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UNITED STATES v. KLEIN

April 2, 1964

UNITED STATES of America, Plaintiff,
v.
Sydney KLEIN doing business as Standard Real Estate Company, Eugene Spirer and R. Doyne Halbritter, Defendants



The opinion of the court was delivered by: ROSENBERG

I. INTRODUCTORY STATEMENT

This action was instituted by the United States against defendants, Sydney Klein, doing business as Standard Real Estate Company, Eugene Spirer and R. Doyne Halbritter, under the provisions of § 3490 and § 5438 of the Revised Statutes, 31 U.S.C.A. § 231 of the False Claims Act. *fn1" The United States maintains it suffered losses attributable to 25 false claims caused by the defendants and resulting from payments made by the Veterans Administration on guaranteed veterans home loans as authorized under the Servicemen's Readjustment Act of 1944. *fn2" The loans were secured by mortgages on houses in the town of Bretz, Preston County, West Virginia.

 The action against R. Doyne Halbritter, one of the named defendants, was previously dismissed without prejudice because of lack of jurisdiction over the person. *fn3" No evidence has been produced here against the defendant, Eugene Spirer. Accordingly, judgment will be rendered in favor of Eugene Spirer and against the plaintiff.

 As for the defendant, Sydney Klein, a stipulation filed between counsel corrects the record to indicate that Sydney is not trading and doing business as Standard Real Estate Company, but is a member of a partnership which is known as Standard Real Estate Company. Testimony, subsequently developed, indicates that the partnership consisted of the brothers Sydney Klein, Morris Klein, Benjamin Klein, Zola Klein and Samuel Klein, and one Charles Chatkin. Obviously, this action should have been brought against the partnership as such, but it was brought only against Sydney, and neither the partnership nor the individual partners were here made party defendants since it appeared that the Government was unaware of them at the time of the institution of the action.

 The town of Bretz consisted of approximately 69 houses, a church, a school, and roads. The town was originally owned by the Bethlehem Steel Corporation which operated a coal mine in the vicinity and provided these houses for its employees as tenants. When the company ceased operation in 1943, it sold the entire town to three joint purchasers. These successor owners or their assigns conveyed the town to Sydney Klein and one Eugene Lebowitz on December 1, 1948 for the consideration of $ 90,000 as secured by (1) a mortgage from the buyers to the sellers in the sum of $ 90,000 payable in quarter annual payments each in the sum of $ 5,000 and (2) a series of 36 notes from the buyers to the sellers, each in the sum of $ 2,500 and payable consecutively.

 After accepting title to the town of Bretz, Klein and Lebowitz affixed exterior wall siding to the houses, repaired porches and repaved the town's roads at a cash expenditure of $ 56,000. Five of the 69 houses were sold outright for cash prices ranging from $ 3400 to $ 5700. The other 64 houses were lease-sold by Agreements of Sale. Individual prospective purchasers-lessees were required to pay such amounts of money as they could -- $ 50, $ 75 or $ 100. They were obligated to pay monthly amounts from $ 50 to $ 60, depending on the sizes of the houses, for such time as it would take to make up the prices mentioned in the Agreements of Sale, including interest, taxes, etc., or unless paid sooner, when the purchasers would be entitled to receive deeds for the properties. At the end of five months the record shows that 69 houses were sold, five outright, as already stated, and the balance by the agreements, with the result that $ 33,000 cash was received and accounts receivable remained outstanding in the amount of $ 215,000. The original Klein-Lebowitz mortgage on the Bretz properties remained.

  In July or August 1949, Mortgage Service Corporation (Mortgage Service), a mortgage and real estate brokering firm, entered into negotiations with Klein for the broadening of his investments in behalf of Standard Real Estate Company (Standard). This involved the purchase of the Sunset Heights Realty Corporation, which owned certain real estate in Titusville, Pennsylvania, for the sum of $ 213,973.54. The transaction required certain financing, and arrangements were made by which the realty in Bretz was tied into the deal. Mortgage Service negotiated a $ 190,000 mortgage loan for the properties in Bretz. Of these proceeds $ 61,372.92 was allocated to the retirement of the Klein-Lebowitz mortgage at Bretz and payment of $ 10,000 was made to Lebowitz. At the same time, Lebowitz conveyed his interest in Bretz to Sydney Klein. The sum of $ 99,071.95 was applied for the purchase of the Sunset Heights Realty Corporation holdings. The balance of the proceeds, after expenses amounting to $ 18,176.63, was paid to Sydney and Zola Klein and their wives. This $ 190,000 mortgage was payable in eight years at the rate of $ 2,498.50 monthly including principal and interest. Also at the same time, Sydney or Standard assumed a mortgage existing on the Titusville property in the sum of $ 348,512.15. The Titusville property had been owned by officers of Mortgage Service which, as well, was the mortgagee of the $ 190,000 mortgage, and which it assigned to the First Federal Savings & Loan Association of Greene County (First Federal). The negotiation was further complicated by the giving of deeds of trust by Sydney and Zola Klein and their wives.

 Early in 1950, it became apparent that the $ 190,000 mortgage held by First Federal on Bretz was looked upon with disfavor by the banking officials of the Commonwealth of Pennsylvania and inquiries by the bank examiners became imminent. With this in view, Sydney with the officials of both Mortgage Service and First Federal commenced a course of conduct for the purpose of reducing the $ 190,000 mortgage loan. It was decided that this would be done with proceeds from Veterans Administration guaranteed home loans. This, of course, required that applications for such guaranteed loans be made by veterans; so veterans had to be procured to make the applications. Accordingly, a campaign was initiated by Sydney and his partners to carry out this program. As the result of this campaign those Bretz homes-occupiers who held whatever title by virtue of Agreements of Sale were told that they would not be permitted to stay in the homes any longer unless they procured veterans to buy the homes and make applications for Veterans Administration loans. Where occupiers were unable to do so, the Klein's procured veterans from the outside to become purchasers and to make applications for the Veterans Administration loans. On occasion, a procurer was allowed a fee for getting a veteran applicant. On two occasions, veterans, were solicited and applications for loans were brought to them while they were in jail. Veterans were requested to buy homes, not necessarily for themselves but for relatives or others. This program was initiated under the direction of Sydney in the Standard offices at Pittsburgh, but it was carried out in the field (Bretz) primarily by the direct contact of the brother and partner, Sam Klein.

 With each application Standard advanced the sum of $ 20.00 to First Federal for processing the loans. Of this sum, $ 5.00 was to be applied for the obtaining of a credit report on each applicant. Credit reports evidently were never procured. Supporting each Veterans Administration home loan, when granted by First Federal, Sydney and Zola gave a personal written guaranty to First Federal obligating themselves to pay all monthly payments due if the veteran-mortgagor defaulted. A total of forty Veterans Administration loans were approved in Bretz between approximately April 5, 1950 and November 16, 1950.

 There is no indication of what collections were made from these new occupiers, but we may fairly infer that some of the Veterans Administration mortgage payments were maintained out of the payments procured from the subsequent occupiers under these Agreements of Sale. Finally, conditions became worse, and Sydney, though personally obligated, or Standard, also, defaulted on the defaulted loan payments as due, and the Veterans Administration commenced foreclosure proceedings on defaulted loans.

 The plaintiff maintains that the defendant in violation of the False Claims Act procured veterans as purchasers (1) by knowingly misrepresenting the net worth of the veterans-applicants; (2) knowingly procuring home owner applicants who had no intention of ever using the Veterans Administration loan properties as homes; (3) by knowingly sponsoring veterans whose incomes bore no reasonable relationship to the obligations; and (4) caused or brought about in concert with the other participants foreclosures against such falsely and fraudulently presented Veterans Administration mortgages; and that this resulted in losses and damages to the Veterans Administration on these home loans which had been guaranteed in reliance upon false, fictitious and fraudulent statements or representations, as made and unknown to the Veterans Administration.

 The defendant, Sydney, resists liability here because he asserts that (1) he did not personally and knowingly present or cause to be presented any false claim against the United States; (2) the plaintiff failed to establish an intent to defraud as an essential element of this cause of action; (3) the plaintiff suffered no actual damage; and (4) the plaintiff's claim is barred by the limitation of the applicable statute.

 The evidence in this case is both manifold and complicated. A number of contentions have been here raised and argued by counsel for the parties. I have diligently and with effort extracted the facts from the many exhibits as supporting the oral evidence and have made extensive findings of facts. I have attempted to give definition to all of these in an overextended opinion. I have not specifically disposed of a number of the parties' arguments, but I am convinced that these either required no comments or rulings, or that they have been generally disposed of the rulings as made.

 II. THE FALSE CLAIMS ACT

 The False Claims Act was originally enacted on March 2, 1863, 12 Stat. 696 and later was adopted in § 3490, § 3494 and § 5438 of the Revised Statute (31 U.S.C.A. § 231, § 235). These sections provided for both criminal and civil remedies. Section 5438 made certain acts to defraud the Government crimes and punishable by imprisonment. Section 3490 made the violation of § 5438 subject to forfeitures and double damages. When § 5438 was repealed, its provisions though criminal in nature were incorporated by reference into the provisions of § 3490. United States v. Rainwater, C.A.8, 1957, 244 F.2d 27, affirmed 356 U.S. 590, 78 S. Ct. 946, 2 L. Ed. 2d 996 (1958).

 Later, the question arose as to whether or not any action brought under the False Claims Act was civil and remedial or penal in nature. It was stated in United States v. McNinch, 356 U.S. 595, 598, 78 S. Ct. 950, 952, 2 L. Ed. 2d 1001:

 '* * * But it must be kept in mind, as we explained in Rainwater, that in determining the meaning of the words 'claim against the Government' we are actually construing the provisions of a criminal statute. Such provisions must be carefully restricted, not only to their literal terms but to the evident purpose of Congress in using those terms, particularly where they are broad and susceptible to numerous definitions. See United States ex rel. Marcus v. Hess, 317 U.S. 537, 542, 63 S. Ct. 379, 383, 87 L. Ed. 443; United States v. Wiltberger, 5 Wheat. 76, 95-96, 5 L. Ed. 37.'

 In United States v. Rainwater, supra, 356 U.S. at pages 592 and 593, 78 S. Ct. at pages 948 and 949, the Supreme Court noted:

 '* * * In reaching our conclusion, we are aware that the civil portion of the Act incorporates, as a test of liability, the provisions of the criminal section as they were set out in § 5438 of the Revised Statutes of 1878, and that according to familiar principles the scope of these provisions should be confined to their literal terms. * * *'

 It is because of this background of the criminal or penal nature of the action that it has been held that a cause of action under the False Claims Act is grounded in fraud, and therefore, the standard of proof necessary to be applied to establish liability under the Act must be by clear, unequivocal and convincing evidence. United States v. Ueber, C.A.6, 1962, 299 F.2d 310.

 However, because the Act is to be confined to its literal terms, it does not follow that the civil provisions are to be ignored. In United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S. Ct. 379 (1943) our Supreme Court characterized an action under § 3490- § 3493 and § 5438 (31 U.S.C.A. 231-234) as 'remedial' and one which imposes 'civil sanction'. The Court was called upon to make a ruling on the question of whether or not § 5438 imposed double jeopardy where there had previously been on the same cause of action a criminal prosecution and a plea of nolo contendere. This was followed by a fine. The Court then went on to say 317 U.S. at page 549, 63 S. Ct. at page 387:

 'It is enough for present purposes if we conclude that the instant proceedings are remedial and impose a civil sanction. The statutes on which this suit rests make elaborate provision both for a criminal punishment and a civil remedy. Violators of § 5438 may 'be imprisoned at hard labor for not less than one nor more than five years, or fined not less than one thousand nor more than five thousand dollars.' We cannot say that the remedy now before us requiring payment of a lump sum and double damages will do more than afford the government complete indemnity for the injuries done it. Helvering v. Mitchell, supra, 303 U.S. (391), 401, 58 S. Ct. (630), 634, 82 L. Ed. 917.'

 317 U.S. at page 550, 63 8s.Ct. at page

 317 U.S. at page 550, 63 S. Ct. at page

 'Quite aside from its interest as preserver of the peace, the government when spending its money has the same interest in protecting itself from fraudulent practices as it has in protecting any citizen from frauds which may be practiced upon him. 'The powers of the United States as a sovereign, dealing with offenders against their laws, must not be confounded with their rights as a body politic. It would present a strange anomaly, indeed, if, having the power to make contracts and hold property as other persons, natural or artificial, they were not entitled to the same remedies for their protection.' Cotton v. United States, 11 How. 229, 231, 13 L. Ed. 675.' 'This remedy does not lose the quality of a civil action because more than the precise amount of so-called actual damage is recovered * * *'.

 The objective of Congress, the Court stated, was to protect, broadly, funds and property of the Government against fraudulent claims, regardless of the particular form or function of the Government instrumentality through which such claims were made. We apply then the principles to enumciated now in this case where the plaintiff seeks to procure restitution to the Government for money which it claims was taken from it by fraud. United States v. Rainwater, supra; United States v. National Wholesalers, 126 F.Supp. 357, 358 (D.C., 1954), reversed on other grounds, C.A.9, 1956, 236 F.2d 944, cert. denied 353 U.S. 930, 77 S. Ct. 719, 1 L. Ed. 2d 724 (1957). Fraud implies a misrepresentation of a material fact either expressed or implied. United States ex rel. Weinstein v. Bressler, C.A.2 (1947), 160 F.2d 403.

 While there have been holdings that a determination under the False Claims Act is to be made by a preponderance of the evidence United States v. Gardner, 73 F.Supp. 644 (D.C., 1947); United States v. Park Motors, 107 F.Supp. 168 (D.C., 1952), we are faced with the fact that the chief purpose of the Act was to provide restitution to the Government for money taken from it by fraud. United States v. Rainwater, supra; United States v. National Wholesalers, supra. However, we do have a double definition in the Act. One which relates to the criminal process and the other which relates to the civil process. In the criminal proceedings, the trier of the facts must be convinced beyond a reasonable doubt that a violation exists. In a civil action, such as this, it is not required that it be proved beyond a reasonable doubt. Congress has provided in this Act against the making of false, fictitious or fraudulent claims, among other things. It will be noticed that this is in the disjunctive. But it has also provided that the making of such false, fictitious or fraudulent claims be done knowingly in order to be actionable.

 When the Supreme Court in United States ex rel. Marcus v. Hess, supra, was called upon to characterize the $ 2,000 sum allowable for double damages, Mr. Justice Black, 317 U.S. at page 551, 63 S. Ct. at page 388 said:

 'We think the chief purpose of the statutes here was to provide for restitution to the government of money taken from it by fraud, and that the device of double damages plus a specific sum was chosen to make sure that the government would be made completely whole. This conclusion is consistent with a statement made immediately before final passage of the bill. A Senator discussing these sections said: 'The government ought to have the privilege of coming upon him (a fraudulent contractor) or his estate and his heirs and recovering the money of which it is defrauded.' The inherent difficulty of choosing a proper specific sum which would give full restitution was a problem for Congress.'

 Under these circumstances the $ 2,000 amount is here indicated not as a penalty, but rather as a device with the double damages by which the Government is to be made completely whole for the loss or damage which it has suffered. It thus lends in an action under the False Claims Act the purpose and meaning of an action for damages. Since the action involves the element of fraud, the evidence upon which any judgment for the plaintiff must rest is, however, required to be clear and convincing. Eastern Express, Inc. v. Mack Warehouse Corporation, C.A.3, 1964, 326 F.2d 554, 556.

 The burden is upon the Government to prove by clear and convincing evidence that the defendant knowingly made false, fictitious or fraudulent representations of the material facts with knowledge of their falsity intentionally made and upon which representations the defendant ...


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