Merchants Bonding Company v. Holden

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
District Judge S. Kato Crews
Civil Action No. 1:24-cv-00878-SKC-KAS
MERCHANTS BONDING COMPANY,
Plaintiff,
v.
MICHAEL HOLDEN,
Defendant.
ORDER RE: MOTION TO DISMISS COUNTERCLAIMS
PURSUANT TO FED. R. CIV. P. 12(B)(6) (DKT. 18)
Suretyship is a tripartite relationship in which the surety guarantees and
assumes joint and several liability for the performance of another (the principal) to a
third party (the obligee). Suretyship: A tripartite relationship, 5 Bruner & O’Connor
Construction Law § 12:2. In the construction context, as here, the surety’s obligation
is “co-extensive with that of the [principal/contractor] under the bonded contract and
is conditioned upon and triggered by the bonded [principal/contractor’s] material
default of its performance.” Id. It is under these circumstances that the present case
arises.
In March 2020, Counter Claimant Michael Holden became a consultant and
investor for non-party Monarch Partners, Inc. d/b/a Skyline Contractors (“Monarch”)
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Dkt. 9, ¶7.1 As part of his agreement to assist Monarch, Holden agreed to become an
additional indemnitor on a commercial construction bond agreement with Counter
Defendant Merchants Bonding Company (“MBC”). Id. at ¶9.
However, 	between 	August 	and 	September 	2020, 	Holden 	terminated 	all
association with Monarch. Id. at ¶13. Although Holden requested that he be removed
from any indemnity agreements, Monarch refused to do so. Id. at ¶¶14-15. Instead,
Monarch sought and received two bonds from MBC. Id. at ¶¶16-17. Although Holden
was not involved with the projects associated with those bonds, he was still listed on
the indemnity agreements. Id. at ¶¶17.
In April 2022, MBC contacted Holden regarding issues Monarch was having
on the bonded construction projects. Id. at ¶22. Holden told MBC he was ready,
willing, and able to complete any deficiencies in the projects to avoid MBC making
payments 	under 	the 	bonds. 	Id. 	at 	¶25. 	But 	Holden 	received 	no 	substantive
communication from MBC until the summer of 2023, after MBC had paid the
obligations under the bond and pursued Monarch for reimbursement. Id. at ¶26.
On January 19, 2024, MBC issued a formal demand to Holden regarding his
duties under the indemnity agreement. Id. at ¶27. Holden responded, stating he
would neither indemnify MBC nor post collateral. See Dkt. 1, ¶26; Dkt. 1-6. MBC
1 These facts are alleged in Holden’s Answer and Counterclaim (Dkt. 9), which the
Court accepts as true for purposes of ruling on the Motion to Dismiss.
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then initiated this action, asserting claims against Holden for breach of contract and
unjust enrichment and seeking specific performance. Dkt. 1.
With his Answer, Holden asserted a counterclaim for an alleged breach of the
implied duty of good faith and fair dealing (Dkt. 9), which MBC now seeks to dismiss
(Dkt. 18). This Court has reviewed the Motion, the related briefing, and the applicable
law. No hearing is necessary. For the following reasons, the Motion is GRANTED.
STANDARD OF REVIEW
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a court may
dismiss a complaint for “failure to state a claim upon which relief can be granted.”
See Fed. R. Civ. P. 12(b)(6). The Court accepts the well-pleaded facts as true and
views the allegations in the light most favorable to the non-movants. Casanova v.
Ulibarri, 595 F.3d 1120, 1124-25 (10th Cir. 2010). But the Court is not “bound to
accept as true a legal conclusion couched as a factual allegation.” Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 555 (2007). “Threadbare recitals of the elements of a cause
of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). To survive a motion to dismiss, “a complaint must contain
sufficient factual matter, accepted as true, to state a claim to relief that is plausible
on its face.” Id. at 678 (internal quotation marks omitted).
The Twombly/Iqbal pleading standard requires courts take a two-prong
approach to evaluating the sufficiency of a complaint. Id. at 678–79. The first prong
requires the court to identify which allegations “are not entitled to the assumption of
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truth” because, for example, they state legal conclusions or merely recite the elements
of a claim. Id. at 678. The second prong requires the court to assume the truth of the
well-pleaded factual allegations “and then determine whether they plausibly give rise
to an entitlement to relief.” Id. at 679. “Accordingly, in examining a complaint under
Rule 12(b)(6), [courts] will disregard conclusory statements and look only to whether
the remaining, factual allegations plausibly suggest the defendant is liable.” Khalik
v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012). The standard is a liberal
one, and “a well-pleaded complaint may proceed even if it strikes a savvy judge that
actual proof of those facts is improbable, and that recovery is very remote and
unlikely.” Dias v. City & Cty. of Denver, 567 F.3d 1169, 1178 (10th Cir. 2009).
ANALYSIS
In his counterclaim, Holden alleges the controlling indemnity agreement
includes several discretionary clauses that implicate the duty of good faith and fair
dealing. Dkt. 9, ¶31. Holden further contends that in exercising its discretion
pursuant to those clauses, MBC was obligated to effectuate the parties’ intentions
and honor Holden’s reasonable expectation that he would participate in the resolution
of the bond demand. Id. at ¶32. MBC argues that Holden’s expectations were not
reasonable because the agreement expressly provided for MBC to act in its sole
discretion. See Dkts. 18, 22. The Court agrees with MBC.
In Colorado, “[e]very contract contains an implied duty of good faith and fair
dealing.” Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359, 1362
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(Colo. App. 1994). A claim for breach of the covenant of good faith and fair dealing
must generally be connected to a specific contract term that gives one party
“discretionary authority to determine certain terms of the contract, such as quantity,
price, or time.” Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo. 1995), as modified on
denial of reh’g (Jan. 16, 1996).
“Good faith performance of a contract emphasizes faithfulness to an agreed
common purpose and consistency with the justified expectations of the other party.”
Occusafe, Inc. v. EG&G Rocky Flats, Inc., 54 F.3d 618, 624 (10th Cir. 1995) (cleaned
up). In this case, therefore, the Court’s inquiry “focuses on whether [MBC’s] conduct
violated the parties’ agreed common purpose or was inconsistent with [Holden’s]
justified expectations.” Id. Importantly, “the implied duty of good faith and fair
dealing cannot contradict terms or conditions for which a party has bargained, nor
can it inject substantive terms into the parties’ contract.” Miller v. Bank of New York
Mellon, 2016 COA 95, ¶ 41, 379 P.3d 342, 348 (2016).
In his counterclaim, Holden contends MBC breached the implied duty of good
faith and fair dealing when it failed to allow him to participate in the resolution of
the demand on the bond or complete the construction project and instead made
payment under the bond. Id. at ¶¶33-35. But the express terms of the indemnity
agreement undermine this argument. Specifically, and as pertinent here, it provides:
The Company shall have the right, at its option and in its sole discretion,
to take possession of the work under any and all contracts guaranteed
by any such Bond whenever, in its sole opinion, such action is desirable
or necessary, and at the expense of the Undersigned to complete or to
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contract for the completion of the same, or to consent to the reletting or
completion thereof by the obligee in any such Bond or to take such other
steps as in the discretion of the Company may be advisable or necessary
to secure its release or to secure itself from loss thereunder. All damage,
loss or expense of any nature which the Company may incur in this
connection shall be borne by the Undersigned.
Dkt. 1-3, p. 2 (emphasis added).
Despite the foregoing language, Holden argues that it is customary practice for
principals or contractors to be given an opportunity to resolve the issue prior to the
surety’s payment to the obligee. Dkt. 21, pp.5-6. But even accepting, arguendo, that
this is true, it is of no moment in this case because the parties have expressly
contracted out of any customary practice. To be sure, as Holden acknowledges in his
counterclaim, this clause grants MBC the sole discretionary authority on how to
proceed in the event demands are made upon the surety bond. See Dkt. 9, ¶31. And
the provision is exquisitely clear that MBC’s actions can redound to the detriment of
the indemnitor, in this case Holden. Dkt. 1-3, p. 2.
Holden’s argument to the contrary essentially asserts that MBC acted in bad
faith by acting in its sole discretion, which deprived Holden of his expectation that
MBC would not do so. Any such expectation by Holden was unreasonable considering
the plain language of his agreement with MBC. See Eur. Motorcars of Littleton, Inc.
v. Mercedes-Benz USA, LLC, No. 17-cv-00051-MEH, 2017 WL 2629133, at *13 (D.
Colo. June 19, 2017) (the plaintiff failed to state a claim for breach of good faith and
fair dealing where the defendant acted as expressly permitted by the contract).
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If the Court were to accept Holden’s theory and find that MBC acted in bad
faith by failing to acquiesce in Holden’s request to participate in the resolution of the
dispute, it would require MBC to accept a material change in the terms of the
contract—i.e., trading the ability to act in its sole discretion for the inability to act
unilaterally. The Court cannot accept this proposition when the contract between the
parties is clear and unambiguous on the point. See Id.; see also Travelers Cas. & Sur.
Co. of Am. v. Highland P'ship, Inc., No. 10CV2503 AJB DHB, 2012 WL 5928139, at
*7 (S.D. Cal. Nov. 26, 2012) (no breach of the covenant of good faith and fair dealing
where the contract gave surety the authority to settle claims against it in its sole
discretion and it did so). Rather, because MBC acted pursuant to the express terms
of the contract, Holden has failed to plausibly allege a claim for breach of the implied
duty of good faith and fair dealing.
* 	* 	*
For the reasons shared above, Merchants Bonding Company’s Motion is
GRANTED and Holden’s counterclaim is dismissed, with prejudice.
DATED: March 28, 2025.
BY THE COURT:
S. Kato Crews
United States District Judge
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