3 GEC, LLC Plaintiff, 1:18-cv-58-CAK -v.- OPINION AND ORDER ARGONAUT INSURANCE COMPANY Defendant. 4 6 CHERYL ANN KRAUSE, Circuit Judge, sitting by designation. 7 THIS MATTER comes before the Court on Defendant’s Motion to Dismiss (Dkt. 8 No. 26) the Plaintiff’s First Amended Complaint (Dkt. No. 18). For the reasons set forth 9 below, the Court will DENY Defendant’s Motion to Dismiss. 10 FACTUAL BACKGROUND1 11 This case arises out of a contract dispute relating to the construction of an affordable 12 housing development on St. Croix. First Amended Compl. (FAC) ¶ 5. Plaintiff GEC, LLC 13 (“GEC”), the general contractor for the project, retained Alpha Technologies Services, Inc. 14 (“Alpha”) to design and construct an electrical generation system (the “Microgrid”) to 15 “provide off-the-grid continuous electrical service” to the development. Id. ¶¶ 6–8, 11.
1 In ruling on Defendant’s Motion to Dismiss, we accept Plaintiff’s well-pleaded factual allegations as true and draw all reasonable inferences in its favor. See Sherwin- Williams Co. v. Cnty. of Delaware, 968 F.3d 264, 269 (3d Cir. 2020), cert. denied, 141 S. Ct. 2565 (2021); Fischbein v. Olson Rsch. Grp., Inc., 959 F.3d 559, 561 (3d Cir. 2020). Thus, these facts are taken from Plaintiff’s First Amended Complaint. 16 Defendant Argonaut Insurance Company (“Argonaut”) issued a Performance Bond in the 17 penal sum of $1.652 million as surety for Alpha’s performance. Id. ¶ 21. Construction of
18 the Microgrid apparently did not go as planned, see id. ¶¶ 24, 30, and Alpha’s alleged 19 failure to timely deliver an operational Microgrid is the subject of ongoing litigation before 20 this Court. See Alpha Energy v. GEC, LLC, No. 1:17-cv-00015-CAK-EAH (filed Mar. 20, 21 2017). In response to Alpha’s alleged failures, GEC connected the development to the 22 local utility’s power grid and paid for commercial electrical service instead. Id. ¶ 31.
23 In light of these challenges, GEC told Argonaut that it was considering a declaration 24 of default on January 27, 2017, id. ¶ 32, and then issued a notice of default and termination 25 on July 23, 2018, id. ¶ 33. But Argonaut responded with a letter (the “denial letter”) 26 denying any liability under the Performance Bond and refusing to pay GEC. See id. ¶ 35; 27 Dkt. No. 28-2. This lawsuit followed.
29 GEC initiated this action on November 21, 2018, Dkt. No. 1, and filed the operative 30 First Amended Complaint on February 8, 2019, Dkt. No. 18. In that single-count 31 complaint, it claims that Argonaut violated the implied covenant of good faith and fair 32 dealing when it refused to pay under the performance bond. FAC ¶ 36. Argonaut has 33 moved to dismiss the First Amended Complaint for failure to state a claim under Federal
34 Rule of Civil Procedure 12(b)(6). Dkt. No. 26. It attached as Exhibit B to its motion the 35 denial letter. Dkt. No. 28-2. 36 DISCUSSION2 37 A. Applicable Law
38 1. Motion to Dismiss 39 In evaluating Argonaut’s Motion to Dismiss, this Court must determine whether the 40 First Amended Complaint states a claim for relief under Rule 8(a). It does so “when the 41 plaintiff pleads factual content that allows the court to draw the reasonable inference that 42 the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
43 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007)). 44 2. Converting a Motion to Dismiss into a Motion for Summary Judgment 45 To resolve a Rule 12(b)(6) motion, a court “must consider only the complaint, 46 exhibits attached to the complaint, matters of public record, as well as undisputedly 47 authentic documents if the complainant’s claims are based upon these documents.” Mayer 48 v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010) (citation omitted). Federal Rule of Civil
49 Procedure 12(d) requires a district court to convert a motion to dismiss into a motion for 50 summary judgment if “matters outside the pleadings are presented to and not excluded by 51 the court.” Fed. R. Civ. P. 12(d). In that instance, “[a]ll parties must be given a reasonable 52 opportunity to present all the material that is pertinent to the motion.” Id.
2 The Court has diversity jurisdiction under 28 U.S.C. § 1332. According to GEC’s First Amended Complaint, there is complete diversity between the parties. GEC is a limited liability company organized under the laws of the Virgin Islands, where it has its principal place of business and where all of its members reside. FAC ¶ 2. Alpha is a corporation organized under Nevada law with its principal place of business in Washington, id. ¶ 3, and Argonaut is a corporation organized under Illinois law with its principal place of business in Texas, id. at ¶ 4. 53 Conversion therefore is unnecessary when documents submitted in support of or 54 opposition to a motion to dismiss are “integral to or explicitly relied upon in the complaint.”
55 In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (citation 56 omitted). The rationale for this exception is that “the primary problem raised by looking 57 to documents outside of the complaint—lack of notice to the plaintiff—is dissipated where 58 the plaintiff has actual notice . . . and has relied upon these documents in framing the 59 complaint.” Id. (quotation omitted).
60 3. Implied Covenant of Good Faith and Fair Dealing 61 Under Virgin Islands law, a claim for breach of the implied covenant of good faith 62 and fair dealing has three elements: “that ‘(1) a valid contract exists between the parties, 63 and (2) acts committed by the [defendant] amount to fraud or deceit or an unreasonable 64 contravention of the parties’ reasonable expectations under the contract;’ and (3) that 65 ‘damages suffered as a result.’” Dukes v. Fay Servicing, LLC, No. 3:18-cv-0064, 2022 WL
66 16855409, at *4 (D.V.I. Nov. 10, 2022) (quoting Arvidson v. Buchar, 71 V.I. 277, 336 67 (Super. Ct. 2019)). The implied covenant of good faith and fair dealing is present in every 68 contract governed by Virgin Islands law. In the Virgin Islands, “no special [contractual] 69 language is required as it is well established . . . that the duty of good faith implicitly arises 70 from the creation of a contract.” Id. (citation omitted).
71 B. Analysis 72 1. Conversion to a Motion for Summary Judgment Is Unnecessary 73 74 In its opposition to the Motion to Dismiss, GEC suggests that because Argonaut’s 75 denial letter was not incorporated by reference into the First Amended Complaint, the 76 Court must treat the motion as a motion for summary judgment. Opp. at 3. However, that 77 is not necessary if the letter is an indisputably authentic3 document that is “integral to . . .
78 the complaint.” In re Burlington Coat Factory, 114 F.3d at 1426; see supra Section A.2. 79 To be integral, a document need not be cited in the complaint; “what is critical is 80 whether the claims in the complaint are ‘based’ on [the] extrinsic document.” In re 81 Burlington Coat Factory, 114 F.3d at 1426 (citations omitted). So long as the court is 82 considering the fact of the document and not, when contested, “the truth of facts in” it,
83 there is no need to convert the motion into a motion for summary judgment. Doe v. 84 Princeton Univ., 30 F.4th 335, 342 (3d Cir. 2022). Thus, in a case alleging sex 85 discrimination by a college in the application of its sexual misconduct policy, the school 86 investigator’s report on the underlying alleged misconduct was integral to the complaint. 87 Doe v. Univ. of Scis., 961 F.3d 203, 208 (3d Cir. 2020). On the other hand, a company’s 88 updates and press releases describing its sale of certain assets were not integral to a
89 complaint alleging that those transactions violated federal securities laws because the suit 90 was ultimately based on the allegedly-fraudulent transactions, not the updates or press 91 releases themselves. See Schmidt v. Skolas, 770 F.3d 241, 249–50 (3d Cir. 2014). 92 Here, although the First Amended Complaint does not mention the means Argonaut 93 used to communicate it, its claims are premised on the allegation that Argonaut
94 “wrongfully denied any liability to GEC under the Performance Bond,” FAC ¶ 35, and the 95 denial letter is simply the document through which Argonaut communicated that decision
3 GEC does not object to the denial letter’s authenticity. See Opp. 2–3. 96 to GEC. That the denial letter is not incorporated by reference is thus beside the point, see 97 Opp. 3; the question is whether the denial letter is integral to GEC’s claim, which it clearly
98 is. There is also no unfair surprise to GEC, which plainly was on notice of the letter. See 99 In re Burlington Coat Factory, 114 F.3d at 1426. GEC contends that Argonaut “makes a 100 factual argument based on the contents of the [denial] letter,” Opp. 3, because “even a 101 cursory review of [the denial letter and the Performance Bond] indicates that” it did not 102 breach, Mot. 6. But to the extent that the Court is considering the letter at all at this stage,
103 it is for the fact of the denial, not for the truth of its contents. See Doe, 30 F.4th at 342. 104 Accordingly, there is no need to convert Argonaut’s Motion to Dismiss into a motion for 105 summary judgment. 106 2. GEC May State a Claim for Breach of the Implied Covenant of Good 107 Faith and Fair Dealing Under the Performance Bond 108 109 Having confirmed that Federal Rule of Civil Procedure 12 still governs Argonaut’s 110 motion, the Court now turns to the merits of its arguments. 111 Argonaut first asserts that, due to the differences between suretyship and insurance, 112 there is no bad faith claim available. Mot. 7–8. In support of that view, Argonaut points 113 the Court to various cases in which district courts declined to recognize claims for the tort 114 of bad faith against sureties. See, e.g., Intercon Constr., Inc. v. Williamsport Mun. Water 115 Auth., No. 4:07-CV-1360, 2008 WL 239554, at *3 (M.D. Pa. Jan. 28, 2008) (holding that 116 plaintiffs could not assert a cause of action against a surety for bad faith breach of an 117 insurance obligation under a Pennsylvania statute, which sounded in tort); U.S. ex. rel.
118 SimplexGrinnell, LP v. Aegis Ins. Co., No. 1:08-CV-01728, 2009 WL 90233, at *3–5 (M.D. 119 Pa. Jan. 14, 2009) (same); Deluxe Bldg. Sys., Inc. v. Constructamax, Inc., Civ. No. 06– 120 2996 (GEB), 2011 WL 322385, at *3 (D.N.J. Jan. 31, 2011) (holding that “New Jersey law
121 does not . . . recognize a cause of action for ‘bad faith’ breach of a surety bond”). 122 That argument, however, misapprehends the gravamen of GEC’s First Amended 123 Complaint. GEC does not assert the bad-faith tort claim that these cases declined to 124 recognize in the surety context. Instead, GEC raises a contract claim. That is, it alleges 125 that “Argonaut wrongfully denied any liability to GEC under the Performance Bond,” see
126 FAC ¶ 35, that this breach was “deliberate[],” “intentional[],” and “dishonest,” and that 127 Argonaut violated the “implied covenant of good faith and fair dealing,” id. ¶ 36.4 Unlike 128 a tort action for “bad faith breach of an insurance policy,” Deluxe Bldg. Sys., 2011 WL 129 322385, at *3, breach of the implied covenant of good faith and fair dealing sounds in 130 contract. Even the Pennsylvania and New Jersey courts on which Argonaut relies 131 acknowledge that distinction. See VSI Sales, LLC v. Int’l Fid. Ins. Co., Civ. Action No.
132 15-507-GMS, 2015 WL 5568623, at *2 n.1 (D. Del. Sept. 22, 2015) (observing that 133 Pennsylvania does not recognize either the tort of bad faith or breach of the implied 134 covenant of good faith and fair dealing against sureties, but that Delaware would); Alden 135 Leeds, Inc. v. QBE Specialty Ins. Co., No. A-2034-14T1, 2015 WL 4507151, at *10 (N.J. 136 Super. Ct. App. Div. July 27, 2015) (“We note that Leeds’s bad faith claim [against its
4 This confusion may have arisen from how GEC amended its complaint. The original Complaint alleged that Argonaut’s refusal to pay “was a breach . . . and was in bad faith,” without making clear that bad faith alleged related to the contractual claim of breach of the implied covenant of good faith and fair dealing. Compl. ¶ 36. The First Amended Complaint, on the other hand, plainly alleges a breach of the Performance Bond’s implied covenant. FAC ¶ 36. 137 insurer] is couched in terms of a claim for breach of the implied covenant of good faith and 138 fair dealing, rather than the tort of bad faith denial.”). And tellingly, Argonaut points to no
139 cases holding that a contractual claim for breach of the implied covenant of good faith and 140 fair dealing, when brought against a surety, is not cognizable. 141 This Court predicts that the Virgin Islands Supreme Court would recognize this 142 claim. Under Virgin Islands law, “[e]very contract imposes upon each party a duty of good 143 faith and fair dealing in its performance and its enforcement,” Chapman v. Cornwall, 58
144 V.I. 431, 441 (2013) (quoting Restatement (Second) of Contracts § 205 (Am. L. Inst. 145 1981)),5 and “claims arising from the duty . . . sound . . . in contract.” Mendez v. Coastal 146 Sys. Dev., Inc., Civil No. 2005-0165, 2008 WL 2149373, at *6 (D.V.I. May 20, 2008); see 147 also Jo-Ann’s Launder Ctr., Inc. v. Chase Manhattan Bank, N.A., 854 F. Supp. 387, 390 148 (D.V.I. 1994) (recognizing a cause of action under contract law, per the Restatement, “for 149 breach of the implied duty of good faith and fair dealing in a loan contract between a lender
150 and a borrower”). This implied duty “limits the parties’ ability to act unreasonably in 151 contravention of the other party’s reasonable expectations,” Chapman, 58 V.I. at 441 152 (citations omitted), and remedies a breach with contract damages, Mendez, 2008 WL 153 2149373, at *15.6 We see no reason to think the Virgin Islands Supreme Court would
5 Because of this authority from the Virgin Islands, a Banks analysis to determine how the Virgin Islands Supreme Court would likely rule on the question is unnecessary. Banks v. Int’l Rental & Leasing Corp., 55 V.I. 967 (2011). 6 Because tort damages are not at issue, it is irrelevant for purposes of this claim whether there is a fiduciary or other special relationship between Argonaut and GEC. Mendez, 2008 WL 2149373, at *5–6 (requiring a “special or fiduciary relationship” only in the “narrow exception for tort recovery in a good faith and fair dealing claim”). 154 exempt sureties alone from this limitation. 155 In sum, because the Performance Bond is a contract governed by Virgin Islands law,
156 a claim for breach of the implied covenant in the performance of that contract is cognizable, 157 and the Court will not dismiss GEC’s complaint on this ground. 158 3. GEC’s First Amended Complaint States a Claim for Breach of the 159 Implied Covenant of Good Faith and Fair Dealing 160 161 We next consider whether GEC sufficiently pleaded its claim. To state a claim for 162 breach of the implied covenant, GEC must plausibly allege (1) that there was a valid 163 contract with Argonaut, (2) that Argonaut committed “fraud or deceit or an unreasonable 164 contravention of the parties’ reasonable expectations,” and (3) that GEC incurred damages 165 as a result. Dukes, 2022 WL 16855409, at *4 (citation omitted). 166 The first and last of these requirements are not at issue here. The parties do not 167 dispute the existence of a valid contract under the Performance Bond. Compare FAC ¶ 21 168 (noting Argonaut issued the Performance Bond), and Opp. 6 (“The existence of the contract 169 is not disputed.”), with Mot. 14–15 (contesting whether the First Amended Complaint 170 alleges fraudulent conduct but never disputing the Performance Bond’s validity). And
171 GEC’s First Amended Complaint plainly alleges, by way of damages, that Argonaut has 172 wrongfully retained $1.652 million owed to GEC. FAC ¶ 21. The only real dispute, then, 173 is whether Argonaut’s alleged conduct rises to the level of “fraud or deceit or an 174 unreasonable contravention of the parties’ reasonable expectations” under the Performance 175 Bond contract. Dukes, 2022 WL 16855409, at *4 (citation omitted). 176 The allegations in the First Amended Complaint easily meet that standard. See FAC 177 ¶¶ 35–36. According to GEC, Alpha failed to build a properly permitted Microgrid on
178 time, see id. ¶ 24, causing GEC to have to perform much of the work at its own expense, 179 id. ¶¶ 25, 30–31, and GEC complied with the notice provisions in the Performance Bond, 180 see id. ¶¶ 32–34. Yet Argonaut—having “deliberately failed to adequately investigate 181 GEC’s claim” and “lack[ing] any reasonable or arguable basis” for denying it, id. ¶ 36— 182 refused to pay. Contrary to Argonaut’s suggestion, see Reply Br. 10, these allegations are
183 sufficiently specific to survive a motion to dismiss, see Restatement (Second) of Contracts 184 § 205 cmt. d (Am. L. Inst. 1981) (defining bad-faith performance as, among other things, 185 “lack of diligence and slacking off”); cf. Walsh Constr. Co. II, LLC v. U.S. Sur. Co., 334 186 F. Supp. 3d 282, 299 (D.D.C. 2018) (dismissing a breach of implied covenant in the 187 absence of an allegation that funds were “withheld . . . for any improper purpose”). 188 4. Consequential Damages Are Available. 189 190 Finally, Argonaut argues that even if GEC’s claim can proceed, it cannot claim 191 consequential damages because of any breach. See Mot. 16–17. The Court is not 192 persuaded. I reach this conclusion in reliance on the following Banks analysis to determine 193 the soundest rule of law for the Virgin Islands. Banks, 55 V.I. at 981–84. To conduct this 194 analysis, I must (1) research whether Virgin Islands courts have articulated an on-point
195 rule, (2) analyze what the majority of other courts do, and then (3) determine “most 196 importantly, which approach represents the soundest rule for the Virgin Islands.” Simon v. 197 Joseph, 59 V.I. 611, 623 (V.I. 2013). 198 First, this Court has not identified, and the parties have not proffered, binding Virgin 199 Islands authority on the availability of consequential damages in cases alleging breach of
200 a performance bond that lacks any language addressing the issue. 201 Second, while courts are split on the question, the majority appear to allow such 202 claims to proceed where, as here, the contract in question does not by its terms deprive 203 either party of the right to consequential damages. As summarized in the Second 204 Restatement of Contracts, under ordinary contract law, when such damages are not
205 expressly excluded, a party in breach (including in breach of the implied covenant of good 206 faith and fair dealing) may be required to compensate the counterparty for such losses to 207 the extent they are foreseeable. See Restatement (Second) of Contracts § 347 cmt. a (Am. 208 L. Inst. 1981) (“The measure of damages . . . is subject to the agreement of the parties, as 209 where they provide for liquidated damages . . . or exclude liability for consequential 210 damages.”); id. § 351 cmt. b (“Loss that results from a breach in the ordinary course of
211 events is foreseeable as the probable result of the breach.”). 212 Argonaut urges the mirror-opposite default rule, noting that some cases applying 213 Pennsylvania law have said that sureties will be liable for consequential damages only to 214 the extent the bond itself expressly provides for them. See Mot. 16 (citing Wise Invs., Inc. 215 v. Bracy Contracting, Inc., 232 F. Supp. 2d 390, 403 (E.D. Pa. 2002) (holding that the
216 surety was “obligated to pay only the costs of performance as provided by the Bond, not 217 all claims [the obligee under the bond] may have against [the bond’s principal] such as 218 liquidated damages and attorneys’ fees”)). But the performance bond at issue there 219 contained language that expressly limited the sureties’ financial obligations to, at most, the 220 contract price “including other costs and damages for which the Surety may be liable 221 hereunder.” Downingtown Area Sch. Dist. v. Int’l Fid. Ins. Co., 671 A.2d 782, 786 (Pa.
222 Commw. Ct. 2001) (emphasis removed); see also Wise, 232 F. Supp. 2d at 403 (noting that 223 the performance bond there was “materially the same” as in Downingtown). The 224 Performance Bond here did no such thing. 225 Moreover, many other jurisdictions follow the Restatement’s rule. See, e.g., 226 Associated Constr./AP Constr., LLC v. Hanover Ins. Co., No. 3:15-cv-1600 (MPS), 2018
227 WL 3998968, at *14 (D. Conn. Aug. 21, 2018) (“[A] surety’s liability for the breach of a 228 contract[], i.e., a surety’s exposure when the bond is triggered and the surety performs its 229 obligations under the bond, is distinct from a surety’s liability when it breaches the terms 230 of the bond.”); In re New Bern Riverfront Dev., LLC, 521 B.R. 718, 723 (E.D.N.C. 2014) 231 (“Unlike a surety’s liability for breach of its derivative obligations, absent express or 232 implied language in the bond, a surety’s liability for breach of its non-derivative, direct
233 obligations may not be limited to the terms of the bond.”); Marshall Contractors, Inc. v. 234 Peerless Ins. Co., 827 F. Supp. 91, 95 (D.R.I. 1993) (identifying jurisdictions following 235 this rule and noting that a surety was not necessarily relieved “from liability for 236 consequential damages attributable to its own alleged breach of [its] performance bond” 237 where the “bond ma[de] no provision for consequential damages”); Hunt v. Bankers and
238 Shippers Ins. Co. of N.Y., 73 A.D.2d 797, 798 (N.Y. App. Div. 1979) (“[T]he primary 239 obligation under a performance bond is the surety’s promise to be bound to the owner . . . 240 and where the surety fails to perform, it is liable for loss of use of the premises.”); Cont’l 241 Realty Corp. v. Andrew J. Crevolin Co., 380 F. Supp. 246, 252 (S.D.W. Va. 1974) (holding 242 that a surety could be “found liable for a sum in excess of the penal sum of the bond . . . by 243 virtue of its own misconduct”). Based on the above survey, I conclude that the majority of
244 jurisdictions follow the Restatement’s rule and allow for consequential damages for breach 245 of a performance bond where the parties have not bargained to exclude them. 246 Finally, I conclude that the soundest rule of law for the Virgin Islands is the 247 Restatement’s rule. As a general matter, Virgin Islands courts have allowed parties to 248 recover damages for “consequential loss [] caused by [a contract] breach.” Creative Minds,
249 LLC v. Reef Broad., Inc., No. ST-11-CV-131, 2014 WL 4908588, at *7 n.36 (V.I. Super. 250 Sept. 24, 2014) (citation omitted); see also Four Winds Plaza Corp. v. Caribbean Fire & 251 Assocs., Inc., 48 V.I. 899, 915 (D.V.I. 2007) (“General, special, and consequential damages 252 all qualify as compensatory damages.”). Argonaut has not identified any Virgin Islands 253 authority articulating a different rule for sureties. Thus, the soundest rule of law for the 254 Virgin Islands holds that, where the parties have not bargained for an alternate
255 arrangement, even if “a performance bond is not intended to compensate for indirect 256 losses,” a surety’s “own alleged breach of the performance bond” can give rise to liability 257 beyond the bond’s penal sum. Marshall Contractors, 827 F. Supp. at 95; see also In re 258 New Bern, 521 B.R. at 725 (“[A]ny limitation on the recovery of consequential damages 259 arising from a surety’s direct liability must be found in the bond itself.”).
260 In sum, because the Performance Bond did not preclude recovery of consequential 261 damages, they are available here. 263 For the reasons discussed above, the Court DENIES Defendant’s Motion to 264 Dismiss.
Dated: August 28, 2023
/s CHERYL ANN KRAUSE 266 United States Circuit Judge