Opinion
No. C 00-1976 MHP.
December 15, 2004
ORDER
Re: Plaintiff's Motion for Partial Summary Judgment
On June 2, 2000, the United States brought this civil action against defendants St. Luke's Subacute Hospital and Nursing Centre, Inc. and Guy Seaton (collectively "defendants"), alleging violations of the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33, and of the common law in connection with cost reports that defendants submitted to Medicare. Now before the court is the United States' motion for summary adjudication as to the issue of defendants' liability under the FCA. Having considered the arguments presented and for the reasons stated below, the court enters the following memorandum and order.
The court's description of the investigation leading to defendants' indictment is described in greater detail in its October 15, 2002 order in the related criminal action against defendants, United States v. St. Luke's Subacute Hospital and Nursing Centre, Inc., No. CR 02-0044 MHP.
This action arises out of a scheme to defraud Medicare by inflating reimbursable nursing hours at defendants' care facility and providing falsified documentation to federal auditors in order to support such false claims. At all times relevant to the allegations in the United States' complaint, defendant St. Luke's Subacute Hospital and Nursing Centre, Inc. ("St. Luke's") operated a nursing facility located in San Leandro, California. Defendant Guy Seaton served as St Luke's chief executive officer ("CEO").
As a "subacute facility," St. Luke's provided care to patients with severe illness or injury who required more intensive services than ordinary nursing care could provide but did not require hospital acute care. See Cal. Admin. Code Title 22, § 51124.5. St. Luke's received compensation from the Medicare program for some of the cost of providing services to certain Medicare-eligible patients. In 1995, the Department of Health and Human Services ("DHS") Office of the Inspector General began an investigation into allegations that St. Luke's was fraudulently inflating the cost of the nursing services that it provided to Medicare beneficiaries. This investigation revealed evidence of an unusually high allocation of nursing costs to Medicare patients and fabricated nursing schedules to support defendants' fraudulent claims for reimbursement.
A. The Related Criminal Action
Based on the finding of the DHS investigation, a grand jury returned a six count indictment against both defendants on May 8, 2002. Winslow Decl., Exh. 2 (hereinafter "Indictment"). The indictment charged defendants with conspiracy to defraud the Medicare program in violation of 18 U.S.C. § 371 (Count 1), three counts of submitting false Medicare claims in violation of 18 U.S.C. § 287 (Counts 2-4), knowingly and willfully making false statements to Medicare auditors in violation of 18 U.S.C. § 1001 (Count 5), and obstructing a federal audit in violation of 18 U.S.C. § 1516 (Count 6). Among other things, the indictment alleged that defendants misrepresented the level of nursing care provided to Medicare patients in support of false claims for direct nursing services costs incurred in 1996, 1997, and 1998. Indictment ¶¶ 10, 14(a)-(c). These claims were subsequently paid by Mutual of Omaha, a fiscal intermediary acting on behalf of the Medicare program. See Winslow Decl., Exh. 1 at 1277-78 (Testimony of Charles Potter). The United States also alleged that defendants fabricated payroll reports and time cards by designating certain employees as working exclusively with Medicare patients when in fact these employees also provided care to non-Medicare eligible patients. Id. ¶¶ 11-12.
On December 19, 2002, a jury found defendants guilty on all counts charged. Winslow Decl., Exh. 6. The court entered judgments of conviction against both defendants on June 9, 2004.Id., Exhs. 3-4. Defendants' appeal of their conviction is currently pending before the Ninth Circuit. Defendants also continue to be involved in proceedings before the Medicare Provider Reimbursement Board ("PRRB") for the purpose of determining the amount of damages sustained by the United States.
B. The United States' Civil Claims
On June 2, 2000, the United States filed the instant civil action against defendants under the FCA, 31 U.S.C. § 3730(a). The allegations, now set forth in the United States' amended complaint filed on April 21, 2000, arise from the same series of transactions that led to defendants' criminal convictions. As in the criminal action, the United States alleges that defendants fraudulently inflated labor costs incurred in caring for Medicare patients and that in seeking reimbursement for these costs, they submitted false and fraudulent claims to the Medicare program. Pl.'s First Amended Compl. (hereinafter "FAC") ¶ 19. Based on these allegations, the amended complaint pleads three violations of the FCA, asserting that defendants: (1) knowingly submitted false claims for payment to the United States in violation of 31 U.S.C. § 3729(a)(1); (2) conspired to defraud the United States in violation of 31 U.S.C. § 3729(a)(3); and (3) knowingly made false statements to the United States in violation of 31 U.S.C. § 3729(a)(2). Id. ¶¶ 23-28. The complaint also alleges state law causes of action for payment by mistake, unjust enrichment, and breach of contract. Id. ¶¶ 29-34.
On March 6, 2001, the court ordered that proceedings in the civil action be stayed pending the resolution of the criminal proceedings against defendants. The stay remained in place until October 12, 2004, when the court granted the United States' motion to lift the stay in order to allow the United States to move for summary adjudication on the issue of defendants' liability under the FCA. That motion is now before the court. The United States argues that the entry of a final judgment in the criminal action estops defendants from denying that they are liable for civil damages and statutory penalties under the FCA. The court addresses this argument below.
LEGAL STANDARD
Summary judgment is proper when the pleadings, discovery, and affidavits show that there is "no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Material facts are those which may affect the outcome of the proceedings. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id. The party moving for summary judgment bears the burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of material fact.Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). On an issue for which the opposing party will have the burden of proof at trial, the moving party need only point out "that there is an absence of evidence to support the nonmoving party's case." Id.
Once the moving party meets its initial burden, the nonmoving party must go beyond the pleadings and, by its own affidavits or discovery, "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). Mere allegations or denials do not defeat a moving party's allegations. Id.;see also Gasaway v. Northwestern Mut. Life Ins. Co., 26 F.3d 957, 960 (9th Cir. 1994). The court may not make credibility determinations, Anderson, 477 U.S. at 249, and inferences drawn from the facts must be viewed in the light most favorable to the party opposing the motion. Masson v. New Yorker Magazine, 501 U.S. 496, 520 (1991). Nonetheless, even if summary adjudication of an entire claim is not warranted, Federal Rule of Civil Procedure 56(d) allows a court to grant partial summary judgment, thereby reducing the number of facts at issue in a trial. Fed.R.Civ.Pro. 56(d); State Farm Fire Cas. Co. v. Geary, 699 F.Supp. 756, 759 (N.D. Cal. 1987) (Patel, J.).
DISCUSSION
The question presented by the United States' motion for partial summary judgment is whether the doctrine of collateral estoppel precludes defendants from denying their liability for civil damages and statutory penalties under the FCA. In addition to relying on the common law doctrine, the United States asserts that the statutory collateral estoppel provision of the FCA bars relitigation of the issues determined in the criminal proceedings against defendants. Specifically, the United States cites 31 U.S.C. § 3731(d), which states:
Notwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730.
There is no question that the instant action alleging violations of 31 U.S.C. § 3729(a) falls within the scope of the FCA's statutory estoppel provision. See 31 U.S.C. § 3730(a) (authorizing the enforcement of section 3729 by the Attorney General). Thus, the principal issue to be resolved is whether the "essential elements" of the offense of which defendants have been convicted are sufficient to establish their liability in the civil action. The court addresses each of the United States' three FCA claims below.
I. Submission of False Claims. 29 U.S.C. § 3729(a)(1).
The first claim for relief in the United States' amended complaint alleges violations of 31 U.S.C. § 3729(a)(1), which imposes liability on any person who "knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval" and subjects defendants who submit such false claims to treble damages and civil penalties. Id. Thus, to prove its claim under section 3729(a)(1), the United States must prove three elements: "(1) a `false or fraudulent' claim; (2) which was presented, or caused to be presented, by the defendant to the United States for payment or approval; (3) with knowledge that the claim was false." United States v. Mackby, 261 F.3d 821, 826 (9th Cir. 2001) (quoting 31 U.S.C. § 3729(a)(1)), cert. denied, ___ U.S. ___, 124 S.Ct. 1657 (2004).
As noted above, on June 9, 2004, the court entered judgments of conviction in the criminal proceedings against defendants following a jury verdict finding defendants guilty on all counts of a six count indictment. Among the offenses of which defendants were convicted were three counts of presenting false claims in violation of 18 U.S.C. § 287. Winslow Decl., Exh. 6 at 2-3. Section 287 prohibits any person from making or presenting "any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent." Id. The court instructed the jury that in order to find defendants guilty under section 287, the United States must prove beyond a reasonable doubt that (1) defendants "knowingly presented . . . false claims to [DHS]" and (2) that they knew those claims were untrue at the time that they were submitted. Winslow Decl., Exh. 5 at 2257-58. In returning guilty verdicts on all three counts of presenting false claims, the jury found these facts to be true with respect to the Medicare reimbursement claims that defendants submitted for the years of 1996, 1997, and 1998. See id., Exh. 6 at 2-3. Thus, because the jury necessarily found to be true each element of the United States' claims under 31 U.S.C. § 3729(a)(1), the plain meaning of the FCA's statutory estoppel provision precludes defendants from denying their liability in the instant action.
Defendants do not dispute that proof of these facts is sufficient to establish the elements of the United States' claim for relief under 31 U.S.C. § 3729(a)(1). Nonetheless, they contend that the court should not apply collateral estoppel here because it would be unfair to do so while defendants' criminal convictions are pending on appeal. While it may be true that an issue of fairness is an important consideration in determining whether to apply the common law doctrine of collateral estoppel offensively against a defendant, see, e.g., Parklane Hosiery Co. v. Shore, 439 U.S. 322, 330-31 (1979), such concerns are for the most part inapposite to the application of the statutory estoppel provision of the FCA. Because section 3731(d) expressly states that its preclusive effect applies "[n]otwithstanding any other provision of law," the prudential limitations on the common law doctrine do not apply. Thus, absent a degree of unfairness that rises to the level of a due process violation — which defendants cannot credibly assert here — the court must interpret section 3731(d) to mean what it says: namely, that a final judgment in any criminal proceeding "shall estop . . . defendant[s] from denying the essential elements" of any offense in a subsequent civil proceeding brought under the FCA and arising out of the same transaction or occurrence. 31 U.S.C. § 3731(d).
Indeed, the United States seeks to apply the FCA's collateral estoppel provision to preclude defendants from denying facts were found to be true following a criminal trial by jury. At trial, defendants had a full and fair opportunity to present evidence to rebut the United States' case-in-chief, and the government bore the burden of proving each element of the offense beyond a reasonable doubt. In light of these facts, it is difficult to imagine circumstances where the application of the collateral estoppel doctrine would be more fair.
Nor is there any serious dispute that defendants' conviction is "final" for the purpose of applying the FCA's statutory estoppel provision. Section 3731(d) requires only that the party asserting the estoppel show there has been "a final judgment in favor of the United States" in a related criminal action. 31 U.S.C. § 3731(d). Defendants do not contest the fact that this court entered final judgments against both defendants on June 9, 2004; indeed, they must rely on the finality of those judgments in order to have standing to appeal their conviction. See 28 U.S.C. § 1291. Thus, because all of the requirements of the FCA's statutory estoppel provision have been satisfied, the court concludes that the judgments against defendants in the criminal action are sufficient to estop defendants from denying their civil liability for submitting false claims in violation of 31 U.S.C. § 3729(a)(1). The court therefore enters summary judgment to that effect.
II. Conspiracy to Violate False Claims Act. 31 U.S.C. § 3729(a)(3).
Having rejected defendants' attempts to avoid the application of the FCA's statutory estoppel provision to this action, the court turns to the United States' remaining FCA claims. The second claim for relief in the United States' amended complaint alleges that defendants conspired to defraud the United States in violation of 31 U.S.C. § 3729(a)(3). Section 3729(a)(3) states that any person who "conspires to defraud the Government by getting a false or fraudulent claim allowed or paid" shall be liable for treble damages and statutory penalties in a civil action brought by the United States. 31 U.S.C. § 3729(a)(3); see also 31 U.S.C. § 3730(a). General principles of civil conspiracy apply to this cause of action. United States ex rel. Durcholz v. FKW, Inc., 189 F.3d 542, 545 n. 3 (7th Cir. 1999). Thus, federal courts have consistently required a plaintiff seeking relief under section 3729(a)(3) to plead and prove (1) that the defendant conspired with one or more persons to get a false or fraudulent claim allowed or paid by the United States and (2) that one or more conspirators performed an act to effect the object of the conspiracy. See, e.g., United States ex rel. Taylor v. Gabelli, ___ F.Supp.2d ___, No. 03 Civ. 8762, 2004 WL 1719357, at *10 (S.D.N.Y. July 29, 2004); United States v. President Fellows of Harvard Coll., No. 00 Civ. 11977, 2004 WL 1447307, at *36 (D. Mass. June 28, 2004); United States ex rel. Atkinson v. Pennsylvania Shipbuilding Co. ("Atkinson I"), 255 F.Supp.2d 351, 371 (E.D. Pa. 2002).
A number of district courts have also also articulated the premise that plaintiffs who bring FCA civil conspiracy claims to prove that the United States suffered damages as a result of the conspirators' unlawful act or acts. See, e.g., United States ex rel. Biddle v. Board of Trustees, C 91-20618-RMW, 1995 WL 456345, at *1 (N.D. Cal. July 28, 1995) (Whyte, J.) (quotingBlusal Meats, Inc. v. United States, 638 F.Supp. 824, 828 (S.D.N.Y. 1986)), aff'd, 161 F.3d 533 (9th Cir. 1998), cert. denied, 526 U.S. 1066 (1999); see also United States v. Bouchey, 860 F.Supp. 890, 893 (D.D.C. 1994) (citing United States ex rel. Stinson, Lyons, Gerlin Bustamante, P.A. v. Provident Life Accident Ins. Co., 721 F.Supp. 1247, 1259 (S.D. Fla. 1989)); see also John T. Boese, 1 Civil False Claims and Qui Tam Actions § 2.01[C][5], at 2-32 to -33 (2d ed. Supp. 2003) ("The express language of Section 3729(c)(3) requires that the `false or fraudulent claim' must be `allowed or paid.' This language requires actual payment and thus, actual damages."). There is no Ninth Circuit precedent directly on point. This court's observation in Biddle that a plaintiff seeking to bring an FCA civil conspiracy action bears the burden of proving "that the United States suffered damages as a result of the false or fraudulent claim", 1995 WL 456345, at *1, was merely a quotation from the Southern District of New York's decision in Blusal Meats, 638 F.Supp. at 824. Biddle did not reach this issue; it dealt only with whether a false claim had been paid. Reading further in Blusal Meats that court expressly states that "[p]roof that a false claim was actually presented to or paid by the government as a result of the conspiracy is not necessary for a defendant to be held liable for the civil penalty . . . under § 3729[a](3)." Id. at 828.
Blusal Meats is thus in keeping with this court's interpretation of the plain meaning of section 3729(a)(3). Section 3729(a)(3) imposes liability on any person "who conspires to defraud the Government by getting a false or fraudulent claim allowed or paid" and provides for civil penalties of up to $10,000 regardless of the actual damages suffered by the United States. 31 U.S.C. § 3729(a)(3). That is sufficient to recover civil penalties. If the United States wishes to recover actual damages against any person who submits (or conspires to submit) false claims against the federal government, even though damages may be difficult or impossible to prove, it may do so and not limit itself to the statutory penalties. However, any attempt to read an actual damages requirement into the statute would negate the deterrent effect of this statutory damages provision. Thus, because a contrary interpretation would contradict both the plain meaning and the clearly expressed intent of 31 U.S.C. § 3729(a)(3), the court holds that the United States need not prove actual damages in order to establish defendants' liability for conspiracy to submit false claims. Thus, to establish a claim for civil conspiracy under the FCA, the United States need only prove (1) that the defendant conspired with one or more persons to get a false or fraudulent claim allowed or paid by the United State and (2) that one or more conspirators performed an act to effect the object of the conspiracy. See, e.g., Taylor, 2004 WL 1719357, at *10.
In reaching this conclusion, the court recognizes that a number of district court decisions have implied that state civil conspiracy laws supply the rules of decision for FCA conspiracy claims brought pursuant to 31 U.S.C. § 3729(a)(3). See, e.g., United States ex rel. Reagan v. East Tex. Med. Ctr. Reg'l Healthcare Sys., 274 F. Supp. 2d 824, 857 (S.D. Tex. 2003) (applying Texas law), aff'd, 384 F.3d 168 (5th Cir. 2004);United States ex rel. Atkinson v. Pennsylvania Shipbuilding Co., ("Atkinson II"), No. Civ. A. 94-7316, 2004 WL 1686958, at *4 (E.D. Pa. July 28, 2004) (applying Pennsylvania law). It is also true that under California law, a plaintiff seeking to hold a defendant liable on a civil conspiracy theory must prove that damages resulted from the act or acts done in furtherance of the conspiracy. Doctors' Co. v. Superior Court, 49 Cal. 3d 39, 44 (1989). However, even assuming that Congress' drafting of section 3729(a)(3) left room for the court to fill a "gap" in the statute by borrowing the elements of a state law cause of action, the rules of decision for filling such gaps are provided by federal common law. See United States ex rel. Green v. Northrop Corp., 59 F.3d 953, 960 (9th Cir. 1995) (applying federal common law to qui tam action), cert. denied, 518 U.S. 1018 (1996). Although a federal court may borrow such common law rules from analogous state law causes of action, a state law rule of decision cannot be permitted to "frustrate specific objectives of the federal program." Id. at 961 (quoting Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1458 (9th Cir. 1986)); see also United States v. Kimbell Foods, Inc., 440 U.S. 715, 728 (1979). For the reasons stated above, the deterrent effect of the FCA's statutory damages provision would be negated if the court adopted California's actual damages requirement. Accordingly, the court need not address whether borrowing the elements of a state law cause of action for purposes of interpreting the FCA would otherwise be appropriate.
In the criminal proceedings related to this action, defendants were charged with and convicted of conspiring to submit false claims to the Medicare program and to obtain fraudulently payment therefrom in violation of 18 U.S.C. § 371. "Three elements establish a conspiracy under section 371: [a]n agreement to achieve an unlawful objective, an overt act in furtherance of the illegal purpose, and the requisite intent to defraud the United States." United States v. Tuohey, 867 F.2d 534, 537 (9th Cir. 1989) (citations omitted). The indictment against defendants alleged that they "knowingly and intentionally conspire[d] to make false statements and defraud the United States of its right to have . . . federal Medicare program funds disbursed in accordance with the laws of the United States." Indictment ¶ 9. The court instructed the jury that proof of the conspiracy charge required the United States to show that: (1) there was an agreement between two or more persons to commit the crime charged in the indictment; (2) defendants became members of the conspiracy knowing of at least one of its objects and intending to accomplish it; and (3) one of the members of the conspiracy performed at least one overt act in furtherance of the conspiracy. Winslow Decl., Exh. 5 at 2253. The jury found defendants guilty of conspiracy. Id., Exh. 6 at 1-2. The verdict also identified a number of overt acts committed in furtherance of the conspiracy, finding that defendants submitted false claims to the Medicare fiscal intermediary for nursing services costs incurred in 1996, 1997, and 1998 and that St. Luke's employees prepared and presented a binder containing false nursing schedules and logs to Medicare auditors in August 1999.Id.; Indictment ¶ 14(a)-(c), (g). Under 31 U.S.C. § 3731(d), defendants are estopped from denying these facts in the instant action. The court therefore holds as a matter of law that defendants are liable for civil conspiracy in violation of 31 U.S.C. § 3729(a)(3) and grants the United States' motion of summary judgment as to that cause of action.
III. Making False Records. 31 U.S.C. § 3729(a)(2).
The United States' final claim for relief under the FCA alleges that defendants "knowingly ma[de], use[d], or cause[d] to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government" in violation of 31 U.S.C. § 3729(a)(2). Id. The requirements for proving a civil claim for making false records are similar to the elements of claim for relief under 31 U.S.C. § 3729(a)(1) discussed in Section I, supra. However, unlike section 3729(a)(1), a person may be liable for making or using false records under section 3729(a)(2) without proof of "presentment" to the relevant government agency; rather, the plaintiff need only show either that the defendant knowingly made or used falsified records in order to obtain payment from the United States or that he or she directed someone else to make or use such a record.See United States ex rel. Riley v. St. Luke's Episcopal Hospital, 355 F.3d 370, 379 (5th Cir. 2004) (holding that although the parties stipulated that defendants did not file claims for payment, that fact "does not exonerate them" from liability under section 3729(a)(2)).
As noted above, the jury in the related criminal action found that defendants committed a number of overt acts in furtherance of their conspiracy to defraud Medicare. Specifically, the jury concluded that defendants submitted false nursing services reimbursement claims in three separate years and prepared and presented a binder containing false nursing schedules and logs to Medicare auditors. Winslow Decl., Exh. 6 at 1-2; Indictment ¶ 14(a)-(c), (g). These findings are sufficient to establish that defendants knowingly made or used false records for the purpose of defrauding the United States. Thus, because defendants are estopped from denying these facts, the court concludes that there is no material dispute of fact regarding defendants' liability under 31 U.S.C. § 3729(a)(2) and grants the United States' motion for summary judgment as to that cause of action.
CONCLUSION
For the reasons stated above, plaintiff's motion for partial summary judgment as to the issue of defendants' liability under the FCA is GRANTED. The court adjudges defendants liable for violations of the 31 U.S.C. § 3729(a)(1)-(3) arising out of the submission of false Medicare reimbursement claims for nursing services costs incurred in 1996, 1997, and 1998. Further proceedings in this action related to determining the amount of damages for which defendants are liable, including plaintiff's request for civil penalties under 31 U.S.C. § 3729(a), shall remain stayed.
In addition to moving for summary adjudication as to liability, the United States urges the court to impose civil penalties pursuant 31 U.S.C. § 3729(a). As the United States observes, section 3729(a) directs courts to award statutory penalties of "not less than $5,000, and not more than $10,000" for each violation of its provisions. 31 U.S.C. § 3729(a). However, in lifting its order to stay proceedings in this action, the court observed that it was doing so for the limited purpose of allowing the United States to move for summary judgment as to defendants' liability under the FCA. Order Lifting Stay at 2. In so limiting its order, the court concluded that in the interest of judicial economy, it would allow proceedings before the PRRB to move forward before adjudicating the United States' civil claim for damages. See id. at 1-2. The court sees no reason to abandon that approach and has no motion before it to do so. Because the court will be in a better position to assess the appropriate statutory penalties after it has determined the amount of compensatory damages to which the United States is entitled, the court defers assessing such penalties until that time.
IT IS SO ORDERED.