United States ex rel. Dieter v. City of Milwaukee

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UNITED STATES OF AMERICA ex rel. JAMES DIETER and KAREN SCHWENKE, Plaintiffs, v. CITY OF MILWAUKEE, CITY OF MILWAUKEE COMMUNITY DEVELOPMENT GRANTS ADMINISTRATION, HOUSING AUTHORITY OF THE CITY OF MILWAUKEE, MILWAUKEE COUNTY, and MILWAUKEE COUNTY HEALTH AND HUMAN SERVICES HOUSING DIVISION, Defendants.

No. 22-CV-240-JPS

United States District Court, E.D. Wisconsin

April 10, 2023

ORDER

J.P STADTMUELLER U.S. DISTRICT JUDGE

On February 25, 2022, Relators James Dieter (“Dieter”) and Karen Schwenke (“Schwenke”) (together, “Relators”) brought this case under the False Claims Act, 31 U.S.C § 3729 (the “FCA”). ECF No. 1. Relators allege unlawful receipt of federal funds through the submission of false certifications of compliance with federal, state, and local antidiscrimination and housing laws and ordinances, all in violation of the FCA. ECF Nos. 1, 34. After the parties met and conferred in accordance with the Court's pretrial order, ECF No. 16, Relators filed an amended complaint on October 21, 2022, which is the operative complaint in this action. ECF No. 34.

The case comes before the Court on (1) Defendants City of Milwaukee and City of Milwaukee Community Development Grants Administration's (together, the “City”) motion to dismiss the amended complaint for failure to state a claim and motion to dismiss the amended complaint for lack of jurisdiction, ECF No. 37; (2) Defendant Housing Authority of the City of Milwaukee's (“HACM”) motion to dismiss the amended complaint for failure to state a claim,^[1] ECF No. 40; and (3) Defendants Milwaukee County (the “County,” and together with the City and HACM, “Defendants”) and Milwaukee County Health and Human Services Housing Division's (“HSHD”)^[2] motion to dismiss the amended complaint for failure to state a claim and motion to dismiss the amended complaint for lack of jurisdiction, ECF No. 45. All three motions are fully briefed, and the United States of America (the “United States”) has separately filed a statement of interest related to the motions.^[3] ECF Nos. 38, 41, 46, 49, 51, 52, 53, 54.

For the reasons stated herein, the Court denies the City's and the County's motions to dismiss the amended complaint for lack of jurisdiction. The Court grants the City's HACM's, and the County's motions to dismiss the amended complaint for failure to state a claim. The Court dismisses the amended complaint without prejudice, but affords Relators leave to amend.

1. LEGAL STANDARD

1.1 Rule 12(b)(6) and Rule 9(b)

Federal Rule of Civil Procedure 12(b) provides for the dismissal of complaints which, among other things, “fail[] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). To state a claim, a complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). In other words, the complaint must give “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The allegations must “plausibly suggest that the plaintiff has a right to relief, raising that possibility above a speculative level.” Kubiak v. City of Chicago, 810 F.3d 476, 480 (7th Cir. 2016) (internal citation omitted). Plausibility requires “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). The Court is required to “accept as true all of the well-pleaded facts in the complaint and draw all reasonable inferences in favor of the plaintiff.” Kubiak, 810 F.3d at 480-81. However, the Court “need not accept as true legal conclusions, or threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009) (citing Twombly, 550 U.S. at 555-56).

“In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). In other words, the plaintiff must set forth the “who, what, when, where, and how of the fraud.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011) (quoting United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 854 (7th Cir. 2009)).

1.2 Rule 12(b)(1)

Federal Rule of Civil Procedure 12(b)(1) provides for dismissal of a case where the Court lacks subject matter jurisdiction. When faced with a jurisdictional challenge, the Court accepts as true the well-pleaded factual allegations found in the complaint, drawing all reasonable inferences in favor of the plaintiff. Ctr. For Dermatology & Skin Cancer, Ltd. v. Burwell, 770 F.3d 586, 588 (7th Cir. 2014).

2. RELEVANT ALLEGATIONS

Defendants receive federal funding from, among others, the United States Department of Housing and Urban Development (“HUD”). ECF No. 1 at 7. From HUD, Defendants receive funds pursuant to four programs: the Community Development Block Grant (“CDBG”), the HOME Investment Partnership (“HOME”), the Emergency Shelter Grant (“ESG”), and Housing Opportunities for People with AIDS (“HOPWA”). Id. The City also receives funds from HUD through the Section 8 Housing Choice Voucher (“Section 8”) program. Id.

As recipients of federal funds, Defendants are required to comply with Title VI of the Civil Rights Act (“Title VI”), Section 504 of the Rehabilitation Act, and the Americans with Disabilities Act (the “ADA”). Id. at 9. HUD requires that fund recipients certify compliance with these laws. Id. In addition to certification of compliance, HUD ensures compliance by requiring recipients to submit plans such as the Consolidated Plan, the Annual Action Plan, and the Consolidated Annual Performance and Evaluation Report (“CAPERs”). Id. HUD also requires fund recipients to certify that they will “affirmatively further the purposes” of the Fair Housing Act (the “FHA”) (the “AFFH mandate”). Id. at 11.

Relators allege that the City has “found it much more profitable to create containment zones . . . in which to house the City's low-income population, minorities, disabled individuals, and criminals” while “devoting substantial resources to neighborhoods comprised of middle to upper income, non-minority, and non-disabled residents.” Id. at 12. As a result, the City is one of the most segregated cities in the country. Id. at 13. The City has ignored HUD's mandate that the City “take intentional, affirmative steps to overcome patterns of segregation [and] eliminate discrimination in housing.” Id.

To combat the worsening conditions in one neighborhood known as the Near West Side (the “NWS”), the City approved the Near West Side Comprehensive Plan (the “NWSCP”) in 2004. Id. at 14. The NWSCP was developed using 2000 U.S. Census data. Id. at 17. The NWSCP's “residential goals” were to “strengthen and improve the existing neighborhood fabric” and to “increase owner-occupancy” in the NWS. Id.at 14. The NWSCP's “commercial goals” were to “create retail destinations that utilize existing commercial land and infrastructure” and to “enhance the marketability of commercial nodes to promote economic stability and growth.” Id. The NWSCP's “institutions and public spaces” goals were to “increase sense of security” and to “enhance public destinations and gathering places for residents and visitors.” Id. The NWSCP's “transportation goals” were to “recreate historic neighborhood traffic patterns to maximize route alternatives” and to “improve the viability of transportation alternatives.” Id. at 15; see also ECF No. 1-2.

The NWSCP involved interviews with “stakeholders” of the NWS. ECF No. 34 at 15. Those interviewed believed it would be valuable to demolish buildings that are (1) without historic or architectural value, (2) deteriorated, (3) abandoned, or (4) sources of crime and drug abuse. Id. Over 79% of interviewees said that they wanted to see more home ownership in the NWS; 63.8% said that they wanted to see increased property maintenance and code enforcement in the NWS. Id. As a result, it was recommended that the City work towards more owner occupancy of single- and two-family homes in the NWS. Id.

The NWSCP also created focus groups for the stakeholders to suggest ideas for the City to bring the process to fruition, id. at 16, and community charrettes, where community members were encouraged to present evidence on issues, id. The NWSCP included land use policies to discourage community living arrangements. Id. It also levied a policy for developers to include architectural elements compatible with the character of the area, such as front porches, sidewalks, garages, windows facing the street, and well-lit entrances and walkways. Id. at 16-17. If a property had code violations or was deemed a nuisance property, the NSWCP instructed that a “spot acquisition” be used. Id. at 17.

Dieter purchased a residence in the NWS in 2004. Id. at 4, 21. The NWSCP was a key reason behind Dieter's decision to purchase his home. Id. Schwenke owns three residential investment properties in the NWS, which she purchased in 2004. Id. at 4, 21. Like Dieter, Schwenke's decision to purchase properties in the NWS was also based on the NWSCP. Id. at 4. Schwenke was aware that the bulk of funds used to rehabilitate the NWS would come from the federal government, which also led her to purchase the investment properties in the NWS. Id.

Relators allege that relatively little, if any, of the NWSCP has been implemented. Id. at 17. The 2000 U.S. Census data used to develop the NWSCP showed that the NWS had approximately twice the population density of other City neighborhoods; the same is true today. Id. Today approximately 82% of the NWS is comprised of minorities. Id. Over 15% of the State of Wisconsin's homeless beds...