Liquidating Tr. Ester Du Val of Ki Liquidation, Inc. v. United States
| Decision Date | 11 June 2014 |
| Docket Number | No. 06-465C,06-465C |
| Parties | LIQUIDATING TRUSTEE ESTER DU VAL OF KI LIQUIDATION, INC., Plaintiff, v. THE UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
Contract; Department of
State; default termination;
fraud counterclaim;
differing site condition.
Louis James D'Agostino, McLean, VA, David G. Barger, McLean, VA, Michael Snyder, McLean, VA, and Józef S. Przygrodzki, McLean, VA, of counsel for plaintiff.
Devin Andrew Wolak and Daniel B. Volk, Civil Division, Department of Justice, Washington, DC, with whom are Stuart F. Delery, Principal Deputy Assistant Attorney General, Bryant G. Snee, Acting Director, and Donald E. Kinner, Assistant Director, for defendant. John C. Sawyer, Department of State, Washington, DC, and Thomas D. Dinackus, Department of State, Washington, DC, of counsel.
Before the court is a dispute involving a contract between the United States, acting through the Department of State ("DOS"), and Kullman Industries, Inc. ("KI"), a company now no longer in business, which at the time specialized in large-scale modular construction. The contract obligated KI to build the United States Embassy compound in Dushanbe, Tajikistan. Kullman Industries worked on the project for nearly three years and nearly brought it to completion before the contract was terminated by DOS for default. KI went into bankruptcy, and the trustee in bankruptcy succeeded to its interests, although we will refer to KI rather than the trustee throughout.
KI advances three claims here: first, it challenges the agency's termination for default and seeks conversion to a termination for convenience; second, it advances a claim of approximately $4.3 million for geotechnical work, which it contends was outside the terms of the contract; and it asserts a claim of approximately $1 million with respect to additional security remediation and related mold and mildew mitigation. The government has counterclaimed, asserting fraud and seeking both monetary penalties and forfeiture of KI's claims. The court has jurisdiction to resolve plaintiff's claims under the Contract Disputes Act of 1978, 41 U.S.C. §§ 7101-7109 (2012), and pursuant to 28 U.S.C. §§ 1503, 2508 (2012), to adjudicate defendant's counterclaims.
The various affirmative and defensive claims were tried between April and June, 2013. The trial dealt with four issues: 1) whether a portion of the geotechnical work was outside the scope of the contract; 2) whether the termination for default was justified; 3) whether certain pay certifications were false; and 4) which party bore the responsibility for delays and additional costs associated with construction of a secure part of the embassy. Post-trial briefs were filed by both parties, and oral argument was heard on January 15, 2014, after which supplemental briefs were filed. The matter is ready for final disposition. For the following reasons, we find that the geotechnical work was within the scope of the contract, the termination for default was justified, plaintiff did not violate the Forfeiture of Fraudulent Claims Act, although it did violate the False Claims Act, and the government bears responsibility for the delays and additional costs associated with the secure space. We reserve for later resolution the question of damages.
Kullman Industries was a family enterprise. The most recent President and CEO of KI was Robert Kullman, who featured prominently as a witness at trial and whose testimony we find to be credible. Mr. Kullman's grandfather founded Kullman Dining Car Company, Inc. in the 1920's. Kullman Dining Car Company successfully built and sold modular diners in a way that was faster and more easily financed than traditional construction. The company would fully construct the modular diner in its factory and then install it on the buyer's property.
Over the years, that company expanded from production of small diners to 6,000-plus square foot restaurants. As a teenager, Robert Kullman got his start in the family business by sweeping floors, painting, and working carpentry jobs. After high school, Robert Kullman attended Bucknell University. During the summers, he continued to work at Kullman Dining Car Company. The day after he graduated from college, Robert Kullman joined the family enterprise as Vice President.
In the 1970's, when the market for diners began to wane, Robert Kullman and his father jointly created Kullman Industries in an effort to broaden production and grow the business. KI began using its modular method to construct bank branches, medical buildings, and schools. The buildings became larger and more complicated. When cellular telephones were in their infancy, KI got into market for building modular structures for the telecommunications industry.
In the 1990's, KI began working on projects for DOS. KI built the United States Embassies in Bishkek, Kyrgyzstan; Ashgabat, Turkmenistan; and Bissau, Guinea-Bissau. Just before KI contracted to build the embassy in Dushanbe, it was doing about $55 million dollars of business each year. Mr. Kullman was the President and CEO of KI from the 1980's until it was dissolved in bankruptcy.
In light of its satisfactory performance of its previous contracts, the State Department began discussing with KI in April of 2002 the project tobuild a new embassy in Dushanbe, Tajikistan. According to the testimony of KI's Chief Operating Officer, John Joseph Lefkus, III, DOS was interested in pursuing modular construction for the Dushanbe Embassy because of the short period of time required for construction and installation when compared with traditional construction and the added benefits to security when construction is controlled within a factory.
Because of KI's unique qualifications, on July 2, 2002, the Director and Chief Operating Officer of DOS's Overseas Building Operations ("OBO"), General Charles E. Williams, agreed to use of a sole source contract with KI for the Dushanbe project. The stated justification for using other than full and open competition was that "Kullman Industries, Inc. offers a more direct way to contract, provides a superior product that meets DS[2] requirements, and, in addition, has greater experience in servicing the requirements of the Department." JX 128 at 3. OBO anticipated a construction budget of $63,920,000.
The DOS Contracting Officer ("CO") assigned to the Dushanbe project at that time was Ralph R. Sutherland. The Contracting Officer's Representative ("COR") was Robert H. Sanders. John Lefkus, KI's Chief Operating Officer, represented KI in negotiations.
On July 12, 2002, DOS's Office of Acquisitions issued solicitation SALMEC-02-C-0025 for "Phase I"3 to develop a plan for the adaptation of the standard embassy design to accommodate modular construction and to facilitate a cost estimate for the Dushanbe embassy. The embassy compound was to include a New Office Building ("NOB"), also known as the chancery, the Marine Security Guard Quarters, Warehouse, Compound Access Control ("CAC" or "gate house") Building, Material Transfer Station, utility building, power plant, well water treatment system, septic system, and a perimeter wall for the compound. The contractor would have 85 days to complete the Phase I design. The solicitation included over one hundred pages of contract detailscovering everything from pricing to the Statement of Work ("SOW") and referenced additional attachments such as the Standard Embassy Design Intent Application Manual ("SED manual"), the Site Utilization Plan, and a Preliminary Geotechnical Report. The SED manual included "the fixed design elements—the 'absolutes' that every project using the Standard Embassy Design (SED) must follow." JX 16 at 1, 4. Pursuant to the SED manual, some elements of the standard design were fixed while other elements could be adapted to fit the needs of each project.
The SED also provided specifications for a Controlled Access Area ("CAA"). The CAA was designed as a room within the embassy that contains special protections for information and occupants.
KI submitted its best and final offer for Phase I of the Dushanbe contract on August 20, 2002. DOS accepted KI's offer and issued the notice to proceed on August 22, 2002. JX 1 at 2. The contract for Phase I was not executed by Mr. Sutherland and Mr. Lefkus, however, until September 18, 2002. On that same day, Mr. Sutherland and Mr. Lefkus also executed Modification 001 ("M001"). M001 incorporated several attachments to Division 1 of the contract and rescinded "Section J," which included the Dushanbe Geological Overview, and replaced it with "Section J, Revision 1."4
While KI worked on Phase I, DOS commissioned the Committee of Architecture and Building within the Province of the Government of the Republic of Tajikistan ("SANIIOSP") to survey, test, and develop a report on the geotechnical conditions at potential sites for the project. SANIIOSP produced a report ("geotechnical report" or "SANIIOSP report"), initially in Russian and then translated into English, on the geotechnical conditions at the site that was eventually chosen for the Dushanbe project. The geotechnical report, while perhaps difficult to read, alerted the reader to what the drafters thought were unusual soil conditions. It reflected that the "main deformation characteristics of the dusty clay soils, which consist of the sand clay and loamy soils are the properties of the settlement while putting into the water and thefirst settlement pressure." JX 10 at 9. Additionally, "[t]he summary quantity of the possible settlement of the soils because of their own weight can reach 54.84cm with the power of the depth of settlement 16.7m." JX 10 at 16. Furthermore, the report provided the following:
The experience of the exploitation of the buildings in the analogous soil conditions on the territory of Dushanbe shows that the...
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