U.S. v. Langer, 90-3783

• Decision Date: 28 April 1992
• Docket Number: No. 90-3783,90-3783
• Parties: 38 Cont.Cas.Fed. (CCH) P 76,318 UNITED STATES of America, Plaintiff-Appellee, v. Fred H. LANGER, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 592

962 F.2d 592

38 Cont.Cas.Fed. (CCH) P 76,318

UNITED STATES of America, Plaintiff-Appellee, v. Fred H. LANGER, Defendant-Appellant.

No. 90-3783.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 20, 1991.

Decided April 28, 1992.

Melvin K. Washington, Asst. U.S. Atty. (argued), Office of the U.S. Atty., Milwaukee, Wis., for plaintiff-appellee.

David P. Geraghty (argued), Coffey, Coffey & Geraghty, Milwaukee, Wis., for defendant-appellant.

Before BAUER, Chief Judge, RIPPLE, Circuit Judge, and FAIRCHILD, Senior Circuit Judge.

BAUER, Chief Judge.

These facts are the stuff from which a segment on Sixty Minutes could be made: Water, Water Everywhere, Nor Any Drop to Drink: Defense Subcontractor Fraud. The segment opens with interviews of persons familiar with the facts surrounding this defense contract. In July 1983, the United States Air Force, through the Warner Robins Air Logistics Center ("Warner Robins" or "Defense Department") at Robins Air Force Base, Georgia, solicited bids for construction of thirteen 5000-gallon capacity tank-type potable water distributor semitrailers with accompanying technical manuals. The solicitation specified that the trailers were to be built in accordance with Military Specification 62080B ("Mil.Spec. 62080B"). In the simplest possible terms, a single trailer was to consist of a water tank mounted on a chassis, the chassis mounted on wheels, with cabinets attached to the underside of the tank for storage of accessories. The units also were to include a spraybar assembly for spraying water, and a winch to raise and lower the spraybar. Military Specification 62080B set out, in exacting detail, the precise materials and assembly of the trailer and its component parts. The primary purpose of these trailers was to transport potable water to service women and men in the field. For that reason, they were required to be constructed of stainless steel. Other metals are not safe for drinking water. Their secondary purpose was to supply firefighting vehicles with water and to spray water on the ground to control dust.

Through the Small Business Administration's ("SBA") minority-owned business set-aside program, Central Manufacturing Corporation of Milwaukee, Wisconsin ("Central"), was awarded the contract in September 1984. Under the terms of the contract, Central was to construct a "First Article" (military jargon for prototype) that complied with Mil.Spec. 62080B. When constructed, the Defense Department would accept it only if it passed a "First Article Test," the results of which would be shown on a "First Article Test Report" ("FATR"). The purpose of the FATR was to ensure that the prototype met Mil.Spec. 62080B. The contract required Central to conduct the First Article Test and to prepare the FATR. After the prototype successfully passed the test and was accepted by the Defense Department, the remaining twelve trailers would be constructed using the prototype as a manufacturing standard: each would be built exactly as the First Article had been built.

The contract itself was between the SBA and the Defense Department, and incorporated the SBA contract with Central. The agreed price for all thirteen units was $1,055,529.20, which was increased to $1,078,342.64 after an amendment to the contract in February of 1986. Although the Defense Department would not make progress payments to Central until after the prototype was approved, the SBA could (and did) advance sums to Central in the meantime. When it was paid by the Defense Department, Central then would repay to the SBA the amount advanced.

The segment's focus now turns to the building and testing of the water tank trailers. During the time that Central was developing its proposal to the Defense Department, Irvine Palmer, Central's president, became concerned that Central would have some engineering difficulties in building the tank trailers as well as developing the technical manual. While the Defense Department and Central were negotiating the contract, Palmer obtained the government's permission to subcontract certain work, which included engineering and production of the manual. The name Fred Langer, a partner in Magnum International, Ltd. ("Magnum"), came up. Some months earlier, Palmer had been introduced to defendant Langer. At that meeting, Langer told Palmer that he was an engineer, having graduated from the Milwaukee School of Engineering ("MSOE"), which was Palmer's alma mater. (At various times, Langer told people connected with the water tank trailer project that he was a degreed, certified engineer, had attended MSOE for two years, and had a bachelor of science degree in nuclear engineering technology. At trial, however, the evidence showed that Langer had attended MSOE for only one quarter, and for his efforts that quarter received three F's and one C.)

Palmer and Langer entered into negotiations on behalf of their respective companies to subcontract certain work to Langer. During the negotiations, Langer proposed to keep the production cost to Central to $810,000. The negotiations resulted in two contracts. Under the first contract, Langer would provide technical and engineering services, management of subcontracting, on-site management of production activities, and development of the technical data and manual. For these services he would be paid a base salary of $81,000 and an additional bonus of $25,000 on the first $25,000 savings under the $810,000 figure, and 30 percent of any further savings after the first $25,000. Among the services Langer agreed to provide under the second contract was procurement of all component parts and subcontracting of all required assemblies, and preparation of the First Article Test Report to applicable military standards. For these services, Langer would receive $105,000.

Production on the prototype began. Langer brought Thomas Krill, who had done work for him before, to Central with him to supervise the production. Everything that went into construction of the trailer, except the water tank itself and the spraybar, was procured and assembled at Central. Completed purchase orders from Central to supply houses required the signature of Central's production manager, George Gillis. As time passed, however, Palmer permitted Gillis to sign purchase orders in blank after Langer presented him with a list of needed items. Gillis left it to Langer to fill in the order. Some of the purchase orders showed Magnum (Langer's company) as the supplier. Because Palmer trusted Langer's knowledge and abilities, and because Langer showed Palmer how and where to save money on purchases, Palmer accepted Langer's system of preparing purchase orders in blank.

Thomas Krill was more familiar with Langer's use of the purchase orders than anyone at Central. He knew that Langer had Magnum purchase needed items, and then use a Central purchase order to mark up and resell the items to Central. Krill gave two examples at trial. The first was the assembly for the spraybar--Langer doubled its price when he resold it to Central. The second was a fire monitor, which is a length of black pipe with a hole in it into which a pressure gauge was threaded. To obtain the pipe for this item, Langer sent Krill across the street to a hardware store, where Krill paid for it out of pocket, and then Langer marked up the price considerably and resold it to Central.

Although not possessing any technical or engineering training, Krill began to question Langer's use of materials for the prototype. Krill and Langer disagreed, several times, about the metals used for the piping and plumbing. Langer used variously aluminum, galvanized steel, or black pipe. Krill, aware that the specifications required stainless steel, questioned Langer about it. But Langer, offering a confusing explanation about piping being different from plumbing, and military specifications that Krill was unaware of, convinced Krill that those metals would be acceptable. Moreover, Langer explained, galvanized steel is much easier to work with than stainless steel. (As Krill later found out, galvanized steel is also eight to ten times less expensive than stainless steel.)

Production of the prototype continued and neared completion. Krill continued to be concerned about what he thought was a patchwork of aluminum and galvanized steel and black pipe--a patchwork that would not be visible to the naked eye at the First Article Test because it had been painted over. Krill continued to voice his concerns to Langer. Then, just days before the First Article Test was to occur, Krill discovered that a strainer necessary to prevent foreign objects from getting into the water pump had not been installed on the prototype. He told Langer, who said, essentially, nevermind, there's no time to put one on before the First Article Test, we'll do it later. As it happened, however, the missing strainer was never installed. The First Article Test came off without a hitch. Langer prepared, signed and submitted the FATR, and the Defense Department representatives on hand accepted the prototype. And Langer fired Krill. Krill then went to Palmer with his concerns, but Palmer dismissed Krill as a malcontent who lacked Langer's technical expertise. So Palmer paid no attention to Krill. He should have.

The segment's final series of interviews centers around the remaining units. After the Defense Department accepted the prototype, the other twelve units were constructed in conformity with the prototype. During this period, Central requested, and received, progress payments from the government totaling $1,001,646. Finally, the trailers were ready for delivery to the military, but Langer had not yet turned over to Central the final version of the technical manual. So the trailers sat at Central, and sat, and sat. The proceedings were at a stalemate. The contract required Central to turn over the trailers and the manual. But Langer would not turn over the...