Department of the Army v. Blue Fox, Inc. (01/20/1999)

By: Eileen Smith, Medill News Service

Questions presented

Should companies that serve as subcontractors on federal projects be able to collect their unpaid claims from the government if the prime contractor fails to pay them in full?

Brief

A section of the Small Business Act established a program to help small firms owned by economically disadvantaged individuals and Indian Tribes compete in the mainstream economy. A selection of government contracts are awarded to different firms at the discretion of the administrator.

The U.S. Army entered into such a contract with the Small Business Administration (SBA) to install and test a telephone switching system at an army depot in Oregon. The SBA subcontracted with a firm called Verdan Technology, Inc. to provide supplies and services.

Verdan in turn hired Blue Fox, Inc., an economically distressed construction company, to work on the project. Blue Fox subcontracted with Verdan to construct a concrete block building to house a switching system for approximately $186,000.

Upon completion of the project, Blue Fox discovered that Verdan had never furnished a payment or performance bond. Blue Fox did not receive approximately $46,000 of the contract price.

Citing default, the Army terminated the contract because, among other things, Verdan did not adhere to the agreed upon delivery schedule. The Army further claimed it was ""concerned"" with Verdan's inability to pay Blue Fox in full. To finish the project, the Army hired Dynamic Concepts, Inc. under an existing contract.

Blue Fox obtained a default judgment against Verdan through the Tribal Court of the Yakima Indian Nation. But the district court denied Blue Fox's motion for summary judgment on the grounds that it did not have jurisdiction against the Army and that the Administrative Procedures Act (APA) did not constitute a waiver of sovereign immunity.

A divided 9th Circuit Court of Appeals reversed, finding that the APA permits Blue Fox's equitable lien claim against the Army because an action for specific performance for the payment of money is not an action for money damages. The court held, though, that a lien cannot be enforced against the Small Business Administration because that agency never possessed nor controlled the contract fund.

Judge Pamela Ann Rymer concurred in part and dissented in part, noting: ""Never before has a court held that a subcontractor may sue an agency of the United States, which has not agreed to be sued, for contract monies that the prime contractor should have paid to the subcontractor but didn't.""

The Army's petition for writ for certiorari was granted by the U.S. Supreme Court on June 26, 1998.

On Jan. 20, 1999, a unanimous Court reversed.