Can Companies Transfer Assets to New Corporations to Avoid Civil Penalties Assessed Under the False Claims Act?

On Behalf of | August 27, 2017 | Whistleblower Law

The Fourth Circuit’s decision in United States ex rel. Bunk v. Government Logistics N.V., 642 F.3d 261 (4th Cir. 2016) addressed whether a successor in interest remains liable for its predecessor’s False Claims Act liability. In other words, if a company is liable for penalties under the FCA, can it avoid liability by transferring assets to a successor corporation? Bunk held that it cannot.

That case involved a defendant, Gosselin Group, and its Chief Executive Officer, who crafted a bid-rigging scheme for Department of Defense contracts to ship goods for military personnel to and from Europe. By colluding with competitors, Gosselin Group artificially inflated prices for packaging and loading services, costing taxpayers millions. The jury assessed a $24,000,000 judgment in statutory damages that the defendant corporation attempted to avoid by transferring assets to a new company, GovLog.

After years of criminal proceedings, the government told Gosselin Group about the pending qui tam suits. The CEO, one of those criminally prosecuted, responded that he was “fed up” with the DOJ. He then transferred “Gosselin Group’s business with the United States into the hands of another business entity,” GovLog—an entity which the CEO created and controlled with his “cronies.”

On appeal from the district court, the Fourth Circuit found in favor of the whistleblower, under fraudulent transfer doctrine. First, the Circuit discussed (but declined to resolve) the question of whether successor in interest suits must satisfy the less stringent pleading requirements under Fed. R. Civ. Pro. 8(b) or the comparatively heightened pleading standards that require greater factual specificity under Fed. R. Civ. Pro. 9(b). Instead, the Court assumed the complaint satisfied the latter. Turning to the merits of the case, the Court reasoned that, because the False Claims Act is silent on successor corporation liability, traditional common law rule applied. That rule states that, when a corporation acquires the assets of another, it does not simultaneously acquire their liabilities, albeit with a few exceptions. Ultimately, the Fourth Circuit applied one such exception—the fraudulent transfer doctrine—which may apply depending on a corporation’s intent for transferring to another its assets and the presence of “badges of fraud” such as inadequate consideration, unusual transfer methods, anticipated lawsuits, debtors who retain the benefits, dispositions of all the property, insolvency, and a failure to present evidence refuting suspicious transactions.

Satisfying several of those factors, Bunk found that the transaction in the case intended to defraud creditors. For example, GovLog paid nothing when it “purchased” Gosselin’s business assets. Instead, it “promised Gosselin Group a percentage of its future net revenue” or “monies received by GovLog … minus the amount of the [services] invoiced by [Gosselin Group] to GovLog in connection with” the services provided to GovLog…” Additionally, GovLog “owned nothing except a couple of automobiles, a chair, and a table,” employed almost entirely former Gosselin personnel, and merely negotiated with DoD personnel. Gosselin Group performed all shipping services and reaped nearly all profits.

Though the Court limited its holdings in some ways by, for instance, applying common law and declining to resolve the question of whether Rule 9(b) or Rule 8(a) should apply, the Court provided FCA plaintiffs and Department of Justice attorneys with a roadmap of what they need to show to hold a successor corporation liable for the misdeeds of its predecessor. It is too early to know the extent of Bunk’s impact, but it is clear that at the very least, the decision has made it more difficult to avoid liability through use of shell corporations.