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United States ex rel. Oberg v. Pennsylvania Higher Education Assistance Agency

United States Court of Appeals, Fourth Circuit

March 13, 2014

UNITED STATES ex rel. JON H. OBERG, Plaintiff - Appellant,

Argued September 19, 2013.

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. (1:07-cv-00960-CMH-JFA). Claude M. Hilton, Senior District Judge.



Bert Walter Rein, WILEY REIN, LLP, Washington, D.C., for Appellant.

Daniel B. Huyett, STEVENS & LEE, Reading, Pennsylvania; John Stone West, TROUTMAN SANDERS, LLP, Richmond, Virginia; N. Thomas Connally, III, HOGAN LOVELLS U.S. LLP, McLean, Virginia, for Appellees.


Michael L. Sturm, Christopher M. Mills, Brendan J. Morrissey, WILEY REIN, LLP, Washington, D.C., for Appellant.

Thomas L. Appler, WILSON ELSER MOSKOWITZ EDELMAN & DICKER LLP, McLean, Virginia, for Appellee Kentucky Higher Education Student Loan Corporation.

Megan C. Rahman, TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee Vermont Student Assistance Corporation.

Thomas M. Trucksess, HOGAN LOVELLS U.S. LLP, McLean, Virginia; Dustin McDaniel, Arkansas Attorney General, Dennis R. Hansen, Deputy Attorney General, Mark N. Ohrenberger, Assistant Attorney General, OFFICE OF THE ARKANSAS ATTORNEY GENERAL, Little Rock, Arkansas, for Appellee Arkansas Student Loan Authority.

Neil C. Schur, STEVENS & LEE, P.C., Philadelphia, Pennsylvania; Jill M. DeGraffenreid, McLean, Virginia, Joseph P. Esposito, HUNTON & WILLIAMS LLP, Washington, D.C., for Appellee Pennsylvania Higher Education Assistance Agency.

Before TRAXLER, Chief Judge, and MOTZ and KEENAN, Circuit Judges. Judge Motz wrote the opinion, in which Judge Keenan joined. Chief Judge Traxler wrote a separate opinion concurring in the judgment in part and dissenting in part.


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This appeal returns to us after remand to the district court. Dr. Jon Oberg, as relator for the United States, brought this action against certain student loan corporations, alleging that they defrauded the Department of Education and so violated the False Claims Act (" FCA" or " the Act" ), 31 U.S.C. § § 3729 et seq. (2006). The district court initially dismissed the complaint in its entirety. When Dr. Oberg appealed, we held that the court had not employed the proper legal framework -- the arm-of-the-state analysis -- in reaching its conclusion and thus vacated its judgment and remanded the case. See U.S. ex rel. Oberg v. Ky. Higher Educ. Student Loan Corp., 681 F.3d 575, 579-81 (4th Cir. 2012) (" Oberg I" ). After applying the arm-of-the-state analysis on remand, the district court again concluded that all of the student loan corporations constituted state agencies not subject to suit under the Act and so again granted their motions to dismiss. For the reasons that follow, we affirm in part, vacate in part, and remand

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for further proceedings consistent with this opinion.


On behalf of the United States, Dr. Oberg brought this action against the Pennsylvania Higher Education Assistance Agency, the Vermont Student Assistance Corporation, and the Arkansas Student Loan Authority (collectively " appellees" ). Appellees are corporate entities established by their respective states to improve access to higher education by originating, financing, and guaranteeing student loans.[1]

Dr. Oberg alleges that appellees defrauded the Department of Education by submitting false claims for Special Allowance Payments (" SAP" ), a generous federal student loan interest subsidy. According to Dr. Oberg, appellees engaged in noneconomic sham transactions to inflate their loan portfolios eligible for SAP, and the Department of Education overpaid hundreds of millions of dollars to appellees as a result of the scheme. Dr. Oberg alleges that appellees violated the FCA when they knowingly submitted these false SAP claims.

The FCA provides a cause of action against " any person" who engages in certain fraudulent conduct, including " knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval" to an officer, employee, or agent of the United States. 31 U.S.C. § 3729(a)(1)(A). The Act does not define the term " person." In Vermont Agency of Natural Resources v. United States, ex rel. Stevens, 529 U.S. 765, 787-88, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000), the Supreme Court held that a state or state agency does not constitute a " person" subject to liability under the Act. But the Court also noted that corporations, by contrast, are " presumptively covered by the term 'person.'" Id. at 782 (emphasis in original). And three years later, the Court applied the latter presumption and held that municipal corporations like counties are 'persons' subject to suit under the FCA. See Cook County v. United States ex rel. Chandler, 538 U.S. 119, 122, 123 S.Ct. 1239, 155 L.Ed.2d 247 (2003).

Accordingly, a court must walk a careful line between two competing presumptions to determine if a state-created corporation is " truly subject to sufficient state control to render [it] a part of the state, and not a 'person,' for FCA purposes." Oberg I, 681 F.3d at 579.[2] In the prior appeal, we held that the appropriate legal framework for this delicate inquiry is the arm-of-the-state analysis used in the Eleventh Amendment context. Id. at 579-80. Because the district court had not undertaken this analysis, we vacated its judgment and remanded the case to the district court for application of the proper legal framework. Id. at 581.

On remand, after applying the arm-of-the-state analysis, the district court concluded

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that each appellee is part of its respective state and thus not a " person" under the Act, and so again granted appellees' motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). Dr. Oberg then timely noted this appeal.

On review of a Rule 12(b)(6) dismissal, we consider a case de novo. See E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011). We evaluate only whether the complaint states " a claim to relief that is plausible on its face." Bell A. Corp. v. Twombly, 550 U.S. 544, 547, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In doing so, we construe " facts in the light most favorable to the plaintiff," Nemet Chevrolet, Ltd. v., Inc., 591 F.3d 250, 255 (4th Cir. 2009), and " draw all reasonable inferences in [his] favor" Kolon Indus., 637 F.3d at 440. Yet " we need not accept as true unwarranted inferences, unreasonable conclusions, or arguments." Kloth v. Microsoft Corp., 444 F.3d 312, 319 (4th Cir. 2006). Nor do we credit allegations that offer only " naked assertions devoid of further factual enhancement." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotations marks, alteration, and citation omitted).

Moreover, in reviewing a Rule 12(b)(6) dismissal, we are not confined to the four corners of the complaint. It is well established that " we may properly take judicial notice of matters of public record," including statutes. Philips v. Pitt Cnty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir. 2009). We may also consider " documents incorporated into the complaint by reference," Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), " as well as those attached to the motion to dismiss, so long as they are integral to the complaint and authentic," Philips, 572 F.3d at 180. Thus, before us, the parties properly cite to and rely on state statutes and exhibits integral to the complaint.

Finally, we note that although arm-of-the-state status may well constitute an affirmative defense in the related Eleventh Amendment context, this is not so in an FCA case. To succeed in an FCA case, a relator must demonstrate that a defendant is a " person" within the meaning of the Act. As the dissent recognizes, this is " a statutory question." Dissent. Op. at 36. That is, personhood is an element of the statutory FCA claim, not an immunity providing a defense from suit as in the Eleventh Amendment context. See, e.g., U.S. ex rel. Adrian v. Regents of Univ. of Cal., 363 F.3d 398, 401-02 (5th Cir. 2004) (dismissing FCA action on 12(b)(6) motion because " the FCA does not provide a cause of action against state agencies" ).[3]


In applying the arm-of-the-state analysis, we consider four nonexclusive factors to determine whether an entity is " truly subject to sufficient state control to render [it] a part of the state." Oberg I, 681 F.3d at 579.

First, when (as here), an entity is a defendant, we ask " whether any judgment against the entity as defendant will be paid

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by the State." Oberg I, 681 F.3d at 580 (quoting S.C. Dep't Disabilities & Special Needs v. Hoover Universal, Inc., 535 F.3d 300, 303 (4th Cir. 2008)).[4] The Supreme Court has instructed that in assessing this factor, an entity's " potential legal liability" is key. Regents, 519 U.S. at 431; see also Parker v. Franklin Cnty. Cmty. Sch. Corp., 667 F.3d 910, 927-28 (7th Cir. 2012) (focusing on legal liability for payment of a judgment in the wake of Regents); Cooper v. Se. Penn. Transp. Auth., 548 F.3d 296, 303 (3d Cir. 2008)(same); U.S. ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 718 (10th Cir. 2006) (same). Thus, we consider whether state law " provides that obligations of [the entity] shall not be binding on [the] State." Lake Country Estates, Inc. v. Tahoe Reg'l Planning Agency, 440 U.S. 391, 402, 99 S.Ct. 1171, 59 L.Ed.2d 401 (1979) (emphasis in original). In doing so, we look to whether " State law indicates that a judgment against [the entity] can be enforced against the State." Cash v. Granville Cnty. Bd. of Educ., 242 F.3d 219, 224 (4th Cir. 2001).

An entity may also constitute an arm of the state " where the state is functionally liable, even if not legally liable." Stoner v. Santa Clara Cnty. Office of Educ., 502 F.3d 1116, 1122 (9th Cir. 2007) (emphasis added); see also Hess v. Port Auth. Trans-Hudson Corp., 513 U.S. 30, 50, 115 S.Ct. 394, 130 L.Ed.2d 245 (1994) (" Where an agency is so structured that, as a practical matter, if the agency is to survive, a judgment must expend itself against state treasuries, common sense and the rationale of the eleventh amendment require that sovereign immunity attach to the agency." ) (internal quotation marks and alteration omitted).

Second, we assess " the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity's directors or officers, who funds the entity, and whether the State retains a veto over the entity's actions." Oberg I, 681 F.3d at 580 (quoting Hoover Universal, 535 F.3d at 303). Also relevant to the autonomy inquiry is the determination whether an entity has the ability to contract, sue and be sued, and purchase and sell property, see Cash, 242 F.3d at 225; Ram Ditta, 822 F.2d at 458, and whether it is represented in legal matters by the state attorney general, see, e.g., Md. Stadium Auth. v. Ellerbe Becket, Inc., 407 F.3d 255, 264 (4th Cir. 2005).

Third, we consider " whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns." Oberg I, 681 F.3d at 580 (quoting Hoover Universal, 535 F.3d at 303). " Non-state concerns," however, do not mean only " local" concerns, but rather also encompass other non-state interests like out-of-state operations. See Hoover Universal, 535 F.3d at 307 (characterizing this factor as " whether the entity is involved with statewide, as opposed to local or other non-state concerns" ) (emphasis added).

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Fourth, we look to " how the entity is treated under state law, such as whether the entity's relationship with the State is sufficiently close to make the entity an arm of the State." Oberg I, 681 F.3d at 580 (quoting Hoover Universal, 535 F.3d at 303). Whether an entity is an arm of the state is ultimately a question of federal law, " [b]ut that federal question can be answered only after considering the provisions of state law that define the agency's character." Regents, 519 U.S. at 429 n.5. " In addressing this factor, a court may consider both the relevant state statutes, regulations, and constitutional provisions which characterize the entity, and the holdings of state courts on the question." Md. Stadium Auth., 407 F.3d at 265 (internal quotation marks omitted).

With these principles in mind, we now apply arm-of-the-state analysis to each of the appellees.


We initially consider the Pennsylvania Higher Education Assistance Agency (" PHEAA" ). In 1963, the Pennsylvania General Assembly created PHEAA, which, according to PHEAA itself, now constitutes one of the nation's largest providers of student financial aid services. Although PHEAA continues to administer state-funded student aid programs in Pennsylvania, it acknowledges that it also operates nationally under the names American Education Services and FedLoan Servicing.

The first factor in the arm-of-the-state analysis, whether Pennsylvania would pay a judgment against PHEAA in this case, weighs decidedly against holding that PHEAA is an arm of the state. For " instead of the state treasury being directly responsible for judgments against [PHEAA], [state law] expressly provides that obligations of [PHEAA] shall not be binding on [the] State." Lake Country Estates, 440 U.S. at 402 (emphasis in original). Pennsylvania explicitly disavows liability for all of PHEAA's debts. See 24 Pa. Cons. Stat. § 5104(3)(2012) (" no obligation of the agency shall be a debt of the State" ). In addition, state law emphasizes that PHEAA's debts are not " payable out of any moneys except those of the corporation." Id. Aside from state appropriations that go directly to students in the form of education grants, moreover, PHEAA's substantial " moneys" derive exclusively from its own operations. The Pennsylvania treasury is thus neither legally nor functionally liable for any judgment against PHEAA. See Stoner, 502 F.3d at 1122.

Nevertheless, PHEAA contends that the important first factor weighs in favor of concluding that it is an arm of the state because state statutes require that its funds be deposited into the state treasury and that " no money" be paid from the treasury without approval from the state treasurer. See 24 Pa. Cons. Stat. § 5104(3); 72 Pa. Cons. Stat. § 307 (2013). This argument, however, ignores " a commonplace of statutory construction that the specific governs the general." Morales v. Trans World Airlines, 504 U.S. 374, 384, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992). The statutory provisions specifically outlining PHEAA's " powers and duties" clearly indicate that PHEAA's board of directors -- not the state treasurer -- controls PHEAA's funds. Those statutes provide that PHEAA's funds " shall be available to the agency" and " may be utilized at the discretion of the board of directors for carrying out any of the corporate purposes of the agency." 24 Pa. Cons. Stat. § 5104(3). Further, the state treasurer may use PHEAA's funds only for purposes " consistent with guidelines approved by the board of directors." Id.

Moreover, PHEAA's funds are held in a segregated account apart from general

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state funds. Id. § 5105.10. Our sister circuits have recognized that such an arrangement counsels against establishing arm-of-the-state status under this factor. The First Circuit, for instance, held that the University of Rhode Island is not an arm of its state in part because its funds are not " merged with[] the general fund, but are kept in segregated accounts [in the state treasury] pending discretionary disbursement by the [University's] Board." Univ. of R.I. v. A.W. Chesterton Co., 2 F.3d 1200, 1210 (1st Cir. 1993). Similarly, the Third Circuit, in assessing whether the Public School Employees' Retirement Board of Pennsylvania was an arm of the state, remanded the case for further consideration in part because -- like PHEEA's account -- the entity's fund was " set apart in the state treasury from general state funds and [] administered by the State Treasurer at the discretion of the Board." Blake v. Kline, 612 F.2d 718, 723 (3d. Cir. 1979) (footnote and citations omitted). In sum, because state law instructs that PHEAA would pay any judgment in this case with its own moneys from its segregated fund, see 24 Pa. Cons. Stat. § 5104(3)(2012), the first factor weighs heavily against holding that PHEAA is an arm of the state.

The second factor, the degree of autonomy exercised by the entity, presents a closer question. PHEAA's board of directors is composed of gubernatorial appointees and state legislators or officials. See 24 Pa. Cons. Stat. § 5103 (repealed July 2010, but effective during the period when PHEAA allegedly violated the FCA). Such an arrangement frequently indicates state control. See Md. Stadium Auth., 407 F.3d at 264. Further, state officials exercise some degree of veto power over PHEAA's operations. For example, the Auditor General may review PHEAA's activities, 24 Pa. Cons. Stat. § 5108, and PHEAA must seek the approval of the Governor in order to issue notes and bonds, id. § 5104(3). These factors may mean, as PHEAA contends, that it is simply a tool of the state.

But other indicia relevant to the autonomy analysis -- PHEAA's source of funding, control over its revenues, and corporate powers -- strongly suggest that PHEAA is not an arm of the state. Most critically, PHEAA is financially independent. According to its annual reports, which were attached to the amended complaint, PHEAA receives no operational funding from Pennsylvania. See also Appellees' Br. 53 (conceding the point). Pennsylvania law, moreover, expressly instructs that PHEAA's funds " shall be available to the agency," and that PHEAA's board may use those funds in any manner that furthers the agency's corporate purposes. 24 Pa. Cons. Stat. § 5104(3). Meanwhile, the state treasurer's use of PHEAA's funds must adhere to " guidelines approved by the board" of PHEAA. Id. Finally, PHEAA has the power to enter into contracts, sue and be sued, and purchase and sell property in its own name, all of which suggest operational autonomy. See Cash, 242 F.3d at 225; Ram Ditta, 822 F.2d at 458. Although the facts relevant to this second factor cut both ways, when we consider " all reasonable inferences in favor of the plaintiff" as we must at this stage, Kolon Indus., 637 F.3d at 440, we conclude that this factor also counsels against holding that PHEAA is an arm of the state.

The third factor is whether PHEAA " is involved with statewide, as opposed to local or other non-state concerns." Hoover Universal, 535 F.3d at 307. Dr. Oberg poses two arguments relevant to this factor.

Initially, he contends that due to PHEAA's commercial focus, its operations do not involve an area of legitimate state

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concern. See Appellant's Br. 43; Reply Br. 25-26. This argument fails. Pennsylvania created PHEAA to finance, make, and guarantee loans for higher education, and " [h]igher education is an area of quintessential state concern and a traditional state government function." Md. Stadium Auth., 407 F.3d at 265. PHEAA does not provide higher education directly, but it nonetheless facilitates the attainment of education ...

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