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United States v. Stevens-Henager College

United States District Court, D. Utah

March 30, 2018

UNITED STATES OF AMERICA ex rel. KATIE BROOKS and NANNETTE WRIDE, Plaintiffs,
v.
STEVENS-HENAGER COLLEGE, et al., Defendants.

          MEMORANDUM DECISION AND ORDER

          Jill N. Parrish United States District Court Judge.

         I. INTRODUCTION

         This is 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.

         The 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).

         II. LEGAL AND FACTUAL BACKGROUND

         A. Title IV

         Under 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.

         To 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 at 3.

         1. The Incentive Compensation Ban

         To be 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 provides:

         By 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.

         2. The 90/10 Rule

         Proprietary 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).

         3. Record Keeping Requirements

         Schools 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).

         4. Satisfactory Academic Progress

         Schools 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”).

         5. Accreditation Standards

         To 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.

         B. Relators' Complaint

         Relators' 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.

         1. The Colleges and Mr. Barney

         The 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. Id.

         2. Relators Katie Brooks and Nanette Wride

         Ms. 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.

         Mr. 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.

         3. Alleged Violations of the ICB

         The 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”[1] 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.

         4. Alleged Violations of the 90/10 Rule

         Relators 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.

         5. Violations of Refund Requirement

         Relators 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.

         Employees 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.

         6. Satisfactory Academic Progress

         Relators 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.

         7. Accrediting Standards

         Relators 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.

         C. The Government's Complaint

         The 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.[2]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.

         D. Procedural Background

         In the 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.

         Shortly 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.

         On 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.

         The day 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.

         III. DISCUSSION

         A. Requirements for Reconsideration

         Grounds 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.

         Here, 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.”).[3]

         In the 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 these claims.[4]

         B. Motion Standard

         Because 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)).

         Where 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).

         Where 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).

         A party 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.

         C. The False Claims Act

         The 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).[5] 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, ...


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