United States of America v. Moody's Corp

Filing 93

OPINION & OPINION re: 84 MOTION for Reconsideration of the Court's March 2, 2017 Order and Opinion and March 3, 2017 Judgment. filed by Ilya Eric Kolchinsky: Relator Ilya Kolchinsky moves pursuant to Federal Rules of Civil Proce dure Rule 59(e) and Local Rule 6.3 for reconsideration of this Court's Opinion and Order, dated March 2, 2017, granting Moody's motion to dismiss this whistleblower action. For the foregoing reasons, Kolchinsky's motion for reconsider ation pursuant to Federal Rules of Civil Procedure Rule 59(e) is granted in part and denied in part. Kolchinsky may file any amended pleading no later than October 6, 2017. The Clerk of Court is directed to close the motion pending at ECF No. 84. (Signed by Judge William H. Pauley, III on 9/1/2017) (jwh) Modified on 9/1/2017 (jwh).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA, ex rel.
ILYA ERIC KOLCHINSKY,
Plaintiff,
-againstMOODY’S CORPORATION, et al.,
Defendants.

:
:
:
:
:
:
:
:
:
:
:

12cv1399
OPINION & ORDER

WILLIAM H. PAULEY III, District Judge:
Relator Ilya Kolchinsky moves pursuant to Federal Rules of Civil Procedure Rule
59(e) and Local Rule 6.3 for reconsideration of this Court’s Opinion and Order, dated March 2,
2017, granting Moody’s motion to dismiss this whistleblower action. Kolchinsky’s motion is
granted in part and denied in part.
BACKGROUND
The factual background of this case is set forth in this Court’s prior Opinion and
Order. United States ex rel. Kolchinsky v. Moody’s Corp., No. 12 CV 1399, 2017 WL 825478
(S.D.N.Y. March 2, 2017) (“Moody’s I”). In short, Kolchinsky brought this action on behalf of
the United States of America against Moody’s Corporation and Moody’s Investors Service, Inc.
under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq, alleging that he was
constructively discharged after protesting Moody’s practice of issuing false credit ratings. This
Court granted the Defendant’s motion to dismiss because the Second Amended Complaint failed
to state a valid FCA claim.

1

DISCUSSION
A motion to alter or amend a judgment pursuant to Rule 59(e) is evaluated under
the same standard as a motion for reconsideration under Local Rule 6.3. Williams v. N.Y. Dep’t.
of Corr., 219 F.R.D. 78, 83 (S.D.N.Y. 2003). Such motions “will generally be denied unless the
moving party can point to controlling decisions or data that the court overlooked-matters, in
other words, that might reasonably be expected to alter the conclusion reached by the court.”
Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995). Reconsideration is warranted
only “if the moving party establishes: (1) a change in the controlling law; (2) new evidence has
become available; or (3) reconsideration is necessary to correct a clear error or prevent manifest
injustice.” Analytical Surveys, Inc. v. Tonga Partners, L.P., No. 06-CV-2692, 2009 WL
1514310, at *1–2 (S.D.N.Y. May 29, 2009), aff'd, 684 F.3d 36 (2d Cir. 2012). The motion
“cannot assert new arguments or claims which were not before this court on the original motion.”
Koehler v. Bank of Berm., Ltd., No. M18-302, 2005 WL 1119371, at *1 (S.D.N.Y. May, 10,
2005). The decision to grant or deny a motion for reconsideration is within the sound discretion
of the district court. McCarthy v. Manson, 714 F.2d 234, 237 (2d Cir.1983).
I.

Motion to Dismiss
Kolchinsky seeks reconsideration of this Court’s Opinion on the grounds that the

Second Amended Complaint adequately alleged factual falsity, fraudulent inducement, and
materiality. Kolchinsky also argues that this Court erred in finding that the Second Amended
Complaint did not satisfy the pleading requirements of FRCP 9(b).

2

a. FCA Claim
i. Factual Falsity
Kolchinksy’s arguments regarding factual falsity largely re-assert those raised in
his opposition to the motion to dismiss and otherwise fail to point to any fact or relevant law that
the Court overlooked. As this Court held, the Second Amended Complaint did not “plead
that Moody's failed to provide any credit ratings, or that the ratings it provided were entirely
worthless. Rather, Kolchinsky's claim [was] one of legal falsity—that its ratings differed in
quality and accuracy from the ratings it promised to Government agencies.” Moody’s I, 2017
WL 825478, at *4. “[C]ourts should not grant a motion for reconsideration when the moving
party seeks solely to relitigate an issue already decided.” Shamis v. Ambassador Factors
Corp., 187 F.R.D. 148, 151 (S.D.N.Y.1999).
ii. Fraudulent Inducement
Kolchinsky argues that the Second Amended Complaint also stated a claim under
the theory of fraudulent inducement. This argument is inadequately presented on the motion for
reconsideration, as Kolchinsky did not raise such a theory in the Second Amended Complaint or
in his briefing on the motion to dismiss. See Koehler, 2005 WL 1119371, at *1 (a motion for
reconsideration “cannot assert new arguments or claims which were not before [the] court on the
original motion”). The only prior mention of fraudulent inducement was a string citation in
Kolchinsky’s opposition to the motion to dismiss. (See MTD Opp., ECF No. 66, at 23–24.)
These cites offered the proposition that fraudulent inducement could be a valid basis for an FCA
claim, but Kolchinsky’s papers were otherwise bereft of any mention of the theory. At oral
argument Kolchinsky’s counsel emphasized his theory of implied legal falsity, and only alluded
opaquely to fraudulent inducement. (See Arg. Tr., ECF No. 69, at 6:17–7:1).
3

“A motion for reconsideration is not an invitation to parties to ‘treat the court’s
initial decision as the opening of a dialogue in which that party may then use such a motion to
advance new theories or adduce new evidence in response to the court’s rulings.’” Patterson v.
United States, No. 04-CV-3170, 2006 WL 2067036, at *2 (S.D.N.Y. July, 26, 2006) (quoting De
Los Santos v. Fingerson, No. 97-CV-3972, 1998 WL 788781, at *1 (S.D.N.Y. Nov. 12, 1998)).
Accordingly, Kolchinsky’s arguments regarding fraudulent inducement do not provide a basis
for reconsideration. Because this Court grants leave to file a third amended complaint, however,
Kolchinsky may use that opportunity to present a more fulsome theory of fraudulent inducement.
iii. Implied Legal Falsity
The bulk of Kolchinsky’s motion argues that, in finding Kolchinsky failed to
plead materiality of Moody’s alleged false statements, this Court overlooked the controlling
precedent established by the Supreme Court in Universal Health Servs., Inc. v. United States,
136 S.Ct. 1989 (2016). Although Universal Health was decided after the Second Amended
Complaint was filed, it cannot be considered a change in the controlling law or a matter that this
Court overlooked in its prior Opinion. This Court held oral argument months after the Supreme
Court issued Universal Health, and both parties had the opportunity to address the decision at
that time.
This Court’s opinion also addressed the holding in Universal Health which, for
purposes relevant here, simply interpreted the FCA materiality requirement. See Moody’s I,
2017 WL 825478, at *5–6. In Universal Health the Court held that, for the implied certification
theory to be a basis for liability, two conditions must be satisfied: “first, the claim does not
merely request payment, but also makes specific representations about the goods or services
provided; and second, the defendant's failure to disclose noncompliance with material statutory,

4

regulatory, or contractual requirements makes those representations misleading half-truths.”
Universal Health, 136 S.Ct at 2001. The Court also held that it is strong evidence a requirement
is not material “if the Government pays a particular claim in full despite its actual knowledge
that certain requirements were violated . . . [o]r, if the Government regularly pays a particular
type of claim in full despite actual knowledge that certain requirements were violated, and has
signaled no change in position.” Universal Health, 136 S.Ct at 2003-04.
Here, Moody’s represented that they provided accurate credit ratings to the
government. However, in the midst of inquiries spawned by credible public reports of
inaccuracies in those ratings, the government continued to pay for Moody’s credit ratings. As
this Court held, the circumstances thus indicate that the credibility of the ratings was immaterial,
making dismissal appropriate. This holding is consistent with Universal Health and accordingly
not a basis for reconsideration.
This Court’s decision is also consistent with the only Second Circuit case
interpreting Universal Health in the context of a False Claims Act allegation. 1 In Grabcheski v.
Am. Int’l Grp., Inc., the Second Circuit held that plaintiff’s failure to plead materiality was
sufficient for the district court to dismiss the case for failure to state a claim. 2017 WL 1381264,
at *1-3 (2d Cir. April 18, 2017). Grabcheski alleged that AIG misrepresented in its debtreduction agreements with the Federal Reserve Bank of New York that, inter alia, its subsidiaries
were duly licensed to conduct domestic insurance business. Citing Universal Health’s ruling that
courts must “look to the effect on the likely or actual behavior of the recipient of the alleged
misrepresentation,” the Second Circuit affirmed the district court’s dismissal because Grabcheski
“failed to allege with particularity facts that demonstrate how [the alleged misrepresentation] was

1

Although Grabcheski was a summary order and does not have any precedential effect, it is the only Second Circuit
case yet to assess materiality under Universal Health in the context of a False Claims Act allegation.

5

likely to have any effect on the agreements.” Grabcheski, 2017 WL 1381264, at *2. Similarly,
Kolchinsky failed to plead materiality here because he did not allege that the misrepresentation
made by Moody’s was material. This finding is consistent with Universal Health because the
“actual behavior of the recipient of the alleged misrepresentation,”—the government’s continued
payment for ratings after public reports of their inaccuracy—suggests that any inaccurate ratings
were “minor or insubstantial” to the decision to pay for them. Universal Health, 136 S.Ct. at
2002–03.
Kolchinsky insists that this Court must reconsider its Opinion under a new,
“holistic” assessment of materiality. The United States Attorney, making his first appearance in
this action since declining to intervene, takes no position on the merits of Kolchinsky’s motion
but agrees that United Health demands a “holistic assessment” of materiality under the FCA.
(See Statement of Interest of the United States, ECF No. 90, at 3.)
As an initial matter and as discussed above, this Court finds that its materiality
analysis is wholly consistent with the Supreme Court’s ruling. More importantly, however,
Kolchinsky’s argument misconstrues Universal Health, which did not itself articulate any rule
requiring a “holistic approach” to materiality—rather, that language comes from the First
Circuit’s decision on remand. See United States ex rel. Escobar v. Universal Health Services,
Inc., 842 F.3d 103, 109 (1st Cir. 2016) (“Universal Health II”). To the extent that this Court’s
holding is inconsistent with the First Circuit’s interpretation of Universal Health, that decision is
not binding precedent and accordingly not a basis for reconsideration here.
b. FRCP 9(b)
Even if Kolchinsky did adequately state an FCA claim under a theory of factual
falsity, fraudulent inducement, or implied legal falsity, dismissal was nonetheless appropriate

6

because Kolchinksy did not meet the pleading requirements of Rule 9(b) of the Federal Rules of
Civil Procedure. Rule 9(b) requires that “[i]n alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake.” Compliance with Rule 9(b)
“depends upon the nature of the case, the complexity or simplicity of the transaction or
occurrence, the relationship of the parties and the determination of how much circumstantial
detail is necessary to give notice to the adverse party and enable him to prepare a responsive
pleading.” United States ex rel. Bilotta v. Novartis Pharm. Corp., 50 F.Supp.3d 497, 508
(S.D.N.Y. 2014) (internal quotation marks omitted). A complaint meets the requirements of 9(b)
if it alleges a “scheme to submit false claims paired with reliable indicia that lead to a strong
inference that [such] claims were actually submitted.” United States ex rel. Resnick v. Weill
Cornell Med. Coll., No. 04 CV 3088, 2010 WL 476707, at *5 (S.D.N.Y. Jan. 21, 2010).
As this Court previously held, Kolchinsky failed to comply with the requirements
of Rule 9(b). See Moody’s I, 2017 WL 825478, at *6-7. Given the chance to re-plead his
allegations, he merely attached to the Second Amended Complaint a government-created
spreadsheet containing all contracts the government had with Moody’s, but not alleging which
ratings were false; why any rating was false; which agencies received those false ratings; and
where the Moody’s might look for answers to these questions. See Moody’s I, 2017 WL 825478,
at *7. Kolchinsky argues that the false ratings were in every report received by the Government
and that every request for payment thus constituted a false claim. But that is a general allegation
that does not meet the specificity requirements of Rule 9(b). Generalized allegations that “any
claim” during a broad period was false, do not satisfy 9(b). New York ex rel. Khurana v.
Spherion Corp., 15-CV-6605, 2017 WL 1437204, at *9 (S.D.N.Y. Apr. 21, 2017) (general

7

assertions that fail to set forth the “who, what, when, where and how of the alleged fraud” are
insufficient to satisfy Rule 9(b)) (quotations omitted).
A motion for reconsideration “is not a vehicle for relitigating old issues,
presenting the case under new theories, securing a rehearing on the merits, or otherwise taking a
second bite at the apple.” (citations and internal quotation marks omitted). Sequa Corp. v. GBJ
Corp., 156 F.3d 136, 144 (2d Cir.1998). Kolchinsky has not demonstrated that this Court
wrongly applied the law regarding Rule 9(b) or overlooked any controlling precedent regarding
its application. Kolchinsky’s disagreement with this Court’s holding is not grounds for
reconsideration.
II.

Leave to Amend and Dismissal with Prejudice
A district court may decline to grant leave to amend “if the request is

“inconspicuous and never brought to the court’s attention” and “gives no clue as to how the
complaints defects would be cured.” Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo Secs.,
LLC, 797 F.3d 160, 190–91 (2d Cir 2015). Raising the request for leave to amend in a footnote,
as Kolchinsky did here, is certainly inconspicuous. However, Kolchinsky accurately observes
that he “did not have the benefit of [United Health’s] recent guidance on materiality” when
drafting his Second Amended Complaint or opposing Moody’s motion to dismiss, and
accordingly this Court grants him leave to re-plead one final time. United States ex rel. Lee v. N.
Adult Daily Health Care Ctr., 205 F. Supp. 3d 276, 296 (E.D.N.Y. 2016). This Court notes,
however, that the pleading deficiencies discussed above must be addressed in any third amended
complaint.

8

CONCLUSION
For the foregoing reasons, Kolchinsky’s motion for reconsideration pursuant to
Federal Rules of Civil Procedure Rule 59(e) is granted in part and denied in part. Kolchinsky
may file any amended pleading no later than October 6, 2017. The Clerk of Court is directed to
close the motion pending at ECF No. 84.

Dated: September 1, 2017
New York, New York
SO ORDERED:
_______________________________
WILLIAM H. PAULEY III
U.S.D.J.

9