The U.S. District Court for D.C. has issued a decision that may have far-reaching implications on the conduct of actions brought by the federal government under the False Claims Act. In United States v. First Choice Armor & Equipment, Inc., No. 09-1458 (D.D.C. Aug. 29, 2011) [PDF], the government asserted claims for fraudulent conveyances under the Federal Debt Collection Procedures Act in addition to its FCA and common law claims, and the court has allowed these claims to survive a motion to dismiss.
According to the government's complaint, First Choice Armor & Equipment, Inc., sold $2.47 million worth of bulletproof vests made with the synthetic fiber Zylon to federal agencies and state, local, and tribal law enforcement authorities. Despite learning in 2001 that Zylon fabric was susceptible to a higher level of degradation than initially thought when exposed to high heat and humidity, the complaint alleges that First Choice ignored warnings and failed to fix its product by adding additional layers of Zylon. When First Choice learned of a pending government investigation after discontinuing sales of its Zylon vests in 2004, the principals allegedly removed more than $5 million from the company, causing it to become insolvent.
In addition to claims under the FCA, the complaint asserted violations of the Federal Debt Collection Procedures Act. First Choice moved to dismiss the FDCPA claims, arguing that it did not owe a debt to the government as required by the statute. In denying the motion to dismiss the FDCPA claims, the court noted that the FDCPA's definition of "debt" includes an amount owing to the United States on account of a penalty or damages. Ultimately, the court allowed the government to proceed on its FDCPA claims because, conceptually, the debt was incurred by First Choice upon payment of the fraudulent claims by the government. Accordingly, the government's allegations that First Choice submitted false claims and made false statements under the FCA were sufficient to allege the existence of a debt under the FDCPA.
In light of the decision in First Choice Armor, contractors can expect to see FDCPA claims used in other FCA actions where the contractor's principals have removed capital from the company in an effort to limit damages.