S.W. Marine Incorp. v. Danzig

• Decision Date: 11 April 2000
• Docket Number: No. 98-56724,98-56724
• Citation: 217 F.3d 1128
• Parties: (9th Cir. 2000) SOUTHWEST MARINE INCORPORATED, Appellant, v. RICHARD DANZIG <A HREF="#fr1-1" name="fn1-1">1 , Secretary of the Navy, Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1128

217 F.3d 1128 (9th Cir. 2000)

SOUTHWEST MARINE INCORPORATED, Appellant, v. RICHARD DANZIG¹ , Secretary of the Navy, Appellees.

No. 98-56724

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted April 11, 2000--Pasadena, California

Filed July 10, 2000

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Peter B. Jones, Jones & Donovan; Ross Pyle, Kathleen Wood Wagner, Pyle, Sims, Duncan & Stevenson, for appellant Southwest Marine Incorporated.

Genevieve Holm, Commercial Litigation Branch, Civil Division, United States Department of Justice, for appellees Richard Danzig, Secretary of the Navy.

Appeal from the United States District Court for the Southern District of California Irma E. Gonzalez, District Judge, Presiding. D.C. No.CV-97-01488-IEG

Before: Ferdinand F. Fernandez, and Kim McLane Wardlaw Circuit Judges, and Charles R. Weiner,²

WEINER, Senior District Judge:

I.

The Secretary of the Navy brought this action seeking a refund of approximately $2 million allegedly overpaid to Southwest Marine Incorporated's predecessor in interest, Northwest Marine Iron Works (NMIW), for overhaul work completed on the U.S.S. Duluth in 1986. The action was heard initially by the Armed Services Board of Contract Appeals (ASBCA), which entered judgment for Southwest. The Navy filed an appeal with the United States Court of Appeals for the Federal Circuit, which held it had no jurisdiction to hear the case and transferred it to the United States District Court for the Southern District of California. Dalton v. Southwest Marine, Inc., 120 F.3d 1249 (Fed. Cir. 1997) ("Dalton I"). The district court reversed the ASBCA, entered judgment in favor of the Navy and remanded to the ASBCA for computation of damages. Jurisdiction in the district court was premised upon the exception to 41 U.S.C. S 607(g)(1)(b) for marine contracts as discussed by the Federal Circuit in Dalton I Jurisdiction on appeal is premised upon 28 U.S.C. S 1291, but contested by the Secretary, who argues that the order of the district court, remanding the action to the ASBCA, was not a final order. Likewise, Southwest contested the jurisdiction of the district court, arguing that the Secretary had no right of appeal from the initial adverse finding of the ASBCA. We find that although the district court's remand order was interlocutory, it is immediately appealable under 28 U.S.C. S 1292(a)(3). We also find the district court's exercise of jurisdiction was proper and that the district court correctly held on the merits that the Navy was entitled to reimbursement. Accordingly, we affirm in all respects.

II.

The underlying facts are not in dispute. The Navy let out the contract to NMIW to overhaul the U.S.S. Duluth in August 1985; the work was completed and the ship redelivered to the Navy in 1986. The contract was a "fixed-price, incentive contract," which is something of a misnomer since it does not contain a fixed price. Rather it is a cost-plus arrangement, under which the Navy reimburses the contractor for its actual allowable costs, adjusted according to a contractually-defined formula, which is limited by a ceiling price. Thus, the actual price of the work is not determined at the time the contract is let. Once final cost is determined, the final price is then determined with a profit to the contractor calculated as the work is performed pursuant to a formula. Prior to determination of the final price, progress payments are made to the contractor, subject to standard clauses allowing for adjustment for over and under payments and a Credits Provision Clause³, which reduces the amounts chargeable to the Navy in the event of a reduction in contractor costs.⁴ After redelivery of the ship, NMIW continued to perform various contract responsibilities, such as negotiating the cost of change orders and submitting data necessary to establish the final contract price.

On October 29, 1986, four months after redelivery, NMIW filed a Chapter 11 petition in District of Oregon. The Navy's contracting officer (CO) for the Duluth and Supervisor of Shipbuilding were both aware of the petition, and the Navy filed claims regarding other work NMIW had performed on other ships. No claim was ever asserted over the work on the Duluth. NMIW's Second Amended Plan of Reorganization was approved by the bankruptcy court on March 20, 1987. It provided that unsecured claims in excess of $1,000 would be converted into interest bearing debentures of the reorganized company in a principal amount equal to the allowed unsecured claim, and for the repayment of that principal out of the reorganized company's net income.

In April 1987, one month after confirmation of the plan, NMIW submitted forms to the Navy identifying final contract costs of $25,093,862 on the Duluth. On December 21, 1988, the Navy agreed to settle NMIW's claims. On April 3, 1989, the CO executed a modification increasing the ceiling price to $23,295,752. Thereafter, NMIW submitted an invoice to the Navy claiming payment of $2,811,077, i.e. the new ceiling price less all prior progress payments and the agreed upon sum to be retained for closeout. The CO approved the invoice the next day.

Meanwhile, in the interim period between when NMIW submitted its final cost calculation and the date the CO approved the new the ceiling price, NMIW signed a letter of agreement with Southwest which agreed to acquire NMIW's outstanding stock. The February 23, 1989 acquisition agreement was conditioned upon NMIW receiving specific debt concessions from its secured creditors and the debenture holders. The stock purchase was completed on April 17, 1989; a few days later the bankruptcy court issued a Chapter 11 Final Report memorializing the concessions of the creditors. The Navy asserts that, at the time it established the final audit of costs and rates under which NMIW would be compensated for those costs, it had no knowledge of the pending stock purchase agreement and creditor concessions.

By letter of April 21, 1989, the Navy notified NMIW that it had learned that at least one of the company's creditors had agreed to forgive some indebtedness, and was considering a recoupment action for fees it had paid the contractor, and for which NMIW was no longer obligated to pay out as costs to others. NMIW maintained that the Navy had no right to participate in a compromise of debts occurring in conjunction with bankruptcy proceedings. On May 11, 1994, after several years of unsuccessful negotiations, the CO issued a final decision holding that the Navy had overpaid NMIW $2,161,287. The CO determined that debt concessions fell within the meaning of the Credits Provision Clause.

Southwest appealed the CO's decision to the ASBCA pursuant to the Contract Disputes Act (CDA), 41 U.S.C.S 607(d).⁵ The Board decided the case on cross motions for summary judgment. The Navy contended that it was entitled to judgment because (1) the Credits Provision Clause, the Incentive Price Revision (IPR) clause of the contract, and the common law, all authorize recovery of overpayments; and (2) Southwest was estopped from contesting recovery because, had the Navy been told of the creditor concessions prior to establishing the final costs, it would have calculated the net amount owed to NMIW differently.

The Board disagreed, holding that forgiveness of the debentures received under the reorganization plan could not be considered an overpayment by the Navy under the fixed price incentive contract.⁶ Applying bankruptcy law principles, the ASBCA decision reasoned that a discharge in bankruptcy does not extinguish or cancel pre-confirmation debts. Rather it merely releases the debtor from personal liability for such debts, because the discharge operates as an injunction against post-confirmation action to collect pre-confirmation debts. The bankruptcy court's confirmation of the plan therefore enjoined NMIW's creditors from collecting debts related to the work on the Duluth, but did not extinguish those debts. The Board concluded that were the Navy to recoup as an overpayment monies never paid by NMIW for subcontractor costs because the subcontractors cannot now collect those costs from NMIW, the Navy would obtain a significant benefit from NMIW's bankruptcy discharge: i.e. the receipt of subcontractor materials and labor for no cost. Accordingly, the Board held that the Navy cannot equate the subcontractor's post-confirmation decision to compromise the debentures they obtained under the reorganization plan with an "overpayment" to NMIW on the Duluth contract.

Instead, the Board granted the cross motion of Southwest which argued that once a contractor performs the contract and incurs costs, payment is due without regard to whether the contractor has actually paid his suppliers or may have payment disputes with them. Finding that the contract included a provision requiring the Navy to make progress payments, computed as a percentage of total costs incurred whether or not actually paid, the Board concluded that the Navy was not authorized to recoup progress payments based upon a failure to pay debts owed to subcontractors or others. The Board also rejected the Navy's argument that, under the Credits Provision Clause, Southwest was required to credit the government if it simultaneously or subsequently recovered a portion of the same costs billed to the Navy from another source. Again the Board, relying on bankruptcy law principles, found that NMIW's discharge did not amount to a recovery of the same costs from another source because the pre-confirmation debt continued to exist, albeit uncollectible from the debtor.

Following the Navy's appeal to the Federal Circuit, and that court's transfer of the appeal to the district court in August 1997, the Navy took no action to prosecute the appeal for six months, leading to the filing by Southwest of a motion to dismiss for want of prosecution. The motion was denied by the...