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United States ex rel. Kelschenbach v. M&T Bank Corp.

United States District Court, W.D. New York

March 20, 2017

UNITED STATES OF AMERICA ex rel. KEISHA KELSCHENBACH, Plaintiffs,
v.
M&T BANK CORPORATION, Defendant.

          DECISION AND ORDER

          WILLIAM M. SKRETNY United States District Judge

         1. Presently before this Court is Patrick Lester, Marlene Miller, and Pauline Myers' (the “SDNY Relators”) Motion to Intervene for the Limited Purpose of Seeking Attorneys' Fees. (Docket No. 69.)[1] The SDNY Relators filed a qui tam action in the Southern District of New York on November 8, 2013 (the “SDNY Action”), alleging an appraisal fraud scheme by multiple defendants, including M&T Bank Corporation (“M&T”), in violation of the False Claims Act, 31 U.S.C. §§ 3729-3733 (the “FCA”). See United States of America ex rel. Patrick Lester, Marlene Miller, and Pauline Myers, et al. v. Appraisal.com, et al., 1:13-cv-07952-LGS (S.D.N.Y.). The SDNY Relators claim a right to intervene in this action (the “WDNY Action”) in order to seek attorneys' fees from M&T. For the following reasons, their motion is denied.

         2. Keisha Kelchenbach (the “WDNY Relator”) initiated the WDNY Action on March 19, 2013, approximately eight months prior to the SDNY Action. She also filed a qui tam complaint, alleging that M&T had violated the FCA by making false representations in connection with its underwriting and origination of Federal Housing Administration (“FHA”) insured mortgages. The WDNY Relator's complaint alleges that, with respect to the alleged underwriting scheme, “[t]he underwriter must have each property appraised in accordance with the standards and requirements prescribed by [the United States Department of Housing and Urban Development].” (Docket No. 1, Compl. ¶ 40.) The WDNY Relator's complaint further alleges that:

[M&T], improperly and in violation of the requirements of the Government Programs, sought and obtained additional appraisals for purposes of obtaining a higher value on a property. [M&T] failed to disclose or properly document these instances, but instead simply ignored the first, unfavorable appraisal.

(Id. ¶ 138).

         3. The SDNY Relators, without providing supporting evidence, state that in April 2016, the Department of Justice (the “Government”) advised the SDNY Relators that a settlement of the WDNY Action was pending, which would resolve all claims of appraisal fraud against M&T. They further state that the Government told counsel for the SDNY Relators that it would intervene in the SDNY Action and include the SDNY Relators as parties to the settlement agreement pending in the WDNY Action. However, the Government did not intervene in the SDNY Action, and instead, on May 10, 2016, filed a notice of intervention in the WDNY Action, together with a settlement agreement signed only by the Government, M&T, and the WDNY Relator (the “Settlement”). (See Docket No. 30.) The Settlement releases M&T from liability for any federal claims related to M&T's conduct in origination, underwriting, property appraisal, and quality control for FHA loans during the relevant period. (Id.) The parties do not dispute that this release extinguishes the SDNY Relators' claims against M&T.

         4. The SDNY Relators filed a notice of voluntary dismissal of the SDNY Action on November 23, 2016, which the Honorable Lorna G. Schofield “so ordered” on November 28, 2016. (SDNY Action Docket Nos. 19, 21.) Accordingly, the SDNY Action is now closed. A significant portion of the SDNY Action's docket remains under seal.

         5. Although the terms of the FCA expressly give relators the right to challenge settlements that are not “fair, adequate, and reasonable, ” see 31 U.S.C. § 3730(c)(2)(B), the SDNY Relators did not seek a hearing as to the fairness of the Settlement. Instead, they filed a motion in this Court requesting that they be allowed to intervene for the limited purpose of seeking a share of the relator's award. (See Docket No. 47.) Before that motion had even been fully briefed, the SDNY Relators, the Government, and the WDNY Relator all agreed that the SDNY Relators could intervene for the limited purpose of seeking a share of the WDNY Relator's award. (See Docket No. 53.) Based on this agreement, and in the absence of any opposition, this Court granted the motion. (See Docket No. 54.) Thereafter, the SDNY Relators and WDNY Relator reached an agreement between themselves as to division of the award. (Docket No. 64.) Nothing has been filed indicating that their agreement resulted in some change to the WDNY Relator's status as the sole relator in the WDNY Action, nor is it clear that such an agreement could change that status.

         6. Now, the SDNY Relators have moved to intervene again, this time in order to seek attorneys' fees from M&T. (Docket No. 69.) The SDNY Relators contend that they should be allowed to intervene under Federal Rule of Civil Procedure 24(a)(2), because they are “prevailing parties” under the FCA. However, as they note, the FCA states: “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.” 31 U.S.C. § 3730(b)(5) (emphasis added). Both the Fourth Circuit and the Ninth Circuit, interpreting this section, have found that a private party cannot intervene in a FCA suit under any circumstances. See U.S. ex rel. LaCorte v. Wagner, 185 F.3d 188, 191 (4th Cir. 1999) (denying motion to intervene by qui tam relators in second qui tam action); United States ex rel. Lujan v. Hughes Aircraft Co., 243 F.3d 1181, 1187 (9th Cir. 2001) (rejecting the notion of reading exceptions into the statute's plain language). The Fourth Circuit has held that § 3730(b)(5), on its face and without exception, precludes any person other than the government from intervening: “[t]his provision states without qualification that persons other than the government may not intervene in qui tam actions.” Id. The Fourth Circuit further observed that, “[b]y drafting the statute in such unequivocal language, Congress made the strongest possible statement against private party intervention in qui tam suits.” Id. The SDNY Relators do not cite, and this Court has not found, any case allowing a Rule 24 intervention in a suit brought under the FCA.

         7. In the alternative, the SDNY Relators contend that they should be allowed to intervene under the “alternate remedy” section of the FCA. That section states:

Notwithstanding subsection (b), the Government may elect to pursue its claim through any alternate remedy available . . . . If any such alternate remedy is pursued in another proceeding, the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section.

31 U.S.C. § 3730(c)(5). The Southern District recently stated that “case law interpreting Section 3730(c)(5) in any context is scarce.” United States v. L-3 Commc'ns Eotech, Inc., No. 15-CV-9262 (RJS), 2017 WL 464431, at *4 (S.D.N.Y. Feb. 3, 2017). However, as noted above, the Fourth Circuit has held that § 3730(c)(5) does not create exceptions to the categorical bar of § 3730(b)(5) against private party intervention. LaCorte, 185 F.3d at 191. Instead, it found that this provision “simply preserves the rights of the original qui tam plaintiffs when the government resorts to an alternate remedy in place of the original action” and “does not confer any rights on would-be intervenors.” Id.; see also U.S. ex rel. Fry v. Guidant Corp., No. CIV.A. 3:03-0842, 2006 WL 1102397, at *5 (M.D. Tenn. Apr. 25, 2006) (“Section 3730(b)(5) strictly forbids private parties, such as [the party seeking to intervene], from being added as additional party relators with claims based on the same underlying facts (‘intervening') after a qui tam action has been filed . . .”).

         8. Even if this Court were to depart from the precedent set by the Fourth Circuit and allow the SDNY Relators to intervene in this action, they have not met the basic requirements for pursuing claims under the “alternate remedy” clause. First, where a qui tam plaintiff asserts that an alternate remedy has been procured by the government, there is typically a question of whether the recovery at issue qualifies as an “alternate remedy.” See, e.g., U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 651 (6th Cir. 2003) (remanding complaint seeking share of alternate remedy to the district court to determine whether the government's settlement “overlap[ped] with the conduct alleged by [the] [r]elator in bringing his qui tam action, ” and directing the district court to “hold an evidentiary hearing at which [the] [r]elator and the government may present evidence in support of their positions”); U.S. ex rel. Barajas v. United States, 258 F.3d 1004, 1012 (9th Cir. 2001) (assessing relator's allegations and procedural history and concluding that settlement agreement with government requiring debarment qualified as an “alternate remedy”).

         9. Second, in order to be eligible to seek a qualifying “alternate remedy, ” the SDNY Relators would need to establish that they were the first-to-file party to satisfy the terms of § 31 U.S.C. § 3730(b)(5). Courts have interpreted § 3730(b)(5) as a jurisdictional bar to later allegations that state all the “essential facts” of a previously-filed claim or the “same elements of a fraud described in an earlier suit.” United States ex. rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 32 (1st Cir. 2009) (internal quotations omitted). This is a jurisdictional rule that is “exception-free.” Id. at 33. The first-to-file rule is intended to “provide incentives to relators to promptly alert the government to the essential facts of a fraudulent scheme.” Id. at 32 (internal quotations omitted). “Under this ‘essential facts' standard, § ...


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