Free Order on Motion to Dismiss - Rule 12(b)(1) - District Court of Federal Claims - federal

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The United States Court of Federal Claims
No. 05-1000 C (Consolidated with No. 04-254) February 7, 2008

_________________________________________ ENRON FEDERAL SOLUTIONS, INC., et al., Plaintiffs, v. THE UNITED STATES OF AMERICA, Defendant. _________________________________________
Privatization; Summary Judgment; Motion to Dismiss for Lack of Jurisdiction; Material Breach Doctrine; Dependent Promises; Termination for Default; Termination for Convenience; FAR § 52.241-10; FAR § 52.249-8; FAR § 52.249-10; Quantum Meruit/Unjust Enrichment

John J. Pavlick, Jr., Venable LLP, Washington, D.C., for the plaintiff Enron Federal Solutions, Inc. John Warshawsky, Commercial Litigation Branch, United States Department of Justice, Washington, D.C., for the defendant.

OPINION AND ORDER Block, Judge.
I. INTRODUCTION The current action is a part of the global fallout from the Enron Corporation's ("Enron Corp") collapse. Prior to that collapse, in 1999, Enron Federal Solutions Inc. ("EFSI"or "Enron"), a subsidiary of Enron Corp, entered into a privatization contract (the "Contract") with the United States Army to own, operate and maintain the power, water and waste systems ("utility systems") at the United States Army Garrison at Fort Hamilton, Brooklyn, New York. More specifically, the Contract called for EFSI to make certain capital improvements within the first year of a ten-year contract in order to be able to more effectively provide energy, water and waste utility service to the base. EFSI was to obtain title to the utility distribution systems and to provide Fort Hamilton service for the ten-year period of the Contract. The Army, in return, was to make monthly installment payments that represented combined charges for the services and capital improvements. On December 2, 2001, Enron Corp filed for Chapter 11

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Bankruptcy, which spawned "one of the most extensive investigations into allegations of corporate fraud and wrongdoing in the nation's history." In re Enron Corp., 314 B.R. 524, 529 (Bankr. S.D.N.Y. 2004). After Enron Corp filed for bankruptcy, EFSI defaulted on its Contract with the Army, which in turn, terminated the Contract for default. At that time, EFSI had completed the capital improvements, but had only provided just over two years of utility service to the base. EFSI seeks compensation for the capital improvements that EFSI made to the energy, water and waste utility systems at Fort Hamilton before it defaulted on the Contract. The legal issue facing this Court is whether the Contract requires the Army to compensate EFSI for the capital improvements it made prior to breaching the Contract and being terminated for default. On September 15, 2005, EFSI filed suit against the government in this Court, raising four claims: (1) breach of contract: refusal to pay for capital improvements/upgrades; (2) breach of contract: refusal to pay for operations and maintenance services; (3) "Quantum Meruit/Unjust Enrichment--Capital Improvements and Upgrades"; and (4) "Quantum Meruit/Unjust Enrichment--Operation and Maintenance Services." Pl.'s Cmpl. Before the Court are the government's May 2, 2006, motion for summary judgment on Counts I and II under United States Court of Federal Claims ("RCFC") Rule 56 for judgment as a matter of law and a motion to dismiss Counts III and IV of the Complaint under RCFC 12(b)(1) for lack of subject matter jurisdiction. On June 2, 2006, EFSI filed its opposition to the government's motion to dismiss, as well as a cross-motion for summary judgment. On December 12, 2006, the parties filed supplemental briefs discussing the legal significance of the Army's failure to transfer title of the utility systems to EFSI. The Court held a hearing on liability and other issues on April 12, 2007. Supplemental briefing was filed by both parties on May 25, 2007, and responses to those briefs were filed on June 29, 2007. As fully explained below, EFSI's material breach of contract terminated the defendant's obligations to EFSI pursuant to the Contract. In addition, the unambiguous terms of the Contract entitle the defendant to judgment as a matter of law. The Court also rejects EFSI's contention that it be compensated under what it termed "Quantum Meruit/Unjust Enrichment." II. FACTUAL BACKGROUND A. Solicitation and Contract History On January 22, 1999, the United States Army Corps of Engineers ("Corps") published Solicitation No. DAC51-99-R-0006 ("Solicitation"). PPFUF1 ¶ 1. Under a December 17, 1999 Contract Modification, the Military District of Washington Acquisition Center replaced the Corps as the signatory to the Contract, and, along with the Corps, will collectively be referred to as the "Army." Contract Modification P00001. In essence, the Solicitation proposed that a
1

"PPFUF" represents Plaintiff EFSI's Proposed Findings of Undisputed Facts. "Pl. App." is Plaintiff EFSI's Appendix to Plaintiff's Cross-Motion for Partial Summary Judgment. "DPFUF" represents Defendant's Proposed Findings of Undisputed Facts. Facts drawn from the PPFUF, Pl. App., DPFUF, or the Complaint are undisputed. -2-

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contractor purchase and upgrade certain utility systems at Fort Hamilton by the end of the first year of the Contract, and thereafter, supply water, waste and energy service to the Fort for a total of ten years. Solicitation ¶¶ B.1.1, C.1.1, C.18. In return, title to the facilities was to transfer to the contractor after congressional notification.2 Solicitation ¶ C.2.1. Additionally, the Army was to make scheduled, monthly payments to the contractor. Solicitation ¶¶ B.2.4, C.11. These monthly payments, which represented the Army's payment for the cost of the utility service and the amortized costs of the capital improvements minus credit for the amortized portion of the purchase price, were to be made at agreed-upon intervals over the ten years of the Contract. Solicitation ¶¶ B.2, H.3.1, H.3.2. Through the Solicitation, the Army sought to further a federal government policy of privatization by the "transfer of ownership, responsibilities, investments, upgrade, plant replacement, continued operation and maintenance of the Army-owned utility systems to the nonDepartment of Defense sector." Id. In other words, the Army was attempting to get out of the utility, energy production, and supply business. Indeed, the Solicitation was part of a military initiative referred to as the "Privatization of Government-Owned Utility Systems,"3 Solicitation ¶ C.2.1, which is itself part of the federal government's contribution to the worldwide movement
2

"The transfer of ownership of Government-owned property is currently subject to Congressional notification and all agreements made pursuant to this notification are subject to final congressional notification." Solicitation ¶ C.2.1. 10 U.S.C.A. § 2688, the provision that provides the Secretary of a military department the authority to convey utility systems, provides a notice-and-wait requirement. 10 U.S.C.A. §2688(e). The notice-and-wait requirement states in part: "The Secretary concerned may not make a conveyance . . . until the Secretary submits to the Committee on Armed Services and the Committee on Appropriations of the Senate and the Committee on National Security and the Committee on Appropriations of the House of Representatives an economic analysis . . . demonstrating that the long-term economic benefit of the conveyance to the United States exceeds the long term economic costs . . ." Id The Department of Defense ("DOD") issued Defense Reform Initiative Directive No. 9 ("DRID No. 9"), "Privatizing Utility Systems," on December 10, 1997, which directed the military to develop a plan to privatize all utility systems by January 1, 2000, except for those needed for security reasons or where privatization is uneconomical. This date was extended by Defense Reform Initiative Directive No. 49. The Directives were issued pursuant to authority delegated by Congress in 10 U.S.C. § 2688(a), which provides that: The Secretary of the military department may convey a utility system, or part of utility system, under the jurisdiction of the Secretary to a municipal, private, regional, district, or cooperative utility company or other entity. The conveyance may consist of all right, title, and interest of the United States in the utility system or such lesser estate as the Secretary considers appropriate to serve the interests of the United States. 10 U.S.C. § 2688(a). For a good history of the military privatization program, see Jeffrey A. Renshaw, Utility Privatization in the Military Services: Issues, Problems, and Potential Solutions, 53 A.F. L. REV . 55, 58 (2002). -3-

3

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towards privatization of public activities that are non-governmental in nature.4 The underlying theory behind privatization is that the free market is a far more efficient means for the production and distribution of goods and services than the government. In addition, privatization limits the political power of the government, thereby promoting economic freedom and protecting individual liberty.5 While the verity of this theory for privatization is of no relevance here, its ramifications are clearly relevant to contract interpretation because it provides a context for understanding this Contract and its allocation of risk. Specifically, the Solicitation sought a "qualified utility service provider or contractor (`Contractor/Offeror') to own (or replace and own), operate, and maintain the Fort Hamilton electrical, natural gas, potable water and wastewater utility systems . . . ." Solicitation ¶ C.1.1. As owner of the facilities, "the Contractor, at its expense, [was to] furnish, install, operate and maintain all facilities required to furnish the service" subject to the Contract. Id. at ¶ C.4.5. The Army "anticipated that the natural gas, potable water, and wastewater utility distribution systems [would] need either major capital repair or complete reconstruction to comply with modern, stringent industry standards." Solicitation ¶ B.2.1. As a result, the contractor was required to initiate and complete any "substantial initial utility system upgrade or utility system replacement" by "the end of the first contract year." Solicitation ¶ H.1. The Army took no responsibility for the initial facility upgrade process. To the contrary, the Army placed on the contractor, "at its expense, [the responsibility to] furnish, install, operate and maintain all facilities required to furnish the service" required by the Contract. Solicitation ¶ C.4.5. Funding responsibility for the capital investments related to acquisition, maintenance and operation of the Fort Hamilton utility systems is covered in Section H of the Solicitation. Solicitation ¶¶ H.1, H.3, H.6. Under Section H, the contractor is responsible for "funding all capital investments required to acquire, maintain and operate" the Fort Hamilton utility systems. Solicitation ¶ H.1.1. The cost of the utility systems acquisition was to be "capitalized and recovered over a desired amortization period." Id. Further, the costs for expansion or upgrade of the systems were to be "funded as capital investment and recovered over a period that is consistent with the Contractor's standard capital investment recovery process." Id. These ¶ H.1.1
4

See generally PRIVATIZATION AND THE FEDERAL GOVERNMENT : AN INTRODUCTION , CRS Report for Congress (December 28, 2006) at 1 ("the CRS Report"). The CRS Report contends there is no standard definition of privatization. Id. The CRS Report noted that the Oxford English Dictionary "defines the term broadly to mean `the policy process of making private as opposed to public.'" Id. at 3 (quoting OXFORD ENGLISH DICTIONARY , available at http:// dictionary.oed.com/). On the other hand, the CRS Report characterizes the Congressional Budget Office (CBO) definition of the term as more narrow, referring "to activities that `involve a genuine sale of assets and termination of a federal activity.'" Id. (quoting Congressional Budget Office, THIRD PARTY FINANCING OF FEDERAL PROJECTS, ECONOMIC AND BUDGET ISSUE BRIEF, June 1, 2005, at 5). It is this latter sense that is implicated in the case at bar. See generally MILTON FRIEDMAN AND ROSE FRIEDMAN , CAPITALISM AND FREEDOM , (40th anniversary ed. 2002); CRS Report at 4­9 (citing at 6 n.24, DAVID OSBORNE AND TED GAEBLER, REINVENTING GOVERNMENT (1992), ch. 3). -45

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capital investments can be viewed as "initial upgrade investments"--those that are needed immediately to acquire the systems and get up and running. Solicitation ¶ B.2.1. In addition to responsibility for the initial upgrade investments, the contractor also was to be responsible for any capital investment required for all system upgrades or enhancements not associated with new or renovated facilities. Solicitation ¶ H.1.2 (emphasis added). These capital investments would be the upgrades and enhancements required throughout the course of the Contract--annual capital improvement investments. Solicitation ¶ B.2.3. Any capital investments not associated with new or renovated facilities were to be subject to negotiation between the contractor and the Army. Id. Further, any of these type of capital improvements would require "budgetary cost estimates as requested by the federal Contracting Officer." Id. Under the Solicitation, the Army agreed to pay a "monthly consolidated utility service charge" ("MCUSC"). Solicitation ¶ H.3.2. The rate structure for the MCUSC was "to consist of four components: `Initial Upgrade,' `Distribution Charge,' `Capital Investments,' and `Purchase Price.'" Solicitation ¶ H.3.2. Each of these four differing components were to be combined in a single "consolidated utility service" charge to be paid by the Army each month. Solicitation ¶ H.3.2. The "Initial Upgrade" component comprised of EFSI's initial investment price--the cost of major utility replacement or repair needed at the beginning of the Contract in order for the systems to comply with modern, strict utility industry standards. Solicitation ¶ B.2.1. The "Distribution Charge" consisted of the annual service charge for the ownership, operation and maintenance of the utility distribution systems by the contractor. Solicitation ¶ B.2.2. "Capital Investment" included any capital-related investments for the utility system upgrades or repairs forecasted on an annual basis. Solicitation ¶ B.2.3. The "Purchase Price" consisted of EFSI's price to purchase the utility systems at Fort Hamilton. Solicitation ¶ B.2.4. With regard to the purchase price, the Solicitation required that it be "amortized over a desired period at an annual interest rate and returned to Fort Hamilton in the form of a credit to the Contractor's utility bill for the services rendered in the contract." Id. Significantly, the Solicitation required amortization of the purchase price and crediting to the utility bill because "Fort Hamilton [did] not desire an up-front lump sum cash payment for the fair value of the utility distribution systems. Other provisions in the Contract are similarly important for the Court's analysis. One is how risk was apportioned in the Contract. The Contract placed the risk of ownership squarely on the contractor. Solicitation ¶ C.4.1. This ownership risk included construction and maintenance of the facilities. Id. In addition, the contractor accepted the risks inherent in a fixed-price contract for capital improvement and maintenance activities. Solicitation ¶ B.2. The Army thus bore no risk for the capital improvement and maintenance activities. As such, the contractor bore the risk of constructing appropriate facilities according to the standards set by the Contract and maintaining those facilities at the sum agreed to in the Contract. Id. See, e.g., Seaboard Lumber Co. v. U.S., 308 F.3d 1283, 1293­96 (Fed. Cir. 2002) (holding that a contractor entering into a fixed-price contract bears the risk of market price increases).

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While the Contract required EFSI take title to the utility systems at Fort Hamilton,6 both parties agree that no transfer of title actually took place during the first two years of the Contract, and title today remains with the government. Pl.'s 12/7/06 Submission; Def's 12/7/06 Suppl. Brief.7 However, as explained in Section III-C, n.14 of this opinion, the Court believes that this is of no legal significance. EFSI's Final Cost Proposal ("Proposal"), submitted August 27, 1999, makes clear that the fixed-price and privatization structure of the Contract give at least seven benefits to Fort Hamilton and the Army: (1) the approach assures that the goals of the program will be achieved with minimal government oversight thereby fostering cooperation with the contractor-owner and thereby limiting administrative and supervisory costs. ("This is a pacesetting contract for privatization and we believe that it offers widereaching opportunities for Fort Hamilton and EFSI to work together in the spirit of cooperation and mutual respect." Id.); (2) the approach assures the proper maintenance and upgrades of the water and energy capital assets at a fixed price, as well as creates incentives for EFSI as the contractor to assure safety and efficiency; (3) the approach transfers all financial risk to EFSI (this is the traditional view of the effect of "fixed price" contracts cited above); (4) the approach "stabilizes" payments made by the Army to EFSI (that is, provides a great degree of "certainty"), as well as making more efficient and stable energy, water and hygienic supplies and services provided by EFSI to Fort Hamilton; (5) an up-front "lump sum" for capital improvements does not have to be made by the Army--instead, the costs can be amortized over the ten year life of the contract; (6) relatedly, the benefits (increased energy supplies and more efficient services) of this "front loading" (this is the term used in the proposal) accrue early in the contract and not incrementally;
6

Solicitation ¶ C.4.5, Contractor's Facilities, provides in part: Unless otherwise provided for in this contract, the Contractor, at its expense shall furnish, install, operated and maintain all facilities required to furnish the service hereunder. Title to all these facilities shall remain with the Contractor and it shall be responsible for all loss of or damage to these facilities, except that arising out of the fault or negligence of the Government, its agents or its employees . . . .

7

Further, the fact that EFSI did not take title to the utility systems is confirmed by EFSI's Statement of Financial Affairs, filed in its bankruptcy proceedings. In re Enron Federal Solutions, Inc., Debtor. Case No. 01-16431 (Bankr. S.D.N.Y. 2002). -6-

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and, finally; (7) the "payment stream" is also made stable by placing the risk of "natural disasters' and "equipment failure" on EFSI as the contractor. Proposal ¶ 1.1. To further support this statement, the Proposal included a "Risks Transferred" chart that demonstrated who would be responsible for certain financial risks. Id. The chart indicated that EFSI would be responsible for all financial risk associated with material procurement, capital financing, expense fluctuation, as well as others issues that might arise throughout the Contract. Id. The Proposal also purported to show how EFSI would own, operate, and maintain the Fort Hamilton electrical, natural gas, potable water, storm water and wastewater systems. In the Proposal, EFSI stated that its privatization approach would provide the Army with the "best value," for all the services requested. Proposal at 7. On December 2, 1999, the Army and EFSI entered into the Contract subject to this suit. PPFUF ¶ 3. The Contract incorporated the Solicitation, Solicitation Amendments 1 through 10, EFSI's Final Technical Proposal, dated July 28, 1999, and EFSI's Final Price Proposal, dated August 27, 1999. Contract Award Document at 2. The fixed price of the Contract was $25,377,637.62. Contract Modification P00011. The estimated portion of the Contract attributable to capital improvements and upgrades was $11,616,000. Pl. App. 16­17. The costs for the capital improvements, including Enron's financing charges to obtain the funds to finance the capital improvements, were to be recouped through the monthly payment formula described above. Id. The contract commenced on March 1, 2000. Contract Modification P00002. Upon expiration or termination of the Contract, the Army had "the option to negotiate a sole source contract with the Contractor or reacquire the facilities. . . ." Id. at C.4.7. The option to reacquire the facilities would only be exercised if it was determined that reacquisition was "in the best interest of the Government." Id. If the Contract were to expire or be terminated, "the Contractor's unrecovered investment [was to] be determined as set for in Paragraph H.8, Termination Liability." Id. H.8 provides, "The termination liability of the parties with respect to the provision of electric, natural gas, potable water and wastewater utility service under this contract shall be based upon [Federal Acquisition Regulation, hereinafter FAR] FAR 52.241-10 Termination Liability (Feb 1995). See Section I, Contract Clauses."8 Contract ¶ H.8. In addition to Contract ¶ C.4.7, the Contract provided the government with a "Right of First Offer." Contract ¶ C.4.8. Under this contract provision, EFSI was not allowed to sell any part of the utility system without first offering to sell the system back to the Army. Id.

8

As will be discussed fully later in the opinion, EFSI places particular emphasis on FAR § 52.249-8, Default (Fixed-Price Supply and Service), one of the many contract clauses incorporated by reference in the Contract. FAR § 52.249-8 is incorporated by reference in Contract ¶ I.46. The specific language of FAR § 52.249-8 upon which EFSI relies is sub-part (f), which reads: "The Government shall pay contract price for completed supplies delivered and accepted." -7-

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It is undisputed that by November 2001, EFSI had substantially completed all of the capital improvements and upgrades to Ft. Hamilton's potable water, natural gas, and electrical distribution systems, and had completed portions of the capital improvements to storm and wastewater/sewer systems as required by the Contract. PPFUF ¶ 18; Def's Statement of Genuine Issues ("Def's SGI") ¶ 18. It is also undisputed that from April 2000 through December 2001, EFSI successfully provided all of the contractually-required utility services at the base. PPFUF ¶ 19; Def's SGI ¶ 19. On December 3, 2001, following its bankruptcy, Enron terminated all EFSI employees at the Fort Hamilton site and EFSI ceased performance of the Contract. DPFUF ¶ 11. In response, on December 5, 2001, the Army issued a cure notice to EFSI, in which the Army demanded EFSI correct its contract performance deficiencies. Complaint ¶ 20. On February 26, 2002, after EFSI failed to respond to the Army's cure notice and EFSI renounced its Contract with the Army in its bankruptcy hearing, the Army terminated the Contract for default. Id. On April 15, 2005, EFSI submitted to the government a certified claim requesting payment of fees owed under the Contract. Complaint ¶ 31. In its claim, EFSI demanded payment of $10,476,801, less a remaining work credit, plus applicable interest as payment for the capital improvements and for its services in operating and maintaining the utility systems. 9 PPFUF ¶ 23. The Contracting Officer denied EFSI's claim by a letter dated August 11, 2005. PPFUF ¶ 24. It is undisputed that from the beginning of Contract until December 3, 2001, the Army paid EFSI $4,225,102.24 per the terms of the Contract.10 PPFUF ¶ 20. B. The Contracting Officer's Decision On August 11, 2005, the Contracting Officer ("CO") issued his final decision regarding EFSI's claim for unreimbursed capital expenditures involving the Fort Hamilton Utility Systems Contract, rejecting EFSI's claims. Contracting Officer's Final Decision ("COFD"). The CO stated three primary reasons for his decision to reject EFSI's claim: 1) FAR § 52.241-10 had no legal force or effect on the Contract; 2) EFSI was not entitled to recovery under the Contract's "Termination for Default" clause; and 3) EFSI was not entitled to recover its capital improvement costs under common law breach of contract or restitution theories. The CO's first stated reason for rejecting EFSI's claim was that FAR § 52.241-10 did not provide EFSI a basis for recovery. COFD at 3. FAR § 52.241-10, as will be discussed later, is a termination liability clause which sets out a formula for calculating termination charges the government would owe a contractor in the event the government discontinues utility service before the end of a contract. 48 C.F.R. § 52.241-10. Within the formula, there are blank sections that need to be filled in by the contracting parties. Id. These blanks, referred to as "fill-ins" by The Court presumes familiarity with this Court's February 27, 2006 order consolidating Liberty Mutual Insurance Co. v. United States, (04-254) with the instant matter.
10 9

The government does not dispute that EFSI has earned an additional $211,262.95 for utility services provided. However, the government has withheld this payment pending resolution of whether Liberty Mutual Insurance Company or EFSI is entitled to this payment. PPFUF ¶ 25. -8-

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the CO, are: negotiated facility cost recovery period, negotiated net facility cost, and negotiated monthly facility cost recovery rate. 48 C.F.R. § 52.241-10(b)­(d). The formula calculates what the government would owe by taking the time left on the Contract, and multiplying that by a cost recovery rate, which is determined by the "salvage value" of the property divided by the time left on the Contract. All these fill-ins, as evidenced by the formula, according to the CO, must have been negotiated into the Contract in order for the provision to make any sense. COFD at 3. Since no fill-ins were ever "negotiated, agreed to, or incorporated" into the Contract, the CO reasoned, FAR § 52.241-10 would be inapplicable and would not provide EFSI with a basis for recovery. Id. The CO did, however, acknowledge that the Solicitation itself incorporated FAR § 52.241-10 both by reference and subsequently in full text. Id. Nevertheless, the CO stressed that without agreement as to the fill-ins of FAR § 52.241-10, FAR § 52.241-10 was inapplicable on the theory that EFSI committed a unilateral mistake. Id. EFSI's only remedy would therefore be based on either the Termination for Convenience or the Termination for Default clauses of the Contract. Alternatively, the CO stated that even if § 52.241-10 did apply, it only applied "when utility services were cancelled by the Government, which never happened here." Id. at 4. The CO's second articulated reason for rejecting EFSI's claim was that EFSI is not entitled to recover under the Contract's "Termination for Default" provision. Id. at 5. FAR § 52.249-8(f), the Termination for Default provision to which the CO refers, provides that in the event of a default termination, the defaulting contractor is entitled to recover the "contract price for completed supplies delivered and accepted." 48 C.F.R. § 52.249-8(f). However, the CO maintained that FAR § 52.249-8 was incorporated into the Contract mistakenly, and instead should have been replaced with FAR § 52.249-10, Default (Fixed-Price Construction) because of the nature of the capital improvement work. "Clearly, the implementation of capital improvements was a pure construction activity . . . and just as clearly, the construction of capital improvements was a part of the contract separate and distinct from performance of [operations and management] services. Thus, the terms of FAR § 52.249-10, not the terms of FAR § 52.2498 dictate EFSI's entitlement; and FAR § 52.249-10 (in contrast to FAR § 52.249-8(f)) contains no provision allowing a defaulting contractor to recover for unfinished construction." Id. Alternatively, the CO continued, even if FAR § 52.249-8 did govern, EFSI "already received full `contract price' (in the form of incremental fixed monthly payments) for work performed . . . ." Id. The CO stated that the Contract, instead of providing for traditional progress payments to EFSI as work was completed, actually provided for payment of a fixed, monthly service fee to EFSI as long as EFSI remained in general compliance with contract performance requirements. As soon as EFSI abandoned the project, it forfeited its right to recover continued payment of the monthly service fee. "EFSI is not interested in simply recovering its contract price," the CO stated, "but wants to shift the onus of its bad bargain onto the Government by recovering its actual costs as well." Id. Ultimately, the CO argued, "as a defaulting contractor under a fixed-price contract, EFSI is not entitled to the recovery it seeks under any standard `Default' clause that may apply, whether it be FAR 52.249-8 or 52.249-10." Id. Relatedly, the CO maintained that EFSI was not entitled to recover its capital improvement costs under common law breach of contract or restitution theories. Id. at 6. To the -9-

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contrary, the CO believed the Contract was eminently clear--the risk of financing and performing the capital improvements was to be on the privatization contractor. Id. at 7. EFSI's "only expectation was to received fixed monthly service fees for as long as it remained in general compliance with the performance obligations of the contract." Id. at 6. Once EFSI abandoned the job site and the work, the Army had no further duty to EFSI and was excused from further payment. Id. at 7. The CO emphasized the fact that "the Government and EFSI did not bargain for a traditional construction contract in soliciting and awarding the utility privatization contract." Id. at 8. Instead, in exchange for "unprecedented opportunities for flexibility and profit," EFSI assumed the financial risk of implementing capital improvements. Id. To the CO, the nature of the privatization contract "contemplates that the contractor, in return for receiving a dependable fixed monthly service fee over a long term, will incur risk as appropriate to assure that the privatized systems continue as a viable, going concern." Id. at 6. Further supporting this position is the fact that in its proposal, EFSI "upped the ante even further." Id. at 7. The CO stated that EFSI upped the ante by proposing to "front load capital improvements." Id. The front-loading of the capital improvements, the CO continued, was not done for the benefit of the Army, but was for EFSI's own benefit. Id. By improving the systems in the first year, EFSI could lower its operations and management costs over the course of the entire contract, resulting in significant savings for EFSI. Id. Clearly, the CO concluded, EFSI intended to assume the financial risk of implementing capital improvements. The unique contract that the Army and EFSI bargained for would only be "frustrated if the Government reassume[d] EFSI's capital risks" after EFSI defaulted on the Contract. Id. at 8. Accordingly, the CO denied EFSI's claim. III. THE SUMMARY JUDGMENT MOTIONS A. Standards for Summary Judgment As initially stated, both parties have proffered cross-motions for summary judgment pursuant to RCFC 56 based on differing legal theories of contract interpretation, and the defendant also has moved to dismiss Counts III and IV of the claim for lack of jurisdiction pursuant to RCFC 12(b)(1). This latter motion, predicated on the contention that these Counts are equitable in nature and thus, this Court lacks jurisdiction, will be dealt with in Section IV. Concerning summary judgment, the Court stresses once again that it may only be granted "if . . . [the record] shows that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." RCFC 56(c); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247­48 (1986). Summary judgment is not a disfavored shortcut, but rather is an integral part of the Court's rules designed to secure a just, speedy and inexpensive determination of the facts. Spirit Leveling Contractors v. United States, 19 Cl. Ct. 84 (1989) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986)). A dispute is considered to be "genuine" if it "may reasonably be resolved in favor of either party." Anderson, 477 U.S. at 250. If a fact "might affect the outcome of the suit under the governing law," it will be deemed "material." Id. at 248. When deciding a motion on summary judgment, the Court must resolve all inferences "`in the light most favorable to the party opposing the motion.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587­88 (1986) (quoting United States v. - 10 -

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Diebold, Inc., 369 U.S. 654, 655 (1962)). No genuine issue of material fact exists if a rational finder could reach only one reasonable conclusion. See, e.g., Matsushita, 475 U.S. at 587. The burden of establishing that no genuine issue of material fact exists rests with the moving party. See Celotex Corp. v. Catrett, 477 U.S. 317, 322­25 (1986). The non-moving party is required to point to "`specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324 (quoting FED . R. CIV . P 56(e)). In considering summary judgment, the Court will not weigh the evidence or make credibility determinations. Anderson, 477 U.S. at 249. To be sure, all "reasonable inferences and presumptions are resolved in favor of the nonmoving party." Id. at 255. This Court must thus resolve all doubt over factual issues in favor of the non-moving party. Matsushita, 475 U.S. at 587. Usually, each party's cross-motion for summary judgment must be evaluated on its own merits following the above precepts. California v. United States, 271 F.3d 1377, 1380 (Fed. Cir. 2001). However, in this case, both motions raise the same primary interpretative issue: does the Contract require the government to pay EFSI for the capital improvements it made to the infrastructure even though EFSI was later terminated for default? To be sure, issues of contract interpretation are generally recognized as questions of law that are particularly well suited for summary judgment. Gov. Sys. Advisors, Inc. v. United States, 847 F.2d 811, 812 n.1 (Fed. Cir. 1988) (citing P.J. Maffei Bldg. Wrecking v. United States, 732 F.2d 913, 916 (Fed. Cir. 1984)). Nevertheless, interpretation of contract language may involve mixed questions of material fact and law, and thus not present a simple, pure question of law. Beta Systems, Inc. v. United States, 838 F.2d 1179, 1183 (Fed. Cir. 1988). Such is not the case here, as the primary and secondary issues both deal with the interpretation of contract language and thus summary judgment is appropriate in this case. B. The Primary Contentions of the Parties The government's motion for summary judgment, filed on May 2, 2006, Def's Mot. for Summ. J., is predicated on the notion that it is not responsible for the remaining capital improvement costs because EFSI was terminated for default. The government argues that because EFSI abandoned performance and was terminated for default, as opposed to being terminated for the convenience of the government, EFSI is not entitled to compensation for the capital investments it made at Fort Hamilton. The government maintains that it is only "where a contractor has been terminated for the convenience of the Government, that it is entitled to recover its initial costs and preparatory expenses for terminated work." Id. at 13. Here, to the contrary, it is undisputed that EFSI was terminated for default approximately two years into the ten-year contract. In its cross-motion for summary judgment, EFSI argues the reverse--that the Contract requires the Army to pay for the capital improvement costs regardless of why the Contract was terminated. Stated simply, EFSI's contention boils down to the fact that "the government promised to pay EFSI for capital upgrades and improvements to its utility systems at Fort Hamilton." Pl.'s Mot. for Summ. J. at 9. EFSI points to three Contract provisions which it claims require the Army to pay for the capital improvements it made pursuant to this privatization contract despite the fact EFSI was terminated for default. These clauses are: (1) the - 11 -

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Termination Liability Clause (48 C.F.R. § 52.241-10), which the Contract expressly incorporates; (2) the Default Clause (48 C.F.R. § 52.249-8) also allegedly incorporated into the Contract; and (3) by operation of the FAR construction provisions, including the Default Clause (48 C.F.R. § 52.249-10), which EFSI claims must be incorporated into the Contract through invocation of the Christian doctrine.11 Pl. Mot. for Summ. J. at 14. C. The Rules for Contract Interpretation Support the View That EFSI Should Not Prevail The standard rules for contract interpretation that bind this Court inexorably lead to the conclusion that the government need not compensate EFSI for the capital improvements. At first blush, it appears that EFSI should be compensated--after all, EFSI did the work. But appearances can be deceiving, and first impressions often fail the test of time. In short, and as will be elaborated below, the Contract must be viewed in the context of privatization. It was a sales agreement; the Army--as part of the government's policy of privatization--intended to get out of the utility business. Thus, the Contract called for the sale of the utility systems in exchange for the contractor supplying the base with energy, water and waste collection services over the ten years of the Contract. Also, in exchange for the sale of the utility systems, the Contract imposed on EFSI the requirement to provide the capital improvements intended to make the services more efficient. The capital improvements were a condition precedent to the Contract, a type of a preparatory activity. The costs of the capital improvements were to be amortized and, along with the utility service charges, paid in monthly installments to the contractor. Additionally, the contractor was not required to pay the Army an up-front lump sum purchase price; instead, the purchase price was also amortized via deduction from the Army's monthly payments. Consequently, one cannot divorce the capital improvements from the rest of the Contract. These promises were all dependent upon one another. In other words, this is what is termed a "contract in the entirety." EFSI's material breach and default excused the Army from performing its obligations under the Contract. Accordingly, under these circumstances it would be unfair to force the government to pay an accelerated lump sum payment for the capital improvements when the Contract called for The so-called Christian doctrine derives from the United States Court of Claims' decision in G.L. Christian & Assocs. v. United States, 160 Ct. Cl. 1, aff'd on reh'g, 160 Ct. Cl. 58 (1963). In Christian, a contractor sued the government for damages resulting from the government's termination for convenience of a federal housing project. Despite the lack of a termination for convenience clause in the contract, the Court of Claims ruled in favor of the government, holding that such a clause should be read into the fixed-price construction contract under the Armed Services Procurement Regulations because these regulations were issued under statutory authority. Accordingly, the court included the missing cancellation provision into the contract by operation of law. As a result of its decision in Christian, the Court of Claims established what has become known as the Christian doctrine, which provides that mandatory federal regulations should be read into a government contract, even if not physically included or incorporated by reference therein. In other words, parties to a government contract are deemed to have agreed to contract terms required by law to be included in the contract. See generally 2 BRUNER & O'CONNOR CONSTRUCTION LAW § 7:51 (2007) (and cases cited therein). - 12 11

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staggered, monthly installment payments for the capital improvements combined with the service payments over the ten-year life of the Contract. In other words, a plaintiff cannot recover for only partial performance on the Contract after it materially breached the same contract. Supporting this view is the salutary fact that the Contract place on the contractor the risks of price increases, the lack of availability of material, and the actual loss of the capital improvements. This is no more than the price of ownership. The Contract cedes the benefit of ownership to EFSI, yet EFSI seeks to insulate itself from the burden of ownership. This the law will not allow. In reaching this conclusion, the Court notes three primary rules of contract interpretation. First, the Court must start with the plain meaning of the Contract's text. See, e.g., ACE Constructors, Inc. v. United States, 499 F.3d 1357, 1361 (Fed. Cir. 2007); Gould, Inc. v. United States, 935 F.2d 1271, 1274 (Fed. Cir. 1991). In interpreting a contract, one must "begin with the plain language," McAbee Constr., Inc. v. United States, 97 F.3d 1431, 1435 (Fed. Cir. 1996), and "give the words of the agreement their ordinary meaning unless the parties mutually intended and agreed to an alternative meaning." Harris v. Dep't of Veterans Affairs, 142 F.3d 1463, 1467 (Fed. Cir. 1998). Indeed, the language of the Contract must be given the meaning that a "reasonably intelligent person acquainted with the contemporaneous circumstances" would afford it. Allied Tech. Group, Inc. v. United States, 39 Fed. Cl. 125, 138 (1997) (internal quotation marks omitted). The second relevant rule that must be applied is what can be termed the whole agreement rule. "We must interpret [a contract] as a whole and `in a manner which gives reasonable meaning to all its parts and avoids conflict or surplusage of its provisions.'" United Int'l Investigative Serv. v. United States, 109 F.3d 734, 737 (Fed. Cir. 1997) (citing Granite Constr. Co. v. United States, 962 F.2d 998, 1003 (Fed. Cir. 1992)); see also Gardiner, Kamya & Assocs., P.C. v. Jackson, 467 F.3d 1348, 1353 (Fed. Cir. 2006); Dalton v. Cessna Aircraft Co., 98 F.3d 1298, 1305 (Fed. Cir. 1996) (describing as a "settled principle of contract interpretation" that courts "view the contract as a whole"); McAbee Constr., Inc. v. United States, 97 F.3d 1431, 1435 (Fed. Cir. 1996). See generally 11 WILLISTON ON CONTRACTS § 32:5 (4th ed. 1999). This is merely another way of saying that context defines a contract and the issues deriving thereof. Accordingly, when interpreting a contract, the language of the contract must be given "the meaning that would be derived from the contract by a reasonably intelligent person acquainted with the contemporaneous circumstances." Metric Constructors, Inc. v. NASA, 169 F.3d 747, 751 (Fed. Cir. 1999). One other precept of contract interpretation relating to context is also helpful to the Court. The mere fact that the parties disagree with regard to the interpretation of a specific provision, does not, standing alone, render that provision ambiguous. See Cmty Heating & Plumbing Co. v. Kelso, 987 F.2d 1575, 1579 (Fed. Cir. 1993); Brunswick Corp. v. United States, 951 F.2d 334, 337 (Fed. Cir. 1991). Not every disagreement as to the meaning of a provision constitutes either a latent or patent ambiguity. Cmty Heating, 987 F.2d at 1578. A contract provision or clause is ambiguous only if it is susceptible to two different and reasonable interpretations, each of which is found to be consistent with the contract language. Jowett, Inc. v. United States, 234 F.3d 1365, 1368 n.2 (Fed. Cir. 2000). And before "making a conclusive determination about an agreement's ambiguity, or lack thereof, the court should consider the context in which the agreement was executed." W&F Bldg. Maint. Co. v. United States, 56 Fed. Cl. 62, 69 (2003). - 13 -

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With these three rules in mind, one is reminded of the golden rule of real estate: "location, location, location."12 Here the golden rule must be context, context, context. Looking at the plain meaning of this Contract, the Contract read as a whole, and the Contract interpreted in context, the Court sees a privatization contract, whereby EFSI was to provide the utility upgrades and maintenance and certain utility service to the Army for a period of ten years at a fixed price. This is not a contract under which the Army is buying boilers or pencils from EFSI whereby the Army must pay EFSI for boilers or pencils it has accepted. No credible evidence exists that either party intended anything but a fixed-price privatization contract with the risks associated with such a contract being allocated per the Contract. Solicitation ¶ B.2. Utility privatization is "the sale of government-owned on-base utility distribution systems to a private entity that will then operate the systems and provide utility services to the base's buildings and activities." Renshaw, supra note 2, at 58. In utility privatization contracts, the government sells its on-base utility systems to a private entity. The contractor purchasing the systems is then responsible for their operation and maintenance. Solicitation ¶ B.1.1. To be clear, the government is not retaining ownership of the systems and contracting out their operation and maintenance--it is selling the systems outright. See Renshaw, supra note 2, at 58. The stated goal of privatization is "to get the Department of Defense (`DoD') out of the business of owning, managing, and operating utility systems by privatizing them." Id. (citing DRID No. 49). In addition to this stated goal, the DOD has issued utility privatization guidance. Id. It is helpful to quote again the relevant portion of that guidance: The purpose of privatization is to allow the Defense Components to focus on core defense missions and functions by relieving them of those installation management activities that can be done more efficiently and effectively by others. Historically, military installations have been unable to fully upgrade and maintain utility systems due to inadequate funding and competing installation management priorities. Utility privatization will allow military installations the opportunity to benefit from private sector financing and efficiencies to obtain improved utility systems and services. Id. (citing Draft Policy Guidance, Office of the Deputy Undersecretary of Defense (Installations & Environment), subject: Privatizing Defense Utility Systems) (emphasis added). The Contract in this case was issued under an Army initiative referred to as "Privatization of Government-Owned Utility Systems."13 Contract ¶ C.2.1. EFSI is now shutting its eyes to the The true origin of the phrase may be lost to history. It has attributed to, among others, New York City real estate developer William Zeckendorf, who bought the Roxy Theater and demolished it to add rooms to the Taft Hotel in the 1950s, http://www.fluther.com/disc/5364/, and to William Dillard, http://www.isearchquotations.com/quotes/location_location_location--/2303.html.
13 12

As mentioned in Section II above, the Court takes judicial notice of the fact that the privatization initiative is in response to legislation, 10 U.S.C. § 2688 (2000), in which Congress granted the Secretary of a military department the authority to sell utility distribution systems to private third parties with the objective of reducing the cost of utility services. 10 U.S.C. § 2688 (2000). The legislation allows the conveyance subject to congressional notice--the Secretary - 14 -

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fact this is a very specific type of contract--a privatization contract. What is more, the contract involved in this case is not a construction contract or a contract for the sale of supplies. It is clear that by selling off its utility systems on military installations to private parties, the government wanted to avoid worrying about any maintenance or upgrade issues for those utility systems. What the Army essentially wanted to do through this Contract is what the average private utility consumer does--use water, power, sewage, and other utilities provided to it by a private utility company, and then pay a bill at the end of each month for what it used. It did not want to have to maintain the infrastructure itself or directly pay to have the utility systems upgraded. To be sure, this is the only explanation of why the Contract allocated all the risks associated with the capital improvements, including loss of the facilities, to the contractor, not the Army. See Contract ¶ C.4.5. EFSI's argument that the terms of the Contract itself indicated that the parties intended for the Army to pay for the capital upgrades, regardless of why the Contract was terminated is without merit. Pl's Cross-Mot. Summ. J. at 9. It is completely contrary to the parties' intended result of the Contract as a whole. The Army wanted to receive continued utility service throughout the course of the fixed-price contract. With continued service, EFSI could expect to receive fixed, monthly service fees. However, upon early termination of service, EFSI knew that it would stop receiving the fixed, monthly payments, and the credit for the amortized purchase price for the facility. Under the privatization model, the very essence of the Contract was to shift the risk of capital improvements onto the contractor. EFSI therefore bore the risk of the capital improvements, and when it defaulted, could not then shift its burden to the Army. See United States v. Spearin, 248 U.S. 132, 136 (1918) (noting that where "one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforseen difficulties are encountered"). Nothing in the Contract contradicts that the purpose of the Contract was for the Army to buy, and EFSI to sell, certain utility services at a certain fixed price. The cost of those services included the amortization of the capital improvements necessary to supply the utility services, but this is true for most contracts. Solicitation ¶ B.2.3. When someone buys a hamburger, part of the cost of the hamburger covers the cost of the stove used to cook it. However, the person buying the hamburger is not buying the stove. If a party enters into a contract with someone to supply them with a certain number of hamburgers and ends up with the stove instead, why should it have to pay for the stove? This is true even if the stove is a brand new top-of-the-line model. See, e.g., Bel-Mar Ford Tractor v. Woods & Copeland Mfg., Inc., 602 F.2d 1199, 1200 (5th Cir. 1979) (holding that defendant who terminated the contract without breach is not liable for plaintiff's preparatory costs incurred in reliance on the contract); Penn. Exchange Bank v. United States, 170 F. Supp. 629, 631­33 (Ct. Cl. 1959) (holding that the plaintiff's significant partial performance did not merit compensation when the plaintiff was unable to fulfill the contract because of bankruptcy and a subsequent assignment, even though the assignee was willing and able to perform); Malott & Peterson Grundy, Inc. v. Reynolds Const. Co., 472 P.2d 701, 702 must first file an economic analysis with both the Senate and House of Representatives Committees on Appropriations which demonstrates that the long-term, economic benefit of such a conveyance outweighs the long-term costs. Id. Obviously, all of this sets the stage for the Court's context analysis. - 15 -

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(Colo. App. 1970) (holding that even 90% completion of a construction was not substantial performance as a matter of law, "particularly where the facts are undisputed that this 10% was the most difficult part of the job"). True, this case is unique in that the party buying the utility services (Army) first transferred the dilapidated infrastructure to the party selling the utility services (EFSI), but that fact is irrelevant. This case is also unique in that the party buying the utility services (Army) now has the new and improved infrastructure that it never wanted in the first place, but this does not mean that party (Army) should have to pay for it.14 The next section discusses the common law basis that supports the Court's interpretive conclusions. D. The Application of the Material Breach Rule Demonstrates That EFSI Should Not Prevail 1. The material breach rule Initially, it is important to stress that the law governing government contracts has its basis in the common law. The government enters into contracts as does a private person, and its contracts are generally governed by the common law--which protects the rights and privileges of the contracting parties. Lynch v. United States, 292 U.S. 571, 579 (1934); Alvin Ltd. v. United States Postal Serv., 816 F.2d 1562, 1564 (Fed. Cir. 1987) (citing Torncello v. United States, 681
14

It is worth reiterating that throughout the course of the Contract, title to all the facilities was to remain with the contractor. Solicitation ¶ C.4.5. Whether title was transferred or not is, nevertheless, of no legal import. Transfer was not effectuated because of EFSI's material breach; EFSI should not be rewarded for such behavior. See Long Island Sav. Bank, FSB v. United States, 503 F.3d 1234, 1251 (Fed. Cir. 2007) (observing that courts often place liability on the party that committed the first material breach). The Court must construe a contract based on the obligations of the parties and the consequences of a breach are always construed from the point-of-view of the non-breaching party, who generally is awarded the economic benefit of its bargain. See generally ARTHUR L. CORBIN , CORBIN ON CONTRACTS, § 992 (1964); 11 WILLISTON § 1338; CHARLES T. MC CORMICK, DAMAGES § 561 (1935). Regardless of failure in title transfer, the Army was to "provide easements and/or right of way access to the equipment and/or facilities conveyed to the Contractor." Solicitation ¶ C.13. Further, EFSI was responsible for "obtaining easement and right of ways for access to equipment and/or facilities not conveyed by the contract and for any new or rerouted systems to be covered or to be covered by the contract." Id. With regard to the rest of Fort Hamilton, the Army was to "grant the Contractor a revocable permit or license to enter the service premises for any proper purpose under the Contract. [The] permit or license [covered] the use of the site or sites agreed upon by the parties for the installation, operation, maintenance and repair of the facilities of the Contractor located upon the service premises." Id. ¶ C.14.1. All this, coupled with the risk provisions, show that EFSI had a present possessory interest with a future interest in fee upon the transfer of title. It is interesting to note, although not binding here, that at common law this contractual arrangement would be interpreted as a fee simple absolute under the Rule in Shelley's Case, 1 THOMPSON ON REAL PROPERTY , THOMAS EDITION § 5.04(c)(1)(iv) (David A. Thomas ed., 1994), or a fee simple defeasible, 2 THOMPSON ON REAL PROPERTY , SECOND THOMAS EDITION § 20.05 (David A. Thomas ed., 2006). - 16 -

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F.2d 756, 762 (Ct. Cl. 1982)). As such, the traditional common law contract doctrines limit the government's power to contract just as they limit the power of any private person. Torncello, 681 F.2d at 762. As this Court has previously explained, the government's entry into the field of contracts is not like its selective creation of rights and entitlements in other fields. Id. In the field of contracts, the government may only trespass the bounds of general contract doctrines pursuant to specific legislation. Therefore, this Court will read the Contract in this case as it would read any contract between private parties and will give or deny effect to any contract term, and the Contract as a whole, as dictated by the general of contract law, except to the extent that statute and regulation (such as the FAR) supersede the common law by substantive alterations or by added procedures. Id. Applying common law contract law, the issue between EFSI and the government in this case then turns on whether EFSI's breach was indeed material. If this is so, the government is excused from performance and EFSI is not entitled to its requested relief. The materiality of a breach acts as a trigger to certain consequences. These consequences are discussed immediately following in subsection 2. When, then, is a breach material? In Thomas v. Dep't Housing and Urban Develop., 124 F.3d 1439 (Fed. Cir. 1997) (discussed in more detail below), the court stated that "[a] breach is material when it relates to a matter of vital importance, or goes to the essence of the contract." (citing ARTHUR L. CORBIN , CORBIN ON CONTRACTS § 1104 (1964)). In some cases, a determination of whether or not a breach is material is a mixed question of fact and law. Mass. Bay Transp. Auth. v. United States, 129 F.3d 1226, 1231 (Fed. Cir. 1997). Where, as in the case between EFSI and the government, the facts are undisputed, the determination of whether there has been material non-compliance with the terms of a contract, and hence a material breach, necessarily is reduced to a question of law. See Carborundum Co. v. Molten Metal Equip. Innovations, 72 F.3d 872, 878 (Fed. Cir. 1995) (stating that where "the only issue is one of law to be applied to an undisputed set of facts, we have plenary review of the court's decision"). A material breach "relates to a matter of vital importance, or goes to the essence of the contract." Thomas v. Dep't of Hous. and Urban Dev., 124 F.3d 1439,1442 (Fed. Cir. 1997). Materiality depends on "the nature and effect of the violation in light of how the particular contract is viewed, bargained for, entered into, and performed by the parties." Stone Forest, 973 F.2d at 1551. In determining materiality courts often look to whether the breached obligation is an important part of the contract. See Thomas, 124 F.3d at 1442 (Fed. Cir. 1997) ("A breach is material when it relates to a matter of vital importance, or goes to the essence of the contract.") (citing ARTHUR L. CORBIN , CORBIN ON CONTRACTS § 1104 (1964)). Cases from the Federal Circuit on this issue abound: ! In Lutz v. United States Postal Serv., 485 F.3d 1377 (Fed. Cir. 2007), an employee appealed to the Board his demotion by the agency, and then he and the agency negotiated a settlement resolving the appeal. Under the terms of the settlement agreement, the employee would apply for disability retirement, and the employee waived his right to appeal. The agency agreed not to place negative statements in the paperwork it would be supplying to the office determining the disability retirement. However, statements and documents submitted by the agency prejudiced the disability proceedings. The court held - 17 -

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this was a material breach of the contract which terminated the employee's obligations under the contract, including his waiver of appeal. ! In Hometown Fin., Inc. v. United States, 409 F.3d 1360 (Fed. Cir. 2005), the government, through authorized regulators, expressly agreed to allow investors to count goodwill toward capital requirements of a failed thrift in exchange for the investor's assumption of the thrift's liabilities. The court held that a change in regulations eliminated such treatment, and was a material breach of the parties' contract. In Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1276 (Fed. Cir. 1999), the court stated that drastic modifications to the contract are a material breach. "Of course, the government may not, through a contracting officer's decision, impose obligations on a contractor far exceeding any contemplated by their contract. If the government orders a `drastic modification' in the performance required by the contract, the order is considered a `cardinal change' that constitutes a material breach of the contract. Such a material breach has the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause." In Stone Forest Industries, Inc. v. United States, 973 F.2d 1548 (Fed. Cir. 1992), the Forest Service entered into a contract with a contractor under which the contractor would buy, cut, and remove timber in a national forest. The Forest Service, however, denied access to two of the units because of the enactment of the California Wilderness Act, 98 Stat. 1619. The court found that the Forest Service had materially breached the contract, thereby excusing the contractor from all further performance. The contract was not severable into different parcels. That is, the government could not hold the contractor to performance of the contract related to some of the parcels and not others.

!

!

Indeed, the immediately preceding case is factually similar to the case between EFSI and the government. In both cases, one party allegedly breached only a part of a contract but performed other parts. Based on the Circuit's material breach jurisprudence discussed above, the Court determines that EFSI materially breached the Contract by discontinuing performance of a ten-year contract to provide utilities, including operating and maintaining the facilities necessary to provide those utilities. EFSI commenced performance of the Contract on or about April 1, 2000. Complaint ¶ 14. By November 2001, it had substantially completed the capital improvements necessary to comply with its contract to provide utility services to the Army for ten years as required. Solicitation ¶¶ B.1.1, C.1.1, C.4.1., C.18. Providing the utility services included operating and maintaining the facilities needed to provide those utility services. The Army was buying utility services from EFSI; it was not buying a plant to provide utility services. In fact, the Army specifically did not want to own a plant providing utility services, it wanted only to be a customer of a business providing those services. The failure of EFSI to continue operating the facility is a material breach of the Contract. See Penn. Exchange Bank, 170 F. Supp. at 632­33 (holding that the failure to fulfill the services that were the ultimate objective of the contract was a material breach). As an analogy, when the government buys paper, it does not want to buy the paper mill that makes the paper; it just wants the paper. Certainly, the price of the paper partially compensates the paper manufacturer for the capital costs of the paper mill, but this does not mean the government is buying the paper mill. - 18 -

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There is another ground to find EFSI in material breach. On December 3, 2001, EFSI discontinued its performance of the Contract and on December 21, 2001, EFSI filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Complaint ¶ 22.15 With an exception discussed in subsection 3 below, it is also the law that a contracting party's status of insolvency or bankruptcy, and its subsequent inability to perform under a contract, constitutes a material breach. See Penn. Exchange Bank, 170 F. Supp. at 632 (citing Central Trust Co. of Illinois v. Chicago Auditorium Ass'n, 240 U.S. 581, 591 (1916); Rhoem v. Horst, 178 U.S. 1 (1900); Pennsylvania Steel Co. v. New York City R. Co., 198 F. 721, 743 (2d Cir. 1912)) (observing that "it is an implied condition in every contract that the promisor will not permit itself, through insolvency or acts of bankruptcy, to be disabled from making performance"). See generally 15 WILLISTON ON CONTRACTS § 43:29 (4th ed. 2000) (stating that "historically, the filing of a petition in bankruptcy by or against a party to a contract has been regarded as the equivalent of an anticipatory breach of an executory agreement."). Accordingly, EFSI was in material breach arguably as early as December 3, 2001, when it discontinued performances under the Contract, and certainly by December 21, 2001, when it filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 2. Consequence