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Southwest Marine Incorporated v. Mabus

United States District Court, S.D. California

February 19, 2014

SOUTHWEST MARINE INCORPORATED, a dissolved California corporation; Plaintiff,
v.
RAYMOND MABUS, Secretary of the Navy, Defendant.

ORDER: (1) GRANTING IN PART AND DENYING IN PART THE NAVY'S MOTION FOR SUMMARY JUDGMENT, (ECF No. 22); (2) GRANTING IN PART AND DENYING IN PART SOUTHWEST MARINE INCORPORATED'S CROSS- MOTION FOR SUMMARY JUDGMENT, (ECF NO. 27)

GONZALO P. CURIEL, District Judge.

INTRODUCTION

Before the Court in this appeal of a decision by the Armed Services Board of Contract Appeals ("ASBCA") is defendant Raymond Mabus's ("Navy") Motion for Summary Judgment, (ECF No. 22), and plaintiff Southwest Marine Incorporated's ("SMI") Cross-Motion for Summary Judgment, (ECF No. 27). Both parties have filed replies in support of their respective motions. (ECF Nos. 30, 31.) The Court finds the motions suitable for disposition without oral argument. See CivLR 7.1.d.1. After a review of the parties' briefs, administrative record, and applicable law, the Court will GRANT IN PART AND DENY IN PART the Navy's Motion and GRANT IN PART AND DENY IN PART SMI's Cross-Motion for Summary Judgment.

BACKGROUND

This case centers on a 1985 contract between the Navy and SMI's predecessor-in-interest, Northwest Marine Iron Works ("NW Marine"), for the overhaul of the U.S.S. Duluth, a naval ship. After N.W. Marine completed performance on the contract and was paid for its work, the Navy determined it had overpaid N.W. Marine because some of the costs N.W. Marine incurred while performing the contract were later forgiven by N.W. Marine's creditors following bankruptcy proceedings.

After a lengthy procedural history, the Ninth Circuit determined the Navy was entitled to some reimbursement in light of the debt concessions N.W. Marine obtained from its creditors. The Ninth Circuit thus remanded the matter to the ASBCA to determine the quantum owed to the Navy in light of the debt concessions.

The ASBCA determined the amount of the debt concessions attributable to work on the Duluth (and therefore creditable to the Navy) to be $1, 728, 522.[1] After considering payments made from the Navy to N.W. Marine and applying certain adjustments, the ASBCA determined the amount owed the Navy $1, 104, 479, plus interest from August 14, 1989, through the date of payment. (A34.) Disagreeing with this outcome, SMI filed the instant action for review of the ASBCA's determination.

I. Factual Background

The underlying facts of this case are fully set forth in the decision by the Honorable Irma E. Gonzalez, U.S. District Judge, and the Ninth Circuit's review of that decision, and do not bear repeating here. See Dalton v. Sw. Marine, Inc., 1998 WL 919360, at *2-4 (S.D. Cal. Aug. 27, 1998); Sw. Marine, Inc. v. Danzig , 217 F.3d 1128, 1132-35 (9th Cir. 2000). The relevant facts for purposes of these proceedings pertain to specific contract provisions and specific dollar amounts used in calculating the reimbursement owed to the Navy as follows.

A. Contract & Relevant Clauses

The contract at issue is a fixed-price incentive contract, which the Federal Acquisition Regulation ("FAR") describes as:

a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset.

48 C.F.R. § 16.403(a). More specifically, the contract at issue is a firm-target, fixed-price incentive contract, which the FAR explains as follows:

A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss. Because the profit varies inversely with the cost, this contract types provides a positive, calculable profit incentive for the contractor to control costs.

48 C.F.R. § 16.403-1 (emphasis added). Thus, the key figures for determining the final price on firm-target, fixed-price incentive contract include the target cost, the total target profit, and the total final negotiated cost. The ASBCA determined these figures to be:

• Total Target Cost: $17, 582, 184 • Total Target Profit: $550, 724 • Total Final Negotiated Cost: $22, 738, 540

These figures are largely undisputed.[2] The only dispute as to these figures, which is discussed in connection with Count III of SMI's Complaint, pertains to the inclusion of a portion of the debt concession by Oregon's State Accident Insurance Fund ("SAIF") in determining the total final negotiated cost. In determining whether this, and other debt concessions, were creditable to the Navy, the ASBCA relied on the FAR Credits provision, FAR § 31.201-5 ("Credits Clause"), which was incorporated into the contract, and which provides:

The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund.

(Emphasis added.) After the ASBCA determined the amount of the debt concessions creditable to the Navy, it was able to determine the total final negotiated cost set forth above.

Once the total negotiated final cost, total target cost, and total target profit were determined, the ASBCA plugged them into a "profit adjustment formula" to determine the total final price of the contract, which, in no event, was to exceed the ceiling price.[3] In this case, the adjustment formula comes from another standard FAR provision that was also incorporated into the contract, namely, the Incentive Price Revision-Firm Target provision, FAR § 52.216-16 ("IPR Clause").

The IPR Clause provides that, after receiving a contractor's final statement of costs, the contracting officer shall promptly establish the total final price as follows:

(a) General. The supplies or services identified in the Schedule as Items 0001, 0005, 0009 [are] subject to price revision in accordance with this clause; provided that in no event shall the total final price of these items exceed the ceiling price of one hundred thirty (130%) percent of the target cost for these Items....

* * *

(d) Price Revision. Upon the Contracting Officer's receipt of the data required by paragraph (c) above, the Contracting Officer and the Contractor shall promptly establish the total final price of the items specified in (a) above by applying to final negotiated cost an adjustment for profit or loss, as follows:
(1) On the basis of the information required by paragraph (c) above, together with any other pertinent information, the parties shall negotiate the total final cost incurred or to be incurred for supplies delivered (or services performed) and accepted by the Government and which are subject to price revision under this clause.
(2) The total final price shall be established by applying the total final negotiated cost an adjustment for profit or loss, as follows:
* * *
(ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less thirty (30) percent of the amount by which the total final ...

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