# United States v. Hangar One, Inc.

> District Court, N.D. Alabama · August 4, 1975 · 406 F. Supp. 60

URL: https://www.frixlaw.com/law-library/cases/2143914

## Case

- **Full name:** UNITED STATES of America, Plaintiff, v. HANGAR ONE, INC. (Formerly Known as Southern Airways Company), Defendant
- **Court:** District Court, N.D. Alabama
- **Decided:** August 4, 1975
- **Citations:** 406 F. Supp. 60; 22 Cont. Cas. Fed. 80,176; 1975 U.S. Dist. LEXIS 16711
- **Precedential status:** Published
- **Opinion:** Opinion by Hancock
- **Judges:** Hancock
- **Cited by:** 9 later opinions in the Frix Law Library

## Citator (automated)

- **Red flag:** Reversed on other grounds by UNITED STATES of America, Plaintiff-Appellant, v. HANGAR ONE, INC. (Formerly Known as Southern Airways Company), Defendant-Appellee, 563 F.2d 1155 (1977).
- Negative treatments: 1
- Distinguished by: 0
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2143914

## Opinion text

MEMORANDUM OF DECISION
HANCOCK, District Judge.
This action, filed by the United States of America under the False Claims Act ( 31 U.S.C. §§ 231-235 ) and for fraudulent breach of contract, is before the Court for decision on defendant’s motion for summary judgment.
Those acting for plaintiff in the premises represent this action to be a completely justified effort (a) to recover damages allegedly sustained from a series of covert, surreptitious and fraudulent activities by the defendant over an extended period of time and (b) to impose upon defendant certain civil penalties provided by law for such activities. As viewed by defendant, the action is but another scene in a drama of planned harassment of defendant pursuant to which persons acting for the plaintiff in the premises, by repeatedly raising in litigation issues that are known to them to be baseless, have set about to break defendant financially so that defendant cannot pursue litigation whereby wrongdoing of persons for whose conduct plaintiff is responsible will be exposed and established.
1
While it cannot be said that there are no facts in this record from which inferences supportive of defendant’s view can be drawn, or that, if confronted squarely with the question, the court would not so find, the court, in the present posture of the action, prefers to proceed on an assumption that the action is the
*63
result of an inability (or refusal) • of those acting for plaintiff to recognize that a contract can be subject to more than one reasonable construction and that a party to a contract by pursuing a course of action predicated upon his own reasonable construction of the contract does not thereby subject himself to liability for fraud.
For the convenience of the parties, there is attached to this Memorandum of Decision (a) as Appendix A, a list of acronyms and similar abbreviated designations used herein, with a brief description of each, (b) as Appendix B, a list of names of persons who are referred to herein, with a short identifying statement about each such person, and (c) as Appendix C, a table reflecting the nature and location of exhibits which are referred to herein.
Three contracts between defendant (whose name has been changed from Southern Airways Company [“Southern”] to Hangar One, Inc. since the execution of the contracts) and plaintiff, one dated October 3, 1966, one dated December 22, 1967, and one dated February 14, 1969, provide the background. In essence, insofar as this civil action is concerned, in these plaintiff-drawn contracts (herein sometimes collectively referred to as the “Supply Contracts” and individually referred to as the “1966 Supply Contract”, the “1967 Supply Contract” and the “1969 Supply Contract”), the parties agreed that, during calendar years 1967 to 1969, inclusive, defendant would tender for delivery to plaintiff, and that plaintiff would accept and pay defendant a fixed price for, more than 2,000,000
2
155 mm HE M107 Howitzer metal parts (“shell”)
3
which, when subjected to inspections pursuant to specified inspection procedures, had properly passed such inspections. Defendant, before delivering any lot of shell, was required by such procedures to make two types — (a) a “one hundred percent [an every unit] inspection” for each of the characteristics that the Supply Contracts classified as a “critical” defect and (b) a “sampling plan inspection” (an inspection of sample units randomly drawn from the lot) for each of the characteristics that the Supply Contracts classified as “major” or “minor” defects.
The gist of the action is plaintiff’s claim that, during the course of the performance of the 1967 and 1969 Supply Contracts, defendant produced and delivered a total of approximately 18,000 shell (about one-half of that number under each of those two contracts) that plaintiff claims defendant knew to be “defective” and that circumstances appertaining to the inspections made before delivery thereof necessarily amount to fraud on the part of defendant
(i. e.,
as alleged in paragraph 8 of the original complaint, that defendant “returned, or caused to be returned,
defective
shells to the production line” and that defendant “failed to perform the
required
inspections for defects” [emphasis supplied]). The 18,000 “defective” shell were delivered in twenty-four of the 153
4
separate production lots (each of which contained approximately 16,000 shell) that were delivered throughout the said contract periods.
5
*64
Plaintiff charges that defendant’s invoices to plaintiff for the production lots, in which plaintiff claims these 18,000 “defective” shell were contained, constitute violations of the False Claims Act, 31 U.S.C. §§ 231-235 . Plaintiff also charges defendant with breaches of contract, alleging that the breaches consisted of the same acts and omissions (which in this aspect are characterized as “fraud
or
such gross mistakes as amount to fraud”
6
) upon which its False Claims Act charges are predicated. More particularly plaintiff’s charges, stripped of their formality, are that defendant (a) breached the 1967 and 1969 Supply Contracts because defendant employed or used the “sampling plan inspection” (rather than the “one hundred percent inspection” process) to inspect for the presence of two defects which plaintiff claims (and defendant denies) are classified by the Supply Contracts as “critical” defects and (b) violated the False Claims Act because defendant obtained payment for such shell by submitting invoices therefor which were supported, respectively, by a document containing a representation (by a government official) that the shell so invoiced had been subjected to and had passed the inspections that defendant was required to make by the particular Supply Contract under which they were delivered.
As is hereinafter shown, there exist disputes as to the proper interpretation of contractual language (¿.
e.,
as to whether two characteristics are classified by the contractual language as “critical” defects or as “minor” defects) between Frankford Arsenal
7
(“FA, the agency by which plaintiff drafted the contractual language that gives rise to the part of the dispute here under discussion) and Ammunition Procurement Supply Agency (“APSA”, the agency by which plaintiff entered into the Supply Contracts containing that language), on the one hand, and defendant
and
Defense Contract Administration Services (“DCAS”, the agency by which plaintiff administered the Supply Contracts), on the other hand.
DCAS, in administering the Supply Contracts for plaintiff, as aforesaid, (a) approved the inspection plans utilized by defendant in its performance of the Supply Contracts, (b) exercised continuing surveillance over defendant’s performance of the Supply Contracts by,
inter alia,
monitoring defendant’s inspection activities, (c) determined the acceptability of, and accepted or rejected, shell tendered by defendant for acceptance under the Supply Contracts, and (d) received, determined the propriety of, and paid,
8
the invoices of which plaintiff here complains. No claim has been made herein at any time by plaintiff that any DCAS .personnel have been guilty of any failure to perform any duty, or of any collusion, or of any exercise of bad faith in or about the performance of any of that agency’s duties in the premises.
At the respective times that each of the 153 lots produced by defendant under the Supply Contracts was tendered to, and accepted by,
9
plaintiff (which
*65
acted in the premises by and through DCAS), the QARIC,
10
a DCAS employee, or his authorized representative, signed and delivered to defendant a certificate in the form of that set forth in Form DD 250 (the hereinafter discussed government form that was used to evidence the government’s acceptance of purchased material) reading:
ACCEPTANCE of the listed items [the shell in lot in question] has been made by me or under my supervision and they conform to contract . . -
11
About once each two weeks during all times that it was engaged in performing the Supply Contracts, defendant, in accord with the Supply Contracts, applied for and was paid a “progress payment”. In connection with each application by defendant for such a payment, the QARIC, or his authorized representative, also signed a certificate thereon reading:
The contractor’s Quality System is acceptable and in accordance with contract requirements. The quality of the items produced is acceptable.
Roland Smith was QARIC at defendant’s Sylacauga facility until mid-August 1969 when he was succeeded as such by W. E. Snider. Snider was QARIC until defendant completed its performance of the Supply Contracts. F. B. Mayes was Assistant QARIC at that facility throughout the entire time that defendant was engaged in its performance of the Supply Contracts. With respect to the two kinds of certificates mentioned next above, an affidavit by each of these officials reads, in substance:
In my judgment each of the two kinds of certificates . . . that were signed during my tenure . [as such officer] are true and correct. Nothing has come to my attention at any time that has causéd me to suspect that anyone of them is or may be erroneous in any respect. I now affirm that it is now my judgment that said lots which were accepted for the Government . . . [during my tenure] met all of the quality requirements of the . . . [Supply] contracts as I understood and applied those requirements while I was . [QARIC or Assistant QARIC as the case may be] at said facility.
12
The authority by which DCAS administered the Supply Contracts for plaintiff is derived from the Armed Services Procurement Regulations (“AS PR”), 32 CFR 1.100,
et seq.
These regulations have the force and effect of federal law.
Paul v. United States,
371 U.S. 245, 255 , 83 S.Ct. 426 , 9 L.Ed.2d 292 (1963). The court, therefore, takes judicial notice of them.
Tucker v. Texas,
326 U.S. 517, 519 , 66 S.Ct. 274 , 90 L.Ed. 274, 276 (1946);
Carter v. American Tel. & Tel Co.,
365 F.2d 486 , 491 (5th Cir. 1966),
cert. denied,
385 U.S. 1008 , 87 S.Ct. 714 , 17 L.Ed.2d 546 (1967).
ASPR Section XIV deals with “Procurement Quality Assurance” (“PQA”). A review of some of the pertinent parts
*66
of that section of ASPR reveals just how significant is the fact that DCAS agrees with defendant, as aforesaid.
ASPR Section 14-203 (a) provides in pertinent part:
. . . [T]he contract administration office cognizant at a plant is responsible for the performance of Government procurement quality assurance. actions. The contract administration office shall
verify
that the contractor has fulfilled contract quality requirements.
13
It is the contract administration office responsibility to develop and apply effective and effici-. ent procedures for Government procurement quality assurance. [Emphasis supplied.]
“Acceptance” is defined in ASPR Section 14-001-6:
Acceptance means the act of an authorized representative of the Government whereby the Government assumes for itself . . . ownership of existing and identified supplies tendered . as . partial or complete performance of the contract on the part of the contractor.
ASPR Section 14-305.1 provides in pertinent part:
Each contract shall designate the place or places where the Government reserves the right to perform those procurement quality assurance actions that it considers necessary to determine that supplies and services conform to contract requirements.
Each of the Supply Contracts here contained provisions to the effect that the procurement quality assurance actions would be “at source.” See,
e. g.,
the last paragraph of Article XIV of the 1969 Supply Contract:
The Government Procurement Quality Assurance Actions . . . will be conducted at: The manufacturer’s plant .
ASPR Section 14-305.2 (c) provides in pertinent part:
Where the contract provides for the performance of Government quality assurance actions at source, these actions shall be taken at such times and places (including any stage in the manufacturing process . . .) as may be necessary to determine conformance to contract requirements.
ASPR Section 14-403(a) provides as follows:
Determination of conformance to contract quality requirements shall be made on the basis of objective evidence of quality. In determining the acceptability of supplies or services, the contract administration office shall make optimum use of quality data generated by contractors. To the extent that contractor quality data are available and reliable,
as determined by the contract administration office,
such data shall be used to adjust the amount of Government procurement quality assurance to a minimum consistent with proper assurance that the supplies or services accepted conform to contract quality requirements. [Emphasis supplied.]
ASPR Section 14-403(c) lists the specific actions DCAS will take to determine conformance to contract:
The following basic actions shall be taken to determine the contractor’s compliance with the contract quality requirements:
(i) review and evaluation of the contractor’s inspection procedures;
(ii) review and evaluation of the contractor’s selection, calibration, maintenance, and use of gauges and measuring and test equipment;
(iii) review and evaluation of the contractor's quality records; and
(iv) performance of product verification inspection by the Government.
*67
From the above, it is obvious that DCAS had the responsibility to administer defendant’s contracts and perform the procurement quality assurance functions necessary to assure contract conformance. The final act by DCAS was acceptance. Under these contracts acceptance was at defendant’s plant. See e.
g.,
Article XVIII of the 1969 Supply Contract:
Acceptance will be at Contractor’s Plant
ASPR Section 14-306 (b) provides that acceptance is to be signified by the execution of a particular form:
. Acceptance shall ordinarily be evidenced by execution of an acceptance certificate on the applicable inspection and receiving report form (DD Form 250 . . .). When acceptance is accomplished at a point other than destination, supplies cannot be reinspected at destination for acceptance purposes.
ASPR Appendix I describes the DD Form 250 and its use. ASPR App. I-101(a) and (b) provide:
(a) This appendix sets forth procedures and instructions for the use, preparation, and distribution of the Material Inspection and Receiving Report (MIRR) (DD Forms 250 Series) . used to evidence Government Procurement Quality Assurance (PQA).
(b) MIRRs are used to document Procurement Quality Assurance, Acceptance of supplies and services, and shipments ....
ASPR App. I-103(a)(i) sets forth the effect of the DD Form 250:
The DD Form 250 is a multi-purpose report used for:
PQA
— to
provide evidence
of acceptance at origin or destination [Emphasis supplied.]
Finally, ASPR Section 14-306 (b) provides for the situation where, as here, one agency (DCAS) is carrying out the procurement quality assurance functions for another agency (APSA):
Acceptance of supplies and services is the responsibility of the activity to which the function is assigned by the purchasing office. When a Government activity uses services of another Government activity or department for the purposes of acceptance,
acceptance by the other activity or department is binding upon the activity for which the services are performed.
Unless there are valid reasons to the contrary, acceptance shall be at origin .... [Emphasis supplied.]
From the foregoing review of pertinent ASPR sections and contract language, the court holds that DCAS, not FA and not APSA, had the authority to determine for plaintiff whether defendant was performing its contractual obligations and producing a product that conformed to contract requirements. It is undisputed, and the court so holds, that plaintiff, acting by and through DCAS (a) approved the inspection plans utilized by defendant in its performance of the Supply Contracts; (b) exercised continuing surveillance over defendant’s performance of the Supply Contracts by,
inter alia,
continually taking action to “verify” defendant’s inspection activities; (c) determined the acceptability of, and accepted or rejected, shell tendered by defendant for acceptance under the Supply Contracts; and (d) received, determined the propriety of, and paid, the invoices of which plaintiff here complains.
In addition to such knowledge as plaintiff already had, or with which it is chargeable, by reason of the actual knowledge thereof that DCAS has continuously had from the inception of defendant’s shellmaking venture, plaintiff, by reason of investigations conducted in 1968 by APSA and FA, was, or should have been, then alerted to the fact that defendant was openly pursuing the course of conduct that plaintiff now contends was fraudulent. As is hereinafter shown, any problems that occasioned such 1968 investigations by APSA and FA, as well as those which subsequently arose, if not caused by, in all probability were magni
*68
fied by,- a group of dissatisfied individuals who were then employees and former employees of defendant. Extensive investigations by the Army (the “other Army investigations”) and the Federal Bureau of Investigation (the “FBI”) were initiated from time to time. Plaintiff claims that these investigations disclosed the existence in said twenty-four lots of the “18,000 defective shells, more or less.”
14
After the mentioned investigations had been underway a number of months, the Secretary of the Army conducted his own investigation (the “Fox and Krohn investigation”) which was participated in by John Krohn, Procuring Contracting Officer, APS A. While the position taken by the plaintiff in this action in large measure is dependent upon the results of the other Army investigations, it is significant to point out that the position plaintiff is asserting in this action is not only completely at odds with the results of the Fox and Krohn investigation, as hereinafter stated, but also is at odds with the views of DCAS, the agency by which plaintiff administered the Supply Contracts, as aforesaid. For example, on March 31, 1970, Assistant Secretary of the Army, J. Ronald Fox, stated in a letter (the “Fox-Chesarek letter,” Exhibit 219 to the deposition of John W. Krohn [the “Krohn Deposition”
15
]) to General F. J. Chesarek, Commanding Officer, Army Materiel Command (“AMC”), that it had been determined by the Fox and Krohn investigation that the shell classified as containing “critical” defects in the inspections that were made in the other Army investigations had been so classified by the application of criteria which were
not
a part of the Supply Contracts and that, if the correct criteria had been applied, in at least the majority of the cases, the defects in question would properly have been classified as “minor”. Moreover, it was also determined in that investigation that, when tested by the same criteria which were used in the other Army investigations, the quality of shell made by the other four suppliers of such shell was no better than (and, in some cases, including Sperry Rand Corporation [“Sperry Rand”], not as good as) that of the lots about which complaint is here made. Further in this connection, Exhibit 226 to the Krohn deposition shows that Richard Porter, then an attorney in the office of the General Counsel for the Department of Defense, which office investigated- the matter for Secretary Fox, also mentioned in a report to Fox that the FBI reports of its investigative interviews with government personnel who made the “critical” classification on which plaintiff now relies, state that, when they were asked by the interviewing FBI agents to define the nature of the critical defects they reportedly had observed, such government personnel usually described one or more of the “surface finish improper” characteristics that are expressly classified in the Supply Contracts as “minor” defects. Also W. C. McCain, who, at all material times, was Chief, Quality Assurance Division, DCAS Birmingham District (“DCAS-B’ham”, in which district the shell in question were made) had his staff investigate the charges that large numbers of “criticáis” had been delivered and, on the basis of that investigation (which was conducted in 1969 after de
*69
fendant had made its lást delivery of shell), found that the shell theretofore reported as “criticáis” on the basis of inspections made in the other Army investigations had been classified as such by the use of criteria other than that specified in the Supply Contracts, as that criteria were uniformly understood and applied by him, his staff, the QARIC and defendant.
16
The absence of an unambigous and monolithic interpretation of the governing documents is an important substantive deficiency in plaintiff’s case. That deficiency is discussed hereinbelow.
Neither party will dispute the fact that representatives of both parties to this action have continually made oral and written references, including oral references by counsel in colloquies with the court, to the previously terminated criminal action in this same court that is hereinafter discussed.
17
On the basis thereof and from its own notice and consideration of this Court’s own record of the proceedings in said criminal action,
18
the court is satisfied (in this instance, as it is in the case of the other factual matters respecting that criminal action that are stated elsewhere in this decision) that, in 1970, substantially the same version which plaintiff here asserts to be the factual background of the fraud charged in this action, was presented to a grand jury empanelled by this Court. During the April, August and November 1970 sessions of that grand jury, attorneys from the Washington office of the Department of Justice (“WDJ attorney [s] ”) and the office of the local United States Attorney (the “United States Attorney”) caused evidence to be presented to that grand jury,
inter alia,
as to the said results of the other Army investigations without directing to the witnesses who testified about such results questions which would have caused that grand jury to know, or certainly to suspect, that the credibility of the testimony of those witnesses as to the quality of the shell in question might be, or was, questionable by reason of the investigations that are the subjects, respectively, of the Fox-Chesarek letter and of the FBI investigative reports that were mentioned, as aforesaid, by Porter;
19
and, on November 24, 1970, that grand jury, on the basis,
inter alia,
of such evidence, returned an indictment (Exhibit 62 in the Addendum) against defendant and twelve individuals for alleged violations of 18 U.S.C. § 371 and 18 U.S.C. § 1001 . Pretrial issues were strongly contested, and much pretrial discovery (some of which is hereinafter discussed) was undertaken by defendant in the criminal action. Because of delays incident to resolution of such matters (occasioned primarily by extensive remodeling of the federal building in which those matters were resolved), it was not until January
*70
23, 1973, that the criminal trial began; and, on March 6, 1973, after over six weeks of trial, jury verdicts of not guilty were returned as to defendant and six of such individuals. During the trial, motions for judgments of acquittal were granted as to three other of said individuals and shortly afterwards, on motion of the United States, the indictment was dismissed as to the remaining individuals indicted.
On February 27, 1974, approximately a year after the conclusion of the criminal action, and (aside from such earlier knowledge as it had or with which it was chargeable, by reason of said actual knowledge of DCAS) at least four or five years after the said factual background of defendant’s alleged illegal conduct was known to plaintiff by reason of the other Army investigations, but in only a matter of days after service on Sperry Rand of the complaint in the antitrust action that is a subject of note 14,
supra,
this civil action was initiated in the United States District Court for the Northern District of Georgia which, on motion of defendant, transferred it to this Court in June of 1974.
20
For plaintiff to be entitled to a recovery under the False Claims Act aspect of this action, it must allege and prove that, in seeking or obtaining payment for the “defective” shell allegedly delivered, defendant
intentionally
defrauded the government. Proof of a specific intent to defraud is essential to a recovery under the False Claims Act.
United States v. Aerodex,
469 F.2d 1003, 1007 (5th Cir. 1972);
United States v. Priola,
272 F.2d 589, 594 (5th Cir. 1959). The essential elements of an intentional fraud are: that (a) a stated false representation was made (b) regarding a material fact (c) by one who did not believe it to be true (d) with the intent that it should be acted on (e) by one who believed it to be true and (f) was misled by it (g) to his (or his principal’s) injury.
Southern Development Co. of Nevada v. Silva,
125 U.S. 247 , 8 S.Ct. 881 , 31 L.Ed 678 (1888);
Socony Vacuum Oil Co., Inc. v. Allied Oil Corp.,
178 F.2d 239 (7th Cir. 1949). Each of these elements must be averred to state a cause of action for intentional fraud.
Socony Vacuum Oil Co. v. Allied Oil Corp., supra; CIT Financial Corp. v. Sachs,
10 F.R.D. 397 (S.D.N.Y.1950);
Curacao Trading Co. v. William Stoke & Co., 2
F.R.D. 308 (S.D.N.Y.1941).
The theory under which plaintiff seeks recovery for breach of contract is that its acceptance of the “defective” shell so delivered was obtained “by fraud or such gross mistakes as amount to fraud”, and, that, therefore, plaintiff can avoid (what
*71
otherwise would have been,
Gordon H. Ball, Inc.,
ASBCA No. 8316 , 1963 BCA 3925 ) the conelusiveness of its admitted acceptance under paragraph 5(d) of the General Provisions of each of the Supply Contracts, reading:
. . . [Acceptance shall be conclusive except as regards latent defects, fraud, or such gross mistakes as amount to fraud.
In each of the Supply Contracts, defendant agreed that, for the fixed prices (about $20 to $23) stated therein, it would produce, inspect and deliver to the government, in accordance with the drawings, designs and “applicable detail specifications” (all of which are sometimes collectively referred to hereinafter as the “tech data package”) stated (or incorporated.by reference) therein, the quantities of shell called for thereby.
' The somewhat detailed discussion next hereinbelow of the tech data package is included at this early stage of this decision because some knowledge thereof-— particularly respecting the interrelationship between the mentioned two types of inspection and the classification of defect charateristics — is
essential
not only to an understanding of the principal dispute between the parties but also of this court’s discussion of that dispute which follows thereafter.
Excepting certain modifications not here material, the “applicable detail specifications” (pursuant to which the government required all such shell acquired by it to be produced, inspected and delivered) were set forth in the provisions of FA-PD-MI-2720, Rev. 0, 15 April 1966, (the “PD”)
21
which provisions, as then so modified, were a part of each of the Supply Contracts.
Part 4 of the PD (the language of which was drafted for plaintiff by FA, as aforesaid,) reads, in part:
4.3.2 Examination. One hundred percent examination shall be performed for all critical defects. Examination for major and minor defects shall be performed on a defect basis
in accordance with the classification of defects contained herein,
using the sampling plans contained in MIL-STD-105.
22
Continuous sampling plans in accordance with MIL-STD-1235
23
may be used if approved by procuring activity. An AQL [Acceptable Quality Level] of 0.40 percent for each major defect of an AQL of 0.65 percent for each minor defect shall be used. All
non-conforming
material [disclosed by any of such methods of inspection] shall be rejected. [Emphasis supplied.]
The only “classification of defects” expressly made in the Supply Contracts is made in Paragraphs 4.3.2.1, 4.3.2.2 and 4.3.2.3, respectively, of Part 4
supra.
These paragraphs, respectively, list and
expressly classify
(as “critical”, “major” or “minor”) the sixty-seven characteristics for which defendant was required to make an inspection at one or more particular (stated) stages of the production process, (a) some before banding (b) others after banding but before paint and (c) still others after paint. And, according to “the classification of defects contained herein
(i. e.,
part 4,
supra)”,
two characteristics are expressly classified as “critical” defects, thirty-
*72
two characteristics as “major” defects and thirty-three characteristics as “minor” defects. Those here pertinent (including the two characteristics “burr” and “surface finish defects” that are the subjects of said dispute) are so classified by said paragraphs, as follows:
Paragraph Class Code Description
4.3.2.1 Critical 1 Metal defective
Minor 202 Surface finish improper
Minor 205 Burr
4.3.2.2 Major 116 Foreign matter in cavity
Minor 214 Surface finish improper
Minor 215 Burr
4.3.2.3 Critical 1 Pool of paint in cavity
Minor 208 Burr
Paragraphs 3.7.3, 3.7.4 and 3.7.7 of the PD read as follows:
3.7.3 Metal Defects. — All components shall be free from cracks, splits, cold shuts, pipe, porosity, inclusions or any other similar defect.
3.7.4 Surface finish. — The requirements for surface finish are as detailed in the applicable drawing.
24
The body cavity shall be free of scale, fins, deep seams, die scratches, pits or other surface discontinuities, the radii of which shall be . less than .030 inch.
25
The characteristics (cracks, splits, cold shuts, pipe, porosity and inclusions) which are specifically enumerated in paragraph 3.7.3,
supra,
as “Metal Defects” and which are classified as “Metal defective” critical defects (Code 1) by paragraph 4.3.2.1,
supra,
are the kinds of defects that the processes used in making steel (a raw material from which shell are made) can cause in the cavity (or elsewhere for that matter) of shell. On his deposition, Hinzman
26
testified, in substance, (p. 45 of April 28, 1975 deposition) that the term “defective metal”, as it is used in paragraph 4.3.2.1,
supra,
“is poor steel or dirty steel” and that these shell defects “are present in the steel from the [steel] mill.”
How “surface finish improper” and “burr” characteristics (which, respectively, are depressions in, or protrusions from, the metal surface) are caused to be in the cavity of a shell (in the process utilized by defendant to make shell) is described by the Armed Services Board of Contract Appeals in
United States Hoffman Machinery Corporation,
ASB CA No. 10906, 68-1 BCA [[7027 (1968), as follows:
[A shell is] formed out of billet steel
27
by means of a technique known as the hot forging process. In that process a metal punch, called a forging tip, [is] rammed into a piece of red hot steel thereby forming a cavity. The hot steel [is] then forced through a series of draw rings which [causes] the walls of the cavity to be elongated to their final size. As might be suspected, the hot forging technique
*73
[does] not produce smooth, machine finished surfaces in the cavity
The quality of a projectile’s cavity finish [is] directly related to the condition of the forging tip used in shaping the cavity. A forging tip [produces] fewer surface imperfections when it [is] new than it [does] when it [is] ready for replacement.
Under the authority of Paragraph 4.3.2 of Part 4 of the PD, plaintiff’s “procuring activity” (APSA) authorized defendant to use the “continuous sampling plans” in accordance with the plan set forth in MIL-1235. On his deposition, Hinzman, testified, in substance, (pp. 77-78 of March 20, 1975 deposition) that continuous sampling plans are designed for use in inspecting for defects that are caused by machinery during the course of a manufacturing process. Using the example alluded to during his deposition, if you are inspecting for a particular defect at a particular point on a production line that is stamping out nickels, you can assume that your manufacturing process is stabilized insofar as that particular defect is concerned when you “clear your ‘i’ factor” (e.
g.,
find “i” number,
28
say 230, consecutive nickels that reach that point on the line that are free of that particular defect) and, thereafter, sample inspect “at frequency f”
29
, say 1 out of 25, of the nickels that reach that point on the line until such time as you find that particular defect in one of the samples you pull for inspection; then you begin all over by screening until you can assume, by again clearing your “i” factor, that your manufacturing process is stabilized
(e. g.,
that the machine that caused the defect you found in the sample has been adjusted).
The particular “frequency f” and “i factor” that MIL-1235 requires to be used depend upon the volume of units being produced (say 1 to 1200, 1200-3200, etc., per 8 hour shift, per day, etc.) and are ascertainable from tables that are contained in MIL-1235.
30
From the sheer number of shell required to be manufactured under each of the Supply Contracts, it would seem that an objective third party observer, even without having knowledge of the contract provisions above quoted, would intuitively expect that some of the units delivered would not in fact meet all of the requirements of the drawings, etc., no matter how faithfully the producer has made any required inspection; further, that the number of such units which would not meet a particular requirement would vary, depending upon the severity of the inspection required to be made to ascertain whether the units meet that particular requirement; and further, that the more objectionable a purchaser deems a failure to meet a particular requirement, the more severe the inspection he would require his own, or his supplier’s, inspection personnel to make for the purpose of detecting and rejecting units in which such a failure occurs. This view, which it seems one would expect to feel intuitively, finds elaborate explicit support in the Supply Contracts. For example, MIL-1235, which was designed to provide inspections for use in gov-
*74
eminent acquisitions of all kinds of mass-produced manufactured items that might be needed by the Army (shell being just one of an almost unlimited number of such items),
31
provides, in parts here pertinent:
3.9 Defect. — ,. . . . Defects are
normally
classified according to severity (see 3.12).
3.12
Classification of defects
. — A classification of defects is an enumeration of pertinent defects classified acccording to their importance.
3.12.2
Critical Defects.
— A critical defect is a defect that
judgment and experience
indicate could result in hazardous or Unsafe conditions for individuals using or maintaining the product ....
3.12.3
Major Defects.
— A major defect, other than critical, that could result in failure or materially reduce the usability of the unit or product for its intended purpose.
3.12.4
Minor Defects.
— A minor defect is one that does not materially reduce the usability of the unit of product for its intended purpose, or is a departure from established standards having no significant bearing on the effective use or operation of the unit of product. [Emphasis supplied.]
Provisions that are comparable to the five paragraphs from MIL-1235 quoted next above are also contained in paragraphs 2.1, 2.1.1, 2.1.2 and 2.1.3 of MIL-105.
The fact that the Supply Contracts required that a “one hundred percent” (commonly called “screening”) type inspection be made for “critical” defects, but only required that a “sampling plan” type inspection be made for “major” and “minor” defects, and the distinctions in the respective procedures that are built upon and around those two types of inspections, must be clearly understood because the very fact that the two types of inspection exist, to say nothing of their application, is central tó understanding the error in plaintiff’s view that the tender to plaintiff by defendant of any shell not meeting a particular drawing, etc., requirement, is a breach of the manufacturing requirements, or of the inspection requirements, either or both, under the Supply Contracts.
The court expects that there can be no quarrel with the proposition that, if the government specifies in the contract that only “frequency f” of shell (say one in each group of 25 of the shell that reaches a particular point on the production line) will be required to be inspected for adherence to a particular drawing requirement and that, if that one is faithfully inspected and no defect is found in it, then that group of 25 will be deemed, for purposes of that contract, to meet that said drawing requirement, there is a mathematical probability that some number of shell out of the other 24 shell not inspected (and not required to be inspected for that same particular requirement at that same point on the production line) will not meet that requirement and will move on up the production line for further manufacturing processing. Stated differently, and in its most succinct form, if the government by contract has specified that only one shell in 25, etc., is to be examined for adherence to a particular requirement, the government has automatically thereby created a manifold probability that
some,
shell (“non-specification shell”) that do not meet that requirement will ultimately be delivered to the government,
and
that this could happen without the contract being ignored or breached and without the government being defrauded.
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Inasmuch, as is hereinafter shown, the governing documents, all drawn by the government, not only expressly state that the receipt of some nonspecification shell is “expected”, but also go on, as is next hereinafter shown, to evaluate that expectation quantitatively, it appears that the mere delivery by the defendant to the government of some number
(and especially some number not exceeding that expectation)
of non-specification shell cannot, standing alone, constitute either a breach of the governing contract or a fraudulent act.
By means of another table contained in MIL-1235, each of the AQLs that is specified in paragraph 4.3.2,
supra (i. e.,
“the 0.40 percent” and “0.65 percent” AQLs), for
each
“major” and
each
“minor” defect, respectively, can be converted into an equivalent AOQL which paragraph 3.18 of MIL-1235 defines, as follows:
3.18 AOQL.-The average Outgoing Quality Limit (AOQL) (stated as a percentage) is the largest fraction of defective material, which is
expected
on the average to pass inspection when the associated sampling plan is
followed faithfully.
[Emphasis supplied.]
Other parts of MIL-1235 here pertinent are:
3.15
Continuous Sampling Inspection.
-Continuous sampling inspection is the examination and/or testing of units of product as they move past an inspection station.
Only those units of product found by the inspector or screening crew to be nonconforming are rejected; the rest of the production, uninspected units as well as units found to be conforming, is allowed to continue down the production line as conforming material.
5.2
Order of
Production.-All inspection must be performed in the order produced. Moreover, all units must pass each inspection station [at which acceptance inspections are made for any defect]. This does not prevent
process
inspection by the supplier prior to submittal to the [acceptance] inspection station nor does it prohibit the supplier from removing [from the production line], or correcting units containing defects prior to submittal.
6.1
Determination of Acceptability.
The acceptability of product submitted shall be determined by use of a specified sampling plan.
6.2
Acceptance.-Durmg
100% inspection periods, the inspection is a sorting process during which good product is allowed to pass the inspection station, while the defective units are withdrawn from the product and returned to the contractor.
During periods of sampling inspection, the product is allowed to pass the inspection so long as the provisions of the plan selected are satisfied. Product which is allowed to pass the inspection station is considered acceptable for the defect (s) concerned, and is not subject to recall for further inspection for those defects except . [that upon] discovery of a critical defect
during sampling inspection, the required screening will begin with the unit of product just after the last defect-free sample unit. [Emphasis supplied.]
Contra to the situation with respect to units containing “critical” defects, which defendant was required by the “one hundred percent” inspection procedures to reject (irrespective of how, where or when found before delivery) and which defendant, if it had any knowledge that such unit contained such a defect, could not return it to the production line (for any purpose other than using the production line merely as a conveyor system by which to move such eighty pound units from one place in the plant to another), the said “sampling” plan procedures, with exceptions not here significant, provided, as shown,
inter alia,
(a) that a required sampling plan inspection be made for each of cer
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tain (specified) “major” and “minor” defects at a (stated) particular stage of the production process
(i. e.,
paragraphs 4.3.2.1, 4.3.2.2 and 4.3.2.3, respectively, required that certain of such defects be so inspected for before banding, others after banding but before painting, and still others after painting), (b) that only
“nonconforming”
units found in any of such required sampling inspections be rejected and (c) that a unit that had been properly passed on a required sampling inspection for a particular “major” or “minor”' defect (in this example called a “first defect”), even though defective by reason of that defect (for example, one of the say 24 in 25 that, not having been selected for inspection in the sampling process, was not required to be actually inspected for the first defect), was “considered acceptable for the defect concerned
[i. e.,
the first defect in this example]” and was “not subject to recall for further inspection” for that defect, with the consequence that, if a unit had properly passed sampling inspection for the first defect and was thereafter set off the production line for a proper purpose (such as, for example, so that it could be repaired for a subsequently discovered “major” or “minor” defect of another kind [the “second defect”]), defendant was authorized, insofar as the first defect was concerned, to return the unit to the production line at any time after the purpose for which the unit had been so set off had been accomplished (such as, for example, after the second defect had been repaired and the unit had been properly subjected to and had passed any after-repair inspections specified for a unit that had undergone repair for that kind of defect), and to do so with the intention that that unit (containing the undetected first defect) would “continue down the production line” and, still containing the first defect, be delivered to the government “as
conforming
material” that the government was due to accept and for which the government was due to pay.
Although, as stated above, one or more of paragraphs 4.3.2.1, 4.3.2.2 and 4.3.3.3,
supra,
expressly list “burr” and “surface finish improper” characteristics as “minor” defects, and although it is nowhere expressly stated in the PD that such defects are “critical” defects, plaintiff insists herein that, depending on the degree of severity, some “burr” and “surface finish defects” are classified as “critical” defects by the PD. Such insistence by plaintiff is a principal basis for its contention herein that defendant is guilty of breach of contract and fraud. This insistence by plaintiff arises from the fact that defendant admittedly did not, with respect to those two named defects, follow the procedures “required” by the Supply Contracts for “critical” defects
(i. e.,
plaintiff claims that defendant did not make “one hundred percent inspections” for those two defects, and that defendant [under circumstances when such action would have been proper only in the case of units containing “major” or “minor” defects] “returned to the production line” units
knowing
that they contained one or more of such two named defects, etc.).
The premise for said insistence by plaintiff is bottomed on its contentions herein (a) that MIL-1235 and MIL-105 are each referenced in the PD, (b) that paragraph 3.12.2,
supra,
of MIL-1235 states that a “critical” defect is “a defect that judgment and experience indicate could result in hazardous or unsafe conditions for individuals using or maintaining the product”, and (e) that the judgment and experience of government ammunition specialists indicate that some “burr” and “surface finish improper” defects have .been demonstrated to be so severe as to be as, or more, “hazardous,” etc., “for individuals using or maintaining the product”, than some of the “metal defective” characteristics that are expressly classified by paragraph 3.7.2.1 as “critical” defects. On the premise of these facts, plaintiff, by evidence and oral argument,
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32
claims that, under the rule of construction known as
ejusdem generis,
i. e., that where, as in paragraph 3.7.3,
supra,
general words
(i. e.,
“other similar defects”) follow an enumeration of particular things
(i. e.,
the characteristics “cracks, splits, cold shuts, pipe, porosity, inclusions”), such general words as a matter of law' must be held to include other characteristics of the same general kind or class as those specifically mentioned
(i. e.,
all characteristics, including, but not limited to, those listed in paragraphs 3.7.4 and 3.7.7 if they are of such severity that the “judgment and experience” [of plaintiff’s ammunition experts] indicate that they too could result in “hazardous or unsafe conditions . . . .”).
This position by plaintiff has been a, perhaps the, most bitterly fought legal issue — not only in this civil action but also in the criminal action. Defendant, in opposition, argues that only a moment’s contemplation is necessary for one to correctly conclude that the “judgment and experience” referred to in paragraphs 2.1.1,
supra,
of MIL-105 and 3.12.2,
supra,
of MIL-1235 must be such judgment and experience, if any, as may be exercised by the government
before
the time its procuring authority requests a bid or proposal for a shell supply contract; that, if it were otherwise and the “judgment and experience” in question were exercisable by those various persons, firms and corporations who might be selected (by means of competitive bid or otherwise) as shell suppliers on the basis of best (all factors considered) price, as the law contemplates that they be, then those suppliers who had had no experience (with the loading or use of ammunition, or otherwise) on which to base an informed judgment would have a decided advantage over those who might have had much such experience because the former might contractually be entitled to reject as “criticáis” no units containing any paragraphs 3.7.4 and 3.7.7,
supra,
characteristics while the latter would be required to reject, as “criticáis” (and to repair, scrap or replace) a substantial part of its production (to say nothing of the added consequence that, each time such a unit was rejected, the more experienced would have imposed on it the added consequence of an extra screen until 2500 consecutive units free of such characteristic had been found); and that plaintiff’s contention totally ignores paragraph 3.9,
supra,
which provides that defects will
“normally”
be classified according to “severity” — that no potentially interested supplier who is asked to respond to a request for a proposal of the price for which he will make shell could determine from the government’s formal requests for such proposal (which historically have purported to state what it is that the government wants the successful offeror to do) but that, under the government’s overall ammunition program, the government already had obtained (as it had with Sperry Rand when defendant entered into the Supply Contracts), or might then already be intending thereafter to obtain, other contracts whereby the government would pay a
loading
contractor to make some (and, if so what) other repairs, inspections or modifications of the shell that the government might from time to time desire to have made of the shell to be supplied before they were loaded. Defendant further contends, in this regard, that, assuming arguendo that there is an ambiguity in the PD which should be resolved by the
ejusdem generis
rule of construction, that what the “particularly enumerated” characteristics (“cracks, splits, cold shuts, pipe, porosity, inclusions”) enumerated in 3.7.3,
supra,
have in common one with the other is the fact that each of them is a metallurgically definable steel making process caused kind of cavity defect (a “steel mill caused cavity defect”) that has an adverse effect on the soundness and strength of the
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metal; that a construction such as that contended for by plaintiff would not only nullify, but also be directly contrary to, those respective parts of paragraphs 3.7.2.1, 3.7.2.2 and 3.7.2.3 that expressly classify the two defects in question as “minor” defects without any stated exception on account of severity or otherwise; further, that, only by construing the said phrase “other similar defects” so that its meaning is limited only to metallurgically definable steel mill caused cavity defects that have an adverse effect on the soundness and strength of the metal can all of the various parts of the Supply Contracts be made meaningful and be construed as a harmonious
whole
— e.
g.,
the phrase “other surface discontinuities, the radii of which is less than 0.30 inch” in paragraph 3.7.4, similarly construed, would thus mean and be limited to shellmaking “process caused” (or “process induced”) defects, “the radii of which is . . . ”;
33
and, finally, that, under the ever changing subjective standard suggested by plaintiff (i.
e.,
the judgment and experience of those persons who might from time to time be plaintiff’s ammunition specialists), a shell supplier who rejected a shell for a paragraph 3.7.4 or 3.7.7 defect but thereafter cleared an “i” factor of only 230 shell (as required for a “minor” defect) instead of 2500 shell (as required for a “critical” defect), would not know until six or eight years later,
after
two petit juries, respectively, had returned verdicts in a criminal case
and
in a civil case, whether by so doing he had defrauded the government or had subjected himself to liability for a False Claims Act violation.
Irrespective of whether either, both or neither of the parties is correct about how the phrase “other similar defect” should be construed, it appears that, because of the significant effect that the provisions quoted hereinabove from the PD and from MIL-1235 will have on what might reasonably be “expected” by the parties to a supply contract, the matter of whether a supply contract will require a particular defect characteristic to be inspected for on a “one hundred percent” or on a “sampling” basis should be considered by and known to the parties
before contracting
— by those charged with government procurement, in order to protect the interests of the government by agreeing to pay for enough but not too much or unnecessary inspection, and by the supplier, in determining the price he will quote or bid in order to determine the cost to him of the inspection system that he must provide as well as the cost to him of the repair, scrapping or replacing (and the handling incident thereto) of the defective units that might reasonably be “expected” to be detected by an inspection made at the required degree of severity — because, once such designation as to any particular defect characteristic is made in a supply contract, it is a material provision of the document to which both parties must look in order to determine their respective rights and liabilities, not only with respect to the severity of the required inspection for that particular defect characteristic but also their rights and liabilities with respect to the repair or replacement of any defective units that might or might not be disclosed by an inspection made for that defect at that degree of severity.
Thus, if, on the one hand, the government determines that it desires that the lots and sub-lots of the units it purposes to acquire by a supply contract be free of a particular defect characteristic (excepting the relatively few such units that might reasonably be expected to escape detection as the result of human fallibility), then, by agreeing with its supplier
in the supply contract
that such characteristic will be inspected for
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on a “one hundred percent” basis, the government, because of its supplier’s contractual obligation in that regard, could reasonably expect to realize its quality expectation with regard to that defect characteristic.
On the other hand, however, if the government, for economy or other reason, determines that it is willing to tolerate a particular defect characteristic in up to a certain percentage of the units it proposes to acquire, then, by consulting said table in MIL-1235, it can find the AQL for the degree of the severity (whether 1 in say 10, 25, 50, etc.,) of the “sampling” inspection that it should by contract require to be made for that particular defect in order to achieve its quality expectation; and then, by agreeing with its supplier in the supply contract, that that characteristic, for the purposes of the supply contract, will be deemed to be a “major” or “minor” defect (with that particular AQL) and that it will be inspected for as such on the “sampling” basis at the degree of severity required by MIL-1235 for defect characteristics having that AQL, the government could (at least the statistical probabilities would be such that it could) reasonably expect to realize its quality expectation with regard to that defect characteristic.
Therefore, it follows that, if the government drawn PD is interpreted literally, by agreeing to said provisions in paragraph 4.3.2,
swpra (i. e.,
that defendant would only be required to inspect for those thirty-two particular characteristics classified by the Supply Contracts as “major” defects on a sampling basis, as provided in MIL-1235, for defects having an AQL of 0.40 percent and that defendant would only be required to inspect for those thirty-three particular characteristics classified by the Supply Contracts as “minor” defects on a sampling basis, as provided in MIL-1235, for defects having an AQL of 0.65 percent), the parties to the Supply Contracts, in effect, acknowledged (a) that it was “expected” by each party thereto that (paraphrasing paragraph 3.16,
supra),
if the continuous sampling plans under MIL-1235 were “followed faithfully”, the deliveries made under the respective contracts,
“on the average”,
would contain “up to” certain percentages (computable by what amounts to a fixed formula in MIL-1235) of units that would be non-specification shell by reason of
each
one of the thirty-three characteristics that were classified under such contracts as “major” defects and “up to” certain percentages (likewise computable) of units that would be non-specification shell by reason of
each
one of the thirty-three characteristics that were classified under such contracts as “minor” defects; and (b) that, if such sampling plan were “followed faithfully” and “on the average” it turned out that way, the government could not rightly complain about the non-specification
(i. e.,
“defective”) units so delivered as it would have obtained exactly what it had bargained to receive. There is, therefore, a vital distinction that must be made in this action between a “defective” shell and a
“nonconforming”
shell, and this distinction will be discussed hereinafter. But it should be emphasized here that one does not breach a contract simply by delivering, or violate the False Claims Act simply by submitting invoices by which he seeks payment for, “defective” material that the government ordered, “expected” to receive, and agreed to pay for.
Alleging that this distinction had been ignored by plaintiff in making its said allegation that defendant had delivered “18,000
defective
shell, more or less” and that such deficiency was in no way cured by plaintiff’s conclusory allegations that the delivery of such shell had been made “fraudulently”
34
and “knowingly”
35
, defendant filed here
*80
in its Motion to Dismiss or, in the Alternative, for a More Definite Statement (“motion to dismiss”). The motion to dismiss also claimed that plaintiff’s allegation that defendant “failed to perform
required
inspections” did not take account of the distinction between “process” and “acceptance” inspections.
36
The importance in this civil action of the mentioned distinction between “defective” shell and “nonconforming” shell is pointed up by plaintiff’s answers to defendant’s Interrogatories 43, 50 and 57 which interrogatories,
inter alia,
were obviously designed to demonstrate that plaintiff’s claims herein exceeded what it reasonably could have “expected” of defendant under the Supply Contracts. Interrogatory 50 reads, in part, here pertinent-:
50. State the total number of each kind of “major” defect that could reasonably be “expected” to be delivered to the United States by a supplier of shell who in inspecting same “followed faithfully” the plan of inspection specified in MIL-STD-1235, if the AQL specified for each such major defect was 0.40% [the AQL specified by paragraph 4.3.2,
swpra,
for
each
of said thirty-two major defects] and the total number of shell delivered were . . .(b) 1,003,000 [the number delivered under the 1967 supply contract] (c) 660,000 [the number delivered under the 1969 supply contract].
Plaintiff’s answer to parts (b) and (c) -of that interrogatory, in substance, is that, under the hypothetical contracts posed (which, respectively, in this aspect are identical in all respects material to this discussion with the 1967 and 1969 Supply Contracts), the government could reasonably expect that the respective numbers of
each
of the thirty-two kinds of “major” defects that would be present in the shell delivered to it by a supplier would vary from minimum numbers to (depending upon certain assumptions not necessary to discuss here) maximum numbers, as follows: (b) under the first contract posed (comparable to the 1967 Supply Contract) from a minimum of 17,653 to a maximum of 23,777 and (c) under the second contract posed (comparable to the 1969 Supply Contract) from a minimum of 11,616 to a maximum of 15,599. The results of simple addition show that comparable minimum and maximum numbers for
each
of the thirty-two kinds of “major” defects under
both
contracts would be 29,269 and 39,376, respectively.
Because the AQL specified by paragraph 4.3.2,
supra,
for each of the thirty-three kinds of “minor” defects is “0.65 percent” (instead of the “0.40 per
*81
cent” that is so specified for each of said thirty-two “major” defects), it is obvious that the respective minimum and maximum numbers of
each
of such thirty-three kinds of “minor” defects that could have reasonably been “expected” by the government to be present in the shell delivered to it by a supplier under the posed contracts (which, insofar as here material are not unlike the 1967 and 1969 Supply Contracts) would certainly be no less than the comparable maximum and minimum numbers, respectively, that are stated for “major” defects in the next preceding paragraph.
Interrogatory 43 requested, in substance, that plaintiff break down the claimed defects in the 18,000 shell “by lot” and “by class and sub-class”. Plaintiff made its first answer to this interrogatory on July 12, 1974, and thereafter, filed the answers or supplements thereto (described below) in response to informal objections made by defendant, in substance, that plaintiff’s next preceding answer, as amended or supplemented, was “incomplete or evasive”. Plaintiff’s first answer to Interrogatory 43 listed the 18,000 shell “by lot” but it did not classify, nor supply sufficient information by which to classify, such shell as “critical”, “major” or “minor” defects. Plaintiff’s second answer, dated July 26, 1974, listed the 18,000 shell “by lot” and, assuming the document referred to therein was the PD (and not the PD, as amended in March 1970 by the Engineering Orders [“EOs”] that are hereinafter discussed
37
), also listed such shell by “class and sub-class” except as noted, as follows:
(a) listed “by lot” 8403 shell delivered under the 1967 Supply Contract that plaintiff claims were “defective”
(i. e.,
Lot 86, 2685; Lot 87, 2965; Lot 88, 1715; Lot 89, 423; Lot 90, 259; Lot 91, 188; Lot 92, 35; and Lot 93, 169); and classified, or supplied information (a defect code number) whereby a classification could be made “by class (but not “sub-class”) of 5777 as “major” or “minor” defects of eight kinds (174 of one kind and 248, 1702, 120, 1270, 479, 1781 and 1226, respectively, of the other kinds). The remaining 2669 were listed as:
3.7.5. thread defects 1403
3.7.4. surface finish improper 1226
(b) listed “by lot” 10024 shell delivered under the 1969 Supply Contract that plaintiff claims were “defective”
(i. e.,
Lot 133, 2027; Lot 134, 1493; Lot 135, 30; Lot 136, 1545; Lot 137, 1502; Lot 138, 1463; Lot 144, 709; Lot 145, 127; Lot 146, 53; Lot 147, 57; Lot 148, 102; Lot 149, 60; Lot 150, 87; Lot 151, 123; Lot 152, 261; Lot 151, 123; Lot 152, 261, and Lot 153, 310); and classified, or supplied information (a defect code number) by which same could be classified “by class”, and, except in the case of the “criticáis”, by “sub-class” as follows:
(i) 496 “critical” defects (106 in Lot 133; 25 in Lot 134; 6 in Lot 135; 17 in Lot 136; 30 in Lot 137; 137 in Lot 138; 21 in Lot 144; 12 in Lot 145; 18 in Lot 146; 15 in Lot 147; 39 in Lot 148; 17 in Lot 149; 28 in Lot 150; 11 in Lot 151; 8 in Lot 152, and 6 in Lot 153);
(ii) 9,114 “major” defects of eighteen kinds (7064 of one kind; and 13, 1, 5, 7, 15, 2, 13, 6, 1, 38, 1291, 1, 10, 641, 1, 3, and 2, respectively, of the other kinds); and
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(iii) 414 “minor” defects of four kinds (36 of one kind; and 125, 38 and 215, respectively, of the other kinds).
Thereafter, plaintiff filed a supplement (dated September 10, 1974) to its answer to Interrogatory 43, reading “Specification FA-PD-MI-2720 referred to (in the answer dated July 26, 1974) should read “FA-PD-MI-2720, Revision 0, dated 15 April 1966”.
Interrogatory 57 requested, in substance, that, with respect to each of the inspections of defendant-made shell which were performed as a part of the other Army investigations, plaintiff state precisely what criteria were used to set aside and classify defects allegedly found in such shell. Plaintiff’s answer, dated July 22, 1974, thereto stated, in substance, that the criteria so used were those stated in the PD.
On September 24, 1974, defendant filed herein a Motion for Sanctions under FRCP 37 (“Motion for Sanctions”) claiming,
inter alia,
that plaintiff’s respective answers, as then last supplemented or amended, to Interrogatories 43 and 57 were “incomplete, evasive
and
false.”
38
In that motion, defendant pointed out (a) that plaintiff’s first answer to Interrogatory 43 had been made in “on information and belief” form by L. C. Chandler (QARIC, LAAP) who admittedly had no personal knowledge of the relevant screenings of Lots 86 to 93, (b) that plaintiff’s second answer to Interrogatory 43, dated July 26, 1974, and its said answer to Interrogatory 57, although made in “as of fact” form, were each made by an APSA attorney (the “APSA attorney”) who not only had no personal knowledge respecting any of the relevant inspections but also had made prior statements (apparently based on his knowledge of records appertaining to such inspections) that were contradictory of the said answers by him,
39
and (c) that plaintiff’s answer to Interrogatory 43, as last amended and supplemented, by Chandler, insofar as it dealt with the approximately 500 “CRITICAL Metal Defects” which that answer, as so supplemented, stated were found in the inspections of Lots 133, et seq., is directly contradictory of testimony which the official court reporter’s transcripts show was given by every witness, including Chandler, who was called by the government to testify at the criminal trial who claimed to have personal knowledge of the results of said inspections. In argument at the hearing next referred to, defendant, in support of this motion, directed the court’s attention to the government statement (Exhibit 29 in the Addendum, the “April 29, 1971, Response”) filed in the criminal action pursuant to court order which defendant claimed was also contradictory of plaintiff’s said answer.
40
*83
On October 8, 1974, this court heard defendant’s motion to dismiss and, for the reasons stated iii its order of October 9, 1974, ordered plaintiff to amend its complaint
to state with particularity the circumstances constituting the alleged fraud.
After stating that it intended to enter such order, the court, at the October 8, 1974, hearing then directed counsel in open court, in substance,
inter alia:
(a) That, by reason of their respective five-year intensive investigations and the long criminal trial, each party already knows what the other knows about the facts of the case and it is highly unlikely that either party will, know any more about the facts of the case at the time of the trial than it now knows ;
41
(b) That, from defendant’s point of view, the charges made here are even more serious than those that were made against it in the criminal case. In the criminal case, the maximum penalty that could have been imposed on defendant in the event of a conviction would have been a fine of $150,-000. Here, if plaintiff prevails, the double damages claimed plus the penalty the law will exact will be almost ten times as great. As the court understands the contracts, each of the 18,000 shell in question was required to be subjected to and to pass 67 inspections. That is over one million inspections. It is not disputed that, during the relevant time periods, defendant utilized hundreds of employees in a multishift operation. Under the Barron and Holtzoff principle cited by defendant,
42
the court has a duty to see to it that defendant has a fair opportunity to defend itself and that means in this instance that defendant should not be required to prepare to defend a million inspections and the acts or omissions of hundreds of employees if the facts are that plaintiff claims that only a few were involved. In the ordinary case with a solvent plaintiff, a defendant could protect itself to some extent from imprecise allegations or totally unfounded charges by requests for admissions, but FRCP 37 exempts plaintiff from the penalty of a wrongful refusal to make admissions. In the ordinary case, a defendant could also protect itself to some extent by interrogatories but, as the record in this complex case shows, many of the interrogatories that defendant propounded in April 1974, more than six months ago, have not been answered and defendant is now asserting that answers that have been made to other of those interrogatories, some of which answers have been already amended or supplemented several times, are still incomplete and evasive. Moreover as a practical matter, defendant cannot effectively inform itself by depositions respecting the claimed in-plant wrongdoing until and unless it is better informed as to which of the million inspections and as to which of its hun
*84
dreds of employees it is that plaintiff really and in fact claims were involved in such wrongdoing.
(c) That, if the material facts in dispute are narrowed by the pleadings as the court is ordering that they be, this case can be tried in a week. If they are not so narrowed, the trial of this action will take as long or longer than the criminal action. A precisely worded complaint will go a long way toward-narrowing the issues. Consequently, the court does not want plaintiff to make any vague or catchall allegations for fear of being boxed in. In the unlikely event that any other instances of wrongdoing come to plaintiff’s attention after it amends its complaint, the court will be very liberal about permitting a further amendment to take them into account.
(d) That the amended complaint which the court’s order contemplates plaintiff will file should be drafted with specificity not unlike that required in the case of a request for admissions. With respect to each of the “numerous occasions” of claimed wrongdoing, plaintiff must articulate in its amended complaint, not only nonconelusory factual allegations that show the elements of fraud but also every fact it knows or can reasonably find out, including names, that will help the defendant and the court to identify a transaction or event and those who participated in it. Plaintiff can even make every sentence that contains a material factual allegation a separate paragraph; and then, if it wants to, it may accompany its amended complaint with a request for admissions and, in that way, shift to defendant its expense of proving any allegation that defendant wrongfully fails to admit. [In response to a comment by lead counsel for plaintiff, in substance, that an amended complaint in this action that would be so particularized would be very, very long], the court does not care how many pages long it is. A long complaint, even one that is a hundred pages long or longer, would be preferable to the long discovery and trial that will otherwise occur.
(e) That the court intends to make defendant be equally specific in its denials and admissions. However, defendant cannot make meaningful admissions or denials unless, as the court is requiring, plaintiff amends its complaint so as to state, by nonconelusory allegations, facts that will show that defendant, by putting a shell with a particular defect characteristic at the particular point on the line it is claimed it was put on, or that defendant, by failing, at a particular point on the line to make an inspection for a particular defect characteristic that it is clamed was omitted, violated defendant’s duty under the contract. Defendant has cited instances, for example the Gissendanner accusations
43
respecting an inspection that the government contended at the criminal trial was a “required” inspection and that the defendant then contended was an “in-process” inspection that, under express language of the contracts, it could make or not make at its election. At this stage, even if it be assumed
arguendo
that what defendant has said about the Gissendanner episode did not happen and was a figment of imagination that its counsel used for illustrative purposes, it has cause the court to be very impressed with the probable validity of defendant’s contention that whether a shell that defendant will admit contained a particular characteristic is “defective”, or is “nonconforming” in the sense that it does not meet the quality requirements of the Supply Contracts, or whether a particular inspection that defendant will admit was not made is a “required” inspection may depend entirely upon a construction of the terms of the contracts in which events it may be that such matters should be resolved by the court before trial as a matter of law.
(f) That this case is going to be tried on the basis of facts — not innuendo.
*85
The contracts contemplate that some shell with major and minor defects would be delivered and there seems to be no dispute but that (a) defendant had a right to return defective shell to at least some points on the production line for some purposes such as, for example, to repair them, to bonderize them so as to prevent rust while they were awaiting repair or merely so that the conveyor system that was a part of the production line could be utilized in moving them from one point to another in the plant, or (b) but that, as defendant has illustrated by use of the Snider report
44
of his investigation of the Gissendanner episode, both defendant and the DCASB’ham representatives interpreted the contractual language in such a way that defendant had a right to do such things for such purposes irrespective of whether any government representative was present at the time. Therefore, as defendant has also illustrated by use of the Snider report, it appears that an allegation that Mr. X, at a time when no government inspection personnel was present, returned defective shell to the production line with the intent that they be delivered to the government is not enough because, for aught appearing from such an allegation, the shell might have been put on the line in the ordinary course of the" business with the intent that they be delivered to the government only
after
they had been properly repaired and had passed all required inspections. It is not enough to allege that a defective shell was returned to the production line. The amended complaint must contain nonconclusory allegations of fact showing that such shell at least got to the end of the line and was' delivered to the government.
(g) That plaintiff has no case, either under the False Claims count or under the contract count, unless it can articulate nonconclusory allegations of facts that prima facie show fraud. If plain-
tiff, with the benefit of years of intensive investigation and the long criminal trial, is not now in position to articulate such facts with respect to any one or more of the “numerous occasions” of which it complains, the court does not understand how plaintiff could reasonably expect that it would be able to offer evidence by which such facts would be articulated at any trial. And, consequently, the court does not want the amended complaint to be cluttered up with allegations about any such occasion(s).
Defendant’s Motion for Sanctions was also a subject of said October 8, 1974, hearing and of this court’s order of October 9,1974. Sensing that plaintiff’s apparent reluctance to make a full and complete answer to Interrogatories 43 and 57 might be occasioned by the fact that plaintiff was attempting to avoid a summary disposition of some part or all of this civil action, the court at said hearing, also directed counsel, in substance,
inter alia:
(a) That, in paragraphs 100 to 102, inclusive, of its motion for sanctions, defendant had quoted excerpts from the official court reporter’s transcripts (which transcripts defendant made available at the hearing for use by the court and opposing counsel) of the testimony of Chandler, DiGiovannantonio, and LeJeune; that it appeared therefrom that each of those persons had participated to some extent in some or all of the inspections made at LAAP of shell from the lots in question; and that, although each of them had been called by the government as a witness in the criminal action, it appeared there might be an inconsistency between testimony given by such persons, respectively, on their cross-examinations at said criminal trial, on the one hand, and plaintiff’s said answers as last supplemented or amended, on the other hand, with
*86
respect to what criteria were in fact used, in the inspections that were made as a part of the other Army investigations, in setting aside and classifying characteristics as “criticáis”;
(b) That, from the court’s examination thereof, it seemed that there might also be a similar inconsistency between said answers and the response that the government filed in-the criminal action on April 29, 1971, in that characteristics that were there characterized as “suspected” criticáis in said answers were classified as “criticáis”;
(c) That, in the court’s view, the matter of precisely what criteria were so used in the said other Army investigations appeared to be the, or at least one of the, most crucial matters in the action;
(d) That, because the matter of precisely what criteria were in fact so used, as aforesaid, did appear . to be so crucial, the court would enter an order, and was now expressly directing, (i) that plaintiff’s (lead) counsel or his designee discuss each of the particulars wherein defendant is contending that plaintiff’s answers to Interrogatories 43 and 57 are false, incomplete or evasive or are contradictory with said testimony and response, with each of Chandler, DiGiovannantonio and LeJeune
45
and with any other person by whose testimony plaintiff expects at the trial to establish the particular criteria utilized in the other Army investigations in setting aside and classifying that part of the 18,000 shell which were then set aside and classified as “criticáis”; ■
(e) That such order will also direct that plaintiff, after the discussions have been held that are a subject of the remarks just made, and on the oath or affirmation of each person whose testimony plaintiff expects to use at the trial, as aforesaid, make and reserve full and complete answers to defendant’s said interrogatories 43 and 57, and that such reserved answers be specific,
inter alia,
as to whether the criteria that in fact were so utilized were some (and, if so, what) part(s) or all of one or more of:
(i) the criteria stated in the specifications FA-PD-MI-2720, Revision 0, dated April 15, 1966, (the “PD”) which were a part of the Supply Contracts;
(ii) the criteria stated in the PD, as said specifications were thereafter “tightened”, either orally or in writing, and if so, a full description of the nature by which and the date on which same were so “tightened”; and
(iii) the criteria stated in the PD, as same were “tightened” by the EOs (Engineering Orders that emanated from FA) dated March 19, 1970
46
(f) That the court was directing that such discussions be held to the end that the court might have some assurance that any prospective signer of either of the answers to be re-served, as aforesaid, would have the particulars of defendant’s said contentions in mind when and if he made either or both of such answers; and that, if, as the result of any hearing that the court might hereafter hold respecting the matter, the court should ascertain, on the one hand, that, after being cautioned by counsel, as directed, any person has made a false answer respecting the particulars here
*87
under discussion, the court now feels it would have a duty to refer the matter to a grand jury for investigation as to whether the facts were such as to warrant any indictment(s) for perjury or subornation of perjury; and that, if, on the other hand, the court should so ascertain that any person had made a false answer respecting such particulars and should further ascertain that, before making such answer, such person had not been so cautioned by counsel, the court now feels that it would be its duty to take action whereby plaintiff’s lead counsel would be. cited for contempt.
On November 12, 1974, plaintiff, in response to the court’s order of October 9, 1974, filed its first amended complaint (the “amended complaint”). As was the case with the original complaint, the amended complaint contains two very general allegations of fraud (paragraphs 18 and 19) which can be summarized as follows:
Paragraph 18
charges that defendant on “numerous [but otherwise unspecified] occasions during its performance of the contracts” knowingly and fraudulently violated the contract inspection procedures by
returning “defective” shells to the production line
(without the knowledge or approval of plaintiff).
Paragraph 19
charges that defendant on “numerous [but otherwise unspecified] occasions during its performance of the contracts” knowingly and fraudulently violated the contract inspection procedures by not performing the
“required inspection” of
shells (without the knowledge or approval of plaintiff) resulting in the intentional delivery to plaintiff of shells which had not been inspected for defects in accordance with the contract.
The amended complaint also describes in paragraphs 27, 28 and 29 three specific transactions (discussed hereinbelow) that plaintiff claims support, or constitute a basis for some one or more of, the general allegations of fraud made by it in paragraphs 18 and 19,
supra.
In paragraphs 23, 25 and 31, plaintiff names twenty-nine persons and alleges that they, together with other former employees of defendant “whose identities are presently unknown to plaintiff,” engaged in or directed (without stating how, when or where) the alleged {without specifying which of the) fraudulent acts or omissions that are subjects of the general allegations of fraud made in paragraphs 18 and 19,
supra.
47
Then in paragraph 33, without stating by reason of what defect or by what criteria such shell were determined to be “defective”, plaintiff alleges that “[a]s a consequence of the foregoing fraudulent acts and omissions, from, in or about August 1968 through December 1969, defendant knowingly and fraudulently, delivered approximately 18,000
*88
defective
shell, more or less, to plaintiff.” (Emphasis supplied.)
At about the same time plaintiff filed its amended complaint, it also re-served and filed herein answers (the “re-served answer[s]”) to Interrogatories 43 and 57. The re-served answer to Interrogatory 43 was made in three parts:
(a) part one — in “on information and belief” form by the APS A attorney which supplied the same (but no more) information with respect to shell delivered under the 1967 Supply Contract as that which was supplied with respect to those same shell by plaintiff’s hereinabove described answer, as theretofore last amended and supplemented, to Interrogatory 43; and
(b) parts two and three — in “as of fact” form by Chandler and DiGiovannantonio which supplied the same (but no more) information with respect to shell delivered under the 1969 Supply Contract as was supplied with respect to those same shell by plaintiff’s hereinabove described answer, as theretofore last amended and supplemented, to Interrogatory 43.
48
In response to Interrogatory 57 which,
inter alia,
asked, in substance, that plaintiff state precisely what criteria were used in each of the inspections (made in the other Army investigations in which any defendant-made shell were set aside and classified), plaintiff filed two identical answers, one by Chandler and the other by DiGiovannantonio, Charles Fairbum (shell engineer, FA), and Robert Coyle (metallurgist, FA) which read, in part here pertinent:
The criteria utilized for the Government’s verification inspection
49
of shells was Item Specification FA-PD-MI-2720, Rev. 0, 15 April 1966.
During the inspections, certain defects known as burrs, scale, pits, fins, embedded material and machining marks were considered to be critical defects,
if
the noted defect was large, sharp, or deep, so as to be hazardous to personnel using a loaded shell with such defects. In making this classification the inpectors considered the definitions of critical defect as found in MIL-STD — 105D and MIL-STD-1235 which were incorporated into said item specification by reference. ******
Although “burr” and “surface finish improper” are listed as minor defects under PD 2720, Rev. 0, dated 15 April 1966, the classification as critical of some burrs, scale, pits, fins, embedded material and machining mark defects was made based upon our judgment and past experience and not pursuant to a “tightening” of said specification or the March 1970 amendment to PD 2720, Rev. 0, April 1966. If the defects, as described above, are determined to be minor in accordance with the classification of defects set forth in PD 2720, Rev. 0, 15 April 1966, our
*89
error in so classifying these defects as critical was based upon past experience and judgment that these defects may cause an unsafe condition in a high explosive projectile at the time of firing, thus endangering the lives of the gun crew, rather than to a deliberate falsification or to any conscious adherence to a “tightening” of specifications or to the application of the March 1970 amendment to the item specification.
On November 27, 1974, defendant filed herein (a) a motion (“Motion to Dismiss”) to dismiss the amended complaint and (b) amended its Motion for Sanctions by assigning as additional grounds therefor,
inter alia,
that the re-served answers were “incomplete, evasive, or false”.
In support of its said Motion to Dismiss, defendant claimed that the amended complaint was as legally insufficient as the original complaint — that, in fact, except for the addition of the “window dressing” of (a) a “meaningless listing of twenty-nine names” and (b) allegations respecting the “three already discredited (in the criminal trial) transactions that are subjects of paragraphs 27, 28 and 29”, the amended complaint, in substance, was “no more a compliance with the court’s order of October 9, 1974, than the filing of a carbon copy of the original complaint would have been”. In support of its motion, as amended, for sanctions (“Motion for Sanctions, as amended”), defendant, in addition to the matters noted in the preceding footnote, (a) claimed that the same inconsistencies existed in the re-served answers that it had theretofore cited between the previous answers to those interrogatories, on the one hand, and the said excerpts from the testimony at the criminal trial and the government’s said April 29,1971, response, on the other hand, which, so defendant claimed, demonstrated that the re-served answers were false and (b) pointed out a number of instances of “weasel wording” therein which, so defendant claimed, made the re-served answers incomplete and evasive.
Although it was somewhat taken aback by the unexpected lack of specificity in the amended complaint and by the fact that the problem of the inconsistencies (which the court had sought to cure by ordering a re-service of answers to Interrogatories 43 and 57) rather than being cured had been magnified by vacillation in parts of the re-served answers, the court, being reluctant to dispose, other than on its merits, of an action involving such serious charges by the government, assumed that, by such minimal allegations, plaintiff had complied as best it could with the court’s order of October 9, 1974, and that the mentioned vacillation was due to an overreaction to the court’s cautionary directions at the October 8, 1974 hearing and, on December 12, 1974, held that, for purposes of defendant’s Motion to Dismiss, the amended complaint did seem to satisfy the pleading provisions of Rule 9(b). When so overruling the Motion to Dismiss, the court informed counsel, in substance, that the inconsistency, if any, between such action and what it had indicated at the October 8, 1974, hearing it would do, resulted from a recognition by the court that it had perhaps been overconvinced by defendant’s assertions (which were then not supported by any sworn statement on the record in this action) that DCAS had concurred in defendant’s interpretation of the contractual language in question and that, if such support were supplied, the court, upon application, would review that ruling. The court also suggested that, by taking the depositions of the persons who had signed the re-served answers, defendant might be able to clear up the matter of the claimed inconsistencies.
On December 20, 1974, the defendant filed a motion (the “Motion to Reconsider”) that the court reconsider its ruling on the Motion to Dismiss. The Motion to Reconsider was supported by an affidavit by each of W. C. McCain, E. E. Lackey and K. D. Hughes (the “McCain affidavit”, the “Lackey affidavit”, and the “Hughes affidavit”, re
*90
spectively), to the effect,
inter alia,
that DCAS had concurred in defendant’s said literal construction of the contractual language. The Motion to Reconsider was amended on December 31, 1974, so as to incorporate, in further support thereof, an affidavit by each of Noble Kermit Little and Henry C. Bullard (the “Little affidavit” and the “Bullard affidavit”, respectively). As so amended, that motion came on for hearing on January 3, 1975. During the course of such hearing, the court, by a ruling which was confirmed by written order filed on January 6, 1975, granted an oral motion then made by defendant that its Motion to Reconsider, as amended, be treated as a motion for summary judgment. Because Rule 56(e) will not allow a plaintiff to rest on such minimal allegations of fraud as those in the amended complaint in the face of defendant’s so highly supported motion for summary judgment, the court ruled (a) that the Motion to Reconsider as amended, with its supporting affidavits, was sufficient to place a burden upon plaintiff under Rule 56(e) to file affidavits to traverse the factual presentation set forth in defendant’s said affidavits or face the inevitable consequence of a failure to do so and (b) that plaintiff must file such affidavits within thirty days. As it had indicated .at the January 6, 1975, oral hearing it would do, defendant on January 9, 1975, filed herein an alternative motion that the court treat the Motion to Reconsider, as amended, as a motion for partial summary judgment (“Motion for Partial Summary Judgment”). The latter motion was supported with said affidavits by each of Smith, Snider and Mayes. In those affidavits, each of the affiants, after referring to and describing each of the two kinds of certificates quoted hereinabove
(i. e.,
those contained in said forms DD 250 and those that accompanied defendant’s said progress payment applications), state, in substance, that nothing that has occurred in the intervening years (including the said FBI investigation, the other Army investigations, the Grand Jury investigation, the long criminal trial and this civil action) has caused him to question the correctness of any one of such certificates. After so stating, and further stating, in substance, that, as such officials respectively, the affiants had personally supervised the activities whereby DCAS, before accepting any lot of shell, acted, as required by ASPR 14-203(a),
supra,
to “verify” that defendant had “fulfilled contract quality requirements” with respect to the shell so accepted, these affiants, in their respective affidavits, then state :
The Smith Affidavit
(p. 10)
As of the date of this affidavit, it is my judgment that, as my records show, the shell that composed Lots DFP-1 to 138, inclusive, met the quality requirements of the Southern contracts, as such requirements were understood and applied at said facility while I was QARIC, as aforesaid, by me, my staff, DCAS-B’ham personnel and Southern.
The Snider Affidavit
(p. 4)
I now affirm that it is my judgment that said lots which were accepted for the Government while I was QARIC met all of the quality requirements of the Southern contracts as I understood and applied those requirements while I was QARIC at said facility.
The Mayes Affidavit
(p. 6)
Each of Lots DFP-1-86 to 153 [which lots include all lots complained of in this civil action], inclusive, were accepted during the time that I was Assistant QARIC, . It . is now my judgment, that each of Lots DFP-86 to DFP-153, inclusive, were produced, inspected, delivered and accepted in full conformity with the requirements of the Southern shell contracts, as same were understood and applied at all relevant times by me, the QARIC and DCAS-B’ham personnel.
It thus appears that
DCAS
(acting by and through its said employees
whose duty it was to verify the defendant’s in
*91
spection procedures, and which had actual knowledge of what those procedures were and that defendant was interpreting the contractual language in question exactly in accord with DCAS’s own interpretation
thereof)
was not misled as to what inspections it was that defendant claimed it was making.
According to the affidavits of said DCAS employees, each of them believed, at the respective times the shells in question were produced and inspected and at the respective times of giving their affidavits, that DCAS had not been misled by defendant ;
and that in fact defendant had acted pursuant to an interpretation of the contractual language in question that coincided precisely with the way that DCAS itself at all material times had interpreted such language.
Of course, the court recognizes that fraud would vitiate the effect of DCAS’s verification inspection and acceptance but, under the circumstances shown by said affidavits, particularized nonconclusory factual allegations, as required by FRCP 9(b), are necessary to charge the defendant adequately with fraud in the execution, or avoidance, or ignorance (active ignoring) of the contract provisions relating to inspection.
Specifically,- by its said Motion for Partial Summary Judgment, defendant seeks summary judgment in its favor as to all claims asserted in the amended complaint except as said claims relate to and are bottomed on the occasions and shell that are a subject of the allegations contained in paragraphs 27, 28 and 29 of the amended complaint. Upon application therefor, the Court on February 3 and 13, 1975, entered orders whereby the parties were given until February 28, 1975, to file affidavits and briefs in support of, and in opposition to, defendant’s said Motion to Reconsider, as amended on December 31, 1975, and said Motion for Partial Summary Judgment.
Thereafter, on February 7, 1975, plaintiff filed affidavits dated February 6, 1975 by each of Michael Eugene Williams, Joseph F. Ellison, Charles Dennis Buckner and an affidavit dated January 30, 1975 by Joseph Marchant (herein sometimes collectively referred to as the “opposing affidavits” and individually referred to as the “Ellison affidavit”, the “Williams affidavit”, the “Buckner affidavit” and the “Marchant affidavit”, respectively
50
). No rule 56(f) motion has been filed. Consequently, the court must again assume that plaintiff has met the court’s order of January 6, 1975, as best it could.
Each of the eleven affidavits mentioned hereinabove will be discussed hereinafter. In addition, because some of the matters that are a subject thereof tend to explain or illuminate transactions that are also a subject of the pending motion by defendant for summary judgment, defendant’s pending Motion for Sanctions, as amended, and some of the affidavits, filed since February 28, 1975, that are directed primarily to the latter motion will also be discussed hereinafter. Extensive discovery has taken place and much of it will also be discussed hereinafter. And the parties have aided the court with excellent legal memoranda in support of, and in opposition to, the said motion for summary judgment.
This is no ordinary action. The pleadings, orders, interrogatories, etc. (and exhibits thereto) in the Clerk’s file total more than 2100 pages. In addition, the parties have filed briefs totaling more than 400 pages and the defendant has taken pretrial depositions that, excepting the many thousands of pages of exhibits thereto, contain more than 3500 pages. Except where it is so stated or the context indicates otherwise, all factual statements in the discussions herein of matters that are a subject of one or more of the items referred to in the paragraph next above, are (a) matters asserted by plaintiff with which it is apparent defendant agrees, (b) matters asserted by defendant with which it is apparent plaintiff agrees, (c) uncontested general background information over which there is no dispute, (d) facts before the court
*92
in verified form (either presented by affidavit or as the result of discovery) which are not disputed or contested by opposing verified facts in a form sufficient to demonstrate a genuine issue as to such facts or (e) facts before the court in verified form which, though disputed by similarly verified facts, are not material to the issues being considered by the court.
At all times material plaintiff had fixed-price shell supply contracts not only with defendant but also with Donovan Construction Company (which operated its shellmaking facility in Minnesota) and with The Chamberlain Corporation (which operated two shellmaking facilities — one in Pennsylvania and the other in Massachusetts). In addition to said fixed-price supply contracts, plaintiff had one cost-plus-award fee type shell supply contract with Sperry Rand which operated its shellmaking facility, the “Y line”, at LAAP. At the time defendant entered into the 1966 Supply Contract the tech data packages in the respective supply contracts that are a subject of this paragraph were identical.
All fixed price shell supply contracts made by plaintiff at any time material contained a “Changes clause” (Paragraph 2 of the General Provisions) by which plaintiff reserved the right from time to time to change any part of the tech data package therein in consideration of plaintiff’s agreement in that clause that, in the event plaintiff made any such change whereby the scope of the work required of the supplier was enlarged, an equitable adjustment would be made in the contract price so that the contractor would be paid his cost plus a reasonable profit for such enlarged work requirement.
Insofar as here material, all shell acquired by plaintiff were shipped to one of three loading plants which were located respectively at Iowa Army Ammunition Plant (IAAP), Ravenna Army Ammunition Plant (RAAP) and LAAP.
So that shell made by any shell manufacturer could be loaded on a mass-production basis at any loading plant, APSA,
inter alia,
designated certain personnel (John Free and William Majors) as “key inspectors” and assigned to them the task of seeing to it that the tech data package was uniformly interpreted by the respective staffs of inspectors that the government maintained in the facility of each supplier of shell.
51
These key inspectors were under the supervision of Hinzman.
After being accepted at Sylacauga, as aforesaid, each of the 153 lots produced by defendant were shipped to LAAP to be loaded at a facility, the “S line” (where items other than shell were also loaded), which was also operated by Sperry Rand under a cost-plus-fee type contract with plaintiff.
Standard operating procedures, at all times in effect, required that shell received at the S line from other suppliers undergo two inspections (a) an “on-receiving inspection” and (to) a “load line” inspection.
52
The S line on-receiving inspections were made pursuant to a MIL-105 “static lot” sampling plan that required frequency f (say 315) samples randomly selected from a newly received lot (of about 16,000 shell) to be inspected for certain (specified) particular charac
*93
teristics. The particular characteristics which were inspected for in the on-receiving inspections were changed by Sperry Rand from time to time so as to take into account such problems as it was then encountering, or which it contemplated it might encounter, on its load line if the lot from which the samples were drawn were to be released to its load line to be loaded.
53
The procedures for load line inspections on the S line were comparable to those which paragraph 4.3.2,
supra,
specified for use in shellmaking facilities
(i. e.,
certain [specified] characteristics that,
for load line purposes,
were classified as “critical” defects, were looked for in “one hundred per cent” inspections and certain [specified] characteristics that,
for load line purposes,
were classified as “major” and “minor” defects [and to which an AQL was assigned] were looked for in MIL-1235 continuous sampling plan inspections at the degree of severity required by the particular AQL that the load line tech data package specified for such “major” and “minor” defects). Insofar as here material, the “critical” (for load line purposes) characteristic
(i. e.,
the characteristic that was looked for on the S line in one hundred percent inspections) was listed in the S line loading procedures (p. 72 of Exhibit 212B; p. 27 of Exhibit 212F; and p. 18 of Exhibit 212G to Chandler deposition) as “foreign matter in cavity”. However, as is hereinafter shown, the definition of that critical load line characteristic was changed from time to time so that it included,
inter alia,
one or more sub-classes which (as John Free testified on his deposition [pp. 183, 184] which was taken herein by defendant on April 29-30 and May 1, 1975 [the “Free deposition”]) were commonly called, in load line parlance, “cavitation defect” (a characteristic in the explosive filler) and “metal defect” (any characteristic[s] in the metal part itself that, in the then current [changed from time to time] opinion of the government ammunition specialists, made it unsuitable to be loaded).
It is significant to note that the term “metal defect”, as used in load line parlance, was not synonymous with that same term or the term “metal defective” as they are defined or used in the paragraphs 3.7.3 and 4.3.2.1, respectively, of the PD.
54
Beginning sometime in 1967, the government ammunition specialists became concerned that “surface irregularities” or “roughness” in a shell cavity might cause a “premature” (an unexpected and undesired explosion of a loaded shell) that would be hazardous to the troops who would be called upon to use ammunition made from such shell. As a result of continuous pressure from these specialists, the government directed changes to be made from time to time in the load line inspection procedures that tightened the load line procedures so that shell with an undesirable degree of roughness in the cavity would not be loaded.
55
By an undated memo (Exhibit 275 to Free deposition), D. Dau, (Deputy Chief, Quality Control Operations, APSA), sometime on or before January 10, 1968,
56
advised AMC, in substance, that as the result of a review made on
November
21,
1967,
by representatives of
PA, FA,
and
APSA,
that:
. . . 3. Paragraph 3.7.4 of . . . [the PD] was determined to be inadequate as a standard for the body cavity area of . . [the shell]. The
*94
new rewritten requirement is now in the process of being put into . . . [the PD].
It is also significant here to note not only that that identical contractual language, the interpretation of which is a principal subject of this civil action “was determined to be inadequate”
(i. e.,
at the very least ambiguous) by representatives of FA (the very agency by which plaintiff drafted such contractual language)
and
by APSA (the very agency by which plaintiff entered into the Supply Contracts which contained such language) but also that
such November 21, 1967, determination was made before the respective dates (December 22, 1967 and February Ik, 1969) when the two Supply Contracts here in question were entered into.
Thereafter, in early 1968, the government expanded the definition,
for load line purposes,
of the characteristic “foreign matter in cavity” to also include “base [cavity] surface irregularities” and in 1969, further expanded the definition of that term to include “sidewall [cavity] surface irregularities”.
57
Under these expanded definitions, “surface finish improper” and “burr” characteristics (defined in paragraphs 3.7.4 and 3.7.7,
supra,
of the PD, respectively, and which,
for manufacturing line purposes,
were expressly classified as “minor” defects by one or more of paragraphs 4.3.-2.1 and 4.3.2.2 and 4.3.3.3,
supra,
of the PD), if large, sharp or deep enough to cause cavity “roughness” (in the base in 1968, and in the base or on the sidewall in 1969) were,
for load line purposes,
classified as “critical” defects and, in common load line parlance, as noted above, were called “metal defects”.
58
The 1968 change whereby roughness in base was added, as aforesaid, as a “critical”
load line
characteristic was directed to be made by a letter (p. 50, Exhibit 212F to the Chandler deposition), dated January 24, 1968, from APSA to the Commanding Officer (CO) at LAAP. It reads in pertinent part:
It is requested the inspection for foreign material . . . currently being performed at your [loading] plant on a 100% basis, include inspection for evidence of base cavity surface irregularities (critical defect). * * íf * * *
Projectiles found to have defective pr questionable base cavity surfaces are to be retained for the establishment of guide standards by technical representatives from Frankford Arsenal, Picatinny Arsenal and this [APSA] Headquarters.
Above inspection is to continue at your [loading] plant until such time as uniform guide standards can be established at metal parts manufactur-
ing facilities.
Although it was not until July 28, 1968, that the published load line inspection procedures were formally amended to take acount of the change which was directed, as aforesaid, the S line loading inspection procedures were in fact so changed immediately upon the receipt of that letter at LAAP. Because it would obviously have been wasteful for the Y line to thereafter continue to manufacture and send to the S line for loading shell that would be rejected when inspected on the S line for roughness in base, Sperry Rand was then also directed to make comparable changes in its inspection procedures on the Y line. This direction required, in effect, that Sperry Rand, on its Y line, make a “one hundred percent” inspection in the cavity base for those minor characteristics which the PD listed as “surface finish improper” and “burr” defects and to reject (and scrap or repair) shell with those kinds of characteristics that were severe enough to cause such roughness rather than to inspect for those defects on a MIL-1235 sampling basis as it had theretofore been required to do by the
*95
tech data package. Putting that change into effect on the Y line caused no problem because, as noted, the Y line was being operated by Sperry Rand under a cost-plus-fee type contract.
59
When, on July 28, 1968, the load line inspection procedures were formally amended (p. 72 of Exhibit 212B to Chandler deposition) so as to classify “base surface irregularities” as a “critical” defect, for
load line purposes,
Sperry Rand informally
(i. e.,
in fact but not in writing) also changed its on-receiving inspection procedures so that, in addition to the characteristics it had theretofore looked for in such inspections, it also made inspections for “surface finish improper” and “burr” characteristics in the cavity base that were of such size, etc., as would cause “roughness”. This change in the on-receiving inspections was made because shell made by defendant and other suppliers (who were still producing and inspecting shell pursuant to the PD) were generating problems for Sperry Rand on its load line.
60
It is significant to note that problems caused by shell (that conformed to the tech data package in defendant’s contract) on Sperry Rand’s load line is a matter for which defendant was not contractually responsible.
After entering into the 1966 Supply Contract which called for the production of 515,000 shell, defendant, for its shellmaking venture, originally leased (and thereafter purchased) real property in Sylacauga; and, in addition to a management team composed of J. L. Builder, Dan Preston and W. V. Phiffer, employed approximately 50 foremen and approximately 700 production and inspection personnel to manage and operate its Sylacauga facility.
At the time said real property was acquired, as aforesaid, there was located therein and thereon certain production machinery owned by the United States. That machinery (of Korean War vintage) was then in lay-away status. Pursuant to a cost-only-reimbursable basis contract, that and other government owned machinery was put into operating condition by defendant.
By contract amendment, dated June 30, 1967, the quantity of shell to be delivered pursuant to the 1966 Supply Contract was increased by 97,232 units. On January 12, 1968 defendant completed production and delivery of the shell called for by the 1966 Supply Contract.
On December 22, 1967, the parties entered into the 1967 Supply Contract which called for the production of 778,-000 shell; and, in the late spring of 1968, entered into negotiations that culminated in an amendment, dated June 27,1968, between plaintiff (per Sam Sternberg, Procuring Contracting Officer, APSA) and defendant, whereby the quantity of shell to be produced under the 1967 Supply Contract was increased by 225,000 units and the 75,000 per month delivery schedule provided for therein was increased to 110,000 per month beginning July 1, 1968.
It is significant to note that, at the respective times the said 1967 Supply Contract and the June 27, 1968, amendment thereto were entered into, plaintiff had then already accepted more than one-half million shell manufactured by defendant.
In mid-July, 1968, while defendant was in the midst of the problems it encountered in gearing up to meet the stepped-up delivery schedule required by the said June 27, 1968, amendment, its entire management team, Builder, Preston and Phiffer, together with 37 of the 52 supervisors and foremen then employed by defendant, walked out
(i. e.,
without giving any advance notice, quit defendant’s employ) .
61
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The lots produced under the 1967 Supply Contract about which complaint is made here
(i. e.,
Lots DFP 1-86 to 93, inclusive) were delivered to the government during the period August 27 to October 23, 1968, inclusive. After the walkout and before the first of Lot 86 was delivered on August 27, defendant put its operation in charge of a management team composed of John (Jack) Fuqua, General Manager; E. E. Lackey, Assistant' General Manager (in charge of) Production; and Ray Bishop, Assistant General Manager (in charge of) Quality Control. This management team had, or established, and maintained a good reputation for integrity with McCain, Smith, Snider and Mayes. For example with respect to the members of that team (and Bullard
62
and Hughes
63
), the Mayes affidavit reads (pp. 1-2):
After the walkout, the Southern management personnel with whom I most frequently had dealings concerning quality matters were Messrs. Jack Fuqua, E. E. Lackey, Ray E. Bishop, Henry Bullard and Kerney Hughes. I became personally and well acquainted with each of these men and, in my judgment, all of them were not only conscientious and honorable but were also able and diligent about the performance of their respective duties. .1 had, and still have, a high regard for them and all other Southern post walkout supervisory inspection personnel.
Whatever they lacked in experience, defendant’s new management team made up for by a cooperative attitude and a willingness to follow helpful suggestions from DCAS personnel. Within a matter of days after the walkout, Lackey met with McCain and Assistant QARIC Mayes and, at that meeting, stated defendant’s policy with respect to quality would continue to be that (Mayes affidavit pp. 2-3):
The shell delivered to the Government [will] be made and inspected in accordance with the contract requirements and in accordance with the requirements of the QARIC, as Southern understood such requirements; that in the event of a difference between the company and the QARIC as to the contract requirements, Southern [will] (1) comply strictly with the QARIC interpretation until such time as it was changed by a higher Government authority; or (2) inform the QARIC that Southern [will] not comply with his interpretation until such time as Southern was directed so to do by someone who had authority to obligate the Government to pay for changes in the contract work; and that, in no event, would Southern attempt to avoid any contract or QARIC requirement by slipping something by, or over on, the QARIC or any member of his' staff. . . . [and that] he and the other members of the company’s management and all Company personnel under them would cooperate 100% with me and all personnel under me to the end that all shell delivered at any time would be of the best quality that it was practicable for the company to make; and that the company not only wanted, but would welcome, any help or suggestions from me and my staff as to how the company might better satisfy the quality requirements of its contracts.
Defendant demonstrated by its conduct that the statement by Lackey as to its policy with respect to quality was
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in fact its policy. For example, the Mayes affidavit, continues (p. 3):
I firmly believe that the pledge made by Mr. Lackey, as aforesaid, was met. I never asked anyone who worked for Southern [defendant] to do anything that they didn’t do promptly and right. I could not have asked for or received better cooperation than I got from Southern. Moreover, nothing has at any time come to my attention that caused me to believe that any of Southern’s supervisory personnel had knowingly directed, permitted or condoned the delivery to the Government of any nonconforming shell. Further, nothing has at any time come to my attention that caused me to even suspect that such might have been the case with the exception of the reports emanating from LAAP in the latter part of 1969 that large numbers of “critical” defects had been found during inspections there made of shell that Southern had delivered. Even this suspicion was entirely removed when I learned that a member of the DCASB’ham staff had personally examined a sufficient number of the shell about which LAAP was complaining to be positive in his own mind that the LAAP inspections had not only been carelessly made but also that the shell that LAAP had reported as “criticáis” had been determined to be such only by the use of criteria for criticáis other than that specified therefor in the Southern contract, as that criteria was uniformly understood and applied at such facility by me, by the QARIC and the other members of his staff, DCAS-B’ham and Southern.
At or about the same time that Lackey met with McCain and Mayes, as aforesaid, Fuqua met with QARIC Smith and made a like statement and pledge of cooperation. After so stating, the Smith affidavit then continues (p. 3):
I firmly believe that the said pledge made by Mr. Fuqua, as aforesaid, was met. Moreover, nothing has thereafter come to my attention that caused me to believe that any of Southern’s supervisory personnel had
knowingly
directed, permitted or condoned the delivery to the Government of any nonconforming shell.
The successor management team not only made defendant’s policy with respect to quality known to DCAS but, as shown by the Lackey, Little, Hughes, and Bullard affidavits, saw to it that all of its employees were frequently informed (by means of bulletin board notices
and
group meetings) of the company policy and directed to carry it out.
The following parts of the Smith affidavit are illustrative of the way in which defendant’s management cooperated with DCAS to the end that defendant’s said policies would be carried out (Smith affidavit pp. 3-4):
After stating the company’s policy, as aforesaid, Mr. Fuqua, at his said meeting with me, also stated to me that the company’s management suspected that some of those who had walked out might attempt to sabotage the company’s operation and requested that I report to him personally or to Mr. Lackey any violation or suspected violation of the company’s said policy and the names of any company personnel that (i) we might suspect of any wrongdoing or (ii) we might believe did not have the competence necessary to do his job or (iii) in whom my staff and I did not have complete confidence. A few weeks later, Mr.
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Bishop and I had a discussion in which we considered each of the company’s inspection personnel. Although neither of us had any evidence that Mr. [Michael Eugene] Williams
64
had been unfaithful about the performance of his duties, we agreed at this conference that, because we knew that he was a very close personal friend of Mr. W. V. Phiffer, one of the persons who had walked out, it would probably be unwise for the company to permit him to continue inspecting as that Job would provide him with an opportunity, if he should be so inclined, to sabotage the company’s operation by passing or failing to set off nonconforming material. On the next morning, Mr. Williams was assigned to production and did not again, so long as I remained at the facility, have any inspection responsibility. About two or three weeks later, Mr. Bishop and I had a similar conference in which the two of us discussed each of the company’s inspection personnel. At this time, I told Mr. Bishop, in substance, that Doyle Browning had let his foreman job go to his head and that, while I couldn’t point to any instance where he had failed to do his duty, he gave me the impression that he resented suggestions from me and my staff as to how he and his crew (which we were still helping to train) might do a better job. I suggested that we should postpone a decision about him and that Mr. Bishop and I watch him very closely for a few days. About one week later, Mr. Bishop and I met again about Browning and at that time, Mr. Bishop said, in substance, that, although our close observation had not detected any wrongdoing by him, he didn’t think Browning was as conscientious about his job as he wanted someone in that position to be and was going to have Browning transferred to other work. Browning was so transferred that same day and did not again work as an inspector while I was at the plant. From time to time thereafter, at the company’s request, the company’s top management inquired of me as to whether I had any suggestions as to personnel or other changes that the company might make that, in my opinion, would eliminate or lessen any problems that I or my staff were having. I do not recall a single instance after August 23,1968
65
when a suggestion so made by me was not promptly and cheerfully put into effect.
Because
all
of defendant’s quality control supervisory employees walked out with Builder, et al, McCain’s staff and the QARIC and his staff, at the direction of McCain, taught defendant’s remaining and replacement inspection personnel what was required of defendant in the way of quality control. Apparently, this teaching was effective because quality steadily improved after the walkout.
66
During August, 1968, Lots DFP 1-80, 81, 82, 83, 84 and 85 were shipped. The report (Exhibit 1 in the Addendum) of the LAAP on-receiving inspection shows that each of these lots was rated “Code 1” which means that the on-receiving inspections thereof indicated that the quality of those lots was such that they could be forthwith released to
*99
the load line for loading. As said report also shows, these were the first defendant-produced lots to be so rated in more than a year,
i. e.,
since May, 1967, when Lot DFP 1-13 was accorded that status.
In mid-September, 1968, APSA and DCAS were informed by LAAP that 1103 defects had been found in Sperry Rand’s “on-receiving” inspection of 800 sample shell randomly pulled from defendant’s lots DFP 1-86 and 87. The teletype (Exhibit 5 in the Addendum) by which APSA was so informed respecting Lot 86 concluded with a recommendation that the lot in question “be returned to vendor [defendant] for corrective action”.
67
Since few, if any, of the defects reportedly found, as aforesaid, were latent, the mentioned recommendation, when considered together with the above quoted contractual provisions (paragraph 5[d], of the General Provisions of the Supply Contract) amounted, in substance, to an accusation by LAAP that Southern,

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2143914. Public record. Not legal advice.