21 January 2015

Court Rejects DOJ’s Effort To Impose Successor Liability for FCA Judgment

Posted by Ellyce Cooper and Collin Wedel

Late last month, in a closely watched False Claims Act case (about which we have previously written here, here, and here), a federal judge in the Eastern District of Virginia rejected the government’s argument that Government Logistics NV (“GovLog”) should be held liable for a $100 million FCA judgment against Belgian shipping company Gosselin World Wide Moving NV (“Gosselin”) under a theory of successor liability.

On August 4, 2014, a jury levied a verdict of $100.6 million in damages and $24 million in civil penalties against Gosselin based on a finding that its repeated submissions of false invoices for moving services amounted to thousands of individual violations of the federal False Claims Act. After the verdict, and DOJ’s ensuing difficulties collecting a judgment from Gosselin, which had sold its US business assets to GovLog, the government sought to hold GovLog liable for the verdict against Gosselin on the theory that GovLog was Gosselin’s successor in interest.

In September 2014, Judge Anthony Trenga ruled that GovLog could be Gosselin’s successor in interest only if the government could establish the elements of successor liability under the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities under the FCA unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. Judge Trenga ordered the parties to brief the question of successor liability, requesting that the parties devote particular attention to whether GovLog’s acquisition of Gosselin would satisfy the fraudulent transfer prong.

On December 23, 2014, Judge Trenga granted summary judgment in favor of GovLog, holding that the plaintiffs had neither adequately pleaded nor submitted sufficient evidence to establish that GovLog was a successor to Gosselin. On the court’s invitation, Plaintiffs had pursued the “fraudulent transaction” prong of establishing successor liability, contending that Gosselin had transferred its US business to GovLog fraudulently for the purpose of avoiding paying a judgment in this or other cases. The court noted that there was insufficient evidence to prove that Gosselin intended through its transaction with GovLog to avoid or delay payment judgment creditors. But, the court went on, even if there had been sufficient evidence to prove the plaintiffs’ contentions, “alleged intent, restructuring [to avoid liability], and knowledge [that judgment creditors would have difficulty collecting a judgment], standing alone, would not be sufficient to impose successor liability.” Otherwise, the court reasoned, “imposing liability under a fraudulent transaction theory without a fraudulent transaction, solely because of the incidental effects of that transaction, turns that theory, in effect, into a theory of strict liability.” Thus, the court concluded, GovLog could not be held liable for Gosselin’s FCA judgment. A copy of the court’s ruling on the successor liability issue in the combined cases U.S. ex rel. Bunk v. Gosselin World Wide Moving, No. 1:02-cv-01168 (E.D. Va.), and U.S. ex rel. Ammons v. Gosselin World Wide Moving NV, No. 1:07-cv-01198 (E.D. Va.) can be found here.

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