Federal Case Law: False Claims on Federal Loan Guarantees, Inadequate Discovery, and More

Case Summaries from the U.S. Court of Federal Claims and the Appeals Courts of the Sixth and Seventh Circuits

A corporation lies in applying for federal loan guarantees—and faces treble damages in United States v. Anchor Mortgage.  In Naylor v. Invacare, plaintiff’s request for information plays a key role.  Find out more.

United States v. Anchor Mortgage Corporation
2013 U.S. App. LEXIS 5552
March 21, 2013
United States Court of Appeals for the Seventh Circuit
Judge Easterbrook 

Defendants, a corporation and its CEO, appealed from the United States District Court for the Northern District of Illinois, Eastern Division, where the judge, following a bench trial, found that they lied when applying for federal guarantees of 11 loans. Under the False Claims Act, the district court imposed a penalty of $5,500 per loan, plus treble damages of about $2.7 million.

One kind of false statement was the corporation’s representation that it had not paid anyone for referring clients to it, but, in fact, it paid at least one referrer. Because the CEO knew that no “controlled business arrangement” was in existence, the district court did not commit a clear error in finding that he knew that the statements to the federal agency were false. The court ruled that the district court properly imposed treble damages under 31 U.S.C.S. § 3729(a)(1) rather than double damages under 31 U.S.C.S. § 3729(a)(2). 

Further, the statute did not cap damages for every violation just because a particular violation was reported. Sub-paragraph (A) refers to “the violation”; each had to be assessed separately. Ruling that neither statutory language nor any policy favored gross trebling under 31 U.S.C.S. §3729(a), the district judge was required to recalculate the award using the net trebling approach.  The judgment was affirmed to the extent it found defendants liable, but it was reversed to the extent it adopted the gross trebling approach. The case was remanded with instructions to recalculate the award under the net trebling approach.

Naylor v. Invacare Continuing Care, Inc.
2013 U.S. App. LEXIS 5684
March 18, 2013
United States Court of Appeals for the Sixth Circuit
Judge Cook

In a contract dispute concerning the sale of a medical equipment rental business’s assets, defendants appealed the U.S. District Court for the Western District of Tennessee’s bench trial judgment finding them liable for breach of contract, intentional misrepresentation, and violation of the Tennessee Consumer Protection Act (TCPA).

Plaintiffs cross-appealed the damages awarded. The district court properly decided plaintiffs’ claims. Defendants breached the finder’s fee provisions of the asset purchase agreement by promising a consultant a finder’s fee in lieu of his usual profit-based quarterly bonus, regardless of its accounting-related motives for paying the fee.

The district court’s factual findings as to the inadequate responses to plaintiffs’ requests for information were upheld, and it properly determined defendants violated plaintiffs’ verification rights under the accounts receivable repurchase provision. Defendants breached the escrow agreement by blocking the disbursement of the escrow funds in bad faith with an unsupported claim related to lost customer accounts. Plaintiff company president’s reliance on the express representations in a negotiated contractual document was reasonable under the circumstances. Because the district court’s factual findings supported each element, it correctly found defendants were liable for intentional misrepresentation. Defendants violated the TCPA for the same reasons a breach of contract and intentional misrepresentation were found. The district court did find some of the damages awards were in error.  The district court’s liability findings, the release of the escrow funds subject to prejudgment interest at a rate of ten percent, and the award of attorney’s fees were affirmed, but the district court’s awards of $210,000 in compensatory damages, $315,000 in punitive damages, and $3,000 for damage to rental beds were reversed.

Stockton East Water District v. United States
2013 U.S. Claims LEXIS 130
February 28, 2013
United States Court of Federal Claims
Judge Miller

A state water district won $2.268 million for its cost of cover after a federal agency breached the parties’ water supply contract.  However, it was only to the extent that the district’s consequential damages claim was based on what the district characterized as “stranded” overhead costs  it incurred for that part of a water conveyance system  it was required to construct (but did not use).  The court rejected the plaintiff’s request for expectancy or overhead damages because the costs to construct and maintain the system would have been incurred whether or not the contract had been breached and thus were not caused by the breach. 

Therefore, plaintiff was awarded $2.268 million for cost of cover, but denied any award of expectancy damages or damages for overhead. 

Peter H. Agrapides, MBA, AVA, is a Principal at Western Valuation Advisors, which has offices in Salt Lake City, Utah and Las Vegas, Nevada. Mr. Agrapides’ practice focuses primarily on valuations for gift and estate tax reporting. He has experience valuing companies in a diverse array of industries. These engagements have ranged from small family owned businesses to companies over $1billion.