Horn & Associates, Inc. v. United States

In the United States Court of Federal Claims

No. 08-415C

Filed: October 31, 2015

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

HORN & ASSOCIATES, INC., *

*

Plaintiff, *

v. * Counterclaim; Fraud; False Claims

* Act; Special Plea in Fraud;

UNITED STATES, * Contract Disputes Act; Recovery

* Audit; NASA; Trial.

Defendant. *

*

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

Robert H. Brunson, Nelson Mullins Riley & Scarborough LLP, Charleston, S.C.,

for the plaintiff. With him was Stephen D. Martin and Patrick C. Wooten, Nelson Mullins

Riley & Scarborough LLP, Charleston, S.C.

Anna Bondurant Eley, Trial Attorney, Commercial Litigation Branch, Civil

Division, United States Department of Justice, Washington, D.C., for the defendant. With

her were David S. Silverbrand, Commercial Litigation Branch, Patryk J. Drescher, Trial

Attorney, Kenneth Woodrow, Trial Attorney, Zachary Sullivan, Trial Attorney, Robert

E. Kirschman, Jr., Director, Commercial Litigation Branch and Benjamin C. Mizer,

Principal Deputy Assistant Attorney General, Civil Division.

OPINION

HORN, J.

FINDINGS OF FACT

Plaintiff, Horn & Associates, Inc. (Horn & Associates), is a recovery audit firm which

performed a recovery audit for the National Aeronautics and Space Administration

(NASA). Recovery audit firms, like Horn & Associates, identify payment errors and

provide assistance in the recovery of erroneous payments from the suppliers or

contractors which received the erroneous payments.

Horn & Associates was founded in February 2003 with the intention of performing

recovery auditing work for federal, state and local government entities, in addition to

recovery auditing work for the private sector.1 The principals of Horn & Associates were

Tom Horn, Larry Farrar, and Michael Lowery.2 Tom Horn was the President of Horn &

Associates. At the time of the NASA recovery audit, Mr. Lowery was the Chief Executive

Officer of Horn & Associates and was responsible for marketing and finding clients,3 and

Mr. Farrar served as Vice President of Marketing and Operations for Horn & Associates.

At trial, Mr. Farrar testified that “[w]e’ve done some county, cities, states, some other

federal agencies as well as NASA. Probably 10 or 12 audits at this point.” Among the

federal agency recovery audits preformed, Horn & Associates worked for the United

States Department of Transportation, the United States Department of Homeland

Security, the United States Patent and Trademark Office, and the United States Census

Bureau.4

Horn & Associates’ focus on recovery audits for the federal government stemmed

from the passage of Section 831 of the Defense Authorization Act for Fiscal Year 2002.

1As indicated in the complaint, Horn & Associates was incorporated as a “veteran-owned

small business, organized and existing under the laws of Utah, with its principal place of

business in Salt Lake City, Utah.”

2 Tom Horn testified that he started his first accounting firm in 1980. Mr. Farrar testified

he worked for private companies for twenty years, most recently as Vice

President/Controller for Montgomery Ward, until 1993 when he joined the largest recovery

audit firm in the country. Another Horn & Associates employee, Jennifer Harris, testified

that Mr. Lowery was involved in auditing for over thirty years, and he “was an incredibly

innovative pioneer in the accounts payable recovery business.”

3 The court noted during the trial that Mr. Lowery was unable to testify at trial for medical

reasons, and, with the court’s permission, the parties designated his earlier taken

deposition as his testimony.

4 Horn & Associates also employed a number of auditors as subcontractors during

contract performance. The subcontractors typically had agreements with plaintiff that

stated: “During the term of this agreement Contractor shall earn a commission equal to

40% of revenue generated by claims identified by Contractor and collected for the client

by H&A [Horn & Associates]. The commission is calculated as 40% of actual net revenues

received from the client for the life of the audit.” Per its contract with NASA, Horn &

Associates was entitled to a contingency fee of 13.5% for any recovery by NASA that

plaintiff identified. Specifically, the contract provided:

The amount of the Contingency Fee for this order is 13.5%. Payments to

the contractor for services under this order will be based on a Contingency

Fee Basis after NASA has recovered and received funds for the basic

requirements as set forth in the Statement of Work (SOW). There will be no

out-of-pocket expenses, costs or other financial obligations or liabilities

incurred by NASA, other than the fees identified in this order.

2

See Defense Authorization Act for Fiscal Year 2002, Pub. L. 107-107, 115 Stat. 1012

(2001). As indicated in the certified claim, described in detail below:

Congress recognized the need for such recovery audits by passing Section

831 of the Defense Authorization Act for Fiscal Year 2002. This section

added a new subchapter to the U.S. Code (31 U.S.C. §§ 3561-3567) that

requires federal agencies that enter into contracts exceeding $500,000,000

in a fiscal year to carry out a “cost-effective program for identifying any

errors made in paying the contractors and for recovering any amounts

erroneously paid to the contractors.” Thus, recovery audits became

mandated for certain federal agencies like NASA.5

The joint stipulations of fact submitted to the court state that “[o]n January 16, 2003, the

White House Office of Management and Budget issued Memorandum M-03-07, titled,

“Programs to Identify and Recover Erroneous Payments to Contractors.” (internal citation

omitted) (OMB Memorandum M-03-07). OMB Memorandum M-03-07 indicated the

Memorandum was “intended to assist agencies to successfully implement recovery

auditing and recovery.” OMB Memorandum M-03-07 also stated that “[a]ll classes of

contracts and contract payments should be considered for recovery audits.” As also jointly

stipulated to by the parties, OMB Memorandum M-03-07 indicated that “[a]gency heads

may exclude classes of contracts and contract payments from recovery audit activities if

the agency head determines that recovery audits are inappropriate or are not a cost-

effective method for identifying and recovering erroneous payments.”

The General Services Administration (GSA) had awarded Contract No. GS-23F-

0258N (the GSA Contract) to Horn & Associates on June 12, 2003. The GSA Contract

was a blanket purchase agreement, pursuant to which various executive agencies could

solicit offers to contract for recovery auditing services. To comply with the Defense

Authorization Act of 2002 and the Improper Payment Information Act of 2002,6 NASA

issued Request for Quote NNH04068239Q (the RFQ) for Audit Recovery Services, and

5 As further indicated by Tom Horn at trial:

We were beginning to do research and we discovered that in 2002 the

Defense Authorization Act was -- there was a piece in there, Section 831

on recovery auditing that was passed that mandated recovery auditing on

the federal government, and also that there was an Improper Payments

Information Act that was passed as well that mandated some testing on

improper payments at government agencies.

6As noted in its post-trial briefing, defendant states that “[p]ursuant to an Act of Congress,

NASA hired Horn and Associates to conduct a recovery audit to return to the Government

hundreds of millions of dollars overpaid to vendors.” (internal reference omitted).

3

the Contracting Officer issued the RFQ to four companies, including Horn & Associates.

As indicated in the Contracting Officer’s cover letter7 to the four companies:

National Aeronautics and Space Administration (NASA) is requesting offers

under Request for Quote (RFQ) NNH04068239Q for Audit Recovery

services described in the attached Statement of Work (SOW). NASA

intends to acquire these services by competing this requirement among

several sources on the GSA Federal Supply Schedule Contract, Schedule

Number 520 SIN 9, entitled “Financial and Business Solutions (FABS).”

Your company is being solicited since it appears on the GSA FABS

Schedule’s list of eligible contractors.

A Statement of Work was attached to the RFQ, which stated: “The contractor shall

perform recovery-auditing services at all 10 NASA Centers for the period beginning

October 1, 1997 through September 30, 2003.” The Statement of Work attached to the

RFQ indicated that: “The audits will be conducted on payments made from all fixed price

contracts.”

NASA received two proposals in response to the RFQ, one from Horn & Associates

and one from Connolly Consulting, Inc. (Connolly Consulting). In the Memorandum for

the Record, for the “Award of Contract NNH05CC28D to Horn and Associates, Inc.,” the

Contracting Officer stated that:

It was determined by both the Office of Chief Counsel and the Contracting

Officer that the proposal received from Connolly Consulting was considered

to be non-compliant with the requirements of the RFQ. Connolly Consulting

did not provide a contingency fee with a fixed percentage [of recovery], but

instead proposed an estimated contingency fee range conditioned upon

additional information.

As a result, Horn & Associates was the only responsive offeror. In its proposal, Horn &

Associates stated that, in its opinion, NASA needed “a 100% look at the Department’s

data to gain the full benefit of the recovery audit” and that Horn & Associates “would like

to have access to all contracts, agreements and documents that would reflect pricing,

terms, allowances, rebate programs, etc.”8

7The Contracting Officer who sent the cover letter to the four companies was Janet

Langweil. Dean Patterson replaced Ms. Langweil as the contracting officer during

performance of the contract in July 2006.

8The Contracting Officer noticed a discrepancy in the option periods, specifically option

year one, in Horn & Associates’ proposal, and requested that Horn & Associates

acknowledge the option years as stated in the RFQ. By email, Horn & Associates

acknowledged, and agreed to, the option years as stated in the RFQ.

4

On December 23, 2004, NASA awarded the Order for Supplies or Services, Order

No. NNH05CC28D (the NASA Contract) to Horn & Associates for the furnishing of

“Recovery Audits,” pursuant to the GSA Contract. The NASA Contract indicated that it

was “subject to all the terms and conditions of the contractor’s GSA Schedule Contract

GS-23F-0258N and as amended by the clauses contained herein.” Included as an

attachment to the NASA Contract was a Statement of Work. The NASA Contract’s

Statement of Work indicated: “The contractor shall perform a primary audit recovery on

all contract payments for the period beginning October 1, 1997 through September 30,

2003, identifying overpayments and/or underpayments.”9 The NASA Contract also

included a unilateral option for NASA which stated:

(a) The Government may extend the term of this contract by written

notice to the Contractor within 30 days; provided that the Government gives

the Contractor a preliminary written notice of its intent to extend at least 60

days before the contract expires. The preliminary notice does not commit

the Government to an extension.

(b) If the Government exercises this option, the extended contract shall

be considered to include this option clause.

(c) The total duration of this contract, including the exercise of any

options under this clause, shall not exceed 5 years.

The NASA Contract further stated, “[t]he Contracting Officer may exercise the option by

written notice to the Contractor within the period specified in the schedule.”

The NASA Contract included four option years to extend the term of the audit

recovery period.10 Each option year extended the period of performance by one year and

expanded the audit recovery period. For option year 1, the period of performance would

be October 1, 200511 to September 30, 2006, and the corresponding audit recovery period

was 2004-2005. For option year 2, the period of performance was October 1, 2006 to

September 30, 2007, and the corresponding audit recovery period was 2006, option year

3 contemplated the period of performance would be October 1, 2007 to September 30,

2008, and the corresponding audit recovery period would be 2007. Finally, for option

year 4, the period of performance would be October 1, 2008 to September 30, 2009, and

the corresponding audit recovery period would be 2008. For all option years, the

9 As noted above and explained below, the Statement of Work attached to the RFQ

differed from the NASA Contract and stated: “The audit will be conducted on payments

from all fixed price contracts.” (emphasis added).

10 The original period of performance of the NASA Contract was December 23, 2004

(the date the NASA Contract was awarded) to December 22, 2005.

11Despite the original period of performance of the NASA Contract ending December 22,

2005, the first option period began on October 1, 2005. Neither party raised this

discrepancy as an issue at trial, and it does not impact the court’s decision in the opinion.

5

contingency fee remained 13.5%.

The NASA Contract only indicated that “the contractor shall perform a primary audit

recovery on all contract payments for the period beginning October 1, 1997 through

September 30, 2003,[12] identifying overpayments and/or underpayments,” and did not

identify the types or categories of contract payments Horn should review and present for

recovery to NASA. In its certified claim, Horn & Associates indicated that

Horn presented NASA over 400 claims for recovery in 15 different classes

on September 30, 2006. The claims fell into the following classes:

Obligations over paid; Prompt Pay Interest Calculation Errors; Statement

Claims; Payment Errors; Cash Discounts; Regular Duplicate Payments;

Award Fees Overpaid; Interest on Overpayments; Prepayment Discounts;

Pricing Claims; Miscellaneous Charges; Obligation Overpaid; and Tax

Charged in Error.

The Contracting Officer’s denial of the certified claim did not address the recovery classes

identified by Horn & Associates.

Performance of the NASA Contract

Payment Centers

Horn & Associates attempted to preform a recovery audit at nine of NASA’s

payment centers. The centers were: Goddard Space Flight Center (Goddard), Lyndon B.

Johnson Space Center (Johnson), John F. Kennedy Space Center (Kennedy), Stennis

Space Center (Stennis), George C. Marshall Space Flight Center (Marshall), John C.

Glenn Research Center (Glenn), Langley Research Center (Langley), Hugh L. Dryden

Flight Research Center (Dryden), and the Ames Research Center (Ames) (collectively,

the NASA Centers). After award of the NASA Contract, Horn & Associates held planning

meetings with the NASA Centers to discuss the audit.13 During performance of the NASA

Contract, according to defendant, Horn & Associates submitted a total of 444 claims to

NASA for collection and payment. NASA approved and paid 45 of them.

12 As indicated in the defendant’s responses to plaintiff’s interrogatories and in the parties’

joint stipulations of fact, the total amount of contract payments made by NASA during

fiscal year 2004 was estimated at $10,872,558,720.53, and the total amount of contract

payments made by NASA during fiscal year 2005 was estimated at $10,806,837,873.44.

13Horn & Associates held planning meetings in April of 2005 at the following NASA

Centers: at Stennis on April 1, 2005, at Kennedy on April 19, 2005, at Glenn on April 20,

2005, at Marshall on April 21, 2005, at Goddard and at NASA Headquarters on April 22,

2005, at Langley on April 26, 2005, at Johnson on April 27, 2005. In May of 2005, Horn

& Associates held planning meetings at Dryden on May 16, 2005, and at Ames on May

17, 2005.

6

Prior to the planning meetings at the NASA Centers, on February 8, 2005, Horn &

Associates participated in a pre-audit planning meeting at NASA headquarters. On March

4, 2005, after the pre-audit planning meeting, an internal NASA memorandum was issued

by Gwendolyn Sykes, NASA’s Chief Financial Officer, to all NASA Centers, which

indicated that Horn & Associates was to audit “payment records of fixed price contracts.”

The contracting officer technical representative at the time, Melvin DenWiddie, issued an

email to all NASA Centers on May 18, 2005, stating the contract for Horn & Associates’

recovery audit was for the audit of “all contract payments.” NASA, therefore, provided

Horn & Associates with payment data for all contracts, not just payment data for fixed

price contracts. As acknowledged by defendant, “[t]he data itself, however, was

admittedly not perfect.”

Mr. DenWiddie testified that “at the various NASA centers, we had what was known

as the Legacy accounting systems. And most of those systems were manual systems

that were not automated and of course, they were not integrated,” and, that, further, each

center had its own accounting system. NASA, therefore, switched to a SAP system. Mr.

DenWiddie, indicated, however, that “[i]t was somewhat of an unfortunate event actually,

because the Legacy systems that we had throughout the centers, at the time of the

implementation of the SAP system, those systems were disconnected and the SAP

system was installed to become the official integrated system of record.” As Mr.

DenWiddie explained when asked what happened to the financial data that had been with

the Legacy system after the transition to the SAP system, he indicated that “information

was virtually lost because typically what should normally happen, there should be a

parallel running of the two systems together so that you could make sure that there was

some compliance. In this case, that did not take place so the information from the Legacy

systems just disappeared.” As a result, in its post-trial briefs, defendant now concedes

that, although NASA produced the SAP data to Horn & Associates, that “[t]he production

of NASA’s SAP data was more problematic.” The parties, especially, the defendant, were

unable to identify the total amount of contract payments for fiscal years 1998-2003, at

issue in the NASA Contract, which called for Horn to “perform a primary audit recovery

on all contract payments for the period beginning October 1, 1997 through September 30,

2003, identifying overpayments and/or underpayments.” The parties have stipulated that:

NASA’s financial system no longer contains data for contract payments

made by NASA during FY1998 through FY2003, and therefore NASA was

unable to identify the total amount of money it expended on contract

payments during those fiscal years, or during the FY1998-2005 period of

the Horn Recovery Audit, in response to requests for that information from

Horn during discovery. NASA did not reconstruct an estimate of the amount

of total contract payments for FY 1998-2005 in response to discovery

requests seeking this information.

On June 30, 2006, Mr. DenWiddie wrote a letter to Horn & Associates, indicating:

Your work on this project has been very impressive. Because our payment

files were in several locations on multisystems, some in a manual format, I

7

wondered how you would overcome that challenge and conduct an effective

Agency-wide recovery audit of our payments.

It soon became apparent that your technical capability was centered on your

highly-experienced staff. The extensive financial management and recovery

auditing experience allowed each challenge to be broken into small

components that were easier to resolve. The customizable audit

methodology was beneficial in addressing specific unique needs of each

NASA Center.

During his testimony, Mr. DenWiddie explained,

I wrote this letter because as I’ve testified before [14] during this testimony,

I thought that Horn was doing an outstanding job. I thought that they were

working under very adverse conditions, namely the accounting systems that

they had to audit, the people who they had to work with who were opposed

to them doing their work, and the fact that they had somehow managed to

do an outstanding job, in my view, I thought that somebody, somebody

needed to say thank you. And I decided that I would be the one and I did.

Mr. DenWiddie testified that the letter was “my last written communication as a

government employee,” as he retired on the same day, June 30, 2005.

On September 8, 2005,15 the NASA Contract was extended for one year through

September 30, 2006 by an “Amendment of Solicitation/Modification of Contract,” with all

terms remaining the same, except the period of performance. The description of the

Modification stated in its entirety:

The purpose of this modification exercises Option 1 to conduct Audit

Recovery for the period of 2004-2005 as identified in Item 13 of the basic

order [the option to extend the term of the contract].

14 Mr. DenWiddie had previously testified:

The recovery audit was a low priority. It was a low priority because the

overall audit of the overall financial statements was so very important that

the recovery audit activity was something that we had to do because it was

a mandate from the presidential level down through OMB. We had to do it.

But it was not nearly as important as getting a clean, unqualified opinion on

the overall financial statements.

15 Although the “Amendment of Solicitation/Modification of Contract” was signed by Horn

& Associates on September 1, 2005, the “Amendment of Solicitation/Modification of

Contract” was not signed by the Contracting Officer until September 8, 2005. The

“Amendment of Solicitation/Modification of Contract” stated: the effective date is the date

signed by the United States.

8

1. Clause 7, PERIOD OF PERFORMANCE, shall commence on the

effective date of this contract through September 30, 2006.

2. The total value of this order remains unchanged.

All other terms and conditions remain the same.

(emphasis in original).

Below is an overview of the number of claims identified and submitted to NASA by

Horn & Associates and illustrative examples of the Horn & Associates’ interactions with

NASA personnel at the centers.16

16Unfortunately, after discovery, trial, and even post-trial briefing, the parties still do not

agree on the number of claims submitted by plaintiff to NASA. As the court first considers

the defendant’s counterclaims, the court uses the defendant’s numbers for the claims,

without, at this time, concluding whether the numbers submitted by either party is correct.

When there is a discrepancy, the court has footnoted the plaintiff’s numbers of claims.

After the court identified the discrepancies relating to the calculation of the number

of claims by the parties, as instructed by the court, the parties filed a joint status report.

The parties discussed the differences, as follows:

the cause of the discrepancy is explained by the parties’ different

characterization of those claims. When they were prepared and submitted,

Horn submitted single Statement Claims aggregating outstanding credits

owed to the Government by a vendor as reflected on the vendor’s books.

However, when the Government’s expert, Wiley Wright, prepared his expert

report, he broke up many of these Statement Claims and treated them as

separate claims based on each outstanding credit, because it is the

Government’s position that such aggregation was inconsistent with the

terms of Horn’s contract with NASA, and that each outstanding credit should

instead have been presented as a separate claim

(internal citation omitted). The parties claimed, “[a]s a result, where Horn’s spreadsheet

reflects a single Statement Claim, the Government’s spreadsheet treats that as several

separate claims, all under the same claim number. . . . This different treatment of

Statement Claims by the parties on their respective post-trial spreadsheets is responsible

for the following apparent discrepancies.”

The parties further explained two unique discrepancies, first:

Horn’s spreadsheet listed Claim No. 2232, which was a Statement Claim,

as having been submitted at Glenn Research Center. However, in the

months following the end of the Recovery Audit in 2006, Claim No. 2232

was identified on various spreadsheets as having been submitted to

9

a. Goddard

According to defendant, regarding activity at Goddard, Horn & Associates

submitted a total of 231 claims.17 This was by far highest portion of the claims identified

by Horn & Associates and submitted to NASA.18 Prior to the audit, Mr. Farrar testified that

he believed “Goddard was designated as one of the biggest centers and certainly one of

the bigger opportunities that we had.”19 Despite this, the sole claim for Goddard approved

Johnson Space Center, rather than to Glenn. On the parties’ spreadsheets,

Horn listed Claim No. 2232 as a single entry submitted to Glenn, whereas

the Government listed Claim No. 2232 as two entries submitted to Johnson.

(internal citations omitted). Second, regarding Claim No. 2053, the parties explained:

As noted in the Court’s May 19, 2015 Order, Claim No. 2053 was included

on Horn’s spreadsheet, but was not listed on the Government’s

spreadsheet. While the actual claim file for Claim No. 2053 was not

introduced as an exhibit at trial, Claim No. 2053 was included on the

spreadsheet submitted by Sam Lenck, the CFO at Kennedy Space Center,

to NASA HQ following the end of the Recovery Audit reporting on the status

of the Kennedy claims. On its post-trial claims spreadsheet, the

Government inadvertently omitted Claim No. 2053 at Kennedy.

17 Plaintiff identified and submitted 223 claims for Goddard on its chart of claims.

18In its certified claim, Horn & Associates explained the difference in the number of claims

generated by the different NASA locations:

The differences in claim potentials found at each of the above payment

centers can be explained in a couple of ways. It is partially a reflection of

the size of the payment center but more likely the amount of contract

payments administered by the center. But, the more important reason for

this claim's purposes is the fact that it is a reflection of the level of

cooperation, or lack thereof, by that payment center with Horn staff [sic] The

level of cooperation in many instances was so bad (i.e. it was a breach of

the duty of cooperation imposed by the contract on NASA), that Horn had

to reassign some of its audit teams on one or more occasions at some of

the centers to other locales.

19 Mr. Farrar also indicated:

When we did our initial look at the centers and we also discussed them in

our meeting with Melvin [DenWiddie] the first of February, we were trying to

identify which centers were bigger than others, where the biggest

opportunity might have been. So we identified, with Melvin, basically in that

meeting the four centers that were the largest and had the biggest

opportunity would be Goddard, Kennedy, Johnson and Marshall.

10

and processed by NASA was an SGT Inc. claim, for $1,163.44 dollars.20

Maggie Baumbach was the primary subcontractor for Horn & Associates to work

at Goddard.21 Ms. Baumbach begin work at Goddard in September 2005. Mr. Farrar

offered testimony that three months after arriving at Goddard, Ms. Baumbach “was

becoming very frustrated because she was having an extremely hard time getting her

claims presented. And at that point, she -- I don’t believe she had any claims processed,

and certainly none collected,” and that “nobody would meet with her.”

After eight months of working on the Goddard recovery audit, Ms. Baumbach left

the Goddard recovery audit, claiming that “I couldn’t afford to continue with no income. I

had been months and months at this and we had, nobody had a claim that was in the

channel to be paid, to be collected from the vendor, and so that was a big factor.” In an

email dated April 17, 2006, to Mr. Lowery, Mr. Farrar, and Jennifer Harris, another Horn

& Associates employee, Tom Horn explained that he spoke with Ms. Baumbach and she

indicated that it was “just too hard and doesn’t want to be the front person. I told her we

were staffing the place with more people and that we would have a good person to handle

the communications . . . and give guidance if she wants to continue to help us, but she

pretty much declined.” The email indicated, however, “[t]his actually may not be all bad

as she seems to be willing to help us with the outstanding items (so she can get paid)

and help with a smooth transition to the new guys.” The email from Tom Horn to Mr.

Lowery, Mr. Farrar, and Jennifer Harris continued, “It does not sound like she has really

audited that much at Goddard. She said she did a few contract reconciliations, looking

mainly for dups [duplicate payments] and believes she has only skimmed the surface.

She hasn’t looked at possible interest claims, or for that matter, a lot of other claim types

which may or may not be there.”

Subsequently, in May of 2006, three auditors replaced Ms. Baumbach: Dan

Lizana,22 Steven Smith and Marie Beckey. Mr. Lizana indicated that once he arrived at

20 Defendant now believes that 15 claims identified and submitted by Horn & Associates

at Goddard were valid, and another claim, an Aerospace Corp. claim was partially valid.

At the time NASA approved two claims, but only processed the one claim for SGT Inc.

claim. The other claim, a different Aerospace Corp. claim, was approved for payment, but

not processed by NASA.

21Ivan Sherman worked at Goddard with Ms. Baumbach. Mr. Sherman, however, only

worked part-time.

22 Regarding his position with Horn & Associates, Mr. Lizana testified at trial that he “first

heard about the position through Craigslist.” Mr. Lizana described his philosophy of

recovery auditing as follows: “I think recovering auditing, it's not a quantitative assessment

of your skills, meaning it's not having done it for 30 years, in my opinion, whether you

have a CPA and so forth. I think recovering auditing is about the type of skills that you

have.”

11

Goddard, “the two individuals that I recall and we were introduced to, the points of contact

was [sic] Yvette Blackwell -- she was the Supervisor for the examiners and she was our

point of contact -- and that week we were introduced to Sandra Brown, who was her

superior, who was going to be responsible for denying and accepting the claims.” Like

Ms. Baumbach, Mr. Lizana felt frustrated at NASA’s handling of Horn & Associates’

claims. For example, according to Mr. Lizana, one claim “was not outright rejected. But

our explanation was NASA was not interested really in pursuing this claim because this

was a cost type contract and DCAA [Defense Contract Audit Agency] will check it at close-

out.” As indicated in an email from Ms. Brown to Mr. Lizana:

My position remains that until either Procurement and/or DCAA determines

that Swales [& Associates23] has violated their contractual agreement with

NASA Goddard, I am at no liberty to act upon your claim. Validation of your

claim has to be supported in conjuction [sic] with the audit/findings of

Procurement and/or DCAA. [24]

Mr. Lizana worked on the Goddard recovery audit until the end of contract performance.

b. Johnson

According to defendant, Horn & Associates identified and submitted to NASA a

total of 14525 claims related to the Johnson recovery audit, only 19 of which were

approved and processed by NASA.26 Johnson was the center that generated the second

23The Swales & Associates claims were the largest identified by Horn & Associates

during performance of the NASA Contract.

24The role that the Defense Contract Audit Agency (DCAA) played in the NASA audit by

Horn & Associates was a source of ongoing tension between the parties. Ms. Brown, in

explaining the above quoted email testified:

They [DCAA] are our periodic auditors for these type contracts, cost types.

They perform periodic audits and sometimes not in the contractual

agreement that goes back and they look at where they’ve not adjusted a

rate or use the wrong rate, and all those things. They do that performance

audit that we look to happen that will take care of that 40 million [in the

Swales & Associates claim identified by Mr. Lizana] if in fact that was a valid

adjustment that had not happened.

25 Plaintiff identified and submitted 120 claims for Johnson on its chart of claims.

26In its chart of claims, defendant states, however, that although one of the claims, the

West Group Payment Center claim, was approved and processed, it was not a valid claim

because “it is for an amount of less than $100, and was submitted by Horn in

contravention of the plain terms of Horn’s scope of work in its contract.” Defendant does

not seek recovery for the West Group Payment Center claim.

12

most claims in Horn’s recovery audit, and the 146 claims from Johnson are more than

were generated at every other center combined, excluding Goddard.

Tom Hott was the primary subcontractor who worked for Horn & Associates at

Johnson.27 Michael Colby also worked on the Johnson recovery audit. The Johnson

recovery audit was the first recovery audit for Mr. Colby. Mr. Hott’s wife, Beth Hott, worked

off-site supporting the Johnson recovery audit. Tom Hott testified that neither he nor his

wife had ever performed a recovery audit of a federal government agency before the

Johnson recovery audit.

Regarding the Johnson recovery audit, Mr. Hott indicated that initially the audit

“went fine. We had access to their records and we had a nice place to work in front of the

vault where the records were kept, and it was easy for us to come up with a program to

start the audit effectively and efficiently.” Mr. Hott, explained, however, “[t]hen when we

began turning in claims, they were, the claims were immediately denied.” Regarding the

process for presenting claims, Mr. Hott testified:

On a regular basis, the first person was Pat Bright. Pat was the supervisor

of the accounts payable department. She reported to June Boeckel who

was, as I understand it, the director of accounting at the time. And June

reported to Marilyn Sampay who was the deputy CFO responsible for the

conduct of the audit, according to our contract. And then I had a few

occasions with John Beall, the CFO of the Johnson Space Center.

When asked on cross-examination why he did not he did not hire more people to work on

the audit with him, Mr. Hott testified that “[i]t didn’t make a lot of sense to spend a

tremendous amount more money to bring in additional resources. We were already

getting screwed to the hilt.”28

27 As indicated at trial, after the Johnson recovery audit, Mr. Hott indicated that he

“decided to start a tree farm, Hott Tree Farm. And I grow container-grown trees for the

landscaping and nursery industry now. So I’m semi-retired. I decided to quit accounting

and dig in the dirt.”

28 Mr. Hott explained his frustration at working on the Johnson recovery audit:

June Boeckel, who was Pat's supervisor, was very reluctant to accept or

approve claims and would create argumentation on the claims that had

nothing to do with the merits of the claims themselves, again causing

unusual time delays, especially when you consider the fact that we would

turn in a claim and it would be weeks or months before we would get the

information back. This caused a severe time problem because we continued

to try to work under one scenario and knowing full well that we would have

to go back and go through all of the claims, all of the contracts again and all

of the payments again.

13

c. Kennedy

According to defendant, Horn & Associates identified and submitted to NASA a

total of eighteen29 claims related to the Kennedy recovery audit, only two of which were

approved and processed by NASA. Brock Young was the primary subcontractor for Horn

& Associates to work at Kennedy. Mr. Young had not performed a federal government

agency audit before the Kennedy recovery audit. He indicated that he would recover forty

percent “of what was collected by Horn & Associates” for the recovery audit claims that

he identified.30 Mr. Young took part in the pre-audit meeting at Kennedy on April 15, 2005,

and he testified that Mr. Farrar and Jennifer Harris, from Horn & Associates attended the

meeting along with Sam Lenck, Deputy Chief Financial Officer for Kennedy and Brenda

Brooks, the Kennedy supervisor over accounts payable from Kennedy.

Mr. Young expressed frustration with the lack of action by NASA with respect to

the claims he submitted to NASA. Mr. Young also was frustrated by the role of Mr. Lenck,

who viewed his role as “to act as the middleman between Mr. Young and the contracting

officer, Ms. Solum.”31 Mr. Young indicated that he first talked to Mr. Lenck and he would

take the documents, “which would be the contract file, the mods [modifications], and the

invoices in question, and we'd go through it in that form. And that's what I'd review with

NASA is all the data with them so they would have everything they needed to look at the

claim.” After that, Mr. Young testified,

I would typically never hear back from them. So what I thought was

happening was Sam was going to approve it and send it where it needed to

be sent, like to the vendor, things of that nature. Later on I found out what

he was really doing was he was facilitating the process, but he was leaving

it up to the contracting officers to approve. So then at that point, I was

assuming they were going to the contracting officers. The thing is I was

never getting anything back, so I don’t know what actually happened.32

29 Plaintiff identified and submitted nineteen claims for Kennedy on its chart of claims.

30As noted above, forty percent was a typical percentage among Horn & Associates’

subcontractors, although Jennifer Harris testified that her agreement with Horn &

Associates called for a fifty percent payout. In May of 2006, Ms. Harris became an

employee of Horn & Associates.

31Ms. Solum was a contracting officer for the contracts awarded and audited at issue at

Kennedy, and not the contracting officer for the Horn & Associates recovery audit for the

NASA Contract.

32 Mr. Young also testified:

[W]e called a meeting. In that meeting, we had Leslie Solum, we had

Leslie's boss, we had a legal representative as well there. Steve Chance

was the COTR, that's the Contract Officer Technical Representative is what

a COTR is, COTR. And then we had myself, Sam Lenck, Brenda Knox, or

14

Mr. Young continued to work on the Kennedy recovery audit until the end of contract

performance.

d. Ames

According to defendant, Horn & Associates submitted a total of six claims related

to the Ames recovery audit, but only two of the six claims were approved and processed

by NASA.33 According to John Lee, Deputy Chief in Financial Management Division for

NASA at Ames, Bob Schuler was the only subcontractor for Horn & Associates to work

at Ames. He began working in November 2005, and stayed at Ames for three weeks.

e. Dryden

According to defendant, Horn & Associates identified and submitted to NASA a

total of three34 claims related to the Dryden recovery audit, two of which were approved

and processed by NASA.35 Valerie Zellmer, NASA’s Chief Financial Officer at Dryden

Brenda Brooks was there, and I think one or two other people as well. So it

was a pretty big meeting. There's [sic] roughly 10 people in this meeting.

We went through everything, decided that yes, there's definitely something

there and we were to pursue it.

...

When I left that meeting, what was supposed to take place next was Leslie

Solum should have had it reviewed and sent out a letter to the vendor to try

to collect the money. The agreement was that yes, it looks like something

was there, so what was supposed to happen was she was supposed to

send the information to the vendor saying either explain to us why it is not

valid or remit the money.

Mr. Young testified, however, that “[n]othing happened actually,” and “that was the last

anything ever happened to it.”

33In its chart of claims, defendant states, however, that although one of the claims, the

Physical Sciences Inc. claim, was approved and processed, it was not a valid claim

“because it falls below the $100 threshold established by Horn's contract.” As with the

previously identified West Group Payment Center claim, defendant does not seek

recovery for the Physical Sciences Inc. claim.

34 Plaintiff identified and submitted two claims for Dryden on its chart of claims.

35 In its chart of claims, defendant noted that the remaining claim, the Infinity Tech claim

was partially valid, but “Dryden did not collect the discount amount because of its small

size, and the fact that it had occurred so far in the past.”

15

testified that two auditors, Penny Parker and Jim Cudlip, worked on the Dryden audit.36

Ms. Zellmer testified the auditors arrived at the end of July 2005 and “left before Labor

Day of 2005.” Ms. Zellmer indicated that she expected the auditors to return after Labor

Day, but neither Ms. Parker nor Mr. Cudlip returned to Dryden.

f. Glenn

According to defendant, Horn & Associates identified and submitted to NASA a

total of six claims37 related to the Glenn recovery audit, five of which were approved and

processed by NASA According to Vickie Hagerman, Supervisor of NASA Accounting

Reports Branch, and the point of contact for the recovery audit at Glenn, Tom Reese was

the only subcontractor for Horn & Associates to work at Glenn, and began working in

November 2005, and worked for “about six months, onsite, offsite.” Jennifer Harris

submitted claims related to Glenn as well on behalf of plaintiff.

g. Langley

According to defendant, Horn & Associates identified and submitted to NASA a

total of fourteen38 claims related to the Langley recovery audit, four of which were

approved and processed by NASA. According to James Michael, Deputy Chief Financial

Officer for Finance at Langley, Ken Respess worked on the Langley recovery audit for

Horn & Associates, arriving in October of 2005.39 He worked for approximately two weeks.

Jennifer Harris submitted claims related to Langley as well.40

36Ms. Zellmer also indicated that, “I can remember two. I thought there were three, but I

definitely remember two,” which she identified as Penny Parker and Jim Cudlip.

37 Plaintiff identified and submitted seven claims for Glenn on its chart of claims.

38 Plaintiff identified and submitted seven claims for Langley on its chart of claims

39According to Mr. Michael, auditors had originally arrived in July 2005, but he could not

remember how many, only testifying that “I think it was about three or four, but I don’t

know exactly how many. It was more than one, less than five, but I don’t remember exactly

how many.”

40 In particular, Ms. Harris had sent out letters for collection with the signature of Deputy

Chief Financial Officer Kerry Christian. Langley did not approve of Ms. Harris’ actions, as

Mr. Michael testified, after discovery of Mr. Harris’ actions, “at that point I know that we

expressed our dissatisfaction. I don't recall in what way we did. I know that Kerry Christian

was very upset at that time that that letter had gone out with his name at the bottom of it.”

Further Langley did not believe the claims were valid, as Mr. Michael testified that Langley

“did not believe they were overpayments at all,” she also testified that NASA “actually

received checks from the vendor.”

16

h. Marshall

According to defendant, Horn & Associates identified and submitted to NASA a

total of twenty-one41 claims related to the Marshall Recovery audit, eleven of which were

approved and processed by NASA.42 James “Chip” Edgerton, was the primary

subcontractor for Horn & Associates to work at Marshall. He employed two additional

auditors to work with him, John Crochet and Michael Mescher, with whom he had worked

on pervious recovery audits. Consistent with other subcontractors, Mr. Edgerton indicated

that he would recover 40 percent of whatever Horn & Associates was able to recovery for

its audit claims that he identified. Mr. Edgerton attended the April 21, 2005 pre-audit

meeting at Marshall with Mr. Mescher, Mr. Farrar, and Jennifer Harris from Horn &

Associates, and John Alexander and Becky Black from Marshall.

Mr. Edgerton indicated that he began the recovery audit in June 2005 with Mr.

Crochet and Mr. Mescher, but after a week, Mr. Crochet did not return because “[t]here

was never enough work for three people,” and Mr. Masker worked for two or three weeks

a month for the rest of 2005, but did not return in 2006 because “[w]e didn’t have enough

complete files to audit.” Mr. Edgerton also indicated that he frequently had to request

documents again and again. Mr. Edgerton left Marshall at the end of May 2006, with the

intention of returning once

it was worked out of how to get the complete files, then we could ramp it

back up, bring in either Mike [Mescher], Jack [Crochet] and myself or bring

in some, if we had other audits going on right then we couldn’t drop those,

so we would find other associates that we could use to bring in to help work

on the audit.

Mr. Edgerton, however, did not return to Marshall. When asked to summarize his

experience at Marshall, Mr. Edgerton indicated that “[t]hey were nice people, but . . . you

know, that they had their work to do and their work came first. And so our files came

second. So it was, you know, it was a -- it wasn’t a combative relationship, it's just that

their jobs came first and ours came second.”

i. Stennis

The parties agree that Horn & Associates did not submit any claims regarding its

recovery audit for Stennis. Mr. Edgerton testified that he was expected to handle the

recovery audit at Stennis, but he decided not to go, believing he would encounter the

same problems with NASA that he had at Marshall. Mr. Edgerton testified that he did not

go to Stennis because

41 Plaintiff identified and submitted nineteen claims for Marshall on its chart of claims.

42In its chart of claims, defendant states, however, that although the SAP Public Services

Inc. claim was approved and processed, the claim was only a partially valid claim. The

court also notes that one claim at Marshall, which was approved and processed by NASA

was for Bulk Gas Helium for Stennis.

17

[w]e were working at Marshall. We were trying, that was one of the big

centers that had a lot of accounts payable. It had a lot of records. If we

weren’t getting the records from Marshall why would, you know, why take

the time and money to go down to Stennis and have the same problem and

just, you know, create another problem?

End of the Contract

On July 17, 2006, Terry Bowie, Deputy Chief Financial Officer of NASA, indicated

to NASA personnel at Johnson that “I have asked the legal people to look into suspending

the contract until we have settled out on the issues raised by Horn in terms of what the

contract calls for and what they are entiltle [sic] too [sic] for payment.” According to the

parties’ joint stipulations, on July 24, 2006, NASA Centers were informed that they were

to limit Horn & Associates’ recovery audit to fixed price contracts only. Dean Patterson,

who had become the Contracting Officer in July 2006,43 informed Horn & Associates on

July 31, 2006, that:

In light of performance concerns that NASA has regarding Contract

NNH05CC28D, you are advised to restrict your current audit recovery

reviews to fixed priced contracts. A meeting will be held, with your

participation, to address performance concerns, contract interpretations

and whether or not it is in the government's best interest to exercise the

option.

On August 15, 2006, Terry Bowie, the NASA Deputy Chief Financial Officer issued a

memorandum to all NASA Centers regarding the March 4, 2005 internal memorandum

from Gwendolyn Sykes, the NASA Chief Financial Officer and stated:

A previous message regarding the program and contract with Horn and

Associates, Inc[.] (Horn) indicated the company would be working with each

Center to conduct an examination of payment records of only fixed price

contracts. This limitation is not consistent with language in the NASA-Horn

contract. Therefore, Centers please work with Horn to conduct an

examination of all contracts. This direction is valid until September 30, 2006,

when the current performance period on the Horn contract will expire.

Ten days after Mr. Bowie’s memorandum to the NASA Centers, on August 24,

2006, Contracting Officer Patterson, informed Horn & Associates, that NASA would not

exercise a second option year on the NASA Contract, and, on September 30, 2006, the

period of performance under the contract would end. On August 28, 2006, Contracting

Officer Patterson sent an e-mail to all NASA Centers informing them “that a decision has

43As indicated above, Janet Langweil was contracting officer for the NASA Contract

before Dean Patterson becoming the contracting officer for the NASA Contract in July

2006.

18

been made not to exercise the option under [the NASA Contract] and to let the current

period of performance end September 30, 2006. Until that time, the contract permits Horn

& Assoc. to review all contractual documents and associated financial records in the

performance of their audit recovery activities.”

Thereafter, on August 31, 2006, Charles McIntosh, a NASA branch manager and

the assistant to Terry Bowie, the NASA Deputy Chief Financial Officer, sent an email to

each of the offices of the deputy chief financial officers for each of the payment centers

and asked them to identify all the claims related to the Horn & Associates audit. Mr.

McIntosh wrote:

As you know, there has been quite a bit of discussion over work that has

been done by Horn & Associates, Inc. regarding recovery audits and claims

that resulted from their work. In order for the agency to collect monies that

they claim are due, a thorough review of the claims in the attached

document, including contract and any other document as necessary to

support or deny the claim.[44]

44 The email also instructed the centers to determine:

1) If the claim is a valid claim that represents an amount that can/should be

recovered (note: Horn receives payment on amounts that have actually

been collected)

2) If the amount should be recovered, please establish an accounts

receivable in SAP and request a refund

3) If the amount of the claim is not a valid amount that is deemed

recoverable, please provide information that explains/supports why we do

not consider the amount to be valid

Keep in mind that we normally do not request refunds on the following, (but

not limited to) types of contracts:

(A) Open contracts that are subject to final review at close-out

(B) Contracts with provisional rates that are pending audit by

DCAA

(C) Contracts with provisions for advanced payments for

nonprofit organizations that conduct experimental or research

and development work

(D) Contracts which authorize progress payments.

Although not necessarily critical to consideration of defendant’s counterclaim, Mr.

McIntosh’s email takes on a greater importance when considering if NASA breached the

contract. NASA personnel used the above A-D framework, quoted immediately above in

this footnote, to decline to process Horn & Associates’ claims after the end of contract

performance. For example, on February 8, 2007, NASA produced a document entitled

“Goddard Space Flight Center/Regional Finance Office Determination of the Validity/Non-

validity of Horn Claims.” The document indicated: “We have reviewed this spreadsheet

we received from headquarters OCFO on January 31, 2007 . . . . We used the criteria

19

As indicated above, according to defendant’s numbers, Horn & Associates

identified and submitted a total of 444 claims45 to NASA, and NASA approved and paid

45 claims. In its amended complaint, Horn & Associates noted that “[i]n spite of the

improper impediments raised by NASA, Horn identified approximately $121 million of

claims for various classifications of improper payments. Each claim was submitted to

NASA with supporting documentation proving the improper payment. Yet to date, only

$197,285.47 dollars [sic] of claims have been processed by the Payment Centers.”]

Despite having only been compensated in the amount of $197,285.47, Horn & Associates

claims in the amended complaint that “Horn found the following recovery audit claim

potentials at each NASA Payment Center included in the recovery audit process: Ames -

$138,536.17; Dryden - $12,443.76; Glen - $17,318.44; Goddard - $97,799,329.39;

Johnson - $20,183,307.33; Kennedy - $2,915,935.08; Langley - $40,451.99; and Marshall

- $272,041.50. The total recovery audit claim potentials for all Payment Centers were

$121,379,363.66.”46

As noted above, the NASA Contract ended on September 30, 2006. After the end

of the recovery audit, NASA declined Horn & Associates’ offer of a “formal review” of all

claims, ostensibly to try and demonstrate entitlement to the $121,379,363.66 in potential

claims. NASA, however, did meet with Horn & Associates personnel to discuss the

various remaining claims. In the meeting at the end of January 2007, Mr. Lowery, Mr.

Lizana, and Marie Beckey, another subcontractor, from Horn & Associates, met with

Bruce Ward, the chief assistant in NASA’s Chief Financial Officer’s office, Andrea Davis,

a contract specialist, Jon Wolz,47 the Goddard Deputy Chief Financial Officer, Sandra

received below from headquarters OCFO to make our determinations.” The document

indicated, among other criteria:

Generally, NASA will consider claims for contract payment errors under the

following circumstances to be inappropriate:

a. Resulting from cost-type contacts subject to final contract audit that have

not been completed.

b. Resulting from cost-type contacts subject to final contract audit that were

completed and prior to final payment of the contractor's final voucher, all

prior interim payments made under the contract were accounted for and

reconciled.

45 As reflected above, plaintiff identified and submitted a total of 403 claims.

46Plaintiff does not seek a 13.5% contingency fee of the $121,379,363.66 in damages,

but in its post-trial brief, plaintiff identified “$54,730,976 in estimated contingency fees

Horn would have received in the non-breach world.” According to plaintiff, subtracting the

$26,634.00 in contingency fees that Horn & Associates actually received, “results in lost

profits damages of $54,704,343.”

47 Mr. Wolz is incorrectly identified incorrectly as “John Walls” in the trial transcript.

20

Brown, and Contracting Officer Patterson, from NASA in which Horn & Associates

presented information showing it had identified claims with approximately $81 million in

improper, erroneous overpayments, as well as an additional $40 million of interest and

penalty claims. Mr. Lizana indicated, however, that as soon as Horn & Associates began

their presentation of claims, both Mr. Ward and Ms. Davis said “that they could not

approve this [Swales & Associates] claim because it was in the purview of DCAA, and it

was a cost type contract.”48 Mr. Lizana emphasized that for each claim NASA’s “response

was more of the same. It was, okay this is DCAA involved matters, and it’s a cost type

contract. Move on there's nothing to see here, and so forth. And so it was -- Frankly, it

was frustrating.” Mr. Lizana testified that the meeting

got to a point where, at one point in the meeting Mike [Lowery] leaned over

and said, listen, I’ve been in a recovery auditing bill [sic] for a long time.

Every client that I’ve ever worked for, they wanted the money back. They

were helpful and cooperative. Can you tell me why NASA doesn’t want the

money?

Horn & Associates’ final meeting with NASA took place on February 9, 2007, again

attended by Mr. Lowery, Ms. Beckey, Mr. Lizana on behalf of Horn & Associates, and Mr.

Ward, Ms. Davis, Mr. Wolz, Ms. Brown, and Contracting Officer Patterson, on behalf of

NASA. Horn & Associates represented in the certified claim that, “[t]he only thing

accomplished during this meeting was the commitment from NASA that someone from

the CFO’s [Chief Financial Officer’s] Office would supply Horn with a list of all our claims

with comments on whether the claim was approved or denied and why the claim was

being denied. Such a complete report has never been received.”

NASA subsequently internally reviewed the Horn & Associates claims that were

presented to NASA. An example of the review is the February 8, 2007, “Goddard Space

Flight Center/Regional Finance Office Determination of the Validity/Non-validity of Horn

Claims.”49 After review, Contracting Officer Patterson sent a March 13, 2007 letter to

Horn & Associates, regarding the agency position with respect to issues between Horn &

Associates and NASA. Contracting Officer Patterson stated, “[w]hile the contract

document (citation to SOW [statement of work]) gave Horn the right to review all contracts,

at this time it is inappropriate to determine if in fact overpayments have taken place on

cost-type contracts that have not been completed.” (emphasis in original). Contracting

Officer Patterson explained, “[t]his is due to the fact that open contracts are still in the

administrative phase of open payment cycles.” Regarding interest on overpayments,

Contracting Officer Patterson indicated:

48 In discussing the Swales & Associates claim at issue in the meeting with Mr. Ward and

Ms. Davis, Mr. Lizana testified, “[t]his claim, it's big. It's a big claim . . . it could be 20

million dollars, it could be 15 million dollars, depending on what rate, a formal rate

information we get.”

49 The document was generated one day before the final meeting with Horn & Associates.

21

The $40,619,548.71 identified by Horn as “interest on overpayments” can

not [sic] be accepted as valid claims. This is because they are from open

cost contracts or in accordance with the Federal Acquisition Regulation

32.614, “the responsible official shall apply interest charges to any contract

debt unpaid after 30 days from the issuance of a demand.”

(internal citation omitted). In addition, Contracting Officer Patterson tried to explain that,

“[w]ith further respect to those claims that were identified as overpayments, but the

CFO/DCFO [Chief Financial Officer/Deputy Chief Financial Officer] determined that the

overpayment had been satisfied by a setoff against another invoice in accordance with

FAR 32.611, the Debt Collection and Offset Act and the authority granted by the treasury

to setoff debts due the government, that such payments are not in fact debts due to the

government.”50 Contracting Officer Patterson concluded that:

At this time NASA has determined that $221,310.39 has been approved for

debt collection under the contract. The fee on this amount will be remitted

to Horn once collection has been made. An amount of $7,862.71 has been

remitted to Horn & Associates to date.”[51]

Additionally, Contracting Officer Patterson informed Horn & Associates that “[t]his is the

final agency position with respect to of [sic] the issues between the parties. NASA is

committed to an equitable closeout of the subject contract.”

On November 20, 2007, Horn & Associates filed a certified claim with NASA. The

certified claim was addressed to “Dean S. Patterson, Procurement Manager, Janet S.

Langweil, Contracting/Ordering Officer, Carrie Causey, Procurement Manager,

NASA/Headquarters Procurement Office,” and was signed by Tom Horn as president of

Horn & Associates. Tom Horn signed the certified claim which indicated:

I certify that the claim is made in good faith; that the supporting data are

accurate and complete to the best of my knowledge and belief; that the

amount requested accurately reflects the contract adjustment for which the

contractor believes the Government is liable; and that I am duly authorized

to certify the claim on behalf of the contractor.

50 Citingthe NASA Contract, Contracting Officer Patterson indicated that NASA would not

accept claims for payments outside the scope of period of performance, or for claims less

than $100.00. Contracting Officer Patterson also indicated that, “[w]ith respect to Prompt

Payment Interest calculation, the cited Prompt Payment Act Provision applies only to

interest on progress payments under construction contracts, when the performance for

which the payment was made is deficient and thus the payment has not been earned.

This provision does not apply by analogy to other contract payment adjustments.”

51At trial, defendant’s expert witness indicated that the amount of claims recovered by

NASA was $208,954.91, and Horn & Associates was paid $28,209.00.

22

At trial, Tom Horn indicated that he understood a certified claim to be an opportunity for

“really submitting our facts and circumstances regarding what we felt was a breach of our

contract, and then a certified claim would have some remedies for the damages.” Tom

Horn acknowledged at that point in time that he had no experience submitting certified

claims to the federal government and he did not draft the claim, but did review it before

filing it. Nonetheless, Tom Horn testified that the claim was made in good faith and that

Horn & Associates “submitted data that supports our claim and to the best of my

knowledge and belief it was complete data for the certified claim.”

In its summary of the certified claim, Horn & Associates stated:

Horn is entitled to recover $279,000,000.00 representing its damages

resulting from the breach of the contract by NASA. A different measure of

those damages limited only to the overpayments that Horn found (despite

the breaches described above) is $14,700,000. Alternatively and also as

certified herein, Horn is entitled to recover at a minimum $7,028,200.96,

representing the costs incurred by Horn including a reasonable overhead

and profit thereon.

Under the heading, “Remedies for NASA’s Breaches,” the certified claim stated:

The remedy available to Horn for NASA's material breaches of the Purchase

Order is that Horn should be put in the same economic position it would

have been in but for NASA’s improper breaches. Such a remedy is not

unlike the remedy available to Horn should the breach be considered a

constructive change to the Purchase Order. While the law requires Horn to

establish not only that NASA has breached the Purchase Order, Horn must

also establish the existence of some amount of damages. It is important to

note that Horn is not required to establish its damages with a finite degree

of accuracy; rather, Horn may establish its approximate damages so long

as there is a reasonable basis for Horn’s computation.

For the first calculation of damages, identified as “Traditional Breach Damages,”

Horn & Associates stated: “The appropriate remedy is to put Horn in the same position it

would have been but for the NASA material breach.” (emphasis in original).” Horn &

Associates claimed that “Horn will prove that NASA would have recovered

$2,068,000,000 of payments erroneously made by NASA, if NASA had not breached the

contract with Horn,” and “[i]t is only a simple mathematical operation to then determine

what Horn’s percentage of recovery would be as compensation for its work on the NASA

contract. Horn's contingent fee was 13.5% of that recovered sum which would have been

$279,000,000.00.”52

52 Horn & Associates appears to have reached this number by taking the total amount of

all contract payments on all types of contracts for Fiscal Years 1997-2005

($57,439,000,000.00), multiplied by the “OMB’s pronouncement above that the

Government's error rate for making erroneous payments is 4%,” and assuming a 90%

collection rate for all improper payments = $2,068,000,000.00. Multiplying Horn &

23

For the second calculation of damages in the certified claim, labeled as an

“Alternative Remedy,” Horn & Associates claimed that:

Horn should, at a minimum, be entitled to recover a considerable sum based

solely on the limited number of contract payments that Horn was allowed to

review despite the material breaches by NASA. Horn's work uncovered in

excess of $121,000,000 in erroneous payments. Application of the 90%

recovery factor indicates that NASA would have recovered $109,000,000

by following through on these erroneous payments as NASA was required

to do under its contract with Horn. Assuming such recovery, then Horn

would be entitled to be paid 13.5% of the recovered funds or $14,700,000.

Thus, that amount would be the sum to which Horn is entitled to put it in the

same position it would have been in, but for the NASA breaches, with the

further proviso that it only addresses the limited contract payments that

Horn actually could review despite the significant and material breaches by

NASA.

For the third calculation of damages in the certified claim, labeled as a “Further Alternative

Remedy,” Horn & Associates claimed that:

Even should NASA determine, improperly Horn believes, that the sums

above are not an appropriate measure of Horn's damages, Horn is entitled

to recover its actual costs and expenses incurred by Horn and its

independent subcontractors. Horn has contacted each of its independent

subcontractors and had them review the time they devoted and the costs

they incurred. Likewise, Horn has reviewed its own records to determine

time and expenses devoted on this contract by Horn staff. The sum of all

such time and expenses plus an overhead and profit factor of 18% is

$7,028,200.96. The information is presented on an individual basis for each

Horn member, employee or subcontractor. Further, the information is

broken out on a monthly basis. Supporting all this information are expense

records and time diaries that were used to construct the documents.

(internal citation omitted). Horn & Associates also indicated:

Horn should be entitled to receive at a bare minimum, compensation for its

actual costs incurred. Such damages are often called “reliance damages.”

Such damages, while not placing Horn in the same position it would have

been, but for the breaches by NASA, would at least compensate Horn for

its out-of-pocket expenses and for the time devoted to the performance of

the Purchase Order.

Associates’ 13.5% contingency fee times $2,068,000,000.00 results in an amount of

$279,000,000.00.

24

Exhibit 42 to the certified claim53 was the “Audit Cost Index,” and included an “Audit Cost

Summary, which listed all the expenses of Horn & Associates employees and

subcontractors, as well as “Auditor Expenses Paid by Horn.” The summary indicated the

total expenses for 2005 were $3,265,402.04, for 2006 the expenses were $3,753,731.31,

and the auditor expenses were $9,067.61, for a total of $7,028,200.96. The

$7,028,200.96 is the same amount listed in the “Further Alternative Remedy,” which

stated: “Horn has contacted each of its independent subcontractors and had them review

the time they devoted and the costs they incurred. Likewise, Horn has reviewed its own

records to determine time and expenses devoted on this contract by Horn staff. The sum

of all such time and expenses plus an overhead and profit factor of 18% is $7,028,200.96.”

After the summary, the Audit Cost Index was divided into three sections: “Horn &

Associates, Inc., Recap of Expenses Reimbursed to Auditors,” “2005 Expense Summary

for each Horn Member, Employee or Subcontractor,” and “2006 Expense Summary for

each Horn Member, Employee or Subcontractor.” The first section “Horn & Associates,

Inc., Recap of Expenses Reimbursed to Auditors,” identified $9,067.61 of expenses, and

included items such as “NASA Postage,” “Ames Expenses,” and “Dryden Expenses.” 54

For the expense summary of each Horn employee or subcontractor, the form identified

the following categories: “Date, Days, Hours, Hourly Rate, $ for Hours, Trans, Meals,

Lodging, Per Diem, Travel Miles, Miles @ Eff Rate, Supplies/Equip., Total.” The expense

summary for each year also listed the “Avg time spent on NASA per week in addition to

above time,” and “Overhead at 18%.” The summaries included all twelve months from

each employee or subcontractor. The individual months for each employee were further

broken down to include: “Mgmt, Auditor Position, Date, Days, Hours, Activity, Location,

Hourly Rate, $ for Hours, Trans, Meals, Lodging, Per Diem, Travel Miles, Miles @ Eff

Rate, Supplies/Equip.”

With regard to the language: “Horn should be entitled to receive at a bare minimum

compensation for its actual costs incurred,” at trial, Tom Horn acknowledged that he did

not give any significance to the term “actual costs incurred,” explaining it “really didn’t

register with me when I read this, reviewed the certified claim.” Tom Horn also indicated

regarding the “Further Alternative Remedy,” which stated “Horn is entitled to recover its

actual costs and expenses incurred by Horn and its independent subcontractors,” that the

term “actual costs and expenses,” “really didn’t have any significance because it really

didn’t register with me when I reviewed the document.” Mustapha Wai, who worked for

the Office of Inspector General (OIG) for NASA indicated when he first heard of Horn &

Associates’ certified claim:

53There were 42 exhibits to the certified claim. Specifically regarding exhibit 42, the Audit

Cost Index, the exhibit included the forms for 26 Horn & Associates employees and

subcontractors, and totaled 607 pages.

54 At closing argument, defendant’s counsel indicated that, “I don’t think we have a huge

problem with the nominal expenses of $9,067.61 that are reported on page 7896 of the

claim.”

25

As an auditor and my understanding of Horn being a professional audit firm

as well, my expectation going forward when I read that was that actual cost

incurred and expenses -- actual costs and expenses incurred are actually

based -- in accounting terms and audit terms are based on costs actually

incurred, whether expensed, which means money going out, or an

obligation, which means you’ve indebted to pay at a later time. But our

professional understanding was that there is evidence to substantiate such,

whether it is invoice, whether there is billing statements, whether it is

timesheets or canceled checks for payments that are being made out, or

receiving reports to show supplies purchased, just whatever substantiating

evidence that actually substantiates that these are costs that have been

incurred in accounting terms, things that we were looking at to see if they

support the $7 million.[55]

Tom Horn also testified that he was unaware that the term “actual costs incurred” was a

defined term in the Federal Acquisition Regulation.56

Tom Horn offered his explanation of the certified claim during his trial testimony

and indicated that because the contract with NASA was “a contingency-based contract,”

“it didn’t require us in any part of the contract to maintain our time and expense records.”

Tom Horn also testified that Mr. Gammon, the previous counsel of record, in a July 2007

letter to Horn & Associates, indicated that:

Horn is otherwise entitled to recover for the actual services and

costs/expenses devoted to the NASA-breached contract. And these

services/costs/expenses are a combination of the actual Horn

services/costs and the services/costs of the independent

auditor/contractors who worked on the NASA project for Horn. The legal

term for this theory of damages is quantum meruit.

...

We must impress upon our independent auditors/contractors the need for

their immediate and close attention to this project. It is essential that they

review the records that they have and that they make a detailed estimate of

their time devoted to the NASA project on a daily basis. In that regard, they

should preserve what records they have that will buttress their estimate of

their actual time. Additionally, they should be cautioned that they may be

examined, either in depositions or at trial, on their estimates so that they

55 Mr. Wai, on cross-examination, however, in discussing Horn & Associates’ damage

theories, indicated that “I don’t know the definition of -- the legal definition of reliance. I’m

not a lawyer. But out-of-pocket, I can understand that as an accountant. . . . I don’t

understand what the reliance damages are. I do understand out-of-pocket expenses.”

56The court notes, however, counsel for plaintiff asked Tom Horn: “Did you know that the

term ‘actual costs’ is used in some documents as defined in the Federal Acquisition

Register?” To which Tom Horn replied: “No.”

26

should only claim time that they actually spent. By the same token, it is

essential that they recall and save proof of their actually incurred expenses.

(emphasis in original). As reflected in the July 2007 letter, Mr. Gammon had advised Horn

& Associates about its certified claim. After his death, and up to, and including trial,

defendant’s counsel repeatedly questioned whether plaintiff would raise an advice of

counsel defense related to Mr. Gammon’s assistance with the certified claim.57 As Mr.

Brunson repeatedly stated before and during trial, plaintiff has no intention of raising an

advice of counsel defense and has not done so in this case.

In order to obtain a record of time and expenses, Tom Horn sent to Horn &

Associates employees and subcontractors affiliated with the NASA recovery audit a

“NASA Recovery Audit Expense Summary” which was “a summary of the time devoted

to our project and the expenses on our contract that I sent out to them.” Each of the

subcontractors, as well as the Horn & Associates employees, who worked on the NASA

audit completed the forms, or Horn & Associates filled it out on their behalf. For the

subcontractors, the individuals did not select the hourly rate that appears in the expense

summary. Mr. Young indicated on cross-examination, “I did not provide the hourly rate.”

Furthermore, Mr. Farrar indicated that regarding the forms, the subcontractors “were

instructed not to” fill out the hourly rate. Tom Horn testified that Horn & Associates had

decided to assign rates to the subcontractors “[b]ecause we just felt like we -- Larry Farrar,

Mike Lowry and myself -- could determine those rates better than anybody else,” and

placed that hourly rate on the form plaintiff provided.

On direct examination, one of the subcontractors, Mr. Edgerton, testified he

selected an hourly rate of $155.00, “[b]ecause that's the one that I found in the contract

for Pricewaterhouse. And it's time and expenses so, you know, why pull a figure . . . out

of the air, have something with a basis for it, go back and look at a government contract.

That gives you a minimum.” 58 Mr. Edgerton indicated that he identified an hourly rate “out

of curiosity to see what the time was coming, so since we weren’t getting paid from NASA,

what it would have been if we hadn’t gotten a contract that wasn’t a contingency contract.”

Mr. Edgerton indicated on cross-examination that he was unaware that Horn & Associates

used a different hourly rate in submitting the certified claim. The subcontractors also

acknowledged not being paid the total amounts listed on expense summaries attached to

the certified claim. For example, when asked on cross-examination if he had been

“actually paid $682,900.96,” that was included in the certified claim, Mr. Hott replied: “Sure

wish I had been.”

57After

the court’s earlier opinion granting plaintiff’s motion for partial summary judgment,

Mr. Gammon unexpectedly passed away. Mr. Brunson ably replaced Mr. Gammon and

zealously represented plaintiff at trial.

58 On cross-examination, Mr. Edgerton also indicated he selected an hourly rate of

$155.00 “based on a 2000 rate that the government was allowing for senior auditors,

different classifications in the year 2000.”

27

On cross-examination, Tom Horn testified that in trying to determine an hourly rate,

because “recovery auditors didn’t post hours because we all worked on a contingency

audit basis,” “[w]e went out just to the GSA schedule and pulled down just a number of

them.”59 Mr. Farrar testified that “we had no basis for hourly rates. We had never billed

anybody on an hourly rate. We didn’t know what our hourly -- what our work was worth

on an hourly basis because it was just then kind of put in as free to operate that way.” Mr.

Young testified that he had never charged an hourly rate and during the recovery audit at

Kennedy, “[w]e didn’t track our time, so we did our best to recreate an estimation.” Mr.

Hott indicated that the expense summary was “intended to be an estimate of with [sic]

what we would’ve normally expected to make under the circumstances.”

Mr. Farrar indicated that “[o]ur expectation was that after we filed the claim, and

maybe naively on our part, that there would be a lot of conversation once NASA received

the claim, and there would be a lot of give and-take back and forth trying to resolve the

issue of the breach, and we would come to some solution to resolve it.”

On January 25, 2008, Contracting Officer Patterson issued a four page final

decision.60 Contracting Officer Patterson stated that: “This letter is in response to Horn

and Associates, Incorporated, hereafter referred to as Horn, claims for $279,000,000.00,

$14,700,000.00 and $7,028,200.96 for alleged material breach of NASA Delivery Order

NNH05CC28D for Recovery Audit services. The claim is denied in its entirety.”61

Contracting Officer Patterson stated that “Horn asserts that it received no compensation

due to a material breach of the order by NASA. To the contrary, Horn received

compensation in accordance with the payment terms of the order that was awarded on a

contingency fee basis.” Contracting Officer Patterson continued:

The ultimate decision as to what constitutes a debt lies not with Horn, but

with the responsible NASA official at each Center in accordance with the

59 Tom Horn explained regarding the GSA schedules:

Well, the three of us, the three principals, we had a discussion about this,

and I went out to the GSA schedule and we first looked at the 520-9, which

was the recovery audit schedule of people that were able to do recovery

auditing, and we looked at the list and there was only a couple firms at that

particular point in time that we noticed on there that did governmental

recovery auditing, and those firms did not have an hourly rate on them. They

were all contingency-based like us, and we didn’t have an hourly rate on

our GSA schedule either.

60The court cites to the March 13, 2007 letter and the January 25, 2008 final decision,

extensively in this opinion. Neither party, however, called the author, Contracting Officer

Patterson, to testify at trial.

61Prior to the issuance of the final decision, Mr. Ward, the chief assistant in NASA’s Chief

Financial Officer’s office indicated, on December 19, 2007 that “he believed the Horn

Certified Claim should be investigated as a ‘false claim’ to the Government.”

28

SOW and FAR Part 32. Horn did not comply with the delivery order terms

and audit as stated under the basic years as awarded, 1998-2003 or fiscal

years 1997-2002, and failed to submit the required management report at

the end of the initial basic period to allow NASA to evaluate the progression

of the audit and make any necessary adjustment to the audit project plan

as stated in Task 3 of the order.

Turning to Horn & Associates’ remedies, Contracting Officer Patterson addressed Horn

& Associates’ first remedy for breach:

The first is a recovery of some $279,000 000.00. This amount sought in

quantum, is based on a calculation of 13.5 percent of the $2,068,000,000

amount that Horn contends that NASA could have recovered in erroneous

payments. The $2,068,000,000 equates to 4 percent of $57,439,999,999 in

NASA payments during the years 1997-2005, with an adjustment for a 90

percent recovery rate. Horn cites to a pronouncement by the Office of

Management & Budget (OMB) that “4 percent of all federal payments made

are improper or erroneous/overpayments.” The amounts claimed have no

supportive basis in fact.

(internal citation omitted). For Horn & Associates’ second remedy for breach, and the first

alternative theory proposed by plaintiff in the certified claim, Contracting Officer Patterson

indicated:

The first “alternative breach remedy” is a calculation based on the “limited

number of contract payments that Horn was allowed to review.” Horn claims

its work uncovered a supposed potential recovery amount of some

$109,000 000; applying the 13.5 percent contingency fee provision in the

delivery order equates to an amount of $14,700,000 to put [Horn] in the

same position it would have been [but for the alleged NASA breaches].

Again, the amount claimed has no basis in fact.

(brackets in original and internal citation omitted).

Finally, for the third remedy of breach and the second alternative theory proposed

by plaintiff in the certified claim, the “Further Alternative Remedy,” Contracting Officer

Patterson indicated:

Horn seeks a further “alternative remedy” based on entitlement to recover

from NASA “actual costs and expenses incurred” by Horn in its performance

of the delivery order. Horn claims the actual expense incurred by its staff,

“plus an overhead and profit factor of 18 percent,” is $7,028,200.96. Horn

knowingly and willingly accepted at award a contingency fee payment

arrangement for the performance of recovery audit services. Therefore,

Horn is not entitled to reimbursement of actual costs incurred.

29

Contracting Officer Patterson finally determined, “[b]ased on the conclusion that Horn has

failed to demonstrate entitlement for an adjustment to the delivery order, and has also

materially misrepresented in its claim the facts and circumstances of the performance

issues it alleges in its claim under the delivery order, the claim is denied in its entirety.”

Ultimately, prior to trial, NASA identified several claims which had been denied

during or shortly after the recovery audit, but which NASA subsequently concluded were

valid claims that should have been approved for collection, rather than denied. In its post-

trial briefing, defendant acknowledged that there were $992,557.38 in valid overpayments

that NASA had failed to pursue and process on which Horn & Associates was owed a

contingency fee. The court notes, however, that plaintiff takes issue with defendant’s

characterization of “valid,” arguing that:

Nearly all of the recommended debts submitted by Horn to NASA were

valid, meaning that based on the information available to Horn during the

audit, the individual claim should have been pursued. As numerous

witnesses testified, Horn had no incentive (and, because of the contingent

fee nature of the Contract, actually had a disincentive) to spend time

working on and submitting recommended debts that Horn’s auditors knew

to not be valid. Each individual claim submitted by Horn was based on the

information available to the Horn auditors at the time, and Horn believed

each of those individual claims to have been valid.[62]

After Contracting Officer Patterson issued his final decision, on June 6, 2008, Horn

& Associates timely filed a complaint in this court. Like the certified claim, Horn &

Associates raised three alternative causes of action, and sought the same amounts:

$279,000,000.00 for breach of contract, $17,599,550.00 for constructive partial

termination for convenience, and $7,028,200.96 for equitable relief. In an opinion issued

by the court prior to trial, the court granted plaintiff’s motion for partial summary judgment

regarding contract interpretation. Plaintiff claimed that the contract’s Statement of Work

directed Horn & Associates to perform a primary audit recovery on all contract payments

62 Plaintiff also argues that:

Horn contends that the present collectability of any of the individual claims,

now 7 or 8 years after Horn’s auditors submitted them to the NASA Centers

and lacking the complete documentation that was available during the

period of performance, is irrelevant to the question of whether NASA

materially breached the Contract in 2005-07, and what Horn’s damages

should be as a result of NASA’s breaches. Horn has proved breach by

demonstrating NASA’s gross misconduct during the period of performance

and it has proved damages by establishing what would have happened in

the “but for world” if NASA had performed as agreed. The claims files today

are a very extensively proved, but marginally relevant side show.

30

between October 1, 1997 through September 30, 2003,63 whereas defendant argued that

“the purchase order was for the auditing of fixed price contracts,” for that same time period

because the RFQ was limited to audits “on payments made from all fixed price contracts.”

(emphasis in original). The court concluded that the Statement of Work attached to NASA

Contract signed by Horn & Associates and the Contracting Officer determined the scope

of the agreement between the parties and required the plaintiff to perform a primary audit

recovery on all contract payments for the time period specified. See Horn & Assocs., Inc.

v. United States, 104 Fed. Cl. 121, 136 (2012).

After the court’s decision, plaintiff filed an amended complaint, albeit without

specific mention of the three claims and their specific dollar amounts. Instead, plaintiff

listed a single cause of action, breach of contract, and in the prayer for relief requested

that “the Court enter judgment for Horn and against NASA on the breach of contract cause

of action and award Horn expectation damages, reliance damages, and/or any other type

of damages which the Court deems appropriate, in an amount to be proven at trial.” In

response, defendant filed an answer to the amended complaint and a counterclaim.64

Defendant asserts a counterclaim in this court against plaintiff under the False Claims

Act, 31 U.S.C. § 3729 (2012), as well as an affirmative defense65 under the Special Plea

in Fraud statute, 28 U.S.C. § 2514 (2012) and the anti-fraud provision of the Contract

Disputes Act, 41 U.S.C. § 7103(b)(1) (2012). In count one of its counterclaim, regarding

the Special Plea in Fraud statute, defendant argues that “Horn knowingly and deliberately

overstated its incurred costs with the intent to cause the United States to pay Horn more

than the amount to which Horn knew it was entitled under the contract and pursuant to

applicable laws and regulations,” and, therefore, “Horn is liable for the forfeiture of its

certified claim, in its entirety, pursuant to 28 U.S.C. § 2514.” Defendant argues in count

two of its counterclaim, regarding the anti-fraud provision of the Contract Disputes Act,

that “Horn is unable to support portions of its actual costs claim, as alleged above, due to

misrepresentations of fact or fraud,” and, therefore, “Horn is liable to the United States

pursuant to 41 U.S.C. § 604 for the unsupported portions of its claims, the exact amount

to be proven at trial, as well as the United States’ costs attributable to reviewing such

63 As noted above, although the NASA Contract had originally called for Horn &

Associates to conduct the recovery audit for contract payments made during October 1,

1997 through September 30, 2003, the NASA Contract subsequently was modified to

cover contract payments from October 1, 1997 through September 30, 2005.

64Defendant had initially filed a counterclaim along with an amended answer to plaintiff’s

complaint, but subsequently, defendant filed a corrected amended answer and

counterclaim, because, despite prior assertions to the contrary, the statements in the

answer to the amended complaint were not identical to statements in defendant’s original

answer.

65Although the defendant frames the Special Plea in Fraud statute and the anti-fraud

provision of the Contract Disputes Act as affirmative defenses, defendant lists both the

Special Plea in Fraud statute and the anti-fraud provision of the Contract Disputes Act as

counts to its counterclaim.

31

parts of its claims.” Regarding the False Claims Act, in count three of its counterclaim,

defendant claims, “Horn knowingly presented, or caused to be presented, a false or

fraudulent claim to officers or employees of the United States for payment or approval,”

and, therefore, “Horn is liable pursuant to the False Claims Act.” In count four of its

counterclaim, also regarding the False Claims Act, defendant alleges that “[f]or the

purpose of getting false or fraudulent claims paid or approved by the Government, Horn

knowingly made, used, or caused to be made or used, false records or statements

material to a false or fraudulent claim,” and, therefore, “Horn is liable pursuant to the False

Claims Act.”

In its post-trial briefing the defendant stated:

The Government does not pretend that its own performance in connection

with the recovery audit was perfect. Indeed, for reasons that we

acknowledge fully below, it was not, with the result that, at the conclusion

of the audit, Horn was owed an additional contingency fee based upon

$992,557.38 in valid overpayments that NASA failed to pursue and process.

Horn’s own subsequent conduct, however, has wiped out its entitlement to

even that amount, and renders it liable to the Government for substantial

damages in fraud.

Due to the potential forfeiture of plaintiff’s claims under the Special Plea in Fraud

statute, or the potential forfeiture of the unsupported portions of plaintiff’s claims under

the anti-fraud provision of the Contract Disputes Act, the court addresses defendant’s

counterclaim and affirmative defenses before addressing plaintiff’s claims. This opinion

is issued following a lengthy trial, and after review of all the information now in the

record.66

DISCUSSION

Defendant argues that:

[H]aving failed to make the profit that it expected on the NASA recovery

audit, Horn submitted a certified claim that alleged various contractual

breaches and demanded $7,028,200.96 in ‘actual costs incurred’ in

performing the NASA recovery audit. Although presented as a figure that

was exact to the penny and ostensibly supported by backup documentation,

this amount was, in truth, neither actual nor incurred, but rather represented

an arbitrary, inflated amount that Horn thought NASA might pay.

According to defendant, this decision to submit the certified claim, in the view of the

government was “quintessential fraud under the FCA [False Claims Act], Special Plea in

Fraud, and the CDA’s antifraud provision, and it mandates the forfeiture of Horn’s breach

66As indicated above, also before the court are the post-trial filings by the parties, which

even today, do not agree on the number of claims submitted by plaintiff or how to

characterize the claims.

32

claims, and renders Horn liable for statutory fines, and payment to the Government of the

unsupported $7 million amount, plus the costs of review.” The government summarizes

its argument by claiming:

The overarching reality is simply that, when Horn represented in its certified

claim that its claimed hours, rates and overheads were “actual,” when in

truth, aside for a nominal amount of claimed expenses, those costs did not

exist, were not real, were never paid and were not liabilities, it made a false

statement for purposes of the FCA, Special Plea in Fraud, and the CDA’s

Anti-Fraud provision. In other words, Horn’s representations to the

Government regarding the nature of these purported expenses were false

under any reasonable interpretation.

(emphasis in original).

In response, plaintiff claims that:

Each of these counterclaims is based on the inclusion of the phrase “actual

costs incurred” in the third measure of damages in Horn’s Certified Claim

and the Government’s erroneous contention that the mere inclusion of those

words irrespective of the context automatically transforms the Certified

Claim into a submission for payment on a cost-type contract. Horn’s

Certified Claim, however, was not a request for payment on a cost-type

contract. Rather, it was effectively a complaint asserting liability of NASA

for breach of a contingency fee contract.

Plaintiff, therefore, argues that “NASA fails to meet the elements of the counterclaims

asserted and its fraud claims could only have merit if one suspends common sense,

ignores context, and relies on unproved assumptions instead of reality.”

I. Special Plea in Fraud

As noted above, in its counterclaim, defendant argues that “Horn knowingly and

deliberately overstated its incurred costs with the intent to cause the United States to pay

Horn more than the amount to which Horn knew it was entitled under the contract and

pursuant to applicable laws and Regulations,” and, therefore, “Horn is liable for the

forfeiture of its certified claim, in its entirety, pursuant to 28 U.S.C. § 2514.” In its post-trial

brief, defendant argues that evidence at trial proved, by the use of the phrase “actual

costs incurred,” plaintiff made multiple false statements with actual knowledge of their

falsity. Defendant also claims that “[a]lthough engineered to appear as a claim for actual

costs incurred, Horn’s claim sought significant dollar amounts beyond any costs incurred

and was in fact a ‘negotiating ploy’ and submitted to get NASA to ‘pay attention.’”

Plaintiff responds that “[a]lthough the Government asserts that the third measure

of damages in Horn’s Certified Claim was ‘engineered to appear as a claim for actual

33

costs incurred,’ it failed to prove this claim. Rather, the evidence showed that the Certified

Claim was not misleading and was not intended to mislead.” (internal citation omitted).

The Special Plea in Fraud statute provides:

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; see also Kellogg Brown & Root Servs., Inc. v. United States, 728 F.3d

1348, 1365 (Fed. Cir. 2013), reh’g denied, 563 F. App’x 769 (Fed. Cir.), cert. denied, 135

S. Ct. 167 (2014). In Kellogg Brown & Root, the United States Court of Appeals for the

Federal Circuit unequivocally held that “[o]n its face, the statute is limited to those

circumstances where the Government proves fraud ‘in the proof, statement,

establishment or allowance’ of a claim not in the execution of a contract.” Id. at 1366

(footnote omitted).

Previous decisions by Judges of the United States Court of Federal Claims have

indicated that “[t]he statutory forfeiture contemplated by 28 U.S.C. § 2514 is broad.

Earlier, the Court of Claims held that, upon a finding that claims are based on ‘a contract

under which [a contractor] practiced fraud against the Government,’ as defined by this

statute, ‘all of his claims under that contract will be forfeited pursuant to 28 U.S.C. § 2514.’

Little v. United States, 138 Ct. Cl. 773, [778,] 152 F. Supp. 84, 88 (1957).” Veridyne Corp.

v. United States, 83 Fed. Cl. 575, 586 (2008); see also Kellogg Brown & Root Servs., Inc.

v. United States, 99 Fed. Cl. 488, 496 (2011), aff’d, 728 F.3d 1348 (Fed. Cir. 2013), reh’g

denied, 563 F. App’x 769 (Fed. Cir.), cert. denied, 135 S. Ct. 167 (2014). In AEY, Inc. v.

United States, the court noted that 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.” AEY, Inc. v. United States, 114 Fed. Cl. 619, 628 (2014).

As articulated by a Judge of the United States Court of Federal Claims:

In order to satisfy § 2514, however, the fraud alleged must be related to the

contract at issue. Little v. United States, 138 Ct. Cl. 773, 152 F. Supp. 84,

87-88 (1957). Fraud in an unrelated transaction will not lead to forfeiture

under this statute. However, when fraud is committed in regard to the very

contract upon which the suit is brought, the court will not divide the contract

and allow recovery on part of it. Id.; UMC Electronics v. United States, 43

Fed. Cl. 776, 791 (1999), aff’d, 249 F.3d at 1340 ([Fed. Cir.] 2001).

In order to prevail in its defense of fraud under 28 U.S.C. § 2514, the

“burden is on the government to establish by clear and convincing evidence

34

that the claimant has committed the fraud alleged.” Glendale [Federal Bank,

FBS v. United States], 239 F.3d at 1379; UMC Electronics, 43 Fed. Cl. at

791 (internal citation omitted). This requirement has more specifically been

rendered in the following way: “in order that a misrepresentation be

fraudulent . . .it must be both consciously false and intended to mislead.” E.

Allan Farnsworth, Farnsworth on Contracts, § 4.12 (2d Ed.1998). Thus, for

the purposes of § 2514, the government must show: 1) that the plaintiff

made a false statement to the government knowing that it was false; and 2)

that this statement was intended to deceive the government. Glendale, 239

F.3d at 1379.

Am. Heritage Bancorp v. United States, 61 Fed. Cl. 376, 385-86 (2004). In Brown

Construction Trades, Inc. v. United States, 23 Cl. Ct. 214 (1991), the court explained the

breadth of the statutory intent in 28 U.S.C. § 2514:

This statute has been held to require the forfeiture of any claim affected by

fraud, whether intrinsic to the claim or in the presentment of the claim.

Kamen Soap Prods. Co. v. United States, 129 Ct. Cl. 619, 641, 124 F. Supp.

608, 620 (1954) (“this statute goes further than merely banning fraudulent

claims. It provides for a forfeiture of the claim if any fraud is practiced or

attempted to be practiced in proving, establishing or allowing a claim.”).

The Court of Claims has ruled that where fraud is committed in the course

of a contract to which the suit pertains, it may not isolate the affected part

and allow suit to proceed on the remainder. The practice of a fraud on part

of a contract condemns the whole. The rule is set out in Little v. United

States, 138 Ct. Cl. 773, 778, 152 F. Supp. 84, 87-88 (1957):

It is true that the forfeiture statute [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 Government. 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

Government, all of his claims under that contract will be

forfeited pursuant to 28 U.S.C. § 2514.

Thus, 28 U.S.C. § 2514 requires the forfeiture of all claims arising under a

contract tainted by fraud against the Government. See also New York Mkt.

Gardeners’ Ass’n v. United States, 43 Ct. Cl. 114, 136, 1907 WL 832 (1908).

35

Brown Constr. Trades, Inc. v. United States, 23 Cl. Ct. at 216; see also Ab-Tech Constr.,

Inc. v. United States, 31 Fed. Cl. 429, 435-36 (1994), aff’d, 57 F.3d 1084 (Fed. Cir. 1995).

But see Kellogg Brown & Root Servs., Inc. v. United States, 99 Fed. Cl. at 499.67

As noted above, in an appeal from the trial court, in Kellogg Brown & Root, the

United States Court of Appeals for the Federal Circuit noted the government had argued

for “a finding of fraud, supporting forfeiture, ‘when fraud in the contract performance

undermined the legitimacy of the contract upon which the plaintiff sought compensation.’”

Kellogg Brown & Root Servs., Inc. v. United States, 728 F.3d at 1365-66. The Federal

Circuit, quoting from the trial court decision regarding the Brown Construction decision,

indicated that:

This is an impermissibly broad reading of the law. The Court of Federal

Claims correctly limited the statute:

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)]

67In Kellogg Brown & Root Services, Inc. v. United States, the Court of Federal Claims

questioned Brown’s holding:

Several decisions have seized upon this language as justification that all

claims must be forfeited by a contract that is “tainted” by fraud, without

regard to the alleged fraud's connection to a submitted claim. See, e.g.,

Brown Constr. Trades, Inc. v. United States, 23 Cl. Ct. 214, 216 (1991). In

doing so, these cases overlook Little's predicate factual finding that false

proof had been submitted in a related claim under the contract.

...

In analyzing the applicability of the forfeiture statute, the Brown Construction

court expanded the scope of the targeted conduct under the statute, while

somehow relying on Little, 152 F. Supp. at 87–88, Kamen Soap, 124 F.

Supp. at 620, and New York Market, 43 Ct. Cl. at 114, by stating that “28

U.S.C. § 2514 requires the forfeiture of all claims arising under a contract

tainted by fraud against the Government.” Id. (emphasis added). 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

claim, a hallmark of every precedential Court of Claims case analyzing

claims under the forfeiture statute. See also Ab–Tech Constr., Inc. v. United

States, 31 Fed. Cl. 429, 435–36 (1994) (repeating that forfeiture statute

requires forfeiture of all claims tainted by fraud without requiring such fraud

relate to “proof, statement, establishment, or allowance” of a claim), aff'd,

57 F.3d 1084 (Fed. Cir. 1995) (unpublished table decision) (per curiam).

Kellogg Brown & Root Servs., Inc. v. United States, 99 Fed. Cl. at 500.

36

(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).

Kellogg Brown & Root Servs., Inc. v. United States, 728 F.3d at 1366 (quoting Kellogg

Brown & Root Servs., Inc. v. United States, 99 Fed. Cl. at 501) (alterations in original);

see also Liquidating Trustee Ester Du Val of KI Liquidation, Inc. v. United States, 116

Fed. Cl. 338, 379 (2014); AEY, Inc. v. United States, 114 Fed. Cl. at 628-29;68 Ulysses,

Inc. v. United States, 110 Fed. Cl. 618, 649 (2013) (“[S]uch an expansive reading of the

FFCA [Forfeiture of Fraudulent Claims Act] is not warranted by the language of the

statute.”).

Under the Special Plea in Fraud statute, “the government must ‘establish by clear

and convincing evidence that the contractor knew that its submitted claims were false,

and that it intended to defraud the government by submitting those claims.’” Daewoo

Eng’g & Constr. Co. v. United States, 557 F.3d 1332, 1341 (Fed. Cir.) (quoting Comm.

Contractors, Inc. v. United States, 154 F.3d 1357, 1362 (Fed. Cir.), reh’g denied (Fed.

Cir. 1998)), reh’g and reh’g en banc denied (Fed. Cir.), cert. denied, 558 U.S. 990 (2009);

see also Veridyne Corp. v. United States, 758 F.3d 1371, 1376-77 (Fed. Cir.), reh’g and

reh’g en banc denied (Fed. Cir. 2014); Kellogg Brown & Root Servs., Inc. v. United States,

728 F.3d at 1365 (“To prevail, the Government must prove its allegations by clear and

convincing evidence.”); Railway Logistics Int’l v. United States, 103 Fed. Cl. 252, 257-58

(2012). In Glendale Federal Bank, FSB v. United States, the United States Court of

Appeals for the Federal Circuit “explained that ‘[t]o prevail under [28 U.S.C. § 2514] the

government is required to establish by clear and convincing evidence that the contractor

knew that its submitted claims were false, and that it intended to defraud the government

by submitting those claims.’”69 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374,

1379 (Fed. Cir. 2001) (brackets in original) (quoting Comm. Contractors, Inc. v. United

States, 154 F.3d at 1362); see also Young-Montenay, Inc. v. United States, 15 F.3d 1040,

68As noted in AEY, “[i]n 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.” AEY, Inc. v. United States,

114 Fed. Cl. at 629.

69 The “clear and convincing” standard applies to proof under the Special Plea in Fraud

statute, 28 U.S.C. § 2514, as opposed to the preponderance of the evidence standard

applicable to the False Claims Act, 31 U.S.C. § 3729, and the Contract Disputes Act, 41

U.S.C. § 604. See UMC Elecs. Co. v. United States, 249 F.3d 1337, 1338-39 (Fed. Cir.

2001) (“The government must prove a violation of the Contract Disputes Act and False

Claims Act by a preponderance of the evidence. Under the Special Plea in Fraud, the

government must prove its allegations by clear and convincing evidence.” (citing Comm.

Contractors, Inc. v. United States, 154 F.3d at 1362)).

37

1042 (Fed. Cir. 1994) (“Under 28 U.S.C. § 2514, the government bears the burden of

proving that the claimant (1) knew the claim was false and (2) intended to deceive the

government by submitting it.” (citing McCarthy v. United States, 670 F.2d 996, 1004, 229

Ct. Cl. 361, 373 (1982), abrogated on other grounds by Slattery v. United States, 635

F.3d 1298 (Fed. Cir. 2011))); Veridyne Corp. v. United States, Veridyne Corp. v. United

States, 105 Fed. Cl. 769, 808, modified, 107 Fed. Cl. 762 (2012), aff’d in part, rev’d in

part, 758 F.3d 1371 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir. 2014);70

Daewoo Eng’g & Constr. Co. v. United States, 73 Fed. Cl. 547, 584 (2006) (“The

contractor must knowingly present the false claim with the intention of being paid for it.”),

aff’d, 557 F.3d 1332 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir.), cert. denied,

558 U.S. 990 (2009); O’Brien Gear & Mach. Co. v. United States, 219 Ct. Cl. 187, 199,

591 F.2d 666, 672 (1979); Miller v. United States, 213 Ct. Cl. 59, 68, 550 F.2d 17, 22

(1977); Kamen Soap Prods. Co. v. United States, 129 Ct. Cl. 619, 641, 124 F. Supp. 608,

620 (1954).

Mere negligence, inconsistency, or discrepancies are not actionable under the

Special Plea in Fraud statute. See Daewoo Eng’g & Constr. Co. v. United States, 73 Fed.

Cl. at 584; Veridyne Corp. v. United States, 105 Fed. Cl. at 801; Grand Acadian, Inc. v.

United States, 105 Fed. Cl. 447, 458 (“‘Proof of negligence or ineptitude does not meet

the standard of clear and convincing evidence; rather, “[a]n intent to deceive the

Government must be proved.”’” (bracket in original) (quoting Alcatec, LLC v. United

States, 100 Fed. Cl. 502, 517 (2011) (quoting Miller v. United States, 213 Ct. Cl. at 68,

550 F.2d at 22), aff’d, 471 F. App’x 899 (Fed. Cir. 2012))), appeal dismissed (Fed. Cir.

2012). The United States Court of Appeals for the Federal Circuit has described the clear

and convincing evidence standard as follows:

“A requirement of proof by clear and convincing evidence imposes a heavier

burden upon a litigant than that imposed by requiring proof by preponderant

evidence but a somewhat lighter burden than that imposed by requiring

proof beyond a reasonable doubt. Clear and convincing evidence has been

described as evidence which produces in the mind of the trier of fact an

abiding conviction that the truth of a factual contention is ‘highly probable.’”

Am-Pro Prot. Agency, Inc. v. United States, 281 F.3d 1234, 1240 (Fed. Cir. 2002) (quoting

Price v. Symsek, 988 F.2d 1187, 1191 (Fed. Cir. 1993)) (emphasis in original); see also

Hernandez, Kroone & Assocs., Inc. v. United States, 110 Fed. Cl. 496, 525 (2013) (citing

Am-Pro Prot. Agency, Inc. v. United States, 281 F.3d at 1239–40 (other citation omitted)),

recons. denied, 2013 WL 3199299 (Fed. Cl. Mar. 29, 2013).

“The court may . . . consider circumstantial evidence in making its determination.”

Alcatec, LLC v. United States, 100 Fed. Cl. at 517 (citing Kamen Soap Prods. Co. v.

United States, 129 Ct. Cl. at 642, 124 F. Supp. at 620). With respect to the court’s

70The court in Veridyne also has indicated that, regarding 28 U.S.C. § 2514, “[a] predicate

for forfeiture under this statute is the establishment of fraud, although the statute itself

does not articulate the elements of fraud.” Veridyne Corp. v. United States, 105 Fed. Cl.

at 801.

38

analysis of circumstantial evidence to demonstrate clear and convincing evidence of

fraud, the United States Court of Claims explained:

About the only way a just conclusion can be reached is by placing the

questioned documents and statements alongside well-known and

established facts Every event in the universe is linked to every other event.

One cause produces an effect, and that effect in turn becomes a cause thus

all events from the beginning of time are woven into one complete pattern.

It is difficult, therefore, to make up a story that is not part of this one

continuous design It is like a patch on a suit of clothes—it may be made out

of the same cloth, may look the same in the middle, but will show around

the edges, because it is not a part of the original garment. Likewise made-

up story will not fit into the scheme of events, because it is not a part of it.

It will not, therefore, stand close examination. One made-up story calls for

another and the last fabrication will not tally with the next fact.

Kamen Soap Prods. Co. v. United States, 129 Ct. Cl. at 642, 124 F. Supp. at 620.

Once fraud is established, “[t]he use of the word ‘shall’ [in 28 U.S.C. § 2514] makes

the judgment of forfeiture obligatory on the court; the court has no discretion to turn a

blind eye to an attempt, whether successful or not, to commit fraud in the statement of a

claim against the United States.” Am. Heritage Bancorp v. United States, 61 Fed. Cl. at

385; see also Farkas v. United States, 57 Fed. Cl. 134, 146 (2003) (quoting Miller v.

United States, 213 Ct. Cl. at 68, 550 F.2d at 22), aff’d, 95 F. App’x 355 (Fed. Cir. 2004)

(“Section 2514 amounts to a ‘silver bullet’ which, in the present case, would require that

[plaintiff’s] claim be forfeited if it is shown by clear and convincing evidence that [plaintiff]

acted or made false or misleading statements with the ‘intent to deceive the

Government.’”). Forfeiture under the Special Plea in Fraud statute “carries no monetary

penalties other than the forfeiture itself.” Daewoo Eng’g & Constr. Co. v. United States,

73 Fed. Cl. at 584. “The forfeiture counterclaim carries no monetary penalties other than

the forfeiture itself.” Id.; see also Barren Island Marina, Inc. v. United States, 44 Fed. Cl.

252, 257 (1999) (“The plain meaning of the statute [28 U.S.C. § 2514] is that the value of

the forfeiture is not restricted or even linked to the value of the loss sustained by the

government. For this reason, the forfeiture is not, strictly speaking, a remedy. Additionally,

because forfeiture under § 2514 requires demonstration of fraud-intentional conduct-the

forfeiture is more akin to punishment.”), appeal dismissed, 54 F. App’x 329 (Fed. Cir.),

vacated by 57 F. App’x 427 (Fed. Cir.), and appeal dismissed, 66 F. App’x 878 (Fed. Cir.

2003).

Although the Special Plea in Fraud Statute does not require the court to render a

judgment of forfeiture when a contractor practices fraud against the government “in some

other unrelated transaction,” when a contractor commits fraud “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.” Little v. United States, 138 Ct. Cl. 773, 778, 152

F. Supp. 84, 88 (1957). The claims that a contractor asserts in court, therefore, may be

forfeited as long as the fraudulent conduct that serves as the basis for the forfeiture is

39

related to the contract from which the claims are derived. See Daff v. United States, 31

Fed. Cl. 682, 697 (1994) (“Although . . . fraud does not have to occur in the court

proceeding itself, it plainly has to be relevant to the present assertion of a claim in court,

arising out of the same transaction or contract.” (citing Little v. United States, 138 Ct. Cl.

at 778, 152 F. Supp. at 87–88), aff’d, 78 F.3d 1566 (Fed. Cir.), reh’g denied, reh’g en

banc suggestion declined (Fed. Cir. 1996); see also Veridyne Corp. v. United States, 105

Fed. Cl. at 806 (“A plaintiff’s claim will be forfeited under 28 U.S.C. § 2514 even if only

part of its claims is [sic] false.” (citing Daewoo Eng’g & Constr. Co. v. United States, 557

F.3d at 1341)); Barren Island Marina, Inc. v. United States, 44 Fed. Cl. at 256 (“Based on

the Little case, there is no question that all claims arising under the contract are subject

to forfeiture.”). A fraudulent invoice submitted to a contracting officer during the

performance of the same contract that is the subject of a contractor’s claims, therefore,

may result in the forfeiture of the contractor’s claims under the Special Plea in Fraud

statute. See Tyger Constr. Co. v. United States, 28 Fed. Cl. 35, 61 (1993) (“The statute

does not specify where such claims must be presented in order to invoke the

statute. Claims for payment before a contracting officer are as subject to ‘proof,

statement, establishment, or allowance’ as are claims before the Court of Federal

Claims.”); see also Jerman v. United States, 96 Ct. Cl. 540, 552 (1942).

As a starting point, for defendant’s counterclaim to be successful, defendant must

demonstrate that the counterclaim is “tied to the submission of a claim, whether in

producing false proof to support a claim, . . . or in falsely establishing the claim.” Kellogg

Brown & Root Servs., Inc. v. United States, 728 F.3d at 1366 (citations omitted). For the

third measure of damages, titled “Further Alternative Remedy,” Horn & Associates’ claim

certified:

Even should NASA determine, improperly Horn believes, that the sums

above are not an appropriate measure of Horn's damages, Horn is entitled

to recover its actual costs and expenses incurred by Horn and its

independent subcontractors. Horn has contacted each of its independent

subcontractors and had them review the time they devoted and the costs

they incurred. Likewise, Horn has reviewed its own records to determine

time and expenses devoted on this contract by Horn staff. The sum of all

such time and expenses plus an overhead and profit factor of 18% is

$7,028,200.96. The information is presented on an individual basis for each

Horn member, employee or subcontractor. Further, the information is

broken out on a monthly basis. Supporting all this information are expense

records and time diaries that were used to construct the documents.

(internal citation omitted). Defendant argues the key phrase, and the one that

demonstrates plaintiff’s fraud, is: “Horn is entitled to recover its actual costs and expenses

incurred by Horn and its independent subcontractors.”71 (emphasis added). Plaintiff

71In its post-trial briefs, defendant claims that “Horn made multiple four false statements

with actual knowledge of their falsity,” but then only identifies one category of false

statements: “Horn Knowingly Made False Statements Concerning Documentary Support

For Its ‘Actual Costs Incurred.’”

40

argues that defendant has constructed a “disingenuous premise” on which to base its

counterclaim argument. Plaintiff also responds that “the Horn witnesses testified credibly

and consistently that they did not intend to state a claim for actual costs incurred,” and

point to the fact that “the Government chose not to present testimony from any witness

who received the Certified Claim to say they were misled by it.”

Mr. Farrar offered testimony that the certified claim was not meant to reflect the

actual costs incurred, and despite that phrase, Mr. Farrer indicated that “quite frankly, I

don’t know how much clearer we could make it than this.” Mr. Farrar pointed to the

language of the certified claim stating: “It is important to note that Horn is not required to

establish as damages with a finite degree of accuracy. Rather Horn may establish

approximate damages so long as there is a reasonable basis for Horn's computation.” Mr.

Farrar also noted that for the third measure of damages, the “Further Alternative

Remedy:”

We clearly state in the last sentence of paragraph two, “According to all of

this information, our expenses records and time diaries that were used to

construct the documents.” If we had actual expenditure documents, we

wouldn’t have had to construct the documents. So I think that clearly again

demonstrates that we’re approximating or constructing the documents to

support our claim -- our remedy.

(quoting the certified claim). On direct examination, plaintiff’s counsel asked Mr. Farrar,

“[a]t the time that you reviewed the certified claim before it was submitted, what was your

understanding of the term ‘actual cost incurred?’” Mr. Farrar responded that “[m]y

understanding of that term -- first of all, that term simply meant to me that you’re talking

about actual time and expenses incurred.” When the government asked if “it's true that

Horn did not pay its subcontractors the amount of $1,889,306 as set forth in this

spreadsheet, correct?” Mr. Farrar reiterated that “[w]ell again, we can’t pay our

subcontractors if we haven’t been paid. So, I mean, technically speaking we had not paid

this at that point in time because we hadn't been paid for [sic] NASA.”

With regard to the language, “Horn should be entitled to receive at a bare minimum

compensation for its actual costs incurred," at trial, Tom Horn acknowledged that he did

not give any significance to the term “actual costs incurred,” explaining “it really didn't

register with me when I read this, reviewed the certified claim.” Tom Horn further indicated

regarding the “Further Alternative Remedy,” which stated, “Horn is entitled to recover its

actual costs and expenses incurred by Horn and its independent subcontractors,” that the

term “actual costs and expenses,” “really didn't have any significance because it really

didn't register with me when I reviewed the document.”

The “Further Alternative Remedy” language of the certified claim also indicated

that “[s]uch damages while not placing Horn in the same position it would have been but

for the breaches by NASA would at least compensate Horn for its out-of-pocket expenses

and for the time devoted to the performance of the purchase order.” Tom Horn testified

that the time devoted was the same as costs to him, because “we didn't actually pay out

41

anything to our subcontractors or to ourselves. The only thing we had was the value of

our time.” On cross-examination, Tom Horn had the following exchange with defendant’s

counsel:

And that's a document that at the top says Horn and Associates, Inc., NASA

Audit Cost Summary. Do you see where I’m reading?

A: Yes.

Q: And there is a column for personnel, correct?

A: Yes.

Q: There is a column for the year 2005?

A: Yes.

Q: There's a column for the year 2006.

A: Yes.

Q: There is a column that states auditor expenses paid by Horn.

A: Correct.

Q: And there is a total column.

A: Correct.

Q: Is that correct? Now speaking specifically of the total column, these

amounts total to $7,028,200.96. Is that correct?

A: Yes.

Q: And that is the same amount that you are seeking as your third measure

of relief in the certified claim, correct?

A: Yes.

Q: Okay. Now in this total column there are a number of values. And my

question to you is this, is there a single amount in this total column that was

actually invoiced by Horn and paid to its subcontractors? Let me break it

out. Is there a single amount in this total column that was actually paid by

Horn to its subcontractors?

42

A: There may have been an instance where we’ve paid some expenses

possibly. I don't remember right offhand.

Q: But other than expenses, there are no amounts that appear in this NASA

audit cost summary that were paid by Horn to any of the individuals listed

in the personnel column. Isn't that the case?

A: There may have been some salaries paid to some of the three principals,

but for the most part these were not paid out.

Q: Okay. Now, just to be clear, you believe that the principals received, I

believe you indicated that the principals of Horn that appear in the personnel

column may have received some salary. Did I understand it correctly?

A: Yeah, but it would be, I’m telling you, it would be really minute because

we didn't have any money.

Q: But these exact figures, which are down to the penny, do not represent

exact amounts that were paid to Horn principals or any of its subcontractors.

Is that the case?

A: The expenses in there were exact amounts.[72] I mean that we paid

ourselves.

Q: Were any other amounts, other than the expenses, amounts that were

made to Horn's subcontractors and principals?

A: No.

In its post-trial briefs, counsel for Horn & Associates includes the following question and

answer:

Did Horn not actually pay any of its members, employees, or subcontractor

the billing rates shown in the third measure of damages? Of course Horn

did not pay those rates, as everyone was working on a contingency basis

and the rates were obviously billing rates, not cost rates. These were not

revelations; they were facts that were never in dispute. That the

Government presented this “proof” as if it were making some important

revelation reveals its case as an exercise in legal pretense and nothing

more.

In addition to identifying that plaintiff did not pay the actual costs incurred,

defendant argues further evidence of fraud is that Horn & Associates also did not conform

to the FAR’s definition of actual costs incurred. Defendant correctly notes that FAR §

72The “Audit Cost Summary” reflected the “expenses reimbursed to Auditors” in the

amount of $9,067.61.

43

31.001 defines “actual costs” as “amounts determined on the basis of costs incurred, as

distinguished from forecasted costs,” 48 C.F.R. § 31.001 (2015), and argues that “[t]he

term ‘actual costs incurred’ is one that is common in the accounting industry, and its

meaning is no different from that provided in the FAR.” On direct examination, in response

to the question: what was your understanding how the term actual costs incurred was

defined in the FAR, Mr. Farrar states that “I did not know it was in the FAR,” and that “I

just had no reason to think that I needed to -- I don't -- the way I think I don't think I have

to look in FAR to see if every term that's used is defined in FAR. I would have never

thought of that.” Tom Horn also was unaware that the term “actual costs incurred” was a

defined term in the FAR. Defendant argues that “[a]lthough Mr. Horn professed ignorance

of the specific FAR definition of ‘actual costs incurred,’ Mr. Horn is a CPA and former

auditor who dealt with invoices and payments every day.” (internal citation omitted). As

noted above, Horn & Associates argues that “NASA presented no testimony that, upon

receiving the Certified Claim, anyone with responsibility for reviewing and acting upon it

received it in the way the Government now argues, as a statement of Horn’s actual costs

and expenses incurred as defined by the FAR.”73 Moreover, regarding the defendant’s

argument about the FAR, plaintiff states:

In keeping with its façade of outrage, the Government devotes the majority

of the counterclaim portion of its Response to arguing the undisputed point

that Horn’s third measure of damages was not based on “actual costs

incurred” as defined by the FAR. Horn agrees, as it always has told NASA

from the beginning, that the claim was not based on “actual costs incurred”

as defined by the FAR.

The court believes defendant established that although the certified claim stated

the claim was based on “actual costs incurred,” plaintiff did not incur the costs identified

in the claim. Nor did plaintiff pay the amounts to its subcontractors, except expenses,

listed in the certified claim. The court, however, does not agree with defendant that the

use of the words “actual costs incurred” by themselves meets the definition of fraud. Nor

73 In a footnote, Horn & Associates argues that “[b]ecause the Government chose not to

call any witness who actually reviewed the Certified Claim when it was submitted

(although they were available), there is no evidence that NASA actually understood the

third measure of damages differently than Horn intended it, or as the Government’s own

expert testified was evident to him upon first reading.” Plaintiff claimed, therefore, that

the court should apply the principle “‘that where a party fails to call a witness available to

him and who has knowledge of material facts, the court may draw the inference that the

testimony of the witness concerning those facts would have been unfavorable to the

party.’” (quoting Day & Zimmerman Servs. v. United States, 38 Fed. Cl. 591, 603, appeal

dismissed, 12 F.3d 49 (Fed. Cir. 1997)). Plaintiff argues, therefore, that “the Court can

presume that the witnesses’ testimony would have been unfavorable to the Government

on this issue, which further supports the conclusion that the Government’s counterclaims

are entirely manufactured.” The court notes that although Mustapha Wai, who testified at

trial, worked for the OIG during the NASA audit and reviewed the certified claim after it

was submitted, defendant did not call either contracting officer involved in the NASA

Contract to address Horn & Associates’ certified claim.

44

does the use of the phrase “actual costs incurred” evidence per se fraud on the plaintiff’s

part. The court does not believe the words by themselves, however wrongly chosen by

plaintiff, automatically demonstrates the intent to defraud the government. Here, Horn &

Associates did not bill the government for its time, it was performing the contract as a

recovery audit firm, and the contract with NASA was “a contingency-based contract,”

which only contemplated payment to Horn & Associates for any successful recovery by

NASA. The 13.5 percent contingency fee provision in the NASA Contract did not require

Horn & Associates to document its hours, expenses or billing rates. As Tom Horn

explained, “it didn't require us in any part of the contract to maintain our time and expense

records.” The court believes Tom Horn, as a CPA, should have been more aware of the

meaning of the phrase “actual costs incurred.”

As reflected repeatedly in this opinion, plaintiff’s contract was a contingency

contract, and plaintiff was placed in a difficult position to try and recover monies it believed

it was entitled to as a result of the work plaintiff had completed under the NASA Contract.

Horn & Associates was convinced that NASA had breached the NASA Contract, making

complete performance impossible, including the roadblocks NASA employees put in the

way of contract performance, first by reading the NASA Contract to include only fixed

price contracts, and then the failure to make files available, and the failure to cooperate

with Horn & Associates personnel by failing to pursue collection of the overpayments

owed the government which were identified and submitted by plaintiff. Absent pursuit and

collection of the claims by NASA, monies due plaintiff, as a contingency fee under the

NASA Contract, would remain unavailable to plaintiff. As noted above, under the NASA

Contract, plaintiff would only be paid if NASA collected on an overpayment discovered

and identified to NASA by Horn & Associates, which had to be invoiced and collected by

NASA.

Plaintiff’s certified claim was submitted following the end of contract performance

of this contingency fee contract, and after the relationship between the plaintiff and the

government broke down and plaintiff considered the government to have breached the

NASA Contract. The records in this case, therefore, were generated after the NASA

Contract was ended. In order to arrive at a damages figure for the certified claim that

represented what Horn & Associates believed it had expended on the recovery audit,

Horn & Associates inartfully described its potential costs as “actual costs and expenses”

in its certified claim. There is no evidence in the record, however, that Horn & Associates

or its principals intended to defraud the government or to submit a false claim. The court

believes plaintiff’s choice of words, “[s]upporting all this information are expense records

and time diaries that were used to construct the documents,” as well as that plaintiff

provided the government with the reconstructed expense records and time diaries, led to

confusion and, consequently, suspicion of the plaintiff on the part of the government.

Moreover, from the start of contract performance, the relationship between the parties

was poor at best. By claiming records were a reconstructed submission as the certified

claim against the government, Horn & Associates left itself vulnerable to a suspicion of

fraud and submitting false statements. After listening to, and observing, the Horn &

Associate witnesses and reviewing Mr. Lowery’s deposition, despite poor drafting choices

by Horn & Associates, the court does not believe Horn & Associates ever intended to

45

defraud the government. The court believes, as supported by testimony at trial, that Horn

& Associates was unsure how collect from the government for their efforts expended on

the contract awarded to it. The government did not process the overpayments Horn &

Associates believed it had discovered and properly submitted to NASA, and, therefore,

Horn & Associates was not being paid.74 Only after the termination of the NASA Contract,

did Horn & Associates suggest an actual costs method of payment. As a recovery audit

firm, Horn & Associates was not well versed in how to select an hourly rate, or calculate

its time. The court believes Horn & Associates made numerous mistakes in formulating

the certified claim, but does not believe the mistakes rises to the level of fraud. Moreover,

the submission of alternative theories and dollar values in the alterative remedies

submitted to the government is further indication that the claims submitted by the plaintiff

involved reconstructed numbers based on the best information available not on precise

records.

The court notes the difference between this case and a more typical fraudulent

records case is striking. For example, in Alcatec, LLC v. United States, the court found

that the plaintiff had committed fraud in performing an indefinite-delivery, indefinite

quantity, fixed-rate contract, which compensated the plaintiff for performing services that

included a monthly inspection of mobile homes. See generally Alcatec, LLC v. United

States, 100 Fed. Cl. 502. Like Horn & Associates, the plaintiff in Alcatec was a small

business contractor that had no experience providing similar services to the government.

See id. at 505. The Alcatec plaintiff admitted that it invoiced for “duplicate inspections,”

but asserted that its over-billing of defendant “was a product of mistake and confusion

and not the result of a scheme to intentionally defraud the Government.” Id. at 517. Noting

that the “routine nature” of the monthly inspections “was at the heart of the performance

that FEMA contracted for,” id. at 521, the Alcatec court concluded that the plaintiff

committed fraud by intentionally falsifying the dates that appeared on inspection reports.

See id. at 518. There is no suggestion of anything like that type of intentional fraud in this

case.

This case is also vastly different from Chapman Law Firm LPA v. United States,

113 Fed. Cl. 555 (2013), aff’d, 583 F. App’x 915 (Fed. Cir. 2014). In Chapman, “plaintiff

falsified inspection reports for the East Dale Avenue, Trenton Street, Mount Elliott

Avenue, and Chester Street properties, which served as supporting documentation for its

claim to the management fee provided for conducting routine inspections under the

parties’ contract.” Id. at 601. The plaintiff in that case, Chapman Law Firm LPA,

represented that routine inspections had occurred on the East Dale Avenue

property on dates that lawn care services were provided, by creating routine

inspection reports for the Trenton Street property which represented that an

inspector had visited the property, which was contradicted by the post-hoc

creation of the reports, the failure of the post-hoc reports to recognize that

a fire had destroyed the property, and Frank Chapman’s direction to use

any interaction with the Trenton Street property as evidence of a routine

74As noted above, for the 44 claims recovered by NASA, the total value was $208,954.91

and the fee paid to Horn & Associates was $28,209.00.

46

inspection, and by uploading questionable routine inspection reports for the

Mount Elliott Avenue and Chester Street properties.

Id. In both Alcatec and Chapman, the court found intentional fraud under the Special Plea

in Fraud statute. The court does not believe the facts in the above captioned case warrant

the same conclusion.

The court does not find the phrase, “actual costs incurred” alone to be proof

positive of fraud for Horn & Associates’ certified claim, nor does the court find the plaintiff’s

conduct demonstrates fraud in the context of the specific facts of the case currently under

review. Although defendant points to plaintiff’s failure to understand how the term “actual

cost incurred” was a term of art in the FAR, defendant is unable to demonstrate how this

failure to understand demonstrates intentional fraud. In its post-trial brief, Horn &

Associates argues that “Horn’s claims should not be forfeited under the Special Plea in

Fraud Statute,” because “NASA has failed to prove the elements of knowledge and intent.

Because the burden necessary to prove a Special Plea in Fraud is much higher [than for

the False Claims Act and the Contract Disputes Act], the claim fails.” The court concludes

that, although plaintiff should have been more precise in its choice of language, defendant

has failed to prove the requisite intent to establish fraud. Therefore, Horn & Associates is

not found to have practiced, or attempted to practice, a fraud against the United States

under the defendant’s claims with respect to the Special Plea in Fraud statute. Plaintiff’s

claims are not forfeited as a result.

II. False Claims Act

In its counterclaim, defendant also argues that “Horn is liable pursuant to the False

Claims Act” because “Horn knowingly presented, or caused to be presented, a false or

fraudulent claim to officers or employees of the United States for payment or approval.”

Defendant claims “[f]or the purpose of getting false or fraudulent claims paid or approved

by the Government, Horn knowingly made, used, or caused to be made or used, false

records or statements material to a false or fraudulent claim,” and, therefore, “Horn is

liable pursuant to the False Claims Act.” In its post-trial brief, defendant contends that

Horn & Associates, in advancing its claim, “made multiple false statements concerning

documentary support for its ‘actual costs incurred.’” Horn & Associates responds that

“NASA must prove the following elements: (1) the claim presented was false; and (2) the

presenter knew that the claim was false or fraudulent,” and Horn & Associates argues

that “[h]ere, the Government has not established either element of its FCA counterclaim.”

As indicated by the United States Supreme Court, “‘[t]he False Claims Act was

adopted in 1863 and signed into law by President Abraham Lincoln in order to combat

rampant fraud in Civil War defense contracts.’” Kellogg Brown & Root Servs., Inc. v. U.S.,

ex rel. Carter, 135 S. Ct. 1970, 1973 (2015) (quoting S. Rep. No. 99–345, at 8 (1986),

1986 U.S.C.C.A.N. 5266, 5273). The False Claims Act, 31 U.S.C. § 3729,75 provides that

any person who –

75The False Claims Act was amended in 2009. See Fraud Enforcement and Recovery

Act of 2009, Pub. L. No. 111–21, § 4(a), 123 Stat. 1617, 1621. The amendments are

47

(1) 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;

(2) knowingly makes, uses, or causes to be made or used, a

false record or statement to get a false or fraudulent claim paid

or approved by the Government;

(3) conspires to defraud the Government by getting a false or

fraudulent claim allowed or paid;

(4) has possession, custody, or control of property or money

used, or to be used, by the Government and, intending to

defraud the Government or willfully to conceal the property,

delivers, or causes to be delivered, less property than the

amount for which the person receives a certificate or receipt;

(5) authorized to make or deliver a document certifying receipt

of property used, or to be used, by the Government and,

intending to defraud the Government, makes or delivers the

receipt without completely knowing that the information on the

receipt is true;

(6) knowingly buys, or receives as a pledge of an obligation or

debt, public property from an officer or employee of the

Government, or a member of the Armed Forces, who lawfully

may not sell or pledge the property; or

(7) knowingly makes, uses, or causes to be made or used, a

false record or statement to conceal, avoid, or decrease an

obligation to pay or transmit money or property to the

Government,

treated “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.” § 4(f), 123 Stat. at 1625.

See AEY, Inc. v. United States, 114 Fed. Cl. at 633 (“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.”). As noted above, Horn &

Associates submitted its certified claim on November 20, 2007, and NASA denied Horn

& Associates’ certified claim in its entirety on January 25, 2008.

48

is liable to the United States Government for a civil penalty of not less than

$5,000 and not more than $10,00076 plus 3 times the amount of damages

which the Government sustains because of the act of that person . . . .

31 U.S.C. § 3729(a) (emphasis in original); see also Kellogg Brown & Root Servs., Inc. v.

U.S., ex rel. Carter, 135 S. Ct. at 1973;77 U.S. ex rel. Heath v. AT & T, Inc., 791 F.3d 112,

115 (D.C. Cir. 2015) (“The False Claims Act, 31 U.S.C. §§ 3729 et seq., broadly

proscribes the knowing or reckless submission of false claims for payment to the federal

government or within a federally funded program.”).

76 “The Department of Justice, by regulation, has increased the penalties for FCA [False

Claims Act] violations to a minimum of $5,500.00 and a maximum of $11,000.00.”

Alcatec, LLC v. United States, 100 Fed. Cl. at 526 n.13 (citing 28 C.F.R. § 85.3(a)(9));

see also Veridyne Corp. v. United States, 105 Fed. Cl. at 808 n.30; Federal Civil Penalties

Inflation Adjustment Act of 1990, Pub. L. No. 101-410, 104 Stat. 890; Civil Monetary

Penalties Inflation Adjustment, 64 Fed. Reg. 47,099–01, 47,104 (Aug. 30, 1999). The

regulation at 28 C.F.R. § 85.3 states:

The civil monetary penalties provided by law within the jurisdiction of the

respective components of the Department, as set forth in paragraphs (a)

through (d) of this section, are adjusted in accordance with the inflation

adjustment procedures prescribed in section 5 of the Federal Civil Monetary

Penalties Inflation Adjustment Act of 1990, Pub. L. 101–410, effective on or

after September 29, 1999, as follows:

(a) Civil Division.

…

(9) 31 U.S.C. 3729(a), False Claims Act, violations: minimum from

$5,000 to $5,500; maximum from $10,000 to $11,000.

28 C.F.R. § 85.3 (2015). The court has the discretion to impose penalties within the

statutory range. See Morse Diesel Int’l, Inc. v. United States, 79 Fed. Cl. 116, 125 (2007),

recons. denied, 81 Fed. Cl. 311 (2008). Although in its post-trial briefing defendant seeks

$11,000.00 in False Claims Act penalties, defendant’s counterclaim has two separate

counts for False Claims Act penalties. Therefore, if the court were to find two separate

violations of False Claims Act, the court could impose penalties in an amount up to

$22,000.00

77 Although the United States Supreme Court in Kellogg Brown & Root addressed the

False Claims Act, because the case was brought as a civil qui tam action, “filed by private

parties, called relators, ‘in the name of the Government,’” Kellogg Brown & Root Servs.,

Inc. v. U.S., ex rel. Carter, 135 S. Ct. at 1973, the holding by the Supreme Court does not

impact this case. In addition, the Supreme Court also addressed the Wartime Suspension

of Limitations Act which is not at issue in the above captioned case.

49

The term “claim” is defined in the False Claims Act as:

Includ[ing] any request or demand, whether under a contract or otherwise,

for money or property which is made to a contractor, grantee, or other

recipient if the United States Government provides any portion of the money

or property which is requested or demanded, or if the Government will

reimburse such contractor, grantee, or other recipient for any portion of the

money or property which is requested or demanded.

31 U.S.C. § 3729(c) (2006). 78 The False Claims Act also states:

78 The revised, and current, version of the False Claims Act is substantively similar to the

prior version, but is organized slightly differently. The current version states:

(a) Liability for certain acts.--

(1) In general.--Subject to paragraph (2), any person who--

(A) knowingly presents, or causes to be presented, a false or fraudulent

claim for payment or approval;

(B) knowingly makes, uses, or causes to be made or used, a false record

or statement material to a false or fraudulent claim;

(C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F),

or (G);

(D) has possession, custody, or control of property or money used, or to be

used, by the Government and knowingly delivers, or causes to be delivered,

less than all of that money or property;

(E) is authorized to make or deliver a document certifying receipt of property

used, or to be used, by the Government and, intending to defraud the

Government, makes or delivers the receipt without completely knowing that

the information on the receipt is true;

(F) knowingly buys, or receives as a pledge of an obligation or debt, public

property from an officer or employee of the Government, or a member of

the Armed Forces, who lawfully may not sell or pledge property; or

(G) knowingly makes, uses, or causes to be made or used, a false record

or statement material to an obligation to pay or transmit money or property

to the Government, or knowingly conceals or knowingly and improperly

avoids or decreases an obligation to pay or transmit money or property to

the Government,

50

the terms “knowing” and “knowingly” mean that a person, with respect to

information –

(1) has actual knowledge of the information;

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. 2461 note; Public Law

104-410), plus 3 times the amount of damages which the Government

sustains because of the act of that person.

...

(b) Definitions.--For purposes of this section--

(1) the terms “knowing” and “knowingly” --

(A) mean that a person, with respect to information--

(i) has actual knowledge of the information;

(ii) acts in deliberate ignorance of the truth or falsity of the information; or

(iii) acts in reckless disregard of the truth or falsity of the information; and

(B) require no proof of specific intent to defraud;

(2) the term “claim”--

(A) means any request or demand, whether under a contract or otherwise,

for money or property and whether or not the United States has title to the

money or property, that--

(i) is presented to an officer, employee, or agent of the United States; or

(ii) is made to a contractor, grantee, or other recipient, if the money or

property is to be spent or used on the Government's behalf or to advance a

Government program or interest, and if the United States Government--

(I) provides or has provided any portion of the money or property requested

or demanded; or

(II) will reimburse such contractor, grantee, or other recipient for any portion

of the money or property which is requested or demanded . . . .

31 U.S.C. § 3729 (2012).

51

(2) acts in deliberate ignorance of the truth or falsity of the information; or

(3) acts in reckless disregard of the truth or falsity of the information,

and no proof of specific intent to defraud is required.

31 U.S.C. § 3729(b) (2006).

Congress rejected requiring a specific intent to defraud under the False Claims

Act. See 31 U.S.C. § 3729(b). Instead, Congress adopted a knowing standard, defined

as “actual knowledge of the falsity,” acting in “deliberate ignorance of the truth or falsity,”

or “acting in reckless disregard of the truth or falsity.” Id.; see also Ulysses, Inc. v. United

States, 110 Fed. Cl. at 642. The standard was designed to address “the problem of the

‘ostrich-like’ refusal to learn of information which an individual, in the exercise of prudent

judgment, had reason to know.” See S. Rep. No. 99-345, at 21 (1986), reprinted in 1986

U.S.C.C.A.N. 5266, 5286. Thus, the False Claims Act covers not just those who set out

to defraud the government, but also those who ignore obvious deficiencies in a claim.

Therefore, the critical issue before the court is whether plaintiff had “knowledge,”

as defined by the False Claims Act, to include reckless disregard, that the claims plaintiff

submitted to the government were false or fraudulent. To prove a violation of the False

Claims Act, the government can, but need not, prove that a party intended to deceive the

government. See United States v. TDC Mgmt. Corp., 24 F.3d 292, 298 (D.C. Cir. 1994);

see also Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d at 1340 (“no proof of

specific intent to defraud is required.” (quoting 31 U.S.C. § 3729(b))); Hernandez, Kroone

& Assocs., Inc. v. United States, 110 Fed. Cl. at 524. The False Claims Act requires only

that the government prove that a party knowingly, as defined under the False Claims Act,

submitted a claim with reckless disregard to the truth or falsity of the information. See 31

U.S.C. § 3729(b); United States v. TDC Mgmt. Corp., 24 F.3d at 298; see also Ulysses

Inc. v. United States, 117 Fed. Cl. 772, 781 (2014); Liquidating Trustee Ester Du Val of

KI Liquidation, Inc. v. United States, 116 Fed. Cl. at 379 (quoting 31 U.S.C. § 3729(b))

(“while the FCA does not require proof of specific intent to defraud, it does require that

the person or entity acted with knowledge. The statute defines “knowing” or “knowingly”

to “mean that a person” “with actual knowledge of the information” either “acts in

deliberate ignorance of the truth or falsity of the information” or “acts in reckless disregard

of the truth or falsity of the information.”); Allison Engine Co. v. United States ex rel.

Sanders, 553 U.S. 662, 672 n.2 (2008) (“Section 3729(b) provides that the terms

‘knowing’ and ‘knowingly’ ‘mean that a person, with respect to information-1) has actual

knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the

information; or (3) acts in reckless disregard of the truth or falsity of the information, and

no proof of specific intent to defraud is required.’”), superseded in unrelated part by

statute, Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111–21, § 4, 123 Stat.

1617, 1621. The United States Court of Appeals for the Federal Circuit has noted that,

“[f]or purposes of the FCA [False Claims Act], a contractor is deemed to have known that

a claim it submitted was false if it had actual knowledge of the falsity of the claim or if it

52

acted in deliberate ignorance or reckless disregard of the truth or falsity of the claim.”

Comm. Contractors, Inc. v. United States, 154 F.3d at 1362.

Reckless disregard has been characterized as “‘an extreme version of ordinary

negligence,’” United States ex rel. K & R Ltd. P’ship v. Mass. Hous. Fin. Agency, 530 F.3d

980, 983 (D.C. Cir.) (quoting United States v. Krizek, 111 F.3d 934, 942 (D.C. Cir. 1997)),

reh’g en banc denied (D.C. Cir. 2008), or “aggravated gross negligence” such as when

the party “deliberately avoided learning the truth.” United States v. Sci. Applications Int’l

Corp., 626 F.3d 1257, 1274-75 (D.C. Cir. 2010); see also United States ex rel. Burlbaw

v. Orenduff, 548 F.3d 931, 945 n.12 (10th Cir. 2008); Trafalgar House Constr., Inc. v.

United States, 77 Fed. Cl. 48, 53 (2007) (“‘Reckless disregard’ has been defined as an

‘“aggravated form of gross negligence.”’ (quoting UMC Elecs. Co. v. United States, 43

Fed. Cl. 776, 792 n.15 (1999) (quoting United States ex rel. Aakhus v. Dyncorp, Inc., 136

F.3d 676, 682 (10th Cir. 1998)), aff’d, 249 F.3d 1337 (Fed. Cir. 2001))), aff’d, 274 F. App’x

898 (Fed. Cir. 2008); Riley Constr. Co. v. United States, 65 Fed. Cl. 264, 270 (2005) (“The

legal standard that may apply is ‘reckless disregard.’ This has been defined in the case

law as something more than gross negligence, or ‘gross negligence plus.’”).79

A failure to make a minimal examination of records can constitute deliberate

ignorance or reckless disregard, and a contractor that deliberately ignores false

information submitted as part of a claim can be found liable under the False Claims Act.

See United States v. TDC Mgmt. Corp., 24 F.3d at 298; see also Miller v. United States,

213 Ct. Cl. at 70, 550 F.2d at 23 (An applicant who submitted estimates of the quantities

of the materials billed to the government prepared by his workmen, but substantially

overbilled due to misrepresentation, resulted in a finding of “extreme negligence” for

which he was found liable under the False Claims Act.). The court in Miller v. United

States noted that

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