Eighth Circuit affirms dismissal of educational loans qui tam on particularity grounds

by Ben Vernia | May 6th, 2011

On May 5, in U.S. ex rel. Vigil v. Nelnet, Inc., the Eighth Circuit Court of Appeals ruled against the whistleblower in his appeal of the dismissal of his False Claims Act case. The relator, a former employee of Nelnet, sued his former employer under the FCA, alleging that Nelnet engaged in unlawful promotional practices, including bonuses and other volume-based compensations forbidden by regulations of the Federal Family Educational Loan Program (FFELP), and that other defendants, including Citigroup and JP Morgan Chase, were also liable for these practices. He alleged that the company’s practices rendered it ineligible to participate in the program, and he claimed that the company’s claims for insurance subsidies, special allowances, and default reimbursements were false.

The court first noted that the relator did not challenge the district court’s conclusion that once Nelnet was certified as eligible, only the Secretary of Education could terminate it from the program. Because that had not happened, the company’s certification that it was an eligible lender was not false or fraudulent.

The relator had challenged, however, the district court’s decision that he had pleaded fraud with insufficient particularity under Fed. R. Civ. P. 9(b). Looking first at his allegations of direct false claims (under former 31 U.S.C. § 3730(a)(1)), the court divided his alleged claims between those for interest subsidies and special allowances – which were submitted with one type of certification – and those for insurance payments – which were submitted with another.

The defendant’s practices did not make the interest subsidy and special allowance certifications false, the court reasoned, because for those, the company only certified that the data for each claim was accurate. In addition, the relator had failed to identify any specific false claim.

The court concluded that the whistleblower’s allegations with respect to the claims for insurance reimbursement were even more deficient under Rule 9(b), even though the certification for those claims specifically represented that the underlying loans had been made in compliance with federal regulations. Nelnet submitted these claims not to the federal government, the court noted, but to guaranty agencies that, in turn, would have submitted them to the Department of Education for payment. But although the relator “plausibly alleges first-hand knowledge of inducements Nelnet paid to him,” he did not allege the company’s practices for submitting those claims to the guaranty agencies, and failed to allege any requirement those entities to forward the false claim to the government for payment. Under the Supreme Court’s decision in Allison Engine, therefore, he failed to plead a viable FCA cause of action.

Turning to the relator’s claims for use of a false document (under former 31 U.S.C. § 3730(a)(2)), the court rejected the relator’s attempt to broadly paint each and every one of the company’s claims as fraudulent. The relator not only failed to provide details regarding the making, using and submitting of any of the certifications, he also failed to allege “with particularity, or plausibility why these alleged violations were material to the government’s decision” to pay the claims.

The court similarly rejected the relator’s allegations that the company was responsible on a “per se” basis under a now-repealed education statute that offered an additional two percent return on defaulted loans to lenders who met due diligence targets for loan collection, and deemed those “failing to service loans or otherwise comply with applicable program regulations” to be in violation of the False Claims Act. 20 U.S.C. § 1078–9(g) (2006). This requirement applied to loan collection, not loan origination requirements, the court reasoned, and it expressed concern that the per se rule in the former statute would implicitly repeal the FCA’s scienter requirements.

Relying on its reasoning in finding a lack of particularity, the court likewise dismissed the relator’s conspiracy claim under the FCA, and it rejected his reverse false claims allegation, noting that in the absence of any administrative action against Nelnet, the relator failed to allege a specific existing obligation (only a potential or contingent one) that could serve as the basis for reverse false claim liability.

Nelnet settled another whistleblower case in November, 2010, paying $57.5 million.

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