MAGNUS PACIFIC CORPORATION v. USA

Filing 89

UNREPORTED OPINION granting in part, as to the retainage counterclaim and denying in part, as to the recalculation counterclaim 70 Motion to Amend Pleadings - Rule 15(b). Defendant shall FILE the government's Amended Answer and (Retainage) Counterclaim by 7/20/2016. Plaintiff's Answer to Defendant's (Retainage) Counterclaim shall be FILED by 7/29/2016. Signed by Senior Judge Lynn J. Bush. (TQ) Copy to parties.

In the United States Court of Federal Claims
No. 13-859 C
(Filed July 13, 2016)
UNPUBLISHED
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MAGNUS PACIFIC CORP.,
Plaintiff,
v.
THE UNITED STATES,
Defendant.
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RCFC 15(a)(2); Amendment of
Answer to Bring Counterclaim;
Jurisdiction Exists for One
Portion of Proposed
Counterclaim; No Undue Delay;
No Undue Prejudice.

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Daniel L. Baxter, Sacramento, CA, for plaintiff.
A. Bondurant Eley, United States Department of Justice, with whom were
Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Robert E.
Kirschman, Jr., Director, Martin F. Hockey, Jr., Assistant Director, Reta E. Bezak,
Trial Attorney, Washington, DC, for defendant.
________________________
OPINION
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Bush, Senior Judge.
On June 10, 2016, defendant filed an opposed Motion for Leave of Court to
File Amended Answer with Counterclaim. This motion has been fully briefed on
an expedited basis. See Order of June 13, 2016. The court also solicited oral

argument on the motion, but only on a jurisdictional issue the court raised sua
sponte. See Order of June 28, 2016. For the reasons stated below, defendant’s
motion is granted in part and denied in part.
Defendant’s motion is brought under Rule 15(a)(2) of the Rules of the
United States Court of Federal Claims (RCFC). The rule states that “[t]he court
should freely give leave [to amend a pleading] when justice so requires.” Id.
Leave to amend a pleading should not be granted, however, when the proposed
amendment would be futile. Foman v. Davis, 371 U.S. 178, 182 (1962).
Amendment of an answer to include a counterclaim outside of this court’s
jurisdiction would be a futility. See, e.g., Shell Oil Co. v. United States, 123 Fed.
Cl. 707, 727 (2015) (denying the government’s motion for leave to amend its
answer, in part, because the proposed counterclaim was barred by this court’s
jurisdictional statute of limitations); Joseph Morton Co. v. United States, 3 Cl. Ct.
780, 782-83 (1983) (considering whether the government’s proposed counterclaim
was within this court’s jurisdiction), aff’d, 757 F.2d 1273 (Fed. Cir. 1985). Leave
to amend may also be denied for reasons of undue delay or undue prejudice.
Foman, 371 U.S. at 182.
I.

Jurisdictional Inquiry

Defendant’s proposed counterclaim has two distinct parts: (1) a government
claim for $466,092 retained by the contracting officer related to Contract
Modification M004; (2) a government claim for an additional sum of $279,448
related to Contract Modification M004. Proposed Amended Answer ¶¶ 55-56.
For the sake of clarity, the court refers to the $466,092 portion of the
government’s proposed counterclaim as the ‘retainage claim.’ The $279,448
portion of the government’s proposed counterclaim can be succinctly described as
the ‘recalculation claim.’ Because this court’s jurisdiction over the distinct
portions of the government’s proposed counterclaim was in doubt, the court raised
its jurisdictional concern sua sponte. See Arctic Corner, Inc. v. United States, 845
F.2d 999, 1000 (Fed. Cir. 1988) (“A court may and should raise the question of its
jurisdiction sua sponte at any time it appears in doubt.”) (citation omitted). The
government bears the burden of establishing jurisdiction over its proposed
counterclaim. See, e.g., Rocovich v. United States, 933 F.2d 991, 993 (Fed. Cir.
1991) (“A party seeking the exercise of jurisdiction in its favor has the burden of
establishing that such jurisdiction exists.” (citing KVOS, Inc. v. Associated Press,
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299 U.S. 269, 278 (1936))).
A.

The Retainage Portion of the Government’s Proposed
Counterclaim

For this court to take jurisdiction over a government counterclaim under the
Contract Disputes Act of 1978 (CDA), 41 U.S.C. § 7103(a)(3) (2012), the
government’s claim must have been the subject of a contracting officer’s final
decision. See, e.g., Sharman Co. v. United States, 2 F.3d 1564, 1568 (Fed. Cir.
1993) (“Under the CDA, a final decision by the contracting officer on a claim,
whether asserted by the contractor or the government, is a jurisdictional
prerequisite to further legal action thereon.”) (citations and footnotes omitted),
overruled on other grounds by Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir.
1995); Joseph Morton Co. v. United States, 757 F.2d 1273, 1279 (Fed. Cir. 1985)
(“[I]f the CDA applies, the Government’s counterclaims against [the contractor]
must be subject to a decision by a CO before the Government can assert them in
the Claims Court.”). The retainage claim was the subject of a contracting officer
final decision, on January 13, 2014, before the retainage issue became a part of
this litigation.1 See Def.’s In Limine Mot. Corrected App. at 253-54; see also Am.
Compl. of Jan. 29, 2014, at 8. The retainage claim, therefore, satisfies the
jurisdictional presentment requirement of the CDA.
The cases invoked by plaintiff at oral argument, Sharman and Volmar
Constr., Inc. v. United States, 32 Fed. Cl. 746 (1995), involved factual scenarios
where a contracting officer’s final decision on the government’s claim did not
occur before litigation of that same claim (or a mirror-image claim brought by the
contractor) commenced in this court. These cases, therefore, are inapposite to the
jurisdictional analysis required for defendant’s retainage claim. The court sees no
jurisdictional impediment to the retainage portion of the government’s proposed
counterclaim.
B.

The Recalculation Portion of the Government’s Proposed

1

/ According to government counsel, a contract modification addressing the contracting
officer’s final decision regarding the retainage was never issued, although the draft contract
modification document (M009) appears to have been relied upon by defendant’s expert. See
Def.’s Witness List Corrected App. at 57, 190-96.

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Counterclaim
Such is not the case for the recalculation claim. The government’s
recalculation claim for $279,448 arose during the litigation of this case when a
government expert reviewed various costs related to Contract Modification M004.
Def.’s Mot. at 2. There is no record of a review or of a final decision of the
contracting officer on the recalculation claim. Indeed, the recalculation claim
differs from the final decision of the contracting officer expressed in his decision
issued January 13, 2014 which stated that Contract Line Item Number 001 (CLIN
001) should be reduced by $466,092 for changes effected by Contract
Modification M004. The recalculation claim, instead, alleges that CLIN 001
should have been reduced by an additional $279,448, for a total reduction to CLIN
001 of $745,540 for changes effected by Contract Modification M004.
The court concludes that the contracting officer was not presented with, and
never ruled on, the government’s recalculation claim for $279,448.2 Because the
contracting officer was never presented with the recalculation claim, and never
issued a final decision on the government’s recalculation claim, this court has no
jurisdiction over the recalculation claim portion of the government’s proposed
counterclaim. In these circumstances, amendment of the government’s answer to
include the recalculation claim portion of the government’s proposed counterclaim
would be futile.
The government’s recalculation claim, likewise, fails to fall within the
mirror-image exception to the presentment requirement. This court has long held
that government CDA counterclaims that are not the subject of a contracting
officer’s final decision cannot proceed unless they are, at a minimum, the mirror
image of a contractor claim denied by the contracting officer. E.g., Blinderman
Constr. Co. v. United States, 39 Fed. Cl. 529, 557-61 (1997), aff’d, 178 F.3d 1307
(Fed. Cir. 1998) (table); Kit San Azusa, J.V. v. United States, 32 Fed. Cl. 647,
2

/ Even if the contracting officer were now to be presented with the recalculation claim,
his ability to issue a valid final decision on such a claim would be precluded by the Sharman
doctrine. See, e.g., Sharman, 2 F.3d at 1571 (“Once a claim is in litigation, the Department of
Justice gains exclusive authority to act in the pending litigation [and] [t]hat exclusive authority
divests the contracting officer of his authority to issue a final decision on the claim.”) (citations
omitted). The amount due plaintiff under CLIN 001 and Contract Modificiation M004 has been
in litigation since January 29, 2014.

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663-64 (1995), aff’d in relevant part, 86 F.3d 1175 (Fed. Cir. 1996). In Kit San
Azusa, this court, relying on Sharman and Placeway Constr. Corp. v. United
States, 920 F.2d 903 (Fed. Cir. 1990), allowed a government counterclaim to
proceed even though the government’s claim for liquidated damages had not been
the subject of a contracting officer’s final decision. The exception to the
presentment requirement, however, was narrowly construed.
The court commented, first, that the United States Court of Appeals for the
Federal Circuit “has allowed the Government to litigate set-offs and
‘mirror-image’ claims even in the absence of a direct decision by the CO.”
Kit San Azusa, 32 Fed. Cl. at 663 (citing Placeway, 920 F.2d at 906-07). There,
the court opined that the Federal Circuit, in effect, deemed the contracting
officer’s retainage of a portion of the contract price to be a decision on the
government’s claim for those funds. Id. at 663-64. The court also interpreted
Sharman to permit both the contractor’s and government’s mirror-image claims to
proceed as long as one of the mirror-image claims had been “decided” by the
contracting officer. Id. at 664 (citing Sharman, 2 F.3d at 1570).
The Kit San Azusa court limited the government’s counterclaim, however,
to the amount of the retainage determined by the contracting officer. 32 Fed. Cl.
at 664. The court stated that
to the extent that the Government’s assessed liquidated
damages do not exceed the amount of the retainage, the
Government may litigate them here [as a counterclaim].
The Government, however, is precluded from recovering
liquidated damages over and above the amount of the
retainage because no CO decision, actual or constructive,
exists regarding that portion of its liquidated damages
offset; that is, to the extent that the Government’s
liquidated damages offset exceeds the retainage, it
cannot be held to be the mirror image of [the
contractor’s] claim to recover the retainage.
Id. Kit San Azusa is the case most on point and guides the court’s decision in this
matter.

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Following Sharman, Placeway and Kit San Azusa, the government’s
recalculation claim portion of its proposed counterclaim cannot proceed in this
court. The recalculation portion of the government’s proposed counterclaim has
not satisfied the presentment requirement of the CDA. The court therefore lacks
jurisdiction over the recalculation claim for $279,448. Because this portion of the
proposed counterclaim is futile, defendant’s motion to amend its answer must
therefore be denied as to the recalculation claim portion of the proposed
counterclaim.3
At oral argument, government counsel asserted that this court possesses
jurisdiction over the recalculation claim because the recalculation claim presents
only a “math problem” or an issue of “quantum.” No authority was presented in
support of this contention. The court is not convinced by this cursory reference
that the proposed recalculation counterclaim for $279,448 can be analogized to a
claim or counterclaim for which the quantum is adjusted slightly during litigation.
Indeed, the entire basis for the proposed alteration of the contracting
officer’s quantum determination rests upon the government expert’s disagreement
with the contracting officer’s original assessment:
Based on my review of the contract modifications and
correspondence related to the Second Complaint for
Action and my own volume estimates, the Mod 9
$466,092 credit is less than the credit that should be
expected for the reduced scope of work on the Project
....
Def.’s Mot Ex. B, at 32-33. What follows that statement is a detailed explanation
and analysis supporting exactly how the government’s expert arrived at his
determination that the contracting officer’s withholding from Magnus Pacific was
insufficient. Id. at 33-34. The expert’s analysis and rationale for the proposed
increase in quantum, as presented, is a drastic departure from that issued by the
contracting officer and is not simply a mathematical adjustment. To characterize

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/ The court need not reach plaintiff’s arguments that the recalculation portion of the
government’s proposed counterclaim is barred because of undue delay and undue prejudice to
Magnus Pacific.

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the requested modification as a mere math adjustment would, in effect, supplant
the contracting officer’s determination with that of the government expert - a
result neither contemplated nor permitted under the CDA.
The government’s proposed counterclaim demonstrates that the contracting
officer’s final decision of January 13, 2014 must be radically and fundamentally
altered to arrive at the $279,448 figure for the recalculation claim. See Proposed
Amended Answer ¶¶ 47-54. The recalculation claim cannot be characterized as a
mere “math problem” to permit inclusion of the proposed recalculation claim in
the government’s amended answer. The government’s motion must therefore be
denied in this regard.
Government counsel’s sole comment on Kit San Azusa at oral argument
was that the case provides only persuasive authority. The court finds that Kit San
Azusa is persuasive where, correctly following binding precedent, it limited a
government counterclaim before this court to the amount retained by the
contracting officer. The government in this case has not met its burden to show
that the court has jurisdiction under the CDA for the recalculation portion of its
proposed counterclaim.
II.

Plaintiff’s Challenge to Defendant’s Retainage Claim

Very little of plaintiff’s opposition brief is devoted specifically to the
government’s retainage claim. The court reproduces the relevant portion of the
paragraph plaintiff devotes to this topic:
[W]hile it is true that Magnus Pacific has at all times
been on notice of the Government’s “inten[t] to retain”
the $466,092.00 referenced in the First Amended
Complaint and answer thereto, that “retention” issue is
already fully joined via those pleadings. In that regard,
Magnus Pacific alleges an entitlement to $431,056.00 in
its Second Cause of Action, which is the difference
between the $466,092.00 credit claimed by the
Government and the $35,036.00 credit that Magnus
Pacific contends was proper. (First Amended Complaint
at ¶¶ 20 and 27.) Those allegations were denied by the
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Government. (Answer to First Amended Complaint, at
¶¶ 20 and 27.) Accordingly, as to the parties’ dispute
over this credit, a counterclaim is neither necessary nor
appropriate to preserve the Government’s right to argue
the relevant issues.
Pl.’s Opp. at 3. Plaintiff cites no authority whereby this court may deny a motion
to amend an answer to present a counterclaim merely because, in the plaintiff’s
view, the counterclaim is “neither necessary nor appropriate.”4 Id.
Because plaintiff concedes that the issue of the government’s right to the
retainage of $466,092 has been “fully joined” since early 2014, the court cannot
deny the government the opportunity to formally state its well-established
litigation position via a counterclaim. Discovery has necessarily encompassed
both the scope of the government’s retainage counterclaim and the scope of
plaintiff’s claim for virtually the same amount of money.
Further, the court does not view the government’s delay in formulating its
retainage counterclaim as “undue.” Certainly this counterclaim could have been
proposed earlier in the parties’ pretrial preparations. Many attorneys, however,
revise their initial understanding of a case when an approaching trial deadline
forces them to closely examine the strengths and weaknesses of their evidence and
arguments. The portion of the government’s motion asserting its right to bring its
retainage counterclaim, while somewhat delayed, was not unduly delayed in the
context of these proceedings.
As for “undue prejudice,” the parties have had adequate time to prepare
their cases with respect to the $466,092 retained by the contracting officer.
Plaintiff does not argue, and cannot argue, that Magnus Pacific has not had a full
chance to prepare its arguments on this issue. See Pl.’s Opp. at 3 (stating that the
“‘retention’ issue is already fully joined”). Nor has plaintiff explained how
Magnus Pacific would be unduly prejudiced by the transformation of the
government’s defense of the almost entirely contested $466,092 retainage into a
counterclaim which seeks to validate that retainage.
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/ At oral argument, plaintiff renewed its contention that no retainage counterclaim is
necessary to protect money that the government already possesses.

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Plaintiff nonetheless argues, without explanation, that the retainage
counterclaim is unnecessary and inappropriate. Id. Defendant appears to
acknowledge that the necessity of its counterclaim is uncertain. See Def.’s Mot. at
2 (stating that the retainage portion of the counterclaim is proposed “in an
abundance of caution and in the absence of legal precedent in the area”); Def.’s
Reply at 7 n.2 (“[T]the Government has sought leave to amend its answer to the
extent that the Government’s retention of funds in connection with a credit might
be construed to be in the nature of an affirmative claim in an abundance of
caution, given the absence of definitive law in the area.”). Although the
government might achieve the same result in this litigation with or without the
retainage counterclaim, in the court’s view this not a sufficient reason to deny
defendant’s motion. Because no persuasive reason to deny defendant’s request to
bring its retainage counterclaim has been proffered by plaintiff, leave to amend the
government’s answer to bring the retainage counterclaim must be freely given.
III.

Conclusion
Accordingly, it is hereby ORDERED that
(1)

Defendant’s Motion for Leave of Court to File Amended Answer
with Counterclaim, filed June 10, 2016, is GRANTED in part, as to
the retainage counterclaim, and DENIED in part, as to the
recalculation counterclaim, as stated in this order;

(2)

Defendant shall FILE an Amended Answer and (Retainage)
Counterclaim, on or before July 20, 2016;5

(3)

Defendant’s Amended Answer and (Retainage) Counterclaim
SHALL NOT INCLUDE any recalculation counterclaim or the
following paragraphs of its proposed amended answer filed June 10,
2016: ¶¶ 47-54, 56, and the second and third sentences of ¶ 36; and,

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/ The court notes that there is a typographical error in the proposed amended answer and
counterclaim filed June 10, 2016. The date noted in ¶ 42 of the proposed amended answer is
listed elsewhere as January 13, 2014, not January 31, 2014. See, e.g., Def.’s In Limine Mot.
Corrected App. at 253. Defendant should correct this typographical error in its Amended Answer
and (Retainage) Counterclaim.

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(4)

Plaintiff’s Answer to Defendant’s (Retainage) Counterclaim shall
be FILED on or before July 29, 2016.

/s/Lynn J. Bush
LYNN J. BUSH
Senior Judge

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