United States Ex Rel. Batiste v. SLM Corp.

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 2011 Decided November 4, 2011

No. 10-7140

UNITED STATES OF AMERICA, EX REL. SHELDON BATISTE,
APPELLANT

v.

SLM CORPORATION,
APPELLEE

Appeal from the United States District Court
for the District of Columbia
(No. 1:08-cv-00425)

Catherine Y. Hancock, Attorney, U.S. Department of
Justice, argued the cause as amicus curiae United States of
America in support of appellant. With her on the brief were
Tony West, Assistant Attorney General, Ronald C. Machen, Jr.,
United States Attorney, and Thomas M. Bondy, Attorney.

Timothy J. Matusheski argued the cause for appellant. With
him on the briefs was Tracy D. Rezvani.

Lisa S. Blatt argued the cause for appellee. With her on the
brief was R. Reeves Anderson.
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Before: SENTELLE, Chief Judge, ROGERS and BROWN,
Circuit Judges.

Opinion for the Court filed by Chief Judge SENTELLE.

SENTELLE, Chief Judge: Relator Sheldon Batiste, on behalf
of the United States, appeals the district court’s dismissal of his
qui tam complaint for lack of subject matter jurisdiction under
Federal Rule of Civil Procedure 12(b)(1). The district court held
that an earlier-filed complaint barred its consideration of
Batiste’s complaint under the first-to-file rule of the federal
False Claims Act (“FCA”), 31 U.S.C. § 3730(b)(5). The case
raises a question of first impression in this Circuit—whether
Section 3730(b)(5) requires the first-filed complaint to meet the
heightened pleading standards of Federal Rule of Civil
Procedure 9(b) for alleging fraud in order to bar a later-filed
complaint.

We affirm the district court. We hold that the earlier-filed
complaint alleges the same material elements of a fraudulent
scheme as Batiste’s complaint, and that the earlier-filed
complaint need not meet the heightened pleading standards of
Rule 9(b) to allege facts sufficient to prompt a government
investigation, and, thus, to bar later-filed complaints under FCA
Section 3730(b)(5). Finally, we hold that Batiste waived his
argument that the case should not have been dismissed with
prejudice.

I. Background

A. Batiste Complaint

On June 13, 2008, Sheldon Batiste filed a complaint on
behalf of the United States government against SLM
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Corporation (“SLM,” commonly called “Sallie Mae”) under the
qui tam provisions of the FCA, 31 U.S.C. §§ 3729-3732. Batiste
First Amended Complaint (“Batiste Complaint”) ¶ 1. The FCA
allows a private person (a “relator”) to bring an action in the
Government’s name, 31 U.S.C. § 3730(b), and to recover a
portion of the proceeds of the action, id. § 3730(d), subject to
the requirements of the statute.

According to the allegations in his complaint, from
September 27, 2004, until April 28, 2006, Batiste worked as a
senior loan associate at SLM Financial Corporation, a subsidiary
of SLM, in Mount Laurel, New Jersey. Batiste Complaint ¶ 18.

He alleges he has personal knowledge that SLM
defrauded the U.S. government through its administration of
student loans under the Federal Family Education Loan Program
(“FFELP”). Id. ¶¶ 5-6. Batiste alleges that from October 5,
2004, to the time of filing, SLM defrauded the government by
presenting claims for funds to the government, each of which
included false certifications that the data SLM submitted with
the claims were correct and conformed to federal law. Id. ¶¶ 9,
16, 26, 27, 33, 35.

He further alleges that SLM accomplished this fraud by
unlawfully putting student loans into forbearance—that is,
allowing borrowers to cease payments temporarily, make
payments over an extended period of time, or make smaller
payments than previously scheduled—in violation of the Higher
Education Act’s (Pub. L. No. 89-329, codified at 20 U.S.C. §
1001 et seq.) forbearance regulations (codified at 34 C.F.R.
§ 682.211). Id. ¶¶ 14-16. Batiste posits SLM did this because
interest continues to accrue and the Department of Education
continues to pay special allowances to SLM while loans are in
forbearance, thereby increasing SLM’s return on each loan. He
further alleges that the longer a loan stayed in forbearance, the
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longer SLM would postpone default, thereby artificially keeping
SLM’s default ratio low and helping SLM maintain its status as
an eligible lender under Department of Education guidelines.
Id. ¶ 17.

Batiste alleges that SLM regularly granted forbearances to
borrowers who paid SLM to bring their accounts current, in
violation of regulations that mandate SLM only put loans into
forbearance when borrowers intend, but cannot afford, to pay
their loans. Id. Batiste alleges SLM systematically encouraged
employees to grant forbearances unlawfully. Managers told loan
officers to “forget” their formal training and to grant forbearances
to “anyone who is delinquent regardless of excuse or whether the
borrower had any intention of ever repaying the loan.” Id. ¶¶ 19-
21. Batiste further alleges that SLM incentivized loan officers to
grant unlawful forbearances by giving bonuses to individuals who
reduced delinquencies by a certain amount, whether by bringing
borrowers current on their loans or granting them forbearances.
Id. ¶ 22-24.

B. Zahara Complaint

On November 9, 2005, over two years before Batiste filed his
complaint, Michael Zahara filed a qui tam case against, inter alia,
SLM and his employer, Student Assistance Corporation (“SAC”),
a wholly-owned SLM subsidiary. Complaint, United States ex
rel. Zahara v. SLM Corp., No. 2:05-cv-8020 (C.D. Cal. Nov. 9,
2005) (later transferred to the Southern District of Indiana)
(“Zahara Complaint”). From November 29, 2004, until August
16, 2005, Zahara worked as a Default Prevention Specialist for
SAC, a division of SLM’s Debt Management Operations
department, in Las Vegas, Nevada. Zahara Complaint ¶¶ 18, 31,
162.
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Zahara alleged that throughout his employment, SLM
“knowingly allowed their employees and agents to falsify loan
records pertaining to delinquent FFELP loans held by Sallie
Mae.” Id. ¶ 3. Specifically, he focused his complaint on
employees falsifying forbearance records, alleging that SLM
employees would represent that borrowers orally agreed to
forbearances when, in fact, the SAC employees had never
actually spoken with the borrowers. Id. ¶¶ 3-4. He alleged that
SLM and SAC encouraged such fabrications by imposing a
delinquency quota system and a bonus system under which
employees would receive bonuses based on team performance in
bringing loans current. Id. ¶¶ 24-27. Zahara alleged SLM did
this to increase its revenue, meet its performance goals, and
maintain its “Exceptional Performer” designation, id. ¶ 30, a
now-repealed status that allowed SLM to receive higher-
guarantee payments than other lenders on its defaulted loans
under the Higher Education Act. See 20 U.S.C. § 1078-79
(repealed 2007).

Zahara also alleged SLM defrauded the government through
other practices, including failing to conduct minimal due
diligence on federal loans it originated, Zahara Complaint ¶¶ 144-
146; improperly consolidating loans, id. ¶¶ 147-152; failing to
bill borrowers in a timely manner, id. ¶¶ 153-154; improperly
crediting borrowers’ payments, id. ¶¶ 155-156; and concealing
defaulted loans, id. ¶¶ 157-159.

The Southern District of Indiana dismissed Zahara’s
complaint without prejudice after he was unable to obtain counsel
by a set deadline. Entry Dismissing Action at 1, United States ex
rel. Zahara v. SLM Corp., No. 1:06-cv-088 (S.D. Ind. Mar. 12,
2009), ECF No. 42.
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C. Procedural History

The district court dismissed Batiste’s complaint with
prejudice on September 24, 2010, for lack of subject matter
jurisdiction under Federal Rule of Civil Procedure 12(b)(1).
United States ex rel. Batiste v. SLM Corp., 740 F. Supp. 2d 98,
101-02 (D.D.C. 2010). The court held that under the FCA’s first-
to-file rule, the Zahara Complaint barred the court’s consideration
of the Batiste Complaint. The first-to-file rule provides, “When
a person brings an action under [the qui tam] 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). The district court found that the Batiste
Complaint alleged the “same material elements” of fraud as the
Zahara Complaint, and thus was barred by the earlier-filed
complaint. Batiste, 740 F. Supp. 2d. at 102. The district court
rejected Batiste’s argument that the Zahara case was not a
“pending action” for first-to-file purposes because the Zahara
Complaint did not meet heightened pleading standards for fraud
allegations under Federal Rule of Civil Procedure 9(b). Id. at
104. This appeal followed.

II. Analysis

Batiste raises three arguments on appeal: (A) the district
court improperly dismissed the Batiste Complaint under the
FCA’s first-to-file bar because the Batiste Complaint and Zahara
Complaint allege different fraudulent schemes; (B) the district
court improperly concluded that the FCA’s first-to-file bar does
not require a first-filed complaint to meet the pleading standards
for fraud; and (C) the district court improperly dismissed
Batiste’s complaint with prejudice.
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We agree with the district court that the complaints allege the
same material elements of the same fraud and that the FCA’s
first-to-file bar does not require a first-filed complaint to meet
heightened pleading standards, and we determine Batiste waived
his argument regarding the district court’s dismissal with
prejudice.

A. Same Material Elements of Fraud

Appellate courts review de novo the dismissal of a complaint
for lack of jurisdiction. United States ex rel. Findley v. FPC-
Boron Emps.’ Club, 105 F.3d 675, 681 (D.C. Cir. 1997).
Applying that standard in this case, we reason as follows:

The FCA’s first-to-file rule provides that “[w]hen 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).
This furthers the statute’s “twin goals of rejecting suits which the
government is capable of pursuing itself, while promoting those
which the government is not equipped to bring on its own.”
United States ex rel. Hampton v. Columbia/HCA Healthcare
Corp., 318 F.3d 214, 217 (D.C. Cir. 2003) (quoting United States
ex rel. Springfield Terminal Ry. v. Quinn, 14 F.3d 645, 651 (D.C.
Cir. 1994)). Therefore, the rule “bar[s] ‘actions alleging the same
material elements of fraud’ as an earlier suit, even if the
allegations ‘incorporate somewhat different details.’” Id. (quoting
United States ex rel. Lujan v. Hughes Aircraft Co., 243 F.3d
1181, 1189 (9th Cir. 2001)). Under this standard, two complaints
need not allege identical facts for the first-filed complaint to bar
the later-filed complaint. Id. at 218.

As a preliminary matter, Batiste urges this Court to interpret
the statute to mean a later-filed complaint must be both “a related
action” to and “based on the facts” underlying the first-filed
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complaint. He argues the district court incorrectly read the
statute disjunctively to mean a later-filed complaint may be either
a related action or based on the same facts. The plain language
of the statute, however, is neither conjunctive nor disjunctive. It
is clear that “based on the facts underlying the pending action”
merely clarifies “related action.” See United States ex rel.
Chovanec v. Apria Healthcare Group, Inc., 606 F.3d 361, 363-65
(7th Cir. 2010). The district court did not misinterpret this
straightforward language. Moreover, Batiste fails to explain how
his complaint is unrelated to the Zahara Complaint. He relies on
the argument that his complaint is not based on the facts
underlying the Zahara Complaint, a contention we find
unavailing, as discussed below.

Reviewing the Zahara and Batiste complaints de novo, we
must consider whether they allege the “same material elements of
fraud.” In other words, we must determine whether the Batiste
Complaint alleges a fraudulent scheme the government already
would be equipped to investigate based on the Zahara Complaint.
A side-by-side comparison has persuaded us that, although the
complaints allege somewhat different facts, Zahara’s complaint
suffices to put the U.S. government on notice of allegedly
fraudulent forbearance practices at SLM and its subsidiaries, and
Batiste’s complaint alleges the same material elements of the
same fraud.

Both Zahara and Batiste name the parent company, SLM, as
the lead defendant. Zahara discusses activities at an SLM
subsidiary office in Nevada, but alleges a nationwide scheme
attributable not only to the subsidiary, but also to SLM. Zahara
Complaint ¶¶ 32, 35, 36. Batiste focuses on activities at an SLM
office in New Jersey where he worked, but he also alleges a
nationwide scheme. See Batiste Complaint ¶¶ 18-25 (discussion
of SLM practices in Batiste’s office); id. ¶¶ 2 (alleging that
“policies and procedures yielding the violations complained of
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herein” originated at Sallie Mae headquarters in the District of
Columbia).

Both Zahara and Batiste allege the fraud began in late 2004.
Zahara Complaint ¶¶ 18, 31; Batiste Complaint ¶ 16. Zahara
alleges the fraud ended at his subsidiary in June 2005. Zahara
Complaint ¶ 29. Batiste alleges the fraud was still continuing at
his subsidiary at the time of the complaint. Batiste Complaint
¶ 16. Putting aside how Batiste might know the fraud continued
through the date he filed his complaint, given that he had not
worked at SLM for two years at that point, these temporal
differences are immaterial, especially since both complaints
allege almost exactly the same starting date. See United States ex
rel. Branch Consultants v. Allstate Ins. Co., 560 F.3d 371, 378
(5th Cir. 2009) (“[A] relator cannot avoid § 3730(b)(5)’s
first-to-file bar by simply adding factual details or geographic
locations to the essential or material elements of a fraud claim
against the same defendant described in a prior complaint.”). If
the government investigated the facts alleged in Zahara’s
complaint on a nationwide basis, it would discover continuing
fraud in the New Jersey offices, as well as the completed fraud in
the Nevada offices, if such fraud existed.

Finally, Zahara and Batiste broadly allege that the same
fraudulent activities occurred at each of their offices, for the same
reasons, and that similar SLM corporate policies promoted the
fraudulent behavior. They both allege SLM fraudulently
increased its profits and promoted its standing with the
Department of Education by falsifying forbearances. Zahara
Complaint ¶ 30; Batiste Complaint ¶ 17. And both allege that
SLM’s corporate culture promoted increasing the dispensation of
forbearances through quotas and a team bonus system. Zahara
Complaint ¶¶ 24-27; Batiste Complaint ¶¶ 22-25. Though Zahara
focused on the fabrication of oral forbearance requests, Zahara
Complaint ¶¶ 3-8, 30, and Batiste focused on the offering of
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forbearances to unqualified borrowers, Batiste Complaint ¶¶ 17-
21, the allegations of the first complaint give the government
grounds to investigate all that is in the second.

Under the Hampton material facts test, these complaints
allege essentially the same corporation-wide scheme. The Zahara
Complaint would suffice to equip the government to investigate
SLM’s allegedly fraudulent forbearance practices nationwide.
Batiste’s additional details would not give rise to a different
investigation or recovery. See United States ex rel. Ortega v.
Columbia Healthcare, 240 F. Supp. 2d 8, 13 (D.D.C. 2003)
(“[A]n examination of possible recovery . . . aids in the
determination of whether the later-filed complaint alleges a
different type of wrongdoing on new and different material
facts.”). The district court properly dismissed Batiste’s complaint
under the FCA’s first-to-file bar.

B. Federal Rule of Civil Procedure 9(b)

Federal Rule of Civil Procedure 9(b) provides that “[i]n
alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.” Batiste raises a
question of first impression in this Court—namely, whether a
complaint must allege fraud with particularity sufficient to meet
that heightened pleading standard in order to bar later-filed
complaints under the FCA’s first-to-file rule. We hold that first-
filed complaints need not meet the heightened standard of Rule
9(b) to bar later complaints; they must provide only sufficient
notice for the government to initiate an investigation into the
allegedly fraudulent practices, should it choose to do so.

Batiste, supported by the United States as amicus curiae,
argues that the court should impose a heightened pleading
requirement on complaints for first-to-file purposes, relying on
Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir.
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2005). Such an interpretation, they argue, would strike the
appropriate balance between the first-to-file rule’s twin
purposes—to encourage whistleblowers to come forward with
allegations of fraud and to prevent copycat actions that do not
provide additional material information to the government.
Requiring a complaint to meet the Rule 9(b) standards, they
contend, would ensure the complaint provides the government
sufficient information to pursue an investigation, as well as
prevent an overly-broad complaint from barring a more detailed,
later-filed complaint.

We are unconvinced. Nothing in the language of Section
3730(b)(5) incorporates the particularity requirement of Rule 9(b),
which militates against reading such a requirement into the statute.
The statutory text imposes a bar on complaints related to earlier-
filed, “pending” actions. The command is simple: as long as a
first-filed complaint remains pending, no related complaint may be
filed. Further, Rule 9(b) is designed to protect defendants in fraud
cases from frivolous accusations and allow them to prepare an
appropriate response. Section 3730(b) is designed to allow
recovery when a qui tam relator puts the government on notice of
potential fraud being worked against the government, but to bar
copycat actions that provide no additional material information.
As the district court found, a complaint may provide the
government sufficient information to launch an investigation of a
fraudulent scheme even if the complaint does not meet the
particularity standards of Rule 9(b). Batiste, 740 F. Supp.2d at
104. Imposing the heightened pleading standard, moreover, would
create a strange judicial dynamic, potentially requiring one district
court to determine the sufficiency of a complaint filed in another
district court, and possibly creating a situation in which the two
district courts disagree on a complaint’s sufficiency.

Finally, Batiste and the government’s analysis of the
incentives such a requirement would create are unpersuasive.
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Like the Sixth Circuit, they suggest that according preclusive
effect to an overly broad first-filed complaint would encourage
would-be qui tam relators to file non-specific suits to block other
potential relators from sharing in their bounty. See Walburn, 431
F.3d at 973. This reasoning, however, does not make sense. Even
without grafting a Rule 9(b) requirement onto the first-to-file rule,
the first plaintiff's complaint is still subject to the Rule 9(b)
pleading requirements in order for a court to hear the case. If the
first relator did not plead fraud with particularity, his complaint
would be dismissed and he would lose his own shot at monetary
reward. The threat of a second application of Rule 9(b) is
unnecessary. As observed in United States ex rel. Folliard v.
Synnex Corp., No. 07-cv-719, slip op. at 9-10 (D.D.C. July 19,
2011), imposing such a requirement “would not minimize
duplicative claims, would encourage opportunistic behavior, and
would have a negligible impact on desirable whistle-blowing.”
We therefore reject Batiste’s argument that first-filed qui tam
complaints must meet a heightened pleading standard under Rule
9(b) in order to bar later-filed complaints.

C. Dismissal with Prejudice

Batiste argues that because Zahara’s complaint was dismissed
before Batiste’s complaint was dismissed, his complaint should
not have been dismissed with prejudice (implying that Batiste
would like the opportunity to amend his complaint and bring this
case again). Batiste, however, waived this argument. Zahara was
dismissed eighteen months prior to the Batiste dismissal. During
that time, Batiste never asked for leave to amend his complaint in
the district court; thus, he has waived his opportunity to file a new
suit on these same grounds now. See Confederate Mem’l Ass’n v.
Hines, 995 F.2d 295, 299 (D.C. Cir. 1993) (recognizing that
although leave to amend generally should be freely granted, that
decision is left to the district court’s discretion, and, as in the
present case, not only was there no abuse of discretion, “it appears
 13

that appellants never properly requested an opportunity to amend
in the District Court”).

III. Conclusion

For the reasons set forth above, we affirm the district court’s
dismissal of the complaint.
So ordered.