Schimmels, In re, 95-16937

Decision Date14 October 1997
Docket NumberNo. 95-16937,95-16937
Citation127 F.3d 875
Parties42 Cont.Cas.Fed. (CCH) P 77,182, 97 Cal. Daily Op. Serv. 7975, 97 Daily Journal D.A.R. 12,861 In Re: H. Edwin and Mary Jo SCHIMMELS, Debtors. UNITED STATES of America, Plaintiff-Appellant, v. H. Edwin SCHIMMELS; Mary Jo Schimmels, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Jeffrey A. Clair, Appellate Staff Civil Division, Department of Justice, Washington, DC, for plaintiff-appellant.

Alan R. Smith, Law Offices of Alan R. Smith, Reno, NV, for defendants-appellees.

Appeal from the United States District Court for the District of Nevada; Edward C. Reed, Jr., Senior District Judge, Presiding. D.C. No. CV-94-836-ECR.

Before: FARRIS and TASHIMA, Circuit Judges, and STAGG, Senior District Judge. *

STAGG, Senior District Judge:

On behalf of the United States of America, relators brought a qui tam action under the False Claims Act, 31 U.S.C. § 3729-3731, against defendants, alleging fraud against the government. Relators received partial judgment against defendants who, in turn, filed for bankruptcy. Both relators and the government filed a Proof of Claim in the defendants' bankruptcy case and brought independent adversary proceedings therein concerning the dischargeability of the defendants' False Claims Act debts. The bankruptcy court granted summary judgment in favor of the defendants in the relators' adversary proceeding, and the government's adversary proceeding was subsequently dismissed as res judicata. The government appealed its dismissal to this court. We affirm.

A. The Qui Tam Action.

In 1989, Steven Rudd, Mark Lanterman, Howard Hamby, Debbie Gibson, and Henry Winburn (hereinafter collectively referred to as the "relators") commenced an action in the United States District Court for the Eastern District of Washington under the False Claims Act against General Contractors, Inc. ("GCI"), a sewage and water projects contractor in Spokane, Washington, and several of its officers and shareholders. 1 In their complaint, the relators alleged that the defendants defrauded the government on seven major public works projects (1) by falsely certifying that they had paid their employees in accordance with the wage standards prescribed by the Davis-Bacon Act, 40 U.S.C. §§ 276a-1 and 276C, AND (2)2 by falsifying the results of mandatory structural tests of sewer lines constructed under government contract.

In February 1993, GCI and two of the individual defendants negotiated a settlement with the relators, and a consent judgment was entered against them. H. Edwin Schimmels, the president and a stockholder of GCI, and Mary Jo Schimmels, the company's assistant treasurer and a stockholder (hereinafter collectively referred to as the "Schimmelses"), 3 however, did not settle, and the case continued against them as the last remaining defendants.

On December 15, 1992, the district court entered a partial summary judgment against the Schimmelses, holding that they had violated the False Claims Act by knowingly and falsely certifying to the government that their employees had been paid in accordance with the Davis-Bacon Act. Specifically, the court held that the Schimmelses' contributions to an "employee training trust" did not count as "wages" for the purposes of complying with the Davis-Bacon Act; 4 that the Schimmelses knew or should have known that these contributions could not be considered as "wages"; that the government relied on these representations in making payments under its contracts with the Schimmelses; and that these false wage certifications, therefore, violated the False Claims Act. 5

On March 12, 1993, the district court entered an Order in the relators' qui tam action, specifying damages. The district court found that the Schimmelses had submitted 149 false claims to the government in violation of the False Claim Act and that as a result of these false claims, the government had incurred actual damages in the amount of $14,958. Therefore, the court ordered the Schimmelses to pay treble damages in the amount of $44,874. The district court's March 12, 1993 Order, however, left several issues in the qui tam action unresolved. In particular, the district court (1) reserved judgment on the amount of civil money penalties to be assessed against the defendants; 6 (2) failed to apportion the recovery between the relators and the government as required by 31 U.S.C. § 3730(d)(2); 7 and (3) failed to rule on a second summary judgment motion with respect to other alleged violations of the False Claims Act by the Schimmelses. 8

B. The Bankruptcy Proceedings.

On April 7, 1993, the Schimmelses filed a petition for Chapter 11 bankruptcy in the United States District Court for the District of Nevada. Pursuant to 11 U.S.C. § 362(a), an "automatic stay" took effect, staying all judicial actions against the Schimmelses and all enforcement proceedings against their property. Thus, the relator's qui tam action was effectively brought to a standstill while major issues remained unresolved.

1. The Relators' Motion For Relief From The Automatic Stay.

On July 12, 1993-shortly after commencement of the Schimmelses' bankruptcy proceeding-the relators moved the bankruptcy court for relief from the automatic stay in order to litigate the remaining issues in their qui tam action, including the assessment of penalties, the apportionment of the recovery, and the resolution of the outstanding motion for summary judgment. 9 The bankruptcy court, however, denied the relators' motion, thereby continuing the stay. The relators appealed this ruling to the Bankruptcy Appellate Panel for the Ninth Circuit.

The bankruptcy appellate panel upheld the lower court's order. The panel stated that further litigation of the relators' qui tam action would be futile because any and all judgments rendered in that action would be discharged at the conclusion of the bankruptcy case. The panel reasoned that the Schimmelses' False Claim Act debts would not be exempted from discharge under 11 U.S.C. § 523(a)(2)(A)-as argued by the relators-because they were not incurred through the Schimmelses' specific intent to defraud their creditors-a necessary finding for "nondischargeability" under section 523(a)(2)(A). 10 Moreover, the panel found that the Schimmelses' qui tam debts would not be exempted from discharge under 11 U.S.C. § 523(a)(7) because the penalties imposed under the False Claims Act are compensatory in nature and section 523(a)(7) only exempts debts that are a "fine, penalty, or forfeiture" payable to the government that are not compensatory. The relators appealed the bankruptcy appellate panel's decision to this court.

2. The Relators' Adversary Complaint.

Independent of the aforementioned motion, the relators filed a "Complaint To Determine Dischargeability" in the bankruptcy court on July 12, 1993, seeking a judicial determination as to whether any damages and penalties assessed against the Schimmelses under the False Claims Act would be dischargeable in bankruptcy. 11 However, without reaching the merits of the relators' complaint, the bankruptcy court granted the Schimmelses' motion for summary judgment on January 4, 1994, finding that the relators had failed to file a timely opposition thereto. The relators appealed this ruling to the United States District Court for the District of Nevada, and the district court dismissed the appeal for lack of subject matter jurisdiction, concluding that the relators had not filed a timely notice of appeal from the bankruptcy court's judgment. The relators appealed the district court's decision to this court.

3. The Government's Adversary Complaint.

On July 9, 1993-three days before the relators filed their adversary complaint against the Schimmelses--the government had filed its own adversary complaint on the same issue of dischargeability. This proceeding, however, lay dormant for approximately six months while the bankruptcy court took up the relators' complaint. Finally, in late April 1994, the relators, having lost their own adversary proceeding in bankruptcy court, filed a motion to intervene as plaintiffs in the government's adversary proceeding. The bankruptcy court denied this motion, and the relators appealed to the district court. The government's case against the Schimmelses went forward, and the bankruptcy court entered summary judgment in favor of the Schimmelses, reasoning--like the bankruptcy appellate panel--that all damages and penalties imposed in the qui tam action would be dischargeable under section 1141 of the Bankruptcy Code. The government appealed this decision to the district court.

Consolidating the relators' and the government's appeals, the district court held (1) that the relators' attempt to intervene in the government's adversary proceeding was barred by the doctrine of res judicata because they had already brought their own adversary proceeding against the Schimmelses on this very same issue and lost on the merits and (2) that the summary judgment entered against the relators in their adversary proceeding had full res judicata effect against the United States as well, barring its independent adversary proceeding against the Schimmelses. The district court reasoned that under Rule 41(b) of the Federal Rules of Civil Procedure, 12 the involuntary dismissal of the relators' adversary proceeding had the effect as an "adjudication upon the merits" on this issue and that as the qui tam action had been brought by the United States ex relatione the relators, the government was bound by this decision's res judicata effect. 13 See Record Excerpts at 15-20. The government appealed the district court's decision to this court.

4. Proceedings In The Ninth Circuit.

On appeal, the government informed this court that the relators had previously filed related appeals from the bankruptcy appellate panel's decision on...

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