Spicer v. Navistar Defense (In re Westbrook)

United States ex rel. Spicer v. Navistar Defense, LLC (In re Westbrook), Case No. 12-10858 (5th Cir. May 5, 2014).
Chapter 7 Trustee of whistleblower / debtor’s estate had exclusive standing to prosecute a qui tam False Claims Act against manufacturer of military vehicles when debtor failed to disclose the claims in its bankruptcy proceedings. The Trustee’s amended complaint, however, was properly dismissed because the Trustee failed to plead with particularity a required element under the FCA that the government’s payment was conditioned upon the manufacturer’s strict compliance with certain quality controls within in the government contract.
Procedural context:
The individual debtor appeals the district court’s decision to reconsider and vacate its order substituting the Chapter 7 Trustee (“Spicer”) as the real party-in-interest. Spicer appeals the district court’s decisions dismissing his claims and denying his motion for reconsideration.
On May 15, 2010, Westbrook Navigator LLC (“Westbrook Navigator”) and its majority member, Clifford Westbrook (“Westbrook”), filed separate Chapter 7 bankruptcies. At Westbrook’s individual creditors’ meeting on June 14, 2010, he answered questions about the potential lawsuit and described himself as the relator. At Westbrook Navigator’s creditors’ meeting on the same day, Westbrook said nothing about the potential lawsuit. The suit was not disclosed in Westbrook Navigator’s schedule of assets, nor did Westbrook Navigator amend its schedules when it filed the False Claims Act lawsuit (under seal) in August 2010, as a relator on behalf of the United States. Westbrook Navigator’s suit claimed that Navistar Defense (which had a government contract to build more than 7,000 armored combat vehicles at a cost of approximately $530,000 each) did not apply a required primer coating to the vehicles that Navistar was supplying to the government under a 2007 contract. Navistar’s invoices to the government stated that its components conformed to specifications; however, Westbrook alleged that Navistar knew the primer hadn’t been applied. In late March 2011, when the FCA lawsuit was still under seal, Westbrook obtained an order substituting himself as the relator. By mid-April, the government declined to intervene, and the lawsuit was unsealed. The defendants moved to vacate the substitution order and Spicer moved to substitute himself as the relator. The district court vacated the prior substitution of Westbrook and granted the trustee’s motion to substitute, making Spicer the relator. Several months later, the district court granted the defendants’ motion to dismiss but granted Spicer leave to amend. Spicer amended, but the district court also dismissed that complaint, and denied Spicer’s motion for reconsideration and request for leave to amend again. Westbrook argued in appeal that the mention of the suit during his personal bankruptcy proceedings effectively disclosed Westbrook Navigator’s claims to Spicer before the suit was filed. The bankruptcies were closely connected, Westbrook claimed, because proceedings were held back-to-back on the same day, with Spicer as trustee for both, the list of creditors had significant overlap, and Westbrook owned nearly 95 percent of his company. The panel unanimously found that Westbrook Navigator had failed to disclose the existence of the FCA claims, because Westbrook and Westbrook Navigator were separate entities; despite Westbrook’s disclosure of the claims and his 95% ownership of Westbrook Navigator. Because Westbrook Navistar failed to disclose the claims, only Spicer had the right to prosecute those claims on behalf of the Chapter 7 estate. In affirming the dismissal order, the panel found that Spicer had failed to allege with particularity any fraud on the part of Navistar because he failed to specifically allege that Navistar make knowingly false and material statements that actually caused the government to pay out money. Spicer alleged that Navistar’s delivery of non-conforming vehicles constituted false statements, but the panel found that “a false certification of compliance, without more, does not give rise to a false claim for payment, unless payment is conditioned on compliance.” Because Spicer failed to allege that Navistar’s certification was a pre-requisite to payment under the contract, and Spicer failed to correct the known pleading deficiencies by amendment, his complaint failed to state a claim for a false statement under the FCA.
Jerry Edwin Smith, Edward C. Prado and Jennifer Walker Elrod.

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