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United States v. Wasatch Advantage Group, LLC

United States District Court, E.D. California

July 21, 2017

UNITED STATES OF AMERICA, ex rel. DENIKA TERRY and ROY HUSKEY III, and each of them for themselves individually, and for all other persons similarly situated and on behalf of the UNITED STATES OF AMERICA, Plaintiffs/Relators,
v.
WASATCH ADVANTAGE GROUP, LLC, WASATCH PROPERTY MANAGEMENT, INC., WASATCH POOL HOLDINGS, LLC, CHESAPEAKE COMMONS HOLDINGS, LLC, LOGAN PARK APARTMENTS, LLC; LOGAN PARK APARTMENTS, LP, Defendants.

          ORDER

         In this False Claims Act action, plaintiffs are tenants who receive rental assistance through the federally subsidized Housing Choice Voucher Program commonly known as “Section 8.” They claim defendant lessors improperly charged plaintiffs, as well as the putative class members they seek to represent, for washer and dryer rentals, renter's insurance, and covered parking. Plaintiffs argue these services constitute impermissible rent under the Section 8 contracts and regulations, and defendants therefore violated the Section 8 contracts and submitted false claims for reimbursement under the federal program. Defendants move to dismiss the complaint on the grounds that these services and appliances cannot constitute rent. For the reasons explained below, the court GRANTS defendants' motion in part and DENIES it in part.

         I. BACKGROUND

         A. Procedural Background

         Plaintiffs filed their qui tam complaint on April 14, 2015. Compl., ECF No. 1. After two extensions of the election period, ECF Nos. 6, 10, the United States declined to intervene in June 2016. ECF No. 14. Plaintiffs filed their first amended complaint by stipulation on August 31, 2016. First Am. Compl. (“FAC”), ECF No. 25.

         On September 14, 2016, defendants moved to dismiss plaintiffs' first amended complaint. Mot., ECF No. 26. Plaintiffs oppose the motion, Opp'n, ECF No. 30, and defendants filed a reply, Reply, ECF No. 32. The court held a hearing on December 2, 2016, at which Joseph Salazar and Yoon Nam appeared for defendants; and Chris Beatty appeared for plaintiffs, with Centro Legal de la Raza Litigation Director Jesse Newmark present with plaintiffs' counsel. Hr'g Mins., ECF No. 38. Vincente Tennerelli appeared for the United States, although the United States did not take a position on the instant motion. Id..

         B. Factual Allegations

         Plaintiffs seek to represent a class of past, present and prospective tenants of residential apartments owned, rented, and managed by defendants. FAC ¶¶ 1-2. Defendants' properties include four apartment communities in the Sacramento area (the “Subject Properties”). Id. ¶ 3. And plaintiffs Denika Terry and Roy Huskey III live at two of them. Id. ¶¶ 4 (“Terry Residence”), 5 (“Huskey Residence”). Defendants rent numerous apartments to tenants who receive rental assistance through the federally subsidized Housing Choice Voucher Program, commonly known as “Section 8.” Id. ¶ 6. The Section 8 program provides that participating tenants pay between thirty percent and forty percent of their adjusted monthly income toward rent and utility costs and the federal government and local housing agencies pay the balance of rent directly to the property owner. Id. Across the Subject Properties, there are at least 167 Section 8 tenants. Id. ¶ 7. Defendants were parties to Housing Assistance Payment Contracts (“HAP Contracts”) with plaintiffs and the Sacramento County Housing and Development Agency as part of the Section 8 program. Id. ¶ 8. As part of their usual course of business, defendants demanded additional monthly rental payments from plaintiffs and other Section 8 tenants, in excess of the tenants' portion of the rent due under the HAP Contracts. Id. ¶ 9. These additional payment demands covered rental charges for washers and dryers, renters' insurance and covered parking. Id.

         Plaintiffs' claims rely on the characterization of these additional payments as rent. The HAP Contracts, which are agreements between and among the tenant family, the landlord and the local housing authority, establish the initial lease term and the total amount of monthly rent due from the tenant. Id. ¶¶ 28-31. The sum of the housing assistance payment by the public housing agency and the tenant's share of rent under the HAP Contract is known as the contract rent, which is subject to change in limited circumstances and only after notice is given. Id. ¶¶ 34- 35. The regulations governing rent under a HAP Contract, found at 24 C.F.R. § 982.451, provide in pertinent part, “[t]he owner may not demand or accept any rent payment from the tenant in excess of the maximum and must immediately return any excess rent to the tenant.” Id. ¶ 36 (citing 24 C.F.R. § 982.451(b)(4)(ii)). Similarly, Part C of the Tenancy Addendum to the standard HAP Contract provides: “The owner may not charge or accept, from the family or from any other source, any payment for rent of the unit in addition to the rent to owner.” Id. ¶ 37.

         Plaintiffs allege defendants repeatedly demanded payment of additional rent payments, or “side payments, ” all in violation of the HAP Contracts and without authorization of the local housing agency or HUD. Id. ¶¶ 47, 66-70, 85-89. Defendants' demand for “side payments” included payment for washer and dryer rentals, renter's insurance, and covered parking. Id. ¶¶ 66, 85. As an example, defendants' Resident Ledger for the Terry Residence for the month of January 2012 reflects a monthly charge of $40 for “Washer/Dryer Rental, ” $17.91 for “Renter's Insurance” and $10 for “Covered Parking Charges.” Id. Ex. B. Similarly, defendants' Resident Ledger for the Huskey Residence for the month of January 2012 reflects a monthly charge of $50 for “Washer/Dryer Rental” and $17.91 for “Renter's Insurance.” Id. Ex. F. Plaintiffs periodically entered into several Residential Rental Agreements, each of which included an Additional Services Agreement that addressed these additional charges. Id. ¶ 110; id. Exs. G, H, I (Terry Agreements); id. Exs. J, K (Huskey Agreements). In order to enforce additional rent payment requirements, defendants threatened Terry and Huskey each with eviction for nonpayment of the “side payments.” FAC ¶¶ 71, 90. Defendants ultimately filed an eviction action against Terry for not making the unlawfully demanded “side payments.” Id. ¶ 72.

         On the basis of these allegations, plaintiffs bring four claims against all defendants: (1) violation of the Federal False Claims Act, 31 U.S.C. § 3729(a), for “knowingly present[ing] a false or fraudulent claim for payment or approval” to the United States, id. ¶¶ 112- 26; (2) Breach of Contract, Cal. Civ. Code §§ 3300 et seq., for breaching the terms of the HAP Contracts that prohibit the charging of additional rent payments, id. ¶¶ 127-33; (3) violation of the Consumer Legal Remedies Act, Cal. Civ. Code § 1750, for engaging in deceptive practices in connection with the conduct of a business providing services, id. ¶¶ 134-45; and (4) Unfair Business Practices, Cal. Bus. & Prof. Code §§ 17200 et seq., for engaging in “unfair competition, ” including any “unlawful, unfair, or fraudulent business act or practice, ” id. ¶¶ 146- 60. Plaintiffs seek damages, injunctive and other equitable relief. Id. ¶¶ 39, 162.

         C. Defendants' Motion

         Defendants argue plaintiffs improperly characterize charges for washer and dryer rentals, renter's insurance and covered parking as “side payments.” Mot. 2. Defendants insist that plaintiffs repeatedly bargained for, and separately agreed to, these amenities and services. Id. at 5. As a result, they say, each of plaintiffs' claims must fail: the charges are not fraudulent (Claim 1); are consistent with the underlying HAP contracts (Claim 2); lead to no cognizable injury under the Consumer Legal Remedies Act (Claim 3); and cannot constitute an “unlawful, unfair, or fraudulent” business practice under state law (Claim 4). Id. at 6-8. The class allegations, which rely on the same underlying claims, must also necessarily fail. Id. at 7.

         In response, plaintiffs argue that the pleadings are sufficient, both as a matter of fact and as a matter of law, to characterize the additional payments as rent. See generally Opp'n. Specifically, plaintiffs argue the additional charges were mandatory and not optional service charges, pointing to their allegations that the charges were recorded by defendants in their rent ledgers and, when unpaid, were used as a basis for eviction. Id. at 2. As a matter of law, plaintiffs argue, the additional charges constitute illegal rent, regardless of whether the services were optional, because the additional charges were part of the total expense for tenants' use of the rented premises; the charges were for appliances not listed in the Section 8 contracts; defendants threatened plaintiffs and other Section 8 tenants with eviction if they failed to pay these charges; and he charges were for items customarily included in rent in the surrounding locality. Id. ...


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