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Merchants Bonding Co. (Mutual) v. Arkansas Construction Solutions LLC

United States District Court, W.D. Arkansas, Fayetteville Division

November 26, 2018

MERCHANTS BONDING COMPANY (MUTUAL) and MERCHANTS NATIONAL BONDING, INC. PLAINTIFFS
v.
ARKANSAS CONSTRUCTION SOLUTIONS, LLC; R.L. STOCKETT & ASSOCIATES, LLC; RICK L. STOCKETT; and DIANA STOCKETT DEFENDANTS

          MEMORANDUM OPINION AND ORDER

          TIMOTHY L.BROOKS JUDGE

         Now before the Court are a Motion to Dismiss (Doc. 28) and Brief in Support (Doc. 29) filed by Defendants R.L. Stockett & Associates, LLC, Rick L. Stockett, and Diana Stockett (collectively, "the Stockett Defendants"); a Response in Opposition (Doc. 31) filed by Merchants Bonding Company (Mutual) and Merchants National Bonding, Inc. (collectively, "Merchants"); a Reply filed by the Stockett Defendants (Doc. 34); and a Sur-Reply filed by Merchants (Doc. 38).

         Counsel for the parties appeared in Court for a hearing on the Motion on November 6, 2018. At that time, the Stockett Defendants advanced two, alternative arguments in favor of dismissal. The first was brought under Federal Rule of Civil Procedure 12(b)(5) for failure to serve the Complaint in compliance with Rule 4(m). The second was brought pursuant to the Colorado River abstention doctrine, which, if applied to the facts of this case, would favor staying or dismissing the federal lawsuit due to parallel litigation in state court and the presence of certain "exceptional circumstances" warranting abstention. After hearing oral argument on these issues, the Court ruled in part from the bench, denying the Motion to Dismiss as to the Rule 12(b)(5) argument. As to the Colorado River abstention argument, the Court took the matter under advisement.

         Now having considered the abstention argument more thoroughly, the Court finds it is unpersuaded that abstention is justified in this case and DENIES the Motion to Dismiss in all respects. Below, the Court will analyze both the Rule 12(b)(5) and abstention doctrine arguments in greater detail. To the extent the contents of this Order conflict with statements made from the bench, this Order will control.

         I. BACKGROUND

         The instant lawsuit, filed on May 14, 2018, involves Merchants' request for declaratory and injunctive relief, as well as for damages for breach of contract and attorneys' fees, related to an Indemnity Agreement (Doc. 1-1) that all Defendants entered into with Merchants on May 3, 2016. According to the Complaint, separate Defendant Arkansas Construction Solutions, LLC ("ACS") was selected to be the contractor on a new home construction project in Northwest Arkansas, called the Sunrise Ridge Subdivision. ACS was required to obtain payment and performance bonds to insure its work on the project. To that end, it approached Merchants, which agreed to act as surety. However, before Merchants would formally issue the bonds to ACS, it needed certain assurances that ACS would fully indemnify Merchants against any and all losses that might be claimed against the bonds, as well as provide Merchants, upon demand, with collateral security "to cover any liability for any loss or expense for which [Merchants] may be obligated to indemnify the Company . . . ." (Doc. 1-1, p. 5).

         Since it appears ACS lacked sufficient assets to fully indemnify Merchants on its own, the Stockett Defendants agreed to serve as indemnitors on the payment and performance bonds.[1] The day after all Defendants signed the Indemnity Agreement, Merchants formally issued the payment and performance bonds on behalf of ACS as principal, and for the benefit of Sunrise Developers, Inc. ("Sunrise") as developer of the home construction project. See Doc. 29-1, p. 32. The full penalty sum of the payment bond was $500, 000.00. Id.

         In around March of 2017, close to a year after Merchant issued these bonds and after construction of the subdivision was well on its way, a subcontractor named Sagely Construction ("Sagely") made a claim against the bonds, complaining that ACS had not paid for certain goods and services that Sagely had provided on the project. Ultimately, Merchants settled this claim for $8, 820.00. Then, another subcontractor called Del-Sha Construction, LLC ("Del-Sha") filed a lawsuit against ACS, Sunrise, and Merchants (as surety of the bonds) in Benton County Circuit Court on July 28, 2017, also asserting that Del-Sha had not been paid for its work on the same project.[2] Things rapidly went from bad to worse after that. On August 4, 2017, ACS filed a mechanics lien against Sunrise in the amount of $285, 240.00. Then, on September 5, 2017, Sunrise filed a cross-claim (Doc. 29-3) against ACS and Merchants in the state court action, claiming that Sunrise was now owed $85, 000.00 in damages, and demanding that ACS and Merchants jointly indemnify Sunrise for its monetary losses associated with the construction project.

         On March 27, 2018, Sunrise's counsel sent a letter to Merchants (Doc. 1-2, pp. 16-20), making a formal, written claim on the payment bond in the full penalty amount of $500, 000.00 and attaching a statement detailing the full extent of ACS's alleged failure to pay construction costs to a number of different companies. Shortly thereafter, on April 19, 2018, Merchants sent all parties to the Indemnity Agreement a written request to deposit collateral for the bonds and to fully indemnify Merchants for any and all costs and legal expenses it was currently incurring in the state court lawsuit, as per the terms of the Indemnity Agreement. When ACS and the Stockett Defendants failed to pay the collateral, Merchants filed the instant lawsuit in May of 2018, along with a Motion for Preliminary Injunction seeking specific performance of the Indemnity Agreement and an order directing Defendants to deposit the requested collateral with Merchants. A couple of months later, on August 22, 2018, separate Defendant Rick Stockett filed a cross-claim in the state court lawsuit against Merchants, asking the state court to declare the payment and performance bonds null and void. From what the Court can gather, it appears Mr. Stockett's argument in state court is that Merchants and Sunrise allegedly engaged in misconduct and/or collusion, which had the effect of nullifying the bonds.

         With that procedural history now behind us, the Court now turns to the Motion to Dismiss. The Stockett Defendants first contend that they were served out of time, and the case should be dismissed on that basis alone. In the alternative, they maintain that good cause exists for the Court to exercise its discretion to abstain from ruling on the federal claims in favor of allowing the state court to rule on those same claims. With respect to the late-service issue, Merchants admits that it did, in fact, serve the Stockett Defendants eighteen days late, but contends that it made reasonable and continuous efforts to effect timely service and only failed to do so because of excusable neglect. As to the more complex federal abstention argument, Merchants disagrees with the Stockett Defendants that the legal claims at issue in the case at bar are also at issue in the state court lawsuit. Merchants believes, instead, that the two cases are not parallel, and that the resolution of all issues in the state court forum will not necessarily resolve any of the pending issues here.

         II. LEGAL STANDARD

         A. Failure to Timely Serve under Rule 4(m)

         Rule 4(m) provides that "[i]f a defendant is not served within 90 days after the complaint is filed, the court-on motion or on its own after notice to the plaintiff-must dismiss the action without prejudice against that defendant or order that service be made within a specified time." Fed.R.Civ.P. 4(m). However, the Rule also provides that "if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period." Id. (emphasis added). Such an extension of time should be granted if the court concludes there was either good cause or excusable neglect in a plaintiff's failure to timely serve. See Kurka v. Iowa Cnty., Iowa, 628 F.3d 953, 957 (8th Cir. 2010). In determining whether excusable neglect has been established, the Eighth Circuit examines the following four factors: "(1) the possibility of prejudice to the defendant, (2) the length of the delay and the potential impact on judicial proceedings, (3) the reason for the delay, including whether the delay was within the party's reasonable control, and (4) whether the party acted in good faith." Id. at 959.

         B. Colorado River ...


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