MCR Federal, LLC v. JB&A, Inc., 294 Va. 446

Background

JB&A, an employee-owned government contractor, agreed to sell to MCR Federal in a May 31, 2011 Asset Purchase Agreement for $42.7M plus contingent earn-outs; the Purchase Agreement included express representations and warranties by MCR and required a closing "bring down certificate" affirming those reps as true at closing.
Shortly before closing, the Air Force asked MCR for employee affidavits after an internal email disclosure; MCR provided affidavits and later was suspended from government contracting (briefly lifted by interim agreements, then reinstated and later converted to an Administrative Agreement).
At closing MCR delivered a bring down certificate certifying no government investigations or threatened actions existed; JB&A later alleged that was false and sued for breach of contract and for actual and constructive fraud in inducement.
After a bench trial the circuit court found MCR breached the Purchase Agreement and committed constructive fraud, awarding JB&A $11,995,002 (difference between a Purchase Price Allocation valuation and the paid price), prejudgment interest, and $1,894,484 in attorneys’ fees.
On appeal, the Supreme Court of Virginia reviewed (1) whether the fraud claims were barred by the source-of-duty rule, (2) causation and sufficiency of damages, and (3) entitlement to attorneys’ fees and election of remedies.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether JB&A could sue in tort (actual/constructive fraud) for false contractual reps/certificate	JB&A: misrepresentation in the bring down certificate was fraudulent inducement and independent of contract duties because it concealed post-contract events that would have prevented closing	MCR: any duty arose solely from the Purchase Agreement (and the bring down certificate); source-of-duty rule bars tort claims	Held: Fraud claims were not proper; the duty sprang from the contract, so tort claims fail under the source-of-duty rule
Whether JB&A proved causation — MCR’s breach caused JB&A’s losses	JB&A: the suspension and related events caused lost contracts/revenue and therefore reduced value/earn-outs; witnesses said they would not have closed if they knew	MCR: JB&A gave no credible proof linking breach to damages; must show earn-out amounts or other buyers	Held: Sufficient evidence supported causation (lost contracts/revenue and testimony)
Whether the Purchase Price Allocation (PPA) reliably measured JB&A’s value and damages	JB&A: PPA was prepared contemporaneously by McLean and used in MCR’s audited financials; it assigned a fair-value probability-weighted value to earn-outs	MCR: PPA relied on speculative/optimistic forecasts (CIM) and valued JB&A as part of MCR, not standalone; earn-out valuation was speculative	Held: Trial court did not err — PPA was a stand‑alone fair-value measure, not tied to the CIM forecasts, and earn-out valuation was not speculative
Whether attorneys’ fees awarded as equitable relief were permissible	JB&A: fees proper because court found constructive fraud	MCR: fees improper absent viable fraud claim and statutory/contractual basis	Held: Fees reversed — because fraud claims were barred, equitable attorneys’ fees were not recoverable

Key Cases Cited

Filak v. George, 267 Va. 612 (distinguishing tort duties from contractual expectations)
Richmond Metro. Auth. v. McDevitt St. Bovis, Inc., 256 Va. 553 (false progress-payment statements tied to contractual duties; tort claim barred)
Dunn Constr. Co. v. Cloney, 278 Va. 260 (representation made to obtain payment related to contractual duty; not independent tort)
Ware v. Scott, 220 Va. 317 (vendor’s post-contract discovery of facts that negate a precontract representation may create a duty to disclose)
Prospect Dev. Co. v. Bershader, 258 Va. 75 (equitable award of attorneys’ fees permissible in cases of fraud as chancery relief)
Shepherd v. Davis, 265 Va. 1088 (plaintiff must prove damages and causation with reasonable certainty)
Condominium Servs. v. First Owners’ Ass’n of Forty Six Hundred Condo., Inc., 281 Va. 561 (uncertainty as to amount of damages does not preclude recovery when damage existence is certain)
Sanitary Grocery Co. v. Wright, 158 Va. 312 (seller’s damages measured by difference between contract price and market value)