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June 12, 1998


The opinion of the court was delivered by: CHIN



 In this qui tam action, the United States of America accuses the City of New York (the "City"), the State of New York (the "State"), and various city and state agencies of committing welfare fraud. Seeking to invoke the False Claims Act, a 135-year-old statute originally enacted in response to rampant overbilling by Civil War defense contractors, the United States sues the City, the State, and certain of their agencies for upwards of $ 100 million in damages, contending that they submitted false claims for federal reimbursement of foster care expenditures.

 The United States sues for treble damages and penalties under the False Claim Act, 31 U.S.C. §§ 3729 et seq., as well as for damages under common law theories of unjust enrichment, mistake of fact, and fraud. Defendants move to dismiss the case, or in the alternative, for summary judgment. They argue, inter alia, that cities and states are not "persons" within the meaning of the False Claims Act. The United States opposes defendants' motion to dismiss and, in turn, cross-moves for summary judgment.

 For the reasons set forth below, defendants' motions to dismiss are granted in part and denied in part. The claims under the False Claims Act are dismissed, for neither the text nor the legislative history of the statute reveals any intent on the part of Congress to subject states or municipalities to liability under the Act. The False Claims Act was passed to protect the taxpayers. It was not intended to provide the federal government with a means to punish city and state taxpayers for the alleged wrongdoing of their local government officials.

 Because genuine issues of fact remain as to the common law claims, however, the parties' cross-motions in all other respects are denied.


 A. The Allegations of the Amended Complaint

 The amended complaint alleges that defendants submitted false claims, statements, and records to obtain federal incentive funding and reimbursement for foster care expenditures under Title IV of the Social Security Act, 42 U.S.C. §§ 620, 670. (Am. Compl. P 1).

 I examine below the structure and objectives of Title IV of the Social Security Act, as well as the United States's contentions as to each set of defendants.

 1. Title IV of the Social Security Act

 Title IV of the Social Security Act is dedicated to "protecting and promoting the welfare of all children, . . . preventing the unnecessary separation of children from their families . . . and assuring adequate care of children away from their homes, in cases where the child cannot be returned home or cannot be placed for adoption." Social Security Act ("SSA") § 425(a)(1), 42 U.S.C. § 625(a)(1). To fulfill these goals, Congress created a statutory framework through which federal funds would be made available to eligible states, thereby "enabling each State to provide, in appropriate cases, foster care and transitional independent living programs for children who otherwise would be eligible for assistance." SSA § 470, 42 U.S.C. § 670.

 Under the established framework, a state is not eligible to receive incentive funds for foster care unless it has "completed an inventory of all children . . . in foster care . . . and determined the appropriateness of . . . foster placement," installed a "statewide information system from which can be readily determined the status, demographic characteristics, location, and goals for the placement of every child," implemented a "case review system . . . for each child," and established a "service program designed to help children . . . return to families from which they have been removed or be placed for adoption . . . or [provided with] some other planned, permanent living arrangement." SSA §§ 422(b)(9)(A), (B)(i), 427(a)(2)(C), 42 U.S.C. §§ 622(b)(9)(A), (B)(i), 627(a)(2)(C).

 Program Instructions for the U.S. Department of Health and Human Services ("HHS") provide that in the first year a state seeks incentive funding, 66% of its cases must satisfy the requirements of § 427 of the Social Security Act, 42 U.S.C. § 627, that in the second year 80% of the cases must satisfy the requirements, and that for each year thereafter, 90% of the cases must satisfy the requirements. Failure to comply with these standards may result in the disgorgement of incentive funding to which a state is not entitled and in the determination by HHS that the state is not eligible for further funds.

 2. The State Defendants' Role

 The State Defendants have been sued for accepting federal foster care funding to which they supposedly knew or should have known they were not entitled.

 By 1990 the State was required to meet the 90% threshold established by HHS instructions. Between 1990 and 1994, the State certified its compliance with § 427. In turn, it received federal incentive funding totalling $ 37,432,436 over the course of the five fiscal years. The United States avers that the State accepted these funds knowing full well, or at least in "reckless disregard" of the fact, that its own records showed that it was not in compliance with the 90% threshold set forth in the HHS instructions. (See Am. Compl. PP 22-24).

 3. The City Defendants' Alleged Scheme

 The allegations against the City Defendants are centered on a purported scheme to falsify compliance information provided to the State, which, in turn, was passed on to the United States and apparently relied upon by it in determining the State's eligibility for incentive funds. The United States alleges that the City's Division of Adoption and Foster Care Services ("DAFCS"), with the knowledge of high-ranking employees of the Child Welfare Administration of the City of New York ("CWA"), pursued a scheme of knowingly entering false data based on incomplete or outdated records into the Child Care Review Service ("CCRS"), a state computer system. (See Am. Compl. PP 47-48). In addition, the City Defendants allegedly failed to conduct required service plan reviews and accurately document that services actually were provided to foster children and their families.

 Bracha Graber, the qui tam relator in this case, served as Acting Director of CWA's Office of Case Management ("OCM") during the relevant time period. Graber purportedly learned of the alleged scheme to defraud and made repeated efforts to inform City and State authorities of her observations. In April of 1991, she allegedly sent anonymous letters to Barbara J. Sabol, then-Administrator of the Human Resources Administration of the City of New York ("HRA") and Commissioner of the New York City Department of Social Services ("NYCDSS"), and then-Executive Deputy Commissioner of CWA Robert L. Little, informing them of the alleged false claims scheme at DAFCS. In or about February of 1992, she sent another anonymous letter to the City's Office of the Comptroller. (Am. Compl. PP 57-60).

 Toward the end of 1992, Graber allegedly met with Walter Mendelson, Assistant Director of the staff from the State Comptroller's Office. After hearing about the alleged scheme at DAFCS, Mendelson "promised Graber that he would investigate the allegations," but Graber never heard from him again. (Am. Compl. P 61).

 In or about May 1993, Graber met with Little and then-Deputy Commissioner for Protective Services and Case Management Mary C. Bradley. During this meeting, Little allegedly asked Graber to involve OCM in the false claims scheme and told her that an audit of their activities, if one were ever initiated, would not be uncovered until Bradley had left office, and that, in any event, any investigation would ultimately return to CWA, where it would languish indefinitely. At this meeting, Graber apparently declined to participate in the alleged scheme.

 On or about December 1993, Bradley purportedly told Graber not to inform any incoming HRA executives about the existence of the false claims scheme. Indeed, she purportedly told Graber that she should not "snitch" on her "brothers and sisters." (Am. Compl. P 64).

 B. Procedural History

 Graber filed the instant action on December 29, 1993 "for [herself] and for the United States Government" pursuant to 31 U.S.C. § 3730(b)(1). In January 1996, after a two-year investigation, the United States intervened in this case as the real party in interest and filed an amended complaint.

 The amended complaint sets forth fourteen causes of action. The first eight counts allege violations of the False Claims Act. Counts I and II allege that defendants knowingly presented or caused to be presented false claims for incentive funding and reimbursement for foster care spending; Counts III and IV allege that defendants made false records or statements to gain approval for incentive funds; Counts V and VI accuse defendants of using false records or statements to conceal, avoid, or decrease monetary obligations to the United States; and Counts VII and VIII allege that defendants conspired to defraud the United States for purposes of obtaining payment on false claims for reimbursements and incentive funding. The remaining counts (Counts IX-XIV) assert various common law claims: unjust enrichment, mistake of fact, and fraud.

 These motions followed.


 A. The False Claims ...

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