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Whistleblower Suits and Qui Tam Provisions Trump Bankruptcy Ruling

April 1, 2014

Whistleblower suits, particularly cases filed under the qui tam provisions of the False Claims Act, are special.

Sorry about throwing the Latin around. The term “qui tam” refers to the right of the individual to sue on behalf of the government.

That is what makes the False Claims Act special.

How special? Well a judge in New York decided that the right to sue under the False Claims Act can’t be as easily discharged as almost every other kind of debt under bankruptcy law. This same judge overturned a bankruptcy court decision to do so.

Peg Brickley of the Wall Street Journal explained the decision:

“Judge P. Kevin Castel said former employees of a Hawker Beechcraft subcontractor should get a chance to press their federal False Claims Act case against the manufacturer of military aircraft, which filed for Chapter 11 bankruptcy protection in May 2012, emerged in 2013, and was sold to Textron Inc.

Such damages may fit through a loophole that exempts some debts from being extinguished in bankruptcy, the judge said, “because they plainly allege fraud by the debtor and associated entities in government contracting.”

The underlying False Claims case involves some serious allegations of fraud made by insiders. The plaintiff-relators were employees of Hawker Beechcraft and, according to the WSJ:

“Donald Minge and David Kiehl, former employees of parts-maker TECT Aerospace Inc., a Beechcraft subcontractor, allege in a federal-court case in Kansas that taxpayers paid for flawed military-aircraft parts. Among other things, their complaint alleges workers would “commence to bash in'” defective parts with pry bars and hammers, to ensure the parts would pass inspection.”

The case was not allowed to proceed because bankruptcy court discharged it. Then Judge Castel ruled on appeal. Castel is no wide-eyed liberal. He’s a George W. Bush appointee who recently was attacked for his decision denying the rights of individuals to sue for sexual harassment when they were interns. In his ruling on that matter, Castel found the individuals did not receive a paycheck and were therefore not “employees” entitled to protection under Title VII of the 1964 Civil rights Act or the New York State Human Rights Law. Not exactly a poster child for liberal interpretations of the law.

No, this is a strict statutory construction kind of a judge. He applied the type of mind-numbing analysis of every applicable noun we are accustomed to seeing form the basis of arcane defenses. His decision has key phrases such as:

“This Court concludes that section 523(c)(1) and corresponding Bankruptcy Rule 4007(c) do not apply to creditors seeking a discharge under any potion of section 1141(d)(6)(A).”

To read the full text of the decision on a pdf file, please click here.

You really won’t find this decision to be fun bedside reading. This time, however, the analysis supports the rights of False Claims Act Relators. The point is a False Claims Act case falls under special exceptions to bankruptcy code and may not be easily discharged. Relators have standing to bring the case on behalf of the government and while it may be upsetting to a planned re-organization, this “self executing” exception to the bankruptcy code does not have to follow the normal rules requiring a timely filing.

This is what happens when Congress decides to enact an important and special law. Sometimes that means that it creates rights that would not attach in other instances. In this case, it seems to have revived an important case alleging serious fraud committed against the government and for that I’m glad. The case will almost certainly be appealed, and the plaintiffs are a long way from collecting on behalf of themselves or the government. Still, it is an interesting precedent and we’ll have to see what happens next.