eNotes: Liability – February 2023 – Virginia

SIGNIFICANT CASE SUMMARIES

Virginia Case Summary

Arch Ins. Co. v. FVCbank
Virginia Supreme Court
No. 211050

Decided: December 29, 2022

When a company obtains a right through subrogation, it is placed in the position of its subrogor and can have no greater rights than those of the subrogor.

Background

Dominion Mechanical Contractors is a subcontracting company that primarily does its banking with Defendant, FVCbank. In addition to general accounts, Dominion had a line of credit through FVCbank that granted FVCbank the right to access the general funds to repay any credit used. Dominion also had obtained a series of surety bonds issued by Plaintiff, Arch Insurance Company, that granted Arch indemnification rights and required that bonded funds be held in a separate trust account at FVCbank. Dominion attempted to set up this trust account, but FVCbank declined to do so. Dominion then continued to deposit all funds into its general accounts.

As Dominion’s debts mounted, FVCbank declared Dominion in default and used $2,500,000 of the deposited funds to pay down the outstanding balance on Dominion’s line of credit. Dominion and Arch both sued, claiming conversion and unjust enrichment. Arch argued that it had absolute subrogation rights due to its indemnification agreement with Dominion, and that the funds should have been held in trust as FVCbank was put on notice of this requirement. The Circuit Court of Fairfax County granted a Motion to strike Arch’s claims, ruling that FVCbank had a priority interest to Dominion’s accounts and the funds therein.

Holding

The Supreme Court determined that Arch’s arguments failed, in part, because Arch’s rights through subrogation could not exceed the rights the subrogor, Dominion. At the time of default, Dominion had never successfully set up a trust account with FVCbank, and had continued to comingle all of its funds together in its general accounts. Therefore, it had no right to trust protection, and FVCbank retained its priority rights to the funds in the accounts through its own agreement with Dominion. For Arch to then claim that it had trust protection when Dominion did not would be allowing Arch to exceed the rights of the subrogor.

Questions about this case can be directed to John Lyding at (571) 470-0395 or jlyding@tthlaw.com.