U.S. ex rel. Augustine v. Century Health

• Decision Date: 07 May 2002
• Docket Number: No. 01-5019.,01-5019.
• Citation: 289 F.3d 409
• Parties: UNITED STATES of America, ex rel.; Edward T. AUGUSTINE, Plaintiffs-Appellees, v. CENTURY HEALTH SERVICES, INC., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

289 F.3d 409

UNITED STATES of America, ex rel.; Edward T. AUGUSTINE, Plaintiffs-Appellees, v. CENTURY HEALTH SERVICES, INC., et al., Defendants-Appellants.

No. 01-5019.

United States Court of Appeals, Sixth Circuit.

Argued March 19, 2002.

Decided and Filed May 7, 2002.

COPYRIGHT MATERIAL OMITTED

Rachel L. Waterhouse, Office of the U.S. Attorney, Nashville, TN, Douglas N. Letter (briefed), Michael D. Taxay (argued and briefed), U.S. Department of Justice, Civil Division, Appellate Section, Washington, DC, Stanley E. Keen, U.S. Department of Labor, Office of the Solicitor, Atlanta, GA, Robert T. Bateman (briefed), Bateman & Bateman, Clarksville, TN, for Plaintiffs-Appellees.

John S. Colley, III, Colley & Colley, Columbia, TN, William P. Suriano (argued and briefed), Law Offices of William P. Suriano, Riverside, IL, for Defendants-Appellants.

Before: SILER and GILMAN, Circuit Judges; HEYBURN, Chief District Judge.^*

OPINION

GILMAN, Circuit Judge.

Century Health Services, Inc. (CHS), a holding company for a number of home healthcare agencies, established an Employee Stock Ownership Plan (ESOP) in 1993 and appointed its top two officers, George Gilley and Bill Goforth, to serve as the trustees. CHS later submitted Medicare cost reports to the Health Care Financing Administration (HCFA) in order to be reimbursed for the company's anticipated contributions to the ESOP as a component of employee expenses. Based upon these cost reports and other submitted documents, the government paid CHS a total of $2,540,715 in 1994 and 1995. CHS used the HCFA payments to contribute over $2,760,000 to the ESOP during the two years in question. But because substantially all of these contributions were promptly withdrawn by CHS for its general corporate use, the government claims that CHS, Gilley, and Goforth (collectively, the defendants) obtained and kept the Medicare funds in violation of the False Claims Act (FCA). After a bench trial, the district court held the defendants liable for $7.62 million in treble damages ($2,540,715 × 3) and $100,000 in civil penalties pursuant to the FCA. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. Factual background

CHS established an ESOP on September 29, 1993. The trustees of the ESOP were George Gilley, the Chairman of the Board of CHS, and Bill Goforth, the President and CEO of CHS. As a healthcare agency, CHS was eligible for reimbursement by the HCFA for ESOP contributions when and to the extent those costs were "actually incurred." Provider Reimbursement Manual 2141.2; 42 C.F.R. §§ 413.1, 413.5, and 413.9. In order to be reimbursed by the HCFA, however, a healthcare agency has to submit cost reports and cost statements. Id.

The district court found that CHS submitted

22 cost reports and cost statements for fiscal years 1993 and 1994 claiming that the ESOP contribution costs were reimbursable by Medicare. Each of the 1993 and 1994 cost reports included the following certification by CHS's signatory: "to the best of my knowledge and belief, [the cost report] is a true, correct, and complete report prepared from the books and records of the provider in accordance with applicable instructions, except as noted." No exceptions were noted with respect to CHS's request for reimbursement of ESOP contribution costs.

United States v. Century Health Servs., Inc., 136 F.Supp.2d 876, 882 (M.D.Tenn. 2000) (alteration in original). Based on these submissions, the HCFA paid CHS a total of $2,540,715.

CHS contributed the following amounts to the ESOP: $1,106,659.77 on September 13, 1994, $1,000,000 on August 14, 1995, and $660,000 on August 29, 1995. On either the same or the next day after each contribution was made, however, all but $6,659.77 was transferred back to CHS: $1,100,000 on September 14, 1994, $1,000,000 on August 14, 1995, and $660,000 on August 29, 1995. The total amount thus removed from the ESOP was $2,760,000. CHS issued promissory notes to the ESOP as consideration for each of these transfers, providing that the amounts owed would be paid in CHS stock of equivalent value.

The government conducted a field audit of CHS's claims for Medicare reimbursement in November of 1995. During this audit, the defendants reported that they had deposited two checks into the ESOP account in August of 1995. The auditor was not told, however, that the funds had been transferred back to CHS on the same day that they were deposited into the ESOP.

On September 16, 1996, before CHS had delivered any stock in satisfaction of the promissory notes, CHS and eight of its ten subsidiary home healthcare agencies transferred the bulk of their operating assets to Integrated Health Services, Inc. (IHS). As part of their agreement, IHS assumed and paid significant liabilities owed by CHS and the eight subsidiary home healthcare agencies.

CHS finally transferred 50,937 shares of its stock to the ESOP, in purported satisfaction of the promissory notes, on February 15, 1997. The number of shares was determined by an appraisal of the shares' value as of the end of 1993 and 1994, the years in which the $2,760,000 was transferred from the ESOP to CHS, not on the basis of the shares' fair market value in 1997. As a result, the appraisal did not take into account CHS's September 16, 1996 sale of assets to IHS.

B. Procedural background

This lawsuit was initially filed by Edward T. Augustine pursuant to the qui tam provisions of the FCA. The Department of Justice later intervened. On May 13, 1997, the Secretary of the United States Department of Labor also filed a complaint under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461, against the same defendants, alleging that they had breached their fiduciary duties to the ESOP. The two cases were later consolidated for discovery and trial.

The defendants filed a motion for summary judgment on the ground that the government, by filing lawsuits under both ERISA and the FCA, was pursuing inconsistent remedies. Following oral argument, the district court denied the defendants' motion, holding that the election-of-remedies doctrine was inapplicable because "the FCA and ERISA actions address separate injuries to different parties."

After a bench trial, the district court concluded that the defendants had violated the FCA. They were ordered to pay treble damages totaling $7.62 million and a civil penalty of $100,000. This timely appeal followed.

II. ANALYSIS

A. Standard of review

We will not set aside a district court's findings of fact unless we conclude that the findings are clearly erroneous. Davies v. Centennial Life Ins. Co., 128 F.3d 934, 938 (6th Cir.1997). A district court's factual findings are clearly erroneous if, based upon the entire record, we are "left with the definite and firm conviction that a mistake has been committed." Bartling v. Fruehauf Corp., 29 F.3d 1062, 1067 (6th Cir.1994) (citations and internal quotation marks omitted). On the other hand, "[l]ower court findings of ultimate facts based upon the application of legal principles to subsidiary facts are subject to de novo review." Williams v. Mehra, 186 F.3d 685, 689 (6th Cir.1999) (en banc).

B. Liability for false claims

The purpose of the False Claims Act is "to provide for restitution to the government of money taken from it by fraud." United States v. Hess, 317 U.S. 537, 551, 63 S.Ct. 379, 87 L.Ed. 443 (1943). Liability under the FCA occurs where a person or entity

(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;

(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;... or

(7) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government....

31 U.S.C. § 3729(a). The FCA provides for treble damages and "a civil penalty of not less than $5,000 and not more than $10,000" for each false claim. Id.

For the purposes of this case, the relevant elements of a FCA claim are that: (1) the claim or record submitted was "false or fraudulent," and (2) the person or entity who submitted the claim or record acted "knowingly." Under the statute, a person will be found to have "knowingly" committed an act only if he or she acts with "actual knowledge," "deliberate ignorance," or "reckless disregard of the truth or falsity of the information." 31 U.S.C. § 3729(b). The FCA does not, however, define "false or fraudulent."

Because the Supreme Court has held that the FCA is "intended to reach all types of fraud, without qualification, that might result in financial loss to the Government," United States v. Neifert-White Co., 390 U.S. 228, 232, 88 S.Ct. 959, 19 L.Ed.2d 1061 (1968), a number of courts have interpreted the phrase "false or fraudulent" broadly. Our own court, for example, in United States v. Midwest Specialties, Inc., 142 F.3d 296, 302 & n. 4 (6th Cir.1998), concluded that the maxim that "[m]en must turn square corners when they deal with the Government" applies fully in the FCA context. Other circuits have endorsed the "implied certification" theory of liability first laid out in Ab-Tech Constr., Inc. v. United States, 31 Fed.Cl. 429, 433-34 (Fed.Cl.1994) (holding Ab-Tech liable pursuant to the FCA after concluding that the company's submission of payment vouchers to the Small Business Administration (SBA) represented an implied certification of its continued compliance with the requirements of the SBA program in question), aff'd, 57 F.3d 1084 (Fed.Cir.1995) (unpublished table decision). See Mikes v. Straus, 274 F.3d 687, 700 (2d Cir.2001) (concluding that implied false certification is appropriately applied where the underlying statu...