Judge Denise Cote's ruling:
"The defendants' May 15, 2012 motion to dismiss is granted as to Fisch's [*20] claims against the Individual Defendants, and denied as to Fisch's claim against the School under the whistleblower provisions of the FCA. This ruling disposes of all claims against the Individual Defendants. The Clerk of Court shall remove defendants Winnitt, Grossmann, Davis, and Rampoltd from the case."
In July, 2013, a settlement was agreed to by all parties:
JOINT MOTION TO STAY THIS ACTION PLEASE TAKE NOTICE that, Plaintiff Gene Fisch Jr. and Defendants New Heights Academy Charter School have reached a tentative agreement to settle this action. The parties jointly move this Court for a stay of the litigation in order to finalize their Settlement Agreement. Once this Agreement is executed, the parties will submit a Stipulation of Dismissal. Dated: July 9, 2013
Below is the Cote Decision.
Betsy Combier
GENE FISCH, JR., Plaintiff, -v- NEW HEIGHTS ACADEMY CHARTER
SCHOOL, a corporation; STACY WINITT, individually and as Executive Director
of New Heights Academy Charter School; GAIL GROSSMAN, individually and as Board
President of New Heights Academy Charter School; JENNIFER DAVIS, individually
and as Board Vice President of New Heights Academy Charter School; and JOEL
RAMPOLDT, individually and as a Board Member of New Heights Academy Charter
School, Defendants.
12 Civ. 2033 (DLC)
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
2012 U.S. Dist. LEXIS 131603
September 13, 2012, Decided
September 13, 2012, Filed
CORE TERMS: finances, audit,
accounting, citation omitted, invoices, purchase orders, whistleblower,
retaliation, federal funds, protected conduct, expenditures, improprieties,
notice, breach of contract, investigating, federal government, contract claims,
cause of action, terminated, viable, individual liability, qui tam,
furtherance, reimbursed, uncovered, assigned, fiscal, handle, caught, jail
COUNSEL: [*1] For Plaintiff: Jeremy Heisler, Steven L. Wittels, Andrew Melzer, Sanford, Wittels & Heisler, LLP, New York, NY; David W. Sanford, Thomas J. Henderson, Brandon Jamison, Sanford, Wittels & Heisler, LLP, Washington, DC.
For Defendants: Marjorie Kaye Jr., Samantha Abeysekera, Jackson Lewis LLP, New York, NY.
JUDGES: DENISE COTE, United States District Judge.
OPINION BY: DENISE COTE
OPINION
OPINION
& ORDER
DENISE COTE, District
Judge:
Plaintiff Gene Fisch,
Jr. ("Fisch") brings this action against defendants New Heights
Academy Charter School (the "School"), Stacy Winnitt
("Winnitt"), Gail Grossmann ("Grossmann"), Jennifer Davis
("Davis"), and Joel Rampoldt ("Rampoltd") pursuant to the whistleblower
provisions of the False Claims Act ("FCA"), 31 U.S.C. § 3730(h), and
New York State law. The defendants have moved to dismiss Fisch's complaint (the
"Complaint") in part, pursuant to Rule 12(b)(6), Fed. R. Civ. P. For the following
reasons, the motion is granted in part.
BACKGROUND
The following facts
are drawn from the complaint and are presumed to be true for purposes of this
motion. The School is a charter school in New York City. It submits requests
for and receives federal funding to support its operations. Fisch alleges that [*2] under
the relevant federal regulations, the School is required to use proper fiscal
control and fund accounting procedures to ensure that expenditures reimbursed
by federal funds are authorized in advance, are made for eligible expenditures
only, and are actually reported. See 34 C.F.R. Part 80. In
order to justify receipt of funds and avoid having to repay them, Fisch claims,
the School is required to account for its expenditures accurately and fully.
See id. at §§ 80.20, 80.21.
Winnitt, Grossmann,
Davis, and Rampoltd (collectively, the "Individual Defendants") are
members of the School's Board of Trustees (the "Board"). Winnitt is
the School's Executive Director.
In July 2008, Fisch
was hired to serve as the School's Chief Operating Officer ("COO") in
order to help the School handle its finances. At this time, the School had
stated policies on "Separation" and "Code of Ethics and Conduct,"
as well as a "Whistleblower Policy." Fisch alleges that these
policies and other School policies were incorporated into his employment
contract. When Fisch began his employment, the School was in the process of
providing information to an outside firm for an annual independent audit. Once
completed, [*3] the
results of that audit would serve as the School's statement to the federal
government justifying its receipt of federal funds.
Upon becoming COO,
Fisch conducted his own internal audit of the School's finances. He soon
uncovered a number of financial accounting improprieties. Specifically, he
discovered that the School had not required the regular use of purchase orders
prepared and approved in advance, had not reviewed and separately approved
invoices before payments were made, and had falsified, forged, and backdated
certain approved purchase orders and invoices at the direction of Winnitt.
Fisch also discovered that approximately $250,000 in invoices, many of them
past due, had not been paid by the School, and that Winnitt had directed that a
demolition take place in relation to a construction project at the School
without the requisite permits and authorizations.
In July 2008, Fisch
reported these financial improprieties to Winnitt, Grossmann, Rampoltd, and
other members of the Board, and argued that the improper practices should be
halted and corrected. Winnitt responded that the School was "too small to
get caught." Fisch also reported his concerns at a meeting of the Board's [*4] Finance
Committee.
In August and
September, Fisch again spoke with Winnitt about the School's improper financial
and unauthorized construction practices, and stated his intention to follow up
with the Finance Committee. Winnitt responded with hostility. She told Fisch
not to worry about the past and repeated her belief that the School was
"too small to get caught." She also instructed Fisch not to speak
with the Finance Committee about any improprieties and to clear any
communications with the Finance Committee with her. She informed him that she
would sit in on all his conference calls with the Finance Committee in the
future, and threatened his employment.
In September, Fisch
informed the Board and the Finance Committee that the School's accounting for
federal funds from 2007—08 was inaccurate, that the numbers used for the 2008
audit were not credible, and that he did not want to sign off on the audit
without redoing the numbers. That same month, he told Grossmann and Ramboldt
that he believed the School was misappropriating funds, that "someone could
go to jail," that he had seen a lawyer about the School's practices, and
that Winnitt was retaliating against him for investigating [*5] and
reporting these issues. Fisch again expressed his concerns to Winnitt in
October, and she again brushed them aside. She instructed him never again to
discuss his concerns with the Board and to remove references to improper
accounting practices from his Finance and Operations Report to the Board.
The 2008 audit by the
outside firm was produced in October. It found a number of deficiencies in the
School's fiscal control and accounting practices, which supported many of
Fisch's findings. The deficiencies included a lack of approval signatures on
purchase orders and invoices, and the School's inability to locate certain
purchase invoices.
Fisch continued to
voice his concerns about the School's financial practices from October to
December. He received a negative mid-year performance review from Winnitt on
December 29. Winnitt said that she would provide Fisch with an improvement plan
for him to follow, but failed to do so.
From January through
March 2009, Fisch prepared a synopsis of the 2008 audit findings. During this
period, he informed Winnitt of his discomfort with the figures in the audit and
with submitting those figures to the federal government. Nevertheless, the
audit was submitted [*6] to the federal
government with Winnitt's signature. Fisch alleges that this submission, along
with the submission of other statements regarding amounts to be paid or
reimbursed to the School with federal funds, violated the FCA, 31 U.S.C. § 3729(a)(1).
In mid-March, after
Fisch informed the Finance Committee that expenditures did not match grant
budgets, Winnitt became angry with him. On March 18, the Board's treasurer
agreed with Fisch regarding certain of the School's financial improprieties and
indicated that he would raise the matter with the Board. On March 20, 2009,
Winnitt terminated Fisch's employment in retaliation for his investigation and
reports, stating that he was "not a good fit" at the School. Fisch's
last day at work was May 15 and his last day on payroll was May 31.
Fisch filed the
Complaint on March 19, 2012, alleging claims against the School and the
Individual Defendants for violations of the whistleblower provisions of the FCA, 31 U.S.C. § 3730(h), and
for breach of his employment contract with the School. On May 15, the
defendants moved to dismiss the FCA claims against all defendants and the
breach of contract claims against the Individual Defendants only. The [*7] motion
to dismiss was fully submitted on July 10.
DISCUSSION
On a motion to
dismiss under Fed. R. Civ. P. 12(b)(6),
the court must "accept all allegations in the complaint as true and draw
all inferences in the non-moving party's favor." LaFaro v. New York Cardiothoracic
Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009) (citation omitted).
To survive a motion to dismiss, "a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is plausible
on its face." Ashcroft v. Iqbal, 556 U.S. 662, 129
S.Ct. 1937, 1949, 173 L. Ed. 2d 868 (citation omitted).
The court is "not bound to accept as true legal conclusions couched as
factual allegations." Id. at 1950-51.
Applying this
plausibility standard is "a context-specific task that requires the
reviewing court to draw on its judicial experience and common sense." Id. at 1950. There must be
a "reasonably founded hope that the discovery process will reveal relevant
evidence." Bell Atl. Corp. v. Twombly, 550 U.S.
544, 563 n.8, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) (citation omitted).
"Plausibility thus depends on a host of considerations: the full factual
picture presented by the complaint, the particular cause of action and its
elements, and the existence of alternative explanations [*8] so
obvious that they render plaintiff's inferences unreasonable." L-7 Designs, Inc. v. Old Navy, LLC,
647 F.3d 419, 430 (2d Cir. 2011).
I.
FCA Claims
The FCA
"authorizes private citizens to sue on behalf of the United States to
recover treble damages from those who knowingly make false claims for money or
property upon the Government or who knowingly submit false statements in
support of such claims or to avoid the payment of money or property to the
Government." U.S. ex rel. Lissack v. Sakura Global
Capital Mkts., Inc., 377 F.3d 145, 146 (2d Cir. 2004). The wrongful
activity must be linked "to the government's decision to pay" a
claim. Mikes v. Straus, 274 F.3d 687, 696
(2d Cir. 2001).
The Complaint alleges
violations of the FCA's whistleblower provision, 31 U.S.C. § 3730(h) ("Section 3730(h)"),
which, at the time of the events at issue in the Complaint, provided as
follows:
Any employee who is
discharged . . . by his or her employer because of lawful acts done by the
employee on behalf of the employee or others in furtherance of an action under
this section, including investigation for, initiation of, testimony for, or
assistance in an action filed or to be filed under this section, [*9] shall be entitled to all relief
necessary to make the employee whole. Such relief shall include reinstatement
with the same seniority status such employee would have had but for the
discrimination, 2 times the amount of back pay, interest on the back pay, and
compensation for any special damages sustained as a result of the
discrimination, including litigation costs and reasonable attorneys' fees.
31 U.S.C. § 3730(h) (subsequently
amended in 2009).
In order to sustain
an action under 31 U.S.C. § 3730(h), Fisch
must prove that: 1) he engaged in conduct protected under the statute; 2) his
employer knew that he was engaged in such conduct; and 3) he was terminated in
retaliation for the protected conduct. See, e.g.,Mendiondo v. Centinela Hosp. Med.
Center, 521 F.3d 1097, 1104 (9th Cir. 2008). Fisch has adequately
pled each of the above elements with respect to the School. He has not done so
with respect to the Individual Defendants, however, because they do not qualify
as "employers" within the meaning of the statute.
A.
The Individual Defendants' Liability
The Individual
Defendants, which consist of the School's Executive Director and other members
of the Board, cannot be liable under Section 3730(h) [*10] because
they do not qualify as employers for purposes of the statute. Section 3730(h) imposes liability
only on employers. See, e.g., U.S. ex rel. Siewick v. Jamieson Sci.
& Eng'g, Inc., 322 F.3d 738, 740, 355 U.S. App. D.C. 278 (D.C. Cir. 2003).
Because the FCA does not define the term "employer," it is given its
ordinary common law meaning. See United States v. Texas, 507 U.S. 529,
534, 113 S. Ct. 1631, 123 L. Ed. 2d 245 (1993). Accordingly, it is
the corporation only, not its officers, that is the employer of the
corporation's employees. See Meyer v. Holley, 537 U.S. 280, 286,
123 S. Ct. 824, 154 L. Ed. 2d 753 (2003); cf. Tomka v. Seiler Corp., 66 F.3d 1295,
1313-17 (2d Cir. 1995) (holding that the
word "employer" does not cover a supervisor in his personal capacity
for cases arising under Title VII). The motion to dismiss thus successfully
disposes of Fisch's FCA whistleblower claims against the Individual Defendants.
Fisch points to a
handful of out-of-Circuit cases in which district courts allowed Section 3730(h) claims to go forward
against individual defendants. In light of the clear language of the statute,
however, this Court joins the overwhelming balance of authority holding
otherwise. See, e.g., Yesudian ex rel. U.S. v. Howard
Univ., 270 F.3d 969, 972, 348 U.S. App. D.C. 145 (D.C. Cir. 2001) [*11] ("Section 3730(h) plainly mentions only
the 'employer' as incurring liability, and the word 'employer' does not
normally apply to a supervisor in his individual capacity.").
Fisch notes that
Congress amended Section 3730(h) on May 20, 2009 to
exclude the word "employer," see Pub. L. 111-21, § 4(f)(1), (2),
effective May 20, 2009, and that at least one court in this Circuit has held
that this amendment allows for FCA retaliation claims against individual
defendants. See U.S. ex rel. Moore v. Cmty. Health
Servs., Inc., 3:09 CV 1127 (JBA), 2012 U.S. Dist. LEXIS 43904, 2012 WL 1069474,
at *9 (D. Conn. Mar. 29, 2012). Fisch urges this Court to hold the
same. Fisch concedes, however, that the 2009 amendments to Section 3730(h) do not apply
retroactively. See id. Fisch was terminated on March 20, 2009 and his last day
at work for the School was May 15, 2009. He does not allege that the defendants
engaged in any form of retaliatory conduct after May 20, 2009 that might give
rise to liability under Section 3730(h). Thus,
even if the 2009 amendments to the FCA had the requisite effect on individual
liability, they have no impact on the individual liability of these defendants.
B.
Protected Conduct
In order for an
employee's [*12] actions
to constitute "protected conduct" under Section 3730(h), they must
have been "in furtherance of an action under the FCA." Garcia v. Aspira of New York, Inc.,
07 Civ. 5600 (PKC), 2011 U.S. Dist. LEXIS 41708, 2011 WL 1458155, at *4
(S.D.N.Y. Apr. 13, 2011) (citation omitted).
In other words, the employee "must have been investigating matters that
were calculated, or reasonably could lead, to a viable FCA action." Shekoyan v. Sibley Int'l, 409 F.3d
414, 423, 366 U.S. App. D.C. 144 (D.C. Cir. 2005) (citation omitted).
Although it is not necessary for the plaintiff actually to file a qui tam
lawsuit, or even "to know that the investigation could lead to" such
a suit, id. (citation omitted), mere investigation of an employer's
non-compliance with federal regulations is not enough. See Faldetta v. Lockheed Martin Corp., 98
Civ. 2614 (RCC), 2000 U.S. Dist. LEXIS 16216, 2000 WL 1682759, at *12 (S.D.N.Y.
Nov. 9, 2000). The plaintiff's investigation must be "directed
at exposing a fraud upon the government." Moor-Jankowski v. Bd. Of Trustees of
New York Univ., 96 Civ. 5997 (JFK), 1998 U.S. Dist. LEXIS 12305, 1998 WL
474084, at *10 (S.D.N.Y. Aug. 10, 1998) (citation omitted).
The allegations in
the Complaint more than meet this standard. Fisch claims that he investigated a
variety of financial improprieties [*13] in
connection with the School's submission of the 2008 audit and other statements
regarding amounts to be paid or reimbursed to the School with federal funds. He
alleges that he uncovered widespread accounting irregularities, including the
School's failure to use purchase orders prepared and approved in advance, its
failure to review and separately approve invoices before making payments, and
its falsification, forgery, and backdating of certain approved purchase orders
and invoices at the direction of Winnitt.
Drawing all
inferences in Fisch's favor, he plausibly alleges that he gathered facts and
information about defendant's conduct that reasonably could have led to a
viable FCA action, and that his actions were directed at exposing fraud upon
the government. Fisch's activities went beyond mere investigation of his
employer's failure to comply with federal regulations. He informed members of
the Board that "someone could go to jail" if the relevant financial
information was submitted to the government, and went so far as to tell Board
members that he had consulted with an attorney. Although Fisch did not actually
file a qui tam action against the School, the Complaint alleges violations [*14] of
accounting and fiscal control regulations intimately associated with the
payment of federal grants. See 34 C.F.R. §§ 80.20, 80.21. And it alleges that
these violations included fraudulent submissions, including intentionally
falsified, forged, and backdated approved purchase orders and invoices.
The defendants argue
that Fisch's actions do not constitute "protected conduct" because,
in investigating the School's finances and audit procedures, he was simply
acting in his capacity as COO. They note that the Complaint states that Fisch
was hired "to help the School handle its finances," and that
"sign[ing] off" on the audit was one of his job responsibilities.
They further note that the Complaint does not cite any discrete false
statements submitted to the government for payment or reimbursement, or allege
that the School's purchase orders and invoices did not correspond to actual
School expenditures. The sum total of the allegations in the Complaint,
defendants argue, amount to a claim that Fisch investigated the School's
failure to abide by the relevant accounting regulations.
These arguments
misconstrue the standard for pleading a Section 3730(h) violation and the
nature of the allegations [*15] in
the Complaint. To state a viable claim under Section 3730(h), the
plaintiff need not plead his fraud allegations with particularity. See Mendiondo, 521 F.3d at 1103.
It is necessary only that he be "investigating matters that were
calculated, or reasonably could lead, to a viable FCA action." Shekoyan, 409 F.3d at 423 (citation omitted).
The investigation of large-scale financial irregularities and accounting
failures addressed in the Complaint, which were allegedly included in
submissions filed with the federal government to justify payment or
reimbursement of federal funds, more than meet this standard.
C.
Notice
To satisfy the second
element of an FCA retaliation claim, Fisch must adequately plead that the
School knew he was engaged in protected conduct. "Absent such notice, then
a fortiori, [the School's] actions could not constitute retaliation." Faldetta, 2000 U.S. Dist. LEXIS
16216, 2000 WL 1682759, at *13 (citation omitted).
Naturally, an employee who simply engages in behavior wholly consistent with
his job description will not, without more, provide notice that he is acting
"in furtherance" of an FCA action. See Eberhardt v. Integrated Design &
Constr., Inc., 167 F.3d 861, 868-69 (4th Cir. 1999). Accordingly, [*16] an
employee assigned the task of investigating fraud within a company must go
beyond the assigned task and put his employer on notice that an FCA action is
"a reasonable possibility." Id. at 869.
Fisch has satisfied
this element. He alleges not only that he helped the School handle its finances
and prepare its 2008 audit and other submissions in accordance with his job
responsibilities as COO, but also that he warned the members of the Board of
possible legal consequences of the financial improprieties he uncovered. Fisch
told Board members that "someone could go to jail" as a result of the
School's improper accounting practices, and that he had consulted with an
attorney. Fisch further alleges that Winnitt explicitly acknowledged that the
School's actions were improper or illegal by stating that the School was
"too small to get caught." Irrespective of the nature or scope of
Fisch's assigned job responsibilities, a reasonable factfinder could conclude
that the School was on notice of a potential FCA action. "[C]haracterizing
the employer's conduct as illegal . . . or recommending that legal counsel
become involved" is sufficient to provide notice to an employer of a
potential qui tam [*17] lawsuit,
even if these statements come from an employee "tasked with the internal
investigation of fraud against the government."
D.
Retaliation
Fisch has adequately
pled facts that, if proven, would permit a jury to conclude that his employment
was terminated in retaliation for his protected conduct. Fisch claims that he
was fired mere days after Winnitt became angry with him for informing members
of the Finance Committee that expenditures did not match grant budgets. The
Complaint describes a pattern of retaliatory behavior by Winnitt that
culminated in Fisch's firing: Winnitt initially resisted Fisch's efforts to
investigate financial and accounting practices at the School, then she limited
his authority to speak independently with the Board and the Finance Committee
and threatened his employment. Next, she punished him through a poor
performance review, and finally she fired him. These allegations are sufficient
to allow Fisch's claim to go forward.
II.
Breach of Contract Claims
Fisch alleges that
the defendants breached his contract with the School by, inter alia, violating
the School's stated policies on "Separation" and "Code of Ethics
and Conduct," and its "Whistleblower [*18] Policy."
The defendants seek dismissal of the breach of contract claims against the
Individual Defendants only. The parties do not argue that any law other than
New York law applies. "[W]here the parties agree that New York law
controls, this is sufficient to establish choice of law." Federal Ins. Co. v. American Home
Assurance Co., 639 F.3d 557, 566 (2d Cir. 2011).
To state a claim for
breach of contract under New York law, "a complaint need only allege (1)
the existence of an agreement, (2) adequate performance of the contract by the
plaintiff, (3) breach of contract by the defendant, and (4) damages." Eternity Global Master Fund Ltd. v.
Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 2004) (citation omitted).
It is black letter law, however, that generally "one who is not a party to
a contract cannot be held liable for a breach of that contract." Underdog Trucking, LLC, Reggie Anders
v. Verizon Servs. Corp., 09 Civ. 8918 (DLC), 2010 U.S. Dist. LEXIS 72642, 2010
WL 2900048, at *3 (S.D.N.Y. July 20, 2010). It is undisputed that
the Individual Defendants did not enter into a contract with Fisch in their
individual capacities. Accordingly, the breach of contract claims against them
must be dismissed.
Fisch [*19] argues
that the Individual Defendants may be held individually liable for aiding and
abetting breach of contract, inducing a breach of contract, tortious
interference of contract, fraud, and various other torts. Although Fisch did
not plead any of these causes of action, he argues that the Court should
liberally construe the Complaint to allow these claims to go forward. These
arguments are unavailing. The Complaint wholly fails to plead the elements of
any of the above causes of action with respect to any of the Individual
Defendants. It fails to plead fraud with sufficient particularity to survive
the pleading requirements of Rule 9(b), Fed. R. Civ. P.,
or the facts necessary to support individual liability under a theory of
piercing the corporate veil. See De Jesus v. Sears, Roebuck & Co.,
Inc., 87 F.3d 65, 69-70 (2d Cir. 1995) (addressing the
pleading requirements for piercing the corporate veil under New York law). And
there is no cause of action for aiding and abetting breach of contract under
New York law. See Purvi Enterprises, LLC v. City of New
York, 62 A.D.3d 508, 509, 879 N.Y.S.2d 410 (N.Y. App. Div. 2009).
CONCLUSION
The defendants' May
15, 2012 motion to dismiss is granted as to Fisch's [*20] claims
against the Individual Defendants, and denied as to Fisch's claim against the
School under the whistleblower provisions of the FCA. This ruling disposes of
all claims against the Individual Defendants. The Clerk of Court shall remove
defendants Winnitt, Grossmann, Davis, and Rampoltd from the case.
SO ORDERED:
Dated: New York, New York
September 13, 2012
/s/ Denise Cote
DENISE COTE
United States District Judge
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