U.S. v. Race

• Decision Date: 25 September 1980
• Docket Number: No. 78-5140,78-5140
• Parties: 28 Cont.Cas.Fed. (CCH) 80,739 UNITED STATES of America, Appellee, v. David G. RACE, Thomas A. Blocker, Michael G. Leatherwood, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1114

632 F.2d 1114

28 Cont.Cas.Fed. (CCH) 80,739

UNITED STATES of America, Appellee, v. David G. RACE, Thomas A. Blocker, Michael G. Leatherwood, Appellants.

No. 78-5140.

United States Court of Appeals, Fourth Circuit.

Argued April 9, 1980.

Decided Sept. 25, 1980.

Peter R. Kolker, Washington, D. C. (Zuckerman, Spaeder & Taylor, Washington, D. C., on brief), for appellants.

J. Clifford Ryan, Asst. U. S. Atty., Charleston, S. C., Mark N. Stempler, Trial Atty., U. S. Navy, Washington, D. C. (Thomas E. Lydon, Jr., U. S. Atty., Columbia, S. C., Carolyn J. Adams, Third Year Law Student, on brief), for appellee.

Before RUSSELL, WIDENER and PHILLIPS, Circuit Judges.

DONALD RUSSELL, Circuit Judge:

The defendants Race, Blocker, and Leatherwood appeal their conviction under an indictment charging the submission by the defendants of false and fraudulent invoices for payment of services and materials rendered a division of the Department of Navy in violation of §§ 2, 371, and 1001, 18 U.S.C. We reverse.

The prosecution arose out of the performance by Consolidated Services, Inc. (hereafter CSI), an engineering firm wholly owned and operated by the defendants, under a contract with the Naval Supply Center at Charleston, South Carolina, as the procurement arm of the Department of Navy in the Southeastern Region, for the delivery of labor and services as ordered by the Naval Electronics Engineering Center (hereafter NAVELEX), a Naval operational unit. CSI had been engaged in work-presumably similar to that with which the challenged contract was concerned-for the Navy for several years prior to the execution of this contract. Until 1975 this work had been performed under fixed price contracts. In February of that year, however, the Naval Supply Center began to use in its contracts with CSI, a unique type of contract described as one indefinite in quantity, time and materials but subject to an overall dollar limit. This form of contract, it was explained, was used when it was not possible at the time of the contract award to estimate the extent and duration of the work or to anticipate costs. Such contract would set forth the hourly rate chargeable to the Navy for the workers and the materials required for any work and certain other charges allowable under the contract. All work under the contract was to be made only pursuant to delivery orders. All these delivery orders repeated the general provisions of the contract and in particular the agreed payment rate for the services or materials requested. Thus if the work involved the use of a plumber the wage rate to be paid for such plumber would be stated in the delivery order as prescribed in the contract by the authorized employee of NAVELEX and, similarly, if the work was to be performed at a point away from Charleston for which a per diem was allowable, that, along with the rate to be paid as per diem would be set forth in the delivery order. Payment by the Navy under the contract was made in accordance with billings covering these delivery orders.

The first of such indefinite contracts between CSI and the Naval Supply Center was executed in February, 1975. That contract, referred to in the record as 113, has been fully performed and audited. The Navy apparently has made no claim of improper charges or fraud in connection with that contract but the contract is relevant, because of its similarity to the contract which provides the basis for the prosecution and because of the construction given by the Navy and the defendants to the provisions in that contract which are similar to those in the challenged contract. The contract, which is the centerpiece of this prosecution and is referred to as 061, was executed later. It, too, was indefinite in quantity, time, and materials and had an approximate limit of a million dollars. It was in connection with this second contract that CSI, under the alleged direction of the defendants, made the billings, which form the basis for the charges in the indictment under § 1001.

The elements of an offense under § 1001 are the making (a) "in any matter within the jurisdiction of any department or agency of the United States," of (b) a false statement of (c) material fact with (d) fraudulent intent. United States v. Weatherspoon, (7th Cir. 1978) 581 F.2d 595, 601; United States v. Glazer, (2nd Cir.) 532 F.2d 224, 228, cert. denied, 429 U.S. 844, 97 S.Ct. 123, 50 L.Ed.2d 115 (1976); United States v. McCue, (2nd Cir.) 301 F.2d 452, 454, cert. denied, 370 U.S. 939, 82 S.Ct. 1586, 8 L.Ed.2d 808 (1962). These elements are sequential. Thus, the two threshold issues that must first be answered in every case under § 1001 are the involvement of an agency of the United States and the falsity of the statement. Unless those two facts are established there is no need to consider either the materiality of the statement or whether it was made knowing it was false or, as some cases put it, with fraudulent intent, and the prosecution must fail. The controverted billings (except for the three small items) ¹ fall into two broad groups, both of which the Government contends were false, material and fraudulent and thus within the statute: (1) billings in amounts in excess of the amounts allowable under the contract; ² and (2) billings for work and/or materials which, though performed and furnished, were not properly authorized in advance. The Government contends that the billings in the first group which were in excess of the amounts authorized under the contract consisted of (1) invoices for per diem for work done more than fifty miles from Charleston, (2) invoices covering a charge for handling materials, and (3) invoices for mileage allowances. The other group of billings in controversy (save for two or three minor items), represented claims for which the Government claimed there was no validly authorized delivery order. This group consisted of (1) cross-billing, ³ (2) overtime billing, ⁴ (3) subcontracting ⁵ and (4) partial billing. ⁶

The charge involving the first group of billings (i. e., those claimed to be stated in amounts greater than authorized in the contract) was defended by the defendants primarily on the ground that the Government had not met the threshold requirement of proof that the billings were false or inaccurate. In effect, the defendants defended as to these items by asserting the billings were in accordance with the terms of the contract itself and were not false. This presented basically a question of the construction of the pertinent terms of the contract. Save in the exceptional cases, such a question presents an issue to be resolved solely by the court. The billings in the second group, on the other hand, depend for their validity upon the existence of departures from the language of the contract either authorized by valid oral changes or supported by such evidence of acquiescence or ratification as to amount to a valid change in the contract. Those issues represent primarily questions of fact to be resolved by the jury in the event of dispute. In this case there is a dispute whether these contract changes were in fact validly authorized and whether the billings were issued with fraudulent intent. The District Court properly, therefore, submitted those issues to the jury on the basis of the record then before it. We are, however, of the opinion that the District Court erred in concluding that the billings in the first group, covering what was alleged to be excess billings, were false and fraudulent and in failing to dismiss as a matter of law the charges based on billings for per diem and material handling. Since these billings were an integral part of all the charges against the defendants, the failure of the District Court to eliminate these billings from the consideration of the jury requires the reversal of the convictions. Our reasons for this conclusion will require a separate discussion of the three types of billings involved in this first group. We begin with the per diem billings for work done more than fifty miles from Charleston.

The written contract itself was quite specific on what per diem payments CSI was entitled to under the contract. It began by declaring unequivocally that "Per Diem shall not be paid for services performed at Contractors' Charleston area facility or at any location within a fifty (50) mile radius of NAVELEXSYSENGCEN." It was equally emphatic, as set forth in the next succeeding sentence, that "Per Diem will be paid in accordance with the provisions of the Military Joint Travel Regulation for civilians in amounts as shown both in CONUS and Overseas. Per Diem rates will be indicated in each Delivery Order." (Italics added) The testimony was that, in connection with performance under the contract, the issuing officer in NAVELEX would secure from Mrs. Walsh, designated in the contract as "the representative of the Contracting Officer (to) be contacted for contract administration purposes," the appropriate per diem rate, as stated in the "Military Joint Travel Regulation," to be used in each delivery order for per diem, and he would insert this rate in each delivery order issued to CSI covering per diem. ⁷ Generally this rate was $33.

In its billing CSI used always precisely the same figure for its billing charges as was set forth by the issuing officer of NAVELEX in the delivery order. This method of billing for per diem followed the procedure followed by CSI when it had billed for per diem under its earlier indefinite contract, in which the contractual provision for payment of per diem was the same as in the contract in question. In May, 1975 the earlier contract had been audited before performance commenced under the contract in question. The auditor was advised at that time that CSI was interpreting the contract provision as entitling it to payment of per diem in accordance with Military Joint Travel Regulation, irrespective of what CSI might pay its employees for per diem. CSI made...