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United States ex rel. Frawley v. McMahon

United States District Court, N.D. Illinois, Eastern Division

January 5, 2015

UNITED STATES OF AMERICA and STATE OF ILLINOIS ex rel. DANIEL FRAWLEY, and DANIEL FRAWLEY, and MAUREEN FRAWLEY, Plaintiffs,
v.
ANTHONY McMAHON, ESTATE OF FRANK McMAHON, JOHN McMAHON, NANCY McMAHON, KATHLEEN McMAHON, BRIDGET McMAHON, SUSAN THIES, CHRISTINE STAJSCZAK, MARY CATHERINE HRASCINSKI, DANIEL HEBERT, BRETT SIEBERT, McMAHON FOOD CORPORATION, McMAHON DAIRY PRODUCTS, INC., C&M JV1 COMPANY, LTD., C & C DAIRY, INC. KRYSTALDAIRY SERVICES, INC., WINDY CITY ELECTRIC CO., WINDY CITY ELECTRIC AVIATION CORPORATION, ACE MECHANICALCO. and PLUMBING SYSTEMS, INC., Defendants.

MEMORANDUM OPINION AND ORDER

ROBERT M. DOW, Jr., District Judge.

Plaintiff-Relators bring this qui tam action against Defendants, alleging violations of the False Claims Act ("FCA") and the Illinois False Claims Act ("IFCA"). Specifically, they allege false claims in violation of 31 U.S.C. § 3729(a)(1) and ILCS 175/3(a)(1) (Counts I and IV, respectively); false statements in violation of 31 U.S.C. § 3729(a)(1)(B) and ILCS 175/3(a)(2) (Counts II and V, respectively); conspiracy to violate the FCA in violation of 31 U.S.C. § 3729(a)(1)(C) and ILCS 175/3(a)(3) (Counts III and VI). This matter is before the Court on Defendants' motion to dismiss Relators' amended complaint [50]. For the reasons stated below, the Court grants Defendants' motion to dismiss [51] in its entirety. However, if Relators have additional factual allegations they believe may overcome the deficiencies identified by the Court and the deficiencies they acknowledge with respect to Defendant Brett Siebert[1], they may file an amended complaint within 28 days of the entry of this memorandum opinion and order. If Plaintiffs choose not to replead, or if all federal claims in their amended complaint are dismissed, the Court will dismiss the state law claims without prejudice.

I. Background[2]

On July 8, 2011, Relators Daniel and Maureen Frawley filed a complaint under seal, alleging various violations of the FCA and the IFCA. The United States of America and the State of Illinois declined to intervene in the action on November 25, 2013. The Court subsequently unsealed Relators' initial complaint, and on February 27, 2014, Relators filed an amended complaint ("FAC") with leave of the Court.

The alleged scheme relates to the City of Chicago's Minority and Women Owned Business Enterprise Procurement Program, a program that aims to enhance opportunities for minority and women-owned business enterprises ("MBEs/WBEs") to compete for government contracts. According to the amended complaint, a business must be certified by the City as an MBE or WBE to participate in the program. To receive certification, a business must meet three criteria. First, at least fifty one percent of the company must be owned and controlled by at least one minority or female. Second, management and daily operations must be controlled by at least one minority or female. Third, the company must be a viable, independent business, and the minority or female principal must have the resources and expertise necessary to operate the business without substantial reliance on non-minority or male businesses. Approved certifications are valid for a period of five years, after which they must be renewed in order to continue working with the City as an MBE/WBE.

The FAC alleges that the City's goal is to award not less than twenty-five percent of the annual dollar value of all City contracts to MBEs and not less than five percent to WBEs. The FAC alleges that the City can obtain its MBE/WBE contracting goals by either:

a. Contracting directly with MBE/WBE certified companies through the "target market" program, which designates certain contracts for competition limited exclusively to MBE/WBE companies; or
b. Including a requirement in all City contracts of a value in excess of $10, 000 that the contractor awarded that contract commit to the expenditure of at least the MBE/WBE percentages of the dollar value of the contract with MBE/WBE firms.

FAC at ¶ 42(b).

Relators generally allege two categories of false claims: false certification and false invoices. More specifically, they allege that Defendants submitted false documentation to the City so that various businesses in the McMahon Family Business Enterprise would receive certification as MBEs/WBEs. The documentation was false insofar as these companies were owned and run by three brothers-Anthony, John and Frank McMahon-none of whom were minorities or women. Through these false MBE/WBE certifications, Defendants fraudulently obtained millions of dollars-worth of municipal contracts with multiple public entities, including the City of Chicago, John H. Stroger Jr. Hospital of Cook County, Juvenile Temporary Detention Center of Cook County, Cook County Bureau of Health Services, Chicago Board of Education, Chicago Public Schools, and the Chicago Housing Authority ("CHA"). According to the FAC, many of these contracts or agencies were federally funded. Relators further allege that after winning these contracts, Defendants submitted false invoices overbilling the relevant agencies.

A. False Certifications

1. McMahon Food and McMahon Dairy

The McMahon family incorporated Defendant McMahon Dairy Products, Inc. in 1987. Although Frank McMahon was the owner, operator and chief decision-maker, he began listing his mother, Catherine McMahon, as the president and principal owner in 1990 to obtain WBE certification. In 1991, he incorporated a second company, Defendant McMahon Food Corporation, again listing Catherine as the president and principal owner for the same purpose. When Catherine became ill, Frank replaced her with his daughters, who are co-defendants in this action-first Mary and then Bridget. None of the three women ever were involved in the management, operations, decision-making or any other aspect of either business; rather, Frank continued to run the business until his recent death. Based on these allegedly false certifications as WBEs, both McMahon Dairy and McMahon Food won various contracts and subcontracts in which they agreed to distribute food to the City and the Board of Education. With each contract and request for payment on the contracts, Bridget McMahon falsely certified to the City that McMahon Food was a WBE.

In further support of these allegations, the FAC alleges details regarding twenty three contracts between McMahon Food and the John H. Stroger Jr. Hospital of Cook County, the Juvenile Temporary Detention Center of Cook County, and the Cook County Bureau of Health Services; specifically, it sets out the date awarded, the contract number, the services provided and the contract value of each contract. The total value of these contracts, which are allegedly only a sample of the larger pool of contracts, is $4, 463, 802.65.

2. Windy City Electric and Ace Mechanical

Frank's brothers, Anthony and John, allegedly expanded the McMahon Family Business Enterprise by incorporating Defendant Windy City Electric Co. in 1989. To receive WBE certification, the brothers listed their wives as the officers and owners. Specifically, they listed Nancy McMahon as president, Kathleen McMahon as secretary, and both women as 50 percent co-owners. Neither woman has ever been involved in the management, operations, decision-making or any other aspect of Windy City Electric, although Kathleen did assist in everyday business around the office. Rather, Anthony and John McMahon oversaw and managed the company. Windy City Electric allegedly won various contracts and subcontracts with the City, the CHA, and the Board of Education based on its allegedly false certification as a WBE.

In 2006, the McMahons also formed Defendant Windy City Electric Aviation Corporation. The McMahons again listed Nancy as president, Kathleen as secretary, and each woman as a 50 percent co-owner in their corporate records, subsequently obtaining WBE certification.

The FAC alleges that Anthony and John McMahon expanded the McMahon Family Business Enterprise in 1993 by incorporating Defendant Ace Mechanical Co. The idea to create Ace Mechanical arose out of a meeting between Anthony McMahon, John McMahon, and James Harney, who was the former Facilities Director for the Board of Education. At that meeting, Harney mentioned that the Board of Education intended to award a significant portion of its funds to minority contractors and that his girlfriend's brother, Jimmy Acevado, could serve as a Hispanic front person for an MBE plumbing contracting company. The McMahons subsequently incorporated Ace Mechanical, listing Acevado as the president and principal owner. Acevado never participated in ownership, management, operations or decision-making; rather, John and Anthony oversaw and managed the company. Ace Mechanical became certified as an MBE, and, based on this false certification, it fraudulently obtained contracts and subcontracts from the City, the CHA, and the Board of Education for plumbing services from its incorporation in 1993 to its involuntary dissolution in 2008.

Based on its allegedly false MBE/WBE status, Windy City Electric and Ace Mechanical won more than seven City contracts and seven more contracts with the Board of Education specifically. The FAC details the date awarded, the contract number, the services provided and the contract value for each of these contracts, alleging a total value of $25, 360, 822.68 ...


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