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Sovereign immunity applies to equity suits

Sovereign immunity applies to equity suits

Where appellant seeks to rescind a settlement between the Virginia Department of Transportation, or VDOT, and appellant’s predecessor in interest, sovereign immunity bars this equity action.


NXL, appellant Montalla’s predecessor in interest, had three consulting contracts with VDOT. A compensation dispute arose. VDOT’s Assurance and Compliance Office (ACO) claimed that NXL had been overcompensated for its services and cut Montalla’s compensation rate, causing significant financial difficulties.

The parties mediated their dispute. “However, just a month before the mediation, the VDOT Commissioner … approved VDOT’s official correspondence to the Federal Highway Administration which recognized that ACO’s criticism of NXL’s rates was likely improper.

“This was not revealed to NXL during the mediation negotiations. Ultimately, because of their severe financial loss, the Company acceded to a mediated settlement agreement in which it would ‘refund’ VDOT $4 million for prior billings.”

“Appellant asserts that NXL only participated in the mediation and consented to the settlement agreement because of economic duress caused by VDOT. Appellant contends that NXL could either go along with the agreement or become bankrupt.

“The settlement agreement included a provision accommodating for financial difficulties and allowed NXL to pay the $4 million over a span of four years. NXL, however, elected to pay VDOT $3.875 million promptly, which VDOT agreed to accept as full payment of the debt since it was paid early. …

“[L]ess than two months after the mediation session between VDOT and the Company, where VDOT insisted that the Company owed VDOT substantial amounts of money due to overpayment for leased vehicles, VDOT implemented a vehicle reimbursement plan that allowed a fixed reimbursement rate for construction inspection vehicles to consultants regardless of who owns the vehicle and regardless of the type of lease involved – this was the very position NXL had advocated during its dispute with VDOT.”

Montalla became the assignee of “rights related to the settlement agreement along with the underlying contracts which were part of that settlement agreement[.]”

In the circuit court

Montalla sued VDOT, “seeking to void the settlement agreement and proceed on claims of breach of contract.

“Montalla sought a declaratory judgment that the settlement agreement was ‘null and void based upon economic duress’ (count one).”

Montalla sought “to vacate the settlement agreement under Code § 8.01-581.26 which permits the voiding of a mediation for fraud or other improprieties (count two). Montalla next asserted a breach of contract based on ‘breach of the implied duty of good faith and fair dealing’ (count three).

“Finally, Montalla alleged material breaches of Montalla’s underlying contracts with VDOT (count four) and an ‘unconstitutional regulatory taking of [its] property without just compensation’ (count five). …

VDOT demurred and filed pleas in bar, asserting “accord and satisfaction, expiration of the statute of limitations, and sovereign immunity.”

The trial court ultimately ruled that sovereign immunity barred all claims.

Montalla appealed.

Count I

“Montalla … seeks to have the settlement agreement adjudicated as void. It is essentially arguing that the parties should be returned to their status quo. ‘If rescission is granted, the contract is terminated for all purposes, and the parties are restored to the status quo ante.’ …

“This would have the effect of equitable recission. …

“As the Supreme Court observed in [Afzall ex rel. Afzall v. Commonwealth, 273 Va. 226 (2007)]

the Commonwealth generally is immune from suits in equity. … Similarly, the Commonwealth is immune from liability for damages and from suits to restrain governmental action or to compel such action.”

Count II

“Montalla argues that Code § 8.01-581.26 ‘permits a Court to vacate a mediated agreement, or vacate an order from a mediation, when the agreement was “procured by fraud or duress, or is unconscionable.”’ …

“Montalla asserts that the Commonwealth implicitly waived its immunity by authorizing public bodies to engage in alternative dispute resolution, including mediation[.] …

“[I]t is well-settled that waivers of sovereign immunity ‘must be explicitly and expressly announced.’ … A waiver of sovereign immunity cannot be implied from general statutory language.”

Montalla relies on Code § 8.01-581.26 to support its argument on Count II.

“The code section sets forth the conditions under which mediations can be vacated including fraud or duress, failure to provide proper financial information, or where there was misconduct by the mediator.

“There is no language whatsoever within the section that expressly or explicitly states a waiver of sovereign immunity.

“In the absence of such an express waiver, sovereign immunity cannot be deemed to have been waived under Code § 8.01-581.26 – and the Commonwealth, accordingly, enjoys the protection of sovereign immunity.”

Count III

“Montalla argues that VDOT breached the covenant of good faith and fair dealing by” first eliminating contract reimbursement and then reinstating it at below contract rates.

“[W]hile Montalla makes a compelling argument that NXL was ill-treated by VDOT, the law does not offer appellant relief under these unique facts.

“If appellant is seeking to recover damages based on a theory of good faith and fair dealing regarding the underlying 2014 contracts, those claims were conclusively resolved through the settlement agreement.”

“[T]he Commonwealth and its agencies are entitled to the protection of sovereign immunity from Montalla’s effort to equitably void the settlement agreement.

“To the extent Montalla might have pursued a claim of breach of the duty of good faith and fair dealing on the underlying contracts, NXL settled and released these claims. Thus, appellant cannot proceed on any claims for damages based on the original contracts.”

Counts IV and V

“Count IV of Montalla’s complaint addresses material breach of the underlying contracts between appellant and VDOT. … Count V of Montalla’s complaint, the unconstitutional regulatory taking claim, is similarly based on the breach of the underlying 2014 contracts – VDOT’s failure to pay amounts owed – coupled with economic duress.”

However, NXL “expressly consented in the settlement agreement to release VDOT from all pecuniary claims under or related to the original contracts and the parties’ dispute over … reimbursement rates. …

“We find that Counts IV and V were properly dismissed.”


Montalla, LLC v. Commonwealth of Virginia Dep’t of Transportation, Record No. 0127-22-2, April 25, 2023. CAV (unpublished opinion) (Friedman). From the Circuit Court of the City of Richmond (Markow). Thomas A. Coulter for appellant. Jeremy D. Capps for appellee. VLW 023-7-151, 26 pp.

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