Compliance with Building and Safety Codes Material to Government’s Decision to Fund Progress Payments; United States District Court for the Eastern District of Pennsylvania No. 18-1864, Don Ascolese v. Shoemaker Construction Co., et al.

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The district court granted in part and denied in part a qui tam case alleging fraud on HUD-financed construction projects. The relator alleged the defendants falsely certified compliance with contractual specifications and relevant building codes when seeking progress payments, despite their awareness that certain work had significant deficiencies, including building code violations. The court denied the motion to dismiss in part, finding the relator had adequately pleaded the allegations with particularity and demonstrated that the defendants were aware of his concerns about the quality and safety of the work. The court also found he cited to specific contract language requiring the certifications. The court granted the motion in part, finding the relator did not show that certain hiring quotas were material to the payment decision. The court dismissed claims against the relator’s former employer, finding that the relator did not show that the company had any role in the submission of false claims. The court also dismissed the relator’s retaliation claims, finding that he failed to show that his employer was aware that he engaged in protected activity and failed to assert any employment relationship with the client alleged to have submitted false claims.

Plaintiff-Relator Don Ascolese alleged that Shoemaker Construction Co., joint venture Shoemaker Synterra (SSAJV), and McDonough Bolyard Peck engaged in a scheme to defraud the government by submitting false claims for payment to the Philadelphia Housing Authority for deficient construction work performed in connection with a public housing project funded by the Department of Housing and Urban Development. The relator also claimed unlawful employment retaliation. The defendants moved to dismiss.

In July 2014, HUD awarded PHA a $30 million grant to build mixed-income homes in North Philadelphia. PHA designated defendant SSAJV as the construction manager for the project. Defendant MBP was hired in 2017 as an independent quality assurance manager. The relator was employed by MBP as a QA manager and was assigned to the project.

The relator alleged that over the course of six months on the project, he observed a number of deficiencies in “concrete work,” which he noted in his deficiency log and reported to his supervisors at MBP and the contractors. The relator attributed the deficiencies to schedule delays and the contractor’s efforts to accelerate work to avoid penalties for late completion. The relator alleged the defendants cut corners and began to ignore fundamental safety issues.

For example, the relator alleged SSAJV backfilled over frozen ground, which is a safety violation. Although assured by SSAJV that another contractor had removed the frost from the ground, the relator maintained that the work could not have been performed. Given the depth of the freeze line and the large area containing frozen soil, the project would have required equipment that the site conditions would not have supported.

The relator also alleged that SSAJV failed to allow concrete used in foundational walls and slabs to fully cure before the forms were removed and that steel, horizontal rebar was not used in the concrete foundational walls as required.

The relator alleged that after he reported these and other deficiencies, he was told by SSAJV that he did not need to go out into the field and report deficiencies, but instead could stay at his desk and “take it easy.”

The relator alleged that when the defendants submitted invoices for progress payments, they were required to certify that the work for which they sought payment from PHA was performed to contract specifications. Because the work did not meet specifications or certain building codes, the relator alleged the claims for payment were fraudulent. The relator also alleged the deficiencies will necessitate future re-work and could compromise the buildings’ structural integrity.

On January 18, 2018, approximately eight months after he was hired, the relator was told by MBP that “Shoemaker wants you off the job.” He was then removed from the project and terminated by MBP, allegedly without explanation.

The defendants moved to dismiss, arguing the relator failed to sufficiently plead falsity, causation, scienter, and materiality.

First, SSAJV argued the relator failed to plead with particularity facts supporting his theory that SSAJV falsely certified contractual conformance to PHA when in fact it had failed to follow the project’s specifications. Specifically, SSAJV argued that the relator (1) did not allege specific contractual requirements that SSAJV violated; (2) did not allege that SSAJV was required to remediate all pending or potential deficiencies before requesting a progress payment; (3) failed to plead the alleged construction deficiencies with sufficient particularity; (4) did not identify particular false claims that SSAJV caused to be submitted; and (5) failed to show that PHA lacked knowledge of the deficiencies, which negates the scienter requirement and precludes a finding of materiality. The defendant also argued that the existence of a retainage provision in the contract rendered the construction deficiencies immaterial to PHA’s decision to pay progress payments.

The court disagreed. First, the court noted the relator alleged the contract required work to follow specific building codes and regulations and that the deficiencies he identified violated those provisions. The relator also cited to contract language with specific requirements he alleged were violated. Further, HUD’s form contract requires the contractor to comply with all applicable laws, codes, and regulations related to the project. The court found this sufficient to put SSAJV on notice regarding the contract provisions it allegedly violated.

Second, SSAJV argued that the relator did not allege that SSAJV was required to remediate all pending or potential deficiencies before requesting a progress payment, and therefore his claims fail. However, the court found the false certification theory did not rest on such a requirement. Instead, the relator alleged that each time SSAJV submitted requests for progress payments, it was required to certify that the work for which it sought payment was performed to contract specifications. The court found the HUD form contract included this exact requirement.

Third, the court found that the relator had sufficiently pleaded the alleged construction deficiencies and the scheme to submit false claims based on those deficiencies. The relator identified specific locations of specific construction deficiencies based on his personal knowledge or his own observations. He also clearly categorized the alleged construction deficiencies that formed the basis of his false certification theory.

Moreover, the relator alleged that he logged every deficiency that fell within these categories on the Project Deficiency List, which he provided to the contractor, and he identified the specific dates he made these reports.

The court also found the relator had provided reliable indicia leading to a strong inference that false claims were actually submitted. The relator alleged that work was not completed to specification or corrected afterwards, that SSAJV sought progress payments, that the contract required relevant certifications, and that SSAJV received payments. The court found this sufficient.

Next, the court found the relator had sufficiently pleaded scienter. SSAJV argued that the scienter element was negated by PHA’s knowledge of SSAJV’s alleged contractual nonconformance. According to the defendant, this inference could be drawn from the relator’s own allegations. However, the court found the relator did not allege that PHA had actual knowledge of all the construction deficiencies or, more importantly, that PHA knew SSAJV had falsely certified that this work was performed properly in order to receive payment from PHA. SSAJV noted that the relator’s deficiency reports were submitted to an online portal that PHA regularly accessed. However, the court found no allegation in the complaint about this fact.

SSAJV also argued that because two engineers from PHA were members of the project team, PHA had knowledge of all alleged deficiencies. The court acknowledged that the complaint stated that the engineers might have had knowledge of one type of construction deficiency. However, the court found the allegations did not establish that the engineers had actual knowledge of all deficiencies. And again, the complaint did not allege that PHA was aware of any alleged fraud.

The court also noted that SSAJV did not allege that it knew that PHA knew about the false statements when it paid its request for progress payments. There was no allegation that SSAJV knew that PHA knew it was submitting false certifications for deficient work in order to receive progress payments from PHA. Therefore, there was not enough information at this stage to show government knowledge to undermine the complaint.

Finally, SSAJV argued that the existence of a retainage provision in the contract rendered the deficiencies immaterial to PHA’s decision to pay progress payments. Relying on the HUD form contract, SSAJV argued that PHA was required to withhold 10 percent of all progress payments until the project was complete and PHA accepted all work. According to SSAJV, the relator cannot show that PHA would have withheld progress payments had it known of the deficiencies, because SSAJV would still have had the opportunity to correct them before seeking final payment.

However, the court noted that the false certification theory did not center on PHA’s final payment, which requires the remediation of all pending construction deficiencies. Rather, the complaint focused on the certifications of contractual compliance that SSAJV was required to submit each time it requested a progress payment from PHA, which the relator alleged were false.

The court found the pleadings adequate and denied the motion to dismiss.

Next, SSAJV moved to dismiss the relator’s second theory of false certification—that SSAJV falsely certified contractual conformance with the project’s specifications based on falsified tests and records. However, the court found the complaint met the pleading standards. The relator alleged that SSAJV knew that the concrete work was deficient and concealed the deficiencies through falsified records. The relator specifically alleged that he was told work had been done to remediate frozen soil, but that this work could not have possibly been done, given the site conditions. The court found the relator adequately pleaded that the defendant created falsified records.

Third, SSAJV moved to dismiss the relator’s third false certification theory—SSAJV’s alleged failure to comply with Section 3 of the Housing and Urban Development Act. The relator alleged “on information and belief” that SSAJV falsely certified to PHA that it had hired the requisite number of low-income persons and Section 3 residents of PHA housing to work on the project.

The relator alleged that the contractors on the job hired a single qualifying individual and then rotated him around different contractors to make it appear they had met the requirements. The relator alleged he objected to this and advised SSAJV that it should not submit payments.

In response, SSAJV argued that (1) Section 3 requires that contractors make only “their best efforts” to give low-income persons training and employment opportunities and (2) the complaint made no allegations regarding SSAJV’s efforts to employ low-income persons.

The court agreed, finding the relator failed to adequately allege violations of the HUD Act. First, the court noted the relator did not allege that SSAJV hired the individual he identified, nor show facts demonstrating that the hiring of this single individual violated the HUD Act. Further, there was no allegation that SSAJV was a business subject to Section 3. Finally, the complaint was otherwise devoid of facts regarding SSAJV’s efforts to employ low-income persons on the project and/or the feasibility of hiring such persons.

The court also found the relator did not allege this requirement was material to payment. The relator did not cite to contract language with this requirement nor allege that PHA would have withheld payment based on a violation. He also failed to identify any certification required of SSAJV. The court therefore dismissed this count.

Next, defendant MBP sought to dismiss the false certification claims against it, arguing the relator improperly referred to the defendants collectively throughout the complaint but did not otherwise plead that MBP submitted or caused to be submitted any false claims.

The court agreed. Although the relator alleged that he reported the alleged construction deficiencies to his supervisors at MBP, as pled, the court found that the reliable indicia of the scheme to falsely certify contractual compliance to PHA for purposes of receiving progress payments are specific only to SSAJV. The relator also did not allege any specific wrongdoing of MBP’s. Without allegations about MBP’s specific role in the scheme, the court agreed that the claims against MBP should be dismissed.

Finally, the court considered the final claim of unlawful employment retaliation. MBP argued the relator failed to show that he engaged in any protected conduct, because he was required by his job duties to note and report on construction deficiencies. However, the court was not persuaded on this point, because it was not within the relator’s job duties to report illegal conduct or government fraud.

Nonetheless, the court found the claim failed to plead MBP had knowledge that he was engaged in protected conduct. In the complaint, the relator alleged that he noted and reported to MBP, SSAJV, and, at times, PHA that certain concrete work performed was not compliant with contract specifications and/or building codes and regulations. Those allegations demonstrated that the relator was performing the functions of his position.

However, those allegations did not plausibly plead that MBP was otherwise aware that the relator was concerned that MBP and/or SSAJV was falsely certifying contractual compliance in order to receive progress payments from PHA. The relator pleaded no facts demonstrating that any of his reported complaints to the defendants were about illegal conduct or fraud on PHA. Thus, the court dismissed the retaliation claim against MBP.

SSAJV and Shoemaker argued that the relator could not pursue a retaliation claim against them, because he was not an employee, contractor, or agent of either entity. In response, the relator argued that he can pursue a claim, because SSAJV caused his removal from the project.

In support, the relator cited precedent holding that the FCA does not condition protection on the employment relationship between a whistleblower and the subject of his disclosures. However, the court found the relator misread the citation. In that case, an employee sued his employer, claiming that his employer fired him for disclosing another company’s fraud on the government. The Fourth Circuit held that the employee could pursue a retaliation claim, even though the subject of his reporting was another company.

In this case, precedent would allow the relator to bring a retaliation claim against MBP based on SSAJV’s alleged fraud if the relator asserted that his reporting of SSAJV’s fraud to MBP resulted in his removal. Because the relator did not allege a relationship with SSAJV or Shoemaker, the court dismissed the retaliation claim.

FCA - Ascolese v. Shoemaker