Thomas v. Mercy Care

1 WO — 2 — — 3 — — 4 — — 5 — 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA — 8 — 9 United States of America ex rel. Craig No. CV-22-00512-PHX-JAT Thomas, 10 ORDER Plaintiff, — 11 — v. — 12 — Touchstone Behavioral Health, — 13 — Defendant. — 14 — — 15 — Pending before the Court are Touchstone Behavioral Health’s (“Touchstone”) — 16 — Motion for Summary Judgment (Doc. 80) and Plaintiff Craig Thomas’ (“Relator”) Motion — 17 — for Summary Judgment (Doc. 81), both of which are fully briefed (Docs. 88, 89, 90, 91). — 18 — The Court now rules. — 19 — I. BACKGROUND — 20 — The Arizona Health Care Cost Containment System (“AHCCCS”) receives federal — 21 — funding in the form of Title XIX (Medicaid) payments and block grants from the — 22 — Community Mental Health Services Block Grant (“MHBG”) and the Substance Abuse — 23 — Block Grant (“SABG”) programs. (Doc. 81 at 3). AHCCCS uses this federal funding to — 24 — contract with Mercy Care, a managed care organization, to operate healthcare plans for — 25 — eligible individuals. (Doc. 81 at 3). In turn, Mercy Care contracts with Touchstone to give — 26 — Touchstone federal funding to provide behavioral healthcare services to eligible — 27 — individuals. (Doc. 80-1 at 2-3, 5). Under those contracts, Mercy Care would pay — 28 — Touchstone “both Title 19 [Medicaid] and block grant monies in advance on a monthly 1 basis.” (Doc. 81 at 3 (emphasis in original); see also Doc. 80-1 at 5). Touchstone would 2 then “earn[] that money by providing beneficiaries with specific services, called 3 ‘encounters.’” (Doc. 81 at 3; see also Doc. 80-1 at 5). If Touchstone “under-encountered”1 4 in a given time frame, or had less “encounters” than Mercy Care prepaid for, the result was 5 “deferred revenue,”2 or money that Touchstone had yet to earn. (Doc. 81 at 3-4). 6 Touchstone would not reclassify “deferred revenue” as “revenue” until Touchstone and 7 Mercy Care reconciled their records. (Doc. 89 at 2). The following individuals from 8 Touchstone and Mercy Care are key actors in this case: 9 - Touchstone: o Craig Thomas: Qui tam Plaintiff and Relator, Chief Operating Officer 10 and Director of Compliance. (Doc. 81 at 4). o Donn Merrill: Chief Financial Officer (“CFO”) from December 2016 11 to May 2019. (Doc. 81 at 1 n. 3). o Lance Monahan: CFO from April 2019 to December 2021. (Doc. 81 12 at 1 n. 3). o Bryan Davey: Chief Executive Officer (“CEO”) from September 13 2016 to November 2019. o April Rhodes: CEO from November 2019 to April 2021. (Doc. 80-1 14 at 7; Doc. 81 at 5 n. 5). - Mercy Care: 15 o Sherman Moore: Director of Finance. (Doc. 80-1 at 6). o Jessica Clemens: Network Administrator. (Doc. 81-34 at 4). — 16 — 17 Two events are at the heart of Relator’s claims. First, “[o]n or around 2017, 18 Touchstone became aware of $300,000 in deferred revenue related to fiscal year 2014 19 during the course of its ongoing reconciliation discussions with Mercy Care.” (Doc. 80-1 20 at 6). Second, “[o]n or around 2019, Touchstone identified an additional deferred revenue 21 obligation, totaling approximately $2.8 million.” (Doc. 80-1 at 7). 22 Relator’s second amended complaint consisted of five counts of violations of the 23 False Claims Act (“FCA”) against Mercy Care and Touchstone. (See generally Doc. 36). — 24 — 1 Per Touchstone: “In this context, an ‘under encounter’ refers to situations where the actual 25 number of encounters—or services rendered to [] patients—falls short of the estimate encounters used to calculate pre-payments from Mercy Care. Under encounters occur when 26 few[er] qualifying encounters take place than originally projected, leading to potential discrepancies in the amount of money pre-paid by Mercy Care to Touchstone.” (Doc. 8027 1 at 7 n. 3). 2 “Deferred revenue is calculated by subtracting the value of the encounters from the 28 amount prepaid.” (Doc. 81 at 4). Put differently, “deferred revenue” is “a liability on the balance sheet.” (Doc. 89 at 2). 1 Relator voluntarily dismissed Counts I and II against both Mercy Care and Touchstone. 2 (Docs. 41, 42). The Court subsequently granted Mercy Care’s Motion to Dismiss and 3 terminated Mercy Care from this action. (See generally Doc. 48). The Court also granted 4 Touchstone’s Motion to Dismiss in part, dismissing Count III against Touchstone. (See 5 generally Doc. 48). Relator’s Count IV (Conversion) and Count V (Reverse False Claim) 6 claims remain. Relator and Touchstone have filed cross-motions for summary judgment on 7 both remaining claims. (Docs. 80, 81). 8 II. LEGAL STANDARDS 9 a. Summary Judgment 10 A court must grant summary judgment “if the movant shows that there is no genuine 11 dispute as to any material fact and the movant is entitled to judgment as a matter of law.” 12 Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The 13 movant bears the initial responsibility of presenting the basis for its motion and identifying 14 those portions of the record, together with affidavits, if any, that it believes demonstrate 15 the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323 . 16 If the movant fails to carry its initial burden of production, the nonmovant need not 17 produce anything. Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Co., Inc., 210 F.3d 1099 , 18 1102-03 (9th Cir. 2000). But if the movant meets its initial responsibility, the burden shifts 19 to the nonmovant to demonstrate the existence of a factual dispute and that the fact in 20 contention is material, i.e., a fact that might affect the outcome of the suit under the 21 governing law, and that the dispute is genuine, i.e., the evidence is such that a reasonable 22 jury could return a verdict for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 23 242, 248, 250 (1986); see also Triton Energy Corp. v. Square D. Co., 68 F.3d 1216 , 1221 24 (9th Cir. 1995). The nonmovant need not establish a material issue of fact conclusively in 25 its favor, First Nat’l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968); 26 however, it must “come forward with specific facts showing that there is a genuine issue 27 for trial.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) 28 (internal citation omitted); see also Fed. R. Civ. P. 56(c)(1). 1 At summary judgment, the judge’s function is not to weigh the evidence and 2 determine the truth but to determine whether there is a genuine issue for trial. Anderson, — 3 — 477 U.S. at 249 . In its analysis, the court must believe the nonmovant’s evidence and draw 4 all inferences in the nonmovant's favor. Id. at 255. The court need consider only the cited 5 materials, but it may consider any other materials in the record. Fed. R. Civ. P. 56(c)(3). 6 “[W]hen simultaneous cross-motions for summary judgment on the same claim are before 7 the court, the court must consider the appropriate evidentiary material identified and 8 submitted in support of both motions, and in opposition to both motions, before ruling on 9 each of them.” Fair Hous. Council of Riverside Cnty., Inc. v. Riverside Two, 249 F.3d 10 1132, 1134 (9th Cir. 2001). 11 b. False Claims Act 12 The FCA, 31 U.S.C. §§ 3729 et seq., generally provides for “the recovery of civil 13 penalties from those who knowingly present a false or fraudulent claim to the federal 14 government for payment, or knowingly use a false record to avoid or decrease an obligation 15 to pay the federal government.” Hagood v. Sonoma Cnty. Water Agency, 81 F.3d 1465 , 16 1467 n.1 (9th Cir. 1996). The Supreme Court has held that the FCA is a “remedial statute 17 [that] reaches beyond ‘claims’ which might be legally enforced, . . . to [] all types of fraud, 18 without qualification, that might result in financial loss to the Government.” United States 19 v. Neifert-White Co., 390 U.S. 228, 232-33 (1968); see also United States v. McLeod, 721 20 F.2d 282, 284-85 (9th Cir. 1983). The current version of the FCA is one that Congress 21 amended in 2009. Specifically, Congress modified the FCA to increase its effectiveness by 22 broadening the scope of the law to include “subcontractors paid with Government money” 23 and prevent them from “escap[ing] responsibility for proven frauds.” S. Rep. 111-10, 4, 24 2009 U.S.C.C.A.N. 430, 433. 25 The FCA authorizes individuals (relators) to file civil suits known as “qui tam 26 actions” on behalf of the federal government against persons who violate the FCA. 31 27 U.S.C. § 3730 . Violations of the FCA include, but are not limited to, (1) when a person has 28 possession, custody, or control of property or money used, or to be used, by the 1 Government and knowingly delivers, or causes to be delivered, less than all of that money 2 or property; and (2) when a person knowingly makes, uses, or causes to be made or used, 3 a false record or statement material to an obligation to pay or transmit money or property 4 to the Government, or knowingly conceals or knowingly and improperly avoids or 5 decreases an obligation to pay or transmit money or property to the Government. 31 U.S.C. 6 § 3729(a)(1)(D), (G). The FCA defines “knowing” as having actual knowledge of 7 information or acting in either deliberate ignorance or reckless disregard of the 8 information’s truth or falsity. 31 U.S.C. § 3729 (b)(1). 9 III. DISCUSSION 10 Relator and Touchstone have both moved for summary judgment on Relator’s two 11 remaining claims: Count IV (Conversion) and Count V (Reverse False Claim). Each claim 12 is discussed in turn below. 13 a. Count IV: Conversion 14 Relator alleges Touchstone is liable under the FCA’s conversion provision, which 15 imposes civil liability on anyone who “has possession, custody, or control of property or 16 money used, or to be used, by the Government and knowingly delivers, or causes to be 17 delivered, less than all of that money or property.” 31 U.S.C. § 3729 (a)(1)(D). As 18 previously stated, “knowingly” is defined as having actual knowledge of information or 19 acting in either deliberate ignorance or reckless disregard of the information’s truth or 20 falsity. 31 U.S.C. § 3729 (b)(1). 21 The first question is whether Touchstone had possession, custody, or control of 22 money used, or to be used, by the Government. The answer is clearly yes. At the very least, 23 Touchstone had possession of some amount of money used, or to be used, by the 24 Government. Touchstone concedes that it received federal Medicaid and block grant 25 funding.3 (See, e.g., Doc 80-1 at 5 (“In 2014, Touchstone and Mercy Care entered into a — 26 — 3 Touchstone executives also understood that the money Touchstone received could be 27 traced back the AHCCCS and the Government. In one audio recording, the admissibility of which is discussed below, Mr. Monahan (Touchstone CFO) said that AHCCCS is “kind 28 of like the federal government.” (Doc. 87-1 at 8). Mr. Monahan also understood that Mercy Care “report[ed] [] back to AHCCCS.” (Doc. 87-1 at 15). 1 contractual relationship under which Touchstone received [] Title XIX [Medicaid] and 2 Block Grant payments for providing behavioral healthcare services to Medicaid 3 beneficiaries.”); Doc. 89 at 2 (“Touchstone receives both Title-19 (Medicaid) and block 4 grant funding.”)). The contract between Touchstone and Mercy Care also references 5 government funds. (See, e.g., Doc. 88-5 at 5 (“With respect to Members of Government 6 Programs, [Touchstone] acknowledges that compensation under this Agreement for such 7 Members constitutes receipt of Federal funds.”)). 8 The next question is whether Touchstone knowingly delivered, or caused to be 9 delivered, less than all of that money.4 Touchstone does not dispute that it delivered Mercy 10 Care less than the amounts Touchstone initially identified as “deferred revenue.”5 For 11 example, Touchstone admits that “Mercy Care ultimately recognized only $1.8 million of 12 the total $2.8 million liability.” (Doc. 80-1 at 12). Because “deferred revenue” is by 13 definition money that Mercy Care received from AHCCCS, “deferred revenue” is 14 Government money. 15 Nonetheless, Touchstone seemingly argues that this element is not met because 16 Touchstone and Mercy Care, through the “reconciliation” process, reached an agreement 17 as to the amount of “all” of the money, and Touchstone delivered that amount. (See, e.g., 18 Doc. 80-1 at 4 (“[O]nce an overpayment was determined [through reconciliation,] 19 Touchstone paid it in accordance with the agreement it had with Mercy Care.”); Doc. 8020 1 at 12 (“Further, and more notably, all overpayments/underpayments were eventually 21 acknowledged and addressed in the reconciliation discussions, with Touchstone agreeing 22 to repay a portion of the funds.”); Doc. 89 at 2-3 (“Only when reconciliation was complete 23 and the parties c[a]me to an agreement could [it] be determined what amount, if any, was 24 to be returned to Mercy Care.”)). In other words, Touchstone argues that “all” was 25 4 The Court notes that it is nondispositive that Touchstone was not required to deliver the money to the Government directly, but rather through the middleman of Mercy Care. See 26 discussion infra Section III.b.i.1 (discussing how Congress amended FCA to specifically apply to subcontractors). 27 5 Although Touchstone paid more than $300,000 in its first settlement agreement, Touchstone ultimately does not provide evidence to show that the $300,000 was 28 encountered or otherwise accounted for. Thus, Touchstone did not show that it “delivered” this money to Mercy Care. 1 redefined through the reconciliation process it undertook with Mercy Care. The Court 2 cannot agree with this argument. 3 First, the term “reconciliation,” as used here, has a meaning grounded in accounting. 4 In an accounting context, reconciliation generally refers to “[a]n adjustment of accounts so 5 that they agree.” Reconciliation, Black’s Law Dictionary (12th ed. 2024). Here, Relator 6 has produced evidence, as discussed below, that Touchstone understood that Mercy Care 7 was adjusting its accounts in a way that did not agree with the numbers that Touchstone 8 had. Thus, at the highest level, it is questionable whether Mercy Care and Touchstone truly 9 participated in a reconciliation. 10 Moreover, the Court cannot agree with Touchstone that reconciliation merely 11 requires an agreement, regardless of whether that agreement is based on incorrect numbers 12 or false premises. A core principle of the Generally Accepted Accounting Principles 13 (“GAAP”) is that of “utmost good faith.” “Good faith” generally means “[b]ehaving 14 honestly and frankly, without any intent to defraud or to seek an unconscionable 15 advantage.” Acting in Good Faith, Black’s Law Dictionary (12th ed. 2024). Relator has 16 produced evidence, discussed below, that suggests Touchstone sought an unconscionable 17 advantage in its reconciliation interactions with Mercy Care. Again, it is questionable 18 whether this reconciliation was sufficient. And although Mercy Care did agree to the 19 settlement amounts, the Court has not found anything that indicates that Mercy Care had 20 the authority to “forgive” or “discount” the amount of money that Touchstone owed vis-à- 21 vis the Government and the FCA. 22 Finally, logic dictates that Touchstone’s concept of “reconciliation” is not correct. 23 Under Touchstone’s line of reasoning, Mercy Care, via the reconciliation process, can 24 absolve Touchstone from liability for conversion, even if the elements are otherwise met. 25 Taken to a logical extreme, Touchstone seems to suggest it would be permissible for 26 Touchstone to identify deferred revenue of $10 million and, through “reconciliation,” 27 deliver $1 back to Mercy Care—so long as Mercy Care agrees. According to Touchstone, 28 once the reconciliation box is checked, Touchstone is only obliged to pay the agreed-upon 1 amount. This cannot be what Congress intended, especially in light of Congress’ explicit 2 desire to expand liability under the FCA. 3 The Court finds that the “reconciliation” that occurred in this case was deficient 4 from an accounting standpoint and it did not change the definition of the amount of “all.” 5 Touchstone “knowingly” delivered, or caused to be delivered, “less than all” of the 6 Government’s money, and no statute or case permits Touchstone to do this based simply 7 on Mercy Care “agreeing” to this result, irrespective of whether Mercy Care entered such 8 an agreement knowingly, or blindly. 9 i. Conversion Conclusion and Damages Discussion 10 Accordingly, Touchstone’s motion for summary judgment is denied as to the 11 conversion claim. With respect to Relator’s cross-motion for partial summary judgment, 12 the Court cannot find that Relator established that he is entitled to judgment as a matter of 13 law. Although Touchstone either admitted, or the Court found evidence that establishes, 14 several elements of a conversion claim, Relator did not establish damages. The Court, 15 despite its best efforts without any briefing from the parties regarding damages,6 cannot 16 sever damages from liability. Although the FCA states that “the United States shall be 17 required to prove all essential elements of the cause of action, including damages, by a 18 preponderance of the evidence,” 31 U.S.C. § 3731 (d) (emphasis added), in some 19 circumstances, the Court of Appeals has expressed that “[l]iability attaches upon proof that 20 a false claim for payment was made, regardless of whether the government suffered actual 21 damage.” United States ex rel. Anita Silingo v. WellPoint, Inc., 904 F.3d 667, 674 (9th Cir. 22 2018) (emphasis added). Similarly, under the FCA, it appears that a “civil penalty” can be 23 awarded regardless of whether the Government sustained damages. See 31 U.S.C. § 24 3729(1) (“[a person who violates the FCA] is liable to the United States Government for a 25 civil penalty of not less than $5,000 and not more than $10,000, . . . plus 3 times the amount 26 6 On summary judgment, neither party briefed the method of calculating the Government’s award in this case; the Court understands that a sufficient reconciliation process might have 27 resulted in a different settlement amount, but the Court has no way of knowing that amount. Furthermore, neither party briefed the issue of the amount of funds that Mercy Care was 28 required to return to the Government; the Court understands that in some scenarios, Mercy Care could keep a portion of the funds. 1 of damages which the Government sustains because of the act of that person.”); U.S. ex 2 rel. Hagood v. Sonoma Cnty. Water Agency, 929 F.2d 1416, 1421 (9th Cir. 1991) (finding 3 “[n]o damages need[ed] to be shown in order to recover the [civil] penalty” in FCA case). 4 Neither party briefed the issue of whether a relator can recover the civil penalty if no actual 5 damages are shown. 6 In conclusion, although the Court found the reconciliation deficient such that the 7 process could not have determined the amount that Touchstone owed Mercy Care, the 8 Court cannot determine what amount a proper reconciliation might have resulted in, nor 9 what damages the Government is entitled to. Thus, on this record, the Court cannot grant 10 summary judgment on liability because while it appears that Touchstone delivered “less 11 than all” of the Government’s money to Mercy Care, the Court cannot conclude that, as a 12 matter of law, liability attaches without knowing if there was actual damage or harm based 13 on what was actually refunded to the Government (which remains unknown to the Court). 14 Accordingly, both parties’ motions for summary judgment on conversion are denied. 15 b. Count V: Reverse False Claim 16 Relator alleges that Touchstone is liable under the FCA’s reverse false claim 17 provision, which creates civil liability for a defendant who “knowingly makes, uses, or 18 causes to be made or used, a false record or statement material to an obligation to pay or 19 transmit money or property to the Government, or knowingly conceals or knowingly and 20 improperly avoids or decreases an obligation to pay or transmit money or property to the 21 Government.” 31 U.S.C. § 3729 (a)(1)(G). Specifically, Relator alleges that Touchstone is 22 liable under the second prong of this provision, which imposes liability on a defendant who 23 “knowingly conceals or knowingly and improperly avoids or decreases an obligation to 24 pay or transmit money . . . to the Government.”7 31 U.S.C. § 3729 (a)(1)(G). 25 7 A plain reading of the statutory text leads this Court to find that a false record or statement is not required for liability under the second prong of the reverse false claim 26 provision. This reading is supported by the legislative history of the FCA. In 2009, Congress expanded the scope of the FCA via the Fraud Enforcement and Recovery Act 27 (“FERA”). S. Rep. 111-10, 10, 2009 U.S.C.C.A.N. 430, 437. Before FERA, the FCA’s reverse false claim provision imposed liability on any defendant that “knowingly ma[de], 28 use[d], or cause[d] to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” 31 U.S.C. 1 i. “An obligation to pay or transmit money to the Government” 2 The FCA defines “obligation” as “an established duty, whether or not fixed, arising 3 from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, 4 from a fee-based or similar relationship, from statute or regulation, or from the retention of 5 any overpayment.” 31 U.S.C. § 3729 (b)(3). 6 1. “Indirect” Reverse False Claim 7 Touchstone first argues that it did not have any “obligation to pay or transmit money 8 to the Government” because “Mercy Care, not Touchstone, was the entity responsible for 9 managing Medicaid payments and ensuring that any overpayments to Touchstone were 10 returned to AHCCCS.” (Doc. 80-1 at 14). 11 Although not directly addressed within the Ninth Circuit, other courts have allowed — 12 — § 3729(a)(7) (1994). This pre-FERA version of the provision clearly requires “a false 13 record or statement.” However, this is not the case after the FERA amendments. Congress amended the reverse false claim provision to read: “knowingly makes, uses, or causes to 14 be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and 15 improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729 (a)(1)(G) (emphasis added). The current statutory text, read 16 in tandem with Congress’ intent to broaden the scope of the law, supports the Court’s reading that a false record or statement is not required for liability under the second prong 17 of the provision. Numerous other courts agree with this post-FERA reading. See, e.g., United States 18 ex rel. Customs Fraud Investigations, LLC. v. Victaulic Co., 839 F.3d 242, 255 (3d Cir. 2016) (“A false statement is no longer a required element, since the post-FERA FCA 19 specifies that mere knowledge and avoidance of an obligation is sufficient, without the submission of a false record, to give rise to liability.”); U.S. ex rel. Yannacopoulos v. Gen. 20 Dynamics, 652 F.3d 818 , 835 n. 16 (7th Cir. 2011) (finding 2009 amendments broadened reverse false claim to apply “regardless of whether such actions involve a falsehood.”); 21 United States ex rel. Barrick v. Parker-Migliorini Int’l, LLC, 878 F.3d 1224, 1230 (10th Cir. 2017) (finding 2009 amendments “added a second route to liability” that “expands on 22 the first by not requiring a ‘false record or statement’”); Miller v. United States ex rel. Miller, 110 F.4th 533 , 542 (2d Cir. 2024) (finding reverse false claims provision includes 23 three theories of liability and “[n]ot all three [] require an affirmative representation”); United States ex rel. Ormsby v. Sutter Health, 444 F. Supp. 3d 1010 , 1056 (N.D. Cal. 2020) 24 (“There is no requirement under the second prong to show that the defendant used a false record or statement or that a record or statement was material”). 25 While Relator points out that U.S. ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 336 (9th Cir. 2017), quoting Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1056 (9th Cir. 26 2011), found that “[t]he ‘reverse false claims’ provision does not eliminate or supplant the FCA’s false claim requirement,” Cafasso was based on the pre-FERA FCA because the 27 events in Cafasso took place prior to the enactment of FERA. See also Dep’t of Emp. Training & Rehab. ex rel. Chagolla v. Lyft, Inc., No. 3:23-CV-00442-ART-CLB, 2024 WL 28 4349314, at *4 (D. Nev. Sept. 30, 2024) (discussing how the FCA was amended postCafasso such that a false statement is not required). 1 liability for “indirect” reverse false claims where the defendant is a third party that impacts 2 “an obligation” between another party and the Government. For example, in Caremark, the 3 Fifth Circuit concluded that the district court erred in granting summary judgment to the 4 defendant on an indirect reverse false claim because the fact that the defendant’s actions 5 “could have caused the state Medicaid agencies to impair their obligations to the 6 Government” was enough to create a disputed issue of fact. 634 F.3d at 817 (emphasis 7 added); see also United States ex rel. Grubea v. Rosicki, Rosicki & Assocs., P.C., 318 F. 8 Supp. 3d 680, 703 (S.D.N.Y. 2018) (“The FCA does not require that the obligation to pay 9 or transmit money to the Government be the defendant’s obligation—rather, the provision 10 applies whenever a defendant has decreased ‘an obligation’ to pay the Government.”); 11 United States v. Merck-Medco Managed Care, L.L.C., 336 F. Supp. 2d 430, 444 (E.D. Pa. 12 2004) (“The fact that [the defendant] may not have been in direct contractual privity with 13 the Government, therefore, is not an automatic bar to [reverse false claim] liability.”). 14 The concept of an “indirect” reverse false claim is also clearly in line with 15 Congressional intent. In amending the FCA in 2009, Congress explicitly wrote that the 16 amendments were in response to “court decisions limiting the scope of the law and 17 allowing subcontractors . . . to escape responsibility for proven frauds.” S. Rep. 111-10, 18 10-11, 2009 U.S.C.C.A.N. 430, 437-38. Congress made clear that it intends liability under 19 the FCA whenever a person runs afoul of the FCA, “without regard to whether the 20 wrongdoer deals directly with the Federal Government; with an agent acting on the 21 Government’s behalf; or with a third party contractor, grantee, or other recipient of such 22 money or property.” Id. Thus, it is clear Congress intended the FCA apply to parties like 23 Touchstone who may not “negotiate with the government or report to the government,” 24 (Doc. 80-1 at 4), but are “subcontractors paid with Government money.” 25 In conclusion, because Touchstone’s actions could have caused Mercy Care to 26 impair its obligations to repay unused Medicaid and block grant funds back to the 27 Government, the Court will not grant Touchstone summary judgment. However, 28 recognizing that both parties included additional arguments, the Court will continue its 1 analysis. 2 Relator argues Touchstone had an obligation because Touchstone had “an 3 established duty . . . arising from the retention of any overpayment.”8 (Doc. 81 at 16-17). 4 The FCA does not define “overpayment.” However, in amending the FCA in 2009, 5 Congress noted that including “the retention of an overpayment” in the new definition of 6 “obligation” would “be useful to prevent Government contractors and others who receive 7 money from the Government incrementally based upon cost estimates from retaining any 8 Government money that is overpaid during the estimate process.” S. Rep. 111-10, 15, 2009 9 U.S.C.C.A.N. 430, 442. “Thus, the violation of the FCA for receiving an overpayment may 10 occur once an overpayment is knowingly and improperly retained, without notice to the 11 Government about the overpayment.” Id. 12 Here, Touchstone receives money from the Government (through Mercy Care), and 13 Mercy Care pre-paid Touchstone the money based on “estimates made by Mercy Care of 14 the anticipated annual qualifying treatments . . . a particular provider would perform.” 15 (Doc. 80-1 at 3). If Touchstone provided less of those treatments than estimated, there was 16 an “overpayment” that Touchstone reported as “deferred revenue.” (Doc. 80-1 at 3). These 17 overpayments seem to be the same overpayments contemplated by Congress; Touchstone’s 18 “deferred revenue” is Government money that it received based on cost estimates, and 19 those estimates resulted in an overpayment. Thus, Relator has offered enough evidence to 20 create a disputed issue of fact on his theory of liability that Touchstone had an obligation 21 to return the overpayments, or “deferred revenue,” at issue in this case and Touchstone 22 “knowingly and improperly retained” that money, without notice to the Government, — 23 — 8 Relator later states that Touchstone’s obligation stemming from its retention of an 24 overpayment is not “the only FCA-actionable overpayment[] or obligation[]” but Relator does not make an alternative argument past pointing to Touchstone’s “contractual 25 obligation” to return unearned Government funds. (Doc. 91 at 4). Nonetheless, the Court recognizes that it is possible that there are multiple sources of Touchstone’s obligation to 26 return Medicaid funds. (See, e.g., Doc. 81-20 at 3 (copy of Mercy Care monitoring report that states that AHCCCS “requires that all Title 19 [Medicaid] revenue be encountered for 27 by appropriate authorized Title 19 [Medicaid] expenditures or returned to Mercy . . . Care.”); Doc. 80-1 at 4 (Touchstone states that “[t]he funds at issue were subject to the 28 Mercy Care and Touchstone contractual relationship.”)). Regardless, because the Court does not grant summary judgment, the Court need not analyze all possible sources. 1 thereby violating the FCA reverse false claim provision.9 2 However, Touchstone argues that the term “overpayment” should be interpreted 3 under the Patient Protection and Affordable Care Act (“ACA”),10 and that under such an 4 interpretation, the amount of “overpayments” that Touchstone was “obligated” to return 5 was determined through reconciliation. Because Touchstone paid the settlement amounts 6 resulting from reconciliation to Mercy Care, Touchstone argues it fulfilled its “obligation.” 7 (Doc. 80-1 at 11-12). This analysis, applicable only to the extent that the “overpayments” 8 included Medicaid funds, as opposed to block grants, continues below. 9 2. Medicaid Funds 10 Under the ACA, an “overpayment” is “any funds that a [provider] receives or retains 11 under . . . [Medicaid] to which the [provider], after applicable reconciliation, is not 12 entitled.” 42 U.S.C. § 1320a-7k(d)(4)(B). If the overpayment is not “reported and returned” 13 within 60 days of identification, the overpayment becomes an “obligation” for purposes of 14 the reverse claim FCA provision. 42 U.S.C. § 1320a-7k(d)(3). 15 Touchstone argues that the deferred revenue amounts initially identified cannot be 16 classified as “overpayments,” and thereby are not “obligations,” because these amounts did 17 not remain “after applicable reconciliation,” and the amounts that did remain after 18 reconciliation were promptly paid by Touchstone. (See, e.g., Doc. 80-1 at 14 (“The 19 evidence here demonstrates that Touchstone was apprised of an overpayment and came to 20 an agreement with Mercy Care following their notice of the overpayment. Following their 21 agreement, Touchstone timely paid the amounts due as agreed.”)). This argument parallels — 22 — 9 This is true for both Medicaid and block grant funds. 23 10 Other courts have used the definitions from the ACA to interpret the FCA. See, e.g., United States ex rel. Ginger v. Ensign Grp., Inc., No. 815CV00389JWHDFMX, 2022 WL 24 4110166, at *10 (C.D. Cal. Mar. 10, 2022) (“[C]ourts have allowed reverse false claims to proceed when they concern an obligation under Medicaid or Medicare.”); United States v. 25 Mariner Health Care, Inc., 552 F. Supp. 3d 938 , 952 (N.D. Cal. 2021); Hawaii ex rel. Torricer v. Liberty Dialysis-Hawaii LLC, 512 F. Supp. 3d 1096 , 1119 (D. Haw. 2021); 26 United States ex rel. Ormsby v. Sutter Health, 444 F. Supp. 3d 1010 , 1056, 1061 (N.D. Cal. 2020); United States ex rel. Dunlap v. Alaska Radiology Assocs., Inc., No. 3:14-CR-0014327 TMB, 2016 WL 11786411 , at *6 (D. Alaska Mar. 31, 2016) (“[A] recipient of an overpayment from Medicare or Medicaid, who after “identifying” that overpayment, 28 knowingly fails to report and return it within 60 days, has committed a reverse false claim.”). 1 Touchstone’s conversion argument; Touchstone essentially argues that the reconciliation 2 process was sufficient to determine the amount of the “overpayment” that Touchstone was 3 obligated to report and return to Mercy Care before it became an “obligation.” The Court 4 again finds that Touchstone cannot be absolved by the reconciliation process on this record 5 because fact issues remain regarding whether there was full disclosure and good faith 6 within the reconciliation process. 7 The Court incorporates its above analysis regarding reconciliation, and adds the 8 following: Congress, in including “the retention of an overpayment” in the definition of 9 “obligation,” understood that “various statutory and regulatory schemes in Federal 10 contracting allow for the reconciliation of cost reports that may permit an unknowing, 11 unintentional retention of an overpayment.” S. Rep. 111-10, 15, 2009 U.S.C.C.A.N. 430, 12 442. Already Touchstone runs afoul of this provision; evidence points to a knowing, 13 intentional retention of an overpayment. Congress also noted that “any action or scheme 14 created to intentionally defraud the Government by receiving overpayments, even if within 15 the statutory or regulatory window for reconciliation, is not intended to be protected by 16 this provision.” S. Rep. 111-10, 15, 2009 U.S.C.C.A.N. 430, 442 (emphasis added). In 17 other words, Congress did not intend the loophole that Touchstone suggests. 18 Reconciliation, even if within the statutory or regulatory window, does not act to absolve 19 Touchstone of liability. See also Kane ex rel. U.S. v. Healthfirst, Inc., 120 F. Supp. 3d 370 , 20 391 (S.D.N.Y. 2015) (“Defendants’ proposed reading of the ACA would frustrate 21 Congress’s intention to subject willful ignorance of Medicaid overpayments to the FCA’s 22 stringent penalty scheme.”).11 23 11 The Court finds the Kane court’s full analysis especially on point: Congress expressly created FCA liability for the retention of Medicaid 24 overpayments in the ACA. By requiring providers to self-report overpayments and imposing a relatively short deadline for repayments, violation of which risks the 25 severe liability of the FCA, Congress intentionally placed the onus on providers, rather than on the Government, to quickly address overpayments and return any 26 wrongly collected money. This reading is in line with the legislative purpose of the FCA, the 1986 FCA amendments, and the FERA, which together reflect Congress’s 27 more than 150-year commitment to deterring fraud against the federal government and ensuring that Government losses due to fraud are recouped in a timely fashion. 28 Based on this understanding of legislative purpose, Defendants’ proposed reading of the ACA would frustrate Congress’s intention to subject willful ignorance of 1 3. Federal Block Grants 2 Touchstone followed the same reconciliation and negotiation process for block 3 grant funds as it did for Medicaid funds. (Doc. 80-6 at 11). Additionally, Mr. Monahan, 4 Touchstone’s CFO, affirmed that Touchstone had to return any “overpayment [that] 5 reflects money from a government-funded healthcare plan, like Medicaid or a federal block 6 grant.” (Doc. 81-7 at 10 (emphasis added)). Thus, it appears to be undisputed that some 7 portion of the block grant funds, like the Medicaid funds, had to be returned if there was 8 an overpayment. 9 4. Conclusion: Obligation Element 10 Touchstone had an obligation because it had an established duty that arose from its 11 retention of overpayments of both Medicaid and block grant funds. This conclusion is in 12 line with the statutory text of the FCA, the legislative purpose behind the 2009 13 amendments, and the ACA. It is irrelevant that Touchstone interacted with Mercy Care 14 instead of the Government directly, and it is also irrelevant that Touchstone and Mercy 15 Care engaged in a reconciliation process, because that process was not sufficient. 16 ii. “Knowingly conceals or knowingly and improperly avoids or decreases” — 17 — The question becomes whether Touchstone (1) knowingly concealed an obligation — 18 — to pay or transmit money or property to the Government, (2) knowingly and improperly — 19 — avoided an obligation to pay or transmit money or property to the Government, or (3) — 20 — knowingly and improperly decreased an obligation to pay or transmit money or property — 21 — to the Government. — 22 — 1. Obligation 1: $300,000 — 23 — Relator provides a detailed account of the origins of Touchstone’s $300,000 — 24 — obligation. (Doc. 81 at 6-8, 14-16). The Court understands the most relevant facts to be as — 25 — follows: — 26 — - Touchstone concedes that “[o]n or around 2017, Touchstone became aware 27 of $300,000 in deferred revenue.” (Doc. 80-1 at 6). 28 Medicaid overpayments to the FCA’s stringent penalty scheme. Kane ex rel. U.S. v. Healthfirst, Inc., 120 F. Supp. 3d 370, 391 (S.D.N.Y. 2015). 1 - Relator will testify that he had a meeting with Mr. Davey (then-CEO) and Mr. Merrill (then-CFO) in which Mr. Davey said Mr. Merrill found $300,000 2 “just sitting around.” (Doc. 81-12 at 2-3). Mr. Davey said he has no reason to dispute Relator’s recollection of that event. (Doc. 81-10 at 5-6). 3 - June 1, 2017: An accounting supervisor at Touchstone emailed Mr. Merrill a report that showed numbers for fiscal year 2015. (Doc. 81-14 at 1). The report 4 listed the total funding received as $9,843,134. (Doc. 81-14 at 4). - July 25, 2017: A senior accountant at Touchstone emailed Mr. Merrill a table 5 that listed the total funding for fiscal year 2015 as $9,543,134. (Doc. 81-16 at 2, 3). Later that same day, the same senior accountant emailed the same 6 table, but this time, the total funding for fiscal year 2015 was listed as $9,844,387. (Doc. 81-17 at 2). After that, still on the same day, Mr. Merrill 7 emailed a group of Mercy Care employees a table that reported that Mercy Care and Touchstone agreed that Touchstone received $9,543,134 in funding 8 for fiscal year 2015. (Doc. 81-19 at 1). In that email, Mr. Merrill stated that Touchstone “would be happy to provide [Mercy Care] with the detail of 9 [Touchstone’s] paid claims” for review. (Doc. 81-19 at 1). - July 26, 2017: A senior accountant at Touchstone provided Mr. Merrill with 10 a copy of Touchstone’s “funding monitoring report” that reported Touchstone’s “total funding” amount for fiscal year 2015 at $9,844,387. 11 (Doc. 81-20 at 3). - August 10, 2017: An accountant at Touchstone emailed Mr. Merrill 12 regarding $300,000 of a $600,000 block grant that Touchstone received in the quarter of July to September 2014. (Doc. 81-21 at 1-2). The total funding 13 amount for fiscal year 2015 was listed as $9,844,387. - August 23, 2017: Mr. Merrill emailed Mr. Davey a table that listed the total 14 funding amount for fiscal year 2015 as $9,544,387. Mr. Merrill noted that “$300k of the $600k funding provi ded by [Mercy Care]” was excluded. 15 (Doc. 81-22 at 1). On the same day, an accountant at Touchstone emailed Mr. Merrill and explained that the $9.5 million number included only 16 $300,000 of a $600,000 block grant, the other $300,000 of which “was not received in [Touchstone’s] fiscal year of Oct 14 – Sept 15.” (Doc. 81-23 at 17 1). - Touchstone and Mercy Care ultimately agree to a deferred revenue amount 18 of $1.7 million for fiscal year 2015, to be encountered by Touchstone in fiscal year 2017. (Doc. 81-24 at 2). — 19 — 20 Together, these facts show that Mr. Merrill, then-CFO at Touchstone, knowingly 21 received and reported numbers that were $300,000 apart, and that Mr. Davey, then-CEO 22 at Touchstone, was also aware of this. Touchstone responds that it “actively [sought] to 23 resolve the discrepancies” but does not provide evidence that the $300,000 found “sitting 24 around” was ever properly reported to Mercy Care or otherwise accounted for. (Doc. 80-1 25 at 8). Thus, Relator has created a disputed issue of fact regarding this element for this 26 obligation. — 27 — — 28 — 1 2. Obligation 2: $1 million 2 Relator has produced seven audio recordings in support of his Obligation 212 claims 3 against Touchstone. Touchstone argues these audio recordings are inadmissible. (Doc. 814 1 at 2, 13). Because “[a] trial court can only consider admissible evidence in ruling on a 5 motion for summary judgment,” Orr v. Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 6 2002), the Court will analyze whether the audio recordings are admissible. 7 a. Admissibility of Audio Recordings 8 i. Authentication and Foundation 9 Unauthenticated evidence cannot be considered in ruling on a motion for summary 10 judgment because authentication is a “condition precedent to admissibility.” Orr, 285 F.3d 11 at 773. Authentication is satisfied if the proponent “produce[s] evidence sufficient to 12 support a finding that the item is what the proponent claims it is.” Fed. R. Evid. 901(a). A 13 proponent seeking to authenticate evidence through personal knowledge must provide an 14 affidavit “[setting] out facts that would be admissible in evidence” and “show[ing] that the 15 affiant or declarant is competent to testify on the matters stated.” Fed. R. Civ. P. 56(c)(4). 16 “In other words, the party offering the evidence must make a prima facie showing of 17 authenticity ‘so that a reasonable juror could find in favor of authenticity or 18 identification.’” United States v. Gadson, 763 F.3d 1189, 1203 (9th Cir. 2014) (quoting 19 United States v. Chu Kong Yin, 935 F.2d 990, 996 (9th Cir. 1991)). To authenticate an 20 audio recording, “a witness with knowledge may testify that the recording is what it 21 purports to be, or is a true and accurate copy of the original.” Id. at 1203-04. “The district 22 court does not abuse its discretion in admitting evidence that meets the minimum 23 requirements for authentication.”13 Id. at 1204. 24 Here, Relator submits a declaration in which he avers the following: (1) he — 25 — 26 12 Relator makes clear that “[n]o recordings have been offered with respect to Obligation 1.” (Doc. 91 at 7). However, the audio recordings are offered with respect to Obligation 2 27 for both claims (conversion and reverse false claim). 13 “Once the trial judge determines that there is prima facie evidence of genuineness, the 28 evidence is admitted, and the trier of fact makes its own determination of the evidence’s authenticity and weight.” Orr, 282 F.3d at 773 n.6. 1 personally made the audio recordings with one of his iPhones;14 (2) he personally 2 participated in and witnessed “each of the interactions which [he] recorded” and “can attest 3 to the circumstances of those interactions;” and (3) the recordings as provided to Relator’s 4 counsel “are true and correct copies of the recordings [he] made.” (Doc. 88-1 at 1-3). He 5 also describes the circumstances of each recording, including the date, who was present, 6 who spoke, the general subject matter, and the portion of the meeting recorded. (Doc. 887 1 at 3-5). Relator explains that if the recording file “was too large to send electronically,” 8 he “clipp[ed] the beginning and/or end from [some] recording[s]” but “did not knowingly 9 or intentionally alter or manipulate the recording contents in any way.” (Doc. 88-1 at 2). 10 Three of the audio recordings “were not shortened at all.” (Doc. 91 at 9). Although 11 Touchstone raises various arguments under the guise of “authentication,” Touchstone 12 ultimately does not dispute that the recordings are what Relator claims they are: recordings 13 of meetings involving various Touchstone employees.15 Accordingly, the Court is satisfied 14 that the recordings meet the minimum requirements for authentication and foundation.16 15 ii. Rule of Completeness 16 Touchstone argues that the audio recordings and transcripts are inadmissible under 17 the Rule of Completeness. (Doc. 89 at 15). The Rule of Completeness provides that “[i]f a 18 party introduces . . . part of a statement, an adverse party may require the introduction, at 19 that time, of any other part—or any other statement—that in fairness ought to be considered 20 at the same time.” Fed. R. Evid. 106. 21 To rebut this argument, Relator quotes U.S. v. Ehmer, 87 F.4th 1073, 1125 (9th Cir. 22 2023). In Ehmer, an adverse party objected to the introduction of a portion of a recording — 23 — 14 Relator references both a “company-issued iPhone” and a “personal iPhone.” (Doc. 8824 1 at 2). 15 Notably, “[n]either Monahan nor Rhodes—[Touchstone] ’s key speakers on the 25 recordings—denied they were the speakers in statements attributed to them. Nor did they deny speaking the words attributed to them or claim any relevant portions are missing.” 26 (Doc. 91 at 10). 16 Although Touchstone points out some “variances between Relator’s recollection of the 27 circumstances of the recordings in his deposition and his declaration,” the Court understands that “Relator relied on his memory for such details in his deposition but in 28 preparing his declaration had access to materials to refresh his recollection.” (Doc. 91 at 10). 1 of an interview “because the remainder of the original [recording] . . . ‘had not been 2 preserved,’ [and] it ‘was impossible for either the parties or the trial court to determine 3 whether [the interviewee’s] statement, as proffered by the government, had been unfairly 4 excerpted from the original recording.’” 87 F.4th at 1125 . The Ninth Circuit held that under 5 the Rule of Completeness, if “the additional recorded statements that the opponent would 6 like to offer no longer exist, . . . the opponent lacks any additional statement to which the 7 right of contemporaneous introduction conferred by Rule 106 might attach.” Id. (emphasis 8 in original). The court goes on to explain that the question of “whether a recorded statement 9 should be admitted, despite its unavoidable incompleteness, instead raises a question of 10 undue prejudice under Rule 403.”17 Id. 11 Here, Touchstone objects to the introduction of the audio recordings because they 12 were “selectively recorded” and “omit[ed] many other conversations.” (Doc. 89 at 15). 13 Thus, like the adverse party in Ehmer, Touchstone essentially argues that the recordings 14 are inadmissible because the recordings in full have not been preserved and because 15 Touchstone’s statements are unfairly excerpted. However, like the additional statements in 16 Ehmer, the additional recorded statements that Touchstone would like to offer no longer 17 exist, or in fact never existed. As a result, there is no additional statement to which Rule 18 106 might attach. 19 Touchstone also argues that the audio recording transcripts are inadmissible because 20 they “are incomplete as they do not capture the full produced recordings and contain 21 segments deemed inaudible by the transcriber.” (Doc. 89 at 15). The Court understands 22 that Touchstone has had copies of the audio recordings since April 2023. (Doc. 91 at 10). 23 If Touchstone wanted transcripts of the audio recordings as produced, it was Touchstone’s 24 prerogative to do so. That Relator only submitted relevant portions of the transcripts is no 25 different than Touchstone submitting relevant portions of depositions. — 26 — 17 Touchstone does argue that “[t]he produced audio recordings should also be excluded 27 and deemed inadmissible under Fed. R. Evid. 403 because the probative value substantially outweighs the danger of unfair prejudice to Touchstone.” However, for many of the same 28 reasons already discussed, the Court finds that the probative value of the evidence outweighs the prejudicial effect against Touchstone. 1 iii. Portion of Transcripts Denoted as “Indiscernible” — 2 — Regarding any portion of the transcripts denoted as “indiscernible,” “[a] recorded — 3 — conversation is generally admissible unless the unintelligible portions are so substantial — 4 — that the recording as a whole is untrustworthy.”18 United States v. Lane, 514 F.2d 22 , 27 — 5 — (9th Cir. 1975). Out of 46 pages of transcripts, there are 11 instances of “indiscernible” — 6 — audio. (See generally Doc. 87). The indiscernible portions appear to be single words, — 7 — fractions of sentences, or situations where two people spoke over one another. (See — 8 — generally Doc. 87). Accordingly, the “indiscernible” portions are not so substantial that the — 9 — audio recordings, or the transcripts, are untrustworthy. Relator does not appear to hinge his — 10 — case on any indiscernible portion and Touchstone does not suggest that the indiscernible — 11 — portions contain audio that might alter the Court’s analysis. The Court will not refuse to — 12 — consider the audio recordings on this basis. — 13 — iv. “Best Evidence Rule” — 14 — Generally, under the best evidence rule, “[a]n original [] recording . . . is required — 15 — in order to prove its content unless [the Federal Rules of Evidence] or a federal statute — 16 — provides otherwise.” Fed. R. Evid. 1002. However, “[a] duplicate is admissible to the same — 17 — extent as the original unless a genuine question is raised about the original’s authenticity — 18 — or the circumstances make it unfair to admit the duplicate.” Fed. R. Evid. 1003. “An — 19 — original is not required . . . if all the originals are lost or destroyed, and not by the proponent — 20 — acting in bad faith.” Fed. R. Evid. 1004. — 21 — Touchstone argues that the audio recordings are inadmissible because they “are not — 22 — originals, but rather, clippings of recordings transmitted to his attorneys, with the originals — 23 — having been lost due to turning in his company iPhone with the original recordings — 24 — contained therein.” (Doc. 89 at 14). As discussed above, the Court agrees that Relator has — 25 — 26 18 The Ninth Circuit found that a district court did not err in admitting audio recordings where the opponent of the evidence did not show that the recordings “were so uniformly 27 unintelligible that the recordings should not have been presented to the jury.” Gadson, 763 F.3d at 1205 . The Court similarly finds that Touchstone has not shown that the audio 28 recordings were so uniformly “inaudible” that the recordings should not be presented to the jury at trial. 1 met the minimum requirements for authentication and the Court does not find any other 2 circumstances making it unfair to admit the audio recordings. 3 v. Exhibit-Specific Objections 4 Touchstone makes additional, exhibit-specific objections. The Court addresses 5 those now. 6 1. Exhibit 24 7 Exhibit 24 is a certified transcript of 12 minutes and 49 seconds of a 14 minute and 8 29 second audio recording. (Doc. 87-1 at 1-17). Touchstone generally objects to the audio 9 recording but does not include a legal basis for such an objection. (Doc. 89 at 10). In fact, 10 the entirety of Touchstone’s objection is a one-sentence description of the recording. (Doc. 11 89 at 10). The Court will consider Exhibit 24. 12 2. Exhibit 26 13 Exhibit 26 is a certified transcript of 21 seconds of a 30 minute and 17 second audio 14 recording. (Doc. 87-2 at 1-3). Again, Touchstone generally objects to the audio recording 15 but does not include a legal basis for such an objection. (Doc. 89 at 10). Although 16 Touchstone raises various other complaints about this exhibit, the complaints center on 17 who exactly remembers what from the meeting. As discussed above, now that the Court 18 has determined that there is prima facie evidence of genuineness, the Court will consider 19 the evidence. Touchstone’s complaints in this respect are pertinent to the trier of fact’s 20 determination of the authenticity and weight of the evidence. However, these non-legal 21 objections are not a basis to wholesale preclude the evidence at summary judgment or at 22 trial. See Orr, 285 F.3d at 773 n.6. The Court will not repeat this analysis, but finds it 23 applicable to Touchstone’s other, similar complaints to other exhibits. 24 3. Exhibit 27 25 Exhibit 27 is a certified transcript of one minute and 41 seconds of a 35 minute and 26 59 second audio recording. (Doc. 87-3 at 1-4). The Court will address Touchstone’s 27 specific objection that “Jessica Clemens, a non-party [] made inadmissible hearsay 28 statements during the meeting.” (Doc. 89 at 11). Ms. Clemens is a Network Administrator 1 at Mercy Care. (Doc. 81-34 at 4). Relator argues that Ms. Clemens’ statements are not 2 inadmissible hearsay “because they are not being cited for the truth of the matter asserted, 3 but rather to provide evidence that [Touchstone] was on notice that, from Mercy Care’s 4 perspective, the deferred revenue being discussed between Mercy Care and [Touchstone] 5 pertained to $1.7 million deferred revenue from fiscal years 2018 and 2019.” (Doc. 91 at 6 12). 7 Hearsay, or an out-of-court statement offered to prove the truth of the matter 8 asserted, is not admissible. Fed. R. Evid. 801, 802. “Accordingly, an out-of-court statement 9 is not hearsay if offered for any purpose other than the truth of whatever the statement 10 asserts.” United States v. Lopez, 913 F.3d 807, 826 (9th Cir. 2019) (emphasis added). For 11 example, “an out-of-court statement introduced to prove that the person to whom the 12 statement was communicated had notice of something” is not hearsay. United States v. 13 Lane, No. CR-12-01419-PHX-DGC, 2013 WL 3716601 , at *2 (D. Ariz. July 13, 2013) 14 (citing Kunz v. Utah Power & Light Co., 913 F.2d 599, 605 (9th Cir. 1990)). The Court 15 will therefore consider Ms. Clemens’ statements not for the truth of the matter asserted, 16 but to show that Ms. Rhodes (Touchstone CEO) and Mr. Monahan (Touchstone CFO) had 17 notice “that, from Mercy Care’s perspective, the deferred revenue being discussed between 18 Mercy Care and [Touchstone] pertained to $1.7 million deferred revenue from fiscal years 19 2018 and 2019.” (Doc. 91 at 12). 20 4. Exhibit 28 21 Exhibit 28 is a certified transcript of five minutes and 44 seconds of a 16 minute 22 and 23 second audio recording. (Doc. 87-4 at 1-7). Touchstone objects that this exhibit 23 “contains inadmissible double-hearsay” based on two of Mr. Monahan’s (Touchstone 24 CFO) statements. (Doc. 89 at 11). Relator avers that he does not rely on either of the 25 statements in his brief. (Doc. 91 at 12). As such, the Court will also not rely on either of 26 these statements and agrees that this objection is moot. 27 5. Exhibit 29 28 Exhibit 29 is a certified transcript of 28 seconds of a 20 minute and 43 second audio 1 recording. (Doc. 87-5 at 1-3). The only speaker is Mr. Monahan (Touchstone CFO). (Doc. 2 87-5 at 2). Touchstone claims Mr. Monahan’s statements are “taken out of context.” (Doc. 3 89 at 12). This is the extent of Touchstone’s objection. However, because Touchstone again 4 does not include a legal basis, there is no objection for the Court to address, and the Court 5 will consider this evidence.19 6 6. Exhibit 30 7 Exhibit 30 is a certified transcript of two portions of a 16 minute and 52 second 8 audio recording: the first portion is 45 seconds long and the second is 54 seconds long. 9 (Doc. 87-6 at 1-4). The Court will address Touchstone’s specific objection that “[t]his 10 exhibit contains inadmissible hearsay in the form of statements purportedly made by Mercy 11 Care employees Sherman Moore and Tad Gary.”20 (Doc. 89 at 12). Mr. Moore was Mercy 12 Care’s Director of Finance. (Doc. 80-1 at 6). Relator argues that Mr. Moore’s statements 13 are admissible for the purpose of showing “that, from Mercy Care’s perspective, the 14 deferred revenue being discussed between Mercy Care and [Touchstone] pertained to $1.7 15 million deferred revenue from fiscal years 2018 and 2019.” (Doc. 91 at 12). The Court 16 agrees and will consider Mr. Moore’s statements not for the truth of the matter asserted, 17 but to show notice of the aforementioned. 18 7. Exhibit 36 19 Exhibit 36 is a certified transcript of two minutes and four seconds of a 14 minute 20 and 44 second audio recording. (Doc. 87-7 at 1-5). The Court finds its analysis for Exhibit 21 26 applicable here and reaches the same conclusion: the Court will consider Exhibit 36. 22 8. Exhibit 25 (Non-Audio Recording) 23 Exhibit 25 is “a page from a slide deck prepared by [Mr.] Monahan for the June 24, — 24 — 19 Even if Touchstone’s argument that Mr. Monahan’s statements were “taken out of 25 context” was a sufficient legal objection, Relator rebuts this argument by pointing to Mr. Monahan’s admission that he cannot reconcile his statement in the recording (that Mercy 26 Care did not know about the $2.8 million in deferred revenue) with the statement he made at his deposition, prior to hearing the recording (that Mercy Care did know about the $2.8 27 million). (Doc. 91 at 13-14). “[S]ince then, [Touchstone] has not offered any additional context in which to understand [Mr.] Monahan’s recorded statement.” (Doc. 91 at 13). 28 20 The Court did not rely on the statements purportedly made by Mercy Care employee Tad Gary in this Order and therefore did not consider the admissibility of such statements. 1 2020 [Touchstone] Board meeting” (Doc. 91 at 13), that “contain[s] monetary figures 2 purportedly associated with deferred revenue,” (Doc. 89 at 12). Touchstone objects to 3 Exhibit 25 but does not explain why. (Doc. 89 at 12). Because there is no objection for the 4 Court to address, the Court will consider this evidence. 5 vi. Conclusion 6 In conclusion, the Court will consider the audio recordings for purposes of this 7 Order. However, the Court notes that all evidentiary objections to specific pieces of 8 evidence not addressed herein are denied without prejudice to re-raising them, if 9 appropriate, at trial. 10 b. Substantive Analysis Considering Audio Recordings 11 Touchstone states that it “identified an additional deferred revenue obligation, 12 totaling approximately $2.8 million.” (Doc. 80-1 at 7). Touchstone also concedes that the 13 settlement agreement with Mercy Care “forgave $900,000 in deferred revenue and agreed 14 that Touchstone would return $900,000 in deferred funds for a sum of $1.8 million.” (Doc. 15 80-1 at 9). There is clearly a $1 million discrepancy between the initially identified amount 16 ($2.8 million) and the settlement ($1.8 million). Touchstone concedes as much, noting that 17 “[w]hile Touchstone’s internal records acknowledged a liability of $2.8 million, the 18 company focused its discussions on resolving the matter for $1.8 million, a figure that 19 Mercy Care accepted.” (Doc. 80-1 at 8) (emphasis added). Evidence suggests that Mercy 20 Care may have accepted the $1.8 million figure because Mercy Care believed that it was 21 negotiating for a different time period. 22 The first draft of the settlement agreement, sent by Mercy Care, reflected Mercy 23 Care’s intent to reconcile fiscal years 2018 and 2019: 24 This letter is intended to serve as the close-out document to fulfill the Mercy Care encounter reconciliation for the period October 1, 2018, through dates of service 25 September 30, 2019. Mercy Care has reviewed various data (encounters, financial statements, etc.) related to CY19 and has deemed that a deferred amount of $900K 26 is appropriate, as to ensure the ongoing operations of Touchstone Behavioral Health. — 27 — (Doc. 81-33 at 1 (emphasis added)). In response, Touchstone suggested that the letter read — 28 — as follows: — 1 — This letter is intended to serve as the close-out document to fulfill the Mercy Care 2 encounter reconciliation for all prior periods up through dates of service September 30, 2019 (CY19). Mercy Care has reviewed various data (encounters, financial 3 statements, etc.) related to all periods up through CY19 and has deemed that a deferred amount of $900K is appropriate, as to ensure the ongoing operations of 4 Touchstone Behavioral Health. — 5 — (Doc. 81-35 at 1 (emphasis added)). Touchstone suggested this change, knowing that the — 6 — amount of deferred revenue for “all prior periods” was actually $2.8 million. This much is — 7 — clear without any audio recording evidence, which further implicates Touchstone. — 8 — In one audio recording exchange, Ms. Rhodes (Touchstone CEO) says that “[t]he — 9 — older debt isn’t going to be current on Mercy Care’s books either,” and that “it is in [Mercy — 10 — Care’s] interest too to resolve some of these things and not have so much debt.” (Doc. 8711 1 at 8-9). In the same meeting, Mr. Monahan (Touchstone CFO) says that auditors told him — 12 — that he needed to leave 2016 and 2017 “on the books” but that Mr. Monahan responded to — 13 — the auditors that Mercy Care was “not going to come back and pursue the ’16 and ’17.” — 14 — (Doc. 87-1 at 13). Mr. Monahan suggested that he could possibly “convince” Mercy Care — 15 — “to forget about it.” (Doc. 87-1 at 14). — 16 — In a subsequent meeting with Mercy Care, Ms. Clemens, a Network Administrator — 17 — at Mercy Care, addressed “the request that [Mercy Care] received [from Touchstone] to — 18 — waive the deferred revenue for, I believe, fiscal year[s] ’18 and ’19. And – or that – the — 19 — rough total on that is about 1.7 million dollars.” (Doc. 87-3 at 2-3). Again, Mercy Care — 20 — appeared to be negotiating for 2018 and 2019, but not “all prior periods.” — 21 — And, in perhaps the most incriminating stretch of dialogue, Mr. Monahan (CFO) — 22 — said the following: — 23 — What that buys us is, debt forgiveness of 2.8 million dollars sitting on our balance 24 sheet in liabilities. Why 2.8? Why isn’t it the 1.7 figure that they are quoting? Well, it is because they are not including 2016 and 2017 deferred revenue. So, any 25 settlement offer, in my mind, would have to say all deferred revenue gone, wiped out, forgiven. That would be – that would be like taking 350,000 and investing it, 26 and getting back 2.8. That is a – that is like a 700% return from day one. . . . 27 The only number that [Mercy Care has] ever given us . . . was that 1.7 – roughly 1.8 figure. Well, that is all they are concerned about, let’s satisfy that concern. But let’s 28 also say, no further – what – however we want to word it, however we want to wordsmith it, no additional deferred revenue to be recouped. And you know, that 1 will satisfy our auditors, if I wipe out 2.8 million dollars. That would clean our balance sheet. That – our balance sheet will be cleaner than it has probable been in 2 10 years. . . . 3 I don’t think we say, well, you know, what about ’16 and ’17? We just say, all past deferred revenue forgiven, not to be recouped. And I think that will be enough for 4 any auditor. Can you – but think about that for a second, 2.8 million dollars gone off our books. — 5 — (Doc. 87-4 at 2, 5-6). — 6 — The Court need not continue. The audio recording evidence is enough to create a — 7 — disputed issue of fact on whether Touchstone knowingly concealed or knowingly and — 8 — improperly avoided or decreased an obligation to pay money to the Government. Neither — 9 — party is entitled to summary judgment on this obligation.21 — 10 — c. Touchstone’s Audit Reports Argument — 11 — At various points, Touchstone argues that it is absolved from liability because — 12 — Touchstone “share[d] its audit reports with Mercy Care to ensure that nothing [was] being — 13 — concealed or hidden.” (Doc. 80-1 at 6, 11-12; Doc. 90 at 6). Even accepting this as true,22 — 14 — the only result is that perhaps the Court was misled in accepting Relator’s allegations as — 15 — true in considering the motions to dismiss.23 Regardless of whether Mercy Care “actually — 16 — knew,” or “should have known,” of the audited numbers, the following can still be true: (1) — 17 — Touchstone possessed Government money and it delivered less than all of that money, and — 18 — (2) Touchstone knowingly concealed or knowingly and improperly avoided or decreased — 19 — 21 The same analysis regarding damages for the conversion claim also applies to the reverse 20 false claim count. See supra Section II.a.i. 22 The Court cannot validate that Mercy Care received these audit reports because no one 21 took any discovery from Mercy Care. Thus, the Court cannot determine if Mercy Care had actual knowledge. Nonetheless, regardless of whether Mercy Care “actually knew,” or 22 “should have known,” it appears that Touchstone still had the opportunity to knowingly conceal or knowingly and improperly avoid or decrease its obligation, which is conceivably 23 sufficient to meet the “knowingly” element in this context. 23 Specifically, the Court accepted as true Relator’s allegations that Touchstone was not 24 transparent regarding the true amounts of deferred revenue, (See, e.g., Doc. 36 at 35, 3840), which resulted in the Court dismissing Relator’s conspiracy count because Mercy Care 25 could not simultaneously knowingly conspire to do something and also be a victim of Touchstone’s alleged deception. In other words, the Court accepted Relator’s factual 26 allegations as true for purposes of the motions to dismiss, and in accepting those facts as true, the Court concluded that Mercy Care could not be an unknowing-victim and a 27 knowing-co-conspirator. If Relator’s allegations that precluded Relator’s own claim against Mercy Care are later called into question (and the Court can only say “in question” 28 because neither party took discovery from Mercy Care), Relator is responsible, through his pleadings, for effectively forfeiting the claim. 1 an obligation it had to the Government. In other words, the Court does not believe that 2 Mercy Care’s alleged knowledge negates any element of either claim and it is at least 3 conceivable that Relator could meet the elements of both claims. Touchstone is not 4 absolved from liability on Relator’s claims based on this argument. 5 d. Unclean Hands 6 Touchstone asserts that Relator’s claims are barred by the doctrine of unclean hands. 7 (Doc. 80-1 at 15). Relator maintains that Touchstone’s argument is inconsistent with Ninth 8 Circuit case law and, alternatively, lacks factual basis. (Doc. 88 at 19). 9 At this juncture, Touchstone attempts to use the doctrine of unclean hands as a 10 complete bar to Touchstone’s liability. However, the Court finds that Relator’s unclean 11 hands may only limit Relator’s eventual award, not bar Touchstone’s liability. This finding 12 is grounded in the FCA and in Ninth Circuit caselaw. Under the FCA, regardless of whether 13 the Government intervenes, “if the court finds that the action was brought by a person who 14 planned and initiated the violation . . . upon which the action was brought, then the court 15 may, to the extent the court considers appropriate, reduce the share of the proceeds of the 16 action which the person would otherwise receive.”24 31 U.S.C. § 3730 (d)(3). This strongly 17 suggests that the appropriate time for this argument is at the damages stage, or at the point 18 when the Court considers whether it should “reduce the share of the proceeds of the action.” 19 Ninth Circuit case law supports this reading. In Mortgages, Inc. v. U.S. Dist. Court 20 for Dist. of Nev. (Las Vegas), 934 F.2d 209, 213 (9th Cir. 1991), the Ninth Circuit explicitly 21 stated that “[t]he FCA is in no way intended to ameliorate the liability of wrongdoers by 22 providing defendants with a remedy against a qui tam plaintiff with ‘unclean hands.’”25 23 Touchstone “acknowledges” this quote, but responds that under Cell Therapeutics, Inc. v. 24 Lash Grp., Inc., 586 F.3d 1204, 1213 (9th Cir. 2009), the FCA does “restrict or prevent 25 24 Similarly, the Court “may award to the defendant its reasonable attorneys’ fees and expenses if the defendant prevails in the action and the court finds that the claim of the 26 person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” 31 U.S.C. § 3730 (d)(4) (emphasis added). Clearly, this is not the 27 right juncture for the Court to decide this issue. It is unknown why Touchstone suggests otherwise. (Doc. 80-1 at 15). 28 25 The Ninth Circuit also noted that “the framers of the [FCA] recognized that wrongdoers might be rewarded under the Act.’” Mortgages, 924 F.2d at 213. || entirely the ability of a relator with unclean hands to collect a qui tam bounty.” (Doc. 80-1 2|| at 15). However, following that quote from Lash is a citation to the same FCA provision || from above, which the Court has already explained is only applicable at a later juncture. 4|| The Court will not grant summary judgment to Touchstone on this basis. 5 IV. CONCLUSION 6 Accordingly, 7 IT IS ORDERED Defendant Touchstone’s Motion for Summary Judgment (Doc. 8 || 80) is denied. 9 IT IS FURTHER ORDERED Plaintiff-Relator’s Cross-Motion for Summary 10 || Judgment (Doc. 81) is denied. 11 Dated this 13th day of March, 2025. — 12 — 13 i C — 14 — James A. Teilborg 15 Senior United States District Judge — 16 — — 17 — — 18 — — 19 — — 20 — — 21 — — 22 — — 23 — — 24 — — 25 — — 26 — — 27 — — 28 — - 28 -