PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT DOCTRINE
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 28th Floor New York, New York 10022
MEMORANDUM
March 15, 2025
TO: Douglas Carmichael, Partner, Calderwood & Harkness LLP Gregory Poole, General Counsel & VP Legal Affairs, Whitmore Aerospace LLC
FROM: Priya Anand, Partner, Calderwood & Harkness LLP
RE: Matter Status Summary and Recommended Next Steps — Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.)
This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation. It is intended solely for the use of the addressees and other authorized representatives of Whitmore Aerospace LLC. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Whitmore Aerospace LLC. Unauthorized disclosure may result in a waiver of applicable privileges.
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I. Purpose and Executive Summary
The purpose of this memorandum is to provide a comprehensive status update on the declaratory judgment action captioned Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.), and all related workstreams as of mid-March 2025. This memorandum also sets forth recommended next steps for client decision-making across the litigation, administrative, insurance, and financial reporting dimensions of this matter.
As discussed in greater detail below, the case has been dormant since March 17, 2023, when the Honorable Richard M. Brannigan, United States District Judge, entered an order staying the action pending conclusion of the Defense Contract Management Agency ("DCMA") administrative review of cost overruns identified under Prime Contract No. FA8620-19-C-0337. The stay order was entered on consent and has not been challenged by either party. In the intervening two years, the court has received six joint status reports from the parties, the most recent of which was filed on March 6, 2025. Each report has confirmed that the DCMA administrative review remains pending and that the Administrative Contracting Officer ("ACO"), Lt. Col. Sandra M. Vickers, has not yet issued a Contracting Officer's Final Decision ("COFD").
The underlying DCMA process has progressed through the field audit stage, which was completed by approximately mid-2024. The remaining step — headquarters legal review of the cost analysis — has been pending for approximately nine months with no indication from the DCMA or from our government contracts regulatory counsel, Ashford & Reeves LLP, that issuance of the COFD is imminent. This extended timeline, while not unusual in complex government contract cost-overrun disputes of this magnitude, requires ongoing vigilance and coordination.
On the insurance front, coverage remains uncertain. Meridian Surety & Insurance Group issued a reservation-of-rights letter on November 1, 2022, reserving its position on two grounds: the contractual-liability exclusion (Exclusion (b) of the CGL form) and the government-contract exclusion (Endorsement GC-04). Despite a follow-up request dated March 10, 2023, Meridian has not issued a definitive coverage determination. Meridian is not currently providing a defense or funding the declaratory judgment action.
From a financial perspective, cumulative legal fees incurred through March 31, 2025, total $487,320 — well below the originally estimated litigation budget of $1,800,000 to $2,400,000 through trial, reflecting the prolonged dormancy of the case. Whitmore Aerospace LLC's ("WAL") credit facility with Ridgeline National Bank, N.A. remains in compliance, with no event of default triggered, and WAL's auditors at Pinnacle Advisory Partners LLC have continued to classify the indemnity contingency as "reasonably possible" for ASC 450 purposes, with footnote disclosure but no accrual.
The key recommended next steps are as follows:
1. DCMA Administrative Review Monitoring. Continue regular coordination with Ashford & Reeves LLP (Harold Reeves, Natalie Cheng) to monitor the COFD timeline, and request that Ashford & Reeves make a formal inquiry to ACO Lt. Col. Vickers regarding the anticipated timeline for issuance of the COFD.
2. Insurance Coverage Follow-Up. Send a renewed written demand to Meridian Surety & Insurance Group (Rachel Underwood, Senior Claims Counsel) pressing for a definitive coverage determination. If a denial is received, perform a cost-benefit analysis of a potential coverage action.
3. Contingency Planning for Litigation Reactivation. Finalize the contingency reactivation plan outlined in Patrick Gallagher's February 20, 2025 memorandum, including identification and preliminary vetting of expert witnesses, preparation of a draft motion to lift the stay, and preparation of a refreshed litigation budget for post-reactivation phases.
4. Settlement Posture Assessment. Defer formal settlement overtures until after the COFD issues, at which point the factual predicate will be clarified and WAL's leverage can be more precisely assessed. Reassess settlement posture promptly once the COFD is in hand.
Each of these recommendations is discussed in detail below.
II. Case Identification and Procedural Background
A. Case Caption and Court
The case is captioned Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB, and is pending in the United States District Court for the Southern District of New York. The matter is assigned to the Honorable Richard M. Brannigan, United States District Judge, with the Honorable Allison P. Kurtz, United States Magistrate Judge, assigned as the referral magistrate for any discovery disputes and non-dispositive pretrial matters.
Calderwood & Harkness LLP represents the plaintiff, Whitmore Aerospace LLC ("WAL"). WAL is a Delaware limited liability company with its principal place of business in Stamford, Connecticut, and is a Tier 1 supplier specializing in advanced titanium structural assemblies and related airframe components for defense and aerospace applications.
The defendant, Hargrove-Dalton Defense Systems, Inc. ("HDDS"), is a Virginia corporation with its principal place of business in Arlington, Virginia, and serves as the prime contractor on the Advanced Tactical Airframe Program ("ATAP"). HDDS is represented by the law firm of Voss, Trager & Kendall LLP, located at 900 17th Street NW, Suite 800, Washington, D.C. 20006. The lead partner on the matter for HDDS is Leonard Trager, and the senior associate is Megan Forsythe. All communications with HDDS are conducted through Voss, Trager & Kendall.
B. Claims and Amount in Controversy
The Verified Complaint for Declaratory Judgment, filed on November 28, 2022, asserts a single count under the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202. WAL seeks a judicial declaration that Section 11.4 of the Teaming Agreement dated June 12, 2019, between HDDS (as Team Lead) and WAL (as Team Member), does not obligate WAL to indemnify HDDS for $14,726,583 in cost overruns identified in the DCMA Contracting Officer's Preliminary Determination ("COPD") dated August 1, 2022.
WAL's declaratory relief request is predicated on three specific theories:
(1) Section 11.4 Does Not Apply. WAL contends that Section 11.4 of the Teaming Agreement, by its terms, applies only to cost disallowances arising from a "claim by the U.S. Government that costs incurred by Team Member are unallowable, unreasonable, or otherwise subject to disallowance." The COPD is a preliminary determination and does not constitute a final government action or formal claim of unallowability. Accordingly, the indemnity obligation has not been triggered.
(2) WAL Did Not "Cause" the Overruns Under Section 11.4(b). Even if Section 11.4 applies, the indemnity obligation is limited to cost disallowances "caused by Team Member's acts or omissions." WAL maintains that it did not cause the WP-4 overruns. The titanium raw-material cost escalation was attributable to global market forces beyond WAL's control; the rework costs resulted from non-conforming machining tolerances traceable to defective engineering specifications furnished by HDDS; the idle-labor charges arose from schedule delays caused by HDDS's late delivery of government-furnished equipment; and the ECP implementation costs were directed by HDDS and the U.S. Government, not by any failure on WAL's part.
(3) The Demand Is Overbroad. HDDS's indemnification demand encompasses the full $14,726,583 COPD amount, but $1,909,142 of that amount — representing 12.97% of the total — relates to cost overruns on work packages other than WP-4. WAL performed work exclusively under WP-4 (titanium structural assemblies) and has no conceivable liability under the Teaming Agreement for overruns attributable to other work packages.
On January 13, 2023, HDDS filed its Answer and Counterclaim. The counterclaim seeks $14,726,583 in contractual indemnification under Section 11.4 of the Teaming Agreement, plus attorneys' fees under Section 11.6 of the Teaming Agreement, which provides that the indemnifying party shall reimburse the indemnitee for reasonable attorneys' fees and costs incurred in enforcing the indemnification obligation. WAL filed its Reply to Counterclaim on February 3, 2023, denying the material allegations and asserting affirmative defenses.
The maximum theoretical exposure under Section 11.5 of the Teaming Agreement is $88,992,000, which represents 120% of the WP-4 contract value of $74,160,000. However, the actual claimed amount is $14,726,583, or approximately 16.5% of the Section 11.5 cap. In addition, HDDS's attorneys' fees claim under Section 11.6 creates an incremental exposure that is not readily quantifiable at this stage but is a factor in the overall risk assessment.
C. Chronological Procedural History
The following is a chronological summary of the key events in this matter:
June 12, 2019: The Teaming Agreement is executed between HDDS (as Team Lead) and WAL (as Team Member) in connection with the ATAP program. The Teaming Agreement governs the parties' respective roles, responsibilities, and financial obligations in the performance of the ATAP prime contract. WAL is designated as the responsible party for Work Package 4 ("WP-4"), encompassing the design, manufacture, and delivery of titanium structural assemblies for the ATAP airframe.
September 1, 2019: Performance begins under Prime Contract No. FA8620-19-C-0337, awarded to HDDS by the U.S. Air Force. The contract is structured as a Cost-Plus-Incentive-Fee ("CPIF") contract with the following key financial parameters: target cost of $412,000,000; target fee of 8% ($32,960,000); ceiling price of $470,000,000; share ratio of 70/30 for cost overruns (government 70%, contractor 30%) and 60/40 for cost underruns (government 60%, contractor 40%).
August 1, 2022: DCMA issues the Contracting Officer's Preliminary Determination ("COPD"), identifying $14,726,583 in cost overruns on the ATAP program. Of this amount, $12,817,441 (87.03%) is attributed to WP-4 (titanium structural assemblies), and $1,909,142 (12.97%) is attributed to other work packages. The WP-4 overrun components identified in the COPD are as follows:
• Titanium raw-material cost escalation: approximately $4,200,000
• Rework due to non-conforming machining tolerances: approximately $5,100,000
• Schedule delays causing idle-labor charges: approximately $2,300,000
• Engineering Change Proposal ("ECP") implementation costs: approximately $1,200,000
September 9, 2022: HDDS sends a formal indemnification demand to WAL under Section 11.4 of the Teaming Agreement, demanding payment of $14,726,583 — the full COPD amount, including the $1,909,142 in non-WP-4 overruns for which WAL has no responsibility.
September 22, 2022: WAL tenders the HDDS indemnity demand to Meridian Surety & Insurance Group under the applicable D&O and CGL policies.
September 28, 2022: WAL delivers a Section 6.07(b) notice to Ridgeline National Bank, N.A. ("Ridgeline"), as administrative agent under WAL's $75,000,000 senior secured revolving credit facility, notifying Ridgeline of the HDDS indemnification demand.
September 30, 2022 and October 14, 2022: Senior executive negotiation meetings are held between Marcus J. Whitmore (Chief Executive Officer, WAL) and William Fong (Senior Vice President, Contracts & Procurement, HDDS) in an attempt to resolve the dispute. No resolution is reached at either meeting.
October 15, 2022: HDDS files a formal response and COFD request with DCMA under the Contract Disputes Act, 41 U.S.C. §§ 7101–7109, seeking a final determination on the cost overruns identified in the COPD.
October 21, 2022: WAL proposes mediation to HDDS pursuant to Section 18.3 of the Teaming Agreement. On October 28, 2022, HDDS declines, asserting that the mediation clause in Section 18.3 is permissive (using the word "may") rather than mandatory, and that HDDS does not wish to engage in mediation at this time.
November 1, 2022: Meridian Surety & Insurance Group issues a reservation-of-rights letter, acknowledging receipt of the tender but reserving its rights on two grounds: (1) the contractual-liability exclusion (Exclusion (b) of the CGL form), and (2) the government-contract exclusion (Endorsement GC-04).
November 1, 2022: WAL executes an engagement letter with Calderwood & Harkness LLP for representation in the anticipated declaratory judgment action and related matters.
November 28, 2022: WAL, through Calderwood & Harkness, files the Verified Complaint for Declaratory Judgment in the United States District Court for the Southern District of New York. The case is opened and assigned to Judge Brannigan.
December 5, 2022: WAL delivers a supplemental notice to Ridgeline National Bank informing Ridgeline of the filing of the declaratory judgment action.
January 13, 2023: HDDS, through Voss, Trager & Kendall LLP, files its Answer and Counterclaim.
February 3, 2023: WAL files its Reply to Counterclaim, denying the material allegations of the counterclaim and asserting affirmative defenses.
February 10, 2023: WAL files a Motion to Stay the action pending conclusion of the DCMA administrative review. The motion is supported by the Declaration of Catherine Soo-Hyun Park (Vice President, Government Contracts, WAL), attesting to the nature and expected timeline of the DCMA process, and the Declaration of Priya Anand, addressing the legal basis for the stay under the primary-jurisdiction doctrine.
February 24, 2023: The parties file a Joint Stipulation to Stay, reflecting the agreement of HDDS (through Voss, Trager & Kendall) that the stay is appropriate pending conclusion of the DCMA administrative review.
March 17, 2023: Judge Brannigan enters an order granting the stay. The court's order cites the primary-jurisdiction doctrine, judicial economy, and the absence of opposition as the bases for the stay. The order requires the parties to file joint status reports every 120 days updating the court on the status of the DCMA administrative review.
III. Current Status of the Stayed Litigation
A. The Stay Order
The stay was entered on March 17, 2023, by Judge Brannigan pursuant to the parties' Joint Stipulation to Stay. The order provides that all proceedings in the case — including discovery, motion practice, and all scheduling deadlines — are tolled during the pendency of the stay. The sole ongoing obligation imposed by the court is the requirement that the parties file joint status reports every 120 days, updating the court on the status of the DCMA administrative review.
The stay order further provides that either party may move to lift the stay upon issuance of the COFD or upon a showing that the DCMA administrative review will not be completed within a reasonable time. To date, no party has moved to lift the stay, and the joint status reports have consistently reflected the parties' agreement that the stay should remain in effect.
The stay has been beneficial to WAL in that it has avoided the expenditure of significant litigation costs during the pendency of the DCMA administrative review, which will establish the factual predicate for the parties' respective claims and defenses. As discussed in Section IX below, the COFD will likely have a material impact on the strength of WAL's defenses and the appropriate settlement posture.
B. Joint Status Reports Filed to Date
The parties have filed six joint status reports since the entry of the stay order, as follows:
The most recent report, the Sixth Joint Status Report, was filed on March 6, 2025, and is attached hereto as Attachment A. The next status report is due approximately July 2025 (120 days from the filing date of the Sixth Joint Status Report).
Each joint status report has been prepared collaboratively by Calderwood & Harkness and Voss, Trager & Kendall, with input from Ashford & Reeves LLP on the DCMA review status. The process has been smooth, and there have been no disputes between counsel regarding the content of the status reports. We note, however, that the reports are necessarily brief and formulaic, and that neither party has used the reports to signal any change in litigation posture or strategy.
C. Observations on Timing
Several observations regarding timing merit discussion with the client:
First, the DCMA review has been pending for approximately two years and seven months since the issuance of the COPD on August 1, 2022, and approximately two years and five months since HDDS filed its formal response and COFD request on October 15, 2022. While this extended timeline is not unprecedented in complex government contract cost-overrun disputes — particularly those involving CPIF contracts and multi-work-package programs — it does represent a longer-than-typical processing time.
Second, the field audit was completed by approximately mid-2024, as reported in the Fourth Joint Status Report filed on July 9, 2024. The remaining step in the DCMA process is the headquarters legal review of the cost analysis, which has been pending for approximately nine months. The duration of this review stage is not unusual in cases involving significant dollar amounts and complex cost-allocation issues, but the lack of any indication from DCMA regarding an anticipated timeline is noteworthy.
Third, the prime contract base period of performance ended on August 31, 2024. The contract includes two one-year option periods, which, if exercised, could extend performance through August 31, 2026. The relationship between the prime contract performance timeline and the DCMA administrative review timeline is relevant because certain cost data may still be in flux if option periods are exercised, which could in turn affect the COFD.
Fourth, and importantly, we have received no indication from Ashford & Reeves LLP — specifically, from Harold Reeves and Natalie Cheng, who monitor DCMA communications on WAL's behalf — that the issuance of the COFD is imminent. Similarly, DCMA has not provided a formal timeline or target date for completion of the headquarters legal review. This uncertainty is, regrettably, a characteristic feature of the DCMA administrative process over which neither party has meaningful control.
We recommend that Ashford & Reeves be directed to make a formal written inquiry to ACO Lt. Col. Vickers regarding the anticipated COFD timeline, as discussed further in Section XI.A below.
IV. Status of the DCMA Administrative Review
A. Background on the Administrative Process
The DCMA Contracting Officer's Preliminary Determination ("COPD") was issued on August 1, 2022, by ACO Lt. Col. Sandra M. Vickers, DCMA Northern Virginia. The COPD identified $14,726,583 in cost overruns on the ATAP program. The procuring contracting agency is the U.S. Air Force, Air Force Life Cycle Management Center ("AFLCMC"), Wright-Patterson Air Force Base, Ohio. The Program Executive Officer for the ATAP program is Col. Brian T. Matsuda.
As noted in Section II.C above, HDDS filed a formal response and COFD request on October 15, 2022, pursuant to the Contract Disputes Act, 41 U.S.C. §§ 7101–7109. The DCMA's administrative process for adjudicating cost-overrun disputes of this nature involves several stages: (1) field audit of the contractor's incurred costs and supporting documentation; (2) preparation of a cost analysis by the DCMA audit team; (3) headquarters legal review of the cost analysis by DCMA counsel; and (4) issuance of the COFD by the ACO. The COFD will set forth the ACO's final determination regarding the allowability, reasonableness, and allocability of the disputed costs, and will constitute the final government action triggering appeal rights under the Contract Disputes Act.
The significance of the COFD to this litigation cannot be overstated. The COFD will establish — at least from the government's perspective — which costs were properly incurred, which costs are subject to disallowance, and the factual basis for any disallowance determination. This factual predicate will directly inform the central issue in the declaratory judgment action: whether WAL's acts or omissions "caused" the cost overruns within the meaning of Section 11.4(b) of the Teaming Agreement.
B. Current Posture
As reported in the Fourth, Fifth, and Sixth Joint Status Reports, the DCMA field audit has been completed. The cost analysis prepared by the DCMA audit team is currently under internal legal review at DCMA headquarters. No COFD has been issued as of the filing of the Sixth Joint Status Report on March 6, 2025. ACO Lt. Col. Sandra M. Vickers has not provided any indication of when the COFD will be issued.
There are several possible outcomes of the COFD, each of which would have different implications for the litigation:
(a) COFD confirms COPD findings in full. The ACO sustains the $14,726,583 in cost overruns and attributes $12,817,441 to WP-4. This outcome would preserve the status quo and maintain the current risk profile for WAL, though WAL's causation defenses would remain viable.
(b) COFD reduces the WP-4 allocation. The ACO concludes that some or all of the WP-4 overruns were attributable to factors outside WAL's control — for example, the titanium raw-material cost escalation or HDDS-furnished specifications. This outcome would strengthen WAL's litigation posture and settlement leverage.
(c) COFD increases the WP-4 allocation or identifies additional overruns. Although less likely, the ACO could conclude that additional costs should be attributed to WP-4. This outcome would increase WAL's potential exposure and weaken its negotiating position.
(d) COFD finds no disallowable costs or reverses the COPD. The ACO concludes that the costs in question were allowable. This outcome — while possible — would effectively moot HDDS's indemnification demand, at least as to costs found allowable.
Until the COFD issues, the factual landscape remains uncertain, and we continue to recommend a defensive posture focused on monitoring and preparation rather than affirmative litigation steps.
C. Coordination with Ashford & Reeves LLP
Ashford & Reeves LLP serves as WAL's government contracts regulatory counsel and has been engaged to monitor and liaise with DCMA on all matters relating to the COPD, the COFD request, and the ongoing administrative review. The coordination protocol between Calderwood & Harkness and Ashford & Reeves was established by letter dated January 5, 2023, from Priya Anand to Harold Reeves, and delineates the respective responsibilities of each firm as follows:
• Ashford & Reeves LLP handles all regulatory and administrative matters relating to the DCMA review, including communications with ACO Lt. Col. Vickers and DCMA headquarters, review of government audit workpapers (to the extent made available), and advice on regulatory strategy under the Contract Disputes Act and FAR Part 42.
• Calderwood & Harkness LLP handles all aspects of the declaratory judgment litigation in the Southern District of New York, including pleadings, motion practice, discovery, trial preparation, and all communications with opposing counsel at Voss, Trager & Kendall LLP.
The two firms engage in regular information sharing regarding DCMA developments. The primary points of contact at Ashford & Reeves are Harold Reeves (Partner) and Natalie Cheng (Senior Associate). The most recent substantive update from Ashford & Reeves, received on approximately March 3, 2025, in advance of the filing of the Sixth Joint Status Report, confirmed that there is no indication from DCMA of imminent COFD issuance and that the cost analysis remains under headquarters legal review. Harold Reeves indicated that his firm has had informal discussions with the DCMA contracting office but has not received any timeline commitment.
We recommend, as discussed in Section XI.A below, that Ashford & Reeves be directed to make a more formal written inquiry to ACO Lt. Col. Vickers regarding the anticipated COFD timeline. While there is no mechanism to compel the ACO to provide a timeline, a formal inquiry may elicit useful information and will create a record that may be relevant if the parties need to consider alternative procedural strategies, such as seeking to lift the stay on the basis that the DCMA review will not be completed within a reasonable time.
V. Insurance Coverage Status
A. Policies at Issue
Two insurance policies issued by Meridian Surety & Insurance Group are potentially implicated by the HDDS indemnification demand:
(1) Directors & Officers Liability Policy. Policy No. MSI-DO-2022-07814; $10,000,000 aggregate limit; $250,000 retention. The current policy period is July 1, 2024 – July 1, 2025 (renewed annually). The D&O policy provides coverage for loss arising from claims made against directors and officers of WAL for wrongful acts in their capacities as such. The applicability of this policy to the HDDS indemnification demand is uncertain and depends on whether the demand is characterized as a claim against WAL's directors or officers for a wrongful act.
(2) Commercial General Liability Policy. Policy No. MSI-CGL-2021-33291; $25,000,000 aggregate limit; $500,000 self-insured retention. The CGL policy provides coverage for sums that WAL becomes legally obligated to pay as damages because of bodily injury or property damage. The applicability of the CGL policy to the HDDS indemnification demand is the subject of greater contention, as the demand relates to economic losses (cost overruns) rather than bodily injury or property damage in the traditional sense.
B. Tender and Reservation of Rights
WAL tendered the HDDS indemnification demand to Meridian on September 22, 2022, with a formal letter from Gregory Poole identifying the relevant policies and requesting that Meridian provide a defense and indemnification for the claim. The tender was made under both the D&O policy and the CGL policy.
On November 1, 2022, Meridian issued a reservation-of-rights letter, signed by Rachel Underwood, Senior Claims Counsel. The letter acknowledged receipt of WAL's tender and stated that Meridian was investigating the claim and reserving its rights with respect to the following coverage defenses:
(1) Contractual-Liability Exclusion (Exclusion (b), CGL Form). The CGL form contains a standard exclusion for "bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. Meridian reserved on the ground that the HDDS indemnification demand arises from WAL's assumed contractual obligation under Section 11.4 of the Teaming Agreement, not from an independent tort duty.
(2) Government-Contract Exclusion (Endorsement GC-04). The CGL policy includes Endorsement GC-04, which excludes coverage for claims arising out of or related to the performance of any contract with the United States government or any agency thereof. Meridian reserved on the ground that the HDDS indemnification demand arises out of or relates to the performance of Prime Contract FA8620-19-C-0337 with the U.S. Air Force.
Since issuance of the reservation-of-rights letter, Meridian has not provided a defense or funded any portion of the declaratory judgment action. All legal fees incurred in connection with this matter have been borne by WAL directly.
On March 10, 2023, Calderwood & Harkness sent a follow-up letter to Rachel Underwood requesting that Meridian issue a definitive coverage determination. The letter pointed out that nearly five months had elapsed since the reservation-of-rights letter, and that WAL was entitled under the terms of the policies and applicable New York law to a timely coverage decision. To date, no definitive coverage determination has been received from Meridian.
C. Assessment and Recommended Next Steps
Coverage under both policies remains uncertain, and the two coverage defenses identified by Meridian present significant barriers. The contractual-liability exclusion is a widely recognized and frequently enforced provision in CGL policies, and courts in New York and elsewhere have generally upheld its application to indemnity obligations arising under negotiated contracts. The government-contract exclusion (Endorsement GC-04) is a less common provision, but its plain language is broad and would appear, on its face, to encompass claims arising out of the performance of a government prime contract.
That said, there are potential arguments that the exclusions do not apply — for example, the "insured contract" exception to the contractual-liability exclusion may provide a basis for coverage if the Teaming Agreement qualifies as a "lease of premises" or otherwise falls within the enumerated exceptions. However, this argument is not strong on the facts presented.
We recommend the following next steps with respect to insurance coverage:
(1) Send a renewed written demand to Meridian (Rachel Underwood, Senior Claims Counsel) pressing for a definitive coverage determination. The letter should note the prolonged pendency of the reservation of rights (now over two years and four months), invoke WAL's rights under New York Insurance Law and the implied covenant of good faith and fair dealing, and request a response within 30 days.
(2) If Meridian issues a formal denial, perform a cost-benefit analysis of whether a coverage action is warranted. Factors to be considered include the likelihood of success on the coverage issues, the potential recovery (up to $25,000,000 under the CGL policy, subject to the self-insured retention), the cost of prosecuting a coverage action, and the strategic implications of a coverage dispute running concurrently with the declaratory judgment action.
(3) Ensure that annual policy renewals for both the D&O and CGL policies are maintained without prejudice to the pending tender. WAL should confirm with its insurance broker that the renewals do not contain any amendments, endorsements, or exclusions that could adversely affect the pending claim.
VI. Credit Facility Compliance
A. Facility Terms and Notification History
WAL maintains a $75,000,000 senior secured revolving credit facility pursuant to a Credit Agreement dated March 15, 2021, with Ridgeline National Bank, N.A. ("Ridgeline") as administrative agent. The lending syndicate includes Ridgeline and two additional lender participants. The facility is secured by substantially all of WAL's assets, including accounts receivable, inventory, equipment, and intellectual property.
Section 6.07(b) of the Credit Agreement requires WAL to provide written notice to the administrative agent of any litigation, proceeding, or claim against WAL that involves an amount in controversy exceeding $5,000,000, within 15 business days of WAL's becoming aware of such litigation, proceeding, or claim.
WAL complied with this notification requirement in a timely manner. An initial notice was delivered to David Kreutz, Senior Vice President, Defense & Aerospace Lending Division, Ridgeline National Bank, N.A., on September 28, 2022 — within 15 business days of the September 9, 2022 indemnification demand. The notice described the COPD, the HDDS indemnification demand, the amount at issue ($14,726,583), and WAL's position that the demand is without merit.
A supplemental notice was delivered to David Kreutz on December 5, 2022, after the filing of the Verified Complaint for Declaratory Judgment. The supplemental notice informed Ridgeline of the commencement of the declaratory judgment action, the case caption and docket number, and the nature of the relief sought by WAL.
B. Current Status
No event of default has been triggered under the Credit Agreement as a result of the HDDS indemnification demand or the declaratory judgment action. The credit facility is fully available, and as of the most recent draw report, $31,200,000 is currently drawn against the $75,000,000 facility. WAL continues to comply with all financial covenants under the Credit Agreement, including the minimum fixed charge coverage ratio, the maximum leverage ratio, and the minimum liquidity requirements.
No further notices are required under Section 6.07(b) at this time, as there has been no material change in the status of the litigation or the underlying claim. However, if the COFD is issued or the stay is lifted, a supplemental notice to Ridgeline may be advisable, particularly if the COFD materially changes the amount in controversy or the nature of the claims. We will evaluate the need for supplemental notice at that time and advise the client accordingly.
VII. Financial Statement Treatment
Pinnacle Advisory Partners LLC, WAL's independent auditor, completed its audit of WAL's fiscal year 2022 financial statements on April 14, 2023. The engagement partner is Thomas Brennan, CPA. As part of the FY 2022 audit, Pinnacle performed an analysis of the HDDS indemnification claim under Accounting Standards Codification ("ASC") 450, Contingencies.
Pinnacle's ASC 450 analysis concluded that the indemnity contingency should be classified as "reasonably possible" but not "probable." Under ASC 450-20-50, a contingent liability that is reasonably possible — meaning that the chance of loss is more than remote but less than likely — must be disclosed in the footnotes to the financial statements but does not require an accrual. Accordingly, the HDDS indemnification claim was disclosed in the footnotes to WAL's FY 2022 audited financial statements as a contingent liability of up to $14,700,000 (rounded). No accrual was recorded.
The same treatment was maintained in WAL's FY 2023 and FY 2024 audits. In each year, Pinnacle reviewed the status of the litigation, the DCMA administrative review, and WAL's legal position, and concluded that there had been no change in circumstances warranting a reassessment of the probability classification. Calderwood & Harkness provided audit-response letters to Pinnacle in connection with each annual audit, consistent with ABA Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information, describing the matter in appropriately guarded terms.
If the COFD issues and confirms or increases the WP-4 allocation, the probability assessment may need to be revisited with Pinnacle. In particular, if the COFD establishes a factual basis for concluding that WAL's acts or omissions caused all or a substantial portion of the WP-4 overruns, Pinnacle may determine that the contingency has become "probable" and that an accrual is required. We recommend coordinating with Thomas Brennan at Pinnacle promptly after the COFD issues to assess whether any change in financial statement treatment is warranted.
VIII. Fees and Budget Summary
A. Engagement Terms
Calderwood & Harkness was retained by WAL pursuant to an engagement letter dated November 1, 2022. The engagement provides for representation on an hourly basis at the following rates:
The original estimated budget for the matter through trial, prepared at the time of engagement, was $1,800,000 to $2,400,000. This estimate assumed a conventional litigation timeline of approximately 18 to 24 months from complaint through trial, and was predicated on the assumption that the case would proceed through fact discovery, expert discovery, dispositive motions, and trial without an extended stay.
B. Cumulative Fees Incurred Through March 31, 2025
As of March 31, 2025, cumulative legal fees incurred by Calderwood & Harkness in connection with this matter total $487,320. The phase breakdown is as follows:
A detailed fee summary by phase is attached hereto as Attachment B.
The most significant cost driver during the dormancy period has been the administrative-proceeding monitoring and coordination with Ashford & Reeves LLP, which accounts for $143,670 (29.5%) of total fees. This category includes partner and associate time spent reviewing DCMA audit workpapers shared by Ashford & Reeves, analyzing government audit findings for their implications on the litigation, participating in periodic coordination calls, and preparing internal analysis memoranda.
C. Budget Outlook
A revised budget memorandum was prepared by Douglas Carmichael and delivered to Gregory Poole on April 15, 2023, shortly after the entry of the stay order. The revised budget adjusted for anticipated dormancy-period monitoring costs of approximately $100,000 per year — an estimate that has proved reasonably accurate, as actual monitoring costs have averaged approximately $95,000 to $110,000 per year depending on the volume of DCMA activity and client communications.
The active litigation phases — including fact discovery, expert retention and discovery, dispositive motions (including potential summary judgment on the non-WP-4 overruns), pretrial preparation, and trial — remain budgeted at the originally estimated range of $1,300,000 to $1,900,000 for those phases, subject to adjustment for inflation (hourly rates have been held constant under the engagement letter) and any changes in scope resulting from the COFD. The total estimated cost of the matter through trial, incorporating both dormancy-period costs incurred to date and projected active-litigation costs, is therefore in the range of $1,800,000 to $2,400,000, consistent with the original estimate.
Upon reactivation of the litigation — which we anticipate will be triggered by the issuance of the COFD — it will be necessary to prepare a refreshed budget estimate that takes into account the specific findings of the COFD, the scope of remaining disputes, the anticipated discovery needs, and the expected timeline for dispositive motions and trial. We direct the client's attention to Patrick Gallagher's February 20, 2025 memorandum on litigation reactivation planning (attached hereto as Attachment C), which provides a preliminary assessment of the following post-reactivation workstreams:
• Anticipated fact discovery needs, including document requests, interrogatories, and depositions of key fact witnesses (estimated 8 to 12 depositions)
• Expert witness requirements, including retention of a damages expert and a government-contracts accounting expert
• Potential for early dispositive motion on the non-WP-4 overruns ($1,909,142), which presents a discrete legal issue suitable for summary judgment
• Estimated timeline from reactivation to trial readiness (approximately 12 to 18 months)
IX. WAL's Substantive Legal Position — Summary Assessment
A. Core Defenses
WAL's substantive legal position rests on three core defenses, each of which is summarized below. A more detailed analysis is contained in the litigation strategy memorandum prepared at the time of filing and updated periodically thereafter; this section provides a summary-level assessment for purposes of the current status review.
1. Causation Under Section 11.4(b)
The centerpiece of WAL's defense is the causation requirement in Section 11.4(b) of the Teaming Agreement. Section 11.4(b) provides, in pertinent part, that the Team Member (WAL) shall indemnify the Team Lead (HDDS) for any cost disallowances "caused by Team Member's acts or omissions in the performance of the work assigned to Team Member under this Agreement." WAL's position is that the WP-4 overruns were not caused by WAL's acts or omissions, for the following reasons:
(a) Titanium Raw-Material Cost Escalation (approximately $4,200,000). The escalation in titanium raw-material costs during the performance period was attributable to macroeconomic and geopolitical factors — including global supply chain disruptions, trade sanctions, and pandemic-related market dislocations — that were entirely outside WAL's control. WAL has a strong argument that this cost escalation constitutes a force-majeure event or, at a minimum, was not "caused by" WAL's acts or omissions. Moreover, the Teaming Agreement does not contain a fixed-price commitment by WAL for titanium raw materials; WAL performed its WP-4 obligations on a cost-reimbursable basis consistent with the CPIF structure of the prime contract.
(b) Rework Due to Non-Conforming Machining Tolerances (approximately $5,100,000). WAL contends that the non-conforming machining tolerances that necessitated rework were the result of defective engineering specifications furnished by HDDS as the prime contractor. Under the Teaming Agreement, HDDS was responsible for providing WAL with approved engineering drawings and technical data packages. WAL performed its machining operations in accordance with the specifications provided. If the specifications were defective, the resulting rework costs were caused by HDDS's acts or omissions, not WAL's. This is WAL's strongest causation argument and is supported by contemporaneous inspection reports and non-conformance records.
(c) Idle-Labor Charges Due to Schedule Delays (approximately $2,300,000). WAL contends that the idle-labor charges resulted from schedule delays caused by HDDS's late delivery of government-furnished equipment ("GFE") that was necessary for WAL to begin certain phases of WP-4 work. HDDS, as the prime contractor, was responsible for coordinating and delivering GFE to subcontractors in accordance with the integrated master schedule. When GFE deliveries were delayed — in some cases by several months — WAL was unable to proceed with scheduled production activities, resulting in idle-labor charges that were beyond WAL's control.
(d) ECP Implementation Costs (approximately $1,200,000). The Engineering Change Proposals at issue were initiated by HDDS and/or the U.S. Government and were directed to WAL for implementation. WAL contends that it had no discretion to decline or modify the ECPs and that the resulting implementation costs were not "caused by" WAL's acts or omissions but were the natural and foreseeable consequence of government-directed changes to the contract requirements.
2. Overbreadth of Demand
HDDS's indemnification demand encompasses the full $14,726,583 COPD amount, including $1,909,142 (12.97%) in cost overruns attributable to work packages other than WP-4. WAL performed work exclusively under WP-4 (titanium structural assemblies) pursuant to the Teaming Agreement. The non-WP-4 overruns relate to work packages performed by HDDS itself or by other subcontractors. There is no basis under the Teaming Agreement — or under any other theory — for requiring WAL to indemnify HDDS for cost overruns on work packages that WAL did not perform and over which WAL had no control or responsibility.
This defense is strong and is likely amenable to early dispositive treatment on a motion for partial summary judgment. Even if HDDS's causation arguments prevail with respect to some or all of the WP-4 overruns, WAL should prevail on the overbreadth defense as to the $1,909,142 in non-WP-4 overruns. As noted in Patrick Gallagher's February 20, 2025 memorandum, we recommend pursuing an early motion for partial summary judgment on this issue upon reactivation of the litigation.
3. Prematurity
WAL also contends that the indemnification obligation under Section 11.4(b) has not been triggered because the COPD is a preliminary determination, not a final government action. Section 11.4(b) refers to indemnification for costs that are the subject of a "claim by the U.S. Government that costs … are unallowable, unreasonable, or otherwise subject to disallowance." WAL's position is that the COPD — as a preliminary, non-binding determination — does not constitute a "claim" within the meaning of Section 11.4(b), and that the indemnity obligation is not triggered until the ACO issues a COFD or the government takes final action to disallow costs. This argument is logically sound and is consistent with the general principle that preliminary agency determinations are not final actions. However, we note that this defense may become moot once the COFD issues, as the COFD will constitute a final government action that will likely satisfy the triggering language of Section 11.4(b).
B. Risk Assessment
WAL's defenses are strong, particularly on the issues of causation and overbreadth. The causation defense is fact-intensive and will require expert testimony and substantial documentary evidence, but the underlying factual record — including contemporaneous inspection reports, non-conformance records, schedule correspondence, and GFE delivery documentation — supports WAL's position. The overbreadth defense is largely a matter of contract interpretation and is well-suited to summary judgment.
That said, the following risk factors must be acknowledged:
• The COFD could strengthen or weaken WAL's position depending on its findings and cost allocation. If the COFD attributes all WP-4 overruns to WAL's performance deficiencies, WAL's causation defense will face a more challenging factual landscape, even though the COFD would not be binding on the court in the declaratory judgment action.
• HDDS's counterclaim includes a request for attorneys' fees under Section 11.6 of the Teaming Agreement. If HDDS prevails on its counterclaim, WAL could be liable for HDDS's attorneys' fees and costs in addition to the indemnification amount. This fee-shifting provision creates an incremental exposure that should be factored into the overall risk assessment.
• The Section 11.5 cap of $88,992,000 (120% of the WP-4 value of $74,160,000) limits WAL's maximum theoretical exposure but is well above the current demand of $14,726,583. The cap is relevant primarily as a benchmark for assessing worst-case scenarios.
• The Teaming Agreement is governed by New York law (Section 18.1). New York courts generally enforce negotiated indemnity clauses in commercial contracts between sophisticated parties, but they require clear and unambiguous language and will construe causation requirements strictly. The "caused by" language in Section 11.4(b) is relatively specific, which favors WAL's position that the indemnity is limited to overruns attributable to WAL's own acts or omissions.
Overall, we assess WAL's litigation position as strong, with a reasonable probability of prevailing on one or more of its declaratory relief theories. However, litigation risk is inherent, and the COFD will materially affect the risk calculus. We recommend deferring a formal settlement analysis until the COFD issues.
X. Settlement Considerations
The question of settlement posture was last addressed in Priya Anand's email analysis dated August 8, 2024, which recommended deferral of any formal settlement overtures until after issuance of the COFD. That recommendation remains in effect and is, in our judgment, the correct strategic course for the following reasons:
First, the COFD will clarify the factual predicate underlying the parties' respective claims. If the COFD reduces the WP-4 allocation, eliminates certain categories of overruns, or attributes overruns to factors outside WAL's control, WAL's settlement leverage will be substantially enhanced. Conversely, if the COFD confirms the full WP-4 allocation and attributes the overruns to WAL's performance deficiencies, WAL will need to recalibrate its settlement posture accordingly.
Second, initiating settlement overtures before the COFD issues could be perceived by HDDS as a sign of weakness and could result in settlement demands that reflect HDDS's current full-demand position ($14,726,583 plus attorneys' fees) rather than a realistic assessment of WAL's defenses. Timing settlement discussions to coincide with the COFD issuance will ensure that both parties are negotiating against a common factual backdrop.
Third, the risk-adjusted value of WAL's defenses — taking into account the strength of the causation arguments, the overbreadth defense on the $1,909,142 in non-WP-4 overruns, and the prematurity argument — suggests that the case has meaningful settlement value well below the $14,726,583 demand. A preliminary, non-binding settlement range analysis, informed by the current factual record, suggests that a reasonable settlement outcome — if settlement is pursued after the COFD — could be in the range of $3,000,000 to $7,000,000, depending on the COFD findings and the parties' respective litigation risk tolerances. However, this range is inherently speculative at this stage and will need to be refined once the COFD issues.
We recommend reassessing settlement posture promptly once the COFD issues, and convening a settlement strategy session with the client team (Marcus J. Whitmore, Elaine Whitmore, Gregory Poole, and Catherine Soo-Hyun Park) at that time.
XI. Recommended Next Steps
Based on the foregoing analysis, we recommend the following next steps for client consideration and approval:
A. DCMA Administrative Review Monitoring
1. Continue Regular Coordination with Ashford & Reeves LLP. Calderwood & Harkness will continue its regular coordination protocol with Ashford & Reeves (Harold Reeves, Natalie Cheng) to monitor the COFD timeline and DCMA developments. Periodic coordination calls should continue on approximately a monthly basis, with supplemental calls as warranted by developments.
2. Formal Inquiry to ACO Lt. Col. Vickers. We recommend that Ashford & Reeves be directed to make a formal written inquiry to ACO Lt. Col. Sandra M. Vickers, DCMA Northern Virginia, regarding the anticipated timeline for completion of the headquarters legal review and issuance of the COFD. While there is no mechanism to compel the ACO to provide a timeline, a formal inquiry will demonstrate WAL's continued engagement, may elicit useful information, and will create a record that could be relevant if the parties need to consider alternative procedural strategies — such as seeking to lift the stay on the basis that the DCMA review will not be completed within a reasonable time.
3. Seventh Joint Status Report. Calderwood & Harkness will prepare and file the seventh joint status report in coordination with Voss, Trager & Kendall LLP, on or about July 2025 (120 days from the filing of the Sixth Joint Status Report on March 6, 2025).
B. Insurance Follow-Up
1. Renewed Written Demand to Meridian. Calderwood & Harkness will prepare and send a renewed written demand to Meridian Surety & Insurance Group (Rachel Underwood, Senior Claims Counsel) pressing for a definitive coverage determination. The letter will note the prolonged pendency of the reservation of rights (now exceeding two years and four months), invoke WAL's rights under New York Insurance Law and the implied covenant of good faith and fair dealing, and request a response within 30 days.
2. Coverage Action Cost-Benefit Analysis. If Meridian issues a formal denial of coverage, Calderwood & Harkness will prepare a cost-benefit analysis of a potential coverage action, evaluating the likelihood of success on the coverage issues, the potential recovery, the cost of prosecution, and the strategic implications of concurrent litigation.
3. Policy Renewal Monitoring. WAL should ensure that annual policy renewals for both the D&O policy (Policy No. MSI-DO-2022-07814) and the CGL policy (Policy No. MSI-CGL-2021-33291) are maintained without prejudice to the pending tender. WAL's insurance broker should be instructed to review all renewal terms, amendments, and endorsements and to flag any provisions that could adversely affect WAL's rights with respect to the pending claim.
C. Litigation Reactivation Planning
1. Finalize Contingency Reactivation Plan. Calderwood & Harkness will finalize the contingency reactivation plan outlined in Patrick Gallagher's February 20, 2025 memorandum (Attachment C). The reactivation plan addresses anticipated discovery needs, expert witness requirements, potential for early dispositive motion on the non-WP-4 overruns, and estimated timeline from reactivation to trial readiness.
2. Expert Witness Identification and Vetting. Calderwood & Harkness will identify and begin preliminary vetting of expert witnesses in two categories: (a) a damages expert with experience in government contract cost analysis, CPIF contract structures, and defense industry cost accounting; and (b) a government-contracts accounting expert with experience in FAR cost principles, CAS compliance, and DCMA audit processes. Preliminary identification and vetting can be conducted during the dormancy period without incurring significant costs and will position WAL to retain experts promptly upon reactivation.
3. Draft Motion to Lift Stay. Calderwood & Harkness will prepare a draft motion to lift the stay, to be filed promptly after the COFD issues. The motion will argue that the basis for the stay (the pendency of the DCMA administrative review) has been resolved and that the case should be returned to the active docket for scheduling and case management.
4. discovery Plan and Document Review Protocol. Calderwood & Harkness will refresh the discovery plan and document review protocol that was initially prepared in anticipation of discovery prior to the stay. The discovery plan will be updated to reflect any developments in the intervening two years, including changes in WAL's document management systems, personnel changes, and new information obtained through the DCMA process. The litigation hold should also be reviewed and updated as needed to ensure that all relevant documents and electronically stored information continue to be preserved.
5. Early Dispositive Motion on Non-WP-4 Overruns. Calderwood & Harkness will assess the potential for an early motion for partial summary judgment on the non-WP-4 overruns ($1,909,142). This issue presents a discrete legal question that is amenable to summary adjudication and, if successful, would reduce WAL's exposure by nearly 13% and narrow the scope of the remaining dispute.
6. Refreshed Litigation Budget. Calderwood & Harkness will prepare a refreshed litigation budget for the post-reactivation phases of the case once the COFD issues and the scope of remaining disputes is known. The refreshed budget will include estimated costs for fact discovery, expert discovery, dispositive motions, pretrial preparation, and trial.
D. Lender and Financial Reporting
1. Supplemental Notice to Ridgeline. Calderwood & Harkness will evaluate whether a supplemental notice to Ridgeline National Bank, N.A. (David Kreutz, SVP) is advisable upon issuance of the COFD or lifting of the stay. A supplemental notice may be prudent if the COFD materially changes the amount in controversy or the nature of the claims, and will ensure continued compliance with Section 6.07(b) of the Credit Agreement.
2. ASC 450 Reassessment. Calderwood & Harkness will coordinate with Pinnacle Advisory Partners LLC (Thomas Brennan, CPA, Engagement Partner) on a reassessment of the ASC 450 probability classification once the COFD issues. If the COFD confirms or increases the WP-4 allocation, the probability assessment may need to be revised from "reasonably possible" to "probable," which would require WAL to record an accrual on its financial statements. This determination will require close collaboration between Calderwood & Harkness, Pinnacle, and WAL's internal finance team (Elaine Whitmore, CFO).
3. Continuation of Current Financial Statement Treatment. Pending any material change in circumstances — including but not limited to the issuance of the COFD, a definitive insurance coverage determination, or a settlement — WAL should continue the current financial statement treatment (reasonably possible / footnote disclosure, no accrual), which is consistent with the advice of both Calderwood & Harkness and Pinnacle Advisory Partners.
E. Client Communication
1. Strategy Call. We recommend scheduling a call with Marcus J. Whitmore (CEO), Elaine Whitmore (CFO), Gregory Poole (General Counsel), and Catherine Soo-Hyun Park (VP, Government Contracts) to discuss this memorandum, review the recommended next steps, and confirm strategic direction. Calderwood & Harkness is available to conduct this call at the client's convenience during the last two weeks of March 2025.
2. Quarterly Update. Calderwood & Harkness will provide its next quarterly status update to the client after the filing of the seventh joint status report, anticipated for approximately July 2025. Ad hoc updates will be provided as warranted by material developments, including any communication from DCMA regarding the COFD timeline or any response from Meridian regarding the coverage determination.
XII. Conclusion
This matter remains dormant as a result of the stay entered by Judge Brannigan on March 17, 2023, but it requires continued active monitoring on multiple fronts. The four primary workstreams — the DCMA administrative review, insurance coverage, credit facility compliance, and financial reporting — each demand ongoing attention and coordination.
The issuance of the COFD by ACO Lt. Col. Sandra M. Vickers will be the pivotal event in this matter. The COFD will establish the factual predicate for the parties' respective claims and defenses, trigger reactivation of the litigation, and necessitate strategic decisions on settlement posture, motion practice, and trial preparation. Until the COFD issues, the prudent course is to continue monitoring, maintain litigation readiness, and preserve WAL's options.
Calderwood & Harkness stands ready to move promptly and decisively once the COFD issues. We have a well-developed understanding of the factual and legal issues in this case, and the contingency reactivation plan prepared by Patrick Gallagher will enable us to resume active litigation with minimal delay.
We respectfully request the client's input on any of the foregoing recommended next steps. We are available to discuss this memorandum and any related matters at the client's convenience.