[00:00:06] Speaker 02:
The next case for argument is 15-11-85, Aon, Aon, Duke, versus Defense, Finance, and Accounting.

[00:00:38] Speaker 04:
Before you begin, Mr. Rizzo, I just want to say that we can take it as a given that anything that involves the defense, finance, and accounting service is going to aggravate my arthritis.

[00:00:49] Speaker 04:
I'm sorry, I couldn't hear it because you're... I said your record's too heavy.

[00:00:54] Speaker 03:
Not too large, just too heavy.

[00:00:56] Speaker 03:
Understood.

[00:00:56] Speaker 03:
May it please the court, I am Mike Rizzo and I do represent the appellant, the Aon Group LLC.

[00:01:03] Speaker 03:
And there are two issues that we want to cover today, one in more detail than the others.

[00:01:09] Speaker 03:
The first issue, the government terminated my client's contract for default.

[00:01:14] Speaker 03:
And after the trial, the board determined that my client, in fact, had defaulted in its performance of the contract.

[00:01:20] Speaker 03:
And also, I think the record shows it's $12.9 million.

[00:01:25] Speaker 04:
In the blue brief, you assert that the system

[00:01:32] Speaker 04:
did have full functionality at the conclusion of GT&E government testing and evaluation.

[00:01:40] Speaker 04:
In your argument section at 19, you say it had, quote, had functionality.

[00:01:49] Speaker 04:
And then you say it had, quote, major functionality.

[00:01:52] Speaker 04:
And then that's at 21.

[00:01:54] Speaker 04:
And then at 21, you say it had basic functionalities.

[00:02:00] Speaker 04:
Joint appendix at 1169, there's testimony that basic functionalities were there, but that it, quote, just wasn't working to what could be fielded, where it could be fielded, i.e.

[00:02:13] Speaker 04:
used.

[00:02:15] Speaker 04:
Similarly, in a March 22, 2007, status summary, which is at 1646, it says, quote, major functionality does not work.

[00:02:28] Speaker 04:
Are you asserting that the contract requirement of 100% functionality was met?

[00:02:33] Speaker 04:
And if so, what in the record supports that?

[00:02:38] Speaker 03:
We are asserting that the government had the burden of proof during the trial to demonstrate that at the conclusion of GT&E, which was April 10, 2007, the system lacked functionality.

[00:02:50] Speaker 03:
And we are asserting that there is not substantial, that the board ignored substantial evidence in Aeon's favor on that issue.

[00:03:00] Speaker 03:
And this is important because terminations for default are draconian.

[00:03:05] Speaker 03:
But the problem is the thing didn't work.

[00:03:08] Speaker 03:
There is no dispositive evidence that as of April 11, 2007, the thing did not work.

[00:03:16] Speaker 03:
In fact, the record.

[00:03:18] Speaker 02:
Did it work 100%?

[00:03:19] Speaker 02:
Was it completely functional?

[00:03:20] Speaker 03:
Our client's position is that it was.

[00:03:23] Speaker 03:
But our position is that the government did not present evidence.

[00:03:27] Speaker 03:
They had the burden at the trial.

[00:03:29] Speaker 03:
And that the government did not have evidence that as of the date of termination, and recall that the contract was terminated for two reasons.

[00:03:38] Speaker 03:
One was a failure to cure, and the cure notice was... No, I understand.

[00:03:42] Speaker 02:
On this point, the government makes two arguments.

[00:03:44] Speaker 02:
Firstly, they say you were required to have 100% functionality at the beginning of the GT&E, not at the end.

[00:03:50] Speaker 02:
So that was default there.

[00:03:52] Speaker 02:
But they argue, and I think there is evidence in the record, that it was, even if you take your date of April 2007, it still wasn't 100% functional.

[00:04:05] Speaker 02:
Now you said something kind of a little odd, which is the government didn't, the board ignored our substantial evidence?

[00:04:14] Speaker 03:
The board, there is not substantial evidence to demonstrate that the

[00:04:20] Speaker 03:
re-hosted system did not have 100 percent functionality as of April 11th.

[00:04:24] Speaker 04:
As I recall, I read the testimony, and the testimony from the government witnesses was that the thing wouldn't integrate.

[00:04:33] Speaker 04:
Now, assuming that that's true, how could it be 100 percent?

[00:04:40] Speaker 03:
There are a couple of points I'd like to make.

[00:04:43] Speaker 03:
One is the testimony that was presented during the hearing did not match the record

[00:04:49] Speaker 03:
during the hearing, and we think that it was error not for the government to have a record that matched the testimony.

[00:04:56] Speaker 03:
So let me give you a couple examples.

[00:04:58] Speaker 03:
There is one test.

[00:05:01] Speaker 04:
Look back at what you just said.

[00:05:04] Speaker 04:
It was error for the government not to have testimony that matched the record.

[00:05:11] Speaker 03:
Let me clarify that, Your Honor.

[00:05:13] Speaker 03:
I apologize.

[00:05:15] Speaker 03:
It was an error for the Armed Services Board of Contract Appeals to determine that the testimony of the government was credible in light of the documentary record.

[00:05:25] Speaker 04:
But that's weighing evidence.

[00:05:28] Speaker 03:
Is it not?

[00:05:29] Speaker 03:
I understand your point, but there was evidence from the government's lead tester, Carol Turner, that the government didn't conduct any testing after April 11, 2007.

[00:05:40] Speaker 03:
There is also... Yeah, they stopped.

[00:05:42] Speaker 03:
Correct.

[00:05:44] Speaker 04:
They stopped because the thing wasn't working.

[00:05:46] Speaker 04:
Your position seems to be that the government bore responsibility to provide testers, which are in fact provided for in the contract as your responsibility, but the government's supposed to then come in when it does its testing and do your work.

[00:06:03] Speaker 04:
That's sort of the core of your argument, isn't it?

[00:06:06] Speaker 03:
That is not the core of our argument.

[00:06:08] Speaker 03:
I don't even think it's peripheral.

[00:06:11] Speaker 03:
There is a test plan that's in the record.

[00:06:13] Speaker 03:
And the test plan that is in the record that the government wrote, which is in the fourth volume of the appendix, states that the parties should expect to find functionality defects during GT&E.

[00:06:25] Speaker 03:
And it states that the testers on the government side and the testers on EON side will meet daily during GT&E to resolve those defects.

[00:06:36] Speaker 03:
So conversely, when you get to the end of GT&E, there needs to be a comprehensive test.

[00:06:41] Speaker 03:
there needs to be a test that demonstrates does this work or does it not work.

[00:06:45] Speaker 03:
And this is particularly important when the company that's performing this contract is a small business, that if it gets terminated for default, it's the most draconian thing that can happen to it.

[00:06:56] Speaker 03:
It goes on its past performance records for a period of five years so that everybody who wants to hire this company knows, oh, they were terminated for default.

[00:07:04] Speaker 03:
Under those circumstances, there should be an obligation on the government to conduct

[00:07:09] Speaker 03:
a demonstrative test which demonstrates, does this thing work as of April 11th or doesn't it?

[00:07:15] Speaker 03:
Because that's the ground of termination.

[00:07:17] Speaker 03:
That's the reason that they terminated the contract.

[00:07:19] Speaker 02:
We've got, as Judge Wallach pointed out earlier, a huge record in which the board evaluated this, weighed all the evidence, weighed all the testimony, and concluded there clearly was substantial evidence based on credibility and other things to conclude that there was no 100% functionality, even if you use the April 10th date.

[00:07:38] Speaker 03:
The board made that determination.

[00:07:41] Speaker 03:
We believe that that determination is not supported by substantial evidence.

[00:07:45] Speaker 02:
I want to go on to the next issue.

[00:07:46] Speaker 03:
Yes, yes.

[00:07:48] Speaker 03:
So the performance-based payments issue.

[00:07:50] Speaker 03:
On this issue, this is a de novo issue.

[00:07:53] Speaker 03:
So it's our position, and I think the government agrees with this, that this court is entitled to determine as a matter of law whether EON has to repay the performance-based payments it received under the contract.

[00:08:07] Speaker 03:
There were $12.9 million that received.

[00:08:10] Speaker 03:
And I'll just point out a couple of regulations first before I get into my argument.

[00:08:15] Speaker 03:
The first one is at 32, FAR 32-1004, the regulations state that performance-based payments can either be made on a whole contract basis or on a delivery item basis.

[00:08:28] Speaker 03:
And then more importantly, the contract clause that's in the contract is FAR 52-232-32.

[00:08:37] Speaker 03:
In that clause at Section J, it talks about what happens in the event of default.

[00:08:43] Speaker 03:
And in the event of default, the contractor has to return unliquidated performance-based payments.

[00:08:50] Speaker 04:
OK, sure.

[00:08:51] Speaker 03:
So conversely, question, Your Honor?

[00:08:54] Speaker 04:
Yes.

[00:08:55] Speaker 04:
So 52-232-32C3-4.

[00:09:02] Speaker 04:
based paid finance amounts paid prior to payment for delivery of an item shall be liquidated by deducting a percentage or a designated dollar amount from the delivery payment.

[00:09:17] Speaker 04:
Right?

[00:09:18] Speaker 04:
Where are you, Your Honor?

[00:09:19] Speaker 04:
FAR 52-232-32C3.

[00:09:21] Speaker 04:
Okay.

[00:09:22] Speaker 04:
Go ahead.

[00:09:32] Speaker 04:
means a payment for accepted supplies or services, including payments for accepted partial deliveries.

[00:09:42] Speaker 04:
Commercial financing payments are liquidated by deduction from these payments.

[00:09:49] Speaker 04:
The contract says the government shall accept or reject

[00:09:55] Speaker 04:
Okay.

[00:09:56] Speaker 04:
Are the system within 30 days from final migration of live legacy production data to the re-posted MOCAS.

[00:10:09] Speaker 04:
The board found that the government formally rejected the re-posted MOCAS.

[00:10:16] Speaker 04:
No acceptance, no acceptance, no liquidation.

[00:10:21] Speaker 04:
What's wrong with that analysis?

[00:10:22] Speaker 03:
I don't know that there's a regulation that says the analysis that you just put forth.

[00:10:27] Speaker 03:
The regulation that was applicable in the contract was the 2002 version of this clause.

[00:10:34] Speaker 03:
And the 2002 version of this clause discusses that if performance-based payments are on a whole contract basis, as the government alleges, liquidation shall be by either pre-designated liquidation amounts or liquidation percentages.

[00:10:50] Speaker 03:
That predesignation is a function of the contracting officer and the record is clear that the contracting officer didn't put a liquidation schedule, a liquidation rate, a liquidation table of any type in the contract as the contracting officer was obligated to do.

[00:11:06] Speaker 03:
Section J discusses the fact that if the contract is terminated, the contractor shall on demand repay the amount of unliquidated performance-based payments.

[00:11:18] Speaker 03:
So what is liquidated and what is unliquidated, right?

[00:11:21] Speaker 04:
That's where we went a minute ago.

[00:11:24] Speaker 03:
So the contractor had eight performance-based payments in the contract that were subsequently broken into smaller payment events.

[00:11:32] Speaker 03:
At each of those performance-based payments, the contractor had to demonstrate with verifiable subjects that it was entitled to be paid.

[00:11:43] Speaker 03:
You're saying they were accepted.

[00:11:45] Speaker 03:
I'm saying that they were accepted.

[00:11:47] Speaker 03:
You're flying in the face of the contract language.

[00:11:51] Speaker 03:
How so?

[00:11:53] Speaker 04:
When I read you.

[00:11:57] Speaker 04:
Let me read it again.

[00:11:59] Speaker 04:
The contract specifies, quote, the government shall accept or reject Rehost MoCast system within 30 days from the final migration of live legacy production data to the Rehosted MoCast.

[00:12:18] Speaker 04:
Is that not there?

[00:12:19] Speaker 03:
I understand that's there.

[00:12:21] Speaker 03:
And I also understand that the contract has a provision that unliquidated progress payments need to be returned and that liquidated progress payments get to be kept by the contractor.

[00:12:33] Speaker 03:
And I can also tell you that the contracting officer who wrote the contract originally was of the position five times that the performance-based payments were liquidated when paid.

[00:12:44] Speaker 03:
And I understand that the government has cited some cases about

[00:12:47] Speaker 03:
information in the contracting officer's final decision is subject to de novo review and that's true on FAFSA.

[00:12:55] Speaker 02:
This is a contract interpretation question.

[00:12:57] Speaker 02:
It's a question of law.

[00:12:59] Speaker 02:
So why is the contracting officer's subjective understanding of the payment status carry any weight here?

[00:13:07] Speaker 03:
Because the contracting officer wrote the contract and the contracting officer's own interpretation of what he meant should be controlled.

[00:13:17] Speaker 02:
May it please the court.

[00:13:35] Speaker 00:
The termination for default was properly sustained because in this case the contractor delivered non-conforming goods.

[00:13:44] Speaker 00:
The contract was

[00:13:46] Speaker 00:
required that there be a hundred percent functionality and there was not a hundred percent functionality.

[00:13:53] Speaker 02:
And your friend says there was, and your friend says there was plenty of evidence on the record to support his position and not enough by the government.

[00:14:01] Speaker 00:
The board cited overwhelming evidence to the contrary.

[00:14:07] Speaker 00:
For example, there was a interface to the shared data warehouse that had to work.

[00:14:13] Speaker 00:
This was a function that had to work.

[00:14:15] Speaker 00:
That function did not work.

[00:14:18] Speaker 02:
Who was supposed to do the testing?

[00:14:20] Speaker 02:
I mean, you say whether it worked or did not work.

[00:14:22] Speaker 02:
Who was supposed to go in there and make that determination?

[00:14:25] Speaker 02:
Was it the government's people or the contractor's people?

[00:14:29] Speaker 00:
The contractor was supposed to deliver a system that it had fully tested.

[00:14:37] Speaker 00:
And then there would be the period of government testing of the functionality.

[00:14:41] Speaker 00:
That was the first 90-day period that the contractor failed.

[00:14:47] Speaker 00:
During that period, the government evaluated the system, and it was undisputed that this interface to the Shear dated warehouse did not work.

[00:14:57] Speaker 00:
You had testimony from three witnesses, a Mr. Jackson, a Ms.

[00:15:02] Speaker 00:
Turner, and a Ms.

[00:15:03] Speaker 00:
Schreiber.

[00:15:04] Speaker 00:
all testifying that the interface did not work.

[00:15:07] Speaker 02:
Are we talking about, because there's a quibble over which date we should be looking at, the pre or the post.

[00:15:13] Speaker 02:
Are we on the April 10th, 2007?

[00:15:17] Speaker 00:
The testimony that I cited from Jackson, Turner, and Schreiber does go also to the very end, after April 10th.

[00:15:26] Speaker 00:
It didn't work before, and it didn't work afterwards.

[00:15:34] Speaker 00:
There were other aspects, other functions that did not work after April 10th, and there's testimony to that effect.

[00:15:42] Speaker 00:
Testimony from Turner and Thompson that the progress payment function, this is the way that you were able to make payments.

[00:15:50] Speaker 02:
Was there contrary evidence in the record?

[00:15:52] Speaker 02:
Did the other side come in with its experts or its people and say, no, they're wrong, it was 100% functional?

[00:15:59] Speaker 00:
The contractor called only one witness.

[00:16:03] Speaker 00:
And that was a witness from Carnegie Mellon.

[00:16:07] Speaker 00:
And actually, their testimony was that the system that was delivered was unstable, was unusable, and they thought that the government should start all over again.

[00:16:17] Speaker 00:
That testimony was cited by the board.

[00:16:21] Speaker 00:
That's the only witness that the contractor called.

[00:16:25] Speaker 02:
Why don't you move on to the liquidation question?

[00:16:27] Speaker 00:
On the liquidation question, the contract is absolutely clear.

[00:16:33] Speaker 00:
What's at issue are the FAR provisions.

[00:16:37] Speaker 00:
And in particular, I mean, we agree that if it's unliquidated, the government can recover it.

[00:16:44] Speaker 00:
If it's liquidated, the government can't recover it.

[00:16:47] Speaker 04:
So the question is, what's liquidation?

[00:16:50] Speaker 00:
Yes, exactly.

[00:16:52] Speaker 00:
And FAR 52.232-32D tells us what liquidation is.

[00:17:02] Speaker 00:
It says,

[00:17:03] Speaker 00:
Performance-based financing amounts paid prior to payment for delivery of an item shall be liquidated by deducting a percentage or designated dollar amount from the delivery payment.

[00:17:18] Speaker 00:
So what it distinguishes between is the performance-based payments.

[00:17:22] Speaker 04:
That's what I read to your brother.

[00:17:25] Speaker 00:
Yes.

[00:17:26] Speaker 04:
We're aware of it.

[00:17:28] Speaker 00:
Yes.

[00:17:28] Speaker 00:
That is the crucial clause.

[00:17:31] Speaker 00:
It distinguishes between the delivery payment and the performance-based payment and says that liquidation occurs when there's a deduction from the delivery payment.

[00:17:43] Speaker 00:
And this contract also includes FAR 52.232-1, the payments clause, which is the ordinary FAR clause that's included in government contracts.

[00:17:57] Speaker 00:
And that states that the government shall pay the contractor

[00:18:00] Speaker 00:
upon submission of a proper invoice, the price stipulated in the contract for supplies delivered and accepted.

[00:18:08] Speaker 00:
So that also explains that you have to have a delivery and an acceptance of the delivery before you have a delivery payment.

[00:18:20] Speaker 00:
And in this case, as the court did read and point out, there never was a full delivery

[00:18:28] Speaker 00:
CLIN number one was never fully delivered and it was never accepted.

[00:18:34] Speaker 00:
And because of that, there never was a final voucher for CLIN one and there never was a delivery payment.

[00:18:42] Speaker 00:
And so the financing payments were never set off against the delivery payment.

[00:18:49] Speaker 00:
For example, if the contractor had done everything they were supposed to do in this case, if they had delivered a fully compliant

[00:18:58] Speaker 00:
system.

[00:18:59] Speaker 00:
What would have happened is they would have tendered the goods, it would have passed the first 90 days, passed the second 90 days, and they would have tendered a final invoice.

[00:19:16] Speaker 00:
At that point, the price is roughly $14 million.

[00:19:21] Speaker 00:
So, against the $14 million, you would have set off

[00:19:26] Speaker 00:
Whatever financing payments, in this case they were performance-based payments, you would have set off that amount and the contractor would have gotten the remainder.

[00:19:39] Speaker 00:
For example, if 13 million had been paid as financing payments prior to final delivery, then they would have gotten the other 1 million.

[00:19:56] Speaker 00:
So effectively in this contract, if everything had gone right, the full amount of the financing payments would have been liquidated after final delivery, which is effectively a 100% liquidation.

[00:20:12] Speaker 00:
So here they're saying that the contract is defective because there is no percentage in there or any

[00:20:20] Speaker 00:
amount, it really isn't, because there was only one delivery contemplated.

[00:20:25] Speaker 00:
If that delivery had been successful, then there would have been a hundred percent liquidation.

[00:20:36] Speaker 01:
So no liquidation and the payments were returnable?

[00:20:40] Speaker 00:
Not in this case, because there was a default, because they did not deliver conforming goods.

[00:20:48] Speaker 00:
The system

[00:20:49] Speaker 01:
Which means that the performance payments could be reclaimed.

[00:20:54] Speaker 00:
Yes.

[00:20:55] Speaker 00:
Yes.

[00:20:57] Speaker 00:
So in that respect, it's the same result whether it's a progress payment or a performance-based payment.

[00:21:04] Speaker 00:
In either case, if there is a default, the government recoups all of the payments.

[00:21:13] Speaker 00:
If the Court has no further questions, we would request that it be affirmed.

[00:21:21] Speaker 03:
Three brief rebuttal points.

[00:21:25] Speaker 03:
On the performance-based payments issue, in the provision D on the liquidation, if the performance-based payments are on a whole contract basis, as the government is alleging, the government has an affirmative obligation to pre-designate a liquidation amount or liquidation percentage.

[00:21:47] Speaker 03:
Under a plain reading of this regulation,

[00:21:51] Speaker 03:
And my friend alleges that essentially the contract had a hundred percent liquidation rate.

[00:21:58] Speaker 03:
But there's no liquidation schedule, there's no liquidation rate, there's nothing in the contract.

[00:22:03] Speaker 03:
And it's our position that if the government is going to take that position, it needs to communicate that position in unmistakable terms in the contract.

[00:22:13] Speaker 03:
It's incumbent upon the government as the author of the contract to do that.

[00:22:19] Speaker 03:
The termination for default issue will just draw the court's attention to Appendix 1411 through 1412, which was Ms.

[00:22:26] Speaker 03:
Turner, the lead tester's testimony, that there was no testing after the GT&E period ended.

[00:22:33] Speaker 03:
And a little context, I'm sorry, that would be Appendix 1038 through 1039.

[00:22:38] Speaker 03:
And then some context on the Carnegie Mellon testimony.

[00:22:41] Speaker 03:
The Carnegie Mellon witness testified that the re-hosted system was an improvement in every measurable over the

[00:22:48] Speaker 03:
system that the government provided.

[00:22:50] Speaker 03:
So the we should start all over was really starting all over by fixing the as-is MOCAS before you do this project again.

[00:23:00] Speaker 02:
That's all.

[00:23:00] Speaker 02:
Thank you.

[00:23:01] Speaker 02:
We thank both sides and the case is submitted and that concludes our proceedings for this morning.

[00:23:07] Speaker 01:
All rise.

[00:23:08] Speaker 01:
The Honorable Court is adjourned until tomorrow morning at 10 o'clock a.m.