Philadelphia Indemnity Insurance Company v. Ohana Control Systems, Inc.
1:17-cv-00435
D. Haw.Jan 30, 2018Background
- Ohana Control Systems contracted with Hawaii DOE to install/upgrade fire-safety equipment at four schools; Hawaii law required performance bonds.
- Philadelphia Indemnity issued the required performance bonds and obtained a General Indemnity Agreement signed by Ohana and its principals (Borochov, Kinjo) obligating them to indemnify Philadelphia and to post collateral on demand.
- DOE made claims under the performance bonds; Philadelphia sued Ohana, Borochov, and Kinjo for indemnification and for failure to post demanded collateral.
- Defendants filed a 124-paragraph Counterclaim asserting eight counts (including pro tanto discharge, breach of contract, breach of implied covenant, misrepresentation, unjust enrichment, failure to investigate/defend, declaratory relief, and punitive damages), largely alleging misconduct by the DOE and only minimal factual allegations about Philadelphia.
- Philadelphia moved to dismiss under Rule 12(b)(6); the court reviewed the Counterclaim alone (excluding extrinsic evidence) and granted dismissal in whole, with limited leave to amend certain claims and dismissal with prejudice for others.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants can claim a pro tanto discharge/impairment-of-surety defense | Philadelphia: Defendants are not sureties and cannot assert surety defenses | Defendants: Philadelphia’s conduct increased their risk and discharged them pro tanto | Dismissed with prejudice — only a surety can assert that defense; defendants are not sureties |
| Whether Philadelphia breached contract by suing/insufficiently investigating DOE claims | Philadelphia: No contractual duty to investigate; decisions to pay are in surety’s sole discretion | Defendants: Philadelphia prematurely sued and failed to investigate | Dismissed with leave to amend — counterclaim fails to identify contract provisions or factual basis for breach |
| Breach of implied covenant of good faith and fair dealing | Philadelphia: No sufficient factual or legal basis pleaded | Defendants: Philadelphia acted wrongfully (invoking statutory good-faith duties) | Dismissed with leave to amend — allegations conclusory; must plead legal basis and factual particulars |
| Fraudulent/negligent misrepresentation | Philadelphia: No particularized misrepresentation pled | Defendants: Induced to sign by Philadelphia’s assurances that agreements were mere formalities | Dismissed with leave to amend — must identify specific false statements and meet Rule 9(b) for fraud |
| Unjust enrichment for retaining premiums | Philadelphia: No plausible breach alleged to make retention unjust | Defendants: Philadelphia unjustly kept premiums while failing obligations | Dismissed with leave to amend — plaintiffs must plead why retention is unjust and absence of adequate legal remedy |
| Declaratory relief seeking determination of no indemnity liability | Philadelphia: Underlying indemnity dispute already before court | Defendants: Seek declaration they are released/discharged | Dismissed without leave to amend — duplicative of existing coercive claim before the court |
| Independent claim for punitive damages | Philadelphia: Punitive damages not a standalone cause of action | Defendants: Seek punitive relief | Dismissed with prejudice as independent claim; punitive damages may be sought as remedy in viable claims |
Key Cases Cited
- Balistreri v. Pacifica Police Dept., 901 F.2d 696 (9th Cir. 1988) (standards for dismissal under Rule 12(b)(6))
- Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530 (9th Cir. 1984) (Rule 12(b)(6) dismissal grounds)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (application of plausibility standard; conclusory allegations insufficient)
- Lumbermens Mut. Cas. Co. v. United States, 654 F.3d 1305 (Fed. Cir. 2011) (discussing impairment-of-suretyship/pro tanto discharge defense available to sureties)
- Best Place v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (Haw. 1996) (recognition of bad-faith tort in insurance context and factors distinguishing insurance contracts)
- Ross v. Stouffer Hotel Co., 76 Haw. 454, 879 P.2d 1037 (Haw. 1994) (punitive damages are incidental remedy, not independent cause)
- Miyashiro v. Roehrig, Roehrig, Wilson & Hara, 122 Haw. 461, 228 P.3d 341 (Ct. App. 2010) (elements of fraudulent/intentional misrepresentation)
- Porter v. Hu, 116 Haw. 42, 169 P.3d 994 (Ct. App. 2007) (elements and requirements for unjust enrichment under Hawaii law)