SUPPRESSED v. SUPPRESSED
Filing
198
MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 12/3/2011. (mk)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA ex rel.
GREG HUDALLA,
Plaintiff,
vs.
WALSH CONSTRUCTION COMPANY,
Defendant.
)
)
)
)
)
)
)
)
)
)
Case No. 05 C 5930
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
Relator Greg Hudalla has brought qui tam claims on behalf of the United States
against Walsh Construction Company under the False Claims Act (FCA), 31 U.S.C. §
3729(a). Hudalla claims that Walsh utilized fraudulent billing practices while working as
general contractor on eight federally funded affordable housing projects and that it
thereby received federal government money to which it was not entitled. Walsh has
moved for summary judgment on Hudalla’s claims, and Hudalla has cross-moved for
partial summary judgment on liability and Walsh’s affirmative defenses. For the
reasons stated below, the Court denies Walsh’s motion and grants Hudalla’s motion in
part.
Background
The Court takes the following facts from the parties’ memoranda of law and
statements of uncontested facts. On a motion for summary judgment, the Court
construes all facts favorably to the nonmoving party and makes reasonable inferences
in that party’s favor. Eaton v. Ind. Dep’t of Corr., 657 F.3d 551, 552 (7th Cir. 2011).
Although Hudalla and Walsh disagree about the relevant aspects of what constitutes
appropriate billing and accounting practice on a construction project that involves
government funding, they agree on most of the historical facts.
Walsh is a Chicago-based construction management and general contracting
firm that has worked since the mid-1990s on a variety of public housing projects. In
1999 or 2000, the Woodlawn Community Development Corporation (WCDC) became
the “project sponsor” (also referred to as the “owner” or “developer”) for a Chicago
housing project called South Park Plaza. After securing funding from various private
and government sources, WCDC hired Walsh as its general contractor. A general
contractor administers a construction project, overseeing logistics and hiring
subcontractors to perform necessary “trade work” such as carpentry or plumbing. A
developer usually works directly with and pays only the general contractor, which is
then responsible for directing and compensating the subcontractors and paying other
project expenses.
Hudalla served as WCDC’s construction-site representative for South Park and
in that capacity had the opportunity to review Walsh’s applications for payment from
WCDC during and after the project. After the project was completed, he concluded that
Walsh had utilized fraudulent billing practices to receive more money than it was
allowed to make for its work on South Park. He claims in this lawsuit that Walsh also
engaged in the same fraudulent practices in the course of its work on seven other
Chicago affordable-housing construction projects: Beth-Anne Extended Living, Lake
Park Crescent, Pershing Courts, Roosevelt Tower, St. Sabina Senior Housing, and
2
Westhaven I and II.1 Walsh for the most part does not deny that it made estimates and
kept billing records on South Park and the other projects in the manner Hudalla claims,
but it denies that there was anything wrong with its practices or methodology.
All of the projects received one or more of four types of financial support that
originate with the United States Department of Housing and Urban Development
(HUD). First, HUD directly funded two projects through its Capital Advance program.
Second, HUD provided funds to the City of Chicago to finance projects through the
HOME program. Third, HUD provided funds to the Chicago Housing Authority (CHA) to
finance projects through the Mixed Finance program. Several of the projects at issue
received funding via the HOME or Mixed Finance programs. Fourth, on certain
projects, HUD guaranteed mortgages against developer default. Each of the projects at
issue that received mortgage guarantees also received funds via one of the other
sources just described.
Each project was completed under one of two types of contracts: “lump sum”
contracts for Beth-Anne, Roosevelt, and Pershing, and “cost plus” contracts for the rest.
To be awarded a lump sum contract, a general contractor enters into a competitive
bidding process. The amount of the winning bid is the amount the winning contractor
receives for its work on the project, regardless of whether its actual expenses are lower
or higher. In a cost plus contract, the general contractor receives the lower of its
expenses on a project or the “guaranteed maximum price” (GMP) for that project, which
1
The Westhaven Park development was the site of two separate construction
projects involving Walsh, referred to by the parties as “Westhaven I” and “Westhaven
II.”
3
is a total it works out in advance with the developer.
Walsh was paid periodically during the course of its work on each project to
ensure that it would have enough funds to pay for expenses and subcontractors, a
practice typical of general contracting arrangements. The projects established interim
pay periods, each of which concluded with a meeting that included Walsh,
representatives of the architect and developer, and sometimes government agency
personnel. The meeting attendees certified that a project was more or less on track.
After each of these certifications, Walsh received a fixed percentage of the project’s
total price (the lump sum or the GMP, depending on the type of contract). These
interim percentage payments were structured so that Walsh would receive its entire fee
by the conclusion of a project. At the end of a cost plus project, Walsh submitted a
statement of its overall costs to be measured against the GMP for the project. In at
least one case, these costs exceeded the GMP, and Walsh therefore did not receive
reimbursement for all of its expenses.
The lump sum or GMP for a project can be altered during construction with a
“change order” form, but the figures tend not to change very much between estimation
and final payment. Because the maximum amount a general contractor can receive on
a project is basically established before it begins work, the contractor goes through a
detailed process of estimating costs before it submits a bid or agrees to a GMP. This
estimation process may involve contacting subcontractors for bids or price quotes, as
well as considering what other kinds of work will be necessary for a site. The process
culminates in the creation of a document called a “schedule of values” (SOV). An SOV
lists the total expected costs for a project, broken down into separate line items for
4
various categories of general contractor and subcontractor work. The projects receiving
Capital Advance funding and funding administered by the City of Chicago required
Walsh to submit its expected costs on HUD form 2328, which asks for the same
information that is included in a typical SOV. The Court will refer to Walsh’s SOVs and
2328 forms collectively as SOVs.
For all of the projects except Pershing and Westhaven I and II, the parties agree
that Walsh’s construction contracts were finalized only after HUD approved the SOVs.
These contracts all incorporated the SOVs as exhibits, and the GMP or lump sum listed
in each contract was the same amount indicated by the SOV for the project. Walsh
completed 2328 forms for Pershing and Westhaven I, but it points out that the forms
were not signed by anyone from HUD and are not exhibits to the construction contracts.
It contends that they therefore did not factor into the approval process in the same way
as the other SOVs. Walsh also completed a non-2328 SOV for Westhaven II that it
claims HUD approved, although neither the form itself nor the contract to which it is an
exhibit indicates that approval. Just as with the other five contracts, however, the lump
sum or GMP for each of these projects is the same value that appears on the SOV for
the particular project.
Each SOV includes a total expected cost for the project, broken down into
itemized lists of costs. These lists are further subdivided into two main sections. The
first section is called the “trade lines” or “trade items.” These lines include the costs of
each particular kind of “hard construction” work that the project requires, such as
masonry or carpentry. The second section indicates three separate allotments of
money specifically for the general contractor: profit, builder’s overhead, and general
5
conditions. Profit represents a stipend for the general contractor over and above its
expenses. Builder’s overhead is a fixed amount that the general contractor receives in
consideration of its day-to-day expenses not directly associated with a particular
project, such as rent for its home office. General conditions, also called general
requirements, comprise the cost of non-trade-specific work that the general contractor
itself performs on a construction project, such as safety, cleanup, and site security, as
well as general expenses such as electrical consumption.
The central point of contention in this case is whether certain self-performed
work that Walsh listed and billed as part of the trade items on each project’s SOV
instead should have been listed under “general conditions.” For example, on the Lake
Park project, Walsh completed an additional form called a “sworn statement” that listed
costs in a more detailed way than the Lake Park 2328 form. The sworn statement
indicated that Walsh’s calculation of trade costs included compensation for itself for
work including “safety, clean-up, firestopping, unloading and delivery.” Walsh does not
dispute that the totals on the 2328 form reflected billing for these activities or that these
amounts represented money that was paid to Walsh separately from the amount it
received for general conditions. Walsh maintains, however, that the all relevant project
stakeholders knew that it was billing this way, and it denies that it broke any rules or hid
anything from HUD.
Hudalla argues that this practice constituted fraudulent billing. Specifically, he
contends that Walsh’s inclusion of costs on the trade lines was fraudulent because
most of the costs should have been listed under “general conditions” and that certain
other costs were not costs for which Walsh was entitled to bill in the first place. Hudalla
6
alleges that the costs billed as trade items either duplicated work already accounted for
under general conditions or that, by separating these costs from the general conditions
line item, Walsh billed more for general conditions than it was allowed to. In support of
the latter argument, Hudalla cites the “Cost Control and Safe Harbor Standards for
Rental Mixed-Finance Development,” which apply to five of the projects at issue, as
establishing that HUD prohibits general contractors from receiving more than six
percent of the hard construction costs on any given project as general conditions, as
well as two percent as builder’s overhead and six percent as profit.
Hudalla contends that the six percent limitation represents a hard cap for general
conditions costs. Therefore, he argues, any general contractor that manages to take
home a higher percentage based on work like safety and clean-up – which Hudalla
says should be categorized, by definition, under “general conditions” – is cheating the
system and deceiving the government. Thus, according to Hudalla, Walsh illegally
supplemented its income in two ways. First, Walsh received the wrongfully added
amounts themselves over and above the six percent allocated on the general contractor
lines, thereby receiving compensation for general conditions work that exceeded six
percent of the project’s hard construction costs. Second, because Walsh counted
these amounts along with subcontractor-performed work when calculating the total
construction costs, the total fourteen percent cut that it received was higher than it
otherwise would have been. Walsh denies all of these allegations.
Although Hudalla worked only on the South Park project, his complaint identified
four other projects and alleged that, due to the way in which Walsh billed as a matter of
practice, it had, “on information and belief, knowingly and recklessly damaged the
7
United States Government” on other projects, “including, but not limited to” several that
Hudalla named. Am. Compl. ¶ 33. Walsh moved to dismiss in part, arguing that the
non-South Park projects were not properly part of the lawsuit because they were not
referenced with sufficient specificity in the complaint. On June 23, 2009, the Court
denied the motion, noting that Hudalla did not have access to the records for other
projects and that his allegations were sufficiently specific to meet the requirements of
Federal Rule of Civil Procedure 9(b). During discovery, Walsh objected to producing
materials regarding projects not named in the complaint. The Court granted Hudalla’s
motion to compel discovery of these materials.
Discussion
Summary judgment is appropriate “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). In other words, a court may grant summary judgment
“where the record taken as a whole could not lead a rational trier of fact to find for the
non-moving party.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986).
A.
Non-South Park projects
As a threshold matter, Walsh contends that some or all of the projects other than
South Park should not be considered in this case because of deficiencies in Hudalla’s
complaint or other alleged missteps.
1.
Adequacy of the complaint
In his original complaint, filed in October 2005, Hudalla alleged in detail how he
8
contended Walsh had committed fraud in connection with South Park. He then alleged
that he was told by Walsh supervisory personnel “that this is how Walsh regularly does
business and accounts for its expenses.” Compl. ¶ 26. Walsh went on to allege that
the damage to the government on South Park exceeded $1,300,000 and that
given the sheer number of other government financed construction
projects for which Walsh serves as general contractor, including, but not
limited to, the federally financed construction projects known as
Westhaven, Park Boulevard, Park Crescent, and Altgeld Gardens, and
the manner in which Walsh “accounts” for its costs, expenses and fees,
Walsh has, on information and belief, knowingly or recklessly damaged
the United States Government in an as yet undetermined amount but, in
any event, in excess of $5,000,000.
Id. ¶ 32. In his amended complaint, Hudalla beefed up his allegation regarding Walsh’s
general billing practices, alleging that he was told by various Walsh supervisory
personnel that
Walsh regularly “does business” this way and routinely collects additional
funds in this manner on construction projects which are governed by
maximum cost contracts such as SPP and other federally funded
construction projects on which it is, or has, been hired.
Am. Compl. ¶ 28. He also supplemented his separate allegation regarding Walsh’s use
of fraudulent practices on projects beyond South Park. See id. ¶ 33.
Walsh argues that Hudalla’s complaint did not adequately reference the nonSouth Park projects because it referred by name only to Westhaven and Lake Park
Crescent – not Beth-Anne, Pershing Courts, Roosevelt Tower, or St. Sabina – and did
not describe Westhaven or Lake Park Crescent in any detail. Walsh contends that this
ran afoul of Federal Rule of Civil Procedure 9(b), which requires allegations of fraud to
be alleged with particularity.
The adequacy of pleading in Hudalla’s complaint, however, is no longer an issue
9
at this advanced stage of the litigation. In any event, the Court rejected Walsh’s Rule
9(b) argument over two years ago when it denied Walsh’s motion to dismiss:
Walsh contends that Hudalla’s allegation concerning construction projects other
than South Park Plaza fail to allege fraud with the requisite particularity.
Generally, an FCA relator must allege specific examples of false claims
submitted for payment in order to comply with the heightened pleading
requirements of Rule 9(b). This requirement is relaxed, however, when the
relator lacks access to the facts necessary to detail his claim. . . . It is undisputed
that Hudalla did not have access to records pertaining to Walsh projects other
than South Park Plaza. And he has alleged that his superiors at Walsh informed
him that the allegedly unauthorized billing of certain expenses to the government
was standard operating procedure for Walsh. These allegations are sufficient to
meet the requirement the requirements of Rule 9(b).
United States ex rel. Hudalla v. Walsh Constr. Co., No. 05 C 5930 (N.D. Ill. June 23,
2009) (order denying motion to dismiss) (internal citations omitted).
Walsh has been on notice since it was first served with Hudalla’s complaint that
he was challenging its practices concerning projects beyond South Park, and indeed
beyond the other projects Hudalla named in the complaint. That was readily apparent
from Hudalla’s detailed allegations regarding the nature of the alleged fraud; his
contention that he had been told that Walsh billed in the same way on other projects;
his identification of several of those projects; and his statement that his claim
“includ[es], but [is] not limited to,” the named projects. Hudalla’s counsel also made it
clear at numerous status hearings, all attended by Walsh’s counsel, that his claim went
beyond South Park: a significant number of discovery-related issues that were brought
to the Court’s attention concerned Hudalla’s requests for documents and information
relating to non-South Park projects. Finally, the report of Hudalla’s expert, served at the
beginning of July 2001, as well as his summary judgment materials, made it abundantly
clear that his claims were not confined to South Park.
10
For these reasons, the Court rejects Walsh’s argument that, based on the
complaint, Hudalla’s claims in this case should be limited to South Park.
2.
FCA presentment requirement
Walsh also argues that, with respect to the non-South Park projects, Hudalla has
failed to comply with 31 U.S.C. § 3730(b)(2). This provision requires a relator in a qui
tam case under the FCA to serve on the government a “copy of the complaint and
written disclosure of substantially all material evidence and information the person
possesses.” According to Walsh, Hudalla’s inadequate disclosures relating to the nonSouth Park projects deprived the government of an adequate opportunity to decide
whether to intervene in the case.
There is no question that Hudalla complied with section 3730(b)(2)‘s requirement
as of the date he filed suit. Walsh does not suggest that Hudalla had information that
he held back at the time. In addition, as the Court noted above, the complaint made it
clear that Hudalla was alleging that Walsh had used on other projects the same
fraudulent practices that his complaint described in detail with regard to South Park. It
is also undisputed that the government has been provided with copies of all motions,
briefs, and other filings in this case. These included Hudalla’s briefs and materials in
support of his motion for summary judgment and in opposition to Walsh’s motion,
including the aforementioned expert report. The summary judgment materials contain,
or at least summarize in detail, the vast majority of the material evidence in the case.
Again, Walsh does not argue otherwise.
The requirement that a relator disclose his evidence to the government serves a
twofold purpose: protecting the government’s interests, and protecting the defendant
11
from having to prepare a defense without knowing whether its opposing litigant is the
relator or the government. See United States ex rel. King v. F.E. Moran, Inc., No. 00 C
3877, 2002 WL 2003219, at *13 (N.D. Ill. Aug. 29, 2002) (citing United States ex rel.
Pilon v. Martin Marietta Corp., 60 F.3d 995,998-99 (2d Cir. 1995)). Both of these
purposes have been satisfied in this case. The government has been apprised of the
scope of Hudalla’s claims throughout the litigation and unquestionably has had an
adequate opportunity to determine whether to intervene. And Walsh likewise has had a
full and adequate opportunity to address in discovery and on summary judgment
Walsh’s claims concerning the non-South Park projects, knowing full well that it is
litigating against Hudalla, not the government.
Because Hudalla complied with the statute’s literal requirements, and because
the purposes behind the statute have been met, the Court denies Walsh’s request to
strike Hudalla’s claims regarding the non-South Park projects. The Court also denies
Walsh’s request to submit a supplemental memorandum in support of summary
judgment regarding those projects, because Walsh has already addressed them in its
briefs.
3.
Affirmative defenses
Walsh asserted two affirmative defenses along with its answer. The first defense
was that the Court lacks jurisdiction over some of Hudalla’s claims because he was not
the “original source” of the information as required by the FCA. Hudalla rebuts this
defense at length in his brief supporting summary judgment, and Walsh provides no
contrary argument either in its own brief or its response to Hudalla’s. Walsh has
12
forfeited the point. Hudalla is entitled to summary judgment on this defense.
Walsh’s second affirmative defense is based on the FCA statute of limitations,
which establishes that a claim may not be brought
(1) more than 6 years after the date on which the violation . . . is committed; or
(2) more than 3 years after the date when facts material to the right of action are
known or reasonably should have been known by the official of the United States
charged with responsibility to act in the circumstances, but in no event more than
10 years after the date on which the violation is committed, whichever occurs
last.
31 U.S.C. § 3731(b). In a case in which the government has not intervened, the statute
of limitations is measured from the date the qui tam relator became aware of the facts
giving rise to the allegations. See King, 2002 WL 2003219, at *13.
There is no viable statute of limitations defense in this case. Hudalla filed suit in
October 2005. It is undisputed that this was within three years after he became aware
of Walsh’s billing practices that he challenges in this case. It was also within ten years
of the alleged FCA violations upon which he sues.
In support of its limitations argument (which concerns only the non-South Park
projects), Walsh cites the proposition that a party may not amend its complaint through
arguments in a summary judgment brief, noting a case in which a complaint was
deemed barred by the statute of limitations although the summary judgment motions
discussed a claim. Grayson v. O’Neill, 308 F.3d 808, 817 (7th Cir. 2002). That has no
bearing on this case. As the Court has already indicated, the additional projects have
been a part of Hudalla’s claims since the beginning of this case, despite Walsh’s
contention that his allegations were insufficiently detailed.
For these reasons, the Court grants Hudalla’s motion for summary judgment on
13
Walsh’s limitations defense.
B.
Hudalla’s claims
Hudalla contends that Walsh’s practice of billing for general contracting activities
under trade items rather than general conditions amounted to a violation of two
provisions of the FCA, 31 U.S.C. § 3729(a)(1) and (2). Count one of his complaint
concerns section 3729(a)(1), which imposes liability for “any person who knowingly
presents, or causes to be presented, a false or fraudulent claim for payment or
approval.” Count two concerns section 3729(a)(2), which imposes liability on “any
person who 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.”
1.
Count 1
Walsh argues that Hudalla cannot prove either that its challenged billing
practices constituted actual claims to the government, or, if they were claims, that they
were knowingly false when made.
a.
Claims
Hudalla must show that Walsh has presented a “false or fraudulent claim for
payment or approval.” 31 U.S.C. § 3729(a)(1). The FCA, at the time of the alleged
fraudulent claims at issue here, defined a “claim” as
any request or demand, whether under a contract or otherwise, for money
or property which is made to a contractor, grantee, or other recipient if the
United States Government provides any portion of the money or property
which is requested or demanded, or if the Government will reimburse
such contractor, grantee, or other recipient for any portion of the money or
property which is requested or demanded.
Former 31 U.S.C. § 3729(c). Case law indicates that under this statutory definition of a
14
“claim,” there is no FCA liability if the defendant made a claim for payment by an entity
that had previously received federal funds over which it thereafter exercised complete
control. See, e.g,. United States Dep’t of Transp. ex rel. Arnold v. CMC Eng’g, 564
F.3d 673, 678 (3d Cir. 2009); United States ex rel. Totten v. Bombardier Corp., 380
F.3d 488, 492-93 (D.C. Cir. 2004).
Hudalla has provided evidence from which a reasonable jury could find that the
federal government disbursed funds for construction costs on each of the projects at
issue only after HUD had reviewed and approved a budget that included the amount to
be paid to Walsh, an amount that, in turn was based on the allegedly false submissions
that Walsh had made regarding its costs. From this, a reasonable jury could find that
Walsh submitted false claims or caused false claims to be submitted.
Walsh created SOVs for each of the eight projects before the formation of the
final construction contracts and incorporated them into at least six of the contracts. The
total value listed on each SOV was equal to the initial GMP or lump sum for the project
for which the SOV was created. A reasonable jury could conclude from this evidence
that the approved GMP and lump sum values for each project were derived from the
HUD-approved SOVs. It is undisputed that the interim and total payments Walsh
requested and received on each project were based on a percentage of these values.
A reasonable jury could therefore conclude that Walsh would not have had access to
the money absent HUD approval of the SOVs, and thus that the SOVs themselves
constituted requests for payment and therefore claims.2 And if the total amounts in
2
Walsh points out that there is no undisputed evidence of HUD approval of the
SOVs or construction contracts for Pershing and Westhaven I. For both projects,
15
these SOVs were fraudulently tabulated, as Hudalla alleges, a reasonable jury could
find that the SOVs, as the documents that secured HUD’s approval for the amount that
Walsh was later to request, constituted claims within the meaning of the FCA.
b.
Knowingly false
Central to each of Hudalla’s claims is his allegation that Walsh’s billing practices
were knowingly false or fraudulent. Walsh argues that Hudalla must show that the
alleged rules requiring general contracting costs to be billed all in one place and not to
surpass fourteen percent were actually requirements, rather than guidelines or
expectations.
As Walsh points out, Hudalla provides no evidence that a HUD statute,
regulation, or specific written policy mandated that general contractors bill in the way
Hudalla contends is required. For his argument that “general conditions” is an exclusive
and all-encompassing definition and that five of the projects had a hard cap of six
percent for general conditions, Hudalla relies principally on the wording on the SOVs,
guidance documents such as Walsh’s internal construction manual and a form from the
American Institute of Architects, and the declarations of several HUD, CHA, and
Chicago employees. In response, Walsh has supplied testimony from various
personnel stating that its billing practices were acceptable, including the general
counsel of WCDC, who had direct knowledge of the practice. Both sides have
however, Walsh completed a 2328 form with the same total value as the lump sum or
GMP for the project, and the construction contracts each referred specifically to a
schedule of values. A reasonable jury could conclude from this evidence that Pershing
and Westhaven I were presented to and approved by HUD in the same manner and
based on the same information as the other projects.
16
submitted expert reports and testimony about standard practice in the industry. Based
on this evidence, a reasonable jury could go either way on the question of whether
Walsh was “allowed” to bill in the manner that it used.
The question of liability in this case, however, depends not on whether Walsh’s
actions were contrary to a rule but rather on whether they were “knowingly fraudulent.”
The FCA penalizes “only those statements made with knowledge of their falsity.
Innocent mistakes or negligence are not actionable” under the FCA. United States ex
rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 832 (7th Cir. 2011) (internal
quotation marks and citation omitted). To establish that Walsh’s statements of costs
were knowingly fraudulent, Hudalla must show that Walsh’s billing methods were
calculated to deceive the government. Specifically, he must show that HUD expected
Walsh’s SOVs and other forms to conform to the rules as Hudalla reads them; Walsh
knew of and knowingly thwarted that expectation; and it walked away from the projects
with more money than HUD would have allowed. Because the evidence would allow a
reasonable jury to determine that the requirements were as either party describes them,
it would also allow a reasonable jury to find for either party on the question of HUD’s
expectations.
In particular, from the evidence described above, a reasonable jury could
conclude that the HUD officials who approved the construction contracts did so with the
expectation that the costs Hudalla describes as “general conditions” would be billed as
such and that they would not exceed six percent of the total construction costs of the
projects, and that Walsh knew this. A reasonable jury could also conclude that the
HUD officials expected that the total cost for hard construction would not include any
17
money going to the general contractor for “general conditions” expenses – even for
those projects not subject to the six percent cap, and that Walsh likewise knew this.
Walsh argues that all the work for which it was paid was self-performed, implying
that it was work that HUD would have had to pay for anyway. This misses the point. A
reasonable jury could find that HUD expected a general contractor to fit all of its costs
for safety, clean-up, and the like into the general conditions line item; that if the general
contractor needed to do additional work, it would have to lower its rates or obtain
specific written approval; and that Walsh knew this.
Walsh contends that it received such approval, as indicated by the fact its
budgets were all approved by various officials of HUD and WCDC. It offers no written
example, however, of an SOV or other billing statement that clearly indicated that it was
billing for costs included in the trade lines and that HUD officials approved. Cf. United
States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1019 (7th Cir. 1999) (noting
that the fact that the government was “fully apprised of [the substance of the claims]
and never complained about them in the least” was evidence there was no fraud).
Although the non-2328 SOV for Westhaven II does indicate that Walsh itself performed
work accounted for in the trade items, the form does not include a signature or other
indication of approval by a HUD official.
It is certainly true that a jury could find from the evidence that HUD inspectors did
not expect Walsh to conform to Hudalla’s version of the rules or industry standards
and/or that Walsh did not believe that it was doing anything deceptive in order to get
paid. Walsh has not shown, however, that a reasonable jury would have no choice but
to find that HUD officials knew not just what the total amounts of Walsh’s bids were but
18
that it was allocating its costs in the particular manner it used. Indeed, a reasonable
jury could find that Walsh’s billing methods thwarted the expectations of the HUD
officials who approved the contracts for each project and that Walsh’s SOVs and
subsequent payment requests thus constituted false claims.
In his cross-motion for partial summary judgment, Hudalla contends that a
reasonable jury would have no choice but to find that Walsh acted fraudulently. For
example, he argues throughout his briefs that the statement on the standard 2328 form
that “[t]his form represents the Contractors and/or Mortgagors [sic] firm costs and
services as a basis for disbursing dollar amounts” necessarily implied that the
representations on the form were in conformity with the rules as Hudalla describes
them. He appears to argue that the statements of costs are supposed to be “firm,”
meaning actual and certain, and that Walsh’s knowingly inflated cost estimates
deliberately flouted the requirement of firmness by virtue of their dishonesty. A
reasonable jury, however, could find that Walsh believed itself to be in compliance with
the rules as it understood them, or that “firm” meant its final, best-guess figures for
purposes of the form, even if they were to change later.
Hudalla submits the “Cost Control and Safe Harbor Standards for Rental MixedFinance Development,” which apply to five of the projects, as well as an affidavit from a
HUD official, both of which reiterate the six percent, two percent, and six percent caps
on profit, builder’s overhead, and general conditions. He also points to the definitions of
“general conditions” in Walsh’s internal construction manual and an American Institute
of Architects form, asserting that any activities listed under these definitions can
appropriately be billed only on the general conditions line item. In response, Walsh
19
offers expert reports and testimony from several persons with knowledge of its practices
that “general conditions” is not meant to be an exclusive definition. A reasonable jury
could find from this evidence that Walsh’s practice of billing for some of these activities
on the trade lines was not a violation of a hard cap on general conditions
compensation. Because the words Hudalla cites as establishing definitive rules
arguably are subject to differing interpretations, especially given the fact that they
appear on forms and in guidance documents rather than in statutes or regulations,
nowhere is the evidence indicating fraudulent intent so undisputedly clear as he alleges.
For these reasons, the Court denies both parties’ motions for summary judgment
on count 1.
2.
Count 2
a.
Retroactivity of 2009 FCA amendments
Count 2 of Hudalla’s complaint alleges that Walsh violated 31 U.S.C. §
3729(a)(1)(b). The parties disagree on which version of the statute, which was
amended in 2009, applies in this case. The previous version, codified at 31 U.S.C. §
3729(a)(2), imposed liability on “any person who 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.” As amended, the statute imposes liability on “any
person who knowingly makes, uses, or causes to be made or used, a false record or
statement material to a false or fraudulent claim.”
The 2009 law amending the FCA, known as the Fraud Enforcement and
Recovery Act (FERA), provided that the amendment to this particular provision “shall
20
take effect as if enacted on June 7, 2008, and apply to all claims under the False
Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date.” Pub. L. No.
111-21, § 4(f). Hudalla argues that the meaning of “claims” in FERA section 4(f)
encompasses lawsuits, such as this one, and that the amended version of the statute
therefore applies in this case, which has been pending since before June 2008. He
contends that the Seventh Circuit has already ruled on this issue, citing the following
footnote from Yannacopoulos:
In 2009, Congress amended the False Claims Act, Pub. L. 111–21, § 4(a)(1),
making those amendments generally applicable only to conduct occurring on or
after May 20, 2009, Pub. L. 111–21, § 4(f). The one exception is the amendment
to section 3729(a)(1)(B), which applies to cases, such as this, that were pending
on or after June 7, 2008. Id.
Yannacopoulos, 652 F.3d at 818 n.2.
Walsh responds that the meaning of “claims” is established by the FCA itself,
which defines the term as “any request or demand . . . for money or property.” 31
U.S.C. § 3729(b)(2)(A). It contends that the previous version of the statute should
therefore apply because none of the claims at issue were pending in 2008. Walsh
argues that the Yannacopoulos footnote is “less than dicta; the issue of whether the
new FERA language applied . . . was never raised in the briefs or argument in the case
and was not otherwise addressed in the opinion, and none of the court’s holdings even
remotely depended on the question.” Def.’s Resp. at 30.
The Court agrees with Walsh that the reference to “cases” in Yannacopoulos is
dicta that does not establish binding precedent on this question. The question of
whether the FERA amendments applied was not at issue in that case. The Court also
agrees that the word “claims” in FERA is not a reference to lawsuits. First, the FCA
21
itself clearly defines “claim” in a manner that does not include “legal claim,” and
“[s]tatutory definitions control the meaning of statutory words.” Mason v. Medline
Indus., Inc., 731 F. Supp. 2d 730, 734 (N.D. Ill. 2010) (citing Lawson v. Suwannee Fruit
& S.S. Co., 336 U.S. 198, 201 (1949)). Second,
In § 4(f)(2), the provision immediately following the section at issue here,
Congress provided that "section 3731(b) of title 31, as amended . . . shall apply
to cases pending on the date of enactment." Pub. L. No. 111-21, 123 Stat. 1625.
If Congress intended the retroactivity of § 4(f)(1) be measured by "cases," it
would have said so just as it did in § 4(f)(2).
Id. at 735.
Several other district judges, as well as at least one court of appeals, have
similarly found that FERA did not retroactively apply to cases like Hudalla’s. See, e.g.,
Hopper v. Sovay Pharm., Inc., 588 F.3d 1318, 1327 (11th Cir. 2009); United States v.
Hawley, __ F. Supp. 2d __, No. 06 C 4087, 2011 WL 3295419, at *8-9 (N.D. Iowa Aug.
1, 2011) (collecting cases). The Court finds the logic of these decisions persuasive. It
therefore concludes that the amended version of 31 U.S.C. § 3729(a)(1)(b) does not
apply in this case.
b.
False statement
The Court’s conclusion that a reasonable jury could find for either party on count
one applies equally to Hudalla’s claim under former section 3729(a)(2). This claim
requires “three essential elements: (1) the defendant made a statement in order to
receive money from the government, (2) the statement was false, and (3) the defendant
knew it was false.” Yannacopoulos, 652 F.3d at 822 (citing United States ex rel. Gross
v. AIDS Research Alliance – Chicago, 415 F.3d 601, 604 (7th Cir. 2005)). The statute
22
provision requires “a causal rather than a temporal connection between fraud and
payment,” meaning that a statement must be “integral to a causal chain leading to
payment.” Main, 426 F.3d at 916.
A reasonable jury could find that Walsh created numerous “records” and
“statements” to get its claims for payment approved, particularly the SOVs and the
interim payment requests that were based on a percentage of the allegedly inflated total
project prices. If Walsh’s claims for interim and total payment were based on items for
which he was not allowed to bill, all of these statements were false. Because they were
submitted to HUD, the other government agencies, and the developer to obtain
approval for and receive payments, a reasonable jury could find that these statements –
some of which arguably were false claims in and of themselves – had a sufficient
causal connection to the claims to provide a basis for liability. A reasonable jury also
could find that Walsh made the false statements knowing that they would cause the
payment of federal funds.
A reasonable jury could also find, however, that Walsh did not commit fraud
because HUD’s expectation of how Walsh would bill or Walsh’s understanding of that
expectation were not what Hudalla claims they were. In that case, neither Walsh’s
overall claims nor the specific statements it made in an effort to get them paid by the
government were false.
For these reasons, the Court denies both parties’ motions for summary judgment
on count 2.
Conclusion
For the reasons stated above, the Court grants relator’s motion for partial
23
summary judgment [docket nos. 158 & 159] with regard to certain of defendant’s
affirmative defenses but otherwise denies the motion. The Court denies defendant’s
motion for summary judgment [docket no. 152]. The case is set for a status hearing on
December 6, 2011 at 9:30 a.m. Lead trial counsel are directed to appear. If lead trial
counsel are unavailable, those attending the status hearing must have complete
knowledge of the trial schedules of lead counsel, because it is likely that the Court will
have to reset the currently scheduled trial date.
s/ Matthew F. Kennelly
MATTHEW F. KENNELLY
United States District Judge
Date: December 3, 2011
24
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?