Federal Court Grants Surety’s Motion to Dismiss Amended Complaint For Alleged Violations of False Claim Act

During the last several years the Department of Justice and its legal warriors have made Herculean attempts to broaden and deepen the reach of the False Claims Act—often with substantial success. The well-known and well-lawyered Scollick v. Narula, et al. case put significant brakes on that effort against bond producers and sureties that bond government contracts. In a more recent decision out of the U.S. District Court for the Middle District of Florida, the court granted the surety’s and a subcontractor’s motion to dismiss the amended complaint (with prejudice), which alleged various False Claims Act (FCA) violations. See United States ex rel. Dennie Gose et al. v. Native American Services Corp. and Great American Insurance Co., Case No. 8:16-cv-3411-SCB-AEP (Nov. 11, 2022).

Interestingly, the government declined to intervene in this FCA suit, which is its prerogative. The relators then carried on with the non-intervened civil suit. A relator is a private person or entity who files an FCA lawsuit on behalf of the United States in exchange for receiving a portion of any recovery from the defendant(s).

Background and Statement of the Case

Relators’ (Sean Gose [sic] and Brent Berry) First Amended Company (FAC) brought three counts against Defendants, Great American Insurance Company (GAIC) and Native American Services Corporation (NASCO), for FCA violations against each defendant: (a) a false presentment claim; (b) a false record claim; and (c) a conspiracy claim.

Gose, a disabled Vietnam War veteran, was the CEO of DWG & Associates (DWG), an architectural and construction firm. Based on Gose’s disadvantaged status, DWG was admitted as a “participant” in the SBA’s 8(a) program in 2004 and completed several 8(a) set-aside multiple-award or IDIQ contracts. Beginning in 2004, GAIC wrote bonds for DWG’s successful task order contracts, potentially putting itself on the hook for millions of dollars if DWG defaulted on its obligations. Gose and Berry, DWG’s CFO from 2002 to 2012, and their spouses entered into an indemnity agreement with GAIC, putting up their personal assets, including their homes, as collateral for the bonds.

By early 2010, DWG surpassed the 8(a) Program’s size limits and was no longer eligible to bid on new 8(a) set-aside multiple-award contracts. The Relators alleged that 8(a) Program rules, however, allowed DWG to continue to bid on individual task orders for the IDIQ contracts it had previously been awarded—but only if Gose retained his 51% unconditional ownership and control of DWG.

After it graduated from the 8(a) Program, DWG’s financial situation deteriorated; and by June 2012, it was in danger of defaulting on its existing 8(a) task order contracts. After DWG disclosed the risk to GAIC, Relators allege, “‘GAIC froze DWG’s bonding program and refused to issue further bonds without third-party indemnification of GAIC.’” DWG then sought an investor company to assist DWG in completing its existing contracts and help it to avoid default. NASCO submitted a proposal for teaming agreements to assist DWG in completing its backlog of already-awarded task orders and offered to partner with DWG on future 8(a) task orders as well. Relators alleged that, by August 2012, GAIC stepped in, ordered DWG to stop negotiations with all other potential partners, and took control of the negotiations with NASCO.

The various parties entered into several agreements:

1. In September 2012, DWG, GAIC, and NASCO entered into a written agreement, Management and Advisory Services Agreement (MAS Agreement), identifying NASCO as a critical subcontractor to provide DWG with management consulting and advisory services and GAIC as the surety that “’shall provide all funding for, and pay for, all costs associated with‘” DWG’s federal projects.
2. Next, GAIC, DWG, Gose, and Berry, and their spouses, entered into a written agreement titled Forbearance, Settlement and Release Agreement (Forbearance Agreement), which recognized that GAIC had paid DWG over $11.5 million to fund its operations and had paid DWG’s bank $1.35 million to purchase the operating loan on which DWG had defaulted. GAIC agreed to forbear enforcing its indemnification rights as long as the MAS Agreement remained in effect and agreed to release Gose, Berry, and their spouses entirely upon completion of DWG’s government contracts if Gose and Berry assisted Defendants under their various agreements.
3. NASCO, Gose, and Berry entered a written agreement, Right of First Refusal and Option Agreement (Right of First Refusal), which provided NASCO with the right to purchase Gose’s 51% interest in DWG in the event of his death or disability or if he agreed to sell his shares to a third party. It also provided NASCO an option to purchase Berry’s 49% interest without regard to death, disability, or an agreement to sell.

Realtors alleged that NASCO knew that DWG was dependent on GAIC for surety bonds and NASCO to indemnify those bonds. NASCO further “‘knew that threatening to withdraw NASCO’s indemnification of DWG’s bonds would force DWG to comply with its instructions and strip Gose of the ability to control DWG.’” Relators alleged that “‘Defendants conspired to use their extreme financial leverage over Gose to force him into the MAS Agreement, the Forbearance Agreement, and the Right of First Refusal.’” They alleged that Berry and DWG’s attorney warned Defendants that these agreements “‘potentially violated SBA regulations requiring control by Gose as the economically and socially disadvantaged individual upon whom DWG’s 8(a) eligibility depended.’”

Later in 2013, Berry was terminated from DWG employment and sold his 49% ownership interest to NASCO. Thereafter, Berry was not affiliated or involved with DWG. Gose maintained his 51% ownership in DWG.

Relators alleged that, once the MAS Agreement, the Forbearance Agreement, and the Right of First Refusal were finalized, NASCO took control of DWG’s day-to-day operations and its long-term strategy, including deciding on which government contracts to bid. Relators alleged that NASCO knew it was required to notify SBA of DWG’s change in ownership and control. Relators further allege that the 8(a) Program’s rules are clear that, once Gose lost either unconditional ownership or control, DWG’s 8(a) contracts were subject to mandatory termination, unless there was a waiver of the termination requirement, which must be requested by the 8(a) entity before the change in ownership or control. Relators allege that NASCO knew the rules and made an affirmative decision not to seek a waiver or otherwise inform SBA of DWG’s change in ownership and control and knowingly caused to be presented to the U.S. bids and false records or statements material to bids.

Relators contended that DWG’s 8(a) contracts were, therefore, subject to mandatory, non-discretionary termination, which would have excluded it from consideration for future task orders under those contracts. Because Defendants never notified the U.S. of the changes, the contracts were not terminated. Instead, argued Relators, Defendants fraudulently bid on task orders in DWG’s name.  And the U.S., unaware of the change in ownership and control, awarded DWG dozens of task order contracts.

Court’s Analysis of the Fraudulent Claim Element

The short version is that the court agreed with Defendants that Relators failed to state claims for relief under the FCA. Relators failed to prove the necessary elements of an FCA claim: (1) false or fraudulent claim, (2) submission of the claim, and (3) knowledge of its falsity. The remainder of this article will address the discrete issue of the court’s analysis of the first—the fraudulent claim—element. I think that this is the most interesting and nuanced section of the court’s opinion.

The court observed that Relators failed to establish the falsity element, as Gose remained the majority owner of DWG, with 51% of the DWG stock, after the execution of the three agreements.

The relevant SBA regulation (13 C.F.R. § 124), so noted the court, focuses on when a business is a “Participant” in the 8(a) Program: a “Participant must be managed on a full-time basis by one or more disadvantaged individuals who possess requisite management skills.” On the facts pled in the FAC, this regulation was not applicable to DWG in 2012. Relators admitted that DWG had grown beyond the size that would permit it to remain in the 8(a) Program and that it was no longer eligible to bid on new 8(a) contracts. The court found that Defendants correctly argued that Relators ignored the legal consequences of DWG’s early graduation. “Participant” is defined as “a small business concern admitted to participate in the 8(a) Program.” After 2010, DWG was no longer a small business, no longer admitted to the program, and, therefore, was no longer a “Participant.” Thus, in 2012, the control requirement of the regulation did not apply to DWG when any change in control by Relators occurred as a result of the MAS Agreement and the Forbearance Agreement. In addition, the court rejected Relators’ argument that the Right of First Refusal destroyed Gose’s ownership of DWG and made the company ineligible to participate in the Program. The regulation only applies to applicants and Participants, and DWG was neither after 2010. The court found that Defendants had no obligation to notify the SBA of their involvement with DWG. The court further found that the Right of First Refusal did not destroy Gose’s unconditional ownership as defined by the SBA regulations under section 124.

Concluding its analysis, the court dismissed the First Amended Complaint with prejudice, finding that no proper FCA claim was stated against GAIC and NASCO.

At the end of January, the court denied the Relators’ Motion to Reconsider. It is not yet known if there will be an appeal.

The author of this article is Martha Perkins, General Counsel at NASBP. She can be reached at mperkins@nasbp.org or 240.200.1270.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels and should not act upon any information contained in this article without such advice.