United States v. Rachel , 208 F. App'x 236 ( 2006 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 04-2276
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
versus
JOHN J. RACHEL; PRISCILLA RACHEL; RGI,
INCORPORATED, a Virginia Corporation; CSM,
INCORPORATED, a Maryland Corporation,
Defendants - Appellants.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. William M. Nickerson, Senior District
Judge. (CA-02-754-WMN)
Argued: November 29, 2005 Decided: December 7, 2006
Before WIDENER and SHEDD, Circuit Judges, and Walter D. KELLEY,
Jr., United States District Judge for the Eastern District of
Virginia, sitting by designation.
Vacated and remanded by unpublished per curiam opinion.
ARGUED: Edward Jay Tolchin, FETTMANN, TOLCHIN & MAJORS, P.C.,
Fairfax, Virginia, for Appellants. Tamera Lynn Fine, Assistant
United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY,
Baltimore, Maryland, for Appellee. ON BRIEF: Allen F. Loucks,
United States Attorney, Baltimore, Maryland, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
The United States of America brought this civil action against
John Rachel, his wife Priscilla Rachel, and two corporations owned
by him (RGI, Inc. and CSM, Inc.)1 contending that they are liable
under the False Claims Act (“FCA”) and several common law theories.
After discovery, the parties filed cross-motions for summary
judgment. The United States’ motion addressed only the appellants’
liability. The district court denied the appellants’ motion and
granted the United States’ motion on the FCA claims.2 Thereafter,
the United States sought a prejudgment writ of attachment on the
Rachels’ property pursuant to the Federal Debt Collection
Procedures Act, and it also moved for summary judgment on the issue
of damages flowing from the FCA violations. In separate orders,
the district court granted the writ of attachment, denied the
appellants’ motion to quash the writ, and awarded the United States
$1,506,708.10 in damages and penalties. The appellants now appeal
the summary judgment rulings and the writ of attachment. As
explained below, we conclude that the district court erred in
entering summary judgment on the issue of the appellants’
1
We will refer to the Rachels and the two corporate entities
collectively as “the appellants” except where it is necessary to
identify them individually.
2
The district court dismissed the United States’ common law
causes of action as moot.
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liability. Accordingly, we vacate the summary judgment and the
writ of attachment, and we remand for further proceedings.
I
Summary judgment is appropriate “if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). The
relevant inquiry in a summary judgment analysis is “whether the
evidence presents a sufficient disagreement to require submission
to a jury or whether it is so one-sided that one party must prevail
as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 251-52 (1986). “We review the district court’s order granting
summary judgment de novo, viewing the facts in the light most
favorable to, and drawing all reasonable inferences in favor of,
the nonmoving party.” Garofolo v. Donald B. Heslep Assocs., Inc.,
405 F.3d 194, 198 (4th Cir. 2005). Of course, we do not weigh the
evidence or make credibility determinations in this analysis.
Williams v. Staples, Inc., 372 F.3d 662, 667 (4th Cir. 2004).
The FCA, codified at 31 U.S.C. §§ 3729 et seq., “prohibits any
person from making false or fraudulent claims for payment to the
United States.” Graham County Soil & Water Conserv. Dist. v.
United States ex rel. Wilson, 545 U.S. 409, 411 (2005). The United
3
States brought its FCA causes of action under subsections (1), (2),
and (3) of 31 U.S.C. § 3729(a), which create liability for any
person who:
(1) knowingly presents, or causes to be presented, to an
officer or employee of the United States Government . .
. a false or fraudulent claim for payment or approval;
(2) 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; [or]
(3) conspires to defraud the Government by getting a
false or fraudulent claim allowed or paid.
The FCA specifies that a person acts “knowingly” with respect to
information if he “has actual knowledge of the information,” “acts
in deliberate ignorance of the truth or falsity of the
information,” or “acts in reckless disregard of the truth or
falsity of the information.” 31 U.S.C. § 3729(b).
The district court found that summary judgment was proper
against the appellants on each of the United States’ three FCA
causes of action. These causes of action arise from the billing
associated with computer-repair work performed under a government
contract. In essence, the United States’ theory is that Mr. Rachel
fraudulently utilized his two companies, RGI and CSM, to inflate
the costs associated with the repair work, thereby causing false
claims to be submitted to, and paid by, the government. The United
States contends that Mrs. Rachel is liable because she acted in
deliberate ignorance or reckless disregard of Mr. Rachel’s
fraudulent activities.
4
Generally, the record establishes that in 1994, RGI entered
into a “Teaming Agreement” with Diez Management Systems, Inc.
(“Diez”) to cooperate in obtaining and satisfying an IRS contract
for computer maintenance and repair. Mr. Rachel, the owner and
president of RGI, signed the Teaming Agreement on behalf of RGI.
The IRS contract had two components: (1) on-site maintenance for
all computer equipment in IRS facilities in the Washington, D.C.,
region and (2) nationwide mail-in repair of IRS laptop or notebook
computers. Pertinent to this case, the IRS contract addressed the
repair of broken laptop hinges. As the IRS contract solicitation
explained, the government had “experienced a chronic problem of
broken hinges/cases with the Vinsotec notebook computers.
Approximately 57% of all notebook repairs in a recent three month
period ha[d] included the repair of broken hinges/cases.” J.A.
121.
Diez was awarded the IRS contract in 1995. Under the terms of
the IRS contract, Diez would service and repair computers for the
IRS, billing for the actual cost of the time and materials utilized
in the repairs plus a fixed markup. Regarding the laptop hinge
repairs, the IRS contract required Diez “to propose a solution
including a six-month warranty (parts and labor) on repairs to the
Vinsotec notebook hinges/cases.” J.A. 313.
Mr. Rachel and an RGI design team developed a means to repair
the broken laptop hinges (the “Hinge Repair Kit”). Mr. Rachel
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created initial prototypes of the Hinge Repair Kit, and he later
obtained a patent for his Hinge Repair Kit. One prototype was also
prepared by Technical Design Resources (“TDR”).
Under the IRS contract, when an IRS laptop needed hinge
repair, it was mailed or shipped to a location which met IRS
security requirements for safeguarding property and information.
This location, known as the depot, was first located at RGI, but it
was later moved to Diez. At the depot, employees would prepare the
laptops for repair, and Mr. Rachel would then deliver the laptop
covers to TDR, which was responsible for manufacturing and
installing the Hinge Repair Kits in accordance with the patent
specifications. Mr. Rachel would then return the repaired laptops
to the depot where they would be reassembled.
Shortly after work started under the IRS contract, Mr. Rachel
incorporated CSM, executing the CSM Articles of Incorporation on
behalf of himself, Mrs. Rachel, and his son. The CSM Articles of
Incorporation listed Mrs. Rachel as an incorporator, director, and
officer of CSM. Mr. Rachel had Mrs. Rachel’s general consent and
authority to use and sign her name in this manner. Mrs. Rachel was
a nurse, and it appears to be undisputed that she did not have
actual knowledge concerning the underlying events.
After its incorporation, CSM became involved in the hinge
repair process. Specifically, CSM supplanted RGI’s role in
obtaining the repaired laptops directly from TDR. Under this
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arrangement, CSM would pay TDR Between $23 and $27 for each Hinge
Repair Kit manufactured and installed by TDR, and CSM would then
invoice RGI $117 for the same. RGI in turn would pay CSM and then
bill Diez $122.84 (which is $117 plus a markup). Diez would then
pay RGI and bill the IRS $128.99 (which is $122.84 plus a markup).
The IRS would then pay Diez.
The crux of the United States’ FCA case is CSM’s involvement
in the hinge-repair process, specifically the fact that CSM paid
TDR approximately $25 for the Hinge Repair Kit and then billed RGI
$117. When asked at his deposition about CSM’s involvement, Mr.
Rachel explained that he was not certain that the Hinge Repair Kits
would work, and if they failed they could seriously damage
electronic components in the laptops. Therefore, because of his
concern about the potential negative financial consequences to RGI
under the terms of the six-month warranty if the Hinge Repair Kits
failed, Mr. Rachel attempted to use CSM as a “buffer”; if the Hinge
Repair Kits failed he “would just defunct” CSM. J.A. 497.
II
In granting summary judgment against the appellants on the
issue of FCA liability, the district court articulated two primary
rulings. We hold that neither of these rulings is appropriate on
the record before us.
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The district court first addressed Mrs. Rachel’s potential
liability under the FCA and found that she “acted at least in
reckless disregard of the truth or falsity of the information being
submitted by CSM to RGI and eventually to the IRS.” J.A. 34. The
district court based its conclusion on the fact that Mrs. Rachel
(1) served on the RGI board of directors, (2) was identified in
documents as an incorporator, officer, and director of CSM, and (3)
gave Mr. Rachel general authority to use her name and identity.3
The district court then discussed the potential liability of all of
the appellants. Framing the “relevant inquiry” as being “whether
the CSM markup of the TDR invoice was fraudulent,” the district
court answered this query in the affirmative. J.A. 36.4 The
district court based its conclusion on the fact that Mr. Rachel
owned and controlled both RGI and CSM, and its belief that CSM
appears to have existed primarily, if not exclusively, for the
3
Although the district court relied on Mrs. Rachel’s service
on the RGI board as a factor supporting her imputed knowledge of
the alleged fraud, the United States admitted during discovery that
she was actually not an owner, officer, director, or employee of
RGI at the time of the alleged fraud.
4
The district court prefaced this discussion by ruling that
under the FCA “a direct contractual relationship with the
Government is not required for liability.” J.A. 35-36. This
ruling was in response to the appellants’ argument, which they
repeat on appeal, that they could not have violated the FCA because
neither the IRS contract nor any law precluded CSM from charging
any amount it desired for the hinge repair. Because the FCA
creates liability for “all fraudulent attempts to cause the
Government to pay out sums of money,” United States v. Neifert-
White Co., 390 U.S. 228, 233 (1968), we reject the appellants’
argument.
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purpose of the markup. Additionally, the district court noted that
no evidence was presented regarding the actual costs of the
warranty expenses, and it expressly found “it difficult to believe
that a six-month warranty would cost four times the amount of the
product itself.” J.A. 38.
Although we are not prepared to rule as a matter of law that
the appellants cannot be held liable for the alleged FCA
violations, we certainly do not believe (as the district court
found) that the evidence establishes their liability as a matter of
law. Instead, viewing the evidence in this case in the light most
favorable to Mrs. Rachel, who was not directly involved in any of
the underlying conduct, a reasonable factfinder could conclude that
she did not have either actual or implied knowledge for purposes of
FCA liability. For this reason, the district court erred in
entering summary judgment against Mrs. Rachel. Likewise, viewing
the evidence in the light most favorable to all appellants, which
tends to establish that the CSM markup was for the purpose of
covering potential warranty costs, a reasonable factfinder could
conclude that they did not submit or cause to be submitted false
claims. Accordingly, the district court also erred in entering
summary judgment against the appellants.
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III
Based on the foregoing, we vacate the summary judgment orders
and remand for further proceedings consistent with this opinion.
Because the district court appears to have relied on its FCA
liability summary judgment ruling as a primary basis for granting
(or refusing to quash) the prejudgment writ of attachment, we also
vacate the writ.5
VACATED AND REMANDED
5
In light of our determination that the district court erred
in holding the appellants liable as a matter of law, we need not
address the parties’ arguments concerning damages. Additionally,
although the parties have presented other arguments relating to the
appellants’ potential liability on the FCA and state-law claims, we
decline to address those arguments on this record. See, e.g.,
Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1473 n.20 (4th Cir.
1996) (declining to consider alternative issues that may be
considered by the district court on remand).
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