United States District Court, D. Utah
UNITED STATES OF AMERICA ex rel. KATIE BROOKS and NANNETTE WRIDE, Plaintiffs,
STEVENS-HENAGER COLLEGE, et al., Defendants.
MEMORANDUM DECISION AND ORDER
N. Parrish United States District Court Judge.
a qui tam action. Relators Katie Brooks and Nannette
Wride filed this case in January 2013 seeking relief under
the False Claims Act. They allege that Defendants
Stevens-Henager College, Inc.; California College San Diego,
Inc.; CollegeAmerica Denver, Inc.; CollegeAmerica Arizona,
Inc.; the Center for Excellence in Higher Education
(“CEHE”); and Carl Barney (collectively, the
“Colleges”) submitted, or caused to be submitted,
“false or fraudulent” claims for federal
financial aid. In April 2014, the Government intervened with
respect to certain allegations against two of the defendants:
Stevens-Henager and its apparent successor in interest, CEHE.
parties engaged in extensive motion practice, and Relators
amended their complaint three times. On March 30, 2016, the
court issued a memorandum decision and order (the
“Prior Order”). In it, the court limited Relators
and the Government (collectively, “Plaintiffs”)
to the legal theory that the Colleges knowingly made false
statements, either express or implied, when entering into
Program Participation Agreements with the Department of
Education. Relators, the Government, and the Colleges have
all asked the court to reconsider the Prior Order based on
the Supreme Court's ruling in Universal Health
Services, Inc. v. United States ex rel. Escobar, 136
S.Ct. 1989 (2016).
LEGAL AND FACTUAL BACKGROUND
Title IV of the Higher Education Act, the Government
“operates a number of programs that disburse funds to
help students defray the costs of higher education.”
Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1043
(11th Cir. 2015) (citing 20 U.S.C. §§ 1070-1099d).
“These programs include the Federal Pell Grant, the
Federal Family Educational Loan Program, the William D. Ford
Federal Direct Loan Program, and the Federal Perkins
Loan.” Id. (citing 20 U.S.C. §§
1070a, 1071-1087, 1087a-1087j, 1087aa-1087ii). Title IV funds
are available only to those students who attend
“eligible” institutions. Id.
become an eligible institution, a school must enter into a
Program Participation Agreement (“PPA”) with the
Department of Education. 20 U.S.C. § 1094(a); 34 C.F.R
§ 668.14(a)(1). Each PPA provides that “[t]he
execution of this Agreement by the Institution and the
Secretary is a prerequisite to the Institution's initial
or continued participation in any Title IV . . .
program.” Third Am. Compl., Ex. 1 at 1. Each PPA also
provides that a school's participation in Title IV is
“subject to the terms and conditions set forth in this
Agreement.” Id. When signing a PPA, a school
promises to comply with all federal statutes applicable to
Title IV and all regulations promulgated thereunder:
“The Institution understands and agrees that it is
subject to and will comply with the program statutes and
implementing regulations for institutional eligibility as set
forth in 34 CFR Part 600 and for each Title IV . . . program
in which it participates . . . .” Id., Ex. 1
The Incentive Compensation Ban
eligible to receive Title IV funds, a school must agree to
comply with the Incentive Compensation Ban (the
“ICB”). The ICB prohibits schools from
“provid[ing] any commission, bonus, or other incentive
payment based directly or indirectly on success in securing
enrollments or financial aid to any persons or entities
engaged in any student recruiting or admission activities or
in making decisions regarding the award of student financial
assistance.” § 1094(a)(20). Each PPA expressly
entering into this [PPA], the Institution agrees that:
. . .
(22) It will not provide, nor contract with any entity that
provides, any commission, bonus, or other incentive payment
based directly or indirectly on success in securing
enrollments or financial aid to any person or entities
engaged in any student recruiting or admission activities or
in making decisions regarding the awarding of student
financial assistance . . . .
Third Am. Compl., Ex. 1 at 4-6.
The 90/10 Rule
schools that execute a PPA agree to comply with what is known
as the 90/10 Rule. § 1094(a)(24). Under this rule, a
proprietary school must derive more than ten percent of its
revenue from sources other than Title IV programs. §
1094(a)(24). A proprietary school loses eligibility for Title
IV programs if it violates the 90/10 Rule for “two
consecutive institutional years.” § 1094(d)(2)(A);
34 C.F.R. § 668.28(c)(1). If a proprietary school
violates the 90/10 Rule for any fiscal year, it
“becomes provisionally certified . . . for the two
fiscal years after the fiscal year it failed to satisfy the
[90/10 Rule].” § 668.28(c)(2).
Record Keeping Requirements
that participate in Title IV programs must track and report
student attendance. In each PPA, a school agrees to
“establish and maintain such administrative and fiscal
procedures and records as may be necessary to ensure proper
and efficient administration of funds.” Third Am.
Compl., Ex. 1 at 4; 20 U.S.C. § 1094(a)(3). If a student
enrolls but fails to attend class, the school must return the
funds received for that student to the Department of
Education within a specified period of time. 20 U.S.C. §
1091b; 34 C.F.R. § 668.21(a), (c). Similarly, if a
student enrolls and attends some classes but then stops
attending, the school must calculate the funds that the
student earned and refund to the Department of Education any
unearned funds. § 668.22(a)(1) (schools are obligated to
“determine the amount of title IV grant or loan
assistance that the student earned as of the student's
withdrawal date”); § 668.22(a)(4) (the
“difference between these amounts must be returned to
the title IV programs”); see also 20 U.S.C.
§ 1091b; 34 C.F.R. § 668.22(b), (g), (i).
Satisfactory Academic Progress
that participate in Title IV programs must create and enforce
reasonable standards of academic progress. Under the
applicable regulations, “[a]n institution must
establish a reasonable satisfactory academic progress policy
for determining whether an otherwise eligible student is
making satisfactory academic progress in his or her
educational program and may receive assistance under the
title IV . . . programs.” § 668.34(a); see
also 20 U.S.C. § 1091(a)(2) (requiring students to
make “satisfactory progress”); § 1091(c)
(defining “satisfactory progress”).
participate in Title IV programs, schools must “meet
the requirements established by . . . accrediting agencies or
associations.” 20 U.S.C. § 1094(a)(21). In each
PPA, a school expressly agrees that it “will meet the
requirements established pursuant to part H of Title IV of
the HEA by . . . nationally recognized accrediting
agencies.” Third Am. Compl., Ex. 1 at 6.
Third Amended Complaint (“Realtors'
complaint”) spans 160 pages and includes over 130 pages
of factual allegations. In brief, Relators allege that the
Colleges ran afoul of various Title IV requirements.
According to Relators, the Colleges made false statements to
the Department of Education in, among other things, PPAs.
These false statements allegedly induced the Department of
Education to make the Colleges eligible for Title IV
programs. The Colleges' requests for Title IV funds were
allegedly “false or fraudulent” because the
Colleges fraudulently induced the Department of Education to
allow the Colleges to participate in Title IV programs.
The Colleges and Mr. Barney
Colleges, other than CEHE, operated for-profit postsecondary
educational schools throughout the western United States.
Id. ¶ 19. Mr. Barney allegedly signed PPAs on
behalf of the Colleges at various times, including one in
2001 for Stevens-Henager. Id. ¶ 273. The
Colleges derived a substantial portion of their revenue from
Title IV programs. Id. ¶ 20. On or about
December 31, 2012, the Colleges merged into CEHE, an Indiana
nonprofit corporation. Id. ¶ 19. Before the
merger, all of the Colleges, other than CEHE, were privately
owned by Mr. Barney. Id. ¶ 21. Mr. Barney is
the chairman of CEHE and the sole statutory member of CEHE.
Relators Katie Brooks and Nanette Wride
Brooks began working at Stevens-Henager as an admissions
consultant in March 2009. Id. ¶ 179. Her base
salary was $38, 000 per year when she started, but it was
increased to $42, 000 per year in September 2009.
Id. ¶ 180 & n.6. Ms. Brooks allegedly
received significant bonuses based on the number of students
she enrolled in Stevens-Henager. Id. ¶ 180. For
instance, in 2010, Ms. Brooks allegedly received bonuses (net
of taxes and withholding) of approximately $31, 450.
Id. ¶ 190. Ms. Brooks stopped working at
Stevens-Henager around March 2011. Id. ¶ 211.
Wride began working at Stevens-Henager as an admissions
consultant in July 2009. Id. ¶ 212. She was
paid a base salary of approximately $33, 000 per year when
she first started, which was later increased to $37, 000 per
year. Id. ¶ 228. She too was allegedly paid
significant bonuses based on the number of students she
enrolled in Stevens-Henager. Id. For instance, Ms.
Wride allegedly received four or five bonuses ranging from
$1, 200 to $4, 000 based on her success in enrolling students
at Stevens-Henager. Id. Ms. Wride stopped working at
Stevens-Henager on June 6, 2011. Id. ¶ 382.
Alleged Violations of the ICB
Colleges, according to Relators, violated the ICB from
“at least July 1, 2002” to at least 2011.
Id. ¶ 138. Specifically, Relators allege that
the Colleges' compensation plan, as detailed in the 2007
version of Procedure Directive 85R, violated the ICB.
Id. ¶ 176. Admissions consultants, under the
terms of the plan, received bonuses if they satisfied three
requirements: first, the admissions consultant
recruited a student who completed thirty-six credit units
(the equivalent of one year of study); second, the
admissions consultant recruited at least five new students
within a three-month period; and third, the
admissions consultant maintained at least a thirty-three
percent “conversion ratio” over the
three-month period. Id. ¶ 182. According to
Relators, the Colleges' written compensation plan, which
purportedly relied on regulatory safe harbors, was drafted to
disguise ICB violations. Id. ¶¶ 165, 178.
Relators also allege that, during their time at
Stevens-Henager, the director of admissions offered
“prizes” to admissions consultants who achieved a
certain number of enrollments. Id. ¶ 195. These
prizes consisted of vacations, cash payments, movie tickets,
and consumer electronic products, such as televisions and
iPads. Id. ¶¶ 196-200, 233.
Alleged Violations of the 90/10 Rule
allege that the Colleges have attempted to disguise
violations of the 90/10 Rule. Id. ¶ 313.
Relators rely on three allegations to show that the Colleges
violated the 90/10 Rule. First, Relators allege that
the Colleges used a “scheme” involving textbooks
to inflate their revenue from non-governmental sources.
Id. ¶ 314. Relators “believe and
allege” that the Colleges used this
“scheme” because, on approximately April 25,
2012, the Colleges' chief operating officer told
employees at a CollegeAmerica campus that she did not want
accreditors to see a book room that might “raise
questions” about compliance with the 90/10 Rule.
Id. ¶ 315. Second, Relators allege
that, in early 2014, employees at Stevens-Henager altered
files to show that Stevens-Henager students attended
CollegeAmerica Arizona. Id. ¶ 317. According to
Relators, this was done to make CollegeAmerica Arizona's
“statistics appear better than they actually
were” for purposes of the 90/10 Rule. Id.
Third, Relators allege that the Colleges are attempting
to achieve not-for-profit status so that they are exempt from
the 90/10 Rule. Id. ¶ 318.
Violations of Refund Requirement
allege that the faculty and administrative personnel at
Stevens-Henager falsified attendance records to delay
students' withdrawal dates, thereby decreasing the amount
of Title IV funds that the Colleges were required to return
to the Department of Education. Id. ¶ 329.
Specifically, “faculty and administrative officials
would alter attendance reports to show that certain students
had attended classes when the students had not actually done
so.” Id. ¶ 320. For instance, one
professor “recorded a student as having perfect
attendance even though the student had given birth during the
module in a different part of the state and had not been to
the campus since that time.” Id. ¶ 321.
Ms. Brooks and Ms. Wride were aware of these practices during
their time at Stevens-Henager. Id. ¶ 319.
at CollegeAmerica allegedly reported similar misconduct.
Id. ¶ 327. For instance, Relators allege that
one CollegeAmerica employee testified that the school
“could change the last day of attendance without [the
student] even knowing it.” Id. ¶ 328.
Relators also allege that the associate dean at
CollegeAmerica Denver would hold a “Last Day
Attended” meeting each year where the deans would reach
out to students who had stopped attending and encourage them
to log on to their account so the school would not have to
count them as “dropped.” Id. ¶ 327.
Satisfactory Academic Progress
allege that the faculty and administrators at Stevens-Henager
falsified grades to show that students were achieving
satisfactory academic progress when, in reality, they were
not. Id. ¶ 330. According to Realtors, faculty
would also employ grading standards that guaranteed passing
grades. Id. Ms. Brooks and Ms. Wride were aware of
these practices during their time at Stevens-Henager.
Id. Relators allege that CollegeAmerica Denver
engaged in similar conduct between July 2010 and March 2011.
Id. ¶ 342. Specifically, students were allowed
to pass a class with a D- or better even though
“faculty members . . . expected students to achieve a
grade of at least C to pass.” Id.
allege that faculty at Stevens-Henager lacked the
qualifications that were required by the school's
accreditor. Id. ¶ 363. Specifically, Ms. Wride
discovered that many faculty members did not meet the minimum
qualifications to teach the courses they were assigned.
Id. For instance, Ms. Wride discovered that one
professor did not have the requisite work experience to teach
the courses he was assigned to teach. Id. ¶
364. Relators allege that Stevens-Henager circumvented
accreditation requirements by assigning qualified teachers to
certain courses but then substituting unqualified teachers in
their place. Id. ¶ 402.
The Government's Complaint
Government intervened with respect to the claims brought
against Stevens-Henager based on alleged violations of the
ICB. The Government's Complaint in Intervention (the
“Government's complaint”) alleges that
Stevens-Henager's compensation plan violated the ICB from
approximately 2000 to at least July 1, 2011. Gov't Compl.
Intervention (“GCI”) ¶¶ 72,
88.During this time, Stevens-Henager promised
in a 2007 PPA and a 2010 PPA that it would not
“provide, nor contract with any entity that provides,
any commission, bonus, or other incentive payment based
directly or indirectly on success in securing enrollments or
financial aid to any person or entities engaged in any
student recruiting or admission activities or in making
decisions regarding the awarding of student financial
assistance.” GCI ¶ 63. Both promises were
allegedly false when made because Stevens-Henager knew that
it was violating and would continue to violate the ICB. GCI
¶ 99. According to the Government, Stevens-Henager's
promises to comply with the ICB were “material to the
Department of Education's decision to make
Stevens-Henager eligible for [Title IV] programs.” GCI
¶ 106, 111.
Prior Order, the court limited Plaintiffs to the legal theory
that the Colleges knowingly made false statements, either
express or implied, when entering into PPAs with the
Department of Education. In reaching this conclusion, the
court relied on the now-discredited “condition of
participation versus condition of payment” test, which
was articulated by the Tenth Circuit in United States ex
rel. Conner v. Salina Regional Health Center, Inc., 543
F.3d 1211 (10th Cir. 2008). About three months after the
court issued the Prior Order, the Supreme Court issued its
decision in Universal Health Services, Inc. v. United
States ex rel. Escobar, 136 S.Ct. 1989 (2016). In it,
the Supreme Court expressly rejected the “condition of
participation versus condition of payment” test upon
which this court had relied.
after the Supreme Court decided Escobar, the parties
requested that the court stay all deadlines while they
attempted to mediate the case. The court did so. After about
five months of unsuccessful mediation, the parties requested
that the court lift the stay. The court lifted the stay on
November 16, 2016, and on December 7, 2016, the Colleges
filed a motion for reconsideration, arguing that all claims
under the False Claims Act should be dismissed in light of
the Supreme Court's decision in Escobar.
November 15, 2017, at a hearing on the Colleges' motion
for reconsideration, the court raised concerns that it had
impermissibly limited Plaintiffs' claims, in light of
Escobar. The court inquired of Plaintiffs why they
had not sought reconsideration of the Prior Order. Plaintiffs
stated that they believed that the Prior Order was erroneous
in light of Escobar, but offered various reasons as
to why they had not sought reconsideration.
after the hearing, Relators filed a motion for
reconsideration, arguing that the court had impermissibly
narrowed their claims in the Prior Order. Relators stated
that they had been instructed by the Government, in January
2017, not to seek reconsideration. The Government followed
suit shortly thereafter and filed a similar motion seeking
reconsideration, explaining that it had not promptly sought
reconsideration for strategic reasons. Both motions were
fully briefed, and the court entertained oral argument on
March 15, 2018.
Requirements for Reconsideration
for seeking reconsideration include “(1) an intervening
change in the controlling law, (2) new evidence previously
unavailable, and (3) the need to correct clear error or
prevent manifest injustice.” Servants of Paraclete
v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000). Moreover,
a motion for reconsideration is appropriate where the court
has misapprehended the facts, a party's position, or the
controlling law. Id. But a motion for
reconsideration is an inappropriate vehicle to “reargue
an issue previously addressed by the court when the motion
merely advances new arguments.” Id.
reconsideration is appropriate because there has been an
intervening change in the law, namely the Supreme Court's
decision in Escobar. The parties agree that
Escobar has effected an intervening change in the
law, but they disagree on what it means for this case. The
court agrees that Escobar has effected an
intervening change in the law and therefore concludes that
reconsideration is appropriate. See Rose v. Stephens
Inst., No. 09-cv-05966-PJH, 2016 WL 5076214, at *3 (N.D.
Cal. Sept. 20, 2016) (“Escobar articulated a
materiality standard under the [False Claims Act] that, at
least potentially, undermines the existing Ninth Circuit law
on the issue.”).
Prior Order, the court also conflated two related but
distinct theories used to show that claims are “false
or fraudulent”: (1) false certification (either express
or implied); and (2) promissory fraud. After review of the
Prior Order, the court concludes that portions of its ruling
relating to the claims against the Colleges are erroneous.
The court therefore vacates the Prior Order as it relates to
the Prior Order addressed motions to dismiss, the court
analyzes the issues presented by the pending motions under
the Rule 12(b)(6) standard. That is, the court must determine
whether Plaintiffs have stated claims for relief under the
False Claims Act. A complaint must contain “a short and
plain statement of the claim showing that the pleader is
entitled to relief.” Fed.R.Civ.P. 8(a)(2). “Each
allegation must be simple, concise, and direct.”
Fed.R.Civ.P. 8(d)(1). This standard “does not require
‘detailed factual allegations, ' but it demands
more than an unadorned, the defendant-unlawfully-harmed-me
accusation.” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (citing Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007)).
the allegations are merely “label and
conclusions” or a “formulaic recitation of the
elements of a cause of action, ” the plaintiff's
claim will not survive a motion to dismiss. Twombly,
550 U.S. at 555. For the claim to survive, the
plaintiff's allegations “must contain sufficient
factual matter, accepted as true, to ‘state a claim to
relief that is plausible on its face.'”
Iqbal, 556 U.S. at 678 (quoting Twombly,
550 U.S. at 570). Plausibility, in this context, means that
the plaintiff has alleged facts that allow “the court
to draw [a] reasonable inference that the defendant is liable
for the alleged misconduct.” Iqbal, 556 U.S.
at 678. Factual allegations that are “‘merely
consistent with' a defendant's liability, ”
however, are not facially plausible. Id. (quoting
Twombly, 550 U.S. at 557).
multiple defendants are involved, “[i]t is particularly
important . . . that the complaint make clear exactly
who is alleged to have done what to
whom, to provide each individual with fair notice as
to the basis of the claims against him or her.”
Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210,
1215 (10th Cir. 2011) (quoting Robbins v. Okla. ex rel.
Dep't of Human Servs., 519 F.3d 1242, 1250 (10th
Cir. 2008)); see also Bulanda v. A.W. Chesterton
Co., No. 11 C 1682, 2011 WL 2214010, at *2 (N.D. Ill.
June 7, 2011) (dismissing complaint that made a number of
generic allegations as to the defendants collectively);
Boykin Anchor Co. v. AT&T Corp., No.
5:10-CV-591-FL, 2011 WL 1456388, at *4 (E.D. N.C. Apr. 14,
2011) (“Plaintiff's attempt to treat all defendants
as one ‘corporate family' for purposes of this
lawsuit is unfounded.”). “The law recognizes a
difference between notice pleading and ‘shotgun'
pleading.” Glenn v. First Nat'l Bank in Grand
Junction, 868 F.2d 368, 371 (10th Cir. 1989). As such,
“[i]t is not the role of the court to sort through a
lengthy complaint to construct the plaintiff's
case.” Chavez v. Huerfano Cnty., 195 F.
App'x 728, 730 (10th Cir. 2006).
alleging violations of the False Claims Act must also comply
with Rule 9(b)'s heightened pleading requirement.
United States ex rel. Lemmon v. Enviocare of Utah,
Inc., 614 F.3d 1163, 1171 (10th Cir. 2010). Under Rule
9(b), a party must “state with particularity the
circumstances constituting fraud.” The purpose of this
rule is to afford defendants fair notice of the
plaintiff's claims and the factual grounds upon which
they are based. Lemmon, 614 F.3d at 1172. To comply
with Rule 9(b), a plaintiff seeking relief under the False
Claims Act must allege the who, what, when, where, and how of
the alleged fraud. Id. at 1171. In short, the
plaintiff must “show the specifics of [the] fraudulent
scheme and provide an adequate basis for a reasonable
inference that false claims were submitted as part of that
scheme.” Id. at 1172.
The False Claims Act
False Claims Act imposes liability on any person who:
(A) knowingly presents, or causes to be presented, a false or
fraudulent claim for payment or approval; [or]
(B) knowingly makes, uses, or causes to be made or used, a
false record or statement material to a false or fraudulent
claim . . . .
31 U.S.C. § 3729(a)(1)(A), (B) (2009). A claim under
§ 3729(a)(1)(A) has three elements: (1) the defendant
submits a claim for payment to the Government; (2) the claim
is false; and (3) the defendant knows the claim is false.
Similarly, a claim under § 3729(a)(1)(B) has three
elements: (1) the defendant makes a false statement; (2) the
defendant acts knowing that the statement is false; and (3)
the false statement is material to a false claim for payment.
“Claim, ” as it is used in the False Claims Act,
means, among other things, ...