Opinion
No. 95 C 4246.
June 20, 1996
MEMORANDUM OPINION AND ORDER
Plaintiff Floyd Phillips Company, d/b/a Pheasant Ridge/Hunter Apartments ("Pheasant Ridge"), in the name of and on behalf of the United States of America, sues Cheryl Seivers and Sharon Warren, individually and d/b/a Sharon's Hair Affairs, under the False Claims Act ("the Act"), 31 U.S.C. § 3729 et seq. Count I alleges that Seivers submitted fraudulent and false information to Pheasant Ridge for purposes of securing "Section 8" federal housing subsidies. Count II alleges fraudulent acts by Warren enabling Seivers to qualify for the subsidies. Count III alleges a conspiracy by Seivers and Warren to make a false claim against the government. This court granted Pheasant Ridge and Seivers' motion for entry of judgment by consent and entered judgment against Seivers on Counts I and III in the amount of $66,211.00. See Order, No. 95 C 4246 (N.D. Ill. Feb. 13, 1996). Warren moves to dismiss the complaint for lack of subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1).
BACKGROUND
For purposes of a motion to dismiss, the court accepts all well-pleaded allegations in the complaint as true. See Travel All Over the World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1428 (7th Cir. 1996); Ezekiel v. Michel, 66 F.3d 894, 897 (7th Cir. 1995). "The district court may properly look beyond the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists." Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188, 191 (7th Cir. 1993) ( per curiam). The following facts are drawn from the complaint unless otherwise noted.
Floyd Phillips Company is the United States' agent and lessor of the premises known as Pheasant Ridge located at 9200 Hunter Drive, Orland Hills, Illinois. Pheasant Ridge is a subsidized housing complex under the federal "Section 8" program administered by and through the United States Department of Housing and Urban Development ("HUD"). See Affidavit of Margaret Mead ("Mead Aff.") ¶ 2. Seivers is an Illinois citizen who formerly resided at 9218 Hunter Drive, Unit No. 104, Orland Hills, Illinois. Warren is an Illinois citizen and conducts business known as Sharon's Hair Affairs, located at 1506 West 127th Street, Calumet Park, Illinois. In May 1985, Seivers submitted an application to Pheasant Ridge for subsidized housing under the federal "Section 8" program. Id. at ¶ 2. Along with her application, Seivers was required to disclose information pertaining to her income and assets for the purpose of determining her rent and the amount subsidized by HUD. In her application, Seivers represented she was receiving public assistance and food stamps, qualifying her for a high rent subsidy. Seivers was permitted to rent an apartment at Pheasant Ridge under Section 8 beginning in 1985 for $33 per month. Id. at ¶ 3. The fair market rental in 1985 for her unit was $589 per month. Id.
Mead was at all times the manager of Pheasant Ridge. Mead Aff. ¶ 1.
On May 22, 1985, Seivers executed an "Approved HUD Apartment Lease for Subsidized Programs." See Complaint, Ex. A. On August 23, 1993, Seivers executed another approved HUD lease. See Complaint, Ex. B. Seivers was required to provide Pheasant Ridge with income and expense statements to determine her continued eligibility for HUD subsidies. The required information included income and employment verification from Seivers' employer. Mead Aff. ¶ 4. On December 2, 1991, March 18, 1992, April 17, 1993, November 6, 1993, and March 22, 1994, Warren provided Pheasant Ridge with verification of Seivers' employment, listing her total monthly income as ranging from $80 to $110. Id. at ¶ 5. Warren identified her business as a hair salon located in Calumet Park, Illinois. Id.
In September 1991, Pheasant Ridge staff and Mead observed Seivers driving a new 1990 Nissan Sentra automobile. Id. at ¶ 6. Upon inquiring as to Seivers' ownership of the car, Seivers indicated she was making the $277.95 monthly payment. Id. Mead suspected Seivers was withholding information relating to additional sources of income, or that she and Warren were falsifying the amount Warren paid Seivers. Id. Given the monthly income Seivers reported to Pheasant Ridge and HUD, she did not have sufficient funds to make her car payments. Id. Upon questioning Seivers further, she represented that her mother, brother or boyfriend gave her money from time to time to make the car payments. Id. at ¶ 7. Although Mead believed Seivers' representations were false, Mead was unable to gather sufficient information within HUD guidelines to establish Seivers' fraud. Id.
In 1993, Pheasant Ridge staff and Mead observed Seivers driving a new Nissan Altima. Id. at ¶ 8. Seivers showed Mead the installation contract stating the monthly payment was $411.91. Id. Mead continued to believe Seivers and Warren were providing false information to Pheasant Ridge concerning Seivers' income. Id. In March 1994, Seivers maintained that the Altima was her boyfriend's car and that she received $200 per month from him to help make the payments on the car. She claimed her share of the payments were only $211.91. Id.
Pheasant Ridge and Mead investigated the matter further and learned that Seivers was the car's sole owner. Id. at ¶ 9. In April 1994, Mead telephoned Seivers' lending institution, Nissan Motor Acceptance Corporation ("the lender"), and learned that Seivers' monthly payment was $411.91, that Seivers was the sole borrower on the loan, and that Warren had verified Seivers' income was "in excess of $20,000." Id. at ¶ 9. On May 31, 1994, Mead served Seivers with a 10-day notice of termination of her tenancy. Def. Ex. B. On June 23, 1994, Pheasant Ridge sought Seivers' eviction through the Circuit Court of Cook County. Mead Aff. ¶ 10; Def. Ex. A. Following that action, Mead received records from the lender pursuant to a subpena served prior to the Cook County proceedings. Mead Aff. ¶ 10.
In October 1994, after the eviction proceedings concluded, Pheasant Ridge filed a state court complaint against both Seivers and Warren to recover the subsidy payments made by HUD on Seivers' behalf. Id. at ¶ 11. Pheasant Ridge's attorneys represented to Warren's counsel that Warren had testified to supplying Seivers with false information regarding income and that the state court judge hearing the eviction action became irate at the conduct of both Warren and Seivers. See Affidavit of James P. Gallagher ("Gallagher Aff.") ¶¶ 6-7. The Circuit Court concluded the HUD handbook was not sufficient to give Pheasant Ridge standing to pursue an action on HUD's behalf. Id. Consequently, the state court action was dismissed and no discovery was obtained from either defendant in that case. Mead Aff. ¶ 11. Warren's attorney claims Pheasant Ridge's attorneys told him they filed the state court action on behalf of HUD based on Warren's testimony during the eviction hearings. Gallagher Aff. ¶ 8.
Warren provides no support for the assertion in her motion to dismiss that the state court judge suggested the conduct of Warren and Seivers be reported to proper federal and state agencies. See Memorandum in support at 3.
On July 24, 1995, Pheasant Ridge filed this qui tam action. The complaint was placed under seal and served upon the United States Attorney. See Order, No. 95 C 4246 (N.D. Ill. July 24, 1995). On September 26, 1995, the United States Attorney elected not to intervene, the complaint was unsealed and Pheasant Ridge was directed to serve the defendants. See Order, No. 95 C 4246 (N.D. Ill. Sept. 28, 1995).
DISCUSSION
When ruling on a Fed.R.Civ.P. 12(b)(1) motion, the court may consider evidence not contained on the face of the complaint. See Radulescu v. Moldowan, 845 F. Supp. 1260, 1262 (N.D. Ill. 1994). The burden on proving subject matter jurisdiction is on the plaintiff. Id. See also Grafon Corp. v. Hausermann, 602 F.2d 781, 783 (7th Cir. 1979) (party invoking jurisdiction has the burden of supporting allegations of jurisdictional facts by "competent proof").
Warren argues that the Act bars an action based on allegations or transactions that were disclosed in a previous trial unless the qui tam relator is an original source of the information. See 31 U.S.C. § 3730(e)(4)(A). Warren contends this action is based on a July 12, 1994 state civil forcible entry and detainer trial. Warren maintains Pheasant Ridge is not an original source of information because the information was disclosed for the first time at the July 12, 1994 trial. Warren notes the eviction complaint raises allegations concerning fraudulent conduct by Seivers not Warren. Warren argues that the complaint should be dismissed because there is no evidence Pheasant Ridge developed any independent knowledge or would have learned about her fraud absent her own public disclosure. See United States ex rel. Doe v. John Doe Corp., 960 F.2d 318, 322-23 (2d Cir. 1990); Houck on behalf of United States v. Folding Carton Admin. Comm., 881 F.2d 494 (7th Cir. 1989), cert. denied, 494 U.S. 1026 (1990). Warren asserts further that Pheasant Ridge did not have "direct" knowledge because its attorneys purportedly informed HUD about the fraud allegations. United States ex rel. Kreindler Kreindler v. United Technologies Corp., 985 F.2d 1148, 1158-59 (2d Cir.), cert. denied, 508 U.S. 973 (1993).
The term "relator" is used to denote a qui tam plaintiff.
Pheasant Ridge responds that as long as it learned of suspicious information and conducted a significant independent investigation into the alleged fraud, this case should not be barred where some of the allegations are based on publicly disclosed information. United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 652-56 (D.C. Cir. 1994); United States ex rel. Siller v. Becton Dickinson Co., 21 F.3d 1339, 1347-50 (4th Cir.), cert. denied, 115 S.Ct. 316 (1994). Pheasant Ridge distinguishes the cases Warren relies on because they involve qui tam relators who learned of facts supporting fraud allegations only through previous litigation. Pheasant Ridge argues it is an original source of the information because it investigated and discovered the facts forming the basis of this action.
A private citizen may bring a civil qui tam action for a violation of the Act. 31 U.S.C. § 3730(b)(1). The complaint is to be filed in camera and remain under seal for at least 60 days while a copy of the complaint and written disclosure of substantially all material evidence and information the relator possesses is served on the United States Attorney. 31 U.S.C. § 3730(b)(2). The United States Attorney then decides whether to intervene. 31 U.S.C. § 3730(b)(4).
Courts lack subject matter jurisdiction over an action "based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing . . . unless the action is brought by the Attorney General or the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A). An "original source" is defined in the Act as "an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information." 31 U.S.C. § 3730(e)(4)(B).
A. Based Upon Public Disclosure
Pheasant Ridge fails to establish that this action is not "based upon the public disclosure of allegations or transactions in a . . . civil action. . . ." In Siller, the Ninth Circuit found that "every court of appeals to have addressed this question [has held] that any information disclosed through civil litigation and on file with the clerk's office should be considered a public disclosure of allegations in a civil hearing for purposes of section 3730(e)(4)(A)." Siller, 21 F.3d at 1350. The term "hearing" encompasses the filing of a civil complaint. Id. Neither party disputes that the eviction hearing and subsequent state court complaint publicly disclosed the fraud allegations or transactions. The issue is whether this action is "based upon" the prior public disclosures.
In the Seventh Circuit, a qui tam relator cannot "bring an action based solely on publicly disclosed transactions." Houck, 881 F.2d at 504 (emphasis added). In Houck, the information upon which the relator based his complaint was publicly disclosed in earlier litigation. The relator assisted people file claims and recover money from a fund created pursuant to a settlement agreement entered in an earlier action. Id. at 503. The relator alleged the committee administering the settlement fund knowingly distributed money in contravention of the court's mandate. Id. Thus, the court found the publicly disclosed information could not form the basis of the subsequent action unless the relator was an "original source." Id. at 504. This approach seems to focus on the degree to which the qui tam relator relied on publicly disclosed information in filing the qui tam action. The court continued its analysis by finding the relator was not an original source of the public information because he failed to show that he would have learned of the false claims absent public disclosure. Houck, 881 F.2d at 505.
The requirement that the qui tam relator actually rely on the publicly disclosed information in filing the complaint was followed in Siller. There, the Fourth Circuit held the "based upon" language required the relator to have "actually derived from that [public] disclosure the allegations upon which his qui tam action is based." Siller, 21 F.3d at 655.
Pheasant Ridge's reliance on Springfield is misplaced. Springfield considered the "quantum of information already in the public sphere." Springfield, 14 F.3d at 655. In Springfield, the District of Columbia Circuit held that a qui tam action cannot be sustained where "all of the material elements of the fraudulent transaction are already in the public domain and the qui tam relator comes forward with additional evidence incriminating the defendant." Springfield, 14 F.3d at 655. The allegations of fraud were publicly disclosed by the qui tam relator itself who "first brought its claim alleging [defendant's] fraud to the fore in the Maine litigation after conducting its own investigation of the circumstances surrounding [documents] obtained in discovery." Id. at 656. The court held because the "actual allegations of fraud were thus publicly disclosed, [the relator] must now qualify as an `original source' of those allegations in order to bring its qui tam suit." Id. Applying Springfield, this action is based upon publicly disclosed allegations because Pheasant Ridge previously litigated an eviction hearing publicly disclosing the fraud allegations and filed a state court complaint alleging the same fraud allegations at issue here. Thus, this court has subject matter jurisdiction only if Pheasant Ridge is an "original source" of the information.
B. Original Source
To be an original source, Pheasant Ridge must show that it: (i) had "direct and independent knowledge" of the fraud allegations; and (ii) "voluntarily provided the information to the Government before filing" the qui tam action. 31 U.S.C. § 3730(e)(4)(B); Houck, 881 F.2d at 504-05. Warren contests only whether Pheasant Ridge had "direct and independent knowledge" of her fraud. "Direct" knowledge is "marked by absence of an intervening agency, instrumentality, or influence: immediate." United States ex rel. Stinson, Lyons, Gerlin Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1160-61 (3rd Cir. 1991) (quoting Webster's Third New International Dictionary 640 (1976)). "Independent" knowledge is established if Pheasant Ridge "would have learned of the [fraud] absent public disclosures." Houck, 881 F.2d at 505.
Warren's "original source" argument is not clearly written. After noting that Pheasant Ridge must prove direct and independent knowledge and voluntary disclosure to the government prior to filing the qui tam suit, Warren summarily contends that "neither requirement has been met." Memorandum in support at 7. Warren apparently refers to the "direct and independent knowledge" requirements because she concedes that Pheasant Ridge voluntarily provided information concerning her fraud to the federal government, but simply "did not have direct and independent knowledge of it." Id. Warren raises arguments only related to Pheasant Ridge's "direct and independent knowledge." In responding, Pheasant Ridge did not address whether it voluntarily provided information to the government before filing the qui tam action. Thus, the court can not determine whether Pheasant Ridge voluntarily provided information to the government prior to filing the qui tam action.
Warren's argument that Pheasant Ridge had neither direct nor independent knowledge of the fraud allegations is unpersuasive. Warren confuses the analysis by arguing that her fraud was disclosed only through her testimony. In Houck, the relator learned of the fraud allegations through his activity in previous litigation. The court held that this was sufficient to show that the relator's knowledge was "direct." Houck, 881 F.2d at 505. However, the court dismissed the qui tam complaint because Houck did not have "independent" knowledge; Houck failed to show that he would have learned of the claims absent the prior litigation. Id. Thus, Warren's reliance on her prior testimony to show a lack of "direct" knowledge is misplaced.
Warren's other argument concerning Pheasant Ridge's "direct" knowledge is based on the unsupported claim that Pheasant Ridge's attorneys relayed Warren's disclosed fraud to HUD. Memorandum in support at 9. Because Warren provides no support for this allegation it shall be disregarded. Nor does Warren persuasively argue that a qui tam action should be barred even if the relator's attorney provided the information to the government. Though the premise is unclear, apparently Warren contends the relator's attorney providing information to the government is evidence of only the attorney's direct knowledge. In United Technologies, the qui tam relator was the attorney in the previous litigation who learned of the allegations directly from and in the course of his preparation for the previous litigation. United Technologies, 985 F.2d at 1159. Here, Pheasant Ridge was a direct participant in all the underlying events and learned first-hand of the fraud.
Pheasant Ridge clearly has independent knowledge of the alleged fraud. Through Mead's affidavit, Pheasant Ridge shows that it conducted a significant independent investigation into the fraud allegations. Pheasant Ridge reviewed Seivers' leases and Warren's verification of Seivers' salary and employment. Warren was Seivers only listed employer and source of income. Pheasant Ridge knew Seivers was driving new automobiles that could not be financed on Seivers' reported income from Warren. Mead investigated and discovered Seivers was the sole owner of the automobiles. Mead attests she telephoned Seivers' lender before evicting her and learned that Warren verified that Seivers' annual salary was in excess of $20,000. Warren previously verified to Pheasant Ridge on four occasions that Seivers' monthly salary was no more than $110. Mead believed Warren provided false verification to either Pheasant Ridge or Seivers' lender. Pheasant Ridge discovered this information prior to the eviction hearing in which Warren admitted she provided false verification to Pheasant Ridge. Subsequent to the eviction hearing but prior to the state complaint naming Warren, Pheasant Ridge obtained a copy of Warren's verification provided to Seivers' lender.
Warren's reliance on the pleadings filed by Pheasant Ridge in Seivers' eviction proceedings is misplaced. Warren was not a party to the eviction proceeding. Thus, Pheasant Ridge did not need to allege that Warren provided false verification to succeed in evicting Seivers.
The preponderance of the evidence shows that Pheasant Ridge would have learned of Warren's fraud absent her public disclosure. Pheasant Ridge demonstrates that it had "direct and independent knowledge" of Warren's fraud. Thus, Pheasant Ridge is an "original source" of the information. Accordingly, the motion to dismiss for lack of subject matter jurisdiction must be denied.
CONCLUSION
Sharon Warren's motion to dismiss for lack of subject matter jurisdiction is denied. Warren is directed to answer the complaint by July 3, 1996. The completion of all discovery and filing of dispositive motions with supporting memoranda previously set for March 12, 1996 is reset to August 30, 1996. The joint final pretrial order submission previously set for April 11, 1996 is reset to September 25, 1996. Plaintiff's draft shall be submitted to defendant by September 16, 1996. The case is placed on the October 1996 trial calendar. ALL DATES ARE FIRM.