Chotas v. Area Storage and Transfer, Inc. et al

Filing 19

MEMORANDUM re dft Area Storage and Transfer, Inc's MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM 11 (Order to follow as separate docket entry)Signed by Honorable Sylvia H. Rambo on 06/12/14. (ma)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
JENNIFER CHOTAS,

:
:
Plaintiff
:
:
v.
:
:
AREA STORAGE AND TRANSFER :
INC.; DAVID F. DEMCHAK II; and :
LORI DEMCHAK,
:
:
Defendants
:

Civil No. 1:14-cv-0084

Judge Sylvia H. Rambo

MEMORANDUM
In this civil action, Plaintiff sued her former employer pursuant to
Section 3730 of the False Claims Act, 31 U.S.C. §§ 3729 - 3733, for unlawful
termination in retaliation to her complaints about and efforts to stop her employer’s
allegedly fraudulent conduct. Presently before the court is Defendant Area’s motion
to dismiss (Doc. 11), which challenges whether Plaintiff sufficiently pleaded that she
engaged in conduct protected by the FCA. For the following reasons, the court
concludes that Plaintiff sufficiently pleaded her cause of action and will deny
Defendant Area’s motion to dismiss.
I.

Background
As is required when deciding a motion to dismiss, the court will accept

the well-pleaded factual averments set forth in the complaint (Doc. 1) as true and
view them in the light most favorable to Plaintiff as the nonmoving party.
A.

Facts

Defendant Area Storage and Transfer Inc. (“Defendant Area”) is a
Pennsylvania Corporation with its principle place of business located within the

Middle District of Pennsylvania and an employer of approximately 400 employees.
(Id. at ¶ 2.) David F. Demchak II (“Mr. Demchak”) and Lori Demchak (“Mrs.
Demchak”) are husband and wife and are Defendant Area’s President and Vice
President, respectively. (Id. at ¶ 3.) The United States Postal Service (“USPS”)
contracts with private companies to provide various services, including those for
transportation and delivery. (Id. at ¶ 13.) Defendant Area was retained by USPS to
supply transportation services, which involved the physical transportation of mail
from one location to another via long-haul tractor trailers. (Id.) Defendant Area has
operated Highway Contract Routes (“HCRs”) for USPS since 1989. (Id. at ¶ 2.) In
order to receive and maintain an HCR, Defendant Area was required to submit
various forms and certifications, which assist USPS in its evaluation of prospective
suppliers based on supplier eligibility, financial capability, past performance, and
supplier capability. (Id. at ¶¶ 14-15.) For purposes of determining financial
capability, USPS requires the supplier submit detailed financial information, copies
of the last three months’ bank statements, a letter from the supplier’s bank stating
that the contractor has an available credit line of at least ten-percent of the estimated
contract amount, and credit reports from the three major credit bureaus. (Id. at ¶ 15.)
For purposes of determining supplier capability, USPS assesses the supplier’s
equipment capacity, which incorporates, inter alia, a review of the supplier’s fleet.
(Id. at ¶ 16.)
Plaintiff, Jennifer Chotas, began her employment as Defendant Area’s
Accounting and Analysis Manager on July 11, 2011. (Id. at ¶ 1.) As part of
Plaintiff’s job duties, she was responsible for preparing and reviewing Defendant
Area’s financial records, including accounting and ledger sheets, balance sheets,
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equipment inventory records, profit and loss statements, financial statements, and
banking records, and was responsible for payroll auditing, human resources planning
and management, accounting controls maintenance, and other duties as assigned by
Mr. and Mrs. Demchak. (Id. at ¶¶ 11, 20.) In late February 2012, Mrs. Demchak
informed Plaintiff that certain documents were soon due for purposes of renewal of
Defendant Area’s contracts with USPS. (Id. at ¶ 21.) Soon thereafter, Plaintiff took
three days of personal leave (Id.) and, upon her return on March 5, 2012, Mrs.
Demchak told Plaintiff that her assistance with the USPS documents was not needed
(Id. at ¶ 22).
On March 6, 2012, while reconciling Defendant Area’s February 2012
PNC bank account statement, Plaintiff discovered a $725,000.00 adjustment to the
contract revenue account which replaced a January 5, 2011 $225,000.00 cash deposit
from Kemner Delivery Service. (Id. at ¶ 23.) This adjustment effectively increased
Defendant Area’s revenue by $500,000.00. (Id.) Plaintiff also noticed that a
$500,000.00 payment journal entry had been posted to the company’s computerized
account ledger in QuickBooks, which recorded the purchase of $500,000.00 worth of
trucks to correspond to a $500,000.00 decrease in cash, which was not reflected in
the bank statements. (See id. at ¶ 24.) Plaintiff also discovered a second payment
journal entry for $500,000.00, which overrode the first entry by making the financial
accounts reflect the $500,000.00 disbursement for trucks effective December 31,
2011. (Id.) All three of these transactions occurred within an eleven minute period
on March 1, 2012. (See id. at ¶¶ 23, 24.)
On March 7, 2012, Plaintiff printed the journal entries that overstated
revenue by $500,000.00 and questioned Mrs. Demchak about the changes. (Id. at ¶
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25.) Mrs. Demchak acknowledged that she made the changes, explaining that she
“was just trying something for up and coming [USPS] contracts.” (See id.) In
response to Plaintiff’s characterizing Mrs. Demchak actions as fraudulent, Mrs.
Demchak disposed of the printout. (Id.)
On March 8, 2012, Plaintiff audited other QuickBooks accounts and
found entries affecting Fuel line items for 2009, 2010, and 2011. (Id. at ¶ 26.) The
following day, Plaintiff brought the results of her investigation to the attention of
Mrs. Demchak, who again indicated that she was “just trying something” for the
USPS contracts. (Id. at ¶ 27.) Plaintiff again told Mrs. Demchak that these
alterations should not have been made. (Id.) Plaintiff corrected each of the entries.
(Id. at ¶ 28.) Soon thereafter, Plaintiff began to be minimized and marginalized in
her job duties and responsibilities by Mrs. Demchak. (See id. at ¶¶ 34-41.)
On August 16, 2012, Plaintiff discovered a directory in Defendant
Area’s shared computer hard drive labeled “Area_Postal,” in which she found
various files related to Defendant Area’s USPS business, including one called
“Area_Financials.” (Id. at ¶ 29.) In that file, Plaintiff found the financial documents
submitted to USPS, which were dated March 2, 2012, and initialed by Mr. Demchak,
and a letter dated March 2, 2012, that forwarded Defendant Area’s financial
statements for 2009, 2010, and 2011, and certifying that the documents reflected an
accurate overview of the company’s financial strength. (Id.) Upon examination,
Plaintiff realized that the submissions contained the false information she previously
brought to Mrs. Demchak’s attention, inasmuch as Defendant Area’s 2011 net
income was falsely overstated by $500,000.00. (Id. at ¶ 31.)

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On August 21, 2012, Plaintiff reported her discovery to Al Gremmel,
Defendant Area’s Operations Manager, and informed him that there were “fraudulent
entries” on the financial submissions to USPS. (Id. at ¶ 33.) Plaintiff also told Mr.
Gremmel that she believed the documents and entries she had discovered had been
illegally used to obtain USPS contract renewals. (Id.) Mr. Gremmel brought
Plaintiff’s accusations to the attention of the Demchaks, and discovered that Mr.
Demchak was aware of the fraudulent activities. (Id. at ¶¶ 43-45.)
On August 23, 2012, Plaintiff left work early with the approval of Mr.
Gremmel. (Id. at ¶ 46.) The following day, Plaintiff met with Mrs. Demchak and
Mr. Gremmel, during which time she was informed that her employment was
terminated. (Id. at ¶ 48.) Mr. Gremmel confirmed that Plaintiff’s reports of
fraudulent activities contributed to Mrs. Demchak’s decision to terminate her
employment. (Id. at ¶ 49.) Plaintiff seeks relief pursuant to 31 U.S.C. § 3730(h).
B.

Procedural History

On January 17, 2014, Plaintiff initiated this lawsuit by filing a
complaint against Defendant Area, Mr. Demchak, and Mrs. Demchak. (Doc. 1.) On
March 14, 2014, the parties filed a joint stipulation of dismissal for Mr. Demchak
and Mrs. Demchak from this action. (Doc. 8; see also Doc. 9.) The remaining
defendant, Defendant Area, filed the instant motion to dismiss and brief in support
on March 21, 2014. (Docs. 11 & 12.) Plaintiff filed her response in opposition on
April 4, 2014 (Doc. 16), and Defendant Area filed its reply on April 11, 2014 (Doc.
18). Thus, this matter is fully briefed and is ripe for consideration.
II.

Legal Standard
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Defendant Area moves to dismiss Plaintiff’s complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6). Federal Rule of Civil Procedure 8 requires
that a complaint set forth “a short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). For a complaint to survive
dismissal, it “must contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The plaintiff’s short
and plain statement of the claim must “give the defendant fair notice of what the . . .
claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555 (quoting
Conley v. Gibson, 355 U.S. 41, 47 (1957)).
In evaluating the sufficiency of a complaint, a court must accept all
well-pleaded factual allegations as true and draw all reasonable inferences in favor of
the non-moving party. See Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d
Cir. 2008). “Factual allegations must be enough to raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555. Further, “[a] pleading that offers
‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of
action will not do.’ Nor does a complaint suffice if it tenders ‘naked assertion[s]’
devoid of ‘further factual enhancement.’” Iqbal, 556 U.S. at 678 (internal citations
omitted) (citing Twombly, 550 U.S. at 555, 557). However, this “‘does not impose a
probability requirement at the pleading stage,’ but instead ‘simply calls for enough
facts to raise a reasonable expectation that discovery will reveal evidence of’ the
necessary element.” West Penn Allegheny Health Sys. Inc. v. UPMC, 627 F.3d 85,
98 (3d Cir. 2010) (citing Phillips, 515 F.3d at 234).
III.

Discussion
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Plaintiff’s claim arises from Defendant Area’s allegedly retaliating
against her in violation of the False Claims Act. According to Plaintiff, by
submitting fraudulent records to USPS in order to be awarded a HCR contract,
Defendant Area exaggerated the financial strength of the company which resulted in
Defendant Area’s receipt of a contract for which it otherwise may not have received.
By investigating and correcting the false entries, and then raising her concerns to
Defendant Area’s upper management, Plaintiff maintains that she took lawful actions
geared toward exposing Defendant Area’s attempt to defraud USPS, and claims that
the reduction of her duties and eventual termination of employment was in retaliation
for her lawful actions. Defendant Area challenges whether Plaintiff’s actions
constituted protected activity under the FCA.
The FCA is a statutory scheme designed to discourage fraud against the
federal government. See U.S. ex rel. Wilkins v. United Health Grp. Inc., 659 F.3d
295, 304 (3d Cir. 2011). Its cornerstone provision bars any person from presenting a
“false or fraudulent claim for payment or approval” to the United States. 31 U.S.C. §
3729(a). In 1986, Congress amended the FCA by adding an anti-retaliation
provision to protect whistleblowers. See False Claims Act, Pub. L. No. 99-562, § 4,
100 Stat. 3153, 3157-58 (1986). The purpose of this whistleblower provision is to
promote enforcement of the FCA by assuring those who may be considering
exposing fraud that they are legally protected from retaliatory acts. See S. Rep. No.
99-345, 34, 1986 U.S.C.C.A.N. 5266, 5299 (1986).
Section 3730(h) protects an employee who “is discharged, demoted,
suspended, threatened, harassed, or in any other manner discriminated against in the
terms and conditions of employment because of lawful acts done by the employee . .
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. in furtherance of [an FCA action] or other efforts to stop 1 or more violations of
[the FCA].” 31 U.S.C. § 3730(h)(1). As the Third Circuit has explained:
In order to establish a claim under § 3730(h), [a plaintiff]
must show[:] (1) he engaged in protected conduct, (i.e.,
acts done in furtherance of an action under § 3730)[;] and
(2) that he was discriminated against because of his
protected conduct. . . . For a plaintiff to demonstrate that
he was discriminated against “because of” conduct in
furtherance of a [FCA] suit, a plaintiff must show that[:]
(1) his employer had knowledge he was engaged in
“protected conduct”; and (2) that his employer’s retaliation
was motivated, at least in part, by the employee’s engaging
in “protected conduct.”
U.S. ex rel. Protilla v. Riverview Post Acute Care Ctr., Civ. No. 12-cv-1842, 2014
WL 1293882, *9 (D.N.J. Mar. 31, 2014) (citing United States ex rel. Hefner v.
Hackensack Univ. Med. Ctr., 495 F.3d 103, 110-11 (3d Cir. 2007)). Significantly, an
employee does not need to have necessarily filed a qui tam action in order to have
engaged in protected activity; rather, protected activity in this context encompasses
steps taken in furtherance of an action under or efforts to stop violations of the FCA.
See 31 U.S.C. § 3730(h). This language manifests Congress’ intent to “protect
employees while they are collecting information about a possible fraud, before they
have put all the pieces of the puzzle together.” Hutchins v. Wilentz, Goldman &
Spitzer, 253 F.3d 176, 188 (3d Cir. 2001) (quoting U.S. ex rel. Yesudian v. Howard
Univ., 153 F.3d 731, 740 (D.C. 1998))
The chief inquiry here is whether Plaintiff’s activity fell within the
protected category under the FCA. The Third Circuit has explained:
Determining what activities constitute “protected conduct”
is a fact specific inquiry. But the case law indicates that
“the protected conduct element . . . does not require the
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plaintiff to have developed a winning qui tam action . . . It
only requires that the plaintiff engage [ ] in acts . . . in
furtherance of an action under [the False Claims Act].” . . .
Under the appropriate set of facts, these activities can
include internal reporting and investigation of an
employer’s false or fraudulent claims.”
Hutchins, 253 F.3d at 187 (alteration in original) (quoting Yesudian, 153 F.3d at 73942).
Moreover, the FCA also requires employees to prove they were
discriminated against “because of” their “protected conduct.” To meet this
requirement, a plaintiff must show his employer had knowledge that he was engaged
in protected conduct and that the employer retaliated against her because of that
conduct. Id. at 188. Such a requirement is essential because without knowledge that
an employee is contemplating an FCA suit, “there would be no basis to conclude that
the employer harbored [Section 3730(h)’s] prohibited motivation [i.e., retaliation].”
Id. (citing Mann v. Olsten Certified Healthcare Corp., 49 F. Supp. 2d 1307, 1314
(M.D. Ala. 1999)). The Third Circuit has explained in this regard:
[T]he kind of knowledge the [employer] must have mirrors
the kind of activity in which the [employee] must be
engaged. What the [employer] must know is that the
[employee] is engaged in protected activity . . . – that is, an
activity that reasonably could lead to a False Claims Act
case.
Id. (alterations in original). “Whether an employer is on notice of the “distinct
possibility’ of False Claims Act litigation is also a fact specific inquiry.” Id. at 189.
Thus, the issue is framed as:
[W]hether the employee engaged in conduct from which a
fact finder could reasonably conclude that the employer
could have feared that the employee was contemplating
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filing a qui [] tam action against it or reporting the
employer to the government for fraud . . . . [L]itigation . . .
[is] a “distinct possibility” only if the evidence reasonably
supports such fear; if the evidence does not support this
fear, litigation would not have been a distinct possibility.
Id. (alterations in original) (citing Mann, 49 F. Supp. 2d at 1314).
Here, Plaintiff spoke to her supervisors and Defendant Area’s Vice
President on multiple occasions to inform them that she believed that adulterating the
company’s records was fraudulent. Moreover, Plaintiff made it clear that she refused
to assist in – and took measures to correct – the fraudulent conduct. Plaintiff also
alleges that she engaged in an investigation that produced evidence confirming that
Defendant Area certified and submitted adulterated statements to USPS for purposes
of obtaining HCRs. Plaintiff alleges that, following her discovery of the adjustments
on Defendant Area’s February 2012 PNC bank account statements on March 6,
2012, she investigated and discovered evidence that demonstrated the fraudulent
records were submitted to USPS. At this stage of the litigation and in light of the
legal standard applicable when considering a motion to dismiss, the court concludes
that Plaintiff has pleaded sufficient facts to show that she engaged in protected
conduct, that is, conduct that could be accepted as designed to collect information
about possible fraud.
Plaintiff further alleges that she characterized the conduct as fraudulent
during her conversations with Mrs. Demchak and Mr. Gremmel, and that, as a result
of her resistance to and criticism of the fraudulent conduct, she was insulated from
certain job-related activities, not given assignments, and eventually terminated. In
addition, Plaintiff alleges that Mr. Gremmel confirmed that Mrs. Demchak’s decision
to deny her the ability to cash out vacation time and eventually terminate her
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employment was because of her reports of fraud. The court has little difficulty in
concluding that Defendant Area was aware that Plaintiff was engaged in protected
conduct. Indeed, Plaintiff spoke directly to the company’s vice president and
provided her with the results of her investigation into the fraudulent conduct.
Furthermore, Plaintiff has certainly alleged that there is a causal connection between
Defendant Area’s knowing that she was engaged in protected conduct and the
ultimate termination of Plaintiff’s employment.
IV.

Conclusion
At this stage of the litigation, and reading the facts pleaded in the light

most favorable to Plaintiff and drawing all inferences in favor of the same, the court
concludes that Plaintiff’s complaint satisfies Rule 8’s pleading requirements because
it has provided a short and plain statement of the claim that gives Defendant Area
“fair notice of what the . . . claim is and the grounds upon which it rests.” Twombly,
550 U.S. at 555. Accordingly, the court will deny Defendant Area’s motion to
dismiss.
An appropriate order will issue.
s/Sylvia H. Rambo
United States District Judge
Dated: June 12, 2014.

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