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UNITED STATES v. BOARD OF EDUC. OF UNION CITY

August 17, 1988

UNITED STATES OF AMERICA, Plaintiff,
v.
BOARD OF EDUCATION OF THE CITY OF UNION CITY, et al., Defendants



The opinion of the court was delivered by: WOLIN

 I. INTRODUCTION

 In the instant motion, plaintiff, the United States, seeks summary judgment on the issue of damages in the underlying civil suit brought by the government for violations of the False Claims Act, 31 U.S.C. §§ 3729-3731, common law fraud, breach of contract, unjust enrichment and conversion. The present action follows the criminal convictions of many of the defendants for their roles in a plan to pocket federal funds earmarked for the purpose of improving Union City schools. On October 15, 1985, Judge Sarokin granted partial summary judgment in favor of the United States on the issue of liability against defendants William V. Musto, John J. Powers, Frank Scarafile, Gildo Aimone, Anthony Genovese, Dominick D'Agostino and Lawrence Dentico on Counts I, II, and III of the Complaint. United States v. Board of Education of Union City, et al., Civ. No. 83-2651, slip op at 3 (D.N.J., filed October 15, 1985). *fn1" Contemporaneously, summary judgment on the issue of damages was denied without prejudice to the right of the government to file supplemental briefs detailing its claim. Id. The current motion by the United States follows its submission of a supplemental brief detailing its damage claim. It seeks to establish damages against defendants Musto, Powers, Scarafile, Aimone, Genovese, D'Agostino and Dentico for their violations of the False Claims Act.

 II. BACKGROUND

 A. The Defendants

 The defendants to this suit are: William V. Musto, former Union City Mayor and State Senator; John Powers, former Union City Board of Education President; Frank Scarafile, former school board member and Union City Deputy Police Chief; Gildo Aimone, who acted as the authorized representative of the board in acquiring and distributing the federal funds; Anthony Genovese and Herbert Maddalene, partners in an architectural firm hired by the Board to supervise the construction projects; the architectural firm of Genovese and Maddalene; Dominick D'Agostino and Lawrence Dentico, both of whom had an interest in and exercised control over construction firms involved in the high school projects; and the Union City Board of Education.

 Some of the defendants are currently serving prison terms for racketeering, mail and wire fraud, and other related offenses. These were committed in connection with the conspiracy that existed to defraud the government. The opponents to this motion, Musto, Powers, Aimone, D'Agostino, Genovese, *fn2" and Scarafile are all acting pro se ; Dentico is represented by counsel.

 B. The Fraudulent Scheme

 In 1977, Union City and the Union City Board of Education applied to the EDA for funds to improve Union Hill and Emerson High Schools. Defendant Musto, as Mayor, signed the applications, certifying that the funds would be used according to regulations, and that the EDA would be provided with reports on the project's progress and the disbursement of funds. Grants ultimately totalling $ 4,462,000 were provided. Defendant Powers signed to accept the grants, reaffirming that the funds would only be used for genuine costs incurred in the high school projects.

 Thereafter, it is alleged that defendants Musto, Powers, Scarafile and Genovese agreed to "bend the law" to assist the Orlando Construction Co., controlled by defendants Dentico and D'Agostino; that the defendants, through Aimone, advanced funds to Orlando on a fraudulent basis; and that Genovese certified false reports and change orders submitted to obtain funding.

 The government maintains that $ 940,280 in grant money fell victim to this scheme and did not go into improving Union Hill and Emerson High Schools. The government claims that this figure represents the damages sustained as a result of the submission of false or fraudulent claims. As already noted, defendants Musto, Powers, Scarafile, Genovese, Aimone, D'Agostino and Dentico were found liable for such damages under Counts I, II and III. In the instant motion, the United States seeks to establish the amount of damages owed to it under the False Claims Act, for which defendants are jointly and severally responsible. Additionally, the United States seeks to impose a penalty against every defendant for each of the 21 alleged violations of the False Claims Act. For the following reasons this motion is granted in part and denied in part.

 III. DISCUSSION

 A. Standard for Summary Judgment

 Summary judgment may be granted only when it has been established that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party has the burden of establishing that there exists no genuine issue of material fact. Anderson v. Liberty Lobby, 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). The opposing party must set forth specific facts showing that a genuine issue exists. Id. In deciding a motion for summary judgment, the facts must be viewed in the light most favorable to the non-moving party and any reasonable doubt as to the existence of a genuine issue of fact must be resolved against the moving party. Continental Ins. Co. v. Bodie, 682 F.2d 436 (3d Cir. 1982).

 B. Application of Amended Statute

 It is appropriate for this Court to apply the current version of 31 U.S.C. § 3729 to the motion before it. The crucial differences between the False Claims Act as it existed when this case was filed and the False Claims Act as amended in 1986 are that treble damages rather than double damages are now awarded, and that the penalty figure has risen from $ 2,000 per violation to between $ 5,000 and $ 10,000.

 Generally, a new statute applies to cases pending on the date of its enactment unless manifest injustice would result, or there is a statutory directive or legislative history to the contrary. United States v. Fernandez-Toledo, 749 F.2d 703, 705 (11th Cir. 1985); United States v. Ford, 737 F.2d 1506, 1508 (9th Cir. 1984); Central Freight Lines, Inc. v. United States, 669 F.2d 1063, 1069 (5th Cir. 1982) (citing Corpus v. Estelle, 605 F.2d 175, 180 (5th Cir. 1979), cert. denied, 445 U.S. 919, 100 S. Ct. 1284, 63 L. Ed. 2d 605 (1980)) (citing Bradley v. Richmond School Board, 416 U.S. 696, 94 S. Ct. 2006, 40 L. Ed. 2d 476 (1974)). In the instant case, no statutory directive exists indicating that the amended form of 31 U.S.C. § 3729 should not be retroactively applied to pending cases. Legislative history indicates, if anything, that legislators were anxious for the amendments passed in 1986 to go into effect immediately. S.Rep.No. 345, 99th Cong., 2d Sess., reprinted in 1986 U.S. Code Cong. & Admin. News 5266. The issue of manifest injustice, however, requires a more detailed analysis.

 Bradley sets forth a three part test to determine whether manifest injustice would result from the application of a new law: the nature and identity of the parties, the nature of the parties' rights, and the impact of the change in law on those rights. Bradley v. Richmond School Board, 416 U.S. at 716-21, 94 S. Ct. at 2019-21 (1974). In Central Freight Lines, this test was applied when a decision of the Interstate Commerce Commission ("ICC") was contested by short haul motor carriers operating in Texas. The decision granted eight new long haul carriers permission to operate in the state. In 1978, the eight long haul carriers applied for this right under the Motor Carrier Act of 1935; they were granted permission under the 1980 version of the Act which had been passed during the pendency of their applications. Despite objections from the short haul carriers, who contended that the 1935 Act should have been used in reviewing the applications, the Court of Appeals affirmed the ICC's use of the new law. 669 F.2d at 1069. Specifically, the Fifth Circuit found that no injustice occurred regarding the second and third parts of the test because the new law did not unfairly deprive the appellants (i.e., the short haul carriers) of any legal rights. The court stated that these carriers did not have the unconditional right to render their services without competition from others, nor did they have any vested right to have such competition determined under the old law. Id.

 In the case at hand, there exists even less of a chance of injustice; these defendants had no identifiable legal right as to the magnitude of sanctions applicable to violations of the law. Neither the nature of the defendants' rights nor the impact of the change in § 3729 constitutes manifest injustice. Thus, the second and third prongs of the Bradley test are satisfied.

 As for the nature of the parties, the first prong under Bradley, Central Freight Lines states that this factor should be weighed against the second and third. The fact that most of the defendants are acting pro se, and that they may not be as capable in the presentation of this case as is plaintiff, is outweighed by the fact that defendants knew they would be responsible for a great deal of money as a result of their unlawful actions in the event that their scheme was found out. Whether this figure is tripled or "merely" doubled, it is still a very large sum. There is no reason to believe that if defendants had known the damages and penalties would be greater (by a factor of one) than those existing at the time of the fraud, then they would have been deterred from their acts. Defendants received adequate notice that their liability would be considerable.

 In addition to the lack of manifest injustice, it is well established that statutes relating to remedies are retroactively applicable to pending litigation. Friel v. Cessna Aircraft Co., 751 F.2d 1037, 1039 (9th Cir. 1985); United States v. Blue Sea Line, 553 F.2d 445, 448 (5th Cir. 1977); Amoco Production Co. v. Douglas Energy Co., Inc., 613 F. Supp. 730, 737 (D. Kan. 1985); Jorae v. Clinton Crop Service, 465 F. Supp. 952, 955 (D. Mich. 1979); Grenier v. United States Internal Revenue Service, 449 F. Supp. 834, 842 (D. Md. 1978). A statute is remedial if it does not create any new rights, or eliminate any vested ones, but rather it only acts in furtherance of an already existing remedy. Jorae, 465 F. Supp. at 955.

 C. False Claims Act, 31 U.S.C. § 3729 (1986)

 The False Claims Act provides for a civil penalty that equals the combined total of: a $ 5,000 to $ 10,000 penalty for each violation of the False Claims Act (hereafter, "statutory penalty"), and three times the damages that the government sustains as a result of the violations (hereafter, "statutory damages"). *fn3" Where defendants are found responsible for a particular false claim, they are jointly and severally liable for the penalty in addition to any damages assessed. United States v. American Packing Corp., 125 F. Supp. 788, 797 (D.N.J. 1954).

 1. Statutory Damages.

 The False Claims Act allows the United States to recover only damages for harm actually sustained due to defendants' fraudulent acts. United States v. Cooperative Grain and Supply Co., 476 F.2d 47, 63 (8th Cir. 1973); United States v. Collyer Insulated Wire Co., 94 F. Supp. 493, 498 (D.R.I. 1950). There are two formulas that have been used to calculate actual damages where a benefit has been received from the perpetrator of the fraud, United States v. Ben Grunstein & Sons Co., 137 F. Supp. 197, 205 (D.N.J. 1956), either the "substandard product" formula or the "fraudulently inflated price" formula. Id. The United States indicated in its brief that the damages it sustained resulted from its receipt of a substandard product. However, inasmuch as it did not allege specifically that the product which it received was substandard, this fact may be gleaned only from the formula the government proposes for the calculation of said damages. *fn4" Additionally, the government proposes that the court apply the substandard product formula to only the ill-gotten funds, rather than to the relative values of the project as a whole, with and without fraud, despite the general rule that the impact of fraud is usually measured with respect to the cost of the entire project. *fn5"

 (a) Change Order No. 11 - Union Hill High School. The government's brief and appended exhibits reveal this change order was "totally false" and that the "work was not done." Change Order No. 11 was in the amount of $ 35,337. This money was falsely claimed and the government received no benefit from it. The entire figure represents a loss.

 (b) Change Orders 4-8. The government was billed twice for the performance of the work covered by Change Orders 4-8. Their costs totalled $ 38,261. This claim was false and the government could not have received the work requisitioned as it had already been performed. Therefore, the United States suffered $ 38,261 in damages.

 (c) Change Orders 11-14 - Union Hill. These were also submitted for payment twice, and resulted in a loss to the government. The work called for by Change Orders 11-14 could not have been rendered twice. Change Order 11, which has been established as having never been performed at all, certainly could not have been done a second time. Change Orders 11-14 cost the United ...


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