Free Motion to Dismiss - Rule 12(b)(6) - District Court of Federal Claims - federal

Case 1:05-cv-00881-VJW

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS COMMERCE FUNDING CORPORATION, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) )

No. 05-881C (Judge Wolski)

DEFENDANT'S PARTIAL MOTION TO DISMISS Pursuant to Rule 12(b)(6) of the United States Court of Federal Claims ("RCFC"), defendant, the United States, respectfully requests that this Court dismiss the portion of Commerce Funding's First Amended Complaint that concerns payments seized by the United States Treasury for failure to state a claim upon which relief may be granted.1 In support of this motion, we rely upon the amended complaint and the following brief. We had previously filed a motion to dismiss Commerce Funding's original complaint with regard to the same issue. Commerce Funding responded to our motion with a motion to amend its complaint. We opposed amendment, in part, because we believed that amendment would be futile. This Court allowed Commerce Funding's amendment, while specifically noting that it was not determining whether the amended complaint stated a claim. QUESTIONS PRESENTED Whether the portion of plaintiff's first amended complaint seeking relief regarding payments allegedly seized by the Department of the Treasury states a claim upon which relief can be granted.

Should this Court deny this motion, the Government respectfully requests 30 days from the date of denial to file a response to the complaint.

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STATEMENT OF FACTS On September 17, 2002, the Department of Health and Human Services ("HHS") awarded contract number GS-35F-4761G to ICES, Ltd..2 Amended Complaint ("Compl.") ¶¶1, 9. To obtain payment under this contract, ICES submitted invoices to the Government. Id. ¶¶ 1, 16. On May 25, 2004, pursuant to 48 C.F.R. § 32.8, ICES executed an Instrument of Assignment whereby it assigned future contract payments to Commerce Funding Corporation. Id. at ¶ 11. Commerce Funding forwarded a notice of assignment to Dorothy M. Parker, the contracting officer, who received the notice on August 9, 2004. Id. at ¶ 12. On August 17, 2004, Commerce Funding confirmed that the Director of the Division of Accounting Operations for the section of HHS that was involved in the contract had received a copy of the Notice of Assignment. Id. at ¶ 13. On March 2, 2005, after having directed at least four invoices to Commerce Funding pursuant to the assignment, HHS made a payment for invoice number 20 directly to ICES. Id. at ¶¶ 16-17. Commerce Funding contacted the payment office, but never received payment for invoice number 20. Id. at ¶ 18. Beginning in April 2005, Commerce Funding began receiving invoice payments that had been reduced for offsets by the Department of the Treasury for debts that ICES owed the Government. Id. at ¶¶ 20-21. On June 9, 2005, Commerce Funding wrote a letter to the contracting officer, Ms. Parker, concerning these invoices numbered 21 through 23.

For the purposes of this motion to dismiss, we rely upon all allegations as stated in plaintiff's first amended complaint. See Harbuck v. United States, 58 Fed. Cl. 266, 267 (2003). However, we do not admit the truth of any of its allegations and reserve the right to dispute any assertions not addressed in the accompanying answer, if necessary, at a later date. 2

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Id. at ¶ 29, Ex. I. Commerce funding received no response. Id. On August 12, 2005, Commerce Funding filed its complaint initiating this lawsuit. On November 10, 2005, we filed a partial motion to dismiss the portion of Commerce Funding's original complaint that concerned the payments allegedly seized by the United States Treasury. We demonstrated in our motion that 31 C.F.R. § 285.5(e) allowed offsets such as those that are present in this case. Def's. Br. at 3. In response, Commerce Funding filed a motion to amend its complaint to allege that the Government had accepted ICES's performance and provided certificates of ICES's performance to Commerce Funding. Id. at ¶¶ 15, 18-19, 2527. Commerce Funding further stated that the Government had made "misrepresentations" to Commerce Funding. ¶¶ 38-39. Commerce Funding asserts that it has an "equitable lien" that rendered unlawful the Treasury's seizure of the Government payment to ICES. Id. ¶¶ 4, 41. On March 23, 2006, this Court permitted Commerce Funding's proposed amendment, while noting that the Court was not rendering a judgment on whether the allegations of the amended complaint could support any theory of recovery. ARGUMENT Plaintiff Has Failed To State A Claim As To The Treasury Department's Offset Deductions From Invoices That HHS Paid To Commerce Funding Pursuant to RCFC 12(b)(6), the Court accepts as true the facts alleged in the complaint. David v. Monroe County Bd. of Educ., 526 U.S. 629, 633 (1999). However, a defendant is entitled to dismissal pursuant to RCFC 12(b)(6) "when the facts asserted by the claimant do not entitle [it] to a legal remedy . . . accept[ing] all well-pleaded factual allegations as true and

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draw[ing] all reasonable inferences in the claimant's favor." Lindsay v. United States, 295 F.3d 1252, 1257 (Fed. Cir. 2002); see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957). A. The Original Complaint Did Not Allege Any Exception To The Treasury Department's Regulatory Right To Offset Government Payments For Prior Debts Owed The Government

Commerce Funding has alleged that it filed a notice of assignment with HHS, and that payments for invoices beginning with invoice 21 were paid to it subject to an offset by the Department of the Treasury. However, Commerce Funding's original complaint did not mention or consider that 31 C.F.R. § 285.5e(6) specifically provides that "[a]n assigned payment will [ ] be subject to offset [by the Department of the Treasury] to collect delinquent debts owed by the assignor . . . ." The regulation states several exceptions. Pursuant to 31 C.F.R. § 285.5(e)(6)(ii), the only exceptions are A) if all of the requirements of 41 U.S.C. § 15(e)-(f) are met, including that the contract contained a prohibition on reduction of payments due to contractor debts; B) if the offset was made in settlement or satisfaction of a claim brought by the assignee against the agency owed the debt based upon the contract, and the debt arises independently of the contract; or C) if the contractor properly assigned the right to payments under the contract, and the contractor's indebtedness to the agency arose after the assignment became effective. Commerce Funding's original complaint did not allege that any of these exceptions applies. Its original complaint with regard to the offsets that began with invoice number 21 focussed solely upon the fact that money was taken from payments that were assigned to Commerce Funding. However, it did not argue any reason that such an offset would not be allowed by 31 C.F.R. § 285.5(e), which clearly provides for such offsets. For these reasons, with

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regards to the Treasury Department offsets from its assigned payments, Commerce Funding's original complaint did not state a claim upon which this Court could have granted relief. B. The Amended Complaint Continues To Fail To State A Claim Regarding Invoices 21 Through 23

Commerce Funding's amended complaint acknowledges that "offsets against assigned payments are generally available under 31 C.F.R. § 285.5(e)(6)." Amended Compl. ¶ 2. However, it alleges that this statute is not applicable because of the "United States' inequitable conduct." Id. The crux of Commerce Funding's amendment to its original allegations is that the Government confirmed to Commerce Funding that it had received services from ICES, the common debtor of the Government and Commerce Funding. Id. ¶¶ 14-15, 19, Ex. D. Commerce Funding further alleges that the Government and ICES formed a "secret agreement" under which the Government, rather than Commerce Funding, would be paid. Id. ¶¶ 25-26. It hopes that these allegations can form the basis for a claim for unjust enrichment. Id. ¶¶ 38-41. However, none of Commerce Funding's new allegations supports a claim for an equitable lien and unjust enrichment. To begin with, Commerce Funding's proposal to argue an "equitable lien" theory ignores the law surrounding equitable liens. The United States Court of Appeals for the Federal Circuit has declared that such liens "arise from established custom and usage in a particular trade or from a mode of dealing between the parties." Skip Kirchdorfer, Inc. v. United States, 6 F.3d 1573 (Fed. Cir. 1993) (rejecting a suggestion of a lien where the plaintiff could demonstrate only one instance of such a lien being honored). An equitable lien can only attach where there is a particular obligation with a particular property to which that lien attached, and an intent that such property would serve as security for that obligation. Skip Kirchdorfer, Inc. v.

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United States, 26 Cl. Ct. 666, 675 (1992). There is no allegation that payments made under the contract were security for an obligation. Even if there had been such an allegation, the alleged obligation would not have been superior to the Government's right to offset. See Madden v. United States, 371 F.2d 469, 473 (1967) (Government offset superior to liens). Although RCFC 12(b)(6) mandates that all allegations be taken as true before a court may find that a plaintiff has failed to state a claim, Commerce Funding's amended complaint does not allege circumstances under which this Court could find that an equitable lien existed. Similarly, unjust enrichment requires that the party claiming it have been wronged, since the purpose of restitution according to that theory is to put "the party [seeking relief] back in the position in which it would have been had there been no wrong." Land Grantors in Henderson, union, and Webster Counties v. United States, 64 Fed. Cl. 661, 709 (2005). Here, there was no allegation that there was any pattern of dealing between the Government and ICES or Commerce Funding that would abrogate the ability of the Department of the Treasury to insure that Government money satisfied pre-existing obligations to the Government. In addition, there is no allegation that the Government was enriched in this matter. An unjust enrichment theory generally arises when there was a valid contract, under which relief may have been sought, which has been invalidated, thereby leaving one party with a benefit for which it has not provided compensation. See Doe v. United States, 58 Fed. Cl. 479, 489-490 (2003) (interpreting Federal Circuit precedent in United States v. Amdahl Corp., 786 F.2d 387 (Fed. Cir. 1986)). Here there was a valid contract between the Government and ICES, pursuant to which ICES and the Government performed their respective duties. The Government received services from ICES, for which it made a payment to ICES. The payment was then offset by the Treasury 6

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in partial satisfaction of another prior ICES debt. In the absence of any allegation of wrongdoing or enrichment, even the facts as Commerce Funding alleges them do not state a claim that can survive dismissal under RCFC 12(b)(6). The only case that Commerce Funding cites for its allegation that 31 C.F.R. § 285.5(e)(6) does not apply is ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104 (D.C. Cir. 1988). Amended Compl. ¶ 2, n. 1. However, the reasoning of the United States Court of Appeals for the District of Columbia Circuit in that case does not address the inadequacy of Commerce Funding's allegations. In that case, the Small Business Administration ("SBA") had helped "subsidize the performance" of a company and helped to guarantee its credit with an account set aside for that purpose. 860 F.2d at 1107, 1111, 1114. The District of Columbia Circuit found that the SBA misrepresented the status of deposits to the secured account from which debtors such as the plaintiff were expecting payment, and was derelict in its supervision of the account in question. Id. at 1115. Because of that level of Government involvement, the District of Columbia Circuit held that the plaintiff could have sustained an unjust enrichment claim. Id. However, in spite of this level of Government involvement, the District of Columbia Circuit specifically held that the Government in that case was not equitably estopped from asserting defenses. Id. at 1112-1113. Commerce Funding has not even alleged any level of Government involvement or misrepresentation that could substantiate a finding of unjust enrichment. Although Commerce Funding's amended complaint employs the word "misrepresentation," the facts that it alleges do not demonstrate any misrepresentation on the part of the Government. Amended Compl. ¶¶ 33, 38. Conclusory allegations, unsupported by facts, "will not withstand a motion to dismiss." Murphy v. United States, 69 Fed. Cl. 593, 600 (2006); Bianchi v. United States, 68 Fed. Cl.442, 7

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448 (2005). The only Governmental involvement that Commerce Funding alleges was the certificates that the Government had accepted ICES' work under the contract pursuant to invoices 21, 22, and 23. Amended Compl. ¶ 19. However, the Government's certificates of acceptance only confirmed that work was proceeding under the contract. ICES was continuing to perform this contract,3 and there was no Government action other than to accept its performance. Id. ¶ 19, Ex. D. The Government certificates of acceptance did not promise that Commerce Funding was guaranteed against any prior obligations that ICES might have incurred and there was no surrender of any regulatory offset rights of the Government. Id. Ex. D. Thus, unlike ATC Petroleum, there is no allegation of wrongdoing or misrepresentation on the part of the Government that could justify equitable relief. Commerce Funding's claim that the Government and ICES had reached a "secret agreement" is irrelevant because the Treasury Department did not seize the money in question pursuant to any alleged secret agreement, but pursuant to its regulatory authority. See Amended Compl. ¶ 26; 31 C.F.R. § 285.5e(6). The Government confirmed that ICES was performing under the contract. But it did not guarantee Commerce Funding that it would be shielded form prior obligations incurred by ICES or that the Government would suspend the Treasury Department's right under 31 C.F.R. § 285.5e(6) to insure that Government money was not employed to satisfy contractor debts incurred subsequent

Commerce Funding does not allege that ICES did not earn the payments in question. Indeed, making such an allegation would not justify payments to Commerce Funding. 8

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to the contractor's obligations to the Government.4 In the absence of any alleged wrong, Commerce Funding has not stated a claim for equitable relief. CONCLUSION For these reasons, we respectfully request that this Court dismiss the those portions of the amended complaint seeking relief regarding payments allegedly seized by the Department of the Treasury for failure to state a claim upon which relief can be granted.

Respectfully submitted, PETER D. KEISLER Assistant Attorney General

DAVID M. COHEN Director s/ Patricia M. McCarthy PATRICIA M. McCARTHY Assistant Director

Even if Commerce Funding had alleged such guarantees, its allegations would be inadequate because only the Secretary of the Treasury has the authority to exempt payments from a centralized offset under 31 C.F.R. § 285.5. See 31 U.S.C. § 3716(c)(3)(B). Because "the Supreme Court has recognized that any private party entering into a contract with the government assumes the risk of having acurately ascertained that he who purports to act for the government does in fact act within the bounds of his authority," any promises that Commerce Funding could have alleged receiving would not have had legal weight. Schism v. United States, 316 F.3d 1259, 1278 (Fed. Cir. 2002) (citing Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947)). 9

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s/ James D. Colt JAMES D. COLT Trial Attorney Department of Justice Civil Division Commercial Litigation Branch 1100 L. Street, NW Attn: Classification Unit 8th Floor Washington, D.C. 20530 Tel: (202) 305-7562 Fax: (202) 305-7643 April 6, 2006 Attorneys for Defendant

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CERTIFICATE OF SERVICE I hereby certify that on this 6th day of April, 2006, a copy of the foregoing DEFENDANT'S MOTION TO DISMISS was filed electronically. I understand that notice of this filing will be sent to all parties of record by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

s/ James D. Colt