Monday, May 19, 2014

Even big businesses need consumer protection law

American Demolition and Nuclear Decommissioning, Inc. v. IBCS Group, Inc., 2014 WL 1906791, No. 3:11CV00078 (W.D. Va. May 13, 2014)

ADND (now there’s an acronym!) is a New York corporation that provides demolition, decommissioning, and environmental remediation services. In 2009, it submitted a bid to perform demolition work at a nuclear facility in South Carolina owned by the Department of Energy, the Savannah River Site. ADND was required to furnish a performance and payment bond that complied with the requirements of the Federal Acquisition Regulations.  ADND had previously obtained bonds from Edmund C. Scarborough and his risk management company, The IBCS Group.   
Leaving individual names out for convenience: ADND emphasized that it needed to procure a bond that would have a high chance of being approved by the federal government.   IBCS encouraged ADND to review a brochure IBCS had recently published and posted on its website.  The brochure said, among other things:
... To back the bond dollar for dollar, some individual sureties, such as Scarborough, utilize Irrevocable Trust Receipts (“ITR”), a financial instrument widely recognized in the financial world and used by the Government and private businesses for a variety of purposes, as their vehicle to pledge the assets to the particular bond.
... Individual sureties are specifically recognized by the Federal Acquisition Regulation (“FAR”). Properly issued bonds are fully compliant with the FAR.... Individual surety bonds have been accepted by, among others, the Department of Justice, Federal Bureau of Prisons, the General Services Administration, Department of the Air Force, Department of Veterans Affairs and Naval Facilities Engineering Command …
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! …
Q. What asset backs the bonds?
A. The bonds may be backed by cash, cash equivalents or readily marketable assets such as commodities. ...
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.
IBCS sent multiple emails to ADND with a link to the brochure (presumably as a footer): “Our updated brochure is now online! Valuable info about Individual Sureties and details about us: Brochure.”  ADND’s decisionmaker “read every page of the entire [b]rochure,” and “referred to it many times.” 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 assets, and that bond premiums would be refunded and that IBCS would reverse a transaction if one of its individual surety bonds was promptly rejected.
As you can guess, ADND entered into an agreement with Scarborough.  The agreement stated 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,” and it contained an integration clause.  ADND paid the required bond premium of $138,005, and defendants presented a performance and payment bond, which was submitted to the relevant federal contracting officer.  This officer rejected the bond on the ground that the asset pledged as security (coal) was unacceptable, since 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.  “Speculative assets” including “mineral rights” are unacceptable.  In fact, the Federal Circuit specifically held that previously mined coal was a speculative asset—“and the surety in that case was Edmund Scarborough.”  Moreover, the Army had recently investigated possibly fraudulent surety bonds issued by a number of individuals and entities, including Scarborough.
ADND promptly notified IBCS of the contracting officer’s decision; IBCS did not successfully cure the defect. Instead, it offered a replacement bond from another individual surety, allegedly secured by property in Nevada. That bond was rejected after the contracting officer “determined that the real property was actually owned by the United States government rather than the individual surety providing the bond.”  (!!!  What is going on in the world of surety bonds?)  The contracting officer told ADND that the contract would be terminated in three days unless ADND verified that it could get a bond from a T-listed surety, which IBCS could not provide.  ADND immediately paid for another bond from a different surety; this was accepted by the contracting officer.
ADND requested a refund of its $138,005 bond premium paid to IBCS.  Defendants refused.  ADND sued for false advertising under Virginia law.
Virginia’s false advertising law only covers written ads, and covers “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.  The brochure was a written ad, as the Fourth Circuit has already specifically held in another case against IBCS; the court here didn’t apply collateral estoppel but still found the brochure sufficient.  The brochure was disseminated with intent to promote the sale of Scarborough’s individual surety bonds. It was available to the public on IBCS’s website and promoted in IBCS emails.
And the brochure contained “misleading or deceptive” information regarding IBCS’s refund policy. The statement that IBCS “will reverse a transaction if a bond is promptly rejected” by the general contractor or project owner was contradicted by its actual refund policy, which expressly forbade refunds for any reason.  (This is why we need false advertising law on top of contract law; the court noted that Virginia’s false advertising law is not trumped by an integration clause.)  Further, the brochure also had misleading or deceptive statements suggesting that the individual surety bonds issued by Scarborough were backed by assets that complied with government requirements. 
Finally, ADND suffered a loss from the deception—it was induced to buy a bond from the defendants that it wouldn’t have paid for if not for its belief that the bond was backed by acceptable assets.  Defendants offered no evidence to contradict ADND’s evidence of reliance and loss. Even if the evidence didn’t establish fraudulent inducement, this wasn’t a fraudulent inducement case. “Indeed, the Virginia Supreme Court has held, in light of the ‘notable differences’ between their respective elements of proof, that ‘the statutory cause of action for false advertising is not properly analogized to a common law cause of action for fraud.’”

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