Federal Judge Rules that Virginia’s False Advertising Law Allows a Contractor to Recover the Premium It Paid to an Individual Surety
On May 13, 2014, the United States District Court for the Western District of Virginia granted summary judgment to a federal contractor against an individual surety. In
American Demolition and Nuclear Decommissioning, Inc. v. The IBCS Group, Inc., Edmund C. Scarborough, and Steven A. Golia, Civil Action No. 3:11CV00078 (W.D. Va. May 13, 2014), the federal court found that the individual surety’s marketing brochure was deceptive and misleading with regard to its bond premium refund policy. This case was the first time that Virginia’s false advertising statute has been applied by a court in a business-to-business dispute.
The denouement of this story is that the judge found that American Demolition and Nuclear Decommissioning, Inc. (ADND) was entitled to recover the $138,005 premium it paid for a surety bond that Edmond Scarborough (Scarborough) and his risk management company, The IBCS Group, Inc. (IBCS), promoted in violation of Virginia’s false advertising statute. But let’s begin the story at the beginning and outline the facts as related in the court’s decision.
In 2009 ADND, which provides demolition, decommissioning, and environmental remediation services, submitted a bid to perform demolition work at a U.S. Department of Energy nuclear facility in South Carolina known as the Savannah River Site (SRS). ADND was required to furnish a performance and payment bond in compliance with the Federal Acquisition Regulations (FAR).
ADND had previously obtained bonds from Scarborough, an individual surety, and IBCS. When the Executive Vice President of IBCS, Steven Golia (Golia) learned that ADND planned to bid on the SRS project, Golia expressed interest in providing the bond. During discussions, William Schaab (Schaab), the Vice President and Secretary of ADND, stressed that ADND needed a bond that would likely be approved by the federal government. Golia directed Schaab to an IBCS brochure that had recently been published and posted on its website, which included the following information in a Q&A section:
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Q. Is your company T-Listed?
A. This means approved by the federal Treasury department on their document “Circular 570.” For corporate sureties, this is an important part of their credentials—the ability to show they are capable of gaining the acceptance of the federal government. We are proud of the fact that our bonds have been repeatedly accepted by the federal government in multi-million dollar amounts. However, since Circular 570 only lists corporate sureties, the fact that we are accepted is not shown on this list. If the obligee requires a surety good enough to be approved by the federal government, we are!
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Q. What asset backs the bonds?
A. The bonds may be backed by cash, cash equivalents or readily marketable assets such as commodities.
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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 rejected.
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Golia sent Schaab multiple emails with a hyperlink to the brochure on the IBCS website. Schaab testified that he believed that the individual surety bonds offered by the defendants “‘would have a high chance of being approved by the federal government because they would be backed by appropriate and FAR compliant assets.’” The brochure also led Schaab to “‘believe that bond premiums would be refunded and that IBCS would “reverse a transaction” if one of its individual surety bonds was promptly rejected’” by the contracting officer (CO).
On March 19, 2009, ADND and Scarborough entered into an indemnity agreement (GIA). The GIA stated that the “‘full initial fee is fully earned upon execution of the bond and will not be refunded, waived or cancelled for any reason.’” The GIA also stated that it “‘constitutes the entire agreement between the parties’” and that “‘no other agreements or understandings, past, present or future, whether oral or written, change the terms of this agreement.’”
Thereafter, ADND paid the bond premium of $138,005, and the defendants issued a performance and payment bond, through “‘Edmund Scarborough as Individual Surety.’” ADND submitted the bond to the CO for the SRS project and executed a contract for the demolition work. The CO then rejected the bond on the ground that the asset pledged as security was unacceptable under the FAR:
| . . . [A]s to the acceptability of coal as a guarantee for the bond, my interpretation of the FAR is that it is unacceptable. FAR section 28.203-2 states that the Government will only accept (1) cash, (2) readily marketable assets, or (3) irrevocable letters of credit from a federally insured financial institution from individual sureties to satisfy the underlying bond obligations. Unacceptable assets include but are not limited to speculative assets (e.g. mineral rights). Here, Edmund Scarborough is offering previously mined coal as an asset. The United States Court of Appeals for the Federal Circuit held in a bid protest case in 2009 that previously mined coal is a speculative asset and the surety in that case was Edmund Scarborough. [The case that the CO is referencing is Tip Top Construction, Inc. v. United States, 563 F.3d 1338 (Fed. Cir. 2009).] |
ADND immediately notified IBCS of the CO’s decision. The CO gave IBCS about five weeks to cure the defect. During that time, IBCS offered the CO a replacement bond from another individual surety, which was allegedly secured by certain real property in Nevada. That bond, however, was also rejected after the CO determined that the real property was actually owned by the U.S. government rather than the individual surety providing the bond.
On February 22, 2010, the CO advised ADND that the demolition contract would be terminated in three days unless ADND provided verification that it could obtain a bond from a corporate surety listed on the T-List. IBCS advised ADND that it could not satisfy that requirement.
To avoid the CO terminating the contract, ADND immediately obtained and paid for another bond from a different surety. That bond was accepted and approved by the CO. ADND requested a refund of the bond premium paid to IBCS. When the defendants refused to issue a refund, ADND filed the lawsuit, asserting a claim for false advertising under Virginia’s consumer protection law. ADND sued under Virginia’s false advertising law because it was precluded under the language of the GIA from recovering the premium or claiming fraud in the inducement. The court granted ADND’s motion for summary judgment and entered judgment in favor of ADND in the amount of $138,005. A summary of the court’s analysis follows.
Under Virginia’s false advertising statute, it is unlawful for any person, firm, corporation or association to publish, disseminate or place before the public a written “‘advertisement of any sort’” that contains “‘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 any obligation. Va. Code Ann. § 18.2-216. The statute also permits an action for damages if a person suffers a loss as a result of a statutory violation.
The court found that the IBCS marketing brochure was a written advertisement pursuant to the statute. The court concluded, as did the Fourth Circuit in
Persaud Companies, Inc. v. IBCS Group, Inc., 425 F. App’x 223 (4th Cir. 2011), when faced with the same brochure, that the brochure is an advertisement under the statute. The court also concluded that the brochure was disseminated, on IBCS’s website and in IBCS emails, with the intent to promote the sale of Scarborough’s individual surety bonds.
The court further concluded, as did the Fourth Circuit in
Persaud, that the brochure contained misleading and deceptive information regarding IBCS’s refund policy. The court observed that the refund policy cited in the brochure contradicted the language of the GIA and also concluded that the brochure falsely suggested that the bonds were backed by FAR-compliant assets. The individual surety bonds actually issued to ADND, however, were instead backed by coal, which, the court observed, is deemed “unacceptable” under the FAR. Besides citing to the FAR, the court referenced
Tip Top Construction, a case involving another individual surety bond issued by Scarborough, in which the Federal Circuit held that “‘the contracting officer correctly concluded that the coal asset pledged in [support of the bond] was not acceptable’” under the FAR.
The court concluded that ADND suffered a loss from the deceptive statements in the marketing brochure and was induced to purchase an individual surety bond from the defendants for the SRS project. Schaab’s sworn declaration indicated that ADND would not have paid the $138,005 bond premium if it had not been induced to believe that the individual surety bond was backed by acceptable assets under the FAR and that the premium would be refunded if the bond were promptly rejected by the CO. The defendants offered no evidence to refute Schaab’s sworn statements of reliance on information in the marketing brochure and ADND’s resulting lost bond premium, so the court granted ADND’s motion for summary judgment on its false advertising claim.
The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at mperkins@nasbp.org or (202) 686-3700.
This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.