Christine Martino-Fleming v. South Bay Mental Health Centers

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

___________________________________

)

COMMONWEALTH OF MASSACHUSETTS ex )

rel. CHRISTINE MARTINO-FLEMING, )

Relator, )

)

) Civil Action

Plaintiff, ) No. 15-13065-PBS

)

v. )

)

SOUTH BAY MENTAL HEALTH CENTER, )

INC.; COMMUNITY INTERVENTION )

SERVICES, INC.; COMMUNITY )

INTERVENTION SERVICES HOLDINGS, )

INC.; H.I.G. GROWTH PARTNERS, )

LLC; H.I.G. CAPITAL, LLC; PETER J. )

SCANLON; AND KEVIN P. SHEEHAN, )

)

Defendants. )

_________________________________ )

MEMORANDUM AND ORDER

September 21, 2018

Saris, C.J.

INTRODUCTION

The Commonwealth of Massachusetts brings this action

against South Bay Mental Health Center, Inc. (“South Bay”), and

others to recover payments made by the Massachusetts Medicaid

program (“MassHealth”) as a result of allegedly false claims

submitted to MassHealth from August 2009 to the present. The

other defendants are Community Intervention Services, Inc.

(“C.I.S.”), and Community Intervention Services Holdings, Inc.

(“C.I.S.H.”); H.I.G. Growth Partners, LLC, and H.I.G. Capital,

LLC (collectively, “H.I.G. Defendants”); Peter J. Scanlon; and

Kevin P. Sheehan. The core allegation is that Defendants

submitted claims for services of “unlicensed, unqualified, and

unsupervised personnel” in violation of MassHealth regulations

at 17 South Bay mental-health centers.

The Commonwealth’s 27-count Complaint-in-Intervention (“the

Complaint”) contains 368 paragraphs and multiple exhibits

alleging false claims in violation of state law, regulations,

and common law. It asserts claims under the Massachusetts False

Claims Act (“MFCA”), Mass. Gen. Laws ch. 12, §§ 5A et seq.; the

Massachusetts Medicaid False Claims Act, Mass. Gen. Laws ch.

118E, §§ 40, 44; Recovery of Overpayment regulations, 130 Mass.

Code Regs. §§ 450.237, 450.260(A), 450.260(I); Unjust

Enrichment; and Breach of Contract. The Commonwealth asserts

subject-matter jurisdiction over state-law claims arising from

the same transactions or occurrences as an action brought under

the federal False Claims Act (“FCA”). 31 U.S.C. § 3732(b).

In a separate complaint, Relator has brought claims under

the FCA. The federal government has declined to intervene.

Because the Relator’s allegations, causes of action, and

theories of recovery are different, her claims will be addressed

in a separate opinion with which the Court assumes familiarity.

In February 2018, the Commonwealth reached an agreement to

resolve its state-law claims against South Bay, C.I.S., and

C.I.S.H., and dismissed them as Defendants. Accordingly, this

memorandum focuses on the remaining 14 state-law counts against

the H.I.G. Defendants and the individual Defendants, Scanlon and

Sheehan.

The remaining Defendants have moved to dismiss on multiple

grounds. After a hearing, the Court ALLOWS the motions as to

Counts 13, 14, and 15 against the H.I.G. Defendants; Counts 18

and 20 against Scanlon; and Counts 23, 24, and 26 against

Sheehan. The motions are otherwise DENIED.

FACTUAL BACKGROUND

The Complaint alleges the following facts, many of which

are disputed. The Court must “accept the truth of all well-

pleaded facts and draw all reasonable inferences therefrom in

the pleader’s favor.” Grajales v. P.R. Ports Auth., 682 F.3d 40,

44 (1st Cir. 2012).

I. South Bay

South Bay, a MassHealth provider, operates 17 mental-health

centers in Massachusetts, which are licensed by the Department

of Public Health. South Bay was founded by Defendant Scanlon in

1986, and from then until April 12, 2012, he owned all

outstanding capital stock. South Bay’s Brockton Clinic is the

parent mental-health center, at which most of the

administrative, organizational, and clinical services are

performed. The satellite facilities are in different locations,

but operate under the license of the parent and fall under its

fiscal, administrative, and personnel management.

South Bay submitted claims for mental-health counseling to

MassHealth through the Massachusetts Behavioral Health

Partnership (“MBHP”), which administers and pays mental health

care plans for patients enrolled in the Primary Care Clinical

Plan. Other patients are enrolled in Managed Care Organizations

(“MCOs”), which contract with MassHealth to administer the

payment of mental-health benefits. MassHealth also provides

mental-health benefits on a fee-for-services basis. The

MassHealth regulations governing the operations, staffing,

licensing, and supervision requirements of mental-health centers

are set out at 130 Mass. Code Regs. § 429.000, et seq.

II. The Private Equity Investors

Defendants H.I.G. Growth, LLC, and its capital investment

affiliate, H.I.G. Capital, LLC, are Delaware limited liability

companies. The H.I.G. entities and Defendant Sheehan partnered

to acquire South Bay. They established layers of corporations to

accomplish this purchase. Scanlon sold his capital stock in

South Bay to C.I.S., a Delaware corporation, and received a cash

payment, common stock, and a promissory note, together worth

over $31 million. C.I.S.H., a Delaware holding corporation, owns

C.I.S., which owns South Bay. H.I.G. Growth owns 71.1 percent of

C.I.S.H. Sheehan, who had over 30 years of behavioral health

care experience and conducted “substantial due diligence” before

purchasing C.I.S., became the Chief Executive Officer (“CEO”) of

C.I.S. until 2016, and Scanlon served as the Chief Clinical

Officer until either 2013 or 2014. Scanlon was a member of the

Boards of Directors of South Bay and C.I.S.

H.I.G.’s managing director and principals form the majority

of the C.I.S. board that owns and operates South Bay. Nicholas

Scola, Steven Loose, Eric Tencer, Sheehan, and Scanlon served on

the five-member Board of Directors of C.I.S. Scola, Loose, and

Tencer are principals or directors of H.I.G. Growth.1 The Board

of Directors of C.I.S. “was aware of South Bay operating” and

was “responsible for making strategic decisions” including

“personnel changes,” “financial matters,” and evaluations of

“specific long-term issues at South Bay” like “the struggle to

recruit and retain clinicians.”

III. The Whistleblower

Christine Martino-Fleming, the Relator, is a licensed

mental-health counselor. She was employed by South Bay from June

2008 until September 2013. Initially, she was a Job Coach at

South Bay, helping with documentation, billing, and time

management. In March 2012, she was elevated to the Coordinator

of Staff Development and Training position for C.I.S. Her duties

1 According to Relator’s complaint, Loose is the Managing Director

of H.I.G., and Scola and Tencer are principals of H.I.G.

included analyzing the education and experience of South Bay

employees. She also was responsible for the clinical training of

new clinicians and the managerial leadership training for

supervisors, directors, and regional directors.

In examining the qualifications of the employees, Martino-

Fleming came across numerous supervision and credentialing

deficiencies, which she communicated to the Defendants as early

as 2012: (1) hundreds of South Bay employees were not licensed

and were ineligible for licenses; (2) at least 28 clinic

directors did not have one of the licenses required by the

regulations, and 24 clinic directors did not have any type of

license; (3) many clinicians could not obtain licenses because

they had degrees from unaccredited schools, they had not taken

the prerequisite licensing courses, some of their degrees were

in programs such as art therapy and school counseling rather

than one of the core disciplines, or they had not had the

required internships; (4) even when employees did have the

proper credentials, they did not have supervised training on a

full-time basis once they obtained their master’s degrees; (5)

unqualified clinicians were not receiving the necessary

supervision; and (6) in some facilities, none of the supervisors

were independently licensed, and it was common to find

unlicensed clinic and regional directors. Because every clinic

needed to be managed by a core team of licensed individuals,

every South Bay clinic, including the parent center, was in

violation of the regulations.

In 2014, Martino-Fleming informed the Chief Operating

Officer and the Compliance Officer that “‘32

directors/supervisors do NOT have their independent license,’ 13

directors/supervisors are independently licensed but don’t have

5 years’ experience, ‘only 8 directors/supervisors are

independently licensed and have 5 years post MA experience’ and

only ‘4 out of 5 regional directors have their independent

license.’” Sara Hart, identified as a Director of Clinical

Services and Compliance Officer, drove this point home with the

President and Chief Operating Officer, noting that even if MBHP

regulations were more flexible, “[South Bay] still ha[d] to be

compliant with ALL [MassHealth regulations].” Hart went on to

note that licensure supervision, necessary for clinicians to be

license-eligible, was insufficient to meet the regulatory

requirements of “direct and continuous” supervision.

IV. Tiger Teams

In early to mid-2014, the Board of Directors employed

“Tiger Teams,” working groups tasked with investigating the

cause of employee turnover. The Tiger Teams found multiple

improper practices, particularly with respect to lack of

licensure supervision, in violation of requirements set by

MassHealth, MBHP, and the MCOs. The teams made recommendations

to the C.I.S. Board and others, including, but not limited to,

Defendants Sheehan and Scanlon, to remedy the improper

practices. The teams encountered supervisors who expressed

concern about signing off on documentation from clinicians they

had never met. Although H.I.G. and C.I.S. knew about the

licensing violations, South Bay did not adopt the

recommendations to rectify the noncompliance and continued

submitting false claims to MassHealth, MBHP, and MCOs. It did

not report the noncompliance to MassHealth. Over $120 million in

unlawful reimbursements were made to South Bay.

LEGAL FRAMEWORK

The MFCA, Mass. Gen. Laws ch. 12, § 5A, et seq., which is

modeled on the FCA, imposes significant penalties on those who

defraud the Commonwealth. In relevant part, § 5B of the MFCA

subjects to liability any person who:

(1) knowingly presents, or causes to be presented, a

false or fraudulent claim for payment or

approval; . . .

(3) conspires to commit a violation of this

subsection; . . . or

(10) is a beneficiary of an inadvertent submission of

a false claim to the commonwealth or a political

subdivision thereof, or is a beneficiary of an

overpayment from the commonwealth or a political

subdivision thereof, and who subsequently discovers

the falsity of the claim or the receipt of overpayment

and fails to disclose the false claim or receipt of

overpayment.

Id. § 5B(a).

Section 5A defines a “claim,” in relevant part, as:

a request or demand, whether pursuant to a contract or

otherwise, for money or property, whether or not the

commonwealth or a political subdivision thereof has

title to the money or property, that: (1) is presented

to an officer, employee, agent or other representative

of the commonwealth or a political subdivision

thereof; or (2) is made to a contractor,

subcontractor, grantee or other person, if the money

or property is to be spent or used on behalf of or to

advance a program or interest of the commonwealth or

political subdivision thereof and if the commonwealth

or any political subdivision thereof: (i) provides or

has provided any portion of the money or property

which is requested or demanded; or (ii) will reimburse

directly or indirectly such contractor, subcontractor,

grantee or other person for any portion of the money

or property which is requested or demanded.

Id. § 5A.

Other definitions in § 5A are applicable. The MFCA’s

scienter requirement defines “knowing” and “knowingly” as

“possessing actual knowledge of relevant information, acting

with deliberate ignorance of the truth or falsity of the

information or acting in reckless disregard of the truth or

falsity of the information; provided, however, that no proof of

specific intent to defraud shall be required.” Id. The MFCA

defines “material” as “having a natural tendency to influence,

or be capable of influencing, the payment or receipt of money or

property.” Id. “Overpayment” is defined as “any funds that a

person receives or retains . . . to which the person, after

applicable reconciliation, is not entitled.” Id.

DISCUSSION

I. H.I.G.’s Motion to Dismiss

A. MFCA Conspiracy2 (Count 13)

The Commonwealth asserts that the H.I.G. Defendants3 are

liable for an MFCA conspiracy in violation of Mass. Gen. Laws

ch. 12, § 5B(a)(3), which subjects to liability any person who

conspires to violate § 5B(a)(1) or § 5B(a)(10). Unlike Relator,

the Commonwealth does not assert that H.I.G. itself caused the

submission of false claims. Rather, the Complaint alleges that

the H.I.G. Defendants, “through their role overseeing and

managing Defendant South Bay,” agreed with South Bay to continue

submitting false claims for services, in violation of Mass. Gen.

Laws ch. 12, § 5B(a)(1), and to continue failing to declare to

the Commonwealth the false claims and receipt of overpayments,

in violation of Mass. Gen. Laws ch. 12, § 5B(a)(10). The H.I.G.

2 Relator does not assert an MFCA conspiracy theory. Neither she

nor the Commonwealth rely on a veil-piercing or alter-ego theory of

liability.

3 The complaint alleges that both H.I.G. Defendants are limited

liability companies under Delaware law.

[A]n LLC may be generally defined as an unincorporated

entity that is formed or organized through a filing with

the state under a state limited liability company statute,

the members and managers of which do not have vicarious

liability for the obligations of the entity, and the

relationship of the members, managers and the entity is

largely governed by an agreement among them or, where the

parties have not agreed to the contrary, by the default

rules of the state statute.

1 Ribstein and Keatinge on Limited Liability Companies § 1:3 (2018).

Defendants move to dismiss this count under the intracorporate

conspiracy doctrine, which generally holds that parent and

subsidiary corporations cannot, as a matter of law, conspire

together.

To survive a motion to dismiss on an FCA conspiracy claim,

the complaint must plausibly allege that “(1) the defendant

conspired with one or more persons to get a false or fraudulent

claim allowed or paid by the United States; and (2) one or more

conspirators performed any act to effect the object of the

conspiracy.” United States v. President and Fellows of Harvard

Coll. (“Harvard”), 323 F. Supp. 2d 151, 196 (D. Mass. 2004)

(quoting United States ex rel. Wilkins v. N. Am. Constr. Corp.,

173 F. Supp. 2d 601, 639 n.33 (S.D. Tex. 2001)). Conspiracy

claims under the FCA require fraud to be alleged with

particularity pursuant to Fed. R. Civ. P. 9(b). United States ex

rel. Gagne v. City of Worcester, 565 F.3d 40, 45 (1st Cir.

2009). The same standards apply to an MFCA conspiracy claim. See

Scannell v. Att’y Gen., 872 N.E.2d 1136, 1138 n.4 (Mass. App.

Ct. 2007) (interpreting the MFCA with guidance from cases and

treatises on the FCA because the former was “modeled on” the

latter, “[t]here is little decisional law interpreting the MFCA,

and its legislative history is scant”).

Generally speaking, the intracorporate conspiracy doctrine

forecloses the existence of a conspiracy between a parent and a

subsidiary because “[c]onspiracy requires an agreement -- and in

particular an agreement to do an unlawful act -- between or

among two or more separate persons.” Ziglar v. Abbasi, 137 S.

Ct. 1843, 1867 (2017). But, in the antitrust context at least,

“the very notion of an ‘agreement’ . . . between a parent and a

wholly owned subsidiary lacks meaning. . . . They share a common

purpose whether or not the parent keeps a tight rein over the

subsidiary; the parent may assert full control at any moment if

the subsidiary fails to act in the parent’s best interests.”

Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 771 (1984).

In Copperweld, the Supreme Court emphasized that

“substance, not form, should determine whether a separately

incorporated entity is capable of conspiracy.” Id. at 773 n.21.

“[T]he question is not whether the defendant is a legally single

entity or has a single name; nor is the question whether

the parties involved ‘seem’ like one firm or multiple firms in

any metaphysical sense.” Am. Needle, Inc. v. Nat’l Football

League, 560 U.S. 183, 195 (2010). Rather, “[t]he question is

whether the [allegedly conspiratorial] agreement joins together

‘independent centers of decisionmaking.’” Id. at 196 (quoting

Copperweld, 467 U.S. at 769). Id.

Centers of decisionmaking are not “independent” if one

sufficiently controls the other. See In re Aluminum Warehousing

Antitrust Litig., 95 F. Supp. 3d 419, 445 (S.D.N.Y. 2015).

“Taken together, Copperweld and American Needle establish that a

non-wholly owned affiliate cannot conspire with its parent . . .

if they are jointly controlled. The same principles apply to

agents. To the extent agents are merely carrying out the

decisions of principals, they are not separate entities.” Id.

Several federal district courts, including courts in this

district, have applied the intracorporate conspiracy doctrine to

FCA conspiracy claims.4 For example, one court observed that,

because a corporation can only act through its agents and

employees, it “does not make sense to permit a conspiracy claim

under the FCA to proceed on the theory that [a] defendant

[corporation] has conspired with its officers and employees.”

United States ex rel. Hagerty v. Cyberonics, Inc., 95 F. Supp.

3d 240, 269 (D. Mass. 2015) (collecting cases), aff’d sub nom.

Hagerty ex rel. United States v. Cyberonics, Inc., 844 F.3d 26

4 Outside of the antitrust context, the scope of the intracorporate

conspiracy doctrine is far from settled. Several circuits, including

the First Circuit, have recognized an exception to the doctrine in the

context of criminal fraud under 18 U.S.C. § 371. See United States v.

Peters, 732 F.2d 1004, 1008 (1st Cir. 1984) (“The actions of two or

more agents of a corporation, conspiring together on behalf of the

corporation, may lead to conspiracy convictions of the agents (because

the corporate veil does not shield them from criminal liability) and

of the corporation (because its agents conspired on its behalf).”).

Separately, the Supreme Court recently declined to decide whether, or

to what extent, the intracorporate conspiracy doctrine from antitrust

cases should apply to a conspiracy to violate civil rights. See

Ziglar, 137 S. Ct. at 1868. Given the dearth of guidance from either

Massachusetts or federal appellate courts, the Court follows the

majority of the federal district court cases, which apply the doctrine

to FCA conspiracies (and, by extension, to MFCA conspiracies).

(1st Cir. 2016). Stated differently, because a conspiracy

requires a meeting between at least two minds, a “corporation

cannot conspire with itself anymore than a private individual

can.” United States ex rel. Ruhe v. Masimo Corp., 929 F. Supp.

2d 1033, 1038 (C.D. Cal. 2012) (citation and quotation marks

omitted). But see, e.g., United States ex rel. Harris v.

Lockheed Martin Corp., 905 F. Supp. 2d 1343, 1354–55 (N.D. Ga.

2012) (holding that the doctrine is inapplicable because of an

exception for intracorporate criminal conspiracies to defraud

the United States).

Here, the Complaint does not adequately allege a conspiracy

among independent centers of decisionmaking. The Commonwealth

alleges that H.I.G. Growth owns 71.1 percent of C.I.S.H., and

that H.I.G. placed its managing director and two of its

principals/employees on C.I.S.’s five-member Board, thereby

controlling both C.I.S. and South Bay. It alleges that the

H.I.G. Defendants -- private equity investors in South Bay, not

competitors -- oversaw and managed C.I.S. and South Bay. As

alleged, H.I.G. and C.I.S. are not independent centers of

decisionmaking, and the formalistic legal distinctions among the

multiple corporate entities are not dispositive. Even when all

reasonable inferences are drawn in the Commonwealth’s favor, the

allegations in the Complaint do not support the contention that

C.I.S., H.I.G., and South Bay are independent actors. The

conspiracy claim against the H.I.G. Defendants is dismissed.5

B. Reverse MFCA (Count 14)

The Commonwealth has asserted a “reverse false claims”

count against the H.I.G. Defendants. With respect to this

theory, the MFCA imposes liability on “any person” who is

a beneficiary of an inadvertent submission of a false

claim to the commonwealth or a political subdivision

thereof, or is a beneficiary of an overpayment from

the commonwealth or a political subdivision thereof,

and who subsequently discovers the falsity of the

claim or the receipt of overpayment and fails to

disclose the false claim or receipt of overpayment to

the commonwealth . . .

Mass. Gen. Laws ch. 12, § 5B(a)(10).

The Commonwealth alleges that from April 2012 to the

present, the H.I.G. entities, through their ownership of C.I.S.,

benefitted from payments based on false claims. Specifically,

the Commonwealth alleges: “[T]he H.I.G. Defendants, as majority

owners of the C.I.S. Defendants, received money to which they

were not entitled, and which they have retained.” Moreover, the

Commonwealth alleges that H.I.G. knew about the failure to meet

regulatory requirements governing supervision and licensing

5 Of course, discovery may reveal additional facts with respect to

the relationship between the corporate Defendants. Therefore, this

dismissal is without prejudice to the Commonwealth’s ability to revive

the conspiracy count should the facts support it.

through communications by the whistleblower and the Tiger Teams

to its agents on the Board of Directors.

The H.I.G. Defendants have moved to dismiss on the ground

that the Commonwealth has failed to show that they actually

received or retained any payments. They point out that South

Bay, not H.I.G., received and retained the alleged overpayments.

The MFCA does not require that a defendant actually receive

a Medicaid payment, but more broadly states that it applies to a

“beneficiary of an overpayment,” or a beneficiary of an

“inadvertent submission of a false claim.” The statute, though,

does not define “beneficiary,” and there is a paucity of caselaw

construing the term in the context of the MFCA.6

This Court has once before rejected too expansive a

definition of “beneficiary.” See In re Pharm. Indus. Average

Wholesale Price Litig., 478 F. Supp. 2d 164, 176 (D. Mass. 2007)

(rejecting argument that drug manufacturers who fraudulently

inflate drug prices are beneficiaries because they profit from

6 Cf. Cape Cod Bank & Tr. Co. v. Cape Cod Hosp., 327 N.E.2d 902,

904 (Mass. App. Ct. 1975) (“A ‘beneficiary,’ in the natural and

ordinary sense of the term, is someone who actually ‘receives

something . . . .’” (quoting Wood v. Packard, 55 N.E. 315, 315 (Mass.

1899)). Typically, a beneficiary is “[s]omeone who is designated to

receive the advantages from an action or change,” especially someone

who “receive[s] something as a result of a legal arrangement or

instrument.” Beneficiary, Black’s Law Dictionary (10th ed. 2014).

Under the broadest definition, “benefit” can mean “to be useful or

helpful to (someone or something).” Benefit, Merriam-Webster

Dictionary (online edition).

increased market share from drug sales to providers who get the

higher reimbursements). Construing a similar provision under

California law, one court has held that a “beneficiary” need not

be the one who submitted the false claim, and that the

legislative history of the section evidences an intent to impose

liability on “third party beneficiaries of false claims.”

Armenta ex rel. City of Burbank v. Mueller Co., 47 Cal. Rptr. 3d

832, 840-41 (Ct. App. 2006) (holding, over a vigorous dissent

and without discussion, that the parent, grandparent, and great-

grandparent corporations of a subsidiary could be liable as

beneficiaries of reverse false claims).

The Court declines to adopt the virtually limitless

definition of “beneficiary” upon which the Commonwealth bases

its reverse-MFCA claim. While the MFCA should be liberally read,

if “beneficiary” is construed too broadly, any person who

incidentally benefitted from South Bay’s improved financial

status resulting from its alleged submission of false claims

could be a “beneficiary” -- say, an employee getting a higher

salary or a shareholder whose stock increases in value. The

Commonwealth cites no caselaw or legislative history to support

such a broad reading, and the Court has found none.

Even under an expansive definition, however, the

Commonwealth’s reverse-MFCA claim fails. For one, the

Commonwealth has not adequately alleged an “overpayment” within

the meaning of the MFCA. The statute defines “overpayment” as

“any funds that a person receives or retains . . . to which the

person, after applicable reconciliation, is not entitled.” Mass.

Gen. Laws ch. 12 § 5A (emphasis added). As discussed in the

Court’s memorandum on Relator’s complaint, the Commonwealth has

not adequately alleged that any such reconciliation occurred

here. And, far from being established, the parties’ entitlement

to the disputed Medicaid payments is the subject of this very

litigation.

Moreover, the Commonwealth has not alleged that the

purported overpayments from MassHealth to South Bay were

transferred to H.I.G., or that H.I.G. was a third-party

beneficiary that benefitted directly from the alleged

overpayments. Finally, the “beneficiary” provision does not

impose liability on “a successor for wrongs committed

previously.” Armenta, 47 Cal. Rptr. 3d at 839 n.6. Accordingly,

Count 14 is dismissed.

C. Recovery of Overpayment Claim (Count 15)

For similar reasons, the Court dismisses the Commonwealth’s

recovery-of-overpayment count against the H.I.G. Defendants.

MassHealth defines an overpayment as “a payment made by the

MassHealth agency to or for the use of a provider to which the

provider was not entitled under applicable federal or state law

or regulations.” 130 Mass. Code. Regs. § 450.101. The Complaint

does not allege that the H.I.G. Defendants were “providers” or

that they received overpayments.

D. Unjust Enrichment (Count 16)

The unjust enrichment claim may be pled against all

defendants as an alternative theory of liability. See Fed. R.

Civ. P. 8(d). The motion to dismiss is denied.

II. Scanlon’s Motion to Dismiss

A. MFCA and Medicaid FCA (Counts 17, 18, 19)

1. Particularity

Scanlon argues that the Complaint must be dismissed under

Fed. R. Civ. P. 9(b) because the Commonwealth fails to identify

actual false claims. See United States ex rel. Ge v. Takeda

Pharm. Co. Ltd., 737 F.3d 116, 123 (1st Cir. 2013) (noting that

plaintiffs must state “with particularity the who, what, when,

where, and how of the alleged fraud” (internal citations and

quotation marks omitted)). Typically, an allegation of an actual

false claim is necessary to satisfy Rule 9(b). Id. at 123-24.

But this is not an inexorable requirement, as the First Circuit

has applied a “more flexible” Rule 9(b) standard under certain

circumstances. See United States ex rel. Allen v. Alere Home

Monitoring, Inc., Civ. No. 16-11372-PBS, 2018 WL 4119667, at *4,

*6-7 (D. Mass. Aug. 29, 2018).

The Commonwealth argues that its Complaint is replete with

allegations specifying clinic-by-clinic claims that were

systematically submitted to MassHealth for services provided in

violation of the staffing and supervision regulations. For

example, the Commonwealth alleges that in the Salem clinic,

“only a handful” of the 80 individuals were independently

licensed. Neither the regional director nor the clinical

director were licensed. None of the supervisors were

individually licensed. There was one licensed supervisor (a

licensed independent clinical social worker), but she was not

providing “direct and continuous supervision” to unlicensed

clinicians. The majority of staff therapists were unlicensed and

could not have been adequately licensed given the lack of

qualified supervisors. According to the Commonwealth, because

the clinic was in violation of the staffing and supervision

regulations, all claims to MassHealth were false and fraudulent.

Scanlon argues that the Complaint does not meet Rule 9(b)

requirements because MassHealth has information about services

billed based on provider identification but does not have

information about the specific clinicians who provided those

services. Attached to the Complaint, though, is a claims summary

chart, which includes information about the procedure codes and

the amounts MassHealth and its reimbursement partners paid to

South Bay for services totaling $123,109,849.13.

The Complaint also references a table in Relator’s second

amended complaint listing specific examples of South Bay’s

claims for patients who received treatment from unlicensed and

unsupervised clinicians. Scanlon complains that the “Information

as of Last Date billed” field in this table does not identify

the date of an allegedly false claim. The Court disagrees: these

allegations of systemic regulatory violations, together with

patient-specific bills, amply meet the particularity requirement

of Rule 9(b).

2. Causation

Next, Scanlon argues that he did not cause the government

to make payments that it would not have otherwise made. Under

both the FCA and the MFCA, a defendant who did not himself

submit false claims is liable if he “causes to be presented” a

false or fraudulent claim for payment or approval. See Mass.

Gen. Laws ch. 12 § 5B(a)(1); United States ex rel. Rost v.

Pfizer, Inc., 507 F.3d 720, 732 n.9 (1st Cir. 2007)

(interpreting the FCA).

Under the FCA, the purpose of the “causes to be presented”

provision is “to reach any person who knowingly assisted in

causing the government to pay claims which were grounded in

fraud, without regard to whether that person had direct

contractual relations with the government.” United States ex

rel. Marcus v. Hess, 317 U.S. 537, 544-45 (1943), superseded by

statute on other grounds as recognized in Schindler Elevator

Corp. v. United States ex rel. Kirk, 563 U.S. 401, 412 (2011).

If a person knowingly participates in a scheme that, if

successful, would ultimately result in the submission of a false

claim to the government, he has caused those claims to be

submitted. United States ex rel. Schmidt v. Zimmer, Inc., 386

F.3d 235, 243-44 (3d Cir. 2004). Even when claims are submitted

by innocent parties, unlawful acts by nonsubmitting persons or

entities may give rise to a false or fraudulent claim. See

United States ex rel. Hutcheson v. Blackstone Med., Inc., 647

F.3d 377, 389-90 (1st Cir. 2011).

To be liable, a person must have “some degree of

participation” in the claims process. Harvard, 323 F. Supp. 2d

at 186-87. A defendant may be liable if “it operates under a

policy that causes others to present false claims.” Id. at 187.

Where the defendant has an ongoing business

relationship with a repeated false claimant, and the

defendant knows of the false claims, yet does not

cease doing business with the claimant or disclose the

false claims to the United States, the defendant’s

ostrich-like behavior itself becomes a course of

conduct that allowed fraudulent claims to be presented

to the federal government.

Id. (internal quotation marks and citations omitted); see also

United States ex rel. Franklin v. Parke-Davis, 147 F. Supp. 2d

39, 52-53 (D. Mass. 2001) (holding defendant could be liable

when the submission of false claims was foreseeable).

The Commonwealth alleges that Scanlon as the founder, sole

owner, president, and CEO of South Bay until April 2012 was

ultimately responsible for the submission of all false claims to

MassHealth. It argues that “Scanlon created and enforced South

Bay’s policies and procedures, oversaw the billing department,

registered South Bay as a MassHealth provider, and signed the

contracts with MassHealth wherein he represented that South Bay

would comply with all laws, rules and regulations.” The

Commonwealth has sufficiently alleged that, as the leader,

Scanlon participated in the alleged fraudulent scheme to submit

claims for reimbursement for unlicensed and unsupervised

clinicians and thereby “caused” the submission of false claims.

3. Violation of MassHealth Regulations

Scanlon argues that no violations of the MassHealth

regulations have been asserted. He criticizes the Commonwealth

for confusing “administrative supervision” and “licensure

supervision.” This argument is also addressed in the Court’s

memorandum on Relator’s case.

The Commonwealth alleges numerous violations of MassHealth

licensing and supervision regulations. For example, one

MassHealth regulation specifies that “[a]ll unlicensed

counselors included in the center must be under the direct and

continuous supervision of a fully qualified professional staff

member.” 130 Mass. Code Regs. § 429.424(F)(1). Because the

majority of unlicensed South Bay clinicians had no qualified

supervisor, the Commonwealth contends they were not receiving

the “direct and continuous supervision” required by 130 Mass.

Code Regs. § 429.424. The Commonwealth further asserts that

South Bay’s newly hired clinicians who had no licensed

supervisors were “instructed to write in the name of a

supervisor they had never met . . . ‘in case they were ever

audited.’” The Court finds that the Commonwealth has

sufficiently alleged violations of the MassHealth regulations.

The Court does not address the separate contractual

requirements of the MCOs and MBHP because any alleged violations

of separate contractual requirements are not stated with

particularity or briefed adequately. Accordingly, any

allegations regarding false claims submitted to the government

contractors will only be considered to the extent they violate

MassHealth regulations.

4. Materiality

Scanlon also argues that the Commonwealth has not

sufficiently alleged that the violations were material to the

payment decisions made by MassHealth, MBHP, or the MCOs. A false

statement is “material” if it has “a natural tendency to

influence, or [is] capable of influencing, the payment or

receipt of money or property.” Mass. Gen. Laws ch. 12, § 5A; see

United States ex rel. Loughren v. Unum Grp., 613 F.3d 300, 307

(1st Cir. 2010) (construing similar provision in the FCA). In

Universal Health Servs., Inc. v. United States ex rel. Escobar,

136 S. Ct. 1989 (2016), the Supreme Court held:

[P]roof of materiality can include, but is not

necessarily limited to, evidence that the defendant

knows that the Government consistently refuses to pay

claims in the mine run of cases based on noncompliance

with the particular statutory, regulatory, or

contractual requirement. Conversely, if the Government

pays a particular claim in full despite its actual

knowledge that certain requirements were violated,

that is very strong evidence that those requirements

are not material. Or, if the Government regularly pays

a particular type of claim in full despite actual

knowledge that certain requirements were violated, and

has signaled no change in position, that is strong

evidence that the requirements are not material.

136 S. Ct. at 2003–04. It also provided factors that did not

necessarily prove materiality:

A misrepresentation cannot be deemed material merely

because the Government designates compliance with a

particular statutory, regulatory, or contractual

requirement as a condition of payment. Nor is it

sufficient for a finding of materiality that the

Government would have the option to decline to pay if

it knew of the defendant's noncompliance. Materiality,

in addition, cannot be found where noncompliance is

minor or insubstantial.

Id. at 2003. Ultimately, “[m]ateriality is more likely to be

found where the information at issue goes to the very essence of

the bargain.” United States ex rel. Escobar v. Universal Health

Servs., Inc., 842 F.3d 103, 110 (1st Cir. 2016) (internal

citations and quotation marks omitted).

Here, the Commonwealth alleges that MassHealth ceased

making payments on South Bay’s fee-for-service claims when the

Complaint was unsealed. Moreover, as alleged, Scanlon knew or

had reason to know that hiring unqualified mental health

clinicians who are not properly supervised by qualified mental

health professionals as required by MassHealth regulations goes

to the heart of the bargain.7 See Escobar, 842 F.3d at 110.

Therefore, the allegations are sufficient to show the allegedly

false statements were material to the payment decision.

5. Causation Pertaining to Government Contractors

Paid at Fixed “Capitation” Rates

Scanlon argues that the Commonwealth has failed to allege

that South Bay’s claims to MBHP and MCOs “caused” the government

to make payments because the contractors are paid on a

“capitated” basis -- that is, at a fixed rate per patient. He

points out that the Commonwealth has not alleged with

particularity that South Bay submitted any false claims or

certifications to the contractors which increased the capitation

rates. See, e.g., United States ex rel. Zemplenyi v. Group

Health Coop., Civ. No. 09-603, 2011 WL 814261, at *2 (W.D. Wash.

Mar. 3, 2011) (holding that alleged false claims for unnecessary

medical procedures, under capitated system, did not violate FCA

7 As pointed out above, the Commonwealth also alleges that

Defendants violated separate MBHP and MCO requirements. The

Commonwealth does not allege that violations of these contractual

requirements are material within the meaning of the MFCA. However, it

is alleged that all providers must comply with MassHealth regulations

regardless of whether they submit directly to MassHealth, MBHP, or the

various MCOs.

because the government was not spending additional money when

surgery was performed). This argument is also addressed in the

memorandum on Relator’s complaint.

Scanlon’s argument fails because the MFCA imposes liability

on any person who causes a false claim to be presented to a

government contractor. Mass. Gen. Laws ch. 12, § 5B(a)(1).

Although the contractors are paid a fixed rate by MassHealth,

the claims for mental health care are paid with government

money. Under the MFCA, a person who makes false claims to a

government contractor is liable if the money is to be spent to

“advance a program or interest of the commonwealth.” Mass. Gen.

Laws. ch. 12, § 5A. Like the FCA, the MFCA does not require the

government to prove actual or specific damages. See United

States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 188 (5th Cir.

2009) (construing the FCA).

6. Reverse MFCA

Scanlon also argues that the reverse false claims count

under Mass. Gen. Laws ch. 12 § 5B(a)(10) should be dismissed

because it has not been alleged that he was a beneficiary of the

funds. The Commonwealth argues that because Scanlon owned all

outstanding capital stock in South Bay, the Complaint plausibly

states he was a third-party “beneficiary” of the overpayments

made to South Bay for that time period.

Assuming, without deciding, that Scanlon qualifies as a

“beneficiary” within the scope of § 5B(a)(10), this claim

suffers from most of the same defects as the reverse-FCA claim

against the H.I.G. Defendants, discussed above. The Commonwealth

again has failed to sufficiently explain or develop this claim

as to Scanlon. Accordingly, Count 18 is dismissed.

B. Recovery of Overpayment Regulations (Count 20)

The Commonwealth’s claims pursuant to 130 Mass. Code Regs.

§ 450.260(A) fail. That regulation permits MassHealth to recover

“the full amount of any moneys” owed by a provider. A provider

is liable for the prompt payment to any MassHealth agency of the

full amount of any overpayments owed under applicable laws or

regulations. 130 Mass. Code Regs. § 450.260(A). A provider is

defined as “an individual, group, facility, agency, institution,

organization, or business that furnishes medical services and

participates in MassHealth under a provider contract with the

MassHealth agency.” 130 Mass. Code Regs. § 450.101. There is no

allegation that Scanlon individually furnished “medical

services” -- defined as “medical care or related goods and

services, including behavioral health services and long-term

services and supports (LTSS) provided to members, paid or

payable by the MassHealth agency” -- under a provider contract.

Id. This claim is dismissed as to Scanlon.

C. Unjust Enrichment (Count 21)

As above, the unjust enrichment claim may be pled against

all defendants as an alternative theory of liability. Fed. R.

Civ. P. 8(d). The motion to dismiss is denied.

III. Sheehan’s Motion to Dismiss

A. Causation and Knowledge under the MFCA (Count 22)

Sheehan argues that the Complaint does not contain

sufficient allegations that he caused the submission of false

claims pursuant to Mass. Gen. Laws ch. 12, § 5B(a)(1). He argues

that when he learned of the problems at South Bay, in June 2014,

he took immediate steps to remedy them. Alternatively, in an

argument of a different stripe, he contends the failure to take

steps to stop the payment after he learned of the falsity from

the Tiger Teams is insufficient to “cause” the presentment of

false claims to the government under § 5B(a)(1).

As alleged by the Complaint, Sheehan was both the CEO and a

Board member of C.I.S., the parent company of South Bay. The

Complaint alleges that he knew about the regulatory issues based

on the due diligence report, statements of Relator, and the

Tiger Team investigation as early as May 2012. The Complaint

also alleges that as the CEO of the company that owned South

Bay, he knowingly rejected recommendations to have licensed

supervision and to end the policy that caused others to submit

false claims for the services of unqualified and unlicensed

individuals.

Sheehan, as CEO of C.I.S. and a member of the Boards of

C.I.S. and South Bay, had the power, authority, and duty to stop

the submission of false claims by the agents and employees of

South Bay once he learned about material violations of

MassHealth regulations. His alleged rejection of the

recommendation left in place the policy which led to the

submission of false claims. These allegations are sufficient to

state a claim under § 5B(a)(1). The motion to dismiss is denied.

B. MFCA Conspiracy (Count 23)

The Commonwealth alleges that Defendant Sheehan

“implicitly” conspired with South Bay in violation of Mass. Gen.

Laws ch. 12 § 5B(a)(3). Even with reasonable inferences drawn in

the Commonwealth’s favor, the Complaint does not adequately

allege that Sheehan, the CEO of C.I.S., which wholly owned and

controlled South Bay, was an independent center of

decisionmaking. Therefore, this claim is barred by the

intracorporate conspiracy doctrine for the reasons discussed

above.

C. Reverse False Claims (Count 24)

The Complaint alleges that Sheehan is liable for reverse

false claims in violation of Mass. Gen. Laws ch. 12,

§ 5B(a)(10). It alleges that by April 2012, Sheehan, in his role

as CEO of C.I.S., “received money to which he was not entitled,

and which he has retained.” The Commonwealth argues that it has

sufficiently stated a claim because it alleges Sheehan held a

financial interest in South Bay.

As above, the Commonwealth has not adequately developed its

reverse-FCA claim against Sheehan. In addition, Sheehan

maintained only a 5.4 percent ownership stake in South Bay by

way of his stake in C.I.S.H. This small of a stake makes it even

less likely that Sheehan would qualify as a “beneficiary” under

§ 5B(a)(10). This count is dismissed.

D. Mass Medicaid FCA (Count 25) and Recovery of

Overpayment Regulations (Count 26)

Sheehan’s motion to dismiss does not separately challenge

these counts apart from the arguments already discussed.

Accordingly, Count 25 is not dismissed for the reasons stated in

Part III.A. of this opinion. Count 26 is dismissed for the

reasons given in Part III.C.

F. Unjust Enrichment (Count 27)

Once again, the unjust enrichment claim may be pled against

all defendants as an alternative theory of liability. Fed. R.

Civ. P. 8(d). The motion to dismiss is denied.

ORDER

The motions to dismiss (Dkt. Nos. 103, 106, and 109) are

ALLOWED IN PART and DENIED IN PART. The Court dismisses Counts

13, 14, and 15 against the H.I.G. Defendants; Counts 18 and 20

against Scanlon; and Counts 23, 24, and 26 against Sheehan. The

other counts remain viable.

/s/ PATTI B. SARIS

Patti B. Saris

Chief U.S. District Judge