US ex rel LaValley v. First Nat. Bank of Boston
| Decision Date | 23 August 1988 |
| Docket Number | Civ. A. No. 86-0236-WF. |
| Citation | 707 F. Supp. 1351 |
| Parties | UNITED STATES of America, ex rel. Harold LaVALLEY, Plaintiff, v. The FIRST NATIONAL BANK OF BOSTON, Defendant. |
| Court | U.S. District Court — District of Massachusetts |
Sheehan, Phinney, Bass & Green, P.A. by Michael C. Harvell, Manchester, N.H., Morris M. Goldings, Mahoney, Hawkes & Goldings, Boston, Mass., Vincent B. Terlep Jr., Atty., Civ. Div., Dept. of Justice, Washington, D.C., U.S. Atty. Office, Martha Susman, for plaintiff.
Bingham, Dana & Gould by E. Susan Garsh, Thomas H. Walsh, Jr., Andrea H. Maislen, Michael J. Tuteur, Goodwin, Proctor & Hoar, Boston, Mass., T. Jeremy Gunn, Washington, D.C., for First Nat. Bank of Boston.
James D. Masterman, Edward I. Masterman, Cargill, Masterman & Culbert, Boston, Mass., for Leland B. Goldberg.
Plaintiff Harold LaValley brought this action on June 7, 1985 in the name of the United States pursuant to the False Claims Act, 31 U.S.C. § 3730, to recover sums paid by the Farmer's Home Administration of the Department of Agriculture ("FmHA") in accordance with a $24.7 million federally guaranteed loan to the Elmendorf Board Corporation ("Elmendorf"). On April 29, 1986, defendant First National Bank of Boston ("Bank of Boston" or "Bank") moved to dismiss plaintiff's complaint for lack of subject matter jurisdiction. Defendant argued that plaintiff's action is based upon evidence or information the government possessed when the action was brought and, therefore, plaintiff's action is barred pursuant to 31 U.S.C. § 3730(b)(4).
On September 10, 1986, the court held a hearing in this case and took the motion to dismiss under advisement. On October 27, 1986, the False Claims Act was amended, altering the relevant provisions of the Act. In short, the new amendments no longer require that the relator, in this case LaValley, base his action on evidence or information which the government does not itself possess. Instead, an action can proceed if the relator was an "original source" of the information possessed by the government.
This court must therefore determine:
(1) whether the provisions of the 1986 amendments to the False Claims Act ("1986 Amendments") apply retroactively to this case;
(2) if they do, whether this court has subject matter jurisdiction over this suit under the new provisions; and
(3) if they do not, whether the government possessed enough information of the alleged fraud to bar jurisdiction under the old provisions.
The court held supplemental hearings on December 15, 1987 and June 2, 1988, and received post-hearing briefs. For the reasons stated below, the court concludes that the relevant provisions of the 1986 Amendments apply retroactively in this case, and that LaValley has standing under the new law. The defendant's motion to dismiss is, therefore, denied.
This action was brought on June 7, 1985, by a group of private citizens under the qui tam provisions of the False Claims Act, 31 U.S.C. § 3730(b) et seq. (1982 ed.). The private citizens, known as relators, alleged that the Bank of Boston defrauded the Government by making false statements to the FmHA in connection with an application for the guarantee of $24.7 million in Bank of Boston loans to Elmendorf for the financing of an oriented strandboard mill. The relators, Harold LaValley, Dr. Gilbert Beinhocker, and Robert G. Watts, were investment bankers involved in the transaction. Subsequently, two of the three original relators withdrew from the suit.
The equity closing for the mill occurred in July 1979. In November, 1981, the closing of the permanent debt financing occurred, with the Bank of Boston placing the permanent debt as lead lender. At that closing, the FmHA gave its guaranty of 90% of the debt.
For various reasons, including the depressed state of the housing business and production problems at the new plant, the financial condition of Elmendorf deteriorated, and by late 1983, Elmendorf defaulted on the loans to the Bank of Boston. The Bank made a claim to FmHA under the guarantee, and FmHA repurchased the guarantee in September, 1983 for $25,628,849.02 (an amount which included past due interest).1 There is no dispute concerning the reasons for Elmendorf's ultimate default. Those reasons were known to all parties, including FmHA, at the time the claim was made to FmHA to honor the guarantee.2 Thus, there is no claim by the relator that there was fraud in connection with the Bank's actual claim under the guarantee.
Instead, the relator claims that the fraud occurred on November 13, 1981, when the Bank presented an allegedly false certificate to FmHA which induced FmHA to agree to the guarantee in the first place. It is alleged that the certificate, known as a "material adverse change report," was false in that it did not apprise the FmHA that the Bank felt, at that time, that the loan was "hopeless," and would probably not be repaid. As evidence of the Bank's conclusion, the complaint alleges that approximately five months before the loan was closed, the Bank transferred the loan to a special section of the Bank which dealt with problem loans destined for liquidation.
The relator alleges that the Bank further defrauded the FmHA because, at the time it submitted the material adverse change report, it really did not believe the statement in the report contending that the planned infusion of an additional amount of working capital at the time the loan was closed (the debt closing) would counteract the adverse effects that the economy and reduced production capacity would have on the plant during its start-up period.
The complaint also alleges that on November 10, 1981, the Bank represented to FmHA that it had no reason to believe that the investors in the project, several major insurance companies, would fail to supply further working capital after the loan was closed. However, the relator alleges that by November 13, 1981, the date of the material adverse change report, the Bank believed that the investors would not commit further funds to the project and failed to so inform FmHA.
The complaint further alleges that the Bank failed to inform FmHA through the material adverse change report of significant misgivings it had about Elmendorf's management, the plant facility, untested markets and uncertain sources of supply. Additionally, the relator alleges that, at the time it presented its material adverse change report, the Bank knew of certain design problems with the plant and of other technical flaws which affected the plant's expected production, yet they failed to so inform FmHA.
Finally, the relator alleges that a conflict of interest existed because of the Bank's alleged special relationship with the construction lender on the project, Swiss Bank Corporation, and that the Bank's alleged fraud was prompted by its desire to ensure that Swiss Bank Corporation would suffer no loss on its construction loan.
On February 22, 1984, approximately five months after FmHA repurchased its guarantee, Beinhocker and Watts, two of the original relators in this action, and two of the investment bankers involved in the transaction, caused an involuntary petition in bankruptcy to be filed against Elmendorf and its parent holding company, Stranway Corporation. On August 24, 1984, the Trustee in bankruptcy filed a complaint to disallow subordinate claims, seeking, inter alia, the disallowance of all claims by the Bank, the United States, and the investors in both Elmendorf and Stranway on the ground that their claims should be treated as equity capital provided principally by insiders at a time when there was no reasonable expectation that the funds, if viewed as loans, would be repaid. The Trustee's complaint contained no allegation that the Bank of Boston had defrauded FmHA or had failed to inform FmHA of relevant information when it submitted its material adverse change report at the time of the debt closing. The Trustee's complaint contained information obtained from a meeting with Beinhocker in which Beinhocker claims he gave information on behalf of a joint venture, ELV, formed by Beinhocker, Watts and LaValley sometime shortly after February 22, 1984.
On February 13, 1984, Beinhocker and Watts sent a letter to the Bank. After reciting many complaints about how the Bank and other parties to the transaction had treated the investment bankers, Dr. Beinhocker and Mr. Watts informed the Bank:
Be advised that we are retaining litigation counsel, and are in the process of conveying all information to them. We expect as soon as possible to file a complaint against you alleging serious improprieties.
Letter from Beinhocker to the Bank of Boston, February 13, 1984, p. 3.
Neither Beinhocker nor Watts sent a copy of their February 13, 1984 letter to the Government. The Bank, however, sent a copy of the letter to the FmHA State Director in Vermont by letter of February 15, 1984.
In early 1985, Beinhocker, Watts and LaValley met Eugene Demchenko, a Bank of Boston employee who had worked on the Elmendorf Bankruptcy while employed with the Bank. See Affidavit of Beinhocker at ¶ 14. But see Affidavit of Leland Goldberg at ¶ 6. ("Mr. Beinhocker's statement in Paragraph 14 of his affidavit that Mr. Demchenko had worked for me and others in connection with the Elmendorf Bankruptcy is false."). Demchenko allegedly provided the group and their counsel with highly credible information concerning the alleged fraud, later confirmed by documents from the files of the Bank obtained in discovery. In June, 1985, LaValley, Beinhocker and Watts filed this suit. In September, 1986, the Complaint was amended, eliminating Beinhocker and Watts as participants in the suit because the statute permits only one individual to serve as the relator.
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