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Linan-Faye Const. Co., Inc. v. Housing Authority of City of Camden

filed: February 13, 1995; As Amended February 15, 1994.

LINAN-FAYE CONSTRUCTION CO., INC., APPELLANT
v.
HOUSING AUTHORITY OF THE CITY OF CAMDEN



Appeal from the United States District Court for the District of New Jersey (D.C. Civ. No. 90-cv-04651).

Before: Becker, Cowen and Garth, Circuit Judges.

Author: Cowen

COWEN, Circuit Judge.

Linan-Faye Construction Company Co., Inc. ("Linan-Faye"), a public housing contractor, appeals from orders of the district court that granted summary judgment for the Housing Authority of the City of Camden ("HACC") on Linan-Faye's claims under public contract law and 42 U.S.C. § 1983. Because the district court erred in applying federal common law rather than state law to resolve this dispute, we will reverse and remand to the district court for further proceedings. Nevertheless, since we conclude that in the absence of New Jersey law which specifically interprets "termination for convenience" clauses New Jersey courts would look to federal common law for guidance, we will limit the triable issues on remand to a determination of: (1) the definition of "work performed" for purposes of paragraph 17 of Linan-Faye's contract with HACC; (2) the pre-termination expenses incurred by Linan-Faye that may be compensable as "work performed" under paragraph 17 of the contract; and (3) HACC's liability, if any, for damages resulting from HACC's withholding of Linan-Faye's performance bond after termination. Finally, because the district court did not err in determining that Linan-Faye failed to demonstrate a protectible property or liberty interest sufficient to support its § 1983 claim, we will affirm the district court's grant of summary judgment on this claim.

I. FACTS & PROCEDURAL HISTORY

On August 11, 1988, HACC advertised for bids on a housing modernization project. The project involved the renovation and rehabilitation of 244 housing units and was to be funded in substantial part by a grant from the United States Department of Housing and Urban Development pursuant to the Public and Indian Housing Comprehensive Improvement Assistance Program ("CIAP"). Plaintiff, Linan-Faye, attended all required pre-bid meetings and submitted a bid of $4,264,000, together with supporting documentation which included a bid bond, performance bond, qualification statement, and required affidavits. Linan-Faye was the lowest responsible bidder for the job, underbidding its nearest competitor by $600,000. Accordingly, HACC informed Linan-Faye that the contract was to be forthcoming.

Linan-Faye engaged in preparatory activities in connection with the contract, including meeting with prospective subcontractors, job planning and pricing, talking with relevant inspectors, and securing insurance. Also, on several occasions, representatives of Linan-Faye met with HACC and its architect to discuss specifications and make preparations for the commencement of physical construction. Linan-Faye, however, never began physical construction because numerous disputes broke out between the parties over interpretation of the specifications.

Linan-Faye contends that HACC demanded concessions before permitting work to begin. HACC maintains that the parties arrived at different interpretations of the project plans and specifications, and this conflict became evident at pre-construction meetings. On November 29, 1988, as the result of these disputes, HACC advised Linan-Faye that it was going to rebid the project. Linan-Faye filed suit to enjoin this rebidding and allow it to complete the project as bid.

The district court entered a temporary restraining order to prevent HACC from accepting further bids. Subsequently, the court approved a Stipulation of Settlement and Order of Dismissal with Prejudice, under which the parties agreed to execute the contract and proceed with the project as originally planned. Nevertheless, disputes soon broke out again.

On November 22, 1989, HACC issued a Notice to Proceed. Linan-Faye contends that the notice was limited to an order to correct certain plumbing problems that were a portion of the original contract. Linan-Faye refused to proceed in a piecemeal fashion, and insisted that it would not begin work until a certain number of vacant buildings were available at the same time so that it could achieve economies of scale. HACC responded that it had scattered vacant units available, but not rows of units.

Subsequently, HACC attempted first to extract the plumbing segment from the contract and, when that failed, proposed a complete buy-out of Linan-Faye's contract. The parties entertained the possibility of a buy-out until July of 1990, at which time HUD informed HACC that it would not approve a buy-out. HACC reinstated the previous Notice to Proceed by letter dated July 23, 1990.

At a preconstruction meeting on September 6, 1990, Linan-Faye informed HACC that it would not start work until the contract price was increased to reflect the costs incurred by the delay in commencing construction. HACC responded that Linan-Faye had to begin work before it would address the issue of the price increase.

HACC elected to terminate Linan-Faye's contract by letter dated September 25, 1990. In that letter, Gregory Kern, the Interim Executive Director of HACC, stated that HACC would instruct the Modernization Office to assist Linan-Faye in reclaiming its performance bond. While the letter did not mention the terms "breach" or "default," it did state that Linan-Faye "had continually failed to demonstrate its intent to perform under the public contract." Letter from Kern to Norman Faye (September 25, 1990); App. Vol. I at 114-115. HACC confirmed its decision to terminate by letter dated October 23, 1990.

Linan-Faye objected to the termination and filed the instant action on October 26, 1990, setting forth theories of recovery under New Jersey public contracts law and 42 U.S.C. § 1983. Linan-Faye served HACC with a complaint in December of 1990 seeking specific performance and damages. HACC did not surrender Linan-Faye's performance bond until July of 1991, after the district court determined that specific performance was not available to Linan-Faye.

In April of 1992, HACC filed a motion for summary judgment on Linan-Faye's civil rights claim and for the first time argued, in that same motion, that the "termination for convenience" clause set forth in paragraph 17 of the General Conditions of their contract limited Linan-Faye's damages under the contract.*fn1 The district court granted HACC's motion for summary judgment on the § 1983 claim, but deferred decision on the effect of the termination of convenience clause pending further discovery.

Upon a renewed motion for summary judgment, the district court held for HACC, determining that Linan-Faye's damages would be limited to those compensable under the contract's termination for convenience clause. The district court left open, however, the possibility of recovery for damages accruing from HACC's initial failure to identify specifically the termination as one of convenience.

HACC filed its third motion for summary judgment on October 27, 1993. In that motion, HACC contended that since Linan-Faye never began work under the contract, it could not recover any damages under the termination for convenience clause. Linan-Faye responded that it could recover damages for: (1) preparatory costs such as soliciting subcontractors, pricing, and pre-construction meetings; (2) improper notice of termination; (3) pre-termination delay by HACC; and (4) HACC's refusal to relinquish Linan-Faye's performance bond. Determining that federal common law applied in interpreting this contract, the district court held that Linan-Faye incurred no compensable damages under the termination for convenience clause. The court, therefore, entered an order granting summary judgment for HACC. This appeal followed.

Following oral argument before this Court, HACC and Linan-Faye agreed to participate in non-binding mediation of the controversy before the Honorable Max Rosenn, Senior Circuit Judge. By memorandum dated November 9, 1994, Judge Rosenn informed us that efforts to reach a settlement of the controversy through mediation were unsuccessful.

II. JURISDICTION & OVERVIEW OF ISSUES RAISED IN THIS APPEAL

The district court exercised jurisdiction in this matter by virtue of the diversity of citizenship of the parties with the requisite amount in controversy pursuant to 28 U.S.C. § 1332 (1988). This Court has jurisdiction pursuant to 28 U.S.C. § 1291 (1988). Linan-Faye essentially raises six issues on appeal:*fn2 (1) whether the district court erred in applying federal common law and not the law of New Jersey to interpret this contract; (2) whether New Jersey law precludes retroactive application of a termination for convenience clause; (3) whether the district court was correct in its application of the constructive termination for convenience doctrine; (4) whether the district court erred by engaging in impermissible fact finding so as to deny Linan-Faye all compensation; (5) whether Linan-Faye has an actionable claim for violation of its civil rights; and (6) whether HACC's position that the termination for convenience clause denies any recovery is barred by principles of equitable and judicial estoppel.

III. CHOICE OF LAW

Linan-Faye contends that the district court erred in applying federal common law and not the law of New Jersey to resolve this dispute. According to Linan-Faye, this action involves a contract dispute between a private contractor and an autonomous public housing authority created pursuant to New Jersey law. Where such parties enter federal court based upon diversity of citizenship, Linan-Faye argues, the federal courts presumptively apply state law. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S. Ct. 817, 822, 82 L. Ed. 1188 (1938). We agree.

Our review of a district court's determination as to choice of law is plenary. Louis W. Epstein Family Partnership v. Kmart Corp., 13 F.3d 762, 766 (3d Cir. 1994) (citing Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981)). This Court's recent decision in Virgin Islands Housing Authority v. Coastal General Construction Services Corp., 27 F.3d 911 (3d Cir. 1994), strongly indicates the proper result in this case. In Coastal General, we determined, in the context of deciding a question of federal jurisdiction, that local law, not federal law, governs a dispute over the termination provisions of a contract between a public housing authority and a private construction company. Id. at 917. As we stated in Coastal General, "the fact that a contract is subject to federal regulation does not, in itself, demonstrate that Congress meant that all aspects of its performance or nonperformance are to be governed by federal law rather than state law applicable to similar contracts in businesses not under federal regulation." Id. at 916 (quoting Lindy v. Lynn, 501 F.2d 1367, 1369 (3d Cir. 1974)). In addition, we explained that even if the contractor's complaint contained assertions respecting the use of federal funds in a construction project and the adoption of contractual forms authorized by HUD, there would be no difference in outcome. 27 F.3d at 917.

Similar to Coastal General, in the instant case a public housing authority contracted with a private construction company. Linan-Faye, the construction company, did not contract directly with the United States government. While HUD funded the construction project in part, and HUD forms were used in the contract, Coastal General teaches that these facts do not dictate application of federal common law. Rather, the holding of Coastal General indicates that in construing termination clauses such as the one at issue in this case, courts must look to local law. Thus, the district court was incorrect in applying federal common law and not the law of New Jersey to resolve this dispute. The district court erred in deviating from the generally applicable Erie doctrine. The Supreme Court, in Boyle v. United Technologies Corp., 487 U.S. 500, 108 S. Ct. 2510, 101 L. Ed. 2d 442 (1988), set forth a two-pronged inquiry for determining whether to apply federal common law in the absence of an express Congressional grant of such authority. According to the Supreme Court, a court must first determine whether the action involves "'uniquely federal interests.'" Id. at 504, 108 S. Ct. at 2514 (citing Texas Industries Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640, 101 S. Ct. 2061, 2067, 68 L. Ed. 2d 500 (1981)). Once a court identifies a uniquely federal interest, the court must then determine whether a "significant conflict" exists between an identifiable "federal policy or interest and the [operation] of state law." Id. at 507, 108 S. Ct. at 2516 (quoting Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68, 86 S. Ct. 1301, 1304, 16 L. Ed. 2d 369 (1966)).

Relying on American Pipe & Steel Corp. v. Firestone Tire & Rubber Co., 292 F.2d 640 (9th Cir. 1961), and United States v. Taylor, 333 F.2d 633 (5th Cir. 1964), the district court concluded that the government's interest in ensuring a uniform interpretation of the termination for convenience provisions in this contract provided the "significant federal interest" necessary to pre-empt state law. Linan-Faye Construction Co. v. Housing Authority of Camden, 847 F. Supp. 1191, 1197 (D.N.J. 1994). These cases, however, do not dictate this result. While both of these cases applied federal law in interpreting a contract, the government interest was far more significant in those cases than in the case at hand. In American Pipe & Steel, the Court of Appeals for the Ninth Circuit stated, "we agree generally with appellee that the construction of subcontracts, let under prime contracts connected with the national security, should be regulated by a uniform federal law." American Pipe & Steel, 292 F.2d at 644. The instant case involves no matter of national security. Further, the court in American Pipe & Steel expressly acknowledged that the development of the law in this area was "still uncertain and unclear." Id. Similarly, in Taylor, the contract at issue involved the construction of an atomic energy plant, a matter intricately involved with national security during the 1950's and 1960's. Taylor, 333 F.2d at 635. The Taylor court also explicitly referred to the fact that American Pipe & Steel dictated application of federal common law in such a case. Id. at 637. Thus, both of these decisions concerned matters of national security that are simply not present in this case.*fn3

Moreover, the district court erred in finding a conflict between federal and state law that would endanger any federal interest involved. The district court correctly recognized the proposition that a lawsuit which involves a federal interest is a "necessary, not a sufficient, condition for the displacement of state law." Linan-Faye Construction Co., 847 F. Supp. at 1198 (quoting Boyle 487 U.S. at 507, 108 S. Ct. at 2516). The court, however, failed to identify a significant conflict. In the only paragraph that attempts to identify a conflict, the court stated:

We find it implausible that the federal government would require all CIAP contracts in excess of $10,000.00 to contain a termination for convenience clause, and then leave interpretation of that clause to the vagaries of state law, particularly where, like New Jersey, there are few or no state law cases interpreting this type of provision. Rather, we believe that the decision to include a termination for convenience clause in the "Uniform Requirements" section of the C.F.R. reflects a federal interest in a consistent interpretation of that clause.

Id.

The first sentence of this paragraph merely assumes the answer to the question the court is wrestling with: whether Congress left interpretation of clauses in these types of contracts to state law. The second sentence of the above quoted paragraph simply reidentifies the interest involved, it does not point out a conflict with state law.

The problem with the district court's reasoning is highlighted by its own analysis of what the outcome would be under state law. The court states, "even assuming that New Jersey law were to apply, we have no basis for believing that New Jersey courts would look elsewhere than to federal common law for guidance." Id. If New Jersey courts, as is likely, would look to federal common law to decide this question for which there is little state law precedent on point, then the court is incorrect in its assertion that a conflict exists. The outcome would be the same under both federal and state common law. Thus, the court erred in applying federal common law and not the law of New Jersey to resolve this dispute and we must reverse with the direction that the district court resolve all remaining issues in accordance with New Jersey law.

IV. NEW JERSEY LAW

Having decided that it is the law of New Jersey that governs the interpretation of this contract, we must now decide whether Linan-Faye is correct when it argues that the general principles of contract damages under New Jersey law would permit Linan-Faye to recover full expectation damages under this contract rather than those damages provided for under the contract's termination for convenience clause. Citing A-S Development, Inc. v. W.R. Grace Land Corp., 537 F. Supp. 549, 557 (D.N.J. 1982), aff'd 707 F.2d 1388 (3d Cir. 1983), and other cases,*fn4 Linan-Faye states that under New Jersey law one who breaches an agreement must compensate the injured party in order to put the non-breaching party in as good a position as he would have been in had performance been rendered as promised. Further, Linan-Faye argues that New Jersey courts have declined to import federal procurement concepts into their contract law jurisprudence. See Edwin J. Dobson, Jr., Inc. v. Rutgers, 157 N.J. Super. 357, 418, 384 A.2d 1121, 1152 n.10 (1978) ("The policy factors that have lead [sic] to the development of this concept in federal contracts, such as a need to expand or abandon a particular arms program with consequent economic impact on contractors and subcontractors, do not warrant state courts adopting it wholesale by judicial fiat when traditional remedies for breach of contract are available."), aff'd sub nom., Broadway Maintenance Corp. v. Rutgers, 180 N.J. Super. 350, 434 A.2d 1125 (A.D. 1981), aff'd, 90 N.J. 253, 447 A.2d 906 (1982). While the cases Linan-Faye cites stand for these general propositions, such generalities provide insufficient guidance in deciding the proper construction of a contract that contains a termination for convenience clause.*fn5

It is undisputed that there are no cases in New Jersey construing the effect of termination for convenience clauses. It is also undisputed that there are numerous federal cases dealing specifically with termination for convenience clauses and, in particular, with the doctrine of constructive termination for convenience. Therefore, as the district court stated, "courts in New Jersey would recognize that where the parties have incorporated a particular clause pursuant to federal regulation, they do so against the backdrop of federal case law addressing the clause." Linan-Faye Construction Co., 847 F. Supp. at 1198. Accordingly, we align ourselves with the district court in its determination that if New Jersey law were to apply, New Jersey courts would look to this rich body of federal common law concerning the termination for convenience doctrine, unless to do so would violate some enshrined principle of New Jersey law. Id. Like the district court, we are unable to discern such a principle.*fn6

V. TERMINATION FOR CONVENIENCE

Because the New Jersey Supreme Court would likely look to federal common law as persuasive authority in order to construe this contract's termination for convenience clause, we must examine the parties' contentions in light of the relevant federal case law.*fn7 As a preliminary matter, we must determine the method HACC used to terminate Linan-Faye. HACC argues that it terminated Linan-Faye by letter of September 25, 1990, and this letter constituted a termination for convenience. Linan-Faye, on the other hand, argues that this letter constituted a default termination. Linan-Faye has the better of this argument.

HACC's letter of September 25, 1990 is replete with references to defaults on the part of Linan-Faye. HACC stated in the letter that Linan-Faye's correspondence evidences Linan-Faye's "intent to avoid compliance with the specifications." Letter from HACC to Norman Faye (September 25, 1990); App. Vol. I at 114. Further, HACC stated in its letter that Linan-Faye had "continually failed to demonstrate its intent to perform under the public contract" and that "it is clear" Linan-Faye is "no closer to performing its contract obligations then it was in September of 1988." Id. at 114, 115. Nowhere in this letter does HACC state that it is terminating Linan-Faye simply for convenience. It is apparent from this document that HACC originally terminated Linan-Faye for default.*fn8

Given HACC's original termination of Linan-Faye for default, the question that we must reach is whether the court should retroactively convert this termination for default into a termination for convenience. HACC argues, based on a number of cases from the United States Court of Claims and the Court of Appeals for the Federal Circuit,*fn9 that the district court did not err in invoking the constructive termination for convenience doctrine in order to convert this default termination into a termination for the convenience of the Housing Authority. Linan-Faye argues that under federal common law the doctrine of constructive termination for convenience has no application to this case. According to Linan-Faye, Federal Acquisition Regulations (FAR's) applicable to direct procurement contracts provide for a "conversion clause," a clause that automatically converts a termination for default into a termination for convenience. 48 C.F.R. § 49.401(b) (1993). Linan-Faye suggests, therefore, that because no such regulations exist in grant situations*fn10 such as this, there is an expressed intent that such a conversion not be allowed. We find Linan-Faye's argument unpersuasive.

The absence of a conversion provision in regulations concerning CIAP grants does not preclude application of federal common law. While the FAR's have an explicit conversion clause, it was the federal common law that originally developed the concept of termination for convenience, and later developed the concept of constructive termination for convenience. We find it appropriate to apply federal common law.

The idea that the government can, under certain circumstances, terminate a contract without paying full expectation damages, dates from the winding down of military procurement following the civil war. Torncello v. United States, 681 F.2d 756, 764, 231 Ct. Cl. 20 (Ct. Cl. 1982). The termination for convenience doctrine originated "in the reasonable recognition that continuing with wartime contracts after the war was over clearly was against the public interest." Id. Where the government terminates a private contractor pursuant to a termination for convenience clause in a contract, instead of receiving full expectation damages the contractor's recovery is defined by the termination for convenience clause. Recovery is limited to "'costs incurred, profit based on the work done, and the costs of preparing the termination settlement proposal.'" Maxima Corp. v. United States, 847 F.2d 1549, 1552 (Fed. Cir. 1988) (quoting R. Nash & J. Cibinic, Federal Procurement Law 1104 (3d ed. 1980)) After World War II, termination for convenience came to be applied to peacetime non-military procurement. Id. (citing Torncello, 681 F.2d at 765-66).

Constructive termination for convenience, an outgrowth of termination for convenience, is a Judge-made doctrine that allows an actual breach by the government to be retroactively justified.*fn11 Maxima Corp., 847 F.2d at 1553. This doctrine has its origins in the Supreme Court's decision in College Point Boat Corp. v. United States, 267 ...


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