Ohio Federal Court Declines to Dismiss Action Against the Officer of a General Contractor Who Allegedly Submitted False Certifications Regarding Payments Made to Subcontractors With Payment Applications

Decker Constr. Co. v. Wesex Corp., No. 2:18-cv-727, 2019 BL 232653 (S.D. Ohio June 24, 2019)

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Emily D. Anderson

In Decker Construction Co. v. Wesex Corporation, the United States District Court for the Southern District of Ohio declined to dismiss a cause of action for fraudulent misrepresentation against Third-Party Defendant Mark Schrader (“Schrader”), the former Chief Financial Officer of Wesex Corporation (“Wesex”).  Wesex served as the general contractor on a construction project in New Albany, Ohio (the “Project”).  In its claim against Schrader, Third Party Plaintiff CCL Label, Inc. (“CCL”), the construction manager on the Project, alleged that Schrader signed affidavits included in Wesex’s payment applications that falsely certified Wesex’s subcontractors had been paid for their work on the Project.  Schrader sought dismissal on the basis that the Court lacked personal jurisdiction over him and that CCL failed to state a claim.

Schrader argued that the Court lacked personal jurisdiction over him because, as an individual officer of Wesex, the Fiduciary Shield Doctrine protected him from being compelled into Ohio courts merely due to Wesex being subject to Ohio’s personal jurisdiction.  The Court rejected this argument on the basis that Schrader engaged in solicitation and negotiations that gave rise to a continuing obligation in Ohio, namely, that Schrader regularly called and dealt with CCL representatives about the Project in Ohio, including submitting the payment applications with false certifications, which induced CCL to continue construction on the Project in Ohio.

The Court held that this same conduct constituted sufficient contacts with Ohio to satisfy Ohio’s long-arm statute, which extends personal jurisdiction to anyone transacting business in the state, even including complete and incomplete business negotiations.

Schrader’s conduct also met the Sixth Circuit’s three-part test for determining whether the particular circumstances warrant exercising personal jurisdiction over a non-resident defendant.  First, Schrader “purposefully availed” himself of the privilege of acting in Ohio or “caused” a consequence in Ohio.  He freely and intentionally transacted business in Ohio by submitting pay applications to CCL that allegedly contained false affidavits.  These affidavits were the subject of the lawsuit and the false affidavits had consequences in Ohio in that subcontractors filed claims in Ohio state courts alleging that they had not been paid.  Second, the cause of action for fraudulent misrepresentation arose from Schrader’s activities in Ohio; the lawsuit arose because Schrader allegedly made false affidavits about paying subcontractors in his payment applications sent to CCL for the project in Ohio.  Further, the Court presumed that the third prong of the test – that the acts of the defendant are substantially connected with the forum state enough to make the exercise of jurisdiction over the defendant reasonable – was met by virtue the first two prongs were met.  The Court saw no compelling reason why Schrader would lack a substantial connection to Ohio or why applying personal jurisdiction to him would be unreasonable.

Schrader argued in support of his motion to dismiss that (1) he did not intentionally defraud CCL because he “had no independent knowledge with regard to the status and/or progress of any construction projects undertaken by Wesex” and (2) all information contained in the affidavits were supplied to him by either Wesex’s owner and or Wesex’s chief design officer. But the Court did not weigh those assertions because doing so was prohibited on a motion to dismiss.

Schrader also argued that CCL failed to state a claim against him because CCL failed to plead with particularity the fraudulent misrepresentation claim.  The Court rejected that because CCL alleged that (1) Schrader made representations to CCL by sending false affidavits promising that all of Wesex’s subcontractors had been paid, (2) the representations were material to the transaction, (3) Schrader had knowledge that the representations were false and the subcontractors were not paid, (4) Schrader intended to mislead CCL through the false affidavits to prevent CCL from terminating Wesex, (5) it was justified for CCL to rely on Schrader’s representations because the affidavits were executed, sworn and notarized and CCL had no reason to suspect they were false, and (6) CCL was injured by the misrepresentations because they would have been able to terminate Wesex had they not falsified the affidavits and subcontractors have sued CCL and put mechanic’s liens on the Project.

The Court also rejected Schrader’s argument that CCL waived their breach of contract claim against Wesex (for which CCL claim’s Schrader was personally liable).  Schrader argued that by not raising objections to Wesex’s failure to include subcontractor lien waivers to at least 17 payment applications CCL waived its claim because it involved allegations of allegedly fraudulent activity, namely, that Schrader and his co-defendants engaged in a scheme to steal money intended for subcontracts for their own benefit.

To view the full text of the court’s decision, courtesy of Bloomberg Law, click here.