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United States of America v. First Choice Armor & Equipment

August 29, 2011

UNITED STATES OF AMERICA, PLAINTIFF,
v.
FIRST CHOICE ARMOR & EQUIPMENT, INC. ET AL., DEFENDANTS.



The opinion of the court was delivered by: Richard W. Roberts United States District Judge

MEMORANDUM OPINION AND ORDER

The government filed a complaint against defendants First Choice Armor & Equipment, Inc., its founder Edward Dovner, Dovner's wife and First Choice's president and sole shareholder Karen Herman, Exotic Cars LLC, Excel Aviation, LLC, and MRSA Jets, LLC, alleging violations of the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33, and fraudulent conveyances under the Federal Debt Collection Procedures Act ("FDCPA"), 28 U.S.C. § 3001 et seq., as well as claims of common law breach of contract, payment by mistake, and unjust enrichment in connection with the sale of Zylon body armor. The defendants have moved to dismiss. Because the government has sufficiently alleged its FCA and fraudulent conveyance claims, and because the government's FCA allegations also form the basis for its breach of contract claim, the defendants' motion to dismiss will be denied with respect to these claims. Because the government alleges the existence of an express contract with First Choice for direct agency and GSA purchases of bulletproof vests, the payment by mistake and unjust enrichment claims against First Choice will be dismissed with respect to these purchases but not with respect to state, local, or tribal purchases. The motion to dismiss the unjust enrichment claim against Dovner and Herman also will be denied.

BACKGROUND

The complaint alleges the following facts. First Choice purchased the synthetic fiber "Zylon" for use in the manufacture of bulletproof vests, which it sold between early 2000 and August 2005. (Compl. ¶¶ 25-26.) First Choice contracted with Lincoln Fabrics Ltd., which wove Zylon fiber into fabric for use in First Choice vests. (Id. ¶ 26.) "From 2000 to 2005, First Choice's marketing emphasized thin and lightweight Zylon vests as a critical element of its sales pitch to the United States' body armor market." (Id. ¶ 29.) First Choice sold vests to federal agencies and to state, local, and tribal law enforcement authorities under the Bullet Proof Vest Grant Partnership Act ("BPVGPA") Program, under which the federal government reimbursed these authorities for up to fifty percent of the costs of the body armor. (Id. ¶¶ 15-24.) During the time it sold its Zylon vests, First Choice issued an industry-standard five-year warranty on them. (Id. ¶ 30.) The federal government paid First Choice at least $2.47 million for more than 7,000 Zylon vests. (Id. ¶¶ 17, 21.)

The government alleges that beginning in 2001, First Choice and Dovner learned that raw Zylon degraded as it aged and when it was exposed to light, heat, and humidity. In July 2001, Toyobo, the manufacturer of Zylon, informed First Choice and Dovner that Zylon's tensile strength decreased in high heat and humidity (id. ¶ 35), and DSM, a Dutch company that manufactured Zylon products, announced that it was postponing introducing Zylon products to market because of concerns about its ballistics resistance. (Id. ¶ 34.) Toyobo informed First Choice and Dovner in August 2001 and then again in November 2001 that the "degradation problem was worse than Toyobo had first indicated." (Id. ¶¶ 36, 38.) In October 2003, Toyobo disclosed to First Choice and Dovner data from fiber strength tests Toyobo conducted on woven Zylon ---- which approximated more closely the condition of Zylon in First Choice's vests than did raw Zylon ---- showing more serious degradation than Toyobo's data on raw Zylon had suggested. (Id. ¶ 45.)

First Choice sought guidance from Cheung Lie Ting, the ISO 9000 quality specialist for Lincoln Fabrics,*fn1 about how to respond to the degradation data, and Ting "recommended that First Choice [add more] layers of ballistic resistant materials to compensate for the Zylon degradation." (Id. ¶¶ 2, 37.) Additionally, Doug Van der Pool, First Choice's Vice President of Sales, reported to Dovner that other manufacturers were modifying their Zylon vests to compensate for the degradation. (Id. ¶¶ 41, 44.) "But First Choice and Dovner ignored th[ese] warning[s], failed to add any more protective layers, and continued to market their Zylon vests as suitable for ballistic protection and as the thinnest and lightest vests available on the market." (Id. ¶ 2.) And, in August 2003, "First Choice issued a press release claiming that its vests were different from that of the competition . . . and were thicker and had higher ariel density than the competition's vests." (Id. ¶ 43.)

First Choice discontinued sales of its 100% Zylon vests in April 2004 and discontinued sales of all Zylon vests in August 2005. (Id. ¶¶ 46, 47.) After learning of the government's investigation regarding Zylon, Dovner and Herman removed more than $5 million from First Choice, causing the company to become insolvent. (Id. ¶ 50.) The government alleges that Dovner and Herman used these funds to purchase a Ferrari, a Maserati, and a private jet. (Id. ¶¶ 51-55.)

The government filed this complaint asserting claims against First Choice and Dovner for FCA violations involving presenting fraudulent claims (Count 1) and making false statements (Count 2), against First Choice for common law breach of contract (Count 3) and payment by mistake (Count 4), and against First Choice, Dovner and Herman for common law unjust enrichment (Count 5) and for making fraudulent conveyances (Counts 6, 7, 8). The defendants have moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss for failure to state a claim and to sufficiently plead with particularity the FCA and fraudulent conveyance counts, and for failure to state a claim the payment by mistake and unjust enrichment counts. The defendants also have moved under Rule 12(b)(1) to dismiss for lack of subject-matter jurisdiction the breach of contract count.

DISCUSSION

I. FAILURE TO STATE A CLAIM

In evaluating a Rule 12(b)(6) motion, a court "'may consider only the facts alleged in the complaint, any documents either attached to or incorporated in the complaint and matters of which [a court] may take judicial notice.'" Trudeau v. FTC, 456 F.3d 178, 183 (D.C. Cir. 2006) (quoting EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624 (D.C. Cir. 1997)). A court considering a Rule 12(b)(6) challenge must accept as true any facts alleged by the plaintiff and grant all reasonable inferences drawn from those facts. Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

Rule 9(b) applies to FCA actions. United States ex rel. Totten v. Bombardier Corp., 286 F.3d 542, 551-52 (D.C. Cir. 2002) (noting that every circuit to consider the issue has held that Rule 9(b) applies to FCA complaints). It provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). Motions to dismiss for failure to plead fraud with sufficient particularity are evaluated in light of the overall purposes of Rule 9(b) to "ensure that defendants have adequate notice of the charges against them to prepare a defense[,]" United States ex rel. McCready v. Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 114, 116 (D.D.C. 2003), discourage "suits brought solely for their nuisance value" or as "frivolous accusations of moral turpitude[,]" United States ex rel. Joseph v. Cannon, 642 F.2d 1373, 1385 (D.C. Cir. 1981), and "'protect reputations of . . . professionals from scurrilous and baseless allegations of fraud[.]'" Id. at 1385 n.103 (alteration in original) (quoting Felton v. Walston & Co., Inc., 508 F.2d 577, 581 (2d Cir. 1974)).

Rule 9(b) does not abrogate Rule 8, and must be read in light of Rule 8's requirement that allegations be simple, concise, and direct, and short and plain statements of each claim. Joseph, 642 F.2d at 1386; see also United States ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., Inc., 238 F. Supp. 2d 258, 269 (D.D.C. 2002) ("While . . . Rule 9(b) requires more particularity than Rule 8, . . . Rule 9(b) does not completely vitiate the liberality of Rule 8."). In an FCA action, Rule 9(b) requires that the pleader "'state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud[,]' . . . [and] individuals allegedly involved in the fraud." United States ex rel. Williams v. Martin-Baker Aircraft Co., Ltd., 389 F.3d 1251, 1256 (D.C. Cir. 2004) (quoting Kowal v. MCI Communic'ns Corp., 16 F.3d 1271, 1278 (D.C. Cir. 1994)). "In sum, although Rule 9(b) does not require plaintiffs to allege every fact pertaining to every instance of fraud when a scheme spans several years, defendants must be able to 'defend against the charge and not just deny that they have done anything wrong.'" Id. at 1259 (quoting United States ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1052 (9th Cir. 2001)); accord McCready, 251 F. Supp. 2d at 116 (reasoning that a court "'should hesitate to dismiss a ...


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