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Federal False Claims Act Proof of Claim Disallowed

In re ATLS Acquisition, LLC, No. 13-10262 (PJW), 2014 WL 490931 (Bankr. D. Del. Feb. 6, 2014)

In this lengthy 71-page Opinion, Judge Walsh tackled the reverse claims provision of the Federal False Claims Act, see 31 U.S.C. § 3729(a)(7) (2006), infrequently opined upon by, or relevant to, the Delaware Bankruptcy Court.  While the intricacies of the medical supply industry and its interconnectedness to the Federal government are interesting in their own right, the effects of this Opinion will not likely be wide reaching.

In short, former employees (the “Relators”) of Liberty Medical Supply, Inc. (the “Debtors“) pursued claims against the Debtors for “overpayments” received by the Debtors that they alleged should have been refunded to the Federal government.  After bringing the claims to the Department of Justice’s (“DOJ”) attention, the DOJ investigated, but declined to intervene.  The Relators, however, continued with their claims, seeking reimbursement of these alleged overpayments.  After lengthy discovery, whereby the Relators received over four million pages of documents from the Debtors, deposed ten witnesses, and retained two experts, the Debtors moved for summary judgment on all claims.

After wading through the record, the Court granted summary judgment for the Debtors, finding that the Relators failed to offer sufficient evidence on each necessary element of their claim.  To establish a reverse false claim, one must prove: (i) a false record or statement; (ii) the defendant’s knowledge of the falsity; (iii) that the defendant made, used, or caused to be made a false statement or record; (iv) for the purpose to conceal, avoid, or decrease an obligation to pay money to the government; and (v) materiality of the misrepresentation.  The Court found that there was no evidence of an “overpayment,” no obligation to repay the Federal government, and no false statements, or knowledge thereof, made by the Debtors.  For these main reasons, and others detailed in the Opinion, the Court sustained the Debtors’ objection and disallowed the Relators’ claim in its entirety.