Court Opinion

ID: 1031704
Source: CourtListenerOpinion
Date Created: 2013-07-05 08:36:03.824633+00
Date Added: 2024-06-11T12:04:02.747223
License: Public Domain

UNPUBLISHED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Affirmed by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.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

                                17