United States ex rel. Jones v. Collegiate Funding Servs., Inc., 11-1103

• Decision Date: 14 March 2012
• Docket Number: No. 11-1103,11-1103
• Parties: UNITED STATES OF AMERICA ex rel. LENORA JONES and PATRICIA J. WILLOUGHBY, Plaintiff - Appellant, v. COLLEGIATE FUNDING SERVICES, INC.; COLLEGIATE FUNDING SERVICES, LLC; CFS-SUNTECH SERVICING, LLC; JP MORGAN CHASE & COMPANY, Defendants - Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

UNITED STATES OF AMERICA ex rel. LENORA JONES and PATRICIA J. WILLOUGHBY, Plaintiff - Appellant,

v. COLLEGIATE FUNDING SERVICES, INC.; COLLEGIATE FUNDING SERVICES,LLC; CFS-SUNTECH SERVICING, LLC; JP MORGAN CHASE & COMPANY, Defendants - Appellees.

No. 11-1103

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Argued: December 7, 2011

Decided: March 14, 2012

UNPUBLISHED

Appeal from the United States District Court for the Eastern District of Virginia, at Richmond. Henry E. Hudson, District Judge. (3:07-cv-00290-HEH)

Before KING, GREGORY, and DAVIS, Circuit Judges.

Affirmed by unpublished opinion. Judge Davis wrote the opinion, in which Judge King and Judge Gregory joined.

ARGUED: Joe Bradley Pigott, PIGOTT & JOHNSON, PA, Jackson, Mississippi, for Appellant. John Donley Adams, MCGUIREWOODS, LLP, Richmond, Virginia, for Appellees. ON BRIEF: M. Bryan Slaughter, MICHIEHAMLETT PLLC, Charlottesville, Virginia, for Appellant. J. William Boland, Jeremy S. Byrum, MCGUIREWOODS, LLP, Richmond, Virginia; Jonathan A. Vogel, MCGUIREWOODS, LLP, Charlotte, North Carolina, for Appellees.

Unpublished opinions are not binding precedent in this circuit.DAVIS, Circuit Judge:

In this appeal, we are urged to hold that the district court erred in its dismissal with prejudice, pursuant to Fed. R. Civ. P. 12(b)(1), (b)(6) and 9(b), of Appellants' myriad claims under the False Claims Act, 31 U.S.C.A. §§ 3729-3732 (West 2003 & Supp. 2011) (FCA).¹ Finding no error, we affirm.

I.

Appellants-Relators Lenora Jones and Patricia J. Willoughby (the Relators) are former employees of Collegiate Funding Services, Inc. (CFS).² They allege that CFS violated various provisions of the FCA in the course of its routine business practices. CFS is a major student loan lender and servicingcompany that provides a variety of federal student loan products, loan services, and school services as a participant in the Federal Family Education Loan Program (FFELP). The FFELP was established by the Higher Education Act (HEA), 20 U.S.C. §§ 1071 et seq., and is administered by the federal Department of Education (DoEd). The Eighth Circuit explained the operation of the FFELP in U.S. ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 795 (8th Cir. 2011) (footnotes omitted):

Under the FFELP, DoEd pays claims submitted by eligible private lenders for interest-rate subsidies and special allowances granted on behalf of student borrowers. See 20 U.S.C. §§ 1078(a)(1), 1087-1; 34 C.F.R. § 682.300, .302. DoEd also reduces private lenders' risk of loan defaults by entering into guaranty agreements with Guaranty Agencies who, in turn, insure Lenders against their potential default losses on student loans. See 20 U.S.C. §§ 1078(b)-(c), 1080; 34 C.F.R. § 682.100(b)(1) . . . .

The practices of private Lenders and Servicers are heavily regulated, and their participation in the FFELP is conditioned on compliance with detailed DoEd regulations.

The applicable regulations provide for withdrawal of eligible lender status if, inter alia, a lender (1) offers direct or indirect inducements to secure loan applications, 20 U.S.C. § 1085(d)(5)(A); (2) engages in fraudulent or misleading advertising, 20 U.S.C. § 1085(d)(5)(I);³ or (3) fails to affordexit counseling by schools to borrowers that includes repayment and indebtedness information, 20 U.S.C. § 1092(b).

The Relators worked as telemarketing solicitors for CFS, making and receiving calls from existing and potential student loan borrowers about consolidation loan products. After leaving CFS, Willoughby worked for various other lenders, as well.

The Relators' Original Complaint, filed in the United States District Court for the Northern District of Illinois, alleged that CFS submitted false claims to the federal government in connection with three distinct courses of conduct that violated federal loan regulations. First, CFS "offered and paid, to financial aid units within post-secondary education institutions . . . payments and other inducements in order to secure applications for [federal] loans." J.A. 27. Second, CFS "engaged in misleading advertising in the form of direct mail solicitations," which were designed to create the perception that the mailings were "official communications from the Federal Government." J.A. 28. Third, CFS solicited consolidation loans in violation of the "single holder rule," which provides that loans may not be consolidated by a lender who does not alreadyhold at least one of the student's loans that will be part of the consolidation.

The Relators asserted that in the course of engaging in the unlawful loan processing conduct described above, CFS regularly submitted claims, or caused claims to be submitted, to the DoEd in order to obtain interest payment subsidies, special allowances, and guaranty payments occasioned by loan payment defaults. The DoEd requires that all such submissions for payment be accompanied by a certification that the loan at issue conforms to all federal regulations.⁴ The Relators alleged that CFS therefore violated the FCA when it submitted claims to the government for interest, allowances, and guaranty payments with certification of compliance with FFELP regulations, when it had in fact engaged in unlawful practices to obtain the underlying loans. Specifically, the Relators alleged four distinct countsunder the FCA: (1) presenting false claims; (2) causing false certifications and other statements to be used to get false claims paid and approved; (3) conspiring to get false claims allowed and paid; and (4) causing false certifications and other statements used to avoid obligations to pay the government.

Almost four months later, after the case had been transferred from the Northern District of Illinois to the Eastern District of Virginia, the Relators filed an Amended Complaint. The Amended Complaint alleged four "patterns of CFS violations" of federal loan regulations. J.A. 45. These alleged "patterns" included the following practices, some of which differed significantly from the allegations in the Original Complaint: (1) that CFS provided inducements to secure and maintain preferred lender status, rather than to increase mere loan volume; (2) that CFS provided on-line, rather than in-person exit counseling to students, which was misleading and inadequate under the statutory requirements for counseling; (3) that CFS engaged in misleading advertising; and (4) that CFS's own recruiters had been induced to increase application volume through per-application bonuses. The Amended Complaint alleged that for each pattern, if the government had been aware of the regulatory violations, no interest, guaranty, or special allowance payments would have been made, and CFS would have been obliged to repay any federal funds received because they wouldnot have qualified as an "eligible lender" under the FFELP. See, e.g., J.A. 50 ("If Guaranty Agency or DoEd representatives had known the truth of such violations, no such claims or funds would have been paid to CFS. If DOEd representatives had known of the truth of such violations, CFS would have been obligated to re-pay funds of the United States received since the time that CFS would have been found not to have been an eligible lender pursuant to 20 U.S.C. § 1085(d)(5).").

The Amended Complaint specifically alleged 21 separate counts of FCA violations arising out of CFS's unlawful conduct, rather than the original four counts. The first 15 counts alleged that CFS and its loan servicing company had, in violation of 31 U.S.C. § 3729(a)(2) (2006), caused false statements to be used to get insurance guaranty payments and claims paid for loans made as a result of the following deviations from prescribed conduct: (1) unlawful inducements (Counts 1-3); (2) deceptive exit counseling (Counts 4-6); (3) deceptive direct mail solicitation (Counts 7-9); (4) bonus-compensated recruiters (Counts 10-12); and (5) violations of the single holder rule (Counts 13-15). The Amended Complaint also alleged that CFS directly presented false claims related to unlawfully made loans, namely, for insurance guaranty payments (Count 16) and loan interest and special allowance payments (Count 17), in violation of 31 U.S.C. § 3729(a)(1) (2006). Inaddition, the Amended Complaint alleged in separate counts that CFS had conspired to get false claims paid for (1) insurance guaranty payments (Count 18) and (2) loan interest and special allowance payments (Count 19), in violation of 31 U.S.C. § 3729(a)(3) (2006). Finally, the Amended Complaint alleged that CFS had caused false certifications and other statements to be used to avoid obligatory repayment of government insurance payments (Count 20) and government interest and special allowance payments (Count 21), in violation of 31 U.S.C. § 3729(a)(7) (2006) (making, using, or causing a false claim to be used "to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government").⁵

CFS filed a motion to dismiss the Amended Complaint in its entirety. First, CFS argued that the court lacked subject matter jurisdiction over all counts except Counts 10-12 (concerning bonus-compensated recruiters) under the "public disclosure bar" of the FCA. Second, CFS argued that all of the counts suffered from inadequate particularity under Fed. R. Civ. P. 9(b), and therefore failed to state a claim upon which relief could be granted under Fed. R. Civ. P. 12(b)(6).

The FCA public disclosure bar, 31 U.S.C. § 3730(e)(4) (2006),⁶ provided at the time that:

(A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

(B) For purposes of this paragraph,

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