Opinion

Fort Howard Senior Housing Associates, LLC v. United States

121 Fed. Cl. 636
2015 U.S. Claims LEXIS 665
2015 WL 3451759

Court: United States Court of Federal Claims
Filed: May 29, 2015
Status: Published
Author: Firestone
On the bench: Nancy B. Firestone
Cited by: 1 cases
Authority: More cited than 44.7%

The opinion

In the United States Court of Federal Claims

No. 10-553C

(Filed: May 29, 2015)

)

FORT HOWARD SENIOR )

HOUSING ASSOCIATES, LLC, )

)

Plaintiff, )

Enhanced-Use Lease; Department of

)

Veterans Affairs; Termination for Default;

v. ) Breach of Contract; Excuse; Force

) Majeure; Reformation; Mutual Mistake;

THE UNITED STATES, ) Impossibility

)

Defendant. )

)

Steven H. Jesser, Glenview, IL, for plaintiff.

Sheryl Lynn Floyd, Civil Division, U.S. Department of Justice, Washington, DC,

with whom were Joyce R. Branda, Acting Assistant Attorney General, and Robert E.

Kirschman, Jr., Director, Commercial Litigation Branch, for defendant.

OPINION

FIRESTONE, Judge.

Pending before the court is the government’s motion for summary judgment, filed

pursuant to Rule 56 of the Rules of the United States Court of Federal Claims (“RCFC”).

At issue is whether the Department of Veterans Affairs (“VA”) properly terminated for

default the September 28, 2006 Enhanced-Use Lease (“Lease”) between the VA and

plaintiff Fort Howard Senior Housing Associates, LLC (“FHSHA”) at the Fort Howard

VA Medical Center in Baltimore County, Maryland. The Lease was executed pursuant to

the VA’s authority under 38 U.S.C. §§ 8161-8167 and gave FHSHA the right to occupy

the property for a term of 65 years, with an option to extend the Lease for 10 additional

years. In exchange for its occupation, FHSHA was required to (1) pay consideration in

the form of rent; (2) design, develop and construct a new 10,000 square foot Community-

Based Outpatient Clinic (“CBOC”) within 39 months; (3) design and construct multi-use

residences onsite in compliance with “applicable” state and local laws, codes, and

regulations; and (4) protect, preserve, maintain, and repair the property.

After several years, the VA became concerned about the status of the project and,

starting in February 2009, the VA began sending notices of default to FHSHA.

Ultimately, the VA determined that FHSHA was in default of the Lease and, on August

17, 2009, the VA terminated the Lease for default on the primary grounds that FHSHA

had failed to (1) commence construction of the new CBOC such that it would be

completed with the timeframe required under the Lease,1 (2) maintain and secure the

property, and (3) pay its proportionate share of the utility bills.

FHSHA filed its initial complaint on August 16, 2010 and an amended complaint

on June 29, 2012.2 In its complaint, plaintiff asserts that the VA’s termination was

wrongful on two main grounds: (1) its failure to build the CBOC was excused by the

force majeure clause in the Lease, and (2) the government otherwise breached the Lease

Plaintiff had not yet begun construction.

Plaintiff’s amended complaint added a new count for “tortious interference with contractual

relationships and prospective economic advantages” and a claim for money damages based on

costs, fees and expenses and for future development fees and profits. The court dismissed

plaintiff’s money claims for lack of jurisdiction on September 11, 2012, on the grounds that

plaintiff had not submitted its money claims to a contracting officer as required by the Contract

Disputes Act, 41 U.S.C. §§ 7101-7109. Order Granting Motion to Dismiss, Fort Howard Senior

Housing Associates, LLC v. United States, No. 10-553 (Fed. Cl. Sept. 11, 2012).

on various grounds. In its amended answer, the government counterclaimed for breach of

the Lease and seeks $313,328.45 as the amount allegedly owed to the government under

the Lease.

At the heart of FHSHA’s defense to the termination is its contention that it entered

into the Lease with the understanding that it would be able to build 1,300 housing units

on the site and that VA’s requirement that it comply with Baltimore County zoning

regulations—which without a variance would limit development to 550 units—made the

project economically unviable, requiring renegotiation. FHSHA argues that Baltimore

County’s failure to accept plaintiff’s request for an exemption from local requirements

amounted to a force majeure event under the terms of the Lease. Plaintiff further argues

that the VA’s insistence that plaintiff comply with local laws in connection with the

project amounted to a breach of contract on several grounds and further excused

FHSHA’s obligations under the Lease. Plaintiff argues that the VA, as the federal

government, is not required to comply with local laws and regulations, and thus it was the

VA’s insistence that plaintiff meet local zoning requirements that made the project

economically unviable.

Discovery in the case is now completed. The government has moved for summary

judgment, asking the court to find that the undisputed facts establish that the termination

for default was reasonable and proper and that plaintiff’s nonperformance is not

excusable for any of the reasons advanced by the plaintiff. In response, FHSHA argues

that the government’s motion should be denied on the grounds that there are genuine

issues of material fact as to each of the government’s alleged grounds for termination for

default and that, even if the termination was correct, FHSHA has presented sufficient

facts to show that the failure to act was excusable under the Lease. For the reasons set

forth below, the court finds that the government is entitled to summary judgment with

regard to the default termination for failing to build the CBOC and that the grounds

asserted by FHSHA for its failure to act do not constitute excuses as a matter of law.

Because FHSHA’s failure to build the CBOC within the time provided for under the

Lease justified a termination for default and the failure cannot be excused, the court does

not reach the alternative grounds for summary judgment set forth in the government’s

motion.

I. STATEMENT OF UNDISPUTED FACTS

The following facts are not disputed. Disputed facts relevant to FHSHA’s defense

that its failure to perform was “excused” are discussed in connection with those claims.

A. The Lease

The authority for the VA to enter enhanced-use leases (“EUL”) such as the Lease

is set forth in 38 U.S.C. §§ 8161-8167. Pursuant to VA Handbook and Directive 7415,

the VA Secretary assigned the Office of Asset Enterprise Management as the office

within VA responsible for oversight of VA’s EUL program and management of

enhanced-use projects identified as VA asset initiatives. Def.’s App’x 295-323, VA

Handbook and Directive 7415.

1. Scope of the Lease

On September 28, 2006, FHSHA and VA entered into an EUL. The Lease

identifies that FHSHA’s role is to serve as the “master developer of the Property, with the

right and obligation to design, develop, construct, alter, operate, maintain, repair, replace,

sublease, finance, improve and renovate the Property into the Project, and to demolish

any existing buildings, structures and improvements on the Property, in accordance with

the terms of this Lease.” Def.’s App’x 2. The Lease defines “Project” as “[t]he Lessee’s

design, development, construction, demolition, alteration, operation, maintenance, repair,

replacement, subleasing, financing, improvement, and renovation of the Property as

provided in this Lease.” Pursuant to the Lease, the VA leased the “Property” to FHSHA

for a term of 65 years, with a FHSHA option to extend for an additional 10-year period as

long as an uncured Lessee Event of Default did not exist. The Lease defines “Property”

as:

[t]hat certain real property consisting of approximately ninety (90) acres (i)

as described and depicted in Exhibits A, with Attachment 1 to Exhibit A,

and E attached hereto and includes (ii) all buildings, improvements, utilities

and infrastructure either existing or erected or placed thereon, but: (1) will

not include the CBOC Parcel and the CBOC when the CBOC Parcel and

CBOC revert to VA upon the completion of construction and acceptance by

the Department, in accordance with Article 4, paragraph A.4. and (2) will

include the ten contiguous acres for the State of Maryland Veterans Home

described in Exhibit A, with Attachment 1 to Exhibit A, and Exhibit H in

the event that such ten contiguous acres are added to this Lease during the

term by amendment in accordance with Article 4.A.5 of this Lease.

Id. at 7, Article 1. The Lease defines “CBOC” as the 10,000 square foot Community-

Based Outpatient Clinic to be designed, developed and constructed on the Property by

FHSHA for the VA as part of the consideration provided by FHSHA to VA under the

Lease. Id. at 4.

2. FHSHA’s Consideration

In exchange for VA leasing the Property to FHSHA, FHSHA agreed to provide

VA consideration in the form of “Rent,” and to complete both a housing project and an

outpatient clinic. The Lease defines “Rent” as

[c]onsideration provided to VA for the Lease pursuant to Title 38 U.S.C.

Section 8162 that includes discounts to veterans as described in Exhibit G,

paragraph G.1; and in the event that discounts to veterans are not provided

in accordance with Exhibit G, paragraph G.3, payments to VA as

compensation for such failure to provide such discounts to veterans in

accordance with Article 23.c.3.c.

Id. at 7-8. Article 4 of the Lease identifies the additional items that FHSHA and VA

agreed “constitute fair consideration for the Lease.” Id. at 10; id. at 892, Infantino Dep.

149:4-20, Jan. 23, 2014.

Pursuant to Article 4.A.1 of the Lease, FHSHA agreed to:

Finance, design, develop, construct, demolish, alter, operate, maintain,

repair, replace, sublease, improve, renovate and market the Property into

the “Project” in accordance with this Lease (including but not limited to

Article 10 hereof), all applicable local and State laws, codes and

ordinances, and the National Fire Protection Association (“NFPA”) 101

Life Safety Code.

Id. at 10, Article 4.A.1. Pursuant to Article 4.A.2 of the Lease, FHSHA agreed to:

[(i)] obtain all applicable local and State permits, licenses, and approvals

(including those approvals of VA) necessary for construction and operation

of the Permitted Uses; (ii) comply with all applicable local, State, and

Federal requirements during operation of the Permitted Uses (including the

applicable version of the National Fire Protection Association (NFPA) 101

Life Safety Code); (iii) undertake its construction and operation activities

so as to not unreasonably interfere with the operations, or otherwise deprive

the Department of its quiet use and enjoyment of the CBOC or such other

facilities on the Property as may be under VA possession, control, use

and/or occupancy (“VA Facilities”) and use all reasonable and commercial

efforts to conduct any of its construction activities involving noise, dirt, or

other emissions that could negatively affect activities or operations of VA

Facilities to times falling within normal business hours; and (iv) operate the

Project in accordance with existing applicable laws pertaining to a drug-

free environment.

Id., Article 4.A.2. Pursuant to Article 4.A.3 of the Lease, FHSHA agreed to

“[a]ccomplish a phased reuse and redevelopment of the Property, not to exceed three (3)

phases, as set forth in the ‘Parcelization Plan’ in the Development Plan hereto, within one

hundred and fifty-nine (159) months after the Effective Date . . . .” Id., Article 4.A.3.

Pursuant to Article 4.A.4 of the Lease, FHSHA agreed to

[d]esign, construct, and develop a 10,000 GSF VA Outpatient Clinic

facility (CBOC) on a parcel of the Property (“CBOC Parcel”) . . . . Lessee

shall complete the construction of the CBOC and obtain final acceptance

thereof . . . no later than thirty-nine (39) months after the Effective Date . . .

. Upon completion of construction of the CBOC and final acceptance by

[the VA], Lessee shall, at no expense or liability to [the VA], transfer all of

Lessee’s right, title and interest in and to the CBOC to [the VA], and

simultaneously Lessee’s leasehold interest in the CBOC Parcel shall

automatically revert to VA at no expense or liability to [the VA] and the

CBOC shall cease being part of the Property.

Id. at 11, Article 4.A.4. Article 10.H.1 further requires that, “Except for the CBOC,

Lessee shall (i) conduct the Project Development so as to comply with all applicable

State and local laws, codes, ordinances, permits and inspections . . . .” Id. at 26, Article

10.H.1.

Articles 4.A.3 and 4.A.4 are subject to the force majeure clause, which the Lease

defines as

[a]ny of the following that directly cause any of Lessee’s obligations

hereunder not to be performed in a timely manner: (1) an earthquake,

hurricane, tornado, flood, or other similar act of God; (2) fire; (3) strikes or

similar labor disputes provided such strike or similar dispute is beyond

Lessee’s control and provided Lessee takes all steps reasonably possible to

remediate such strike or similar dispute; (4) acts of the public enemy; (5)

inability to obtain labor or materials or clear access to the Project or

unreasonable delay in approving permit applications for the Project by

reason of acts or omissions of any governmental body not caused by

Lessee’s actions or omissions; (6) rebellions, riots, insurrections or civil

unrest; (7) unusually severe weather conditions that actually cause similar

construction or development activities in the area of the Project to be

suspended; or (8) an unknown environmental hazard or unknown hazardous

substance (e.g., one that Lessee did not know of or have notice of by the

Effective Date) affecting the Property.

Id. at 5, Article 1.

In addition to the housing project and outpatient clinic, FHSHA agreed to provide

upkeep services for the property. Pursuant to Article 4.A.7 of the Lease, FHSHA agreed

to “[b]e responsible for the operation, management, and maintenance of the Property in

accordance with the provisions herein . . . .” Id. at 12, Article 4.A.7. Pursuant to Article

4.A.9 of the Lease, FHSHA agreed to “[b]e responsible for maintaining and securing all

necessary access to the Property for construction and operation of the Project and

underlying facilities.” Id. at 13, Article 4.A.9. Pursuant to Article 4.D of the Lease,

FHSHA agreed that, “Throughout the Term, Lessee shall maintain the Property in a good,

clean and safe condition and shall make all repairs thereto, interior and exterior and

structural and non-structural which are required to maintain the Property in a good, clean

and safe condition.” Id. at 15, Article 4.D. Pursuant to Article 4.E of the Lease, FHSHA

agreed that, “During the Term, Lessee shall be responsible for providing or arranging for,

at no cost or expense to VA, the infrastructure (including without limitation, all utility

metering) for all water, gas, electricity, sewer, telephone and other utilities serving the

Property . . . .” Id., Article 4.E.

3. Compliance with Federal, State, and Local Laws

Consistent with 38 U.S.C. § 8167 (2004), Article 17.A of the Lease states, “The

United States’ fee title interest in the Property and [the VA’s] interest in this Lease shall

not be subject, directly or indirectly, to any State or local laws relative to taxation, fees,

assessment or special assessments.” Id. at 44, Article 17.A.

Article 17.C of the Lease states, “It is understood that the intent of the parties is

that [the VA] shall not be obligated to pay any charges, impositions, or assessments

directly or indirectly made against the Property during the term hereof.” Id., Article

17.C.

Further, Article 33 of the Lease states:

Unless the Lessee can demonstrate to the satisfaction of [VA] in the form

of a written determination or written correspondence from the U.S.

Department of Labor that the Lease or the Project is exempt therefrom,

Lessee shall comply with the requirements of the Davis-Bacon Act, as

amended, 40 U.S.C. Section 3141 et. seq. and the relevant rules, regulations

and orders of the Secretary of Labor applicable thereto.

Id. at 64, Article 33. Additionally, as discussed below, Articles 4.A.1, 4.A.2, and 10.H.1

of the Lease set standards for the specific requirements for FHSHA’s compliance with

local and state laws.

4. Representations, Warranties, and Covenants

Pursuant to Article 6.C.1 of the Lease, FHSHA represented, warranted, and

covenanted that “[VA] has made no representations concerning the Property’s condition,

nor has it agreed to alter or improve the Property.” Id. at 19, Article 6.C.1.

Additionally, pursuant to Article 6.C.2 of the Lease, FHSHA represented,

warranted, and covenanted that

[VA] has made no representations or warranties concerning the fitness or

suitability for any particular use of the Property and except as provided in

the Lease (including but not limited to provisions in Article 4 and Article 6

pertaining the responsibility of [VA] and United States with respect to

hazardous substances) [VA] shall not be liable for any latent or patent

defect in such Property, nor has it agreed to alter, improve or maintain such

Property.

Id. at 20, Article 6.C.2.

5. The Development Plan

As described in Article 10.A.1 of the Lease, “Lessee has commenced and

completed the Development Plan which sets forth Lessee’s overall plans, including but

not limited to planned Permitted Uses for the Parcels, for developing the Property into the

Project pursuant to this Lease . . . .” Id. at 23, Article 10.A.1.3 The Development Plan

includes, amongst other items, the obligation to construct 1,300 units—including 353

active senior units; 481 independent living units; 165 assisted living units; and 106

skilled nursing units—and 170,000 square feet of amenities and services. Id. at 98, 103.4

Pursuant to Article 4.A.3 of the Lease, FHSHA was required to develop the Property in

accordance with the Development Plan. Id. at 10.

Article 24.H of the Lease states, “[I]n the event of a conflict in interpretation of

provisions of this Lease between the Development Plan at Exhibit E of this Lease, and

Articles 1-31 or any other Exhibit of this Lease, Articles 1-31 or any other Exhibit of this

The Development Plan was attached to the Lease as Exhibit E and was never amended by the

parties. Id. at 80-187, Exhibit E, Development Plan.

The Development Plan did not reference the Baltimore County Land Use Regulation, which

plaintiff contends would have limited the project to only 550 housing units. See id. at 93, 971.

Lease shall control . . . .” Id. at 54, Article 24.H; id. at 915, Infantino Dep., 221:9-222:3,

Jan. 23, 2014.

Article 16.C.11 of the Lease states:

[VA] and the Lessee shall cooperate by considering any and all proposed

Lease amendments which may be requested by any proposed lender, or

may otherwise be reasonably necessary, to implement the provisions of this

Article; provided, however, that any such amendment shall not in any way

affect the Term or the rent nor affect adversely in any material respect any

rights of the Department under this Lease.

Id. at 44, Article 16.C.11. Similarly, Article 24.T of the Lease states:

[VA] and Lessee shall cooperate in including in this Lease by suitable

amendment from time to time any provision which may be requested by

any proposed lender; provided, however, that any such amendment shall

not in any way affect the Term nor affect adversely in any material respect

any rights of the Department under this Lease.

Id. at 57, Article 24.T.

6. Default

Article 23.A of the Lease itemizes what is considered an “Event of Default” by

Lessee. Amongst other items, Events of Default include:

Lessee fails to pay any monetary obligation due under the provisions of this

Lease, and such failure is not cured within the manner and time periods

provided by Article 23.B of this Lease;

Failure of Lessee, its assigns or sublessees, to perform or observe any

material requirement, consideration, covenant, condition and/or

commitment required by this Lease, and such failure is not cured within the

manner and time periods provided for by Article 23.B of this Lease;

[L]essee fails to complete Phase I of the Development Plan as follows: (a)

Construct the CBOC and obtain a Certificate of Acceptance by [VA] within

thirty-nine (39) months of the Effective Date in accordance with

Development Plan, or (b) Complete construction and commence operation

of the LCC facilities pursuant to Phase I of the Development Plan within

fifty-seven (57) months of the Effective Date.

Id. at 49-50, Article 23.A. Article 23.C.1 of the Lease states:

Upon the occurrence of a Lessee Event of Default in failing to complete

construction of Phase 1 (including failure to complete the CBOC and

convey title to VA), as provided in Paragraph A.6 of this Article 23, which

either (a) continues beyond the expiration of any applicable notice and cure

periods, or (b) is not fully cured after the end of sixty-three (63) months

following the Effective Date, extended by a period equal to the period or

periods of Force Majeure, if any, that prevented such completion of

construction by such period of sixty-three (63) months, whichever event of

clause (a) or (b) of this paragraph C.1 first occurs, VA may,

notwithstanding Article 16 or any other provisions of this Article, terminate

the Lease for such uncured Lessee Event of Default . . . .

Id. at 50, Article 23.C.1. Article 23.C.2 of the Lease states:

In the event that Lessee is in default of Article 23.A.3 of this Lease for

failure to pay Rent to the Department, and Lessee fails to cure the default in

accordance with Article 23.B of this Lease, the Department may,

notwithstanding Article 16 or any other provisions of this Lease, terminate

this Lease for such uncured Lessee Event of Default . . . .

Id. at 51, Article 23.C.2.

B. VA Default Notices and Cure Letters

Plaintiff has affirmed that, in accordance with the procedures outlined in Article

23 of the Lease, the VA sent numerous notices of default and requests to cure to FHSHA

when FHSHA failed to perform its obligations under the Lease. Id. at 640-703, Default

Notice 1; 704-09, Default Notice 2; 710-25, Default Notice 3; 726-34, Default Notice 4;

741-50, 751-56, Requests to Cure.

On February 11, 2009, VA sent FHSHA a its first default notice demanding that,

within thirty days, FHSHA remit in full the sum of $126,530.00. This amount

represented the total amounts cited in five electric utility bills that the VA previously

issued to FHSHA from September 28, 2006 through November 6, 2007, and one electric

utility bill that the VA issued on September 22, 2008. The government attributed the

$126,530.00 demand to Baltimore Gas & Electric utility services that were provided to,

and thus benefitted, the leased premises, excluding the CBOC used by the VA. Id. at

640-703, Default Notice 1.

On February 27, 2009, in accordance with Article 7.E of the Lease, the VA sent

FHSHA a Request for Information seeking information to help the VA determine

FHSHA’s compliance with Articles 24.Q.1, 10.A.2, 10.A.3, 14, and 31.A of the Lease.

On that same date, in accordance with Article 7.E of the Lease, the VA sent

FHSHA a Request for Information seeking information about deposits FHSHA was

collecting from veterans.

On February 27, 2009, in accordance with Article 23.B of the Lease, the VA sent

FHSHA a second default notice identifying that FHSHA was breaching its obligations

and responsibilities under the following provisions of the Lease:

a. Article 4.A.1 – FHSHA is failing to finance, develop and maintain the

Project as required by Article 4.A.1 of the Lease.

b. Article 4.A.7 – FHSHA is failing to operate, manage and maintain the

Property as required by Article 4.A.7 of the Lease.

c. Article 4.A.9 – FHSHA is failing to maintain and properly secure access to

the Property as required by Article 4.A.9 of the Lease.

d. Article 4.A.12 – FHSHA is failing to pay Rent as required by Article

4.A.12 of the Lease.

e. Article 4.D – FHSHA is failing to maintain and repair the Property as

required by Article 4.D.

f. Article 6.C.8 – FHSHA has failed to provide VA unaudited income

statements, balance sheets and cash flow statements within the time periods

required by the Lease. In addition, FHSHA failed to notify VA of the

lawsuit filed against FHSHA by STV Incorporated. Both of these actions

are required by Article 6.C.8 of the Lease.

g. Article 12.B.1 – FHSHA is failing to manage, protect, preserve, maintain

and repair the Property as required by Article 12.B.1 of the Lease.

h. Article 12.B.2 – FHSHA is failing to employ a local, designated

representative for emergency management, protection, preservation,

maintenance and repair as required by Article 12.B.2 of the Lease.

i. Article 13.A.1 and Article 13.A.4 – FHSHA has failed to maintain and

deliver to VA a current certificate of insurance or a certified copy of each

policy of insurance, as required by Article 13.A.1 and Article 13.A.4 and

requested by VA on numerous occasions.

Id. at 704-09, Default Notice 2. Default Notice 2 further stated:

[I]n addition to remedying the aforementioned Lease breaches, FHSHA’s

failure to make progress, including its failure to obtain financing and begin

construction of the Project, is endangering FHSHA’s ability to complete

Phase 1 of the Development Plan in the time required by the Lease. VA

hereby demands assurances from FHSHA that it will complete Phase 1 of

the Development Plan in accordance with the Lease, including construction

and acceptance of the CBOC within thirty-nine (39) months of the

Effective Date of the Lease . . . .

Id. On March 3, 2009, the VA sent FHSHA a notice identifying several concerns:

(i) FHSHA has failed to maintain the Property “in a good, clean and safe

condition,” (ii) make timely repairs, and (iii) properly secure the Property . .

. . VA is concerned for the safety of the veterans accessing the Property

and the protection of VA assets. In accordance with Article 12.B.2 of the

Lease, VA hereby notifies FHSHA that if substantial attempts to correct all

deficiencies related to maintenance, repairs and security are not performed

within thirty (30) days on all Parcels, VA will correct such deficiencies at

the sole cost and expense of FHSHA . . . .

Id. at 759-64. On March 10, 2009, the VA sent FHSHA a third default notice, which

demanded that FHSHA remit to the VA $3,101.55. Id. at 710-25, Default Notice 3. The

VA attributed this amount to certain Baltimore City water services and Baltimore County

sewer services that were provided to, and thus benefitted, the portion of the Leased

Premises, excluding the CBOC used by the VA. Id.

On March 16, 2009, FHSHA responded to the VA’s February 27, 2009 Default

Notice 2. The response did not indicate that FHSHA would begin curing any of the

identified defaults, with the exception of identifying a contact person and providing the

requested income statements. The response did not provide assurances that the

construction would be completed within the timelines set forth in the Lease.

On April 24, 2009, the VA sent FHSHA a fourth default notice for failure to

respond to two Requests for Information sent to FHSHA on February 27, 2009. Also on

April 24, 2009, FHSHA sent a letter to the VA stating that FHSHA planned to respond to

each of the letters from the VA on or before the end of May 2009. On May 13, 2009, the

VA sent a letter to FHSHA stating:

[I]n accordance with Article 23.B of the Lease, FHSHA is required to cure

the defaults identified in Default Notice 1 prior to May 18, 2009 and cure

the defaults identified in the Default Notice 2 prior to June 2, 2009. If

FHSHA fails to cure the defaults identified in the Default Notices, VA

intends to exercise VA’s rights under the Lease, which includes, but is not

limited to, termination of the Lease.

Id. at 735-40.

C. Termination of the Lease

On August 17, 2009 at 3:29 pm, the VA sent a Termination for Default Notice

(“Termination Notice”) to FHSHA via email and certified mail. The effective date of the

termination was August 17, 2009. Id. at 783-866.

The Termination Notice stated:

[FHSHA] was required to cure the defaults identified in Default Notice 1

prior to May 18, 2009 and cure the defaults identified in Default Notice 2

prior to June 2, 2009. VA notified FHSHA that if FHSHA failed to cure the

defaults identified in the Default Notices as required by the Lease and in the

time periods provided in the Lease and the Default Notices, that VA will

exercise VA’s rights under the Lease, which includes, but is not limited to,

termination of the Lease.

Id. The Termination Notice constituted the designated VA Representative’s final

decision that the Lease is terminated in its entirety for the following reasons:

1. The defaults identified in the Default Notices constitute a failure to

pay Rent, as defined in the Lease. The failure to pay Rent is a

material default.

2. FHSHA’s failure to maintain the Property and undertake the

maintenance required by the Lease at the Property, as described in

the Default Notices, are material breaches of the Lease and

constitute a failure to pay Rent.

3. FHSHA’s failure to secure the Property, as described in Default

Notice 2, is a material breach of the Lease and constitutes a failure to

pay Rent.

4. FHSHA’s failure to maintain insurance on the Property, as described

in Default Notice 2, is a material breach of the Lease and constitutes

a failure to pay Rent.

5. FHSHA’s failure to pay for electrical utilities, as described in

Default Notice 1, is a material breach of the Lease.

6. FHSHA has taken no steps to begin the actual development or

construction of the Project. FHSHA did not respond to VA’s request

in Default Notice 2 that FHSHA provide assurances that FHSHA

would complete Phase 1 of the Development Plan in accordance

with the Lease, including construction and acceptance of the CBOC

within thirty-nine (39) months of the Effective Date of the Lease.

To date (almost thirty-six (36) months after execution of the Lease),

FHSHA has failed to obtain financing for the Project and no lender

has been identified and confirmed that it is ready, willing, and able

to provide FHSHA the requisite financing to enable FHSHA to

construct the CBOC. In addition, no plans have been submitted to

VA or the County for review and approval. Further, FHSHA has not

started construction of the Project. Accordingly, VA has determined

that FHSHA will not be able to meet the deadline of thirty-nine (39)

months after the Effective Date of the Lease (December 28, 2009)

for construction of the CBOC in accordance with the Lease terms.

Id. at 786-87.

D. FHSHA’s Obligations Regarding State and Local Approvals Under the

Lease

As noted above, the lease provided that FHSHA was required to undertake the

development in a manner that satisfied all requirements of “applicable” state and local

laws, as required by Articles 4.A.1, 4.A.2, and 10.H.1 of the Lease.

FHSHA claims that while this was true, under the statutes governing EULs, 38

U.S.C. § 8166, local land use laws and regulations were not “applicable.” 38 U.S.C. §

8166 provides:

(a) Unless the Secretary provides otherwise, the construction, alteration,

repair, remodeling, or improvement of the property that is the subject of the

lease shall be carried out so as to comply with all standards applicable to

construction of Federal buildings. Any such construction, alteration, repair,

remodeling, or improvement shall not be subject to any State or local law

relating to land use, building codes, permits, or inspections unless the

Secretary provides otherwise.

38 U.S.C. § 8166.

Prior to execution of the Lease, the VA and FHSHA discussed the VA’s

expectation that FHSHA comply with all applicable state and local laws. In response to a

question regarding larger issues negotiated in the Lease, Mr. Infantino, FHSHA’s

representative,5 explained, “Obviously, the applicable word, the VA wanted to put in

there that you comply with everything. We said, no, it’s got to be applicable because

we’re not complying with certain local jurisdictions . . . but we resolved that by putting

the word ‘applicable’ in.” Def.’s App’x 891-92, Infantino Dep., 141:22-142:6, Jan. 23,

2014.

According to FHSHA, the VA accepted FHSHA’s Development Plan which

included the higher development density, development program, master plan, budgets,

and economic consideration all based on 1,300 units, although County land use

regulations would apparently allow a 550 unit density.

Although Baltimore County never rejected FHSHA’s proposed 1,300 units as

FHSHA never applied for a zoning variance, it is not disputed that 1,300 was not

consistent with the Baltimore County land use regulations in place at the time.

E. FHSHA’s Obligation Regarding Financing

FHSHA sought financing from Starwood Capital, who participated in Lease

negotiations with the VA and FHSHA prior to the execution of the Lease. Id. at 884-85,

Infantino Dep., 71:21-72:3, Jan. 23, 2014.

The VA participated in multiple meetings with FHSHA’s potential lenders. In

response to a question if the VA participated in any meetings with FHSHA’s potential

lenders, Mr. Infantino explained, “Absolutely. They were there for the HUD and GMAC

Mr. Infantino is the chief executive manager of Ft. Howard Senior Housing Associates, LLC.

lending meetings…and they absolutely participated with Starwood . . . GMAC was

probably two, three meetings . . . . I would have to guesstimate it was somewhere

between 5 to 15 [meetings with Starwood]. It’s a pretty wide range, but it extended over

a long period of time. Enough to generate $700,000 in legal fees . . . [With Enterprise,]

we definitely had conference calls, and I’d say probably three to five conference calls, a

series of e-mail exchanges, and we might have had one or two meetings . . . .” Id. at 919-

20, Infantino Dep., 240:5-241:19, Jan. 23, 2014.

F. Application of the Davis-Bacon Act

Prior to execution of the Lease, FHSHA and the VA discussed that the Davis-

Bacon Act may apply to FHSHA’s activities.6 Mr. Infantino explained, “[W]e told the

VA during the process that Davis-Bacon doesn’t apply to the buildings we built, and they

said they don’t know about that. They are not sure about that . . . .” Id. at 912-13,

Infantino Dep., 193:18-194:2, Jan. 23, 2014.

To resolve this ambiguity, Article 33 of the Lease was drafted to require

compliance with the Davis-Bacon Act unless FHSHA obtained a written determination or

written correspondence from the U.S. Department of Labor (“DOL”) that the Lease or the

Project is exempt therefrom. Id. at 64, Article 33; id. at 891, Infantino Dep., 141:18-20,

Jan. 23, 2014.

The Davis-Bacon Act sets standards for the pay of laborers and mechanics for federal contracts,

and in particular requires that workers be paid a minimum wage determined in reference to the

prevailing local rate. 40 U.S.C. §§ 3141-3142.

The VA remained neutral on the applicability of the Davis-Bacon Act to the

Project, as the VA believed that the DOL, and not the VA, was the appropriate party to

determine the applicability of this statute to the project. After FHSHA signed the Lease,

FHSHA sought a waiver of the Davis-Bacon Act; however, on June 5, 2008, FHSHA

informed the VA that it would no longer be seeking the waiver. Id. at 867, Email from

John Infantino to Erik Wishneff & Alan Hackman (June 5, 2008, 01:40 EST) (“This

email confirms that there is no reason to cont[i]nue dialogue with Department of labor at

this time. We will not be seeking an immediate decision on this issue.”).

II. DISCUSSION

A. Standard of Review for Summary Judgment

Summary judgment is proper “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(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty

Lobby, Inc. v. United States, 477 U.S. 242, 247 (1986). In order to defeat a motion for

summary judgment, the nonmoving party must point to “‘specific facts showing that there

is a genuine issue for trial.’” Celotex, 477 U.S. at 324 (quoting Fed. R. Civ. P. 56(e)).

The nonmoving party must “establish the existence of an element essential to that party’s

case, and on which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at

322. “A genuine dispute is shown to exist if sufficient evidence is presented such that a

reasonable fact finder could decide the question in favor of the non-moving party.”

Opryland USA Inc. v. Great American Music Show, Inc., 970 F.2d 847, 850 (Fed. Cir.

1992) (citing Anderson, 477 U.S. at 248). However, to the extent that actual evidence is

presented, “the evidence of the non-movant is to be believed, and all justifiable

inferences are to be drawn in his favor.” Anderson, 477 U.S. at 255.

B. The Legal Standards Governing Terminations for Default and For

Establishing That A Default is “Excused”

In reviewing a termination for default, the court must “strike a balance between

the judicial aversion to default terminations . . . and the fact that ‘the Government, just as

any other party, is entitled to receive that for which it has contracted and the right to

accept only goods that conform to the specification.’” McDonnell Douglas Corp. v.

United States, 323 F.3d 1006, 1015 (Fed. Cir. 2003) (quoting Cascade Pac. Int’l v. United

States, 773 F.2d 287, 291 (Fed. Cir. 1985)) (citing J.D. Hedin Constr. Co. v. United

States, 187 Ct. Cl. 45 (1969)). When a contractor challenges a default termination, the

government bears the burden of establishing the validity of the termination. Lisbon

Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987). These “principles

apply with equal force where the Government has terminated a lease.” Moreland Corp.

v. United States, 76 Fed. Cl. 268, 284 (2007) (citation omitted). Where, as here, the

termination for default regarding construction of the CBOC involves the failure to

perform the work, the government must establish that there was “a reasonable belief on

the part of the contracting officer that there was ‘no reasonable likelihood that the

[contractor] could perform the entire contract effort within the time remaining for

contract performance.’” Lisbon, 828 F.2d at 765 (quoting RFI Shield-Rooms, ASBCA

Nos. 17374, 17991, 77-2 BCA (CCH) ¶ 12,714, 61,735) (citing Discount Co. v. United

States, 554 F.2d 435, 441 (Ct. Cl. 1977), cert. denied, 434 U.S. 938 (1977)).

Even if the government sustains its burden of showing a proper termination for

default, the termination will be converted to a termination for convenience only if the

delay was “excusable” under the terms of the default provision of the contract. Sauer Inc.

v. Sec’y of the Navy, 224 F.3d 1340, 1345 (Fed. Cir. 2000). In addition, a contractor’s

failure to perform will be excused and the termination for default converted to a

termination for convenience if the contractor can establish that the government materially

breached the contract. See Murdock Mach. & Engineering Co. of Utah v. United States,

873 F.2d 1410, 1413 (Fed. Cir. 1989) (citing Malone v. United States, 849 F.2d 1441,

1446 (Fed. Cir. 1988)).

Tested by these standards, the court now turns to the questions of whether the

government’s decision to terminate the Lease for default was justified and if so whether,

as the government argues, the plaintiff’s claims of “excuse” fail as a matter of law.

C. The Termination for Default Regarding Construction of the CBOC

The following facts are not disputed. FHSHA did not begin construction of the

CBOC by the time that the termination for default was issued. Under the terms of the

Lease, failing to construct the CBOC in accordance with the Lease terms would be

grounds for default unless the time for constructing the CBOC was extended by

agreement or due to a force majeure event. However, it is undisputed that the time for

constructing the CBOC was not extended by agreement. Further, it is also undisputed

that when the VA, in accordance with the Lease, sent a cure letter to FHSHA on May 13,

2009 asking FHSHA to provide assurances that it could comply with Lease and construct

the CBOC in accordance with the Lease terms, FHSHA failed to respond by the date

provided. When the VA had not heard from FHSHA, it began its initial steps to

terminate the Lease for default. Finally, it is not disputed that, although FHSHA

responded to some of the VA’s concerns in a letter it sent to the VA on August 17, 2009,

FHSHA did not commit to constructing the CBOC in accordance with the schedule set

forth in the Lease and the notice of termination for default was sent on that same day.

In light of these undisputed facts, the court finds that the termination for default

based on FHSHA’s failure to timely construct the CBOC was justified under the terms of

the Lease. Under the undisputed facts as laid out above, FHSHA was unable to construct

the CBOC by the date required by the Lease. Indeed, FHSHA had not begun

construction. Accordingly, unless, as FHSHA argues, there are disputed issues of fact

which if proven would establish that FHSHA’s failure to perform was excused by a force

majeure event,7 as provided for in the Lease or by a material breach of the lease by the

VA, it will be affirmed.

1. As a Matter of Law, the VA Did Not Breach Its Duty to

Cooperate or Violate Any Implied Warranties by Requiring

Compliance with State and Local Land Use Laws and Taxes.

FHSHA contends that the VA breached its duty to cooperate and violated implied

warranties in two ways: (1) by requiring FHSHA to comply with state and local land use

and construction requirements and state and local taxes, and (2) by then failing to assist

FHSHA to resolve issues that arose out of FHSHA’s obligations to comply with local

At oral argument, counsel for plaintiff conceded that, if there was no force majeure event, then

there is no dispute that FHSHA materially breached the lease.

zoning laws. According to plaintiff, these actions excuse its failure to begin construction

on the CBOC. Plaintiff recognizes that the Lease states that FHSHA would comply with

“applicable local and State laws, codes and ordinances,” but argues that the Federal

government’s exemption from such laws means that none of the state or local

requirements or taxes are “applicable.”

The government argues that it did not breach its duty to cooperate or violate any

implied warranties because the VA, in the terms of the Lease, exercised its statutory

authority to require such compliance. The government argues that the version of 38

U.S.C. § 8166(a)8 in effect at the time the parties entered into the Lease gave the VA the

“discretion” to require a lessee that enters into an EUL to comply with state or local

requirements relating to land use, building codes, permits or inspections and thus the VA

was entitled to require compliance with state and local laws and regulations.

Specifically, the government relies on the second sentence of § 8166(a), contending that

it expressly states that any construction, alteration, repair, remodeling, or improvement”

is not subject to state or local “land use, building codes, permits, or inspections unless the

Secretary provides otherwise.” 38 U.S.C. § 8166(a) (emphasis added). The government

The version of 38 U.S.C. § 8166(a) in effect at the time the parties entered into the Lease states:

Unless the Secretary provides otherwise, the construction, alteration, repair,

remodeling, or improvement of the property that is the subject of the lease shall be

carried out so at to comply with all standards applicable to construction of Federal

Buildings. Any such construction, alteration, repair, remodeling, or improvement

shall not be subject to any State or local law relating to land use, building codes,

permits, or inspections unless the Secretary provides otherwise.

38 U.S.C. § 8166(a) (2004).

argues that the Lease by its terms demonstrates that the Secretary of the VA did not

exempt FHSHA from complying with state and local laws, instead stating in Articles

4.A.1, 4.A.2, and 10.H.1 that FHSHA is subject to all applicable laws. According to the

government, “applicable” laws include the local Baltimore County zoning requirements.

The court agrees with the government. While the VA does have discretion under

38 U.S.C. § 8166(a) to determine whether it must comply with state and local law, it is

clear that the VA required compliance under the terms of the Lease. The Lease states:

Lessee hereby agrees to the following, all of which shall constitute fair

consideration for this Lease:

1. Finance, design, develop, construct, demolish, alter, operate, maintain,

repair, replace, sublease, improve, renovate and market the Property into the

“Project” in accordance with this Lease (including but not limited to Article

10 hereof), all applicable local and State laws, codes and ordinances, and the

National Fire Protection Association (“NFPA”) 101 Line Safety Code.

2. During the Term of the Lease: (i) obtain all applicable local and State

permits, licenses, and approvals (including those approvals of VA) necessary

for construction and operation of the Permitted Uses; . . .

Def.’s App’x 10, Articles 4.A.1, 4.A.2. Plaintiff argues that the use of “applicable”

allows FHSHA to avoid compliance: as § 8166 generally exempts the government, none

of the laws are applicable. However, such a reading of the Lease would render these

terms mere surplussage, which is disfavored. E.g. Metric Constructors, Inc. v. Nat’l

Aeronautics & Space Admin., 169 F.3d 747, 753 (Fed. Cir. 1999) (“Courts prefer, for

example, an interpretation of a contract that gives effect to all its terms and leaves no

provision meaningless.” (citing United States v. Johnson Controls, Inc., 713 F.2d 1541,

1555 (Fed. Cir. 1983))). Instead, it is clear that these terms unambiguously state that

state and local laws are relevant to the project. Plaintiff’s contention that “applicable”

should be read to mean “none” is simply inconsistent with the plain language of the lease

and must be rejected. Accordingly, the VA’s later insistence that FHSHA comply with

state and local laws was not a breach of the lease, but rather entirely consistent with it.

In addition, contrary to FHSHA’s contention, nothing in 38 U.S.C. § 8167

suggests that the VA breached any duty in connection with state and local tax obligations

under the Lease. Under 38 U.S.C. § 8167, the United States’ interest in and use of the

property “shall not be subject . . . to any State or local laws relative to taxation, fees,

assessments, or special assessments, except that sales taxes [shall be] charged in

connection with any construction, alteration, repair, remodeling or improvement project

carried out under the lease.” 38 U.S.C. § 8167 (1991). This exemption, however, did not

extend to FHSHA’s interest in the property. The Lease expressly required that FHSHA

pay and discharge, . . . prior to delinquency, all taxes, general and special

assessments, and other charges of every description that during the term of

this Lease may be levied or assessed against the Property and all interests

therein and all improvements and other property thereon, whether

belonging to [the VA] or the Lessee.

Def.’s App’x 44, Article 17.B. Accordingly, if a state or local government imposed taxes

on FHSHA’s interest in the property, FHSHA was obligated to pay such taxes and the

VA did not have the power under § 8167 to exempt FHSHA from paying state or local

taxes.

Given the plain language of the subject Lease provisions, the court finds as a

matter of law that the VA did not breach a duty of good faith and fair dealing or violate

any implied warranties when it (1) required in the Lease that FHSHA comply with state

and local land use, building code, permit, and inspection laws, notwithstanding that 38

U.S.C. § 8166(a) permitted the VA to exempt itself from those requirements; or (2)

declined to interpret 38 U.S.C. § 8167 to permit the VA to exempt FHSHA from paying

state and local taxes. In such circumstances, the VA did not have an obligation to work

with FHSHA to help FHSHA avoid its legal obligations. Plaintiff has provided no legal

basis for this court to find that the parties’ agreement to cooperate required the VA to

assist FHSHA in avoiding its responsibilities under the terms of the Lease. For those

reasons, the court finds that the VA acted in accordance with its rights under the law and

did not breach the Lease.

2. The VA Did Not Breach the Lease by Concluding that Baltimore

County Zoning Rules Were “Applicable” Under the Lease.

FHSHA further contends that the VA breached its Lease with FHSHA by

requiring compliance with state and local laws that limited development to 550 units

because the VA knew that if FHSHA had to comply with all local land use rules it would

not be able to build the 1,300 units identified in the Development Plan attached to the

Lease. FSHSA argues that, by approving the Development Plan, the VA must not have

intended that Baltimore County’s 550-unit limit was an “applicable” requirement under

the Lease.

The government argues that FHSHA’s argument fails as a matter of law because

the term “applicable” in Article 4.A.2 of the Lease plainly meant that FHSHA would be

required to comply with all of state and local rules that “apply” to the Project, and

nothing in the Lease suggested that Baltimore County’s density zoning rules were not

“applicable.” With regard to FHSHA’s contention that the VA would not have intended

to make a 550-unit local zoning limit “applicable,” the government argues that, by its

terms, the Lease took precedence over the Development Plan.9 Moreover, the

government argues that both the Lease and the Development Plan state that “FHSHA will

obtain all applicable local and State permits, licenses, and approvals (including those

approvals of VA) necessary for construction and operation.” Def.’s App’x 10, Article

4.A.2; id. at 93, Development Plan.

As noted above, the court agrees with the government that the Lease is not

ambiguous with regard to the use of “applicable.” There is no dispute that the housing

project was to be built in Baltimore County. In such circumstances, because the project

was in Baltimore County, Baltimore County’s zoning rules were applicable and therefore

FHSHA was required to comply with them. There is nothing in the Lease or

Development Plan that puts this reading of the Lease into question. Thus, the VA did

not, as a matter of law, breach the lease by requiring FHSHA to comply with local zoning

laws with regard to the density limit on housing units.

To the extent that FHSHA contends that the VA breached the contract by failing to

disclose or discuss Baltimore County’s density limit in advance of FHSHA signing the

Specifically, the government refers to Article 24.H, which states in relevant part:

All Exhibits attached to [the] Lease are fully a part of [the] Lease. In the event of

a conflict in interpretation of provisions of [the] Lease between the Development

Plan at Exhibit E of [the] Lease, and Articles 1-31 or any other Exhibit of [the]

Lease, Articles 1-31 or any other Exhibit of [the] Lease shall control.

Def.’s App’x 54, Article 24.H.

Lease, the argument also fails as a matter of law. The government acknowledges that

under the “superior knowledge” doctrine it could be liable for a breach if “the

government owes a duty to disclose critical information to a contractor that is necessary

to prevent the contractor from unknowingly pursuing a ruinous course of action.”

McDonnell, 323 F.3d at 1020 (quoting McDonnell Douglas Corp. v. United States, 182

F.3d 1319, 1329 (Fed. Cir. 1999) (internal quotation marks omitted)). FHSHA, however,

fails to provide any factual support for its allegations that the VA knew in advance of

signing the Lease with FHSHA that Baltimore County had zoning restrictions which

would have limited the number of units that could have built on the site. To the contrary,

the undisputed evidence shows that the VA did not learn about Baltimore County’s

zoning restrictions until FHSHA informed the VA after the Lease was signed. Def.’s

Supp. App’x 1253, Hackman Decl. ¶ 14. In such circumstances, the VA lacked the

knowledge necessary to create a duty and FHSHA’s claim of breach based on a “superior

knowledge” claim also fails as a matter of law.

3. FHSHA’s Various Force Majeure Claims Fail As a Matter of

Law.

Under the Force Majeure Clause of the Lease, FHSHA’s delay in completing the

CBOC could be excused

if [a]ny of the following that directly cause any of Lessee’s obligations