United States v. Strock

UNITED STATES OF AMERICA, Plaintiff, v. LEE STROCK, KENNETH CARTER,CYNTHIA ANN GOLDE, and STROCK CONTRACTING, INC., Defendants.

Case #15-CV-0887-FPG

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK

March 23, 2021

DECISION AND ORDER

INTRODUCTION

On October 29, 2018, Plaintiff, the United States of America ("the Government"), filed its amended complaint against Defendants alleging violations of the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., (Counts I, II, III), common law fraud (Count IV), unjust enrichment (Count V), and payment by mistake (Count VI). ECF No. 48. The Government alleged that Defendants knowingly misrepresented that their company, Veteran Enterprises Company, Inc., ("VECO"), qualified as a service-disabled veteran owned small business ("SDVOSB") in order to obtain and profit from construction contracts that were set aside for SDVOSBs.

On September 24, 2019, upon Defendants' motions, the Court dismissed the Government's amended complaint with leave to amend. ECF No. 69. The Government appealed. On January 25, 2021, the Second Circuit (1) affirmed this Court's dismissal of the FCA counts against Golde, (2) reversed the dismissal of the FCA counts against Strock, and (3) vacated the dismissal of the FCA counts against Strock Contracting, Inc., as well as the federal common law claims against all Defendants, and remanded for this Court to consider the adequacy of those claims in the first instance. United States v. Strock, 982 F.3d 51, 68 (2d Cir. 2020).

DISCUSSION

A detailed discussion of the facts and the Government's claims is set forth in this Court's September 24, 2019 Decision and Order on the motion to dismiss ("MTD Order") and in the Second Circuit's opinion, and, therefore, need not be repeated here. Broadly speaking, however, the Government alleged that Defendants knowingly misrepresented that their company, VECO, qualified as an SDVOSB in order to obtain and profit from construction contracts that were set aside for SDVOSBs. The Government alleged that this conduct violated the FCA, which, in general terms, imposes liability on any person who makes a false claim for payment from the federal treasury. 31 U.S.C. § 3729(a)(1)(A)-(B).

To be actionable under the FCA, a misrepresentation like the one alleged here—"about compliance with a statutory, regulatory, or contractual requirement[—]must be material to the Government's payment decision." Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989, 1996 (2016) (clarifying the materiality standard and characterizing it as "demanding").

In its MTD Order, the Court distinguished a "payment decision" from a decision to award a contract in the first place, and held that "a misrepresentation is not necessarily material to the Government's payment decision just because the Government would not have awarded the contract but for the misrepresentation." MTD Order, 2019 U.S. Dist. LEXIS 163290, at *30-31. In other words, the Court held that the Government needed to "sufficiently allege that VECO's SDVOSB status was material to its decision to pay VECO's claims, not just its decision to award VECO SDVOSB contracts." MTD Order, 2019 U.S. Dist. LEXIS 163290, at *21. The Court concluded that the Government had not met its burden.

The Second Circuit, however, determined that the Court "relie[d] on an unduly narrow understanding of the scope of the relevant 'payment decision.'" Strock, 982 F.3d at 65. It"assign[ed] 'payment decision' a broader scope than either party would" and held that "the government's 'payment decision' comprised both the decision to award contracts in the first instance and the decision to ultimately pay claims under these contracts." Strock, 982 F.3d 60. Under that standard, the Second Circuit concluded that the Government had adequately alleged materiality.

As a result, the Second Circuit reversed the Court's dismissal of the FCA claims against Strock. It affirmed the dismissal of the FCA claims against Golde but vacated the dismissal of the FCA claims against Strock Contracting and remanded to this Court to consider the adequacy of that claim.

The Second Circuit also vacated the Court's dismissal of the Government's common law claims—fraud, unjust enrichment, and payment by mistake—against all of the Defendants. The Court had dismissed those claims on the basis that it could decline to exercise supplemental jurisdiction over them following the dismissal of the FCA claims, but the Second Circuit pointed out that this Court has original jurisdiction over the common law claims. See 28 U.S.C. §§ 1331, 1345. The Second Circuit remanded to this Court to consider Defendants' alternative arguments for dismissal of the common law claims.

I. The FCA Claims Against Strock Contracting

To impose liability, the FCA requires that a defendant knowingly—i.e. with actual knowledge, deliberate ignorance, or reckless disregard—present or cause to be presented a false claim for payment. See 31 U.S.C. §§ 3729(a)(1)(A), (b)(1). Strock Contracting urges the Court to dismiss the FCA claims against it because the Government does not allege that Strock Contracting itself submitted any false claims for payment (instead, VECO did), or had the requisite knowledge that VECO was not a legitimate SDVOSB. ECF No. 53-1 at 6-7.

The Government counters that Strock Contracting is vicariously liable for Strock's misrepresentations based on respondeat superior. ECF No. 56 at 9-10; Government Brief on Appeal, No. 19-4331, ECF No. 46 at 53. Its theory is that Strock simultaneously acted both as an employee of Strock Contracting and an employee of VECO, and was acting in the scope of his authority at both entities when causing VECO to submit the false claims,¹ thus subjecting Strock Contracting to vicarious liability. See STMicroelectronics v. Credit Suisse Grp., 775 F. Supp. 2d 525, 540 (E.D.N.Y. 2011) ("Where the evidence supports a finding that an agent made misrepresentations simultaneously on behalf of distinct entities, there is 'no difference in the fact of liability of the two as principals.'") (quoting Slotkin v. Citizens Cas. Co. of New York, 614 F.2d 301, 316-17 (2d Cir. 1979))).

Strock Contracting concedes that a corporate defendant may be held vicariously liable for FCA violations under an agency theory but seizes on the Government's use of the term "apparent authority" to avoid liability. Strock Brief on Appeal, No. 19-4331, ECF No. 58 at 58. Strock Contracting argues that Strock did not manifest Strock Contracting-authority vis-à-vis the Government, but rather manifested VECO-authority, since the false claims were submitted by VECO. Id. at 59. But apparent authority is just one form of respondeat superior liability; an employee can also act with actual authority. See United States v. Gatto, 986 F.3d 104, 127 (2d Cir. 2021) (describing actual and apparent authority). Here, the allegations suggest that Strock had actual authority, because he partially owned and controlled Strock Contracting and VECO. It thus makes no difference which entity's authority was "apparent" to the Government.

In its opinion, the Second Circuit noted that it expressed no view about the potential merit of a vicarious liability theory, because that theory has not yet been adopted in this circuit. Strock, 982 F.3d 68 n.8. Nevertheless, the Court declines to dismiss the FCA claim against Strock Contracting at this time. As noted above, Strock Contracting does not contest the viability of the theory itself, nor does it argue that vicarious liability should not be applied in this circuit. Other courts have allowed FCA claims to proceed based on vicarious liability. See, e.g., United States ex rel. Jones v. Brigham & Women's Hosp., 678 F.3d 72, 82 n.18 (1st Cir. 2012) ("We have long held that corporate defendants may be subject to FCA liability when the alleged misrepresentations are made while the employee is acting within the scope of his or her employment.") (citing United States v. O'Connell, 890 F.2d 563, 568 (1st Cir. 1989)); United States ex rel. Scollick v. Narula, No. 14-cv-01339-RCL, 2017 U.S. Dist. LEXIS 119530, at *18 (D.D.C. July 31, 2017) (concluding that plaintiff sufficiently alleged a theory of FCA-vicarious liability based on respondeat superior where plaintiff alleged that individual defendants were senior executives of a corporate defendant and that they acted with that corporate defendant's authority when submitting false claims in the name of a different corporate entity, which, like here, was alleged to be a fake SDVOSB).

Accordingly, the Court finds that the FCA claims may proceed against Strock Contracting.

II. The Common Law Claims²

A. Fraud

1. Strock Contracting

Strock Contracting seeks dismissal of the common law fraud claim against it for the same reasons as discussed above, i.e., that the Government does not allege that Strock Contracting itself made a material false representation. ECF No. 53-1 at 9-10. But for the same reasons as above, this argument fails. The doctrine of respondeat superior applies to fraud claims. See Rapillo v. Fingerhut, No. 09-CV-10429 (VSB), 2016 U.S. Dist. LEXIS 202573, at *40 (S.D.N.Y. Sep. 14, 2016) "Under New York law, an employer may be vicariously liable for the tortious acts of its employees only if those acts were committed in furtherance of the employer's business and within the scope of employment.") (citation and quotation marks omitted); see also, e.g., Cosmos Imp. & Exp. v. Merrill Lynch, Pierce Fenner & Smith, 96 CIV. 6224 (DLC), 1997 U.S. Dist. LEXIS 8409, at *15-17 (S.D.N.Y. June 12, 1997) (denying motion to dismiss common law fraud claim against corporate entity based on respondeat superior, and explaining that, because "fictional entities . . . can only act through their agents," particular allegations of the corporate entity's participation in the fraud is not required); Chapin Home for the Aging v. McKimm, No. 11-CV-667 (FB) (RER), 2013 U.S. Dist. LEXIS 34305, at *13 (E.D.N.Y. Mar. 11,...