United States of America and the State of New York ex rel. J. Doe v. Community…

Background

Marianne T. O’Toole, acting as trustee for the bankruptcy estate of relator Robert Douglas, brought a qui tam action on behalf of the United States and New York under the federal False Claims Act and the New York False Claims Act. The complaint alleged that Community Living Corporation, Christine Stile, John Porcella, Creative Escapes, LLC, Delores Lulgjuray, Jack Mungovan, and Douglas Jurczak participated in schemes involving Medicaid-funded services for people with developmental disabilities.

The alleged conduct included directing employees to complete service records after services were provided or for services that were not provided; improperly dispensing prescription medication; failing to provide or monitor medical care; allowing consumers who allegedly lacked the capacity to consent to engage in sexual activity; failing to report incidents to the New York State Office for People With Developmental Disabilities; and using CLC employees, offices, supplies, and Medicaid-funded vans in connection with Creative Escapes vacations. The complaint also alleged that Douglas reported these issues and was later terminated.

The CLC defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the trustee should be barred by judicial estoppel and, alternatively, had not stated viable claims. Creative Escapes, Lulgjuray, Mungovan, and Jurczak had not been served.

Judicial Estoppel

The court rejected the CLC defendants’ argument that judicial estoppel barred the action. Judicial estoppel is a rule that can prevent a party from taking a position in one proceeding that conflicts with a position successfully taken in an earlier proceeding. The court found that Douglas had disclosed the action to the trustee during the bankruptcy and, more importantly, that O’Toole—not Douglas—was the plaintiff. The court also found no evidence that O’Toole had concealed the claims from creditors or taken an inconsistent position.

Fraud Claims

The court granted the CLC defendants’ motion as to the claims under 31 U.S.C. § 3729 and New York State Finance Law § 189. Claims under the False Claims Act alleging fraud must satisfy Federal Rule of Civil Procedure 9(b), which requires the circumstances of fraud to be pleaded in detail. For claims based on submitting false claims, the complaint generally must provide enough information about the claims—such as when they were submitted, what was billed, who was involved, and the amount or services at issue—to allow the defendants to identify them.

The court held that the second amended complaint did not identify a single actual false claim submitted for Medicaid reimbursement. It described alleged regulatory violations and fraudulent practices but did not provide details showing that claims based on those practices were actually submitted. The court also declined to relax the pleading requirement because the complaint indicated that Douglas had access to CLC records and billing-related information.

The court separately held that the complaint did not adequately plead falsity. Although the complaint alleged violations of regulations governing Medicaid and related services, it did not provide a basis to infer that the United States or New York would have refused reimbursement if they had known about the violations. The court therefore concluded that the alleged regulatory noncompliance was not adequately pleaded as material to the government’s payment decisions. The court also stated that the allegations that employees signed records for services that were never provided were conclusory and did not satisfy the ordinary plausibility standard or Rule 9(b).

Retaliation Claims

The court denied the motion as to the retaliation claims under 31 U.S.C. § 3730(h) and New York State Finance Law § 191. A retaliation claim generally requires allegations that the employee engaged in protected activity, the employer knew about it, and the employer took adverse action because of it. Unlike the fraud claims, the retaliation claims did not have to meet Rule 9(b)’s heightened fraud-pleading requirement.

The court found the alleged timing sufficient at the motion-to-dismiss stage. The complaint alleged that Douglas had a detailed conversation with Stile on November 5, 2014, filed incident reports with the Justice Center around that time, and was fired on December 14, 2014. The court held that these allegations supported a sufficient connection between the protected activity and the termination. The court did not decide as a matter of law whether the alleged reduction in Douglas’s job responsibilities also supported a retaliation claim.

Unserved Defendants and Disposition

The court dismissed all claims against Creative Escapes, LLC, Delores Lulgjuray, Jack Mungovan, and Douglas Jurczak without prejudice under Federal Rule of Civil Procedure 4(m) because they remained unserved despite additional time to complete service. The court granted the CLC defendants’ motion to dismiss as to the federal and New York fraud claims and denied the motion as to the federal and New York retaliation claims. Judge Katherine Polk Failla directed the CLC defendants to file a responsive pleading by June 5, 2020, and directed the parties to submit a proposed case-management plan and joint status letter by June 12, 2020.