Court Opinion

ID: 1021197
Source: CourtListenerOpinion
Date Created: 2013-07-04 23:02:47.929237+00
Date Added: 2024-06-11T12:07:37.052822
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                              No. 04-2276

UNITED STATES OF AMERICA,

                                                 Plaintiff - Appellee,

           versus

JOHN J. RACHEL; PRISCILLA RACHEL;             RGI,
INCORPORATED, a Virginia Corporation;         CSM,
INCORPORATED, a Maryland Corporation,

                                              Defendants - Appellants.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.   William M. Nickerson, Senior District
Judge. (CA-02-754-WMN)

Argued:   November 29, 2005                 Decided:   December 7, 2006

Before WIDENER and SHEDD, Circuit Judges, and Walter D. KELLEY,
Jr., United States District Judge for the Eastern District of
Virginia, sitting by designation.

Vacated and remanded by unpublished per curiam opinion.

ARGUED: Edward Jay Tolchin, FETTMANN, TOLCHIN & MAJORS, P.C.,
Fairfax, Virginia, for Appellants.   Tamera Lynn Fine, Assistant
United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY,
Baltimore, Maryland, for Appellee.    ON BRIEF: Allen F. Loucks,
United States Attorney, Baltimore, Maryland, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:

     The United States of America brought this civil action against

John Rachel, his wife Priscilla Rachel, and two corporations owned

by him (RGI, Inc. and CSM, Inc.)1 contending that they are liable

under the False Claims Act (“FCA”) and several common law theories.

After    discovery,     the   parties    filed      cross-motions       for   summary

judgment. The United States’ motion addressed only the appellants’

liability.     The district court denied the appellants’ motion and

granted the United States’ motion on the FCA claims.2                   Thereafter,

the United States sought a prejudgment writ of attachment on the

Rachels’     property    pursuant       to    the    Federal     Debt    Collection

Procedures Act, and it also moved for summary judgment on the issue

of damages flowing from the FCA violations.                 In separate orders,

the district court granted the writ of attachment, denied the

appellants’ motion to quash the writ, and awarded the United States

$1,506,708.10 in damages and penalties.               The appellants now appeal

the summary judgment rulings and the writ of attachment.                          As

explained below, we conclude that the district court erred in

entering    summary     judgment    on       the    issue   of   the    appellants’

     1
      We will refer to the Rachels and the two corporate entities
collectively as “the appellants” except where it is necessary to
identify them individually.
     2
      The district court dismissed the United States’ common law
causes of action as moot.

                                         2
liability.     Accordingly, we vacate the summary judgment and the

writ of attachment, and we remand for further proceedings.

                                     I

     Summary     judgment     is   appropriate   “if   the   pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine

issue as to any material fact and that the moving party is entitled

to a judgment as a matter of law.”        Fed. R. Civ. P. 56(c).    The

relevant inquiry in a summary judgment analysis is “whether the

evidence presents a sufficient disagreement to require submission

to a jury or whether it is so one-sided that one party must prevail

as a matter of law.”        Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 251-52 (1986). “We review the district court’s order granting

summary judgment de novo, viewing the facts in the light most

favorable to, and drawing all reasonable inferences in favor of,

the nonmoving party.”   Garofolo v. Donald B. Heslep Assocs., Inc.,

405 F.3d 194, 198 (4th Cir. 2005).       Of course, we do not weigh the

evidence or make credibility determinations in this analysis.

Williams v. Staples, Inc., 372 F.3d 662, 667 (4th Cir. 2004).

     The FCA, codified at 31 U.S.C. §§ 3729 et seq., “prohibits any

person from making false or fraudulent claims for payment to the

United States.”     Graham County Soil & Water Conserv. Dist. v.

United States ex rel. Wilson, 545 U.S. 409, 411 (2005).      The United

                                     3
States brought its FCA causes of action under subsections (1), (2),

and (3) of 31 U.S.C. § 3729(a), which create liability for any

person who:

     (1) knowingly presents, or causes to be presented, to an
     officer or employee of the United States Government . .
     . a false or fraudulent claim for payment or approval;

     (2) knowingly makes, uses, or causes to be made or used,
     a false record or statement to get a false or fraudulent
     claim paid or approved by the Government; [or]

     (3) conspires to defraud the Government by getting a
     false or fraudulent claim allowed or paid.

The FCA specifies that a person acts “knowingly” with respect to

information if he “has actual knowledge of the information,” “acts

in   deliberate   ignorance    of    the   truth   or   falsity      of   the

information,” or “acts in reckless disregard of the truth or

falsity of the information.”        31 U.S.C. § 3729(b).

     The district court found that summary judgment was proper

against the appellants on each of the United States’ three FCA

causes of action.    These causes of action arise from the billing

associated with computer-repair work performed under a government

contract. In essence, the United States’ theory is that Mr. Rachel

fraudulently utilized his two companies, RGI and CSM, to inflate

the costs associated with the repair work, thereby causing false

claims to be submitted to, and paid by, the government.            The United

States contends that Mrs. Rachel is liable because she acted in

deliberate    ignorance   or   reckless    disregard    of   Mr.    Rachel’s

fraudulent activities.

                                      4
       Generally, the record establishes that in 1994, RGI entered

into a “Teaming Agreement” with Diez Management Systems, Inc.

(“Diez”) to cooperate in obtaining and satisfying an IRS contract

for computer maintenance and repair.           Mr. Rachel, the owner and

president of RGI, signed the Teaming Agreement on behalf of RGI.

The IRS contract had two components: (1) on-site maintenance for

all computer equipment in IRS facilities in the Washington, D.C.,

region and (2) nationwide mail-in repair of IRS laptop or notebook

computers.   Pertinent to this case, the IRS contract addressed the

repair of broken laptop hinges.       As the IRS contract solicitation

explained, the government had “experienced a chronic problem of

broken    hinges/cases   with   the       Vinsotec    notebook   computers.

Approximately 57% of all notebook repairs in a recent three month

period ha[d] included the repair of broken hinges/cases.”              J.A.

121.

       Diez was awarded the IRS contract in 1995.       Under the terms of

the IRS contract, Diez would service and repair computers for the

IRS, billing for the actual cost of the time and materials utilized

in the repairs plus a fixed markup.           Regarding the laptop hinge

repairs, the IRS contract required Diez “to propose a solution

including a six-month warranty (parts and labor) on repairs to the

Vinsotec notebook hinges/cases.”          J.A. 313.

       Mr. Rachel and an RGI design team developed a means to repair

the broken laptop hinges (the “Hinge Repair Kit”).               Mr. Rachel

                                      5
created initial prototypes of the Hinge Repair Kit, and he later

obtained a patent for his Hinge Repair Kit.        One prototype was also

prepared by Technical Design Resources (“TDR”).

     Under the IRS contract, when an IRS laptop needed hinge

repair, it was mailed or shipped to a location which met IRS

security requirements for safeguarding property and information.

This location, known as the depot, was first located at RGI, but it

was later moved to Diez.     At the depot, employees would prepare the

laptops for repair, and Mr. Rachel would then deliver the laptop

covers   to   TDR,   which   was   responsible    for    manufacturing     and

installing the Hinge Repair Kits in accordance with the patent

specifications.      Mr. Rachel would then return the repaired laptops

to the depot where they would be reassembled.

     Shortly after work started under the IRS contract, Mr. Rachel

incorporated CSM, executing the CSM Articles of Incorporation on

behalf of himself, Mrs. Rachel, and his son.            The CSM Articles of

Incorporation listed Mrs. Rachel as an incorporator, director, and

officer of CSM.      Mr. Rachel had Mrs. Rachel’s general consent and

authority to use and sign her name in this manner.          Mrs. Rachel was

a nurse, and it appears to be undisputed that she did not have

actual knowledge concerning the underlying events.

     After its incorporation, CSM became involved in the hinge

repair   process.      Specifically,     CSM   supplanted   RGI’s   role    in

obtaining the repaired laptops directly from TDR.               Under this

                                     6
arrangement, CSM would pay TDR Between $23 and $27 for each Hinge

Repair Kit manufactured and installed by TDR, and CSM would then

invoice RGI $117 for the same.       RGI in turn would pay CSM and then

bill Diez $122.84 (which is $117 plus a markup).           Diez would then

pay RGI and bill the IRS $128.99 (which is $122.84 plus a markup).

The IRS would then pay Diez.

     The crux of the United States’ FCA case is CSM’s involvement

in the hinge-repair process, specifically the fact that CSM paid

TDR approximately $25 for the Hinge Repair Kit and then billed RGI

$117.   When asked at his deposition about CSM’s involvement, Mr.

Rachel explained that he was not certain that the Hinge Repair Kits

would   work,   and   if   they   failed   they   could   seriously   damage

electronic components in the laptops.         Therefore, because of his

concern about the potential negative financial consequences to RGI

under the terms of the six-month warranty if the Hinge Repair Kits

failed, Mr. Rachel attempted to use CSM as a “buffer”; if the Hinge

Repair Kits failed he “would just defunct” CSM.           J.A. 497.

                                     II

     In granting summary judgment against the appellants on the

issue of FCA liability, the district court articulated two primary

rulings.   We hold that neither of these rulings is appropriate on

the record before us.

                                      7
     The district court first addressed Mrs. Rachel’s potential

liability under the FCA and found that she “acted at least in

reckless disregard of the truth or falsity of the information being

submitted by CSM to RGI and eventually to the IRS.”   J.A. 34.   The

district court based its conclusion on the fact that Mrs. Rachel

(1) served on the RGI board of directors, (2) was identified in

documents as an incorporator, officer, and director of CSM, and (3)

gave Mr. Rachel general authority to use her name and identity.3

The district court then discussed the potential liability of all of

the appellants.   Framing the “relevant inquiry” as being “whether

the CSM markup of the TDR invoice was fraudulent,” the district

court answered this query in the affirmative.      J.A. 36.4     The

district court based its conclusion on the fact that Mr. Rachel

owned and controlled both RGI and CSM, and its belief that CSM

appears to have existed primarily, if not exclusively, for the

     3
      Although the district court relied on Mrs. Rachel’s service
on the RGI board as a factor supporting her imputed knowledge of
the alleged fraud, the United States admitted during discovery that
she was actually not an owner, officer, director, or employee of
RGI at the time of the alleged fraud.
     4
      The district court prefaced this discussion by ruling that
under the FCA “a direct contractual relationship with the
Government is not required for liability.”      J.A. 35-36.    This
ruling was in response to the appellants’ argument, which they
repeat on appeal, that they could not have violated the FCA because
neither the IRS contract nor any law precluded CSM from charging
any amount it desired for the hinge repair.        Because the FCA
creates liability for “all fraudulent attempts to cause the
Government to pay out sums of money,” United States v. Neifert-
White Co., 390 U.S. 228, 233 (1968), we reject the appellants’
argument.

                                 8
purpose of the markup. Additionally, the district court noted that

no    evidence   was    presented    regarding   the    actual     costs   of   the

warranty expenses, and it expressly found “it difficult to believe

that a six-month warranty would cost four times the amount of the

product itself.”       J.A. 38.

       Although we are not prepared to rule as a matter of law that

the    appellants      cannot   be   held   liable     for   the    alleged     FCA

violations, we certainly do not believe (as the district court

found) that the evidence establishes their liability as a matter of

law.    Instead, viewing the evidence in this case in the light most

favorable to Mrs. Rachel, who was not directly involved in any of

the underlying conduct, a reasonable factfinder could conclude that

she did not have either actual or implied knowledge for purposes of

FCA liability.         For this reason, the district court erred in

entering summary judgment against Mrs. Rachel.               Likewise, viewing

the evidence in the light most favorable to all appellants, which

tends to establish that the CSM markup was for the purpose of

covering potential warranty costs, a reasonable factfinder could

conclude that they did not submit or cause to be submitted false

claims.    Accordingly, the district court also erred in entering

summary judgment against the appellants.

                                        9
                               III

     Based on the foregoing, we vacate the summary judgment orders

and remand for further proceedings consistent with this opinion.

Because the district court appears to have relied on its FCA

liability summary judgment ruling as a primary basis for granting

(or refusing to quash) the prejudgment writ of attachment, we also

vacate the writ.5

                                              VACATED AND REMANDED

     5
      In light of our determination that the district court erred
in holding the appellants liable as a matter of law, we need not
address the parties’ arguments concerning damages. Additionally,
although the parties have presented other arguments relating to the
appellants’ potential liability on the FCA and state-law claims, we
decline to address those arguments on this record.      See, e.g.,
Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1473 n.20 (4th Cir.
1996) (declining to consider alternative issues that may be
considered by the district court on remand).

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