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Fidelity and Deposit Company of Maryland v. Travelers Casualty and Surety Company of America

United States District Court, D. Nevada

August 21, 2017

FIDELITY AND DEPOSIT COMPANY OF MARYLAND, a Maryland corporation, Plaintiff,


          GEORGE FOLEY, JR., United States Magistrate Judge

         This matter is before the Court on Defendant Travelers Casualty and Surety Company's Motion to Disqualify Counsel (ECF No. 252) filed on July 11, 2017. Plaintiff Fidelity and Deposit Company filed its Opposition (ECF No. 257) on July 25, 2017, and Defendant filed its Reply (ECF No. 263) on August 1, 2017. The Court conducted a hearing in this matter on August 14, 2017.


         Defendant Travelers Casualty and Surety Company (“Travelers”) moves to disqualify Plaintiff's counsel, the law firm of Kolesar & Leatham and attorneys employed by that law firm, based on an alleged conflict of interest arising from related litigation.

         The Clark County School District (“School District” or “CCSD”) filed a civil complaint in this court against Travelers on June 21, 2013, and thereafter filed an amended complaint on August 19, 2013. See Clark County School District v. Travelers Casualty and Surety Co., Case No. 2:13-cv-1100-JCM-PAL, ECF Nos. 1 and 9. The School District was represented in that action by the law firm of Kolesar & Leatham. The School District alleged that it contracted with Big Town Mechanical Company (“Big Town” or “BTM”) pursuant to the competitive bid process, to perform modernization work on fifteen elementary schools. The modernization work included the heating, ventilating and air conditioning (“HVAC”) systems in the schools. Amended Complaint (ECF No. 9), at ¶ 5. Defendant Travelers issued performance bonds on behalf of Big Town, naming the School District as obligee. Id. at ¶¶ 12, 15. The School District alleged that beginning in the fall of 2010, Big Town began defaulting on its obligations to timely and sufficiently complete work on some of the schools, including failing to program the HVAC systems in some of the schools. Id. at ¶¶ 18-23. Eventually by November 2012, Big Town defaulted on all of the fifteen school modernization contracts. Id. at ¶¶ 26-27. In May 2013, Big Town filed for bankruptcy. Id. at ¶ 32. The School District alleged that Travelers caused delays and contributed to Big Town's defaults by contending that it was entitled to the remaining contract monies. Id. at ¶¶ 28-30. The School District further alleged that Travelers breached its duty to perform, repair and complete Big Town's work under the contracts as guaranteed by the performance bonds. Id. at ¶¶ 32-45. The School District sought a mandatory injunction to compel Travelers' performance under its bond, and damages for breach of contract, contractual breach of the covenant of good faith and fair dealing, tortious breach of the covenant of good faith and fair dealing, and declaratory relief. Id. at ¶¶ 46-78.

         Travelers filed an amended counterclaim against the School District on August 6, 2015 in which it alleged that Big Town's ability to perform under its contracts was impaired by the acts or omissions of the School District. Travelers alleged that the School District failed to pay all amounts due under the contracts and for change order work and extra work; delayed and disrupted Big Town's work; issued defective and/or deficient contract documents; and caused delays and disruptions and additional costs associated therewith. Amended Counterclaim (ECF No. 107), ¶ 12. Travelers alleged that but for the delays and disruptions caused by the School District, Big Town “fulfilled all obligations under each of the Contracts, or was excused by the actions and omissions of CCSD from doing so.” Id. at ¶ 21.

         On February 1, 2016, the School District and Travelers entered into a written Settlement Agreement and Release. Motion to Disqualify (ECF no. 252), Exhibit 1 (“Settlement Agreement”). The Settlement Agreement recited that the School District and Travelers entered into a takeover agreement on December 19, 2013 regarding Travelers' completion of the work, and that Travelers entered into a contract with Sletten Construction Co. on that same date to complete the projects, and that the projects were now fully complete. Id. at ¶¶ E and F. Pursuant to the Settlement Agreement, Travelers agreed to pay $5 million to the School District in addition to the contract retention amount(s) which the School District was entitled to keep. Id. at pg. 2, ¶ 2(a). The Settlement Agreement further stated:

Assignment. In exchange for and effective ten (10) business days after Travelers' payment to CCSD of the Settlement Payment and retroactive to the Effective Date, CCSD assigns, transfers, and conveys to Travelers all of CCSD's rights arising out of or related to the Contracts with BTM, the Projects, the BTM Claims, on the Projects, and the Action (as well as all related damages in connection therewith), including but not limited to all direct costs, resultant damages, liquidated damages (including the LDs set forth in Exhibit C), interest and fee claims thereon. The purpose of this assignment is to give Travelers the ownership of and the right to assert any and all claims that CCSD has asserted and/or could have asserted in any ongoing or future dispute/litigation that Travelers is or may eventually be involved in. The Parties agree that this assignment does not affect CCSD's ownership of equipment and renovations that BTM installed/performed on the projects.

Id. at ¶ 2(c).

         The School District also agreed to use its best efforts to make its current employees reasonably available to Travelers so long as it does not impose an undue burden on the School District. Id. at ¶ 2(d).

         Plaintiff Fidelity and Deposit Company of Maryland (“Fidelity” or “ F&D”) filed its complaint in this action against Big Town and Travelers on March 6, 2013. Complaint (ECF No. 1). The complaint was filed on Fidelity's behalf by attorneys Kurt C. Faux and Willi Siepmann of The Faux Law Group who continue to be counsel of record in this lawsuit. Fidelity alleged that it issued performance and payment bonds on behalf of F.A.S.T. Systems, Inc. (“FAST”) which had entered into subcontracts with Big Town to perform the modernization work on the HVAC systems in five of the schools subject to the general contracts between the School District and Big Town. FAST subsequently defaulted on its subcontracts and Big Town demanded that Fidelity meet its obligation under its bonds. Fidelity thereafter arranged for the completion of FAST's work on the subcontracts and made payments under the bonds issued on behalf of FAST. Fidelity alleged that while completing FAST's work on the subcontracts, it “repeatedly demanded that Big Town provide an accounting of the balance of the subcontract price as required by the [bonds]” and that Big Town refused to provide an accounting or pay Fidelity the balance of the subcontract prices as required by the bonds. Id. at ¶¶ 14, 15, 20, 21, 26, 27, 32, 33, 38, 39. Fidelity asserted causes of action for an accounting and for breach of contract, and a claim against Travelers on its bonds.

         On July 18, 2014, Travelers filed a counterclaim against Fidelity. Counterclaim (ECF No. 47). Travelers alleged that Fidelity was obliged to complete the entirety of FAST's subcontract work without regard to the penal sums of its bonds. Id. at ¶ 16. Travelers further alleged that FAST's subcontract work was not complete and did not comply with the project plans and specifications. Travelers alleged that as a result, it “has or will have to pay an estimate in excess of $1, 000, 000 to repair and replace work performed by FAST/Perini and to complete FAST's Subcontract scope of work on the Projects.” Id. at ¶ 20.[1]

         On February 2, 2017, Fidelity, Travelers, and Third Party Defendant Controlco participated in a private mediation conference in an effort to settle this case. The mediation was not successful. Statement re Unsuccessful Mediation (ECF No. 145). Thereafter on March 16, 2017, attorneys Alan J. Lefebvre, William D. Schuller and Colby L. Balkenbush of the law firm of Kolesar & Leatham entered their appearance as counsel for Fidelity. Notice of Appearance (ECF No. 148). That same day, Mr. Balkenbush sent Travelers' counsel a lengthy letter addressing alleged deficiencies in Travelers' discovery responses and other discovery issues. See Motion to Compel (ECF No. 168), Exhibit 3. On March 24, 2017, Travelers' counsel sent an email to Fidelity's attorney Kurt Faux stating that Travelers would be filing a motion that day to disqualify Kolesar & Leatham. Opposition to Motion to Disqualify (ECF No. 257), Exhibit 2, pg. 4. Also on March 24th, Mr. Balkenbush sent an email to Travelers' counsel stating that Fidelity would not agree to stay or postpone discovery pending the filing and decision on a motion to disqualify counsel. Id. at Exhibit 2, pg. 2.

         On March 28, 2017, Mr. Balkenbush sent an email to Travelers' counsel regarding matters discussed by them on March 27th. The email states: “Finally, you indicated that while Travelers is still considering filing a motion to disqualify Kolesar & Leatham from representing F&D in this litigation for the time being Travelers has elected not to file said motion. You indicated ...

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