(5) Commitments and Contingencies

 

Commitments

The one remaining bonded project of approximately $3 million was completed during the quarter ended June 30, 2016.

Contingencies

We are one of the defendants in a multiple plaintiff wrongful death action in Hawaii related to a fireworks explosion that occurred in April 2011 at a facility operated by a subcontractor, that resulted in the death of five of its employees. The litigation is expected to proceed to trial in 2017. While the results of litigation cannot be predicted with certainty, we do not anticipate that this litigation will have a material adverse effect on our results of operations or financial position.

In March 2013, a lawsuit, Anchorage v. Integrated Concepts and Research Corporation, et al., was filed in the Superior Court for the State of Alaska at Anchorage by the Municipality of Anchorage, Alaska against our wholly owned subsidiary Integrated Concepts and Research Corporation (“ICRC”) and two former subcontractors of ICRC (the “Anchorage Lawsuit”).  With respect to ICRC, the plaintiff asserts, among other things, breach of contract, professional negligence and negligence in respect of work and services ICRC rendered under the Port of Anchorage Intermodal Expansion Contract with the Maritime Administration, a federal agency with the United States Department of Transportation. ICRC did not have a contract with the Municipality of Anchorage. In April 2013, ICRC removed the case to the United States District Court for the District of Alaska. ICRC’s contract with the Maritime Administration expired on May 31, 2012. The litigation is expected to proceed to trial in 2017. Currently, we cannot predict whether the Anchorage Lawsuit will have a material adverse effect on our results of operations or financial position.

On or about August 21, 2015, a lawsuit, The Charter Oak Fire Insurance Company, The Travelers Indemnity Company of Connecticut and Travelers Property Casualty Company of America v. Integrated Concepts and Research Corporation, VSE Corporation and Municipality of Anchorage, was filed in the United States District Court for the District of Alaska.  The plaintiff insurance companies are seeking, among other things, (a) a declaration by the court that there is no defense or indemnity coverage available to ICRC and VSE for the Anchorage Lawsuit under the insurance policies issued by the plaintiffs and (b) reimbursement of defense fees and costs incurred by the plaintiffs in the defense of uncovered claims in respect of the Anchorage Lawsuit.

On or about February 27, 2015, a lawsuit, Heritage Disposal and Storage v. VSE Corporation, was filed against VSE in the United States District Court for the District of Nebraska. On November 9, 2015, the litigation was transferred to the Eastern District of Virginia. The complaint asserts, among other things, that VSE breached a contract with Heritage for firework storage and manipulation services rendered by Heritage and that VSE has not fully paid Heritage for such services rendered during the period of October 2010 through August 2015.  The services relate to VSE’s prime contract with the U.S. Bureau of Alcohol Tobacco, Firearms and Explosives regarding the storage of fireworks seized by the Government.  Following a ruling by the Court that VSE had not breached a contract with Heritage because VSE and Heritage had not agreed on a contract, the Court instructed the jury to determine if Heritage was entitled to recover under its equitable claims of quantum meruit and unjust enrichment. On June 30, 2016, the jury determined that Heritage was entitled to recover on both of its equitable claims and awarded damages of approximately $4.8 million, exclusive of interest to be determined by the Court. The Court has not issued a final decision on the matter and has requested that briefs be filed by the parties on a number of substantive issues that may affect the Court’s final decision.  The Court is expected to rule on these substantive issues and other matters, including whether the jury verdict was binding or advisory, and issue a final judgment in late August 2016.  Depending on the Court’s final decision, we intend to consider numerous legal options, including filing a motion for a new trial or appealing one or more of the Court’s rulings.

During the course of defending the Heritage litigation and shortly before trial, VSE obtained evidence that invoices provided by Heritage under our predecessor contract with the Treasury Department, which were then charged to the Government, were based on Heritage’s improper inflation of the weight of certain seized fireworks stored by Heritage. We filed a voluntary disclosure of this matter with the Inspector General of the Department of Treasury on June 17, 2016.  We estimate that the overbilling of the Government based on Heritage’s improper inflation of the weight of seized fireworks stored by Heritage may be approximately $1.5 million.  We are cooperating with the Government and are continuing to investigate the matter, which may affect the final disposition of the Heritage litigation. This investigation and the Heritage litigation may affect VSE’s claim before the U.S. Civilian Board of Contract Appeals (“CBCA”) seeking additional funds from the Government related to Heritage’s fireworks seizure services.  In that matter, following a joint request by VSE and the Government, the CBCA has suspended VSE’s claim against the Government until late August of 2016 when the CBCA is expected to request a status update from VSE and the Government on the possible overcharging issues related to Heritage.

Regardless of the outcome of our voluntary disclosure to the Inspector General of the Department of Treasury and our claim against the Government that is under the CBCA’s jurisdiction, we believe it is probable that VSE will sustain a loss from the resolution of the Heritage litigation.  While there are a number of pending issues regarding the final disposition of the Heritage litigation, we currently estimate the probable range of VSE’s loss will be between $1.2 million and $5.5 million.  The lower end of the range of loss is based on obtaining a favorable ruling by the Court on VSE’s 2013 settlement agreement with Heritage, which would significantly reduce the amount of underpaid storage fees payable by VSE to Heritage, and the upper end of the range is based on potential unfavorable rulings on the matters pending before the Court, including the imposition of interest.  Given that we do not have enough information at this time to determine if any amount in that range is a better estimate than any other amount because of the ongoing nature of this litigation, we accrued the reserve at the low end of the range. As discussed under Results of Operations in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report, VSE’s “Costs and operating expenses” reflects in the unaudited consolidated statements of income for the three months ended June 30, 2016 contained herein includes a reserve of $1.2 million in respect of the Heritage litigation.

In addition to the above-referenced legal proceedings, we have, in the normal course of business, certain claims against us and against other parties and we may be subject to various governmental investigations.  In our opinion, the resolution of these claims and investigations will not have a material adverse effect on our results of operations, cash flows or financial position. However, the results of any legal proceedings cannot be predicted with certainty, therefore, the amount of loss, if any, cannot be reasonably estimated.