Fifth Circuit affirms bankruptcy trustee's standing to prosecute qui tam suit, as well as its dismissal

by admin | May 9th, 2014

On May 5, in U.S. ex rel. Spicer v. Navistar Defense, LLC, the Court of Appeals for the Fifth Circuit agreed with a bankruptcy trustee that he had the standing to litigate a qui tam suit originally brought by a bankrupt company, but the court also affirmed the dismissal of that suit for failing to allege a violation of the False Claims Act.

The case was originally brought by a defense contractor against a competitor and its subcontractors. The relator-contractor alleged had submitted false claims for Mine Resistant Ambush Protected (MRAP) vehicles, because components had not been chemically treated by a sub-subcontractor. When the relator-contractor filed for bankruptcy, it obtained the court’s permission to substitute its owner (who also had filed for bankruptcy) on the grounds that the company remained in existence only to wind down. The government declined to intervene in the case, and the defendants and the trustee moved to vacate the substitution order. The trustee also moved to substitute himself for the relator, and was granted standing by the District Court. That court subsequently dismissed the case on grounds of lack of particularity under Fed. R. Civ. P. 9(b). The trustee appealed that decision, and the owner of the defunct relator-contractor appealed the District Court’s substitution of the trustee for him in the case.

The Fifth Circuit first affirmed the trustee’s standing, noting that under bankruptcy law, the trustee was the real party in interest for all undisclosed claims. The question, therefore, became whether the relator-contractor had disclosed the existence of the qui tam claim in its bankruptcy – a question complicated by the fact that both it and its owner had been interviewed on the same day with respect to the assets of their respective bankruptcies. The court first found that there had been no disclosure of the case whatever in the company’s bankruptcy, despite the company’s obligation to disclose all of its assets. The owner had vaguely referred to an interest in a case against his competitors, but even assuming, arguendo, that this amounted to a disclosure on behalf of the company, the court reasoned, it fell short of a disclosure sufficient to deprive the trustee of standing.

Turning to the lower court’s dismissal of the case, the Fifth Circuit rejected the trustee’s allegation that each MRAP delivery to the government comprised a false statement. Although a Federal Acquisition Regulation incorporated into the contract by reference required the prime contractor to have an inspection system in place and to provide to the government goods that had been inspected according to that system, this fell short of a condition of payment under the contract, the court reasoned. It noted that it had previously described the prerequisite requirement as arising from materiality, the latter concept “does not fully encompass the requirement” (i.e., that it was a condition of payment).

The court rejected the trustee’s reliance on the FAR provision, noting that the government had a range of remedies for noncompliant goods, and it relied on the fact that the government had rejected some of the MRAPs for noncompliant coating:

The United States’ rejection of those MRAPs – within the terms of FAR clause 52.246-2 – belies the notion that Navistar Defense made a material false or fraudulent statement within the meaning of the FCA.

The court likewise rejected the trustee’s reliance on false statements regarding conformance with the coating requirement, made by the sub-subcontractor on its invoices. Nothing in his complaint, the court found, satisfied the prerequisite requirement nor did he allege that the prime contractor made a statement to the United States in reliance on the sub-subcontractor’s alleged misrepresentations.

For these reasons, the court concluded, the trustee had failed to allege fraud with particularity.

The court also affirmed the District Court’s denial of the trustee’s motion for leave to file a second amended complaint.

Comment: The dismissal portion of this opinion strikes me as very poorly-reasoned: First, the case clearly alleges that the defendant contractors knowingly submitted MRAPs which failed to conform to contract specifications. The importance of this requirement to the government is underscored, not undermined, by the fact that in some instances, it rejected MRAPs for failing to comply with it. In adopting this hyper-technical reading of materiality under the FCA, the court digs a deeper hole for relators (and the government) than it had already dug in U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262 (5th Cir. 2010).

Second, the court conflates Rule 9(b)’s particularity requirement with the standard under 12(b)(6) to state a legally sufficient claim. The case and the court’s analysis of it have essentially nothing to do with particularity, and instead deals with whether the alleged misrepresentations are sufficient to violate the Act.

Unfortunately, once again, it appears from the Fifth Circuit’s docket that the government neither briefed nor argued the case.

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