“The amended provision, 31 U.S.C. § 3729 (a)(1)(B), took effect as if enacted on June 7, 2008 and applies to all claims under the False Claims Act that were pending on or after that date.”
How later courts described this case
- “The amended provision, 31 U.S.C. § 3729 (a)(1)(B), took effect as if enacted on June 7, 2008 and applies to all claims under the False Claims Act that were pending on or after that date.”
- “[T]he Contract Disputes Act does not allow a contracting officer to consider claims involving fraud.”
Written by the judges who cited it.
The opinion
In the United States Court of Federal Claims
No. 10-733C
(Filed: January 30, 2014)
********************************** Contract case; counterclaims for forfeiture
) based on fraud and for penalties and
AEY, Inc., ) damages premised on the False Claims
) Act; motion to amend reply to
Plaintiff, ) counterclaims; scope of Forfeiture Statute,
) 28 U.S.C. § 2514; material facts in dispute
v. ) regarding waiver of Forfeiture Statute
)
UNITED STATES, )
)
Defendant. )
)
**********************************
Cyrus E. Phillips, IV, Albo & Oblon, L.L.P., Arlington, Virginia, for plaintiff.
Anna Bondurant Eley, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, Washington, D.C., for defendant. With her on the briefs
were Stuart F. Delery, Assistant Attorney General, Jeanne E. Davidson, Director, and Kirk T.
Manhardt, Assistant Director, Civil Division, Commercial Litigation Branch, United States
Department of Justice, Washington, D.C. Of counsel was J. Mackey Ives, Litigation Attorney,
General Litigation Branch, Army Litigation Center, Fort Belvoir, Virginia.
OPINION AND ORDER
LETTOW, Judge.
In this contract case, AEY, Inc. (“AEY”) contends that the United States Army (“the
Army”) wrongfully withheld payment on two invoices submitted by AEY for ammunition
delivered to the Army for use by Afghan troops and police. The government counterclaims that
AEY is liable for forfeiture of its claims because the two invoices at issue pertain to a contract
tainted by fraud in an unrelated, earlier aspect of contractual performance and that AEY
additionally is liable for damages under the False Claims Act, 31 U.S.C. § 3729, for prior false
invoices submitted pursuant to the contract. Pending before the court are the parties’ cross-
motions for summary judgment on the forfeiture counterclaim, plaintiff’s motion to dismiss the
government’s count of the counterclaim based upon the False Claims Act, and plaintiff’s motion
to amend its reply to the counterclaims.
1
BACKGROUND 1
On January 26, 2007, the Army awarded AEY Contract Number W52P1J-07-D-0004, a
firm, fixed-price requirements contract to provide non-standard ammunition for use by the
Afghan National Army and Afghan National Police. Compl. ¶ 5, ECF No.1. Pursuant to this
contract, the Army reportedly issued AEY as many as five delivery orders, and AEY made
deliveries between May 18, 2007 and March 25, 2008. Compl. ¶ 7. 2 The parties’ submissions
concern only Delivery Orders 2, 3, and 4. See Hr’g Tr. 24:8-15. 3 Delivery Order 2 was issued
on March 13, 2007, Pl.’s Mot. for Summ. Judgment Ex. 2, at 2, ECF No. 16-2, and about 35
deliveries pursuant to Delivery Order 2 took place between June 21 and November 30, 2007,
Pl.’s Mot. for Summ. Judgment at 3. Delivery Order 3 was issued on June 21, 2007, id. Ex. 3, at
2, ECF No. 16-3, and Delivery Order 4 was issued on August 6, 2007, id. Ex. 4, at 2, ECF No.
16-4; Hr’g Tr. 25:22 to 26:2. The two unpaid invoices at issue in this case are for two shipments
under Delivery Orders 3 and 4, i.e., Shipment Nos. AEY0007 and AEY0017, respectively, which
shipped on March 25, 2008 and were accepted by the government on or about March 28, 2008.
Hr’g Tr. 26:3-11; Compl. ¶¶ 9, 15; see also Compl. Exs. 1, 5.
“The contract expressly incorporated . . . 48 C.F.R. § 252.225-7007, a provision of the
Defense Federal Acquisition Regulation Supplement [(“DFARS”)], which provides that supplies
delivered under the contract ‘may not be acquired, directly or indirectly, from a [c]ommunist
Chinese military company.’” AEY, Inc. v. United States, 99 Fed. Cl. 300, 302 (2011) (“AEY I”)
(quoting DFARS § 252.225-7007(b)). The parties agree that AEY fulfilled Delivery Order 2 by
purchasing ammunition from Albania’s Military Export and Import Company (“the Albanian
MEICO”) and that this ammunition was originally manufactured by communist Chinese military
companies in factories in the People’s Republic of China (“China”). Pl.’s Am. Countercl. Reply
¶¶ 39-40, ECF No. 44-1; see also AEY I, 99 Fed. Cl. at 302. AEY discovered the Chinese origin
of the ammunition while preparing the shipment for transport from Albania to Afghanistan. An
employee of AEY had gone to Albania to remove the ammunition from its wooden packing
crates to save shipping costs, and he discovered Chinese characters on the crates. Pl.’s Am.
1
The recitation of facts that follow is provided solely for purposes of providing a
background for analysis of the motions and does not constitute findings of fact by the court.
Unless otherwise noted, however, the facts set out appear to be undisputed.
2
In its most recent filings with the court, AEY has altered its terminology and appears to
be referring to Delivery Order 2 as the “first” of three delivery orders, and to Delivery Orders 3
and 4 as the “second” and “third,” respectively. See Pl.’s Second Responsive Supplemental Br.
at 2, ECF No. 67; Pl.’s Responsive Supplemental Br. at 3, ECF No. 61-1. The parties do not
explain or describe Delivery Orders 1 and 5, if, indeed, any such Delivery Orders actually
existed. Notwithstanding the resulting gap in the record, the court will maintain the original
terminology used by the parties throughout all prior briefing, in part because the government has
not altered its use of the terms, and in part because the exhibits that accompany AEY’s
Complaint and Motion for Summary Judgment refer to the invoices at issue as arising out of
Delivery Orders (labeled as Task Orders) 3 and 4.
3
Citations to the transcript refer to a hearing held on October 15, 2012.
2
Countercl. Reply ¶¶ 42-49; see also Def.’s Answer & Countercl. ¶¶ 42-49, ECF No. 14.
According to a factual proffer later signed by AEY in connection with a criminal prosecution
regarding these shipments under Delivery Order 2, AEY understood that providing ammunition
manufactured in China would violate the contract’s provisions, see Def.’s Cross-Mot. for Summ.
Judgment at 3 & Ex. 1, ¶ 7 (“Factual Proffer”), ECF Nos. 22 & 22-01; see also United States v.
AEY, Inc., No. 08-20574-CR (S.D. Fla. Aug. 28, 2009), 4 so AEY employees discussed with one
another how to conceal the ammunition’s origins, Factual Proffer ¶ 9. They decided to remove
the ammunition from the wooden crates and the metal tins that had the Chinese markings,
dispose of papers inside the tins containing Chinese markings, and repack the ammunition in
cardboard boxes. Factual Proffer ¶ 10. Ultimately, AEY fulfilled Delivery Order 2 by shipping
the ammunition purchased from the Albanian MEICO that was originally manufactured in
China. See Pl.’s Am. Countercl. Reply ¶¶ 40, 64. AEY provided Certificates of Conformance
for each shipment under Delivery Order 2, certifying that the ammunition “conform[ed] in all
respects with the contract requirements.” Id. at ¶¶ 67, 68.
Shortly after shipments commenced under Delivery Order 2 in June 2007, the
government began to suspect that the ammunition being delivered by AEY was manufactured by
communist Chinese military companies, in violation of the contract. The government executed a
search warrant on AEY’s place of business in Miami Beach, Florida on August 23, 2007. Hr’g
Tr. 27:1-6. This timing is significant; the search warrant was executed shortly after Delivery
Orders 3 and 4 had been issued to AEY in June and early August, and seven months before
Shipment Nos. AEY0007 and AEY0017, were shipped and accepted pursuant to Delivery Orders
3 and 4, respectively. On March 25, 2008, the day Shipment Nos. AEY0007 and AEY0017 were
shipped, the Army temporarily suspended AEY from future contracting with the government.
Pl.’s Am. Countercl. Reply ¶ 74; Def.’s Answer & Countercl. ¶ 74. 5 The Army accepted
Shipment Nos. AEY0007 and AEY0017 on or about March 28, 2008. Compl. ¶¶ 9, 15.
Shipment No. AEY0007, delivered pursuant to Delivery Order 3, contained 1,797,400
rounds of 7.62x54 mm ball ammunition. Compl. Ex. 5. AEY states, and the government does
not refute, that the ammunition was manufactured in Hungary. Pl.’s Mot. for Summ. Judgment
4
AEY is seeking reconsideration of its sentence resulting from its guilty plea in the
criminal case and is challenging, among other things, the validity of the factual proffer. See
Motion (Complaint) to Vacate Sentence (2255), Diveroli, et al. v. United States, No. 12-20216
(S.D. Fla. Jan. 19, 2012), ECF No. 1. The district court has not yet decided the pending contest
of the sentence.
5
In its Cross-Motion for Summary Judgment, the government asserts that the Army
suspended further deliveries under the contract on March 28, 2008. Def.’s Resp. to Pl.’s Mot.
For Summ. Judgment & Cross-Mot. for Summ. Judgment at 2, ECF No. 22. The government’s
previously filed Answer and Counterclaim, however, states that the Army temporarily suspended
AEY “from future contracting with the United States [g]overnment” on March 25, 2008. Def.’s
Answer & Countercl. ¶ 74. An e-mail written by Melanie Johnson, Chief, Propellants,
Explosives, Artillery & Ammo Demil Branch, HQ, Army Sustainment Command, attached as
Exhibit 9 to AEY’s Motion for Summary Judgment, indicates that a suspension notice was
issued on March 25, 2008. Pl.’s Mot. for Summ. Judgment Ex. 9, ECF No. 16-9.
3
at 2. The corresponding invoice number for Shipment No. AEY0007 is GOV01C07. Compl.
Ex. 5. The Certificate of Conformance provided by AEY for this shipment was not
countersigned by a U.S. Government Receiving Official. Id. A contemporaneous e-mail among
government employees acknowledges that the receiving official, Lt. Col. Douglas M. Heath,
United States Air Force, was waiting for approval to sign the Certificate of Conformance.
Compl. Ex. 6. Lt. Col. Heath reportedly wrote in an e-mail that the “[a]mmo arrived in correct
quantity and in good shape per our ammo experts. So shipment arrived good to go.” Compl. Ex.
6, at 2. AEY submitted a proper invoice on or around March 31, 2008 for payment in the
amount of $250,377.82, but the Army has not paid it. Compl. ¶ 16.
Shipment No. AEY0017, delivered pursuant to Delivery Order 4, contained 1,858,560
rounds of 7.62x54 mm ball ammunition. Compl. ¶ 9; see also Compl. Ex. 1. AEY states, and
the government does not refute, that the ammunition was manufactured in Bulgaria. Pl.’s Mot.
for Summ. Judgment at 2. Lt. Col. Heath countersigned the Certificate of Conformance for this
shipment, acknowledging receipt of the items and assuming responsibility for them. Compl., Ex.
1, at 2. The receiving report for the shipment lists the accompanying invoice number,
GOV01D17, and a total price for the ammunition, $258,889.23. Id. Ex. 2, at 12. AEY properly
submitted the invoice on or around March 31, 2008, in the amount of $258,889.23, but the Army
has not paid it. Compl. ¶ 10.
On May 23, 2008, the Army terminated the contract for default due to the delivery of
ammunition under Delivery Order 2 that had been manufactured by a communist Chinese
military company, in violation of DFARS § 252.224-7007(b). See AEY I, 99 Fed. Cl. at 302;
Pl.’s Am. Countercl. Reply ¶ 75. On June 19, 2008, AEY and its officers were indicted in the
United States District Court for the Southern District of Florida for crimes associated with the
delivery of the Chinese-manufactured ammunition under Delivery Order 2. United States v.
AEY, Inc., et al., No. 08-20574 (S.D. Fla. June 19, 2008), ECF No. 1. 6 On May 22, 2009, prior
to resolution of the criminal case in the Southern District of Florida, AEY filed a civil complaint
in this court challenging the Army’s decision to terminate its contract for default. AEY I, 99 Fed.
Cl. at 303.
Three months later, on August 28, 2009, AEY pled guilty in the district court to
conspiracy to make false statements (18 U.S.C. § 1001(a)(2)), conspiracy to commit major fraud
against the United States (18 U.S.C. § 1031), and conspiracy to commit wire fraud (18 U.S.C.
§ 1343), all in violation of the federal conspiracy statute (18 U.S.C. § 371). AEY I, 99 Fed. Cl. at
303. On September 4, 2009, this court stayed the proceedings in AEY I to allow the case in the
district court to come to conclusion with the sentencing of AEY. Id.
In the midst of the stay in AEY I and sentencing in the criminal case in the district court,
AEY filed the present case in this court on October 28, 2010.
6
A superseding indictment was filed July 17, 2008. See Notice of Filing Ex. 1,
Superseding Indictment, AEY v. United States, No. 09-330 (Fed. Cl. May 3, 2011), ECF No. 24.
4
On January 18, 2011, after the conclusion of sentencing in the criminal case, this court
lifted the stay in AEY I. See AEY I, 99 Fed. Cl. at 303. Subsequently, on May 24, 2011, this
court held that the Army properly terminated AEY’s contract for default. Id. at 310.
As part of the plea agreement in the criminal case, AEY’s president, Efraim Diveroli, had
signed a factual proffer on behalf of AEY admitting to its wrongdoing. Pl.’s Am. Countercl.
Reply ¶¶ 78-83; see also Def.’s Answer & Countercl. ¶¶ 78-83. AEY has since filed a motion in
the district court to vacate its sentence and now disputes the validity of the factual proffer. See
Motion (Complaint) to Vacate Sentence (2255), Diveroli et al., v. United States, No. 12-20216
(S.D. Fla. Jan. 19, 2012); see also Pl.’s Am. Countercl. Reply ¶ 78.
The present case contests a contracting officer’s final decision. By a letter dated January
1, 2010, AEY informed the Army that Invoice No. GOV01C7 (Shipment No. AEY0007,
Delivery Order 3) was in dispute, and it submitted a certified claim for the total amount of the
invoice, plus applicable interest under the Prompt Payment Act and the Contract Disputes Act
(“CDA”). Compl. ¶ 17 & Ex. 7. AEY submitted a similar letter and claim respecting Invoice
No. GOV01D17 (Shipment No. AEY0017, Delivery Order 4), also dated January 1, 2010.
Compl. Ex. 3. In a letter dated May 7, 2010, the Army’s contracting officer, Kim Jones, made a
final decision denying AEY’s certified claims. Compl. Ex. 4.7 In rejecting AEY’s claims for
Invoice Nos. GOV01C07 and GOV01D17, the contracting officer cited 28 U.S.C. § 2514
(“Forfeiture Statute” or “Special Plea in Fraud”) as the reason for non-payment of the invoices.
She wrote,
Once a contract is tainted by fraud, a contractor may not recover for any claims
arising under the contract even when the particular claim is not directly related to
the fraud. Little v. United States, 138 Ct. Cl. 773, 778, 152 F. Supp. 84, 87
(1957). There is no need for a nexus between the fraud and the claims asserted.
Compl. Ex. 4 (citations and emphasis in original). The contracting officer also noted that “the
subject contract was terminated for default” and “the [g]overnment may acquire similar supplies
and the [c]ontractor will be liable to the [g]overnment for any excess costs for those supplies.”
Compl. Ex 4, at 2. The government has not made a claim for reprocurement costs presumably
because there was no reprocurement; the government had accepted proper delivery of the
acceptable ammunition in Kabul, Afghanistan.
The motions presently before this court raise primarily questions of law and can be
decided without awaiting a decision from the district court regarding AEY’s challenge to its
sentence. The motions have been thoroughly briefed and a hearing was held on October 15,
2012. Two extended rounds of supplemental briefing occurred subsequent to the hearing, to
address related arguments being made in appeals pending before the Court of Appeals for the
7
According to the contracting officer’s letter, AEY had submitted two other certified
claims to the contracting officer for Invoice Nos. GOV01A03 and GOV01B63. The contracting
officer denied those claims because the deliveries “were the subject of a Report of Discrepancy
for Nonconformance that remained uncorrected when the subject contract was Terminated for
Default.” Compl. Ex. 4. AEY has not contested those denials.
5
Federal Circuit, as well as decisions rendered by the Circuit. The motions are now ready for
disposition.
JURISDICTION
This court has jurisdiction over AEY’s claims pursuant to the CDA, 41 U.S.C.
§ 7104(b)(1), and the Tucker Act, 28 U.S.C. § 1491(a)(2). The CDA allows a contractor to
challenge a decision of a contracting officer in denying a claim by bringing an “action directly on
the claim in the United States Court of Federal Claims.” 41 U.S.C. § 7104(b)(1). The Tucker
Act recognizes this grant of jurisdiction and states, “[t]he Court of Federal Claims shall have
jurisdiction to render judgment upon any claim by or against, or dispute with, a contractor arising
under section 7104(b)(1) of title 41.” 28 U.S.C. § 1491(a)(2).
The government’s counterclaims are properly brought before this court pursuant to 28
U.S.C. §§ 1503, 2508. 8
ANALYSIS
Pending before the court are four motions: (1) AEY’s motion to file an amended reply to
the government’s counterclaims, (2) and (3) the parties’ cross-motions for summary judgment on
Count I of the government’s counterclaim relating to the Forfeiture Statute, and (4) AEY’s
motion to dismiss Count II of the government’s counterclaim relating to the False Claims Act.
I. AEY’s Motion to File an Amended Reply to the Government’s Counterclaims
On June 6, 2011, AEY filed its initial reply to the government’s counterclaims. See Pl.’s
Reply to Countercl., ECF No. 15. Fourteen months later, on October 8, 2012, AEY filed a
motion for leave to file an amended reply to the government’s counterclaims. Pl.’s Mot. for
Leave to File Am. Countercl. Reply, ECF No. 44. The government opposes AEY’s motion. See
Def.’s Resp. to Pl.’s Mot. for Leave to File Am. Countercl. Reply, ECF. No. 46. AEY replied on
October 11, 2012. See Pl.’s Reply to Def.’s Resp. to Pl.’s Mot. for Leave to File Am. Countercl.
Reply, ECF No. 47.
AEY is seeking leave to amend its counterclaim reply because of its pending action in the
Southern District of Florida to vacate, set-aside, and correct its judgment of conviction and
sentence in the related criminal case. See Pl.’s Mot. to File Am. Countercl. Reply ¶¶ 2, 3. In the
8
28 U.S.C. § 1503 provides that “[t]he United States Court of Federal Claims shall have
jurisdiction to render judgment upon any set-off or demand by the United States against any
plaintiff in such court.”
28 U.S.C § 2508 is a further jurisdictional grant that provides, “Upon the trial of any
suit in the United States Court of Federal Claims in which any setoff, counterclaim, claim for
damages, or other demand is set up on the part of the United States against any plaintiff making
claim against the United States in said court, the court shall hear and determine such claim or
demand both for and against the United States and plaintiff.”
6
action in the district court, AEY relies, in part, on a legal theory advanced by Ralph Merrill, a
former AEY associate who was also charged with and convicted of crimes related to fraud in
performance of Delivery Order 2. See id. ¶ 3. Mr. Merrill advanced arguments in the Eleventh
Circuit concerning the meaning of “acquisition” under the contract and challenging the
sufficiency of the evidence regarding the materiality of the purported violations. See id. Overall,
AEY is seeking to conform its counterclaim reply in this case to its claims pending in the district
court. Id. at 4. The amended reply largely consists of denials of prior admissions regarding
(1) whether AEY “acquired” ammunition from a prohibited source, Pl.’s Am. Countercl. Reply
¶¶ 27, 37, 64, 70; (2) whether AEY knew it was contractually prohibited from supplying the
ammunition, id. ¶¶ 50-53, 58; and (3) the validity of the previously signed factual proffer, id.
¶¶ 78-83. AEY also seeks to amend its response to the government’s counterclaim that AEY is
liable for forfeiture of its claims under 28 U.S.C. § 2514. In its initial reply to the government’s
counterclaims, AEY alleged that “despite precedent to the contrary, 28 U.S.C. § 2514 properly
applies only to the particular claims tainted by fraud.” Pl.’s Reply to Countercl. ¶ 86. In its
amended reply, AEY argues that “28 U.S.C. § 2514 conflicts with 41 U.S.C. § 7103(c)(2), a later
enacted statute, which specifically contemplates the submission of several Claims under the
same Contract, allowing payment of non-fraudulent money Claims notwithstanding fraud on
other money Claims.” Pl.’s Am. Countercl. Reply ¶ 86. The government opposes AEY’s motion
to amend its reply on the grounds of futility of the proposed amendments. Def.’s Resp. to Pl.’s
Mot. for Leave to File Am. Countercl. Reply at 5.
Rule 15(a) of the Rules of the Court of Federal Claims (“RCFC”) provides that a party
seeking to amend its pleadings more than 21 days after service of the pleading or more than 21
days after a responsive pleading or certain motions are filed, may do so “only with the opposing
party’s written consent or the court’s leave. The court should freely give leave when justice so
requires.” RCFC 15(a)(2). RCFC 15(a) mirrors, in all pertinent respects, Fed. R. Civ. P. 15(a),
and consequently application of Fed. R. Civ. P. 15(a) is highly persuasive in this court. See
Mitsui Foods, Inc. v. United States, 867 F.2d 1401, 1403-04 (Fed. Cir. 1989) (citing Foman v.
Davis, 371 U.S. 178, 182 (1962)). In Foman, the Supreme Court set forth a general standard to
guide courts in applying Rule 15(a):
In the absence of any apparent or declared reason—such as undue delay, bad faith
or dilatory motive on the part of the movant, repeated failure to cure deficiencies
by amendments previously allowed, undue prejudice to the opposing party by
virtue of allowance of the amendment, futility of amendment, etc.—the leave
sought should, as the rules require, be ‘freely given.’ Of course, the grant or
denial of an opportunity to amend is within the discretion of the District Court,
but outright refusal to grant the leave without any justifying reason appearing for
the denial is not an exercise of discretion; it is merely abuse of that discretion and
inconsistent with the spirit of the Federal Rules.
Foman, 371 U.S. at 182.
The government opposes AEY’s motion to amend on grounds of futility. “When futility
is asserted as a basis for denying a proposed amendment, courts do not engage in an extensive
analysis of the merits of the proposed amendments. . . . Instead, courts simply decide whether a
7
party’s proposed amendment is facially meritless and frivolous.” St. Paul Fire & Marine Ins.
Co. v. United States, 31 Fed. Cl. 151, 155 (1994) (holding that the government could amend its
answer after two years had passed to include counterclaims even though it failed to secure a
grand jury indictment on those counterclaims); see also Centech Grp., Inc. v. United States, 78
Fed. Cl. 658, 661 (2007) (approving clarification of complaint in a bid protest by addition of
factual allegations elaborating on those initially made, rejecting a futility contention by the
government).
First, the government argues that AEY is estopped from denying the admissions in its
factual proffer and guilty plea that relate directly to admitting to perpetrating fraud against the
government. See Def.’s Resp. to Pl.’s Mot. for Leave to File Am. Countercl. Reply at 6-7.
According to the government, “[i]t is well established that ‘[a] criminal conviction is conclusive
proof and operates as an estoppel on defendants as to the facts supporting the conviction in a
subsequent civil [proceeding],’” id. at 7 (quoting United States v. Uzzell, 648 F. Supp. 1362,
1363-64 (D.D.C. 1986)), and AEY’s conviction retains its res judicata effect at least until a
decision is rendered on the pending challenge, id. The court accepts these principles of law put
forward by the government, and it recognizes the potential res judicata effect of the guilty plea
and the basis for that plea established in the accompanying factual proffer. The proceedings
respecting that plea and factual proffer have not, however, been fully resolved, and the court
must take that inchoate state into account in addressing AEY’s motion to amend.
Second, the government challenges the amended reply as futile because the amendments
are intended to allow AEY to maintain arguments asserted and rejected in United States v.
Merrill, 685 F.3d 1002 (11th Cir. 2012). See Def.’s Resp. to Pl.’s Mot. for Leave to File Am.
Countercl. Reply at 8. Mr. Merrill, an investor in AEY, challenged his criminal fraud conviction
in connection with Delivery Order 2, in part, by asserting (1) that AEY never “acquired”
ammunition from a communist Chinese military company within the terms of DFARS
§ 225.770-2 and (2) that the evidence was insufficient to show materiality of the purported
violations. See Merrill, 685 F.3d at 1010-11. Mr. Merrill argued that because the Albanian
MEICO acquired the ammunition from a communist Chinese military company long before AEY
secured the ammunition from the Albanian MEICO to fulfill a contract with the United States,
AEY did not “‘acquire supplies or services covered by the United States Munitions List . . .
through a contract or subcontract at any tier, from any [c]ommunist Chinese military company’”
within the terms of DFARS § 225.770-2. Id. at 1011 (quoting DFARS § 225.770-2).
AEY’s amended counterclaim reply seeks to make this same argument. See Pl’s Am.
Countercl. Reply ¶ 27. The Eleventh Circuit rejected all of Mr. Merrill’s contentions on appeal,
Merrill, 658 F.3d at 1005, and denied his petition for rehearing en banc, Order Denying Petition
for Rehearing and Petition for Rehearing En Banc, United States v. Merrill, No. 11-11432 (11th
Cir. Sep. 10, 2012). In its proffered amended reply, AEY argues that the Eleventh Circuit’s
denial of Mr. Merrill’s petition only represents that the “[j]udges in active service on that [c]ourt
found the panel decision not to conflict with the decisions of the Supreme Court of the United
States of America or with other decisions of the United States Court of Appeals for the Eleventh
Circuit.” Pl.’s Reply to Def.’s Resp. to Pl.’s Mot. for Leave to File Am. Countercl. Reply at 3-4
(citing Fed. R. App. P. 35(b)(1)(A)). AEY accurately restates Rule 35. And, decisions by the
Eleventh Circuit, while persuasive, are not binding on this court. Despite the potential futility of
8
AEY’s argument that it did not “acquire” ammunition from a communist Chinese military
company, the court will allow AEY to file its amended counterclaim reply.
II. Parties’ Cross-Motions for Summary Judgment on Count I of the Government’s
Counterclaims
In Count I of the counterclaims, the government contends that AEY’s claims for payment
on the two invoices at issue are forfeited under the Forfeiture Statute. In their cross-motions for
summary judgment, the parties dispute the applicability of that statute.
A. Standard for Decision
RCFC 56(a) states that “[t]he court shall grant summary judgment if the movant shows
that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” RCFC 56 mirrors Fed. R. Civ. P. 56. See RCFC 56 Rules Committee Note,
2011 Amendment (“RCFC 56 has been rewritten in its entirety to reflect the corresponding
revision of [Fed. R. Civ. P.] 56 that became effective December 1, 2010.”). A fact is material if
it “might affect the outcome of the suit under governing law,” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986), and an issue is genuine if it “may reasonably be resolved in favor of
either party,” id. at 250. The moving party bears the initial burden of demonstrating the absence
of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The
moving party may discharge its burden by “pointing out . . . that there is an absence of evidence
to support the nonmoving party’s case.” Id. at 325. In this instance, both parties have moved for
summary judgment and each bears a burden of showing the absence of any genuine issue of
material fact. See Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1391 (Fed. Cir.
1987) (“[T]he court must evaluate each party’s motion on its own merits, taking care in each
instance to draw all reasonable inferences against the party whose motion is under
consideration); see also Council for Tribal Emp’t Rights v. United States, 112 Fed. Cl. 231, 242
(2013) (applying Mingus). Because the salient facts are largely undisputed, issues of law are the
focus of the court’s inquiry.
B. Analysis
Count I of the government’s counterclaims is in essence an affirmative defense to AEY’s
claims. The government contends that AEY’s claims are forfeited under the Forfeiture Statute,
28 U.S.C. § 2514, due to AEY’s actions in supplying Chinese-made ammunition to satisfy
Delivery Order 2 and endeavoring to conceal the country of manufacture. Def.’s Answer &
Countercl. ¶¶ 85-86.
AEY contends that (1) the Forfeiture Statute properly applies only to the particular claims
tainted by fraud; (2) the Army waived its rights under the Forfeiture Statute when it required and
accepted the shipments at issue with knowledge of the fraud under Delivery Order 2; (3) the anti-
fraud provisions of the CDA supersede the Forfeiture Statute; 9 and (4) the Forfeiture Statute
9
The CDA’s anti-fraud provisions are codified at 41 U.S.C. § 7103(c). Paragraph
7103(c)(1) states, “No authority to settle. – This section does not authorize an agency head to
9
does not bar claims under separate delivery orders untainted by fraud. See Pl.’s Mot. for Summ.
Judgment at 1; Pl.’s Am. Countercl. Reply ¶ 86.
The government contends that the Forfeiture Statute provides for forfeiture of all of
AEY’s claims on this contract even though fraud has only been alleged regarding Delivery Order
2. See Def.’s Cross-Mot. for Summ. Judgment at 6-8. No fraud or impropriety has been alleged
respecting Delivery Orders 3 and 4 generally or the invoices at issue here specifically, and the
government accepted and used the ammunition AEY delivered under Delivery Orders 3 and 4.
See Compl. ¶¶ 9, 15.
1. The Forfeiture Statute.
The scope of the Forfeiture Statute has been strongly contested recently in the Court of
Federal Claims and the Federal Circuit. The Forfeiture Statute states,
A claim against the United States shall be forfeited to the United States by any
person who corruptly practices or attempts to practice any fraud against the
United States in the proof, statement, establishment, or allowance thereof. In
such cases the United States Court of Federal Claims shall specifically find such
fraud or attempt and render judgment of forfeiture.
28 U.S.C. § 2514 (emphasis added). Here, as in other recent cases, the parties dispute the
meaning of the words “in the proof, statement, establishment, or allowance thereof.”
The parties’ initial motions for summary judgment focused largely on Little v. United
States, 152 F. Supp. 84 (Ct. Cl. 1957), which is frequently cited in support of a broad
interpretation of 28 U.S.C. § 2514. In Little, the plaintiff had received a contract from the
Veterans Administration to educate and train veterans. Little, 152 F. Supp at 85. The school was
to operate under contract from January 1, 1949 to December 31, 1949. Id. In April 1949, the
plaintiff received notice that his school was at risk of closure because it was not meeting the
settle, compromise, pay, or otherwise adjust any claim involving fraud.” 41 U.S.C. § 7103(c)(1)
(emphasis added). This provision is part of the Section of the Contract Disputes Act that pertains
to, and is headed as, “[d]ecision by contracting officer.” 41 U.S.C. § 7103. In effect, this
provision removes fraud claims involving contracts from the purview of the agency dispute
process. See the discussion infra, at 16 n.13. Paragraph 7103(c)(2) then provides for liability:
Liability of contractor. – If a contractor is unable to support any part of the
contractor’s claim and it is determined that the inability is attributable to a
misrepresentation of fact or fraud by the contractor, then the contractor is
liable to the [f]ederal [g]overnment for an amount equal to the unsupported
part of the claim plus all of the [f]ederal [g]overnment’s costs attributable
to reviewing the unsupported part of the claim.
41 U.S.C. § 7103(c)(2).
10
state’s minimum requirements for the training of veterans. Id. at 86. After an initial spot check
of the school’s records, funding was suspended as of April 30, 1949. Id. After learning that a
further investigation would be required, the school destroyed its attendance records for all
veterans who were in training prior to January 3, 1949. Id. A more complete audit report by the
Veterans Administration in July 1949 revealed a series of substantial irregularities in the school’s
attendance records. Id. Approval of the school was withdrawn entirely, and the contract was
cancelled. Id. at 87. The plaintiff then sought, among other things, reimbursement for tuition,
books, and supplies for the period from May 1 to August 4, 1949 when the school was in
operation but no payments had been received for services rendered. Id. The government filed
counterclaims asserting violations of the False Claims Act for claims for payment submitted to
the government prior to May 1, 1949 and asserting forfeiture of the plaintiff’s claims under the
Forfeiture Statute. Id. The court explained:
Plaintiff’s present suit is for services rendered after April 30, 1949. . . . The
defendant does not allege that plaintiff practiced fraud after April 30, 1949,
and the record does not establish fraud after that date. It is true that [28 U.S.C.
§ 2514] was not intended to forfeit an otherwise valid claim of a claimant merely
because, in some other unrelated transaction, he had defrauded the [g]overnment.
But where, as in the present case, fraud was committed in regard to the very
contract upon which the suit is brought, this court does not have the right to divide
the contract and allow recovery on part of it. Since plaintiff’s claims are based
entirely upon contract V3020V-241, a contract under which he practiced fraud
against the [g]overnment, all of his claims under that contract will be forfeited
pursuant to 28 U.S.C. § 2514.
Id. at 87-88. Little has served as the basis for decisions in this court holding that fraud in the
performance of a contract leads to forfeiture of all claims arising out of the contract. See, e.g.,
American Heritage Bancorp v. United States, 61 Fed. Cl. 376, 386 (2004) (The requirement of
Little . . . has led . . . this court to apply the forfeiture statute to situations outside the strict terms
of the statute.); UMC Electronics Co. v. United States, 43 Fed. Cl. 776, 791 (1999), aff’d, 249
F.3d 1337 (Fed. Cir. 2001) (“[Section] 2514 requires the forfeiture of all claims arising under a
contract tainted by fraud against the government.”); Supermex, Inc. v. United States, 35 Fed. Cl.
29, 40 (1996) (“[T]he fraudulent act [of bribery] . . . had an effect on every aspect of contract
performance, making it virtually impossible to distinguish between tainted and untainted
claims.”).
After the parties filed their cross-motions for summary judgment on Count I, the Federal
Circuit rendered its decision in Kellogg Brown & Root Servs., Inc., v. United States, 728 F.3d
1348 (Fed. Cir. 2013) (“KBR II”), which concluded that the Forfeiture Statute pertains to claims
brought before the court, and does not also encompass contractual performance unrelated to
those claims. KBR II, 728 F.3d at 1366. Because KBR II has relevance to the issue before the
court in this case, the court requested that the parties submit supplemental briefs addressing that
decision. Order of Sep. 12, 2013, ECF No. 65.
In KBR II, the plaintiff, KBR, received a contract from the United States Army that
among other things concerned the provision of dining facility services in the Middle East. KBR
11
II, 728 F.3d at 1352. The government determined that KBR had charged the government some
unreasonable costs and refused to pay a portion of them. Id. KBR sued the government for the
unpaid costs. Id. During discovery, the government learned that employees of KBR had been
receiving kickbacks from a subcontractor in exchange for giving dining facility subcontracts to
the subcontractor, and the government filed a forfeiture counterclaim. Kellogg Brown & Root
Servs. v. United States, 99 Fed. Cl. 488, 493 (2011) (“KBR I”). The government argued that the
kickbacks “tainted” the entire contract with fraud, and that “any invoice submitted upon a fraud-
tainted contract support[ed] the finding of a ‘false or fraudulent’ claim.” KBR II, 728 F.3d at
1365-66. It urged that KBR should be liable for forfeiture of any and all claims under that
contract. Id. The government’s legal theory omitted any requirement of a nexus between the
fraud and the claim submitted. The trial court had distinguished Little and ruled in part in favor
of KBR on issues involving the Forfeiture Statute. KBR I, 99 Fed. Cl. at 498-501, 516.
On appeal, the Federal Circuit rejected the government’s position, drawing in part on the
trial court’s analysis:
A valid cause of action under [the Forfeiture Statute] must be tied to the
submission of a claim, whether in producing false proof to support a claim, see,
e.g., [Kamen Soap Prods. Co. v. United States, 124 F. Supp. 608, 622 (Ct. Cl.
1954)] (forfeiting claim because falsified documentation was submitted in
presentation of claim), or in falsely establishing the claim, see, e.g., [N.Y. Mkt.
Gardeners’ Ass’n v. United States, 43 Ct. Cl. 114, 136 (1908)] (Government’s
objection to claim based on contractor’s not fulfilling contract specification, i.e.,
“establishment” of a false claim).
KBR II, 728 F.3d at 1366 (alterations in original) (quoting KBR I, 99 Fed. Cl. at 501). As the
Circuit’s decision noted: “On its face, the statute is limited to those circumstances where the
[g]overnment proves fraud ‘in the proof, statement, establishment or allowance’ of a claim at the
Court of Federal Claims, not in the execution of a contract.” Id. (emphasis added). Further, the
Federal Circuit agreed with the trial court that the expansive interpretation of 28 U.S.C. § 2514
that had developed and persisted in this court was not in keeping with the plain meaning of the
statute. See KBR II, 728 F.3d at 1366 n.18 (“Several other Court of Federal Claims decisions
state otherwise: ‘The words of the statute make it apparent that a claim against the United States
is to be forfeited if fraud is practiced during the contract performance or in the making of the
claim.’ Crane Helicopter Servs., Inc. v. United States, 45 Fed. Cl. 410, 431 (1991) (emphasis
added); see also Anderson v. United States, 47 Fed. Cl. 438, 444 (2000); Supermex, Inc. v.
United States, 35 Fed. Cl. 29, 39-40 (1996). This is an impermissibly broad reading of the
statute.”). 10 The Federal Circuit stressed that the statutory context confirms a more particular
reading of the statute:
10
In KBR I, the trial judge opined that while Little was not wrongly decided, it had been
stretched far beyond its holding, pointing to Brown Constr. Trades, Inc. v. United States, 23 Cl.
Ct. 214, 216 (1991), as the first major expansion of Little. See KBR I, 99 Fed. Cl. at 499. In
Brown Construction, a contractor’s vice-president was charged with bribery and conspiring to
bribe a government official responsible for inspection of his work. Brown Constr., 23 Fed. Cl. at
215. The contract was terminated, and the contractor filed suit for work completed prior to the
12
The provision codified at section 2514 was part of legislation creating the Court
of Federal Claims and regulating its operations and procedure. See Act of Mar. 3,
1863, ch. 92, 12 Stat. 765, 767. The surrounding provisions concern requirements
for filing claims, including time limits and verification. Thus the neighboring
provisions illustrate that the forfeiture statute is best understood as a companion
requirement of claims procedure rather than a catch-all anti-fraud provision.
Id. at 1366.
In upholding the trial court’s decision in KBR I, the Federal Circuit did not address that
court’s interpretation of the continuing validity of Little. The Federal Circuit only confirmed the
invalidity of much of its progeny. The trial court had limited Little to its factual predicate, i.e.,
that false proof had been submitted in a related claim under the contract. See KBR I, 99 Fed. Cl.
at 498. Falsified attendance records, unrelated to the time period at issue in the claim, had been
presented to the government for payment, and the government was seeking recovery of those
overpayments made in reliance upon the fraudulent attendance records. Thus, according to the
trial court, the rule from Little is that “fraud in the ‘proof’ of a claim, i.e., the falsification of the
underlying documents upon which the claim was based, voids each of the claims associated with
the contract.” Id. at 498. 11 As the trial court considered the matter, the rule derived from the
Forefeiture Statute is not so broad as to conclude that every act of fraudulent performance is
fraud in the “proof, statement, establishment, or allowance” of a claim. Id. at 498-99.
The facts in this case have some parallels to those in Little. As in Little, invoices based
on false information were submitted to the government regarding Delivery Order 2, and later
invoices, valid and conforming, were subsequently submitted regarding Delivery Orders 3 and 4
and were not paid by the government. The unequivocal statement in the Federal Circuit’s
default termination. Id. at 214-15. The court held that the Forfeiture Statute applied to
plaintiff’s claim because the contract was “tainted by fraud.” Id. at 216. “As a consequence, the
court effectively read out of the law the requirement that the fraud relate to the ‘proof, statement,
establishment or allowance,’ of [a] claim.” KBR I, 99 Fed. Cl. at 500. This improper
interpretation of Little had been carried forward to stand for the proposition that the Forfeiture
Statute applies if there has been any fraud in the performance of a contract. See, e.g., American
Heritage Bancorp, 61 Fed. Cl. at 387; Anderson, 47 Fed. Cl. at 444 (“[T]he statute is not
confined to the presentment of the claim.”); UMC Electronics, 43 Fed. Cl. at 790 (“[A] claim
against the United States is to be forfeited if fraud is practiced during contract performance or in
the making of a claim.”); Crane Helicopter Servs., 45 Fed. Cl. at 431 (same); Supermex, 35 Fed.
Cl. at 39-40 (same); Ab-Tech Constr., Inc. v. United States, 31 Fed. Cl. 429, 435-36 (1994) (“28
U.S.C. § 2514 requires the forfeiture of all claims arising under a contract tainted by fraud
against the government.”).
11
The term “claim” in the context used by the court in KBR I in explaining Little was
apparently not limited to a legal claim presented to the court but instead referred to invoices
(falsified vouchers) submitted to the government based on false attendance records maintained
by Little prior to May 1, 1949. See KBR I, 99 Fed. Cl. at 498-99.
13
opinion in KBR II that the “statute is limited to those circumstances where the [g]overnment
proves fraud ‘in the proof, statement, establishment or allowance’ of a claim at the Court of
Federal Claims, not in the execution of a contract,” 728 F.3d at 1366, is in tension with
applicability of Little to this case. Additionally, KBR II adheres to the plain meaning of the
statutory text. See KBR II, 728 F.3d at 1366 (citing Alexander v. Sandoval, 532 U.S. 275, 288
(2001)). Nonetheless, this court need not now rule on the continuing validity of Little or its
applicability to this case. 12 The issue of waiver, discussed below, provides the immediate basis
for ruling on the parties’ cross-motions for summary judgment.
2. Waiver.
AEY contends that the government has waived its rights under the Forfeiture Statute
because it “knew of AEY’s fraud under [Delivery] Order 2 at the time it required and accepted
delivery of the two shipments under [Delivery] Orders 3 and 4.” Pl.’s Mot. for Summ. Judgment
at 10. AEY has submitted numerous exhibits suggesting that the Army knew of the fraud at least
by September 2007. A timeline e-mailed by Melanie Johnson of the Army on March 29, 2008
states: “12 Sep[tember]: Telecon between Michael Mentavlos and Melanie Johnson and Kim
Jones that D[efense ]C[riminal ]I[nvestigative ]S[ervice] has evidence that AEY obtained the
7.62 ammo from a prohibited source (China) . . . .” Id. Ex. 7, at 3. Even before that
teleconference, the government executed a search warrant on August 23, 2007 at AEY’s place of
business in Miami Beach, Florida. Hr’g Tr. 27:1-6. Nonetheless, six months later, as of
February 2008, it appears that the Army wanted “the delivery of ammunition to continue,” Pl.’s
Am. Countercl. Reply Attach. 2, at 2 (e-mail from Col. Luigi Bieves to Daniel Stanwick (Feb.
22, 2008)), and was willing to accept the consequences. In an e-mail, Lt. Col. Moises Gutierrez
wrote,
CJ4 has not had sufficient time to analyze the impact of immediate suspension of
the 4 SAAM deliveries from AEY, Inc., nor staff the analysis to CSTC-A
leadership. Additionally the ANSF are moving into the Spring fighting season
and most ammunition is critically needed. The ANP has zero 7.62 x 54 mm on-
hand and is urgently waiting on deliveries of this ammo. As such, we are
requesting that DCMA be engaged as soon as possible to ensure quality
product/packaging, but that deliveries continue given the criticality of need.
Id. (e-mail from Lt. Col. Gutierrez to Col. Bieves (Feb. 22, 2008)) (emphasis added).
12
This would be a very different case if the government were able to make credible
allegations that AEY had obtained the underlying contract by fraudulent means. See United
States ex rel. Marcus v. Hess, 317 U.S. 537, 542-44 (1943), superseded by statute on other
grounds as recognized in Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel
Wilson, 559 U.S. 280 (2010). As the court stated in United States v. United Technologies Corp.,
626 F.3d 313, 319 (6th Cir. 2010), “Hess establishes that an invoice, which itself does not
contain a falsity, may supply the premise for a false claim if submitted in connection with a
fraudulently obtained contract.” (citing Hess, 317 U.S. at 542-44) (discussing liability under the
False Claims Act, which does not have the same intent requirement as the Forfeiture Statute).
14
In response to AEY’s waiver argument, the government asserts that waiver does not
apply because the Army did not know it was being defrauded on Delivery Order 2 when it issued
Delivery Orders 3 and 4. See Def.’s Cross-Motion for Summ. Judgment at 19. Moreover, the
government avers that requiring the contracting officer to have refused delivery of the shipments
at issue “would place [g]overnment contracting officials [in] an impossible position: reveal a
criminal investigation by informing a contractor that they should halt deliveries of already placed
[delivery] orders, or risk being forced to pay a contractor who may be engaged in fraud.” Id.
As precedent for finding waiver of the Forfeiture Statute, AEY cites Carrier Corp. v.
United States, 328 F.2d 328 (Ct. Cl. 1964). See Pl.’s Mot. for Summ. Judgment at 10-13. In
Carrier, the plaintiff contracted with the government to produce high-explosive shells. Carrier
Corp., 328 F.3d at 328. A detailed quality-control system had been specified by the government,
but eventually the government discovered that the plaintiff was bypassing a portion of the
established quality control system to keep up with required production levels. See id. at 329-332.
Upon discovery of the bypass, the government ordered production to stop. Id. at 332.
Subsequently, the plaintiff and the government informally, via phone calls and letters, worked
out provisions under which production could resume, and after fulfilling the requested
provisions, plaintiff resumed production. Id. at 332-33. Ultimately, governmental officials
rejected the provisions that allowed the resumption of production and canceled the contract. Id.
at 334. The plaintiff then sued for breach, and the government sought forfeiture of the plaintiff’s
claim under 28 U.S.C. § 2514. Id. The court concluded that “[i]t would be manifestly unfair for
defendant to practically agree to such an arrangement, induce [the plaintiff] to incur considerable
new expense, and at the same time have lurking in the back of its mind the intention to cancel the
whole contract, including the extra expense which the defendant had permitted and for practical
purposes had authorized after full knowledge of the facts in connection with the basis for final
cancellation.” Id. at 334. Accordingly, the court held that the government’s discussions with the
plaintiff amounted to a supplemental agreement untouched by fraud and that the government was
not entitled to forfeiture of the plaintiff’s claims. Id. at 336. The Court of Claims rejected the
idea that the government could knowingly continue to benefit from a contract it knew it intended
to cancel. See id. at 336-37 (“[D]efendant’s officials continued to discuss ways and means of
canceling the entire contract, while the plaintiff incurred additional needless expense without its
being advised of the nature of the discussion. While the decision was reached on December 16,
plaintiff was not notified until December 29.”).
The government resists applicability of Carrier by asserting that there was no
“supplemental agreement” in this case, Def.’s Cross-Mot. For Summ. Judgment at 17, but the
factual patterns in that case and this one have many similarities. Here the government became
aware of a fraud, but it chose to continue benefitting from the contract before ultimately
canceling the contract and claiming forfeiture of the contractor’s claims. The government’s
contention that it was under a “gag order” and could not halt shipments without jeopardizing its
investigation, id. at 20, ignores the record evidence that the ordered shipments of ammunition
were continued because they were desperately needed.
In the alternative, the government argues there are outstanding issues of material fact that
would make a decision on waiver premature, see Def.’s Cross-Mot. for Summ. Judgment at 29-
30. The court agrees. The specific timing of the issuance, delivery, and acceptance of Delivery
15
Orders 3 and 4 are generally delineated by the existing record, as are some of the government’s
activities to investigate AEY’s activities to deliver Chinese-made ammunition for Delivery Order
2. But, details may illuminate the timeline and the government’s actions in accepting the
delivery and then immediately suspending AEY from future contracting with the government.
3. Synopsis.
Due to the viability of AEY’s argument that the government waived its protections under
the Forfeiture Statute in this case and the genuine issues of material fact regarding that issue,
neither party’s motion for summary judgment can be granted. In the circumstances, the court
need not now address AEY’s arguments that 28 U.S.C. § 2514 is superseded by the CDA’s anti-
fraud provisions 13 and that each delivery order constitutes a separate contract. 14
III. AEY’s Motion to Dismiss Count II of the Government’s Counterclaims, Which Sets
Out Allegations Premised on the False Claims Act
Count II of the government’s counterclaims alleges that AEY is liable under the False
Claims Act (“FCA”) for the prior invoices submitted for the ammunition shipped under Delivery
Order 2 that was manufactured by a communist Chinese military company. See Def.’s Answer
& Countercl. ¶¶ 87-92. See Def.’s Ans. & Countercl. ¶¶ 87-92. AEY has moved to dismiss this
count of the government’s counterclaims, arguing that it was a compulsory counterclaim that
13
AEY asserts that the CDA provisions specifically contemplate “the submission of
several [c]laims under the same [c]ontract, allowing payment of non-fraudulent money [c]laims
not-withstanding fraud on other money [c]laims.” Pl.’s Am. Countercl. Reply at 21. In a hyper-
technical legal sense, this position can be understood as a restatement of the principle that the
Contract Disputes Act does not allow a contracting officer to consider claims involving fraud.
See Martin J. Simko Constr., Inc. v. United States, 852 F.2d 540, 545 (Fed. Cir. 1988)
(“Congress did not intend fraud claims by the government to be included in the dispute process
outlined by section 605(a) [of the Act, now recodified as 41 U.S.C. § 7103(a)].”); see also 48
C.F.R. § 33.210(“The authority [of a contracting officer] to decide or resolve claims does not
extend to . . . (b) [t]he settlement, compromise, judgment or adjustment of any claim involving
fraud.”). The contracting officer’s action in this case to rule on fraud in denying AEY’s claims
regarding Delivery Orders 3 and 4 does not, however, affect in any realistic way this court’s
judicial power to adjudicate AEY’s and the government’s competing claims because the court
can ignore the contracting officer’s specific conclusions and treat the officer’s action as a
straightforward denial of AEY’s claims. In all events, the court considers an action on a claim as
a de novo matter, and not as an appeal from a contracting officer’s decision. See 41 U.S.C.
§ 7104(b)(4) (“An action under paragraph (1) or (2)[, i.e., inclusive of an action brought in this
court on a claim that has been presented to a contracting officer] shall proceed de novo in
accordance with the rules of the appropriate court.”).
14
AEY submits that if each delivery order is considered a distinct contract, then fraud
under Delivery Order 2 cannot “taint” Delivery Orders 3 and 4 in any case. Pl.’s Mot. for
Summ. Judgment at 9.
16
should have been brought in AEY I, the prior civil case in this court, and is barred by claim
preclusion. Pl.’s RCFC 12(b)(6) Mot. to Dismiss Def.’s Cross-Mot. ¶¶ 2-3, ECF No. 38. 15
The government alleges violations of two provisions of the FCA, calibrating its
allegations to fit the effective dates of amendments to the Act. See Def.’s Answer & Countercl.
¶¶ 89-92. The Act was amended by Public Law 111-21, the Fraud Enforcement and Recovery
Act of 2009 (“FERA”), enacted on May 20, 2009. Generally, the amended provisions only
“apply to conduct on or after the date of enactment,” but with one exception that is arguably
applicable to this case. Pub. L. 111-21, § 4(f), 123 Stat. 1625 (codified at 31 USC § 3729 note
(2012) (effective date of 2009 amendment)). 16 The count of the government’s counterclaims
rests on one un-amended provision and one amended provision. The unamended provision, 31
U.S.C. § 3729(a)(1) provides that, for any person who
knowingly presents, or causes to be presented, to an officer or employee of the
United States Government or a member of the Armed Forces of the United States
a false or fraudulent claim for payment or approval . . . the court may assess not
less than 2 times the amount of damages which the [g]overnment sustains because
of the act of the person. A person violating this subsection shall also be liable to
the United States Government for the costs of a civil action brought to recover
any such penalty or damages.
31 U.S.C. § 3729(a)(1) (2006). Notably, the government’s count sets out minimal
allegations of damage sustained as a result of AEY’s delivery of Albanian-derived,
Chinese-manufactured ammunition to satisfy Delivery Order 2. See Def.’s Answer &
Countercl. ¶ 89 (“Because of the false [Certificates of Conformance], the United States
Government paid AEY a total of $10,331,736.44 to which AEY was not entitled.”). The
government apparently accepted and used that ammunition.
15
The government did not move for summary judgment regarding this count, and so the
merits of this count are not currently before the court for decision.
16
In pertinent part, Subsection 4(f) of FERA reads:
Effective Date and Application. – The amendments made by
this section shall take effect on the date of enactment of this Act and
shall apply to conduct on or after the date of enactment, except that –
(1) subparagraph (B) of section 3729(a)(1) of title 31, United States
Code, as added by subsection (a)(1), shall take effect as if enacted on
June 7, 2008, and apply to all claims under the False Claims Act (31 U.S.C. [§] 3729 et
seq.) that are pending on or after that date.
31 U.S.C. § 3729 note (2012).
17
The amended provision, 31 U.S.C. § 3729(a)(1)(B), took effect as if enacted on
June 7, 2008 and applies to all claims under the False Claims Act that were pending on or
after that date. The pertinent portion of Section 3729 states that any person who
knowingly makes, uses, or causes to be made or used, a false record or
statement material to a false or fraudulent claim . . . [,] is liable to the
United States Government for a civil penalty of not less than $5,000 and
not more than $10,000, as adjusted by the Federal Civil Penalties Inflation
Adjustment Act of 1990 (28 U.S.C. § 2641 note; Public Law 10[1]-410),
plus 3 times the amount of damages which the Government sustains
because of the act of that person.
31 U.S.C. § 3729(a)(1)(B). 17
In AEY I, AEY challenged the Army’s termination of its contract for default, seeking a
declaration that AEY was not in default and conversion to a termination for convenience. Pl.’s
Resp. to Def.’s Cross-Mot. at 3, ECF No. 37-1. In that action, that government filed a motion to
dismiss, which the court treated as a motion for summary judgment because “matters outside the
pleadings [were] presented to and not excluded by the court.” AEY I, 99 Fed. Cl. at 303 (quoting
RCFC 12(d)).
RCFC 13, the rule governing compulsory counterclaims, requires that “[a] pleading state
as a counterclaim any claim that – at the time of its service – the pleader has against an opposing
party if the claim: (A) arises out of the transaction or occurrence that is the subject matter of the
opposing party’s claim; and (B) does not require adding another party over whom the court
cannot acquire jurisdiction.” RCFC 13(a)(1). The government does not dispute that its FCA
counterclaim arises out of the same “transaction or occurrence” addressed in the prior civil case,
but it contends that it never filed a “pleading” within the terms of the rules, and so it was never
required to bring the counterclaim. Def.’s Resp. to Pl.’s Mot. to Dismiss at 5-6, ECF No. 41.
The government is correct. RCFC Rule 7(a) lists the pleadings allowed in this court, and neither
a motion to dismiss nor a motion for summary judgment is considered a pleading. As a
consequence, courts have consistently held that a motion for summary judgment is not a
“pleading” and does not trigger a requirement to file compulsory counterclaims. See, e.g., Horn
& Hardart Co. v. National Rail Passenger Corp., 843 F.2d 546, 549 (D.C. Cir. 1988) (ruling in a
claim for further relief under the Declaratory Judgment Act, that a motion for summary judgment
filed in the prior proceeding did not trigger the compulsory counterclaim requirement of Fed. R.
Civ. P. 13(a)); Trotter v. Jack Anderson Enters., Inc., 818 F.2d 431, 436 (5th Cir. 1987) (holding
that motion for summary judgment is not a responsive pleading).
17
In essence, Section 3729 imposes a penalty on a person who knowingly presents a false
claim wholly apart from proof of any specific damages. See Daewoo Eng’g & Constr. Co. v.
United States, 557 F.3d 1332, 1340 (Fed. Cir. 2009) (“Because the court did not find that the
government incurred damages from Daewoo’s false claim, the court properly assessed only the
statutory penalty.”).
18
Similarly, the government is not otherwise prohibited from bringing its counterclaim by
the common law rules of claim preclusion. Claim preclusion refers to the “effect of foreclosing
any litigation of matters that never have been litigated, because of a determination that they
should have been advanced in an earlier suit.” 18 Charles Alan Wright, Arthur R. Miller &
Edward H. Cooper, Federal Practice and Procedure § 4402 (2d. ed. 2002); see also Nevada v.
United States, 463 U.S. 110, 129-30 (1983) (considering that a final judgment is “a finality as to
the claim or demand in controversy . . . not only as to every matter which was offered and
received to sustain or defeat the claim or demand, but as to any other admissible matter which
might have been offered for that purpose” (quoting Cromwell v. County of Sac, 94 U.S. 351, 352
(1876))). In this respect, the Federal Circuit has recognized rules particular to “defendant
preclusion.” See Nasalok Coating Corp. v. Nylok Corp., 522 F.3d 1320, 1324 (Fed. Cir. 2008).
The court in Nasalok applied the Restatement (Second) of Judgments § 22(2) (1982), which
states: “A defendant who may interpose a claim as a counterclaim but fails to do so is precluded
after the rendition of judgment in that action, from maintaining an action on the claim, if:
(a) [t]he counterclaim is required to be interposed by a compulsory counterclaim statute or rule
of court [e.g., RCFC 13(a)] or (b) [t]he relationship between the counterclaim and the plaintiff’s
claim is such that successful prosecution of the second action would nullify the initial judgment
or would impair rights established in the initial action.” Restatement (Second) of Judgments,
§ 22(2); see Nasalok, 522 F.3d at 1324.
In this case, the government was not required by RCFC 13(a) to bring its counterclaim in
the prior action, and there is no concern that if the government prevails on its FCA counterclaim
that it would have an adverse effect on the court’s prior judgment. Consequently, the
government’s FCA counterclaim is not barred by application of RCFC 13(a) or claim preclusion.
CONCLUSION
For the reasons stated, AEY’s motion for summary judgment as to Count I of the
government’s counterclaims and its motion to dismiss Count II of the government’s
counterclaims are DENIED. The government’s motion for summary judgment as to Count I of
its counterclaims is also DENIED. AEY’s motion to file an amended reply to the government’s
counterclaims is GRANTED.
It is so ORDERED.
s/ Charles F. Lettow
Charles F. Lettow
Judge
19