Nevada District Court dismisses, under Rule 9(b), qui tam complaint against purchaser of alleged submitter of false claims

by Ben Vernia | June 17th, 2010

In a June 7, order, Nevada District Judge Kent Dawson dismissed the claims of a former employee of Kaplan, Inc., asserting that the educational company was liable as successor for allegedly false student loan applications submitted by a Las Vegas trade school it had purchased. Judge Dawson wrote:

Each of Plaintiff’s fraud allegations occurred, according to the information provided in Plaintiff’s Complaints, at times prior to Defendant Kaplan acquiring Heritage in May 2003. Under the standards governing successor liability, Defendant cannot be held liable for those activities as alleged in Plaintiff’s Complaint. “Ordinarily ‘a corporation which purchases the assets of another corporation does not thereby become liable for the selling corporation’s obligations,’” Lessard v. Applied Risk Mgmt. 307 F.3d 1020, 1027 (9th Cir. 2002), unless certain exceptions are satisfied, see E.E.O.C. v. G-K-G, Inc., 39 F.3d 740, 747–748 (7th Cir. 1994); Lessard, 307 F.3d at 1027. Generally, two conditions must be met in order for successor liability to take effect. First, “the successor [must have] had notice of the claim before the acquisition.” E.E.O.C., 39 F.3d at 748. Second, “there [must] be substantial continuity in the operation of the business before and after the sale.” Id. Additionally, courts may allow for successor liability “for mergers fraudulently executed to avoid the predecessor’s liabilities, . . . or for transactions where the purchaser has specified which liabilities it intends to assume.” Lessard, 307 F.3d at 1027 (citing Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1425 (7th Cir. 1993).

In this case, Plaintiff has failed to provide any specific allegations related to time, place, or the parties involved, demonstrating that Defendant Kaplan, as a successor to Heritage, had notice of the claim or the actions out of which it arises prior to the acquisition of Heritage in May 2003. Additionally, Plaintiff has not provided specific allegations demonstrating that Defendant Kaplan continued to conduct the alleged fraudulent activities following its acquisition of Heritage. Nor has Plaintiff alleged that the acquisition of Heritage was “fraudulently executed to avoid the predecessor’s liabilities” or that Defendant specified an intention to assume the possible liabilities of Heritage.

The court also rejected the relator’s attempt to amend his complaint to include incentive compensation allegations. These were too late (six years into the case), Judge Dawson reasoned, and were offered in bad faith and for purposes of delay. He likewise refused to sever the relator’s employment claims from the case and to transfer the case. He did, however, permit the relator one “final opportunity to amend his FCA claims.”

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