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.
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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