Appeal from a COFC decision finding that the government was entitled to offset a debt owed under one contract against another contract is vacated in part and affirmed in part. The government claimed it had overpaid the contractor on one contract and thus was entitled to an offset against another contracts. The COFC found that the government was entitled to an offset. On appeal, the contractor argued that government could not offset the debt because the debt was not owed to the government. Rather, the contractor asserted, the government had made the overpayments as a contract administrator on behalf of the Iraqi government, so the debt was actually owed to Iraq. The court rejected this argument, reasoning that the contractor had been paid with U.S. funds, and the U.S. government has an inherent right to collect wrongfully paid U.S. funds. Nevertheless, although the government had a right to collect the debt, the Federal Circuit determined that the COFC had erred in declining to review the validity of the underlying debt—i.e., whether the government had actually overpaid the contractor. The court remanded for further proceedings on the validity of the alleged debt.
Following the invasion of Iraq 2003, the United States and it coalition partners formed the Coalition Provisional Authority (CPA) to support the reconstruction of Iraq. The CPA awarded an IDIQ contract to Agility Public Warehouse Company to provide logistics support for staging areas in Iraq. CPA paid Agility with money from the Development Fund for Iraq (DFI). The DFI, in turn, was funded with Iraqi money from petroleum and natural gas revenues.
In 2004, the CPA transferred authority over the reconstruction of Iraq to the Interim Iraqi Governing Council (IIG). The IIG assumed Agility’s logistics support contract from the CPA and thus became a party to that contract. The IIG issued a memorandum appointing the U.S. Army as the administrator of Agility’s logistics contract. That memorandum also provided that the Army would pay Agility out of DFI funds.
Over the course of several years, the Army issued twenty task orders to Agility under the logistics IDIQ contract. The Army paid for the first two task orders out of DFI funds. For whatever reason, the Army paid the other task orders out of U.S. funds appropriated by Congress to the Army Corps of Engineers.
In 2010, following an audit, the Army determined that it had overpaid Agility by $81 million on the task orders that had been paid with U.S. funds. Agility disputed the overpayment. Indeed, Agility submitted a claim to the Army asserting that it had been underpaid by $47 million. The Army denied the claim and notified Agility that it was going to initiate a collection action under the Debt Collection Act of 1982. Agility still refused to pay. The Army therefore withheld payments due to Agility under a separate contract (the DDKS contract) as on offset of the amount due under the logistics contract.
Agility appealed the Army’s overpayment determination to the ASBCA. The board determined that it lacked jurisdiction because the logistics contract was made by the CPA, which was not an agency of the United States. Agility appealed the ASBCA decision to the Federal Circuit. The Federal Circuit affirmed, holding that the U.S. government was only the administrator and not a party to the logistics contract.
Agility then filed suit in the Court of Federal Claims challenging the Army’s offset decision. The COFC ruled in favor of the government, finding that it was owed the alleged overpayment, and that the Debt Collection Act authorized the government to offset that debt against Agility’s DDKS contract. Agility appealed the COFC decision to the Federal Circuit.
On appeal, Agility argued that under the Debt Collection Act, the government is only allowed to obtain an offset of a valid pre-existing debt owed to the United States. Agility contended that the alleged overpayment was not a debt owed to the U.S. because the U.S. was not a party to the logistics contract; rather, it administered the contract on behalf of the IIG. Thus, any claim for overpayment was solely a claim of the Iraqi government.
The court rejected this argument, holding that to the extent the U.S. overpaid Agility with U.S. funds, the U.S. has an inherent right to recover those funds. The power to release or dispose of rights or property of the United States is vested in Congress by the Constitution. Thus, any erroneous payment of U.S. funds is a direct violation of the Constitution. Accordingly, the U.S. has an inherent right to sue for money wrongfully paid from the treasury apart from any statute, regulation, or contract. Here, neither party disputed that Congress appropriated the funds paid to Agility under several task orders. The U.S. government had a right to collect those funds regardless of whether it was a party to the IDIQ contract.
But the U.S. government only has a right to collect funds that have been wrongfully paid. In this case, Agility disputed the validity of the overpayment decision. The COFC had declined to review the validity of the Army’s overpayment decision, reasoning that the overpayment decision itself was sufficient to establish a claim under the Debt Collection Act, and that a court was powerless to determine otherwise.
The Federal Circuit determined the COFC made a legal error. A challenged to an offset under the Debt Collection Act is subject to judicial review. That review must necessarily include whether the debt underlying the offset is valid. If the debt is not valid, then the government does not have a legal basis for withholding payment due to a contractor. Accordingly, the court vacated the COFC’s decision to punt on overpayment and remanded for a determination of whether the Army’s overpayment decision was valid.
Agility further argued that the government was judicially estopped from claiming entitled to the overpayment. Under the doctrine of judicial estoppel, a party that successfully urges a legal position in a proceeding is estopped from taking a contrary position in a subsequent proceeding. Agility argued that in the first ASBCA appeal, the government had argued that it had made the payments with Iraqi funds as a contract administrator on behalf of the Iraqi government. Now, however, the government was claiming that it had paid U.S. funds and had the payments separate and apart from its role as an administrator.
The court rejected this argument, reasoning that in the ASBCA appeal, the U.S. had never asserted that it paid the task order with Iraqi funds. Instead, it had maintained that it paid the task orders with U.S. funds. What’s more, the court continued, Agility had not shown that the U.S. had persuaded the ASBCA that it had made the payments as a contract administrator. Indeed, the board never addressed the validity of the government’s offset.
Agility asserted that by withholding funds due under the DDKS contract, the government had breached that contract’s covenant of good faith and fair dealing. But the court found that the government had a right to offset those funds under the Debt Collection Act.
Finally, Agility contended that the government had not afforded the company procedural rights under the Debt Collection Act. The court agreed finding that the government had not offered Agility a right to inspect records related to the government’s claim. The court remanded for further proceedings to correct the procedural gap.
Agility is represented by Derek L. Shaffer, Jonathan Gordon Cooper, and Kristin Tahler of Quinn Emanuel Urquhart & Sullivan, LLP. The government is represented by William James Grimaldi, Ethan P. Davis, Claudia Burke, and Robert Edward Kirschman, Jr. of the Department of Justice.
