is Merchants’ claim for breach of the lndemnity Agreement

by virtue of Defendants’ apparent refusal to fully indemnify Merchants thus far for liability

connected with the payment and performance bonds, and for Defendants’ apparent

failure to pay to Merchants the collateral demanded under the terms of the lndemnity

Agreement Finally, Count Four is a claim for attorneys’ fees and interest

The Stockett Defendants argue in their Motion to Dismiss that the state and federal

cases are parallel “because both involve a determination of the validity and enforceability

of the Surety Bonds issued by Merchants” (Doc. 29, p. 9). The Court disagrees The

state court is currently being asked to adjudicate the parties’ rights under the payment

and performance bonds and determine who should be paid and in what amounts. These

claims are not at issue in the federal lawsuit The Stockett Defendants also contend that

the “preliminary issue of whether the construction contract was breached by SD [Sunrise]

or by ACS . . . must be decided first” by this Court, id. at 10. Their thinking on this point,

apparently, is that if ACS is eventually absolved of all liability in state court on the bond

issues, then any action by this Court to require the Stockett Defendants to pony up

collateral to secure the bonds will end up being a waste of time. Certainly, the Stockett

Defendants prefer not to indemnify Merchants and not to post any collateral. They would

much rather wait and see how the state court action plays out, and then, perhaps a year

or more from now, after all obligations under the payment and performance bonds have

been fully resolved, permit Merchants to then proceed with their federal claims under the

lndemnity Agreement But surely this “wait-and-see” strategy was not contemplated by

the parties when they signed the lndemnity Agreement

Contrary to the Stockett Defendants’ position, the Court believes that deciding

Merchants’ claims in the instant lawsuit will not require the Court to decide “the preliminary

issue of whether the construction contract was breached by SD [Sunrise Developers] or

by ACS.” (Doc. 29, p. 10). lt is the state court that is tasked with resolving the parties’

claims under the payment and performance bonds, not the federal court lt is therefore

also the state court’s task to determine the validity and enforceability of those bonds, if

called upon to do so. Accordingly, if any party to this action requests that this Court make

rulings concerning the validity, enforceability, or obligations owed under the payment and

performance bonds, the Court Wil/ abstain from doing so in favor of allowing the state

court to rule on those issues Further, if the state court eventually determines that the

bonds are null and void (as Mr. Stockett contends), such a decision will not adversely

affect the rulings made by this Court with respect to the lndemnity Agreement or otherwise

result in a net waste of judicial resources

Because the Court finds that the state and federal lawsuits are not parallel, it need

not reach the second step in the'Co/orado River abstention analysis, which asks whether,

in the Court’s discretion, exceptional circumstances may nonetheless exist to warrant

abstention. Assuming for the sake of argument that the state and federal actions are,

indeed, parallel, the Court finds that no exceptional circumstances exist to warrant

abstention here.

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The following six factors are useful in guiding the Court’s analysis of “exceptional

circumstances”:

(1) whether there is a res over which one court has established jurisdiction,

(2) the inconvenience of the federal forum, (3) whether maintaining separate

actions may result in piecemeal litigation, unless the relevant law would

require piecemeal litigation and the federal court issue is easily severed, (4)

which case has priority_not necessarily which case was filed first but a

greater emphasis on the relative progress made in the cases, (5) whether

state or federal law contro|s, especially favoring the exercise of jurisdiction

where federal law controls, and (6) the adequacy of the state forum to

protect the federal plaintiff’s rights.

Federated Rura/ E/ec. /ns. Corp. v. Ark. E/ec. Coop., /nc,, 48 F.3d 294, 297 (8th Cir.

1995).

ln the instant case, the parties agree that factors one and two are neutral and that

factor five weighs in favor of abstention Factor four, however, weighs against abstention.

While the state court case was filed over a year prior to the federal action, there has been

no claim made in that case relating to Merchants’ rights under the lndemnity Agreement

lnstead, the only case in which the parties’ rights and obligations under the lndemnity

Agreement are at issue is the federal-case. The state court case therefore receives no

priority over the federal case in the analysis

As to factor three, the Court finds that maintaining separate actions will not result

in piecemeal litigation, as the bonds and the lndemnity Agreement are separate contracts

with separate obligations Though there appear to be no cases within this Circuit

addressing the distinction between indemnity agreements and performance bonds, there

are certainly helpful cases from other jurisdictions that explain the relevant distinctions

For example, in At/antic Mutual Insurance Co. v. Ki/eam, lnc., the Northern District of

Georgia found that a state court action involved “the underlying construction contracts,

[but] not the lndemnity Agreement.” 2007 WL 2422041, at * 4 (N.D. Ga. Aug. 21, 2007).

ll

The court then reasoned that since the indemnity agreement and the underlying

construction contracts did not address the same subject matter, bind the same parties, or

raise the same claims, “the indemnity issues [were] separate and distinct requiring only

a determination of: (1) the costs and expenses that plaintiff incurred as a result of issuing

the performance and surety bonds; and (2) whether those costs and expenses resulted

from plaintiff’s ‘deliberate and willful malfeasance.”’ ld. As a result of this analysis, the

court declined to abstain under the Colorado Riverdoctrine.

Similarly, in lndiana Lumbermens Mutual Insurance Co. v. Wild, the plaintiff in

federal court sought enforcement of an indemnity agreement under a surety bond for an

asbestos removal project for the Chicago Board of Education. 1994 WL 411743, at *1

(N.D. lll. Aug. 4, 1994). The district court for the Northern District of lllinois found that a

right to indemnification arises immediate|y, regardless of any obligations owed on the

performance bond. ln the end, the court did not favor abstention because the state court

claims that were proceeding at the same time could be determined by reference to the

performance bond, whereas the federal claims could be determined by reference to the

indemnity contract ld. at *2. The same analysis applies in the case at bar, and factor

three therefore weighs against abstention.

Lastly, as to factor six, the state forum is plainly inadequate to protect Merchants’

rights under the lndemnity Agreement The not-so-subtle request the Stockett

Defendants make in their l\/lotion is for the Court to simply ignore the existence of the

lndemnity Agreement for the time being and put the matter of their obligations under that

contract on hold. Doing so would mean, of course, that the Stockett Defendants would

not be required to specifically perform under the contract and pay Merchants, potentially,

12

hundreds of thousands of dollars of collateral to secure the payment and performance

bonds while litigation concerning those bonds rages on in state court The Court finds

that no exceptional circumstances exist to justify the extraordinary act of abstention under

the Co/orado River doctrine in this case, and for the reasons explained above, the

Stockett Defendants’ request for dismissal or stay under this doctrine is DENlED.

|V. CONCLUS|ON

|T |S THEREFORE ORDERED that the |Vlotion to Dismiss (Doc. 28) filed by

Defendants R.L. Stockett & Associates, LLC, Rick L. Stockett, and Diana Stockett is

DENlED. 56

lT rs so oRDERED on this g

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