United States v. Baxter

Background

Relator LLC filed this qui tam action on behalf of the United States under the False Claims Act. The United States declined to intervene, although it remained the real party in interest. Relator sued Santa Lucia Preserve Company (SLPC), its CEO and board chair Karen Baxter, its former CFO Andrew Simer, and 10 Doe defendants.

Relator alleged that SLPC violated the False Claims Act by applying for and receiving a Paycheck Protection Program loan exceeding $2.1 million. According to Relator, SLPC was ineligible because the Preserve Golf Club and Ranch Club restricted membership for reasons other than capacity. Relator also alleged that defendants falsely certified the loan applications, knew the loan was unnecessary, and obtained full loan forgiveness on July 21, 2021.

Public-Disclosure Bar

Defendants argued that the False Claims Act’s public-disclosure bar required dismissal because information about the loan was publicly available on PandemicOversight.gov. The court explained that the bar applies when substantially the same fraud allegations or transactions were publicly disclosed through a qualifying source, unless the relator was an original source.

The court concluded that the website information did not contain an explicit accusation of wrongdoing. It also did not show a transaction from which fraud could be inferred because defendants did not contend that the publicly available facts were misrepresented. The court therefore ruled that Relator’s claim was not barred by the public-disclosure rule and declined to grant defendants’ motion on that basis. It did not decide whether Relator was an original source.

Failure to State a Claim

The court applied Federal Rule of Civil Procedure 12(b)(6), which requires dismissal when a complaint does not state a claim for which relief can be granted. Because the claim alleged fraud, the court also applied Rule 9(b), which requires the circumstances of fraud to be stated with particularity, including the who, what, when, where, and how, as well as what was false and why it was false.

To state a False Claims Act claim, Relator had to allege a false statement or fraudulent conduct, knowledge of the falsity and intent to deceive, materiality, and that the conduct caused the government to pay money or forfeit money.

The court held that Relator failed to plausibly allege fraud. In an earlier order, the court had found that Relator had not plausibly alleged that SLPC owned the private clubs. In the Second Amended Complaint, Relator instead alleged that SLPC owned the property on which the clubs operated and managed the property and access to it. Defendants provided information that the clubs owned the land on which they operated, and the court concluded that SLPC did not own either the clubs or that land.

The court ruled that, without facts showing that a defendant owned the clubs that might have been barred from obtaining PPP loans, Relator could not show that any defendant committed False Claims Act fraud. The fact that some SLPC clients were allegedly exclusive clubs did not establish that SLPC itself was an exclusive club. Relator also had not named either club as a defendant or alleged that either club applied for a PPP loan.

The court further held that the Second Amended Complaint relied on conclusory statements rather than particular facts supporting the alleged false certifications. The court also ruled that Relator failed to plead scienter—knowledge that a statement was false and an intent to deceive, or deliberate ignorance or reckless disregard of the truth. Statements that defendants knowingly made false claims or certifications did not, without supporting facts, adequately plead scienter.

Individual Defendants

The court separately considered the allegations against Baxter and Simer. Relator alleged that Baxter was SLPC’s CEO and board chair and that Simer was its CFO. It alleged that Baxter approved the loan application and that Simer necessarily knew about and directed the application because he was CFO.

The court found these allegations conclusory. It ruled that Relator did not allege facts permitting a reasonable inference about Baxter’s involvement in applying for the loan or facts supporting the required scienter. The court therefore also granted defendants’ motion concerning the individual defendants.

Leave to Amend and Disposition

Relator requested permission to file a Third Amended Complaint. The court denied that request because Relator had already had three opportunities to plead the False Claims Act claim and had repeatedly failed to cure the deficiencies. The court concluded that another amendment would be futile.

The court granted defendants’ motion to dismiss the Second Amended Complaint with prejudice and ordered judgment to be entered.