## United States Court of Appeals for the Federal Circuit

2007-5137

RICK’S MUSHROOM SERVICE, INC., Plaintiff-Appellant,

v.

UNITED STATES, Defendant-Appellee.

Jonathan J. Bart , Wilentz, Goldman & Spitzer, P. A., of Philadelphia, Pennsylvania, argued for plaintiff-appellant. Joan M. Stentiford , Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Ju stice, of Washington, DC, argued for defendant-appellee. With her on the brief were, Jeanne F. Davidson , Director, and Steven J. Gillingham , Assistant Director. Appealed from: United States Court of Federal Claims Judge Christine O.C. Miller

## United States Court of Appeals for the Federal Circuit

2007-5137 RICK’S MUSHROOM SERVICE, INC., Plaintiff-Appellant,

v. UNITED STATES, Defendant-Appellee.

Appeal from the United States Court of Federal Claims in 06-CV-255, Judge Christine O. C. Miller.

__________________________ DECIDED: April 2, 2008

__________________________ Before RADER, LINN, and PROST, Circuit Judges

. PROST, Circuit Judge

. This is an appeal from the United States Court of Federal Claims pertaining to a cost-share agreement between t he government and Rick’s Mushrooms, Inc. (“Rick’s”) for implementing conservation practices in a facility for recycling of mushroom waste. Rick’s seeks indemnification from the gover nment for costs incurred in defending and settling claims by a third party for violati on of certain state and federal environmental laws. The Court of Federal Claims dismi ssed the action for lack of subject matter jurisdiction. For the reasons set forth below, we affirm.I Mushroom farming is a major economic acti vity in Chester County, Pennsylvania. Historically, the organic by-product waste of mushroom farming, known as “spent mushroom substrate” (“SMS”), was dumped in nearby woods or str eams, resulting in severe nitrogen pollution. Rick’s operates an SMS transfer facility, which processes SMS by leaching out the ex cess nitrogen and then recycling it as potting soil or other products. The Natural Resources Conservation Service (“NRCS”) was created by the Department of Agriculture Reorganization Ac t of 1994. The NRCS is specifically charged to cooperate with state and local soil and water conservation districts to carry out improvements under the Wa tershed Protection and Flood Prevention Act. As such, the NRCS has a cooperative arrangement wit h the Red-White Clay Creeks Watershed Protection Plan, which includes the region where Rick’s SMS trans fer facility is located. The NRCS is also authorized to enter into cost-share agreements with landowners or land occupiers to carry out conservation plans approved by the local soil and water conservation districts. In 1996, M.A.Y. Farms, Inc. (“M.A.Y. Farms ”), as a prospective purchaser of the property where Rick’s is now located, consulted with the Pennsylvania Department of Environmental Protection (“PDEP”) and the NRCS regarding what was necessary to operate an SMS transfer facility at that location. The NRCS required that the property be cleaned of existing SMS and t hat whoever operated the SMS transfer facility enter into a contract for construction of an envir onmentally sensitive SM S transfer facility. Thereafter, Custom Casings, Inc. (“Custo m Casings”), the corporate predecessor to

2007-5137 2Rick’s, entered into a long-term lease with M.A.Y. Farms, the then owner of the property, and cleaned the property of existing SMS. On September 26, 1997, t he NRCS, after consultation with the PDEP and the Chester County Conservation District (“CCCD”), entered into a “Long-Term Contract for NRCS Cost Share Programs” with Custom Casings. J.A. 113-16. Pursuant to the contract, NRCS designed and provided specificat ions for conservation practices to be implemented at the transfer facility, including a storage area, leaching field, wastewater impoundment and spray system. Custom Casi ngs was to install the components and operate the facility. On July 26, 2001, Warren and John Reynolds, Rick’s neighbors, and the Wilmington Trust Company (“Reynolds”) filed suit against Rick’s in the United States District Court for the Eastern District of P ennsylvania, alleging that Rick’s operated the SMS transfer facility in violation of the Clean Water Act and the Pennsylvania Clean Streams Law, and that wastewater runoff from Rick’s was enter ing a stream and contaminating the Reynolds’s pond. In March 2004, the district court issued a permanent injunction requiring Rick’s to obtai n PDEP permits as a wastewater and solid waste facility. Reynolds v. Rick’s Mushroom Serv. Inc. , No. Civ.A. 01-3773, 2004 WL 620164, at *9 (E.D. Pa. Mar. 29, 2004). The court found that the CCCD had developed a Mushroom Farm Environmental Management Plan (“MFEMP”), and that Rick’s failure

2007-5137 3to comply with some of the operational requirements of the MFEMP had caused the contamination on Reynolds’s property. 1 Id. at *2-5. After the order by the dist rict court, Rick’s agreed to settle the case for $950,000. Thereafter, the NRCS drafted a rehabilitation plan and a plan for a roof structure to help eliminate some of the problems with wast e discharge. The NRCS did not indemnify Rick’s for its losses in the litigation and did not pay for the new roof structure. On November 4, 2005, Rick’s submitted a claim under the Contract Disputes Act (“CDA”) to the contracting officer at the NRCS for $5 million in damages. J.A. 188-89. The claim alleged that the NRCS had br eached its implied warranty of the specifications, and, as a consequence, Rick’ s had incurred additional costs, including attorneys’ fees in defending the lawsuit brought by the Reynolds; the lost value of its contribution to the original design, its subst antial design revisions, and the installation of the new roof structure; and its liability for environmental impact. J.A. 188-89. The NRCS contracting officer denied the claim, st ating that because the contract was not a procurement contract for goods or servic es, but rather a cooperative agreement, the CDA was inapplicable. Id. at 138. Rick’s then filed suit in the Court of Federal Claims alleging that the Reynolds lawsuit and settlement was due to defective s pecifications drafted by the NRCS and that the NRCS should be liable for the costs incurred in the lawsuit. Rick’s Mushroom Serv., Inc. v. United States , 76 Fed. Cl. 250, 254 (2007). Ri ck’s had three legal theories for

1 Specifically, the court found that Rick’s did not have a groundwater monitoring system, did not keep adequate records of the quantity of SMS stored, did not measure accurately the volume of leachat e on its property, and did not maintain rain gauges. Reynolds , 2004 WL 620164, at *2-5.

2007-5137 4recovery: Count I, equitable i ndemnification based on an implied-in-fact warranty arising under the Spearin doctrine; 2 Count II, breach of contrac t; and Count III, professional negligence. Id. First, the court determined that Ri ck’s had satisfied the administrative exhaustion requirements, at least with respect to Count I, because Rick’s claim based on an implied-in-fact contract under the CDA had been submitted to the contracting officer for a final decision. Id. at 256. Nevertheless, t he court held that it lacked jurisdiction over Rick’s professional negligenc e claim because it was a claim sounding in
tort. Id. The court further held that, because the contract between Rick’s and the NRCS was a cooperative agreem ent and not a procurement contract, there was no basis for jurisdiction under the CDA fo r the breach of contract claim. Id. at 258. Finally, the court rejected the claim for equitable indemnification under the Spearin doctrine because it was precluded by the Anti-Deficiency Act. Id. at 261. The court, therefore, dismissed the case for lack of subject matter jurisdiction. Id. at 262. On appeal, Rick’s argues that the Court of Federal Claims erred in dismissing its contract claims, in denying it due process, and in failing to transfer the professional negligence claim to the District Court for the Eastern District of Pennsylvania. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).
II Subject matter jurisdiction is a question of law, which we review de novo. Emery Worldwide Airlines, Inc. v. United States , 264 F.3d 1071, 1078 (Fed. Cir. 2001). We review a denial of a request for additional discovery for abuse of discretion. Digeo, Inc. v. Audible, Inc. , 505 F.3d 1362, 1370 (Fed. Cir. 2007); Forest Prods. N.W., Inc. v.

2 See United States v. Spearin , 248 U.S. 132 (1918).

2007-5137 5United States , 453 F.3d 1355, 1359 (Fed. Cir. 2006). A decision by the Court of Federal Claims concerning whether to dismiss a claim or transfer it to another court is also reviewed for abuse of discretion. LeBlanc v. United States , 50 F.3d 1025, 1031 (Fed. Cir. 1995). The underlyi ng determination of whether the transferee court has jurisdiction over the claim is a question of law, which we review de novo. Acceptance Ins. Cos. v. United States , 503 F.3d 1328, 1332 (Fed. Cir. 2007).
III A Rick’s argues that the Court of Federal Claims erred in dismissing its claims for lack of subject matter jurisdic tion. The jurisdictional reach of the Court of Federal Claims is set forth in the Tucker Act. The Tucker Act provides: (1) The United States Court of Feder al Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution or any Act of Congress or any regulation of an executive department, or upon any express or imp lied contract with the United States , or for liquidated or unliquidated damages in cases not sounding in tort

. . . . (2) . . . The Court of Federal Claim s shall have jurisdiction to render judgment upon any claim by or against, or dispute with, a contractor arising under section 10(a)(1) of the Contract Disputes Act of 1978 , including a dispute concerning termination of a contract, rights in tangible or intangible property, compliance with cost accounting standards, and other nonmonetary disputes on which a decision of the contracting officer has been issued under section 6 of that Act

. 28 U.S.C. § 1491(a) (emphases added). The plain language of the Tucker Act excludes from the Court of Feder al Claims jurisdiction claims sounding in tort. Id. § 1491(a)(1). A claim for professional negligence is a tort claim. GlobalNet Financial.Com, Inc. v. Frank Crystal & Co. , 449 F.3d 377, 385 (2d Cir. 2006); GLF Constr. Corp. v. LAN/STV , 414 F.3d 553, 555 (5th Cir. 2005); Piazza v. Ebsco Indus., Inc. , 273 F.3d 1341, 1348 (11th

2007-5137 6Cir. 2001); White v. Napoleon , 897 F.2d 103, 114 n.4 (3d Cir . 1990). Therefore, the Court of Federal Claims did not err in concluding that it lacked subject matter jurisdiction to hear the professional negligence claim of Count III.
B In Count II of the compla int, Rick’s alleges that the government breached its contract with Rick’s by providing defective s pecifications. Based on that alleged breach, Rick’s seeks recovery for its direct costs in constructing the SMS transfer facility, clearing the property of accumulated SMS, ma king changes to the fac ility to prevent the overflow of pollutants, and ultimately in closing the facility. The government’s consent to suit under the Tucker Act does not extend to every
contract. Kania v. United States , 650 F.2d 264, 268 (Ct. Cl. 1981); accord Sanders v. United States , 252 F.3d 1329, 1335 (Fed. Cir. 2001). The Tucker Act is merely a jurisdictional statute and does not creat e a substantive cause of action. United States v. Testan , 424 U.S. 392, 398 (1976). T herefore, the plaintiff mu st look beyond the Tucker Act to identify a substantive source of law t hat creates the right to recovery of money damages against the United States. United States v. Mitchell , 463 U.S. 206, 216 (1983). Rick’s breach of contract claim arises from its cost-shar e agreement with the government; however, the cost-share agreement does not provide a substantive right to recover money-damages and Rick’s does not poi nt to a money-mandating source of law to establish jurisdiction under 28 U.S.C. § 1491( a)(1) for its breach of contract claim. Instead, Rick’s attempts to re ly on the CDA as the source of its substantive right to recover money damages and to establish jurisdiction under 28 U.S.C. § 1491(a)(2).

2007-5137 7The CDA, however, applies only to express or implied government contracts for procurement of goods or services. 41 U.S.C. § 602(a). In contrast, the cost-share agreement provided that Rick’s would constr uct and operate its SMS transfer facility in accordance with government spec ifications and in return Rick’s would be entitled to cost-share payments. The Court of Feder al Claims went through a lengthy analysis explaining why the cost-share agr eement is not a procurement contract. In particular, the court noted that the agreement did not provide for transfer of goods or services to the government, there was no evidence of a buyer-seller relationship, and the government did not receive a direct benefit from the operation of the SMA transfer facility. We find the court’s analysis to be sound. Thus, the CDA is inapplicable to the cost-share agreement and there is no basis for jurisdiction under 28 U.S.C. § 1491(a)(2). On appeal, Rick’s argues that the Court of Federal Claims overlooked the fact that its breach of contract claim was based, in part, on an implied- in-fact contract. A claim to a breach of an implied-in-fact cont ract with the governm ent fails for similar reasons. Rick’s does not point to a m oney-mandating provision that establishes jurisdiction for an implied-in-fact contra ct under 28 U.S.C. § 1491(a)(1), and Rick’s cannot establish jurisdiction under 28 U. S.C. § 1491(a)(2) because Rick’s has not alleged an implied-in-fact contract for proc urement of goods or services which would come within the CDA. Moreover, this cour t may only find an implied-in-fact contract when there is no express contract. Trauma Serv. Group v. United States , 104 F.3d 1321, 1326 (Fed. Cir. 1997). Here, Rick’s and t he government entered into an express
contract.

2007-5137 8In sum, Rick’s cannot establish Tucker Act jurisdiction under either 28 U.S.C. § 1491(a)(1) or (2). Accordingly, the Court of Federal Claims did not err in holding that it lacked subject matter jurisdiction over Rick’s breach of contract claim. C In Count I, Rick’s seeks equitable indem nification based on breach of an impliedin-fact warranty by the gov ernment arising under the Spearin doctrine. Rick’s acknowledges that there is no express provis ion in the cost-share agreement providing for indemnification by the government for th ird party claims. Nevertheless, Rick’s argues that the government is liable to Ri ck’s for the costs incurred in defending the lawsuit against Reynolds because the gover nment, in providing detailed design specifications for the SMS transfer facilit y in the cost-share agreement, gave Rick’s an implied warranty that the transfer facilit y would be adequate and t hat the government would be liable for the consequences of any defec ts. For the Court of Federal Claims to have jurisdiction over the im plied warranty claim, the court must necessarily have jurisdiction over the cost-share agreement on which the implied warranty is founded. For the reasons discussed above, however, we find that the cost-share agreement does not provide Tucker Act jurisdiction. In addition, we find that Rick’s Spearin warranty claim fails for another reason. The Spearin doctrine provides that if a governm ent contract contains detailed design specifications, as opposed to performance s pecifications, the government gives an implied warranty that if the specifications are followed an acceptable result will be produced. Stuyvesant Dredging Co. v. United States , 834 F.2d 1576, 1582 (Fed. Cir.

2007-5137 91987). 3 “When the government provi des a contractor with defective specifications, the government is deemed to have br eached the implied warranty that satisfactory contract performance will result from adher ence to the specifications, and the contractor is entitled to recover all of the costs proximately flowing form the breach.” Essex Electro Eng’rs, Inc. v. Danzig , 224 F.3d 1283, 1289 (Fed. Cir. 2000). Spearin was a construction contractor, w ho entered into a fixed price contract with the government to build a dry dock accord ing to plans and specifications prepared by the government. Spearin , 248 U.S. at 133. The pl ans contained a provision requiring relocation of a section of sewer. Id. at 133-34. After relocation of the sewer, a storm caused build up in internal pressure in the relocated sewer section and flooding of the dry dock excavation site. Id. at 134. The Court held t hat the provision requiring relocation of the sewer created an implied warranty by the gover nment that if the specifications were complied wit h, the sewer would be adequate. Id. at 137. Because the sewer was inadequate, the Court held that the government had breached its implied warranty. Id. at 138. The doctrine has been applied, as in Spearin , to construction contracts with the government, White v. Edsall Constr. Co., Inc. , 296 F.3d 1081, 1086 (Fed. Cir. 2002); Poorvu v. United States , 420 F.2d 993, 999 (Ct. Cl. 1970); Luria Bros. & Co. v. United States , 369 F.2d 701, 708 (Ct. Cl. 1966), as well as to other contracts for procurement of goods or se rvices by the government. Essex Electro , 224 F.3d at 1289-90; USA Petroleum Corp. v. United States , 821 F.2d 622, 624 (Fed. Cir. 1987);

3 “Design specifications explicitly st ate how the contract is to be performed and permit no deviations. Performance specif ications, on the other hand, specify the results to be obtained, and leave it to the c ontractor to determine how to achieve those results.” Stuyvesant Dredging , 834 F. 2d at 1582.

2007-5137 10Ordnance Research, Inc. v. United States , 609 F.2d 462, 481 (Ct. Cl. 1979); R.E.D.M. Corp. v. United States , 428 F.2d 1304, 1308-10 (Ct. Cl. 1970). Even if we were to find that the Spearin doctrine is applicable outside the procurement contract context, that t he cost-share agreement contained design specifications as opposed to performance s pecifications, and that a defect in those specifications was the prox imate cause of the lawsuit brought by Reynolds, we still could not find that Rick’s is entitled to recover the costs of defending and settling the lawsuit. Such a finding is foreclos ed by the Supreme Court’s holding in Hercules, Inc. v. United States , 516 U.S. 417 (1996). Hercules was a chemical manufacturer who manufactured Agent Orange for the government and sought to recover from t he government costs incurred in defending and settling lawsuits brought by Vietnam veter ans alleging health problems caused by exposure to Agent Orange. Id. at 419-20. The Court held that Hercules could not recover on an implied warranty under Spearin because such a warranty does not extend as far as third-party claims. Id. at 424-25. The Court furt her held that it could not find an implied-in-fact agreem ent by the government to i ndemnify for losses to third parties because the Anti-Deficiency Act (“ADA”) would bar such an open-ended indemnification agreement. Id. at 426-28. The ADA provides: An officer or employee of the United States Government . . . may not-- (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation; (B) involve [the] government in a cont ract or obligation for the payment of money before an appropriation is made unless authorized by law . . .

.

2007-5137 1131 U.S.C. § 1341(a)(1) (emphases added). U nder the ADA, proc urement agencies or employees are prohibited from “ entering into a contract for future payment of money in advance of, or in excess of, an existing appropriation.” Hercules , 516 U.S. at 427. This limitation on authority is equally applicable to implied-in-fact contracts as to express
contracts. Id. at 428. Because the contracting o fficer would have no authority under the ADA to enter into an indemnity agreement without an appropriation, we cannot find an implied-in-fact warranty by t he government to indemnify Rick’ s for its litigation costs in defending against third party claims. As rec ognized by the Court of Federal Claims, because the contracting officer had no authorit y to enter into an open-ended indemnity agreement, there could be no mutual intent to contract, a prerequisite for an implied-infact contract. Contrary to argument s advanced by Rick’s, such an implied indemnification term would indeed be “open-ended” since the amount of the government’s obligation to th ird parties would not have been known at the time the parties entered into the cost-share agreem ent. Furthermore, we find no basis to conclude, as Rick’s urges , that the holding of Hercules with respect to application of the ADA was limited to design specif ications. Accordingly, the Court of Federal Claims did not err in dismissing Rick’s implied warranty cl aim for lack of subject matter jurisdiction. 4

4 Rick’s contends that Lopez v. A.C. & S., Inc. , 858 F.2d 712 (Fed. Cir. 1988), holds that the ADA does not shield the government from liability under a Spearin implied warranty because ther e is a standing appropriation to pay court judgments. However, discussion of the ADA in Lopez was not necessary to the decision in that case. The court’s holding that there was no Tucker Act jurisdiction ultimately rested on its determination that the a lleged warranty was implied-in-l aw and not implied-in-fact and, thus, the court did not reach whether an implied warranty would be illegal under the ADA. Id. at 716-17. Moreover, to the extent that the F ederal Circuit’s analysis in Lopez is in any way inconsistent wit h the Supreme Court’s analysis in Hercules , the Supreme Court has effectively overruled Lopez

.

2007-5137 12D On appeal, Rick’s also asserts that it was deprived of due process on two accounts. First, Rick’s avers that it was denied due process because the government first presented its argument wit h respect to the ADA during supplemental briefing. However, any party may challenge, or the court may raise sua sponte, subject matter jurisdiction at any time. Arbaugh v. Y & H Corp. , 546 U.S. 500, 506 (2006); Folden v. United States , 379 F.3d 1344, 1354 (Fed. Cir. 2004); Fanning, Phillips & Molnar v. West , 160 F.3d 717, 720 (Fed. Cir . 1998). Thus, Rick’s was not denied due process even though the government did not raise the issue of t he ADA until the supplemental briefing stage. Second, Rick’s argues that it was deni ed due process because the court did not permit discovery on allocation exhaustion after the ADA issue was raised. Rick’s relies on the testimony of Peter Vanderstappen of the NRCS, who st ated that between $500,000 and $700,000 was obligated eac h year to the Red-White Clay Creeks project. Rick’s contends that there is no evidence that the money allocated to the project was exhausted and thus there should still be funds available to pay Rick’s claim. However, Rick’s misunderstands the import of the ADA. The ADA prohibits commitment of funds in advance of, or in excess of, an existing appropriation. Here, there was no appropriation for indemnification of third party claims. Therefore, additional discovery on whether or not certain government funds have been exhausted would have no impact on the court’s determinat ion of whether or not it had jurisdiction over Rick’s implied-in-fact warranty claim. Hence, we find no abuse of discretion by the Court of Federal Claims in disallowing discovery on allocation exhaustion.

2007-5137 13E Finally, Rick’s argues that the Court of Federal Claims abused its discretion in dismissing Rick’s professional negligence claim, ra ther than transferring it to the district court. According to Rick’s, 28 U.S.C. § 1631 mandates that the Court of Federal Claims shall transfer a claim over which it lacks juri sdiction to the court where the claim could have been brought. In this case, Rick’s cont ends, the District Court for the Eastern District of Pennsylvania would have jurisdic tion over its professional negligence claim under the Federal Tort Claims Act. 28 U.S.C. § 1631 provides: Whenever a civil action is filed in a cour t . . . and that cour t finds that there is a want of jurisdiction, the court shall, if it is in the in terest of justice, transfer such action . . . to any other such court in which the action . . . could have been brought at the time it was filed . . . . The plain language of the st atute requires that t he transferee court have jurisdiction over the claim. We agree with the government, however, that here the district court lacks jurisdiction over the professional negligence claim. The Federal Tort Claims Act provides t hat an action shall not be initiated in a district court unless the claimant has “fir st presented the clai m to the appropriate Federal agency and his claim shall have been finally denied by the agency in writing . . . .” 28 U.S.C. § 2675(a); see Dancy v. United States , 668 F.2d 1224, 1227 (Ct. Cl. 1982). The claim that was submitted to the contracting officer was a claim based on the CDA for breach of an implied warranty of specific ations. Even if the claim were a proper CDA claim, the denial of the claim by the contracting officer served only to establish jurisdiction in the Court of Federal Claims. It did not es tablish jurisdiction in the district court for a professional negligenc e claim. Rick’s never presented a written

2007-5137 142007-5137 15 professional negligence claim for money damages to the U.S. Department of Agriculture. Therefore, Rick’ s did not satisfy the exhaustion requirements set forth in 28 U.S.C. § 2675(a) in order to establish jurisdiction in the district court. 5 As such, the Court of Federal Claims did not err in not transferring the professional negligence claim to the district court. We find no abuse of discretion by the Court of Federal Claims in its dismissal of the professional negligence claim. IV For the foregoing reasons, we affirm the C ourt of Federal Claim’s dismissal of Rick’s claims for lack of s ubject matter jurisdiction. AFFIRMED

5 The government also ar gues that Rick’s failed to satisfy the exhaustion requirements set forth in the Department of Agriculture Reorganization Act. The Act provides that a final determination of t he National Appeals Division is reviewable in district court, 7 U.S.C. § 6999, but that the appellant must first “exhaust all administrative appeal procedures es tablished by the Secretary.” Id. § 6912(e). As noted by the Court of Federal Claims, howev er, the regulations limit those appeals to challenges to “technical determinations and program decisions made by NRCS.” 7 C.F.R. § 614.1. Because Ri ck’s professional negligence claim does not relate to a technical determination or program decision, it does not appear to be within the ambit of the National Appeals Division. Thus, we dis agree that Rick’s was required to satisfy the exhaustion requirements set forth in § 6912(e).