Heartland Constr. v. Travelers Cas. & Sur. Co. of Am.

• Decision Date: 30 August 2022
• Docket Number: Civil Action 2:21CV43 (RCY)
• Parties: HEARTLAND CONSTRUCTION, INC., Plaintiff, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

HEARTLAND CONSTRUCTION, INC., Plaintiff, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendant.

Civil Action No. 2:21CV43 (RCY)

United States District Court, E.D. Virginia, Norfolk Division

August 30, 2022

MEMORANDUM OPINION

Roderick C. Young United States District Judge

This matter is before the Court on Defendant Travelers Casualty and Surety Company of America's Motion for Summary Judgment (ECF No. 44) and Plaintiff's Motion for Summary Judgment (ECF No. 46). The Motions have been fully briefed and the Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. For the reasons stated below, the Court will grant Defendant Travelers Casualty and Surety Company of America's Motion for Summary Judgment and deny Plaintiff's Motion for Summary Judgment.

I. BACKGROUND

A. The Alleged Underlying Loss

Heartland Construction, Inc. (“HCI” or “Plaintiff”) is a Kentucky corporation with a principal place of business in Chesapeake, Virginia, and is a subcontractor in the business of managing and constructing large-scale construction projects. (Complaint ¶¶ 2, 6, ECF No. 1.) Travelers Casualty and Surety Company of America (“Travelers” or “Defendant”) is a Connecticut insurance corporation. (Id. ¶ 3.) P.J. Potter Enterprises, Inc. (“PJP”) is a veteran-owned general contractor in the business of building construction projects for the U.S. Veterans Administration (Id. ¶ 7.) Denny Hemmis is the owner and President of PJP. (Id. ¶ 8.) Matt Hemmis, Denny Hemmis' son, was employed as the President of HCI from August 3, 2015 to December 3, 2018. (Id. ¶ 6; Pl.'s Mem. Supp. ¶ 30, ECF No. 47.) Matt Hemmis (“Hemmis”) also served as Vice President of PJP while serving as HCI's President without HCI's knowledge or consent. (Id. ¶ 8.)

In March of 2017, the U.S. Veterans Administration (“VA”) awarded PJP a contract for the construction of a new building at the VA Medical Center in Hampton, Virginia (the “Project”). (Id. ¶ 9; Def.'s Mem. Supp. ¶ 2, ECF No. 45; Pl.'s Resp. ¶ 2, ECF No. 52; Pl.'s Mem. Supp. ¶ 1.) HCI contends that it agreed to enter into a fixed-price Construction Management Agreement (“CMA”) with PJP whereby HCI was to provide construction management services and second and third tier subcontracts. (Def.'s Mem. Supp. ¶ 3; Pl.'s Mem. Supp ¶ 11.) In November of 2017, Hemmis created a new document or altered an existing Word document, thereby creating a less favorable, cost-plus CMA between HCI and PJP related to the Project. (Def.'s Mem. Supp ¶ 6; Pl.'s Resp. ¶ 6.) HCI contends that Hemmis stole or destroyed a hard-copy, executed version of a fixed-price CMA that was allegedly in HCI's paper files. (Def.'s Mem. Supp ¶ 7; Pl.'s Resp. ¶ 7.) Hemmis was an authorized user of HCI's computer system during his employment until his laptop and access to HCI's computer system were taken away on November 19, 2018. (Def.'s Mem. Supp. ¶ 5; Pl.'s Resp. ¶ 5; Pl.'s Mem. Supp. ¶ 28.) HCI was paid on a fixed-price, percentage-of-completion basis, consistent with a fixed-price arrangement from June 30, 2017 through September 30, 2018. (Def.'s Mem. Supp. ¶ 4; Pl.'s Resp. ¶ 4.)

In November of 2018, disputes arose between HCI and PJP when PJP attempted to take over HCI's subcontracts and remove HCI from the Project. (Def.'s Mem. Supp. ¶ 8; Pl.'s Resp. ¶ 8; Pl.'s Mem. Supp. ¶ 29.) The disputes resulted in a mediation on January 21, 2019. (Id.) Between when the dispute arose and the mediation, on December 3, 2018, HCI terminated Hemmis' employment. (Pl.'s Mem. Supp. ¶ 30.) During the mediation, HCI, HCI's CEO Rhonda Bridgeman, PJP, Dennis Hemmis, and Hemmis executed a settlement agreement. (Def.'s Mem. Supp. ¶ 10; Pl.'s Resp. ¶ 11; Pl.'s Mem. Supp. ¶ 32.) However, the cost-plus CMA created by Hemmis was not signed or delivered to HCI or its CEO until after the settlement agreement was signed on January 21, 2019. (Pl.'s Mem. Supp. ¶ 32.) On February 14, 2019, HCI filed an arbitration demand against PJP alleging that PJP had failed to comply with the settlement agreement. (Def.'s Mem. Supp. ¶ 11; Pl.'s Resp. ¶ 11.) On March 13, 2019, HCI issued a letter to the surety on a payment bond related to the Project, on which PJP was the principal, whereby HCI made a demand of payment of $750,648.98 on the basis of a fixed-price CMA between HCI and PJP and alleged that any cost-plus CMA relating to the Project had been “procured through fraud.” (Def.'s Mem. Supp. ¶ 12; Pl.'s Resp. ¶ 12.)

HCI alleges that, in December 2018, HCI's IT manager, George Schnabel, received Hemmis' laptop and found that all of the laptop's software and files had been deleted. (Pl.'s Mem. Supp. ¶ 34.) Despite the unusual deletions, Schnabel was able to retrieve the contents of the Hemmis laptop from a cloud-based backup. (Id. ¶ 35.) After the deleted files were recovered and downloaded onto a hard drive, the hard drive was sent to BDO, HCI's forensic accountant. (Id. ¶ 36.) BDO prepared a list of files that were retrieved from the cloud-based backup on Hemmis' laptop and among the files, HCI discovered a Word version of the fixed-price CMA created on January 31, 2017, that had been saved on HCI's servers. (Id. ¶¶ 37, 38.) As a result of the discovery, on March 28, 2019, HCI's counsel issued a letter to the arbitrator stating that it would be amending its arbitration demand to allege fraud and fraud in the inducement by PJP and Hemmis. (Def.'s Mem. Supp. ¶ 15; Pl.'s Resp. ¶ 15.) On April 2, 2019, HCI's counsel issued a letter to counsel for PJP and Hemmis alleging that the cost-plus CMA was “back dated” and “fraudulent” and amended its arbitration demand to allege a fraudulent scheme by PJP and Hemmis to avoid paying HCI $898,677.27 by claiming that the parties had entered a cost-plus CMA rather than a fixed-price CMA. (Def.'s Mem. Supp. ¶ 16; Pl.'s Resp. ¶ 16.)

B. The Crime Policy

Travelers issued a Crime Policy, Policy No. 107060732, to HCI on March 14, 2019 (the “Crime Policy”). (Pl.'s Mem. Supp. ¶ 56.) On October 1, 2019, HCI submitted a statement of its claim to Travelers. (Id. ¶ 58.) On October 3, 2019, Travelers responded to HCI, acknowledging receipt of HCI's claim. (Id. ¶ 59.) Later, on October 21, 2019, HCI provided a proof of loss to Travelers. (Id. ¶ 60.)

II. PROCEDURAL HISTORY

HCI filed a Complaint (ECF No. 1) against Travelers for breach of contract and declaratory judgment on January 20, 2021. HCI sought damages from Travelers “for Employee Theft under Insuring Agreement A.1., Forgery and Alteration under Insuring Agreement B., [], On Premises losses under Insuring Agreement C.1. and C.2., Computer Fraud under Insuring Agreement F.1.[,] and Claim Expenses under [I]nsuring Agreement I.” (Compl. ¶ 1.) On March 19, 2021, Travelers filed a Partial Motion to Dismiss (ECF No. 7). The Court granted Travelers' Partial Motion to Dismiss, dismissing the parts of Plaintiff's Complaint seeking judgment based upon breach of contract and seeking declaratory relief under Insuring Agreements B., C.1, C.2, and F.1 (ECF No. 63). That previous Memorandum Opinion is incorporated herein and will be referenced as appropriate. On September 8, 2021, Defendant and Plaintiff filed Motions for Summary Judgment and Memoranda in Support (ECF Nos. 44-47). On September 22, 2021, Defendant and Plaintiff filed their Responses in Opposition to each parties' Motion for Summary Judgment (ECF Nos. 51, 52).

On September 28, 2021, each party filed a Reply in support of its Motion for Summary Judgment (ECF Nos. 53, 54).

III. STANDARD OF REVIEW

Summary judgment is appropriately granted when there is “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A dispute about a material fact is genuine when the “evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The party moving for summary judgment “bears the initial burden of demonstrating the absence of any genuine issue of material fact.” DiSciullo v. Griggs & Co. Homes, 2015 WL 6393813, at *4 (E.D. N.C. Oct. 22, 2015). “The burden [then] shifts to the nonmoving party to show that there are genuine issues of material fact.” Emmett v. Johnson, 532 F.3d 291, 297 (4th Cir. 2008). “Summary judgment is particularly well-suited for resolution of insurance coverage disputes because the construction of insurance contracts is a legal question.” Grossberg v. Travelers Indem. Co. of Am., 825 F.Supp.2d 717, 721 (E.D. Va. 2011) (citing St. Paul Fire & Marine Ins. Co. v. Jacobson, 826 F.Supp. 155, 157 (E.D. Va. 1993)).

The Fourth Circuit notes that Virginia has adopted the Eight Corners Rule under which the court may “look primarily at the underlying complaints and the insurance policy to determine if there is a potential for coverage.” CACI Int'l, Inc. v. St. Paul Fire & Marine Ins Co., 566 F.3d 150, 155 (4th Cir. 2009); Am. Online, Inc. v. St. Paul Mercury Ins. Co., 207 F.Supp.2d 459, 465 (E.D. Va. 2002) (“the ‘eight corners rule' requires review of ‘(1) the policy language to ascertain the terms of the coverage and (2) the underlying complaint to determine whether any claims alleged therein are covered by the policy.'”) (internal citation omitted). Furthermore, “[a] federal court sitting in diversity jurisdiction must apply the choice-of-law rules of the forum state.” Phila. Indem. Ins. Co. v. Associated Univs., Inc., No. 3:20-CV-47, 2021 WL 4484556, at *5 (W.D. Va. Sept. 29, 2021) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). Here, the forum state is Virginia, and “[i]n insurance coverage disputes, the general rule in Virginia is that ‘the law of the place where...