United States of America et al v. Ocean State, LLC

OCR transcription for search; preserved printed pages are authoritative

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 1 of 18 PagelD #:
<pagelD>

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

UNITED STATES OF AMERICA ex
rel. JAMES R. BERKLEY,
Relator,

V.

OCEAN STATE, LLC; NEW HARBOR
CAPITAL FUND LP; NEW HARBOR
CAPITAL FUND IT LP; NEW
HARBOR CAPITAL MANAGEMENT
LP; BLUEPRINT TEST
PREPARATION, LLC; and FYZICAL
ACQUISITION HOLDINGS, LLC,
Defendants.

C.A. No. 20-°5388-JJM-PAS

eee ete ee ee ee tee eae ee ee

ORDER
Pursuant to the qui tam provisions of the False Claims Act (“FCA”), 31 U.S.C.
§ 3730, Relator James R. Berkley filed this lawsuit against Defendants Ocean State,
LLC, New Harbor Capital Fund LP, New Harbor Capital II LP, New Harbor Capital
Management LP, Blueprint Test Preparation, LLC, and Fyzical Acquisition Holdings,
LLC alleging three counts for violating the FCA. ECF No. 28. Defendants have
moved to dismiss. ECF No. 29. For the reasons stated below, the Court DENIES the

motion.

I, BACKGROUND
The Court states the facts relevant to its decision here.
The COVID-19 pandemic thrust the entire world into a personal and economic

downturn, shutting down schools, businesses, and government agencies. Small

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 2 of 18 PagelD #:
<pagelD>

businesses and those who worked in them, suffered immediately. In response,
Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”). This law, among other things, established the Paycheck Protection Program
(“PPP”), which allowed small businesses adversely affected by COVID-19 to apply for
and receive a PPP loan. Various regulations and restrictions applied to PPP
applicants and recipients including those that relate to the size of the company (the
affiliation requirement) and whether the loan is necessary (the necessity
requirement).

This lawsuit is against six companies. The three New Harbor Defendants
(New Harbor Capital Fund LP, New Harbor Capital II LP, New Harbor Capital
Management LP) are private equity firms and the management company that
employs the people who manage the investments. None of these entities applied for
or received PPP loans, but Mr. Berkley alleges that New Harbor had a controlling
investment in the remaining three Defendants (Ocean State, LLC, Blueprint Test
Preparation, LLC, and Fyzical Acquisition Holdings, LLC) who did apply for and
receive PPP loans. He alleges that the three PPP recipients committed fraud because
their certifications that they met the affiliation and necessity requirements of the
CARES Act were false—essentially he asserts that Ocean State, Blue Print, and
Fyzical did not meet the size requirement and they had plenty of funds available to
them via New Harbor, a well-capitalized private equity firm; so they did not qualify
fora PPP loan. He alleges that New Harbor’s liability is rooted in its ability to direct

and control the three PPP recipient companies.

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 3 of 18 PagelD #:
<pagelD>

Mr. Berkley’s connection to this case is that his wife’s business rented office
space to Ocean State who stopped paying rent during the pandemic. When
Mr. Berkley suggested that Ocean State get funds from New Harbor, he was told
“that’s not how it works.” Concluding that Ocean State and these other named PPP
recipients backed by New Harbor submitted false information to the government to
get money they were not entitled to, he sued them under the FCA. The FCA contains
qui tam provisions that encourage private citizens to come forward with claims of
fraud on the government. As a Relator, Mr. Berkley filed an original complaint,
amended it once, and then after Defendants moved to dismiss the amended
complaint, he amended the complaint a second time. The Second Amended
Complaint is the operative one here and Defendants move to dismiss it. ECF No. 29.
II. STANDARD OF REVIEW

Federal Rule of Civil Procedure 12(b)(6) tests the plausibility of the claims
presented in a plaintiffs complaint. “To avoid dismissal, a complaint must provide ‘a
short and plain statement of the claim showing that the pleader is entitled to relief.”
Garcia-Catalén v. United States, 734 F.3d 100, 102 (1st Cir. 2013) (quoting Fed. R.
Civ. P. 8(a)(2)). At this stage, “the plaintiff need not demonstrate that she is likely to
prevail, but her claim must suggest ‘more than a sheer possibility that a defendant
has acted unlawfully.” Jd at 102-03 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009)). The “complaint must contain sufficient factual matter, accepted as true, to
‘state a claim to relief that is plausible on its face.” Jgbal, 556 U.S. at 678 (quoting

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 4 of 18 PagelD #:
<pagelD>

“The plausibility inquiry necessitates a two-step pavane.” Garcia-Catalan, 734
F.3d at 103. “First, the court must distinguish ‘the complaint’s factual allegations
(which must be accepted as true) from its conclusory legal allegations (which need
not be credited).” Jd. (quoting Morales-Cruz v. Univ. of P_R., 676 F.3d 220, 224 (1st
Cir. 2012)). “Second, the court must determine whether the factual allegations are
sufficient to support ‘the reasonable inference that the defendant is liable for the
misconduct alleged.” Jd. (quoting Haley v. City of Boston, 657 F.3d 39, 46 (1st Cir.
2011)). “In determining whether a complaint crosses the plausibility threshold, ‘the
reviewing court [must] draw on its judicial experience and common sense.” Jd,
(alteration in original) (quoting Jgbal, 556 U.S. at 679).
III. DISCUSSION

“The FCA imposes liability upon persons who (1) present or cause to be
presented to the United States government, a claim for approval or payment, where
(2) that claim is false or fraudulent, and (8) the action was undertaken ‘knowingly,’
in other words, with actual knowledge of the falsity of the information contained in
the claim, or in deliberate ignorance or reckless disregard of the truth or falsity of
that information.” United States ex rel, Karvelas v. Melrose-Wakefield Hosp., 360
F.3d 220, 225 (1st Cir. 2004) (quoting 31 U.S.C. § 3729(a)(1)(b)). To prove liability
under the statute, a party must show submission of a false claim for payment. Proof

of an intent to defraud is not required. See 31 U.S.C. § 3729(b); Karvelas, 360 F.3d

at 225.

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 5 of 18 PagelD #:
<pagelD>

The FCA contains qui tam provisions that encourage private citizens to come
forward with claims of fraud on the government. U.S. ex rel. Duxbury v. Ortho
Biotech Prod, L.P., 579 F.3d 13, 16 (1st Cir. 2009). “The qui tam provisions permit
whistleblowers (known as relators) to bring certain fraud claims on behalf of the
United States; in return, ‘la] private relator is entitled to a portion of any proceeds
from the suit, whether the United States intervenes as an active participant in the
action or not.” Jd. (quoting United States ex rel. Rost v. Pfizer, Inc., 507 F.3d 720,
727 (1st Cir. 2007)). To avoid rewarding “opportunists [] seekling] compensation
based on fraud already apparent from information in the public domain”, United
States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201, 206 (1st Cir. 2016),
the FCA requires a court to “dismiss an action ...if substantially the same allegations
or transactions as alleged in the action or claim were publicly disclosed... unless. .
. the person bringing the action is an original source of the information.” 31 U.S.C.
§ 3730(e)(4)(A); U.S! ex rel. Poteet v. Bahler Med, Inc., 619 F.3d 104 (1st Cir. 2010).
It is this public disclosure bar that Defendants argue requires dismissal of Mr.

Pellechio’s FCA suit.!

1 Before the Court gets started on Defendants’ arguments, it must address Mr.
Berkley’s argument that because the 2010 Amendments to the FCA converted the
current public disclosure bar provision to an affirmative defense rather than it being
viewed as a jurisdictional issue, it cannot be resolved on a motion to dismiss, citing
the District of Massachusetts court in United States ex rel. Winkelman v. CVS
Caremark Corp. The First Circuit reviewed that case on appeal, however, and held
that even if it could be viewed as an affirmative defense, “an affirmative defense may
serve as a basis for dismissal under Rule 12(b)(6).” Winkelman, 827 F.3d at 207
(citing Banco Santander de P.R. v. Lopez—Stubbe (In re Colonial Mortg. Bankers
Corp.), 324 F.3d 12, 16 (1st Cir. 2003)). Therefore, without deciding whether the

5

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 6 of 18 PagelD #:
<pagelD>

A. Public Disclosure Bar

“A prior, public disclosure of fraud occurs ‘when the essential elements
exposing the particular transaction as fraudulent find their way into the public
domain.” Poteet, 619 F.3d at 110 (quoting U.S. ex rel. Ondis v. City of Woonsocket,
587 F.3d 49, 54 (1st Cir. 2009)). “To be a disclosure “of fraud” the disclosure must
contain either (1) a direct allegation of fraud, or (2) both a misrepresented state of
facts and a true state of facts so that the listener or reader may infer fraud.” Jd.
at 110 Ginternal citations omitted).

The public disclosure bar is analyzed using a three-step process that asks
whether “the allegations or transactions identified in the relators’ complaint have
already been publicly disclosed,” “that disclosure occurred through one of the
statutorily prescribed methods,” and “if these two queries yield affirmative answers,
we proceed to examine whether the allegations or transactions on which the relators’
suit rests are substantially the same as the publicly disclosed allegations or
transactions.” Winkelman, 827 F.3d at 208. The only way a relator can defeat the
public disclosure bar is if she is the original source of the information, which is a
person with “knowledge that is independent of and materially adds to the publicly
disclosed allegations or transactions” and that she “voluntarily provided the
information to the Government before filing an action under this section.” /d. at 211;

31 U.S.C. § 3730(e)(4)(B)(2).

public disclosure bar is an affirmative defense, the Court moves on to deciding the
substance of Defendants’ 12(b)(6) motion.

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 7 of 18 PagelD #:
<pagelD>

Because there is some crossover with the parties’ arguments on the first two

elements, the Court will address them together.
1. Disclosure and Sources

Public disclosure occurs when allegations of fraud are placed in the public
domain. Fost, 507 F.3d at 730-731. Statutorily articulated sources are (1) “criminal,
civil, or administrative hearingls],” (2) “congressional, administrative, or
Government Accounting Office reports], hearingls], auditls], or investigation[s],” or
(3) “from the news media.” Poteet, 619 F.3d at 113 (quoting Graham Cnty. Soil &
Water Conservation Dist. v. U.S. ex rel. Wilson, 130 S. Ct. 1396, 1401-02 (2010)).
The information both parties invoke here comes from the Small Business
Administration (“SBA”) PPP loan data, New Harbor’s website, press releases issued
by New Harbor and republished by third-party news source websites, and a Daily
Beast article. Mr. Berkley concedes that the SBA PPP loan data and the Daily Beast
article were publicly disclosed for purposes of the FCA public disclosure bar. ECF
No. 31 at 5, 22. He does not appear to dispute that the information on New Harbor’s
website and its press releases issued and then republished on third-party websites
was publicly available but argues that they were not published through statutorily
prescribed sources. Jd. at 15.

Defendants argue that all the information is publicly available and publicly
disclosed in news media. The FCA does not define “news media,” but “courts that
have considered the issue have construed the term to include readily

accessible websites.” United States ex rel. Green v. Serv. Contract Educ. & Training

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 8 of 18 PagelD #:
<pagelD>

Tr, Fund, 843 F. Supp. 2d 20, 32 (D.D.C. 2012) (collecting cases). Mr. Berkley doubts
the newsworthiness of the press releases and argues that those issued and
republished in Providence Business News, the Wall Street Journal, Pro-Private
Equity, and Private Equity Professiona/do not count as “news media” reports because
they were posted online and the re-posts contained no curated information or exercise
of editorial judgment. United States ex rel. Integra Med Analytics LLC v. Providence
Health & Servs., Case No. CV 17-1694 PSG (SSx), 2019 WL 3282619, at *14 (C.D.
Cal. July 16, 2019).

Mr. Berkley has not argued that the websites involved here were not readily
accessible to the public. And the Court finds Mr. Berkley’s heavy reliance on the
multilayered analysis of what constitutes “news media” in the /ntegra case to be
unconvincing; reading the FCA in accordance with its plain meaning, the Court finds
that there is no requirement that the website must curate the information or exercise
editorial judgment on the information the website reposts in order to be considered
a public disclosure under the statutory language. See, e.g., Poteet, 619 F.3d at 110
(articles published in the New York Times that discuss allegations in a complaint
qualify as public disclosures); United States ex rel. Beauchamp v. Academi Training
Ctr., Inc., 933 F. Supp. 2d 825, 844-45 (E.D. Va. 2018) (coverage of lawsuit on
Wired.com is a public disclosure).

By its nature, a press release is written and circulated to disseminate
information, usually something newsworthy, to an audience of readers. Those

readers are generally members of the public at large. That the third-party news sites

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 9 of 18 PagelD #:
<pagelD>
did not add information to the press releases or somehow curate this information into
a larger story does not take away from the fact that New Harbor had news to release
to the public, chose to do so through a press release, and those other sites found them
newsworthy such that they decided to further disseminate that information. See
Winkelman, 827 F.3d at 209 (relying on a press release and resulting media coverage
to find a public disclosure), While the Court agrees that not all websites will qualify
as “news media,” it concludes that the sources the parties cite in this case qualify as
news media as referenced in the FCA.
2. Basis

Finally, the Court considers whether Mr. Berkley’s qui tam action is “based
upon” prior disclosures of fraud. “The ‘based upon’ requirement is satisfied when the
relator’s allegations are substantially similar to allegations or transactions already
in the public domain at the time he brings his qui tam action.” Ondis, 587 F.3d at 58.
The Court “must compare the substance of the prior disclosures with the substance
of the relator’s complaint.” Poteet, 619 F.3d at 114. The Court must determine
whether Defendants’ alleged misrepresentation (that they satisfied the size and
necessity requirements to receive PPP loans) and what My. Berkley alleges was their
plan (to falsify information in order to receive PPP loans to which they were not
entitled) were in the public domain such that an inference of fraud can be drawn.”

Ondis, 587 F.3d at 54.

2Mr. Berkley appears to argue that each individual piece of data or information
must contain both the misrepresentation and the true fraudulent plan, but the case
law allows that “[t]he two states of facts may come from different sources, as long as

9

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 10 of 18 PagelD #:
<pagelD>

Mr. Berkley alleges that Ocean State, Blueprint, and Fyzical applied for PPP
loans and certified that the money would be used for payroll and that they complied
with the affiliation and necessity requirements relating to the number of employees
and financial need. ECF No. 28 ¥§ 117-133. He alleges that the loans were
unnecessary because the companies could have accessed New Harbor’s billion-dollar
portfolio to survive any pandemic economic shortfall. Jd. §{ 178-179. Mr. Berkley
also alleges that the PPP recipients falsely certified their employee counts to appear
“small.” Jd. {| 215-217. He alleges that New Harbor either directed these companies
to apply for the PPP loans or at least knew they applied while knowing that they
could not truthfully certify compliance with the regulations. /d. J 146.

The SBA loan data and New Harbor’s press releases provide background
information on each Defendant vis-a-vis the PPP applications and New Harboyr’s
relationship to the PPP applicants and company financials. The SBA information
shows that Defendants applied for and received PPP money and New Harbor’s
website and press releases show its relationship with the Defendants. This is basic
data that does not suggest a fraudulent scheme. It is the Daily Beast article, if
anything, that has the potential to be the bow around the package of publicly
available information standing in the way of Mr. Berkley’s qui tam FCA suit.

The July 15, 2020 Daily Beast article, entitled “Inside the Pandemic Cash

Bonanza for Private Equity-backed Firms”, describes how about 1,300 companies

the disclosures together lead to a plausible inference of fraud.” Ondis, 587 F.3d at
54,

10

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 11 of 18 PagelD #:
<pagelD>

backed by wealthy private equity firms applied for forgivable PPP loans and
questions whether the government was properly overseeing the administration of
these public funds.’ The author calls out companies that merged the year before the
pandemic and yet still applied for PPP money when it seems impossible that the
merged company could meet the size requirement. This article does not mention the
Defendants in this case or definitively accuse any company of FCA violations.
Acknowledging that there could be other explanations for these applications, a former
federal inspector general “was careful not to characterize it as fraud because ‘there
could be some explanation, but it does look like a problem. ... It looks like an anomaly
that should be investigated further.” The article considered whether some private
equity firms might have devised clever workarounds in order to access the PPP
money. It lamented that attention given by banks to bigger companies was at the
expense of smaller mom and pop businesses and their underpaid employees who
disproportionally suffered during the pandemic. The article also suggests that
companies receiving PPP money could commit fraud by taking the money and then
lying about retaining their employees and could use the pandemic as an excuse to cut
back expenses even after receiving money to bolster their bottom lines.

This available information is not substantially similar to the facts alleged
against Defendants in Mr. Berkley’s Second Amended Complaint. Taking his

allegations in the Second Amended Complaint as true, Mr. Berkley argues that he

3 “Tnside the Pandemic Cash Bonanza for Private Equity-Backed Firms,” Daily
Beast, July 15, 2020, available at https://www.thedailybeast.com/private-equity-
backed-firms-got-ppp-funds-for- businesses: hit-by-coronavirus.

11

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 12 of 18 PagelD #:
<pagelD>

was only able to discern the fraud through his “experience and knowledge of the
private equity fund model and compensation structure, coupled with his investigation
and analysis into New Harbor Capital and its portfolio companies.” ECF No. 28
4160. He interviewed former Ocean State employees and landlords and
communicated with Ocean State CEO. Jd. ¥{ 162-179. “In evaluating substantial
similarity, an inquiring court should bear in mind the core purpose of the FCA: to
encourage suits by individuals with valuable knowledge of fraud unknown to the
government.” Winkelman, 827 F.3d at 210. Nowhere in any of this publicly disclosed
information does it demonstrate that these Defendants misstated facts or defrauded
the government by falsifying their PPP loan applications.

Mr. Berkley’s own research and inference drawing supports his allegations
that Defendants committed fraud in certifying that they were eligible for PPP loans.
Mr. Berkley’s allegations demonstrate that he has added many more facts about these
Defendants and their PPP loans—much more than a “sprinkle of factual garnish” of
more facts. U.S. ex rel. Listtza v. Johnson & Johnson, 765 F. Supp. 2d 112, 123 (D.
Mass. 2011). The Court finds it significant that the Daz/y Beast article, arguably the
best source of synthesized public information relating to looming questions about
private equity-backed companies applying for PPP loans, does not name the
Defendants in this case. Almost all of the cases the parties have cited to the Court

have identified one or more defendants ultimately sued under the FCA.4 The fact

4 The Court does not conclude that the public disclosure bar requires that a
specific defendant be named to meet the “basis” element but, given all the other facts
alleged in Mr. Berkley’s complaint, the Court highlights this deficit.

12

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 13 of 18 PagelD #:
<pagelD>
that Mr. Berkley had to ferret out Defendants’ alleged role in defrauding the
government through his own investigation and knowledge demonstrates that the
government was not put on notice of the potential fraud. U.S ex rel, Bartz v. Ortho-
McNeil Pharm., Inc., 856 F. Supp. 2d 258, 265 (D. Mass. 2012) (“[Tlhe public
disclosure bar’s focus is on notice and not detail.”) Because the Court finds that the
basis for Mr. Berkley’s FCA lawsuit was not publicly disclosed, such that the
government was not alerted to conduct its own investigation of potential fraud, the

public disclosure bar does not apply.

B. Rule 9(b)

Because Mr. Berkley’s FCA claims sound in fraud, they must meet the
heightened pleading standard of Federal Rule of Civil Procedure 9(b). U.S. ex rel.
Gagne v. City of Worcester, 565 F.3d 40, 45 (1st Cir. 2009). Rule 9(b) requires that
“liln alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.” This standard “means that a complaint
must specify ‘the time, place, and content of an _ alleged false
representation.” Fost, 507 F.3d at 731 (quoting Doyle v. Hasbro, Inc., 103 F.3d 186,
194 (1st Cir. 1996)). In other words, Rule 9(b) requires the pleader “to specify the
who, what, where, and when of the allegedly false or fraudulent representation.”
Alternative Sys. Concepts, Inc. v. Synopsys, Inc. 374 F.3d 238, 29 (1st Cir. 2004)
“Conclusory allegations ... are not sufficient” to satisfy Rule 9(b). Rost, 507 F.3d
at 731. The rule may be satisfied, however, “where, although some questions remain

unanswered, the complaint as a whole is sufficiently particular to pass muster under

13

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 14 of 18 PagelD #:
<pagelD>
the FCA.” Jd. at 732; see also U.S. ex rel. Franklin v. Parke-Davis, Div. of Warner-
Lambert Co.,147 F. Supp. 2d 39, 46-47 (D. Mass 2001) (observing that,
reading Rule 9(b) in conjunction with Federal Rule of Civil Procedure 8(a), “while
Relator must allege the circumstances of the fraud, he is not required to plead all of
the evidence or facts supporting it” (citation omitted)).

“The purpose of this requirement is to ‘give notice to defendants of the
plaintiffs’ claim, to protect defendants whose reputation may be harmed by meritless
claims of fraud, to discourage ‘strike suits,’ and to prevent the filing of suits that
simply hope to uncover relevant information during discovery.” Karvelas, 360 F.3d
at 226, abrogated by Allison Engine Co. v. U.S. ex rel. Sanders, 558 U.S. 662 (2008);
see also U.S. ex rel. Ge v. Takeda Pharm. Co., Ltd, 737 F.3d 116, 123 (1st Cir. 2013)
(particularity requirement inhibits “parasitic relators who bring FCA damages
claims based on information within the public domain or that the relator did not
otherwise discover”).

Defendants raise countless deficiencies that, in their view, doom Mr. Berkley’s
complaint in the face of Rule 9(b)’s heightened pleading requirements. These
deficiencies relate to the PPP loan programs necessity and affiliation requirements.
The Court will examine the complaint allegations as to each of these in terms of each
count in Mr. Berkley’s complaint.

1. Count I - FCA subsection 3729 (a)(1)(A)

a. Necessity Requirement

14

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 15 of 18 PagelD #:
<pagelD>

Defendants argue that Mr. Berkley has not adequately alleged that
Defendants violated the necessity requirement because he does not identify what
made their certifications of financial need false and by focusing on New Harbor, looks
at the wrong corporate entity.

Mr. Berkley must allege with particularity “the who, what, where and when of
the allegedly false or fraudulent representation.” Alternative Sys. Concepts, Inc. v.
Synopsys, Inc., 374 F.3d 23, 29 (1st Cir. 2004). Accepting his allegations as true as
Rule 12(b)(6) requires all the while keeping in mind the purpose of Rule 9(b)’s
heightened pleading standard for fraud claims, the Court finds that Mr. Berkley’s
complaint survives Defendants’ challenge. Mr. Berkley’s allegations about whether
Defendants falsely certified that they needed PPP funds from the government are
extensive. Essentially, Mr. Berkley alleges that these PPP recipients falsely certified
to the government and therefore caused false claims to be presented to the
government that the loan was necessary even though they had access to other sources
of available liquidity. See ECF No. 28 4§ 4°10, 54-55, 57-58, 92, 97, 105-107, 118-
116, 124, 182, 146-151, 152, 154-156, 158-186; see also ECF No. 31 at 29-32.

b. Affiliation Requirement

. Defendants argue that Mr. Berkley fails to allege that Defendants violated the
affiliation requirement because he does not allege any facts contradicting Defendants’

contention that each of the PPP recipients qualified for an exception to the size and

affiliation rules.

15

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 16 of 18 PagelD #:
<pagelD>

Mr. Berkley’s complaint contains allegations sufficient to overcome
Defendants’ motion. He alleges that the PPP recipients did not meet the size
standards, they knew or should have known that they did not, and that the CARES
Act’s waiver of the affiliation rules did not apply to them. ECF No. 28 4 187-219.
At this stage of the case, the Court finds that the complaint states a claim such that
Defendants’ Motion to Dismiss is DENIED as to Count I.

2. Count II-FCA Subsection 3729 (a)(1)(B)

This section makes liable a person who “knowingly makes, uses or causes to be
made or used, a false record or statement material to a false or fraudulent claim.” 31
U.S.C. § 3729(a)(1)(b). It requires allegations that “the defendant made a false record
or statement for the purpose of getting ‘a false or fraudulent claim paid or approved
by the Government.” Gagne, 565 F.3d at 46 (quoting Allison Engine Co., 553 U.S. at
665-67). Because Mr. Berkley has alleged with particularity that Defendants
prepared and submitted or caused to be submitted to the SBA loan applications

containing false information, this claim survives Defendants’ motion to dismiss.

3. Count III-FCA Subsection 3729(a)(1)(G)

This section makes liable any person who “knowingly makes, uses, or causes
to 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 improperly avoids or decreases an obligation to pay or transmit money or

property to the Government.” 381 U.S.C. § 3729(a)(1)(G). “Obligation” is defined as

16

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 17 of 18 PagelD #:
<pagelD>
“an established duty, whether or not fixed, arising from an express or implied
contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or
similar relationship, from statute or regulation, or from the retention of any
overpayment.” 31 U.S.C. § 3729(b)(3).

Mr. Berkley contends that Defendants violated the second part of this section.
He alleges that because they were not entitled to the PPP loans, they knowingly
retained an overpayment. ECF No. 28 {{[ 42, 55-60, 220-231, 250-2538. The Court
finds that these allegations are sufficient to survive Defendants’ motion to dismiss.

C. Allegations as to New Harbor

Defendants argue that Mr. Berkley’s allegations against New Harbor fail
because they are separate corporate entities and not liable for the PPP recipients’
actions. They focus on the corporate structure which they argue provides a barrier
to New Harbor’s liability here. Mr. Berkley points to the statutory language in
support of his allegations that as the private equity backer of these PPP recipients,
New Harbor caused a false claim for payment to the government.

Mr. Berkley relies on cases in which courts have allowed claims against private
equity firms who were alleged to be involved—whether it be by exerting control or
influence over the portfolio company or working through those entities—in submitting
false claims to the government. Mr. Berkley alleges that New Harbor controlled and
directed the PPP recipients’ conduct during their submission of the PPP loans
applications and receipt of the PPP funds. ECF No. 28 4§ 4-10, 105-107, 113-116,

146-151, 162-163, 165, 177, 185. He alleges that New Harbor was at least aware of

17

Case 1:20-cv-00538-JJM-PAS Document 33 Filed 05/02/23 Page 18 of 18 PagelD #:
<pagelD>
the false claims in the applications to the government and did nothing to prevent
them from being submitted or from receiving the money. Jd. While the nuances of
the relationship between these entities will be revealed during discovery, the Court
finds that this is sufficient at this motion to dismiss stage to keep New Harbor in the
case. Through their well-briefed and researched motion, Defendants attempt to
recast Mr. Berkley’s complaint in terms of their defenses as an expedient way to
define it as deficient under the Rule 9(b) heightened pleading standard for FCA
claims. While Mr. Berkley’s complaint at times paints his fraud claims against these
Defendants with a broad brush, the Court finds that his pleadings are enough to
survive Defendants’ motion. Defendants’ Motion to Dismiss New Harbor is DENIED.

IV. CONCLUSION

The Court DENIES Defendants’ Motion to Dismiss. ECF No. 29.

John J. McConnell, Jr.
Chief Judge
United States District Court

May 2, 2023

18