Court Opinion

ID: 194794
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:25:17+00
Date Added: 2024-06-11T12:06:44.777816
License: Public Domain

June 23, 1993
                UNITED STATES COURT OF APPEALS
                    FOR THE FIRST CIRCUIT
                                 

No. 92-2108

                  UNITED STATES OF AMERICA,
                    Plaintiff, Appellant,

                              v.

      AMERICAN HEART RESEARCH FOUNDATION, INC., ET AL.,
                    Defendants, Appellees.

                                    

                         ERRATA SHEET

   The  opinion of  this  Court issued  on  June 18,  1993,  is
amended as follows:

   On page 9, line 1:  insert a comma between "understanding" 
and the quotation mark that immediately follows. 

                UNITED STATES COURT OF APPEALS
                    FOR THE FIRST CIRCUIT
                                         

No. 92-2108

                  UNITED STATES OF AMERICA,

                    Plaintiff, Appellant,

                              v.

      AMERICAN HEART RESEARCH FOUNDATION, INC., ET AL., 

                    Defendants, Appellees.

                                         

         APPEAL FROM THE UNITED STATES DISTRICT COURT

              FOR THE DISTRICT OF NEW HAMPSHIRE

         [Hon. Norman H. Stahl, U. S. District Judge]
                                                    

                                         

                            Before

                      Cyr, Circuit Judge,
                                        
               Campbell, Senior Circuit Judge,
                                             
                  and Boudin, Circuit Judge.
                                           

                                         

Paul  D. Scott, Attorney,  Department of Justice, with whom Stuart
                                                                  
M.  Gerson,  Assistant Attorney  General,  Jeffrey  R. Howard,  United
                                                         
States Attorney,  Douglas N. Letter, Attorney,  Department of Justice,
                               
Michael  F.  Hertz, Attorney,  Department  of Justice,  and  Steven D.
                                                                  
Altman, Attorney, Department of Justice, were on brief for appellant.
  
Kenneth I. Schacter with whom David  M. Cohen, Richards &  O'Neil,
                                                                 
David Jordan and Jordan & Gfroerer were on brief for appellees.
                              

                                         

                        June 18, 1993
                                         

     BOUDIN,  Circuit Judge.    In this  case, involving  the
                           

underpayment  of  postage  based  on  misrepresentations, the

district court ruled that  the False Claims Act, 31  U.S.C.  

3729, did  not (prior to its amendment  in 1986) apply to so-

called "reverse false claims"  whereby the government is paid

less than its due.  A back-up claim for unjust enrichment was

dismissed  on  res judicata  grounds.    We  agree  with  the
                           

district court on the interpretation of the  False Claims Act

but disagree that the  unjust enrichment claim was barred  by

res  judicata.  Accordingly, we affirm in part and vacate and
             

remand in part.

     The  facts can  be briefly  stated.   Robert Paltrow  in

1983-1984  set up  two corporations--American  Heart Research

Foundation, Inc. ("AHRF") and American Cancer Research Funds,

Inc. ("ACRF")--purportedly to promote research  to cure these

diseases.   In July 1984  Paltrow submitted an application to

the  United  States  Postal  Service  to  obtain for  ACRF  a

reduced-rate mailing permit; the application represented that

ACRF  was  a scientific  non-profit  entity  helping to  cure

cancer.

     ACRF  used  the  permit  to  mail  millions  of  letters

soliciting  for funds.   AHRF, without  applying for  its own

permit,  used ACRF's  permit for  its own  solicitations.   A

direct  mail   organization  controlled  by   Paltrow,  North

American   Communications,   Inc.   ("NAC"),  conducted   the

                             -2-

mailings.  As a result of the special permit, the postage was

approximately one-half  the usual  rate for bulk  third class

mail,  and  ACRF  and  AHRF paid  the  Postal  Service  about

$472,000  less  than  they  would have  without  the  special

permit.

     In fact ACRF and AHRF were not non-profit  scientific or

charitable  organizations  but  were old-fashioned  swindles,

raising money on charitable pretexts  for the benefit of  the

organizers.   In addition  to raising  funds,  ACRF sent  out

purported  scientific  surveys,   of  no  scientific   value,

apparently  to gull  the public  into taking  ACRF seriously.

Needless to say,  the application ACRF filed  with the Postal

Service, making  the necessary claim that it  was a qualified

non-profit organization under the applicable regulations, was

false.    AHRF's  mailings  were based  on  the  fraudulently

obtained ACRF permit.

     The solicitations occurred in 1984 and 1985.   In spring

1986, the  government filed  a  criminal information  against

ACRF and AHRF  asserting ten  counts of mail  fraud under  18

U.S.C.   1341;  NAC and  Paltrow were named  in the  criminal

information  as  participating in  the  scheme  but were  not

separately charged.   The  government also filed  a complaint

for injunctive relief under  18 U.S.C.   1345.   That section

gives the government a  civil action for expedited injunctive

                             -3-

relief  where mail fraud is occurring  or is threatened.   No

damage claim was asserted in this action.

     In April  1986 Paltrow pleaded  ACRF and AHRF  guilty on

all ten counts  of mail fraud  in the criminal  case, and  he

admitted  that he and NAC  employed ACRF and  AHRF to defraud

the  public.  The civil injunction action was resolved on the

same day by a  consent order enjoining Paltrow and  all three

entities from  charitable fund-raising through the  mails.  A

$100,000 criminal fine was imposed on the bogus charities and

the  court ordered  that the  funds fraudulently  obtained be

turned over to legitimate charities.

     In 1990, after some preliminary negotiations failed, the

government filed the present case under the False Claims  Act

against Paltrow  and his  three entities.   The  suit claimed

underpayment  of  postage  in  the  amount  of  $472,478  and

multiple  damages  as  provided  by  the  statute.    In  the

alternative,  the  government  sought  single  damages  on an

unjust enrichment  theory.    On  cross-motions  for  summary

judgment, the  district court dismissed the  False Claims Act

claims on the ground that  the statute did not apply, and  it

dismissed  the  unjust  enrichment   claim  on  res  judicata
                                                             

grounds.

     We  agree  with  the  district  court's   well  reasoned

treatment of the False Claims Act.  The statute, prior to the

                             -4-

1986 amendments, provided the government with a double-damage

civil action against anyone who 

     (1) knowingly presents  . . . to . .  . the [United
     States]  Government  .  . .  a false  or fraudulent
     claim for payment or approval; [or]

     (2)  knowingly makes    . .  .  a false  record  or
     statement to  get a false or  fraudulent claim paid
     or approved[.]

31  U.S.C.    3729(a)(1),  (2).   In  1986, the  statute  was

amended  not only to provide  for treble damages  but also to

apply to one who knowingly uses "a false record or statement"

in order to "conceal, avoid, or decrease an obligation to pay

.  .  . money  .  .  . to  the  Government."1   31  U.S.C.   

3729(a)(7).

     The  current version  of  the False  Claims Act  clearly

embraces reverse false claims, such as that presented in this

case,  whereby  someone  uses  a false  statement  to  secure

services  from the  government at  a reduced  rate.   But the

government  on this  appeal has  not pursued  its contention,

rejected  by  the district  court,  that  the 1986  amendment

enacting section  3729(a)(7) applies retroactively.  Thus the

question is whether securing  reduced rate mailing privileges

by  dint of a false statement can be classed as presenting "a

                    

     1False Claims Amendments  Act of 1986,  Pub. L. No.  99-
562,  100  Stat.  3153  (1986),  adding  inter  alia  section
                                                    
3729(a)(7) which employs the  quoted language.  See generally
                                                             
S. Rep. No. 345, 99th Cong., 2d Sess. (1986).

                             -5-

false or fraudulent claim for payment  or approval" or making

a false statement to get such a "claim" paid or approved.

     We think the  natural weight of the  words, properly the

starting   point   for  the   inquiry,   leans  against   the

government's  reading.   A  "claim for  payment or  approval"

sounds to ordinary ears like a bill from an army supplier for

uniforms or some  like invoice presented  for payment or  for

approval to permit payment.  The False Claims Act was in fact

enacted in 1863  in the  wake of scandal  to "combat  rampant

fraud  in Civil  War defense  contracts."   S. Rep.  No. 345,

supra,  at 8.    An  attempt  to  secure  services  from  the
     

government at reduced rates may be just as fraudulent, but at

least  judged  by  "normal usage  or  understanding,"  United
                                                             

States v.  McNinch, 356  U.S. 595,  598 (1958),  it is  not a
                  

"claim for payment or approval" of payment.2

     In McNinch,  the Supreme Court held  that an application
               

for   credit  insurance,   requesting  the   Federal  Housing

Administration to insure certain bank loans, was not a "claim

for payment or approval"  within the meaning of  the statute.

Quoting a lower court decision, the Court said that a "claim"

against the government "normally  connotes a demand for money

                    

     2The original  1863 statute reinforces this  point.  Its
language spoke of presenting  "for payment or approval .  . .
any claim upon  or against the Government  . . .  ."  Act  of
                                         
Mar.  2, 1863, c.  67, 12 Stat. 696.   The underscored phrase
was  omitted in a subsequent revision  but without any intent
to alter substance.  31 U.S.C.   3729 (1982) (see explanatory
                                                 
note).

                             -6-

or for some  transfer of  public property,"  adding that  the

statute  "was  not designed  to  reach  every  kind of  fraud

practiced on  the Government." Id.  at 599. If  McNinch stood
                                                       

alone,  it   would  resolve   our  case,  for   a  customer's

underpayment for postal services does not involve any payment

by the government or transfer of its property.

     As is often the  case, there is a contrapuntal  theme in

the case law.   United States v. Neifert-White Co.,  390 U.S.
                                                  

228  (1968), held that  the False Claims  Act did  apply to a

falsified loan  application made  to a federal  agency where,

unlike  McNinch,  the  false  statement was  made  "with  the
               

purpose and effect of  inducing the Government immediately to

part  with money."  Id.  at 232.   Neifert-White said broadly
                                                

that  "the  Act was  intended to  reach  all types  of fraud,

without qualification, that might result in financial loss to

the  Government."    Id.  (footnote  omitted).    While  this
                        

language  is helpful to  the government  in the  abstract, we

read it as directed to the subject of the Court's discussion,

namely, claims, however unconventional, asking the government

immediately "to part with money."  Id.3
                                      

                    

     3Not  only  did  the  Court  make  its  broad  statement
immediately after distinguishing  McNinch on the  ground that
                                         
it  involved   no  payment  of  government   money,  but  two
paragraphs  later, in  the course  of summing  up, the  Court
repeated the point: "This  remedial statute [the False Claims
Act] reaches beyond `claims' which might be legally enforced,
to all fraudulent attempts to cause the Government to pay out
                                                             
sums of money."  Id. at 233 (emphasis added).
                    

                             -7-

     Subsequent  to Neifert-White,  the Supreme  Court quoted
                                 

with approval, albeit in a footnote, its statement in McNinch
                                                             

that "claim" in  the statute normally connotes  "a demand for

money  or  for some  transfer  of public  property."   United
                                                             

States  v. Bornstein,  423 U.S.  303, 309  n.4 (1976).   This
                    

reiterated equating  of "claim" with  a demand  for money  or

property  is   fatal  to  the  government's   position  here:

securing  a   reduced  rate   for  mailing,  even   by  false

statements,  is not a  claim for money  or property.   In the

federal  hierarchy, a  footnote  in a  Supreme Court  opinion

normally outweighs  a covey  of lower court  decisions.   The

lower courts are,  in any  event, divided as  to whether  the

pre-1986  False  Claims Act  could  be  stretched to  include

reverse  false  claims.    Compare, e.g.,  United  States  v.
                                                         

Lawson, 522 F. Supp. 746 (D.N.J. 1981), with United States v.
                                                          

Douglas, 626 F. Supp. 621 (E.D. Va. 1985).
       

     The government is correct  that the Senate Report issued

when  the statute was expanded in 1986 took the position that

the statute  had always  embraced underpayments and  that the

new language merely clarified  the statute.  See S.  Rep. No.
                                                

345, supra, at 19.   We are reluctant, however,  to give much
          

weight in  construing a Civil War statute  to Committee views

first  expressed over 100 years later.  This is especially so

when, as here, the original language of the Civil War statute
                           

was even  more favorable  to the  construction that we  adopt

                             -8-

than the pared down  version later adopted with no  intent to

alter substance.

     No doubt the effect of fraud on the government is pretty

much  the same whether too much is extracted from the federal

treasury or too little paid in.  That is why Congress amended

the  statute  in 1986.    But  it is  one  thing  to construe

ambiguous language broadly in accord with a remedial purpose;

it is quite another matter to stretch language beyond "normal

usage or understanding," McNinch,  356 U.S. at 598, when  the
                                

natural  reading  matches  the  very  problem  that concerned

Congress  at  the time  the statute  was  enacted.   When the

Supreme Court  has thrice  affirmed that natural  reading and

emphasized that a "claim"  in this context refers to  one for

money or property, we think that  all doubts vanish as to the

course this court should follow.

     We turn now to the government's  alternative remedy--its

claim  for  single  damages  based on  an  unjust  enrichment

theory--and here  our views  differ from  those  of the  able

district  judge.   The  district court  held that  the "claim

preclusion" branch of res judicata barred the government from
                                  

asserting an unjust enrichment claim after it secured a final

judgment in  its civil  injunction action involving  the same

transactions.  We  conclude that for reasons  peculiar to the

civil injunction  statute, a successful  action brought under

                             -9-

that  statute does not preclude a later separate claim by the

government for monetary relief.

     Claim preclusion,  formerly the merger or  bar aspect of

res judicata, precludes a party who has won or lost a case on
            

the merits from  reasserting the  same cause of  action in  a

subsequent case.   In  some jurisdictions, this  doctrine has

been  expanded  so  that  a  final  judgment  on  the  merits

extinguishes any further "rights of the plaintiff to remedies

against  the [same] defendant with respect to all or any part

of the transaction, or  series of connected transactions, out

of which  the [earlier] action arose."   Restatement (Second)
                                                             

of Judgments    24 (1982).   See Diversified  Foods, Inc.  v.
                                                        

First  National Bank  of Boston,  985 F.2d  27, 30  (1st Cir.
                               

1993).  This broader definition, which converts old fashioned

res judicata  doctrine into a  kind of compulsory  joinder of
            

related claims,  was  adopted  by this  court  in  Manego  v.
                                                         

Orleans Board of Trade, 773 F.2d 1,  5 (1st Cir. 1985), cert.
                                                             

denied,  475 U.S.  1084 (1986),  for cases where  federal law
      

controls the issue.

     Under ordinary  circumstances, Manego and Section  24 of
                                          

the  Restatement  would pose  a  formidable  obstacle to  the

government's   unjust  enrichment  claim  brought  after  its

successful injunction  action.  The parties  are identical in

the two actions, both actions were civil, and  the injunction

action  resulted in a final judgment on the merits.  Finally,

                             -10-

the  two  remedies--an  injunction  and the  disgorgement  of

unjust  enrichment--are premised on  the same  transaction or

series of transactions, and that is normally enough where the

transactions test of Manego is followed.
                           

     Res judicata is nevertheless a judge-made doctrine based
                 

upon practical concerns:  hostility to relitigation, wariness

about  double recovery,  and anxiety  that resources  will be

wasted  by successive  suits where  one would  have sufficed.

The  doctrine is  not  to be  applied  where other  practical

concerns  outweigh the  traditional  ones and  favor separate

actions.   See, e.g., Brown  v. Felsen, 442  U.S. 127 (1979).
                                      

Here, we  believe that those other  concerns counsel strongly

in favor of allowing the government to bring a damage action,

whatever the  underlying theory,  even though  the government

brought and  concluded a separate injunction  action under 18

U.S.C.   1345.

     The purpose of section  1345 is  "to allow  the Attorney

General to put  a speedy end to a fraud  scheme by seeking an
                            

injunction  in  federal  district   court"  as  soon  as  the

requisite  evidence is secured.  S. Rep. No. 225, 98th Cong.,

2d Sess.  402 (1984)  (emphasis added).   The  statute itself

directs   the  district   court  to   "proceed  as   soon  as

practicable" to  a hearing  and determination.   18  U.S.C.  

1345(b).    The  legislative  history  shows  that   Congress

authorized  this  expedited  action  precisely  because  "the

                             -11-

investigation of fraudulent  schemes often  takes months,  if

not years, before the case is ready for criminal prosecution"

and  in   the  meantime  "innocent  people   continue  to  be

victimized."  S. Rep. No. 225, supra, at 402.
                                    

     The  same  concerns  that  prompted  Congress  to  adopt

section  1345 suggest  that  courts should  not handicap  and

delay  injunction actions  by insisting  that the  government

assert  at the  same time  any civil  damage claims  that may

arise from  the same  transactions.  Commonly  the government

may want to secure additional facts,  including the amount of

damages,  before asserting such  claims and may  well wish to

negotiate  with  the  defendant  as to  settlement  once  the

ongoing violation has ceased.  To require that the government

resolve  these matters within, and on the same time table as,

the expedited injunction action makes no sense.

     The   government  is   not  automatically   exempt  from

limitations on  claim splitting, Federation  Dep't Stores  v.
                                                         

Moitie, 452  U.S. 394, 398 (1981), but those limitations will
      

not  be  applied  where   they  would  frustrate  a  specific

statutory  objective.  Brown, 442  U.S. at 135-36.   See also
                                                             

Restatement  (Second) of  Judgments    26(1)(d) (1982).   For
                                   

this  reason  the  government  is  permitted  to  enjoin  the

continuation of an  illegal merger or other  violation of the

antitrust laws and then bring its own separate  damage action

                             -12-

for any damages it may have suffered.4  In our  view the same

policy  permits  the  government  to  litigate an  injunction

action under  section 1345 to  final judgment and  then bring

its own damage action as a separate case.

     The treatment  of the unjust enrichment  claim on remand

is a  matter for the district  court.  We express  no view on

whether any aspect  of the government's claim may be governed

by the  issue preclusion  (or collateral estoppel)  branch of

res  judicata, nor do we address any other questions that may
             

be presented by  that claim.   The judgment  of the  district

court is  affirmed so  far as it  dismissed the  government's
                  

claims  under the  False Claims  Act, and  it is  vacated and
                                                             

remanded  as  to the  claim  based on  the  unjust enrichment
        

theory.

     It is so ordered.  No costs to either side.
                     

                    

     4See, e.g.,  ITT v.  GT & E,  369 F.  Supp. 316,  326-27
                                
(M.D.N.C.  1973), remanded  on other  grounds, 527  F.2d 1162
                                             
(4th Cir.  1975); United  States v.  Grinnell  Corp., 307  F.
                                                   
Supp. 1097 (S.D.N.Y. 1969).  See  generally II P. Areeda & D.
                                           
Turner, Antitrust Law   323, at  109 (1978) ("[T]he equitable
                     
suit  in the  public  interest ought  not  to be  delayed  or
affected by the government's concern whether or not it should
seek proprietary relief as well.").

                             -13-