In the aftermath of a major hurricane, it is both conceivable and predictable that in the chaotic hustle to mobilize government resources to assist the victims there will be occasions for fraud, waste and abuse, including fraudulent, inflated, or false claims. When government contracts are involved, instances of fraud are often first brought to light by whistleblowers through claims initiated pursuant to the “qui tam” provision of the federal False Claims Act (FCA). The qui tam provision authorizes private individuals to file actions on behalf of the government and to share in the proceeds of any recovery. One such action, which was settled in December 2012, was initiated by a whistleblower based on allegations of wrongdoing related to a government contract to provide temporary housing to hurricane victims.
In 2005, Hurricanes Katrina and Rita caused catastrophic damage to the Gulf coast states of Louisiana, Mississippi, Alabama, and Texas. More than 700,000 people were displaced, and many were left homeless. Hurricanes Katrina and Rita caused significant wind and rain damage, extensive storm surge flooding, and failure of the New Orleans levee system. As a result, available housing in the region was severely reduced.
The Robert T. Stafford Disaster Relief and Emergency Management Assistance Act authorizes the President of the United States to declare a major disaster or emergency and, thus, trigger federal public assistance to disaster or emergency victims. With the passage of Hurricane Katrina, after its second landfall on the morning of August 29, 2005, the President declared a major disaster, thus triggering provisions of the Stafford Act, including FEMA’s delegated authority to provide housing assistance in the form of temporary housing units. In response, FEMA provided hurricane evacuees over 100,000 travel trailers and manufactured housing units. To quickly mobilize, set up, maintain and later deactivate these housing units, FEMA initially awarded four large technical assistance contracts on a non-competitive basis to four large contractors—Bechtel, CH2M Hill, Fluor Corporation, and Shaw Group. FEMA awarded these contracts noncompetitively because the urgency and magnitude of the disasters required immediate action. In the months following the hurricane disasters, however, FEMA solicited new contracts designed to provide competition and contracting opportunities to small and disadvantaged local businesses. Based on eight solicitations, FEMA awarded thirty-six additional contracts and assigned each of the thirty-six contractors to specific geographic regions within the four hurricane-impacted states.
In April 2006, FEMA awarded one of those contracts to Jacquet Construction Services LLC (“JCS”)—a New Orleans based contractor. The contract was an Indefinite Delivery/Indefinite Quantity, Fixed Price five-year contract for maintenance and deactivation of manufactured homes and travel trailers. The contract was based on a guaranteed minimum order of $50,000 and was capped by a maximum funding limitation of $100,000,000. JCS was ultimately assigned work on several thousand trailers under the contract. Travel trailers were placed at a variety of locations, including group sites that were acquired, designed, built and maintained by FEMA’s contractors and also at individual home sites throughout Louisiana. On the JCS contract, the guaranteed minimum order requirement was met by FEMA’s simultaneous issuance of the first task order for Year 1 in the amount of $28,040,511. The contract work proceeded over a 3½ year period. Ultimately, JCS wound up in litigation amid allegations of violations of the federal False Claims Act, which allegedly occurred during the first two months of the multi-year contract.
As part of the FEMA contract, JCS was required to provide monthly preventative maintenance inspections on the trailers. These inspections could only be performed when the occupant was present because the contractor required access to the inside of the trailer. However, if JCS made three attempts to contact the occupant to perform the monthly inspection but could not perform the inspection because the occupant was not available, FEMA would still pay JCS for a monthly maintenance inspection so long as an exterior inspection was performed.
On April 26, 2006, at the outset of the contract, JCS entered into a subcontract with JWK International Corporation (“JWK”) to perform maintenance work on the trailers that were the subject of FEMA’s contract with JCS. Allegedly, JWK failed to perform maintenance inspections and failed to make three attempts to contact the occupants of trailers for many of the trailers assigned to JCS by FEMA. As a result, on August 21, 2006, JCS terminated its subcontract with JWK.
In June 2007, whistleblower Brenda deCastro filed a qui tam action against JCS alleging violations of the federal False Claims Act. See United States of America ex rel. Brenda deCastro v. Jacquet Construction Services, LLC, Carter Jacquet, Yolanda Jacquet, and Steven Jacquet, Civil Action No. 07-3584, United States District Court, Eastern District of Louisiana. Based on the court record, Ms. deCastro was a former employee of JCS, where she served as an Accounting Manager. Allegedly, she had an extremely tumultuous relationship with her employer and was ultimately terminated on April 23, 2007. On April 30, 2007, Ms. deCastro allegedly demanded a severance package of $202,789. The court record indicates that coupled with the alleged demand, Ms. deCastro stated that she would decide by the end of the week whether she would send a 28 page statement to FEMA’s office in Washington, D.C. JCS rejected Ms. deCastro’s demands. In the qui tam action that followed, Ms. deCastro alleged that JCS defrauded FEMA by submitting invoices for work that had not actually been performed. Sometime in 2008, the FBI launched a criminal investigation into the allegations made by Ms. deCastro, but apparently the investigation was later dropped and the Department of Justice declined criminal charges. Despite declining criminal charges, however, in June 2011 the federal government nonetheless decided to intervene in Ms. deCastro’s civil suit.
In its complaint, the United States asserted that JCS knowingly presented or caused to be presented false or fraudulent claims for payment to the United States stemming from the FEMA contract. The United States also alleged that JCS knowingly made, used, or caused to be made or used false records, namely false supporting documents, to get the false claims paid. JCS vehemently denied the allegations that it had submitted falsified invoices for work that was not performed. JCS maintained that it had received instructions regarding how to prepare invoices from FEMA’s Technical Monitor in charge of invoice review. JCS also maintained that during the 3½ years in which it performed services under the FEMA contract, JCS received numerous awards from FEMA, was constantly praised in FEMA meetings for its organizational skills, was paid bonuses based on work performance, and its methods of doing business were copied and used not only by FEMA, but by other contractors as well.
The United States alleged that JCS, through a co-defendant employee, instructed Ms. deCastro, the original qui tam plaintiff, to create false “3-attempt” forms to be submitted to FEMA for reimbursement for trailers on which its subcontractor JWK failed to perform preventative maintenance inspections, even though JCS knew that JWK did not make three attempts to contact the occupants. JCS then allegedly submitted these purportedly false forms to FEMA for reimbursement. The United States alleged that JCS submitted invoices for 3,803 inspections for June 2006 and 3,672 inspections for July 2006 claiming payment for preventative maintenance inspections or for three-attempts and exterior inspections. The United States alleged, however, that only 4,963 inspections were performed over this two-month period. Thus, the United States alleged that JCS charged FEMA for 3,703 inspections that were never performed.
The United States sought to recover at least $2,247,690 from JCS based on the allegedly false claims submitted to FEMA by way of three separate invoices. To calculate the claimed amount, the United States multiplied the number of allegedly false claims (3,703) by the amount billed for each claim ($199.36), for a total of $738,230. Because the False Claims Act permits treble damages, the United States then multiplied this number by three to reach $2,214,690. Finally, the United States argued that it was entitled to at least an additional $33,000 in penalties under the False Claims Act for three false invoices submitted by JCS (three times $11,000). Thus, the United States was seeking to recover a minimum of $2,247,690 from JCS. It is not clear from the court record whether the United States was also taking the position that each of the 3,703 inspections—which were allegedly never performed—triggered the imposition of a civil penalty. If so, then the United States would have been seeking between $20,366,500 and $40,733,000 in additional civil penalties ($5,500 to $11,000 per instance).
The litigation proceeded rather slowly, and little or no formal discovery had taken place as of mid-2012. On July 26, 2012, the court set the case for trial to begin on March 11, 2013. As fate would have it, Hurricane Sandy intervened before all of the documents were exchanged and before the first deposition occurred, which was scheduled for December 13, 2012. Consequently, on November 14, 2012, the parties filed a joint motion requesting a continuance of the trial date because the government witnesses and resources required to proceed with discovery were diverted to Hurricane Sandy response and recovery efforts. The court was unsympathetic. Given that the case had been pending since 2007, long before Hurricane Sandy struck the Northeast, the court denied the joint motion on November 21, 2012. Shortly thereafter, on December 10, 2012, the parties contacted the court and announced that a settlement had been reached. As of this writing, the details of the settlement agreement have not been disclosed.
As this case demonstrates, Congress and government agencies remain deeply concerned about alleged fraudulent, inflated, or false claims. The FCA is a very important and effective weapon in the government’s arsenal of criminal and civil statutes to ferret out and combat fraud, to deter false claims, and to recover money damages. Government recoveries of money damages and civil penalties have been significant and steadily increasing. In 1988, the government recovered about $355,000 in cases involving violations of the FCA. Recoveries under the FCA have been rapidly increasing ever since. By 2002, recoveries reached $1.2 billion. In fiscal year 2011, more than $3 billion was recovered. On December 4, 2012, the Department of Justice announced that for the fiscal year ending September 30, 2012 the federal government had recovered a record-breaking $4.9 billion.
Contractors should expect that the heightened agency and court awareness of fraud, which has been seen in recent years, will continue to be manifested in vigorous bipartisan campaigns to enforce anti-fraud laws and regulations. When fast-moving disaster response and recovery efforts present occasions for fraud, it is very likely that the government, often with the assistance of whistleblowers, will continue to work vigorously to ferret out and pursue wrongdoers, recover the wrongdoers’ ill-gotten gains, and protect the public purse.
Eugene J. Heady is a Partner in Smith, Currie & Hancock’s Atlanta office. Smith, Currie & Hancock is a national law firm focusing on construction law, government contracts, environmental law, and commercial litigation. Gene is a regular contributor to the Construction Connection Newsletter. He has over 30 years of experience as a problem solver in the construction industry. Following a successful career in the construction business, Gene began practicing law in 1996. He represents and assists owners, general contractors, builders, subcontractors, suppliers, architects, engineers, designers, sureties, real estate developers, and manufacturers in avoiding and resolving disputes related to construction projects throughout the continental United States, Alaska and the Caribbean. His work involves private, local, state and federal government contracts and commercial, industrial and institutional construction projects. Gene literally grew up in the construction industry; his father was a successful electrical contractor. Unlike most construction attorneys, Gene has hands-on experience. Gene has worked with the tools, at the drafting table and at the helm of a construction company. In 1981, Gene earned a B.S. degree in Engineering from the University of Hartford, majoring in Electrical Contracting. Before law school, he worked in the electrical construction business as a project engineer, project manager, and construction business owner. Gene is a prolific writer and has published numerous works related to the construction industry. He is also a frequent lecturer on construction law topics. Contact Gene at firstname.lastname@example.org or directly at 404-582-8055.