The opinion, available here, of March 24 from the U.S. District Court for Nevada granted in part and denied in part Ormat’s motion to dismiss an action brought by ex-Ormat employees under the False Claims Act. The ex-employees are alleging fraud by Ormat in its preparation of three Section 1603i cash grant (Cash Grant) applications for geothermal projects. In theory, either party could appeal, but that seems unlikely. Background about the case and the False Claims Act is available in my prior blog post.
Ormat was unsuccessful in its effort to have the case dismissed under the “tax bar” rule, which provides that, since the Internal Revenue Service (IRS) is the designated enforcer of the tax law, tax matters are not subject to the False Claims Act. The court’s rationale was that (i) the amounts at issue were grants and not tax benefits, and (ii) the IRS is not empowered to recover inappropriate Cash Grant awards.
Ormat’s next ground for dismissal was the “public disclosure” rule, which provides that relators (i.e., the ex-employees who brought the case) may not use the False Claims Act to seek recoveries based on information that had been publicly disclosed. This issue was a split decision.
Ormat prevailed on two critical issues. First, the allegations as to fraud with respect to the second Cash Grant application for the Brawley plant were dismissed because that application was prepared after one relator had resigned from Ormat and the other was on medical leave. Thus, the two relators were not in a position to be privy to any nonpublic information suggesting a fraud by Ormat. However, the Cash Grant award that resulted from the second application for the Brawley plant was only $13,821,143, which is the smallest of the three awards at issue.
Second, the relators’ allegation of miscalculating the eligible cost basis in the first Brawley Cash Grant application was also dismissed. The ground for the dismissal is that Ormat’s securities filings had disclosed the same cost numbers that the relators pointed to as suggesting that the cost-basis numbers in the Cash Grant application were false.
For similar reasons, the allegation that Ormat had delayed recording write-downs for the Brawley plant for financial accounting statement purposes in order to avoid a partial recapture of the Cash Grant was dismissed as being based on performance data contained in Ormat’s securities filings. This dismissal meant that the court avoided the questions as to whether an asset can be taken partially out of service as a result of a reduction in production and whether a write-down of an asset for financial statement purposes has bearing on that tax issue.
Unfortunately for Ormat, the court concluded that the relators’ claim that the portion of the Brawley project that was covered by the first Brawley Cash Grant application, was placed in service in 2008, as opposed to 2010 as reported by Ormat on its Cash Grant application was based on nonpublic information provided by the relators. Thus, the court denied Ormat’s motion to dismiss with respect to that issue. Further, the placed-in-service issue is an all-or-nothing issue because, if the Brawley plant had been in service prior to 2009, it would not have been Cash Grant eligible. So, with respect to the first Brawley Cash Grant application, the full award of $108,285,626 is still at issue.
The court also held that the relators provided nonpublic information germane to allegedly false statements by Ormat in the Cash Grant application for the expansion of the Puna plant. The issue for the Puna expansion was whether costs were properly allocated between the Cash Grant-eligible expansion and the ineligible improvements and repairs to the original plant. The Puna Cash Grant award was more than $105 million. However, the opinion suggests that the amount at issue may be far less; the court notes that the relators’ allegation is that “Ormat’s failure to truthfully represent the relationship between the 30-MW plant and the Expansion, as well as Ormat’s misrepresentation of the cost basis of the Expansion, resulted in an overpayment by the Treasury of at least $3,000,000.”
Thus, the case boils down to two highly technical and somewhat gray issues of tax law. The first is the date the first portion of the Brawley plant was placed in service. “Placed in service” is governed by a highly factual, five-factor test and the rulings and cases applying those factors are far from clear.
The second is the allocation of costs between the original Puna plant and the expansion thereto. That is a highly factual issue over which, in my experience, reasonable minds can differ, and even the relators’ version of the appropriate allocation may result in a relatively small reduction to the Cash Grant award.
The opinion suggests that, if Ormat’s factual conclusions in question are ones over which reasonable minds can differ, then Ormat will prevail. The opinion provides that the False Claims Act “requires a showing of knowing fraud. The requisite intent is the knowing presentation of what is known to be false. Innocent mistakes or mere negligence do not satisfy the standard; the statement must be a palpable lie” (citations and internal quotation marks omitted). It would appear that, if Ormat disclosed the pertinent facts to a qualified tax advisor and fully reflected the tax advisor’s advice in preparing the Cash Grant applications, then Ormat could not have told a “palpable lie.”
Finally, the opinion may include a harbinger as to the judge’s view of the merits of the case. The opinion provides, “Frustratingly, and perhaps indicative of the overall strength of their claims, relators cite generally to [their complaint] rather than directing the Court to specific provisions [of the complaint] that contain what [the relators] consider to be their independent and material knowledge as it pertains to the Brawley plant.”
i The Cash Grant is provided for in Section 1603 of Division B of the American Recovery and Reinvestment Act, as amended. For geothermal projects, the Cash Grant is 30 percent of “eligible basis.” Geothermal projects must have been originally placed in service between January 1, 2009 and December 31, 2011 (regardless of when construction begins), or placed in service after 2011 and before January 1, 2014, if construction of the property began between January 1, 2009 and December 31, 2011. More information is available at http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx.