ADCS, Inc. v. Rollie O. Kimbrough, Jr., et al.

Plaintiff ADCS, Inc. (ADCS) appeals the district court's grant of
summary judgment to defendant Rollie O. Kimbrough, Jr. (Kim-
brough) on its fraud, constructive fraud, unjust enrichment and con-
version claims arising out of a contract between ADCS and MCSI
Technologies, Inc. to provide technology services and equipment to
the government. Defendant Kimbrough cross appeals an earlier order
of the district court denying his motion to dismiss for lack of subject
matter jurisdiction, improper jurisdiction, failure to state a claim, and
failure to join a necessary party. * * * Kimbrough is president and chief executive officer of MCSI, Inc.,
a Maryland corporation. ADCS is a California corporation which provides information technology services and equipment.

In December 1996, MCSI was awarded a contract with the Depart-
ment of Veterans Affairs to provide information technology services
as a prime contractor. In this capacity, MCSI could enter into subcon-
tracts to provide services to the government. ADCS, as a subcontrac-
tor, not being qualified to bid as a general contractor, successfully bid
on a project to perform scanning and document imaging work on a
Panama Canal project, with MCSI serving as the prime contractor.
Because of the urgency of the Canal and other government projects,
ADCS allegedly did not have time to qualify as a prime contractor on
its own.

After some negotiation, MCSI and ADCS entered into a Subcon-
tract Agreement effective July 1, 1998, which governed the contrac-
tor/subcontractor relationship between themselves. On December 30,
1999, ADCS filed an eight count complaint against MCSI and Kim-
brough individually arising from the alleged breach of the July 1,
1998 contract. Specifically, three counts were directed against MCSI:
(1) breach of contract; (2) declaratory judgment and specific perfor-
mance; and (3) quantum meruit; and five counts were directed against
both Kimbrough individually and MCSI: (4) promissory estoppel; (5)
unjust enrichment; (6) conversion; (7) fraud; and (8) constructive
fraud.

MCSI filed its Chapter 11 bankruptcy petition in the District of
Maryland on March 10, 2000. MCSI subsequently filed a suggestion
for a stay and a notice of removal to the U.S. Bankruptcy Court. The
district court ordered the case stayed as to MCSI pending the disposition of the bankruptcy proceeding. Following the stay, ADCS filed,
in the bankruptcy court, a notice of dismissal without prejudice as to
MCSI.

After the claims solely against MCSI had been dismissed in this
case in view of the bankruptcy proceeding, Kimbrough moved to dismiss the remaining claims against himself. The district court at first
granted Kimbrough's motion to dismiss as to the promissory estoppel
claim, but declined to dismiss the fraud, constructive fraud, unjust
enrichment and conversion claims. The court concluded it had both
subject matter and personal jurisdiction and that venue was proper.

Shortly before trial was scheduled to begin, Kimbrough filed a
motion to dismiss or in the alternative for summary judgment. The
district court held a hearing and issued an order removing the trial
from the docket and indicated it was of opinion that defendant Kim-
brough's motion should be granted. Later, in March 2001, the district
court issued its final order and memorandum opinion granting summary judgment to Kimbrough and dismissing the case. The court concluded that ADCS had not come forward with evidence that
Kimbrough was personally liable on plaintiff ADCS's claims.

* * *

Although it is true that a corporate officer can be held individually
liable for tortious conduct under certain circumstances, see
Metromedia Company v. WCBM Maryland, Inc., 610 A.2d 791, 794
(Md. 1992),3 there are no material facts in dispute which support the
tort claims against defendant Kimbrough.

* * *

We turn first to ADCS's claim that Kimbrough was unjustly
enriched at ADCS's expense. Maryland courts have recognized three
required elements of unjust enrichment: (1) a benefit conferred upon
the defendant by the plaintiff, (2) an appreciation or knowledge by the
defendant of the benefit, and (3) the acceptance or retention of the
benefit by the defendant of the benefit under such circumstances as
to make it inequitable for the defendants to retain the benefit without
payment of its value. See Berry & Gould, P.A. v. Berry, 757 A.2d
108, 113 (Md. 2000).

We agree with the district court that ADCS has not come forward
with any evidence that Kimbrough personally benefitted from the
Subcontract Agreement. Kimbrough appropriately received a salary
for his work as CEO of ADCS. Other payments, such as those made
to Prinvest, a lender with whom ADCS had a financing agreement,
with funds ADCS alleges should have gone to it, were payments
made by MCSI for obligations of the corporation. There is no unjust
enrichment claim against Kimbrough where there was no benefit
received by him.

Similarly, ADCS's claim for conversion against Kimbrough fails
because there is no evidence Kimbrough personally received any
property or monies belonging to ADCS. Under Maryland law, "[a]
conversion is any distinct act of ownership or dominion exerted by
one person over the personal property of another in denial of his right
or inconsistent with it." Allied Investment Corp. v. Jasen, 731 A.2d
957, 963 (Md. 1999) (citations omitted). As the prime contractor,
MCSI was entitled to receive payment from the government. As a
contractual matter under the terms of the Subcontract Agreement,
ADCS was entitled to payment for its services as the subcontractor.
Although ADCS may have a contractual dispute with MCSI in which
ADCS claims it was not paid or did not receive monies allegedly
owed, no conversion claim can lie against Kimbrough because there
is no evidence Kimbrough personally received any payment from the
government which belonged exclusively to ADCS.

Turning to ADCS's claims of fraud and constructive fraud, we
agree with the district court that the plaintiff has presented no evi-
dence of a misrepresentation of a material fact by Kimbrough. To pre-
vail on a claim of fraud under Maryland law, a plaintiff must prove
by clear and convincing evidence that (1) the defendant made a false
representation to the plaintiff; (2) that its falsity was either known to
the defendant or that the representation was made with reckless indif-
ference to the truth; (3) that the misrepresentation was made for the
purpose of defrauding the plaintiff; (4) that the plaintiff relied on the
misrepresentation and had the right to rely on it, and (5) that the plain-
tiff actually suffered compensable injury resulting from the misrepre-
sentation. See Alleco, Inc. v. Harry & Jeanette Weinberg Foundation,
Inc., 665 A.2d 1038, 1047 (Md. 1995).

ADCS presented no evidence of a misrepresentation of a material
fact by Kimbrough. Although MCSI may have been in poor financial
condition when it entered into the subcontract with ADCS, it is pure
speculation to infer that Kimbrough entered into the contractual rela-
tionship fraudulently. Unsupported speculation is not sufficient to
defeat a summary judgment motion. See Felty v. Graves-Humphreys
Co., 818 F.2d 1126, 1128 (4th Cir. 1987).

Plaintiff's constructive fraud claim fails for similar reasons. Under
Maryland law a key element of constructive fraud is the breach of a
legal or equitable duty. See Scheve v. McPherson, 408 A.2d 1071,
1076 (Md. 1979) (defining constructive fraud as "a breach of legal or
equitable duty which, irrespective of the moral guilt of the fraud fea-
sor, the law declares fraudulent because of its tendency to deceive
others, to violate public or private confidence, or to injure public
interests."). Here, not only are there no facts regarding any misrepre-
sentations made by Kimbrough, plaintiff has not identified, nor are we
aware of, any legal duty Kimbrough had that he breached in entering
into the Subcontract Agreement on behalf of MCSI.

* * *

Click the case caption above for the full text of the Court's opinion.

In sum, we agree with the district court that although ADCS may
have a claim for monies due under the contract with MCSI, that is a
matter for the Bankruptcy Court. The filing of bankruptcy by a corpo-
ration does not make the officers of the corporation liable and ADCS
has not come forward with evidence that Kimbrough is personally lia-
ble on plaintiff's claims.

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