United States of America et al v. Academy Mortgage Corporation

Filing 97

ORDER by Judge Edward M. Chen Denying #60 Government's Motion to Dismiss and Denying as Moot #68 Relator's Request for Evidentiary Hearing. (emcsec, COURT STAFF) (Filed on 6/29/2018)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 UNITED STATES OF AMERICA, ET AL., Plaintiffs, 8 9 10 11 ORDER DENYING GOVERNMENT’S MOTION TO DISMISS AND DENYING AS MOOT RELATOR’S REQUEST FOR EVIDENTIARY HEARING v. ACADEMY MORTGAGE CORPORATION, Docket Nos. 60, 68 Defendant. United States District Court Northern District of California Case No. 16-cv-02120-EMC 12 13 I. INTRODUCTION 14 In this qui tam suit under the False Claims Act, the Relator alleged that Academy 15 Mortgage defrauded the Government by falsely certifying loans for government insurance. The 16 Government declined to intervene on the initial complaint. Docket No. 10. But after the Relator 17 amended, the Government moved to dismiss under 31 U.S.C. § 3730(c)(2)(A), arguing that 18 proceeding with the suit would drain its resources. Docket No. 60 (“Mot.”). The Relator objected 19 to the motion and requested an evidentiary hearing on the Government‟s motion, see Docket No. 20 68, at 7, which the Government opposed. As this Court held, to obtain an evidentiary hearing, the 21 Relator “must present „some evidence‟ that the Government‟s decision to dismiss was 22 unreasonable, not a result of a full investigation, or based on arbitrary or improper considerations.” 23 Docket No. 90, at 6 (citing U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 24 F.3d 1139, 1145 (9th Cir. 1998)). The Court invited the parties to submit evidence pursuant to this 25 standard. Id. 26 The Relator‟s evidence showed that the Government performed only a limited 27 investigation of the original complaint and appears not to have investigated the amended 28 complaint at all. See Docket Nos. 92, 93. Despite this, the Government submitted no evidence in 1 response to the Court‟s order. See Docket No. 94 (“Gov. Response”). Because the undisputed 2 evidence shows that the Government did not perform a full investigation of the amended 3 complaint, its motion to dismiss is DENIED. Accordingly, the Relator‟s request for an 4 evidentiary hearing is DENIED as moot. II. 5 6 A. DISCUSSION The Relator‟s Request for an Evidentiary Hearing 7 As the Court previously determined, the Relator may obtain an evidentiary hearing 8 regarding the Government‟s decision to dismiss if the Relator makes a prima facie showing “that 9 the . . . dismissal is unreasonable in light of existing evidence, that the Government has not fully investigated the allegations, or that the Government‟s decision was based on arbitrary or improper 11 United States District Court Northern District of California 10 considerations.” Sequoia Orange, 151 F.3d at 1145 (quoting S. Rep. No. 99-345, at 26 (1986)). 12 The Relator‟s evidence meets that standard. Based on the evidence in the record, the 13 Government‟s investigation of the original complaint consisted only of interviewing the Relator 14 and examining documents produced by her. See Docket No. 92-1 (“Thomas Decl.”) ¶¶ 11-14. 15 The documents pertained only to misconduct at the particular branch of Academy Mortgage where 16 the Relator had been employed, did not concern “high-level malfeasance or fraud from senior 17 executives in the company,” and provided “no testimony from employees employed at [other] 18 locations.” Id. The Government conducted no additional investigation beyond reviewing this 19 information, even turning down the Relator‟s counsel when he offered to provide additional 20 information. See id. ¶ 17. 21 To be sure, the Government correctly notes that the original complaint did not allege any 22 particular time period or location. The Government appears to have inferred from this that the 23 initial complaint was limited to the time and location of the Relator‟s employment. See Gov. 24 Response at 18. Regardless of whether this was a reasonable interpretation of the complaint, the 25 amended complaint explicitly expanded the allegations to the whole statute-of-limitations period 26 (six years) and alleged nationwide misconduct. In response, the Government offers no evidence 27 that it conducted any further investigation; it merely stated that it “did not concede that it 28 performed no investigation of the amended complaint.” Gov. Response at 20. Thus, the 2 1 Government seeks to dismiss a suit alleging nationwide misconduct over six years, even though it 2 investigated misconduct at only one branch of Academy Mortgage for a period of approximately 3 1.5 years—and only to the extent that information was provided by the Relator herself. 4 A more complete investigation was well within the Government‟s ability. For example, 5 the Relator submitted evidence that Academy Mortgage received more than $157 million in FHA 6 insurance claims between 2010 and 2017. See Docket No. 93 (“Ferris Decl.”) ¶¶ 17-18. The 7 Relator obtained this evidence from the Government itself by filing a FOIA request with the 8 Department of Housing and Urban Development. See id. ¶¶ 3-4. The Relator also analyzed 9 publicly available Neighborhood Watch data to show that loans originated by Academy Mortgage are more likely to be seriously delinquent or to result in claims. See Docket No. 92-10. The 11 United States District Court Northern District of California 10 Government has access to that data. Additionally, the Relator, with the resources of a seven- 12 attorney law firm, conducted additional investigation after the Government‟s declination and 13 before the Relator‟s amendment, interviewing 17 witnesses regarding Academy Mortgage‟s 14 alleged misconduct. See Ferris Decl. ¶ 39. The Government argues that these witnesses were not 15 “suggested by [the Relator‟s] personal knowledge” and was rather an “independent investigation” 16 by the Relator‟s counsel, Gov. Response at 18, but that has no bearing on whether the Government 17 could have conducted a similar investigation. All of this suggests that the Government, with its 18 considerable resources, could have easily conducted additional investigation to assess the potential 19 recovery in this case before moving to dismiss. Whatever the precise contours of a “full 20 investigation” may be, the Government has not conducted such investigation in this case. 21 The Government‟s primary response in justifying its failure to conduct a further 22 investigation is that the Relator was difficult to work with and refused to file the amended 23 complaint under seal, denying the Government the opportunity to investigate the amended 24 complaint. See Gov. Response at 4-5, 8-11. While the Relator could have requested that the 25 amended complaint be filed under seal, it is unlikely that a seal would have been granted since the 26 basic thrust of the amended complaint is substantially similar to that of the initial complaint. See 27 E. Bay Mun. Util. Dist. v. Balfour Beattty Infrastructure, Inc., No. 13-cv-2032-WHO, 2014 WL 28 2611312, at *2-3 (N.D. Cal. June 11, 2014) (holding that an amended complaint need not be filed 3 1 under seal where it is “substantially similar” to the initial complaint). The fundamental 2 misconduct alleged—fraudulent certification by Academy Mortgage of loans insured by the 3 Government—remained unchanged, even though the amended complaint fleshed out the prior 4 allegations. Compare Docket No. 1 (initial complaint), with Docket No. 45 (amended complaint). 5 In any event, the Relator‟s failure to request sealing did not prevent the Government from 6 completing a full investigation. The seal period in qui tam suits under the False Claims Act is 7 meant to facilitate government investigation without tipping off the defendant. See Balfour Beatty 8 Infrastructure, 2014 WL 2611312, at *3. However, the suit here had already been unsealed 9 following the Government‟s declination to proceed with the initial complaint. See Docket No. 10. Academy Mortgage was therefore already alerted to the allegations of fraudulent certification of 11 United States District Court Northern District of California 10 loans. In these circumstances, sealing the amended complaint would do little to aid the 12 Government‟s investigation. Indeed, the undisputed evidence shows that the Government 13 declined the Relator‟s offer to send the Government additional information before the initial seal 14 period expired. See Thomas Decl. ¶¶ 19-23. In fact, the Government voluntarily cut short the seal 15 period by about three months. See Docket No. 9 (order granting the Government an extension on 16 the seal through March 23, 2017); Docket No. 10 (the Government‟s declination to intervene, filed 17 December 28, 2017). The Relator‟s failure to file the amended complaint under seal did not 18 prejudice the Government nor absolve it of its responsibility to conduct a full investigation prior to 19 moving to dismiss. The Relator‟s unrebutted evidence shows that the Government failed to conduct a full 20 21 investigation of the amended complaint. Because the evidence is unrebutted and thus undisputed, 22 there is no need for an evidentiary hearing. See United States v. Batiste, 868 F.2d 1089, 1093 (9th 23 Cir. 1989). Instead, the Court proceeds to the merits of the Government‟s motion to dismiss. 24 B. The Government‟s Motion to Dismiss 25 The False Claims Act provides, “The Government may dismiss the action notwithstanding 26 the objections of the person initiating the action if the person has been notified by the Government 27 of the filing of the motion and the court has provided the person with an opportunity for a hearing 28 on the motion.” 31 U.S.C. § 3730(c)(2)(A). Sequoia Orange reads this provision to incorporate a 4 1 burden-shifting approach for adjudicating dismissal. First, the Government must identify a valid 2 government purpose and demonstrate a rational relation between dismissal and that purpose. See 3 Sequoia Orange, 151 F.3d at 1145. Then, the burden shifts to the relator “to demonstrate that 4 dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. (quoting the district court below). 5 This approach “respect[s] the Executive Branch‟s prosecutorial authority by requiring no greater 6 justification of the dismissal motion than is mandated by the Constitution itself.” Id. at 1146. 7 As to the first step, the Government submits that the dismissal would permit it to achieve a 8 valid government purpose by conserving resources that litigation would otherwise consume. See 9 Mot. at 6-8. In response, the Relator disputes that the Government conducted a sufficient costbenefit analysis to satisfy the first step. See Docket No. 79, at 7-8. In particular, it argues that the 11 United States District Court Northern District of California 10 Government failed to consider and meaningfully assess the potential proceeds from the suit, i.e., 12 the “benefit” of the cost-benefit analysis. See id. By failing to conduct a minimally adequate 13 investigation, the Government fails the first test. 14 Even if the Government prevailed on the first step, the Relator carried her burden on the 15 second step. In establishing the burden-shifting framework, Sequoia Orange noted that “[t]his 16 standard . . . draws significant support from the Senate Report . . . which explained that the 17 relators may object if the government moves to dismiss without reason. A hearing is appropriate 18 „if the relator presents a colorable claim that the settlement or dismissal is unreasonable in light of 19 existing evidence, that the Government has not fully investigated the allegations, or that the 20 Government‟s decision was based on arbitrary or improper considerations.‟” Id. (citations 21 omitted) (quoting S. Rep. No. 99-345, at 26). Logically, the bases for obtaining an evidentiary 22 hearing, if ultimately proven, also provide the bases to find the Government‟s motion to dismiss 23 “fraudulent, arbitrary and capricious, or illegal,” in the context of a qui tam suit under the False 24 Claims Act. Otherwise the evidentiary hearing would be superfluous to the determination of 25 dismissal. In light of Sequoia Orange, the Court denies the Government‟s motion to dismiss the 26 complaint because the complaint has not been fully investigated. 27 This result is consistent with the requirement that once the Government declines to 28 intervene in a qui tam action, it must demonstrate “good cause” in order to intervene subsequently. 5 1 31 U.S.C § 3730(c)(3). Although the Ninth Circuit has suggested that the Government may move 2 to dismiss the Relator‟s suit without formally intervening, see Sequoia Orange, 151 F.3d at 1145, 3 moving to dismiss is tantamount to intervention—indeed, it functions as the most intrusive form of 4 intervention since dismissal denies any recovery to the Relator rather than reducing Relator‟s 5 share to between 15% and 25%. The criteria for granting the Government‟s motion to dismiss in 6 Sequoia Orange comports with the “good cause” requirement. 7 As previously established, the Government did not fully investigate the amended 8 complaint. Accordingly, the Court DENIES the Government‟s motion to dismiss. The Relator‟s 9 request for an evidentiary hearing is DENIED as moot. 10 This order disposes of Docket Nos. 60 and 68. United States District Court Northern District of California 11 12 IT IS SO ORDERED. 13 14 Dated: June 29, 2018 15 16 17 ______________________________________ EDWARD M. CHEN United States District Judge 18 19 20 21 22 23 24 25 26 27 28 6

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