Opposition — Ehrlich v. United States

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| RICHARD K. EuRLICH AND LURLINE GARDENS LIMITED

ae om DIVIDEND HOUSING PARTNERSHIP, PETITIONERS

Vv,

UNITED STATES OF AMERICA

; ON PETITION FOR A WRIT OF CERTIORARI TO

A sae THE UNITED STATES COURT OF APPEALS FOR

e THE:NINTH CIRCUIT »

BRIEF FOR THE UNITED STATES IN OPPOSITION

"ad

'» Rex E. Lee.

“Solicitor General

STUART E. SCHIFFER

Acting Assistant Attorney General

WILLIAM KANTER _

' JuDITH RABINOWITZ .

|. Attorneys,

. ty ».. ~ Department of Justice.

? -¥ |... » Washington, D.C, 20530

(202) 633-22] 7 ;

QUESTIONS PRESENTED

1. Whether vouchers submitted monthly in order to

receive interest subsidies from the government constitute

“claims” within the meaning of the False Claims Act.

2. Whether the False Claims Act imposes liability on

petitioners of one statutory forfeiture for each false claim

submitted to the United States on petitieners’ behalf, when

petitioners had actual knowledge and control over each

such submission.

3. Whether, in a suit under the False Claims Act, the

government may recover damages that accrued after dis-

covery of the fraud.

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

United States v. Bornstein, 423 U.S. 303 .... 3, 5-6

United States v. Cohn, 270 U.S. 339 ......0006: 5

United States v. McNinch, 356 U.S. 595 ........ 5

United States v. Neifert-White Co.,

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Statutes and regulation:

False Claims Act:

Rev. Stat. (1874 ed.):

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National Housing Act, Section 236, 12 U.S.C.

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In the Supreme Court of the Rnited States

} OcTOBER TERM, 1980

No. 81-106

RICHARD K. EHRLICH AND LURLINE GENERAL LIMITED

DIVIDEND HOUSING PARTNERSHIP, PETITIONERS

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

.THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. Al-A17) is

reported at 643 F. 2d 634. The opinion of the district court

(Pet. App. B1I-B8) is not reported.

JURISDICTION

The judgment of the court of appeals was entered on

April 23, 1981. The petition for a writ of certiorari was filed

on July 14, 1981. The jurisdiction of this Court is invoked

under 28 U.S.C. 1254(1).

STATEMENT

Petitioners Lurline Gardens, a limited partnership, and

Richard Ehrlich, Lurline’s sole general partner, obtained a

commercial mortgage to finance a low income housing

project. The mortgage was insured and partially subsidized

by the United States under Section 236 of the National

Housing Act, 12 U.S.C. 1715z-1, a program administered

2

by the Department of Housing and Urban Development

(HUD). Under the statute, the insured amount of the mort-

gage may not exceed 90% of the replacement costs of the

project, including construction costs. The subsidy provided

under the statute reduces the project sponsor’s interest

payments to 1% of the amount of the mortgage; hence, the

larger the mortgage, the larger the subsidy (Pet. App.

Al-A2).

In accordance with routine program procedure, HUD

estimated the maximum mortgage for which it would insure

petitioners’ proposed housing project. Petitioners obtained

a mortgage at the estimated amount and, in August 1971,

HUD, petitioners, and a mortgagee entered into an “Agree-

ment and Certification” under which HUD was to pay the

interest reduction subsidy directly to the mortgagee (Pet.

App. A3). Both the Act and the agreement provide for a

reduction of the insurable mortgage principal, to be paid

by the mortgagor (petitioners) to the mortgagee, in the

event that actual costs of construction are smaller than

estimated project costs (ibid.). Such a reduction of the

principal has the effect of reducing the interest subsidy

HUD is obligated to pay the mortgagee.

Upon completion of the project in August 1972, petition-

ers submitted two Certificates of Actual Cost to HUD, one

as the mortgagor and cne as the general contractor. Both

certificates were prepared by petitioner Ehrlich. The certifi-

cates overstated construction costs to avoid repaying part

of the principal as required by the Act and the agreement.

Thus, the false certifications caused HUD to insure a larger

mortgage and pay larger interest subsidies than those auth-

orized by the Act or required under the agreement. Ehrlich

also certified falsely that there was no identity of interest

with any subcontractor on the project although he was the

sole owner of one subcontractor (Pet. App. A4).

3°

Pursuant to the agreement, HUD paid monthly interest

reduction subsidies to the mortgagee upon the receipt each

month of a “voucher” or “statement” prepared by the mort-

gagee.' Each voucher stated whether the mortgagor (the

partnership) was in default and the amount of the interest

reduction payment due. Seventy-six such vouchers were

submitted by the mortgagee to HUD, causing HUD to

make 76 subsidy payments totalling $995,264.22. Had peti-

tioners not inflated their actual costs, HUD would have

paid the mortgagee $70,068.72 less in interest reduction

payments (Pet. App. B5).

In 1975, based on these events, petitioner Ehrlich pleaded

guilty to two counts of an indictment charging him with

submitting false claims to an agency of the United States, in

violation of 18 U.S.C. 1001. Ehrlich admitted knowingly

and intentionally inflating construction costs. In April

1978, HUD demanded that the partnership pay the excess

principal due the mortgagee under the agreement, but the

partnership refused to do so (Pet. App. A4).

In May 1978, the United States brought this suit in the

United States District Court for the Central District of

California to obtain specific performance of the agreement,

i.e., reduction of the mortgage principal, and to obtain

damages under the False Claims Act, Rev. Stat. 3490, 3494,

and 5438 (1873'€d).2 The district court granted the United

States full relief upon motion for summary judgment,

including forfeitures of $2,000 for each of the 76 vouchers

submitted to HUD by the mortgagee (Pet. App. A4-A5).

'The monthly “vouchers” referred to here have been so labeled

throughout this litigation. In the petition, however, petitioners have

changed this nomenclature to “statements” (Pet. 14 n.*).

2The False Claims Act is codified at 31 U.S.C. 231 et seq., but that

version has not been enacted into positive law. See United States v.

Bornstein, 423 U.S. 303, 305-307 n.1 (1976).

4

The court of appeals affirmed the district court’s judg-

ment in all respects (Pet. App. Al-A14). Judge Canby

dissented only with respect to the number of forfeitures that

could be assessed (id. at Al4-A17).

ARGUMENT

The decision of the court of appeals is correct and does

not conflict with any decision of this Court or another court

of appeals. Further review is therefore unwarranted.

1. Petitioners contend (Pet. 14-16) that the vouchers

submitted by the mortgagee to HUD are not “claims”

within the meaning of the Act. This contention is without

merit. This Court has recognized that “the [False Claims]

Act is broadly phrased to reach any person who makes or

causes to be made ‘any claim upon or against’ the United

States.” United States v. Neifert-White Co., 390 U.S. 228,

232 (1968). Indeed, the Act “reaches beyond ‘claims’

* * * toall fraudulent attempts to cause the Government to

pay out sums of money.” /d. at 233. Thus, the statute

specifies that the submission of “any false bill, receipt,

voucher, roll, account, claim, certificate, affidavit, or depo-

sition” may be grounds for liability. Rev. Stat. 5438 (1874

ed.). The requirement is simply that the false statement has

“the purpose and effect of inducing the Government imme-

diately to part with money.” 390 U.S. at 232.

This requirement clearly was met in this case. The

vouchers here were a necessary prerequisite to payment.

HUD regulations provide that “(t]he interest reduction

payments * * * shall be paid upon the receipt of a billing

* * * from the mortgagee.” 24 C.F.R. 236.515. The mort-

gagee submitted this billing or voucher monthly on behalf

of petitioners and thereby obtained the interest reduction

5

payments from HUD. Thus, the courts below correctly

concluded (Pet. App. A8, B7) that the vouchers were false

claims within the meaning of the Act.’

2. Petitioners contend (Pet. 16-19), relying on United

States v. Bornstein, 423 U.S. 303 (1976), that they cannot

be held liable for 76 forfeitures based on the 76 claims

submitted to HUD by the mortgagee. Instead they assert

that they can be subjected only to one forfeiture because

they submitted false information only once, on the Certifi-

cates of Actual Cost. As the court of appeals explained in

detail (Pet. App. A8-Al1), however, its decision is fully

consistent with Bornstein.

In Bornstein,. this Court considered a subcontractor’s

liability for forfeitures in a case in which the subcontractor

supplied mislabeled parts to the prime contractor, who

incorporated them into a finished product that was fur-

nished to the government. The subcontractor submitted

three shipments of parts to the prime contractor, each of

which was accompanied by a separate invoice, and the

prime contractor forwarded 35 separately invoiced ship-

ments to the government. Recognizing that “the statute

imposes liability only for the commission of acts which

cause false claims to be presented” (423 U.S. at 312), the

Court held that the number of forfeitures is not necessarily

determined by the number of claims ultimately presented by

the innocent prime contractor; rather, it requires examina-

tion of “the specific conduct of the person from whom the

Petitioners mistakenly claim (Pet. 15) that the decision below is

inconsistent with United States v. Cohn, 270 U.S. 339 (1926), and

United States v. McNinch, 356 U.S. 595 (1958). As this Court

explained in United States v. Neifert-White Co., supra, 390 U.S. at

230-232, those decisions simply held that no “claim on or against the

Government” was presented on the particular facts before the Court.

Unlike those cases, however, here the vouchers induced the United

States “immediately to part with money”(390 U.S. at 232) in the form of

interest reduction payments and thus constitute claims within the mean-

ing of the False Claims Act.

6

Government seeks to collect the statutory forfeitures.” 423

U.S. at 313. On the facts of that case, the Court held the

subcontractor liable for three forfeitures, noting (423 U.S.

at 312; emphasis added):

The fact that [the prime contractor] chose to submit 35

false claims instead of some other number was, so far

as [the subcontractor] was concerned, wholly irrele-

vant—completely fortuitous and beyond [the subcon-

tractor’s] knowledge or control.

The situation here is quite different. Petitioners knew

that, because of petitioners’ false certifications, the mortga-

gee submitted monthly claims to HUD for interest reduc-

tion payments that exceeded the amount permitted by sta-

tute. Indeed, because the vouchers reported each month

that the mortgagor was not in default, they depended on

petitioners’ payment each month of their obligations under

the agreement. Moreover, it was completely within peti-

tioners’ control to prevent the submission of each of the 76

claims. At any time, they could have honored the covenant

in the agreement to reduce the excess mortgage amount,

thereby reducing each interest reduction payment to the

correct figure. By refraining each month from performing

their contractual obligations under the agreement, petition-

ers knowingly caused the submission of a false claim to the

United States by the mortgagee. Furthermore, unlike the

Bornstein defendants, petitioners continued to derive a

benefit from the submission of additional vouchers. While

the subcontractor in Bornstein had no stake in the number

of claims presented by the prime contractor, petitioners

here benefitted from an inflated interest subsidy paid each

month as a result of the presentation of each monthly

voucher, the payment of which also prevented their mort-

gage from going into default.

In these circumstances, it is fully consistent with Born-

stein, and in accordance with the purposes of the False

£5

Claims Act, to penalize petitioners, not for the mortgagee’s

actions in submitting the vouchers, but for petitioners’ own

actions in engineering and continuing to assure the presen-

tation of the false vouchers. Moreover, petitioners point to

no decision of another court that is even arguably inconsis-

tent with the decision below. Accordingly, the decision of

both courts below that petitioners are liable for 76 civil

forfeitures does not warrant review by this Court.

3. Petitioners also contend (Pet. 19-22) that the United

States was dilatory in bringing this suit and that damages

suffered after the false claim has been exposed may not be

recovered under the False Claims Act. This contention is

insubstantial. The Act contains a specific, six-year statute

of limitations, which petitioners do not claim was violated.

- Apart from this restriction enacted by Congress, petitioner

points to no authority imposing a time bar to the recovery

of damages under the False Claims Act.

Moreover, even assuming arguendo that the United

States has an affirmative obligation to mitigate damages in

suits brought under the Act, it could not have done so in the

circumstances of this case. Although petitioner Ehrlich’s

guilty plea in 1975 indicated that the amount of the insured

mortgage was too large, the United States was not relieved

of its obligations under the agreement. Had the United

States withheld the interest reduction payments it con-

tracted to pay the mortgagee, it would have risked contrac-

tual liability to the mortgagee for the interest payments and

government liability as insurer of a mortgage in default.

Therefore, the United States had no choice but to continue

making payments and incurring damages, which clearly

were sustained “by reason of” petitioners’ conduct.‘

‘Petitioners also contend (Pet. 22-25) that summary judgment was

inappropriate here because certain factual questions remained in dis-

pute, This factual contention was correctly rejected by both courts

8

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

Rex E. Lee

Solicitor General

STUART E. SCHIFFER

Acting Assistant Attorney General

WILLIAM KANTER

JUDITH RABINOWITZ

Altorneys

SEPTEMBER 1981

below, and it does not warrant review by this Court. As the court of

appeals explained (Pet. App. A5-A6, Al4), the alleged unresolved

factual questions identified by petitioners cast no doubt on the judg-

ment below and provide no reason for the district court to have refused

to grant summary judgment.

DOJ.1981.09