Randy Maniloff checks in with a good analysis of the recent 5th Circuit decision in Ex Rel Branch

Randy Maniloff is a very familiar name to us at Slabbed as we’ve seen him used by reporters like Rebecca Mowbray at the Times Picayune as a source for business community legal reaction when she reports on Katrina policyholder cases. I’ve found Randy’s legal analysis (as reported) to be rigorous even in cases where we might not see things quite the same. As such I was honored that he sent us a link to an article he did for the latest issue of the Federalist Society’s Class Action Watch on the implications of the recent 5th Circuit decision reinstating Ex Rel Branch to the current massive money giveaways known as the bailout and stimulus package. He article begins on page 6 of the publication as he sets his piece up but it is on the bottom page 7 were I’ll begin as he gives a brief overview of Ex Rel Branch:

Branch Consultants (2009) has expanded plaintiffs’ ability to bring qui tam actions under the False Claims Act. At issue before the Fifth Circuit was an appeal of the Eastern District of Louisiana’s dismissal of Branch Consultant’s False Claims Act qui tam complaint against eight insurance companies and six adjusting firms. Branch’s claim was based on fraud allegedly committed by the insurer defendants in their role as participants in FEMA’s “Write Your Own” flood insurance program (WYO). Under this program, private insurance companies issue and service flood insurance policies, but any claims are paid from the federal treasury.

In the ordinary course, participating WYO insurers are required to comply with certain FEMA rules to ensure accurate estimates of flood damage. However, following Hurricane Katrina, FEMA was forced to waive certain of their rules in order to expedite payments to insureds. In general, a significant issue in the adjustment of Katrina claims (and source of substantial litigation) was the apportionment between wind damage and flood damage. According to Branch, waiver of the FEMA rules “created a perverse incentive for WYO insurers to understate losses due to wind (which an insurer would be required to pay under the insured’s homeowner’s policy) and overstate losses due to flood, thereby shifting the loss from the WYO insurers to the federal government.”

At the time that Branch filed its qui tam action, a similar action—Rigsby—had already been filed and was under seal—pursuant to False Claims Act provisions. It was alleged in the Rigsby complaint that four insurers in the WYO program “‘made a corporate decision to misdirect and misallocate claims from those of hurricane coverage to flood claims’ payable by the federal government.” The Rigsby plaintiffs made general allegations of fraud against the four WYO insurer-defendants and also made specific allegations of fraud against State Farm.

In the Branch Consultants complaint, Branch—just as the Rigsbys had done—generally alleged that the WYO insurer defendants defrauded the National Flood Insurance Program by improperly attributing wind damage and other non-flood losses to the flood policies subsidized or underwritten by the government. By doing so, the defendants were allegedly able to avoid attributing such losses to causes that were covered by homeowners policies largely underwritten by themselves.

However, Branch also went a step further, by detailing fifty-seven claimed instances of fraud, including the homeowner’s address, insurance company and policy number, the amount of flood damage paid by the federal government, and a dollar amount and explanation of the ‘true’ flood damage to the properties. Branch, like Rigsby, named State Farm and Allstate as defendants, but also named WYO insurers that the Rigsbys did not sue.

The district court granted the defendants’ motion to dismiss the Branch complaint on the basis of the False Claims Act’s “first-to-file” bar. This provision deprives the court of jurisdiction over a qui tam suit if the claim has already been filed by another. The district court held that the Branch complaint alleged the “same general conduct and theory of fraud” as the Rigsby complaint “regardless of whether Branch alleged diff erent details, different geographic locations, or other participants in the alleged scheme.”

The qui tam provision’s first-to-file bar is designed to balance two competing policy goals: encourage whistleblowers with genuinely valuable information to act as private attorneys general in bringing suits for the common good, while discouraging opportunistic plaintiffs from fi ling parasitic lawsuits that merely feed off previous disclosures of fraud.

Of course the designated purpose of first to file did not contemplate events such as occurred with the two wind claims dumping related False Claims Act suits. The Fifth Circuit had a genuine issue and how they resolved it does have implications for the various bailout and stimulus programs as Mr Maniloff continues:

On appeal to the Fifth Circuit, the court upheld the dismissal of State Farm and Allstate on the basis that the first-to-file bar cannot be avoided 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 compliant.”…….

However, the Fifth Circuit was not as generous to the other defendants in the Branch suit. The court noted that no circuit has directly addressed the issue before it—whether allegations in a first-filed action can bar a subsequent qui tam action based on related allegations but filed against unrelated defendants. Looking to analogous situations for guidance, such as an action filed against a corporation followed by a subsequent action alleging fraud against the corporation’s subsidiaries, the Branch Consultants court concluded as follows:

[T]here might be situations in which the allegations in a first-filed complaint pertain to such a narrow or readily-identifiable group of potential wrongdoers that § 3730(b)(5) acts to bar subsequent allegations against previously unnamed defendants. But that is not the case here. Rigsby does not allege a true industry-wide fraud or concerted action among a narrow group of participants. Rather, looking only at the facts pleaded (not any public information, which is not part of the first-to-file analysis), Rigsby implicates, at most, four specific WYO insurers among the approximately ninety-five WYO insurers conducting business in the Louisiana and Mississippi areas during Hurricane Katrina.

Thus, Rigsby tells the government nothing about which of the ninety-one other WYO insurers (and adjusting firms working for or with those insurers), if any, actually engaged in any fraud.
***
Thus, in combing through a host of WYO insurers and identifying those specific insurers and adjusting firms that may have committed wind/water fraud, Branch likely revealed instances of fraud that would have otherwise eluded the government.

Thus, the Fifth Circuit held that the False Claims Act’s first-to-file rule was not a bar to the Branch complaint against all defendants except State Farm and Allstate.

I noted Mr Maniloff cited the DHS OIG report on the issue of claims dumping in his footnotes noting they concluded claims dumping was not a problem. As we noted at the time here and here their sampling methodology was not designed to find the problem with claims dumping though they did indeed find it in their sampling despite their flawed conclusions. DHS, circa Bushie was not interested in finding the problems that happened under their watch thus the whitewash. Time will talk on the thoroughness of the DHS OIG investigation, especially in Branch, which used a hands on approach to readjusting the flood claims using a more focused sampling methodology.

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