Government’s motion to amend its answer in a wrongful termination suit to assert counterclaims of fraud and unjust enrichment is granted, where the plaintiff’s loss of its SDVOSB status did not put the government on notice that the plaintiff had allegedly lied about its eligibility at the time of award, and where the government reasonably declined to intervene in a qui tam suit alleging the plaintiff fraudulently obtained its SDVOSB set-aside contract and only later discovered first-hand evidence of fraud.
The court also held that the six-year statute of limitations did not apply to counterclaims of fraud arising out of a breach of contact claim and the government could assert both False Claims Act and unjust enrichment claims as alternative theories at the pleadings stage, while noting the government could not recover under both theories.
LW Construction of Charleston LLC sued the Department of Veterans Affairs, alleging the agency had breached and wrongly terminated a contract for construction of a National Cemetery. In 2017, the government sought leave to amend its answer in LW’s suit to assert (1) an affirmative defense and counterclaim of common law fraud, (2) two counterclaims for violations of the False Claims Act, and (3) a counterclaim for unjust enrichment. The government’s counterclaims were premised on the contention that LW had misrepresented its status as a service disabled veteran-owned small business to receive award of the cemetery contract.
LW opposed the motion to amend, arguing that it was untimely. Specifically, LW explained that it had lacked SDVOSB status for years, and in 2014, one of its subcontractors brought a qui tam suit alleging the company had misrepresented its SDVOSB status to obtain the cemetery contract. Thus, the government had notice of LW’s alleged misrepresentations for several years and had unduly delayed bringing the counterclaims.
The court first addressed the government’s counterclaim for common law fraud. LW argued that the claim was barred by 28 U.S.C. § 2501, which states that every claim over which the Court of Federal Claims has jurisdiction shall be barred unless filed within six years. However, the court reasoned that a counterclaim brought by the government is not subject to the statute of limitations in § 2501, because that statute only applies to claims brought against the government, not counterclaims asserted by the government.
Still, LW argued that the common law fraud counterclaim was barred by 28 U.S.C. § 2415(a), which prescribes a six-year bar on any contract claims brought by the United States. The court noted that a fraud claim sounds in tort and thus would actually be governed by the three year statute of limitations for torts in 28 U.S.C. § 2415(b). Regardless, the court found that the government’s counterclaim was exempted from the statute of limitations under 28 U.S.C. § 2415(f), which provides that that statute of limitation will not apply to a claim by the government that arises out of the same transaction or occurrence. In this case, the government’s counterclaim (fraud in obtaining the cemetery contract) arose out of the same transaction as LW’s claim (breach of the cemetery contract) and thus was not barred.
Next, LW argued that the government’s fraud counterclaim would be futile because the government would not be able to prove that it justifiably relied on LW’s representation of its SDVOSB status. LW contended that it had provided the government with information in its proposal about its relationship with an associated company that should have put the government on notice of potential problems with the company’s SDVOSB status. The court, however, found that this information was insufficient to negate a finding of justifiable reliance. At the time LW bid on the contract, VA was only required to verify that the contractor had registered as a SDVOSB in a government database. Because LW had registered as an SDVOSB, the government was entitled to rely on that registered status.
As to the False Claims Act counterclaims, LW argued that the amendment would be futile because the government could not establish that any of the alleged misrepresentations were material. LW asserted that its alleged misrepresentation could not have been material because the government allowed the company to continue performing on the contract after its SDVOSB status had been revoked. But the court noted that under the Small Business Administration’s regulations a contractor that represents itself as a SDVOSB at the time of initial offer retains that status throughout the contract. Thus, the operative issue was whether the government knew LW had misrepresented its status at the time it bid on the contract, not whether the status was revoked while the company was performing the contract.
LW also argued that the government’s False Claims Act counterclaims were time barred by the Act’s six-year statute of limitations. The court agreed in part. LW had submitted 22 claims of payment to the VA for work done on the cemetery contract. Each of those constituted a “claim” for purposes of the False Claims Act. LW submitted some of those claims after October 2011, the six year cutoff under the False Claims Act’s statute of limitations. The majority of claims, however, had been submitted before October 2011. The court therefore only allowed the government to amend its answer for the claims submitted during the limitations period. The claims submitted before October 2011 were time-barred.
LW also argued that the court should not permit the government’s unjust enrichment counterclaim because there was an express contract that already covered the same subject matter. A party can claim unjust enrichment when a contract is void for fraud. Thus, LW argued, the government could not assert an unjust enrichment claim while simultaneously basing claims on the False Claims Act, which assumes a valid contract. The court, however, reasoned that its rules allow parties to plead inconsistent claims or defenses. The court recognized that in asserting the unjust enrichment claims, the government was merely asserting an alternative legal theory. While the government could not recover under both the unjust enrichment claim and the False Claims Act, it was not barred from asserting both theories at the pleadings stage.
Aside from the statute of limitations and futility issues, LW argued the government’s request was untimely because the government elected not to intervene in a qui tam suit filed by LW’s subcontractor in 2014. The government responded that in 2014 it thought the suit was little more than the complaints of a disgruntled subcontractor. It was only in 2016, when the government began to depose people in LW’s termination suit, that the government began to suspect fraud. The court found that there was no reason to doubt the government’s representations and that it was not unreasonable for the government to doubt the veracity of the earlier qui tam suit. Accordingly, the court refused to bar the counterclaims as untimely.
Finally, the court considered whether the amendment would prejudice LW; the court found no prejudice. Given the history of LW’s SDVOSB status—which includes the loss of that status, the qui tam suit, and a criminal investigation into LW’s SDVOSB representations—the company should have anticipated the possibility that the government would be asserting fraud counterclaims in the termination suit. While the amendment could cause some delay and additional discovery, there was no indication the government was acting in bad faith or seeking to amend for an improper purpose.
The court granted the government’s motion for leave to amend in part on (1) the common law fraud counterclaim and defense, (2) the False Claims Act counterclaims for claims that arose after October 2011, and (3) the unjust enrichment counterclaim. The court denied the motion as to the False Claims Act counterclaims based on claims for payment made before October 2011.
LW is represented by William A. Scott and James L. Warner of Pederson & Scott, P.C. The government is represented by Erin K. Murdock-Park, Jeffrey Lowry, Martin F. Hockey, Jr., Robert E. Kirschman, Jr., and Chad A. Readler, Department of Justice.
