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Calisesi v. Hot Chalk, Inc.

United States District Court, D. Arizona

May 1, 2015

Regina Calisesi, Toi, and Jeffri Bolton, ex rel. United States of America, Plaintiffs,
Hot Chalk, Inc., et al., Defendants.


NEIL V. WAKE, District Judge.

Before the Court is Concordia College's Motion to Dismiss the Second Amended Consolidated Complaint (Doc. 96), the Motion to Dismiss Second Amended Consolidated Complaint by Concordia University (a Nebraska not for profit) (Doc. 107), and Defendants' Joint Motion to Dismiss Second Amended Consolidated Complaint (Doc. 101 (redacted) and Doc. 104 (sealed, unredacted)) filed, or joined in the alternative, by all Defendants.


This is an action under the qui tam provisions of the False Claims Act, 31 U.S.C. §§ 3729 et seq., to recover damages and civil penalties for allegedly false statements, claims, and certifications made or caused to be made by four not-for-profit higher education institutions, a for-profit corporation providing services under contracts with the institutions, and three employees of the for-profit corporation, for the purpose of receiving funds through federal scholarship and financial aid programs under Title IV of the Higher Education Act. The action was filed by three former employees of the for-profit institution on behalf of the United States.

Defendant HotChalk, Inc., provides turnkey services to post-secondary educational institutions to deliver internet-based degree programs. It has provided such services to the following institutions: University of Mary, Concordia University (a Portland, Oregon, not-for-profit) ("CUP"), Concordia University (a Nebraska not-for-profit) ("CUNE"), and Concordia College New York ("CCNY") (collectively the "Defendant Institutions").[1] The HotChalk employee defendants are Edward Fields, James Cheshire, and Mark Zinselmeier (collectively the "Individual Defendants"). Plaintiffs Regina Calisesi, Toi Bolton, and Jeffri Bolton were employed by HotChalk as enrollment specialists.

The Defendant Institutions entered into Program Participation Agreements with the United States Department of Education in which they certified they were and would remain in compliance with Title IV statutes and regulations. The Defendant Institutions and HotChalk were sponsors and/or co-applicants on student loan and financial aid applications completed by students enrolling in the educational programs offered by the Defendant Institutions. Each application certified that Defendant Institutions and HotChalk were in compliance with all of the Higher Education Act and Title IV program statutory and regulatory requirements.

As alleged, the compliance certifications by the Defendant Institutions and HotChalk were false because Defendants violated federal law by paying incentives for student recruitment, outsourcing more than 50% of Defendant Institutions' education programs, and making misleading promises concerning scholarships or other financial considerations. The Second Amended Consolidated Complaint includes three counts under the False Claims Act: (1) knowingly presenting a false or fraudulent claim for payment and knowingly making a false statement material to a false or fraudulent claim (31 U.S.C. § 3729(a)(1)(A), (B) against all Defendants); (2) conspiring to present a false claim and make a false statement (31 U.S.C. § 3729(a)(1)(C) against all Defendants); and (3) retaliating for lawful acts done in furtherance of efforts to stop one or more violations of the False Claims Act (31 U.S.C. § 3730(h) against HotChalk and the Individual Defendants by Calisesi only).


If a defendant is not served within 120 days after a complaint is filed, Fed.R.Civ.P. 4(m) requires a court to dismiss an action without prejudice against that defendant or order that process be made within a specified time. But a court must extend the time for service for an appropriate period if the plaintiff shows good cause for the failure. CUNE contends that Plaintiffs failed to accomplish valid service of process of the First Amended Complaint upon CUNE within 120 days.

On April 10, 2014, Calisesi filed under seal a Notice of Filing Qui Tam First Amended Complaint, which included as an exhibit a proposed Qui Tam First Amended Complaint adding CUNE as a defendant. (Doc 25.) On April 16, 2014, the Court unsealed this case and ordered Calisesi to serve the summons and complaint on each defendant. (Doc. 27.) In May 2014, Calisesi served a Qui Tam First Amended Complaint on some parties, but she never filed it.

On May 27, 2014, Toi and Jeffri Bolton filed a Notice of Filing Qui Tam First Amended Complaint and also filed their Qui Tam First Amended Complaint. (Docs. 32, 33.) Toi and Jeffri Bolton's First Amended Qui Tam Complaint did not name CUNE as a defendant. (Id. )

On June 30, 2014, upon stipulation of Plaintiffs and Defendants, which did not include CUNE, the Court ordered that Plaintiffs were permitted to file a consolidated Second Amended Complaint by July 7, 2014. (Docs. 51, 52.) On July 7, 2014, Plaintiffs filed a pleading titled "Qui Tam First Amended Consolidated Complaint, " attached as an exhibit to a Notice of Filing and not as a separate document. (Docs. 56, 57.) On July 8, 2014, Plaintiffs filed a "Qui Tam First Amended Consolidated Complaint, " which named CUNE as a defendant. (Doc. 59.) Therefore, Rule 4(m) permitted Plaintiffs until November 5, 2014, i.e., 120 days after the First Amended Consolidated Complaint was filed, to serve process on CUNE.

On August 29, 2014, Plaintiffs filed their Second Amended Consolidated Complaint. (Doc. 88.) Service of a summons and the Second Amended Consolidated Complaint on CUNE was executed on October 29, 2014. (Doc. 117.) Therefore, service of process on CUNE was made within the time permitted under the Federal Rules of Civil Procedure, and CUNE's motion to dismiss under Rules 4(m) and 12(b)(5) will be denied.


Under Fed.R.Civ.P. 8(a)(2), a pleading that states a claim for relief must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." A complaint need contain only "enough facts to state a claim for relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

In deciding a motion to dismiss under Rule 12(b)(6), all allegations of material fact are assumed to be true and construed in the light most favorable to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). Dismissal under Rule 12(b)(6) can be based on "the lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). The court accepts as true all factual allegations pled, but does not assume legal conclusions in a complaint to be true. Ashcroft v. Iqbal, 566 U.S. 662, 678 (2009). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.

Under Rule 12(b)(1), a defendant may challenge the plaintiff's jurisdictional allegations by either (1) attacking the plaintiff's allegations as insufficient on their face to invoke federal jurisdiction or (2) contesting the truth of the plaintiff's factual allegations, usually by introducing evidence outside the pleadings. Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2014). The first, a facial attack, is resolved by the district court as it would be under Rule 12(b)(6), i.e., accepting the plaintiff's allegations as true and drawing all reasonable inferences in the plaintiff's favor, the court determines whether the allegations are legally sufficient to invoke the court's jurisdiction. Id. The second, a factual attack, requires the plaintiff to support its jurisdictional allegations with competent proof, under the same evidentiary standard applied in the summary judgment context. Thus, the plaintiff bears the burden of proving by a preponderance of the evidence that each of the requirements for subject matter jurisdiction has been met. Id.

Certain elements of fraud claims must satisfy a higher standard of pleading under the Federal Rules of Civil Procedure. In alleging fraud or mistake, plaintiffs may allege malice, intent, knowledge, and other conditions of a person's mind generally, but the circumstances must be alleged with particularity. Fed.R.Civ.P. 9(b). Rule 9(b) requires allegations of fraud to be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001). Rule 9(b) requires a pleading to identify the "who, what, when, where, and how" of the misconduct charged, what is false or misleading about the allegedly false statement, and why it is false. United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011). Plaintiffs alleging fraud "must state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986); accord Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007). However, Rule 9(b)'s particularized pleading requirement may be relaxed to permit allegations of fraud based on information and belief where plaintiffs are not likely to have personal knowledge of all of the underlying facts, such as in cases of corporate fraud, and the allegations are accompanied by a statement of facts on which the belief is founded. Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 540 (9th Cir. 1989). In cases of corporate fraud, where plaintiffs cannot attribute particular fraudulent conduct to each defendant as an individual, the allegations should include the misrepresentations themselves with particularity and, where possible, identify the roles of individual defendants in the misrepresentations. Id.

Because qui tam actions under the False Claims Act involve allegations of fraud, they must meet not only the plausibility requirements of Rule 8, but also the particularity requirements of Rule 9(b). United States v. Corinthian Colleges, 655 F.3d 984, 992 (9th Cir. 2011); Cafasso, 637 F.3d at 1055; Bly-Magee, 236 F.3d at 1018. Rule 9(b)'s particularity requirements are wholly consistent with the False Claims Act's purpose to "encourage insiders privy to a fraud on the government to blow the whistle on the crime." Bly-Magee, 236 F.3d at 1019. Such insiders should have adequate knowledge of the wrongdoing to be able to comply with Rule 9(b), thereby giving defendants notice of the particular misconduct alleged to constitute the fraud charged. Id. Further,

Rule 9(b) does not allow a complaint to merely lump multiple defendants together but requires plaintiffs to differentiate their allegations when suing more than one defendant and inform each defendant separately of the allegations surrounding his alleged participation in the fraud. In the context of a fraud suit involving multiple defendants, a plaintiff must, at a minimum, identify the role of each defendant in the alleged fraudulent scheme.

Corinthian Colleges, 655 F.3d at 997-98.

Under Rule 9(b), to plead a claim under the False Claims Act, it is sufficient to allege "particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted." Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010). A plaintiff may, but is not required to, provide representative examples of false claims or payments. Id. Thus,

To survive a Rule 9(b) motion to dismiss, a complaint alleging implied false certification must plead with particularity allegations that provide a reasonable basis to infer that (1) the defendant explicitly undertook to comply with a law, rule or regulation that is implicated in submitting a claim for payment and that (2) claims were submitted (3) even though the defendant was not in compliance with that law, rule or regulation.

Id. at 998.

Although leave to amend should be freely given "when justice so requires, " Fed.R.Civ.P. 15(a)(2), courts should consider five factors: bad faith, undue delay, prejudice to the opposing party, futility of amendment, and whether the plaintiff has previously amended the complaint. Johnson v. Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004). "Futility alone can justify the denial of a motion to amend." Id. Leave to amend should be granted if the complaint's deficiencies can be cured with additional factual allegations that are consistent with and do not contradict allegations in the challenged pleading. Corinthian Colleges, 655 F.3d at 995. Dismissal without leave to amend is proper if the complaint cannot be cured by any amendment. Id. Courts have "especially broad" discretion to deny leave to amend where the plaintiff already has had one or more opportunities to amend a complaint. Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149, 1161 (9th Cir. 1989); Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir. 1989) ("Leave to amend need not be given if a complaint, as amended, is subject to dismissal.").


CUNE and CCNY each contend that the Second Amended Consolidated Complaint (Doc. 88) does not plead claims against either of them with particularity, i.e., it does not give either notice of its particular role in the alleged fraudulent scheme, but rather bundles them with the other defendants. Because CUNE and CCNY join Defendants' Joint Motion to Dismiss Second Amended Consolidated Complaint (Docs. 101, 104), issues they raise that apply to all of the Defendant Institutions will be addressed in the context of Defendants' Joint Motion to Dismiss (Docs. 101, 104).

The Second Amended Consolidated Complaint alleges: "HotChalk is engaged in enrollment activities for CUNE and CCNY under the auspices of the HotChalk-CUP contract. Thus, CUNE and CCNY provide HotChalk with an incentive payment of 75% of the tuition for each student enrolled as a result of the HotChalk Defendants' activities." It alleges that HotChalk's agreement with CUP to receive incentive payments is based on students it has enrolled into CUNE's and CCNY's educational programs. It further alleges that CCNY and CUNE agreed to pay HotChalk, and HotChalk was paid, illegal incentive payments pursuant to contracts between CUP and CCNY and between CUP and CUNE. It alleges that ...

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