U.S. ex rel. Branch Consultants v. Allstate Ins.

668 F.Supp.2d 780

UNITED STATES of America ex rel. BRANCH CONSULTANTS, L.L.C. v. ALLSTATE INSURANCE CO., et al.

Civil Action No. 06-4091.

United States District Court, E.D. Louisiana.

October 19, 2009.

Order Denying Leave to Appeal December 22, 2009.

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Allan Kanner, Cynthia Green St. Amant, Kanner & Whiteley, L.L.C, New Orleans, LA, Jonathan Bridges, Susman Godfrey, LLP, Dallas, TX, Tibor L. Nagy, Susman Godfrey, LLP, New York, NY, for Plaintiff.

Stacey H. Dore', Attorney at Law, Lafayette, LA, Russell R. Yager, Vinson & Elkins, LLP, Dallas, TX, Jay M. Lonero, Angie Arceneaux Akers, Christopher Raymond Pennison, Larzelere, Picou, Wells, Simpson, Lonero, LLC, Metairie, LA, James C. Rather, Jr., McCranie, Sistrunk, Covington, LA, Gordon P. Serou, Jr., Law Offices of Gordon P. Serou, Jr., Peter Stephan Koeppel, Michael Louis Martin, Best Koeppel, Harry Rosenberg, Barbara Lee Arras, Brent Bennett Barriere, Phelps Dunbar, LLP, New Orleans, LA, Bryce L. Friedman, Paul C Curnin, Simpson, Thacher, & Bartlett, LLP, New York, NY, Deborah L. Stein, Simpson, Thacher, & Bartlett, LLP, Los Angeles, CA, for Defendants.

ORDER AND REASONS

SARAH S. VANCE, District Judge.

Before the Court is defendants' Motion to Dismiss (R. Doc. 116). For the following reasons, the motion is GRANTED IN PART and DENIED IN PART.

I. Background

This case arises out of the aftermath of Hurricane Katrina. The storm struck southern Louisiana and Mississippi in late August of 2005, causing damage in the billions of dollars. In numerous places, particularly within New Orleans, homes and commercial property were damaged by the wind and rain generated from the hurricane, as well as by flooding that inundated the area after the storm had passed through the region.

While insurance against wind and rain is available from private insurance companies, flood insurance generally is not. "It is uneconomical for private insurance companies to provide flood insurance with reasonable terms and conditions to those in flood prone areas." Gowland v. Aetna, 143 F.3d 951, 953 (5th Cir.1998). In 1968, the federal government established the National Flood Insurance Program ("NFIP"), which provides coverage "at or below actuarial rates," and payments on these insurance policies are made with federal money. Id. The NFIP is in turn administered by the Federal Emergency Management Agency ("FEMA"). In 1983 FEMA established a program within the NFIP known as "Write Your Own" ("WYO"), which allowed for certain private insurers to issue standard, government-guaranteed flood insurance policies in their own names. See generally 44 C.F.R. § 62.23. The policies are drafted by FEMA and cannot be altered by the insurance company without governmental approval. Id. §§ 61.4(b), 61.13(d); see also Dwyer v. Fidelity Nat. Prop. & Cas. Co., 565 F.3d 284, 285 (5th Cir.2009). The private companies under WYO act as fiscal agents of the United States and are responsible for adjustment, settlement, payment, and defense of claims under the policies. 44 C.F.R. § 62.23(d)-(g). Payments under the policies, however, "ultimately come[] from the United States treasury." Dwyer, 565 F.3d at 285.

The damage caused by Hurricane Katrina resulted in a tremendous number of NFIP claims. The government approximates that it paid 162,000 Katrina-related flood damage claims by May of 2006. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, NATIONAL FLOOD INSURANCE PROGRAM: NEW PROCESSES AIDED HURRICANE KATRINA CLAIMS HANDLING, BUT FEMA'S OVERSIGHT SHOULD BE IMPROVED 6 (Dec.2006). On account of this strain, FEMA, through the Acting Federal Insurance Administrator, relaxed the standards for submitting proofs of loss claiming flood damage. Specifically, when policyholders did not dispute the insurance company's adjustment, the proof-of-loss requirement was waived and the claim was to be paid on the basis of the adjuster's report. See Monistere v. State Farm Fire & Cas. Co., 559 F.3d 390, 394-95 (5th Cir.2009); Eckstein v. Fidelity Nat. Prop. & Cas. Ins. Co., 07-4567, 2009 WL 1870558, at *4 (E.D.La. June 29, 2009).

Plaintiff Branch Consultants ("Branch") brought this qui tam action on behalf of the United States government under the False Claims Act. Defendants are WYO insurance companies and adjusters that were involved in the adjustment of NFIP flood claims after Katrina. Branch alleges that the circumstances after Katrina gave defendants complete control over the adjustment and payment of the NFIP policies. Specifically, it contends that when defendants adjusted claims arising from Hurricane Katrina, they systematically and on a massive scale overstated the amount of flood losses to the properties they adjusted. In so doing, defendants exaggerated the amount of money that the government should pay under the individual flood policies, which in turn reduced the amount that the insurance companies would themselves be obligated to pay under wind and rain policies. Stated differently, Branch asserts that defendants "passed off" the costs of paying for wind damage to the government by fraudulently claiming that the damage was caused by flood. Because of the expedited claims-handling process that was put into effect after Katrina, many of these claims were allegedly not scrutinized by the government as they would have been in more typical circumstances. This resulted in the submission of myriad fraudulent insurance claims, which the federal government then paid.

Branch asserts that it reexamined numerous properties that defendants had fraudulently adjusted, and in so doing found the actual flood damage to be substantially less than defendants claimed when they sought payment from the government. In its amended complaint, Branch provides specifics on fifty-seven of these properties, including the street address, the WYO insurer of the property, the policy number, the amount of flood damage Branch found during its readjustment, and the amount paid by the government under defendants' adjustment report. For all of these properties, the actual flood damage is allegedly less than the amount the government paid. Many of the examples display minimal flood damage despite an adjustment near or equal to the policy limits. Branch also generally alleges that defendants engaged in a pervasive and systematic scheme in which these fifty-seven properties are but examples, and that this scheme included "hundreds of millions if not billions of dollars in fraudulent insurance claims" submitted to and paid by the government while the defendant insurance companies underpaid for damage caused by wind.

Branch filed its original complaint under seal on August 2, 2006, and the government did not timely intervene under 31 U.S.C. § 3730(b)(2). (R. Doc. 23, 36.) Branch filed its First Amended Complaint on June 22, 2007, and defendants moved to dismiss the case in partial reliance on the "first to file" bar of the FCA. See 31 U.S.C. § 3730(b)(5) ("When a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action."). At that time, defendants argued that a pending case against some of the then-defendants had been filed in a different court before this action was filed, and this case should thus be dismissed under the first-to-file bar. The district court agreed and dismissed the suit entirely. Branch Consultants, L.L.C. v. Allstate Ins. Co., 06-4091, 2007 WL 3118310 (E.D.La. Oct. 17, 2007) (dismissing case based on United States ex rel. Rigsby v. State Farm Ins. Co., No. 06-433 (S.D. Miss. filed Apr. 26, 2006)).

On appeal, the Fifth Circuit found that the first-to-file bar applied only to the defendants named in the first-filed case. See United States ex rel. Branch Consultants v. Allstate Ins. Co., 560 F.3d 371, 381 (5th Cir.2009). The court affirmed the dismissal of the two defendants who appeared in both cases, Allstate Insurance Company and State Farm Insurance Company, and it reversed the ruling with respect to the remaining defendants and remanded the case to this Court.

Reurging their motion to dismiss, defendants make three arguments.¹ First, they assert that the Court does not have subject matter jurisdiction over this suit because it is based upon a public disclosure of the fraud, and Branch is not an "original source" of the information in its complaint. Second, they argue that the Court lacks subject matter jurisdiction because Branch did not file its amended complaint under seal. Third, they contend that Branch failed to state a claim upon which relief can be granted. Each of these arguments will be addressed in turn.

II. Discussion

A. The "Public Disclosure" Bar and "Original Source" Exception of the False Claims Act

The False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., "permits, in certain circumstances, suits by private parties on behalf of the United States against anyone submitting a false claim to the Government." Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 941, 117 S.Ct. 1871, 138 L.Ed.2d 135 (1997). A violator of the FCA is liable to the United States for civil penalties and three times the amount of the government's damage. 31 U.S.C. § 3729(a). When non-governmental parties, called "relators," file FCA claims, they prosecute the case on behalf of the government and in turn receive a percentage of any recovery that might result from a successful suit. Id. § 3730(b)(1), (d)(1)-(4). Because relators have such strong financial incentives to bring FCA suits, the Act attempts to balance the "promot[ion of] private citizen involvement in exposing fraud against the government" against the "prevent[ion of] parasitic suits by opportunistic late-comers who add nothing to the exposure of fraud." United States ex rel. Reagan v. East Tex. Med. Cent. Reg'l Healthcare Sys., 384 F.3d 168, 174 (5th...