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United States ex rel. Scollick v. Narula

United States District Court, District of Columbia

July 31, 2017

UNITED STATES OF AMERICA, ex. rel. ANDREW SCOLLICK, Plaintiff-Relator,
v.
VIJAY NARULA, et al., Defendants.

          MEMORANDUM OPINION

          Royce C. Lamberth United States District Judge

         I. INTRODUCTION

         Plaintiff-relator Andrew Scollick originally brought this case against eighteen defendants for violations of the False Claims Act (“FCA”) in connection with a scheme to obtain certain set-aside government contracts through fraudulent means. Plaintiff-relator alleged four causes of action against all of the defendants: (1) submitting or causing to be submitted false or fraudulent claims to the United States in violation of 31 U.S.C. § 3729(a)(1)(A) (presentment claims); (2) making or causing to be made or used false statements or records material to false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1)(B) (false statement claims); (3) knowingly avoiding or decreasing obligations to the United States in violation of 31 U.S.C. § 3729(a)(1)(G) (reverse false claims); and (4) conspiracy to violate the FCA in violation of 31 U.S.C. § 3729(a)(1)(C).

         The following defendants moved to dismiss for failure to state a claim: Hudson Insurance Co., Hanover Insurance Co., Centennial Surety Associates, Inc., Michael Schendel, Ajay K. Madan, Vijay Narula, Optimal Solutions and Technologies, Inc. (“OST”), CB Construction Group, Inc. (“CB”), Dilip Parekh, Shobha N. Mehta, Melvin G. Goodweather, Citibuilders Solutions Group, and Guatam Chitnis.[1] On October 14, 2016, this Court granted in part and denied in part the motions. See United States ex. rel. Scollick v. Narula, 215 F.Supp.3d 26 (D.D.C. 2016). The Court found that plaintiff-relator failed to state a claim against defendants Hudson Insurance Co., Hanover Insurance Co., Centennial Surety Associates, Inc., Michael Schendel, CB Construction, Dilip Parekh, Shobha N. Mehta, Melvin G. Goodweather, and OST and granted their motions to dismiss. Id. at 30.

         It found, however that “plaintiff-relator has stated claims against defendants Citibuilders, Ajay K. Madan, and Vijay Narula for certain FCA violations-presenting false claims in violation of 31 U.S.C. § 3729(a)(1)(A), making false statements in violation of 31 U.S.C. § 3729(a)(1)(B), and conspiracy in violation of 31 U.S.C. § 3729(a)(1)(C) (Counts I, II, IV).” Id. Plaintiff-relator “fail[ed] to state a claim for reverse FCA violations (31 U.S.C. § 3729(a)(1)(G)) against any of the defendants, ” including defendants Citibuilders, Madan, and Narula. Id. at 36.

         Plaintiff-relator now moves, pursuant to Federal Rule of Civil Procedure 15(a), for leave to amend his Complaint in order to address the pleading shortcomings in his original Complaint. See Mot. for Leave to Amend, ECF No. 131. He asserts the same four causes of action under the FCA. The following defendants have filed oppositions: 1) Hudson Insurance [ECF No. 133]; 2) Centennial Surety Associates and Michael Schendel [ECF No. 137]; Vijay Narula, Ajay Madan, and OST [ECF No. 138]; Shobha Mehta [ECF No. 145]; Hanover Insurance [ECF No. 146]; and Melvin Goodweather [ECF No. 157]. The defendants argue that plaintiff-relator's motion should be denied because the Amended Complaint fails to cure the pleading deficiencies previously identified by this Court, and therefore that amendment would be futile.

         II. BACKGROUND

         The factual background of this case is set forth in this Court's prior opinion regarding defendants' motions to dismiss. See United States ex. rel. Scollick v. Narula, 215 F.Supp.3d 26 (D.D.C. 2016). The Court need not repeat all of the details here, but, for clarity, will include an excerpt from that opinion regarding the general background of this case:

The factual allegations in this case center around an alleged scheme to defraud the United States government by submitting bids to obtain government construction contracts. Plaintiff-relator claims that the defendants participated in this scheme by fraudulently claiming or obtaining service-disabled veteran-owned small business (“SDVOSB”) status, HUBZone status, or section 8(a) status for certain companies to bid on and obtain set-aside contracts, when in fact the bidders did not qualify for the statuses claimed. Plaintiff-relator alleges that defendants, as part of this scheme, falsely certified these statuses, made false claims regarding past performance, hid certain aspects of the management and control of the companies at issue, and hid or falsified certain information regarding the employees of the companies at issue.
1The central actors in this scheme are Neil Parekh, Ajay K. Madan, Vijay Narula, Centurion Solutions Group (“CSG”), and Citibuilders Solutions Group (“Citibuilders”). Parekh, Narula, and Madan allegedly engaged in conspiracy to defraud the government by bidding on SDVOSB construction contracts although none of them were service disabled veterans. Accordingly, Parekh, Narula, and Madan established CSG as a “front company” for the purpose of allowing them to bid on and obtain SDVOSB set-aside contracts. To qualify for SDVOSB status, defendant Gogia-a service disabled veteran-was allegedly falsely identified as a 100% service disabled owner of CSG, although he did not actually exercise control or ownership over CSG. Parekh, Narula, Madan, and Gogia also falsely identified that CSG operated out of a HUBZone when in fact it did not. Plaintiff-relator alleges that CSG then submitted false claims and statements to the government. Plaintiff-relator claims that the CSG bids contained falsified information regarding past performance, and false representations concerning CSG's employees. Finally, plaintiff-relator claims that CSG obtained millions of dollars in government contracts as a result of this fraudulent scheme, and lists the specific contracts allegedly fraudulently obtained.
With regard to Citibuilders, plaintiff-relator alleges that Parekh established Citibuilders to branch out his fraudulent SDVOSB contracting activity. According to the Complaint, Parekh falsely certified Citibuilders as a service-disabled veteran-owned entity-utilizing defendant Goodweather's service-disabled veteran status even though Parekh was the de facto owner and controller of Citibuilders, and misrepresented Citibuilders' past performance and project personnel. Plaintiff-relator claims that Citibuilders obtained millions of dollars in government contracts as a result of this fraudulent scheme, and lists the specific contracts allegedly fraudulently obtained. Plaintiff-relator claims that the creation of Citibuilders by Parekh caused a rift between himself and Narula and Madan. Plaintiff-relator claims that Narula is the alter ego of OST, that Neil Parekh, Dilip Parekh, CB, and Citibuilders are all alter egos of each other, that Narula, Neil Parekh, Madan, OST, and CB are joint-alter egos of CSG, and that Neil Parekh, Goodweather, and Citibuilders are joint alter egos.
Finally, Plaintiff-relator claims that similar fraud was committed in the name of a third company, KCGI. Specifically it alleges that Narula, Parekh, Madan, Guatam Chitnis, and Anita Chitnis schemed to use KCGI to defraud the government by seeking Small Business Administration section 8(a) contracts and/or service disabled contracts. On December 21, 2015 plaintiff-relator, with the consent of the U.S. government, filed a notice of voluntary dismissal with respect to KCGI, Guatam Chitnis, and Anita Chitnis.

Id. at 30-32 (internal citations omitted). The Amended Complaint tells essentially the same story in greater detail and with additional allegations. Where necessary, the Court will discuss the new allegations with respect to the defendants at issue.

         The Court found that plaintiff-relator failed to state a claim for any FCA violations against defendants Hudson, Hanover, Centennial, Schendel, Mehta, Goodweather, OST, CB Construction, and Dilip Parekh. It found that plaintiff-relator sufficiently stated claims for the presentment of false claims, making false statements, and conspiracy in violation of the FCA, but failed to state a claim for reverse false claims against defendants Citibuilders, Narula, and Madan. Defendants Amar Gogia, CSG, and Neil Parekh did not move to dismiss, but this Court sua sponte dismissed the reverse false claim count against them as well.

         Plaintiff now brings claims in the Amended Complaint under the same four causes of action: (1) submitting or causing to be submitted false or fraudulent claims to the United States in violation of 31 U.S.C. § 3729(a)(1)(A) (presentment claims) (Count I); (2) making or causing to be made or used false statements or records material to false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1)(B) (false statement claims) (Count II); (3) knowingly avoiding or decreasing obligations to the United States in violation of 31 U.S.C. § 3729(a)(1)(G) (reverse false claims) (Count III); and (4) conspiracy to violate the FCA in violation of 31 U.S.C. § 3729(a)(1)(C) (Count IV). He has removed defendants Dilip Parekh, KCGI, Inc., Guatam Chitnis, and Anita Chitnis from the Amended Complaint. He brings Counts I, II, and IV against all of the remaining defendants. He only brings Count III (reverse false claims) against defendants Hudson, Hanover, Centennial, and Schendel (the “insurance defendants”). As noted above, only defendants Hudson, Hanover, Centennial, Schendel, OST, Mehta, and Goodweather oppose plaintiff-relator's attempt to assert these claims. After reviewing the relevant legal standards, the Court will examine whether leave should be granted as to each of these defendants.

         III. LEGAL STANDARDS

         A. Leave to Amend

         Parties have a right to amend their pleadings once as a matter of course. Fed.R.Civ.P. 15(a)(1). After this, a party may amend if the opposing party consents, or if the court grants leave. Fed.R.Civ.P. 15(a)(2). Courts “should freely give leave when justice so requires.” Id. Whether to grant leave is within the discretion of the District Court. Foman v. Davis, 371 U.S. 178, 182 (1962). Reasons for denying leave to amend include “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment.” Id. “An amendment would be futile if it merely restates the same facts as the original complaint in different terms, reasserts a claim on which the court previously ruled, fails to state a legal theory, or could not withstand a motion to dismiss.” Robinson v. Detroit News, Inc., 211 F.Supp.2d 101, 114 (D.D.C. 2002).

         If a party alleges that amendment would be futile because the amended complaint could not withstand a motion to dismiss, the court's “review . . . is, for practical purposes, identical to review of a Rule 12(b)(6) dismissal based on the allegations in the amended complaint.” In re Interbank Funding Corp. Sec. Litig., 629 F.3d 213, 216 (D.C. Cir. 2010) (internal quotation marks omitted). To survive a 12(b)(b) motion to dismiss “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations and quotation marks omitted). Plaintiffs must provide more than labels, conclusions, or “formulaic recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id.

         As this Court previously explained, “Federal Rule of Civil Procedure 9(b) applies to FCA actions.” Scollick, 215 F.Supp.3d at 35. Thus,

An FCA plaintiff “must state with particularity the circumstances surrounding the defendants' allegedly false claims, as required by Rule 9(b) of the Federal Rules of Civil Procedure.” [United States ex rel. Totten v. Bombardier Corp., 286 F.3d 542, 544 (D.C. Cir. 2002)]. The “time, place, and contents of the false representations” must be pleaded with specificity, as these are the “element[s] of fraud about which the rule is chiefly concerned.” Id. “[A]n FCA plaintiff must identify the ‘who, what, when, where, and how of the alleged fraud.'” United States v. Kellogg Brown & Root Servs., Inc., 800 F.Supp.2d 143, 153 (D.D.C. 2011). In sum, “[c]ombining Rules 8 and 9(b), we require that ‘the pleader . . . state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud, ” and that he “identify individuals allegedly involved in the fraud.” U.S. ex rel. Williams v. Martin- Baker Aircraft Co., 389 F.3d 1251, 1256 (D.C. Cir. 2004).

Id.

         B. Elements of FCA Claims

         This Court previously identified the elements of the four FCA violations at issue. They are as follows:

The elements of presentment claims are as follows: “(1) the defendant submitted a claim to the government, (2) the claim was false, and (3) the defendant knew the claim was false.” Pencheng Si v. Laogai Research Found., 71 F.Supp.3d 73, 91 (D.D.C. 2014) (internal quotation marks omitted). The elements of a false statement claim are nearly the same as those for a presentment claim, with the exception that a false statement claim “requires evidence that the defendant made a false statement to the government, as opposed to the submission of a false claim for payment.” Id. at 87. Defendants must make these claims or statements “knowingly, ” that is, “by (1) having actual knowledge, (2) acting in deliberate ignorance, or (3) acting in reckless disregard.” U.S. ex rel. K & R Ltd. P'ship v. Massachusetts Hous. Fin. Agency, 530 F.3d 980, 983 (D.C. Cir. 2008).
A reverse false claim occurs when a person “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G). In contrast to the claims described above, “[a] reverse false claim is any fraudulent conduct that ‘results in no payment to the government when a payment is obligated.'” Pencheng Si, 71 F.Supp.3d at 88. “Whereas a traditional false claim action involves a false or fraudulent statement made to the government to support a claim for money from the government, a typical reverse false claim action involves a defendant knowingly making a false statement in order to avoid having to pay the government when payment is otherwise due.” Id.
Finally, to state a claim for conspiracy under the FCA, the plaintiff-relator must allege “(1) that ‘an agreement existed to have false or fraudulent claims allowed or paid' to the government, (2) that each alleged member of the conspiracy ‘joined that agreement, ' and (3) that ‘one or more conspirators knowingly committed one or more overt acts in furtherance of the object of the conspiracy.'” Id. at 89 (quoting United States ex rel. Miller v. Bill Harbert Int'l Constr., Inc., 608 F.3d 871, 899 (D.C. Cir. 2010)). An action for conspiracy cannot exist absent underlying tortious conduct, and therefore “there can be no liability for conspiracy where there is no underlying violation of the FCA.” Id.

Id. at 35-36.

         Presentment and false statement claims can rest on a theory of direct presentment/making of false statements or indirect presentment/making of false statements. Indirect presentment or false statements occur when a defendant causes a false claim to be presented or a false statement to be made. The Court previously summarized the law surrounding indirect presentment/false statements as follows:

To determine whether a defendant who did not actually submit a claim or make a false statement “has ‘caused' the submission of a false claim or false statement, a court must look at the degree to which that party was involved in the scheme that results in the actual submission.” United States ex rel. Tran v. Computer Scis. Corp., 53 F.Supp.3d 104, 127 (D.D.C. 2014). Courts should therefore consider whether the plaintiff has alleged that the defendant's conduct was “at least a substantial factor in causing, if not the but-for cause of, submission of false claims.” [United States v. Toyobo Co., Ltd., 811 F.Supp.2d 37, 48 (D.D.C. 2011)] (finding that the causation requirement was satisfied by allegations that the non-submitting defendant, a fiber manufacturer, marketed the fiber to vest manufacturers for use and “induced with the prospect of refunds, rebates, and reimbursements . . . manufacturers and other companies in the [fiber] supply chain to continue producing [fiber-related] products-and selling them to the government-when questions arose” regarding the fiber's suitability). Courts have credited indirect presentment and false statement claims in the following circumstances: “when the non-submitting party takes advantage of an unwitting intermediary, thereby causing that party to submit a false claim;” when “the non-submitter was the driving force behind an allegedly fraudulent scheme;” when “they had agreed to take certain critical actions in furtherance of the fraud;” and when the “non-submitter continued to do business with an entity upon becoming aware that that entity was submitting false claims.” Tran, 53 F.Supp.3d at 126-27. Because the FCA “penalizes a person for his own acts, not for the acts of someone else, ” United States v. Bornstein, 423 U.S. 303, 312 (1976), failure to act is insufficient. “Courts generally require that the defendant affirmatively act in order to impose liability under the FCA, particularly when a plaintiff alleges that the defendant ‘caused' the submission of false claims.” United States ex rel. Landis v. Tailwind Sports Corp., 51 F.Supp.3d 9, 50 (D.D.C. 2014).

         IV. ANALYSIS

         Plaintiff-relator argues that his Amended Complaint cures the pleading deficiencies identified by this Court and now sufficiently alleges claims for the presentment of false claims, making false statements, and conspiracy against all of the defendants, and alleges a reverse false claims violation against defendants Hudson, Hanover, Centennial, and Schendel (the insurance defendants). The Court will consider in turn whether these claims are sufficiently alleged against the defendants who have raised oppositions to plaintiff-relator's motion.

         A. OST

         The Court previously summarized the facts alleged in plaintiff-relator's original Complaint regarding defendant OST as follows:

OST is a corporation located in Washington, D.C. Vijay Narula is the president and CEO of OST. Ajay K. Madan is the chief operating officer of OST and is a 49% owner of CSG. Narula is alleged to be the alter ego of OST, and Narula, Madan, and OST are alleged to be (some of) the alter egos of CSG. Regarding OST, the Complaint alleges that CB's business operations were relocated to OST's office, that CSG's business operations occurred out of OST's headquarters, and that Narula, Madan, and Parekh prepared CSG bid proposals while working out of OST's office space. It alleges that OST never qualified for SDVOSB or HUBZone status and was not a small business enterprise. The Complaint further alleges that CSG's bid proposals “include[d] statements pertaining to work alleged to have been completed at defendant OST's corporate headquarters . . . [but] CSG never performed any such construction activity.” Narula allegedly “would personally provide past performance survey responses [regarding the OST project] to the government.” Scollick, 215 F.Supp.3d at 32 (internal citations omitted).

         1. Vicarious Liability

         Plaintiff-relator originally alleged, in part, that defendant Narula was the alter ego of OST and that Narula, Neil Parekh, Madan, OST, and CB were joint-alter egos of CSG. This Court found that despite plaintiff-relator's “attempt to hold some of the defendants liable for the actions of CSG, Citibuilders, and KCGI . . . [by] alleg[ing] that many of the defendants [were] alter egos of each other and [were] therefore jointly and severally liable for each other's conduct, ” he “failed to sufficiently allege facts showing that the alter ego doctrine applie[d].” Id. at 36. Specifically, plaintiff-relator relied on legal conclusions that the defendants had “such a unity of interest and ownership that the individuality of each entity ceased and they functioned as a single entity, ” and failed to “identify the specific factual allegations in the Complaint that show commingling, manipulation, and diversion [of funds and assets].” Id. at 37. Importantly, he “failed to allege any facts showing that an inequitable result would follow if the corporate veil remains unpierced.” Id.

         Plaintiff-relator now argues that OST is vicariously liable for the acts of its agents and employees (specifically, Narula and Madan) under a theory of respondeat superior. “[A] corporation is liable under the FCA for the fraudulent acts of its agents even if the corporation received no benefit from its fraud.” U.S. ex rel. McCready v. Columbia/HCA Healthcare Corp., 251 F.Supp.2d 114, 118 (D.D.C. 2003) (Lamberth, J.). “Under the doctrine of respondeat superior, an employer may be held liable for the acts of his employees committed within the scope of their employment.” Boykin v. D.C., 484 A.2d 560, 561 (D.C. 1984).

         The Court finds that plaintiff-relator has sufficiently alleged that OST is liable under a theory of respondeat superior, and therefore that ...


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