DocketNumber: Case No. 18-cv-03175-SVK
Citation Numbers: 374 F. Supp. 3d 884
Judges: Keulen
Filed Date: 12/20/2018
Status: Precedential
Modified Date: 7/25/2022
I. INTRODUCTION
On May 29, 2018, Plaintiffs Kristi Kelley and Chad Loya (collectively, "Plaintiffs"), individually and on behalf of the United States filed a complaint to redress violations of the Federal False Claims Act. ECF 1 ("Complaint"). Plaintiffs rented a residential unit from Defendants Roger Denault and the Denault Family Limited Partnership (collectively, "Defendants") for over a decade. Id. at ¶ 9. Plaintiffs allege that Defendants violated the terms of their Housing Assistance Payment Contract ("HAP Contract") and took a number of unlawful actions related to Plaintiffs' tenancy. See id. On October 11, 2018, Defendants filed a motion to dismiss and motion to strike Plaintiffs' first, second, third and tenth claims as well as Plaintiffs' request for punitive damages. ECF 30. The Court held a hearing on December 11, 2018. Based on the pleadings, submissions of the Parties, arguments presented at the hearing and relevant law, the Court GRANTS Defendants' motion as to Plaintiffs' third claim and DENIES Defendants' motion as to Plaintiffs' first, second and tenth claims as well as to Plaintiffs' punitive damages allegations.
II. BACKGROUND
A. Factual Background
The Court bases the following factual background on the allegations set forth in Plaintiffs' Complaint, which the Court takes as true when ruling on Defendants' motion to dismiss and motion to strike.
*888Erickson v. Pardus ,
Plaintiffs and their two children rented an unpermitted residential unit located at 8485A Glen Arbor Road in Ben Lomond, California, from December 2006 through May 2018 ("Subject Premises"). ECF 1 at ¶ 9. Defendants own the Subject Premises, which is a 500 square foot, one bedroom dwelling, constructed in 1978. Id. at ¶¶ 10, 18. Santa Cruz County never approved the Subject Premises for use as either a residential rental unit or as a second unit. Id. at ¶ 19. Indeed, when Defendant Denault applied for a permit to expand the septic system in 2002, he labeled the Subject Premises as an office. Id. at ¶ 20.
Plaintiff Kelly became a Section 8 voucher recipient in September 2015. Id. at ¶ 9. The federal government assists low-income families, the elderly and disabled persons in obtaining decent, safe and sanitary housing in the private market through the Section 8 voucher program. The United States Department of Housing and Urban Development ("HUD") implements the program by providing funding to public housing agencies to use as rent subsidies to pay landlords renting to tenants with Section 8 vouchers.
Before approving Plaintiffs' tenancy with Defendants, the Housing Authority of the County of Santa Cruz ("Housing Authority") required that Defendants enter into a HAP Contract with the Housing Authority. Id. at ¶ 26. The HAP Contract imposes conditions on Defendants. Id. at ¶¶ 27-28. In particular, it requires that Defendants certify that the lease complies with local and state law and that Defendants will not receive any rent or other consideration for the property beyond the payment amount provided for in the HAP Contract. Id. The HAP Contract further provides that Plaintiffs would pay $ 202 per a month in rent as well as their share of the utilities, while the federal government would contribute $ 748 in subsidies for a total rent of $ 950 a month. Id. at ¶ 32. In October 2016, the Housing Authority issued an HAP Contract amendment that reduced Plaintiffs' portion of the rental payments to $ 33 and increased the federal government's payments to $ 917. Id. at ¶ 33.
Defendants increased Plaintiffs' share of the water bill to 60% in June 2016, and Plaintiffs paid this increased utility bill through December 2017. Id. at ¶¶ 36, 42. In April 2017, Defendants sent Plaintiffs notice of a rent increase from $ 950 to $ 1,100 without seeking prior approval or notifying the Housing Authority. Id. at ¶ 38. Defendants then served Plaintiffs with two 90-day notices to terminate tenancy and filed an unlawful detainer action against Plaintiffs on December 20, 2017. Id. at ¶¶ 39-40, 44. In January 2018, Defendants demanded $ 1,200 in allegedly delinquent utility payments. Id. at ¶ 43.
Plaintiffs also allege that the Subject Premises suffers from a number of habitability problems. Id. at ¶ 25. In addition to frequent septic and sewage problems, the Subject Premises had electrical issues, a leaking roof, [and] growth of toxic biological contaminants." Id. at ¶ 25. Finally, Defendants complained several times to Plaintiffs about their water use suggesting that Plaintiffs limit their showering or take sponge baths to avoid over taxing the septic system. Id. at ¶¶ 37-38.
B. Defendants' Motion to Dismiss and Motion to Strike
On October 11, 2018, Defendants filed a motion to dismiss and motion to strike Plaintiffs' first, second, third and tenth claims as well as Plaintiffs' request for punitive damages. ECF 30. Plaintiffs' first claim alleges violations of the Federal *889False Claims Act (
All Parties have consented to the jurisdiction of the undersigned magistrate judge. ECF 8; ECF 10; ECF 23.
III. LEGAL STANDARD
Under Federal Rule of Civil Procedure 12(b)(6), the Court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly ,
IV. DISCUSSION
A. Plaintiffs' False Claims Act Claim
1. Legal Background
Plaintiffs' first claim seeks relief under the False Claims Act. ECF 1 at ¶¶ 56-68. The False Claims Act imposes liability on any person who knowingly submits a false claim to the United States government.
*890made with scienter, (3) that was material, causing (4) the government to pay out money or forfeit moneys due."
Here, Plaintiffs allege that Defendants submitted false claims for federal funds as part of the Section 8 voucher program. ECF 1 at ¶¶ 56-68. Plaintiffs specifically allege that two theories support their False Claims Act claim against Defendants. First, Defendants misrepresented the legality of the Subject Premises in violation of the HAP Contract which requires that the rental property be legal under state law, and second, Defendants charged and collected excess side-payments beyond the approved amount under the HAP contract. Id. at ¶ 60. Defendants' motion to dismiss focuses on the second and third elements of a False Claims Act claim-scienter and materiality. ECF 24 at 2.
2. Scienter
Under the False Claims Act, a person acts "knowingly" if that person "(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information."
Plaintiffs' Complaint contains adequate allegations regarding scienter for each of their two theories of False Claims Act liability. First, the Complaint alleges that Defendants had knowledge of the illegality of the Subject Premises based on Defendants' misrepresentation on their July 12, 2002, permit application to expand the septic system in which Defendant Denault labeled the structure that would become the Subject Premises as an office. ECF 1 at ¶ 20. This allegedly fraudulent permit application was made prior to Defendants signing the HAP Contract in 2015. As a result, Defendants' alleged failure to advise the Housing Authority about the illegality of the unit is a misrepresentation by omission that "could constitute a knowing and intentional fraud on the government." U.S. ex rel Sutton v. Reynolds ,
*8913. Materiality
A claim under the False Claims Act must include "[a] misrepresentation about compliance with a statutory, regulatory, or contractual requirement" that is "material to the Government's payment decision." Universal Health ,
Defendants contend that Universal Health stands for the proposition that a requirement that a defendant comply with local and state laws is too general to satisfy the materiality prong, and as a result, Plaintiffs' theory regarding Defendants' false certification of the Subject Premises' legality fails to state an actionable claim. ECF 24 at 4-5. Although "statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment," Universal Health ,
Plaintiffs allege that the HAP Contract requires Defendants to certify that "[t]he Lease is consistent with State and local law" and that "[h]ad HUD been aware that there was no certificate of occupancy issued for the unit, it would not have agreed to subsidize the subject unit." ECF 1 at ¶ 27 (quoting ECF 1-1 at 4) (internal quotation marks omitted). That certification goes directly to subject of the HAP Contract-the residence for the Section 8 voucher recipient and whether the landlord is legally permitted to rent that residence. Further, requiring that the rental unit be legal serves the housing voucher program's purpose, which is ensuring that "eligible families can afford decent, safe, and sanitary housing."
*892The amount of a Section 8 recipient's monthly payment is likewise material to the government's payment decision. Several courts have recognized that collecting or attempting to collect illegal-side-payments gives rise to a cognizable claim under a Fair Claims Act false-certification theory. United States ex rel. Carmichael v. Gregory ,
At oral argument, Defendants posited that Plaintiffs' allegation of a single impermissible rent increase is insufficient to rise to the level of materiality. Defendants mischaracterize Plaintiffs' allegations and the law. First, Plaintiffs allege that Defendants charged or collected three side-payments from Plaintiffs. ECF 1 at ¶¶ 36, 38, 43. For example, Defendants allegedly increased Plaintiffs' share of the water bill to 60% in June 2016, and Plaintiffs paid this extra side-payment through December 2017.
B. Plaintiffs' Claim Under Santa Cruz County Code § 8.43.020(C)
In addition to Plaintiffs' second claim for unlawful retaliation under
It shall be unlawful for a lessor to increase rent, decrease services, cause a lessee to quit involuntarily, bring an action to recover possession, or threaten to do any of such acts, for the purpose of retaliating against the lessee because he or she has lawfully organized or participated in a lessees' association or an organization advocating for affordable rents or lessees' rights or has lawfully and peaceably exercised any rights under the law.
Santa Cruz County Code § 8.43.020(C).
Defendants argue that the California litigation privilege set forth in *893
1. Preemption Under California Law
Article XI, section 7 of the California Constitution provides that "[a] county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws." Cal. Const. art. XI, § 7. "If otherwise valid local legislation conflicts with state law, it is preempted by such law and is void." Sherwin-Williams Co. v. City of Los Angeles ,
2. The California Litigation Privilege
The litigation privilege's principal purpose is to provide litigants and witnesses with "the utmost freedom of access to the courts without fear of being harassed subsequently by derivative tort actions." Silberg ,
3. Analysis
In Action Apartment , the California Supreme Court addressed a similar ordinance to Santa Cruz County Code § 8.43.020(C). The Court ruled that the litigation privilege preempted the portion of a Santa Monica city ordinance that "authorize[d] civil and criminal penalties against a landlord who maliciously ... brings any action to recover possession of a rental unit without a reasonable factual or legal basis." Action Apartment ,
Plaintiffs contend that since Action Apartment , courts have reached a consensus that the litigation privilege does not preempt retaliatory eviction actions. ECF 30 at 15. However, the cases cited by Plaintiffs only address whether the litigation privilege preempts
Action Apartment specifically recognized the distinction between state and local laws, noting that "local governments may not create their own exceptions to the litigation privilege." Id. at 1247,
Nevertheless, Action Apartment also recognized that a local ordinance may not be preempted when it authorizes penalties or a cause of action based on non-litigation communications. Indeed, the Court upheld another provision of the Santa Monica ordinance at issue in Action Apartment , which authorized penalties based the service of eviction notices.
Although Santa Cruz County Code § 8.43.020(C) is not limited by its terms to retaliatory evictions like the portion of the Santa Monica ordinance invalidated in Action Apartment , Plaintiffs base their third claim solely on Defendants' unlawful detainer action. Plaintiffs allege that "Defendants attempted to evict Relators in retaliation for Relators' complaints and their refusal to submit to a rent increase while severe habitability issues remained unrepaired which constituted Defendants' exercise of their rights under Santa Cruz County Code § 8.43." ECF 1 at ¶ 74. As the California Supreme Court recognized, Defendants' attempt to evict Plaintiffs through an unlawful detainer action is a communication protected by the litigation privilege. Action Apartment ,
C. Plaintiffs' Intentional Misrepresentation Claim
Defendants move to dismiss Plaintiffs' tenth claim, contending that Plaintiffs fail to meet the heightened pleading requirement of Federal Rule of Civil Procedure 9(b). ECF 24 at 7-8. Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). To satisfy that rule, a plaintiff must allege the "who, what, where, when, and how" of the charged misconduct. Cooper v. Pickett ,
Plaintiffs provide sufficiently specific allegations to satisfy Rule 9(b)'s standard. First, Plaintiffs identify the particular misrepresentations that Defendants allegedly made as false certifications of "the legality, safety and habitability code compliance of the Subject Premises." ECF 1 at ¶ 125. Second, the Complaint further alleges that Defendants had knowledge of the illegality of the Subject Premises based on Defendant Denault's misrepresentation on a July 12, 2002, permit application to expand the septic system in which he labeled the Subject Premises as an office. Id. at ¶ 20. Third, Plaintiffs allege that they "relied on Defendants' implied or express representations that the Subject Premises was a legal dwelling unit." Id. at ¶ 19. Finally, Plaintiffs allege that they "acted in justifiable reliance on Defendants' promises in renting the Subject Premises," id. at ¶ 127, and they "were not aware that the Subject Premises was thus not a legal rental unit until county code enforcement activity took place in early 2018." Id. at ¶ 19. Such allegations identify Defendants' allegedly fraudulent conduct with sufficient particularity to satisfy Rule 9(b). See Cooper ,
D. Plaintiffs' Request for Punitive Damages
Defendants move to dismiss or in the alternative strike Plaintiffs' punitive damages claims. ECF 24 at 8-9. They argue that Plaintiffs' Complaint fails to state facts entitling them to punitive damages under California law and that none of the acts identified by Plaintiffs constitute the level of extreme conduct necessary to trigger punitive damages.
California law provides for punitive damages where "the defendant has been guilty of oppression, fraud, or malice."
A plaintiff may recover punitive damages for a retaliatory eviction in certain circumstances under California law.
(1) Defendant demanded that Plaintiff move out of his home, without any cause, and threatened to bring an action to evict him if he stayed; (2) Defendant increased Plaintiff's rent by purporting to terminate the HAP Contract and hold him responsible for the full monthly rent to owner; and (3) Defendant harassed Plaintiff by leaving aggressive, abusive, and profane messages on his answering machine regarding his tenancy.
Plaintiffs in this case allege similar retaliatory actions. They allege that Defendants sought to evict Plaintiffs through a retaliatory unlawful detainer action (ECF 1 at ¶ 44), Defendants charged and collected side-payments in violation of the HAP Contract (id. at ¶¶ 38-43) and Defendants harassed Plaintiffs regarding their water use.
*897V. CONCLUSION
For the reasons set forth above, the Court ORDERS as follows:
• The Court DENIES Defendants' motion to dismiss Plaintiffs' first, second and tenth claims.
• The Court GRANTS Defendants' motion to dismiss Plaintiffs' third claim without prejudice.
• The Court DENIES Defendants' motion to dismiss or in the alternative strike Plaintiffs' punitive damages claims.
• The Court also GRANTS Plaintiffs' unopposed request for judicial notice (ECF 30-1).
The Court GRANTS Plaintiffs the opportunity to amend their third claim by December 31, 2018 , Defendants must file their response by January 9, 2019 . The Parties are to appear for a case management conference on January 22, 2019 , with a joint case management statement to be filed by January 15, 2019 .
SO ORDERED.
The term excess side-payments refers to any additional payments beyond those provided for in the HAP Contract, such as excess rent or utility charges.
The plaintiff in Winslett did bring a claim under Oakland's Just Cause for Eviction Ordinance.