MORRISON C. ENGLAND, Jr., Chief District Judge.
In April of 2010, Relators Aria and Donna Kozak initiated this qui tam action on behalf of the United States, alleging that Defendant Chabad of California ("Chabad"), along with various other entities affiliated with Chabad and also named as defendants, misappropriated federal grant funds made available for security upgrades at Chabad-owned facilities and then concealed the obligation to repay those funds. The lawsuit was instituted under the auspices of the federal False Claims Act, 31 U.S.C. § 3729 et seq. ("FCA"). On October 9, 2012, the United States filed its election to intervene in this case, ECF No. 27, and on December 5, 2012, the Government filed the operative First Amended Complaint ("FAC"), ECF No. 33. The FAC named Chabad and seven other Chabad-related entities as Defendants. Entry of default has been entered against two, Bais Chana High School ("Bais Chana") and Chabad-Lubavitch, Inc. ECF No. 48. A third, Chabad Cheder Menachem, was dismissed at the Government's request on July 30, 2013, ECF No. 53, and the Government has represented it anticipates that Bais Chaya Mushka will be voluntarily dismissed. Pl.'s Mot., ECF No. 78-1 at 9:9-10, n.2. With respect to Defendant Chabad Running Springs Residential Camp, the parties have stipulated that this Defendant is not a separate entity but instead is a fictitious business name owned and operated by Chabad.
Through the Motion for Summary Judgment ("Motion") now before the Court, ECF No. 78, the Government requests that this Court find as a matter of law that Chabad, Yeshiva Ohr, and Marina have violated the FCA and enter judgment against them and in favor of the United States. Each of the Defendants filed separate papers opposing the Motion. For the reasons set forth below, the Court grants the Motion as to Chabad, but finds that triable issues of material fact preclude judgment against either Yeshiva Ohr or Marina.
The Urban Areas Security Initiative: Nonprofit Security Grant Program ("NSG Program") provides federal funding through the Department of Homeland Security ("DHS") to pay for security upgrades needed by eligible nonprofit organizations. The DHS administers the NSG Program in California through the California Emergency Management Agency ("Cal EMA").
Chabad is part of the Chabad-Lubavitch movement, a branch of Hasidic and Orthodox Judaism. Chabad institutions provide cultural and educational activities at Chabad-run community centers, synagogues, schools, and camps. According to Chabad, Yeshiva Ohr, Marina and Chabad itself are independent entities financed by voluntary contributions. Chabad, however owns the physical facilities used by both Marina and Yeshiva Ohr.
It is undisputed that in 2008, Chabad applied for NSG Program funding in order to install video surveillance and other security equipment at facilities located in Running Springs and Los Angeles, California. Pl.'s Statement of Undisputed Fact ("SUF"), ECF No. 78-2, Nos. 1, 4.
Yeshiva Ohr and Marina also applied for NSG grants and were notified by Cal EMA in late 2008 that their applications were approved in the amount of $72,750.00 each; performance periods ending on May 31, 2010, were established in both instances.
As a condition to participating in the NSG Program, it is uncontroverted that Defendants executed grant assurances agreeing to be bound by and comply with the provisions set forth in several directives, including the so-called "OMB Circular A-110" (as codified by 28 C.F.R. part 70) along with other federal and state guidance materials.
Approval of the grant applications to Chabad, Yeshiva Ohr, and Marina did not mean they were immediately entitled to a lump sum payment equivalent to the amount approved. Instead, grant funds were intended to be released over time as project costs were either incurred or anticipated. In seeking the release of funds, Defendants had the option of either paying the vendors providing the security improvements and then seeking a drawdown of grant funds as reimbursement, or instead seeking an advance of grant funds that could be used to pay the vendors directly. 28 C.F.R. §§ 70.2(d), 70.22(b), (e).
The governing regulations permit grant advances, as opposed to reimbursement requests, only if recipients agree to comply with strict financial management standards:
28 C.F.R. § 70.22(b);
As the Government points out, these strict financial management standards serve two important purposes. As one of the documents encompassed by the grant assurances, the Office of Justice Program's 2006 Financial Guide ("OJP Guide"), makes clear, the standards enforce the grant recipient's status as a "fiduciary" with the "responsibility to safeguard grant funds and ensure funds are used for the purposes for which they were awarded." OJP Guide, Decl of Glen Dorgan, ECF No. 79, Ex. 35, Forward, p. iii. In addition, the standards also discourage grantees from holding federal funds for extended periods, since "idle funds in the hands of subrecipients will impair the goals of cash management."
Moreover, the performance deadlines imposed with respect to each of the grants, as set forth above, require that before the expiration date the grantee must "obligate" grant funds by hiring a vendor to install the security improvements specified in the grant project. 28 C.F.R. § 70.2(u), 70.28. Then, a grantee must "liquidate" grant funds by paying vendors no later than 90 days following the performance deadline. 28 C.F.R. § 70.71(b). Should a grantee fail to comply with these deadlines, it becomes automatically indebted to the United States and must "promptly" repay advances to the United States through Cal EMA. 28 C.F.R. §§ 70.2(nn), 70.71(d), 70.73(a).
Although, as indicated above, Yeshiva Ohr, Marina and Bais Chana were, and remain, separate entities, Chabad owned the facilities used by these entities and, as a result, took over full management of the grant projects designed to increase security at each physical facility.
The Government asserts that Chabad had no written financial management procedures to regulate use of grant funding despite the fact, as set forth above, that they had assured the Government that they had such procedures in place 1) to provide control over and accountability for all funds received under the NSG Program; and 2) to adequately safeguard all such funds and to assure they were used solely for authorized purposes.
That assertion is amply supported by the record. First, Chabad's bank records show that grant monies were not segregated so that they would be used only for approved grant purposes. On May 28, 2009, and July 28, 2009, Chabad submitted two claims to Cal EMA seeking advance drawdowns of $66,725.00 and $68,140.00 from the monies awarded for security upgrades at its Running Springs and Gayley facilities.
With regard to Bais Chana, it is undisputed that on October 27, 2009, Chabad also submitted a claim to Cal EMA on Bais Chana's behalf seeking a drawdown in the full grant amount of Bais Chana's $72,750.00 award.
Yeshiva Ohr similarly transferred $72,000.00 of the grant funds it received to Chabad in two installments of $40,000 and $32,000.00 on November 23, 2009, and December 15, 2009, respectively.
The same pattern of requesting drawdown requests and depositing much if not all of the funds received into Chabad's Comerica accounts (used for general operating expenses) continued with respect to Marina. On December 17, 2009, after Cal EMA provided the entire $72,750.00 grant award to Marina, Marina transferred $50,000.00 of those funds to Chabad, and Chabad thereafter deposited those funds in a Comerica account and used the money for non-grant purposes.
Significantly, all the advance drawdown requests outlined above were made either by Chabad directly for its own grants or indirectly as to the requests Chabad made on behalf of its affiliates. In addition to the grant assurances made to safeguard grant funds at the time initial grant applications were tendered, Chabad recertified those assurances when it sought grant advance drawdowns both for itself and for its affiliates. .
Second, even aside from the fact that the funds themselves were not specially earmarked for grant use as the Government had been assured, it is undisputed that contemplated security improvements were not made before the end of the performance period, contractors were not paid for work they did perform, or both. Taking into account advances paid in the amount of $353,115.00, and given disbursements in the amount of $21,195.00 that had already been made by the time the advance payments were made, together with advance funds totaling $9,425.00 that were retained by Yeshiva Ohr and Marina for other purposes, Chabad was responsible for a net amount of $322,495.00 received that had to be obligated and paid before the various grant performance deadlines expired.
Of this net $322,495.00 figure which had to be obligated and paid before the end of the various performance periods, the evidence shows that only two additional payments were made in November and December of 2009 totaling $50,000.000 to Elite Interactive Solutions ("Elite"), the vendor hired to install security cameras at Yeshiva's Ohr's facilities. SUF, ECF No. 78-2, nos. 38-39; Yeshiva Ohr SUF, ECF No. 78-3, nos. 20-21. The remaining balance of $272,495.00 was not paid within 90 days following the specified performance periods, the last of which expired on May 31, 2010.
Chabad failed to pay Elite for its video surveillance installation despite the fact that, by late 2009, Chabad owed Elite some $145,000.00 for work completed at Chabad's two sites and at the Yeshiva Ohr facility. SUF, ECF No. 78-2, nos. 40-45. When Chabad failed to pay this debt, Elite refused to perform additional work and filed a lawsuit to collect the outstanding monies it was owed.
By letter dated April 23, 2010, Cal EMA advised Chabad of its intent to perform an audit of grant monies paid to Marina, Bais Chana, and Yeshiva Ohr, and to Chabad for its Running Springs and Gayley locations. SUF, ECF No. 78-2, no. 66. Thereafter, on November 1, 2010, Cal EMA issued a demand to Chabad for repayment of some $612,066.00, which represented both unpaid grant funds and associated penalties. On May 2, 2011, Cal EMA issued a revised repayment demand of $598,118.17. SUF, ECF No. 78-2, nos. 68-69. In the meantime, Elite and its assignee, Continental Business Credit, Inc., ("Continental") ultimately settled its suit against Chabad and its affiliates in exchange for Chabad's payment of $102,000.00 to Elite and $130,137.00 to Continental in February of 2011.
The Federal Rules of Civil Procedure provide for summary judgment when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a);
Rule 56 also allows a court to grant summary judgment on part of a claim or defense, known as partial summary judgment.
In a summary judgment motion, the moving party always bears the initial responsibility of informing the court of the basis for the motion and identifying the portions in the record "which it believes demonstrate the absence of a genuine issue of material fact."
In attempting to establish the existence or non-existence of a genuine factual dispute, the party must support its assertion by "citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits[,] or declarations . . . or other materials; or showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Fed. R. Civ. P. 56(c)(1). The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law.
In resolving a summary judgment motion, the evidence of the opposing party is to be believed, and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party.
The FCA imposes liability for the submission of false claims seeking receipt of federal funds on the grounds that such claims defraud the United States. 31 U.S.C. § 3729(a)(1) (A)-(B). Liability also attaches under the FCA if a party knowingly conceals or knowingly and improperly avoids an obligation to repay funds to the government.
A cause of action for violation of 31 U.S.C.3729(a)(1)(A) requires "(a) a false or fraudulent claim (2) that was material to the decision-making process, (3) which defendant presented, or caused to be presented, to the United States for payment or approval (4) with knowledge that the claim was false or fraudulent.
As the Government points out, a "claim" under the FCA is defined broadly to include "any request or demand" for federal funds. 31 U.S.C. § 3729(b)(2). Both the grant assurances submitted along with the initial applications for NSG Program funds, and the drawdown requests seeking advances for vendor payments, are properly deemed "claims" within this expansive definition since the representations made in those documents triggered the payment of grant funds.
It is undisputed that in 2008 Chabad agreed with its affiliates in advance of the grant application process that it would handle all aspects of the grant application and disbursement process. SUF, ECF No. 78-2, no. 17. Given those agreements, Chabad is responsible for the veracity of the representations made in connection with the NSG Program applications. One of those representations was that written procedures were in place to provide for control over and accountability for all funds received so that their use, solely for authorized purposes, was adequately safeguarded.
In addition, and perhaps most tellingly, Chabad did not respond to the following request for admission, propounded by the Government in January of 2014, and did not seek relief from the Court for its failure to respond:
Request for Admissions, Ex. 6 to Decl. of Glen Dorgan, ECF No. 79-1, Request No. 16. Thus, pursuant to Rule 36(a)(3) of the Federal Rules of Civil Procedure, Chabad is deemed as a matter of law to have admitted this fact.
The deposition testimony of Rabbi Cunin, the individual undisputedly in charge of managing and executing the entire grant process, is equally damning. Rabbi Cunin confirmed that Chabad never instituted policies to "ensure that the grant funds, though co-mingled with other funds . . ., would not be spent until vendors were ready to be paid." Cunin Dep., ECF No. 79-2, Ex. 11 to Dorgan Decl., 68:2-15. Moreover, Rabbi Cunin made it clear that the absence of such policies was not an oversight and conceded that he never planned to safeguard the grant advances and ensure that funds so received were used only to pay authorized grant costs.
Chabad places great weight on the fact that it used accrual-based accounting and therefore properly recorded expenses in its books even if those expenses had not actually yet been paid. However, that does not change the reality that Chabad failed to institute any procedure to safeguard advance payments and control disbursements in accordance with the performance deadlines, and to ensure that grant advances were not converted to non-grant uses. Chabad's claims therefore were substantively false and support a finding of FCA liability.
It is undisputed that Defendants each presented claims for federal grant funds by submitting, through Chabad, the subject advance drawdown requests to Cal EMA. Because Chabad caused its affiliates to present false claims as stated above, it is jointly and severally liable for the drawdown requests it orchestrated on behalf of the other Defendants as well as its conduct in managing its own grants. The prohibition on causing another to present a false or fraudulent claim, as set forth in 31 U.S.C. § 3729 (a)(1)(B), extends the FCA's reach to "any person who knowingly assisted in causing the government to pay claims which are grounded in fraud, without regard to whether that person had direct contractual relations with the government."
Given the broad reach of the FCA in this regard, and the uncontroverted fact that Chabad orchestrated, either directly or indirectly, all of the advance drawdown requests, this prerequisite for FCA liability is also satisfied.
Because both the NSG Program grant applications and the drawdown requests expressly required compliance with the applicable financial management standards, and because as indicated above those requirements were undisputedly not satisfied, the false certifications made by Chabad were unquestionably material. The Government has represented that it would not have awarded the grant funds in the absence of affirmative compliance with those standards, and Defendants offer no evidence that this assertion is untrue.
To establish liability under the FCA for "knowingly" submitting a false claim, "no proof of specific intent to defraud" is required. 31 U.S.C. § 3729(b)(1)(B). Instead, the FCA broadly defines the term "knowing" to include "deliberate ignorance" or "reckless disregard." 31 U.S.C. § 3729(b)(1)(A)(ii)-(iii).
Chabad insists that triable issues of fact preclude any finding as a matter of law that its alleged malfeasance in handling the NSG Program was "knowing" for purposes of triggering FCA liability. After carefully reviewing all of the undisputed facts and circumstances, however, the Court disagrees.
Chabad initially points to the fact that it hired David Sternlight, Ph.D, in 2008 in order to understand the administrative requirements of the NSG program, and argues that seeking Dr. Sternlight's counsel demonstrates in and of itself a willingness to maintain accountable financial management systems that militates against any "knowing" action to the contrary. Chabad's actions in the wake of very specific advice received from Dr.Sternlight, however, suggest just the opposite. It is undisputed, for example, that on October 7, 2009, before any of the grant performance deadlines expired, Dr. Sternlight warned Rabbi Cunin, the individual at Chabad entirely responsible for managing the NSG Program grants, that Chabad only had "120 calendar days from the date on the California Treasurer's advance check (not the day it is received) to perform the project installation and submit the final invoice information offsetting the cash advance." SUF, ECF No. 78-2, no. 61. To emphasize the importance of this deadline, the next sentence of the email read, in caps, "PLEASE DO NOT FORGET THIS."
In fact, Rabbi Cunin never asked Dr. Sternlight to provide advice after Rabbi Cunin began collecting and depositing the grant advances, and Chabad does not dispute that Dr. Sternlight ultimately had no involvement with the management of the grant proceeds despite being retained being retained to assist with the grants. SUF, ECF No. 78-2, no. 63. Instead, proceeding without Dr. Sternlight's involvement and any potential oversight, Rabbi Cunin treated the grant advances as if they were gifts to Chabad that, once paid by Cal EMA, were no longer the "business of the government."
Cunin Dep., ECF No. 79-2, Ex. 12 to Dorgan Decl., 264:3-12.
This cavalier attitude shows, at minimum, a reckless disregard for administering the NSG Grant Program in accordance with its requirements. Indeed, given the pointed admonitions provided by Dr. Sternlight in connection with Rabbi Cunin's complete disregard for safeguarding the funds, a compelling argument can be made that Rabbi Cunin, and thus Chabad's, behavior was intentional. Either way, the facts unequivocally show that Chabad "knowingly" submitted false claims since reckless disregard alone is sufficient to make that determination.
While Chabad's counsel argues that the Government cannot show circumstantial evidence of Chabad's "state of mind" and that any such assessment must be left to the jury, Chabad's argument, that the Government must show both knowledge of falsity and intent to deceive to establish FCA liability, is incorrect. The statute itself makes clear that "reckless disregard" can suffice and that "no proof of specific intent to deceive is required." 31 U.S.C. § 3729(b)(1)(B). Even the primary case cited by Chabad,
The undisputed facts in this matter show that Chabad knew about the requirements attendant to NSG Program grants in general and to drawdown advance requests in particular, yet had no compunction whatsoever in failing to adhere to those requirements. Under the circumstances, it is clear to the Court that Chabad acted at minimum "knowingly" as defined by the FCA.
Having determined that all the prerequisites for FCA liability under 31 U.S.C. § 3729(a)(1)(A) and (B) are present both with respect to the presentation of a false claim and attendant statements made material to such a claim, the Court finds that the Government has met its burden of establishing Chabad's FCA liability. Accordingly, the Court must assess the proper amount of damages to which the Government is entitled.
In a false certification case, the measure of damages is ordinarily the difference between what the Government paid and what it would have paid had the certifications at issue been truthful.
Although Chabad did make a payment of $136,920.00, which it claimed represented the amount of overpaid grant funds, in July of 2014, that payment was made nearly four years after this qui tam lawsuit was instituted and long after demands for repayment had been made by the government in 2010 and 2011. The Court finds that this belated, post-litigation repayment should not offset Chabad's FCA liability. Similarly, the fact that Chabad ultimately settled Elite's claim for unpaid invoices by paying Elite and its assignee, Continental, a total of $232,137.00 to settle their lawsuit in February of 2011 should not operate as any credit against Chabad's independent FCA liability.
Having determined that Chabad has incurred FCA liability in the amount of $272,495.00 based on its false statements/certifications, the Court need not address the Government's alternative argument that Chabad is also liable under 3729(a)(1)(G), which provides for FCA liability when an entity "knowingly conceals or knowingly improperly avoids or decreases an obligation to pay or transmit money or property to the Government." The damages sought are duplicative, even though the record is clear that Chabad failed to remit any unpaid funds until almost four years after this lawsuit was filed.
The Court's determination that $272,495.00 represents the proper initial measure of Chabad's FCA liability is not the end of this Court's damages assessment. The FCA provides that any entity violating 31 U.S.C. § 3729(a)(1) is liable for "3 times the amount of damages which the Government sustains because of the act of that [entity]." The statute makes imposition of treble damages mandatory. Thus, Chabad is liable for total damages in the amount of $817,485.00.
Moreover, in addition to treble damages, the FCA also mandates a civil penalty of "not less than" $5,500.00 for each violation. 31 U.S.C. § 3729(a)(1); see 28 CFR § 85.3(a)(9). These civil penalties are mandatory upon a finding, as this Court has made above, that false claims were submitted to the government.
Here, Chabad either submitted, or caused to be submitted, a total of five separate drawdown requests that were based on false certifications. SUF, ECF No. 78-2, nos. 19-23. Thus, the imposition of five separate $5,500.00 penalties is required for a total penalty of $27,500.00 Accordingly, the Court determines Chabad's total FCA liability in this matter is $844,985.00.
While the Court finds that summary judgment is proper as to Chabad, it cannot make that determination with respect to Chabad's affiliates Marina and Yeshiva Ohr. Triable issues of fact remain as to whether Chabad acted as those entities' principal or agent. Given the fact that the surveillance equipment contemplated was for use at physical facilities actually owned by Chabad, Marina argues that Chabad was actually acting as a de facto principal in arranging for and managing the NSG Program grants. Additionally, as Yeshiva Ohr points out, if Chabad was acting as an agent for its affiliates, there are triable issues of fact as to whether Chabad acted within the scope of that agency. Yeshiva Ohr, for example, maintains it believed that the grant money would be used to pay vendors, entrusted Chabad accordingly, and had no reason to question Chabad's ability to properly manage grant funds. Such claims bring into question whether the Chabad affiliates could have acted "knowingly" for purposes of FCA liability, let alone whether the affiliates can be liable for acts performed in excess of any authority they entrusted to Chabad.
These issues present triable questions not amenable to disposition on summary judgment, and therefore the Court declines to enter summary judgment against either Marina or Yeshiva Ohr.
For all the reasons set forth above, the United States' Motion for Summary Judgment (ECF No. 78) is GRANTED IN PART and DENIED IN PART. The Court GRANTS summary judgment in favor of the Government and against Defendant Chabad of California because the Government has established as a matter of law that Chabad of California violated the False Claims Act both in submitting NSG Program claims, both on its behalf and in arranging for and managing claims made by its affiliates. Given those violations, the Court awards the sum of $817,485.00 in treble damages against Defendant Chabad of California, along with statutory penalties in the amount of $27,500.00, for a total of $844,985.00.
The Government's Motion for Summary Judgment insofar as it applies to Defendants Chabad of Marina and Yeshiva Ohr, however, is DENIED. Given these rulings, and their impact on what remains at issue in this case, the Court vacates both the December 18, 2014, Final Pretrial Conference in this matter, as well as the jury trial scheduled to commence on January 20, 2015. The remaining parties are hereby directed to file a Joint Status Report not later than thirty (30) days after the date this Memorandum and Order is electronically filed.
