Two qui tam relators who have filed a complaint against a government contractor under the False Claims Act have asked a bankruptcy court to find that False Claims Act damages may not be discharged via the bankruptcy process.

The relators, Donald Minge and David Kiehl, are former employees of TECT Aerospace Wellington, Inc. (“TECT”), a defense company that subcontracted with Hawker Beechcraft to produce certain parts in the production of the Texan T-6 military training aircraft. Under the False Claims Act, a federal whistleblower statute, private whistleblowers (called relators) may file suit on behalf of the government for alleged fraud perpetrated against a government agency or in the course of performance of a public contract. While the government may intervene in a False Claims Act suit filed by private relators, it does not always elect to do so, or at least not right away. In the Hawker Beechcraft case, the government has declined to intervene but reserved its right to do so in the future. According to the qui tam complaint, TECT used unapproved production processes that rendered the parts brittle and susceptible to corrosion. Moreover, the complaint alleges that Hawker Beechcraft knew about these defects and yet failed to notify the government of the problems, inducing the government to accept defective merchandise. Damages flowing from the contract are trebled under the False Claims Act, which allows for the recovery of treble damages plus civil penalties of up to $11,000 per violation; the relators have consequently claimed damages of more than $763 million in the case. Both the subcontractor and Hawker Beechcraft have defended vigorously in the litigation, claiming that the alleged production defects fail to satisfy the False Claims Act’s requirement that the false claims be “material” to the damages suffered by the government. Both companies claim that the alleged defects in this case were not material to the design or viability of the aircraft.

As is often the case in False Claims Act suits, the Hawker Beechcraft matter has transpired for several years, since 2009, and both the relators and defendants have expended a great deal of resources in connection with the lawsuit. False Claims Act litigation, particularly where the relators are acting without the assistance of the government through their private counsel, requires counsel with intricate knowledge of the procedural and factual hurdles that whistleblowers face in trying to prevail in their claims. The Hawker Beechcraft case has a particular layer of complexity, because Hawker has recently filed for bankruptcy and has claimed that any damages that would result from the False Claims Act suit would be discharged in bankruptcy. Minge and Kiehl, on the other hand, have asked the bankruptcy court to find that the whistleblower suit would not be dischargeable in bankruptcy because the False Claims Act complaint is filed on behalf of the government. Thus, the relators argue, damages would be owed to a “domestic governmental unit.”

The federal False Claims Act is a statute dating back to 1863 that contains qui tam provisions allowing relators to sue on behalf of the government for fraud. Relators stand to recover 15% and 30% of any final judgment or settlement, and, as in this case, may proceed privately with their claims even if the U.S. government declines to exercise its right to intervene in the litigation. When a person or entity submits a false claim for payment from the government, or submits a false claim in order to reduce a liability owed to the government, there is liability under the FCA. The statute also recognizes so-called “reverse false claims,” whereby a party fails to return an overpayment from the government, as violations of the FCA. A series of amendments passed in 2009 heightened the statute’s protections against employer retaliation. Qui tam suits brought under the FCA are projected to result in over $9 billion worth of recoveries for the federal government in the year 2012 alone.

 

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