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Commercial Contractors Inc. v. United States

September 04, 1998


Before Rader, Bryson, And Gajarsa, Circuit Judges.

The opinion of the court was delivered by: Bryson, Circuit Judge.

Appealed from: United States Court of Federal Claims

Judge Diane G. Weinstein

United States Court of Appeals for the Federal Circuit

Following a trial, the United States Court of Federal Claims held that Commercial Contractors, Inc., (CCI) knowingly submitted false or fraudulent claims with respect to a government construction project. See Commercial Contractors, Inc. v. United States, No. 612-89C (Fed. Cl. Aug. 29, 1995). The court entered judgment against CCI for more than $14 million. See Commercial Contractors, Inc. v. United States, No. 612-89C (Fed. Cl. Aug. 6, 1996). We affirm in part, reverse in part, and remand.


In October of 1987, the Army Corps of Engineers awarded a contract to CCI to construct several segments of the Telegraph Canyon Channel in Chula Vista, California, as part of a flood control project. The contract required CCI to excavate the areas in which the channel segments were to be built, to build the channel segments by setting up forms and pouring concrete into the forms, and to backfill the excavated areas surrounding the channel segments. The contract contained detailed specifications that governed all aspects of the work to be performed, including drawings indicating the lines to which CCI was required to excavate, quality control standards specifying the hardness that the poured concrete was required to achieve before the supporting forms could be removed, and miscellaneous other provisions specifying such factors as the proper composition and required compaction density of the backfill materials.

Joseph Augustine, CCI's president and owner, and William Zondorak, CCI's project manager, supervised the project for CCI. Mr. Augustine oversaw the field work, while Mr. Zondorak was primarily responsible for handling the paperwork, including the billing. The contract required CCI to hire a licensed surveyor to perform the specified surveying work, including the quantity surveys upon which payments were to be based. Michael Pallamary was the principal of Precision Survey & Mapping (PSM), the subcontractor CCI hired to perform that work.

CCI completed the contract on July 24, 1989. Shortly before that date, Mr. Pallamary wrote to the Corps' headquarters expressing concerns with CCI's performance under the contract. Mr. Pallamary wrote a second letter following the completion of the contract, again noting deficiencies in CCI's performance. That letter was forwarded to the Army's Criminal Investigation Division (CID), which conducted an investigation of the charges.

On November 13, 1989, CCI filed suit in the Court of Federal Claims asserting a number of claims for additional payment under the contract. The suit was twice suspended pending resolution of the CID investigation into the allegations of criminal fraud by CCI. Instead of pursuing the criminal investigation, however, the government decided to assert counterclaims in CCI's suit based on the anti-fraud provision of the Contract Disputes Act (CDA), 41 U.S.C. § 604, the False Claims Act (FCA), 31 U.S.C. §§ 3729-3731, and the Forfeiture of Fraudulent Claims Act (FFCA), 28 U.S.C. § 2514.

The Court of Federal Claims granted the government's motion to bifurcate the trial so as to resolve the government's counterclaims before addressing CCI's affirmative claims. The counterclaims were tried between October 18 and October 30, 1993. After several rounds of post-trial briefing, the court entered a final judgment against CCI in the amount of $14,190,161.85 under the FCA and the CDA, and it ordered CCI's affirmative claims to be forfeited pursuant to the FFCA. The court's judgment rested on its finding that CCI submitted claims for payment that it knew to be false or fraudulent with respect to six categories of contract work: (1) excavation quantities; (2) backfill quantities; (3) backfill composition; (4) shoring; (5) channel length; and (6) concrete testing. CCI appeals from the judgment with respect to each of the six categories.


The False Claims Act provides, in pertinent part, that anyone who "knowingly presents . . . a false or fraudulent claim for payment" to the government shall be liable "for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person." 31 U.S.C. § 3729(a). The government must prove the elements of the cause of action by a preponderance of the evidence. See 31 U.S.C. § 3731(c). For purposes of the FCA, a contractor is deemed to have known that a claim it submitted was false if it had actual knowledge of the falsity of the claim or if it acted in deliberate ignorance or reckless disregard of the truth or falsity of the claim. See 31 U.S.C. § 3729(b).

The Contract Disputes Act provides that a contractor who is unable to support any part of a claim because of a misrepresentation of fact or fraud on the part of the contractor shall be liable to the government for the unsupported part of the claim, as well as for the government's costs expended in reviewing the claim. See 41 U.S.C. § 604. To recover under the CDA, the government is required to establish that the contractor made false or fraudulent statements in its submitted claim with an intent to deceive or mislead the government. See 41 U.S.C. § 601(7). Although the statute does not prescribe a standard of proof, the "preponderance of the evidence" standard has been applied in the past, see Al Munford, Inc. v. United States, 34 Fed. Cl. 62, 67 (1995), vacated on other grounds, 86 F.3d 1178 (Fed. Cir. 1996) (Table), and we agree that the traditional civil standard is appropriate here. See Grogan v. Garner, 498 U.S. 279, 286 (1991) (citing Herman & MacLean v. Huddleston, 459 U.S. 375, 389-90 (1983)).

The Forfeiture of Fraudulent Claims Act provides that "[a] claim against the United States shall be forfeited . . . by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof." 28 U.S.C. § 2514. To prevail under the FFCA, the government is required to establish by clear and convincing evidence that the contractor knew that its submitted claims were false, and that it intended to defraud the government by submitting those claims. See Young-Montenay, Inc. v. United States, 15 F.3d 1040, 1042 (Fed. Cir. 1994); McCarthy v. United States, 670 F.2d 996, 1003-04 (Ct. Cl. 1982).


1. Excavation Quantities

The contract called for CCI to excavate the channel to the lines specified in the contract drawings. CCI was to be compensated for the excavation portion of the project based on the volume of earth excavated. The contract also stated that "[a]ll excavation outside of the excavation lines shown on the drawings will be considered as being for the convenience of Contractor and will not be included in the measurement for payment." Contract § 1B, ¶ 3.1.

The Court of Federal Claims found that CCI excavated less than the contract drawings required, but submitted cross-sections and quantity surveys indicating that it had excavated up to the contract lines. CCI does not dispute those findings. Furthermore, the court found that CCI billed the Corps for additional excavation which was not required by the contract, but which CCI did to accommodate a traveling metal form system that CCI used to speed up the project.

At trial, CCI argued that its excavation claims were not false because it interpreted the contract as providing for payment based on the volume of earth computed from the contract drawings, regardless of whether CCI actually excavated up to the lines specified in those drawings. The court rejected CCI's contract interpretation, principally because that interpretation directly contradicted the express terms of the contract, which provided that CCI was required to excavate "accurately to the lines, grades, and elevations shown" in the drawings. The court noted that Mr. Pallamary, CCI's own subcontractor, repeatedly warned Mr. Zondorak that he did not believe that the contract permitted CCI to excavate less than the contract drawings called for, or to submit cross-sections that did not reflect the actual amounts excavated. In addition, the court noted that as an engineering graduate of the Naval Academy, Mr. Zondorak should have realized that the excavation lines specified in the contract were an engineering requirement: It was essential to excavate the indicated areas and to backfill those areas with properly compacted materials in order to provide adequate support for the channel walls and thereby ensure that the channel was structurally sound.

The court further found that CCI acted knowingly in submitting the false excavation claims. CCI's contract interpretation, the court held, was untenable in light of the unambiguous provisions of the contract. CCI knew that Mr. Pallamary, a reputable surveying professional, strongly disagreed with its interpretation of the contract, yet CCI failed to seek guidance from the Corps with respect to how much it was required to excavate and whether it should have been billing only for actual excavation. Mr. Zondorak even went so far as to prohibit a meeting requested by Mr. Pallamary to discuss the contract with the Corps. The court thus concluded that CCI either knew or acted in reckless disregard of whether the cross-sections and quantity surveys it submitted in support of its claims were false.

On appeal, CCI contends that it did not knowingly submit false excavation claims because its interpretation of the contract was reasonable and adopted in good faith and because, far from concealing its interpretation of the contract from the Corps, CCI actually disclosed its method of calculating the submitted claims to a Corps representative.

CCI relies on two pieces of evidence in support of its contention that its contract interpretation was reasonable. First, CCI points to the following contract provision:

A survey of the site shall be made prior to commencement of work, and all measurements will be based on this survey without regard to any changes in the site that may be made between the excavation lines and grades indicated on the drawings or staked in the field and the ground surfaces as indicated by the above mentioned survey. Alterations may be necessary due to the nature of the materials excavated and methods used in performing the work, but such alterations shall not change the measurement for payment from the original lines as specified herein.

Contract § 1B, ¶ 3.1. Additionally, CCI relies on testimony from Mr. Zondorak that James Barron, the Corps' original project engineer (now deceased), directed Mr. Zondorak to submit quantity surveys before starting any work - a direction that CCI interpreted as indicating that it was to be paid based on the lines specified in the contract drawings.

Like the trial court, we reject CCI's contention that its interpretation of the contract was reasonable. The portion of the contract quoted above simply states that all quantity measurements were to be based on the ground lines indicated in the initial site survey, regardless of any changes that may have been made to the site due to the nature of the excavation methods and materials. The second sentence, on which CCI places great weight, does not support its argument; even if the sentence is read to suggest that CCI would be paid up to the contract's excavation lines, it cannot plausibly be read to give CCI the discretion to excavate to lines of its own choosing, as CCI contends. The contract specifies that "excavation consists of the removal and disposal of all materials within the lines and grades indicated," and that "excavation . . . shall be made accurately to the lines, grades and elevations shown." In light of that unequivocal language, CCI's interpretation of the contract is untenable.

With respect to Mr. Barron's alleged direction to submit quantity surveys before performing any actual excavation, we note first of all that Mr. Zondorak did not testify that Mr. Barron expressly modified the contract's excavation requirements. Furthermore, Mr. Zondorak's testimony was uncorroborated and was contradicted by testimony from the Corps' contracting officials, whom the court found to be credible witnesses. Based on those credibility determinations, we uphold the court's rejection of CCI's contention that Mr. Barron interpreted and modified the contract so as to permit CCI to ignore the minimum excavation specifications for all but payment purposes. In light of the clear and unambiguous contract language, we also uphold the court's ruling that CCI's interpretation of the contract was so unreasonable as to defeat CCI's assertion that it pressed its claims based on a good faith belief of entitlement under the contract.

CCI's second argument is that it did not submit false claims to the government because it disclosed its method of calculating the submitted excavation claims - and thus its interpretation of the contract - to the Corps. CCI relies on two pieces of evidence to support that argument: a letter from Mr. Pallamary to Mr. Zondorak that CCI submitted to the Corps with one of its claims, and a negotiation session set up between Mr. Augustine and James Lindsay, the Corps' construction representative, for the purpose of working out an agreement with respect to the quantities excavated from certain stations along the channel.

The body of Mr. Pallamary's letter to Mr. Zondorak is as follows:

Enclosed please find the quantity calculations for the above referenced project. Please note that the template used for these calculations is based upon a 3/4 to 1 slope without any consideration for the location of the easement or right of way lines. As you are aware, I am unable to determine their location in this area and as such I have simply projected the excavation lines to their logical terminus.

CCI claims that Mr. Pallamary's letter, which was submitted to the Corps with one of CCI's excavation claims, "implicitly excludes the concept of physical location," and thus served as a "clear signal" to the Corps that CCI's submissions were not based on actual excavation. We disagree. The letter indicates that Mr. Pallamary was not sure whether the slope of the excavated area reached all the way to the ground line, or whether it was cut off at an earlier point because otherwise it would have extended beyond the channel easement. Thus, the Corps may have been put on notice that Mr. Pallamary was not able to calculate the precise amount of earth excavated at the particular stations alluded to in the letter. The letter did not, however, put the Corps on notice that CCI was ...

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