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United States Ex Rel. Munoz v. Computer Systems Institute, Inc.

United States District Court, Seventh Circuit

October 25, 2013

UNITED STATES OF AMERICA, ex rel. LIZETTE MUNOZ and WESLEY FRENDT, Plaintiffs-Relators,
v.
COMPUTER SYSTEMS INSTITUTE, INC., Defendant.

MEMORANDUM OPINION AND ORDER

ROBERT M. DOW, Jr., District Judge.

Plaintiffs-Relators bring this action against their former employer, Computer Systems Institute, Inc. ("CSI"), pursuant to the False Claims Act, alleging that CSI knowingly caused false claims to be filed by making a number of misrepresentations to the Department of Education, its accrediting agencies, and students that wrongfully enabled CSI to secure student financial aid in the form of loans and grants from the federal government. This matter is before the Court on Defendant's motion to dismiss Plaintiffs-Relators' amended complaint [33]. For the reasons set forth below, the Court grants in part and denies in part CSI's motion to dismiss [33]. As set forth below, Plaintiffs-Relators allege only a single count (Count I: FCA, 31 U.S.C. § 3729 et seq.), and that count remains pending; however, not all of the theories advanced by Plaintiffs-Relators' are viable based on the allegations in the amended complaint.

I. Background[1]

A. General Background

The federal government distributes funds under Title IV of the Higher Education Act ("HEA"), 20 U.S.C. § 1094, in order to assist with the costs of secondary education. Notwithstanding Congress's admirable intentions, the large sums of money administered under Title IV have led to abuses. See, e.g., Leveski v. ITT Educational Servs. Inc., 719 F.3d 818, 820 (7th Cir. 2013). Specifically, Congress became concerned in 1992 that "recruiters [of students for institutions of higher education] paid by the head are tempted to sign up poorly qualified students who will derive little benefit * * * and may be unable or unwilling to repay federal guaranteed loans." United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir. 2005). Thus, in order to receive federal funds under the HEA, schools must enter into a Program Participation Agreement with the Department of Education, in which they agree to abide by a host of statutory, regulatory, and contractual requirements. 34 C.F.R. § 668.14(a) (2010). The schools must continually certify their compliance with the current DOE regulations through program participation agreements ("PPAs") in order to receive federal financial assistance award money. 20 U.S.C. § 1094(a).

Among these requirements is a recruiter-incentive compensation ban, which prohibits institutions from paying recruiters "incentive payments" based on the number of students that they enroll. More specifically, this ban prohibits schools from "provid[ing] any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance." 20 U.S.C. § 1094(a)(20). In 2002, the DOE amended its prior regulations to create a "safe harbor" provision interpreting and clarifying this ban on recruiter-incentive compensation. As amended, the regulation provided that an educational institution may, without violating the ban on incentive compensation, provide "payment of fixed compensation, such as a fixed annual salary or a fixed hourly wage, as long as that compensation is not adjusted up or down more than twice during any twelve month period, and any adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid." 34 C.F.R. § 668.14(b)(22)(ii)(A) (2010) ("Safe Harbor Provision"). In July 2011, the DOE eliminated the Safe Harbor Provision for salary-based compensation. See 75 Fed. Reg. 66832 (Oct. 29, 2010). In commenting on the elimination of the Safe Harbor Provision, the DOE noted that "the Department's experience has demonstrated that unscrupulous actors routinely rely upon these safe harbors to circumvent the intent of [the incentive compensation ban] of the HEA." Id. at 66872. According to the DOE, "the safe harbors have served to obstruct [the objectives of the incentive compensation ban] and have hampered the Department's ability to efficiently and effectively administer the title IV, HEA programs." Id. Current DOE regulations flatly prohibit institutions receiving federal award money from adjusting the salaries of student recruiters and financial aid officers "based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid." 34 C.F.R. § 668.14(b)(22)(ii)(A) (2013). In other words, educational institutions must comply with the ban on incentive compensation in order to be eligible for federal grant money, but may no longer rely on the Safe Harbor Provision to shield compensation programs based directly or indirectly upon recruitment numbers.

B. Factual Background

CSI is a provider of post-secondary education founded in 1989 and headquartered in Skokie, Illinois. CSI, which claims to have over 10, 000 graduates, offers three "career programs" and is approved by the DOE to provide Title IV funding to eligible students. Many of CSI's students depend on Title IV loans to pay for the programs. CSI has expanded rapidly over the past several years and now owns and operates five campuses in Illinois and two in Massachusetts.

Plaintiffs-Relators are former CSI employees. Lizette Munoz worked for CSI as an admissions representative from December 2010 to May 2011. Wesley Frendt worked as an admissions representative from July 2009 to June 2011. Plaintiffs-Relators filed this qui tam action under the False Claims Act ("FCA") against CSI in November 2011. The case was filed under seal pursuant to 31 U.S.C. § 3730(b)(2). The seal requirements are designed to provide the United States with an opportunity to investigate the allegations before a defendant has knowledge of the action. The government then has the option of intervening and assuming control of the litigation. In this instance, the United States declined to intervene, and Plaintiffs-Relators chose to pursue the matter on their own. CSI then moved to dismiss and Plaintiffs-Relators amended their complaint. CSI followed by filing a second motion to dismiss.

According to the allegations in the amended complaint, CSI's three career programs- "Healthcare, " "Networking, " and "Business"-each cover eight months of study but confer no degree or transferable credits. Every student who qualifies for federal financial aid is accepted. CSI charges between $14, 835 and $15, 500 for its programs, which allegedly matches the amount of loans and grants that its students can receive under Title IV. According to the amended complaint, CSI's receipt of Title IV funds has grown from $161, 000 in 2006-07 to approximately $18 million in 2011-2012.

Plaintiffs-Relators allege that when CSI entered into each PPA with the DOE, it was not in compliance with, and did not intend to comply with, the statutory and regulatory requirements upon which Title IV eligibility and payment are conditioned. Specifically, Plaintiffs-Relators allege that CSI failed to comply with the following provisions identified in the PPA: 20 U.S.C. § 1094(a)(8) (relating to institutions that advertise placement rates); § 1094(a)(21) (stating that an institution will meet the requirements of nationally recognized accrediting agencies); and § 1094(a)(20) (relating to incentive compensation). Plaintiffs-Relators also allege that CSI failed to comply with the following provisions not identified in the PPA: 20 U.S.C. § 1088(b)(2)(A)(ii) (dealing with a 70% placement rate rule) and 34 C.F.R. § 668.72 (relating to misrepresentations to students). Finally, Plaintiffs-Relators allege that CSI knowingly violated these rules at the time that it signed PPAs and audit statements.

II. Legal Standard

A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint, not the merits of the case. Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990). In reviewing a motion to dismiss under Rule 12(b)(6), the Court takes as true all factual allegations in Plaintiff's complaint and draws all reasonable inferences in its favor. Killingsworth, 507 F.3d at 618. To survive a Rule 12(b)(6) motion to dismiss, the claim first must comply with Rule 8(a) by providing "a short and plain statement of the claim showing that the pleader is entitled to relief" (Fed. R. Civ. P. 8(a)(2)), such that the defendant is given "fair notice of what the * * * claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Second, the factual allegations in the claim must be sufficient to raise the possibility of relief above the "speculative level, " assuming that all of the allegations in the complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Twombly, 550 U.S. at 555). "A pleading that offers labels and conclusions' or a formulaic recitation of the elements of a cause of action will not do.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). However, "[s]pecific facts are not necessary; the statement need only give the defendant fair notice of what the * * * claim is and the grounds upon which it rests." Erickson v. Pardus, 551 U.S. 89, 93 (2007) (citing Twombly, 550 U.S. at 555) (ellipsis in original). The Court reads the complaint and assesses its plausibility as a whole. See Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir. 2011); cf. Scott v. City of Chi., 195 F.3d 950, 952 (7th Cir. 1999) ("Whether a complaint provides notice, however, is determined by looking at the complaint as a whole.").

Where a complaint sounds in fraud, the allegations of fraud must satisfy the heightened pleading requirements of Rule 9(b). Fed.R.Civ.P. 9(b); see also Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007) (citing Rombach v. Chang, 355 F.3d 164, 170-71 (2d Cir. 2004)). The False Claims Act "is an anti-fraud statute and claims under it are subject to the heightened pleading requirements of Rule 9(b) * * *." See U.S. ex rel. Gross v. Aids Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005); see also U.S. ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 376 (7th Cir. 2003). Rule 9(b) states that for "all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). A complaint satisfies Rule 9(b) when it alleges "the who, what, when, where, and how: the first paragraph of a newspaper story." Borsellino, 477 F.3d at 507 (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). Rule 9(b), read in conjunction with Rule 8, requires that the plaintiff plead "the time, place and contents" of the purported fraud. Fujisawa Pharm. Co., Ltd. v. Kapoor, 814 F.Supp. ...


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