CATHERINE C. BLAKE, District Judge.
Charles E. Moore, a former mortgage broker, originally brought this claim against Cardinal Financial Company, L.P. ("Cardinal") and others as a qui tam relator on behalf of the United States under the federal False Claims Act. Moore's former attorney, Jason Rheinstein, claims to have obtained all rights, title, and interest in the lawsuit and has continued to prosecute this qui tam action as a "successor in interest."
The federal False Claims Act ("FCA"), 31 U.S.C. §§ 3729 et seq., generally makes liable to the United States "any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" to the government. Id. § 3729(a). Private persons may act as relators and bring a civil action on behalf of the United States. Id. § 3730(b). The relator must first file suit under seal, giving the U.S. government time to investigate the claim and choose to either intervene in the action or allow the relator to proceed on his own. Id. The action is then unsealed and notice is provided to the defendant. If the action is successful, the relator receives a percentage of any proceeds. Id. § 3730(d).
This FCA case centers on an alleged scheme in which ten named defendants, acting in concert, fraudulently procured mortgage insurance from the Federal Housing Administration ("FHA") in 27 separate mortgage transactions ("subject transactions"). The loans in the subject transactions were originated between July 2009 and November 2010, and the fraudulent scheme allegedly could cost the government $2.6 million. (Am. Compl. ¶¶ 3, 8, ECF No. 21).
FHA mortgage insurance protects commercial lenders against defaults on mortgage payments and thus encourages these lenders to make loans to borrowers who might not meet conventional underwriting requirements. (Am. Compl. ¶¶ 15, 35). At the same time, FHA only accepts a fixed level of risk, and a mortgage must meet certain requirements in order to qualify for mortgage insurance. These requirements relate to, inter alia, the borrower's income and creditworthiness and the valuation of the property subject to the mortgage. (Id. ¶¶ 15, 36).
In order to expand the number of homeowners (and lenders) that the FHA insurance program can benefit, the program is implemented through the Direct Endorsement Lender ("DEL") Program. (Id. ¶ 16). Under this program, the federal government "does not itself conduct a detailed review of applications for mortgage insurance before an FHA-insured mortgage closes." (Id. ¶ 37). Instead, government-approved commercial lenders — known as direct endorsement lenders ("DELs") — are tasked with determining if a potential borrower qualifies for FHA insurance. If so, the DEL closes the loan with the borrower and submits documents to the government certifying that the mortgage qualifies for FHA insurance. FHA then endorses the loan based on the DEL's certification. Accordingly, DELs obligate the government without independent government review. (Id. ¶¶ 37-39).
If a borrower defaults on an FHA-insured mortgage, the holder of the mortgage — which could be the DEL or a third party — may submit a claim to the government for the costs associated with the defaulted mortgage, and the government covers those costs. (Id. ¶ 40).
The relator — and now Rheinstein, acting as a purported successor-in-interest — claim the defendants exploited the FHA insurance program by arranging sales of residential properties in Baltimore City, Maryland, to straw purchasers at inflated prices and fraudulently obtaining FHA mortgage insurance in connection with these sales. (Am. Compl. ¶¶ 50-75).
The alleged scheme had three elements. First, certain defendants owned residential properties in Baltimore City. (Id. ¶¶ 53-55). These defendants, acting in concert with others, recruited and paid straw purchasers to act as named borrowers for FHA-insured mortgages that were originated by DELs. (Id. ¶¶ 55, 62). These straw purchasers should not have qualified for FHA mortgage insurance, partly because they had neither the capability nor the intention of repaying their mortgage loans. However, they qualified because defendants provided the DELs with "false information and phony documents" on behalf of the straw purchasers. (Id. ¶¶ 57-61). With mortgage insurance in hand, the straw purchasers qualified for substantial loans, which they used to purchase the properties at inflated prices. (Id. ¶ 53). The straw purchasers soon defaulted on their mortgage payments, and the properties entered foreclosure proceedings. But because the government had agreed to insure these mortgages, all losses associated with foreclosure proceedings were borne by the federal government. (Id. ¶¶ 64-72).
The ten defendants allegedly played different roles in this fraudulent scheme. Three entities — E&W Realty, LLC ("EWR"), National Homes, LLC ("National Homes"), and KMJ Realty, LLC ("KMJ") — owned and sold all but one of the properties at issue here. These three entities were allegedly under the sole ownership and control of a fourth defendant, Kathryn Jewell; collectively, these four defendants are referred to as "the Jewell defendants." (Id. ¶¶ 26-29). Defendant Boomerang Properties, LLC ("Boomerang") was the seller in one of the suspected fraudulent transactions. (Id. ¶ 32). Defendant Robert S. Svehlak is allegedly one of two individuals who owns and controls a real estate and lending enterprise comprised of Boomerang and several other companies. (Id. ¶ 33). Defendants Ronald Miles and Jonathan Lee Miles both worked for Transatlantic Mortgage, LLC — a now-defunct company that allegedly served as the broker or originator for all the subject transactions. (Id. ¶¶ 30-31). Cardinal Financial Company, L.P. ("Cardinal") served as a DEL and as the original mortgage lender for loans in the subject transactions. (Id. ¶ 24). Most subject transactions originated by Cardinal were then assigned to defendant Wells Fargo Bank, N.A. ("Wells Fargo"). (Id. ¶ 25).
The amended complaint details how this scheme operated with respect to one particular transaction involving the sale of a property located at 2138 Hollins Street in Baltimore, which the amended complaint refers to Case No. 19 of the 27 subject transactions. Moore formerly owned this property but conveyed it to Boomerang, a defendant here, in 2009. (Id. ¶ 78 n.7). Boomerang then allegedly sold this property to a straw purchaser for $122,000. (Id. ¶ 93). The proof that this transaction was fraudulent, according to the amended complaint, centers on a form known as a HUD-1 settlement statement.
With respect to the sale of the Hollins Street property, and perhaps others, the amended complaint claims two versions of the HUD-1 settlement statement were produced "in order to deceive HUD about the true disposition of the mortgage loan proceeds that financed the transaction." (Id. ¶ 98). With respect to the Hollins Street property, the "accurate" version of the form allegedly reveals that Boomerang gave $68,740 of the sale proceeds to defendant EWR. (Id. ¶ 100). Especially because the property only sold for $122,000, the relator claims this is far too high for a brokerage fee and that the $68,740 payment instead reflects the fact that EWR had identified and recruited a straw purchaser pursuant to the alleged scheme. (Id. ¶ 107). The second version of the form, also attached to the complaint, simply omits this $68,740 payment. The existence of the two forms — only one of which contains an "exorbitant" consulting fee paid to EWR — "would have made it blatantly obvious to anyone that the transaction was not legitimate," according to the amended complaint. (Id. ¶ 112). The amended complaint further claims that Cardinal received both versions of the form and chose to submit to the government only the version omitting the $68,740 payment. (Id. ¶ 111 ).
The amended complaint alleges the remaining 26 mortgage transactions "followed the same pattern" as the sale of the Hollins Street property, but provides less detail. (Id. ¶¶ 162-89).
The present litigation concerns various alleged violations of the FCA. The amended complaint claims various defendants violated § 31 U.S.C. 3729(a)(1)(A), which provides for liability for any person who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval"; § 3729(a)(1)(B), which provides for liability for any person who "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim"; § 3729(a)(1)(G), which provides for liability for any person who "knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government"; and § 3729(a)(1)(C), which imposes liability on any person who conspires to commit a violation of the FCA. (Id. ¶¶ 210-97).
The court will briefly summarize related litigation in state court before detailing the procedural history of the present qui tam lawsuit.
The current qui tam litigation has its origin in a prior state court proceeding, Imagine Capital, Inc. v. Charles E. Moore et al., Case No. 24-C-09-003634 (Balt. City Cir. Ct.) ("Confessed Judgment Action"). That dispute centered on a construction loan provided by Imagine Capital — which is owned by Robert Svehlak, a defendant here — to Moore. After Moore defaulted on his loan repayments, a confessed judgment was entered against him in state court in June 2009. (Pl.'s Resp. in Opp'n to Mot. to Vacate, Confessed Judgment Case, Am. Complaint Ex. 7, ECF No. 21-8, 2-3). In light of his debt to Imagine Capital, Moore agreed to convey a property he owned — the 2138 Hollins Street property — to Boomerang, a company owned and controlled by Svehlak, on September 23, 2009. (Id. 3-4; Def.'s Mot. to Vacate, Confessed Judgment Case, Boomerang Mot. to Dismiss, Ex. A, ECF No. 29-4, 7-8). But the two sides then disagreed as to whether the conveyance of the 2138 Hollins Street property fully satisfied Moore's debt. (Pl's Resp. in Opp'n to Mot. to Vacate, Confessed Judgment Case 4; Defendant's Mot. to Vacate, Confessed Judgment Case 8-9). In light of that disagreement, Moore attempted to vacate the confessed judgment against him, and Rheinstein served as his counsel. (See Defendant's Mot. to Vacate, Confessed Judgment Case). Moore and Rheinstein first became aware of the alleged fraudulent scheme at issue in the current qui tam lawsuit in the fall of 2011 in the context of this Confessed Judgment Action in state court. In particular, they claim that Svehlak submitted a "suspicious exhibit" in the Confessed Judgment Action that tipped them off to the fact that Boomerang and others were engaged in mortgage fraud. (Am. Compl. ¶ 23).
Moore, as relator, filed the current qui tam lawsuit on June 20, 2012, with Rheinstein once again serving as counsel. (Compl., ECF No. 1).
After Mr. Rheinstein helped to secure that first extension on behalf of the trustee, all rights, title, and interest in the present qui tam lawsuit purportedly were transferred from the trustee to him on June 15, 2015. (Am. Compl. ¶ 23 n.2; Second Rheinstein Affidavit, Ex. 3, Notice of Assignment, ECF No. 39-5). Rheinstein had asserted a claim against Moore (and his wife) in the bankruptcy proceedings, and the transfer of rights in the qui tam case was meant to partially settle his claim. For that reason, Rheinstein now purports to continue the qui tam litigation "as the successor in interest to the Relator and the Estate." (Am. Compl. ¶ 23 n.2). On September 12, 2015, Rheinstein — now as successor-in-interest — requested another extension, this time up to and including December 12, 2015. (Second Mot. to Extend, ECF No. 19), which was granted, (Order Granting Second Extension, ECF No. 20). Rheinstein did not serve the defendants by that date. Instead, he filed an amended complaint on December 12, 2015 — the same day service of the original complaint was due. (Am. Compl.). The next day — after the deadline for service — he filed a "Motion to File Amended Complaint In Camera and Maintain Records Under Seal." (Mot. to File Am. Compl., ECF No. 22). In that motion, Rheinstein asked the court to enter an order 1) permitting the amended complaint to be filed and docketed in camera and remain under seal, and 2) providing that the defendants "shall not be served until the Government has noticed its intervention decision." (Id. 4). That motion was granted on December 15, 2015. (Order Granting Mot. to File Am. Compl., ECF No. 23).
Meanwhile, the U.S. government had filed criminal proceedings against three individuals — Kevin C. Campbell, Jonathan Miles, and Alberic Okou Agodio — "in connection with the scheme that resulted in the fraudulent mortgage transactions at issue" in the qui tam litigation. The government filed a case against Campbell on November 29, 2012 — about five months after the relator had filed his original qui tam complaint. The government then filed cases against Miles and Agodio on July 2, 2014, and February 18, 2015, respectively. (Am. Compl. ¶ 190). The government entered three separate plea deals with these defendants on November 15, 2012, June 26, 2014, and June 29, 2015. (Am. Compl. ¶¶ 192, 199, 204 & Exs. 18, 19, 20, ECF Nos. 21-18, 21-19, 21-20). These plea deals were entered after Moore filed the original complaint but before Rheinstein filed the amended complaint in December 2015.
On February 16, 2016, the government declined to intervene with respect to the amended complaint. (Second Intervention Decision, ECF No. 26). Rheinstein then served the defendants with the amended complaint in the ensuing months.
In particular, Boomerang and Svehlak filed a motion to dismiss or, in the alternative, for summary judgment on May 2, 2016. (Boomerang Mot. to Dismiss, ECF No. 29). An initial response was filed on June 1, 2016, (Resp. in Opp'n to Boomerang Mot. to Dismiss, ECF No. 41), and an amended response was filed on June 3, 2016, (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss, ECF No. 45). Boomerang and Svehlak replied on June 21, 2016. (Reply, Boomerang Mot. to Dismiss, ECF No. 52).
Wells Fargo filed a motion to dismiss on July 15, 2016. (Wells Fargo Mot. to Dismiss, ECF No. 54). Rheinstein filed a response on September 26, 2016, (Resp. in Opp'n to Wells Fargo Mot. to Dismiss, ECF No. 109), and Wells Fargo replied on October 21, 2016. (Reply, Wells Fargo Mot. to Dismiss, ECF No. 115).
Cardinal filed a motion to dismiss on July 15, 2016. (Cardinal Mot. to Dismiss, ECF No. 56). A response was filed on September 16, 2016 (Resp. in Opp'n, Cardinal Mot. to Dismiss, ECF No. 93), and then a corrected response was filed on September 25, 2016, (Amended Resp. in Opp'n, Cardinal Mot. to Dismiss, ECF No. 102). Cardinal moved to strike the amended response on September 27, 2016, (Cardinal Mot. to Strike, ECF No. 107), which Rheinstein opposed, (Resp. in Opp'n, Mot. to Strike, ECF No. 108). Cardinal then filed a reply on its motion to dismiss on October 11, 2016. (Reply, Cardinal Mot. to Dismiss, ECF No. 112).
Ronald Miles filed a motion to dismiss on September 8, 2016. (Ronald Miles Mot. to Dismiss, ECF No. 79), and a response was filed on October 17, 2016, (Resp. in Opp'n, Ronald Miles Mot. to Dismiss, ECF No. 114). Jonathan Lee Miles filed a motion to dismiss on December 15, 2016, (Jonathan Lee Miles Mot. to Dismiss, ECF No. 123), and a response was filed on February 6, 2016 (Resp. in Opp'n, Jonathan Lee Miles Mot. to Dismiss, ECF No. 127).
Kathryn Jewell filed a motion to dismiss on October 5, 2016, (Jewell Mot. to Dismiss, ECF No. 111), and then filed a motion to amend her pleading to incorporate defenses raised by other defendants on October 17, 2016, (Jewell Mot. to Amend, ECF No. 113). A response to both the motion to dismiss and the motion to amend was filed on November 21, 2016. (Resp. in Opp'n, Jewell Mot. to Dismiss, ECF No. 122).
The defendants raise a host of procedural and substantive issues in their motions to dismiss, some of which overlap and some of which relate to their specific alleged roles. But defendants generally agree that the court should dismiss this action pursuant to Fed. R. Civ. P. 12(b)(5) for insufficient service of process.
Rule 12(b)(5) provides that a motion to dismiss may be based on "insufficiency of service of process." The requirements for service of process are set forth in Fed. R. Civ. P. 4(c)(1), which states, "A summons must be served with a copy of the complaint. The plaintiff is responsible for having the summons and complaint served within the time allowed by Rule 4(m). . . ." Rule 4(m), in turn, provides, in relevant part:
Rule 4(m) applies to FCA cases as well, see Am. Civil Liberties Union v. Holder, 673 F.3d 245, 251 (4th Cir. 2011). Because FCA cases initially are filed under seal, however, the 90day clock does not start until the court unseals the complaint and orders service. See 31 U.S.C. § 3730(b)(3) ("The defendant shall not be required to respond to any complaint filed under this section until 20 days after the complaint is unsealed and served upon the defendant pursuant to Rule 4 of the Federal Rules of Civil Procedure."). Here, the court unsealed the complaint and ordered service on November 17, 2014. But the court extended that deadline twice; the second extension mandated service by December 12, 2015. The parties agree that Rheinstein was obliged to effect service by that date, or else face whatever consequences may result under Rule 4(m). They disagree, however, on how Rule 4(m) should be interpreted. According to the defendants, the court must dismiss this action for insufficient service of process because Rheinstein failed to effect service by December 12. (See, e.g., Boomerang Mot. to Dismiss Mem. Law, ECF No. 29-1, 15). Rheinstein claims dismissal is discretionary and, in any event, would be improper. (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss 23-32).
Courts in this circuit have long debated whether they have discretion under Rule 4(m) to extend deadlines for service absent a showing of "good cause." In Mendez v. Elliot, 45 F.3d 75, 78 (4th Cir.1995), the Fourth Circuit interpreted Rule 4(m) as mandating dismissal if service is not effected by the applicable deadline and the plaintiff fails to show "good cause." That holding was subsequently put in doubt by other circuit courts and, in dicta, the Supreme Court. Henderson v. United States, 517 U.S. 654, 658 n.5 (1996). Especially in light of Henderson, I concluded more than 15 years ago that Mendez was not good law and that, "given the opportunity, the Fourth Circuit perforce would adopt the interpretation of Rule 4(m) held by the Supreme Court and the other circuit courts." Hammad v. Tate Access Floors, Inc., 31 F.Supp.2d 524, 527-28 (D. Md. 1999).
The Fourth Circuit has not clarified the matter in a published opinion since Mendez. In unpublished opinions since Mendez, it has endorsed both sides of the debate. Compare Giacomo-Tano v. Levine, 199 F.3d 1327, at *1 (4th Cir. 1999) ("Even if a plaintiff does not establish good cause, the district court may in its discretion grant an extension of time for service"), with Martinez v. United States, 578 F. App'x 192, 193-94 (4th Cir. 2014) ("A plaintiff may escape dismissal for failure to timely serve process only if she demonstrates `good cause' for the delay.").
If Mendez is still good law, the defendants' motions to dismiss must be granted, unless Rheinstein can show "good cause" for failing to meet the December 12 deadline.
Here, Rheinstein offers no evidence that might show he "made reasonable and diligent efforts to effect service" before the December 12, 2015, deadline. In fact, he offers no explanation at all for why he failed to act before filing an amended complaint on the day service was due. Nonetheless, Rheinstein contends that "good cause" exists in this case in light of events that took place after that deadline. In particular, he notes that the December 15th court order granted his request to file an amended complaint and provided that service on the defendants "shall not be completed" until the amended complaint is unsealed. Rheinstein relied on that December 15 order "in good faith," providing him "good cause" to wait until the subsequent unsealing of the amended complaint in February 2016 before effecting service, he suggests. (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss, 31-32).
Rheinstein also suggests "good cause" exists in light of the consequences of dismissing this case for insufficient service of process. In particular, he claims the defendants were not prejudiced by the delay in service, whereas dismissal would be "extremely prejudicial" to him because the FCA statute of limitations may now bar his claims. (See Amended Resp. in Opp'n to Boomerang Mot. to Dismiss 31). But "good cause" does not turn on the implications of granting a motion to dismiss. See, e.g., Chen, 292 F.R.D. at 295 ("The good cause inquiry . . . implicates the reason for failure to effect service, not the severity of the consequences. Accordingly, it is of no moment that the statute of limitations may pose a barrier to a new complaint.") (citations and quotation marks omitted); Knott v. Atl. Bingo Supply, Inc., 2005 WL 3593743, at *2 (D. Md. Dec. 22, 2005) (good cause inquiry does not turn on the "possibility that Plaintiff's claims will be time-barred if dismissed without prejudice"); Defreitas v. Montgomery Cnty, 2014 WL 31885, at *4 (D. Md. Jan. 3, 2014) ("[T]he running of the statute of limitations has no bearing on the good cause inquiry"); cf. Mendez, 45 F.3d at 78 (dismissal without prejudice pursuant to Rule 4(m) "does not . . . give the [plaintiff] a right to refile without the consequence of time defenses, such as the statute of limitations"). And even if the defendants here were not prejudiced by the delay, that fact alone would not suffice to establish good cause. See Chen, 292 F.R.D. at 293 ("good cause" requires "reasonable and diligent efforts" to effect service before the deadline); see also Scott, 2016 WL 7378091, at *5 (listing prejudice to defendant as one of six factors that may be relevant in the context of "good cause" inquiry).
Finally, Rheinstein claims Mendez is no longer good law and that the court is not required to dismiss this case even if "good cause" is absent. (Resp. in Opp'n to Wells Fargo Mot. to Dismiss Mem. Law, ECF No. 109-1, 27 n.23). But even assuming Rheinstein is correct on this point, it is well established that the court "would still need to have some reasoned basis to exercise its discretion and excuse the untimely service: the Court must give some import to the rule." Hoffman, 379 F. Supp. 2d at 786; see also Lehner v. CVS Pharmacy, 2010 WL 610755, at *3 (D. Md. Feb. 17, 2010) (even if Mendez is not good law, "this Court will not make a mockery of the time requirements" under Rule 4(m)). Here, there is no such "reasoned basis" to exercise any discretion the court may have, because Rheinstein offers no explanation for his failure. See id. (no "reasoned basis" exists where plaintiff "made no effort" to effect service by deadline).
Setting aside "good cause" and "reasoned basis," Rheinstein makes four alternative arguments for why dismissal pursuant to Rule 12(b)(5) is inappropriate.
First, Rheinstein claims the December 12, 2015, deadline was rendered meaningless once he filed the amended complaint. At that point, service was not required until after the court unsealed the amended complaint and ordered service, he claims. (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss 25). This argument is unpersuasive. In general, filing an amended complaint does not reset the Rule 4(m) service period except as to those defendants newly listed in the amended complaint. See Lee v. Airgas Mid-S., Inc., 793 F.3d 894, 898 (8th Cir. 2015) ("[F]iling an amended complaint in itself does not toll the service period or reset the 120-day clock.") (internal quotation marks omitted); Bolden v. City of Topeka, Kan., 441 F.3d 1129, 1148 (10th Cir. 2006) ("[T]he 120-day period provided by Rule 4(m) is not restarted by the filing of an amended complaint except as to those defendants newly added in the amended complaint."); Convergence Techs. (USA), LLC v. Microloops Corp., 711 F.Supp.2d 626, 631 n.4 (E.D. Va. 2010) (same); Jackson v. Alleghany Cty., 2008 WL 3992351, at *16 n.7 (W.D. Va. Aug. 28, 2008) (same).
To support his claim that an amended complaint resets the service deadline, Rheinstein relies on U.S. ex rel. Budike v. PECO Energy, 897 F.Supp.2d 300 (E.D. Pa. 2012). There, a relator faced a deadline for service in March 2011. But prior to expiration of that deadline, on November 17, 2010, the court entered an order stating, "Relator's period in which to conclude its investigative work and to further advise the Court of its decision to proceed in this civil action shall be EXTENDED to April 3, 2011 or further order of this Court." Budike, 897 F. Supp. 2d at 311-12. The relator took no action until April 8, 2011, when the relator filed an amended complaint — five days after the April 3, 2011, deadline. The court subsequently ordered unsealing and service of the amended complaint on May 4, 2011, and the relator effected service within 120 days of that May 4, 2011, order. Faced with a motion to dismiss for insufficient service of process, the court rejected the notion that the relator was required to effect service by April 3, 2011. Instead, it concluded the 120-day timeframe started anew on May 4, 2011, in light of the amended complaint. Id. 314 & n.17. The relevance of Budike here is limited by its unique facts. That decision rested heavily on the fact that the November court order extended the deadline until April 8, 2011, "or further Order of this Court." The Budike court then concluded that the May 4, 2011, order establishing a new deadline for service was such a "further Order" of the court. Id. The court did not hold, as Mr. Rheinstein now suggests, that an amended complaint automatically resets the service deadline. Especially because the court order at issue here did not contain similar language to the order in Budike, the court finds this argument unpersuasive.
Relatedly, Mr. Rheinstein claims the amended complaint "tolled" the deadline for effecting service that would have otherwise applied. He claims "the time for completion of service . . . is tolled when there exists a statutory or rule-based prerequisite to service, for a particular type of complaint, that requires the occurrence of an event beyond the plaintiff's control." (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss 28). Under this theory, Rheinstein appears to suggest that, but for FCA requirements stipulating that a complaint cannot be served until the court so orders, Rheinstein would have both filed the amended complaint and served that complaint on all defendants on December 12, 2015. (See id. 29). To support this argument, Mr. Rheinstein relies on Robinson v. Clipse, 602 F.3d 605 (4th Cir. 2010). There, the Fourth Circuit noted that in forma pauperis plaintiffs cannot serve complaints until the district court screens the complaint and authorizes service. Because these court processes are beyond the control of an in forma pauperis plaintiff, the Fourth Circuit concluded the time during which this initial screen takes places does not count against the Rule 4(m) deadline for service. Id. at 608-09. This holding in Robinson has never been extended to FCA cases, and the court sees no reason to do so here. Prior to the December 12, 2015, deadline, Mr. Rheinstein had ample time to serve his complaint, and his failure to take any actions prior to the day of the deadline was not caused by circumstances beyond his control.
Finally, Rheinstein claims dismissal is inappropriate simply because any failing that might otherwise have resulted in dismissal was obviated by the December 15, 2015, court order. The defendants' motions, he claims, are "predicated on the notion that a prior order of the court extending the service period was improvident or in error," and Rheinstein suggests he "had a right to rely upon" the December 2015 order or, relatedly, that the December 15, 2015 order "superseded any earlier orders." (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss 27, 31). This argument also fails. The December 2015 order was granted before the court had the benefit of adversarial briefing. And the court may grant a meritorious motion to dismiss even if it means vacating a prior court order. See Chen, 292 F.R.D. at 295 (granting defendants' motion to vacate a prior court order extending the Rule 4(m) deadline because there was no "good cause" for the extension); see also Mendez, 45 F.3d at 79 (suggesting courts may vacate prior orders extending deadline for service if no "good cause" for the extension); Smith v. Ocwen-Loan Servicing LLC, 2015 WL 4092452, at *2 (D. Md. July 6, 2015) (suggesting that, when plaintiffs fail to meet Rule 4(m) deadlines, courts should provisionally extend the deadline for service but then allow the parties to brief the issue of whether dismissal for insufficient service of process is warranted).
The FCA contains a public disclosure bar, 31 U.S.C. § 3730(e)(4), "to prevent `parasitic' qui tam actions in which relators, rather than bringing to light independently-discovered information of fraud, simply feed off of previous disclosures of government fraud." U.S. v ex rel. Siller v. Becton Dickenson & Co., 21 F.3d 1339, 1347 (4th Cir. 1994). The public disclosure bar requires a complaint to be dismissed where there is a qualifying public disclosure that predates the complaint and the relator is not the "original source" of the information. 31 U.S.C. § 3730(e)(4). In large part, this case is a paradigmatic example of a "parasitic" suit, as illustrated by the procedural history set forth above and a comparison of the initial and amended complaint.
In the initial complaint, filed June 20, 2012, Moore conceded that his first knowledge of the alleged scheme originated from publicly-filed documents in state court litigation related to the 2138 Hollins Street property. (Compl. ¶ 20). He then identified, largely on "information and belief," a total of 27 properties involved in the alleged scheme, for which Cardinal was alleged to be the mortgage lender, and he also claimed that Cardinal certified 25 of the transactions to HUD for FHA mortgage insurance and assigned nearly all of the mortgages to Wells Fargo. In the amended complaint, filed December 12, 2015, Rheinstein identified in more detail his October 2011 discovery of the supposedly fraudulent HUD-1 statement in connection with the state court litigation. (See Am. Compl. ¶¶ 95-105). He also added more factual detail about the 2138 Hollins Street property and again relied on "information and belief" to assert that the other 26 transactions also were fraudulent. The amended complaint also described the criminal cases pursued by the U.S. Attorney's Office in this court, acknowledging that the plea agreement for Alberic Agodio covered all the transactions in this case.
The FCA's public disclosure bar was amended effective March 23, 2010. Because the amendment was not retroactive, the pre-amendment bar applies to conduct that occurred before March 23, 2010, and the post-amendment bar applies to conduct after that date. May v. Perdue, 737 F.3d 908, 914 (4th Cir. 2013). If a complaint alleges a continuing course of fraud occurring both before and after March 23, 2010, the pre-amendment version governs conduct occurring before that date, and the post-amendment version governs conducts occurring thereafter. See United States v. Premier Educ. Grp., L.P., 2016 WL 2747195, at *7 (D. N.J. May 11, 2016).
In this case, the pre-amendment bar appears to apply to Case Nos. 1-16 alleged in the amended complaint, which involve real estate transactions that were certified for FHA insurance before March 23, 2010, and the post-amendment bar appears to apply to Case Nos. 17-27, which were certified after that date.
31 U.S.C. 3734(e)(4)(A) (2006). The pre-amendment version of the public disclosure bar thus requires the court "to answer three questions: Was there a public disclosure? If there was a public disclosure, was the qui tam action based on the public disclosure? If the action was based on the public disclosure, was the qui tam plaintiff an original source?" U.S. ex rel. Wilson v. Graham Cty. Soil & Water Conservation Dist., 528 F.3d 292, 299 (4th Cir. 2008), rev'd on other grounds by 559 U.S. 280 (2010). "A relator bears the burden of proving that the public disclosure bar does not preclude his FCA action." May, 811 F.3d at 640.
The post-amendment version of the bar "is a grounds for dismissal — effectively, an affirmative defense — rather than a jurisdictional bar." United States ex rel. Beauchamp v. Academi Training Ctr., LLC, 816 F.3d 37, 40 (4th Cir. 2016). It provides:
With respect to Case Nos. 1-16 — which are analyzed under the pre-amendment version of the public disclosure bar — documents disclosed in state-court litigation qualify as "public disclosures," Siller, 21 F.3d at 1348, 1350, and Rheinstein admits his claims are "based upon" documents obtained through public state court filings. (See Compl. ¶ 20). Rheinstein's affidavits (as well as the amended complaint) also suggest that the public filings, specifically the two different HUD-1s, constitute the disclosure of "allegations or transactions" — as opposed to mere "information" — because the two different forms establish the "x + y = z" implication of fraud. See U.S. ex rel. Springfield Terminal Railway Co. v. Quinn, 14 F.3d 645, 653-55 (D.C. Cir. 1994) (a "transaction" reflecting fraud occurs when two documents are disclosed from which readers could infer fraud has been committed). Under Fourth Circuit precedent, this established both prongs of the public disclosure bar. That is, Moore or Rheinstein also do not qualify as an "original source" because their knowledge of fraud is based on public disclosures in state court. See Grayson v. Advanced Mgmt. Tech., Inc., 221 F.3d 580, 582-83 (4th Cir. 2000). Accordingly, to the extent the initial complaint adequately stated a claim against any defendant, claims based on conduct prior to March 23, 2010 are barred.
With respect to claims based on conduct after March 23, 2010, the court applies the postamendment version of the public disclosure bar. Here, the bar applies if "substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed" before the filing of a qui tam action in a federal criminal hearing, unless the person bringing the action is an "original source." And an "original source" is an individual who either "prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based," or "who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section." 31 U.S.C. § 3730(e)(4).
First, the amended complaint controls here when deciding whether a public disclosure has occurred prior to the filing of a qui tam lawsuit. The original complaint did not particularly allege the relevant fraud — rather, it made vague allegations upon "information and belief." See Beauchamp, 816 F.3d at 46. Second, publicly filed federal criminal documents, particularly the plea agreements in the Campbell, Miles, and Agodio cases, are qualifying "public disclosures" that occurred before Rheinstein filed his amended complaint in December 2015. Third, many of the specifics in the amended complaint are provided by reference to these plea agreements in the criminal cases involving defendants Campbell, Miles, and Agodio. (See Am. Compl. ¶¶ 190-208 & Exs. 18, 19, 20). Put differently, the same "allegations or transactions" at issue in the criminal cases were then included in this qui tam action. Finally, Rheinstein and Moore are not "original sources" under the post-amendment bar. Moore and Rheinstein have proffered no knowledge that is "independent of and materially adds to" the information contained in the plea agreements, nor have they specifically alleged that they provided the relevant information to the government prior to filing the amended complaint.
Accordingly, to the extent the specifics required by the FCA are contained only in the amended complaint, all claims would fall under the public disclosure bar. Beauchamp, 816 F.3d at 45-46. And because the original complaint contains no specifics, but rather makes allegations based on information or belief, the court finds the public disclosure bar applies to all claims. Because the application of the public disclosure bar with respect to Case Nos. 17-27 is not jurisdictional, however, the court will now examine other issues raised by the defendants.
As discussed more fully below, Rheinstein continues to support his claims against Cardinal and Wells Fargo primarily on the grounds of "information and belief," though his obligation is to allege specific facts establishing the necessary scienter for a violation of the FCA. Rheinstein also, however, has attached to the amended complaint the statement of facts agreed to between the U.S. Attorney's Office and Alberic Agodio, who pled guilty before Judge James K. Bredar in United States v. Agodio, 1:15-cr-0061-JKB.
(Agodio Statement of Facts 1-5). Rheinstein stands in the government's shoes and has no claim other than that on behalf of the government. U.S. ex rel Barajas v. Northrop Corp., 147 F.3d 905, 910 (9th Cir. 1998). Where the government has acknowledged Cardinal and the secondary lenders as innocent victims in a public filing before this court, for the purpose of persuading the court to accept a guilty plea, it could not now reverse course and claim that Cardinal and Wells Fargo had perpetrated the fraud scheme against the FHA.
To withstand a motion to dismiss with respect to an FCA claim, the plaintiff must plead facts with sufficient specificity to satisfy Rule 9(b) of the Federal Rules of Civil Procedure. See U.S. ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 455-56 (4th Cir. 2013); U.S. ex rel. Palmieri v. Alpharma, Inc., 928 F.Supp.2d 840, 854-57 (D. Md. 2013). Most of the allegations against Cardinal and Wells Fargo in the FAC are supported only on "information and belief," which is not sufficient. Essentially, Rheinstein simply asserts that Cardinal must have known that statements allegedly made by others involved in the transactions were false, and that Cardinal was acting on behalf of Wells Fargo, and that fraudulent claims must have been submitted to the FHA. He has largely failed to provide any of the essential time, place, or date specifics as to these defendants. U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008). Further, facts sufficient to establish that Cardinal was an "agent" of Wells Fargo have not been pled.
For the reasons stated herein, the court will dismiss Rheinstein's amended complaint. First, the court concludes that the defendants were not properly served, which is grounds for dismissal without prejudice. In addition, or in the alternative if the ruling as to service is not correct, the court will dismiss with prejudice all claims against all defendants that are based on the first sixteen subject transactions (Case Nos. 1-16): the court lacks subject matter jurisdiction over these claims under the pre-amendment version of the public disclosure bar. The postamendment version of the public disclosure bar also bars all claims based on the remaining subject transactions (Case Nos. 17-27), and they also will be dismissed with prejudice. With respect to Cardinal and Wells Fargo, the court will additionally dismiss all claims with prejudice, because Rheinstein is estopped from bringing those claims. Separately, the court also finds that Rheinstein has failed to plead facts with sufficient particularity with respect to Cardinal and Wells Fargo.
Accordingly, the court will grant the motions to dismiss filed by Boomerang, Svehlak, Wells Fargo, Cardinal, Ronald Miles, Jonathan Lee Miles, and Kathryn Jewell. It will deny Cardinal's motion to strike the amended response filed by Rheinstein as moot. It will retroactively grant the motion by Rheinstein for an extension of time to respond to the motion to dismiss by Jonathan Lee Miles. And it will grant Jewell's motion to amend her pleading to incorporate defenses raised by other defendants.
A separate order follows.
