Navajo Health Found. - Sage Mem'l Hosp., Inc. v. Razaghi Dev. Co.
| Decision Date | 15 March 2021 |
| Docket Number | Case No.: 2:19-cv-00329-GMN-EJY |
| Parties | NAVAJO HEALTH FOUNDATION - SAGE MEMORIAL HOSPITAL, INC., Plaintiff, v. RAZAGHI DEVELOPMENT COMPANY, LLC; AHMAD R. RAZAGHI; TAUSIF HASAN, Defendants. |
| Court | U.S. District Court — District of Nevada |
Pending before the Court is the Motion to Dismiss, (ECF No. 46), filed by Defendants Tausif Hasan ("Hasan"), Ahmad R. Razaghi ("Razaghi"), and Razaghi Development Company, LLC ("RDC") (collectively, "Defendants"). Plaintiff Navajo Health Foundation - Sage Memorial Hospital ("Sage") filed a Response, (ECF No. 62), and Defendants filed a Reply, (ECF No. 80).
Also pending before the Court is Defendants' Motion to Strike, (ECF No. 47). Sage filed a Response, (ECF No. 61), and Defendants filed a Reply, (ECF No. 79).
Also pending before the Court is Sage's First Motion for Leave to File the First Amended Complaint ("Motion to Amend"), (ECF No. 76). Defendants filed a Response, (ECF No. 88), and Sage filed a Reply, (ECF No. 95). On January 15, 2021, United States Magistrate Judge Elayna Youchah entered a Report and Recommendation ("R&R"), recommending that the Court deny without prejudice the Motion to Amend. (See Order and R&R, ECF No. 117). Sage and Defendants filed Objections to the R&R, (ECF Nos. 120-21). The parties filed Responses to the respective Objections, (ECF No. 122, 127).
For the reasons discussed below, the Court GRANTS the Motion to Dismiss with leave to amend, DENIES as moot the Motion to Strike, and ADOPTS the Magistrate Judge's R&R to DENY without prejudice the Motion to Amend.
This case arises from Defendants' alleged scheme to defraud Sage of over $10.8 million through Defendants' deceptive acquisition and invocation of a lucrative termination payment provision in the hospital management agreement between RDC and Sage (the "Management Services Contract"), followed by Defendants' billing for services not rendered. (See generally Compl., ECF No. 1). Sage is a federally funded non-profit hospital serving an indigent Navajo Nation community in rural Ganado, Arizona. (Id. ¶ 23). The majority of Sage's operation budget comes from the Indian Health Service ("IHS"), an agency within the U.S. Department of Health and Human Services. (Id. ¶ 24). Principally, Sage alleges that Defendants fraudulently induced Sage's Board of Directors ("BOD") to unwittingly authorize a contractual amendment to the parties' Management Services Contract containing an extremely generous termination payment, which Defendants invoked to siphon $10.8 million from Sage's operating budget. (See id. ¶¶ 39-57). The Court's below discussion provides background on the relationship between Sage and Defendants, up to and including the scheme described in the Complaint.
Pursuant to Sage's bylaws, every member of its BOD must be a member of the Navajo Nation and reside in the community in or around Ganado, Arizona. (Id. ¶ 21). Sometime in 2007, "Razaghi and his brother partnered with a friend, Manuel Morgan ('Morgan'), a member of the Navajo Tribe and former Navajo Nation County Commissioner, to form Morgan & Associates, LLC, a company in which Morgan [held] majority ownership so that the entity could qualify as a Navajo business." (Id. ¶ 26). Sage alleges that Razaghi, leveraging Morgan'sstatus as a member of the Navajo Nation, persuaded Sage to award Morgan & Associates a management services contract. (Id. ¶ 27). Under the terms of this contract, Razaghi would serve as Sage's "Contract CEO." (Id.). Sage claims Razaghi subsequently created business entities, including RDC, to supply Sage with medical personnel at a profit. (Id. ¶ 28).
On March 18, 2011, RDC1 entered into the Management Services Contract with Sage's BOD. (Id. ¶ 29). This contract replaced Morgan & Associates' contract with the hospital and placed management of Sage under Razaghi and RDC's control. (Id.). Sage alleges that this was when the "multiple different schemes to defraud Sage Memorial began through the use of the mail and interstate wires." (Id.).
On or about May 17, 2013, Sage's BOD approved a "First Amendment" of the March 18, 2011 Management Services Contract. (Id. ¶ 30). "Notably, . . . the [First Amendment to the] contract provided that [RDC] could hire, at Sage Memorial's expense, special counsel to represent . . . Sage Memorial . . . with respect to specific legal matters." (Id.) (internal alterations and quotation marks omitted). Razaghi selected Stephen Hoffman ("Hoffman") to serve as RDC's special counsel. (Id. ¶ 17). Around this time, non-party Stenson Wauneka ("Wauneka") served as Chairman of the BOD. (Id. ¶ 30). Sage alleges Razaghi "developed a close and friendly relationship with Wauneka, meeting with him privately on numerous occasions . . . for which Wauneka would receive a financial benefit following each meeting in the form of an 'honorarium payment.'" (Id.).
During RDC's management of Sage, Razaghi and others allegedly lined their pockets at Sage's expense. On October 16, 2014, a group of whistleblowers filed a complaint in theUnited States District Court for the District of Arizona, alleging Razaghi and others violated the False Claims Act ("FCA"), 31 U.S.C. § 3729. See Case No. 3:14-cv-8916-PCT-SRB. These whistleblowers alleged Razaghi "devised a massive scheme through which he abused his relationship with [Sage] to divert millions of dollars of federal funds provided by federal programs and contracts from Sage to himself and others. (Id. ¶ 32). In January 2017, after the United States declined to intervene, the whistleblowers voluntarily dismissed the action. (Id. ¶ 33).
Around the same time the whistleblower complaint was filed, IHS advised Sage that the federal government would not be renewing its contracts with the hospital. (Id. ¶ 34). On October 23, 2014, Sage sued the Secretary of the U.S. Department of Health and Human Services in the United States District Court for the District of New Mexico, challenging the IHS action and alleging the federal government breached a number of prior contracts from 2009 through 2013. (Id.); (See also Navajo Health Foundation - Sage Memorial Hospital, Inc. v. Burwell et al., 263 F. Supp. 3d 1083 (D.N.M. 2016)). On December 16, 2016, the United States agreed to pay $122,500,000.00 to settle the litigation with Sage. Sage represents that the:
settlement document memorializing the parties' agreement provided that payment must be used to fund Indian healthcare services, including ancillary services to the hospital or for any other legitimate healthcare purpose. However, the settlement agreement also expressly prohibited the hospital from providing payment to any management company or affiliated entity. Notably, the agreement also singled out Razaghi by name by further providing that "[i]f Ahmad R. Razaghi or any current officer or officer-level employee of a Razaghi-level entity is convicted of a felony crime of fraud related to the management of [the] [h]ospital or any federal health care program operated by [the Hospital] within 5 years of the effective date of this Settlement Agreement, IHS may conduct additional monitoring on the expenditure of the Settlement sum . . . ." (Id. ¶ 36).
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On June 16, 2017, Razaghi allegedly called a BOD meeting at which time Hoffman urged the BOD to approve a "Second Amendment" to RDC's Management Services Contract. (Id. ¶ 39). Sage claims none of the BOD members, with the possible exception of Wauneka, were provided with a copy of the proposed Second Amendment prior to this meeting. (Id.). Sage further claims this omission was in contravention of BOD rules and policies that require members be provided with important documents at least twenty-four hours in advance of a meeting so they can conduct meaningful review prior to voting. (Id.). Sage maintains none of the BOD members have any formal legal training or knowledge about contract interpretation and that many BOD members do not speak English as a first or native language. (Id.). Among other things, Section 5.D (the "Termination Payment Provision") of the proposed Second Amendment (Id. ¶ 40). In relevant part, Section 5.D(2) of the Termination Payment Provision provides that:
In the event that this Contract expires, or [RDC] terminates this Contract for cause, or the Corporation elects to terminate this Contract at any time prior to expiration of this Contract for any Reason other than those listed as "cause" in Section 4.A, the Corporation shall, in addition to any other amounts due under this Contract, pay [RDC] a Termination Payment in an amount equal to the average of the amount paid to [RDC] by the Corporation each year during the most recent four years of service, including the year of expiration or termination, which shall be prorated through the actual date of such expiration or termination.
(Id. ¶ 41) (internal alterations omitted). In addition to the Termination Payment Provision, the Second Amendment proposed an increase of Razaghi's base hourly compensation from $175 per hour to $495 per hour and stated that the contract would retroactively become effective from July 6, 2016. (Id. ¶ 42). Sage claims Hoffman recommended the BOD approve the Second Amendment without discussing the Termination Payment Provision or the increase inRazaghi's base hourly rate. (Id. ¶ 41). The BOD approved the Second Amendment. (Id. ¶ 42). Razaghi, and Wauneka in his capacity as BOD Chairman, then signed the contract. (Id.).
About a year later, Razaghi allegedly began taking steps in...
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