International Business Machines Corporation v. State of Indiana, acting on behalf of the Indiana Family & Social Services Administration , 124 N.E.3d 1187 ( 2019 )


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  •                                                                        FILED
    Jun 26 2019, 1:25 pm
    CLERK
    Indiana Supreme Court
    Court of Appeals
    and Tax Court
    IN THE
    Indiana Supreme Court
    Supreme Court Case No. 19S-PL-19
    International Business Machines Corporation,
    Appellant/Cross-Appellee
    (Defendant/Plaintiff below),
    -v-
    State of Indiana, acting on behalf of the Indiana
    Family & Social Services Administration
    Appellee/Cross-Appellant
    (Plaintiff/Defendant below).
    Argued: February 21, 2019 | Decided: June 26, 2019
    Appeal from the Marion Superior Court
    No. 49D01-1005-PL-21451
    The Honorable Heather A. Welch, Judge
    On Petition to Transfer from the Indiana Court of Appeals
    No. 49A02-1709-PL-2006
    Opinion by Justice David
    Chief Justice Rush and Justice Goff concur.
    Justice Slaughter concurs in part and dissents in part with separate opinion.
    Justice Massa not participating.
    David, Justice.
    This case comes before our Court for the second time and arises out of a
    contract entered into between the State of Indiana, acting on behalf of the
    Family and Social Services Administration, and International Business
    Machines, Corp. to modernize and improve Indiana’s welfare eligibility
    system. We previously determined that IBM materially breached the
    contract and remanded the matter to the trial court to determine damages
    and appropriate offsets. After the submission of evidence and a full-day
    hearing, the trial court issued detailed findings and conclusions. It
    determined that damages to the State resulting from the breach totaled
    $128 million and that IBM was entitled to offsets in the amount of
    $49,510,795, resulting in a final judgment of $78,178,109 to the State.
    Both parties appealed, raising various issues. Today we address one of
    the issues raised: whether IBM is entitled to post-judgment interest on its
    $49.5 million damages award running from the date of the original
    judgment in 2012 or running from the judgment on remand. Finding that
    the original 2012 judgment was not “final,” we hold that the post-
    judgment interest due to IBM runs from the judgment on remand. We
    summarily affirm the Court of Appeals on all other issues and affirm the
    trial court on all issues.
    Facts and Procedural History
    As this Court explained in State v. International Business Machines Corp.,
    
    51 N.E.3d 150
    , 152 (Ind. 2016) (“IBM I”):
    This case involves a $1.3 billion Master Services Agreement
    (“MSA”) entered into between the State of Indiana, acting on
    behalf of the Family and Social Services Administration
    (“State”) and International Business Machines, Corp. (“IBM”)
    to modernize and improve Indiana’s welfare eligibility system.
    Although the MSA was supposed to last ten years, the State
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019            Page 2 of 9
    terminated it less than three years in, citing performance issues
    on the part of IBM. Both parties sued each other for breach of
    contract.
    After a six-week bench trial, the Marion Superior Court found that the
    State failed to prove that IBM’s breach of the MSA was material and
    awarded IBM damages for assignment and equipment fees. It also
    awarded termination payments and pre-judgment interest. Both parties
    appealed. Ultimately, this Court reversed, in part, holding that IBM
    materially breached the MSA. We reversed IBM’s termination payment
    and pre-judgment interest awards, but affirmed its assignment and
    equipment fees in the amount of $49,510,795. We remanded to the trial
    court with the following instructions:
    [W]e hold that IBM did materially breach the MSA through its
    collective breaches in light of the MSA as [a] whole. We
    therefore reverse the trial court's finding that IBM did not
    materially breach the MSA. We summarily affirm the Court of
    Appeals on all other issues including: affirming the trial court's
    award of $40 million in assignment fees and $9,510,795 in
    equipment fees to IBM, affirming the trial court's denial of
    deferred fees to IBM, and reversing the trial court's award of
    $2,570,621 in early termination close out payments and
    $10,632,333 in prejudgment interest to IBM. We also remand
    the case to the trial court to determine the amount of fees IBM
    is entitled to for Change Orders 119 and 133, and for
    calculation of the parties' damages consistent with this opinion,
    including any appropriate offsets to the State as a result of
    IBM's material breach of the MSA.
    
    Id. at 168-169.
    On remand, the trial court held a full-day hearing and considered both
    pre-hearing briefs and post-hearing submissions. It issued an 83-page
    order awarding the State $128 million in damages and credited IBM
    $49,510,795 for assignment and equipment fees this Court upheld plus the
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019           Page 3 of 9
    amount of fees for the change orders (an amount agreed to via stipulation
    of the parties). The trial court denied IBM’s request for post-judgment
    interest on the $49.5 million-dollar award for assignment and equipment
    fees. Thus, IBM was ordered to pay the State $78.2 million, after offsets.
    Both parties again appealed. IBM argued: 1) it is entitled to post-
    judgment interest on the fees upheld by this Court in IBM I; 2) the trial
    court erred by setting aside the factual findings of the original trial court;
    and 3) the trial court erred by holding IBM responsible for the costs of
    implementing a different and more expensive welfare system than the one
    contemplated by the MSA. For its part, the State argued it was entitled to
    additional damages resulting from the breach.
    The Court of Appeals affirmed in part, reversed in part, and remanded
    with instructions. Int’l Bus. Machines Corp. v. State on behalf of Indiana
    Family & Soc. Servs. Admin., 
    112 N.E.3d 1088
    (Ind. Ct. App. 2018) (“IBM
    II”). It rejected both of the State’s requests for additional damages and
    concluded that IBM was entitled to post-judgment interest on the $49.5
    million damages award that survived IBM I.
    Both parties sought transfer. The Indianapolis Bar Association’s
    Appellate Practice Section and the Defense Trial Counsel of Indiana
    (DTCI) have filed amici briefs in support of transfer on the post-judgment
    interest issue. We granted transfer thereby vacating the Court of Appeals
    opinion. Ind. Appellate Rule 58(A). We write only to address the post-
    judgment interest issue. We summarily affirm the other portions of the
    Court of Appeals opinion and affirm the trial court on all issues.
    Standard of Review
    Here, the trial court has made special findings pursuant to Indiana Trial
    Rule 52(A). As such, a reviewing court may affirm the judgment on any
    legal theory supported by the findings. G & N Aircraft, Inc. v. Boehm, 
    743 N.E.2d 227
    , 234 (Ind. 2001) (citations omitted). Further, [w]hen the
    specific issue on review relates to the award of damages, a damage award
    should not be reversed if it is within the scope of the evidence before the
    trial court.” 
    Id. (quoting Dunn
    v. Cadiente, 
    516 N.E.2d 52
    , 54 (Ind. 1987)).
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019           Page 4 of 9
    However, the right to post-judgment interest arises as a matter of
    statutory law. Tincher v. Davidson, 
    784 N.E.2d 551
    , 553 (Ind. Ct. App.
    2003). The meaning of a statute is a question of law which we review de
    novo. ESPN, Inc. v. Univ. of Notre Dame Police Dep't, 
    62 N.E.3d 1192
    , 1195
    (Ind. 2016).
    Discussion and Decision
    IBM argues that it is entitled to post-judgment interest on its $49.5
    million award as entered by the trial court and affirmed by this Court in
    IBM I. Our Court of Appeals agreed. It applied Beam v. Wausau Ins. Co.,
    
    765 N.E.2d 524
    (Ind. 2002) and found that the “one constant” in the case
    was the award of assignment and equipment fees to IBM. Int'l Bus.
    Machines 
    Corp., 112 N.E.3d at 1103
    . While it is true that this award has
    remained unchanged from the original judgment until present, we do not
    find Beam to be applicable to these facts and circumstances.
    In Beam this Court looked at Indiana Code section 24-4.6-1-101 and
    addressed whether post-judgment interest on a modified award runs on
    the amount after modification by the reviewing court or the original
    amount. 
    Beam, 765 N.E.2d at 534
    . Indiana Code section 24-4.6-1-101
    provides that post-judgment interest accrues back to the "date of the
    return of the verdict or finding of the court until satisfaction. . . ." The
    operative language in Beam is that when:
    a judgment is reversed on appeal and remanded to the trial
    court for the entry of a new judgment, post-judgment interest
    accrues from the date the trial court enters the new judgment.
    ***
    [But] where a money judgment has been modified on appeal
    and the only action necessary in the trial court is compliance
    with the mandate of the appellate court, interest on the
    judgment as modified runs from the date of the original
    judgment.
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019              Page 5 of 9
    
    Beam, 765 N.E.2d at 534
    -535. (citation omitted).
    We found that because we modified the amount of damages but did
    not reverse judgment for plaintiff, post-judgment interest ran from the
    date of the original verdict on the modified amount. 
    Id. at 534.
    But here, it is not Indiana Code section 24-4.6-1-101 1 that governs, but
    Indiana Code section 34-13-1-6 because we are dealing with a sum of
    money due from the State. It provides:
    Whenever, by final decree or judgment, a sum of money is
    adjudged to be due any person from the state, an execution
    shall not issue but the judgment shall draw interest at an
    annual rate of six percent (6%) from the date of the
    adjournment of the next ensuing session of the general
    assembly until an appropriation is made by law for the
    payment and the judgment is paid.
    The relevant inquiry in Beam was whether the judgment was only
    modified or reversed entirely, and pursuant to the statute, post-judgment
    interest was due from the “date of the return of the verdict or finding of
    the court.” Ind. Code § 24-4.6-1-101. Here, the relevant inquiry pursuant
    to Indiana Code section 34-13-1-6 is whether there was a final decree or
    judgment. A final judgment "disposes of all issues as to all parties thereby
    ending the particular case." Georgos v. Jackson, 
    790 N.E.2d 448
    , 451 (Ind.
    2003).
    At the time of remand, all the issues were not disposed of as this
    Court's opinion in IBM I did two things: 1) it reversed the trial court on
    the issue of whether the State’s breach of the MSA was material; and 2)
    remanded to the trial court to calculate appropriate damages as well as
    offsets. While IBM wants us to consider its suit against the State separate
    and apart from State's suit, the two arise out of the same facts and
    1Ind. Code § 24-4.6-1-101 begins with qualifying language that it applies “[e]xcept as
    otherwise provided by statute. . . .”
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019                           Page 6 of 9
    circumstances and are inextricably tied. Case law is clear that a final
    judgment disposes of “all issues as to all parties.” 
    Id. (quoting Indiana
    Appellate Rule 2(H) (emphasis added). Not all the issues as to all parties
    were resolved at the time of remand and further, what was due and owed
    to IBM was necessarily contingent upon what damages were due the State
    for the breach. IBM could have recovered money from the State if the
    State’s damage award was less than what was awarded to IBM or IBM
    award could have simply been applied to offset what was owed to the
    State. In Beam, we stated the rationale for awarding post-judgment
    interest as if the date of the original judgment when it has not been
    reversed: it "compensates plaintiffs for the loss of money that has been
    determined to be have rightfully belonged to them throughout the time of
    the pending appeal." 
    Beam, 765 N.E.2d at 534
    . Here, there is no money
    that rightfully belonged to IBM as the amount awarded to it may have
    been and ultimately was, only an offset to what IBM owes the State.
    Accordingly, looking at the statute, our case law and the facts of this case,
    post-judgment interest going back to the original judgment is
    inappropriate.
    Conclusion
    We hold that the post-judgment interest due to IBM runs from the
    judgment on remand. We summarily affirm the Court of Appeals on all
    other issues and affirm the trial court on all issues.
    Rush, C.J., and Goff, J., concur. Slaughter, J., concurs in part and
    dissents in part with separate opinion. Massa, J., not participating.
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019           Page 7 of 9
    ATTORNEYS FOR APPELLANT
    Jay P. Lefkowitz
    Kirkland & Ellis LLP
    New York, New York
    Paul D. Clement
    Kirkland & Ellis LLP
    Washington, D.C.
    Andrew W. Hull
    Laurie E. Martin
    Hoover Hull Turner LLP
    Indianapolis, Indiana
    ATTORNEYS FOR APPELLEE
    Peter J. Rusthoven
    John R. Maley
    J. Curtis Greene
    Meredith Thornburgh White
    Barnes & Thornburg LLP
    Indianapolis, Indiana
    ATTORNEYS FOR AMICUS CURIAE, INDIANAPOLIS BAR
    ASSOCIATION
    Tyler D. Helmond
    Voyles Vaiana Lukemeyer Baldwin & Webb
    Indianapolis, Indiana
    Josh S. Tatum
    Plews Shadley Racher & Braun LLP
    Indianapolis, Indiana
    Joel M. Schumm
    Indianapolis, Indiana
    Bryan H. Babb
    Bose McKinney & Evans LLP
    Indianapolis, Indiana
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019   Page 8 of 9
    Libby Y. Goodknight
    Krieg DeVault LLP
    Indianapolis, IN
    ATTORNEYS FOR AMICUS CURIAE, DEFENSE TRIAL COUNSEL
    OF INDIANA
    James D. Johnson
    Blair M. Gardner
    Jackson Kelly PLLC
    Evansville, Indiana
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019   Page 9 of 9
    Slaughter, J., concurring in part, dissenting in part.
    The Court summarily affirms an award of $125 million to the State as
    direct damages resulting from IBM’s breach of contract to update
    Indiana’s welfare system. A central premise of the appellate ruling we
    affirm is that the “Modernization” approach required by the parties’
    Master Services Agreement is “essentially the same” as the more
    expensive “Hybrid” approach the State eventually implemented. IBM v.
    State, 
    112 N.E.3d 1088
    , 1101 (Ind. Ct. App. 2018), trans. granted. I am
    unable to join the Court’s summary affirmance because the record
    establishes that the Agreement required IBM to implement only
    Modernization and not Hybrid. Thus, I would treat the State’s additional
    costs to implement Hybrid not as direct damages subject to a $125-million
    cap but as consequential damages subject to a $3-million cap. On the
    separate issue of post-judgment interest, I join the Court.
    I.
    The State’s original plan for updating what then-Governor Mitch
    Daniels called “America’s worst welfare system” was to adopt a
    “modernized” system based on remote eligibility. State v. IBM, 
    51 N.E.3d 150
    , 153 (Ind. 2016). Needy Hoosiers would apply for welfare benefits
    using the internet or accessing a call center without the need for face-to-
    face meetings with a case worker. 
    Id. An applicant’s
    eligibility would then
    be decided through a centralized process statewide rather than in local
    county welfare offices. 
    Id. After months
    of negotiations, in December 2006 the State contracted
    with IBM to establish Modernization—a centralized system with call
    centers to process welfare applications. 
    Id. This arrangement
    also would
    allow remote electronic access to the system, provide a paperless
    document system, implement tools to lower fraud and improve Indiana’s
    poor welfare-to-work record, and reduce administrative costs. 
    Id. The parties’
    ten-year, billion-dollar-plus Agreement was more than 160 pages
    long with extensive attachments, including exhibits, schedules, and
    appendices, addressing all aspects of the parties’ business relationship. 
    Id. The Agreement
    also included a change-order procedure by which the
    parties could agree for IBM to take on additional work—not required
    under the original Agreement—for additional pay. 
    Id. at 165.
    Problems with Modernization arose as soon as the system was first
    rolled out to a limited pilot area. 
    Id. at 155.
    Some of the problems were
    attributed to the economic downturn in 2008 as welfare applications
    increased dramatically. 
    Id. And that
    same year, the State faced a series of
    natural disasters that also strained the system. 
    Id. Throughout the
    project,
    the State used the change-order process eleven times to expand the scope
    of IBM’s work under the Agreement. 
    Id. at 156.
    But problems persisted,
    and in October 2009 the State notified IBM it would be terminating the
    Agreement for cause effective in December 2009. 
    Id. at 157.
    Just before
    announcing the termination, the State adopted a “Plan B” approach to
    welfare modernization—a decentralized model requiring additional
    personnel and physical space. 
    Id. [In September
    2009], the State decided to change approaches
    and adopt a hybrid approach to welfare modernization,
    referred to by the parties as “Plan B.” Plan B moved away from
    the centralized call center and moved eligibility determinations
    back to the local office, increasing face-to-face contact between
    clients and staff.
    
    Id. The State
    initially asked IBM to implement its Plan B—“Hybrid”—
    system via the change-order process, but the parties were unable to agree
    on the price for IBM to take on these additional services. 
    Id. After the
    termination, the State incurred substantial additional costs associated with
    implementing Hybrid.
    Our initial opinion agreed with the State that IBM had materially
    breached the Agreement by failing to deliver the Modernization system
    the State had procured, thus entitling the State to recoup damages
    resulting from the breach. 
    Id. at 168-69.
    On remand, the trial court
    awarded $125 million in direct damages for the State’s increased costs
    associated with the transition to Hybrid and an additional $3 million in
    consequential 
    damages. 112 N.E.3d at 1095
    . As to damages, the court of
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019          Page 2 of 4
    appeals affirmed. 
    Id. at 1105-06.
    And today our Court summarily affirms
    the court of appeals.
    II.
    The Agreement did not require IBM to incur the Hybrid-related costs of
    renting additional space, hiring additional personnel, and renegotiating
    subcontracts with subcontractors already under contract to implement
    Modernization. And the parties’ conduct reflects as much. It is telling that
    the State initially asked IBM to implement Hybrid via change order. By
    entering into the change-order process, the State all but admits that
    Hybrid is outside the scope of contracted services. Parties do not negotiate
    proposed changes to an agreement that already requires those things.
    The court of appeals thus erred in treating the State’s additional costs to
    implement Hybrid as “reprocurement costs”—a defined term under the
    Agreement. Such costs are the “reasonable costs and expenses” the State
    incurs to “procure services similar to the applicable terminated Services . .
    . to the extent such costs and expenses would not have otherwise been
    incurred by the State but for the Termination”. The State’s post-
    termination costs of transitioning its welfare-reform system from
    Modernization to Hybrid were not costs to “reprocure” anything; the
    additional Hybrid services had never been “procured” from IBM in the
    first place. Only Modernization had been procured from IBM, but IBM did
    not deliver, so it was in material breach. Thus, it was not IBM’s breach but
    the State’s decision to switch to the different, more expensive Hybrid
    system that caused the State to incur these additional expenses. The State’s
    additional, Hybrid-related costs are at most consequential damages, not
    direct damages.
    One result of the court of appeals’ ruling is that the State is better off
    than if IBM had not breached. To be sure, the State is entitled to the benefit
    of its bargain with IBM. It can recover the damages caused by IBM’s
    breach—i.e., the difference between what IBM had to provide under the
    Agreement and what IBM actually delivered. But the State is not entitled
    to a windfall. It cannot recover costs for additional services beyond what
    the Agreement required. Because I disagree with the court of appeals’
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019            Page 3 of 4
    award of damages attributable to IBM’s breach, I respectfully dissent from
    our Court’s summary affirmance of that portion of the appellate opinion.
    III.
    Finally, though the Court’s summary affirmance benefits the State in
    the short term, the longer-term consequence of our ruling for the State’s
    future procurement efforts may not be so favorable. It will come as little
    surprise if prospective vendors respond to today’s ruling in one of two
    ways. Either they will not do business with the State at all, thus reducing
    the supply of those willing to contract with the State. Or they will include
    a risk premium in their contracts to cover the unknown costs of fulfilling
    obligations beyond what they agreed to. Either way, the State and its
    taxpayers may soon learn that the future cost of obtaining third-party
    services will be higher—perhaps appreciably so—than otherwise. The
    magnitude of the increased cost may not be knowable, but it is a cost
    nonetheless.
    Indiana Supreme Court | Case No. 19S-PL-19 | June 26, 2019          Page 4 of 4
    

Document Info

Docket Number: 19S-PL-19

Citation Numbers: 124 N.E.3d 1187

Filed Date: 6/26/2019

Precedential Status: Precedential

Modified Date: 1/12/2023