- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
GMS Indus. Supply, Inc. v. G&S Supply, LLC, 2022 U.S. Dist. LEXIS 51657, 2022 WL 853624 (E.D. Va. Mar. 22, 2022)
GMS Indus. Supply, Inc. v. G&S Supply, LLC, 2022 U.S. Dist. LEXIS 51658, 2022 WL 853626 (E.D. Va. Mar. 22, 2022)
GMS Indus. Supply, Inc. v. G&S Supply, LLC, 2022 U.S. Dist. LEXIS 151648, 2022 WL 3635325 (E.D. Va. Aug. 23, 2022)
GMS Industrial Supply, Inc. (“GMS”) is an industrial sales company that sells its products to military customers throughout the United States, Europe, and Asia. To sell its products, GMS uses sales agents. GMS hired Westly L. Greer (“Greer”) as a sales agent in 2011 and promoted him in 2015 to Director of Sales, which gave him access to GMS’ confidential, proprietary, and trade secret information. In 2015, Greer started GMC Supply, LLC (“GMC”) with Gregory Spires (“Spires”) and two other GMS sales agents. In June 2017, Greer and Spires started G&S Supply, LLC (“G&S”), which sold standard industrial products to GMS customers. Greer and Spires also recruited other GMS sales agents to sell G&S goods to GMS customers. On April 3, 2019, GMS’ counsel sent letters to Greer, Spires, and other sales agents working with G&S terminating their sales agreements with GMS. Greer’s letter also informed him of his legal obligation to preserve all potentially relevant information and his responsibility to suspend any document destruction policies and automatic deletion functions.
On April 17, 2019, GMS sent Greer a letter directing him to return GMS’ property (laptop, desktop, tablet, and two monitors), which Greer returned on April 22, 2019. GMS discovered that user-created files had been deleted and they could not access the tablet because it was password protected. GMS had a forensic examination performed on the laptop and desktop, which revealed 18,866 deleted files after Greer received the litigation hold letter, the attachment of unique data storage devices, and the connection of a USB device. After Greer attached the USB device on April 19, 2019, Greer then ran a Google search for “fileshredder,” visited the File Shredder website, downloaded and installed the file shredding program, ran the file shredding program which permanently deleted 3,397 files, and then uninstalled the file shredding program.
On June 20, 2019, GMS sued G&S, Greer, and other defendants for injunctive relief and damages. The Court granted a temporary restraining order and preliminary injunction. The Court granted in part and denied in part the defendants’ motion to dismiss and the plaintiffs amended their complaint. Both sides then moved for sanctions pursuant to Rule 11 and GMS moved for partial summary judgment. The Court granted GMS’ motion for sanctions against Greer and G&S, denied the defendants’ motion for sanctions, and denied GMS’ motion for partial summary judgment.
Spoilation refers to the destruction or material alteration of evidence or to the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation. Movants must establish the following before a court decides if any spoliation sanction is appropriate: (1) ESI should have been preserved; (2) ESI was lost; (3) the loss was due to a party’s failure to take reasonable steps to preserve the ESI; and (4) the ESI cannot be restored or replaced through additional discovery. Spoliation requires more than negligent loss or destruction, as the alleged destroyer must know that the evidence was relevant to some issue in the anticipated case and willfully engaged in conduct resulting in the evidence’s loss or destruction. If spoliation occurred, courts may impose a variety of sanctions, ranging from dismissal or judgment by default, preclusion of evidence, imposition of an adverse inference, or assessment of attorney’s fees and costs, but the sanction should be molded to serve the prophylactic, punitive, and remedial rationales underlying the spoliation doctrine.
The defendants’ agreed that GMS could establish the first and third elements, so the Court only examined the second and fourth elements. For Rule 37(e) purposes, information is lost if it is irretrievable from another source, including other custodians. Irreplaceability does not require a party to pursue every possible avenue for replacing or restoring the ESI, but good-faith attempts must be made to explore its alternatives before pursuing spoliation sanctions. Of the 3,397 files Greer destroyed, GMS was only able to recover the original file names for 2,916 files, which meant that GMS was unable to recover the names for 481 files destroyed by Greer and it was impossible for the parties to determine whether those files were relevant or replace the files. Thus, the Court found that the DLA documents and the 481 permanently deleted files were both lost and irreplaceable.
Sanctions under Rule 37(e)(1) require a finding of prejudice to another party from the loss of the information, which sanctions under Rule 37(e)(2) requires a finding that the party acted with the intent to deprive another party of the information’s use in litigation. A party’s conscious dereliction of a known duty to preserve electronic data – whether passive or active – is both necessary and sufficient to find that the party acted with the intent to deprive another party of the information’s use under Rule 37(e)(2). The Court found that Greer actively attempted to destroy files after receiving GMS’ litigation hold letter and second letter to return GMS’ equipment. For sanctions, the Court imposed an adverse inference jury instruction and ordered Greer and G&S to pay GMS’ reasonable attorney fees and costs incurred in preparing its motion for sanctions. The Court reduced GMS’s attorney’s fee request and awarded GMS $95,022.05 in attorney’s fees.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Fernaays v. Isle of Wight Cnty., 2022 U.S. Dist. LEXIS 52804, 2022 WL 866416 (E.D. Va. Mar. 23, 2022)
Plaintiffs brought an inverse condemnation action claiming the Isle of Wight County’s (“County”) failure to maintain a drainage easement on their two properties caused damage to the properties, including erosion, a sinkhole, unstable banks, and sediment deposits. Plaintiffs identified five expert witnesses. The County moved to exclude all five experts based on Plaintiffs’ failure to provide Rule 26(a)(2)(B) disclosures and based on the experts’ purported failure to provide reliable and relevant opinions as required by Rule 702. Plaintiffs conceded that Patricia Raper would be called as a fact witness and not as an expert. For John T. Claud (“Claud”), John Steve Ferguson, L.S. (“Ferguson”), and Nanette Criddle (“Criddle”), the Court found their reports deficient under Rule 26(a)(2)(B) and unreliable under Rule 702. For Dennis Gruelle, the Court found his report complied with Rule 26(a)(2)(B), but his opinions were unreliable under Rule 702. The Court excluded the expert testimony of all five designated experts, but permitted one to provide factual testimony at trial.
Claud was to testify about “drainage improvements within the drainage easement including their type, construction method, failure, and method of repair.” He did not provide any information regarding his education, training, or experience to establish how he was qualified to offer engineering opinions. Claud failed to identify the facts or data that he considered in forming his opinions and did not state whether he conducted site visits, performed studies, and/or reviewed photographs. Claud opined that “remediation must include bank stabilization and an individual dredging plan to remove sediment from Brewer’s Creek,” but failed to state the basis and reasons for this opinion. Without a sufficient proffer as to an expert’s qualifications, the Court refused to permit Claud to offer opinions that require scientific, technical, or other specialized knowledge.
Ferguson was to testify about “surveying of the drainage easement and the rate of failure drainage improvements.” Ferguson’s report consisted of a single-page drawing purporting to show the areas of erosion and the sinkhole with dates ranging from March 13, 2020 to August 25, 2021. Plaintiffs later provided a supplemental disclosure attaching Ferguson’s resume and a statement of his compensation for testifying. The one-page drawing was provided without explanation and contained none of the disclosures required by Rule 26(a)(2)(B). None of the opinions asserted could be gleaned solely from the document, any reasons alleged, or any facts or data provided. Ferguson included no explanation of what the drawing or the dates on the document represented.
Criddle was to testify about “her duty as a real estate salesperson to disclose known defects and sinkhole’s negative impact on the marketability of the subject property.” Criddle’s report consisted of a one-page letter addressed to Plaintiffs, purportedly “to identify impacts to your properties arising from the dedicated drainage easement encumbrances on your properties which the County refuses to maintain.” Criddle failed to identify the facts or data she considered in forming her opinion that the easement and sinkhole reduce the salability of the properties, failed to identify the basis or reason for this opinion, and failed to disclose any information about her qualifications and why she is entitled to offer this opinion other than the fact that she has a realtor’s license.
Gruelle was to testify about “the value of the subject properties before and after the failure to maintain the drainage easement.” Gruelle provided two appraisals and concluded that the difference in market value before and after the sinkholes are $75,000 and $190,000 for the Brock and Fernaays’ properties, respectively. He did not, however, explain why the condition and costs to repair this sinkhole and drainage easement would be similar to a comparable property in the same subdivision. Gruelle simply stated that they are similar. Also, his opinions rested on an unreliable foundation because they relied on a number of people who were not designated to testify in this litigation, or whose testimony the Court had already found unreliable under Rule 702.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Reserve at Winchester I, LLC v. R 150 SPE, LLC, 2022 U.S. Dist. LEXIS 21367, 2022 WL 358500 (W.D. Va. Feb. 7, 2022);
Reserve at Winchester I, LLC v. R 150 SPE, LLC, 2022 U.S. Dist. LEXIS 106803, 2022 WL 2161518 (W.D. Va. Jun. 15, 2022);
Reserve at Winchester I, LLC v. R 150 SPE, LLC, 2022 U.S. Dist. LEXIS 177447 (W.D. Va. Sep. 29, 2022)
Robert B. Cathcart (“Cathcart”) and the Reserve at Winchester, LLC (“Reserve” and collectively with Cathcart, the “Plaintiffs”) signed a real estate purchase option agreement (the “Option”) with R 150 SPE, LLC (“R150”). The Option structured the parties’ responsibilities and negotiations pertaining to Cathcart’s potential future purchase of 26 acres of R150’s land (the “Property”). If the parties agreed on the exact location of the 26 acres and honored their respective contractual obligations, R150 would sell the 26 acres to Cathcart and keep the remainder for itself. The Option required the Plaintiffs to deliver 3 documents to R150 at appropriate times. One of these documents was a “written notice of exercise” on or before the Options expiration. The Plaintiffs were also required to give a final approved Site Plan and the legal description of the approximately 26 acres to be subdivided into parcels to R150 before closing on any given parcel. The parties executed 3 Amendments to the Option. The Second Amendment memorialized the parties’ intent to make the potential sale in two conveyances instead of three. However, the deal fell through, partly
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Schmidt v. U.S. Dept. of Defense Office of Inspector Gen., 2022 U.S. Dist. LEXIS 90583, 2022 WL 1572245 (E.D. Va. May 18, 2022)
Following the Department of Defense Office of Inspector General’s (“OIG”) public release in April 2020 of the Joint Enterprise Defense Infrastructure Cloud Procurement report (“JEDI Cloud Report”), the Honorable Joseph E. Schmitz (“Schmitz”), a former Inspector General, submitted several Freedom of Information Act (“FOIA”) requests to the OIG, seeking the case investigative file and similar documents related to allegations of financial conflicts of interest on the part of federal officials involved in the JEDI procurement process. The OIG provided Schmitz with several sets of documents, each containing redactions. Schmitz did not file administrative appeals as to any of the documents sent to him by the OIG or another federal sub-agency. Several months later, Schmitz filed suit against the OIG and the other sub-agency, alleging violations of the FOIA.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
United States ex rel. Allan Myers VA, Inc. v. Ocean Constr. Servs., 2022 U.S. Dist. LEXIS 89940, 2022 WL 1571310 (E.D. Va. May 18, 2022)
In June 2020, Ocean Construction Services, Inc. (“Ocean”) contracted with the United States Army Corps of Engineers (“USACE”) for the renovation of certain sections of Arlington National Cemetery (the “Project”). Ocean subcontracted with Allan Myers VA, Inc. (“Myers”) to perform earthwork and concrete and asphalt work. Once on the job, Myers’ work repeatedly failed to satisfy Ocean and USACE. In July 2021, following months of jobsite disagreements and delay, USACE issued Ocean a “cure notice” related to Myers’ work. Ocean, in turn, notified Myers of USACE’s concerns and Myers agreed to remedy its deficiencies. Two weeks later and after additional failures by Myers, USACE issued a “safety stand-down notice,” halting all work on the Project. On August
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Jacobs Eng’g Grp., Inc. v. CONRAIL, 2022 U.S. Dist. LEXIS 69563, 2022 WL 1123789 (E.D. Va. Jul. 21, 2022)
Jacobs Engineering Group, Inc. (“Jacobs”) provided engineering and/or construction management services for Consolidated Rail Corporation (“CRC”) under “on-call” contracts. CRC is the primary subsidiary of Conrail, Inc. (“Conrail”). On November 13, 2008, Jacobs and CRC entered into an Engineering Services Agreement (the “2008 Agreement”), under which Jacobs could provide engineering design, in-house engineering, and construction management services to CRC from December 1, 2008 to December 31, 2009, unless terminated sooner in accordance with Appendix A. The period of performance was extended through a series of change orders. On March 31, 2016, Jacobs and CRC entered into a new contract (the “2016 Agreement”).
CRC hired Cornell & Company, Inc. (“Cornell”) to replace steel cables attached to the Delair Bridge. Cornell used hydraulic jacks from a third party to support the bridge’s lift span while it replaced the cables. A jack failed, killing one Cornell employee and injuring another. Two negligence lawsuits were brought against Conrail, Jacobs, the jack manufacturer, the manufacturer of the t-fitting attached to the jack, and the owner of the jack who rented it to Cornell, which were then consolidated (the “Philadelphia Litigation”). Conrail crossclaimed against Jacobs for contractual indemnification and demanded that Jacobs defend Conrail. Conrail also crossclaimed for breach of contract, asserting that Jacobs had an obligation to procure insurance naming Conrail as an additional insured. Jacobs brought this declaratory action in federal court in Virginia seeking a declaration as to which contract controlled for purposes of the Philadelphia Litigation.
The Court declined to exercise jurisdiction and granted Conrail’s motion to dismiss. The Declaratory Judgment Act provides that, in a case of actual controversy, any court of the United States may declare the rights and other legal relations of any interested party seeking such declaration. If a court has jurisdiction, then (1) there must also be a ‘case or controversy’ within the confines of Article III of the Constitution and (2) the trial court, in its discretion, must be satisfied that relief is appropriate. Here, the Court found that it had subject matter jurisdiction and assumed the dispute was a ‘case or controversy.’ However, the Court, in its discretion, declined to exercise jurisdiction. A declaratory judgment action is appropriate (1) when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue and (2) when it will terminate and afford relief from uncertainty, insecurity, and controversy giving rise to the proceeding. Where, as here, a related state proceeding is underway, a court should consider whether the controversy can better be settled in the pending state court. Factors to consider include: (i) the strength of the state’s interest in having the issues raised in the federal declaratory action decided in the state courts; (ii) whether the issues raised in the federal action can more efficiently be resolved in the court in which the state action is pending; (iii) whether permitting the federal action to go forward would result in unnecessary entanglement between the federal and state court systems, because of the presence of overlapping issues of fact or law; and (iv) whether the declaratory judgment action is being used merely as a device for procedural fencing—that is, to provide another forum in a race for res judicata or to achieve a federal hearing in a case otherwise not removable. The Court concluded the controversy would better to be brought in Pennsylvania state court, as Pennsylvania had a strong interest in resolving all litigation stemming from a single controversy in a single court system, the Philadelphia Litigation’s extensive record would more efficiently resolve the issues, and declaratory judgment from the Federal Court would not settle the entire controversy.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Clarendon Regency IV, LLC v. Equinox Clarendon, Inc., 2022 U.S. Dist. LEXIS 86096, 2022 WL 1494377 (E.D. Va. May 11, 2022)
Clarendon Regency IV, LLC (“Clarendon”), landlord, and Equinox Clarendon, Inc. (“Equinox”), tenant, entered into a commercial lease (the “Lease”). Under the Lease, Clarendon was to make $5,868,041.00 in structural and architectural alterations and modifications to the building. Within 90 days of receiving Clarendon’s final construction drawings, Equinox was to provide Clarendon with construction work plans. On March 19, 2019, Clarendon provided Equinox with final construction drawings. Equinox was late in submitting plans. Because Equinox did not submit plans, the parties amended the Lease to modify the Commencement Date and provide that Equinox waived its right to terminate the Lease. On December 16, 2019, Equinox filed its initial permit application. On April 1, 2020, Equinox sent Clarendon a letter saying it was unable to commence previously planned construction projects due to COVID-19, which rendered Equinox’s Lease obligations commercially impracticable and impossible for an indefinite period. After confirming the Arlington County permitting office was fully functional, Clarendon sent Equinox a letter on April 10, 2020 rejecting Equinox’s April 1, 2020 letter. On May 21, 2020, Clarendon delivered the premises to Equinox (the “Delivery Date”). When Equinox had still not obtained the necessary permits to complete its work obligations under the Lease, Clarendon sent Equinox a letter on July 9, 2020 regarding its perceived failures, that it was in default under the Lease, and that it had 30 days to cure. On August 28, 2020, Equinox attempted to terminate the Lease. Clarendon asserted that the Lease Commencement Date began on November 17, 2020, 180 days after the Delivery Date. On November 19, 2020, Clarendon sued Equinox for breach of contract.
The Court denied Clarendon’s Motion for Summary Judgment because there were genuine disputes of material fact. The parties disputed when Clarendon submitted its final plans and specifications, thereby triggering the 90-day period for Equinox. Equinox argued the trigger date was June 27, 2019. Second, the parties disputed whether Equinox diligently pursued obtaining necessary permits. The Lease defined “diligently pursue” to include payment of fees and charges, hiring an expediter, and cooperating with the governmental agencies in an expeditious manner. There was evidence that Equinox did apply for permits, but elected to not pursue a third round of permit applications due to COVID-19. Also, the parties disputed the permit filing date.
The Court permitted Count I of Equinox’s Amended Counterclaim for declaratory judgment as to whether or not the Lease was breached to proceed. Clarendon’s allegation that Equinox failed to diligently pursue its permit requirements under the Lease is the only basis on which Clarendon could bring a breach of contract claim. If Equinox is found to have diligently pursued its permits, this determination does not require the factfinder from also assessing whether the Lease was properly terminated, but does preclude Clarendon from obtaining judgment for damages against Equinox on its breach of contract claim. Declaratory relief would serve the purpose of clarifying the rights of the parties and removing the specter of uncertainty.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Abacus Tech. Corp. v. Sci. Applications Int’l Corp., 2022 Va. Cir. LEXIS 27 (Cir. Ct. Fairfax Cnty. Apr. 6, 2022)
Science Applications International Corporation (“SAIC”), a primary government contractor, subcontracted with Abacus Technology Corp. (“Abacus”) for Abacus to help SAIC with its work for NASA under SAIC’s government contract with the agency. SAIC terminated the subcontract and Abacus alleged $450,775.09 in damages for breach of contract for nonpayment of Abacus’ full indirect cost reimbursement adjustment to its 2018 invoice. Abacus alleged its subcontract with SAIC was a cost-plus-award-fee contract, i.e. Abacus would be paid its costs of performance in addition to a calculated award fee. Abacus’ indirect costs (“G&A Expenses”) were subject to after-action government audit, which occurred and adjusted the G&A Expense rate upward for Abacus. Abacus alleged that SAIC refused to reimburse Abacus for its G&A Expenses. SAIC alleged that Abacus is to blame for a cost overrun where Abacus exceeded the maximum funding allowed under a cost-reimbursement subcontract and failed to provide timely notice to SAIC of the overrun. At issue was how much Virginia’s summary judgment procedure was expanded when the 2019 Virginia General Assembly revised Virginia’s summary judgment procedures to permit certain business litigants to use affidavits and depositions to support their summary judgment motions. Va. Code § 8.01-420(C).
The Court denied Abacus’ Motion for Partial Summary Judgment and held that the 2019 amendment did not morph Virginia summary judgment procedure into its federal court analogue and the amendment only slightly liberalized civil procedure to permit the use of affidavits and depositions to support summary judgment motions. Abacus argued, due to the 2019 amendment, that once Abacus filed its Motion for Summary Judgment and offered its declaration, SAIC’s failure to file responsive affidavits, offer contrary deposition testimony, or otherwise put on evidence negated any general denials of Abacus’ claim in pleadings. While the 2019 amendment allows a party to use depositions and affidavits to support or oppose a motion for summary judgment, Virginia does not have an analogous requirement to Federal Rules of Civil Procedure Rule 56(c)(1), which requires a party to support or defend a factual assertion in a motion for summary judgment and failure to do so may lead a court to deem the non-presented fact undisputed for purposes of the motion. The General Assembly also knew that the Supreme Court of Virginia directly held that a party has no duty to develop a factual record in time for an opposing party’s summary judgment motion. Abacus needed deposition testimony or affidavits from SAIC rebutting SAIC’s pleaded claims, not from Abacus itself, or Abacus needed other evidence showing that SAIC did not really dispute Abacus’ claims despite SAIC’s denials in the pleadings. However, Abacus had neither. Ultimately, the Court found there were material facts in dispute, which the Court gleaned from the pleadings.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Powell v. Boxley Materials Co., 2021 U.S. Dist. LEXIS 228822, 2021 WL 5627035 (W.D. Va. Nov. 30, 2021)
Powell v. Boxley Materials Co., 2021 U.S. Dist. LEXIS 231886 (W.D. Va. Dec. 3, 2021)
Powell v. Boxley Materials Co., 2021 U.S. Dist. LEXIS 232992, 2021 WL 5772307 (W.D. Va. Dec. 6, 2021)
In February 2017, the Virginia Department of Transportation (“VDOT”) awarded Boxley Materials Company (“Boxley”) a contract to mill and pave Route 11 (the “Contract”). The contract required that all work be in accordance with the Virginia Work Area Protection Manual (“VWAPM”) and the Virginia Supplement to the Virginia Manual for Uniform Traffic Control Devices (“MUTCD”), that Boxley place “end of day” signage to warn drivers of ongoing construction, and that Boxley provide “Bump,” “Uneven Lanes,” and “Road Work Ahead” warning signs. Between milling and paving, there would be a 2-inch drop. On September 20, 2017, Richard Powell (“Powell”) rode his motorcycle on a milled section of Route 11 when the front wheel hit a ridge and flew Powell over the handlebars, injuring Powell. Video of the accident scene by the Volunteer Fire Department showed visible warning signs. Powell sued Boxley and its subcontractors for negligence. Boxley moved for summary judgment.
The Court denied Boxley’s motion for summary judgment because there were genuine disputes of material fact. Contributory negligence is an affirmative defense that the plaintiff failed to act as a reasonable person would have acted for his own safety under the circumstances and is ordinarily determined by the fact finder. There was a dispute on how the accident occurred because Boxley argued Powell switched from the left to the right lane despite a “Stay in Lane” sign, while Powell claimed he never switched lanes.
The December 6, 2021 opinion dealt with pre-trial motions, including motions to exclude certain experts. The plaintiff’s medical expert was excluded as a sanction for failure to comply with the Court’s Rule 16 scheduling order, specifically the scope and timing of disclosures required under Rule 26. The defendant’s medical expert was also excluded for failing to comply with the Rule 26 disclosure scope and timing. The Court in several instances emphasized the deficiency in disclosures for failing to provide the experts’ list of cases in which they have previously provided expert testimony. Finally, the Court undertook a Daubert analysis to assess the relevance and reliability of the engineering expert’s testimony. The engineering expert’s opinions as to contract interpretation and credibility of factual testimony were excluded under the Daubert analysis.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Givago Growth, LLC v. Itech AG, LLC, 863 S.E.2d 684 (Va. Oct. 14, 2021)
Contanza Valdes and Givago Growth, LLC (the “petitioners”) entered into a partnership agreement with Artifact, LLC (“Artifact”) and two other individuals, which provided for each party to contribute an amount to the development of land in McLean, Virginia, each party to receive a proportionate share of the proceeds when the land was sold, and for petitioners to retain title to the property until it was sold. To acquire capital to fund their contribution, Artifact and Valdes borrowed $400,000 from iTech AG, LLC (“iTech”). Several months later, Artifact and Valdes defaulted on the iTech loan. Artifact and iTech then entered into a joint venture agreement, in which Artifact stated it would provide a collateral deed of trust on the McLean property to secure iTech’s contribution. Petitioners were not a party to the Artifact-iTech agreement. In 2018, Valdes met with iTech’s attorney, said he could not provide the promised collateral deed of trust, and agreed to assign any proceeds he would receive from the sale of the property to iTech. In September 2018, iTech filed a complaint asserting a claim for specific performance and demanding the petitioners provide a secured interest in the property by way of a deed of trust. iTech’s attorney also filed a lis pendens in the land records with respect to the property. When the lis pendens was filed, the property was already under contract for sale. In January 2019, the sales contract for the property closed, but $812,668.90 of the proceeds were held in escrow because of the pending litigation. In August 2019, iTech nonsuited its complaint and withdrew the lis pendens. The petitioners then filed a complaint against iTech and its attorney for malicious abuse of process, slander of title, tortious interference with contractual relations, and civil conspiracy due to the lis pendens. The circuit court sustained the demurrers of iTech and its attorney to petitioners’ original complaint and amended complaint on the grounds that a lis pendens is entitled to absolute privilege and dismissed the petitioners’ amended complaint with prejudice. The petitioners appealed.
The Supreme Court of Virginia held that the circuit court erred in sustaining the demurrers. Absolute privilege is an affirmative defense and affirmative defenses may not be raised in a demurrer, which tests only the facial validity of the allegations in a complaint rather than the validity of affirmative defenses. Words spoken or written in a judicial proceeding that are relevant and pertinent to the matter under inquiry are absolutely privileged from subsequent charges defamation. The rule of absolute privilege is broad and comprehensive, including within its scope all proceedings of a judicial nature whether pending in some court of justice, or before a tribunal or officer with judicial or quasi-judicial powers, and includes any proceedings for purpose of obtaining such remedy as the law allows. Previously, the Supreme Court of Virginia has held that the filing of a mechanic’s lien is subject to a privilege because it is a prerequisite to a suit to enforce the lien. A lis pendens is similarly intertwined with the filing of a complaint. While not necessary to institute a case, a lis pendens provides notice of the pending lawsuit and merely republishes the key information from the complaint. Extending absolute privilege to a complaint but not a lis pendens would be inconsistent. In addition, absolute privilege does not apply to non-defamation torts in Virginia, specifically including malicious abuse of process, tortious interference with contractual relations, and civil conspiracy. For the information in the lis pendens to be sufficiently “relevant and pertinent to the matter under inquiry” for the absolute privilege to apply, it must be determined whether lis pendens was so palpably wanting in relation to the subject matter of the controversy that no reasonable man could doubt its irrelevancy and impropriety. If it is, then the absolute privilege does not apply. However, this is a fact driven inquiry that must be resolved by the trial court.
- Written by: Scott W. Kowalski, Mark A. Burgin, Thomas M. Wolf, Kenneth T. Stout and Jason F. Goldsmith
Advance Training Grp. Worldwide, Inc. v. ProActive Techs., Inc., 2022 U.S. Dist. LEXIS 155658, 2022 WL 3718494 (E.D. Va. Aug. 29, 2022)
Advance Training Group Worldwide, Inc. (“ATG”) provides advance tactical training services, but did not have any federal contracting experience. ProActive Technologies, Inc. (“ProActive”) provides engineering services and manufacturing for the United States (“U.S.”) military and its business is in the federal contracting world. In 2011, the U.S. government announced that it was starting the acquisition process for the U.S. Army Special Operations Forces RAPTOR III (“RAPTOR III”). On November 21, 2011, ProActive contacted ATG about ProActive and ATG working together in a joint venture (“JV”) on RAPTOR III. ProActive prepared an initial draft of a Memorandum of Understanding (“MOU”) between ProActive and ATG to create the JV for the purposes of bidding on and performing the RAPTOR III contract, which set forth the membership interests and voting rights in the JV as 67% for ProActive and 33% for ATG. On July 27, 2012, ProActive and ATG executed the MOU, which provided that the JV would be conducted through a Virginia limited liability company (“LLC”) called RAPTOR Training Services (“RTS”).
On February 13, 2014, the U.S. government awarded RTS the RAPTOR III contract and RTS accepted the award, which was an IDIQ task order contract that provided for services but did not specify a quantity. The RAPTOR III contract incorporated Federal Acquisition Regulation (“FAR”) § 52.219-14 Limitations on Subcontracting, which required RTS to perform at least 50% of the labor under the contract (the “51% Rule”). On January 2, 2013, the National Defense Authorization Act for Fiscal Year 2013 was signed into law, which changed the Limitations on Subcontracting to allow employees of small businesses subcontractors to count as “employees of concern” for purposes of compliance with the 51% Rule. During a weekly meeting, the U.S. government raised a concern about RTS’ compliance with the 51% Rule because both ProActive and ATG subcontracted most of their work. The U.S. government confirmed to RTS that the limitations on subcontracting would remain in effect until the changes to the 51% Rule were implemented and there was a modification to the RAPTOR III contract. ProActive suggested to ATG that another company be brought into the JV to satisfy the 51% Rule.
From July 2012 to March 2016, RTS, ProActive, and ATG operated under the MOU, which functioned as the de facto Operating Agreement (“OA”). Given the U.S. government’s warning that RTS needed to come into compliance with the 51% Rule, ProActive believed an OA needed to be executed and Class B members needed to be brought into the JV. The parties exchanged multiple drafts of an Operating Agreement for that purpose. After numerous drafts did not resolve their differences, ProActive sent ATG a letter indicating that ATG was in material breach of the MOU, noting the urgent need for an OA that brought in additional Class B Members and that ATG conditioned its consent to the OA on a change in the membership interests and voting rights of the JV to 50/50 despite the MOU providing for 67% for ProActive and 33% for ATG. On November 8, 2016, ProActive sent ATG a letter terminating ATG from the JV for the reasons stated in its earlier letter, ATG refusal to operate in accordance with the MOU (including its insistence on a 50/50 share of voting rights and membership interest), ATG’s repeated demands for task order lead positions on tasks that ATG did not have the requisite experience, ATG’s poor performance on other tasks where it was the task order lead, and for directly contacting the government customer.
The parties agreed that the MOU was a valid contract, but disagreed on whether there was a breach and, if so, by which party. A breach of contract requires: (1) a legal obligation between the parties; (2) a violation or breach of that obligation; and (3) consequential injury or damage to the complaining party. A party who commits the first material breach of a contract is not entitled to enforce the contract and the breach excuses the nonbreaching party from future performance. A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract. Under the MOU, the parties had a legally enforceable obligation to work toward the goals of the JV: to (1) secure the RAPTOR III IDIQ; (2) bid on task orders offered under that award; and (3) perform the services required to support successful execution of the award. The Court held that ATG breached the MOU. The Court found that compliance with the requirements of the RAPTOR III contract, including the 51% Rule, was integral to the MOU’s goal and the MOU established membership and voting rights as 67% ProActive and 33% ATG. The Court found that ATG’s actions were done in contravention of the MOU because it frustrated the JV’s purpose. ATG’s delay in signing the OA was unreasonable because the delay was attributable to ATG’s attempts to renegotiate its voting rights and rewrite the core tenant of the MOU, and ATG was aware of the pressing need for the OA and that Class B members could not be added without the existence of an OA. Accordingly, ATG’s unreasonable delay and attempts to overhaul the core structure of the JV’s MOU was a material breach.
Because ATG materially breached the MOU, ATG could be terminated from the JV under the MOU. The MOU, however, did not describe how a member could be terminated, so the Virginia LLC Act governed ProActive’s termination of ATG. The Virginia LLC Act provides that any action required or permitted to be taken by members of a LLC may be taken upon a majority vote of the members. A majority vote consists of the vote or other approval of members having a majority share of the voting power of all members. Because ProActive had 67% voting power, ProActive was authorized to terminate ATG by majority vote. Because ATG materially breached the MOU first, its action for breach of contract against ProActive failed and the Court found in favor of ProActive.
