Textron Aviation Def. v. United States
| Docket Number | 20-1903C |
| Decision Date | 12 August 2022 |
| Parties | TEXTRON AVIATION DEFENSE LLC, Plaintiff, v. THE UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
Thomas A. Lemmer, Dentons U.S. LLP, Denver, CO, for plaintiff. With him on the briefs were Phillip R. Seckman and K. Tyler Thomas.
Daniel B. Volk, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C., for Defendant. With him on the briefs were Brian M. Boynton Principal Deputy Assistant Attorney General, Civil Division Patricia McCarthy, Director, and Elizabeth M. Hosford Assistant Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington D.C., and Peter M. Casey and Debra A. Berg, Defense Contract Management Agency, Hanscom AFB, MA.
This Contract Disputes Act ("CDA") case involves the arcane subject of pension cost allocations - a process of such complexity that, if it were just a game, it would make professional poker look like a round of go fish.[1] In this case, the stakes are substantial: Plaintiff, Textron Aviation Defense LLC ("Textron AD"), seeks approximately $19.4 million from Defendant, the United States, following Textron AD's acquisition of another company reorganized as part of bankruptcy proceedings in late 2012 and early 2013.
Notwithstanding that Textron AD's counsel were dealt some bad cards in this case - Textron AD delayed submitting its required administrative claim until 2020 - they played a solid hand, giving this Court serious pause about whether the government held the winning trump card: an ironclad statute of limitations defense. Ultimately, however, the Court concludes that government was not bluffing: the statute of limitations indeed bars Textron AD's complaint from moving forward.
In 1968, the United States House of Representatives' Banking and Currency Committee held a series of hearings on whether to renew the Defense Production Act of 1950.[2] Witness testimony, including that of United States Navy Admiral Hyman G. Rickover, identified several problems stemming from the lack of uniform cost accounting standards - ranging from risks that "defense suppliers could make excessive profits and disguise them as overhead costs" to difficulties in "assess[ing] costs incurred on contracts" and in "compar[ing] costs among prospective contractors' cost estimates."[3] As a result, Congress created the Cost Accounting Standards Board (the "Board") in 1970.[4]
The Board "has exclusive authority to prescribe, amend, and rescind cost accounting standards, and interpretations of the standards, designed to achieve uniformity and consistency in the cost accounting standards governing measurement, assignment, and allocation of costs to contracts with the Federal Government." 41 U.S.C. § 1502(a)(1). Between 1972 and 1980, the Board issued nineteen Cost Accounting Standards ("CAS") "intended to ensure that incurred costs were appropriately allocated to government contracts."[5] Today, the CAS are recognized as "accounting principles that regulate how the costs of Government contractors are defined and measured, assigned to cost accounting periods, and allocated to contracts." 2 Karen L. Manos, Government Contract Costs &Pricing § 60.1 (June 2021 update). Federal Acquisition Regulation ("FAR") 52.230-2, a standard contract clause, is incorporated into CAS- covered contracts and requires contractors to "[c]omply with all CAS, including any modifications and interpretations[.]" FAR 52.230-2(a)(3).
At issue in this case is CAS 413, "Adjustment and Allocation of Pension Cost." 48 C.F.R. § 9904.413.[6] Pension plans are deferred-compensation plans maintained by employers that pay benefits to employees after they retire. 48 C.F.R. § 9904.413-30(a)(12). Because pension plans are inherently future-oriented, companies that provide employees with pensions must determine, in each individual accounting period, how much money to invest in the plans to meet the required future payouts. See Gates, 584 F.3d at 1064. For federal contractors, these pension plan costs qualify as contract costs that "are paid, in part, by the government." Id.
Determining the proper amount to contribute to pension plans in each period requires contractors to make estimates on "a wide range of variables, such as the expected growth of the pension fund's assets and the length of time before participants retire." Raytheon Co. v. United States, 747 F.3d 1341, 1345-46 (Fed. Cir. 2014).[7] Congress vested the Board with the power to promulgate cost accounting standards in part to help contractors navigate the complexity of these estimates. Allegheny Teledyne, 316 F.3d at 1370. In that regard, CAS 412 and 413 specifically provide rules for calculating and allocating pension costs to particular business segments and to individual contracts within segments. See Gates, 584 F.3d at 1064-65 (citing 48 C.F.R. §§ 9904.412-40(d), 9904.413-40(c)).
CAS 412 "establishes the basis on which pension costs shall be assigned to cost accounting periods," 48 C.F.R. § 9904.412-20(a), and "requires contractors to fund pension costs within the cost accounting period in which those costs are assigned," Raytheon Co., 747 F.3d at 1345 (citing 48 C.F.R. § 9904.412-50(d)(1)). Our appellate court, the United States Court of Appeals for the Federal Circuit, explained the basic allocation process, as follows:
The contractor first determines its pension cost as a whole, then allocates those costs among its different segments, then further allocates them among various contracts. Those pension costs allocated to cost-type government contracts are paid by the government if allowed under the [FAR] and the terms of the particular contract.
Allegheny Teledyne, 316 F.3d at 1371.
CAS 413, on the other hand, describes accounting standards for contractors to apply when they close a segment[8] of their business. See 48 C.F.R. § 9904.413. The normal rule is that "CAS 413 requires actuarial gains and losses to be amortized in equal annual installments over a 15-year period." Raytheon Co., 747 F.3d at 1346. When a business segment closes, however - by virtue of discontinuing operations, being sold, or ceasing to perform government contracts[9] - this 15-year amortization period is not available. See id. (). Instead, when a business segment closes, CAS 413 provides that the contractor must "determine the difference between the actuarial accrued liability for the segment and the market value of the assets allocated to the segment." 48 C.F.R. § 9904.413-50(c)(12); see also Raytheon Co., 747 F.3d at 1346 (describing this process). If there is a surplus, the government "may be entitled" to recover that surplus from the contractor; if there is a deficit, the contractor "may be entitled" to recover that deficit from the government. Id. at 1346-47. In either case, the requisite adjustment is known as a "segment closing adjustment." Gates, 584 F.3d at 1065. "In more simple terms, if the plan was overfunded at the time of the sale, the contractor owe[s] the Government its share of that overfunding; if it was underfunded, the Government ha[s] to contribute its share of the underfunding." Steven L. Briggerman, Cost Accounting Standards: Liability for Interest Under CAS 413 When Terminating a Pension Plan, 24 No.1 Nash &Cibinic Rep. ¶ 1 (Jan. 2010).
Textron AD's predecessor-in-interest was Hawker Beechcraft Defense Company, LLC ("HBDC"). ECF No. 1 ("Compl.") ¶ 79. HBDC's parent company was the Hawker Beechcraft Corporation ("HBC"). Compl. at 2; Compl. ¶ 12. In May 2012, HBC and its related entities (collectively, "Beechcraft") began formal bankruptcy proceedings. Compl. ¶ 15.
Through December 31, 2012, HBDC had been performing contracts with the federal government (the "Contracts"), which incorporated FAR § 52.230-2 and were CAS-covered. Compl. ¶¶ 26, 79. HBC contributed to three employee pension plans: (1) the "Salaried Plan"; (2) the "Base Plan"; and (3) the "Hourly Plan." Compl. ¶ 13. As part of the bankruptcy proceedings, on December 31, 2012, Beechcraft terminated the Salaried Plan and the Base Plan, and curtailed the Hourly Plan. Compl. ¶¶ 13, 16, 18, 23. Also as part of the bankruptcy proceedings, Beechcraft transferred the assets and liabilities of both the Salaried Plan and the Base Plan, along with $11 million in cash, to the Pension Benefit Guaranty Corporation ("PBGC") on February 13, 2013. Compl. ¶¶ 19-20. Beechcraft's bankruptcy proceedings concluded on February 15, 2013. Compl. ¶ 41. In total, the PBGC received $441.7 million in liabilities and $422.1 million in assets from the Salaried and Base Plans. Compl. ¶ 20.
Beechcraft emerged from bankruptcy as a reorganized company, the highest-level parent company of which was Beech Holdings, LLC. Compl. ¶ 41. On March 14, 2014, Textron Inc. acquired Beech Holdings, including the Contracts. Compl. ¶ 43. Through a series of corporate acquisitions, mergers, and new entity formations,[10] Textron AD acquired the contractual rights and obligations arising from the termination of the Salaried Plan and Base Plan and the curtailment of the Hourly Plan. Compl. ¶ 47.
On April 4, 2018, Textron Inc. submitted a payment demand (what Textron AD has termed its "CAS 413 Submission") to the cognizant administrative contracting officer ("ACO") at the Defense Contract...
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