Free Motion to Amend Pleadings - Rule 15 - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS MULTISERVICE JOINT VENTURE LLC, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) )

No. 06-312C (Judge Wheeler)

DEFENDANT'S MOTION FOR LEAVE TO AMEND ITS ANSWER TO ASSERT AFFIRMATIVE DEFENSES AND COUNTERCLAIMS Pursuant to Rules 13(f) and 15(a) of the United States Court of Federal Claims ("RCFC"), defendant respectfully requests leave of the Court to amend its answer in this case to assert affirmative defenses and counterclaims based upon the False Claims Act, 31 U.S.C. § 3729 et seq., the special plea in fraud, 28 U.S.C. § 2514, and the fraud provision of the Contract Disputes Act ("CDA"), 41 U.S.C. § 604. In support of this motion, we rely upon the brief below and the pleadings in this case. Our proposed amended pleading is attached to this motion. DEFENDANT'S BRIEF STATEMENT OF THE CASE I. Nature of the Case On or about February 14, 2003, the United States Department of the Navy ("Navy") awarded Multiservice Joint Venture, LLC ("MJV") Contract No. N62447-02-D-0558 to perform janitorial services at the United States Naval Academy (the "Academy") in Annapolis, Maryland. On April 24, 2006, MJV filed a complaint in this Court, pursuant to the Contract Disputes Act ("CDA"), seeking approximately $355,970.00 in "compensatory damages" due to the Navy's alleged failure to pay MJV certain "expenses." MJV Complaint at ¶ 24. In

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particular, MJV alleges that the Navy owes MJV due to: (1) increased labor and health and welfare costs; (2) the Navy's refusal to permit MJV to reperform certain contract work; (3) losses to MJV supplies and equipment caused by the Navy's alleged failure to provide MJV with "suitable storage facilities" for its property at the Academy during Hurricane Isabel; and (4) the Navy's delaying MJV from performing certain contract work, thereby causing it to pay increased wages. We propose to assert affirmative defenses and counterclaims based upon the False Claims Act (31 U.S.C. § 3729 et seq.), the special plea in fraud (28 U.S.C. § 2514), and the fraud provision of the CDA (41 U.S.C. § 604). II. Statement of Facts The counterclaims we propose to assert primarily concern MJV's claim that it is owed $71,158.04 due to losses of supplies and equipment caused by the Navy's alleged failure to provide MJV with "suitable storage facilities" for its property located at the Naval Academy during Hurricane Isabel. See MJV Complaint at ¶¶ 18-20. The genesis of that claim lies in a September 25, 2003 request for an equitable adjustment (REA) that MJV filed with the contracting officer for certain "supplies and equipment that [MJV] lost during the hurricane." In that regard, MJV sought $21,579.85 for lost supplies and $30,064.60 for lost equipment. MJV also sought $3,582.85 for "equipment missing and presumed lost." In total, MJV asked for an equitable adjustment of $57,988.67 (including, without explanation, a five percent tax), and indicated that it may seek an additional $13,141 for damaged floor mats. On October 20, 2003, the contracting officer denied MJV's REA.

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On July 16, 2004, MJV sent the Navy a letter in which MJV persisted in claiming that it is entitled to a "reimbursement from the Navy for supplies and equipment . . . lost due to Hurricane Isabel." On December 7, 2004, and February 2, 2005, MJV submitted certified CDA claims upon which MJV bases its current action in the Court of Federal Claims. In those CDA claims, MJV once again asserted that "the Navy is required to compensate MJV for the losses in equipment and supplies MJV sustained as a result of Hurricane Isabel." MJV also claimed, for the first time, $6,609.66 for entrance mats allegedly discarded by the Navy's salvage company following the hurricane. The contracting officer issued a final decision denying MJV's claims on April 22, 2005. Our investigation of this case (including depositions of MJV principals) confirms that MJV has misrepresented the amount and nature of property that MJV lost during Hurricane Isabell. For example, one of the items MJV claims to have lost is a floor scrubbing machine (the "Clark scrubber"). However, not only was the Clark scrubber in used condition when MJV began providing janitorial services, it was damaged beyond repair before Hurricane Isabel struck. Moreover, ater Hurricane Isabel struck the Academy, the Clark scrubber was not discarded, contrary to MJV's claims. Indeed, we have confirmed that the Clark scrubber is currently stored in Bancroft Hall at the Academy, and have digital photographs of the scrubber. MJV seeks approximately $10,000 for the alleged loss of that scrubber. MJV also claims $469 for an Excel power washer allegedly lost due to Hurricane Isabel. However, the Excel power washer was not destroyed, but rather was used by MJV to power wash the Academy's track after the hurricane. While MJV claims $269 for the alleged loss of a Husky power washer due to the hurricane, MJV did not own that power washer; rather, it was

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the personal property of MJV's project manager, Ms. Elma Gadsen. Deposition testimony from MJV principals confirms the knowingly or recklessly false nature of MJV's claims for lost supplies and equipment. For example, George W. Tolson, Jr., the general manager of MJV until September 2005, testified that although he was the supply manager, he did not compute ­ and, indeed, is unable to substantiate ­ the approximately $73,000 in damages MJV seeks for items lost during Hurricane Isabel. George Tolson, Sr., a partial owner of MJV, likewise testified that he had no specific knowledge of what was damaged due to the hurricane. David R. Tolson, the other owner of MJV ­ and who signed its certified claim ­ testified that "once the [MJV] supervisors got back to Mr. [Joseph] Smith regarding the losses, him and I got together, and I made a calculation." However, Mr. Smith states that he never made a list of lost items with David Tolson. Mr. Smith does not know how David Tolson determined the specific quantities of items MJV claims were damaged or destroyed by Hurricane Isabel. Moreover, Mr. Smith states that he did not speak with other MJV supervisors or janitorial staff to create a list of lost items, nor did David Tolson ask Mr. Smith to do so. MJV's claims with respect to lost supplies are also grossly inflated. For example, while MJV claims it is owed $5,400 for 400 cases of lost multifold paper towels, MJV discarded no more than between 100 and 200 such cases as a result of the hurricane. Similarly, while MJV claims that it is owed $12,542.26 for 371 "walk-off" floor mats (of various sizes) lost due to the hurricane, MJV in fact discarded, at most, between 40 and 50 walk-off mats due to hurricane damage. Finally, MJV also seeks $22,359.10 due to Navy's alleged failure to permit MJV to reperform certain contract work. MJV Complaint at ¶¶ 16-17. MJV claimed that identical

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amount in its December 7, 2004 certified CDA claim, allegedly "taken for deductions [by Navy] during the first year of performance." However, David Tolson admitted during his deposition that, indeed, because "there were times when the government did permit reperformance[,]" MJV is owed less than the $22,359.10 it has claimed. David Tolson was unable to determine "how much less" ­ if anything ­ MJV allegedly is owed because he "ha[s] not done the calculation on that." In fact, David Tolson admitted that he could not explain "which are valid claims" ­ with respect to reperformance ­ and which are not. Finally, David Tolson admitted that he might never be able to determine what the correct amount of the claim should be, but that, in any event, he had not performed any analysis either prior to his submitting MJV's certified claim.1 Contrary to MJV's reperformance claim, Navy personnel confirm that the Navy always gave MJV the option to reperform unsatisfactory or unperformed work, where it was possible to do so. ARGUMENT An omitted counterclaim may be added by amendment, see RCFC 13(f), and "leave [to amend] shall be freely given when justice so requires." RCFC 15(a). The Supreme Court has indicated that leave to amend should be allowed liberally "except where prejudice to the opposing party would result." United States v. Hougham, 364 U.S. 310, 316 (1960); see also Intrepid v. Pollock, 907 F.2d 1125, 1128-29, 1131 (Fed. Cir. 1990). The facts discussed above support counterclaims based upon the False Claims Act, 31 U.S.C. § 3729 et seq., the special plea in fraud statute, 28 U.S.C. § 2514, and the antifraud

In a subsequent deposition, David Tolson asserted that MJV's actual claim was between "$17,000 and $18,000," although he had great difficulty explaining how he arrived at those figures. MJV neither has submitted a revised certified claim, nor has MJV filed an amended complaint. -5-

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provision of the CDA, 41 U.S.C. § 604. This Court possesses jurisdiction pursuant to 28 U.S.C. §§ 1503 and 2508 to adjudicate counterclaims raised by the United States, including those arising pursuant to the False Claims Act and for fraud. Brown v. United States, 524 F.2d 693, 703 (Ct. Cl. 1975); Daewoo Engineering and Const. Co., Ltd. v. United States, 73 Fed. Cl. 547, 584 (2006). Furthermore, justice requires that MJV be prohibited from profiting from its fraudulent misrepresentations and that the Government be afforded the opportunity to demonstrate that MJV submitted false and fraudulent claims for payment under the CDA. Moreover, there is no prejudice to plaintiff MJV, particularly, where, as here, all of the relevant facts necessary to defend against the counterclaims are within plaintiff's control, i.e., no additional discovery should be necessary. In that regard, we note that we discovered evidence in support of our proposed counterclaims only during discovery and as a result of our own, independent investigation. Nevertheless, should MJV seek a reasonable amount of time for additional discovery in this case, we will not oppose such a request.2 I. False Claims Act The False Claims Act ("FCA") prohibits anyone from presenting a "fraudulent claim for payment or approval" to the Government. 31 U.S.C. § 3729(a)(1). "For the purposes of the FCA, a contractor is deemed to have known that a claim it submitted was false if it had actual knowledge of the falsity of the claim or it acted in deliberate ignorance or reckless disregard of

Indeed, we may request that this Court reopen discovery to allow the Government to take additional discovery on the counterclaims. In any event, we intend to contact counsel for plaintiff so that the parties may propose to this Court a reasonable and realistic schedule to resolve this case. -6-

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the truth or falsity of the claim." Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1362 (Fed. Cir. 1998) (citing 31 U.S.C. § 3729(b)); see also United States ex rel. Franklin v. Parke-Davis, 147 F. Supp. 2d 39, 51 (FCA violations where "material misrepresentations [are] made to obtain a government benefit") Here, MJV claims money owed under a putative contracts with the Navy to provide janitorial services. The facts discussed above, however, demonstrate that MJV submitted false claims in seeking payment from the Government for lost equipment and supplies due to Hurricane Isabel, and in seeking payment for contract work that MJV alleges the Navy would not permit MJV to reperform. With respect to MJV's claim for lost supplies and equipment, MJV has committed separate FCA violations for each distinct, false line item enumerated in MJV's September 25, 2003 REA, in addition to two contained within MJV's certified CDA claim. See United States ex rel. Jordan v. Northrop Grumman Corp., 2002 WL 34251040, *17 (C.D. Cal. Aug. 5, 2002) ("The Court finds that the Government has shown that Northrop is liable under the FCA for all of the false DD-250's submitted with the requisite scienter. . . . [A] claimant is liable for each of the false claims filed, even where only one act led to the falsity . . . ."); see also United States, ex rel. Garibaldi v. Orleans Parish School Board, 46 F. Supp. 2d 546, 555 (E.D. La. 1999) (rejecting defendant's argument that its motion for judgment should be granted because defendant did not make each claim with the knowledge that it was false and noting that "[i]f [defendant] knew that its actions would result in a number of false claims, the FCA penalizes it for each false claim"); United States ex rel. Tyson v. Amerigroup Illinois, Inc., 488 F. Supp. 2d 719, 741 (N.D. Ill. 2007) (discussing United States v. Bornstein, 423 U.S. 303, 312-13(1976), and concluding that

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"had the general contractor submitted a single invoice, the subcontractor would still have been liable for three FCA violations"). MJV is thus liable for at least five false claims for lost supplies and equipment (i.e., for the multifold paper towels, the walk-off mats, the Clark scrubber, the Excel power washer, and the Husky power washer), in addition to at least one false claim for contract work that MJV alleges the Navy would not permit MJV to reperform. II. The Special Plea In Fraud The Forfeiture of Fraudulent Claims Act (also known as the "special plea in fraud"), 28 U.S.C. § 2514, provides: A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice fraud against the United States in the proof, statement, establishment, or allowance thereof. In such cases the United States Court of Federal Claims shall specifically find such fraud or attempt and render judgment of forfeiture. The special plea in fraud supports the forfeiture of all claims arising under a contract tainted by fraud against the government, even when the particular claim is not directly related to the fraud. Little v. United States, 138 Ct. Cl. 773, 778, 152 F. Supp. 84, 87 (1957); Barren Island Marina, Inc. v. United States, 44 Fed. Cl. 252, 255 (1999) (forfeiture of all claims under the contract where president and sole shareholder committed fraud); Brown Const. Trades, Inc. v. United States, 23 Cl. Ct. 214, 216 (1991) (claim forfeited where vice president convicted of bribery and conspiracy); see also Daff v. United States, 31 Fed. Cl. 682, 688 (1994) ("Fraud taints everything it touches." (citations omitted)).

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In order to prevail on a special plea in fraud under 28 U.S.C. § 2514, the government must prove: (1) a misrepresentation of material fact; and (2) the knowledge and intent to deceive the government. Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1362 (Fed. Cir. 1998), Young-Montenay, Inc. v. United States, 15 F.3d 1040, 1042 (Fed. Cir. 1994); American Heritage Bancorp v. United States, 61 Fed. Cl. 376, 386 (2004); Supermex, Inc. v. United States, 35 Fed. Cl. 29, 42 (1996); Daff v. United States, 31 Fed. Cl. at 688 (explaining that fraud under section 2514 "consists of knowingly or recklessly making false statements with intent to deceive"); Long Island Savings Bank, FSB v. United States, 476 F.3d 917, 926 (Fed. Cir. 2007) (holding that "[t]here is no language in the plain meaning of the statute that would impose requirements of reliance and injury, especially when used as an affirmative defense rather than as a cause of action, and we have found nothing in the legislative history of the original Court of Claims Act that indicates otherwise"). In this case, David Tolson, who certified MJV's CDA claim, admittedly cannot substantiate MJV's reperformance claim, and concedes that he did no analysis to compute the claimed amount. With respect to the claimed lost supplies and equipment, David Tolson testified that he relied on information provided by Mr. Smith, but Mr. Smith states that he never provided David Tolson with such information. Moreover, the Government's evidence indicates that MJV's list of claimed lost items have been grossly inflated, or are completely false (e.g., with respect to the Clark scrubber and the two power washers). III. The CDA Fraud Provision The CDA includes a fraud provision that provides as follows: If a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation -9-

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of fact or fraud on the part of the contractor, he shall be liable to the Government for an amount equal to such unsupported part of the claim in addition to all costs to the Government attributable to the cost of reviewing said part of his claim. 41 U.S.C. § 604. The CDA defines a "misrepresentation of fact" as "a false statement of substantive fact, or any conduct which leads to a belief of a substantive fact material to proper understanding of the matter in hand, made with intent to deceive or mislead." 41 U.S.C. § 601(7). As explained in detail above, MJV made several false statements of substantive fact with the intent to deceive or mislead the Government. CONCLUSION For the foregoing reasons, we respectfully request that the Court grant our motion for leave to amend our answer in this case to assert affirmative defenses and counterclaims based upon the FCA, the special plea in fraud, and the fraud provision of the CDA.

Respectfully submitted, GREGORY G. KATSAS Assistant Attorney General JEANNE E. DAVIDSON Director s/ Martin F. Hockey, Jr. MARTIN F. HOCKEY, JR. Assistant Director

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s/ Matthew H. Solomson MATTHEW H. SOLOMSON Trial Attorney, Commercial Litigation Branch Civil Division, U.S. Department of Justice Attn: Classification Unit, 8th Floor 1100 L Street, N.W. Washington, DC 20530 Telephone: 202-305-3274 Dated: August 11, 2008 Attorneys for Defendant

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