Hanover Insurance Company (The) v. United States
134 Fed. Cl. 51
| Fed. Cl. | 2017Background
- Lodge Construction (prime) and Hanover Insurance (surety) sued the United States under the Contract Disputes Act seeking contract damages arising from a Corps of Engineers construction contract that was terminated for default; Hanover also sought an equitable lien/subrogation.
- During discovery defendant (the United States) developed evidence suggesting fraud in Lodge’s dewatering and design claims, including a settlement between Lodge’s subcontractor CCT and Hanover that could undermine a $1.16 million pass-through item in Lodge’s claim.
- Defendant moved for leave under RCFC 15(a) to file amended answers in four consolidated cases asserting (1) an affirmative defense (illegality/false claim) and (2) three fraud-based counterclaims: Special Plea in Fraud (28 U.S.C. § 2514), the CDA anti‑fraud provision (41 U.S.C. § 604), and the False Claims Act (31 U.S.C. § 3729).
- Lodge and Hanover opposed, arguing the motion was untimely, sought for improper leverage, would cause undue prejudice, failed to plead fraud with particularity, and was futile.
- The court evaluated timeliness, motive, prejudice, RCFC 9(b) particularity, and futility (12(b)(6) plausibility) and also addressed whether Hanover could recover if Lodge’s claims were forfeited and Hanover’s exposure as surety.
- Ruling: the court granted leave to amend for Lodge I, Hanover I, and Hanover II (denied as moot for Lodge II where defendant already answered), concluding the motion was timely, not for improper purpose, not unduly prejudicial, and the proposed fraud counterclaims were pleaded with sufficient particularity and plausibility to survive a motion to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness of motion to amend | Motion was unreasonably late; defendant had information earlier | Defendant discovered key evidence (deposition, settlement) during late discovery and moved promptly thereafter | Motion was timely given discovery timeline and explanation for delay |
| Improper purpose (dilatory/leveraging) | Amendment is tactical delay to gain leverage | Government seeks to vindicate taxpayer interests and present fraud defense | No improper purpose; motive not shown to be dilatory |
| Undue prejudice to plaintiffs | Opening new fraud claims would force onerous additional discovery and delay; Lodge’s limited resources | Additional discovery is limited in scope, can proceed with existing schedule; plaintiffs previously sought many extensions | No undue prejudice: discovery not closed, no imminent trial, limited additional discovery possible |
| Sufficiency of fraud pleadings (RCFC 9(b)) | Alleged errors were honest mistakes; pleadings lack particularity and scienter | Proposed answers identify specific false items (double billing, duplicated compensation, inflated equipment values, pass‑through despite settlement) and scienter facts | Pleadings satisfy RCFC 9(b): specific factual allegations and scienter pleaded sufficiently to give fair notice |
| Futility (would claims survive 12(b)(6)?) | Errors are inadvertent; counterclaims destined to fail for lack of scienter and plausibility | Allegations, if proven, plausibly support Special Plea forfeiture, CDA anti‑fraud liability, and FCA liability; Hanover may be directly liable too | Counterclaims are not futile; they state plausible claims and would survive a motion to dismiss |
| Hanover’s exposure as surety | Tender & Release absolved Hanover; Hanover shouldn’t be liable for Lodge’s fraud or for extra‑contractual penalties | Contracting officer cannot release fraud claims; surety may be liable for contractor’s contractual damages and Hanover can be directly liable for its own alleged conduct | Tender and Release cannot bar fraud claims; Hanover cannot recover if Lodge’s claim forfeited; Hanover may be directly subject to defendant’s fraud counterclaims though punitive FCA penalties unlikely to be treated as contract completion costs for surety liability |
Key Cases Cited
- Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (U.S. 1971) (standard that amendment decisions rest in court’s discretion)
- Foman v. Davis, 371 U.S. 178 (U.S. 1962) (leave to amend should be freely given absent undue delay, bad faith, prejudice, or futility)
- Cencast Servs., L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013) (amendment prejudicial where parties had stipulated scope and case resources devoted to settled issues)
- Kellogg Brown & Root Servs., Inc. v. United States, 728 F.3d 1348 (Fed. Cir. 2013) (distinct standards and consequences under multiple fraud statutes, including interplay of forfeiture and FCA/CDA claims)
- Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009) (application of Special Plea in Fraud, CDA anti‑fraud, and FCA principles; fraudulent part can forfeit entire claim)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must state a plausible claim to survive dismissal)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (court must accept well‑pleaded facts and determine plausibility)