Fourth Circuit Invalidates Fraudulently-Induced Settlement Agreement

On Novmeber 10, 2011, the Fourth Circuit issued its unpublished per curiam opinion in Paul Morrell, Inc. v. Kellogg, Brown & Root Services in which it affirmed a nearly $20 million fraudulent inducement judgment against Kellogg Brown & Root (KBR) and related entities.  The judgment included prejudgment interest and $4 million in punitive damages.

The suit arose out of a contract dispute and settlement between KBR and Paul Morrell, which was doing business as The Event Source (TES) and was a sub-contractor on a contract in which KBR and TES provided dining services for US troops in Iraq.  A government audit revealed that KBR was charging the government for more meals that were actually served and so the government decided to withhold nearly 20% of its payments to KBR.  KBR passed this loss on to its subcontractors.  For reasons that are unclear but were based on fraudulent misreprentations that KBR made to TES, TES agreed to payments of $24 million for its services under the contract when it was in fact entitled to $36 million.

The district court determined that KBR made material false statements in order to induce TES to accept a settlement payment that was approximately $12.4 million less than what KBR had previously acknowledged it owed TES.  Applying Texas law in this diversity case, the Court of Appeals had to determine whether TES's reliance on KBR's fraudulent misrepresentations was reasonable.  That issue raises a mixed question of fact and law, but in this case, the trial court's ruling turned on factual determinations that could only be not clearly erroneous.  

The Fourth Circuit also rejected KBR's additional challenges to the District Court's judgment.

[JT]