Keith Sanders v. American-Amicable Li

Opinions of the United

2008 Decisions States Court of Appeals

for the Third Circuit

10-29-2008

Keith Sanders v. American-Amicable Li

Precedential or Non-Precedential: Precedential

Docket No. 07-3429

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 07-3429

UNITED STATES OF AMERICA

EX REL KEITH SANDERS;

KEITH SANDERS

v.

AMERICAN-AMICABLE LIFE

INSURANCE COMPANY OF TEXAS;

CENTRAL NATIONAL BANK

OF WACO, TEXAS

Keith Sanders,

Appellant

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. No. 03-cv-04327)

District Judge: Honorable Gene E. K. Pratter

Submitted Under Third Circuit LAR 34.1(a)

October 27, 2008

Before: SLOVITER, GREENBERG, Circuit Judges,

and IRENAS,* Senior District Judge

(Filed: October 29, 2008)

________

*

Honorable Joseph E. Irenas, Senior United States District

Judge for the District of New Jersey, sitting by designation.

Harry P. Litman

Litman Law Firm

Pittsburgh, PA l5219

Jonathan K. Tycko

Tycki & Zavareei

Washington, DC 20036

Attorneys for Appellant Keith Sanders

Jessica L. Ellsworth

Catherine E. Stetson

Mitchell E. Zamoff

Hogan & Hartson

Washington, DC 20004

Attorneys for Appellee American-Amicable Life

Insurance Company of Texas

Joanna J. Cline

Stephen G. Harvey

Pepper Hamilton

Philadelphia, PA l9l03

Attorneys for Appellee Central National Bank

of Waco, Texas

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Keith Sanders, the Relator in this qui tam action brought

on behalf of the United States, appeals the District Court’s order

dismissing his claim pursuant to the False Claims Act (the

“FCA”), 31 U.S.C. §§ 3729-3733, for failure to state a claim.

I.

2

Between 1996 and 2002, Sanders intermittently worked

as a commissioned insurance agent for defendant American-

Amicable Life Insurance Company (“American-Amicable”).

Sanders alleges that American-Amicable, together with

defendant Central National Bank (“Central”) (hereafter jointly

referred to as “American-Amicable”), violated the FCA by

submitting or causing to be submitted false claims to the United

States government arising out of defendants’ scheme to sell

military personnel life insurance in contravention of regulations

governing such sales.

According to Sanders, American-Amicable specifically

targeted “unsophisticated and young enlisted personnel,” for the

sale of what is purportedly a “savings plan” that is “in reality an

insurance policy sold by American Amicable.” App. at 43. If a

service member elected to participate, an American-Amicable

agent would complete allotment and direct deposit forms to

establish direct payment out of the service member’s salary

through an account at Central to American-Amicable.1 Sanders’

complaint alleges that American-Amicable agents falsified

information on each allotment form, such as stating that the

allotment was for a savings account rather than an insurance

premium, in order to avoid military regulations that limited the

use of the allotment system to pay life insurance premiums. The

complaint also alleges that American-Amicable sought to

circumvent a mandatory seven-day waiting period on allotments

for such premiums.2 Finally, Sanders alleges that, as a result of

this scheme, the defendants prepared false claims to be

submitted by the military personnel “in an extensive series of

1

The military’s allotment system is analogous to direct

deposits from a salary in the private sector and allows service

members to make payments of salary directly to certain third

parties, such as certain family members and creditors.

2

See 32 C.F.R. Part 50 App. A (2007) (“For personnel in

pay grades E-4 and below . . . at least seven calendar days shall

elapse between the signing of a life insurance application and the

certification of a military pay allotment for any supplemental

commercial life insurance.”).

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transactions,” App. at 48, thereby causing the United States to

suffer damages “in an amount that has yet to be determined but

that is expected to be in the millions of dollars.” App. at 50.

After investigating Sanders’ allegations, the government

declined to intervene in June 2006 and Sanders elected to bring

the action individually. The government, however, did sue

American-Amicable under the Fraud Injunction Statute, 18

U.S.C. § 1345, based on essentially the same conduct at issue in

Sanders’ complaint. That suit was settled by an agreement by

American-Amicable to provide $10 million in compensation to

current and former policyholders as well as to accept certain

limitations on marketing its products to military personnel.

In this action, American-Amicable moved to dismiss

Sanders’ qui tam action pursuant to Fed. R. Civ. Pro. 12(b)(6).

The District Court granted the motion, holding that Sanders did

not plead facts that would, if true, prove the existence of any

false “claim”–a prerequisite for liability under all of Sanders’

FCA theories–because Sanders failed to “establish any actual or

potential economic loss to the federal government” arising out of

the defendants’ alleged conduct. App. at 18-19 (emphasis

deleted).3

II.

As relevant here, the FCA imposes civil penalties and/or

treble damages on any person who “knowingly presents, or

causes to be presented, to [a federal officer] a false or fraudulent

claim for payment or approval,” 31 U.S.C. § 3729(a)(1),

“knowingly makes, uses, or causes to be made or used, a false

record or statement to get a false or fraudulent claim paid or

approved by the Government,” 31 U.S.C. § 3729(a)(2), or

“conspires to defraud the Government by getting a false or

fraudulent claim allowed or paid,” 31 U.S.C. § 3729(a)(3). All

of these provisions require, as a threshold matter, that a “claim”

3

We have jurisdiction over the District Court’s final order

dismissing Sanders’ claims pursuant to 28 U.S.C. § 1291. We

exercise plenary review of a district court’s dismissal under Fed. R.

Civ. Pro. 12(b)(6).

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be submitted to the government by some party. The term

“‘claim’ includes any request . . . for money or property which

is made to a contractor, grantee, or other recipient if the United

States Government provides any portion of the money or

property which is requested . . . .” 31 U.S.C. § 3729(c).

Relying in part on Hutchins v. Wilentz, Goldman &

Spitzer, 253 F.3d 176, 179 (3d Cir. 2001), the District Court

noted that Sanders “does not describe any process through which

the United States actually expends federal funds with respect to

any fraudulent claims, as opposed to merely depositing . . . a

portion of an employee’s salary per that employee’s direction.”

App. at 16. Thus, Sanders identified no “claim” against the

government, because the “amount of total compensation the

United States pays to the employee does not change” as a result

of the alleged fraud, App. at 17, and “the Relator cannot

establish any actual or potential economic loss to the federal

government.” App. at 18-19 (emphasis in original).

Sanders contends that the District Court erroneously

added an “economic loss test” to the FCA. Sanders correctly

notes that a party can be subject to FCA liability (i.e. civil

penalties) even where the government suffers no monetary

injury. See Hutchins, 253 F.3d at 183 (noting that “recovery

under the False Claims Act is not dependent upon the

government’s sustaining monetary damages”) (quoting Varljen

v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001)).

This is so, for example, where the government discovers that a

claim is false before it makes payment, see Rex Trailer Co. v.

United States, 350 U.S. 148, 153 n.5 (1956) (approving

imposition of civil penalty under an earlier version of the FCA

where the fraud was discovered prior to payment), or where the

government in essence passes on the cost of the false claim to a

third party, see United States ex rel. Hayes v. CMC Electronics

Inc., 297 F. Supp. 2d 734, 737-39 (D.N.J. 2003) (holding that

relator stated a claim under FCA where defendant allegedly

inflated price of military equipment sold to the federal

government, notwithstanding fact that the government

subsequently resold the equipment at that inflated price).

Although there may be FCA liability even where the government

suffers no injury, that does not answer the threshold question

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whether a false claim has been submitted to the government.

As we stated in Hutchins, the FCA “is only intended to

cover instances of fraud ‘that might result in financial loss to the

Government.’” 253 F.3d at 183 (quoting United States v.

Neifert-White Co., 390 U.S. 228, 232 (1968)). Thus, a party

makes “false or fraudulent claim[s] for payment or approval” to

the government within the meaning of the statute only where

such claims “cause or would cause economic loss to the

government.” Hutchins, 253 F.3d at 179. We held in Hutchins

that no claim was made against the government where a FCA

relator alleged that a law firm submitted inflated bills to a

bankruptcy court because the bills would be paid out of the

assets of the bankrupt entity and not from the Federal Treasury.

Id. at 183-84.

Similarly, the fraudulent scheme alleged by Sanders did

not involve any claim against the government inasmuch as

allotment payments are not made on behalf of the United States,

but simply are made from the salary of military personnel as they

direct. See Department of Defense Financial Management

Regulation 7000.14-R, Vol. 7A, Definitions (2008) (defining

“allotment” as a “definite portion of the pay and allowances of a

person in the Military Service, which is authorized to be paid to

a qualified allottee”). It follows that the alleged fraud could not

cause the government, as opposed to the defrauded military

personnel, to suffer any economic loss.4 Therefore, the District

Court correctly held that no claim was made against the

government; as a result, the FCA is inapplicable. See also

United States ex rel. Costner v. URS Consultants, Inc., 153 F.3d

667, 677 (8th Cir. 1998) (“[O]nly those actions by the claimant

which have the purpose and effect of causing the United States

4

Sanders contends that the alleged fraud did cause the

government to suffer economic harm, including the cost of

investigating the fraud and reductions in troop morale. Appellant’s

Brief at 35-37. However, this argument again fails to recognize the

distinction between whether a claim was made against the

government and whether the government was injured by the

alleged fraud. Unless a FCA relator establishes the former, the

latter is irrelevant.

6

to pay out money it is not obligated to pay, or those actions

which intentionally deprive the United States of money it is

lawfully due, are properly considered ‘claims.’”).

Sanders attempts to escape this conclusion by arguing that

the statutory definition of “claim” in 31 U.S.C. § 3729(c) is

satisfied because the government “provide[d]” the requested

money directly to the defendants in response to a “request” (i.e.

the allotment forms). Nothing in the plain language of § 3729(c)

suggests that the federal government “provides” funds when it

simply releases the salary of its employees (per their

instructions) directly to a third party. Here, it was the defrauded

military personnel who furnished or made money available to the

defendants–and not the federal government–because it was those

personnel who decided to participate in the fraudulent “savings

programs.”5

Finally, Sanders argues that the funds at issue were in fact

government property until they were disbursed to the defendants,

and therefore the government did provide its own money in

response to a request from the defendants. For support, Sanders

notes that sovereign immunity bars creditors from attaching or

garnishing funds in the Treasury. See Buchanan v. Alexander,

45 U.S. 20, 21 (1846) (holding that creditor could not attach

seaman’s salary while held by government purser). However,

this does not change our conclusion that it was the defrauded

military personnel, rather than the government, that “provided”

money to the defendants.

In sum, the District Court appropriately dismissed

Sanders’ claim because he alleged no “claim” against the

5

FCA liability under § 3729(a) clearly extends to parties

that cause some third person to submit a false claim to the

government. Thus, the problem with Sanders’ theory is not that it

was military personnel, rather than the defendants directly, that

submitted the falsified allotment forms. Instead, the problem is

that, notwithstanding the submission of those forms, no “claim”

was made to the government’s–as opposed to the

personnel’s–money or property.

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government’s money or property.

III.

For the above-stated reasons, we will affirm the decision

of the District Court.

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