Strike up the band – Judge Vance’s Order calls the dance and “rocks” on Rockwell (a Branch qui tam update)

It’s been almost six months since SLABBED published Shall we dance? (March 2010), a post reporting Magistrate Shushan’s Order that granted in-part only the Branch Consultant’s Motion for leave to file a Second Amended Complaint (SAC) – so long that most have likely forgotten the big news of Shushan’s Order was what she denied and her subsequent Report, posted by Sop stock-basher style, recommending the Court limit Branch’s Discovery to the exemplar claims cited in the original Complaint.

Suffice it to say, a flurry of motions followed both the Order and Report and then everyone waited and waited –  and waited even longer – for Judge Vance to issue a related Order and Reasons (posted on Scribd below):

Before the Court are two challenges to the decisions of the Magistrate Judge. First, relator Branch Consultants appeals the Magistrate Judge’s decision granting in part and denying in part its Motion for Leave to File a Second Amended Complaint.  Branch also opposes the Magistrate Judge’s Report and Recommendation regarding the scope of discovery.  For the following reasons, the Magistrate Judge’s denial of Branch’s motion for leave to amend is REVERSED. The Court, after a de novo review, declines to accept the Magistrate Judge’s Report and Recommendation as detailed in this Order.

Because Judge Vance’s decision declining to accept the Magistrate’s Report and Recommendations addresses issues relevant to the Rigsby qui tam case, SLABBED reminds readers that Judge Vance “rocks” on Rockwell as we first review the related portion of her Order and the reasoning that led her to determine:

…nothing in the statutory language requires Branch to be the original source for each manifestation of the allegedly fraudulent scheme. It need only have “direct and independent knowledge of the information on which the allegations are based.” The Court has determined that, based on the allegations in the First Amended Complaint, Branch is the original source of the information underlying the listed properties. It therefore appears appropriate for the Court to assert jurisdiction over every example of the fraudulent scheme. After all, Branch’s allegation that defendants engaged in a far-ranging scheme is a natural extension of the specific information asserted in its complaint.

Assuming that Branch’s allegations are true, the presence of a large number of fraudulent adjustments suggests that there are many more examples of the same conduct — a “scheme,” even — that are not listed in the complaint. And because Branch’s allegation of a scheme is thus based upon the information about the exemplar properties, it would appear that Branch could be considered the original source of the entire loss-shifting scheme and that the Court is not divested of jurisdiction.

Accordingly, none of the relevant case law — as articulated in Rockwell, the cases cited in Rockwell, as well as post-Rockwell cases that apply the claim-smuggling prohibition — holds that the claim-by-claim analysis requires a district court to make original-source determinations with respect to every example or instance of a single scheme of fraudulent conduct. Defendants have not cited to any cases that would support their interpretation. Rather, the cases suggest that Rockwell’s prohibition on claim-smuggling applies to discrete theories or types of fraud. Branch would thus be prohibited from alleging a separate scheme as to which it was not an original source, because its original-source status for the loss-shifting theory does not allow it to shoehorn other theories for which it was not an original source into the complaint. But Branch has demonstrated that it is the original source for the entire fraudulent scheme based on loss shifting. Again, the Court has already determined that Branch has direct and independent knowledge of the information surrounding the exemplar properties.

And its allegation that defendants engaged in a much broader scheme is based upon that knowledge. The Court may thus exercise jurisdiction over all the instances or examples of the alleged scheme, and Branch is not prohibited from proceeding to discovery on properties outside those explicitly listed in the First Amended Complaint. (emphasis added)

That said, we return to Judge Vance’s decision reversing the Magistrate’s Order declaring the “inflated-revenue scheme…a new theory of recovery” – and point out her stinging rejection of Branch’s related argument and agreement with the Magistrate on this point:

Branch cannot seriously contend that this amendment does not seek to include a new theory that had not been pleaded before (p 19)…

Again, the First Amended Complaint contains no allegation that would provide an incentive for defendants to overstate flood losses to properties upon which they did not also have a wind policy. Nor does it allege that defendants inflated prices in their adjustments or paid for property that did not need replacement. These aspects of the inflated-revenue scheme were clearly added to the Second Amended Complaint, and the lossshifting theory was demoted from its role as Branch’s central allegation to merely one among others. The Court therefore finds that Branch’s First Amended Complaint did not plead an inflatedrevenue scheme, and that its Second Amended Complaint seeks to add one.

Ouch!  Nonetheless, Vance determined, “the Magistrate Judge erred in not allowing the amendment, and…[the Court]…will allow Branch to amend its complaint to add the inflated-revenue scheme”:

The first and perhaps the most significant reason for the Court’s holding is that Branch amended its complaint within the period of time that the Court explicitly allowed the parties to make amendments. In November of 2009 the Court issued the applicable scheduling order — the first scheduling order set in this matter — which established deadlines for various filings. One such deadline made clear that “[a]mendments to pleadings, third-party actions, crossclaims, and counterclaims shall be filed no later than JANUARY 4, 2010.”  Accordingly, the Court set forth a time in which Branch was expressly allowed to amend its pleadings. Branch moved to amend its complaint on December 30, 2009, which was before the expiration of the deadline. Although there is no rule that amendments filed before the deadline are per se appropriate, the Court gives consideration to Branch’s compliance with the date that the Court specifically set for amendments. The Fifth Circuit has recognized that moving for leave to amend “well within” the court-created deadline could lead to the conclusion that “on its face, the motion was timely and evidenced no prejudice to the other parties or potential to delay the proceedings.”

Although there have been some allegations to the contrary made in comments on SLABBED, IMO, Judge Vance is an independent thinker who made a public Declaration of Independence in Weiss v Allstate – and when it comes to Katrina insurance litigation, she rocks!  Strike up the band, Sop!

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