Late last month, a federal judge reversed a bankruptcy court’s decision to alleviate military aircraft contractor Hawker Beechcraft from liability under a False Claims Act whistleblower lawsuit. The bankruptcy court relied on the fact that military contractor Hawker Beechcraft was recently sold to Textron, Inc. as part of its Chapter 11 exit plan. However, the federal District Court determined that Hawker Beechcraft should be required to face plaintiffs’ allegations of fraud under a loophole in the bankruptcy code. Specifically, Section 523 of Chapter 11 lists several exceptions to the right of a corporate debtor to discharge obligations, including “debts arising for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud….”
Details of Original Case Against Hawker Beechcraft
Several years ago, former employees of a Beechcraft sub-contractor known as TECT Aerospace, Inc. alleged fraud against the aircraft maker regarding the quality and value of various parts used in aircraft for military operations. The individuals believed Beechcraft was allowing its employees and sub-contractors to commit certain acts of misconduct in order for the parts to pass inspection by U.S. military officials. The complaint specifically asserts that Beechcraft directed employees and contractors to “bash in” defective parts with pry bars and hammers, presumably to eliminate dents or cavities, in order to make the parts look new and unworn. The complaint also contended that Beechcraft manufactured wing parts for certain aircraft that did not comply with the provisions of the contract and should have been rejected.
Shortly after whistleblowers filed their lawsuit against Beechcraft, it filed for Chapter 11 bankruptcy, emerging as a smaller company known as Beechcraft, Corp. It was thereafter sold to Textron, Inc. before the whistleblower lawsuit was ever resolved. Thinking it had escaped liability, the company relied on the bankruptcy court’s findings that any outstanding debts (i.e., possible liability to the U.S. government and whistleblowers) would dissipate under the bankruptcy reorganization.
However, a federal judge in New York held that the bankruptcy court erred in this holding, relying on the aforementioned exception to the rule that debts are excused under Chapter 11 proceedings.
The District Court’s finding does not necessarily mean the whistleblowers will be successful in their claims. However, it does eliminate any possible statute of limitations or deadline defenses that Textron could have raised in the subsequent False Claims Act litigation.
“Judge Castel’s decision only means that [the relators] did not miss a deadline for seeking to have their claims survive the bankruptcy….the case is now remanded to the bankruptcy court where Beechcraft will be able to pursue its other defenses to the issue of whether the claims are non-dischargeable.”
The whistleblowers’ case is seeking approximately $2.3 billion in damages. If successful, plaintiffs could recover up to 30 percent of the amount recovered in the lawsuit.
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