United States District Court, S.D. Texas, Houston Division
UNITED STATES OF AMERICA and STATE OF TEXAS, ex rel. SHATISH PATEL, et al., Plaintiffs,
CATHOLIC HEALTH INITIATIVES, et al., Defendants.
MEMORANDUM & ORDER
P. ELLISON, UNITED STATES DISTRICT JUDGE
qui tam action under the False Claims Act, 31 U.S.C.
§ 3729 et seq., alleges two unlawful schemes by
St. Luke's Health System (“System”) in
connection with its hospital in Sugar Land, Texas. The System
launched the hospital with partial physician ownership. In
2011, after several years of poor performance and an
intervening change in the law, the System decided to buy out
the physician-investors and change the hospital's
ownership structure. Relators are three physicians who were
among the earliest investors and resisted the System's
attempt to buy them out. Defendants are various St.
Luke's entities, St. Luke's executives from the
relevant period, and Catholic Health Initiatives, which
bought the St. Luke's Health System in 2013.
first alleged scheme concerns the process by which the
physician investors were bought out. St. Luke's used a
statutory rescission process under the Texas Securities Act.
Relators allege that it resulted in payments to the physician
investors substantially above the market value of their
stakes in the hospital. According to Relators, St. Luke's
made these high payments with the intent of maintaining
referral relationships with the physicians. This discrepancy
in value is alleged to violate the Anti-Kickback Statute, the
Stark Law, and by extension, the False Claims Act.
second alleged scheme concerns St. Luke's representations
to federal and state health care programs about the true
ownership of the hospital. Before the investors were bought
out, they were part of a limited liability partnership that
existed for the purpose of owning the hospital. After the
buyout, St. Luke's began representing to the government
that the partnership was defunct and so a different entity
owned the hospital. Relators allege that St. Luke's knew
this to be false at the time they made these various
representations. Relators rely on their own litigation
against St. Luke's in Texas courts from 2011 to 2016,
which established that Relators retained partnership
interests and that the partnership remained the owner of the
hospital. According to Relators, this rendered St. Luke's
representations factually false, leading to violations of
both the False Claims Act and the Texas Medicaid Fraud
complaint has an abundance of detail, but it does not add up
to liability under the False Claims Act. Relators might well
have had legitimate grievances; their litigation in state
court against some of the Defendants suggests as much. But
the False Claims Act “is not an all-purpose antifraud
statute or a vehicle for punishing garden-variety breaches of
contract or regulatory violations.” Univ. Health
Servs., Inc. v. U.S. ex rel. Escobar, 136 S.Ct. 1989,
2003 (2016). More is needed to establish that false or
fraudulent claims have been made on the government.
based on careful consideration of the parties' filings
and the applicable law, the Court must dismiss with prejudice
Relators' claims for violations of the False Claims Act.
Dismissal of those claims leaves only claims under state law
in the suit. The Court dismisses those claims without
prejudice to refiling in state court.
begin their story in the mid-2000's. St. Luke's was
trying to catch up to competitors that had moved more quickly
into markets in the suburbs of Houston like Sugar Land. (Doc.
No. 1 at 7-8.) To stay competitive, St. Luke's needed to
form good relationships with physicians in the area who would
make referrals. Its approach was conferring ownership stakes
in its new hospital. In 2006, the System formed a new
partnership, the St. Luke's Sugar Land Partnership,
L.L.P. (“Partnership”), a non-party.
(Id. at 8.) Class A shares would comprise 49% of the
Partnership, while Class B shares would comprise 51%.
(Id. at 9.) Physician investors could buy Class A
units for $40, 000 per unit, while only the System or an
affiliated entity would own the Class B shares.
(Id.) Later, Defendant St. Luke's Community
Development Corporation-Sugar Land (“SLCDC-SL”)
came to be the owner of these Class B shares. (Id.
at 11.) Despite the 49-51 split, the physician investors had
an important role in the Partnership's governance,
because the partnership agreement imposed supermajority
thresholds for votes by the Partnership's governing board
on important matters. (Id. at 23.) Relators Shatish
Patel, Hemalatha Vijayan, and Wolley Oladut were among the
first physician investors, with Patel and Vijayan buying four
Class A units each and Oladut buying two. (Id. at
New Limits on Hospital Expansion Lead to Rescission
hospital opened for business in October 2008, and it
evidently was a Medicare provider from the outset. (Doc. No.
1 at 12.) The next year, Congress began consideration of the
Affordable Care Act (ACA), and the ACA's passage in 2010
had major significance for the hospital. Based on
long-standing apprehensions about the conflicts of interest
inherent in physician-owned hospitals,  the ACA added a
provision to the Stark Law, 42 U.S.C. § 1395nn(i)(1)(B),
that limited the expansion of operating rooms, procedure
rooms, and beds in physician-owned hospitals to the number
they had as of March 2010. The effect of this provision,
according to one commentator, was to “prohibit future
physician investment and cap existing physician investment
in hospitals.” Craig A. Conway, Physician Ownership
of Hospitals Significantly Impacted by Health Care Reform
Legislation, Univ. Houston L. Ctr., Health L.
Perspectives 2 (Apr. 2010). Another observed that the
provision “rais[ed] questions about [physician-owned
hospitals'] future status and viability.” Cristie
M. Cole, Physician-Owned Hospitals and
Self-Referral, 15 Am. Med. Assoc. J. Ethics 150, 150
say that the ACA hampered the System's plans for
expanding the hospital from a 100-bed to a 200-bed facility.
(Doc. No. 1 at 12-13.) The System had been planning this
expansion for some time, viewing it as a necessity for the
hospital to become reliably profitable. (Id. at
13-14.) The System also had intended to open an additional
operating room at the hospital, but the new law prevented
that. Relators quote emails from System executives saying
that the new law “is killing us.” (Id.
the ACA's limits on physician-owned hospitals impeding
business, System executives--like Defendants David Fine,
David Koontz, and Stephen Pickett--began planning to move
away from physician ownership. (Doc. No. 1 at 14-17.) The
System worked with outside counsel from Baker Donelson and a
health care consultant, HCAI, to devise a plan. By March
2011, the System had chosen to use the Texas Security
Act's rescission process, which permits sellers of
securities to rescind a sale at a statutorily determined
price in exchange for the release of the buyer's legal
claims against the seller. See Tex. Rev. Civ. Stat.
art. 581-33. In April 2011, HCAI produced a report that
appraised the Class A ownership units, originally sold for
$40, 000, at only $5, 000. (Id. at 19-21.) In May,
the Partnership took a $10 million loan from the System to
fund rescission offers, and then it made the offers in June,
giving the physician investors thirty days to decide.
(Id. at 23.)
devote a lengthy portion of their complaint to the argument
that the System and Partnership faced no risk of lawsuits
from their physician investors. (Doc. No. 1 at 18-29.) The
inference is that the System used the Texas Securities
Act's rescission process under false pretenses. Relators
assert that “no formal or informal claims of any kind
had been made by any of the physician investors in the
Partnership.” (Id. at 19.) Relators also
assert that the statute of limitations for claims under the
Texas Securities Act was, right at that time, foreclosing the
possibility of litigation by most or all of the original
physician investors. (Id. at 25-26.)
rescission offers are the core of the first scheme that the
Relators allege. As to the plausibility of Relators'
allegations, it must be noted that Patel sued the Partnership
in state court in April 2011, shortly before the rescission
offers went out. The other Relators later joined the suit.
Whether Relators can plausibly contend that the Partnership
faced no litigation risk at the very time they were suing the
Partnership is a question the Court takes up below.
Relators' Conflict with St. Luke's
but four of the physician investors accepted the System's
rescission offers: Relators and Subodh Sonwalkar, their
co-plaintiff in the state court litigation. (Doc. No. 1 at
29.) At this point, the four physicians were the last
hold-outs blocking the System's plans. A complex dispute
over the hospital's ownership then unfolded, playing out
partly in Texas courts. The significance, in Relators'
view, is that this dispute allegedly led the System to
knowingly misrepresent SLCDC-SL, its subsidiary, as the
hospital's owner to the government.
took the position that the rescission of all other Class A
units left them and Sonwalkar in sole control of the Class A
units' 49% voting interest in the Partnership that owned
the hospital. (Doc. No. 1 at 29.) The System seems to have
taken the view that the rescission process resulted in
Relators and Sonwalkar possessing only a small stake in the
Partnership-- under 5%--while its subsidiary, SLCDC-SL,
controlled the rest. As the System saw it, the four physician
investors were therefore incapable of blocking decisions by
the Partnership's governing board.
with these four physician investors' resistance, the
System initiated a capital call, demanding they produce
nearly a quarter of a million (in the case of Oladut and
Sonwalkar) or half a million dollars (in the case of Patel
and Vijayan). (Doc. No. 1 at 29.) Relators say the capital
call was ultra vires, because the Partnership's
board did not properly approve it. (Id. at 30.) By
this time, they had already tried and failed twice to obtain
an injunction blocking the Partnership's actions.
(Id.) After the capital call went unanswered, the
Partnership moved to terminate the Relators' and
Sonwalkar's ownership interests. A third request for
injunctive relief at this point was unsuccessful in the trial
court but more successful in the First Court of Appeals,
which ruled that the physicians had demonstrated a probable
right to relief against the unlawful deprivation of their
voting interest in the Partnership. Sonwalkar v. St.
Luke's Sugar Land P'ship, L.L.P., 394 S.W.3d 186
(Tex. App.--Houston [1st Dist.] 2012, no pet.).
remand, two days before the injunction hearing, St.
Luke's apparently surprised Relators and Sonwalkar with a
new argument: the Partnership had terminated their interests;
the elimination of Class A units rendered the Partnership a
defunct entity; SLCDC-SL was now the owner; and so the suit
was moot. (Doc. No. 1 at 31-33.) The trial court accepted
this argument and denied relief, prompting another trip to
the First Court of Appeals. The appellate court again sided
with Relators and Sonwalkar, ruling that their lawsuit was
not moot. Patel v. St. Luke's Sugar Land P'ship,
L.L.P., 445 S.W.3d 413, 424 (Tex. App.-Houston [1st
Dist.] 2013, pet. denied). It ruled that the Partnership had
not ceased to exist, because Relators' and
Sonwalkar's ownership interests had not been validly
eliminated. Id. at 422. The court also rejected St.
Luke's theory that elimination of the physicians'
interests would cause ownership of the hospital to
automatically revert to SLCDC-SL by operation of Texas law.
Even if their interests had been eliminated, numerous steps
were necessary to wind up the Partnership; it would not
happen automatically. Id. at 422-23. The failure of
St. Luke's to take all these steps was another reason the
suit was not yet moot. Id. at 423. In sum,
“there is no evidence whatsoever, ” the court
said, that “ownership of the hospital was actually
transferred away from the Partnership.” Id.
was a split decision. One justice would have affirmed the
trial court's ruling that the case was moot and the
physicians' interests in the hospital had been
terminated. Patel, 445 S.W.3d at 424 (Keyes, J.,
dissenting). St. Luke's also repeatedly sought review of
the decision afterwards. It sought rehearing (denied in
January 2014), review in the Supreme Court of Texas (denied
in October 2014), and reconsideration of its petition for
review (denied in January 2015). See Docket, St.
Luke's Sugar Land P'ship L.L.P. v. Patel, No.
14-0183 (Tex. 2014).
believe that the First Court of Appeals' ruling on the
mootness of their suit, issued on November 7, 2013, has
significance under the False Claims Act. In Relators'
view, any representations to the government after that date
that SLCDC-SL, not the Partnership, owned the hospital must
be factually false. (Doc. No. 1 at 44.)
Misleading Texas and CMS
Relators also assert that the First Court of Appeals'
ruling should have come as no surprise to St. Luke's.
They allege that the System's senior in-house counsel,
Ann Thielke, wrote an email on October 26, 2011--after the
purported termination of Relators' partnership
interests--saying “that the Partnership was still in
existence and in the winding up phase.” (Doc. No. 1 at
38.) As Relators see it, this “directly contradict[s]
the self-serving … theory that the Hospital had
automatically transferred to SLCDC-SL” that St.
Luke's was advancing in court. (Id.) In another
email to System executives the same day, Thielke carefully
explained that “the idea … of the Hospital
automatically transferring to SLCDC-SL was not
correct.” (Id. at 39.)
Thielke emails are important to Relators' story because
St. Luke's would soon represent to Texas and to the
federal government that SLCDC-SL was the sole owner of the
hospital. On December 2, 2011, the System submitted a form to
the Centers for Medicare & Medicaid Services (CMS), Form
855A, giving notice of the change in the hospital's
ownership. (Doc. No. 1 at 40.) According to Relators, CMS
requires a “bill of sale” to corroborate such
changes, but the System did not have one. In lieu of the
required documentation, the System advanced the
automatic-transfer theory that, by this time, its own senior
counsel had debunked. (Id.) Moreover, three days
later, its outside counsel, Haynes and Boone, confirmed to
the System that Thielke's analysis was right.
its attorneys' guidance, the System allegedly continued
to misrepresent the hospital's ownership. In February and
March 2012, it made three misrepresentations to the state of
Texas: an email to the Texas Department of State Health
Services (TDSHS), the administrator of Medicaid in Texas, on
February 10; an attempt to pass off an unrelated document as
a bill of sale on March 1; and another attempt to do so on
March 14. (Doc. No. 1 at 40-42.) Relators also allege that
the System never corrected its misrepresentations to CMS,
which had approved the change of ownership in May 2012.
(Id. at 42-43.) Consequently, the System based its
change of ownership form and its annual cost reports ever
since on information that it knew to be false.
further developments warrant mention. First, in 2013,
Defendant Catholic Health Initiatives (CHI) bought the System
from the Episcopal Diocese of Texas, after the First Court of
Appeals' decision in Sonwalkar but before its
decision in Patel. (Doc. No. 1 at 45.) Relators
allege that CHI knows all this history but still
“decided to continue the System's ongoing
misrepresentations to CMS and [Texas] about the ownership of
the Hospital.” (Id. at 46.)
Relators' lawsuit in state court went to trial. A jury
evidently returned a $3 million verdict for Relators, the
plaintiffs in that suit, in June 2015. (Doc. No. 19 at 1.)
The parties' filings do not reveal what further
litigation unfolded in the state courts since then.
False Claims Act
False Claims Act (FCA) is the federal government's
“primary litigation tool for recovering losses
resulting from fraud.” U.S. ex rel. Steury v.
Cardinal Health, Inc., 625 F.3d 262, 267 (5th Cir.
2010). Passed in 1863 to combat fraud by private suppliers of
the Union Army during the Civil War, it was “intended
to protect the Treasury against the hungry and unscrupulous
host that encompasses it on every side.” U.S. ex
rel. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir.
2009) (quoting S. Rep. No. 99-345 at 11).
authorizes actions by the United States or by a relator in a
qui tam capacity on behalf of the
government. 31 U.S.C. § 3730(a), (b). Through
those actions, it imposes civil penalties and treble damages
on any person who “knowingly presents, or causes to be
presented, a false or fraudulent claim for payment or
approval” to the federal government. Id.
§ 3729(a)(1)(A). It imposes the same liability on any
person who “knowingly makes, uses, or causes to be made
or used, a false record or statement material to a false or
fraudulent claim.” Id. § 3729(a)(1)(B).
The FCA defines “knowingly” to mean that a person
“(i) has actual knowledge of the information; (ii) acts
in deliberate ignorance of the truth or falsity of the
information; or (iii) acts in reckless disregard of the truth
or falsity of the information, ” but proof of the
person's “specific intent to defraud” is not
required. Id. § 3729(b)(1)(A)-(B). The FCA
defines “material” to mean “having a
natural tendency to influence, or be capable of influencing,
the payment or receipt of money or property.”
Id. § 3729(b)(4). The Fifth Circuit has
summarized the FCA inquiry as follows: “(1) whether
there was a false statement or fraudulent course of conduct;
(2) made or carried out with the requisite scienter; (3) that
was material; and (4) that caused the government to pay out
money or to forfeit moneys due (i.e., that involved a
claim).” U.S. ex rel. Harman v. Trinity Industries,
Inc., 872 F.3d 645, 653-54 (5th Cir. 2017) (quoting
U.S. ex rel. Longhi v. Lithium Power Tech. Inc., 575
F.3d 458, 467 (5th Cir. 2009)).
can incur liability under the FCA by submitting claims for
services rendered in violation of the Anti-Kickback Statute
(AKS) or the Stark Law. U.S. ex rel. Thompson v.
Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th
Cir. 1997). Those statutes are explained in separate sections
may dismiss a complaint for a “failure to state a claim
upon which relief can be granted.” Fed.R.Civ.P.
12(b)(6). “[A] complaint ‘does not need detailed
factual allegations, ' but must provide the
plaintiff's grounds for entitlement to relief-including
factual allegations that when assumed to be true ‘raise
a right to relief above the speculative level.'”
Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir.
2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555, (2007)). That is, a complaint must “contain
sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.'”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 570). The plausibility standard
“is not akin to a ‘probability requirement,
'” though it does require more than simply a
“sheer possibility” that a defendant has acted
complaint filed under the False Claims Act must meet the
heightened pleading standard of Rule 9(b).”
Grubbs, 565 F.3d at 185. The rule provides that
“[i]n alleging fraud or mistake, a party must state
with particularity the circumstances constituting fraud or
mistake, ” though it permits “[m]alice, intent,
knowledge, and other conditions of a person's mind [to]
be alleged generally.” Fed.R.Civ.P. 9(b). The rule
plays a “screening function, standing as a gatekeeper
to discovery, a tool to weed out meritless fraud claims
sooner than later.” Grubbs, 565 F.3d at 185.
The Fifth Circuit has given Rule 9(b) a
“flexible” interpretation in the FCA context in
order “to achieve [the FCA's] remedial
purpose.” Id. at 190. A complaint can survive
either by alleging “the details of an actually
submitted false claim” or by “alleging particular
details of a scheme to submit false claims paired with
reliable indicia that lead to a strong inference that claims
were actually submitted.” Id.
first and second claims for relief concern the rescission
offers and are based on both the AKS and Stark Law. The Court
treats each statutory basis for the first two claims
separately. Relators' third and fourth claims for relief
concern the issue of hospital ownership and are based on the
FCA. Relators' fifth and sixth claims also concern the
issue of hospital ownership but are based on the Texas
Medicaid Fraud Prevention Act (TMFPA).
Claims I and II: ...