Fifth Circuit Upholds Order Requiring Seafood Company to Repay $1 Million Fraudulent Deepwater Horizon Claim

Case: Deepwater Horizon v. Lake Eugenie Land & Dev., Inc.
           United States Court of Appeals for the Fifth Circuit
           No. 16-30717, 2017 U.S. App. LEXIS 8463 (5/12/17)

Appellant, Crystal Seafood Company, Inc. appealed an order of the lower holding the seafood processing company and two of its officers jointly and severally liable for a $1,034,228.42 payment received pursuant to a settlement of the company’s claim arising out of the Deepwater Horizon oil spill in April 2010. Pursuant to the 2013 district court order appointing a Special Master to examine and investigate suspicious past or pending claims submitted to the Deepwater Horizon Economic Claims Center (“DHECC”), and further, to initiate legal action to “clawback” any fraudulent claims paid, in 2015, the Special Master sought to recoup the $1,034,228.42 paid to Crystal Seafood Company, Inc. on the basis that the company fraudulently misrepresented itself as an ongoing business in order to receive settlement funds. On May 24, 2016, the district court granted the clawback motion, holding there was no genuine dispute of material fact that Crystal Seafood was a “failed business” under the terms of the settlement agreement and that Crystal’s sworn statement to the contrary constituted fraud. The district court then pierced the company’s corporate veil and held two its officers, Victor Tran and Christopher Tran, jointly and severally liable with the company for the $1 million owed.

Reviewing the district court’s grant of a clawback motion as a grant of summary judgment, the Fifth Circuit reviewed the judgment de novo, the court noted that in order to prove common law fraud, the following must be established: (1) that the claimant knowingly or recklessly (2) made a material misrepresentation (3) that he intended to be acted upon, and was in fact acted upon, to the detriment of the DHECC.

Although Crystal Seafood argued the existence of a genuine dispute as to the first and second elements, the Fifth Circuit disagreed. The Fifth Circuit also rejected the company’s appeal of the judgment holding the Trans personally liable finding the company lacked standing to champion the rights of the Trans (whom did not personally appeal the court’s judgment).

Considering whether Crystal Seafood made a material misrepresentation, the court noted the settlement agreement defined a “failed business” as a business that subsequent to May 1, 2010, but prior to December 31, 2011 either: (1) ceased operations and wound down or (2) initiated or completed a liquidation of substantially all of its assets. Finding it undisputed that the company processed the last of its shrimp approximately one year before the oil spill and sold the last of its frozen inventory approximately three months after the oil spill, in addition to finding it undisputed that the company submitted profit and loss statements to the DHECC, under oath, illustrating it stopped taking a depreciation expense on its processing equipment the month of the oil spill and, according to the tax returns submitted, the company had “disposed” of all of its assets by December 31, 2010. Based upon this evidence, the lower court concluded Crystal Seafood was a failed business at the time it made its claim and was therefore ineligible for the $1,034,228.42 it received. Agreeing with the lower court, the Fifth Circuit found no genuine dispute of material fact as to whether Crystal Seafood materially misrepresented itself as an ongoing business when it filed its claim in 2012. Relying on the same evidence, the Fifth Circuit likewise found the seafood company knew or should have known that it was a failed business when it filed its claim.

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