Federal Insurance Co. v. United States, 021318 FED2, 16-2967-op

Docket Nº:16-2967-op, 16-3402-cr
Opinion Judge:Gerard E. Lynch, Circuit Judge.
Party Name:Federal Insurance Company, as subrogee of Science Applications International Corporation, now known as Leidos Holdings Inc., Petitioner, v. United States of America, Respondent. United States of America, Appellee, v. Mark Mazer, Dimitry Aronshtein, Svetlana Mazer, Larisa Medzon, Anna Makovetskaya, Carl Bell, Gerard Denault, Padma Allen, Reddy ...
Attorney:William B. Pollard (Amy C. Gross, on the brief), Duane Morris LLP, New York, NY, for Petitioner/Appellant. Jacob E. Warren (Andrew D. Goldstein, Howard Master, Michah W.J. Smith, on the brief), Assistant United States Attorneys, for Geoffrey Berman, Interim United States Attorney, Southern Distri...
Judge Panel:Before: Parker, Lynch, and Carney, Circuit Judges.
Case Date:February 13, 2018
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Federal Insurance Company, as subrogee of Science Applications International Corporation, now known as Leidos Holdings Inc., Petitioner,

v.

United States of America, Respondent.

United States of America, Appellee,

v.

Mark Mazer, Dimitry Aronshtein, Svetlana Mazer, Larisa Medzon, Anna Makovetskaya, Carl Bell, Gerard Denault, Padma Allen, Reddy Allen, Technodyne LLC, Science Applications International Corporation, Defendants, Federal Insurance Company, as subrogee of Science Applications International Corporation, now known as Leidos Holdings Inc., Appellant.

Nos. 16-2967-op, 16-3402-cr

United States Court of Appeals, Second Circuit

February 13, 2018

Argued: August 29, 2017

These related cases stem from an extended fraud committed against the City of New York between 2003 and 2011. Science Applications International Corporation ("SAIC") was the lead contractor on New York's CityTime project, an effort to update the City's time-keeping and management software. Several SAIC employees, including Carl Bell, conspired to obtain bribes and kickbacks from one of SAIC's subcontractors on the CityTime project in exchange for steering work to that entity at inflated prices. The employees were eventually convicted, and SAIC entered into a deferred prosecution agreement taking responsibility for its part in the scheme. In 2014, SAIC successfully argued to its insurer, Federal Insurance Company ("Federal"), that the improper payments obtained by Bell and his coconspirators triggered an Employee Theft Insurance Policy that covered a portion of the relevant period. After making a $15 million payment to SAIC, Federal entered Bell's criminal case and attempted to recover its payment. These cases concern Federal's efforts to obtain restitution from Bell or, in the alternative, to assert a priority interest in his forfeited property.

Federal's petition for mandamus to challenge the district court's denial of its application for restitution is brought pursuant to the Crime Victims' Rights Act ("CVRA"), 18 U.S.C. § 3771. Assuming that Federal could overcome various procedural obstacles identified by the government, its petition nevertheless fails on the merits because the district court did not abuse its discretion when it concluded that SAIC's own criminal conduct precluded it-and, by extension, Federal-from obtaining restitution from Bell. Accordingly, Federal's petition for mandamus relief is DENIED.

Federal also appeals the district court's order summarily dismissing its petition in Bell's forfeiture proceeding, in which Federal claimed superior rights to the forfeited property pursuant to 21 U.S.C. § 853(n). Federal asserted that a constructive trust in favor of SAIC should be imposed on the subject property because that property was traceable to bribes and kickbacks that Bell improperly obtained by virtue of his position as an SAIC employee. We conclude that the district court failed to make adequate factual findings regarding whether SAIC's allegedly unclean hands should bar it from obtaining an equitable remedy, and if such a remedy remains available, whether the property was traceable to bribes and kickbacks actually obtained at SAIC's expense. The district court's order of dismissal is thus VACATED and the matter is REMANDED for further proceedings consistent with this opinion.

William B. Pollard (Amy C. Gross, on the brief), Duane Morris LLP, New York, NY, for Petitioner/Appellant.

Jacob E. Warren (Andrew D. Goldstein, Howard Master, Michah W.J. Smith, on the brief), Assistant United States Attorneys, for Geoffrey Berman, Interim United States Attorney, Southern District of New York, New York, NY, Respondent/Appellee.

Before: Parker, Lynch, and Carney, Circuit Judges.[*]

Gerard E. Lynch, Circuit Judge.

These related cases stem from an extended fraud committed against the City of New York between 2003 and 2011. Science Applications International Corporation ("SAIC") was the lead contractor on New York City's so-called CityTime project, an effort to update the City's time-keeping and management software. Several SAIC employees, including Carl Bell, conspired to obtain bribes and kickbacks from one of SAIC's subcontractors on the CityTime project in exchange for their steering work to that entity at inflated prices. The employees were eventually convicted in the United States District Court for the Southern District of New York (George B. Daniels, J.), and SAIC entered into a deferred prosecution agreement taking responsibility for its part in the scheme. In 2014, SAIC successfully filed a claim under an Employee Theft Insurance Policy provided by Federal Insurance Company ("Federal") on the theory that the improper payments obtained by Bell and his coconspirators constituted the wrongfully appropriated property of SAIC. After making a $15 million payment to SAIC, Federal entered the criminal case against Bell in an effort to recover its payment. The present appeals concern Federal's efforts either to obtain restitution from Bell or, in the alternative, to assert a priority right in the property that he agreed to forfeit as proceeds of his crimes.

The district court rebuffed both of Federal's attempts to obtain relief below. First, Federal moved pursuant to the Crime Victims' Rights Act ("CVRA"), 18 U.S.C. § 3771, for an order of restitution to be entered in its favor as part of Bell's sentence. The district court denied the motion, and in the matter before us designated No. 16-2967-op, Federal seeks a writ of mandamus directing the district court to order restitution in its favor. Although the government has identified numerous procedural obstacles that might prevent Federal from obtaining that remedy, we need not resolve all of the questions of statutory interpretation raised by the government's arguments. We conclude that, even assuming Federal could overcome the applicable procedural obstacles, its petition nevertheless fails on the merits. The district court did not abuse its discretion when it concluded that SAIC's own criminal conduct precluded it-and, by extension, Federal as its subrogee-from obtaining restitution from Bell. Accordingly, Federal's petition for mandamus relief is DENIED.

Second, Federal filed a petition in connection with the government's application to forfeit the proceeds of Bell's crimes, claiming superior rights to Bell's forfeited property pursuant to 21 U.S.C. § 853(n). Federal asserted that a constructive trust should be imposed on the subject property in favor of SAIC, because the property was traceable to bribes and kickbacks that Bell improperly obtained by virtue of his position as an SAIC employee. The district court summarily dismissed Federal's petition, and, in the case before us designated No. 16-3402-cr, Federal appeals that order. We conclude that the district court failed to make adequate factual findings regarding whether SAIC's allegedly unclean hands should bar it from obtaining an equitable remedy, and, if such a remedy remains available, whether the property was traceable to bribes and kickbacks actually obtained at SAIC's expense. The district court's order of dismissal is thus VACATED and the matter is REMANDED to the district court for further proceedings consistent with this opinion.

BACKGROUND]

I.

Factual Background

In 2000, SAIC became the lead contractor on CityTime, a New York City initiative to modernize its timekeeping and payroll system (the "Project"). Between 2003 and 2011, Gerard Denault, SAIC's Program Manager for the Project, and Carl Bell, its Chief Systems Engineer, conspired with others to steer CityTime-related work to Technodyne LLC, a subcontractor that provided information technology consulting staff for the Project, at inflated prices, in exchange for kickbacks and bribes. Over the course of the scheme, Technodyne was paid approximately $325 million for its work on the Project, out of which millions of dollars were kicked back to Bell and Denault.

SAIC initially had a fixed-price contract with the City, meaning that SAIC had committed to fulfilling its obligations under the contract for a specified price, regardless of its actual costs. Because SAIC bore any excess costs, including the costs of its employees' kickback scheme, by the end of 2005 it was "losing millions of dollars on the Project." RA at 183.2 That year, however, SAIC began negotiations with the City to convert the contract to what was essentially a "cost-plus" payment plan, in which the City would pay SAIC for its work on an hourly basis using a formula that factored in the price of subcontractor labor. Such a plan would effectively shift the burden of cost overruns to the City. At Denault's eventual criminal trial, Bell (who testified for the government) identified Denault as the "champion" of the contract amendment. RA at 78. Both Bell and Denault understood that the adoption of the cost-plus amendment would enable them...

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