Case No. 95-14283-SSM, Adversary Proceeding No. 95-1490United States Bankruptcy Court, E.D. Virginia
May 19, 1997
Thomas R. Nedrich, Esquire, Thomas R. Nedrich Associates, Falls Church, VA, Of Counsel for the plaintiff
J. Scott Hommer, III, Esquire, Venable, Baetjer and Howard, L.L.P., McLean, VA, Of Counsel for defendant The Prometheus Company
MEMORANDUM OPINION AND ORDER
STEPHEN MITCHELL, Bankruptcy Judge
This matter is before the court on a second motion for summary judgment filed by The Prometheus Company, the remaining defendant in this action.[1] A hearing was held on April 29, 1997, at which the parties presented oral argument. At the conclusion of the hearing, the court took the matter under advisement. On May 12, 1997, Prometheus submitted a supplemental letter brief and additional deposition transcripts. For the reasons stated in this opinion, the motion for summary judgment will be denied.
Facts
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The plaintiff, tgB, Inc., a government contractor, filed a voluntary petition under Chapter 11 of the Bankruptcy Code in this court on September 28, 1995. The present adversary proceeding was brought on November 30, 1995, against the United States and two of the debtor’s subcontractors, The Rail Company (“Rail”) and The Prometheus Company (“Prometheus”). Both the United States and Rail have reached settlements with the debtor and have been dismissed as defendants.
On February 28, 1990, the Naval Air Systems Command, U.S. Department of the Navy (“NAVAIR”) awarded tgB a 5 year contract, effective April 1, 1990, for logistical support and maintenance of F/A-18 aircraft. The contract had formerly been held by Rail, which had been awarded it under a small business set-aside program. It was not expected, however, that Rail would qualify as a small business when the contract came up for renewal.
tgB and Rail formed a team to bid on the new contract, with tgB as the prime contractor and Rail as the major subcontractor. At some point in the planning, it was agreed, at Rail’s request, that a small portion of the work would be subcontracted to Prometheus. After tgB was awarded the contract, Rail and tgB entered into a firm fixed price subcontract dated May 30, 1990, to provide labor support for budget and financial analysis for the NAVAIR contract.
Over the span of several years, Prometheus performed services for the debtor in connection with the NAVAIR contract. As tgB received delivery orders from the Navy, it would issue its own work orders (referred to in the subcontract as “bilateral agreements”) to Prometheus. The subcontract work orders issued by tgB in connection with Delivery Orders No.
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3, 17, 24, 29, 35, 41, 46, 49, 65, 69, and 70 from NAVAIR were the subject of the court’s prior summary judgment order.
In addition to the labor supplied under the subcontract work orders, Prometheus supplied labor to tgB in connection with two Delivery Orders — No. 34 and 52 — under a separate agreement whereby tgB “leased” employees from Prometheus to assist tgB in performing the contract.[2] This “lease” arrangement is reflected in a written agreement between Prometheus and tgB dated May 15, 1992. The agreement contained the following recital:
2. At the present time, tgB’s Government contract obligations require it to employ additional personnel on a temporary basis who are technically qualified to perform work required of tgB under certain of its Government contracts. Also at the present time, PROMETHEUS has in its employ personnel who are technically capable to perform the type of skilled labor which is required by tgB to complete its said Government contract obligations in a proper and timely manner.
The agreement then stated that Prometheus agreed to lease to tgB the employees listed on an attached schedule entitled “Borrowed Personnel Agreement.” The schedule attached to the agreement, however, did not actually list any names or labor rates. Instead, in the places provided for that information was the notation, “To Be Determined.” Subsequently, however, the parties executed a document dated May 28, 1992, entitled “Schedule A Leased Personnel Agreement,” reflecting the lease of a named senior financial analyst for the period from April 20, 1992 through
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September 30, 1992 at $21.78 per hour for a maximum of 1,058 hours. A subsequent amendment extended the lease to December 15, 1992 and increased the maximum hours to 1,497.
The May 15, 1992, agreement further provided,
It is agreed that the person(s) listed in Schedule A shall at all times be and remain employees of PROMETHEUS for purposes of payment of salaries, withholding of taxes, and continuation of employee benefits. . . . tgB shall pay no wages to any PROMETHEUS employee covered by this Agreement. . . . While leased to tgB, the employees of PROMETHEUS . . . shall, for the purposes of performance of tgB work, be under the supervision of tgB’s program manager, and shall provide deliverables and other required documentation and information to tgB as stated in the Statement of Work. . . . The parties agree that it shall be solely the responsibility of tgB to obtain all necessary consents from third parties to use Prometheus employees in the performance of tgB Government contract obligations. . . . PROMETHEUS agrees to comply with tgB requests for personnel data on leased PROMETHEUS employees reasonably necessary for tgB to obtain such third party consents.
The agreement is silent with regard to the responsibilities of either party for keeping and maintaining employee time records. Schedule A dated May 28, 1992, however, contains the following language: “PROMETHEUS shall provide to tgB an accounting of hours expended by labor category NLT 5 working days after the end of each month.”
Prometheus also supplied tgB with “leased” employees to perform work under Delivery Order No. 52. Documents entitled “Leased Personnel Agreement” dated January 4, 1993, May 1, 1993, and September 8, 1993, reflect the lease of a senior financial analyst for the period December 16, 1992 through September 30, 1993 at $22.54 per hour for a maximum of 1,607 hours. None of the agreements related to Delivery Order No. 52 contained the language requiring Prometheus to provide tgB “an accounting of hours expended by labor category.”
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Prometheus billed tgB a total of 1,426 hours for employees supplied in connection with Delivery Order No. 34 and 1,599 hours for employees supplied in connection with Delivery Order No. 52.[3] tgB included those hours in its own billings to the Navy. For reasons that are unexplained, it appears that, even though the labor hours supplied by Prometheus in connection with Delivery Orders No. 34 and 52 were intended to be billed as tgB’s own hours, all of the hours related to Delivery Order No. 34, and the first 142 hours related to Delivery Order No. 52, were nevertheless — the court can only assume by administrative error — billed as subcontract hours. The remaining 1,457 hours related to Delivery Order No. 52 were apparently billed as tgB hours.
The Defense Contract Audit Agency (“DCAA”) conducted an audit of subcontractor charges billed to the Navy by tgB and on July 31, 1995, issued an audit report finding that tgB had over-billed the government for labor not performed by subcontractors in the total amount of $6,378,522. Of this sum, approximately $637,000 represents hours billed by tgB for work performed by Prometheus.[4] This figure includes all 1,426 hours furnished under the employee
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lease agreement in connection with Delivery Order No. 34 and 142 of the hours furnished in connection with Delivery Order No. 52. DCAA disallowed the claimed hours — for which tgB had billed the Navy a total of $38,379.90[5] — based on lack of time records to support them. The audit focused only on subcontractor hours, not tgB’s own hours, and it does not appear that the leased employee hours tgB billed as its own in connection with Delivery Order No. 52 were disallowed. The debtor, which did not keep its own time records with respect to the leased employees, asserts that Prometheus failed to provide DCAA with the employee time records that would have substantiated the hours billed to the Navy. The debtor is seeking to recover the amounts disallowed by the Government together with other damages, primarily attorneys fees in defending against and settling the Government’s claim as well as loss of good will.[6]
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tgB has offered no direct evidence that the leased Prometheus employees did not work the number of hours stated in the invoices submitted by Prometheus. Instead, it relies on the DCAA audit results and the failure of Prometheus, until it filed the summary judgment motion presently before the court, to produce what it now represents to be contemporaneous time records substantiating the hours worked by the leased employees.
Discussion
Under Fed.R.Civ.P. 56(b) and (c), made applicable to bankruptcy adversary proceedings by F.R.Bankr.P. 7056, a party against whom a claim is asserted may, at any time, move with or without supporting affidavits for summary judgment in that party’s favor. The court is required to grant the judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”Id. While a defendant moving for summary judgment has the burden of showing that there is no genuine issue of fact, the plaintiff has the burden of producing evidence that, if believed, would support a jury verdict in his (or her or its) favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202
(1986). In assessing whether the non-moving party has met the burden of showing a genuine issue of material fact, “[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” Id. at 255, 106 S.Ct. at 2513. Additionally, the non-moving party need not produce evidence in a form that would be admissible at trial in order to avoid summary judgment.Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548,
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2553, 91 L.Ed.2d 265 (1986). The Supreme Court has explained that summary judgment “is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'” Id. at 327, 106 S.Ct. at 2555. At the same time, the Supreme Court has acknowledged that trial courts may properly act with caution in granting summary judgment and may deny summary judgment in a case where there is reason to believe that the better course would be to proceed to a full trial. Catrett, 477 U.S. at 324, 106 S.Ct. at 2553.
tgB’s claims against Prometheus sound in fraud and deceit (Count IV) and in breach of contract and indemnity (Count V). Under the fraud count, tgB alleges that Prometheus willfully, intentionally and maliciously overbilled tgB for labor hours not performed, and the complaint specifically points to the 1,426 hours disallowed in connection with Delivery Order No. 34 and the 142 hours disallowed in connection with Delivery Order 52[7] as particular examples of overbilling. The breach of contract and indemnity count alleges that Prometheus breached express obligations it had under the subcontract to submit accurate invoices and to defend, indemnify and hold tgB harmless in the event of a government audit. Count V was apparently drafted on the mistaken belief that the labor supplied by Prometheus in connection with Delivery Orders No. 34 and 52 was furnished pursuant to the subcontract. tgB now concedes that the labor supplied in connection with those two delivery orders is governed by the “leased personnel” agreements — which have no express provision for indemnity — and not the subcontract, which does. However, tgB asserts that under the pleadings it is entitled to prove breach of an implied
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covenant and to recover under a theory of implied indemnity See Fed.R.Civ.P. 15(b) (amendments to conform to the evidence), made applicable by F.R.Bankr.P. 7015.
In the present case, it is uncontradicted that DCAA disallowed 1,568 of the 3,029 hours supplied by Prometheus under the “leased personnel” agreements based on lack of supporting time records, tgb did not keep its own time records and none were supplied by Prometheus either to tgB or DCAA at the time the audit was performed. The question, therefore, essentially comes down to this: did Prometheus have an obligation to keep such records and to make them available when informed that DCAA was auditing subcontractor billings, and, if so, did Prometheus breach that obligation?
Nothing in the language of the “leased personnel” agreements directly addresses the responsibility of keeping time records and responding to government audits. As noted above, however, the agreement dated May 28, 1992 does require Prometheus to “provide to tgB an accounting of hours expended by labor category.” Prometheus has supplied an affidavit of tgB’s then-Director of Contracts that “tgBauer told Prometheus that tgBauer would take care of providing any back-up regarding the `leased’ employees if the Government requested it.”[8] tgB has supplied an affidavit of its president stating,
tgB expected that Prometheus would keep time sheets of their own employees. This is standard practice in the government contracts industry. In my 24 years of experience in the industry whenever either of two government contractors agrees to lease its employees to the other, the lessor, who pays the leased employee’s salary, also is required to keep that employee’s time sheets. . . . The lessor . . . is the party best able to track its own employee’s work hours.
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The Prometheus affidavits are notably silent on the issue of what, if any requests, were made to Prometheus by tgB or DCAA for backup related to the labor hours supplied in connection with Delivery Orders No. 34 and 52. tgB’s president also states in his affidavit that the DCAA auditor “had asked Prometheus for additional information for some delivery orders to enable him to complete his audit,” and that Prometheus’s president, at a deposition in November, 1996, testified “that Prometheus did not have the Delivery Order 34 and 52 time sheets.”
Upon careful review, I conclude that the summary judgment record presents a number of unanswered factual issues that preclude summary judgment. In particular, it is far from clear exactly what the reasonable understandings and expectations of the parties were as to the keeping of time records and what requests the DCAA auditors made to Prometheus for records substantiating the labor hours billed to tgB and which tgB then billed to the Navy, or why those records have only now been produced. For that reason, I conclude that the better course is to proceed to a trial where these matters can be resolved based on the live testimony of the participants, particularly as much may depend on testimonial nuances. The only factual issues at such trial, however, will be (1) whether contemporaneous oral discussions or industry practice placed a burden on Prometheus to maintain time records with respect to the leased employees; (2) what hours did Prometheus employees actually work in connection with Delivery Orders No. 34 and 52; (3) what contemporaneous time records, if any, were actually kept by Prometheus; (4) what requests were made to Prometheus at the time of the audit for information related to the labor hours billed in connection with Delivery Orders No. 34 and 52; and (5) what damages, if any, flowed from tgB’s inability to provide DCAA with the time records related to the leased
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employees.[9]
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion for summary judgment is denied.
2. The clerk will mail a copy of this memorandum opinion and order to counsel for the plaintiff, counsel for Prometheus, and the United States Trustee.