Aldridge v. Corporate Management ( 2023 )

Case: 21-60568 Document: 00516864897 Page: 1 Date Filed: 08/21/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
August 21, 2023
No. 21-60568 Lyle W. Cayce
consolidated with Clerk
No. 22-60145
United States of America, ex rel, James Aldridge,
Plaintiff—Appellee,
United States of America,
Intervenor—Appellee,
versus
Corporate Management, Incorporated, a Mississippi
corporation (CMI); Stone County Hospital, Incorporated;
H. Ted Cain, professionally and in his individual capacity; Julie Cain;
Thomas Kuluz,
Defendants—Appellants.
Appeals from the United States District Court
for the Southern District of Mississippi
USDC No. 1:16-CV-369
Before Jones, Ho, and Wilson, Circuit Judges.
Cory T. Wilson, Circuit Judge:
This False Claims Act case involves Medicare reimbursements to
Stone County Hospital (SCH), a critical access hospital in Wiggins,
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Mississippi. This appeal follows a nine-week jury trial, which resulted in a
$10,855,382 verdict (approximately $32,000,000 trebled) for the
Government. At trial, the Government proved that Appellants (a corporate
management company, company owner, corporate executives, and SCH) 1
defrauded Medicare out of millions over the span of twelve years by
overbilling for the owner’s and his wife’s compensation despite little or no
reimbursable work.
Generally speaking, Appellants’ arguments on appeal fail to undercut
the jury’s verdict. But the Government’s dilatory conduct over the
protracted procedural history of this case gives pause, even if the
Government largely prevails today: The Government sought to extend the
seal entered by the district court pursuant to 31 U.S.C. § 3730(b)(3) eighteen
times and delayed its intervention in the relator’s action for eight years, all
while conducting one-sided discovery against Appellants. When Appellants
interposed the statute of limitations because of the Government’s dawdling,
the Government maintained its claims were timely. It does the same on
appeal. But the Government’s own sealed extension request memoranda,
which remain sealed to this day, demonstrate otherwise. As to the district
court’s final merits judgment, we therefore affirm in large part, reverse in
part, and remand.
The district court’s judgment in favor of the Government included an
order barring Appellants from dissipating their assets. Almost two years
later, the district court issued a temporary enforcement order that specifically
barred Appellants from selling a piece of real property. Appellants separately
appealed the enforcement of this post-judgment injunction. We
1
The term “Appellants” is used in referring to the defendants collectively;
however, defendant Starann Lamier is not part of the appeal.
2
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consolidated the appeals. Because we lack jurisdiction over the district
court’s enforcement injunction, we dismiss the latter appeal.
I.
A. The FCA
The False Claims Act (FCA) is “the Government’s primary litigative
tool for combatting fraud” against the Government. S. Rep. No. 99-345, at
2 (1986). The FCA imposes liability on anyone who “knowingly presents, or
causes to be presented, a false or fraudulent claim for payment or approval”
or “knowingly makes, or causes to be made, a false statement or record
material to a false claim.” 31 U.S.C. §§ 3729(a)(1)(A), (B). Violators of the
FCA are liable for civil penalties “plus 3 times the amount of damages which
the Government sustains because of” their conduct. Id. § 3729(a)(1).
FCA actions may be brought by the Attorney General or by a private
party, known as a qui tam relator, in the name of the United States. 31 U.S.C.
§§ 3730(a), (b)(1). The Government, if it so chooses, may intervene in a
relator’s action and “conduct[]” the litigation. Id. § 3730(b). If the
Government prevails in the litigation, the relator shall be awarded no less
than 15 percent but no more than 25 percent of the proceeds of the action or
settlement. Id. § 3730(d). When a qui tam relator brings an action under the
FCA, “[t]he complaint shall be filed in camera, shall remain under seal for at
least 60 days, and shall not be served on the defendant until the court so
orders.” Id. § 3730(b)(2). “The Government may, for good cause shown,
move the court for an extension of the time during which the complaint
remains under seal . . . [and] [t]he defendant shall not be required to respond
to any complaint filed under this section until 20 days after the complaint is
unsealed[.]” Id. § 3730(b)(3).
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B. Critical Access Hospitals and Medicare Reimbursement
“Critical access hospitals” serve rural populations who otherwise lack
access to healthcare via other nearby hospitals. To incentivize this access to
care, Medicare reimburses these hospitals at 101% of cost. 42 C.F.R. § 413.5(reimbursement parameters); § 413.64 (reimbursement procedures);
§ 413.70 (critical access hospital reimbursement). According to the
Government, the Centers for Medicare and Medicaid Services (CMS)
typically continue to reimburse a critical access hospital’s costs even when
allegations of fraud surface, in order to ensure access to care for underserved
Medicare beneficiaries. CMS later seeks recovery of the wrongful
overpayments. This practice is commonly known as “pay and chase.”
CMS delegates administration of Medicare’s critical access hospital
program to Medicare Administrative Contractors (MACs). MACs, also
called “Fiscal Intermediaries,” are contractors that handle provider
reimbursement services. MACs assist providers in interpretation and
application of Medicare reimbursement rules. 42 C.F.R. § 413.20(b). They
also act as Medicare’s oversight agents, auditing cost reports, setting
payment amounts, and identifying potential overpayments or fraudulent
claims. Aside from the FCA, which is used to combat fraud, CMS also has
an administrative process employed by MACs for recovering payments. See
CMS Provider Reimbursement Manual (PRM) Chapter 24, available at
https://www.cms.gov/Regulations and Guidance/Guidance/Manuals/Pap
er-Based-Manuals-Items/CMS021929. 2
2
The PRM provides that “[t]here are generally two ways in which repayment can
be made: (l) refund and (2) set-off, or a combination of these two.” PRM § 2409. If a MAC
finds that a provider furnished “excessive services which were neither reasonable nor
medically necessary . . . and has been billing for such services,” the MAC investigates the
claims and seeks repayment from the provider. PRM § 2409.2. Once the overpayment
amount is determined, the MAC arranges for repayment and may allow an extended set-
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Medicare sets reimbursement payments to critical access hospitals
using “cost reports,” which are statements detailing hospital operating costs
for the prior year. 42 C.F.R. § 413.20 (cost reporting principles). Medicare
regulations govern reimbursement of owner compensation. 42 C.F.R.
§ 413.9 (defining what constitutes a reasonable, necessary, and proper cost).
Medicare does not use a formula to set hospital owner and administrator
compensation. Rather, compensation is subject to a “test of reasonableness”
guided by the PRM.
The PRM provides that “[a] reasonable allowance of compensation
for services of owners is an allowable cost, provided the services are actually
performed in a necessary function.” “Necessary” means that “had the
owner not furnished the services, the institution would have had to employ
another person to perform those services.” Such services must be related to
patient care and be documented. See 42 C.F.R. § 413.20 (governing
necessary documentation for cost reimbursement). Owner compensation
must be limited to what is paid for comparable services by comparable
institutions and is controlled by the fair market value of the services provided
on the open market. The PRM disallows costs related to “managing or
improving the owner’s financial investments.” These compensation rules
also apply to an owner’s relative.
C. Appellants and Medicare Submissions at Issue
SCH is a 25-bed hospital in Wiggins, Mississippi, with a daily census
of less than 12 patients. Ted Cain, the sole owner of SCH, acquired the
hospital in 2001 and enrolled it as a critical access hospital with CMS. Ted
off period to avoid “financial hardship.” Id. If the provider objects to the MAC’s decision,
it may pursue an administrative appeal followed by judicial review. See 42 C.F.R.
§§ 405.1801 et seq. (appeal procedures); PRM Chapter 29 (appeal guidance).
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owned or operated multiple nursing homes over his career. Ted’s wife Julie
Cain served as SCH’s hospital administrator from 2003 to 2012. Julie also
held a nursing home administrator’s license and a social worker’s license.
Corporate Management, Inc. (CMI) served as a management
company for SCH and Ted’s other businesses. Ted is the owner and chief
executive officer of CMI. CMI served as SCH’s “home office,” providing
centralized administrative services, management support, and consulting
services for SCH and the other businesses under its management. Tommy
Kuluz served as CMI’s chief financial officer, and Starann Lamier served as
chief operations officer.
Two types of Medicare submissions are at issue in this case: SCH’s
cost reports and CMI’s home office cost reports. CMI annually submitted
both types of cost reports on behalf of SCH and itself. Kuluz gathered the
information for the cost reports but relied on an outside accounting firm to
prepare them. Ted reviewed the cost reports after their preparation.
SCH’s cost reports indicated the hospital was a critical access hospital
and catalogued hospital-specific costs such as doctors’ salaries and supply
costs. The reports identified the amounts SCH paid to CMI as a
management company but did not separately identify the compensation paid
to Ted. CMI’s cost reports enumerated its expenses as the management
company for numerous entities that Ted owned or controlled. CMI, through
Kuluz, allocated Ted’s compensation across these entities and, from 2004 to
2009, directly allocated much of Ted’s salary to SCH (via the CMI home
office report). From 2010 to 2015, CMI included Ted’s salary in a “pooled
allocation” of home office costs, meaning that his salary was allocated across
all businesses in proportion to their revenues.
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D. Procedural History
Relator James Aldridge worked at CMI and served as SCH’s CEO
from 2005 to 2006. He filed this action under seal in May 2007, alleging the
Cains and others had submitted false claims to Medicare. 3 His qui tam
complaint alleged that Appellants violated the FCA by inflating supply costs,
“ping-ponging” patients between nursing homes and SCH to manipulate the
facilities’ “swing bed” status, and improperly waiving copays and
deductibles. Aldridge filed an amended complaint in November 2009,
reasserting these allegations.
On August 13, 2007, the United States filed its first motion for an
extension of time, and of the initial seal period, to consider its election to
intervene. All told, the Government went on to file eighteen sealed motions
for extensions of time, the last on June 1, 2015.
On January 20, 2010, the Government moved for a partial lifting of
the seal to disclose Aldridge’s operative complaint to Appellants, and the
district court granted the motion. On March 9, 2010, the Government first
notified Appellants that it was investigating sealed qui tam allegations against
them and requested that they provide information to aid its investigation.
Initially cooperating, Appellants voluntarily produced thousands of
documents and provided numerous employees for interviews. In October
2011, after Appellants informed the Government they would cease their
3
On May 31, 2007, the district court granted Aldridge leave to file his first
complaint under seal, per 31 U.S.C. § 3730(b)(2). All documents filed in the case were to
remain under seal until further order of the district court. The case thus proceeded without
Appellants’ involvement or knowledge until the Government requested a partial lifting of
the seal almost three years later, to disclose Aldridge’s complaint to them and request their
cooperation in the investigation. Other portions of the case were unsealed over the
Government’s eight-year investigation, but several documents remain under seal,
including the Government’s series of seal extension memoranda, as discussed infra.
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voluntary compliance, the Government issued Civil Investigative Demands
(CIDs) for more materials and information. After objections and motions
practice, the district court enforced the CIDs, held Appellants in contempt,
and ordered the Cains, Kuluz, and Lamier to give depositions to Government
investigators.
Eight years after its initial extension motion, on September 18, 2015,
the Government intervened in Aldridge’s action. Its intervenor complaint
included a common law claim for unjust enrichment. The Government
thereafter filed an amended complaint in December 2015, adding a common
law claim for payment by mistake of fact. The Government’s amended
complaint alleged that Ted and Julie Cain and Kuluz took advantage of
Medicare’s 101% reimbursement rate to SCH to defraud Medicare out of
millions of dollars from 2002 to 2013. The fraud was accomplished through
a sweetheart contract between SCH and Ted’s management company, CMI,
which charged SCH almost twice as much as CMI charged for the same
services to other entities that were not critical access hospitals (and thus
could not bill Medicare at 101% cost). These “management fees” also
provided an opportunity to disguise the actual amount paid as compensation
to Ted, which was fifteen times the average compensation for like services.
The fees were billed through SCH’s Medicare cost report and were not
detectable from the face of the report. Moreover, Ted received these inflated
amounts even though he did little to no work at SCH. Appellants likewise
billed Medicare hundreds of thousands of dollars for work supposedly (but
not actually) performed by Julie, first as a hospital administrator and then as
a consultant and director. 4
4
The Government calculated that, from 2004 to 2015, the MAC reimbursed Ted
a total of $11,779,551 in compensation. During that same period, the MAC reimbursed
Julie $1,598,970.
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Following the Government’s intervention, Appellants moved to
dismiss its claims, arguing that the Government’s eight-year delay violated
the FCA and prejudiced them. Appellants also moved to unseal the entire
record, including the Government’s extension request memoranda. After a
hearing with all parties and an ex parte conference with the Government, the
district court denied the motion to dismiss and unsealed only the
Government’s pro forma extension motions and the court’s orders granting
them; it refused to unseal the eighteen extension memoranda. Those
memoranda remain sealed.
Beginning January 13, 2020, the district court held a nine-week jury
trial. There were 25 witnesses who testified and numerous evidentiary
exhibits. Ultimately, the jury found the Cains, Kuluz, SCH, and CMI jointly
and severally liable for approximately $10 million. On May 10, 2020, thirteen
years after the case began, the district court entered judgment, trebling the
damage award to over $32,000,000.
The parties filed several post-trial motions. Appellants renewed their
motion to unseal the Government’s extension request memoranda.
Appellants then moved for post-trial discovery to probe the relator’s post-
trial disclosures. Last, Appellants moved for a judgment as a matter of law
and a new trial. In February 2021, the district court held argument on the
pending motions, and in June 2021, the court issued its ruling confirming the
judgment.
Appellants timely appealed. They challenge the sufficiency of the
evidence proving the FCA claims; the district court’s application of the
FCA’s statute of limitations; the court’s grant of eighteen seal extensions,
which allowed the Government unilaterally to “investigate” Appellants for
eight years; and several evidentiary and post-trial discovery rulings.
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II.
We review the denial of a motion for judgment as a matter of law “de
novo, using the same analysis as the district court.” United States v. Hodge,
933 F.3d 468, 473 (5th Cir. 2019). We reverse the district court’s ruling only
if “there is no legally sufficient evidentiary basis for a reasonable jury to have
found for [the nonmovant.]” Id. (quoting Flowers v. S. Reg’l Physician Servs.
Inc., 247 F.3d 229, 235 (5th Cir. 2001)). We review a district court’s denial
of a motion for a new trial for abuse of discretion. Fornesa v. Fifth Third Mortg.
Co., 897 F.3d 624, 627 (5th Cir. 2018). We reverse “only when there is an
absolute absence of evidence to support the jury’s verdict.” Wantou v. Wal-
Mart Stores Tex., L.L.C., 23 F.4th 422, 431 (5th Cir. 2022) (internal quotation
marks and citation omitted). In both instances, our review of the jury’s
verdict is “especially deferential.” Id.We review a district court’s evidentiary rulings for abuse of discretion.
Seatrax, Inc. v. Sonbeck Int’l, Inc., 200 F.3d 358, 370 (5th Cir. 2000). “[T]o
vacate a judgment based on an error in an evidentiary ruling, this court must
find that the substantial rights of the parties were affected.” Id. (internal
quotation marks and citation omitted). We also review a district court’s
decision to deny discovery for abuse of discretion. Crosby v. La. Health Serv.
& Indem. Co., 647 F.3d 258, 261 (5th Cir. 2011).
III.
The FCA “imposes significant penalties on those who defraud the
Government.” Universal Health Servs., Inc. v. United States ex rel. Escobar,
579 U.S. 176, 180 (2016). That said, the FCA “is not an all-purpose antifraud
statute . . . or a vehicle for punishing garden-variety breaches of contract or
regulatory violations.” Id. at 194 (internal quotation marks and citation
omitted). “In determining whether liability attaches under the FCA, this
court asks (1) whether there was a false statement or fraudulent course of
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conduct; (2) made or carried out with the requisite scienter; (3) that was
material; and (4) that caused the government to pay out money or to forfeit
moneys due (i.e., that involved a claim).” United States ex rel. Harman v.
Trinity Indus. Inc., 872 F.3d 645, 653–54 (5th Cir. 2017) (internal quotation
marks and citation omitted).
In their first two issues on appeal, Appellants contend that “[t]he
Government did not—and cannot—meet its burden on two elements:
materiality and scienter.” In the alternative, Appellants contend that “[a]t
minimum, the FCA judgment against Julie Cain must be reversed because
she did not knowingly assist in the presentation of a false claim.”
A. Materiality
“A misrepresentation about compliance with a statutory, regulatory,
or contractual requirement must be material to the Government’s payment
decision in order to be actionable under the FCA.” Escobar, 579 U.S. at 192.
The FCA defines “material” as “having a natural tendency to influence, or
be capable of influencing, the payment or receipt of money or property.” 31
U.S.C. § 3729(b)(4). Although the materiality standard is “demanding,”
Escobar, 579 U.S. at 194, “[n]o one factor is dispositive, and our inquiry is
holistic,” United States ex rel. Lemon v. Nurses To Go, Inc., 924 F.3d 155, 161
(5th Cir. 2019). A non-exhaustive list of the factors we consider includes:
(a) whether the alleged violations are conditions of payments; (b) whether
the Government would deny reimbursement if it knew of the violations; and
(c) whether the noncompliance is substantial or minor. Id. at 161–63. As
these factors indicate, a misrepresentation is material when it goes “to the
very essence of the bargain.” Escobar, 579 U.S. at 193 n.5 (quoting Junius
Constr. Co. v. Cohen, 257 N.Y. 393 (1931)).
Appellants assert the Government’s “pay and chase” recoupment
method, whereby Medicare pays claims upon submission and then pursues
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violations after the fact, defeats the FCA’s materiality requirement.
According to Appellants, the fact that Medicare continued to reimburse SCH
even as the Department of Justice (DOJ) conducted an eight-year
investigation into allegations of fraud belies any contention that Appellants’
cost-report certifications influenced the Government’s decision to pay. As
support for this position, Appellants refer the court to Escobar. There, the
Supreme Court noted that the Government’s regular payment of a claim in
full despite actual knowledge that certain requirements were violated “is
strong evidence that the requirements [were] not material.” Id. at 195.
The Government counters that Appellants’ position is too narrow
under this court’s holistic approach to determining materiality. The
Government cites United States ex rel. Longhi v. United States, 575 F.3d 458,
468–69 (5th Cir. 2009), where this court rejected the “outcome materiality
standard,” which would require a misrepresentation to affect the
Government’s ultimate decision to remit funds in order to be material.
Regarding its decision to employ the “pay and chase” policy, specifically, the
Government contends that various circuits have recognized valid reasons
why an agency may continue to pay claims despite allegations of fraud
without defeating materiality—for example, public health and safety. The
Government asserts that such is the case here where it was important for
potential patients of SCH to continue to have access to healthcare. For these
reasons, the Government maintains, its “pay and chase” approach does not
neutralize the evidence supporting the jury’s finding of materiality. We
agree.
Viewing the evidence presented to the jury in toto and giving the jury’s
verdict requisite deference, the record contains sufficient evidence to
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support a finding of materiality. 5 This is so regardless of the Government’s
pay and chase policy, which we decline to second-guess in this case. For
example, when enrolling SCH as a critical access hospital, Ted certified that
he was familiar with Medicare regulations and understood that payments
were conditioned on compliance with them. Moreover, Appellants’ fraud
was substantial, amounting to approximately $10 million over 12 years. And
finally, the Appellants’ fraud went to the essence of the bargain. The cost
reports and statements that Appellants submitted to Medicare were the basis
for determining reimbursement amounts owed to SCH and CMI.
While Escobar articulated that continued payment despite knowledge
of fraud often indicates lack of materiality, “often” does not mean “always.”
Here, Appellants’ reliance on Escobar is misplaced. For starters, it is not
clear that CMS and the MAC were cognizant of Appellants’ fraud. 6 More to
5
The jury received lengthy instruction on the term “materiality.” In part, the
district court explained:
For purposes of the False Claims Act, the term “materiality” means
having a natural tendency to influence or being capable of influencing the
payment or receipt of money. A matter is material if, one, a reasonable
person would attach importance to it in determining a choice of action in a
transaction, or two, that one or more defendants knew or had reason to
know that the recipient of the representation would attach importance to
the specific matter in determining the choice of action, regardless of
whether a reasonable person would do so. Materiality means a holistic
analysis without any single factor being dispositive. Minor or insubstantial
noncompliance is not material.
6
Appellants rely heavily on United States ex rel. Janssen v. Lawrence Memorial
Hospital, 949 F.3d 533 (10th Cir.), cert. denied, 141 S. Ct. 376 (2020), to counter the district
court’s “suggest[ion] that ‘the Escobar Court starts from a point of actual knowledge on
the part of the Government, not suspicion nor mere allegations[.]’” But Janssen stemmed
from a district court’s grant of summary judgment, not a jury verdict. Moreover, the
Janssen court likewise acknowledged that the materiality requirement is holistic, and
“[n]one of [the Escobar factors] alone are dispositive.” Id. at 541. To that end, other factors
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the crux, the evidence presented to the jury showed that without continued
reimbursements, SCH, a critical access hospital that relied on Medicare for
over 70 percent of its revenue, would have probably closed. Stopping
reimbursements upon the first allegations of fraud would thus have
undermined CMS’s goal of sustaining healthcare access for underserved
rural patients. “The byzantine laws governing Medicare reimbursement
have been aptly described as a ‘labyrinth’ . . . [but] [e]ven the most
complicated labyrinth has an outer boundary[.]” United States ex rel.
Drummond v. BestCare Lab’y Servs., L.L.C., 950 F.3d 277, 281 (5th Cir. 2020)
(quoting Biloxi Reg’l Med. Ctr. v. Bowen, 835 F.2d 345, 349 (D.C. Cir. 1987)).
Appellants crossed this boundary and may not now interpose Medicare’s
reimbursements during their fraudulent activities to argue that all was
copacetic. We decline to disturb the jury’s finding of materiality.
B. Scienter
Appellants next assert that the Government did not carry its burden
regarding scienter, which requires proof that Appellants “knowingly” made
false or fraudulent claims. Appellants argue that: (1) the FCA requires
objective falsity, and the Government did not prove that Appellants made
objectively false statements about their salaries; and (2) because this case
centers around a disputed interpretation of an ambiguous regulation,
Appellants could not have acted “knowingly” to defraud by basing their
actions on a reasonable interpretation, particularly when they were not
warned away from that interpretation.
The Government responds that there was ample evidence for the jury
to find that Appellants acted knowingly under the FCA. This evidence
in Janssen supported a finding of immateriality. See id. at 543. And while Janssen involved
reimbursements to a hospital, it does not appear to have been a critical access hospital.
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included testimony that Ted and Julie Cain performed little, if any,
reimbursable work at SCH or CMI for their grossly inflated salaries. And
that testimony was accentuated by Appellants’ paucity of evidence showing
any substantial, reimbursable work. The Government highlights that
Appellants certified that they knew and would follow Medicare’s rules,
including Medicare’s documentation requirements. The Government adds
that the FCA does not require “objective falsity,” and, even if it did,
Appellants forfeited any argument regarding objective falsity by raising it for
the first time on appeal. Finally, the Government contends that Medicare
provides clear standards for providers to determine reasonable owner
compensation, such that the regulations at issue were not ambiguous and did
not require “warning away” Appellants from their excessive billings.
First, objective falsity. 7 Appellants cite Riley v. St. Luke’s Episcopal
Hospital, 355 F.3d 370 (5th Cir. 2004), to support their contention that the
FCA requires proof of objective falsity. In Riley, we noted that “[t]he district
court concluded . . . that expressions of opinion or scientific judgments about
which reasonable minds may differ cannot be ‘false.’” Id. at 376 (emphasis
added). And we “agree[d] in principle with the district court and accept[ed]
that the FCA requires a statement known to be false, which means a lie is actionable
but not an error.” Id. (emphasis added). But contrary to Appellants’ position,
Riley did not establish an objective falsity standard, and we decline in today’s
7
We disagree that Appellants forfeited their objective falsity argument. Though
Appellants did not use the term “objective falsity” in their post-trial motions, they argued
that the Government could not prove they made a “knowingly false claim” because,
pursuant to Medicare’s provider reimbursement manual, an owner’s compensation is
governed under a test of reasonableness. On appeal, Appellants’ objective falsity argument
is premised on the corresponding contention that reasonableness is a matter of opinion, and
thus cannot be objectively false.
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case to address whether the FCA requires it. 8 There was sufficient evidence
to support the jury’s finding of scienter regardless.
“What matters for an FCA case is whether the defendant knew the
claim was false.” United States ex rel. Shutte v. Supervalu Inc., 143 S. Ct. 1391,
1396 (2023); see also Riley, 355 F.3d at 376 (“[T]he FCA requires a statement
known to be false[.]”). And there was ample testimony at trial that the Cains
performed little, if any, reimbursable work at SCH, yet they knowingly
sought reimbursement for inflated compensation. 9 Several employees
testified that they never saw Ted do any work at the hospital and that they
never communicated with him about anything related to the hospital or its
patients. The employees further testified that when they did see Ted, it was
“[u]sually in the cafeteria” on “Wednesdays for fried chicken and Fridays
for catfish.” Along this same line, testimony highlighted that Appellants
produced a total of six hospital documents from the years 2004 to 2015 that
Ted had signed (not including documents merely stamped with his signature)
and virtually no documentation that would allow an audit of Ted’s work
(despite such being a prerequisite under the PRM). There was similar
testimony that Julie was rarely at the hospital, and when she was, she was not
doing work related to patient care.
Second, Appellants’ “reasonable interpretation” of the regulations.
Here again, assuming arguendo ambiguity in the reimbursement regulations,
8
As Appellants acknowledge, there is currently a circuit split on whether the FCA
requires objective falsity—and Riley has been cited in support of both sides. Compare
United States v. Care Alternatives, 952 F.3d 89, 95–100 (3d Cir. 2020) (rejecting objective
falsity standard), with United States v. AsercaCare, Inc., 938 F.3d 1278, 1296–1301 (11th Cir.
2019) (adopting objective falsity standard).
9
Appellants’ argument that the jurors clearly believed Ted performed some work
is only speculation. The verdict does not provide any explanation from the jury, and we
cannot divine what work the jury credited to Ted.
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we agree with the Government that Appellants’ interpretation of them was
not reasonable. The Government presented expert testimony that despite
the Cains’ lack of compensable work, they submitted grossly unreasonable
compensation claims to Medicare. The Government showed that Ted
received compensation ten to sixteen times the national average for critical
access hospital executives. 10 Moreover, Kuluz testified there were no time
studies and no supporting documents for Ted’s compensation; rather, he
“estimated” Ted’s hours for the Medicare cost report. Similarly, the
Government presented evidence that Julie’s salary, as the prior hospital
administrator, was at times double that of the incumbent administrator.
Based on this evidence, we uphold the jury’s finding that Appellants
“knowingly” made false or fraudulent claims. 11
C. Julie Cain
Appellants next contend that, at a minimum, the jury’s FCA verdict
against Julie Cain should be reversed. According to Appellants, Julie did not
certify cost reports or make statements to Medicare, and “at most [the
Government] proved that Julie should have suspected others of submitting
10
The Government’s exhibits showed that, based on a 2009 IRS report, the
national average executive compensation for critical access hospitals was $177,600. But
Ted billed Medicare $907,649 for his salary in 2004 and $2,796,045 in 2009. Ted lowered
his claimed compensation after the Government notified Appellants of its investigation in
2010, but he still billed Medicare for compensation five times the national average.
11
Appellants also challenge the jury’s verdict on the Government’s common law
claims—asserting that those claims circumvent the administrative process and because the
claims lack merit. The district court declined to enter judgment on those claims,
concluding they were subsumed in the verdict as to the FCA claims. Because we affirm the
FCA judgment, Appellants’ challenge is moot. See Drummond, 950 F.3d at 284. Moreover,
Appellants failed to raise their attack on the common law claims in their motion for
judgment as a matter of law or their motion for a new trial. “A party forfeits an argument
by failing to raise it in the first instance in the district court—thus raising it for the first time
on appeal[.]” Rollins v. Home Depot USA, 8 F.4th 393, 397 (5th Cir. 2021).
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false claims and acted to prevent them doing so.” Appellants characterize
this behavior as “passive acquiescence, not knowing assistance.”
The Government responds that Julie played a critical role in setting
the fraud in motion, executing “a management agreement on behalf of SCH
that allowed CMI to charge SCH up to 15% of revenue despite that CMI
charged all the other Cain entities half that.” The Government also notes
that Julie knew that the costs attributed to SCH had to be reasonable,
necessary, and related to patient care, but nonetheless deliberately
disregarded the excessive compensation being funneled through the CMI
management agreement, including her own.
The record provides sufficient evidence to support the jury’s verdict
against Julie. “The FCA applies to anyone who knowingly assists in causing
the Government to pay claims grounded in fraud, without regard to whether
that person has direct contractual relations with the Government.” Riley,
355 F.3d at 378 (cleaned up). “Knowing assistance” does not require that a
person “be the one who actually submitted the claim forms in order to be
liable.” Id. (internal quotation marks and citation omitted).
To the contrary, as district courts have discussed, “[t]he causation
standard employs traditional notions of proximate causation to determine
whether there is a sufficient nexus between the conduct of the party and the
ultimate presentation of the false claim.” U.S. ex rel. Wuestenhoefer v.
Jefferson, 105 F. Supp. 3d 641, 681 (N.D. Miss. 2015) (internal quotation
marks and citation omitted); see also United States v. Hodge, 933 F.3d 468,
474–75 (5th Cir. 2019) (applying proximate causation in FCA housing case).
Such nexus “merely demands more than mere passive acquiescence in the
presentation of the claim and some sort of affirmative act that causes or
assists the presentation of a false claim.” United States v. Medoc Health Servs.
LLC, 470 F. Supp. 3d 638, 655 (N.D. Tex. 2020) (internal quotation marks
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and citation omitted). “[M]ere negligence” is not actionable. U.S. ex rel.
Longhi v. Lithium Power Techs., Inc., 513 F. Supp. 2d 866, 876 (S.D. Tex.
2007). But “constructive knowledge,” or “what has become known as the
ostrich type situation where an individual has ‘buried [her] head in the sand’
and failed to make simple inquiries which would alert [her] that false claims
are being submitted” is sufficient. Id. (quoting S. Rep. 99-345, at *21, 1986
U.S.C.C.A.N. 5266, 5286).
Inter alia, the jury could have seen Julie’s execution of the
management agreement between SCH and CMI, allowing CMI to charge
SCH up to 15% of revenue, as an “affirmative act” that facilitated these false
claims. And the Government presented evidence that Julie did little to no
work for SCH despite the salaries and fees she collected from Medicare. The
Government also presented evidence indicative of constructive knowledge,
such as Julie’s failure to inquire about the management fees ultimately
charged by CMI. Sufficient evidence supports the jury’s verdict against Julie
Cain.
IV.
Should this court decline to reverse and render judgment for them,
Appellants assert that the FCA’s six-year statute of limitations applies to bar
claims accruing before September 2009, such that the judgment should be
reduced to $4,590,495. 12 According to Appellants, “the relator’s claims
made no mention of [excessive] salaries or luxury cars,” which they contend
is the crux of the Government’s intervening complaint, so that the
Government’s claims do not relate back to the filing date of Aldridge’s
complaint. Appellants further argue that the FCA’s tolling period does not
12
September 2009 is six years prior to the Government’s intervening complaint,
filed in September 2015.
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apply because the Government failed to make a diligent investigation. The
Government counters that its claims in fact relate back to Aldridge’s
“Medicare cost report fraud” claims, and even if not, the FCA’s tolling
provision salvage its claims in toto.
“[Q]uestions of law, such as whether the statute of limitations has run
or whether equitable tolling applies,” are reviewed de novo. Newby v. Enron
Corp., 542 F.3d 463, 468 (5th Cir. 2008). But as to tolling, “[w]hether the
Government should have reasonably discovered the alleged [actions] is a
mixed question of law and fact that we review for clear error.” United States
ex rel. Vavra v. Kellogg Brown & Root, Inc., 848 F.3d 366, 383–84 (5th Cir.
2017). Appellants, “as the party asserting the statute-of-limitations defense,
[bear] the burden of proving limitations barred the Government’s claims.”
Id. at 383.
The FCA’s limitations provision states:
(b) A civil action under section 3730 may not be brought--
(1) more than 6 years after the date on which the violation
of section 3729 is committed, or
(2) more than 3 years after the date when facts material to
the right of action are known or reasonably should have been
known by the official of the United States charged with
responsibility to act in the circumstances, but in no event
more than 10 years after the date on which the violation
is committed,
whichever occurs last.
(c) If the Government elects to intervene . . . the Government
may file its own complaint or amend the complaint of a person
who has brought an action under section 3730(b) to clarify or
add detail to the claims in which the Government is intervening
and to add any additional claims with respect to which the
Government contends it is entitled to relief. For statute of
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limitations purposes, any such Government pleading shall
relate back to the filing date of the complaint of the person who
originally brought the action, to the extent that the claim of the
Government arises out of the conduct, transactions, or occurrences
set forth, or attempted to be set forth, in the prior complaint of that
person.
31 U.S.C. § 3731 (emphasis added).
A. Relation Back
As under Federal Rule of Civil Procedure 15, “a new [FCA] claim or
pleading will not relate back when it asserts a new ground for relief supported
by facts that differ in both time and type from those the original pleading set
forth.” Vavra, 848 F.3d at 382 (internal quotation marks and citation
omitted). “[T]o relate back, a new claim must be ‘tied to a common core of
operative facts[.]’” Id. (quoting Mayle v. Felix, 545 U.S. 644, 664 (2005)).
Because our caselaw on this point is limited, Appellants refer to two
out-of-circuit cases, U.S. ex rel. Miller v. Bill Harbert International
Construction, Inc., 608 F.3d 871 (D.C. Cir. 2010), and U.S. ex rel. Bledsoe v.
Community Health System, Inc., 501 F.3d 493 (6th Cir. 2007). In Miller, the
D.C. Circuit vacated a district court’s FCA judgment in part based on the
statute of limitations. 608 F.3d at 882–83. The Miller court concluded that
allegations concerning one contract did not fairly encompass two other
contracts “because each contract is unique and no two involved the same
‘conduct, transaction, or occurrence.’” Id. at 882. The court was not
persuaded by the Government’s argument that the use of “contracts”
(plural) in the relator’s original complaint was sufficient. “Allowing such
broad and vague allegations to expand the range of permissible amendments
after the limitation period has run would circumvent the statutory
requirement in the FCA that the amendments ‘arise out of the conduct,
transactions, or occurrences’ in the original complaint.” Id.
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In Bledsoe, the Sixth Circuit took an even narrower view. 501 F.3d at
516. There, the court found that though a relator’s original complaint alleged
improper billing under “Code 94799” for services related to “emergency
room” and “02 Equip./Daily,” the later amended allegations for improper
billing under the same code for “call back” services did not relate back. Id. at
518. The court likewise did not consider the relator’s general allegation of
fraud “by miscoding and upcoding items billed to Medicare and Medicaid”
sufficient to provide the defendants with adequate notice. Id. at 516, 523.
Here, unconvinced by Appellants’ reading of the relation back
doctrine grounded on Miller and Bledsoe, the district court instead surmised
that the Fifth Circuit, via Vavra, attached a broader meaning to § 3731(c).
Based on its reading of Vavra, the district court concluded that the Aldridge’s
general allegations regarding cost report fraud were sufficient for relation
back because “the FCA allows the Government to add detail or clarify the
claims on which it is intervening; and it . . . allows relation back even when
the claim of the Government arises out of conduct the [r]elator ‘attempted
to set forth.’” Appellants contend that the district court erred. We agree.
Vavra’s focus was on whether the FCA’s relation back provision
could attach to other, non-FCA claims, which is not the issue here. 848 F.3d
at 381–83. Even so, the Vavra panel did not construe § 3731(c) as broadly as
the district court did here. Instead, our colleagues cautioned that their
conclusion that § 3731(c) allowed the Government to allege non-FCA claims
upon intervention was not a free pass to add such claims willy-nilly: “This is
not to say that the Government may take advantage of Section 3731(c)’s
relation-back provision by adding any claims (FCA or not) to any qui tam
FCA complaint.” Id. at 382. And Vavra reiterated that new claims must be
tied to a common core of operative facts to relate back under § 3731(c). Id.
By contrast, relation back is generally improper when, though a new pleading
shares some elements in common with the original pleading, it faults the
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defendant for conduct different than that alleged in the original complaint.
Miller, 608 F.3d at 881. That is the scenario here.
Aldridge initially alleged that Appellants “falsified their claims by
engaging in a number of practices including fraudulent cost reporting,
inflating supply costs, manipulating the swing bed status of the hospitals
controlled by [CMI] . . . , and improperly waiving co-payments and
deductibles.” Neither of Aldridge’s complaints nor the Government’s
March 2010 notice letter to Appellants (summarizing the relator’s
allegations) made any mention of excessive salaries or luxury vehicles. By
contrast, the Government’s intervening complaint, though generally
premised on fraudulent cost reporting, primarily alleged that Appellants
“abused the special Medicare rules for Critical Access Hospitals by
improperly claiming expenses for the Cains’ excessive and unwarranted
compensation for work not performed and for Ted Cain’s personal luxury
automobiles . . . .” Thus, the upshot of the Government’s complaint was “to
fault [Appellants] for conduct different from that” alleged by Aldridge.
Miller, 608 F.3d at 881; accord Vavra, 848 F.3d at 382. Rather than
“clarifying” or “adding detail” to the relator’s initial allegations, the
Government’s intervening complaint set forth new ones. Those new claims
do not relate back under § 3731(c) to the date of Aldridge’s original
complaint.
B. Tolling
Relation back unavailing, we next address whether the FCA’s tolling
provision salvages the Government’s pre-September 2009 claims. It does
not.
To benefit from the tolling period, the Government must file suit
within “3 years after the date when facts material to the right of action are
known or reasonably should have been known by the official of the United
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States charged with responsibility to act in the circumstances.” 31 U.S.C.
§ 3731(b)(2). The Government must also have acted with due diligence to
preserve its claim. See Baldwin Cnty. Welcome Ctr. v. Brown, 466 U.S. 147,
151 (1984) (denying tolling because “[o]ne who fails to act diligently cannot
invoke equitable principles to excuse that lack of diligence”).
Appellants posit that the five-year period from the filing of Aldridge’s
initial complaint in May 2007 to September 2012, the earliest date the
Government could concede knowledge of FCA violations but still benefit
from the equitable tolling provision, “is far too long to claim diligence.”
Appellants assert that neither the Government nor its agent, the MAC, was
diligent in investigating its claims. They contend that the MAC knew, or
should have known, the facts supporting the Government’s claims long
before September 2012 because the MAC processed and reviewed
Appellants’ cost reports each year. They also contend the DOJ knew, or
should have known, the facts supporting the Government’s claims before
then, given that the relator’s initial complaint was filed in 2007 and given the
Government’s protracted and repeated requests for seal extensions while it
investigated Appellants. 13 Finally, Appellants point to proof Aldridge
produced after trial, in support of his fee petition, that his expert, Rob
Church, had notified the DOJ about the salary issues by the fall of 2011.
The Government answers that the relevant “official of the United
States charged with responsibility,” as referenced in the FCA’s statute of
limitations, is the Attorney General or an authorized designee, not the MAC.
The Government further responds that the cost reports provided to the
13
Appellants also note that the Government’s relation back contentions are
inconsistent with its tolling contentions: “If [Appellants] should have surmised the
Government was investigating excessive salaries in March 2010, then surely the
Government should have known about its claims by then.”
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MAC could not have triggered notice “given the opaque cost reporting
structure [Appellants] engineered for Ted Cain’s compensation.” And the
Government deflects Appellants’ assertions that the DOJ knew or should
have known the facts supporting the Government’s claims before September
2012 as “mere[] allegations,” having, “as the district court concluded, . . . no
reasonable basis.” Similarly, the Government submits that Appellants’
contentions regarding Church’s post-trial declarations amount only to
speculation. 14
In its order denying Appellants’ post-trial motions, the district court
sided with the Government, concluding that though it was unnecessary to
reach the statute of repose given the relation back of the Government’s
claims, it was “persuaded that at a minimum, the Government had ten years
from the date of the violation within which to bring its Complaint.” The
district court noted that even if the MAC’s auditor had realized the amount
of Appellants’ salaries and that knowledge could be imputed to the
Government, the MAC “still could not have determined, from the
documents submitted, that Ted Cain was not actually performing any
substantive work.” The court found that the Government’s position, that it
only became aware in December 2013 of Ted’s CMI compensation and the
amounts Medicare reimbursed SCH for his compensation, was “borne out
by the evidence.” Additionally, the district court found, “it was not until
October 8, 2014, . . . that [the Government] learned Ted Cain had not
performed any qualifying work eligible for reimbursement by Medicare.”
The district court thus concluded “the United States brought its lawsuit
14
Appellants’ counsel concededly characterize Church’s contradictory
declarations as “a train wreck” and acknowledge “[Church] doesn’t have any specific
recollection of what he did or did not do.”
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within three years of the date it knew or should have known of the
violations.”
Regardless of whether the Attorney General, his authorized designee,
or the MAC was the relevant “official of the United States” for the FCA’s
statute of limitations accrual, and irrespective of whether the MAC’s
knowledge could be imputed to the Government, the record does not show
that the MAC was contemporaneously aware of Ted’s lack of reimbursable
work. However, whether the DOJ should have uncovered the basic facts
material to the Government’s claims during the five years between August
2007 and September 2012 is a different matter.
In particular, the Government’s August 2011 memorandum to the
district court in support of an extension of the seal period—a memo that
remains sealed and thus unavailable to Appellants—indicates that, after
reviewing documents from Appellants, an expert recommended intervention
in the case. 15 This suggests not just that the Government “reasonably should
have . . . known” “facts material to the right of action,” § 3731(b)(2), but
that it likely did know such facts by August 2011. And the Government offers
no explanation for how, despite this knowledge, it was nonetheless diligent in
investigating and asserting its claims. Contrary to the Government’s
assertion that it learned of the Cains’ compensation issues only in 2013, the
Government’s August 2011 memorandum instead supports Appellants’
“mere[] allegations” that the Government either knew or should have known
of its basis to intervene before September 2012.
15
It is unclear the expert to which the August 2011 memorandum refers. But
Aldridge’s expert, in his first post-trial declaration, averred that he provided information
to the Government in the fall of 2011 regarding Appellants’ salary issues, quite possibly
corroborating the Government’s August 2011 memorandum to the district court. See infra
Part VII.
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Given that, the Government cannot invoke the FCA’s tolling
provision. Instead, the FCA’s statute of limitations applies to bar the
Government’s claims against Appellants accruing before September 2009,
six years prior to when the Government filed its first intervenor complaint,
and the damages awarded against Appellants must be remitted accordingly.
V.
Next, Appellants challenge the Government’s repeated requests for
extensions of the seal period—and the district court’s granting of those
extensions—as well as the Government’s eight-year delay in intervening in
this case. They urge that as a matter of law, eight years is too long to delay
intervention, as “[t]here simply is no ‘good cause’ for such an extraordinary
delay.” Appellants contend that the district court abused its discretion by
indulging the Government’s serial requests—so much so that dismissal of
the Government’s intervening complaint is warranted. We agree that the
Government’s incessant delay in intervening is inexcusable, as is the
Government’s tactic of hiding behind its sealed extension memoranda in
resisting Appellants’ challenge on this score. And we lament that, faced with
eighteen increasingly rote requests for extension of the seal period, the district
court enabled the Government’s gamesmanship. Nonetheless, we decline
Appellants’ invitation to dismiss the Government’s complaint as sanction.
After the initial 60-day period during which a FCA qui tam complaint
is sealed, 31 U.S.C. § 3730(b)(2), “[t]he Government may, for good cause
shown, move the court for extensions of the time during which the complaint
remains under seal,” id. § 3730(b)(3). Here, the Government made eighteen
such requests, extending the seal period from 60 days to more than eight
years. To support their argument that this constituted an abuse of the FCA’s
seal provisions, Appellants rely on three out-of-circuit district court opinions:
U.S. ex rel. Brasher v. Pentec Health, Inc., 338 F. Supp. 3d 396, 403 (E.D. Pa.
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2018) (“Clearly, the statute does not condone the granting of extension
requests routinely or that submissions in support thereof remain forever
sealed.”); U.S. ex rel. Martin v. Life Care Ctrs. of Am., Inc., 912 F. Supp. 2d
618, 623 (E.D. Tenn. 2012) (“The length of time this case has remained
under seal borders on the absurd.”); U.S. ex rel. Costa v. Baker & Taylor, Inc.,
955 F. Supp. 1188, 1190 (N.D. Cal. 1997) (“The legislative history of the
[FCA] makes abundantly clear that Congress did not intend that the
[G]overnment should be allowed to prolong the period in which the file is
sealed indefinitely.”).
Martin is particularly persuasive in considering whether the seal
period was abusively extended here. In Martin, the seal period was extended
for a total of four years. 912 F. Supp. 2d at 623. Even after the parties agreed
to unseal most of the record, the Government requested that certain
documents, identifying cooperating witnesses, remain sealed. Id. at 622.
The Martin court addressed the request, stating that “the Government ha[d]
stretched the FCA’s ‘under-seal’ requirement to its breaking point.” Id. at
623. The court noted that “the primary purpose of the under-seal
requirement is to permit the Government sufficient time in which it may
ascertain the status quo and come to a decision as to whether it will intervene
in the case filed by the relator.” Id. (citation omitted). And “with the vast
majority of cases, 60 days is an adequate amount of time to allow Government
coordination, review, and decision.” Id. at 625 (quoting S. Rep. No. 99-345
(1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5289–90).
Addressing the facts, the Martin court did not censor its discontent.
It found that the Government’s actions—conducting unchecked discovery
and attempting to settle with the defendant prior to intervening—were
“indicative of significant overreach.” Id. at 624; see also Costa, 955 F. Supp.
at 1191 (“This practice of conducting one-sided discovery for months or
years while the case is under seal . . . is not authorized by the FCA . . . .
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Congress enacted the seal provision to facilitate law enforcement, not to
provide an extra bargaining chip in settlement negotiations.”). Noting regret
in granting successive extensions, the Martin court concluded that “the
Government’s stated reasons were insufficient bases on which to obtain []
interminable extensions” of the seal period, and “[t]o the extent that the
Government alleged that the pre-intervention investigation was overly
complex, that complexity was likely a product of the Government’s own
extra-statutory discovery efforts[.]” 912 F. Supp. 2d at 625.
To recount Martin is to describe the Government’s conduct here.
Only, it was twice as egregious in this case: Aldridge filed his qui tam
complaint in May 2007 and an amended complaint in November 2009. Yet
the Government delayed its intervention until September 2015, for eight years
of “evaluation.” That meant extensive unilateral discovery, document
review, and deposition requests; expert analysis, which according to the
Government’s August 2011 seal extension memorandum, included a
recommendation to intervene; and, via selective disclosure of the relator’s
complaint in 2010, pressure on Appellants to settle, “thereby avoiding
protracted litigation.” Of course, all this transpired with the acquiescence of
the district court.
For its part, the Government offers three counterpoints to
Appellants’ challenge: (1) Appellants do not point to any prejudice from the
extensions (and cannot do so because they had notice of the Government’s
allegations as early as 2010); (2) Congress did not provide courts with
dismissal authority based on the length of the Government’s investigation;
and (3) the length of the investigation was due to the complexity of the case
and Appellants’ own discovery violations. The first is, to put it charitably,
not meritorious, for the same reasons the Government loses on the statute of
limitations issue; the third is readily disposed of on the same basis as
discussed in Martin, 912 F. Supp. 2d at 625.
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The Government’s second point is grounded upon State Farm Fire &
Insurance Company v. U.S. ex rel. Rigsby, 580 U.S. 26 (2016). In Rigsby, the
Supreme Court held that “the FCA has a number of provisions that do
require, in express terms, the dismissal of a relator’s action.” 580 U.S. at 34.
According to the Government, it follows that, “had Congress intended to
require dismissal for a violation of the seal requirement, it would have
[likewise] said so.” Id.
Appellants reply, reasonably, that leaving the Government and the
district court unchecked “cannot be the law.” They view Rigsby as
inapposite because the issue there was whether a seal violation (as opposed
to abuse of the FCA’s seal provision) required mandatory dismissal of a
relator’s complaint. 580 U.S. at 32–33. And unlike Rigsby, Appellants do not
seek dismissal of the entire action but rather request dismissal of “the
Government’s complaint in intervention, allowing the relator to proceed on
his original complaint if he so chooses.”
We agree with Appellants that Rigsby does not dictate the outcome of
this case, in which Appellants effectively request dismissal of the
Government’s complaint for failure to prosecute. Irrespective of the FCA’s
provisions requiring dismissal of claims in certain instances, “[t]he authority
of a federal [] court to dismiss a plaintiff’s action with prejudice because of
[its] failure to prosecute cannot seriously be doubted.” Link v. Wabash R.
Co., 370 U.S. 626, 629 (1962). But the district court here declined to exercise
that authority, and Appellants fail to pinpoint when the court’s cumulative
indulgence of the Government’s snail’s pace rose to an abuse of discretion.
More importantly, Appellants provide no precedent, and we are aware of
none, where such an extraordinary sanction as dismissal has been awarded
because of the Government’s inexcusable delays in intervening in a relator’s
case. Cf. Rigsby, 580 U.S. at 37–38 (noting that lesser sanction short of
dismissal may well be warranted where the FCA’s seal provisions are
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abused). We decline to break new ground today by granting such drastic
relief. Nevertheless, because of its statute of limitations problems, discussed
supra Part IV, the Government does not escape unscathed. The
consequence of the Government’s dilatory conduct is the reduction by over
half of the judgment entered against Appellants. That should be consolation
enough in this particular case.
VI.
Appellants next attack certain evidentiary rulings by the district court.
They contend that the court improperly excluded Kuluz’s testimony on two
points, depriving them of a fair trial: first, that he relied on the advice of an
outside accountant to allocate Ted’s salary directly to SCH, and second, that
Ted contributed millions of dollars to keep SCH operating.
A. Advice to Allocate Directly
During trial, the district court prevented Kuluz from testifying as
summarized in Appellants’ briefing on appeal:
Bill King—who prepared defendants’ cost reports—advised
Kuluz in 2005 to directly allocate a portion of Ted’s salary to
SCH because the pooled percentage understated the time Ted
spent on SCH matters . . . . King recommended direct
allocation, and Kuluz set the allocation percentage based on his
knowledge of Cain’s work for SCH.
Appellants challenge the district court’s conclusion that this testimony
would potentially confuse the jurors. They assert that Kuluz’s testimony was
“directly relevant to the FCA’s scienter element” and “could have led jurors
to a different finding on scienter, as it supports the point that [Appellants]
may have made mistakes in their allocations, but they did not lie to CMS.”
However, the district court excluded the subject testimony on
multiple grounds, citing prejudice to the Government, lack of reliability, and
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a likelihood of jury confusion. The Government argues that because
Appellants do not challenge the district court’s other reasons for excluding
Kuluz’s testimony, they have forfeited any such argument. See Rollins, 8
F.4th at 397 (“A party forfeits an argument . . . by failing to adequately brief
the argument on appeal.”). Tellingly, Appellants do not assert otherwise in
their reply.
Regardless, we perceive no abuse of discretion in the district court’s
ruling. As noted by the court in its post-trial order, King is now deceased and
there is no other evidence corroborating that he advised Kuluz; Appellants
did not previously disclose this testimony to the Government; 16 and even
assuming King had advised Kuluz, Appellants presented no evidence that
King knew the amount of time Ted actually spent working at SCH or the
amount of Ted’s salary that Kuluz allocated to SCH. These findings support
the district court’s ruling. Moreover, even assuming an abuse of discretion,
any error was harmless because there was additional evidence showing
Kuluz, also an accountant, acted knowingly and did not properly allocate the
Cains’ salaries given their lack of work for SCH. See Abner v. Kan. City S.
R.R. Co., 513 F.3d 154, 168 (5th Cir. 2008) (applying harmless error analysis).
This issue lacks merit.
B. Ted’s Contributions to SCH
Appellants also contend “the district court wrongly barred Kuluz
from describing Ted’s substantial contributions to SCH, including over
$4,000,000 in capital contributions and $18,000,000 in personal guarantees
for hospital loans.” Appellants assert this testimony would have refuted the
16
Kuluz testified in his discovery deposition that he could not remember why he
chose to allocate Ted’s salary directly to SCH.
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Government’s theme that a “greedy” Ted was diverting money from SCH
to the hospital’s detriment.
The Government counters that the district court did not abuse its
discretion in excluding this testimony, and even if it did, the exclusion did
not affect Appellants’ substantial rights. According to the Government, the
court correctly excluded this testimony based on the best evidence rule. The
Government also contends that the testimony was properly excluded as
irrelevant and prejudicial.
The district court addressed this evidentiary issue in its post-trial
order. The court reasoned that exclusion of this testimony was justified
because (1) Appellants did not produce or disclose these matters during
discovery; (2) Kuluz could not produce the checks or documents to
authenticate these transactions, though he stated that such documents
existed; (3) Ted’s investments into his business were irrelevant to this action,
which solely concerned claims submitted to Medicare for reimbursement;
and (4) the jury could have been confused by this information, thinking it
entitled Ted to an offset or credit. “A district court abuses its discretion
when its ruling is based on an erroneous view of the law or a clearly erroneous
assessment of the evidence.” In re: Taxotere (Docetaxel) Prods. Liab. Litig., 26
F.4th 256, 263 (5th Cir. 2022) (citation omitted). We discern neither in the
district court’s reasoning here.
VII.
Appellants also contend the district court committed reversible error
in denying their request for post-trial discovery. Following trial, on March
27, 2020, Aldridge filed a motion for attorney’s fees and expenses. In
support of his petition, he included a declaration and time sheets from his
expert, Rob Church. In the declaration, Church attested to the following:
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Exhibit B hereto accurately itemizes the time I actually spent,
and the tasks I performed, in the course of my work concerning
this case at the request of the [r]elator’s attorneys.
...
Exhibit D hereto is a “power-point style” document which was
created by me in October and November of 2011 as a result of
my work in this case, and was used by [Aldridge’s attorney]
Cliff Johnson and DOJ Attorneys Tom Morris and Angela
Williams in order to present the relevant facts to attorneys for
the Defendants in this case in September 2011.[17] Pages 9 and
10 of that document itemized for the participants in that
meeting my findings as of that time about the salary amounts,
paid to Ted Cain and Julie Cain, which had been allocated to
[SCH]’s Medicare cost reports.
Church’s appended timesheets indicate that he identified the compensation
issue and discussed it with Aldridge’s attorneys and the Government as early
as February 2011. The Government, by contrast, had responded to an
interrogatory during pretrial discovery that it did not discover the Cains’
salary issues until December 2013, when an expert uncovered it during an
analysis of the cost reports.
Based on the conflicting accounts, Appellants filed a motion on May
5, 2020, to conduct post-trial discovery to determine when the Government
became aware of the Cains’ salary issues. On May 10, 2020, the district court
entered judgment against Appellants. Church filed a supplemental
declaration on May 13, 2020, as part of Aldridge’s rebuttal in support of his
petition for attorneys’ fees. In the supplemental declaration, Church
appeared to backtrack, stating “Mr. Johnson and I discussed the powerpoint
17
The parties acknowledge that these dates appear to be inconsistent.
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on November 11, 2011 . . . . At no time did I email or mail any ‘powerpoint’
document to any DOJ attorney.”
The district court denied Appellants’ motion for post-trial discovery,
explaining in a twelve-page order that Appellants provided no authority for
withholding entry of judgment to allow Appellants to re-open discovery. 18
The district court analyzed the motion as a request for relief from the
judgment based on newly discovered evidence. See Fed. R. Civ. P. 60(b)
(“[T]he court may relieve a party . . . from a final judgment, order, or
proceeding for . . . newly discovered evidence that, with reasonable
diligence, could not have been discovered in time to move for a new trial
under Rule 59(b)[.]”).
To prevail on a Rule 60(b) motion based on newly discovered
evidence, a movant must demonstrate “(1) that it exercised due diligence in
obtaining the information; and (2) that the evidence is material and
controlling and clearly would have produced a different result if present
before the original judgment.” Hesling v. CSX Transp., Inc., 396 F.3d 632,
639 (5th Cir. 2005) (quoting Goldstein v. MCI WorldCom, 340 F.3d 238, 257
(5th Cir. 2003)). The district court concluded that Appellants had ample
opportunity to explore this issue in discovery yet failed to show the requisite
due diligence to merit relief from the judgment. The court likewise
concluded that Appellants failed to show the evidence was material.
We apply a highly deferential standard of review to discovery matters.
“Our standard of review in [cases where a party seeks to reopen discovery]
‘poses a high bar; a district court’s discretion in discovery matters will not be
disturbed ordinarily unless there are unusual circumstances showing a clear
18
As noted above, the district court entered judgment prior to the conclusion of
the briefing of Appellants’ motion for discovery.
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abuse.’” In re Complaint of C.F. Bean, LLC, 841 F.3d 365, 370 (5th Cir. 2016)
(citing Marathon Fin. Ins., RRG v. Ford Motor Co., 591 F.3d 458, 469 (5th Cir.
2009)); see also Marathon, 591 F.3d at 469 (providing we “will disregard a
district court’s discovery error unless that error affected the substantial
rights of the parties” (internal quotation marks and citation omitted)).
Appellants contend the district court erred by denying post-trial
discovery “into an obvious discrepancy between the Government’s pre-trial
claim not to have discovered the salary issues until December 2013 and the
relator’s post-trial proof that [his] expert advised the Government about the
salary issues—in correspondence, telephone calls, and meetings—as early as
February 2011.” Appellants further argue the district court misapplied the
law by applying Rule 60(b)(2) when they moved for discovery “after the
verdict, but before judgment was entered.” Appellants lastly assert that the
district court’s reasoning, i.e., Appellants’ lack of diligence and the
immateriality of the information sought, was incorrect.
The Government responds that the district court properly denied
Appellants’ request because the discovery was immaterial; Appellants
forfeited the issue by failing to provide specific discovery requests; and
Appellants were not diligent in “following-up on the interrogatory response
despite ‘ample opportunity’ in pre-trial discovery or at trial.” The
Government also asserts that regardless of whether Rule 60 applied to
Appellants’ request, Appellants still fail to meet the “high bar” of “clear
abuse” necessary to re-open discovery.
As discussed supra, there is evidence in the record—the
Government’s own sealed memorandum from August 2011—that seemingly
corroborates Church’s first version of events, i.e., that he shared information
with the Government about the Cains’ excessive salaries, well prior to
September 2012. Given the importance of such evidence for the Appellants’
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statute of limitations defense, it is somewhat incongruous for the district
court to have foreclosed any chance to resolve the seeming contradictions in
Church’s declarations, particularly against the backdrop of the
Government’s own (sealed) statements. That said, we are also mindful of
the highly deferential standard we apply in reviewing the district court’s
discovery rulings—particularly as to whether to reopen discovery.
It is not necessary for us to square this circle. The purpose of
Appellants’ request for post-trial discovery was plainly to flesh out evidence
to support their statute of limitations defense. Because we have already
determined that their defense is well-taken, the post-trial discovery sought
by Appellants would only be redundant. We therefore decline to delve
further into the issues related to the district court’s discovery ruling.
VIII.
In the consolidated appeal, No. 22-60145, Appellants also challenge
the district court’s March 14, 2022 order enjoining Appellants from
transferring certain pieces of property. We lack jurisdiction to review the
district court’s order, which merely enforces a prior injunction, and therefore
dismiss the appeal in the consolidated case.
Following the jury verdict, the district court entered a final judgment,
holding Appellants jointly and severally liable to the United States for
roughly $32 million. The judgment provided that “[t]he [c]ourt continues
its [o]rder forbidding the defendants from transferring, dissipating, selling or
disposing of any of their assets.” The record does not contain the district
court’s previous order preventing dissipation of assets, as the district court
apparently never issued a formal order doing so. Instead, it appears that the
district court was referring to a directive during trial that the parties should
“maintain the status quo with regard to all assets, that from this point on,
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nothing [was] supposed to be done with any asset [that was] the subject of
this particular hearing.”
Almost two years after final judgment was entered, on March 2, 2022,
the district court set a status conference. The conference was prompted by
the Government’s discovery that 400 North Beach Blvd., Bay St. Louis,
Mississippi, a vacant lot held by HR Properties, LLC, was pending sale for
roughly $2.7 million. The Government believed that this violated the district
court’s anti-dissipation injunction in the final judgment.
Appellants responded that because none of them owned the lot, it was
not subject to the injunction the district court had put in place. 19 Appellants
sought to cancel the status conference and have the Government file a motion
seeking specific relief. The Government responded that a status conference
was appropriate because, among other things, facts relating to the ownership
of the subject property and the ownership and control of Ted Cain’s various
entities were still undisclosed as Appellants had resisted related discovery.
The district court required the Government to file a motion to enforce
the final judgment and provided Appellants the opportunity to respond. 20 In
the interim, the district court entered a temporary enforcement order,
specifically enjoining Appellants “from transferring, selling, encumbering, or
disposing of any of” a specific list of properties identified by the Government.
This list included “all properties believed to be owned or managed by Ted
19
Appellants also noted that the Government was not a party to the relator’s debt
collection action before the district court (No. 1:20-cv-321), wherein the relator alleged
fraudulent transfers by Appellants, and that the Government’s action, also alleging
fraudulent transfers by Appellants, (No. 1:22-cv-11) was pending before another judge.
20
The district court has not ruled on this motion.
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Cain and HTC Elite and its management company, HTC Enterprises,” 21
including the vacant lot at 400 North Beach Blvd. Appellants filed a notice
of appeal the same day the order was entered.
Appellants make a straightforward argument: HR Properties holds
the vacant lot and was not bound by the district court’s initial judgment and
injunction. Therefore, any order by the district court applying the injunction
to assets held by HR Properties is an expansion of its preexisting injunction,
requiring clearly stated grounds and sufficient notice to the affected parties.
Fed. R. Civ. P. 65(d)(1), (d)(2). Appellants also levy arguments that the
Government violated Federal Rule of Civil Procedure 7 by not properly
requesting this relief in a motion and that the Government failed to carry the
heavy burden of proof for an injunction.
The Government asserts that this court lacks jurisdiction over the
appeal. According to the Government, because the Cains own HR
Properties, at least indirectly, the district court’s March 14, 2022 order
merely enforces a preexisting injunction, and no appellate jurisdiction can be
asserted over such an order. See 28 U.S.C. § 1292(a)(1) (“[T]he courts of
appeals shall have jurisdiction of appeals from . . . [i]nterlocutory orders of
the district courts of the United States . . . granting, continuing, modifying,
refusing or dissolving injunctions.”). The Government is correct.
“We have refused [] to assert jurisdiction . . . if the district court’s
order merely enforces or interprets a previous injunction.” In re Seabulk
Offshore, Ltd., 158 F.3d 897, 899 (5th Cir. 1998) (internal quotation marks
and citations omitted). “[A] court has not modified an injunction when it
simply implements an injunction according to its terms or designates
21
HR Properties, LLC is owned by HTC Elite, LP and HTC Enterprises, LLC.
Julie and HTC Enterprises are part owners of HTC Elite. And Ted and Julie together own
100% of HTC Enterprises.
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procedures for enforcement without changing the command of the
injunction.” In re Deepwater Horizon, 793 F.3d 479, 491 (5th Cir. 2015)
(internal quotations, brackets, and citation omitted). “Interpretation, then,
is not modification.” Id.The district court’s March 14, 2022 order merely enforces the court’s
preexisting injunction. Contrary to Appellants’ frequent reference to
“nonparties” in their briefing, the Cains in fact own, or control, the property
in question, albeit through indirect corporate entities. At the end of the day,
the only ownership interests beyond Ted’s and Julie’s in any of the relevant
entities are held by trusts for the Cains’ children—trusts that Ted controls.
The district court recognized this obfuscation as well. It stated in its
March 14, 2022 order that
Cain’s companies are interwoven, with some held by holding
companies, but if any companies are subject to Cain family
control or ownership, this prohibition against dissipation
applies to all of them. There is to be no change [in] the status
of any of these properties. This court is not going to deal in
sophistry. This court order applies if Ted Cain is in control,
even if acting through a corporate structure, or in the role of a
“manager.”
Because the Cains own or manage every entity that has any share in
the vacant lot, the vacant lot is plainly subject to the district court’s May 2020
injunction. 22 Indeed, during trial, Appellants’ counsel conceded that entities
owned or directed by Ted were included in the district court’s ongoing
22
“It is axiomatic that that federal courts possess inherent power to enforce their
judgments.” Thomas v. Hughes, 27 F.4th 363, 368 (5th Cir. 2022) (internal brackets,
quotation marks, and citation omitted); see also Test Masters Educ. Servs., Inc. v. Singh, 428
F.3d 559, 577 (5th Cir. 2005) (“District courts can enter injunctions as a means to enforce
prior judgments.”).
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injunction. 23 This was also the district court’s view. In a June 7, 2022 order
denying Appellants’ request to stay the March 14, 2022 enforcement order,
the district court stated, “the injunctive relief ordered by this court is not a
new order, but is an order to enforce the injunction already in place as
contained in the judgment of this court.” Aldridge on behalf of United States
v. Corp. Mgmt. Inc., 2022 WL 2046105, at *4 (S.D. Miss. June 7, 2022).
Because we agree with the district court that the injunction is not new
or modified, the consolidated appeal in case No. 22-60145 must be dismissed
for lack of jurisdiction.
* * *
As to appeal No. 21-60568, we AFFIRM in part, REVERSE in part,
and REMAND for proceedings consistent with this opinion.
As to appeal No. 22-60145, we DISMISS for lack of jurisdiction.
23
Counsel stated at trial, “Mr. Cain is absolutely a defendant in this suit, and you
have full power over him, as the controlling member of these LLCs, to do whatever is
necessary and proper . . . . And given that Mr. Cain has the authority to direct these other
entities, you could direct him to direct the other entities.” Accord Thomas, 27 F.4th at 368–
69 (approving order barring business owner “from causing [the entity] to effectuate any
proscribed transfer indirectly that [owner] could not make directly”).
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James C. Ho, Circuit Judge, dissenting in part:
I fully appreciate how my distinguished colleagues could reasonably
conclude—as they do in Section IV of the majority opinion—that we should
not allow the Government’s subsequent complaint to relate back to the
relator’s original complaint for purposes of applying the statute of
limitations.
I agree that it’s a close question. At the end of the day, it amounts to
a judgment call about what it means to present a claim that “arises out of the
conduct, transactions, or occurrences set forth, or attempted to be set forth,
in the prior complaint of that person.” 31 U.S.C. § 3731(c). See also Fed.
R. Civ. Proc. 15(c). As our court has observed, “determining when an
amendment will relate back” can be “difficult.” FDIC v. Conner, 20 F.3d
1376, 1386 (5th Cir. 1994). “Courts have eschewed mechanical tests for
determining when relation back is appropriate.” Id.Given the circumstances presented here, relation back appears to be
contemplated under our precedent. In Conner, for example, the original
complaint involved “approv[ing] twenty-one specified loans to specified
borrowers” that “allegedly caused the bank to lose in excess of $2.8 million.”
Id. at 1378. The agency later “sought to incorporate into the complaint
charges that the defendants’[] allegedly wrongful conduct caused [the bank]
to suffer losses from several loans that were not identified in the original
complaint.” Id. We held that “the amended complaint should relate back to
the date of the original complaint.” Id. at 1386. “The damage allegedly
caused by the loans that the FDIC seeks to include in this case arose out of
the same conduct as the damage caused by the twenty-one loans listed in the
original complaint. The conduct identified in the original complaint that
allegedly caused the defendants to approve the loans listed in that pleading
also allegedly caused the defendants to approve the loans that the FDIC seeks
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to include in this case through the amended complaint.” Id. “The FDIC’s
amendment thus seeks to identify additional sources of damages that were
caused by the same pattern of conduct identified in the original complaint.”
Id.Accordingly, I would affirm and hold Defendants liable for pursuing
federal reimbursement for luxury cars and compensation for work not
performed. Defendants surely knew that luxury cars and excessive salaries
are not, to quote the original complaint, “related to qualified services
provided for the benefit of Medicare and Medicaid beneficiaries,” but are
instead “unallowable costs” “not reimbursable under . . . Medicare and
Medicaid.”
43