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United States of America v. Drc

April 21, 2012

UNITED STATES OF AMERICA, PLAINTIFF,
v.
DRC, INC., DEFENDANT.



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

MEMORANDUM OPINION AND ORDER

The government brings suit against defendant DRC, Inc. (also known as Disaster Relief Construction, Inc.) under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729 et seq., alleging that DRC submitted false pre-qualification documents and false invoices in connection with a contract awarded to DRC to provide relief assistance in Honduras that was financed by the United States Agency for International Development ("USAID"). DRC filed a motion for partial summary judgment on the false invoices claim. The claim alleges that DRC's unauthorized subcontracting of work violated the terms of DRC's contract with Honduras. The parties dispute whether the contract required DRC to seek USAID's approval for subcontracting and, if so, whether DRC's invoices were false because they impliedly certified that DRC had complied with that obligation when it had not. There are genuine issues of material fact with respect to elements of the false invoices claim with regard to claims for payment submitted from December 2000 to April 2001 and after October 2001. However, the government cannot show that DRC possessed the scienter required to give rise to FCA liability with respect to claims for payment submitted between April 2001 and October 2001. DRC's motion for partial summary judgment therefore will be granted in part and denied in part.

BACKGROUND

The contract at the heart of this dispute was financed by USAID in order to help Honduras and other countries rebuild after Hurricane Mitch struck in 1998. USAID collaborated with the Honduran Social Investment Fund ("FHIS"), an agency of the government of Honduras, on a project to construct and reconstruct water, sewer, and sanitation infrastructure in the wake of the hurricane. (Am. Compl. ¶ 10.) DRC participated in a competitive bidding process for a contract to perform the construction work and in connection with its bid submitted numerous pre-qualification documents representing its equipment, inventory, personnel, and financial obligations. (Id. ¶¶ 11-12.) The pre-qualification documents also requested information about the contractor's plans to subcontract. (Pl.'s Opp'n to Def.'s First Mot. Partial Summ. J. ("Pl.'s Opp'n"), Exs. 4 and 5.) DRC did not identify any subcontractors with which it planned to work and represented that the company had no intention of subcontracting. (Id.)

On the basis of its pre-qualification score and low bid, DRC obtained a contract for construction projects in Honduras. (Am. Compl. ¶ 13.) The contract took the form of a "host country contract," an agreement between a foreign country and a third-party contractor, where USAID provides funding but is not itself a party. (Def.'s Reply in Support of Def.'s First Mot. Summ. J. ("Def.'s Reply"), Def.'s Stmt. of Undisputed Facts for Def.'s First Mot. Summ. J. ("Def.'s Stmt. Undisputed Facts") ¶¶ 10-11.) DRC ultimately submitted twenty eight vouchers for payment under the contract (Compl., Ex. C), each of which the government alleges constitutes a false claim (Am. Compl. ¶¶ 30-36).

I. SUBCONTRACTING OBLIGATIONS IN THE CONTRACT

The construction contract between DRC and FHIS was executed on June 21, 2000. (Def.'s Stmt. Undisputed Facts ¶ 26.) The contract contained twelve constituent sections, many of which were written only in Spanish.*fn1 (Id. ¶¶ 4-5.) USAID required the inclusion of two of those sections, Attachment A and Attachment B ("the Mandatory Clauses"), which were rendered both in Spanish and in English. (Id. ¶¶ 6-7.)

Multiple provisions in the contract addressed subcontracting. First, Section 28 of the contract provided that "[t]he contractor may not . . . subcontract with third parties without obtaining the advance, written consent of FHIS and USAID." (Id. ¶ 20; Def.'s First Mot. Summ. J., Ex. 2.) Section 28 further provided that subcontracted work could not exceed 40 percent of the total work budget. (Def.'s Stmt. Undisputed Facts ¶ 21.) The contract listed five instances in which payment could be withheld, including "[f]ailure of the Contractor to make payments due to subcontractors for materials or labor." (Id. ¶ 157.)

Second, both Attachment A, in Section 3(G)(2)(e), and Attachment B, in Section 3(F)(2)(e), state that "[u]nder a fixed-price construction contract of any value, the prime contractor may procure locally produced goods and services under subcontracts." (Id. ¶¶ 16-17; Def.'s First Mot. Summ. J., Ex. 3.)

Third, both Attachments, in Section 2, provide that "the Contract has reserved to USAID certain rights such as . . . the right to approve the terms of this Contract, the Contractor, and any or all . . . subcontracts . . . related to this Contract and the Program/Activity of which it is part." (Def.'s First Mot. Summ. J., Ex. 3.) Section 2 in Attachment A further states that "[a]ny approval (or failure to disapprove) by USAID shall not bar the Contracting Agency or USAID from asserting any right, or relieve the Contractor of any liability which the Contractor might otherwise have to the Contracting Agency or USAID." (Id.)*fn2

Finally, Attachment A contains Section 14, entitled "Assignment, Subcontract Clauses and Procurements." Subsection A provides that "USAID's prior written consent to any assignment of obligations under the Contract, in addition to the consent of the Contracting Agency, is required"; subsection B obligates the contractor to include specified provisions of the Attachment in all subcontracts. (Id.)*fn3

II. DRC'S NEGOTIATIONS CONCERNING SUBCONTRACTING FHIS issued a notice to proceed on June 23, 2000, two days after the contract was executed, giving DRC fifteen days in which to begin work. (Def.'s Stmt. Undisputed Facts ¶ 27.) According to DRC's Executive Vice President, Sid Vogel, he told FHIS on July 3, 2000 that DRC planned to subcontract and submitted a list of subcontractors for FHIS approval at a meeting with Moises Starkman, the Minister of FHIS, Ramon Cardona, the FHIS director of major infrastructure projects (the "DIM") who was responsible for administering the contract, and others. (Def.'s First Mot. Partial Summ. J., Ex. 8 (Vogel Dep. 71:20-72:10, 152:18-153:20).) Vogel testified that he asked Starkman the next day "what [Starkman] want[ed] [Vogel] to do" and Starkman "told [Vogel] to go to work," which Vogel understood to constitute "approval [for DRC] to . . . go out there and go to work with these subcontractors." (Id. 72:11-15.)

Several months later, on November 7, 2000, Cardona sent a letter to DRC stating that FHIS had "been informed" that DRC was engaged in subcontracting and reminding DRC that the project "can only be contracted up to 40 percent of the project, previous authorization from FHIS." (Def.'s First Mot. Partial Summ. J., Ex. 9.) The letter concluded, "[w]e would appreciate that you do not effect any subcontractions [sic] without previous authorization." (Id.) Cardona sent a copy of the letter to Todd Sloan, the head of the USAID section that administered the construction contract. (Def.'s Stmt. Undisputed Facts ¶¶ 32-33.) On November 8, 2000, DRC submitted "participation contracts" to FHIS in order to receive FHIS's legal evaluation of whether those contracts required formal approval under the construction contract. (Id. ¶ 37.) In the preceding months, DRC "had replaced its original subcontracts with 'participation contracts' and argued, based on advice of Honduran legal counsel, that the Contract did not require DRC to obtain further approval from FHIS concerning these 'participation contracts' and [that] the 40 percent [subcontracting] limit did not apply.'" (Def.'s First Mot. Partial Summ. J., Def.'s Stmt. of Material Facts ("Def.'s Stmt. of Material Facts") ¶ 34 (citing Ex. 11, Pelaez Dep. at 115:16-118:11; 27:22-28:7).) FHIS issued a legal opinion on November 11, 2000 that the participation contracts did require approval and were subject to the limit. (Def.'s Stmt. Undisputed Facts ¶ 38.)

After receiving FHIS's legal opinion, DRC Project Manager Francisco Pelaez submitted a memorandum on November 15, 2000 addressed to Starkman acknowledging the parties' difference of opinion about the status of participation agreements and, given FHIS's legal position, submitting a list of subcontractors for the approval of both FHIS and USAID. (Def.'s Stmt. Undisputed Facts ¶¶ 39-40; Def.'s First Mot. Partial Summ. J., Ex. 18.) The memorandum represented that, regardless of the form of agreement with local companies, the budgeted amount was below the 40 percent threshold. (Id.) A series of meetings and letter exchanges among DRC, FHIS, and USAID followed, lasting several months. (Def.'s Stmt. Undisputed Facts ¶ 42.) DRC requested USAID and FHIS approval for subcontracting again later in November, along with revised subcontract forms. (Id. ¶¶ 61-63.) A report by a USAID auditor, Christine Byrne, who visited DRC work sites in November noted that at several work sites it appeared that DRC had subcontracted the vast majority of the work. (Def.'s First Mot. Partial Summ. J., Ex. 12.) From December through early March, DRC submitted several requests to FHIS requesting approval for subcontractors, copying USAID on the letters. (Def.'s Stmt. Undisputed Facts ¶¶ 65, 66, 68, 69, 71-73, 75, 76, 78, 79.) In January 2001, Sloan wrote to Cardona and expressed USAID's concern about one subcontractor currently working for DRC and requested additional information about the subcontractor. (Id. ¶ 75.) Cardona forwarded USAID's request to DRC. (Id. ¶ 76.)*fn4

At various points during these negotiations, USAID officials suggested that the portion of overall work that DRC subcontracted was not important. USAID contracting head John McAvoy drafted a December 6, 2000 letter, signed by USAID Mission Director Timothy Mahoney, in which USAID asked FHIS to increase the permissible subcontracting quota from 40 percent to 75 percent. (Def.'s First Mot. Partial Summ. J., Ex. 39; id., Ex. 1 (McAvoy Dep. 39:9-41:7).) USAID Deputy Mission Director Joseph Lombardo testified that the 40 percent limit was a matter of local law and that, from USAID's ...


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