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Hamilton v. Yavapai Community College District

United States District Court, D. Arizona

December 6, 2016

Daniel Hamilton, Plaintiff,
Yavapai Community College District, et al., Defendants.


          Honorable G. Murray Snow United States District Judge.

         Pending before the Court is Defendant North-Aire, LLC ("North-Aire"), Justin Scott ("Scott") and Angela Scott's Motion to Dismiss (Doc. 49). For the following reasons, the Motion is granted in part and denied in part.


         Plaintiff-Relator Hamilton's Complaint alleges that Defendants North-Aire and Scott violated the False Claims Act ("FCA") by knowingly assisting Yavapai College ("Yavapai") to submit false claims to the Department of Veteran's Affairs ("VA"). (Doc. 1.) Defendant North-Aire is managed by Defendant Scott. (Doc. 1 at 3.)

         In October of 2011, North-Aire entered into an agreement with Yavapai to offer an Associate of Applied Science ("AAS") degree for airplane operations. (Doc. 1 at 6.) Under the agreement, North-Aire provided the flight course component of the airplane program ("PPA") while Yavapai offered all of the ground training. (Doc. 1 at 7.) North-Aire would then invoice Yavapai for the costs of the flight course, and Yavapai would submit these invoices to the VA. (Doc. 1 at 14.) The result of this system was that North-Aire was reimbursed by funds Yavapai received from the VA. (Doc. 1 at 11.)

         To receive education benefit funding from the VA, Yavapai and North-Aire had to comply with Regulation 4201, or the “85/15 Rule.” 38 C.F.R. § 21.4201(f)(2)(i). Regulation 4201 requires that no more than 85% of students enrolled in a specific course of study be supported by the VA or by the institution at any given time. 38 C.F.R. § 21.4201(a). The institution is responsible for reporting these numbers accurately to the VA. 38 C.F.R. § 21.4201(f). A separate 85/15 calculation is required anytime a course varies in a material way from another, such as through degree requirements, length, or course objectives. 38 C.F.R.§ 21.4201(e).

         Plaintiff-Relator Hamilton is a former employee of Yavapai. He asserts that “[f]rom the inception of the Airplane Program in spring 2012, ” North-Aire never complied with the 85/15 Rule. (Doc. 1 at 11-12.) Instead, he alleges that the Defendants conspired with Yavapai to knowingly count students as non-supported who were not eligible for that status. (Doc. 1 at 12.)

         According to the Complaint, there were several tactics employed by the Defendants to accomplish this. First, Hamilton asserts that beginning in spring 2012, the Defendants allegedly included students that were not admitted to the program, part-time students, students receiving financial aid from the institution, and students that were not currently taking flight courses as “non-supported” students for their calculations. (Doc. 1 at 14.) Additionally, Hamilton alleges that North-Aire paid for certain civilian students' tuition, but never veterans. (Doc. 1 at 35.) North-Aire also participated in a scholarship program with Yavapai to donate 1, 000 dollars for every North-Aire student that graduated. (Doc. 1 at 36.) However, this scholarship program never benefited a single veteran, and was allegedly targeted at only providing support for students that would later be classified as “non-supported” for the purposes of the 85/15 calculation. (Doc. 1 at 36.)

         Hamilton's Complaint also asserts that Yavapai, with North-Aire's knowledge, created a combined AVT program in summer 2013 to mislead the VA into believing that its four independent flight programs were a single program under the 85/15 Rule. (Doc. 1 at 37.) On July 30, 2012, a meeting was held where Morgan, an executive for Yavapai, voiced concern over creating the combined AVT program because he was unsure how the “VA would analyze the combined degree for 85/15 compliance.” (Id.) Defendant Scott was present at this meeting. (Id.) Despite this uncertainty, the Defendants participated in the combined degree program beginning in summer 2013. (Id.)

         Additionally, beginning in fall 2013 Defendants “knowingly counted ineligible non-airplane flight majors as non-supported students in 85/15 compliance calculations.” (Doc. 1 at 38.) These included high school students that were part of a Joint Technology Education District (“JTED”) program. JTED students had different degree requirements from those in the AAS Airplane Program. (Doc. 1 at 39.) These differences led Ms. Jarrell, a Yavapai employee, to inform Yavapai and North-Aire representatives that “there is a statute stating [the programs] can't count the JTED students as civilians.” (Doc. 39.) Despite uncertainty regarding the legality of the program, North-Aire started to include JTED students as non-supported students in their 85/15 compliance calculations in fall 2013. (Id.)

         Hamilton asserts that each of these endeavors constitutes a violation of the False Claims Act, and that the Defendants failure to repay the federal government for funds it received during this time period violates the reverse FCA provision. The Defendants now bring a Motion to Dismiss under Rule 12(b)(6) due to the Complaint's perceived failure to allege the requisite scienter for a violation of the FCA. Therefore, at issue here is whether Relator Hamilton adequately alleged the requisite scienter against the current Defendants.


         I. Legal Standard

         To survive dismissal for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint must contain more than''labels and conclusions'' or a''formulaic recitation of the elements of a cause of action''; it must contain factual allegations sufficient to ''raise a right to relief above the speculative level.'' Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). While ''a complaint need not contain detailed factual allegations . . . it must plead 'enough facts to state a claim to relief that is plausible on its face.''' Clemens v. DaimlerChrysler Corp., 534 F.3d 1017, 1022 (9th Cir. 2008) (quoting Twombly, 550 U.S. at 570). AA 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.'' Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). The plausibility standard ''asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief.''' Id. (quoting Twombly, 550 U.S. at 555) (internal citations omitted).

         When analyzing a complaint for failure to state a claim under Rule 12(b)(6), A[a]ll allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.'' Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). However, legal conclusions couched as factual allegations are not given a presumption of truthfulness, and ''conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.'' Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).

         Because the FCA targets falsity, the heightened pleading standard of Rule 9(b) applies to FCA claims. Cafasso, United States ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 2011). Rule 9(b) requires that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9. This requires the party to establish “the who, what, when, where, and how of the misconduct charged, as well as what is false or misleading about [the purportedly fraudulent] statement, and why it is false.” Cafasso, 637 F.3d at 1055 (internal citations and quotations omitted). Rule 9(b) does provide that “malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b). However, qui tam claims arising under the FCA must allege sufficient facts illustrating that the defendant's scienter went beyond “innocent mistakes, mere negligent misrepresentations, and differences in interpretations.” U.S. v. Corinthian Colls., 655 F.3d 984, 996 (internal citations and quotations omitted).

         II. The False Claims Act and the 85/15 Rule

         The FCA imposes liability on any individual that knowingly defrauds the federal government. 31 U.S.C. § 3729. Section 3730(b) of the FCA empowers individuals to “file suit on behalf of the United States seeking damages from persons who file false claims for government funds.” Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1041 (9th Cir. 2012). To establish a claim under the FCA, a plaintiff must establish that the defendant acted knowingly. The FCA defines the terms “knowingly” and “knowing”:

(A) that a person, with respect to information-
(i) has actual knowledge of the information;
(ii) acts in deliberate ignorance of the truth or falsity of the ...

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