Court Opinion

ID: 2799276
Source: CourtListenerOpinion
Date Created: 2015-05-07 16:01:49.734585+00
Date Added: 2024-06-11T12:08:20.880321
License: Public Domain

NOTE: This disposition is nonprecedential.

  United States Court of Appeals
      for the Federal Circuit
                ______________________

   ALLEN ENGINEERING CONTRACTOR INC.,
             Plaintiff-Appellant

                           v.

                  UNITED STATES,
                  Defendant-Appellee
                ______________________

           2014-5094, 2014-5095, 2014-5096
               ______________________

    Appeals from the United States Court of Federal
Claims in Nos. 1:13-cv-00684-JFM, 1:13-cv-00695-JFM,
1:13-cv-00720-JFM, Senior Judge James F. Merow.
                ______________________

                 Decided: May 7, 2015
                ______________________

    WILLIAM L. BRUCKNER, Bruckner & Walker, San Die-
go, CA, for plaintiff-appellant. Also represented by
CHELSEY N. DEL TESTA.

    ERIC LAUFGRABEN, Commercial Litigation Branch,
Civil Division, United States Department of Justice,
Washington, DC, for defendant-appellee. Also represent-
ed by JOYCE R. BRANDA, ROBERT E. KIRSCHMAN, JR.,
DONALD E. KINNER; STEPHEN TOBIN, Office of Litigation,
United States Navy, Washington, DC.
2                     ALLEN ENGINEERING CONTRACTOR    v. US

                  ______________________

        Before MOORE, CLEVENGER, and WALLACH, Circuit
                         Judges.
CLEVENGER, Circuit Judge.
    Allen Engineering Contractor Inc. appeals the deci-
sions of the Court of Federal Claims, granting motions to
dismiss, in their entirety, complaints for improper termi-
nation of a contract. Allen Eng’g Contractor Inc. v. United
States, 115 Fed. Cl. 457 (2014); Allen Eng’g Contractor
Inc. v. United States, No. 13-720 C, 2014 WL 1862269
(Fed. Cl. May 8, 2014); Allen Eng’g Contractor Inc. v.
United States, No. 13-695 C, 2014 WL 1860074 (Fed. Cl.
May 8, 2014). This court has jurisdiction under 28 U.S.C.
§ 1295(a)(3) (2012). Because Allen Engineering Contractor
Inc. breached its agreement with the Navy, and has failed
to establish any grounds for excusing this breach or
shifting liability to the Navy, we affirm.
                             I
    This case concerns the same set of operative facts,
pertaining to three distinct construction contracts be-
tween Allen Engineering Contractor Inc. (“AECI”) and the
United States Navy. Between June and July 2012, AECI
entered into three construction contracts with the Navy
individually valued at $2,855,419, $11,553,083, and
$ 12,301,127.05. 1 In May 2013, the Navy terminated all

    1   AECI filed three complaints alleging improper
termination of contracts. The court issued one detailed
opinion and order, pertaining to one contract. Allen Eng’g
Contractor Inc. v. United States, 115 Fed. Cl. 457 (2014).
Then, finding no material differences between the first
case and the other two, the court issued two brief orders,
based on the same reasons set forth in the prior opinion.
No. 13-720 C, 2014 WL 1862269 (Fed. Cl. May 8, 2014);
ALLEN ENGINEERING CONTRACTOR v. US                         3

three of the contracts because AECI had failed to main-
tain valid performance and payment bonds covering each
of them. This was a material breach of AECI’s agreement
with the Navy, and the Navy appropriately terminated
the contracts under 48 C.F.R. § 52.249-10(a).
    A contractor on a construction project worth more
than $150,000 is required to post and maintain perfor-
mance and payment bonds covering 100 percent of the
contract price. 40 U.S.C. § 3131; 48 C.F.R. § 52.228-15(b). 2
The regulations require that the “bonds shall be in the
form of firm commitment, supported by corporate sureties
whose names appear on the list contained in Treasury
Department Circular 570 . . .” 48 C.F.R. § 52.228-15(d).
    “Under a performance bond, a surety guarantees that
the project will be completed if a contractor defaults. It is
designed to ensure ‘that [the government] is not left with
a partially completed project because of an insolvent
contractor.’” Dependable Ins. Co. v. United States, 846
F.2d 65, 66 (Fed. Cir. 1988) (citing Aetna Casualty & Sur.
Co. v. United States, 845 F.2d 971, 973 (Fed. Cir. 1988);
Morrison Assurance Co. v. United States, 3 Cl. Ct. 626,
632 (1983)). And payment bonds are designed to protect
people who have contractual relationships with the prime
contractor or a subcontractor. J.W. Bateson Co., Inc. v.
United States ex rel. Bd. Of Trustees of Nat. Automatic
Sprinkler Industry Pension Fund, 434 U.S. 586, 587
(1978). “Because ‘a lien cannot attach to Government

No. 13-695 C, 2014 WL 1860074 (Fed. Cl. May 8, 2014).
AECI filed three appeals, and this court consolidated
them under the case number 2014-5094.
    2  In 2010, the government increased the threshold
for payment and performance bonds from $100,000 to
$150,000. Federal Acquisition Regulation; Inflation Ad-
justment of Acquisition-Related Thresholds, 75 Fed. Reg.
53129, 53135 (Aug. 30, 2010).
4                     ALLEN ENGINEERING CONTRACTOR    v. US

property,’ persons supplying labor or materials on a
federal construction project [are] protected by a payment
bond.” Id. at 589 (quoting F.D. Rich Co. v. United States
ex rel. Industrial Lumber Co., 417 U.S. 116, 121–22
(1974)).
    Shortly after the Navy awarded the contracts in ques-
tion, AECI provided performance and payment bonds
from Liberty Mutual Insurance Company (“Liberty”). The
Navy accepted each of the Liberty bonds, and work com-
menced on all three projects.
    Between February and March 2013, AECI sought to
replace those Liberty bonds with bonds from the Pacific
Indemnity Company (“PIC”). After investigating the
validity and authenticity of the PIC bonds, and per
AECI’s request, the Navy replaced the Liberty bonds with
PIC bonds. Also per AECI’s request, the Navy returned
the Liberty bonds. Then, in May 2013, PIC called AECI
and the Navy to inform them that the bonds supposedly
issued by PIC were fraudulent. The supposed-PIC bonds
were not issued by PIC and were therefore invalid.
    In light of that fact, the Navy suspended work on each
of the three contracts in question. The Navy asked AECI
to provide valid replacement bonds, but AECI was unable
to secure them. Because AECI failed to secure valid
bonds, on July 5, 2013, the Navy terminated one contract
for default and on July 10, 2013, terminated the other two
for default.
     In the present action, AECI is seeking to have the de-
fault terminations converted to convenience terminations.
It would be appropriate to convert these to terminations
for the convenience of the government if “it is determined
that the Contractor was not in default, or that the delay
was excusable.” 48 C.F.R. § 52.249-10(c).
   AECI relies on multiple theories to allege that the
Navy improperly terminated these contracts, and that it
ALLEN ENGINEERING CONTRACTOR v. US                         5

therefore did not default on the contracts. The Court of
Federal Claims (“CFC”) held AECI had failed to state a
claim on which relief could be granted, and therefore
granted the government’s motion to dismiss. This court
reviews de novo a CFC decision to dismiss for failure to
state a claim. Hearts Bluff Game Ranch, Inc. v. United
States, 669 F.3d 1326, 1328 (Fed. Cir. 2012).
                             II
    AECI’s arguments on appeal are the same as those it
raised to the CFC. “[O]nly a complaint that states a
plausible claim for relief survives a motion to dismiss.”
Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (citing Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007)). And
a “claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasona-
ble inference that the defendant is liable for the miscon-
duct alleged.” Id. We agree that the CFC correctly
rejected each of AECI’s arguments, and address each
argument in turn.
                             A
    The Navy terminated the AECI contracts for default
under 48 C.F.R. § 52.249-10(a). “If [a] Contractor refuses
or fails to prosecute [] work . . . , with the diligence that
will insure its completion within the time specified in [a]
contract . . . , the Government may . . . terminate the right
to proceed with the work . . . .” 48 C.F.R. § 52.249-10(a).
AECI argues that the termination was wrong, because it
merely failed to provide a third set of bonds and there is
no evidence that it failed to perform work.
     We disagree. For one, AECI breached the contracts by
failing to furnish valid bonds. This material breach was,
itself, grounds for termination. Moreover, the CFC has
recognized other, non-delay related grounds for default
terminations. Finally, AECI was prohibited from working
on the contract until valid bonds were in place. Therefore,
6                     ALLEN ENGINEERING CONTRACTOR     v. US

it would not have been able to complete the work in the
allotted time.
    As a general matter, government contracting officers
have “broad discretion to determine whether to terminate
a contract for default.” Lanterman v. United States, 75
Fed. Cl. 731, 733–34 (2007). The CFC overturns those
decisions only if they are arbitrary, capricious, or an
abuse of discretion. However, the government bears the
burden of establishing that a termination was justified.
Id.
    In this case, AECI’s failure to maintain valid payment
and performance bonds was a material breach of the
contract. “A breach is material when it relates to a matter
of vital importance, or goes to the essence of the contract.”
Thomas v. Dep't of Hous. & Urban Dev., 124 F.3d 1439,
1442 (Fed. Cir. 1997). And, even for the government, it is
true that “[a] party to a contract, faced with a breach by
the opposing party, can choose either to terminate the
contract or to continue the contract. . .” McDonnell Doug-
las Corp. v. United States, 182 F.3d 1319, 1327 (Fed. Cir.
1999). Even AECI seems to agree that the bonds are
material to these contracts. It suggests that the Navy
materially breached the agreement by failing to investi-
gate the validity of the bonds. If a failure to investigate
the bonds is of vital importance to the agreement, as
AECI says, then the bonds themselves must also be vital.
    The CFC has previously held that “failure to furnish
adequate bonding . . . is a material breach that justifies
termination for default.” Airport Indus. Park, Inc. v.
United States, 59 Fed. Cl. 332, 334 (2004). In Airport
Industrial, the contractor obtained bonds from a surety
that became insolvent before work on the contract was
complete. Id. at 333. When the contractor failed to obtain
a replacement payment bond, the government terminated
the contract for default under 48 C.F.R. § 52.249-10(a). Id.
at 333–34. The contractor argued, in part, that its failure
ALLEN ENGINEERING CONTRACTOR v. US                         7

to maintain adequate bonds was caused by government
delay. Id. at 337. The parties had agreed to contract
modifications and extended the time of completion. Id.
And the contractor argued that, absent that delay, it
would have maintained bonds throughout the project. Id.
    In that case, the CFC held that the termination for
default was justified. Id. at 338. The CFC concluded that,
to prevail, and excuse its default, the contractor would
have to prove that the government materially breached
the contract. Id. And the contractor failed to point to
specific contract terms or implied obligations that the
government breached. Id.
    In its opinion below, the CFC emphasized Airport In-
dustrial to establish that failure to maintain bonds consti-
tutes a material breach. On appeal, AECI attempts to
distinguish the present case. It argues that, in Airport
Industrial, the government was not at fault in causing the
contractor’s inability to obtain bonds, and in this case,
AECI claims that the Navy directly caused AECI’s lack of
adequate bonding.
     As discussed in the following section, we find no
grounds to excuse AECI’s default based on government
actions. And if, as in Airport Industrial, AECI must prove
that the government materially breached the contract to
establish excusable default, it has failed to do that. Final-
ly, the Navy’s actions to investigate the PIC bonds and
honor AECI’s request to replace the Liberty bonds did not
cause this default. AECI provided fraudulent bonds to the
Navy, and AECI failed to furnish valid bonds after that.
Therefore, AECI’s attempt to distinguish Airport Indus-
trial based on the Navy’s actions in this case is unconvinc-
ing.
    Beyond the bonding requirement, the CFC has held
that other, non-delay related breaches can be grounds to
terminate for default under § 52.249-10(a). See Profes-
sional Servs. Supplier, Inc. v. United States, 45 Fed. Cl.
8                     ALLEN ENGINEERING CONTRACTOR    v. US

808 (2000) (problems with materials and workmanship
may give rise to termination for default); Aptus Co. v.
United States, 61 Fed. Cl. 638, 663 (2004) aff'd sub nom.
Lin v. United States, 159 F. App’x 186 (Fed. Cir. 2005)
(non-compliant submission of details about a product
design, failure to get advance approval for purchases, and
failure to comply with staffing requirements may all
constitute material breach of contract and termination for
default was appropriate). Case law reveals one relevant
limiting factor—termination for default must be related to
contract performance. McDonnell Douglas Corp. v. United
States, 182 F.3d 1319, 1326 (Fed. Cir. 1999) (when pres-
sure from a congressional oversight committee is the sole
grounds for termination, that is unrelated to contract
performance and termination for default is improper). The
payment and performance bonds in this case are embod-
ied in the contract, and failure to maintain them relates
to contract performance.
    Finally, even on a narrow read of the “failure to pros-
ecute work” standard at 48 C.F.R. § 52.249-10(a), termi-
nation for default was appropriate here. AECI itself
admits that if a contractor fails to maintain payment and
performance bonds, the contract will be terminated. The
government is allowed to terminate contracts for default
when it knows that the contractor will be unable to com-
plete the work. McDonnell Douglas Corp. v. United States,
323 F.3d 1006, 1016 (Fed. Cir. 2003) (exercising default
provision requires a reasonable belief that there was no
reasonable likelihood the contractor would be able to
perform the entire project in the allotted time). So termi-
nation was appropriate here, under § 52.249-10(a), be-
cause the government knew that AECI could not complete
the project because it had no proper bonds in place.
                            B
    AECI makes two related arguments. First, AECI sug-
gests that it complied with § 52.228-15, the requirement
ALLEN ENGINEERING CONTRACTOR v. US                       9

for performance and payment bonds, when it secured the
Liberty bonds at the outset of the contract. However,
AECI itself admits that the bonds are a condition to both
starting and continuing work on the contract. Because
§ 52.228-15 requires maintaining bonds through the term
of the work, merely furnishing bonds at the outset of the
contract is not enough to constitute compliance.
     Second, § 52.228-2 requires that contractors must
furnish additional securities if a surety becomes unac-
ceptable to the government. AECI argues that the Navy
cannot find bonds acceptable and then later reverse
course and determine that the surety is unacceptable. For
one, AECI cites no authority for this argument. Moreover,
this argument does not comport with the plain meaning of
§ 52.228-2. That regulation specifically pertains to situa-
tions where a surety on a bond subsequently becomes
unacceptable to the government. Therefore, it only applies
to situations where the government accepts a bond in the
first place, then later determines the surety is unaccepta-
ble. In those situation, additional security is required.
    These two regulations afford no relief for AECI. In-
stead, they confirm that the Navy had solid grounds for
terminating the contracts.
                            C
     AECI presents several arguments that fall generally
under the rubric of excusable default. Overall, AECI
asserts that the Navy’s investigation of the replacement
PIC bonds was inadequate, and that if the Navy had done
a proper investigation, it would have caught the fraud
before it approved the PIC bonds. Even if true, there is
nothing about the Navy’s investigation that relieves AECI
of its responsibility for the breach.
    Under various theories of liability, AECI argues that
the Navy’s review and approval is relevant because: (1)
the Navy breached its agreement with AECI, (2) the Navy
10                    ALLEN ENGINEERING CONTRACTOR     v. US

owes an independent duty to AECI when investigating
bonds; (3) the Navy’s review and approval excuses default
under 48 C.F.R. § 52.249-10(b); (4) the Navy caused
AECI’s bonding problem, so Airport Industrial does not
apply; and (5) the Navy violated its duty of good faith and
fair dealing under this contract.
    “In order for a private contractor to bring suit against
the Government for violation of a regulation, that regula-
tion must exist for the benefit of the private contractor.”
Freightliner Corp. v. Caldera, 225 F.3d 1361, 1365 (Fed.
Cir. 2000). This general proposition essentially excludes
each of AECI’s arguments regarding the Navy’s flawed
review and approval of the PIC bonds.
    The CFC found that the Navy’s review and approval
of bonds is for the government’s benefit—not for the
benefit of AECI. This is consistent with the statutory
description of these bonds. Performance bonds are “for the
protection of the Government.” 40 U.S.C. § 3131(b)(1).
Payment bonds are “for the protection of all persons
supplying labor and material and carrying out the work
provided for in the contract for the use of each person.” 40
U.S.C. § 3131(b)(2). Logic dictates that, if the bonds are
for the protection of the government and third party
suppliers, then the investigation of the bonds is also for
the benefit of those parties.
    AECI suggests that, when the government fails to fol-
low its own written procedures for investigating bonds,
then contractors are at risk of losing their contracts. Put
another way, the government’s approval of a fraudulent
bond makes the contractor vulnerable to a termination for
default. And therefore, AECI argues, the government
owes a duty to the contractor when reviewing bonds. This
argument ignores the fact that the contractor has total
control over procuring bonds in the first place. AECI
sought replacement bonds from PIC, and submitted them
to the government. AECI’s acquisition of fraudulent bonds
ALLEN ENGINEERING CONTRACTOR v. US                       11

exposed it to the risk of having the contract cancelled. The
government reviews those bonds, submitted by the con-
tractor, to ensure they provide adequate protection. The
government does not review the bonds in the interest of
catching the contractor’s own mistakes. Therefore, we
agree with the CFC that the Navy’s review and approval
of bonds is done for the benefit of the government.
    However, the court must also address AECI’s claims
that the Navy violated a specific Federal Acquisition
Regulation (“FAR”) or policy. 3 See Chris Berg, Inc. v.
United States, 426 F.2d 314, 317 (Ct. Cl. 1970) (different
parts of the FAR may have different purposes, and some
of them may be for the benefit of the contractor). AECI
argues that the Navy violated two provisions in the Naval
Facilities Engineering Command (“NAVFAC”) Contract-
ing Manual (P-68).
    Part 28.102-1(b) of the NAVFAC manual instructs
contracting officers to contact the surety directly when
authenticating bonds, as opposed to contacting a surety
agent’s office. In this case, the Navy contacted the agent
who perpetrated the fraud, instead of contacting PIC
directly. And part 28.106-2 of the manual specifies that a
Level III contracting officer has to approve substituting
an original bond with a replacement one. In this case, a
contracting officer who is not a Level III officer returned
the Liberty bonds and approved the substitution with PIC
bonds.
    The NAVFAC P-68 contracting manual provides gen-
eral guidance to Navy contracting officers. “It is not a
stand-alone document, but must be read together” with
the FAR and other Navy and Department of Defense
acquisition regulations. NAVFAC P-68, 1.301. We agree

   3     Federal Acquisition Regulations are codified at Ti-
tle 48, Chapter 1 of the C.F.R.
12                    ALLEN ENGINEERING CONTRACTOR    v. US

that both parts 28.102-1(b) and 28.106-2 exist for the
benefit of the government, and not for the benefit of
private contractors. These are internal operating proce-
dures that give the Navy the information it needs to
decide whether to approve the bonds. See, e.g., Am. Farm
Lines v. Black Ball Freight Serv., 397 U.S. 532, 538 (1970)
(rules intended to provide the government with necessary
information to reach an informed decision do not benefit
private contractors); Freightliner Corp. v. Caldera, 225
F.3d 1361, 1365 (Fed. Cir. 2000) (internal operating
procedures that ensure contract officers are acting in the
best interest of the government are not for the benefit of
private contractors). Since the review of the bonds exists
for the benefit of the government, AECI cannot establish
breach or shift liability to the Navy for failure in the
review procedures.
     Relatedly, AECI argues that the government’s flawed
review of the bonds should excuse its default. Termination
for default is not appropriate where the “delay in complet-
ing the work arises from unforeseeable causes beyond the
control and without the fault or negligence of the Contrac-
tor. Examples of such causes include . . . (ii) acts of the
Government in either its sovereign or contractual capacity
. . . .” 48 C.F.R. § 52.249-10(b). Here, the Navy did not
cause this default. The Navy might have caused the
default if it breached its agreement with AECI, see Air-
port Indus. Park, Inc. v. United States, 59 Fed. Cl. 332,
338 (2004), if it failed to communicate obligations to
AECI, or if it otherwise failed to satisfy terms of its
agreement with AECI, e.g., United Partition Sys., Inc. v.
United States, 90 Fed. Cl. 74 (2009); Abcon Assoc., Inc. v.
United States, 49 Fed. Cl. 678 (2001). But in the present
case, AECI caused this default. AECI procured and sub-
mitted the bonds—later found to be fraudulent and inva-
lid—and that caused the default.
    Finally, AECI argues that the Navy breached the im-
plied duty of good faith and fair dealing. According to
ALLEN ENGINEERING CONTRACTOR v. US                          13

AECI, it had a reasonable expectation the Navy would
follow its own procedures when investigating the PIC
bonds. By failing to comply with those procedures, the
Navy effectively denied AECI the benefits of the contract.
See Metcalf Constr. Co. v. United States, 742 F.3d 984,
991 (Fed. Cir. 2014) (defining the implied duty of good
faith and fair dealing).
      However, the implied duty of good faith and fair deal-
ing cannot expand a party’s contractual duties. This
means that “an act will not be found to violate the duty
. . . if such a finding would be at odds with the terms of
the original bargain, . . . by altering the contract’s discern-
ible allocation of risks and benefits . . .” Id. In this case,
the Navy and AECI struck a bargain that included AECI
furnishing valid payment and performance bonds, which
by definition must be supported by an approved surety. 48
C.F.R. § 52.228-15(d). AECI failed to do that. Requiring
the Navy, as a contractual duty, to catch AECI’s mistake
would expand the government’s duties.
                              D
     AECI also argues that the Navy knew this particular
agent was submitting fraudulent bonds. As such, the
Navy should not have approved them. The question here
turns on whether the Navy knew this agent was submit-
ting fraudulent bonds. See J.A. Jones Constr. Co. v. Unit-
ed States, 182 Ct. Cl. 615, 619–20 (1968). And AECI has
failed to point to any evidence establishing the Navy
knew about the fraudulent bonds before it investigated
the bonds under these contracts.
                              E
    Finally, AECI argues that the Navy had an oppor-
tunity to rescind its return of the Liberty bonds, and that
the Navy was unreasonable when it refused to demand
Liberty reinstate them. However, AECI cites no legal
14                    ALLEN ENGINEERING CONTRACTOR     v. US

authority for this argument and fails to allege facts that
establish the Navy had such an opportunity.
                       CONCLUSION
     Because AECI has failed to establish any grounds for
excusing its material breach or otherwise shifting liability
to the Navy, the CFC’s decision to dismiss these claims is
affirmed.
                       AFFIRMED
     No costs.