International Business Machines Corporation v. State of Indiana, acting on behalf of the Indiana Family & Social Services Administration

FILED
Jun 26 2019, 1:25 pm
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
IN THE
Indiana Supreme Court
Supreme Court Case No. 19S-PL-19
International Business Machines Corporation,
Appellant/Cross-Appellee
(Defendant/Plaintiff below),
-v-
State of Indiana, acting on behalf of the Indiana
Family & Social Services Administration
Appellee/Cross-Appellant
(Plaintiff/Defendant below).
Argued: February 21, 2019 | Decided: June 26, 2019
Appeal from the Marion Superior Court
No. 49D01-1005-PL-21451
The Honorable Heather A. Welch, Judge
On Petition to Transfer from the Indiana Court of Appeals
No. 49A02-1709-PL-2006
Corrected
Opinion by Justice David
Chief Justice Rush and Justice Goff concur.
Justice Slaughter concurs in part and dissents in part with separate opinion.
Justice Massa not participating.
David, Justice.
This case comes before our Court for the second time and arises out of a
contract entered into between the State of Indiana, acting on behalf of the
Family and Social Services Administration, and International Business
Machines, Corp. to modernize and improve Indiana’s welfare eligibility
system. We previously determined that IBM materially breached the
contract and remanded the matter to the trial court to determine damages
and appropriate offsets. After the submission of evidence and a full-day
hearing, the trial court issued detailed findings and conclusions. It
determined that damages to the State resulting from the breach totaled
$128 million and that IBM was entitled to offsets in the amount of
$49,510,795, resulting in a final judgment of $78,178,109 to the State.
Both parties appealed, raising various issues. Today we address one of
the issues raised: whether IBM is entitled to post-judgment interest on its
$49.5 million damages award running from the date of the original
judgment in 2012 or running from the judgment on remand. Finding that
the original 2012 judgment was not “final,” we hold that the post-
judgment interest due to IBM runs from the judgment on remand. We
summarily affirm the Court of Appeals on all other issues and affirm the
trial court on all issues.
Facts and Procedural History
As this Court explained in State v. International Business Machines Corp.,
51 N.E.3d 150, 152 (Ind. 2016) (“IBM I”):
This case involves a $1.3 billion Master Services Agreement
(“MSA”) entered into between the State of Indiana, acting on
behalf of the Family and Social Services Administration
(“State”) and International Business Machines, Corp. (“IBM”)
to modernize and improve Indiana’s welfare eligibility system.
Although the MSA was supposed to last ten years, the State
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terminated it less than three years in, citing performance issues
on the part of IBM. Both parties sued each other for breach of
contract.
After a six-week bench trial, the Marion Superior Court found that the
State failed to prove that IBM’s breach of the MSA was material and
awarded IBM damages for assignment and equipment fees. It also
awarded termination payments and pre-judgment interest. Both parties
appealed. Ultimately, this Court reversed, in part, holding that IBM
materially breached the MSA. We reversed IBM’s termination payment
and pre-judgment interest awards, but affirmed its assignment and
equipment fees in the amount of $49,510,795. We remanded to the trial
court with the following instructions:
[W]e hold that IBM did materially breach the MSA through its
collective breaches in light of the MSA as [a] whole. We
therefore reverse the trial court's finding that IBM did not
materially breach the MSA. We summarily affirm the Court of
Appeals on all other issues including: affirming the trial court's
award of $40 million in assignment fees and $9,510,795 in
equipment fees to IBM, affirming the trial court's denial of
deferred fees to IBM, and reversing the trial court's award of
$2,570,621 in early termination close out payments and
$10,632,333 in prejudgment interest to IBM. We also remand
the case to the trial court to determine the amount of fees IBM
is entitled to for Change Orders 119 and 133, and for
calculation of the parties' damages consistent with this opinion,
including any appropriate offsets to the State as a result of
IBM's material breach of the MSA.
Id. at 168-169.
On remand, the trial court held a full-day hearing and considered both
pre-hearing briefs and post-hearing submissions. It issued an 83-page
order awarding the State $128 million in damages and credited IBM
$49,510,795 for assignment and equipment fees this Court upheld plus the
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amount of fees for the change orders (an amount agreed to via stipulation
of the parties). The trial court denied IBM’s request for post-judgment
interest on the $49.5 million-dollar award for assignment and equipment
fees. Thus, IBM was ordered to pay the State $78.2 million, after offsets.
Both parties again appealed. IBM argued: 1) it is entitled to post-
judgment interest on the fees upheld by this Court in IBM I; 2) the trial
court erred by setting aside the factual findings of the original trial court;
and 3) the trial court erred by holding IBM responsible for the costs of
implementing a different and more expensive welfare system than the one
contemplated by the MSA. For its part, the State argued it was entitled to
additional damages resulting from the breach.
The Court of Appeals affirmed in part, reversed in part, and remanded
with instructions. Int’l Bus. Machines Corp. v. State on behalf of Indiana
Family & Soc. Servs. Admin., 112 N.E.3d 1088 (Ind. Ct. App. 2018) (“IBM
II”). It rejected both of the State’s requests for additional damages and
concluded that IBM was entitled to post-judgment interest on the $49.5
million damages award that survived IBM I.
Both parties sought transfer. The Indianapolis Bar Association’s
Appellate Practice Section and the Defense Trial Counsel of Indiana
(DTCI) have filed amici briefs in support of transfer on the post-judgment
interest issue. We granted transfer thereby vacating the Court of Appeals
opinion. Ind. Appellate Rule 58(A). We write only to address the post-
judgment interest issue. We summarily affirm the other portions of the
Court of Appeals opinion and affirm the trial court on all issues.
Standard of Review
Here, the trial court has made special findings pursuant to Indiana Trial
Rule 52(A). As such, a reviewing court may affirm the judgment on any
legal theory supported by the findings. G & N Aircraft, Inc. v. Boehm, 743
N.E.2d 227, 234 (Ind. 2001) (citations omitted). Further, [w]hen the
specific issue on review relates to the award of damages, a damage award
should not be reversed if it is within the scope of the evidence before the
trial court.” Id. (quoting Dunn v. Cadiente, 516 N.E.2d 52, 54 (Ind. 1987)).
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However, the right to post-judgment interest arises as a matter of
statutory law. Tincher v. Davidson, 784 N.E.2d 551, 553 (Ind. Ct. App.
2003). The meaning of a statute is a question of law which we review de
novo. ESPN, Inc. v. Univ. of Notre Dame Police Dep't, 62 N.E.3d 1192, 1195
(Ind. 2016).
Discussion and Decision
IBM argues that it is entitled to post-judgment interest on its $49.5
million award as entered by the trial court and affirmed by this Court in
IBM I. Our Court of Appeals agreed. It applied Beam v. Wausau Ins. Co.,
765 N.E.2d 524 (Ind. 2002) and found that the “one constant” in the case
was the award of assignment and equipment fees to IBM. Int'l Bus.
Machines Corp., 112 N.E.3d at 1103. While it is true that this award has
remained unchanged from the original judgment until present, we do not
find Beam to be applicable to these facts and circumstances.
In Beam this Court looked at Indiana Code section 24-4.6-1-101 and
addressed whether post-judgment interest on a modified award runs on
the amount after modification by the reviewing court or the original
amount. Beam, 765 N.E.2d at 534. Indiana Code section 24-4.6-1-101
provides that post-judgment interest accrues back to the "date of the
return of the verdict or finding of the court until satisfaction. . . ." The
operative language in Beam is that when:
a judgment is reversed on appeal and remanded to the trial
court for the entry of a new judgment, post-judgment interest
accrues from the date the trial court enters the new judgment.
***
[But] where a money judgment has been modified on appeal
and the only action necessary in the trial court is compliance
with the mandate of the appellate court, interest on the
judgment as modified runs from the date of the original
judgment.
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Beam, 765 N.E.2d at 534-535. (citation omitted).
We found that because we modified the amount of damages but did
not reverse judgment for plaintiff, post-judgment interest ran from the
date of the original verdict on the modified amount. Id. at 534.
But here, it is not Indiana Code section 24-4.6-1-101 1 that governs, but
Indiana Code section 34-13-1-6 because we are dealing with a sum of
money due from the State. It provides:
Whenever, by final decree or judgment, a sum of money is
adjudged to be due any person from the state, an execution
shall not issue but the judgment shall draw interest at an
annual rate of six percent (6%) from the date of the
adjournment of the next ensuing session of the general
assembly until an appropriation is made by law for the
payment and the judgment is paid.
The relevant inquiry in Beam was whether the judgment was only
modified or reversed entirely, and pursuant to the statute, post-judgment
interest was due from the “date of the return of the verdict or finding of
the court.” Ind. Code § 24-4.6-1-101. Here, the relevant inquiry pursuant
to Indiana Code section 34-13-1-6 is whether there was a final decree or
judgment. A final judgment "disposes of all issues as to all parties thereby
ending the particular case." Georgos v. Jackson, 790 N.E.2d 448, 451 (Ind.
2003).
At the time of remand, all the issues were not disposed of as this
Court's opinion in IBM I did two things: 1) it reversed the trial court on
the issue of whether IBM's breach of the MSA was material; and 2)
remanded to the trial court to calculate appropriate damages as well as
offsets. While IBM wants us to consider its suit against the State separate
and apart from State's suit, the two arise out of the same facts and
1Ind. Code § 24-4.6-1-101 begins with qualifying language that it applies “[e]xcept as
otherwise provided by statute. . . .”
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circumstances and are inextricably tied. Case law is clear that a final
judgment disposes of “all issues as to all parties.” Id. (quoting Indiana
Appellate Rule 2(H) (emphasis added). Not all the issues as to all parties
were resolved at the time of remand and further, what was due and owed
to IBM was necessarily contingent upon what damages were due the State
for the breach. IBM could have recovered money from the State if the
State’s damage award was less than what was awarded to IBM or IBM
award could have simply been applied to offset what was owed to the
State. In Beam, we stated the rationale for awarding post-judgment
interest as if the date of the original judgment when it has not been
reversed: it "compensates plaintiffs for the loss of money that has been
determined to be have rightfully belonged to them throughout the time of
the pending appeal." Beam, 765 N.E.2d at 534. Here, there is no money
that rightfully belonged to IBM as the amount awarded to it may have
been and ultimately was, only an offset to what IBM owes the State.
Accordingly, looking at the statute, our case law and the facts of this case,
post-judgment interest going back to the original judgment is
inappropriate.
Conclusion
We hold that the post-judgment interest due to IBM runs from the
judgment on remand. We summarily affirm the Court of Appeals on all
other issues and affirm the trial court on all issues.
Rush, C.J., and Goff, J., concur. Slaughter, J., concurs in part and
dissents in part with separate opinion. Massa, J., not participating.
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ATTORNEYS FOR APPELLANT
Jay P. Lefkowitz
Kirkland & Ellis LLP
New York, New York
Paul D. Clement
Kirkland & Ellis LLP
Washington, D.C.
Andrew W. Hull
Laurie E. Martin
Hoover Hull Turner LLP
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE
Peter J. Rusthoven
John R. Maley
J. Curtis Greene
Meredith Thornburgh White
Barnes & Thornburg LLP
Indianapolis, Indiana
ATTORNEYS FOR AMICUS CURIAE, INDIANAPOLIS BAR
ASSOCIATION
Tyler D. Helmond
Voyles Vaiana Lukemeyer Baldwin & Webb
Indianapolis, Indiana
Josh S. Tatum
Plews Shadley Racher & Braun LLP
Indianapolis, Indiana
Joel M. Schumm
Indianapolis, Indiana
Bryan H. Babb
Bose McKinney & Evans LLP
Indianapolis, Indiana
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Libby Y. Goodknight
Krieg DeVault LLP
Indianapolis, IN
ATTORNEYS FOR AMICUS CURIAE, DEFENSE TRIAL COUNSEL
OF INDIANA
James D. Johnson
Blair M. Gardner
Jackson Kelly PLLC
Evansville, Indiana
Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019 Page 9 of 9
Slaughter, J., concurring in part, dissenting in part.
The Court summarily affirms an award of $125 million to the State as
direct damages resulting from IBM’s breach of contract to update
Indiana’s welfare system. A central premise of the appellate ruling we
affirm is that the “Modernization” approach required by the parties’
Master Services Agreement is “essentially the same” as the more
expensive “Hybrid” approach the State eventually implemented. IBM v.
State, 112 N.E.3d 1088, 1101 (Ind. Ct. App. 2018), trans. granted. I am
unable to join the Court’s summary affirmance because the record
establishes that the Agreement required IBM to implement only
Modernization and not Hybrid. Thus, I would treat the State’s additional
costs to implement Hybrid not as direct damages subject to a $125-million
cap but as consequential damages subject to a $3-million cap. On the
separate issue of post-judgment interest, I join the Court.
I.
The State’s original plan for updating what then-Governor Mitch
Daniels called “America’s worst welfare system” was to adopt a
“modernized” system based on remote eligibility. State v. IBM, 51 N.E.3d
150, 153 (Ind. 2016). Needy Hoosiers would apply for welfare benefits
using the internet or accessing a call center without the need for face-to-
face meetings with a case worker. Id. An applicant’s eligibility would then
be decided through a centralized process statewide rather than in local
county welfare offices. Id.After months of negotiations, in December 2006 the State contracted
with IBM to establish Modernization—a centralized system with call
centers to process welfare applications. Id. This arrangement also would
allow remote electronic access to the system, provide a paperless
document system, implement tools to lower fraud and improve Indiana’s
poor welfare-to-work record, and reduce administrative costs. Id. The
parties’ ten-year, billion-dollar-plus Agreement was more than 160 pages
long with extensive attachments, including exhibits, schedules, and
appendices, addressing all aspects of the parties’ business relationship. Id.The Agreement also included a change-order procedure by which the
parties could agree for IBM to take on additional work—not required
under the original Agreement—for additional pay. Id. at 165.
Problems with Modernization arose as soon as the system was first
rolled out to a limited pilot area. Id. at 155. Some of the problems were
attributed to the economic downturn in 2008 as welfare applications
increased dramatically. Id. And that same year, the State faced a series of
natural disasters that also strained the system. Id. Throughout the project,
the State used the change-order process eleven times to expand the scope
of IBM’s work under the Agreement. Id. at 156. But problems persisted,
and in October 2009 the State notified IBM it would be terminating the
Agreement for cause effective in December 2009. Id. at 157. Just before
announcing the termination, the State adopted a “Plan B” approach to
welfare modernization—a decentralized model requiring additional
personnel and physical space. Id.[In September 2009], the State decided to change approaches
and adopt a hybrid approach to welfare modernization,
referred to by the parties as “Plan B.” Plan B moved away from
the centralized call center and moved eligibility determinations
back to the local office, increasing face-to-face contact between
clients and staff.
Id. The State initially asked IBM to implement its Plan B—“Hybrid”—
system via the change-order process, but the parties were unable to agree
on the price for IBM to take on these additional services. Id. After the
termination, the State incurred substantial additional costs associated with
implementing Hybrid.
Our initial opinion agreed with the State that IBM had materially
breached the Agreement by failing to deliver the Modernization system
the State had procured, thus entitling the State to recoup damages
resulting from the breach. Id. at 168-69. On remand, the trial court
awarded $125 million in direct damages for the State’s increased costs
associated with the transition to Hybrid and an additional $3 million in
consequential damages. 112 N.E.3d at 1095. As to damages, the court of
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appeals affirmed. Id. at 1105-06. And today our Court summarily affirms
the court of appeals.
II.
The Agreement did not require IBM to incur the Hybrid-related costs of
renting additional space, hiring additional personnel, and renegotiating
subcontracts with subcontractors already under contract to implement
Modernization. And the parties’ conduct reflects as much. It is telling that
the State initially asked IBM to implement Hybrid via change order. By
entering into the change-order process, the State all but admits that
Hybrid is outside the scope of contracted services. Parties do not negotiate
proposed changes to an agreement that already requires those things.
The court of appeals thus erred in treating the State’s additional costs to
implement Hybrid as “reprocurement costs”—a defined term under the
Agreement. Such costs are the “reasonable costs and expenses” the State
incurs to “procure services similar to the applicable terminated Services . .
. to the extent such costs and expenses would not have otherwise been
incurred by the State but for the Termination”. The State’s post-
termination costs of transitioning its welfare-reform system from
Modernization to Hybrid were not costs to “reprocure” anything; the
additional Hybrid services had never been “procured” from IBM in the
first place. Only Modernization had been procured from IBM, but IBM did
not deliver, so it was in material breach. Thus, it was not IBM’s breach but
the State’s decision to switch to the different, more expensive Hybrid
system that caused the State to incur these additional expenses. The State’s
additional, Hybrid-related costs are at most consequential damages, not
direct damages.
One result of the court of appeals’ ruling is that the State is better off
than if IBM had not breached. To be sure, the State is entitled to the benefit
of its bargain with IBM. It can recover the damages caused by IBM’s
breach—i.e., the difference between what IBM had to provide under the
Agreement and what IBM actually delivered. But the State is not entitled
to a windfall. It cannot recover costs for additional services beyond what
the Agreement required. Because I disagree with the court of appeals’
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award of damages attributable to IBM’s breach, I respectfully dissent from
our Court’s summary affirmance of that portion of the appellate opinion.
III.
Finally, though the Court’s summary affirmance benefits the State in
the short term, the longer-term consequence of our ruling for the State’s
future procurement efforts may not be so favorable. It will come as little
surprise if prospective vendors respond to today’s ruling in one of two
ways. Either they will not do business with the State at all, thus reducing
the supply of those willing to contract with the State. Or they will include
a risk premium in their contracts to cover the unknown costs of fulfilling
obligations beyond what they agreed to. Either way, the State and its
taxpayers may soon learn that the future cost of obtaining third-party
services will be higher—perhaps appreciably so—than otherwise. The
magnitude of the increased cost may not be knowable, but it is a cost
nonetheless.
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