Court Opinion

ID: 2665246
Source: CourtListenerOpinion
Date Created: 2014-04-04 07:25:24.903821+00
Date Added: 2024-06-11T12:22:13.515215
License: Public Domain

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA ex

)

rel. SHELDON BATISTE, )
)

Plaintiff, )

)

v. ) Civil Case No. 08-425 (RJL)

)

SLM CORPORATION, )
)
)

Defendant.

v‘=»~

MEMoRANDUM 0P1N10N
(sepiember.§$§ 2010) [#22]

Plaintiff Sheldon Batiste brings this suit on behalf of the United States pursuant to the
qui tam provisions of the False Claims Act ("FCA"), 31 U.S.C. §§ 3129-3732 (2006). He
alleges that the defendant SLM Corporation, a company known as "Sallie Mae" that
administers federally-guaranteed student loans, defrauded the United States by accepting
payments from the federal government that were predicated on certifications of compliance
with federal law that the defendant knew to be false.l The defendant has now moved to
dismiss the case. Among the grounds given for dismissal is that the Court lacks subject
matter jurisdiction over the plaintiff’ s action because his is not the first to raise these
particular allegations of fraud. The defendant asserts that another plaintiff, acting on behalf
of the United States in a qui ram action, filed a nearly identical complaint against it in the

United States District Court for the Central District of California. As a consequence, the

‘The defendant contends that "Sallie Mae" is actually Sallie Mae, Inc., a wholly-
owned subsidiary of the defendant. (Def.’s Mem. in Support of Mot. to Dismiss [#22] at 1
n.l). For purposes of resolving the case at this stage, however, the Court will assume that
the defendant is the same entity as Sallie Mae.

defendant contends that this Court is without jurisdiction to hear the recycled claims.
Because the Court is persuaded that it lacks jurisdiction in this case, the defendant’s Motion
to Dismiss is GRANTED.

BACKGROUND

The plaintiff is a former senior loan associate for Sallie Mae who claims to have
direct and independent knowledge of the facts on which he bases his allegations. (Am.
Compl. jj 5). On March 12, 2008, the plaintiff filed his initial Complaint [#l] against the
defendant followed on June 13, 2008 by his First Amended Complaint [#5]. Just over a year
later, on July 7, 2009, the United States announced its decision not to intervene in the case.
(Notice of Election to Decline Intervention, July 8, 2009 [#16]). Given that announcement,
the Court unsealed the First Amended Complaint, (Order, July 15 , 2009 [#17]), and the
plaintiff promptly served it on the defendant.

At the core of the plaintiff s lawsuit is the allegation that the defendant, in the course
of administering federally- guaranteed student loans, systematically granted unwarranted
forbearances to borrowers in blatant violation of federal regulations. (Am. Compl. jj 16).
Specifically, the plaintiff accuses the defendant of regularly giving forbearances to
borrowers regardless of their intention to repay the loan and regardless of the reasons given
for their inability to make payments. (Icz'.). The plaintiff asserts that the defendant would
often grant forbearances even when there was no basis documented in the borrower’s file
that justified forbearance. (Id. jl‘ll 16, 20). The plaintiff further alleges that the defendant
would extend forbearances to delinquent borrowers who were not entitled to forbearance as

an inducement for those borrowers to make their outstanding payments. (Ia’. 11 2l). Indeed,

to promote this systematic misuse of forbearances, the defendant implemented a system of
quotas and bonuses that, according to the plaintiff, incentivized the defendant’s employees
to extend forbearances to borrowers who were not legally entitled to them. (Ia’. 1111 22-24).

The plaintiff contends that the fraud perpetrated against the United States, which is
the basis for his FCA claims, occurred when the defendant falsely certified to the
Department of Education and affiliated guaranty agencies that it had complied with the laws
and regulations governing federally-guaranteed student loans. To be eligible for obtaining
subsidies from the government, the defendant must enter into agreements with the
Department of Education and with various guaranty agencies in which it promises to
comply with all relevant laws and regulations, including regulations that govern the granting
of forbearances. (Ia’. M 27, 31). When the time comes to request a payment from the
government, the defendant must submit a claim with the Department of Education, and
sometimes with the relevant guaranty agency, certifying that it has indeed complied with
those laws and regulations. (Ia’. 111 28-30, 32-33). Because of the defendant’s systematic
practice of extending forbearances unlawfully to borrowers who were not entitled to them,
the plaintiff alleges that all of the certifications of compliance made by the defendant were
false statements. (Ia’. jj 35). To the extent those false certifications served as the basis for
obtaining payments from the government, the plaintiff contends in his 1 1-count Complaint
that the defendant repeatedly violated the FCA. (Id. at 19-33). Due to these violations, the
plaintiff seeks treble damages, civil penalties, and costs. (Ia’. at 33-34).

In its Motion to Dismiss, the defendant raises three arguments. First, it contends that

the Court lacks subject matter jurisdiction over the plaintiffs qui lam suit because it is not

the first suit filed in relation to the underlying factual allegations. (Def’s Mot. to Dismiss at
5-l9). The defendant claims that, at the time the plaintiff commenced this suit, a nearly
identical suit had long before been brought against it by a qui iam plaintiff in the Central
District of California. (Ia’. at 7-10). The defendant also asserts that the Court is without
jurisdiction because the plaintiff is not the original source of the factual allegations in the
First Amended Complaint. (Id, at 18-19). The defendant claims that those facts were
readily accessible in the public domain before the plaintiff even filed his initial complaint.
(Id. at l2-l6). Second, the defendant contends that the case should be dismissed, if not for
lack of jurisdiction, then for failure to state a claim because the plaintiff failed to allege
sufficient facts to raise an inference of fraud. (Id. at 20-26). Third, the defendant contends
that the plaintiff lacks standing because he sued the wrong company. (Ia’. at 26-29). The
defendant represents that it is merely a passive holding company that has no role to play in
granting forbearances on federally-guaranteed student loans and that the real party in
interest, "Sallie Mae," is merely a wholly-owned subsidiary. (Ia’. at 28).
DISCUSSION
Because the Court’s power to decide this case is a prerequisite to further judicial

review, I must first address the defendant’s claim, raised pursuant to Rule l2(b)(l) of the
Federal Rules of Civil Procedure, that the Court lacks jurisdiction because the plaintiff has
failed to satisfy the FCA’s threshold requirements for bringing an action on behalf of the
United States. "A qui iam relator’s qualification to proceed is an issue of subject matter
jurisdiction." United States ex rel. Ervin & Assocs., Inc. v. Hamilton Sec. Grp., Inc., 332 F.

Supp. 2d l, 4 (D.D.C. 2003). Thus, a relator’s failure to clear the necessary statutory

hurdles deprives the court of its power to hear the relator’s claims. Under Rule 12(b)(1),
"the plaintiff bears the burden of establishing that the court has jurisdiction," Fowler v.
District of Columbia, 122 F. Supp. 2d 37, 39-40 (D.D.C. 2000) (internal citation omitted),
and the Court may consider material outside of the pleadings to determine whether the
plaintiff has met its burden, Ervin & Assocs., 332 F. Supp. 2d at 5.

To decide this case, 1 need to look no further than the FCA’s so-called "first-to-file"
rule. That rule, as set forth at 31 U.S.C. § 3730(b)(5), provides as follows: "When a person
brings an action under [the qui tam] subsection, no person other than the Govemment may
intervene or bring a related action based on the facts underlying the pending action." This
provision is, of course, jurisdictional. Thus, "[i]f an action ‘based on the facts underlying’ a
pending case comes before a court, it must dismiss the later-filed case for lack of
jurisdiction." United States ex rel. Ortega v. Columbia Healihcare, Inc., 240 F. Supp. 2d 8,
11 (D.D.C. 2003) (internal citation omitted). The facts underlying the two cases need not be
identical. Rather, it is the law of our Circuit that Section 3730(b)(5) "bars any action
incorporating the same material elements of fraud as an action filed earlier." United States
ex rel. Hampton v. Columbia/HCA Healthcare Corp., 318 F.3d 2l4, 217 (D.C. Cir. 2003)
(emphasis added).

What exactly that standard means when applied to actual cases and controversies,
however, remains open to some interpretation. Of course, the plain language of the
provision makes clear its overarching purpose: "The first-filed claim provides the
government notice of the essential facts of an alleged fraud, while the first-to-file bar stops

repetitive claims." United States ex rel. Lujan v. Hughes Aircraf‘ Co., 243 F.3d 1181, 1187

(9th Cir. 2001). As our Circuit Court has explained, Congress crafted the FCA to strike a
balance "betweeri encouraging whistle-blowing and discouraging opportunistic behavior."
Hampton, 318 F.3d at 217 (internal quotation marks omitted). To that end, the "first-to-f`ile"
rule awards the spoils to those vigilant enough to blow the whistle f`irst, not to every whistle-
blower. Once the government has been put on notice of "the essential facts of a fraudulent
scheme," duplicative claims serve no purpose since the government "has enough
information to discover related frauds" on its own. Ortega, 240 F. Supp. 2d at 13 (internal
quotation marks omitted). Given these principles, the most sensible test for determining
whether two actions allege the same material elements of fraud is the one adopted in
Ortega: "A later-filed qui iam complaint is barred unless (1) it alleges a different type of
wrongdoing, based on different material facts than those alleged in the earlier suit; and (2) it
gives rise to separate and distinct recovery by the government." Id. By focusing not only
on the underlying facts, but on the type of wrongdoing, this test does justice to the language
of Section 37 30(b)(5) barring subsequent "related" actions. In so doing, the test prevents
the less vigilant whistle-blower from using insignificant factual variations to allege what is
essentially the same fraudulent scheme already made known to the government by an earlier
whistle-blower.
Applying the Ortega test to the case at hand, I agree with the defendant that the

plaintiffs claims are barred by an earlier-filed case in the Central District of California,

United States ex rel. Zahara v. SLM Corp., No. CV05-8020 (C.D. Cal. filed Nov. 9, 2005).2

2 The defendant reports that this case was subsequently transferred to the Southern
District of Indiana, where it was styled as United States ex rel. Zahara v. SLM Corp., No.
l:06-cv-088-SEB-JMS (S.D. Ind. 2006). (Def.’s Mot. to Dismiss at 8 n. 3).

6

Indeed, that case was filed well over two years before the defendant here filed his case in
March 2008. Moreover, a comparison of the plaintiffs First Amended Complaint with the
Zahara Complaint reveals that they allege the same essential wrongdoing by the same
defendant. How so?

Here, the plaintiff alleges that the defendant fraudulently obtained subsidy payments
from the government by falsely certifying that it had complied with federal regulations
pertaining to the granting of forbearances. (Am. Compl. 11 35). Among the violations of
federal law alleged by the plaintiff is that the defendant regularly gave forbearances to
borrowers regardless of their intention to repay the loan and regardless of the reasons given
for their inability to pay. (Ia'. 11 16). The plaintiff also alleges that the defendant granted
forbearances even when there was no documented justification for doing so. (Ia’. 1111 16, 20).
Furthermore, the plaintiff alleges that, to promote this systematic misuse of forbearances,
the defendant implemented a system of quotas and bonuses to incentivize its employees to
extend forbearances to borrowers who were not legally entitled to them. (Ia’. 1111 22-24).

Along the same lines, Zahara alleged that the defendant fraudulently obtained
subsidy payments from the government by submitting claims that it knew were based on
violations of federal law pertaining to the granting of forbearances. (Zahara Compl. [#22-3]
1111 3-6, Ex. B). He further alleged that, to submit those claims, the defendant had to be in
compliance with the applicable regulations and that by submitting the claims anyway, even
though it knew it was ineligible for payment, the defendant defrauded the government. (Ia’.
1111 72-73). Like the plaintiff here, Zahara claimed that the defendant’s employees would

routinely "fabricate" forbearances by extending them to borrowers without their assent or

knowledge, (ia’. 1111 119-20), and without any documentation that the borrower was even
entitled to forbearance, (ia’. 1111 128-29). Zahara further claimed that fabricated forbearances
were most commonly granted for chronically delinquent accounts where there was no
indication of any intention to repay the loan. (Ia'. 11 117). Of course, the similarities do not
end there. Like the plaintiff in this case, Zahara also alleged that the defendant had
constructed an elaborate system of quotas and bonuses that encouraged its employees to
grant as many fabricated forbearances as possible. (Ia’. 1111 25-26, 96-107).

The plaintiffs attempt to differentiate his case from the Zahara case is, to say the
least, feeble! The plaintiff argues, for example, that a "critical distinction" between the two
cases is that the Zahara Complaint failed to make any allegation that the defendant would
extend forbearances to delinquent borrowers as an inducement for them to make their
outstanding payments. (Resp. to Mot. to Dismiss [#23] at l7; Am. Compl. 11 21). Yet, the
plaintiff offers no explanation why that distinction is critical. At most, the allegation adds
factual support to the plaintiffs overarching claim that the defendant was unlawfully
granting forbearances in order to make fraudulent claims for payment from the government.
In that sense, the distinction is not critical at all. lt is merely a factual variation that in no
way changes the essential nature of the wrongdoing already alleged by Zahara and known to
the government. The plaintiff also points to the Zahara Complaint’s failure to mention all
the ways in which the defendant must certify its compliance with federal rules and
regulations pertaining to forbearances as a condition for obtaining subsidies from the
govemment. (Resp. to Mot. to Dismiss at 15-16). But this distinction is also immaterial

given the Zahara Complaint’s allegation that the right to receive payment is conditioned

upon compliance with all applicable federal regulations. (Zahara Compl. [#22-3] 11 72, Ex.
B). Here again, the factual variation in the plaintiff s First Amended Complaint does not
alter the essential nature of the wrongdoing already alleged by Zahara. Because the plaintiff
alleges the same type of wrongdoing based on underlying facts that admit of only minor
variations, l must conclude that his claims are barred because they incorporate the same
essential elements of fraud as Zahara’s earlier-filed action.

Undaunted, plaintiff makes a last-ditch effort to clear the "first-to-file" bar by relying
on a Sixth Circuit opinion to argue that the Zahara case is not a "pending action" for
purposes of preempting the plaintiff s later-filed case because Zahara failed to plead his
allegations of fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil
Procedure. (Resp. to Mot. to Dismiss at ll-l4). I disagree. The plaintiff relies chiefly on
Walburn v. Lockheea’ Martin Corp., 431 F.3d 966 (6th Cir. 2005), which held that a
"complaint’s failure to comply with Rule 9(b) render[s] it legally infirm from its inception,
and therefore it cannot preempt [a subsequent] action under the first-to-file bar." Walburn,
431 F.3d at 972. In Walburn, the Sixth Circuit reasoned that "according preemptive effect
to a fatally-broad complaint" would not further the FCA’s "policy of encouraging
whistleblowers to notify the government of potential frauds." Ia’. at 973. Fundamental to
Walbum’s holding is the premise that an insufficiently-detailed complaint should be
dismissed under Rule 9(b) "precisely because it fails to provide adequate notice to the
defendant of the fraud it alleges." Ia’. And, of course, a "complaint that fails to provide
adequate notice to a defendant can hardly be said to have given the government notice of the

essential facts of a fraudulent scheme, and therefore would not enable the government to

uncover related frauds." [a’. Regrettably for the plaintiff, I am not persuaded by the Sixth
Circuit’s reasoning.

The point of Rule 9(b)’s heightened pleading standard is that it provides more than
what is normally required to give adequate notice of the essential elements of a claim. As
such, the Walbum court goes too far! Rule 9(b)’s particularity requirement serves a number
of purposes in addition to providing sufficient information for the defendant to prepare an
adequate response. United States ex rel. Williams v. Martin-Baker Aircraft Co., Lta’., 389
F.3d 1251, 1256 (D.C. Cir. 2004). For example, it protects potential defendants by
discouraging "the initiation of suits brought solely for their nuisance value, and safeguards
potential defendants from frivolous accusations of moral turpitude." Ia'. For that reason, a
complaint may give adequate notice without also satisfying Rule 9(b). Moreover, it is
entirely plausible that a complaint may provide sufficient information to cause the
government to launch its own investigation of a fraudulent scheme without providing
enough information under Rule 9(b) to protect the defendant’s interests. In other words,
there might be a situation where there is sufficient notice for the govemment, but not for the
defendant. In that event, it would be proper to dismiss the complaint against the defendant
for purposes of Rule 9(b) but to allow the preemption of any subsequent related actions for
purposes of the "f`irst-to-file" rule. After all, once the whistle has sounded, the govemment
has little need for additional whistle-blowers. See United States ex rel. LaCorte v.
SmithKlirze Beecham Clinical Labs., Inc., 149 F.3d 227, 234 (3d Cir. 1998) ("[D]uplicative

claims do not help reduce fraud or retum hinds to the federal fisc, since once the

10

govemment knows the essential facts of a fraudulent scheme, it has enough information to

discover related frauds."). 3

CONCLUSION
Because the plaintiff is not the first to raise the essential elements of the fraud alleged
in his First Amended Complaint, his claims are barred by the FCA’s "first-to-file" rule.
Accordingly, this Court lacks jurisdiction, and the defendant’s Motion to Dismiss is

GRANTED. An Order consistent with this Memorandum Opinion is attached.

l

RICHARD L ON
United States istrict Judge

3 The Court is not swayed by the plaintiffs point that his is not a parasitic or
opportunistic lawsuit because the Zahara Complaint was still under seal when he filed his
initial Complaint. (Resp. to Mot. to Dismiss at l2). Although the "first-to-file" rule aims to
prevent opportunistic filing, that is not its only aim. By awarding the spoils to the first-filer,
the rule also aims to encourage the prompt reporting of fraud. Furthermore, as mentioned
above, once the govemment is made sufficiently aware of the alleged fraud so that it can
pursue its own investigation into the matter, little is gained by subsequent, duplicative
claims from less-vigilant whistle-blowers.

ll