Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-00852/USCOURTS-caed-1_05-cv-00852-5/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

TRAVELERS CASUALTY AND SURETY )

COMPANY OF AMERICA, et al., )

)

Plaintiffs, )

v. )

)

CLAUDE E. ATKINS ENTERPRISES, )

INC., et al., )

)

Defendants. )

)

 )

1:05-cv-00852-SMS

ORDER GRANTING DEFENDANTS’ MOTION

FOR LEAVE TO FILE COUNTERCLAIM

(DOC. 100)

ORDER DIRECTING THE FILING OF,

SERVICE OF, AND RESPONSE TO THE

COUNTERCLAIM

Plaintiffs are proceeding with a civil action in this Court.

The matter has been referred to the Magistrate Judge pursuant to

28 U.S.C. § 636(b) and Local Rules 72-302(c) and 72-303. Pending

before the Court is the motion of Defendant Claude E. Atkins

Enterprises, Inc., for leave to file a counterclaim against

Plaintiffs Travelers Casualty and Surety Company of America

(Travelers) and United States Fidelity & Guaranty Company (USFG),

filed on September 21, 2007, including a notice of motion and

motion, proposed counterclaim, supporting memorandum, and

declaration of William J. Braun. Plaintiffs filed opposition to

the motion on October 16, 2007, including a memorandum and

declarations of David L. Hughes and Michael Tomeo with

attachments. Defendants filed a reply on October 26, 2007,

including a memorandum and exhibits.

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

By separate order, the hearing on the motion was vacated,

and the matter was submitted to the Court for decision. 

I. Motion for Leave to Amend

Fed. R. Civ. P. 13 states in pertinent part:

(a) Compulsory Counterclaims. A pleading shall state

as a counterclaim any claim which at the time of serving

the pleading the pleader has against any opposing party,

if it arises out of the transaction or occurrence that

is the subject matter of the opposing party’s claim

and does not require for its adjudication the presence

of third parties of whom the court cannot acquire

jurisdiction. But the pleader need not state the claim

if (1) at the time the action was commenced the claim

was the subject of another pending action, or (2) the

opposing party brought suit upon the claim by 

attachment or other process by which the court did

not acquire jurisdiction to render a personal judgment

on that claim, and the pleader is not stating any

counterclaim under this Rule 13.

(b) Permissive Counterclaims. A pleading may state as

a counterclaim any claim against an opposing party not

arising out of the transaction or occurrence that is

 the subject matter of the opposing party’s claim.

....

 (f) Omitted Counterclaim. When a pleader fails to set

up a counterclaim through oversight, inadvertence, or

excusable neglect, or when justice requires, the pleader

may by leave of court set up the counterclaim by amendment.

Rule 15(d) provides in pertinent part as follows:

Upon motion of a party the court may, upon reasonable

notice and upon such terms as are just, permit the 

party to serve a supplemental pleading setting forth 

transactions or occurrences or events which have 

happened since the date of the pleading sought to

be supplemented.... If the court deems it advisable

that the adverse party plead to the supplemental

pleading, it shall so order, specifying the time

 therefor.

Generally, pursuant to Rule 15(a), amendment of pleadings

should be liberally allowed, and in determining whether leave to

amend should be granted, courts consider factors such as the good

faith and diligence of the claimant, the extent of the delay,

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

futility of amendment, and the danger of prejudice to the

opposing party. Foman v. Davis, 371 U.S. 178, 182 (1962). These

factors are likewise considered in determining if, pursuant to

Rule 13(f), leave should be granted to allow an amendment to

allege a counterclaim omitted through oversight, inadvertence, or

excusable neglect, or when justice requires. Pioneer Investment

Services Co. v. Brunswick Associates Limited Partnership, 507

U.S. 380, 392 n. 10 (1993); Hip Hop Beverage Corp. v. RIC

Representcoes Importacao e Comercio Ltda., 220 F.R.D. 614, 620

(C.D.Cal. 2003). Generally, although the decision to grant or

deny a motion for leave to amend is governed by the district

court’s discretion, amendment is permitted unless the opposing

party makes a showing of undue delay, bad faith, undue prejudice,

or futility of amendment on the part of the moving party. Hip Hop

Beverage Corp. RIC etc., 220 F.R.D. 614, 620 (C.D.Cal. 2003). 

Although delay is significant, prejudice to the opposing party is

the most important consideration in many decisions denying leave

to amend. Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9 Cir. th

1990).

Here, the action is proceeding on the first amended

complaint (FAC) of Plaintiffs, who are the sureties under

performance and payment bonds written in connection with

Defendants’ construction of a physical sciences building for the

University of California, and who further are the indemnitees

under an indemnity agreement. In the FAC, Plaintiffs

sureties/indemnitees sue the indemnitors for breach of express

indemnity agreements, specific performance of the indemnity

agreements, and for injunctive relief with respect to the

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

indemnity agreements. On the fourth claim, Plaintiffs also sue

Defendant Claude E. Atkins Enterprises and Atkins as principal on

the bonds for reimbursement of amounts paid on the bonds by the

sureties. 

Defendants seek to add a counterclaim against the Plaintiffs

sureties/indemnitees that is based on the same indemnity

agreement that is the basis of the FAC. Defendants seek to add a

claim of breach of contract, including a breach of the covenant

of good faith and fair dealing involving the sureties’

performance of the indemnity agreement. (Claude E. Atkins

Enterprises, Inc.’s counterclaim at pp. 10-13.) Defendant Atkins

complains of Plaintiffs’ failure and refusal to process and

negotiate in good faith disagreements regarding the supervision

and performance of the building project, failure to execute

consents to allow payments to continue to be paid to Defendant

Atkins, misrepresentation regarding Plaintiffs’ intent to deal

with Defendant Atkins’ claims against the university and settling

disputes concerning the scope of the work and work performed by

other builders, paying charges known to be outside the scope of

the contract, refusing to negotiate additional compensation from

the university, etc.

Plaintiffs argue that the counterclaim is futile. An

amendment is futile only if it would clearly be subject to

dismissal. Hip Hop Beverage Corp. v. RIC Representcoes Importacao

e Comercio Ltda., 220 F.R.D. 614, 622-23 (C.D.Cal. 2003).

Although courts will determine legal sufficiency using the same

standards as applied on a motion pursuant to Fed. R. Civ. P.

12(b)(6), such issues are often more appropriately raised in a

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

motion to dismiss rather than in an opposition to a motion for

leave to amend. Id. at 623. 

Plaintiffs argue that the claim is merely defensive matter

and that the claims do not factually have a chance to succeed;

the Plaintiffs did nothing more than what they were authorized to

do under the indemnity agreement. Plaintiffs point out that they

had the authority to declare the contractor in default and to

settle all claims pursuant to a provision in the indemnity

agreement that upon the contractor’s being declared in default,

the surety was assigned all right, title and interest by the

contractor to money payable on the contract, and was authorized

to assert, prosecute, compromise, and settle any claims or rights

“on such terms as it considers reasonable under the circumstances

in its sole and absolute discretion, subject only to the

requirement that it act in good faith, which shall be defined as

the absence of deliberate or willful malfeasance.” (Gen.

Agreement Indemnity ¶¶ 8(A), (B).) Although the agreement does

not expressly require affirmative performance of particular

deeds, it does set a standard of good faith/absence of deliberate

or willful malfeasance. Defendant Atkins alleges that the surety

acted unreasonably and wilfully and deliberately breached the

agreement; further, it breached the covenant of good faith and

fair dealing. (Counterclaim ¶ 37, 37(J).) It thus appears that

Defendant is not necessarily attempting to rewrite the contract

but rather is alleging a breach of its terms.

Plaintiffs argue that Defendant is attempting to use the

covenant of good faith to create rights that are inconsistent

with the express terms of the agreement, citing Carma Developers

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

(Cal.), Inc. v. Marathon Dev. California, Inc., 2 Cal.4th 342,

374 (1992), where it was held that where a contract permitted a

lessor to terminate a lease upon a proposed transfer, it was

within the reasonable expectations of the parties and could not

have been a breach of the covenant of good faith to do so.

However, here it appears that Defendant is arguing that the

breaches of the indemnity agreements were deliberate and wilful

malfeasance and other conduct that was not contemplated by the

express terms of the agreement and was also in violation of the

implied covenant.

Plaintiffs cite Cates Construction, Inc. v. Talbot Partners,

21 Cal.4th 28, 43-61 (1999), in which it was held in part that

tort damages for bad faith were not recoverable for breaches

occurring in the context of a construction performance bond;

further, recovery for a surety’s breach of the implied covenant

of good faith and fair dealing was properly limited to those

damages within the contemplation of the parties at the time the

performance bond was given or reasonably foreseeable by them at

that time. 

Here, Defendant seeks to allege contract claims and seeks to

recover contract damages; Defendant does not seek tort damages.

(Counterclaim p. 13.) Accordingly, the Cates case does not render

the proposed counterclaim futile.

A counterclaim is compulsory, and thus must be alleged in

the action or be lost after its conclusion, if it arises out of

the same transaction or occurrence as the plaintiff’s claim. Fed.

R. Civ. P. 13(a); Hydranautics v. Filmtec Corp., 70 F.3d 533, 536

(9 Cir. 1995). A claim arises out of the same transaction or th

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

occurrence if the issues of fact and law are largely the same for

both the claim and counterclaim, the same evidence will support

or refute both claims, res judicata would bar a subsequent suit

on the defendant’s claim, or there is a logical relationship

between the claim and counterclaim. FDIC v. Hulsey, 22 F.3d 1472,

1487 (10 Cir. 1994). The Court must determine if the essential th

facts of the various claims are so logically connected that

considerations of judicial economy and fairness dictate that all

the issues be resolved in one lawsuit. Pochiro v. Prudential Ins.

Co. of America, 827 F.2d 1246, 1249 (9th Cir. 1987). A logical

relationship exists when the counterclaim arises from the same

aggregate set of operative facts as the initial claim, in that

the same operative facts serve as the basis of both claims or the

aggregate core of facts upon which the claim rests activates

additional legal rights otherwise dormant in the defendant. In re

Pinkstaff, 974 F.2d 113, 115 (9th Cir.1992). “‘Transaction’ is a

word of flexible meaning. It may comprehend a series of many

occurrences, depending not so much upon the immediateness of

their connection as upon their logical relationship." Moore v.

New York Cotton Exch., 270 U.S. 593, 610 (1926); see Pochiro v.

Prudential Ins. Co. of Am.,, 827 F.2d 1246, 1252 (9th Cir.1987)

(noting that the term “transaction” should be broadly construed).

The stronger the relationship between the counterclaim and the

main claim, the better the movant’s case for permitting the

counterclaim.

Here, the counterclaim relates to the very indemnity

agreement that is the principal subject of the FAC; it is

compulsory. It appears that if the proposed counterclaim is not

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

filed, then Defendant Atkins will suffer the loss of its claim,

which it estimates to amount to about twenty million dollars. It

is established that the effect of Rule 13(a) is to bar a party

who has failed to assert a compulsory counterclaim in one action

from instituting a second action in which the counterclaim is the

basis of the complaint. Seattle Totems Hockey Club, Inc. v.

National Hockey League, 652 F.2d 852, 854-55 (9 Cir. 1981). th

Plaintiffs argue that Defendant unreasonably delayed in

seeking leave to allege the counterclaim. It does appear that

Defendant delayed about two years after the filing of the answer

on September 2, 2005. The pendency of negotiations between

Plaintiffs and the university, and the reluctance of Plaintiffs

to divulge any information regarding its negotiations and/or

settlement with the university, are two factors which provide

some justification for the delay; Plaintiffs did not receive a

copy of the settlement agreement until July 2007, and it does not

appear certain that the agreement has been signed by all parties.

The Court concludes that with respect to prejudice,

Plaintiffs have not shown that substantial prejudice will result.

Undue prejudice means substantial prejudice or substantial

negative effect; the Ninth Circuit has found such substantial

prejudice where the claims sought to be added would have greatly

altered the nature of the litigation and would have required

defendants to have undertaken, at a late hour, an entirely new

course of defense. Hip Hop Beverage Corp. v. RIC Representcoes

Importacao e Comercio Ltda., 220 F.R.D. 614, 622 (C.D.Cal. 2003).

Where new issues raised are substantially related to the issues

already in the suit, and the new claims are similar or the same,

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

then the scope of litigation is not greatly altered. Id. 

Requiring a slight adjustment of a discovery plan in light of the

addition of proposed counterclaims does not constitute unfair

prejudice. Id. 

Here, the counterclaim is related; the scope of the

litigation is not greatly altered, and the Plaintiffs will not be

required to undertake at a late hour an entirely new set of

issues. 

The dates presently set for this case are discovery

deadline, February 22, 2008; pretrial conference, May 6, 2008;

trial, June 16, 2008. It is not clear whether a continuance of

any of the dates will be required. Should counsel determine that

some or all of the scheduled deadlines should be amended, they

are directed to coordinate a telephonic conference with the Court

by contacting Harriet Herman at (559) 499-5692.

II. Disposition

Accordingly, it IS ORDERED that

1) The motion of Defendant Claude E. Atkins Enterprises,

Inc. for leave to file a counterclaim IS GRANTED; and

2) Defendant SHALL FILE the counterclaim no later than

fifteen days after the date of service of this order and SHALL

PROCEED to serve the counterclaim forthwith; and

3) Plaintiffs ARE DIRECTED to respond to the counterclaim no

later than twenty days after service thereof.

IT IS SO ORDERED.

Dated: November 14, 2007 /s/ Sandra M. Snyder 

icido3 UNITED STATES MAGISTRATE JUDGE

Case 1:05-cv-00852-SMS Document 109 Filed 11/15/07 Page 9 of 9