ALGENON L. MARBLEY, District Judge.
This matter comes before the court on Defendants', Brink's Company and Brink's Inc., Motion to Dismiss Plaintiffs' Complaint Pursuant to Rule 12(b)(6), (Doc. 26), joined by Defendants Jackson Metals LLC ("Jackson") and Walter Luhrman ("Luhrman"). (Doc. 27). Defendants seek to dismiss the case in its entirety, on the grounds that Plaintiff has failed to state claims for relief under the Federal Claims Act, 31 U.S.C. § 3729, and failed to meet particularity requirements under Fed. R. Civ. P. 8(a) & 9(b). For the reasons stated herein, Defendants' Motion is
This action arises out of a Complaint brought by the qui tam relator Brian D. Holbrook ("Holbrook") under the Federal Claims Act ("FCA"), 31 U.S.C. §§ 3729. From August 27, 1996 through December 4, 2007, Holbrook worked for Brink's, Incorporated ("Brink's Inc.") in Cleveland, Ohio. Brink's, Inc. is a wholly owned subsidiary of The Brink's Company, which is a world-wide provider of security-related services to financial institutions, retailers, government agencies, mints, and other commercial operations. Brink's Coin Branch facilities sort, count, wrap and store coin for a variety of customers, including the Federal Reserve. The Complaint alleges that from 2006 to the present, on information and belief, Brink's Inc., allegedly "operated" by Brink's Company (collectively "Brink's"), has engaged in a secret penny-swapping scheme with Jackson Metals—a wholesale metal buyer that has special machinery to cull brass pennies of their copper content—and Jackson Metal's President Luhrman. In this alleged scheme, Defendants sort through Federal Reserve-owned pennies stored in Brink's, Inc. vaults to remove copper pennies minted prior to 1982 that contain 95% copper and 5% zinc ("brass"), and replace them with newer pennies that contain 97.5% zinc and only 2.5% copper ("copper-plated zinc). In essence, Holbrook asserts that the objective of this penny-swapping scheme is to deprive the U.S. Treasury of the rising value of older, higher copper content pennies. Holbrook claims that this deprivation harms the U.S. Government since the burden will fall on the taxpayer to replace these melted coins, and the U.S. Government is deprived of the value of the copper should it elect to cull and melt pre-1982 pennies at any time.
Brinks, Inc. and the FRB of Cleveland entered into a Coin Terminal Agreement ("CTA") on August 25, 2000. Such a CTA between an armored carrier and the FRB is common practice. According to the July 20, 2010 testimony of Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems,
Brink's, like all armored carrier companies that contract with the Federal Reserve, does not charge the FRB a fee for the services it provides pursuant to the CTA. Id. In the 1990s, the FRB and armored carriers reached a mutually beneficial agreement that "the armored carriers would provide coin services on behalf of the Federal Reserve at no cost in exchange for access at the armored carrier terminals to Reserve Bank coin inventories, which significantly reduced the transportation expenses incurred by the armored carriers in obtaining the coin from Reserve Bank locations." Id.
The CTA acknowledges the mutual desire of both parties for "Brink's to maintain an inventory of Bank-owned coin in a vault of similarly secure storage compartment or area at its facility . . . in order to provide coin services to depository financial institutions ("DFIs") which order coin from and deposit coin with the Bank and which also may be customers of Brink's ("Mutual Customers")." (CTA, Doc. 26-4). In the CTA, Brink's, Inc. agrees to "handle bank-owned coin only for the purpose of, and in accordance with the requirements set forth in this agreement," and "acknowledges that title to Bank-owned coin shall at all times remain with the Bank and Brink's shall have no right, title or interest therein." Id. at ¶ 1.
The CTA strictly limits the movement of Bank-owned coin in Brink's care. The CTA acknowledges that there may be situations in which it would be convenient for Brink's to deliver coin to or receive coin from a competing armored carrier or to a non-customer bank, but it is permitted only with the mutual consent of the Bank, and if Brink's reports such transfers the same day to the Bank. Id. at ¶ 2(c). Further, the only time in which the CTA permits Brink's to "remove bags of coin from the Bank's designated storage area" is for the purpose of "opening the bags and wrapping the coin for pending delivery to a Mutual Customer. . ." Id. at ¶ 9.
Further, Brink's receives coin from the FRB in penny, nickel, dime, quarter, half-dollar and dollar denominations, but the CTA only requires Brink's to weigh incoming bags of Bank-owned coin in the dime, quarter, half-dollar and dollar denominations and report to the Bank if the bags of coin are not within "Weight Tolerances set forth on Appendix E." Id. at ¶ 3. According to the July 20, 2010 testimony of the Director, Division of Reserve Bank Operations and Payment Systems, "[t]he Reserve Banks stopped routinely weighing penny and nickel deposits in 2003 after determining that the costs exceeded the benefits of doing so. Instead, the Reserve Banks give depository institutions credit on deposits of coin on a `said to contain' basis." Upon receipt, the Bank-owned coin accepted for the "Bank's inventory shall be stored at the Facility in a vault or similarly secure compartment or area." (CTA, Doc. 26-4 at ¶ 6).
The CTA outlines procedures for ensuring the FRB is apprised of the location and amount of bank-owned coin stored at Brink's facilities at all times. For example, Brink's is tasked with retaining "documentation to show in reasonable detail at any given point in time accountability for Bank-owned coin," notifying the FRB of the "dollar value and denomination of coin ordered for shipping to Mutual Customers," and sending the FRB daily "Customer Inventory Reports . . . of its close-of-the-day inventory." Id. at ¶¶ 6, 10, 13. Further, the FRB can conduct periodic, unannounced inspections "for the purpose of inspecting the Bank's inventory and verifying that Brink's is receiving, counting, weighing, storing, handling, disbursing, shipping and/or transferring Bank-owned coin in accordance with the requirements of [the] Agreement." Id. at ¶ 14.
The CTA further provides for the exchange of receipts as Bank-owned coin is transferred between both entities:
Id. at ¶ 13.
From April 1, 2003 until his termination on December 4, 2007, Holbrook served as the Branch manager of the Cleveland Coin Branch, where he managed the budget and depository accounts, and supervised administrative functions for the FRB and all major Ohio financial institutions. He also oversaw vault inventory, performed daily vault audits, tabulated shipments and receipts, and reported consolidated balances to customers.
Holbrook states that he first learned of the alleged penny-swapping scheme in August 2007 from Paul Zinser, Brink's former Great Lakes Region Coin Product Manager, when Zinser sent him to the Jessup, Maryland coin terminal to assist in managing that branch. At the Jessup facility, Zisner instructed Holbrook to allow pennies stored by Brink's, Inc., including FRB-owned coin, to be picked up by a non-armored Jackson Metals truck, rather than by a Brink's, Inc. vehicle. Holbrook states that twice a week, in or around August 2007, Jackson Metals sent an empty semitrailer to the Jessup facility for them to fill it with about $76,000 in circulated pennies.
In around August 2007, Holbrook allegedly began having daily phone conversations with Luhrman, who stated that he was a coin dealer with the technology to cull copper pennies. Luhrman allegedly admitted to Holbrook that the penny-swapping scheme began in 2006, when he was referred to James Mulroney, Brink's Director of Coin Services, because Luhrman was considering setting up self-service kiosks in retail stores that would exchange coins for paper dollars, similar to those used by Coinstar, so that he would have access to large quantities of pennies. Mulroney allegedly told Luhrman that Brink's could help because it had excessive inventory of pennies due to contracts with Coinstar and the Federal Reserve and regularly needed to move them from place to place. Holbrook states that Jackson Metals and Luhrman agreed to pay Brink's a premium rate of $2.45 (the Cleveland verification rate) per standard bag (the normal standard rate is only $0.00 to $0.50) to ship these pennies to other locations where there were purported shortages of pennies, in return for giving Jackson Metals access to Federal Reserve pennies, which it could cull for brass pennies, and then replace the pennies it culled with copper-coated zinc pennies. Holbrook states that Defendants conspired to conceal, and never disclosed, this agreement to the FRB. Jackson Metals and Luhrman also allegedly provided Brink's, Inc. with free transportation of pennies from Maryland to any destination or Federal Reserve Bank, saving Brink's substantial transportation costs, which ranges from $1,200 to $3,000 a shipment. Holbrook estimates that from the Jessup, Maryland facility, Jackson Metals made 126 shipments of pennies a year for Brink's, Inc.
Additionally, between September and October 2007, Holbrook allegedly directed and reported to Brink's management eight swaps of about $66,000 worth of pennies, in which Brink's relieved Jackson Metals of an excess of copper-plated zinc pennies in return for pennies stored in Brink's vaults. In one Brink's-Cleveland penny swap, Holbrook alleges there were approximately 1,320 bags of $50.00 of pennies, with $2.45 charged per bag to Huntington Bank Cleveland, plus a $190.00 preparation fee, resulting in a gain of about $3,424 for Brink's. Holbrook designated this gain as revenue in his end of month reports. Holbrook states that a $50.00 bag of pennies weighs about 32 lbs., and about 37 percent of those pennies are brass pennies. At the estimated market price of copper at about $3.07 per pound, Jackson Metals and Luhrman earned profits of $44,892.33 per tractor-trailer penny swap. For each swap, Jackson Metals provided a zero-balance invoice, like the one attached to this motion. (See Doc. 26-4). Holbrook alleges that Brink's has access to more pennies than any other source as a subcontractor to the Federal Reserve Bank and also as the largest processor to Coinstar deposits in the United States.
Luhrman confirms in his affidavit that Jackson Metals LLC and Brink's US entered into two service agreements in Cincinnati Ohio, dated September 1, 2006 and January 24, 2008. (Doc. 27-2). He also states that he processed pennies, or sorted them based upon their metal content. Finally, he states that Jackson metals ceased operations in March 2009.
In the fall of 2007, Keith Kovach, the former Great lakes Regional Coin Mechanic for Brink's, Inc., allegedly successfully installed and tested proprietary digital-signal processing ("DSP") software on the Cleveland Branches Supersorter machines so that Brink's, Inc. could internally cull brass pennies. Holbrook allegedly reported to Luhrman and Mulroney that this new copper-mining software was effective, and that considering Brink's, Inc.'s ability to cull brass pennies internally, the agreement between Brink's and Jackson Metals should be altered to increase Brink's financial benefits. Holbrook heard from Bill Patske, Brink's Coin Services Mechanic, that Mulroney "hit the roof" when he received Holbrook's email and voicemail, and Mulroney quickly advised Holbrook to keep quiet. Luhrman also advised Holbrook to be careful about with whom he discussed the software. Shortly thereafter, Brink's terminated Holbrook's employment.
In a telephone conversation with Keith Kovach, the former Great lakes Regional Coin Mechanic for Brink's, Inc.—who installed and tested proprietary digital-signal processing ("DSP") software for Brink's—Kovach allegedly told Holbrook that the DSP software was used in many Brink's branches and, since Holbrook's termination, was being used to cull brass pennies that were being sent to Jackson Metals.
Moreover, in a telephone conversation on January 28, 2010, Luhrman allegedly reported to Holbrook that he had $5,000,000 in copper pennies in his vault that were acquired through the Jackson Metals and Brink's, Inc. scheme.
Holbrook alleges on December 14, 2006, the United States Mint announced the enactment of new regulations prohibiting the melting and limiting the exportations of pennies and nickels with the goal of preventing a shortage of small change in circulation. See 31 C.F.R. §§ 82, et seq. The rules became final on October 29, 2007 and extend through 2014. The Secretary of the Treasury propounded this regulation after determining that:
Prohibition on the Exportation, Melting, or Treatment of 5-Cent and One-Cent Coins, 72 FR 18880-02.
Holbrook alleges that Defendants' penny-swapping scheme not only costs taxpayers down the line as the U.S. mint must replace these coins, but also deprives the Government of the copper in the pennies should it choose to recycle the copper pennies in the future.
On August 16, 2011, relator Holbrook filed this qui tam action under seal in the United States District Court of New Jersey, claiming violations of the FCA by Jackson, Luhrman, The Brink's Company and Brink's, Inc. (Doc. 1). On September 6, 2012, the Unites States declined to intervene in this action, thus allowing Holbrook to maintain the action in the name of the United States. (Doc. 7).
On March 25, 2013, Brink's Defendants filed this Motion to Dismiss the Complaint or, in the Alternative, to Change Venue. (Doc. 26). Also on March 25, 2013, Defendants Jackson and Luhrman filed a Motion joining in the Brink's Defendants'' Motion. (Doc. 27). On September 3, 2013, the United States District Court of New Jersey granted Defendants' Motion as to transfer of venue only, and this case was transferred to the Southern District of Ohio. (Doc. 43). On November 12, 2013, this Court ordered supplemental briefing limited to relevant Sixth Circuit case law pertaining to the dismissal-related issues raised in the previously filed Motion to Dismiss. (Doc. 64). This matter has been fully briefed and now is ripe for review.
Federal Rule of Civil Procedure 12(b)(6) allows for a case to be dismissed for "failure to state a claim upon which relief can be granted." Such a motion "is a test of the plaintiff's cause of action as stated in the complaint, not a challenge to the plaintiff's factual allegations." Golden v. City of Columbus, 404 F.3d 950, 958-59 (6th Cir. 2005). Thus, the Court must construe the complaint in the light most favorable to the non-moving party, meaning the Court must presume that all factual allegations in the complaint are true, and make reasonable inferences in favor of the non-moving party. Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008). The Court is not required, however, to accept as true mere legal conclusions unsupported by factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). Although liberal, Rule 12(b)(6) requires more than bare assertions of legal conclusions. Allard v. Weitzman, 991 F.2d 1236, 1240 (6th Cir. 1993) (citation omitted). Generally, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). But the complaint must "`give the defendant fair notice of what the claim is, and the grounds upon which it rests.'" Nader v. Blackwell, 545 F.3d 459, 470 (6th Cir. 2008) (quoting Erickson v. Pardus, 551 U.S. 89, 93 (2007)). In short, a complaint's factual allegations "must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). It must contain "enough facts to state a claim to relief that is plausible on its face." Id. at 570.
In addition, complaints alleging FCA violations must comply with Rule 9(b)'s requirement that the circumstances constituting fraud be pled with particularity, although "malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 563 (6th Cir.2003). This is because "defendants accused of defrauding the federal government have the same protections as defendants sued for fraud in other contexts." Id. The requirement "reflects the rule-makers' additional understanding that, in cases involving fraud or mistake, a `more specific form of notice' is necessary to permit a defendant to draft a responsive pleading." U.S. ex rel. SNAPP, Inc. v. Ford Motor Co., 532 F.3d 496, 504 (6th Cir. 2008) (citation omitted); see also United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 503 (6th Cir.2007) (finding that without the heightened pleading standard in FCA cases, "[d]efendants would not have notice of the specific conduct with which they were charged, they would be exposed to fishing expeditions and strike suits, and they would not be protected from spurious charges of immoral and fraudulent behavior.") (internal citations and quotations omitted).
To plead fraud under the FCA with particularity, "the plaintiff must allege (1) the time, place, and content of the alleged misrepresentation, (2) the fraudulent scheme, (3) the defendant's fraudulent intent, and (4) the resulting injury." Chesbrough v. VPA, P.C., 655 F.3d 461, 466-67 (6th Cir. 2011) (citing Bledsoe 501 F.3d at 503); see also U.S. ex rel. Tillson v. Lockheed Martin Energy Sys., Inc., No. CIV.A. 5:00CV-39-M, 2004 WL 2403114, at *13, 23-26 (W.D. Ky. Sept. 30, 2004) (finding relator sufficiently pled the "who, when, what and how" of the alleged fraudulent scheme under the FCA). When a relator's allegations in an FCA case encompass many allegedly false claims over a substantial period of time, however, the relator need not plead every specific instance of fraud. Bledsoe, 501 F.3d at 509 (finding that "where the allegations in a relator's complaint are complex and far-reaching, pleading every instance of fraud would be extremely ungainly, if not impossible.") (internal quotations and citations omitted)). Instead, "where a relator pleads a complex and far-reaching fraudulent scheme with particularity, and provides examples of specific false claims submitted to the government pursuant to that scheme, a relator may proceed to discovery on the entire fraudulent scheme." Id. at 510. If the relator presents concrete examples of fraudulent acts representative of other fraudulent acts in the entire scheme, the defendant will be able to infer with reasonable accuracy the precise fraudulent acts at issue, thus striking the right balance between protecting defendants from a fishing expedition, and allowing relators to pursue far-reaching fraudulent schemes. Id. at 511.
Further, under Rule 9(b), Plaintiffs may plead fraud based "upon information and belief," but the complaint "must set forth a factual basis for such belief, and the allowance of this exception must not be mistaken for license to base claims of fraud on speculation and conclusory allegations." Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 878 (6th Cir. 2006) (internal quotations omitted).
A complaint's failure to comply with Rule 9(b)'s pleading requirements is treated as a failure to state a claim under Rule 12(b)(6). United States ex rel. Howard v. Lockheed Martin Corp., 499 F.Supp.2d 972, 976 (S.D. Ohio 2007).
In his Complaint, Holbrook claims that from 2006 to the present, the Defendants' alleged penny-swapping scheme has violated three separate provisions of the FCA. First, Holbrook alleges that Brinks Defendants violated 31 U.S.C. § 3729(a)(1)(D) because they had possession, custody or control of Government property—pennies—and knowingly delivered less than all of that property back to the Government because they swapped pennies with a higher copper content for pennies with a lower copper content. Second, Holbrook alleges that Brink's Defendants violated 31 U.S.C. § 3729(a)(1)(G) because they knowingly made and used false records by failing to report their dealings with Jackson Metals, and that such false records were used to avoid a material obligation to transmit property—pennies with the same metallurgical content as those entrusted to them—to the FRB. Third, Holbrook alleges that all Defendants violated 31 U.S.C. § 3729(a)(1)(C) because they conspired to make or present false or fraudulent claims and performed one or more acts to affect payment of false or fraudulent claims.
Defendants respond that all three counts should be dismissed under Federal Rule of Civil Procedure 12(b)(6). First, Defendants contend that the older version of the FCA must apply to all conduct before the May 20, 2009 passage of the Fraud Enforcement and Recovery Act Amendments ("FERA") to the FCA, and the amended version of the FCA must apply to any alleged conduct after May 20, 2009. Second, Defendants claim that Plaintiff's Complaint fails to meet the particularity requirement under Rule 9(b) for any alleged violations of the FCA after Fall 2007, when Brink's fired Holbrook. Third, Defendants argue that even if the Court finds that the Plaintiff pled post-Fall 2007 conduct with particularity, Holbrook fails to state a claim upon which relief can be granted under both the pre-FERA and post-FERA versions of the FCA. Finally, Defendants argue that the Brink's Company should be dismissed because the Complaint is devoid of any factual allegations against it.
First, the Court will address which version of the FCA to apply to the claims in this case.
The FCA provides civil penalties for presenting false claims to the government and defrauding the government in other ways. 31 U.S.C. § 3729. On May 20, 2009, Congress passed FERA, Pub.L. No. 111-21, 123 Stat. 1617 (2009), which amended portions of the FCA and other anti-fraud statutes. Section 4 of FERA, concerning amendments to portions of the FCA, is titled "Clarifications to the False Claims Act to Reflect the Original Intent of the Law." Id. FERA amended and renumbered all subsections of the FCA that the Plaintiff alleges Defendants violated with their penny-swapping scheme, including (a)(1)(C) (previously (a)(3)), (a)(1)(D) (previously (a)(4)), and (a)(1)(G) (previously (a)(7)). FERA § 4(a), 123 Stat. at 1621.
Defendants argue that Plaintiff's claims relating to conduct occurring prior to the enactment of FERA on May 20, 2009 must be analyzed under the pre-FERA version of the FCA, and conduct alleged after May 20, 2009 must be analyzed under the post-FERA version of the FCA because the FERA amendments to subsections (a)(1)(C) (previously (a)(3)), (a)(1)(D) (previously (a)(4)), and (a)(1)(G) (previously (a)(7)) do not apply retroactively. Specifically, Section 4(f)(1) of FERA states:
FRAUD ENFORCEMENT AND RECOVERY ACT OF 2009 (FERA), PL 111-21, May 20, 2009, 123 Stat 1617
Defendants argue that 4(f)(1) shows that only § 3729(a)(1)(B) has any retroactive effect, and all other amendments take effect on May 20, 2009 and do not apply to any claims before that. Defendants urge that since Plaintiff's complaint alleges violations only under post-FERA Amendments, which are not retroactive, any claims based on conduct prior to May 20, 2009 should be dismissed.
Plaintiff responds that the language of Section 4 of FERA aside, since Holbrook alleges a unified, ongoing scheme that has been in operation from 2006 through at least 2010, the pre-FERA/post-FERA distinction is irrelevant, and the FERA amendments should apply to all facts in the case sub judice.
Although Section 4 of FERA states that the purpose of the amendments to the FCA is to clarify the FCA to reflect the original intent of the law, and the FERA Senate Report supports that many if not all of the changes to the FCA correct confusion among courts regarding proper interpretation of the law, this Circuit and ample others have interpreted Section 4(f)(1) of FERA to indicate that FERA's amendments to provisions of 31 U.S.C. § 3729, except for § 3729(a)(1)(B) (previously (a)(2)), are inapplicable to conduct that occurred before May 20, 2009. See Sanders v. Allison Engine Co., 703 F.3d 930, 934 (6th Cir. 2012) cert. denied sub nom. Allison Engine Co. v. U.S. ex rel. Sanders, 133 S.Ct. 2855, 186 L. Ed. 2d 925 (2013) (finding that Section 4 of FERA applies to conduct occurring on or before the enactment date, except for two exceptions: (1) (a)(1)(B) shall take effect as if enacted on June 7, 2008; and (2) new allegations filed by the United States as intervenor relate back to the date of the relator's complaint); U.S. ex rel. Bahrani v. ConAgra, Inc., 624 F.3d 1275, 1303 (10th Cir. 2010) (holding that revisions under FERA to U.S.C. § 3729(a)(1)(G) was not made retroactive by Congress and, thus, was inapplicable to the case); U.S. ex rel. Loughren v. Unum Grp., 613 F.3d 300, 307 (1st Cir. 2010) (holding the FERA amendment to section 3729(a)(2), but not the FERA amendment to section 3729(a)(1), was made retroactive to June 7, 2008); U.S. ex rel. Dennis v. Health Mgmt. Associates, Inc., No. 3:09-CV-00484, 2013 WL 146048, at *8 (M.D. Tenn. Jan. 14, 2013) (holding that "[b]ecause FERA's amended provisions in 31 U.S.C. § 3729(a)(1)(A), (C), and (G) are inapplicable to conduct that occurred before [May 20,] 2009, they are inapplicable to the defendants' alleged conduct"); Pencheng Si v. Laogai Research Found., No. 09-CV-2388 (KBJ), 2014 WL 5446487, at *8 (D.D.C. Oct. 14, 2014) (holding that "[w]ith the exception of FCA suits that have been brought under 31 U.S.C. § 3729(a)(1)(B) and that were pending on June 7, 2008, the FERA amendments to the FCA are not retroactive," so the pre-FERA version of the FCA applies to conduct prior to May 20, 2009).
Accordingly, this Court will apply the pre-FERA version of the FCA to conduct alleged in the complaint prior to May 20, 2009, and the post-FERA version of the FCA to conduct alleged after May 20, 2009. Although Plaintiff's Complaint alleges violations of the post-FERA version of the FCA for all alleged conduct from 2006 through the present, this Court will construe the causes of action under pre-FERA numbering and text when necessary. See U.S. ex rel. Dennis v. Health Mgmt. Associates, Inc., No. 3:09-CV-00484, 2013 WL 146048, at *8 (M.D. Tenn. Jan. 14, 2013) (construing relator's claims for relief as proceeding under the FCA's text and numbering that predate FERA for conduct alleged prior to May 20, 2009, even though Plaintiff pled its claims for relief under the pre-FERA text and numbering in his complaint).
Prior to FERA, 31 U.S.C. § 3729(a)(4) stated that a person violates the FCA who "has possession, custody, or control of property or money used, or to be used, by the Government, and intending to defraud the Government or willfully to conceal the property, delivers or causes to be delivered, less property than the amount for which the person receives a certificate or receipt." The post-2009 version of 31 U.S.C. § 3729(a)(4), renumbered to 31 U.S.C. § 3729(a)(1)(D), eliminated the intent and receipt requirements, and states that a person violates the FCA who "has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property." Plaintiff's complaint alleges that by secretly swapping bank-owned brass pennies for lesser-valued copper-plated zinc pennies, Brink's returned to the FRB or authorized consignee pennies having less metallurgical value than was entrusted to it.
Defendants argue that Count I should be dismissed because, first, as matter of law and under the terms of the CTA, Defendants returned the same amount of Government property as the FRB entrusted to it because a penny is a penny, and the CTA nowhere differentiates any coin delivered by the FRB to Brink's by their metallurgical content, but only by their quantity and denomination. Second, Defendants argue that Plaintiff's Complaint fails to state a cause of action for any conduct before May 20, 2009 under the pre-FERA version of the FCA because it fails to include facts regarding the "intent" or "receipt" requirements. Finally, Defendants argue that Plaintiff's Complaint fails to meet the particularity requirement under Rule 9(b) for any conduct after Fall 2007.
Holbrook's fraud allegations under § 3729(a)(1)(D) rely on his position that Brink's was required to return coins to the FRB having the identical metallurgical value as those that the FRB had entrusted to Brinks. Defendants argue that Holbrook fails to state a cause of action under § 3729(a)(1)(D) because: (1) the CTA does not evidence any requirement that Defendants return coins with the same metallurgical value, and thus as long as they returned the same number of pennies, there is no violation of § 3729(a)(1)(D); and (2) as a medium of exchange or legal tender the law knows no difference between a dollar coin and a dollar note, or by the same logic, between a "brass" penny and a "copper-plated" zinc penny.
Defendants argue that the CTA does not provide, and, therefore, Holbrook cannot allege, that the FRB shall know the metallurgical content of the pennies it delivers to Brink's, nor the metallurgical value of pennies Brink's returns to the FRB. Instead, according to the CTA, Bankowned loose coin is delivered to Brink's facilities in standard bags or containers placed on skids or pallets. CTA, Doc. 26-4 ¶ 9. As such, Defendants urge, Brink's is not required to weigh or count pennies received pursuant to the CTA, much less know the number of copper and copperplated zinc pennies. The only requirements that pertain to pennies, Defendants contend, are that Brink's: (1) monitor the number of skids of Bank-owned coin held at the facility; (2) monitor the value and denomination; (3) store the coins in a secure compartment; (4) retain documentation to show in reasonable detail accountability for Bank-owned coin; and (e) send Customer Inventory Balance Reports to the FRB. Id. ¶¶ 2.a., 2.c., 6, 13. As such, Defendants argue, from a factual standpoint Holbrook cannot plead that Defendants returned FRB-owned property to the FRB or its consignees that was less in either value or quantity than required under the CTA. Moreover, Defendants assert that as the terms of the CTA contradict the Complaint's allegations that Defendants returned less than all of the FRB's property, because the CTA nowhere differentiates any coin delivered by the FRB to Brink's by their metallurgical content, these contradictory allegations cannot survive a motion to dismiss. See Williams v. CitiMortgage, Inc., 498 F. App'x 532, 536 (6th Cir. 2012) ("[W]hen a written instrument contradicts allegations in the complaint to which it is attached, the exhibit trumps the allegations.").
Holbrook responds that the terms of the CTA do not contradict the allegation that Brink's returned less property than entrusted to it, because when read together, the provisions of the CTA reflect FRB's intent to have Brink's return the same property entrusted to it initially; thus, if the pennies are returned with a lesser metallurgical content, there is a violation of § 3729(a)(1)(D). In addition to Paragraphs 2.a., 2.c., 6, and 13 of the CTA on which Defendants rely, Plaintiff also relies on Paragraph 1, which states that Brink's agrees to "handle bank-owned coin only for the purpose of, and in accordance with the requirements set forth in this agreement," and "acknowledges that title to Bank-owned coin shall at all times remain with the Bank and Brink's shall have no right, title or interest therein." When read in its entirety, Plaintiff argues, it is clear that the FRB intended that the coins entrusted to it would be accounted for at all times, and only moved from the vault upon the FRB's direction or consent.
Plaintiff further asserts that because title to the specific coins entrusted to Brink's remained with the FRB at all times, and the coins could not be moved without Brink's direction or consent, the CTA presupposes that the same coins entrusted to Brink's were to be returned to it or a consignee. Thus, Plaintiff contends, the CTA presupposes that there are no circumstances under which coins of a lesser metallurgical content than entrusted to Brink's would be returned to the FRB or a consignee.
This Court agrees. When read as a whole, the terms of the CTA presuppose that the same coins entrusted to the FRB would be returned to it or a consignee. Mead Corp. v. ABB Power Generation, Inc., 319 F.3d 790, 797 (6th Cir.2003) ("It is well settled that contracts must be read as a whole, and they must be interpreted in such a manner as to give effect to every provision."). Such a presupposition obviated any need for the CTA to have distinguished between pennies with a lesser or higher copper content; under the terms of the CTA, under no circumstances should FRB's pennies have been sorted based on their metallurgical content and reconstituted in their metallurgical content in any way.
Now that the Court has determined that the CTA does not contradict the allegation that less property was returned to the FRB than entrusted to Brink's, the Court must address Defendants' contention that as a medium of exchange or legal tender the law knows no difference between a dollar coin and a dollar note, or by the same logic, between a "brass" penny and a "copper-plated" zinc penny.
Defendants cite to Crummey v. Klein Indep. Sch. Dist., 295 F. App'x 625, 627 (5th Cir. 2008) for the proposition that as legal tender, a dollar is a dollar, or, in this case, a penny is a penny, "regardless of the physical embodiment of the currency." Accordingly, Defendants argue that as Brink's returned the same number of pennies to the FRB or its consignees as entrusted to it initially, it could not have violated § 3729(a)(4) or § 3729(a)(1)(D) by returning less FRB property than entrusted to it.
In Crummy, a taxpayer filed an action against a school district because it had refused to accept fifty-dollar Unites States American Eagle coins for any more than face value of the coins in Federal Reserve Note dollars, or cash, as tender in payment for taxes Crummy owned. Id. at 626. Crummy argued that the legal monetary value of the coins is different than and much more than a fifty-dollar Federal Reserve note. Id. at 627. The Crummy Court found that Crummy confused the market value of such coins as bullion, or as a collector's item, with the value of coins as legal tender, citing to the Supreme Court opinion, Thompson v. Butler, which explains:
Id. (citing Thompson v. Butler, 95 U.S. 694, 696, 24 L.Ed. 540 (1877)).
The Crummy Court held that, "[a]s legal tender, a dollar is a dollar, regardless of the physical embodiment of the currency," and the legal monetary value of Crummy's American Gold Eagle coin was equivalent to that of a fifty dollar bill for purposes of tax payment. Id. at 627.
This Court agrees that as legal tender used "for all debts, public charges, taxes and dues," a penny is a penny. See 31 U.S.C. § 5103. What is distinguishable in the case sub judice, however, from the facts in Crummy and Thompson, is that the pennies Brink's and Jackson Metals allegedly swapped were not used as legal tender, but instead were traded and converted based on their intrinsic or tangible metallurgical value.
This Court finds guidance in Sanders v. Freeman, 221 F.3d 846, 855 (6th Cir. 2000), which holds that although coins are legally a form of currency, when they are used or purchased not for their face value as currency, but for their intrinsic value either as collectors' items or as precious metal, they are properly treated as personal investment property. There, the question was whether a Defendant who exchanged collectors' coins for cash based on their intrinsic value, rather than their face value, had adequate notice that such transactions were subject to state sales tax based on the intrinsic value and not the face value of the collectors' coins. The Court held that it did, and that Defendant's reliance on Thompson v. Butler was inapposite. The Sanders Court explained that in Thompson v. Butler, "the Supreme Court held only that creditors could not discriminate between coin and paper currency when a debtor sought to use one or the other form of currency to satisfy a debt." Id. In contrast, in Sanders, "unlike in Thompson, there is no indication that any of Sanders's customers planned to use the coins or bullion they purchased as currency." Id. Thus, the Sanders Court held that "[b]ecause the transactions at issue in this case involved the sale of coins and bullion based on their intrinsic, rather than representative, values, the lower courts properly found the transactions taxable as sales of tangible personal property . . . ." Id. at 856.
Applying Sanders' rationale to the case sub judice, because the transactions at issue here involved the conversion and sale of pennies based on their intrinsic, rather than representative values, this Court finds that the allegedly swapped and replaced pennies should be valued based on their intrinsic, rather than representative value, for the purpose of determining whether Brink's returned less property to the FRB or its consignees than entrusted to it.
Thus, taking the facts in the light most favorable to Holbrook, Brink's returned to the FRB pennies with less intrinsic value than entrusted to it. Further, Brink's profited from trading pennies with higher intrinsic value, to which FRB had title and exclusive right, as the CTA makes clear. As this Court has determined that Brink's returned less property to the FRB than entrusted to it, this Court will now consider the other elements of the standards under § 3729(a)( 4) for pre-May 20, 2009 conduct, and § 3729(a)(1)(D) for post-May, 20, 2009 conduct, to determine whether Holbrook has stated a claim under either version of the FCA.
Section 3729(a)(4) states that a person violates the FCA who "has possession, custody, or control of property or money used, or to be used, by the Government, and intending to defraud the Government or willfully to conceal the property, delivers or causes to be delivered, less property than the amount for which the person receives a certificate or receipt." Defendants argue that Plaintiff's Complaint fails to state a claim under § 3729(a)(4) because Holbrook presents no facts regarding Defendants' "inten[t] to defraud the government or willfully to conceal the property", or facts showing that the FRB gave Defendants a "receipt" evidencing Brink's delivered less property than the amount for which the person receives a certificate or receipt. Further, Defendants contend that Plaintiff fails to state a cause of action for any conduct after Holbrook's termination in Fall 2007, because the scant allegations in the Complaint regarding alleged violations of § 3729(a)(4) after Fall 2007 do not meet Rule 9(b)'s particularity requirements.
Other circuits have found that the essential elements of a cause of action under § 3729(a)(4) include: (1) possession, custody, or control of property or money used, or to be used, by the government; (2) delivery of less property than the amount for which the person receives a certificate or receipt; (3) with intent to defraud or willfully to conceal the property. United States v. Dyncorp, 136 F.3d 676, 681 (10th Cir.1998); see also U.S. ex rel. Atkinson v. Pennsylvania Shipbuilding Co., No. CIV. A. 94-7316, 2000 WL 1207162, at *7 (E.D. Pa. Aug. 24, 2000) aff'd on other grounds sub nom. U.S. ex rel. Atkinson v. PA. Shipbuilding Co., 473 F.3d 506 (3d Cir. 2007) (citing to U.S. ex rel. Atkinson v. Pennsylvania Shipbuilding Co).
As to the intent element, Defendants rely on U.S. ex rel. Becker v. Westinghouse Savannah River Co., 305 F.3d 284, 289 (4th Cir. 2002), and argue that § 3729(a)(4) contains a "more stringent specific intent standard" that Plaintiff fails to meet in his Complaint. Defendants give no argument or evidence as to what this more stringent requirement entails.
Plaintiff retorts that in his Complaint he specifically alleges Brink's knowingly misreported and withheld information relating to the security and location of the Federal Reserve's coin, as well as deceived the FRB about activities with Jackson Metals. The Complaint additionally cites to the CTA, which outlines specific procedures for reporting to the FRB the location of its coin, including: documenting in detail the location of bank-owned coin; notifying the Bank of any shipments; and sending daily "Customer Inventory Reports" to the FRB. Further, the Complaint details Holbrook's role in executing the reporting procedures that the FRB required when he served as manager of the Cleveland Coin Branch from April 1, 2003 until his termination on December 4, 2007. In that role, Holbrook allegedly managed the budget and depository accounts, and supervised administrative functions for the Federal Reserve Bank and all major Ohio financial institutions. He also oversaw vault inventory, performed daily vault audits, tabulated shipments and receipts, and reported consolidated balances to customers.
This Court concluded that when viewed in its totality, the Complaint sufficiently alleges that Holbrook knew that Brink's knowingly concealed in its mandatory reports to the FRB information concerning the location of FRB-owned pennies that it allegedly was swapping with Jackson Metals. Similarly, the Complaint sufficiently alleges that Holbrook had knowledge that Jackson Metals transported FRB-owned pennies, as part of the penny-swapping scheme, without FRB's knowledge. The Court, therefore, can infer from the Complaint that Brink's intended willfully to conceal the fact that it was returning to the FRB or its consignees less property than originally entrusted to it by swapping pennies with Jackson Metals. Thus, Holbrook sufficiently pled the intent requirement of § 3729(a)(4).
To state a claim under § 3729(a)(4) Plaintiff must allege the following: "delivery of less property than the amount for which the person receives a certificate or receipt" from the Government. While few cases address the receipt element of (a)(4), those that do agree that failure to allege the receipt element is fatal to a claim under § 3729(a)(4). See U.S. ex rel. Aakhus v. Dyncorp, Inc., 136 F.3d 676, 681 (10th Cir. 1998) (holding that to survive a motion to dismiss under (a)(4), Plaintiff must allege that the Government issued a certificate or receipt indicating that the Defendant returned less property to the Government than was entrusted to it); see also U.S. ex rel. Atkinson v. Pennsylvania Shipbuilding Co., No. CIV. A. 94-7316, 2000 WL 1207162, at *19 (E.D. Pa. Aug. 24, 2000) aff'd on other grounds sub nom. U.S. ex rel. Atkinson v. PA. Shipbuilding Co., 473 F.3d 506 (3d Cir. 2007) (dismissing Plaintiff's (a)(4) claim because the plaintiff made no allegation that the government issued any kind of receipt to Defendants in recognition of property delivered by them, an essential element of an FCA claim under section 3729(a)(4)); U.S. ex rel. Barrett v. Columbia/HCA Healthcare Corp., 251 F.Supp.2d 28, 36 (D.D.C. 2003) (finding that none of relator's allegations under (a)(4) "implicate delivering property to the United States and receiving a receipt in return," and thus the allegation lacks the specificity required by Rule 9(b)). In Aakhus the Court held further that "the certificate or receipt must indicate how much property defendant allegedly returned to the government." 136 F.3d at 681.
Defendants argue that the Complaint nowhere alleges any instance where Brink's received a receipt generated by the FRB for pennies Brink's returned to the FRB; further, Defendants argue that under Aakhus, even if the Government generated such a receipt, the receipt would have to show how much property was returned either in terms of quantity or metallurgical value. Defendants point out that as the Cleveland Coin Branch Manager, Holbrook allegedly was responsible to control depository accounts, tabulate shipments and receipts, etc., yet he makes no mention in his Complaint of receipts generated by the FRB or its consignees for returned pennies.
Plaintiff responds that the CTA, incorporated by reference into the Complaint, specifically provides for the exchange of receipts as FRB-owned coin is transferred between both entities:
(Doc. 26-4 at ¶ 13) (emphasis added). In addition, Holbrook argues that while it is understandable that at this stage in the proceeding he is unable to produce details about such receipts, it is inconceivable that the FRB/Brink's transactions involving thousands of dollars in coins were accomplished without furnishing receipts.
In U.S., ex rel. Vargas v. Lackmann Food Servs., Inc., No. 6:05-CV-712-ORL-19, 2006 WL 1460381, at *5 (M.D. Fla. May 23, 2006), the Vargas Court drew reasonable inferences in Plaintiff's favor to find that Plaintiff sufficiently pled the receipt requirement of (a)(4). In that case, Plaintiffs alleged that government contractors violated (a)(4) by causing to be "delivered less edible food [to government employees] than the amount for which the United States and its employees, contractors, and invitees received a certificate or receipt." Plaintiffs did not, however, refer to a specific receipt or receipt-generating process in their complaint. Id. The Court held that delivery of substandard food could constitute delivery of less property within the meaning of (a)(4), and that "[w]hile inartfully drafted, it can be inferred that Defendants received a certificate or receipt because Defendants are contractors. At the motion to dismiss stage, the Court draws all reasonable inferences in favor of Plaintiff." Id.
Construing the Complaint in the light most favorable to the Plaintiff, and drawing all reasonable inferences for the Plaintiff, this Court finds that Plaintiff met its burden in alleging the receipt requirement under § 3729(a)(4). While the Plaintiff failed to allege specifically in the Complaint that the FRB receipted all property that Brink's returned to it, the Plaintiff attached the CTA to the Complaint, and the CTA requires that the FRB generate receipts any time Brink's returns FRB-owned coins to it or its consignees. This unambiguous reference to a receipt procedure exceeds any facts regarding a receipt procedure in Vargas, where the Court found the Plaintiff satisfied the receipt requirement simply by the reasonable inference that the government generates receipts when dealing with government contractors. Here, as in Vargas, this Court infers that receipts exist showing the amount of pennies, or number of bags of pennies, returned to the FRB or its consignees, as required by the CTA.
In addition, this Court already inferred that Brink's delivered less property to the FRB than entrusted to it due to the penny-swapping scheme. As such, the Court reasonably can infer that some of the receipts generated by the Government showed the number of bags of FRB-owned pennies that Brink's returned, and that some of those bags contained fewer brass pennies than the Government would have anticipated they contained had Brink's not engaged in the penny swapping scheme. Thus, the Court reasonably can infer that FRB had control of property to be used by the Government, and, intending willfully to conceal the property, delivered less property than the amount for which Brink's received a receipt.
Next the Court will address the Aakhus Court's requirement that "the certificate or receipt must indicate how much property defendant allegedly returned to the government." 136 F.3d at 681. In Vargas, the Court found the Plaintiffs met the receipt requirement even though any receipts ostensibly would have shown on their faces that the contractors delivered all of the food that the Government ordered. The food, however, was spoiled, and, thus, it would not have been apparent from the faces of the receipts that the contractors delivered "less property" than the Government anticipated. Similarly, here, the receipts from the FRB will ostensibly indicate that all of the pennies the FRB anticipated Brink's would deliver actually were delivered. On the faces of the receipts, it will not be apparent that the pennies returned were of a lesser intrinsic value than the FRB anticipated they would be. As Vargas determined, however, by the plain language of (a)(4), the Plaintiff meets the receipt requirement by alleging that Brink's had possession of FRB-owned pennies, and intending willfully to conceal the brass pennies which it had swapped for copper-coated zinc pennies, delivered less property that the amount receipted.
The FRB anticipated that FRB coin would be used only for the purposes outlined in the CTA, and thus anticipated that any receipted and returned coin would have the same average content of copper pennies versus copper-coated zinc pennies as the pennies initially entrusted to Brink's. Thus, Plaintiffs alleged sufficient facts as to the "receipt" requirement of (a)(4).
In their Motion, Defendants argue that Count I should be dismissed because Plaintiff failed to state a claim under § 3729(a)(4)—the pre-FERA version of the FCA—in that Plaintiffs failed to meet the "intent" and "receipt" requirements of that subsection. Additionally, Defendants contend that Plaintiff failed to state a claim under § 3729(a)(1)(c)—the post-FERA version of the FCA, passed on May 20, 2009—because the Plaintiff failed to satisfy Rule 9(b) for any allegations regarding Defendant's conduct after December 4, 2007. Now that the Court has determined Plaintiff successfully pled all elements of § 3729(a)(4), however, the Court must address also whether Plaintiff satisfied rule 9(b) for any allegations under § 3729(a)(4) from December 4, 2007—when Brink's fired Holbrook—through May 20, 2009—when Congress passed FERA and changed § 3729(a)(4)'s text.
The question is whether Plaintiff pled sufficient facts showing that the conduct alleged from 2006 through December 4, 2007, of which Holbrook had personal knowledge, continued through May 20, 2009. Plaintiff generally alleges in the Complaint that the penny-swapping scheme occurred "[f]rom in or about 2006 through 2007, and, upon information and belief, through the present . . ." (Doc. 1 at ¶ 53). Defendants point out, however, that Plaintiff alleges only two facts in the Complaint regarding Brink's conduct after December 4, 2007: (1) Keith Kovach, the former Great lakes Regional Coin Mechanic for Brink's, Inc., who installed coinculling software for Brink's, Inc., allegedly told Holbrook in a June 210 telephone conversation that since Holbrook's termination the special software was used in many Brink's branches to cull copper pennies that were being sent to Jackson Metals; and (2) a telephone conversation on January 28, 2010, in which Luhrman allegedly reported to Holbrook that he had $5,000,000 in brass pennies in his vault that were acquired through the Jackson Metals and Brink's, Inc. scheme. Defendants argue that neither allegation suggests any actionable wrongdoing because neither sorting nor holding copper pennies violates the FCA. Further, Defendants contend that the allegations lack the specificity required under Rule 9(b) because the pennies Brink's is allegedly culling and hoarding could belong to Coinstar, and not to the FRB.
As discussed in Section (III)(B)(1)(a) and (b) supra, Defendants allegedly violated the FCA not because Jackson Metals may have melted brass pennies, but because Defendants allegedly returned to the FRB fewer brass pennies than entrusted to them, due to swapping pennies with Jackson Metals. The allegation that Brink's continued to hoard and cull copper pennies, in or around 2010, still raises the reasonable inference that Brink's returned fewer copper pennies per batch than the FRB entrusted to Brink's, and thus returned less property to the FRB and its consignees than entrusted to it.
Further, the heightened pleading standard for FCA requires simply that the relator sufficiently plead the "who, when, what and how," of the alleged fraudulent scheme. See Bledsoe, 501 F.3d at 509-11; U.S. ex rel. Tillson 2004 WL 2403114, at *13, 23-26. When a scheme is far-reaching, the standard requires only that the relator provide examples of specific fraudulent claims representative of the rest, so that the Defendant can infer with reasonable accuracy the precise fraudulent acts at issue. Id. As to the "who" and the "what" in the case sub judice, Holbrook alleges a penny-swapping scheme between Brink's and Jackson Metals that resulted in returning to the FRB fewer copper pennies, and thus, less property, than originally entrusted to Brink's.
As to the "how," Holbrook provides two examples in his Complaint regarding the mechanism by which Brink's swapped pennies with Jackson Metals, both of which he allegedly has personal knowledge. First, Holbrook alleges that Jackson Metals provided Brink's with free transportation of pennies to other Federal Reserve destinations, and through these shipments, Jackson Metals gained access to a definable number of brass pennies, which it allegedly culled and replaced with copper-coated zinc pennies. Second, Holbrook alleges that Brink's and Jackson Metals performed large "swaps" of pennies, in which Brink's relieved Jackson Metals of an excess of copper-plated zinc pennies in return for pennies stored in Brink's, Inc. vault that had an average percentage of brass pennies. Holbrook attached a receipt of such a swap in his Complaint. Based on these two concrete examples, Defendants sufficiently are on notice of the allegations against it, and can infer with reasonable accuracy the precise fraudulent acts at issue which may have continued past the date of Holbrook's termination.
The "when" can be determined, or at least constrained, by the length of any contractual agreements between Brink's and Jackson Metals, a fact that surely will be revealed during discovery in this case.
Thus, as Plaintiff alleges an ongoing fraudulent scheme, and has provided concrete examples of the precise fraudulent acts at issue, which are limited in duration by the length of any contractual agreement between Jackson Metals and Brink's, Plaintiff meets the 9(b) standard stating a claim under § 3729(a)(4) for alleged conduct from 2006 through May 20, 2009.
The post-May 20, 2009 version of 31 U.S.C. § 3729(a)(4), renumbered to 31 U.S.C. § 3729(a)(1)(D), eliminated the intent and receipt requirement and states that a person violates the FCA who "has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property." Accordingly, if Holbrook can make a claim under § 3729(a)(4) with the facts alleged, he certainly can make a claim under § 3729(a)(1)(D) with those same alleged facts.
While Defendants argue that Plaintiff fails to state a cause of action for any conduct after the May 20, 2009 FERA Amendment, because the allegations in the Complaint regarding alleged fraudulent conduct after December 2007 do not meet Rule 9(b)'s particularity requirements, this Court has already determined that Plaintiff provided sufficient who, what, when, and how to put Defendants on notice of particular, alleged fraudulent acts through the present. As stated, the "when" will be limited, at least, by the length of the contractual relationship between Brink's and Jackson Metals.
Thus, since this Court has found that Plaintiff met the particularity pleading requirement of Rule 9(b) for conduct from 2006 through the present, and this Court has determined the Plaintiff stated a claim under § 3729(a)(4), it follows that Plaintiff stated a claim under § 3729(a)(1)(D).
In sum, Defendants Motion to Dismiss Count I for failure to state a claim is hereby
Prior to FERA, 31 U.S.C. § 3729(a)(7) stated that a person violates the FCA who "knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government." The post-May 20, 2009 version of 31 U.S.C. § 3729(a)(7), renumbered to 31 U.S.C. § 3729(a)(1)(G), states that a person violates the FCA 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." In addition, the FERA amendments added a definition of the term "obligation", which means "an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment." Plaintiff's Complaint alleges that Brink's violated § 3720(a)(1)(G) because Brink's knowingly made, used or caused to be made or used false records or false statements—i.e. the misrepresentations and withholding of material information relating to the security and location of the Federal Reserve's coin—material to an obligation to transmit property to the FRB.
Defendants argue that Count II should be dismissed because Plaintiff failed to state a cause of action under either 31 U.S.C. § 3729(a)(7) or 31 U.S.C. § 3729(a)(1)(7). As previously determined, this Court will apply the pre-FERA version of the FCA to conduct alleged in the complaint prior to May 20, 2009, and the post-FERA version of the FCA to conduct alleged after May 20, 2009.
To establish a claim under 31 U.S.C. § 3729(a)(7), Plaintiff must show: "(1) that the Defendants made, used or caused to be used a statement or record to conceal, avoid or decrease an obligation to the United States; (2) that the statement or record was false or fraudulent; (3) that the Defendant knew the statement or record was false or fraudulent; and (4) that the Defendant `made a false record or statement at a time that the defendant owed to the government an obligation sufficiently certain to give rise to an action of debt at common law.'" U.S. ex rel. Dennis v. Health Mgmt. Associates, Inc., No. 3:09-CV-00484, 2013 WL 146048, at *18 (M.D. Tenn. Jan. 14, 2013) (quoting United States ex rel. Augustine v. Century Health Servs., 136 F.Supp.2d 876, 888 (M.D.Tenn.2000) (quoting Am. Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190 F.3d 729, 737 (6th Cir.1999))). A claim under this provision is called a "reverse" false claim because the action of the defendant results not in improper payment to the defendant from the government, but, rather, no payment (or reduced payment) to the government when payment is otherwise obligated. Id. Applying the Rule 9(b) heightened pleading requirement to a reverse false claim requires the relator to plead "[t]he time, place and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby." Id. (citation and quotation omitted).
Defendants argue that Holbrook failed to plead a cause of action under 31 U.S.C. § 3729(a)(7) because he does not allege facts showing Defendants submitted any false record or statement to the FRB, nor that such alleged false statement or record was used to avoid or decrease an obligation to transmit property to the government, which would be impossible because the CTA nowhere states that Brink's had an obligation to return pennies of the same metallurgical content. Plaintiff responds that he met the "false record or statement" requirement of (a)(7) by stating that Brink's knowingly misreported and/or misrepresented and withheld material information related to the security and location of FRB coin that Brink's sent to Jackson Metals, thus concealing the penny-swapping scheme and the fact that Brink's returned pennies with a lesser intrinsic value to the FRB. Further, Plaintiff argues that the CTA shows that Defendant had an existing contractual obligation to return to the FRB the same pennies entrusted to it, and by logic alone, this would include pennies of the same metallurgical content as those entrusted to it.
As to the record or statement requirement, this Court has held that omitting information in regular logs—regardless of whether law requires the Defendants keep such logs—in order to avoid an obligation to pay the government, satisfies the "false record or statement" requirement under § 3729 (a)(7). See Pickens v. Kanawha River Towing, 916 F.Supp. 702, 705 (S.D.Ohio 1996). In Pickens, the Court considered whether failing to note in a ship's regular logs the discharge of pollution to avoid paying fines to the government met the "false record or statement" requirement. The Pickens Court held that while a reverse false claim "requires more than a mere failure to report a violation of another statute," it is sufficient to allege that a failure to document certain information in a regularly kept log, even one that the defendant is under no obligation to maintain, constitutes a false record or statement. Pickens, 916 F.Supp. at 708. Specifically, the Pickens Court held:
Id.
Applying the logic in Pickens to the case sub judice, under the CTA, Defendants were required to retain "documentation to show in reasonable detail at any given point in time accountability for Bank-owned coin," notify the FRB of the "dollar value and denomination of coin ordered for shipping to Mutual Customers," and send the FRB daily "Customer Inventory Reports . . . of its close-of-the-day inventory." (CTA, Doc. 26-4 at ¶¶ 6, 10, 13). The FRB relies on these logs and documents regarding the location of FRB-owned coin to ensure that Brink's does not deprive the FRB of its property. This Court holds, therefore, that Brink's alleged omissions of Jackson Metal's transport and exchange of FRB-owned coin in Customer Inventory Reports and other required documents makes those reports and documents false records within the meaning of § 3729(a)(7).
As to the requirement that the Defendant owed an obligation to pay or transmit money to the FRB, the Sixth Circuit has held that the obligation under § 3729(a)(7) must arise before the Defendant makes the false statement; so, "where an obligation arises if and only if a defendant makes a false statement or files a false claim," this a "contingent" obligation, and an action under the FCA based on a contingent obligation will not lie. Am. Textile Mfrs. Inst., Inc. v. The Ltd., Inc., 190 F.3d 729, 734 (6th Cir. 1999). False Claims Act encompasses, however:
Id. at 736 (emphasis added).
This Court finds that Brink's was under a specific, contractual obligation to return to the FRB pennies with the same metallurgical content as the pennies entrusted to it at the time that Brink's generated Customer Inventory Reports and other documents that failed to report Jackson Metal's possession of FRB-owned pennies. Under the CTA, Brink's agreed to "handle bank-owned coin only for the purpose of, and in accordance with the requirements set forth in this agreement," and "acknowledges that title to Bank-owned coin shall at all times remain with the Bank and Brink's shall have no right, title or interest therein." (CTA, Doc. 26-4 at ¶ 1). Further, Brink's agreed to store Bank-owned coin in a secure storage area, and only to move coin in accordance with the CTA. While the CTA acknowledges that there may be situations in which it would be convenient for Brink's to deliver coin to or receive coin from a competing armored carrier or to a non-customer bank, Brink's is permitted to move coin only with the consent of the Bank, and if Brink's reports such transfers the same day to the Bank. Further, the only time in which the CTA permits Brink's, Inc. to "remove bags of coin from the Bank's designated storage area" is for the purpose of "opening the bags and wrapping the coin for pending delivery to a Mutual Customer. . .," Id. at ¶ 9. When these provisions are taken together, the CTA unambiguously requires that Brink's return to the FRB pennies which have not been sorted based on their metallurgical content, because the CTA demands that the pennies are transferred only for transportation reasons, and that aside from wrapping coins, they are to remain untouched.
Thus, this Court finds that under the CTA, Defendant Brink's was contractually obligated to return pennies of the same average metallurgical content as the pennies initially entrusted to it. This Court already determined in Section (III)(B)(1)(a) and (b) supra that by returning pennies with a lesser intrinsic value, albeit identical representative value, Brink's returned less property to the FRB. Thus, because Brink's allegedly used false records that omitted transactions with Jackson Metals in order to conceal its contractual obligation to return pennies of the same intrinsic value to the FRB, while Brink's instead returned pennies with a lesser intrinsic value, Plaintiff sufficiently pled that Brink's violated § 3729(a)(7).
This Court has determined that Plaintiff sufficient pled a claim under § 3729(a)(4) for Brink's alleged conduct from December 4, 2007, when Brink's fired Holbrook, through May 20, 2009, when Congress passed FERA and the text under § 3729(a)(4) changed. The Court similarly determines that Plaintiff pled facts with sufficient particularity for alleged violates of § 3729(a)(7) for the same time period.
As this Court noted in Section (III)(B)(3) supra the heightened pleading standard for the FCA requires that the relator sufficiently plead the "who, when, what and how," of the alleged fraudulent scheme. See Bledsoe, 501 F.3d at 509-11; U.S. ex rel. Tillson 2004 WL 2403114, at *13, 23-26. When a scheme is far-reaching, the standard requires only that the relator provide examples of specific fraudulent claims representative of the rest, so that the Defendant can infer with reasonable accuracy the precise fraudulent acts at issue. Id.
Regarding the "who" and the "what" in the case sub judice, Holbrook alleges a penny-swapping scheme between Brink's and Jackson metals. In that scheme, Brink's allegedly created false records by omitting transactions with Jackson Metals. These false records allegedly allowed Brink's to avoid its contractual obligation to return pennies of the same intrinsic value to the FRB.
As explained in Section (III)(B)(1)(a) and (b) supra, Holbrook alleges that "how" Brink's returned to FRB pennies with a lesser metallurgical content than those entrusted to it was through a penny-swapping scheme that Holbrook alleges took two forms. First, Holbrook alleges that Jackson Metals provided Brink's with free transportation of pennies to other Federal Reserve destinations, and that through these shipments, Jackson Metals gained access to a definable number of pennies which it allegedly culled and replaced with copper-coated zinc pennies. Second, Holbrook alleges that Brink's and Jackson performed large "swaps" of pennies, in which Brink's, Inc. relieved Jackson Metals of an excess of copper-plated zinc pennies in return for pennies stored in Brink's, Inc. vault that had some average percentage of brass pennies; Holbrook provided an example receipt of such a swap. Based on these two concrete examples, Defendants are sufficiently on notice of the allegations.
Furthermore, Defendants are on notice that the dates of any alleged penny-swaps or penny-transports by Jackson Metals will correspond with alleged false statements made to FRB to conceal Defendants' obligation to return to the FRB and its consignees pennies of the same metallurgical content as those entrusted to it. Thus, Defendants can infer with reasonable accuracy the fraudulent acts at issue which may have continued past the date of Holbrook's termination. As stated in Section (III)(B)(3) supra, the "when," can be determined easily, or at least circumscribed, by the length of any contractual agreements between Brink's and Jackson Metals, a fact that likely will be revealed discovery in this case.
Thus, as Plaintiff alleges an ongoing fraudulent scheme, and has provided concrete examples of the precise fraudulent acts at issue, which are limited in duration by the length of any contractual agreement between Jackson Metals and Brink's, Plaintiff states a claim under § 3729 (a)(7) for alleged conduct from 2006 through May 20, 2009.
The post-FERA version of 31 U.S.C. § 3729(a)(7), renumbered to 31 U.S.C. § 3729(a)(1)(G), lessened the requirement that a Defendant must make a false statement or record in order to "conceal, avoid, or decrease" an obligation to pay the government, to simply a requirement that the Defendant must make a false record or statement that is "material" to an obligation to pay the government. Further, § 3729(a)(1)(G) added an alternative ground for liability, in which a person is liable if he "knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government." Thus, a relator can state a claim under § 3729(a)(1)(G) without alleging that the Defendant used a false record or statement. Accordingly, if a relator has made a claim with alleged facts under § 3729(a)(7), the relator certainly can make a claim with the same alleged facts under § 3729(a)(1)(G).
While Defendants argue that Plaintiff fails to state a cause of action under § 3729(a)(1)(G) for any conduct after the May 20, 2009 FERA Amendment, because the scant allegations in the Complaint regarding alleged fraudulent conduct after December 2007 do not meet Rule 9(b)'s particularity requirements, this Court has already determined that Plaintiff provided sufficient facts regarding the "who, what, when, and how" of the alleged fraudulent scheme to put Defendants on notice of particular, alleged fraudulent acts leading to liability under § 3729(a)(1)(G) through the present. As stated, the "when" will be limited, at least, by the length of the contractual relationship between Brink's and Jackson Metals.
Thus, as this Court has found Plaintiff stated a claim under § 3729(a)(7) for conduct from 2006 through the present, it follows that Plaintiff stated a claim under § 3729(a)(1)(G).
Accordingly, Defendants' Motion to Dismiss Count II is hereby
Prior to FERA, 31 U.S.C. § 3729(a)(3) stated that a person violates the FCA who "conspires to defraud the Government by getting a false or fraudulent claim allowed or paid." The post-May 20, 2009 version of 31 U.S.C. § 3729(a)(3), renumbered to 31 U.S.C. § 3729(a)(1)(C), states that a person violates the FCA who "conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G)."
Defendants argue that Count III should be dismissed because: (1) Plaintiff fails to state a claim under § 3729(a)(3) since Plaintiff pled no facts concerning an alleged conspiracy to make or present false or fraudulent claims to the Government; and (2) Plaintiff fails to state a claim under § 3729(a)(1)(C) in that he failed to state a claim under any other subparagraph of the FCA.
This Court agrees that Plaintiff failed to state a claim under 31 U.S.C. § 3729(a)(3); nowhere does the Plaintiff allege the Defendants made or presented false claims for payment to the FRB or performed one or more acts to effect payment of false claims by the FRB. Instead, Plaintiff has alleged only that Brink's had possession of FRB property and, through the penny-swapping scheme with Jackson Metals, knowingly delivered less than all of that property, and that Brink's, through a false record, concealed an obligation to transmit property to the Government. Thus, Plaintiff failed to state a claim under 31 U.S.C. § 3729(a)(3).
Now, this Court will address whether Plaintiff sufficiently pled an alleged violation of 31 U.S.C. § 3729(a)(1)(C) for any post May 20, 2009 conduct. 31 U.S.C. § 3729(a)(1)(C) is the post-FERA version of 31 U.S.C. § 3729(a)(3), and it dramatically expanded the scenarios under which a conspiracy can be found under the FCA. While 31 U.S.C. § 3729(a)(3) only applied to conspiracies to violate § 3729(a)(1) and § 3729(a)(2)—which did and still do in their renumbered form involve knowingly presenting false claims to the government for payment or using a false record or statement to induce the government to pay a false claim—§ 3729(a)(1)(C) applies to conspiracies to commit a violation of any subparagraph of 31 U.S.C. § 3729. As no clear case law exists regarding application of § 3729(a)(3) and § 3729(a)(1)(C) to subparagraphs of § 3729 other than the first two, this Court will look to case law interpreting the elements of conspiracy under § 3729(a)(3).
The Fifth Circuit determined that to prove a claim under § 3729(a)(3), a plaintiff must show: (1) an unlawful agreement by the defendant to violate the FCA; and (2) at least one overt act performed in furtherance of that agreement. See U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 193 (5th Cir.2009). Further, the Supreme Court has held that it is not enough for the alleged conspirators to agree upon a fraud scheme that had the effect of leading to a violation of the FCA, more particularly subparagraphs (a)(1) and (a)(2); instead, it must also be shown alleged conspirators "intended `to defraud the government. Allison Engine Co. v. U.S. ex rel. Sanders, 553 U.S. 662, 664 (2008).
This Court has already determined that Plaintiff sufficiently pled violations of both § 3729(a)(1)(D) and § 3729(a)(1)(G). On the one hand, these potential violations only involve conduct directly attributable to Brink's: it was Brink's that allegedly returned less property to the FRB than entrusted to it, in violation of § 3729(a)(1)(D), as well Brink's that allegedly used a false record in order to conceal an obligation to pay the FRB, in violation of § 3729(a)(1)(G). On the other hand, it was through Jackson Metal's and Brink's alleged financial agreement that the FRB was ultimately deprived of its brass pennies. Indeed, only if Holbrook proves his allegations concerning the alleged penny-swaps between Brink's and Jackson Metals will Holbrook ultimately prevail in this case.
As the Supreme Court explained, it is not enough that the Plaintiff shows the alleged conspirators agreed upon a fraud scheme that had the effect of leading to a violation of the FCA; Plaintiff must also show that all alleged parties to an agreement that resulted in a violation of the FCA actually intended to defraud the government. Allison Engine Co., 553 at 664. Plaintiff generally alleges that all Defendants in this case had the requisite intent to defraud the FRB when they agreed to the penny-swapping scheme. That it is not so obvious. Jackson Metals was under no legal obligation to the FRB, but, by its actions, contributed to Brink's alleged violations of the FCA. At this stage in the proceedings, however, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Chesbrough v. VPA, P.C., 655 F.3d 461, 466-67 (6th Cir. 2011). Accordingly, this Court finds that by alleging Brink's, Luhrman, and Jackson Metals entered into the penny-swapping agreement, which resulted in alleged violations of the FCA, and by alleging all parties intended to defraud the FRB when they entered into that agreement, Plaintiff's claim that all Defendants violated § 3729(a)(1)(C) survives a Motion to Dismiss.
Thus, as to
Defendant Brink's Company argues that all claims against it should be dismissed because Holbrook's only allegation against it is that it "operates" Brink's, Inc., the company with whom the FRB has the Coin Terminal Agreement, and the company at which Defendant worked. Additionally, Defendant Brink's Company argues that Holbrook nowhere alleges that Brinks Company is an alter ego to Brink's, Inc., nor pursues any piercing the veil theory.
This Court agrees that "[b]eing a parent corporation of a subsidiary that commits a FCA violation, without some degree of participation by the parent . . . is not enough to support a claim against the parent for the subsidiary's FCA violation," particularly when the Plaintiff does not "pursue liability against [the Defendant] on a piercing of the corporate veil theory." U.S. ex rel. Tillson v. Lockheed Martin Energy Sys., Inc., No. CIV.A. 5:00CV-39-M, 2004 WL 2403114, at *33 (W.D. Ky. Sept. 30, 2004) (dismissing claims against parent corporation due to failure to plead any participation of the parent, or pursue liability against the parent based on a piercing the corporate veil theory). Instead, "[r]elator must be able to demonstrate either that [the defendant] is liable under a veil piercing or alter ego theory, or that it is directly liable for its own role in the submission of false claims." United States ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F.Supp.2d 25, 60 (D.D.C.2007) (holding that a "parent corporation cannot be liable merely because a plaintiff alleges that its subsidiary violated provisions of the FCA) (quoting United States ex rel. Tillson v. Lockheed Martin Corp., 2004 WL 2403114, *33, 2004 U.S. Dist. LEXIS 22246 at *107 (W.D.Ky.2004)); see also, United States ex rel Fent v. L-3 Commc'ns Aero Tech., LLC, 2007 WL 3485395 at *3 (N.D.Okla.) ("The FCA does not, however, address whether a parent corporation may be liable for the fraudulent and wrongful conduct of its subsidiary. See 31 U.S.C. §§ 3729-3730. Thus, courts must apply the veil-piercing test."); United States v. Universal Health Servs., Inc., No. 1:07CV000054, 2010 WL 2976080, at *2 (W.D. Va. July 28, 2010) (holding that failure to specify parent company's involvement in alleged FCA violations, or allege facts that demonstrate subsidiaries were alter egos of the parent, warranted dismissal of claims as to parent corporation).
As Plaintiff failed to plead with particularity any direct participation of Brink's Company in the alleged violations of the FCA, or pursue liability against the Brink's Company on a piercing the veil theory, this Court holds that claims as to Brink's Company are hereby
Based on the foregoing, the Court finds Defendants' Motion to Dismiss is
