Terracom v. Valley Nat. Bank

• Decision Date: 07 March 1995
• Docket Number: No. 93-55660,93-55660
• Parties: , 40 Cont.Cas.Fed. (CCH) P 76,777 Loral TERRACOM, Plaintiff-Appellant, v. VALLEY NATIONAL BANK, a federally chartered bank; Citizens Bank Trust Co., a Kentucky corporation and state chartered bank, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 555

49 F.3d 555

63 USLW 2568, 40 Cont.Cas.Fed. (CCH) P 76,777

Loral TERRACOM, Plaintiff-Appellant, v. VALLEY NATIONAL BANK, a federally chartered bank; Citizens Bank Trust Co., a Kentucky corporation and state chartered bank, Defendants-Appellees.

No. 93-55660.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 16, 1994.

Decided March 7, 1995.

Davide Golia, Marks & Golia, San Diego, CA, for plaintiff-appellant.

Michael J. Rusing, Rusing & Lopez, Tucson, AZ, Kerry D. Smith, McMurray & Livingston, Paducah, KY, for defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before CHOY, FARRIS and BRUNETTI, Circuit Judges.

CHOY, Circuit Judge:

Loral Terracom ("Loral") appeals the district court's order granting Citizens Bank and Trust Company's ("Citizens") and Valley National Bank's ("Valley") joint Fed.R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. Loral alleges that Citizens and Valley ("the Banks") negligently failed or unreasonably performed investigations of the financial strengths of applicant sureties for bonds submitted in accordance with the Miller Act, 40 U.S.C. Sec. 270a, before executing Certificates of Sufficiency ("Certificates") in accordance with 48 C.F.R. Sec. 28.200, et seq. Loral contends that as a result, financially unfit individuals qualified as sureties on Miller Act payment bonds to Loral's detriment.

Loral also appeals the district court's order granting Citizens' Fed.R.Civ.P. 12(b)(2) motion to dismiss for lack of personal jurisdiction. Having jurisdiction under 28 U.S.C. Sec. 1291, we affirm both dismissals.

I

Loral was a subcontractor to West Coast Construction ("West Coast"). West Coast had a contract for the construction of communications/electronics improvement at Camp Pendleton Marine Corps Base, California ("Project") with the United States Department of the Navy ("Government").

40 U.S.C. Sec. 270a of the Miller Act requires that a contractor of any public building or work provide a payment bond with a surety satisfactory to the federal officer awarding the contract before any contract in excess of $25,000 is awarded. The purpose of the payment bond is to protect all persons supplying labor and materials for the completion of the Project. See 40 U.S.C. Sec. 270(a)(2). The government contracting officer has the sole responsibility of determining the acceptability of an individual surety applicant. See 48 C.F.R. Sec. 28.202-2(a) (1987). In making the determination, the officer considers the information on the Standard form 28 as well as other factors, such as the applicant surety's outstanding bond commitments. See 48 C.F.R. Sec. 28.202-2(a), (b) (1987).

In accordance with the Miller Act, West Coast executed two payment bonds with individual sureties, Purdy L. Sisson ("Sisson") and Hugh J. Johnson ("Johnson"), in July, 1987 and submitted the bonds to the Government. In accordance with 48 C.F.R. Sec. 28.202-2(b) in effect in 1987, each bond was accompanied by a Standard Form 28, containing a sworn Affidavit of Individual Surety ("Affidavit") and the Certificate on the reverse side. The Affidavit contains a worksheet where the surety applicant must list his assets and liabilities and declare his intent to become a surety on a federal works project. The Certificate provides that the surety named in the Affidavit is personally known to the signatory and that "to the best of [the signatory's] knowledge," the facts stated in the Affidavit are true. The Certificate does not contain specific instructions as to either the method or the extent of verification for the information provided. The instructions on the Affidavit provide that the certifier can be:

an officer of a bank or trust company, a judge or clerk of a court of record, a United States district attorney or commissioner, a postmaster, a collector or deputy collector of internal revenue, or any other officer of the United States acceptable to the department or establishment concerned.

The Certificate for Sisson's Affidavit was signed by Janis Morris ("Morris"), an officer of Citizens. Citizens is a Kentucky corporation doing business in the Commonwealth of Kentucky. The Certificate accompanying Johnson's Affidavit was signed by Carol J. Reynolds ("Reynolds"), an officer of Valley, a federally chartered bank with its principal place of business in Phoenix, Arizona.

West Coast subsequently breached its subcontract with Loral, and Loral filed a complaint in the United States District Court, Southern District of California, alleging among other claims, breach of contract, intentional and negligent misrepresentation, and for enforcement of the Miller Act. Johnson, Sisson, Dwight C. Lundell (a personal surety on a third payment bond), West Coast and its two general partners were named as defendants. In addition, Loral named the Banks as defendants for negligently executing the Certificates. On November 20, 1989, the Banks were dismissed without prejudice on the ground that Loral's claims against the Banks were premature. Although Loral obtained a court judgment against the remaining defendants on April 6, 1992, it has been unable to collect any portion of the judgment.

In a second action, Loral renewed its assertions against the Banks for negligently investigating Johnson's and Sisson's financial strengths before signing the Certificates. The district court granted the Banks' simultaneous motions to dismiss for failure to state a claim upon which relief can be granted. The district court also granted Citizens' motion to dismiss for lack of personal jurisdiction. Judgment was entered on April 14, 1993. Loral timely filed an appeal to this court on May 3, 1993.

II

Loral's first contention of error is that the district court's Fed.R.Civ.P. 12(b)(6) dismissal was improper because (1) the district court considered matters outside the pleadings; and (2) the Banks owed a duty to investigate the veracity of the financial information provided by the sureties.

We review de novo a Fed.R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. Frey v. California, 982 F.2d 399, 401 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 3000, 125 L.Ed.2d 693 (1993). "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). In applying this standard, we assume that all of Loral's allegations are true. See Reddy v. Litton Indus., Inc., 912 F.2d 291, 293 (9th Cir.1990), cert. denied, 502 U.S. 921, 112 S.Ct. 332, 116 L.Ed.2d 272 (1991).

First, Loral contends that the district court erred procedurally when it considered matters outside the pleadings while ruling on the 12(b)(6) motion to dismiss. During the hearing when it granted the Banks' Fed.R.Civ.P. 12(b)(6) motion to dismiss, the district court made a passing reference to Morris' affidavit which Citizens had submitted in support of its motion to dismiss for lack of personal jurisdiction. The district court, however, did not rely upon the affidavit to render its decision. Rather, the motion to dismiss was granted on the basis of the district court's interpretation of the Miller Act, its accompanying regulations and the qualified language used in the Certificate.

The district court determined that Loral was not entitled to relief under any set of facts because the Banks did not owe a duty to perform an independent investigation into the financial condition of each applicant surety. The court's decision was based solidly on the allegations in the complaint; the reference to Morris' affidavit was a minor parenthetical observation rather than a material basis for the district court's decision.

Next, Loral contends that the district court erred in deciding that the Banks did not owe a duty of care to independently investigate the veracity of the financial information provided by the applicant sureties. Loral argues that such a duty arises under common law principles of negligence rather than under the Miller Act. Loral first contends that the Banks' duty arises from the practical use of the certification by the federal contracting officers in approving sureties. Loral, however, fails to explain how the federal contracting officer's possible reliance, without more, establishes a duty of care.

Second, Loral argues that the language in the Certificate establishes a duty of care. We find no language in the Miller Act or its accompanying regulations which imposes such a duty upon the Banks. ¹ The Certificate states:

I Hereby Certify, That the surety named herein is personally known to me; that, in my judgment, said surety is responsible, and qualified to act as such; and that, to the best of my knowledge, the facts stated by said surety in the foregoing affidavit are true. (emphasis added).

The phrase, "to the best of my knowledge," indicates that the certifier attests for the surety on the basis of the certifier's previous, personal knowledge about the surety and an examination of any documents provided with the Affidavit. The language limits the representation to what the maker personally knows. See Northwestern Mutual Life Ins. Co. v. Gridley, 100 U.S. 614, 616, 25 L.Ed. 746 (1880). It puts the hearer on notice that further investigation may be needed.

The only situation where a certifying official is required to conduct an investigation arises when the government contracting officer has requested continuing proof of acceptability after the contract has been awarded. 48 C.F.R. Sec. 28-202.2(c) (1987). Instruction 5 on the Certificate imposes a duty on the executing official to conduct a personal investigation for further certificates showing additional assets. Specifically the instruction...