Joseph Morton Co., Inc. v. U.S.

• Decision Date: 15 March 1985
• Docket Number: 84-854,Nos. 84-826,s. 84-826
• Citation: 757 F.2d 1273
• Parties: , 32 Cont.Cas.Fed. (CCH) 73,277 JOSEPH MORTON CO., INC., Appellant/Cross-Appellee, v. The UNITED STATES, Appellee/Cross-Appellant. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1273

757 F.2d 1273

53 USLW 2503, 32 Cont.Cas.Fed. (CCH) 73,277

JOSEPH MORTON CO., INC., Appellant/Cross-Appellee, v. The UNITED STATES, Appellee/Cross-Appellant.

Appeal Nos. 84-826, 84-854.

United States Court of Appeals Federal Circuit.

March 15, 1985.

William W. Thompson, Jr., Hudson, Creyke, Koehler & Tacke, Washington, D.C., for appellant/cross-appellee. With him on brief were John B. Tacke, Washington, D.C.

Richmond I. McKay, Commercial Litigation Branch, Dept. of Justice, Washington, D.C., for appellee/cross-appellant. With him on brief were Richard K. Willard, Acting Asst. Atty. Gen., David M. Cohen, Director and Thomas W. Petersen, Washington, D.C.

Before MILLER, Circuit Judge, SKELTON, Senior Circuit Judge, and NIES, Circuit Judge.

JACK R. MILLER, Circuit Judge.

These appeals are from a decision of the United States Claims Court under the Contract Disputes Act of 1978, Pub.L. No. 95-563, 92 Stat. 2383-91, 41 U.S.C. Secs. 601-613 (1982) ("CDA"), and involve a contract for building construction at Plum Island, New York. They present two issues: (1) Whether the Claims Court committed reversible error in granting summary judgment dismissing the petition of appellant on the ground that, as a matter of law, fraud committed in one aspect of the contract prior to termination for default constitutes an independent basis for upholding the termination where the fraud was not expressly stated as a ground for termination by the Contracting Officer ("CO"); (2) whether the CDA mandates that Government claims related to a pre-CDA contract must first be the subject of a decision by a CO if, as in this case, the contractor elects to proceed under the CDA.

On the first issue (Appeal No. 84-826), we affirm the Claims Court's decision granting summary judgment dismissing Morton's petition. On the second issue (Appeal No. 84-854), we affirm the Claims Court's decision denying the Government's motion for leave to file counterclaims because they have not been the subject of a decision by the CO.

Background

On September 24, 1976, Joseph Morton Company ("Morton") entered into a fixed price contract (No. 12-14-0605-192) with the Science and Education Administration of the Department of Agriculture for the construction of animal disease research facilities, including extensions to biohazard containment laboratories. The original amount of the competitively bid contract was $10,049,000, but it was changed by amendment to $10,779,997.

Throughout the term of the contract, the Government issued numerous change orders, field orders, and revisions to the drawings. Prior to initiation of the construction, the Government issued the first substantive change order following the award of the contract, change order No. 2. This was a revision of the air handling and filtration system. On April 27, 1981, Morton was convicted in the United States District Court for the Eastern District of New York for the crimes of conspiring to defraud the Government (in respect to change order No. 2) under 18 U.S.C. Secs. 2 and 371 and, in furtherance of the conspiracy, knowingly submitting false and fraudulent cost statements to the Government under 18 U.S.C. Secs. 2, 1001, and 3237. United States v. Joseph Morton Co., Docket No. CR-80-00413 (E.D.N.Y. Apr. 24, 1981), aff'd, Nos. 81- 1174/1233 (2d Cir. Jan. 11, 1982). In the same action, the district court also convicted Morton of obstructing justice by removing, concealing, and destroying documents requested by the grand jury pursuant to two subpoenas duces tecum related to the same change order under 18 U.S.C. Secs. 2, 1503, and 3237. Morton was heavily fined, and two of its principal employees were sentenced to terms of imprisonment, which terms have been served.

The Government issued at least four cure notices in response to deficiencies by Morton during the course of the contract. The last cure notice was issued in February, 1979, and was fifty-five pages in length. It directed Morton to remedy the problems enumerated therein or demonstrate substantial progress toward compliance within ten days after receipt. Morton's response was considered unsatisfactory and, on March 28, 1979, the contract was terminated for default due to the alleged deficiencies.

Thereafter, on March 3, 1980, Morton filed for a Chapter 11 voluntary bankruptcy, which, if granted, would have permitted it to avoid liability for damages, including reprocurement costs. On March 1, 1982, the Government filed suit in the United States District Court for the Eastern District of New York against Seaboard Surety Company ("Seaboard"), Morton's surety on the contract performance bond, seeking to recover under the bond for Morton's breaches of the contract. United States v. Seaboard Surety Co., Civil Action No. CV-82-0518. The bankruptcy proceeding was dismissed on April 8, 1983, thus dissolving the automatic stay and rendering Morton liable for its debts. See 11 U.S.C. Sec. 362 (1982).

Also on March 1, 1982, Morton filed an action in the Court of Claims (now the Claims Court, to which the case was subsequently transferred), seeking to convert the default termination into a termination for the convenience of the Government. Joseph Morton Co. v. United States, No. 107-82C (Dec. 16, 1983). The thrust of its allegations was that it had been wrongfully terminated because the Government was, at least in part, responsible for Morton's alleged breaches, and that Morton adequately responded to the Government's last cure notice, issued in February, 1979.

On August 23, 1982, the Government moved for summary judgment sustaining the default termination--not on the basis of the asserted performance deficiencies which led to the CO's decision of March, 1979, but on Morton's convictions for false and fraudulent cost submissions. Although the Government denied that the contract was wrongfully terminated for alleged performance deficiencies, for purposes of the summary judgment motion and of this appeal, it has argued only fraud in support of the default termination on the contract and has not asserted performance deficiencies. ¹ Morton opposed the summary disposition, arguing that a conviction for the submission of false documentation with respect to a single change order during the performance of a very large and complex contract does not permeate the entire contract and, therefore, does not support a default termination.

At the time the suit was filed, the Government could not counterclaim for damages, because of the temporary automatic stay imposed under the bankruptcy proceedings and the pending suit against Morton's surety. However, on May 24, 1983, after the bankruptcy proceedings were terminated and the stay lifted, the Government moved the court for permission to amend its answer to assert two counterclaims: one for common law breach of contract, and the other for excess reprocurement costs. On July 12, 1983, the Claims Court sustained the default termination. Joseph Morton Co. v. United States, 3 Cl.Ct. 120 (1983). Entry of the judgment was deferred, however, to allow Morton to respond to the Government's motion to amend.

At some point between April 8, 1983, when Morton's bankruptcy proceedings were terminated, and November 18, 1983, the date of the Claims Court's opinion on the Government's motion to add the counterclaims, Seaboard impleaded Morton as a third-party defendant in the pending Eastern District of New York suit. ² Joseph Morton Co. v. United States, 3 Cl.Ct. 780, 782 (1983). In the Claims Court, Morton opposed the filing of the Government's proposed counterclaims on the grounds that (1) the July 12, 1983, Claims Court opinion effectively dismissed the complaint in that forum so that no counterclaim could be filed, and (2) a contracting officer's decision is a prerequisite to the assertion of the Government's claims and, thus, the Government's claims were premature.

In its November 18 opinion, the Claims Court stated that the prerequisite for its jurisdiction over counterclaims is the filing of a claim within the jurisdiction of the court under 28 U.S.C. Secs. 1503, 2508 (1982). It found that, in this case, although Morton's claim lacked merit, the original claim set forth a contract claim against the United States and, thus, fulfilled the requirement; further, that even though the counterclaims were not asserted within the normal response period during the pleading stage of the litigation, the exercise of the court's discretion to permit amendment at this time would fit squarely within the bounds of statutory and decisional law. "[T]he procedure generally employed is to defer entry of a final judgment on a plaintiff's claim within the court's jurisdiction pending final resolution of any counterclaim(s) correctly asserted in the matter involved." Joseph Morton Co., at 783, citing Astro-Space Laboratories, Inc. v. United States, 470 F.2d 1003 (Ct.Cl.1972).

In response to Morton's second ground for opposing the Government's counterclaims, the court cited the CDA and decisional law in concluding that the United States cannot assert its claims first in the Claims Court if Morton elects to bring those claims under the CDA. Joseph Morton Co., at 783-784. It found that the contract to which Morton was a party is covered by section 16 of the CDA, Public Law 95-563. The Claims Court said that this provision governs the contract in suit and adopted the interpretation of its predecessor, the Court of Claims, namely: that the provision permits the contractor to elect whether a Government claim, initiated after enactment of the CDA, must be brought only under the provisions of the CDA. Joseph Morton Co., at 783. Under the CDA, the Government is bound by 41 U.S.C. Sec. 605(a), which requires all Government claims to be "the subject of a decision by the contracting officer." 41 U.S.C. Sec. 605(a). The Claims Court ordered Morton to file a statement electing whether or not to proceed under the CDA with respect to the...