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~y COrps of Engincc~ -~Litflc RockDistrict Force Base Resident :Office ~P.O. Box 219 : ~~aeksoavffie, AR72078-0219 ~C130JEugine,/Propcllcr Building >Littlc~ock 3.irForce Basc ,,~ittlo>RockDistrict Corpsof Engineet-s ~wu~ . ~OHgin~Contract ~moun~: :!$I,~11)000.00 " ~q2ontract #: ~DACA03-03-C-0011 ¯ .):Bond-#: ~B8843564 Project: To WhomIt MayConch: We., TheLask~r-Group, Inc., Lask~,::'Inc.,'~and Laskcr Constmdfion,.~h~'~by in-evoeably ....... ~i:i~¢m~d all :, that paymcn~ uowdu~ t0~b..ecome.dueabove or onthe projcctbe forward~ directly toJ. . . ,! i..~~Michad HeRu~m/~Cinclnnati Compauy,6200 Road, Instuanc~ Gilmore P..O..Box 145496, Fairfield, ,....... -~"_-?OH.. 45014- I, Cincinnati InsuranceCompany a~ted as..Surety on th¢.Pedormanoe Payments and 514 ./-,~,executed. on behalfiiof The>.LaskcrGroup,.In¢.,-+Lasker, Inc., -and Laskcr:Constructionby The : .Chadam, Insurance aft Co...m.,:pauy ("Cincinnati") with respect.to the above.project, There will be no ...modification or change ~u th~se -instru~ons wi~out the wd.'ttea ¯ authorization and consentof Cinc~unati.
The.,,W~~'G the., Lasker, Inc., p, "' and Lask'er Construction cc: J. Michael Hcnnigan Th.oma.sE. Crafton
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ASSIGNMENT FROM PRINCIPAL TO SURETY OF CONTRACT RIGHTS AND PROCEEDS KNOW ALL MENBY THESE PRESENTS: ~ . .. THAT The Lasker Group, Inc., Lasker, ]inc., and Lasker Coustruefiou, ~of 412 we, ¯ '~$turgis~Road, Conway, .Arkansas, 72034,9261, .hereby intending to-:bc.Icgally=bound,'and in ¯., .:~.o.nsidc~atiort of One~!and,NO/l:~=Dollars ($1!00),-..~ndother goodand-valuabIc consideration, :~ i-:::re~ipt.wh~reofis,hereby acknowlcdgcd,/f0r:O .m~dws andoursuccessors~aud~assigns, fl0-he, eby ¯ ' :". :".. :~:.~rmv~cab~y:.ass!~..trans~c'ra~dsct~v~unt~.~eCin~inn`~ti.~nsuran~e~mpany~its ~uce~ssors " "." . ~. ~.i~ndlasSi~i-aIlUfourright, fitlc~andint~esti~~ndtoanyand~all~.pa.3fmentsaccountde, sfimatcs, on : i" i :~.::~,hangoord~(~ndu~gthe eatimat~s,.:fmalp~ymonts,.and~rotainagcs),~¢laims Other final aud any : " ' ~ ~nowdu¢ orh.~x~efto become due, arisi~gOuiO~our contracts, describcdand:identifiCdas followa: "
¯ " ' :7" '~. " . . ~"." :~. ~.. ,5 . .--'?' ~' , '. .
-3Cl30J Euginc/PropcllcrBuilding
. ~":: '~!Oi~glnaIContract Amount:
'.:' : '. ..... ,~Contract #:
~-~Littl~. Rock District~. Engiu~'rs Corps 0f :~-~ACAOB-03-C-0011 ~Bg8435~4
-: toge, with~-all :and h~r fights action,..acc~cdor ,accmc~ezenndct;,:add~wc ~which,~may dohereby ... :i " ~"~c°.nstitute and:appoint.said The.CincinnatiInsurance.Company our:~e:and lawful attomcy-in-
:.~ WITNESS'~VHEREOF) causMthcsc presents to bc executed by Greg Lnsker wc have
(CORPORATESEAL)
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~BER CRAFTON
ATTORNEYS AT LAW
PSC
Hursthoume Place, Suite ~36o 9300Shelbyville Road Louisville, Kentucky 4o2~2 ¯ Telephone~(502)8~5-5ooo Facsimile: (502) 815-5oo5 Thomas E. Crafton [email protected]
August 30, 2004 VIA FACSIMILE (501)988-1530. ~~:~Ron Garner J:2Contracting OfficersRepresentative ':~Departmentof the Army .~Little RockDistrict, Corpsof Engineers 2~O Box 219 2Jacksonville, AR72078-0219 ..:Re: .:Our)Client: No.: :~Project: -The Cincinnati Insurance Company B80-843564 ~ ~C-130JEngine &P,ropeller Storage ~Building ¯ ,e4Litfle Rock~r Force Base,Pulaski County. Contract No.: ¯ ~DACA03-03-C-0011
~DearMr. Garner: .. -.. ;On June. 25, 2004.I. wrote IJotm A. Balgav~via:facsimile advisinghimthat Cincirmati :..,!~tnsur~.ance Company-('Cincinnati")~ surety:~!fqr.,Easker Group,4nc. ("Lasker"),. had received as .- .; ~:~pproximately,$400,000,00 pa,yment::b0.n.d:~laims .of ,with respect to .the C-130J project bonded' :~y:Cincinnati..I also, in that letter, requestedthat any further payments Mr. Laskerbe held up to .-:.~pending further approvalof Cincinnati by reason of the payment bondclaims against its:payment ~:~ond. June 26, 2004 you.q~wrote Mr. Lasker advising him that ~ents would be for reasons set-£orth, in-my__!rd.~,to Mr. Balgavy..Cincinnati,. obviously, relied upon ...your letter sgnt to Lasker',-believing that the project funds wouldbe held by the U.S.'Corpsof Engineersfor the benefit of all of the project creditors who not beenpaid by Lasker. had Wehave recently learned that, notwithstanding our direction to withhold payment, the Corps of Engineers has made a recent p@mentto Lasker in an amount approximating ¯ $104,000.00 and furthermore, that Lasker provided only $20,000.00 of those funds to the paymentof C-130Jproject creditors. We believe: therefore, that Cincinnati ha~ been prejudiced by the premature release of funds, by the Corps of Engineers and hereby request the Corps of .,...On
Louisville,
Kentucky
Troy,
Michigan
Columbus,
Ohio
Fairfield,
Ohio
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Rob Garner Contracting Officers Representative 8/30/2004 Page -2-
;Engineers to reimburse Cincinnati the full cost and expenses which relate to this premature release of contract funds. Please contact meat your very earliest convenience concerningthis matter. Very. truly yours.:.
ThomasE. Crafton
¯ -John A.~Balgavy,-P.E. (501=988-153.0) -i;J. Michael.Hennigan (513,603-5099) -.,!~GregLasker (50t -470-1931 ;:~Cyril:Hollingswortt{:(501-375-6484) :..~arrel Johnson.(501-324-5680) .'Indemnitors(via mail)
Louisville,
Kentucky
Troy, Michigan Columbus, Ohio
Fairfield,
Ohio
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Case 1:05-cv-00751-NBF Document 8-3 Filed 10/27/2005 DEPARTMENT OF THE ARMY
LII-rLE ROCKDIS.TRICT, CORPSOF ENGINEERS Post Office Box 867 LITTLE ROCK, ARKANSAS72203-0867
Page 10 of 19
September 2004 10,
REPLYTO ATFENTtON OF:
SEP1 6 200~ N
B Y: "
Contracting Division SUBJECT: Contract No. DACW03-03-C-0011, Engine and Propeller Storage Facility, Little Rock Air Force Base, Arkansas
.~Alber.Craflon, PSC .~;Attomeysat Law ~ttn: :Mr ThomasCrafton ::~urstbourne Place, Suite 1300 ¯ .~%ouisville,Kentucky 40222 ,.. 9ear MrCrafton We in receipt of your letter dated August 2004.Yourletter states that the District are 30, ,. .... i-~pr.e.judiced the.Cincinnati Insurance:Company bY:making payment.to-theLasker.Groupfor work ' -,~p.e.r.f0rmedon the C-130J Engine Pro.pellet Storage:.Building project. You also state that these -::4paYments were madein.disreg~d to inforrnati0n::pmv|deto-youbythe district in a June.26, 2004 'letter. .....: .:-./... We acknowledge youwereincorrectly.informed that that wehad the authority to withhold ..~p.ayments to Lasker Group:based.on nonpayment subcontractors and suppliers. The his of . ~ :... (i~¥ederal AcquisitionRegulati0n, Part 28.106-7(a), Withholding Contract Payments,states ~ ..~ . .:., .;~"'Duringcontract perf0rmance, agenciesshall not withholdpayments contractorsor assignees due . ,. .... ~because subcontractorsor suppliers havenot beenpaid." Therefore,weare not authorizedto withhold paymentto the prime contractor. TheFederal AcquisitionRegulation,Part 28:106'-7(b)states, "If, after completion the of contract work,the Government receives written notice from the surety regarding the contractor's failure to meetits obligation tO its subcontractors suppliers, the contractingofficer shall or withhold final payment. However,the surety must agree to hold the Government harmless from any liability resulting from withholdingthe final payment.Thecontracting officer will authorize final payment uponagreementbet~veenthe contractor and surety or upona judic.ial determination of the fights of the pmies." TheLittle.Rock District did receive an Assignment Claimson 12 of August2004, dated 4 August2004the day after the LaskerGroupreceived their last payment.. .... As I informedyou during our last telephone conversation I wouldtry to recover the funds from Mr. Lasker. I specifically asked Mr. GregLasker if the Government could debit his bank account and recover the last payment had received for the subject project. Helaughedand said is there he ....-
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a questionhere and I restated myrequest ttiat he- give the Government authority to debit his account - he said no. Withoutthe contractor's permissionweare not allowedto recover the payment. We will be glad to further discuss the authority granted by the Federal Acquisition Regulationand the DefenseFinance and Accounting Systemin resolving this matter. Please feel free to contact meat (501) 324-5720 1166or email me ~xt darrel, kj 9hnson.@,swl02~usace.army.mil. Sincer,.e!y, f~__~
~ContractingOfficer
~:CESW-L-EC-C ~ESWL--EC-CA ~ESWL-EC-CM ~:CESWL-OC
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ALBER CRAFTON
ATTORNEYS AT LAW
Hurstbourne-Place, Suite 13oo 9300Shelby~dlleRoad Louisville, Kentucky 4o222 Telephone:(5o2) 815-5ooo Facsimile: (502) 815-5oo5 G. Bruce Stigger [email protected]
February 11, 2005
Daniel L. Johnson, Contracting Officer Department of the Army Little RockDistrict, Corpsof Engineers P.O. Box 867 Little Rock, Arkansas 72203-0867
Re:
Contract No. DACW03-0022, Engine and Propeller Storage Facility, Little RockAir Force Base, Arkansas Request for Contracting Officer's Decision
Dear Contracting Officer: As you are aware, this office represents Cincinnati Insurance Company ("CIC") whowas the Miller Act surety to the Lasker Groupon the above-referenced Project. In response to your letter to this office's Thomas Crafton dated September10, 2004, webelieve your reliance upon FAR 28.106-7 is misplaced. In situations wherebythe Miller Act surety asserts the Government has improperly releasedprogress paymentsto the construction contractor, the key question is whetherthe contracting officer reasonablyexercised his discretion by paying the contractor. The AmericanInsurance Co. v. The United States, 62 Fed.Ct. 151 (2004). With respect to the Corps' wrongful payment of $106,477.50 to Lasker on August 4, 2004, it is our opinion that the Contracting Officer abused this discretion by authorizing such paymentand CIC's security has been prejudiced thereby. Thechronology events pertinent to this issue are as follows: of May20. 2004 (Tab A): Letter from John Balgavy, the Contracting Officer's representative, notifies Lasker as well as CIC and the SBAof Lasker's failure to pay subcontractors and Lasker's possible violations of PromptPaymentAct (31 USC §3905), and the PromptPaymentfor Construction Contracts Clause (FAR52.232-27). June 23, 2004 (Tab B): Fax from Corps to TomCrafton, CIC Counsel, enclosing Lasker Pay Application #10 with subcontractor paymentcertification. June 25, 2004 (Tab C): Letter from TomCrafion, CIC counsel, to Mr. Balgavy notifying the Corps of Lasker's unpaid subcontractors and Lasker's apparent false certification with Pay Application # 10, and Lasker's inability to comply with its PromptPayment
Louisville, Kentucky Troy, Michigan Columbus, Ohio Fairfield, Ohio
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obligations. Alsorequests the Corpsto reviewLasker's contract status, to enforce their contract obligations and notifies the Corpsthat all surety consents for payments Laskerare withdrawn. to June 26, 2004 (Tab D): Letter from RodGarner, the Contracting Officer's representative, to Lasker notifying it that the Corps finds Lasker Pay Application #10 to be improperlysubmitted due to:
ao
Requesting100% activities whichstill require punchlist work; for Remaining contract balance is insufficient ... "to protect Government's interest for outstanding payments subcontractors and/or suppliers." due Breachof contract by not payingsubcontractors properly; False certification included with pay application.
Mr. Garner also states that the Corpswill take no action on Lasker's Pay ApplicationNo. 10. However,Lasker was allowed to re-submit the pay application upon satisfying the abovedescribed problems. This notice was also provided to Mr. Craflon and CICby fax on June 26, 2004. August 4, 2004 (Tab E): Lasker's letter directs the Corps to forward all payments due or to becomedue to CIC. Lasker also provides the Corps with an "Assignment from Principal to Surety of Contract Rights and Proceeds" dated August4, 2004. Au~st 11~ 2004 (Tab F): Barry Jundt of the Contragtir~g Officer's Office emails Lasker acknowledging discussing the~f Assignment on August 10, 2004 and states the Corpswill accept this Assignment assist Laskerin its relations with its surety, CIC. to Au_~st 30~ 2004 (Tab G): Mr. Crafton letter to Mr. Garner addressing release of contract funds to Lasker despite surety's prior request to withhold funds due to unpaid subcontractors and Corps' prior letter advising Lasker that payments were being withheld pending resolution of subcontractor debts. Crafton requests the Corps to reimburse CIC for damagesassociated with Corps' improper paymentto Lasker. Sept. 10, 2004(Tab H): Darrel L. Johnson, Contracting Officer, responds to Crafton's August30, 2004 letter and denies Crafton's request for reimbursementof the Corps' improper payment. Accordingto Mr. Johnson, the Corps madeand Lasker received the subject payment on August 11, 2004. The next day the Little Rock District received Lasker's Assignment of Claims. Mr. Johnson requests to Lasker to return the improper payment were refused. As you are aware, the Governmenthas an obligation owing to the surety to make paymentsto the contractor in accordance with the bondedcontract and ... "to administer the contract, during the course of its performance, a waythat does not materially increase the risk in that was assumedby the surety whenthe contract was bonded." National Surety Corp. v. United Louisville, Kentucky Troy, Michigan Columbus, Ohio Cincinnati, Ohio
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States, 118 F.3d 1542, 1546 (1997); AmericanInsurance, 62 Fed.Ct. @156. The Federal courts have gone on to declare that Contract terms that provide security for the bonded performance cannot be ignored, waived, or modified without consideration of the surety's interests ... Thegovernment'sfailure to retain the required sumsduring the performanceof the contract was a change in the terms from those on which the surety provided the bonds. AmericanInsurance, 62 Fed.Ct. @157. Further, the courts have found that contract retainage provisions serve as security for performance of the bonded contract and whenthe Government knows the contractor/principal has not met the condition precedent required for the Government release contract funds but to still pays the contractor, the surety is entitled to recover its actual damages occasionedby,,the Government's improper release of moniesin contradiction to the terms of the bondedcontract. National Surety, 1-18 F.3d @1547. Here, the Corps had prior knowledge of Lasker's problems with not paying its subcontractors in violation of its PromptPaymentobligations, and pursuant to its contract, .properly advised Lasker (and CIC) that it would take no action on Lasker's pending pay application until Lasker remediedtheir subcontractor paymentproblems. Notwithstanding the above obligations owing to CIC, the Corps apparently waived the requirement that Lasker comply with its Prompt Paymentobligations and paid said amount without proof that Lasker had complied with its contract requirements by paying its subcontractors and suppliers. By doing so, the Corpsdisregarded CIC'ssecurity interests in the bondedcontract. As a result, the Corps disbursed $!06,477.50 to Lasker and instead of the full amountbeing paid to Lasker's subcontractors and suppliers for this bondedProject (and thus ~ reducing CIC's financial exposure on the bondedProject), only approximately $20,000.00 went to those creditors. The remaining sum of approximately $86,000.00 apparently went to other Lasker creditors or debts. That was the last paymentthat Lasker received on this Project. ¯ Recoveryof this improperpaymentfrom Lasker has been unsuccessful. As a result of the Contracting Officer's abuse of discretion by releasing contract funds even though Lasker had over-billed for certain activities and were on notice that Lasker had failed to properly pay its subcontractors, contract funds in the amountof $106,477.50 were ¯ improperly released by the Corps. In further disobeyanceof the contract requirements and its Prompt Paymentobligations, Lasker only applied approximately $86,000.00 of said paymentto creditors of the bondedcontract. By doing so, the Corps has impaired CIC's surety status and Theamount $20,000 estimated Greg of was by Lasker suchamount not beenauditedor otherwise but has verified byCIC.CIC reservesthe right to amend amount. said Louisville, Kentucky Troy, Michigan Columbus, Ohio Cincinnati, Ohio
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has increased its costs to perform ~tsbondedobligations. Recoveryof said improper payment has been fi-uifiess and CIC incurred damages approximately$86,000,00as a direct result has of thereof. Based upon the above and the doc~:ine of equitable subrogation, CIC respectfully requests that a Contracting Officer's Decision be issued granting CIC's request to be reimbursed for all damagesincurred as a result of the above described abuse of discretion (approximately
$86,000,00).
Company GBS:ss CERTIFICATION I, Michael J. Nermigan, am the Associate Manager - Bond Claims for Cincirmafi Insurance Company, Inc., and hereby certify that the above claim is madein good faith, that the supporting damare accurate and complete to the best of my knowledgeand belief, that the amountrequested accurately reflects flae contract adjustment of which Cincinnati Insurance Company believes the governmentis liable, and that I amduly authorized to certify the above claim on behalf of Cincinnati Insurance Company.
Subs,ribed and swornto before methis 10-'#"dayof February, 2005. My-commission expires: ~] iOIZ2-} 0
/~¢INCINNATI INSURANCE
Notary. Public
Notan/Public, of Ohio State My' Commission 10-22-07 Expires
: Pending final determination of an audit to de~crmine howLasker spent the subject payment, CIC reserves ~he right to amend this amountrequeste6, Louisville, Keatucky Troy~ Michigan Columbus, Ohio
VICKI GALL A.
Cincinnati, Ohio
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Contracting Division G. Bruce Stigger Counsel for Cincinnati Insurance Company Hurstbourne Place, Suite 1300 9300 Shelbyville Road Louisville, Kentucky40222
Subject: Contract No. DACW03-C-0022, Engine and Propeller Storage Facility, Little Rock Air Force Base Dear Mr. Stigger: This letter is in responseto your letter of February11, 2005, whereinyou requested a Contracting Officer's final decision regarding an alleged wrongfulpayment to Lasker, Inc, (the prime contractor) on August4, 2004, in the amountof $106,477.50. Accordingto your letter, this paymentshould not have been madeby the government until the non-payment sub-contractors had been fully resolved. Yourclient is alleged of to have suffered damages approximately$86,000as a result. of Since receipt of your letter, there have been several communications an attempt in to ascertain the facts and to discuss our respective positions. That has been helpful but has not led to any resolution satisfactory to both parties. Regardless,I appreciate the communications. Althoughyou have requested a Contracting Officer's final decision, one will not be issued as a Payment Bondsurety lacks the requisite standing under the Contract Disputes Act. However, will respond to the general allegation that a wrongfulpayment I was madeto the prime contractor. At the time the paymentin question was made,not all workon the project had been completedand this paymentwas not final payment. In fact over $60,000 remained to be paid. Thus, at the time of the payment August4, 2004, I believe the situation on was governed by Federal Acquisition Regulation 28.106-7, entitled "Withholding contract payments,"whichreads: "During contract performance,agencies st~all not withhold paymentsdue contractors or assignees because subcontractors or suppliers have not been paid." (emphasisadded)It is myreading of this regulation that I had discretion to withhold paymentfrom the contractor under these circumstances. Having no discretion to exercise, it is therefore not possible to abuse suchdiscretion as alleged in yourletter. Based upon the above, I do not believe there was an erroneous paymentmadeto the prime contractor, nor do I believe that the Government indebted to the Payment is Bondsurety for any amountsunder the prime contract. Sincerely,
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SandraK. Easter Contracting Officer