Court Opinion

ID: 9322855
Source: CourtListenerOpinion
Date Created: 2022-12-05 15:00:47.089815+00
Date Added: 2024-06-11T17:14:44.016686
License: Public Domain

Case: 21-1965   Document: 65     Page: 1    Filed: 12/05/2022

   United States Court of Appeals
       for the Federal Circuit
                 ______________________

          SUPREME FOODSERVICE GMBH,
                   Appellant

                            v.

     DIRECTOR OF THE DEFENSE LOGISTICS
                   AGENCY,
                    Appellee
             ______________________

                       2021-1965
                 ______________________

     Appeal from the Armed Services Board of Contract Ap-
 peals in Nos. 57884, 57884-QUAN, 58666, 58666-QUAN,
 59636, 59636-QUAN, 61361, 61361-QUAN, Administra-
 tive Judge J. Reid Prouty, Administrative Judge Michael
 N. O’Connell, Administrative Judge Richard Shackleford.
                  ______________________

                Decided: December 5, 2022
                 ______________________

    JOHN PRAIRIE, Wiley Rein LLP, Washington, DC, ar-
 gued for appellant. Also represented by JAMES RYAN
 FRAZEE.

     P. DAVIS OLIVER, Commercial Litigation Branch, Civil
 Division, United States Department of Justice, Washing-
 ton, DC, argued for appellee. Also represented by BRIAN
 M. BOYNTON, PATRICIA M. MCCARTHY.
                  ______________________
Case: 21-1965     Document: 65    Page: 2    Filed: 12/05/2022

 2                             SUPREME FOODSERVICE GMBH v.
                   DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

     Before MOORE, Chief Judge, PROST and HUGHES, Circuit
                           Judges.
 HUGHES, Circuit Judge.
     Supreme Foodservice GmbH appeals an Armed Ser-
 vices Board of Contract Appeals decision concluding that
 Supreme’s contract claims against the government were
 barred by Supreme’s prior material breach. Supreme ar-
 gues that the government waived its prior material breach
 defense and seeks Contract Disputes Act interest on money
 the Board found the government over-withheld. Because
 we agree that the government did not waive its defense,
 and because Supreme’s prior material breach means there
 is no valid underlying contractor’s claim through which Su-
 preme may recover CDA interest, we affirm.
                              I
                              A
      In 2005, the Defense Logistics Agency (DLA) awarded
 a “subsistence prime vendor” (SPV) contract to Supreme to
 furnish and deliver food to U.S. forces in Afghanistan. Ini-
 tially, the contract only required Supreme to deliver food
 by truck to four main U.S. military bases, but DLA later
 modified the contract to direct Supreme to begin delivering
 food to other forward operating bases in Afghanistan.
     The parties then began negotiating payment for those
 deliveries to forward operating bases, known as Premium
 Outbound Transportation (POT). During negotiation, Su-
 preme submitted inflated cost proposals that were, accord-
 ing to Michael Epp, Supreme’s Commercial Division
 Director, “completely false.” J.A. 9. Because Supreme
 threatened to withhold payments to subcontractors (thus
 potentially cutting off food supply to troops in Afghani-
 stan), the parties executed Modification No. P00010 on Au-
 gust 2, 2006, agreeing to Supreme’s proposed rates “subject
 to final verification.” J.A. 13. DLA asked the Defense
Case: 21-1965     Document: 65     Page: 3    Filed: 12/05/2022

 SUPREME FOODSERVICE GMBH v.                                 3
 DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 Contract Audit Agency (DCAA) to audit Supreme’s pro-
 posed POT costs. The parties then entered into Modifica-
 tion No. P00012, which provided that DLA would
 reimburse Supreme at 75 percent of the P00010 rates until
 the audit was complete.
     DCAA performed two audits of Supreme’s proposed
 POT costs and concluded that Supreme’s submitted docu-
 mentation was not adequate to support its proposal. In its
 second and more-thorough audit, DCAA examined over
 $602 million in claimed costs and questioned more than
 $375 million of those costs due to inadequate documenta-
 tion.
     Relying on information uncovered during the audit, the
 contracting officer (CO) issued a final decision (COFD I) on
 December 9, 2011, establishing final POT rates that were
 significantly lower than Supreme’s initial, inflated pro-
 posed rates. Using the final rates, the CO determined that
 DLA had overpaid Supreme by $567,267,940 and de-
 manded Supreme return that money. DLA then began
 withholding money from Supreme’s monthly payments,
 eventually totaling over $540 million. In response, Su-
 preme submitted a “reverse image” claim of the govern-
 ment’s December 9, 2011 claim, contending that it was
 entitled to the proposed rates from the start of performance
 and that, in total, it was due an additional $1.8 billion dol-
 lars. The CO denied that claim (COFD II). Supreme then
 submitted a second claim seeking $598,769,101. The CO
 never issued a final decision on that claim. Supreme ap-
 pealed that deemed denial.
                               B
     In its proposal, Supreme stated that it would get local,
 market-ready items from Barakat Vegetable and Fruits
 Co., which would consolidate items at a facility in Dubai
 and then airlift them to Afghanistan. Supreme later re-
 quested that Jamal Ahli Foods Co., LLC (JAFCO) be
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 4                            SUPREME FOODSERVICE GMBH v.
                  DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 approved as an additional place of performance for such
 items. DLA approved this request in September 2005.
     In March 2009, Paul Rigby, a self-described “disgrun-
 tled former employee” of Supreme, wrote to the CO and
 DLA, alleging potentially fraudulent activity surrounding
 JAFCO. Specifically, he alleged that JAFCO was wholly
 owned by Supreme, and that when JAFCO would source
 and consolidate local market ready items, it would include
 an “undisclosed mark-up” (a 35 percent increase to the pur-
 chase price) which increased Supreme’s margin to “60ish
 percent.” J.A. 6026; Appellant’s Br. 11. DLA then referred
 the matter to the Defense Criminal Investigation Service,
 and an investigation followed.
     In September 2014, the United States filed a Criminal
 Information in the Eastern District of Pennsylvania
 against Supreme, alleging three counts of fraud. Supreme
 pled guilty to all three counts in December 2014. In its
 Guilty Plea Agreement, Supreme confirmed that it had de-
 vised a scheme to “use JAFCO to make profits over and
 above the profits made from the Distribution Fees in the
 SPV Contract by fraudulently increasing the Delivered
 Price for Local Market Ready . . . goods sold to the United
 States.” J.A. 11087.
      Supreme had also sourced bottled water for U.S. forces
 in Afghanistan. Supreme collected water from various sup-
 pliers and then charged the U.S. $6.45 per case, telling the
 CO that that was the average price it paid. Mr. Epp, Su-
 preme’s Commercial Division Director, later testified that
 water was the most profitable item on the contract because
 Supreme was actually paying less than $2 per case in some
 instances. The $6.45 price also included transportation
 costs, even when the government transported the water.
 Supreme’s guilty plea also acknowledged that it had de-
 frauded the United States by overcharging for bottled wa-
 ter.
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 SUPREME FOODSERVICE GMBH v.                               5
 DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

     In March 2010, Mr. Epp, as relator, filed a qui tam com-
 plaint against Supreme under the False Claims Act in the
 Eastern District of Pennsylvania, alleging the fraudulent
 behavior described above. The United States intervened.
 The relator provided documents from his time at Supreme
 to the Assistant U.S. Attorney, who in turn informed DLA
 that the complaint had been filed and that they had “a fair
 volume of documents” regarding the fraudulent activity.
 J.A. 5436. In 2014, Supreme entered into a civil settlement
 agreement with the relator and the Department of Justice
 to resolve the qui tam action.
                              C
     While the fraud investigations were underway and
 with Supreme’s contract set to expire in December 2010,
 the parties entered into Modification No. P00092 on De-
 cember 20, 2010 (the Modification), a two-year extension of
 the contract. In its Justification for Other than Full and
 Open Competition Memo regarding the contract extension,
 DLA explained that “[t]he proposed contract extension is
 required in order to maintain continuous prime vendor cov-
 erage and uninterrupted supply of vitally needed subsist-
 ence items, until implementation of the new, competitively
 awarded prime vendor contract for foodservice support can
 be put in place.” J.A. 11028. The Modification included new
 distribution prices that specifically covered JAFCO. And in
 June 2012, after the Department of Defense and the De-
 partment of Justice had had more than three years to in-
 vestigate any fraud but before Supreme had entered any
 guilty plea, DLA issued a second bridge contract extending
 Supreme’s contract through December 12, 2013.
      In January 2015, based on Supreme’s December 2014
 guilty plea, DLA issued a third CO final decision (COFD
 III) demanding the return of all money paid under the con-
 tract, about $8 billion dollars. Supreme appealed COFD III
 to the Board.
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 6                            SUPREME FOODSERVICE GMBH v.
                  DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

     In October 2017, a fourth CO final decision (COFD IV)
 updated the debt determination in COFD I regarding the
 POT rates and duplicated costs. DLA asserted that Su-
 preme owed a total debt of around $350 million. Supreme
 also appealed that decision to the Board.
                              D
      In May 2020, the Board issued its decision. As to the
 POT claims, it largely found in DLA’s favor, concluding
 that Supreme had failed to meet its burden of producing
 evidence of its costs sufficient to justify its proposed POT
 rates. The Board then considered DLA’s affirmative de-
 fenses to Supreme’s claims. It discussed whether DLA
 could assert affirmative defenses to a COFD that appears
 to be its own government claim, rather than a typical con-
 tractor claim. The Board concluded that it could address
 DLA’s affirmative defenses because DLA had already with-
 held about $540 million from Supreme to recoup the over-
 payments. “Due to the size of the DLA withholding . . .
 there is a significant possibility that DLA will have to re-
 turn some money to Supreme. If so, Supreme will be poten-
 tially entitled to [Contract Disputes Act] interest on the
 amounts withheld. This interest, then, would fit into the
 ‘box’ of being a contractor claim and, as such, would be sub-
 ject to DLA’s affirmative defenses.” J.A. 55. Thus, the
 Board concluded that it could address DLA’s affirmative
 defense that Supreme’s fraud was a prior material breach
 barring recovery of CDA interest.
      Supreme argued that DLA waived its affirmative de-
 fense by continuing to contract with Supreme even after it
 first learned of Supreme’s fraud. Even though DLA “had
 ample evidence of Supreme’s extensive fraud” by June
 2010, yet still continued with its contract, the Board held
 that DLA had not waived its affirmative defense of first
 material breach because it did not continue the contract af-
 ter Supreme pled guilty. J.A. 56–58. The Board based its
 decision on our prior decision in Laguna Construction
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 SUPREME FOODSERVICE GMBH v.                                 7
 DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 Company, Inc. v. Carter, where we held that the govern-
 ment could not waive its prior material breach defense un-
 til it had a “known right” to the defense—i.e., when a
 contractor pled guilty to fraud. 828 F.3d 1364, 1369 (Fed.
 Cir. 2016). The Board also rejected Supreme’s contention
 that DLA’s prior material breach defense did not apply to
 the bridge contract from 2012–2013 because “the SPV and
 bridge contracts were inextricably intertwined for POT
 purposes and the parties treated them as such.” J.A. 60.
 The Board concluded that Supreme committed the first
 material breach and had lost its right to CDA interest.
      Supreme moved for reconsideration of the Board’s de-
 cision, arguing that the Board treated CDA interest as a
 contractual entitlement, rather than a statutory one. The
 Board denied the motion. It agreed with Supreme “that
 CDA interest is a statutory right on a valid claim,” but con-
 cluded that “Supreme’s prior material breach through its
 commission of fraud bars its claim for interest.” J.A. 80.
 The parties subsequently agreed upon quantum amounts,
 and the Board adopted them.
    Supreme now appeals. We have jurisdiction under 28
 U.S.C. § 1295(a)(10).
                               II
      Our review of the Board’s decision is limited by statute.
 We review the Board’s legal conclusions de novo, but we
 may not set aside a factual finding unless it is “(A) fraudu-
 lent, arbitrary, or capricious; (B) so grossly erroneous as to
 necessarily imply bad faith; or (C) not supported by sub-
 stantial evidence.” 41 U.S.C. § 7107(b)(2); Kellogg Brown &
 Root Servs., Inc. v. Sec’y of the Army, 973 F.3d 1366, 1370
 (Fed. Cir. 2020). Contract interpretation is a question of
 law reviewed without deference. Kellogg Brown & Root
 Servs., Inc., 973 F.3d at 1370. The appellant bears the bur-
 den of establishing reversible error. See Fernandez v. Dep’t
 of the Army, 234 F.3d 553, 555 (Fed. Cir. 2000).
Case: 21-1965    Document: 65       Page: 8   Filed: 12/05/2022

 8                            SUPREME FOODSERVICE GMBH v.
                  DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

                              III
                              A
     Supreme argues that DLA waived its prior material
 breach defense by continuing with performance of the con-
 tract even after learning of Supreme’s fraudulent behavior.
     Under the doctrine of prior material breach, “when a
 party to a contract is sued for breach, it may defend on the
 ground that there existed a legal excuse for its nonperfor-
 mance at the time of the alleged breach.” Barron
 Bancshares, Inc. v. United States, 366 F.3d 1360, 1380
 (Fed. Cir. 2004) (citing Coll. Point Boat Corp. v. United
 States, 267 U.S. 12, 15 (1925)). “The government may use
 the prior material breach doctrine to defeat a contractor’s
 breach claim.” Laguna, 828 F.3d at 1371.
      The Board held that DLA did not waive its prior mate-
 rial breach defense based on our decision in Laguna. J.A.
 56–57. In Laguna, the government learned of a kickback
 scheme in January 2008 on a construction contract where
 physical work was not complete until 2010. Laguna, 828
 F.3d at 1366. The government obtained its first guilty plea
 from one of Laguna’s project managers in October 2010. Id.
 The parties continued with “conducting audits and making
 cost reimbursements” after the completed physical work in
 2010. Id. at 1372. The government did not raise its first
 material breach defense to the contractor’s claim until after
 a final guilty plea by a Laguna senior executive in 2013. Id.
 at 1367. Laguna argued that the government’s “continued
 performance” of paying incurred costs and auditing La-
 guna’s statements, even after the government knew of the
 kickback scheme, constituted waiver of the prior material
 breach defense.
     We held that “[i]t was reasonable for the government
 to invoke the prior material breach rule after [the senior
 executive] entered a guilty plea in July 2013,” even though
 it had some notice of criminal conduct as early as 2008,
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 SUPREME FOODSERVICE GMBH v.                                 9
 DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 because prior to the plea, “the government did not have a
 ‘known right’ that would have invoked the prior material
 breach rule.” Id. at 1372. Thus, the actions the government
 took in continuing with the contract after 2008 still “did not
 waive [the government’s] right to invoke the prior material
 breach rule.” Id.
     Laguna applies squarely to the facts of this case. Be-
 cause waiver “is an intentional relinquishment or abandon-
 ment of a known right,” Massie v. United States, 166 F.3d
 1184, 1190 (Fed. Cir. 1983), DLA cannot have waived its
 defense prior to Supreme’s December 2014 guilty plea be-
 cause it did not have a known right until Supreme finally
 entered that guilty plea, conclusively ending the criminal
 investigation into its fraud. Even though DLA had some
 notice of Supreme’s fraudulent behavior beginning in 2009,
 it had no “known right” until Supreme’s guilty plea. And
 DLA never extended Supreme’s contract after Supreme
 pled guilty. Accordingly, we affirm the Board’s conclusion
 that DLA did not waive its affirmative defense of prior ma-
 terial breach.
                               B
     Supreme next argues that, even if we conclude that
 DLA did not waive its affirmative defense, we should still
 determine that Supreme is entitled to CDA interest on
 money the government over-withheld. The CDA provides
 that “[i]nterest on an amount found due a contractor on a
 claim shall be paid to the contractor for the period begin-
 ning with the date the CO receives the contractor’s claim,
 pursuant to section 7103(a) of this title, until the date of
 payment of the claim.” 41 U.S.C. § 7109(a)(1) (emphases
 added). Typically, this provision entitles a contractor to in-
 terest on its own successful claim. But here, there is no
 such successful claim. Although the Board concluded that
 the government had over-withheld approximately $143
 million when addressing the government’s claim, the Board
 terminated Supreme’s claims based on the government’s
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 10                            SUPREME FOODSERVICE GMBH v.
                   DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 prior material breach defense. Supreme seeks interest on
 that over-withheld amount related to the government’s
 claim, despite the fact its own claims did not prevail.
      In Supreme’s view, this statutory language has only
 two requirements for a contractor to be entitled to interest:
 (1) that a contractor is owed a monetary recovery on any
 claim (an “amount found due”), and (2) that the contractor
 submitted its own certified claim to the CO (“on a claim”).
 Appellant’s Reply Br. 31. Under this view, it is enough for
 the contractor to simply submit its own claim—it need not
 prevail on that claim. Thus, Supreme argues that it is en-
 titled to recover interest on the $143 million that the Board
 found Supreme is owed from the money DLA withheld, be-
 ginning from the date Supreme submitted its own certified
 claim to the CO. Appellant’s Br. 61. We must decide
 whether the CDA requires a contractor to successfully pre-
 vail on its own claim to be entitled to interest; or whether
 interest may be assessed on any monetary recovery owed
 for which the contractor submitted a certified claim, re-
 gardless of how unsuccessful that claim may be.
      To answer this question, we look to the statutory text:
      Interest on an amount found due a contractor on a
      claim shall be paid to the contractor for the period
      beginning with the date the contracting officer re-
      ceives the contractor’s claim, pursuant to section
      7103(a) of this title, until the date of payment of the
      claim.
 41 U.S.C. § 7109(a)(1) (emphases added). This language is
 clear—the “claim” for which a contractor is owed interest
 is “the contractor’s claim.” Id. (emphasis added). Nothing
 in this provision grants a contractor the right to receive in-
 terest on an amount due under the Government’s claim. See
 Ruhnau-Evans-Ruhnau Assocs. v. United States, 3 Cl. Ct.
 217, 219 (1983) (“[W]here an award of interest against the
 government is at issue, such congressional silence cannot
 be read as an affirmative grant.”). Rather, it is obvious that
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 SUPREME FOODSERVICE GMBH v.                                  11
 DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 a contractor must be successful on its own claim to be enti-
 tled to interest under the CDA.
      Supreme relies on a non-precedential decision, Secre-
 tary of the Army v. Kellogg Brown & Root Services, 779 F.
 App’x 716 (Fed. Cir. 2019), to argue that a claim alone is
 all that is required to recover interest. In Kellogg, the con-
 tractor, KBR, brought three certified CDA claims between
 2007 and 2010, seeking to recover a total of $44 million that
 the Army had withheld. Id. at 722. In September 2011,
 KBR brought a fourth certified CDA claim for that same
 $44 million plus interest under the CDA. Id. at 718. In the
 2011 claim, KBR alleged a new legal theory for recovering
 the $44 million plus interest. Id. Although KBR’s original
 legal theories did not prevail, KBR was ultimately success-
 ful on its 2011 legal theory and was awarded $44 million
 plus interest. Id. at 722. The issue on appeal was whether
 the clock for calculating interest on the $44 million recov-
 ery began when the claims for that $44 million were first
 made, or if it began when the prevailing legal theory was
 first raised. We concluded that the Board did not err in
 starting the interest clock as of the 2007 to 2010 claims,
 even though KBR’s prevailing legal theory was not raised
 until the September 2011 claim. Id.
     Kellogg is distinguishable from the circumstances here.
 This case does not ask what event triggers the interest
 clock, but whether a contractor is at all entitled to CDA
 interest if it has not prevailed on its own claim. “The pur-
 pose of the [CDA] interest provision . . . is to provide ‘inter-
 est to the contractor upon a favorable decision on his
 claim. . . .’” Esprit Corp. v. United States, 6 Cl. Ct. 546, 548
 (1984) (emphases added) (quoting S. Rep. No. 95-1118, at
 32 (1978)). While KBR received a favorable decision on its
 own claim in Kellogg, Supreme has received no favorable
 decision here. Rather, Supreme’s claims failed because of
 the Army’s successful affirmative defense. If anything, Su-
 preme’s circumstances are more analogous to the cases
 that Kellogg distinguished and recognized “stand for the
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 12                           SUPREME FOODSERVICE GMBH v.
                  DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

 proposition that defenses to government claims alone are
 not entitled to CDA interest.” Kellogg, 779 F. App’x at
 722–23 (citing, e.g., Magnus Pac. Corp. v. United States,
 133 Fed. Cl. 640 (2017) (“[T]he CDA awards interest on suc-
 cessful contractor claims denied by a contracting officer,
 not on successful appeals of government claims.” (empha-
 ses in original))). Supreme’s prior material breach, through
 its commission of fraud, bars its claim for payment for both
 the underlying amount and any interest that might other-
 wise have been due. We affirm the Board’s denial of CDA
 interest.
                              C
     Finally, Supreme argues that DLA’s first material
 breach defense cannot apply to the two subsequently
 awarded contract extensions covering 2010–2012 and
 2012–2013. It contends that those are separate contracts it
 did not breach and that it therefore should be able to re-
 cover CDA interest on the amounts DLA over-withheld
 during the periods of those two contracts. Appellant’s Br.
 66. The crux of its argument is that its actions that consti-
 tuted the material breach (i.e., the JAFCO and bottled wa-
 ter fraud) all occurred before DLA awarded the first
 contract extension in December 2010, and therefore Su-
 preme never breached the 2010–2012 or the 2012–2013
 contracts.
     The Board concluded that the first contract extension,
 from 2010–2012, was clearly not a separate contract be-
 cause it was implemented through a bilateral modification
 to the original contract, despite later references to the ex-
 tension as a bridge contract. J.A. 41, 59. We agree with that
 conclusion—the agreement is clearly styled and executed
 as a modification. See J.A. 4257 (agreement entitled
 “Amendment of Solicitation/Modification of Contract”).
 Thus, DLA’s prior material breach defense applies to the
 2010–2012 extension of the parties’ original contract.
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 SUPREME FOODSERVICE GMBH v.                               13
 DIRECTOR OF THE DEFENSE LOGISTICS AGENCY

     The Board also concluded, and the government does
 not dispute, that the final extension from 2012–2013 is a
 bridge contract, not an extension. J.A. 59. But the Board
 found that the original SPV contract and the bridge con-
 tract “were inextricably intertwined for POT purposes and
 the parties have treated them as such.” J.A. 60. Specifi-
 cally, the bridge contract increased POT rates by 4.5 per-
 cent, but otherwise was very similar to the original
 contract—incorporating by reference all the terms, condi-
 tions, and modification of the original contract, and provid-
 ing that unresolved claims and requests for equitable
 adjustments were not affected by the bridge contract. J.A.
 59. Furthermore, the Board pointed out that “if the bridge
 contract were treated as a separate contract, Supreme
 would need to prove its costs during that contractual pe-
 riod, but it has not done so. It would not be consistent (or
 fair) to allow Supreme to treat the contracts as separate for
 purposes of DLA’s affirmative defenses but one and the
 same for purposes of proving its costs.” J.A. 60.
     We agree that we should not allow Supreme to treat
 the bridge contract as separate only when it attempts to
 evade the government’s affirmative defenses. The parties
 treated the original contract and the bridge contract as in-
 extricably intertwined, and so we shall too. We conclude
 that DLA’s prior material breach defense applies to the
 2012–2013 bridge contract as well.
                              IV
      We have considered Supreme’s remaining arguments
 but find them unpersuasive. For the foregoing reasons, we
 affirm.
                        AFFIRMED