Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

YANNACOPOLOUS v. GENERAL DYNAMICS (July 26, 2011)

In the early 1980s, General Dynamics had a consulting agreement with Dimitri Yannacopolous under which Yannacopolous helped a subsidiary market telephone equipment in Greece. The agreement was terminated in 1983. In 1987, General Dynamics agreed to sell Greece several fighter planes plus parts and services. The sale was conducted under the auspices of the United States' Foreign Military Financing program. Under that program, Greece purchased the planes from General Dynamics directly but with funds loaned to it by the United States government. When Yannacopolous learned of the sale, he demanded a commission. General Dynamics refused. Yannacopolous brought suit against General Dynamics and lost. Relying on information he obtained, at least in part, from discovery in that suit, he filed a False Claims Act complaint against General Dynamics. Judge Gettleman (N.D. Ill.) granted summary judgment to General Dynamics. Yannacopolous appeals.

In their opinion, Seven Circuit Judges Bauer, Sykes, and Hamilton affirmed. Under the False Claims Act, it is illegal to present to the United States a false or fraudulent claim for payment, to make a false statement material to a false claim, or to use a false record to conceal an obligation to pay. Individuals (known as "relators") are authorized to initiate civil suits under the Act on behalf of the United States and receive, in return, a percentage of any funds recovered. The elements of the claim are that: a) the defendants made a statement for the purpose of receiving money from the government, b) the statement was false, and c) the defendant knew the statement was false. Yannacopolous alleges several separate claims under the Act. He claimed that General Dynamics (or, in the case of d) below, Lockheed): a) lied about funds used to capitalize a Greek business development company, b) failed to disclose the deletion of the Economic Price Adjustment clause from the draft contract, c) made misrepresentations regarding spare parts purchases, and d) made misrepresentations in contract amendments. The Court considered each claim in turn. First, the Court rejected Yannacopolous's argument that General Dynamics breached the contract by charging to it its costs of establishing the Greek business development company. It did not violate the representation that "material" was of U.S. origin since the investment in the development company was not "material." Furthermore, there was nothing in the contract itself that prohibited these costs from being charged to the contract. In fact, it appeared that General Dynamics’ conduct was consistent with the contract. Yannacopolous also claimed that General Dynamics falsely certified compliance with respect to the business development company costs. Again, the Court rejected that claim, in part, because it related only to "material." It did concede that one certification neglected to explicitly refer to the contract. The Court concluded that no reasonable juror could find the omission material, since General Dynamics had recently submitted the contract for review. Second, the Court rejected Yannacopolous's argument with respect to the Economic Price Adjustment Clause deletion. The draft contract contained such a clause. It reduced the contract price because of the economic benefit General Dynamics was going to receive from advance payments. Greece agreed to delete the clause, however, in exchange for General Dynamics' agreement to deliver the planes on an accelerated schedule. Before General Dynamics submitted any invoices, it sent a letter to the government explaining that the clause was no longer applicable. Even if General Dynamics failed to comply with paragraph 10 of the Certification Agreement that required notification of any changes in the clause, the deletion of the clause was immaterial. Third, the Court rejected Yannacopolous's argument with respect to spare parts. Under the contract, $70 million was allocated for spare parts, including hardware and services. The services element was not subject to change but the hardware portion of the charge was understood to be an estimate, subject to recalculation at the end of the contract period. General Dynamics continued to submit invoices including spare parts charges after Greece decided to purchase some spare parts outside the contract. The contract required an "appropriate" adjustment to the spare parts price before the March 1987 payment. Yannacopolous maintained that General Dynamics’ failure to reduce the parts price after knowing of Greece's decision was a false statement. In order to prevail, Yannacopolous had to present evidence that General Dynamics knew that the initial estimate was incorrect and that Greece would not order $70 million in spare parts over the life of the contract. Yannacopolous did not produce evidence that General Dynamics could have known that Greece's decision to buy some spare parts elsewhere would lead to a conclusion that it would not purchase $70 million of spare parts from General Dynamics over the following decade. Next, the Court rejected Yannacopolous's interpretation of the contract with respect to the depot program and concluded there were no false invoices. Finally, Lockheed assumed all of General Dynamics' rights and obligations under the program in 1993 and entered into two contract modifications with Greece. Yannacopolous claims both are "reverse" false claims. The Court concluded that Yannacopolous did not present evidence that either modification was objectively false. 

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BALTAZAR v. WARDEN (February 18, 2011)

Advanced Healthcare Associates hired chiropractor Kelly Baltazar in 2007. Within a very short period of time, Baltazar concluded that the AHA staff regularly submitted inflated bills to the federal government. Baltazar resigned and filed suit under the False Claims Act. Judge Norgle (N.D. Ill.) dismissed the suit on the ground that the allegations were based on already public disclosures. The court based its conclusion on several federal government reports that established "prevalent fraud" by chiropractors. Baltazar appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Wood reversed and remanded. The Court conceded that there had been numerous allegations of fraud with respect to chiropractors. In fact, the report relied upon by the district court concluded that over half of the claims reviewed for that particular study were inflated. But Baltazar's allegations were not based on the study or the report. They were based on her personal knowledge of the practices of AHA. In concluding that Baltazar could proceed with her suit, the Court noted that no appellate court has held that a report of widespread fraud in a particular industry forecloses a False Claims Act suit against every member of the industry.

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DEXIA CRÉDIT LOCAL v. ROGAN (November 24, 2010)

Peter Rogan was apparently engaged in a large Medicare and Medicaid fraud scheme in the 1990s through Edgewater Medical Center, a hospital he owned in Chicago. In a government False Claims Act case, a federal district court concluded that Edgewater submitted over $19 million in false claims. Dexia Crédit Local ("Dexia") also sued Rogan and his partners after it was forced to pay $55 million to Edgewater's bondholders under a letter of credit. Rogan defended that suit for years but eventually fled to Canada (but see). Dexia obtained a $124 million default judgment (see an earlier opinion and intheiropinion). Meanwhile, Rogan's entities had funneled millions of dollars to Florida and Belizean trusts he set up for each of his three children. Rogan's lawyer was the trustee of each of the trusts. Dexia started supplementary proceedings against the trusts by serving the trustee. During those proceedings, the district court dismissed two parties in the underlying litigation after it was discovered that their presence in the case destroyed diversity. After a bench trial, Judge Kennelly (N.D. Ill.) granted Dexia's motion to turn over the assets of the trusts. Alternatively, the court imposed a constructive trust on the trust's property. The Rogan children (the "Children") appeal.

In their opinion, Seventh Circuit Judges Kanne and Williams and District Judge Springmann affirmed. The Children raised numerous arguments on appeal, each of which was considered and rejected by the Court. First, the Court rejected the argument that diversity jurisdiction was lacking because LaSalle Bank, an Illinois corporation, assumed part of Dexia's risk. Dexia is a corporation formed under the laws of France. The Court rejected the notion that Dexia and La Salle operated together as some form of unincorporated association. Next, the Children argued that the were invalid because the underlying judgment was not final when those proceedings were commenced. It is true that the underlying judgment was not final when the supplementary proceedings were commenced, due to the bankruptcy status of one of the non-diverse parties. However, the non-diverse parties were dismissed retroactively. The Court concluded that the complaint in the supplementary proceedings should be read as if the non-diverse parties were never a part of the case. The district court therefore did not err in allowing the case to proceed. Third, the Children asserted that the district court had no authority to adjudicate their property rights. The Court disagreed with the premise of the argument. The district court was not adjudicating the Children's property rights. The supplementary proceedings alleged that the trusts contained assets of Rogan, the judgment debtor. The district court agreed -- it did not exceed its authority in so doing. Next, the Court rejected the Children's argument that they were entitled to a jury trial. The Court focused on the nature of the remedy. Because the relief sought and obtained was purely equitable, the Children were not entitled to a jury. Fifth, the Children argued that Illinois' five-year statute of limitations for constructive trusts applied, that the limitations period began to run when Dexia filed suit, and that Florida's 12-year statute of repose for fraud actions also barred the proceedings. The Court disagreed, holding that Illinois' seven-year statute for enforcement of judgments applied and that Florida law did not apply. Next, the Court agreed with the district court that issue preclusion prevented re-litigation of the factual finding by the district court in the False Claims Act case that Rogan's fraud began no later than 1993. Issue preclusion applies when the issue is the same, when it was actually litigated, when the finding was essential to the judgment, and when the party against whom it is to be applied was represented in the prior action. Although the Children were not parties to the prior proceeding, the Court concluded that the "adequately represented" exception applied since their interests coincided with their father's. Next, the court affirmed the district court's imposition of the constructive trust, notwithstanding a suggestion that legitimate funds could have been commingled. Once Dexia met its burden, it was up to the Children or the Trustee to provide evidence of any commingling. Finally, the Court rejected the Children's challenges to the form of the citation and Robert's challenge to personal jurisdiction.

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UNITED STATES v. APRIA HEALTHCARE GROUP (May 19, 2010)

Two qui tam actions were filed against Apria Healthcare Group in the late 1990s, accusing Apria of fraudulently billing the Medicare and Medicaid programs from 1995-98. Years later, but while those actions were still pending, Christine Chovanec filed this action, similarly alleging fraudulent billing by Apria from 2002-04 in Illinois. Judge Kocoras (N.D. Ill.) dismissed the action with prejudice pursuant to 31 U.S.C. § 3730(b)(5), which provides that no person may bring a "related action" based on the facts of a pending action brought by another person. Four days later, the earlier cases were settled. Chovanec moved for reconsideration. The court denied. Chovanec appeals.

In their opinion, Chief Judge Easterbrook and Judges Cudahy and Sykes vacated and remanded. The Court first held that the statute means what it says -- that no person "may . . . bring a related action based on the facts” of another pending action. Any action thus brought must be dismissed, rather than stayed. The Court next addressed whether Chovanec's action was a "related action." It aligned itself with other courts of appeals and concluded that the statute's reference to "facts" meant the material facts in the original relator's complaint. The Court explained that it was the complaints in those cases, not the settlement, that provided the material facts. Those complaints alleged an ongoing national fraud. Therefore, even though Chovanec's allegations referred to later years and a specific office, they were related to the original allegations. Concluding, therefore, that the statute required the dismissal of her complaint, the Court nevertheless vacated the judgment. Now that the original complaints are no longer pending, nothing in § 3730(b)(5) prevents her from refiling. The district court should have dismissed without prejudice.

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GLASER v. WOUND CARE CONSULTANTS, INC. (July 2, 2009)
 

Carol Glaser is a Medicaid recipient with some serious medical problems. She started receiving care at Wound Care Consultants, Inc. in 2002. At some point, an attorney contacted her and advised her that Wound Care may have submitted improper billing to Medicaid. Glaser filed a qui tam action under the False Claims Act in April of 2005. However, several months before she filed, a routine audit led the Centers for Medicare & Medicaid Services ("CMS") to begin an investigation of Wound Care. Glaser and her attorney stated that they were unaware of the CMS investigation. Nevertheless, the district court dismissed the action on the ground that it was based upon a public disclosure and that Glaser was not an “original source.” Glaser appeals.

In their opinion, Judges Cudahy, Kanne and Sykes affirmed. The Court described the essence of the False Claims Act. The Act prohibits false payment claims to the government. It allows private citizens to file actions on the government’s behalf and receive a substantial share of the recovery, if successful. Qui tam actions, as they are called, are barred if the action is “based upon the public disclosure” of allegations unless the person is an “original source.” This jurisdictional bar necessitates a three-part inquiry: a) whether the allegations have been publicly disclosed, b) if so, whether the action is based upon the disclosure, and c) if so, whether the person is an original source. The Court applied the test to the facts. Public disclosure is satisfied when, as here, the very agency responsible for investigating claims of abuse has started an investigation before the action was filed. The fact of the investigation need not be widely known. With respect to the second prong, the Court noted its earlier precedent that held that “based upon” meant that the allegations actually depended on and were derived from the publicly disclosed information. However, the Court recognized that eight other circuits apply a different test -- an allegation is "based upon" publicly disclosed information when the allegations are substantially similar. The Court conceded the merits of the majority position. Although its construction of the statute is consistent with the plain language doctrine, the Court recognized that its position made the third prong of the test -- original source -- superfluous. In doing so, the Court overruled Bank of Farmington and Caremark. Applying their new standard, the Court concluded that Glaser's allegations were not only substantially similar, but were nearly identical, to those of CMS. Finally, with respect to the third prong of the test, the Court held that Glaser was not an "original source" of the information contained in her action. The Court principally relied on the fact that Glaser knew of the fraudulent conduct only through her attorney but asserted the attorney-client privilege to prevent disclosure of how she learned the information. Thus, she did not meet the burden of proving that she had independent knowledge of the fraud.

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HEALTH CARE INDUSTRY LIABILITY INSURANCE PROGRAM v. MOMENCE MEADOWS NURSING CENTER, INC. (May 20, 2009)

The Health Care Industry Liability Insurance Program (the "Insurer") issued a commercial general liability policy to Momence Meadows Nursing Center, Inc. (“Momence”). The policy included commercial general liability coverage and professional liability coverage. After the policy was issued, two former employees brought an action against Momence for violations of the False Claims Act and the Illinois Whistleblower Reward and Protection Act ("IWRPA"). The suit alleged that Momence submitted false claims to the United States and the State of Illinois and that the employees were retaliated against for bringing the charges. The basis for the false claims charge was that Momence improperly certified that it was meeting the Medicare and Medicaid standards of care. The complaint alleged numerous instances of improper care, inadequate nutrition, and injuries to patients. The insurer brought this action for a declaration that it had no duty to defend or indemnify Momence. The court granted summary judgment to the insurer on the duty to defend and held that the issue of indemnification was not ripe. Momence appeals.

In their opinion, Judges Manion, Rovner and Sykes affirmed. The Court first addressed Momence's argument that the district court’s rulings on the issues of duty to defend and indemnification were inconsistent. The Court actually agreed with Momence but disagreed on the outcome. In Illinois, the duty to defend its broader duty to indemnify. Therefore, a finding of no duty to defend precludes a finding of a duty to indemnify. Instead of allowing the lower court’s decision on indemnity to reopen its decision on a duty to defend, the Court simply concluded that there was no duty indemnify if the district court properly held there was no duty to defend. The Illinois rule on duty to defend is that if any portion of a complaint is potentially within the scope of coverage, an obligation exists. The Court rejected Momence's argument that the allegations of physical injury underlying the false claims and IWRPA counts fell within the "bodily injury" coverage of the policies. The Court concluded that the damages sought by those counts of the complaint resulted from the allegations of false filings, not from allegations of bodily injury. The Court could find no theory of recovery in the complaint that required proof of bodily injuries. The Court also summarily rejected Momence's arguments that the retaliation counts were somehow included within the policies’ coverage.

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