A federal appeals court rejected the attempts of a bankrupt whistleblower to prevent his trustee from prosecuting a $12 billion False Claims Act suit.
On May 5, a panel for the U.S. 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.
Circuit Judge Jennifer Walker Elrod, writing for a unanimous panel, affirmed a district court’s decision that trustee John Dee Spicer had exclusive standing to bring the FCA suit alleging Navistar Defense LLC submitted false claims over $3.7 billion in military vehicles.
“We agree with the district court that only Spicer has standing to prosecute the FCA lawsuit,” Elrod wrote. “We further agree with the district court’s Rule 12(b)(6) dismissal and conclude the district court did not abuse its discretion in denying the motion for reconsideration. We therefore affirm.”
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.
A qui tam lawsuit is brought by a private citizen ( a "whistle blower") against a person or company who is believed to have violated the law in the performance of a contract with the government or in violation of a government regulation, when there is a statute which provides for a penalty for such violations.
Clifford Westbrook and his company, Westbrook Navigator LLC, filed separate Chapter 7 petitions on May 15, 2010.
Court papers say that on his personal schedule of assets, Westbrook listed “potential claims against competitors improper action (amount unknown)” under the category labeled “other contingent and unliquidated claims of any nature.” The same category was left blank on Navigator’s schedule of assets.
Westbrook was referring to a case in which the Department of Justice was investigating “bribery in a government contract,” and Westbrook was to possibly serve as a witness for a 15 fee of any money recovered by the government.
Since Westbrook had listed no assets for Navigator, the bankruptcy court approved Spicer’s no-asset report and closed the Navigator bankruptcy case on July 223, 2010. Westbrook’s bankruptcy was approved with a no-asset report on April 25, 2011.
But in October 2011, Spicer moved to reopen the Westbrook and Navigator bankruptcy cases in order to administer the FCA lawsuit as an asset, claiming he had just been made aware of the lawsuit at the end of September 2011. The bankruptcy court granted the motion.
In January 2007, U.S. government hired Navistar Defense LLC a contract to manufacture Mine Resistant Ambush Protected vehicles (MRAPs), vehicles to transport fighters in combat zones.
Navistar subcontracted with Defiance Metal Products Co. to manufacture component parts of the MRAPs. Bell Custom Conversions was also subcontracted to apply the Chemical Agent Resistant Coating to the vehicles, which includes the application of a specific epoxy primer.
Court documents say Custom Conversions began work in February 2007, “but soon confronted difficulties in applying the required epoxy primary.”
“Custom Conversions then decided to skip the priming step of the CARC system,” appellate documents state. “Yet Custom Conversions included a statement on invoices sent to Navistar Defense and Defiance that its finished component parts conformed to the relevant military specifications.”
Even though Westbrook supposedly noticed the component parts had visible corrosion and adhesion problems, court papers say Navistar Defense continued to subcontract with Custom Conversions into 2009. Navistar Defense ultimately delivered more than 7,000 MRAP vehicles to the U.S. government at $530,000 each.
Navigator asserted claims in 2010 against Navistar Inc., Navistar Defense, Defiance, Jerry Bell and Custom Conversions, alleging the defendants violated “various provisions of the FCA by making false statements to the United States in connection with the delivery of MRAPs pursuant to a government contract.” Navigator alleged damages of more than $12 billion.
At the same time, Navigator was in the middle of bankruptcy proceedings.
In April 2011, Westbrook was substituted as relator in Navigator’s case.
Defendants moved for reconsideration in September 2011, arguing that neither Navigator nor Westbrook had standing to prosecute the case, and in December 2011, Spicer had himself substituted as relator.
Spicer filed an amended complaint on April 20, 2012, asserting five FCA claims. He alleged Navistar Defense knowingly made false statements that the MRAPs were manufactured according to contract requirements. He also claimed Navistar Defense, Defiance, Custom Conversions and Bell conspired to present false claims and make false statements in connection with the delivery of the non-conforming MRAPs.
On July 11, 2012, however, the district court dismissed Spicer’s First Amended Complaint.
Westbrook and Spicer went to the Supreme Court with two separate appeals
Court affirmed decision to substitute Spicer as relator.
Westbrook argued that he had adequately disclosed Navigator’s potential claims against competitors to Spicer by listing them on his personal asset schedule.
“Each party was aware of the facts underlying the FCA claims (i.e., generally, the alleged failure to comply with the CARC) prior to both bankruptcies,” the court wrote.
"Because the FCA suit belonged to Navigator’s bankruptcy estate when it was filed, Spicer was the real party in interest, with exclusive standing to assert the claims. We therefore conclude that the district court did not abuse its discretion in substituting Spicer as relator in this case."
Qui tam is short for "qui tam pro domingo rege quam pro se ipso in hac parte sequitur," which means "who pursues this action on our Lord the King’s behalf as well as his own.”
Case No. 12-10858