Galois, Inc. v. SP Glob.

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GALOIS, INC., Plaintiff, v. SP GLOBAL, INC., Defendant.

Civil Action No. 1:22cv0166 (PTG/JFA)

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

May 22, 2023

PROPOSED FINDINGS OF FACT AND RECOMMENDATIONS

John F. Anderson, United States Magistrate Judge

This matter is before the court on a motion for default judgment filed by plaintiff Galois, Inc. (“plaintiff') against defendant SP Global Inc. (“defendant”). (Docket no. 74). Pursuant to 28 U.S.C. § 636(b)(1)(C) the undersigned magistrate judge is filing with the court his proposed findings of fact and recommendations, a copy of which will be provided to all interested parties.

Procedural Background

On February 16, 2022, plaintiff filed a complaint against defendant, Dan Tolley, and Tom Burns asserting claims for unjust enrichment, intentional interference with contractual rights, fraud, piercing the corporate veil/alter ego, and conversion. (Docket no. 1) (“Comp!.”). The Clerk of Court issued summonses for service on defendant on February 22, 2022. (Docket no. 7). On March 2, 2022 plaintiff filed proof of service that stated defendant was served on February 25, 2022. (Docket no. 10). In accordance with Federal Rule of Civil Procedure 12(a), a responsive pleading from defendant was due on March 18, 2022.

On March 16, 2022, defendant, along with Bums and Tolley, filed a consent motion to extend time to respond to complaint. (Docket no. 15). Magistrate Judge Buchanan granted the motion and gave defendant until April 1, 2022 to respond.^[1] (Docket no. 17). Defendant, Bums, and Tolley filed a motion to dismiss on April 1, 2022. (Docket no. 18). On April 28,2022, District Judge Giles granted in part and denied in part the motion to dismiss. (Docket no 25). Judge Giles allowed the claims for unjust enrichment, tortious interference with contract, fraud, and piercing the corporate veil to proceed against defendant, while she dismissed the conversion claim along with various claims against Bums and Tolley. Id.

Defendant and Tolley filed an answer to the complaint on May 12,2022. (Docket no. 26). Following the entry of the scheduling order on July 29,2022, discovery began. (Docket no. 28). On August 31, 2022, upon request of the parties, the case was stayed until November 4, 2022. (Docket no. 32). The stay was lifted on November 4, 2022, and the parties were ordered to conclude discovery by February 10,2023. (Docket no. 34). After defendant's counsel moved to withdraw as counsel for defendant, Bums, and Tolley (Docket no. 35), the undersigned granted the request to withdraw on December 16, 2022. (Docket no. 41). In the order granting the motion, the undersigned noted that defendant, being a corporation, must be represented by a member of the bar admitted to practice in this court, and the undersigned ordered that substitute counsel enter an appearance on behalf of defendant within fourteen (14) days of entry of the order. Id. The undersigned noted that failure to do so may result in consequences, such as default being entered against defendant for failure to defend. Id.

On February 3, 2023, plaintiff filed a motion to strike answer and request for entry default. (Docket no. 48). The undersigned granted that motion on February 10, 2023 and requested the Clerk enter default against defendant pursuant to Federal Rule of Civil Procedure 55(a). (Docket no. 57). The Clerk of Court entered default as to defendant that same day. (Docket no. 58). Bums and Tolly were ultimately dismissed from the case on April 13, 2023 after plaintiff filed motions to voluntarily dismiss. (Docket nos. 67, 70, 72-73).

On April 27,2023, plaintiff filed a motion for default judgment against defendant, a memorandum in support of the motion, a declaration in support of the motion, and a notice of hearing for May 19, 2023. (Docket nos. 74-77). Plaintiff certified that it sent the motion, memorandum, declaration, and notice by UPS to Tolley and Bums, as officers of defendant. (Docket nos. 74 at 3; 75 at 22; 76 at 3; 77 at 2). On May 19, 2023, the motion was called in open court, and plaintiffs counsel appeared before the undersigned. No one appeared on behalf of defendant.

Factual Background

The following facts are established by the complaint and memorandum in support of the motion for default judgment. (Compl.; Docket no. 75). Plaintiff is an Oregon corporation with its principal place of business in Oregon. (Compl. ¶ 1). Defendant is a corporation with a principal place of business in Virginia. (Compl. ¶ 2). Tolley operates as the President and Chief Technology Officer of defendant, and he served as Vice President and Treasurer of SPG Institute, Inc. (Compl. ¶ 4). Bums is the CEO of defendant and the President of SPG Institute. (Compl. ¶ 6).

ARCNet Project Award

Around February 2019, the United States Air Force (USAF) awarded SPG Institute a $195 million contract to design, develop, and provide technical support associated with cloudbased technology in support of artificial intelligence advancement sought by the USAF on a platform called the ARCNet Consortium. (Compl. ¶ 10). Plaintiff contends that SPG Institute was formed to serve as a vehicle to administer this USAF contract. (Docket no. 75 at 1). Upon receiving this reward from the USAF, SPG Institute subcontracted with numerous businesses, including plaintiff. (Compl. ¶ll).

SPG Institute received at least $11 million in federal funds from the USAF, but it still owes millions of dollars to numerous contractors. (Compl. ¶¶ 23-24). SPG Institute and/or defendant paid some of the sub-contractors, but, at some point, they began using the USAF funds for other purposes, such as paying defendant's debts, salaries, and obligations. (Compl. ¶ 25). Over time, Tolley caused and allowed SPG Institute to transfer millions of dollars in federal funds into defendant's accounts and used that money to benefit themselves, not the federal government or sub-contractors. Id.

Agreement and Non-Payment

SPG Institute and plaintiff entered into an agreement on July 21,2020. (Compl. ¶ 26). Under the agreement, plaintiff was to “perform and deliver a physical design of their MicroElectronics Challenge project.” (Compl. ¶ 27). The agreement provided that SPG Institute would pay plaintiff $1,789,605.57 in total for the work performed. (Compl. ¶ 28). Plaintiff invoiced SPG Institute monthly in the amount of actual costs incurred for the full amount of the contract. (Compl. ¶¶ 29, 31). Plaintiff fully performed under the agreement, submitting all deliverables as defined in the agreement's statement of work. (Compl. ¶ 32). SPG Institute accepted the deliverables and never identified any deficiencies in the deliverables. (Compl. ¶ 33).

As part of the agreement, SPG Institute agreed to pay invoices within fifteen (15) days from the receipt of the invoice. (Compl. ¶ 30). On September 15, 2020, SPG Institute informed plaintiff that it had submitted the first two invoices to “corporate” for payment, confirmed plaintiffs address, and noted their surprise that plaintiff had not received the first check yet. (Compl. ¶ 34). Plaintiff claims that when SPG Institute referred to “corporate,” it meant defendant. (Compl. ¶ 35). Plaintiff never received any checks from SPG Institute or defendant. (Compl. ¶ 36). On September 30, 2020, an SPG Institute employee promised to reach out to “corporate” again about the payments. (Compl. ¶ 37). That employee informed plaintiff a week later that defendant would be paying the outstanding invoices through ACH wire transfer.

(Compl. ¶ 38). When plaintiff checked on the status of the payments a week after that, the employee stated that the request had again been sent to “corporate,” but “corporate” had not confirmed that the payment would be wired. (Compl. ¶ 39). Later that day, Tolley promised plaintiff that it should be paid that week. (Compl. ¶ 40).

Plaintiff alleges it continued to not receive any payment for the deliverables. Plaintiff claims it had phone conversations with Tolley where he, on behalf of SPG Institute and/or defendant, offered to pay eighteen percent (18%) APR due to the delays in the payment. (Compl. ¶ 42). Tolley later confirmed plaintiffs understanding and expressed his appreciation for plaintiffs willingness to work with them on the payment. (Compl. ¶ 43). Plaintiff continued following up with Tolley, but plaintiff was still never paid. (Compl. ¶¶ 44-48). In December 2020, Tolley blamed SPG Institute's and/or defendant's accounting system as the reason why plaintiff had not been paid. (Compl. ¶ 47).

SPG Institute's Relationship with Defendant

SPG Institute is a registered 501(c)(3) organization. (Compl ¶ 9). Plaintiff alleges that SPG Institute is owned and controlled by defendant, Tolley, and Bums. (Compl. ¶ 12). Plaintiff also claims that defendant, Tolley, and Bums were controlling all of the payments on behalf of SPG Institute and that defendant and SPG Institute's funds were co-mingled. (Compl. ¶¶ 19 22). Plaintiff alleges that when it asked SPG Institute about the status of past due invoices, an employee of SPG Institute responded that “all payments are handled by corporate, but I will forward this email to Dan Tolley the President of SP Global, Inc as he would be the individual who would be in the best position to answer.” (Compl. ¶ 15). Plaintiff claims Tolley would use his SP Global email address with a signature block identifying himself as President of defendant when emailing with plaintiff. (Compl. ¶ 16). At one point, Tolley informed plaintiff that defendant was having issues involving their accounting system, which was causing them to freeze the account and bring in cash to cover all the needs, including the ARCNet fees. (Compl. ¶ 20). Bums informed the USAF that they...