NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 16-1327
_____________
PHILADELPHIA WORKFORCE DEVELOPMENT CORPORATION
v.
KRA CORPORATION,
Appellant
_______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2-09-cv-05261)
District Judge: Hon. Wendy Beetlestone
_______________
Submitted Under Third Circuit L.A.R. 34.1(a)
November 3, 2016
Before: JORDAN, GREENAWAY, JR., and RENDELL, Circuit Judges.
(Filed: December 13, 2016)
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OPINION
_______________
JORDAN, Circuit Judge.
This appeal involves a contract dispute between KRA Corporation, a for-profit
workforce development services management company, and Philadelphia Workforce
This disposition is not an opinion of the full court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
Development Corporation (“PWDC”), a non-profit entity responsible for overseeing
federal and state programs to help unemployed or underemployed Philadelphians develop
job skills. PWDC contracted with KRA for the latter to manage some of those programs.
After an audit by the Commonwealth of Pennsylvania found that PWDC had overpaid
KRA by over two million dollars, PWDC refused to pay KRA for certain invoiced but
not-yet-paid work. PWDC sued to recover the money that it claims it overpaid KRA,
while KRA sought to compel PWDC to pay the money it claims is still owed.
KRA argues that the contract allowed it to keep as profit all of the payments it
received upon meeting certain performance benchmarks, regardless of how much money
it expended to administer the programs. PWDC urges, to the contrary, that the contract
cabins profit and requires KRA to return most of the revenue that exceeded expenditures.
The District Court determined that the contract was ambiguous and left interpretation of
it to the jury. The jury returned a verdict for PWDC.
On appeal, KRA challenges the determination that the contract was ambiguous. It
also takes issue with several evidentiary rulings, and contends that there was insufficient
evidence to support PWDC’s decision to withhold payments for certain indirect costs
incurred by KRA. We conclude that the contract was ambiguous, that none of the
evidentiary rulings amount to reversible error, and that the evidence was sufficient to
allow the jury to accept PWDC’s indirect cost calculations. We will therefore affirm.
2
I. BACKGROUND
A. Factual Background
PWDC acts as the fiscal agent for the City of Philadelphia in administering
services for the unemployed or underemployed,1 including a variety of workforce
development and skills training programs. In 2005, PWDC began contracting with both
for-profit and non-profit organizations to provide personalized career guidance to city
residents and to operate Employment Advancement and Retention Network Centers
(“EARN Centers”) where Philadelphians can receive assistance in finding and retaining
employment.
In such a contract entered in 2007, KRA agreed to operate two EARN Centers for
the 2008 fiscal year. 2 The first was in Germantown and the second in West Philadelphia
on or near Delancey Street. During FY 2009, KRA continued to operate the two centers
and also began offering Job Specific Skills Training (“JSST”) programs for dental
assistants and phlebotomists at the Delancey location.
PWDC utilized three types of contracts to govern its relationship with contractors
like KRA. The first was a cost-reimbursement model in which the contractor was
reimbursed for direct and indirect costs, including profit categorized as an administrative
expense. The second provided for performance-based payments requiring a contractor to
1
In 2012, PWDC merged with another entity, the Philadelphia Workforce
Investment Board to form a new entity, Philadelphia Works, Inc. That merger does not
impact this appeal.
2
Fiscal Years run from July 1 of one year through June 30 of the next.
3
meet certain benchmarks before being paid. The third type of contract, the one that
governed the relationship between PWDC and KRA, was a hybrid that featured both
cost-reimbursement and performance-based payments. Under hybrid contracts in 2008
and 2009, KRA was immediately reimbursed an amount up to a fixed percentage of the
cost to run each center. It was also fully reimbursed for money expended on direct client
services. KRA received additional payments as it achieved predetermined performance
benchmarks.
During FY 2008, the relationship proceeded according to the terms of the contract.
KRA ran the EARN centers, invoiced PWDC, and received payment in a timely fashion.
It is undisputed that KRA met its performance benchmarks. But the relationship changed
when, in May of 2009, pursuant to the terms of the contract, the Bureau of Financial
Operations of the Commonwealth of Pennsylvania audited PWDC’s payments to KRA.
The Commonwealth concluded that KRA had inflated its reported expenses and therefore
had been paid 2.2 million dollars ($2,219,060) more than it was owed. Consequently, in
June 2009, PWDC suspended payments to KRA and launched an internal audit of
pending invoices. The internal audit concluded that 1.9 million dollars ($1,932,991.08)
of invoiced payments should not be paid. Of particular relevance to this appeal, the audit
found that KRA failed to properly document administrative costs.
Because of a budget impasse in Pennsylvania in 2009, PWDC was unable to fully
negotiate new contracts with the entities running its EARN Centers, and so it authorized
those entities to continue operating the centers on a cost-reimbursement basis. KRA thus
kept operating the Germantown and Delancey EARN Centers and JSST programs for a
4
while. After PWDC withheld all payments from KRA because of the disputed FY 2008
overpayments, KRA stopped operating the EARN centers in October 2009, which fell
within FY 2010.
That same month, PWDC sued KRA seeking damages for breach of contract,
replevin, and conversion, arguing that KRA was overpaid and failed to return the
overpayment. KRA filed counterclaims seeking payments that PWDC withheld. PWDC
conceded that KRA was owed nearly sixty thousand dollars ($59,190) from FY 2009 and
nearly two million dollars ($1,998,719) for its work during FY 2010. But once those
amounts were deducted from the amount it said it had overpaid KRA, PWDC demanded
one hundred and sixty thousand dollars ($161,151) from KRA.
B. Procedural Background
At trial, each side presented sharply contrasting theories of contract interpretation.
The central dispute was over whether the FY 2008 contract required performance-based
payments to be somehow linked to expenditures. KRA argued that the contract
unambiguously entitled KRA to full payment for all performance benchmarks achieved.
PWDC, on the other hand, argued that performance-based payments in excess of
expenditures constituted excess profit that had to be returned to PWDC. KRA moved for
summary judgment, which was denied, and then made a motion in limine before the start
of trial seeking to exclude parol evidence regarding the proper interpretation of the
contract. The District Court rejected KRA’s argument and concluded that the contract
was ambiguous. As a result, the Court allowed extrinsic evidence to be presented to the
jury. Over KRA’s objection, the jury was allowed to consider the Commonwealth’s audit
5
report and so-called Subcontractor Expenditure Summary forms completed by KRA at
the end of FY 2008, which reported that KRA did not have excess program income to
return to PWDC.
KRA was not only on the losing end of rulings that allowed evidence in, it also
lost on rulings that kept evidence out. The Court excluded certain documents produced
by KRA in response to PWDC’s audit. Those documents were offered to justify some of
the payments that had been disallowed by PWDC. The Court also excluded, as
irrelevant, an e-mail from PWDC’s former President to a Commonwealth official. The
email discussed changes to PWDC’s budget proposal for FY 2010, which would cap “the
amount that EARN Centers can earn for each performance benchmark[.]” (App. at
2586.) According to the email, the changes were “absolutely necessary” since “[l]ast
year most centers earned above the contract amount in certain performance benchmarks,
which ‘busted’ the budget but did not get … the desired results[.]” (Id.)
At trial, PWDC and KRA continued to dispute the propriety of PWDC’s
disallowance of certain payments sought by KRA for FY 2009. KRA claimed that
PWDC did not have evidence to support those disallowances. But PWDC presented its
audit report and testimony from those who had prepared it.
After hearing extensive testimony, the jury ruled in favor of PWDC. It adopted
PWDC’s damage estimates in full and concluded that KRA owed PWDC $161,151.
KRA filed a motion for judgment as a matter of law or for a new trial. The Court denied
the motion, and KRA filed this timely appeal.
6
II. DISCUSSION3
KRA raises three challenges before us. First, it argues that the District Court
improperly concluded that the FY 2008 contract was ambiguous. Because KRA urges
that the contract was unambiguous, it likewise believes that parol evidence should not
have been admissible and that the jury should not have been permitted to consider
PWDC’s interpretation of the contract. Second, KRA claims that the District Court erred
when it admitted into evidence certain documents introduced by PWDC and excluded
others introduced by KRA. Finally, KRA challenges specific payment disallowances for
indirect costs incurred during FY 2009. We address each of those arguments in turn.
A. Contract Ambiguity and Parole Evidence
Pennsylvania law, which governs the interpretation of the contract, permits
extrinsic evidence “where a term in the parties’ contract is ambiguous[.]” Yocca v.
Pittsburgh Steelers Sports, Inc., 854 A.2d 425, 437 (Pa. 2004). “Determining whether a
contract is ambiguous is a legal question, and our review is plenary.” Pacitti v. Macy’s,
193 F.3d 766, 773 (3d Cir. 1999). A contract is ambiguous when “it is reasonably or
fairly susceptible of different constructions and is capable of being understood in more
senses than one and is obscure in meaning through indefiniteness of expression or has a
double meaning.” Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 614
(3d Cir. 1995) (quoting Samuel Rappaport Family P’ship v. Meridian Bank, 657 A.2d 17,
21-22 (Pa. Super. Ct. 1995)).
3
The District Court had jurisdiction under 28 U.S.C. §1332. We have jurisdiction
pursuant to 28 U.S.C. § 1291.
7
If a contract is ambiguous, then “a decision as to which of the competing
interpretations of the contract is the correct one is reserved for the factfinder, who would
examine the content of the extrinsic evidence (along with all the other evidence) in order
to make this determination.” Bohler-Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d
79, 94 (3d Cir. 2001).
We agree with the District Court that the FY 2008 contract between PWDC and
KRA was ambiguous. Ambiguity arises from three parts of the contract.
To begin with, the definition section of the contract defines two closely related key
terms – “program income”4 and “profit”5 – in an internally inconsistent fashion.
4
Whether KRA’s revenue is considered program income is perhaps the most
bitterly contested issue in this case. A portion of the contract explicitly states that “[a]ll
program income … realized in operating a program provided for under this agreement …
shall be reported and returned to PWDC.” (App. at 1066.) Program income is defined as
“income” derived from a variety of sources such as interest, rental and service fees, and
the sale of commodities. KRA argues that, as a commercial organization, its revenue is
not considered program income and need not be returned to PWDC. (See App. at 759
(defining program income, in part, as “revenue in excess of costs earned by organizations
other than those that are commercial”).) PWDC, in contrast, argues that a more general
clause applies to all payments including those earned by for-profit organizations such as
KRA. (See id. (defining program income in performance-based contracts to “include[]
the difference between the payments received for completing the performance
benchmarks and the actual expenses incurred in operating the program during the
program year”).)
5
KRA and PWDC specifically argue over whether the contract puts any limits on
KRA’s ability to earn profit. Profit is defined as “an amount in excess of the cost
necessary to operate a program.” (App. at 759-60.) PWDC argues that the contract only
allows profit under a cost-reimbursement contract. (See id. (“Profit is allowable under a
cost-reimbursement agreement to the extent that it is determined reasonable during
contract negotiations.”).) Alternatively, it argues that the contract cabins profit to no
more than 10% of the reimbursable costs. (See id. (noting that “the combination of profit
and administrative cost must not exceed 10%”).) KRA on the other hand argues that the
8
Consequently, KRA and PWDC were both able to offer plausible interpretations of those
terms.
Next, the method of payment section, the portion of the contract that describes the
process KRA used to invoice costs and record expenses, is ambiguous as to whether or
not KRA was required to maintain records of expenses incurred in order to receive
performance-based payments. KRA was “responsible for maintaining adequate
books/records to document the costs incurred to execute programming under th[e]
contract.” (App. at 764.) That contractual language is consistent with PWDC’s position.
On the other hand, the same section lists supporting documentation that a party may
provide when seeking reimbursement under a performance-based contract, but the list
conspicuously omits documentation regarding expenditures. (See App. at 764 (listing
supporting documentation as including “copies of enrollment reports, attendance records,
employment verification forms, pay stubs and/or copy of completion certificates or
paperwork.”).)
Finally, the budget, which is contained in Rider A and incorporated by reference
into the contract, offers some support for KRA’s position but remains open to PWDC’s
reading as well. It sets out all of the expected payments under the contract, including the
total “Prospective Performance Based-Payments” for which KRA could qualify. (App. at
796.) That amount is listed without any reference to cost, and the budget only mentions
that KRA would be subject to a quarterly performance review to determine whether KRA
contract is silent as to profit under hybrid contracts and that therefore such profit is
permitted without limits.
9
“is meeting the performance goals” set out in the contract. (App. at 798.) KRA relies
heavily on the absence of any language linking performance-based payments to actual
expenses. PWDC, however, rightly points out that nothing in the budget is incompatible
with PWDC’s reading or forecloses the possibility of requiring the return of program
income in excess of costs.
KRA argues that those ambiguities should be resolved in its favor due to policy
considerations. Specifically, it claims that, since the risk of loss for failing to meet
performance-based metrics would be too great without a commensurate opportunity to
earn unconstrained profit, no for-profit entity would enter into a contract under the terms
described by PWDC. But Pennsylvania law instructs that “ambiguous writings are
interpreted by the finder of fact.” Ins. Adjustment Bureau, Inc. v. Allstate Ins. Co., 905
A.2d 462, 469 (Pa. 2006). Here, the District Court rightly concluded that there was
ambiguity. The jury then heard the parties’ positions and decided against KRA.
“[V]iewing all the evidence which ha[d] been tendered and should have been admitted in
the light most favorable to the party opposing the motion,” we cannot say that “no jury
could decide in [PWDC’s] favor.” Walter v. Holiday Inns, Inc., 985 F.2d 1232, 1238 (3d
Cir. 1993) (citation omitted).
B. The District Court’s Evidentiary Rulings
KRA challenges several of the District Court’s evidentiary rulings. We review
decisions to admit or exclude evidence for abuse of discretion. See United States v.
Furst, 886 F.2d 558, 571 (3d Cir. 1989).
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1. Inclusion of Evidence
KRA challenges the admission of the Commonwealth’s audit, arguing that it was
inadmissible hearsay. The District Court agreed that the audit was hearsay but concluded
that it was still admissible under the hearsay exception for regularly conducted business
activities. FED. R. EVID. 803(6)(B). Because there was evidence presented at trial that
the audit was made and kept in the ordinary course of business, the Court was within the
bounds of its discretion in ruling that the audit could be admitted.
KRA also argues that the audit and the Subcontractor Expenditure Summary forms
were irrelevant. We disagree. Relevance is a low bar and those documents undoubtedly
clear it. See FED R. EVID. 401. The audit supported PWDC’s damage calculations. The
forms showed that PWDC’s contemporaneous understanding of the contract term
“program income” was fully compatible with its theory at the time of trial, so the forms
were capable of assisting the jury in its effort to understand the contract. The Court did
not abuse its discretion by admitting the documents.
2. Exclusion of Evidence
KRA also challenges the exclusion of evidence it offered. The documents it
submitted to try to reconcile its claims with expenditures were not documents “kept in the
course of a regularly conducted activity of a business,” nor was producing those
documents “a regular practice” of KRA. FED. R. EVID. 803(6)(B), (C). They were
therefore properly excluded as inadmissible hearsay.
The District Court’s decision to exclude the email authored by PWDC’s President
is another matter. The Court dismissed that email as irrelevant, but it is hard to see how
11
that could be so since it bore directly on how the budget was affected by contractual
benchmarks. It was written soon after the end of FY 2009 and discussed how contracts in
that year for EARN centers had worked out financially. PWDC’s President’s statement
that many of the EARN centers “earned above the contract amount in certain
performance benchmarks” and that those payments “‘busted’ the budget” could have
given the jury a basis for accepting KRA’s interpretation of the contract. (App. at 2586.)
If performance payments had “busted” the budget, then the jury could have concluded
that PWDC had not cabined profit to 10% and had instead allowed contractors to keep all
of their profits.
But even if the District Court should have allowed the e-mail into evidence, the
error was harmless. It is highly likely that the admission of the e-mail would not have
altered the jury verdict. See McQueeney v. Wilmington Trust Co., 779 F.2d 916, 917 (3d
Cir. 1985) (holding that nonconstitutional errors in civil suits “are harmless only if it is
highly probable that the errors did not affect the outcome of the case”). While the e-mail
could have supported KRA’s interpretation of the contract, it also could be interpreted in
harmony with PWDC’s interpretation. Testimony at trial suggested that the budget was
“busted” as a result of the mandate that an EARN center accept all “clients that are
referred to that EARN Center.” (App. at 512.) In light of the economic downturn, there
was greater demand for the services of the EARN Center and therefore PWDC incurred
unusually high expenses. (App. at 512.) And, overall, PWDC’s case was strong. Even
some of the witnesses called by KRA supported PWDC’s interpretation of the contract.
Indeed, KRA’s own internal audit supported PWDC’s position that excess payments
12
needed to be returned to PWDC. (See App. at 2526 (noting that KRA “does not maintain
any equity in the contract and any excess of cash received from Philadelphia Workforce
Development Corporation over final expenditures is due back to Philadelphia Workforce
Development Corporation”).)
Given the ease with which PWDC could have drawn KRA’s interpretation of the
e-mail into question, and the strength of the evidence against KRA, we conclude that it is
highly probable that the exclusion of the e-mail did not affect the outcome of the case.
McQueeney, 779 F.2d at 917.
C. Indirect Cost Calculations
The final issue before us concerns PWDC’s decision to disallow payment of
administrative costs that KRA incurred during FY 2009.6 The budget filled out at the
start of the fiscal year stated that KRA could be reimbursed for approximately one
million dollars in administrative costs and other indirect costs ($490,472 for the Delancey
EARN Center and $462,030 for the Germantown EARN Center). In the budget, those
costs were broken down into categories (salaries, fringe benefits, operating expenses,
equipment, supplies, indirect costs, other, and profit).
6
In its brief, KRA also seems to broadly challenge all of PWDC’s FY 2009
disallowances. But the administrative and indirect cost disallowances are the only ones
that KRA points to with any specificity. We therefore find that KRA has failed to
preserve its arguments regarding PWDC’s other disallowances. See Kost v. Kozakiewicz,
1 F.3d 176, 182 (3d Cir. 1993) (recognizing that it is well settled “that casual mention of
an issue in a brief is cursory treatment insufficient to preserve the issue on appeal.”
(citing Simmons v. City of Philadelphia, 947 F.2d 1042, 1066 (3d Cir. 1991))).
13
PWDC’s internal audit found that KRA failed to adequately account for and
categorize its administrative costs and instead lumped all of its administrative costs into
the general category of “indirect costs.” PWDC therefore disallowed all administrative
costs for FY 2009. KRA, on the other hand, argues that it did not need to break out its
administrative costs into categories because it had an agreement with the federal
Department of Health and Human Services setting a fixed rate for the reimbursement of
indirect costs, and so it could properly place all of its administrative costs into that
general category.
KRA and PWDC both make plausible arguments based on contradictory parts of
the FY 2009 budget. In the budget’s breakdown of administrative costs by category,
KRA is not entitled to reimbursement for indirect costs. A few pages later, however, the
budget lists a reimbursement rate for indirect costs and a large “base” value for
reimbursable indirect costs. (App. at 1333.) Those two sections of the budget seem to
contradict each other.
Even though KRA could point to language supporting its argument, it did not
otherwise offer evidence in support of its theory. The section that KRA relies on requires
that “[a] copy of the current negotiated rate, supporting the base and rate must
accompany the proposal.” (App. at 1333.) No such negotiated rate accompanied the
budget. And, at trial, KRA failed to produce the negotiated rate or any evidence that it
had a fixed rate agreement with the Department of Health and Human Services. In
contrast, PWDC put forth witnesses who testified that PWDC had conducted a line-by-
line audit of all of KRA’s claimed expenses and that the amounts that PWDC had
14
disallowed were consistent with the audit findings. Because of KRA’s failure to
substantiate its claims, the jury was free to accept PWDC’s evidence and conclude that
KRA had erroneously lumped all of its administrative costs into the category of indirect
costs.
III. CONCLUSION
For the foregoing reasons, we will affirm.
15