Court Opinion

ID: 804617
Source: CourtListenerOpinion
Date Created: 2012-07-18 18:35:51+00
Date Added: 2024-06-11T18:00:12.985063
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                              No. 11-1618

BANK OF AMERICA, N.A.,

                 Plaintiff - Appellant,

           v.

CHRISTOPHER ANDREW SANDS,

                 Defendant – Appellee,

           and

JAMES STEPHEN BRITT,

                 Defendant.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.    Claude M. Hilton, Senior
District Judge. (1:10-cv-00731-CMH-JFA)

Argued:   May 16, 2012                      Decided:   July 18, 2012

Before WILKINSON, GREGORY, and FLOYD, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: E. John Steren, OBER KALER GRIMES & SHRIVER, PC,
Washington, D.C., for Appellant.     Thomas W. Repczynski, OFFIT
KURMAN, PA, Vienna, Virginia, for Appellee.    ON BRIEF: Michael
A. Hass, Kristina J. Longo, OBER KALER GRIMES & SHRIVER, PC,
Washington, D.C., for Appellant. John B. Raftery, OFFIT KURMAN,
PA, Bethesda, Maryland, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

      Bank    of     America,       N.A.    (the     Bank),      a    national    banking

association        with   its       principal      place    of       business    in   North

Carolina,     brought      this      action       against    Christopher        Sands,    a

citizen of Virginia, accusing him, among other things, of actual

and constructive fraud.               According to the Bank, Sands made a

number of misrepresentations related to his company’s accounts

receivable, which the Bank relied upon when issuing a loan to

facilitate a third party’s purchase of his company.                              The case

survived motions for summary judgment and proceeded to trial.

At the close of the Bank’s case, the district court determined

that there was insufficient evidence to send the case to the

jury and granted Sands’s motion for judgment as a matter of law.

The   Bank   appeals      this       ruling.        Because      we     agree    with    the

district     court    that      a    reasonable      jury     would      have    lacked    a

legally sufficient evidentiary basis on which to find that Sands

engaged in actual or constructive fraud, we affirm.

                                             I.

      Given the procedural posture of this appeal, we view the

evidence in the light most favorable to the Bank and draw all

reasonable    inferences        from       that   evidence       in    its   favor.      See

Buckley v. Mukasey, 538 F.3d 306, 321 (4th Cir. 2008).                                   The

evidence presented at trial established the following facts.

                                              3
     Sands       was    the       founder,      co-owner,             and    chief    executive

officer of AC Technology, Inc., a company in the business of

reselling hardware.             From the company’s inception, Sands’s goal

was eventually to sell it, preferably for cash.                                      Because he

desired a cash purchase of the company, he rejected multiple

offers    that      contained       noncash         components.             Ultimately,       this

perseverance        paid     off,       and    on     July       1,     2008,    MB     Security

Corporation purchased AC Technology for approximately $5 million

in cash.

     In    effectuating           this    purchase,         MB    Security       used    a    loan

furnished by the Bank.                   The loan involved a line of credit,

capped at $10 million, that allowed MB Security to draw varying

amounts    depending         on    the    level       of    AC    Technology’s          accounts

receivable, which served as the collateral base for the loan.

Hence,    as   the      value      of    AC    Technology’s            accounts       receivable

increased,     so      did   the    amount      that       MB    Security       could   borrow,

provided this amount could not exceed $10 million.                                    This loan

structure is known as “receivable financing.”

     As was to be expected, the Bank demanded certain documents

relating to AC Technology’s finances, particularly its accounts

receivable, for determining how much to lend.                               Most pertinent to

this appeal are documents referred to as accounts receivable

aging     (ARA)      summaries.               These        ARA    summaries          listed    AC

Technology’s accounts receivable, the customers to which they

                                                4
related, and how long they had been outstanding.                       An account

receivable could not be properly listed on an ARA summary until

the product shipped to the purchaser.               Until then, it remained a

purchase order, not a billable account receivable.

     To   satisfy      the    Bank’s    requests    for     accounts    receivable

information, Sands sent ARA summaries to Michael Byrd and Earle

Munns, co-owners of MB Security.              He did not provide Byrd and

Munns direct access to AC Technology’s records and books.                       Byrd

and Munns then sent ARA summaries to the Bank, which understood

them to be receiving their information from Sands.                     Also, based

on the information set forth in the ARA summaries, Byrd and

Munns prepared borrowing base certificates (BBCs) for the Bank.

After subtracting certain ineligible accounts receivable, BBCs

calculated    a    gross     accounts     receivable       availability       number,

which the Bank used to determine the line of credit.

     In   supplying     information       about    AC   Technology’s      accounts

receivable to Byrd and Munns, Sands knew what did and did not

constitute    an    account    receivable.         Prior    to   the   sale    of    AC

Technology,       he   actively        participated        in    maintaining        the

company’s accounting system and constantly reviewed its accounts

receivable.       He was aware that for a purchase to be listed as an

account receivable in the information he was providing to Byrd

and Munns, the product must have actually shipped.                      That said,

                                          5
it   was   never       Sands’s    practice        to   verify      whether    orders   had

shipped as planned.

        Sands also appreciated that the Bank would rely upon the

financial information he provided Byrd and Munns in its loan

decisions.       And, along those lines, he understood that Byrd and

Munns    were    to    supply     the     Bank    with       the   accounts   receivable

information that he provided them.                     From these facts arises the

reasonable inference that Sands anticipated that the Bank would

base    its     loan    decisions        at   least     in    part    on   the    accounts

receivable information that he furnished Byrd and Munns.

       On the evening of June 27, 2008, three days before the loan

closing, Sands sent an e-mail to Byrd and Munns with an ARA

summary       attached.          Among    the     specific         accounts   receivable

contained in this ARA summary were two that possess particular

relevance here: an account receivable relating to a purchase by

the Maryland Procurement Office (MPO) and an account receivable

relating to a purchase by General Dynamics (GD).                                 Sands had

requested that the vendor for the MPO purchase ship the product

earlier in the day and, as was customary for him, listed it as

an account receivable without verifying that the product had

actually shipped.          To the extent they existed, similar details

regarding the GD purchase were not provided.                          In any event, at

the time Sands sent this ARA summary, neither the MPO purchase

nor the GD purchase had in fact shipped.

                                              6
      Later in the night of June 27, after receiving the ARA

summary from Sands, Byrd sent an ARA summary to the Bank via e-

mail.     But this ARA summary was not the same ARA summary that

Sands had sent Byrd and Munns.                     Whereas Sands’s ARA summary

listed     the   total   worth     of        the    GD    account      receivable    as

$163,709.13,      Byrd’s       summary        listed      its     total      worth   as

$4,469,509.13.      And although Sands’s ARA summary provided one

MPO   account    receivable     with     a    total      worth    of     $2,007,460.66,

Byrd’s summary listed two MPO accounts receivable, one having a

total worth of $25,980.00 and the other having a total worth of

$2,010,000.00.      Other discrepancies in values existed as well.

Because of these differences, the two ARA summaries contained

different    amounts     for    the      total      worth    of     AC    Technology’s

accounts receivable: Byrd’s ARA summary listed total accounts

receivable of $9,649,523.00, but Sands’s ARA summary reported

accounts receivable totaling only $4,896,514.65.

        Byrd and Munns created these disparities by altering the

ARA summary that Sands sent them.                  In making these alterations,

Munns dictated to Byrd the values of accounts receivable for

various accounts, which Byrd then entered.                        Nothing at trial

                                          7
established that Sands represented these inflated values to Byrd

or Munns. 1

     On the morning of June 29, 2008, Munns resent Byrd’s June

27 e-mail with the above-described altered ARA summary to the

Bank based on the understanding that it did not receive the

prior one.    He did not make any further changes to Byrd’s ARA

     1
       We have thoroughly examined the record regarding this
point.   At one point, regarding the value of the GD purchase,
Byrd testified that he received the inflated number from Munns,
and when asked where Munns obtained that number, Byrd stated
that “[t]he General Dynamics was some conversations [Munns]
claimed he was having with Mr. Sands.”    That statement is too
ambiguous to yield a reasonable inference that Sands represented
to Munns that the GD purchase was valued at over $4 million
rather than the approximately $160,000 he listed in his ARA
summary.    This is particularly true in light of the other
testimony.   Munns testified that he did not know the source of
the information regarding the GD purchase.       And earlier in
Byrd’s testimony, he stated that he only assumed Munns obtained
the information from Sands. Moreover, Byrd testified that Munns
told him that the information he was including came not only
from Sands, but from others.    And, even then, he subsequently
clarified that he did not entirely understand where Munns was
receiving his information.

     Also, in an attempt to show that Sands provided the
information regarding the value of the GD purchase, the Bank
points to a number of e-mails that Byrd sent it wherein he
mentioned the value of the GD purchase and alluded to
conversations with Sands.    But we have reviewed these e-mails
and find nothing to suggest that the value of the GD purchase
came from these conversations.      The fact that the e-mails
contain references to both the GD purchase and conversations
with Sands does not yield a reasonable inference that the value
of the GD purchase came from him. In the end, even viewing the
evidence in the light most favorable to the Bank, we find
nothing establishing that Sands represented to Munns or Byrd the
inflated values included in Byrd’s ARA summary.

                               8
summary before resending it.          The following morning, on June 30,

Byrd sent the Bank a BBC that listed the total amount of AC

Technology’s accounts receivable as $9,649,523.                   The Bank, in

deciding the amount of credit to extend, relied on this BBC and

Byrd’s ARA summary.         Had the MPO and GD accounts receivable not

been listed in that ARA summary, the amount of available credit

would have dropped significantly.            In fact, without the MPO and

GD accounts receivable, the Bank would not have issued the loan

to   cover   the   purchase     price   because     there    would    have    been

insufficient collateral.

      The closing for the loan took place on June 30, 2008.                   That

morning, at 9:56 a.m., an AC Technology employee, Paul Ford,

forwarded Sands an e-mail, the subject line of which read “FW:

Orders.”     The    forwarded    material     in   the    body   of   the   e-mail

mentioned that the MPO purchase would not ship until mid-July.

According    to    Sands,   because     he   was   busy    preparing    for   the

closing, he did not read the e-mail that morning and it was not

until the following day that he discovered the MPO order had

failed to ship.       At 11:42 a.m. on June 30, Sands sent Byrd and

Munns an e-mail from the same account to which Ford sent the e-

mail regarding the expected shipment date for the MPO purchase.

Sands attached an ARA summary and informed them that it was “the

A/R as of 8:30 am this morning June 30, 2008.”               The MPO purchase

remained listed as an account receivable on this ARA summary.

                                        9
Its total worth was $2,135,268.47.                Also still listed as an

account receivable was the GD purchase.             Its total worth, as on

Sands’s June 27 ARA summary, remained $163,709.13.                 But again,

neither of these purchase orders had shipped.

       At the closing, the Bank extended a loan of $5.5 million to

fund MB Security’s purchase of AC Technology.                 Of this $5.5

million, Sands personally received about $1.38 million.                      The

next day, on July 1, MB Security closed on its purchase of AC

Technology.

       AC Technology subsequently defaulted on the loan, and the

Bank undertook efforts to recover the balance it was owed.                   The

Bank    brought   a   lawsuit    against   Byrd    alleging   fraud.        Byrd

eventually settled with the Bank, agreeing to a nondischargeable

judgment against him.         The Bank also obtained a judgment against

Munns.     Nevertheless, at the time of Sands’s trial, the Bank

still maintained an outstanding balance of $4,377,722 on the

loan.

       The Bank filed a complaint against Sands and James Stephen

Britt in the Eastern District of Virginia on June 29, 2010.                  The

complaint alleged that Britt was an attorney and current co-

owner of AC Technology who, on behalf of himself, Byrd, and

Munns,    negotiated    and     entered    into   the   purchase    and     sale

agreement with Sands.          The Bank asserted causes of action for

fraudulent    misrepresentation,      constructive      fraud,     common    law

                                      10
conspiracy to commit fraud, and statutory conspiracy to commit

fraud.      The Bank’s case survived motions for summary judgment.

On May 3, 2011, the Bank stipulated to the dismissal of Britt as

a defendant.

       The case against Sands proceeded to trial on May 9, 2011.

The next day, at the close of the Bank’s case, the district

court granted Sands’s motion for judgment as a matter of law

pursuant to Federal Rule of Civil Procedure 50(a), finding there

was    insufficient       evidence       to    send       the       case     to       the     jury.

Specifically, the district court concluded that the Bank had

failed to provide evidence demonstrating that Sands knew the

products     relating     to    the     MPO    and       GD    purchases      had       not    yet

shipped,      meaning       that        he         did        not     make        a         knowing

misrepresentation in listing them as accounts receivable.                                      The

court also determined that the Bank did not rely on Sands’s

representations in determining the amount of credit to extend

but    instead   relied    on     the    altered         information         that      Byrd    and

Munns sent it.       The Bank then filed this timely appeal.

                                             II.

       We   review   de    novo    a    district         court’s       order      granting       a

motion for judgment as a matter of law.                             Buckley, 538 F.3d at

321.     In conducting this review, we apply the same standards as

the district court.         Corti v. Storage Tech. Corp., 304 F.3d 336,

                                              11
341 (4th Cir. 2002).               Pursuant to this standard, a district

court may enter judgment as a matter of law against a party on a

claim   only    if,    after    the      party   has     been   fully       heard    on   a

dispositive issue, the court determines “that a reasonable jury

would not have a legally sufficient evidentiary basis to find

for the party on that issue.”              Fed. R. Civ. P. 50(a).              Moreover,

because   our   jurisdiction        in    this    case    rests      on    diversity      of

citizenship,     we    apply   the    substantive        law    of    Virginia.        See

Universal Concrete Prods. v. Turner Constr. Co., 595 F.3d 527,

529 (4th Cir. 2010).

      Virginia law recognizes claims for both actual fraud and

constructive fraud.           See Evaluation Research Corp. v. Alequin,

439   S.E.2d    387,    390    (Va.      1994).        To   prove         actual    fraud,

claimants must provide evidence of “(1) a false representation,

(2) of a material fact, (3) made intentionally and knowingly,

(4) with intent to mislead, (5) reliance by the party misled,

and (6) resulting damage to the party misled.”                       Id.      Similarly,

to    sustain    claims       of    constructive         fraud,      claimants       must

establish 1) “a material false representation”; 2) “that the

hearer believed it to be true”; 3) “that it was meant to be

acted on”; 4) “that it was acted on”; and 5) “that damage was

sustained.”      Nationwide Ins. Co. v. Patterson, 331 S.E.2d 490,

492 (Va. 1985).         “Constructive fraud differs from actual fraud

in that the misrepresentation of material fact is not made with

                                           12
the intent to mislead, but is made innocently or negligently

although      resulting          in    damage        to     the        one      relying       on    it.”

Evaluation Research, 439 S.E.2d at 390.

      Claimants alleging actual fraud or constructive fraud must

prove      each    element        of        the     claim        by     clear     and     convincing

evidence.         ITT Hartford Grp., Inc. v. Va. Fin. Assocs., Inc.,

520 S.E.2d 355, 361 (Va. 1999).                          “Clear and convincing evidence

is such proof as will establish in the trier of fact a firm

belief or conviction concerning the allegations that must be

established.”          Thompson         v.        Bacon,     425       S.E.2d     512,     514      (Va.

1993).      It requires “more than a mere preponderance” of evidence

but less evidence than is necessary to prove a claim “beyond a

reasonable doubt.”               Fred C. Walker Agency, Inc. v. Lucas, 211

S.E.2d 88, 92 (Va. 1975) (quoting Cross v. Ledford, 120 N.E.2d

118, 123 (Ohio 1954)) (internal quotation marks omitted).

      We      begin         by        recognizing           that         Sands        made         false

representations         of       material         facts.         As     the    Bank     asserts,      he

falsely     represented           to    Byrd       and     Munns        that    the     MPO    and    GD

purchases were accounts receivable.                         The evidence, viewed in the

light      most    favorable           to     the        Bank,        established       that       these

purchases had not yet shipped and therefore could not properly

be listed as accounts receivable.                                Sands nevertheless listed

them as accounts receivable on his ARA summaries.                                       And because

the   value       of   AC    Technology’s            accounts           receivable        drove      the

                                                    13
amount      of    the    loan     that      the    Bank      would    extend,     these     false

representations were material.

       We agree, however, with the district court that the Bank

failed      to    provide      evidence       on    which      a    reasonable     jury     could

conclude that it relied upon Sands’s false representations.                                  For

both       actual       and    constructive            fraud,       claimants     must    prove

reliance on the misrepresentations by the injured party.                                      See

Richmond Metro. Auth. v. McDevitt Street Bovis, Inc., 507 S.E.2d

344,       346-47    (Va.      1998).         The       Bank    points      to    Sands’s    ARA

summaries, which contained his false representations that the

MPO and GD orders were accounts receivable.                                 But the Bank did

not rely on Sands’s ARA summaries in making its loan decision.

Rather,      it     relied      on    the    inflated        value     of    AC   Technology’s

accounts receivable as reported in Byrd’s BBC and ARA summary.

And, as seen, Byrd’s ARA summary did not simply relay Sands’s

representations           to    the    Bank.           Instead,      Byrd    altered     Sands’s

information         to    raise       the   value       of     AC    Technology’s      accounts

receivable—his total value of the company’s accounts receivable,

$9,649,523, was significantly higher than the value that Sands

represented, $4,896,514.65. 2

       2
       This number comes from Sands’s June 27 ARA summary.  In
his June 30 ARA summary, he stated the total amount of AC
Technology’s accounts receivable was $6,335,373.82, which is
still less than Byrd represented.       The evidence at trial
demonstrated, however, that the Bank did not rely upon Sands’s
(Continued)
                                                  14
        Thus,    it   was     Byrd’s,    not       Sands’s,   false    representations

regarding the worth of AC Technology’s accounts receivable that

the Bank relied upon in deciding that enough collateral existed

to extend the $5.5 million loan.                    No reasonable jury could have

concluded otherwise.                Accordingly, we agree with the district

court     that    the    Bank       failed     to     provide    legally      sufficient

evidence     upon     which     a    reasonable       jury    could    find    actual    or

constructive fraud.            And having determined that the evidence was

insufficient to show reliance by the Bank, we need not reach the

district court’s determination that a reasonable jury could not

find    by   clear      and    convincing          evidence     that   Sands    had     the

requisite knowledge for actual fraud.

                                             III.

       For these reasons, we affirm the judgment of the district

court.

                                                                                AFFIRMED

June 30 ARA summary, as it had already decided to extend the
loan by that time.

                                              15