Schagrin et al v. LDR Industries, LLC et al

Filing 59

MEMORANDUM Opinion and Order: Defendants' motion to dismiss 44 is granted. The case is dismissed with prejudice because § 3730(e)(3) is a legal bar and repleading would be futile. Civil case terminated. Signed by the Honorable Thomas M. Durkin on 5/23/2018:Mailed notice(srn, )

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 1 of 11 PageID #:478

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ROGER B. SCHAGRIN and ROGER B.
SCHAGRIN, PC, doing business as
SCHAGRIN ASSOCIATES,

No. 14 C 9125

Plaintiffs,

Judge Thomas M. Durkin

v.
LDR INDUSTRIES, LLC; GB HOLDINGS,
INC.; LARRY GREENSPON and DENNIS
GREENSPON,
Defendants.
MEMORANDUM OPINION AND ORDER
Defendants manufacture and import steel pipe from China. Relators, Roger
Schagrin and his law firm, allege that Defendants misclassify the pipe in order to
avoid paying certain customs duties. Relators claim that this works a fraud against
the federal government in violation of the False Claims Act. Defendants have moved
to dismiss for lack of subject matter jurisdiction and for failure to state a claim
pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), respectively. R.
44. For the following reasons, that motion is granted and the case is dismissed.
Background
In international trade, products are sometimes imported to the United States
and sold for less than their normal value. This practice is referred to as “dumping,”
and can hurt domestic companies who sell the same product at normal value.
Similarly, some imports are able to be sold at less than normal value because of

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 2 of 11 PageID #:479

foreign government subsidies. The federal government can counter these practices
with “anti-dumping” and “countervailing” customs duties, respectively.
According to Relators, around November 2007 the federal government
imposed such duties on “circular welded pipe” (i.e., steel pipe of various
specifications for use in plumbing, among other uses) imported from China. R. 1 ¶¶
1, 27. These duties amount to at least 30% and sometimes as much as 620%. Id. ¶
27. After these duties were imposed, steel pipe imports from China decreased from
748,181 tons in 2007 to only 2,813 tons in 2009, representing only 0.6% of
consumption in the United States. Id. ¶ 30. The duty regulations exclude “pipe
suitable for use in boilers [and] superheaters,” among other exceptions. Id. ¶ 2.
Defendant LDR Industries LLC, headquartered in Chicago, has imported
steel pipe from China “since at least 2010.” Id. ¶ 3. It sells steel pipe and related
products to retail stores around the country including Home Depot. Id. ¶ 13. LDR
owns companies in Taiwan and China that manufacture the pipe and prepare it for
export to the United States. Id. Defendant GB Holdings, Inc. is the sole member of
LDR, and has its headquarters at the same Chicago address as LDR. Id. ¶ 14. GB
Holdings is owned by defendants Larry and Dennis Greenspon, who are also LDR’s
managers. Id. ¶ 15.
Relator Schagrin is an attorney experienced in the steel pipe industry and
related matters of international trade. Id. ¶¶ 10-11. In 2010, Schagrin visited a
Home Depot store and noticed LDR pipe imported from China. Id. ¶ 31. Based on
his experience with the steel pipe industry he surmised that this pipe did not fall

2

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 3 of 11 PageID #:480

into any of the exceptions to the duty regulations, and was the same type of pipe
LDR imported from China prior to implementation of the duty regulations. Id. ¶¶
31-36. He also surmised that LDR had not paid the duties because the prices were
too low. Id. ¶ 37. Schagrin alleges that these conclusions would have been obvious to
anyone with sufficient knowledge of the industry and regulations. Id. ¶ 38.
Schagrin reported his suspicions to the United States Customs and Border
Protection Agency (“U.S. Customs”) in 2012. Id. ¶ 43. U.S. Customs investigated
and determined that LDR had misclassified its imported pipe in order to avoid
paying duties. Id. ¶ 44. Relators allege that U.S. Customs “billed” LDR for unpaid
duties in the amount of $6.7 million, which was later reduced to $4.85 million,
covering pipe shipments in 2011 and 2012. Id. Relators also allege that U.S.
Customs “continues to investigate the matter.” Id.
Largely due to the penalties imposed by U.S. Customs, LDR declared
bankruptcy on September 2, 2014. U.S. Customs filed a proof of claim in that
proceeding on February 3, 2015. Defendants have attached that proof of claim (and
its amendments) to their motion to dismiss. According to those documents, U.S.
Customs claims the following:
The loss of revenue of $14,376,139.08 was a result of
incorrect classification in which LDR Industries, LLC
underpaid Customs duties on entries from November
2007 to September 2012.
The penalty is being assessed for $38,813,848.70 due to
the findings that the entries were filed with incorrect
classification with no rate and/or lower rates of dumping
countervailing duties. The penalty also includes entries
that were filed as consumption should have been subject
3

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 4 of 11 PageID #:481

to anti-dumping and countervailing. These findings are
the result of the penalty pursuant to 19 U.S.C. § 1592.
R. 45-4 at 8; R. 45-5 at 8; 45-6 at 10. Additionally, in the initial proof of claim
(although not in subsequent amendments), U.S. Customs stated that LDR “paid
dumping deposit rate of 3.39% for entries imported from Korea; however, it turned
out that the merchandise came from China and the rate for dumping and
countervailing should have been at 68.24% and 39.01%.” R. 45-4 at 10.
Relators did not file a proof of claim in LDR’s bankruptcy proceedings.
Relators filed this action on November 13, 2014.
On October 6, 2016, the bankruptcy court entered an order approving LDR’s
Chapter 11 plan. See R. 45-2. That order notes that the plan “incorporates the terms
of a settlement between [LDR] and [U.S. Customs] which resolves the Disputed
Claim filed by [U.S. Customs] in the amount of $58,717,368.86[.]” Id. at 8. The plan
itself provides that the settlement constitutes a “full and complete satisfaction of
[LDR’s] obligations for all Claims held by [U.S. Customs].” Id. at 21.
Analysis
In a provision known as the “government action bar,” the False Claims Act
provides, “In no event may a person bring an action under [the False Claims Act]
which is based upon allegations or transactions which are the subject of a civil suit
or an administrative civil money penalty proceeding in which the Government is
already a party.” 31 U.S.C. § 3730(e)(3). 1 Defendants argue that this case must be

The Seventh Circuit has held that “it is not clear that § 3730(e)(3) imposes a true
jurisdictional limitation.” U.S. ex. rel. Absher v. Momence Meadows Nursing Ctr.,
1

4

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 5 of 11 PageID #:482

dismissed because U.S. Customs assessed penalties against LDR pursuant to 19
U.S.C. § 1592, and then pursued those penalties by filing a claim in LDR’s
bankruptcy proceeding.
Relators’ primary argument against application of the government action bar
to this case is that U.S. Customs did not pursue an “administrative civil money
penalty proceeding” against LDR, as § 3730(e)(3) requires. Relators characterize
U.S. Customs’s pursuit of payment from LDR as “a bill for duties [that] is quite
different from a penalty proceeding under 19 U.S.C. § 1592(b).” R. 50 at 14. The
problem with this argument is that the proof of claim U.S. Customs filed in the
bankruptcy court notes that the findings supporting the claim “are the result of the
penalty pursuant to 19 U.S.C. § 1592.” R. 45-5 at 8. 2 Contrary to Relators’ allegation
that U.S. Customs merely sent LDR “a bill” for unpaid duties, the proof of claim
shows that U.S. Customs pursued a penalty amount far greater than the $6.7
million for which LDR was allegedly “billed.” The few district courts to have
addressed what constitutes an “administrative civil money penalty proceeding” for
purposes of § 3730(e)(3) agree that whether the government has already imposed a
“penalty” against the defendant is key to determining whether § 3730(e)(3) bars a
subsequent FCA claim. See Found. For Fair Contracting, Ltd. v. G&M E.

Inc., 764 F.3d 699, 706 (7th Cir. 2014). It is unnecessary to decide whether §
3730(e)(3) implicates the Court’s subject matter jurisdiction because the outcome of
this motion is the same regardless.
It is proper for the Court to take judicial notice of these court filings on a motion to
dismiss. See Olson v. Champaign County, 784 F.3d 1093, 1097 (7th Cir. 2015) (“As a
general rule, we may take judicial notice of public records not attached to the
complaint in ruling on a motion to dismiss under Rule 12(b)(6).”).

2

5

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 6 of 11 PageID #:483

Contracting & Double E, LLC, 259 F. Supp. 2d 329, 337-38 (D.N.J. 2003)
(dismissing FCA claim because the Department of Labor had already imposed
penalty for inaccurate reporting of employee number and wage misclassifications);
U.S. ex rel. Int’l Broth. of Elec. Workers, Local Union No. 98 v. Farfield Co., 2013
WL 3327505, at *12 (E.D. Penn. July 2, 2013) (denying motion to dimiss FCA claim
because Department of Labor audit did not seek a penalty); U.S. ex rel. Jonson v.
Shell Oil Co., 26 F. Supp. 2d 923, 928 (E.D. Tex. 1998) (denying motion to dismiss
FCA claim because the federal Mineral Management Service audit did not seek a
penalty); U.S. ex rel. McDermott v. Genetech, Inc., 2006 WL 3741920, at *7 (D.
Maine Dec. 14, 2006) (denying motion to dismiss FCA claim based on a Justice
Department investigatory subpoena, because “there is nothing but . . . speculation
to suggest that the government will obtain redress through its investigation”).
Accordingly, this Court finds that U.S. Customs’s pursuit of penalties against LDR
pursuant to 19 U.S.C. § 1592(b) was an “administrative civil money penalty
proceeding” for purposes of § 3730(e)(3).
Relators also argue in passing that their claims are “not ‘based upon’ any
‘allegations or transactions’ that the Government alleged in a pleading or other
document.” R. 50 at 16. But as Defendants point out, Relators concede that their
allegations about LDR’s failure to pay antidumping and countervailing duties are
the same allegations “Customs concluded . . . were true,” R. 50 at 17, and that
Relators are seeking to collect the remainder of penalties identified in U.S.

6

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 7 of 11 PageID #:484

Customs’s proof of claim. 3 The Seventh Circuit has explained that a claim is barred
under the False Claims Act “when either the allegation of fraud or the critical
elements of the fraudulent transaction themselves are the subject of a governmental
civil action or penalty proceeding.” Absher, 764 F.3d at 707. Such “critical elements”
include the misrepresentation underlying the alleged fraud. Id. at 709 n.10. Here,
the misrepresentation at issue is the failure to accurately classify the imported pipe
in

order

to

evade

customs

duties.

As

Relators’

allegations

show,

this

misrepresentation is at the heart of both the U.S. Customs penalty proceeding and
Relators’ claims. Relators’ pursuit of claims based on LDR’s failure to pay
antidumping and countervailing duties is based on the same “allegations and
transactions” as the U.S. Customs penalty proceeding against LDR.
Relators’ claims are unlike those at issue in Absher where the Seventh
Circuit held that the False Claims Act allegations were not based on the same
allegations and transactions as the prior penalty proceedings. In that case, a
nursing home was alleged to have provided substandard care and to have made
false claims when it certified that the care met the standard in seeking payment. Id.
at 708-09 & n.10. The Seventh Circuit held that the government’s knowledge of
substandard care (uncovered during an administrative investigation) did not

See R. 50 at 5-6 (“Customs sent LDR a bill for approximately $4.85 million . . . .
But that was only a small portion of the Government’s damages. In LDR’s
subsequent bankruptcy proceedings—which was the Greenspons’ attempt to avoid
paying that bill—Customs filed a claim form indicating that it has suffered a ‘loss of
revenue’ of $14,376,149.08 . . . . The Government is still owed more than $14
million, and this lawsuit is the only hope for recovering any of that for the Nation[’s]
taxpayers.”).
3

7

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 8 of 11 PageID #:485

necessarily demonstrate that the government had knowledge that the nursing home
acted with the scienter necessary to state a claim under the False Claims Act. In
this case, however, it is not possible to similarly separate the underlying activity
from the misrepresentation about the activity. Rather, LDR’s misrepresentations
about the pipe characteristics is the relevant activity itself. Thus, both the U.S.
Customs penalty proceeding and Relators’ claims are based on misrepresentations
inherent to misclassifying imported products.
Relators also cite U.S. ex rel. S. Prawer and Co. v. Fleet Bank of Maine, a
frequently cited First Circuit decision explaining that the government action bar is
one of several attempts by Congress to add jurisdictional or statutory bars to the
False Claims Act with the intent to prohibit “parasitic” actions—i.e., actions which
“receiv[e] support, advantage or the like from the host case (in which the
government is a party) without giving any useful or proper return to the
government.” 24 F.3d 320, 327-28 (1st Cir. 1994). Relators argue that this case is
“not a situation where Relators are merely attempting to piggyback on the
Government’s prior pursuit and receipt of an adequate remedy . . . . [and] there is no
host/parasitic relationship here that the government action bar was enacted to
discourage. Indeed Customs only became aware of the unpaid duties because
Relators blew the whistle and [were] instrumental in Custom’s investigation.” R. 50
at 15.
To the extent that the “parasite” metaphor accurately characterizes the
general intent of the statutory bars included in the False Claims Act, it does not

8

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 9 of 11 PageID #:486

help determine whether § 3730(e)(3) bars this case in particular. In Prawer, the
FDIC took over insolvent Maine National Bank and later sold Maine National’s
assets to Fleet Bank, on the condition that Fleet Bank had the right to sell certain
Maine National loans back to the FDIC under certain conditions. Fleet eventually
sold certain Prawar loans back to the FDIC. The FDIC instituted an action to collect
on the Prawar loans which eventually settled. Prawar then brought FCA claims
against Fleet and others alleging fraud in exercising the right to sell the Prawar
loans to the FDIC. The First Circuit held that Prawar’s FCA action was not
“parasitic” on the FDIC collection action because Fleet and the other defendants in
the FCA action were not the defendants in the collection action, and the two
proceedings concerned “entirely different transaction[s] or occurrence[s].”
This reasoning is not helpful to answering the questions at issue in this case.
It is irrelevant to determining whether the U.S. Customs proceedings against LDR
constitutes an “administrative civil money penalty proceeding” under § 3730(e)(3).
It also does not shed light on whether this case is “based upon [the] allegations or
transactions which [were] the subject” of the U.S. Customs proceeding against LDR.
Unlike Prawar, LDR is on the defensive in both proceedings at issue here. Further,
unlike Prawar, the same transaction or occurrence—i.e., LDR’s failure to pay
certain customs duties on steel pipe—is at the heart of both proceedings. Relators
contend that their being the original source of this information leading to U.S.
Customs instituting the penalty proceeding against LDR shows that this FCA case
is not parasitic. This may be an argument that Relators are an “original source”

9

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 10 of 11 PageID #:487

such that the FCA’s “public disclosure bar” does not apply. See 31 U.S.C. §
3730(e)(4). But it is not enough to be an original source in order to have the right to
file an FCA claim. The government action bar provision also requires that the
government has chosen not to pursue that claim in some other forum. Defendants
have shown that the government made such a decision in this case such that it is
barred by § 3730(e)(3).
In addition to claiming that Defendants evaded customs duties by improperly
classifying the imported pipe (Count One), Relators claim that Defendants evaded
customs duties by using improper labels to identify the pipe’s country of origin
(Count Two). Specifically, Relators allege that “LDR’s pipes and pipe fittings are
marked with small paper labels identifying them as foreign made. They do not have
the proper stenciling, engraving, or otherwise permanent markings required.” R. 1 ¶
7. So called “marking duties” are assessed if the import does not properly identify
the country of origin. The parties do not address whether Relators’ claim regarding
marking duties can be said to be “based upon allegations or transactions” which
were “the subject of” the penalty proceedings U.S. Customs brought against LDR.
U.S. Customs’s proof of claim in the bankruptcy proceedings does not appear to
specifically reference a marking duty violation. But the initial proof of claim
document notes that part of the U.S. Customs investigation addressed the
allegation that LDR paid the duty for imports “from Korea; however it turned out
that the merchandise came from China.” R. 45-4 at 10. Clearly, U.S. Customs was
concerned with how LDR had misidentified the country of origin for its products,

10

Case: 1:14-cv-09125 Document #: 59 Filed: 05/23/18 Page 11 of 11 PageID #:488

which is the underlying misrepresentation when failing to pay marking duties.
Thus, the Court finds that both of Relators’ claims were addressed by the U.S.
Custom penalty proceeding against LDR, and are barred by § 3730(e)(3). 4
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss, R. 44, is granted.
The case is dismissed with prejudice because § 3730(e)(3) is a legal bar and
repleading would be futile.
ENTERED:
______________________________
Honorable Thomas M. Durkin
United States District Judge

Dated: May 23, 2018

In light of this decision, it is unnecessary for the Court to address Defendants’
arguments regarding the preclusive effect of the bankruptcy proceedings, res
judicata, and the substantive elements of the False Claims Act.
4

11