158 F. 3d 478 - Mrt Construction Inc. v. Hardrives, Inc.

In May 1986, the U.S. Department of the Interior, Bureau of Reclamation ("BOR"), awarded Hardrives, Inc. ("Hardrives") a contract to construct a canal in Arizona. The contract incorporates the Contract Disputes Act, 41 U.S.C. §§ 601-613 ("CDA"). The contract terms allow Hardrives to pursue claims against the government for government-caused delays and errors, but also require Hardrives to complete the canal project on time without regard to any government error or misconduct.

In June 1986, Hardrives and MRT Construction, Inc. ("MRT") entered into a subcontract for specified work on the canal, including a major portion of the earthwork on the project. The subcontract requires MRT to complete its assigned work on schedule without regard to government errors. Further, under the subcontract, MRT is not entitled to payment for any work unless and until the government pays Hardrives.

The government furnished Hardrives with plans and specifications for the canal project. These plans and specifications contained several defects. MRT claims these defects caused it significant delays and cost overruns. On April 9, 1987, MRT demanded payment from Hardrives for increased costs. Hardrives claims MRT breached the contract on or around this same date by abandoning the canal project and failing to complete its assigned earthwork.

On April 15, 1987, Hardrives submitted a claim to the BOR, seeking to recover increased costs resulting from the defects in the government's specifications. This claim included MRT's claim as well as other amounts expended by Hardrives. After the BOR rejected or refused to rule on Hardrives' claims, Hardrives appealed to the Interior Board of Contract Appeals ("IBCA"). As of July 1987, Hardrives refused to make any further payments to MRT until all claims between Hardrives and the government were settled. Hardrives ultimately completed MRT's work.

In 1988, MRT sued Hardrives1 in federal district court, claiming Hardrives breached the subcontract by failing to pay MRT in full. Following a bench trial, the district court2 issued judgment for Hardrives. See MRT Constr., Inc. v. Hardrives, Inc., No. CIV 88-1768-PHX-WPC (D.Ariz. May 19, 1992) ("MRT I" ). The court found Hardrives had not breached the subcontract by failing to pay MRT, because the subcontract stated MRT was entitled to payment only after the government had paid Hardrives. The court determined Hardrives had paid MRT in full for all amounts the government had paid to Hardrives as of the date of trial. Further, the court concluded MRT breached the subcontract by failing to complete the earthwork, and MRT owed Hardrives a total of $141,535. On May 19, 1992, the court awarded Hardrives judgment against MRT for $141,535 plus interest. The court also awarded Hardrives $291,826 in attorneys' fees and litigation expenses.3

Prior to the decision in MRT I, the government filed an action in federal district court against Hardrives, alleging Hardrives' claims for increased costs related to the canal project violated the fraudulent claims provision of the CDA, 41 U.S.C. § 604, and the False Claims Act, 31 U.S.C. §§ 3729-3733. MRT cooperated with the government, and MRT's president testified against Hardrives. At the close of the government's evidence, the district court dismissed the case.

Shortly after it filed the fraud action against Hardrives, the government moved to intervene in Hardrives' claims before the IBCA and asked the IBCA to stay Hardrives' appeals. The IBCA granted the government's motion and stayed all proceedings on Hardrives' claims.

Upon dismissal of the government's fraud case, the IBCA proceeding resumed, and the IBCA held a hearing on Hardrives' claims. MRT attempted to intervene, asserting: (1) it did not and would not support Hardrives' claims; (2) it would not support the claim because Hardrives notified MRT that pursuant to the subcontract, Hardrives would seek a payment of attorneys' fees out of any recovery attributable to MRT; and (3) it had not released Hardrives from any claims. On August 4, 1993, the IBCA awarded Hardrives $3,488,360 for additional costs on the canal project. The IBCA also awarded Hardrives interest on those costs. The government paid Hardrives on September 3, 1993.

On August 26, 1993, MRT filed an action in federal district court seeking, among other things, an equitable accounting for the money Hardrives would receive as a result of the IBCA judgment, a lien on the IBCA award, and a declaratory judgment of the parties' rights concerning the IBCA award. Before trial, the district court4 made several rulings, including:

1) With respect to any off-sets to which MRT is entitled arising from the costs Hardrives recovered from the IBCA, Hardrives may be entitled to assert a deduction for attorneys' fees and costs incurred in the IBCA proceedings and the earlier fraud litigation;

2) MRT is not entitled to any portion of the interest awarded to Hardrives in the IBCA proceeding;

3) The judgment rendered in MRT I is a final judgment, the factual determinations reached in that case bind the court in this case, and MRT is therefore precluded from relitigating factual issues determined in that action.

See MRT Constr., Inc. v. Hardrives, Inc., No. CV 93-1678-PHX-SMM, slip op. at 2-3 (D.Ariz. Apr. 28, 1997). Following trial, and based upon the accounting set forth below, the district court granted judgment in favor of Hardrives for $217,676 plus fees, costs, interest, and post-judgment interest.

5. According to Hardrives, this figure is an equitable multiplier used by the trial court. MRT urges the figure is based on the subcontract. Regardless of the figure's origin, neither MRT nor Hardrives dispute the percentage used.

A.   Total of IBCA award to Hardrives on September 1, 1993:  $2,044,050
     (1)    66% of IBCA award due MRT from Hardrives   $1,322,673  (sic)*

*Although the district court, as well as both parties show that this figure is $1,322,673, our computation shows that 66% of $2,044,050 is $1,349,073. Rather than alter this figure and the judgment which reflects this erroneous calculation, we prefer to leave any amendment to the judgment reflecting the proper computation to the district court.

    (2)  Less amount Hardrives paid to complete MRT's        $1,220,069  (sic)*
           contractual duties
         Subtotal due MRT from Hardrives                     $  102,604  (sic)*
B.  Total amount of attorney fees paid by Hardrives to       $1,449,472
      pursue IBCA and fraud suit:
    (1)  66% of total fees attributable to MRT claims due    $  956,652
           Hardrives
    (2)  66% of net amount of EAJA award ($903,000, p 50)    $  595,980
           due MRT from Hardrives for fees and costs at
           statutory amount
    (3)  Court's disallowance of Sinj[e]m Service claim      $   60,750
         Subtotal due MRT from Hardrives                     $  299,922  (sic)*
C.  Miscellaneous costs
    (1)  Equipment utilization adjustment and other          $    8,515
           equipment costs due MRT from Hardrives
    (2)  Amount due under paragraph 54(e)                    $   26,620
    (3)  Amount due under Paragraph 54(f)                    $    2,253
         Subtotal due MRT from Hardrives                     $   20,358
         Total amount                                        $  217,676  (sic)*

MRT appeals.

MRT claims the district court inserted two erroneous figures in its equitable accounting formula. First, MRT claims the court incorrectly inserted $2,044,050 as the amount of the September 1993 IBCA award to Hardrives. MRT claims the correct amount of the IBCA award is $3,488,260, and the IBCA's decision identifies this figure as the proper amount. In response, Hardrives contends the figure of $2,044,050 is correct and represents the portion of the IBCA award that related to MRT's earthwork on the canal project. Hardrives concedes the trial court's labeling could have been clearer in that this figure could have been labeled "total of IBCA award to Hardrives on September 1, 1993, for MRT related work." Hardrives Br. at 25.

In MRT's case to the trial court on the issue of MRT's total expenditures on the project, MRT presented the testimony of its accounting expert, Patricia Mensch. During her testimony, Mensch specifically indicated that MRT's costs related to the project totaled $2,001,409. See Excerpts of R. at 125; Supplemental Excerpts of R. at tab 5. This figure was slightly lower than the figure Hardrives' accounting expert identified as MRT's costs. MRT made no allegations during trial or in any post-trial motion6 that $3,488,260 somehow represented its costs related to the project.

To now insert the figure of $3,488,260 into the court's accounting formula--a formula MRT does not contest--would result in MRT recovering more than its claimed costs. Neither the parties nor the district court intended such a result. Based on our review of the record, we conclude the figure the district court inserted accurately reflects the portion of the IBCA award to Hardrives that is attributable to MRT-related work. We therefore conclude the district court did not clearly err when it inserted the figure of $2,044,050 into the accounting formula.

Second, MRT claims the district court incorrectly inserted $1,220,069 as the amount Hardrives paid to complete MRT's contractual duties. MRT now claims that Hardrives' own exhibit shows the correct figure to be $400,440. Hardrives concedes the district court's labeling of the $1,220,069 figure might have been more exact, but maintains the figure is correct.

During its case to the trial court, MRT, through Patricia Mensch, presented evidence that although MRT incurred costs on the project of $2,001,409, MRT also received payments from Hardrives totaling $1,220,000. See Excerpts of R. at 125-27; Supplemental Excerpts of R. at tab 5. Mensch thus claimed a preliminary balance due from Hardrives of approximately $781,000. See id.

MRT never claimed that $400,440 represented the amount Hardrives paid MRT for MRT's work on the project. Put simply, MRT sought to recover from Hardrives the total paid by the government for MRT's work, less the amount Hardrives had already paid MRT for that work, plus miscellaneous costs and interest. See Supplemental Excerpts of R. at tab 5. Thus, while the $1,220,069 figure MRT complains of may not be artfully labeled, the figure nonetheless produces a result that accurately reflects MRT's claims to the district court. Therefore, we conclude the district court did not clearly err when it inserted $1,220,069 into its accounting formula.

MRT's Entitlement to Interest from the IBCA Award

Prior to trial, Hardrives moved for summary judgment on several issues, including whether MRT was entitled to a portion of the CDA interest Hardrives received as a part of the IBCA award. Hardrives contended in its motion that the subcontract does not provide for pre-judgment interest. The district court granted Hardrives' summary judgment motion on this issue, concluding the subcontract did not support MRT's claim for CDA interest, and MRT's earlier claims for payment from Hardrives were resolved against MRT in MRT I.

In the present case, MRT claims sixty-six percent of the CDA interest is directly due to and accrued upon MRT's claimed share of the IBCA award. MRT argues this figure is $1,223,079.05, and the district court erred by refusing to allow MRT to recover this interest. For the following reasons, we agree with the district court's conclusion that MRT is not entitled to recover a portion of the CDA interest Hardrives received as part of the IBCA award.

Under the CDA, a contractor is entitled to interest on amounts found due that contractor. Specifically, section 611 of the CDA provides:

Interest on amounts found due contractors on claims shall be paid to the contractor from the date the contracting officer receives the claim pursuant to section 605(a) of this title from the contractor until payment thereof. The interest provided for in this section shall be paid at the rate established by the Secretary....

41 U.S.C. § 611 (emphasis added). The CDA states that "the term 'contractor' means a party to a Government contract other than the Government[.]" 41 U.S.C. § 601(4).

The subcontract between MRT and Hardrives incorporates the contract, and the contract incorporates the CDA. However, the terms of the subcontract do not extend the CDA's definition of "contractor" to MRT. Moreover, MRT cites no authority in which a subcontractor has been considered a contractor under the CDA's definition of that term. Indeed, we deem it clear that MRT is not a party to the contract between Hardrives and the government, and is therefore not a contractor as that term is used in § 611 of the CDA. See 41 U.S.C. §§ 601(4) & 611. Thus, the CDA itself does not entitle MRT to a portion of the interest paid to Hardrives.

Most importantly, however, the subcontract governs the relationship between MRT and Hardrives, and the terms of the subcontract do not entitle MRT to a portion of the interest Hardrives recovered from the government in the IBCA proceeding. The subcontract expressly provides that "[i]n no event shall [MRT] be entitled to receive any form of payment prior to Hardrives, Inc.'s receipt of that payment. [MRT] waives all right of action until said monies are received by Hardrives, Inc."7 See Excerpts of R. at 36. Under the terms of the subcontract that MRT and Hardrives bargained for, MRT had no right to the monies upon which the CDA interest accrued during the time the interest accrued. Thus, we find the district court did not err when it denied MRT's claim to the interest Hardrives received as part of the IBCA award.8

Alleged Errors in the Accounting of Hardrives' Attorneys' Fees and Expenses

During trial, in order to prove its claims of set off and recoupment, Hardrives introduced into evidence, through its chief financial officer, Scott Sinjem, attorney bills generated by the law firm that represented Hardrives in the IBCA proceedings and fraud litigation. MRT claims the evidence is inadmissible hearsay, and the district court erred when it characterized the bills as falling under the business records hearsay exception.

The following are not excluded by the hearsay rule, even though the declarant is available as a witness:

* * *

A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.

Fed.R.Evid. 803(6). This circuit has held that records a business receives from others are admissible under Federal Rule of Evidence 803(6) when those records are kept in the regular course of that business, relied upon by that business, and where that business has a substantial interest in the accuracy of the records. See United States v. Childs, 5 F.3d 1328, 1333-34, 1334 n. 3 (9th Cir.1993).

In this case, Hardrives received the bills directly from the law firm and maintained the bills in its files. Further, Hardrives relied upon the bills as statements of fees owed to the law firm. Finally, the record indicates Hardrives had a substantial interest in the accuracy of the bills. For these reasons, the district court did not err in admitting the bills into evidence.

MRT also assigns error to the district court for allowing Sinjem to testify regarding the portion of the law firm bills that related to the earthwork portion of the canal project. MRT claims this testimony was inadmissible on the grounds of lack of foundation, hearsay, improper opinion testimony, and speculation. In response, Hardrives contends Sinjem's testimony was admissible as that of the individual who authorized, reviewed, and paid the law firm bills, as well as that of an expert witness in accounting matters. From our review of the record, we conclude the district court did not err when it allowed Sinjem to testify regarding the portion of the law firm bills that related to the earthwork portion of the canal project.

MRT also claims Hardrives failed to establish or provide the district court a reasonable basis with which to apportion fees and expenses related to the earthwork between effort for the benefit of MRT and effort for the benefit of Hardrives or others. From our review of the record, we conclude Hardrives provided the district court a reasonable basis with which to apportion these fees and expenses.

In its decision, the district court concluded Hardrives is entitled to recover its attorneys' fees and costs incurred in this case. MRT claims that it, not Hardrives, is entitled to recover attorneys' fees and expenses at the trial and appellate levels. While MRT correctly points out that under Arizona law, "[i]n any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney's fees," Ariz.Rev.Stat. § 12-341.01A, MRT is not the successful party at either the trial level or appellate level. Thus, MRT is not entitled to recover its attorneys' fees and expenses. We affirm the allowance of attorneys' fees to Hardrives.9

For the foregoing reasons, subject to the possible correction relating to the mathematical computation in the award, the judgment of the district court is AFFIRMED.