United States v. International Fidelity Insurance Company

8 UNITED STATES DISTRICT COURT CENRAL DISTRICT OF CALIFORNIA

11 UNITED STATES OF AMERICA for Case No. CV 16-8064 DSF (AGRx) the use and benefit of NASATKA BARRIER INCORPORATED d/b/a NASATKA SECURITY, Plaintiff, FINDINGS OF FACT AND 14 CONCLUSIONS OF LAW AS TO vs. PLAINTIFF’S CLAIMS INTERNATIONAL FIDELITY INSURANCE COMPANY, et al., 17 Defendants.

19 and RELATED CLAIMS.

1 INTRODUCTION 2 This action involves a dispute between Plaintiff United States of

3 America, for the use and benefit of Nasatka Barrier, Inc., d/b/a Nasatka

4 Security (Nasatka), and Third-Party Defendant North American

5 Specialty Insurance Company on the one hand, and Defendants and

6 Cross-claimants International Fidelity Insurance Company, Insight

7 Environmental Engineering & Construction, Inc. (IFIC), Cesight Joint

8 Venture (Cesight), and Everest Re-Insurance Company (Defendants) on

9 the other hand. Nasatka filed suit for breach of contract, recovery under

10 the Miller Act, and quantum meruit on February 19, 2016. This action

11 was tried before the Court from October 16, 2018 to October 18, 2018.

12 Having heard and reviewed the evidence and having considered

13 the parties’ post-trial briefs, the Court makes the following findings of

14 fact and conclusions of law.1

15 FINDINGS OF FACT

16 1. CeSight entered into contract Number W912DW-13-C-0024

17 (the Prime Contract) with the United States Army Corps of Engineers

18 (USACE-Seattle) under Project Name FY2012 Access Control Point

19 Infrastructure Phase I, PN 66206, as the prime contractor for

20 construction at Joint Base Lewis-McChord, WA (the Project). Tr. Ex. 74

21 (Prime Contract); Tr. Ex. 39 (defining contract as Prime Contract).

1 Any finding of fact deemed to be a conclusion of law is incorporated into the conclusions of law. Any conclusion of law deemed to be a finding of fact is incorporated into the findings of fact. To the extent that findings of fact or conclusions of law in the concurrently filed Findings of fact and Conclusions of law as to Defendants’ Counterclaim, Third-Party Counterclaim, and Affirmative Defenses are relevant, they are incorporated into these Findings.

27 Where the Court declined to adopt a fact submitted by a party, the Court found the fact was either unsupported, unnecessary, or irrelevant to its 1 2. USACE-Se attle was the Prime Contract holder for the Project. Tr. Ex. 74, Bates NASATKA 0000295 (Contract No. W912DW-

3 13-C-0024 issued by Seattle District, Corps of Engineers); Tr. Ex. 39

4 (Subcontract), Bates NASATKA 0004037 (defining USACE-Seattle as

5 the Client);

6 3. The contracting authority for the Project was the contracting

7 officer (KO) at the Lewis Resident Office under the USACE, Seattle

8 District. TT at 422:12-424:12; 436:17-25.

9 4. IFIC and Everest, together with CeSight, as principal,

10 furnished a Miller Act Payment Bond according to 40 U.S.C. § 3131, to

11 ensure payment to subcontractors and suppliers furnishing labor,

12 materials, or both in the prosecution of the work on the Project. Tr. Ex.

13 141.

14 5. CeSight subcontracted with co-defendant Insight

15 Environmental Engineering & Construction, Inc. (Insight) to provide

16 steel decking, electrical and exterior improvements, including the Active

17 Vehicle Barrier (AVB) and Passive Vehicle Barrier (PVB) systems. Tr.

18 Ex. 39, Bates NASATKA 0004037; Dk. 117-1 at 3.

19 6. Insight entered into a $1,121,539.30 subcontract

20 (Subcontract) with Nasatka to provide all labor, material,

21 transportation, equipment, and other facility barriers with full controls,

22 automation and chain link fencing, including the installation of the

23 specified AVB and PVB systems in compliance with USACE-Seattle’s Prime Contract specifications. Tr. Ex. 39 (Subcontract).

25 7. NAS furnished a Performance Bond to Nasatka for the Project.2 26 8. A dispute arose regarding Nasatka’s performance on the Project and on February 19, 2016, Nasatka filed suit for breach of contract, recovery under the M iller Act, and quantum meruit, seeking $1,280,423.69 plus attorney’s fees, interest, and penalties for alleged

3 late payment.

4 9. Nasatka seeks payment of (1) the unpaid contract balance

5 under the Subcontract, (2) costs associated with work performed after it

6 completed the cinch-rampart controller, and (3) unpaid service call

7 invoices. In the alternative, Nasatka seeks equitable relief under

8 quantum meruit.

9 A. Nasatka’s Subcontract Requirements

10 10. The Subcontract incorporates provisions of the Prime

11 Contract that relate in any way to Nasatka’s work under the

12 Subcontract, including provisions of the Prime Contract required by law

13 and referenced within the Subcontract. Tr. Ex. 39, Bates NASATKA

14 004037 (Recitals); id. at Bates NASATKA 0004038, §§ 2.1-2.6

15 (Incorporation of the Prime Contract).3

16 11. Section 14 of the Subcontract provides, “If any claim or

17 dispute shall arise between [Insight] and [Nasatka] regarding

18 performance of the Work, or any alleged change in the Work, [Nasatka]

20 3 Nasatka’s objections concerning whether the Subcontract incorporates provisions of the Prime Contract are overruled. John Scolaro’s witness narrative does not state it is undisputed that Nasatka was not provided the Prime Contract. It says that Nasatka did not receive a copy of the Prime Contract when it signed the Subcontract, and that Nasatka did not receive a copy of the Prime Contract until it asked for a copy from USACE Seattle in April 2015. Dkt. 126-4 (Scolaro Witness Narrative) ¶ 21. Nasatka does not dispute that it agreed to the Subcontract, which expressly references and incorporates the Prime Contract; it is therefore required to adhere to its terms. (Nasatka’s lack of diligence in ensuring that it received a copy of the Prime Contract does not mean it is not bound by it, and there are no facts showing that Cesight prevented Nasatka from receiving or reviewing the Prime Contract before it signed the Subcontract.) Nasatka’s objection that Cesight failed to enforce the Prime Contract or inform Nasatka that it failed to comply with it is not supported by any reference to the record. Nasatka does not object that the Subcontract is otherwise unenforceable.

1 shall timely perform t he disputed Work and shall give written notice of a request or claim for additional compensation for the disputed Work

3 within ten (10) days after commencement of the disputed Work.

4 [Nasatka’s] failure to give written notice within the ten (10) day period

5 constitutes an agreement by [Nasatka] that it will receive no extra

6 compensation for the disputed Work.” Id. at Bates NASATKA 0004044.4

7 12. Under Section 15 of the Subcontract, “[Nasatka] shall

8 perform all warranty obligations and responsibilities assumed by

9 [Insight] under the Prime Contract with respect to the Work. All Work

10 not conforming to these requirements may be considered defective.

11 [Nasatka] shall promptly correct any Work rejected by [Insight] as

12 defective or as failing to conform to the Subcontract Documents, whether

13 observed before or after completion, and shall correct any Work found to

14 be defective or nonconforming within a period of one (1) year from the

15 date of completion of the Project. Should [Nasatka] fail to correct any

16 defective Work, [Insight] may perform or cause to be performed the

17 same at [Nasatka’s] expense. . . .”. Id. at Bates NASATKA 0004045.

18 13. Insight retained the right to reject Nasatka’s Work after

19 completion of the Work if it did not conform to the Prime Contract. See

20 id.

21 14. Section 23.4 of the Subcontract permits Insight to offset any

22 claims for any amount due to Insight, including without limitation, an

23 amount resulting from the expense of completing the Work, together with a reasonable charge for awarding and administering any subcontract, any damages caused by delays in completing the Work, and 4 Nasatka’s objection on the grounds that this provision is waived is overruled.

Exhibit 192 does not support this contention and neither does Scolaro’s cited testimony.

1 any amounts resultin g from Insight repairing or causing to be repaired any deficiency in the Work attributable to Nasatka. Id.

3 15. Exhibit B to the Subcontract sets forth the Statement of

4 Work, which obligated Nasatka to comply with all General

5 Requirements and the Project Specifications, including without

6 limitation: Specifications 01 32 01, governing Project Schedule; 01 33 00,

7 governing Submittal Procedures; 01 45 01, governing Contractor Quality

8 Control; 01 45 01.10, governing Quality Control System; 01 78 00,

9 governing Closeout Submittals; 01 78 23, governing Operation and

10 Maintenance Data; and 34 41 26.00 10, governing Access Control Point

11 Control System (ACPCS). Id., Ex. B, at Bates NASATKA 0004051.

12 16. Pursuant to Exhibit B of the Subcontract, Nasatka’s work

13 included the installation of the Access Control Point Control System

14 (ACPCS) as identified in the Prime Contract’s Projection Specifications

15 under Division 34, Transportation, Section 34 41 26.00 10, Part 1:

16 Furnish and install a complete, integrated, and

17 functional ACPCS for the Access Control Point

18 including active vehicle barriers, active vehicle

19 barrier controls, traffic signals, traffic signal

20 controls, traffic warning signals, traffic signs and

21 pavement markings, wrong-way detectors, vehicle

22 presence detectors, Sequence of Events Recorder,

23 data transmission, and all interconnecting conduit 24 and wiring.

25 Id. at Bates NASATKA 0004051 (listing Division 34, Transportation, Section 34 41 26.00 10, Part 1).

27 17. Exhibit B also contained additional requirements and conditions, including without limitation, items (J)(17) requiring compliance with the P roject Schedule, (J)(18) requiring “[a]ll materials to be used by this subcontractor shall be as per specification section,”

3 and (J)(19) requiring “[a]ll materials shall be installed per the

4 manufacturers recommendations and specifications.” Id. at Bates

5 NASATKA 000453.

6 18. Cesight assigned Anthony Goveas as Quality Control

7 Systems Manager and Quality Control Manager to ensure Nasatka’s

8 compliance including, without limitation, review of submittals,

9 inspection of materials, installation of materials, all performance and

10 testing and reporting to USACE-Seattle District, Joint Base Lewis-

11 McChord (JBLM) DWP, The Army Garrison, and the Department of

12 Emergency Services (DES). TT at 418:8-423:9; Tr. Ex. 56 (Project

13 Specifications).

14 19. Variations from the Prime Contract’s specifications required

15 the KO’s approval. Tr. Ex. 56, Bates NASATKA008596, Section 01 33

16 00, subsection 1.9.

17 20. Prior to any work being started, all submittals with a “G”

18 designation required approval by the KO. Id. at Bates NASATKA

19 0085894, subsections 1.3; 1.12.

20 21. A designation following the “G” designation identified the

21 government office charged with reviewing the submittal for USACE-

22 Seattle. Id.

23 22. USACE-Omaha functioned as the Government Designer of Record (GDOR) on the Project, performing review of certain submittals.

25 TT at 433:18-25; see e.g., Tr. Ex. 56, Bates NASATKA 0003901-0003905.

26 23. USACE-Omaha functioned as the reviewer of the Factory Acceptance Test Plan for USACE-Seattle. Id. at Bates NASATKA 0003904.

1 24. USACE-O maha did not have ultimate approval authority over Nasatka’s work on the Project and was subject to being overruled

3 by the KO. Id.

4 25. Under the Project Specifications, the approval of submittals

5 does not relieve the contractor from complying with all the requirements

6 of the Prime Contract and approval does not represent acceptance by the

7 KO. Tr. Ex. 56, Bates NASATKA0085898, Section 01 33 00, subsection

8 1.13; TT at 445:13-23.

9 26. As between the KO at USACE-Seattle and the GDOR at

10 USACE-Omaha, the KO has final approval authority of Project

11 submittals and work. Tr. Ex. 56, Bates NASATKA 0085898, Section 01

12 33 00, subsections 1.11-1.13; TT at 436:17-437:14; Seawell Narrative

13 ¶ 9.

14 27. The Project Specifications required Nasatka to complete a

15 PLC based ACPCS: “The ACPCS processor shall consist of a

16 combination of controllers to include a Traffic Controller Unit (TCU),

17 programmable logic controller (PLC) and other controllers or shall just

18 be PLCs and other controllers.” Tr. Ex. 56, Bates NASATKA 0003916,

19 Section 34 41 26.00 10, subsection 2.2.

20 28. The ACPCS was a critical component of the Project. TT at

21 425:10-426:11.

22 29. Nasatka’s submittals presented a non-compliant cinch-

23 rampart controller rather than a PLC based controller. Tr. Exs. 74, 86, 88, 127; TT at 476:7-478:14.

25 30. Nasatka did not introduce any evidence at trial that USACE- Seattle approved the cinch-rampart controller before or after completion.

1 31. On August 12, 2014, Insight issued Nasatka a Notice and Demand to Cure Default (Cure Notice) as a result of Nasatka’s failure to

3 perform. Tr. Ex. 300.

4 32. On August 21, 2014, USACE-Seattle concluded that the

5 cinch-rampart controller did not comply with the ACPCS Specifications

6 and called a meeting with CeSight, Insight, and Nasatka to address

7 Nasatka’s failure to comply with the Prime Contract specifications. Tr.

8 Ex. 350; TT at 154:12-21.

9 33. The August 21, 2014, Meeting Minutes document that

10 Nasatka acknowledged that the cinch-rampart controller could not meet

11 the requirements of the Prime Contract with the current hardware,

12 software, and control system as submitted. Tr. Ex. 350.

13 34. At the August 21, 2014, meeting, there was consensus that

14 Nasatka must utilize other vendors to provide a compliant PLC system.

15 Id.

16 35. The parties stipulate that Nasatka materially performed its

17 requirements under the Subcontract in February 2015 and USACE-

18 Seattle accepted Nasatka’s work. Dkt. 117-1 at 4.

19 36. USACE-Seattle compensated Cesight/Insight for Nasatka’s

20 work on the Project. Id.

21 37. On May 17, 2015, Nasatka submitted an untimely claim for

22 compensation for costs expended to remove and replace the

23 nonconforming cinch-rampart controller with the conforming PLC controller. Tr. Ex. 39, Bates NASATKA 0004044, Section 14; Tr. Ex. 254.

26 38. Nasatka’s claim was rejected by Insight because Nasatka had failed to comply with the express requirements of the Prime Contract and Subcontract: namely, that because the PLC controller was originally required under the Pr oject specifications, the Subcontract clearly required Nasatka to bear the cost of correcting its defective/non-

3 compliant work. Tr. Ex. 39, Bates NASATKA 0004045, Section 15.

4 39. Defendants did not pay Nasatka the unpaid Subcontract

5 balance despite Nasatka’s work being accepted by USACE-Seattle. Dkt.

6 117-1 at 4.

7 40. Nasatka’s Work on the Project was warranted for two years.

8 Tr. Ex. 53, Bates NASATKA 0101098; TT at 162:9-19.

9 41. The warranty period began March 1, 2015. Tr. Ex. 53, Bates

10 NASATKA 0101098; Dkt. 126-3 (Rojas Narrative) ¶ 64.

11 42. The warranty was “limited to supply without charge, part

12 components necessary to correct operation and from failure of operation

13 by ordinary use against defects due to faulty manufacturer material or

14 workmanship of the furnished Nasatka barrier system.” Tr. Ex. 53,

15 Bates NASATKA 0101098.

16 43. Following substantial competition, Nasatka performed all

17 required quarterly maintenance as required by the Project

18 Specifications. Rojas Narrative, ¶¶ 63-71; Tr. Ex. 56, Bates NASATKA

19 0087456, Section 34 41 10, subsection 1.8.3; Tr. Exs. 260 and 262.

20 44. Nasatka provided service calls related to its work on the

21 Project following substantial completion. Rojas Narrative, ¶¶ 67; Tr.

22 Exs. 20, 21, 63, 64, 78, 157, 158, 159, 160, 225, 261, 262.

23 45. The service calls related to drains that were not properly maintained as directed by Nasatka. Rojas Narrative ¶¶ 68-71; Tr. Ex. 78, Bates Army_Prod-0132758; Tr. Ex. 155 (Nasatka’s Operations & Training Manual).

1 46. Nasatka se nt Defendants an invoice for $11,162.50 for service calls not covered under Nasatka’s warranty, which Defendants

3 did not pay. Tr. Ex. 181 (service invoice); Rojas Narrative ¶¶ 68-71.

4 47. Defendants did not introduce evidence of damages at trial.

5 See Dkt. 142 (Second Amended Exhibit List identifying exhibits

6 admitted into evidence); Dkt. 158 (Partial Judgment Order).

7 CONCLUSIONS OF LAW

8 48. This Court has jurisdiction over the parties and the subject

9 matter of this litigation. 28 U.S.C. § 1331; 40 U.S.C. § 3133(b)(1); 28

10 U.S.C. § 1332.

11 49. This district is the proper venue for this litigation.

12 50. The Court finds in favor of Nasatka on its claims for the

13 unpaid Subcontract balance and unpaid service calls, but against

14 Nasatka on its claims for costs associated with replacing the cinch-

15 rampart ACPCS with a PLC-based ACPCS.

16 51. In order to prevail on a breach of contract claim, Nasatka

17 must prove: “(1) the existence of the contract, (2) plaintiff’s performance

18 or excuse for nonperformance, (3) defendant’s breach, and (4) the

19 resulting damages to the plaintiff.” Oasis West Realty, LLC v.

20 Goldman, 51 Cal. 4th 811, 821 (2011).

21 52. To prove its claim for violation of the Miller Act, Nasatka

22 must prove: (1) Nasatka supplied labor or materials in prosecution of the

23 work provided for in the contract; (2) payment has not been made; (3) there is a good faith belief that the materials were intended for the specified work; and (4) the jurisdictional requisites of timely notice and filing were satisfied. 40 U.S.C. § 3133; United States ex rel. Hawaiian Rock Prods. Corp. v. A.E. Lopez Enters., Ltd., 74 F.3d 972, 975 (9th Cir. 1996).

1 53. The partie s stipulate that Nasatka performed its obligations under the Subcontract in February 2015 and that USACE-Seattle paid

3 Cesight/Insight for Nasatka’s work under the Subcontract.

4 54. The parties stipulate that Nasatka did not receive the full

5 Subcontract balance for its work on the Project.

6 55. Nasatka therefore has proved its breach of contract claim and

7 Miller Act claim for the unpaid Subcontract balance of $433,737.15.

8 56. Nasatka proved that it provided service calls in the amount of

9 $11,162.50 that were not covered under warranty.

10 57. Nasatka therefore has proved its breach of contract claim and

11 Miller Act claim for the unpaid service calls.5

12 58. Under the terms of the Subcontract and Prime Contract,

13 Nasatka bears the costs associated with remedying its work to comply

14 with the Project’s Specifications.

15 59. Because Nasatka failed to comply with the Prime Contract’s

16 Project Specifications when it built the noncompliant cinch-rampart

17 controller, it cannot recover for the costs expended to make its Work

18 compliant with the Project’s Specifications.

19 60. Nasatka’s breach of contract claim and Miller Act claim fail to

20 the extent those claims seek recovery beyond the unpaid Subcontract

21 balance other than for service calls.

22 61. Nasatka’s quantum meruit claim for recovery of costs

23 associated with remedying its work to comply with the Project’s Specifications also fails.

27 5 Because Nasatka succeeds on its breach of contract claim and Miller Act claim for the unpaid Subcontract balance, the Court does not address 1 CONCLUSION 2 62. Judgment shall be entered in favor of Nasatka and against | Defendants on Nasatka’s breach of contract claim and Miller Act claim 4] for the unpaid Subcontract balance and service calls.

Date: September 4, 2019 Moe A. Je, AN 7 Dale S. Fischer g United States District Judge 1] □□