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MCR Federal, LLC v. JB&A, Inc.

Supreme Court of Virginia

December 14, 2017

MCR FEDERAL, LLC
v.
JB&A, INC.

         FROM THE CIRCUIT COURT OF FAIRFAX COUNTY Lorraine Nordlund, Judge

          PRESENT: All the Justices

          OPINION

          DONALD W. LEMONS, CHIEF JUSTICE

         This appeal involves claims for breach of contract and constructive fraud arising out of a contract for the sale of a government contracting firm, JB&A, Inc. ("JB&A") to MCR Federal, LLC ("MCR Federal"), another government contractor. At the sale's closing, MCR Federal falsely stated that a representation and warranty in the contract remained true. We consider whether this misrepresentation was a fraudulent act independent of the contractual relationship such that JB&A properly brought actions for both fraud and breach of contract. Additionally, we consider whether MCR Federal's misrepresentation caused JB&A damages and whether damages were proven with reasonable certainty.

         I. Facts and Proceedings A. Asset Purchase Agreement

         JB&A was a government contractor from 1988 to 2011 that provided services to U.S. intelligence agencies. An employee stock ownership plan ("ESOP") owns approximately 67 percent of JB&A's stock. Under the ESOP, JB&A is obligated to repurchase the employees' stock upon their retirement. In 2009, JB&A hired an outside consultant, Corporate Capital Resources ("CCR"), to evaluate its financial ability to meet the repurchase obligation. CCR found that the ESOP obligation was being managed appropriately, but that "[t]he greatest value to the ESOP and shareholders in the near term would probably come from a sale to a strategic buyer."

         As a result, JB&A retained the McLean Group ("McLean"), an investment bank, to market its business to potential buyers. McLean contacted MCR Federal, a government contractor specializing in strategic planning, cost and schedule analysis, acquisition management, and program assessment. MCR Federal offered to purchase JB&A in January 2011 and the parties signed a letter of intent the next month. In the letter, MCR Federal offered 45 million dollars in cash and potential "earn out payments" totaling up to 17 million dollars. The earn out payments were contingent on JB&A achieving certain revenue targets in 2011 and 2012. The parties also agreed that JB&A would not solicit offers from other potential buyers while they negotiated the purchase agreement.

         While conducting due diligence, MCR Federal reviewed an accounting measurement of profitability called "earnings before interest, taxes, depreciation, and amortization" ("EBITDA"). MCR Federal disputed the method JB&A used to calculate EBITDA, and JB&A agreed to reduce the cash component of the purchase price from 45 million dollars to 42.7 million dollars. On May 5, 2011, the parties entered an Asset Purchase Agreement ("Purchase Agreement") that reflected this adjustment and required MCR Federal to pay up to 19.5 million dollars in earn out payments if JB&A met certain revenue and profit targets.

         MCR Federal made several representations and warranties in the Purchase Agreement. As relevant here, MCR Federal represented in Section 3.3(a) of the Purchase Agreement that:

There is no private or governmental action, suit, proceeding, claim, arbitration, mediation, investigation, litigation, or inquiry pending or, to the knowledge of Buyer, threatened before, with or by any Governmental Entity or other Person against Buyer or any of its Affiliates that would cause a Buyer Material Adverse Effect. . . . To the knowledge of Buyer, no event has occurred or circumstances exist that could reasonably be expected to give rise to, or serve as a basis for, any such action, suit, proceeding, claim, arbitration, mediation, investigation, litigation or inquiry that would cause a Buyer Material Adverse Effect.

         Section 5.3(c) of the Purchase Agreement provided that the representations and warranties of MCR Federal "shall be true and correct in all respects . . . on and as of the Closing Date as though such representations and warranties were made on and as of such date." The Purchase Agreement required MCR Federal to deliver a "bring down certificate" certifying that "the conditions precedent set forth in Sections 5.3(b) and 5.3(c) have been satisfied." The parties closed the transaction on May 31, 2011, and MCR Federal delivered the bring down certificate on that day.

         After the transaction closed, MCR Federal assumed the business operations of JB&A, but the former JB&A employees continued to work in independent facilities with independent management. JB&A continued to manage the ESOP, which included collecting any earn out payments due under the Purchase Agreement and distributing them to ESOP participants.

         B. Air Force Suspends MCR Federal from Government Contracting

         While JB&A and MCR Federal were preparing to close the sale, MCR Federal and MCR, LLC, an affiliate of MCR Federal, (collectively "MCR") were competing with another company for an Air Force contract. On May 19, 2011, an Air Force contracting officer inadvertently sent an MCR, LLC employee its competitor's bid in an email attachment. The contracting officer quickly realized her mistake, but the email had already been forwarded internally within MCR, LLC to six employees. The following morning, the MCR, LLC employee who received the email informed the contracting officer that he had distributed the email internally but had deleted all copies. In response, the contracting officer asked for affidavits from all employees who received the email describing their actions upon receipt.

          MCR retained Venable LLP, a law firm that specializes in government contracting, to assist with the request for affidavits. MCR gave the Air Force the affidavits on June 7, 2011. Three days later, the Air Force requested additional affidavits from two employees and supplemental affidavits from five employees. The Air Force asked each employee to answer questions that focused on whether information in the email affected the final bid MCR submitted after receiving the email. MCR provided the additional affidavits and did not hear anything from the Air Force until August 2011.

         The Air Force suspended MCR and four employees from participating in government contracting on August 23, 2011. The suspension barred MCR from submitting bids on new government contracts and renewing existing contracts. The Air Force found that four employees held meetings to discuss information in the email after they were notified that such information was inadvertently disclosed. It also found that the employees helped prepare the final bid despite possessing information about a competitor's bid. The Air Force and MCR entered an Interim Administrative Agreement ("Agreement") lifting MCR's suspension approximately one month later. The Agreement noted that MCR "acknowledged its improper conduct, the improper conduct of its employees, and its deficient procedures" and promised to improve its ethics and compliance programs.

         On October 28, 2011, after learning that one employee made false statements in his affidavit, the Air Force terminated the Agreement and reinstated the suspension. Thereafter, MCR, LLC wrote the Air Force a letter describing the suspension's financial impact.

[T]ime is short and of the essence for MCR to remain a viable business:
• Banks have reduced MCR's available credit by 60 percent and have indicated they will take the first step toward foreclosure.
• MCR has lost, or will soon lose, over a quarter of its employees.
• The suspension continues to reduce MCR's business base dramatically, having already prevented MCR from performing, retaining, or pursuing hundreds of millions of dollars worth of federal government contracts.
• Three specific business units have suffered or shortly will suffer catastrophic losses of employees and contracts that would force them to close.

         One of the three business units facing "catastrophic losses" was JB&A. MCR, LLC explained that:

JB&A already has lost the opportunity to retain some existing work. Before Thanksgiving, unless the suspension is lifted, JB&A will lose the opportunity to retain work as a subcontractor on its most significant contract, National Geospatial-Intelligence Agency's Resource and Decision Analysis Support program - a loss which would cripple the business. JB&A's employees would lose a significant portion of the equity they hold in an ...

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