Equitable Trust Co. v. G & M CONST. CORP.

• Decision Date: 09 August 1982
• Docket Number: Civ. A. No. J-80-1769.
• Citation: 544 F. Supp. 736
• Court: U.S. District Court — District of Maryland
• Parties: The EQUITABLE TRUST COMPANY, Plaintiff, v. G & M CONSTRUCTION CORPORATION and H. Wendell Gardner, Defendants, v. The EQUITABLE TRUST COMPANY, Counter-Defendant and Third-Party Plaintiff, v. UNITED STATES of America Small Business Administration, Third-Party Defendant.

544 F. Supp. 736

The EQUITABLE TRUST COMPANY, Plaintiff, v. G & M CONSTRUCTION CORPORATION and H. Wendell Gardner, Defendants, v. The EQUITABLE TRUST COMPANY, Counter-Defendant and Third-Party Plaintiff, v. UNITED STATES of America Small Business Administration, Third-Party Defendant.

Civ. A. No. J-80-1769.

United States District Court, D. Maryland.

August 9, 1982.

COPYRIGHT MATERIAL OMITTED

Richard P. Kidwell, David F. Clinnin, Baltimore, Md., for plaintiff.

Robert L. Bloom, Baltimore, Md., C. Edward Hitchcock, Towson, Md., Steven J. Riegel, U. S. Dept. of Justice, Washington, D. C., for third-party defendant.

MEMORANDUM AND ORDER

SHIRLEY B. JONES, District Judge.

The Equitable Trust Company (ET) sued G & M Construction Corporation (G & M) for breach of contract and G & M and H. Wendell Gardner for fraud. Defendants filed a counterclaim for breach of contract and conversion against ET and a third-party claim against the Small Business Administration (SBA). ET filed a third-party claim against SBA, on which liability was conceded. Trial of liability was bifurcated from damages with respect to defendants' counterclaim and third-party claim, and the case was tried, except for the issue of damages, to the Court on November 2, 3 and 23, 1981. Proposed findings of fact were submitted by the parties and exchanged, and posttrial memoranda of law were submitted. This opinion constitutes the Court's findings of fact and conclusions of law.

SBA entered into a contract, pursuant to Section 8(a) of the Small Business Act, as amended, 15 U.S.C. § 637(a), with the General Services Administration (GSA) on September 29, 1978 to perform certain work on the Social Security Administration Administrative Headquarters Expansion Project, Metro West, Baltimore, Maryland (the Metro West project) and in turn subcontracted that work to G & M. (SBA Exs. A, B).¹ The contract designates George Ferensky as SBA contracting officer.

G & M applied to SBA for an advance payment of $120,000 in November 1978 to finance start-up costs, and began work on the project in December 1978. The advance payment was approved, and an advance payment contract was signed on March 1, 1979.² (SBA Exs. F, G). Joseph Monteleone signed as SBA contracting officer. At the same time, pursuant to the advance payment contract, a special bank account agreement was executed by G & M, ET and SBA. (ET Ex. 1). It required, among other things, SBA approval of disbursements and signature of checks by a representative of G & M and of SBA. A Corporate Certificate of Authority (SBA Ex. E) authorizing the checking account and setting out the persons authorized to sign checks³ was submitted by G & M. The advance payment funds were finally deposited in the account in April 1979.

Around August 1979 G & M began experiencing cash flow problems and applied to SBA for additional financing so that it could continue work on the Metro West project. Meetings involving G & M,⁴ SBA, the general contractor and the GSA contracting officer, concerning the work to be done by G & M, were held in September and October, and on October 5, 1979 G & M quit work on the project. SBA had stopped authorizing disbursements from the special bank account in August 1979 and froze it on October 25, 1979.

Meetings were held by SBA regional office personnel with G & M in September and October 1979, primarily concerning G & M's financial problems, in an effort to resolve its efficiency and cash flow problems. Two meetings were held with SBA national representatives in Washington, D. C., one in November 1979 and one on December 7, 1979. At the latter meeting specific figures were discussed, and general approval for a $412,000 loan to G & M was given.

The loan papers and some supporting documents were prepared, and on December 27, 1979, they were signed by Gardner and the SBA regional director. The $412,000 check for the loan proceeds, which had been requested earlier in the expectation that the loan would be consummated shortly, arrived at ET on January 10, 1980 and was deposited in the special bank account on January 11, 1980. One of the conditions of the loan was that Gardner obtain a life insurance policy. (SBA Ex. T, ¶ 3(c)(2)). The policy was never supplied, although in January and most of February 1980 all parties, including SBA representatives, were proceeding on the assumption that this and other "loose ends" would be tied up and the loan finalized. A meeting was held at SBA offices in Philadelphia on January 24, 1980, with G & M and outside management consultants to discuss what steps to take to get G & M back on the job.

On February 13, 1980, after telephone conversations with ET and authorization from Les Lewis, two SBA employees, Edward Hitchcock and O. J. Phillips, visited the ET Pikesville branch and obtained a check in the amount of $412,000, payable jointly to G & M and SBA. Hitchcock was SBA district counsel, Phillips was the SBA district representative working on the G & M loan. A debit memorandum was issued immediately. G & M, which had not been told of the SBA request for the check or the February 13 visit, learned of the bank's action when it received the debit memorandum a day or two later. The testimony was conflicting as to the reason for the SBA's action, but I find credible Hitchcock's explanation that the money was withdrawn because of a fear that the Internal Revenue Service was planning to attach the account to recover taxes owed by G & M in connection with Metro West and other projects.

Gardner took a corporate resolution changing the signatures on the special account, to remove the SBA representatives, and a new signature card to the Pikesville branch on February 26, 1980. They were accepted, and the new signature card was filed. The next day, Gardner returned to the branch and wrote two checks on the Metro West account payable to G & M Construction (ET Exs. 10, 11), depositing one in another G & M ET account, No. XXX-XXXX-X (ET Exs. 10, 15B), and the other in a G & M account, No. XXX-XXX-X at another bank (see ET Ex. 11). The two checks were in the amounts of $100,000 and $87,000. The Pikesville branch manager, William R. Pearce, with whom Gardner dealt on February 27, 1980, did not check the signature cards on the Metro West account in permitting these transactions. Also on February 27, 1980, a meeting was held at SBA national headquarters in Washington, D. C. at which a decision was made not to proceed with financing G & M. It is unclear which of the two actions on February 27, Gardner's visit to the bank or the meeting in Washington, occurred first.

Gardner returned to the bank on February 28, 1980 and from the other G & M account he paid off two outstanding loans and had a $60,000 treasurer's check issued to himself. When he tried to cash it a few days later, the branch manager refused to cash it and kept the check. On February 28, 1979 Gardner had a certified check payable to the Internal Revenue Service issued out of the Metro West account (ET Ex. 12).

SBA learned of Gardner's removal of funds from the special bank account on February 28, 1980, and the district director immediately called ET to advise that SBA would hold the bank responsible for the release of funds. A few weeks later ET placed a "hold" on all G & M accounts. The $412,000 check payable jointly to SBA and G & M was returned to the bank and reissued payable only to SBA on March 27, 1980. ET attempted to trace the funds originating in the special bank account in G & M's other accounts. It charged funds in those accounts against the total amount withdrawn and paid SBA $20,895.59 on June 4, 1980 (ET Exs. 15, 16). It paid $60,000, representing the uncashed treasurer's check on May 8, 1980 (ET. Ex. 17).

This action was removed from the Superior Court of Baltimore City upon petition of the United States when SBA was joined as a third-party defendant. Jurisdiction was asserted under 28 U.S.C. § 1441(a) and 15 U.S.C. § 634(b)(1),⁵ and the entire case was removed pursuant to § 1441(c). For reasons discussed below, an alternate basis of jurisdiction over the claims of ET against the defendants is 28 U.S.C. § 1331 and this Court's pendent jurisdiction.

Although not heretofore raised, there is a question whether federal law or state law is to be applied in construing the special bank account agreement and deciding whether it was breached. If federal common law governs interpretation of the contract in the first instance, a further question may arise as to whether state law should be applied by incorporation. Cf. Quadrini v. Sikorsky Aircraft Div., 425 F.Supp. 81, 84-85 (D.Conn.1977) (discussing questions of application of federal and state law in action based on federal statute).

There is no direction in the contract concerning the law to be applied to it, nor did the trial testimony shed much light on the question. When federal common law not specifically authorized by statute is to be fashioned and applied is not entirely clear. 19 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4514 (1982). A leading commentator suggests that there are three contexts, not necessarily mutually exclusive, in which federal common law has developed: where there is conflict between a federal policy and the use of state law, where federal statutes dominate the area, and where there is a strong federal or national concern. Id. § 4514 at 223-24.

The special bank account agreement was executed in compliance with the advance payment provisions (SBA Ex. G, ¶ 2). The advance payment provisions are referred to in the agreement, and the bank is bound by them with respect to deposit and withdrawal of funds. SBA is a party to this three-party contract, and its rights and duties, as well as the other parties' rights and duties under it, are at issue here. The advance payment agreement does not require that SBA be a party to the bank account agreement, only that the contractor submit a special account agreement...