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Laguna Construction Co. Inc. v. Carter

United States Court of Appeals, Federal Circuit

July 15, 2016

LAGUNA CONSTRUCTION COMPANY, INC., Appellant
v.
ASHTON CARTER, SECRETARY OF DEFENSE, Appellee

         Appeal from the Armed Services Board of Contract Appeals in No. 58324, Administrative Judge Jack Del-man, Administrative Judge Mark N. Stempler, Administrative Judge Richard Shackleford.

          Carolyn Callaway, Carolyn Callaway PC, Albuquerque, NM, argued for appellant.

          Domenique Grace Kirchner, Civil Division, Commercial Litigation Branch, United States Department of Justice, argued for appellee. Also represented by Benjamin C. Mizer, Robert E. Kirschman, Jr., Bryant G. Snee.

          Before Prost, Chief Judge, Taranto and Hughes, Circuit Judges.

          Hughes, Circuit Judge.

         Laguna Construction Company was awarded a government 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 government alleged that it was not liable because Laguna had committed a prior material breach by accepting subcontractor kickbacks, thereby excusing the government's nonperformance. The Board granted the government's motion for summary judgment on this ground, and declined 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. (Laguna). 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 vouchers that Laguna submitted in 2011 for taxes owed to Pueblo of Laguna and other incurred costs, including $24, 000 of subcontract charges.

         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 approximately $17.8 million of subcontract costs due to insufficient 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 begun investigating allegations that Laguna's employees were engaged in kickback schemes with its subcontractors. 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 subcontractors to submit inflated invoices to Laguna for reimbursement 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 awarding subcontracts. The United States Attorney for the District of New Mexico filed a separate criminal information 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.

         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, arguing 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 concluded 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 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 because 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 ...


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