Court Opinion

ID: 73480
Source: CourtListenerOpinion
Date Created: 2010-04-26 08:09:31+00
Date Added: 2024-06-11T14:58:59.692192
License: Public Domain

United States Court of Appeals,

                                           Eleventh Circuit.

                                             No. 97-6910.

                       UNITED STATES of America, Plaintiff-Appellant,

                                                  v.

   PEMCO AEROPLEX, INC., a subsidiary of Precision Standard Company, a corporation,
Defendant-Appellee.

                                             Feb. 8, 1999.

Appeal from the United States District Court for the Northern District of Alabama. (No. 97-P-1300-
S), Sam C. Pointer, Jr., Judge.

Before HATCHETT, Chief Judge, HULL, Circuit Judge, and MOORE*, District Judge.

       HATCHETT, Chief Judge:

       Appellant United States (government) challenges the district court's dismissal of its False

Claims Act lawsuit and state common law claims against appellee Pemco Aeroplex, Inc. (Pemco)

for failing to state a claim. We affirm.

                                           I. BACKGROUND

       Since the 1960s, Pemco and its predecessor, Hayes International Corporation, have

contracted to perform high-level maintenance of C-130 aircraft for the United States Air Force (Air

Force). Pemco's contracted performance included assembling new model wings and replacing older

model wings on C-130s. As a result of their contract, Pemco had on its premises both older and

newer model wings.

       In 1991 Pemco had on its premises five C-130 wings that belonged to the government that

   *
     Honorable William T. Moore, Jr., U.S. District Judge for the Southern District of Georgia,
sitting by designation.
it did not need to perform its contract. Pemco decided to initiate a "Plant Clearance Procedure" so

that it could receive instructions from the Air Force concerning the disposition of the five wings.

The Federal Acquisition Regulations define the plant clearance procedure as "all actions relating to

the screening, redistribution, and disposal of contractor inventory from a contractor's plant or work

site." 48 C.F.R. § 45.601 (1997). Under this procedure, a government contractor submits a form

advising the government that it is holding certain government property in excess of its government

contract. The government may then "exercise its rights to require delivery of any contractor

inventory," or dispose of the property through: (1) allowing the contractor to purchase the property

at cost; (2) returning the property to the suppliers; (3) donating the property to "eligible donees";

(4) selling the property, "including purchase or retention at less than cost by the prime contractor";

(5) donating the property to public bodies; or (6) abandoning or destroying the property. See 48

C.F.R. 45.603.

       Pursuant to the plant clearance procedure, Pemco submitted a "Standard Form 1428,

Inventory Schedule B" (inventory schedule) on May 28, 1991, that notified the Air Force that it held

five C-130 wings (three right-side wings and two left-side wings), and described the wings,

referencing them with two national stock numbers.1 The government uses national stock numbers

to identify precisely items within its inventory system. Pemco used national stock numbers that

identified older model wings in the inventory schedule it submitted for plant clearance, and offered

to purchase the wings as scrap—estimating their value as $1,125 for the three right-side wings and

$750 for the two left-side wings.2

   1
   The Federal Acquisition Regulations require the use of Standard Form 1428, Inventory
Schedule B in 48 C.F.R. section 45.606-5(a)(2).
   2
     The government asserts in its complaint that the type of older wings that Pemco referenced in
its inventory schedule and corresponding national stock number were "routinely disposed of as
          The government agreed to sell the five wings to Pemco for their scrap value of $1,875 listed

in the inventory schedule. Pemco, however, had wrongfully identified the wings' national stock

numbers. The wings it purchased from the government were actually newer-model wings and worth

much more than the scrap value Pemco had listed in the inventory schedule. Shortly after

purchasing the wings from the government, Pemco sold two of the wings for approximately

$1,500,000.      The government estimates the total market value of the wings to be at least

$2,071,526.25.

          The government thereafter sued Pemco in the United States District Court for the Northern

District of Alabama, alleging that Pemco had violated the False Claims Act, 31 U.S.C. §§ 3729-

3733, and also alleging state common law counts of mistake of fact and unjust enrichment. With

regard to the False Claims Act, the government contended that Pemco "knowingly made, used, or

caused to be made or used, false statements or actions for the purpose of obtaining property from

the United States," "knowingly presented, or caused to be presented, to an officer or employee of

the United States Government a false or fraudulent claim for approval" and "knowingly made, used,

or caused to be made or used, a false record or statement to conceal, avoid, or decrease an obligation

to pay or transmit money or property to the government." The district court granted Pemco's motion

to dismiss, holding that: (1) the dismissal was with prejudice as to the government's claim regarding

a false claim under the False Claims Act because the government did not allege that Pemco

submitted documents that constituted a false "claim"; and (2) the dismissal was without prejudice

as to the government's ability to refile a False Claims Act complaint that contained the particularity

requirement for intent to defraud under Federal Rule of Civil Procedure 9(b).

                                               II. ISSUE

scrap."
       The issue we decide is whether the district court erred in dismissing the government's

"reverse false claim" under the False Claims Act, 31 U.S.C. § 3729(a)(7).

                                  III. STANDARD OF REVIEW

        We review de novo a dismissal for failure to state a claim, and apply the same standard as

did the district court. Harper v. Blockbuster Entertainment Corp., 139 F.3d 1385, 1387 (11th

Cir.1998), cert. denied, --- U.S. ----, 119 S.Ct. 509, --- L.Ed.2d ----, 67 U.S.L.W. 3106 (U.S. Nov.

16, 1998) (No. 98-200). We must accept the allegations set forth in the complaint as true for

purposes of a motion to dismiss. See Gonzalez v. McNary, 980 F.2d 1418, 1419 (11th Cir.1993).

The district courts should grant motions to dismiss only "when the movant demonstrates "beyond

doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to

relief.' " Harper, 139 F.3d at 1387 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2

L.Ed.2d 80 (1957)). Additionally, because the district court's disposition of Pemco's motion to

dismiss involved interpretation of the False Claims Act, we must review de novo questions of

statutory interpretation. Gonzalez, 980 F.2d at 1419.

                                         IV. DISCUSSION

       In this appeal, the government contends that the district court erred in dismissing its "reverse

false claim" under the False Claims Act. 31 U.S.C. § 3729(a)(7). That provision provides that any

person who "knowingly makes, uses, or causes to be made or used, a false record or statement to

conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government"

is liable to the government "for a civil penalty of not less than $5,000 and not more than $10,000,

plus 3 times the amount of damages which the Government sustains because of the act of that

person...." 31 U.S.C. § 3729. The government argues that Pemco caused the government to sell the

wings at a price below true value because Pemco knowingly misidentified the wings on the
inventory schedule. Thus, the government contends that Pemco submitted a "reverse false claim"

and violated section 3729(a)(7).

       This court has not had the opportunity to construe the reverse false claim provision of the

False Claims Act. The Eighth Circuit in United States v. Q Int'l Courier, Inc. analyzed the reverse

false claim provision of section 3729(a)(7) in the context of an illegal international "ABA remail"

scheme. 131 F.3d 770 (8th Cir.1997). Essentially, Q International Courier (Quick) transferred bulk

mail from the United States to Barbados for the purposes of remailing the letters individually back

into the United States. The United States Postal Service charged the Barbadian Postal Service

significantly less for the delivery to the United States than it would for the same delivery within the

United States. See Q Int'l Courier, 131 F.3d at 772. The government contended that Quick violated

the reverse false claim provision of section 3729(a)(7), asserting that Quick "owed an obligation to

the United States for the full domestic postage for each letter and that they attempted to reduce this

obligation through fraudulent statements or records." Q Int'l Courier, 131 F.3d at 772. The Eighth

Circuit held that the government failed to establish that Quick "had some duty to pay money or

property that it sought to evade by using false statements or records" and affirmed the district court's

grant of summary judgment in favor of Quick on the government's False Claims Act allegations.

See Q Int'l Courier, 131 F.3d at 774.

       We find the Eighth Circuit's analysis of the reverse false claims provision to be persuasive.

The Q Int'l Courier court construed the plain language of the False Claims Act, as well as its

legislative history, and held that in order to recover under the reverse false claims provision, the

government "must demonstrate that it was owed a specific, legal obligation at the time that the

alleged false record or statement was made, used, or caused to be made or used." Q Int'l Courier,

131 F.3d at 773. Further, the Q Int'l Courier court held that this obligation could not be "merely a
potential liability," but instead

        a defendant must have had a present duty to pay money or property that was created by a
        statute, regulation, contract, judgment, or acknowledgment of indebtedness. The duty, in
        other words, must have been an obligation in the nature of those that gave rise to actions of
        debt at common law for money or things owed.

Q Int'l Courier, 131 F.3d at 773; see also United States ex rel. S. Prawer & Co. v. Verrill & Dana,

946 F.Supp. 87, 94 (D.Me.1996) (" "obligation' in the False Claims Act refers to something more

than potential liability or moral or social duty; a legal obligation seems to be the touchstone.").

        The reverse false claim's legislative history further persuades us of this specific obligation

requirement. As the Q Int'l Courier court noted, the legislative history twice refers to "money owed"

under the false claims provision as the type of duty that the reverse claims provision addresses. See

Q Int'l Courier, 131 F.3d at 773. We agree that Congress intended that the government must

premise a reverse false claim upon a specific, legal obligation at the time a defendant used or caused

to be used an alleged false claim. See, e.g., False Claims Amendments Act of 1986, S.Rep. No. 99-

345 at 15, 18, 1986 U.S.C.C.A.N. (100 Stat. 3153) 5266, 5280, 5283 ("an individual who makes a

material misrepresentation to avoid paying money owed the Government should be equally liable

under the Act as if he had submitted a false claim.").

        We do not find this type of obligation when we analyze the government's complaint and

Pemco's filing of an inventory schedule pursuant to the plant clearance procedure. According to the

Federal Acquisition Regulations, Pemco submitted the inventory schedule to the Air Force's plant

clearance officer, "an authorized representative of the contracting officer assigned responsibility for

plant clearance." 48 C.F.R. § 45.601; see also 48 C.F.R. § 45.606-1 ("[w]hen property is no longer

needed to perform the contract, the contractor shall prepare inventory schedules in accordance with

the contract and instructions from the plant clearance officer and shall promptly submit the

schedules to the cognizant contract administration office."). Within 15 days of receiving the
inventory schedule, the plant clearance officer reviews the schedule, determines its acceptability and

requests any corrections. See 48 C.F.R. § 45.606-3(a). Then, the plant clearance officer "shall

verify that (1) the inventory is present at the location indicated, (2) the inventory is allocable to the

contract, (3) the quantity and condition are correctly stated, and (4) the contractor has endeavored

to divert items to other work." 48 C.F.R. § 45.606-3(b). In dealing with "scrap," the plant clearance

officer "shall review the schedules of property reported as scrap and, if necessary, physically inspect

the property involved. If the plant clearance officer determines that any of the property is

serviceable, usable, or salvable, the contractor shall resubmit it on appropriate inventory schedules."

48 C.F.R. § 45.607-1(b). Property the government had not deemed to be "scrap" "shall be screened

for use by Government agencies before disposition by donation or sale." 48 C.F.R. § 45.608-1(a).

After these procedures, the plant clearance officer may then decide the proper disposition of the

property, which could include selling it to the contractor or requiring delivery to the government.

See 48 C.F.R. § 45.603.

        Pemco's filing of the inventory schedule did not create a specific, legal obligation or a

present duty to pay money, and the government's complaint does not detail any other type of reverse

false claim. Although Pemco listed the scrap estimate of the wings in the "offer" column of the

inventory schedule, the government could not accept this offer—or demand return of the

wings—until it utilized the plant clearance procedure. See 48 C.F.R. §§ 45.600—45.615. Pemco's

submission of the inventory schedule initiated the plant clearance procedure, and did not create the

type of obligation that the reverse false claim provision of the False Claims Act requires.

Additionally, the "offer" that Pemco submitted in its inventory schedule may have created a future

potential liability (an offer to purchase the wings or return them after the occurrence of the plant

clearance procedure), but did not create the specific legal obligation that the reverse false claim
provision requires. Therefore, we hold that the district court did not err in dismissing the

government's lawsuit under the False Claims Act, including its allegations of Pemco's violations of

the reverse false claim provision, for failing to state a claim.

                                          V. CONCLUSION

          Based on the foregoing, we affirm the district court's dismissal of the government's lawsuit

under the False Claims Act for failing to state a claim, and do not reach the government's

contentions regarding its state common law claims.

          AFFIRMED.

          HULL, Circuit Judge, dissenting:

          This important case of first impression in this Circuit involves a Rule 12(b)(6) dismissal of

the Government's complaint and not entry of summary judgment.                  I dissent because the

Government's complaint clearly states a cause of action, and the district court erred in dismissing

it.

          The majority correctly concludes that Section 3729(a)(7) of the False Claims Act requires

a specific, legal obligation to pay or to transmit money or property, at the time a false statement is

made.1 However, the majority incorrectly finds that the Government's complaint fails to allege such

an obligation. The specific allegations of the complaint show why the majority errs.

          The complaint alleges that Pemco performed high-level maintenance of "C-130" aircraft for

the Air Force and that Pemco had on its premises both older model and newer model "C-130" wings

belonging to the Government. Paragraph 8 of the complaint asserts that Pemco possessed five wings

      1
   Section 3729(a)(7) provides for liability if a person "knowingly makes, uses, or causes to be
made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or
transmit money or property to the Government." 31 U.S.C. § 3729(a)(7) (emphasis supplied).
belonging to the Government that "were not needed by Pemco for performance of its contracts with

the United States," and that thus Pemco initiated the Plant Clearance procedure in order to have the

Government instruct Pemco regarding the return of the wings to the Air Force or other disposal.

       Paragraph 9 of the complaint alleges that "[u]nder the Plant Clearance procedure, the

contractor (in this case Pemco) advises the [G]overnment that the contractor is holding certain

property belonging to the United States in excess to the needs of its Government contract." The

complaint explains that the contractor may offer to purchase the property from the Government

rather than have it returned. As alleged in paragraph 10 of the complaint, "Pemco submitted to the

United States a document entitled "Inventory Schedule B' which was part of the "Plant Clearance'

procedure mentioned above."

       The complaint continues that Pemco listed five wings, described those wings by two national

stock numbers, and incorrectly identified the stock numbers. According to the complaint, Pemco

used stock numbers referencing older, obsolete model wings worth $1,875, or $375 each, when, in

fact, the wings Pemco actually had were newer model wings with a market value of over $2,071,526.

The complaint alleges that Pemco sold just two of the five wings for $1,500,000. Pemco does not

deny these allegations.

       I agree with the majority that Pemco's inventory schedule alone does not necessarily create

a legal obligation to pay at the time the inventory schedule is submitted to the Air Force. But the

majority errs in considering solely Pemco's inventory schedule and overlooking Pemco's contract

with the Government that requires Pemco either to return these wings or to purchase them. The

complaint specifically alleges that Pemco submitted this inventory schedule pursuant to its contract

with the Air Force and that Pemco's contract required Pemco to advise the Government about any

property belonging to the Government in excess of the needs of its Government contract. Therefore,
Pemco had a contractual obligation either to return (i.e., "transmit" under § 3729(a)(7)) excess

property to the Government or to purchase (i.e., "pay" for under § 3729(a)(7)) excess property from

the Government.2

       The complaint has sufficient allegations to survive the granting of a motion to dismiss for

failure to state a claim. The complaint alone contains express references to Pemco's contract with

the Air Force, and alleges that Pemco obtained the wings "as a result of [those] contracts," and that

the inventory schedule was being filed because these wings exceeded Pemco's needs under its

Government contract. The complaint expressly references Pemco's obligations either to return the

wings to the Government or to purchase the wings from the Government and that the inventory

schedule was submitted in connection with those contractual obligations.

       Pemco argues that it was required to return the wings only at the end of its Government

contract or at an earlier date if required by the Government's contracting officer. According to

Pemco, because neither of those events had occurred, Pemco did not have an existing obligation to

return or pay for the wings at the time it submitted the inventory form. In addition, Pemco argues

that the submission of the inventory form was merely an offer to purchase the excess wings but did

not establish either an obligation to purchase or the specific purchase price. According to Pemco,

at best, this offer created only a contingent obligation to purchase—dependent on the Government's

   2
     Because the district court disposed of this case on a motion to dismiss, the record below is
extremely bare. Therefore, the text of the dissent discusses only the allegations in the complaint.
However, the Government did attach to its appellate brief the Government property clause, and
portions of Pemco's contract showing incorporation of that clause in Pemco's contract with the
Air Force. The contract contained provisions expressly stating (1) that the Government retained
title to all Government-furnished property, (2) that the contractor (Pemco) was responsible and
accountable for all Government property provided under the contract, and (3) that all such
property not consumed in performing the contract was to be returned to the Government, or
disposed of according to its instructions, with proceeds of any such disposal being credited to the
contract price or paid directly to the Government. Add. B at 4b-6b. Since these documents were
not attached to the complaint in the district court, they cannot be considered on appeal.
inspection of the property and acceptance of Pemco's offer.

       These arguments ignore the complaint's allegations that at the time Pemco submitted the

inventory form, the wings were deemed excess. Indeed, Pemco only submitted the inventory form

because the wings were deemed excess and it had a pre-existing contractual obligation to submit

such a form. That Pemco offered to purchase the property and that a specific purchase price had not

been agreed upon at the time Pemco submitted the inventory form are not the touchstone. As alleged

in the complaint, Pemco had a contractual obligation to return excess Government property or to

dispose of it in accordance with the Government's instructions. This legal obligation was a specific,

ongoing obligation during the life of the contract and did not begin or end at any one point in time.

This is the relevant obligation and submitting the inventory form was just part of fulfilling this

pre-existing contractual obligation.

       The majority bases its opinion on United States v. Q International Courier, Inc., 131 F.3d

770 (8th Cir.1997). I agree with the Eighth Circuit's reasoning but Q International Courier is totally

different from this case because that decision did not involve a Government contract.                Q

International Courier involved a mail courier firm that transferred bulk mail from the United States

to Barbados in order to remail the letters individually from Barbados to the United States. Id. at 772.

Through this scheme, Q International Courier ("Quick") was able to take advantage of the

discounted rates the United States Postal Service charged the Barbadian postal service, achieving

significant savings for its customers. Id. In contrast to this case, Quick was not a Government

contractor. Id. at 772-73. Thus, any "obligation" Quick may have owed to the Government could

only have derived from statutes, regulations, judgments—legal sources other than a written contract.

       The Eighth Circuit in Q International Courier explicitly noted that the Government did not

have a contract with Quick, thereby suggesting that a contractual duty would qualify as an
"obligation" in its opinion. Id. at 773. In addition, the Eighth Circuit in Q International Courier

concluded that no obligation to pay domestic postage rates could be found in any of the statutes or

regulations cited by the Government. Id. at 773-774.

       In contrast, Pemco had a written contract which expressly obligated Pemco to be responsible

and accountable for the Government property in its possession and to return that property to the

Government or dispose of the property in accordance with the Government's instructions. In

addition, the Government has pointed to regulations that obligate Pemco to return Government

property not needed in the performance of the contract. Q International Courier, if anything, shows

why the district court erred in dismissing the Government's complaint for failure to state a claim

under Rule 12(b)(6).

       Therefore, I respectfully dissent.