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Bagley v. United States

United States District Court, C.D. California

August 5, 2013

RICHARD D. BAGLEY, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant

Counsel Amended August 8, 2013.

Page 983

For Richard D. Bagley, Plaintiff: Sharyn M Fisk, LEAD ATTORNEY, Barbara E Lubin, Hochman Salkin Rettig Toscher & Perez PC, Beverly Hills.

For United States of America, Defendant: Darwin Thomas, LEAD ATTORNEY, Office of U.S. Attorney, Tax Division, Los Angeles, CA; Daniel W Layton, U.S. Attorneys Office, Tax Division, Los Angeles, CA.

OPINION

Page 984

FINDINGS OF FACT AND CONCLUSIONS OF LAW

HON. ROBERT J. TIMLIN, UNITED STATES DISTRICT JUDGE.

Through this action, Plaintiff Richard D. Bagley (" Bagley" ) seeks a refund of federal

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income taxes paid by him in the amount of $3,874,407 with respect to the 2003 tax year. From 1994 through 2003, Bagley, on behalf of the United States of America (" government" ), prosecuted TRW Inc. (" TRW" ) for false claims under the False Claims Act (" FCA" ), 31 U.S.C. § 3729 et seq. For his actions as a relator under the FCA, the government paid Bagley a FCA award of $27,244,0000 and statutory attorneys' fees of $9,407,295. Of the $36,651,295 of income, Bagley paid a total of $18,477,815 to his attorneys. On his 2003 amended federal tax refund claim, Bagley reported the $36,651,295 gross income as properly attributable to his " trade or business" of being a private attorney general, and reported the $18,477,815 paid to his private attorneys as ordinary and necessary business expenses deductible pursuant to Section 162 of the Internal Revenue Code. The Internal Revenue Service (" IRS" ) denied Bagley's refund claim, stating that the $36,651,295 is " Other Income" as defined in Section 212 of the Internal Revenue Code, and the $18,477,815 paid to Bagley's private attorneys is an itemized deduction reportable on Schedule A.

The court conducted a bench trial on this matter, and now issues its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). After carefully reviewing all the evidence and hearing argument presented by the parties' counsel, the court makes the following Findings of Fact and Conclusions of Law:

FINDINGS OF FACT [1]

This is an income tax refund suit filed by Richard D. Bagley (" Bagley" ). The Complaint for Refund of Internal Revenue Taxes was filed in Case No. CV-10-00483-RT by Bagley on January 22, 2010. The Defendant is United States of America (" United States" or " Government" ).

Richard D. Bagley, the Plaintiff, has an MBA and an MS in accounting from UCLA. Bagley is not an attorney and has never been to law school. From 1967 until 1993, Bagley worked for TRW in a variety of positions. During his employment with TRW, Bagley had prior experience with the FCA in 1985when he helped investigate accounting fraud in another office of TRW. Upon Bagley's identification of the source of the accounting fraud, TRW made voluntary disclosures to the Government with respect to these claims.

From 1987 through 1992, Bagley was the Chief Financial Manager for TRW's space and technology group. As Chief Financial Manager for that group, Bagley was responsible for, among other things, contract proposal pricing, indirect expense budgeting and control, and accounting. When Bagley was Chief Financial Manager of the space and technology group at TRW, one of his primary functions was to ensure the integrity of the accounting records and that the bills were sent to the government.

Bagley understood the accounting schemes at TRW and how the costs flowed through the accounting system into the invoices and payment requests which TRW submitted to the government for payment. Starting about 1989 and continuing through 1991, during his employment with TRW, Bagley became aware of false claims made by TRW to the government.

On or about March 29, 1991, Bagley signed a certification to the Federal government that TRW's " indirect" expense claim for the TRW Space and Technology Group for 1990 represented reimbursable costs. The certification was under penalty

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of perjury and, at the time he signed it, Bagley believed that it was incorrect. Bagley signed another certification to the Federal government verifying TRW's " indirect" expense claim for TRW's 1991 year. He also signed the 1991 certification under penalty of perjury even though he did not believe it was correct at that time.

In TRW's 1990 and 1991 indirect expense certifications, Bagley certified, to the best of his knowledge and belief, that he had reviewed each year's Indirect Cost Proposal, that all costs in the proposal were allowable in accordance with the requirement contracts, that the proposal included no costs that were unallowable, and that all costs were properly allocable to in accordance with applicable regulations. Bagley signed the certifications to the government even though he knew they were wrong in order to retain his job. At that time, Bagley had not initiated FCA proceedings against the government. When Bagley discovered the information regarding TRW's false claims, he discussed it with two individuals whom he believed were operating the false claim schemes, the general manager of his group and his functional supervisor, but his concerns were not resolved.

Bagley was notified in early 1993 that he was going to be laid off as a result of a reorganization at TRW, Bagley was ultimately laid off in August of 1993. When he left TRW, Bagley took documents that pertained to the false claims issue. After he was laid off, Bagley looked for employment for about a year. Bagley has had no other employment since being laid off by TRW. Until 2003, Bagley's sources of income after being laid off were a retirement pension from TRW and some savings.

In mid-1994, Bagley sued TRW for wrongful employment termination. Bagley ultimately lost the wrongful termination lawsuit against TRW.

In June 1994, Bagley met with Tuttle & Taylor to discuss filing a FCA lawsuit. He met Michael Bierman (" Bierman" ) for the first time. Bierman was an experienced attorney who had prior FCA litigation experience. Bagley retained Tuttle and Taylor to represent Bagley for the FCA suits on October 1, 1994. Because of Bagley's role in falsely certifying TRW's " indirect" expense summaries which were submitted to the government, Bagley retained Tuttle & Taylor in part to help him seek immunity for the possibility that he could be charged criminally in submitting false documents to the United States.

Prior to filing any FCA suits, Bagley spent over 200 hours in furtherance of the FCA prosecution activity, including his attendance at numerous meeting and submitted written representations to Bierman. Bagley filed two lawsuits on behalf of the United States under the FCA against TRW for false claims. Bagley's FCA suits involved claims by TRW for the recovery of " indirect" costs charged under government contracts. The essence of Bagley's FCA lawsuits was that TRW allocated certain costs to the government as indirect expenses when those costs were not properly pooled as indirect costs and not allowable as charges to the government.

Bagley filed the first FCA lawsuit on behalf of himself as relator and on behalf of the United States on November 16, 1994. This complaint asserted eight claims against TRW. On June 21, 1995, approximately seven months after the first FCA complaint was filed, Bagley as a relator filed a second FCA complaint against TRW. The second FCA suit, which Bagley continued to pursue after the Government declined to intervene, had amounts of damages that were double the damage amounts in the first FCA suit. Bagley exerted diligent efforts to convince the

Page 987

Government to intervene in the FCA suits in order to reach a successful conclusion.

By 1996, Bagley hired a second law firm that specialized in FCA suits, Phillips and Cohen. Bierman subsequently became a partner in the law firm Luce, Forward, Hamilton & Scripps (" Luce Forward" ) and Luce Forward continued representing Bagley in the FCA suits until 2003.

In 1998, the Federal government intervened on two of the eight claims alleged in the first FCA suit, and Bagley dismissed the remaining claims in that suit. Bagley continued to pursue the second FCA suit after the Government initially declined to intervene, based upon his belief that he would be able to find favorable evidence which he knew existed and the identity of those engineers who had knowledge of such evidence. Bagley spent considerable time in " structuring the evidence" in the second lawsuit in order to convince the Government to intervene. The federal government intervened on the second FCA suit in 2000.

From June 1994 through the settlement of the FCA claims in 2003, Bagley provided information to his attorneys which he thought was important to the FCA suits and which they needed to know in order to effectively prosecute them. During the 1994 to 2003 time period, Bagley exclusively worked on his FCA prosecution activity, and was not otherwise employed.

Bagley maintained a contemporaneous log of hours he worked in relation to the litigation of the qui tam actions. The log started in June of 1994, when Bagley was assisting his attorneys in preparing the first FCA complaint. Bagley spent approximately 5,963 hours on his FCA activity. The hours spent by Bagley in the FCA prosecution activity varied from year to year based on the present demands of the litigation. Bagley's counsel spent 21,054 hours prosecuting the FCA suits.

Bagley attended meetings with his counsel and the Federal government's counsel. He attended monthly litigation meetings conducted by AUSA David Long, and he also attended 40-50 meetings with the Defense Contract Audit Agency (" DCAA" ) to reach a consensus on the financial damages to the Government. Bagley was deposed during the FCA litigation. Bagley provided to his private counsel his written summaries of information regarding TRW's false claims.

Bagley's attorneys would prepare documents and Bagley made comments on draft documents prepared by his attorneys, and Bagley spent a lot of time looking through TRW documents. Bagley was able to help identify key documents of TRW because he " worked at TRW and the documents of interest were documents that [he] knew existed from having looked at them and [he] knew where they were and [he] knew whose possession they were in." Because he " had worked at TRW in association with those individuals," Bagley knew and identified individuals at TRW who had knowledge of a certain false claim.

Bagley stayed involved with the prosecution of the FCA claims by his private counsel team because " they weren't accountants and hadn't spent 25 years working with TRW and didn't have an in-depth understanding of TRW's accounting system or the people or the products or anything about the company which was necessary to understand how the frauds occurred and where the evidence was."

Bagley was helpful to his attorneys in the following ways.

a. First, Bagley had a fairly extensive knowledge of most of the facts that underlay the FCA claims because " he was either there or he knew what happened if he wasn't there." He spent a significant amount of time presenting the evidence and issues

Page 988

to his attorneys in order to help them understand various elements of the FCA suits and thereby improve the probability of success.
b. Second, he had an encyclopedic knowledge of the federal acquisition regulations (" FAR" ) and of the accounting rules that related to the cost pools. Bierman found this to be very helpful, as he was not an expert in that area and Bagley was able to assist him particularly by providing the broader context of the regulations and rules, i.e. if the attorneys were interpreting one particular rule and Bagley was able to point out if there was another rule that would also play into the analysis.
c. Third, he had a good knowledge of the pricing provisions of the government contracts. Bierman found this helpful because that information was not all compiled in one place, so Bagley's understanding of the pricing procedures and claims settlement procedures was very helpful.
d. Fourth, Bagley understood what could be characterized, according to Bierman, as the " code" used by TRW employees when they wrote various memoranda. He also knew where to look specifically for documents that would memorialize decisions made by TRW, and how to determine whether a memorandum which might, on its face, look innocuous was, in fact, TRW's recording of an improper cost accounting decision.

Further, Bagley, along with Private Counsel, substantiated the false claims allegations by obtaining documentary evidence that did so, and then interviewing or deposing the involved engineers to confirm the types of activities they were engaging in. Bierman found Bagley's familiarity with the witnesses to be very helpful when deposing them.

There were times when Bagley felt that Private Counsel did not understand the issues. In response, Bagley provided the specific information they needed to understand what the government regulations required. He also interpreted those regulations for them and supported his comments through case law.

Bagley drafted and/or edited at least 73 documents in furtherance of the FCA litigation activity. Bagley also played a primary role with respect to calculating damages and, to that end, attended 40 to 50 meetings with the DCAA between 1997 and 2003. He also spent substantial hours doing his own damage calculations.

Bagley was involved in all aspects of gathering documentary evidence against TRW. He reviewed the extensive production of documents received from TRW, and he structured the evidence found in those documents to put together the false claim allegations against TRW.

Michael Pace, a United States Air Force Investigator, requested that Bagley review TRW's document production. Between 1995 and early 1997, Bagley reviewed the contents of approximately 212 to 218 boxes of documents produced by TRW between mid-1995 and early 1997. In 1998, Bagley reviewed an additional 36 boxes produced by TRW with respect to the second FCA suit. The government helped Bagley in his document review by making copies of certain documents Bagley thought were of exceptional importance.

Bagley had to be involved throughout the entire FCA litigation. Bagley testified: " Because these false claims were allegations of accounting fraud and I was the only person on the prosecution team that understood all aspects of ...


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