           In the United States Court of Federal Claims
                                 No. 14-250 C

                              (Filed June 10, 2016)

                               UNPUBLISHED

**********************
CALIFORNIA RIDGE WIND     *
ENERGY LLC and INVENERGY  *
WIND LLC,                 *
                          *                RCFC 15(a)(2); Amendment of
              Plaintiffs, *                Answer Not Futile;
                          *                Plausible Counterclaim.
          v.              *
                          *
THE UNITED STATES,        *
                          *
              Defendant.  *
**********************

     John C. Hayes, Jr., Washington, DC, for plaintiffs. Alycia A. Ziarno, Brian
P. Donnelly and Brian J. Whittaker, Washington, DC, of counsel.

       S. Starling Marshall, United States Department of Justice Tax Division,
with whom were Caroline D. Ciraolo, Acting Assistant Attorney General, David I.
Pincus, Chief, G. Robson Stewart, Assistant Chief, Miranda Bureau and Blaine G.
Saito, Trial Attorneys, Washington, DC, for defendant.

                         ________________________

                                 OPINION
                         ________________________

Bush, Senior Judge.

      The court has before it Defendant’s Motion for Leave to Amend Answer to
Bring Counterclaim, filed April 5, 2016. The motion is opposed by plaintiffs1 and
has been fully briefed. Plaintiffs argue that defendant’s proposed counterclaim
fails to state a claim upon which relief can be granted. In plaintiffs’ view,
therefore, the proposed amendment of the government’s answer is futile and
defendant’s motion should be denied. Because plaintiffs’ futility argument is not
persuasive, the government’s motion must be granted.

I.     Standard of Review

       Defendant’s motion is brought under Rule 15(a)(2) of the Rules of the
United States Court of Federal Claims (RCFC). The rule states that “[t]he court
should freely give leave [to amend a pleading] when justice so requires.” Id.
Leave to amend a pleading should not be granted, however, when the proposed
amendment would be futile. Foman v. Davis, 371 U.S. 178, 182 (1962). The
appropriate test for futility here is whether the proposed counterclaim fails to state
a claim upon which relief can be granted, under the plausibility test delineated by
the United States Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544
(2007) (Twombly). Pls.’ Opp. at 3; Def.’s Reply at 3.

       The United States Court of Appeals for the Federal Circuit invoked the
Twombly plausibility standard, as applied to amended pleadings, in A & D Auto
Sales, Inc. v. United States, 748 F.3d 1142 (Fed. Cir. 2014). After this court had
denied motions to dismiss two similar suits asserting takings claims, the Federal
Circuit affirmed the trial court and remanded the cases for further proceedings.
The Federal Circuit acknowledged that the plaintiffs’ complaints, as filed, failed to
state claims upon which relief could be granted. Id. at 1158. The “proper
remedy,” however, was not dismissal but for the trial court to grant the plaintiffs
leave to amend their complaints to include some of the factual allegations they
raised in the oral argument held by the Federal Circuit. Id. at 1158-59.

      The Federal Circuit noted that the amended complaints in A & D Auto
would nonetheless be required to provide more explicit factual allegations than
“conclusory loss of value allegations” in order to adequately support the plaintiffs’


       1
         / This case was originally filed by a single plaintiff; a second plaintiff was added on
December 8, 2015. As a consequence, documents filed or served before that date reference
“plaintiff,” not “plaintiffs.”

                                                 2
takings claims. 748 F.3d at 1159. In other words, the amended pleadings would
be required to go beyond mere “‘“labels and conclusions,”’” or “‘“a formulaic
recitation of the elements of a cause of action.”’” Id. (quoting Twombly, 550 U.S.
at 555, as quoted in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (Iqbal)). Thus,
pursuant to A & D Auto, a proposed counterclaim must “contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).

II.   Analysis

        The focus of plaintiffs’ challenge to the government’s proposed amendment
of its answer is that defendant’s proposed counterclaim is futile. Pls.’ Opp. at 3-8.
Plaintiffs’ futility argument has two prongs. The first states that the counterclaim
proposed by the government is not plausible because its factual allegations
contradict sworn statements from defendant obtained by plaintiffs during
discovery. Id. at 4-5. The second futility prong asserts that the government’s
counterclaim, even if contradictory statements of fact are disregarded, cannot
satisfy the plausibility standard set forth in Twombly. Id. at 5-8. The court
addresses each of plaintiffs’ futility arguments in turn.

      A.     Alleged Contradictions in Statements of Fact Presented by
             Defendant Do Not Render Its Counterclaim Implausible

       The government, in its counterclaim, alleges that plaintiffs were overpaid
$5,635,537 when they received their wind power development grant from the
United States Department of the Treasury (Treasury), a grant which is also known
as a “Section 1603” payment. Def.’s Mot. at 2; Proposed Counterclaim ¶ 27.
Plaintiffs correctly point out that the government’s explanation of the genesis of
the overpayment amount has varied during this litigation. In discovery, the
Section 1603 payment actually provided to plaintiffs was explained by the
government in this manner:

             Defendant states that [plaintiff’s Section 1603 payment]
             reflects Treasury’s 1603 payment [based on a downward]
             adjustment for Plaintiff’s application, which Treasury
             calculated based on a reduction of Plaintiff’s claimed
             eligible basis by the amount of the development fee

                                          3
              included in Plaintiff’s total cost basis, and subsequent
              addition of a mark-up equal to five percent of Plaintiff’s
              claimed qualified direct costs. This adjustment was
              made based on Treasury’s conclusion that the dollar
              value of the development fee that Plaintiff allocated to
              claimed eligible basis was inconsistent with Treasury’s
              belief as to the fair market value of such a development
              fee that is appropriately allocable to eligible basis.

Pls.’ Opp. Ex. A at 3-4. In recent filings however, the government omits any
mention of an excluded development fee,2 a five percent mark-up, or fair market
value, and instead states that plaintiffs’ Section 1603 payment reflected a “reduced
portion of the development fee,” or a “reduced Development Fee.” Def.’s Mot. at
2; Proposed Counterclaim ¶ 6. According to plaintiffs, these variations in the
government’s explanation of the amount of plaintiffs’ Section 1603 payment
destroy the plausibility of its overpayment counterclaim.

       The alleged overpayment included within plaintiffs’ Section 1603 payment
from Treasury is perhaps better understood by considering the actual dollar
amounts involved. The first important variable for Section 1603 payments is thirty
percent, the percentage of a wind power facility’s cost basis which can be
recovered in a grant award from Treasury. Compl. ¶ 10. Another important figure
is plaintiffs’ statement of their facility’s cost basis, at $456,196,599. Id. ¶ 16.
Thirty percent of $456,196,599 equals $136,858,980, which is the amount
plaintiffs sought from Treasury for their grant award. Id. ¶ 20.

       Plaintiffs received a reduced Section 1603 payment from Treasury,
however, in the amount of $127,699,997. Compl. ¶ 20. Plaintiffs’ claim in this
suit, $9,158,983, is for the difference between the Section 1603 payment they
sought, i.e., $136,858,980, and the Section 1603 payment they received, i.e.,
$127,699,997. Id. at 6. Defendant argues, and plaintiffs do not appear to dispute,
that the reduction in plaintiffs’ Section 1603 payment was attributable to
Treasury’s treatment of the $50,000,000 development fee included, at least in part,
in plaintiffs’ cost basis calculations. Def.’s Reply at 6 (“It is clear that Treasury’s


       2
        / The development fee paid by plaintiffs was in the amount of $50,000,000. See Def.’s
Br. of May 7, 2015, Ex. E at 2.

                                              4
reduced Section 1603 payment was due to a reduction of the amount of the
claimed Development Fee.”); Pl.’s Disc. Mot. of Sept. 30, 2015, at 11 (“This is a
case in which more than $9 million is in controversy, all of which depends on the
Court’s determination as to the fair market value of Plaintiff’s development fee.”).
Thus, plaintiffs seek in this suit to obtain approximately nine million dollars which
they would have received if Treasury had accepted, without reduction, plaintiffs’
$50,000,000 development fee as presented as an element of the facility’s cost basis
in their Section 1603 application.

       Turning now to the government’s counterclaim, defendant alleges that even
the reduced cost basis of plaintiffs’ facility, as determined by Treasury, was too
high. Proposed Counterclaim ¶¶ 6, 27. According to the government, Treasury
included an overpayment of $5,635,537 in plaintiffs’ Section 1603 payment which
was attributable to Treasury’s treatment of plaintiffs’ $50,000,000 development
fee. Id. In other words, the government states that previously a portion of
plaintiffs’ cost basis was attributed by Treasury to the $50,000,000 development
fee, but instead, none of the $50,000,000 development fee should have been
included in the cost basis of plaintiffs’ facility.

     Defendant, in its reply brief, presents the following explanation of the
foundation for its counterclaim:

             Although California [Ridge] claimed a Section 1603
             payment that included approximately $14.7 million
             attributable to the [$50,000,000] Development Fee, it
             sued for approximately $9.1 million, recognizing that
             Treasury’s award included an amount that accounted for
             some, but not all of the amount of the Development Fee
             that California Ridge included in its claimed [cost] basis.
             Other filings by both parties reflect this understanding as
             well. Further, the counterclaim clearly alleges that
             $5,635,537 was attributable to the Development Fee.

Def.’s Reply at 6. To put it simply, according to the government’s proposed
counterclaim plaintiffs received not the $14.7 million attributable to a $50,000,000
development fee that they requested, but only $5,635,537; yet even this
$5,635,537 was not allowable and should be repaid to the United States.

                                          5
       The court now considers whether the government’s varying explanations for
the payment to plaintiffs of $127,699,997 destroy the plausibility of its
overpayment counterclaim. Plaintiffs appear to argue that the “no development
fee, but rather a five percent mark-up” explanation provided in discovery
fundamentally contradicts the explanation currently provided by the government
that a reduced development fee was included in the government’s grant award
calculations, but should now be eliminated. Pls.’ Opp. at 4-5. The court, however,
does not view the differences in these explanations as particularly significant.
Plaintiffs’ argument in this regard does not establish that the government’s factual
allegations are fundamentally contradictory, and fails to establish that the
government’s counterclaim is not plausible.

       As a threshold matter, the court notes that there is no fatal variance between
the phrasing of: (1) “a reduced portion of the development fee,” Def.’s Mot. at 2;
(2) an amount “attributable to the inclusion of a reduced Development Fee,”
Proposed Counterclaim ¶ 6; and, (3) “a reduction of Plaintiff’s claimed eligible
basis by the amount of the development fee included in Plaintiff’s total cost basis,
and subsequent addition of a mark-up equal to five percent of Plaintiff’s claimed
qualified direct costs,” Pls.’ Opp. Ex. A at 4. Each of these phrasings explains that
Treasury did not accept the full claimed amount of plaintiffs’ $50,000,000
development fee and instead substituted a lower amount in its calculations of the
cost basis of plaintiffs’ wind power facility. Although the explanations given by
the government contain somewhat conflicting narratives of cost basis calculations,
the court finds no obvious contradiction that would call into question the
foundation of Treasury’s Section 1603 payment to plaintiffs.

       Having considered the parties’ arguments, the court sees no fundamental
contradiction between Treasury significantly reducing a claimed development fee,
on the one hand, and Treasury replacing a disregarded development fee amount
with a lesser amount that better approximates the fair market value of development
services, on the other hand. The end result is a reduction in cost basis attributable
to a claimed development fee, even if the description of that reduction has varied
over time. Most importantly, as the government argues, the legal issue before the
court is not a review of Treasury’s methodology for calculating plaintiffs’ Section
1603 payment, but a determination of the proper grant award for plaintiffs’ wind
power facility. Def.’s Reply at 6-7. The resolution of that legal issue might
support either plaintiffs’ claim or the government’s counterclaim, both of which

                                         6
are plausible at this stage of the litigation of this case.

       For these reasons, the court does not find that the government’s proposed
counterclaim is futile. It is not “barred by the Government’s prior sworn
statements,” as alleged by plaintiffs. Pls.’ Opp. at 5. The court turns now to
plaintiffs’ contention that the government’s proposed counterclaim is not plausible
under Twombly.

       B.     Plausible Counterclaim under Twombly

       Plaintiffs argue that the government’s proposed counterclaim is either
facially implausible or insufficiently developed factually. Pls.’ Opp. at 5-8. In
plaintiffs’ view, the development fee included in their Section 1603 application,
valued at approximately $50,000,000, Def.’s Br. of May 7, 2015, Ex. E at 2, could
not be excluded, in its entirety, from the qualified cost basis of their wind power
facility. See Pls.’ Opp. at 7 (“[N]o factual allegations in the Government’s
proposed counterclaim support the theory that California Ridge’s development fee
does not form part of the cost basis of grant eligible property.”). Plaintiffs assert,
in particular, that the government’s proposed counterclaim neither alleges that the
development services acquired by plaintiffs had zero value, nor alleges that the
$5,635,537 attributed by Treasury to development services for plaintiffs’ facility
exceeded thirty percent of the fair market value of such development services. Id.
at 6-7. According to plaintiffs, the government’s proposed counterclaim therefore
cannot be considered to be plausible because “it has not alleged sufficient facts to
state a plausible claim.” Id. at 7.

       Defendant counters these arguments, first, by noting that the court should
not attempt to decide the merits of the government’s proposed counterclaim at the
pleadings stage. Def.’s Reply at 2-3 (citing cases). The court agrees. Nothing in
Twombly suggests that its plausibility test requires a decision on the merits of a
claim. Instead, the proposed counterclaim must “contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal, 556
U.S. at 678 (quoting Twombly, 550 U.S. at 570). The counterclaim before the
court asserts that Treasury overpaid plaintiffs by according some value to the
$50,000,000 development fee when calculating plaintiffs’ Section 1603 payment:

              [T]he defendant has received documents in discovery

                                            7
             providing important details about the plaintiffs’
             organizational structure at various points in time, the tax
             equity investment in plaintiff California Ridge, and the
             development fee that California Ridge included in its
             claimed cost basis. Based on that information, defendant
             determined that a factual basis exists to assert that
             California Ridge’s development fee was a sham
             transaction, or otherwise did not constitute an eligible
             cost under § 1603. As a result, the defendant now
             believes that no portion of the development fee can be
             included in the eligible cost basis of California Ridge’s
             wind energy facility, and that the portion that Treasury
             previously allowed was an overpayment to which
             California Ridge was not entitled.

Def.’s Mot. at 5-6.

       In sum, defendant contends that “California Ridge was not entitled to
include any portion of the Development Fee in its claimed eligible basis.” Def.’s
Reply at 2; see also Proposed Counterclaim ¶ 7 (“The Development Fee was a
sham transaction, or was otherwise not an eligible cost under § 1603.”). The
proposed counterclaim proffers a number of facts relevant to plaintiffs’ corporate
relationships which allegedly prevented the development fee agreement for the
payment of $50,000,000 from qualifying as “a bona fide agreement with a
legitimate business purpose.” Proposed Counterclaim ¶ 17. Thus, according to
the proposed counterclaim, Treasury should not have attributed any cost basis to
the $50,000,000 development fee included by plaintiffs in their Section 1603
application, and plaintiffs now owe the United States $5,635,537. Id. ¶¶ 26-28.

      The court must agree with defendant that its proposed counterclaim is
plausible under Twombly. Indeed, the level of factual detail in the counterclaim is
as specific, if not more specific, than that provided by plaintiffs in their complaint.
The merits of both plaintiffs’ claim and the government’s counterclaim must be
resolved, not at the pleadings stage, but once the parties’ legal claims are fully
explored through discovery and presented thereafter for the court’s review.

                                  CONCLUSION

                                           8
       For the foregoing reasons, defendant’s motion is granted. Plaintiffs suggest
that in the event the court permits the government’s counterclaim, additional
discovery relevant to the government’s counterclaim must be scheduled by the
court. Pls.’ Opp. at 8-9. In response, the government contends that the existing
discovery schedule encompasses discovery relevant to plaintiffs’ claim as well as
the government’s counterclaim and that fact discovery remains open for both
parties until July 22, 2016. Defendant also asserts that it has been responsive to
plaintiffs’ discovery requests (for example, the United States points to the three
government employees requested for deposition by plaintiffs it has now made
available). Plaintiffs do not specify additional discovery that they are being
denied by defendant and the court takes this opportunity to express its expectation
that both parties will be able to engage in such sufficient and reasonable discovery
as necessary to litigate their claims. In the event the July 22, 2016 deadline is
inadequate for the parties to complete fact discovery, counsel should arrive at a
mutually agreeable extension proposal in that regard. The court encourages the
parties to cooperate in completing discovery so that this case may proceed
efficiently without the need for intervention by the court.

       Accordingly, it is hereby ORDERED that

       (1)    Defendant’s Motion for Leave to Amend Answer to Bring
              Counterclaim, filed April 5, 2016, is GRANTED;

       (2)    Defendant shall FILE under seal its Amended Answer, including its
              Counterclaim, and also FILE a redacted public version of its
              Amended Answer and Counterclaim, on or before June 16, 20163;
              and,

       (3)    Pursuant to the court’s order of June 2, 2016, the parties shall FILE a
              Joint Status Report, on or before June 27, 2016, apprising the court


       3
        / Pursuant to Paragraph 9 of the Protective Order entered October 27, 2014 in this case,
leave of the court is required to file documents under seal. To clarify the procedure for filing
documents under seal as this case proceeds, the court will accept the simultaneous submission of:
(1) a motion for leave to file under seal, which should always state whether such motion is
unopposed; and, (2) the sealed filing as a separate docket entry.

                                               9
of the status of fact discovery and proposing a schedule for expert
discovery that reflects the parties’ consensus on an appropriate
schedule.


                                      /s/Lynn J. Bush
                                      LYNN J. BUSH
                                      Senior Judge




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