James G. Davis Constr. Corp. v. FTJ, Inc.

• Decision Date: 14 May 2020
• Docket Number: Record No. 190345
• Citation: 841 S.E.2d 642
• Parties: JAMES G. DAVIS CONSTRUCTION CORPORATION v. FTJ, INC. , f/k/a Ciesco, Inc.
• Court: Virginia Supreme Court

841 S.E.2d 642

JAMES G. DAVIS CONSTRUCTION CORPORATION

v. FTJ, INC. , f/k/a Ciesco, Inc.

Record No. 190345

Supreme Court of Virginia.

May 14, 2020

Stephen M. Seeger (Alexandra E. Busch ; Peckar & Abramson, on briefs), for appellant.

R. Scott Caulkins, Arlington (Greta P. Iliev; Caulkins & Bruce, on brief), for appellee.

PRESENT: All the Justices

OPINION BY JUSTICE STEPHEN R. McCULLOUGH

Relying on the doctrine of unjust enrichment, the trial court held that a general contractor, James G. Davis Construction Corporation ("Davis"), was liable for construction materials provided by a supplier to one of Davis’ subcontractors. Davis challenges this judgment on a number of grounds. For the reasons noted below, we affirm the trial court’s judgment.

BACKGROUND

Davis served as the general contractor for a residential condominium project in Arlington County. On February 19, 2016, Davis contracted with H&2 Drywall Contractors to complete the drywall and metal framing for this project. H&2 was required to provide all labor, materials, supervision, and equipment to complete those aspects of the construction project. The revised contract between Davis and H&2 called for H&2 to be paid a total of $1,269,396, which was to be paid in installments. The contract also called for 10 percent retainage, to be withheld until final payment was due.

H&2 agreed to purchase materials for the project from Ciesco, now known as FTJ, Inc. H&2 completed a Credit Application and Agreement, in which it agreed to pay Ciesco for materials delivered to H&2. Renan Buendia, the principal of H&2, also provided a personal guarantee to pay Ciesco any amounts H&2 owed to Ciesco for building materials.

To ensure the smooth operation of the project, Davis and H&2 entered into a joint check agreement. That agreement provided as follows:

JOINT CHECK AGREEMENT

THIS JOINT CHECK AGREEMENT ("Agreement") is made this 29 day of April, 2016 by and among (1) JAMES G. DAVIS CONSTRUCTION CORPORATION, whose address is 12530 Parklawn Drive, Rockville, Maryland 20852 ("DAVIS"), (2) H&2 Drywall Contractors ("Subcontractor") whose address is 6702 Braddock Rd. Annandale VA 22003 and (3) ("Supplier") Ciesco Inc. whose address is Corporate Office

109 Millers Ln Harrisburg PA 17110

The parties to this agreement hereby agree as follows:

1. Any and all material checks issued by DAVIS to Subcontractor for invoices submitted by Supplier to Subcontractor on sales of materials in connection with the construction project known as Lot 3 Gas line ("Project") shall be made payable to Supplier and Subcontractor, provided Subcontractor and Supplier agree upon the amount actually owed by Subcontractor to Supplier for such invoices.

2. All such checks issued by DAVIS to Subcontractor shall be immediately endorsed by Subcontractor, then promptly delivered by Subcontractor to Supplier at the above address (or such other address as Supplier may designate in writing).

3. DAVIS will only make payments to Subcontractor and Supplier by joint check to the extent that DAVIS actually owes money to Subcontractor on the Project.

4. The sole purpose of this Agreement is to assist Subcontractor in making payment to Supplier of invoices on sales of all materials furnished by Supplier to Subcontractor for use in connection with the Project. This Agreement does not constitute an assignment of fund[s]. Nothing contained in this Agreement is intended by the parties to create any contractual relationship or equitable obligation between DAVIS and Supplier; this Agreement is solely for the convenience of the parties. This Agreement may be cancelled at any time by DAVIS upon written notice to Subcontractor and Supplier.

JAMES G. DAVIS CONSTRUCTION CORP.	SUBCONTRACTOR H&2 drywall contractor
By Michelle Christen	By Renan Buendia
Michelle Christen - VP Accounting & Financial Reporting	Renan Buendia PM
SUPPLIER
By Jeffrey G. Depew CFO
Jeffrey G. Depew II

The agreement thus specifies a method for how Ciesco would be paid for the materials it shipped to the job. Ciesco would send its invoices to Davis and H&2. Davis would pay via a joint check made payable to both H&2 and Ciesco and deliver the check to H&2. H&2 would then endorse the check and turn it over to Ciesco to apply against the invoices for the project. The joint check agreement specifies that "DAVIS will only make payments [to H&2] and [Ciesco] by joint check to the extent that DAVIS actually owes money to [H&2] on the Project."¹

Joint checking agreements are common in the construction industry. A joint checking agreement facilitates payment to a supplier, by providing a greater assurance to the supplier that it will be paid. With a joint check, the subcontractor cannot abscond with money owed to the supplier. From Ciesco’s perspective, the joint check agreement meant that there was no credit limit on the amount of materials it would ship to H&2 at one time. The agreement made Ciesco more confident that it would be paid and alleviated any concerns it might have about shipping a larger increment of materials.

Ciesco began shipping materials in July 2016. Payment was due within 60 days of the date of the invoice. When Ciesco experienced repeated delays in the payment of its invoices, Jolene Finley, an accountant with Ciesco, reached out to Davis at repeated intervals: November 11, 2016, December 13, 2016, and January 10, 2017. Ciesco’s policy was not to ship additional materials on accounts that are past due. Each time Ciesco inquired about the past due invoices, Davis responded that a check had been or would be written. Initially, the parties contemplated that the check would be written pursuant to the joint check agreement and that is how Davis paid, writing joint checks to H&2 and Ciesco. Davis sent two "release of liens" forms to Ciesco for invoices that had been paid. Davis paid the invoices for materials Ciesco provided through December of 2016. Benjamin Mahoney, who managed the project for Davis, acknowledged that a supplier who is not paid might cut off supplies, and that there is "always a concern" about non-payment generating delays. Mahoney explained that Davis’ involvement with Ciesco’s invoices is "not a typical scenario for us to be in." He testified that, ordinarily, the subcontractor is hired "to manage that process, to manage the orders, [and] to manage the invoices." Davis’ assurances to Ciesco in January 2017 resulted in Ciesco continuing to ship materials to H&2 rather than withholding materials because the account was past due.

As work on the project progressed, Davis noticed that H&2 was in difficulty. In early 2017, Davis learned that H&2 had "payroll payment problems" and was not paying its employees. As a predictable result of not paying its employees, H&2 was having trouble supplying enough personnel to complete the project. By March 22, 2017, Davis came to the conclusion that H&2 would not be able to pay its suppliers. For its part, Ciesco was not aware of any issues H&2 was having. However, while Davis was communicating with Ciesco about Ciesco’s unpaid invoices, Davis was concerned about Ciesco cutting off supplies to H&2 based on, at least in part, H&2’s financial condition.

Ciesco made deliveries of materials from January 10 through March 22. Neither H&2 nor Davis paid for those materials. Ciesco did not deliver any additional materials after March 2017.

On March 21, 2017, Davis issued a "notice to cure" to H&2, detailing the issues Davis was having with H&2. The second paragraph of the notice highlighted the ongoing nature of the problems with H&2. It stated "As previously notified, H&2 Drywall Contractors continued to underperform and manpower has steadily declined."

The following day, on March 22, 2017, Mahoney called Jolene Finley of Ciesco to inform her that there were "some problems between Davis and H&2" and he asked her not to ship any further materials on the joint check account. Mahoney requested a Ciesco credit application and a W-9 form. Finley and Mahoney discussed payment of Ciesco’s invoices. Mahoney assured Finley that there were ample funds to pay Ciesco. Ciesco discussed internally whether it needed to take any action, such as filing a mechanic’s lien or hiring legal counsel to collect the outstanding amounts due. Finley testified that Ciesco decided that it did not need to take any action, explaining that "we felt confident in the assurances we were provided by Mr. Mahoney and the Davis Company."

On March 23, 2017, Davis added Ciesco to its accounting system. Approximately two weeks later, Davis requested copies of invoices from January 2017, and Ciesco provided them the next day. Ciesco requested a status update on Davis’ outstanding payments on April 10. Davis responded that a $160,670.05 payment was being processed, and that the delay was due to moving from the joint checking agreement account. Prior to replying to Ciesco’s request for a status update, Davis’ internal emails confirmed that the payment to Ciesco was being processed.

The owner of H&2 responded to Davis’ notice to cure by stating that he could not provide the required personnel to complete the project, and that Davis should find a new subcontractor. After 72 hours had passed from the issuance of that notice, Davis terminated H&2 as a subcontractor. Davis paid H&2 a total of $969,779.70, or $299,616.30 less than what the revised contract contemplated as full compensation for H&2. Davis then hired another subcontractor on March 28, 2017. Davis paid that subcontractor a total of $260,007 to complete the job. The scope of the work was the same for the new subcontractor. H&2’s default caused Davis to settle claims with other suppliers.

On April 12, when Finley called again about invoices that were past due, Mahoney responded that payments in the amount of $160,670.05 were being currently processed, and he explained that "there was a slight delay with our Accounting program when we switched over from the joint check payments." On April 21,...