United States v. Howell, 18292.

• Decision Date: 27 May 1963
• Docket Number: No. 18292.,18292.
• Citation: 318 F.2d 162
• Parties: UNITED STATES of America, Appellant, v. Stanley N. HOWELL, Warren S. Cochran, Cochran & Howell, a partnership, Post Cleaners, Thrifty Cleaners, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

318 F.2d 162 (1963)

UNITED STATES of America, Appellant, v. Stanley N. HOWELL, Warren S. Cochran, Cochran & Howell, a partnership, Post Cleaners, Thrifty Cleaners, Appellees.

No. 18292.

United States Court of Appeals Ninth Circuit.

May 27, 1963.

Joseph D. Guilfoyle, Asst. Atty. Gen., Cecil F. Poole, U. S. Atty., Alan S. Rosenthal and David L. Rose, Dept. of Justice, Washington, D. C., for appellant.

James T. Davis, San Francisco, Cal., for appellee Warren S. Cochran.

Valentine C. Hammack, San Francisco, Cal., for appellee Stanley N. Howell.

Before ORR, HAMLEY and BROWNING, Circuit Judges.

ORR, Circuit Judge.

Appellees Howell and Cochran, operating the firms of Cochran and Howell, Post Cleaners, and Thrifty Cleaners, obtained and held Concessionaire Agreements with the Bay Area Exchange, which the Government alleges to be an integral part of the Army and Air Force Exchange Service, an agency of the United States.

Under the said Concessionaire Agreements, appellees were granted the privilege of performing the cleaning, pressing, tailoring and laundering of wearing apparel at military installations of the United States and, in return for such privilege, agreed to pay to the Bay Area Exchange a specified percentage of their gross receipts from said operations.

It is alleged in the complaint that Howell and Cochran knowingly and wilfully submitted false statements and records of their gross receipts to the Bay Area Exchange by substantially understating the amounts of their gross receipts; that they directed their employees to conceal the true amount of said gross receipts; and that they paid less commissions to the Exchange than were actually due, thereby causing a financial loss to the Exchange.

It is further alleged that Howell and Cochran, in the year 1949, entered into a conspiracy with one Elliott, general manager of said Exchange, and bribed him to use his office to secure preferential treatment and favorable terms in the Concessionaire Agreements for appellees' firms. Elliott also agreed to allow them to conceal the full amount of receipts received by them and to accept lesser sums than were actually due.

Howell, one of the appellees, has been convicted on four counts of a charge of submitting intentionally false statements to an agency of the United States in violation of 18 U.S.C. § 1001 and fined $2,500. The United States brought this civil action, alleging in four counts: First, that the submission of the false statements of gross receipts by appellees constituted a violation of the False Claims Act, 31 U.S.C. § 231. The second count is brought under 28 U.S.C. § 1345 for money wrongfully withheld from the United States and seeks recovery of the unpaid commissions. The third count charges a conspiracy between the appellees and Elliott to defraud the United States and seeks double resulting damages and $2,000 from each appellee. The fourth count seeks to recover the alleged bribes paid to Elliott by the appellees.

The trial court dismissed all four counts on the ground that they failed to state a claim upon which relief could be granted. The United States is not impressed and asks this Court to reverse the judgment as to the first three counts. It does not here complain about the fourth count.

So we are first confronted with the question of whether the facts as alleged bring the action within the provisions of the False Claims Act, which provides:

"Any person not in the military or naval forces of the United States, * * * who shall make or cause to be made, or present or cause to be presented, for payment or approval, to or by any person or officer in the civil, military, or naval service of the United States, any claim upon or against the Government of the United States, or any department or officer thereof, knowing such claim to be false, fictitious, or fraudulent, * * * or who enters into any agreement, combination, or conspiracy to defraud the Government of the United States, or any department or officer thereof * * * shall forfeit and pay to the United States the sum of $2,000, and, in addition, double the amount of damages which the United States may have sustained by reason of the doing or committing such act, together with the costs of suit; and such forfeiture and damages shall be sued for in the same suit."

A cause of action cannot operate within the area of the False Claims Act unless a false or fraudulent claim can be established. See United States v. Farina, 153 F.Supp. 819 (D.N.J.1957) and cases cited therein. The United States argues that by submitting the false statements of their monthly receipts, appellees were claiming the right under the Agreements to continue to hold the laundry and dry cleaning concessions on the military installations in the San Francisco Bay Area. A similar argument has been rejected by the Second Circuit in United States ex rel. Kessler v. Mercur Corp., 83 F.2d 178 (2d Cir., 1936), wherein the Government alleged that the defendant had submitted false reports as to its net profits under a percentage lease with the Government.

A claim within the meaning of the False Claims Act is a demand upon the Government for the payment of money or transfer of property. United States v. Borth, 266 F.2d 521 (10th Cir., 1959); United States v. Cochran, 235 F.2d 131 (5th Cir., 1956); United States v. Tieger, 234 F.2d 589 (3rd Cir., 1956); United States v. Schmidt, 204 F.Supp. 540 (E.D.Wis.1962).¹ The allegations made in the complaint do not constitute a demand upon the Government for the payment of money or delivery of property.

We adopt the definition of a claim within the meaning of the False Claims Act as stated in United States v. Cohn, 270 U.S. 339, 46 S.Ct. 251, 70 L.Ed. 616 (1926):

"While the word `claim\' may sometimes be used in the broad juridical sense of `a demand of some matter as of right made by one person upon another, to do or to forbear to do some act or thing as a matter of duty,\' Prigg v. Pennsylvania, 16 Pet. 539, 615 10 L.Ed. 1060, it is clear, in the light of the entire context, that in the present statute, the provision relating to the payment or approval of a `claim upon or against\' the Government relates solely to the payment or approval of a claim for money or property to which a right is asserted against the Government, based upon the Government\'s own liability to the claimant." 270 U.S. at 345-346, 46 S.Ct. at 252-253, 70 L.Ed. 616.

The United States contends that this language² in Cohn was disavowed by the Supreme Court in United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87 L.Ed. 443 (1943). We do not so read that case. In Marcus the defendants worked on PWA projects and were charged with defrauding the United States by collusive bidding. Although the contracts were not made between the federal government and the defendants, a portion of the money paid to them was federal in origin and part of their compensation came from the United States. The Supreme Court of the United States held that the claim need not be made directly against the Government provided that, ultimately, the claim would be paid by the Government. Although the claim in Marcus was made indirectly against the Government, it still was a claim within the definition of Cohn. See United States v. Brown, 274 F.2d 107 (4th Cir., 1960); United States v. Veneziale, 268 F.2d 504 (3rd Cir., 1959). Not only did the Supreme Court distinguish Cohn on its facts, but it also stated that: "The initial fraudulent action and every step thereafter taken pressed ever to the ultimate goal — payment of government money to persons who had caused it to be defrauded" 317 U.S. at 543-544, 63 S.Ct. at 383-384, 87 L.Ed. 443.

In the latest Supreme Court opinion to interpret the False Claims Act, United States v. McNinch, 356 U.S. 595, 78 S.Ct. 950, 2 L.Ed.2d 1001 (1958), the Court found the above quoted language from Cohn still relevant in determining what is a claim within the meaning of the Act. 356 U.S. at 600, n. 10, 78 S.Ct. at 953, 2 L.Ed.2d 1001. The Court also relied on the Third Circuit's definition of a claim as being "a demand for money or for some transfer of public property." 356 U.S. at 599, 78 S.Ct. at 952, 2 L.Ed. 2d 1001.³

In an attempt to sustain their interpretation of a claim within the meaning of the False Claims Act, the United States directs our attention to the broad statements made during the Senate debates at the time the Act was being considered to the effect that it was intended to provide protection against those who attempt to cheat the Government. If the Act were intended to cover any and all attempts to cheat the United States, we doubt that the Congress would have used the word "claim" to specify such an intent. The Supreme Court of the United States has made it clear that the "False Claims Act was not designed to reach every kind of fraud practiced on the Government." United States v. McNinch, supra, 356 U.S. at 599, 78 S.Ct. at 953, 2 L.Ed.2d 1001. See also United States v. Cochran, supra, 235 F.2d at 133-134.

The United States argues that the difference between a situation where the claimant is fraudulently demanding money and one where he is fraudulently seeking a reduction in the amount of money to be paid by him is not one which warrants a different result under the False Claims Act. The effect of both types of conduct is the same in that the Government is defrauded of money to which it is entitled. This reasoning would be valid if we were dealing with a general fraud statute. But the manner in which the fraud occurs is controlling in bringing the False Claims Act into play. To do that, there must be more than mere fraud; the fraud must be predicated on a claim. The fraudulent reduction of appellees' liability to the Government does not spell out a false claim as defined by the statute.⁴

In support of their contention, the United States relies upon Smith v. United States, ...