United States of America ex rel. Keisha Kelschenbach v. M&T Bank Corporation

Filing 97

DECISION AND ORDER DENYING the Sealed Movants' 69 Motion to Intervene; DENYING as moot the Sealed Movants' 88 Motion for Attorney Fees; DENYING as moot Defendant M&T Bank Corporation's 92 Motion to Stay the Motion for Attorney Fees. Signed by William M. Skretny, United States District Judge on 3/20/2017. (MEAL)- CLERK TO FOLLOW UP -

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA ex rel.
KEISHA KELSCHENBACH,
Plaintiffs,
v.

DECISION AND ORDER
13-CV-280S

M&T BANK CORPORATION,
Defendant.

1.

Presently before this Court is Patrick Lester, Marlene Miller, and Pauline

Myers’ (the “SDNY Relators”) Motion to Intervene for the Limited Purpose of Seeking
Attorneys’ Fees. (Docket No. 69.)1 The SDNY Relators filed a qui tam action in the
Southern District of New York on November 8, 2013 (the “SDNY Action”), alleging an
appraisal fraud scheme by multiple defendants, including M&T Bank Corporation
(“M&T”), in violation of the False Claims Act, 31 U.S.C. §§ 3729–3733 (the “FCA”). See
United States of America ex rel. Patrick Lester, Marlene Miller, and Pauline Myers, et al.
v. Appraisal.com, et al., 1:13-cv-07952-LGS (S.D.N.Y.). The SDNY Relators claim a
right to intervene in this action (the “WDNY Action”) in order to seek attorneys’ fees from
M&T. For the following reasons, their motion is denied.
2.

Keisha Kelchenbach (the “WDNY Relator”) initiated the WDNY Action on

March 19, 2013, approximately eight months prior to the SDNY Action. She also filed a
qui tam complaint, alleging that M&T had violated the FCA by making false
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The motion and related filings were docketed under seal. (See Docket Nos. 69, 76, 82.) However, the
Sealed Movants’ later-filed Motion for Attorney Fees was not sealed and reveals the relevant information
that the parties had previously sought seal over, namely, the Sealed Movants’ identities and reference to
the SDNY Action. (See Docket No. 88.) Further, the SDNY Action was unsealed in part on September
28, 2016. Accordingly this decision is not filed under seal.

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representations in connection with its underwriting and origination of Federal Housing
Administration (“FHA”) insured mortgages. The WDNY Relator’s complaint alleges that,
with respect to the alleged underwriting scheme, “[t]he underwriter must have each
property appraised in accordance with the standards and requirements prescribed by
[the United States Department of Housing and Urban Development].” (Docket No. 1,
Compl. ¶ 40.) The WDNY Relator’s complaint further alleges that:
[M&T], improperly and in violation of the requirements of the Government
Programs, sought and obtained additional appraisals for purposes of
obtaining a higher value on a property. [M&T] failed to disclose or
properly document these instances, but instead simply ignored the first,
unfavorable appraisal.
(Id. ¶ 138).
3.

The SDNY Relators, without providing supporting evidence, state that in

April 2016, the Department of Justice (the “Government”) advised the SDNY Relators
that a settlement of the WDNY Action was pending, which would resolve all claims of
appraisal fraud against M&T. They further state that the Government told counsel for
the SDNY Relators that it would intervene in the SDNY Action and include the SDNY
Relators as parties to the settlement agreement pending in the WDNY Action.
However, the Government did not intervene in the SDNY Action, and instead, on May
10, 2016, filed a notice of intervention in the WDNY Action, together with a settlement
agreement signed only by the Government, M&T, and the WDNY Relator (the
“Settlement”). (See Docket No. 30.) The Settlement releases M&T from liability for any
federal claims related to M&T’s conduct in origination, underwriting, property appraisal,
and quality control for FHA loans during the relevant period. (Id.) The parties do not
dispute that this release extinguishes the SDNY Relators’ claims against M&T.

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4.

The SDNY Relators filed a notice of voluntary dismissal of the SDNY

Action on November 23, 2016, which the Honorable Lorna G. Schofield “so ordered” on
November 28, 2016. (SDNY Action Docket Nos. 19, 21.) Accordingly, the SDNY Action
is now closed. A significant portion of the SDNY Action’s docket remains under seal.
5.

Although the terms of the FCA expressly give relators the right to

challenge settlements that are not “fair, adequate, and reasonable,” see 31 U.S.C. §
3730(c)(2)(B), the SDNY Relators did not seek a hearing as to the fairness of the
Settlement. Instead, they filed a motion in this Court requesting that they be allowed to
intervene for the limited purpose of seeking a share of the relator’s award. (See Docket
No. 47.)

Before that motion had even been fully briefed, the SDNY Relators, the

Government, and the WDNY Relator all agreed that the SDNY Relators could intervene
for the limited purpose of seeking a share of the WDNY Relator’s award. (See Docket
No. 53.) Based on this agreement, and in the absence of any opposition, this Court
granted the motion. (See Docket No. 54.) Thereafter, the SDNY Relators and WDNY
Relator reached an agreement between themselves as to division of the award.
(Docket No. 64.) Nothing has been filed indicating that their agreement resulted in
some change to the WDNY Relator’s status as the sole relator in the WDNY Action, nor
is it clear that such an agreement could change that status.
6.

Now, the SDNY Relators have moved to intervene again, this time in order

to seek attorneys’ fees from M&T. (Docket No. 69.) The SDNY Relators contend that
they should be allowed to intervene under Federal Rule of Civil Procedure 24(a)(2),
because they are “prevailing parties” under the FCA. However, as they note, the FCA
states: “When a person brings an action under this subsection, no person other than

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the Government may intervene or bring a related action based on the facts underlying
the pending action.” 31 U.S.C. § 3730(b)(5) (emphasis added). Both the Fourth Circuit
and the Ninth Circuit, interpreting this section, have found that a private party cannot
intervene in a FCA suit under any circumstances. See U.S. ex rel. LaCorte v. Wagner,
185 F.3d 188, 191 (4th Cir. 1999) (denying motion to intervene by qui tam relators in
second qui tam action); United States ex rel. Lujan v. Hughes Aircraft Co., 243 F.3d
1181, 1187 (9th Cir. 2001) (rejecting the notion of reading exceptions into the statute’s
plain language). The Fourth Circuit has held that § 3730(b)(5), on its face and without
exception, precludes any person other than the government from intervening: “[t]his
provision states without qualification that persons other than the government may not
intervene in qui tam actions.” Id. The Fourth Circuit further observed that, “[b]y drafting
the statute in such unequivocal language, Congress made the strongest possible
statement against private party intervention in qui tam suits.” Id. The SDNY Relators
do not cite, and this Court has not found, any case allowing a Rule 24 intervention in a
suit brought under the FCA.
7.

In the alternative, the SDNY Relators contend that they should be allowed

to intervene under the “alternate remedy” section of the FCA. That section states:
Notwithstanding subsection (b), the Government may elect to pursue its
claim through any alternate remedy available . . . . If any such alternate
remedy is pursued in another proceeding, the person initiating the action
shall have the same rights in such proceeding as such person would have
had if the action had continued under this section.
31 U.S.C. § 3730(c)(5). The Southern District recently stated that “case law interpreting
Section 3730(c)(5) in any context is scarce.” United States v. L-3 Commc’ns Eotech,
Inc., No. 15-CV-9262 (RJS), 2017 WL 464431, at *4 (S.D.N.Y. Feb. 3, 2017). However,

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as noted above, the Fourth Circuit has held that § 3730(c)(5) does not create
exceptions to the categorical bar of § 3730(b)(5) against private party intervention.
LaCorte, 185 F.3d at 191. Instead, it found that this provision “simply preserves the
rights of the original qui tam plaintiffs when the government resorts to an alternate
remedy in place of the original action” and “does not confer any rights on would-be
intervenors.” Id.; see also U.S. ex rel. Fry v. Guidant Corp., No. CIV.A. 3:03-0842, 2006
WL 1102397, at *5 (M.D. Tenn. Apr. 25, 2006) (“Section 3730(b)(5) strictly forbids
private parties, such as [the party seeking to intervene], from being added as additional
party relators with claims based on the same underlying facts (‘intervening’) after a qui
tam action has been filed . . .”).
8.

Even if this Court were to depart from the precedent set by the Fourth

Circuit and allow the SDNY Relators to intervene in this action, they have not met the
basic requirements for pursuing claims under the “alternate remedy” clause.

First,

where a qui tam plaintiff asserts that an alternate remedy has been procured by the
government, there is typically a question of whether the recovery at issue qualifies as an
“alternate remedy.” See, e.g., U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d
634, 651 (6th Cir. 2003) (remanding complaint seeking share of alternate remedy to the
district court to determine whether the government’s settlement “overlap[ped] with the
conduct alleged by [the] [r]elator in bringing his qui tam action,” and directing the district
court to “hold an evidentiary hearing at which [the] [r]elator and the government may
present evidence in support of their positions”); U.S. ex rel. Barajas v. United States,
258 F.3d 1004, 1012 (9th Cir. 2001) (assessing relator’s allegations and procedural
history and concluding that settlement agreement with government requiring debarment

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qualified as an “alternate remedy”).
9.

Second, in order to be eligible to seek a qualifying “alternate remedy,” the

SDNY Relators would need to establish that they were the first-to-file party to satisfy the
terms of § 31 U.S.C. § 3730(b)(5).

Courts have interpreted § 3730(b)(5) as a

jurisdictional bar to later allegations that state all the “essential facts” of a previouslyfiled claim or the “same elements of a fraud described in an earlier suit.” United States
ex. rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 32 (1st Cir. 2009) (internal
quotations omitted). This is a jurisdictional rule that is “exception-free.” Id. at 33. The
first-to-file rule is intended to “provide incentives to relators to promptly alert the
government to the essential facts of a fraudulent scheme.” Id. at 32 (internal quotations
omitted). “Under this ‘essential facts' standard, § 3730(b)(5) can still bar a later claim
‘even if that claim incorporates somewhat different details.’” Id. (quoting United States
ex rel. LaCorte v. SmithKline Beecham Clinical Labs., Inc., 149 F.3d 227, 232-33 (3d
Cir. 1998)).
10.

Although this Court has not been provided with sufficient information to

assess whether the SDNY Relators should be considered first to file with respect to their
appraisal fraud allegations, it notes that Rule 9(b) does not apply to the first-to-file rule.
Thus, even if the WDNY Relator’s allegations were only generally pled, the first-to-file
rule would still bar a subsequent “copy-cat” action. United States ex rel. Batiste v. SLM
Corp., 659 F.3d 1204, 1210 (D.C. Cir. 2011) (“We hold that first-filed complaints need
not meet the heightened standard of Rule 9(b) to bar later complaints[.]”).

This is

because “[first-filed complaints] must provide only sufficient notice for the government to
initiate an investigation into the allegedly fraudulent practices, should it choose to do

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so.” Id.; see also United States ex rel. Heineman-Guta v. Guidant Corp., 718 F.3d 28,
35 (1st Cir. 2013) ((“[T]he allegations of a preclusive first-filed complaint under §
3730(b)(5) need not comport with Rule 9(b)'s pleading requirements to provide the
government with sufficient notice of potential fraud.”). Without reaching a determination
on this issue, this Court notes that the WDNY Relator’s complaint appears to have given
the Government notice of a potential appraisal fraud claim. (See Docket No. 1, Compl.
¶ 138.)
11.

Third, even if their action were not barred by the first-to-file rule, the SDNY

Relators have not established that theirs is a valid qui tam action. United States of Am.
& N.Y. State v. N. Adult Daily Health Care Ctr., 174 F. Supp. 3d 696, 700 (E.D.N.Y.
2016). Although the Second Circuit has not addressed this issue, several other circuit
courts have found that “a valid, particularly pled qui tam action is a prerequisite to
recovering an alternate remedy.” Id. (collecting cases) (citing U.S. ex rel. Newell v. City
of St. Paul, Minn., 728 F.3d 791, 799 (8th Cir. 2013); U.S. ex rel. Godfrey v. KBR, Inc.,
360 Fed. App’x 407, 412-13 (4th Cir. 2010); U.S. ex rel. Hefner v. Hackensack Univ.
Med. Ctr., 495 F.3d 103, 112 (3d Cir. 2007); U.S. ex rel. Bledsoe v. Cmty. Health Sys.,
Inc., 501 F.3d 493, 522 (6th Cir. 2007)). The Sixth Circuit has stated that “allowing a
relator who failed to plead fraud with particularity to recover proceeds from an alternate
remedy pursued by the government with respect to those fraudulent allegations would
make little sense,” as “[q]ui tam proceeds are available not to persons who inform the
government of wrongdoing, but are only available when the government proceeds ‘with
an action.’” Bledsoe, 501 F.3d at 522 (quoting 31 U.S.C. § 3730(d)(1)). Thus, “[a]bsent
a valid complaint which affords a relator the possibility of ultimately recovering

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damages, there is no compelling reason for allowing a relator to recover for information
provided to the government.” Id.
12.

Here, again, there has been no evidence provided to this Court

demonstrating that the SDNY Relators’ action was valid. A significant portion of the
SDNY Action’s record remains under seal, and none of the publicly filed documents
indicate that the validity of their qui tam action has been vetted. Until it has been
determined that the SDNY Relators have stated a claim and have pled fraud with the
requisite particularity, they “do not have any right to recovery in their qui tam action, and
therefore, they also lack any corresponding right to share in an alternate remedy.” See
N. Adult Daily Health Care Ctr., 174 F. Supp. 3d at 704.
13.

Moreover, the SDNY Relators voluntarily dismissed the SDNY Action on

November 23, 2016. (See SDNY Action Docket Nos. 19, 21.) Several courts have held
that voluntary dismissal of a qui tam action bars participation in any later recovery. In L3 Communications Eotech, Inc., a first-to-file relator who had voluntarily dismissed his
action sought recovery of a portion of a government settlement. 2017 WL 464431, at
*1. The court held that “[the relator]’s decision to voluntarily dismiss his qui tam action
in 2014 precludes him from clambering back on board for a share of the government’s
proceeds as though he had never dismissed his own action. To hold otherwise would
contradict the plain language of Section 3705(c)(5) and provide [the relator] with a
windfall to which he is not entitled under the statute.” Id. at *5. Similarly, in Webster v.
United States, the Fourth Circuit denied recovery to a first-to-file relator on the grounds
that she could not “assert the rights of an original qui tam plaintiff . . . because she
abandoned those rights when she voluntarily dismissed her suit.” 217 F.3d 843 (table),

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2000 WL 962249, at *2 (4th Cir. 2000) (unpublished). This Court recognizes that these
cases are distinguishable, in that each involved a relator who dismissed his or her
action prior to a settlement being reached. Nevertheless, “[r]equiring a qui tam plaintiff
to make some effort to prosecute her suit in order to participate in any ultimate recovery
results in neither unfairness nor the frustration of congressional policy.” Id.
14.

Finally, this Court is not persuaded by the SDNY Relators’ argument that

their motion should be granted simply because they were previously allowed to
intervene to seek a portion of the WDNY Relator’s award. First, the SDNY Relators
were permitted to intervene only because all of the interested parties consented to their
doing so. Second, their motion to intervene was granted without reference to the FCA.
Third, because the WDNY Relator and the Government agreed to allow the SDNY
Relators to intervene, the limited intervention did not adversely impact the rights of any
interested parties.

Fourth, the SDNY Relators intervened for a limited, unopposed

purpose: to seek a portion of the WDNY Relator’s award. Here, the facts are entirely
different.

Not only does the relevant party (M&T) strongly oppose the motion, but

allowing the SDNY Relators to intervene could adversely impact M&T’s rights. Further,
while the SDNY Relators intervention-by-agreement did not undermine the policy of the
FCA, intervention here would. See LaCorte, 185 F.3d at 191 (“Settlements in qui tam
actions can draw intervenors like moths to the flame. Congress therefore struck a
careful balance between encouraging citizens to report fraud and stifling parasitic
lawsuits.”) Accordingly, the motion to intervene is denied.

15.

Also pending are the SDNY Relators’ Fee Motion (Docket No. 88), as well

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as M&T’s Motion to Stay the Fee Motion (Docket No. 92). Having denied the SDNY
Relators motion to intervene, these two motions are denied as moot.

IT HEREBY IS ORDERED, that the Sealed Movants’ [69] Motion to Intervene is
DENIED.
FURTHER, that the Sealed Movants’ [88] Motion for Attorney Fees is DENIED as
moot.
FURTHER, that Defendant M&T Bank Corporation’s [92] Motion to Stay the
Motion for Attorney Fees is DENIED as moot.
SO ORDERED.
Dated: March 20, 2017
Buffalo, New York
/s/William M. Skretny
WILLIAM M. SKRETNY
United States District Judge

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