US ex rel. Damuth Services v. Western Surety Company

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1170
UNITED STATES OF AMERICA FOR THE USE AND BENEFIT OF DAMUTH
SERVICES, INCORPORATED, trading as Damuth Trane; DAMUTH
SERVICES, INCORPORATED, trading as Damuth Trane,
Plaintiffs - Appellants,
v.
WESTERN SURETY COMPANY,
Defendant – Appellee,
and
H&L MECHANICAL, INCORPORATED,
Defendant.
Appeal from the United States District Court for the Eastern
District of Virginia, at Norfolk. Robert G. Doumar, Senior
District Judge. (2:08-cv-00030-RGD-TEM)
Argued: January 26, 2010 Decided: March 4, 2010
Before GREGORY and DUNCAN, Circuit Judges, and Catherine C.
BLAKE, United States District Judge for the District of
Maryland, sitting by designation.
Affirmed by unpublished opinion. Judge Duncan wrote the
opinion, in which Judge Gregory and Judge Blake joined.
ARGUED: Glen William Thompson, PENDER & COWARD, PC, Virginia
Beach, Virginia, for Appellants. John Harvey Craddock, Jr.,
LECLAIR RYAN, PC, Richmond, Virginia, for Appellee. ON BRIEF:
Richard H. Matthews, PENDER & COWARD, PC, Virginia Beach,
Virginia, for Appellants. Joseph M. Rainsbury, LECLAIR RYAN,
PC, Richmond, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
DUNCAN, Circuit Judge:
This is an appeal from a grant of summary judgment on a
claim under the Miller Act, 40 U.S.C. § 3131 et seq. The Act
requires general contractors who enter into contracts with the
government to obtain bonds from sureties “for the protection of
all persons supplying labor and material in carrying out the
work provided for in the contract.” Id. § 3131(b)(2). Damuth
Services, Inc. (“Damuth”), a materialman, filed a claim under
the Miller Act on a payment bond obtained by the general
contractor after the subcontractor for which Damuth supplied
material went out of business. The district court granted
summary judgment to the general contractor’s surety on the bases
of equitable estoppel and unclean hands. Damuth now appeals.
For the reasons that follow, we affirm.
I.
In September 2005, Viteri Construction Management, Inc.
(“VCMI”), entered into a contract with the United States
government to expand and modify an existing Coast Guard station
in Chesapeake, Virginia (the “CAMSLANT” project). Because this
contract was valued at more than $100,000, VCMI was required by
the Miller Act to obtain a payment bond. Id. § 3131(b)(2).
VCMI secured this bond from appellee Western Surety Co.
(“Western”) in the amount of $2,675,738.00. VCMI’s owners,
3
Carlos Viteri and his wife (the “Viteris”), guaranteed the bond
personally.
As part of the CAMSLANT project, VCMI had to install new
HVAC equipment. VCMI entered into a subcontract with H&L
Mechanical, Inc. (“H&L”), to perform that work. H&L’s work was
to be performed “in compliance with all [applicable] national,
federal, state, and local codes.” J.A. 62. H&L, in turn,
engaged the services of a materialman, Damuth, to supply the
HVAC parts.
On November 16, 2006, Damuth supplied H&L with $160,205.85
in HVAC equipment and related support services. On November 21,
2006, H&L invoiced VCMI for $185,811.31 in work performed on the
CAMSLANT project, which included Damuth’s amount. As part of
its payment request, H&L signed a form that said:
I . . . certify that payments, less applicable
retainage, have been made (through the period covered
by previous payments received from Viteri Construction
Management, Inc.) to all my subcontractors, for all
materials and labor used in, or in connection with the
performance of this Contract.
Id. at 152. On January 5, 2007, VCMI paid H&L $185,811.31, the
full amount requested. Rather than pay Damuth its invoiced
amount, however, H&L applied the funds to debts owed on
4
unrelated projects. H&L did this despite a self-recognized
obligation to use the VCMI payment to pay Damuth. 1
By February 15, 2007, Damuth had become concerned that it
had not been paid, and arranged to meet with H&L to discuss the
matter. At the meeting on February 27, Damuth learned that H&L
had spent its invoiced amount paying off other debts and was, in
fact, facing significant financial difficulties.
Damuth was generally aware that H&L was to use the payment
from the CAMSLANT project to pay Damuth for its work. 2 Damuth,
1
H&L’s president, John Hartman, testified in a
deposition as follows:
Q: Okay. At the time you knew, you being H&L
and John Hartman, you knew this money, $185,811.31,
that [VCMI] paid to H&L on January 5th, 2007,
$160,205.85 was intended to pay Damuth Trane for its
equipment?
. . . .
A: Yes. Me [sic] being the president of H&L
Mechanical knew that the money that came in needed to
go to pay that invoice, correct.
J.A. 88.
2
William Mitchell, the corporate representative for
Damuth, testified in a deposition as follows:
Q: Okay. So Damuth knew that [H&L] had been
paid for your supplies, right, your material?
A: Yes.
. . . .
(Continued)
5
however, was persuaded that in order for H&L to make good on its
debt, H&L would need “to continue doing business.” Id. at 120.
Damuth therefore entered into an agreement with H&L over the
repayment of monies owed. H&L agreed to pay Damuth on all debts
owed for non-CAMSLANT project work, an amount that came to
$6,031.22. H&L would also make a series of payments between
April and September 2007, on the fifteenth of each month, until
Damuth had been paid in full for the CAMSLANT project. In
exchange, Damuth agreed not to inform VCMI of H&L’s non-payment.
Damuth also “reserv[ed] [the] right to go to [VCMI]” if H&L did
not keep its word. Id. at 124.
After the meeting, Damuth continued to perform work, but
H&L never made a payment under their agreement. Meanwhile, H&L
received an additional $105,000 from VCMI on CAMSLANT-related
work after the initial $185,811.31 payment. At least $33,024.88
of that money came after H&L met with Damuth on February 27,
2007.
Q: Okay. And then was it Damuth’s
understanding that once [VCMI] paid H & L the amount
that was for your invoice, that H & L would just turn
around and cut that money back to you?
A: That is a standard industry practice, yes.
J.A. 119.
6
On May 1, 2007, H&L met with Damuth a second time to
renegotiate their agreement. At that point, H&L agreed to pay
Damuth $5,000 per week for thirty-four weeks, beginning on May
11, 2007, until Damuth had received $170,000. On May 16, 2007,
however, H&L went out of business without ever making an
installment payment. On June 5, 2007, Damuth gave notice to
VCMI and its surety, Western, of its intent to make a claim upon
the payment bond.
On January 17, 2008, Damuth filed a two-count complaint in
the United States District Court for the Eastern District of
Virginia. In Count I, Damuth requested judgment against Western
in the amount of $161,020.65, plus interest and costs, as
payment upon the bond for its performance on the CAMSLANT
project. Count II incorporated the same request against H&L.
H&L, who was properly served with the complaint, did not respond
and the district court entered default judgment against it.
Western filed an answer to the complaint, asserting several
affirmative defenses, including the equitable doctrines of
equitable estoppel and unclean hands. Western and Damuth
thereafter filed cross-motions for summary judgment.
On January 21, 2009, the district court granted summary
judgment to Western. The district court found that Damuth’s
claim upon the bond was barred by equitable estoppel and unclean
hands. First, the district court found that Damuth’s agreement
7
to remain silent about H&L’s diversion of the CAMSLANT project
payment was sufficient to invoke estoppel:
VCMI received money from the government, VCMI paid H&L
in full for Damuth’s work on the [CAMSLANT] project,
and H&L diverted that money to other creditors for
matters unrelated to the contract with VCMI. Damuth
was aware of these events and . . . it agreed not to
advise the general contractor in consideration of
receiving funds for unrelated transactions.
J.A. 519. The district court also noted the injustice that
would follow if Damuth were allowed to make a claim upon the
bond, for it would require the Viteris, as personal guarantors
of the bond to Western, to pay twice for the HVAC equipment.
Second, the court determined that H&L’s decision to apply
the CAMSLANT project payments to unrelated debts was a criminal
act in Virginia under Va. Code Ann. § 43-13, and so the district
court reasoned that Damuth entered into an illegal bargain with
H&L when it agreed to keep silent about H&L’s conduct. Since
Damuth helped to conceal a criminal act and imposed a burden
upon VCMI to pay monies it otherwise would not have to pay, the
court concluded that Damuth’s claim was barred by unclean hands.
II.
On appeal, Damuth challenges the district court’s grant of
summary judgment to Western, primarily arguing that the district
8
court misapplied the doctrine of equitable estoppel. 3 We review
a district court’s grant of summary judgment de novo.
Shipbuilders Council of Am. v. U.S. Coast Guard, 578 F.3d 234,
243 (4th Cir. 2009). Summary judgment is appropriate “if the
pleadings, the discovery and disclosure materials on file, and
any affidavits show that there is no genuine issue as to any
material fact and . . . the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(c). On summary judgment, we
review the evidence in the light most favorable to the non-
moving party. Pueschel v. Peters, 577 F.3d 558, 563 (4th Cir.
2009).
It is well settled that equitable estoppel is a proper
affirmative defense to a Miller Act claim. U.S. ex rel. Humble
Oil & Ref. Co. v. Fidelity & Cas. Co. of N.Y., 402 F.2d 893, 897
(4th Cir. 1968); Moyer v. U.S. ex rel. Trane Co., 206 F.2d 57,
60 (4th Cir. 1953). To assert equitable estoppel, a defendant
must show, as the first necessary element of the defense, that
the plaintiff made a representation of fact that was misleading. 4
3
Damuth also challenges the district court’s application of
unclean hands to its claim. We recognize that unclean hands and
equitable estoppel are distinct doctrines, and that application
of the former in this context presents a novel issue. We need
not reach it, however, because our holding on equitable estoppel
alone is sufficient to resolve this appeal.
4
The defendant must also show reliance by the defendant on
the representation, a change in position due to the reliance,
(Continued)
9
Humble Oil, 402 F.2d at 898. The defendant need not show that
the plaintiff practiced deception upon it; rather, the question
is whether the plaintiff, having committed its actions, should
be able to repudiate them. U.S. ex rel. Noland Co. v. Wood, 99
F.2d 80, 82-83 (4th Cir. 1938).
Damuth maintains that the district court erred in finding
its agreement with H&L to constitute a misleading
representation. Damuth argues that, because the effect of its
bargain was simply not to inform VCMI of H&L’s conduct, its
conduct amounts to nothing more than “mere silence.” We need
not resolve here the question of whether a finding of equitable
estoppel can ever be premised solely on silence, however, for
the facts here go beyond passive silence.
Our precedent under the Miller Act establishes that a
materialman makes a misrepresentation by acting with the
subcontractor to enable the subcontractor to mislead the general
contractor and surety. In Moyer, for example, we said that a
and detriment as a result. Humble Oil, 402 F.2d at 898. Damuth
has not raised any arguments concerning these other elements.
In any event, we have reviewed the record carefully and are
satisfied that Western met its burden of establishing each
element. VCMI reasonably relied on the representation, made by
H&L and left uncontradicted by Damuth, that H&L had met its own
obligations. Based on that reliance, VCMI continued to make
payments to H&L and, as a result, is now subject to the
potential of double payment.
10
misrepresentation could be made out where a materialman provided
falsified receipts to the subcontractor so that the
subcontractor could obtain progress payments from the general
contractor. 5 206 F.2d at 60.
In United States ex rel. Gulfport Piping Co. v. Monaco &
Son, Inc., 336 F.2d 636 (4th Cir. 1964), we found equitable
estoppel appropriate where a materialman acquiesced in a
subcontractor’s misleading representation to the general
contractor. In that case, Durant, the subcontractor,
represented to Monaco and Son, the general contractor, that it
was a fabricator of material. Unbeknownst to Monaco and Son,
Gulfport Piping was the true fabricator, but it allowed Durant
to put its own letterhead on all the bills of lading, freight
bills, and packing tickets, which gave Monaco and Son the
impression that Durant was the fabricator. Id. at 637-38. When
Durant did not pay Gulfport Piping, the latter filed a claim
upon Monaco and Son’s Miller Act bond. On appeal, we affirmed
5
Similarly, in Graybar Electric Co., Inc. v. John A. Volpe
Construction Co., Inc., 387 F.2d 55 (5th Cir. 1967), a
subcontractor endorsed checks received from the general
contractor to the materialman. The materialman then endorsed
the checks back to the subcontractor so that the materialman
could represent an artificial unpaid balance on its account,
thereby allowing the subcontractor to obtain further progress
payments from the general contractor. Id. at 56-57. The Fifth
Circuit found that the materialman’s conduct amounted to a
misrepresentation. Id. at 59.
11
the district court’s application of equitable estoppel,
reasoning that Monaco and Son had regarded Durant as the
manufacturer and that Gulfport Piping “knew of and acquiesced in
the misrepresentation.” Id. We found relevant the fact that,
had Monaco and Son known that Gulfport Piping was the
materialman and thus entitled to Miller Act protection if Durant
did not pay, it would have acted differently. 6 Id. at 639.
The same type of conduct that led us to find misleading
representations in Moyer and Gulfport Piping occurred here. H&L
had an obligation, of which Damuth was generally aware, to use
the payment from VCMI to pay Damuth for its work on the CAMSLANT
project. Damuth’s awareness of this obligation is evidenced by
its belief that advising VCMI of H&L’s failure to pay would
prevent H&L from being able to “continue doing business.” J.A.
6
United States ex rel. Lincoln Electric Products Co., Inc.
v. Greene Electrical Service of Long Island, Inc., 379 F.2d 207(2d Cir. 1967), upon which Damuth seeks to rely, is not to the
contrary. In Lincoln Electric, the materialman, Lincoln
Electric, performed work for a subcontractor, Greene. Greene
never paid Lincoln Electric, despite receiving reimbursement
from the prime contractor, McTeague. Lincoln Electric’s only
notice of the subcontractor Greene’s nonperformance, however,
was that a single check from Greene bounced. Id. at 209. When
Greene went out of business, the Second Circuit allowed a Miller
Act claim on McTeague’s surety. Id. Significantly, the record
reflected no knowledge by Lincoln Electric of any diversion of
funds by Greene, and no collusive acts between Greene and
Lincoln Electric to secure payments from McTeague. Id. at 210.
Damuth can draw no comfort from such easily distinguishable
facts.
12
120. Furthermore, this obligation, which was spelled out in the
general contract, 7 has been well recognized. For example, we
have long declined to hold a surety liable unless the
subcontractor applies payments to creditor materialmen on jobs
for which the surety has provided the bond. See U.S. ex rel.
Crane Co. v. Johnson, Smathers & Rollins, 67 F.2d 121, 123 (4th
Cir. 1933) (“[W]hen . . . a payment is made by the debtor to the
creditor with the identical money for the payment of which the
surety is bound, or with the proceeds or fruits of the very
contract, business, or transaction covered by the obligation of
the surety, the application of the payment to some other debt,
with or without the direction or consent of the debtor, does not
bind the surety.”); see also U.S. ex rel. W. Chester Elec. &
Elecs. Co., Inc. v. Sentry Ins., 774 F.2d 80, 85 (4th Cir. 1985)
(refusing liability to a surety when the general contractor paid
the subcontractor and materialman with a joint check, as they
had requested pursuant to a side deal relating to past debts
between them, and the side deal went awry, because “the suret[y]
7
Beyond being a general criminal statute that would apply
by its very terms, Va. Code Ann. § 43-13 was a part of this
agreement, for H&L’s subcontract included a clause requiring it
to perform “in compliance with all [applicable] national,
federal, state, and local codes.” J.A. 62. See Overstreet v.
Commonwealth, 67 S.E.2d 875, 877 (Va. 1951) (holding that
contractors bargain with an understood knowledge of section 43-
13’s existence, and that the statute “becomes a part of every
contract covered by its terms”).
13
cannot be held liable for the subsequent redirection of funds
paid when the principal took proper steps to ensure payment”).
This rule has been well understood to place an obligation on the
subcontractor to apply payments to materialmen on related jobs
only. Graybar, 387 F.2d at 59; U.S. ex rel. Hyland Elec. Supply
Co. v. Franchi Bros. Constr. Corp., 378 F.2d 134, 137-38 (2d
Cir. 1967); St. Paul Fire & Marine Ins. Co. v. U.S. ex rel.
Dakota Elec. Supply Co., 309 F.2d 22, 29-30 (8th Cir. 1962);
U.S. ex rel. Carroll v. Beck, 151 F.2d 964, 966 (6th Cir. 1945).
H&L’s obligation is, moreover, codified by Virginia law,
which criminalizes the actions of a subcontractor that diverts
funds owed to a materialman on a particular job. See Va. Code.
Ann. § 43-13. Contrary to Damuth’s contention, the fact that
this statute may be prosecuted upon the filing of a complaint by
the injured materialman does not undermine its consideration
here, for the conduct at issue falls within the bounds of that
which Virginia has deemed criminal. See Overstreet, 67 S.E.2d
at 877 (“[Section 43-13] was enacted in the exercise of the
police power, in that its object is the prevention of fraud and
becomes a part of every contract covered by its terms.”).
In light of these legal and contractual obligations,
Damuth’s conduct takes on an affirmative cast. When Damuth
learned that H&L had disregarded its obligation, Damuth’s
response was to strike a bargain with H&L, by which Damuth
14
procured a consideration, i.e., payment, in exchange for a
promise not to “tell.” When asked why Damuth would do such a
thing, it answered, “so that [H&L] could make payments and
continue doing business.” J.A. 120. Even viewing the evidence
in the light most favorable to Damuth, the only logical
inference of this exchange is that it enabled H&L to continue
representing to VCMI that Damuth had been paid for the CAMSLANT
project, and for H&L to continue accepting payments from VCMI.
Damuth seeks to minimize the significance of the exchange,
pointing out that it merely received funds which it was already
owed. This overlooks the fact that the VCMI payment Damuth was
to receive was gone, and Damuth had reason to believe no funds
would be forthcoming. As the record makes clear, Damuth
considered H&L’s renewed commitment to pay of sufficient
significance to negotiate for it twice.
Moreover, Damuth gave value in the exchange. Prior to the
agreement, Damuth was free to inform VCMI of H&L’s conduct if it
wished. The effect of the bargain was that Damuth bound itself
not to do so. The record is undisputed that VCMI paid, and
continued to pay, H&L for the CAMSLANT project with the
understanding that H&L would pay its own subcontracting parties. 8
8
Carlos Viteri testified as follows:
(Continued)
15
H&L signed a form statement that it would apply monies received
from VCMI to debts owed on the CAMSLANT project, and VCMI stated
in a deposition that it relied on this representation when
making payments. VCMI asserted, and Damuth did not dispute,
that had VCMI known the truth, it would have taken materially
different actions before H&L went out of business, for VCMI’s
owners, the Viteris, were personally liable on the payment bond.
Damuth and H&L acted affirmatively in concert to cause VCMI
to believe that H&L had discharged its obligation to pay for
services rendered. This makes the bargain struck by Damuth
analytically similar to the false receipts provided in Moyer,
206 F.2d at 60, and the misleading arrangement undertaken in
Gulfport Piping, 336 F.2d at 639. In line with this precedent,
Damuth’s conduct exceeds the bounds of mere silence, and is
sufficient to satisfy the requirement of a misleading
representation for purposes of the doctrine of equitable
Q: . . . You believe that you shouldn’t have to
pay if VCMI has already paid H&L?
A: Right.
Q: Are there any . . . facts that you believe
would provide or would prevent you or release you from
having to pay on Damuth’s claim?
A: Based on what we received from H&L and what
we expected to by contract, I have met my obligation.
J.A. 307.
16
estoppel. 9 See FDIC v. Harrison, 735 F.2d 408, 413 (11th Cir.
1984) (stating that estoppel requires the presence of “words,
acts, conduct or acquiescence causing another to believe in the
existence of a certain state of things”); see also U.S. ex rel.
Krupp Steel Prods., Inc. v. Aetna Ins. Co., 923 F.2d 1521, 1527
(11th Cir. 1991) (“[T]he central notion of the estoppel defense
is that A cannot either intentionally or negligently represent
to B that one state of affairs exists . . . and then pursue his
normal statutory remedy when it becomes apparent that the state
of affairs represented is inaccurate or false.”).
III.
For the foregoing reasons, the judgment of the district
court is
AFFIRMED.
9
Damuth argues that if equitable estoppel is appropriate,
then the district court erred in finding that estoppel was
appropriate to bar its claim on the bond completely. Damuth
contends that estoppel should only undercut its ability to claim
two amounts, namely its full amount requested offset by either
the $6,031.22 that it accepted from H&L for non-CAMSLANT work,
or the $33,024.88 that H&L accepted from VCMI after the February
27 agreement. We decline to consider Damuth’s contentions, for
Damuth did not argue them to the district court. In the absence
of extraordinary circumstances, we do not consider arguments
made for the first time on appeal. Williams v. Prof’l. Transp.
Inc., 294 F.3d 607, 614 (4th Cir. 2002). No such circumstances
are present here. In any event, as the district court noted,
Damuth is estopped by its conduct from bringing a claim on the
bond. It therefore could not claim any amount.
17