473 F.3d 506 (3rd Cir. 2007), 04-3374, United States ex rel. Atkinson v. PA. Shipbuilding Co.
|Citation:||473 F.3d 506|
|Party Name:||UNITED STATES of America, ex rel., Paul E. ATKINSON; Eugene Schorsch v. PA. SHIPBUILDING CO.; First Fidelity Bank, N.A.; Sun Ship, Inc., Paul E. Atkinson, Appellant.|
|Case Date:||January 12, 2007|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued on November 15, 2005
Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 94-cv-07316) District Judge: Honorable William H. Yohn, Jr.
[Copyrighted Material Omitted]
John G. Harkins, Jr., Esquire, (Argued), Eleanor M. Illoway, Esquire, David W. Engstrom, Esquire, Harkins Cunningham, Philadelphia, PA, for Appellee Sun Ship Inc.
Thomas H. Lee, II, Esquire, (Argued), Veronica B. Rice, Esq., Dechert LLP, Philadelphia, PA, Joseph O. Click, Esquire, Blank Rome LLP, Washington, DC, for Appellee PA Shipbuilding Co.
Joseph G. DeRespino, Esquire, (Argued), Robert J. Dougher, Esquire, DeRespino & Dougher, Philadelphia, PA, for Appellee Fidelity Bank.
William N. France, Esquire, (Argued), Healy & Baillie LLP, New York, NY, for Appellant.
Before: FUENTES, BECKER[*], and ROTH[**], Circuit Judges
ROTH, Circuit Judge
Paul Atkinson claims that certain companies conspired to and did defraud the United States Navy in connection with a contract to build oil tankers. Atkinson brought a qui tam action 1under the False Claims Act ("FCA" or "the Act"), 31 U.S.C. § § 3729-33, 2 alleging both false claims and "reverse" false claims. Following submission of the Third Amended Complaint, the District Court dismissed all of the claims, relying on both jurisdictional and substantive deficiencies. While we will affirm the District Court, we do so for different reasons.
I. Factual Background
Plaintiff/relator Paul Atkinson brought this action based on fraud allegedly perpetrated on the Navy by Sun Ship Inc., Pennsylvania Shipbuilding Co., and First Fidelity Bank, N.A. (Fidelity), in connection with the construction of Henry J. Kaiser class Oiler ships.3 Detailing the alleged fraud requires discussing both Penn Ship's corporate history and the events leading up to the Oiler contract. Although we decide this case on jurisdictional grounds, we will set forth the facts as Atkinson has alleged them.4
In 1980, Sun Ship decided to get out of the shipbuilding business. This enabled Sun Ship's parent company, Sun Co., to record a large loss reserve from which it was able to obtain a substantial tax benefit provided it did not go back into the shipbuilding business. However, Sun Ship had outstanding obligations which it could not discontinue without incurring large contractual liability. Accordingly, Sun Ship decided to continue to build ships via nominally independent companies. This enabled Sun Co. to obtain the tax benefit without breaching any of its contractual obligations.
In accordance with this plan, Sun Ship sold the Chester Shipyard in Chester,
Pennsylvania, to three companies controlled by Edward E. Paden, Chairman of Levingston Shipbuilding Co. Atkinson alleges that Levingston was not financially sound at the time of sale and that Paden sought Sun Ship's help in obtaining Navy work for Levingston prior to the announcement of the deal. Sun Ship and Levingston allegedly agreed that Sun Ship would assist Levingston's pursuit of Navy contracts and that Levingston would take over Sun Ship's existing shipbuilding operations and perform Sun Ship's backlog of shipbuilding obligations. The sales agreement provided that three separate Paden companies would take title to the Chester Shipyard. Only one of those companies, Penn Ship, is a party to the current suit. The sales contract contained restrictive covenants that prevented Penn Ship from guarantying Levingston's obligations, making loans to Levingston, or investing in Levingston. The purpose of these restrictions, according to Atkinson, was to ensure Sun Company's tax write-off.
Two years later, Paden sold a controlling share of his ownership in Capital Marine Corporation (CMC), the corporate parent of Paden's companies including Levingston, to City Capital Corp., controlled by Thomas C. Weller, Jr., Leland Moore, and Ronald J. Stevens. The Navy solicited bids for oil tankers in 1984. According to Atkinson, Penn Ship and Sun Ship acted together in an effort to misrepresent Penn Ship's financial condition to enable it to obtain the Oiler contract. This was accomplished by the use of allegedly false financial statements that concealed the fact that Penn Ship, despite the restrictive covenants in the sales agreement between Sun Co. and Paden, was propping up Levingston financially. A possible Levingston bankruptcy could have impeded Penn Ship's ability to fulfill the Navy contract because Levingston held a lease on a floating drydock at the Chester Shipyard--an essential piece of equipment for building the Oilers. If creditors foreclosed on the drydock, Penn Ship would be unable to continue construction.
On December 21, 1984, Penn Ship submitted a Best and Final Offer (BAFO) to build the ships. Of the five bids the Navy received, Penn Ship's was by far the lowest. In part, this was the result of Penn Ship's failure to include the cost of architectural and naval drawings necessary for completion of the project.
Although the Navy's solicitation offer was silent as to performance guarantees, after the Navy had accepted Penn Ship's bid, it asked Penn Ship to provide security against reprocurement costs in the event of default. This posed a problem for both the Navy and Penn Ship because requiring a performance bond would have necessitated a new solicitation of offers.5 To avoid this, Thomas Weller, Chairman of Penn Ship, sent a letter to the Navy suggesting a Trust Indenture.6 The Navy was to be the beneficiary of a trust, the assets of which were to be security interests in most of the Chester Shipyard property. Fidelity was to be appointed trustee.
The letter contained three statements that Atkinson alleges were false: first, that significant cost overruns were highly unlikely; second, that the Trust Indenture was irrevocable; and, third, that the Trust assets would consist of a security interest in the entire Penn Ship facility at Chester.
On March 26, 1985, the Navy accepted the Trust Indenture. Under its terms,
Penn Ship was to record the security instruments comprising the res of the trust. Penn Ship failed to perform this obligation, and the interests were never recorded. Fidelity, the trustee, never sought to ensure that Penn Ship recorded the security interests, did not record them itself, and never informed the Navy of Penn Ship's failure to record. Penn Ship and the Navy entered into the Oiler contract on May 6, 1985. Despite the original solicitation offer, the final contract called for the construction of only two Oilers with an option, which the Navy later exercised, for two more.
Near the end of 1987, Penn Ship informed the Navy that it was having trouble paying subcontractors. In the spring of 1989, Penn Ship reported that it had reached a tentative agreement with Avondale Industries, Inc., to take over construction of the two additional Oilers ordered pursuant to the contract option. In June of 1989, the Navy signed Modification 05, which deleted the option Oilers from its contract with Penn Ship. The Navy renegotiated with Avondale for construction of the two option ships. In addition, Modification 05 changed Penn Ship's compensation structure from a cost reimbursement incentive price plan to a fixed price contract for $331,400,000. In January 1989, the Navy and Penn Ship agreed to Modification 11, which permitted the Navy to make advance payments to Penn Ship of up to seventeen million dollars and provided that the drydock would act as security.7
After Modification 11 became effective, Penn Ship told the Navy that it was unable to perform the contract. In late August 1989, the Navy and Penn Ship signed Modification 17 (the Default Modification), which stipulated that Penn Ship was in default and provided that the contract would be transferred to another company for completion. The Trust Indenture was terminated and Penn Ship was released from liability under the contract, except for certain reprocurement costs and other liabilities. To secure these liabilities, the Navy obtained an additional two million dollar security interest in the floating drydock, a subordinated mortgage on some real estate that was mortgaged under the Trust Indenture, and a preferred mortgage on a floating derrick. The purpose of these interests was to encourage Penn Ship to use its best efforts to sell collateral so that some of those funds could be applied to Penn Ship's reprocurement obligations.
Atkinson claims that Penn Ship did not use its best efforts to sell the collateral and, in any event, Penn Ship was unsuccessful in doing so. After the period for the sale of collateral had expired, Penn Ship sold the derrick to Maritime Capital Corp (MCC), a corporation controlled by the Thomas Weller family of corporations. In its offer of sale to MCC, Penn Ship incorrectly asserted that title to the derrick was free and clear of encumbrances. This claim was false because of Penn Ship's obligations to the Navy. MCC then sold the derrick to Donjon Marine Co., Inc., a good faith purchaser for value with no notice of the Navy's unrecorded security interest. This bill of sale also asserted that MCC owned the derrick free of encumbrances.
On January 13, 1992, Penn Ship and the Navy entered into Modification 20, which released Penn...
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