1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 UNITED STATES OF AMERICA ex rel. No. 1:22-cv-00924-TLN-CDB RELATOR, LLC, 12 Plaintiffs, 13 ORDER v. 14 HOWARD D. KOOTSTRA and GOLDEN 15 EMPIRE MORTGAGE, INC., 16 Defendants. 17 18 This matter is before the Court on Defendants Golden Empire Mortgage, Inc. (“GEM”) 19 and Howard D. Kootstra’s (“Kootstra”) (collectively, “Defendants”) Motion to Dismiss. (ECF 20 No. 33.) Plaintiff-Relator Relator LLC (“Relator”), who brings this qui tam action on behalf of 21 the United States, filed an opposition. (ECF No. 40.) The United States did not file an 22 opposition. Defendants filed a reply. (ECF No. 41.) For the reasons set forth below, the Court 23 GRANTS Defendants’ motion. 24 /// 25 /// 26 /// 27 /// 28 /// 1 I. FACTUAL AND PROCEDURAL BACKGROUND 2 This case arises from Defendants’ application for a Paycheck Protection Program (“PPP”) 3 loan.1 (ECF No. 1 at 2.) The federal government implemented the PPP in response to the 4 COVID-19 pandemic to provide eligible businesses with loans to cover payroll and other 5 specified business-related expenses. (Id. at 12.) Businesses wishing to obtain a PPP loan were 6 required to submit a loan application, which required businesses to acknowledge PPP rules and 7 certify their eligibility to receive a loan. (Id.) Certain businesses were ineligible for PPP loans, 8 such as businesses engaged in lending. (Id. at 19.) 9 Relator initiated this case under seal on July 26, 2022. (Id. at 1.) Relator alleges 10 Defendants were ineligible to receive PPP loans as a mortgage lender and thus knowingly made 11 false or fraudulent statements on their PPP application in violation of the False Claims Act 12 (“FCA”),

(a)(1)(A–B). (Id. at 19–26.) The Department of Justice investigated 13 the allegations and declined to intervene on October 13, 2023. (ECF No. 16.) The Court 14 unsealed the Complaint on October 27, 2023. (ECF No. 22.) Defendants filed the instant motion 15 to dismiss on February 16, 2024. (ECF No. 33.) 16 II. STANDARD OF LAW 17 A motion to dismiss under Federal Rule of Civil Procedure (“Rule”) 12(b)(6) tests the 18 legal sufficiency of a complaint. Navarro v. Block,

(9th Cir. 2001). Rule 8(a) 19 requires that a pleading contain “a short and plain statement of the claim showing that the pleader 20 is entitled to relief.” Fed. R. Civ. P. 8(a); see also Ashcroft v. Iqbal,

, 677–78 21 (2009). Under notice pleading in federal court, the complaint must “give the defendant fair notice 22 of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic v. Twombly,

(2007). “This simplified notice pleading standard relies on liberal discovery rules and 24 summary judgment motions to define disputed facts and issues and to dispose of unmeritorious 25 claims.” Swierkiewicz v. Sorema N.A.,

(2002). 26

27 1 GEM is a mortgage lending company. (ECF No. 1 at 10.) Kootstra is GEM’s Chief Executive Officer and Founder. (Id.) Relator refers to Defendants collectively in the Complaint, 28 and the Court will do the same in this Order. 1 On a motion to dismiss, the factual allegations of the complaint must be accepted as true. 2 Cruz v. Beto,

(1972). A court must give the plaintiff the benefit of every 3 reasonable inference to be drawn from the “well-pleaded” allegations of the complaint. Retail 4 Clerks Int’l Ass’n v. Schermerhorn,

, 753 n.6 (1963). A plaintiff need not allege 5 “‘specific facts’ beyond those necessary to state his claim and the grounds showing entitlement to 6 relief.” Twombly,

(internal citation omitted). 7 Nevertheless, a court “need not assume the truth of legal conclusions cast in the form of 8 factual allegations.” U.S. ex rel. Chunie v. Ringrose,

, 643 n.2 (9th Cir. 1986). 9 While Rule 8(a) does not require detailed factual allegations, “it demands more than an 10 unadorned, the defendant-unlawfully-harmed-me accusation.” Iqbal,

. A 11 pleading is insufficient if it offers mere “labels and conclusions” or “a formulaic recitation of the 12 elements of a cause of action.” Twombly,

; see also Iqbal,

. Thus, 13 “[c]onclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to 14 dismiss” for failure to state a claim. Adams v. Johnson,

(9th Cir. 2004) 15 (citations omitted). Moreover, it is inappropriate to assume the plaintiff “can prove facts that it 16 has not alleged or that the defendants have violated the . . . laws in ways that have not been 17 alleged.” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters,

519, 526 (1983). 19 A court may not dismiss a complaint in which the plaintiff has alleged “enough facts to 20 state a claim to relief that is plausible on its face.” Twombly,

. “A claim has 21 facial plausibility when the plaintiff pleads factual content that allows the court to draw the 22 reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal,

680. While the plausibility requirement is not akin to a probability requirement, it demands more 24 than “a sheer possibility that a defendant has acted unlawfully.”

. This plausibility 25 inquiry is “a context-specific task that requires the reviewing court to draw on its judicial 26 experience and common sense.”

. Thus, only where a plaintiff fails to “nudge [his or 27 her] claims . . . across the line from conceivable to plausible[,]” is the complaint properly 28 dismissed.

(internal quotations omitted). 1 In ruling on a motion to dismiss, a court may consider only the complaint, any exhibits 2 thereto, and matters which may be judicially noticed pursuant to Federal Rule of Evidence 201. 3 See Mir v. Little Co. of Mary Hosp.,

(9th Cir. 1988). If a complaint fails to 4 state a plausible claim, “‘[a] district court should grant leave to amend even if no request to 5 amend the pleading was made, unless it determines that the pleading could not possibly be cured 6 by the allegation of other facts.’” Lopez v. Smith,

(9th Cir. 2000) (en banc) 7 (quoting Doe v. United States,

(9th Cir. 1995)). 8 III. ANALYSIS 9 Defendants move to dismiss for two reasons: (1) the FCA’s public disclosure bar applies; 10 and (2) Relator’s claims fail to satisfy Rules 12(b)(6) and 9(b). (ECF No. 33-1 at 6–7.) As will 11 be discussed, the Court agrees with Defendants that the public disclosure bar applies. Therefore, 12 the Court need not and does not address Defendants’ remaining arguments. 13 A. Applicable Law 14 “The FCA creates civil liability for ‘any person who (A) knowingly presents, or causes to 15 be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, 16 uses, or causes to be made or used, a false record or statement material to a false or fraudulent 17 claim.’” United States v. Allergan, Inc.,

(9th Cir. 2022) (quoting

3729(a)(1)). “A private person, known as a qui tam relator, may bring a civil action under the 19 FCA in the name of the U.S. government.”

at 994 (citing

(b)). “The 20 government may proceed with the action or decline to take over the action; if the government 21 declines, then the relator can still pursue the action.”

(citing

(b)(4)). “The 22 FCA incentivizes whistleblowers to come forward by offering successful relators up to thirty 23 percent of the recovery.”

(citing

(d)). However, “the FCA . . . provides 24 limits on who can bring a qui tam action and the sources of information upon which they can base 25 their suit.”

“These ‘bars’ to suit are intended to prevent ‘parasitic’ or ‘opportunistic’ qui tam 26 actions.”

(citation omitted). 27 At issue in this case is the public disclosure bar. The public disclosure bar is set forth in 28

(e)(4)(A), which provides: 1 The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or 2 transactions as alleged in the action or claim were publicly disclosed— 3 (i) in a Federal criminal, civil, or administrative hearing in which the 4 Government or its agent is a party; 5 (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or 6 (iii) from the news media, 7 unless the action is brought by the Attorney General or the person 8 bringing the action is an original source of the information. 9 Thus, the public disclosure bar is triggered when: “(1) the disclosure at issue occurred 10 through one of the channels specified in the statute; (2) the disclosure was public; and (3) the 11 relator’s action is substantially the same as the allegation or transaction publicly disclosed.”

at 12 996 (citing United States ex rel. Solis v. Millennium Pharms., Inc.,

(9th Cir. 13 2018)) (internal quotations omitted). 14 B. Analysis 15 Defendants argue Relator’s Complaint is based on details about Defendants’ PPP loan that 16 were publicly disclosed on PandemicOversight.gov, which qualifies as either a “federal report” or 17 “news media” under the public disclosure bar. (ECF No. 33-1 at 13–15.) Defendants further 18 argue Relator is not an original source of the information in the Complaint. (Id. at 15–17.) In 19 opposition, Relator argues PandemicOversight.gov does not constitute “news media” and the 20 information on the website does not disclose that Defendants were ineligible to receive a PPP 21 loan. (ECF No. 20 at 17–26.) 22 The Court will first address whether the information on the PandemicOversight.gov 23 website constitutes a qualifying public disclosure, then whether the publicly disclosed 24 information is substantially similar to Relator’s claims, and lastly, whether Relator is an original 25 source of the information in the Complaint. 26 /// 27 /// 28 /// 1 i. Qualifying Public Disclosure 2 Defendants contend PandemicOversight.gov, an official website of the United States 3 government, qualifies as a “federal report” under the public disclosure bar because it is 4 maintained and curated by the Pandemic Response Accountability Committee of the Council of 5 Inspectors General on Integrity and Efficiency.2 (ECF No. 33-1 at 14.) Alternatively, Defendants 6 argue the website qualifies as “news media.” (Id.) In opposition, Relator argues only that the 7 website does not qualify as “news media.” (ECF No. 40 at 20–23.) Relator does not respond to 8 Defendants’ argument about the website being a “federal report.” 9 The Court agrees with Defendants that the website is a federal report. In Schindler 10 Elevator Corp. v. United States ex rel. Kirk, the Supreme Court explained the “ordinary meaning” 11 of “report is something that gives information or a notification, or an official or formal statement 12 of facts or proceedings.”

, 407 (2011) (internal citation, quotation marks, and 13 alterations omitted). The Court reasoned that “[t]his broad ordinary meaning of ‘report’ is 14 consistent with the generally broad scope of the FCA’s public disclosure bar.” Id. 15 In the instant case, PandemicOversight.gov clearly gives information. The website is 16 titled “PPP Borrower Search.” (ECF No. 33-2 at 11.) The website provides information about 17 PPP borrowers such as the borrower’s name, location, business type, industry, business age, 18 lender, date the PPP loan was approved, loan amount, spending category, amount forgiven, 19 number of loans, and jobs reported. (Id.) Considering Schindler’s broad definition of “report” 20 and absent any argument to the contrary from Relator, the Court concludes the website constitutes 21 a “federal report” within the meaning of the public disclosure bar.3 22 /// 23

24 2 Defendants request the Court take judicial notice of excerpts of PPP borrower information for GEM obtained from PandemicOversight.gov. (ECF No. 33-2 at 2.) Noting no opposition 25 from Relator, the Court GRANTS the request because the excerpts from an official website of the 26 United States government contain facts that can “accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b). 27 3 Because the Court concludes the database is a “federal report,” the Court need not and 28 does not address whether it is also “news media.” 1 ii. Substantial Similarity 2 In determining whether Relator’s action is “substantially the same as the allegation or 3 transaction publicly disclosed,” the Court first looks to “whether the publicly available 4 information . . . contained an ‘allegation or transaction’ of fraud.” U.S. ex rel. Mateski v. 5 Raytheon Co.,

(9th Cir. 2016). “The substance of the disclosure . . . need not 6 contain an explicit ‘allegation’ of fraud, so long as the material elements of the allegedly 7 fraudulent ‘transaction’ are disclosed in the public domain.”

(citation omitted). The 8 Court then decides whether the relator’s claim and the prior disclosures are substantially similar. 9

. Courts should not “read[ ] qui tam complaints at only the ‘highest level of 10 generality,’” thereby “wip[ing] out qui tam suits that rest on genuinely new and material 11 information.”

at 575–78 (citations omitted). 12 The parties appear to agree PandemicOversight.gov does not disclose an explicit 13 “allegation” of fraud. Instead, the dispute seems to be whether the website discloses the material 14 elements of a fraudulent “transaction.” Both parties cite Mateski for the following formula used 15 to determine substantial similarity: 16 [I]f X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent 17 transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that 18 fraud has been committed. 19

. 20 Defendants contend that every significant fact in Relator’s Complaint is present on 21 PandemicOversight.gov. (ECF No. 33-1 at 14.) Defendants argue applying the Mateski formula, 22 “X” represents how Defendants applied for and received a PPP loan despite being a mortgage 23 lender and “Y” represents how mortgage lenders were ineligible for PPP loans. (Id. at 15.) 24 Defendants argue these two variables establish “Z” — an inference that fraud must have occurred. 25 (Id.) In opposition, Relator argues the information on PandemicOversight.gov does not disclose 26 that Defendants were ineligible to receive a PPP loan. (ECF No. 40 at 20–22.) 27 The Court again agrees with Defendants. The thrust of Relator’s Complaint is that 28 Defendants applied for and obtained a PPP loan despite knowing they were ineligible to do so as 1 a mortgage lender. Defendants’ status as a mortgage lender and the fact that they obtained a PPP 2 loan was publicly disclosed. Not only does Relator allege Defendants reported being a mortgage 3 lender on the PPP application, but that information is also reflected on PandemicOversight.gov. 4 (See ECF No. 1 at 5–6 (alleging GEM used NAICS Code 522292 on its PPP loan application, 5 signifying it was a lending company that used real estate as collateral); see also ECF No. 33-2 6 (indicating GEM is a mortgage company in the real estate credit industry).) In other words, the 7 material elements of the alleged fraud — that Defendants applied for a PPP loan despite being a 8 mortgage lender — were publicly disclosed. From that information, “readers or listeners may 9 infer . . . the conclusion that fraud has been committed” — namely, that Defendants falsely and/or 10 fraudulently applied for a PPP loan despite being ineligible to do so. Mateski,

. 11 The Court notes that Relator spends most of its opposition presenting general background 12 information about the public disclosure bar rather than engaging in meaningful analysis or 13 applying the law to the facts of the instant case. Specifically, within the eight pages Relator 14 devotes to “argument” about the public disclosure bar, the Court counts less than eight sentences 15 that reference the facts of the instant case. Further, those eight sentences lack clarity, substance, 16 and citation to authority. To the extent Relator’s argument is that Defendants’ false certifications 17 from the loan application are not publicly disclosed on PandemicOversight.gov, it appears the 18 Government possessed all the relevant information to investigate the alleged fraud before Relator 19 filed the Complaint. See Mateski,

(“[W]e sometimes have asked whether the 20 Government was on notice to investigate the fraud before the relator filed his complaint — which 21 is another way of thinking about substantial similarity.”); see also Allergan, Inc.,

22 (“It is salient and potentially controlling that the key factual information underlying [the relator’s] 23 complaint was all publicly disclosed and much could be found in websites maintained by the 24 [Patent and Trademark Office] and other government agencies.”). 25 For these reasons, the Court concludes the material elements of the allegedly fraudulent 26 “transaction” were disclosed in the public domain and Relator’s claim and the prior disclosures 27 are substantially similar. 28 /// 1 iii. Original Source 2 Lastly, Relator fails to argue that it is an “original source” for purposes of circumventing 3 the public disclosure bar. See United States ex rel. Solis v. Millennium Pharms., Inc.,

Supp. 3d 786, 795 (E.D. Cal. 2020), aff’d sub nom. Solis v. Millennium Pharms., Inc.,

App’x 298 (9th Cir. 2021) (“Relator bears the burden of establishing that he qualifies as an 6 original source.”). An “original source” is defined in relevant part as an individual who “has 7 knowledge that is independent of and materially adds to the publicly disclosed allegations or 8 transactions, and who has voluntarily provided the information to the Government before filing 9 an action under this section.”

(e)(4)(B). 10 Relator’s allegations appear to be based entirely on public information. Relator does not 11 cite — nor can the Court locate — any information in the Complaint that materially adds to the 12 public disclosures or shows that Relator had any independent knowledge of the alleged fraud. 13 See United States ex rel. Hastings v. Wells Fargo Bank, NA, Inc., 656 Fed. App’x 328, 331–32 14 (9th Cir. 2016) (“Allegations do not materially add to public disclosures when they provide only 15 background information and details relating to the alleged fraud — they must add value to what 16 the government already knew.”). 17 For all these reasons, the Court GRANTS Defendants’ motion based on the public 18 disclosure bar. Indeed, Relator’s Complaint appears to be at odds with the purpose of qui tam 19 actions. See Allergan, Inc.,

(“The public disclosure bar seeks to strike a balance 20 between ‘encourag[ing] suits by whistle-blowers with genuinely valuable information, while 21 discouraging litigation by plaintiffs who have no significant information of their own to 22 contribute.’”). Although the Court has serious doubts as to whether Relator can cure the 23 deficiencies addressed herein, the Court will give Relator an opportunity to amend based on the 24 liberal standard in favor of granting leave to amend. Lopez,

. 25 IV. CONCLUSION 26 For the foregoing reasons, the Court GRANTS Defendants’ Motion to Dismiss and 27 DISMISSES Relator’s Complaint with leave to amend. (ECF No. 33.) Relator may file an 28 amended complaint not later than thirty (30) days from the electronic filing date of this Order. 1 | Defendants’ responsive pleading is due not later than twenty-one (21) days after Relator files an 2 | amended complaint. If Relator opts not to file an amended complaint, the Court will dismiss this 3 | action and close the case. 4 IT IS SO ORDERED. 5 | Date: August 5, 2024 6 r> /) 7 “ I of bw

9 United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10