Qui Tam Motions and Settlements

John O’Toole writes:

On July 13, 2016, Judge Kevin J. Carey denied a former shareholder’s (the “Movant”) Motion to Proceed Qui Tam (the “Motion”) against the chapter 11 debtors (the “Debtors”) in In re Syntax-Brillian Corporation, Case No. 08-11407 (KJC) (Bankr. D. Del. Jul. 13, 2016).  A copy of the opinion is available here.  The Motion would have allowed the Movant to exercise his power under the False Claims Act (“FCA”) to bring a civil action on behalf of the United States against, among others, the Debtors.  As a threshold matter, Judge Carey determined that because the Movant had previously entered into a “Settlement Agreement Resolving Shareholder Claims” by which he agreed to release any claims “concerning, arising from or related to” the Debtors and the chapter 11 cases, the Movant lacked standing to bring the Motion.  Despite the Movant’s lack of standing, the Court heard the Motion because former shareholders who were not parties to the Settlement Agreement, and thus had standing, filed papers in support of the Motion.

The Court ultimately denied the Motion because the Movant failed to “establish a prima facie case under the [FCA].”  Opinion at *6.  In order to proceed qui tam “under the [FCA] a plaintiff must prove: (1) the defendant presented or caused to be presented to an agent of the United States a claim for payment; (2) the claim was false or fraudulent; and (3) the defendant knew the claim was false or fraudulent.”  Opinion at *6.  The Movant’s allegations suggested only that the government should have taken action to protect him and other former shareholders from the alleged fraud perpetrated by the Debtors, not that the government itself had been aggrieved by the Debtors’ fraud.  Thus, as the “primary purpose of the FCA is to indemnify the government…against losses caused by a defendant’s fraud,” Judge Carey determined that the Motion was deficient.  Opinion at *5.

Also of note is a footnote in the Court’s opinion that indicates that, even if the Movant had standing and the assertions in the Motion validly stated a claim under the FCA, the Court does not have jurisdiction.  The Court stated that it “lacks jurisdiction to determine [the Motion] because qui tam suits under the [FCA] must be heard in a federal district court.”  Opinion at *7 n. 18.

John O’Toole is a summer associate, resident in the firm’s Wilmington office.