            In the United States Court of Federal Claims
                                   No. 13-684 C
                              (Filed March 27, 2014)

 ALLEN ENGINEERING                       )
 CONTRACTOR, INC.,                       )   Construction Contract; Fraudulent
                   Plaintiff,            )   Performance and Payment Bonds; Prior
         v.                              )   Material    Breach;  Violation    of
                                         )   Regulations; Default Terminations;
 THE UNITED STATES,                      )   Equitable Estoppel.
                           Defendant.    )


       William L. Bruckner, Bruckner Law Firm, San Diego, California for
plaintiff.

       Eric E. Laufgraben, Commercial Litigation Branch, Civil Division, United
States Department of Justice, Washington, D.C., with whom were Stuart F. Delery,
Assistant Attorney General, Bryant G. Snee, Acting Director, Donald E. Kinner,
Assistant Director, for defendant. Stephen Tobin, of counsel.

                                     ORDER

Merow, Senior Judge

      In its complaint, plaintiff alleges that the government, under several theories
of liability, improperly terminated a contract between the parties involving
construction work at Marine Corps Base, Camp Pendleton, California. See Doc. 1.
The government has moved the court to dismiss the complaint in its entirety,
arguing that plaintiff has failed to state any claim on which relief may be granted.
See Doc. 7. The court finds as follows.

I.    FACTS

      The parties executed a contract for construction work at Camp Pendleton on
July 29, 2012. See Doc. 1, ¶ 4. Plaintiff provided the required performance and
payment bonds from Liberty Mutual Insurance Company (“Liberty”) to the Navy
on August 20, 2012. See id., ¶ 8. After initially rejecting the bonds, the Navy
ultimately accepted them by letter dated September 6, 2012. See id.
       On February 13, 2013, plaintiff submitted a second set of bonds, from
Pacific Indemnity Company (“PIC”), and asked that if the PIC bonds were
approved by the Navy, that they be substituted for the Liberty bonds. See id., ¶ 9.
Plaintiff acquired the PIC bonds from Individual Surety Group, LLC (“ISG”), a
company which represented itself as a broker for PIC, a subsidiary of Chubb
Group. See id. Plaintiff alleges that upon receipt of the PIC bonds, the Navy
began an investigation into whether the bonds were an acceptable substitute for the
Liberty bonds. See id., ¶ 11.

       The Navy verbally confirmed the authenticity of the bonds by calling a man
named Ed Campbell, who allegedly worked for PIC. See id., ¶ 12. Plaintiff
believes that the Navy actually spoke to Eric Campbell, a purported representative
of ISG. See id., at n.3. Plaintiff further believes that the Navy did not call the
telephone number for PIC listed in the Treasury Circular 570. See id., ¶13. The
Navy followed this verbal confirmation with a letter, dated March 14, 2013,
requesting written confirmation that the PIC bonds were authentic. See id, ¶ 12.
Plaintiff alleges that the Navy did not contact the proper person for authentication
and that the Navy did not actually send the letter requesting written confirmation to
PIC, in violation of its duty to do so under certain Navy regulations, Federal
Acquisition regulations, and other federal laws. See id.

      The Navy approved the PIC bonds and the Liberty bonds were returned to
Liberty on April 10, 2013. See id., ¶ 14. In the complaint, Plaintiff alleges that the
Navy sent the Liberty bonds back to Liberty, but Exhibit F to the same complaint
indicates otherwise. Liberty sent a letter to the Navy, dated May 2, 2013, stating:
“Liberty’s original performance and payment bonds for this contract (024039638),
for which the new Pacific Indemnity bonds were substituted, have been returned to
Allen Engineering Contractors, Inc., who has in turn forwarded the original bonds
to Liberty.” Id. at Exhibit F. On May 2, 2013, Liberty notified PIC that the PIC
bonds had been substituted for the Liberty bonds on the project. See id., ¶ 15. On
May 6, 2013, Walter Maxwell of Chubb Group, informed plaintiff that the PIC
bonds were not issued by PIC, and therefore, were invalid. See id. The next day,
May 7, 2013, PIC informed the Navy that the bonds were invalid. See id., ¶ 15.
And on May 8, 2013, the Navy sent a letter to plaintiff stating that the PIC bonds
were fraudulent, and requesting that plaintiff provide replacement bonds. See id., ¶
16.

      On May 20, 2013, the Navy suspended performance of the contract and
requested that plaintiff provide valid replacement bonds. See id., ¶ 17. In response,

                                          2
plaintiff explained that it was having trouble securing replacement bonds, see id.,
Exhibit I at 2, and proposed alternatives to allow the project to move forward, see
id., ¶ 18.

       The Navy issued a cure notice on June 11, 2013, giving plaintiff 10 days to
provide valid bonds. See id., ¶ 18 and Exhibit J. And on June 17, 2013, the Navy
rejected plaintiff’s alternative proposals, stating that the suggestions did not meet
the FAR bonding requirements. See id., ¶ 19 and Exhibit K.

       The Navy then issued a show cause letter on June 24, 2013, giving plaintiff a
final opportunity to provide additional information relating to its failure to provide
replacement bonds. See id., ¶ 20 and Exhibit L. Plaintiff responded to the show
cause letter on July 3, 2013, and again proposed alternatives to providing
replacement bonds. See id., ¶ 20 and Exhibit M. On July 10, 2013, the Navy
issued a notice of termination for default. See id., ¶ 20 and Exhibit N. Plaintiff
alleges that at the time of termination, the project was 40% complete. See id., ¶ 20.

       Plaintiff also attaches to its complaint a copy of a lawsuit filed by Chubb
against Eric Campbell, ISG and others, relating to fraudulent bonds. See id., ¶ 22
and Exhibit O. Although plaintiff argues in its response to the government’s
motion to dismiss that the Navy “was fully aware” of Eric Campbell’s fraudulent
activity, and was therefore in a position to protect plaintiff, see Doc. 10 at 19 and
29, the complaint does not make any such allegation and the attached exhibits do
not supply such facts.

       Plaintiff alleges that throughout the bonding process, the Navy violated a
variety of its own regulations contained in the Naval Facilities Engineering
Command (“NAVFAC”) Contracting Manual (NAVFAC P-68) and several FAR
provisions, including the following: (1) the contracting officer, Leilani J. Murray,
was not a Level III contracting officer, as required by Navy regulations, and was
therefore unauthorized to approve the new bonds, see Doc. 1, ¶ 22 (The paragraphs
in the complaint are mis-numbered, and include two paragraphs 22. This reference
is contained in the second such paragraph.); (2) the Navy failed to contact the
correct representative from PIC to authenticate the bonds, see id.; (3) the Navy
failed to notify the surety and principal of the effective date of the new bonds, see
id., ¶ 23; (4) the Navy unreasonably refused to accept plaintiff’s alternative
proposals, see id., ¶¶ 24 and 27; (5) the Navy improperly terminated the contract
because 48 C.F.R. § 52.249-10 does not permit termination for failure to provide
replacement bonds, see id., ¶¶ 25, 26, and 28.


                                          3
II.   ANALYSIS

       The government has moved the court to dismiss plaintiff’s complaint under
Court of Federal Claims Rule 12(b)(6), on the basis that it fails to state a claim
upon which relief could be granted. See Doc. 7 at 1. A complaint should be
dismissed under Rule 12(b)(6) “when the facts asserted by the claimant do not
entitle him to a legal remedy.” Lindsay v. United States, 295 F.3d 1252, 1257
(Fed. Cir. 2002). To survive a motion to dismiss, a complaint must contain factual
allegations that are “enough to raise a right to relief above the speculative level.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). However, “[i]n ruling on a
RCFC 12(b)(6) motion to dismiss, the court must accept as true the complaint’s
undisputed factual allegations and should construe them in a light most favorable
to plaintiff.” Bristol Bay Area Health Corp. v. United States, 110 Fed. Cl. 251,
259 (2013).

       Despite the fact that the complaint enumerates only one cause of action, in
the papers submitted to the court, plaintiff makes five discernable arguments for
recovery. Three appear in the complaint: (1) that the Navy violated a number of
applicable regulations and committed a prior material breach by violating a duty it
had to plaintiff in failing to properly investigate the validity of the PIC bonds and
approve the substitution; (2) that the Navy improperly refused to accept plaintiff’s
alternative proposals to providing valid replacements for the fraudulent PIC bonds;
and (3) that the Navy improperly terminated plaintiff’s contract under FAR §
52.249-10, because this provision does not allow for termination for failure to
provide replacement bonds. And two are articulated in plaintiff’s response to the
motion to dismiss: (1) that the Navy had both the “last clear chance” and the
superior knowledge to save plaintiff from its predicament, see Doc. 10 at 17-20,
and (2) that the Navy should be equitably estopped from terminating the contract,
see id. at 28-30. Although the last two arguments appear only in plaintiff’s
response to the government’s motion to dismiss, they are purportedly based on
facts that are either alleged in the complaint or in documents attached to the
complaint. The court, therefore, will address the sufficiency of each theory in turn.

      A.     The Navy’s Investigation of Bond Validity was Inadequate and
             Approval of the Replacement Bonds was Improper

      Plaintiff alleges that its failure to provide valid replacement bonds for the
fraudulent PIC bonds should be excused because of the Navy’s actions. See Doc.
10 at 14-21. Specifically, plaintiff claims that the Navy breached its obligations


                                         4
under the contract and violated its own regulations and FAR provisions throughout
the bonding process in the following respects:

      (1) the Navy failed to contact the correct representative from PIC to
      authenticate the bonds, as stated in Department of the Treasury Circular 570,
      in violation of 48 C.F.R. § 28.202 and NAVFAC P-68 ¶ 28.102-1(b), which
      requires that the surety and not the bonding agent be contacted for
      authentication purposes;

      (2) the Navy violated 48 C.F.R. § 28.106-2(a) and NAVFAC P-68 ¶
      28.106-2 by allowing someone other than a Level III contracting officer
      authorize the substitute bonds; and

      (3) the Navy violated 48 C.F.R. § 28.106-2(b), by failing to notify the
      surety and principal of the effective date of the new bonds.

             1.     Prior material breach

       According to plaintiff, the Navy’s failure to conduct an adequate
investigation of the PIC bonds amounts to a prior material breach such that
plaintiff “was excused from providing replacement payment and performance
bonds when the NAVY returned the LIBERTY BONDS after accepting the PIC
BONDS based upon a negligent and invalid investigation in violation of the
CONTRACT, FAR, NAVFAC regulations and the purpose of the Miller Act.”
Doc. 10 at 21.

      Under the doctrine of prior material breach, “[u]pon a material breach of a
contract the non-breaching party has the right to discontinue performance of the
contract.” Precision Pine & Timber, Inc. v. United States, 62 Fed. Cl. 635, 648
(2004) (citing Stone Forest Indus., Inc. v. United States, 973 F.2d 1548, 1550 (Fed.
Cir. 1992)). In order for plaintiff to find shelter under this theory for its failure to
provide replacement bonds, it must state a claim that the government breached a
material term of the contract. Plaintiff has failed to do so.

      The only contract term that the plaintiff cites is the requirement that the
contractor furnish payment and performance bonds “for Government review and
approval.” See Doc. 10 at 16. The plaintiff argues that:

      Implied within Section 19 [of the contract] is the fact that a “review
      and approval” would take place by the NAVY undertaken in some

                                           5
      standard, regulated method designed to, . . . serve the contractual and
      statutory bonding purpose of “. . . provid[ing] the Government with
      ‘financial protection against losses under contracts,’ and shield the
      Government from [risk] . . .”

Id. at 16 (citing the government’s brief in support of its motion to dismiss). By
plaintiff’s own admission, this provision is an obligation imposed on plaintiff
under the contract as a measure of protection for the government—not an
obligation that the government had to protect the plaintiff.

       In order to find some obligation in this provision that the government has
allegedly breached, plaintiff essentially asks the court to incorporate, in their
entirety, the provisions of the FAR, the NAVFAC P-68, and the Miller Act into the
contract to supply content to the phrase “review and approval.” Plaintiff offers no
authority for such an incorporation, and the court declines to expand the
contractual duties of the parties in such an extreme manner on the basis of the
plaintiff’s logic. And as the Federal Circuit has held, wholesale incorporation is
inappropriate since not every provision of the FAR is meant for the benefit of
contractors. See Freightliner Corp. v. Caldera, 225 F.3d 1361, 1365 (Fed. Cir.
2000). Instead, “each regulation must be analyzed independently to determine
whether it confers a cause of action upon the private contractor.” Id.

             2.     Violation of regulations independent of contract terms

       Plaintiff has likewise failed to state a claim for relief based on the Navy’s
alleged failure to abide by its internal regulations or the FAR, independent of the
terms of the contract. As an initial matter, “[i]n order for a private contractor to
bring suit against the Government for violation of a regulation, that regulation must
exist for the benefit of the private contractor.” Id. (citing Cessna Aircraft Co. v.
Dalton, 126 F.3d 1442, 1451 (Fed. Cir. 1997); Rough Diamond Co. v. United
States, 173 Ct. Cl. 15, 22-26 (1965). As a corollary, if “the regulation exists for
the benefit of the Government, then the private contractor does not have a cause of
action against the Government in the event that a contracting officer fails to
comply with the regulation.” Id.

                    a.    Failure to contact the correct PIC representative

      Plaintiff first argues that the Navy failed to contact the correct representative
from PIC to authenticate the bonds, as identified in the Department of the Treasury
Circular 570. See Doc. 1, ¶ 13. The Treasury Circular is referred to in both FAR §

                                          6
28.202 and in NAVFAC P-68 ¶ 28.102-1(b). In the complaint, plaintiff quotes
FAR § 28.202(a)(1), which requires that sureties appear in Treasury Circular 570:
“Corporate sureties offered for bonds furnished with contracts performed in the
United States or its outlying areas must appear on the list contained in the
Department of the Treasury Circular 570, ‘Companies Holding Certificates of
Authority as Acceptable Sureties on Federal Bonds and Acceptable Reinsuring
Companies.’” 48 C.F.R. § 28.202(a)(1); see Doc. 1, ¶ 10. Plaintiff then alleges
that the contact information for each approved surety can be found in Treasury
Circular 570. Id.

      Plaintiff also alleges that the Navy violated NAVFAC P-68 ¶ 28.102-1(b),
which requires that the surety and not the bonding agent be contacted for
authentication purposes: “For contracts over $500,000, copies of the payment and
performance bonds shall be forwarded to the surety (not the agent’s office) for
authentication. A copy of this request to the surety shall be sent to the contractor.”

       To the extent that FAR § 28.202 affirmatively states any duty or required
action on the part of the government, it requires only that the Navy made certain
that the surety proposed by plaintiff appeared on Treasury Circular 570 as a
condition of approving the bonds. There is no dispute that PIC is, in fact, listed on
the Circular. See Doc. 1, Exhibit D (portions of Treasury Circular 570 attached to
plaintiff’s complaint, including an entry for PIC). Thus, this section has not
plausibly been violated. Plaintiff has also alleged, however, that the Navy is liable
as a result of improperly contacting the agent’s office rather than the surety, in
violation of NAVFAC P-68 ¶ 28.102-1(b). See Doc. 1, ¶¶ 12-13.

       Taking plaintiff’s allegations as true, in order to make a valid claim for this
failure, plaintiff must demonstrate that NAVFAC P-68 ¶ 28.102-1(b) was
promulgated for its benefit. As the government points out, the NAVFAC P-68
expressly states that it “provides general guidance to field contracting officers in
the execution of their delegated authority,” and that it “implements or
supplements” the FAR, but “is not a stand-alone document.” See Doc. 12 at 7
(citing Doc. 10, Attachment 2 at A028). This statement clearly shows that this
document was designed for the benefit of government employees, not private
contractors. Furthermore, there is nothing in the text of the specific section to
indicate otherwise. The essential function of performance and payment bonds is to
protect the government’s interests and the interests of suppliers of labor and
materials, respectively. See 40 U.S.C. § 3131(b)(1) (stating that a “performance
bond . . . [is] for the protection of the Government”); (b)(2) (stating that a
“payment bond . . . [is] for the protection of all persons supplying labor and

                                          7
material in carrying out the work provided for in the contract”). As such, ensuring
that bonds are authentic logically serves the same interests. Because this
regulation is evidently meant as a measure of protection for the Navy and for the
suppliers engaged by plaintiff, but not to protect the plaintiff itself, plaintiff’s claim
for relief based on a violation of this section fails as a matter of law.

                    b.     Failure to ensure substitute bonds authorized by a
                           Level III contracting officer

       Plaintiff next argues that the Navy is liable for its failure to abide by FAR §
28.106-2(a) and NAVFAC P-68 ¶ 28.106-2. See Doc. 1, ¶ 22. When read
together, these regulations require that a Level III contracting officer authorize
substitute bonds. See 48 C.F.R. 28.106–2(a) (“A new surety bond covering all or
part of the obligations on a bond previously approved may be substituted for the
original bond if approved by the head of the contracting activity, or as otherwise
specified in agency regulation.”); NAVFAC P-68 ¶ 28.106-2, Doc. 10, Attachment
2 at A030 (“A Level III contracting officer approval is required prior to
substituting the original bond with a new surety bond covering all or part of the
obligations on the previously approved bond.”).

       In the complaint, plaintiff alleges that Leilani J. Murray, the officer who
approved substitution of the PIC bonds for the Liberty bonds, is not a Level III
officer. See Doc. 1, ¶ 22. Even assuming Ms. Murray was not the proper person to
review the bond substitution in this case, the cited regulations do not provide
plaintiff with a basis for asserting the Navy’s liability. As explained above, the
bonds at issue were not required for plaintiff’s protection, therefore, the court will
not assume that the regulatory provisions dealing with the authentication or
approval of the bonds were meant to protect plaintiff. Here, no specific language
in the text of the regulations alters that conclusion. Plaintiff, therefore, cannot
sustain a claim against the government on this theory.

                    c.     Failure to notify the surety and principal of effective
                           date of new bonds

       Plaintiff further alleges that the government is liable for its failure to abide
by the regulation that requires the government to “notify the principal and surety of
the original bond of the effective date of the new bond,” in cases of bond
substitutions. 48 C.F.R. § 28.106–2(b); see Doc. 1, ¶ 23. The language of this
regulation does suggest that it exists, at least in part, for plaintiff’s benefit, since it
required that the Navy provide notice to both plaintiff and Liberty of the effective

                                            8
date of PIC substitution. Assuming that to be the case, however, it appears from
plaintiff’s own filings that the Navy in fact provided the required notice.

       Among the exhibits to plaintiff’s complaint are two letters. The first is a
letter dated April 10, 2013, from the Navy to plaintiff copying PIC. See Doc. 1,
Exhibit E. The letter states: “Receipt of performance and payment bonds
numbered 02082013 is hereby acknowledged and approved. The surety, Pacific
Indemnity Company, has authenticated your performance and payment bonds and
you may commence work.” Id. The second letter, dated May 2, 2013, from
Liberty to the Navy copying plaintiff and PIC, states in relevant part: “Liberty
Mutual Insurance Company is in receipt of your April 10, 2013 letter to Allen
Engineering Contractor, Inc. confirming the Government’s receipt and approval of
substitute performance and payment bonds received from Pacific Indemnity
Company (no. 02082013) . . .” See Doc. 1, Exhibit F at 1.

       The first letter clearly states that the PIC bonds have been approved as
substitutes for the Liberty bonds. And although the letter does not expressly
contain the phrase “effective date,” it is a small and reasonable inference that a
letter dated April 10, 2013, that states the bonds have “hereby” been approved
indicates effective approval as of April 10, 2013. And, despite the fact that Liberty
was not formally copied on the Navy’s April 10, 2013 letter, it is evident from the
May 2, 1013 letter it actually received a copy. Thus, the Navy evidently met any
obligations it had to notify plaintiff and Liberty under FAR § 28.106–2(b).

       While it is true that the allegations in the complaint must generally be
accepted as true for purposes of evaluating a motion to dismiss, “in the event of
conflict between the bare allegations of the complaint and any exhibit attached
pursuant to Rule 10(c), Fed.R.Civ.P., the exhibit prevails.” Fayetteville Investors
v. Commercial Builders, Inc., 936 F.2d 1462, 1465 (4th Cir. 1991). Here, the
exhibits to the complaint belie plaintiff’s assertion that the Navy failed to provide
proper notification. As such, the facts as alleged do not support the theory that the
Navy violated FAR § 28.106–2(b).

      B.     The Navy Improperly Refused Plaintiff’s Alternative Proposals

      In its complaint, plaintiff alleges that “[t]he Navy’s actions in refusing to
accept any one of multiple solutions that would allow the construction of RANGE
409 to move forward and satisfy the FAR requirements was unreasonable and a
breach of the obligation of good faith and fair dealing.” Doc. 1, ¶ 24. Plaintiff
more specifically claims that the Navy “unreasonably declined” the tripartite

                                         9
escrow agreement that plaintiff proposed, pursuant to FAR § 28.102-1(b)(1)(iii),
and refused to hold Liberty or PIC as sureties. Doc. 1, ¶ 27.

       “The covenant of good faith and fair dealing is an implied duty that each
party to a contract owes to its contracting partner.” Centex Corp. v. United States,
395 F.3d 1283, 1304 (Fed. Cir. 2005). Specifically, “[t]he covenant imposes
obligations on both contracting parties that include the duty not to interfere with
the other party’s performance and not to act so as to destroy the reasonable
expectations of the other party regarding the fruits of the contract.” Id. (citations
omitted). As the Federal Circuit recently explained:

      the “implied duty of good faith and fair dealing cannot expand a
      party’s contractual duties beyond those in the express contract or
      create duties inconsistent with the contract’s provisions.” . . . [O]ur
      formulation means simply that an act will not be found to violate the
      duty (which is implicit in the contract) if such a finding would be at
      odds with the terms of the original bargain, whether by altering the
      contract’s discernible allocation of risks and benefits or by conflicting
      with a contract provision. The implied duty of good faith and fair
      dealing is limited by the original bargain: it prevents a party’s acts or
      omissions that, though not proscribed by the contract expressly, are
      inconsistent with the contract’s purpose and deprive the other party of
      the contemplated value.

Metcalf Constr., Inc. v. United States, 742 F.3d 984, 991 (Feb. 11, 2014)
(discussing application of the court’s prior decision in Precision Pine & Timber,
Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010)). This duty applies to both
private parties and the government. See Centex, 395 F.3d at 1304.

       Plaintiff’s only basis for claiming that the Navy violated its duty of good
faith and fair dealing is the general allegation that the Navy was unreasonable in
refusing to accept plaintiff’s alternative proposals to providing valid bonds to
replace the fraudulent PIC bonds. See Doc. 1, ¶¶ 24, 27. In order for the Navy’s
decision to amount to a violation, plaintiff must show that it had a reasonable
expectation that the government would agree to the alternatives. But neither the
complaint, nor the attached exhibits, make even a facially plausible claim that such
an expectation was reasonable.

     In two letters attached to the complaint, in which it expressly “agrees that
the NAVY and subcontractors/suppliers have a right to be protected,” Doc. 1,

                                         10
Exhibit I at 5, Exhibit M at 6, plaintiff outlines three alternatives to the Navy’s
requirement that it provide valid bonds: (1) that the Navy hold Liberty
accountable; (2) that the Navy hold PIC accountable; and (3) that the Navy accept
an escrow agreement and notice of assignment in place of bonds. See Doc. 1,
Exhibit I at 3-5, Exhibit M at 4-6.

      Plaintiff claims that the Navy should have accepted its proposed escrow
agreement, pursuant to FAR § 28.102-1(b)(1)(iii). But, as the government
correctly argues, escrow arrangements are only applicable to contracts valued
between $30,000 and $150,000. See id., Doc. 7 at 21. In the complaint, plaintiff
alleges that the value of the contract at issue here far exceeds that range—at
$2,855,419.00. See Doc. 1, ¶ 5. As such, plaintiff has no claim under this
provision.

       That leaves plaintiff with its claims that the Navy should take on the
responsibility of holding either Liberty or PIC as sureties. Plaintiff not only
requested the bond substitution that resulted in its current predicament, but also
actually returned the Liberty bonds to Liberty. See Doc. 1, ¶ 9, Exhibit F at 1.
And it is undisputed that the PIC bonds were forgeries, Doc. 1, ¶¶ 15-16, thus PIC
was never obligated as a surety on the contract. Given these facts, plaintiff’s
position that the government could expect any protection from either set of bonds
strains credulity. The court simply cannot see how the Navy’s decision that it
needed more security than plaintiff’s alternatives offered either alters the allocation
of risks and benefits under the contract, or conflicts with the contract terms.

       To the extent that plaintiff means to argue that the Navy acted unreasonably
or contrary to law in refusing plaintiff’s alternatives independent of the covenant of
good faith and fair dealing, its argument is equally unavailing. The Navy rejected
plaintiff’s proposals because they did “not comply with bonding requirements of
FAR clause 52.228-15.” Doc. 1, Exhibit K. See also id., Exhibit L (reiterating
plaintiff’s failure to comply with FAR 52.228-15, and noting that plaintiff had
“failed to cure the conditions endangering performance” under the contract);
Exhibit N (terminating the contract for default due to plaintiff’s failure to comply
with FAR 52.228-15). Section 52.228-15, in relevant part, requires that:

      Amount of required bonds. Unless the resulting contract price is
      $150,000 or less, the successful offeror shall furnish performance and
      payment bonds to the Contracting Officer as follows:



                                          11
          (1) Performance bonds (Standard Form 25). The penal amount of
          performance bonds at the time of contract award shall be 100 percent
          of the original contract price.

          (2) Payment Bonds (Standard Form 25-A). The penal amount of
          payment bonds at the time of contract award shall be 100 percent of
          the original contract price.

48 C.F.R. 52.228-15(b). Plaintiff makes two excuses in the complaint for its
failure to comply with this regulation. First, it alleges that compliance with this
provision after discovery of the fraud was unnecessary since it complied at the time
the contract was executed by supplying the valid Liberty bonds. See Doc. 1, ¶ 26.
This argument is addressed in the following section, discussing proper termination
for failure to maintain bonds under 48 C.F.R. § 52.249-10. Second, plaintiff
claims that its non-compliance should be excused because the Navy failed to
properly investigate the validity of the PIC bonds. See id., ¶ 28. As considered at
length above, however, the investigation that plaintiff claims the Navy was
required to do was not meant for plaintiff’s benefit, and therefore cannot form the
basis of a valid claim.

          C.    The Navy Improperly Terminated Plaintiff’s Contract under 48
                C.F.R. § 52.249-10

          The applicable regulation governing default on fixed-price construction
states:

          If the Contractor refuses or fails to prosecute the work or any
          separable part, with the diligence that will insure its completion within
          the time specified in this contract including any extension, or fails to
          complete the work within this time, the Government may, by written
          notice to the Contractor, terminate the right to proceed with the work
          (or the separable part of the work) that has been delayed.

48 C.F.R. 52.249-10(a). Here, the Navy terminated plaintiff’s contract pursuant to
this provision when plaintiff failed to provide replacements for the PIC bonds. See
Doc. 1, Exhibit N at 1 (stating that the contract “is terminated for default under the
clause FAR 52.249-10 (“Default” [April 1984] [sic] effective immediately”). The
termination notice further explains that “[t]his notice of termination for default is
based upon AECI’s inability to comply with FAR Clauses 52-228-15 [sic]


                                             12
Performance and Payment Bonds—Construction and 52.228-2 (Additional Bond
Security).” Id.

      As quoted above, section 52.228-15 states that a contractor “shall” furnish
payment and performance bonds on contracts with a value exceeding $150,000,
and that those bonds must cover 100% of the contract price. 48 C.F.R. 52.228-
15(b). Section 52.228-2 imposes a duty on the contractor to furnish additional
bond security in specified circumstances, including when “[a]ny surety upon any
bond, or issuing financial institution for other security, furnished with the contract
becomes unacceptable to the Government.” 48 C.F.R. 52.228-2(a).

       Plaintiff alleges in the complaint that the language of FAR § 52.249-10 does
not allow the Navy to terminate a contract based on the contractor’s failure to
maintain performance and payment bonds, and thus does not apply to this case.
See Doc. 1, ¶ 25. In the event that FAR § 52.249-10 does apply to the case,
according to plaintiff, its non-compliance should be excused due to the Navy’s
failure to adequately investigate the validity of the PIC bonds. See Doc. 1, ¶ 28.
Plaintiff also alleges that because it offered to “furnish additional security” in the
form of the tripartite escrow agreement, it did not violate FAR § 52.228-2. See
Doc. 1. ¶ 27.

       In its motion to dismiss, the government argues that termination was proper
under FAR § 52.249-10, citing this court’s decision in Airport Industrial Park, Inc.
v. United States, 59 Fed. Cl. 332 (2004). In Airport Industrial Park, the contractor
obtained performance and payment bonds from a company that became insolvent
prior to conclusion of the contract work. Id. at 333. The government notified the
contractor that it must provide replacement bonds, and when it failed to do so, the
government terminated the contract for default. Id. at 334. The court held, based
on a review of numerous cases and board decisions, that “failure to furnish
adequate bonding required by a government procurement contract is a material
breach that justifies termination for default.” Id. See also Precision Pine &
Timber, Inc. v. United States, 62 Fed. Cl. 635, 647 (2004) (holding that the
contractor materially breached the contract by failing to maintain bonding with an
approved surety) (citing Pac. Sunset Builders, Inc., ASBCA No. 39, 312, 93–3
B.C.A. (CCH) ¶ 25,923, 1993 WL 89769 (Mar. 17, 1993) (stating that when
sureties became unacceptable to Government, appellant’s failure to provide
adequate financial information justified termination of contract for default) and
JaMar Constr. Co., ENG BCA No. 5251, 87–3 B.C.A. (CCH) ¶ 20,125, 1987 WL
41310 (Aug. 21, 1987) (finding a “material breach entitling the Government to


                                         13
terminate the contract for default” when the contractor’s surety went bankrupt and
contractor could not obtain substitute bonding)).

       These decisions, although not binding precedent, are clearly supported by
the stated purpose of mandating bonds. The reason performance and payment
bonds are required is to protect the government’s interests and the interests of
suppliers of labor and materials, respectively. See 40 U.S.C. § 3131(b)(1) (stating
that a “performance bond . . . [is] for the protection of the Government”); (b)(2)
(stating that a “payment bond . . . [is] for the protection of all persons supplying
labor and material in carrying out the work provided for in the contract”).
Allowing plaintiff to avoid default on the basis that it provided a valid bond at the
time the contract was executed, notwithstanding the fact that the plaintiff requested
that the Navy replace those valid bonds with bonds that later turned out to be
fraudulent, would gut these statutory protections.

       The conclusion that a contractor must maintain bonds throughout the
contract term is also supported by a number of other FAR provisions. First,
contractors cannot perform work without valid bonds. See 48 C.F.R. § 28.102-1(a)
(stating that “The Miller Act (40 U.S.C. 3131 et seq.) requires performance and
payment bonds for any construction contract exceeding $150,000”). Given the
requirement that valid bonds are in place in order for a contractor to prosecute
work under the contract, the lack of valid bonds would necessarily lead to the
failure to prosecute work. Here, the Navy notified plaintiff on May 8, 2013 that
the PIC bonds were fraudulent and must be replaced. See Doc. 1, Exhibit G.
Shortly thereafter, because plaintiff failed to immediately provide replacement
bonds, the Navy suspended work on the contract. See id., Exhibit H. It was only
after several more attempts to obtain valid bonds from plaintiff that the Navy
actually terminated the contract. The failure to maintain the bonds or provide
acceptable replacements, consequently, led to a direct violation of the express
terms of FAR § 52.249-10(a).

       In addition, section 52.228-2 requires a contractor to furnish additional bond
security in specified circumstances, including when “[a]ny surety upon any bond,
or issuing financial institution for other security, furnished with the contract
becomes unacceptable to the Government.” 48 C.F.R. 52.228-2(a). This is
effectively a mechanism for ensuring adequate security is maintained throughout
the contract term. Plaintiff’s failure to provide additional security under this
provision is, in part, the stated reason for the contract termination. Plaintiff’s offer
to provide an escrow agreement that is clearly unacceptable as security for


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contracts exceeding $150,000, does not, as plaintiff alleges, amount to compliance
with this provision.

      Plaintiff offers no authority to support the proposition that a contractor is not
required to maintain valid bonds throughout the term of the contract so long as it
provides valid bonds at the beginning of the contract, and the force of logic weighs
heavily against its position. And for the reasons previously explained, any
negligence plaintiff perceives in the Navy’s investigation of the validity of the
bonds does not excuse its default under FAR § 52.249-10.

      D.     The Navy Had the “Last Clear Chance” to Keep Liberty Bonds in
             Force or the Superior Knowledge to Protect Plaintiff

        In its response to the government’s motion to dismiss, plaintiff argues, under
two theories, that the Navy’s superior knowledge imposed a duty on the Navy to
protect the plaintiff. First, plaintiff alleges that it was left without valid bonds due
to the Navy’s refusal to demand that Liberty return the original bonds. See Doc. 10
at 18-19. Plaintiff claims that the Navy had the “last clear chance” to make such a
demand based on Liberty’s letter dated May 2, 2013. See Doc. 1, Exhibit F. In
that letter, Liberty confirmed the bond substitution and stated that it had cancelled
the original performance and payment bonds. See id. The portion of the letter that
plaintiff apparently believes forms the basis of its argument is the final sentence,
which reads: “Should you have any questions, comments or contrary
understandings regarding the contents of this letter, please advise us within seven
(7) days of the date of this letter,” or by May 9, 2013. Id. Plaintiff was copied on
this letter, and presumably received it at the same time the Navy did.

      According to the allegations in the complaint, a Chubb representative first
informed plaintiff that that PIC bonds were fraudulent on May 6, 2013. Doc. 1, ¶
15. PIC then informed the Navy of the fraud on May 7, 2013. See id.

       The last clear chance doctrine likely has a very limited application to cases
involving government contracts. The doctrine is a defense to contributory
negligence in which, typically, a negligent plaintiff must show elements similar to
the following:

      (1) that the plaintiff was in a position of danger caused by the
      negligence of both plaintiff and defendant; (2) that the plaintiff was
      oblivious to the danger, or unable to extricate herself from the position
      of danger; (3) that the defendant was aware, or by the exercise of

                                          15
      reasonable care should have been aware, of the plaintiff’s danger and
      of her oblivion to it or her inability to extricate herself from it; and (4)
      that the defendant, with means available to him, could have avoided
      injuring the plaintiff after becoming aware of the danger and the
      plaintiff’s inability to extricate herself from it, but failed to do so.
Johnson v. Washington Metro. Area Transit Auth., 98 F.3d 1423, 1425 (D.C. Cir.
1996) (citations omitted) (stating the test for the last clear chance doctrine under
the District of Columbia law). Even if plaintiff could establish that the doctrine
should be considered in cases such as the one at bar, it certainly cannot show that it
was oblivious to the danger of being left without a valid bond. In fact, based on
the allegations in the complaint, plaintiff knew of the impending danger before the
Navy did.

      Plaintiff then raises the theoretically similar argument that the Navy knew
that Eric Campbell and ISG had previously submitted fraudulent PIC bonds, and
therefore had a duty to save plaintiff from itself. See Doc. 10 at 19. It cites the
“established rule” that:

      while the [government] had no obligation to prevent (and, indeed, was
      free to precipitate) the avalanche that buried the contractor, it was not
      free, if it was aware of the impending avalanche and knew that [the
      contractor] was not, to stand aside and let the bidder be overwhelmed
      without a warning.

J.A. Jones Const. Co. v. U. S., 390 F.2d 886, 888 (Ct. Cl. 1968). Assuming,
however, that the Navy’s superior knowledge would have imposed on it the duty to
protect the plaintiff, plaintiff has failed to adequately allege facts to support this
theory. In the complaint, plaintiff alleges the existence of another lawsuit against
Eric Campbell and ISG for the same sort of behavior at issue here. See Doc. 1,
¶22. And that lawsuit does, in fact, mention the Navy. See Doc. 1, Exhibit O at 7-
10, 18.

      Plaintiff’s argument in its response to the motion to dismiss, however,
promises far too much. It claims that the lawsuit attached to the complaint
“indicates that the NAVY was fully aware as early as November, 2012 that Eric
Campbell, et al, was submitting fraudulent PIC BONDS to the NAVY.” See Doc.
10 at 19. It does no such thing. The complaint was filed by Federal Insurance
Company and Pacific Indemnity Company, and indicates no involvement or
relevant knowledge on the part of the Navy. See Doc. 1, Exhibit O. No certificate

                                          16
or proof of service demonstrates that a copy of the complaint was served on the
Navy. In short, the mere existence of a complaint that mentions the Navy, without
more, is facially insufficient to establish the required knowledge that might impose
a duty on the government to protect the plaintiff.

      E.     The Navy Should Be Equitably Estopped from Terminating the
             Contract

       In its response to the government’s motion to dismiss, plaintiff also alleges
that the government should be equitably estopped from terminating the contract for
default. See Doc. 10 at 28-30. In order to state a claim for equitable estoppel, the
plaintiff must allege the following elements:

      (1) misleading conduct, which may include not only statements and
      actions but silence and inaction, leading another to reasonably infer
      that rights will not be asserted against it; (2) reliance upon this
      conduct; and (3) due to this reliance, material prejudice if the delayed
      assertion of such rights is permitted.

Mabus v. Gen. Dynamics C4 Sys., Inc., 633 F.3d 1356, 1359 (Fed. Cir. 2011)
(quoting Lincoln Logs Ltd. v. Lincoln Pre-Cut Log Homes, Inc., 971 F.2d 732, 734
(Fed. Cir. 1992)). In addition, in order to invoke equitable estoppel against the
government, plaintiff must allege affirmative misconduct. See Rumsfeld v. United
Technologies Corp., 315 F.3d 1361, 1377 (Fed. Cir. 2003) (citing Zacharin v.
United States, 213 F.3d 1366, 1371 (Fed. Cir. 2000).

       Here, irrespective of whether plaintiff has alleged any other elements of
equitable estoppel, it has failed to allege any affirmative misconduct on the part of
the Navy. Plaintiff argues that the Navy’s “negligent investigation, enhanced by
the imputed knowledge of the NAS Pensacola PIC bonds, is the affirmative
misconduct.” See Doc. 10 at 29. As the court has already explained at length,
plaintiff has not stated a claim that the Navy has violated any duty it had to
plaintiff or any regulation that was meant for plaintiff’s benefit in performing its
investigation. And plaintiff has entirely failed to allege facts that support its
statement that the Navy had any knowledge Eric Campbell’s prior, allegedly
fraudulent, activity. Plaintiff’s equitable estoppel theory, therefore, fails.




                                         17
III.   CONCLUSION

       For the foregoing reasons, the government’s motion to dismiss, see Doc. 7,
is hereby GRANTED, and plaintiff’s motion for summary judgment, see Doc. 8, is
DISMISSED AS MOOT.

       SO ORDERED.

                                            s/ James F. Merow
                                            James F. Merow
                                            Senior Judge




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