United States v. Empire Educ. Corp.

• Decision Date: 13 August 2013
• Docket Number: No. 1:11–CV–0035.,1:11–CV–0035.
• Parties: UNITED STATES of America, the Commonwealth of Massachusetts, and the State of New York, ex rel. Lawrence Klein, Plaintiffs, v. EMPIRE EDUCATION CORPORATION and Does 1–50, Defendants.
• Court: U.S. District Court — Northern District of New York

959 F.Supp.2d 248

UNITED STATES of America, the Commonwealth of Massachusetts, and the State of New York, ex rel. Lawrence Klein, Plaintiffs,

v.EMPIRE EDUCATION CORPORATION and Does 1–50, Defendants.

No. 1:11–CV–0035.

United States District Court,

N.D. New York.

Aug. 13, 2013.

Douglas J. Rose, Esq., Tully Rinckey PLLC, Albany, NY, for Plaintiff–Relator.

John L. Sinatra, Jr., Esq., Kevin J. Espinosa, Esq., Michelle L. Merola, Esq., Hodgson Russ LLP, Buffalo, NY, for Defendants.

MEMORANDUM–DECISION and ORDER

DAVID N. HURD, District Judge.

I. INTRODUCTION

Plaintiff-relator Lawrence Klein (“Klein”) filed this qui tam action against Empire Education Corporation (“Empire” or “defendant”) and Does 1–50 pursuant to the federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729–33; the Massachusetts False Claims Act, Massachusetts General Laws, Chapter 12, Section 5A et seq.; and the New York False Claims Act, New York State Finance Law, Section 187 et seq. The United States, Massachusetts, and New York have elected not to intervene.

Defendant filed a motion to dismiss pursuant to Federal Rules of Civil Procedure (“Rule ––––”) 12(b)(6) and 9(b). Plaintiff opposed, and defendant replied. The United States submitted a Statement of Interest pursuant to 28 U.S.C. § 517. The motion was taken on its submissions without oral argument.

II. FACTUAL BACKGROUND

Klein worked for Empire from March 11, 2008 until his discharge on December 8, 2009, in the position of Director of Career Services at defendant's Pittsfield, Massachusetts campus. Klein purports to recover damages and civil penalties on behalf of the United States, Massachusetts, and New York, arising out of false claims approved and presented by Empire to obtain amounts from the United States Department of Education (“DOE”) pursuant to Title IV of the Higher Education Act (“HEA”).

When individuals apply for student loans from the government, educational institutions such as Empire are eligible for Title IV funds on behalf of their students through a variety of government programs, such as the Federal Pell Grant Program, the Federal Supplemental Educational Opportunity Grant Program, the Federal Perkins Loan Program, and the Federal Family Education Loan Program (collectively, “Title IV Programs”). These institutions also request funds for eligible students through DOE programs provided by Massachusetts and New York.

The federal government, Massachusetts, and New York do not pay these funds directly to the student applicants, but rather to the educational institution or a third party intermediary lender. The government or intermediary lender wires these funds directly into the institution's account, and the institution credits the funds against the student's tuition and other fees the student owes the institution. The federal government, state agencies, and non-profit organizations (“Guaranty Agents”) guarantee the federal and state funds that the student is borrowing and the educational institution receives. The Guaranty Agents are accordingly subsidized and re-insured by the DOE.

When students graduate or withdraw from an educational institution, they are responsible for paying back the federal government, Massachusetts, and/or New York, whether they complete their schooling or drop out. If a student defaults on the payment of these funds, a Guaranty Agent reimburses the applicable federal or state government lender. If the Guaranty Agent cannot collect from the student, then the DOE reimburses the Guaranty Agent.

As a condition of participation in Title IV programs, an educational institution is required to enter into a written Program Participation Agreement (“PPA”) with the United States Secretary of Education. In signing the PPA, the institution agrees that it will comply with the various federal statutes and regulations that serve as conditions of participation for the Title IV programs. Klein alleges that Empire engagedin numerous practices which violated these conditions of participation. Thus, he contends that, by executing the PPA, defendant falsely certified to the federal government, Massachusetts, and New York that it was in compliance with “all federal regulations, federal laws, state laws, and that [Empire] meet[s] the proper requirements of the accrediting agency in order to receive federal financial student loans.” Compl. ¶ 18.

Klein alleges: Empire made misrepresentations regarding the transfer of credit policies (First Cause of Action); Empire made misrepresentations regarding the nature of its educational programs, employment and graduation statistics, and other information (Second Cause of Action); Empire fraudulently certified grade point averages to procure federal and state funding to pay the tuition of students who would otherwise be ineligible to receive funding (Third Cause of Action); Empire unlawfully tied student recruitment to adverse employment actions (Fourth Cause of Action); Empire unlawfully discharged Klein in retaliation for engaging in protected activities (Fifth Cause of Action); Empire violated the Massachusetts False Claims Act (Sixth Cause of Action); and Empire violated the New York False Claims Act (Seventh Cause of Action).

III. LEGAL STANDARDSA. Federal and State False Claims Acts

The FCA is intended to recover damages from those who defraud the federal government. It imposes liability on those who knowingly present, or cause to be presented, false or fraudulent claims for payment, or knowingly make, use, or cause to be used, false records or statements to get false claims paid or approved. 31 U.S.C. § 3729(a)(1)(A) & (B). Private persons, known as relators, may file qui tam actions—actions on behalf of the government—for violations of § 3729. Id. § 3730(c)(3); see also United States ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13, 16 (2d Cir.1990).

The Massachusetts False Claims Act “is modeled on the federal FCA” and “courts use the federal FCA for guidance in interpreting the M[assachusetts] FCA.” United States ex rel. Ciaschini v. Ahold USA Inc., 282 F.R.D. 27, 37 (D.Mass.2012) (internal quotation marks omitted). Similarly, the New York False Claims Act is “nearly identical to the [federal] FCA in all material respects.” United States ex rel. Assocs. Against Outlier Fraud v. Huron Consulting Grp., Inc., 929 F.Supp.2d 245, 256 (S.D.N.Y.2013). Therefore, Klein's state law claims are subject to the same standard of review under Rule 9(b).

B. Rule 12(b)(6)

In order to survive a motion to dismiss under Rule 12(b)(6), “a complaint 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, 663, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007)). All reasonable inferences must be drawn in favor of the complainant. SeeBank of N.Y. v. First Millennium, Inc., 607 F.3d 905, 922 (2d Cir.2010). However, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949. Instead, “[w]hile legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Id. at 679, 129 S.Ct. at 1950.

C. Rule 9(b)

It is well-settled law that “claims brought under the FCA fall within the express scope of Rule 9(b).” Gold v. Morrison–Knudsen Co., 68 F.3d 1475, 1477 (2d Cir.1995). A plaintiff alleging fraud under Rule 9(b) “must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). The allegations of fraud must: “(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.” Dobina v. Weatherford Int'l Ltd., 909 F.Supp.2d 228, 240 (S.D.N.Y.2012) (internal quotation marks omitted).

In the context of the FCA, the plaintiff-relator must allege “facts as to time, place, and substance of the defendant's alleged fraud, specifically the details of the defendant['s] allegedly fraudulent acts, when they occurred, and who engaged in them.” United States ex rel. Chapman v. Office of Children & Family Servs. of the State of N.Y., No. 1:04–CV–1505, 2010 WL 610730, at *4 (N.D.N.Y. Feb. 16, 2010) (internal quotation marks omitted), aff'd,423 Fed.Appx. 104 (2d Cir.2011) (summary order). Klein must not only allege with particularity the “underlying schemes and other wrongful activities” but also the resulting “submission of fraudulent claims.” United States ex rel. Mooney v. Americare, Inc., No. 06–CV–1806, 2013 WL 1346022, at *3 (E.D.N.Y. Apr. 3, 2013) (internal quotation marks omitted). Thus, “pleadings invariably are inadequate unless they are linked to allegations, stated with particularity, of the actual false claims submitted to the government that constitute the essential element of an FCA qui tam action.” Id. (internal quotation marks omitted).

Although Rule 9(b) provides that “[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally ... the relaxation of Rule 9(b)'s specificity requirement for scienter must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994) (internal quotation marks omitted). Therefore, plaintiff is required “to allege facts that give rise to a strong inference of fraudulent intent.” Id.

IV. DISCUSSION

Empire moves to dismiss the complaint for failure to state a claim pursuant to Rule 12(b)(6) and for failure to allege fraud with particularity pursuant to Rule 9(b). It argues that: (1) plaintiff cannot state a claim pursuant to Rule 12(b)(6) under the FCA nor state law by relying on an implied false certification theory with a statute that is a condition to participation in a...