1. The False Claims Act & Bankruptcy Presentation to the Bankruptcy Bar Association for the District of Maryland Alan C. Lazerow

2. What is the False Claims Act? 31 U.S.C. §§ 3729–3733
The purpose of the False Claims Act is “to provide for restitution to the government of money taken from it by fraud.” United States v. Hess, 317 U.S. 537, 551 (1943).
Under the FCA, anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” is liable
Most prevalent fraudulent healthcare billing, but also includes defense contractor fraud, disaster-relief fraud, procurement fraud, research fraud, etc.

3. False Claims Act - Procedure
FCA cases initiated either by the government or by private citizens (the “relator” in a qui tam case)
If by private citizen complaint filed under seal, and government given 60 days to investigate whether it wants to intervene
Complaint is under seal even as to the defendant, and the government routinely granted extensions of its time to investigate, sometimes for years
If the government intervenes, it steps in as a party plaintiff and assumes prosecution of the case
Government intervention in only a small percentage of cases
If no intervention, relator can still proceed alone, but success far less likely
If FCA case successful, relator receives between 15-25% of judgment/settlement if government intervenes; between 25-30% if no government intervention – plus attorneys’ fees + expenses

4. Different Types of False Claims
Goods/services never provided
Example: doctor submitting Medicare claim for medical care not provided
False Certifications– affirmative/implied false certification regarding compliance with a statute/ regulation, where compliance is a prerequisite to payment
Example: contractor submitting claim along with a certification that the goods conform to statute X

5. False Claims Act - Damages
Two components
Per-claim penalty: between approx. $5K-$10K per false claim
Treble damages
Example: $1K in Medicare payments for services not rendered
Per claim penalty: $10K
Treble damages: $1K x 3 = $3K
= $13K in liability for $1K false claim

6. Issue #1 – Dischargeability of a False Claims Act Judgment

7. History of Section 1141
Prior to the 2005 and BAPCPA, the confirmation of a corporate debtor’s plan discharged all of its pre-confirmation debts, unless the plan provided for the liquidation of all or substantially all of the property of the estate and the debtor did not engage in business after the consummation of the plan.
“Section 1141(d) provides that the confirmation of the plan of reorganization discharges all claims of any kind against a corporate debtor in a reorganization….” Beard v. A.H. Robins Co., 828 F.2d 1029, 1031 (4th Cir. 1987) (emphasis added).
After Enron’s bankruptcy filing and subsequent criminal proceedings, Congress, in BAPCPA, eliminated the ability of Chapter 11 corporate debtors from discharging all pre-petition debts

8. Section 1141(d)(6)
In BAPCPA, Congress enacted Section 1141(d)(6) of the Bankruptcy Code, which states:
“the confirmation of a plan does not discharge a debtor that is a corporation from any debt— (A) of a kind specified in paragraph (2)(A) or (2)(B) of section 523 (a) that is owed to a domestic governmental unit, or owed to a person as the result of an action filed under subchapter III of chapter 37 of title 31 or any similar State statute”
Section 523(a)(2)(A) and (a)(2)(B) renders debts for fraud and false writings, respectively, from discharge
Section 1141(d)(6) therefore excepts two kinds of debts from discharge: (1) debts owed to a government unit arising from fraud; and (2) debts owed to a qui tam relator under the FCA

9. Are False Claims Act Judgments Dischargeable
Are False Claims Act Judgments Dischargeable? Comparing the Standards… Liability under the FCA
Liability most often found under Section 3729(a)(1)(A) of the FCA: liable when a person “knowingly presents …a false or fraudulent claim....”
Section 3729(b)(1) defines “knowing” as meaning that a person “has actual knowledge of the information,” “acts in deliberate ignorance of the truth,” or “acts in reckless disregard of the truth”
Further establishes that the term “knowing” “requires no proof of specific intent to defraud.”
See United States ex rel. K&R L.P. v. Mass. Housing Fin. Agency, 530 F.3d 980, 983 (D.C. Cir. 2008) (“[T]he FCA requires that defendants make false claims ‘knowingly’ by (1) having actual knowledge, (2) acting in deliberate ignorance, or (3) acting in reckless disregard.”).

10. Are False Claims Act Judgments Dischargeable
Are False Claims Act Judgments Dischargeable? Comparing the Standards… Standard for Non-Dischargeability under Section 523(a)(2)(A)
Section 523(a)(2)(A) – debts obtained by “false pretenses,” “false representation” or “actual fraud”
Elements: (1) false representation, (2) knowledge that the representation was false, (3) intent to deceive, (4) justifiable reliance on the representation, and (5) proximate cause of damages.” SG Homes Assocs., LP v. Marinucci, 718 F.3d 327 (4th Cir. 2013) (internal quotation marks omitted).
Majority of cases hold that “knowledge” element can be satisfied by a “reckless” representation
In re Gordon, 491 B.R. 691, 701 (Bankr. D. Md. 2013) (Keir, B.J.) (“The requirement of a knowing false representation can be satisfied by a reckless representation.”)

11. Are False Claims Act Judgments Dischargeable? Analyzing the Comparison
Some overlap…
Where person submits false claim with “actual knowledge” of the falsity, it will satisfy the “knowledge that the representation was false” element under 523
“Knowledge” requirement of both FCA and 523 can be met (in most jurisdictions) by a showing of reckless disregard for the truth
But far from identical…
Section 523 test requires intent to deceive; FCA explicitly says that the term “knowing” “require[s] no proof of specified intent to defraud”
Section 523 test requires justifiable reliance; FCA does not
Section 523 test requires proximate cause of other party’s damages; under FCA, cases split, but many cases hold that proximate causation of damages need not be proven for liability under the FCA (“but for” causation suffices instead)

12. Caselaw Discussing the Distinction
In re Winters, No , 2006 WL , *4 (Bankr. W.D. Tenn. Dec. 28, 2006)
“[T]he court notes that the findings of the district court are not sufficient as a matter of law to determine that the debt to the United States is nondischargeable pursuant to section 523(a)(2)(A) The record reflects a finding that the claims submitted to Medicare, while false, resulted from deliberate ignorance or reckless disregard of their truth or falsity on the part of the Debtor. It is not clear, without more, that this finding rises to the level of scienter required for purposes of rendering a debt nondischargeable pursuant to section 523(a)(2)(A).”
Elza v. United States, 335 B.R. 654 (E.D. Ky. 2006) (holding that that the mere finding of liability under the FCA is not res judicata or collateral estoppel for purposes of non-dischargeability).

13. Million Dollar Question: Are FCA Judgments Non-Dischargeable in Bankruptcy?
Answer: Maybe
If courts findings and conclusions clearly establish the required elements for fraud under section 523, res judicata will likely bar the debtor from relitigating the issue, and debt likely held non-dischargeable
In re Spicer, 155 B.R. 795, 802 (Bankr. D.D.C. 1993) (holding that FCA liability was conclusive for purposes of non-dischargeability “since the debtor’s conduct amounted to fraud under § 523(a)(2)(A)”)
If no specific findings by district court regarding the required elements under section 523, no res judicata effect, and government will have to re-litigate the issue
If debtor found not liable under FCA at trial court, then res judicata will bar the Government from prevailing in its non-dischargeability action
In re Schimmels, 127 F.3d 875, 885 (9th Cir. 1997)

14. Issue #2 – Recoupment in the Medicare Context

15. Recoupment and Setoff Generally
Setoff – under section 553, the Code preserves the nonbankruptcy right of a “creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case....”
Broad – mutual debts need not be related to each other; can arise from totally different transactions
Yet narrow – timing element – prepetition claims against the debtor cannot be set off against postpetition debts to the debtor
Recoupment – allows a creditor to reach across the petition date to recoup amounts owed on a pre-petition debt, but only where the debts arise out of a single “transaction”
Automatic Stay Implications – even if setoff is allowed under section 553, stay relief must be granted under section 362; however, with regard to recoupment, “the automatic stay is not applicable,” and thus “[a] defendant is not required to seek judicial approval prior to recoupment....” In re Powell, 284 B.R. 573, 576 (Bankr. D. Md. 2002) (Derby, B.J.).

16. Application to the Medicare Context
When a healthcare company files bankruptcy, it is not uncommon that they owe the government $$ for overpayments/FCA judgment; the issue is whether the government can withhold amounts owed to healthcare providers as a valid recoupment against its FCA judgment/overpayment?
Answer: yes, but the extent to which depends on what Circuit/jurisdiction you are in and which test has been adopted therein

17. The “Integrated Transaction” Test – a Narrow Approach
Requires more than a “logical relationship” between the two events and more than the fact that “the same two parties are involved” – must be the result of a “single integrated transaction”
Among the federal appellate circuits, only applied by the Third Circuit. In re Univ. Med. Ctr., 973 F.2d 1065 (3d Cir. 1992).
As applied in the Medicare context: pre-petition Medicare overpayments and the subsequent withholding of amounts due debtors are all part of the same transaction, but only when the overpayments and the payments to be recouped are within the same “cost” year
Rationale: because each “cost” year is distinct under Medicare, only transactions from within that one cost year can be said to arise from a single transaction

18. The “Logical Relationship” Test – a Broad Approach
Under which “a transaction may include a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship ” TLC Hosps. v. United States Dept. of Health and Human Servs., 224 F.3d 1008, 1012 (9th Cir.2000) .
Been termed a “liberal” and “flexible” test
Applied in the First, Seventh, Ninth and D.C. Circuits
As applied in the Medicare context: pre-petition Medicare overpayments and the subsequent withholding of amounts due debtors are all part of the same transaction, even if they were for different fiscal/“cost” years
Rationale: taking a different view of the Medicare statutes and regulations; the regulations do not “compartmentalize” the cost years – overpayments and underpayments are always being discovered, often times after a technical “cost year” has ended

19. Fourth Circuit Caselaw
Fourth Circuit has not ruled on this issue
Split of authority within the Fourth Circuit
Third Circuit Approach
In re Quality Link-Bertie, LP, 2001 WL , *5 (Bankr. W.D.N.C. 2001) (following the University Medical Center decision and finding that Medicaid payments for the reporting year at issue were “separate and distinct transactions from overpayments due” for prior years)
In re Camellia Food Stores, Inc., 287 B.R. 52, 61 (Bankr. E.D. Va. 2002) (stating that it was “likely” that the Fourth Circuit would apply the Third Circuit’s approach)
Majority Approach
In re Fischbach, 464 B.R. 258 (Bankr. D.S.C. 2012), aff’d (D.S.C. Mar. 22, 2013) (accepting the majority approach)
In re Dist. Mem’l Hosp. of Sw. N.C., Inc., 297 B.R. 451, (Bankr. W.D.N.C. 2002) (“[T]his court finds that the distinctive Medicare systems of estimated payments and later adjustments do constitute a single transaction for recoupment purposes.  Such an exchange of funds may stretch over an extended period of time ”). 

20. District of Maryland Caselaw
In re Powell, 284 B.R. 573 (Bankr. D. Md. 2002) (Derby, B.J.)
Involved overpayment of an employee-benefit plan
Judge Derby applied the narrow, Third Circuit approach
Ravenwood Healthcare, Inc. v. State, No , 2007 WL (D. Md. June 5, 2007)
Judge Schneider agreed with the majority view and allowed the recoupment
On appeal, Judge Garbis held that “the pre-petition and post-petition payments amount to one transaction,” and allowed the recoupment, because “the Medicaid system is premised on continuous payments and reconciliations that span fiscal years”

21. Alan C. Lazerow 7 Saint Paul Street Baltimore, Maryland 21202-1636
(443)