Exhibit 10.1
IN THE UNITED STATES COURT OF FEDERAL CLAIMS

                      ENVIRONMENTAL TECTONICS CORPORATION,     )      
 
            )      
 
      Plaintiff,     )      
 
  v.         )      
 
            )       THE UNITED STATES,     )     No.05-746C
 
            )     (Judge Susan G. Braden)
 
      Defendant.     )      

SETTLEMENT AGREEMENT
     For the purpose of disposing of all claims and counterclaims which were, or
could have been, brought pursuant to the underlying contract, without the
necessity of a trial upon the merits or further adjudication of any issue of
fact or law, and without constituting an admission of liability upon the part of
either party, and for no other purposes, the plaintiff and counter-claim
defendant, Environmental Tectonics Corporation (ETC), and the defendant and
counter-claim plaintiff, United States, mutually agree as follows:
     1. On November 19, 1997, the United States Navy (Navy) issued a
solicitation requesting proposals for the design, fabrication, assembly,
testing, and delivery of a pair of submarine decompression chambers (SDCs).
     2. The SDCs are part of a Submarine Decompression System, which is part of
the Submarine Rescue Diving and Recompression System (SRDRS). The SRDRS is
designed to rescue submariners from disabled submarines, and to provide
decompression treatment if needed. Because the system must be able to quickly
respond to a disabled submarine anywhere in the world, its components must be
transportable by air, land, and sea.
     3. On September 25,1998, the Navy awarded Contract N47408-98-C-2103
(contract) to ETC. The contract was funded in phases: Contract line item numbers
(CLINs) 0001-0007, relating to the preliminary design, were awarded for a total
of $839,536.58; Contract modification P00004 exercised CLINs 0008-0032, relating
to the final design and manufacturing, for an additional amount of
$2,401,807.00.
     4. The contract required final delivery within two years after contract
award. Contract modifications increased the contract by $189,960.58 to
$3,431,304.16, and extended the completion date to August 31, 2003.
     5. On May 6, 2003, ETC submitted a certified claim in the amount of
$5,166,401. ETC submitted claim amendments on August 6, 2003, January 6, 2004,
and April 28, 2004, increasing the total of the claim to $6,028,093. All of
ETC’s claim amounts included an estimate of the cost to complete the project.
     6. According to ETC’s certified claim, ETC experienced direct and indirect
costs as the result of uncompensated changes made to the contract by the Navy.
These changes were

 

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allegedly the result of defective and deficient contract drawings and
specifications and deficient contract administration.
     7. On July 22, 2004, the contracting officer issued a final decision
denying ETC’s certified claim in full.
     8. On July 11, 2005, ETC filed a complaint in the United States Court of
Federal Claims, in which it sought $9,109,617.50. The technical issues raised in
ETC’s complaint included the following categories: (1) issues relating to the
Navy’s reduction of the maximum weight of the SDCs by approximately seven
percent shortly after the award of the contract; (2) issues related to the fact
that, instead of having to design and test one SDC and then fabricate two, ETC
was required to design and test two SDCs; (3) issues related to the space
constraints imposed by the SDCs; (4) out-of scope work; and (6) defective
specifications, ETC also sought damages for delay in association with all counts
dealing with technical issues. On May 16, 2006, following the filing of the
Government’s motion to dismiss elements of ETC’s complaint, ETC filed an amended
complaint which dropped its claims for liquidated damages and attorney fees. ETC
sought $7,995,398,00 in its amended complaint.
     9. On June 4, 2007, the Government filed a motion to amend its answer to
ETC’s amended complaint to assert counterclaims against ETC, pursuant to the
Special Plea in Fraud, 28 U.S.C. § 2514, the anti-fraud provision of the
Contract Disputes Act, 41 U.S.C., § 604, and the False Claims Act, 31 U.S.C., §
3729, based upon the Government’s allegations that ETC submitted false and
fraudulent claims under its contract with the Navy.
     10. On June 14, 2007, the Court granted the Government’s motion to amend
its answer. On June 14, 2007, the Government filed its answer to the amended
complaint, in which the Government asserted counterclaims in fraud against ETC.
     11. On June 26, 2007, ETC and the Government filed a joint motion to
dismiss with prejudice ETC’s amended complaint By order dated June 28, 2007, the
Court granted the motion to dismiss.
     12. ETC and the United States entered into negotiations in an attempt to
resolve all counterclaims which were brought pursuant to the underlying
contract.
     13. In exchange for the Government agreement to dismiss the counterclaims
raised in this case, and its agreement to waive potential claims for
re-procurement costs, ETC has offered to pay to the Government a sum of three
million, five hundred and fifty thousand dollars ($3,550,000) (Settlement
Amount).
     14. The offer referenced in paragraph 13 has been accepted upon behalf of
the Attorney General.
     15. Pursuant to this Settlement Agreement, ETC shall pay to the United
States the Settlement Amount of $3,550,000 in three separate installment
payments. The first installment in the amount of $1,275,000 shall be paid within
ten days of receipt by ETC of a fully executed copy of this Settlement Agreement
by electronic funds transfer to the Department of Justice in accordance with the
“Instructions and Codes for Electronic Funds Transfer to The United States
Government,” a copy of which has been previously furnished by the United States
to counsel for ETC, and receipt of which is hereby acknowledged. The second
installment, in the amount of $1,275,000, shall be paid within two-months after
the payment of the first installment. The third

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installment, in the amount of $1,000,000, shall be paid within one month after
the payment of the second installment.
     16. Upon receipt of the first installment payment of $1,275,000, the United
States agrees to stipulate to the dismissal with prejudice of the counterclaims
in this action.
     17. If ETC fails to make payment in full of any installment payment when
due in accordance with this Settlement Agreement, upon written notice to ETC,
the United States may proceed to have ETC’s obligation to pay the remaining
balance of the Settlement Amount, plus interest from the due date, reduced to
judgment by the United States Court of Federal Claims or any appropriate United
States District Court. In such instance, ETC authorizes any Department of
Justice attorney authorized to practice before the United States Court of
Federal Claims or the appropriate United States District Court to confess
judgment against ETC in favor of the United States for the full amount of the
remaining balance of the Settlement Amount, plus interest and attorney fees.
     18. ETC agrees that the United States is entitled to recover from ETC the
attorney fees and costs incurred by the United States in the event of any
default, enforcement action, or other efforts reasonably deemed necessary by the
United States to collect any of the amounts due under this Settlement Agreement.
The procedure described in paragraph 17 shall constitute the United States’ sole
remedy in the event that ETC fails to make payment as specified in this
Settlement Agreement.
     19. ETC warrants and represents that no other suit or action with respect
to the claims of ETC against the United States or its agents in this case are
pending or will be filed in or submitted to any court, administrative agency, or
legislative body, including, but not limited to, the Government Accountability
Office. ETC further warrants and represents that it is the sole owner of the
claims involved in this case and that it has made no assignment or transfer of
all or any part of its rights arising out of the present suit.
     20. This agreement does not release ETC from (a) any administrative action
for suspension or debarment; (b) any criminal liability; or (c) any claim for
express or implied warranty under the contract, unless expressly released
herein. In the event that ETC asserts any other claim under the contract that is
not resolved by this settlement agreement, the United States expressly reserves
its right to assert as a defense to such claim the Special Plea in Fraud, 28
U.S.C. § 2514, and any other applicable defenses.
     21. Claims arising from the breach of this Settlement Agreement are
specifically excluded and reserved from the scope and terms of this Settlement
Agreement.
     22. ETC releases, waives, and abandons all claims against the United States
arising out of, or related to, the contract, irrespective of whether those
claims were asserted in the Court of Federal Claims, including any claims for
interest, costs, attorney fees, and expenses. The United States releases,
waives, and abandons, for the conduct alleged in the counterclaims, any civil or
administrative monetary claims it may have against ETC under the False Claims
Act, 31 U.S.C. §§ 3729-3733, the Contract Disputes Act, 41 U.S.C. § 604, the
Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-3812, common law theories of
payment by mistake, unjust enrichment, breach of contract and fraud, and the
Special Plea in Fraud statute, 28 U.S.C. § 2514.

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     23. ETC agrees that all costs incurred by or upon behalf of ETC, and its
present and former officers, directors, employees, shareholders, and agents in
connection with: (1) ETC’s preparation, submission, negotiation and appeal of
its claim to the Navy; (2) ETC’s preparation, filing, and litigation of this
lawsuit; (3) the Government’s audit and investigation of the matters covered by
this settlement agreement; (4) ETC’s investigation and defense related to the
Government’s counterclaims; (5) the negotiation of this settlement agreement;
and (6) all other matters covered by this settlement agreement, including costs
and attorneys fees, constitute unallowable costs as defined in the Federal
Acquisition Regulation, 48 C.F.R. § 31.205-47, for Government contracting
purposes. ETC shall separately account for these costs.
     24. The parties agree that this Settlement Agreement may not be altered,
amended, modified, or otherwise changed except by a writing duly executed by the
authorized representatives of the United States and ETC.
     25. Except as necessary to effectuate its terms, this Settlement Agreement
shall not bind the parties and shall not be cited or otherwise referred to in
any proceedings, whether judicial or administrative in nature, in which the
parties or counsel for the parties have or may acquire an interest.
     26. William Mitchell, Sr. represents that he has been and is authorized to
enter into this agreement upon behalf of ETC.
     27. This document constitutes a complete integration of the agreement
between the patties and supercedes any and all prior oral or written
representations, understandings or agreement among or between them.
     28. The date of this Settlement Agreement is the latest date in time with
respect to the signature lines below.

     
 
  /s/Jeffrey S. Bucholtz
 
  JEFFREY S. BUCHOLTZ
 
  Acting Assistant Attorney General
 
   
 
  /s/ Jeanne E. Davidson
 
  JEANNE E. DAVIDSON
 
  Director
 
   
ENVIRONMENTAL TECTONICS
  /s/ Franklin E. White, Jr.
CORPORATION
  FRANKLIN E. WHITE, JR.
By: /s/ William Mitchell, Sr.
  Assistant Director
       William Mitchell, Sr.
   
 
   
 
  /s/ Leslie Cayer Ohta
LESLIE CAYER OHTA
 
  Trial Attorney
 
  Commercial Litigation Branch, Civil Division
 
  Department of Justice

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  100 L Street, N.W.
 
  Washington, DC 20530
 
   
 
  Attorneys for Defendant
 
   
Dated: February 22, 2008
  Dated: February 21, 2008

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