The Fourth Circuit recently provided guidance on a successor entity’s liability under the False Claims Act in United States ex rel. Bunk v. Government Logistics N.V., 642 F.3d 261 (4th Cir. 2016). Bunk involved a bid-rigging scheme between freight operators who had submitted inflated bids to the Department of Defense. The Gosselin Group and its CEO, Marc Smet, were at the center of the scheme. Starting in 2001, Smet and the Gosselin Group began conspiring with other entities to increase the prices that the DOD paid to the freight operators.
Smet and the Gosselin Group were subsequently indicted, and in 2004, the Gosselin Group pled guilty to conspiracy to defraud the Government and conspiracy to restrain trade. In 2006, after the criminal proceedings had concluded, the Government informed Smet and the Gosselin Group that two qui tam actions concerning the same bid-rigging scheme had been filed back in 2002. After learning about the existence of the qui tam actions, the Gosselin Group entered into a series of transactions with the newly created Government Logistics whereby Gosselin Group transferred its business with the DOD to GovLog. GovLog’s principals were all employees of Gosselin Group or one of its subsidiaries and GovLog paid nothing to the Gosselin Group in exchange for the transfer of business. Instead, GovLog agreed to transfer a percentage of future net revenues to the Gosselin Group.
After learning of the transfer, the relators amended their complaint to add GovLog as a defendant, alleging that GovLog was liable as the Gosselin Group’s successor because the transaction was a sham and done solely to defraud the relators. GovLog argued that it could not be held liable as a successor under any recognized legal theory and that the relators’ fraudulent transaction allegations were entirely speculative. The district court agreed with GovLog and entered summary judgment in its favor.
On appeal, the Fourth Circuit first explained the general rule that a corporation that acquires the assets of another corporation does not also acquire its liabilities. The Court went on to explain, however, that there are several well-defined exceptions to this rule, including where the transaction is fraudulent. In holding that summary judgment was inappropriate, the Fourth Circuit found that the transaction was “adorned with several of the badges of fraud” as there was evidence of inadequate consideration, the transaction allowed for the Gosselin Group to retain benefits as it was to be paid from GovLog’s net revenues, and the transaction was commenced in response to Smet learning about the pending qui tam actions.
The Bunk decision provides an instructive analysis on the contours of successor liability in the FCA context. As the Bunk court explained, while the default rule remains that an entity acquiring the assets of another company does not also take on the seller company’s liabilities, the transaction must be legitimate and cannot be done in an attempt to escape liability or damages under the FCA.