United States: In High-Profile "Custer Battles" Dispute, US Fourth Circuit Holds that False Claims Made to Grantees or Other Recipients of US Money Are Actionable if the Claim Involves Any Portion of US Funds

Article by Marcia G. Madsen , Cameron S. Hamrick and Anthony M. Alexis

Originally published April 20, 2009

Keywords: Custer Battles dispute, false claims, US funds, False Claims Act, Coalition Provisional Authority, CPA, FCA, false invoices, Iraq, Development Fund for Iraq

Overview

In one of the more highly publicized recent cases involving the civil False Claims Act, 31 U.S.C. §§ 3729-3733 (FCA), the Fourth Circuit recently overruled parts of a district court decision in the Custer Battles litigation that had spurred members of Congress to seek changes to the FCA.  See U.S. ex rel. DRC, Inc. v. Custer Battles, LLC, No. 07-1220, 2009 WL 971017 (4th Cir. Apr. 10, 2009).  In connection with a contract between Custer Battles and the Coalition Provisional Authority (CPA) that temporarily governed Iraq, the Fourth Circuit held that the lower court erred by limiting the relators' claims to $3 million paid to Custer Battles with a US Treasury check, thus excluding payments from the CPA's "Development Fund for Iraq" that included amounts provided by the United States.  In a finding that has significant potential implications for grantees, local governments, and their downstream contractors who receive some federal funds in connection with US government programs, the Fourth Circuit found that the FCA addresses false or fraudulent claims made to a grantee of US money so long as "any portion" of the claim is or will be funded by US money given to the grantee.  The Fourth Circuit also held that the district court erred in finding insufficient evidence to demonstrate that Custer Battles "presented" false invoices to US government employees or officers, where the district court incorrectly assumed that US government personnel detailed to the CPA could not be working in their official capacities as US government employees. 

Background

During the Iraq conflict, US General Tommy Franks, the Commander of the Coalition Forces, created a temporary body – the CPA – that governed Iraq in 2003 and 2004.  The large majority of the CPA's personnel were US civilian contractors and employees or in the US Military, and the remainder were from other countries.  In 2003 the CPA entered into a cost reimbursement contract with Custer Battles to provide services in Iraq related to the conversion of Iraqi currency.  At that time, the CPA gave Custer Battles a $3 million advance payment using a US Treasury check signed by a US Military officer.  Funds for the advance payment came from the CPA's "seized assets" account, which consisted of assets seized from Iraqi government sources.  Custer Battles' subsequent invoices, however, were paid from the CPA's "Development Fund for Iraq," which included funds from various non-US sources, but also included $210 million confiscated by the United States from Iraqi bank accounts and transferred to the Development Fund.  These payments, totaling approximately $12 million, resulted from Custer Battles invoices submitted to US personnel detailed to work with the CPA, who then forwarded the invoices to a US-retained contractor and US Military personnel for approval and ultimately to the CPA finance office for payment. 

DRC, Inc., a Custer Battles subcontractor, and DRC's managing director commenced the FCA case as "relators" under the FCA's qui tam provisions, which permit private citizens to bring claims under the FCA on behalf of the government and obtain a percentage of any recovery.  The relators claimed that Custer Battles submitted inflated invoices to the CPA.  Count I of the complaint alleged that Custer Battles presented to a US government official false claims in violation of 31 U.S.C. § 3729(a)(1), and Count II alleged that Custer Battles made false records to ensure payment of false claims under the contract in violation of 31 U.S.C. § 3729(a)(2).  The United States declined to intervene in the suit. 

Prior to trial, the district court granted partial summary judgment in favor of Custer Battles, limiting the Count I and II claims to the $3 million advance payment made with the US Treasury check.  The court concluded that requests for payment from the Development Fund were requests for Iraqi funds and thus did not constitute "claims" under the FCA.  In reaching this decision, the court found that once US funds were transferred to the Development Fund, the US relinquished control of the funds and thus did not "provide" a portion of the money requested from the Development Fund.  The court proceeded to trial on the Count I and II claims, and the jury returned a verdict in favor of the relators, finding defendants liable under both § 3729(a)(1) and (a)(2) up to the maximum damages allowed by the court – $3 million.  However, after trial, the court granted Custer Battles' motion for judgment as a matter of law pursuant to Fed. R. Civ. P. 50(a), finding that, with respect to § 3729(a)(1), the relators did not prove that invoices were presented to US government employees or officers, as required by that provision, but rather to the CPA; the court reached a similar conclusion with respect to § 3729(a)(2). 

The Fourth Circuit's Decision

On appeal, the Fourth Circuit noted that the definition of "claim" at 31 U.S.C. § 3729(c) addresses a false claim even if made to a "grantee, or other recipient" of US money so long as the claim would draw on money of which the United States provides "any portion."  The district court therefore erred by concluding it had to consider each source of funds separately to determine whether a request for payment constitutes a "claim," and also erred by imposing a "control of funds" requirement with respect to the $210 million in US funds that were transferred to the Development Fund.  The evidence demonstrated that, beyond the $3 million advance, Custer Battles made claims to a grantee of US money – the CPA – and the claims were paid from the grantee's funds – the Development Fund – a portion of which was provided by the United States.  The Fourth Circuit also concluded that, while all of the claims submitted on the contract were qualifying "claims" under the FCA, damages would be limited to those sustained by the United States (which might not have exceeded the $3 million found by the jury).  The Fourth Circuit remanded to give the relators the right to elect a new trial on the cost-plus contract claims.

Turning to the "presentment" issue, the Fourth Circuit stated that while § 3729(a)(1) requires presentment to US government personnel working in their official capacity, the relators introduced ample evidence to show that fraudulently inflated invoices were presented to such personnel.  For example, the Fourth Circuit noted that invoices were presented in the first instance to professional US government contracting officers who were paid and supervised by the US military.  With respect to Count II, the Fourth Circuit found that the district court's holding, that § 3729(a)(2) contains a "presentment" requirement, has been subsequently rejected by the Supreme Court in Allison Engine Co. v. U.S. ex rel. Sanders,     U.S.     , 128 S.Ct. 2123, (2009).

The relators did not achieve complete victory.  The CPA also entered into a fixed-price contract with Custer Battles to provide airport security; while Custer Battles submitted a proposal for that contract based on salaries of 138.5 personnel, the contract did not specify a fixed number of personnel.  The relators nonetheless alleged that Custer Battles understaffed that contract by not providing at least 138.5 persons, in violation of the FCA.  The Fourth Circuit sustained the district court's grant of summary judgment on behalf of Custer Battles concerning that claim, which the Fourth Circuit characterized as based on alleged fraud-in-the-inducement – Custer Battles promised 138 security personnel but provided fewer.  The Fourth Circuit observed that Custer Battles' proposal did not state or promise 138 security personnel, nor did the contract refer to that number.  Moreover, because the contract was for a fixed price, no invoices for personnel expenses were submitted.

Pending Legislation

The district court's decision received substantial attention – including the attention of key members of Congress, who heard complaints from the qui tam relators' bar about the presentment aspect of the dispute and the threat to FCA cases involving funds administered by the United States. The qui tam relators' bar has asserted that there are thousands of qui tam cases pending involving fraud against the CPA.  Bills are pending before both the House and the Senate that would amend the FCA, in part, to overturn the district court's decision (proposing, for example, to eliminate the language in current § 3729(a)(1) for presentation to "an officer or employee of the United States Government or a member of the armed forces of the United States").  Thus, while the Fourth Circuit's decision may facilitate further FCA cases involving claims submitted to the CPA, it also addresses one of the allegedly incorrect cases advanced by proponents of changes to the FCA and demonstrates that courts are following the Allison Engine decision, thus perhaps rendering further legislation unnecessary.

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