United States v. Strock

Citation982 F.3d 51
Decision Date03 December 2020
Docket NumberAugust Term, 2020,Docket No. 19-4331
Parties UNITED STATES of America, Appellant, v. Lee STROCK, Cynthia Ann Golde, Strock Contracting, Inc., Defendants-Appellees, Kenneth Carter, Defendant.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Charles W. Scarborough, Appellate Staff Attorney, for Joseph H. Hunt, Assistant Attorney General, James P. Kennedy, United States Attorney for the Western District of New York, Buffalo, NY, for Appellant.

Robert C. Singer, Esq., Singer Legal PLLC, Williamsville, NY, for Defendants-Appellees Lee Strock and Strock Contracting, Inc.

Reetuparna Dutta, Esq. (David A. Short, on the brief), Hodgson Russ LLP, Buffalo, NY for Defendant-Appellee Cynthia Ann Golde.

Before: Calabresi, Katzmann, and Carney, Circuit Judges.

Katzmann, Circuit Judge:

This case calls upon us to address the materiality inquiry under the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., in light of Universal Health Services, Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S. Ct. 1989, 195 L.Ed.2d 348 (2016).

Veteran Enterprises Company, Inc. ("VECO") was putatively owned by Terry Anderson, a service-disabled veteran. VECO applied for and received millions of dollars of federal government contracts that are reserved for small businesses owned by service-disabled veterans (known in this context as "service-disabled veteran-owned small businesses" or "SDVOSBs"). According to the government, however, Anderson's ownership was illusory, and he never controlled or managed VECO. In fact, the government alleges, the company was controlled by defendant-appellee Lee Strock, who set up VECO as a front to funnel contract work to his company, defendant-appellee Strock Contracting, Inc. ("Strock Contracting" or "SCI"). The government filed suit under the FCA and federal common law against Strock, SCI, and Cynthia Golde, an employee of both VECO and SCI.

The United States District Court for the Western District of New York (Geraci, C.J. ) granted defendantsmotion to dismiss the government's amended complaint, concluding that the government had not adequately pleaded that the alleged misrepresentation—that VECO qualified as an SDVOSB—was material to the government's decision to make payments under the awarded contracts or that defendants knew of this materiality. Further, the district court dismissed the common law claims on jurisdictional grounds. Because we find that the district court's conclusion as to materiality relied on an unduly restrictive understanding of the FCA materiality analysis set out in Escobar , and that the complaint adequately alleges Strock's knowledge, we reverse in part. Additionally, we vacate the district court's dismissal insofar as it relied on these errors to dismiss the claims against SCI. Finally, we vacate the dismissal of the common law claims.

BACKGROUND

Several statutory provisions authorize awarding government contracts to SDVOSBs. 15 U.S.C. § 657f(a) and (b) permit contracts to be awarded to SDVOSBs either on a sole-source basis or based on competition limited to SDVOSBs. 15 U.S.C. § 644(g)(1)(A)(ii) establishes a "[g]overnmentwide goal" that at least three percent of all contracts awarded during the fiscal year go to SDVOSBs. 38 U.S.C. § 8127 establishes a similar program specifically for contracts issued by the Department of Veterans Affairs ("VA").

As relevant to this appeal, a SDVOSB must be majority-owned by, and its management and daily operations must be controlled by, one or more service-disabled veterans. 15 U.S.C. § 632(q)(2)(A) ; 38 U.S.C. § 8127(k)(3).1 To be "controlled" by a service-disabled veteran "means that both the long-term decision[ ] making and the day-to-day management and administration of the business operations must be conducted by one or more service-disabled veterans." 13 C.F.R. § 125.13(a).

"At the time that a service-disabled veteran-owned small business concern submits its offer" to perform government contracting work, "it must represent to the contracting officer that it is a [SDVOSB]." 48 C.F.R. § 19.1403(b). Where contracts "have been set aside for" SDVOSBs, "[o]ffers received from concerns that are not [SDVOSBs] shall not be considered," and "[a]ny award resulting from this solicitation will be made to a[n] [SDVOSB]." 48 C.F.R § 52.219-27(b)(1), (c)(1)(2) ; see also 48 C.F.R. § 852.219-10(b)(1)(2).

Defendant Lee Strock is the owner of defendant Strock Contracting.2 In 2006, Strock met defendant Terry Anderson, a service-disabled veteran. The two formed Veteran Enterprises Company, Inc. ("VECO"), with Anderson as president and 51% owner, Strock as vice-president and 30% owner, and Ken Carter as secretary and 19% owner.3 VECO subsequently applied for and received SDVOSB recognition from the VA. Between 2008 and 2013, VECO was awarded over $21 million in SDVOSB-reserved contracts from the VA, the Army, and the Air Force.

According to the government, however, VECO's SDVOSB status was a sham. After another company owned by Strock lost its eligibility for a Small Business Administration contracting program, Strock "decided to recruit a service-disabled veteran," Anderson, "to head a company in order that Lee Strock and Strock Contracting could earn profits on federal contracts from the VA and other federal agencies that were set aside for SDVOSBs." Joint App'x 21 ¶ 30. But Anderson's leadership of VECO existed only on paper. Strock, not Anderson, controlled the day-to-day operations at VECO. Strock decided which contracts VECO would bid on; Anderson was not involved. Anderson was not given access to payroll records. He made no decisions about hiring or firing. He would "occasionally" attend meetings and perform inspections, but he did little else. Id. at 25–26 ¶¶ 63–64. Strock owned the building that VECO "leased" as office space, and Anderson did not even have a key to the office; defendant Cynthia Golde (or another employee) had to let him in. Nor did Anderson have access to the company email account, which nonetheless displayed his name as the sender. Although he was nominally the president, he was not the highest-paid employee; and although he was purportedly the majority shareholder, he was paid less than 5% of VECO's profits. VECO also made several "questionable" payments to Strock Contracting, totaling several hundred thousand dollars. Id. at 31 ¶ 102. The government claims that, had it known that VECO was not a bona fide SDVOSB, it would either not have awarded the contracts or would have terminated them.

The government filed suit, asserting violations of the False Claims Act, as well as common law fraud, unjust enrichment, and payment by mistake. The district court granted the defendantsmotion to dismiss. The court concluded that the government had not pleaded with the particularity required by Federal Rule of Civil Procedure 9(b) that any of the individual defendants knew that VECO did not qualify as an SDVOSB, or knew that such a designation would be material to the government's decision to pay VECO. The district court further held that the complaint did not adequately plead that any misrepresentation was material for FCA purposes, reasoning that "a misrepresentation is not necessarily material to the Government's payment decision just because the Government would not have awarded the contract but for the misrepresentation." Id. at 74.4 The district court then "decline[d] to exercise jurisdiction over the Government's common law claims." Id. at 75. This appeal followed.

DISCUSSION
I. Standard of Review

"We review the district court's grant of defendantsRule 12(b)(6) motion to dismiss de novo , accepting all factual claims in the complaint as true and drawing all reasonable inferences in the plaintiff's favor." United States v. Wells Fargo & Co. , 943 F.3d 588, 594 (2d Cir. 2019).5

II. The False Claims Act Counts
A. Legal Standard

The False Claims Act imposes liability, as relevant here, on a person who either "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval," or who "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1)(A)(B). "Knowingly" means that a person "(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information." Id. § 3729(b)(1)(A). It "require[s] no proof of specific intent to defraud." Id. § 3729(b)(1)(B). "Material" means "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." Id. § 3729(b)(4). The government must "plead [its] claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality." Universal Health Servs., Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S. Ct. 1989, 2004 n.6, 195 L.Ed.2d 348 (2016).

B. Materiality

We turn first to whether the government sufficiently alleges that defendants’ misrepresentations about VECO's SDVOSB status were material. To be actionable under the FCA, "[a] misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision." Id. at 1996. The Supreme Court recently clarified this materiality requirement in Universal Health Services, Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S. Ct. 1989, 195 L.Ed.2d 348 (2016). In Escobar , the Court explained that the FCA's "materiality standard is demanding," id. at 2003, and "looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation," id. at 2002, rather than superficial designations. Thus, a misrepresentation is not necessarily material because "the Government would have the option to decline to pay if it knew of ...

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