Russell v. The City of Columbus

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
UNITED STATES OF AMERICA
ex rel. ERIC J. RUSSELL,
Plaintiff-Relator,
v.
THE CITY OF COLUMBUS,
Defendant.
:
:
Case No. 2:22-cv-3292
Chief Judge Sarah D. Morrison
Magistrate Judge Chelsey M.
Vascura
OPINION AND ORDER
Plaintiff-Relator Eric J. Russell asserts four claims under the False Claims
Act (“FCA”), 31 U.S.C. § 3729, et seq. and 31 U.S.C. § 3730(h), against the City of
Columbus. (Compl., ECF No. 1.) The City moves to dismiss three of Mr. Russell’s
claims under Rule 12(b)(6). (Mot., ECF No. 43.) Mr. Russell responded in
opposition1 (Resp., ECF No. 45), and the City filed its reply (Reply, ECF No. 47). For
the reasons below, the City’s Motion is GRANTED.
I. FACTUAL BACKGROUND
All well-pleaded factual allegations in the Complaint are considered as true
for purposes of the Motion to Dismiss. See Gavitt v. Born, 835 F.3d 623, 639–40 (6th
Cir. 2016). The following summary draws from the Complaint.
1 Mr. Russell requests the Court take judicial notice of the “Columbus City
Council’s ordinance, enacted on December 5, 2022, reimbursing the CDBG program
just over a million dollars[.]” (Resp., PAGEID# 426.) Because the City Council’s
ordinance has no bearing on the Court’s decision at this time, the Court denies Mr.
Russell’s request.
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A. Community Development Block Grants
The United States Department of Housing and Urban Development (“HUD”)
provides Community Development Block Grants (“CDBG”) to grantee states, cities,
and counties based on a statutory formula. (Compl. ¶¶ 27, 33.) The primary
objective of CDBG funding “is the development of viable urban communities, by
providing decent housing and a suitable living environment and expanding
economic opportunities principally for persons of low and moderate income.” (Id.
¶ 29 (citing 42 U.S.C. § 5301(c)).)
CDBG funds are highly regulated. Federal law prohibits HUD from issuing
any grant unless a grantee certifies compliance with six requirements. (Id. ¶ 34
(citing 42 U.S.C. § 5304(b)).) Several regulations identify eligible activities for which
the funds can be used. (Id. ¶ 35 (citing 24 C.F.R. §§ 570.201–207).) Grantees must
submit annual plans and reports detailing CDBG disbursements and certifying
compliance with applicable laws. (Id. ¶ 44.)
B. Mr. Russell concluded that the City was misusing CDBG funds on
Neighborhood Liaisons and ineligible labor costs.
Mr. Russell was hired as a Deputy Director in the Columbus Department of
Finance and Management in August 2021. (Id. ¶ 20.) His responsibilities included
oversight of the Grants Management section, which managed the City’s CDBG
funding. (Id. ¶ 22.) Shortly after starting in the role, Mr. Russell began to suspect
that the City was using CDBG funds for ineligible activities.
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1. Neighborhood Liaisons
When Mr. Russell was hired, the City was compiling its 2022 CDBG Annual
Action Plan. (Id. ¶ 83.) He soon learned that the City was using CDBG funds to pay
so-called Neighborhood Liaisons. (Id. ¶ 85.) Mr. Russell determined that
Neighborhood Liaisons were not eligible for CDBG funding. (Id. ¶ 88.) After sharing
that with his supervisor, Neighborhood Liaisons were removed from the 2022
Annual Action Plan and all 2021 funds spent on Neighborhood Liaisons were
returned to HUD. (Id. ¶¶ 95, 97.)
Mr. Russell was also tasked with closeout activities for the 2015 and 2016
CDBG funding years. (Id. ¶ 98.) While reviewing the CDBG expenditures for those
years, he discovered still more Neighborhood Liaison costs. (Id. ¶ 104.) Between
July 2016 and December 2021, nearly $1.23 million in CDBG funds were used to
pay Neighborhood Liaisons. (Id. ¶¶ 110–12.) When Mr. Russell met with HUD
representatives in May 2022 to discuss the issue, HUD requested additional
information (specifically grant numbers, activity names, activity identification
numbers, and amounts at issue). (Id. ¶¶ 114, 116.)
2. Additional Labor Costs
Mr. Russell also met Alex Cofield in May 2022; Mr. Cofield was a Fiscal
Manager in the City’s Department of Development. (Id. ¶ 117) Mr. Cofield told Mr.
Russell that certain other costs had been misallocated to the CDBG program. (Id.
¶ 119.) For example, beginning around 2008, the City had shifted costs for Code
Enforcement personnel from the General Fund to the CDBG fund, even though the
personnel were not performing HUD-related work. (Id. ¶¶ 120, 121.) Mr. Cofield
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represented that Finance Department leadership had been alerted to the issue. (Id.
¶ 124.)
When Mr. Russell shared Mr. Cofield’s information with Joe Lombardi (his
supervisor), Mr. Lombardi was aware of the issue but believed that those costs had
been re-allocated back to the General Fund. (Id. ¶¶ 128, 129.) Mr. Russell could not
find documents supporting any such re-allocation. (Id. ¶¶ 133–34.)
Mr. Cofield then shared a spreadsheet with Mr. Russell that showed costs
charged to CDBG funds that were either ineligible, not allocable, or otherwise
inadequately supported. (Id. ¶ 135.) According to the spreadsheet, those charges,
made over a five-year period, totaled more than $11 million. (Id. ¶ 137.)
C. Termination
The following month, Kathy Owens was appointed as the City’s new Director
of Finance. (Id. ¶ 152.) In their first meeting, Ms. Owens stripped Mr. Russell of his
grant management duties. (Id. ¶ 154.) A few weeks later, he was terminated. (Id.
¶ 168.)
II. PROCEDURAL BACKGROUND
Mr. Russell’s Count I is for presenting false claims for payment; Count II is
for use of false statements and false certifications; Count III is for failure to return
misused funds; and Count IV is for whistleblower retaliation.
Because Counts I–III are made under the FCA’s qui tam provisions, the case
was sealed until the United States issued a notice declining to intervene. (ECF No.
23.) The City now moves to dismiss those claims for failure to state a claim. (Mot.)
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III. STANDARD OF REVIEW
Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim
with sufficient specificity to “give the defendant fair notice of what the claim is and
the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007) (internal alteration and quotations omitted). A complaint which falls short of
the Rule 8(a) standard may be dismissed if it fails to state a claim upon which relief
can be granted. Fed. R. Civ. P. 12(b)(6). The Supreme Court has explained:
To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is
plausible on its face. A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged. The
plausibility standard is not akin to a probability requirement, but it asks
for more than a sheer possibility that a defendant has acted unlawfully.
Where a complaint pleads facts that are merely consistent with a
defendant’s liability, it stops short of the line between possibility and
plausibility of entitlement to relief.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations and quotations
omitted). The complaint need not contain detailed factual allegations, but it must
include more than labels, conclusions, and formulaic recitations of the elements of a
cause of action. Id. (citing Twombly, 550 U.S. at 555.) “Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not
suffice.” Id. In reviewing a motion to dismiss, the Court “construe[s] the complaint
in the light most favorable to the plaintiff[.]” DirecTV, Inc. v. Treesh, 487 F.3d 471,
476 (6th Cir. 2007).
FCA claims sounding in fraud are subject to a heightened pleading standard.
U.S. ex rel. USN4U, LLC v. Wolf Creek Fed. Servs., Inc., 34 F.4th 507, 513–14 (6th
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Cir. 2022) (citing Fed. R. Civ. P. 9(b)). To survive a motion to dismiss, a plaintiff-
relator must “allege the time, place, and content of the alleged misrepresentation on
which [he] relied; the fraudulent scheme; the fraudulent intent of the defendants;
and the injury resulting from the fraud.” Coffey v. Foamex L.P., 2 F.3d 157, 161–62
(6th Cir. 1993) (citations omitted). “If the complaint alleges a complex and far-
reaching fraudulent scheme, then that scheme must be pleaded with particularity
and the complaint must also provide examples of specific fraudulent conduct that
are representative samples of the scheme.” U.S. ex rel. Prather v. Brookdale Senior
Living Cmtys., Inc., 892 F.3d 822, 830 (6th Cir. 2018) (cleaned up).
IV. ANALYSIS
A. Mr. Russell fails to plead Counts I and II with sufficient
particularity.
For both Counts I and II, a plaintiff-relator must allege that:
(1) the defendant made a false statement or created a false record;
(2) with scienter; (3) that was material to the Government’s decision to
make the payment sought in the defendant's claim; and (4) that the
defendant submitted to the U.S. government causing it to pay the claim.
Id. (internal quotation and citations omitted). The City argues that Mr. Russell fails
to state a claim for three reasons. First, the Complaint does not allege that the City
made a false certification to HUD; second, any allegedly false statement was not
material to HUD’s decision to award the City CDBG funds; and third, the
Complaint does not allege sufficient facts to infer the requisite scienter.2 Because
2 The City further argues that any alleged false certifications made before
August 31, 2016, are time-barred. (Mot., PAGEID# 166.) Because it is unclear if or
when any false certifications were made, the Court does not address this argument.
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the first and second arguments are well-taken, the Court need not and does not
address the third.
1. The Complaint fails to adequately allege that the City
submitted a false certification.
The “false or fraudulent claims” actionable under the FCA include false
certifications, fraudulent misrepresentations, and misleading omissions. Universal
Health Servs., Inc. v. Escobar, 579 U.S. 176, 186–87 (2016). A false certification can
be express or implied. An express false certification occurs where “the defendant is
alleged to have signed or otherwise certified to compliance with some law or
regulation on the face of the claim submitted.” U.S. ex rel. Hobbs v. MedQuest
Assocs., Inc., 711 F.3d 707, 714 (6th Cir. 2013). An implied false certification occurs
where “a defendant makes representations in submitting a claim but omits its
violations of statutory, regulatory, or contractual requirements … [that] render the
defendant’s representations misleading with respect to the goods or services
provided.” Escobar, 579 U.S. at 187. In either circumstance, a plaintiff-relator must
allege “the time, place, and content of the alleged misrepresentation” to survive a
motion to dismiss. U.S. ex rel. Sheldon v. Kettering Health Network, 816 F.3d 399,
407 (6th Cir. 2016) (cleaned up).
The Complaint does not allege that the City made a false express
certification. According to Mr. Russell, the City “falsely certified compliance with
the federally mandated criteria in its Consolidated Plan and Annual Action Plans to
HUD[.]” (Compl. ¶ 7.) In support, he cites an example HUD certification form,
which contains several specific certifications required before CDBG funds are
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released to a grantee. (Id. ¶ 48 n. 6 (citing Specific Community Development Block
Grant Certifications, U.S. Dept. of Housing and Urban Dev.
https://www.hud.gov/sites/dfiles/CPD/documents/Non-State-Certifications.pdf
[https://perma.cc/TYU8-7Z6B]).) But he fails to allege when the City submitted such
a form or the content of any form completed by a City employee. Even assuming the
City did submit the form, none of the certifications on the sample form require
compliance with the regulations governing permitted use of CDBG funds. Instead,
the form contains a catchall provision that certifies “compl[iance] with all applicable
laws.” (Id.) “All applicable laws” cannot be read to include all applicable regulations.
Cf. Dept. of Homeland Sec. v. MacLean, 574 U.S. 383 (2015) (holding the phrase
“specifically prohibited by law” rather than “specifically prohibited by law, rule, or
regulation” implies the exclusion of rules and regulations).
Mr. Russell’s failure to allege an express false certification does not end the
inquiry. An implied false certification can also confer liability so long as two
elements are satisfied: first, that the claim does not merely request payment, but it
makes specific representations about the goods or services provided; and second,
that the defendant’s failure to disclose noncompliance with material statutory,
regulatory, or contractual requirements makes those representations misleading
half-truths. Escobar, 579 U.S. at 190.
As for the first element, there are no allegations that the City made specific
representations about the goods or services it provided. Mr. Russell only cites to an
example HUD form, but he does not provide any allegations that the City actually
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submitted the form. (Compl. ¶ 48 n. 6 (citing Specific Community Development
Block Grant Certifications, U.S. Dept. of Housing and Urban Dev.,
https://www.hud.gov/sites/dfiles/CPD/documents/Non-State-Certifications.pdf
[https://perma.cc/TYU8-7Z6B ]).) Had the City submitted these certifications yet
intended to use CDBG funds for ineligible activities, the omission may be an
actionable “half-truth.” See Escobar, 579 U.S. at 188 (explaining that “half-truths—
representations that state the truth only so far as it goes, while omitting critical
qualifying information—can be actionable misrepresentations”). But the Complaint
does not allege facts sufficient for the Court to reach that conclusion.
For example, Mr. Russell concedes that he does not know when the alleged
misuse of funds related to the Neighborhood Liaisons began. He further fails to
allege whether any grant certifications were fraudulently submitted, by whom, and
when. As to the allegations that the City paid personnel costs with CDBG funds, the
Complaint lacks similar detail. Finally, the Complaint is insufficient as to the
allegedly ineligible activities and what, if anything, the City knew at the time
certifications were submitted.
Perhaps acknowledging these deficiencies, Mr. Russell urges the Court to
apply a relaxed pleading standard to his Complaint. (Resp., PAGEID# 446.) The
Sixth Circuit has explained that “the requirement that a relator identify an actual
false claim may be relaxed when, even though the relator is unable to produce an
actual billing or invoice, he or she has pled facts which support a strong inference
that a claim was submitted[.]” Chesbrough v. VPA, P.C., 655 F.3d 461, 471 (6th Cir.
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2011). But that inference only arises “when the relator has personal knowledge that
the claims were submitted by Defendant[] … for payment.” Id. (internal quotations
and citations omitted). Allegations of such personal knowledge are lacking here. The
Court thus declines to apply the relaxed standard.
2. The Complaint fails to adequately plead that the City’s
allegedly false certification was material to HUD’s
decision to award CDBG funds.
“[T]he term ‘material’ means having a natural tendency to influence, or be
capable of influencing, the payment or receipt of money or property.” 31 U.S.C.
§ 3729(b)(4). Facts supporting allegations of materiality must also be pleaded with
particularity. Escobar, 579 U.S. at 195 n. 6.
The FCA is not “a vehicle for punishing garden-variety breaches of contract
or regulatory violations.” Id. at 194. It follows, then, that the “materiality standard
is demanding.” Id. Still, materiality is not one-size-fits-all. It requires a balancing of
several relevant factors, including:
(1) the Government’s decision to expressly identify a provision as a
condition of payment; (2) whether the Government consistently refuses
to pay claims in the mine run of cases based on noncompliance with the
particular statutory, regulatory, or contractual requirement or if, with
actual knowledge of the non-compliance, it consistently pays such claims
and there is no indication that its practice will change; and (3) whether
the noncompliance is minor or insubstantial or if it goes to the very
essence of the bargain.
Prather, 892 F.3d at 831 (cleaned up).
Express Condition of Payment. Mr. Russell fails to sufficiently allege that
payment of CDBG funds was conditioned on the grantee using those funds only for
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eligible activities. As such, it cannot be said that compliance with the myriad
regulations defining eligible activities is an express condition of payment.
Mr. Russell argues for the opposite conclusion, citing U.S. ex rel. Mei Ling v.
City of Los Angeles, 389 F. Supp. 3d 744 (C.D. Cal. 2019). The Mei Ling court
addressed whether “compliance with the various federal accessibility laws was
expressly identified as a condition for receiving” CDBG funds from HUD. Id. at 753
(emphasis added). The court found that it was because, before receiving funds, the
City of Los Angeles expressly certified its compliance with Title VI of the Civil
Rights Act of 1964 and the Fair Housing Act. But no similar certification exists for
compliance with the regulations at issue here.
That said, HUD’s “decision to expressly identify a provision as a condition of
payment is … not automatically dispositive.” Escobar, 579 U.S. at 194. So while this
factor does not support a finding of materiality, the Court’s inquiry must continue.
Past Government Action. “Another relevant factor in determining materiality
is the government’s past response to claims violating the same requirement.”
Prather, 892 F.3d at 833. At this stage of the litigation, the Court has no insight
into the government’s past response to allegations like Mr. Russell’s. It is thus
neutral in the inquiry.
Essence of the Bargain. Finally, the Court asks whether the
misrepresentation goes “to the very essence of the bargain.” Escobar, 579 U.S. at
193 n. 5; see also Prather, 892 F.3d at 831. The CDBG is specifically “designed to
bring federal funds for housing and community development to local governments.”
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United States v. City of Parma, Ohio, 661 F.2d 562, 567 (6th Cir. 1981). To
effectuate that goal, HUD has defined “eligible activities”—or those activities that
local governments can (or cannot) fund with CDBG dollars. 24 C.F.R. §§ 570.201–
570.207. The Complaint alleges that CDBG funds were used to pay personnel costs
in a variety of business units—including administration, code enforcement,
economic development, housing, and land redevelopment—and concludes without
explanation that the costs were ineligible and thus improper.3 The use of CDBG
funds on eligible activities may well be the essence of the bargain, but Mr. Russell
has not pleaded with particularity which of these essential provisions was violated
and how. Thus, the Court cannot determine whether the allegedly false certification
would have affected HUD’s decision to award the grant.
After considering the relevant factors, the Court finds that the Complaint
fails to plead with particularity that the City’s alleged non-compliance was material
to the government’s award of CDBG funds.
* * *
Because Mr. Russell fails to plead with particularity that the City submitted
false certifications that were material to the government’s decision to award CDBG
funds, the City’s Motion is GRANTED as to Counts I and II.
3 The Complaint cites generally to the CDBG regulations as support for the
proposition that these costs are ineligible. (Id. ¶ 35 (citing 24 C.F.R. §§ 570.201–
570.207).) But the regulations are extensive and far from self-explanatory.
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B. Count III also fails.
Count III, brought under 31 U.S.C. § 3279(a)(1)(G), is known as a “reverse
false claim.” In support, Mr. Russell does not assert that the City made a false
certification to receive payment; instead, he asserts that the City is obligated to
return funds, yet failed to do so. But Mr. Russell’s “inability to show that false
claims were actually submitted to the government” is fatal to his reverse false
claim. U.S. ex rel. Crockett v. Complete Fitness Rehab., Inc., 721 Fed. App’x 451, 459
(6th Cir. 2018). The City’s Motion is thus GRANTED as to Count III.
V. CONCLUSION
For the above reasons, Defendant’s Partial Motion to Dismiss (ECF No. 43) is
GRANTED. Counts I, II, and III of Mr. Russell’s Complaint are DISMISSED
without prejudice.
IT IS SO ORDERED.
/s/ Sarah D. Morrison
SARAH D. MORRISON, CHIEF JUDGE
UNITED STATES DISTRICT COURT
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