Horn & Assocs., Inc. v. United States, 08-415C

Decision Date31 October 2015
Docket NumberNo. 08-415C,08-415C
PartiesHORN & ASSOCIATES, INC., Plaintiff, v. UNITED STATES, Defendant.
CourtU.S. Claims Court

HORN & ASSOCIATES, INC., Plaintiff,
v.
UNITED STATES, Defendant.

No. 08-415C

United States Court of Federal Claims

October 31, 2015


Counterclaim; Fraud; False Claims Act; Special Plea in Fraud; Contract Disputes Act; Recovery Audit; NASA; Trial.

Robert H. Brunson, Nelson Mullins Riley & Scarborough LLP, Charleston, S.C., for the plaintiff. With him was Stephen D. Martin and Patrick C. Wooten, Nelson Mullins Riley & Scarborough LLP, Charleston, S.C.

Anna Bondurant Eley, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C., for the defendant. With her were David S. Silverbrand, Commercial Litigation Branch, Patryk J. Drescher, Trial Attorney, Kenneth Woodrow, Trial Attorney, Zachary Sullivan, Trial Attorney, Robert E. Kirschman, Jr., Director, Commercial Litigation Branch and Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Civil Division.

OPINION

HORN, J.

FINDINGS OF FACT

Plaintiff, Horn & Associates, Inc. (Horn & Associates), is a recovery audit firm which performed a recovery audit for the National Aeronautics and Space Administration (NASA). Recovery audit firms, like Horn & Associates, identify payment errors and provide assistance in the recovery of erroneous payments from the suppliers or contractors which received the erroneous payments.

Horn & Associates was founded in February 2003 with the intention of performing recovery auditing work for federal, state and local government entities, in addition to

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recovery auditing work for the private sector.1 The principals of Horn & Associates were Tom Horn, Larry Farrar, and Michael Lowery.2 Tom Horn was the President of Horn & Associates. At the time of the NASA recovery audit, Mr. Lowery was the Chief Executive Officer of Horn & Associates and was responsible for marketing and finding clients,3 and Mr. Farrar served as Vice President of Marketing and Operations for Horn & Associates. At trial, Mr. Farrar testified that "[w]e've done some county, cities, states, some other federal agencies as well as NASA. Probably 10 or 12 audits at this point." Among the federal agency recovery audits preformed, Horn & Associates worked for the United States Department of Transportation, the United States Department of Homeland Security, the United States Patent and Trademark Office, and the United States Census Bureau.4

Horn & Associates' focus on recovery audits for the federal government stemmed from the passage of Section 831 of the Defense Authorization Act for Fiscal Year 2002.

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See Defense Authorization Act for Fiscal Year 2002, Pub. L. 107-107, 115 Stat. 1012 (2001). As indicated in the certified claim, described in detail below:

Congress recognized the need for such recovery audits by passing Section 831 of the Defense Authorization Act for Fiscal Year 2002. This section added a new subchapter to the U.S. Code (31 U.S.C. §§ 3561-3567) that requires federal agencies that enter into contracts exceeding $500,000,000 in a fiscal year to carry out a "cost-effective program for identifying any errors made in paying the contractors and for recovering any amounts erroneously paid to the contractors." Thus, recovery audits became mandated for certain federal agencies like NASA.5

The joint stipulations of fact submitted to the court state that "[o]n January 16, 2003, the White House Office of Management and Budget issued Memorandum M-03-07, titled, "Programs to Identify and Recover Erroneous Payments to Contractors." (internal citation omitted) (OMB Memorandum M-03-07). OMB Memorandum M-03-07 indicated the Memorandum was "intended to assist agencies to successfully implement recovery auditing and recovery." OMB Memorandum M-03-07 also stated that "[a]ll classes of contracts and contract payments should be considered for recovery audits." As also jointly stipulated to by the parties, OMB Memorandum M-03-07 indicated that "[a]gency heads may exclude classes of contracts and contract payments from recovery audit activities if the agency head determines that recovery audits are inappropriate or are not a cost-effective method for identifying and recovering erroneous payments."

The General Services Administration (GSA) had awarded Contract No. GS-23F-0258N (the GSA Contract) to Horn & Associates on June 12, 2003. The GSA Contract was a blanket purchase agreement, pursuant to which various executive agencies could solicit offers to contract for recovery auditing services. To comply with the Defense Authorization Act of 2002 and the Improper Payment Information Act of 2002,6 NASA issued Request for Quote NNH04068239Q (the RFQ) for Audit Recovery Services, and

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the Contracting Officer issued the RFQ to four companies, including Horn & Associates. As indicated in the Contracting Officer's cover letter7 to the four companies:

National Aeronautics and Space Administration (NASA) is requesting offers under Request for Quote (RFQ) NNH04068239Q for Audit Recovery services described in the attached Statement of Work (SOW). NASA intends to acquire these services by competing this requirement among several sources on the GSA Federal Supply Schedule Contract, Schedule Number 520 SIN 9, entitled "Financial and Business Solutions (FABS)." Your company is being solicited since it appears on the GSA FABS Schedule's list of eligible contractors.

A Statement of Work was attached to the RFQ, which stated: "The contractor shall perform recovery-auditing services at all 10 NASA Centers for the period beginning October 1, 1997 through September 30, 2003." The Statement of Work attached to the RFQ indicated that: "The audits will be conducted on payments made from all fixed price contracts."

NASA received two proposals in response to the RFQ, one from Horn & Associates and one from Connolly Consulting, Inc. (Connolly Consulting). In the Memorandum for the Record, for the "Award of Contract NNH05CC28D to Horn and Associates, Inc.," the Contracting Officer stated that:

It was determined by both the Office of Chief Counsel and the Contracting Officer that the proposal received from Connolly Consulting was considered to be non-compliant with the requirements of the RFQ. Connolly Consulting did not provide a contingency fee with a fixed percentage [of recovery], but instead proposed an estimated contingency fee range conditioned upon additional information.

As a result, Horn & Associates was the only responsive offeror. In its proposal, Horn & Associates stated that, in its opinion, NASA needed "a 100% look at the Department's data to gain the full benefit of the recovery audit" and that Horn & Associates "would like to have access to all contracts, agreements and documents that would reflect pricing, terms, allowances, rebate programs, etc."8

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On December 23, 2004, NASA awarded the Order for Supplies or Services, Order No. NNH05CC28D (the NASA Contract) to Horn & Associates for the furnishing of "Recovery Audits," pursuant to the GSA Contract. The NASA Contract indicated that it was "subject to all the terms and conditions of the contractor's GSA Schedule Contract GS-23F-0258N and as amended by the clauses contained herein." Included as an attachment to the NASA Contract was a Statement of Work. The NASA Contract's Statement of Work indicated: "The contractor shall perform a primary audit recovery on all contract payments for the period beginning October 1, 1997 through September 30, 2003, identifying overpayments and/or underpayments."9 The NASA Contract also included a unilateral option for NASA which stated:

(a) The Government may extend the term of this contract by written notice to the Contractor within 30 days; provided that the Government gives the Contractor a preliminary written notice of its intent to extend at least 60 days before the contract expires. The preliminary notice does not commit the Government to an extension.

(b) If the Government exercises this option, the extended contract shall be considered to include this option clause.

(c) The total duration of this contract, including the exercise of any options under this clause, shall not exceed 5 years.

The NASA Contract further stated, "[t]he Contracting Officer may exercise the option by written notice to the Contractor within the period specified in the schedule."

The NASA Contract included four option years to extend the term of the audit recovery period.10 Each option year extended the period of performance by one year and expanded the audit recovery period. For option year 1, the period of performance would be October 1, 200511 to September 30, 2006, and the corresponding audit recovery period was 2004-2005. For option year 2, the period of performance was October 1, 2006 to September 30, 2007, and the corresponding audit recovery period was 2006, option year 3 contemplated the period of performance would be October 1, 2007 to September 30, 2008, and the corresponding audit recovery period would be 2007. Finally, for option year 4, the period of performance would be October 1, 2008 to September 30, 2009, and the corresponding audit recovery period would be 2008. For all option years, the

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contingency fee remained 13.5%.

The NASA Contract only indicated that "the contractor shall perform a primary audit recovery on all contract payments for the period beginning October 1, 1997 through September 30, 2003,[12] identifying overpayments and/or underpayments," and did not identify the types or categories of contract payments Horn should review and present for recovery to NASA. In its certified claim, Horn & Associates indicated that

Horn presented NASA over 400 claims for recovery in 15 different classes on September 30, 2006. The claims fell into the following classes: Obligations over paid; Prompt Pay Interest Calculation Errors; Statement Claims; Payment Errors; Cash Discounts; Regular Duplicate Payments; Award Fees Overpaid; Interest on Overpayments; Prepayment Discounts; Pricing Claims; Miscellaneous Charges; Obligation Overpaid; and Tax
...

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