B. American Home’s Motion to Strike Cape’s Affirmative Defenses
On May 14, 2004, this court granted in part Cape’s motion for leave to file an amended
complaint and consolidated and amended affirmative defenses adding counts and affirmative
defenses of breach of contract and bad faith. Cape now asserts the following affirmative
defenses:
30. American Home’s claims are barred by waiver and estoppel.
31, American Home’s claims are barred on the grounds of payment.
32. American Home’s claims are barred to the extent that the claims are offset by
competing claims.
33. American Home’s claims are barred by lack of legal entitlement.
34. American Home’s claims are barred due to its breach of its contractual duty of good
faith and fair dealing.
35. American Home’s claims are barred because it acted in bad faith by failing to
mitigate the claims against the payment bond.
American Home moves to strike Cape’s Amended Affirmative Defenses.
Because affirmative defenses are pleadings, they are subject to the pleading requirements
of the Federal Rules of Civil Procedure. See Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883
F.2d 1286, 1294 (7th Cir.1989). Therefore, affirmative defenses must set forth a “short and plain
statement” of the defense. Fed.R.Civ.P. 8(a). The court evaluates a motion to strike affirmative
defenses under Rule 12(f), which provides “upon motion made by a party before responding to a
pleading . . . the court may order stricken from any pleading any insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f). Motions to strike
are not favored, and affirmative defenses will only be stricken when they “are patently defective

and could not succeed under any circumstances.” Mobley v. Kelly Kean Nissan, Inc., 864 F.Supp.

726, 732 (N.D.II1.1993), Defenses should, however, be stricken when their effect is to add

13


Cape’s payment under the subcontract. Cape claims that, instead of interceding, American Home
encouraged or acceded to the Army’s payment of the remaining funds in the contract to Bowles.

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.

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.

On May 28, 2004, Cape filed an Amended Complaint against American Home, adding

counts for breach of contract and negligence or bad faith.


Amended Complaint, and American Home has not attached any documents verifying those
actions to its motion to dismiss (which would allow the court to convert American Home’s
motion to dismiss into a motion for summary judgment, see R.J. Corman Derailment Services,
LLC vy. Int'l Union of Operating Engineers, Local Union 150, 335 F.3d 643, 647 (7" Cir. 2003)).
Thus, American Home’s motion to dismiss on this ground is denied.

Finally, American Home argues that Cape has failed to plead that American Home’s
actions were either unreasonable, arbitrary, capricious, or otherwise not in a manner consistent
with the reasonable expectations of the parties, First, American Home again recites the actions it
claims it took with the Army, arguing that these actions demonstrate that American Home did not
act in bad faith. However, as explained above, none of those actions are mentioned in Cape’s
Amended Complaint. The Amended Complaint only alleges that American Home “acted
negligently or in bad faith when it failed to investigate, process and intercede in a timely, good
faith manner” (Am. Compl. {] 33-36) and instead “encouraged or acceded to the Government’s
payment of the remaining funds in the contract to Bowles and others by joint checks or
otherwise, which arrangement excluded Cape from any payments... .” (/d. ]36.) These
allegations are sufficient to state a claim for negligence and/or bad faith.

American Home’s second argument is somewhat muddled. First, American Home argues
that a payment bond surety is only subject to liability for vexatious delay in investigating a claim,
citing 215 ILCS 5/155, However, American Home fails to cite any authority supporting the
assertion that section 155 is the only basis for a surety’s liability under a payment bond, and the
court’s own research reveals none. American Home continues, “Cape is unable to plead any set

of facts that meet the requisite legal standards to support its claims for Breach of Contract and


reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp.,
176 F.3d 971, 977 (7" Cir. 1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7" Cir. 1996).

1. Counts II and IIL

Counts II of Cape’s Amended Complaint alleges that American Home breached its duty
of good faith and fair dealing under the Payment Bond and the Indemnity Agreement by “failing,
in a timely, adequate and good faith manner, to investigate, process and intercede to prevent
further continuing defaults by Bowles and losses to Cape.” Count III alleges that American
Home, by essentially the same actions, breached its duty, as an indemnitee and payment bond
surety, to act without negligence, bad faith or in a way that would prejudice the rights of Cape, as
bond claimant and indemnitor.

American Home makes three arguments in support of its motion to dismiss Counts II and
If. First, American Home asserts that any actions it could have taken to intercede to prevent
further defaults by Bowles and losses to Cape would have subjected American Home to liability
from Bowles. Second, American Home argues that it had no right to take any such actions,
because the Army has the discretion to make payments to a contractor with financial problems.
Finally, American Home argues that Cape has failed to plead that American Home’s actions were
either unreasonable, arbitrary, capricious, or otherwise not in a manner consistent with the
reasonable expectations of the parties.

First, American Home argues that any action it could have taken to intercede would have
subjected it to liability from Bowles, because Bowles had not been declared in default by the
Army. American Home contends that a surety “cannot take action and intervene with the

principal’s contractual rights until the obligee has triggered the surety’s bond obligations by


DISCUSSION

American Home moves to dismiss Cape’s Amended Complaint pursuant to Rule 12(b)(6)
of the Federal Rules of Civil Procedure. American Home also moves to strike Cape’s
Affirmative Defenses to American Home’s Counterclaim and Third-Party Complaint.

A. American Home’s Motion to Dismiss

American Home argues that Cape’s Miller Act claim against the Payment Bond (Count I)
should be dismissed because either (a) Cape’s claim is void because Cape must indemnify
American Home for Cape’s own claim; (b) if Cape’s claim is later found to be valid, American
Home would be entitled to recover for Cape’s claim directly from Cape; or (c) American Home
can exercise its right of set off (indemnification by Cape) against Cape’s Bond claim. American
Home also argues that Cape has failed to plead the requisite elements for breach of contract
(Count II) and bad faith or negligence (Count IIf). For reasons that will become apparent, the
court will address American Home’s arguments regarding Counts II and III before proceeding to
Count I.

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the
sufficiency of the complaint for failure to state a claim upon which relief may be granted.
General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7" Cir. 1997).
Dismissal is appropriate only if it appears beyond doubt that the plaintiff can prove no set of facts
in support of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46
(1957); Kennedy v. Nat’! Juvenile Det. Ass’n, 187 F.3d 690, 695 (7" Cir. 1999). In ruling on the

motion, the court accepts as true all well pleaded facts alleged in the complaint, and it draws all



to a contractor after the United States received notice from the surety that the contractor was in
default or was about to be in default in paying subcontractor)). American Home has failed to cite
a single case of a payment bond surety being subjected to liability from its principal for
interceding in the principal’s contract with the obligee before the obligee declared the principal in
default. Thus, American Home’s motion to dismiss on this ground is denied.

Second, American Home argues that it had no right to take any action with the Army,
because the Army has the discretion to make payments to a contractor with financial problems.
American Home is correct that the Army had the discretion to make payments to Bowles despite
American Home’s objections. See Argonaut Ins. Co. v. United States, 434 F.2d 1362, 1367-68
(Ct. Cl. 1970) (holding that the Government has discretion, despite a surety’s objection, to make
payments to a contractor with financial problems as long as it follows its own procurement
regulation); United States v. Continental Casualty Co., 346 F.Supp. 1239, 1243 (N.D. Ill. 1972)
(holding that Argonaut’s discretionary standard applies to the Government in withholding
progress payments at the request of the surety). This does not mean, however, that American
Home could sit idly by while the Army continued to pay Bowles. The Army had a “duty to
exercise its discretion responsibly and to consider the surety’s interest in conjunction with other
problems encountered in the administration of the contract.” Argonaut, 434 F.2d at 1368. The
Army’s duty to consider American Home’s interest gave rise to a concomitant duty on the part of
American Home, as Cape’s indemnitee, to make its interest known to the Army. American
Home seems to recognize this, and argues that it “did in fact notify the Army that Bowles had
financial problems and that American Home objected to the Army releasing payment to Bowles.”

(Reply, at 5-6.) However, these alleged actions by American Home are not mentioned in Cape’s


ute Order Form (06/97)

United States District Court, Northern District of Illinois

N: f Assigned Jud; Sitting Judge if Oth
noe Magistrate Judge Joan H. Lefkow than Assigned Judge
CASE NUMBER 02 C 1903 DATE 12/2/2004
CASE United States of America for the Use and Benefit of James Cape & Sons Company vs.
TITLE American Home Assurance Co.

[Un the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.)

MOTION:

DOCKET ENTRY:

qd) QO Filed motion of { use listing in “Motion” box above.]

(2) a Brief in support of motion due

GB) ao Answer brief to motion due___. Reply to answer brief due.

(4) oO Ruling/Hearingon__ set for___at

(5) o Status hearing[held/continued to] [set for/re-set for]on___—setfor__—_at

(6) i) Pretrial conference[held/continued to] [set for/re-set for]on.__———ssetfor__——s at

@) Oo Trial{set for/re-set for] on___—_at

(8) Oo [Bench/Jury trial] [Hearing] held/continuedto at

(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) (Cl Local Rule 41.1 OFRCP41(a)(1) OO FRCP41(a)(2).

ao =f [Other docket entry} | Enter Memorandum Opinion and Order. For the reasons stated in the

Memorandum Opinion and Order, defendant’s motion to dismiss [#84] is denied. Defendant’s motion
to strike plaintiff's affirmative defenses [#85] is granted in part and denied in part. Plaintiff's Affirmative
Defense of estoppel is stricken.

(il) {For further detail see order attached to the original minute order.]

No notices required, advised in open court,
8

No notices required,

YS | Notices mailed by judge's staff.

Notified counsel by telephone.

Dacketing to mail notices

WIRES Panegea ga
Mail AO 450 form.

Copy to judge/magistrate judge.

dane mailed NSice
courtroom nt

MD deputy's oatpy gc)

dept MO
initials

Date/time received in
central Clerk’s Office Imaiting deputy initials



457 (1872) (“It is an answer to an action that a party is legally interested in each side of the
question. A party cannot be both plaintiff and defendant in an action.”); City of Chicago v.
Board of Education of the City of Chicago, 246 Ill. App. 405 (Ill. App. 1* Dist. 1927) (A party
with a “substantial interest in the defense” may not prosecute an action.); see also Siler v.
Northern Trust Co., Inc., 80 F. Supp.2d 906, 908 (N.D.IIl. 2000) (applying Minnesota law and
holding, “A circuitry of obligation will defeat a plaintiff’s claim as a matter of law. A circuitry
of obligation is created when, by virtue of pre-existing indemnity agreements or obligations, the
plaintiff is in effect obligated to indemnify the defendant for claims including the plaintiff's own
claim.”).

Cape’s only response is to argue that the Indemnity Agreement is void as a matter of
public policy. Cape correctly points out that the Miller Act is “entitled to a liberal construction
and application in order to properly effectuate the Congressional intent to protect those whose
labor and materials go into public projects.” Clifford F. McEvoy Co. v. United States ex rel.
Calvin Tompkins Co,, 322 U.S 102, 107 (1944). From this, Cape concludes that to deny its right
to recover under the payment bond would violate the clear purpose of the Miller Act. However,
Cape was not just a subcontractor on the Project; it was also American Home’s indemnitor, a role
Cape voluntarily assumed to insure that American Home would issue payment bonds on behalf
of Bowles. In doing so, Cape assumed the risk that Bowles would not pay its subcontractors.
Cape cannot now escape its responsibility to indemnify American Home by claiming the
protection of the Miller Act.

In support of its argument, Cape cites Cal’s A/C and Electric v. Famous Constr. Corp.,

982 F. Supp. 1219 (W.D. La. 1997). This case is inapplicable here. Cal's A/C addresses the

il


Bad Faith.” (Memo. in Support, at 13.) However, Cape is not required to plead facts. Pleading
in federal court is governed by Rule 8 of the Federal Rules of Civil Procedure. Unlike IIlinois’
fact-pleading requirements, Rule 8 requires only notice pleading, that is, “a short and plain
statement of the claim.” See Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 761, 764 (7" Cir.
1999) (“The courts keep reminding plaintiffs that they don’t have to file long complaints, don’t
have to plead facts, don’t have to plead legal theories.”); Sanyo Laser Prod., Inc. v. Royal Ins.
Co. of America, 2003 WL 23101793, at * 5 (S.D. Ind. Nov. 7, 2003)(notice-pleading standard
applies to allegations of bad faith). Cape has clearly met this requirement. Thus, American
Home’s motion to dismiss is denied as to Counts II and III.

If. Count I

Count I of Cape’s Amended Complaint is a Miller Act claim seeking payment under the
payment bond issued by American Home. American Home moves to dismiss this claim, arguing
that either (a) Cape’s claim is void because Cape must indemnify American Home for Cape’s
own claim; (b) if Cape’s claim is later found to be valid, American Home would be entitled to
recover for Cape’s claim directly from Cape; or (¢) American Home can exercise its right of set
off (indemnification by Cape) against Cape’s Bond claim. Cape argues in response that the
indemnification agreement is void because it violates public policy.

Assuming arguendo that the indemnity agreement is valid, American Home is correct that
Cape’s claim is essentially a claim against itself. Under Illinois law, there is a “presumed
identity of interests between [an] indemnitor and indemnitee.” Cowan v. Ins. Co. of North
America, 318 N.E.2d 315, 321 (Ill. App. 1" Dist. 1974). Thus, Cape is legally interested in each

side of the action. This is not permitted under Illinois law. See McElhanon v. McElhanon, 62 Il.

10


declaring the principal in default or terminating the principal. Ifa surety takes any action prior to
the surety’s bond obligations being triggered, the surety will be potentially liable for interfering
with the principal’s contract with the obligee.” (Memo. in Supp., at 9.) In support of this
argument, American Home cites L&A Contracting Co. v. Southern Concrete Service, Inc.,

17 F.3d 106 (5" Cir. 1994), and Lambert v. Maryland Cas. Co,, 403 So.2d 739 (La.Ct.App.
1981). Neither of these cases supports American Home’s argument. In L&A Contracting, the
court held that a surety’s liability to a contractor under a performance bond is not triggered until
the contractor declares the subcontractor to be in material breach of the subcontract. 17 F.3d at
110. The court makes no mention of the surety’s potential liability for actions taken to protect its
interests before such a declaration. The holding in Lambert, moreover, is precisely the opposite
of American Home’s proposition. There, the court upheld the right of a dual-obligation payment
and performance bond surety to notify the Louisiana Department of Highways and other public
agencies of the surety’s claim to payments due to an insolvent contractor prior to the formal
recordation of the contractor’s default. The court cited approvingly numerous cases holding that
“exposure to claims under payment obligation of a public works bond is sufficient in itself to
justify a surety’s notification to the owner under a public works contract of its interest in the
contract balances.” 403 So.2d at 753-54 (citing, inter alia, Gerstner Elec., Inc. v. American Ins.
Co., 520 F.2d 790 (8" Cir. 1975) (holding that a surety, after becoming aware of a single claim
for labor and materials by a subcontractor, acted reasonably by directing the owner to withhold
further payments from the contractor even though contractor had not been declared in default by
the owner); American Fidelity Fire Ins. v. United States, 513 F.2d 1375 (Ct. Cl. 1975) (holding

that the United States was liable to a surety under a Miller Act payment bond for payments made


executing any of the said bonds or suretyship instruments.” In the Indemnity Agreement, Cape
also assigned American Home, among other things, Cape’s rights and claims arising out of its
subcontract with Bowles for the Project. Additionally, Cape granted American Home a power of
attorney to execute and perform all acts under the Cape/Bowles subcontract “including . . .
making demand and bringing suit therefor in its, or his or their names, at its option, and settling
and compromising the same.” 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 and
requested American Home to intercede with Bowles to compel Bowles to make payments to
Cape. Cape thereafter advised American Home that Bowles had falsely certified and was
continuing to falsely certify its applications for payment to the Army by certifying that it was
making and had previously made payments to subcontractors from payments received by Bowles
from the Army when it was not and had not. Cape advised American Home that, instead of
paying Cape, Bowles was dissipating corporate funds for purposes such as “casino gambling
sprees, strip club charges, personal expenses and payments to entities affiliated with its
principals.” (Am, Compl. { 24.) Cape also advised American Home that further payments would

be forthcoming to Bowles from the Army and requested that American Home intercede to insure


unnecessary clutter to a case. Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286,
1295 (7th Cir.1989).

As in its motion to dismiss, American Home seems to misunderstand the pleading
requirements of Rule 8(a). American Home repeatedly argues that Cape’s affirmative defenses
should be stricken because Cape fails to allege “any facts supporting its defense.” Again, Cape
does not have to allege facts. See Kirksey, 168 F.3d at 764; see also Hoskins v. Poelstra, 320
F.3d 761, 764 (7th Cir. 2003)(“The complaint does not contain all of the facts that will be
necessary to prevail, but a filing under Rule 8 is not supposed to do that.”)(emphasis in original).
Cape need only set forth a “short and plain statement” of the defense. It has done so. Thus,
American Home’s motion to strike Cape’s affirmative defenses is denied as to paragraphs 31-35
and as to the defense of waiver in paragraph 30 of Cape’s Amended Affirmative Defenses.

However, because an affirmative defense of estoppel is “premised on a showing of
intentional deception or gross negligence amounting to constructive fraud, this defense (like
fraud) requires a recitation of adequate factual underpinnings for considerations of the
applicability of the doctrine; mere conclusions and puffery will not suffice.” Household
Financial Services, Inc. v. Northeastern Mortg. Inv. Corp., 2000 WL 816795, at *2 (N.D. Sil.
Jun. 22, 2002). The elements of equitable estoppel in Illinois are (1) words or conduct by the
party against whom the estoppel is alleged amounting to a misrepresentation or concealment of
material facts; (2) knowledge by the party against whom estoppel is asserted at the time the

representations were made that the representations were false, or that the representation was

"Though Cape pleads the affirmative defenses of waiver and estoppel in the same paragraph, the waiver
defense does not require a heightened pleading standard. See Household Financial Services, Inc. v. Northeastern
Mortg. Inv. Corp., 2000 WL 816795, at *3 (N.D. Il. Jun. 22, 2002).

14


court are American Home’s motions to dismiss Cape’s Amended Complaint and to strike Cape’s
affirmative defenses to American Home’s Counterclaim and Third-Party Complaint. For the
reasons stated below, the court denies American Home’s motion to dismiss and grants in part and
denies in part American Home’s motion to strike Cape’s affirmative defenses.

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. The Indemnity Agreement
provided that Cape would “save harmless and indemnify” American Home “from and against any
and all liability, loss, damages, costs, counsel and attorney fees .. . which it or they shall or may

at any time for any cause incur, sustain or be put to for or by reason or in consequence of


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

UNITED STATES OF AMERICA for the Use
and Benefit of JAMES CAPE & SONS
COMPANY, a Wisconsin Corporation,

Plaintiff,

Judge Joan H. Lefkow
AMERICAN HOME ASSURANCE CO.,
a New York corporation, et al.,

Defendants and

)
)
)
)
)
)
vy. ) No, 02 C 1903
)
)
)
)
)
Third Party Plaintiff. )

MEMORANDUM OPINION AND ORDER

Plaintff/third-party defendant, James Cape & Sons Company (“Cape”), filed an Amended
Complaint under the Miller Act, 40 U.S.C. § 3131, against defendant/third-party plaintiff,
American Home Assurance Company (“American Home”), seeking payment for work performed
under a payment bond issued by American Home. Cape also claims that American Home
breached an indemnity agreement executed by the parties and acted negligently or in bad faith by
failing to act to insure Cape and other subcontractors would be paid for work performed. A
number of these other subcontractors also filed claims against the payment bond. American
Home consolidated these suits and filed a counterclaim against all known bond claimants,
including Cape, seeking a determination of each claimant’s rights, if any, against the payment
bond. In addition, American Home filed a Third-Party Complaint against Cape seeking an order
requiring Cape to indemnify American Home from all claims against the payment bond. Cape

filed its answer and affirmative defenses to American Home’s indemnity complaint. Before the

\os


validity of a venue selection clause in a subcontract. The defendant contractor sought to dismiss
the subcontractor’s case for improper venue or to transfer the case to the court specified in the
subcontract’s venue selection clause. The court denied the defendant’s motion, holding that the
Miller Act “lays exclusive, non-waivable venue in the federal district court in which the project
is located.” Id. at 1219 (citing 40 U.S.C. § 270b (“Every suit instituted under this section shall be
brought in the name of the United States for the use of the person suing, in the United States
District Court for any district in which the contract was to be performed and executed and not
elsewhere.”)). In contrast, nothing in the Miller Act prohibits a subcontractor from indemnifying
a surety in return for the surety issuing payment bonds to the contractor, and the court sees no
reason why public policy would forbid a subcontractor from doing so. While the Miller Act is
intended to protect subcontractors, there is a strong public policy favoring freedom of contract.
Liberty Mut. Fire Ins. Co. v. Statewide Ins. Co., 352 F.3d 1098, 1101 (7" Cir, 2003). Thus, the
court holds that the Indemnity Agreement does not violate public policy.

This, however, does not resolve the matter. Cape alleges in Count II that American Home
breached the Indemnity Agreement. Under Illinois contract law, a material breach by one party
to a contract discharges the other from performing its obligations under the contract. Kel-Keef
Enters. Inc. v. Quality Components Corp., 738 N.E.2d 524, 537 (Ill. App. 1" Dist. 2000). Thus,
if Cape succeeds in proving that American Home breached the indemnity agreement, it would be
discharged from its obligation to indemnify American Home for claims against the payment
bond. Consequently, Cape would no longer be legally interested in both sides of the action and
could pursue its claim for payment under the payment bond. Thus, the court denies American

Home’s motion to dismiss Count I.

12



made with gross negligence as to their truth; (3) the truth respecting the representations was
unknown to the party asserting estoppel at the time the representations were made and when they
were acted upon; (4) the party against whom estoppel is claimed must intend or reasonably
expect that the representations or concealment would be acted upon by the party asserting
estoppel or the public generally; (5) the party asserting estoppel must have relied upon the
representation in good faith to its detriment; and (6) the party claiming the benefit of the estoppel
would be prejudiced if the other party is permitted to deny the falsity of the misrepresentation or
concealment. /d. (citing Vaughan v. Speaker, 533 N.E.2d 885, 890 (Ill. 1988)). Cape has failed
to allege any specific acts of misrepresentation or concealment in which American Home
engaged. Cape’s only response is to claim that American Home “failed to disclose to Cape that it
never intended to pay out a dime under the Payment Bond.” (Resp., at 8.) This is clearly
insufficient under the heightened pleading requirements. It fails to provide any details of this
alleged concealment-the “who, what, when, where, and how” required by Rule 9(b). See
DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7" Cir. 1990). Thus, American Home’s motion to
strike Cape’s affirmative defense is granted as to the defense of estoppel.
CONCLUSION

For the reasons stated above, American Home’s Motion to Dismiss is denied [#84].

American Home’s Motion to Strike Cape’s affirmative defenses is granted in part and denied in

part [#85]. Cape’s Affirmative Defense of estoppel is stricken.

ENTER:

IQAN HUMPHREYIEEFKOW
Dated: December 2, 2004 United States District Judge

15