Issue: Dec. 12 2022

A bank can be sued for allegedly misleading a company and failing to process its application under the federal Paycheck Protection Program.

Judge Norman K. Moon of the Western District of Virginia rejected the bank’s argument that it had no contract with the company.

The judge said the plaintiff sufficiently alleged that, because the bank failed to process its loan application as promised, the plaintiff could show contractual damages of almost $1 million in PPP money that would have been forgiven.

The opinion is Ironworks Development LLC v. Truist Bank (VLW 022-3-498).

Failed application

Ironworks Development received a first-round PPP loan after applying through Truist Bank. When the government offered another round of PPP loans in January 2021, Ironworks’ parent corporation again applied through Truist.

Truist sent a letter to Ironworks saying that it was “unable to process” the application in the amount requested. It offered two options: seek a lower loan amount or submit additional information.

Ironworks responded in writing that it would seek the lower amount and agreed to the terms of Truist’s offer, including that Ironworks couldn’t apply for a PPP loan with another lender because the government would automatically reject all of their pending applications.

Truist submitted Ironworks’ application at the end of February 2021. When the government pointed out that the parent corporation hadn’t received first round loans and was therefore ineligible for the second round, Ironworks submitted another application in early March 2021.

After an initial hold was quickly resolved, a second automated hold required that Truist check and select “Submit Lender Certification” in the government’s online system.

Ironworks claimed that, instead of doing so, Truist “‘repeatedly made misleading and false statements … about the PPP loan status.’”

Ironworks cited three times in March 2021 where Truist said the application was submitted, that it would provide updates or that it didn’t know why the government was holding up the process.

In July 2021, Ironworks learned in an email from Truist’s PPP portal that its application had been denied because the lender certification hadn’t been completed before the deadline.

Ironworks filed suit. In its breach of contract complaint, the company said that once it accepted the terms offered in Truist’s letter the bank was contractually bound to submit the company’s PPP loan application for the agreed amount.

Further, Ironworks said it would have been simple for Truist to resolve the second hold.

Ironworks claimed it was damaged by the loss of nearly $1 million in loans that would have been forgiven because Truist failed to process the application.

Truist moved to dismiss the claim.

Valid contract

Truist argued that Ironworks hadn’t suffered an injury because the alleged contract for the second loan was between it and Ironworks’ parent corporation and pertained solely to the initial application before Ironworks reapplied in its own name.

But Moon said the bank had already conceded the contract was between it and Ironworks.

“In its Opposition … Defendant repeatedly referred to Plaintiff as the letter’s addressee [and] characterized the letter as ‘an agreement that Truist would adjust the amount of the proposed loan in Plaintiff’s application,’” the judge wrote.

Offer and acceptance

Moon also rejected Truist’s argument that Ironworks failed to plausibly allege a claim for breach of contract.

“At a minimum, Plaintiff has alleged that, through the SBA Letter, the Defendant gave it two options, and that Plaintiff accepted its second option, therein accepting Defendant’s offer to ‘process [Plaintiff’s] PPP loan in the above amount,’” the judge said. (Emphasis in the original.)

He found those facts sufficient to establish an offer, acceptance and bargained-for exchange constituting a benefit to both parties.

Moon further concluded that both parties incurred a detriment because Truist agreed to process the loan for a fee, while Ironworks agreed to apply for a lower amount and couldn’t apply with any other lenders.

Truist also argued that Ironworks failed to plausibly allege a breach of the bank’s obligations or that any injury suffered was caused by the alleged breach.

But Moon disagreed.

“Plaintiff alleges that the reason it never received the loan ‘had nothing to do with its failure to meet any requirements or eligibility, or anything to do with the SBA’ as ‘[a]ll those things were in order,’” the judge said. “Rather, Plaintiff never received the second-round loan because ‘Defendant failed to “process” Plaintiff’s application as it promised.’”

The judge also credited allegations that Ironworks was “damaged by the breach because the breach caused Plaintiff not to receive ‘nearly $1 million in PPP money that would have been forgiven.’”

Accountable stewards

Jonathan Jacobs, of counsel to Zoblaw in Washington, D.C., said he filed Ironworks’ complaint against Truist knowing it would be an uphill battle.

“There’s a lot of caselaw about how banks can do whatever they want with your money,” he told Virginia Lawyers Weekly.

Unlike a normal bank loan, Jacobs pointed out that PPP loans were “completely different because the money didn’t belong to the banks, who were acting as gatekeepers and stewards of free government money.”

He added that he’s confident his client isn’t the only one who lost out.

“Some people got hoodwinked because they chose banks that negligently took more applications than they could handle and those banks need to be held accountable as stewards over this public money,” he said.

And while he acknowledged this decision was specific to PPP, Jacobs said he’s “beyond pleased that we get to litigate some of these issues.”

Attorneys for Truist declined to comment about ongoing litigation.

Despite a contractor’s failure to complete a multimillion-dollar home renovation by the deadline, a federal judge has dismissed fraud and consumer protection claims brought by the homeowners.

Judge Liam O’Grady of the Eastern District of Virginia agreed that the contractor was disorganized and ineffective.

However, “the Plaintiffs have not met their burden to demonstrate that the Defendant had the intent not to complete performance on the contract or intended to defraud the Plaintiffs,” he pointed out.

While the judge found the contractor was in breach of his agreement with the plaintiffs and awarded actual damages, he declined to award recission or consequential damages.

The opinion is Harrell v. Deluca (VLW 022-3-500).

Stymied renovation

John and Dawn Harrell lived in Washington, D.C., before they relocated to the Northern Virginia area in 2019. They were introduced by a realtor to Douglas Deluca, a general contractor who specialized in renovating residential properties.

In 2018, Deluca purchased a six-bedroom house that was constructed in the 1930s with a separate two-level garage in Arlington. In early April 2019, the Harrells contracted to buy the house and have Deluca renovate it.

After several addendums to the contract, including changes to the work to be completed, the Harrells moved to close the sale in early July 2019 and paid Deluca almost $4.5 million.

They also signed a post-closing construction agreement. It detailed what work needed to be completed by the first of August and outlined new work to be finished two weeks later.

Trouble arose in early August when the Harrells began have doubts about Deluca’s performance.

But according to Deluca, the Harrells kept changing their plans, neglected to give needed input and interfered with the subcontractors — one of whom they falsely accused of being a registered sex offender.

On Aug. 6, 2019, John Harrell told Deluca in an email to stop work and remove all equipment so that they could find a replacement contractor. Harrell warned Deluca of a coming lawsuit.

The Harrells, however, had difficulty replacing Deluca. They invited him back, but found that the relationship was irreconcilable. The renovation was never finished.

The Harrells filed suit in late January 2020, claiming Deluca was liable for fraudulent inducement, constructive fraud, breach of contract and violations of the Virginia Consumer Protection Act, or VCPA.

After a bench trial in July 2022, Deluca asserted several affirmative defenses, including failure to mitigate and that the prevention doctrine limited damages.

Unfulfilled promises

O’Grady explained that fraud “cannot be predicated on unfulfilled promises or statements as to future events,” and that the economic loss rule prevents tort actions based on contracts.

However, the judge also said that an exception applied if the defendant “‘did not intend to perform at the time of contracting.’”

The Harrells said Deluca made four statements that fraudulently induced them to enter into the contract: that the work was permitted, the roof was original slate, a custom tile deposit had been made and the square footage of the home was roughly 6,500 square feet.

They reasoned that Deluca’s extensive construction experience and alleged failure to apply for building permits were indicative of an intent to mislead, as was an allegedly false statement on an insurance application.

Deluca testified that he still wished he could finish the renovations, which was reinforced by emails he sent to the realtor, and that he stayed in contact with county officials about permitting after the relationship broke down.

O’Grady agreed with the Harrells that “the Defendant was incredibly unorganized, did not communicate effectively, and may have possibly cut corners in the building permitting process.”

However, he concluded, the plaintiffs had failed to show “that the Defendant had the intent not to complete performance on the contract or intended to defraud the Plaintiffs.”

The judge also dismissed the Harrells’ constructive fraud claim by applying the economic loss and source-of-duty rules, which prevent tort claims from arising where damages are solely “disappointed economic expectations” or where a duty is based on a contract.

Consumer Protection Act

The Harrells contended that Deluca’s misrepresentations and false promises established a violation of the VCPA.

For the same reasons that he dismissed the fraud claims, O’Grady found that Deluca didn’t have the requisite fraudulent intent about completing the work that would enable him to be found liable for promissory construction fraud.

“Further, there is zero evidence that the Defendant ever refused to complete construction until the Plaintiffs prevented his performance … and threated legal action to rescind the contract,” the judge wrote.

O’Grady rebuffed the Harrells’ argument that Deluca misrepresented the square footage of the home’s interior space, finding that it “was a general estimate of a future condition.”

“The evidence at trial undisputedly shows that the Defendant performed a substantial amount of work on the Property … especially in consideration of the amount that the Defendant’s performance was substantially hindered by the Plaintiffs.”

– U.S. District Judge Liam O’Grady

The judge also rejected allegations about the permitting process or tile deposits because the only resulting damages were not being able to move in on time and the Harrells weren’t entitled to consequential damages.

Finally, O’Grady found that because the Harrells could freely inspect the roof at all times, they couldn’t claim that Deluca misrepresented its condition.

Substantially hindered

The judge said the parties’ agreement to complete certain items by Aug. 1, 2019, was material to the contract and that Deluca’s failure to do so was a breach.

But recission wasn’t a proper remedy because the Harrells premised their argument on a finding of fraud, O’Grady said, noting that “unless a defendant’s failure of performance is ‘total or substantial’” recission will not be granted.

“The evidence at trial undisputedly shows that the Defendant performed a substantial amount of work on the Property … especially in consideration of the amount that the Defendant’s performance was substantially hindered by the Plaintiffs,” the judge said.

O’Grady then refused to award consequential damages because the prevention doctrine limits recovery of damages for a party who interferes with the completion of the performance of a contract.

After reviewing expert testimony from both parties, the judge on balance sided with Deluca’s expert and awarded actual damages of $181,762.87 to the Harrells.

‘Nature of construction’

Andrew Burcher, a shareholder with Walsh Colucci in Prince William, represents Deluca.

“This case was never about a breach of contract, it was about fraud and recission,” he told Virginia Lawyers Weekly. “The fraud claims certainly diverted things in a way that the relationship deteriorated such that they couldn’t compromise or resolve the construction.”

He added that “it’s just not the nature of construction to expect the contractor to deliver exactly on a specific anticipated date.”

And while his client was liable for damages, Burcher felt the amount was de minimis compared to what the plaintiffs sought at trial — and was significantly less than what his client offered early in the case.

Whether that amount remains the extent of Deluca’s liability may be an open question, as the plaintiffs have appealed.

Attorneys for the plaintiffs did not respond to requests for comment before deadline.

A litigant’s suit against a federal judge was dismissed after the U.S. District Court for the Eastern District of Virginia found the plaintiff lacked standing as Virginia law does not allow private individuals to bring an action in Virginia courts to discipline an attorney.

The court also determined that the judge was subject to judicial immunity in this case.

Senior U.S. District Judge Deborah K. Chasanow of the U.S. District Court for the District of Maryland authored the opinion in Spanos v. Gibney (VLW 022-3-524) last month.

Background

The issue in this case pertains to a prior proceeding handled by U.S. District Judge John A. Gibney in his capacity as a judge for the Eastern District of Virginia.

In that proceeding, Nickolas Spanos filed an action in the Henrico County Circuit Court against the then-state attorney for Henrico County, seeking discipline or disbarment.

That action was removed to federal court and assigned to Gibney, who denied a motion to recuse filed by Spanos.

Gibney dismissed the action, holding that Spanos lacked standing on federal claims. The judge remanded the state law claims back to the county court. Spanos did not appeal the decision.

Spanos then filed a lawsuit against Gibney in Henrico County Circuit Court, seeking “either revocation of Judge Gibney’s license to practice law in Virginia, or that Judge Gibney be disciplined under the Virginia Code of Professional Conduct.”

The action was removed to federal court, and Gibney filed a motion to dismiss.

Dismissed

Gibney sought dismissal under Federal Rule of Civil Procedure 12(b)(1) and (6), and claimed Spanos lacked standing under Virginia law, that no private right of action exists under Virginia’s Rules of Professional Conduct and that he was entitled to judicial immunity.

In his response, Spanos argued that judicial immunity did not apply “in cases alleging unethical conduct. His action, he said, was “an ‘action filed to protect the Public’” rather than a private cause of action.

Chasanow first addressed the issue of standing, pointing out that “whether Virginia law allows a private individual to bring a state court action seeking to have an attorney disciplined or disbarred” was the primary issue.

“If the answer to this question is no,” Chasanow wrote, “then Mr. Spanos lacks standing because a court cannot provide him with the relief he seeks.”

The argument that Spanos filed a “public cause of action” fails, the judge said, because “there is no basis in law for Mr. Spanos to bring an action for the public welfare. He does not have standing to act in the public interest.”

Spanos’s argument relied on Virginia Code § 54.1-3915, which states “Supreme Court shall not … promulgate any rule or regulation or method of procedure which eliminates the jurisdiction of the courts to deal with the discipline of attorneys.” According to Spanos, this allows private individuals to bring an action in Virginia’s state courts to discipline attorneys.

Chasanow rejected the argument.

“[T]here is no authority construing this provision to mean that an individual cause of action exists,” she pointed out.

The judge then noted that the Virginia Supreme Court “has clear authority” to specify a code of ethics governing attorney conduct — and for barring methods for disciplining, suspending and disbarring attorneys.

“[T]he Virginia Supreme Court has adopted extensive procedures for disciplining, suspending, and disbarring attorneys,” she explained. “None of these procedures allow for a private individual to institute such an action.”

Moreover, Chasanow said, the statute Spanos relied on “simply protects the authority of a state court to ban an attorney from practicing before that particular court.”

Judicial immunity

Having found that Spanos lacked standing as an individual to bring an action seeking attorney discipline, Chasanow turned to the judicial immunity issue. She ruled in Gibney’s favor.

“Even if the court were to find that Mr. Spanos has both prudential and statutory standing to bring his complaint, Judge Gibney would have judicial immunity for acts taken in his official or individual capacity,” Chasanow wrote.

The judge made that determination by noting that, while Spanos alleged Gibney’s actions were unethical, he did not claim Gibney acted beyond the scope of the litigation.

“Regardless of Mr. Spanos’ claims, he provides no grounds to defeat the judicial immunity that applies to Judge Gibney’s determinations in Spanos v. Vick,” Chasanow wrote. “Judge Gibney is entitled to judicial immunity for his actions.

Citing the U.S. Supreme Court’s 1988 decision in Forrester v. White, Chasanow noted the reasoning behind the use of judicial immunity.

“If judges were personally liable for erroneous decisions, the resulting avalanche of suits, most of them frivolous but vexatious, would provide powerful incentives for judges to avoid rendering decisions likely to provoke such suits,” Chasanow wrote.

Chasanow granted Gibney’s motion to dismiss and dismissed the complaint for lack of standing.