United States District Court, D. Maryland
GARY W. DAY, Individually and as Assignee of the Claims of Hudson Insurance Company, Plaintiff,
UNITED BANK, Defendant.
Xinis, United States District Judge
pending and ripe for resolution in this matter is Defendant
United Bank's Motion for Summary Judgment or to Dismiss
Plaintiff's Third Amended Complaint. ECF No. 47. The
matters are fully briefed and the Court now rules pursuant to
Local Rule 105.6 because no hearing is necessary. For the
reasons stated below, Defendant's motion is
action, Plaintiff Gary W. Day, both individually and as the
assignee of the claims of Hudson Insurance Company
(“Hudson”), seeks to recover against Defendant
United Bank, formerly the Bank of Georgetown (the
“Bank”). This matter centrally concerns certain
lending arrangements entered into between the Bank and a
non-party government contractor, Persaud Companies, Inc.
(“PCI”). See ECF No. 38 ¶ 7.
the Bank moved to dismiss Day's Amended Complaint.
See ECF No. 23. Before the Court acted on the
motion, Day filed a second Amended Complaint with the
Court's approval. See ECF Nos. 30, 31, 33. The
Court therefore denied the Bank's previous motion to
dismiss as moot. ECF No. 35. The Court simultaneously granted
Day an opportunity to file a Third Amended Complaint, ECF No.
35, and subsequently directed the parties to engage in
limited discovery as to whether Day's claims were barred
by limitations, ECF No. 40. The Court granted the Bank an
opportunity, following discovery, to move for dismissal or
alternatively summary judgment. ECF No. 40. The Bank now
brings that motion.
facts as follows are taken from the third Amended Complaint.
(ECF No. 38.) The lending agreement between PCI and the Bank,
entered into in 2009, was secured by PCI's receivables
for its government contracting work, among other assets. ECF
No. 38 ¶ 19. The agreement provided that all funds paid
by government departments and agencies for PCI's work
would be paid directly into a bank account owned by the Bank.
ECF No. 38 ¶¶ 7, 20. A second operating account was
established with the Bank in PCI's name. ECF No. 38
¶ 20. Each month, PCI would apply to the Bank to borrow
money for its operations based on the amount in the
Bank's account, and the Bank's assessment of
PCI's finances. ECF No. 38 ¶¶ 7, 20. Initially
the Bank filed formal written assignments of the contract
funds with the Government, but at some point the formal
assignments ceased, with PCI providing the Government the
account number for the Bank's account for payment. ECF
No. 38 ¶¶ 8, 23.
2010, PCI and Hudson entered into an agreement pursuant to
which Hudson issued payment and performance bonds for
PCI's government projects. ECF No. 38 ¶¶ 11,
25. PCI did not inform Hudson of the above-described banking
arrangement. See ECF No. 38 ¶ 43. In December
2010, PCI and its principal, Andy Persaud, executed a General
Indemnity Agreement (“GIA”) in favor of Hudson,
which provided that all funds earned by PCI on bonded
construction project funds would be trust funds for the
purpose of paying PCI's obligations on its contracts. ECF
No. 38 ¶ 31. PCI did not notify Hudson of the nature of
its lending relationship with the Bank, ECF No. 38 ¶ 33,
and the Bank did not thereafter notify Hudson that the funds
from PCI's projects were being deposited into the
Bank's account, see ECF No. 38 ¶¶ 12,
13. Hudson alleges that the Bank's failure to file
written notices of assignments with the Government and Hudson
violated the Assignment of Claims Act.
on the GIA, Hudson began issuing bonds for PCI's
government projects. ECF No. 38 ¶ 34. Hudson alleges
that it would not have issued bonds for PCI projects had it
been aware of the details of PCI and the Bank's
arrangement. ECF No. 38 ¶¶ 14, 35.
2011, PCI requested that Hudson expand its bond program. ECF
No. 38 ¶ 36. At that time, Hudson had not experienced
any bond claim for PCI's projects. Nonetheless, Hudson
required an amended GIA and an additional indemnitor, in
light of Persaud's ongoing and contentious divorce. ECF
No. 38 ¶ 36. Day agreed to execute the amended GIA as
that second indemnitor. ECF No. 38 ¶¶ 37, 39. The
parties also agreed that all funds from contracts relating to
the GIA be run through a third-party administered escrow
account, or “funds control.” ECF No. 38 ¶
37. The other relevant terms of the amended GIA remained the
same. ECF No. 38 ¶ 40. Neither PCI nor Persaud disclosed
the precise lending relationship with the Bank to Hudson or
Day. See ECF No. 38 ¶ 38.
time, all was well with PCI, Hudson, and Day. Then, in the
spring of 2012, PCI and Persaud began diverting funds from
PCI's operating account with the Bank for non-business
purposes. ECF No. 38 ¶ 15. PCI's subcontractors and
suppliers subsequently did not receive timely payment, and so
made claims on the bonds issued by Hudson. ECF No. 38
¶¶ 15, 41.
2012, Hudson demanded that PCI provide collateral security
pursuant to the GIA. ECF No. 38 ¶ 42. PCI and Hudson
entered into an agreement to satisfy Hudson's demand, the
conditions of which PCI subsequently breached. ECF No. 38
¶¶ 42-43. Hudson alleges that PCI committed this
breach in order to conceal its with the Bank. ECF No. 38
January 2013, Hudson filed an indemnity suit against PCI,
Persaud, and Day in the Eastern District of Virginia. ECF No.
38 ¶ 44. During that case Hudson served subpoenas on the
Bank, which led to the production of a number of documents,
but none of the documents reflected the Bank-owned account
into which PCI's contract funds had been deposited. ECF
No. 38 ¶ 45. Based on the facts pleaded, it is not all
clear how the Bank would have known that Hudson served as a
surety on PCI's projects. Hudson and Day, however,
learned of the exact banking relationship between the Bank
and PCI on July 9, 2013, during the corporate designee
deposition of the Bank in connection with the indemnity suit.
ECF No. 38 ¶ 46.
indemnity suit concluded with Hudson dismissing its claims
against Day in exchange for a $1, 700, 000.00 payment, and
assigning its claims against the Bank to Day. ECF No. 38
¶ 50. In all, Hudson asserts that PCI's failure to
pay subcontractors and suppliers led to $3, 790, 333.43 in
payment and performance bond losses, net of the $1, 700,
000.00 paid to it by Day. ECF No. 38 ¶¶ 47, 48.
Although Hudson succeeded in its indemnity claims against PCI
and Persaud, neither Hudson nor Day are likely to collect on
such claims because PCI is defunct and Persaud is believed
penniless. ECF No. 38 ¶ 51.
action, Day brings claims for negligence against the Bank for
its alleged failure to comply with the Assignment of Claims
Act (Count I); violations of the Assignment of Claims Act
(Count II); “Equitable Right to Recover
Payments/Assignment of Claims Act” (Count III); breach
of trust (Count IV); constructive fraud (Count V);
constructive trust (Count VI); conversion (Count VII); unjust
enrichment (Count VIII); and accounting (Count IX). The Bank
moves for summary judgment, alleging that Hudson (and
therefore Day) was on inquiry notice as to the Bank's
lending arrangement with PCI well before the relevant time
period for limitations in this case, and in the alternative
argues that all of Day's claims are subject to dismissal
for failure to state a claim. For the reasons below, the
Court agrees with the Bank that Day has failed to state a
claim against the Bank for which relief can be granted, and
further agrees that the facts as known to Hudson during the
lending process sufficed to put Hudson on inquiry notice as
to the Bank and PCI's lending arrangement.
STANDARD OF REVIEW
Motion to Dismiss
reviewing a motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6), a court must determine whether the
complaint includes facts sufficient to state a claim to
relief that is plausible on its face. Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007); Ashcroft v.
Iqbal, 556 U.S. 662, 678-79 (2009). A plaintiff must
plead facts to support each element of the claim to satisfy
the standard. See McCleary-Evans v. Md. Dep't of
Transp., State Highway Admin., 780 F.3d 582, 585 (4th
Cir. 2015). In so assessing, the Court takes as true all
well-pleaded factual allegations and makes all reasonable
inferences in the plaintiff's favor. Philips v. Pitt
Cty. Mem. Hosp., 572 F.3d 176, 180 (4th Cir. 2009). The
Court does not credit conclusory statements or legal
conclusions, even when couched as allegations of fact.
See Iqbal, 556 U.S. 678-79; Giarratano v.
Johnson, 521 F.3d 298, 302 (4th Cir. 2008).
claim alleges fraud, or if the gravamen of a claim is fraud,
the allegations must meet the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b). See
Haley v. Corcoran, 659 F.Supp.2d 714, 721 (D. Md. 2009).
The rule requires the plaintiff to “state with
particularity the circumstances constituting fraud or
mistake.” Fed.R.Civ.P. 9(b). To satisfy this standard,
plaintiffs “must, at a minimum, describe the time,
place, and contents of the false representations, as well as
the identity of the person making the misrepresentation and
what he obtained thereby.” United States ex rel.
Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370,
379 (4th Cir. 2008) (quotation marks and citation omitted).
Fraud allegations that fail to comply with Rule 9(b) warrant
dismissal under Rule 12(b)(6). See Harrison v.
Westinghouse Savannah River Co., 176 F.3d 776, 783 (4th
Court may consider materials attached to the complaint
without transforming the motion to dismiss into one for
summary judgment. See Fed. R. Civ. P. 10(c). The
Court also may consider materials attached to a motion to
dismiss, so long as such materials are integral to the
complaint and authentic. Philips, 572 F.3d at 180;
see Walker v. S.W.I.F.T. SCRL, 517 F.Supp.2d 801,
806 (E.D. Va. 2007) (“[W]here a complaint in a fraud
action references a document containing the alleged material
misrepresentations, the referenced document may be considered
part of the complaint.”). This rule seeks to prevent a
“situation in which a plaintiff is able to maintain a
claim of fraud by extracting an isolated statement from a
document . . . even though if the statement were examined in
the full context of the document, it would be clear that the
statement was not fraudulent.” Am. Chiropractic
Ass'n v. Trigon Healthcare, Inc., 367 F.3d 212, 234
(4th Cir. 2004) (internal marks and citation omitted).
judgment is appropriate when the Court, construing all
evidence and drawing all reasonable inferences in the light
most favorable to the non-moving party, finds no genuine
dispute exists as to any material fact, thereby entitling the
movant to judgment as a matter of law. Fed.R.Civ.P. 56(a);
see In re Family Dollar FLSA Litig., 637 F.3d 508,
512 (4th Cir. 2011). Summary judgment must be granted
“against a party who fails to make a showing sufficient
to establish the existence of an element essential to that
party's case, and on which that party will bear the
burden of proof at trial.” Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986). “In responding
to a proper motion for summary judgment, the party opposing
summary judgment must present evidence of specific facts from
which the finder of fact could reasonably find for him or
her.” Venugopal v. Shire Labs., 334 F.Supp.2d
835, 840 (D. Md. 2004), aff'd sub nom. Venugopal v.
Shire Labs., Inc., 134 Fed.Appx. 627 (4th Cir. 2005)
(citing Anderson v. Liberty Lobby, 477 U.S. 242, 252
(1986); Celotex, 477 U.S. at 322-23). The party
opposing summary judgment “cannot create a genuine
issue of material fact through mere speculation or the
building of one inference upon another.” Othentec
Ltd. v. Phelan, 526 F.3d 135, 140 (4th Cir. 2008)
(quoting Beale v. Hardy, 769 F.2d 213, 214 (4th Cir.
1985)). If a party's statement of a fact is
“blatantly contradicted by the record, so that no
reasonable jury could believe it, ” the Court credits
the record over the averred fact. See Scott v.
Harris, 550 U.S. 372, 380 (2007).
The Anti-Assignment Act
outset, the Court notes that many of Day's claims
implicate, in some fashion, the Anti-Assignment Act, 41
U.S.C. § 6305. Under the Anti-Assignment Act, a
“party to whom the Federal Government gives a contract
or order may not transfer the contract or order, or any
interest in the contract or order, to another party, ”
and any such transfer “annuls the contract or order so
far as the Federal Government is concerned.” 41 U.S.C.
§ 6305(a); see Commerce Funding Corp. v. Worldwide
Sec. Servs. Corp., 249 F.3d 204, 211 (4th Cir. 2001).
Funding institutions such as the Bank may receive direct
payments from government contracts, but the Bank must first
file written notice of assignment with the relevant
government agency and surety on any bond connected with the
contract. See 41 U.S.C. § 6305(b). If the
assignment provisions are violated, the Government may annul
claims against the contract, so far as the Government is
concerned, at its election, thus extinguishing an
assignee's right to payment. See Am. Gov't Props.
v. United States, 118 Fed.Cl. 61, 66 (2014);
Commerce Funding Corp., 249 F.3d at 211.
Alternatively, the Government may waive the notice
requirements by contract or “by acting consistently
with the assignment through its course of conduct.”
Am. Gov't Props., 118 Fed.Cl. at 66. In that
case, the Government gives up its rights and remedies under
the Anti-Assignment Act.
primary purpose of the Anti-Assignment Act is two-fold:
“first, to prevent persons of influence from buying up
claims against the United States, which might then be
improperly urged upon officers of the Government; and second,
to enable the United States to deal exclusively with the
original claimant instead of several parties.”
Monchamp Corp. v. United States, 19 Cl. Ct. 797, 801
(1990); see Maffia v. United States, 135 Ct. Cl.
604, 606 (1956) (Anti-Assignment Act “seems plainly
designed to protect the United States from the assertion by
parties other than the contracting party of rights under
Government contracts”). It is against this backdrop
that the Court will consider Day's claims.
doctrine of equitable subrogation also bears discussion
before examining Day's claims. A surety who pays the debt
of another is entitled to all the rights of the person on
behalf of whom the surety had paid claims in order to enforce
the surety's right to be reimbursed. Handex of Md.,
Inc. v. Waste Mgmt. Disposal Servs. of Md., Inc., 458
F.Supp.2d 266, 274-75 (D. Md. 2006) (quoting Pearlman v.
Relianse Ins. Co., 371 U.S. 132, 136-37 (1962)).
Subrogation “is an equitable remedy. It allows the
Court to do that which ought to be done.” Id.
at 275. As “a creature of equity, ” subrogration
“is enforced solely for the purpose of accomplishing
the ends of substantial justice.” W. Cas. &
Sur. Co. v. Brooks, 362 F.2d 486, 490 n.18 (4th Cir.
1966) (quoting Memphis & L.R.R. v. Dow, 120 U.S.
287, 301-02 (1887)).
equitable subrogation, “the surety steps into the shoes
of the principal obligor and is entitled to all of its rights
relating to the . . . contract.” Lumbermens Mut.
Cas. Co. v. United States, 654 F.3d 1305, 1312 (Fed.
Cir. 2011) (internal marks omitted). “[W]hen a surety meets
its obligations on a contract bond by paying the claims of
the laborers and materialmen, it subrogates to whatever
rights the owner[, ] . . . contractor, and laborers and
materialmen had in the retained funds.” W.
Cas., 362 F.2d at 489-90. When a surety performs a
contract in place of the contractor, “he is subrogated
to the rights of the obligee, and is entitled to the moneys
unpaid so far as necessary to reimburse him for his
loss.” Hartford Accident & Indem. Co. v.
Coggin, 78 F.2d 471, 478 (4th Cir. 1935). Critical to
the Court's analysis, the rights for which a subrogee can
recover are limited to those the subroger possessed at the
time of subrogation. See Lumbermens, 654 F.3d at
1313 (“[S]tepping into the shoes of Landmark at the
time of the default notice would not enable Lumbermens to
assert a claim for damages . . . because Landmark itself
would have no claim against the government for funds the
government had already paid it under the contract (as opposed
to a right to recover future payments).”); In re
Jones Constr. & Renovation, Inc., 337 B.R.
579, 583 (Bankr. E.D. Va. 2006) (when a contractor defaults
on its obligations and a surety either completes the work
under the contract or pays related bills, the surety has a
right to the payments due to the contractor).
alleges that by virtue of Hudson's performance on the
bonds issued to PCI, Hudson is subrogated to the rights of
subcontractors and suppliers for reimbursement. This is
supported by the doctrine of equitable subrogation. But Day
further alleges that Hudson is subrogated to the rights of
the Government, not with respect to an interest in retained