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UNITED STATES v. INCORPORATED VILLAGE OF ISLAND PA

April 24, 1992

UNITED STATES OF AMERICA, Plaintiff,
v.
THE INCORPORATED VILLAGE OF ISLAND PARK, JACQUELINE PAPATSOS, in her capacity as Mayor of the Incorporated Village of Island Park, CHARLOTTE KIKKERT, in her capacity as Trustee of the Incorporated Village of Island Park, PHILIP TAGLIANETTI, in his capacity as Trustee of the Incorporated Village of Island Park, JAMES FALLON, in his capacity as Trustee of the Incorporated Village of Island Park, MICHAEL A. PARENTE, JAMES G. BRADY, FRANCIS R. McGINTY, MICHAEL MASONE, GERALDINE McGANN, HAROLD SCULLY, DANIEL McGANN, EILEEN McGANN, ANTHONY CICCIMARRO, JANET CICCIMARRO, JOSEPH RUOCCO, DEBRA RUOCCO, MARY ELLEN GUERIN, DENNIS GUERIN, JOSEPH DiDOMENICO, MARIA DiDOMENICO, DONNA MOORE and KENNETH MOORE, Defendants.



The opinion of the court was delivered by: I. LEO GLASSER

 GLASSER, United States District Judge:

 Who will guard the guardians? The complaint that underlies this action alleges a profoundly disturbing abuse of government programs and of government funds by officials and residents of a small municipality. And yet, the undisputed facts material to the disposition of this motion reveal a still more disturbing failure by the federal officials charged with oversight of those programs to ensure the just and lawful administration of these affairs. Now the government, which for so long permitted these alleged misdoings to proceed with impunity, has brought suit after the time in which to present most of its claims has passed. The government urges that its own failure to enforce the public trust in a timely manner should be disregarded. But "even wrongdoers are entitled to assume their sins may be forgotten," Wilson v. Garcia, 471 U.S. 261, 271, 85 L. Ed. 2d 254, 105 S. Ct. 1938 (1985); and it is unworthy of those charged with the protection of the public interest to decline blame for their own lack of vigilance.

  This action arose from the administration of a Community Development Block Grant Program ("CDBG Program") and of a Section 235 Housing Program and from the alleged misuse of Housing and Urban Development ("HUD") funds in those programs by the Village of Island Park, New York ("Island Park" or the "Village") between 1979 and 1983. The government filed this action on March 22, 1990; it filed an amended complaint on May 11, 1990. The amended complaint lists eight causes of action: (1) violation of the False Claims Act, 31 U.S.C. §§ 3729 et seq.; (2) fraud; (3) violation of the Fair Housing Act, 42 U.S.C. §§ 3601 et seq.; (4) breach of fiduciary duty; (5) aiding and abetting breach of fiduciary duty; (6) unjust enrichment; (7) constructive trust; and (8) erroneous payment of funds. The government has named as defendants: The Incorporated Village of Island Park; Jacqueline Papatsos (as mayor of Island Park); Charlotte Kikkert, Philip Taglianetti, and James Fallon (as trustees of Island Park); and, as individual defendants, Michael A. Parente, James G. Brady, Francis R. McGinty, Michael Masone, Geraldine McGann, Harold Scully, Daniel McGann, Eileen McGann, Anthony Ciccimarro, Janet Ciccimarro, Joseph Ruocco, Debra Ruocco, Mary Ellen Guerin, Dennis Guerin, Joseph DiDomenico, Maria DiDomenico, Donna Moore, and Kenneth Moore. All defendants have moved this court for summary judgment as to all causes of action on the ground that the applicable limitations period for each claim expired before the government filed its complaint. The defendants also argue that certain administrative proceedings conducted against the defendant Geraldine McGann have preclusive effect in this action. For the reasons set forth below, the motion of the defendants for summary judgment is granted in part and denied in part.

 FACTS

 Section 235 of the National Housing Act, 12 U.S.C. § 1715z, established the Section 235 Program to provide mortgage-assistance subsidies to enable lower income families to acquire homes. Pursuant to the 235 Program, HUD makes monthly payments to a mortgagee to subsidize the payments made by a participating mortgagor. The housing is built by a private developer who obtains mortgage commitments from a HUD-approved lender and who applies to HUD for approval of the development.

 Island Park administered such a Section 235 Program: It purchased land with CDBG funds obtained from Nassau County and resold the property to participating developers. Under the Island Park Section 235 Program, 44 single-family homes were constructed in the municipality over a four-year period that began in 1979. The homes were built in three phases: Five were built in the first phase; 22 were built in the second; and 17 were built in the third segment of development.

 The Halandia Group constructed and marketed the five homes in the first phase of the program. An Affirmative Fair Housing Market Program ("AFHMP") was submitted to HUD with respect to the first phase pursuant to 24 C.F.R. §§ 200.600. On February 14, 1980, HUD approved the AFHMP and stated that:

 
The selecting or giving of preference to prospective purchasers . . . is not permitted. Transactions should be entered on a first-come-first-serve basis. The principal standard in determining compliance with the Affirmative Fair Housing Marketing Plan is diligent good faith effort.

 Defendants' Exhibit 11. The Nassau Office of Housing reported to HUD that the five homes of the first phase were purchased by four white families and one Hispanic family. Defendants' Exhibit 12.

 The developer for the second phase of the Section 235 Program was Ocean Park Properties, Inc. The AFHMP for this segment of the program was approved with similar caution from HUD as to the use of preferences in selecting recipients of the homes. Defendants' Exhibit 14. No AFHMP was submitted for the third phase of the Program.

 Of particular interest to the government is the conduct of defendant Geraldine McGann. During the time of the administration of the third segment of the Section 235 Program, she was both a Village trustee and the Special Assistant to HUD Regional Administrator Joseph Monticciolo; she is alleged to have voted on HUD-related matters in her capacity as a trustee of Island Park during her tenure as a HUD employee. The government also alleges that, during the third phase of the program, she arranged for her son, defendant Daniel McGann, to receive one of the HUD houses. The government alleges that McGann participated in a "conspiracy" to cover up the misdoings of the officials of Island Park by, inter alia, drafting a letter to HUD for the signature of Mayor Parente that denied any wrongful acts in the administration of the Island Park Program. Plaintiff's Exhibit F. Further, the government alleges that McGann (and possibly Monticciolo) may have attempted to remove documents from HUD in 1990.

 However, allegations of wrongdoing by McGann were formally considered after the government, on March 22, 1990, served a Notice of Proposed Removal on her as a HUD employee. Defendants' Rule 3(g) Statement P77. Several of the charges against McGann were initially sustained by HUD Associate General Deputy Assistant Secretary for Housing James E. Schoenberger. Defendants' Exhibit 58. McGann appealed this determination to the Merit Systems Protection Board ("MSPB") before which a full evidentiary hearing -- including direct and cross-examination of witnesses -- was conducted on March 21, 1991. Defendants' Rule 3(g) Statement PP82 - 83. After that hearing, Administrative Judge Joseph E. Clancy dismissed all charges against McGann. Defendants' Exhibit 60. The government did not appeal this decision to the United States Court of Appeals for the Federal Circuit.

 The government contends that it did not learn of the wide-spread wrongdoing by officials of Island Park until press reports in June of 1989. Government's Rule 3(g) Statement P138. However, HUD first began to receive complaints about the administration of the Section 235 Program in Island Park in late 1981. Defendants' Exhibit 17. And, by letter dated June 10, 1983, the clerk of the Village of Island Park, Harold Scully, notified HUD as to the race and the ethnic background of all the home recipients: He informed HUD that forty white families, three Hispanic, and no black families received houses. *fn1" Defendants' Exhibit 23.

 Moreover, from late 1983 through early 1984, HUD conducted an extensive internal investigation into allegations of misconduct in the administration of the Section 235 Housing Program in Island Park. This investigation revealed to HUD auditors that the Village had preselected recipients of the Section 235 houses. Defendants' Exhibit 30. Indeed, Abraham Levy, the Regional Inspector General for Audit for HUD Region II, concluded in late November of 1983 that the government had legally actionable claims against the Village of Island Park for its abuse of the Section 235 Program. Defendants' Exhibit 35.

 
The review disclosed no evidence of an aggressive and good faith effort to market the Section 235 homes to the general public and particularly to minority and non-minority groups outside the Village, or to provide an equal opportunity for housing.
 
An examination of Village and Nassau County files showed that public advertisements for the second stage of housing were first published on November 19, 1981. On the same morning at 9:00 a.m. purchasers were "selected" by the Village for all 22 homes available. There were no formal applications stating family size, income, employment, etc., on which the Village could have based its selections, and all 22 applications consisted of informal hand-delivered letters, date stamped November 19, 1981, the same date as the public advertisements. Each letter was marked in pen as received at 9:00 a.m., and were numbered one through 22.
 
. . .
 
The review also disclosed that the Village did not publicly advertise for the third stage of 17 homes; however, purchasers were selected who were not included in the batch of unsuccessful applications (about 120 apparently received after the 22 successful applicants) during stage two. One of these 18 purchasers is the son of [Geraldine McGann,] Village Trustee and Special Assistant to the HUD Regional Administrator-Regional Housing Commissioner.
 
. . .
 
No minority families were selected under stage three of the Village's program and only two minority families were selected in stage two.
 
. . .
 
As discussed above, the Village apparently prescreened prospective purchasers prior to the public advertisements, and selected all 22 applicants on the first morning of the date that the advertisement appeared in the local newspapers. In addition, as discussed below, since the Village apparently gave preference to families of Village residents as well as to families of Village officials and employees, the intent and spirit of equal opportunity for housing was circumvented, and a genuine first come-first serve basis for selection was rendered meaningless.

 This report, which details misdeeds in the Village of Island Park, was widely disseminated throughout HUD. Defendants' Rule 3(g) Statement PP68-69.

 The government contests neither the existence nor the content of the audit report. Rather, the government argues that the defendants engaged in a "fraudulent concealment" of their wrongdoing and thereby prevented the government from initiating this action until after June of 1989. The government alleges that the preselection process for participation in the Section 235 Program was a "self-concealing scheme." Memorandum of Government at 70. Also, the government alleges, the defendants falsely represented to HUD as early as 1982 that the administration of the Section 235 Program was fair and impartial. Government's Rule 3(g) Statement PP64-71. Then, during the time of the HUD audit, the government charges, McGann drafted a letter for then-Mayor Parente to send to HUD; that letter denied any irregularities or improprieties in the administration of the housing program. Government's Rule 3(g) Statement PP89-90. According to the government, McGann and Village clerk Scully also fraudulently amended her voting record as a Village trustee to conceal her votes on HUD-related matters; they each then informed HUD that the earlier record of her votes had been in error. Government's Rule 3(g) Statement PP100-103. Finally, as a last element of the alleged "cover-up", the government charges that Joseph Monticciolo, who was then the HUD Regional Administrator, had immediate responsibility to act on the conclusions of the HUD audit report; but Monticciolo apparently proceeded no further with the investigation. Government's Rule 3(g) Statement P95. From this, the government infers that Monticciolo may have been a member of the "conspiracy" in Island Park -- a conspiracy, the government argues, formed for the abuse of government programs and of government funds.

 DISCUSSION

 Federal Rule of Civil Procedure 56(c) provides, in relevant part, that "judgment . . . shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." These two requirements are plainly conjunctive. In this case, there is no dispute of any material fact that precludes this court from rendering judgment on the affirmative defenses of the relevant time bars and of claim and issue preclusion.

 I. STATUTES OF LIMITATIONS

 A. The Beginning of the Limitations Periods

 The government does not dispute that, for most of its causes of action, the applicable limitations periods began to run as a matter of law no later than March 2, 1984 -- the day that HUD released its audit report concerning the administration of the Section 235 Program in Island Park. See, e.g., Memorandum of Government at 59 n. 14 and at 67. Indeed, the government concedes that, as to the second cause of action and as to parts of the sixth and the eighth causes of action, "the government is not entitled, as a matter of law, to defeat the statute of limitations defense." Id. at 5. Rather, the government contends that -- with respect to the second, the fourth, the fifth, the sixth, and the eighth causes of action -- the beginning of the limitations periods were tolled until June of 1989. With respect to the first cause of action, the government contends that the applicable limitation period did not begin until the Department of Justice learned of these matters -- also in June of 1989. With respect to the third and the seventh causes of action, the government contends that no statute of limitations is applicable. Nonetheless, it is clear that, as to these latter two causes of action, the claims accrued no later than did the claims of the second, the fourth, the fifth, the sixth, and the eighth causes of action. Thus, the government nowhere contends that -- absent the claimed tolling -- the applicable limitations periods for every cause of action (other than the first) would not have begun to run, as a matter of law, by March 2, 1984.

 This concession of the government is well-advised. The general rule concerning the commencement of the running of a limitations period is that the statute of limitations is triggered when the plaintiff's claim first arises. This in turn generally occurs either when the defendant actually commits the acts that give rise to the plaintiff's action or when the plaintiff either knows or reasonably should know of the facts that are material to his right of action. See, e.g., Delaware State College v. Ricks, 449 U.S. 250, 259, 66 L. Ed. 2d 431, 101 S. Ct. 498 (1980) (in Title VII action "the limitations period commenced to run when the [employment] decision was made and [the plaintiff] was notified"); Singleton v. City of New York, 632 F.2d 185, 191 (2d Cir. 1980), cert. denied, 450 U.S. 920, 67 L. Ed. 2d 347, 101 S. Ct. 1368 (1981) ("Federal law . . . 'establishes as the time of accrual that point . . . when the plaintiff knows or has reason to know of the injury which is the basis of his action.") (quoting Bireline v. Seagondollar, 567 F.2d 260, 263 (4th Cir. 1977), cert. denied, 444 U.S. 842, 62 L. Ed. 2d 54, 100 S. Ct. 83 (1979)); Rodriguez v. Village of Island Park, Inc., CV-89-2676, at 12 (E.D.N.Y. July 2, 1991) (discovery standard of when plaintiff knows or has reason to know of defendant's wrongdoing is "more liberal" accrual rule than moment-of-injury standard); Gerasimou v. Ambach, 636 F. Supp. 1504, 1509 (E.D.N.Y. 1986) ("Generally, a cause of action accrues when a plaintiff 'knows or has reason to know' of the injury or event that is the basis of his claim.") (quoting Singleton, 632 F.2d at 191). Compare 28 U.S.C. § 2416(c) (statutes of limitations on actions brought by the United States are tolled as long as "facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances. . . .").

 Hence, the government does not contest that, with respect to all but the first cause of action, the applicable limitations periods began to run as a matter of law no later than March 2, 1984. Rather, the government simply argues that these periods were tolled by the "fraudulent concealment" of the defendants until June of 1989 -- when attorneys for the Department of Justice read a newspaper account of the Island Park affair.

 B. The Applicable Statutes of Limitations

 The parties vigorously dispute the applicable statutes of limitations for the eight claims of the amended complaint. As a general proposition, the third and the seventh claims may be separated from the other six insofar as they seek equitable relief: The government contends that no statute of limitations applies against it in such an action. Also, the government contends that the first cause of action did not accrue until June of 1989. The other five claims are for damages. *fn2"

 1. The First Claim for Relief

 The defendants argue that the applicable statute of limitations for the first cause of action, violation of the False Claims Act, is six years under 31 U.S.C. § 3731(b). The government agrees that Section 3731(b) sets forth the applicable limitation period, but it contends that subsection (b)(2) renders its claim timely. Section 3731(b) provides in its entirety:

 
A civil action under section 3730 may not be brought --
 
(1) more than 6 years after the date on which the violation of section 3729 is committed, or
 
(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.

 The government argues that "the official of the United States charged with responsibility to act in the circumstances" is the appropriate official at the Department of Justice ("DOJ"); thus, the government argues, the six-year limitation period of Section 3731(b)(1) is tolled until the "facts material to the right of action are known or reasonably should have been known by" that official at DOJ. Memorandum of Government at 44. The government argues that "it is undisputed that the Department of Justice did not learn of the facts at issue [regarding the misdeeds in Island Park] until less than a year before suit was brought when an article appeared in The New York Times." Memorandum of Government at 49. Hence, even though the violations of the False Claims Act occurred more than six years before this lawsuit and even though the highest officials at HUD had documented the relevant facts, the government maintains that the cause of action under the False Claims Act is timely because it was brought within three years of the time when lawyers at DOJ first happened upon an account of the events at Island Park in a newspaper.

  The position of the government -- that "the official of the United States charged with responsibility to act in the circumstances" refers only to an official at DOJ -- is, however, somewhat problematic. For instance, that argument rests in part on the proposition that the Attorney General has the exclusive power to enforce the False Claims Act. And, indeed, it is clear under Section 3730 that actions under the False Claims Act may only be initiated either by the Attorney General of the United States or by a private person in the name of the United States. In the case of the second type of action (qui tam), the Attorney General has the power to proceed with the action on behalf of the United States, and this "private" action may not be dismissed without the consent of the Attorney General. As stated by the Federal Circuit: "Regardless of who initiates the suit, the Attorney General is specifically authorized to administer such claims for the government." Martin J. Simko Const., Inc. v. United States, 852 F.2d 540, 547 (Fed. Cir. 1988). The court there construed this specific authorization of power to prosecute claims under the False Claims Act to be exclusive of other segments of the government. Id. ("No other agency is empowered to act under the statute."). Nonetheless, actions under the False Claims Act have been brought not by the Attorney General but by government corporations -- in their own names. See, e.g., Federal Crop Ins. Corp. v. Hester, 765 F.2d 723 (8th Cir. 1985). The government proposes no satisfactory explanation for the apparent conflict between those authorities that hold that only the Attorney General (or a private actor suing in the name of the United States) may bring suit under the False Claims Act and those authorities in which this "rule" clearly does not bar suit by a federal corporation that proceeds in its own name. But to the extent that federal corporations or federal agencies may in fact sue to enforce the False Claims Act, the argument that "the official . . . charged with responsibility to act" designates only officials within the DOJ is correspondingly less persuasive.

 Second, the government correctly points out that the legislative history of the False Claims Amendments Act -- which added Section 3731(b)(2) to the statute -- construes the phrase "the official of the United States charged with responsibility to act in the circumstances" to require knowledge "by an official within the Department of Justice with the authority to act in the circumstances." S. Rep. No. 345, 99th Cong., 2d Sess. 30 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5295. *fn3" That passage of the Senate Report, which purports to construe Section 3731(b)(2), provides in full:

 
Subsection (b) of section 3731 of title 31, as amended by section 3 of the bill, would include an explicit tolling provision on the statute of limitations under the False Claims Act. The statute of limitations does not begin to run until the material facts are known by an official within the Department of Justice with the authority to act in the circumstances. *fn4"

 Although this provision appears straightforward, its presence does raise new difficulties. For example, it is not clear why the Congress would have enacted the broader language of the statute -- language that appears to leave open the question of who "the official . . . charged with responsibility to act" may be -- if the Congress "intended" that "the official" be narrowly construed as only someone within DOJ. Even the legislative history itself is not univocal on the specificity found in that one passage of the Senate Report. For instance, the same Senate Report elsewhere reformulates the changes proposed by Section 3731(b)(2):

 
The subcommittee added a modification of the statute of limitations to permit the Government to bring an action within 6 years of when the false claim is submitted (current standard) or within 3 years of when the Government learned of a violation, whichever is later.

 S. Rep. No. 345 at 15 (emphasis added). Further, the False Claims Act -- including the modifications made by the False Claims Amendments Act -- refers elsewhere to "the Attorney General" of the United States. See Section 3730. It is again not clear why the False Claims Act should specify that the "Attorney General" has the sole power to perform certain functions under the False Claims Act and yet leave unclear on the face of the statute whether "the official of the United States charged with responsibility to act" is in fact only the Attorney General. The case law since the False Claims Amendments Act has not made this difficulty any easier to explain. Compare United States v. Macomb Contracting Corp., 763 F. Supp. 272, 274 (M.D.Tenn. 1990) ("The 'official of the United States charged with responsibility' could only have been the appropriate official of the Civil Division of the Department of Justice, which alone has the authority to initiate litigation under the Act.") with United States ex rel. Kreindler & Kreindler v. United Technologies Corp., 777 F. Supp. 195, CV-87-1626 (N.D.N.Y. Nov. 14, 1991) ("the facts material to relator's cause of action were known, in 1979 by the senior [Army] officials in charge of the Black Hawk project. Thus, those facts were known, or reasonably should have been known, by officials with the responsibility to act.").

 In the face of patently inconsistent authority, this court will nonetheless construe the tolling provision of Section 3731(b)(2) with reference to the legislative history; thus, "the official . . . charged with responsibility to act" must be "an official within the Department of Justice with the authority to act in the circumstances." However, it does not necessarily follow, as the government argues, that the limitations period under Section 3731(b) was tolled until lawyers at DOJ read about the Island Park affair in a newspaper article. Rather, the limitations period was tolled until "the facts material to the right of action [were] known or reasonably should have been known" by that DOJ official. *fn5" That is, under the "reasonably should have been known" standard, the limitation period under Section 3731(b) may run even while officials at DOJ are unaware of the "facts material to the right of action." Further, this possibility of tolling "of course assumes due diligence on the part of the party charged with the responsibility of uncovering the fraud." United States v. Uzzell, 648 F. Supp. 1362, 1367 (D.D.C. 1986).

 In this case, the officials at DOJ "should have . . . known" of the misdeeds at Island Park by March 2, 1984 -- the day on which HUD released an audit report that alleged extensive wrongdoing by Island Park officials and residents. That audit report was widely disseminated throughout the United States government; any one of the many offices to which it was sent could have -- and should have -- referred the matter to the Department of Justice. At the very least, "due diligence" on the part of DOJ personnel should have uncovered "the facts material" in this case: To hold that the common knowledge of the Island Park affair at all levels of the federal government cannot reasonably be attributed to the Department of Justice is to ignore the basic fact that HUD and DOJ are both subdivisions of the same branch of the same government. Indeed, as Section 3730 makes clear, for purposes of prosecuting violations of the False Claims Act, DOJ serves as the "litigator" for the rest of the government; in this case, DOJ was to act as the "advocate" for its "client" -- HUD. In that the Attorney General is charged with responsibility to represent the government in any False Claims Act action, and in that powerful officials at HUD knew of the activities in Island Park, it cannot be but that the Department of Justice "should have . . . known" through the exercise of "due diligence" about these matters at the time that they were well known throughout the rest of the United States government. It would be absurd indeed to conclude that an official audit report of a cabinet-level department does not foreclose tolling of the limitations period but that a happenstance review of a newspaper article initiates the running of the clock against the government.

 The audit report of 1984 was detailed in its account and widely dispersed in the government; indeed, it was so widely available that it was cited extensively by the newspaper article from which the government now claims that DOJ personnel first learned of misdeeds in Island Park. See Michael Winerip, "D'Amato, His Village and Favoritism in Housing," The New York Times, June 8, 1989, section A, page 1. Because, then, the Department of Justice "should have . . . known" on March 2, 1984 of the Island Park matter, the right of ...


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