United States District Court, M.D. Tennessee, Cookeville Division
KEVIN H. SHARP, District Judge.
The United States of America, on behalf of Defendants United States Department of Agriculture ("USDA"), Farm Service Agency ("FSA"), and Bruce Nelson ("Nelson") (collectively, "Defendants") filed a Motion to Dismiss for Lack of Jurisdiction (Docket Entry No. 41), to which Plaintiffs AUI Management, LLC ("AUI") and Jeff Callahan ("Callahan") (collectively, "Plaintiffs") filed a response (Docket Entry No. 43), and Defendants filed a reply (Docket Entry No. 45). For the reasons discussed herein, the Court will deny Defendants' motion.
RELEVANT PROCEDURAL HISTORY AND FACTUAL BACKGROUND
Plaintiff Callahan is an individual resident of Putnam County, Tennessee and is the President and owner of AUI, a limited liability company. AUI, was the management company for Advocacy Resources Corporation ("ARC"), a non-profit entity that participated in a federal government set-aside program geared toward the employment of disabled individuals and the provision of certain products to government agencies ("Government Supply Contracts"). Defendant USDA is an agency of the United States Government, and Defendant FSA is a division of the USDA. Defendant Nelson is the Administrator of the FSA and was the Suspending Official in this matter.
ARC was in the business of fortifying vegetable oil with Vitamin A for use in Government Supply Contracts for domestic and export programs, generating $30-$50 million per year in gross revenue. ARC's primary customer was the United States Government. ARC operated primarily under contracts designated for nonprofit companies under the Javits-Wagner-O'Day Act ("JWOD"), 41 U.S.C. §§ 46-48c. JWOD (now known as AbilityOne) was created to provide set-aside business for the benefit of nonprofit agencies that employ blind and disabled individuals for 75 percent or more of their direct labor. ARC supplied 20 percent of vegetable oil bought by the USDA for various government programs.
The legislation that governs the AbilityOne program includes a process for a separate Government committee to handle certain duties. JWOD required the establishment of the Committee for Purchase From People Who Are Blind or Severely Disabled (the "Committee") to administer the set aside of products and services for purchase from nonprofit agencies. The Committee's responsibilities include establishing a procurement list for commodities and services suitable for procurement from qualified non-profit agencies for the blind or severely disabled and determining a "fair market price" of commodities and services on the procurement list in accordance with the provisions of the AbilityOne legislation.
Despite the Committee's charge to ensure fair pricing, under contract prices set by the Committee, USDA had underpaid ARC for oil since at least 2005, costing ARC several million dollars by 2006, and resulting in ARC's filing a Chapter 11 bankruptcy petition on June 20, 2006. Michael Collins, an attorney and financial restructuring specialist, was appointed trustee of a liquidating trust for the benefit of ARC's prepetition creditors. He also became a member of ARC's board of directors pursuant to its bankruptcy reorganization. While in bankruptcy, the underpayments continued resulting in an underpayment claim totaling approximately $13.4 million through 2011. As a result, ARC's poor financial position deteriorated precipitously. By late 2006, ARC had a large negative net worth and could not continue as a going concern. It faced imminent failure and liquidation.
ARC was within days of being liquidated when the trustee, lacking non-profit financing options, approached AUI and Callahan to provide financing and management expertise to help restart ARC. As collateral, AUI would receive a first priority secured position on any post-bankruptcy petition assets of ARC, instead of the customary first position on pre- and post-filing assets, which would have provided a larger asset pool. Because ARC was a not-for-profit company having no stock certificates or shares, it could not pledge any stock as additional security. Despite the high level of risk, AUI and Callahan were willing to accept the terms that the trustee offered, terms that had been rejected by other potential sources of financing. Callahan personally guaranteed all of the funds provided to ARC.
A financing arrangement was approved by the Bankruptcy Court on November 22, 2006, that allowed AUI a management fee for its role. The agreement was subject to Bankruptcy Court oversight and included a provision indemnifying and holding AUI harmless from any claims resulting from any negligence or willful misconduct by ARC. In accordance with the Management Agreement, AUI provided accounting and management personnel as well as millions of dollars in financing for inventory and equipment. Callahan served in a "big picture" strategic role and delegated the day-to-day operational authority to others.
In late August or early September of 2009, Robert Buxton ("Buxton"), a USDA contracting officer involved with the ARC contracts, was contacted by Lanelle Step ("Step"), a USDA auditor with the Warehouse Licensing Examination Division. She faxed a number of Certificates of Analysis ("COAs") that had been issued by the Barrow Agee testing lab in connection with ARC vegetable oil. COAs are the means by which the Government determined that the oil met government standards for Vitamin A fortification. Buxton compared the Barrow Agee COAs with the COAs that had been included in several ARC invoice packages. Buxton found that there was one difference between the Barrow Agee original data on the COAs and the data on the ARC versions submitted with the invoice packages - the percentage content of Vitamin A had been altered.
The decision was made by the USDA to report the matter to the USDA Office of Inspector General ["OIG"]. Although there was enough information available from the initial review of records to see that multiple COAs were involved, likely affecting shipments of at least $375, 000, the decision was made not to contact ARC, AUI, or Callahan, or advise any of them of the issue. Neither AUI nor Callahan was aware of the issue or had any reason to suspect any problem with the COAs.
On September 16, 2009, the USDA, with a number of its agents involved, executed a search warrant on the facilities of ARC in Cookeville, Tennessee. Shortly after the search warrant was executed, ARC contacted counsel for assistance. ARC's counsel contacted the U.S. Attorney's office and informed Assistant U.S. Attorney Ty Howard ("Howard") that he would be conducting an internal investigation. ARC's counsel took steps to assure that records were preserved and that ARC cooperated fully with the Government.
ARC interviewed a number of employees and reviewed other material and came to the conclusion that Richard Foster ("Foster") had acted alone in connection with the COA falsification and that he was simply a rogue employee. Foster resigned within days after the search warrant was executed, and he admitted his improper conduct to the federal authorities and subsequently to ARC's counsel. Based on the investigation conducted by ARC, there was no credible information that anyone other than Foster was involved in the falsification of the records. Foster was an employee of ARC and was not affiliated with AUI or Callahan in any manner.
From September of 2009 to 2011, ARC, while still under the direction of AUI and Callahan, shipped to the government $80 million to $90 million of vegetable oil. Although on a few occasions the testing process resulted in remixing to correct variations from the required specifications before shipments occurred, there is nothing in the record to indicate that there has ever been a shipment received by the Government that was out of spec since September 2009.
ARC, AUI and Callahan were suspended from the Government Supply Contracts on May 18, 2011, based on actions of a rogue employee of ARC, unknown to and hidden from AUI and Callahan, which occurred approximately two years prior to the suspension. The only basis in the suspension letter for suspending AUI and Callahan was that the Government alleged they "knew or should have known" of ARC's misconduct. ARC, along with AUI and Callahan, immediately sought review by Nelson. Subsequently, ARC provided written information and participated in a telephonic meeting with Nelson. After determining that a hearing was appropriate, Nelson appointed a USDA employee, G. Sean O'Neill ("O'Neill" or the "Hearing Officer"), to conduct the hearing on the appeal and the parties engaged in a day-long hearing on July 7, 2011. After the hearing, Nelson proceeded to uphold his original ARC decision anyway, and subsequently, the suspensions of AUI and Callahan - that they "knew of or had reason to know of, the fraudulent activity of ARC." With regard to the falsification, ARC, AUI and Callahan have never disputed that it occurred. However, the falsification of those records ended nearly two years prior to the suspensions.
The impact of these suspensions on AUI and Callahan, as well as ARC, has been devastating. Callahan has been forced to file a Chapter 11 bankruptcy petition. AUI's business operations have been shut down and all of its employees have been laid off. ARC, despite it eventually settling with the Government, was ...