Opinion
No. 94 C 4414.
February 27, 1995
MEMORANDUM OPINION AND ORDER
Plaintiff, the United States of America, ("the Government") filed suit on behalf of the Department of Defense alleging various violations of the False Claims Act, 31 U.S.C. § 3729, breach of contract, common law fraud, unjust enrichment and mistake of fact. Defendant Hydroaire, Inc. ("Hydroaire") entered into a contract with the Government to supply certain cylinders to be used in Trident submarines. The Government alleges that Defendants knowingly supplied cylinders which did not comply with the standards set forth in the contract. Defendant Sydney Rice ("Rice") was the project engineer for Hydroaire on all of its government contracts. Defendant George Harris ("Harris") is the president and registered agent for Hydroaire. Hydroaire, Harris and Rice (collectively "the Defendants") move to dismiss the Complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim and pursuant to Fed.R.Civ.P. 9(b) for failure to plead fraud with particularity. Defendants Harris and Rice also move to dismiss the Complaint individually on similar grounds as well as for failure to allege sufficient claims which suggest each Defendant's individual misrepresentations and involvement in the alleged fraud. For the following reasons, we grant Defendants' motion to dismiss Count IV (the unjust enrichment claim) and Count V (mistake of fact) and deny the remainder of Defendants' motion.
BACKGROUND
On March 14, 1988, the United States, acting through the Defense Construction Supply Center, an agency of the Department of Defense, entered into a contract with Hydroaire. The contract called for Hydroaire to manufacture thirty-four linear actuating cylinders constructed of two different stainless steel alloys and forged by the dual metal centrifugal casting method of production with a metallurgical bonding between the two layers of stainless steel alloy. The cylinders, used to operate hydraulic drive planes on Trident nuclear submarines, were classified as critical application items. The cylinders manufactured under this contract were to be used to retrofit and replace old linear actuating cylinders on United States Navy submarines.
On December 9, 1987, Hydroaire submitted solicitation DLA-700-88R-0438 to the Defense Construction Supply Center. The solicitation identified Sydney Rice, Project Engineer, as the person authorized to sign the offer and otherwise act on behalf of Hydroaire. Hydroaire's solicitation offered to manufacture and deliver the seventeen stainless steel linear actuating cylinders. The contract specifications, number 845-4687549, required each cylinder to be a single metal cylinder with its inner and outer shells composed of two different alloys. The contract required that the single cylinder "be a dual metal centrifugal casting produced by U.S. Pipe and Foundry Company, East Burlington, N.J. or equal." The specifications further required the inner shell to be metallurgically bonded to the outer shell.
On March 14, 1988, the United States awarded the contract for the seventeen cylinders to Hydroaire under contract number DLA700-88-C-1093. The contract price to be paid to Hydroaire was $9,805.00 per cylinder for a total of $166,685.00. Subsequently, Hydroaire engaged Weld Systems, Inc. ("Weld Systems") to perform the machining work on the contract cylinders. On April 28, 1988, the parties modified the Hydroaire contract by ordering the manufacture of seventeen additional cylinders, bringing the contract total to thirty-four cylinders. The total contract price to be paid by the United States was now $307,870.00.
On April 13, 1988, Hydroaire contacted U.S. Pipe and Foundry Company, East Burlington, New Jersey (the company specified in the contract) and asked for a price quote on the ten dual metal centrifugally casted cylinders according to the specifications of Contract DLA700-88-C-1093. U.S. Pipe and Foundry quoted a price in excess of $8,000.00 to manufacture each cylinder. Determining that the price quoted by U.S. Pipe to manufacture an individual cylinder was too costly, Hydroaire and Sydney Rice began looking for companies to manufacture different types of metal cylinders. On May 19, 1988, Rice contacted Techni-Cast Corporation ("Techni-Cast"), South Gate, California and hired Techni-Cast to produce thirty-five sets of cylinders. These cylinder sets were comprised of different alloys and were different sizes. At the time it was hired by Hydroaire, Techni-Cast did not have the capability or the equipment to perform dual metal centrifugal casting in the production of metal cylinders.
Officials from Techni-Cast were not shown the drawings or the contract for the linear actuating cylinders and they were not told that Hydroaire wanted the two different types of cylinders to fulfill a government contract. Hydroaire paid $1,178.00 and $1,075.00, respectively, for each type of metal cylinder, for a total of $78,855.00. On July 21, 1988, Hydroaire submitted a request for payment under the government contract entitled "Contractor's Request for Progress Payment" in which Rice certified that Hydroaire incurred $173,570 in eligible costs of the contract and that the work performed thus far was consistent with the requirements of the contract. Based upon this request for progress payment under the contract, the United States paid $138,856.00 to Hydroaire on July 26, 1988. Rice, on behalf of Hydroaire, further certified that Hydroaire had expended $131,081.00 in direct material costs on Contract DLA700-88-C-1093 as of July 21, 1988.
On August 2, 1988, the 70 cylinders manufactured by Techni-Cast were shipped to Weld Systems in Mundelein, Illinois. After August 2, 1988, Weld Systems performed a process referred to as "rosebudding" on the thirty-five sets of cylinders manufactured by Techni-Cast. In the "rosebudding" process, the larger cylinder is heated so it expands and then the smaller of the two cylinders is inserted inside. Once the larger outer cylinder cools and contracts around the inner cylinder, the two separate pieces appear to be one cylinder with the same alloy composition. Any bond that may result from "rosebudding" is referred to as a mechanical bond.
Weld Systems shipped the thirty-five newly created cylinder sets to Rode Welding Service, Inc. ("Rode Welding") in Elk Grove, Illinois. Rode Welding performed a process designed to "stress relieve" (heating the cylinders to stabilize them) the thirty-five Hydroaire cylinder sets. Rode returned seventeen cylinder sets to Weld Systems advising that they were not bonded together; the inner cylinder of the sets had separated from the outer cylinder due to the absence of a bond. Kurt Wiesmeyer, president and owner of Weld Systems, contracted Rice and informed him that no bonding had occurred between the two cylinders. Rice instructed Wiesmeyer to have the cylinders metal sprayed. "Metal spraying" is a process by which the adjoining surfaces of each cylinder in the cylinder set are sprayed with metal particles to conceal lack of mechanical bonding. Rice told Wiesmeyer that the metal spraying process would satisfy the bonding requirement. The "metal spraying" was to be performed by three separate companies after which the cylinders were returned to Weld Systems. Rice then told Wiesmeyer that the cylinders did not pass inspection. Rice instructed Weld Systems to cut a groove on the end of the cylinder set where the two individual cylinders met and then insert a bead of stainless steel substance into the groove. Rice told Wiesmeyer that this procedure was to be performed to help fasten a metal ring to the ends of the cylinders. On December 12, 1988, Hydroaire presented one cylinder to the United States for visual inspection prior to shipping to the Trident Refit Facility in Bremerton, Washington. Hydroaire represented that the cylinder had been manufactured pursuant to Contract DLA700-88-C-1093. Hydroaire also presented a certificate of conformance signed by Rice certifying that this cylinder conformed with the contract. Based upon this certification and visual inspection, and accompanying demand for payment, the United States paid $89,755.97 to Hydroaire. Based upon the inspection and certification presented on December 12, 1988, the United States also paid an additional $1,339.00 in shipping costs. On December 20, 1988, Rice submitted another Contractor's Request For Progress Payment in which it was certified that the work performed thus far was consistent with the requirements of the contract. Based upon this request for progress payment, the United States paid $74,304.00 to Hydroaire.
On December 31, 1988, Hydroaire presented thirty cylinders for visual inspection to the United States which were represented to be manufactured under Contract DLA700-88-C-1093 and to be in substantial conformance with the contract. Based upon this presentation, and accompanying demand for payment, the United States paid Hydroaire $54,146.75 on January 12, 1989. On December 31, 1988, Hydroaire shipped those thirty cylinders to the Defense Depot in Ogden, Utah. On December 31, 1988, Hydroaire presented three additional cylinders for visual inspection to the United States which were represented to be manufactured under Contract DLA700-88-C-1093 and to be in substantial conformance with the contract. Based upon this presentation and accompanying demand for payment, the United States paid Hydroaire $30,356.92 on February 8, 1989. Hydroaire shipped the three cylinders to the Trident Refit Facility in Bremerton, Washington. Based upon the inspection and certification presented on December 31, 1988, the United States paid Hydroaire $4,017.00 in shipping costs.
On February 22, 1989, the Trident Refit Facility in Bremerton, Washington, performed ultrasonic testing on the cylinders and discovered that no metallurgical bond existed in the cylinders. To date, the United States has incurred a minimum of $103,000.00 in procurement costs to replace the defective cylinders.
DISCUSSION
When assessing a motion to dismiss, the court tests the sufficiency of the complaint, not the merits of the suit. Triad Assocs. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989), cert. denied, 498 U.S. 845 (1990). Assuming all well-pleaded facts to be true, the court draws all inferences and resolves all ambiguities in the non-moving party's favor. Dimmig v. Wahl, 983 F.2d 86, 87 (7th Cir.), cert. denied, 114 S.Ct. 176 (1993). A motion to dismiss will be granted only if it is clear that the plaintiff can prove no set of facts that would entitle him to relief. Venture Assocs. Corp. v. Zenith Data Systems Corp., 987 F.2d 429, 432 (7th Cir. 1993); Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
Rule 9(b) requires that "the circumstances constituting fraud . . . shall be stated with particularity." The Seventh Circuit has interpreted this to require the complaint to state "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992) (internal quotation omitted). These requirements are tempered somewhat where a plaintiff alleging fraud, prior to discovery, does not have access to all the facts necessary to provide details. Schiffels v. Kemper Fin. Servs., 978 F.2d 344, 353 (7th Cir. 1992). The rationale underlying Rule 9(b) is that where fraud is alleged, pleadings should be particularized enough to give notice to the defendants of the conduct complained of, to enable the defendants to prepare a defense. D. G. Enterprises v. Continental Illinois Nat'l Bank Trust, 574 F. Supp. 263, 267 (N.D.Ill. 1983).
Rule 9(b), however, should be read in conjunction with Rule 8(a) which only requires plaintiff to plead a "short and plain statement" in order to give notice to the defendant of the nature of his claims. Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975). In light of these interests, the Seventh Circuit has declined to require "full-scale fact pleading" in such situations. Bankers Trust Co., 959 F.2d at 683.
Applying these principles to the facts of the Complaint before the Court, it can be seen that Defendants have been placed on notice of the following information regarding the alleged fraud: 1) that Hydroaire entered into an agreement with the Government which entailed specific qualifications for the materials requested; 2) that Hydroaire contacted Techni-Cast in May of 1988 to produce the product knowing that Techni-cast did not have the ability to produce the bond required under the contract; 3) that a representative from Weld Systems informed Hydroaire that the cylinders did not meet the bond specifications of the agreement and that this communication occurred sometime between August and December of 1988; and 4) that on five dates, Hydroaire, through its representative, requested payment for cylinders which did not comply with the specifications of the agreement, each time presenting a certificate which stated that the products were in compliance.
The Defendant had been informed of each date of the request for payments. These dates are the dates of misrepresentation, because each time Hydroaire requested payment, it also allegedly submitted a certificate of compliance stating that the product was produced according to the terms of the agreement. The Complaint informs Defendants of the names of both the subcontractors and their respective representatives. The only date which is absent from the Complaint is the date upon which Weld Systems informed Hydroaire that the bond was not in compliance with the type required under the contract. However, there is a short, four month period of time which has been revealed to Defendants as to when this communication occurred. This general period of time is sufficient to place Defendants on notice of the claims. Capalbo v. Paine Webber, Inc., 672 F. Supp. 1048, 1050 (N.D.Ill. 1987); Dunham v. Independence Bank of Chicago, 629 F. Supp. 983, 987 (N.D.Ill. 1986). We further find that the allegations against Defendant Harris are sufficient to survive a motion to dismiss due to both his role within the organization at the time of the alleged fraudulent conduct and the factual scenario presented above. We therefore deny Defendant's motion to dismiss pursuant to Fed.R.Civ.P. 9(b).
Finally, we note that the Government provided pre-complaint notice to Hydroaire. The parties engaged in extensive discussions regarding the allegations in the Complaint and the Government even supplied information and reports to the Defendants. This is not a situation in which the Defendants have been broadsided by a surprise complaint with little or no knowledge of the background. Instead, the Government has supplied the Defendants with notice long before this Complaint was ever filed and even supplied them with reports to give their own metallurgical experts for testing. In light of the extensive sharing of information prior to the filing of the Complaint, and the sufficiency of the allegations within the Complaint, the motions to dismiss are denied.
Defendants also seek to dismiss Plaintiff's claims pursuant to Fed.R.Civ.P. 12(b)(6) alleging that the Contract Disputes Act ("CDA"), 41 U.S.C. § 601, preempts the district court's jurisdiction over the dispute. The CDA provides exclusive jurisdiction over "[a]ll claims by the government against a contractor relating to a contract." 41 U.S.C. § 601-613. However, Congress indeed carved out a few isolated exceptions to the CDA's coverage. Among those very limited exceptions is an exception for "any claim involving fraud." 41 U.S.C. § 605(a). Because we have held that the Government's allegations of fraud are sufficient to survive this motion to dismiss, the fraud claims will go forward. Therefore, pursuant to the explicit exception to the CDA for fraud claims, Defendant's motion to dismiss for lack of jurisdiction is also denied.
Finally, we note that 28 U.S.C. § 1367(a) provides that district courts will have supplemental jurisdiction over all claims in the action in which they form part of the same case or controversy of the matter which the court has original jurisdiction. Because this Court has jurisdiction over the fraud claims, we will also retain jurisdiction over the common law claims. See United States v. Rockwell Int'l Corp., 795 F. Supp. 1131, 1134 (N.D.Ga. 1992) (granting supplemental jurisdiction to common law claims including mistake of fact).
Defendants also move to dismiss the claim for unjust enrichment (Count IV) and the claim for mistake of fact (Count V). While it is true that a plaintiff can plead in the alternative, as the Government suggests, the doctrine of unjust enrichment has no application where, as in this case, a specific contract governs the relationship of the parties. La Throp v. Bell Fed. Sav. Loan Ass'n, 370 N.E.2d 188, 195 (Ill. 1977), cert. denied, 436 U.S. 925 (1978). Further, a court can only grant equitable relief to a party upon showing that no adequate remedy at law exists. See, e.g., Allstate Amusement Co. v. Pasinato, 421 N.E.2d 374, 376 (Ill.App.Ct. 1981). Because the Government has plead the existence of a contract and assertions of fraud in relation to that contract, there are three avenues of relief for the Government: the False Claims Act, Breach of Contract and Common Law Fraud. In light of the existence of adequate remedies pursuant to those theories, and in light of the failure of the Government to seek rescission as a possible form of relief (the appropriate remedy under a mistake of fact theory), the Court dismisses the mistake of fact count. Therefore, the Court grants Defendants' motion to dismiss Counts IV and V of the Complaint.
CONCLUSION
The Court denies Defendants' motion to dismiss Counts I, II, and III of the Complaint and grants Defendants' motion to dismiss Counts IV and V.