“Teaming Agreements” Must Be Carefully Written

prime vs sub
In a recent blow to a common tactic of small- and medium-sized companies attempting to do business as subcontractors on federal government contracts, Judge James C. Cacheris of the U.S. District Court for the Eastern District of Virginia ruled that a Teaming Agreement between a prime-contractor and its former sub-contractor was too vague and indefinite to be enforced by a court.  This ruling serves as yet another warning to government sub-contractors to carefully examine any Teaming Agreement to ensure it includes concrete, enforceable obligations, or otherwise, accept the risk that if the relationship between prime- and sub-contractor turns bad, the sub-contractor may be left with no legally-enforceable rights at the end of the road.The case, Cyberlock Consulting, Inc. v. Information Experts, Inc., No. 1:12-cv-396 (E.D. Va.), involved a sub-contractor that had already successfully completed work for the prime-contractor under a contract from the U.S. Office of Personnel Management (“OPM”), and ironically, involved an earlier teaming agreement between the prime and the sub.  When the prime learned of a new contract that would soon be awarded by OPM, the prime and the sub entered a new teaming agreement that was significantly less-detailed than the first teaming agreement, notably including a provision that said it would terminate if there was a “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”  Relying upon information provided by the sub-contractor, the prime successfully bid the new OPM contract, but the prime and sub later failed to agree to a sub-contract.  The sub-contractor then sued the prime, claiming that the Teaming Agreement formed an enforceable, legal contract, and that the court should look to the surrounding circumstances of the relationship, including the successful work done under the previous Teaming Agreement.Judge Cacheris disagreed and ruled in favor of the prime-contractor, holding that the Teaming Agreement could not be enforced under Virginia law.  Judge Cacheris focused on the written terms of the Teaming Agreement as a whole, and citing long-standing Virginia law that bars the consideration of evidence from outside the written document (known as the “parol evidence rule”), refused to consider the prior course of conduct between the prime and sub.  Stating that it is “well settled under Virginia law that agreements to negotiate at some point in the future are unenforceable,” the judge ruled that the Teaming Agreement “read as a whole indicates that this particular language was not meant to provide a binding obligation but rather set forth a contractual objective and agreed framework for the negotiation of a subcontract in the future along certain established terms.”  Judge Cacheris even went as far as to note that “calling an agreement something other than a contract or subcontract, such as a teaming agreement or letter of intent, implies that the parties intended it to be a nonbinding expression in contemplation of a future contract.”  While the Teaming Agreement did contain seemingly mandatory language requiring the prime to award the sub with a portion of the contract, that language was modified by other tentative, indefinite language that recognized the parties would still negotiate a future agreement regarding the work.  This proved fatal to the sub-contractor.Attorneys and practitioners in the field of federal government contracts should also pay attention to Judge Cacheris’s criticism of a 2002 case that is routinely cited by attorneys attempting to enforce Teaming Agreements on behalf of sub-contractors.  That 2002 case, EG&G, Inc. v. Cube Corp., 63 Va. Cir. 634, 2002 WL 31950215, was issued by the Fairfax County Circuit Court and favored a sub-contractor after examining not only the language of the Teaming Agreement, but the surrounding circumstances, including the parties’ intent and performance on the government contract.  Judge Cacheris criticized this approach, stating “[t]o the extent that EG&G suggests that teaming agreements are a special arrangement to which Virginia’s standard rules of contract interpretation, including the parol evidence rule, do not apply, the Court concludes that that case is incorrect and should not be followed.”  Thus, practitioners (especially those representing sub-contractors) should be aware of this new development.Judge Cacheris issued his Opinion and Order granting the prime-contractor’s motion for summary judgment while denying the sub-contractor’s motion for summary judgment on April 3, 2013.  The sub-contractor appealed the decision to the U.S. Court of Appeals for the Fourth Circuit (Case No. 13-1599), and its opening appellate brief is due to be filed with that court by July 1, 2013 while the prime-contractor’s response brief is due on August 8, 2013.Cyberlock v Info Experts Opinion (PDF)
Please note:  This blog/Web site is made available by the firm of Redmon, Peyton & Braswell, LLP (“RPB”) solely for educational purposes to provide general information about general legal principles and not to provide specific legal advice applicable to any particular circumstance. By using this blog/Web site, you understand that there is no attorney client relationship intended or formed between you and RPB. The blog/Web site should not be used as a substitute for competent legal advice from a lawyer you have retained and who has agreed to represent you.

“Badges of Fraud” Make a Prima Facie Case of Fraudulent Conveyance

prima facie case
In McCarthy v. Giron, the Judge Gerald Bruce Lee of the U.S. District Court for the Eastern District of Virginia considered what is necessary to establish a prima facie case of fraudulent conveyance. The Court recognized several facts and circumstances commonly referred to as “badges of fraud” which, if established, create a prima facie case of fraudulent conveyance which must then be rebutted by defendants.In McCarthy v. Giron, 1:13-cv-01559, 2014 WL 2696660 (E.D.Va. June 6, 2014), a bankruptcy trustee brought an adversarial proceeding against Carlos I. Giron and Carlos A. Giron to hold them personally liable for the debts of their company, C & C General Buildings, Inc. (“C & C”), and for fraudulent conveyance. Judge Lee adopted the bankruptcy court’s recommendation regarding a claim of fraudulent conveyance because the Trustee made a prima facie case of fraudulent conveyance based on the presence of certain badges of fraud which were not rebutted by the defendants.The “badges of fraud” formula is an evidentiary rule that gives rise to an inference that a transaction is a fraudulent attempt to evade a creditor.  Once this inference arises, the burden of proof switches from the plaintiff to the defendant to prove the legitimacy and good-faith of the transaction.Judge Lee first looked to the evidence for badges of fraud.  “Under Virginia law, certain facts and circumstances have become badges of fraud, or presumptions of fraud that establish a prima facie case of fraudulent conveyance.” Id. (citing Fox Rest Assoc, L.P. v. Little, 717 S.E.2d 126, 131 (Va.2011).)  The Bankruptcy Court detected a number of badges of fraud related to the transaction:
  1. Threat of litigation by its creditors at the time of transfer
  2. The transfer left the debtor insolvent
  3. Gross inadequacy of consideration for the conveyance
  4. Close relationship (i.e., family members) between the parties
Judge Lee, however, emphasized that “the close relationship of the parties, while not a determining factor of fraud in itself, strengthens the presumption of impropriety arising from the other circumstances discussed.” Id.If badges of fraud are found and a prima facie case of fraudulent conveyance is established, the burden of proof shifts to the defendant to prove the propriety of the alleged fraudulent transaction. Id. (citation omitted). In the instant case, Judge Lee found that the trustee made a prima facie case of fraudulent conveyance which Defendants failed to rebut “because they did not offer any evidence to explain the legitimacy of the transfers, and chose not to testify.” Id. Accordingly, the Court adopted the Bankruptcy Court’s recommendation that the fraudulent conveyance made by Defendants on behalf of C&C was voidable.A debtor who seeks to evade judgments is an old problem, as old as the western legal system itself.  In fact, the “badges of fraud” formula was first set forth in 1601 in Twyne’s Case.[1]  But in recent years, the Virginia General Assembly has breathed new life (and teeth) into the Commonwealth’s fraudulent conveyance statutes with the amendment of Virginia Code § 55-82.1 in 2012.  This amendment granted a court wide discretion to award sanctions and attorney’s fees against any party who assisted or participated in a fraudulent conveyance.  This is a major development in the law impacting creditors’ rights.  Counsel who represent creditors and other financial institutions should keep in mind this remedy.
[1] Twyne’s Case, 3 Coke Rep. 80b, 76 Eng. Rep. 809 (Star Chamber 1601)

EDVA Tightens Reins on Punitive Damages

edva tightens
In an opinion released on July 14th, Judge James C. Cacheris used a motion to dismiss to carve back a plaintiff’s personal injury claim for punitive damages under Virginia state law.  In granting the motion to dismiss, the judge held that punitive damages are only available for “willful and wanton conduct,” not for negligent conduct.  The opinion takes a narrow view of what qualifies as “willful” conduct, and this approach could affect not only the personal injury bar, but also other civil litigators who seek punitive damages in business cases.The case, Gillespie v. Ashford Hospitality Prime, No. 1:15-cv-350, 2015 WL 4361262 (E.D. Va. July 14, 2015), arose from hard facts:  While visiting the Marriott Crystal Gateway Hotel in Arlington, Virginia, the plaintiff and her infant granddaughter were severely injured when a lighting fixture fell from a ballroom ceiling.  The plaintiff sued both the hotel owner and the construction general contractor who installed the light fixture.  In the plaintiff’s personal injury lawsuit for negligence, she sought both compensatory and punitive damages.  The defendants then moved to dismiss the amended complaint.Judge Cacheris denied the motion as to the negligence claim for compensatory damages, but he granted the motion as to the punitive damages.  Quoting prior case law, Judge Cacheris said that “[u]nder Virginia law, to properly plead a claim for punitive damages, a plaintiff must allege sufficient facts to plausibly demonstrate such willful and wanton conduct.  Mere conclusory legal statements, without facts to support them will not suffice.”The judge went on conclude that the alleged negligent installation of the light fixture was not “willful” conduct that would justify punitive damages because the hotel owner did not intend to commit negligence:  “[The hotel owner’s] willful and conscious maintenance of an unreasonably safe hotel defies logic.  Similarly, [the general contractor’s] willful and malicious installation of an unreasonably safe light fixture would be just as bad for its business, such that it is too an illogical proposition.  In short, Plaintiff’s request for punitive damages is vaguely pleaded as a mere conclusion . . . .”.  Judge Cacheris then quoted from previous Fourth Circuit case law, stating that “[e]xemplary damages are allowable only where there is misconduct or malice, or such recklessness or negligence or as evinces a conscious disregard of the rights of others.”This opinion is notable because Judge Cacheris focuses on the question of intent, specifically whether the defendant consciously intended to harm the plaintiff, as opposed to whether the defendant intended a more general act (such as installing a light fixture).  This appears to be a tightening of the availability of punitive damages, not only in personal injury cases, but in commercial business torts.  The opinion is also noteworthy because Judge Cacheris was willing to take this action at the motion to dismiss stage, making conclusions that could be characterized as factual determinations in a future appeal.Regardless of any appeal, business litigators who seek punitive damages should be aware of this opinion and structure their complaints to adequately plead a conscious intent that satisfies the tightened standard.