United States of America, ex rel. Joseph M Hedley and Fred A. Rauch, III v. ABHE & Svoboda, Inc.

Filing 92

MEMORANDUM AND ORDER granting in part and denying in part Plaintiff's 87 Motion to Alter or Amend Judgment and for Leave to File Amended Complaint. Signed by Judge Richard D Bennett on 2/1/2016. (dass, Deputy Clerk) Modified on 2/1/2016 (dass, Deputy Clerk).

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
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JOSEPH HEDLEY, et al.,
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Plaintiffs,

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v.

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ABHE & SVOBODA, INC.,
Defendant.
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Civil Action No. RDB-14-2935

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MEMORANDUM ORDER

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This False Claims Act action was initially filed by Plaintiffs Joseph M. Hedley and
Fred A. Rauch, III (“Plaintiffs”) against Defendant ABHE & Svoboda, Inc. (“Defendant” or
“ASI”) in the United States District Court for the Southern District of Illinois. At the time
of the initial filing, the Plaintiffs acted as relators on behalf of the United States of America.
The United States was the original plaintiff in this action, but withdrew its intervention on
January 21, 2014. See Order, ECF No. 52. Plaintiffs Hedley and Rauch allege that ASI
orchestrated a fraudulent scheme whereby it falsely represented the use of a Disadvantaged
Business Enterprise (“DBE”) subcontractor in order to receive payments under a
government contract. Specifically, the First Amended Complaint (ECF No. 19) alleged
violations of the False Claims Act, 31 U.S.C. §§ 3729, et seq., and various state law claims.1
After the United States District Court for the Southern District of Illinois transferred
the action to this Court pursuant to 28 U.S.C. § 1404(a), ASI filed a Renewed Motion to

1 The United States, and not the current Plaintiffs, filed the First Amended Complaint.
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Dismiss (ECF No. 76).2 On July 31, 2015, this Court issued a Memorandum Opinion (ECF
No. 84) and Order (ECF No. 85) granting ASI’s Motion to Dismiss, dismissing Counts I-III
without prejudice, and dismissing Counts IV, V, and VII with prejudice. Of relevance to the
pending motion, this Court found that the First Amended Complaint failed to allege with
the requisite specificity of Federal Rule of Civil Procedure 9(b) that ASI had knowingly
submitted false claims for payment to the government, in violation of the False Claims Act.
Currently pending is Plaintiffs’ Motion to Alter or Amend Judgment and For Leave
to File Amended Complaint (ECF No. 87). The parties’ submissions have been reviewed
and no hearing is necessary. See Local Rule 105.6 (D. Md. 2014). For the reasons that follow,
Plaintiffs’ Motion to Alter or Amend Judgment and For Leave to File Amended Complaint
(ECF No. 87) is GRANTED IN PART and DENIED IN PART. Plaintiffs are permitted to
file the Second Amended Complaint at issue. However, as this Court merely dismissed
Plaintiffs’ claims in its earlier ruling, no judgment exists that this Court could alter or amend
under Rule 59(e) of the Federal Rules of Civil Procedure.
BACKGROUND
The present action arises from a contract between Defendant ASI and the Maryland
State Highway Administration (“MSHA”) for the cleaning and repainting of the Severn
River Bridge3 (the “Contract”). Plaintiffs Joseph Hedley and Fred Rauch were, at all times
relevant to this action, officers of Brighton Painting Company (“Brighton”), a participant in

2 Prior to the transfer to this Court, ASI had filed a Motion to Dismiss (ECF No. 33). While that motion was
pending, the United States moved to withdraw its intervention, and the district court granted the withdrawal.
See Mot. to Withdraw Intervention, ECF No. 50; Order, ECF No. 52. Plaintiffs chose to continue to pursue
the subject action after the Government’s withdrawal. The district court held a hearing on ASI’s Motion to
Dismiss on July 7, 2014 (ECF No. 62). That court dismissed with prejudice the unjust enrichment claim
(Count VI), and transferred the action to this Court. See Minute Entry, ECF No. 62; Order, ECF No. 63.
3 The Severn River Bridge is officially named the “Pearl Harbor Memorial Bridge.”
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the alleged scheme. On April 25, 2006, MSHA invited the submission of bids to clean and
repaint the Severn River Bridge. ASI then submitted a bid proposal to MSHA stating that it
intended to achieve MSHA’s required fifteen percent DBE participation requirement by
employing Northeast Work and Safety Boats, LLC (“NWSB”), a certified Women-Owned
Business Enterprise (“WBE”), as a subcontractor. On the basis of ASI’s representations in
its proposal, MSHA awarded the Contract to ASI on July 21, 2006.
The Contract, pursuant to the Disadvantaged Business Enterprise (“DBE”)
participation requirement, required ASI to utilize at least fifteen percent of the federal
government dollars on goods and services performed by a DBE. Instead of complying with
this DBE participation requirement, ASI allegedly represented that NWSB performed
certain work that was actually performed by Brighton. Plaintiffs claim that, under the alleged
scheme, ASI paid NWSB eight percent of the government funds ASI received under the
Contract, even though NWSB did not perform any “commercially useful function” as
mandated by the DBE participation goal. In furtherance of the scheme, ASI allegedly
submitted many false documents that were allegedly prerequisites to any payments by the
Government to ASI. ASI completed its cleaning and repainting of the Severn River Bridge
on July 17, 2008.
ANALYSIS
As a preliminary matter, Hedley and Rauch ask this Court to vacate its “judgment”
dismissing Counts I-III without prejudice as a necessary prerequisite to the filing of the
Second Amended Complaint. Yet, Plaintiffs misconstrue the posture of this Court’s Order
of July 31, 2016. When a plaintiff seeks to file an amended complaint post-judgment, the
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district court must first vacate that judgment before permitting the requested filing. Matrix
Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 193 (4th Cir. 2009). In this case, this
Court did not enter a judgment in favor of either party, instead merely dismissing Counts IIII without prejudice (and the uncontested Counts IV, V, and VII with prejudice). As such,
no judgment even exists that this Court could alter or amend under Rule 59(e) of the Federal
Rules of Civil Procedure.
Turning next to Plaintiffs’ request to file the proffered Second Amended Complaint,
Rule 15(a) of the Federal Rules of Civil Procedure instructs that leave to file an amended
complaint “shall be freely given when justice so requires.” This “liberal rule” reinforces the
“federal policy in favor of resolving cases on their merits instead of disposing them on
technicalities.” Laber v. Harvey, 438 F.3d 404, 426 (4th Cir. 2006); see also Conley v. Gibson, 355
U.S. 41, 48 (1957) (“The Federal Rules reject the approach that pleading is a game of skill in
which one misstep by counsel may be decisive to the outcome and accept the principle that
the purpose of pleading is to facilitate a proper decision on the merits.”). As noted by the
United States Court of Appeals for the Fourth Circuit, Rule 15(a) ensures that the “plaintiff
[is] given every opportunity to cure a formal defect in his pleading.” Ostrzenski v. Seigel, 177
F.3d 245, 252-53 (4th Cir. 1999) (quoting 5A Charles Allen Wright & Arthur R. Miller,
Federal Practice & Procedure § 1357 (2d ed. 1990)).
The “liberal rule” of Rule 15(a), however, is not absolute. A court may deny leave to
file an amended complaint when the amendment “would be prejudicial to the opposing
party, there has been bad faith on the part of the moving party, or the amendment would be
futile.” Johnson v. Oroweat Foods Co., 785 F.2d 503, 509 (4th Cir. 1986) (citing Forman v. Davis,
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371 U.S. 178, 182 (1962)). Delay alone may not serve as the basis for denying a plaintiff’s
motion. Oroweat Foods Co., 785 F.2d at 509. Rather, any claimed delay “must be accompanied
by prejudice, bad faith, or futility.” Id.at 510 (citing Davis v. Piper Aircraft Co., 615 F.2d 606,
613 (4th Cir. 1980)). A court must consider the “nature of the amendment and the timing,”
as the “further the case progresse[s] before judgment [is] entered, the more likely it is that
the amendment will prejudice the defendant or that a court will find bad faith on the
plaintiff’s part.” Laber, 438 F.3d at 427.
In this case, the “liberal rule” of Rule 15(a) counsels in favor of allowing the Plaintiffs
to file the Second Amended Complaint. First, permitting this filing does not foreclose any
rights of the Defendant to contest the Second Amended Complaint. ASI is free to move to
dismiss pursuant to Rule 12(b)(6), or pursue any other courses available under the Federal
Rules of Civil Procedure. Although ASI, as the Defendant in this action, certainly desires
finality, that wish does not amount to prejudice under Rule 15(a). Indeed, this action was
transferred to this Court for ASI’s, and not the Plaintiffs’, convenience under 28 U.S.C. §
1404(a). ASI’s actions have thus contributed to the length of this litigation. Even further, if this
Court denied leave to file the Second Amended Complaint, Plaintiffs have a right to file a
new action. This litigation will thus continue, whether in the present action or a new action.
Rather than expend the judicial resources given to a new action, the filing of the Second
Amended Complaint will encourage the resolution of this case on its merit. See Laber, 438
F.3d at 426.
Second, this Court can discern no evidence that Plaintiffs acted in bad faith by
seeking to file this amendment. In their Response in Opposition to ASI’s Renewed Motion
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to Dismiss, Hedley and Rauch asserted that they would seek to file an amended complaint if
this Court dismissed any claims without prejudice. As the Government, and not Hedley and
Rauch, drafted the First Amended Complaint, Plaintiffs sought the opportunity to
supplement the allegations with further details. Prior to the transfer of the action to this
Court, the sole count to have received any substantive review was Count VI, which the
district court dismissed with prejudice. See Minute Entry, ECF No. 62; Order, ECF No. 63.
This Court’s review of Counts I-III was thus the first time that a court considered the
sufficiency of the relevant pleadings. After this Court ordered the dismissal of Counts I-III
without prejudice, Plaintiffs promptly filed the pending Motion. By filing the present
Motion, Plaintiffs are simply acting as they had promised in their earlier submission.
Finally, the Second Amended Complaint is not a futile effort to prolong this litigation
unnecessarily. To state a claim under the False Claims Act, a plaintiff must plead “(1) that
the defendant made a false statement or engaged in a fraudulent course of conduct; (2) such
statement or conduct was made or carried out with the requisite scienter; (3) the statement
or conduct was material; and (4) the statement or conduct caused the government to pay out
money or to forfeit money due.” U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 352
F.3d 908, 913 (4th Cir. 2003) (“Harrison II”). In dismissing Plaintiffs’ claims, this Court
identified several deficiencies in the pleadings necessitating dismissal. For example, the First
Amended Complaint did not allege with the requisite specificity of Rule 9(b) that ASI made
or submitted false claims to the Government for payment. The Second Amended
Complaint, however, addresses this deficiency by identifying the false documents at issue,

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and explaining precisely how the false statements were necessary to obtain payment under
the contract. See, e.g., Second Amend. Compl. ¶¶ 34-46, 62-65, 78-79, ECF No. 87-3.
A second deficiency identified by this Court was the First Amended Complaint’s
failure to allege the materiality of the alleged false statements to any payments issued by the
Government. Under the False Claims Act, the materiality of a false statement or conduct
“turns on whether the false statement has a natural tendency to influence agency action or is
capable of influencing agency action. United States ex rel. Berge v. Bd. of Tr. of Univ. of Ala., 104
F.3d 1453, 1460 (4th Cir. 1997). Materiality does not look to whether the false statements
actually influenced agency action, but rather whether the statements are “capable” of having
such an influence. Harrison II, 352 F.3d at 916-17. The Second Amended Complaint alleges
with specificity that ASI’s continued certification of compliance with the DBE participation
requirement induced the Government to pay the claims. According to the Second Amended
Complaint, if a contractor failed to comply with the DBE participation requirement, then the
contractor materially breached its contract with the Government. See Second Amend.
Compl. ¶¶ 17, 48. This Court notes that futility may serve as the basis for denying an
amendment only where the proposed amendment is clearly insufficient or frivolous on its
face. Oroweat Foods, 785 F.2d at 510 (citing Davis, 615 F.2d at 613). Given the considerable
increase in specific details supporting Plaintiffs’ allegations, this Court cannot conclude that
the Second Amended Complaint is frivolous.
In the absence of prejudice, bad faith, and futility, Rule 15(a) encourages district
courts to permit the filing of an amendment “when justice so requires.” Fed. R. Civ. P. 15(a).
Accordingly, Plaintiffs will be permitted to file the Second Amended Complaint.
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CONCLUSION
For the foregoing reasons, it is this 1st day of February, 2016 HEREBY ORDERED
that:
1. Plaintiffs’ Motion to Alter or Amend Judgment and For Leave to File Amended
Complaint (ECF No. 87) is GRANTED IN PART and DENIED IN PART.
Plaintiffs are permitted to file the Second Amended Complaint at issue. However, as
this Court merely dismissed Plaintiffs’ claims in its earlier ruling, no judgment exists
that this Court could alter or amend under Rule 59(e) of the Federal Rules of Civil
Procedure; and
2. The Clerk of the Court transmit copies of this Memorandum Order to Counsel.

/s/_____________________
Richard D. Bennett
United States District Judge

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