United States ex rel. McSherry v. SLSCO, L.P.
| Docket Number | 18-CV-5981 (ARR) (SLT) |
| Decision Date | 15 September 2023 |
| Parties | UNITED STATES OF AMERICA, ex rel. MICHAEL MCSHERRY and LISA PALMA MCSHERRY, Plaintiffs/Relators, v. SLSCO, L.P. (DBA SLSCO, LTD. AND/OR SULLIVAN LAND SERVICES, LTD.); TODD P. SULLIVAN; JOHN R. SULLIVAN; WILLIAM W. SULLIVAN; BAUMGARDNER HOUSE RAISING, LLC (DBA BAUMGARTNER HOUSE LIFTING); ANDREW W. BAUMGARDNER; THE CITY OF NEW YORK; THE NEW YORK CITY DEPARTMENT OF BUILDINGS; THE NEW YORK CITY DEPARTMENT OF DESIGN AND CONSTRUCTION; THE NEW YORK CITY MAYOR'S OFFICE OF HOUSING RECOVERY; NEW YORK CITY BUILD IT BACK; and JOHN DOES NUMBER ONE THROUGH TEN, fictitious names, real names unknown, individuals or entities submitting or facilitating False Claims as set forth herein; Defendants. |
| Court | U.S. District Court — Eastern District of New York |
NOT FOR ELECTRONIC OR PRINT PUBLICATION
Michael McSherry and Lisa Palma McSherry (“the McSherrys” or “the Relators”) bring this action pursuant to the federal False Claims Act (“FCA”), 31 U.S.C § 3729 et seq., and the New York False Claims Act (“NYFCA”), N.Y. State Fin. Law § 187 et seq. Now before me is a motion to dismiss the McSherrys' qui tam claims against the City of New York (“the City”)[1] for failure to state a claim or plead fraud with the requisite particularity. Because the Relators have failed to state a claim under 31 U.S.C. § 3729(a)(1)(A) or § 3729(a)(1)(C), and because the City is not subject to suit under the NYFCA, I grant the City's motion and dismiss the claims against the City.
After Hurricane Sandy damaged thousands of homes in 2012, Congress allocated funds to the City so that it could elevate homes vulnerable to damage from future hurricanes. Compl. ¶¶ 3234. The McSherrys applied to have their home elevated and the City approved their application, assigning defendants SLSCO, L.P. and Baumgardner House Raising (collectively, along with Todd P. Sullivan, John R. Sullivan William W. Sullivan, and Andrew W. Baumgardner, “the Contractors”) to perform the necessary work. Id. ¶¶ 25, 35-36.
The City's internal processes required the Contractors to document the work to be performed and the materials to be used in a Scope of Work (“SOW”); each SOW reflected the monetary value of the materials and labor necessary for the work (the “Negotiated Cost”) and a formula dictated that the Contractors would be paid twice that amount. Id. ¶¶ 38-39, 43-46, 46 n.7. These internal processes also required the Contractors to set forth any change to a SOW in an updated SOW or a Change Order, and required the City to review any variance in work or the amount the Contractors would be paid. Id. ¶¶ 40, 47.
The McSherrys contend that the Contractors fraudulently applied for and received payment for work that they either did not perform, performed incorrectly or with deficient materials, or for which they received duplicative payments. Id. ¶ 49. They allege that the Contractors installed wooden stairs even though the SOW reflected metal stairs, and that the Contractors applied for and received payment for installing the more expensive metal stairs. Id. ¶¶ 52-65. The Contractors applied for and received payment for installing new fiber cement siding, the Relators allege, but in fact installed only excess scrap siding from another home. Id. ¶¶ 66-69. Despite never installing shrubs reflected in the SOW, the McSherrys allege, the Contractors applied for and received payment for installing those shrubs; after the Relators successfully demanded that the Contractors install the shrubs, the Contractors applied for and received payment for the shrubs again, rendering that payment duplicative. Id. ¶¶ 72-79. The McSherrys allege that although the Contractors applied for and received payment for new smoke detectors, they never installed those detectors. Id. ¶¶ 8185. The Contractors allegedly applied for and received payment for installation of certain siding, but they installed it incorrectly, rendering it not fire resistant and voiding its warranty. Id. ¶¶ 8799. Although the Contractors applied for and received payment for the installation of fire-resistant fiber cement trim, the Relators allege, they in fact installed less expensive, non-fire-resistant material. Id. ¶¶ 103-10. Similarly, although the Contractors applied for and received payment for the installation of fireproof taped sheetrock, the McSherrys allege, they installed less expensive, non-fireproof, non-taped sheetrock instead. Id. ¶¶ 112-16. Finally, the Relators allege that the Contractors applied for and received payment for the installation of triple-lined flue pipe, but they in fact installed only single-walled flue pipe, which is less expensive and violates the New York City Fire Code. Id. ¶¶ 123-34.
The McSherrys further allege that the City was aware of and facilitated these fraudulent payments. Id. ¶ 51. Specifically, they allege that City employees attended a walkthrough that was meant to certify the home's readiness for occupancy and secure the release of money from the City to the Contractors, and that the City in fact certified the home for occupancy despite flaws in the Contractors' work. Id. ¶¶ 140, 144, 150. They also allege that they notified the City of the excessive and fraudulent nature of the charges submitted by the Contractors. Id. ¶ 148. By paying claims for work that was either not completed or completed defectively, the McSherrys allege, the City was complicit in the Contractors' purported fraud. Id. ¶¶ 151-60.
There are two components to fraud under 31 U.S.C. § 3729(a)(1)(A): The defendant “must submit or cause the submission of a claim for payment to the government, and the claim for payment must itself be false or fraudulent.” United States ex rel. Chorches for Bankr. Est. of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, 83 (2d Cir. 2017) (quoting Hagerty ex rel. U.S. v. Cyberonics Inc., 844 F.3d 26, 31 (1st Cir. 2016)). The defendant must also act knowingly- that is, either with actual knowledge, deliberate ignorance of the truth, or reckless disregard of the truth. 31 U.S.C. § 3729(a)(1)(A); id. § 3729(b)(1)(A). “Actual knowledge” refers to “whether a person is aware of information.” United States ex rel. Schutte v. SuperValu Inc., 143 S.Ct. 1391, 1400 (2023) (quotation marks omitted). “Deliberate ignorance” refers to defendants “who are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement's truth or falsity.” Id. “Reckless disregard,” meanwhile, refers to defendants “who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.” Id. at 1401. In assessing scienter, the FCA is concerned with “what the defendant thought when submitting the false claim-not what the defendant may have thought after submitting it.” Id.
To survive a motion to dismiss when contending that a defendant caused a false claim to be submitted to the government, a relator must allege that the defendant's behavior was a “substantial factor in bringing about [the] filing” of a false claim and that the filing was “a normal consequence of the situation created by that scheme.” U.S. ex rel. Arnstein v. Teva Pharms. USA, Inc., No. 13-CV-3702, 2019 WL 1245656, at *27 (S.D.N.Y. Feb. 27, 2019) (quoting United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 244-45 (3d Cir. 2004)); see also U.S. ex rel. Kolchinsky v. Moody's Corp., 162 F.Supp.3d 186, 195 (S.D.N.Y. Feb. 4, 2016) . To state a claim of conspiracy to violate the FCA under 31 U.S.C. § 3729(a)(1)(C), meanwhile, a relator must allege that “(1) the defendant conspired with one or more persons to get a false or fraudulent claim allowed or paid by the United States and (2) one or more conspirators performed any act to effect the object of the conspiracy.” United States ex rel. CKD Project, LLC v. Fresenius Med. Care Holdings, Inc., 551 F.Supp.3d 27, 48 (E.D.N.Y. 2021) (quoting United States v. Spectrum Painting Corp., No. 19-CV-2096, 2020 WL 5026815, at *15 (S.D.N.Y. Aug. 25, 2020)), aff'd, No. 21-2117, 2022 WL 17818587 (2d Cir. Dec. 20, 2022). The first prong of the test for conspiracy requires the relator to allege that the defendant and the entity who submitted the claim “agreed to defraud the government.” U.S. ex rel. Ladas v. Exelis, Inc., 824 F.3d 16, 27 (2d Cir. 2016) (quotation marks omitted); see also United States ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905, 917 (6th Cir. 2016) ()
Because qui tam complaints filed under the FCA are claims of fraud, they are subject to Federal Rule of Civil Procedure 9(b), which requires the pleading party to “state with particularity the circumstances constituting fraud.” Chorches, 865 F.3d at 81 (quoting Fed.R.Civ.P 9(b)). Generally, this requires a complaint to “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Ladas, 824 F.3d at 25 (quotation marks omitted). A qui tam FCA complaint typically must also “provide details of actual bills or invoices submitted to the government.” Chorches, 865 F.3d at 93. The adequacy of particularized allegations under Rule 9(b), however, is “case- and context-specific,” and the Second Circuit has...
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