by Andrew Van Ornum, Associate

Contractors performing public works in California now have additional guidance on the repercussions for violating the California False Claims Act (“Act”).  In Fassberg Construction Co. v. Housing Authority of the City of LosFassbergAngeles, 151 Cal.App.4th 267, 60 Cal.Rptr.3d 375 (Cal.App. 2007), the court of appeal confirmed civil penalties may only be imposed for false “claims,” as opposed to false “records or statements” in connection with requests for payment.  As to the latter, a public entity must prove it was damaged before it is entitled to recovery.  Now it is clear that public entities may not simply multiply the number of “false” payroll reports, change order proposals, or other records or statements by a penalty of up to $10,000 per record or statement.

The Fassberg Facts

In Fassberg, the Housing Authority of the City of Los Angeles (the “Authority”) awarded plaintiff Fassberg a contract for $12,862,690 to build 25 residential buildings.  Among other terms, the contract required Fassberg to submit certified payroll reports on a weekly basis and to present applications for payment based upon the estimated amount of work performed to date.  The contract also allowed the Authority to make changes in the work as well as allowed Fassberg to submit proposed pricing and change orders for such work.

During construction, the Authority ordered numerous changes to the work, leading to Fassberg’s submission of 224 change order proposals.  The Authority acknowledged the merit of many of the change order proposals, but many were disputed.  On 70 of the acknowledged changes, the Authority failed to pay or issue final written change orders.  In addition to change order issues, Fassberg and the Authority also disputed the cause of the significant extended project duration (795 days compared to the original contract-allowed 270 days).

Ultimately, Fassberg sued the Authority for retention, unpaid and disputed change orders, and for delay and disruption damages.  The Authority counterclaimed with allegations, among others, that Fassberg breached the contract and committed numerous violations of California’s False Claims Act.  The Authority claimed Fassberg’s false claims included false change order proposals, overestimated requests for partial payment, and inaccurate certified payroll records.

At trial, the Authority characterized each certified payroll report, change order proposal, and request for progress payment as a separate false claim.  In total, the Authority alleged Fassberg made 3,959 false claims.  Specifically, the Authority claimed Fassberg underpaid and fraudulently reported payroll, asserted inflated change order proposals, and overstated percentages of completion in payment requests. The jury agreed in most part and found that Fassberg submitted 2,983 false claims, which resulted in $455,000 in damages.  The trial court trebled the damages and imposed a civil penalty of $500 for each of the false claims.

The Statutory Distinction Between “Claims” and “Records or Statements”

The Act provides that persons who commit certain prohibited acts are liable for treble damages.  Without limitation, a contractor violates the Act by: (1) knowingly presenting or causing to be presented “a false claim for payment or approval” by the state or a political subdivision, or (2) knowingly making or using or causing to be made or used “a false record or statement to get a false claim paid or approved.”  Cal. Govt. Code § 12651(a)(1), (2).  Beyond liability for treble damages, the Act also provides that a person who violates the Act is liable for a civil penalty of up to $10,000 for each “false claim.”  Cal. Govt. Code § 12651(a).

In Fassberg, the court of appeal overturned the jury’s findings of 2,983 false claims, and the concomitant award of penalties of $500 for each false claim (totaling $1,491,500).  The court faulted the trial court’s failure to distinguish between a “false claim for payment“ and a “false record or statement.”  Under the Act, a “claim” is a “request or demand for money, property, or services.”  Cal. Govt. Code § 12650(b)(1).  The court concluded that the legislature intended the separate terms to mean different things. Accordingly, as provided in the Act, only false “claims,” i.e., false requests or demands for money, may subject a contractor to penalties.

•    Certified Payroll Records

With respect to payroll records, which comprised 2,964 of the total 3,959 alleged false claims, the court noted that the records were contractually required, were required to be certified accurate by Fassberg, and had to be furnished before the Authority would make payments.  However, the court noted the records were not requests for payment.  Rather, the records were made or used to support Fassberg’s requests for payment.  At best, the payroll records were submitted in conjunction with a “claim” but were not separate claims.  Consequently, even though the payroll records misstated payroll amounts, and were intended to induce payment, they were not separate false “claims.”

•    Change Order Proposals

The Authority argued that change order proposals were false claims because the proposals included “price increases” for original contract work, work caused by Fassberg’s own delays, and work for which Fassberg was otherwise was not entitled to additional compensation.  In addition, the change order proposals contained undocumented excessive wage rates and greater costs for general conditions, insurance, and bonds.  The court, like with the payroll records, determined that the change order proposals were not payment requests.  While change order proposals were intended to cause modifications of the contract for future payment, they were not requests for payment.  That does not mean a contractor is totally immune from liability for over-inflated or unjustified change order requests.  The court adopted the federal rule that when a contractor knowingly presents a false change order proposal and the owner issues a change order in reliance thereon, each subsequent request for a progress payment is a false claim. 

•    Progress Payment Requests

As to progress payment requests, the court concluded that they were claims because they were direct requests or demands for money. While the Authority claimed that Fassberg’s progress payment applications were false because they overstated the percentage of work completed, it was unclear whether the jury believed the Authority, and the court did not address the sufficiency of the evidence.  This issue was remanded for a new trial on the number of false claims, if any, and any appropriate penalties.

Damages

If the contractor’s violations of the Act consist only of “false records or statements”, the public entity must prove that it incurred damage as a result of the records or statements.”  Fassberg is illustrative of the situation where numerous violations may not equal significant recovery.

Beyond its claims for civil penalties, the Authority claimed Fassberg’s false claims, records and statements caused the Authority damages of $1,159,014.60.  All but $45,882 related to liquidated damage claims and claimed deductive change orders.  The $45,882 represented claimed labor overcharges in change orders.  After some apparent confusion, the jury awarded the Authority $455,000, which corresponded with the amount Fassberg underpaid in wages.  However, the Authority had no obligation to pay the wages and in fact did not make any payments or incur loss.

Nonetheless, the Authority claimed it was “entitled to recover the amounts paid to Fassberg under the contract in reliance on the purported false certifications of weekly payroll reports.”  Fassberg, supra, 152 Cal.App.4th 720, 60 Cal.Rptr.3d at 400-401.  It claimed that damages should be measured as “the difference between the total amount paid to Fassberg and the amount it would have paid if the payroll certifications had been truthful.” Id.  Even though payment of prevailing wages to workers was a necessary condition for payment to Fassberg, the court properly rejected the argument.  Id.

The court clarified that a public owner must show actual damages, such as increased costs, impaired project value, or other cognizable loss or harm.  As the contractor is paid to construct the project, just because it submits false records or statements does not necessarily mean the owner is not receiving what it paid for.  The Act does not merely allow disgorgement of amounts paid under the contract.  The court overturned the jury award and determined that under the Act, damages must still be proved to have resulted from the contractor’s violation of the Act.

Summary

While public entities frequently allege false claims in response to contractor claims, the decision in Fassberg clarifies the potential exposure for violations of the Act.  If the violation of the Act constitutes a false “claim”, the contractor faces a civil penalty of up to $10,000 for each violation.  If, however, the contractor is accused of furnishing false “records or statements” in connection with a request for payment, the public entity must prove its damages resulting from that record or statement.  The public entity simply cannot count the number of violations of the Act and multiply the total by the statutory penalty amount.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.

Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.