Federal Recovery Services, Inc. v. United States , 72 F.3d 447 ( 1995 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 94-30545
FEDERAL RECOVERY SERVICES, INC.,
United States, ex rel., ET AL.,
Plaintiffs-Appellants,
and
MICHAEL H. PIPER, III and LOUIS R. KOERNER, JR.,
Movants-Appellants,
versus
UNITED STATES OF AMERICA,
Intervenor-Appellee,
and
CRESCENT CITY E.M.S., INC.,
dba Medic One, ET AL.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Louisiana
December 22, 1995
Before REYNALDO G. GARZA, KING, and HIGGINBOTHAM, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This case came with a host of issues attending the question
whether Federal Recovery Services, Inc. or Michael Boatright, a
minority shareholder of FRS, was a proper party under the False
Claims Act, 31 U.S.C. § 3729 et seq. Following oral argument, FRS
settled with the United States for a substantial sum, and the
parties agreed to dismiss most of the claims arising in this
appeal. FRS's attorneys claim attorneys' fees and expenses under
the False Claims Act, 31 U.S.C. § 3730(d), in addition to the
substantial fees paid from the settlement proceeds. We are
persuaded that FRS lacked standing to prosecute a claim under the
False Claims Act and that the district court never had jurisdiction
over it. FRS's effort to "amend" and substitute a minority
shareholder after the government had intervened was not effective.
We affirm the order of the district court dismissing the claim.
I.
On October 8, 1990, Priority E.M.S. sued its competitor,
Crescent City E.M.S., Inc., in Louisiana state court, alleging that
Crescent City was engaging in unfair trade practices by filing
fraudulent claims for reimbursement for ambulance services rendered
to individuals not needing them.
On November 7, 1991, the president of Priority E.M.S., Michael
Boatright, and his attorneys, Michael Piper and Louis Koerner,
incorporated Federal Recovery Services, Inc. The attorneys control
a majority of the corporation's stock under a subscription
agreement, although shares were not formally issued. They also
served as directors and officers in the corporation.
On November 12, 1991, FRS filed a sealed complaint attempting
to state a claim in the name of the United States of America
against Crescent City E.M.S., Inc., Blue Cross & Blue Shield of
2
Arkansas, and other individual defendants. The complaint alleged
that, beginning in January 1989, Crescent City submitted claims
seeking reimbursement for the transportation of dialysis patients
who were ineligible under Medicare and Medicaid regulations for
ambulance services. In particular, FRS alleged that Medic One
provided ambulance transportation for Urban Chastant and 13 other
individuals, even though their medical conditions did not require
such service.
On March 1, 1993, the United States filed a notice of its
partial election to intervene in the action pursuant to 31 U.S.C.
§ 3730(b)(4).1 The following day, the district court ordered the
complaint unsealed and served upon Crescent City, Blue Cross, and
the individual defendants. In addition, the district court's order
provided that "the United States shall have 30 days from the date
of this order in which to file an amended complaint." Despite this
order, on March 3, 1993, over two-and-one-half years after filing
the complaint, FRS filed its First Amended Complaint naming Michael
Boatright as an additional relator and alleging additional
instances of fraudulent conduct by Crescent City. This amended
complaint purported to invoke Rule 15(a) of the Federal Rules of
Civil Procedure.
1
The United States elected to intervene in that portion
of the suit against Crescent City and the individual defendants
but declined to intervene against Blue Cross & Blue Shield of
Arkansas. Although the United States' intervention vested it
with control of the litigation against Crescent City, FRS
retained the authority to proceed against Blue Cross on its own.
31 U.S.C. § 3730(b)(4)(B).
3
On June 2, 1993, Crescent City moved to dismiss FRS for lack
of subject matter jurisdiction. Crescent City argued that FRS was
not entitled to bring this action because the facts underlying the
complaint had been previously disclosed in the prior Louisiana
state court litigation and that FRS was not the original source of
that information. In addition, Crescent City argued that Michael
Boatright was improperly joined as a party plaintiff.
Attempting to cure the jurisdictional defect identified by
Crescent City, on August 3, 1993, FRS and Boatright filed a motion
to substitute Boatright for FRS as the relator. On August 12,
1993, the district court granted Crescent City's motion to dismiss
FRS for lack of subject matter jurisdiction. The court, construing
FRS's first amended complaint filed on March 3, 1993 as a motion
for leave to amend its complaint, rejected FRS's attempt to add
Boatright as an additional relator. On August 30, 1993, the
district court confirmed its August 12th ruling and issued its
memorandum explaining the ruling.
With FRS and Boatright out of the picture, the United States
proceeded with the litigation against Crescent City and prepared
the case for trial. Before trial, the United States and Crescent
City reached a settlement in which Crescent City agreed to pay over
$1.8 million, and, on August 2, 1994, both joined in filing a
stipulation of dismissal pursuant to Rule 41(a)(1)(ii). That same
day, almost a year after they had been dismissed from the case, FRS
and Boatright filed a motion for reconsideration of the district
court's August 30, 1993 ruling. In addition, FRS filed a motion to
4
strike the stipulation of dismissal. Prompted by FRS's actions,
the United States filed a motion to dismiss the suit pursuant to
Rule 41(a)(2) on September 9, 1994.
While the motion for reconsideration was pending, on August
30, 1994, FRS's attorneys, Louis Koerner and Michael Piper, both
filed motions for award of attorneys' fees summing to $190,000. On
September 21, 1994, the district court denied FRS's motion for
reconsideration, holding that "[n]o argument or authority cited in
support of FRS's Motion for Reconsideration . . . has given this
Court cause or pause to question its prior ruling." Moreover, the
court noted that FRS's and Boatright's attempt to reenter the
litigation at this stage in the litigation--on the eve of the
settlement of suit--were particularly unwelcome.
Turning to the motion for attorneys' fees, the district court
ruled that FRS's attorneys were not entitled to fees because FRS
was not a proper party to the litigation. In addition, the court
noted that there had been no finding that Crescent City violated
the False Claims Act. Accordingly, the district court entered its
judgment on September 23, 1994, dismissing the claims against
Crescent City and the individual defendants.2
FRS, Boatright, and FRS's attorneys timely appealed to this
court, contesting the propriety of the district court's orders
2
On April 23, 1993, Blue Cross had filed a motion to
dismiss FRS's claim for lack of subject matter jurisdiction. The
district court had granted this motion on August 13, 1993, and
the final judgment dismissed the claims against Blue Cross. FRS
and Boatright did not appeal from that portion of the judgment
dismissing the claims against Blue Cross.
5
dismissing FRS, denying FRS leave to add Boatright as an additional
relator, and denying attorneys' fees for FRS's attorneys, Koerner
and Piper.
After oral argument, the United States negotiated a settlement
agreement with FRS, Boatright, and the two attorneys. Pursuant to
the settlement agreement, the United States agreed to pay Boatright
$186,250, 10% of the proceeds of its recovery from Crescent City.
The agreement contemplated that Boatright, Koerner, and Piper would
share in the proceeds of this settlement. In return, FRS,
Boatright, and the attorneys released their claims against the
United States. The agreement expressly provided, however, that it
did not affect the right of FRS and its attorneys to pursue this
appeal for the purposes of challenging the district court's denial
of an award of attorneys' fees and expenses against Crescent City.
II.
31 U.S.C. § 3730(d)(1) provides that qui tam relators shall
receive, in addition to any share of the proceeds of the litigation
or settlement of the underlying qui tam action, "an amount for
reasonable expenses which the court finds to have been necessarily
incurred, plus reasonable attorneys' fees and costs," such
expenses, fees, and costs to be awarded "against the defendant."
Only those parties that are properly a part of the qui tam action
are statutorily entitled to the award of attorneys' fees and
expenses. United States ex rel. Taxpayers Against Fraud v. General
Electric Co., 41 F.3d 1032, 1044 (6th Cir. 1994) (noting that
6
attorneys for qui tam relator who has no standing are not entitled
to attorneys' fees). Thus, Koerner's and Piper's statutory
entitlement to attorneys' fees depends in the first instance upon
their client's status as a party in the case. We hold that FRS was
not a proper party to this litigation and that therefore FRS's
attorneys, Koerner and Piper, are not entitled to attorneys' fees
and expenses.
A.
31 U.S.C. § 3730(e)(4)(A) limits the subject matter
jurisdiction of courts adjudicating qui tam actions under the False
Claims Act. It provides:
No court shall have jurisdiction over an action under
this section based upon the public disclosure of
allegations or transactions in a criminal, civil, or
administrative hearing, in a congressional,
administrative, or Government Accounting Office report,
hearing, audit, or investigation, of from the news media,
unless the action is brought by the Attorney General or
the person bringing the action is an original source of
the information.
Following the statutory framework, we ask 1) whether there has been
a "public disclosure" of allegations or transactions, 2) whether
the qui tam action is "based upon" such publicly disclosed
allegations, and 3) if so, whether the relator is the "original
source" of the information. Cooper v. Blue Cross & Blue Shield of
Florida, Inc., 19 F.3d 562, 565 n.4 (11th Cir. 1994).
The filings in the Louisiana state court suits brought by
Priority E.M.S. were "public disclosures" within the meaning of the
statute. "[A]ny information disclosed through civil litigation and
on file with the clerk's office should be considered a public
7
disclosure of allegations in a civil hearing for purposes of
section 3730(e)(4)(A)." United States ex rel. Siller v. Becton
Dickinson & Co., 21 F.3d 1339, 1350 (4th Cir.), cert. denied, 115
S.Ct. 316 (1994). This includes civil complaints. Id. at 1350-51.
In October 1990, more than a year prior to the filing of this
qui tam action, Priority E.M.S. filed two different complaints
against Crescent City in Louisiana state court, both alleging that
Crescent City submitted fraudulent claims for reimbursement for
ambulance services provided to individuals who were not medically
eligible for those services. See Priority E.M.S., Inc. v. Crescent
City E.M.S. d/b/a Medic One and Medic One Inc., No. 90-19542 (La.
Civ. Dist. Ct.), remedial writ denied, 607 So.2d 559 (La. 1992),
cert. denied, 646 So.2d 380 (La. 1994); Priority E.M.S., Inc. v.
Crescent City E.M.S., Inc. d/b/a Medic One, Inc. and Medic One, No.
64-668 (Jud. Dist. Ct.), remedial writ denied, 600 So.2d 660 (La.
1992). These complaints were a matter of public record and, as
such, constitute public disclosures.
FRS's qui tam action is "based on" these public disclosures.
Wang v. FMC Corp., 975 F.2d 1412, 1415 (9th Cir. 1992). FRS has
conceded as much, noting in its Motion to Partially Lift Seal filed
on August 10, 1992 that "[t]he claim of Priority E.M.S., Inc.
against Crescent City E.M.S. for unfair trade practices is based
upon the same factual matters as the claim against Crescent City
E.M.S., Inc. in this proceeding." FRS now contends that its qui
tam action is not based on the prior Louisiana state court
litigation because only one instance of fraud--that involving Urban
8
Chastant--is common to both the state and federal litigation. FRS
presses that its investigation unearthed additional instances of
fraudulent conduct by Crescent City that were not a part of the
earlier, state court litigation. We are not persuaded.
"[A]n FCA qui tam action even partly based upon publicly
disclosed allegations or transactions is nonetheless 'based upon'
such allegations or transaction." United States ex rel. Precision
Co. v. Koch Industries, Inc., 971 F.2d 548, 552 (10th Cir. 1992)
(Koch I), cert. denied, 113 S.Ct. 1364 (1993); see also Cooper, 19
F.3d at 567 (holding that 31 U.S.C. § 3730(e)(4) "preclude[s] suits
based in any part on publically disclosed information"). As the
Tenth Circuit acknowledged, Congress chose not to insert the adverb
"solely" before "based upon," yet to hold as FRS urges would
accomplish exactly that result and alter the statute's plain
meaning. Koch I, 971 F.2d at 552. Stated another way, FRS cannot
avoid the jurisdictional bar simply by adding other claims that are
substantively identical to those previously disclosed in the state
court litigation.
B.
Nor does FRS qualify as an "original source" immune to the
jurisdictional bar of 31 U.S.C. § 3730(e). The False Claims Act
defines an "original source" as "an individual who has direct and
independent knowledge of the information on which the allegations
are based and has voluntarily provided the information to the
Government before filing an action under this section which is
based on the information." 31 U.S.C. § 3730(e)(4)(B).
9
In Koch I, the Tenth Circuit rejected a virtually identical
claim. There, Precision Company filed a qui tam action against
Koch Industries, Inc., alleging that Koch had been understating the
amount of crude oil and natural gas it had produced from federal
lands. Precision had obtained the information regarding Koch's
conduct from Precision's majority shareholder, William Koch, and
its president, William Presley. Nevertheless, the Koch I court
held that Precision was not the original source of the information
that Koch and Presley had collected prior to Precision's
incorporation. 971 F.2d at 554 (noting that "Precision is the qui
tam plaintiff in the present action, not William Koch or William
Presley").
There is no suggestion that this litigation is based upon
information collected by FRS. To the contrary, like Precision, FRS
was not incorporated until well after Priority E.M.S. had
investigated Crescent City's conduct and filed the state court
suits against Crescent City. See id. (finding that Precision did
not come into existence as corporate entity until well after
related state court litigation had been commenced). Indeed, FRS
was incorporated only days before this qui tam action was filed.
FRS responds that, even if it is not the original source of
the information collected prior to its incorporation, it is the
original source of that information obtained after its
incorporation. FRS presses that it undertook a substantial amount
of investigative work, work that disclosed additional fraudulent
10
conduct by Crescent City and that significantly enhanced the value
of the litigation to the United States.
The Tenth Circuit in Koch I rejected an identical argument,
holding that Precision was not the original source of the
information that Koch and Presley obtained after Precision's
incorporation. The court concluded that "this information is best
characterized as a continuation of, or derived from Mr. Presley's
and Mr. Koch's individual investigations." 971 F.2d at 554.
Comparing the information obtained by Koch and Presley prior to
Precision's incorporation with that obtained after its
incorporation, the court noted that the latter information was
"weak, informal and strikingly redundant." Id.FRS's status in this litigation differs from Precision's
status in Koch I in no meaningful way. FRS never demonstrates that
the work that it performed unearthed qualitatively different
information than what had already been discovered. Rather, as FRS
concedes, FRS participated in this litigation solely as the nominal
plaintiff-relator. Indeed, FRS was incorporated with the express
purpose of pursuing qui tam litigation based on the information
that others, either Priority E.M.S. or Boatright, had already
obtained. Any information collected after FRS's incorporation was
the product and outgrowth of the information that others had
obtained prior to FRS's incorporation. In short, FRS had no
11
"direct and independent" knowledge of the information upon which
this qui tam action is based.3
Finally, FRS attempts to end-run the "original source" inquiry
by arguing that the United States' intervention in the action cured
any jurisdictional defect. According to this reading of 31 U.S.C.
§ 3730(e)(4), that section bars qui tam actions based on publicly
disclosed information unless the plaintiff is the original source
or unless the United States intervenes.
The United States may properly intervene in a suit by a
putative source regardless of jurisdictional failures in the
underlying suit. United States v. Pittman, 151 F.2d 851 (5th Cir.
1945), cert. denied, 328 U.S. 843 (1946). Such intervention does
not, however, confer subject matter jurisdiction over the relator's
claims. Such a reading of the jurisdictional bar of 31 U.S.C.
§ 3730(e)(4) ignores the False Claims Act's goal of preventing
parasitic suits based on information discovered by others. Indeed,
under FRS's interpretation, the United States' intervention would
cure the jurisdictional defects in all suits, even those brought by
individuals who discovered the defendant's fraud by reading about
it in the morning paper. The legislative history and policy behind
the Act refute such a reading.
3
Nor did FRS demonstrate that it "has voluntarily
provided the information to the Government before filing an
action." 31 U.S.C. § 3730(e)(4)(B). Although not impossible, it
is highly unlikely that FRS contacted the government during the
5-day time span between FRS's incorporation and the filing of
this suit.
12
Nor does our interpretation of 31 U.S.C. § 3730(e)(4) render
ineffective that portion of 31 U.S.C. § 3130(d)(1) that provides
for the award to the relator of up to 10% of the proceeds of the
action where the action was "based primarily on disclosures of
specific information." The legislative history discloses that
Congress included that provision to provide for "the case where the
information has already been disclosed and the person qualifies as
an 'original source' but where the essential elements of the case
were provided to the government or news media by someone other than
the qui tam plaintiff." 132 Cong. Rec. H9389 (statement of Rep.
Berman); see also 132 Cong. Rec. S11244 (statement of Sen.
Grassley). We hold that 31 U.S.C. § 3730(e)(4) bars FRS from
pursuing this qui tam litigation.
III.
FRS also argues that, even if it cannot pursue this
litigation, Michael Boatright can. In this vein, FRS contends that
the district court erred in denying its attempt to amend its
complaint to name Boatright as an additional relator and in denying
FRS's attempt to substitute Boatright as the relator. We disagree.
31 U.S.C. 3730(e)(4) denies subject matter jurisdiction over
the qui tam complaint filed by FRS. Under precedent controlling
the panel, neither Rule 15 nor any other rule of civil procedure
permit FRS to cure this jurisdictional defect by including or
substituting Boatright. In Aetna Casualty & Surety Co. v. Hillman,
796 F.2d 770, 774 (5th Cir. 1986), we held that Rule 15 does not
13
permit a plaintiff from amending its complaint to substitute a new
plaintiff in order to cure the lack of subject matter jurisdiction.
See also Summit Office Park, Inc. v. United States Steel Corp., 639
F.2d 1278, 1282 (5th Cir. Unit A Mar. 1981) (holding that "where a
plaintiff never had standing to assert a claim against the
defendants, it does not have standing to amend the complaint and
control the litigation by substituting new plaintiffs"). We see no
difference between FRS's attempt to remedy the lack of subject
matter jurisdiction in this case from that rejected in Hillman.
We recognize that the Tenth Circuit in United States ex. rel.
Precision Co. v. Koch Industries, Inc., 31 F.3d 1015, 1019 (10th
Cir. 1994) (Koch II), held that a qui tam relator over whom the
district court does not have subject matter jurisdiction may amend
its complaint to include a proper relator. The Tenth Circuit
dismissed the analysis of Judge Ainsworth in Summit Office Park as
a "technical position" that was "subject to the equally technical
response that at the time the amended complaint was filed no
determination of standing had been made." Id.We do not take such a sanguine view of the federal courts'
limited subject matter jurisdiction. That FRS sought to include
Boatright as a relator prior to the district court dismissing it
from this suit is of no moment. In Hillman, we rejected Aetna's
attempt to substitute USF&G as plaintiff, even though Aetna filed
its amended complaint prior to the district court's determination
that there was no subject matter jurisdiction over Aetna's claims.
In short, regardless of when the district court actually determines
14
it lacks subject matter jurisdiction over the original plaintiff,
"Rule 15 . . . do[es] not allow a party to amend to create
jurisdiction where none actually existed." Hillman, 796 F.2d at
776.
Koerner and Piper created FRS only days before filing this
suit. Its sole, corporate purpose was to prosecute this suit.
Koerner and Piper controlled the corporation. Michael Boatright,
the alleged original source of the information underlying this
suit, held less than half of its shares. Koerner and Piper contend
that they created FRS to protect Boatright's safety, but that
contention is belied both by the attorneys' control over FRS and by
the fact that the state court litigation had already disclosed
Boatright's identity. FRS's origins and capital structure suggest
that the attorneys created FRS to control the proceeds of this
litigation. The attorneys by-passed a suit by Boatright, their
client, in favor of an entity they controlled. It was only a year
later, when confronted by the reality that the district court had
no jurisdiction over the claims of FRS and after the government had
intervened under the statute, that Koerner and Piper attempted to
sue on behalf of their client. Neither the record before us nor
the oral argument of counsel offer any other credible explanation.
We are sensitive to the reality that Congress allows cupidity
of counsel and client to effectuate congressional goals. Most
private attorneys-general litigation does so as well. That said,
even here there are limits. Under the statutory scheme before us,
there is a right to reasonable attorneys' fees, but the statute did
15
not dispense with the tradition that a lawyer must represent his
client's interest, not his own. The attorneys' effort to control
Boatright by creating FRS overreached, and the resulting loss of
counsel fees is its price. This is not a gratuitous observation.
Rather, it is to explain that while the law of standing in this
circuit dictates the result in this case, it works no "technical"
or unfair result.
IV.
Neither FRS nor Boatright were proper parties to this qui tam
litigation. Their attorneys, Koerner and Piper, are not
statutorily entitled to attorneys' fees and expenses. We AFFIRM
the judgment of the district court.
16