United States v. Pemco Aeroplex, Inc.

Citation: 166 F.3d 1311Docket: 97-6910

Court: Court of Appeals for the Eleventh Circuit; February 7, 1999; Federal Appellate Court

Original Court Document: View Document

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The United States government appealed the dismissal of its False Claims Act lawsuit and state common law claims against Pemco Aeroplex, Inc., a subsidiary of Precision Standard Company, following the district court's ruling that the claims failed to state a cause of action. The appeal was reviewed by the Eleventh Circuit Court of Appeals.

Pemco has been contracted since the 1960s to perform maintenance on C-130 aircraft for the Air Force, including the assembly and replacement of wings. In 1991, Pemco had five C-130 wings in its possession that were surplus to its contract requirements and initiated a "Plant Clearance Procedure" to seek guidance from the Air Force on how to handle these wings. Under federal regulations, this procedure involves contractors notifying the government of excess inventory, allowing the government to decide on the property’s disposition.

Pemco submitted an inventory schedule indicating that the five wings were older models, valued at $1,875 for scrap. The government approved the sale based on this valuation. However, Pemco misidentified the wings' stock numbers; they were actually newer models worth significantly more, totaling an estimated market value of at least $2,071,526.25. After purchasing the wings, Pemco sold two for approximately $1.5 million.

The government filed suit against Pemco, alleging violations of the False Claims Act, as well as claims of mistake of fact and unjust enrichment under state law.

The government alleged that Pemco violated the False Claims Act by knowingly making false statements to obtain property from the United States and presenting fraudulent claims. The district court dismissed the government's claims, ruling that the dismissal was with prejudice for the false claim allegation due to a lack of specific false claims submitted by Pemco, but without prejudice for the government’s ability to refile if it met the particularity requirement for intent to defraud under Federal Rule of Civil Procedure 9(b). The appellate issue centers on the correctness of the district court's dismissal of the government’s 'reverse false claim' under 31 U.S.C. § 3729(a)(7), which penalizes those who knowingly make false records to conceal or decrease obligations to the government. The government argued that Pemco caused the government to sell wings below value by misidentifying them, thus constituting a violation of the reverse false claim provision. This provision has not been previously interpreted by this court, but the Eighth Circuit addressed it in United States v. Q Int’l Courier, Inc., where the court found that misrepresentation to reduce obligations owed to the government constituted a violation.

The Eighth Circuit affirmed the district court's summary judgment in favor of Quick, ruling that the government did not prove Quick had a duty to pay money or property that it attempted to evade through false statements or records, as required under the False Claims Act (FCA). The court referenced the case Q Int’l Courier, which clarified that to recover under the reverse false claims provision, the government must show that a specific legal obligation was owed at the time the alleged false record or statement was made. This obligation must not be a mere potential liability but rather a present duty arising from statute, regulation, contract, judgment, or acknowledgment of indebtedness, akin to common law debt obligations. The term 'obligation' in the FCA denotes a legal obligation rather than a mere moral duty, supported by the legislative history that emphasizes 'money owed' as the core duty under the reverse claims provision. The analysis indicated that an individual making a material misrepresentation to evade payment to the government should be liable as if submitting a false claim. However, the court found no such obligation in the government's complaint regarding Pemco's submission of an inventory schedule to the Air Force, which followed proper procedures under the Federal Acquisition Regulations. The regulations outline the responsibilities of the contractor and the plant clearance officer, detailing the review, verification, and potential resubmission of property reported as scrap.

Property not classified as 'scrap' by the government must be assessed for potential use by government agencies before any donation or sale (48 C.F.R. § 45.608-1(a)). Following this assessment, the plant clearance officer determines the appropriate action for the property, which may include selling it to the contractor or requiring return to the government (48 C.F.R. § 45.603). Pemco's filing of the inventory schedule did not create a legal obligation to pay; the government's complaint failed to demonstrate a reverse false claim. Although Pemco included a scrap estimate for the wings in its inventory, the government could not act on this until completing the plant clearance process (48 C.F.R. §§ 45.600, 45.615). Pemco's submission initiated this procedure but did not establish the obligation required under the False Claims Act's reverse false claim provision. The offer in the inventory schedule suggested potential future liability but did not meet the necessary legal obligation criteria. Consequently, the district court's dismissal of the government's lawsuit under the False Claims Act was affirmed.

In dissent, Circuit Judge Hull argues that the government’s complaint adequately states a cause of action, claiming that the district court erred in its dismissal. The dissent emphasizes that the complaint specifically alleges Pemco's possession of government property not needed for contract performance and its initiation of the Plant Clearance procedure to address the return or disposal of the wings. It highlights that the complaint details Pemco's submission of a document titled 'Inventory Schedule B,' which inaccurately listed the wings’ stock numbers, leading to a significant undervaluation of the property involved compared to its actual market value.

Pemco is alleged to have sold two of five wings for $1,500,000, and it does not contest this claim. While the majority finds that Pemco’s inventory schedule does not create a legal obligation to pay at the time of submission, it overlooks the contractual obligation between Pemco and the Government. Specifically, the complaint asserts that Pemco submitted the inventory schedule under its contract, which required it to inform the Government of any excess property and either return it or purchase it. The complaint contains sufficient allegations to withstand a motion to dismiss, including references to Pemco's contract and its obligation regarding the wings.

Pemco contends that its obligation to return the wings only arose at the end of its contract or upon request from the Government’s contracting officer, arguing that no obligation existed at the time of submitting the inventory form. It further claims that the form submission was merely an offer to purchase the excess wings, contingent on Government inspection and acceptance. However, the complaint indicates that the wings were deemed excess at the time of the inventory submission, which was part of Pemco’s pre-existing contractual obligation to manage excess Government property.

The dissent highlights that the majority's reliance on the case of United States v. Q International Courier, Inc. is misplaced, as that case did not involve a government contract and therefore does not align with Pemco’s situation. In contrast, Pemco has a written contract mandating accountability for Government property, including obligations to return or dispose of excess property per Government instructions. The dissent argues that the majority erred in dismissing the Government’s complaint, reinforcing that Pemco’s contractual obligations are the critical factor in this case.