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Novation Agreements Did Not Bar Segment Closing Claims

 

A contractor's segment closing claims were not barred, according to the Court of Federal Claims, because novation agreements did not waive or transfer the contractor's Cost Accounting Standard 413 adjustment claims. The dispute involved the contractor's sale of certain business segments and the retention of assets and liabilities associated with the defined benefit pension plans of those segments. CAS 413-50(c)(12) requires contractors to calculate an adjustment of previously-determined pension costs for each segment's defined benefit pension plan or plans. To determine a segment closing adjustment, the contractor must calculate the difference between the actuarial liability for the segment and the market value of the assets allocated to the segment. The difference between the plan's assets and liabilities indicates the amount by which the plan is over- or under-funded. If the difference is positive, the government may be entitled to a share of the surplus from the contractor, and if the difference is negative, the contractor may be entitled to a share of the deficit from the government. The government argued novation agreements it entered into with the contractor and two segment buyers barred the contractor's adjustment claims. Pursuant to FAR 42.1204 (i), the novation agreements stated the contractor waived "any claim and rights against the [g]overnment that [the contractor] now has or may have in the future in connection with the contracts."

Consistent and Overwhelming Evidence

The court, however, found "consistent and overwhelming" evidence established that none of the government or contractor employees involved in processing and signing the novation agreements or negotiating the CAS 413 segment closing adjustment understood that the FAR 42.1204 (i) waiver language barred the contractor's claims. Instead, government and contractor employees understood the contractor did not transfer its pension obligations associated with the closed segments to the segment buyers, and the buyers would not assume the contractor's preexisting pension obligations to the segment employees. The government further argued the contractor's failure to submit a certified claim before it signed the novation agreements barred its claims. However, the agreements' waiver language did not extend to the CAS 413 claims. Specifically, the FAR 42.1204 novation agreement is designed for use when "all the [contractor]'s assets are transferred," and the waiver is intended to protect the government from multiple claims that might arise "in connection with" the specific contracts that are transferred from the seller to the buyer. By contrast, segment closing claims settle up retained pension liabilities and are not contract-specific. Moreover, in Gates v. Raytheon Co. ( 53 CCF 79,168), the Court of Appeals for the Federal Circuit recognized that a segment closing adjustment is never contract-specific and therefore requires an adjustment calculation to be made without regard to individual contracts. ( Raytheon Co. v. U.S., FedCl, 56 CCF 79,850)

































































































































































































 






 

 

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )

     
  
 

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