US v. Stella Perez, Civ. No. 85-2197 (RLA).

• Decision Date: 09 December 1993
• Docket Number: Civ. No. 85-2197 (RLA).
• Citation: 839 F. Supp. 92
• Parties: UNITED STATES of America, Plaintiff, v. Edgar M. STELLA PÉREZ and Guillermo Alemañy Rivera, Defendants.
• Court: U.S. District Court — District of Puerto Rico

839 F. Supp. 92

UNITED STATES of America, Plaintiff, v. Edgar M. STELLA PÉREZ and Guillermo Alemañy Rivera, Defendants.

Civ. No. 85-2197 (RLA).

United States District Court, D. Puerto Rico.

December 9, 1993.

José M. Pizarro Zayas, U.S. Attorney's Office, Hato Rey, PR, Marlene F. Gibbons, Commercial Litigation Branch, Civ. Div., U.S. Dept. of Justice, Washington, DC, for plaintiff.

Pedro Varela, Harry Anduze Montaño, Hato Rey, PR, for defendants.

OPINION AND ORDER

ACOSTA, District Judge.

This action was instituted by the United States of America seeking damages and forfeiture penalties against Edgar M. Stella Pérez and Guillermo Alemañy Rivera under the provisions of the False Claims Act, 31 U.S.C. §§ 3729-3733 ("FCA").

Plaintiff moved for summary judgment pursuant to Fed.R.Civ.P. 56 (docket Nos. 16, 17, 40, 49, and 61). The defendants opposed and requested the dismissal of the complaint, alleging, inter alios, that the government's action is time-barred under the provisions of the FCA (docket Nos. 35, 38, and 73). These motions were referred to the U.S. Magistrate Judge who issued his Report and Recommendation (docket No. 80). Both defendants opposed and plaintiff responded to defendants' objections (see docket Nos. 82, 84, 87, 88, 94, and 95).

I. MOTION TO DISMISS

A. STATUTE OF LIMITATIONS

The defendants contend that the government's claim is time-barred under the 6-year statute of limitations contained in the FCA, which reads, in its pertinent part, as follows:

(b) A civil action under section 3730 may not be brought—

(1) more than 6 years after the date on which the violation of section 3729 is committed....

31 U.S.C. § 3731(b)(1). We disagree with defendants' position.

B. FACTS AND APPLICABLE LAW

On July 7, 1982 both defendants were charged in a nine-count indictment with violations of 18 U.S.C. §§ 2, 152, 371, and 1001. While affirming defendants' convictions, the Court of Appeals for the First Circuit summarized the facts of this case in accordance with the criminal charges as follows:

Count one charged Stella, the President, Chairman of the Board of Directors, and former Medical Director of the Hospital Nuestra Señora de la Guadalupe in Hato Rey, Puerto Rico (the "Hospital"), and Alemañy, the former controller of the Hospital, with conspiracy to defraud the Departments of Housing and Urban Development ("HUD") and Health and Human Services ("HHS") in connection with a federally insured $12.46 million mortgage loan obtained by the Hospital for remodeling and expansion. Count one alleged that Stella and an unindicted co-conspirator named José A. Cardona-Alvarez, the Hospital's former assistant administrator, controlled a furniture company known as Casa Cardona, Inc., and its subsidiary, an equipment company by the name of AAA Hospital Supply, Inc. Stella and Cardona allegedly used these two corporations, with Alemañy's assistance, to siphon off the Hospital's mortgage funds by selling equipment and furnishings to the Hospital at inflated prices, and by charging the Hospital for equipment that the corporations never furnished.

Counts two through four of the indictment charged Stella and Alemañy with submitting and causing to be submitted false documents to HUD to procure mortgage funds. Counts five through seven charged the defendants with submitting and causing to be submitted false Medicare cost reports for the years 1977, 1978, and 1979. Counts eight and nine charged Stella and Alemañy with making, aiding, and abetting false oaths in bankruptcy in connection with personal bankruptcy petitions filed by Stella and his wife in 1979.

After a 30-day jury trial, Stella was found guilty on all counts, sentenced to a 20-year term of imprisonment, and placed on probation for another five years on condition that he make restitution of $686,349.¹ Alemañy was found guilty on counts one, five, and six of the indictment, sentenced to ten years in prison, and fined $10,000....

United States v. Alemañy Rivera, 781 F.2d 229, 231 (1st Cir.1985), cert. denied, 475 U.S. 1086, 106 S.Ct. 1469, 89 L.Ed.2d 725 (1986) (footnote added). Thereafter, on October 25, 1985, the government filed the instant complaint.

As stated earlier, suits instituted pursuant to the provisions of the FCA must be brought within 6 years from the date "the violation of section 3729 is committed...." 31 U.S.C. § 3731(b)(1). Defendants contend that, for the purposes of the FCA, the violation was committed at the time the mortgage loan was defaulted, i.e., May 1, 1979, and hence, more than 6 years had elapsed by the time the complaint was filed in this case. In support of their argument, defendants cite Jankowitz v. United States, 533 F.2d 538 (Ct.Cl.1976); and United States v. Goldberg, 256 F.Supp. 540 (D.Mass.1966).

We find, however, the argument unconvincing in light of other cases on point, in addition to the fact that the cases cited by defendants can be easily distinguished.

In Jankowitz the court left for another day the determination of whether or not a cause of action accrues upon default or filing of request for benefits. Goldberg, on the other hand, essentially states that accrual does not occur at the time the application to qualify for benefits is submitted but rather when default takes place. It did not, however, explore any further into the difference between time of default and when demand for payment is made. This finding was also rejected in United States v. Stillwater Community Bank, 645 F.Supp. 18 (W.D.Okl. 1986).

The FCA applies to instances where monies, subsidies or other benefits are sought from the United States by means of false representations. It covers not only persons or entities which directly cause the government to pay fraudulent claims, but also those who assisted or participated in the fraudulent scheme. United States v. Veneziale, 268 F.2d 504 (3rd Cir.1959). See also United States v. Consolidated Industries, Inc., 720 F.Supp. 919, 921 (N.D.Ala.1989) ("A false claim is actionable under the FCA although the claims or false statements were made to a party other than the government, if the payment of the claim would ultimately result in a loss to the United States.") (citation omitted).

The mere submission of fraudulent documents to obtain a subsidy or a guarantee by a federal agency does not entail any economic injury to the government. It is not until a demand for payment is made that the economic injury materializes. United States v. Ekelman & Associates, Inc., 532 F.2d 545, 552 (6th Cir.1976) ("No cause of action arises, and, consequently, the statute of limitations does not begin to run, until the mortgage holder presents a claim to the government or one of its agencies for payment on the guaranty or insurance.") (citations omitted). See also United States v. First Nat. Bank of Boston, 707 F.Supp. 1351, 1352 n. 2 (D.Mass. 1988) ("There can be no violation of the False Claims Act until a claim is made.... Liability arises, and the False Claims Act's statute of limitations begins to run, from the date of claim....") (citations omitted); and United States v. Ettrick Wood Products, Inc., 683 F.Supp. 1262, 1263 (W.D.Wis.1988) ("The statute of limitations contained in the FCA begins to run when a demand has been made upon the government for performance on the insurance or guarantee.") (citations omitted). In situations such as the one before us, where exposure of federal funds is channeled through a middle institution by way of a guarantee, the mere default by the debtor does not automatically trigger the obligation to pay on behalf of the United States. It is not until the lending institution or mortgage holder makes a claim for execution of the guarantee that federal funds are in fact at stake. Thus, it is at that time that the statute of limitations begins to run. United States v. Stillwater Community Bank, 645 F.Supp. at 19. Prior to that date, no claim for payment capable of affecting public funds has been made. See United States v. Bornstein, 423 U.S. 303, 309 n. 4, 96 S.Ct. 523, 528, 46 L.Ed.2d 514 (1976) ("The conception of a claim against the government normally connotes a demand for money or for some transfer of public property.") (citations and quotation marks omitted).

As plaintiff correctly points out in its motions, the government's obligation to pay did not arise until Merrill Lynch, Hubbard, Inc., the Hospital's mortgagee, assigned to HUD its claims under the mortgage on October 26, 1979. Thus, it was then that the 6 years under the statute of limitations started to run. Accordingly, the suit filed on October 25, 1985 was timely.

II. MOTION FOR SUMMARY JUDGMENT

A. SUMMARY JUDGMENT STANDARD

In ruling on a motion for summary judgment, the court will look beyond the pleadings to determine whether or not a factual dispute exists which requires that trial be held. If there are no genuine issues of material fact and movant is entitled to judgment as a matter of law, the petition will be granted. Bird v. Centennial Ins. Co., No. 93-1363, 11 F.3d 228, 231 (1st Cir.1993).

B. COLLATERAL ESTOPPEL

"It is well established that a prior criminal conviction may work an estoppel in favor of the government in a subsequent civil proceeding." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 568, 71 S.Ct. 408, 414, 95 L.Ed. 534 (1951) (citations omitted). "Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 649, 58 L.Ed.2d 552 (1979) (citation and footnote omitted). "Collateral estoppel does not involve the `re-examination' of any fact decided by a jury. On the contrary, the whole premise of collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no further fact-finding...