United States, Ex Rel. Hayes v. Allstate Insurance Company

16-705
United States, ex rel. Hayes v. Allstate Insurance Company
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed on or
after January 1, 2007 is permitted and is governed by Federal Rule of Appellate Procedure 32.1
and this court’s Local Rule 32.1.1. When citing a summary order in a document filed with this
court, a party must cite either the Federal Appendix or an electronic database (with the notation
“summary order”). A party citing a summary order must serve a copy of it on any party not
represented by counsel.
At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, at 40 Foley Square, in the City of New York, on
the 4th day of April, two thousand seventeen.
Present: ROBERT A. KATZMANN,
Chief Judge,
ROSEMARY S. POOLER,
GERARD E. LYNCH,
Circuit Judges.
________________________________________________
UNITED STATES OF AMERICA, ex rel.
J. MICHAEL HAYES,
Plaintiff-Appellant,
v. No. 16-705
ALLSTATE INSURANCE COMPANY, DAIMLER CHRYSLER
INSURANCE COMPANY, ERIE INSURANCE COMPANY OF
NEW YORK, ERIE INSURANCE EXCHANGE, INC., ERIE
INDEMNITY COMPANY, FARMERS INSURANCE EXCHANGE,
TRUCK INSURANCE EXCHANGE, FIRE INSURANCE
EXCHANGE, FOREMOST INSURANCE GROUP, GEICO,
INSURANCE, GMAC INSURANCE, KEMPER INDEPENDENCE
INSURANCE COMPANY, LIBERTY MUTUAL INSURANCE
COMPANY, LIBERTY MUTUAL GROUP, LIBERTY MUTUAL
HOLDING COMPANY, INC., METROPOLITAN GROUP
PROPERTY AND CASUALTY INSURANCE COMPANY,
METROPOLITAN PROPERTY AND CASUALTY INSURANCE
COMPANY, NATIONWIDE GENERAL INSURANCE COMPANY,
NATIONWIDE FINANCIAL SERVICES INCORPORATED,
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NATIONWIDE MUTUAL INSURANCE COMPANY, NEW YORK
CENTRAL MUTUAL FIRE INSURANCE COMPANY,
PREFERRED MUTUAL INSURANCE COMPANY,
PROGRESSIVE INSURANCE COMPANY, THE PROGRESSIVE
CORPORATION, INC., REPUBLIC - FRANKLIN INSURANCE
COMPANY, UTICA MUTUAL INSURANCE COMPANY,
GRAPHICS ARTS MUTUAL INSURANCE COMPANY, UTICA
NATIONAL INSURANCE COMPANY OF TEXAS, UTICA
NATIONAL INSURANCE COMPANY OF OHIO, UTICA
NATIONAL ASSURANCE COMPANY, UTICA LLOYD’S OF
TEXAS, UTICA SPECIALTY RISK INSURANCE COMPANY,
FOUNDERS INSURANCE COMPANY, FOUNDERS INSURANCE
COMPANY OF MICHIGAN, UTICA NATIONAL INSURANCE
GROUP, STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY, HARTFORD FINANCIAL SERVICES GROUP, INC.,
TRAVELERS INSURANCE GROUP HOLDING, INC.,
TRAVELERS PROPERTY CASUALTY CORPORATION, THE
TRAVELERS COMPANIES, INC., ZURICH NORTH AMERICA,
FEDEX CORPORATION, FEDEX EXPRESS, FEDEX GROUND,
FEDEX FREIGHT, FEDEX OFFICE, FEDEX CUSTOM CRITICAL,
FEDEX TRADE NETWORKS, FEDEX SUPPLY CHAIN
SOLUTIONS, FEDEX SERVICES, J.B. HUNT TRANSPORT
SERVICES, INCORPORATED, U-HAUL INTERNATIONAL, THE
ERIE INSURANCE COMPANY,
Defendants-Appellees,
ALLSTATE CORPORATION, CASTLEPOINT NATIONAL
INSURANCE COMPANY, SPECIALTY UNDERWRITERS
ALLIANCE, INC., TOWER GROUP COMPANIES, MAIDEN
HOLDING LTD, KEMPER CORPORATION, MEDICAL
LIABILITY MUTUAL INSURANCE COMPANY, NATIONWIDE
CORPORATION, NEW YORK STATE INSURANCE
RECIPROCAL, THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, PRUDENTIAL FINANCIAL, INC., HEARTLAND
EXPRESS, INCORPORATED, NATIONWIDE, FARMERS
INSURANCE GROUP COMPANIES, FARMERS UNDERWRITERS
ASSOCIATION, AIG, BERKSHIRE HATHAWAY INC.,
NATIONWIDE MUTUAL INSURANCE INTERCOMPANY POOL,
NATIONWIDE, ZURICH FINANCIAL SERVICES AG, ZURICH
INSURANCE GROUP AG,
Defendants.
________________________________________________
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For: Plaintiff-Appellant United States ex rel.
J. Michael Hayes:
J. MICHAEL HAYES (Peter M. Jasen,
Buffalo, NY, on the brief).
For: Defendants-Appellees FedEx Corporation,
Federal Express Corporation, FedEx Ground
Package System Inc., FedEx Freight
Corporation, FedEx Office and Print Services,
Inc., FedEx Custom Critical, Inc., FedEx
Trade Networks, Inc., FedEx Supply Chain
Systems, Inc., and FedEx Corporate Services,
Inc.:
JOHN W. CAMPBELL, Federal Express
Corporation, Memphis, TN.
For: Defendants-Appellees Farmers Insurance
Exchange, Truck Insurance Exchange, Fire
Insurance Exchange, and Foremost Property
and Casualty Insurance Company:
DAVID L. YOHAI (Lori L. Pines and
John P. Mastando III, on the brief),
Weil, Gotshal & Manges LLP, New
York, NY.
For: Defendants-Appellees Travelers Insurance
Group Holding, Inc., Travelers Property
Casualty Corporation, and The Travelers
Companies, Inc.:
Bryce L. Friedman, Simpson
Thatcher & Bartlett LLP, New York,
NY; Deborah L. Stein, Simpson
Thatcher & Bartlett LLP, Los
Angeles, CA.
For: Defendant-Appellee Hartford Financial
Services Group, Inc.:
Jonathan M. Freiman, Wiggin and
Dana LLP, New Haven, CT.
For: Defendants-Appellees J.B. Hunt Transport
Services Inc., Founders Insurance Company,
Founders Insurance Company of Michigan,
Graphic Arts Mutual Insurance Company,
Republic-Franklin Insurance Company, Utica
Mutual Insurance Company, Utica National
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Insurance Company of Texas, Utica National
Insurance Company of Ohio, Utica National
Assurance Company, Utica Lloyd’s of Texas,
Utica Specialty Risk Insurance Company,
and Utica National Insurance Group:
Sharon Angelino, Goldberg Segalla
LLP, Buffalo, NY.
For: Defendants-Appellants Erie Insurance
Company of New York, Erie Insurance
Exchange, Inc., Erie Indemnity Company,
and The Erie Insurance Company:
Heath J. Szymczak, Bond,
Schoeneck & King, PLLC, Buffalo,
NY.
For: Defendants-Appellees Allstate Insurance
Company, Allstate Indemnity Company,
Kemper Independence Insurance Company,
Metropolitan Group Property and Casualty
Insurance Company, Metropolitan Property
and Casualty Insurance Company, and
Defendants Kemper Corporation and The
Allstate Corporation:
Steven M. Levy and Alan S. Gilbert,
Dentons US LLP, Chicago IL; Sean
C. Cenawood, Dentons US LLP,
New York, NY; Sharon Angelino,
Goldberg Segalla LLP, Buffalo, NY.
For: Defendant-Appellee Preferred Mutual
Insurance Company:
Suzanne O. Galbato, Bond,
Schoeneck & King, PLLC, Syracuse,
NY.
For: Defendants-Appellees Progressive Insurance
Company and The Progressive Corporation,
Inc.:
Terrance M. Connors, Connors LLP,
Buffalo, NY; Michael K. Loucks,
Skadden, Arps, Slate, Meagher &
Flom LLP, Boston, MA.
For: Defendant-Appellee State Farm Mutual
Automobile Insurance Company:
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Douglas W. Baruch and Anayansi
Rodriquez Carbo, Fried, Frank,
Harris, Shriver & Jacobson LLP,
Washington, D.C.; Dan David
Kohane, Hurwitz & Fine, P.C.,
Buffalo, NY.
For: Defendant-Appellee Zurich North America:
Michael J. Willett, Gibson, McAskill
& Crosby, LLP, Buffalo, NY.
For: Defendants-Appellees Nationwide General
Insurance Company, Nationwide Financial
Services Incorporated, and Nationwide
Mutual Insurance Company:
Stephen Sozio, Jones Day,
Cleveland, OH; Matthew Corcoran,
Jones Day, Columbus, OH; Mark C.
Davis, Lippes Mathias Wexler
Friedman LLP, Buffalo, NY.
For: Defendant-Appellee New York Central
Mutual Fire Insurance Company:
Eric Dranoff, Saretsky Katz &
Dranoff, LLP, New York, NY.
For: Defendant-Appellee CorePointe Insurance
Company f/k/a Daimler Chrysler Insurance
Company:
Susan L. Swatski, Hill Wallack LLP,
Princeton, NJ.
For: Defendant-Appellee Geico, Insurance:
Barry I. Levy, Cheryl F. Korman,
Brian L. Bank, Rivkin Radler LLP,
Uniondale, NY.
For: Defendants-Appellees Liberty Mutual
Insurance Company, Liberty Mutual Group,
and Liberty Mutual Holding Company, Inc.:
Kevin J. Fee and Amy C. Gross,
Duane Morris LLP, New York, NY:
Dennis R. McCoy, Barclay Damon,
LLP, Buffalo, NY.
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For: Defendant-Appellee U-Haul International:
Kevin M. Hogan, Phillips Lytle LLP,
Buffalo, NY.
________________________________________________
Appeal from the United States District Court for the Western District of New York
(Skretny, J.).
ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
and DECREED that the order of the district court is AFFIRMED.
Plaintiff-Appellant J. Michael Hayes, relator in this qui tam action, appeals from the
February 8, 2016 order and February 9, 2016 judgment of the United States District Court of the
Western District of New York (Skretny, J.) adopting the Report and Recommendation of the
magistrate judge and dismissing Hayes’s Amended Complaint with prejudice as to Hayes as a
sanction pursuant to Federal Rule of Civil Procedure 11. We assume the parties’ familiarity with
the underlying facts, the procedural history of the case, and the issues on appeal.1
Relator Hayes is an attorney. In this qui tam action, Hayes sued over sixty companies,
primarily, but not exclusively, liability insurance companies, alleging that they have been
systematically noncompliant with certain statutory obligations to reimburse Medicare. Hayes
alleged that, through his law practice, he acquired “personal knowledge from conversations with
defense counsel, insurance carrier representatives[,] and other attorneys[] of the Defendant
insurance companies’ company-wide and nationwide failure to notify Medicare of liability case
resolutions . . . .” App. 150-51.
After the government declined to intervene and the complaint was unsealed, Hayes filed a
motion for expedited discovery. In that motion, Hayes admitted that certain defendants might not
have participated in the scheme alleged in the complaint and acknowledged that such defendants
1
We address a challenge to the district court’s subject matter jurisdiction, mounted by several of the defendants, in
an opinion filed simultaneously with this order.
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should be dismissed. After receiving this motion, the magistrate judge called a conference and
observed that “repeatedly throughout the amended complaint, the allegation [wa]s that Mr.
Hayes ha[d] personal knowledge of this nationwide scheme involving every single defendant.” S.
App. 21. The magistrate judge further noted that Hayes’s motion for expedited discovery
“admit[s] . . . that it’s possible that some defendants weren’t involved.” S. App. 22. Due to this
inconsistency, the magistrate judge ordered Hayes to show cause as to why he had not violated
Federal Rule of Civil Procedure 11 and held several subsequent conferences to discuss the issue.
In the written Report and Recommendation on the Rule 11 violation issued on October
16, 2014, the magistrate judge returned to the allegations in Hayes’s complaint, noting that:
One of those allegations, repeated throughout the Amended
Complaint, was that the Relator “has personal knowledge that this
scheme [to defraud Medicare] was . . . employed generally and
throughout the industry nationally, by all the Defendants herein.”
. . . However, the Relator’s subsequent submissions demonstrate
beyond question that he did not know whether all defendants had
participated in the alleged scheme . . . . Relator’s claim of personal
knowledge that all defendants defrauded Medicare, and that they
did so whenever they settled claims involving Medicare
beneficiaries, fits the definition of subjective bad faith, because he
knew that he had no such knowledge as to all defendants or all
settlements.
S. App. 111-13 (alterations in original). As a result, the magistrate judge recommended that
Hayes’s complaint against all defendants be dismissed with prejudice as to Hayes, but without
prejudice as to the United States.
Hayes and the defendants submitted objections to the Report and Recommendation, but
the district court adopted the magistrate judge’s recommendation. The district court observed
that “Hayes steadfastly adhered to his disproven allegations that he had personal knowledge that
all defendants were engaged in a nationwide scheme to defraud the United States by failing to
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reimburse Medicare” when “[his] own submissions and statements before the court demonstrate
that he does not possess such personal knowledge.” S. App. 132. Hayes now appeals.
Federal Rule of Civil Procedure 11(b)(3) provides that “[b]y presenting to the court a
pleading, . . . an attorney . . . certifies that to the best of [his] knowledge, information, and belief,
. . . the factual contentions have evidentiary support.” A court may, sua sponte, “order an
attorney . . . to show cause why conduct specifically described in the order has not violated Rule
11(b).” Fed R. Civ. P. 11(c)(3). “If, after notice and a reasonable opportunity to respond, the
court determines that Rule 11(b) has been violated, the court may impose an appropriate
sanction.” Fed. R. Civ. P. 11(c)(1). A district court must make a finding of bad faith before
issuing sanctions sua sponte. See Muhammad v. Walmart Stores E., L.P., 732 F.3d 104, 108 (2d
Cir. 2013) (per curiam) (citing In re Pennie & Edmonds LLP, 323 F.3d 86, 91 (2d Cir. 2003)).
Similarly, the district court must make a finding of “willfulness, bad faith, or fault” before
dismissing a complaint as a sanction. West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779
(2d Cir. 1999).
Hayes now concedes that his claim to have personal knowledge of the involvement of
“all” the defendants in the alleged scheme was “incorrect,” but contends that this error was not
the result of bad faith and thus did not merit the sanction of dismissal. Br. at 22, 24. Whether a
litigant “acted . . . in bad faith [is a] question[] of fact, and we review the [d]istrict [c]ourt’s
determination[]” on that question “for clear error.” Agiwal v. Mid Island Mortg. Corp., 555 F.3d
298, 302 (2d Cir. 2009) (per curiam). Ordinarily, we review a district court’s imposition of Rule
11 sanctions for abuse of discretion. See Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy &
Sauce Factory, Ltd., 682 F.3d 170, 175 (2d Cir. 2012). “We must bear in mind, however, that
when the district court is accuser, fact finder and sentencing judge all in one, our review is more
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exacting than under the ordinary abuse-of-discretion standard.” ATSI Commc’ns, Inc. v. Shaar
Fund, Ltd., 579 F.3d 143, 150 (2d Cir. 2009) (citation and internal quotation marks omitted).
The magistrate judge concluded, and the district court adopted the conclusion, that
Hayes’s “claim of personal knowledge that all defendants defrauded Medicare . . . fits the
definition of subjective bad faith[] because he knew that he had no such knowledge as to all
defendants.” S. App. 112-13, 132. Hayes’s primary argument to the contrary, that he was
confused by “corporate complexities,” Br. at 25, is different from the explanations for his
behavior that he offered to the magistrate judge below. Even if we were to credit Hayes’s
explanation, confusion about corporate complexities would not justify falsely purporting to have
personal knowledge as to more than sixty defendants’ involvement in wrongdoing. Cf. DiRose v.
PK Mgmt. Corp., 691 F.2d 628, 632 (2d Cir. 1982). In light of the foregoing, the finding of bad
faith made by the magistrate judge and district court is not clearly erroneous, even under our
“more exacting” standard of review. Shaar Fund, 579 F.3d at 150.
Hayes also argues that he should have been granted leave to amend his complaint. “The
court should freely give leave [to amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2).
However, leave to amend may be denied based on bad faith. See Loreley Fin. (Jersey) No. 3 Ltd.
v. Wells Fargo Sec., LLC, 797 F.3d 160, 190 (2d Cir. 2015). “We review the district court’s
denial of leave to amend the complaint for abuse of discretion.” Id. at 169. The magistrate judge
concluded Hayes “should not now be allowed to simply walk away from his earlier
misrepresentations,” and the district court adopted this conclusion. S. App. 118, 132. And insofar
as Hayes concedes that some of the defendants may not be proper parties to the case, his
proposed Second Amended Complaint does not solve that problem; in fact, the proposed Second
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Amended Complaint would add 38 new defendants. The district court’s denial of leave to amend
for bad faith based on the foregoing does not constitute an abuse of discretion.
We have considered all of Hayes’s remaining arguments and find them without merit. For
the reasons given here, as well as those given in the opinion on the district court’s subject matter
jurisdiction issued simultaneously with this order, we AFFIRM the judgment of the district
court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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