Capitol Indemnity Corporation v. United States

In the United States Court of Federal Claims
No. 18-916C
(Filed: February 21, 2020)
)
CAPITOL INDEMNITY ) Motion To Dismiss; RCFC 12(b)(6);
CORPORATION, ) Failure to State a Claim; Contract
) Disputes Act; Equitable Subrogation;
Plaintiff, ) Takeover Contract; Materials Outside the
) Complaint
v. )
)
THE UNITED STATES, )
)
Defendant. )
)
Ian Michael McLin, San Antonio, TX, for plaintiff.
Daniel K. Greene, Civil Division, United States Department of Justice, Washington,
D.C., with whom were Joseph H. Hunt, Assistant Attorney General, Robert E. Kirshman,
Jr., Director, and Deborah A. Bynum, Assistant Director, for defendant. Major Adrian
Allison, Washington, D.C., of counsel.
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO
DISMISS
FIRESTONE, Senior Judge.
Pending before the court is the United States’ (“government” or “defendant”)
motion to dismiss Capitol Indemnity Corporation’s (“Capitol”) claims for damages in
connection with performance and payment bonds Capitol issued to Redstick,
Incorporated (“Redstick”) under the Miller Act, 40 U.S.C. § 3131. On September 27,
2014, the United States Army (the “Army”) awarded a contract to Redstick (“Contract”)
to renovate a fitness facility at Fort Hood in Texas. After the government terminated
Redstick’s Contract for default on March 28, 2016, Capitol completed the work
remaining on the renovation pursuant to a Takeover Agreement. In this action, Capitol is
seeking damages from the government for claims arising in connection with Capitol
having to fulfill its obligations under the performance and the payment bonds issued to
Redstick. First, under the doctrine of equitable subrogation, Capitol claims it is entitled to
$461,585.70 on the grounds that the Army improperly released progress payments to
Redstick in contravention to the FAR 52.232-16.1 Second, also under the theory of
equitable subrogation, Capitol claims that it is entitled to an equitable adjustment of
$135,065.69 under FAR 252.243-7002(a),2 in connection with work Capitol performed
reinstalling a gym floor at the Fort Hood fitness facility. Third, Capitol is seeking
$94,847.10, as Redstick’s assignee, under the Contract Disputes Act (“CDA”) for
additional work Redstick performed on the heating, ventilating, and air conditioning
(“HVAC”) system at the fitness facility and which Capitol argues the Army owed but did
not pay to Redstick.
1
Under FAR 52.232-16(a) the government is required in certain circumstances to retain at least
20% of the total amount of progress payments made to a contractor. FAR 52.232-16(a) provides
in relevant part that, “The total amount of progress payments shall not exceed 80 percent of the
total contract price.” FAR 52.232-16(c) goes on to provide that even more than 20% can be
retained under specified conditions. Specifically, the “[CO] may reduce or suspend progress
payments . . . after finding on substantial evidence any of the following conditions . . .
[p]erformance of this contract is endangered by the Contractor’s (i) [f]ailure to make progress; or
(ii) [u]nsatisfactory financial condition” or “[t]he Contractor is delinquent in payment of the
costs of performing this contract in the ordinary course of business.” Id.
2
FAR 252.243-7002(a) states: “The amount of any request for equitable adjustment to contract
terms shall accurately reflect the contract adjustment for which the Contractor believes the
Government is liable. The request shall include only costs for performing the change, and shall
not include any costs that already have been reimbursed or that have been separately claimed. All
indirect costs included in the request shall be properly allocable to the change in accordance with
applicable acquisition regulations.”
2
The government has moved to dismiss Capitol’s entire complaint under Rules
12(b)(1) and 12(b)(6) of the Rule of the United States Court of Federal Claims
(“RCFC”).
For the reasons that follow, the government’s motion to dismiss (ECF No. 7) is
GRANTED IN PART AND DENIED IN PART.
I. FACTUAL BACKGROUND
The following facts are taken from Capitol’s amended complaint (ECF No. 23)
and exhibits attached to the complaint. See RCFC 10(c) (providing that “[a] copy of a
written instrument that is an exhibit to a pleading is a part of the pleading for all
purposes”); Rocky Mountain Helium, LLC v. United States, 841 F.3d 1320, 1325 (Fed.
Cir. 2016) (permitting the court to consider the allegations and exhibits “incorporated
into the complaint by reference”) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 322 (2007)).
A. Contract Award, the Bond Agreements, and Payments to Redstick
Redstick was awarded fixed price contract number W91151-14-C-0061 on
September 27, 2014 for the renovation of the Iron Horse Gym Building at Fort Hood.
Am. Compl. ¶ 4 (ECF No. 23). Under the terms of the Contract, Redstick was required to
complete the renovation by September 30, 2015. Id. ¶¶ 13, 15. After various
amendments, the total contract price was raised to $2,307,898.53. Id. ¶ 8; id. at Ex. B
(ECF No. 23-2).
Under the terms of the Contract, Redstick was required to “provide executable
performance and payment bonds within the timeframe specified in the contract.” Id. Ex.
3
B at 45. Redstick sought and Capitol, as surety, issued a Performance Bond and Payment
Bond (collectively, the “Bonds”) on October 2, 2014. Id. at ¶ 6.3 The Army approved of
the Bonds. Id. at ¶ 7.
Over the course of Redstick’s performance, the Army made nine progress
payments to Redstick totaling 90% of the contract price. Id. at ¶ 18; id. Ex. D at 16 (ECF
No. 23-4). The Contract included three provisions regarding progress payments. First, the
Contract’s text included FAR 52.232-16. Id. Ex. B at 25-26; see supra note 1. Second,
the Contract contained a provision titled “ELIGIBILITY FOR
PAYMENT/CONSTRUCTION CONTRACT PROGRESS PAYMENT REQUESTS,”
Am. Compl. Ex. B at 48, which states in relevant part that “[n]o progress payments are
authorized above 80% of the contract value.” Id. Ex. B at 49.
Third, the Contract incorporated by reference FAR 52.232-5. Id. Ex. B at 12. FAR
52.232-5 provides in relevant part: “The Government shall make progress payments
monthly as the work proceeds, or at more frequent intervals as determined by the [CO],
on estimates of work accomplished which meets the standards of quality established
under the contract, as approved by the [CO]” and “if satisfactory progress has not been
3
Prior to the award of its contract with the Army, Redstick, on September 12, 2014, executed a
General Indemnity Agreement with Capitol. Am. Compl. ¶ 6. In the agreement, Redstick agreed
to assign Capitol its rights “to all monies due or to become due . . . under any contract(s) covered
by such Bonds” to be effective where “[Capitol], at its option, shall notify” the obligee that the
assignment is in force. Id. ¶ 6; Id. Ex. C at 2. When the assignment is in effect, Capitol had
“power of attorney to endorse in their name(s) as the payee(s), and to collect any checks, drafts,
warrants, or other instruments made or issued in payment of any such sums and to disburse the
proceeds thereof.” Id.
4
made, the [Contracting Officer (“CO”)] may retain a maximum of 10 percent of the
amount of the payment until satisfactory progress is achieved.”
Capitol alleges that a government representative “contacted Capitol on September
24, 2015 to advise [Capitol] of Redstick’s default” and stated “[Redstick] is currently
25% behind schedule. Today is the last day of the Period of Performance (POP) for this
contract. There are issues other issues [sic] with this [C]ontract that we are trying to work
thru[sic]. . . .” Am. Compl. ¶ 22.
Capitol alleges based on this September 24, 2015 communication from the Army
that the Army understood as of September 24, 2015 that Redstick was in “default” and
that Capitol’s surety duties would soon be triggered under the Bonds. Id. ¶ 22. Capitol
alleges that the Army later acknowledged this communication in an April 7, 2016 email.
See id. ¶ 24.
On September 29, 2015, the Army “sent correspondence” to Redstick identifying
numerous deficiencies in Redstick’s contract performance. Id. ¶ 23.4 On October 21,
2015, the government sent Redstick a “Cure Notice” in which the Army scheduled an
inspection and demanded that Redstick provide the Army with a remedial plan. Id. ¶ 25.
Redstick failed to provide a remedial plan to the Army. Id. On October 30, 2015, the
Army issued to Redstick an “official Letter of Concern” due to “the numerous
deficiencies and non-conforming work.” Id. at ¶ 26.
4
The deficiencies included failing to meet deadlines, remove and level the floors, deliver or
install the rubber mats, finish the interiors, complete the latrines, install all the ceilings, and
complete the hallway tiling. Id.
5
On November 25, 2015 and December 1, 2015, the Army again wrote to Redstick
and referenced the provision in the Contract prohibiting the Army from paying Redstick
more than 80% of the Contract’s funds through progress payments. Id. ¶ 11.
On December 30, 2015, the Army “communicated to Capitol” that Redstick’s
work on the Contract was not complete and that Capitol should be receiving Payment
Bond claims from Redstick’s unpaid subcontractors. Id. ¶ 28.5 On January 4, 2016, the
Army suspended Redstick’s Contract and copied Capitol. Id. ¶ 29.
Despite these communications, Capitol alleges that the Army, contrary to the
terms of the Contract, continued to issue progress payments to Redstick in the amounts
claimed. These payments included the ninth progress payment paid to Redstick after
Redstick had been suspended on January 4, 2016, id. ¶ 20, and after Capitol asked the
Army to issue joint checks to Redstick and the subcontractors on January 13, 2016 which
the Army refused, id. at ¶ 31; id. Ex. E at 2 (ECF No. 23-5). The ninth progress payment
appears to have been made on January 29, 2016. Id. Ex. C at 6 (ECF No. 23-3). On
March 28, 2016, the Army issued a letter declaring Redstick to be in default. Id. ¶ 37.
B. Capitol’s Equitable Subrogation Claims for Wrongful Payment
Capitol alleges that it is entitled to $461,585.70, or the amount the Capitol alleges
the Army wrongfully paid Redstick after the Army knew of Redstick’s “default” in
September 2015. See Am. Compl. ¶ 29 and Oral Arg. 14:26:35-14:27:55. In the
alternative, Capitol claims it is entitled to damages equal to the amount paid by the Army
5
Capitol eventually received Payment Bond Claims from seven subcontractors totaling to
$736,793.19. Am. Compl. ¶ 35.
6
to Redstick after Redstick was suspended on January 4, 2016. Am. Compl. ¶ 29. Capitol
argues that the Army’s knowledge of Redstick’s default triggered Capitol’s rights as the
surety and that progress payments made to Redstick after its “default,” should have been
retained for Capitol to complete the work and pay subcontractors. Id. at ¶¶ 29-31.
C. Capitol’s Claim for Replacing the Gym Floor
Redstick’s renovation Contract called for the removal of the existing hardwood
gym floor and the installation of rubber matting over the exposed concrete. Am. Compl. ¶
61. Capitol alleges that the Army accepted and paid for Redstick’s work on the gym
floor. Id. at ¶ 32.6 In such circumstance, Capitol alleges the Army’s subsequent insistence
that Capitol redo the gym floor on May 4, 2016 amounted to a contract change and that
Capitol is entitled to be paid for the additional gym floor work. Id. at ¶ 62.
As relevant to this claim, the Takeover Agreement, effective May 13, 2016, states
that Capitol “undertakes to cause the performance of the Work, including correcting
patent defects, a list of which is set forth in Exhibit ‘A’ of this Agreement, and any latent
defects in the work performed by [Redstick] to be completed in accordance with each and
every one of the terms, covenants and conditions of the [Redstick] Contract.” Id. Ex. A at
1. The Takeover Agreement also states that “the Surety does not agree that any of the
items on Exhibit ‘A’ constitute patent defects and shall have the right to have items
removed from the list that it demonstrates are not patent defects, by mutual consent of the
parties to this Agreement.” Id. Further, Exhibit A states “[f]loor surface below rubber
6
It is unclear which progress payment covered this gym floor work, and, if the ninth progress
payment covered the gym floor work, whether Capitol can recover for both its FAR 52.232-16
and FAR 252.243-7002(a) claims under the theory of equitable subrogation.
7
flooring will be floated to ensure a flat, smooth look. Remove rubber flooring, float floor,
and re-install rubber flooring.” Id. Ex. E at 6.
D. Capitol’s Claim for HVAC Work
Capitol claims that while Redstick was performing the Contract with the Army,
the Army’s Contracting Officer Representative (“COR”) directed Redstick’s
subcontractors to perform certain work outside the scope of the Contract in connection
with fixing the HVAC system. Am. Compl. ¶¶ 63-68. The subcontractors were “advised
that no request for information would be permitted and that if utilized or the additional
work was not performed, liquidated damages would be assessed.” Id. at ¶ 65. Capitol
alleges that the Army told Redstick’s subcontractors that Redstick would be able to seek
funding for this extra work from the United States. Id. Ex. D at 12; see id. ¶ 68
(incorporating Ex. D).
After Redstick’s termination, Capitol and the Army negotiated the terms of
Capitol’s Takeover Agreement to complete the work pursuant to Capitol’s Performance
Bond. Am. Compl. ¶¶ 37-39. In its negotiations over the Takeover Agreement, Capitol
alleges it specifically reserved all rights arising under Redstick’s contract. Id. at ¶ 38.
Capitol advised the Army that Capitol sought to “reserve any rights” in an email and the
Army responded, “Got It!” on April 21, 2016. Id. at ¶ 39. Capitol alleges that this
reservation of rights includes the amount that was owed to the HVAC subcontractor for
work it was required to perform outside the scope of Redstick’s contract. See id. at ¶¶ 38-
40, 64-65.
8
E. The Takeover Agreement
In the Takeover Agreement, Capitol agreed to complete certain work in exchange
for the $230,792.85 balance remaining on Redstick’s contract and for the reservation of
Redstick’s rights under the original contract and Capitol’s own equitable subrogation
rights. Specifically, Paragraph 13 of the Takeover Agreement states:
Surety [CAPITOL] expressly reserves all prior rights, equitable liens and
subrogation rights under the contract [Contract], performance bond,
payment bond, at law or in equity, as well as the Surety’s own rights dating
back to the execution of the bond, to include, but not be limited to, those
rights and remedies that accrued prior to the former Contractor’s [Redstick]
termination, Contractor’s default, and those rights and remedies that may
accrue during the completion of the contract, including any and all claims
of overpayment and/or payments in violation of the terms of the Contract to
the Contractor arising under the subject Contract. No waiver of such rights
is agreed to or implied, regardless of any provisions of this Agreement to
the contrary and Owner acknowledges Contractor’s assignment of such
claims and causes of action to Surety.
To the extent necessary, if Surety elects to pursue any claims of former
contractor arising under the contract in its own name and for its own
benefit, Owner hereby acknowledges and consent [sic] to the assignment of
all former contractor’s claims to Surety under the contract, to the extent
permitted by law, including but not limited to, the right of Surety to assert,
in its own name and for its own benefit, all of former Contractor’s and any
of Contractor’s subcontractor’s claims for equitable adjustment to the
Contract Price or time under the subject Contract, whether arising prior to
or after the default.
See Amend. Comp. ¶ 41; id. Ex. A at 5.
II. PROCEDURAL HISTORY
Capitol submitted three claims to the CO on March 22, 2017 and the CO denied
those claims on July 24, 2017. Am. Compl. Ex. D at 1; id. Ex. E. Capitol filed its initial
complaint on June 26, 2018. The government filed an initial motion to dismiss Capitol’s
case on October 26, 2018. (ECF No. 7). After a status conference, Capitol submitted a
9
first amended complaint containing the above-described allegations. (ECF No. 23). The
government thereafter renewed its motion to dismiss Capitol’s complaint (ECF No. 24).
The court held oral argument on the government’s renewed motion to dismiss on January
15, 2020. Following oral argument, the court requested supplemental briefing on the
issue of whether certain of the government’s arguments were properly raised under
RCFC 12(b)(1) or should be considered under RCFC 12(b)(6). The supplemental briefing
was completed on January 24, 2020 (ECF Nos. 34-35).
III. STANDARD OF REVIEW
A. Subject Matter Jurisdiction under RCFC 12(b)(1)
In deciding a motion to dismiss for lack of subject matter jurisdiction, the court
must “accept as true all undisputed facts asserted in the plaintiff’s complaint and draw all
reasonable inferences in favor of the plaintiff.” LaBatte v. United States, 899 F.3d 1373,
1375 (Fed. Cir. 2018) (quoting Trusted Integration, Inc. v. United States, 659 F.3d 1159,
1163 (Fed. Cir. 2011)). The plaintiff “bear[s] the burden of establishing that the court has
jurisdiction by a preponderance of the evidence.” Diversified Group Inc. v. United States,
841 F.3d 975, 980 (Fed. Cir. 2016). “In determining jurisdiction, a court must accept as
true all undisputed facts asserted in the plaintiff's complaint and draw all reasonable
inferences in favor of the plaintiff.” Id. (quoting Trusted Integration, 659 F.3d at 1163).
“While the court may look beyond the pleadings in resolving issues relating to
subject matter jurisdiction, when issues of fact are central to both jurisdiction and the
merits of the claim, the trial court should assert jurisdiction for the purpose of
10
establishing relevant facts and dispose of all aspects of the case through trial.” U.S. Fire
Ins. Co. v. United States, 78 Fed. Cl. 308, 324 (2007).
B. Failure to State a Claim under RCFC 12(b)(6)
When addressing a motion to dismiss pursuant to RCFC 12(b)(6), the court must
determine whether, based solely on the pleadings, “a claim has been stated adequately.”
Brocade Commc’n Sys. v. United States, 120 Fed. Cl. 73, 78 (2015) (citing Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 563 (2007)). A claim should survive a RCFC 12(b)(6) motion
only if the plaintiff’s “factual allegations [are] substantial enough to raise the right to
relief ‘above the speculative level.’” Id. at 78 (quoting Bell Atl. Corp., 550 U.S. at 555).
In determining whether a plaintiff has adequately stated a claim, the court must accept as
true all factual allegations in the complaint and must make all reasonable inferences in
favor of the plaintiff. Id. (citing Bell Atl. Corp., 550 U.S. at 555-56); see Chapman Law
Firm Co. v. Greenleaf Constr. Co., 490 F.3d 934, 938 (Fed. Cir. 2007). However, the
court need not accept legal conclusions in the complaint. Bell/Heery v. United States, 739
F.3d 1324, 1330 (Fed. Cir. 2014).
IV. DISCUSSION
A. Claims Based on the Army’s Payment of More Than 80% of the
Contract Price to Redstick and the Failure to Suspend Payments after
Redstick’s Failure to Meet Contract Deadlines
When Capitol assumed Redstick’s obligations under the Takeover Agreement, the
Army had already paid Redstick 90% of the contract price leaving only 10% of the
Contract’s funds or $230,792.85 available to Capitol for finishing the remaining contract
work. Capitol has completed its obligations under the Takeover Agreement and has
11
received those remaining funds from the Army. In this action, Capitol seeks (1) an
additional $230,792.85 on the ground that the Army violated the FAR 52.232-16(a) when
it made progress payments to Redstick in excess of 80% of the contract price in
contravention of FAR 52.232-16(a) and (2) an additional $230,792.85 on the ground that
the Army abused its discretion by failing to suspend progress payments under FAR
52.232-16(c) after Redstick failed to meet the contract’s deadlines. Oral Arg. 14:26:35-
14:27:55. Capitol argues that both of these claims arose after Capitol was equitably
subrogated to Redstick’s rights under the contract.
In its motion to dismiss, the government argues that Capitol’s claim under FAR
52.232-16(a) should be dismissed for lack of jurisdiction on the grounds that it was not
raised before the CO as required for claims brought under the CDA. Def.’s Supp. Reply
at 4-5 (ECF No. 26). The government also argues that Capitol’s claims for payments
under FAR 52.232-16 fail as a matter of law because Capitol’s equitable subrogation
rights were not triggered until after Redstick was “terminated” for default in March 2016
and the Army did not make any payments to Redstick after Redstick was terminated.
Def.’s Supp. Mot. at 12-15 (ECF No. 24).
Turning first to the question of jurisdiction, the court finds that because Capitol
was not required to raise its equitable subrogation claim based on FAR 52.232-16(a)
before the CO, the court has jurisdiction to hear Capitol’s claim under that FAR
provision. Equitable subrogation claims are brought under this court’s original
jurisdiction under 28 U.S.C. § 1491(a)(1) and thus the claim did not have to be raised as a
CDA claim before the CO. See Ins. Co. of the W. v. United States, 243 F.3d 1367, 1369
12
(Fed. Cir. 2001) (“[A] subrogree, after stepping into the shoes of a government
contractor, may rely on the waiver of sovereign immunity in the Tucker Act, 28 U.S.C.
§ 1491, and bring suit against the United States.”); see also Pearlman v. Reliance Ins.
Co., 371 U.S. 132, 136 n.12 (1962) (equitable subrogation “is independent of any
contractual relations between the parties”) (quotation and citation omitted).
In addition, even if Capitol’s equitable subrogation claim under FAR 52.232-16(a)
needed to be raised before the CO under the CDA, the court finds that the claim was
effectively raised before the CO when Capitol made a claim for wrongful payments to
Redstick under the same FAR provision, although under a different subsection. In this
court, Capitol claims that the Army should have known that Capitol’s subrogation rights
were triggered once Redstick had failed to meet the contract deadline in September 2015
and that funds should have been reserved for the surety after that date. Before the CO,
Capitol further alleged that payments should have been withheld because the Army was
aware of Redstick’s failure to pay subcontractors. The court views the two arguments as
involving the same remedies, the same FAR provision, and the same progress payments.
See K-Con Bldg. Sys. Inc. v. United States, 778 F.3d 1000, 1004-5 (Fed. Cir. 2015)
(stating that the CDA’s requirement to raise claims to the CO in the first instance has not
been “so rigid a standards as to preclude all litigation adjustments in amount based upon
matters developed in litigation” and that “merely adding factual details or legal
argumentation does not create a different claim”) (internal quotation and citation
omitted). The CO was thus on notice of the rationale of Capitol’s claim and determined
that in all instances Capitol’s rights were not triggered before March 2016 and even
13
addressed Capitol’s January 13, 2016 request for the issuance of joint checks. In such
circumstance, the notice requirement was satisfied.
Having concluded that the court has jurisdiction over Capitol’s equitable
subrogation claims under FAR 52.232-16, the court now turns to whether Capitol has
alleged sufficient facts to state equitable subrogation claims under FAR 52.232-16(a) and
(c). The Federal Circuit has explained that an equitable subrogation claim is based on the
theory “that the triggering of a surety’s bond obligation gives rise to an implied
assignment of rights by operation of law whereby the surety ‘is subrogated to the
[principal obligor’s] property rights in the contract balance.’” Lumbermens Mut. Cas. Co.
v. United States, 654 F.3d 1305, 1312 (Fed Cir. 2011) (quoting Balboa Ins. Co. v. United
States, 775 F.2d 1158, 1161 (Fed Cir. 1985).7 “[A] legally enforceable duty can arise
between the government and a surety if the surety notifies the government that its
principal is in default of the bond agreement.” Hanover Ins. Co. v. United States, 133
Fed. Cl. 633, 635 (2017) (citing Balboa Ins. Co., 775 F.2d at 1164). The court in a case
affirmed by the Federal Circuit has also recognized that notice to the government that the
contractor “is in danger of defaulting under the bond” from other sources besides the
surety may be adequate to trigger the assignment of rights to the surety. Hartford Fire
7
Although ordinarily, a surety “asserts the doctrine of equitable subrogation to acquire retained
contract funds that are still in the government’s possession after performance of the contract is
complete[,]” Hartford Fire Ins. Co. v. United States, 108 Fed. Cl. 525, 532 (2012) (citing Prairie
State Nat’l Bank of Chicago v. United States, 164 U.S. 227, 227-28 (1986)), the doctrine allows
“a surety to recover from the government when the government abuses its discretion in
disbursing earned progress payments.” Id
14
Ins. Co. v. United States, 40 Fed. Cl. 520, 522-23 (1988), aff’d, 185 F.3d 885 (Fed. Cir.
1999); see Capitol Indem. Corp. v. United States, 71 Fed. Cl. 98, 102-03 (2006) (stating
that “a payment bond surety must notify the government that the contractor is or is close
to being inn default”). Finally, a surety’s equitable subrogation rights can be triggered
where the government “had knowledge of the default . . . and so informed the surety.”
Lumbermens Mut. Cas. Co., 654 F.3d at 1313 (quoting Nat’l Surety Corp. v. United
States, 118 F.3d 1542, 1547 (Fed. Cir. 1997)).
Capitol alleges in its complaint that its equitable subrogation rights were triggered
on September 30, 2015, when the Army informed Capitol of Redstick’s performance
issues and the missed September 2015 contract deadline. Am. Compl. ¶ 29. Yet, the
government persuasively argues the September 30, 2015 communications could not have
triggered Capitol’s equitable subrogation rights as a matter of law because Capitol did not
take any action at that time to acknowledge its potential liability as the surety and made
no objections to the progress payments submitted to Redstick after September 30, 2015.
See Def.’s Supp. Mot. at 6. Moreover, it is clear from the facts alleged that the Army did
not consider Redstick to be in default in September 2015. Rather, the alleged facts
indicate that between September 2015 and December 30, 2015 the Army was working
with Redstick to complete the Contract. Def.’s Supp. Mot. at 19. The court agrees that
where the alleged facts show that (1) Capitol did not assert its surety rights and (2)
Redstick was still working with the government to resolve its problems with contract
performance, the government did not have “knowledge of the default” under the Bonds
between September and December 2015. Thus, Capitol’s equitable subrogation rights
15
were not triggered. Lumbermens Mut. Cas. Co., 654 F.3d at 1313 (internal quotation
marks and citation omitted).
Capitol argues in the alternative that its equitable subrogation rights were triggered
by the Army’s actions starting on December 30, 2015, when the Army informed Capitol
that Capitol “should be receiving Payment Bond claims,” when the Army then
“suspended Redstick” on January 4, 2016, and when the Army received Capitol’s
January 13, 2016 request that the Army issue checks payable to both Redstick and the
subcontractors. See Am. Compl. ¶¶ 28-31, id. Ex. E at 2. Capitol alleges these events
occurred before the Army paid Redstick’s ninth progress payment, and that, therefore
Capitol is entitled to the ninth progress payment under the equitable subrogation doctrine.
While the court agrees with the government that the knowledge of a contractor’s
failure to make subcontractor payments alone does not constitute adequate notice to
establish a claim for equitable subrogation, see Fireman’s Fund Ins. Co. v. United States,
909 F.2d 495, 499 (Fed. Cir. 1990), here Capitol has alleged more than a failure to pay
subcontractors. Rather, Capitol alleges that the Army’s actions after December 30, 2015,
when taken together, are sufficient to state a claim for equitable subrogation for the ninth
progress payment. See Balboa Ins. Co., 775 F.2d at 1160 (treating notice that the
principal “was in financial straits and would not be able to fulfill its payment and
performance obligations” and “demanding that no further contract funds be released
without its consent” as sufficient notice of potential default); Am. Fid. Fire Ins. Co. v.
United States, 513 F.2d 1375, 1377 n.1, 1380-81 (Ct. Cl. 1975) (finding a letter stating
“please consider this letter formal demand that any monies due under the above contract
16
be forthwith distributed to and placed with [the surety]” as sufficient notice of default).
Capitol’s allegations of the communications between the Army and Capitol that preceded
the ninth progress payment are tantamount to Capitol acknowledging that Redstick had
defaulted and that Capitol was responsible.8 The court concludes that this is enough to
trigger Capitol’s equitable subrogation rights.
For these reasons, the court DENIES the government’s motion to dismiss
Capitol’s claims under FAR 52.232-16(a) and (c) regarding the ninth progress payment.
Capitol’s equitable subrogation claim for the ninth progress payment may proceed. The
court GRANTS the government’s motion to dismiss Capitol’s claims under FAR 52.232-
16(a) and (c) for progress payments made prior to the ninth progress payment.
B. Claims Based on the Demand to Reinstall the Gym Floor after
Accepting and Paying Redstick for the Gym Floor
Capitol asserts that it is entitled to an equitable adjustment in the amount of an
additional $135,065.69 under FAR 252.243-7002(a) for the work it performed on the
gym floor. Capitol claims that because the Army allegedly accepted Redstick’s gym floor
8
In addition, the court finds the government’s argument that Capitol’s claims under FAR
52.232-16 should be dismissed as a matter of law because FAR 52.232-16 did “not create any
‘mandatory obligations’ for the [CO] in this case” is unpersuasive. See Def.’s Supp. Reply at 5.
The government contends that FAR 52.232-16 “only applies to progress payments made based
on costs incurred” and here “the Army made progress payments to Redstick based on work
accomplished.” Def.’s Supp. Reply at 5. However, Capitol has alleged that FAR 52.232-16 was
incorporated to the contract in full, Capitol issued bonds based on the terms of that contract, and
the Army made progress payments inconsistent with FAR 52.232-16. The government’s
argument, properly construed, is a dispute with Capitol’s allegation that the parties understood
that FAR 52.232-16 regulated progress payments. The government’s disagreement with this
allegation, which the court takes to be true, is not an appropriate ground for dismissal under
RCFC 12(b)(6).
17
and paid Redstick for the gym floor work, the Army’s May 4, 2016 demand that Capitol
reinstall the gym floor amounted to a contract modification. See Am. Compl. ¶ 61.
The government argues that Capitol’s claim is barred by the terms of the Takeover
Agreement, in which Capitol agreed to reinstall the gym floor in return for only the
remaining contract funds. Def.’s Supp. Mot. at 20-21. In addition, the government argues
that Capitol has not identified any cognizable contract modification because the
attachments to the original contract (not in the amended complaint), the Army’s alleged
May 4, 2016 demand to Capitol, and the attachments to the Takeover Agreement (not in
the amended complaint) all use the same language to describe the manner in which the
gym floor must be installed and Capitol agreed to perform the work in the Takeover
Agreement. Id.9
FAR 252.243-7002(a) provides that the “amount of any request for equitable
adjustment to contract terms shall accurately reflect the contract adjustment for which the
Contractor believes the Government is liable.” “The changes clause is invoked when the
contracting officer decides to expand the limits of work.” Conner Bros. Cons. Co., Inc. v.
United States, 65 Fed. Cl. 657, 678 (2005).
9
The government also argues that to the extent this claim is raised under the CDA, the court is
without jurisdiction because the claim was not lawfully assigned. Def.’s Supp. Mot. at 20. First,
Capitol’s gym floor claim is raised under the doctrine of equitable subrogation rather than the
CDA because it occurred after Redstick’s default but prior to the Takeover Agreement. Second,
even if this claim was raised under the CDA and required assignment, the government’s
argument cannot be resolved on this motion to dismiss for the reasons discussed below regarding
the HVAC claim. See infra Part III.C.
18
The court concludes, taking Capitol’s allegations to be true, that Capitol has stated
a claim for $135,065.69 based on the theory of a contract adjustment. The government’s
argument that the Takeover Agreement precludes Capitol’s claim is contradicted by
Capitol’s factual allegations that Capitol was not relinquishing a claim for reinstalling the
gym floor after Capitol learned that the gym floor work had been accepted and paid for
by the Army while Redstick was performing. Therefore, the court DENIES the
government’s motion to dismiss the gym floor claim.
C. Claim Based on the Equitable Adjustment for Alleged Additional
HVAC Work
Capitol alleges that it is owed $94,847.10 in damages in connection with the
Army’s alleged modification to the scope of work on the HVAC portion of Redstick’s
Contract. Capitol asserts that through its General Indemnity Agreement with Redstick,
Redstick assigned this claim to Capitol and that the government consented to this
assignment in the Takeover Agreement. See Am. Comp. ¶ 64.
The government, in its motion to dismiss, contends that Capitol’s assignment is
not valid and that Capitol cannot maintain this claim because it was not in privity of
contract with the Army during the relevant time period. See Def.’s Supp. Mot. at 20-21.
The government argues that even if the claim was lawfully assigned, Redstick released
the Army from liability for the claim. Id. at 22.10 Finally, the government argues that
10
Each of the releases stated that Redstick “does release and discharge the Government its
officers, agents and employees of and from all liabilities, obligations and claims whatsoever in
law and equity arising out of or by virtue of said contract, except specified claims in the stated
amounts, or in estimated amounts when the amounts are not susceptible of exact statement by the
19
even if the claim was not released by Redstick, Redstick never provided notice of the
alleged contract change within 20 days of incurring the costs as required by FAR 52.243-
4 and thus the government cannot be liable for the claim.11 Id. at 25.
The legality of any assignment to Capitol from Redstick and thus whether this
court has jurisdiction to hear Capitol’s claim is properly construed as a challenge to the
facts alleged in the complaint that the Army assented to the assignment of Redstick’s
claims. See Ham Investments, LLC v. United States, 388 Fed. App’x 958, 960 (Fed. Cir.
2010) (discussing how the government may assent to the assignment of claims).12 In
addition, whether Redstick complied with the FAR and preserved a claim for payment or
released the claim for additional HVAC work requires the court to consider evidence
outside the complaint including the releases themselves. As with Capitol’s claim
regarding the gym floor, these are matters that cannot be resolved on this motion to
dismiss and the government’s argument is appropriate only in a motion for summary
judgment. See RCFC 12(d) (“If, on a motion under RCFC 12(b)(6) . . . matters outside
the pleadings are presented to and not excluded by the court, the motion must be treated
contractor[.]” Id. at Supp. App. 3. These releases were not included nor explicitly referenced in
the amended complaint.
11
FAR 52.243-4(d) states in relevant part “no adjustment for any change . . . shall be made for
any costs incurred more than 20 days before the Contractor gives written notice as required.”
12
To the extent the government argues that the question of assignment is jurisdictional and the
court may consider documents outside the complaint to resolve this factual dispute, Def.’s Supp.
Brief (ECF No. 34), the court finds it involves “issues of fact [that] are central to both
jurisdiction and the merits” and the court will “assert jurisdiction for the purpose of establishing
relevant facts.” See U.S. Fire Ins. Co. v. United States, 78 Fed. Cl. 308, 324 (2007). The record
has not been sufficiently developed at this stage of the litigation to establish the relevant facts.
20
as one for summary judgment” and “[a]ll parties must be given a reasonable opportunity
to present all the material that is pertinent to the motion”). Finally, the government’s
argument that Capitol failed to state a claim because there is no allegation that Redstick
provided notice within the requisite time period under FAR 52.243-4 is unpersuasive at
this stage of the litigation. Here, Capitol has alleged that the Army waived the notice
requirement because it explicitly told subcontractors that a claim for the additional
HVAC work could be brought at a later time. Therefore, the government’s motion to
dismiss Capitol’s HVAC claim is DENIED.
CONCLUSION
For the reasons stated above, the government’s motion to dismiss is GRANTED
IN PART AND DENIED IN PART. The court GRANTS the government’s motion to
dismiss Capitol’s claim for progress payments under FAR 52.232-16(a) and (c) except
for the ninth progress payment. The government’s remaining arguments regarding the
ninth progress payment, the gym floor, and HVAC work are DENIED. The parties are
further ORDERED to submit a joint status report by Wednesday, March 18, 2020 with
a proposed schedule for discovery.
IT IS SO ORDERED.
s/Nancy B. Firestone
NANCY B. FIRESTONE
Senior Judge
21