Opinion
CIVIL 3:19-CV-1824
07-27-2022
UNITED STATES OF AMERICA, ex rel PATEL, Plaintiff, v. FIDELITY DEPOSIT & DISCOUNT BANK, et al., Defendants.
Mariani, Judge
REPORT AND RECOMMENDATION
MARTIN C. CARLSON, UNITED STATES MAGISTRATE JUDGE
I. Introduction
The art of advocacy often entails the skillful, informed selection of the appropriate legal paradigm through which to present the myriad factual disputes to which parties fall prey. When the legal cause of action chosen by a party aptly fits the factual scenario presented in a given case, the law is often advanced and transformed. However, when the cause of action chosen by a plaintiff is ill-suited to fit the true nature of the parties' dispute, the effect is less transformative and more transmogrifying.
The instant case calls to mind this observation regarding the nature of the law. While cast as a False Claims Act lawsuit, it is evident that the gravamen of this litigation is an intramural dispute between former shareholders in an ill-fated corporate hotel renovation project. In this case, the plaintiff-relators endeavor to profit from this intra-corporate dispute, arising out the ashes of a failed decades-old joint venture, by alleging that the corporation of which they were shareholders engaged in the submission of false claims to the United States Small Business Administration in the course of financing this project and during the foreclosure sale that followed this collapse of this business proposal.
The fact that the False Claims Act is an inapt vehicle for pursuing this dispute is evident from the tortured procedural history of this case, which has been marked by repeated, halting steps and missteps over the past three years aimed at filing a legally sufficient complaint. Indeed, even at this juncture, after three years, the parties have been unable to take the preliminary step of closing the pleadings in this case, as evidenced by the pending motions to dismiss the plaintiffs' second amended complaint, and the contested motion by the plaintiffs to endeavor to file yet another, third amended complaint. (Docs. 62, 63, 76).
In these motions, the parties air a number of legal disputes regarding the plaintiffs' efforts to recast this dispute as a False Claims Act lawsuit. For example, the constellation of defendants named by the plaintiffs in the various iterations of their amended complaint is curious in that the plaintiffs name a defendant as to whom liability plainly does not rest based upon the well-pleaded allegations set forth in their pleadings, but fail to name another seemingly indispensable party as a defendant. Further, the parties dispute whether the allegations set forth in the various complaints tendered by the plaintiffs entail alleged conduct which falls beyond the limitations period prescribed by the False Claims Act. In addition, the parties contest the sufficiency of the plaintiffs' fraud allegations and dispute whether their role in these business transactions now constitutes a bar to pursuit of this case as a false claims lawsuit.
In consideration of these competing concerns regarding the plaintiffs' various iterations and amendments of their complaint, for the reasons set forth below it is recommended as follows:
First, the defendants' motions to dismiss should be granted, in part, and denied in part, as follows: Fidelity Bancorp should be dismissed as a defendant in this case. In addition, the Court should identify CSH as a necessary party in this litigation, and direct either: (1) the joinder of CSH as a defendant; or (2) renewal of any motion to dismiss based upon a showing that CSH cannot be joined as a defendant but remains both a necessary and indispensable party in this litigation. In all other respects the motions to dismiss should be denied without prejudice to the assertion of any available legal defenses on a more fulsome factual record.
Second, the plaintiffs' motion to amend should be granted in part, but only insofar as the plaintiff-relators should be directed to file a final amended complaint in conformity with the findings set forth in this Report and Recommendation within 30 days. It is further recommended that upon the filing of this pleading, the plaintiffs' pleadings be deemed closed so this case can finally proceed forward.
II. Statement of Facts and Procedural History
A. Procedural History
As Judge Jones, who was formerly assigned to this case, previously observed: “This action, . . . has a tortured and needlessly complicated procedural history-in part due to counsel on both sides failing to follow local rules and this Court's explicit orders.” (Doc. 56, at 1). This False Claims Act lawsuit was initially filed by the relators, Harshad and Divyakant Patel, against their erstwhile business partner, Ankim Shah, Fidelity Bank and related defendants on October 18, 2019. (Doc. 1). The case remained under seal and was subject to one amendment by the plaintiffs, until June 30, 2020, when the United States declined to intervene in this action, the complaint was unsealed, and the complaint was served upon the defendants. (Docs. 12 and 13).
What then ensued was a protracted period of contentious litigation marked by the filing of various motions to dismiss, and proposed amended complaints, coupled with sanctions litigation which entailed mutual accusations of bad faith. (Docs. 2861). Many of these filings we submitted in an irregular fashion, leading the judge who was then assigned to the case, Judge Jones, to chide and admonish all parties. (Doc. 56).
As a result of this somewhat chaotic and completely contentious course of litigation, the operative pleading in this case is now the plaintiffs' second amended complaint. (Doc. 59). Given this operative pleading, the court is presented with three motions including two motions to dismiss this pleading filed by the defendants. (Docs. 62 and 63). These motions to dismiss raise multifaceted challenges to the timeliness and legal sufficiency of the plaintiffs' second amended complaint. In addition, there remains pending a motion by the plaintiff-relators to further amended their oft-amended complaint, (Doc. 76), a request which is opposed by the defendants.
Thus, as a consequence of this regrettable state of affairs, the parties still have not yet closed the pleadings in this case despite some three years of litigation. And so, this case having been reassigned from Judge Jones to Judge Mariani and then referred to the undersigned, we turn to the task of endeavoring to resolve these preliminary legal objections to the plaintiffs' various iterations of their amended complaint. In doing so we examine the well-pleaded facts set forth in these pleadings to determine their timeliness and legal sufficiency.
B. Statement of the Plaintiffs' Claims
With respect to the latest iterations of the plaintiffs' complaint, their second and proposed third amended complaints, (Docs. 59 and 76-6), the well-pleaded facts supporting these False Claims Act allegations vary somewhat but entail some overarching and consistent factual themes. In 2008, the plaintiff-relators, Harshad and Divyakant Patel, and the Defendant, Ankim Shah, were co-venturers in a corporation called Clark Summit Hospitality, LLC (hereafter CSH). Through CSH, the Patels and Shah sought to purchase and renovate a facility called the Nichols Village Inn.
In connection with the hotel purchase and renovation project, CSH sought financing through Fidelity Deposit and Discount Bank, under the Small Business Administration's (SBA) 504 loan program. According to this complaint, the 504 program offers federally guaranteed long-term fixed rate business financing. 504 loans are made through certified development companies, cover a portion of the business financing and are fully guaranteed by the SBA, which obtains a second mortgage on the property. The balance of the financing for the project comes from a third-party lender, like Fidelity Bank, which assumes a first mortgage position on the property.
In this case CSH, working through a certified development company called DelVal, applied for and received a 504 loan from the SBA as well as financing from Fidelity Bank. The Patels now allege, however, that in the course of this project their corporate colleague Shah caused CSH to make a series of false representations to the SBA through Fidelity and DelVal in order to induce the SBA to guarantee a portion of this financing. Notably, all of these initial false submissions are alleged to have taken place in 2008 and 2009, prior to October 2009. Based upon what the plaintiff-relators now allege were these false statements submitted by and on behalf of CSH, the SBA approved a 504 loan to this company in the Fall of 2009.
What then ensued was a protracted, but ultimately unsuccessful effort to promote this project. In the course of this effort, it is alleged that additional false statements were made by the defendants to the SBA. Ultimately, by April of 2016, CSH defaulted on its loan obligations, and by July 2016 the SBA received a demand to pay off the debenture holders on these defaulted loans as required by that agency's loan guarantee.
With this default the Nichols Village Inn went into foreclosure proceedings. It is further averred by the plaintiff-relators that in the course of these foreclosure proceedings, Fidelity Bank, Shah and various corporate entities controlled by Shah conspired to defeat the SBA's right to recover on this collateral through a variety of false statements and the concealment of material facts from that agency. According to the plaintiff-relators, at the conclusion of these foreclosure proceedings the defendants then conspired to sell the property for a fraction of its true value, thus defrauding the SBA. Notably, although the amened pleadings describe a series of allegedly fraudulent actions taken over the course of years by or on behalf of the corporation in which they had an ownership interest, CSH, this corporation is not named as a defendant in this lawsuit. Moreover, the plaintiff-relators' amended pleadings go to great pains to characterize themselves as passive investors with no knowledge of the true and fraudulent nature of these transitions, a characterization that the defendants vehemently dispute. Instead, the Patels name their former business associate, Ankim Shah, several companies allegedly owned by Shah, as defendants, along with Fidelity Bank and its corporate parent Fidelity Bancorp. (Docs. 59, 76-6). The plaintiffs then bring six False Claims Act allegations against the defendants relating to the initial SBA financing and subsequent mortgage foreclosure proceedings involving CSH and the Nichols Village Project. According to the plaintiff-relators in the course of these events, the defendants conspired together to present false claims to the SBA, use false records to induce SBA loan guarantees, conceal obligations from the SBA and use false records to avoid payments to the SBA. (Id.) These allegations, which form the basis of the plaintiffs' claims, are now the subject of both the motions to dismiss, and the contested motion to further amend these pleadings.
III. Discussion
A. Standards of Review: Motions to Dismiss and Amend Pleadings
The legal benchmarks which guide us in considering motions to dismiss, or amend, pleadings are familiar ones. Moreover, questions regarding the dismissal or amendment of complaints often entail an overlapping analysis, since in both instances the court must examine whether a complaint or proposed amended complaint fails to state a claim upon which relief may be granted.
Motions to amend are governed by Rule 15 of the Federal Rules of Civil procedure, which provides as follows:
(a) Amendments Before Trial.
(1) Amending as a Matter of Course. A party may amend its pleading once as a matter of course within:
(A) 21 days after serving it, or
(B) if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.
(2) Other Amendments. In all other cases, a party may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires.
As the text of this rule implies, decisions regarding motions to amend or supplement pleadings rest in the sound discretion of the district court and will not be disturbed absent an abuse of that discretion. See e.g., Bjorgung v. Whitetail Resort, LP, 550 F.3d 263 (3d Cir. 2008); Cureton v. National Collegiate Athletic Ass'n., 252 F.3d 267 (3d Cir. 2001). That discretion, however, is governed by certain basic principles, principles that are embodied in Rule 15 of the Federal Rules of Civil Procedure. Thus, “[l]eave to amend must generally be granted unless equitable considerations render it otherwise unjust.” Arthur v. Maersk, Inc., 434 F.3d 196, 204 (3d Cir. 2006). Further:
The liberality of Rule 15(a) counsels in favor of amendment even when a party has been less than perfect in the preparation and presentation of a case. See Foman, 371 U.S. at 182, 83 S.Ct. 227; Boileau v. Bethlehem Steel Corp., 730 F.2d 929, 938-39 (3d Cir. 1984). It allows for misunderstandings and good-faith lapses in judgment, so long as the party thereafter acts reasonably and diligently.Arthur, 434 F.3d at 206.
Yet, while Rule 15 provides that leave to amend should be freely given when justice so requires, the district court still retains broad discretion when ruling upon a motion to amend, Bjorgung, 550 F.3d 263; Cureton, 252 F.3d 267, and may deny a request for leave to amend:
if the plaintiff's delay in seeking to amend is undue, motivated by bad faith, or prejudicial to the opposing party. Adams, 739 F.2d at 864. Delay becomes “undue,” and thereby creates grounds for the district court to refuse leave, when it places an unwarranted burden on the court or when the plaintiff has had previous opportunities to amend. Cureton, 252 F.3d at 273 (citing Adams, 739 F.2d at 868; Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir.1993)). Thus, our review of the question of undue delay . . . will “focus on the movant's reasons for not amending sooner,” Cureton, 252 F.3d at 273, and we will balance these reasons against the burden of delay on the District Court. Coventry v. U.S. Steel Corp., 856 F.2d 514, 520 (3d Cir. 1988).Bjorgung, 550 F.3d at 266.
Thus, when assessing the relevance of delay to the determination of a motion to amend, we do not engage in a mere arithmetic exercise counting the passage of days. Rather, ours is a qualitative assessment which examines the reasons for the delay, any history of dilatory conduct by the plaintiff, and then balances those factors against the burdens imposed by the delay. As the Court of Appeals has observed:
The mere passage of time does not require that a motion to amend a complaint be denied on grounds of delay. Adams, 739 F.2d at 868. In fact, delay alone is an insufficient ground to deny leave to amend. Cornell & Co., Inc. v. Occupational Safety & Health Review Comm'n., 573 F.2d 820, 823 (3d Cir.1978). However, “at some point, the delay will become ‘undue,' placing an unwarranted burden on the court, or will become ‘prejudicial,' placing an unfair burden on the opposing party.” Adams, 739 F.2d at 868. Delay may become undue when a movant has had previous opportunities to amend a complaint. See Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir.1993) (three year lapse between filing of complaint and proposed amendment was “unreasonable” delay where plaintiff had “numerous opportunities” to amend); see also Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 654-55 (3d Cir.1998) (rejecting proposed second amended complaint where plaintiffs were repleading facts that could have been pled earlier).....Thus, while bearing in mind the liberal pleading philosophy of the federal rules, Adams, 739 F.2d at 864, the question of undue delay requires that we focus on the movant's reasons for not amending sooner. Id. at 868.Cureton, 252 F.3d at 273. Applying this analytical paradigm, delays measured in many months or years are particularly problematic. In contrast, delays of shorter duration, measured in terms of a few months, raise lesser concerns. Compare Cureton, 252 F.3d 267 (3-year delay, motion denied); Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993) (three-year lapse between filing of complaint and proposed amendment was “unreasonable” delay where plaintiff had “numerous opportunities” to amend) with Arthur, 434 F.3d at 205 (“a period of eleven months from commencement of an action to the filing of a motion for leave to amend is not, on its face, so excessive as to be presumptively unreasonable”).
“Among the grounds that could justify a denial of leave to amend are .., bad faith, dilatory motive, prejudice, and futility. ‘Futility' means that the complaint, as amended, would fail to state a claim upon which relief could be granted.” Shane v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000) (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir.1997); Lorenz v. CSX Corp., 1 F.3d 1406, 1413-14 (3d Cir.1993)) (some quotations omitted). Moreover, a party seeking to supplement pleadings must act in a diligent fashion. Thus, for example, “[a] District Court has discretion to deny a plaintiff leave to amend where the plaintiff was put on notice as to the deficiencies in his complaint but chose not to resolve them.” Krantz v. Prudential Investments Fund Management LLC, 305 F.3d 140, 144 (3d Cir. 2002) (citing Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 654 (3d Cir. 1998)).
By defining futility for purposes of a motion to amend as failure to state a claim upon which relief could be granted, Rule 15 mirrors the language of Rule 12(b)(6) of the Federal Rules of Civil Procedure, which provides that a complaint should be dismissed for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). With respect to this benchmark standard for the legal sufficiency of a complaint, the United States Court of Appeals for the Third Circuit has aptly noted the evolving standards governing pleading practice in federal court, stating that:
Standards of pleading have been in the forefront of jurisprudence in recent years. Beginning with the Supreme Court's opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), continuing with our opinion in Phillips [v. County of Allegheny, 515 F.3d 224, 230 (3d Cir. 2008)], and culminating recently with the Supreme Court's decision in Ashcroft v. Iqbal, BU.S-, 129 S.Ct. 1937 (2009), pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading, requiring a plaintiff to plead more than the possibility of relief to survive a motion to dismiss.Fowler v. UPMC Shadyside, 578 F.3d 203, 209-10 (3d Cir. 2009).
In considering whether a complaint fails to state a claim upon which relief may be granted, the court must accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom are to be construed in the light most favorable to the plaintiff. Jordan v. Fox, Rothschild, O'Brien & Frankel, Inc., 20 F.3d 1250, 1261 (3d Cir. 1994). However, a court “need not credit a complaint's bald assertions or legal conclusions when deciding a motion to dismiss.” Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997). Additionally, a court need not “assume that a . . . plaintiff can prove facts that the . . . plaintiff has not alleged.” Associated Gen. Contractors of Cal. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). As the Supreme Court held in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), in order to state a valid cause of action, a plaintiff must provide some factual grounds for relief which “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of actions will not do.” Id., at 555. “Factual allegations must be enough to raise a right to relief above the speculative level.” Id.
In keeping with the principles of Twombly, the Supreme Court has underscored that a trial court must assess whether a complaint states facts upon which relief can be granted when ruling on a motion to dismiss. In Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court held that, when considering a motion to dismiss, a court should “begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.” Id., at 679. According to the Supreme Court, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id., at 678. Rather, in conducting a review of the adequacy of a complaint, the Supreme Court has advised trial courts that they must:
[B]egin by identifying pleadings that because they are no more than conclusions are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual
allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.Id., at 679.
Thus, following Twombly and Iqbal, a well-pleaded complaint must contain more than mere legal labels and conclusions; it must recite factual allegations sufficient to raise the plaintiff's claimed right to relief beyond the level of mere speculation. As the United States Court of Appeals for the Third Circuit has stated:
[A]fter Iqbal, when presented with a motion to dismiss for failure to state a claim, district courts should conduct a two-part analysis. First, the factual and legal elements of a claim should be separated. The District Court must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Second, a District Court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a “plausible claim for relief.” In other words, a complaint must do more than allege the plaintiff's entitlement to relief. A complaint has to “show” such an entitlement with its facts.Fowler, 578 F.3d at 210-11.
As the court of appeals has observed:
The Supreme Court in Twombly set forth the “plausibility” standard for overcoming a motion to dismiss and refined this approach in Iqbal. The plausibility standard requires the complaint to allege “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955. A complaint satisfies the plausibility standard when the factual pleadings “allow[ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 129 S.Ct. at 1949 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). This standard requires showing “more than a sheer possibility that a defendant has acted unlawfully.” Id. A complaint which pleads facts
“merely consistent with” a defendant's liability, [ ] “stops short of the line between possibility and plausibility of ‘entitlement of relief.' ”Burtch v. Milberg Factors, Inc., 662 F.3d 212, 220-21 (3d Cir. 2011), cert. denied, 132 S.Ct. 1861 (2012).
In practice, consideration of the legal sufficiency of a complaint entails a three-step analysis:
First, the court must “tak[e] note of the elements a plaintiff must plead to state a claim.” Iqbal, 129 S.Ct. at 1947. Second, the court should identify allegations that, “because they are no more than conclusions, are not entitled to the assumption of truth.” Id., at 1950. Finally, “where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.”Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010) (quoting Iqbal, 129 S.Ct. at 1950).
In considering a motion to dismiss, the court generally relies on the complaint, attached exhibits, and matters of public record. Sands v. McCormick, 502 F.3d 263, 268 (3d Cir. 2007). The court may also consider “undisputedly authentic document[s] that a defendant attached as an exhibit to a motion to dismiss if the plaintiff's claims are based on the [attached] documents.” Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993). Moreover, “documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered.” Pryor v. Nat'l Collegiate Athletic Ass'n, 288 F.3d 548, 560 (3d Cir. 2002); see also U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 382, 388 (3d Cir. 2002) (holding that “[a]lthough a district court may not consider matters extraneous to the pleadings, a document integral to or explicitly relied upon in the complaint may be considered without converting the motion to dismiss in one for summary judgment”). However, the court may not rely on other parts of the record in determining a motion to dismiss, or when determining whether a proposed amended complaint is futile because it fails to state a claim upon which relief may be granted. Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994).
Finally in addition to considering the legal sufficiency of any proposed amended complaint, in undertaking an analysis of a motion for leave to amend a complaint “prejudice to the non-moving party is the touchstone for the denial of an amendment.” Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993) (quoting Cornell & Co. v. Occupational Safety & Health Review Comm'n, 573 F.2d 820, 823 (3d Cir. 1978)). Thus, we are enjoined to consider the prejudice suffered by the defendants named in an amended complaint when evaluating whether further amendment of the pleadings should be permitted.
It is against these legal guideposts that we assess the current motions to dismiss, and further amend, the plaintiffs' second amended complaint.
B. The Plaintiffs' Amended Complaints are Both Too Broad and Too Narrow in Their Identification of Defendants.
At the outset, we find that the various iterations of the plaintiffs' amended complaint are flawed, in part, because they are both too broad and too narrow in their identification of defendants. In particular, the second and third amended complaints name Fidelity D&D Bancorp, Inc., as a defendant in this False Claims Act lawsuit, but the amended complaints are devoid of any well-pleaded facts describing the alleged involvement of this defendant in the actions set forth in the amended complaints beyond an assertion that Fidelity D&D Bancorp is the holding corporation for Fidelity Deposit and Discount Bank.
This incredibly cursory style of pleading simply will not do. It is axiomatic that the liability of a defendant in a civil lawsuit is entirely dependent upon the presence of well-pleaded allegations in the body of the complaint which plausibly state a claim against the defendants. Therefore, pleadings, like these proposed amended complaints, which simply list Fidelity D&D Bancorp, Inc., in the caption and introduction of the pleadings without setting forth any well-pleaded factual averments describing the defendant's involvement in actions which may plausibly give rise to False Claims Act liability are patently inadequate and compel dismissal of this defendant. Indeed, it has long been well-settled that a complaint which simply lists a party defendant but is “completely devoid of any accusation or indication that [the] defendant . . . was involved in the incidents upon which this civil action is based,” fails to state a claim upon which relief may be granted. U.S. ex rel. Brzozowski v. Randall, 281 F.Supp. 306, 312 (E.D. Pa. 1968). Simply put, “[w]here a complaint alleges no specific act or conduct on the part of the defendant and the complaint is silent as to the defendant except for his name appearing in the caption, the complaint is properly dismissed.” Potter v. Clark, 497 F.2d 1206, 1207 (7th Cir. 1974). See Hudson v. City of McKeesport, 244 Fed.Appx. 519 (3d Cir. 2007) (affirming dismissal of defendant who was only named in caption of case).
Nor can the plaintiffs save this fatally deficient pleading with respect to Fidelity D&D Bancorp by resorting to the doctrine of piercing the corporate veil, as they attempt to do in their response to the defendants' motion to dismiss. (Doc. 68, at 31). On this score, the plaintiffs cite United States v. Bestfoods, 524 U.S. 51, 6162, 118 S.Ct. 1876, 1884, 141 L.Ed.2d 43 (1998) to support their contention that they have sufficiently alleged corporate liability by Fidelity D&D Bancorp through the simple expedient of alleging that this company is the holding corporation for Fidelity Deposit and Discount Bank. This is an astounding argument since the Supreme Court case cited by the defendants actually refutes their argument. Far from suggesting that corporate parent liability can rest upon such a thinly pleaded reed, the mere assertion that a company is the parent corporation of a separate entity, in Bestfoods the Supreme Court made it unmistakably clear that:
It is a general principle of corporate law deeply “ingrained in our economic and legal systems” that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiaries. Douglas & Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193 (1929) (hereinafter Douglas); see also, e.g., Buechner v. Farbenfabriken Bayer Aktiengesellschaft, 38 Del.Ch. 490, 494, 154 A.2d 684, 687 (1959); Berkey v. Third Ave. R. Co., 244 N.Y. 84, 85, 155 N.E. 58 (1926) (Cardozo, J.); 1 W. Fletcher, Cyclopedia of Law of Private Corporations § 33, p. 568 (rev. ed. 1990) (“Neither does the mere fact that there exists a parent-subsidiary relationship between two corporations make the one liable for the torts of its affiliate”); Horton, Liability of Corporation for Torts of Subsidiary, 7 A.L.R.3d 1343, 1349 (1966) (“Ordinarily, a corporation which chooses to facilitate the operation of its business by employment of another corporation as a subsidiary will not be penalized by a judicial determination of liability for the legal obligations of the subsidiary”); cf. Anderson v. Abbott, 321 U.S. 349, 362, 64 S.Ct. 531, 537, 88 L.Ed. 793 (1944) (“Limited liability is the rule, not the exception”); Burnet v. Clark, 287 U.S. 410, 415, 53 S.Ct. 207, 208, 77 L.Ed. 397 (1932) (“A corporation and its stockholders are generally to be treated as separate entities”). Thus it is hornbook law that “the exercise of the ‘control' which stock ownership gives to the stockholders ... will not create liability beyond the assets of the subsidiary.”Bestfoods, 524 U.S. at 61-62.
In sum, in their current form, these amended complaints utterly fail to state a plausible claim against Fidelity D&D Bancorp, Inc. The amended complaints are devoid of any well-pleaded facts relating to this defendant's role in submitting any false claims. Furthermore, the wholly speculative proposition that the plaintiffs may be able to hold this defendant directly liable for the alleged conduct of a separate subsidiary merely by alleging that it is the holding company for that subsidiary flies in the face of “hornbook law that ‘the exercise of the “control” which stock ownership gives to the stockholders ... will not create liability beyond the assets of the subsidiary.'” Id. Therefore, this defendant should be dismissed.
Beyond finding that these amended complaints are too broad in that they name Fidelity D&D Bancorp, Inc., as a defendant, we also conclude that these pleadings are too narrow in that they fail to name another indispensable party defendant. Currently these pleadings present a striking and untenable circumstance. They allege false claims violations, but do not name the entity which submitted what are alleged to have been these false claims as a defendant.
As we read these amended complaints, the gravamen of many of the false claim allegations relate to submissions to the SBA made directly or indirectly by CSH, the corporation which had the relators and defendant Shah as its principals. Yet, CSH is not named as a defendant. Thus, the amended complaints allege False Claims Act violations but refuse to name the corporate author of those allegedly false claims as a party-defendant.
The Federal Rules of Civil Procedure recognize the injustice which can flow from a plaintiff's failure to name necessary and indispensable parties as defendants, and specifically provides that defendants may move to dismiss a complaint of “failure to join a party under Rule 19.” Fed.R.Civ.P. 12(b)(7). A motion to dismiss based the alleged failure to join an indispensable party under Rules 12(b)(7) and 19 necessarily involves both legal analysis and a careful, searching evaluation of the factual circumstances in a case. Accordingly:
In reviewing a Rule 12(b)(7) motion to dismiss, the court must accept all factual allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party. Pittsburgh Logistics Sys., Inc. v. C.R. England, Inc., 669 F.Supp.2d 613, 618 (W.D. Pa. 2009). A court making a Rule 19 determination may consider evidence outside the pleadings. Id. (citing Jurimex Kommerz Transit G.M.B.H. v. Case Corp., 201 F.R.D. 337, 339-40 (D. Del. 2001)). The moving party bears the burden of showing that a nonparty is both necessary and indispensable. Pittsburgh Logistics, 669 F.Supp.2d at 618 (citing Develcom Funding, LLC v. Am. Atl. Co., Civ. A. No. 09-1839, 2009 WL 2923064, *2 (D.N.J. Sept. 9, 2009)).State Auto. Mut. Ins. Co. v. Frameworkers.com, Inc., No. CIV.A. 11-3271, 2011 WL 3204838, at *2 (E.D. Pa. July 27, 2011).
With respect to the fact-specific inquiry called for by Rule 19, that rule, in turn, defines parties who must be joined in litigation in the following terms:
Under Rule 19(a), the joinder of parties is compulsory or “necessary” if their joinder is “feasible.” Specifically, the rule states in material part:
A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii)
leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
Courts treat clauses (1) and (2) in the disjunctive just as the rule phrases them. See Koppers, 158 F.3d at 175 (“As Rule 19(a) is stated in the disjunctive, if either subsection is satisfied, the absent party is a necessary party that should be joined if possible.”). Additionally, ..., a holding that joinder is compulsory under Rule 19(a) is a necessary predicate to a district court's discretionary determination under Rule 19(b) that it must dismiss a case because joinder is not feasible (i.e., will defeat diversity) and the party is indispensable to the just resolution of the controversy. See Janney Montgomery Scott, 11 F.3d at 405.Gen. Refractories Co. v. First State Ins. Co., 500 F.3d 306, 312-13 (3d Cir. 2007).
Yet, while Rule 19's definition of “necessary” parties defines the first step in any analysis of a motion to dismiss for failure to join “indispensable parties,” there is a necessary second step to this analysis. In conducting this analysis:
[W]e first must determine whether the absent [non-joined parties] should be joined as “necessary” parties under Rule 19(a)...., we next must determine whether the absent parties are “indispensable” under Rule 19(b). Should we answer this question in the affirmative, the action cannot go forward. Janney Montgomery Scott, 11 F.3d at 404 (citing Bank of Am. Nat'l Trust & Sav. Ass'n v. Hotel Rittenhouse Assocs., 844 F.2d 1050, 1053-54 (3d Cir. 1988)).
Put another way, [only] a finding of indispensability under Rule 19(b) necessitates dismissal for lack of subject matter jurisdiction. Under Rule 19(b), the four factors listed, though not exhaustive, are “the most important considerations” in determining whether a party is indispensable. Gardiner v. V.I. Water & Power Auth., 145 F.3d 635, 640 (3d Cir. 1998).
These factors are: first, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for non-joinder. Fed.R.Civ.P. 19(b).Gen. Refractories Co., 500 F.3d at 312, 319.
These two related determinations regarding whether, first, joinder of party is “necessary” under Rule 19 and, second, whether that non-joined party is also “indispensable,” compelling dismissal of an action, are governed by separate legal standards of review. Thus, to the extent that the court premises its decision on a Rule 19(a) determination that the absent party's joinder was “necessary,” this conclusion of law is subject to plenary review. Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 404 (3d Cir. 1993). By contrast, the district court's Rule 19(b) determination that absent parties are indispensable rests in the sound discretion of the court and will be set aside only upon an abuse of discretion. Gen. Refractories Co., 500 F.3d at 312.
It is the defendants' position that CSH is a necessary and indispensable party in this litigation whose absence compels dismissal of the case. For their part, the plaintiff-relators contest this indispensable party joinder claim simply by challenging the notion that CSH is a necessary party in this litigation. Relying upon the general proposition that “it is not necessary for all joint tortfeasors to be named as defendants in a single lawsuit," Huber v. Taylor, 532 F.3d 237, 250 (3rd Cir 2008), the plaintiff-relators insist that the threshold showing of necessity has not been made here with respect to CSH.
We disagree. To be sure, courts have held that the mere status of alleged joint tortfeasors does not by itself make a missing party a “necessary” defendant under Rule 19(a). Id. However, this general rule is subject to a significant and well recognized caveat which is directly applicable here. Under Rule 19, a “joint tortfeasor will be considered a necessary party when the absent party ‘emerges as an active participant' in the allegations made in the complaint that are ‘critical to the disposition of the important issues in the litigation.'” Laker Airways, Inc. v. Brit. Airways, PLC, 182 F.3d 843, 848 (11th Cir. 1999). Thus, where a missing party is deemed an active participant in the events alleged in a complaint, that party is deemed necessary to the fair adjudication of the case. See e.g., Amboy Bancorporation v. Jenkens & Gilchrist, No. 02-CV-5410 DMC, 2007 WL 2688885, at *2 (D.N.J. Sept. 12, 2007), affd sub nom. Amboy Bancorporation v. Bank Advisory Grp., Inc., 432 Fed.Appx. 102 (3d Cir. 2011); Glades Pharms., LLC v. Call, Inc., No. CIV.A. 04-4259, 2005 WL 563726, at *4 (E.D. Pa. Mar. 9, 2005)(collecting cases); Whyham v. Piper Aircraft Corp., 96 F.R.D. 557, 561 (M.D. Pa. 1982).
In our view, in their various proposed amended complaints, the plaintiff-relators have clearly stated that CSH was an active participant in the submission of these allegedly false claims. Indeed, the amended complaints are replete with allegations regarding false and misleading submissions made by or on behalf of CSH. Given these averments made by the plaintiff-relators, by any measure the corporate actor who they allege was primarily responsible for the submission of these false claims-CSH-is an active participant and a necessary defendant in this lawsuit. CSH is a necessary party because it submitted many of these allegedly false claims and in the absence of CSH as a defendant a full understanding of these transactions, and full and fair relief for all parties, may not be possible. Simply put, without the addition of this principal corporate actor as a defendant complete and fair relief may not be available to all parties since the named defendants may well be impeded in their efforts to demonstrate that CSH bore exclusive responsibility for these false statements.
In short, presently, the plaintiffs' opposition to this Rule 12(b)(7) motion rests solely upon the novel and unsupportable proposition that the actual corporate actor who may have caused the submission of these allegedly false claims is not a necessary party in this resolution of this litigation. We disagree. We find that CSH is a necessary defendant. Yet, while CSH is a necessary defendant, we acknowledge that for the relator-plaintiffs it is a decidedly inconvenient defendant. The inconvenience for the plaintiffs which arises from naming CSH as a party-defendant stems out to the fact that the plaintiffs were members and shareholders of CSH at the time of that corporation's alleged wrongdoing. Thus, by naming CSH-a necessary party-as a defendant, the plaintiffs would find themselves in the awkward posture of bringing a False Claims Act case against their own corporate alter ego. Pursuing such litigation against CSH may be more than just awkward for the relators. If the relators have guaranteed any of CSH's debts it may also expose them to financial liability. This stubborn, but inconvenient, fact may explain why CSH has not been named as a defendant thus far, but it does not excuse the joinder of this necessary party whose actions were integral to the false claims act allegations in the lawsuit. Rather, it simply highlights the improvident nature of this lawsuit as a False Claims action. These inconvenient truths, however, do not justify foregoing Rule 19's commands regarding the joinder of necessary parties. Nor would they warrant allowing the relator-plaintiffs to seek the benefits of a False Claims Act lawsuit without confronting the potential liabilities which might flow from the fact that their corporation, CSH, may have been the actual architect of these false statements.
Yet, while we find that the requirements Rule 19(a) are met and CSH is a necessary party defendant as an alleged active participant in these false statements, on the current record it is less clear that the second component of a failure to join dismissal are met here. Once a necessity finding has been made under Rule 19(a), we must turn to Rule 19(b)'s indispensability analysis, which provides that, “if a person who is required to be joined if feasible cannot be joined, the court must determine whether, in equity and good conscience, the action should proceed among the existing parties or should be dismissed.” Fed.R.Civ.P. 19(b). In determining whether joinder of a necessary defendant is feasible we look to whether the defendant is subject to service of process and [whether] joinder will . . . deprive the court of subject-matter jurisdiction.” Fed.R.Civ.P. 19(a).
In the instant case it is unclear whether there is any barrier to joinder of CSH as a party-defendant. Such joinder would not seem to affect subject matter jurisdiction in this case. Nor is there any indication that CSH is not subject to service of process. Therefore, we simply are not in a position to engage in the indispensability/dismissal analysis called for by Rule 19(b) at this juncture since the feasibility of compelled joinder of CSH has not yet been tested by the parties.
On these facts, it is submitted that the court should identify CSH as a necessary party in this litigation, and direct either: (1) the joinder of CSH as a defendant; or (2) renewal of any motion to dismiss based upon a showing that CSH cannot be joined as a defendant but remains both a necessary and indispensable party in this litigation.
C. The Bar of the Statute of Limitations Cannot Be Asserted in this Case Based Solely on the Pleadings
In addition to these disputes regarding whether the plaintiff-relators have named appropriate party-defendants, the litigants in this case are embroiled in a heated disagreement regarding the timeliness of the complaint. This dispute regarding the application of the False Claims Act statute of limitations plays out against the backdrop false claims litigation set against a government loan guarantee program where it is alleged that false statements, which were made in 2009 to induce an SBA loan guarantee, resulted in a demand against that guarantee following CSH's default on these loans seven years later, in 2016.
In this factual context, the parties posit two conflicting and irreconcilable views regarding when the limitations period on any federal false claim would begin to run. Relying upon “the principle that the application for payment, rather than payment of the claim, triggers the accrual of an action,” U.S. ex rel. Bauchwitz v. Holloman, 671 F.Supp.2d 674, 686 (E.D. Pa. 2009), the defendants contend that the statute of limitations commenced when allegedly false documents were first submitted in 2009 in order to induce the SBA to issue loan guarantees. Adopting this view of when the false claim accrued, the defendants assert that the initial complaint in this matter, which was filed in October of 2019, is time-barred.
The plaintiff-relators have a different view of claim accrual and the statute of limitations. With respect to a False Claims Act lawsuit involving a government loan guarantee program, the plaintiffs suggest that, while an initial false submission which induces the government to extend a loan guarantee may create an inchoate claim, that claim does not accrue until some events transpires which triggers the government's payment obligation on the loan guarantee. Given this view of the claims accrual deadline, the plaintiff-relators insist that these claims did not accrue until CSH's default and the demand for payment on the loan guarantee in 2016. Under this claims accrual arithmetic, the plaintiffs assert that their initial complaint was timely filed.
While the issue is not entirely free from doubt, we believe that the greater weight of authority supports the plaintiffs' view regarding when a claim accrues under the False Claims Act in the setting of a government loan guarantee program. The statute of limitations prescribed for False Claims Act cases is set forth in 31 U.S.C.A. § 3731 (b) which provides that:
(b) A civil action under section 3730 may not be brought--
(1) more than 6 years after the date on which the violation of section 3729 is committed, or
(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed,
whichever occurs last.Id.
The substantive act which triggers this limitations period is a violation of section 3729, which forbids submission of “a false or fraudulent claim for payment” upon the United States. 31 U.S.C. § 3729 (a)(1)(A). Therefore, the crucial question in this factual context for purposes of ascertaining when a cause of action accrued is when was a false claim submitted for payment.
Our consideration of this question in the context of a federal program guaranteeing or insuring various types of loans begins with the Supreme Court's decision in United States v. McNinch, 356 U.S. 595, 598-99, 78 S.Ct. 950, 952, 2 L.Ed.2d 1001 (1958). In McNinch the Court addressed the question of whether a lending institution's application for credit insurance under an FHA program constituted to false claim under the False Claims Act. Relying upon third circuit case law the Supreme Court held in this context that an application for credit insurance was not a claim within the meaning of the statute, finding instead that:
Curiously, although the parties hotly dispute the issue of when this claim accrued, no party directly cites to the Supreme Court's pronouncements on this issue.
In normal usage or understanding an application for credit insurance would hardly be thought of as a ‘claim against the government.' As the Court of Appeals for the Third Circuit said in this same context, ‘the conception of a claim against the government normally connotes a
demand for money or for some transfer of public property.' United States v. Tieger, 234 F.2d 589, 591. In agreeing to insure a home improvement loan the FHA disburses no funds nor does it otherwise suffer immediate financial detriment. It simply contracts, for a premium, to reimburse the lending institution in the event of future default, in any.McNinch, 356 U.S. at 598-99. Following the reasoning in McNinch, lower courts which have considered the question of when a false claim is made in the context of some federally insured or guaranteed loan program generally agree that the submission of the application for federal loan insurance or loan guarantees does not constitute a “claim against the government.” Instead, it is some later event triggering a demand for payment upon the insurance or guarantee from the United States that constitutes the “claim” for purposes of the statute. As the D.C. Circuit Court of Appeals observed when considering accrual of false claims under an SBA loan guarantee program:
It is generally accepted that the false application for a guaranteed loan by the debtor establishes only an “inchoate” violation of the Act that does not ripen into a claim actionable under the statute until a later event of legal consequence between the lender and the government. See, e.g., United States v. Ekelman & Assoc., Inc., 532 F.2d 545, 552 (6th Cir.1976) (false application ripened into claim when lender sought guarantee payment from government); United States v. Ettrick Wood Products, Inc., 683 F.Supp. 1262, 1263-64 (W.D. Wisc.1988) (false application ripened into claim either on date lender's demand for payment was made on government or date on which funds were disbursed).United States v. Van Oosterhout, 96 F.3d 1491, 1494 (D.C. Cir. 1996). This benchmark for claims accrual and the statute of limitations in the context of federally insured or guaranteed loans enjoys wide acceptance in the courts. See e.g., United States v. Rivera, 55 F.3d 703, 707 (1st Cir. 1995) (“We accordingly proceed on the theory that the ‘violation' here was ‘committed,' see 31 U.S.C. § 3731(b) (1982), for statute of limitation purposes, whenever Merrill Lynch can properly be said to have presented its insurance claim to the government.”); United States v. Ekelman & Assocs., Inc., 532 F.2d 545, 552 (6th Cir. 1976) (“No cause of action arises, and, consequently, the statute of limitations does not begin to run, until the mortgage holder presents a claim to the VA or FHA for payment on the guaranty or insurance); United States v. Klein, 230 F.Supp. 426 (W.D.Pa.1964), affd mem., 356 F.2d 983 (3d Cir. 1966); United States v. Goldberg, 256 F.Supp. 540 (D.Mass.1966); see also United States v. Ueber, 299 F.2d 310 (6th Cir. 1962); United States ex rel. Vance v. Westinghouse Elec. Corp., 363 F.Supp. 1038 (W.D.Pa.1973). Therefore, we join this rising tide of case law which recognizes these later events involving a claim upon the loan guarantee as the crucial triggering acts under the statute of limitations.
Moreover, in our view, U.S. ex rel. Bauchwitz v. Holloman, 671 F.Supp.2d 674, 686 (E.D. Pa. 2009), the principal case relied upon by the defendants, does not compel a different result. In Bauchwitz, the court was confronted with an entirely different factual scenario involving allegedly false statements made in connection with a federal grant application. In this setting, where the false application directly led to the release of federal grant money, the court's holding “that the application for payment, rather than payment of the claim, triggers the accrual of an action,” was an unremarkable description of this direct causal link between the submission a false claim and the receipt of federal funds. However, this holding does not assist us in determining when a false claim is made in the more attenuated circumstances of a federally insured or guaranteed loan. Instead McNinch and its progeny teach us that false statements made to induce a federal loan guarantee do not ripen into an actionable false claim until there is a later event of legal consequence between the lender and the government like a loan default or a claim by a third party upon this loan guarantee. United States v. Ettrick Wood Prod., Inc., 683 F.Supp. 1262, 1263 (W.D. Wis. 1988).
Guided by these false claims accrual standards relating to federally insured or backed loans, the plaintiff-relators' inchoate claims based upon allegedly false statements which induced loan guarantees did not become actionable false claims until events transpire which trigger a claim against those guarantees. In this case the plaintiff-relators allege that those events took place between April and July of 2016. Given this claims accrual date, the initial complaint, which was filed in October 2019, is not barred by the six-year statute of limitations.
D. The Plaintiffs' Pleadings Comply with the Requirements of Rules 9; The Question of Whether They Can Prove What They Allege Must Await Another Day.
Beyond challenging the timeliness of these amended complaints, the defendants attack the legal sufficiency of the plaintiffs' allegations, arguing that the amended complaints fail to meet Rule 9's heightened pleading standards for fraud claims. On this score, we note that the pleadings which the defendants assail as legally insufficient under Rule 9 each set forth more than 120 factual averments, and are accompanied by hundreds of pages of proposed exhibits. (Docs. 59 and 76-6).
To be sure, Rule 9 sets a heightened standard for pleading allegations of fraud. Under Rule 9: “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). Thus, Rule 9 of the Federal Rules of Civil Procedure prescribes what must be pleaded to assert a claim of fraud. In this regard, it is well-settled that:
[T]he rules governing specificity of pleading fraud in federal court call for much greater clarity in pleading and proof to sustain such grave allegations. As the United States Court of Appeals for the Third Circuit has observed:
[Allegations of fraud must comply with Federal Rule of Civil Procedure 9(b), which requires that allegations of fraud be pled with specificity. In order to satisfy Rule 9(b), plaintiffs must plead with particularity “the 'circumstances' of the alleged fraud in order to place the defendants on notice of the precise misconduct with
which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior.” Plaintiffs may satisfy this requirement by pleading the “date, place or time” of the fraud, or through “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.” Plaintiffs also must allege who made a misrepresentation to whom and the general content of the misrepresentation.
Lum v. Bank of America, 361 F.3d 217, 223-4 (3d Cir.2004) (citations omitted, emphasis added).
Thus, “[p]ursuant to Rule 9(b), a plaintiff averring a claim in fraud must specify ‘ “the who, what, when, where, and how: the first paragraph of any newspaper story.”' Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir.1999) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990)). ‘Although Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.”' In re Rockefeller Ctr. Props. Secs. Litig., 311 F.3d 198, 216 (3d Cir.2002) (quoting In re Nice Sys., Ltd. Secs. Litig., 135 F.Supp.2d 551, 577 (D.N.J.2001), emphasis supplied).” Animal Science Products, Inc. v. China Nat. Metals & Minerals Import & Export Corp., 596 F.Supp.2d 842, 878 (D.N.J.2008).Angino v. Wells Fargo Bank, N.A., No. 1:15-CV-418, 2016 WL 787652, at *10 (M.D. Pa. Feb. 19, 2016), report and recommendation adopted, No. 1:15-CV-418, 2016 WL 759161 (M.D. Pa. Feb. 26, 2016), affd, 666 Fed.Appx. 204 (3d Cir. 2016).
The requirements of Rule 9 apply to alleged violations of the False Claims Act, which must be pleaded with particularity. In a False Claims Act lawsuit:
[T]o satisfy the standards of Rule 9(b), . . ., [t]he [plaintiff] must provide “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” See Grubbs, 565 F.3d at 190. Describing a mere opportunity for fraud will not suffice. Sufficient facts to establish “a plausible ground for relief” must be alleged. Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir.2009) (internal citation omitted).Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 157-58 (3d Cir. 2014).
Applying these guideposts, and with our scrutiny limited to an evaluation of the pleadings, we find that these amended complaints satisfy Rule 9, in that they allege with some detail and specificity the actions, statements, submissions and omissions which they contend are the gist of the false claims made against the government. Read as a whole, and in a commonsense fashion, these allegations “state with particularity the circumstances constituting fraud . . ..” Fed.R.Civ.P. 9(b). Therefore, we should decline the invitation to dismiss these pleadings as legally insufficient under Rule 9.
We further note that, in many instances, the defendants' contentions invite us to conclude, based upon the pleadings and attached exhibits alone, that these averments are legally insufficient because they mischaracterize the evidence and are untrue. We should decline this invitation to ferret out the truthfulness of these allegations at the present time because we believe that the determinations the defendants ask us to make often turn on matters outside the pleadings. For example, the authorship and accuracy of various documents cited by the parties are matters that frequently entail questions of context and provenance. Such disputed issues typically cannot be fully addressed in the abstract based solely upon the pleadings. Instead, these questions of candor, in our view, must await another day, and another motion in the nature of a summary judgment motion.
We note, however, that some aspects of the plaintiff-relators' amended complaint, while pleaded with sufficient specificity, may prove to be economically counterintuitive when considered in the light of a fully developed factual record. For example, the allegations that Fidelity Bank engaged in a conspiracy to defraud the SBA during the foreclosure action on the Nichols Village property may ultimately encounter several evidentiary hurdles. At the outset, we note that the SBA was a party to the foreclosure action but did not object to the sale. Further, the SBA had a subordinate lien position which may well have minimized the likelihood that this agency would have recovered any proceeds through the foreclosure action. Finally, if, as it appears, Fidelity Bank suffered significant losses through this foreclosure action, then the plaintiffs will have to be prepared to explain why this financial institution entered into a conspiracy with others which was adverse to its financial interests. All of these questions further underscore that the apparent gravamen of this lawsuit is a dispute between the Patels, the plaintiff-relators, and Defendant Shah. This intramural contest between former business partners ultimately may not be well-suited for resolution as part of a False Claims Act lawsuit, particularly if the corporation controlled by these actors, CSH, is joined as a necessary party in his litigation. However, these questions should await another day.
E. The Defendants' Jurisdictional Objections Cannot Be Resolved on the Pleadings Alone.
The defendants also raise a number of jurisdictional objections to this False Claims Act lawsuit, many of which are grounded in the notion that the Patels, the plaintiff-relators, and Defendant Shah, were at one time co-participants in CSH the corporate entity whose activities lie at the heart of this lawsuit. In particular, the defendants cite the roles of the plaintiffs as co-venturers in CSH to challenge the credibility of their assertions that, as passive investors, they were unaware of this alleged fraud. Instead, the defendants argue that the plaintiff-relators are in pari delicto, or at equal fault, in this case. According to the defendants, the role of these plaintiff-relators in CSH, the corporation which is alleged to have played a major role in these false claims, should bar them from proceeding with this False Claims Act lawsuit under 31 U.S.C. §3730(e).
As we have previously observed, the posture of this case, where the gravamen of this litigation appears to be an intramural dispute between former shareholders in an ill-fated corporate venture, CSH, may make this dispute ill-suited to resolution through the False Claims Act. However, at this juncture, the issue of whether the relator-plaintiffs may maintain this claim under the False Claims Act appears to turn in large measure of competing factual characterizations of their roles in these transactions. The plaintiff-relators present themselves as innocent dupes who along with the SBA were defrauded. In contrast, the defendants describe them as in pari delicto, or at equal fault, for any losses suffered by the government. In our view, these competing, and irreconcilable, factual characterizations of the relators' role in these events are the factual predicate to resolution of the defendants' jurisdictional objections. Since these factual matters are not amenable to resolution on the pleadings alone, they do not provide grounds for dismissal of this lawsuit at this time. Rather, examination of these questions must await further development of the factual record, something that has not yet occurred due to prolonged squabbling over the state of the pleadings.
F. The Plaintiffs Should Be Permitted Limited Leave to Amend Their Complaint.
Having addressed the various legal objections lodged by the defendants to the plaintiffs' amended pleadings, we finally turn to the question of whether further leave to amend the complaint should be granted. Rule 15 favors liberal amendment of pleadings and the animating guidance under the rule suggests that “[l]eave to amend must generally be granted unless equitable considerations render it otherwise unjust.” Arthur v. Maersk, Inc., 434 F.3d 196, 204 (3d Cir. 2006). However, “[a]mong the grounds that could justify a denial of leave to amend are .., bad faith, dilatory motive, prejudice, and futility. ‘Futility' means that the complaint, as amended, would fail to state a claim upon which relief could be granted.” Shane v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000).
The instant case presents an exceedingly close case when one considers whether further amendment of the pleadings is necessary or appropriate. It is a close case because over the past three years there have been multiple, halting attempts to amend the pleadings, a suggestion by Judge Jones of some past conduct which in the court's view approached bad faith, and extraordinary delay in framing the pleadings. Moreover, we have found, in at least some limited respects, that the plaintiffs' claims remain unavailing, and have concluded that at least as to Fidelity Bancorp this defendant should be dismissed and further amendment would be futile.
All of these considerations could justify a denial of further leave to amend. However, our review of the current pleadings has also led us to conclude that, while the False Claims Act may be an inapt vehicle for pursuing this dispute, the plaintiff-relators have sufficiently pleaded a number of timely claims under the Act and the resolution of further legal challenges to these claims must entail development of the factual record. Therefore, given the strong preference in the law for merits-based resolutions of disputes, it is recommended that the motion to amend be granted in part, but only insofar as the plaintiff-relators should be directed to file a final amended complaint in conformity with the findings set forth in this Report and Recommendation within 30 days. It is further recommended that, upon the filing of this pleading, the plaintiffs' pleadings be deemed closed, so this case can finally proceed forward.
IV. Recommendation
For the foregoing reasons, IT IS RECOMMENDED that:
First, the defendants' motions to dismiss (Docs. 62 and 63), should be granted, in part, and denied in part, as follows:
Fidelity Bancorp should be dismissed as a defendant in this case.
In addition, the court should identify CSH as a necessary party in this litigation, and direct either: (1) the joinder of CSH as a defendant; or (2) renewal of any motion to dismiss based upon a showing that CSH cannot be joined as a defendant but remains both a necessary and indispensable party in this litigation.
In all other respect the motions to dismiss should be denied without prejudice to the assertion of any available legal defenses on a more fulsome factual record.
Second, the plaintiffs' motion to amend (Do. 76) should be granted in part, but only insofar as the plaintiff-relators should be directed to file a final amended complaint in conformity with the findings set forth in this Report and Recommendation within 30 days. It is further recommended that, upon the filing of this pleading, the plaintiffs' pleadings be deemed closed, so this case can finally proceed forward.
The parties are further placed on notice that pursuant to Local Rule 72.3:
Any party may object to a magistrate judge's proposed findings, recommendations or report addressing a motion or matter described in 28 U.S.C. § 636 (b)(1)(B) or making a recommendation for the disposition of a prisoner case or a habeas corpus petition within fourteen (14) days after being served with a copy thereof. Such party shall file with the clerk of court, and serve on the magistrate judge and
all parties, written objections which shall specifically identify the portions of the proposed findings, recommendations or report to which objection is made and the basis for such objections. The briefing requirements set forth in Local Rule 72.2 shall apply. A judge shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made and may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge. The judge, however, need conduct a new hearing only in his or her discretion or where required by law, and may consider the record developed before the magistrate judge, making his or her own determination on the basis of that record. The judge may also receive further evidence, recall witnesses or recommit the matter to the magistrate judge with instructions.
Submitted this 27th day of July 2022.