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United States v. McMahon

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

September 28, 2016

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, MCMAHON FOOD CORPORATION, MCMAHON DAIRY PRODUCTS, INC., C&M JV1 COMPANY, LTD., C & C DAIRY, INC. KRYSTAL DAIRY SERVICES, INC., WINDY CITY ELECTRIC CO., WINDY CITY ELECTRIC AVIATION CORPORATION, ACE MECHANICAL CORPORATION, PLUMBING SYSTEMS, INC., QUANTUM CROSSINGS, LLC, AMPERE ELECTRIC, CO., ARAMARK CORRECTIONAL SERVICES, LLC, and ARAMARK CORPORATION, Defendants.

          MEMORANDUM OPINION AND ORDER

          Robert M. Dow, Jr., United States District Judge.

         Plaintiffs-Relators bring this qui tam action under the False Claims Act (“FCA”), 31 U.S.C. § 3730, and the Illinois False Claims Act (“IFCA”), ILCS 175. Specifically, Relators 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 and IFCA in violation of 31 U.S.C. § 3729(a)(1)(C) and ILCS 175/3(a)(3) (Counts III and VI, respectively). Currently before the Court are the following motions to dismiss Relators' Second Amended Complaint [92]: Defendants' joint motion to dismiss [142] pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 9(b), and invoking the statute of limitations; Defendants Aramark Correctional Services, LLC and Aramark Corporation's motion to dismiss [145] based on Rules 12(b)(1) and 12(b)(6) and the statute of limitations; and Defendant Ampere Electric Co.'s motion to dismiss [153] pursuant to Rules 12(b)(6), 8(a), and 9(b). For the reasons set forth below, Defendants' joint motion to dismiss [142] is granted pursuant to 12(b)(1) and the case is dismissed as to all Defendants, including those that did not join the joint motion to dismiss [142], pursuant to Rule 12(h)(3). The Court dismisses the case for lack of jurisdiction because Relators' allegations of wrongdoing were publicly disclosed at the time the action was filed, and Relators do not qualify as an original source because they did not “voluntarily” disclose the information to the government. Defendants Aramark Correctional Services, LLC and Aramark Corporation's motion to dismiss [145] and Defendant Ampere Electric Co.'s motion to dismiss [153] are denied as moot. The Court declines to exercise supplemental jurisdiction over the state claims brought under Illinois law. Accordingly, the case is dismissed in its entirety, the Court will enter a final judgment, and the case will be closed.

         I. Background

         On July 8, 2011, Relators Daniel and Maureen Frawley filed a complaint under seal, alleging various violations of the False Claims Act (“FCA”) and the Illinois False Claims Act (“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 with leave of the Court. On January 15, 2015, the Court granted Defendants' motion to dismiss Relators' First Amended Complaint. U.S. and State of Illinois ex rel. Frawley v. McMahon, 2015 WL 115763, (N.D. Ill. Jan. 5, 2015). Relators filed a Second Amended Complaint (“SAC”) with leave of the Court on May 4, 2015, which is the operative complaint for purposes of this opinion.

         The alleged scheme relates to the City of Chicago's Minority and Women Owned Business Enterprise Procurement Program, which aims to enhance opportunities for minority and women-owned business enterprises (“MBEs” and “WBEs, ” respectively) to compete for government contracts. [92, at ¶¶ 37-39.] According to the SAC, 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 woman. Second, management and daily operations must be controlled by at least one minority or woman. Third, the company must be a viable, independent business, and the minority or woman principal must have the resources and expertise necessary to operate the business without substantial reliance on non-MBE or non-WBE businesses. [92, at ¶ 42.] 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. [92, at ¶ 43.] The SAC alleges that the City's goal is to award at least twenty-five percent of the annual dollar value of all City contracts to MBEs and at least five percent to WBEs. [92, at ¶ 44.] The SAC 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.

[SAC at ¶ 45.]

         Relators allege that Defendants submitted false certifications to fraudulently obtain MBE and WBE status and secure municipal contracts, at least some of which were funded by the federal government;[1] submitted false invoices to various municipal agencies; conspired to submit rigged bids for various contracts to restrict open competition and to fix the price of milk sold to municipal agencies at artificially high levels; and falsely represented to the City that Defendant McMahon Dairy Products maintained nonsegregated work facilities.

         A. False Certifications

         1. McMahon Food Corporation and McMahon Dairy Products, Inc.

         The SAC alleges that the “McMahon Family Business Enterprise” began in 1987 with the incorporation of Defendant McMahon Dairy Products, Inc. Although Frank McMahon was the owner, operator, and chief decision-maker of the company, he began listing his mother, Catherine McMahon, as the president and principal owner of Defendant McMahon Dairy Products, Inc. in 1990 to fraudulently obtain WBE certification. [92, at ¶ 47.] ¶ 1991, Frank incorporated a second company, Defendant McMahon Food Corporation, again listing Catherine as the president and principal owner despite the fact that she had no involvement in any aspect of the company. [92, at ¶ 49.] When Catherine became ill, Frank replaced her with his daughter, Defendant Bridget McMahon, now Bridget McMahon Healy, who was a teenager at the time. [92, at ¶ 50.] Relators allege upon information and belief that Bridget is still listed as the president and principal owner of both companies, even though she was never involved in the management, operations, decision-making or any other aspect of either business; rather, Frank continued to run the business until his death. By using these allegedly false certifications as WBEs, McMahon Dairy and McMahon Food were awarded various food distribution contracts and subcontracts by the City, primarily by the Board of Education of the City of Chicago. [92, ¶ 52.]

         In support of these allegations, the SAC 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. [92, at ¶ 170.] The total value of these contracts, which are allegedly only a sample of a larger pool of fraudulently-obtained contracts, is $4, 463, 802.65. [92, at ¶ 171.]

         2.Windy City Electric Co., Windy City Electric Aviation Corporation, and Ace Mechanical Co.

         Frank's brothers, Anthony and John McMahon, allegedly expanded the McMahon Family Business Enterprise by incorporating Defendant Windy City Electric Co. in 1989. [92, at ¶ 53.] To receive WBE certification, the brothers listed their wives as the officers and owners. Specifically, they listed Defendant Nancy McMahon as president and Defendant Kathleen McMahon as secretary, and designated Nancy and Kathleen as 50 percent co-owners. Neither woman has ever been involved in the management, operations, or decision-making of Windy City Electric, although Kathleen did assist in everyday business around the office. [92, at ¶¶ 54- 55.] Defendant Windy City Electric allegedly won various contracts and subcontracts with the City, the Chicago Housing Authority, and the Board of Education based on its false certification as a WBE.

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

         The SAC alleges that Anthony and John expanded the McMahon Family Business Enterprise in 1993 by incorporating Defendant Ace Mechanical Co., using Jimmy Acevado as a Hispanic front person to fraudulently obtain MBE status. [92, at ¶ 60.] Acevado never participated in ownership, management, operations or decision-making; rather, John and Anthony oversaw and managed the company, and Defendant Daniel Hebert also managed the day-to-day operations of the company, including preparing and submitting invoices to the government. [92, at ¶¶ 61, 65.] Based on its false MBE certification, Defendant Ace Mechanical Co. fraudulently obtained contracts and subcontracts from the City, the Chicago Housing Authority, and the Board of Education for plumbing services during the time period between its incorporation in 1993 and its involuntary dissolution in 2008. [92, at ¶ 62.]

         Based on their allegedly false WBE and MBE statuses, Windy City Electric and Ace Mechanical won more than seven City contracts between 2003 and 2010, as well as an additional seven contracts with the Board of Education specifically between 2005 and 2011. [92, at ¶¶ 173, 177.] The SAC 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 for the seven City contracts and $17, 091, 142.00 for the seven Board of Education contracts. [92, at ¶ 174, 178.]

         Anthony became the point person for preparing and submitting all paperwork to the City, Chicago Housing Authority, and Board of Education for false MBE and WBE certification. [92, at ¶ 66.] Bridget, Nancy, Kathleen, and Acevado each signed the disclosures, affidavits and other paperwork prepared by Anthony, knowing that they were not actually involved in the ownership, management, and operations of their respective companies. [92, at ¶ 67.] Relators allege that Defendant Susan Thies notarized the majority of paperwork prepared by Anthony, despite knowing that Bridget, Nancy, Kathleen, and Acevado were not involved in the ownership, management, and operation of the entities. [92, at ¶ 68.]

         3. Quantum Crossings, LLC and Ampere Electric Co.

         Since at least 2007, Windy City Electric has allegedly partnered with Quantum Crossings, LLC, a certified MBE. Relators do not allege that Quantum Crossings is a phony MBE. The SAC alleges that Windy City Electric and Quantum Crossings would list each other as direct or subcontract parties to government contracts in order to meet government WBE and MBE requirements and that Quantum Crossings knew that Windy City Electric was a phony WBE. [92, at ¶ 76.]

         Relators vaguely allege that “Ampere Electric was another fraudulent MBE that the McMahons used as a front to obtain City contracts, ” and that the McMahons “were the real decision makers behind any contract that they were involved in that relate to Ampere.” [92, at ¶ 76.] Relators do not provide any additional details relating to Ampere.

         4. C&M JV1 Company, Ltd.

         In 2003, the McMahons expanded the family businesses by incorporating Defendant C&M JV1 Company, Ltd. [92, at ¶ 70.] Corporate records list Defendant Christine Stajsczak as president and Bridget McMahon as secretary of C&M. Relators allege, on information and belief, that C&M is a joint venture of Defendants McMahon Food, McMahon Dairy, C & C Dairy, and Krystal Dairy. Defendant Christine Stajsczak is listed as president, secretary, and principal owner of C & C Dairy, and Defendant Mary Catherine Hrascinski is listed as president, secretary, and principal owner of Krystal Dairy.

         C&M allegedly won dairy contracts with the City and Board of Education by falsely representing that two or more WBEs would serve as its vendors: McMahon Food, McMahon Dairy, C & C Dairy, and/or Krystal Dairy. The SAC further alleges that when the Board of Education awarded C&M contracts, it waived its MBE sub-contracting requirements in reliance on C&M's representation that at least two of its vendors would be WBEs, finding that C&M had made “good faith efforts” at compliance. [92, at ¶¶ 71, 141, Exhibit 4.] Relators allege that “C&M would not have gotten the contracts to supply the Chicago Public Schools with milk if it had not certified that it was a significant WBE.” [92, at ¶ 71.] The SAC alleges that based on these false representations regarding WBE status, the Board of Education awarded nine contracts to C&M, McMahon Food, McMahon Dairy, C & C Dairy, and/or Krystal Dairy to supply milk to the Chicago Public Schools (“CPS”) between 2005 and 2013. [92, at ¶ 143.] The SAC again provides the date, number, value, and services associated with each contract and alleges that the total value of these contracts is $156, 009, 645.05. [92, at ¶¶ 143-44.]

         5. Plumbing Systems, Inc.

         In 2005, the McMahons incorporated Defendant Plumbing Systems, Inc., listing John as president, Anthony as secretary, and both brothers as 50 percent co-owners. The two brothers allegedly used false MBE suppliers, such as “Jose Supply, ” to meet the government's MBE's requirements. [92, ¶ 174.] “Jose Supply” did not supply any plumbing tools or materials for government contracts and allegedly operated out of a telephone booth. The McMahons provided plumbing services and materials through Plumbing Systems and under the guise of “Jose Supply.” From approximately 2005 to the present, Plumbing Systems has worked directly and indirectly on government contracts with the Chicago Housing Authority, the City of Chicago, and the Board of Education. The brothers allegedly pay front minorities, such as “Jose, ” a percentage of the amount billed for supplies. [92, ¶ 174.]

         6. Nexus with Federal Funds

         Relators make six allegations connecting these contracts with federal funds. Specifically, the SAC alleges that: (1) the federal government heavily subsidized the Chicago Public Schools' breakfast and lunch program [92, at ¶¶ 145-51]; (2) Defendants filled out sections of bid applications titled, “Certification of Federally Funded Matters” [92, at ¶¶ 152-54]; (3) the Cook County Jail receives federal funds to reimburse the county for the cost of holding immigration detainees [92, at ¶ 157]; (4) Defendant Quantum Crossings was awarded federally funded contracts as evidenced by a Freedom of Information Act response from the Chicago Department of Aviation [92, at ¶ 159]; (5) on information and belief, the Chicago Board of Education receives federal funds [92, at ¶ 179]; and (6) the Chicago Housing Authority receives funds from the federal government to redevelop and modernize public housing units [92, at ¶ 182.]

         B. False Invoices

         In addition to alleging false certification, Relators allege that the McMahons submitted false invoices to the City, the Board of Education and the Chicago Housing Authority. Specifically, they allege that the McMahons submitted false invoices the government for unused materials and unperformed work. [92, at ¶ 189.] Further, the McMahons allegedly billed at rates higher than the contract rates and created a “ghost payroll” scheme for nonexistent employees. [92, at ¶ 6.] More specifically, they billed out John McMahon at the higher City journeyman plumber's rate although he is not a plumber and “otherwise padded the Government's bills.” [92, at ¶ 189.] The McMahons allegedly submitted these false invoices with the assistance of Defendant Daniel Hebert. [92, at ¶ 189.]

         C. Bid Rigging and Price Fixing

         Relators further allege that the McMahons conspired to submit rigged bids for various contracts to restrict open competition and to fix the price of milk sold to municipal agencies at artificially high levels. In 1994, Frank McMahon allegedly told Relator Daniel Frawley that “he had his guys at [Chicago Public Schools] and that he charged artificially ...


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