[00:00:00] Speaker 04:
Our next case for argument is 21-1965, Supreme Food Services versus Director of Defense Logistics Agency.

[00:00:11] Speaker 04:
Mr. Perry, please proceed.

[00:00:14] Speaker 02:
Good morning.

[00:00:14] Speaker 02:
May it please the court, John Perry, on behalf of Appellant Supreme Food Service.

[00:00:18] Speaker 02:
Court should reverse the board's decision below and find that DLA waived a first material breach defense by continuing to contract with Supreme for years after learning of its breach.

[00:00:29] Speaker 00:
Can I just ask you a preliminary question just to have some feel for it?

[00:00:32] Speaker 00:
I think the parties agreed that there were

[00:00:34] Speaker 00:
pending claims, other claims, before the board.

[00:00:38] Speaker 00:
Can you just give us a very brief flavor for what those are, just because we can understand what we do here and how it affects it?

[00:00:45] Speaker 02:
Yes, Judge Prost.

[00:00:46] Speaker 02:
There are 41 other claims pending before the board, all but one of them under the same contracts at issue here.

[00:00:53] Speaker 02:
38 of those claims are claims by Supreme, largely for additional work that

[00:00:59] Speaker 02:
DLA added to the contract during performance.

[00:01:01] Speaker 00:
So just the way we decide this case, let's assume we were to decide this case hypothetically as an affirmance.

[00:01:07] Speaker 00:
Would that dispose of a lot of those claims, or are they separate and distinct issues that have been raised?

[00:01:12] Speaker 02:
DLA has filed a motion for summary judgment and contends that because of the first material breach holding in this case, all 38 of our cases would go away.

[00:01:21] Speaker 02:
We dispute that on a number of grounds, but that's their position.

[00:01:27] Speaker 02:
The board held that DLA learned of Supreme's conduct by no later than June 2010.

[00:01:31] Speaker 02:
That finding is supported by substantial evidence showing that as early as March 2009, DLA learned that Supreme had been charging DLA a hidden markup on food and bottled water by purchasing it through an affiliated entity.

[00:01:45] Speaker 02:
By June 2009, DLA and the Department of Justice had determined that Supreme had violated the contract and was intentionally overcharging the government for food and water.

[00:01:55] Speaker 00:
So Laguna is a problem, right?

[00:01:59] Speaker 00:
I mean, they may have thought it.

[00:02:01] Speaker 00:
They may have thought something of it.

[00:02:04] Speaker 00:
But the ultimate determination of fraud was made subsequently.

[00:02:07] Speaker 00:
And that's when this time frame kicked in that the board relied on.

[00:02:11] Speaker 00:
So why is that wrong?

[00:02:12] Speaker 00:
And how is this different from Laguna?

[00:02:13] Speaker 00:
Because it seems on all fours to me.

[00:02:16] Speaker 02:
Laguna was based on the facts of that case.

[00:02:19] Speaker 00:
Every case is based on the facts of that case.

[00:02:21] Speaker 00:
That's not helpful.

[00:02:24] Speaker 02:
We don't read Laguna to upend 50 or more years of case law looking at first material breach and waiver and focusing on what the non-breaching party learned, when, and what they decided to do after learning of that.

[00:02:38] Speaker 02:
In Laguna, there was no evidence that the government learned of the conduct prior to the plea.

[00:02:43] Speaker 02:
It didn't have a known right prior to that plea being entered.

[00:02:46] Speaker 02:
And by the way, contract performance had ended by that time.

[00:02:50] Speaker 02:
In this case, we've got extensive evidence, including formally-privileged law enforcement and attorney-client-privileged information showing exactly what DLA knew when they knew it.

[00:03:01] Speaker 00:
And they had decided- Did you make any findings in Laguna?

[00:03:04] Speaker 00:
Was the result in Laguna based in any way, shape, or form on who knew when exactly the assertion you're making about when they didn't know it and when they did?

[00:03:14] Speaker 00:
Is there anything in Laguna in there?

[00:03:16] Speaker 00:
Because I can't find it.

[00:03:17] Speaker 02:
The appellant specifically raised that argument on appeal that the government learned.

[00:03:21] Speaker 00:
I asked about the opinion.

[00:03:23] Speaker 02:
The opinion does not discuss the government's knowledge of the underlying conduct, because there was no evidence of the underlying conduct.

[00:03:30] Speaker 02:
Best we can tell from that case, the board's decision doesn't even mention the word waiver.

[00:03:35] Speaker 02:
Best we can tell, that argument didn't get raised until appeal here at the Federal Circuit.

[00:03:40] Speaker 04:
I have a couple of factual questions.

[00:03:42] Speaker 04:
Number one, it was 2014 where Supreme

[00:03:46] Speaker 04:
pled guilty to major fraud, right?

[00:03:49] Speaker 02:
Correct.

[00:03:50] Speaker 04:
OK.

[00:03:51] Speaker 04:
What were the consequences of that guilty plea?

[00:03:54] Speaker 04:
Did anyone go to jail?

[00:03:56] Speaker 04:
Has Supreme been barred as a contractor for the government?

[00:04:00] Speaker 04:
I want to know what actually were the real world consequences.

[00:04:02] Speaker 02:
There were significant consequences.

[00:04:04] Speaker 02:
There was a guilty plea.

[00:04:06] Speaker 02:
There were civil and criminal fines and penalties to the tune of some $400 million.

[00:04:11] Speaker 02:
Supreme was debarred from government contracting for five plus years.

[00:04:14] Speaker 02:
There were a number of individuals.

[00:04:16] Speaker 02:
that were debarred from government contracting for five plus years.

[00:04:19] Speaker 02:
And so there were significant consequences.

[00:04:23] Speaker 02:
What we're ultimately here today talking about are the party's contract rights.

[00:04:27] Speaker 04:
So I know.

[00:04:28] Speaker 04:
Let me ask my question.

[00:04:29] Speaker 04:
So OK, I understand what happened in 2014.

[00:04:32] Speaker 04:
So if I understand the setup of this case, the argument goes as follows.

[00:04:39] Speaker 04:
And I know you don't agree with all of this, but just hear me out and then you can respond.

[00:04:44] Speaker 04:
Of course.

[00:04:45] Speaker 04:
Judge Chen like question.

[00:04:47] Speaker 04:
So here's where I start.

[00:04:51] Speaker 04:
So Supreme committed fraud.

[00:04:56] Speaker 04:
At what point did the government stop withholding, start withholding the payments to Supreme that would otherwise be owed under the contract?

[00:05:04] Speaker 04:
At what point did that happen?

[00:05:05] Speaker 02:
December 2011.

[00:05:06] Speaker 04:
So 2011, the government stops paying under the contract, right?

[00:05:13] Speaker 04:
end up stop paying to the tune of roughly five hundred million dollars that they held back.

[00:05:17] Speaker 04:
Does that sound approximately right?

[00:05:19] Speaker 04:
Correct.

[00:05:19] Speaker 04:
Okay.

[00:05:20] Speaker 04:
So stop paying five hundred million dollars.

[00:05:22] Speaker 04:
In 2014, Supreme pleads guilty.

[00:05:24] Speaker 04:
The government then says, okay, well you plead guilty and the amounts that you demanded from us were wrong to the tune of three hundred and fifty eight million dollars.

[00:05:36] Speaker 04:
Is that approximately right?

[00:05:37] Speaker 04:
Roughly, yes.

[00:05:38] Speaker 04:
Okay.

[00:05:39] Speaker 04:
So the government held somewhere in the order of five hundred million.

[00:05:42] Speaker 04:
The government

[00:05:42] Speaker 04:
determined as a result of the fraud that they should have only withheld $358 million.

[00:05:49] Speaker 04:
So then how much did they then turn over to Supreme?

[00:05:55] Speaker 04:
I mean, because they withheld more than they should have, right?

[00:05:57] Speaker 04:
So they gave you some money, which they said was, in fact, owed to you.

[00:06:02] Speaker 04:
How much was that, $150 or something?

[00:06:04] Speaker 02:
Yes, but I'd like to correct a little bit of the chronology if you don't mind.

[00:06:08] Speaker 02:
So they didn't stop collecting because of the fraud.

[00:06:12] Speaker 02:
They learned about it, and performance continued.

[00:06:15] Speaker 02:
They kept paying Supreme.

[00:06:16] Speaker 02:
What they did in December 2011 was issue a final decision because of this premium outbound transportation issue.

[00:06:22] Speaker 02:
and say, we overpaid you, we need $750 million back.

[00:06:26] Speaker 02:
And they started collecting $21 million a month.

[00:06:28] Speaker 04:
But that was because of the fraud, right?

[00:06:30] Speaker 02:
No.

[00:06:30] Speaker 04:
It wasn't because we overpaid you.

[00:06:32] Speaker 04:
Oops, we accidentally sent you two checks in the mail.

[00:06:34] Speaker 04:
It was we overpaid you because you're overcharging us.

[00:06:36] Speaker 02:
No, Your Honor.

[00:06:37] Speaker 02:
The claim was this premium outbound transportation issue.

[00:06:41] Speaker 02:
Back when the contract first started, they agreed to a tentative rate.

[00:06:46] Speaker 02:
Supreme performed the premium outbound transportation mission at a tentative rate.

[00:06:50] Speaker 02:
DLA in December 2011 said, you know what?

[00:06:53] Speaker 02:
That tentative rate is too high.

[00:06:55] Speaker 02:
We're going to set it at a lower amount.

[00:06:57] Speaker 02:
We overpaid you by $750 million, and we're going to start collecting on that.

[00:07:00] Speaker 04:
Okay.

[00:07:01] Speaker 02:
Meanwhile, they continued to pay Supreme to perform other work under the contract.

[00:07:05] Speaker 04:
All right, I get it.

[00:07:06] Speaker 04:
So it's not a tip for tat thing.

[00:07:08] Speaker 04:
I get it now.

[00:07:09] Speaker 04:
It wasn't they didn't withhold because they suspected fraud.

[00:07:12] Speaker 04:
They withheld for a completely unrelated contract for this reason.

[00:07:15] Speaker 04:
Correct.

[00:07:15] Speaker 04:
Okay.

[00:07:16] Speaker 04:
But still, now I want to get to where I want to go, which is they withheld money from you and they shouldn't have.

[00:07:25] Speaker 04:
And what I don't understand is if the first material

[00:07:29] Speaker 04:
breach doctrine creates a scenario where they don't have to pay you for the interest of the money that they withheld wrongly.

[00:07:39] Speaker 04:
That's what we're here to decide today, right?

[00:07:41] Speaker 04:
Whether or not the first material, whether there was a first material breach, but even assuming there was, assuming there was, does that bar your entitlement to receive interest on the money they wrongfully withheld from you?

[00:07:53] Speaker 02:
No.

[00:07:54] Speaker 02:
And that's another key distinction with Laguna.

[00:07:56] Speaker 02:
Remember, what brings us here today is a government claim.

[00:07:59] Speaker 02:
They're claiming money back from Supreme because they believe they overpaid us for premium outbound transportation.

[00:08:05] Speaker 02:
That claim has nothing to do with fraud.

[00:08:07] Speaker 02:
The board determined they overcollected by $143 million, and they need to return that to us.

[00:08:13] Speaker 02:
So at the same time, the government is enforcing a contract against us.

[00:08:16] Speaker 02:
They're doing it in other claims as well.

[00:08:18] Speaker 02:
They're saying, whoa, you can't bring, we don't have to pay you interest for the money we overheld.

[00:08:23] Speaker 02:
You can't bring claims against us.

[00:08:25] Speaker 02:
The contract's invalid and unenforceable for you.

[00:08:28] Speaker 02:
It's only valid and enforceable for us.

[00:08:31] Speaker 02:
And so the reason the government has to return some of that money is because it's a government claim.

[00:08:36] Speaker 02:
The government has this extraordinary right where it can.

[00:08:38] Speaker 04:
But I guess what I'm getting at is I guess I just don't understand why they're not required to pay interest on.

[00:08:47] Speaker 04:
I mean, if you haven't got gathered yet, this is a friendly series of questions, not a hostile one.

[00:08:52] Speaker 04:
I don't understand why they're not required to pay you interest.

[00:08:56] Speaker 04:
What is the argument?

[00:08:57] Speaker 04:
Why are they not required to pay you interest on money they wrongfully withheld?

[00:09:02] Speaker 02:
The board held that our claim, our request for interest, fits in the box of a claim.

[00:09:08] Speaker 02:
And so at the same time that the government can use the contract as a sword to recover from us,

[00:09:14] Speaker 02:
It can use the first material breach defense as a shield to block our claim for interest.

[00:09:20] Speaker 03:
Which statutory provision are you relying on to claim interest?

[00:09:25] Speaker 02:
41 USC 7109.

[00:09:27] Speaker 03:
Right, which requires the contractor to file a claim.

[00:09:30] Speaker 02:
It requires two things.

[00:09:31] Speaker 02:
It requires the contractor to be found and amount due on a claim, which could be government.

[00:09:37] Speaker 02:
OK.

[00:09:37] Speaker 03:
But then it refers later back to the contractor's claim.

[00:09:41] Speaker 03:
So it's clearly referencing interest when you file a claim.

[00:09:46] Speaker 02:
There's a procedural requirement in 7109 that the contractor also file its own certified claim, which we did in this case.

[00:09:52] Speaker 03:
Well, they're all together, aren't they?

[00:09:54] Speaker 03:
It's not two separate requirements.

[00:09:56] Speaker 03:
That there be any claim.

[00:09:58] Speaker 03:
And then the contractor filed a claim.

[00:09:59] Speaker 03:
It's all part of the same provision.

[00:10:02] Speaker 02:
It's all part of the same provision, but it allows for situations where a contractor could recover interest on a government claim for its own claim.

[00:10:10] Speaker 02:
But in both cases, it must file a claim.

[00:10:12] Speaker 03:
How do you get there when the claim it's talking about that you get interest on is later defined as the contractor's claim?

[00:10:21] Speaker 02:
No, the part that references the contractor-certified claim is discussing when the interest clock starts.

[00:10:28] Speaker 02:
And it says it starts from 1.

[00:10:29] Speaker 03:
But it's referring back to that same A claim.

[00:10:32] Speaker 03:
It's all in the same sentence, isn't it?

[00:10:34] Speaker 02:
Yes, it's all in part of the same sentence.

[00:10:36] Speaker 02:
It could say.

[00:10:37] Speaker 03:
OK, let me back up.

[00:10:38] Speaker 03:
Is there a general right to interest from the government absent a statutory waiver immunity?

[00:10:47] Speaker 03:
The answer is no, right?

[00:10:48] Speaker 02:
The answer is no.

[00:10:49] Speaker 03:
So even though in normal commercial world, if you win a case or something, you normally get interest on the money you get back.

[00:10:57] Speaker 03:
In the government cases, you don't get that.

[00:11:00] Speaker 03:
Correct.

[00:11:01] Speaker 03:
Absent this provision, you would get no interest whatsoever, even if the government withheld $500 million for 20 years and then finally gave it back because they said, oh, sorry.

[00:11:12] Speaker 03:
If there's no statutory provision for interest, you don't get interest.

[00:11:16] Speaker 02:
Correct.

[00:11:17] Speaker 02:
This is the provision we're going on.

[00:11:18] Speaker 03:
So if this provision only applies to contractor claims and not give you interest on government claims, you don't get interest.

[00:11:28] Speaker 02:
Correct.

[00:11:29] Speaker 02:
The court held not that long ago in Kellogg, Brown, and Root that contractors can collect interest when they win on a government claim.

[00:11:37] Speaker 03:
But in that case, it was based on them filing their own claims for return of the same amounts.

[00:11:44] Speaker 02:
which is exactly what happened here.

[00:11:45] Speaker 02:
We filed our own claims for it.

[00:11:47] Speaker 03:
Yes, but the problem and the interest related to their claims, not the government claim.

[00:11:52] Speaker 03:
Even though they won on the affirmative defense to the government claims, the interest ran to the date of their claims for the return of the money and relied on a valid claim that the contractor filed for the interest of the money, for the interest, right?

[00:12:07] Speaker 02:
Which is precisely what we're relying on here.

[00:12:09] Speaker 02:
Yes.

[00:12:10] Speaker 03:
The problem is your claims are barred by fraud.

[00:12:14] Speaker 03:
So how can you get interest on your claims?

[00:12:18] Speaker 03:
Because there's no general interest provision for a government claim.

[00:12:22] Speaker 02:
In Kellogg, Brown, and Root, they did not recover on their claims either.

[00:12:26] Speaker 02:
The court merely used their claims as the date from when they could start collecting interest.

[00:12:31] Speaker 04:
Isn't your claim related to the separate overpayment of the POT rates?

[00:12:37] Speaker 04:
That's not the fraud question, right?

[00:12:40] Speaker 02:
Right, neither of the party's claims at issue in this case are concerned the fraud.

[00:12:45] Speaker 04:
So your claim was to the POT rates and overpay.

[00:12:52] Speaker 04:
You wanted the money back that the government withheld that they said you had overpaid.

[00:12:56] Speaker 04:
And that claim was denied.

[00:12:57] Speaker 04:
Is that correct?

[00:12:58] Speaker 02:
The court or the board below did not address our claims.

[00:13:02] Speaker 02:
He found they were moot because the court determined because the government's claim was to establish the final POT rates,

[00:13:09] Speaker 02:
The board decided it could do that based exclusively on the government's claim and did not need to reach ours.

[00:13:16] Speaker 04:
I guess one of my questions is, how did you get your $143 million back?

[00:13:20] Speaker 04:
If the board denied your claim and you had no claim, could the government technically have not given you back the $143 million that it wrongfully withheld?

[00:13:32] Speaker 02:
I think that highlights a flaw in the government's argument here.

[00:13:35] Speaker 02:
It's their claim.

[00:13:36] Speaker 02:
They've got this extraordinary right where they can claim money from you, collect immediately, and force you to continue to perform.

[00:13:44] Speaker 02:
And so the board rightfully said, no, we have to look at the extent to which that claim is valid, and you've got to return the excess.

[00:13:51] Speaker 02:
But the extraordinary thing here is the government is saying it's a valid claim.

[00:13:55] Speaker 04:
So the reason it had to return the excess, isn't it because you claimed that you wanted that money back?

[00:14:00] Speaker 04:
I mean, why else would the government

[00:14:02] Speaker 04:
have returned the excess.

[00:14:05] Speaker 02:
I think we would have been entitled to that excess whether we filed our own affirmative claims or not.

[00:14:10] Speaker 02:
We filed them as a protective measure in case it was determined that we needed to file our own under Maripakis.

[00:14:15] Speaker 04:
Well, had you not filed them, you wouldn't have been eligible for interest.

[00:14:17] Speaker 02:
We would not have been eligible for interest, exactly.

[00:14:20] Speaker 03:
But if it relies on your claims for interest and your claims are barred by fraud, then how do you get interest?

[00:14:27] Speaker 03:
Again, we read that- I mean, KBR doesn't include a fraud.

[00:14:31] Speaker 03:
component, does it?

[00:14:33] Speaker 02:
No, but just like us, they did not recover on their claims.

[00:14:36] Speaker 02:
And so from that standpoint, we view the two as indistinguishable.

[00:14:40] Speaker 03:
But they recovered based on a contractor asserted claim.

[00:14:44] Speaker 03:
They recovered interest based on a contractor asserted claim.

[00:14:48] Speaker 03:
a valid contractor.

[00:14:50] Speaker 03:
And you can't, because you don't have any.

[00:14:53] Speaker 03:
The interest there, even though they recovered because of the procedural posture of that case as an affirmative defense, they had filed claims for the return of money.

[00:15:02] Speaker 03:
The grounds they raised were not found to be sufficient, but the amended complaint at the board that allowed an affirmative defense still raised a return for that same money.

[00:15:17] Speaker 03:
based on your claims.

[00:15:19] Speaker 03:
What's going on here?

[00:15:20] Speaker 03:
I am also a little unclear as to why the government has to pay you any money back.

[00:15:25] Speaker 03:
But it must be something to do with to show that they've over withheld on their decision improperly.

[00:15:31] Speaker 03:
But that doesn't relate necessarily.

[00:15:33] Speaker 03:
Even if it related back to your claims and the money returned, your claims are barred by fraud.

[00:15:39] Speaker 02:
I see that amount of time I respond to your question.

[00:15:42] Speaker 02:
Again, our position is that KBR prevailed on an affirmative defense.

[00:15:47] Speaker 02:
Their claim was defeated, just as in our case.

[00:15:51] Speaker 02:
And the court viewed the filing of the claim as all that is required is a procedural requirement to put the government on notice that the contractor is disputing the collection of the money and wants interest if they've overcollected.

[00:16:04] Speaker 03:
Let me just ask one more question.

[00:16:07] Speaker 03:
If I read that statutory language as not allowing interest on a government claim that it requires interest on a contractor claim.

[00:16:17] Speaker 03:
Um, and I find that inconsistent with KBR.

[00:16:21] Speaker 03:
I don't think it is actually, but I do.

[00:16:24] Speaker 03:
KBR is not binding, right?

[00:16:25] Speaker 03:
I don't have to follow that.

[00:16:27] Speaker 02:
It was a non-precedential decision.

[00:16:29] Speaker 02:
Yeah.

[00:16:29] Speaker 03:
And the plain language of the statute says you only get interest on contractor claims and your contractor claims are barred by fraud.

[00:16:36] Speaker 03:
That would be a consistent reading of the statute.

[00:16:39] Speaker 03:
I know you disagree with it, but.

[00:16:41] Speaker 02:
Yeah, respectfully, I think it would be bad policy to allow the government to over-collect on claims, keep the money for 10 years, and not pay interest.

[00:16:47] Speaker 03:
But that's the general policy of no interest against the government.

[00:16:51] Speaker 03:
This happens in tons of cases across the sphere.

[00:16:55] Speaker 03:
And whether it's fair or not, sovereign immunity isn't necessarily fair.

[00:17:01] Speaker 03:
Congress has to actually enact a specific interest statute that relates to your situation and explicitly gives you interest.

[00:17:09] Speaker 03:
And if what you're arguing for is interest on government claims, I don't see a specific waiver.

[00:17:14] Speaker 03:
That's why people file a mirror image counterclaims all the time.

[00:17:20] Speaker 02:
Respectfully, we think 7109 does not require a contractor claim to have prevailed.

[00:17:26] Speaker 04:
OK.

[00:17:26] Speaker 04:
Thank you, Mr. Perry.

[00:17:27] Speaker 04:
Thank you, Your Honor.

[00:17:28] Speaker 04:
Government, Mr. Oliver.

[00:17:33] Speaker 03:
Can you explain why the government is giving back money to them?

[00:17:38] Speaker 01:
Yes.

[00:17:40] Speaker 01:
Pursuant to the board's ultimate decision, the question for the board was what rates were applicable.

[00:17:46] Speaker 01:
Certain rates that were opposed by Supreme were higher than they should have been.

[00:17:51] Speaker 01:
But based on those rates, even though Supreme charged higher than it should have,

[00:17:55] Speaker 01:
that still meant that there were funds that would ultimately be owed to Supreme.

[00:18:01] Speaker 01:
In fact, the government overwithheld based upon what the board determined was the proper POT rates.

[00:18:09] Speaker 01:
And so their Supreme's claim for interest then pursuant to Section 7109 of CDA is based expressly on

[00:18:18] Speaker 01:
fact that there must be a contractor claim that is in the statute.

[00:18:22] Speaker 01:
That contractor claim, unlike in KBR, is barred by the government's affirmative defense clause.

[00:18:31] Speaker 03:
They were charging something.

[00:18:32] Speaker 03:
The government withheld saying you're charging too much.

[00:18:34] Speaker 03:
The board found here's the proper rate, but the government's still over withheld under the proper rate.

[00:18:40] Speaker 03:
And you didn't assert any kind of fraud, affirmative defense to that over withholding?

[00:18:46] Speaker 01:
The government did assert.

[00:18:48] Speaker 01:
fraud based upon a void at an issue.

[00:18:53] Speaker 01:
There was fraud that affected from the beginning.

[00:18:55] Speaker 01:
The board disagreed with that.

[00:18:56] Speaker 01:
That's not an appeal.

[00:18:57] Speaker 01:
And so the DLA did timely assert an affirmative defense, a prior defense, of fraud a month after the guilty plea.

[00:19:07] Speaker 01:
And that affirmative offense applies squarely to the only contractor claim that's at issue for this court, which is the claim for CDA interest.

[00:19:18] Speaker 01:
Starting back on Laguna.

[00:19:20] Speaker 00:
But can we stay where we are?

[00:19:23] Speaker 00:
Absolutely.

[00:19:23] Speaker 00:
I understand the chief's concern, because it feels a little bit incongruous.

[00:19:28] Speaker 00:
And let's stop using the word claim, because maybe that's a special.

[00:19:31] Speaker 00:
But if the other side, if Supreme has established before the board that it is entitled to get some of its money back, $143 million, whatever it was, and the court or the board agrees with that,

[00:19:46] Speaker 00:
Doesn't it strike you as sort of intuitive that if you have a right or an entitlement to money back from the government, because they improperly withheld it from you, that the right to interest in that money would flow automatically from your entitlement to the money?

[00:20:03] Speaker 00:
Do you understand the intuitive view of that?

[00:20:05] Speaker 01:
I understand being rude to you, Your Honor.

[00:20:07] Speaker 01:
And here is where it comes down to.

[00:20:08] Speaker 01:
The board discussed the weird, procedure posture of having a government claim

[00:20:14] Speaker 01:
in essence, for this is the amount that DLA asserts is owed.

[00:20:20] Speaker 01:
And then Supreme asserts basically mirror image claims saying, no, no, no.

[00:20:26] Speaker 01:
The proposed rates are the correct rates.

[00:20:28] Speaker 01:
The government's claim is, no, no, no.

[00:20:30] Speaker 01:
It claims the rates are much lower.

[00:20:32] Speaker 01:
And so although the board ultimately determined that there was an owe without and that the rates, actually the rates that were much closer to what the government proposed are correct, or what the government suggests is correct,

[00:20:43] Speaker 01:
Nonetheless, in order to maintain interest, there must be a waiver of sovereign immunity.

[00:20:48] Speaker 01:
There must be a statutory basis for that.

[00:20:50] Speaker 01:
And there is in this case.

[00:20:51] Speaker 01:
But the language of that statute, again, provides that there must be a valid contractor claim.

[00:20:57] Speaker 01:
So again, the only contractor claim at issue is that claim for CDA interest based upon the amount that was overheld, based on the government claim.

[00:21:05] Speaker 01:
And that, yes, Your Honor?

[00:21:06] Speaker 04:
My problem is if that logic is correct, and I definitely understand your statutory argument,

[00:21:12] Speaker 04:
then you wouldn't even have happened to give back the $143 million.

[00:21:15] Speaker 04:
They would have had, they have no valid claim according to you for the $143 million.

[00:21:20] Speaker 04:
So if I accept as true everything you've said, you're not off the hook just for the interest.

[00:21:26] Speaker 04:
You're off the hook for all the overly withheld money.

[00:21:32] Speaker 04:
I know.

[00:21:35] Speaker 03:
It's hard for me to swallow.

[00:21:39] Speaker 03:
So let's just assume they didn't file any claims at all.

[00:21:43] Speaker 03:
So if they didn't file any claims at all, I think even they would concede no interest whatsoever.

[00:21:48] Speaker 03:
So if all we had was the government claim that they properly withheld x amount of dollars, there's no interest provision.

[00:22:00] Speaker 03:
And on the government claim,

[00:22:02] Speaker 03:
You can't assert a material breach claim, can you, in defense of your claim, or can you?

[00:22:10] Speaker 03:
Like if you say, we withheld x amount of dollars, and they said, oh no, the withholding should have been lower.

[00:22:20] Speaker 03:
They can do that, setting aside their own claims.

[00:22:23] Speaker 03:
Correct.

[00:22:24] Speaker 03:
And the reason the first material breach doctrine comes into play here is because you can use that as a defense to contractor claims.

[00:22:31] Speaker 03:
Correct.

[00:22:31] Speaker 03:
Can you use it as a defense to a government claim?

[00:22:35] Speaker 01:
I'm not aware of case law suggesting that that's the case.

[00:22:39] Speaker 03:
I mean, I don't think the board explained that really well.

[00:22:41] Speaker 03:
And I'm not sure that you all explained it really well.

[00:22:44] Speaker 03:
But it seems to me that that's probably the reason that you have to give back money is because the contracting officer's final decision on withholding is considered a government claim.

[00:22:54] Speaker 03:
And they can appeal that without filing their own claim.

[00:22:57] Speaker 03:
And you have to defend that.

[00:22:59] Speaker 03:
And in defending that, I'm not aware of any situations where you can use

[00:23:04] Speaker 03:
an affirmative defense of first material breach to deny your own claim.

[00:23:11] Speaker 03:
That's only with regards to their claims and their claims here, they did file them and they're out because of that.

[00:23:18] Speaker 03:
And then there's no interest on a government claim.

[00:23:22] Speaker 03:
Correct.

[00:23:23] Speaker 03:
Despite the seeming unfairness of it, it's the world we live in with sovereign immunity.

[00:23:29] Speaker 01:
It's the world we live in with sovereign immunity, and it's the world we live in with respect to the specific CTA provision that provides for statutory interest.

[00:23:35] Speaker 01:
It's specifically tied to contractor claim, and for the reasons he's mentioned,

[00:23:39] Speaker 01:
The only contract to claim here involves interest.

[00:23:42] Speaker 01:
And again, it's a weird procedural posture, just because you have government claims, and then you have image supreme claims.

[00:23:47] Speaker 00:
This isn't that different from KBR.

[00:23:49] Speaker 00:
So is it your view that this is, as Judge Hughes suggested tentatively to your friend, that this is distinguishable from KBR?

[00:23:58] Speaker 00:
Or is it your view that we don't have to follow KBR anywhere?

[00:24:00] Speaker 00:
So who cares, because it's non-crack.

[00:24:02] Speaker 01:
The former.

[00:24:03] Speaker 01:
It is distinguishable from KBR.

[00:24:05] Speaker 01:
Not that you don't follow KBR.

[00:24:07] Speaker 01:
That's not the reasoning.

[00:24:08] Speaker 01:
The reasoning is KBR did not involve a first material breach based upon fraud that would then bar a contractor claim.

[00:24:21] Speaker 00:
In that case, you had a valid... But your rent says there was no rejection here based on fraud.

[00:24:27] Speaker 00:
This particular issue was not based... the fraud stuff didn't play into that.

[00:24:32] Speaker 01:
Well, I disagree with that characterization.

[00:24:36] Speaker 01:
What the proper rates were was the subject of final decisions.

[00:24:39] Speaker 01:
And certainly, the government put forth a fraud, contended that this was, well, let me back up.

[00:24:48] Speaker 01:
All of the final decisions based upon the issue of what was the proper rate.

[00:24:54] Speaker 01:
And then in 2014, following the guilty plea, a month after, you have the timely assertion

[00:25:03] Speaker 01:
a fraud from an offense.

[00:25:04] Speaker 01:
And then after that, you have a final decision in which the government, DLA specifically, alleged that the entire contract is void ad minutiae.

[00:25:12] Speaker 01:
So that is the sequence in which fraud came into it.

[00:25:15] Speaker 01:
And now we're here before this court.

[00:25:17] Speaker 01:
Do you read KBR as allowing interest on a government claim?

[00:25:21] Speaker 01:
No.

[00:25:22] Speaker 01:
It says the exact opposite.

[00:25:23] Speaker 01:
I mean, KBR especially says that they're covering

[00:25:26] Speaker 03:
The quantum recovered in KBR was on the government, an affirmative defense for the government claim, right?

[00:25:33] Speaker 03:
Correct.

[00:25:34] Speaker 03:
But the interest recovered was on a contractor claim.

[00:25:37] Speaker 01:
Yes.

[00:25:38] Speaker 01:
It was on a valid contractor claim in KBR.

[00:25:41] Speaker 01:
And what we do not have here is a valid contractor claim.

[00:25:46] Speaker 03:
I mean, it's not valid because there is prior... So there was no fraud here in the...

[00:25:55] Speaker 03:
the quantum was recovered as an affirmative defense to the government claims.

[00:26:01] Speaker 03:
But they still have these same claims out there outstanding.

[00:26:03] Speaker 03:
They would get interest.

[00:26:05] Speaker 03:
Can you repeat that, Ron?

[00:26:07] Speaker 03:
So no fraud.

[00:26:08] Speaker 03:
Yes, sir.

[00:26:08] Speaker 03:
They filed the same claims, and they also, and you had your claim, and their recovery is based upon an affirmative defense to the government claim.

[00:26:19] Speaker 03:
Would they get interest in that situation?

[00:26:22] Speaker 01:
That scenario sounds similar to KBR.

[00:26:25] Speaker 03:
Right, because the quantum may be recovered, but they still have a valid

[00:26:29] Speaker 03:
contractor claim to invoke interest here.

[00:26:33] Speaker 03:
Let's just assume they have no valid contractor claim.

[00:26:36] Speaker 03:
I don't think there's been any challenge.

[00:26:37] Speaker 03:
I mean, I know they were rejected.

[00:26:39] Speaker 03:
Let's just assume we're rejecting.

[00:26:40] Speaker 03:
I don't know whether we're rejecting their, you know, waiver argument or not, but let's assume we're rejecting that and that the fraud bars, the contractor claims.

[00:26:48] Speaker 03:
Your view is because there's no valid contractor claim, they can't recover interest because that statute only applies to interest on contractor claims, not government claims.

[00:26:58] Speaker 01:
That's absolutely the case, Your Honor.

[00:26:59] Speaker 01:
You have to have a valid contractor claim under 7109 and there is no, there isn't a valid contractor claim because of the fraud firm of defense that we've lost and which has not been waived.

[00:27:13] Speaker 01:
Their waiver argument is precluded by Laguna and this court in Laguna made clear that waiver is the intentional relinquishment of a known right and in that case the known right

[00:27:25] Speaker 01:
arose following the guilty plea.

[00:27:27] Speaker 01:
And the court in Laguna was clear that before the guilty plea in that case, there was no known right.

[00:27:35] Speaker 01:
And so in this case, the guilty plea.

[00:27:37] Speaker 00:
You know what your friend is arguing about Laguna and the distinctions among others is that Laguna was different because they didn't really know.

[00:27:44] Speaker 00:
The contracting people really didn't have the same information on fraud that the contracting people here

[00:27:52] Speaker 01:
This court didn't say that in Laguna.

[00:27:53] Speaker 01:
If that was a dispositive fact, if that was an established fact, then that was something we would have seen in Laguna.

[00:27:59] Speaker 01:
And the Laguna court in Luna with them would have made certain conclusions that followed from who knew what and when, which agency communicated what to which agency and to what stage.

[00:28:09] Speaker 00:
So the cases refer to known right.

[00:28:11] Speaker 00:
What does that mean?

[00:28:13] Speaker 01:
Known right, in the context of a prior affirmative offensive, when does a party, in this case the government,

[00:28:20] Speaker 01:
a right based upon its knowledge to assert an affirmative offense.

[00:28:24] Speaker 01:
Here, it's a fraud.

[00:28:25] Speaker 01:
And fraud is different than your garden variety type defenses that you might see in Baron Banksheers and others, which they rely upon.

[00:28:33] Speaker 01:
Because as we stated in our brief, the CTA expressly removes fraud from administrative consideration, expressly disempowers.

[00:28:45] Speaker 01:
contracting officers from settling terminating contracts based upon suspected fraud in both FAR 33209 and 210.

[00:28:54] Speaker 01:
Those suspected matters of fraud have to be referred to the proper investigative agency.

[00:29:00] Speaker 00:
And that principle generally protects contractors as well as the government, right?

[00:29:05] Speaker 01:
It protects both.

[00:29:06] Speaker 01:
But the implications for the implication of your question in terms of the known right is that the contracting officer can't just,

[00:29:13] Speaker 01:
2010, when there's allegations of fraud, immediately terminate and say we're making an election.

[00:29:18] Speaker 01:
It can't do that.

[00:29:19] Speaker 01:
It has to do what it exactly did in this case, which is to refer to the proper investigative authorities.

[00:29:24] Speaker 01:
And then once there is a conclusion to that process, that investigative process, that's when the known right exists.

[00:29:31] Speaker 01:
And it's the same principle regarding the board, because this is a board case right below.

[00:29:34] Speaker 01:
And as this court in Laguna stated, again,

[00:29:37] Speaker 01:
the board doesn't have jurisdiction to make findings of facts.

[00:29:41] Speaker 01:
So even if somehow there would be an election that would allow the DLA to assert from the defense of fraud, it can't be litigated before the board prior to a court of competent jurisdiction determining that there's fraud.

[00:29:54] Speaker 01:
The board can't do that.

[00:29:55] Speaker 01:
Laguna stands for that principle as well.

[00:29:59] Speaker 04:
I'm still a little bit confused if fraud truly bars Supreme's claims, all of its claims related to this contract,

[00:30:08] Speaker 04:
Why would you give the $143 million back?

[00:30:10] Speaker 04:
And what would happen if you didn't?

[00:30:12] Speaker 01:
Right.

[00:30:14] Speaker 01:
The confusion lies in so far as what is the contract claim at issue in this case.

[00:30:18] Speaker 01:
I think that the $143 million actually is in relation to the government's.

[00:30:22] Speaker 01:
And the government claimed it was, the government made certain conclusions in its final statement as to what the rates were.

[00:30:30] Speaker 01:
the board slightly disagreed with that.

[00:30:32] Speaker 01:
Based upon that, the board's finding, which the government's not appealing, on the government's claim, then there was no withholding.

[00:30:40] Speaker 01:
And so there's not, again,

[00:30:42] Speaker 04:
A contractor claim that attaches to that, the only contractor- They did file a claim saying you're wrongfully withholding this money.

[00:30:49] Speaker 01:
It was a mirror image.

[00:30:51] Speaker 01:
And that claim's barred by fraud.

[00:30:52] Speaker 01:
And their claim- All of their claims are barred by fraud.

[00:30:56] Speaker 01:
Their contractor claims are barred by fraud.

[00:30:59] Speaker 03:
Their recovery doesn't depend on their claims in any way.

[00:31:03] Speaker 04:
But if their claims are barred by fraud, what happens if you don't give them the $143 million back?

[00:31:07] Speaker 04:
What if you just say, see ya?

[00:31:09] Speaker 03:
Well, the court has, the board has found you haven't proven your claim to the extent of the full withholding, right?

[00:31:16] Speaker 01:
Right.

[00:31:16] Speaker 01:
The board has found, right.

[00:31:18] Speaker 03:
The board made the determination.

[00:31:19] Speaker 03:
The fraud finding doesn't have anything to do with that.

[00:31:21] Speaker 03:
You can't assert fraud as a defense to you're not proving your withholding.

[00:31:28] Speaker 03:
Correct.

[00:31:28] Speaker 00:
The fraud doesn't have anything to do with it, then how can you use

[00:31:35] Speaker 00:
Fraud is the way to distinguish this from KBR and other instances by your answer to Judge Morridge.

[00:31:41] Speaker 00:
Chief Judge Morridge would simply be, well, their claim was fraud, so we don't have to consider their claim.

[00:31:46] Speaker 01:
Well, to be clear, I guess I need to be crystal clear as to what fraud applies to.

[00:31:49] Speaker 01:
Fraud applies to bar the contractor's claims under his contract.

[00:31:53] Speaker 01:
And the only claims that are issued on appeal are the claim for interest.

[00:31:59] Speaker 01:
Because the other contract claims are barred by

[00:32:04] Speaker 01:
One, we're barred by fraud.

[00:32:08] Speaker 01:
And the only other claims are the government claims for, well, what are the proper rates?

[00:32:13] Speaker 01:
And the board's determination, based on what the proper rates were, well, you would overestimate by an actual amount.

[00:32:19] Speaker 01:
And therefore, then the issue is, well, is any interest owed?

[00:32:22] Speaker 01:
And of course, our answer is no.

[00:32:24] Speaker 01:
Because that's what implicates the only government contract claim, the only government contract claim in this case.

[00:32:32] Speaker 01:
And so the confusion is really just over the fact that there are mirror image claims that were at issue, let's say below, in terms of the contracting officers' final decisions.

[00:32:44] Speaker 01:
For the reason I say, we ask that you affirm the decision of the board.

[00:32:46] Speaker 01:
Thank you.

[00:32:51] Speaker 04:
You have a little time.

[00:32:52] Speaker 04:
No, no, I'm sorry.

[00:32:53] Speaker 03:
I mean, you don't have to use it if you don't want to.

[00:32:57] Speaker 04:
Come on out, Mr. Perry.

[00:32:59] Speaker 02:
We'll give you two minutes.

[00:33:01] Speaker 04:
No.

[00:33:02] Speaker 04:
No, no.

[00:33:02] Speaker 04:
Come on out.

[00:33:03] Speaker 04:
I'm sorry.

[00:33:04] Speaker 02:
My apologies.

[00:33:05] Speaker 04:
If you want to leave, go ahead.

[00:33:07] Speaker 02:
No, I could stay here all day and talk about this.

[00:33:10] Speaker 03:
Well, you can't do that.

[00:33:12] Speaker 03:
It looks like you get two minutes.

[00:33:14] Speaker 02:
Well, I appreciate that.

[00:33:18] Speaker 03:
Can I just start with, generally, there is no interest on a government claim, right?

[00:33:24] Speaker 03:
If all that happened is the government issued a final contracting officer's decision, you file an appeal at the board saying the government contracting officer's final decision is wrong, and you win, you don't get interest, do you?

[00:33:39] Speaker 02:
Not without filing our own claim under 7109.

[00:33:42] Speaker 03:
Right.

[00:33:43] Speaker 03:
Because 7109 is a provision for interest on contractor's claims.

[00:33:49] Speaker 02:
Respectfully, we think it's a provision on both claims.

[00:33:52] Speaker 03:
Well, that doesn't make sense to me.

[00:33:53] Speaker 03:
Because if it's a provision for interest on both claims, then that would mean you could get interest on a government claim.

[00:34:00] Speaker 03:
But it's not.

[00:34:01] Speaker 03:
It's a provision.

[00:34:02] Speaker 03:
You're reading it as a provision for interest on both claims with the condition precedent that you have to file your own claim.

[00:34:09] Speaker 03:
But that's not what that sentence says.

[00:34:11] Speaker 03:
The sentence talks when it refers to any claim.

[00:34:15] Speaker 03:
Later in the sentence, it defines it as a contractor claim.

[00:34:19] Speaker 02:
Respectfully your honor.

[00:34:20] Speaker 03:
We don't read it that way we read it as setting the any case outside of KBR And I don't think KBR stands for what you said it is But you would think that if that case stands for the notion that you can get interest on a contractor claim On a government claim not a contractor claim on a government claim As long as you have filed your own claim then we would have case on this This is not an issue that wouldn't have arisen before

[00:34:47] Speaker 02:
There are prior cases that have addressed it.

[00:34:49] Speaker 02:
There's not a Federal Circuit case besides KVR that has addressed it.

[00:34:52] Speaker 03:
And don't all of them require some kind of mirror image contractor claim?

[00:34:56] Speaker 02:
All of those cases did involve a mirror image claim, yes.

[00:35:01] Speaker 03:
And if those mirror image claims, and the interest runs based on those mirror image claims, right?

[00:35:08] Speaker 03:
They don't run based upon the government claim.

[00:35:10] Speaker 03:
In fact, if the interest ran on the government claim, it would run from the date of the government claim, logically, not the date of the mirror image contractor claim.

[00:35:20] Speaker 02:
That is not how the statute is written.

[00:35:23] Speaker 03:
The statute is written to cover contractor claims.

[00:35:27] Speaker 02:
Respectfully, we disagree.

[00:35:28] Speaker 02:
We believe the statute is written to use the contractor claim as the date.

[00:35:32] Speaker 02:
And the reason for that is because you wouldn't.

[00:35:35] Speaker 02:
How could that make any sense?

[00:35:37] Speaker 03:
What if you filed your claim two years before they started withholding money?

[00:35:42] Speaker 03:
I don't know how that would necessarily work, but suppose it did, and then they started withholding money, and you say, well, we thought a claim that covers the same subject matter area, and so we should get interest back before they even started withholding our money.

[00:35:55] Speaker 03:
That can't be what Congress intended.

[00:35:59] Speaker 02:
We think the reason it's set up the way it is is because when the government withholds money, the contractor has an obligation, if they contest it, to file its own claim, to put the government on notice saying, if you're going to collect pursuant to your claim, if at some point you start over collecting, we're going to want interest on that money.

[00:36:15] Speaker 02:
And that's why we think it's set up the way.

[00:36:17] Speaker 02:
You don't have to file your own claim.

[00:36:18] Speaker 02:
You could simply dispute the claim.

[00:36:20] Speaker 02:
If you win, you don't get interest.

[00:36:22] Speaker 02:
But if you file your own claim and you win, you get interest back.

[00:36:26] Speaker 02:
That's how we make the statute.

[00:36:30] Speaker 02:
Well, again, we read KBR to say that KBR recovered because of its affirmative defense.

[00:36:37] Speaker 02:
And the claim was purely to start the clock for interest, which is what the government's argument was.

[00:36:43] Speaker 02:
The government was saying, you shouldn't get interest all the way back to when you filed your claims.

[00:36:48] Speaker 02:
You should get interest from when you added this affirmative defense.

[00:36:51] Speaker 02:
The court found, no, we're going to attach to when you filed your claims.

[00:36:54] Speaker 04:
How much money is the interest?

[00:36:56] Speaker 02:
It's roughly 25 to 30 million dollars depending on when you start the clock.

[00:37:03] Speaker 04:
Anything further?

[00:37:05] Speaker 02:
I'm sorry, Your Honor.

[00:37:06] Speaker 04:
Anything further?

[00:37:07] Speaker 02:
Anything further.

[00:37:07] Speaker 02:
Do you have anything further than you want to stay?

[00:37:09] Speaker 02:
No, Your Honor.

[00:37:10] Speaker 02:
All right.

[00:37:11] Speaker 02:
Thank you.

[00:37:11] Speaker 04:
Thanks both counsels.

[00:37:12] Speaker 04:
This case is taken under submission.