United States v. Dinerstein

• Decision Date: 28 June 1966
• Docket Number: Docket 29395.,No. 292,292
• Citation: 362 F.2d 852
• Parties: UNITED STATES of America, Plaintiff-Appellant and Cross-Appellee, v. George C. DINERSTEIN, doing business as Associated Electronics Company, and Harvey B. Levy, Defendants-Appellees and Cross-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

362 F.2d 852 (1966)

UNITED STATES of America, Plaintiff-Appellant and Cross-Appellee, v. George C. DINERSTEIN, doing business as Associated Electronics Company, and Harvey B. Levy, Defendants-Appellees and Cross-Appellants.

No. 292, Docket 29395.

United States Court of Appeals Second Circuit.

Argued April 26, 1966.

Decided June 28, 1966.

David L. Rose, Atty., Dept. of Justice, Washington, D. C. (John W. Douglas, Asst. Atty. Gen., and Alan S. Rosenthal, Atty., Dept. of Justice, Washington, D. C., and Joseph P. Hoey, U. S. Atty., for the Eastern Dist. of New York, on the brief), for plaintiff-appellant.

Vincent J. Crowe, and Morris K. Siegel, of Siegel & Crowe, New York City, for defendant-appellee Dinerstein.

Liebowitz, Deixel & Brodsky, New York City, Leonard Brodsky, New York City, of counsel, for defendant-appellee and cross-appellant, Harvey Levy.

Before SMITH, KAUFMAN and FEINBERG, Circuit Judges.

J. JOSEPH SMITH, Circuit Judge:

The United States appeals, and George C. Dinerstein, doing business as Associated Electronics Company, cross-appeals, from a judgment after trial in the United States District Court for the Eastern District of New York before Judge Dooling, sitting without a jury.¹ Judgment was for defendants Dinerstein and Levy on the government's claim for a $68,000 forfeiture, and for the government against Dinerstein individually for $4000 and against Dinerstein and Levy for $2000. 226 F.Supp. 368. We affirm that part of the judgment holding Dinerstein liable for $4000 and $2000, and reverse on the government's appeal.

The action was brought by the United States pursuant to § 19(c) of the Contract Settlement Act of 1944, 58 Stat. 667, 41 U.S.C. § 119,² for recovery of civil penalties for fraudulent claims in securing payment for terminated government war contracts. Dinerstein was a contractor, and Levy his accountant for some, but not all of the period in question. On June 6, 1946, Dinerstein was awarded nine contracts for the preparation of technical manuals for the Army Transportation Corps, five of which are relevant here. Each of the five contracts contained a termination clause providing that in the event the government terminated it would pay at the contract price for articles already delivered and accepted, and at cost, plus certain charges, including 6% (profit), for other terminated work, unless the parties agreed otherwise. The total contract price of all five contracts was $109,200.

On July 23, 1946, the parties agreed to a Supplement to the contracts covering partial payments. Payments so made were not to exceed 75% of cost, or 80% of the allocable contract price. Dinerstein promptly requested a partial payment of $21,840, and on August 2 he sent invoices as to this request showing that the request was based on a calculation of the percentage of the contract completed 20% multiplied by the contract price. On August 9 the government returned the request, and advised that invoices must be based on cost. Dinerstein then resubmitted his request in the same amount, along with invoices on the surface based upon cost.

Before this request could be paid, however, the government, on August 28, terminated all five contracts. The supplemental agreement concerning partial payments was thus ended, and partial payments were henceforth governed by § 9 of the Act, 58 Stat. 657, 41 U.S.C. § 109. Dinerstein submitted a request for partial payment under that section, which permits the contracting agency to make such payments "upon such conditions as it deems necessary * * *." Dinerstein's request, dated September 13, was for $15,000. Evidently the government required a cost basis, rather than a percentage completion basis. Compare 41 C.F.R. § 1-8.212-1(b) (3) and (4). Accordingly, Dinerstein said that $19,854.53 was the best estimate of costs incurred to date. The contracting agency allowed the request, and paid Dinerstein $15,000. That amount is just over 75% of $19,854.53. It may have been that the agency had a 75% of cost rule under § 9 just as in the supplemental agreement. See Regulations cited supra.

On September 16, Dinerstein made another application for a partial payment, this time for $46,425.00. His best estimate of costs incurred to that date including the $19,854.53 was $81,900, 75% of which was $61,425. Taking from this the $15,000 already paid left the amount of this request. The agency paid $42,330. Dinerstein had computed his costs by calculating that the contracts were 75% completed, and asserting that his costs were 75% of the contract price; the agency concluded that the contract was only 70% completed,³ and, for the second payment, allowed 75% of 70% of the contract price, less the $15,000 already paid. In other words, in calculating the second payment, the government evidently worked on a percentage completion basis, even though it supposedly required a cost basis.

On December 21, Dinerstein sought final payment of $40,197.48, based on a calculation that at termination the contracts were, on average, 89.3% completed.⁴ The agency advised that a cost estimate was required, and on February 10, 1947, Dinerstein submitted an estimate of total costs of $97,496.94, only $30 less than 89.3% of the contract price. On March 20 Dinerstein offered to settle on the basis of $94,917.33, less amounts already paid; this figure included $4500 settlement costs see 41 U.S.C. § 106(d) (3). In so doing he stated to the agency that the facilities of Associated were exclusively devoted to the five contracts during July and August until the termination, that as of termination work was 89% completed, and that the costs incurred consisted of the following: direct labor costs, $15,989.70; material and services, $24,221.49; other costs, selling and administrative expenses, and overhead, $19,112.13; and pre-contract costs, expected profit, and anticipated additional compensation due employees, $35,594.00. In fact there were forty jobs being done by Associated during July and August, and direct labor costs allocable to the five contracts were only $746.02.

The government conducted a Negotiation Audit in connection with the offer of settlement. The result was a recommendation that $21,812.03 of material and service costs be accepted; that $487.26 of such costs and $10,271.89 of general and administrative costs, as well as $3000 of the $4500 settlements costs, be rejected, and that the remainder (about $60,000) be further considered. The auditor found the records of Associated to be very scant and not entirely to be relied on.

On May 2, 1947, the parties conducted a six hour negotiation, and agreed to a settlement figure of $70,846.15. The Settlement Review Board 41 U.S.C. § 106(c) approved, and the government paid Dinerstein the remaining amount. $13,516.15.

Apparently no job cost records were kept by Associated before August 1946, when the jobs concerned here were terminated. Although the employees kept time cards showing how much time was spent on each job, this data, or a synthesis of it, was not available to the negotiation auditor. But in 1958, while going over records in Dinerstein's possession in connection with an audit concerning other contracts, an auditor for the government examined such a synthesis, "weekly labor cost distribution sheets," from which the auditor concluded that the labor costs allocable to the five contracts was only $746.02, and that the figure Dinerstein submitted, $15,989.70, was the labor cost of all jobs done by Associated at its plant. This was the only direct evidence of costs. The auditor in 1958 concluded that the total costs on the five contracts were $2927.02, by adding to the $746.02 for direct labor, a proportional amount for indirect labor and for general costs, and $585 for material and services, being 20% of the total, paid to a subcontractor under a contract for services, and 10% of costs excluding profit, for profit.

The complaint of the United States asked for judgment in the amount of statutory penalties and double the difference between $70,846.15, the amount of the settlement, and the amount of actual costs, said to be around $2000. The District Court found that the claims Dinerstein made were knowingly false and fraudulent, and allowed a recovery of $2000 for each of two fraudulent claims, against Dinerstein, and $2000 for another, against Dinerstein and Levy. The court denied any other recovery on the theory that reliance had to be proven for the government to recover the payment received as a result of the false claims, and it had not proved reliance on defendants' false claims, but had instead paid out sums relying on its own determinations. On its appeal, the United States does not press its claim for double damages under the statute, and asks only that the judgment be reversed with directions that the District Court award it the...