Summary
holding that FCA claims against government officials in their personal capacities must contain allegations of personal gain
Summary of this case from Alexander v. GilmoreOpinion
No. C99-1936 TEH.
July 11, 2001
ORDER
This matter comes before the Court on the motion of the San Francisco Housing Authority, Jon Gresley, and Ronnie Davis, to dismiss this action. The Court has carefully considered the parties' papers, as well as their supplemental briefs addressing the impact of the Supreme Court's decision in Vermont Agency of Natural Resources v. United States, ex. rel. Stevens, 529 U.S. 765, 120 S.Ct. 1858 (2000). For the reasons set forth below, the Court concludes that the motion should be granted. BACKGROUND
A separate motion to dismiss by the City and County of San Francisco ("San Francisco") was subsequently resolved by a stipulation dismissing San Francisco from this action.
At the last status conference in this case, the parties suggested that the Court consider the motion on the papers submitted without oral argument.
This action arises out a dispute between Honeywell, Inc., ("Honeywell") and the San Francisco Housing Authority ("SFHA") over a contract for goods and services. Specifically, the complaint alleges as follows: Under governing federal law, the SFHA (a California public agency), receives funds from the United States Department of Housing and Urban Development ("HUD") for operations of housing units and for utilities consumption in particular. To encourage energy conservation, public housing authorities ("PHA"), such as SFHA, who contract for energy savings improvements, and obtain HUD approval of such contracts, can "freeze" their utilities consumption funding at current levels for a certain period of time. This allows the PHA to continue receiving its current budget from HUD, despite realizing savings in energy costs achieved by the installation of energy efficient measures.
In 1995, Honeywell, Inc. ("Honeywell") was designated the most qualified vendor to make energy conservation improvements in housing units operated by the SFHA. In March 1996, pursuant to a request from the city of San Francisco, the Secretary of HUD and his appointee (Kevin Marchman) were temporarily conferred all power, duty and authority to operate the SFHA. Shortly thereafter, on June 12, 1996, SFHA signed an agreement with Honeywell to retrofit and/or install high efficiency light fixtures and related energy control and conservation equipment in various buildings owned by SFHA.
SFHA thereafter obtained approval of the contract from HUD and began receiving the benefits of the "freeze" described above. Under governing HUD regulations, SFHA was allowed to keep fifty percent of the savings achieved from the Honeywell contract, and was required to pay Honeywell the other fifty percent (up to the amount of the contract). SFHA, however, refused to pay Honeywell 50% of the savings achieved. At the same time, it failed to inform HUD that it was telling Honeywell that there was no contract in place, and was refusing to pay Honeywell for services performed. On October 31, 1996, Honeywell stopped work on the contract, and in 1997, it filed a breach of contract lawsuit against SFHA. In November 1977, SFHA resumed control of its own affairs from HUD, and continued to retain 100% of the freeze benefits while denying the existence of the contract.
The contract claim was submitted to a jury in July 2000. The jury found that (1) Honeywell and the SFHA had "agreed" that financing would be in place as a condition of the contract going into effect, (2) that there was a valid contract between Honeywell and the SFHA, and (3) that SFHA did not breach the contract. See Honeywell, Inc. v. SFHA, 97-4314 TEH, April 12, 2001 Order at 2. The Court construed this verdict to mean that while the jury found that both parties signed a valid contract (i.e. SFHA was authorized to sign the document, it constituted an accepted offer for which there was mutual consent and consideration), the contract never went into effect because the parties agreed that it would only become effective if financing was secured and this condition precedent never occurred. Accordingly, SFHA had no obligation to perform under the contract and thus did not breach the contract when it failed meet the payment schedule set forth in the contract. Id. at 13. The Court did, however, find that Honeywell was entitled to recover 50 percent of the savings achieved from the freeze (in an amount of $466,394.50 plus 50% of any future savings for the life of the freeze) pursuant to its claim for equitable relief and its claim under 42 U.S.C. § 1983. Id. at 5-10; See also April 12, 2001 Judgment at 2.
In the instant qui tam action, Honeywell contends that defendants SFHA, Jon Gresley ("Gresley"), former Acting Executive Director of SFHA, and Ronnie Davis ("Davis"), successor to Gresley, and current Executive Director, violated the False Claims Act, 31 U.S.C. § 3729 when it sought and obtained the utility "freeze benefit" from HUD. Essentially, Honeywell argues that if there was no contract (as SFHA maintains), then defendants submitted a false claim when they sought the freeze benefit based on the contract. Alternatively, Honeywell argues that if there was an enforceable contract (as Honeywell maintains), then defendants submitted a false claim because they had no intention of complying with their regulatory obligation to pay Honeywell 50 percent of the savings achieved from the contract. DISCUSSION
A. Impact of Vermont Agency of Natural Resources v. United States ex rel. Stevens on the SFHA
Subsequent to the filing of defendants' motion to dismiss, the United States Supreme Court decided Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 120 S.Ct. 1858 (2000). SFHA contends that it should be dismissed from this action in light of Stevens, and this Court agrees for the reasons explained below.
In Stevens, the Supreme court held that FCA claims can not be brought against states or state agencies. In so doing, it explicitly resolved the dispute over whether the current version of the FCA — which mandates treble damages — is compensatory or punitive, finding it to be the latter. Stevens, 529 U.S. at 784-85, 120 S.Ct. at 1869 ("[T]he current version of the FCA imposes [treble] damages that are essentially punitive in nature, which would be inconsistent with state qui tam liability in light of the presumption against imposition of punitive damages on governmental entities"); U.S. ex rel. Garibaldi v. Orleans Parish School Bd., 244 F.3d 486, 491, and n. 5 (5th Cir. 2001) ( Stevens conclusively resolved the question of whether the FCA is a punitive or compensatory statute); see also U.S. ex. Rel. Graber v. City of New York, 8 F. Supp.2d 343, 349-50 (S.D.N.Y. 1998) (holding that the FCA is a punitive statute).
It is also well established that there is a "presumption against imposition of punitive damages on governmental entities." Stevens, 529 U.S. at 785, 120 S.Ct. at 1869; City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 101 S.Ct. 2748, 2756 (1981) ("Judicial disinclination to award punitive damages against a municipality has persisted [from 1871] to the present day in the vast majority of jurisdictions"); Garibaldi, 244 F.3d at 491 (there is a "well-settled presumption that governments, including local governments, are not subject to punitive damages"). Thus, in City of Newport, the Supreme Court ruled that punitive damages could not be imposed against local governments under 42 U.S.C. § 1983 given the policy considerations underlying the presumption and the lack of Congressional intent to impose such damages in section 1983 cases.
The presumption against saddling public entities with punitive damages — combined with Stevens' recent pronouncement regarding the punitive nature of FCA claims — raises the question whether FCA claims can be brought against local government entities. In Garibaldi, the Fifth Circuit recently answered this question in the negative, holding that an FCA claim could not be brought against a local school board:
As the Supreme Court has held, imposing punitive damages on local governments is ordinarily contrary to sound public policy. [citation omitted]. Though a local government can properly be made to pay compensation for the wrongful acts of its agents, punishing a local government is pointless. The punishment, in the form of higher taxes or reduced public services, is visited upon the blameless. . . . Extracting damages from [the blameless] — damages that are far more than is needed to compensate the federal government for whatever losses it has suffered — is supported, as the Supreme Court has said, by, `[n]either reason nor justice.' [citation omitted].Garibaldi, 244 F.3d at 491-92. The Court further found that there was no indication that Congress contemplated liability for local governments under the FCA. Id. at 494. Rather, the FCA "was enacted in 1863 with the principal goal of `stopping the massive frauds perpetrated by large [private] corporations during the Civil War.'" Stevens, 529 U.S. at 781, 120 S.Ct. at 1867 (citations omitted); Garibaldi, 244 F.3d at 494 ("The False Claims Act was enacted to reach fraud by private government contractors"); U.S. ex. Rel. Graber, 8 F. Supp.2d at 352-55 (Congress did not have fraud by local governments in mind either when it enacted the FCA or when it amended it in 1986). As such, the purpose of the FCA would not be thwarted if the presumption against imposing punitive damages on governmental bodies was applied to the FCA. Id. at 494-495. See also U.S. ex rel. Chandler v. Hecktoen Institute for Medical Research, 118 F. Supp.2d 903 (N.D. Ill. 2000) (finding county immune from liability under FCA in light of Stevens); Dunleavy, 2000 WL 1522854 (Oct. 12, 2000 E.D. Pa.) (same).
Honeywell contends that Garibaldi is distinguishable because in this case the SFHA does not have the power to tax, and obtains most of its funding from the federal government. The Court is not persuaded, however, that these distinctions justify a different result. First, the cases do not distinguish between local governmental bodies that have the power to tax and those that do not. Instead, they speak of the unfairness of visiting upon the blameless the effect that a punitive damage award may have because of either increased taxes or reduced services. See e.g. Newport, 453 U.S. at 267, 101 S.Ct. at 2760 ("Indeed, punitive damages imposed on a municipality are in effect a windfall . . . and are likely accompanied by an increase in taxes or a reduction of public services . . .") (emphasis added); Garibaldi, 244 F.3d at 491 ("The punishment, in the form of higher taxes or reduced public services, is visited upon the blameless") (emphasis added). Clearly, a windfall punitive damage award must come from somewhere in the SFHA budget. If the SFHA can not raise taxes then it must necessarily pay the punitive damage penalty — triple that of the actual damages caused — from monies that would otherwise have been available for services to low income citizens in need of housing. Thus, the Court is not convinced that the taxation factor warrants a different result or analysis.
Second, Honeywell argues that because the federal government primarily funds the SFHA that the federal government could "forgive" the penalty or otherwise adjust its funding of the agency. While this is theoretically possible, it is purely speculative. As such, the Court is not persuaded that this factor is sufficient to warrant reversing the well-settled presumption against imposing punitive damages against governmental entities. See Dunleavy, 2001 WL 1522854 (although county might be able to recover punitive penalty from other sources, this possibility did not warrant permitting FCA claim against county).
Honeywell relies entirely upon United States ex rel. Rosales v. SFHA, 2001 WL 371076 (N.D. Cal. 2001), decided shortly before Garibaldi. There, the court concluded that the SFHA could be sued under the FCA because the FCA is not punitive, notwithstanding Stevens, and that any award would not burden taxpayers or the innocent. For the reasons discussed above, however, the Court declines to follow this decision.
Accordingly, the Court concludes that plaintiff's qui tam action against the SFHA must be dismissed.
B. The Individual Defendants
The dismissal of the SFHA requires dismissal of the individual defendants in their official capacity, see Kentucky v. Graham, 473 U.S. 159, 166, 105 S.Ct. 3099, 3105 (1985) (suit against government official in official capacity is essentially a suit against the governmental entity). Honeywell contends, however, that it may still maintain its suit against Gresley and Davis in their personal capacities. The individual defendants, however, contend that such a claim is not proper given that there is no allegation that they personally benefitted from the freeze benefit obtained from HUD. Rather, any such benefit remained with the SFHA. See e.g. FAC at ¶ 14 (As a result of the freeze " SFHA has . . . enjoyed federally funded savings . . .") (emphasis added); FAC at ¶ 45 ( SFHA continued to receive savings benefits, . . . to deny the existence of the contract with Honeywell and to retain 100% of the savings for itself") (emphasis added).
While authority on this issue appears to be scant at best, the Court concludes that Honeywell has not alleged any basis for proceeding against the individual defendants in their personal capacity. As noted above, there is no allegation in the complaint — nor has there ever been any allegation in the history of this or the related contract action — that either Gresley or Davis personally benefitted from the freeze benefit. Rather, the 50 percent of savings achieved that should have been paid to Honeywell inured to the benefit of the SFHA. In Graber, the Court indicated in dicta that FCA claims against government officials in their personal capacities should rest on allegations of personal gain. After concluding that an FCA claim could not lie against a governmental entity, the Court observed that:
[I]n appropriate circumstances state and local officials could still be sued under the [False Claims] Act in their individual capacities. See e.g., Smith v. United States, 287 F.2d 299 (5th Cir. 1961) . . . No suggestion has been made in this case that any state or local official personally profited from the alleged fraud. Rather, all the monies apparently were used for the foster care program.Graber, 8 F. Supp.2d at 356. Notably, the Smith case cited to by Graber concerned an Executive Director of a public housing authority who diverted federal funds for his own personal use. This Court concludes that Graber represents the better construction of the FCA, particularly given the punitive nature of the statute.
Honeywell points to FCA cases involving corporations, in which individual defendants were also held personally liable. However, these individual defendants are invariably presidents, shareholders or other corporate stakeholders who personally profited from the alleged fraud against the government. See e.g. United States v. Advance Tool Co., 902 F. Supp. 1011 (W.D. Mo. 1995) (individual defendant was president and sole owner of company), aff'd, 86 F.3d 1159 (8th Cir. 1996) (table); United States ex el. Trim v. McKean, 31 F. Supp.2d 1308 (W.D. Okla. 1998) (company and CEO held liable).
Honeywell also argues that the FCA itself does not require an allegation of personal gain by a government official in order to pursue a personal capacity claim. Rather, it simply imposes liability on "[a]ny person" who inter alia, "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." 31 U.S.C. § 3729(a). The issue is not, however, whether Gresley and Davis are "persons," but whether they can be sued in their personal capacity, rather than their official capacity, when there is no allegation of personal gain. Absent any clear authority on this point, we conclude that they can not.
Finally, Honeywell emphasizes that such a result would allow local governments to defraud the federal government with impunity. As Graber points out, however, the United States has remedies, even in the absence of the FCA. Graber, 8 F. Supp.2d at 356 ("Common law remedies are available to the United States" if it is defrauded). Nor, as discussed above, was the FCA particularly concerned with the issue of local government fraud against the United States.
Accordingly, the Court concludes that plaintiff can not state a claim against the individual defendants in their personal capacity in this particular case. Nor as explained above, can they be sued in their official capacity given the dismissal of the SFHA Accordingly, the individual defendants must be dismissed as well. CONCLUSION
Given the allegations in the complaint, it does not appear that Honeywell could amend the complaint to allege personal gain. Nor has it indicated in its memoranda that it could do so; rather, it argues that no allegation of personal gain is necessary to maintain an action against an individual government official in his or her personal capacity.
In light of the above, and good cause appearing, it is HEREBY ORDERED that:
1. Defendants' Motion to Dismiss is GRANTED.
2. This action is DISMISSED for the reasons set forth above.
Given the above discussion, the Court does not reach the other grounds for dismissal raised in defendants' motion.