Ameriserv Trust & Fin. Servs. Co. v. United States, 14-1161C

• Decision Date: 17 March 2016
• Docket Number: No. 14-1161C,14-1161C
• Parties: AMERISERV TRUST AND FINANCIAL SERVICES COMPANY AS TRUSTEE FOR THE EMPLOYEE REAL ESTATE CONSTRUCTION TRUST FUND, Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

AMERISERV TRUST AND FINANCIAL SERVICES COMPANYAS TRUSTEE FOR THE EMPLOYEE REAL ESTATE CONSTRUCTION TRUST FUND, Plaintiff, v. UNITED STATES, Defendant.

No. 14-1161C

United States Court of Federal Claims

March 17, 2016

Action for damages based upon alleged breach of contract; motion for partial judgment on the pleadings; RCFC 12(c); express warranty; viability of affirmative defenses

Michael A. Shiner, Tucker Arensberg, P.C., Pittsburgh, Pennsylvania, for plaintiff. With him on the briefs and at the hearing was Gary P. Hunt, Tucker Arensberg, P.C., Pittsburgh, Pennsylvania.

Eric E. Laufgraben, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C. for defendant. With him on the briefs were Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Civil Division, and Robert E. Kirschman, Jr., Director, and Scott D. Austin, Assistant Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington D.C. Of counsel and present at the hearing were William E. Sexton, Jr., Cameron Gore, Katherine M. Smyth, and Reid Nicolosi, Office of General Counsel, Department of Veterans Affairs.

OPINION AND ORDER

LETTOW, Judge.

In this action for damages based upon an alleged breach of contract, plaintiff, Ameriserv Trust and Financial Services Company ("Ameriserv"), provided a secured $7.5 million construction loan to VA Butler Partners Company, LLC ("VA Butler Partners"), an assignee and affiliate of Westar Development Company ("Westar"), to enable VA Butler Partners to begin construction of a hospital for the Department of Veterans Affairs ("VA"). Ameriserv made the loan in its capacity as trustee for the Employee Real Estate Construction Trust Fund ("ERECT Fund").¹ Its loan to VA Butler Partners was secured by a lease of the hospital to the VA. Before Ameriserv provided the loan, the government signed a tripartite subordination and non-disturbance agreement with Ameriserv and VA Butler Partners, stating that VA Butler Partners' hospital lease was in full force and effect and that no events had occurred that would ripen into default. Ameriserv then disbursed the loan. Subsequently, the government concluded that Westar had committed fraud during the procurement and terminated the hospital lease for default.

Ameriserv claims the government made express warranties that were breached when facts surfaced showing Westar had procured the lease through fraud. To this end Ameriserv has filed a motion for partial judgment on the pleadings pursuant to Rule 12(c) of the Rules of the Court of Federal Claims ("RCFC"). See Pl.'s Br. in Support of Mot. for Partial Judgment on the Pleadings ("Pl.'s Mot."), ECF No. 25; see also Pl.'s Mot. for Partial Judgment on the Pleadings, ECF No. 24. In response, the government argues it did not breach any warranty, and that its affirmative defenses bar judgment on the pleadings. See Def.'s Opp'n to Pl.'s Mot. and Request for Discovery ("Def.'s Opp'n"), ECF No. 31.

BACKGROUND²

A. The VA Requests Proposals for a Hospital Lease, Selects Westar for Award,

and Denies an Agency-Level Protest

The VA issued a request for proposals in 2011 for the development and leasing of a hospital in Butler, Pennsylvania. Am. Compl. ¶ 15; Am. Answer ¶ 15. On January 10, 2012, Westar submitted a response, and in March of 2013 it submitted a final bid proposal. Am. Compl. ¶¶ 16, 17; Am. Answer ¶¶ 16, 17. In May 2012, the VA awarded the lease ("hospital lease") to Westar. Am. Compl. ¶ 18; Am. Answer ¶ 18.

In June 2012, losing bidder Gilbane/Cedarwood Development ("Gilbane") filed an agency-level bid protest with the government's contracting officer, contending that Westar should not have received the award because it was not a responsible bidder. Am. Compl. ¶ 19, Ex. D; Am. Answer ¶ 19. Gilbane asserted that Mr. Robert Berryhill, a principal of Westar, lacked integrity because he was under a criminal investigation by the Federal Bureau ofInvestigation ("FBI") relating to embezzlement from his former employer, which was also a government contractor. Am. Compl. ¶ 20, 21, Ex. D at 4; Am. Answer ¶ 21. In addition, the contracting officer had been contacted on June 1, 2012 by the FBI, which told him of the investigation into Mr. Berryhill and requested all proposals submitted by Westar and Mr. Berryhill. Am. Compl. ¶ 73, Ex. T at 13; Am. Answer ¶ 73.

On July 25, 2012, the contracting officer denied the protest. Am. Compl. ¶ 23, Ex. E; Am. Answer ¶ 23. The contracting officer's decision stated that "[t]o determine responsibility, the source selection process relies on information of a specific nature available to the Source Selection Official (in this instance, the C[ontracting ]O[fficer]), which includes certain [g]overnment-maintained data bases, and representations and certifications submitted by each bidder." Am. Compl. Ex. E at 2. The contracting officer then concluded that "[a]lthough 'integrity' is indeed a legitimate factor in determining 'responsibility,' there is no evidence of such lack of integrity as Gilbane asserts on the part of Westar as an entity, and furthermore, there is no evidence of any such lack of integrity on the part of Mr. Berryhill that could conceivably impute to Westar." Am. Compl. Ex. E at 2 (emphasis in original).

B. Westar Seeks Financing to Begin Construction and Applies for Loans fromFifth Third Bank and Ameriserv

Westar needed financing to begin construction. Am. Compl. ¶ 36; see also Am. Compl. Ex. L ¶ B ("To provide funds necessary to construct [the] medical/office building . . . , Borrower has requested Bank to grant a loan to Borrower."). It sought and obtained a construction mortgage of $57,500,000 from Fifth Third Bank. Am. Compl. ¶ 26; Am. Answer ¶ 26. Fifth Third Bank in turn required Westar to obtain a second construction loan in an amount of $7,500,000. Am. Compl. ¶ 27; Am. Answer ¶ 27. Westar applied to Ameriserv for this $7,500,000 loan on January 17, 2013. Am. Compl. ¶ 29; Am. Answer ¶ 29.

Before disbursing any funds, Ameriserv required the government to meet a variety of conditions, two of which are relevant here. First, Ameriserv and Fifth Third Bank required Westar to assign the hospital lease to VA Butler Partners ("borrower"), a special purpose entity which would be owned and managed by Westar and serve as the borrower for legal purposes. Am. Compl. ¶ 30; Am. Answer ¶ 30. In an agreement dated March 6, 2013, the government approved Westar's assignment of the lease to VA Butler Partners. Am. Compl. ¶ 31, Ex. C at 1; Am. Answer ¶ 31.

Second, Ameriserv requested that the government provide assurances about Westar's lease, which assurances were contained in a Subordination, Nondisturbance, and Attornment Agreement signed by the government, VA Butler Partners, and Ameriserv. See Am. Compl. Ex. L ("Subordination Agreement" or "Agreement"). The Subordination Agreement stated: "As a condition to the implementation of the Loan, Bank³ has requested Government confirm certain matters with respect to the lease mentioned in Subsection A afore; and Bank would not grant theLoan to Borrower but for the execution of this Agreement by Government." Subordination Agreement ¶ C.

Section 1 of the Subordination Agreement was entitled "Representations and Warranties," and began by providing

Government and Borrower represent and warrant as follows:

. . .

1.2 The Lease is in good standing, in full force and effect, and has not been modified, altered, or amended.

. . .

1.5 To the date hereof, Borrower has timely performed all its obligations under the Lease, and no events have occurred which, with notice, the passage of time, or both, would constitute a default under any provisions of the Lease obligatory on Borrower.

Subordination Agreement § 1. Section 2 of the Agreement included further assurances, requiring the government to provide Ameriserv written notice and an option to cure if VA Butler Partners defaulted on the lease. Id. § 2.1. The government further agreed that "it shall not invoke any of its remedies under the Lease . . . until Bank has received written notice of such default and an opportunity to cure as provided for herein." Id.

In Section 3 of the Subordination Agreement, the government agreed to "subordinat[e] its rights under the Lease at all times and in all respects to the terms, conditions and provisions of the mortgage and/or security interests . . . which will secure the repayment of the Loan and to all renewals, modifications, replacements and extensions thereof." Subordination Agreement § 3. Section 9 set out an integration clause. Id. § 9 ("This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter of this Agreement and merges and shall supersede all prior agreements, commitments, representations, writing, negotiations and discussions between them."). Section 9 further provided that "[w]hen inconsistent with the provisions of the Lease, the provision of this Agreement shall be paramount and control." Id.

The Subordination Agreement was effective March 27, 2013. Am. Compl. ¶ 47; Am. Answer ¶ 47. Near that time, Ameriserv, Fifth Third Bank, and VA Butler Partners signed loan documents. Am. Compl. ¶ 33, Exs. G - L; Am. Answer ¶ 33. As noted in Subordination Agreement § 3, Ameriserv and Fifth Third Bank took a security interest in the hospital lease. Am. Compl. ¶ 33, Exs. G - L; Am. Answer ¶ 33. At some point between March 28 and April 2, 2013, Ameriserv disbursed the loan to VA Butler Partners. Am. Compl. ¶ 37, Ex. M (showing loan document in which Ameriserv provided $7,500,000 in credit to VA Butler Partners); Am. Answer ¶ 37. On April 5, there was a public groundbreaking ceremony for the hospital's construction, which was attended by numerous representatives of the VA and Westar. Am. Compl. ¶ 41; Am. Answer ¶ 41.

C. The Government Terminates the Hospital Lease for Default

While the financing arrangements were being made, in late March 2013...