Branch files Appeal of Magistrate’s Order

“No wonder you’re late. Why, this watch is exactly two days slow.”

SLABBED reported the Magistrate’s Order in Shall we dance?…, a post that focused on what the Branch plaintiffs argue was the Magistrate’s “flawed construction” of a “Loss Shifting” and “Inflated Revenue” dichotomy.   In Branch’s Motion for Appeal of Magistrate’s Order, however, the Plaintiffs lead with the suggestion the Magistrate’s watch, like that of the March Hare, was running “exactly two days slow” as “There Was No Undue Delay” and, therefore, “There Is No Undue Prejudice”:

The sole basis for the Magistrate Judge’s denial of leave to add the allegations concerning adjusting fees is that Defendants would be “unduly prejudiced” by Branch’s “undue delay.” Order at 18-19. The record does not support such a finding, and the Magistrate Judge’s ruling is clear error for at least three reasons. First, there was no undue delay… Accordingly, “it cannot be said that plaintiff’s motion as a product of bad faith, dilatory motive or undue delay when plaintiff satisfied the deadline set forth in the Court’s new Scheduling Order.” Mendoza v. City of New Orleans, 2007…

Second, the Magistrate Judge’s conclusion that there would be undue prejudice is clear error because Branch filed its Motion for Leave at the very beginning of discovery… Branch is aware of no case finding undue prejudice under such circumstances…Third, the Order should be reversed because it narrowly construes the First Amended Complaint (“FAC”) in a manner that disposes of Branch’s claims based on properties for which the homeowners carrier and the WYO carrier are not identical.

As this Court recognized, Branch “pleaded the existence of a broad scheme to defraud the government” following Hurricane Katrina. Departing from this ruling, the Magistrate Judge concluded that there are two “entirely different schemes,” the “loss shifting” scheme and the “inflated revenue” scheme, and held that Branch’s allegations encompass only the “loss shifting” scheme. (citations omitted, emphasis added)

In a related post, “It’s the same old song But with a different meaning”… , SLABBED pointed out the Defendants’ strategy is to word their briefs in a way that attempts to put the Magistrate “in a box” when she issues Orders in the case.  The Appeal demonstrates it was this strategic boxing that resulted in the Magistrate seeing the “broad scheme” as “two ‘entirely different'” schemes:

Branch filed its proposed SAC on December 22, 2009 largely to address allegations in Defendants’ Answers, which were filed on November 23, 2009. Defendants for the first time took the position in their answers that the FAC pleaded a loss shifting scheme that encompasses only those properties on which a defendant issued both the wind and the flood policies. Although Branch strongly disagrees with Defendants’ interpretation of the FAC, the most efficient and appropriate way for Branch to address Defendants’ newfound argument was to moot it by amending the complaint to clarify the factual allegations…

The Magistrate Judge’s finding of undue delay was premised on her erroneous construction of the FAC and SAC. The Magistrate Judge construed the proposed SAC as containing two “entirely different” schemes: a “loss shifting scheme” and an “inflated revenue scheme”…

Despite her conclusion that these are two “entirely different schemes,” the magistrate found that Rockwell “does not bar Branch’s request to amend to assert the inflated-revenue scheme.” Order at 20. Instead, her ruling was based solely on her conclusion that Branch had engaged in “undue delay” in the timing of its proposed amendment.

…the Magistrate Judge’s “loss shifting scheme” and “inflated revenue scheme” dichotomy is false. The Magistrate Judge’s construction of Branch’s pleadings, which results in a sub silentio dismissal of claims previously upheld by this Court, should be reversed. (citations omitted, emphasis added)

Branch supports the requested reversal of the Magistrate’s Order by pointing out the “The FAC Pleads A Single Broad Scheme That Encompasses Both Loss Shifting And Inflating Flood Adjusting Revenues”.

The FAC alleged a single, broad scheme in which defendants defrauded the government in the wake of Hurricane Katrina by improperly inflating flood claims. At the very beginning of the FAC, Branch alleges:

The defendants have defrauded the Government through a practice of grossly overstating flood damages to insured properties damaged by Hurricane Katrina and then, based on those overstated damages, submitting claims for payment on Government-backed flood insurance policies to the National Flood Insurance Program (“NFIP”). (FAC ¶ 3, SAC ¶ 3.)

…For each Defendant, the FAC specifically alleges that the Defendant “systematically overstated flood damages to insured properties damaged by Hurricane Katrina.” Defendants do not dispute that the FAC encompasses loss shifting. It also encompasses inflating flood adjusting revenues. The government pays WYO companies a fee for adjusting flood claims (FAC ¶ 15), which is calculated as a percentage of the total amount of the flood claim. By “grossly  overstating flood damages,” Defendants improperly inflated their adjusting revenues. In other words, every Defendant who sought to fraudulently inflate its adjusting revenues did so by “grossly overstating flood damages”.

A review of the allegations directed at the Adjuster Defendants demonstrates that the FAC cannot be limited only to loss shifting. For each of the Defendant Adjusters, the FAC alleges that it “systematically overstated flood damages to insured properties damaged by Hurricane Katrina.”  The FAC does not allege that the adjuster defendants issued wind policies or was engaged in a loss shifting scheme. Therefore, the allegations in the FAC must be broader than loss shifting—this Court already concluded that the FAC stated a claim against the adjuster defendants (Colonial and Simsol). The Magistrate Judge’s construction of the FAC as encompassing only a loss shifting scheme would result in a sub silentio dismissal of Colonial and Simsol, which would directly contradict with this Court’s denial of their motion to dismiss.

In the supporting argument that follows, Branch explains how “The Magistrate Judge’s “Loss Shifting” And “Inflated Revenue” Dichotomy Is False Because The Loss Shifting Scheme Is Not Limited To Single-Carrier Properties”.

Nothing in the FAC limits the loss shifting scheme to only those properties on which a particular defendant issued both a wind and a flood policy.  To the contrary, Defendants engaged in a broad scheme in which they systematically overstated flood claims and systematically understated wind claims, which had the overall effect of shifting wind losses to flood claims. It would not make sense for a defendant to fraudulently inflate the flood claims on only those properties on which it issued both a flood and a wind policy. Creating two separate methodologies for adjusting flood losses would have been difficult to manage, and the resulting inconsistencies would have increased the likelihood of detection. Branch has not pleaded that Defendants engaged in different flood-adjusting practices depending on whether they also issued homeowners insurance on the property. In fact, the examples Branch has pleaded refute that conclusion. The Magistrate Judge improperly interpreted the alleged fraud as narrowly tailored to those properties on which Defendants had the most to gain, but that interpretation comes from Defendants’ arguments only, not from the FAC.

Instead, Branch alleges that Defendants engaged in “a practice of grossly overstating flood damages to insured properties damaged by Hurricane Katrina” by paying and submitting “reimbursement claims to NFIP regarding losses that obviously should not be fully covered by the flood policies.” FAC ¶¶ 3, 17. That is true whether or not an insurer defendant issued a wind policy on the particular property. Indeed, the FAC never alleges that Defendants issued a wind policy on each of the exemplar properties and does not even mention any loss shifting scheme in the Defendant-specific paragraphs.  Why? Because such an allegation is not a necessary element of the scheme alleged in the FAC to fraudulently inflate flood claims, and because it is untrue.

The threat of “resulting inconsistencies” that “would have increased the likelihood of detection” is the reason that some, myself included, believe more than just the currently named defendants in the Branch and Rigsby qui tam complaints were involved in “the scheme” – a belief that, named or not, “they were all in it together”. Consider, for example, the industry-wide record profits reported following Hurricane Katrina and this related footnote on pages 16-17 of the Appeal:

The amount of adjusting fees at issue for adjusting Hurricane Katrina flood claims is far from trivial. For example, ARIC’s parent company, Assurant, announced record flood adjusting fees at their Third Quarter 2005 Earnings Conference Call: “We are going to get some fees that are unprecedented. We’ve been writing several government flood programs for quite a long while. We’ve never really had fees of that magnitude come through.” (Dkt # 327, Ex. 5, p. 15, 5) Fidelity also recognized enormous fees from adjusting claims. In its 2005 Form 10-K that it filed with the Securities and Exchange Commission, Fidelity announced: “Our specialty insurance revenues in 2005 were significantly increased [from $239.3million in 2004 to $428.9 million in 2005] due to fee revenues we earned from settling claims related to the year’s major hurricanes, including Katrina , Rita and Wilma.” (Dkt. # 327, Ex. 6 at p. 68) (emphasis added)

Also consider the additional incentive for inflating flood claims when a state-funded insurer issued the wind policy:

Moreover, even under the Magistrate Judge’s improperly narrow construction of the FAC, the scheme would include properties on which Defendants issued the flood policies and Louisiana Citizens issued the wind policies. Louisiana Citizens can and did levy assessments on insurance companies such as Defendants for its deficiencies in paying Hurricane Katrina wind claims. Thus, Defendants had a direct financial incentive to shift wind losses from Louisiana Citizens policies to flood claims to minimize the size of any assessments.

For example, Fidelity’s answer alleges that it issued a wind policy on less than 1% of the properties on which it also issued a flood policy  But even if true, that is beside the point. On 60% of the Fidelity exemplar properties in the FAC, Louisiana Citizens issued the wind policies. On those properties, Fidelity had an incentive to shift wind losses to the government to minimize any assessments levied against it.  In 2005 alone, Allstate paid an assessment of $34 million to Louisiana Citizens. Discovery will show the amount of the assessments paid by Fidelity and the other defendants.

The final two arguments of the Branch Appeal for reversal of the Magistrate’s Order were solid:

The Magistrate Judge’s Ruling Would Preclude The Government From Ever Recovering For Fraud On A Significant Number of Hurricane Katrina Flood Claims
The Order precludes the government in this action from recovering on fraudulently adjusted flood claims where a defendant did not also issue the wind policy on the property and res judicata likely would preclude the government from later filing a False Claim Action to recover on the fraudulently adjusted flood claims that the Magistrate Judge concluded were beyond the scope of the FAC.

Motive Is Not An Element Of A False Claims Act Claim
To prevail, Branch “must demonstrate that there was a false statement or fraudulent course of conduct, that the statement was provided knowingly, that the statement was material, and that the government paid money as a result.  Branch need not prove motive. The jury will not be asked why Defendants fraudulently inflated flood claims, only whether they did so knowingly.

However, the most compelling arguments for reversal are those that show the Magistrate’s watch was “two days slow” when she reached “her conclusion that Branch had engaged in ‘undue delay’ in the timing of its proposed amendment” and saw two “distinctly different schemes” when there was only one.