Laguna Construction Company v. Defense

United States Court of Appeals
for the Federal Circuit
______________________
LAGUNA CONSTRUCTION COMPANY, INC.,
Appellant
v.
ASHTON CARTER, SECRETARY OF DEFENSE,
Appellee
______________________
2015-1291
______________________
Appeal from the Armed Services Board of Contract
Appeals in No. 58324, Administrative Judge Jack Del-
man, Administrative Judge Mark N. Stempler, Adminis-
trative Judge Richard Shackleford.
______________________
Decided: July 15, 2016
______________________
CAROLYN CALLAWAY, Carolyn Callaway PC, Albu-
querque, NM, argued for appellant.
DOMENIQUE GRACE KIRCHNER, Civil Division, Com-
mercial Litigation Branch, United States Department of
Justice, argued for appellee. Also represented by
BENJAMIN C. MIZER, ROBERT E. KIRSCHMAN, JR., BRYANT
G. SNEE.
______________________
2 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
Before PROST, Chief Judge, TARANTO and HUGHES, Circuit
Judges.
HUGHES, Circuit Judge.
Laguna Construction Company was awarded a gov-
ernment contract in 2003 to perform work in Iraq. After
the work was completed, Laguna sought reimbursement
of past costs, a portion of which the government refused to
pay. Laguna sued the government for these costs at the
Armed Services Board of Contract Appeals. The govern-
ment alleged that it was not liable because Laguna had
committed a prior material breach by accepting subcon-
tractor kickbacks, thereby excusing the government’s
nonperformance. The Board granted the government’s
motion for summary judgment on this ground, and de-
clined to consider the merits of Laguna’s motion. Because
we agree that Laguna committed the first material breach
by violating the contract’s Allowable Cost and Payment
clause, we affirm.
I
In November 2003, the government awarded Contract
No. FA8903-04-D-8690, one of twenty-seven contracts for
Worldwide Environmental Remediation and Construction
(WERC), to Laguna Construction Company, Inc. (La-
guna). The contract is governed by the Contract Disputes
Act (CDA), and incorporates by reference certain Federal
Acquisition Regulation (FAR) contract clauses. Under the
contract, Laguna received sixteen cost-reimbursable task
orders to perform work in Iraq, and awarded subcontracts
to a number of subcontractors. The physical work under
the contract was completed by 2010. The issue on appeal
concerns the government’s failure to pay fourteen vouch-
ers that Laguna submitted in 2011 for taxes owed to
Pueblo of Laguna and other incurred costs, including
$24,000 of subcontract charges.
LAGUNA CONSTRUCTION COMPANY v. DEFENSE 3
In February 2009, the Defense Contract Audit Agency
(DCAA) began an audit of Laguna’s incurred costs for
fiscal year 2006. In 2011, the DCAA disapproved approx-
imately $17.8 million of subcontract costs due to insuffi-
cient support proving that the government paid a fair and
reasonable price for the services subcontracted. In April
2012, the DCAA rejected a portion of these costs, which
comprised the fourteen Laguna vouchers at issue, totaling
$3,031,925. Laguna submitted a claim on the rejected
vouchers for $2,874,081. Laguna properly submitted a
notice of appeal to the Armed Services Board of Contract
Appeals (Board) after the Administrative Contracting
Officer did not issue a decision.
Meanwhile, in January 2008, the government had be-
gun investigating allegations that Laguna’s employees
were engaged in kickback schemes with its subcontrac-
tors. In October 2010, Laguna’s project manager, Ismael
Salinas, pleaded guilty to conspiracy to pay or receive
kickbacks in violation of 18 U.S.C. § 371, to conspiracy to
defraud the United States, and to violations of 41 U.S.C.
§ 53, the Anti-Kickback Act. Mr. Salinas admitted that
from April 2005 to March 2008, he worked with subcon-
tractors to submit inflated invoices to Laguna for reim-
bursement by the government, and profited from the
difference. Additionally, in February 2012, a federal
grand jury in the District of New Mexico issued a criminal
indictment against three principal officers of Laguna—
Neal D. Kasper, Bradley G. Christiansen, and Tiffany
White—alleging that they received kickbacks for award-
ing subcontracts. The United States Attorney for the
District of New Mexico filed a separate criminal infor-
mation against Mr. Christiansen, the Executive Vice
President and Chief Operating Officer of Laguna, for
conspiring to defraud the United States by participating
in a kickback scheme from December 2004 to February
2009. On July 2, 2013, Mr. Christiansen pleaded guilty to
the indictment.
4 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
After Mr. Christiansen’s guilty plea, the government
moved to amend its answer in the Board appeal to include
the affirmative defense of fraud. The Board granted the
government’s motion to amend over Laguna’s objection.
Appeal of Laguna Constr. Co., Inc., ASBCA No. 58324, 13
BCA ¶ 35,464. In the government’s amended answer, the
government alleged that it “is not liable for LCC’s claim
. . . because of LCC’s breach of Contract No. FA8903-04-D-
8690 when its principal officers and employees solicited
and accepted kickbacks for awarding subcontracts under
task orders issued under that contract, which constituted
fraud against the United States.” Id.
Laguna filed a motion for summary judgment, argu-
ing that the government is not authorized to withhold
funds where it has accepted the subcontractor prices as
reasonable during contract performance and that any
claims are barred by the statute of limitations. Laguna
also alleged that the government had improperly imposed
a monetary penalty for alleged deficiencies in Laguna’s
files. The government filed a cross-motion for summary
judgment, arguing that Laguna’s claim should be denied
because Laguna committed the first material breach of
contract by the fraud of its employees.
The Board agreed with the government and declined
to consider the merits of Laguna’s motion. The Board
held that the “well settled principle of antecedent breach”
is articulated in Christopher Village, L.P. v. United States,
360 F.3d 1319, 1334 (Fed. Cir. 2004), and that Laguna
“committed the first material breach under this contract,
which provided the government with a legal excuse for not
paying [Laguna’s] invoices.” J.A. 13. The Board conclud-
ed that Laguna breached the duty of good faith and fair
dealing because its employees’ criminal acts in engaging
in a kickback scheme were imputed to Laguna. The
Board also found that Laguna breached the Allowable
Cost and Payment clause in the contract because its
vouchers were improperly inflated to include the payment
LAGUNA CONSTRUCTION COMPANY v. DEFENSE 5
of kickbacks. Id. The Allowable Cost and Payment
clause, incorporated as FAR 52.216-7, states that a cost is
allowable only when it is reasonable and complies with
the terms of the contract.
The Board found that the breaches were material be-
cause kickbacks are fraudulent. Id. at 14. Further,
“[t]hat the government has not proven that kickbacks
were paid under every TO [task order] or under every
voucher does not render the fraud any less material.” Id.
(citing Joseph Morton Co., Inc. v. United States, 757 F.2d
1273, 1278 (Fed. Cir. 1985)).
Laguna appeals the Board’s decision, arguing that the
Board did not have jurisdiction over the government’s
affirmative defense of fraud, and in the alternative, that
the Board erred in granting the government’s summary
judgment motion. We have jurisdiction under 28 U.S.C.
§ 1295(a).
II
We review the Board’s legal conclusions without def-
erence, and must accept findings of fact unless they are
fraudulent, arbitrary or capricious, so grossly erroneous
as to necessarily imply bad faith, or not supported by
substantial evidence. Ryste & Ricas, Inc. v. Harvey, 477
F.3d 1337, 1340 (Fed. Cir. 2007).
Initially, we must determine whether the Board had
jurisdiction over the government’s affirmative defense of
fraud. We hold that the Board properly exercised its
jurisdiction.
“The Armed Services Board has jurisdiction to decide
any appeal from a decision of a contracting officer of the
Department of Defense, the Department of the Army, the
Department of the Navy, the Department of the Air Force,
or the National Aeronautics and Space Administration
relative to a contract made by that department or agen-
cy.” 41 U.S.C. § 7105(e)(1)(A). Certain fraud-related
6 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
claims are outside of the Board’s jurisdiction. Martin J.
Simko Constr., Inc. v. United States, 852 F.2d 540, 545–48
(Fed. Cir. 1988). These include claims relating to 41
U.S.C. § 7103 (formerly 41 U.S.C. § 604), 28 U.S.C. § 2514
(Special Plea in Fraud), and 31 U.S.C. §§ 3729–31 (False
Claims Act). Id. The government’s affirmative defense of
prior material breach does not fall into any of these
categories.
Laguna argues that the Board does not have jurisdic-
tion because the government’s affirmative defense of
fraud is a “claim” that requires “a decision of a contract-
ing officer.” Appellant’s Br. at 17. A “claim” is “a written
demand or written assertion by one of the contracting
parties seeking, as a matter of right, the payment of
money in a sum certain, the adjustment or interpretation
of contract terms, or other relief arising under or relating
to the contract.” H.L. Smith, Inc. v. Dalton, 49 F.3d 1563,
1565 (Fed. Cir. 1995) (citing 48 C.F.R. § 33.201 (1994)).
At oral argument, Laguna asserted that the government
is seeking a reduction in the amount owed, which is a
monetary award, or alternatively, a change in contract
terms. Oral Argument at 1:10–1:50
http://oralarguments.cafc.uscourts.gov/default.aspx?fl=20
15-1291.mp3. We disagree. Unlike our prior cases, the
government’s defense plainly does not seek the payment
of money or the adjustment or interpretation of contract
terms. See Raytheon Co. v. United States, 747 F.3d 1341,
1353 (Fed. Cir. 2014) (“In general, an equitable adjust-
ment is a fair price adjustment designed to account for a
change in the contract.”); M. Maropakis Carpentry, Inc. v.
United States, 609 F.3d 1323, 1331 (Fed. Cir. 2010) (find-
ing no jurisdiction where the contractor had failed to
submit a claim to modify the contract time). Such an
interpretation would unnecessarily expand the definition
of a “claim” and could improperly bar the Board’s jurisdic-
tion where the government raises any affirmative defense.
LAGUNA CONSTRUCTION COMPANY v. DEFENSE 7
Further, in cases such as this, where the Board does
not have jurisdiction over the underlying fraud actions––
here an Anti-Kickback Act claim––the Board has deter-
mined that it can maintain jurisdiction over a separate
affirmative defense involving that fraud as long as it does
not have to make factual determinations of the underly-
ing fraud. See, e.g., Appeals of AAA Eng’g & Drafting,
Inc., ASBCA No. 48729, 01-1 BCA ¶ 31,256 (finding
jurisdiction where the government alleged fraud in con-
tract administration, and the Tenth Circuit had already
determined that AAA had committed fraud); Turner
Constr. Co. v. Gen. Servs. Admin., GSBCA No. 15502, 05-2
BCA ¶ 33,118 (holding that the Board did not have juris-
diction over the government’s affirmative defense of prior
breach because the Board would have to find fraudulent
conduct).
Here, the Board did not have to make any factual
findings of fraud because it relied on Mr. Christiansen’s
July 2013 criminal conviction. And, the government’s
defense is not a “claim” that requires a decision by the
contracting officer. Therefore, the Board properly exer-
cised jurisdiction over the government’s affirmative
defense.
III
We review the Board’s grant of summary judgment
without deference. Ryste, 477 F.3d at 1340. “Summary
judgment is appropriate when the record, when examined
in a light most favorable to the non-movant, indicates
that there is no genuine issue of material fact and the
movant is entitled to judgment as a matter of law.” Id.
(internal quotation marks and citation omitted).
Prior material breach is a federal common law de-
fense asserted when a party breaches a contract after
another party has already breached the same contract.
Christopher Village, 360 F.3d at 1334. We have held that
it can bar a contractor’s breach claim against the govern-
8 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
ment, even if the government’s later-occurring breach
happened without knowledge of the first breach. See id.
In Christopher Village, as a result of a criminal investiga-
tion, a plea agreement was entered establishing that the
contractor was involved in a fraudulent insurance scheme
that resulted in false claims for rent being submitted to
the government. Id. at 1325. Based on that admitted
fraudulent conduct, the Court of Federal Claims granted
summary judgment to the government, finding that
Christopher Village had committed a prior material
breach that excused the government’s alleged subsequent
breach. Id. at 1326.
We affirmed, holding that when “a party to a con-
tract . . . is sued for its breach [it] may ordinarily defend
on the ground that there existed, at the time [of the
breach], a legal excuse for nonperformance.” Id. at 1334
(citing Coll. Point Boat Corp. v. United States, 267 U.S.
12, 15 (1925)); see also Joseph Morton, 757 F.2d at 1279;
K&R Eng’g Co., Inc. v. United States, 616 F.2d 469, 475
(Ct. Cl. 1980). We found that Christopher Village had
materially breached the contract by submitting false data
and was under common control with the guilty affiliated
company. 360 F.3d at 1334–36. Therefore, its prior
breach excused the government’s subsequent breach. Id.
at 1336.
Laguna attempts to distinguish Christopher Village
by arguing that it did not involve a CDA contract and that
the CDA displaces the common law prior material breach
rule. Nothing in the CDA suggests that Congress intend-
ed to displace this federal common law defense, nor is
there any sound reason to do so.
The purpose of the CDA was to streamline the proce-
dural aspects of government contract disputes, not to
displace existing government defenses and remedies.
Congress enacted the CDA to “provide[] a fair, balanced,
and comprehensive statutory system of legal and admin-
LAGUNA CONSTRUCTION COMPANY v. DEFENSE 9
istrative remedies.” S. REP. NO. 95-1118, at 1 (1978). It
clarified how the contract dispute process should work.
Id. at 4; see also id. at 35 (“S. 3178 will put into statute
the process by which Government contract claims are
handled.”); H.R. REP. NO. 95-1556, at 33 (1978) (“The bill
provides for a statutory basis for the settlement of con-
tract disputes in lieu of the present system primarily
governed by standard contract provisions. . . . It does not
provide for any new specific programs.”). This goal was
achieved primarily through enhancing contractors’ access
to courts and clarifying the powers of agency boards of
contract appeals. S. REP. NO. 95-1118, at 11–13.
While the CDA was intended to be comprehensive, it
did not foreclose the applicability of established prece-
dent. For example, Congress noted that “to a large degree
this bill provides for a statutory restatement of current
practice and procedure” as a “large body of precedent has
been established over the years to the extent that the
rules are now well understood.” H.R. REP. NO. 95-1556, at
13. Further, Congress made clear that certain aspects of
contract disputes are not explicitly included in the CDA
where there is well-established precedent. See 124 CONG.
REC. 36261–68 at 36267 (1978) (explanation of amend-
ments) (“Executive agency compromise and settlement
authority is not addressed in this Act as this is a matter
considered to be included in their [contracting officers or
Agency Boards] existing procurement/acquisition authori-
ty under the established precedents.”); S. REP. NO. 95-
1118, at 19 (stating that the CDA is not intended to
change various existing procedures).
Moreover, in an analogous case, we already have
permitted the government to rely on a fraud-based af-
firmative defense in a contract governed by the CDA. In
J.E.T.S., Inc. v. United States, the government entered
10 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
into a CDA contract 1 with J.E.T.S., Inc., requiring
J.E.T.S. to provide food service management on an air
base. 838 F.2d 1196, 1197 (Fed. Cir. 1988). After J.E.T.S.
sought an equitable adjustment for the second and third
years of the contract, employees of its parent company
were indicted for conspiracy to defraud the government
for falsely certifying that it was a small business. Id. at
1199. Prior to obtaining the contract, J.E.T.S. itself had
improperly certified that it was a small business. Id. at
1198. After the Eleventh Circuit affirmed the convictions,
the government moved for summary judgment. The
Board granted the government’s motion, finding that “the
bad faith of [J.E.T.S] in securing the award made the
award voidable, if not void.” Id. at 1199. We affirmed,
finding that because the contract was “procured by and
therefore permeated with fraud,” J.E.T.S. was not entitled
to an equitable adjustment. Id. at 1200.
Because J.E.T.S. had falsely certified that it was a
small business, the government was excused from its
purported subsequent breach of extending the contract at
the same price as the first year, and therefore J.E.T.S.’s
claim for an equitable adjustment was voided. This was
the case even where J.E.T.S.’s fraudulent act was discov-
1 Although the decision on its face does not indicate
that the case was governed by the CDA, the record makes
clear that it was. The contract was awarded on April 1,
1980, after the CDA’s effective date of March 1, 1979. See
Pub. L. 95-563 at Sec. 16. Moreover, the parties in their
respective briefing both indicated that the CDA applied.
See Brief for Appellee at 3, J.E.T.S., Inc. v. United States,
No. 87-1269 (Fed. Cir. Sept. 10, 1987); Reply Brief for
Appellant at 1, J.E.T.S., Inc. v. United States, No. 87-1269
(Fed. Cir. Sept. 18, 1987).
LAGUNA CONSTRUCTION COMPANY v. DEFENSE 11
ered after the government’s purported subsequent breach
because the fraudulent certification occurred beforehand.
Application of the prior material breach rule in CDA
proceedings at the Board comports with the Supreme
Court’s instruction that the government must be able to
“rid itself” of contracts that are “tainted” by fraud, includ-
ing kickbacks and violations of conflict-of-interest stat-
utes. See United States v. Acme Process Equip. Co., 385
U.S. 138, 146 (1966); United States v. Miss. Valley Gener-
ating Co., 364 U.S. 520, 563 (1961) (“As we have indicat-
ed, the primary purpose of the statute [precursor to 18
U.S.C. § 208(a), the conflict-of-interest statute] is to
protect the public . . . . This protection can be fully accord-
ed only if contracts which are tainted by a conflict of
interest on the part of a government agent may be disaf-
firmed by the Government.”). Acme Process noted that
the Anti-Kickback Act clearly expresses a policy “decided-
ly hostile” to kickback schemes, which are “hurtful to the
Government’s procurement practices” and “rarely detect-
able,” and supports a “public policy [that] requires that
the United States be able to rid itself of a prime contract
tainted by kickbacks.” 385 U.S. at 143–47; id. at 144–45
(“[E]ven if the Government could isolate and recover the
inflation attributable to the kickback, it would still be
saddled with a subcontractor who, having obtained the job
other than on merit, is perhaps entirely unreliable in
other ways. This unreliability in turn undermines the
security of the prime contractor’s performance—a result
which the public cannot tolerate, especially where, as
here, important defense contracts are involved.”).
Lastly, we do not find persuasive Laguna’s invocation
of the termination and Anti-Kickback clauses. These
clauses provide alternatives to address Laguna’s fraud,
but, as we have concluded, they do not foreclose applica-
tion of the common law defense of prior material breach.
The government could have chosen to terminate the
contract for default or sought remedies under the Anti-
12 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
Kickback Act, but it was not required to do so. Rather, as
we held in Christopher Village and J.E.T.S., the govern-
ment may use the prior material breach doctrine to defeat
a contractor’s breach claim.
IV
We agree with the Board’s determination that Laguna
committed the first material breach by violating the
Allowable Cost and Payment clause, which states that a
cost is allowable only when it is reasonable and complies
with the terms of the contract. See FAR 52.216-07.
Laguna clearly violated the clause, and breached the
same contract that it seeks payment under. Laguna’s
project manager admitted that he “agreed with others to
accept kickbacks from LCC subcontractors,” and “would
cause subcontractors to submit inflated invoices to LCC
for presentment to the government, but to agree to accept
lesser amounts than those specified in their subcontractor
invoices so that contract funds were available to pay me
kickbacks.” J.A. 6. Laguna’s vice president also admitted
that he “improperly manipulated the contracting process
in order to ensure that the subcontractors who paid us
kickbacks were awarded subcontracts. . . . Through this
process [we] circumvented the competitive bidding process
required by the FAR and LCC’s own policies and proce-
dures, and I was able to direct subcontracts to companies
that were willing to pay us kickbacks.” J.A. 8. The Board
properly determined that these criminal acts constituted
material breach that may be imputed to Laguna, since
both employees were operating under the contract and
within the scope of their employment when they “manipu-
lated the contracting process.” J.A. 13.
The fourteen vouchers at issue in this appeal, which
total nearly $2.87 million, also include subcontract charg-
es and taxes relating to past task orders. Therefore, these
fourteen vouchers were inflated by Laguna’s employees’
fraudulent acts of accepting kickbacks, and constitute
LAGUNA CONSTRUCTION COMPANY v. DEFENSE 13
violations of the Allowable Cost and Payment clause that
governs the contract as a whole. Based on the facts of this
case, Laguna’s employees’ criminal acts constitute a first
material breach of its contract with the government.
Laguna argues that any alleged breach is not material
because the government may audit and reconcile costs,
thereby “assur[ing] that the Government will incur no
damages.” Appellant’s Br. at 44. But this argument is
foreclosed by Acme Process, which holds that government
contracts tainted by kickbacks are hurtful because the
government would be “saddled with” an unreliable sub-
contractor, which “undermines the security of the prime
contractor’s performance.” 385 U.S. at 144–45. Further,
as the government notes, there are resulting harms even
if the government had audited and reconciled the inflated
costs, such as losing the use of money it had overpaid to
Laguna.
Laguna also contends that the government knew of
the kickback scheme as early as January 2008, but con-
tinued to perform the contract until 2015, thereby waiv-
ing the prior material breach defense. This alleged
“continued performance” included paying approximately
$3.5 million in July 2012 for incurred costs and auditing
Laguna’s cost statements. Appellant’s Br. at 26–27. In
light of the facts of this case, we do not find these argu-
ments persuasive.
A waiver is “an intentional relinquishment or aban-
donment of a known right.” Massie v. United States, 166
F.3d 1184, 1190 n.** (Fed. Cir. 1999) (internal quotation
marks and citation omitted). It was reasonable for the
government to invoke the prior material breach rule after
Mr. Christiansen entered a guilty plea in July 2013.
Therefore, prior to this date, the government did not have
a “known right” that would have invoked the prior mate-
rial breach rule. In addition, after Laguna completed the
physical work in 2010, the government’s sole acts com-
14 LAGUNA CONSTRUCTION COMPANY v. DEFENSE
prised conducting audits and making cost reimburse-
ments. We disagree with Laguna’s contention that it
relied on these acts to its detriment by performing final
accounting and audit tasks. It is clear that Laguna would
have performed these tasks even if the government had
terminated the contract. Therefore, the government did
not waive its right to invoke the prior material breach
rule.
Accordingly, we affirm the Board’s grant of the gov-
ernment’s summary judgment motion on the grounds that
Laguna’s prior material breach of the Allowable Cost and
Payment clause excused the government’s nonperfor-
mance. 2
V
We have considered Laguna’s remaining arguments
and do not find them persuasive. Because the prior
material breach rule applies, we find that the govern-
ment’s nonperformance was excused by Laguna’s earlier
violation of the Allowable Cost and Payment clause of
Contract No. FA8903-04-D-8690.
AFFIRMED
2 Because the Board properly granted the govern-
ment’s summary judgment motion, the Board was correct
not to address the merits of Laguna’s summary judgment
motion.