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Travelers Casualty and Surety Company of America v. Highland Partnership

September 20, 2011


The opinion of the court was delivered by: Hon. Anthony J. Battaglia U.S. District Judge


Presently before the Court is Plaintiff Travelers Casualty and Surety Company of America's ("Travelers") Motion to Dismiss Defendants' Counterclaims against Travelers. (Doc. 46.) For the following reasons, the motion is granted in part and denied in part.


On August 18, 2004, Highland Partnership ("Highland") entered into a contract with First Avenue Partners ("FAP") for the construction of a project called the Diegan Hotel in downtown San Diego. (Counterclaim ¶ 13.) Highland was the general contractor for construction, and FAP was the developer and owner of the hotel. (Id.) To finance the construction, FAP obtained a loan of $67,815,000 from WestLB, a banking corporation. (Id. at ¶ 14.)

In April 2006, Highland obtained a payment bond and a performance bond from Travelers in connection with the Project. (Id. at ¶ 15.) Travelers required Highland to enter into an Indemnity Agreement. (Id.) Also in April 2006, WestLB asked Highland to sign a Consent and Agreement, purporting to subordinate Highland's mechanic's lien and all other related rights for the Project to the rights of WestLB. (Id. at ¶ 16.) Highland claims it sought advice from Travelers as to whether or not it should sign the Consent and Agreement, and that Travelers advised Highland to sign it without revising or removing the subordination language. (Id. at ¶ 17.)

On May 5, 2008, Highland terminated its agreement with FAP due to numerous breaches by Id. at ¶ 18.) Highland recorded a mechanic's lien in the amount of $14,500,000. (Id. at ¶ 19.) In November 2008, Travelers and Highland entered a Joint Defense Agreement to work together against the claims of FAP and other subcontractors, suppliers, and trade unions seeking payment as a result of work on the Project. (Id. at ¶ 21.) Highland claims it spent significant time and expense in the arbitration, which ultimately found that Travelers' performance bond was exonerated due to FAP's breach of the construction agreement. (Id. at ¶ 22-23.)

Meanwhile, Harris Concrete filed a lawsuit claiming breach of its subcontract against Highland, although Highland claims Harris had been paid in full. In full settlement of the lawsuit filed by Harris, and over Defendants' strong objections, Travelers agreed to pay Harris $250,000 on the payment bond. at ¶ 25-26.)

FAP is now in bankruptcy, and Highland is at risk of losing its lien position as a result of the Consent and Agreement, since WestLB has asserted that its lien has priority over Highland's claims. If WestLB's priority position prevails, it will prevent Highland from ever being paid out of the bankruptcy estate. (Id. at ¶ 39-40.)

Plaintiff Travelers filed its complaint on December 6, 2010, seeking indemnity from Defendants for payments it made to settle payment bond claims, as well as fees and costs incurred. (Doc. No. 1.) On March 4, 2011, Defendants filed their Answer and Counterclaims (Doc. No. 36), and Travelers filed the instant Motion to Dismiss on March 24, 2011.

Defendants allege five counterclaims for relief against Travelers: (1) negligence, (2) breach of fiduciary duty, (3) breach of contract (as to Payment Bond and Indemnity Agreement), (4) breach of contract (as to Joint Defense Agreement), and (5) breach of the covenant of good faith and fair dealing.


A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the pleadings and allows a court to dismiss a complaint upon a finding that the plaintiff has failed to state a claim upon which relief may be granted. See Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court may dismiss a complaint as a matter of law for: (1) "lack of cognizable legal theory," or (2) "insufficient facts under a cognizable legal claim." SmileCare Dental Grp. v. Delta Dental Plan of Cal., 88 F.3d 780, 783 (9th Cir. 1996) (citation omitted). However, a complaint survives a motion to dismiss if it contains "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

Notwithstanding this deference, the reviewing court need not accept "legal conclusions" as true. Ashcroft v. Iqbal, -- U.S. -- , 129 S. Ct. 1937, 1949--50, 173 L.Ed.2d 868 (2009). It is also improper for the court to assume "the [plaintiff] can prove facts that [he or she] has not alleged." Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). On the other hand, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Iqbal, 129 S.Ct. at 1950. The court only reviews the contents of the complaint, accepting all ...

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