letter-ridgeline-section-607b-notice.docx

1019-00005 · Whitmore Aerospace LLC · Lender Notification

letter-ridgeline-section-607b-notice.docx DOCUMENT Litigation

19 / 35 ← → ✕

CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 841-7000 Facsimile: (212) 841-7001 www.calderwoodharkness.com

September 28, 2022

Via Sundial Data Systems and Email (david.kreutz@ridgelinenational.com)

David Kreutz Senior Vice President, Defense & Aerospace Lending Ridgeline National Bank, N.A. 300 Wilson Boulevard Arlington, Virginia 22201

Re: Whitmore Aerospace LLC — Notice Pursuant to Section 6.07(b) of Senior Secured Revolving Credit Agreement dated March 15, 2021 Borrower: Whitmore Aerospace LLC (EIN: 54-2198437)

Dear Mr. Kreutz:

I. Purpose and Authority

Calderwood & Harkness LLP represents Whitmore Aerospace LLC ("WAL" or the "Borrower"), a Virginia limited liability company with its principal place of business at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. We are writing to you on behalf of WAL in WAL's capacity as Borrower under that certain Senior Secured Revolving Credit Agreement dated as of March 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among WAL, as borrower, Ridgeline National Bank, N.A. ("Ridgeline" or the "Administrative Agent"), as administrative agent, and the several lenders from time to time party thereto (collectively, the "Lenders"). As you are aware, the Credit Agreement provides for a $75,000,000 senior secured revolving credit facility (the "Facility") for the benefit of the Borrower. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.

The purpose of this letter is to provide formal written notice to the Administrative Agent pursuant to Section 6.07(b) of the Credit Agreement. Section 6.07(b) requires, among other things, that the Borrower deliver written notice to the Administrative Agent within fifteen (15) business days after becoming aware of any litigation, arbitration, investigation, claim, proceeding, or governmental action against or involving the Borrower or any of its Subsidiaries in which the amount in controversy exceeds $5,000,000 (or its equivalent in any other currency), or that could reasonably be expected to have a Material Adverse Effect. WAL is providing this notice in full compliance with that affirmative covenant. The facts and circumstances giving rise to this notice are described in detail below.

II. Background — The Underlying Government Contract and Teaming Agreement

To provide context for the matter described herein, it is necessary to summarize the contractual relationships at issue.

WAL serves as a subcontractor and teaming partner to Hargrove-Dalton Defense Systems, Inc. ("HDDS"), a Delaware corporation headquartered at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is the prime contractor under Prime Contract No. FA8620-19-C-0337 awarded by the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), Wright-Patterson Air Force Base, Ohio, for the Advanced Tactical Airframe Program (the "ATAP" or the "Program"). The ATAP is a major defense acquisition program focused on the design, development, and initial production of next-generation tactical airframe structural components for integration into advanced tactical aircraft platforms.

The prime contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following material financial parameters:

Pursuant to a Teaming Agreement dated June 12, 2019 (the "Teaming Agreement"), by and between HDDS, as Team Lead, and WAL, as Team Member, WAL is responsible for the fabrication of titanium structural assemblies, specifically including wing-box substructure components, center fuselage longerons, and bulkhead fittings. This scope of work is designated as Work Package 4 ("WP-4") under the prime contract's work breakdown structure. WAL's allocated share of the prime contract target cost is approximately eighteen percent (18%), equating to approximately $74,160,000 of the $412,000,000 total target cost. The Teaming Agreement is governed by the laws of the State of New York, as specified in Section 18.1 thereof.

WAL's performance under WP-4 is a significant component of WAL's overall revenue base and has been a material contributor to WAL's operations since the commencement of the ATAP program. The work performed by WAL under WP-4 involves advanced titanium machining and structural assembly processes conducted at WAL's manufacturing facilities in Chantilly, Virginia.

III. Description of the DCMA Cost-Overrun Finding

On August 1, 2022, the Defense Contract Management Agency ("DCMA"), acting through Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, issued a Contracting Officer's Preliminary Determination (the "COPD") under Prime Contract No. FA8620-19-C-0337. The COPD was issued in the context of a routine incurred-cost and program-performance review conducted by DCMA and the Defense Contract Audit Agency ("DCAA") with respect to the ATAP program.

The COPD identified aggregate cost overruns on the ATAP program totaling $14,726,583. Of this total, the DCMA attributed $12,817,441 — approximately 87.03% of the total identified overruns — to WP-4, the titanium structural assembly work package performed by WAL. The remaining $1,909,142, representing approximately 12.97% of the total overruns, was attributed to other work packages under the prime contract that are not within WAL's scope of performance.

The narrative portion of the COPD identifies the following root causes for the cost overruns attributed to WP-4:

(a) Titanium Raw-Material Cost Escalation — Approximately $4,200,000. The COPD references significant increases in titanium sponge and mill-product pricing during the 2020–2022 timeframe, driven by global supply-chain disruptions and commodity-market volatility. WAL notes that these price escalations were the result of macroeconomic forces beyond WAL's control, including supply-chain impacts attributable to the COVID-19 pandemic and geopolitical disruptions affecting titanium-producing regions.

(b) Rework Due to Non-Conforming Machining Tolerances — Approximately $5,100,000. The COPD identifies costs associated with the rework and re-machining of certain titanium structural components that did not initially meet engineering specification tolerances. As discussed further in Section V below, WAL's position is that a substantial portion of these rework costs resulted from engineering specification deficiencies in HDDS-supplied drawings and technical data packages, rather than from any manufacturing error on the part of WAL.

(c) Schedule Delays Causing Idle-Labor Charges — Approximately $2,300,000. The COPD attributes idle-labor charges to schedule disruptions that resulted in periods during which WAL's production workforce was unable to perform planned fabrication activities. WAL's position is that these schedule delays were caused primarily by HDDS's late delivery of government-furnished equipment ("GFE") that was required for WAL's production processes, as well as by HDDS's delayed issuance of work authorizations.

(d) Engineering Change Proposal Implementation Costs — Approximately $1,200,000. The COPD identifies costs associated with the implementation of engineering change proposals ("ECPs") directed by HDDS and the government during the performance period. WAL notes that these ECPs were directed changes that WAL was contractually obligated to implement and that the resulting costs should be separately recoverable.

It is important to emphasize that the COPD is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer, no final decision has been issued, and the administrative review process at DCMA remains ongoing. The COPD expressly states that it is subject to further review, audit, and potential revision, and it invites the prime contractor's response before any final determination is made. Accordingly, the ultimate resolution of the government's cost-overrun determination remains pending, and the final amounts, if any, that may be disallowed are not yet known.

IV. Description of the HDDS Indemnification Demand

Notwithstanding the preliminary nature of the COPD, on September 9, 2022, HDDS transmitted to WAL a formal indemnification demand letter (the "Demand Letter") asserting that WAL is obligated to indemnify and hold harmless HDDS for the full amount of the cost overruns identified in the COPD — i.e., the entire $14,726,583 — pursuant to Section 11.4 of the Teaming Agreement.

Section 11.4(b) of the Teaming Agreement provides, in relevant part, as follows:

"The Team Member shall indemnify, defend, and hold harmless the Team Lead and its officers, directors, employees, and agents from and against any and all claims, demands, losses, costs, damages, or expenses (including reasonable attorneys' fees) arising out of or relating to any claim by the Government that costs incurred under the Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance under applicable Federal Acquisition Regulation cost principles, to the extent such claim is caused by Team Member's acts or omissions."

(Emphasis added.) The italicized causation language is of critical importance and is addressed further below.

Additionally, Section 11.5 of the Teaming Agreement provides an aggregate cap on the Team Member's indemnification liability, as follows:

"Notwithstanding anything to the contrary in this Agreement, the Team Member's aggregate liability under this Article XI shall not exceed one hundred twenty percent (120%) of the value of the Team Member's Work Package."

Applying the Section 11.5 cap, WAL's maximum aggregate indemnification exposure under the Teaming Agreement is $88,992,000 (calculated as $74,160,000 × 1.20). HDDS's current demand of $14,726,583 falls below this contractual cap but substantially exceeds the $5,000,000 reporting threshold specified in Section 6.07(b) of the Credit Agreement, thereby triggering the Borrower's notice obligation.

WAL received the Demand Letter on September 9, 2022. This notice is being delivered on September 28, 2022, which is within the fifteen (15) business-day notice period prescribed by Section 6.07(b) of the Credit Agreement.

V. WAL's Position Regarding the Demand

WAL disputes the HDDS indemnification demand in its entirety and believes it has meritorious defenses on multiple grounds. WAL's principal legal and factual positions are summarized below.

First, Section 11.4(b) of the Teaming Agreement contains an express causation requirement. The indemnification obligation applies only "to the extent such claim is caused by Team Member's acts or omissions." WAL's position is that the cost overruns identified in the COPD were not caused by WAL's acts or omissions, but rather by factors attributable to HDDS, the government, and external market forces, including specifically:

(i) Titanium price escalation: The approximately $4,200,000 in raw-material cost overruns resulted from global market forces and supply-chain disruptions — circumstances that constitute force majeure events or, at minimum, that are not attributable to WAL's acts or omissions. WAL procured titanium materials through commercially reasonable procurement practices and in accordance with applicable Federal Acquisition Regulation ("FAR") cost principles.

(ii) HDDS-supplied engineering specifications: The approximately $5,100,000 in rework costs arose primarily from deficiencies, ambiguities, and errors in the engineering drawings and technical data packages provided to WAL by HDDS. WAL manufactured components in conformity with the specifications as furnished and should not bear responsibility for rework necessitated by HDDS's specification errors.

(iii) HDDS's late delivery of government-furnished equipment: The approximately $2,300,000 in idle-labor charges resulted from schedule disruptions caused by HDDS's failure to deliver GFE and work authorizations in accordance with the integrated master schedule. WAL maintained its workforce in a state of readiness in compliance with contractual requirements, and the idle-labor costs were a direct and foreseeable consequence of HDDS's delays.

(iv) Directed engineering changes: The approximately $1,200,000 in ECP implementation costs resulted from engineering changes directed by HDDS and the government, which WAL was contractually obligated to implement. These are properly characterized as equitable adjustment costs, not indemnifiable cost overruns.

Second, HDDS's demand improperly seeks indemnification for $1,909,142 in cost overruns that were attributed by DCMA to work packages other than WP-4. WAL has no conceivable indemnification liability under the Teaming Agreement for overruns associated with work packages that are outside WAL's designated scope of performance. The inclusion of these non-WP-4 overruns in the Demand Letter is wholly unsupported by the terms of the Teaming Agreement and is, in WAL's view, without any contractual or factual basis.

Third, the DCMA finding is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer, and no Contracting Officer's Final Decision has been issued. WAL's position is that the indemnification trigger under Section 11.4(b) requires, at a minimum, a formal government claim that costs are "unallowable, unreasonable, or otherwise subject to disallowance." A preliminary determination that is still subject to review, audit, response, and potential revision does not, in WAL's view, satisfy the contractual prerequisites for the indemnification obligation to arise. HDDS's demand is therefore premature.

WAL's Chief Executive Officer, Marcus J. Whitmore, and HDDS's Senior Vice President, Contracts & Procurement, William Fong, have agreed to meet on September 30, 2022 to discuss the dispute at the senior executive level. This meeting, which is scheduled to take place at HDDS's offices in Bethesda, Maryland, has not yet occurred as of the date of this letter. WAL intends to engage constructively in these discussions while preserving all of its legal rights and remedies. WAL is simultaneously evaluating all available remedies and defenses, including the potential filing of a declaratory judgment action, as described further below.

VI. Pre-Litigation Status and Anticipated Proceedings

As of the date of this letter, the dispute between WAL and HDDS is in the pre-litigation phase. No lawsuit, arbitration, or other formal legal proceeding has been commenced by either party.

The Teaming Agreement prescribes a multi-step dispute resolution process. Specifically, Section 18.3 of the Teaming Agreement provides for:

(a) A thirty (30)-day senior executive negotiation period, during which designated senior officers of the parties are required to meet and confer in good faith in an effort to resolve the dispute;

(b) If the dispute is not resolved during the senior executive negotiation period, either party may submit the dispute to non-binding mediation, to be conducted by a mutually agreed mediator in New York, New York; and

(c) If mediation is unsuccessful or if either party declines mediation, either party may initiate litigation in accordance with the forum-selection provisions of Section 18.2 of the Teaming Agreement.

Section 18.2 of the Teaming Agreement provides that the parties consent to the exclusive jurisdiction of the United States District Court for the Southern District of New York, or, if such court lacks subject-matter jurisdiction, the courts of the State of New York sitting in the County of New York, for any action or proceeding arising out of or relating to the Teaming Agreement.

WAL anticipates that the forthcoming senior executive meeting on September 30, 2022 will initiate the thirty-day negotiation period under Section 18.3(a). If the parties are unable to resolve the dispute through negotiation or, subsequently, through non-binding mediation, WAL may initiate a declaratory judgment action in the U.S. District Court for the Southern District of New York, seeking a judicial determination that WAL has no liability under Section 11.4 of the Teaming Agreement with respect to the COPD findings, or alternatively, that WAL's liability, if any, is limited to those specific cost overruns, if any, that are demonstrated to have been caused by WAL's own acts or omissions. WAL may also assert affirmative claims against HDDS, including claims for breach of the Teaming Agreement arising from HDDS's delivery of defective engineering specifications and late provision of GFE.

Separately, DCMA's administrative review of the cost overruns identified in the COPD is expected to continue over the coming months. The Contracting Officer has not yet issued a final determination with respect to the allowability of the costs at issue, and the ultimate resolution of the government's review remains pending. WAL, through its government contracts regulatory counsel, is monitoring the DCMA process closely and will participate, to the extent permitted, in the prime contractor's response to the COPD.

VII. Assessment of Financial Impact

The current maximum amount of HDDS's claim against WAL, as set forth in the Demand Letter, is $14,726,583. WAL's maximum theoretical exposure under the Section 11.5 indemnification cap of the Teaming Agreement is $88,992,000 (120% of the WP-4 work package value), although the actual amount currently demanded by HDDS is limited to $14,726,583. WAL is not aware of any additional claims or demands by HDDS beyond the amount stated in the Demand Letter.

For the reasons described in Section V above, WAL believes it has strong and meritorious defenses to the HDDS claim, and WAL's assessment is that its actual financial exposure, if any, is significantly less than the amount demanded. In particular, WAL believes that a substantial portion of the claimed overruns is attributable to factors for which HDDS, rather than WAL, bears responsibility.

WAL wishes to confirm to the Administrative Agent that no Event of Default (as defined in the Credit Agreement) has occurred or is continuing under the Credit Agreement as a result of, or in connection with, the HDDS indemnification demand, the COPD, or any of the matters described in this letter. WAL's current drawn balance under the Facility, availability information, and financial covenant compliance data are within the Administrative Agent's possession through its own records and regular reporting. WAL continues to operate in the ordinary course of business, and this matter does not, in WAL's assessment, affect WAL's ability to perform its obligations or service its indebtedness under the Credit Agreement.

VIII. Insurance Tender

WAL has tendered the HDDS indemnification demand to its insurer, Meridian Surety & Insurance Group ("Meridian"), under the following policies:

(a) Directors' and Officers' Liability Policy — Policy No. MSI-DO-2022-07814, with a $10,000,000 aggregate limit of liability and a $250,000 per-claim retention. The tender was submitted to Meridian on September 22, 2022.

(b) Commercial General Liability Policy — Policy No. MSI-CGL-2021-33291, with a $25,000,000 aggregate limit of liability and a $500,000 self-insured retention. The tender was submitted to Meridian on September 22, 2022.

As of the date of this letter, WAL is awaiting Meridian's coverage determination with respect to both policies. WAL will advise the Administrative Agent of any material developments regarding insurance coverage for this matter as they become known.

IX. Counsel Retention

WAL has retained Calderwood & Harkness LLP as its outside litigation counsel in connection with the HDDS indemnification dispute and any related proceedings. The engagement team at Calderwood & Harkness LLP is led by Priya Anand, Partner, and Douglas Carmichael, Partner, both based in the firm's New York office.

In addition, WAL has engaged Ashford & Reeves LLP, located in Washington, D.C., as government contracts regulatory counsel to advise WAL on the DCMA administrative aspects of the dispute, including the ongoing COPD review process and any related audit or investigative proceedings. The engagement at Ashford & Reeves LLP is led by Harold Reeves, Senior Partner, who has extensive experience in defense contract cost-accounting and government claims matters.

X. Reservation of Rights

This notice is provided solely for the purpose of complying with WAL's affirmative covenant obligations under Section 6.07(b) of the Credit Agreement. Nothing in this letter shall constitute, nor shall it be construed as, an admission of liability by WAL to HDDS or to any other person or entity, an admission that the HDDS indemnification demand has merit, or an acknowledgment that any Event of Default has occurred or is continuing, or is reasonably expected to occur, under the Credit Agreement. WAL expressly reserves all of its rights, remedies, claims, and defenses under the Credit Agreement, the Teaming Agreement, and applicable law, including without limitation the right to contest the HDDS demand in its entirety, to assert affirmative claims against HDDS, and to seek all available relief in any appropriate forum.

XI. Availability for Further Discussion; Supplemental Notices

WAL and its counsel are available to discuss this matter with the Administrative Agent and the Lenders at their convenience. We would welcome the opportunity to provide any additional information or documentation that the Administrative Agent may require in connection with its review of this notice. Please do not hesitate to contact the undersigned at the telephone number or email address listed below to arrange a call or meeting.

WAL will provide supplemental notices to the Administrative Agent as material developments occur in this matter, including without limitation any formal government disallowance determination, the outcome of settlement negotiations or mediation, the commencement of any litigation or other proceeding, and any material change in WAL's assessment of its financial exposure.

Copies of the HDDS indemnification demand letter dated September 9, 2022 and the DCMA Contracting Officer's Preliminary Determination dated August 1, 2022 are available for review by the Administrative Agent upon request. Due to the sensitive nature of the underlying government contract information and certain confidentiality restrictions, WAL may need to provide redacted versions of these documents, and WAL reserves the right to impose reasonable confidentiality protections on any materials disclosed.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Douglas Carmichael Partner

600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 841-7244

Email: dcarmichael@calderwoodharkness.com

cc:

Gregory Poole, Esq. General Counsel Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151

Catherine Soo-Hyun Park Vice President, Government Contracts & Compliance Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151

Priya Anand, Esq. Partner Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022

Enclosures: Available upon request — (1) Copy of HDDS indemnification demand letter dated September 9, 2022 (redacted as appropriate); (2) Copy of DCMA Contracting Officer's Preliminary Determination dated August 1, 2022 (redacted as appropriate).

CONFIDENTIAL — This letter and any accompanying documents contain information that is privileged and confidential. This communication is intended solely for the use of the addressee and authorized representatives of Ridgeline National Bank, N.A. in its capacity as Administrative Agent under the Credit Agreement. Any unauthorized review, use, disclosure, or distribution is prohibited. If you have received this communication in error, please notify the sender immediately and destroy all copies.

Parameter	Amount / Detail
Target Cost	$412,000,000
Target Fee (8%)	$32,960,000
Ceiling Price	$470,000,000
Share Ratio — Overruns	70% Government / 30% Contractor
Share Ratio — Underruns	60% Government / 40% Contractor
Period of Performance	September 1, 2019 through August 31, 2024
Options	Two (2) one-year option periods

CALDERWOOD & HARKNESS LLP Attorneys at Law 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 841-7000 Facsimile: (212) 841-7001 www.calderwoodharkness.com
September 28, 2022
Via Sundial Data Systems and Email (david.kreutz@ridgelinenational.com)
David Kreutz Senior Vice President, Defense & Aerospace Lending Ridgeline National Bank, N.A. 300 Wilson Boulevard Arlington, Virginia 22201
Re: Whitmore Aerospace LLC — Notice Pursuant to Section 6.07(b) of Senior Secured Revolving Credit Agreement dated March 15, 2021 Borrower: Whitmore Aerospace LLC (EIN: 54-2198437)
Dear Mr. Kreutz:
I. Purpose and Authority
Calderwood & Harkness LLP represents Whitmore Aerospace LLC ("WAL" or the "Borrower"), a Virginia limited liability company with its principal place of business at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. We are writing to you on behalf of WAL in WAL's capacity as Borrower under that certain Senior Secured Revolving Credit Agreement dated as of March 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among WAL, as borrower, Ridgeline National Bank, N.A. ("Ridgeline" or the "Administrative Agent"), as administrative agent, and the several lenders from time to time party thereto (collectively, the "Lenders"). As you are aware, the Credit Agreement provides for a $75,000,000 senior secured revolving credit facility (the "Facility") for the benefit of the Borrower. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
The purpose of this letter is to provide formal written notice to the Administrative Agent pursuant to Section 6.07(b) of the Credit Agreement. Section 6.07(b) requires, among other things, that the Borrower deliver written notice to the Administrative Agent within fifteen (15) business days after becoming aware of any litigation, arbitration, investigation, claim, proceeding, or governmental action against or involving the Borrower or any of its Subsidiaries in which the amount in controversy exceeds $5,000,000 (or its equivalent in any other currency), or that could reasonably be expected to have a Material Adverse Effect. WAL is providing this notice in full compliance with that affirmative covenant. The facts and circumstances giving rise to this notice are described in detail below.
II. Background — The Underlying Government Contract and Teaming Agreement
To provide context for the matter described herein, it is necessary to summarize the contractual relationships at issue.
WAL serves as a subcontractor and teaming partner to Hargrove-Dalton Defense Systems, Inc. ("HDDS"), a Delaware corporation headquartered at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is the prime contractor under Prime Contract No. FA8620-19-C-0337 awarded by the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), Wright-Patterson Air Force Base, Ohio, for the Advanced Tactical Airframe Program (the "ATAP" or the "Program"). The ATAP is a major defense acquisition program focused on the design, development, and initial production of next-generation tactical airframe structural components for integration into advanced tactical aircraft platforms.
The prime contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following material financial parameters:
Pursuant to a Teaming Agreement dated June 12, 2019 (the "Teaming Agreement"), by and between HDDS, as Team Lead, and WAL, as Team Member, WAL is responsible for the fabrication of titanium structural assemblies, specifically including wing-box substructure components, center fuselage longerons, and bulkhead fittings. This scope of work is designated as Work Package 4 ("WP-4") under the prime contract's work breakdown structure. WAL's allocated share of the prime contract target cost is approximately eighteen percent (18%), equating to approximately $74,160,000 of the $412,000,000 total target cost. The Teaming Agreement is governed by the laws of the State of New York, as specified in Section 18.1 thereof.
WAL's performance under WP-4 is a significant component of WAL's overall revenue base and has been a material contributor to WAL's operations since the commencement of the ATAP program. The work performed by WAL under WP-4 involves advanced titanium machining and structural assembly processes conducted at WAL's manufacturing facilities in Chantilly, Virginia.
III. Description of the DCMA Cost-Overrun Finding
On August 1, 2022, the Defense Contract Management Agency ("DCMA"), acting through Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, issued a Contracting Officer's Preliminary Determination (the "COPD") under Prime Contract No. FA8620-19-C-0337. The COPD was issued in the context of a routine incurred-cost and program-performance review conducted by DCMA and the Defense Contract Audit Agency ("DCAA") with respect to the ATAP program.
The COPD identified aggregate cost overruns on the ATAP program totaling $14,726,583. Of this total, the DCMA attributed $12,817,441 — approximately 87.03% of the total identified overruns — to WP-4, the titanium structural assembly work package performed by WAL. The remaining $1,909,142, representing approximately 12.97% of the total overruns, was attributed to other work packages under the prime contract that are not within WAL's scope of performance.
The narrative portion of the COPD identifies the following root causes for the cost overruns attributed to WP-4:
(a) Titanium Raw-Material Cost Escalation — Approximately $4,200,000. The COPD references significant increases in titanium sponge and mill-product pricing during the 2020–2022 timeframe, driven by global supply-chain disruptions and commodity-market volatility. WAL notes that these price escalations were the result of macroeconomic forces beyond WAL's control, including supply-chain impacts attributable to the COVID-19 pandemic and geopolitical disruptions affecting titanium-producing regions.
(b) Rework Due to Non-Conforming Machining Tolerances — Approximately $5,100,000. The COPD identifies costs associated with the rework and re-machining of certain titanium structural components that did not initially meet engineering specification tolerances. As discussed further in Section V below, WAL's position is that a substantial portion of these rework costs resulted from engineering specification deficiencies in HDDS-supplied drawings and technical data packages, rather than from any manufacturing error on the part of WAL.
(c) Schedule Delays Causing Idle-Labor Charges — Approximately $2,300,000. The COPD attributes idle-labor charges to schedule disruptions that resulted in periods during which WAL's production workforce was unable to perform planned fabrication activities. WAL's position is that these schedule delays were caused primarily by HDDS's late delivery of government-furnished equipment ("GFE") that was required for WAL's production processes, as well as by HDDS's delayed issuance of work authorizations.
(d) Engineering Change Proposal Implementation Costs — Approximately $1,200,000. The COPD identifies costs associated with the implementation of engineering change proposals ("ECPs") directed by HDDS and the government during the performance period. WAL notes that these ECPs were directed changes that WAL was contractually obligated to implement and that the resulting costs should be separately recoverable.
It is important to emphasize that the COPD is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer, no final decision has been issued, and the administrative review process at DCMA remains ongoing. The COPD expressly states that it is subject to further review, audit, and potential revision, and it invites the prime contractor's response before any final determination is made. Accordingly, the ultimate resolution of the government's cost-overrun determination remains pending, and the final amounts, if any, that may be disallowed are not yet known.
IV. Description of the HDDS Indemnification Demand
Notwithstanding the preliminary nature of the COPD, on September 9, 2022, HDDS transmitted to WAL a formal indemnification demand letter (the "Demand Letter") asserting that WAL is obligated to indemnify and hold harmless HDDS for the full amount of the cost overruns identified in the COPD — i.e., the entire $14,726,583 — pursuant to Section 11.4 of the Teaming Agreement.
Section 11.4(b) of the Teaming Agreement provides, in relevant part, as follows:
"The Team Member shall indemnify, defend, and hold harmless the Team Lead and its officers, directors, employees, and agents from and against any and all claims, demands, losses, costs, damages, or expenses (including reasonable attorneys' fees) arising out of or relating to any claim by the Government that costs incurred under the Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance under applicable Federal Acquisition Regulation cost principles, to the extent such claim is caused by Team Member's acts or omissions."
(Emphasis added.) The italicized causation language is of critical importance and is addressed further below.
Additionally, Section 11.5 of the Teaming Agreement provides an aggregate cap on the Team Member's indemnification liability, as follows:
"Notwithstanding anything to the contrary in this Agreement, the Team Member's aggregate liability under this Article XI shall not exceed one hundred twenty percent (120%) of the value of the Team Member's Work Package."
Applying the Section 11.5 cap, WAL's maximum aggregate indemnification exposure under the Teaming Agreement is $88,992,000 (calculated as $74,160,000 × 1.20). HDDS's current demand of $14,726,583 falls below this contractual cap but substantially exceeds the $5,000,000 reporting threshold specified in Section 6.07(b) of the Credit Agreement, thereby triggering the Borrower's notice obligation.
WAL received the Demand Letter on September 9, 2022. This notice is being delivered on September 28, 2022, which is within the fifteen (15) business-day notice period prescribed by Section 6.07(b) of the Credit Agreement.
V. WAL's Position Regarding the Demand
WAL disputes the HDDS indemnification demand in its entirety and believes it has meritorious defenses on multiple grounds. WAL's principal legal and factual positions are summarized below.
First, Section 11.4(b) of the Teaming Agreement contains an express causation requirement. The indemnification obligation applies only "to the extent such claim is caused by Team Member's acts or omissions." WAL's position is that the cost overruns identified in the COPD were not caused by WAL's acts or omissions, but rather by factors attributable to HDDS, the government, and external market forces, including specifically:
(i) Titanium price escalation: The approximately $4,200,000 in raw-material cost overruns resulted from global market forces and supply-chain disruptions — circumstances that constitute force majeure events or, at minimum, that are not attributable to WAL's acts or omissions. WAL procured titanium materials through commercially reasonable procurement practices and in accordance with applicable Federal Acquisition Regulation ("FAR") cost principles.
(ii) HDDS-supplied engineering specifications: The approximately $5,100,000 in rework costs arose primarily from deficiencies, ambiguities, and errors in the engineering drawings and technical data packages provided to WAL by HDDS. WAL manufactured components in conformity with the specifications as furnished and should not bear responsibility for rework necessitated by HDDS's specification errors.
(iii) HDDS's late delivery of government-furnished equipment: The approximately $2,300,000 in idle-labor charges resulted from schedule disruptions caused by HDDS's failure to deliver GFE and work authorizations in accordance with the integrated master schedule. WAL maintained its workforce in a state of readiness in compliance with contractual requirements, and the idle-labor costs were a direct and foreseeable consequence of HDDS's delays.
(iv) Directed engineering changes: The approximately $1,200,000 in ECP implementation costs resulted from engineering changes directed by HDDS and the government, which WAL was contractually obligated to implement. These are properly characterized as equitable adjustment costs, not indemnifiable cost overruns.
Second, HDDS's demand improperly seeks indemnification for $1,909,142 in cost overruns that were attributed by DCMA to work packages other than WP-4. WAL has no conceivable indemnification liability under the Teaming Agreement for overruns associated with work packages that are outside WAL's designated scope of performance. The inclusion of these non-WP-4 overruns in the Demand Letter is wholly unsupported by the terms of the Teaming Agreement and is, in WAL's view, without any contractual or factual basis.
Third, the DCMA finding is a preliminary determination only. No costs have been formally disallowed by the Contracting Officer, and no Contracting Officer's Final Decision has been issued. WAL's position is that the indemnification trigger under Section 11.4(b) requires, at a minimum, a formal government claim that costs are "unallowable, unreasonable, or otherwise subject to disallowance." A preliminary determination that is still subject to review, audit, response, and potential revision does not, in WAL's view, satisfy the contractual prerequisites for the indemnification obligation to arise. HDDS's demand is therefore premature.
WAL's Chief Executive Officer, Marcus J. Whitmore, and HDDS's Senior Vice President, Contracts & Procurement, William Fong, have agreed to meet on September 30, 2022 to discuss the dispute at the senior executive level. This meeting, which is scheduled to take place at HDDS's offices in Bethesda, Maryland, has not yet occurred as of the date of this letter. WAL intends to engage constructively in these discussions while preserving all of its legal rights and remedies. WAL is simultaneously evaluating all available remedies and defenses, including the potential filing of a declaratory judgment action, as described further below.
VI. Pre-Litigation Status and Anticipated Proceedings
As of the date of this letter, the dispute between WAL and HDDS is in the pre-litigation phase. No lawsuit, arbitration, or other formal legal proceeding has been commenced by either party.
The Teaming Agreement prescribes a multi-step dispute resolution process. Specifically, Section 18.3 of the Teaming Agreement provides for:
(a) A thirty (30)-day senior executive negotiation period, during which designated senior officers of the parties are required to meet and confer in good faith in an effort to resolve the dispute;
(b) If the dispute is not resolved during the senior executive negotiation period, either party may submit the dispute to non-binding mediation, to be conducted by a mutually agreed mediator in New York, New York; and
(c) If mediation is unsuccessful or if either party declines mediation, either party may initiate litigation in accordance with the forum-selection provisions of Section 18.2 of the Teaming Agreement.
Section 18.2 of the Teaming Agreement provides that the parties consent to the exclusive jurisdiction of the United States District Court for the Southern District of New York, or, if such court lacks subject-matter jurisdiction, the courts of the State of New York sitting in the County of New York, for any action or proceeding arising out of or relating to the Teaming Agreement.
WAL anticipates that the forthcoming senior executive meeting on September 30, 2022 will initiate the thirty-day negotiation period under Section 18.3(a). If the parties are unable to resolve the dispute through negotiation or, subsequently, through non-binding mediation, WAL may initiate a declaratory judgment action in the U.S. District Court for the Southern District of New York, seeking a judicial determination that WAL has no liability under Section 11.4 of the Teaming Agreement with respect to the COPD findings, or alternatively, that WAL's liability, if any, is limited to those specific cost overruns, if any, that are demonstrated to have been caused by WAL's own acts or omissions. WAL may also assert affirmative claims against HDDS, including claims for breach of the Teaming Agreement arising from HDDS's delivery of defective engineering specifications and late provision of GFE.
Separately, DCMA's administrative review of the cost overruns identified in the COPD is expected to continue over the coming months. The Contracting Officer has not yet issued a final determination with respect to the allowability of the costs at issue, and the ultimate resolution of the government's review remains pending. WAL, through its government contracts regulatory counsel, is monitoring the DCMA process closely and will participate, to the extent permitted, in the prime contractor's response to the COPD.
VII. Assessment of Financial Impact
The current maximum amount of HDDS's claim against WAL, as set forth in the Demand Letter, is $14,726,583. WAL's maximum theoretical exposure under the Section 11.5 indemnification cap of the Teaming Agreement is $88,992,000 (120% of the WP-4 work package value), although the actual amount currently demanded by HDDS is limited to $14,726,583. WAL is not aware of any additional claims or demands by HDDS beyond the amount stated in the Demand Letter.
For the reasons described in Section V above, WAL believes it has strong and meritorious defenses to the HDDS claim, and WAL's assessment is that its actual financial exposure, if any, is significantly less than the amount demanded. In particular, WAL believes that a substantial portion of the claimed overruns is attributable to factors for which HDDS, rather than WAL, bears responsibility.
WAL wishes to confirm to the Administrative Agent that no Event of Default (as defined in the Credit Agreement) has occurred or is continuing under the Credit Agreement as a result of, or in connection with, the HDDS indemnification demand, the COPD, or any of the matters described in this letter. WAL's current drawn balance under the Facility, availability information, and financial covenant compliance data are within the Administrative Agent's possession through its own records and regular reporting. WAL continues to operate in the ordinary course of business, and this matter does not, in WAL's assessment, affect WAL's ability to perform its obligations or service its indebtedness under the Credit Agreement.
VIII. Insurance Tender
WAL has tendered the HDDS indemnification demand to its insurer, Meridian Surety & Insurance Group ("Meridian"), under the following policies:
(a) Directors' and Officers' Liability Policy — Policy No. MSI-DO-2022-07814, with a $10,000,000 aggregate limit of liability and a $250,000 per-claim retention. The tender was submitted to Meridian on September 22, 2022.
(b) Commercial General Liability Policy — Policy No. MSI-CGL-2021-33291, with a $25,000,000 aggregate limit of liability and a $500,000 self-insured retention. The tender was submitted to Meridian on September 22, 2022.
As of the date of this letter, WAL is awaiting Meridian's coverage determination with respect to both policies. WAL will advise the Administrative Agent of any material developments regarding insurance coverage for this matter as they become known.
IX. Counsel Retention
WAL has retained Calderwood & Harkness LLP as its outside litigation counsel in connection with the HDDS indemnification dispute and any related proceedings. The engagement team at Calderwood & Harkness LLP is led by Priya Anand, Partner, and Douglas Carmichael, Partner, both based in the firm's New York office.
In addition, WAL has engaged Ashford & Reeves LLP, located in Washington, D.C., as government contracts regulatory counsel to advise WAL on the DCMA administrative aspects of the dispute, including the ongoing COPD review process and any related audit or investigative proceedings. The engagement at Ashford & Reeves LLP is led by Harold Reeves, Senior Partner, who has extensive experience in defense contract cost-accounting and government claims matters.
X. Reservation of Rights
This notice is provided solely for the purpose of complying with WAL's affirmative covenant obligations under Section 6.07(b) of the Credit Agreement. Nothing in this letter shall constitute, nor shall it be construed as, an admission of liability by WAL to HDDS or to any other person or entity, an admission that the HDDS indemnification demand has merit, or an acknowledgment that any Event of Default has occurred or is continuing, or is reasonably expected to occur, under the Credit Agreement. WAL expressly reserves all of its rights, remedies, claims, and defenses under the Credit Agreement, the Teaming Agreement, and applicable law, including without limitation the right to contest the HDDS demand in its entirety, to assert affirmative claims against HDDS, and to seek all available relief in any appropriate forum.
XI. Availability for Further Discussion; Supplemental Notices
WAL and its counsel are available to discuss this matter with the Administrative Agent and the Lenders at their convenience. We would welcome the opportunity to provide any additional information or documentation that the Administrative Agent may require in connection with its review of this notice. Please do not hesitate to contact the undersigned at the telephone number or email address listed below to arrange a call or meeting.
WAL will provide supplemental notices to the Administrative Agent as material developments occur in this matter, including without limitation any formal government disallowance determination, the outcome of settlement negotiations or mediation, the commencement of any litigation or other proceeding, and any material change in WAL's assessment of its financial exposure.
Copies of the HDDS indemnification demand letter dated September 9, 2022 and the DCMA Contracting Officer's Preliminary Determination dated August 1, 2022 are available for review by the Administrative Agent upon request. Due to the sensitive nature of the underlying government contract information and certain confidentiality restrictions, WAL may need to provide redacted versions of these documents, and WAL reserves the right to impose reasonable confidentiality protections on any materials disclosed.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Douglas Carmichael Partner
600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 841-7244
Email: dcarmichael@calderwoodharkness.com
cc:
Gregory Poole, Esq. General Counsel Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151
Catherine Soo-Hyun Park Vice President, Government Contracts & Compliance Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151
Priya Anand, Esq. Partner Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022
Enclosures: Available upon request — (1) Copy of HDDS indemnification demand letter dated September 9, 2022 (redacted as appropriate); (2) Copy of DCMA Contracting Officer's Preliminary Determination dated August 1, 2022 (redacted as appropriate).
CONFIDENTIAL — This letter and any accompanying documents contain information that is privileged and confidential. This communication is intended solely for the use of the addressee and authorized representatives of Ridgeline National Bank, N.A. in its capacity as Administrative Agent under the Credit Agreement. Any unauthorized review, use, disclosure, or distribution is prohibited. If you have received this communication in error, please notify the sender immediately and destroy all copies.
Parameter | Amount / Detail
Target Cost | $412,000,000
Target Fee (8%) | $32,960,000
Ceiling Price | $470,000,000
Share Ratio — Overruns | 70% Government / 30% Contractor
Share Ratio — Underruns | 60% Government / 40% Contractor
Period of Performance | September 1, 2019 through August 31, 2024
Options | Two (2) one-year option periods

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts