USA Ex Rel.

• Decision Date: 27 August 1999
• Docket Number: No. 98-2636,98-2636
• Citation: 189 F.3d 542
• Parties: (7th Cir. 1999) UNITED STATES OF AMERICA EX REL. ROBERT A. DURCHOLZ, and DURCHOLZ EXCAVATING AND CONSTRUCTION CO., INC., Plaintiffs-Appellants, v. FKW INC., Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 542

189 F.3d 542 (7th Cir. 1999)

UNITED STATES OF AMERICA EX REL. ROBERT A. DURCHOLZ, and DURCHOLZ EXCAVATING AND CONSTRUCTION CO., INC., Plaintiffs-Appellants, v. FKW INC., Defendant-Appellee.

No. 98-2636

United States Court of Appeals, Seventh Circuit

Argued February 26, 1999

Decided August 27, 1999

Appeal from the United States District Court for the Southern District of Indiana, Evansville Division. No. EV95-121-C-B/H--Sarah Evans Barker, Chief Judge.

Before POSNER, Chief Judge, and CUDAHY and ROVNER, Circuit Judges.

CUDAHY, Circuit Judge.

Officers at the Crane Naval Surface Warfare Center (Crane) wanted to remove sediment from two ponds located on Crane grounds and solicited bids to do the job. An unsuccessful bidder, Robert Durcholz, and his eponymous company, brought this three-count qui tam Federal Claims Act, 31 U.S.C. sec. 3729 et seq. (FCA), action against FKW, Crane's private general contractor, and Jeffrey Strange, Crane's civilian contracting specialist. The district court granted summary judgment in favor of FKW, see United States ex rel. Durcholz v. FKW Inc., 997 F. Supp. 1159, 1171-74 (S.D. Ind. 1998) (Durcholz II), and Durcholz appeals.¹ We agree with the district court and accordingly affirm its order granting summary judgment in favor of FKW on all three counts.

This case, like most FCA cases, is "heavily dependent on its facts." Hindo v. University of Health Sciences/The Chicago Med. School, 65 F.3d 608, 610 (7th Cir. 1995). The district court has recited the story in some detail in two different published opinions. See United States ex rel. Durcholz v. FKW Inc., 997 F. Supp. 1143, 1146-49 (S.D. Ind. 1998) (Durcholz I); Durcholz II, 997 F. Supp. at 1162-64. We repeat only those facts necessary to the disposition of this appeal.

Debris from a demolition range began to clog two sedimentation ponds, threatening Crane's compliance with various environmental regulations. Crane officials needed to unclog the ponds and quickly. They took three measures to fast-track the project. First, they decided to have the ponds dredged, a method which is faster, but more expensive, than conventional excavation. Second, they issued the job order contract (JOC) through the JOC manager, FKW. Under the JOC regulations, FKW could then select the sub- contractor without regard to price. Finally, Crane officials classified the project as a "performance specification," which they hoped would speed up the bidding process by requiring the use of conventional line-items from the Unit Price Book (UPB). There were two potential drawbacks with this approach, however: the UPB does not contain line-items for dredging, and the winning bidder could, under the governing regulations, complete the project however it liked, whether by dredging or by excavation.

Recognizing these problems, Crane officials made it clear to Brian Frederick, FKW's site manager, that they expected the ponds to be dredged. They were not concerned about the lack of a dredging line-item; they simply expected bidders to price the dredging project using UPB excavation line- items. Frederick, in turn, informed all interested bidders of these expectations, but also told them that (again, pursuant to the regulations) they would be permitted to submit excavation bids. Using UPB line-items for excavation, Crane officials estimated the project would cost about $373,644; FKW's calculations were virtually identical.

FKW received five bids--one for excavation, three for dredging and Durcholz's $271,700 bid, which, Durcholz told Frederick, he would perform by either excavation or dredging. Midwest Dredge was the next lowest dredging bid, at $369,800. FKW presented a summary of these bids to Crane officials. The summary included the names of the companies and the bid prices, but not the proposed method of performance. Frederick, Strange and various Crane officials discussed the bids at a series of meetings, the particulars of which we discuss later. For now, suffice to say that the Crane officials with decision-making authority believed that Durcholz's bid was for excavation only. Midwest was awarded the contract. FKW forwarded its proposal--priced at $457,812: Midwest's bid price plus FKW's 23% cut- -to Crane officials. Pursuant to suggestions from those officials, Midwest included several additional excavation line-items in the proposal in order to help square the final project price with the original estimates. Midwest began dredging the ponds, and FKW submitted an invoice for work completed, still using UPB excavation line-items. A Crane accounting official, claiming that the specific work covered by the line-items had not been completed, refused to pay FKW. Other Crane officials directed FKW to resubmit the invoice without the line-items. FKW followed these instructions; Midwest eventually completed the job; and everyone got paid.

Durcholz's suspicions of fraud resulted in an internal Crane investigation and this lawsuit, which alleges three violations of the FCA. Counts one and two relate to FKW's use of UPB excavation line-items in (1) its proposal for and (2) subsequent invoices from the dredging project. The presentation of these claims to the government, Durcholz alleges, was fraudulent.

To prove a FCA violation, Durcholz must produce evidence that FKW knowingly presented, or caused to be presented, a false or fraudulent claim for payment or approval. See 31 U.S.C. sec. 3729(a)(1). The mens rea element, "knowingly," requires that the defendant have actual knowledge of (or deliberately ignore or act in reckless disregard of) the truth or falsity of the information presented; no specific intent to defraud is required. See id. at sec. 3729(b). Thus, "[i]nnocent mistakes or negligence are not actionable"; "[w]hat constitutes the offense is not intent to deceive but knowing presentation of a claim that is either fraudulent or simply false." Hindo, 65 F.3d at 613 (internal quotations and citation omitted). The government's prior knowledge of an allegedly false claim can vitiate a FCA action. See, e.g., United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1421 (9th Cir. 1991); but see United States v. Incorporated Village of Island Park, 888 F. Supp. 419, 442 (E.D.N.Y. 1995) (government's knowledge not a bar to a FCA claim if the knowledge is incomplete or acquired too late in the process). If the government knows and approves of the particulars of a claim for payment before that claim is presented, the presenter cannot be said to have knowingly presented a fraudulent or false claim. In such a case, the government's knowledge effectively negates the fraud or falsity required by the FCA. See Hindo, 65 F.3d at 613-14; see also United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir. 1999) ("it is impossible to meaningfully discuss falsity without implicating the knowledge requirement").

The district court held that the Crane officials' knowledge--that FKW's proposal and invoices used excavation line-items for the dredging project--barred Durcholz's FCA claims. See Durcholz II, 997 F. Supp. at 1171-73. We agree with this reasoning. From the start, Crane officials were more interested in speed than cost and made their decisions in accordance with these priorities. They classified the project as a performance specification in order to expedite the bidding, knowing that the UPB did not contain dredging line-items. They later directed FKW to modify its proposal to match the Midwest bid and told FKW to resubmit its invoices without the excavation line-items. Thus, the government not only knew that FKW's proposal and invoices contained excavation line-items, it directed FKW to use those pricing numbers. In essence, then, Durcholz is alleging that the government was defrauded by the very activities that its agents ordered. We decline to hold FKW liable for defrauding the government by following the government's explicit directions.² The government knew what it...