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United States ex rel. Kolchinsky v. Moodys Corp

United States District Court, S.D. New York

March 2, 2017

MOODY'S CORP., et al., Defendants.

          OPINION & ORDER

          WILLIAM H. PAULEY III, District Judge.

         Ilya Eric Kolchinsky brings this action on behalf of the United States of America against Moody's Corporation and Moody's Investors Service, Inc. (collectively, “Moody's”) and various John Does under the qui tam provisions of the False Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq. Kolchinsky, a former Managing Director of Moody's, alleges that he attempted to criticize inaccurate credit rating practices at the company in 2009 and was constructively discharged after protesting against a practice of issuing false credit ratings.[1] (See Second Amended Complaint (“SAC”) ¶ 29.) Moody's now moves to dismiss the Second Amended Complaint, arguing that, like the First Amended Complaint, it fails to state a sufficiently particularized claim under the FCA. For the following reasons, Moody's motion is granted and this action is dismissed.


         While familiarity with this Court's prior opinion and order, United States ex rel. Kolchinsky v. Moody's Corp. (“Moody's I”), 162 F.Supp.3d 186 (S.D.N.Y. 2016) is presumed, a brief review of the history of this action is appropriate. Kolchinsky filed this action on February 24, 2012, asserting a bevy of FCA claims under varying theories of relief. The common thread among those claims was that credit ratings issued by Moody's prior to 2009 were improperly inflated or deflated; that the ratings entered the financial markets through various channels; and that certain governmental entities were ultimately affected by the quality of those ratings. (See ECF No. 1.) After two years of investigation, the Government declined to intervene. (See ECF Nos. 2-8.) Thereafter, this Court entered orders unsealing the Complaint and authorizing Kolchinsky to serve Moody's. (See ECF Nos. 9-10, 13.) Following protracted settlement discussions, Kolchinsky interposed an Amended Complaint in May 2015. (ECF Nos. 28-30.)

         The Amended Complaint was a 124-page tome: a lengthy catalogue exhaustively chronicling the major events of the 2008 financial crisis, and alleging in substance that Moody's, a Nationally Registered Statistical Rating Organization (“NRSRO”), defrauded financial markets nationwide by issuing inaccurate credit ratings. See Moody's I, 162 F.Supp.3d at 191. The Amended Complaint largely tracked the original Complaint, alleging that Moody's pre-2009 credit ratings were insufficiently accurate (see, e.g., Am. Compl. ¶ 4); that Moody's anticipated that the financial markets would rely those ratings (see, e.g., Am. Compl. ¶ 2); and accordingly, that each of the “466, 700 false [credit] ratings” issued by Moody's during this period, with a “face value of over $2.3 trillion, ” were “false claim[s] for payment to the Government” within the meaning of the False Claims Act (Am. Compl. ¶ 4). While the Amended Complaint did not clearly demarcate the different theories on which Kolchinsky relied, this Court's prior opinion endeavored to do so. To that end, this Court grouped Kolchinksy's claims into five categories and dismissed four of them[2] in Moody's I. Specifically, this Court held that the four dismissed categories of claims failed to establish the “sine qua non” that is required for FCA liability- seeking payment from Government, as opposed to payment from private entities. See Moody's I, 162 F.Supp.3d at 195 (quoting United States ex rel. Kester v. Novartis Pharms. Corp., 23 F.Supp.3d 242, 253 (S.D.N.Y. 2014) (emphasis omitted)). This Court permitted Kolchinsky to attempt to replead the fifth category-the Ratings Delivery Service claims. The Ratings Delivery Service claims alleged that Moody's provided ratings directly to subscribers (including Government entities) in return for payment. (See Am. Compl. ¶¶ 77-80.)

         In Moody's I, this Court reasoned that Kolchinsky might be able to state a valid claim under his Ratings Delivery Service theory. This Court concluded that charging the Government for inaccurate credit ratings-if Moody's had promised to provide truthful ratings- could satisfy the basic elements required by the FCA. See Moody's I, 162 F.Supp.3d at 197. This Court noted, however, that the Amended Complaint pleaded no Government agency that actually agreed to pay Moody's for its credit ratings, or any credit rating that had been received in return. See Moody's I, 162 F.Supp.3d at 197. Further, this Court held that because the Ratings Delivery Service claims were not pleaded until the May 27, 2015 Amended Complaint, any such claims accruing prior to May 27, 2009 were time-barred, [3] even under the more generous of the FCA limitations periods. See 31 U.S.C. § 3731(b)(1) (providing that a civil FCA action may not be brought more than “6 years after the date on which the violation of [the FCA] is committed”). Accordingly, this Court authorized Kolchinsky to “file a substantially narrowed Second Amended Complaint” that pleaded, with particularity, Ratings Delivery Service claims accruing after that date. Moody's I, 162 F.Supp.3d at 197.

         Kolchinsky filed a Second Amended Complaint which was-for all relevant purposes-no different from his prior two pleadings. (See ECF No. 54.) Indeed, even after this Court had dismissed four of Kolchinsky's five theories, and instructed that any amended pleading be streamlined, the Second Amended Complaint was even longer than its predecessors, and failed to identify which specific claims submitted after May 27, 2009 were submitted to which specific entities. Instead, Kolchinsky attached to his Amended Complaint a twenty-page Microsoft Excel spreadsheet-printed from the internet-showing that Moody's had some contracts with Government agencies in the years 2007 and later. A few rows in the spreadsheet related to “Ratings Delivery Service” contracts. (See SAC Ex. C, “Excerpts of data from, ” at 1-23.)

         Moody's now moves to dismiss the Second Amended Complaint for failure to state a claim, arguing (1) that Kolchinsky failed to plead with specificity any particular “false claim for payment” to the Government; (2) that none of the claims for payment were “factually” or “legally” false under the FCA; and (3) that Kolchinsky's claims accrued before the May 27, 2009 statute-of-limitations cutoff. Kolchinsky argues that the motion is procedurally barred because Moody's previously filed a 12(b)(6) motion, and that the presence of pre-2009 false ratings suggests that Government agencies also received false ratings on and after May 27, 2009.


         I. Fed. R. Civ. P. 12(g) Bar

         Kolchinsky argues that Moody's 12(b)(6) motion is procedurally barred by reason of prior motion to dismiss. Specifically, Kolchinsky contends that he was prejudiced by Moody's alleged failure to “raise[] any arguments that [Kolchinsky's] [Ratings Delivery Service]-related allegations of false claims failed under 9(b) or under the theories of factual or legal falsity, ” or issues regarding the “statute of limitations . . . in connection with [the Ratings Delivery Service] claim.” (Pl.'s Opp. to Motion to Dismiss, ECF No. 66, at 6-7.) Kolchinsky then relies on the text of Rule 12, which provides that a “party that makes a motion under this rule must not make another motion under this rule raising a defense or objection that was available to the party but omitted from its earlier motion.” Fed.R.Civ.P. 12(g). In short, Kolchinsky argues that once a defendant makes a Rule 12(b)(6) motion, it cannot make additional 12(b)(6) motions if the relevant argument could have been asserted at an earlier time.

         Kolchinsky's argument rests on a misunderstanding of Rule 12, which bars successive motions premised on the differing defenses listed in Fed.R.Civ.P. 12(b)(2)-(5), not differing arguments raised on a Fed.R.Civ.P. 12(b)(6) motion. As Rule 12(h) explains, the only defenses that are “waive[d]” if not asserted in the first pre-answer motion are listed in Rules 12(b)(2)-(5).[4] Indeed, Rule 12 provides an exception to waiver for any motion to dismiss for “[f]ailure to state a claim, ” which may be raised not only in a pleading or motion, but as late as trial itself. See Fed.R.Civ.P. 12(h)(2). In sum, Rule 12 provides that while procedural defenses are waived if omitted from a pleading or pre-answer motion, a defendant cannot waive the more fundamental 12(b)(6) defense-that the plaintiff has no legal right to recovery in the first place. See Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2001) (explaining that “the defense of failure to state a claim is not waivable” and is “preserved from the waiver mechanism in Rule 12(h)”) (quoting 5A Wright & Miller, Federal Practice and Procedure § 1361 (2d ed. 1990)); accord Ennenga v. Starns, 677 F.3d 766, 773 (7th Cir. 2012) (“The exception at issue here-contained in Rule 12(h)(2)-makes it clear that a litigant need not consolidate all failure-to-state-a-claim arguments in a single dismissal motion.”)[5]

         In any event, Kolchinsky's contention that Moody's failed to object to the legal validity of the Ratings Delivery Service claims in its prior motion is incorrect. While the prior 12(b)(6) motion did not focus solely on the Ratings Delivery Service claims-given additional multifaceted claims addressed in the lengthy Amended Complaint-it specifically noted that Kolchinsky had failed to identify any particular government agency that paid for any false claims, including with respect to the Ratings Delivery Service theory. (See ECF No. 39, at 25 & n.10.) Moreover, the prior motion included an entire section titled, “The Amended Complaint is Barred by the Statute of Limitations, ” which argued that any claims “based on an alleged violation of [the FCA] occurring prior to May 27, 2009” were time-barred. (ECF No. 39, at 17.) To the extent that Moody's challenges to the Ratings Delivery Service claims have been refined and narrowed, that argument is elsewhere addressed in this Opinion and Order.

         II. False Claims Act Liability Generally

         Moody's argues that Kolchinsky's current Ratings Delivery Service theory fails to state a valid claim under the False Claims Act. For the reasons set forth below, this Court agrees.

         A. Theories of “Falsity” Under the False Claims Act

         “Enacted in 1863, the False Claims Act ‘was originally aimed principally at stopping the massive frauds perpetrated by large contractors during the Civil War.” Universal Health Servs., Inc. v. United States, 136 S.Ct. 1989, 1996 (2016) (quoting United States v. Borenstein, 423 U.S. 303, 309 (1976)). “Sensational congressional investigations” resulted in hearings that “‘painted a sordid picture of how the United States had been billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war.'” Universal Health, 136 S.Ct. at 1996 (quoting United States v. McNinch, 356 U.S. 595, 599 (1958)). Congress responded “by imposing civil and criminal liability for 10 types of fraud on the Government, ” later amending the Act to include both requests for Government payment and “reimbursement requests made to recipients of federal funds under federal benefits programs.” Universal Health, 136 S.Ct. at 1996. The modern variant of the FCA permits “private persons known as ‘relators'” to “file ...

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