Free Supplemental Brief - District Court of Federal Claims - federal

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UNITED STATES OF AMERICA COURT OF FEDERAL CLAIMS BENJAMIN ALLI, SHAKI ALLI and BSA CORPORATION, a Michigan Corporation Plaintiffs, vs. UNITED STATES OF AMERICA, Defendant. _____________________________________/ STEMPIEN & STEMPIEN, PLLC By: Gregory J. Stempien Eric Stempien Attorney for Plaintiff 315 N. Center Street Suite 200 Northville, MI 48167 (248) 735-9200 DEPARTMENT OF JUSTICE, COMMERCIAL LITIGATION By: Marla Conneely Attorney for Defendant 1100 L Street N.W., Room 11054 Washington, DC 20005 (202) 307-0318 _____________________________________/ PLAINTIFFS' SUPPLEMENTAL MEMORANDUM OF LAW Pursuant to this Court's November 2, 2005 Order, Plaintiffs hereby submit their supplemental brief limited to the two issues raised by the Court in its order: (1) whether, as a matter of law, a government official's statement indicating disapproval of a proposed transaction may give rise to a breach of contract claim against his agency, where government regulations incorporated into the contract provide a detailed process for dealing with the approval/disapproval issue that that
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process was not followed and (2) Michigan courts' application of the standard for piercing the corporate veil, with particular attention to the second prong of the standard, that the "corporate entity must be used to commit a fraud or wrong" as stated in Foodland Distributors v. Al-Naimi, 559 NW2d 379, 381 (Mich Ct App. 1996) I. Can a government official's statement of disapproval of a proposed transaction give rise to a breach of contract claim against his agency, where government regulations incorporated into the contract provide a detailed process for dealing with the approval/disapproval issue, which was not followed?

There are three factors to determine whether a breach of contract occurred when Robert Brown made his statement of disapproval: (1) was Brown a "contracting officer" with the authority to enter into, modify and terminate HUD contracts, (2) did Brown have the authority to disapprove the proposed sale of the Collingwood property to Cory Fanning and (3) if factors 1 and 2 are met, was his disapproval effective in light of the failure to meet the requirements of the regulations regarding the transfer of physical assets process. a. Brown was a contracting officer for HUD

In order to bind the government or an agency with regard to a contract, the plaintiff must prove that the government officer who purported to enter into, modify or terminate the contract had the actual authority to do so. United Pacific Insurance Co. v. Roche, 401 F.3d 1362, 1366 (Fed. Cir. 2005); Johnson Management Group CFC, Inc. v. Martinez, 308 F.3d 1245, 1255 (Fed. Cir. 2002) The person with the authority to bind the United States government with regard to contracts is known as a "contracting officer". The Federal Circuit Court of Appeals recently reviewed the role of the contracting officer: A party seeking to enter into an agreement with the government can abate the
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risk by taking particular care to insure that it negotiates with a government agent whose status is that of a "contracting officer". See 48 C.F.R. § 2.101 (2004) ("Contracting officer means a person with the authority to enter into, administer and/or terminate contracts and make related determinations and findings") Flexfab, LLC v. United States, 424 F.3d 1254, 1260 (Fed. Cir. 2005) It is clear from the evidence that Brown is a contracting officer with regard to the contractual relationship between the plaintiffs and the Department of Housing and Urban Development. With regard to the Collingwood property, Brown was the authorized government official who signed the housing assistance payments contract. App. at 7-101 Further, Brown was the authorized government official who declared that HUD was assuming mortgagee-in-possession of the Collingwood property in January, 2000, thereby modifying the parties' contractual relationship and enforcing certain provisions of the contract. App. at 11 Brown was also the authorized government official who signed the Pingree housing assistance payments contract. App. at 12-17 He was also authorized by HUD to terminate the housing assistance payments contract for the Riverside property. App. at 1-6 b. As the contracting officer, Brown had the authority to disapprove the proposed sale of the Collingwood property to Fanning

The powers of the contracting officer are made clear by the CFR. As stated by the Federal Circuit, Brown's authority with regard to the Collingwood property included the power to "enter into administer and/or terminate contracts and make related findings and determinations". Flexfab at 1260; 48 C.F.R. § 2.101 (2004) (emphasis added) It is clear that a contracting officer has all of these powers, and the government cannot arbitrarily decide that government official is acting with authority as to one decision in the contracting process, but not another. Further, Brown has

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exercised all of the powers listed in 48 C.F.R. § 2.101 (2004). He has entered into the housing assistance payments contracts, he has terminated them and he has administered them. App. at 1-17 Because he possessed and exercised each of those powers, the government cannot now claim that he lacked the authority to accept or reject the proposed sale to Fanning, pursuant to the same contract that he signed as HUD representative. In expressing his disapproval, Brown was making "findings and determinations" pursuant to his authority as the contracting officer for HUD with regard to its contractual relationship with the Plaintiffs. "The law has long been that `it makes no difference that the contract was not formally signed or the bond formally approved' for the Government to be bound by the terms of a contract." Texas Instruments Incorporated v. United States, 922 F.2d. 810, 814 (Fed. Cir. 1990); citing United States v. Purcell, 249 U.S. 313, 319 (1918) If the United States can bound to the terms of a contract without a formal signature, it follows that modification of or enforcement of a contract can be done without a formal signature of the contracting official. Further, the United States can be bound by the statements of its contracting officials even absent a communication through official or formal means. Texas Instruments; General Electric v. United States, 412 F.2d. 1215 (Ct. Cl. 1969) In fact, the Court of Claims has held that "the Government can be bound by a contracting officer's unfettered opinion [as] the person delegated as decision-maker by the parties to the contract." Texas Instruments at 815 In General Electric, the plaintiff was seeking damages for costs overruns on a contract with the Army Weapons Command. The plaintiff submitted its request for the overruns to the Army Weapons Command. The authority for modifying the contract rested with another agency, the

1 "App. at ___" refers to the particular page numbers of the appendix attached to this brief.
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Boston Procurement District, U.S. Army. The request for cost overrun was submitted to the Procurement District. In an internal memorandum, the contracting officer stated that the cost overrun was to be approved. This memorandum was not submitted to the contractor. The matter was returned to the Army Weapons Command, who denied the request for overrun costs due to the fact that it was not timely filed. General Electric sued on the basis that the internal memorandum was an effective decision by a contracting officer that it was entitled to its additional cost overruns. The Court of Claims agreed and found in favor of the plaintiff. It ruled that the contracting officer: was aware of the overrun situation and his indication of concurrence meant exactly what it said: that he, as contracting officer, approved the funding of the overrun and favored reimbursing plaintiff for its costs. Under the facts present here, we believe that when an authorized contracting officer expresses a definite opinion concerning the merits of a claim with knowledge of the relevant facts, a "decision" has been made. As we have emphasized numerous times, it is the unfettered opinion of the person delegated as decision-maker by the parties to the contract that is determinative. General Electric at 1221 (emphasis added) Here, Brown was the contracting officer for the Collingwood housing assistance payments contract. He expressed a definite opinion concerning the merits of the proposed sale between the Plaintiffs and Cory Fanning. Therefore, a decision had been made, to deny the requested sale, thereby giving rise to Plaintiff's claim for a breach of the housing assistance payments contract. c. The clear manifestation of intent to deny the request for sale to Fanning gives rise to a breach of contract claim, even in light of the requirements of the regulations 5

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Both the General Electric and Texas Instruments cases make clear that the Courts' focus when determining the effect of a contracting official's statement is on the clear intent of the statement. In General Electric, the United States sought to deny the cost overrun request on the basis that the contractor had not submitted timely notification. The Court acknowledged that the United States is not obligated to pay overruns that are not timely filed, citing both the contract and decisions from the Armed Services Board of Contract Appeals. The Court further acknowledged that the overrun request was untimely. However, the Court ruled that the Procurement Office's unfettered opinion, i.e. clear manifestation of intent, was determinative of the fact that the costs were approved and the United States was obligated to pay. The contract, as upheld in prior adjudicative decisions, required that the request be timely filed. However, the Court looked past that requirement based on the statements of the authorized contracting official. In Texas Instruments, the contractor sought payment on a contract modification that was submitted to the contracting official. That official approved the payment on an internal

memorandum. The United States later rejected the request. One basis for the rejection was that the matter had to be submitted to agency's Contract Management Boards of Review, which needed additional information. The contractor objected to providing any additional information, arguing that there was already a binding agreement between the parties. The Federal Circuit Court of Appeals reviewed the matter, with particular attention to the clear manifestation of intent by the contracting official in the internal memorandum. The Court stated that "we reach the legal conclusion that the [contracting official's] signature on the PNM [the internal memorandum] constituted an authorized decision to approve the negotiated price", despite the agency's requirement that all contracts be reviewed by the Contract Management Boards of Review. Although the board
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review was not mandated by regulations, it was clearly considered a requirement by the agency. The Court's ruling indicates that an authorized official's clear manifestation of intent can moot the requirements of review of a proposal. The key aspect of these cases is the focus on the statements of the authorized officials. Courts, including this Court, have upheld the decisions of the official even when they were: (1) made internally, and not communicated to the contractor and (2) made in contravention of the review requirements of the agency. II. Michigan law with regard to the "fraud or wrong" prong of the three prong test for determining whether to pierce the corporate veil

There is no single rule delineating when a corporate entity may be disregarded. Papo v. Aglo Restaurants of San Jose, Inc., 149 Mich App 285, 301; 386 NW2d 177 (1986) "The entire spectrum of relevant fact forms the background for such an inquiry, and the facts are to be assessed in light of the corporation's economic justification to determine if the corporate form has been abused." Klager v. Robert Meyer Co., 415 Mich 402, 411-412; 329 NW2d 721 (1982) In order for the United States to pierce the corporate veil of BSA Corporation, it must show that the corporate form was used to commit a fraud or wrong. Foodland; Kline v. Kline, 104 Mich App 700; 305 NW2d 297 (1981) It is clear from a review of Michigan cases that the Court focuses on the use of the corporate form to commit a fraud or wrong in deciding whether to disregard the corporate entity. In Kline, the Michigan Court of Appeals held: When the notion of a corporation as a legal entity is used to defeat public convenience, justify a wrong, protect fraud or defend crime, that notion must be set aside and the corporation treated as the individuals who own it. The fiction of a corporate entity different from the stockholders themselves was introduced for
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convenience and to serve the ends of justice, but when it is invoked to subvert the ends of justice it should be and is disregarded by the courts. Kline at 703 (citations omitted) The Michigan Supreme Court has provided some guidance regarding when to apply the doctrine of piercing the corporate veil. Klager v. Robert Meyer Co., 415 Mich 402; 329 NW2d 721 (1982) In Klager, the Court held that: By limiting an investor's financial risk to the amount of his stock contribution, the corporate form serves important social policies by creating an incentive to pool resources and to channel them into productive activity. By the same token, freeing shareholders from all personal liability runs the risk that the corporate form may be used as a shield for action the law would not condone if done by an individual and as a subterfuge for increasing one's personal autonomy at the expense of others. In an effort to strike a balance between these opposing policies, this Court has held that fraud or other attempts to evade the law justify invoking equity's power to look through and behind the legal entity of corporate existence. Klager at 411 (citations omitted) Klager involved a breach of contract action by the plaintiff against the corporate defendant and its shareholders. The trial court and the Michigan Court of Appeals held that piercing the corporate veil was appropriate in that case. The Michigan Supreme Court reversed, stating that "a Court will refuse to pierce the corporate veil where corporate action is not fraudulent or otherwise illegal". Klager at 418 There was no dispute that the corporation had breached the contract at issue in that case. Therefore, it is clear that the Michigan Supreme Court does not consider a breach of a contract action that is "fraudulent or otherwise illegal", which is required for disregarding the corporate entity. As stated in Plaintiffs' Motion for Partial Summary Judgment, the only cause of action alleged by the United States is breach of contract as to the three properties. The United States has
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not pled nor provided any evidence of fraud. Because Michigan courts do not recognize a simple breach of contract claim as a basis for piercing the corporate veil, Plaintiffs pray for the relief requested in their Motion for Partial Summary Judgment.

STEMPIEN & STEMPIEN, PLLC

s/ Eric Stempien By: Eric Stempien Attorney for Plaintiffs Dated: December 2, 2005

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