United States ex rel. Oberg v. Pa. Higher Educ. Assistance Agency

• Decision Date: 21 October 2015
• Docket Number: No. 15–1093.,15–1093.
• Citation: 804 F.3d 646
• Parties: UNITED STATES ex rel. Jon H. OBERG, Plaintiff–Appellant, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant–Appellee, and Nelnet, Inc.; Kentucky Higher Education Student Loan Corp. ; SLM Corporation; Panhandle Plains Higher Education Authority; Brazos Group; Arkansas Student Loan Authority; Education Loans Inc/SD; Southwest Student Services Corporation; Brazos Higher Education Service Corporation; Brazos Higher Education Authority, Inc.; Nelnet Education Loan Funding, Inc.; Panhandle–Plains Management and Servicing Corporation; Student Loan Finance Corporation; Education Loans Inc. ; Vermont Student Assistance Corporation, Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

804 F.3d 646

UNITED STATES ex rel. Jon H. OBERG, Plaintiff–Appellant

v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant–AppelleeandNelnet, Inc.; Kentucky Higher Education Student Loan Corp. ; SLM Corporation; Panhandle Plains Higher Education Authority; Brazos Group; Arkansas Student Loan Authority; Education Loans Inc/SD; Southwest Student Services Corporation; Brazos Higher Education Service Corporation; Brazos Higher Education Authority, Inc.; Nelnet Education Loan Funding, Inc.; Panhandle–Plains Management and Servicing Corporation; Student Loan Finance Corporation; Education Loans Inc. ; Vermont Student Assistance Corporation, Defendants.

No. 15–1093.

United States Court of Appeals, Fourth Circuit.

Argued: May 12, 2015.

Decided: Oct. 21, 2015.

ARGUED:Bert Walter Rein, Wiley Rein LLP, Washington, D.C., for Appellant. Paul D. Clement, Bancroft PLLC, Washington, D.C., for Appellee. ON BRIEF:Michael L. Sturm, Brendan J. Morrissey, Stephen J. Obermeier, Wiley Rein LLP, Washington, D.C., for Appellant. John S. West, Megan C. Rahman, Richmond, Virginia, Christopher G. Browning, Jr., Troutman Sanders LLP, Raleigh, North Carolina, for Appellee Vermont Student Assistance Corporation; George W. Hicks, Jr., Raymond P. Tolentino, Bancroft PLLC, Washington, D.C., Joseph P. Esposito, Jill M. deGraffenreid, Hunton & Williams LLP, Washington, D.C., Daniel B. Huyett, Neil C. Scur, Stevens & Lee P.C., Reading, Pennsylvania, for Appellee Pennsylvania Higher Education Assistance Agency.

Before TRAXLER, Chief Judge, and GREGORY and KEENAN, Circuit Judges.

Opinion

Vacated and remanded by published opinion. Chief Judge TRAXLER wrote the opinion, in which Judge GREGORY and Judge KEENAN concurred.

TRAXLER, Chief Judge:

The Pennsylvania Higher Education Assistance Agency (“PHEAA”), was established by the Commonwealth of Pennsylvania in 1963 “to improve access to higher education by originating, financing, and guaranteeing student loans.” United States ex rel. Oberg v. Pa. Higher Educ. Assistance Agency (“Oberg II ”), 745 F.3d 131, 135 (4th Cir.2014). In addition to administering state-funded grant and scholarship programs on behalf of the Commonwealth, PHEAA conducts nationwide lending, servicing, and guaranteeing activities, and it “now constitutes one of the nation's largest providers of student financial aid services.” Id. at 138.

Dr. Jon H. Oberg brought this action against PHEAA and other private and state-created student-loan entities under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729 –33, alleging that from 2002 through 2006, the defendants fraudulently claimed hundreds of millions of dollars in federal student-loan interest-subsidy payments to which they were not entitled. See Oberg II, 745 F.3d at 135. As this case has proceeded up and down the appeals ladder,¹ the other defendants have settled or were dismissed from the case, and PHEAA is now the sole remaining defendant.

The only issue in this appeal is whether PHEAA qualifies as an “arm of the state” or “alter ego” of Pennsylvania such that it cannot be sued under the FCA. See Vermont Agency of Nat. Res. v. United States ex rel. Stevens, 529 U.S. 765, 787–88, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000). We conclude that PHEAA is not an arm of Pennsylvania, and we therefore reverse the district court's order granting summary judgment in favor of PHEAA and remand for further proceedings on the merits of Oberg's FCA claims against PHEAA.

I.

The FCA imposes civil liability on “any person” who makes or presents a false claim for payment to the federal government. 31 U.S.C. § 3729(a)(1). Corporations, including municipal corporations like cities and counties, are “persons” under the FCA, see Cook County v. United States ex rel. Chandler, 538 U.S. 119, 126–27, 134, 123 S.Ct. 1239, 155 L.Ed.2d 247 (2003), but states and state agencies are not, see Vermont Agency of Nat. Res., 529 U.S. at 787–88, 120 S.Ct. 1858. To determine whether PHEAA falls into the former or the latter category, we apply “the arm-of-the-state analysis used in the Eleventh Amendment context.” Oberg II, 745 F.3d at 135. If PHEAA qualifies as an “arm” or “alter ego” of Pennsylvania, then it is not a “person” subject to liability under the FCA. See United States ex rel. Oberg v. Ky. Higher Educ. Student Loan Corp. (“Oberg I ”), 681 F.3d 575, 580 (4th Cir.2012) (internal quotation marks omitted).

We evaluate four non-exclusive factors when considering whether a state-created entity functions as an arm of its creating state:

(1) whether any judgment against the entity as defendant will be paid by the State ...;

(2) the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity's directors or officers, who funds the entity, and whether the State retains a veto over the entity's actions;

(3) whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns; and

(4) how the entity is treated under state law, such as whether the entity's relationship with the State is sufficiently close to make the entity an arm of the State.

Id. (quoting S.C. Dep't of Disabilities & Special Needs v. Hoover Universal, Inc., 535 F.3d 300, 303 (4th Cir.2008) ).

Although the focus of the first factor is whether the “primary legal liability” for a judgment will fall on the state, Regents of the Univ. of Cal. v. Doe, 519 U.S. 425, 428, 117 S.Ct. 900, 137 L.Ed.2d 55 (1997) (emphasis added), the practical effect on the state treasury of a judgment against the entity must also be considered. “Where an agency is so structured that, as a practical matter, if the agency is to survive, a judgment must expend itself against state treasuries,” Hess v. Port Auth. Trans–Hudson Corp., 513 U.S. 30, 50, 115 S.Ct. 394, 130 L.Ed.2d 245 (1994) (alteration omitted), the agency will be found to be an arm of the state, see Oberg II, 745 F.3d at 137 ; Cash v. Granville Cnty. Bd. of Educ., 242 F.3d 219, 223 (4th Cir.2001).

“[I]f the State treasury will be called upon to pay a judgment against a governmental entity, the [entity is an arm of its creating state], and consideration of any other factor becomes unnecessary.” Cash, 242 F.3d at 223. If the state treasury will not be liable for a judgment rendered against the entity, we must consider the remaining factors, which focus on the nature of the relationship between the state and the entity it created.See id. at 224 ; accord Lee–Thomas v. Prince George's Cty. Pub. Sch., 666 F.3d 244, 248 n. 5 (4th Cir.2012).

The purpose of the arm-of-state inquiry is to distinguish arms or alter egos of the state from “mere political subdivisions of [the] State such as counties or municipalities,” which, though created by the state, operate independently and do not share the state's immunity. Kitchen v. Upshaw, 286 F.3d 179, 184 (4th Cir.2002) ; see Mt. Healthy Bd. of Educ. v. Doyle, 429 U.S. 274, 280, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977) (“The issue here thus turns on whether the Mt. Healthy Board of Education is to be treated as an arm of the State partaking of the State's Eleventh Amendment immunity, or is instead to be treated as a municipal corporation or other political subdivision to which the Eleventh Amendment does not extend.”). Although we must consider “the provisions of state law that define the agency's character,” Regents, 519 U.S. at 429 n. 5, 117 S.Ct. 900, “[u]ltimately ..., the question whether a particular state agency has the same kind of independent status as a county or is instead an arm of the State, and therefore one of the United States within the meaning of the Eleventh Amendment, is a question of federal law,” id. (internal quotation marks omitted).

In our first opinion in this case, we held that the district court erred by concluding that PHEAA was a state agency and dismissing Oberg's complaint without applying the arm-of-state analysis. See Oberg I, 681 F.3d at 581. On remand, the district court applied the arm-of-state analysis and again granted the motion to dismiss, concluding that PHEAA was not a person within the meaning of the FCA.

Oberg again appealed, and we again held that the district court erred by dismissing the claims against PHEAA. See Oberg II, 745 F.3d at 140–41. Considering the arm-of-state issue in light of the statutes governing PHEAA's operation and the facts alleged in Oberg's complaint, we held in Oberg II that Oberg had plausibly alleged that PHEAA was not an arm of the state but was instead a “person” subject to suit under the FCA. See id.

We first concluded that Pennsylvania was “neither legally nor functionally liable for any judgment against PHEAA.” Id. at 138. PHEAA was not legally liable because “state law expressly provides that obligations of PHEAA shall not be binding on the State,” id. (internal alterations omitted), and requires PHEAA's debts to be paid from “ ‘moneys ... of the corporation,’ ” id. (quoting 24 Pa. Stat. § 5104(3) ). As to practical or functional liability, PHEAA argued that Pennsylvania was functionally liable for a judgment against PHEAA because Pennsylvania statutes require PHEAA to deposit its commercially generated revenues with the state Treasury and require the Treasurer's approval of any payment from state Treasury funds. We rejected that argument, however, given that the statute requiring the deposit also explicitly granted control over those funds to PHEAA, not the Treasurer, and the funds were held in a segregated account within the Treasury. See id. at 138–39. Because PHEAA had control over “substantial ‘moneys' [that] derive exclusively from its own operations,” id. at 138, “any judgment in this case [would be paid] with [PHEAA's] own moneys from its segregated fund,” id. at 139, and we therefore concluded that Pennsylvania would not be functionally liable for any judgment against PHEAA. And because there was no functional or legal liability, we held that the first arm-of-state factor weighed “heavily against holding that PHEAA is an arm of the state.” Id...