United States v. American Heart ( 1993 )

June 23, 1993
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-2108
UNITED STATES OF AMERICA,
Plaintiff, Appellant,
v.
AMERICAN HEART RESEARCH FOUNDATION, INC., ET AL.,
Defendants, Appellees.
ERRATA SHEET
The opinion of this Court issued on June 18, 1993, is
amended as follows:
On page 9, line 1: insert a comma between "understanding"
and the quotation mark that immediately follows.
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-2108
UNITED STATES OF AMERICA,
Plaintiff, Appellant,
v.
AMERICAN HEART RESEARCH FOUNDATION, INC., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Norman H. Stahl, U. S. District Judge]
Before
Cyr, Circuit Judge,
Campbell, Senior Circuit Judge,
and Boudin, Circuit Judge.
Paul D. Scott, Attorney, Department of Justice, with whom Stuart
M. Gerson, Assistant Attorney General, Jeffrey R. Howard, United
States Attorney, Douglas N. Letter, Attorney, Department of Justice,
Michael F. Hertz, Attorney, Department of Justice, and Steven D.
Altman, Attorney, Department of Justice, were on brief for appellant.
Kenneth I. Schacter with whom David M. Cohen, Richards & O'Neil,
David Jordan and Jordan & Gfroerer were on brief for appellees.
June 18, 1993
BOUDIN, Circuit Judge. In this case, involving the
underpayment of postage based on misrepresentations, the
district court ruled that the False Claims Act, 31 U.S.C.
3729, did not (prior to its amendment in 1986) apply to so-
called "reverse false claims" whereby the government is paid
less than its due. A back-up claim for unjust enrichment was
dismissed on res judicata grounds. We agree with the
district court on the interpretation of the False Claims Act
but disagree that the unjust enrichment claim was barred by
res judicata. Accordingly, we affirm in part and vacate and
remand in part.
The facts can be briefly stated. Robert Paltrow in
1983-1984 set up two corporations--American Heart Research
Foundation, Inc. ("AHRF") and American Cancer Research Funds,
Inc. ("ACRF")--purportedly to promote research to cure these
diseases. In July 1984 Paltrow submitted an application to
the United States Postal Service to obtain for ACRF a
reduced-rate mailing permit; the application represented that
ACRF was a scientific non-profit entity helping to cure
cancer.
ACRF used the permit to mail millions of letters
soliciting for funds. AHRF, without applying for its own
permit, used ACRF's permit for its own solicitations. A
direct mail organization controlled by Paltrow, North
American Communications, Inc. ("NAC"), conducted the
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mailings. As a result of the special permit, the postage was
approximately one-half the usual rate for bulk third class
mail, and ACRF and AHRF paid the Postal Service about
$472,000 less than they would have without the special
permit.
In fact ACRF and AHRF were not non-profit scientific or
charitable organizations but were old-fashioned swindles,
raising money on charitable pretexts for the benefit of the
organizers. In addition to raising funds, ACRF sent out
purported scientific surveys, of no scientific value,
apparently to gull the public into taking ACRF seriously.
Needless to say, the application ACRF filed with the Postal
Service, making the necessary claim that it was a qualified
non-profit organization under the applicable regulations, was
false. AHRF's mailings were based on the fraudulently
obtained ACRF permit.
The solicitations occurred in 1984 and 1985. In spring
1986, the government filed a criminal information against
ACRF and AHRF asserting ten counts of mail fraud under 18
U.S.C. 1341; NAC and Paltrow were named in the criminal
information as participating in the scheme but were not
separately charged. The government also filed a complaint
for injunctive relief under 18 U.S.C. 1345. That section
gives the government a civil action for expedited injunctive
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relief where mail fraud is occurring or is threatened. No
damage claim was asserted in this action.
In April 1986 Paltrow pleaded ACRF and AHRF guilty on
all ten counts of mail fraud in the criminal case, and he
admitted that he and NAC employed ACRF and AHRF to defraud
the public. The civil injunction action was resolved on the
same day by a consent order enjoining Paltrow and all three
entities from charitable fund-raising through the mails. A
$100,000 criminal fine was imposed on the bogus charities and
the court ordered that the funds fraudulently obtained be
turned over to legitimate charities.
In 1990, after some preliminary negotiations failed, the
government filed the present case under the False Claims Act
against Paltrow and his three entities. The suit claimed
underpayment of postage in the amount of $472,478 and
multiple damages as provided by the statute. In the
alternative, the government sought single damages on an
unjust enrichment theory. On cross-motions for summary
judgment, the district court dismissed the False Claims Act
claims on the ground that the statute did not apply, and it
dismissed the unjust enrichment claim on res judicata
grounds.
We agree with the district court's well reasoned
treatment of the False Claims Act. The statute, prior to the
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1986 amendments, provided the government with a double-damage
civil action against anyone who
(1) knowingly presents . . . to . . . the [United
States] Government . . . a false or fraudulent
claim for payment or approval; [or]
(2) knowingly makes . . . a false record or
statement to get a false or fraudulent claim paid
or approved[.]
31 U.S.C. 3729(a)(1), (2). In 1986, the statute was
amended not only to provide for treble damages but also to
apply to one who knowingly uses "a false record or statement"
in order to "conceal, avoid, or decrease an obligation to pay
. . . money . . . to the Government."1 31 U.S.C.
3729(a)(7).
The current version of the False Claims Act clearly
embraces reverse false claims, such as that presented in this
case, whereby someone uses a false statement to secure
services from the government at a reduced rate. But the
government on this appeal has not pursued its contention,
rejected by the district court, that the 1986 amendment
enacting section 3729(a)(7) applies retroactively. Thus the
question is whether securing reduced rate mailing privileges
by dint of a false statement can be classed as presenting "a
1False Claims Amendments Act of 1986, Pub. L. No. 99-
562, 100 Stat. 3153 (1986), adding inter alia section
3729(a)(7) which employs the quoted language. See generally
S. Rep. No. 345, 99th Cong., 2d Sess. (1986).
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false or fraudulent claim for payment or approval" or making
a false statement to get such a "claim" paid or approved.
We think the natural weight of the words, properly the
starting point for the inquiry, leans against the
government's reading. A "claim for payment or approval"
sounds to ordinary ears like a bill from an army supplier for
uniforms or some like invoice presented for payment or for
approval to permit payment. The False Claims Act was in fact
enacted in 1863 in the wake of scandal to "combat rampant
fraud in Civil War defense contracts." S. Rep. No. 345,
supra, at 8. An attempt to secure services from the
government at reduced rates may be just as fraudulent, but at
least judged by "normal usage or understanding," United
States v. McNinch, 356 U.S. 595, 598 (1958), it is not a
"claim for payment or approval" of payment.2
In McNinch, the Supreme Court held that an application
for credit insurance, requesting the Federal Housing
Administration to insure certain bank loans, was not a "claim
for payment or approval" within the meaning of the statute.
Quoting a lower court decision, the Court said that a "claim"
against the government "normally connotes a demand for money
2The original 1863 statute reinforces this point. Its
language spoke of presenting "for payment or approval . . .
any claim upon or against the Government . . . ." Act of
Mar. 2, 1863, c. 67, 12 Stat. 696. The underscored phrase
was omitted in a subsequent revision but without any intent
to alter substance. 31 U.S.C. 3729 (1982) (see explanatory
note).
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or for some transfer of public property," adding that the
statute "was not designed to reach every kind of fraud
practiced on the Government." Id. at 599. If McNinch stood
alone, it would resolve our case, for a customer's
underpayment for postal services does not involve any payment
by the government or transfer of its property.
As is often the case, there is a contrapuntal theme in
the case law. United States v. Neifert-White Co., 390 U.S.
228 (1968), held that the False Claims Act did apply to a
falsified loan application made to a federal agency where,
unlike McNinch, the false statement was made "with the
purpose and effect of inducing the Government immediately to
part with money." Id. at 232. Neifert-White said broadly
that "the Act was intended to reach all types of fraud,
without qualification, that might result in financial loss to
the Government." Id. (footnote omitted). While this
language is helpful to the government in the abstract, we
read it as directed to the subject of the Court's discussion,
namely, claims, however unconventional, asking the government
immediately "to part with money." Id.3
3Not only did the Court make its broad statement
immediately after distinguishing McNinch on the ground that
it involved no payment of government money, but two
paragraphs later, in the course of summing up, the Court
repeated the point: "This remedial statute [the False Claims
Act] reaches beyond ``claims' which might be legally enforced,
to all fraudulent attempts to cause the Government to pay out
sums of money." Id. at 233 (emphasis added).
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Subsequent to Neifert-White, the Supreme Court quoted
with approval, albeit in a footnote, its statement in McNinch
that "claim" in the statute normally connotes "a demand for
money or for some transfer of public property." United
States v. Bornstein, 423 U.S. 303, 309 n.4 (1976). This
reiterated equating of "claim" with a demand for money or
property is fatal to the government's position here:
securing a reduced rate for mailing, even by false
statements, is not a claim for money or property. In the
federal hierarchy, a footnote in a Supreme Court opinion
normally outweighs a covey of lower court decisions. The
lower courts are, in any event, divided as to whether the
pre-1986 False Claims Act could be stretched to include
reverse false claims. Compare, e.g., United States v.
Lawson, 522 F. Supp. 746 (D.N.J. 1981), with United States v.
Douglas, 626 F. Supp. 621 (E.D. Va. 1985).
The government is correct that the Senate Report issued
when the statute was expanded in 1986 took the position that
the statute had always embraced underpayments and that the
new language merely clarified the statute. See S. Rep. No.
345, supra, at 19. We are reluctant, however, to give much
weight in construing a Civil War statute to Committee views
first expressed over 100 years later. This is especially so
when, as here, the original language of the Civil War statute
was even more favorable to the construction that we adopt
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than the pared down version later adopted with no intent to
alter substance.
No doubt the effect of fraud on the government is pretty
much the same whether too much is extracted from the federal
treasury or too little paid in. That is why Congress amended
the statute in 1986. But it is one thing to construe
ambiguous language broadly in accord with a remedial purpose;
it is quite another matter to stretch language beyond "normal
usage or understanding," McNinch, 356 U.S. at 598, when the
natural reading matches the very problem that concerned
Congress at the time the statute was enacted. When the
Supreme Court has thrice affirmed that natural reading and
emphasized that a "claim" in this context refers to one for
money or property, we think that all doubts vanish as to the
course this court should follow.
We turn now to the government's alternative remedy--its
claim for single damages based on an unjust enrichment
theory--and here our views differ from those of the able
district judge. The district court held that the "claim
preclusion" branch of res judicata barred the government from
asserting an unjust enrichment claim after it secured a final
judgment in its civil injunction action involving the same
transactions. We conclude that for reasons peculiar to the
civil injunction statute, a successful action brought under
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that statute does not preclude a later separate claim by the
government for monetary relief.
Claim preclusion, formerly the merger or bar aspect of
res judicata, precludes a party who has won or lost a case on
the merits from reasserting the same cause of action in a
subsequent case. In some jurisdictions, this doctrine has
been expanded so that a final judgment on the merits
extinguishes any further "rights of the plaintiff to remedies
against the [same] defendant with respect to all or any part
of the transaction, or series of connected transactions, out
of which the [earlier] action arose." Restatement (Second)
of Judgments 24 (1982). See Diversified Foods, Inc. v.
First National Bank of Boston, 985 F.2d 27, 30 (1st Cir.
1993). This broader definition, which converts old fashioned
res judicata doctrine into a kind of compulsory joinder of
related claims, was adopted by this court in Manego v.
Orleans Board of Trade, 773 F.2d 1, 5 (1st Cir. 1985), cert.
denied, 475 U.S. 1084 (1986), for cases where federal law
controls the issue.
Under ordinary circumstances, Manego and Section 24 of
the Restatement would pose a formidable obstacle to the
government's unjust enrichment claim brought after its
successful injunction action. The parties are identical in
the two actions, both actions were civil, and the injunction
action resulted in a final judgment on the merits. Finally,
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the two remedies--an injunction and the disgorgement of
unjust enrichment--are premised on the same transaction or
series of transactions, and that is normally enough where the
transactions test of Manego is followed.
Res judicata is nevertheless a judge-made doctrine based
upon practical concerns: hostility to relitigation, wariness
about double recovery, and anxiety that resources will be
wasted by successive suits where one would have sufficed.
The doctrine is not to be applied where other practical
concerns outweigh the traditional ones and favor separate
actions. See, e.g., Brown v. Felsen, 442 U.S. 127 (1979).
Here, we believe that those other concerns counsel strongly
in favor of allowing the government to bring a damage action,
whatever the underlying theory, even though the government
brought and concluded a separate injunction action under 18
U.S.C. 1345.
The purpose of section 1345 is "to allow the Attorney
General to put a speedy end to a fraud scheme by seeking an
injunction in federal district court" as soon as the
requisite evidence is secured. S. Rep. No. 225, 98th Cong.,
2d Sess. 402 (1984) (emphasis added). The statute itself
directs the district court to "proceed as soon as
practicable" to a hearing and determination. 18 U.S.C.
1345(b). The legislative history shows that Congress
authorized this expedited action precisely because "the
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investigation of fraudulent schemes often takes months, if
not years, before the case is ready for criminal prosecution"
and in the meantime "innocent people continue to be
victimized." S. Rep. No. 225, supra, at 402.
The same concerns that prompted Congress to adopt
section 1345 suggest that courts should not handicap and
delay injunction actions by insisting that the government
assert at the same time any civil damage claims that may
arise from the same transactions. Commonly the government
may want to secure additional facts, including the amount of
damages, before asserting such claims and may well wish to
negotiate with the defendant as to settlement once the
ongoing violation has ceased. To require that the government
resolve these matters within, and on the same time table as,
the expedited injunction action makes no sense.
The government is not automatically exempt from
limitations on claim splitting, Federation Dep't Stores v.
Moitie, 452 U.S. 394, 398 (1981), but those limitations will
not be applied where they would frustrate a specific
statutory objective. Brown, 442 U.S. at 135-36. See also
Restatement (Second) of Judgments 26(1)(d) (1982). For
this reason the government is permitted to enjoin the
continuation of an illegal merger or other violation of the
antitrust laws and then bring its own separate damage action
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for any damages it may have suffered.4 In our view the same
policy permits the government to litigate an injunction
action under section 1345 to final judgment and then bring
its own damage action as a separate case.
The treatment of the unjust enrichment claim on remand
is a matter for the district court. We express no view on
whether any aspect of the government's claim may be governed
by the issue preclusion (or collateral estoppel) branch of
res judicata, nor do we address any other questions that may
be presented by that claim. The judgment of the district
court is affirmed so far as it dismissed the government's
claims under the False Claims Act, and it is vacated and
remanded as to the claim based on the unjust enrichment
theory.
It is so ordered. No costs to either side.
4See, e.g., ITT v. GT & E, 369 F. Supp. 316, 326-27
(M.D.N.C. 1973), remanded on other grounds, 527 F.2d 1162(4th Cir. 1975); United States v. Grinnell Corp., 307 F.
Supp. 1097 (S.D.N.Y. 1969). See generally II P. Areeda & D.
Turner, Antitrust Law 323, at 109 (1978) ("[T]he equitable
suit in the public interest ought not to be delayed or
affected by the government's concern whether or not it should
seek proprietary relief as well.").
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