American Government Properties and Houma Ssa, LLC v. United States

In the United States Court of Federal Claims

No. 09-153, 10-541C, & 11-486C (consolidated)

(Filed: August 28, 2014)

**********************

AMERICAN GOVERNMENT

PROPERTIES and HOUMA

SSA, LLC,

Plaintiffs,

v.

THE UNITED STATES OF AMERICA,

Defendant.

**********************

Attorneys

OPINION

This case concerns a contract to design, build, and then lease to the Social

Security Administration (“SSA”) an office building in Houma, Louisiana. The

General Services Administration (“GSA”) terminated the contract for default,

citing lack of progress in construction. This case was filed along with three

others also involving contracts to design, build, and lease office buildings in

Louisiana to the SSA.1 Plaintiffs in each case were terminated for default and

now allege that the termination was improper and seek damages as a result of

defendant’s alleged breach of the contract. Defendant has moved to dismiss

two of the cases, including this one, on the grounds of an improper assignment.

1

Those cases are American Government Properties & New Iberia SSA, LLC,

No. 09-131C, Lake Charles XXV, LLC v. United States, No. 09-363C, and

Terrytown SSA, LLC v. United States, No. 09-364C. Those cases are not

consolidated with this one because they involve separate contracts. The docket

numbers consolidated with the present case, as will be explained later,

represent later claims made to the contracting officer regarding this contract.

In this case, the allegation is that the contract was assigned to Houma SSA,

LLC (“Houma”) by American Government Properties (“AGP”), the original

contracting party, in violation of the Contracts Act’s prohibition against

assignments,2 or, in the alternative, that one or both of the two plaintiffs lack

standing.3 Because we agree that the assignment from AGP to Houma violated

the Contracts Act, we grant the motion to dismiss.

BACKGROUND

The General Services Administration (“GSA”) awarded Lease No. GS-

07B-15580 to AGP on June 16, 2005. The contract called for AGP to design

and build a 12,206 rentable square feet office facility in Houma, Louisiana and

then lease it to SSA.

On July 27, 2005, AGP executed a document entitled “Assignment of

U.S. Government Real Property Lease” with Huoma, a newly formed

Louisiana limited liability company. AGP was the sole member of Houma.

The assignment document stated that the assignor, AGP, “assign[ed] all of its

contractual rights and interests under the Lease.” Def.’s App 223. The

assignee, Houma, agreed “to perform all of the obligations of Lessor under the

Lease.” Id. Houma, as assignee, also agreed to “take all steps necessary to

ensure that this Assignment is reflected in the records of the United States

Government.” Id.

GSA provided final design drawings in late June 2006. See Def.’s App.

248-49 (emails between GSA, SSA and plaintiffs’ subcontractor regarding the

design drawings). GSA issued the notice to proceed on March 1, 2007.

By September 2007, the parties were discussing possibilities for

plaintiffs and their general contractor, Carotex Construction, Inc., to extricate

themselves from the lease and several other related projects on which Carotex

was the general contractor. Victor Blackmon, a principal of plaintiffs and

Carotex, inquired about selling and assigning the leases or mutually

terminating them. See Def.’s App. 251-52 (email chain between Blackmon

2

See 41 U.S.C. § 6305 (2012).

3

Defendant also moved for summary judgment on the alternate ground that its

termination for default was proper. We need not reach that motion because we

grant the government’s motion to dismiss.

2

and GSA). On September 20, 2007, however, Mr. Blackmon proposed a

construction schedule culminating in delivery of the facility to SSA for move-

in on February 18, 2008. The parties proceeded down that path with

AGP/Houma/Carotex building the facility.

In October 2007, the contracting officer at that time, Nancy Lopez, and

Mr. Blackmon discussed by email the assignment from AGP to Houma. Ms.

Lopez inquired whether Houma/AGP had sent to GSA the necessary

paperwork documenting the assignment. If not, she asked for a copy of the

assignment agreement between AGP and Houma. Mr. Blackmon replied that

he would look through company files and send a copy of a Supplemental Lease

Agreement (“SLA”) in which, he said, GSA agreed to substitute Houma for

AGP. See Def.’s App. 259-60. Neither party has produced a copy of such an

SLA nor is there any evidence, other than this email exchange, that one was

executed.

GSA and plaintiffs did, however, execute a SLA regarding a different

matter on November 8, 2007, in which the parties agreed that GSA would

conduct a site visit and inspection of the concrete slab on November 12, and

that plaintiff would deliver the Houma facility on February 18, 2008. Def.’s

App. 261 (SLA No. 1). Less than a week later, GSA sent a cure notice to

Carotex, stating that the inspection revealed that no construction progress had

been made since the last site visit on August 10, 2007. Def.’s App. 274

(November 16, 2007 cure notice). The notice warned that GSA was

considering terminating the contract for default and instructed Mr. Blackmon

that he had ten days “to present, in writing, any facts bearing on the question”

of whether the “failure to perform arose from causes beyond your control and

without fault or negligence on your part.” Def.’s App. 275.

Mr. Blackmon responded to the cure notice in a November 26, 2007

email to Ms. Lopez, stating that Houma had experienced 34 days of rain delay

since September 1, 2007, and that all the necessary building permits were not

received until October 8, 2007. Def.’s App. 278. He asked for credit for 23

days of rain delay and a concomitant extension. Further, he promised to

provide a new schedule and supporting information by November 30, 2007.

He also promised to provide more information regarding the chronology of the

project and the impact of the various events on the project’s time line within

two weeks of his email. Id. at 279.

Plaintiffs and Carotex continued to work through problems with

subcontractors and the various building permits. An internal Cerotex email

3

from project manager Jesse LeBlanc indicated that Houma had these issues

largely worked out by December 21, 2007, and that the “only loose end”

remaining was an electrical contractor. Def.’s App. 280. GSA conducted site

visits in December 2007 and January 2008.

On February 21, 2008, GSA sent another letter to AGP, detailing the

various deadlines not met, problems with the concrete slab, and failure to

respond to the previous notice with the promised information. GSA once

again warned of a likely termination for default and instructed AGP to provide

information within 10 days regarding whether it was at fault.

Plaintiffs responded on March 4, 2008, through a Carotex employee,

John Kimbrough, writing on Houma letterhead. In that letter, AGP/Houma

reported that plaintiffs had hired a structural engineer to report on the concrete

slab and that another nine yards remained to be poured. The next day, Mr.

Kimbrough sent a revised schedule extending the completion date to June 18,

2008.

The contracting officer responded by letter dated March 12, 2008,

terminating the contract for default pursuant to GSA Regulation (“GSAR”)

552.270-18, which was incorporated into the contract by reference, citing, among

other things, failure to complete the project by the February 21, 2008 date agreed

to in SLA No. 1 and failure to submit information regarding the delays and

problems noted in the November 2007 cure notice. The agency then sought bids

for a replacement contractor to design, build, and lease a facility in Houma,

Louisiana.

AGP submitted a certified claim to the contracting officer, dated March

25, 2010, seeking $4,217,607.20 in damages as a result of wrongful termination.

AGP claimed that delays in completion were due to unusually severe rain for “no

less than 87 days,” which it claimed excused the delay in construction. Def.’s

App. 305. AGP also claimed it experienced delay due to GSA’s failure to timely

provide design drawings and a notice to proceed, GSA’s failure to cooperate and

communicate after Hurricanes Katrina and Rita, and GSA’s improper halting of

the concrete slab pour. AGP did not, however, quantify those alleged delays. See

id. at 301-08.

The contracting officer issued her final decision denying AGP’s claim on

June 10, 2010. She rejected the weather delay claim based on lack of evidence

and failure to provide notice of such delay prior to contract termination, and

concluded that the termination for default was proper. The rest of plaintiffs’

4

claims were denied on the basis that the termination was proper. See Def.’s

App. 649-54.

In early May 2010, the contracting officer issued another final decision

assessing $2,463,170.80 in reprocurement costs and liquidated damages

totaling $365,000 for the delay between the original contract completion date,

February 18, 2008, and the estimated January 11, 2012 replacement lease

delivery date ($250.00 dollars per day). On June 22, 2010, GSA issued a

replacement contract for the design, construction, and lease of similar, slightly

larger facility.

Plaintiffs brought their complaint here on March 11, 2009, prior to

submitting a certified claim to the contracting officer. Plaintiffs subsequently

voluntarily dismissed the damages element of that complaint. The case

remained pending while they submitted a certified claim and the contracting

officer issued her decisions. Plaintiffs then reasserted their request for

damages in a new complaint filed on August 11, 2010, under docket number

10-541. Plaintiffs separately appealed the agency’s assessment of

reprocurement costs and liquidated damages in a complaint filed on July 26,

2011, under docket number 11-486. Both of those cases have been

consolidated under this case, and all of those issues are pending before the

court. After extensive discovery, defendant has moved to dismiss, or in the

alternative, for summary judgment that the termination was proper. Plaintiffs

responded, opposing the motion to dismiss, and moved for partial summary

judgment that the termination was improper.

DISCUSSION

The basis of defendant’s motion to dismiss is that the assignment of the

contract from AGP to Houma was a violation of the Contracts Act’s

prohibition against contract assignments, thereby voiding the contract.

Without a valid contract with the United States, plaintiffs do not have standing

to maintain a claim against the United States. In the alternative, if the court

decides that either plaintiff survives the motion to dismiss, then the other

company should be dismissed because it was not in privity with the

government. Because we agree with defendant that the assignment executed

between AGP and Houma violated the Contracts Act, we need not reach the

parties’other arguments regarding whether the termination for default was

proper.

Plaintiffs bear the burden of proving jurisdiction by a preponderance of

5

the evidence. Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 748

(Fed. Cir. 1988). The factual allegations in the complaint are generally treated

as true, but they may be challenged. See Shoshone Indian Tribe of the Wind

River Reservation v. United States, 672 F.3d 1021, 1030 (Fed. Cir. 2012).

When considering a question of jurisdiction, the court may consider extrinsic

evidence. See Cedars-Sinai Med. Ctr. v. Watkins, 11 F.3d 1573, 1584 (Fed.

Cir. 1993). Our jurisdictional statutes, as waivers of sovereign immunity, must

be construed strictly, and any conditions placed upon the court’s jurisdiction

must be met in order to hear a claim. John R. Sand & Gravel Co. v. United

States, 552 U.S. 130, 133-34 (2008) (holding that this court’s statute of

limitations had to be construed strictly as a condition placed upon this court’s

jurisdiction).

The Contract Disputes Act (“CDA”), 41 U.S.C. §§ 7101-7109 (2012),

grants this court jurisdiction to review final decisions of contracting officers.

Id. § 7104(b). When the CDA is implicated, this court has “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

requirements of the CDA and other contracting statutes “operate as limits upon

this waiver of sovereign immunity.” Inter-Coastal Xpress, Inc. v. United

States, 296 1357, 1365 (Fed. Cir. 2002). In the context of a CDA claim, the

implication of strictly construing our jurisdiction is that, if plaintiffs fail to

meet a requirement of the act or otherwise violate a requisite to triggering

access to the court through a contracting statute, jurisdiction does not attach.

41 U.S.C. § 6305, known as the “Contracts Act,” prohibits the transfer

of federal contracts, or any interest in such a contract, to another party. “A

purported transfer in violation of this subsection annuls the contract or order

so far as the Federal Government is concerned, except that all rights of action

for breach of contact are reserved to the [government].” Id. § 6305(b).4 This

“protect[s] the Government from secret assignment arrangements, to prevent

possible multiple claims, and to make unnecessary the investigation of alleged

assignments.” Fireman’s Fund Ins. Co. v. England, 313 F.3d 1344, 1349 (Fed.

Cir. 2002). Thus the government knows with whom it is dealing, see Hobbs

v. McLean, 117 U.S. 567, 576 (1886), and is protected against the potential of

4

This section was recodified on January 4, 2011 to appear as it does today at

41 U.S.C. § 6305. Previously it was codified at 41 U.S.C. § 15(a) in

substantially the same form. For ease of reference, we cite to its current

location.

6

duplicate claims, NGC Inv. & Dev., Inc. v. United States, 33 Fed. Cl. 459, 463

(1995).

Under the act, contracts may be assigned only to a financing institution,

such as a bank or trust company, for the entire balance due, to only one party,

and the assignee must file a written notice of the assignment, along with a copy

of the instrument of assignment with the CO, the surety provider, and the

disbursing officer designated in the contract to make payment. 41 U.S.C. §

6305(b). These requirements may be abrogated by contractual agreement

between the government and the original contractor. If these conditions are

not met, the assignment violates the Contracts Act, and any claim against the

contract is annulled at the government’s option. Id.

In addition to the statutorily allowed assignments, there are two

judicially recognized exceptions to these requirements. The first is if the

agency waives the statutory prohibition by giving “clear assent to the

assignment.” D&H Distrib. Co. v. United States, 102 F.3d 542, 546 (Fed. Cir.

1996). This court’s predecessor explained that the government can waive the

assignment prohibition through a novation agreement executed by all three

involved parties, which the court described as the “soundest and most accepted

method of establishing recognition” of the assignment by the government, or

it can waive the prohibition by acting consistently with the assignment through

its course of conduct. Tuftco Corp. v. United States, 614 F.2d 740, 745 (Ct.

Cl. 1980). The question is thus whether the agency’s actions “indicated its

consent to and recognition of the assignments.” Id. The burden is on the

plaintiffs to show a “meeting of the minds” that the government acquiesced to

the change. Kawa v. United States, 86 Fed. Cl. 575, 91 (2009).

The second exception to the prohibition against assignment is one by

operation of law. This exception has been recognized since the Supreme

Court’s 1878 decision in Erwin v. United States, in which the Court

maintained that an assignee in bankruptcy could sue the government on a

contract claim despite the statute’s prohibition. Erwin v. United States, 97

U.S. 392 (1878). Since then, courts have further applied the operation of law

exception in cases of corporate succession through merger or consolidation,

see, e.g., Seaboard v. Air Line Ry. v. United States, 256 U.S. 655 (1921), and

certain instances of corporate reorganization, see, e.g., Johnson Controls

World Servs., Inc. v. United States, 44 Fed. Cl. 334 (1999) (allowing a wholly

owned subsidiary to maintain a claim after it was assigned a contract entered

into by the parent company).

7

Defendant argues that plaintiffs violated the act when AGP entered the

lease assignment agreement with Houma because Houma is not a financing

company, as required by the act, nor did plaintiffs properly notice the agency

by notifying the disbursing officer. Defendant further argues that the

government did not waive its rights in this regard because GSA took no actions

that would show an intentional abandonment of its rights. Defendant points

to the fact that no novation was entered into by the parties, i.e., no

supplemental lease agreement naming Houma as the party to receive payment,

and GSA never submitted payment to Houma nor took any other action

manifesting a clear intent to recognize and accept AGP’s transfer to Houma.

The government’s final point is that the transfer from AGP to Houma could

not have been “by operation of law” because Houma is an entirely separate

corporate entity from AGP, Houma did not succeed AGP in interest through

corporate reorganization or acquisition, and the transfer of interest did not

happen by other lawful means such as bankruptcy.

Plaintiffs do not claim to meet the statutory requirements for

assignment, but argue that, because the same individuals were in control of

both entities (AGP and Houma), the purpose of the act was not violated and

the “operation of law” exception should apply. Plaintiffs cite a decision of the

General Services Board of Contract Appeals in which the board allowed a

claim to survive despite plaintiff having assigned the contract to a partnership

that she created with her two sons. See Adelaide Blomfield Mgmt. Co.,

GSBCA No. 13125, 95-2 BCA ¶ 27,865 (1995). The board held that the

contract need not be annulled because GSA knew with whom it was dealing

and to whom payment was owed. Id. Here, plaintiffs argue that the transfer

to Houma was akin to a corporate reorganization. Plaintiffs allege that Houma

was a wholly owned subsidiary of AGP, formed specifically to administer this

contract, which plaintiffs aver was the normal practice of AGP. AGP was the

only member of Houma as a Limited Liability Company, and thus, in

plaintiff’s view, the aims of the statute are not met by annulling this contract

because the same individuals were in control of both entities and thus also

responsible to the government. We disagree.

I. The Transfer to Houma Was Not a Corporate Reorganization

There is a distinction between a voluntary transfer of contract rights,

like that between AGP and Houma, and one in which the transfer is forced by

law, like corporate succession through purchase or merger, or by other

operation of law, such as bankruptcy. The courts have long recognized this

distinction in carving out the limited exception to the prohibition against

8

contract assignment. See, e.g., United States v. Dow, 357 U.S. 17, 20 (1958)

(holding a taking claim to be barred by The Assignment of Claims Act because

the former land owner’s assignment of the claim was a voluntary transfer and

not an operation of law).5 As this court previously explained, the operation of

law exception “generally involves situations where, for all intents and

purposes, the contract with the Government continues with essentially the

same entity, which has undergone a change in its corporate form or

ownership.” L-3 Commc’ns Integrated Sys., L.P. v. United States, 84 Fed. Cl.

768, 777 (2008) (citing Westinghouse Elec. Co. v. United States, 56 Fed. Cl.

564, 569 (2003)).

In Johnson Controls, we concluded that a corporate reorganization

whereby the parent corporation shifted an entire division responsible for

performance of the subject contract to a wholly owned subsidiary did not run

afoul of the Contracts Act. 44 Fed. Cl. at 344. This transfer was not

problematic because the Air Force was never faced with more than one

contracting party and was “always cognizant of the contracting party” before

and after the reorganization. Id. The new subsidiary also maintained the same

management and financial resources dedicated to the contract before and after

the change. Id. Recognizing the exception to the prohibition in that instance

did not “impinge upon the purposes of the Act.” Id.

Here, Houma was not a successor in interest to AGP in the sense used

in Johnson Controls. Houma did not succeed in interest through bankruptcy,

merger, or acquisition. It was a voluntary transaction, a transfer of interest

from one continuing corporate entity to another newly formed one. Although

AGP was the sole member of Houma, a limited liability company, plaintiff has

neither alleged nor presented evidence suggesting that Houma maintained the

same management, outside of the commonality of Mr. Blackmon and several

other owners common to both companies, or the same financial wherewithal

to perform the contract. The government lost the assurance that the resources

of AGP would be available to complete the project or available should the

5

The Assignment of Claims Act (“Claims Act”), 31 U.S.C. § 3727 (2012),

prohibits the assignment of claims against the government before the claim has

been allowed. Dominion Res., Inc. v. United States, 641 F.3d 1359, 1362 (Fed.

Cir. 2011). The Claims Act and Contracts Act serve very similar purposes and

the courts have recognized that these statutes act in concert to protect the

government, and as such, the operation of law exception is treated similarly

under both statutes. See id. at 1363 (citing Tufcto, 614 F.2d at 744 n.4).

9

government be forced to seek a remedy for breach.

The Contracts Act ensures that an agency will know with whom it is

dealing during contract performance, whom it should pay, and whom it has

recourse against should the contractor fail to perform. The purposes of the

act’s prohibition of assignments are well met in this case. The parties

corresponded regarding a transfer to Houma. Mr. Blackmon told GSA that the

lease was under the wrong name, AGP rather than Houma. The contracting

officer, Ms. Lopez, responded by asking for supporting documentation and

more specifically also asked whether a supplemental lease agreement had been

executed to substitute Houma for AGP. The record is silent after this point as

to the existence of such a document, and after several years of discovery,

plaintiff is unable to produce one.6 Thereafter, plaintiffs occasionally

communicated to GSA through Houma, but the agency responded to AGP.

The fact that the government is now sued by both entities is the best proof that

the attempted assignment was problematic.

Plaintiffs attempt to assuage these concerns by pointing to the ex post

dissolution of Houma and the necessary transfer by operation of Louisiana law

of its assets back to AGP. Thus, in plaintiffs’ view, the assignment to Houma

was a practical nullity. Because no novation agreement was ever entered into

by the parties, GSA dealt with AGP all along, and the Contracts Act should not

be implicated, according to plaintiffs’ counsel.

We cannot, at plaintiffs’ invitation, simply ignore assignment of the

lease agreement between AGP and Houma, however.7 There was a period of

time when, under state law, the rights and duties of AGP under the contract

with GSA were transferred to Houma. The government, however, not having

acceded to the transfer of interest, continued to correspond and administer the

contract with AGP. The Contracts Act prohibits exactly this sort of

contractual imprecision. This is why the courts have long recognized that a

6

Plaintiffs admit several times in their briefing that no novation agreement was

reached between the parties. Eg., Pls.’ Reply to Def.’s Mot. To Dismiss 2.

7

We also do not regard, and plaintiff has not argued, that the contracting

officer’s request for supporting documentation and inquiry as to whether a

SLA had been executed constituted a waiver by course of conduct. Mr.

Blackmon informed GSA that the lease should be in the name of Houma, and

GSA responded only with questions. See Def.’s App. 259-60. We cannot

construe that as an intentional waiver of rights.

10

novation is the proper way to avoid the prohibition against assignment. See

Tuftco, 614 F.2d at 745.

Plaintiffs violated the act by transferring the lease from AGP to Houma.

Although this trouble would almost certainly have been avoided had plaintiffs

simply sent the necessary paperwork to GSA and executed a supplemental

agreement to substitute Houma in place of AGP, the Contracts Act must be

strictly construed as a condition on the waiver of sovereign immunity. Not

having undertaken those necessary steps, the conclusion that plaintiffs’

contract was annulled is inescapable. Defendant’s motion to dismiss must be

granted.

CONCLUSION

Because the Contracts Act annulled plaintiffs’ contract with GSA, they

lack standing to maintain a suit against the government. Accordingly,

defendant’s motion to dismiss for lack of jurisdiction is granted, and

defendant’s and plaintiff’s cross-motions for summary judgment are denied as

moot. The clerk is directed to enter judgment accordingly.

s/ Eric G. Bruggink

ERIC G. BRUGGINK

Judge

11