Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00110/USCOURTS-azd-2_07-cv-00110-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

City of Phoenix, 

Plaintiff/Counter-defendant, 

vs.

Leo A. Daly Company, 

Defendant/Counterclaimant. 

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No. CV 07-110-PHX-JAT

ORDER

Pending before the Court is Plaintiff/Counter-defendant City of Phoenix’s

(hereinafter, the “City”) motion to dismiss the counterclaim (Doc. #43). The Court now rules

on the motion.

I. FACTUAL AND PROCEDURAL HISTORY

The City hired Defendant/counter-plaintiff Leo A. Daly Company ("Daly") to provide

various professional design and architectural services for Phase I of the new Convention

Center and Symphony Hall Renovation (the "Project") in downtown Phoenix. The City and

Daly signed three separate contracts: the program validation contract, the design contract,

and the construction administration contract. The Project encountered many problems,

including cost overruns. As a result, the City sued Daly for negligence and breach of

contract.

On April 16, 2007, Daly filed a counterclaim against the City for breach of contract

and tortious interference with third-party contractual rights (Doc. #22). Daly bases its

Case 2:07-cv-00110-JAT Document 51 Filed 10/17/07 Page 1 of 7
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Although Daly bases its counterclaim on the contract between the City and HRA,

Daly did not attach the contract to its counterclaim. The City attached the City/HRA contract

to the City’s motion to dismiss. Because Daly relies on the City/HRA contract for its

counterclaim, but did not attach the contract as an exhibit, the Court may consider the

contract without converting the City’s motion to dismiss into a motion for summary

judgment. See Fecht v. Price Co., 70 F.3d 1078, 1080 n.1 (9th Cir. 1995)(quoting Branh v.

Tunnell, 14 F.3d 449 (9th Cir. 1994)), overruled on other grounds.

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counterclaim on the contract between the City and Hunt Russell Alvarado (HRA), the Project

construction contractor.1

 Daly alleges that the City contracted for HRA to purchase

insurance coverage for Daly, but, later, to save costs, the City encouraged HRA not to

purchase the insurance. Daly maintains that, if purchased, the insurance would have covered

the City’s claims in this lawsuit.

The City filed a motion to dismiss the counterclaim on May 25, 2007 (Doc. #28). The

Court struck that motion from the record for failure to comply with the rules of procedure for

a motion to dismiss (Doc. #42). The City filed the pending motion to dismiss the

counterclaim on August 15, 2007 (Doc. #43); arguing that Daly did not allege the

counterclaim within the statute of limitations and that Daly cannot state a claim because Daly

was not a beneficiary of the City/HRA contract. 

II. ANALYSIS AND CONCLUSION

Standard of Review

Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain

statement of the claim showing that the pleader is entitled to relief,” in order

to “give the defendant fair notice of what the ... claim is and the grounds upon

which it rests,” Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80

(1957). While a complaint attacked by a Rule 12(b)(6) motion to dismiss does

not need detailed factual allegations, ibid.; Sanjuan v. American Bd. of

Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (C.A.7 1994), a plaintiff's

obligation to provide the “grounds” of his “entitle[ment] to relief” requires

more than labels and conclusions, and a formulaic recitation of the elements

of a cause of action will not do, see Papasan v. Allain, 478 U.S. 265, 286, 106

S.Ct. 2932, 92 L.Ed.2d 209 (1986) (on a motion to dismiss, courts “are not

bound to accept as true a legal conclusion couched as a factual allegation”).

Factual allegations must be enough to raise a right to relief above the

speculative level, see 5 C. Wright & A. Miller, Federal Practice and Procedure

§ 1216, pp. 235-236 (3d ed.2004) (hereinafter Wright & Miller) (“[T]he

pleading must contain something more ... than ... a statement of facts that

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merely creates a suspicion [of] a legally cognizable right of action”), on the

assumption that all the allegations in the complaint are true (even if doubtful

in fact), see, e.g., Swierkiewicz v. Sorema N. A., 534 U.S. 506, 508, n. 1, 122

S.Ct. 992, 152 L.Ed.2d 1 (2002); Neitzke v. Williams, 490 U.S. 319, 327, 109

S.Ct. 1827, 104 L.Ed.2d 338 (1989) (“ Rule 12(b)(6) does not countenance ...

dismissals based on a judge's disbelief of a complaint's factual allegations”);

Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) (a

well-pleaded complaint may proceed even if it appears “that a recovery is very

remote and unlikely”). 

Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964 -65 (2007).

The City makes two arguments in its motion to dismiss: 1) Daly missed the one-year

statute of limitation on its counterclaim and 2) Daly was not a third party beneficiary to the

contract it attempts to enforce. Daly counters that its claims did not accrue until the City

filed a suit that would have been covered by the insurance HRA never purchased and that

Daly filed its claims within a year of that time. In response to the failure to state a claim

argument, Daly argues: 1) that alleging in its counterclaim that it was a third party

beneficiary of the City/HRA contract alone should suffice to defeat the motion to dismiss and

2) that Daly need not be the primary beneficiary of the contract as a whole in order to be a

third party beneficiary of one provision.

The Court disagrees with Daly’s supposition that simply alleging Daly was a third

party beneficiary defeats the City’s 12(b)(6) arguments. In Arizona, whether a party has

rights under a contract as a third party beneficiary is a question of law. See In re Estate of

Levine, 700 P.2d 883, 887 (Ariz. Ct. App. 1985); see also Samsel v. Allstate Ins. Co., 19 P.3d

621, 625 (Ariz. Ct. App. 2001) (stating, “Whether one is a third-party beneficiary presents

a question of law for the Court.”), vacated on other grounds by Samsel v. Allstate Ins. Co.,

19 P.3d 621 (Ariz. 2002). The Court does not have to accept as true Daly’s legal conclusion

that it is a third party beneficiary. Papasan v. Allain, 478 U.S. 265, 286 (1986) (“[W]e are

not bound to accept as true a legal conclusion couched as a factual allegation.”). The Court

will make that determination.

Under Arizona law, in order for a person to recover as a third party beneficiary under

a contract, the contract itself must indicate an intention to benefit that person. Norton v. First

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“CM@Risk [HRA] and its Subcontractors shall procure . . . insurance against claims

. . . which may arise from the . . . the performance of the Work hereunder by the CM@Risk

[HRA], its agents, representatives, employees or Subcontractors.”

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Federal Savings, 624 P.2d 854, 856 (Ariz. 1981). “The contemplated benefit must be both

intentional and direct . . ., and ‘it must definitely appear that the parties intend to recognize

the third party as the primary party in interest.’” Id. (quoting Irwin v. Murphey, 302 P.2d

534, 538 (Ariz. 1956)). The City/HRA contract therefore must manifest an intent to directly

benefit Daly in order for Daly to survive the motion to dismiss. 

The City points out that the contract does exactly the opposite. Not only does the

insuring provision of the City/HRA contract not include Daly by name or by class (design

professional),2

 but the contract specifically states that it is not intended to benefit any party

other than the City and HRA. Section 12.8 of the City/HRA contract, entitled “Third Party

Beneficiary,” reads:

Nothing under the Contract Documents shall be constructed to give any rights

or benefits in the Contract Documents to anyone other than the City and the

CM@Risk [HRA], and all duties and responsibilities undertaken pursuant to

the Contract Documents will be for the sole and exclusive benefit of the City

and the CM@ Risk and not for the benefit of any other party.

Under the circumstances, a finding by the Court that Daly is an intended beneficiary

of the City/HRA contract would impermissibly rewrite the contract. See Pioneer Plumbing

Supply Co. v. Southwest Sav. & Loan Ass’n, 428 P.2d 115, 118 & 120 (Ariz. 1967) (internal

citations omitted). In United Plumbing v. Gibraltar Sav. & Loan Ass’n, 441 P.2d 575 (Ariz.

Ct. App. 1968), a mechanic and materialman sought to recover on their liens against the

receiver in bankruptcy of a savings and loan association that had held funds for the financing

of two construction projects. The owners of the projects in United Plumbing had a contract

with the lender savings & loan that provided for the assignment of the proceeds of the loans

to the lender in the event of default. 441 P.2d at 577. The owners of the projects did in fact

default on the loans; and the lender called a default, accelerated its loans, applied the

undisbursed loan proceeds, and foreclosed on its mortgages. Id. 

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The mechanic and materialman made several arguments in an attempt to recover a

portion of the loan proceeds to cover their losses on the projects, including an argument that

they were third party beneficiaries of the contract between the owners and the lender. Id. at

578-79. The contract between the owners and the lender contained a paragraph, reading,

“This agreement is made for the sole protection of the undersigned, and the said[lender], its

successors and assigns, and no other person or persons shall have any right of action hereon.”

Id. at 579 n.1. The United Plumbing court held that the preceding paragraph specifically

refuted any intention to benefit a third party. Id. at 579. In so holding, the United Plumbing

court quoted Irwin v. Murphey, 302 P.2d 534, 538 (Ariz. 1956):

To find that appellant Irwin was the direct and intentional beneficiary of this

agreement, without supporting facts, would be to alter or add to or change the

written contract of the parties. Under the law as laid down by this court and

which we feel is stare decisis, it definitely must appear that the parties intend

to recognize the third party as the primary party in interest and, as privy to the

promise, in order for the third party to recover.

In response to the City’s arguments regarding Arizona’s law of third party

beneficiaries, Daly cites to non-Arizona cases, standard industry contract terms, and one

distinguishable Arizona case. The Court finds the out-of-state cases and the discussion of

standard industry practice unhelpful in resolving the motion. United States Fid. and Guar.

Co. v. Farrar’s Plumbing & Heating Co., 762 P.2d 641 (Ariz. Ct. App. 1988), while

somewhat relevant, is distinguishable.

The construction contract at issue in Farrar’s contained an insurance clause, reading,

“[T]he Owner shall purchase and maintain property insurance upon the entire Work at the

site to the full insurable value thereof. This insurance shall include the interests of the

Owner, the Construction Manager, the Contractor, Subcontractors and Sub-subcontractors

in the Work . . . .” Id. at 641. The contract further provided that the Owner and Contractor

waived all rights against each other and the Subcontractors for damages caused by fire or

other perils to the extent covered by insurance obtained pursuant to the above-quoted

provision. Id. at 642. Farrar’s was the plumbing subcontractor on the job. Id. at 641. The

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construction project burned. The Owner’s fire insurer paid the loss, then sued Farrar’s for

subrogation, claiming that Farrar’s negligently caused the fire. Id. 

Farrar’s moved for summary judgment in the subrogation action based on the insuring

and waiver provisions in the contract between the Owner and the Contractor, which the trial

court granted. Id. The Arizona appeals court upheld the decision because the Owner’s

insurer, standing in the shoes of the Owner in the subrogation action, had only the claims of

the Owner, and the Owner had contractually waived any liability action against

subcontractors. Id. at 642. The court stated, “The only intent that is material is the intent

manifested in the contract, and that intent clearly was to waive those rights.” Id.

Unlike the contract in Farrar’s, the insuring provision in this case does not

specifically provide that HRA must purchase insurance to cover claims against the design

professional. Nor does the Farrar’s opinion make any mention of a contractual clause

denying third party beneficiary status to all but the signatories like the clause in the

City/HRA contract. The Farrar’s case is therefore distinguishable. 

Arizona law requires a contract to manifest an intent to benefit a third party before a

Court can grant third party beneficiary status. See, e.g., Norton, 624 P.2d at 856. The

City/HRA contract does not manifest an intent to benefit Daly. In fact, the contract clearly

refutes any intention to benefit a third party. The Court will not rewrite the City and HRA’s

agreement. The Court finds that Daly is not a third party beneficiary of the City/HRA

contract.

Because the Court finds Daly is not a third party beneficiary of the City/HRA

contract, Daly’s claims for breach of that contract and tortious interference with its rights

under that contract necessarily fail. Having decided the motion to dismiss the counterclaim

on the City’s third party beneficiary arguments, the Court will not address the statute of

limitation argument. 

Accordingly,

///

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///

IT IS ORDERED GRANTING the City’s motion to dismiss the counterclaim (Doc.

#43).

DATED this 17th day of October, 2007.

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