United States v. Narco Freedom, Inc.

• Citation: 95 F.Supp.3d 747
• Decision Date: 02 April 2015
• Docket Number: No. 14 Cv. 8593JGK.,14 Cv. 8593JGK.
• Parties: UNITED STATES of America, Plaintiff, v. NARCO FREEDOM, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

95 F.Supp.3d 747

UNITED STATES of America, Plaintiff

v.NARCO FREEDOM, INC., Defendant.

No. 14 Cv. 8593JGK.

United States District Court, S.D. New York.

Signed April 2, 2015.

Cristine Irvin Phillips, Kirti Vaidya Reddy, Carina Hyatt Schoenberger, Christopher Blake Harwood, Rebecca C. Martin, United States Attorney's Office, New York, NY, for Plaintiff.

Linda Jane Clark, Joseph Anthony Murphy, Hiscock & Barclay, LLP, Albany, NY, Karl Jay Sleight, Harris Beach PLLC, Albany, NY, for Defendant.

OPINION AND ORDER

JOHN G. KOELTL, District Judge:

The Government brought this action against Narco Freedom, Inc. (“Narco Freedom”). The Government alleges that Narco Freedom is violating 42 U.S.C. § 1320a–7b, the “Anti–Kickback Statute,” by providing below-market housing at Narco Freedom's “Freedom Houses” only to persons that attend Narco Freedom's Medicaid subsidized drug treatment programs.

The Government now has moved for a preliminary injunction pursuant to 18 U.S.C. § 1345. The preliminary injunction would prohibit Narco Freedom from conditioning residence in the Freedom Houses on enrollment in Narco Freedom drug treatment programs, from requiring any individual residing in a Freedom House to move within the first thirty days of establishing residence, and from closing any Freedom House without advanced notice. The Government also requests that the Court impose obligations on Narco Freedom involving recordkeeping, reporting, and the terms of Narco Freedom's relationships with its patients.

On November 3, 2014, the Court issued—with the parties' consent—a temporary restraining order enjoining the defendant from evicting individuals who are participating in outpatient programs not controlled by Narco Freedom and enjoining the defendant from closing any Freedom House without advanced notice.

Narco Freedom consented to continue the temporary restraining order pending the Court's decision on the Government's motion for a preliminary injunction. From December 2, 2014, to December 4, 2014, the Court held an evidentiary hearing. At the request of both parties, the Court held the case in abeyance while the parties discussed a possible resolution.

On March 13, 2015, The New York State Attorney General issued a superseding indictment against Gerald Bethea, Narco Freedom's then chief executive officer (“CEO”), Richard Gross, Narco Freedom's then Comptroller, and Narco Freedom itself (among others). On March 18, 2015, Bethea and Gross were arrested. On March 19, 2015, the Government filed an order to show cause for the appointment of a temporary receiver.

On March 24, 2015, the New York Office of Medicaid Inspector General (“OMIG”) informed Narco Freedom that a fifty percent withhold had been placed on Narco Freedom's current and future Medicaid payments. OMIG Letter Ex. B. On March 26, 2015, OMIG informed Bethea and Gross that they would be excluded from participating in the New York State Medicaid program, effective March 31, 2015. See OMIG Letter Ex. A. And on April 1, 2015, OMIG informed Narco Freedom that it would be excluded from the New York State Medicaid program, effective April 6, 2015. See OMIG Letter Ex. C.

Having reviewed the record and assessed the credibility of the witnesses, the Court now makes the following findings of fact and reaches the following conclusions of law pursuant to Rule 65 of the Federal Rules of Civil Procedure. For the reasons stated below, the Government's motion is granted.

I.

A.

Narco Freedom provides drug treatment programs in the Bronx, Queens, Brooklyn, and Long Island. Narco Freedom serves over 3,000 clients, many of whom are referred to Narco Freedom by the New York City Department of Probation, the New York State Division of Parole, the United States Parole Commission, and the Brooklyn and Manhattan drug courts. See Bethea Decl. ¶ 5; Def.'s Ex. A at 1; Hr'g Tr. at 413. Narco Freedom's drug programs include, among others, drug-free outpatient treatment and methadone treatment. Hr'g Tr. at 424.

The drug treatment programs are regulated by the New York Office of Alcohol and Substance Abuse Services (“OASAS”) and other federal and state agencies. Hr'g Tr. at 413. For individuals enrolled in drug-free outpatient programs, Medicaid reimburses all costs of up to seventy-five treatments. O'Connor Decl. ¶ 46.

Narco Freedom also runs “three-quarter houses,” known as “Freedom Houses,” for individuals who participate in Narco Freedom's outpatient treatment programs. Hr'g Tr. at 339, 414. These three-quarter houses do not provide in-house services to tenants, are not licensed or regulated, and have no formal arrangement with any government agency. O'Connor Decl. ¶ 7; Gov't Ex. S (“Kent Decl.”) ¶¶ 11–12; Hr'g Tr. at 43. The staff members at the Freedom Houses do not have mental health training, and some Freedom Houses staff as few as one employee for every one hundred residents. Hr'g Tr. at 470.

Narco Freedom has opened a total of twenty-one Freedom Houses; at the time of the hearing, eighteen remained operational. Gov't Ex. A. Approximately 1,500 people currently live in the Freedom Houses. Bethea Decl. ¶ 4; Hr'g Tr. at 414. And as of November 10, 2014, over 471 parolees resided in Freedom Houses. Gov't Ex. T (“Herzog Decl.”) ¶ 9. The sizes of the Freedom Houses vary, with occupancy ranging from thirty to two hundred people. Hr'g Tr. at 390–91; Gov't Ex. B.

The Freedom Houses receive funding from two sources. First, many residents assign their monthly housing allowances from the New York City Human Resources Administration (“HRA”), currently $215 per month, to Narco Freedom. Hr'g Tr. at 374–75. Second, Narco Freedom uses the funds that it receives from its other programs to cover the costs of the Freedom Houses. Hr'g Tr. at 428–29. Although Narco Freedom employees testified that the HRA allowances are insufficient to cover the costs of the Freedom Houses, Hr'g Tr. at 314, 374–75, 429, Narco Freedom did not submit documentary evidence showing the actual costs of running the Freedom Houses.

Narco Freedom leases the Freedom Houses from third-party realtors. See Gov't Ex. C; Gov't Ex. AA (“Deutchman Decl.”) ¶¶ 9–11. Jay Deutchman is the largest single owner of the buildings that are leased to Narco Freedom. Deutchman Decl. ¶ 15. Deutchman testified that Alan Brand, the former CEO of Narco Freedom, informed him that Brand used a formula to determine whether to lease and open a Freedom House. The formula added the $215 per person per month from the HRA to the Medicaid funds that Narco Freedom expected to receive from providing drug treatment to the persons residing at the Freedom Houses. Brand would then subtract the costs—such as rent payments and staff salary—to determine whether opening a new Freedom House would be profitable. Hr'g Tr. at 314–15; see also Deutchman Decl. ¶¶ 16–17.

When explaining Brand's business model, Deutchman testified: “Well, there are two sides to it, and one side is you can't control your clients if you don't know where they are. And number two, it's just a mathematical formula that if you're at the end of the day, after you look at all your income, and you look at your expenses, and there will be a profit, then it makes sense. So the more you house, the more income you bring in for the organization.” Hr'g Tr. at 317.¹

B.

Narco Freedom provides housing only to patients that participate in Narco Freedom's drug treatment programs. Hr'g Tr. at 428–29. Donna DeCicco, a consultant who provides marketing services for Narco Freedom, testified that individuals could not live in a Freedom House “unless [they] were a client of Narco Freedom's outpatient [treatment programs].” Hr'g Tr. at 347. According to DeCicco, Brand hired her to fill the Freedom Houses through outreach to potential referral sources. Hr'g Tr. at 342. She testified that “when I made my referrals, they were people that needed a residence and outpatient treatment.” Id. at 344. She also explained that when marketing Narco Freedom to potential referral sources, “[i]t was pretty clear when we went in there that we were there to represent an outpatient treatment program that provided living for their clients that needed somewhere to live.” Hr'g Tr. at 348.

Dr. Kamala Greene, the clinical and administrative director of addiction treatment at Bronx Lebanon Hospital Center (“Bronx–Lebanon”), testified that Narco Freedom markets its housing to the inpatient counselors at Bronx–Lebanon. Hr'g Tr. at 251–52. One promotional flyer from Narco Freedom heavily emphasizes the Freedom Houses as an aspect of Narco Freedom's clinical services. See Gov't Ex. N. Dr. Greene also testified that the Bronx–Lebanon counselors contact DeCicco when they wish to find housing for clients that complete inpatient programs. See Hr'g Tr. at 252–53.

Finally, Gerald Bethea, the CEO of Narco Freedom at the time of the hearing, testified that Narco Freedom's “budgetary model” depends on requiring all Freedom House residents to attend Narco Freedom's substance abuse programs. Hr'g Tr. at 429.

C.

When an individual arrives at a Freedom House, he or she must sign a “Code of Conduct” and a “Waiver of Tenant[']s Rights.” The Code of Conduct requires “[a]ll participants ... to attend one (1) group treatment or counseling session a day, seven days a week, in their designated program with Narco Freedom Inc., or as approved by Program Director.” Gov't Ex. D, at 9. The Waiver of Tenant's Rights also states that “all residents, as a pre-supposed condition in residing at the program, will attend said resident[']s designated outpatient program.” Gov't Ex. E. ¶ 8.

The Waiver of Tenant's Rights, as its name would suggest, also limits the rights of Narco Freedom residents. Paragraph four provides that a “resident is excluded from all claims of ‘Landlord–Tenant Law it's per uniform Landlord and Tenant Act: set part 11, section 1.202(1) Residence as an institution.’ Therefore the resident does not have ANY claims of further stay or rights unto the property if the resident is asked to leave the program...