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Day v. United Bank

United States District Court, D. Maryland

August 3, 2018

GARY W. DAY, Individually and as Assignee of the Claims of Hudson Insurance Company, Plaintiff,
UNITED BANK, Defendant.


          Paula Xinis, United States District Judge

         Presently 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 GRANTED.[1]

         I. BACKGROUND

         In this 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.

         Previously, 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.

         The 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.

         In 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.

         Relying 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.

         In late 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.

         For a 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.[2] 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.

         In July 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 ¶ 43.

         In 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.

         The 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.

         In this 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.


         A. Motion to Dismiss

         When 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).

         If a 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 Cir. 1999).

         The 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).

         B. Summary Judgment

         Summary 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).

         III. Discussion

         A. The Anti-Assignment Act

         At the outset, the Court notes that many of Day's claims implicate, in some fashion, the Anti-Assignment Act, 41 U.S.C. § 6305.[3] 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.

         The 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.

         B. Subrogation

         The 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)).

         Through 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).[4] “[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).

         Day 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 or ...

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