Persaud Companies, Inc. v. The IBCS Group, Inc. ( 2011 )

  •                             UNPUBLISHED
                      UNITED STATES COURT OF APPEALS
                          FOR THE FOURTH CIRCUIT
                                No. 10-1514
                    Plaintiff – Appellee,
                    Defendants – Appellants.
                                No. 10-1518
                    Plaintiff – Appellant,
                    Defendants – Appellees.
    Appeals from the United States District Court for the Eastern
    District of Virginia, at Alexandria. Gerald Bruce Lee, District
    Judge. (1:09-cv-00094-GBL-IDD)
    Argued:   March 23, 2011                   Decided:   April 25, 2011
    Before WILKINSON, SHEDD, and DUNCAN, Circuit Judges.
    Vacated and remanded by unpublished per curiam opinion.
    ARGUED: David Martin Buoncristiani, JONES DAY, San Francisco,
    California,   for    Appellants/Cross-Appellees.     Christopher
    Mayfield Brown, SEEGER FAUGHNAN MENDICINO, PC, Washington, D.C.,
    for Appellee/Cross-Appellant.      ON BRIEF: Paul W. Berning,
    HOWREY, LLP, San Francisco, California, Laura R. Thomson,
    HOWREY, LLP, Washington, D.C., for Appellants/Cross-Appellees.
    Seth A. Robbins, SEEGER FAUGHNAN MENDICINO, PC, Washington,
    D.C., for Appellee/Cross-Appellant.
    Unpublished opinions are not binding precedent in this circuit.
           The IBCS Group, Inc., challenges the district court’s grant
    of    summary    judgment      in       favor    of    Persaud       Companies,    Inc.,    on
    Persaud’s       fraudulent     inducement            and    false    advertising    claims.
    We agree with IBCS that Persaud has failed to establish a claim
    for fraudulent inducement under Virginia law.                              We also agree
    with    IBCS     that   the    grant       of    summary       judgment    on     the    false
    advertising       claim      was    improper.              Therefore,     we    remand     for
    further proceedings.
           On   October     3,    2008,       Persaud          Companies,    Inc.     (Persaud),
    signed a $3.5 million subcontract for work on a border fence
    project     in   Texas.       The       subcontract         required     Persaud    to    post
    payment and performance bonds.                       Although Persaud had used the
    same corporate surety on its previous jobs, on this occasion
    Persaud’s bond brokers recommended that the company obtain bonds
    from    Edmund      Scarborough,         an     individual      surety,    and     his    risk
    management company, IBCS Group.
           During the negotiations with IBCS, two key issues arose.
    First, two of Persaud’s brokers suggested that Persaud have the
    general     contractor        pre-qualify            the    bonds,    ensuring     that    the
    bonds would be accepted.                  Second, Persaud’s brokers asked IBCS
    how    it   would    respond       if    the    general       contractor       rejected    the
    bonds-i.e.,      whether        IBCS    would       provide    a     refund   of   any     bond
    premium paid by Persaud.                With regard to this second issue, the
    brokers       were    referred     to       IBCS’    brochure        about    Scarborough’s
    bonds.        The brochure contains a Question and Answer section,
    which includes the following:
         Q.       What happens if a bond is rejected by an obligee?
         A.   We intend to pre-qualify all bonding requests to
         minimize the possibility of bond rejection.  However,
         we will reverse a transaction if a bond is promptly
    (JA at 44).
         Persaud entered into a General Agreement of Indemnity (the
    Agreement) with Scarborough on December 29, 2008.                             The Agreement
    specifies, with regard to payment, that “[t]he full initial fee
    is fully earned upon execution of the BOND and will not be
    refunded, waived or cancelled for any reason.”                          (JA at 51).         The
    Agreement also notes that, “[t]his Agreement may not be changed
    or   modified         orally.          No    change     or     modification        shall     be
    effective unless specifically agreed to in writing, and signed
    by Surety.”          (JA at 53).
         Persaud authorized release of the bonds ten days later,
    paying    a    bond     premium    of       $121,557.         Eventually,      the   general
    contractor       rejected       the     bonds       because     of    its     concern      over
    Scarborough’s assets.             Thereafter, the general contractor waived
    the bond requirement for Persaud and permitted it to work on the
    project while issuing Persaud a “deductive change order.”                         (JA
    at 1190).     Persaud, meanwhile, contacted IBCS in a timely manner
    to request a refund.          In response, IBCS referred Persaud to the
    Agreement’s     language        specifying        that     all     payments      were
    nonrefundable       and,      accordingly,        denied     Persaud’s      request.
    Scarborough later indicated that, although he had granted more
    than twenty refunds in the past, he did not grant Persaud a
    refund because (1) he was led to believe the bonds would be
    accepted; (2) Persaud retained the subcontract; and (3) Persaud
    did not have to purchase replacement bonds.
         After     IBCS     refused    Persaud’s        refund       request,      Persaud
    responded by filing this action, alleging claims of breach of
    contract, fraud, fraud in the inducement, and false advertising
    against IBCS.         Persaud requested actual and punitive damages.
    The district court dismissed the breach of contract and fraud
    claims.       Following       discovery,     on    cross-motions,        the     court
    granted summary judgment in favor of Persaud on the fraudulent
    inducement    and     false   advertising     claims,      and    granted      summary
    judgment in favor of IBCS on the issue of punitive damages.                       The
    court awarded Persaud damages of $121,557, the total amount of
    the bond premium.
         On appeal, IBCS challenges the award of summary judgment on
    both the fraudulent inducement and false advertising claims. 1
    Summary judgment is appropriate “if the movant shows 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(a).   We review the district court’s order granting summary
    judgment de novo. Bonds v. Leavitt, 
    629 F.3d 369
    , 379 (4th Cir.
                         A. Fraudulent Inducement
         Under Virginia law, “a false representation of a material
    fact, constituting an inducement to the contract, on which the
    purchaser had a right to rely, is always ground for rescission
    of the contract.”   George Robberecht Seafood, Inc. v. Maitland
    Bros. Co., 
    255 S.E.2d 682
    , 683 (Va. 1979)(internal quotation
    marks omitted).   “Fraud in the inducement of a contract is also
    ground for an action for damages.”   Id.   A plaintiff asserting a
    cause of action for fraudulent inducement bears the burden of
    proving by clear and convincing evidence the following elements:
    “(1) a false representation, (2) of a material fact, (3) made
           Persaud also noted a cross-appeal, contesting the district
    court’s denial of its requests for punitive damages and
    attorney’s fees. Because we are vacating the awards of summary
    judgment in favor of Persaud, we need not address these issues
    at this time.
    intentionally and knowingly, (4) with intent to mislead, (5)
    reliance by the party misled, and (6) resulting damage to the
    party misled.”      Evaluation Research Corp. v. Alequin, 
    439 S.E.2d 387
    , 390 (Va. 1994).
          Applying this standard, IBCS contends that, because Persaud
    had access to the Agreement prior to signing it—and thus had the
    ability to read the provisions regarding a refund—the promise of
    a refund in the marketing brochure could not have reasonably
    induced Persaud into signing the Agreement.                 We agree.       Given
    the   unequivocal     contract     language,    Persaud’s   reliance    on    the
    statements in the brochure was unreasonable.                  As the Supreme
    Court of Virginia has explained:
          Where ordinary care and prudence are sufficient for
          full protection, it is the duty of the party to make
          use of them. Therefore, if false representations are
          made regarding matters of fact, and the means of
          knowledge are at hand and equally available to both
          parties, and the party, instead of resorting to them,
          sees fit to trust himself in the hands of one whose
          interest is to mislead him, the law, in general, will
          leave him where he has been placed by his own
          imprudent confidence.
    Costello    v.   Larsen,      
    29 S.E.2d 856
    ,   858   (1944)    (internal
    quotation marks omitted); see also Johnson v. Washington, 
    559 F.3d 238
    , 245 (4th Cir. 2009) (affirming summary judgment in
    favor of the defendant by noting that, “[e]ven assuming” the
    defendant    misled     the    plaintiff,      “the   documents      that    [the
    plaintiffs] signed plainly stated the terms of the transaction
    and more than corrected any misleading oral statements”).
           Persaud offers several alternative reasons for affirmance,
    none of which is persuasive.                   For instance, Persaud contends
    that the Agreement itself does not provide IBCS’s actual refund
    policy because Scarborough admitted that he has given more than
    twenty      refunds   over    the   past   several     years.    While      this    is
    factually       correct,     legally   IBCS     and   Scarborough     are   free    to
    enforce the contractual refund provision or waive it as they see
    fit.        See Roenke v. Virginia Farm Bureau Mut. Ins. Co., 
    161 S.E.2d 704
    , 709 (Va. 1968) (noting that waiver “may or may not
    be exercised by the person holding it”). 2
           In sum, Persaud cannot establish, by clear and convincing
    evidence, that it reasonably relied on the brochure or any oral
    statements by IBCS because the Agreement clearly stated that the
    bond       premium   was   nonrefundable.         Accordingly,   we    vacate      the
    award of $121,557 in favor of Persaud and direct the district
    court, on remand, to enter summary judgment in favor of IBCS on
    this count.
           In a similar vein, Persaud suggests that the waiver policy
    is applied irrationally and subjectively. To the extent this is
    even relevant, IBCS put into evidence declarations that it
    considered each refund request in good faith, and Persaud did
    not come forward with any contrary evidence.
                                   B. False Advertising
         We next address IBCS’s argument that the district court
    erred   in   granting    summary      judgment      to     Persaud    on   the   false
    advertising claim.       Virginia Code § 18.2-216 prohibits the use,
    in any advertisement, of “any promise, assertion, representation
    or statement of fact which is untrue, deceptive or misleading”
    if the advertisement is made with the “intent to sell” or “to
    induce the public” to enter into an obligation.                       See Henry v.
    R.K. Chevrolet, Inc., 
    254 S.E.2d 66
    , 67-68 (Va. 1979).                       Section
    18.2-216 also “subjects the defendant to an action for damages
    [under Va. Code Ann. § 59.1-68.3] by any person who suffers loss
    as the result” of a statutory violation.                     Id. at 67; see also
    Klaiber v. Freemason Associates, Inc., 
    587 S.E.2d 555
    , 559 (Va.
    2003)   (“[Section      59.1-68.3]      by    its    express     terms     requires,
    however, that the plaintiff must ‘suffer[ ] loss’ in order to
    recover damages.”).           As a “penal statute,” §18.2-216 “must be
    construed strictly” and should not “be extended by implication,
    or be made to embrace cases which are not within its letter and
    spirit.”      Henry,    254    S.E.2d   at    68    (internal       quotation    marks
         The     Supreme    Court    of   Virginia       has    noted    two   important
    distinctions    between       fraud   and    false    advertising.          First,   a
    fraud claim requires a showing that a representation was false,
    while false advertising requires a showing that a statement was
    “untrue, deceptive or misleading.”                       Parker-Smith v. Sto Corp.,
    551 S.E.2d 615
    ,    619    (Va.        2001).        Second,       “in    fraud,    the
    misrepresentation must relate to a present or pre-existing fact;
    it cannot be predicated on unfulfilled promises or statements as
    to future events.            In contrast, the misrepresentation in a false
    advertising claim does not have to relate to a statement of
    present or pre-existing fact. It can be just a promise.”                                     Id.
    (internal citation and quotation marks omitted).                                  See also Va.
    Code    Ann.     §    18.2-216      (“promise,        assertion,        representation        or
    statement of fact”).
           The district court concluded that the marketing brochure
    qualified        as    an    advertisement            under     the     statute       and   was
    misleading.            On    this       basis    alone,       and   without        considering
    whether     Persaud          “suffer[ed]          loss”       as    a    result       of    the
    advertisement, the district court awarded summary judgment.                                  We
    agree    with        the    district      court       that    the     marketing       brochure
    satisfies the statutory requirements of a false advertisement:
    the brochure is an advertisement under the statute and it is—at
    a minimum—misleading or deceptive.                       As IBCS notes, however, the
    district       court       did    not     consider       whether      the    brochure       made
    Persaud “suffer loss,” that is, whether the advertisement caused
    any actual injury.               Because of this failure, we vacate the grant
    of summary judgment in favor of Persaud on this claim as well.
    On remand, the district court must determine whether Persaud can
    satisfy this statutory requirement. 3
         Accordingly, we vacate the award of $121,557 in favor of
    Persaud and vacate the grant of summary judgment on Persaud’s
    claims for fraudulent inducement and false advertisement.                On
    remand,   the   district   court   is     instructed    to   grant   summary
    judgment in favor of IBCS on the fraudulent inducement claim and
    to consider whether Persaud suffered loss as a result of IBCS’s
    false advertisement.       If the district court finds in Persaud’s
    favor on those issues, it is free to assess appropriate damages.
                                                           VACATED AND REMANDED
           We note that IBCS urges us to simply answer the question
    of whether Persaud suffered loss because of the advertisement in
    the first instance. While we recognize our discretion to do so,
    we decline to exercise that discretion in this case.