KBG Holding Corp. v. Union Bank & Trust Co. , 56 F. App'x 111 ( 2003 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
KBG HOLDING CORPORATION, 
Plaintiff-Appellant,
v.
UNION BANK AND TRUST COMPANY,
Defendant-Appellee,
v.
TRANSPHOR, INCORPORATED;  No. 02-1183
RONALD A. LAOS,
Third Party Defendants-Appellants,
and
KOMPLETT BAUTRAEGER GES. M.B.H.;
WALTER O. KNAPP,
Third Party Defendants.

2 KBG HOLDING CORP. v. UNION BANK AND TRUST
KBG HOLDING CORPORATION, 
Plaintiff-Appellant,
v.
UNION BANK AND TRUST COMPANY,
Defendant-Appellee,
v.
TRANSPHOR, INCORPORATED;
RONALD A. LAOS,
Third Party Defendants-Appellants,
KBG HOLDING CORPORATION;

TRANSPHOR, INCORPORATED;
RONALD A. LAOS, No. 02-1204
Third Party Defendants-Appellants,
v.
UNION BANK AND TRUST COMPANY;
UNION BANKSHARES CORPORATION; G.
WILLIAM BEALE; SCOTT O. NININGER;
ANA MARIA DAY,
Third Party Defendants-Appellees,
and
KOMPLETT BAUTRAEGER GES. M.B.H.;
WALTER O. KNAPP,
Third Party Defendants.

Appeals from the United States District Court
for the Eastern District of Virginia, at Richmond.
Richard L. Williams, Senior District Judge.
(CA-01-770-3)
Argued: October 29, 2002
Decided: January 8, 2003
Before NIEMEYER, WILLIAMS, and GREGORY, Circuit Judges.
KBG HOLDING CORP. v. UNION BANK AND TRUST 3
Affirmed by unpublished per curiam opinion.
COUNSEL
ARGUED: Charles Alexander Trainum, Jr., TRAINUM, SNOW-
DON & DEANE, P.C., Fredericksburg, Virginia, for Appellants. Alan
Durrum Wingfield, TROUTMAN SANDERS, L.L.P., Richmond,
Virginia, for Appellees. ON BRIEF: Robert A. Angle, TROUTMAN
SANDERS, L.L.P., Richmond, Virginia, for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
KBG Holding Corporation (KBG) initiated this action seeking the
release of money deposited in the form of International Money Orders
(IMOs) in its account at Union Bank & Trust Co. (Union Bank).
Union Bank filed a counterclaim against KBG, Komplett Bautraeger
Ges. m.b.H. (KBG-Austria), Transphor, Inc., Ronald A. Laos, and
Walter O. Knapp seeking damages and a permanent injunction impos-
ing a constructive trust on funds Union Bank exchanged for IMOs
that were determined to be counterfeit. KBG, Laos, and Transphor
(the KBG parties) then counterclaimed against Union Bank, Union
Bankshares Corporation, and three of Union Bank’s employees, G.
William Beale, Scott Q. Nininger, and Ana Maria Day (the Union
Bank parties), seeking compensatory and punitive damages for defa-
mation, malicious prosecution, breach of contract, and illegal seizure
of property. The district court dismissed KBG’s original complaint,
granted actual damages and permanent injunctive relief to Union
Bank on its counterclaim, and entered summary judgment in favor of
the Union Bank parties on the KBG parties’ defamation, malicious
prosecution, breach of contract, and illegal seizure of property coun-
4 KBG HOLDING CORP. v. UNION BANK AND TRUST
terclaims. The issues on appeal are whether Laos is personally liable
for Union Bank’s losses and whether the district court erred by grant-
ing the Union Bank parties’ motion for summary judgment on the
defamation, malicious prosecution, and breach of contract claims.
Finding no error, we affirm the judgments of the district court.
I.
KBG, a Delaware corporation, was formed in November 2000, pur-
suant to an agreement between Laos and Knapp. According to the
agreement, Laos and Knapp were to share ownership of KBG,
although Knapp would pay organizational costs, have a majority own-
ership, and hold the titles of chairman of the board of directors and
chief executive officer. Knapp intended to use KBG as a United
States-based entity to effect transactions on behalf of Knapp and his
company, KBG-Austria.
On November 10, 2000, Laos opened an account with Union Bank
in the names of "KBG Holding Company" and "KOMPLETT
BAUTRAEGER Ges." Around the same time, Laos approached
Beale, the president and CEO of Union Bank, to determine if Union
Bank would participate in a business deal that would involve a large
deposit of money from KBG-Austria into KBG’s account at Union
Bank. While Beale initially agreed, later the same day, before the
transaction was complete, he withdrew his acceptance on the ground
that Union Bank had "no knowledge of [i]nternational business." (J.A.
at 25.) In March 2001, Laos opened an account with Union Bank in
the name of Transphor, Inc., a corporation of which Laos owns forty-
five percent and serves as President.
On August 2, 2001, Laos telephoned the Kenmore branch of Union
Bank in Fredericksburg, Virginia, and spoke with Day, a Union Bank
customer service representative, about a document he identified as an
IMO. That same day, Laos visited Union Bank’s Kenmore Branch
and presented the document to Day. Day inspected the IMO and saw
that it was purportedly drawn on Security Pacific National Bank, a
United States bank, and thus could be processed through ordinary
bank procedures. Fran Farmer, a Union Bank teller, gave Laos $2000,
the face value of the IMO, in return for the IMO.
KBG HOLDING CORP. v. UNION BANK AND TRUST 5
Union Bank processed the IMO in the ordinary course of business
and forwarded it to the Federal Reserve Bank of Richmond on August
2, 2001.1 On August 9, 2001, Laos again visited Union Bank’s Ken-
more branch. Laos presented nine additional IMOs in the face amount
of $2000 each, all purportedly drawn on Security Pacific National Bank.2
At Laos’s direction, $17,000 was deposited into the KBG account and
$1000 was deposited into the Transphor account. The KBG account
was then debited $17,000, of which $10,000 was wired to a KBG-
Austria account at Erste Bank in Vienna and $7000 in cash was given
to Laos. The Transphor account was debited $850, which was wired
to a Transphor account in South Africa.
On August 13, 2001, Laos and Knapp returned to Union Bank’s
Kenmore branch. They presented an additional 600 purported IMOs,
each in the face amount of $2000 and purportedly drawn on Security
Pacific National Bank. A Union Bank teller inspected, totaled, and
handled the distribution of this third set of IMOs. The KBG account
at Union Bank was credited $1,200,000 and then debited for the fol-
lowing transactions: a $100,000 transfer to the Transphor account at
Union Bank, issuance of $9,500 in cash to Knapp, issuance of a
$75,000 cashier’s check payable to Laos, and a $525,000 wire trans-
fer to a KBG-Austria account at Erste Bank. Laos and Knapp also
prepared and executed a corporate resolution and a new signature card
making Knapp a signatory to the KBG account.
The 600 IMOs arrived at Union Bank’s processing department late
on the afternoon of August 13. Beale and Nininger, Union Bank’s
security officer, realized that Security Pacific no longer existed, hav-
ing been merged into Bank of America. Upon contacting Sue Cervan-
tes, a Bank of America security officer, Nininger learned that the
IMOs were not genuine. As required by federal banking regulations,
Union Bank reported the forged IMOs to the FBI and the Fredericks-
burg Police Department. After interviewing bank employees, a detec-
tive with the Fredericksburg Police caused warrants to be issued for
the arrest of Laos and Knapp. Both were subsequently arrested and
1
This IMO was returned unpaid by the Federal Reserve Bank of Rich-
mond on August 20, 2001, and marked as "counterfeit." (J.A. at 340.)
2
These IMOs also were processed in the ordinary course of business
and returned on August 21 and 22 unpaid by the Federal Reserve.
6 KBG HOLDING CORP. v. UNION BANK AND TRUST
the $9,500 in cash given to Knapp was recovered. Union Bank froze
the KBG account, reversed the $100,000 credit to the Transphor
account, and stopped payment on the $75,000 cashier’s check given
to Laos. Attempts to recover the money wired to Erste Bank were
unsuccessful. Thus, as a result of the fraudulent IMOs, an account
shortage in excess of $535,000 existed in the KBG account at Union
Bank. On September 25, 2001, the criminal charges against Laos and
Knapp were nolle prosequied.
On November 14, 2001, KBG filed a complaint in the United
States District Court for the Eastern District of Virginia under the
Expedited Funds Availability Act, 12 U.S.C.A. §§ 4001-4010 (West
2001) (EFAA), seeking release of the funds deposited in its account.
On November 16, 2001, the district court scheduled an evidentiary
hearing for KBG’s preliminary injunction request on December 14,
2001.
On November 20, 2001, Union Bank filed an answer and counter-
claim against KBG, Laos, Transphor, Knapp, and KBG-Austria seek-
ing to recover its losses resulting from the counterfeit IMOs. Union
Bank stated causes of action for breach of contract, actual and con-
structive fraud, and unjust enrichment, and sought a money judgment
and imposition of a constructive trust. Union Bank also sought a pre-
liminary injunction ordering a return of the $525,000 held in an
account at Erste Bank in Vienna, Austria. The parties engaged in
expedited discovery in preparation for the December 14, 2001 hear-
ings on the competing motions for preliminary injunction.
On December 10, 2001, in a pretrial order, the district court
announced that "this case was set for a trial without a jury on Decem-
ber 14, 2001." (J.A. at 108.) Trial was held on December 14 and 21.
KBG-Austria and Knapp did not appear at trial. Six witnesses testi-
fied, including Laos, and 39 exhibits were admitted into evidence.
On January 4, 2002, the KBG parties filed an answer and counter-
claim against the Union Bank parties, stating claims for malicious
prosecution, defamation, breach of contract, and illegal seizure of
property. These state-law claims were based upon statements made by
Beale and Nininger to law enforcement authorities, Union Bank’s and
Day’s alleged failures to take appropriate steps to ascertain whether
KBG HOLDING CORP. v. UNION BANK AND TRUST 7
the IMOs were valid, and Union Bank’s seizure of funds from Trans-
phor’s account.
On January 9, 2002, the district court issued an order dismissing
KBG’s claim under the EFAA and granting Union Bank judgment
against KBG, Laos, Transphor, KBG-Austria, and Knapp on Union
Bank’s counterclaim. The district court found, based upon uncontro-
verted evidence, that the 610 IMOs presented by Laos and Knapp to
Union Bank were counterfeit and concluded that KBG, Laos, KBG-
Austria, and Knapp were jointly and severally liable for Union Bank’s
actual damages of $539,183, plus costs and attorneys’ fees. Moreover,
the district court determined that the funds wired to Austria,
$525,000, constituted a constructive trust and that Knapp and KBG-
Austria, as constructive trustees, and Laos and KBG, on account of
their joint ventureship with Knapp and KBG-Austria, have personal
joint and several liability to Union Bank for the funds in the construc-
tive trust. On February 7, 2002, the KBG parties filed a timely notice
of appeal from the district court’s January 9, 2002 order.
On February 13, 2002, the district court issued an order granting
the Union Bank parties’ motion for summary judgment on the mali-
cious prosecution, defamation, breach of contract, and illegal seizure
of property claims. The district court determined that Union Bank, in
light of the findings of fact in its January 9, 2002 order, met its burden
as the moving party and thus the KBG parties could not rely on mere
allegations. The KBG parties presented no evidence in the form of
affidavits or otherwise to support its allegations. The district court
concluded that given the lack of support for the KBG parties’ counter-
claims, summary judgment in favor of the Union Bank parties was
appropriate. On February 21, 2002, the KBG parties filed a timely
notice of appeal from the district court’s February 13, 2002 order. The
two appeals were consolidated, and this court has jurisdiction over the
consolidated appeals pursuant to 28 U.S.C.A. § 1291 (West 1993 &
Supp. 2002).
8 KBG HOLDING CORP. v. UNION BANK AND TRUST
II.
A.
Because the January 9, 2002 order is a judgment from a bench trial,3
we review conclusions of law de novo but may set aside findings of
fact only if they are clearly erroneous. Accord Virginia Vermiculite,
Ltd. v. Historic Green Springs, Inc., 307 F.3d 277, 284 (4th Cir.
2002). In their appeal from the January 9, 2002 order, the KBG par-
ties challenge the district court’s conclusion that Laos is personally
liable for Union Bank’s losses.4 One of the bases relied upon by the
district court in finding Laos liable was its conclusion that Laos per-
sonally committed actual and constructive fraud in the presentation of
the IMOs to Union Bank. "To prevail on an actual fraud claim under
Virginia law, a plaintiff must prove by clear and convincing evidence
‘(1) a false representation, (2) of a material fact, (3) made intention-
ally and knowingly, (4) with intent to mislead, (5) reliance by the
party misl[ed], and (6) resulting damage to the party misled.’" Hitachi
Credit America Corp. v. Signet Bank, 166 F.3d 614, 628 (4th Cir.
1999) (quoting Evaluation Research Corp. v. Alequin, 439 S.E.2d
387, 390 (Va. 1994)). "Virginia law also recognizes an action for
fraud where misrepresentations are made without specific fraudulent
3
As explained above, the district court’s pretrial order stated that "this
case was set for a trial without a jury on December 14, 2001," the date
on which the hearings for KBG’s and Union Bank’s competing motions
for preliminary injunction were scheduled. (J.A. at 108.) Federal Rule of
Civil Procedure 65(a)(2) permits a district court to "order the trial of the
action on the merits to be advanced and consolidated with the hearing of
[an] application" for preliminary injunction. Fed. R. Civ. Pro. 65(a)(2).
"Before such an order may issue, however, the courts have commonly
required that ‘the parties should normally receive clear and unambiguous
notice [of the court’s intent to consolidate the trial and the hearing] either
before the hearing commences or at a time which will still afford the par-
ties a full opportunity to present their respective cases.’" Univ. of Texas
v. Camenisch, 451 U.S. 390, 395 (1981) (quoting Pughsley v. 3750 Lake
Shore Drive Cooperative Bldg., 463 F.2d 1055, 1057 (7th Cir. 1972)).
Because the district court’s pretrial order provided clear and unambigu-
ous notice that it intended to combine the preliminary injunction hearings
with a trial on the merits, there is no indication that the district court
abused its discretion.
4
The KBG parties concede that KBG is liable to Union Bank for the
$539,183 shortage in its account under its account agreement and do not
dispute the district court’s holding that Transphor was unjustly enriched
by any money credited to its account based on the fraudulent IMOs.
KBG HOLDING CORP. v. UNION BANK AND TRUST 9
intent but made with reckless abandon and disregard for the truth." Id.(citing Bradley v. Tolson, 85 S.E. 466, 467 (Va. 1915)); Bank of Mon-
treal v. Signet Bank, 193 F.3d 818, 826 (4th Cir. 1999) (observing
that affirmative misrepresentations made recklessly subject the
speaker to liability for actual fraud under Virginia law).
The KBG parties concede that there was a "false representation of
a material fact which was relied upon by Union Bank, causing it dam-
age."5 (Appellant’s Br. at 39 (footnote omitted).) The KBG parties
argue that there is no evidence that Laos knew that the IMOs were
counterfeit or that he intended to mislead Union Bank. As stated
above, however, an actual fraud action may succeed in the absence of
knowledge and intent if the misrepresentations were made recklessly.
The district court’s finding that "the evidence shows clearly and con-
vincingly that Laos acted with sufficient recklessness to satisfy the
scienter element of actual fraud under Virginia law," (J.A. at 344), is
therefore sufficient to support its conclusion that Laos committed
actual fraud.6 Moreover, our review of the record indicates that the
district court’s finding that Laos acted recklessly was not clearly erro-
neous. We therefore affirm the district court’s January 9, 2002 order.7
5
Because the KBG parties concede reliance, we do not address whether
there is clear and convincing evidence that Union Bank’s reliance on
Laos’s misrepresentation was "reasonable and justified." See Hitachi
Credit America Corp. v. Signet Bank, 166 F.3d 614, 629 (4th Cir. 1999)
("In order to prove reliance, a plaintiff must demonstrate that its reliance
upon the representation was reasonable and justified.").
6
Even if Laos’s recklessness did not rise to the level necessary to sup-
port an actual fraud claim, the district court’s finding of recklessness cer-
tainly supports the conclusion that he was negligent and thus liable for
his constructive fraud. See Hitachi, 166 F.3d at 628 ("Constructive fraud
differs [from actual fraud] only in that the misrepresentation of material
fact is not made with the intent to mislead, but is made innocently or
negligently; the plaintiff must still prove the other elements of actual
fraud—reliance and detriment—by clear and convincing evidence.").
7
Because the district court’s conclusion that Laos personally commit-
ted actual fraud is enough to support the imposition of liability on Laos,
we do not address the other bases upon which the district court relied.
Specifically, we do not reach the issue of whether Laos and KBG were
engaged in a joint venture with Knapp and KBG-Austria or whether Laos
was personally liable on the grounds that he was a signatory on KBG’s
account.
10 KBG HOLDING CORP. v. UNION BANK AND TRUST
B.
We now turn to the KBG parties’ challenge to the district court’s
February 13, 2002 order.8 We review the grant of summary judgment
de novo. Providence Square Assocs. v. G.D.F., Inc., 211 F.3d 846,
850 (4th Cir. 2000). Summary judgment is appropriate only if "the
pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving
party has the initial burden of showing that no genuine issue of mate-
rial fact exists and that the undisputed facts entitle him to judgment
as a matter of law. See, e.g., Celotex Corp. v. Catrett, 477 U.S. 317,
323 (1986); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970).
Once the moving party has properly supported his motion for sum-
mary judgment, the burden shifts to the nonmoving party to go
beyond the pleadings and set forth specific facts showing that there
is a genuine issue for trial. Fed. R. Civ. P. 56(e); Celotex, 477 U.S.
at 323-24.
In their motion for summary judgment, the Union Bank parties
pointed out that the district court’s earlier findings of fact and conclu-
sions of law have a preclusive effect on the pending counterclaims
and thus, that there are no genuine issues of material fact. Therefore,
to the extent that the district court’s earlier findings are determinative
of the defamation, malicious prosecution, and breach of contract
counterclaims, the Union Bank parties satisfied their burden and the
burden shifted to the KBG parties.
To establish a claim for defamation based on statements made to
the authorities about Laos, the KBG parties had to provide evidence
that Union Bank’s report of Laos’s fraudulent activity was false.
Chapin v. Knight-Ridder, Inc., 993 F.2d 1087, 1092 (4th Cir. 1993).
The KBG parties, however, could not re-litigate the district court’s
conclusion that Laos committed actual fraud. See Rhodes v. Common-
wealth, 292 S.E.2d 373, 376 (Va. 1982) ("‘[W]hen a[n] issue of ulti-
8
In their appeal, the KBG parties do not reference the district court’s
grant of summary judgment to Union Bank on KBG’s counterclaim for
illegal seizure of property. Accordingly, that claim is not before us.
KBG HOLDING CORP. v. UNION BANK AND TRUST 11
mate fact has once been determined by a valid and final judgment,
that issue cannot again be litigated between the same parties in any
future lawsuit.’") (quoting Ashe v. Swenson, 397 U.S. 436, 443
(1970)). Similarly, while the KBG parties had to show a lack of prob-
able cause to establish their malicious prosecution claim, Niese v.
Klos, 222 S.E.2d 798, 800 (Va. 1976), the district court’s conclusion
that Laos committed actual fraud demonstrated that there was proba-
ble cause to accuse Laos of fraud. Cf. Bell v. Commonwealth, 563
S.E.2d 695, 708 (Va. 2002) (explaining that a subsequent guilty ver-
dict demonstrates that there was probable cause to charge defendant
with the crime). Finally, the breach of contract claim against Union
Bank was premised on allegations that Union Bank failed to ascertain
the validity of the IMOs before accepting them. The district court,
however, concluded that by presenting the IMOs to Union Bank as
valid instruments, Laos warranted to the bank that they would be hon-
ored. In other words, in its January 9, 2002 order, the district court
concluded that there was no explicit or implied contract between Laos
and Union Bank to ascertain the validity or invalidity of the IMOs and
thus there is no basis for the KBG parties’ breach of contract claim.
The burden thus shifted to the KBG parties, who did not present any
evidence to support the allegations in their counterclaim. Because the
nonmoving party may not rest on his allegations, Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986), we affirm the district court’s
grant of summary judgment to the Union Bank parties on the defama-
tion, malicious prosecution, and breach of contract claims.
III.
Having reviewed the record, briefs, applicable law, and considered
the oral arguments of the parties, we conclude that the judgments of
the district court were correct. Accordingly, we affirm. See KBG
Holding Corp. v. Union Bank & Trust Co., No. 3:01CV770 (E.D. Va.
Jan. 9, 2002 & Feb. 13. 2002).
AFFIRMED