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United States ex rel Salmeron v. Enterprise Recovery Systems

November 30, 2006


The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge


United Student Aid Funds, Inc. ("Funds") has moved for its dismissal as a newly-added defendant in this qui tam action brought by relator Rhonda Salmeron ("Salmeron"). Funds bases its motion on (1) Salmeron's asserted failure to plead fraud under the False Claims Act ("Act," 31 U.S.C. §3729(a))*fn1 with the specificity required by Fed. R. Civ. P ("Rule") 9(b) and (2) her claimed failure to state a claim upon which relief can be granted in violation of Rule 12(b)(6). For the reasons set forth in this memorandum opinion and order, Funds' motion is denied.

Because of the nature of both aspects of Funds' motion, this opinion necessarily accepts Salmeron's allegations as true. What follows, then, need not repeat such qualifying language as "Salmeron claims" or the like--without, of course, this Court's making or implying any factual findings. Allegations in

Salmeron's First Amended Complaint will be cited "FAC ¶--."

Salmeron's Claims

Salmeron's action, brought on behalf of the United States, alleges false statements, false claims and the creation of false records made and submitted directly or indirectly by Enterprise Recovery Systems ("Enterprise") and Funds to the United States government in violation of the Act (FAC ¶1). Funds is an entity that guarantees student loans for both state and private lenders (id. ¶5).

As part of its guaranty services, Funds often contracts with other agencies that act as third-party servicers performing due diligence on Funds' accounts (FAC ¶5). Enterprise is one such third-party servicer (see the definition in Reg. §668.2*fn2 ) for the United States Department of Education (id. ¶3). Enterprise has contracts with various educational institutions and is required to submit annual compliance reports to the Secretary of Education (id. ¶4). Funds entered into an agreement with Enterprise under which Enterprise agreed to perform due diligence and collect on defaulted loans for Funds' accounts (id. ¶¶5-6).

To maintain its contract with Funds, Enterprise was subjected to an annual audit performed by Funds, designed to monitor Enterprise's success at communicating with debtors and collecting on outstanding loans (FAC ¶¶10, 12). To pass those annual audits Enterprise created false records of the contacts it made with debtors (id. ¶12). And to facilitate that scheme Funds would in turn let Enterprise know in advance which accounts it would be inspecting, a benefit that no other third-party servicer received (id. ¶¶36-37).

Thus having knowledge of which accounts would be audited, Enterprise was enabled to falsify data on those accounts to create the false appearance that due diligence had been performed (FAC ¶34). For its part, Funds used the falsified records provided by Enterprise as the basis for claiming payment from the Government, despite its awareness that Enterprise had the ability to enter false or postdated due dates for payments on accounts going through consolidation or rehabilitation (id. ¶¶13, 39).

Salmeron worked as a general manager for Enterprise from 1998 through July 2002 (FAC ¶24). On October 28, 1999 Salmeron discovered that Enterprise was "engaged in [that] pattern or practice of falsifying activities on accounts, including telephone calls not made, and skip trace activity not in fact performed" (id. ¶28). Because of her position within Enterprise, Salmeron has information to support her belief that Funds has made claims for fees based on Enterprise's false or fraudulent audit results (id. ¶40).

Salmeron filed her original Complaint on August 4, 2005 solely against Enterprise. Then on September 7, 2006 she filed the FAC to add Funds as a party.

Dismissal Pursuant to Rule 9(b)

While Rule 9(b) does apply to Act claims, and while there is a good deal of caselaw that speaks of a journalistic-type approach to its requirement of pleading "with particularity," that locution really does not fit well in dealing with extended fraudulent schemes involving a large volume of transactions--it must be remembered that what Rule 9(b) mandates particularity about are "the circumstances constituting fraud." Hence such cases as Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1020 (7th Cir. 1992) have held that a plaintiff is required to provide only a "general outline" of the alleged scheme sufficient to put defendants on notice about their roles in the fraudulent or false activity. To serve the well-known goals of Rule 9(b), plaintiff must provide fair notice (see Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 777-78 (7th Cir. 1994)) by supplying just such a general outline of the "circumstances constituting fraud"--in this instance the very matters that have been recited here under the heading Salmeron's Claims.

Salmeron has sufficiently adumbrated the scheme at issue in the FAC to survive Funds' dismissal motion. She has alleged that starting in October 1999 she became aware of the scheme between Enterprise and Funds under which Funds would let Enterprise know in advance which accounts it would audit, enabling Enterprise to doctor those accounts to reflect purported compliance with both its contractual terms and Government regulations. Salmeron's position within Enterprise gave her access to information about the scheme, and she further deduced that Funds submitted reports based on the false information provided by Enterprise, allowing Funds to receive money from the Government under the auspices of those false pretenses. That ...

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