Opinion
Civil No. 05-1607 (JAF).
June 8, 2006
OPINION AND ORDER
On June 7, 2005, the United States filed this action under the False Claims Act (FCA), 31 U.S.C. § 3729 et seq., the Financial Institution Reform Recovery And Enforcement Act (FIRREA), 12 U.S.C. § 1833a and 18 U.S.C. § 1014, and common law, to recover damages and civil penalties from the defendants because of their false and fraudulent claims and/or false and fraudulent statements made in violation of federal and common law in support of or in relation to applications for emergency and operating loans and applications for indemnity under the Livestock Indemnity Program granted by the United States Department of Agriculture, Farm Service Agency, for alleged losses sustained as a result of Hurricane Georges. Summons were served upon co-defendants Alfonzo and Morales personally on July 13, 2005. On August 1, 2005, co-defendants Alfonzo and Morales requested an extension of time to file an answer, which was granted on August 30, 2005. On August 30, 2005, co-defendants Alfonzo and Morales requested a second extension of time to file an answer, which was also granted as the last extension, on September 2, 2005. On October 25, 2005, the United States requested the entry of default against co-defendants Alfonzo, Morales and the conjugal partnership constituted by both. On November 4, 2005, this court entered the default of co-defendants Alfonzo, Morales and the conjugal partnership constituted by both. More than eight months have elapsed from the Order of this court granting the last extension of time, and co-defendants Alfonzo, Morales and the conjugal partnership constituted by both have failed to plead or otherwise defend in this case. Under Rule 55 of the Federal Rules of Civil Procedure, Judgment by Default may be entered against any party who is in default.
This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1345 and its general equitable jurisdiction. Venue is proper in this District under 28 U.S.C. § 1391 and 31 U.S.C. § 3732(a).
We have before us a Motion for Judgment by Default as to co-defendants Alfonzo, Morales and the conjugal partnership constituted by both filed by the United States of America. It appearing from the record on file in these proceedings that default was entered upon their failure to answer or otherwise plead in this case, and upon review of the allegations contained in the Complaint and in the Motion for Judgment by Default, which have been supported by uncontested documentary evidence, we find Plaintiff is entitled to Judgment by Default under Rule 55 (b)(2) of the Federal Rules of Civil Procedure, and we now enter our findings and conclusions.
I. The Facts
The following facts have not been contested by co-defendants Alfonzo, Morales and the conjugal partnership constituted by both.
On April 25, 2003, the Grand Jury returned a 22-count indictment in Criminal Case #03-124 (JAG) charging Fernando Toledo-Fernández, co-defendant Ismael L. Alfonzo-Reyes, co-defendant Vanessa Morales-Hernández, José Torres-Correa, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, and José Juan Toledo-Fernández with conspiracy to defraud the United States ( 18 U.S.C. Section 371), false statements in loan applications to the United States Department of Agriculture, Farm Service Agency (hereinafter referred to as "FSA") ( 18 U.S.C. Section 1014), false statements in application and/or certification to obtain monies form FSA Livestock Indemnity Program ( 18 U.S.C. Section 1014), bribery of public official ( 18 U.S.C. Section 201), and acts affecting a personal financial interest ( 18 U.S.C. Section 208), all in connection with applications for emergency and operating loans granted by the United States Department of Agriculture, Farm Service Agency, for alleged losses sustained as a result of Hurricane Georges.
On April 2, 2004, the Grand Jury returned a 62-count superseding indictment in Criminal Case No. 03-124 (JAG), superseding the previous indictment referred to in the preceding paragraph, against the same named defendants, and charging them with conspiracy to defraud the United States ( 18 U.S.C. Section 371), false statements in loan applications to the United States Department of Agriculture, FSA ( 18 U.S.C. Section 1014), false statements in application and/or certification to obtain monies from FSA Livestock Indemnity Program ( 18 U.S.C. Section 1014), bribery of public official ( 18 U.S.C. Section 201), and acts affecting a personal financial interest ( 18 U.S.C. Section 208), all in connection with applications for emergency and operating loans granted by the United States Department of Agriculture, Farm Service Agency, for alleged losses sustained as a result of Hurricane Georges.
At all times pertinent to that superseding indictment, co-defendant Ismael Luis Alfonzo-Reyes, hereinafter referred to as "Alfonzo," was employed by the United States Department of Agriculture, Farm Service Agency, as Farm Loan Manager assigned to the Ponce office until May 9, 1999, then transferred to the Arecibo Office.
At all times pertinent to that superseding indictment co-defendant Vanessa Morales-Hernández, hereinafter referred to as "Morales," was married to "Alfonzo," and under contract with the Farm Service Agency, as a loan packager (person paid by FSA to help farmers put together an application for loans at FSA, free of charge to the borrower). During times pertinent to this complaint, "Morales" also worked independently of FSA, charging the borrowers a percentage of the loan for her services.
At all times pertinent to the superseding indictment, Fernando Toledo-Fernández, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, and José Juan Toledo-Fernández were cattlemen in the Arecibo/Hatillo region of Puerto Rico and owned several farms and corporations dedicated to milk production and cattle raising. Fernando Toledo-Fernández and Gregorio Toledo-Fernández were the owners and in control of the affairs of Gregorio Toledo, Inc., dedicated to the business of cattle sales. Gregorio Toledo, Inc. (owned by Fernando Toledo-Fernández and Gregorio Toledo-Fernández,) was the owner of and in control of the affairs of Café Dairy, Inc., dedicated to the business of milk production. Gregorio Toledo-Fernández and Pedro Toledo-Fernández were the owners of and in control of the affairs of Toledo Dairy, Inc., dedicated to the business of milk production. Gregorio Toledo-González was the owner of and in control of the affairs of Marina Dairy, Inc., dedicated to the business of milk production. Pedro Toledo-Fernández was the owner of and in control of the affairs of PTF, Inc., dedicated to the business of milk production. José Juan Toledo-Fernández was the owner of and in control of the affairs of J. Dairy, Inc., dedicated to the business of milk production.
At all times pertinent to the superseding indictment, José Torres-Correa, was the Farm Program Director of FSA in Puerto Rico.
At all times pertinent to the superseding indictment, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramón L. Barreto-Ginorio, Luis René Delgado-Pérez, Jorge Herrera-Mora (now deceased), Luis R. Martínez-Martínez, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, José Zaragoza-Urdaz, Teodoro Alfonzo-Toledo, Jorge Delgado-Pérez, Ismael Delgado-Pérez, Ivan Rosa-Toledo, Luis M. Ruiz-Ruiz, and Pedro Vélez-Cabrera, were cattlemen in the Arecibo region of Puerto Rico.
In Count One of the superseding indictment, both Alfonzo and Morales were charged with conspiracy to defraud and commit offenses against the United States ( 18 U.S.C. Section 371) as follows: Beginning on or about September 26, 1998, and continuing up to and until in or about July 2000, in Arecibo, Hatillo, San Juan, Mayaguez, Camuy, Ponce, and Coamo, Puerto Rico, and other areas in the District of Puerto Rico and elsewhere within the jurisdiction of the court, the defendants therein (including Alfonzo and Morales), and José Torres-Correa, Edgardo Mercado-Rosa, Jorge Herrera-Mora (now deceased), Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramon Barreto-Ginorio, Luis René Delgado-Pérez, Luis Martínez-Martínez, Jorge Delgado-Pérez, José Zaragoza-Urdaz, and others known and unknown to the grand jury, did knowingly and willfully conspire, confederate and agree together and with each other to: (1) defraud the Farm Service Agency, an agency of the United States, in excess of $10 Million, in the process of evaluating, approving, and disbursing emergency and operating loans and providing awards and incentives available to farmers that qualified and who were in need because of damages suffered as a consequence of the passing of Hurricane Georges through the island of Puerto Rico on or about September 21, 1998; and/or (2) make false statements or reports, or overvalue land, property or security for the purpose of influencing the actions of the Secretary of Agriculture, acting through the Farm Service Agency, in connection with applications for emergency and operating loans, and incentive programs.
On September 24, 1998, the President of the United States declared that a major disaster existed in the Commonwealth of Puerto Rico. This declaration was based on the damages resulting from Hurricane Georges, which occurred on September 21, 1998.
This disaster declaration resulted in the availability of emergency loans at low-interest rates, as well as free monetary awards for fence damages and cattle losses, all provided by the federal Farm Service Agency ("FSA"). FSA also provided operating loans at low-interest rates, the number of which was substantially increased due to claims asserted following the hurricane. The maximum an individual or related entity can receive from an emergency loan is $500,000; and from an operating loan, $200,000.
In the Superseding Indictment the overt acts committed by the members of the conspiracy were described as follows. On or about October 13, 1998, at El Buen Café Restaurant in Hatillo, Puerto Rico, Fernando Toledo-Fernández, co-defendant Alfonzo, and José Torres-Correa met and discussed the process of applying, processing and obtaining emergency and operating loans from FSA for Fernando Toledo-Fernández and his family corporations, as well as for other cattlemen from the Arecibo region.
On or about October 13, 1998, Alfonzo, offered a kickback of approximately $130,000 to José Torres-Correa, for expediting, approving, and disbursing emergency and operating loans from FSA to approximately twelve to fifteen cattlemen from the Arecibo region.
On or about the same date referred to in the above-mentioned paragraph, Alfonzo agreed that his wife, Morales, would be recruited to serve as a loan packager to prepare the loan applications for a group of cattlemen from the Arecibo region.
On or about the same date as referred to in the above-mentioned paragraph, Alfonzo agreed to charge a 4% commission to the cattlemen from the total amount of the loans proceeds disbursed, to be divided between himself (Alfonzo) and his wife, Morales, José Torres-Correa, and an unnamed person.
On or about the same date as referred to in the above-mentioned paragraph, it was agreed by Fernando Toledo-Fernández, an unnamed person, and co-defendant Alfonzo that Fernando Toledo-Fernández would be in charge of recruiting cattlemen to seek emergency and operating loans from FSA.
In or about October 1998, Fernando Toledo-Fernández invited family members and other cattlemen from the Arecibo region to his home, in order to offer the services of an attorney for the purpose of preparing and expediting applications, and the disbursement of emergency and operating loans to be obtained from FSA. On the same date as referred to in the above-mentioned paragraph, co-defendant Alfonzo went to the residence of Fernando Toledo-Fernández, spoke to the group of cattlemen, and explained the emergency and operating loans available from FSA. At that meeting, co-defendant Alfonzo introduced his wife, co-defendant Morales, as an FSA-authorized loan packager that would be working with the attorney that Fernando Toledo-Fernández introduced to the group.
From in or about September 1998 to January 2000, Morales assisted Fernando Toledo-Fernández, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, José Juan Toledo-Fernández, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramón L. Barreto-Ginorio, Luis René Delgado-Pérez, Luis R. Martínez-Martínez, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, José Zaragoza-Urdaz and others, in submitting false information in their loan application documents to FSA, in order to obtain emergency and/or operating loans.
The false information submitted to Farm Service Agency to support the loan applications consisted in false Certification of Losses, which contained false and or inflated information as to the physical losses of dairy cattle and damages to farm fences on account of Hurricane Georges, other false documents, letters and certifications to support these losses, and Requests for Lender Verification of Loan Application from several commercial financial institutions which contained false information to support their loan application(s) with FSA.
From in or about October 1998 to January 2000, co-defendant Alfonzo, while being the Farm Loan Manager for the Ponce field office of FSA, and after his transfer to the Arecibo field office of FSA, personally worked on the loan application documents of cattlemen that his wife, co-defendant Morales, had prepared as loan packager.
Between October 1998 and February 2000, co-defendants Alfonzo and Morales knowingly presented, or caused to be presented, false or fraudulent loan applications, running records, forms, documents, vouchers, invoices, records, certification of losses, loan verifications, financial statements, and other documents, statements, and/or records that were used to submit, process, authorize, approve, grant, and/or pay Farm Service Agency emergency and operating loans in excess of $10 Million to Fernando Toledo-Fernández, Gregorio Toledo-Fernández, José Juan Toledo-Fernández, Pedro Toledo-Fernández, Gregorio Toledo González, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramón Barreto-Ginorio, Luis René Delgado-Pérez, Luis Martínez-Martínez, and José Zaragoza-Urdaz, and other dairy farmers in the Arecibo area.
With respect to the false information presented or caused to be presented to FSA in support of the loan applications, Alfonzo and Morales had either actual knowledge of the said false information, and/or acted in deliberate ignorance of the truth or falsity of said information, and/or acted in reckless disregard of the truth or falsity of said information.
In or about March 1999, José Torres-Correa suggested to the State Executive Director of FSA in Puerto Rico that he transfer co-defendant Alfonzo from the FSA field office in Ponce to the FSA field office in Arecibo.
Sometime after May 9, 1999, but prior to September 24, 1999, co-defendant Alfonzo, as Farm Loan Manager and County Supervisor of the Arecibo office of FSA, requested from José Torres-Correa that he approve and authorize for disbursement the loan applications of Fernando Toledo-Fernández, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, José Juan Toledo-Fernández, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramón L. Barreto-Ginorio, Luis René Delgado-Pérez, Luis R. Martínez-Martínez, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, José Zaragoza-Urdaz, and other cattlemen in the Arecibo region.
On June 9, 1999, Alfonzo, as FSA Loan Manager in Arecibo, falsely certified that the losses and damages claimed by various dairy farmers on their emergency loan application documents were reasonable and of sufficient magnitude to qualify them for an emergency loan.
On June 9, 1999, José Torres-Correa, as Farms Program Director of FSA in Puerto Rico, approved and authorized the disbursement of disaster-related loans to Fernando Toledo-Fernández, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, José Juan Toledo-Fernández, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colon, Juan J. Peraza-Mora, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, Luis René Delgado-Pérez, and José Zaragoza-Urdaz, which loan documents contained false information.
Between November 2003 and March 2005, José Torres-Correa, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Ramón Barreto-Ginorio, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, Luis René Delgado-Pérez, and José Zaragoza-Urdaz, all plead guilty to a count of loan fraud ( 18 USC § 1014), for knowingly making false statements or reports to obtain the FSA loans subject of this case.
On March 18, 2005, Fernando Toledo-Fernández plead guilty to a count of conspiracy and a count of loan fraud ( 18 USC § 1014) for knowingly making false statements or reports to obtain the FSA loans subject of this complaint.
From on or about July 1999 to February 2000, FSA disbursed to Fernando Toledo-Fernández, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, José Juan Toledo-Fernández, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, Luis René Delgado-Pérez, Ramón Barreto-Ginorio, Luis Martínez-Martínez, and José Zaragoza-Urdaz, a total of $8,231,530 in Emergency Loan Funds and $2,200,000 in Operating Loan funds.
A reading of the Superseding Indictment, copy of which was submitted as part of the Memorandum in Support of the Motion for Judgment by Default, shows that Alfonzo and Morales submitted or caused to be submitted to the Farm Service Agency at least one-hundred eighteen false claims or statements in relation to or in support of the emergency and operation loans disbursed by said agency. In addition, Alfonzo was charged and found guilty on Eight Counts (Counts Forty-Four through Fifty-One) of false statements on application and/or certification to obtain monies from the Farm Service Agency Livestock Indemnity Program ( 18 U.S.C. § 1014). This adds at least Eight more false claims or statements attributed to Alfonzo in relation to FSA Livestock Indemnity Program.
From in or about July 1999 to February 2000, co-defendant Morales was paid $202,322.82 for her participation in preparing emergency and operating loan applications packages with false information for Fernando Toledo-Fernández, Gregorio Toledo-González, Gregorio Toledo-Fernández, Pedro Toledo-Fernández, José Juan Toledo-Fernández, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramón L. Barreto-Ginorio, Luis René Delgado-Pérez, Luis R. Martínez-Martínez, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Carmelo Rivera-Rivera, José Zaragoza-Urdaz, and other farmers.
From in or about August 1999 to March 2000, co-defendants Alfonzo and Morales paid approximately $18,000 in cash to José Torres-Correa, for his role in expediting, approving, and authorizing disbursements of various emergency and operating loans to several cattlemen in the Arecibo region of Puerto Rico.
At different times during the existence of this conspiracy, co-defendant Alfonzo assured José Torres-Correa that he did not have to pay a $50,000 debt he had with co-defendant Alfonzo, in exchange for his role in expediting, approving, and authorizing disbursements of various emergency and operating loans to several cattlemen in the Arecibo region of Puerto Rico.
With respect to the false and fraudulent information presented or caused to be presented to FSA related to the loan closings, and the payment of kickbacks to José Torres-Correa, co-defendants Alfonzo and Morales had either actual knowledge of the said false information and kickbacks, and/or acted in deliberate ignorance of the truth or falsity of said information and kickbacks, and/or acted in reckless disregard of the truth or falsity of said information and kickbacks.
On or about September 1, 1999, through on or about January 10, 2000, the Farm Service Agency disbursed to Fernando Toledo-Fernández, Gregorio Toledo-Fernández, José Juan Toledo-Fernández, Pedro Toledo-Fernández, Gregorio Toledo González, Edgardo Mercado-Rosa, Carlos H. Ortiz-Colón, Juan J. Peraza-Mora, Nelson Ramos-Irizarry, Juan Isidoro Barreto-Barreto, Glorimar Barreto-Ginorio, Juan Félix Barreto-Ginorio, Juan Manuel Barreto-Ginorio, Ramón Barreto-Ginorio, Luis René Delgado-Pérez, Jorge Delgado-Pérez, and José Zaragoza-Urdaz, Teodoro Alfonso-Toledo, Ismael Delgado-Pérez, Iván Rosa Toledo, Luis M. Ruiz-Ruiz, Pedro Vélez-Cabrera, and other dairy farmers in the Arecibo area a total of $364,784 in free livestock indemnity monies under the FSA Livestock Indemnity Program. Co-defendant Alfonzo was charged and found guilty of knowingly presenting, or causing to be presented, false or fraudulent applications, records, forms, documents, vouchers, invoices, certification of losses, and other documents, statements, and/or records that were used to submit, process, authorize, approve, grant, and/or pay Farm Service Agency free livestock indemnity monies under the FSA Livestock Indemnity Program in Eight Counts.
The false statements consisted in that these dairy farmers, with the knowledge, assistance and/or advice of co-defendant Alfonzo, claimed that they had lost certain number of cows and heifers as a consequence of Hurricane Georges when they well knew that this information was false.
In addition to the fact that co-defendants Alfonzo, Morales and the conjugal partnership constituted by both, have failed to contest any of the aforementioned facts, on December 22, 2004, after a six-month trial, a jury found both co-defendants Alfonzo and Morales guilty on Count One of the Superseding Indictment (Conspiracy to Defraud and Commit Offenses Against the United States, 18 U.S.C. Section 371), and on Counts Two through Thirteen (False statements in loan applications, 18 U.S.C. Section 1014), on Count Twenty (Bribery of Public Official, 18 U.S.C. Section 201), on count Twenty-Two through Forty-Six (Acts Affecting a Personal Financial Interest, 18 U.S.C. Section 208). In addition, Alfonzo was found guilty on Counts Fourty-Four through Fifty-One (False statements on application and/or certification to obtain monies from the Farm Service Agency Livestock Indemnity Program, 18 U.S.C. Section 1014), all in relation to the FSA loans and programs subject of the complaint in the case at bar. Alfonzo and Morales were sentenced by this court on February 17 and 13, 2006, respectively.
Except that Morales was not found guilty as to counts 22, 41, and 43 through 46.
II. The False Claims Act
Plaintiff contends that Judgment by Default should be entered in its favor under the False Claims Act ( 31 U.S.C. § 3729 et seq.). The False Claims Act establishes seven acts, each of which constitutes a basis for liability. 31 U.S.C. § 3729(a). The most common provisions impose liability on any person who:
(1) knowingly presents, or causes to be presented to an officer or employee of the United States Government or a member of the Armed Forces of the United States 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;
(3) conspires to defraud the Government by getting a false or fraudulent claim allowed or paid;
(4) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.31 U.S.C. § 3729(a)
In addition, the False Claims Act, 31 U.S.C. § 3729(b), provides that:
For the purpose of this section, the term "knowing" and "knowingly" means that a person, with respect to information
(1) had actual knowledge of the information;
(2) acts in deliberate ignorance of the truth or falsity of the information; or
(3) acts in reckless disregard of the truth or falsity of the information,
and no proof of specific intent to defraud is required. (Emphasis added)
The case law construing 31 U.S.C. § 3729(b) affirms the clear language of the statute and the intentions of Congress that "no proof of specific intent to defraud is required". U.S. v. Cabrera-Diaz, 106 F. Supp. 2d 234, 239 (D.P.R. 2000). Notwithstanding the above, in the case at bar, the United States has exceeded the requirement of the False Claims Act regarding intent or knowledge. Here, both Alfonzo and Morales have acted with criminal intent to defraud the United States and to file false claims/statements, as it appears from their conviction in criminal case 03-124 (JAG), and, therefore, the government has established intent or knowledge beyond the requirements of the False Claims Act.
As stated in U.S. v. Cabrera-Diaz, supra, the False Claims Act provides that any person who violates its provisions is liable to the United States for "a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person." 31 U.S.C. § 3729(a). Persons violating the Act are also liable for the cost of litigation. Id.
A. Damages
There is no set formula for measuring damages under the False Claims Act. Damages have been measured in a variety of ways and the measure applied by the courts in specific cases has been greatly influenced by the nature of the fraud and the type of Government transaction affected by it.
"The measure of the government's damages [is] the amount that it paid out by reason of the false statements over and above what it would have paid if the claims had been truthful." United States v. Woodbury, 359 F.2d 370, 379 (9th Cir. 1966); accord TDC, 288 F.3d at 428 ("measure of damages [is] based on what the government would have paid out had it known of the information that [defendant] omitted"); United States v. Cabrera-Diaz, 106 F.Supp.2d 234 (D.P.R. 2000) (damages are "the amount the Government would not have paid had it known the true facts"); United States ex rel. Roby v. Boeing Co., 79 F. Supp. 877 (S.D. Ohio 1999) ("A court should ask the question, `How much would the government have paid for the item at issue `but for' the fraudulent actions of the defendant?'"); BMY Combat Systems v. United States, 44 Fed. Cl. 141, 147 (Ct.Cl. 1999) ("[T]he measure of the government's damages would be the amount that it paid out by reason of the false [claims] over and above what it would have paid if the claims had been truthful") (quotingWoodbury, 359 F.2d at 379).
This rule of damages was confirmed by the Supreme Court nearly sixty years ago in U.S. ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which involved collusive bidding on a government contract. The trial court held that the measure of damages was "the money which the Government contributed to each project in excess of what it would have paid, had there been fair and open competition." 41 F. Supp. 197, 214 (W.D. Pa. 1941). The Supreme Court affirmed the district court's ruling, observing that the "chief purpose of the [FCA] was to provide for restitution to the government of money taken from it by fraud." 317 U.S. at 551.
In TDC, the D.C. Circuit relied upon the Supreme Court's decision in Hess to reject an argument similar to that advanced by Defendants here. The TDC defendants had been hired by the government to develop a minority bonding program. The government brought a FCA action against the defendants after discovering that they had failed to comply with the program's conflict of interest rules. In the trial court, the defendants argued that the government suffered no damages despite their conflict of interest because the government got the program it paid for. In rejecting that argument, the trial court held that the proper question in determining damages is: "How much would the government have paid for the item at issue `but for' the fraudulent actions of the defendant?" United States v. TDC Management Corp. et al., CA No. 89-1533, at 11 (Feb. 6, 2001) (quoting Roby, 79 F. Supp.2d at 877) (appended as Attachment A). The trial court concluded: "Had the Government been aware of the program deviations, it would not have continued to expend funds on the minority bonding program. Therefore, [defendant] is liable for damages on all submitted vouchers starting with the first fraudulent voucher. . . ." Id. at 12. The D.C. Circuit affirmed the trial court's decision, concluding that it was consistent with the standard in Hess and that it "properly applied a `but for' measure of damages based on what the government would have paid out had it known of the information that [defendant] omitted." TDC, 288 F.3d at 428.
A similar damage rule was applied by the court in United States v. Globe Remodeling Co., 196 F. Supp. 652 (D. VT 1961), which involved a factual situation similar to the instant matter. In that case, the defendants were found liable for having fraudulently induced the Federal Housing Administration ("FHA") to insure a home improvement loan. When the borrowers defaulted, the FHA was required to pay the lending institution. Subsequently, the borrowers fully repaid the government. Nevertheless, the court held that the government's damages were the full amount of the "original loss" to the government occasioned by its payment to the lending institution. Id. at 657. The court gave defendants credit for the repaid amounts, but only after doubling the government's initial damages.
Under the pre-1986 version of the FCA, the government was entitled to double, rather than treble, damages.
In Young Montenay v. United States, 15 F.3d 1040 (Fed Cir. 1994), the defendant falsely claimed progress payments for $49,000 in expenses it had not yet incurred. Because the work was subsequently performed, the defendant argued at trial that the government's damages were limited to lost interest on the early payments. The trial court disagreed and held that the government's damages were the full $49,000. On appeal, the Federal Circuit affirmed. Looking to the amount of money the government paid out at the time the fraudulent conduct occurred, the court concluded that the government "was denied the use of" the full amount of the false progress payments. Id. at 1043 n. 3.
As these cases make clear, the touchstone of FCA damages is the pay-out of government funds as a result of the defendant's fraud. Once funds are fraudulently procured from the treasury and are no longer available for use by the government, the United States has suffered a loss that gives rise to damages under the FCA. Such a rule recognizes the opportunity cost to the government due to the unavailability of these funds. This rule is also consonant with the FCA's "chief purpose of provid[ing] for restitution to the government of money taken from it by fraud." Hess, 317 U.S. at 551. It ensures that the government will be fully compensated for any fraud on the public fisc, and avoids subjecting the government's right of recovery to the unknown risks of future events. For this reason, the courts have correctly held that the government is entitled to damages under the FCA whenever it pays out money it would not have paid but for the defendant's fraud — regardless of any other recourse the government might possess to recoup the lost funds.
Here, it is undisputed that Alfonzo's and Morales' fraud caused the FSA to pay out at least $10 Million in emergency and operating loans and Livestock Indemnity Program funds it would not otherwise have disbursed. Accordingly, Alfonzo's and Morales' fraud caused the FSA to disburse at least $10 Million it would not otherwise have paid out. These payments constitute damages subject to the FCA's trebling provisions.
A logical and necessary corollary to the rule that FCA damages arise whenever the government is fraudulently induced to pay out money from the treasury, is the principle that any subsequent recoupment of those payments does not negate the government's claim for damages. This latter principle was expressly confirmed by the Supreme Court's seminal decision in United States v. Bornstein, 423 U.S. 303 (1976), where the Supreme Court held that a recoupment entitles the defendant to an offset once the government's damages are multiplied, but does not reduce the amount of the government's initial loss.
In Bornstein, a subcontractor was found liable for causing the prime contractor to submit false claims to the United States for 397 radio kits that did not meet government specifications. Subsequent to the submission of the false claims, the government recouped from the prime contractor the cost of replacing most of the faulty radio kits. Both the trial court and the appellate court concluded that the government's damages should be reduced by the amount recouped from the prime contractor. The Supreme Court reversed. The Court held that, "in computing the double damages authorized by the Act, the Government's actual damages are to be doubled before any subtractions are made for compensatory payments previously received by the Government from any source." 423 U.S. at 316.
As Bornstein itself recognized, its rule on recoupment serves several beneficial purposes. First, the rule preserves the FCA's treble damages provision both as a deterrent against fraud and a vehicle for ensuring full restitution of the government's loss. If a defendant can "avoid the Act's [treble]-damage provision by tendering the amount of the [untrebled] damages at any time prior to judgment . . . this possibility would make the [treble] damage provision meaningless." 423 U.S. at 316.
Second, multiplying damages before applying any offset is "consistent with the congressional judgment that [multiple] damages are necessary to compensate the Government completely for the costs, delays, and inconveniences occasioned by fraudulent claims." Id. at 530-31.
Third, the rule "fixes the liability of the defrauder without reference to the adventitious actions of other persons." Thus, it ensures that "two [defendants] who committed similar acts and caused similar damage" will not be "subject to widely disparate penalties depending on whether and to what extent [a third party] ha[s] paid the Government." Id.
Finally, Bornstein's holding promotes mitigation of damages. The United States would have little incentive to pursue collection efforts if those efforts would nullify its right to claim treble (or any) damages.
In light of these considerations, any recoupment is to be credited only after the government's damages are multiplied. Significantly, nothing in these cases holds or suggests that Bornstein's recoupment rule turns on the nature or source of the particular recoupment. Indeed,Bornstein itself forecloses such an interpretation. Bornstein twice emphasized that its holding applies to subsequent payments received from the government "from any source." 423 U.S. at 316;see also Hill, 676 F. Supp. at 1182 ("The Government is entitled to damages . . . equal to triple the losses it actually incurred, reduced by payments received from any other source.").
See United States v. Ekelman Associates, Inc., 532 F.2d 545, 549 (6th Cir. 1976); Cabrera-Diaz, 106 F.Supp.2d at 241; United States v. Entin, 750 F. Supp. 512, 519 (S.D. Fla. 1990); United States v. Hill, 676 F. Supp. 1158, 1182 (N.D. Fla. 1987); United States v. Heck, 1987 WL 49253 at * 6 (D.N.J. 1987); United States v. Canada, 425 F. Supp. 91, 92 (S.D. Ind. 1977); BMY, 44 Fed. Cl. at 150; Globe, 196 F. Supp. at 657.
In short, the government incurred damages when Alfonzo and Morales fraudulently induced the FSA to disburse $10 Million in fraudulent loans and (Alfonzo) $364,784 in Livestock Indemnity Program, which funds the government "was denied the use of" until they were later partially repaid. Under Bornstein, belated repayment of these monies may entitle Alfonzo and Morales to a credit, but only after the government's damages are trebled. This repayment does not entitle Alfonzo and Morales to turn back the clock and pretend that their fraudulent scheme — and the resulting $10 Million disbursement by the FSA — never occurred.
B. Civil Penalties
The False Claims Act provides that a person who commits any of the acts specified in 31 U.S.C. § 3729 (a) (1)-(7) is liable for a "civil penalty of not less than $5,000 and not more than $10,000.".
The report of the Senate Judiciary Committee summarizes the law with respect to civil penalties as follows:
The imposition of this forfeiture is automatic and mandatory for each claim which is found to be false. The United States is entitled to recover such forfeiture solely upon proof that false claims were made, without proof of any damages. Fleming v. United States, 336 F.2d 475, 480 (10th Cir. 1964), cert. denied, 380 U.S. 907 (1965). A forfeiture may be recovered from one who submits a false claim though no payments were made on the claim. United States v American Precision Products Corp., 115 F. Supp. 823 (D.N.J. 1953)
Each separate bill, voucher or other "false payment demand" constitutes a separate claim for which a forfeiture shall be imposed, see for example, United States v. Bornstein, 423 U.S. 303 (1976), United States v. Collyer Insulated Wire Co., 94 F. Supp. 493 (D.R.I. 1950), and this is true although many such claims may be submitted to the Government at one time. For example, a doctor who completes separate Medicare claim for each patient treated will be liable for a forfeiture for each such form that contains false entries even though several such forms may be submitted to the fiscal intermediary at one time.
S. Rep. No 345, 99th Cong., 2d Sess. 8-10 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5273-75.
As stated by Congress, the "United States is entitled to recover [civil penalties] solely upon proof that false claims were made, without proof of any damages." S. Rep. No. 345, 99th Cong., 2d Sess. 8 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5273. The primary cases concerning the issue are United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943); Rex Trailer Co. v. United States, 350 U.S. 148 (1956); and United States v. Rohleder, 157 F.2d 126 (3rd Cir. 1946). See also In re Schemmels, 85 F.3d 416 (91:h Cir. 1996)
The legislative history of the 1986 amendments makes clear that civil penalties are "automatic and mandatory for each claim which is false." S. Rep. No. 345, 99th Cong., 2d Sess. 8 (1986),reprinted in 1986 U.S.C.C.A.N. 5266, 5273. Thus, up to a certain point, the number of civil penalties, or whether to even assess civil penalties, is not discretionary. "This forfeiture provision is mandatory; it leaves the trial court without discretion to alter the statutory amount." United States v. Hughes, 585 F.2d 284, 286 (7th Cir. 1978). The point at which a court may gain some discretion and limit the number of penalties is when the penalties are deemed "excessive". See United States v. Halper, 490 U.S. 435 (1989).
A reading of the Superseding Indictment shows that Alfonzo and Morales submitted or caused to be submitted to the Farm Service Agency at least one-hundred eighteen false claims or statements in relation to or in support of the emergency and operation loans disbursed by said agency. A jury adjudicated that both Alfonzo and Morales had incurred in such false statements and claims as they found them guilty on Count One of the Superseding Indictment (Conspiracy to Defraud and Commit Offenses Against the United States, 18 U.S.C. Section 371), and on Counts Two through Thirteen (False statements in loan applications, 18 U.S.C. Section 1014). Therefore, Alfonzo and Morales are exposed to a mandatory civil penalty between $590,000 to $1,180,000 under 31 U.S.C. § 3729(a)(1)-(7). Alfonzo is exposed to an additional mandatory civil penalty between $40,000 to $80,000 on account of at least eight more false claims or statements in relation to FSA Livestock Indemnity Program Alfonzo was charged and found guilty on Eight Counts (Counts Forty Four through Fifty One) of false statements on application and/or certification to obtain monies from the Farm Service Agency Livestock Indemnity Program ( 18 U.S.C. Section 1014).
C. Costs
In addition to treble damages and civil penalties, "[a] person violating this subsection shall also be liable to the United States Government for the costs of a civil action brought to recover any such penalty or damages". 31 U.S.C. § 3729(a). See also BMY-Combat Systems Division of Harsco Corporation v. United States, 44 Fed.Cl. 141 (Fed.Cl. 1999).
D. Statute of Limitations
The False Claims Act contains the following limitations period:
(b) A civil action under 3730 may not be brought
(1) more than 6 years after the date on which the violations of section 3726 is committed, or
(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.31 U.S.C. § 3731.
Thus, the United States may bring a False Claims Act action either within six years from the date of the violation of the Act, or up to three years from the date the "official of the United States charged with responsibility to act in the circumstances" is made aware of the facts "material to the right of action,' whichever occurs last. No more than ten years, however, may elapse from the date of the violation to the date the action is commenced.
The present action is related to a fraudulent scheme to have FSA loans approved that according the superseding indictment began on or about October 13, 1998 until on or about February 2002. In fact, all of the requests for obligations of funds for the loans in this case were made on June 9, 1999. All the loan funds were disbursed after that date. Payment by the United States Government triggers statute of limitations period under the False Claims Act. See U.S. ex rel. Duvall v. Scott Aviation, 733 F.Supp. 159 (W.D.N.Y. 1990). This civil action was filed on June 7, 2005, and, therefore, is within the six-year statute of limitations.
III. Collateral Estoppel
A final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceedings and which is brought under 31 U.S.C. Section 3730 (a) or (b). 31 U.S.C. Section 3731(d). "It is well established that a prior criminal conviction may work an estoppel in favor of the government in subsequent civil proceedings." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 568 (1951). See also U.S. v. Lamanna, 114 F.Supp.2d (W.D.N.Y. 2000), U.S. v. Fliegler, 756 F.Supp. 688 (E.D.N.Y. 1990) and U.S. v. Stella, 839 F.Supp. 92 (D.P.R. 1993), reversed on other grounds in U.S. v. Rivera, 55 F 3rd 703 (1st Cir 1995) "Collateral estoppel, like the related doctrine of res judicata, has a dual purpose of protecting litigants from the burden of relitigating identical issues with the same party or his privy and of promoting judicial economy by preventing needles litigation." Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 (1979). "Collateral estoppel does not involve the `re-examination' of any fact decided by a jury. On the contrary, the whole premise of collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no further factfinding function to be performed." Id. at 336 n. 23.
After reviewing the superseding indictment and judgments against Alfonzo and Morales in criminal case 03-124 (JAG) and the civil record and other allegations in this case, it is evident that the civil complaint is based on the same allegations that served as the basis for Alfonzo's and Morales' convictions. Alfonzo and Morales have not presented anything to determine otherwise. Therefore, Alfonzo and Morales are collaterally estopped form relitigating the issues subject to this action.
IV. Judgment by Default
Rule 55(b)(2) of the Federal Rules of Civil Procedure allow for the Court to enter judgment by default against any party who is in default and has failed to plead or otherwise defend as provided by said rules.
[R]ule 55(b)(2) prescribes the procedure to be followed when a judgment is sought against a litigant in default in situations that lie beyond the powers delegated to the clerk under Rule 55(b)(1). Thus, the rule provides that "if the party against whom judgement by default is sought has appeared in the action, the party (or, if appearing by representative, the party's representative) shall be served with written notice of the application for judgment at least 3 days prior to the hearing on such application. The court has discretion to decide whether to enter a judgment by default, however and Rule 55(b)(2)empowers the district judge to hold hearings or "order such references as it deems necessary and proper" to aid its exercise of this discretion. . . .
Wright, Miller Kane, Federal Practice and Procedure: Civil 3d § 2684. (footnotes omitted) (emphasis supplied)
As of this date, more than 120 days have elapsed from the personal service of process, and defendants have failed to answer, plead or otherwise defend in this case.
Rule 55 does not require that testimony be presented as a prerequisite to entry of a default judgment, and thus several courts have determined that a hearing is not required before entering a default. However, when it seems advantageous, a court may conduct a hearing to determine whether to enter judgment by default. The hearing is not considered a trial, but is in the nature of an inquiry before the judge.
Wright, Miller Kane, Federal Practice and Procedure: Civil 3d § 2688. (footnotes omitted) (emphasis supplied)
In this case, it is within the court's discretion to decide whether to enter judgment by default, hold a hearing, including a hearing "in the nature of an inquiry," or enter any order as it deems necessary and proper to its exercise of this discretion. This court holds that Rule 55 does not require that testimony be presented as a prerequisite to entry of default judgment. See United States v. Cabrera-Diaz, 106 F. Supp. 2d 234, 243 (2000).
V. Conclusion
A review of the record and case law reveals that co-defendants Alfonzo, Morales and the conjugal partnership constituted by both have knowingly presented or caused to be presented false claims to the United States; and/or caused to be made or use false statements to get false claims paid or approved by the United States. The facts in this case are uncontested.
In view of the foregoing, plaintiff's Motion for Judgment by Default against co-defendants Alfonzo, Morales and the conjugal partnership constituted by both is GRANTED. Judgment shall be entered in its favor and against co-defendants Alfonzo, Morales and the conjugal partnership constituted by both, jointly and severally, for treble (three times) the damages sustained by the United States on account of the false claims/statements submitted in relation to the emergency and operating loans in the amount of $10,431,530.00, which totals an aggregate amount of $31,294,590.00, less the amounts repaid to the United States for the emergency loans ($5,467,190.68) and for the operating loans ($1,205,433.90), for a total net amount of $24,621,965.42, plus mandatory civil penalties against co-defendants Alfonzo, Morales and the conjugal partnership constituted by both, jointly and severally, in the amount of $10,000.00 for each one of the one-hundred eighteen false statements or false claims submitted by Alfonzo and Morales to the FSA in relation to the emergency and operating loans, for a total of $1,180,000.00. Also, Judgment shall be entered against co-defendant Alfonzo alone, in addition to the amounts specified above, for treble (three times) the damages sustained by the United States on account of the false statements/claims submitted by him in relation to the Livestock Indemnity Program (LIP) in the amount of $364,784.00, which totals an aggregate amount of $1,094,352.00, less the amounts repaid to the United States on said LIP which total $58,297.00, for a total net amount of $1,036,055.00, plus additional mandatory civil penalties against co-defendants Alfonzo alone, in the amount of $10,000.oo for each one of the eight false statements or false claims submitted by Alfonzo to the FSA on account of the Livestock Indemnity Program (LIP), for the total net amount of $80,000.00, plus the investigation costs incurred by the plaintiff as the result of their false claims penalties. Judgment shall be entered accordingly.
IT IS SO ORDERED.