False Claims Act Issues Abound in Nevada Case, Including a Tax Bar Issue

  • LinkedIn

In US ex rel. Calilung v. Ormat Industries. (D. Nev. 2015), the court addressed a variety of interesting legal issues under the False Claims Act, including one that is not often litigated–the Tax Bar. In Calilung, the relators alleged that the defendants, which operate geothermal energy plants, submitted false information in order to obtain “$136,800,000 in grant money from the United States pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009 (‘ARRA’).” The grants were given in lieu of tax credits offered under the Internal Revenue Code. The relators allege that the defendants falsified various information, including the dates that certain geothermal plants were placed “in service,” in order to obtain grants to which they were not entitled.

Defendants moved to dismiss on several grounds, including under the Tax Bar and the Public Disclosure Bar. The Tax Bar provides that the FCA “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” 31 U.S.C. § 3729(d). “Congress’s intent behind Section 3729(d) was to codify caselaw that reserved discretion to prosecute tax violations to the IRS.” (quoting U.S. ex rel. Lissack v. Sakura Global Capital Markets, Inc., 377 F.3d 145, 152-53 (2d Cir. 2004) (marks omitted)). The defendants argued that the Tax Bar “also extends to actions involving grants received in lieu of tax credits.” The court first identified the allegedly false claims and statements, which were the Section 1603 applications. The court then asked whether those applications were made under the revenue code. Based on a plain-language analysis, the court concluded they were not: “Quite simply, Ormat’s claims for grant money were made under Section 1603 of the ARRA and not the IRC.”

The court also examined the Lissack factors and determined they did not change the court’s conclusion. Those factors are “(1) whether [r]elators’ claims depend on a violation of the Tax Code, and (2) whether the IRS can bring an action against [the defendant] to collect the money.” The court noted that because the grants were given in lieu of tax credits, and that by applying for the grants, the defendants could not apply for tax credits, the grants were expressly not within the purview of the Tax Bar under the first factor. The court observed that the regulations addressing the grants were outside of the tax regulations and that the IRS did not have authority over the alleged violations, which demonstrated the second Lissack factor was also lacking.

On the Public Disclosure Bar issue, the defendants argued that much of the information in the complaint had been disclosed in SEC filings. The court first concluded that SEC filings did qualify as public disclosures that could trigger the bar. The court then carefully compared the information disclosed in the SEC filings with the relators’ allegations. The court divided the relators’ allegations into three parts–relating to the three alleged grant violations. The court noted that the first violation had not been publicly disclosed, but the second two had been. The court, however, found the relators were original sources for the third violation (but not the second). The court therefore upheld relators’ claims as to two of the three alleged grant violations under the Public Disclosure Bar.

The Court rejected challenges under Rule 9(b) and Rule 12(b)(6) and also allowed the relators to pursue alter ego theories against a group of related corporate defendants. It will be interesting to follow this case to see how it progresses.