Laguna Construction Company, Inc.
Docket: ASBCA 58324
Decision date: 2013-11-22

ARMED SERVICES BOARD OF CONTRACT APPEALS 
Appeal of--
Laguna Construction Company, Inc. 
Under Contract No. F A8903-04-D-8690 
APPEARANCE FOR THE APPELLANT: 
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APPEARANCES FOR THE GOVERNMENT: 
ASBCA No. 58324 
Carolyn Callaway, Esq. 
Carolyn Callaway, P.C. 
Albuquerque, NM 
E. Michael Chiaparas, Esq. 
DCMA Chief Trial Attorney 
Gregory T. Allen, Esq. 
Trial Attorney 
Defense Contract Management Agency 
Manassas, VA 
OPINION BY ADMINISTRATIVE JUDGE DELMAN 
ON GOVERNMENT'S MOTION TO AMEND ANSWER 
The government has filed a motion for leave to file an amended answer in this 
appeal to include the affirmative 
defense of fraud. Appellant opposes the motion. We 
have jurisdiction under the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109. 
STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTION 
1. In November 2003, the Air Force Center for Environmental Excellence 
(government) awarded Contract No. FA8903-04-D-8690, a contract for Worldwide 
Environmental Remediation and Construction Services (WERC), to Laguna Construction 
Company, Inc. (appellant or Laguna). Under this contract, Laguna received 
16 cost-reimbursable task orders (TOs) to perform construction and/or environmental 
remediation work in Iraq. (Compl. ~~ 6, 12, 14) While Laguna was performing these 
TOs the United States was engaged 
in a contingency operation in Iraq as defined by FAR 
2.101 (compl. ~ 15). 
2. Insofar as pertinent, the WERC contract contained the following clauses: FAR 
52.215-2, AUDIT AND RECORDS-NEGOTIATION (JUN 1999); FAR 52.216-7, ALLOWABLE 
COST ANDPAYMENT(DEC 2002)- ALTERNATE 1 (FEB 1997); FAR 52.233-1, DISPUTES 
(JUL 2002); FAR 52.244-2, SUBCONTRACTS (AUG 1988); and FAR 52.244-5, 
COMPETITION IN SUBCONTRACTING (DEC 1996) (R4, tab 1 at 25-29). 

3. In February 2009, the Defense Contract Audit Agency (DCAA) began an audit 
of Laguna's incurred costs for its fiscal year (FY) 2006 (compl. ~ 32). Insofar as 
pertinent here, on 17 March 2011, DCAA issued four Notices of Contract Costs 
Suspended and/or Disapproved (hereafter "Forms 1 "),designated by numbers 2011-002 
through 2011-005, totaling $17,459,674 of disapproved costs (compl. ~ 41; R4, tabs 
26-29). On 4 August 2011, DCAA revised the four Forms 1, changing the designations 
to 2011-002a through 2011-005a and increasing disapproved costs to $17,823,506 
(compl. ~ 43; R4, tabs 32-35). 
4. On or about 6 April2012, DCAA, seeking to recover some of the disapproved 
costs, rejected 14 Laguna vouchers under a number of TOs under the contract totaling 
$3,031,925 (compl. ~ 47). On or about 21 May 2012, Laguna submitted a certified claim 
to the contracting officer, requesting a decision, inter alia, "authorizing payment to 
Laguna ofthe improperly withheld sum certain of$2,874,081" (supp. R4, tab 40 at 
283-84). 
5. On 18 September 2012, Laguna submitted a notice of appeal to this Board 
based upon the deemed denial of this claim. The Board docketed the appeal as ASBCA 
No. 58324. 
6. Appellant's complaint was filed on or about 26 October 2012. The 
government's answer 
was filed on or about 2 January 2013. The government did not 
assert an affirmative defense of fraud at this time. 
Indictment of Laguna Manager 
7. On 10 October 2010, a Laguna manager pled guilty to a criminal information 
for conspiring to 
receive kickbacks from subcontractors on a number of Iraq projects, 
including certain TOs under this contract. As part of the plea agreement, he 
acknowledged as follows: 
From April 2005 until March 2008, I agreed with 
others to accept kickbacks from [Laguna] subcontractors, 
specifically: money payments for the 
purpose of improperly 
facilitating the award of [Laguna] subcontracts and favorably 
rating the performance of subcontractors.... In order to make 
contract funds available for kickbacks, I would cause 
subcontractors to submit inflated invoices to [Laguna] for 
presentment to the government, but to agree to accept lesser 
amounts than those specified in their subcontractor invoices 
so that contract funds were available to pay me kickbacks. 
Through this practice, I caused the subcontracts paid by the 
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United States Government to be inflated by the amounts I 
would receive as kickbacks. 
(Appx., mot. at 84-85) 
Indictment ofLaguna's Officers and Subcontractors 
8. On 28 February 2012, a federal grand jury in the United States District Court 
for the District of New Mexico issued a criminal indictment against three principal 
officers of Laguna and four owners of subcontractors with subcontracts with Laguna 
under the TOs under this contract. The Laguna officers indicted were: (1) the president 
of Laguna; (2) the executive vice president and chief operating officer of Laguna; and 
(3) Laguna's contract compliance manager. The indicted subcontractor owners/principals 
were two owners of a Jordanian construction company known as "Snobar"; an owner of 
Mercury Development Company (MDC); and an owner of Tigris River Company. 
(Appx., mot. at 97-99) Generally, the indictment alleged that the subcontractors paid and 
Laguna's officers received kickbacks for awarding construction subcontracts to the 
subcontractors on TOs issued under the WERC contract. It alleged 1 count of wire fraud 
conspiracy, 74 counts ofwire fraud, 1 count of illegal kickbacks, 1 count of money 
laundering conspiracy, 11 counts of money laundering, and 3 counts of income tax 
evasion. (Appx., mot. at 97)1 
9. On or about 2 July 2013, the United States Attorney for the District ofNew 
Mexico filed a criminal information against Laguna's executive vice president. The 
information generally alleged that from in or about December 2004 through on or about 
February 2009, said individual and others knowingly conspired to defraud the United 
States by providing, soliciting, and accepting kickbacks in connection with 
Laguna's 
reconstruction projects in Iraq. It specifically identified numerous kickback payments to 
said individual from Snobar and MDC. (Appx., mot. at 132-39)2 
10. On 2 July 2013, Laguna's executive vice president pled guilty to solicitation 
and receipt of subcontractor kickbacks, in violation of 41 U.S.C. § 53 (2008), attempt to 
1 By letter to the Board dated 30 October 2013, appellant brought to our attention that the 
government filed a superseding indictment on 27 August 2013. Among other 
changes, it appears that Laguna's executive vice president was withdrawn from the 
original indictment after he pled guilty to a criminal information on 2 July 2013, 
infra (findings 9, 10). Neither party suggests that the changes made in the 
superseding indictment have any material impact on the government's motion 
before us, and we so find. 
2 The transcript of the criminal information and the plea agreement were initially placed 
under seal by the court, but the court unsealed these documents by order dated 
8 July 2013. 
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evade and defeat tax in violation of26 U.S.C. § 7201; and conspiracy to provide, solicit, 
and accept kickbacks in violation of 18 U.S.C. § 371 (appx., mot. at 140-62, 163-64). 
In his plea agreement he admitted that: 
[D]uring and in conjunction with the administration of the 
LCC Iraqi reconstruction prime contracts and subcontracts, I 
accepted numerous kickbacks from [Snobar and MDC], and 
others, in return for giving them favorable treatment in 
connection with the awards of subcontracts under the WERC 
and HERC .... These subcontractors were willing to pay us 
kickbacks because we circumvented the fair, open, and 
competitive bidding process required by the FAR and LCC's 
policies and procedures, and instead directed subcontracts to 
these favored subcontractors. 
(Appx., mot. at 150) It is undisputed that Snobar and MDC received a number of 
subcontracts under the TOs under this contract, e.g., TOs 12, 18, 20. Appellant's rejected 
vouchers 
also relate to these TOs. 
11. On 2 August 2013, the government moved to amend its answer to include the 
affirmative defense of fraud. After alleging a series of factual contentions, including 
those above, the government's proposed amended answer avers as follows: 
The Fraud By LCC Officers and Employees 
The Government is not liable for LCC's claim ... because of 
LCC's breach of Contract No. FA8903-04-D-8690 when its 
principal officers and employees solicited and accepted 
kickbacks for awarding subcontracts under task orders issued 
under that contract, which constituted fraud against the 
United States. 
(Proposed amended answer at 103, 110) 
DECISION 
Board Rule 7 provides that the Board has the discretion within the proper scope of 
the appeal to permit amendments of pleadings "upon conditions fair to both parties." In 
the exercise of this discretion, we have been guided by FED. R. CIV. P. 15(a) and the cases 
that have construed it. Space Age Engineering, Inc., ASBCA No. 25761 et al., 83-2 BCA 
~ 16,789. FED. R. CIV. P. 15(a)(2) states in pertinent part as follows: "[A] party may 
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amend its pleadings only with the opposing party's written consent or the court's leave. 
The court should freely give leave when justice so requires." (Emphasis added) 
In Space Age Engineering we quoted with approval the following guidance from 
the federal courts: 
Leave to amend pleadings out of time under Rule 15(a) 
of the Federal Rules of Civil Procedure is generally at the 
discretion of the trial court, Farnan v. Davis, 371 U.S. 178, 
182, 83 S.Ct. 227, 230 9 L.Ed.2d 222 (1962), Zenith Radio 
Corporation v. Hazeltine Research, Inc., 401 U.S. 321, 330, 
91 S.Ct. 745, 802, 28 L.Ed.2d 77 (1971), and "[c]ourts have 
shown a strong liberality .. .in allowing amendments under 
Rule 15(a)," 3 Moore's Federal Practice ~ 15.08(2) at 15-59 
(2d ed. 1980), (footnote omitted) .... 
In Farnan v. Davis the Supreme Court observed: 
Rule 15(a) declares that leave to amend "shall be 
freely given when justice so requires"; this mandate is to be 
heeded.... In the absence of any apparent or declared reason 
-such an [sic] undue delay, bad faith or dilatory motive on the 
part of the movant, repeated failure to cure deficiencies by 
amendments previously allowed, undue prejudice to the 
opposing party by virtue of amendment, etc.-the leave sought 
should, as the rules require, be "freely 
given." 
Space Age Engineering, 83-2 BCA ~ 16,789 at 83,439-40. 
Although the government's answer dated 2 January 2013 did not contain the 
affirmative defense of fraud, the government sought to add this affirmative defense 
roughly four weeks after the guilty plea of Laguna's executive vice president. We find 
this timely. Appellant has not shown that the government's motion to amend was filed in 
bad faith, nor has appellant shown a dilatory motive or repeated government failures to 
cure deficiencies by previously allowed amendments. 
Appellant does assert undue prejudice in the filing of this amended pleading. It is 
self-evident that the government's affirmative defense of fraud, if established, may 
prejudice appellant (see infra). But the relevant factor is not prejudice but "undue" 
prejudice. We believe appellant has not shown any undue prejudice here. Appellant 
cannot legitimately claim "surprise;" the government filed an affirmative defense of fraud 
in an earlier, related appeal before the Board in Laguna Construction Company, ASBCA 
No. 58292, 13 BCA ~ 35,315 at 173,364. Currently, there is no pretrial order pending in 
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the subject appeal; trial dates and trial preparation deadlines have been canceled. While 
the parties have already conducted substantial discovery, the Board will consider a 
reasonable discovery extension, at appellant's request, to allow appellant to meet this 
fraud defense. We believe these conditions are fair to both parties, as required by Board 
Rule 7. 
Next, appellant contends that the government's amendment would be futile because 
it provides no legal basis to excuse the government's payment of appellant's invoices here. 
Appellant is incorrect. Fraud in the performance of a contract may be deemed a breach of 
contract sufficient to deny payment of appellant's invoices on grounds of public policy. 
AAA Engineering & Drafting, Inc., ASBCA No. 47940 et al., 01-1 BCA ~ 31,256. The 
government's amended pleading provides sufficient notice of the government's affirmative 
defense consistent with Board Rule (6)(b). The proposed amended pleading also avers 
sufficient facts to support the government's defense. 
Appellant contends that the disputes process under the CDA does not provide for the 
recovery of alleged kickbacks or other fraudulent conduct in violation of federal law. 
While this contention is true, it has no application here. The government's proposed 
affirmative defense seeks denial of appellant's claim and the appeal, not a finding of a 
violation of federal law. 
CONCLUSION 
We have considered appellant's remaining arguments but are not persuaded by 
them. Having considered the relevant guiding factors under the case law, we exercise our 
discretion to permit the government to amend its answer in this appeal to include the 
affirmative defense of fraud. The government's motion seeking leave to file its amended 
pleading is granted, and the amended answer is accepted consistent with this opinion. 
Dated: 22 November 2013 
(Signatures continued) 
6 
ministrative Judge 
Armed Services Board 
of Contract Appeals 

I concur 
~S£--
MARK N. STEMPLER ' 
Administrative Judge 
Acting Chairman 
Armed Services Board 
of Contract Appeals 
I concur 
i~~~~ 
Administrative Judge 
Acting Vice Chairman 
Armed Services Board 
of Contract Appeals 
I certify that the foregoing is a true copy of the Opinion and Decision of the Armed 
Services Board of Contract Appeals in ASBCA No. 58324, Appeal of Laguna Construction 
Company, Inc., rendered in conformance with the Board's Charter. 
Dated: 
7 
JEFFREY D. GARDIN 
Recorder, Armed Services 
Board of Contract Appeals