U.S. ex rel. Longhi v. Lithium Power Technologies

• Decision Date: 23 March 2007
• Docket Number: Civil Action No. H-02-4329.
• Citation: 481 F.Supp.2d 815
• Parties: UNITED STATES of America, ex rel. Alfred J. LONGHI, Jr., Plaintiffs, v. LITHIUM POWER TECHNOLOGIES, INC., and Mohammed Zafar A. Munshi, Defendants.
• Court: U.S. District Court — Southern District of Texas

481 F.Supp.2d 815

UNITED STATES of America, ex rel. Alfred J. LONGHI, Jr., Plaintiffs, v. LITHIUM POWER TECHNOLOGIES, INC., and Mohammed Zafar A. Munshi, Defendants.

Civil Action No. H-02-4329.

United States District Court, S.D. Texas, Houston Division.

March 23, 2007.

Andrew A. Bobb, US Attorneys Office, Houston, TX, Mitch Kreindler, Kreindler & Associates, P.C., Houston, TX, for Plaintiffs.

David C. Holmes, Solomon Law Firm PC, Houston, TX, for Defendants.

MEMORANDUM OPINION ON SUMMARY JUDGMENT

MILLER, District Judge.

Defendants Lithium Power Technologies, Inc. and Mohammed Zafar A. Munshi (jointly and interchangeably referred to as "LPT" or "Munshi") bring this motion for summary judgment with respect to the qui tam¹ claims of the relator Alfred J. Longhi ("Longhi" or "relator") brought against them under 31 U.S.C. §§ 3729-3733, the federal False Claims Act ("FCA"). Dkt. 91. "[T]he FCA imposes civil liability upon `any person' who, inter alia, `knowingly presents, or causes to be presented, to an officer or employee of the United States Government ... a false or fraudulent claim for payment or approval.²'" Defendants allege that "[r]elator lacks standing to assert his claims in this lawsuit," because he purportedly executed a release agreeing not to sue LPT and indemnify defendants if he did. Dkt. 36 ¶ 166. After 4 review of the applicable standard for summary judgment, the litigants' arguments addressing relator's claims and the applicable law, defendants' motion for summary judgment on relator's claims based on the release is DENIED. Dkt. 36.

I. FACTUAL BACKGROUND

In 1997, Relator invested $130,000 to purchase a 8.4% stake in LTP. Dkt. 27 at 4. This stake equated to 12,083 shares in LPT common stock. Dkt. 27 at 4, Dkt. 37, EX. 2 at 1. The shares were issued to The Kathleen M. Longhi Living Trust (the "Trust"). Dkt. 37, EX. 2, at 1. While Longhi signed the stock sale agreement as trustee of the Trust, it is unclear from the record whether Longhi was a beneficiary of the Trust. Dkt. 92 at 8-9, but see Dkt. 37, EX. 2 at 1 (Defendant Munshi stating that "it is my understanding that Mr. Longhi was the trustee and possibly a beneficiary of the Trust.") (emphasis added).

In March 2000, Relator joined LTP as an employee. Dkt. 27 at 4. During his employment relator claims he became aware of defendants' alleged scheme to defraud the government in contracts solicited by LTP under the federal Small Business Innovation Research Program ("SBIR"). Dkt. 27. On November 18, 2002, relator filed his action under seal, as is required by the FCA. Dkt. 27 at 4; Dkt. 36 at 1. Eleven days later, on November 29, 2002, the Trust executed a stock sale and conveyance agreement, selling its 12,083 shares to Munshi's wife for $80,000. Dkt. 91, Ex.2. In conjunction with the stock sale agreement, relator purportedly executed a general release as well as a covenant agreeing not to sue LPT. Id. On December 17, 2002, the government obtained a search warrant. Dkt. 96 at 3-4. The United States, after a lengthy investigation, which it suggests did not start in earnest until about December 17, 2002, ultimately chose to intervene in the matter almost 3 years later in 2005. Id. at 4.

II. STANDARD OF REVIEW

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. Cry P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party moving for summary judgment must demonstrate that there are no genuine issues of material fact. Warfield v. Byron, 436 F.3d 551, 557 (5th Cir.2006). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S, 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Fordoche, Inc. v. Texaco, Inc., 463 F.3d 388, 392 (5th Cir.2006). An issue is "material" if its resolution could affect the outcome of the action. Anderson, 477 U.S. at 248, 106 S.Ct. 2505; Daniels v. City of Arlington, Tex., 246 F.3d 500, 502 (5th Cir.2001), cert. denied, 534 U.S. 951, 122 S.Ct. 347, 151 L.Ed.2d 262 (2001).

The moving party bears the initial burden of informing the court of all evidence demonstrating the absence of a genuine issue of material fact. Celotex Carp. v. Catrett, 477 U.S. at 323, 106 S.Ct. 2548. Only when the movant has discharged this initial burden, does the burden shift to the non-moving party to demonstrate that there is a genuine issue of material fact. Id. at 322, 106 S.Ct. 2548. If the moving party fails to meet this burden, then it is not entitled to a summary`judgment and no defense to the motion is required. Id.

In responding to a properly supported summary judgment motion, the non-movant cannot merely rely on its pleadings, but must present specific and supported material facts, of significant probative value, to preclude summary judgment. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 11, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Guillory v. PPG Indus., Inc., 434 F.3d 303, 309 (5th Cir.2005). In determining whether a genuine issue of material fact exists, the court views the evidence and draws inferences in the light most favorable to the non-moving party. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505; Richardson v. Monitronics Int'l Inc., 434 F.3d 327, 332 (5th Cir.2005).

III. ANALYSIS

The court finds the release unenforceable for the following reasons. First, the release is invalid because of public policy demands and the pro-plaintiff posture of the FCA. Second, the release is also invalid under the plain language of the FCA. Statutory construction suggests that a release entered into during the proscribed 60-day investigatory period unduly interferes with the United States' exclusive and unilateral right during that time to evaluate whether to join the qui tam action. Defendants argue that the release should be analyzed under contract law. Even in the event that the court performed such a review, the defendants have not met their burden for summary judgment.³ However, such an analysis here would be contrary to the federal common law principles expressed in Town of Newton v. Rumery, 480 U.S. 386, 107 S.Ct. 1187, 94 L.Ed.2d 405 (1987). Therefore, the court declines the invitation. In addition, defendants' counterclaim for breach of contract and indemnification must collapse under the same analysis as the release, because one cannot exist without the other. And finally, case law squarely on point suggests that any indemnification of a qui tam defendant by the relator fails as a matter of law.

1. The Enforceability of Longhi's Release

A. The Public Policy Rationale

"The qui tam provisions of the False Claims Act create incentives for potential whistle blowers to assist the government to discover fraud against the taxpayers." United. States v. United States ex rel. Thornton, 207 F.3d 769, 771 (5th Cir.2000) (citing Hall). "The FCA allows a private citizen with special knowledge of fraud against the government to commence suit in the name of the government." Id. (citing 31 U.S.C. § 3730(b)(1) (1999)) (emphasis added). As the United States correctly points out, it is in the public interest to protect the federal treasury and ensure the integrity and honesty of those that receive payments from the government. Dkt. 96 at 12. Enforcement of the release would run counter to this public policy and serve to potentially shield those who allegedly commit fraud against the United States. Id

(i) Applying Town of Newton v. Rumery⁴

Under federal common law "a promise is unenforceable if the interest in its enforcement is outweighed in the circumstance by a public policy harmed by enforcement of the agreement." Rumery, 480 U.S. at 392, 107 S.Ct. 1187. Courts have applied Rumery to a broad spectrum of pre- and post-filing releases of qui tam claims entered into without the United States' knowledge or consent. See, e.g. United States ex rel. Bahrani v. Conagra, Inc., 183 F.Supp.2d 1272 (D.Colo.2002) (denying defendants' motion to dismiss and finding a pre-filing release invalid because the government only started investigating the matter a number of weeks after the filing of the qui tam action), rev'd on other grounds, 465 F.3d 1189 (10th Cir.2006); Brown v. City of South Burlington, 393 F.3d 337, 338 (2d Cir.2004) (analyzing a pre-filing release related to a qui tam action under contract law but allowing the case to go to trial to determine whether the release had been obtained under duress); United States ex rel. Gebert v. Worldwide Technology, Inc., 260 F.3d 909 (8th Cir.2001) (distinguishing, its facts from Green and finding a pre-filing release of a qui tam claim in a bankrupcty estate valid); United States ex rel., Hall v. Teledyne Wah, Chang Albany, 104 F.3d 230, 233 (9th Cir.1997) (upholding a pre-filing release because the government had already fully and extensively investigated the allegations for approximately two years prior to the filing of the qui tam action and for some time subsequent to the filing, and based on its findings, had declined to intervene); United States ex rel. Green v. Northrop Corp., 59 F.3d 953, 956, 969 (9th Cir.1995) (finding a pre-filing release invalid).

As defendants correctly state, Rumery has two prongs that must be satisfied in order for this common law exception to apply: (1) public policy must actually be harmed by enforcement of the release at issue, and (2) public policy must outweigh the interest in enforcing the release. Dkt. 92 at 19. Defendants further argue that plaintiffs have not met their burden of proof under Rumery. Id. As the discussion below will show, the plaintiffs — assuming they did indeed have this burden — have met it.⁵ The public policy at issue...