Catch of the Week – Hybrid Tech pays $29 Million to Resolve Claims of Collusive Bidding on Sale of Energy Department Loan in Case Brought by Creditors
Our Catch of the Week arises out of misconduct in a corporate restructuring, features a unique whistleblower, and resulted in a $29 million recovery by the government. The defendants, Hybrid Tech Holdings, LLC and related entities, were alleged to have rigged bids in a government auction of a loan made to Fisker Automotive under the Department of Energy’s Advanced Technology Vehicles Manufacturing loan program.
Fisker Automotive’s Financial Failure
The ATVM loan program, established in 2007, provides low-cost direct federal loans to automakers and parts suppliers for fuel-efficient vehicle and eligible component manufacturing in the United States. Electric car maker Fisker applied for ATVM loans in 2008, and DOE granted Fisker access to up to $529 million. In 2013, with $168.5 million outstanding on the DOE loan, Fisker was struggling: it was in breach of loan covenants, had missed performance milestones, and was insolvent.
Given Fisker’s financial situation, DOE decided to sell the loan, and did so through a competitive auction. Several entities, including Hybrid, were qualified as bidders, and following a final, live phase of the auction, only Hybrid submitted a bid to purchase the loan from DOE; Hybrid’s bid was for $25 million.
Thus, the government sold its right to recover $168.5 million from Fisker to Hybrid for $25 million. While this represented a substantial loss to the government, Fisker was in dire financial straits and the $25 million price should have accurately represented the receivable’s fair market value, given that it resulted from a competitive auction. Indeed, each bidder in the auction had been required to affirm that it would act independently and adhere to applicable law. In the loan closing documents, Hybrid warranted that it had done so.
Hybrid’s Alleged Bid Rigging
In fact, however, as alleged in the whistleblower complaint, Hybrid had not acted independently. Instead, it had exerted pressure on other bidders to suppress their bids, colluding to reduce the bid it would have to make to prevail in the auction. The loss to the government was made clear when, in Fisker’s bankruptcy proceedings, only four months after Hybrid purchased the loan, a different entity purchased most of Fisker’s remaining assets for $149.2 million. If Fisker’s assets were worth $149 million in February, 2014, why had the government only been able to sell the loan, which was secured by Fisker’s assets, for $25 million in October, 2013? The answer, according to the whistleblower complaint, lies in the fraudulent conduct of Hybrid at the auction.
The Whistleblower Complaint
In 2015, a qui tam complaint under the False Claims Act was filed by co-whistleblowers William R. Baldiga and the FAH Liquidating Trust, which was the successor to the claims of the Official Committee of Unsecured Creditors of Fisker Automotive Holdings. Baldiga, an expert in bankruptcy law at the firm Brown Rudnick LLP, had been, according to the complaint, the attorney for the Creditors’ Committee; Baldiga and the Liquidating Trust were represented in the FCA action by Brown Rudnick.
The complaint alleges that Baldiga had discovered the defendants’ wrongful conduct in the course of his representation of the Creditors Committee. According to the DOJ press release, the relators will share a whistleblower reward of $5.2 million.
Loan Programs, the False Claims Act, and Non-Traditional Relators
Fraud in federal loan programs can pose challenges under the False Claims Act, as courts may question whether the government has suffered any damage in the absence of a default on the loan. However, FCA liability has been found on various theories in cases involving fraud in federal home mortgage programs, HUD-guaranteed nursing home loans, clean energy loan programs, Commerce Department loans, and student loans.
Here, the fraud was alleged to happen not in the loan program itself, but in the government’s sale of the loan, with fraudulent contact by bidders in the course of that sale. Bid-rigging and other collusive action is a long-recognized basis for FCA liability.
Those in a position to report bid-rigging are often those who were also harmed by that bid-rigging, such as competitors who lost out as a result of collusive conduct. Like the government, such whistleblowers seek to ensure fair bidding and secure the maximum recovery or the lowest price.
In the case of Hybrid and the ATVM loan sale, the government as a creditor of Fisker was damaged when it received less than the fair market value for its loan to Fisker as a result of the auction rigging by Hybrid. The whistleblower creditors were similarly situated in that they too wanted to maximize recovery in Fisker’s liquidation.
While it is unusual to see a Creditors Committee and its counsel as relators, the qui tam provisions and financial rewards of the False Claim Act provide the basis for public-private partnerships between whistleblowers – of any kind – and the government agencies charged with investigating and prosecuting fraudsters. Presumably Baldiga and the Liquidating Trust acted as co-relators so that the Trust could benefit from any whistleblower reward, while also ensuring that an individual was a named relator if the defendants raised a public disclosure argument and original source issues became important. Regardless of their unconventional identity, the relators here have much in common with other relators, and they should be applauded for using the False Claims Act to recover taxpayer funds.
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