Hitachi Credit America Corp. v. Signet Bank

Filed: February 17, 1999
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
Nos. 97-2753(L)
(CA-96-815-3)
Hitachi Credit America Corporation,
Plaintiff - Appellee,
versus
Signet Bank, etc., et al,
Defendants - Appellants.
O R D E R
The court amends its opinion filed January 19, 1999, as
follows:
On page 5, footnote 2, line 2 -- the word "related" is
corrected to read "relate."
On page 8, first full paragraph, line 4 -- "December
Assignment Agreement" is corrected to read "Assignment Agreement."
On page 13, second full paragraph, line 8 -- the words
"qualifier ‘to the’; that the ‘any similar ....’" are corrected to
read "qualifier ‘to the best’ and that the ‘any similar ....’"
- 2 -
On page 16, second full paragraph, lines 3 and 15 -- the
phrase "Assignment Agreement" is corrected to read "December
Assignment Agreement."
On page 18, first full paragraph, line 12 -- the phrase
"Assignment Agreement" is corrected to read "December Assignment
Agreement."
On page 24, second full paragraph, line 3 -- the words
"alleged that Hitachi" are corrected to read "that Hitachi."
On page 24, footnote 9, lines 17-18 -- the cross-reference to
"See ante at 20" is deleted.
On page 27, first paragraph, line 3 -- the cross-reference to
"see ante at 17-23" is deleted.
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
HITACHI CREDIT AMERICA
CORPORATION,
Plaintiff-Appellee,
v.
No. 97-2753
SIGNET BANK, formerly known as
Signet Bank/Virginia; SIGNET
LEASING AND FINANCIAL
CORPORATION,
Defendants-Appellants.
HITACHI CREDIT AMERICA
CORPORATION,
Plaintiff-Appellant,
v.
No. 97-2754
SIGNET BANK, formerly known as
Signet Bank/Virginia; SIGNET
LEASING AND FINANCIAL
CORPORATION,
Defendants-Appellees.
Appeals from the United States District Court
for the Eastern District of Virginia, at Richmond.
James R. Spencer, District Judge.
(CA-96-815-3)
Argued: October 27, 1998
Decided: January 19, 1999
Before MURNAGHAN and WILLIAMS, Circuit Judges, and
MOON, United States District Judge for the Western District of
Virginia, sitting by designation.
Affirmed in part, reversed in part and remanded by published opinion.
Judge Williams wrote the opinion, in which Judge Murnaghan and
Judge Moon joined.
_________________________________________________________________
COUNSEL
ARGUED: Murray Hardison Wright, WRIGHT, ROBINSON,
OSTHIMER & TATUM, Richmond, Virginia, for Appellants. Brian
Alan Sher, ROSS & HARDIES, Chicago, Illinois, for Appellee. ON
BRIEF: Jonathan S. Geldzahler, David E. Boelzner, Paul D. Anders,
WRIGHT, ROBINSON, OSTHIMER & TATUM, Richmond, Vir-
ginia, for Appellants. Daniel P. Hogan, Sean M. Sullivan, ROSS &
HARDIES, Chicago, Illinois; John H. O'Brion, Jr., COWAN &
OWEN, P.C., Richmond, Virginia, for Appellee.
_________________________________________________________________
OPINION
WILLIAMS, Circuit Judge:
Signet Bank and Signet Leasing and Financial Corporation (collec-
tively Signet) appeal the district court's grant of summary judgment
in favor of Hitachi Credit America Corporation on Hitachi's two
breach of contract claims against Signet. Hitachi cross-appeals the
district court's dismissal of its fraud claims against Signet, refusal to
grant Hitachi attorneys' fees and costs in collateral litigation with
third parties, and calculation of pre- and postjudgment interest on
Hitachi's monetary award on the breach of contract claims. We agree
with the district court that summary judgment was proper on Hitachi's
breach of contract claims and that Hitachi was not entitled to attor-
neys' fees and costs in collateral litigation with third parties. We con-
clude that the district court erred in dismissing Hitachi's fraud claims
and in calculating pre- and postjudgment interest on Hitachi's mone-
tary award. We therefore affirm in part, reverse in part, and remand
with instructions to reinstate Hitachi's fraud claims and to recalculate
pre- and postjudgment interest on Hitachi's monetary award in a man-
ner consistent with this opinion.
2
I.
A.
This case arises from a fraudulent loan scheme perpetrated by
Edward J. Reiners, a former employee of Philip Morris Companies,
Inc. In the fall of 1993, Reiners met with representatives of Nelco,
Ltd., a computer leasing firm located in Richmond, Virginia, to dis-
cuss the acquisition of computer and communications equipment for
Philip Morris. Reiners had previously dealt with Nelco on behalf of
Philip Morris. At the fall 1993 meeting, Reiners convinced the Nelco
representatives that Philip Morris had selected him as Chief Opera-
tions Officer for a secret off-shore research and development project
titled "Project Star" that needed to lease large quantities of computer
equipment from Nelco. Shortly thereafter, Richard Nelson, the presi-
dent and owner of Nelco, met with representatives of Signet, Nelco's
primary lender, to discuss possible funding of "Project Star." As proof
of Reiners's authority to represent Philip Morris, Nelson provided
Signet with the "Incumbency Certificate" Reiners had given him,
which appeared to confirm Reiners's claimed status as Chief Operat-
ing Officer of Philip Morris.
Supposedly to protect the secrecy of Project Star, Reiners required
Signet to sign a "Confidentiality Agreement." This agreement
required Signet to hold all information concerning Project Star in the
strictest confidence and to deal exclusively with Reiners as Philip
Morris's representative for the project. Reiners explained that the
project was so secret that if anyone contacted Philip Morris to inquire
about Project Star, Philip Morris would deny that the project existed
and would even deny that Reiners was employed by Philip Morris.
Signet signed the Confidentiality Agreement on November 12, 1993.
Nelco signed the Confidentiality Agreement soon thereafter. On
November 18, 1993, Nelco and Reiners (purportedly acting on Philip
Morris's behalf) signed a "Master Equipment Lease" (the "Master
Lease") setting forth the general terms of an equipment lease arrange-
ment between Nelco, and, ostensibly, Philip Morris.
On November 18, 1993, Reiners and Nelson met with Signet offi-
cials. At that meeting, Reiners described Project Star. According to
Reiners, Project Star was a confidential off-shore research and devel-
3
opment project being conducted by Philip Morris through a corporate
subsidiary known as Worldwide Regional Exports ("WRE"). The pur-
pose of the project was to study the long-term effects of smoking and
to develop alternative tobacco products, including "smokeless" ciga-
rettes. Reiners stated that each of Philip Morris's five overseas Project
Star research centers would require large amounts of sophisticated
computer and communications equipment, including an estimated $25
million worth of equipment in the first year alone. In order to finance
the acquisition of the equipment Philip Morris needed pursuant to the
Master Lease agreement, Reiners, through Nelco, requested loans
from Signet.
In reality, each of Reiners's representations was false and made
with fraudulent intent. Project Star was completely fictitious. Reiners
was not employed in any capacity by Philip Morris and, according to
Philip Morris, had no authority to represent or bind Philip Morris. The
Incumbency Certificate and the authenticity signature on it were for-
geries. WRE was not affiliated with Philip Morris. Reiners knew that
no computers or communications equipment would be procured. Nev-
ertheless, on the basis of Reiners's representations, in November 1993
Signet entered into the first of several secured loans to Nelco for the
purchase of computer equipment to be leased pursuant to the Master
Lease (the "Credit Facility"). Each loan to Nelco was secured by,
inter alia, all of the computer equipment, lease payment streams, and
other proceeds associated with the Master Lease (the "Collateral").
The fraud proceeded in the following manner.1 Nelco was to pur-
chase computers from CCS, Inc., a New York computer reseller and
Reiners's co-conspirator in the scheme, and lease the computers to
Philip Morris. Pursuant to this plan, Signet Bank (and later, other
banks) disbursed funds directly to CCS, which was then supposed to
ship the computers to the various project sites for use by Philip Mor-
ris. In exchange for the funds, CCS provided the banks with invoices
showing that large quantities of equipment had been purchased and
shipped to Philip Morris and also provided "Certificates of Accep-
tance" from Philip Morris. In fact, both the invoices and Certificates
of Acceptance were forged and no computers were ever purchased or
_________________________________________________________________
1 These facts are drawn from United States v. Reiners, 934 F. Supp.
721, 722 (E.D. Va. 1996), and the Joint Appendix at 590-91.
4
delivered. Instead, Reiners, with CCS's complicity, diverted the loan
proceeds for his personal benefit, including investment of the funds
in real estate, stocks, and other securities.
Other banks soon became ensnared in Reiners's fraudulent scheme.
Faced with requests for increased funding by Nelco, beginning in
1995 Signet syndicated portions of the loans made under the Credit
Facility. Banks that purchased a participation in the Project Star
Credit Facility from Signet included NationsBank, N.A., Bank of
Montreal, and CoreStates Bank, N.A. In late November 1995, Gil
Kennedy, a Vice President in the Syndication Department of Signet
Leasing, had a discussion with Brian Riordan, a Vice President of
Hitachi.2 Kennedy told Riordan that Signet was in the process of syn-
dicating participation in a $250 million lease financing for Nelco for
the purchase of computers and related equipment involving what
Kennedy described as an "A" rated confidential lessee. Kennedy fur-
ther stated that Signet was interested in selling a portion of its Nelco
financing facility to Hitachi, but that he could not disclose the identity
of the lessee until Hitachi signed a Confidentiality Agreement.
After some negotiations, on or about December 6, 1995, Hitachi
signed a Confidentiality Agreement. Kennedy then informed Riordan
that the lessee was Philip Morris and that the transactions between
Nelco and Philip Morris were part of a highly secret offshore cigarette
development project initiated in 1993. The Confidentiality Agreement
prevented Hitachi from investigating the role of Philip Morris in the
underlying transaction. Riordan therefore requested a meeting with
Signet to obtain more details about the proposed financing transac-
tion.
On December 14, 1995, Riordan and William Besgen, Executive
Vice President of Hitachi, attended a meeting in New York with rep-
resentatives of Signet and Nelco. Present at the meeting were Ken-
_________________________________________________________________
2 The discussion of the negotiations between Hitachi and Signet leading
up to Hitachi's approval of the loan assignment relate to Hitachi's fraud
claims. Because the fraud claims were dismissed by the district court
pursuant to Rule 12(b)(6), we accept as true all of Hitachi's well-pleaded
allegations and view the complaint in the light most favorable to Hitachi.
See Mylan Lab., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993).
5
nedy, Nelson, and Connie Mooney, a Vice President of Signet Bank.
Mooney informed Riordan and Hitachi that (1) Nelco was a "good
customer" and that Signet had provided Nelco with $65 million in
financing for the Philip Morris leases since the inception of Project
Star in 1993; (2) Signet had provided financing to Nelco for a number
of other leases with Philip Morris unrelated to the secret project; (3)
Philip Morris had given its approval for Hitachi's proposed involve-
ment in the Nelco financing; (4) Signet was confident that Reiners
was authorized to act on behalf of Philip Morris; and (5) Signet would
obtain and provide to Hitachi an Incumbency Certificate from Philip
Morris acknowledging that Reiners was authorized to enter into
research project lease transactions on behalf of Philip Morris. Mooney
also informed Besgen and Riordan that Philip Morris chose to main-
tain its secret facilities offshore in order to avoid U.S. government
scrutiny and interference. In response to a request from Besgen and
Riordan for a copy of a Philip Morris resolution authorizing the
research project, Mooney stated that Philip Morris would not provide
an authorizing resolution because of the secret nature of the research
project. Mooney reasserted that Signet was confident that Philip Mor-
ris had properly authorized the lease transactions.
On or about December 18, 1995, Riordan informed Kennedy that
Hitachi was interested in being involved in financing lease transac-
tions between Nelco and Philip Morris. Riordan also noted that
Hitachi was only interested in financing leases involving "investment
grade" lessees, such as Philip Morris, and that Hitachi would not pro-
vide financing to Nelco, directly or indirectly, unless Philip Morris
was the lessee on the underlying leases. Riordan asked Kennedy and
Mooney to confirm again that Philip Morris was the obligor on the
underlying leases with Nelco. Mooney again confirmed that Philip
Morris was the obligor on those leases, and was directly and primarily
liable for all lease payments due under the leases.
During the course of negotiations, Signet informed Hitachi that the
underlying lease transactions were in the name of or would involve
a purported Philip Morris subsidiary, WRE. Prior to entering any
agreement with Signet, Riordan requested a Dun & Bradstreet report
on WRE. Dun & Bradstreet was unable to provide a report or any
information regarding WRE, prompting Riordan to inform Signet that
Hitachi would require a written statement from Philip Morris describ-
6
ing WRE and its purpose as a condition of Hitachi's providing financ-
ing for Project Star. In late December 1995, Reiners provided a letter
to Nelson on Philip Morris letterhead that described WRE as an entity
established by Philip Morris and the U.S. government to implement
Project Star (the "Original WRE Letter"). After receiving the Original
WRE Letter, Mooney instructed Nelson to obtain a new letter from
Reiners deleting any reference to the involvement of the U.S. govern-
ment in Project Star, because the Original WRE Letter "would raise
more questions than it would answer." (J.A. at 43.) Reiners thereafter
provided to Nelson a second letter on Philip Morris letterhead (the
"Revised WRE Letter"), which was identical to the Original WRE
Letter except that it omitted the reference to the U.S. government's
involvement in Project Star. Mooney provided the Revised WRE Let-
ter to Hitachi on December 28, 1995. Neither Mooney nor anyone
else at Signet gave Hitachi a copy of the Original WRE Letter or oth-
erwise disclosed to Hitachi this alleged government involvement in
Project Star.
Unbeknownst to Hitachi, Signet also internally had raised ques-
tions regarding Reiners's purported authority to act for Philip Morris.
In October 1993, Reiners had submitted an "Authorization Certifi-
cate" purportedly executed by Philip Morris Chairman Michael Miles.
Signet questioned many aspects of this document. Specifically, Moo-
ney noted that the signature on the Authorization Certificate -- "Mike
Miles" -- was significantly different from the signature of "Michael
A. Miles" on the Philip Morris annual report. Signet also noted that
George R. Lewis, Vice President and Treasurer, rather than Michael
Miles, had previously signed loan documents on behalf of Philip Mor-
ris. Signet subsequently rejected the Authorization Certificate. Signet
did not provide Hitachi with a copy of the Authorization Certificate.
Signet also did not disclose to Hitachi that Reiners had submitted the
Authorization Certificate in 1993 and that Signet had rejected the cer-
tificate.
Hitachi approved the loan transaction on December 21, 1995. Dur-
ing the negotiation of the Assignment Agreement between Hitachi
and Signet, Hitachi's outside counsel, James Scantling, informed Sig-
net's attorney, Brian Murphy, that Hitachi required a representation
from Signet in the Assignment Agreement that Philip Morris was the
lessee. Murphy used a Signet form agreement to prepare the Assign-
7
ment Agreement. On December 28, 1995, Murphy prepared a revised
draft of the Assignment Agreement, which incorporated comments
received from Scantling and Mooney (the "Revised Draft"). The
Revised Draft included a new section, labeled § 2(e), which provided
in relevant part:
To the best knowledge of the Assignor, the Master Equip-
ment Lease Number 1991 dated November 18, 1993 (the
"Master Lease") between the Borrower, as "Lessor", and
Philip Morris Companies, Inc., a Virginia corporation, as
"Lessee" . . . is in full force and effect.
(J.A. at 870.) Section 2(n) of the Assignment Agreement defined "As-
signor's knowledge, and any similar reference" as the actual knowl-
edge of certain Signet officers. (J.A. at 872.) Murphy understood the
term "best knowledge" in § 2(e) would be defined by § 2(n).
On December 29, 1995, Mooney informed Riordan that Diane
McAdams, Philip Morris's assistant secretary, was on vacation and
unable to execute the Incumbency Certificate from Philip Morris as
required by § 5(g) of the Assignment Agreement. Riordan
stated that he did not want to wait to close the loan, and agreed to
accept, in lieu of the Incumbency Certificate, a letter from Signet stat-
ing that if Signet did not send the Incumbency Certificate to Hitachi
by a certain date, then Signet would buy back the transaction from
Hitachi. A letter dated December 29, 1995, drafted by Mooney and
faxed to Riordan (the "Repurchase Agreement") provided:
Signet Bank will provide an executed Certificate of
Incumbency from Philip Morris Companies, Inc., for the
Nelco lease transaction by January 16, 1996. If this docu-
ment is not delivered to you by that date, we agree to repur-
chase the transaction from Hitachi in the amount of
$12,364,893.80.
(J.A. at 97.)
Following these reassurances from Signet, the loan assignment
transaction proceeded forward. On December 29, 1995, Nelco exe-
8
cuted a Promissory Note (the "December Note") in favor of Signet in
the original principal amount of $12,305,729.35 and a Security
Agreement (the "December Security Agreement") to secure repay-
ment of the December Note. The Security Agreement granted to Sig-
net a security interest in specific collateral including: (1) a master
lease dated November 18, 1993 between Nelco, as lessor, and Philip
Morris, as lessee (the "Master Lease"), to the extent it applied to lease
schedule no. 68; (2) lease payments payable to Nelco by Philip Morris
under the Master Lease and lease schedule no. 68; (3) the equipment
described in lease schedule no. 68; and (4) all proceeds of the forego-
ing. On the same day, Hitachi entered into the Assignment Agreement
with Signet (the "December Assignment Agreement"). The December
Assignment Agreement provided that Signet agreed to sell and
Hitachi agreed to buy all of Signet's "rights, obligations, title and
interest" in the December Note, the December Security Agreement,
and the collateral described therein. (J.A. at 81.) Hitachi paid Signet
the sum of $12,364,893.80 as the purchase price under the December
Assignment Agreement.
On January 5, 1996, Signet delivered to Hitachi a document that
was represented as an Incumbency Certificate executed by Philip
Morris. After receiving the certificate, Riordan sent the executed
December Assignment Agreement to Signet on January 11, 1996. On
January 31, 1996, Nelco executed a second Promissory Note (the
"January Note") in favor of Signet in the original principal amount of
$12,272,655.26 and a second Security Agreement (the "January
Security Agreement") to secure repayment of the January Note.
Hitachi entered into a second Assignment Agreement with Signet on
January 31, 1996 (the "January Assignment Agreement") for a pur-
chase price of $12,325,461.95. The terms of the January Assignment
Agreement were identical to the terms of the December Assignment
Agreement.
On March 19, 1996, Signet informed Hitachi that Reiners was not
an employee or officer of Philip Morris and was not authorized to act
on Philip Morris's behalf, that the signature on the Incumbency Cer-
tificate was a forgery, and that Philip Morris denied that it was a party
to the Master Lease or other lease agreements described in the docu-
ments between Nelco, Signet, and Hitachi. On March 26, 1996,
Hitachi notified Signet that Signet had failed to comply with the terms
9
of the Repurchase Agreement, because it had failed to provide an
Incumbency Certificate from Philip Morris. Pursuant to the terms of
the Repurchase Agreement, Hitachi demanded that Signet repurchase
Hitachi's interest in the December Note, the December Security
Agreement, and the Collateral described in the December Security
Agreement. By letter dated March 29, 1996, Signet informed Hitachi
that Signet would not repurchase Hitachi's interest in the subject
loans and loan documents.
B.
On May 24, 1996, Hitachi brought this diversity action in United
States District Court for the Eastern District of Virginia against Signet
Bank alleging, inter alia, actual and constructive fraud, breach of the
Repurchase Agreement, and breach of § 2(e) of the Assignment
Agreements.3 Concurrent with its action against Signet, Hitachi par-
ticipated in collateral litigation resulting from the fraud perpetuated
by Reiners. Between March 1996 and June 1997, Hitachi and its
attorneys participated in a bankruptcy proceeding involving Nelco,
with the purpose of pursuing possible recovery of the amounts due on
the Hitachi loans. Between September 1996 and February 1997,
Hitachi, Signet, and the other Project Star lenders negotiated a series
of agreements with the U.S. government relating to the allocation
among the lenders of funds seized by the government following the
discovery of the fraud.4
The district court dismissed various counts of Hitachi's Complaint
and Amended Complaint against Signet in its decisions of December
3, 1996 and May 12, 1997. On cross motions for summary judgment
on the two remaining claims, breach of the Repurchase Agreement
and breach of § 2(e) of the Assignment Agreements, the district court
granted Hitachi's motion for summary judgment on July 21, 1997. In
_________________________________________________________________
3 In its Amended Complaint, Hitachi added Signet Leasing and Finan-
cial Corporation as a defendant.
4 On or about June 5, 1996, Reiners pleaded guilty to bank fraud in vio-
lation of 18 U.S.C.A. § 1344 (West Supp. 1998) and to money launder-
ing in violation of 18 U.S.C.A. § 1956(a)(1)(A)(i) (West Supp. 1998).
Reiners also agreed to an order of forfeiture of the proceeds of his fraud-
ulent scheme.
10
the July 21 Order, the district court directed Hitachi to file a brief on
the subject of damages. On November 14, 1997, the district court
issued a final order awarding Hitachi attorneys' fees and costs for its
litigation, but denying recovery of these fees and costs related to the
criminal forfeiture proceeding and the Nelco bankruptcy. The district
court also awarded Hitachi prejudgment interest on the balance of the
loans at the rates set in the Assignment Agreements and postjudgment
interest on the balance of the loans at the statutory rate of nine per-
cent. Signet appeals the district court's granting of Hitachi's motion
for summary judgment. Hitachi cross-appeals the district court's dis-
missal of Hitachi's fraud claims, its partial denial of costs and fees,
and its calculation of the appropriate pre- and postjudgment interest.
II.
We turn first to Signet's appeal from the district court's grant of
summary judgment in Hitachi's favor on Hitachi's breach of contract
claims. This Court reviews a grant of summary judgment de novo.
See Higgins v. E.I. DuPont de Nemours & Co., 863 F.2d 1162, 1167
(4th Cir. 1988). Summary judgment is appropriate only if there are no
material facts in dispute and the moving party is entitled to judgment
as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986) (citing Fed. R. Civ. P. 56(c)). As a federal court sitting in
diversity, we must apply the choice of law rules of the forum state --
in this case, Virginia. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313
U.S. 487, 496-97 (1941). Virginia law looks favorably upon choice
of law clauses in a contract, giving them full effect except in unusual
circumstances. See Tate v. Hain, 25 S.E.2d 321, 324 (Va. 1943). Sec-
tion 9(c) of the Assignment Agreements explicitly calls for the appli-
cation of Virginia law in the interpretation of "[t]his Agreement and
the rights and obligations of the parties hereunder . . . including all
matters of construction, validity and performance." (J.A. at 91.) We
therefore apply Virginia law in our review of Hitachi's breach of con-
tract claims.
A.
Signet first argues on appeal that the district court erred in granting
Hitachi's motion for summary judgment on Hitachi's claim that Sig-
net breached § 2(e) of the Assignment Agreements when it turned out
11
that Philip Morris was not a party to the underlying lease transaction
and the Master Lease between Nelco and Philip Morris was not in full
force and effect. Under Virginia law, courts adhere to the "plain
meaning" rule in interpreting and enforcing a contract. "``[W]here an
agreement is complete on its face, is plain and unambiguous in its
terms, the court is not at liberty to search for its meaning beyond the
instrument itself. . . . This is so because the writing is the repository
of the final agreement of the parties.'" Berry v. Klinger, 300 S.E.2d
792, 796 (Va. 1983) (quoting Globe Co. v. Bank of Boston, 140
S.E.2d 629, 633 (Va. 1965)) (alteration and omission in original). In
interpreting a contract, a court should read the contract as a single
document and give meaning to every clause where possible. See
Berry, 300 S.E.2d at 796. Such an interpretation gives effect to the
"presumption that the parties have not used words aimlessly." Winn
v. Aleda Constr. Co., 315 S.E.2d 193, 195 (Va. 1984).
With these principles in mind, we turn to the language of the
Assignment Agreements. Section 2 of the Assignment Agreements
states, in relevant part, that:
In order to induce the Assignee [Hitachi] to enter into this
Agreement and purchase the Loan Documents, the Assignor
[Signet] makes the following representations and warranties:
...
(e) To the best knowledge of the Assignor, the Master
Equipment Lease Number 1991 dated November 18, 1993
(the "Master Lease") between the Borrower, as "Lessor",
and Philip Morris Companies, Inc., a Virginia corporation,
as "Lessee" (the "Lessee"), as supplemented by Supplemen-
tary Schedule No. 68 (the "Supplementary Schedule") dated
November 16, 1995 (the Master Lease and Supplementary
Schedule being herein collectively referred to as the
"Lease") is in full force and effect on the date hereof, the
Lessee has not prepaid any installment of rent due under the
Lease, the Lease has not been amended and neither the Bor-
rower nor the Lessee is in default under the Lease.
(J.A. at 82-83.) Hitachi argues that § 2(e) is a warranty that Philip
Morris was a party to the underlying lease transaction and the Master
12
Lease between Nelco and Philip Morris was in full force and effect.
To recover for breach of warranty under Virginia law, Hitachi has the
burden of showing (1) the existence of a warranty and (2) a breach.
See Collier v. Rice, 356 S.E.2d 845, 847 (Va. 1987). It is undisputed
that Philip Morris was not a party to the underlying lease transaction
and the Master Lease between Nelco and Philip Morris was not in full
force and effect. The determinative issue therefore is whether Signet
represented and warranted in § 2(e) that Philip Morris was a party to
the underlying lease transaction and the Master Lease between Nelco
and Philip Morris was in full force and effect.
Whether § 2(e) is a warranty and representation turns on the mean-
ing of the clause "To the best knowledge of the Assignor." Under Vir-
ginia law, courts should not resort to extrinsic evidence to interpret
a contract where the contract language is plain and unambiguous. See
Berry, 300 S.E.2d at 796. We therefore turn first to the language of
the Assignment Agreements to see if it expressly defines this clause.
Section 2(n) of the Assignment Agreements defines "Assignor's
Knowledge" in the following manner:
For the purposes of this Section 2, any reference to "Assign-
or's knowledge", and any similar reference, shall mean the
actual knowledge of the President or any Vice President of
the Assignor or any other officer of the Assignor having
responsibility for the administration of the Note that is the
subject of the representation or warranty to which such ref-
erence relates.
(J.A. at 85 (emphasis added).)
The only references to "Assignor's knowledge" and similar refer-
ences in § 2 are "best knowledge of the Assignor" in § 2(b) and
§ 2(e), and "Assignor's knowledge" in § 2(k). Because a court should
read a contract as a whole and give meaning to every clause if possi-
ble, see Berry, 300 S.E.2d at 796, we must import the definition in
§ 2(n) into § 2(e) if the clause "any similar reference" in § 2(n) is to
have any meaning. Signet argues that any interpretation of § 2(e) must
take into account the qualifier "to the best" and that the "any similar refer-
ence" of § 2(n) refers only to "knowledge of the Assignor" and not
"best knowledge of the Assignor." Thus, Signet argues that the substi-
13
tution of the definition in § 2(n) transforms § 2(e) into a warranty and
representation that to the best actual knowledge of the specified Sig-
net officials, the lease is in full force and effect. In contrast, Hitachi
argues that "any similar reference" refers to the clause "best knowl-
edge of the Assignor," transforming § 2(e) into a warranty and repre-
sentation that the specified Signet officials have actual knowledge
that the lease is in full force and effect.
We agree with the district court that a plain reading of the Assign-
ment Agreements mandates Hitachi's interpretation. Absent any refer-
ence in the Assignment Agreements as to what the clause "to the best"
means, we believe that the most straightforward interpretation of "any
similar reference" in § 2(n) is that it refers to "best knowledge of the
Assignor" in § 2(e). Because we agree that the interpretation of § 2(e)
is plain and unambiguous, we need not consider Signet's parol evi-
dence of merger & acquisition and banking treatises. See Berry, 300
S.E.2d at 796. Although the language of § 2(e) could have been
drafted in a more direct, declaratory manner like the other warranties
in § 2, "[h]owever inartfully it may have been drawn, the court cannot
make a new contract for the parties, but must construe its language
as written." Berry, 300 S.E.2d at 796. The district court, therefore,
correctly held that Signet warranted in § 2(e) that the underlying lease
transaction was in full force and effect and that Philip Morris was a
party to the Master Lease.
Signet also argues that (1) a finding of warranty in § 2(e) is incon-
sistent with the disclaimer in § 2(m) and the shifting of the loan risk
to Hitachi in § 3; (2) it is only liable for breach of § 2(e) upon proof
that one of the specified officers had actual knowledge of fraud; and
(3) the Philip Morris reference in § 2(e) merely identifies the lease
being discussed and sorts out the function of the parties to the transac-
tion. We find all of these arguments to be unpersuasive. First, § 2(m)
disclaims liability for warranties and representations, "except as set
forth in this section 2." (J.A. at 84.) It, therefore, by its terms, does
not apply to § 2(e). Section 3 shifts the risk of the transaction to
Hitachi, but only regarding the financial condition of the parties
involved in the lease. This section does not shift the risk to Hitachi
regarding whether the underlying lease transaction is actually in effect
and whether Philip Morris is a party to the Master Lease.
14
Signet's second and third arguments run afoul of the plain language
of § 2(e). Signet's desired interpretation of § 2(e) -- that is it is only
breached if Signet's President or a Vice President knew that the
underlying lease was not in full force and effect or that Philip Morris
was not a party to the lease -- is a tortured reading of the section. Had
Signet wanted that interpretation, it could have drafted that section to
begin, "The Assignor is without knowledge." Finally, we believe that
the reference to Philip Morris, which included its full corporate name
and state of incorporation, unequivocally warranted that the lease
between the borrower and Philip Morris was in full force and effect.
Signet's argument that the reference to "Philip Morris" in § 2(e)
merely identified the lease being discussed and sorted out the function
of the parties on each transaction is not plausible in light of the fact
that the lease is already identified by its execution date and document
number.
We conclude that § 2(e), when read in conjunction with the defini-
tion in § 2(n), demonstrates that Signet warranted that it possessed
actual knowledge that the underlying lease transaction was in full
force and effect and that Philip Morris was a party to the Master
Lease. Signet breached that warranty because the underlying lease
transaction was not in full force and effect and Philip Morris was not
a party to the Master Lease. The district court correctly granted
Hitachi's motion for summary judgment on its claim for breach of
§ 2(e) of the Assignment Agreements.
B.
Signet next argues on appeal that the district court erred in granting
summary judgment to Hitachi on Hitachi's claim that Signet breached
the Repurchase Agreement when Signet delivered to Hitachi an
Incumbency Certificate that turned out to be forged. Signet's argu-
ment takes two forms. First, Signet argues that the Repurchase Agree-
ment is not a separate contract, but is subsumed within the terms of
the December Assignment Agreement. In the alternative, Signet
argues that even if the Repurchase Agreement is deemed to be a con-
tract, § 2(m) of the December Assignment Agreement effectively dis-
claims the validity of the Incumbency Certificate. We address these
arguments in turn.
15
Signet first argues that the Repurchase Agreement is not a contract
independent of the December Assignment Agreement, and therefore,
the Incumbency Certificate is subject to the disclaimer of validity of
loan-related documents in § 2(m). Because the Repurchase Agree-
ment and Assignment Agreement are separate instruments, we are
confronted with the issue of whether to read them together as one
contract. "A contract may be contained in several instruments," and
they may be read together as one instrument "[i]f made at the same
time and in relation to the same subject matter." D.H. Pritchard, Con-
tractor, Inc. v. Nelson, 147 F.2d 939, 942 (4th Cir. 1945); accord Bott
v. N. Snellenburg & Co., 14 S.E.2d 372, 374 (Va. 1941); see also
Daugherty v. Diment, 385 S.E.2d 572, 574 (Va. 1989) ("Where a
business transaction is based upon more than one document executed
by the parties, the documents will be construed together to determine
the intent of the parties; each document will be employed to ascertain
the meaning intended to be expressed by the others."). To construe
two instruments as one, reference in one instrument to the other need
not be explicit; "it is sufficient if it is fairly traceable." Texas Co. v.
Northup, 153 S.E. 659, 662 (Va. 1930). Until it appears that the sev-
eral writings are part of a single transaction, either from the writings
themselves or by extrinsic evidence, courts should not read the writ-
ings together as one contract because the same parties may have had
more than one transaction in one day of the same general nature. See
Bailey v. Hannibal & St. Joseph R.R. Co., 84 U.S. 96, 108 (1873).
Hitachi concedes that the execution of the December Assignment
Agreement depended upon Signet's execution of the Repurchase
Agreement. Moreover, it is undisputed that the December Assignment Agree-
ment and the Repurchase Agreement bore the same date (December
29, 1995) and concerned the same subject matter (the assignment of
the loan from Signet to Hitachi). As the case law indicates, however,
a court is not required to construe two documents as one contract just
because they are executed at the same time and concern the same sub-
ject matter. The court must give effect to the intent of the parties. See
American Realty Trust v. Chase Manhattan Bank, N.A., 281 S.E.2d
825, 831 (Va. 1981). The parties dispute their intent in executing the
Repurchase Agreement. Signet argues that the sole purpose of the
Repurchase Agreement was to extend the time within which Signet
was required to provide the Incumbency Certificate promised in
§ 5(g) of the December Assignment Agreement. Hitachi argues that the Repur-
16
chase Agreement warranted that Signet would deliver an Incumbency
Certificate from Philip Morris, and that it was a necessary guarantee
because the certificate would be delivered after Hitachi had per-
formed its obligations under the December Assignment Agreement
and released the funds.
We agree with the district court that the key to the intent of the par-
ties lies in the plain language of the Repurchase Agreement. See
Berry, 300 S.E.2d at 796. The Repurchase Agreement expressly states
that "Signet Bank will provide an executed Certificate of Incumbency
from Philip Morris." (J.A. at 97.) We believe that this language indi-
cates that the Repurchase Agreement dealt with a distinct buyback
transaction, and thus, constituted an agreement separate from the
December Assignment Agreement. Although general rules of con-
struction should not be applied mechanically to thwart the intent of
the contracting parties, American Realty Trust, 281 S.E.2d at 831, we
agree that there is ample evidence to support this conclusion. As the
district court noted, the Repurchase Agreement did not refer to the
December Assignment Agreement or, more specifically, to § 5(g) of
that agreement. Moreover, reading the December Assignment Agree-
ment and Repurchase Agreement together as one document would
lead to the absurd result that the latter, which the parties executed in
order for the transaction to go forward, is subject to the disclaimer of
§ 2(m) in the former. See id. (holding as unreasonable the view that
the parties intended that one section of an instrument executed by the
parties would render meaningless another instrument executed by the
parties). We conclude that the Repurchase Agreement is a separate
agreement that warranted that Signet would provide an Incumbency
Certificate from Philip Morris.
On appeal, Signet also argues that the Repurchase Agreement is
not a separate and independent contract that modifies the December
Assignment Agreement because it referenced the "Nelco lease trans-
action" in the December Assignment Agreement, and it was a unilat-
eral promise not supported by consideration. We find these arguments
unpersuasive. First, Virginia law does not favor declaring contracts
void for indefiniteness, and courts will not "permit parties to be
released from the obligations which they have assumed if this can be
ascertained with reasonable certainty from language used, in the light
of all the surrounding circumstances." High Knob, Inc. v. Allen, 138
17
S.E.2d 49, 53 (Va. 1964). We believe that the term "Nelco lease trans-
action," when construed in light of the surrounding circumstances,
including the negotiations between Signet and Hitachi and the
December Assignment Agreement, is sufficiently complete and defi-
nite for the Repurchase Agreement to be valid and enforceable. Sec-
ond, it is clear to us that the Repurchase Agreement was supported by
consideration. The Repurchase Agreement was a bargained-for
exchange in which Signet agreed to provide an Incumbency Certifi-
cate from Philip Morris, and in return, Hitachi agreed to release the
funds it promised under the December Assignment Agreement before
reviewing the certificate. Because the Repurchase Agreement is a sep-
arate contract, it is not subject to the requirement in § 9(d) of the
December Assignment Agreement that an amendment be executed by
both parties.5
In the alternative, Signet argues that even assuming that the Repur-
chase Agreement is a separate contract, it constitutes a limited modifi-
cation to the December Assignment Agreement that simply extends
the time in which Signet had to deliver the Incumbency Certificate.
Because the Repurchase Agreement is a limited modification, the
argument continues, the Incumbency Certificate is still subject to the
disclaimer of validity of loan-related documents in § 2(m). We do not
find this argument compelling. We agree with the district court that
the Repurchase Agreement is more than a limited modification; it
plainly and unambiguously promises an Incumbency Certificate from
Philip Morris. Moreover, we agree with the district court that reading
the December Assignment Agreement and Repurchase Agreement as two sepa-
rate contracts removes "Signet's contention that the disclaimers in
Assignment Agreement § 2(m) apply to the Repurchase Agreement."
(J.A. at 171.) There is no similar disclaimer in the Repurchase Agree-
ment, and we will not read one into it. See Bridgestone/Firestone, Inc.
_________________________________________________________________
5 Section 9(d) of the Assignment Agreements provides:
Entire Agreement. This agreement constitutes the entire agree-
ment between the parties with respect to the subject matter
hereof and thereof and shall not be amended or altered in any
manner except by a document in writing executed by both par-
ties.
(J.A. at 91.)
18
v. Prince William Square Assocs., 463 S.E.2d 661, 664 (Va. 1995)
("The law will not insert by construction, for the benefit of a party,
an exception or condition which the parties omitted from their con-
tract by design or neglect.").
We conclude that the Repurchase Agreement was an agreement
separate from the December Assignment Agreement that Signet
breached when it delivered to Hitachi an incumbency certificate that
was not executed by Philip Morris. The district court properly granted
Hitachi's motion for summary judgment on this claim.
III.
We next turn to Hitachi's cross-appeal.6 On cross-appeal, Hitachi
first argues that the district court improperly dismissed its claims for
fraud against Signet pursuant to Rule 12(b)(6). At the outset, we note
that "Virginia law recognizes the separate tort of fraud, even where
the parties have agreed to a contract," City of Richmond v. Madison
Management Group, Inc., 918 F.2d 438, 446-47 (4th Cir. 1990), and
a plaintiff may recover damages for both fraud and breach of contract,
see id. at 457. We review a district court's dismissal of a claim under
Rule 12(b)(6) de novo. See Mylan Lab., Inc. v. Matkari, 7 F.3d 1130,
1134 (4th Cir. 1993). Generally, where a cause of action arises in tort,
Virginia applies the law of the state where the tortious conduct or
injury occurred. See Jones v. R.S. Jones & Assocs., 431 S.E.2d 33, 34
(Va. 1993) (stating that lex loci delicti is settled rule in Virginia).
Where a choice of law clause in the contract is sufficiently broad to
encompass contract-related tort claims such as fraudulent inducement,
other courts have honored the intent of the parties to choose the appli-
cable law. See In re Allegheny Int'l, Inc., 954 F.2d 167, 178 (3d Cir.
1992); Moses v. Business Card Express, Inc., 929 F.2d 1131, 1139
(6th Cir. 1991). We believe that the choice of law language of § 9(c)
in the Assignment Agreements indicates that the parties intended to
cover more than merely contract claims. Thus, pursuant to § 9(c) and
_________________________________________________________________
6 We address only the issues Hitachi briefed on its cross-appeal. See
Canady v. Crestar Mortgage Corp., 109 F.3d 969, 973-74 (4th Cir.
1997) (holding that issues raised in notice of appeal but not briefed on
appeal are deemed waived).
19
recognizing the close relationship of the tort claims to the contract,
this Court will apply Virginia law to Hitachi's fraud claims.
Hitachi alleges in its Amended Complaint that the representations
and material omissions that Signet made to Hitachi during the course
of the loan transaction negotiations constituted fraudulent inducement
to enter the Assignment Agreements. To prevail on an actual fraud
claim under Virginia law, a plaintiff must prove by clear and convinc-
ing evidence "(1) a false representation, (2) of a material fact, (3)
made intentionally and knowingly, (4) with intent to mislead, (5) reli-
ance by the party mislead, and (6) resulting damage to the party mis-
led." Evaluation Research Corp. v. Alequin, 439 S.E.2d 387, 390 (Va.
1994). Virginia law also recognizes an action for fraud where misrep-
resentations are made without specific fraudulent intent but made
with reckless abandon and disregard for the truth. See Bradley v.
Tolson, 85 S.E. 466, 467 (Va. 1915). Constructive fraud differs 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 det-
riment -- by clear and convincing evidence. See Evaluation Research
Corp., 439 S.E.2d at 390.
Under Virginia law, a concealment or omission of a material fact
may also give rise to a claim of actual fraud. Although silence does
not constitute fraud in the absence of a duty to disclose, cf. Norris v.
Mitchell, 495 S.E.2d 809, 812-13 (Va. 1998), "[c]oncealment of a
material fact by one who knows that the other party is acting upon the
assumption that the fact does not exist constitutes actionable fraud,"
Allen Realty Corp. v. Holbert, 318 S.E.2d 592, 597 (Va. 1984). For
purposes of an action for fraud, concealment, whether by word or
conduct, may be the equivalent of a false representation because it
always involves deliberate nondisclosure designed to prevent another
from learning the truth. See Van Deusen v. Snead , 441 S.E.2d 207,
209 (Va. 1994). Moreover, a party's willful nondisclosure of a mate-
rial fact that he knows is unknown to the other party may evince an
intent to practice actual fraud. Id.
It is not enough for a plaintiff in a fraud action to show that it acted
to its detriment in response to the defendant's false representation or
concealment of a material fact. "In order to prove reliance, a plaintiff
20
must demonstrate that its reliance upon the representation was reason-
able and justified." Meridian Title Ins. Co. v. Lilly Homes, Inc., 735
F. Supp. 182, 185 (E.D. Va. 1990) (interpreting Virginia law), aff'd,
934 F.2d 319 (4th Cir. 1991). The touchstone of reasonableness is
prudent investigation. A plaintiff cannot claim that its reliance was
reasonable and justified when it makes a partial inquiry, with full
opportunity of complete investigation, and elects to act upon the
knowledge obtained from the partial inquiry. See Harris v. Dunham,
127 S.E.2d 65, 71-72 (Va. 1962). Moreover,
[I]f false representations are made regarding matters of fact,
and the means of knowledge are at hand and equally avail-
able to both parties, and the party, instead of resorting to
them, sees fit to trust himself in the hands of one whose
interest it is to mislead him, the law, in general, will leave
him where he has been placed by his own imprudent confi-
dence.
Horner v. Ahern, 153 S.E.2d 216, 219 (Va. 1967) (quoting Costello
v. Larsen, 29 S.E.2d 856, 858 (Va. 1944)). The cases in Virginia are
clear, however, that "one cannot, by fraud and deceit, induce another
to enter into a contract to his disadvantage, then escape liability by
saying that the party to whom the misrepresentation was made was
negligent in failing to learn the truth." Nationwide Ins. Co. v.
Patterson, 331 S.E.2d 490, 492 (Va. 1985). A buyer may therefore
recover for fraud if the seller does or says anything to divert the buyer
"from making the inquiries and examination which a prudent man
ought to make." Horner, 153 S.E.2d at 219.
In its Amended Complaint, which incorporated by reference the
original fraud allegations in its Complaint, Hitachi alleges that it rea-
sonably relied to its detriment on the untrue statements that Signet
made to Hitachi regarding the purported transactions between Nelco
and Philip Morris. In the Amended Complaint, Hitachi also alleges
that Signet made representations to Hitachi regarding the purpose and
nature of Project Star and the purported authority of Reiners to act on
behalf of Philip Morris with knowledge of their falsity, or reckless
indifference to their truth or falsity. Hitachi also alleges that Signet
deliberately concealed and omitted material facts regarding the pur-
ported involvement of the U.S. government in Project Star and Sig-
21
net's doubts as to Reiners's authority to act on behalf of Philip
Morris. Hitachi also claims that Signet intended for Hitachi to rely on
these representations and omissions. Finally, Hitachi alleges in the
Amended Complaint that it relied on these representations and omis-
sions and thereby was induced to enter the Assignment Agreements
to its detriment.
The only element of Hitachi's fraud causes of action that Signet
questions is whether Hitachi's reliance on Signet's allegedly false
representations and omissions of material fact was reasonable and jus-
tified. Signet argues that §§ 2(m) and 3 of the Assignment Agree-
ments allocate to Hitachi the responsibility of learning about the
underlying transaction and disclaim Hitachi's reliance on any infor-
mation provided by Signet. In general, a contractual disclaimer of
reliance is not a prophylactic against a claim of fraud. "While . . . con-
tracting parties may waive their contractual rights and disclaim or
limit certain liabilities, a ``false representation of a material fact, con-
stituting an inducement to the contract, on which the purchaser had
a right to rely, is always ground for rescission of the contract by a
court of equity'" or an action for damages in a court of law. George
Robberecht Seafood, Inc. v. Maitland Bros. Co., 255 S.E.2d 682, 683
(Va. 1979) (quoting Wilson v. Carpenter, 21 S.E. 243, 244 (Va.
1895)). Thus, a buyer can show that a contract of sale was induced
by the seller's fraud, even though the written contract contains cove-
nants waiving warranties or disclaiming or limiting liabilities. See id.
We have previously held, however, that under Virginia law reli-
ance on a false representation is not justified where the relying party
fails to undertake a prudent investigation and specifically disclaims
reliance on that very representation in a contract. In Hoover Univer-
sal, Inc. v. Brockway Imco, Inc., 809 F.2d 1039 (4th Cir. 1987), a
buyer purchased a machine after reviewing documentation describing
the machine that, unbeknownst to seller and buyer, was erroneous.
See id. at 1041-42. The buyer brought an action for fraudulent induce-
ment against the seller, arguing that the erroneous description was a
"substantial motivating factor" in purchasing the machine. Id. at 1043.
Not only did the buyer fail to inspect the machine closely, the sales
contract the buyer signed provided that the buyer would "inspect" and
"become familiar" with the machine. Id. at 1041, 1044. We affirmed
the district court's grant of summary judgment in favor of the seller
22
on the ground that the buyer's "clear failure to fulfill the duty of
inspection imposed by both the operation of law and contract" pre-
cluded its effort to assert reliance on the handout. Id. at 1044. Based
on Hoover and cases from our sister circuits that reached the same
conclusion in similar factual situations,7 the district court concluded
that Hitachi expressly warranted and represented that it would con-
duct its own investigation of the underlying lease, and Signet
expressly disclaimed any statements by the Borrower or the authentic-
ity of any of the documents related to the loan.
We conclude that the district court erred. Hitachi was reasonable
and justified in relying on Signet's representations and omissions
regarding the purpose and nature of Project Star and the purported
authority of Reiners to act on behalf of Philip Morris. First, Hitachi
conducted a prudent investigation under the circumstances. The Con-
fidentiality Agreement Hitachi signed at the start of the negotiations
with Signet prevented a full investigation into the truth of Signet's
representations.8 Moreover, Signet's concealment of the purported
involvement of the U.S. government in Project Star prevented Hitachi
from making inquiries that might have led to the truth. In spite of
these impediments, Hitachi attempted to investigate the underlying
transaction, as evidenced by its request to Signet for an authorizing
resolution from Philip Morris and its request to Dun & Bradstreet for
a report on WRE. Hitachi was simply unable to discover the fraud by
gathering information from sources other than Signet. Under these
circumstances, as alleged, Hitachi conducted a prudent investigation
and was justified in relying on Signet's representations.
_________________________________________________________________
7 See Banque Arabe et Internationale v. Maryland Nat'l Bank, 57 F.3d
146, 156 (2d Cir. 1995); Bank of the West v. Valley Nat'l Bank, 41 F.3d
471, 477-78 (9th Cir. 1994); First Fin. Fed. Sav. & Loan Ass'n v. E.F.
Hutton Mortgage Corp., 834 F.2d 685, 687-88 (8th Cir. 1987).
8 The Confidentiality Agreement specifically stated that Hitachi was
entitled to rely on the representation that Reiners was an authorized
Philip Morris representative. The Confidentiality Agreement also pre-
vented Hitachi from contacting Philip Morris to discuss Project Star.
Moreover, Reiners represented that if anyone contacted Philip Morris to
inquire about Project Star, Philip Morris would deny that Reiners was a
Philip Morris employee.
23
Second, unlike the buyer in Hoover, Hitachi did not contractually
disclaim reliance on the representations claimed to be fraudulent.
Reading Hoover in conjunction with George Robberecht, we con-
clude that a buyer can recover for fraudulent inducement not only
where the contract contains a general disclaimer of warranties and lia-
bilities, but also where the contract contains specific disclaimers that
do not cover the allegedly fraudulent contract-inducing representa-
tions. Sections 2(m) and 3(e)-(i) of the Assignment Agreements con-
tain disclaimers by Signet and warranties by Hitachi regarding only
the financial condition or statements of Nelco and Philip Morris and
the financial risks of the transaction. By their plain terms, the dis-
claimers of liability do not extend Hitachi's obligations to include
ascertaining the validity of the underlying transaction and are insuffi-
ciently specific to render Signet immune from the alleged fraud that
induced the contract.
We conclude that Hitachi has affirmatively alleged all of the ele-
ments of constructive and actual fraud on the part of Signet and
that Hitachi did not disclaim reliance on Signet's alleged
fraudulent misrepresentations and omissions of material fact that
induced Hitachi to enter the Assignment Agreements.9 Because
_________________________________________________________________
9 We do not believe that the Supreme Court of Virginia's recent deci-
sion in Richmond Metropolitan Auth. v. McDevitt Street Bovis, Inc. 1998
WL 774505 (Va. Nov. 6, 1998), changes our analysis. In that case, the
Supreme Court of Virginia held that a breach of a contractual duty does
not give rise to a claim for constructive or actual fraud. See Richmond
Metropolitan Auth., 1998 WL 774505 at *3. The Supreme Court of Vir-
ginia concluded, however, that its decision did not apply to cases of fraud
in the inducement. See id. at *4 ("The present case is not one of fraud
in the inducement."). This conclusion is consistent with the distinction in
Virginia law between a statement that is false when made (which is
fraud) and a promise that becomes false only when the promisor later
fails to keep his word (which is breach of contract). See Colonial Ford
Truck Sales, Inc. v. Schneider, 325 S.E.2d 91, 94 (Va. 1985). In this case,
Hitachi's fraud claims do not rest on a breach of the duties that Signet
undertook in the Assignment Agreements; rather, they concern alleged
misrepresentations and omissions of material fact that Signet made in
order to induce Hitachi to sign the Assignment Agreements.
Under Virginia law, Hitachi has stated claims for constructive and
actual fraud.
24
Hitachi can prove a set of facts that, if believed, would support its
fraud claims and would entitle it to relief, the district court erred in
dismissing these claims. See Mylan Lab., 7 F.3d 1130, 1134 (4th Cir.
1993). We therefore reverse the district court's dismissal of Hitachi's
fraud claims and remand to the district court with instructions to rein-
state these claims.
IV.
Hitachi next argues on cross-appeal that it was entitled to attor-
neys' fees and costs it incurred in collateral litigation involving the
Nelco bankruptcy and the criminal forfeiture proceeding. The district
court refused to award Hitachi attorneys' fees and costs for these two
proceedings, concluding that there was no cause and effect relation-
ship between Signet's breach of § 2(e) and each proceeding. This
Court reviews a district court's decision to award attorneys' fees for
abuse of discretion. See Carroll v. Wolpoff & Abramson, 53 F.3d 626,
628 (4th Cir. 1995). We apply Virginia law to determine whether an
award of attorneys' fees and costs to Hitachi is warranted. See
Culbertson v. McCall Coal Co., 495 F.2d 1403, 1405-06 (4th Cir.
1974).
In general, absent a contractual or statutory provision to the con-
trary, a prevailing party cannot recover attorneys' fees and expenses
from a losing party. See Mullins v. Richland Nat'l Bank, 403 S.E.2d
334, 335 (Va. 1991). Where a defendant's "breach of contract has
forced the plaintiff to maintain or defend a suit with a third person,"
however, Virginia law provides that the plaintiff may recover the
counsel fees and court costs incurred by him in that suit, provided
those expenditures "are reasonable in amount and reasonably
incurred." Hiss v. Friedberg, 112 S.E.2d 871, 876 (Va. 1960) (the
"Hiss rule"). The employment of counsel must be a "direct and neces-
sary consequence" of the defendant's breach of contract. Id. at 876-
77. If the damages that result from defendant's breach are consequen-
tial rather than direct, they are not compensable. See Long v.
Abbruzzetti, 487 S.E.2d 217, 219-20 (Va. 1997). Parties may also
allocate attorneys' fees and costs via an indemnity clause in a con-
tract. See Chesapeake & Potomac Telephone Co. v. Sisson & Ryan,
Inc., 362 S.E.2d 723, 728-29 (Va. 1987).
25
Hitachi argues that it is entitled to recover attorneys' fees and costs
pursuant to § 8(a) of the Assignment Agreement.10 Hitachi also argues
that it is entitled to recover attorneys' fees and costs pursuant to the
Hiss rule. The issue we must resolve, therefore, is whether Hitachi's
expenses arose out of or were related to Signet's breach of the
Assignment Agreements or the Repurchase Agreement so as to impli-
cate § 8(a) or whether the expenses were a direct and necessary con-
sequence of Signet's breach so as to implicate Virginia common law.
We address the Nelco bankruptcy and the criminal forfeiture proceed-
ing in turn.
The direct cause of the Nelco bankruptcy was Nelco's fragile
financial condition, for which Hitachi explicitly assumed responsibil-
ity in §§ 3(e) and (h) of the Assignment Agreements. We agree with
the district court that Hitachi had access to all relevant financial infor-
mation but failed to investigate adequately Nelco's financial strength.
Signet's breach of § 2(e) and of the Repurchase Agreement caused
Hitachi's expenditures in the Nelco bankruptcy proceeding only in the
sense that Hitachi might not have entered the transaction in the first
place but for the breach. The district court did not abuse its discretion
in concluding that Hitachi's attorneys' fees and costs did not "arise
out of" or "result from" Signet's breach.11 Hitachi's expenditures also
were not a direct and necessary consequence of Signet's breach.
_________________________________________________________________
10 Section 8(a) of the Assignment Agreements provides in relevant part:
Indemnity. Each party hereto shall upon the other party's
demand pay and assume liability for, and indemnify, protect,
defend, save and keep harmless such other party, on an after tax
basis, from any and against any and all liabilities, obligations,
losses, damages, settlements, claims, actions, suits, penalties,
costs and expenses (including, without limitation, reasonable
fees and expenses of counsel) of whatsoever kind and nature
which shall at any time or from time to time be imposed upon,
incurred by or asserted against such other party in any way relat-
ing directly or indirectly to, or arising out of, (i) any inaccuracy
or other breach of any representation or warranty made by a
party under this Agreement or in any other document, instrument
or certificate delivered by it pursuant to this Agreement.
(J.A. at 90.)
11 Although the district court only addressed Signet's breach of § 2(e),
we believe that its reasoning applies to Signet's breach of the Repurchase
Agreement as well.
26
The direct cause of the criminal forfeiture proceeding was Rei-
ners's fraud. Although we disagree with the district court's reasoning
that Hitachi assumed the risk of Reiners's fraud, we
agree with the district court's ultimate conclusion. We believe, as
stated above, that Signet's breach of § 2(e) and of the Repurchase
Agreement caused Hitachi's expenditures in the criminal forfeiture
proceeding only in the sense that Hitachi might not have entered the
transaction in the first place but for the breach. The district court did
not abuse its discretion in holding that Hitachi's attorneys' fees and
costs were not caused by Signet's breach. Hitachi's expenses also did
not "arise out of" or "relate to" Signet's breach.
Accordingly, we conclude that the district court did not abuse its
discretion when it denied Hitachi attorneys' fees and costs in connec-
tion with the criminal forfeiture proceeding and Nelco bankruptcy.
We therefore affirm the district court on the issue of attorneys' fees
and costs.
V.
Finally, Hitachi argues on cross-appeal that the district court mis-
calculated the pre- and postjudgment interest due on its monetary
award.12 The district court awarded Hitachi prejudgment interest at
the rates set in the Assignment Agreements -- 6.55% on the balance
of the December loan and 6.35% on the balance of the January loan.
The district court awarded Hitachi postjudgment interest of nine per-
cent on the balance of the combined loans in accordance with the Vir-
ginia Code. These rulings are matters of law that this Court reviews
de novo. See In re Pucci Shoes, Inc., 120 F.3d 38, 41 (4th Cir. 1997).
A.
Virginia law governs the award of prejudgment interest in a diver-
sity case. See United States v. Dollar Rent A Car Systems, Inc., 712
_________________________________________________________________
12 In its November 17, 1997 Order, the district court awarded Hitachi
the net outstanding balance of its loan in the amount of $6,340,340.00,
attorneys' fees and costs for the Hitachi Litigation (this case) in the
amount of $608,950.26, and attorneys' fees and costs in the amount of
$32,280.19 for the Signet Declaratory Judgment Action.
27
F.2d 938, 940 (4th Cir. 1983). With regard to such an award, the Vir-
ginia Code provides in pertinent part that "[i]n any action at law or
suit in equity, the verdict of the jury, or if no jury the judgment or
decree of the court, may provide for interest on any principal sum
awarded, or any part thereof, and fix the period at which the interest
shall commence." Va. Code Ann. § 8.01-382 (Michie 1992). Whether
prejudgment interest should be awarded under § 8.01-382 is a matter
within the sound discretion of the district court. See Hannon Arm-
strong & Co. v. Sumitomo Trust & Banking Co., 973 F.2d 359, 369
(4th Cir. 1992); Dairyland Ins. Co. v. Douthat, 449 S.E.2d 799, 801
(Va. 1994). The district court held that Hitachi was entitled to pre-
judgment interest on the outstanding balance of the Project Star loans,
and Signet has not appealed that determination. The only issue for us
to resolve, therefore, is whether the district court applied the correct
prejudgment interest rate.
With regard to the correct prejudgment interest rate, the Virginia
Code provides in relevant part that
The judgment rate of interest shall be an annual rate of nine
percent, except that a money judgment entered in an action
arising from a contract shall carry interest at the rate law-
fully charged on such contract, or at nine percent annually,
whichever is higher. Interest at the judgment rate, where no
rate is provided by contract, shall apply to [] prejudgment
interest pursuant to § 8.01-382.
Va. Code Ann. § 6.1-330.54 (Michie 1993) (emphasis added).
According to the statute, when a district court makes an award of pre-
judgment interest, it should award the higher of nine percent or the
rate set in the contract. The rates set in the Assignment Agreements
-- 6.55% in the December Assignment Agreement and 6.35% in the
January Assignment Agreement -- were clearly lower than nine per-
cent. The district court erred as a matter of law in not awarding
Hitachi prejudgment interest of nine percent. We therefore remand the
case to the district court with instructions to award Hitachi prejudg-
ment interest of nine percent on the balance of both loans.
B.
Federal law, rather than state law, governs the calculation of post-
judgment interest in diversity cases. See Forest Sales Corp. v.
28
Bedingfield, 881 F.2d 111, 113 (4th Cir. 1989). The applicable federal
statute provides in relevant part that
Interest shall be allowed on any money judgment in a civil
case recovered in a district court. . . . Such interest shall be
calculated from the date of the entry of the judgment, at a
rate equal to the coupon issue yield equivalent (as deter-
mined by the Secretary of the Treasury) of the average
accepted auction price for the last auction of fifty-two week
United States Treasury bills settled immediately prior to the
date of the judgment.
28 U.S.C.A. § 1961(a) (West 1994). The district court erred as a mat-
ter of law both in applying state law and in applying the statutory rate
only on the balance of the loans rather than the entire judgment. We
therefore remand the case to the district court with instructions to cal-
culate the proper rate of postjudgment interest on Hitachi's entire
money judgment pursuant to 28 U.S.C.A. § 1961.
VI.
In sum, we affirm the district court's grant of summary judgment
in favor of Hitachi on Hitachi's breach of contract claims and the dis-
trict court's refusal to award Hitachi attorneys' fees and costs for col-
lateral litigation with third parties. We reverse the district court's
dismissal of Hitachi's fraud claims and the district court's calculation
of pre- and postjudgment interest on Hitachi's monetary award. We
remand this case to the district court with instructions to reinstate
Hitachi's fraud claims and to calculate and award pre- and postjudg-
ment interest in a manner consistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
29