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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________________________________ ) NORTH STAR ALASKA HOUSING ) CORPORATION, ) ) Plaintiff, ) ) v. ) No. 98-168C ) Judge Francis M. Allegra THE UNITED STATES, ) ) Defendant. ) ____________________________________)

PLAINTIFF'S MEMORANDUM OF CONTENTIONS OF FACTS AND LAW Plaintiff North Star Alaska Housing Corporation ("North Star" or "Plaintiff") hereby submits its Memorandum of Contention of Facts and Law pursuant to Paragraph 14 of Appendix A to the Rules of the Court of Federal Claims. The relationship between North Star and Defendant United States of America ("Government" or "Defendant") is governed by a lease, dated November 6, 1987, wherein the Department of the Army agreed to lease 400 housing units from North Star on Fort Wainwright, Alaska, called Birchwood Homes, for a term of 19.5 years ("Lease"). North Star built these units, and, per its Lease with the Government, agreed to perform necessary maintenance and repairs for the Lease term. A copy of the Lease (and maintenance annex) is attached hereto as Exhibit 1. The instant memorandum addresses Lease disputes between the parties which began shortly after a settlement of prior litigation was reached in 1995 and the Government embarked on a course of conduct of changing its interpretation of many Lease provisions to the detriment of North Star. The Government's multifaceted wrongful conduct has two principal purposes and impacts: (1) maximizing the number of downtime days assessed against North Star so that

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maximum rent abatements may be assessed. This includes stockpiling the units and releasing multiple units on the same day, violating explicit Lease requirements which permit North Star to orderly schedule its work on units, and refusing to provide additional time to repair occupantcaused damages; and (2) ignoring Lease requirements that require the Government to timely identify and pay for extra work. The Government's failures to honor the terms of the Lease, as described below, have resulted in out-of-pocket costs to North Star and a devaluation of North Star's property. The Government's change in Lease interpretation and pervasive failures to abide by its obligations under the Lease, even in the face of North Star's pleas for it to change its conduct to conform with the Lease, constitute clear breaches of the Government's duty to administer the Lease in good faith and deal fairly with North Star. There is no other explanation but bad faith for the consistent maladministration of the Lease by the Government. I. STATEMENT OF FACTS PLAINTIFF WILL PROVE AT TRIAL & PLAINTIFF'S POSITION RESPECTING FACTS ON WHICH DEFENDANT IS EXPECTED TO RELY A. Downtime/Rent Abatements 1. Computation Not in Accordance with the Lease

The Lease defines downtime as the "period of time during which a unit is vacant and has been officially turned over to the Developer for accomplishment of required work" and states that "[f]or purposes of this lease agreement, downtime is measured in working days, vice [sic] calendar days." Lease. at 23 § B.10. The Lease further provides that "[a]ll change of occupancy work must be completed within three working days after the unit becomes available, which shall be determined from the date the unit is turned over to the Developer by the Government for

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change of occupancy work." Lease at 39 § D.7.d.(1). Monthly downtime totals should be computed on an average basis, with the Lease directing North Star to: ensure that downtime while a unit has been turned over to him does not exceed the allowable down time described below . . . . (a) The total number of downtime days for units vacant for purposes of change of occupancy maintenance shall not exceed the number of move-outs (excluding move-outs for purposes of scheduled repairs or fires and acts of God) per month multiplied by 3 days. For example, if there are 10 move-outs in 1 month, the total allowable downtime for that month is 30 days. Additionally, if any 5day work period, more than eight units are turned over to the Developer, two additional days will be allowed for each unit in excess of eight. Lease at 36 § § D.5 and D.5.(a) (emphasis added). For the first nine years the Lease was in effect, turnaround time for change of occupancy maintenance was calculated by both North Star and the Government on an average basis: by totaling the number of released units and multiplying that total by three working days in order to arrive at the total available working days to perform change of occupancy maintenance; when more than eight units were released in a five work-day period, two additional days for completion times the number of units over eight were added for change of occupancy maintenance. Work days, not calendar days, were used. North Star will show that in late 1996/early 1997, the Government informed North Star that it had adopted a new interpretation of the provisions of the Lease pertaining to downtime. In 1998, the Government sought to modify the downtime provisions of the Lease, and presented North Star with a draft Supplemental Agreement pertaining to change of occupancy maintenance and repairs, which North Star did not agree to execute. Starting with the month of February 20021, the Government began reducing North Star's rent for its alleged failure to meet downtime requirements and stockpiling units: holding onto them and releasing them on the same day,
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The Court issued an order in January 2002 denying the Government's attempts to enforce the terms of the Unconsummated 2000 Settlement Agreement.

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typically in groups of four on Mondays and Fridays. While penalizing North Star for alleged excess downtime, the Government engaged in behaviors, discussed below, designed to increase downtime, and thus maximize rent deductions. The Government also began penalizing North Star for weekends and holidays, and not on an average basis. The Government is expected to concede that it did not call into question North Star's downtime record until late 1996/early 1997, nearly 10 years into the Lease, and that it was not until February 2002 that the Government began to reduce North Star's rent, but to nonetheless contend that the Government did not even then share North Star's interpretation of the downtime provisions of the Lease. This position is contradicted by the fact that the Government awarded North Star full incentive fee awards (incentive fees are discussed in detail below) for years during which North Star interpreted downtime exactly as it does today, and the fact that the Government was silent as to any complaints it had respecting North Star's downtime record. The Government is also expected to contend that North Star requested that units be released in groups or that the Government's release of groups of units was for the benefit and convenience of North Star. To the contrary, North Star has repeatedly requested that the Government release units as they become available, and continually complained about the Government's practice of stockpiling units. 2. Failure to Follow Inspection Requirements

The Lease provides with respect to the pre-termination inspection that: During the pre-termination inspection, the Developer shall identify and prepare work orders covering all painting, maintenance, and repair work required of the Developer. The Government shall jointly identify, with the occupant, all damage to property and installed equipment which is over and above normal wear and tear and which is the occupant's responsibility to correct. The Government will provide the occupant with a list of this work and associated costs for which the occupant is liable, as contained in the approved list of repair costs, and provide a copy to the Developer. At the conclusion of this inspection, the Government shall

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notify, in writing, the Developer of the firm date and time for the final inspection and the date that the unit will be turned over to the Developer for accomplishment of change of occupancy work. The Developer, in turn, shall immediately provide the Government with a firm , written commitment as to the date and time that the unit will be turned back over to the Government for assignment to the next occupant. Lease at 38 § D.7(b)(2) (emphasis added). In violation of the Lease, the Government has wholly failed to provide North Star with this information and, rather, waits until the eve of unit turnover to issue partial work authorizations to North Star. This practice deprives North Star of the notice to which it is entitled under the Lease, and causes delay in scheduling the work and, in particular, in scheduling subcontractors to perform the work, which contributes to increased downtime for which rent reductions have been taken. The Government also violates Lease provisions which require them to provide sufficient advance notice to North Star of inspection dates, for scheduling purposes. The Lease requires: The Government will, in writing, notify the Developer of the date, time, and address of each [pretermination and termination] inspection. The Government will make every effort to provide this notice 21 days in advance of the projected change of occupancy. Because of short-time occupant orders or other extenuating circumstances, the Developer can expect an average of 10-14 days advance notice. Lease at 37 § D.7.(b)(1). The Government will conduct the termination inspection jointly with the occupant after the furnishings have been removed. Should the date and time the unit will be turned over change for any reason, the Government shall immediately notify the Developer in writing of the revised date and time. The Developer will then immediately notify the Government, in writing, of the revised date and time that the unit will be turned over to the Government for assignment. Lease at 38 § D.7.(b)(3)(emphasis added). The Government has repeatedly failed to provide timely notification of the termination and pretermination inspections, which North Star uses to project when it will receive a unit for change of occupancy maintenance and repair. It is critical that North Star be able to accurately project these dates so that it can schedule subcontractors in advance to perform such work as

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countertop and carpet replacement, as well as scheduling its own workers to perform routine change of occupancy work. The Government has also repeatedly revised turnover dates without providing North Star with additional time to reschedule subcontractors to perform repairs necessary to prepare the units for their next occupants. The impact is particularly pronounced because of the Government's practice of holding onto units and releasing them all at once (stockpiling): because North Star is almost always working on multiple units at the same time, workers and subcontractors are frequently unavailable because they are scheduled for other units. The additional days that a unit is down because the Government (1) does not provide sufficient advance notice for North Star to complete early scheduling, and (2) changes turnover dates, are improperly included in the downtime calculations and used to reduce North Star's rent. The Government is expected to contend that because North Star attends the pretermination inspection it is aware of work requirements. However, this anticipated argument misses the point, because North Star does not timely know, absent the Government providing the required list of work and associated costs, what work will be authorized by the Government. The Government will also likely contend that the Lease language is aspirational respecting the 21-day notice, and that the Government does, on average, provide 10 to 14 days advance notice of the inspections. However, North Star will show a pattern and practice whereby the Government does not follow the clear intent of the Lease to provide North Star, on a regular basis, sufficient advance notice of turnovers. Moreover, the frequent scheduling changes by the Government are not accompanied by turn-back dates revised by North Star as required by the Lease, and North Star is penalized down days as a result.2

Moreover, it appears that the Government is providing notice for some units very far in advance, which alters the average notice time and results in the appearance that the Government is meeting the notice requirement. In reality, the Government frequently fails to provide adequate notice under the Lease.

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3.

Failure to Grant Extensions of Time and Pay for Repair Work

The Lease distinguishes between the time a unit is down for change of occupancy maintenance work and the time a unit is down for non-routine repair work. Change of occupancy work is "[w]ork identified by the Developer or Government during the pretermination and final termination inspections which is required to make a unit ready for the next occupant . . . This work includes any routine maintenance and repair." Lease at 37 § D.7.(a). As stated above, change of occupancy downtime is defined as the "total number of downtime days for units vacant for purposes of change of occupancy maintenance." Lease at 36 § D.5(a). The Lease has a separate category for "scheduled repair or renovation downtime," which "will be completed on the basis of the actual number of days any specific unit has been turned over to the Developer for such work." Lease at 37 § D.5(b). The Lease further distinguishes between maintenance and repair work in setting forth the Government's responsibility to "[n]otify Developer of any maintenance or repair work required of which the Developer may be unaware." Lease at 32 § C.2.(c)(14) (emphasis added). Moreover, as discussed above, the Lease requires the Government to provide North Star with "a list of . . . work and associated costs for which the occupant is liable, as contained on the approved list of repair costs." Lease at 38 § D.7.(b)(2) (emphasis added). The deduction provisions of the Lease also distinguish between units down for change of occupancy maintenance and units down for scheduled repairs: Developer's Failure to Meet Allowable Change of Occupancy Downtime: If the downtime in any one month for units vacant for purposes of change of occupancy work exceeds the allowable downtime for that month (established in accordance with clause D.5.(a)), the Government shall assess liquidated damages based on the most current average daily rate of BAQ plus VHA plus average daily lease cost for each calendar day in excess of the allowable downtime.

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Developer's Failure to Complete Scheduled Repairs: If the Developer fails to complete scheduled repairs in units that were made vacant for that purpose within the time period approved by the Government, the Government will deduct shelter and maintenance rentals prorated on a daily basis beginning with the first late day plus, liquidated damages based on the most current average daily rate of BAQ and VHA for each calendar day in excess of the approved time period. (emphasis added). Lease at 55 §§ H.1.(d)-(e). These provisions further highlight the clear distinction in the Lease between change of occupancy maintenance work and repair work. North Star will show that for the first nine years that the Lease was in effect, the Government recognized the distinction between change of occupancy maintenance and repair work. When repair work was required in units, North Star's site manager would discuss the required time with the Government's 801 Project Manager and they would agree on an acceptable number of repair days. These repair days were days in addition to the 3 days allocated for change of occupancy maintenance. Indeed, simply because repair work, such as replacing occupant damaged carpet, countertops, or vinyl, occurs while units are vacant for change of occupancy purposes, does not make it subject to the 3-day limit for routine betweenoccupancy maintenance. In violation of the Lease provisions, the Government has ceased to distinguish between change of occupancy maintenance and repair work, and expects North Star to complete work on units between occupancies within three days regardless of the extent of damage. North Star has informed the Government many times that repair work takes time to schedule and perform beyond the three days allocated for routine change of occupancy maintenance. While the Government has, on occasion, granted extra days to North Star for extensively damaged units, it has not, as the Lease requires, provided those days based upon an assessment of how long the repair work will take. The Government's failure to provide the time necessary for repairs to

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units to be accomplished inflates the Government's downtime calculations, which are used to wrongfully reduce North Star's rent. North Star expects the Government to argue that the repair work referenced in the abovecited provisions refers only to repairs that do not occur during change of occupancy, or that when North Star was given additional time necessary to accomplish repairs, such additional time was provided in error by the previous Government site manager, Mr. Miller. Neither anticipated position is persuasive in light of the plain language of the Lease and the Government's prior conduct thereunder. 4. Improper Use of Extracontractual Inspections

Under the Lease, the pretermination and termination inspections are the only inspections on which determinations of work to be performed during changes of occupancy are based. Lease at 37-39 § D. Nonetheless, the Government began conducting an additional inspection after the cleaning contractor cleans the units (subsequent to the termination inspection but prior to the unit being turned over to North Star for change of occupancy maintenance and repair), and using the results of this additional extracontractual inspection to make determinations about change of occupancy work. This conduct negatively impacts North Star's ability to schedule its work and the work of its subcontractors, in violation of the Lease, which requires the Government to inform North Star of work required at the conclusion of the pre-termination inspection. Work authorizations, which are supposed to be issued at the conclusion of the termination inspection, are delayed until these additional inspections are conducted, with resulting scheduling delays, increased downtime, and associated rent deductions. The Government also uses these extracontractual inspections to direct North Star to perform additional "fair wear and tear" work, which the Government had not previously identified, at North Star's expense.

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The Government is expected to contend that the Lease does not limit the number of inspections that it can conduct for the purpose of determining change of occupancy work that North Star must perform. It is also expected to adopt a reading of the Lease that requires the Government to issue work authorizations "subsequent to the termination inspection" only. This position, however, overlooks the very purpose of the Lease: to provide sufficient advance notice to North Star so it can schedule its contractors and workers and minimize the time that the units are down for maintenance and repair. This position also illustrates the extent to which the Government is failing to administer the Lease in good faith. 5. Wrongful Rejection of North Star's Maintenance/Misuse of Acceptance Inspection

After North Star completes its change of occupancy work, the Government is to conduct an "acceptance inspection" at which "[t]he Government has the right to refuse to accept the unit if the work has not been completed or performed satisfactorily or is otherwise not in accordance with the provisions of this annex. . . . If the unit is refused, the Government shall also notify the Developer, in writing, of all discrepancies requiring correction." Lease at 31 § C.2.(a) (emphasis added); see also Lease at 38 § D.7(d). The Lease establishes the standards for maintenance to which the parties must adhere: a standard that prevents deterioration beyond that which results from normal wear and tear, and corrects deficiencies in a timely manner to assure full life expectancy of the facilities and equipment. The level of maintenance shall assure all structures are free of missing components or defects which would affect the safety, pleasing appearance or habitability of the units. . . . Whenever the term "pleasing appearance" is used in this or subsequent paragraphs, it shall be construed to mean an appearance similar to the original finished appearance with only minor, nonobjectionable deterioration resulting from normal use. Lease at 39 § E.

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The Government has engaged in the practice of rejecting North Star's maintenance on units at the acceptance inspection, and/or adding work, even when it is performed in accordance with Section E and when all work identified at the pre-termination and termination inspections has been completed. When the Government does this, downtime continues to accrue while North Star corrects the alleged "discrepancies," since downtime runs until "written notification of the Government's acceptance." Lease at 38 § D.7(d). The Government is rejecting acceptable maintenance work, and adding new work, and consequently downtime continues to accrue. The Government is expected to argue that it has discretion to reject North Star's maintenance work even if all work identified at the pre-termination or termination inspections is completed satisfactorily when the Government later determines that additional work needs to be accomplished, and that the Lease permits the accrual of downtime until units are accepted back by the Government. However, this anticipated argument ignores the plain language of the Lease which identifies two inspections, pre-termination and termination, which are to be used to identify the work required. Moreover, the Government's actions deviate from its prior conduct, wherein the acceptance inspection was used as intended: to evaluate North Star's performance of work identified at the pre-termination and termination inspections and directed by the Government. Finally, the Lease does not permit the Government to assess downtime against North Star while North Star accomplishes work that the Government was requiring even though such work had not been previously identified by the Government at the pre-termination or termination inspections. 6. Wrongful Calculation of Downtime Days

The following Lease provisions establish how the downtime period is derived:

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If the unit becomes available prior to 12:00 noon, the period will begin at 1:00 p.m. that day. If the unit becomes available at 12:00 noon or later, the maintenance period will begin at the start of the following day. Lease at 39 § D.7.d.(2). Upon completion of all change of occupancy work, the developer will notify the Government of work completion and unit availability . . . The Government will conduct an acceptance inspection in accordance with C.2.(a). Upon written notification of the Government's acceptance, the time period calculated for downtime purposes will be concluded. Lease at 38 § D.7.d. Acceptance inspections of all dwelling units will be conducted prior to beneficial occupancy and after completion of repair or rehabilitation work on the unit. . . . The Government will schedule these inspections to occur on the same date that work is completed if notification of work completion is received before 12:00 noon, or before 12:00 noon of the next workday, if such notifications received after 12:00 noon, at a time that is mutually agreeable. Lease at 31 § C.2.(a). The Government's monthly calculations, which are used to reduce North Star's rent, contain numerous errors which clearly violate the Lease, resulting in North Star's rent being further reduced. North Star will show that it has been charged downtime and had its rent reduced because the Government started counting "downdays" too early or continued counting "downdays" because its inspector delayed beyond the permissible time for conducting the acceptance inspection, or delayed in re-inspecting the unit after deficiencies were corrected, which was often done on the spot by North Star's representative. The Government refused to even provide the basis for its calculations and, instead, continued to assess these rent reductions despite North Star's letters disputing to the Government's calculations. Moreover, the Corps of Engineers representative responsible for effectuating rent deductions admitted that when the Army housing manager proposes a deduction amount based on alleged excess downtime, he does not check to ensure that downtime for each unit is calculated accurately. The Government is expected to argue that its calculations are accurate, which the unit file data will contradict. With respect to acceptance inspections, it is expected to argue that the

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Lease permits it to keep the downtime clock running while North Star corrects alleged discrepancies, even if the Governments adds work. The Lease clearly does not contemplate this behavior by the Government and resulting penalty to North Star. B. Work Authorizations 1. Failure to Issue Work Authorizations for Correction of OccupantCaused Damage Timely or at All

Under the Lease, the Government is financially responsible for occupant-caused damages, while North Star is responsible for correcting normal wear and tear: Damage to a housing unit or to other improvements within the project which are beyond normal wear and tear and are caused by the Government or an occupant, his dependents, or invited guests, or which are not corrected by the Government or occupant, shall be repaired by the Developer. The cost of such repairs shall be billed to the Government . . . Repair of damages which occur to the units or other improvements that cannot be attributed to the Government, his agents, officers, occupants, their dependents, or invited guests shall be accomplished by the Developer at no cost to the Government. Lease at 30 § C.1.(s) (emphasis added). Occupant damages are identified and authorized at the inspections of the units specified in the Lease: Pre-Termination: * * * The Government shall jointly identify, with the occupant, all damage to property and installed equipment which is over and above normal wear and tear and which is the occupant's responsibility to correct. The Government will provide the occupant with a list of this work and associated costs for which the occupant is liable, as contained in the approved list of repair costs, and provide a copy to the Developer. Lease at 38 § D.7.(b)(2). Termination Inspection: * * * Subsequent to the termination inspection, the Government will issue to the Developer a work authorization for the repair of damages, or accomplishment of cleaning, which are the responsibility of the occupant but were not completed at the time of the termination inspection. Lease at 38 § D.7.(b)(3). North Star is paid for correcting occupant-caused damages through a document called a "work authorization." Lease at 26 § B.33 (defining a work authorization as an "official document issued by the Government for the accomplishment of work by the Developer and

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which is used to verify entitlement for reimbursement."). The Lease directs the Government to "[n]otify Developer via work authorization of occupant-caused damages or conditions requiring correction or cleaning and reimbursing Developer for accomplishment of same." Lease at 32 § C.2.(c)(10). The sample Work Authorization attached to the Lease has a category for description of the work and a category of the cost which is authorized. Lease at 59, Ex. 4. Moreover, the Contracting Officer issued a decision on March 26, 2002 that "[i]f North Star performs work without the benefit of a work authorization, they do so at their sole expense." North Star is not permitted to negotiate or settle costs for correction of occupant-caused damages directly with occupants, Lease at 30 § C.1.(s). ("Under no circumstances shall the Developer negotiate or settle reimbursement of costs for such [occupant-necessitated] repairs directly with the occupant, his dependents, or invited guests."), and thus the Government's issuance of a work authorization is North Star's only means of getting paid for work performed. Government issuance of a work authorization for the correction of occupant-caused damage is not optional, but is a requirement of the Lease: For those items of work identified elsewhere in this annex, for which the Developer is entitled to reimbursement in addition to the monthly lease and maintenance rent, the Government shall issue a work authorization. . . . Developer charges for this work will be based upon the approved list of repair costs. Lease at 55 § H.(2.) (emphasis added). Contrary to the Lease requirements, the Government has failed to issue work authorizations for the correction of occupant-caused damages. This behavior, which was repeated over and over despite North Star's written complaints, and had the effect of harming North Star and its property, and violated not only the work authorization provisions of the Lease but also the standards of maintenance to which Birchwood units must be maintained. Lease at

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39 § E, While these standards are meant to remain constant throughout the 19.5-year Lease, North Star will show that, as the Lease grew closer to the 2007 end-date, the Government applied a serviceability standard to maintenance at Birchwood, rather than the standard for maintenance required under the Lease, resulting in a decline in work authorizations. In other words, rather than ensuring that damaged items were restored to meet the pleasing appearance standard of the Lease, the Government evaluated damaged items on the basis of whether they could serve their intended purpose for the next occupant without being fixed. This served to reduce the value of North Star's asset and impose repair costs on North Star after the expiration of the Lease in 2007. North Star will also show that the Government embarked on a path to deliberately reduce work authorizations to save the Government money. The Government will likely contend that the Lease gives its 801 housing manager discretion to ascertain the extent to which damage is fair wear and tear or occupant damage, and that it did so in accordance with such discretion. However, North Star will show that the housing manager disregarded the standards of Section E of the Lease, which are not discretionary, in making her determinations. The Government will also likely contend that its funding problems did not impact 801 projects, which were fully funded. However, while the shelter rent was fully funded, it appears that expenditures on correction of occupant damages were impacted by Government funding limitations. 2. Issuance of Improper Work Authorizations

In addition to its failure to issue work authorizations at all, the Government issues work authorizations that are content deficient, in violation of the Lease.

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a. No or Zero Reimbursement Amount As stated above, the "work authorization" is a document which is used to "verify entitlement to reimbursement." Lease at 26 § B.(33). Exhibit 4 to the Lease, which contains the sample work authorization form, contains a space for both a description of the work and the cost thereof. Lease at 59 Ex. 4. North Star will show that, even when there is occupant-caused damage in need of correction for which North Star is entitled to reimbursement, work authorizations issued by the Government will contain no or "zero" reimbursement amounts. Without reimbursement amounts, North Star cannot be assured reimbursement; however, if North Star disputes the improper work authorizations and defers its work until a proper document is issued, downtime on units continues to accrue and rent abatements are increased. The Government is expected to contend that its failure to put dollar amounts on work authorizations is excusable if it has not received invoices from North Star for subcontracted work. However, and as detailed below, subcontractor invoices are not required under the Lease for issuance of a work authorization: the Lease requirement that billings be prepared in accordance with an annually-updated List of Repair Costs. The Government may also contend that issuance of the work authorization document is sufficient to comply with the Lease but, as discussed above, inclusion of a dollar amount stating the amount of reimbursement is a Lease requirement. b. Not Based on List of Repair Costs The Lease states that Developer charges on work authorizations "will be based upon the approved list of repair costs." Lease at 55 § H.(2.). The sample work authorization also states that "[p]ayment will be based upon latest approved List of Repair Costs." Lease at 59 Ex. 4. The Lease provides, in pertinent part:

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List of Repair Costs: The Developer shall, with the approval of the Government, establish a list of cleaning and repair costs for dwelling unit components which will establish the normal maximum amounts to be charged in the event of damage to property and equipment installed within a living unit over and above normal wear and tear. The list of repair costs will be based upon the latest published edition of the applicable Engineered Performance Standards (EPS) Manuals . . . which will be utilized to estimate manhour requirements. . . . This list . . . will be subject to change annually or from time to time by mutual agreement of the Developer and the Government. Lease at 30 § C.(1)t (emphasis added). Pre-Termination: * * * The Government shall jointly identify, with the occupant, all damage to property and installed equipment which is over and above normal wear and tear and which is the occupant's responsibility to correct. The Government will provide the occupant with a list of this work and associated costs for which the occupant is liable, as contained in the approved list of repair costs, and provide a copy to the Developer. Lease at 38 § D.7.(b)(2). In other words, work authorizations, pursuant to which North Star obtains reimbursement for damages caused by the Government and its occupants, are based on the List of Repair Costs, which is based on Government data. Included among the Government's responsibilities are to "[a]pprove annual schedule of repairs, list of repair costs for occupant damages and printed occupant instructions as submitted by the Developer." Lease at 32 § C.2.(c)(11). Contrary to the Lease requirements, the Government began issuing work authorizations which were not based on the List of Repair Costs. The Government also began the practice of unilaterally removing items from the List of Repair Costs in violation of the Lease. The Government will likely attempt to convince the Court that the work authorization and list of repair costs are not inextricably intertwined. The Lease, however, requires work authorizations to be issued for the correction of occupant damages and requires occupant damages to be based on the List of Repair Costs. The Lease even specifies that the Government must provide North Star with a written list of occupant damages, including costs based on the List of Repair Costs, at the pre-termination inspection. The Government is also expected to argue that the List of Repair costs pertains to repairs as opposed to replacements. This position

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is also contradicted by the Lease, pursuant to which the work authorizations must be issued, based on the List of Repair costs, for the correction of occupant-caused damage. The Lease makes no distinction as to whether that correction is accomplished by replacement or repair, and, for 10 years under this Lease the Government made no such distinction. It was only after 1996 that the Government began to disregard the List or Repair Costs in issuing work authorizations. c. Requiring Subcontractor Invoices In 2002, after an attempt to settle disputes ended unsuccessfully, the Government began another practice that impacted North Star's timely receipt of a work authorization for the correction of occupant-caused damages: requiring subcontractor invoices as a condition for reimbursement. This extra-contractual requirement clearly violated the Lease, which requires reimbursement for occupant-caused damages based on the List of Repair Costs. It is also anathema to the Lease goal of having the parties establish reimbursement amounts for correction of occupant damages ahead of time so that time is not wasted obtaining subcontractor invoices while the downtime clock is ticking. The Government's practice of requiring North Star to submit subcontractor invoices as a condition to issuing work authorizations delayed North Star's work on units, contributing to increased downtime and increased rent abatements. The Government is expected to cite Lease language the requires North Star to submit invoices. This language, however, imposes a monthly requirement on North Star to submit billing invoices, not a day-to-day requirement to submit subcontractor invoices prior to the Government issuing complete work authorizations: [invoices] shall be submitted monthly . . . for services performed for the Government. The original of each invoice shall have attached to it a copy of the work authorization document(s) and a summary of the charges for reimbursable work. Upon the Government's verification of work actually performed invoices will be processed for payment. Payment will be based on (a) A monthly charge for the maintenance and operational services portion of the work; (b)

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Reimbursable work authorized by Government work authorizations and which is billed in accordance with the approved List of Repair Costs." Lease at 55 § H.3 (emphasis added). Moreover, this Lease provision reinforces the requirement that work authorizations be based on the List of Repair Costs, which is prepared ahead of time, so that work is not delayed pending receipt of subcontractor invoices. d. Depreciating Work Authorized Items The Court has already ruled that depreciation is impermissible under the Lease. North Star continues to try to come to agreement with the Government on the damages, but to date has not been paid ­ not even for the amount that the Government agrees is due and owing. North Star also believes that the Government is continuing to take depreciation, in violation of the Court's order, and is deciding the most appropriate way in which to seek redress for this conduct. e. Not Including Overhead on the Work Authorizations

The Lease provides that the manhour requirements of the EPS manuals, used to develop the List of Repair Costs, "will be multiplied by the Department of Labor Service Contract Act Wage Determination rate plus materials at wholesale cost plus reasonable overhead and profit." Lease at 30 § C.1(t). The parties came to an agreement that 10% overhead and 10% profit was reasonable (although North Star's actual overhead is 50%). However, for some work authorization items, the Government excluded the agreed-upon overhead amount from the reimbursement amount listed on the work authorization form. The Government may argue that it paid outstanding overhead amounts owed to North Star. However, while some amounts were paid, the Government has failed to pay all outstanding overhead amounts owed to North Star.

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C.

Incentive Fee Awards

The Lease contains a system pursuant to which North Star is evaluated on an annual basis based on its "performance over the preceding twelve-month period" by an "incentive fee board" comprised of "three (Army) Officers or civilian personnel." Lease at 55 § H.(4.). Under the Lease, the incentive fee is awarded "for exceptional performance of standards contained in this annex, not to exceed 5 percent of the "Maintenance Rental." Lease at 55 § H.(4.). Article VIII of the lease provides that: In addition to rents stipulated in Article IV of this Lease, the Government, at its option, may pay the Developer an incentive fee not to exceed 5 percent (5%) of the maintenance rental for all housing units, for the period of time for which Developer's performance of the obligations and responsibilities contained herein are evaluated and found by the Government to substantially exceed the established standards. The amount of the incentive fee shall be determined by an Incentive Fee Board based upon the performance of the Developer in operating the Premises in accordance with its obligation. Exhibit "C" contains the provisions to establish the makeup of the Board and the procedures for determining such bonuses Lease at 4 Art. VIII. For the seven years prior to the 1995 settlement of Case 93-88-C, the Government evaluated North Star's performance over the preceding 12 month period and granted North Star 100% of the available awards. During that time, North Star interpreted the Lease as it does now and performed accordingly. It was only after the Government changed its interpretation of the Lease that it began reducing the incentive fees, and then eliminated the incentive fees entirely. Moreover, the alleged justification for the Government's failure to provide incentive fees has been tied to issues that have now been resolved in North Star's favor: depreciation of replacement items and occupant-caused fire damage. The Government also cited the "lock set issue" as a basis for withholding the incentive fee. That issue arose when North Star mistakenly charged for a portion of a new lockset cylinder which it did not replace and, immediately upon

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learning of this error, reimbursed the Government. The Government's own auditors found that there was no evidence of overcharging beyond the $250 reimbursed by North Star. Moreover, Government documents show that incentive fee decisions were tied to Government budget considerations rather than North Star's contract performance, which is a clear breach of the terms of the Lease.3 The Government will likely argue that incentive fee awards are to be made "at its option" and therefore North Star lacks entitlement thereto. However, the Government cannot act arbitrarily in making its decision by misquoting North Star's obligations under the Lease or relying upon extracontractual bases for withholding fees. Indeed, North Star's performance has consistently surpassed the Lease standards, even in the face of the obstacles erected by the Government. D. Bad Faith

In addition to the breaches of contact detailed herein, the Government's actions under the Lease amount to bad faith. The Government (1) implemented a practice of stockpiling units ­ holding onto releasable units so that they can be released to North Star in groups of eight, typically four on a Friday and four on a Monday ­ and requiring that all units be returned within three days of release without regard for the type and amount of work required of North Star, and deducting rent when units are not returned in three days total, including for weekends and holidays. The stockpiling conduct emerged at the same time that the 2002 settlement agreement between the parties fell through and the Government began to reduce North Star's rent, and was clearly crafted to maximize downtime and associated rent abatements. While the Government

In addition, decisions not to award any incentive fee were dictated by Government employees who were not members of the incentive fee board, in violation of the Lease. Indeed, in some years, the incentive fee board did not even meet.

3

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holds on to units and dumps them on North Star all at once, many of these units are in the Government's possession for several weeks, sometimes more, and could be released to North Star as they became available. In addition, the Government (2) failed to timely inform North Star of extra work required; (3) issued incomplete work authorizations at the last minute; (4) refused to grant any extensions to do extra work; and (5) added extra work while continuing to charge downtime. Similarly, Government undertook a deliberate course of action to harm North Star and to save the Government money by reducing the amount of work authorized items. Indeed, reduction of work authorization amounts became a goal of the Birchwood Housing Manager, who acted without regard for the Lease requirements. The standards for maintenance changed as the Lease term nears its end in 2007, such that items that are occupant damaged but deemed "serviceable" are not work authorized. Lease requirements meant to provide North Star with sufficient advance notice of change of occupancy dates so that it could schedule work are flagrantly ignored, and downtime is assessed and rent is abated even though the Government's actions caused downtime to increase. The Government makes its maintenance decisions based on maximizing the amounts paid by North Star and minimizing the amounts paid by the Government. The Government also eliminated any objectivity in North Star's ability to obtain fair contracting officers' decisions when it implemented a practice that permitted Army representatives from the Department of Public Works to review and approve draft contracting officer's decisions before they were finalized. The Government also ignored the requirements of the incentive fee provisions of the Lease, permitting the command interest to dictate automatic denial of awards.

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Finally, the Lease obligates the Government to oversee "the day-to-day administration of the housing site," including "[e]stablish[ing] and disseminat[ing] to occupants rules and regulations governing occupancy of units" and "[e]nsuring occupant compliance with all rules and regulations." Lease at 32 §§ C.2.(c)(1), (c)(3). The rules and regulation that the Government is charged with enforcing are contained in the Lease and in the Forth Wainwright Resident's Handbook, which requires occupants to maintain their homes and land in a clean, orderly, and sanitary manner; limits the number of pets occupants may have; and requires that occupants prevent their pets from soiling or urinating on carpets. The Government has failed to enforce the rules and regulations respecting unit occupancy, maintenance of yards, and care of pets, resulting in damage to North Star's units that are expensive to repair (especially in light of the Government's parallel conduct not to issue work authorizations as required) and an overall diminution in the value of North Star's property.4 The Government will likely deny that its actions under the Lease were specifically crafted to harm North Star. However, there is no explanation for its conduct under the Lease other than its intent to harm North Star. E. Other Issues 1. Refuse Collection

In September, 1995, North Star and the Government resolved Case No. 93-88C through a Settlement Agreement in which North Star agreed to "assume full responsibility for refuse collection and disposal for the remainder of the lease and any extensions of the lease" with the
In addition, the Government eliminated self help items so that occupants can no longer obtain items free of charge to make small repairs; withdrew clean-up support from the Support Battalion which was provided during the first decade of the Lease; placed large numbers of temporary occupants at Birchwood well in excess of North Star's expectation under the Lease that 30% of units will be vacated within a 12-month period (Lease at 37 § D.7.(a)); and permitted housing employees to perpetuate rumors about Birchwood being an undesirable place to live. Each of these actions leads to occupants with substantially diminished incentives to care for their units.
4

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express representation from Government counsel that North Star was required to collect trash once a week and that it was entitled to use the Fort Wainwright landfill, as the Government had done previously. The Government's own internal documents confirm that the parties agreed to refuse collection once per week. Moreover, when the Government was collecting refuse at Birchwood it was doing so once per week. Contrary to the terms of the agreement, the Government demanded that North Star pick up garbage twice a week, and North Star has borne the additional cost of the extra weekly pickup ever since. In addition, the defendant prohibited tenants living in Birchwood Homes from depositing bulk items at the Fort Wainwright landfill. All tenants were provided a three-page handout on refuse collection denigrating North Star's performance. North Star was made to cover expenses for refuse deposit at a private landfill, contrary to its understanding in the settlement that the onbase landfill would continue to be available. The Government will likely argue that the Lease requires twice-weekly refuse collection, and therefore North Star must bear the cost of the second weekly pickup. However, the parties' agreement in 1995 supercedes the Lease provision. In that 1995 Agreement, North Star agreed to assume the collection that the Army had previously accomplished, which was once weekly. The Government will also likely contend that the landfill closing was out of its control, but that does not change the fact that, per the parties' settlement agreement, it was understood that North Star would collect refuse in the manner that the Government had previously, which included deposit at the landfill. 2. Fencing Policy

The Lease gives North Star the right to reject (with reason) alterations, attachment of fixtures, and erection of additions, structures, or signs in or upon the "Premises," which are

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defined to include the land and improvements constructed thereon. Lease at 4, 1, Arts. VII, I. North Star has opposed chain link fencing at Birchwood since the Lease's inception, and has required that fencing be constructed of cedar. The Government ignored North Star's objections and permitted the erection of chain link fencing, which is unsightly and does not shield from view the deplorable condition of the yards, which have been neglected and damaged by occupants free from the required Government oversight. Erection of chain link fencing without North Star's consent violates the Lease and contributes to the diminution in value of North Star's properly. The Government will likely argue that fences are erected on land, not attached to the structures, and because the land is owned by the Government, North Star's approval of fencing is not necessary. However, this position contradicts the Government's prior conduct under the Lease wherein it sought the approval of North Star with respect to fencing. Moreover, the Lease gives North Star the right to reject the erection of structures on the "Premises," which includes the Government-owned land as well as the North Star-owned buildings. The Government may also attack the reasonableness of North Star's position on fencing. However, the unsightly appearance of chain link fences, particularly in light of the unkempt nature of many yards at Birchwood, makes North Star's rejection of this type of fencing eminently reasonable. These unauthorized fences have reduced the value of North Star's property. 3. Carpet Replacement in Unit 884

The carpet in the upstairs hallway of Unit 884 was damaged by occupants, causing staining and a non-pleasing appearance. North Star replaced the carpet, which was blue in color, with the only available carpet, which was brown in color. The Government then ordered North Star to either re-replace the carpet with a blue carpet or replace undamaged stairs and downstairs

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carpet with brown carpet. Because the Government insisted on replacement of the adjacent carpet, the Government should pay North Star the cost of this replacement under Section C.1.(s) of the Lease since the reason for replacement was occupant damage, not fair wear and tear. When a similar issue of replacement item matching arose with respect to countertop replacement, the contracting officer issued a decision on January 31, 2003 that: all countertop surfaces in a room must be viewed as a whole, and therefore must match to meet lease requirements. If a portion of a countertop in a room has been damaged by the occupant, and the damaged portion cannot be repaired to match the existing countertop, then the Government is financially responsible for the replacement of as much countertop as necessary to ensure that all countertop in the room matches. Similarly, if fair wear and tear requires replacement of only a portion of countertop and no color-matched material is available to make the repair, North Star would be responsible for replacement of as much countertop in the same room as necessary to ensure all of the countertop in the room matches and meets the pleasing appearance requirements of Sec. E of the lease. Moreover, prior to ordering that non-damaged carpet in unit 884 be replaced because it allegedly did not match, the Government had directed installation of the new brown carpet in other units without demanding replacement of blue carpet elsewhere in the unit. The Government is expected to cite Section E of the Lease, which states that "[a]ll replacements shall match existing dimensions, material, quality of work, finish, color, and design" and that "[a]ny complete or partial replacement of carpeting shall be in kind." However, the reason the carpet required correction in the first place was that the occupant damaged it, and the Government called for replacement. The original color carpet was not available, so North Star used the carpet it had, and if the Government required additional replacements, the Government should bear the cost. The Government's direction to North Star for this unit also violated its own contracting officer's precedent regarding the Government's liability for the replacement for countertops.

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4.

Interior Painting in Unit 704

In June, 2002, North Star painted the entire interior of unit 704. In November 2002, the Government ordered North Star to repaint the entire interior of that unit even though the unit had recently been painted and the paint was in good condition. North Star protested the Government's direction to paint unit 704 and performed the painting under protest. Prior to ordering that North Star paint the unit, the Government, in writing, stated that it and North Star were in agreement that the unit was fully painted in June 2002 and did not require additional painting at that time. Section E.8.(d) of the Lease states that: Complete interior painting will be accomplished as required in conjunction with the change of occupancy work. Complete interior painting will be accomplished at the first change of occupancy occurring subsequent to the 3rd, 6th, 9th, 12th, 15th, and 18th years of the lease agreement. Complete or partial interior painting during all other changes of occupancy, except where required in connection with maintenance and repair, will be at the discretion of the Developer. . . . The 15th year of the Lease agreement occurred on November 6, 2002. The Government is expected to argue that the Lease requires a full interior paint at the first change of occupancy after November 6, 2002 regardless of the date the last full interior painting or condition of the unit. However, the only reasonable read of the interior painting provision of the Lease ­ and the interpretation the parties shared before their relationship became contentious ­ is to require complete interior paints at the first change of occupancy subsequent to the years identified in the Lease only if a unit had not been completely painted in the course of change of occupancy work in the preceding three year period. North Star is entitled to recover the additional cost of unnecessarily repainting units recently painted with a pleasing appearance. 5. Carpet and Vinyl Replacement in Unit 833

The Government ordered replacement of all the carpet and the laundry room vinyl in unit 833 at North Star's expense allegedly due to fair wear and tear. However, these replacements

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were necessitated by occupant damage, not fair wear and tear, pursuant to Section C.1.(s) of the Lease. The Government failed to issue work authorizations for replacement of occupant-

damaged carpet identified in this unit during previous changes of occupancy. The last occupant had spilled bleach throughout the carpet and had caused easily repairable frays, seam runs, or unraveling. The carpet would have been in good condition but for the prior occupant's occupant abuse and neglect. With respect to the vinyl, its non-pleasing appearance was attributable to occupant-caused stains and occupant neglect from lack of cleaning and waxing. The small crack in the vinyl could have easily been repaired without replacement. The Government's requirement of replacement of these items reflects its practice of ordering replacement when North Star is responsible, and forgoing correction or ordering a small repair when it is responsible, so that North Star will bear more financial responsibility at a later change of occupancy. The Government is expected to argue that it has discretion to forego correction of occupant damages and, when they accumulate over time and result in a non-pleasing appearance, to attribute the non-pleasing appearance to fair wear and tear and put the financial burden on North Star. This position is contradicted by the plain language of the Lease, which requires that occupant damage be corrected during changes of occupancy in accordance with the standards of maintenance. 6. Reimbursement for Light Fixture in Unit 1029

One of two matching kitchen light fixtures in unit 1029 required replacement due to occupant damage. Accordingly, North Star replaced the damaged light fixture and billed the Government the cost of replacement. The Government only paid for the cost of the original fixture.

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The Government will argue that the fixture was replaced with an "upgrade" the cost of which is not its responsibility. However, the Lease itself contemplates upward adjustments through the annually updated List of Repair Costs. The Lease contemplates that a fixture price will rise over time. Moreover, the reason for replacement was occupant damage, which is the Government's financial responsibility under Section C.1.(s) of the Lease. 7. Corrections of Vinyl of Units 1090 and 1111

The Government ordered replacement of vinyl at North Star's expense in units 1090 and 1111 when wholly minor seams could easily have been corrected by repair. Moreover, the vinyl was not identified at the pre-termination or termination inspections as in need of correction. Section C.1.(s) of the Lease states that damages beyond normal wear and tear that are caused by the Government or an occupant and are not "corrected" by the Government or occupant shall be "repaired" by the Developer and that "repair of damages" not attributable to the Government or an occupant shall be accomplished by the Developer at no cost to the Government. Section E.2(b)(4) of the Lease states that floor covering should be "maintained free of cracks, chips, and torn or excessively worn material to provide floor coverings that are usable and have a pleasing appearance." In addition, Section D.7(a) of the Lease states that work "identified by the

Developer or Government during the pre-termination and final inspection terminations which is required to make a unit ready for the next occupant shall be accomplished while that unit is vacant." No other inspections for the determination of work to be performed during change of occupancy are specified under the Lease. North Star conducted repairs which rendered the vinyl in these units free of cracks, safe, and of a pleasing appearance in accordance with Section E of the Lease. However, the

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Government continued to demand replacement of the vinyl, likely because the repair was to be at North Star's expense. The Government will contend that with respect to unit 1090, vinyl required replacement due to the presence of cracks and that the Government had discretion to determine that the repairs conducted by North Star were unsatisfactory, and with respect to unit 1111 that because vinyl replacement had not been work authorized, North Star was responsible for the cost of vinyl replacement there. These positions, however, defy the intention of the Lease: for work to be identified at the pretermination and termination inspections only; for compulsory work authorizations to be issued for the correction of occupant-caused damage; and for correction ­ whether by repair or replacement ­ to be determined by the standards of maintenance. 8. Vinyl Replacement in Unit 633

The Government ordered full replacement of vinyl at North Star's expense in unit 633 due to the alleged "non-pleasing appearance" of the vinyl. The vinyl's "non-pleasing

appearance" was due to occupant damage and not fair wear and tear. The COR stated that the vinyl was "unsightly and showing its age," that the "overriding reason for replacement is its nonpleasing appearance," and that "replacement is at North Star's expense." The Contracting Officer also considered the age of the vinyl in his decision that North Star was responsible for replacement. Pursuant to Section C.3(a)(4) of the Lease, occupants are responsible for cleaning, waxing, and polishing floors. Moreover, manufacturer instructions for proper vinyl maintenance were provided to the Government at the inception of the lease, and thereafter. The Government has failed to ensure that the vinyl flooring is properly maintained, which would keep it in good condition with a pleasing appearance, as it is maintenance, not age, which primarily affects the

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appearance of vinyl. Moreover, the Court has now ruled that age is not a permissible reason to place financial responsibility on North Star. The Government is expected to argue that the damage was to the vinyl was normal wear and tear not attributable to lack of cleaning. Significantly, however, the Government used to instruct occupants on proper maintenance of floors, and stopped that practice about a decade into the Lease. Had the vinyl been maintained properly, the alleged "normal wear and tear" could easily have prevented. The failure to maintain the vinyl is occupant neglect for which the Government is financially responsible. 9. List of Repair Costs

As indicated above, the Lease states that the List of Repair Costs "will be based upon the latest published edition of applicable [EPS Manuals]" and "will be subject to change annually or from time to time by mutual agreement of the Developer and the Government." Lease at 30 § C.1.(t). In 2003, the Government refused to approve items on the List of Repair Costs submitted by North Star which are reasonable and based on the costs of materials and labor time. The Government has also imposed an extracontractual requirement: that North Star provide separate invoices for items on the List of Repair Costs. Delayed approval of the List of Repair Costs means that reimbursement amounts are not adjusted for increased costs on an annual basis, as required. Failure to approve items means that North Star spends excess time during change of occupancy justifying costs and obtaining invoices which should be determined by the List of Repair Costs billing templat