[00:00:00] Speaker 01:
Five, six, seven, eight.

[00:00:40] Speaker 01:
Mr. Lobel, whenever you're ready.

[00:00:43] Speaker 04:
Good morning.

[00:00:43] Speaker 04:
Good morning, Your Honor.

[00:00:44] Speaker 04:
May I please record?

[00:00:46] Speaker 04:
The state of California is seeking a de novo review of a contract it signed in 2010 with the Department of Justice.

[00:00:55] Speaker 01:
We understand everything that's going on in this case.

[00:00:57] Speaker 01:
Can I just ask you a sort of technical question?

[00:00:59] Speaker 01:
I think the government raised this in red brief, which is even if we would agree with you on the fringe benefit issue, that only seems to account for a chunk

[00:01:10] Speaker 01:
of the $300,000 that's in dispute here.

[00:01:14] Speaker 01:
So I don't think you responded in gray.

[00:01:18] Speaker 01:
Even if you're right on fringe benefits, that doesn't allow a reimbursement of $300,000.

[00:01:25] Speaker 01:
That's like $60,000, right?

[00:01:29] Speaker 04:
That's not quite true, because the $300,000

[00:01:36] Speaker 04:
is dependent on a formula which is not based on the actual numbers.

[00:01:41] Speaker 04:
We pointed that out in our first response to their attempt to get the money.

[00:01:47] Speaker 04:
It's on page 133 of the appendix.

[00:01:50] Speaker 04:
And we detailed why it's wrong.

[00:01:52] Speaker 04:
We didn't make a big point of it.

[00:01:55] Speaker 03:
Sorry.

[00:01:55] Speaker 03:
The two provisions in the contract that say you can use the state system deal with fringe benefits and overheads.

[00:02:03] Speaker 04:
Excuse me, I have my hearing aids.

[00:02:05] Speaker 03:
Yeah, I got my hearing aids too.

[00:02:07] Speaker 03:
The two provisions in the contract that deal with the state system, allowing the state system deal with overhead and with fringe benefits.

[00:02:18] Speaker 00:
Correct.

[00:02:19] Speaker 03:
The provision for salaries, for salary compensation is not given the benefit of the state system.

[00:02:30] Speaker 04:
The salaries are directed

[00:02:31] Speaker 03:
So what I want to get at, my understanding of your argument is that the SAM formula uses accrual accounting for things such as fringe benefits and overhead.

[00:02:45] Speaker 00:
Correct.

[00:02:46] Speaker 03:
When it does it for fringe benefits using an accrual thing, it impacts the amount of compensation that the employees are entitled to.

[00:02:56] Speaker 03:
No.

[00:02:57] Speaker 03:
Because part of the fringe benefit are days off for holidays and that sort

[00:03:01] Speaker 04:
Those are actual costs that the state now still owes the employees who work the money.

[00:03:08] Speaker 03:
Sir, we got a problem here.

[00:03:11] Speaker 03:
My understanding is that for a period of time the state used the SAM formula and in the SAM formula they were using it to look at the fringe benefits that these employees were entitled to and the overhead associated with their work.

[00:03:28] Speaker 04:
Correct.

[00:03:29] Speaker 03:
The SAM formula makes a magic computation that produces a compensation number, how much these people are entitled to.

[00:03:38] Speaker 00:
Right.

[00:03:38] Speaker 03:
Right.

[00:03:39] Speaker 03:
That's what you did for a long period of time.

[00:03:42] Speaker 03:
In an audit over one of the years, the government auditor said, whoops, wait a second.

[00:03:50] Speaker 03:
You're using accrual accounting.

[00:03:54] Speaker 03:
You're accruing costs at the beginning of the year that you've

[00:03:58] Speaker 03:
think you'll have to pay out over the course of the year.

[00:04:02] Speaker 03:
Some you might not have to pay off, they might not carry over till the next year, but that they are real live liabilities that your client incurred.

[00:04:12] Speaker 03:
The auditor said, well, you can't use accrual accounting.

[00:04:18] Speaker 03:
You can only be reimbursed for actual cash outlays.

[00:04:23] Speaker 03:
And so they did a formula.

[00:04:25] Speaker 03:
I dug them all up from below all the charts.

[00:04:29] Speaker 03:
And the difference between the two is your numbers are based on accrued liabilities and the government's numbers were based on actual cash out.

[00:04:40] Speaker 03:
And the government was saying, we want you to true up at the end of the year, meaning that you would look and see how much of the accrual you haven't actually paid yet.

[00:04:50] Speaker 03:
And you wouldn't bill for that.

[00:04:51] Speaker 03:
You would only bill for what you'd actually pay.

[00:04:56] Speaker 03:
The lower court, in interpreting the contract, held that the contract requires expenditures to be actually expended.

[00:05:07] Speaker 03:
You actually must spend the money.

[00:05:09] Speaker 03:
You can't accrue the liability.

[00:05:12] Speaker 03:
That's what the court held below.

[00:05:14] Speaker 03:
And that's the government's theory.

[00:05:16] Speaker 03:
And so the question is, where in the

[00:05:20] Speaker 03:
contract or in the regulations, is it unambiguously required that the reimbursements be cash as opposed to accrual?

[00:05:32] Speaker 04:
And your argument is it isn't there.

[00:05:34] Speaker 04:
Well, no, my argument is we are entitled to use the SAM method, the accrual basis, because we negotiated for that.

[00:05:43] Speaker 04:
This contract is the result of a lot of very acrimonious

[00:05:49] Speaker 04:
negotiations between interior.

[00:05:51] Speaker 03:
I don't understand all that, sir.

[00:05:52] Speaker 03:
I mean, the short of the matter is that the contract says you get to use SAM.

[00:05:59] Speaker 03:
Right.

[00:06:00] Speaker 03:
For fringe benefits and overhead.

[00:06:03] Speaker 04:
Correct.

[00:06:04] Speaker 03:
And your feeling is you get to use it for salaries too because the overhead, the fringe benefit.

[00:06:09] Speaker 04:
No.

[00:06:10] Speaker 04:
Huh?

[00:06:10] Speaker 04:
No.

[00:06:11] Speaker 04:
We don't do it.

[00:06:11] Speaker 04:
We bill, every month we provide the interior department with the number of actual hours billed

[00:06:19] Speaker 04:
to that contract.

[00:06:21] Speaker 04:
Every year, that number was audited by the Interior Department.

[00:06:25] Speaker 04:
I understand it was audited.

[00:06:26] Speaker 04:
Does it have accrual numbers in it?

[00:06:28] Speaker 04:
Yes or no?

[00:06:30] Speaker 04:
Only for fringe benefits, not for salaries.

[00:06:33] Speaker 01:
So what is the dispute?

[00:06:35] Speaker 01:
Can I go back to where I started?

[00:06:37] Speaker 01:
What is the dispute for the additional $100,000, $200,000, or whatever?

[00:06:42] Speaker 01:
Well, it's $300,000.

[00:06:44] Speaker 01:
Excluding fringe benefits, I get that.

[00:06:47] Speaker 01:
But I thought you had put a number

[00:06:49] Speaker 01:
on that amount, which was $63,000.

[00:06:51] Speaker 01:
So there's other money that's in dispute here that's outside of alleged overpayment for fringe benefits.

[00:06:59] Speaker 01:
It's alleged overpayment for salary and for ICR, right?

[00:07:05] Speaker 04:
But that's wrong as a matter of fact.

[00:07:09] Speaker 04:
And that's why I referred you to the first response we made to this audit.

[00:07:17] Speaker 04:
We pointed out that the numbers they were using were not the actual billed numbers.

[00:07:23] Speaker 04:
They had those numbers.

[00:07:25] Speaker 04:
We give them to them every single month.

[00:07:29] Speaker 04:
They chose not to use them.

[00:07:31] Speaker 04:
They chose to use this formula that they devised to determine what the total amount was.

[00:07:38] Speaker 04:
Can I give you an analogy?

[00:07:41] Speaker 04:
It's, we all know about LIFO and FIFO.

[00:07:45] Speaker 04:
Assume that California negotiated a contract allowing it to use LIFO.

[00:07:51] Speaker 04:
It was negotiated.

[00:07:52] Speaker 04:
But the OMB says you're supposed to use FIFO.

[00:07:56] Speaker 04:
Now, five years after you've entered into that contract, the Interior Department says, oh, we didn't know what we were doing for five years.

[00:08:05] Speaker 04:
The people who negotiated this didn't know.

[00:08:07] Speaker 04:
The people who audited it didn't know.

[00:08:11] Speaker 04:
But we now know that your results under

[00:08:15] Speaker 04:
Our way of accounting is $2,000 or $2 million different than yours, so you have to use our number.

[00:08:24] Speaker 04:
That's not right.

[00:08:28] Speaker 04:
That's what they're doing here.

[00:08:29] Speaker 04:
They're saying if you use our accounting principles, which they developed, you owe us this money.

[00:08:37] Speaker 04:
But we used our accounting principles only for fringe benefits.

[00:08:42] Speaker 04:
The actual numbers are a matter of

[00:08:46] Speaker 04:
public record because we have to submit those monthly.

[00:08:49] Speaker 01:
Okay, that goes to my question, and maybe it's just a stupid, inane question, and that's why you're not understanding it.

[00:08:55] Speaker 01:
But you said you used your accounting principles under your hypothetical for just fringe benefits.

[00:09:03] Speaker 00:
Correct.

[00:09:03] Speaker 01:
So tell me what the dispute is.

[00:09:06] Speaker 01:
So I understand that $63,000 was stuff that you think you're owed because you did it under your accounting system.

[00:09:12] Speaker 01:
What I just don't understand is what about the remainder of the money that you're seeking reimbursement for?

[00:09:18] Speaker 04:
That's all for fringe benefits.

[00:09:21] Speaker 01:
Okay, because it was categorized as, it was broken down as fringe benefits, then salary, and then ICR.

[00:09:29] Speaker 01:
So I thought they were all different categories.

[00:09:31] Speaker 01:
Is that wrong?

[00:09:32] Speaker 01:
The entire $300,000 is entirely for fringe benefits?

[00:09:38] Speaker 04:
Yes.

[00:09:40] Speaker 01:
Do you understand where I got the confusion I'm getting?

[00:09:43] Speaker 04:
I thought it was a breakdown of the call.

[00:09:45] Speaker 04:
They confused the facts that they had for the theory that they tried to promote.

[00:09:55] Speaker 01:
But your view is that the entire amount in dispute is the non-overpayment of you all for this categorization of fringe benefits.

[00:10:08] Speaker 01:
That's correct.

[00:10:10] Speaker 03:
Right.

[00:10:10] Speaker 03:
Now, am I right, sir, that you are using accrual accounting under the SAM formula?

[00:10:18] Speaker 04:
Correct.

[00:10:19] Speaker 03:
All right.

[00:10:20] Speaker 03:
Am I right in thinking that the government, both the auditors and the government and the Court of Federal Claims say you can't use accrual accounting?

[00:10:31] Speaker 04:
OMB recommends that you not use accrual accounting.

[00:10:35] Speaker 03:
And they say you should only

[00:10:37] Speaker 03:
seek reimbursement for cash paid out.

[00:10:42] Speaker 04:
Yes.

[00:10:43] Speaker 03:
OK.

[00:10:43] Speaker 03:
Let's assume for purposes of argument that the contract actually said that you can only reimburse for amounts paid out.

[00:10:55] Speaker 04:
That would be different.

[00:10:56] Speaker 03:
Now, that's the argument that the government is making.

[00:11:00] Speaker 04:
Yes.

[00:11:01] Speaker 03:
That's the argument that the Court of Federal Claims made.

[00:11:04] Speaker 04:
Yes.

[00:11:04] Speaker 03:
The Court of Federal Claims and the government say that the contract unambiguously requires only cash payments to be reimbursed.

[00:11:16] Speaker 03:
There are two places in the contract.

[00:11:19] Speaker 03:
You know, the two places in the contract where actual cash payout is referenced.

[00:11:26] Speaker 04:
Right.

[00:11:27] Speaker 04:
And that's for salaries.

[00:11:30] Speaker 04:
And that's for, you know, expenses.

[00:11:33] Speaker 04:
It is not for fringe, but we negotiated a separate deal for fringe benefits because we knew.

[00:11:41] Speaker 04:
We did that in 2010, and everybody knew we had done that.

[00:11:46] Speaker 04:
Everybody had gone along with it.

[00:11:48] Speaker 04:
The people who negotiated it went along with it, and the people who audited and accepted it went along with it.

[00:11:55] Speaker 04:
And all of a sudden now, someone comes along and says, oh, no, you're wrong.

[00:12:01] Speaker 04:
been allowed to use FIFO, but now we're saying you got to use LIFO because that's the way OMB says it.

[00:12:07] Speaker 04:
That's not giving you the benefit of the bargain that you sought.

[00:12:13] Speaker 04:
We did it deliberately.

[00:12:15] Speaker 04:
Why else would we, would we enter into an agreement that allows us to do our method plus the OMB method?

[00:12:23] Speaker 04:
Suppose they conflict, LIFO and FIFO conflict.

[00:12:27] Speaker 04:
They say,

[00:12:28] Speaker 04:
We owe $2 million because we didn't use the proper method.

[00:12:32] Speaker 04:
They're both costs, real costs.

[00:12:36] Speaker 01:
I know you've been asked questions, but you're into your rebuttal.

[00:12:40] Speaker 01:
You're into your rebuttal time.

[00:12:42] Speaker 01:
Oh, I'm sorry.

[00:12:43] Speaker 04:
I will sit down.

[00:12:44] Speaker 04:
Thank you.

[00:12:56] Speaker 05:
May I please the court?

[00:12:57] Speaker 05:
Court should affirm the judgment of the Court of Federal Claims.

[00:12:59] Speaker 05:
Just ask a question.

[00:13:01] Speaker 03:
So my understanding is that the contract was interpreted by the Court of Federal Claims as allowing reimbursement only for actual cash-out expenditures.

[00:13:15] Speaker 03:
I believe the... Asking, that's what the court held, correct?

[00:13:18] Speaker 05:
The cost incurred, yes, our actual cost.

[00:13:20] Speaker 03:
No, it isn't cost.

[00:13:21] Speaker 03:
It's not incurred.

[00:13:22] Speaker 03:
It's in actual cost paid.

[00:13:26] Speaker 05:
I don't know what language of the opinion your honor is referring to it.

[00:13:30] Speaker 03:
The word actual.

[00:13:32] Speaker 05:
I think the court used actual cost and cost incurred.

[00:13:35] Speaker 03:
So let me ask you that.

[00:13:38] Speaker 03:
Is a accrued cost in standard accounting, as to which there's no question that it was properly accrued, is it incurred?

[00:13:48] Speaker 05:
Before I answer that, I'll just say the parties didn't get into the accrual.

[00:13:52] Speaker 03:
Did you know the answer in accounting terms?

[00:13:54] Speaker 05:
The partisan, I want to be careful not to speak to something that the record doesn't speak to in the partisan brief before this court or the court below.

[00:14:03] Speaker 05:
Ultimately, California had to actually pay out the cost in whether that didn't.

[00:14:09] Speaker 03:
So your case is that you will only reimburse for actual cost pay down?

[00:14:16] Speaker 05:
Yes.

[00:14:16] Speaker 03:
OK.

[00:14:17] Speaker 05:
I say yes.

[00:14:18] Speaker 05:
Salary, for example.

[00:14:19] Speaker 03:
OK.

[00:14:20] Speaker 03:
So you have a cost for overhead.

[00:14:24] Speaker 03:
that is written on the books, and it's done on accrual accounting.

[00:14:29] Speaker 03:
You understand what accrual accounting is?

[00:14:31] Speaker 03:
I understand.

[00:14:32] Speaker 05:
I'm not very familiar.

[00:14:35] Speaker 03:
And the SAM formula allows accrual accounting for purposes of the overhead and the fringe benefits.

[00:14:46] Speaker 05:
I don't know.

[00:14:46] Speaker 05:
I'm just telling you.

[00:14:47] Speaker 05:
Let's assume that's true.

[00:14:50] Speaker 03:
So the SAM formula is going to allow a number for an expenditure on overhead of fringe benefits.

[00:14:56] Speaker 03:
That's on a crude basis.

[00:14:58] Speaker 03:
Right?

[00:14:59] Speaker 03:
OK.

[00:14:59] Speaker 03:
The auditors refused to accept that number.

[00:15:02] Speaker 03:
The auditor said, no, it has to be a cash expenditure.

[00:15:09] Speaker 03:
You assert that the contract plus by including 43 CFR 12 and the OMB circular.

[00:15:19] Speaker 03:
You assert that the contract unambiguously requires cash expenditures, actual expenditures.

[00:15:29] Speaker 05:
Yes, actual.

[00:15:30] Speaker 03:
Show me where in the contract actual payments are required.

[00:15:36] Speaker 05:
In the contract.

[00:15:39] Speaker 05:
When I use the word actual payments, I'm using it in the sense of cost incurred.

[00:15:45] Speaker 05:
That's not correct.

[00:15:47] Speaker 03:
That's just not correct, because we already in the data point said that an accrued cost is incurred under SAM.

[00:15:54] Speaker 05:
OK.

[00:15:54] Speaker 05:
Well, my references then to the cooperative agreement would be to all the references to the cost incurred.

[00:15:59] Speaker 03:
Now, just OK.

[00:15:59] Speaker 03:
Take me in the contract.

[00:16:01] Speaker 03:
Where does the word actual, how many times does the word actual appear in the contract?

[00:16:06] Speaker 05:
I don't know if the word actual appears.

[00:16:08] Speaker 05:
I know cost incurred.

[00:16:10] Speaker 03:
Just excuse me.

[00:16:10] Speaker 03:
How many times does the word actual appear in the contract?

[00:16:14] Speaker 05:
I don't know.

[00:16:14] Speaker 05:
I don't know that that.

[00:16:16] Speaker 03:
So you don't know where it appears.

[00:16:19] Speaker 05:
I don't know where the word actual.

[00:16:20] Speaker 05:
The part is to focus on whether a cost has been incurred.

[00:16:24] Speaker 03:
Well, I'm telling you that a accrued cost is incurred.

[00:16:31] Speaker 03:
So assuming an incurred cost is incurred, the question is, what's the difference between that and an actual cost?

[00:16:39] Speaker 03:
The accountants here said the actual cost is what California actually paid out.

[00:16:45] Speaker 03:
not what it accrued as a liability, that maybe it paid out, maybe it paid out next year.

[00:16:52] Speaker 03:
So you're telling me that the contract does, since you couldn't find the two places where actual shows up, I'll just tell you, it doesn't help you.

[00:17:02] Speaker 05:
That's maybe why I'm looking at the applicable provisions.

[00:17:06] Speaker 03:
So then I'll take you to the hook you're going to hang on for the contract

[00:17:12] Speaker 03:
unambiguously requiring cash expenditures, actual expenditures, would be 43 CFR or the OMB circuit.

[00:17:22] Speaker 05:
43 CFR and the language of... No, no, the contract doesn't help you.

[00:17:27] Speaker 03:
Oh, the cross-incurred language at the section... Cross-incurred because an accrued cost is incurred.

[00:17:32] Speaker 05:
Oh, your honor, we were... We started talking about the overhead.

[00:17:35] Speaker 05:
The overhead rate is not... Just a second.

[00:17:37] Speaker 05:
Okay.

[00:17:38] Speaker 03:
I know that none of the calculations that they did in SAM

[00:17:42] Speaker 03:
are disputed.

[00:17:44] Speaker 03:
You have conceded that they faithfully applied SAM.

[00:17:48] Speaker 05:
Yes.

[00:17:49] Speaker 05:
They got exactly the right number.

[00:17:51] Speaker 05:
No, we haven't conceded they faithfully applied.

[00:17:54] Speaker 03:
It's just that SAM allows for reimbursement of non-paid costs, that is to say for accrued costs.

[00:18:03] Speaker 05:
Yeah, okay, but we haven't, you're referring to the audit that was done that led to this lawsuit.

[00:18:08] Speaker 05:
Okay, but we haven't conducted discovery in this case because the parties agreed that the agreement could be resolved on the plain language.

[00:18:14] Speaker 05:
So I wouldn't say we can see that they faithfully, we would conduct discovery.

[00:18:18] Speaker 03:
Yeah, your point is that they can only recover for money they paid out of their pocket, not for expenditures they incurred.

[00:18:26] Speaker 03:
For example, salaries... And I'm asking you, where does the contract say that?

[00:18:32] Speaker 05:
I would refer you to the cost incurred language, which I understand you would tell me does not mean that I would refer to 6.4 is the best.

[00:18:40] Speaker 02:
A contract also says that fringe benefits, which we've heard are all of the amount in contest here, shall be allowed in accordance with the state's established accounting system.

[00:18:53] Speaker 02:
Now, why doesn't that have at least equal dignity compared with the incurred?

[00:19:00] Speaker 02:
provision.

[00:19:00] Speaker 02:
This is specific.

[00:19:01] Speaker 05:
As an initial matter, by way of background, my understanding is that $300,000 is not just fringe benefits.

[00:19:07] Speaker 05:
I would refer the court to page 147 of the appendix, which is the audit report.

[00:19:11] Speaker 05:
And I think that's where the roughly $300,000 adds up.

[00:19:16] Speaker 05:
And I think the fringe benefits is a relatively small portion.

[00:19:19] Speaker 05:
Why don't you answer his question?

[00:19:20] Speaker 05:
OK.

[00:19:21] Speaker 05:
But in terms of that section 6.5c, which states that fringe benefits shall be allowed,

[00:19:28] Speaker 05:
Section 6.5 goes to the allowability of costs and the understandings of costs.

[00:19:32] Speaker 05:
For example, there are terms that would be attached to a salary.

[00:19:36] Speaker 05:
It lays it out in there that, for example, you couldn't just come up with a new salary for, I think, under 6.5.

[00:19:44] Speaker 05:
You can come up with some new salary just for... Well, there's no argument they did.

[00:19:48] Speaker 05:
No, we didn't argue.

[00:19:49] Speaker 03:
There's no challenge here to... So then on six point, on the fringe benefits?

[00:19:53] Speaker 03:
The challenge here is that the number they're asking for

[00:19:57] Speaker 03:
includes money that wasn't actually paid out it was accrued yes they didn't actually pay out all the fringe benefits well that's that's the whole case right on the fringe benefit portion yes but i mean you haven't made and you haven't made an independent showing in your briefs that salaries should be treated differently

[00:20:16] Speaker 05:
No, we think that all three overhead salary.

[00:20:22] Speaker 03:
So the difference is between numbers that are built on accrual and numbers that are built on actual cost out.

[00:20:29] Speaker 03:
What does it mean when they say true up at the end of the year?

[00:20:32] Speaker 05:
I mean, if they actually, if they sought and received more reimbursement,

[00:20:39] Speaker 05:
than that was actually paid out by California.

[00:20:42] Speaker 03:
And what basis would they have been seeking more than they actually paid out?

[00:20:47] Speaker 05:
Because they came up with this loaded hourly rate that included fringe benefits and salaries.

[00:20:52] Speaker 03:
And because of accrual accounting.

[00:20:54] Speaker 05:
But these are not hourly employees.

[00:20:57] Speaker 03:
Because of accrual accounting.

[00:20:58] Speaker 03:
So the state system produced a number that, as Judge Lurie pointed out, you don't disagree with.

[00:21:05] Speaker 03:
The contract says they can use the state system.

[00:21:08] Speaker 03:
They get the number.

[00:21:10] Speaker 03:
The counter to that in the Court of Federal Claims and here is that the contract unambiguously bars that and requires the cash to be paid out.

[00:21:21] Speaker 03:
And I'm asking you where in the contract, when the contract uses the word actual costs in two places, but does not use it with regard to salaries, does not use it with regard to fringe benefit or overhead.

[00:21:37] Speaker 03:
So where do we get the notion

[00:21:40] Speaker 03:
that the contract requires actual.

[00:21:43] Speaker 03:
And then when I ask you where in your backup sources that you rely on heavily below and that the court of federal claims rely on heavily below, where does 43 SCF or 12A or the OMB circular require cash expenditures?

[00:22:02] Speaker 05:
There's a couple of questions.

[00:22:02] Speaker 05:
Can I?

[00:22:03] Speaker 03:
Do you know?

[00:22:04] Speaker 03:
Are you familiar with 12A?

[00:22:06] Speaker 05:
I'm familiar with 12A and it incorporates OMB circular 8-87.

[00:22:11] Speaker 03:
And you know that both of them respect accrual accounting.

[00:22:14] Speaker 05:
Yes.

[00:22:15] Speaker 03:
Both of them treat accrued costs as incurred and allowable.

[00:22:20] Speaker 05:
Both of them.

[00:22:21] Speaker 05:
OK.

[00:22:22] Speaker 05:
But OMB circular 8-87, I would point, Your Honor, to detachment A, section C,

[00:22:28] Speaker 05:
including the section.

[00:22:30] Speaker 03:
Wait, I got it right here.

[00:22:31] Speaker 03:
What are we going to look at now?

[00:22:34] Speaker 03:
The OMB circular or?

[00:22:36] Speaker 05:
Yes, your OMB circular.

[00:22:43] Speaker 03:
This helps.

[00:22:45] Speaker 03:
Cost means an amount determined on a cash, accrual, or other basis.

[00:22:50] Speaker 05:
The parties did not get into this accrual versus cash base in order

[00:22:55] Speaker 05:
accrual is allowed versus cash is allowed.

[00:22:57] Speaker 03:
That was the basis on which the audit said you've overpaid.

[00:23:03] Speaker 05:
Yeah, but the basis of our motion for summary judgment and the cross-motion for summary judgment was whether these costs actually had to have been incurred or paid out.

[00:23:12] Speaker 03:
Had to actually be paid.

[00:23:13] Speaker 05:
Paid out, yes.

[00:23:14] Speaker 03:
Paid out.

[00:23:14] Speaker 03:
And I'm saying is where does the contract say they have to be paid out?

[00:23:19] Speaker 05:
And I would refer to section 6.4b, which states.

[00:23:22] Speaker 03:
OK, just a second.

[00:23:25] Speaker 03:
You know it intimately when the time comes to talk about it.

[00:23:28] Speaker 03:
6.4b says, we'll reimburse the state for approved costs incurred under this agreement in accordance with 12a.

[00:23:37] Speaker 03:
12a respects accrual accounting.

[00:23:43] Speaker 03:
It says you can accrue a cost.

[00:23:44] Speaker 03:
It will be allowable.

[00:23:46] Speaker 03:
And it's incurred.

[00:23:47] Speaker 05:
I am not arguing, and we've not argued that they cannot use accrual versus cash base.

[00:23:52] Speaker 03:
That has not been an issue, so... Okay, so if they can use it, and the reason why the SAM number is objectionable to you is because of accrual accounting, then where'd your case go?

[00:24:06] Speaker 05:
I don't think the SAM number is objectionable because of accrual accounting.

[00:24:09] Speaker 05:
It's objectionable if someone makes $75,000 annual salary, and ultimately we're paying more

[00:24:17] Speaker 05:
for them to do work on this contract, and they're doing 100% of the work on this cooperative agreement.

[00:24:21] Speaker 05:
We're paying them more than they actually pay their employees.

[00:24:25] Speaker 05:
We're paying them more for the salary.

[00:24:27] Speaker 05:
It's the most prominent example, and it makes up the greatest portion of the money in this case.

[00:24:32] Speaker 05:
But isn't that what Sam allows?

[00:24:34] Speaker 05:
I think California's argument is that Sam allows them to bill private and public clients in the way that they did here.

[00:24:43] Speaker 05:
I think that's their point.

[00:24:45] Speaker 05:
Again, the parties didn't get to these factual issues, because plaintiff agreed, and then we agreed.

[00:24:50] Speaker 03:
I mean, the debate is whether or not the contract requires a cost to actually be paid, actually paid, in order to be reimbursable.

[00:25:01] Speaker 03:
Yes or no?

[00:25:03] Speaker 05:
I didn't catch the first part.

[00:25:06] Speaker 03:
Let's assume the contract does not require the expenditures to be actually paid out.

[00:25:13] Speaker 03:
They only require it to be incurred in an accounting sense.

[00:25:19] Speaker 05:
Well, if it doesn't require it to actually be incurred, in our argument, it is in the court.

[00:25:24] Speaker 03:
I don't know, but I just assume that the contract said, you know, your actual costs, the actual payment cost does not include overhead fringe benefits itself.

[00:25:40] Speaker 05:
Your honor, if that were the case, we would want to conduct a discovery into whether California complied with it.

[00:25:45] Speaker 03:
It was too late for that, no, because the case is being pitched as just interpreting the contract.

[00:25:50] Speaker 03:
And your whole case depends on me thinking the contract unambiguously requires all expenditures to be actually paid out.

[00:25:59] Speaker 05:
Well, I don't think it's too late.

[00:26:00] Speaker 05:
To the extent the language was not clear and unambiguous, then we would look to externally, right?

[00:26:06] Speaker 03:
No, no.

[00:26:07] Speaker 03:
If there's a conflict,

[00:26:10] Speaker 03:
not clearing an ambiguous bit of conflict, then the specific clause will prevail over the general clause.

[00:26:17] Speaker 03:
And you can't point to a specific clause in OMB circular or in 12 CFR that say you have to use cost.

[00:26:29] Speaker 05:
Yes, I'm not pointing to a specific provision that says you have to use cash versus accrual.

[00:26:36] Speaker 05:
But the OMB circular does cover guidelines for reimbursing

[00:26:39] Speaker 05:
costs and that's including at Section C of Attachment A. Also there's a compensation for personnel services, Section 8 of Attachment B. None of them preclude accrued costs.

[00:27:04] Speaker 05:
Now, I don't think there's a preclusion of cash versus accrual, if that's the question.

[00:27:12] Speaker 05:
And for example, compensation for personnel services at Section 8 does not preclude accruals.

[00:27:24] Speaker 05:
It's defined as compensation for personnel services includes all remuneration paid currently or accrued for services rendered during the period of performance.

[00:27:34] Speaker 05:
At the end of the year, if California charges more than it actually paid its own employees, that would be... Well, that's what happens when you have an accrued cost.

[00:27:44] Speaker 03:
Just take, for example, in terms of their compensation, a certain number of days they get off.

[00:27:51] Speaker 03:
A certain number, they earn a certain number, like in the government, you earn a number of sick leave days and whatnot, right, and you get them.

[00:27:57] Speaker 03:
Right.

[00:27:57] Speaker 03:
Now, the problem was that by the end of the year, the people that earned the sick leave hadn't taken it all.

[00:28:04] Speaker 03:
They hadn't said, pay me for my sick leave.

[00:28:08] Speaker 03:
But the government was being charged for the sick leave because the sick leave wasn't a crude cost, understand?

[00:28:16] Speaker 03:
And that's what the auditor said was the fly in the ointment.

[00:28:20] Speaker 05:
And that was done before there was a lawsuit.

[00:28:22] Speaker 05:
This is not an administrative record review of the audit that was done.

[00:28:26] Speaker 03:
I appreciate that, but we're trying to understand why it matters whether or not

[00:28:32] Speaker 03:
your interpretation of the contract as opposed to his government.

[00:28:36] Speaker 03:
His is, I get to use Sam.

[00:28:38] Speaker 05:
And this did not hinge on the trial court's decision in our briefs and I don't believe- The trial court rejects his reimbursement request because the money wasn't actually paid out.

[00:28:49] Speaker 05:
Right.

[00:28:50] Speaker 05:
But I don't think it was- Right?

[00:28:52] Speaker 05:
Yes, I think it was, yeah, it wasn't actually paid out.

[00:28:55] Speaker 03:
But I don't think the trial- So the question is, does the contract require the money to be paid out?

[00:29:00] Speaker 03:
Yes or no?

[00:29:01] Speaker 05:
The contractor, when I say pay, yes, you actually have to pay your employee $75,000.

[00:29:08] Speaker 05:
You can't charge us $100,000 for that employee.

[00:29:12] Speaker 05:
OK.

[00:29:12] Speaker 05:
OK.

[00:29:12] Speaker 05:
Thank you.

[00:29:13] Speaker 05:
Thank you, Your Honor.

[00:29:31] Speaker 04:
The Interior Department has admitted there's no question of fraud here, and this was the benefit of the bargain.

[00:29:38] Speaker 04:
The issue is whether, as Judge Clevenger pointed out, whether we are entitled to use the SAM method of accounting, and we did.

[00:29:49] Speaker 04:
There's no question we did.

[00:29:51] Speaker 04:
And in fact, if you look at the OMB guidance, which is not part of the record, but it's section 200.431, compensation for fringe benefits, it says,

[00:30:02] Speaker 04:
Accept is otherwise provided.

[00:30:04] Speaker 04:
The cost of fringe benefits are allowable provided the benefits are reasonable and required by law non-federal entity employee agreement or an established policy of a non-federal entity.

[00:30:16] Speaker 04:
If SAM isn't an established policy of a non-federal entity, I don't know what is.

[00:30:24] Speaker 04:
Thank you very much.

[00:30:25] Speaker 01:
We thank both sides and the case is submitted.