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United States v. Community Recovery Resources, Inc.

United States District Court, E.D. California

May 22, 2017

United States of America, State of California and Nevada, Placer and Sierra Counties, ex rel. Vicki L. Miller, Jennifer Bente, Priscilla Frazier, Linda Garcia, Mary M. Graham, Bonnie Hampton, and Tamara Nichols, Plaintiffs and Relators,
v.
Community Recovery Resources, Inc., a California Corporation, Sierra Council on Alcoholism and Drug Dependence, a Merged California Corporation, Ron Abram, Jeremy Ashurst, Pauline Bowman, Doug Carver, Kevin M. Cassidy, Aaron J. Cleveland, M.D., Chuck Coovert, Warren A. Daniels, Sommer Dobbins, Christine Findley, Christina Frye, Toni Gehrman, Jeffery Jones, Jonel Landry, Keith Litke, Debora Martin, Traci J. Peters, Elaine Seidel, Randall Tryon, and Traci Witt, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' SECOND AMENDED COMPLAINT.

          Troy L. Nunley United States District Judge.

         This matter is before the Court on Defendants' motions to dismiss.[1] Defendants Community Recovery Resources, Inc. (“CORR”), Sierra Council on Alcoholism and Drug Dependence (“Sierra Council”), Ron Abram, Keith Litke, Chuck Coovert, Elaine Bailey, Pauline Bowman, Debora Martin, Christina Frye, Christine Findley, Jonel Landry Mullins, Randall Tryon, Kevin M. Cassidy, Aaron J. Cleveland, M.D., Traci Witt, Jeffrey Jones, and Warren A. Daniels moved to dismiss Plaintiffs' Second Amended Complaint (“SAC”) on December 8, 2015.[2] (ECF No. 77.) Defendants Jeremy Ashurst, Doug Carver, Traci J. Peters, Sommer Dobbins, and Toni Gehrman filed a separate motion to dismiss on December 9, 2015. (ECF No. 78.) Plaintiffs opposed Defendants' motions. (ECF Nos. 80 & 81.) The Court has carefully considered the arguments raised by both parties and for the reasons stated below, Defendants' Motions to Dismiss (ECF Nos. 77 & 78) are hereby GRANTED IN PART and DENIED IN PART.

         I. Factual and Procedural Background

         Plaintiffs bring the instant qui tam action against Defendants for knowingly submitting false claims in violation of both the Federal False Claims Act (“FCA”), 31 U.S.C. § 3729(a)(1)(A) and the California False Claims Act (“CFCA”), Cal. Gov. Code § 12651(a)(1); knowingly making a false record to get a false claim approved in violation of both the FCA, 31 U.S.C. § 3729(a)(1)(B) and the CFCA, Cal. Gov. Code § 12651(a)(2); and conspiracy in violation of both the FCA, 31 U.S.C. § 3729(a)(1)(c) and the CFCA, Cal. Gov. Code § 12651(a)(3).[3] (ECF No. 73 at 105-107.) Plaintiffs allege Defendants submitted claims for reimbursement from various government programs in spite of Defendants' noncompliance with the regulations upon which funding was conditioned. (ECF No. 73 at 7.) Specifically, Plaintiffs allege Defendants billed county, state, and federal funding sources for alcohol and other drug (“AOD”) treatment services that were: 1) not provided; 2) falsely documented; 3) provided by non-registered or non-certified staff members; or 4) otherwise failed to comply with applicable rules and regulations. (ECF No. 73 at 5.) Plaintiffs' allegations center on Defendants' conduct beginning in 1998 and continuing until this action commenced on May 21, 2013.

         Defendants CORR and Sierra Council are non-profit organizations that provide AOD services in Nevada, Placer, and Sierra counties. (ECF No. 73 ¶ 2.) Sierra Council merged with CORR in January 2011. (ECF No. 73 ¶ 140.) The other twenty individually named Defendants are past and present employees, directors, or board members of either CORR or Sierra Council. (ECF No. 73 at 48-53.) Plaintiffs worked for CORR or Sierra Council at various times over the period outlined in Plaintiffs' SAC. (ECF No. 73.)

         A. Program Description[4]

         The California Department of Alcohol and Drug Programs (“ADP”) certifies whether substance abuse treatment programs comply with California regulations. (ECF No. 73 ¶ 164.) ADP receives federal funds from the United States Department of Health and Human Services Substance Abuse and Mental Health Services Administration and allocates these funds to approved counties to combat alcohol and drug use problems. (ECF No. 73 ¶ 164.) In addition to the ADP-allocated state funds from Nevada, Placer, and Sierra counties, CORR and Sierra Council receive funding from various other sources including the Center for Medicare and Medicaid and the United States Department of Agriculture. (ECF No. 73 ¶ 6.) As government funded treatment providers, CORR and Sierra Council must comply with all applicable regulations and guidelines to maintain licensure and certification and to be reimbursed for their provision of AOD services. (ECF No. 73 ¶ 165.)

         B. Alleged Violations of Certification and Licensing Requirements

         To provide counseling services in an AOD program, a staff member must be licensed, certified, or registered to become certified pursuant to California Code of Regulations Sections 13010(a) and 13035(f) within six months of hire. (ECF No. 73 ¶ 169.) Furthermore, any staff conducting intake, assessment of need for services, treatment or recovery planning, or counseling in an ADP-licensed program must be certified. (ECF No. 73 ¶ 169.) Title 9 of the California Code of Regulations outlines the requirements for AOD certification. (ECF No. 73 ¶ 170.)

         Plaintiffs allege CORR and Sierra Council routinely directs its employees to provide treatment services beyond the scope of their credentials or without registration or certification. (ECF No. 73 ¶ 178.) Plaintiffs allege that although they were neither licensed nor certified at various times during their employment, supervising employees at CORR and Sierra Council instructed them to perform AOD treatment services in violation of Title 9. (ECF No. 73 ¶¶ 179, 181, 185, 188, 193197, 201.)

         C. Alleged Violations of Medicare and Medicaid Service Guidelines

         The California Medical Assistance program (“Medi-Cal”), California's Medicaid program, provides healthcare services to low-income persons. (ECF No. 73 ¶ 204.) While the Department of Health Care Services administers Medi-Cal, California's ADP certifies Drug Medi-Cal (“DMC”) treatment providers. (ECF No. 73 ¶ 205.) Additionally, ADP oversees reimbursement for AOD treatment services and monitors treatment providers' compliance with Title 9 and 22 of the California Code of Regulations. (ECF No. 73 ¶ 205.)

         Medi-Cal reimbursement to an ADP treatment provider is contingent on the nature of the services rendered. (ECF No. 73 ¶ 207.) DMC providers submit a Claim Submission Certification form for each service entitled to reimbursement, on which providers must certify compliance with all eligibility requirements including: admission, treatment plan, counseling, progress notes, minimum provider and beneficiary contact, necessity for continuing services, discharge, and proof of DMC eligibility. (ECF No. 73 ¶ 208.) To be payable by Medi-Cal, DMC treatment providers must establish that the provision of treatment services was at a minimum “determined [to be] medically necessary” and “prescribed by a physician.” (ECF No. 73 ¶ 208.)

         Plaintiffs allege CORR and Sierra Council billed Medi-Cal for screening, intake, and assessment services performed by non-certified counselors and registrants without supervision. (ECF No. 73 ¶ 210.) Plaintiffs allege CORR billed Medi-Cal for AOD services without establishing that such services were medically necessary. (ECF No. 73 ¶ 222.) Plaintiffs further allege CORR and Sierra Council directed its counseling staff to falsify treatment plan records and submit fraudulent billing statements to Medi-Cal for treatment planning services. (ECF No. 73 ¶ 230.) Plaintiffs allege CORR and Sierra Council billed Medi-Cal for falsified one-on-one counseling sessions or directed its staff to bill Medi-Cal based upon falsified records. (ECF No. 73 ¶ 248.) Plaintiffs allege CORR billed Medi-Cal based upon falsified group counseling documentation for group counseling services. (ECF No. 73 ¶ 287.) Plaintiffs allege CORR billed Medi-Cal for referrals when referrals were not provided or failed to give referrals when required by law. (ECF No. 73 ¶ 322.) Finally, Plaintiffs allege CORR billed Medi-Cal for discharge planning and services which were not provided in compliance with DMC guidelines. (ECF No. 73 ¶ 326.)

         D. Alleged Violations of Residential Licensing Requirements

         CORR and Sierra Council operate residential alcohol and drug abuse treatment facilities that provide 24-hour services to persons recovering from substance abuse. (ECF No. 73 ¶ 332.) California requires a valid ADP-issued license to operate residential treatment facilities. (ECF No. 73 ¶ 329.) To apply for an ADP license, entities seeking to operate residential treatment facilities must comply with state, federal and/or local codes and regulations. (ECF No. 73 ¶ 329.)

         Plaintiffs allege CORR and Sierra Council billed county, state, or federal funding sources for licensed residential treatment and counseling services despite violations of residential licensing requirements. (ECF No. 73 ¶ 332.) Plaintiffs allege AOD counselors and registered recovery workers at Sierra Council's South Placer residential facility distributed medication to residents. (ECF No. 73 ¶ 333.) Plaintiffs allege South Placer staff failed to supervise residents working in the kitchen. (ECF No. 73 ¶ 334.) Plaintiffs further allege CORR obtained its food at local food banks by using residents' food stamps although residents and staff consumed this food collectively. (ECF No. 73 ¶ 336.)

         E. Alleged Violations of Various State and Federal Funding Requirements

         CORR and Sierra Council receive funding from various state and federal sources, including the Substance Abuse Prevention and Treatment (“SAPT”) block grant, the U.S. Department of Agriculture (“USDA”) Community Facility Direct Loan Program, and Substance Abuse and Crime Prevention Act funding. (ECF No. 73 at 93-99.) Each funding source has specific compliance and reimbursement requirements.

         Plaintiffs allege CORR and Sierra Council engaged in the routine practice, management, and operation of their AOD residential and out client treatment facilities in violation of state and federal funding requirements. (ECF No. 73 ¶¶ 337, 342, 345, 348, 351, 358.) Plaintiffs allege Defendants violated SAPT block grant guidelines through their noncompliance with and false certification of the registration and/or certification of its counselors as well as its violations of DMC guidelines in its Mothers in Recovery, Out Client, and Juvenile/Adolescent programs. (ECF No. 73 ¶ 341.) Plaintiffs allege Defendants violated USDA loan guidelines through their noncompliance and false certification of the registration and/or certification of its counselors and violated DMC guidelines in its Out Client program. (ECF No. 73 ¶ 344.) Plaintiffs further allege CORR fraudulently billed Nevada County for counseling services through Nevada County's Deferred Entry of Judgment Program for services provided by non-certified counseling professionals without supervision and for substantive AOD counseling. (ECF No. 73 ¶ 353.)

         II. Standard of Law

         A motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Federal Rule of Civil Procedure 8(a) requires that a pleading contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” See Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). Under notice pleading in federal court, the complaint must “give the defendant fair notice of what the claim . . . is and the grounds upon which it rests.” Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). “This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims.Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002).

         On a motion to dismiss, the factual allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322 (1972). A court is bound to give plaintiff the benefit of every reasonable inference to be drawn from the “well-pleaded” allegations of the complaint. Retail Clerks Int'l Ass'n v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963). A plaintiff need not allege “‘specific facts' beyond those necessary to state his claim and the grounds showing entitlement to relief.” Twombly, 550 U.S. at 570. “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.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. 544, 556 (2007)).

         Nevertheless, a court “need not assume the truth of legal conclusions cast in the form of factual allegations.” United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th Cir. 1986). While Rule 8(a) does not require detailed factual allegations, “it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678. A pleading is insufficient if it offers mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555; see also Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”). Moreover, it is inappropriate to assume that the plaintiff “can prove facts that it has not alleged or that the defendants have violated the . . . laws in ways that have not been alleged[.]” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983).

         Ultimately, a court may not dismiss a complaint in which the plaintiff has alleged “enough facts to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 697 (quoting Twombly, 550 U.S. at 570). Only where a plaintiff fails to “nudge[] [his or her] claims . . . across the line from conceivable to plausible[, ]” is the complaint properly dismissed. Id. at 680. While the plausibility requirement is not akin to a probability requirement, it demands more than “a sheer possibility that a defendant has acted unlawfully.” Id. at 678. This plausibility inquiry is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679.

         In ruling upon a motion to dismiss, the court may consider only the complaint, any exhibits thereto, and matters which may be judicially noticed pursuant to Federal Rule of Evidence 201. See Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988); Isuzu Motors Ltd. v. Consumers Union of United States, Inc., 12 F.Supp.2d 1035, 1042 (C.D. Cal. 1998).

         If a complaint fails to state a plausible claim, “‘[a] district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.'” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (en banc) (quoting Doe v. United States, 58 F.3d 484, 497 (9th Cir. 1995)); see also Gardner v. Marino, 563 F.3d 981, 990 (9th Cir. 2009) (finding no abuse of discretion in denying leave to amend when amendment would be futile). Although a district court should freely give leave to amend when justice so requires under Federal Rule of Civil Procedure 15(a)(2), “the court's discretion to deny such leave is ‘particularly broad' where the plaintiff has previously amended its complaint[.]” Ecological Rights Found. v. Pac. Gas & Elec. Co., 713 F.3d 502, 520 (9th Cir. 2013) (quoting Miller v. Yokohama Tire Corp., 358 F.3d 616, 622 (9th Cir. 2004)).

         III. Analysis

         Plaintiffs allege numerous violations of the federal and state false claims acts.[5] The Federal False Claims Act (“FCA”) allows individuals to bring a false claims action on behalf of the government to prevent fraud against the public treasury resulting in monetary loss. United States v. Neifert-White Co., 390 U.S. 228, 232 (1968). A so-called qui tam action may be brought against anyone who: 1) knowingly presents, or causes to be presented, to the government a false or fraudulent claim for payment or approval; 2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or 3) conspires to defraud the government by getting a false or fraudulent claim allowed or paid. 31 U.S.C. § 3729(a)(1)-(3).

         A civil action for FCA liability requires: 1) a false and fraudulent claim; 2) which was presented or caused to be presented to the government for payment; 3) with knowledge that the claim was false. United States v. Mackby, 261 F.3d 821, 826 (9th Cir. 2001). “Evidence of an actual false claim is the sine qua non of a False Claims Act violation.” United States ex rel. Aflatooni v. Kitsap Physicians Serv., 314 F.3d 995, 1002 (9th Cir. 2002). A claim, for purposes of the FCA, covers both direct requests to the government for payment as well as reimbursement requests made to the recipients of funding under government benefits programs. Universal Health Servs., Inc. v. United States, 136 S.Ct. 1989, 1996 (2016).

         In a quintessential FCA action, “the claim for payment is itself literally false or fraudulent.” U.S. ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1170 (9th Cir. 2006). The FCA, however, incorporates false certification theories of liability as well. Express false certification occurs within the meaning of the FCA when an entity seeking payment certifies compliance with a law, rule, or regulation as part of the process through which the claim for payment is submitted. Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010). Alternately, under the implied certification theory, a knowing failure to disclose a defendant's violation of a material funding requirement may render a claim for payment false or fraudulent and thus actionable under the FCA. See Universal Health Servs., Inc. 136 S.Ct. at 1995.

         Like all allegations of fraud brought in federal court, FCA claims must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). United States ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1051 (9th Cir. 2001). Rule 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud or mistake, ” including “the who, what, when, where, and how of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotation marks omitted). Further, “‘[t]he plaintiff must set forth what is false or misleading about a statement, and why it is false.'” Id. (quoting Decker v. GlenFed, Inc. (In re GlenFed, Inc. Sec. Litig.), 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc)).

         A. Claims Against Defendants Ashurst, Carver, Abram, Coovert, Litke, Bowman, Martin, Finley, Seidel

         Defendants contend Plaintiffs fail to allege actionable wrongdoing on the part of Defendants Abram, Coovert, Litke, Bowman, Martin, Finley, and Seidel (ECF No. 77-1 at 22- 27), and Defendants Ashurst and Carver. (ECF No. 78-1 at 14.) Indeed, Plaintiffs provide no factual allegations as to these Defendants beyond descriptions of their respective roles as past or current board members or officers of Defendants CORR and Sierra Council. (ECF No. 73.) In their objections, Plaintiffs concede that dismissal is appropriate as to these individuals, but remain concerned that the United States may object to the dismissal. (ECF Nos. 80 at 12; 81 at 7.) Defendants assert the named Defendants should be dismissed with prejudice because Plaintiffs have been unable to provide any facts in their SAC upon which individual liability can be based. (ECF Nos. 83 at 2-3; 84 at 2-3.)

         As discovery has not yet occurred, Plaintiffs seek leave to amend without prejudice. (ECF Nos. 80 at 12; 81 at 7.) Federal Rule of Civil Procedure 16 counsels that “leave shall be freely given when justice so requires.” Fed.R.Civ.P. 16. The Court observes that discovery may shed light on actionable conduct by the aforementioned Defendants and finds that justice would best be served by allowing Plaintiffs the opportunity to conduct discovery as to these Defendants. ...


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