Holding Company Sold Contractor and Attempted to Retain Rights to Contractor’s Claim. Why Couldn’t the Holding Company File Suit on that Claim?

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If you sell a government contractor, you must take care in preserving your right to that contractor’s claims. In this case, a holding company sold a contractor and then filed suit on one of the contractor’s claims. The court found that it lacked jurisdiction because the holding company was not in privity with the government. The holding company itself was never a party to a government contract. Moreover, while the holding company had attempted to retain rights in the claim, the claim had not been properly assigned.

DDS Holdings, Inc. v. United States, COFC No. 14-612C

Background

The Centers for Medicare and Medicaid awarded a contract for diabetic medical supplies to Doctor Diabetic Supply, Inc. (DDSI). Two weeks after the contract began, however, Congress enacted legislation that resulted in abrogation and termination of the contract.

A year after the contract was terminated, DDS Holdings, which owned DDSI, sold the company to another entity, Sanare, LLC. As part of the purchase agreement for the sale of DDSI,, DDS Holdings indicated that it retained the rights to any claim  DDSI had against the government. 

Following the sale of DDSI to Sanare, DDS Holdings filed suit in the Court of Federal Claims, alleging the government breached the diabetic medical supplies contract with DDSI. The government moved to dismiss, arguing the court lacked jurisdiction because DDS Holding was not party to the contract.

Legal Analysis

DDS Holdings Was Not in Privity With the Government

To maintain a claim, a plaintiff must demonstrate privity of contract with the government—I.e., that its claim is based on a contract between itself and the government. The contract in this case was executed between DDSI and the government. DDS Holdings at one point owned DDSI, but it was never in privity with the government.

DDS Holdings Was Not Assigned DDSI’s Claim

  • Anti-Assignment Act – Under the Anti-Assignment Act, the assignment of a government contract is prohibited unless (1) the assignment occurs by operation of law, including a merger, subrogation or testamentary disposition; or (2) the government waives the prohibition through novation or ratification
  • Claim Was Not Assigned by Operation of Law – To show assignment by operation of law, DDS Holdings would have to show that DDSI had merged with DDS Holdings or that the two became the same corporate entity. This didn’t happen at all. DDS Holdings sold DDSI; it did not merge with DDSI
  • Government Didn’t Waive Assignment – DDS Holdings argued that it had been assigned DDSI’s claim as part of the sale. Even if DDS Holdings had been assigned the claim, there was no evidence the government waived the Anti-Assignment Act. DDs Holdings contended the government had effectively ratified the assignment because it knew of the assignment for years and hadn’t objected. The government’s mere awareness of the assignment, without more, did not amount to ratification of the assignment.

DDS Holdings is represented by Stephen B. Hurlbut and Lawrence D. Silverman. The government is represented by David M. Kerr, Brian M. Boynton, Martin F. Hockey, Jr., and Steven J. Gillingham of the Department of Justice.

COFC - DDS Holdings