demonstrate that American Home breached the Indemnity Agreement by failing to take action to
rectify Bowles’ nonpayment.

Cape now seeks leave to amend its Complaint against American Home to include a
subrogation count for the four claims that Cape settled with the subcontractor claimants and to
include counts alleging that American Home breached its contractual and legal duty to exercise
good faith and fair dealing by failing to take action to rectify Bowles’ failure to pay Cape. Cape
also seeks to amend its affirmative defenses to American Home’s indemnity action to include the
defenses that American Home breached the indemnity contract and that American Home acted in
bad faith,

DISCUSSION

Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend a
pleading “shall be freely given when justice so requires.” The Seventh Circuit has held that
leave to amend pleadings should be liberally granted unless (1) the movant unduly delayed filing
its motion for leave to amend; (2) the opposing party would suffer undue prejudice; or (3) the
amended pleading would be futile. Campania Management Co. v. Rooks, Pitts & Poust, 290 F.3d
843, 849 (7" Cir. 2002)(citing Forman v. Davis, 371 U.S. 178, 182 (1962)). Undue prejudice “is
the most important factor in determining whether to allow an amendment to a complaint.”
Ameritech Mobile Communications, Inc. v. Computer Sys. Solutions, Inc., 188 F.R.D. 280, 283
(N.D. IIL. 1999). . \

I. Undue Delay
Cape did not unduly delay filing its motion. On May 14, 2003, Cape submitted its first

discovery request to American Home. American Home failed to produce any documents to Cape


subrogee, who has all the rights of the subrogor, “cannot acquire by subrogation what another
whose rights he claims did not have.” Jd. Thus, because the subcontractor claimants are barred
by res judicata from bringing those claims against American Home, Cape is likewise barred. See
United States v. California, 507 U.S. at 756-57 (After a subrogor dismissed suit without
prejudice, the subrogee “could have proceeded only if [subrogor] could have filed a new state-
court action at that time, which it could not do” because the statute of limitations had expired.).
On the other hand, there is no such bar to Cape’s breach of contract and bad faith claims
and affirmative defenses. American Home, as indemnitee, owed Cape, as indemnitor, a duty of
good faith and fair dealing in all issues relating to the Indemnity Agreement. Resolution Trust
Co. v. Harris Trust & Savings Bank, No. 90 C 7330, 1992 WL 223807, at *9 (N.D. Ill. Sept. 2,
1992). American Home argues persuasively that it did not breach its duty of good faith and fair
dealing. However, the court declines to pass on the issue without the benefit of reviewing the
complete factual record. Because Cape’s amendment is not facially futile, the court grants
Cape’s motion for leave to amend its Complaint and Affirmative Defenses to include counts and

defenses of breach of contract and bad faith.

CONCLUSION
For the reasons stated above, Cape’s Motion for Leave to File an Amended Complaint
and Consolidated and Amended Affirmative Defenses [#66] is granted in part and denied in part.

Cape may file an Amended Complaint adding counts for breach of contract and bad faith and


On March 15, 2002, while the matter between Cape and Bowles was pending in state
court, Cape filed its initial Complaint against American Home seeking payment for its work on
the Project under the Payment Bond. Between April 24, 2002, and November 26, 2002, several
other subcontractors filed claims against the Payment Bond. Since the total sum of the pending
claims against the Payment Bond exceeded the total limit of American Home’s exposure of
$2,500,000, American Home consolidated several of the suits and filed a counterclaim against all
known Bond claimants seeking a determination of each claimant’s rights, if any, against the
Payment Bond. In addition, American Home filed a Third Party Complaint against the Cape
Indemnitors seeking an order requiring the Cape Indemnitors to indemnify American Home from
all claims against the Payment Bond. On September 17, 2002, Cape filed its answer and
affirmative defenses to American Home’s indemnity complaint.

By virtue of the assertion of liability under the Indemnity Agreement, Cape entered into
settlement agreements with the four of the subcontractors seeking payment under the Payment
Bond (the “subcontractor claimants”). Cape settled these claims between October 3, 2002, and
October 2, 2003. The subcontractor claimants’ suits against American Home were subsequently
dismissed with prejudice. Cape has also agreed in principle to settle another of the claims
against the Payment Bond.

On May 14, 2003, Cape submitted its first discovery request to American Home.
American Home failed to produce any documents. On January 15, 2004, this court ordered
American Home to respond to Cape’s discovery requests by January 30, 2004. On February 4,

2004, Cape received from American Home certain discovery materials that Cape alleges


~~

until February 4, 2004. According to Cape, the documents produced on February 4 contain
information that it believes demonstrate that American Home breached the indemnity agreement
and acted in bad faith. Cape promptly sought to add these claims to its complaint, filing its
motion for leave to amend on February 17, 2004. Furthermore, during the period from October,
2002, to October, 2003, Cape settled four outstanding bond claims and thus became subrogated
to the rights of those claimants. The combination of Cape’s successful year-long effort to settle
the bond claims and the fact that American Home did not produce its documents until February
4, 2004, after which Cape filed its motion in less than two weeks, refutes any suggestion that
Cape unduly delayed filing its motion.
Il. Prejudice

An amendment will almost always result in some level of prejudice, so the relevant
inquiry is “whether undue prejudice will result from amending a complaint.” Grun v. Pneumo
Abex Corp., No. 90 C 5273, 1993 WL 13411, at *3 (N.D.II. Jan.21, 1993)(citing Hess v. Gray,
85 F.R.D. 15, 20 (N.D.III.1979)) (emphasis in original). In determining whether undue prejudice
exists, courts must balance each party’s interests: “This balancing ‘entails an inquiry into the
hardship to the moving party if leave to amend is denied, the reasons for the moving party failing
to include the material to be added in the original pleading, and the injustice resulting to the party
opposing the motion should it be granted.” Sitrick v. Freehand Systems, Inc., No. 02 C 1568,
2004 WL 725306, at *4 (N.D. Ill March 31, 2004)(quoting Ameritech, 188 F.R.D. at 283).

Cape clearly will suffer hardship if leave to amend is denied, while the prejudice to
American Home if leave to amend is granted will be slight. Because American Home failed to

produce discovery documents until February, 2004, Cape was unaware of any legitimate breach



may file Consolidated and Amended Affirmative Defenses adding the same issues by May 28,

2004.
ENTER: (4
IOAN HUMP! LEFKOW
Dated: May 14, 2004 United States District Judge


Minute Order Form (06°97)

. United States District Court, Northern District of Dlinois
Name of Assigned Jud; Sitting Judge if Oth
‘or Magistrate Judge Joan H. Lefkow than Assigned Judge
CASE NUMBER 02 C 1903 DATE 5/14/2004
CASE United States of America for the Use and Benefit of James Cape & Sons vs. American
TITLE Home Assurance Co., et al.
[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.)
DOCKET ENTRY:
qd) Qo Filed motion of [ use listing in “Motion” box above.]
(2) Oo Brief in support of motion due
(3) a Answer brief to motion due. . Reply to answer brief due. .
(4) ia} Ruling/Hearing on set for at
(5) oO Status hearing{held/continued to] [set for/re-set for] on set for at
(6) Oo Pretrial conference[held/continued to] [set for/re-set for] on set for at :
(7) Oo Trial[set for/re-set for] on at
@) Oo [Bench/Jury trial] [Hearing] held/continued to at
(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to)
OOFRCP4(m) (Local Rule 41.1 OFRCP41(a)(1) OFRCP41(a)(2).
ao) of [Other docket entry) / Enter Memorandum Opinion and Order. For the reasons stated in the
Memorandum Opinion and Order, _ plaintiff's motion for leave to file an amended complaint and
consolidated and amended affirmative defenses [#66] is granted in part and denied in part. Plaintiff may
file an amended complaint adding counts for breach of contract and bad faith and may file consolidated
and amended affirmative defenses adding the same issues by May 28, 2004.
(11) @ [For further detail see order attached to the original minute order.]
No notices required, advised in open court. :
No notices required. sember of nosos
Y | Notices mailed by judge's staff. MAY 18 2004
Notified counsel by telephone, date docketed
Docketing to mail notices. Lena I sia-sa
Mail AO 450 form,
Copy to judge/magistrate judge. 6024 6 nana
date mailed notice
courtroom
MD deputy's mem * >
initials ee
Date/time received in
central Clerk's Office aang dept nts



of contract and bad faith claims and affirmative defenses. Any prejudice to American Home
resulting from allowing Cape to amend its Complaint and Affirmative Defenses is attributable to
American Home’s, not Cape’s, delay. American Home’s argument that granting Cape leave to
amend would require expensive and time-consuming new discovery is unpersuasive where
timely action on American Home’s part would have avoided this inefficiency.

Ill. Futility

A proposed amendment to a pleading is futile if “it sets forth facts or legal theories that
are redundant, immaterial, or unresponsive to the allegations in the complaint.” Campania
Management, 290 F.3d at 850. American Home first argues that Cape’s subrogation claims are
futile because they are barred by res judicata, Cape responds that the subrogation claims are not
barred by res judicata because there is not an identity of the parties between the instant case and
the earlier bond claims by other subcontractors. Cape also points out that, in order for the
common law of subrogation to work, after Cape settled the various bond claims, the bond
claimants necessarily had to dismiss their claims against American Home.

The actions against American Home by the subcontractor claimants were dismissed with
prejudice. “A dismissal with prejudice is a final judgment on the merits which will bar a second
suit between the same parties for the same cause of action.” Phillips v. Shannon, 445 F.2d 460,
462 (7" Cir. 1971). Thus, the subcontractor claimants are barred by res judicata from attempting
now to bring those claims against American Home. By settling these claims, Cape is subrogated
to the rights of the subcontractor claimants. When proceeding in subrogation, the subrogee
“stands in the place of one whose claim he has paid.” United States v. California, 507 U.S. 746,

756 (1993)(quoting United States v. Munsey Trust Co., 332 U.S, 234, 242 (1947)). The


UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DOCKETED

UNITED STATES OF AMERICA for the Use)
and Benefit of JAMES CAPE & SONS ) MAY 1 8 2004
COMPANY, a Wisconsin Corporation, )
)
Plaintiff, )
)
v. ) No. 02 C 1903
) Judge Joan H. Lefkow
AMERICAN HOME ASSURANCE CO., )
a New York corporation, et al., )
)
Defendants and )
Third Party Plaintiff. )
Mi ECISI D

Plaintiff/third-party defendant, James Cape & Sons Company (“Cape”), seeks leave to
file an Amended Complaint against American Home Assurance Company (“American Home”)
and leave to file Consolidated and Amended Affirmative Defenses to American Home’s Third
Party Complaint. For the reasons stated below, the motion is granted in part and denied in part.

BACKGROUND

On or about July 22, 1999, Bowles Construction Services, Inc. (“Bowles”) entered into a
contract with the United States Army Corps of Engineers (“Army”) to perform certain
construction improvements on a project commonly referred to as the Chicago Shoreline
Improvements in Chicago, Illinois (the “Project”). Pursuant to its contract with the Army and the
Miller Act, 40 U.S.C. § 3131, Bowles was required to obtain a performance bond guaranteeing

its performance of its obligations under the contract and a payment bond guaranteeing Bowles’

:

payments to persons or entities providing labor or materials to the project.


On or about August 25, 1999, Bowles and Cape entered into a written subcontract
whereby Cape agreed to perform certain work on the Project. To assist Bowles in obtaining the
payment bond for the Project, Cape requested that American Home issue the payment bond on
behalf of Bowles. To secure issuance of the payment bond, Cape, Curkeet Services, Inc., Cape
Brothers Realty & Equipment Co., Christopher C. Cape, W. Robert Cape, William R. Cape, and
Amy Cape (collectively, the “Cape Indemnitors”) executed a General Contract of Indemnity
(“Indemnity Agreement”) for the benefit of American Home. American Home then executed and
provided a payment bond pursuant to the Miller Act, 40 U.S.C. §§ 270(a)-(d), in the amount of
$2,500,000 (the “Payment Bond”).

Beginning in or around August, 2000, Bowles ceased to pay Cape for its labor or
materials, except for two miscellaneous fund transfers, Despite not paying Cape, Bowles
continued to submit pay applications to the Army for reimbursement and continued to receive
payment for Cape’s work. Cape notified American Home of Bowles’ failure to pay. American
Home then contacted the Army to notify it of Bowles’ failure and to “request that [the Army]
take such actions as necessary to prevent prejudice to either American Home or to Cape, its
indemnitor.” (Def. Group Ex. 7.)

On February 21, 2001, Cape filed against Bowles a Demand for Arbitration with the
American Arbitration Association to resolve the dispute arising out of Bowles’ failure to pay
Cape. The arbitrators found in favor of Cape and awarded compensatory damages, equitable
remedies, and attorneys’ fees in the amount of $2,560,279.62. On June 21, 2002, the Circuit
Court of Cook County, Illinois confirmed the arbitration award, which was subsequently

modified in other respects on October 21, 2002. To date, Bowles has failed to pay.