Under that act the whistleblowers can receive up to 30 percent of the tripled damages, with the rest going to the government. Tony Mastando, attorney originally represented the whistleblowers.

aw360 (September 28, 2021, 4:44 PM EDT) — Efforts to sell a helicopter company long seen as a high-value holding of distressed debt investor Lynn Tilton’s Patriarch Partners have hit serious turbulence in the form of a $36.2 million federal whistleblower suit award and potential treble damages against the company, MD Helicopters Inc.

Jurors in the U.S. District Court for the Northern District of Alabama found the company guilty of fraud Friday in connection with U.S. Army-brokered MDHI sales to forces in El Salvador, Costa Rica and Saudi Arabia.

Although the original suit sought $354 million in damages for four contracts, the claims that went to the jury resulted in an award of $3.8 million for a tainted contract with El Salvador, $29.1 million for an agreement with Saudi Arabia and $3.3 million for a deal with Costa Rica. Those jury-approved awards, if tripled, could top $110 million, plus attorney fees and costs.

Late Monday, Latham & Watkins LLP, counsel for MDHI, notified U.S. Bankruptcy Judge Karen B. Owens in Delaware about the Alabama decision. Judge Owens is currently overseeing efforts to sell MDHI and other Patriarch companies to cover more than $1 billion in claims filed by Zohar funds noteholders who staked Tilton’s once high-flying business-turnaround enterprise.

“MDHI vehemently disagrees with the verdict and is considering its numerous post-verdict and appellate rights but, given its status as one of the portfolio companies of the Zohar debtors, we thought it prudent to alert Your Honor to this development,” Christopher J. Clark of Latham said in the letter.

Clark said that “although the award has the potential to increase materially under applicable federal laws related to these types of whistleblower suits, no judgment has yet been entered” by U.S. District Judge Abdul K. Kallon.

Patriarch, Tilton and Zohar have kept pivotal details of the bankruptcy litigation, claims and sale efforts under seal, including most details surrounding negotiations over and prices sought or paid for the portfolio companies, including MDHI. It was unclear how a potential $110 million liability would affect sale efforts or negotiations.

In the Alabama case, which dates to a whistleblower action filed in 2013 and unsealed in 2014, government employee relators Philip Marsteller and Robert Swisher accused MDHI of knowingly inflating helicopter prices in multiple government contracts.

The original case also accused Tilton of having an unethical relationship with an Army project manager who had been involved with helicopter programs. The project manager went to work for Patriarch after retiring from government service and was accused of sharing sensitive information that allowed MDHI to secure better deals from the government contracts.

Judge Kallon dismissed the suit without prejudice in 2016, but it was remanded in 2018 by the Eleventh Circuit in 2018. The case at one point included a more than $300 million claim that also involved helicopters for Afghanistan, an amount that would have pushed the triple-damages claim above $1 billion.

Since the U.S. government did not participate in prosecution of the case, hundreds of millions could have gone to the whistleblowers for their share of the recovery in the four-country claim.

Tilton was originally named in the suit but dismissed with prejudice days before the trial began. The whistleblower, or qui tam, action accused MD Helicopters of violating federal acquisition regulations.

In a document filed in support of a prosecution pretrial brief, the whistleblowers argued MDHI undermined the integrity of the government’s Foreign Military Sales program.

“By lying and cheating its way into FMS contracts in the first instance, MD wholly deprived the United States of this indisputably intangible benefit,” the brief said. “Indeed, the evidence shows that the government would not have entered into these FMS contracts at all — it would not have paid a dollar — if MD had not falsely promised compliance with material ethics laws.”

The Alabama ruling came three days after MBIA Insurance Corp. renewed a Delaware bankruptcy court suit seeking more than $1 billion from Tilton and 13 affiliated businesses, alleging the systematic, multiyear looting of assets and funds that triggered massive MBIA noteholder payouts and left the insurer wrongfully blocked from recoveries.

Qui tam relators Philip Marsteller and Robert Swisher are represented by Dennis A. Mastando of Mastando & Artrip LLC and Joel W. Reese, Pete Marketos, Adam C. Sanderson, Joshua M. Russ, Andrew O. Wirmani, Brett S. Rosenthal and Allison N. Cook of Reese Marketos LLP.

The Zohar Funds and Tilton have been involved in a multiyear, multicourt battle over control of Tilton’s collateralized-debt empire. Tilton took the funds into Chapter 11 in 2018 after losing a Delaware Chancery Court control battle, but ceded the bankruptcy helm in a mediated settlement aimed at a sale of Patriarch assets.

MD Helicopters Inc. is represented by Charles A. Stewart III, Jonathan C. Hill, J. Bradley Robertson, Kimberly Bessiere Martin and Kristina A. Reliford of Bradley Arant Boult Cummings LLP.

The case is United States of America, ex rel Philip Marsteller and Robert Swisher v MD Helicopters Inc., case number 5:13-cv-00830, in the U.S. District Court for the Northern District of Alabama.

The bankruptcy adversary case is MBIA Insurance Corp. v. Lynn Tilton et al., case number 1:20-ap-50776, in the U.S. Bankruptcy Court for the District of Delaware.

The bankruptcy case is In re: Zohar III Corp. et al., case number 1:18-bk-10512, in the U.S. Bankruptcy Court for the District of Delaware

Article originally published at law360.com

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