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FCA Claim Improperly Limited to Funds Paid from U.S. Treasury

A district court ruling in a False Claims Act qui tam action that limited the relators' damages claim was reversed by the Court of Appeals for the Fourth Circuit because the court erred in restricting the FCA's applicability to a claim for funds paid from the United States Treasury. The action arose from a cost-plus contract awarded by the Coalition Provisional Authority in Iraq to provide risk management services. The relators alleged the contractor made fraudulent statements and submitted falsified invoices in violation of the FCA (31 USC 3729-3732). The district court limited the relators' fraud claim to $3 million, which was the amount paid to the contractor with a U.S. Treasury check (49 CCF 78,442). The court concluded that requests for payment from the Coalition Authority were requests for Iraqi funds and thus did not constitute an FCA claim. The court reasoned that a request for payment from government funds does not extend to cases where the government acts solely as a custodian or administrator of the funds. In reaching its holding, the district court conducted a source-of-funds analysis, which analyzed the three sources of funds used by the Coalition Authority: "vested funds," "seized funds," and the "Development Fund for Iraq." The court concluded the vested funds consisted of Iraqi monies held in U.S. bank accounts that were confiscated by Executive Order. It classified seized funds as those that were physically located in Iraq but legally confiscated by U.S. and coalition forces. The DFI, it determined, belonged to the Iraqi people. Although the U.S. government contributed vested funds to the DFI, the court determined the government no longer had title to those funds when the DFI was used to pay the contractor's claims. Thus, only the $3 million advance from seized funds supported a claim under the FCA.

Statutory Language

The relators appealed, arguing the district court erred in conducting a source-of-funds analysis that resulted in the damages limitation. In looking at the text of the FCA, the appellate court found the FCA covers a fraudulent claim even if the claim is "made to a ... grantee, or other recipient" of U.S. money so long as the claim would draw on a portion of money provided by the government (31 USC 3729(c)). The district court, therefore, erred in concluding it was "necessary to consider each source of funds separately to determine whether a request for payment therefrom constitute[d] a 'claim.' "The district court also erred in imposing a "control of funds" requirement. According to the court, when the U.S. transferred vested funds to the DFI, the government "relinquished control of those funds and they ceased to be ... government property," and thus the U.S. did not "provide" a portion of the money. The statutory language, however, precludes an interpretation requiring the government to retain control over funds used to pay claims by extending the reach of the FCA to money in the hands of a government "grantee" or "other recipient." Also, the contractor's argument that its requests for payment were not "claims" because the contractor was not in privity with the government lacked merit as the statutory language provided no indication Congress intended to require privity (see Allison Engine Co. v. U.S., ex rel Sanders, (US SCt 2008) 52 CCF 78,948). Thus, the district court's order limiting the definition of FCA "claims" was reversed and remanded to give the relators the right to elect a new trial. (U.S., ex rel. DRC, Inc., et al. v. Custer Battles, LLC, et al., CA-4, 53 CCF 79,087)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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