US v. Ettrick Wood Products, Inc.

• Citation: 774 F. Supp. 544
• Decision Date: 04 January 1988
• Docket Number: No. 87-C-595-C.,87-C-595-C.
• Parties: UNITED STATES of America, Plaintiff, v. ETTRICK WOOD PRODUCTS, INC., Stephen K. McLeod, Kenneth J. McLeod, Larry W. Rieck, United Bank of Osseo, Robert J. Ofsdahl, Robert O. Helstad, Defendants.
• Court: U.S. District Court — Western District of Wisconsin

774 F. Supp. 544

UNITED STATES of America, Plaintiff, v. ETTRICK WOOD PRODUCTS, INC., Stephen K. McLeod, Kenneth J. McLeod, Larry W. Rieck, United Bank of Osseo, Robert J. Ofsdahl, Robert O. Helstad, Defendants.

No. 87-C-595-C.

United States District Court, W.D. Wisconsin.

January 4, 1988.

David C. Sarnacki, Asst. U.S. Atty., Madison, Wis., for plaintiff.

William A. Kirkpatrick, Hale, Skemp, Hanson & Skemp, LaCrosse, Wis., for defendants.

REPORT AND RECOMMENDATION

JAMES GROH, United States Magistrate Judge.

In this civil action, the United States asserts claims under the False Claims Act, 31 U.S.C. § 3729 et seq. (Counts I and II), and common law claims for fraud (Count III), breach of contract (Count IV) and unjust enrichment (Count V). All of the claims grow out of alleged false statements and misrepresentations in connection with the application for, and receipt of, loan guarantees from the Farmers Home Administration, an agency of the United States.

All defendants, except defendants Ettrick Wood Products, Inc. (hereafter "Ettrick") and Larry W. Rieck, filed motions to dismiss on a variety of grounds. However, plaintiff's claims against defendants Stephen K. McLeod and Kenneth J. McLeod have since been compromised and they have been, or are in the process of being, dismissed from the action. Therefore, no further consideration of the McLeod motions (found at Docket ## 12 and 18) is required.

FINDINGS OF FACT

For purposes of all motions, other than Helstad's motion for summary judgment, I find the following facts from the well-pleaded allegations of the complaint. (Dkt. # 2)¹

1. The United States of America is plaintiff in this action, and this court has jurisdiction thereof pursuant to 28 U.S.C. § 1345 and 31 U.S.C. § 3732. (Compl. ¶¶ 1, 4)

2. Defendant Ettrick Wood Products, Inc. ("Ettrick") is a Wisconsin corporation with principal offices in Ettrick, Wisconsin. Defendant Larry W. Rieck and former defendants Stephen K. McLeod and Kenneth J. McLeod were all directors, officers and shareholders of Ettrick at all material times. (Compl. ¶¶ 5-8)

3. Defendant United Bank of Osseo (hereafter, "Bank"), a Wisconsin banking corporation, is the successor in merger with the Ettrick State Bank and has its principal offices in Ettrick, Wisconsin. Defendant Robert J. Ofsdahl ("Ofsdahl") was at all times material an officer and employee of the Bank. (Compl. ¶¶ 9-10)

4. Defendant Ronald O. Helstad was at all times material a partner in the LaCrosse accounting firm of Preeshl, Helstad, Shoup & Company. (Compl. ¶ 11)

5. The Farmers Home Administration ("FmHA") is an agency of the United States authorized to issue loan guarantees. (Compl. ¶ 12)

6. On May 27, 1980, Ettrick and the Bank submitted an Application for Loan and Guarantee to the FmHA. The application documents and supporting materials were primarily prepared by defendant Helstad and were signed by Stephen and Kenneth McLeod, defendant Rieck and defendant Ofsdahl. (Compl. ¶¶ 13-15)

7. In reliance on the application and supporting materials, the FmHA issued two conditional guarantee commitments to the Bank for two loans on or about June 23, 1980. Further documentation was required under the conditional commitments and on July 18, 1980, the Bank submitted a closing statement for its loans to Ettrick, which statement contained a certified schedule of disbursements describing how the loan proceeds were to be applied. The schedule certified that $291,824.17 was to be allocated for debt refinancing, including $252,122 owed by Ettrick to the Bank. The remaining funds were allocated for construction, real estate acquisition, machinery and equipment, and working capital. (Compl. ¶¶ 16-18)

8. The Bank also submitted the personal financial statements of defendants Rieck and Stephen and Kenneth McLeod signed by them and their wives. The financial statements certified to each person's net worth. The Bank also submitted the personal guarantees of the loans by the McLeods and Rieck and their respective wives. (Compl. ¶¶ 19-20)

9. On August 6, 1980, the Bank submitted a lender certification that Ettrick had marketable title to the collateral; that the required security instruments had been obtained; and that there were no actions, suits or proceedings which could result in any material adverse change in the business, operation or assets of Ettrick. The certification was signed by defendant Ofsdahl. (Compl. ¶¶ 21-22)

10. On August 12, 1980, based upon the loan application and the various supporting submissions, the FmHA issued two 90% loan guarantees for loans made by the Bank to Ettrick in the amount of $150,000 (20-year loan) and $350,000 (8-year loan). The terms of the loan guarantees were incorporated into the Lenders Agreement signed by Ofsdahl on behalf of the Bank, pursuant to which the guaranteed funds were to be used solely for the purposes certified in the application and supporting documents. On August 27, 1980, the Bank assigned the guaranteed portion of each loan to the Western-Southern Life Insurance Company. (Compl. ¶¶ 23-25) 11. On September 11, 1980, Ofsdahl disbursed approximately $416,000 of the guaranteed loans by paying 10 pre-existing notes held by the Bank. (Compl. ¶¶ 26-27)

12. The Bank never submitted fully audited annual or quarterly financial statements of Ettrick as required by the Lenders Agreement. (Compl. ¶ 28)

13. On July 17, 1981, acting under the Lenders Agreement, FmHA determined that liquidation of Ettrick was necessary due to financial difficulties, and on August 5, 1981, the Bank submitted a liquidation plan. (Compl. ¶¶ 29-30)

14. The Bank received notification that the fire insurance on Ettrick's assets was being discontinued. The fire insurance policy lapsed on November 17, 1981, and the assets of Ettrick were substantially damaged by fire on June 5, 1982. (Compl. ¶¶ 31, 34 & 35)

15. Following September 9, 1981, the loans were in default for over 60 days and Western-Southern Life Insurance Co. demanded that FmHA repurchase the guaranteed portions of the loan. The FmHA did so on November 3, 1981, paying Western-Southern $428,986. (Compl. ¶¶ 32-33)

16. The government did not have knowledge of facts material to this action over 6 years prior to the filing of the complaint on July 27, 1987.

17. The defendants knowingly presented false or fraudulent statements or claims to the FmHA as follows:

a. Misrepresented and understated the indebtedness of Ettrick to the Bank;

b. Misrepresented the personal net worth of Stephen and Kenneth McLeod by omitting certain mortgages held by the Bank on their residences;

c. Presented false certifications as to title and value of collateral taken to secure the loans in that Ettrick did not have marketable title in many instances, first liens were not obtained, and the value of collateral was overstated.

d. Defendants did not, and did not intend to, apply the loan proceeds as certified in the loan application and closing statement.

e. The certification as to pending actions, suits or proceedings failed to disclose an IRS tax lien against Ettrick. (Compl. ¶ 39)

18. Defendants knowingly made or used false records or statements to obtain payment of a false or fraudulent claim by the United States. The United States paid the claim, being unaware of the falsity thereof, and has been damaged in the amount of $452,000. (Compl. ¶¶ 40-42)

19. All of the defendants conspired to defraud the United States by obtaining payment of a false and fraudulent claim, to the damage of plaintiff of $452,000. (Compl. ¶¶ 43-45)

20. Defendants' false statements were material misrepresentations of fact made knowingly or with reckless disregard for the truth and with the intent that the United States rely upon them. The United States justifiably relied upon defendants' misrepresentations in approving and repurchasing the guaranteed portions of the loan, to its damage in the amount of $452,000. (Compl. ¶¶ 46-52)

21. Defendants' conduct was willful and egregious. (Compl. ¶ 53)

SUPPLEMENTAL FINDINGS OF FACT — SUMMARY JUDGMENT

I find the following facts solely for the purpose of defendant Helstad's motion for summary judgment.²

1. Defendant Helstad, a resident of LaCrescent, Minnesota, is a member of the accounting firm of Preeshl, Helstad, Shoup & Company, Limited (hereafter, "the Firm").

2. The Firm has prepared tax returns for the Bank but has performed no auditing work or prepared financial statements for it. The Firm's average annual compensation

from the Bank over the past 5 years has been $932. Neither Helstad nor the Firm has any investment of financial interest in the Bank. Neither Helstad nor any member of the Firm have any investment or financial interest in Ettrick or in the McLeod Construction Company.

3. On November 6, 1979, Ofsdahl and Stephen McLeod asked Helstad to prepare an application for a Small Business Administration (SBA) loan. Helstad prepared an opening balance sheet from information furnished by Stephen McLeod and Ofsdahl, to which Helstad attached a disclaimer to the effect that the statement was based solely upon information furnished to the Firm, that it had not been audited or verified, and that no opinion was expressed with respect thereto. The SBA rejected the application in late 1979 or early 1980.

4. In February, 1980, the Firm was asked to prepare an application for an FmHA loan for Ettrick. Helstad and an employee, Rick Hamilton, performed most of the work in compiling a balance sheet and income statement to which was attached the following disclaimer:

The accompanying balance sheet of Ettrick Wood Products, Inc., as of January 31, 1980 and the related statement of income for the four months ended have been compiled by us.

A compilation is limited to presenting, in the form of financial statements, information that is the representation of management. We have not audited or reviewed the accompanying financial statements and accordingly do not express any opinion or any

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