The contract climate in which ARC conducted its’ work was authorized and captured in the United States Code, and implemented through Federal Acquisition Regulations[1] and clauses.[2] Historically, annual fair market prices for government unique supplies[3] had been set by the Committee for Purchase after a review of direct and indirect cost and compliance with requirements imposed by the Office of Management and Budget and captured in OMB Circulars A-122 and A-133. These price schedules, adjusted annually in response to economic conditions, were ‘fixed’ for an annual price period, with certain elements of price adjusting through the use of agreed methodologies long established in government. According to regulation, interim price changes can be negotiated when conditions in the marketplace markedly change and procedures for negotiation were clearly established by regulation and memorized by the Committee in Pricing Memorandum 2 (PR-2, 1998).[4]
After the hurricanes of 2004 (Rita, Ivan) and 2005 (Katrina), ARC-D entered in a protracted price change negotiation with the personnel in Farm Service Agency, a division of the United States Department of Agriculture.[5] An additional dispute was in process with the Department of Defense. The agency’s fixed-price contracts[6] were significantly and negatively affected by rapid increases in commodity and fuel prices after sales to China reduced crop reserves, followed by the destruction in the gulf coast states. The environment was much like we see in the economic conditions of the current US business climate. When the price change negotiation failed to resolve through the use of established procedures and within the necessary timelines, we requested the use of the alternative dispute resolution procedure known as “Impasse.”[7] The authority to use this procedure was delayed by management personnel within Nish’s products division until January of 2006, nearly seven months after the thirty day price change period had elapsed. On January 17, 2006 ARC filed an administrative dispute procedure with the Committee for Purchase. The dispute resolution process became unnecessarily prolonged when management staff at the Committee opted to unilaterally revise the criteria for the management of the dispute process itself during the course of our dispute process, extending the dispute resolution period from thirty days to one-hundred-twenty days without notifying the parties of the change in procedure.
There is evidence that this same management staff at the Committee allowed non-price issues to ‘muddy’ the dispute process and may have also been unduly influenced by the lobbying of commercial firms to reduce the size of the JWOD contracts within the Department of Agriculture. It has since been learned that the Federal Acquisition Regulations which provided a basis for fixed price contracting were suborned to the political machinations of a few highly placed political appointees and management staffers in the Department of Agriculture and the Committee for Purchase who circulated and used the allegations in the Oregonian articles as a basis for impeding the organization’s contractual price change rights under the FAR to pass thru direct costs (up or down) through adjustments to the fixed annual price, and whose misapplications of federal procurement laws have since been chronicled by both the General Accounting Office (GAO), the Office of Management and Budget (OMB)[8] and the Washington Post[9] in at least two other matters related to the events here in Cookeville and elsewhere in the JWOD community of affiliates.[10]
The failure of this dispute to resolve timely appears to have become, at least in part, the basis for our lender’s decision to call our lines of credit and seize agency assets for resale in preparation for their merger with Regions Bank (publicly announced May 26, 2006).[11] That commodity and fuel prices were escalating wildly is well documented by economic indexes. That the prolonged negotiation had caused a compromise of the agency’s compliance to the lender’s profitability covenants as of second quarter ending December 2005 (fiscal year July 1 thru June 30) is without question and was duly disclosed to the lender along with a complete explanation of the status of the dispute. That management had completely informed the lender’s personnel throughout the process is also a matter of record. When disclosed, the lender’s representative, Jim Armistead, made the following statement to executive management in response: “What kind of a bank would we be if we were only here for the good times?” We know the answer to that now.
It is also known that personnel within the lender’s organization had become aware of the controversy raised by the Oregonian’s widely reprinted allegations about the JWOD program which in turn, trickled down by implication to ARC. By January of 2006 the agency was conducting workforce reductions and stripping whole programs out of the organization in response to the protracted dispute. Wages and salaries were rapidly and markedly reduced beginning with executive management. The agency’s executive managers began to negotiate with outside firms for the restructuring and sale of the UGR-A contract to a commercial competitor.
Our operating line of credit was renewed by the lender in February and subsequently ‘called’ in April of 2006. Coupled with the continuing stress of what had become a protracted dispute with the government, our ability to continue to cashflow our significant contractual obligations was immediately impeded, causing our largest vendors to stop delivering supplies when they could not be assured of payment. Amsouth placed us into the ‘Special Assets Group.’ We proposed a workable financial reorganization plan to the lender to work us past the resolution of the dispute. Special Assets personnel declined to release our assets to another bank. We were told to direct our employees to continue to work. I notified our employees in writing that we had been ordered to work and I could not guarantee their wages. I called the City Council members into a meeting at our facility and advised them that we were under financial siege by our lender, had been told to continue to work without the use of our receivables and that I could not guarantee that we could pay our bills for utilities. I asked for their forebearance while we worked through the crisis. Every day became an ordeal.
It should be noted that up to the point that Amsouth called our line of credit, and while we were operating under the stress of months of dispute without resolution, we had not missed a single payment to our lender, and all vendors were receiving payments and employees were receiving wages. Special Assets forced a ‘workout’ group, Kraft Recovery Services, LLC (KRS), into our work advising us that they would determine whether this company was ‘worth saving,’ but the lender failed to disclose that they had already ‘written the organization down’ as part of a multi-million dollar reduction in their lending portfolio in preparation for their pending merger. The Advocacy and Resources Corporation was not the only local entity negatively affected by this merger.
KRS, presenting themselves as experienced in not for profit workout, insisted on the one hand that ‘they were here to help us’ and effectively manipulated our Board of volunteer directors to turn over the reins of the organization. On the other, KRS had failed to disclose their pre-existing arrangement with the secured lender to position (hence the term ‘workout’ in favor of the secured lender) the organization’s $18,000,000 worth of assets for a bankruptcy filing. Little did we know that the ninety day pre-petition period for a bankruptcy filing had been commenced, or that the secured creditor’s total concern was to insure their receipt of as much cash as possible paid down to their organization at the expense of creditors before the petition filing date. KRS immediately began to reduce the ability of agency personnel to conduct the tasks necessary to deliver on orders to the government knowing that it was highly unlikely that a bankruptcy judge would require payments made to the secured creditor during the prepetition period be “disgorged or reversed.”
Our Board, believing they were working in good faith with KRS toward a solution, worked to develop continued financing or move the lending facilities without success, while agency staff struggled to maintain orders and minimize disruption. While executive staff worked to reorganize internal resources and prioritized contractual obligations to reduce risk and maximize revenue, KRS examined revenue streams, costs, wages and salaries, and began the wholesale ‘slaughter’ of vendors and customers, ordering large amounts of supplies to convert inventory into receivables to pay down the secured lender at the expense of the creditors. I protested vigorously.
During the April interval, when cashflows reduced and large numbers of transactions stopped moving through the accounts, the executive management and Board were notified by the department manager for business operations that an account linking the MAS500[12] sales order module to the inventory module was found to have accumulated $4.2 million in unrelieved adjusting transactions from the beginning of the installation in 2003 through the current date. Despite multi-year independently contracted audits, bank audits, internal audits, and audits conducted by BCG,[13] the software reseller under contract to the ARC, this functional error in a dynamic account in which value increased and decreased daily, had not been identified from the installation of the new system. While not affecting receivables or expenditures, these numbers had, unbeknownst to all, affected the linking sales order purchase clearing account on the agency balance sheet from the beginning of the installation of the accounting system at the end of 2003, creating a percentage of error of .02% of approximately $174,000,000 total reported dollars for the three year period from the date of installation. Relieving these numbers to correct the balance sheet required either (1) deleting them through the ‘cost of goods account,’ washing the dollars out through net return, and restating the balance sheets in question or (2) taking the time to rebuild the transactions. Given time constraints, the agency’s auditors, board and the workout group elected to utilize the first option.
Whether this error occurred because staff was improperly trained by the software firm, misunderstood the requirements, or the system linkage was set up improperly, remains to me an unknown as I simply was not afforded the opportunity to determine the root cause. What is known is that this error, under the control of agency business operations staff and under continuous scrutiny by BCG from the installation date, did not result in the improper reporting of receivables, expenditures, payables, fixed assets, or net return, and the correction served to ‘double dip’ the (already) relieved values associated with the sales orders. [14] This error became the fuel for (1) a whisper campaign created by KRS intimating that funds under the control of executive staff were “missing” and conversely (2) the claim by Baker-Donelson Attorneys that we ‘cooked the books to obtain higher salaries and knowingly gave compensation consultants false information.’[15] Every party to the correction of this error knew those claims to be without merit.
On May 19, 2006,[16] bank representatives and KRS insisted to the volunteer Board that executive management no longer be able to make financial decisions on behalf of the agency. Accordingly, my access to financial information, vendor activities, and day to day decision making was removed. KRS extracted control of the agency from the Board of Directors from May 19th, and at that time, insisted on the termination of our legal counsel claiming ‘conflict of interest.’ They were replaced by Baker-Donelson,[17] a firm that later disclosures indicated was also under contract to Amsouth Bank, a clear conflict of interest. The merger of Amsouth and Regions was publicly announced on May 26, 2006.[18] The Department of Agriculture placed the agency contracts into a default status when the lender refused to authorize funds necessary to purchase supplies.[19] The lender refused to allow the agency to respond to DoD orders to ‘launch’ critical supplies in support of critical military programs. Nearly five million dollars worth of pending unfilled orders were in the system for June production. KRS ordered supplies from vendors knowing that orders would not be filled and increasing creditor debt would tip the agency’s internal financial relationships in support of the pending bankruptcy filing. I vigorously protested the harm to suppliers, many of which were very small businesses.
In an attempt to preserve and replace the jobs and revenue associated with the vegoil program, I successfully negotiated the sale of ARC’s UGR-A contract to a large commercial firm, Wornick Company. KRS came to the table as this negotiated sale was completing and took control of the negotiation, pressing unsuccessfully for a $1,000,000 “good faith” signing bonus. The sale of this contract relieved ARC of the cash outgo associated with the purchase of UGR-A supplies, was expected to create as much or more profit for the assembly program than had been previously attached to the vegoil set-aside, was expected to wipe out the year end deficit imposed by the prolonged dispute by the first of October 2006 and would have preserved forty jobs for persons with disabilities while mitigating financial damage to vendors by improving cashflows.[20]
On June 9, 2006 executive management was ordered to resign or be terminated, with the understanding that if we resigned, the organization would be allowed to ‘live’ by the lender for a ninety day period of reorganization and continue to carry on functions. Key executive personnel tendered their resignations, believing that the lender would honor the promise of continued operations and financial reorganization pending resolution of the government impasse. When I requested that vendors be notified that I was no longer responsible for purchase and payment decisions I was assured that KRS would take care of notification and remove my name from vendor accounts. They not only failed to execute notification, they placed my name on purchase orders to vendors who thought they were helping work us through a crisis and placed my name on blank guarantees for payment[21] through the use of my signature stamp and auto check signature well after May 19[22] and beyond my date of constructive termination on June 9. Days later, the entire management team was notified of pending termination. Kraft directed the Board of Directors to vacate activity on the government lawsuit.
During this period, contracts were abandoned, creditors were abused, and customers were harmed by failed deliveries. The agency’s relationship to its’ Board was terminated, and KRS extracted total control. A Chapter 11 liquidation bankruptcy was filed on June 30, 2006[23] by KRS, now openly acting on behalf of the secured creditor. To my knowledge, at no time was the Board of Directors notified of their right to other recourse. Two managers who had NO knowledge of the agency’s financial matters, the government dispute, or the intricacies of contract management were kept to support KRS with liquidation of agency assets.
[1] Almost since government contracting began, there has been a special process followed for disputes arising under a government contract between the Government and the contractor. Until 1978, this process was governed solely by a "Disputes" clause found in almost all government contracts. In 1978, this process was codified by the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§ 601, et seq . This process applies to all disputes arising under or relating to a government contract. As a waiver of sovereign immunity, courts and administrative boards of contract appeals construe the CDA narrowly. Accordingly, a contractor that has a dispute with the Government must be careful to follow the CDA's mandated procedures, or it risks waiving or otherwise losing its right to proceed against the agency. Administratively, the FAR implements the CDA through the standard "Disputes" clause, which defines the rights and duties of a contractor in dispute with the Government. Notably, a contractor must continue performance pending resolution of a dispute with the Government.
[2] C. " Default" Clause. The standard "Default" clause resembles the "termination for cause" term often used in the commercial marketplace. It permits the Government to terminate a contract for default where the contractor breaches the contract -- i.e., fails to (1) deliver the supplies or perform the services within the time specified in the contract; (2) make progress, thereby endangering performance of the contract; or (3) perform any other material provision in the contract. FAR 52.249-8(a)(1). If the Government intends to exercise its right to terminate under the second or third referenced circumstances, it must first notify the contractor in writing and allow the contractor to "cure" its deficient performance within ten days. FAR 52.249-8(a)(2). The standard "Default" clause, however, excuses the failure to perform where such failure arises from causes beyond the control and without the fault or negligence of the contractor (e.g., acts of God, fires, floods, strikes, and unusually severe weather).
[3] ‘Government unique’ refers to supplies and services for which there is no commercial marketplace and the specifications and requirements are defined by the government for reserved sales and government use only.
[4] www.abilityone.gov/library
[5] For more information see www.fsa.usda.gov
[6] Fixed price contracts are…
[7] www.abilityone.gov/library; FAR Section….
[8] GAO Report
[9] Washington Post
[10] Platte River Industries v. Committee for Purchase
[11] See Merger Announcement dated May 26, 2006.
[12] Sage Systems, Sales Order Module
[13] BCG, Ohio
[14] As Directors and Officers, certainly we should have known of this error, but we could not have, as multiple internal and external audits by many parties over a period of three years from 2004 – 2006 had not revealed the error in adjustments. Management reports set up by the software support company, BCG, did not detail the contents of this dynamic account on management reports. Further, in accordance with best practices for ensuring the efficacy of internal controls, the system was set up to deny the executive management, officers and directors physical access to the system. See restated balance sheets 2004, 2005, 2006.
[15] It’s hard to comprehend how ‘missing funds’ could be utilized to ‘inflate assets’ and become the basis for overstating asset figures for years prior to their very existence, all for the benefit of influencing larger salaries that were set up on non-revenue based figures, independently derived by consultants from industry standards as opposed to agency revenue. It’s even more amazing that a supposedly competent seated Bankruptcy Judge can’t recognize the oxymoronic nature of these claims.
[16] See letter from Don Calcote to Terri McRae May 19, 2006
[17] For more information about this law firm see www.bakerdonelson.com
[18] See merger announcement
[19] See Default letter Robert Buxton KCCO
[20] The first order placed from Wornick to ARC for July, 2006 of 100,000 units would have generated a $1,000,000 net return to ARC-D.
[21] See guarantee for payment issued to IWC, Cookeville, TN.
[22] See IWC lawsuit
[23] Filing document
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