US ex rel. Damuth Services v. Western Surety Company

• Court: Court of Appeals for the Fourth Circuit
• Decided: March 4, 2010
• Docket: 09-1170
• Status: Unpublished

Opinion

UNPUBLISHED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Affirmed by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.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.