Keith Sanders v. American-Amicable Li ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
10-29-2008
Keith Sanders v. American-Amicable Li
Precedential or Non-Precedential: Precedential
Docket No. 07-3429
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 07-3429
UNITED STATES OF AMERICA
EX REL KEITH SANDERS;
KEITH SANDERS
v.
AMERICAN-AMICABLE LIFE
INSURANCE COMPANY OF TEXAS;
CENTRAL NATIONAL BANK
OF WACO, TEXAS
Keith Sanders,
Appellant
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 03-cv-04327)
District Judge: Honorable Gene E. K. Pratter
Submitted Under Third Circuit LAR 34.1(a)
October 27, 2008
Before: SLOVITER, GREENBERG, Circuit Judges,
and IRENAS,* Senior District Judge
(Filed: October 29, 2008)
________
*
Honorable Joseph E. Irenas, Senior United States District
Judge for the District of New Jersey, sitting by designation.
Harry P. Litman
Litman Law Firm
Pittsburgh, PA l5219
Jonathan K. Tycko
Tycki & Zavareei
Washington, DC 20036
Attorneys for Appellant Keith Sanders
Jessica L. Ellsworth
Catherine E. Stetson
Mitchell E. Zamoff
Hogan & Hartson
Washington, DC 20004
Attorneys for Appellee American-Amicable Life
Insurance Company of Texas
Joanna J. Cline
Stephen G. Harvey
Pepper Hamilton
Philadelphia, PA l9l03
Attorneys for Appellee Central National Bank
of Waco, Texas
OPINION OF THE COURT
SLOVITER, Circuit Judge.
Keith Sanders, the Relator in this qui tam action brought
on behalf of the United States, appeals the District Court’s order
dismissing his claim pursuant to the False Claims Act (the
“FCA”), 31 U.S.C. §§ 3729-3733, for failure to state a claim.
I.
2
Between 1996 and 2002, Sanders intermittently worked
as a commissioned insurance agent for defendant American-
Amicable Life Insurance Company (“American-Amicable”).
Sanders alleges that American-Amicable, together with
defendant Central National Bank (“Central”) (hereafter jointly
referred to as “American-Amicable”), violated the FCA by
submitting or causing to be submitted false claims to the United
States government arising out of defendants’ scheme to sell
military personnel life insurance in contravention of regulations
governing such sales.
According to Sanders, American-Amicable specifically
targeted “unsophisticated and young enlisted personnel,” for the
sale of what is purportedly a “savings plan” that is “in reality an
insurance policy sold by American Amicable.” App. at 43. If a
service member elected to participate, an American-Amicable
agent would complete allotment and direct deposit forms to
establish direct payment out of the service member’s salary
through an account at Central to American-Amicable.1 Sanders’
complaint alleges that American-Amicable agents falsified
information on each allotment form, such as stating that the
allotment was for a savings account rather than an insurance
premium, in order to avoid military regulations that limited the
use of the allotment system to pay life insurance premiums. The
complaint also alleges that American-Amicable sought to
circumvent a mandatory seven-day waiting period on allotments
for such premiums.2 Finally, Sanders alleges that, as a result of
this scheme, the defendants prepared false claims to be
submitted by the military personnel “in an extensive series of
1
The military’s allotment system is analogous to direct
deposits from a salary in the private sector and allows service
members to make payments of salary directly to certain third
parties, such as certain family members and creditors.
2
See 32 C.F.R. Part 50 App. A (2007) (“For personnel in
pay grades E-4 and below . . . at least seven calendar days shall
elapse between the signing of a life insurance application and the
certification of a military pay allotment for any supplemental
commercial life insurance.”).
3
transactions,” App. at 48, thereby causing the United States to
suffer damages “in an amount that has yet to be determined but
that is expected to be in the millions of dollars.” App. at 50.
After investigating Sanders’ allegations, the government
declined to intervene in June 2006 and Sanders elected to bring
the action individually. The government, however, did sue
American-Amicable under the Fraud Injunction Statute, 18
U.S.C. § 1345, based on essentially the same conduct at issue in
Sanders’ complaint. That suit was settled by an agreement by
American-Amicable to provide $10 million in compensation to
current and former policyholders as well as to accept certain
limitations on marketing its products to military personnel.
In this action, American-Amicable moved to dismiss
Sanders’ qui tam action pursuant to Fed. R. Civ. Pro. 12(b)(6).
The District Court granted the motion, holding that Sanders did
not plead facts that would, if true, prove the existence of any
false “claim”–a prerequisite for liability under all of Sanders’
FCA theories–because Sanders failed to “establish any actual or
potential economic loss to the federal government” arising out of
the defendants’ alleged conduct. App. at 18-19 (emphasis
deleted).3
II.
As relevant here, the FCA imposes civil penalties and/or
treble damages on any person who “knowingly presents, or
causes to be presented, to [a federal officer] a false or fraudulent
claim for payment or approval,” 31 U.S.C. § 3729(a)(1),
“knowingly makes, uses, or causes to be made or used, a false
record or statement to get a false or fraudulent claim paid or
approved by the Government,” 31 U.S.C. § 3729(a)(2), or
“conspires to defraud the Government by getting a false or
fraudulent claim allowed or paid,” 31 U.S.C. § 3729(a)(3). All
of these provisions require, as a threshold matter, that a “claim”
3
We have jurisdiction over the District Court’s final order
dismissing Sanders’ claims pursuant to 28 U.S.C. § 1291. We
exercise plenary review of a district court’s dismissal under Fed. R.
Civ. Pro. 12(b)(6).
4
be submitted to the government by some party. The term
“‘claim’ includes any request . . . for money or property which
is made to a contractor, grantee, or other recipient if the United
States Government provides any portion of the money or
property which is requested . . . .” 31 U.S.C. § 3729(c).
Relying in part on Hutchins v. Wilentz, Goldman &
Spitzer, 253 F.3d 176, 179 (3d Cir. 2001), the District Court
noted that Sanders “does not describe any process through which
the United States actually expends federal funds with respect to
any fraudulent claims, as opposed to merely depositing . . . a
portion of an employee’s salary per that employee’s direction.”
App. at 16. Thus, Sanders identified no “claim” against the
government, because the “amount of total compensation the
United States pays to the employee does not change” as a result
of the alleged fraud, App. at 17, and “the Relator cannot
establish any actual or potential economic loss to the federal
government.” App. at 18-19 (emphasis in original).
Sanders contends that the District Court erroneously
added an “economic loss test” to the FCA. Sanders correctly
notes that a party can be subject to FCA liability (i.e. civil
penalties) even where the government suffers no monetary
injury. See Hutchins, 253 F.3d at 183 (noting that “recovery
under the False Claims Act is not dependent upon the
government’s sustaining monetary damages”) (quoting Varljen
v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001)).
This is so, for example, where the government discovers that a
claim is false before it makes payment, see Rex Trailer Co. v.
United States, 350 U.S. 148, 153 n.5 (1956) (approving
imposition of civil penalty under an earlier version of the FCA
where the fraud was discovered prior to payment), or where the
government in essence passes on the cost of the false claim to a
third party, see United States ex rel. Hayes v. CMC Electronics
Inc., 297 F. Supp. 2d 734, 737-39 (D.N.J. 2003) (holding that
relator stated a claim under FCA where defendant allegedly
inflated price of military equipment sold to the federal
government, notwithstanding fact that the government
subsequently resold the equipment at that inflated price).
Although there may be FCA liability even where the government
suffers no injury, that does not answer the threshold question
5
whether a false claim has been submitted to the government.
As we stated in Hutchins, the FCA “is only intended to
cover instances of fraud ‘that might result in financial loss to the
Government.’” 253 F.3d at 183 (quoting United States v.
Neifert-White Co., 390 U.S. 228, 232 (1968)). Thus, a party
makes “false or fraudulent claim[s] for payment or approval” to
the government within the meaning of the statute only where
such claims “cause or would cause economic loss to the
government.” Hutchins, 253 F.3d at 179. We held in Hutchins
that no claim was made against the government where a FCA
relator alleged that a law firm submitted inflated bills to a
bankruptcy court because the bills would be paid out of the
assets of the bankrupt entity and not from the Federal Treasury.
Id. at 183-84.
Similarly, the fraudulent scheme alleged by Sanders did
not involve any claim against the government inasmuch as
allotment payments are not made on behalf of the United States,
but simply are made from the salary of military personnel as they
direct. See Department of Defense Financial Management
Regulation 7000.14-R, Vol. 7A, Definitions (2008) (defining
“allotment” as a “definite portion of the pay and allowances of a
person in the Military Service, which is authorized to be paid to
a qualified allottee”). It follows that the alleged fraud could not
cause the government, as opposed to the defrauded military
personnel, to suffer any economic loss.4 Therefore, the District
Court correctly held that no claim was made against the
government; as a result, the FCA is inapplicable. See also
United States ex rel. Costner v. URS Consultants, Inc., 153 F.3d
667, 677 (8th Cir. 1998) (“[O]nly those actions by the claimant
which have the purpose and effect of causing the United States
4
Sanders contends that the alleged fraud did cause the
government to suffer economic harm, including the cost of
investigating the fraud and reductions in troop morale. Appellant’s
Brief at 35-37. However, this argument again fails to recognize the
distinction between whether a claim was made against the
government and whether the government was injured by the
alleged fraud. Unless a FCA relator establishes the former, the
latter is irrelevant.
6
to pay out money it is not obligated to pay, or those actions
which intentionally deprive the United States of money it is
lawfully due, are properly considered ‘claims.’”).
Sanders attempts to escape this conclusion by arguing that
the statutory definition of “claim” in 31 U.S.C. § 3729(c) is
satisfied because the government “provide[d]” the requested
money directly to the defendants in response to a “request” (i.e.
the allotment forms). Nothing in the plain language of § 3729(c)
suggests that the federal government “provides” funds when it
simply releases the salary of its employees (per their
instructions) directly to a third party. Here, it was the defrauded
military personnel who furnished or made money available to the
defendants–and not the federal government–because it was those
personnel who decided to participate in the fraudulent “savings
programs.”5
Finally, Sanders argues that the funds at issue were in fact
government property until they were disbursed to the defendants,
and therefore the government did provide its own money in
response to a request from the defendants. For support, Sanders
notes that sovereign immunity bars creditors from attaching or
garnishing funds in the Treasury. See Buchanan v. Alexander,
45 U.S. 20, 21 (1846) (holding that creditor could not attach
seaman’s salary while held by government purser). However,
this does not change our conclusion that it was the defrauded
military personnel, rather than the government, that “provided”
money to the defendants.
In sum, the District Court appropriately dismissed
Sanders’ claim because he alleged no “claim” against the
5
FCA liability under § 3729(a) clearly extends to parties
that cause some third person to submit a false claim to the
government. Thus, the problem with Sanders’ theory is not that it
was military personnel, rather than the defendants directly, that
submitted the falsified allotment forms. Instead, the problem is
that, notwithstanding the submission of those forms, no “claim”
was made to the government’s–as opposed to the
personnel’s–money or property.
7
government’s money or property.
III.
For the above-stated reasons, we will affirm the decision
of the District Court.
8