Front Loading Pay Requests May Lead To Liability
 

by James R. Keller

This article appeared in St. Louis Construction News & Review, p. 6, July-August 1999.

The construction and legal communities are abuzz again about downtown St. Louis' new federal courthouse. Unfortunately, the stir is not over its completion and opening, which are now far past the original date and appear to be pushed back yet again. Rather, the "news" is another lawsuit against Morse Diesel International Inc., the general contractor, filed in federal court in St. Louis by the United States of America.

The lawsuit is based on the False Claims Act, 31 U.S.C. 3729-3733, and various common law theories of breach of contract, payment under mistake of fact, and unjust enrichment. The government alleges that Morse Diesel front-loaded payment requests to the government.

The lawsuit relies on Federal Acquisition Regulation 52.232-5, Payments Under Fixed-Price Construction Contracts, which requires reimbursement to a contractor for bond premiums after the contractor has certified full payment to the surety. In addition, Regulation 52.232-27, Prompt Payment for Construction Contracts, requires that a contractor must pay its subcontractor for satisfactory performance within seven days of receipt of payment from the government for such work.

The government alleges that contrary to these provisions, Morse Diesel received progress payments for bond premiums before Morse Diesel actually paid them and Morse Diesel did not pay various subcontractors for work performed within seven days of receipt of payment for such services from the government. The government claims such "front loading" is improper.

The False Claims Act essentially requires that the government prove the following to make out its claim:

1.  
2. A contractor presented or caused to be presented to an agent of the United States a claim for payment; and
3. The claim was false or fraudulent; and
4. The contractor knew the claim was false or fraudulent; and
5. The United States suffered damages as a result of the false or fraudulent claim (one court decided actual damages were not necessary).

The government can prove that a contractor knew its claim was false or fraudulent by showing the contractor's actual knowledge, or its deliberate indifference as to the truth or falsity of the information, or its reckless disregard as to the truth or falsity of the information. The Act states that "no proof of specific intent to defraud is required." 31 U.S.C. 3729(b).

The False Claims Act has generated many cases since its enactment in 1982. However, the government's allegation that "front loading" is a violation of this Act is rather novel in this district but not completely without historical support from other federal districts. In Young-Montenay, Inc. v. United States of America, decided in 1993 in the United States Court of Federal Claims, the government advanced this same argument. (The case is unpublished in the Federal Reporters but can be located at 39 Cont. Cas. Fed. (CCH) p 76,642 and 1993 W.L. 721993 (Fed. Cl.).) The case was affirmed on appeal by the United States Court of Appeals, Federal Circuit, 15 F.3d 1040 (Fed. Cir. 1994).

This case involved a general contractor, Young-Montenay, who contracted with the Department of Veterans Affairs to renovate boilers at the medical center in Kerrville, Texas. The project started in 1982 and finished in 1990. Young submitted claims exceeding $228,000 for alleged government-caused delays and defective specifications.

The contractor sued the government. During the discovery process, the government found that the general contractor had submitted a false invoice to the government. The United States then counter sued under the Special Plea in Fraud, 28 U.S.C. 2514, and the False Claims Act.

The contractor admitted in his deposition that he knowingly submitted an invoice for a progress payment in the amount of $153,000 that included materials from its supplier when the actual cost for these materials was only $104,000. This meant a front-loaded payment of $49,000. The general contractor candidly testified that this was "an attempt to get up front money."

The Court of Claims "scheduled a hearing for the express purpose of determining whether a benign reason for such a practice could exist." The general contractor's central argument was that its supplier never got a penny more out of the contract than it was supposed to get; thus, the government's only complaint was that the general contractor received "$49,000 early."

The Court of Claims flatly found the contractor's actions to be wrong. In fact, the court concluded that the action would have been wrong even if the general contractor had received money from the United States only one week early. Applying the False Claims Act, the court concluded that the contractor "may have been entitled to the money at a future date, but this did not give it license to submit an altered invoice for payment."

The court found this method of "front loading" to be unacceptable and a violation of not only the False Claims Act, but also the Special Plea in Fraud, 28 U.S.C. 2514. This statute provides that anyone who attempts to defraud the United States in a statement for a claim forfeits that claim to the United States. The court concluded that the contractor therefore forfeited its own claim, and was liable pursuant to the False Claims Act for three times the false invoice of $49,000, making a total of $147,000 plus $5,000 in statutory penalties, also provided under the Act.

The Court of Appeals upheld this decision, including the amount of damages awarded to the government. In fact, both courts found the evidence to be strong enough that it was proper to enter summary judgment against the contractor without a trial.

What started as a $228,000 claim by the contractor ended in Young-Montenay forfeiting that claim and paying the government $152,000 in damages for violation of the False Claims Act. This was a swing in the government's favor of $380,000.

Jim Keller is a partner at Herzog, Crebs & McGhee, LLP, St. Louis, Missouri, where he concentrates on construction law, real estate and business litigation. He also is a panelist with the American Arbitration Association.