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United States ex rel. Petras v. Simparel, Inc.

United States Court of Appeals, Third Circuit

May 18, 2017

UNITED STATES OF AMERICA ex rel. ANDRE PETRAS, Appellant
v.
SIMPAREL, INC., DAVID ROTH, RON GRILLI, LOG LOGISTICS, MONTERP ENTERPRISES, a Canadian Corporation f/k/a RON CACCHIONE LLC

          Submitted Pursuant to Third Circuit L.A.R. 34.1(a) September 20, 2016

         On Appeal from the United States District Court for the District of New Jersey (D.C. No. 3-13-cv-02415) District Judge: Hon. Freda L. Wolfson

          ROSS BEGELMAN MARC M. ORLOW Begelman, Orlow & Melletz Counsel for Appellant

          DIANE KREBS Gordon Rees Scully Mansukhani, LLP Counsel for Appellee Simparel, Inc.

          PAUL H. SHUR MARK SKOLNICK Platzer, Swergold, Levine, Goldberg, Katz & Jaslow, LLP Counsel for Appellees David Roth and Ron Grilli

          Before: McKEE, Chief Judge, [1] HARDIMAN and RENDELL, Circuit Judges.

          OPINION

          McKEE, Chief Judge.

         Andre Petras appeals the District Court's dismissal of his reverse False Claims Act suit against his former employer, Simparel, Inc.; David Roth, Simparel's founder and Chief Technology Officer; and Ron Grilli, Simparel's Chief Executive Officer (collectively, "the Simparel defendants").[2]

         Petras initially alleged a reverse FCA claim[3] and retaliation claim[4] under the False Claims Act against the Simparel defendants, as well as a conspiracy claim[5] against all of the defendants. The District Court dismissed the reverse FCA claim without prejudice, but the remaining conspiracy and retaliation claims were dismissed with prejudice. Petras reasserted the reverse FCA claim against the Simparel defendants in a Second Amended Complaint, which the District Court again dismissed.

         On appeal, Petras challenges the District Court's dismissal of both Complaints. For the reasons that follow, we will affirm.

         I.

         A. Background

         Simparel sells proprietary software to apparel manufacturing companies. Simparel's original investor was L Capital, a venture capital firm licensed by the Small Business Administration, a federal agency. The SBA provided over $90 million to L Capital through the purchase of certain securities, over $4 million of which was invested in Simparel. In return, L Capital received preferred shares of Simparel representing 50.1% of that entity. That amount was later reduced to 37.88% after the firm sold some shares.

         The Amended and Restated Certificate of Incorporation ("the Certificate") specified two conditions that would require Simparel to pay preferred shareholders, such as L Capital, accrued dividends. The Certificate provided for such payments if Simparel's Board exercised its discretion to pay the dividends or if Simparel underwent an involuntary or voluntary liquidation, dissolution, or windup.

         From 2007 to 2012, Petras was Simparel's Chief Financial Officer, David Roth was CTO, and Ron Grilli was its CEO. The SBA was appointed as receiver of L Capital in 2012 after Simparel failed to comply with its SBA funding agreement. Petras contends that this failure resulted in the SBA becoming a preferred shareholder in Simparel, thus triggering the Certificate's provisions and entitling the SBA to accrued dividends as a direct shareholder.

         Petras does not allege that the Simparel Board ever declared that dividends would be paid, or that Simparel underwent liquidation, dissolution, or windup. He instead claims that the Simparel defendants engaged in certain fraudulent conduct-to which he objected-in order to avoid paying the SBA these contingent dividends. For example, he contends that the Simparel defendants engaged in tactics such as hiding Simparel's deteriorating financial condition from the SBA, failing to hold board meetings to review quarterly results, and neglecting to send Simparel's financial statements to the SBA, as well as other tactics. According to Petras, the Simparel defendants did this to prevent the SBA from placing Simparel into involuntary liquidation, which would have triggered the accrued dividends payment. Petras also alleged that the Simparel defendants avoided dividend payments by diverting customers and technology from Simparel to Log Logistics, which is a company Roth had formed, and MontERP, a Canadian consulting company formed to provide computer programming services to aid Simparel's software development.

         After Petras was terminated from employment with Simparel, he filed this suit under the FCA in District Court.

         B. The District Court's Dismissal Orders

         Generally, an FCA action under 31 U.S.C. § 3729(a)(1) targets fraudulent efforts to obtain money from the United States Government.[6] A "reverse" FCA suit under § 3729(a)(1)(G), however, arises from fraudulent efforts to reduce or avoid an obligation to pay the Government.[7] More specifically, § 3729(a)(1)(G) imposes liability on anyone who "knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay . . . money . . . to the Government."

         The District Court first dismissed with prejudice all of the claims against the Simparel defendants and former defendants (Log Logistics and MontERP) except for the reverse FCA claim, which the District Court dismissed without prejudice. The court held that Petras had not adequately pled that the Simparel defendants had an obligation to pay money to the Government because the "obligations" Petras identified in his First Amended Complaint were "outside the scope of the FCA's definition of an obligation."[8] The dismissal of those substantive claims resulted in dismissal of Petras's conspiracy claim. The District Court also dismissed the retaliation claim, concluding that Petras could not establish the required causal nexus between the alleged retaliatory conduct and his FCA claim because he had not pled that the defendants knew of his claim or the related conduct.[9]

         Petras responded by filing a Second Amended Complaint in which he reasserted a reverse FCA claim against the Simparel defendants and attempted to support it with additional allegations.[10] The attempt was unsuccessful, as the District Court again dismissed the FCA claim against the Simparel defendants. The District Court concluded that the alleged obligation to pay the Government that was the basis of the FCA claim was too "speculative" to give rise to an obligation under the FCA.[11]

         Petras now appeals the District Court's dismissal of both his First Amended Complaint and his Second Amended Complaint.[12]

         II.

         A. Legal Standards

         Our review of the District Court's dismissal is plenary.[13] We have previously explained that a private individual, known as a "relator, " may bring a civil action in the name of the United States to enforce the FCA.[14]Nevertheless, a relator's action survives a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure only if the factual allegations "raise a right to relief above the speculative level."[15] Thus, the complaint must state a "plausible claim for relief."[16]

         Beyond this general standard, we have also explained that FCA claims in particular must be pled with particularity under Rule 9(b).[17] Under Rule 9(b), "the circumstances constituting fraud or mistake shall be stated with particularity, "[18] and a party must plead his claim with enough particularity to place defendants on notice of the "precise misconduct with which they are charged."[19]

         With these standards in mind, we will proceed to evaluate the District Court's dismissal of each of Petras's claims.[20]

         B. Petras's Reverse FCA Claim

         Petras's reverse FCA claim alleges that the Simparel defendants knowingly and improperly avoided a contingent obligation to pay the accrued dividends to L Capital after L Capital had been placed into receivership and was being operated by the SBA. On appeal, Petras argues that the District Court ignored the plain meaning of the FCA's definition of "obligation" and that the court's ruling contravenes Congress's intent to broadly construe that term, as evidenced by recent amendments to the FCA.[21] Petras also challenges the District Court's finding that the obligation he alleged was too "speculative."[22] On that specific issue, according to Petras, the standard is not whether it is "possible that the triggering events for payment of accrued dividends may never occur, " but rather simply whether it is "plausible" under his Second Amended Complaint's well-pleaded facts that the contingencies "could reasonably occur."[23]

         We begin our analysis with the relevant statutory text. For Petras to assert a viable reverse FCA claim, he must show that the Simparel defendants "knowingly and improperly avoid[ed] or decrease[d] an obligation to pay or transmit money or property to the Government."[24] The Simparel defendants reiterate their argument on appeal that Petras's reverse FCA claim fails because the SBA was not the "Government" when it was acting as the receiver for L Capital, a private entity. The District Court did not address this issue. However, since it is an issue of first impression before this court, we will take this opportunity to address it.

         We conclude that the SBA, when acting as a receiver under the circumstances here, was not acting as the Government. In the absence of controlling precedent, we find the decisions of our sister circuit courts of appeal helpful. In United States v. Beszborn, for example, the Court of Appeals for the Fifth Circuit held that the Resolution Trust Corporation, an entity the Federal Government created to handle failed financial institutions' affairs, was not a Government actor when operating as receiver of a failed bank.[25] As receiver, the RTC sued the former officers and directors of the failed bank and obtained a judgment that included punitive penalties.[26] When the Government later criminally charged the officers and directors for the same conduct, the Fifth Circuit rejected the defendants' double jeopardy defense.[27] The Fifth Circuit concluded that the RTC, as receiver, was not a Government entity because it had merely stood in the failed bank's shoes.[28]

         More recently in United States ex rel. Adams v. Aurora Loan Servs., Inc., the Court of Appeals for the Ninth Circuit applied a similar principle under the FCA.[29] There, relators brought a traditional FCA suit against lenders and loan servicers, alleging that they had submitted false certifications to the mortgage entities, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), by selling loans to those companies.[30] The relators argued that the false certifications to Fannie Mae and Freddie Mac constituted "claims" under the FCA because they were requests for payment "'presented to an officer, employee, or agent of the United States.'"[31] The court rejected the relators' argument, concluding that the mere fact of the Federal Housing Finance Agency's conservatorship of Fannie Mae and Freddie Mac did not mean those companies had become "federal instrumentalities."[32] The Ninth Circuit explained that the Federal Housing Finance Agency, as conservator, assumed all of Fannie Mae's and Freddie Mac's rights, titles, powers, and privileges, "plac[ing] [the] FHFA in the shoes of Fannie Mae and Freddie Mac, and giv[ing] the FHFA their rights and duties, not the other way around."[33]

         The same logic applies here. As a general matter, when a federally chartered-but private-entity is placed into receivership, the relevant federal agency, acting as receiver, "takes over the day-to-day operations and assumes the powers of shareholders, board of directors, and management."[34] In other words, the agency usually "steps into the ...


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