Court Opinion

ID: 9478311
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:45:42.35567+00
Date Added: 2024-06-11T17:46:21.602849
License: Public Domain

MAYER, Circuit Judge,
dissenting.
For a reason of its own the landlord, Warwick, wanted Riverside to terminate its lease three and a half years early. So it agreed to pay Riverside’s moving expenses and says it paid about $1.7 million to an affiliated company it owned and controlled to make leasehold improvements at Riverside’s new location. Riverside ended up at a new building, with better facilities, a longer lease, and a lower rent; all in all, a bonanza. Now this court says the government must pay Riverside again for the “cost” of the leasehold improvements. This, despite the fact that Riverside paid no money and gave up nothing of value for the improvements.
The fundamental flaw is in equating Riverside’s “cost” for the leasehold improvements with what Warwick was willing to pay as an inducement for Riverside to move, What it “cost” Riverside is entirely unrelated to how much Warwick was willing to spend to get Riverside out of its building. The focus must be on what the improvements cost Riverside — nothing, ex*425cept for the vestiges of unamortized improvements at the old location — not on what they cost Warwick. Riverside had the contract with the government.
The result here is in direct conflict with Marquardt Co. v. United States, 822 F.2d 1573 (Fed.Cir.1987), in which a contractor was acquired by another company and attempted to charge that company’s acquisition costs against its government contracts. We said that the threshold requirement for allowability is that a cost actually be incurred by a contractor; because the acquisition costs had been incurred by the acquiring corporation, the contractor could not charge those costs against its government contracts. Id. at 1577. The same principle applies here. Riverside simply has no right to convert “an expenditure by a third party into a ‘cost’ incurred by itself.” 822 F.2d at 1577 (quoting Marquardt, 86-3 BCA ¶ 19,100 at 96,549).
All agree that “cost” is the extent to which a contractor makes an economic sacrifice to obtain goods or services. Moreover, there is no dispute that the only thing Riverside sacrificed was its right to remain at the West End location until the imminent end of its lease. The question is how to value that vestigial right.
The record is replete with evidence that the remainder of the lease had a zero — or even negative — fair market value. Riverside’s own expert, a managing partner with Arthur Anderson, said he did not even attempt to appraise the value because a lease “with 3x/2 years remaining on its term in a rather poor commercial area in New York City ... didn’t seem to have any ‘substance of value....’” 87-2 BCA ¶ 19,693 at 99,-704. In fact, evidence before the Board showed that if Riverside had been able to sublet the Warwick premises “it would have received a rental substantially less than the existing rental,” and suffered a net loss in excess of $1 million. No one is going to relieve it of its lease for a return like that. So, the fair market value of the remainder of the lease was zero, see United States v. Petty Motor Co., 327 U.S. 372, 381, 66 S.Ct. 596, 601, 90 L.Ed. 729 (1946), and Riverside incurred no “cost” in giving it up.
But the court concludes that the fair market value of Riverside’s West End leasehold was $1.7 million because Warwick was willing to spend that much to repossess it. “Fair market value is generally defined as ‘the price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both being reasonably informed as to all relevant facts.’ ” Julius Goldman’s Egg City v. United States, 697 F.2d 1051, 1054 n. 3 (Fed.Cir.1983) (quoting Miller v. United States, 620 F.2d 812, 825, 223 Ct.Cl. 352 (1980)). It is not measured by a property’s “special value” to a particular individual. Miller, 620 F.2d at 825; see United States v. 564.54 Acres of Land, 441 U.S. 506, 511, 99 S.Ct. 1854, 1857, 60 L.Ed.2d 435 (1979). The remainder of the lease had a “special value” to Warwick because it owned the building and was under “compulsion” to get Riverside out so it could close a contract to sell the building for more than $9 million, which it did three days later. The price Warwick was willing to pay for the lease does not measure its fair market value. The fair market value was the price a willing buyer on the open market would pay, nothing.
That Riverside had to give up its right to the improvements at its old location also does not transform the transaction with Warwick into an economic sacrifice. Riverside did not own the West End improvements; it does not now own the improvements at the new location. “The economic substance of the exchange ... [was] a physical move by Riverside from one location to another with no out-of-pocket expense to itself and an exchange of leasehold improvements.” 87-2 BCA ¶ 19,693 at 99,715.
This imaginative scheme to amortize the improvements against its government contracts allows Riverside to have its cake and eat it too: Warwick pays for the improvements; the government pays Riverside. But this is akin to the kind of double recovery precluded by Blue Cross Ass’n v. Unit*426ed States, 568 F.2d 1339, 215 Ct.Cl. 400 (1978). In that case, insurers wanted to charge state franchise taxes against their government contracts, but were disallowed because they had already recouped the tax through the rates charged non-government policyholders. They had “already extracted the [franchise tax] from their policy holders and [could] not now extract it a second time from the Government.” Id. at 1341. Likewise here, Warwick paid for the leasehold improvements to Riverside’s profound benefit. Riverside should not now be allowed to “extract this cost a second time from the Government.”
Finally, a contractor’s own treatment of an event, reflecting its “practical interpretation of the contract ... at a time when it was not a subject of controversy, is entitled to great, if not controlling, weight.” Inland Empire Builders, Inc. v. United States, 424 F.2d 1370, 1378, 191 Ct.Cl. 742 (1970); see Blanchard v. United States, 347 F.2d 268, 273, 171 Ct.Cl. 559 (1965). By Riverside’s own accounting treatment, the transaction with Warwick was recognized as a financial windfall, not an economic sacrifice.