United States of America v. Kernan Hospital
Filing
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MEMORANDUM OPINION. Signed by Judge Richard D Bennett on 11/20/12. (bmhs, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
UNITED STATES OF AMERICA,
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Plaintiff,
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v.
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KERNAN HOSPITAL,
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Defendant.
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Civil Action No. RDB-11-2961
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MEMORANDUM OPINION
Defendant Kernan Hospital has filed this Petition to Set Aside a civil investigative
demand that the United States Government, the Plaintiff in this False Claims Act case,1
served on Kernan Hospital on August 23, 2012. In an earlier Memorandum Opinion, this
Court dismissed without prejudice the Government’s original complaint for its failure to
plead fraud with particularity under Rule 9(b) of the Federal Rules of Civil Procedure. See
Mem. Op. 16-22, ECF No. 26. Now the Government has issued a civil investigative
demand pursuant to 31 U.S.C. § 3733(a)(1). The Government contends that this civil
investigative demand is necessary to cure the deficiencies in its original fraud allegations.
The parties’ submissions have been reviewed and no hearing is necessary. See Local Rule
105.6 (D. Md. 2011). For the reasons that follow, Defendant Kernan Hospital’s Petition to
Set Aside Civil Investigative Demand (ECF No. 29) is GRANTED.
1
31 U.S.C. §§ 3729, et seq.
1
BACKGROUND
The facts of this case pertaining to the original complaint alleging violations under
the False Claims Act are fully set forth in this Court’s earlier Memorandum Opinion issued
on July 30, 2012. Mem. Op. 2-7, ECF No. 26. On October 17, 2011, the Plaintiff United
States Government (“the Government”) filed a complaint against the Defendant Kernan
Hospital (“Kernan” or “Defendant”), alleging that Kernan presented false claims to the
Government.
Specifically, the Government alleged that Kernan devised a scheme to
increase its Medicare, Medicaid, and Tricare reimbursement by systematically “upcoding”2
secondary diagnoses concerning malnutrition.
Before filing its complaint, the Government initiated an investigation into this alleged
upcoding scheme that ultimately lasted three years. According to Kernan, the investigation
began on June 3, 2008, when the Office of the Inspector General issued a subpoena (the
“June 2008 subpoena”) to Kernan, requesting documents—including patient records,
employee files, coding personnel records, physician queries relating to malnutrition, internal
documents relating to the hospital’s coding system, training records for physicians and
coding and billing personnel, the hospital’s annual cost reports, and communications with
the Health Services Cost Review Commission—related to the coding of malnutrition as a
secondary diagnosis during a period from 2005 to 2007.3 After the parties conferred on this
2
“‘Upcoding,’ a common form of Medicare fraud, is the practice of billing Medicare for medical
services or equipment designated under a code that is more expensive than what a patient actually
needed or was provided.” United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 637 n.3
(6th Cir. 2003) (citing Bonnie Schreiber et al., Health Care Fraud, 39 Am. Crim. L. Rev. 707, 750 n.331
(2002)).
3
Def.’s Pet. to Set Aside 1, ECF No. 29; Def.’s Ex. 1, ECF No. 29-1. Kernan sets out facts
pertaining to the Government’s three-year investigation in its Petition to Set Aside Civil
Investigative Demand. The Government does not refute these facts except to say that Kernan did
2
subpoena, the Government requested a more narrow production of 100 specifically
identified medical records on March 4, 2009, see Def.’s Ex. 2, ECF No. 29-2, and Kernan
complied with that request on April 6, 2009, see Def.’s Ex. 3, ECF No. 29-3, producing
15,686 pages. On April 20, 2009, the Government requested the coding summary sheets
that corresponded to the 100 medical records, see Def.’s Ex. 4, ECF No. 29-4, and Kernan
produced them on April 29, 2009, see Def.’s Ex. 5, ECF No. 29-5.
On May 18, 2011, more than two years after the Government’s initial production
requests, the Government asked Kernan to respond to the June 2008 subpoena. See Def.’s
Ex. 6, ECF No. 29-6. On June 2, 2011, Kernan produced 1,709 pages of documents in
response to the June 2008 subpoena. See Def.’s Ex. 7, ECF No. 29-7. Then on August 2,
2011, Kernan produced additional documents responsive to the June 2008 subpoena. See
Def.’s Ex. 8, ECF No. 29-8. Kernan again supplemented its production of documents on
September 29, 2011. See Def.’s Ex. 9, ECF No. 29-9. All told, Kernan produced 2,996
pages in response to the Government’s June 2008 subpoena. Def.’s Pet. to Set Aside 2.
On September 7, 2011, the Government issued a civil investigative demand,4 seeking
deposition testimony from Martha Green, the Director of Health Information Management
for Kernan. Two weeks later, on September 22, the Government deposed Ms. Green at the
United States Attorney’s Office in Baltimore, Maryland. Based on the information obtained
not fully comply with the Government’s production requests. See Pl.’s Opp. 5, ECF No. 34.
Specifically, the Government maintains that “Kernan Hospital has never produced emails.” Id.
4
Section 3733 of the False Claims Act empowers an Attorney General or a designee, “before
commencing a civil proceeding under § 3730(a) or other false claims law,” to issue a “civil
investigative demand.” 31 U.S.C. § 3733(a)(1). The civil investigative demand requires a person
who may be in possession of information relevant to a false claims investigation to produce that
information in the form of documents, answers to written interrogatories, or oral testimony. Id.
3
from the three-year investigation into Kernan’s alleged scheme of upcoding, the
Government filed a False Claims Act suit as well as alleged breach of fiduciary duties, unjust
enrichment, and payment under mistake of fact.
See Compl. 19-24, ECF
No. 1. Kernan filed two separate motions to dismiss, one based on the Government’s
failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure (“Federal Rules”), and the other based on its failure to
plead fraud with sufficient particularity pursuant to Rule 9(b) of the Federal Rules. See Mot.
to Dismiss, ECF No. 6; Mot. to Dismiss, ECF No. 10. This Court granted Kernan’s Motion
to Dismiss all counts of the complaint, concluding that the Government had failed to
adequately plead its fraud allegations, and dismissed the Government’s complaint without
prejudice.5
On August 23, 2012, the Government served Kernan with the civil investigative
demand that is at issue in the pending petition. See Def.’s Ex. 11, ECF No. 29-11. This civil
investigative demand requires Kernan to submit documents—including medical records,
patient files, coding summary forms, and e-mail communications—regarding Kernan’s
coding practices and the coding of malnutrition as a secondary diagnosis. Id. Some of these
requests are for documents during a period from January 1, 2004 to present, and others are
5
See Mem. Op. 16-22. The disposition of this case is disputed by the parties. Kernan claims that in
dismissing the Government’s complaint, this Court, “though not required to do so, . . . granted leave
for the government to file an amended complaint.” Def.’s Pet. to Set Aside 3. The Government
responds that in dismissing the complaint, this Court closed the case. Pl.’s Opp. 3. The case is
closed, and this Court has not granted leave for the Government to amend its complaint. However,
this Court dismissed the complaint without prejudice so that the Government would have an
opportunity to plead the allegations of fraud with more particularity. See Mem. Op. 22 (“To state a
claim under the Act in this case, the Government must describe what false statements were
submitted to the government, and more importantly, how those submissions affected the hospital’s
reimbursement.” (emphasis in original)).
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for documents during a period from January 1, 2005 to present. Id. This most recent civil
investigative demand mirrors, for the most part, the requests in the June 3, 2008 subpoena.
Id. However, it does request some unique documents as well as seeks documents from an
expanded time period.6
Kernan has petitioned this Court to set aside the most recent civil investigative
demand, arguing that section 3733 of the False Claims Act allows the Government to issue a
civil investigative demand only “before commencing a civil proceeding” under the False
Claims Act. Because the Government already commenced a proceeding and the second civil
investigative demand relates to the same proceeding, Kernan argues that the Government is
without authority to issue the demand.
The Government contends that section 3733
inherently deprives the Attorney General of the power to issue a civil investigative demand
only if the suit is pending. Because this False Claims Act case is closed, the Government
reasons, the parties are in the same positions as they were before suit.
Thus the
Government contends that it has the authority to issue the demand in its pursuit of evidence
to overcome its earlier pleading deficiencies. It makes this contention after already having
conducted a three-year investigation of Kernan’s coding practices, which accumulated nearly
19,000 documents, and determining that it was prepared to bring suit against Kernan.
6
Kernan contends that, aside from expanding the relevant time period to include the years 2004 and
2008 to present, the second civil investigative demand issued in August 2012 seeks the same
documents as the June 3, 2008 subpoena. Def.’s Pet. to Set Aside 4. A review of the two civil
investigative demands reveals that although most of the prefiling requests and the requests in the
civil investigative demands are quite similar, the second civil investigative demand contains some
unique requests. See, e.g., Def.’s Ex. 11 at 6 ¶¶ 4-6, 9-10 (requesting, for example, documents relating
to malnutrition as a secondary diagnosis from January 1, 2004 to present; documents relating to
conversations between Kernan and HP3, Inc. or Navigant, Inc.; and documents relating to any audit
of the Kernan query process).
5
STANDARD OF REVIEW
Section 3733 empowers an Attorney General or a designee, “before commencing a
civil proceeding under § 3730(a) or other false claims law,” to issue a “civil investigative
demand” requesting documents, responses to written interrogatories, or deposition
testimony. 31 U.S.C. § 3733(a)(1). The civil investigative demand functions as a “prefiling
information-gathering tool to perceive widespread fraud” against the government. United
States v. Witmer, 835 F. Supp. 201, 206 (M.D. Pa. 1993), order vacated in part on other grounds on
reconsideration, 835 F. Supp. 208 (M.D. Pa. 1993).
This investigative tool provides the
government “with a means to assess quickly, and at the least cost to the taxpayers or to the
party from whom information is requested, whether grounds exist for initiating a false claim
suit.” United States v. Markwood, 48 F.3d 969, 979 (6th Cir. 1995).
The civil investigative demand provision was added to the False Claims Act in 1986
“as part of an extensive revision of the Act.” Avco Corp. v. U.S. Dep’t of Justice, 884 F.2d 621,
622 (D.C. Cir. 1989). In particular, section 3733 was included to remedy the “serious
roadblocks to obtaining information as well as weaknesses in [investigative tools],” including
the government’s limited investigative resources and the fact that civil attorneys “have no
authority to compel production of documents or depositions prior to filing suit.” S. Rep.
No. 99-345, at 3-6 (1986). In one of the few cases to examine the workings of section 3733,
the United States Court of Appeals for the D.C. Circuit remarked that “it is evident to
anyone reading the statute . . . that the Attorney General may not employ the power granted
by this section after he has commenced a false claims action.” Avco Corp., 884 F.2d at 623.
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ANALYSIS
The crux of this dispute concerns the statutory limitations on the False Claims Act’s
civil investigative demand, 31 U.S.C. § 3733. In its petition, Kernan argues that because the
Government already commenced a False Claims Act suit, basing its allegations on
information discovered during a three-year investigation of the hospital’s coding practices,
the Government cannot now issue a civil investigative demand. The Government disputes
Kernan’s petition, contending that it has renewed authority to issue a civil investigative
demand because this Court dismissed the Government’s complaint without prejudice and
closed the case.
There is little case law construing the metes and bounds of the False Claims Act’s
civil investigative demand. The case that comes closest to addressing the issue before this
Court is Avco Corporation v. United States, in which the Court of Appeals for the D.C. Circuit
decided that the filing of a qui tam complaint did not preclude the Attorney General from
issuing a civil investigative demand. 884 F.2d 621. In Avco, a relator brought a quit tam
action against Avco Corporation, alleging violations of the False Claims Act. Id. at 622.
After receiving a copy of the qui tam complaint, the Attorney General initiated his own
investigation and issued a civil investigative demand on an Avco employee with knowledge
of Avco’s work for the United States Coast Guard. Id. at 622-23. The employee filed a
petition to set aside the civil investigative demand, arguing that the relator’s filing of a qui
tam proceeding “cut off the power of the Attorney General” to issue a civil investigative
demand. Id. at 623. Relying on the plain meaning of section 3733, the Court of Appeals
found that the Attorney General’s power to issue a civil investigative demand was
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circumscribed only by his own intervention in a False Claims Act suit. Id. at 623-24. “It is
evident to anyone reading the statute,” the court stated, “that the Attorney General may not
employ the power granted by [section 3733] after he has commenced a false claims action.”
Id. at 623.
The D.C. Circuit’s opinion in Avco does not touch on the issue presented to this
Court: whether the Government can issue a civil investigative demand after having initiated
an investigation into possible False Claims Act violations and filed suit on the basis of that
investigation. Section 3733 sets out a prefiling limitation on the use of the civil investigative
demand, yet neither the statute nor the case law interpreting it suggests whether that
limitation expires after an initial complaint is dismissed. Indeed, the Government in this
case acknowledges that there is no case law or authority addressing the issue before this
Court. Pl.’s Opp. 5.
The Government, however, advances two reasons why this Court should deny
Kernan’s petition. First, the Government argues that section 3733 inherently deprives the
Attorney General of the power to issue a civil investigative demand only if a suit is pending.
Pl.’s Opp. 3. This reading of the statute relies on the Government’s understanding of the
disposition of this case. Because its complaint was dismissed without prejudice and the case
was closed, the Government argues that the two parties are put “in the same position as
though [a] suit had not been filed.” Id. at 3-4. To bolster this point the Government cites
McLean v. United States, 566 F.3d 391 (4th Cir. 2009). In McLean, the Court of Appeals for
the Fourth Circuit found, in the context of determining a prisoner’s eligibility for in forma
pauperis status, that a “dismissal without prejudice for failure to state a claim is not an
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adjudication on the merits . . . and ‘permits a plaintiff to refile the complaint as though it had
never been filed.’” 566 F.3d at 396 (internal citations omitted). Thus, in the absence of a
pending suit the Government argues that it wields the same authority it had before
commencing a civil proceeding against Kernan.
Because the Government’s argument turns on the meaning of the statute, this Court
must apply the well settled canons of statutory interpretation.
The starting point for
interpreting a statute is “the language of the statute itself.” Consumer Prod. Safety Comm’n v.
GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). “[R]esort may be had to legislative history”
where the statute’s language is ambiguous or the ordinary meaning would lead to an absurd
or futile result. Avco Corp., 884 F.2d at 625 (internal citation omitted). The Government
suggests that section 3733 contains a second-order limitation—the prefiling limitation itself
is limited, the Government proposes, to the period during which a suit is pending. Though
the Government maintains that this limitation is “inherent” in the statute, Pl.’s Opp. 3, this
Court finds that the Government’s argument is unavailing.
Looking first to the plain meaning of the statute, this Court does not detect an
inherent limitation on section 3733 that would grant the Government power to issue a civil
investigative demand at this stage. Section 3733 grants an Attorney General or a designee
the power to issue a civil investigative demand “before commencing a civil proceeding under
§ 3730(a) or other false claims law.” 31 U.S.C. § 3733(a)(1). As the D.C. Circuit found in
Avco, “it is evident to anyone reading the statute . . . that the Attorney General may not
employ the power granted by this section after he has commenced a false claims action.”
884 F.2d at 623. However, an examination of the plain words of the statute does not invite
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an interpretation of “before commencing a civil proceeding” to include the period after the
commencement of a civil proceeding when no suit is pending, and the Government does not
propose how section 3733 could be read in such a way.
Because the plain meaning of section 3733 does not speak to the issue presented in
this case, this Court finds that the statute is ambiguous on the issue. Thus, this Court may
refer to the legislative history to determine if there is some period after the commencement
of a False Claims Act proceeding when the Government could, in keeping with section 3733,
issue a civil investigative demand. See Avco Corp., 884 F.2d at 625 (“[R]esort may be had to
legislative history when a statute is ambiguous.” (internal citation omitted)). Indeed, the
legislative history, which includes both the Senate Report on the False Claims Amendments
Act of 1986 (“Senate Report”) and the corresponding report from the House of
Representatives (“House Report”), is helpful in this case. In designing a civil investigative
demand for the False Claims Act, the Senate Report describes that Congress aimed to
remedy the Government’s “inadequate investigative tools.” S. Rep. No. 99-345, at 4. In
particular, the Senate recognized that “some cases are weeded out and not filed because
information is missing—information that might have turned up through pre-suit
investigation if the tools were available.” Id. The House Report echoes the Senate Report’s
concern that without a prefiling subpoena power the Government was unable to properly
assess whether to commence a case under the False Claims Act:
Currently, the Government must make a determination whether to file a civil
fraud case based on sketchy information. Often, the Government files a suit
and institutes discovery and only then discovers that there is not enough
evidence to pursue the case. The Committee determined that the use of [civil
investigative demands] would enable the Government to determine whether
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enough evidence existed to warrant the expense of filing suit, as well as to
prevent the potential defendant from being dragged into court unnecessarily.
H.R. Rep. No. 99-660, at 26 (1986). This legislative history suggests that when Congress
circumscribed the period during which the Government could issue a civil investigative
demand to the prefiling stage, it did not mean to provide the Government with that power at
any time a suit was not pending. At the prefiling stage, the Government is able to gather the
information it needs “to determine whether enough evidence existed to warrant the expense
of filing suit.” Id. After the suit has been filed, the civil investigative demand no longer
serves its purpose as expressed in the legislative history.
In this case, the Government conducted a three-year investigation of Kernan’s coding
practices and made use of section 3733’s civil investigative demand before filing suit. This
investigation provided the Government with nearly 19,000 documents to use in its False
Claims Act complaint. An examination of the statute does not suggest, as the Government
argues, that it has renewed power to issue a civil investigative demand at this stage. Rather,
the plain meaning of the statute makes clear that the tool is to be used “before commencing
a civil proceeding.” 31 U.S.C. § 3733(a)(1). Moreover, the legislative history confirms that
the civil investigative demand is a prefiling investigative tool that Congress created to aid the
Government in deciding whether to file suit in the first place. The Government already
determined that the False Claims Act suit against Kernan was worthwhile.
For these
reasons, this Court finds that the Government may no longer exercise the civil investigative
demand power under section 3733 with respect to its allegations that Kernan engaged in
fraud by upcoding secondary diagnoses concerning malnutrition.
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The Government’s second argument is based on policy.
This Court granted
Kernan’s Motion to Dismiss for failure to plead fraud with particularity. That dismissal was
without prejudice. Accordingly, based upon the exhaustive discovery already conducted, the
Government may file an amended complaint claiming fraud, or perhaps breach of contract
or negligence. The Government contends that the granting of the subject Motion to Set
Aside Civil Investigative Demand would prevent it from obtaining the information it needs
to cure pleading deficiencies. See Pl.’s Opp. 5. The Government argues that “Kernan
Hospital cannot have it both ways.” Id. At this stage of the proceeding, the information
that the most recent civil investigative demand requests is needed, states the Government, to
“plead[] a recognized claim with the requisite particularity.” Id.
The problem with this argument, however, is that the Government is not, as it seems
to suggest, stuck between a rock and a hard place. The Government conducted a lengthy
investigation of Kernan’s coding practices and decided after three years that it was prepared
to file suit. During its investigation, the Government received nearly 19,000 pages of
information as well as deposition testimony pursuant to a civil investigative demand and
several document requests. This Court is not persuaded that the Government needs to
exercise its section 3733 power before it can sufficiently amend its complaint. Rather, the
circumstances of this case suggest that the Government conducted a thorough investigation
and gathered the information it needed to determine whether to file suit. The length and
depth of the investigation, along with the fact that the Government’s recent civil
investigative demand seeks documents within the same universe of information it already
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had the opportunity to access, reveals that the Government took full advantage of its section
3733 power in preparation for filing suit.
It is worth stressing the sheer volume of documents that the Government procured
during its prefiling investigation of Kernan and the opportunity the Government now has to
amend its first complaint.
Through various subpoenas, the Government received 100
specifically identified medical records; documents relating to the coding of malnutrition as a
secondary diagnosis, including patient records, physician queries, employee files, and training
records; and deposition testimony from Kernan’s Director of Health Information
Management. Except for the Government’s claim in its Opposition to Kernan’s Petition to
Set Aside Civil Investigative Demand that Kernan has “never produced emails,” the
Government does not address any additional information requested. See Pl.’s Opp. 5. On
the contrary, the fact that the investigation resulted in nearly 19,000 documents suggests that
Kernan made a good faith effort to comply with the Government’s many prefiling requests.
If, despite the volume of material provided to it in discovery, the Government still
finds itself unable to plead the alleged fraudulent scheme with particularity, it has other
options.
The Government certainly has the opportunity to bring a claim for alleged
contractual overbilling based on the underlying facts of this case. However, to the extent
that the Government chooses to continue to pursue a fraud claim, it must satisfy Rule 9(b)’s
heightened pleading standard.
As this Court explained in its previous Memorandum
Opinion, “Rule 9(b)’s directive that ‘the circumstances constituting fraud or mistake shall be
stated with particularity’ does not permit a False Claims Act plaintiff merely to describe a
private scheme in detail but then to allege simply and without any stated reason for his belief
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that claims requesting illegal payments must have been submitted, were likely submitted or
should have been submitted to the Government.” Mem. Op. 20 (quoting United States ex rel.
Clausen v. Lab. Corp. of Am., 290 F.3d 1301, 1311 (11th Cir. 2002)). The Government’s first
complaint failed to allege with particularity the crucial circumstances of the alleged
fraudulent scheme.
The Government has been given the opportunity to amend its
complaint if it so chooses, but this opportunity does not grant the Government the right to
rehash the prefiling investigation that it conducted for over three years.
It is also important to consider the potential damage this False Claims Act suit has
caused to Kernan’s goodwill and reputation. Both the civil investigative demand provision
and Rule 9(b) of the Federal Rules are intended to encourage careful behavior when alleging
fraudulent conduct. The Senate Report emphasized that the civil investigative demand is a
tool to be used by “the responsible Assistant Attorney General.” S. Rep. No. 99-345, at 24.
The House Report envisioned that the civil investigative demand would prevent unnecessary
lawsuits and be used “[not] in every potential civil fraud case, but only in those instances
where it is absolutely necessary to determine whether a fraud action under the Act is
appropriate.” H.R. Rep. No. 99-660, at 26. Likewise, one of the purposes of Rule 9(b) is to
protect “defendants from harm to their goodwill and reputation.” Harrison v. Westinghouse
Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999). Thus this Court finds that construing
section 3733 to prevent the Government from filing a civil investigation demand at this stage
is in keeping with the policy goals underlying both section 3733 and Rule 9(b). Accordingly,
this Court grants Kernan’s petition to set aside the Government’s civil investigative demand,
which the Government issued after commencing its False Claims Act suit.
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CONCLUSION
For the reasons stated above, Defendant Kernan Hospital’s Petition to Set Aside
Civil Investigative Demand (ECF No. 29) is GRANTED.
A separate Order follows.
Dated:
November 20, 2012
/s/_________________________________
Richard D. Bennett
United States District Judge
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