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UNITED STATES v. SEABOARD SUR. CO.

November 25, 1985

UNITED STATES OF AMERICA, Plaintiff, against SEABOARD SURETY COMPANY and THE HOME INSURANCE COMPANY, Defendant and Third-Party Plaintiffs, -against- JOSEPH MORTON CO., INC., JOSEPH J. BATTAGLIA and THE PERKINS & WILL PARTNERSHIP, Third-Party Defendants


The opinion of the court was delivered by: WEXLER

MEMORANDUM AND ORDER

WEXLER, District Judge.

 In September 1976 Joseph Morton Company (Morton), then headed by Joseph Battaglia, was awarded a building contract by the United States government to construct additions to the Plum Island Animal Disease Center on Long Island, New York. Seaboard Surety Company and The Home Insurance Company (the Sureties) issued the performance bond. During the ensuing three years hundreds of modifications were ordered. In March 1979 Morton by letter declared the United States in breach of contract. The United States immediately notified Morton that it was terminated for default, specifically for non-performance. The United States then looked to the Sureties for completion of the project. The Sureties refused to either complete the project or pay the performance bond.

 In March 1980 Morton filed for Chapter 11 Reorganization under the Bankruptcy Code. Pursuant to 11 U.S.C. § 302(c)(2)(B), all persons were stayed from filing any action against Morton without the leave of the Bankruptcy Court during pendency of the bankruptcy action. In March 1982 Morton filed suit in the United States Claim Court seeking to have the termination for default converted into a termination for convenience. Termination for convenience would allow Morton to recover costs plus some profit on the work performed before termination. Unfortunately, in 1980 the United States charged Morton with fraud and conspiracy to commit fraud in connection with Change Order No. 2 of the Plum Island contract. The company was convicted of submitting false and fraudulent cost statements in violation of 18 U.S.C.§§ 2, 371, 1001, and 3227 in April 1981. *fn1"

 In response to Morton's 1982 suit in the Claims Court for a ruling of termination for convenience, the United States asked for summary judgment sustaining the default termination. In July 1983 the Claims Court issued a decision. Neatly avoiding the issue of non-performance, the Claims Court upheld the termination for default based on the post-termination charge and conviction of fraud. The Claims Court declared that even though the United States did not know of the fraudulent cost statements in March 1979 and did not terminate the contract for that reason, the fraud had been committed before termination and could have been, had it been discovered, a basis for default termination. Accordingly, since fraud could have been the ground for default termination, the Claims Court sustained the default termination of the entire contract without deciding the non-performance issue. Joseph Morton Co. v. United States, 107-82c, slip.op. at 3 (Cl. Ct. July 12, 1983). On appeal the United States Court of Appeals for the Federal Circuit affirmed the Claims Court, holding that newly-discovered grounds can support a prior termination for default. Joseph Morton Co. v. United States, 757 F.2d 1273, slip. op. at 7-13 (Fed.Cir. 1985).

 In 1982, at the same time Morton commenced its suit in the Claims Court, the United States commenced the instant action against the Sureties under the Miller Act. 40 U.S.C. §§ 270a.-f. The simultaneous suits were filed by agreement. Moreover, it appears that the Sureties were acting for Morton in the Claims Court, that is, they paid the lawyer and generally directed the litigation. In any event, in April 1983 the United States Bankruptcy Court dismissed Morton's Chapter 11 proceeding. Morton was not discharged and the automatic stay was lifted. At this point, the United States sought to enter counterclaims for breach of contract against Morton in the Claims Court action.

 Morton opposed adding the counterclaims on the basis of the recently enacted § 6(a) of the Contract Disputes Act of 1978 (CDA), 41 U.S.C. § 605(a). Under the CDA "[a]ll claims by the government against a contractor relating to a contract shall be the subject of a decision by the contracting officer." There was some question as to whether § 6(a) of the CDA applied to Morton, as its contract pre-dated the Act, and might or might not be grandfathered in under the footnote to § 16, 41 U.S.C. § 601. Despite a First Circuit Court of Appeals opinion holding that a decision by a contracting officer was not necessary in a similar case, Woods Hole Oceanographic Institution v. United States, 677 F.2d 149 (1st Cir. 1982), the Claims Court held that under §§ 6(a) and 16 of the CDA, Morton could choose to invoke the requirements of the Act. If Morton so chose there must be a decision from a contracting officer before the government could file and pursue its counterclaims in the Claims Court action. Morton opted to proceed under the CDA. The government appealed and the Federal Circuit affirmed the Claims Court, holding that the CDA does apply and the contracting officer's decision is a jurisdictional prerequisite to the government's claims against Morton. Joseph Morton Co. v. United States, 757 F.2d 1273 (Fed.Cir. 1985).

 Plaintiff United States now moves for partial summary judgment in its favor, Rule 56(b), Fed.R.Civ.P., holding that the Claims Court decision sustaining termination for default works collateral estoppel on the issue of the Sureties' liability. The government argues that as it is now settled that Morton defaulted on the contract, the Sureties' liability on the bond is established and only damage issues remain for trial. The Sureties oppose partial summary judgment, maintaining that they are not collaterally estopped by the Claims Court judgment from contesting liability. The Sureties also move for dismissal of this action on the ground that under the CDA a decison by a contracting officer is a jurisdictional prerequisite to commencing and maintaining this suit, and that the Court of Claims then has exclusive jurisdiction. 41 U.S.C. §§ 605, 609. The government counters that the CDA is applicable to contractors but not their Sureties. In addition, the Sureties move for summary judgment in their favor holding that under the circumstances it was impossible for Morton to perform the construction contract or that changes in the contract during the course of construction amounted to breach or recession releasing Morton from performance. The various motions were submitted in two sets of motions some months apart. In the interest of efficiency the Court chooses to address and decide them in one opinion.

 II.

 The Court first addresses the issue of collateral estoppel. Collateral estoppel is a more limited and narrow application of its sister doctrine, res judicata. Both serve the goals of judicial finality, legal certitude, and judicial economy. E.g., Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 597, 68 S. Ct. 715, 719, 92 L. Ed. 898 (1948). The doctrine of res judicata holds that once a case has been litigated to judgment it should not be the subject of repeated suits. Rather, the first judgment disposes of any subsequent suits involving the same factual events and legal issues among the same parties or their privities. Of course, application of res judicata frequently raises questions of identity, privity, and what issues and claims were the subject of final judgment.

 Collateral estoppel is a narrower application of res judicata. Where a second lawsuit between the same parties, or those who stand in their place, involves a different cause of action, the judgment in the first action estops relitigation of only those matters that were litigated and the subject of a final determination or verdict. Id. at 598, 68 S. Ct. at 719. In other words, the effect of the prior judgment is limited to specific issues in the second action and does not dispose of the entire suit.

 In the instant case, the government asks that this Court apply the judgment of the Claims Court upholding contract termination for default to dispose of the liability issue between the government and the Sureties. More accurately, the government asks that Morton's criminal conviction for fraud operate as an estoppel on the issue of the Sureties' liability on the performance bond.

 It is not disputed that there is sufficient identity of interest between the parties on each side of the two cases. Neither party here seriously disputes that there was sufficient opportunity to litigate the questions of fraud and termination in the earlier action. What is in question is what the earlier judgment decided and the effect it should have here.

 The Court will not indulge in long discussion. The application the government advocates is overly broad. Collateral estoppel requires a narrow application. The judgment in the criminal case was that Morton had committed fraud in certain cost and payment statements submitted to the government. The judgment in the Claims Court case was that Morton defaulted on the contract by committing that fraud. Neither judgment addresses the issues of contract performance. Whether Morton performed construction of the Plum Island addition as it should have, whether the architect's construction plans were faulty, and other performance issues have not yet been litigated or decided by any court. These contract performance issues are the essence of the government's claims and the ...


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