Opinion
No. 103997/2012.
12-08-2016
The STATE of New York ex rel. Aniruddha BANERJEE, et ano, Plaintiff(s), v. MOODY'S CORPORATION, et al, Defendant(s).
David E. Kovel, Esq., Kirby McInerny, LLP, John A. Beranbaum, Esq ., Beranbaum Menken LLP, New York, for Plaintiff–Relator. Sharon L. Nelles, Esq., Benjamin R. Walker, Esq., Matthew F. Sullivan, Esq., Sullivan & Cromwell LLP, New York, for Moody's Defendants. Donald L. Korb, Esq., Sullivan & Cromwell LLP, Washington, D.C., of Counsel.
David E. Kovel, Esq., Kirby McInerny, LLP, John A. Beranbaum, Esq ., Beranbaum Menken LLP, New York, for Plaintiff–Relator.
Sharon L. Nelles, Esq., Benjamin R. Walker, Esq., Matthew F. Sullivan, Esq., Sullivan & Cromwell LLP, New York, for Moody's Defendants.
Donald L. Korb, Esq., Sullivan & Cromwell LLP, Washington, D.C., of Counsel.
JAMES E. d'AUGUSTE, J.
Upon the foregoing papers, defendants Moody's Corporation (MCO or Moody's), Moody's Investors Service (MIS), Moody's Assureco Inc. (MAI), Moody's Assurance Company, Inc. (MAC), MIS Asset Holdings, Inc. (MISAH), and MIS Quality Management Corp. (QM) (collectively, defendants) move this Court for an order granting their pre-answer motion to dismiss pursuant to New York Civil Practice Laws and Rules (CPLR) Rule 3211(a). The motion is denied except to the extent that the causes of action in the complaint are limited to certain allegations as set forth herein.
Although not specifically stated as such in their notice of motion, the papers discuss subdivisions (7), as well as (1) and/or (5), of CPLR Rule 3211(a).
BACKGROUND
Plaintiff-relator Anirudda Banerjee (relator) filed this action on behalf of the State of New York (State) and City of New York (City) pursuant to the New York State False Claims Act (FCA) (State Fin. L. §§ 187 –94) claiming that the defendants knowingly and unlawfully took advantage of certain tax benefits primarily relating to one of Moody's subsidiaries, MAC, a licensed captive insurance company, and abused its tax-advantageous structure, thereby avoiding certain tax liabilities that are owed to the State and City. Specifically, relator claims that the insurance policies MAC holds to insure its parent and related affiliates are all "shams" and provides numerous examples of its alleged sham nature, including the inability to actually pay out any claims; and that the defendants arbitrarily valued intellectual property held by MAC. Additionally, since the New York State Tax Law (Tax Law) was amended in 2009 to prevent captive insurance companies from abusing the privilege of favorable tax rates, relator claims that the insurance premiums are not "bona fide" under the law and are thus not entitled to be taxed at such favorable rates but, rather, should be included as income on MAC's parent's returns to be taxed at the parent's corporate rate. Relator also alleges a retaliation claim for "blowing the whistle" on the alleged "sham" set up of MAC to his Moody's supervisors and the New York State Attorney General's Office (OAG). The allegations in relator's amended complaint dated August 9, 2013 are as follows.
All statutory citations are to New York laws, published by McKinneys, and current through 2016, unless otherwise noted.
The Complaint
Defendants
Defendant Moody's is a publicly traded corporation, incorporated in the State of Delaware, and is the ultimate parent company of the other defendants. Compl. ¶¶ 18–19. Defendant MIS is the principal operating subsidiary of Moody's and is a credit rating agency, which wholly owns defendants MAI and QM. Id., ¶¶ 19–21; Defs. Mem. at 4. MAI's direct subsidiary is defendant MAC, a captive insurance company; and defendant MISAH, a Delaware corporation, is wholly owned by MAC. Compl. ¶¶ 22, 24, 68.
Captive Insurance Companies & Defendant MAC
Captive insurance companies (captives) are formed and operated in accordance with Article 70 of the New York State Insurance Law (Insurance Law), and are licensed and regulated by the Department of Financial Services (DFS). Compl. ¶¶ 35–40. Captives are subject to taxes only on premiums at incredibly attractive low rates: four-tenths of one percent (0.4%) for the first twenty million ($20M) in direct premiums, and gradually lowered until it plateaus off at seventy-five thousandths of one percent (0.075%) for premiums in excess of sixty million ($60M). Id., ¶¶ 36, 42 (citing Tax L. § 1502–b ). In 2009, the applicable tax law was amended to exclude an "overcapitalized captive insurance company" (OCCIC) from being taxed at the favorable rate. Id., ¶¶ 45–49; L.2009, ch. 57, pt. E–1, § 9 (amending Tax L. § 1502–b(a) ). The same act amended Tax Law Section 2 to include a definition of an "overcapitalized captive insurance company," which, as applicable here, includes a company licensed as a captive and fifty percent (50%) or less of its gross receipts for the taxable year consist of premiums. L.2009, ch. 57, pt. E–1, § 1 (adding Tax L. § 2(11) ). The provision goes on to exclude certain types of consideration from being considered as a "premium," such as any consideration for insurance contracts that do not provide "bona fide insurance." Id.; Compl. ¶ 45–49. The legislative amendment also provided that, if a captive is an OCCIC, it would file a combined report with a parent company, and thus be taxed at such parent's corporate rate. See L.2009, ch. 57, pt. E–1, § 2 (amending Tax L. § 211(4)(a) ); Compl. ¶ 49.
The Court notes that the statute has been further amended since the filing of the complaint and the instant motion by L.2014, c. 59, part A, effective January 1, 2015. The differences are nominal, as the term "overcapitalized captive insurance company" is replaced with "combinable captive insurance company." The Court will use the current term, combinable captive insurance company (combinable captive or CCIC) throughout this decision, or as an "overcapitalized captive" (or OCCIC) as that is the term used in the parties' papers. The same 2014 amendment also moved the combined reporting requirements from Tax Law Section 211(4)(a)(7) to newly-created Section 210–C.
Formed as a captive in 2002, MAC is designed to provide insurance or reinsurance to its parent company and affiliates. Compl. ¶¶ 27, 35. MAC primarily provides catastrophic coverage (e.g., terrorism), excess liability coverage, and commercial insurance, as well as reputational coverage. Id., ¶¶ 51–61. Several accounting and consulting firms assisted Moody's in forming and managing MAC, including co-defendant Marsh & McLennan Companies, Inc. ("Marsh"), which relator specifically alleges assisted in the restructuring of MAC and managed it from 2007 onwards. Id., ¶¶ 25, 33.
The amended complaint also asserts a conspiracy claim under the FCA (State Fin. L. § 189(c) ) against defendant Marsh. The Court granted Marsh's pre-answer motion to dismiss (motion sequence no. 4) by separate order dated October 21, 2016.
The complaint alleges that, even though it is licensed as a captive, MAC's gross receipts consist of income other than insurance premiums, such as royalties and interest payments on an inter-company note, all of which are tax deductible to Moody's. The complaint includes several allegations as to how MAC, and its income, are all illegitimate in nature—specifically designed by defendants to knowingly misuse the captive to receive and funnel monies through its tax-advantageous structure so that its parent and related companies can avoid paying regular corporate taxes on such funds. See generally, id.
With respect to the insurance, relator alleges that, when compared to outside commercial carriers, the insurance premiums are not based on a real consideration of the market rate for the types of insurance MAC provides. Relator also alleges that one of Moody's vice presidents, Christine Merkel, allegedly said that Moody's would never have paid such premiums to an outside third-party/commercial insurance carrier; and Ms. Merkel allegedly ruled out the possibility of MAC providing directors and officers (D & O) insurance and errors and omissions (E & O) insurance because of the "reality" that MAC would not be able to pay claims under such policies and would, consequently, subject Moody's board of directors to risks as individuals. Id., ¶¶ 52–62. As an example of his claim, relator points to MAC's reputation insurance coverage and alleges that Moody's pays an abnormal twenty-six percent (26%) in premiums in relation to the amount of coverage, which is one-hundred million dollars ($100M).Id., ¶ 55. Relator further alleges that defendants inflate such premiums and provide such coverage knowing that the policy would never be triggered and MAC would be unable to pay out any claim; and relator also notes that no claim was ever made and the policy was never triggered during the financial crisis in 2008, even though Moody's' reputation was allegedly harmed during that time. Id., ¶¶ 55–56. Relator also alleges that Moody's paid MAC a forty-million dollar ($40M) premium for a Tax Opinion Guarantee annually from 2002 until the restructuring began in 2008, even though industry practice only requires that a one-time premium be paid. Id., ¶ 72.
Relator further alleges that the insurance policies are shams because of MAC's inability to actually pay claims, as they would render MAC insolvent and also cause significant problems to the other defendants. For example, if any catastrophic event actually occurred, it would be difficult for MAC to collect on the inter-company note in order for it to pay out a claim. Even then, MAC would still come up short on its ability to pay out the full policy. Id., ¶¶ 85–101.
Additionally, as evidence that defendants know of the sham nature and do not treat MAC's insurance as bona fide economic liabilities, relator alleges that certain recommendations from Marsh in 2011—e.g ., that the inter-company note be secured by actual assets, and that reputational and terrorism coverage should be discontinued because they cannot reasonably be insured by MAC—did not change anything. Id., ¶ 102. Relator further alleges that major corporations that have captives treat similar insurance liabilities as risks that are disclosed in filings with regulatory agencies and to investors, and because defendants failed to do so with MAC, it shows how they do not treat such liability as a real risk. Id., ¶ 103.
Relator claims that MAC's restructuring was purposefully done in light of the changes to the Tax Law in 2009 in order to avoid MAC's characterization as an OCCIC, even though it is admitted that defendants treated MAC as an OCCIC solely during the 2009 tax year. The legislature allegedly recognized the ability of a parent company to shift certain, otherwise-taxable income to a captive that "distort[s] the parent company's true tax liability," thereby prompting the requirement that consideration must be for "bona fide" insurance. Id., ¶¶ 104–07. As a result of the restructuring, relator alleges that MAC removed some types of insurance policies and added some seemingly legitimate insurance policies, but did little to affect the sham nature of other policies. Id., ¶¶ 104–06. Thus, relator alleges that MAC should not be entitled to captive tax rates even after the restructuring.
With respect to the royalties, relator notes that, even though it has nothing to do with underwriting, Moody's transferred certain intellectual property to MAC when formed and, since that time until the restructuring in 2009, the royalties Moody's paid constituted the majority of MAC's gross receipts. Id., ¶ ¶ 74–80. As part of the deliberate restructuring, relator alleges that the intellectual property was transferred to newly-formed MISAH, MAC's direct subsidiary, in order to avoid overcapitalizing MAC with non-premium income. Id., ¶ 79. Yet, relator claims that the transfer did little to help MAC under the new tax laws and continues to demonstrate the sham nature of the transaction because the royalties paid to MISAH as income then goes back to MAC in the form of a dividend. Id. In addition to the other income MAC receives, the royalties (whether paid directly to MAC, or to MISAH and then to MAC in the form of a dividend) are then circled back in the form of an unsecured inter-company note. Id., ¶ 68. Additionally, relator alleges that the transfer of intellectual property from MAC to MISAH itself reflects the arbitrary valuation of the intellectual property and corresponding royalties. This is because there was a significant drop in the royalty payments once the same intangible assets were transferred from MAC to MISAH, though they should have remained relatively the same because royalties should be based upon a percentage of revenue, which did not decrease, but increased, if anything. Id., ¶¶ 70–80. Further evidence of the arbitrary intellectual property valuation, as alleged by relator, is the fact that the royalty payments to QM (the wholly-owned Delaware subsidiary of MIS) remained unchanged at a steady four percent (4%) throughout the years in question. Id., ¶ 82 n. 10.
With all the income MAC received, relator alleges that defendants misused the captive structure because the money is not legitimately used for its stated purpose (i.e., reserved for insurance claims), but the funds go back to the parent company in the form of an unsecured inter-company loan, the interest payments of which are deducted by Moody's. Id., ¶¶ 63–73. The benefit Moody's receives, as alleged by relator, is substantial: as the note kept growing, its deductible interest payments did as well—at least until 2006, which is when the interest payments decreased as a result of the drop in the benchmark London Interbank Offered Rate (LIBOR). Id., ¶¶ 68–71. Essentially, however, relator alleges that Moody's used MAC as a shell entity to avoid paying more than $120 million in corporate taxes to the State and City. Id., ¶ 73.
Foreign Tax Arbitrage
Additionally, as it concerns QM, relator alleges that defendants engaged in foreign tax arbitrage due to the nature of Moody's arrangement with QM, a Delaware company whose tax rate is lower than a comparable company in New York. Id., ¶¶ 81–84. Relator further alleges that Moody's has the same set up with QM as with MISAH and MAC in that the royalty payments are circled back to Moody's in the form of an unsecured inter-company note. Id., ¶ 82.
Settlements
Relator acknowledges that as a result of an audit, defendants entered into agreements with the State and City resolving certain tax liabilities for previous years. Id., ¶ 113. Relator claims however that these were only partial settlements, and that relator himself helped secure them by providing the OAG with information to use as leverage in negotiating the tax liabilities. Id., ¶¶ 113–16.
Retaliation
Relator alleges that he began working for Moody's as a treasury manager in the Treasury Department in February of 2011. Compl. ¶ 117. He reported to Carlton Charles, Jr., Treasurer and Chief Operational Risk Officer, who gave him an assignment to prepare a cost-benefit analysis of MAC in April, 2011. Id., ¶¶ 117–18. Based upon communications with other employees and documents reviewed, relator alleges that he concluded that Moody's' practices in connection with MAC were unlawful as MAC's sole purpose was tax evasion, and that MAC lacked economic substance. Id., ¶ 120.
Relator alleges that he e-mailed Mr. Charles and Ms. Merkel on June 17 and July 26, 2011 with his concerns, stating that MAC was purely tax driven and "had a ‘wrong-way risk profile.’ " Id., ¶ 123. He also claims he contacted Lauren Kiesel at Moody's Human Resources Department (HR) on July 13, 2011, advising that he believed the captive was not legitimate but feared retaliation and/or termination if he contacted upper management. Id., ¶¶ 124–25. He met with Ms. Kiesel and Amanda Sears, also from HR, the next day regarding the same and alleges upon information and belief that no investigation was initiated in response to relator's concerns. Id., ¶¶ 125–26.
As stated supra, Christine Merkel was one of Moody's vice presidents in 2011. Id., ¶ 54.
Relator alleges that he then received a negative mid-year performance review on or about July 27, 2011 in retaliation for expressing his opinions regarding MAC's legitimacy. Id., ¶ 127.
In August, 2011, relator alleges he told Ms. Merkel, Mr. Charles, and Richard Li, Assistant Treasurer, that defendants' practices with MAC were unlawful and MAC's sole purpose was tax evasion. Id., ¶ 121. Specifically, relator claims that on August 2, 2011, he told Ms. Merkel and Mr. Charles that "he believed that MAC served no valid purpose[;] that its sole reason-for-being was tax avoidance and, as such, MCO's restructuring of MAC was likely illegal." Id ., ¶ ¶ 121, 128. Relator alleges Mr. Charles and Mr. Li said he should "keep his views on MAC silent, and warned him of serious consequences if he did not"; and that Ms. Merkel allegedly said "I hear your concerns," but "don't put anything in writing," and suggested he speak with one of Marsh's representatives. Id., ¶ ¶ 121, 128–29.
Relator alleges that he had a conference call on September 14, 2011 with Ms. Merkel and Arthur G. Koritzinsky, Managing Director of Marsh's Captive Solutions Group. Id., ¶ 130; see id., ¶ 33. Relator alleges that he expressed his opinions regarding MAC and, inter alia, its insufficiency to cover potential claims under certain policies. Id., ¶ 130. Specifically, relator alleges that he argued that MAC's policies were not bona fide and demanded that Mr. Koritzinsky "explain the basis for Defendants' position ... that MCO's three largest policies—reputational, terrorism and excess coverage—constituted bona fide insurance for purposes of use within a captive structure." Id., ¶ 115. Allegedly, Mr. Koritzinsky was "unable to provide a credible response" regarding the captive's structure. Id., ¶ 122.
Another conference call was held on or about September 22, 2011 with the same three participants, as well as Gemma Mah from Marsh. Id., ¶¶ 131–33. During the call, relator alleges that the Marsh representatives "acknowledged that MAC was aggressively structured to maximize State and City tax avoidance," and that if tax officials "analyzed the question of risk transfer between the parent and the captive, they would have concluded that MAC was inappropriately designed solely for tax avoidance purposes." Id., ¶¶ 131–32. Additionally, Ms. Mah allegedly stated that, out of all the captive insurance companies managed by Marsh, MAC was the most aggressive captive. Id., ¶ 131. Relator alleges that at the end of the call, he asked what corrective action the defendants should take regarding the aggressive structure. Id., ¶ 133. Mr. Koritzinsky allegedly recommended that MAC discontinue "its reputational risk coverage of MCO, excess liability, and terrorism"; attach security interest to the currently unsecured inter-company note; reduce the amount of the inter-company note by fifty percent; and reduce the two-billion dollar ($2B) umbrella policy. Id., ¶ 133.
On September 23, 2011, relator alleges that he met with Ms. Merkel and advised that he intended to report that MAC's structure was a tax-evasion scheme in his cost-benefit analysis memorandum. Id., ¶ 134. She allegedly advised him that he would get "in trouble if he used such ‘inflammatory language.’ " Id. Relator also alleges that Mr. Charles knew of the same intention and, consequently, Mr. Charles allegedly became so upset with him about his conclusions that he refused to talk to relator about MAC during a meeting on or about September 27, 2011. Id., ¶ 135.
Relator claims he presented his analysis of MAC on or about September 30, 2011 and his memorandum was written in "understated language" per Ms. Merkel's instructions, but made his point clear. Id., ¶ 136. He was then terminated during a meeting on October 17, 2011 with Moody's' Chief Financial Officer, Linda Huber. Id., ¶ 138; see id., ¶ 124. Ms. Huber allegedly stated he was terminated, effective immediately, for insubordination. Id . Relator claims that he told Ms. Huber that he was being fired "because of his allegations about MAC as a vehicle for tax evasion"; and alleges he was then escorted out of the building. Id., ¶¶ 138–39.
Prior to his termination, relator alleges that he contacted the OAG regarding his conclusions on MAC's allegedly unlawful practices and structure sometime in July of 2011, and claims he was in regular contact with the OAG through October of that year. Id., ¶ 137. He alleges that he had several meetings with the OAG during August and September of 2011 to discuss MAC's problems, and "provided numerous internal company documents to the [OAG and] shared his analysis of MAC's structure." Id., ¶ 116. Relator also "pointed out MCO's tax department had been stonewalling the [State] and [City] tax authorities in their ongoing audit process" after learning that Moody's had deliberately been uncooperative with the tax authorities. Id., ¶¶ 116, 114. He further alleges upon information and belief that defendants knew relator had communicated with the OAG at the time of his termination. Id., ¶ 140.
Specifically, relator alleges that during a meeting in June of 2011, Scott Kaputa, Moody's' Senior Vice President of Tax, stated that defendants' "obfuscation" in being uncooperative with the tax authorities during the audits "had been a deliberate strategy." Id., ¶ 114.
Procedural History
Relator's original complaint, dated October 11, 2012, was served on the OAG in accordance with New York State Finance Law (Finance Law) Section 190(2)(b), and the OAG declined to intervene by notice dated December 11, 2012. Relator's amended complaint, dated August 9, 2013, was served on defendants, as well as the City, who also declined to intervene by notice dated September 17, 2013. The instant motion was made on or about July 28, 2014 and, after being transferred to the undersigned, oral argument was held on January 13, 2016.
Defendants' motion to dismiss argues that the complaint fails to state a cause of action under the FCA because (1) MAC has consistently been reviewed and licensed as a legitimate captive and Moody's was, therefore, entitled to deduct its payments to MAC; (2) MAC is not an OCCIC but admittedly was treated as one in 2009; (3) the complaint fails to plead that defendants knowingly violated the FCA; and (4) Moody's has not engaged in foreign tax arbitrage. The motion also argues that relator's claims are barred by tax audit settlement agreements for most of the years at issue; the ex post facto clause of the United States Constitution bars claims based on allegations prior to the FCA's 2010 amendment to include violations of the tax law; and relator's retaliation claim fails because there was no violation of the FCA and, therefore, there was no protected activity.
That part of defendants' motion to dismiss arguing that the ex post facto clause bars retroactive application of the FCA to violations of the Tax Law prior the 2010 amendment is denied. After the instant motion was made, the issue was conclusively resolved in People v. Sprint Nextel Corp., 26 NY3d 98 (2015), where the Court of Appeals held that "the retroactive application of the FCA does not trigger the Ex Post Facto Clause of the United States Constitution." Id. at 113–15.
DISCUSSION
CPLR Rule 3211(a)(7): Failure to State a Reverse False Claim
In determining dismissal under CPLR Rule 3211(a)(7), "the court must afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference." EBC I, Inc. v. Goldman, Sachs & Co., 5 NY3d 11, 19 (2005) ; see Vig v. New York Hairspray Co., L.P., 67 AD3d 140, 144–45 (1st Dep't 2009). "Whether a plaintiff can ultimately establish [his] allegations is not part of the calculus in determining a motion to dismiss." EBC I, Inc., 5 NY3d at 19.
The FCA allows a private person to bring a qui tam civil action to recover damages on behalf of such person and the State of New York or other local government for the commission of an act enumerated in subdivisions (a) through (h) of Finance Law Section 189(1). Relator alleges that defendants violated Finance Law Section 189(1)(g), which holds a person liable where such person "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 state or a local government." Also known as a "reverse false claim," such cause of action is asserted when it is alleged that a person "uses a false record to avoid an obligation to pay the government." State of New York ex rel. Seiden v. Utica First Ins. Co., 96 AD3d 67, 71 (1st Dep't 2012). The complaint must allege three elements to sufficiently state this claim: "(1) that [defendants] filed the tax records at issue, (2) that those records were actually false—i.e., that [defendants] made a false statement or filed a false record because it incorrectly stated the amount of [tax] owed under [the Tax Law]—and (3) that [defendants] acted knowingly in doing so." Sprint, 26 NY3d at 120–21 (Stein, J., dissenting in part) (citing U.S. ex rel. Oliver v. Parsons Co., 195 F.3d 457, 461 (9th Cir.1999) ). Additionally, such claim must be stated with particularity. Seiden, 96 AD3d at 72.
Other courts have also analyzed the claim similarly, albeit noting the element of damages to the government. See United States v. Raymond & Whitcomb Co., 53 F.Supp.2d 436, 444–45 (S.D.NY 1999) (quoting Wilkins ex rel. United States v. Ohio, 885 F.Supp. 1055, 1059 (S.D.Ohio 1995) ); Seiden, 96 AD3d at 71–72. Though not at issue in the motion sub judice, the Court notes that the element of damages is implicit in the threshold requirement of Finance Law Section 188(4)(a) and was, in any event, adequately alleged in the subject complaint.
Because the New York FCA "follows the federal False Claims Act (31 U.S.C. § 3729 et seq. ) ... it is appropriate to look toward federal law when interpreting the New York act." Seiden, 96 AD3d at 71.
False Claim
Appropriate Tax Treatment of QM
Initially, the Court finds that relator has not sufficiently alleged that defendants engaged in foreign tax arbitrage. Specifically, relator alleges that defendants' arrangement with QM, a Delaware subsidiary, is also sham in nature and, therefore, the corporate form should be disregarded in this instance. However, other than the mere fact that QM is a wholly-owned subsidiary that is incorporated in Delaware, whose tax laws may impose a more favorable tax rate than in New York, relator does not allege anything else that would suggest that QM's corporate form should be disregarded, such that QM's income should be treated as its parent's income and subject to combined reporting for tax purposes. See Frank Lyon Co. v. United States, 435 U.S. 561, 580 (1978) ("We cannot ignore the reality that the tax laws affect the shape of nearly every business transaction.").
The corporate form will only be disregarded where the arrangement is sham in nature. Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439 (1943). In New York, the "Commissioner is afforded discretion to permit or require a corporation paying the New York tax to file a combined report with other corporations that the taxpayer controls." Matter of Sherwin–Williams Co. v. Tax Appeals Tribunal of Dep't. of Taxation & Fin. of State of NY, 12 AD3d 112, 114 (3d Dep't 2004) (hereinafter "Sherwin–Williams ").
The decision from the Appellate Division, Third Department in Sherwin–Williams is instructive on this issue, where the petitioner, a taxpayer-parent corporation, formed two wholly-owned subsidiaries in Delaware to hold and manage the parent's trademarks, which were licensed back to petitioner in exchange for royalties. See id. Delaware was presumably favored for this arrangement because its laws exempted a corporation from corporate income tax if its "activities are confined to maintenance and management of intangible investments." Id. at 113 n. 2 (citing Del.Code Ann., tit. 30, § 1902(b)(8) ). In considering the CPLR Article 78 petition to review the determination of the New York Tax Appeals Tribunal, which found in favor of respondent Commissioner, the court discussed the nature of the arrangement and the criteria for combined reporting—namely, whether "a distortion of income would result if the corporations reported separately." Id. at 114. A "presumption of distortion arises ‘when the taxpayer reports on a separate basis if there are substantial intercorporate transactions among the corporations.’ " Id. at 114–15 (quoting 20 N.Y.C.R.R. § 6–2.3(a)–(b) ). The presumption is rebuttable, and the court stated that the ultimate question is "whether, under all of the circumstances of the intercompany relationship in this case, combined reporting fulfills the statutory purpose of avoiding distortion of and more realistically portraying true income." Sherwin–Williams, 12 AD3d at 115–16 (quoting Matter of Standard Mfg. Co. v. Tax Comm'n. of State of NY, 114 A.D.2d 138, 141 (3d Dep't.1986) ) (internal quotation marks omitted). This Court finds that relator has not alleged any detailed facts that QM lacks "a business purpose or economic substance apart from tax avoidance and [that, e.g.,] the royalties paid by [defendants] were not at arm's length rates." Cf. Sherwin–Williams, 12 AD3d at 115 ; see also Frank Lyon Co., 435 U.S. at 580 ("The fact that favorable tax consequences were taken into account by [taxpayer] on entering into the transaction is no reason for disallowing those consequences."). Because the analysis is fact-driven, something more is needed to put defendants on notice of the alleged FCA violation, such as specific allegations showing how the arrangement is one that is "shaped solely by tax-avoidance features that have meaningless labels attached," as opposed to a genuine, multi-party "transaction with economic substance [that may be] compelled or encouraged by business or regulatory realities, [and] is imbued with tax-independent considerations." Frank Lyon Co., 435 U.S. at 583–84.
Appropriate Tax Treatment of MAC
A licensed captive insurance company pays New York tax on premiums in accordance with Tax Law Section 1502–b (Ins.L. § 7012 ), which sets forth the tax rate of four-tenths of one percent (0.04%) on the first twenty million dollars ($20M) of premiums, and the rate gradually decreases for every $20M thereafter and levels out to a tax rate of seventy-five thousandths of one percent (0.075%) for every dollar over sixty million. "Premium" is defined per Tax Law Section 1510(c), but Section 1502–b(c) broadens the definition to include "any amount received by a captive insurance company as consideration for insurance provided, in the case of a pure captive insurance company, to its parents and affiliated companies."
In 2009, the legislature amended Tax Law Section 1502–b to disallow an "overcapitalized" captive from benefitting from this tax rate. See L.2009, ch. 57, pt. E–1. The same act added subdivision 11 to Section 2 of the Tax Law to define an overcapitalized (id. § 1), or now termed "combinable" captive (L.2014, ch. 59, pt. A, § 22; see supra, n. 3).
In acknowledging a potentially abusive situation, relator cited the following legislative intent:
Corporations have increasingly been using overcapitalized "captive" insurance companies—that is, insurance companies providing insurance to their parent or affiliates—as a means to avoid tax on their income. Since insurance companies pay New York tax based only on the premiums they receive, income generated by income-producing assets goes untaxed. The premiums-based tax for captives has led many corporations to transfer to their captives assets far exceeding the level necessary to properly insure the risks of the captives. Pl. Mem. at 14 (quoting Kovel Aff. Ex. D (N.Y.S. Div. of the Budget, 2009–10 N.Y.S. Executive Budget, Revenue Article VII Legislation, Memorandum in Support, pt. F, at 12) (hereinafter "DOB Mem.")).
Thus the amendment sought to prevent too much money (non-insurance related income) from being improperly taxed at such low rates by, inter alia, requiring that the income actually derived from premiums be related to bona fide insurance and removing the bar to combinable reporting if the captive structure is abused by inflating it with non-premium income. See Tax L. § 2(11) (as added by L.2009, ch. 57, pt. E–1, § 1). Thus, if a captive is found to be a CCIC, it is subject to combined reporting under Tax Law Section 210–C.
Previously under Tax Law Section 211(4)(a)(7). See supra, n. 3.
In order to determine whether MAC is entitled to the tax rate set forth in Tax Law Section 1502–b, the first question presented is whether MAC is a CCIC. At issue is the provision which necessitates a determination as to how much of MAC's "gross receipts for the taxable year consist of premiums." Tax L. § 2(11)(d). The term "premiums" used in this analysis are those which are "from arrangements that constitute insurance for federal income tax purposes" (id. ) and specifically exclude "any part of the consideration for insurance, reinsurance or annuity contracts that do not provide bona fide insurance, reinsurance or annuity benefits" (id. § 2(11) ).
The three other defining elements of a CCIC are not at issue and were, in any event, adequately alleged. Those are set forth in subdivisions (a)-(c) of Tax Law Section 2(11) as follows:
The term "combinable captive insurance company" means an entity that is treated as an association taxable as a corporation under the internal revenue code (a) more than fifty percent of the voting stock of which is owned or controlled, directly or indirectly, by a single entity that is treated as an association taxable as a corporation under the internal revenue code and not exempt from federal income tax; (b) that is licensed as a captive insurance company under the laws of this state or another jurisdiction; [and] (c) whose business includes providing, directly and indirectly, insurance or reinsurance covering the risks of its parent and/or members of its affiliated group.
A plethora of case law exists discussing the relationship between an insured and its wholly-owned captive insurance company that analyzes whether their arrangement constitutes insurance under Federal law and the resultant tax implications. Although "insurance" is not defined in the United States Code or Treasury Regulations,
While the issue presented in most of these cases (discussed infra ) is whether the taxpayer properly deducted insurance premiums, the following analysis serves a dual purpose here in determining that issue as well as the proper tax treatment of the captive, MAC.
courts have looked primarily to four criteria in deciding whether an arrangement constitutes insurance for Federal income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risks among its policyholders; and (4) the arrangement must be insurance in the commonly accepted sense. Securitas Holdings, Inc. v. C.I.R., T.C. Memo.2014–225, 2014 WL 5470747, at *18 (U.S. T.C. Oct. 29, 2014).
In determining whether the arrangement meets "commonly accepted" notions of insurance, a court looks to factors such as whether: "(1) the insurer was organized, operated, and regulated as an insurance company; (2) the insurer was adequately capitalized; (3) the insurance policies were valid and binding; (4) the premiums were reasonable; and (5) the premiums were paid and the [claimed] losses were satisfied." Id. at *10.
In light of the above factors, the Court finds that the complaint contains numerous allegations demonstrating that the defendants' arrangement is not bona fide and does not meet the definition of insurance under Federal law. In support of this finding, the Court points to relator's allegations concerning MAC's inability to pay claims if/when made, as the nature of the arrangement circles the amounts paid in premiums back to the parent as an unsecured note. The idea of relying on a parent company to satisfy claims demonstrates the "economic reality of the situation" "that the risk of loss did not leave the parent company." In re Stewart's Shops Corp. DTA No. 825745, 2016 WL 1086062, at *21 (N.Y. Div. Tax App. Mar. 10, 2016) (discussing Sterns–Roger Corp. v. United States, 774 F.2d 414 (10th Cir.1985) ); id. at *24 (finding a "common thread" in various federal cases that "payments from a parent to a wholly-owned captive do not qualify as deductible insurance premiums because the arrangement lacks risk shifting and risk distribution"). Where, as relator alleges here, risk of loss has not shifted and stays with the parent, it is akin to maintaining a reserve for losses, or self-insurance, the payments of which are, similarly, not deductible from taxable income. Ocean Drilling & Expl. Co. v. United States, 988 F.2d 1135, 1150–51 (Fed .Cir.1993). Additionally, any intellectual property assets held by MAC, or its wholly-owned subsidiary MISAH, would not be useful in a situation where the event triggering insurance coverage simultaneously reduces the value of assets intended to pay any claim under, e.g., reputational or catastrophic coverage. See Rent–A–Center, Inc. v. C.I.R., 142 T.C. 1, 43 (U.S. T.C.2014) (Lauber, J., dissenting) ("No true insurance company invests its reserves in assets that are both undiversified and negatively correlated to the risks that it is insuring.").
The Court notes that such an intercompany loan is sanctioned under the Insurance Law but MAC must have received prior approval from the DFS. See Ins. L. § 7009(b) ("A pure captive insurance company may make loans to its parent company or affiliates with the prior approval of the superintendent."). Further, "[s]uch loan must be evidenced by a note in a form approved by the superintendent" and "[l]oans of minimum capital and surplus funds required by section seven thousand four of this article are prohibited." Id. Neither party has alleged that MAC received such required approval.
Relator's allegations also tend to show that the arrangement does not conform to traditional notions of insurance. Specifically, relator alleges that none of the insurance policies were entered into at arms-length, and the amount of premiums paid to MAC are arbitrarily valued—they are not proportional to the amount of coverage provided by any given insurance policy and not based on valid market considerations. Cf. Rent–A–Center, 142 T.C. at 27 (Buch, J., concurring) (where captive's premiums were independently and/or actuarially determined); Stewart's Shops, 2016 WL 1086062, at *20 (where captive's premiums were "based on the PWC study, [parent-insured's] historical insurance needs and losses, [and] market rates and industry standards for similar lines of insurance provided by other companies"). In addition to the unusually large premiums, relator alleges that defendants paid MAC a $40 million premium for a tax opinion guarantee multiple times for a number of years, even though industry practice only requires a one-time premium. Relator further alleges that MAC is severely undercapitalized—notwithstanding any licensure received by the DFS to operate as a captive, as that is not dispositive. See Rent–A–Center, 142 T.C. at 41 (Lauber, J., dissenting) (finding that "intragroup payments were not ‘insurance premiums' even though the captive met ‘the extremely thin minimum capitalization required by Bermuda Law’ " (discussing Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 841 (6th Cir.1995) )). As to receiving and satisfying claims, it is difficult for the Court to say anything with respect to this factor, as relator alleges that no claims have ever been made—even when situations arose that could trigger coverage under, e.g., the reputational insurance.
Additionally, the Court finds sufficient support for relator's allegation that MAC was formed for the sole purpose of tax avoidance, as opposed to legitimate and non-tax-driven reasons. Cf. Rent–A–Center, 142 T.C. at 11–13 ; see also Stewart's Shops, 2016 WL 1086062. The complaint alleges that, pre-restructuring, a sizable portion of MAC's income was derived, not from insurance, but from royalties received from defendants. Such allegation further demonstrates the illicit use of MAC as a tax shelter rather than for bona fide insurance. Throughout MAC's existence, defendants paid MAC royalty payments in order to take advantage of the captive's tax rate, while being able to deduct the same. In furtherance of the scheme, relator alleges that the royalty payments were arbitrarily valued and points to the sizeable difference between the amount of royalties paid to MISAH for the same intellectual property originally held by MAC. Upon the transfer from MAC to MISAH, relator alleges that the royalty amount was artificially lowered even though it would have stayed the same, if appropriately based upon a percentage of revenue; and further claims that arbitrary valuation of intellectual property was done intentionally, or with a reckless disregard for the true value, in order to manipulate the level of income to falsely obtain the favorable tax rate, and avoid MAC turning into a CCIC based upon non-insurance income. These allegations demonstrate the falsity element required of an FCA violation. See Sprint, 26 NY3d at 115–16, 122 (Stein, J., dissenting in part) (agreeing with the majority to the extent that certain allegations demonstrate falsity, such as Sprint's arbitrary calculation of charges, which bore no rational relation to the amount of interstate mobile calls actually made; the creation of an arbitrary percentage of interstate calls (noting the inconsistent use of such arbitrary percentage); and Sprint's failure to even attempt to identify the true interstate component of its mobile voice services). The Court notes that there is nothing wrong with an intercorporate restructuring to reduce tax liability, but courts cannot condone "manipulation by a taxpayer through arbitrary labels and dealings that have no economic significance." Frank Lyons Co., 435 U.S. at 583.
MAC is still affected by the intellectual property valuation, and amount of corresponding royalties, even after the intellectual property was transferred to MISAH because MAC receives the non-insurance income in the form of dividends, as MAC is MISAH's sole owner. Tellingly, defendants admit that the restructuring was done in light of the 2009 amendment to the Tax Law but, rather than moving the intellectual property to an already existing affiliate (like QM), defendants formed a new corporation in Delaware. This is significant because (1) Delaware laws are incredibly advantageous to companies holding such intellectual property; and (2) in being wholly-owned by MAC, the income derived by MAC in the form of dividends goes to MAC to be taxed at a lower rate than its parent, affiliates, and/or other combined corporations.
Based on the foregoing, the complaint sufficiently alleges that MAC should be treated as a combinable captive insurance company and, therefore, defendants allegedly submitted false claims in terms of their obligation to pay the appropriate amount of tax. The Court finds that, even before the 2009 amendment that first introduced the OCCIC term, relator's complaint sufficiently alleges MAC's sham nature, which allows the corporate form to be disregarded. Ocean Drilling, 988 F.2d at 1150 ("[I]f the business operations of [the captive] are a sham, [the captive's] ‘corporate form may be disregarded.’ " (quoting Moline Props., 319 U.S. at 439 )); Moline Props., 319 U.S. at 439 ("[I]n matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal."); see 595 Inv'rs Ltd. P'ship v. Biderman, 140 Misc.2d 441, 445–46 (Sup.Ct., N.Y. County 1988) ("Courts have frequently invoked the substance-over-form rule to disallow taxpayers' use of dummy or shell entities which have a tax avoidance effect.") (citing Higgins v. Smith, 308 U.S. 473 (1940) ).
With respect to time frames, defendants' motion to dismiss seeks to temporally limit the claims only based upon the tax settlement agreements (discussed infra ), and it does not argue that the pre–2009 allegations fail to allege a FCA violation. Though the Court acknowledges that the Tax Law prohibited a captive from being required or even permitted to file a combinable return before 2009 (see Tax L. § 1515(f), as amended by L.1997, ch. 389, pt. A, § 150; DOB Mem. (noting the prohibition on combined reporting for companies under different Tax Law Articles)), such statutory prohibition on MAC's tax rate would not affect the idea that the other defendants improperly deducted premium payments in calculating tax liability since 2002.
Similarly, it does not appear as though Moody's should have been entitled to deduct its payments to MAC in computing its tax liability, as the premium payments are not for real insurance under Federal law. Stewart's Shops, 2016 WL 1086062, at *17 ("If the payment is not deductible as an insurance premium at the federal level, ... no such deduction is allowed in computing [entire net income]" for state tax purposes.).
Thus, relator's allegations regarding defendants' failure to treat MAC as a CCIC, and improper deduction of premiums and royalties paid, sufficiently state a reverse false claim under the FCA.
Knowingly
"The FCA defines ‘knowingly’ to mean ‘that a person, with respect to information: (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.’ " Sprint, 26 NY3d at 112 (quoting State Fin. L. § 188(3)(a) ). Here, the complaint contains numerous allegations sufficiently demonstrating that defendants knew that their tax treatment of MAC was aggressive, risky, and/or abusive due to its sham nature. See, e.g., People v. Sprint Nextel Corp., 41 Misc.3d 511, 519–20 (Sup.Ct., N.Y. County 2013), aff'd, 114 AD3d 622 (1st Dep't 2014), aff'd, 26 NY3d 98 (2015). Specifically, relator alleges Ms. Merkel claimed defendants would never have paid the same premiums to outside and/or third-party carriers; defendants did not want MAC to provide D & O and E & O liability insurance because it would subject directors and officers to liability, personally, given Ms. Merkel's alleged knowledge that MAC would not be able to pay out any claims; and defendants knew of Marsh's recommendations in 2011 to make MAC more legitimate, but did not act on any of them. Relator also points to the arbitrary valuation of intellectual property, both before and after the restructuring (when held by MAC and then MISAH, respectively), that differs when compared to QM, which employed a flat four percent of revenue to value its intellectual property held throughout the same years. The complaint also alleges conduct (or lack thereof) demonstrating that defendants did not treat MAC and its insurance policies as real, legitimate insurance because, throughout MAC's existence, no claim has ever been made under any policies it held—even during the financial crisis around 2008–09 when Moody's reputation was allegedly damaged. Additionally, defendants paid MAC a $40 million premium for tax opinion guarantees annually from 2002 to 2008, even though industry practice only requires a one-time premium. Relator further alleges that the fact that defendants did not state MAC's liabilities in investor disclosures and/or regulatory agency filings demonstrates how they did not view MAC as presenting real economic liability because, as relator alleges, the related insureds never intended on making a claim. As such, the Court finds that the complaint sufficiently alleges that defendants knowingly submitted false claims.
Defendants' Argument(s)
Defendants' Failure to Address Relevant Factors
Defendants' motion essentially rests on one argument: MAC's license to operate as a captive is dispositive and definitively negates the elements of an FCA violation. However, as discussed supra, MAC's formation, licensure, and regulation by the DFS is only one of the factors to consider in determining whether a captive's arrangement with related companies constitutes insurance in the commonly-accepted sense. See Securitas, 2014 WL 5470747. For example, "[t]he fact that a captive meets the minimum capital requirements of [the relevant regulatory body] is not dispositive as to whether the arrangements constitute ‘insurance’ for Federal income tax purposes." Rent–A–Center, 142 T.C. at 41 (citing Malone & Hyde, 62 F.3d at 841 ).
Furthermore, the commonly-accepted notions of insurance analysis is only part of the "substantive discussion of the deductibility of insurance payments to captive insurers," which "[begins] with the overall guideline that the court ‘must adhere to the principles of Le Gierse and Moline Properties in reaching a decision.’ " Kidde Indus., Inc. v. United States, 40 Fed. Cl. 42, 46–47 (1997) (quoting Ocean Drilling, 988 F.2d at 1150 ) (alteration omitted). Namely, such a principle as enunciated by the Supreme Court in Helvering v. Le Gierse, is that "insurance involves risk-shifting and risk-distributing." 312 U.S. 531, 539 (1941) ; see Rent–A–Center, 142 T.C. at 13 (holding that "risk shifting and risk distribution" are "necessary criteria" established by the Supreme Court); id. at 44 (Lauber, J., dissenting) ("Because risk shifting is essential to ‘insurance,’ the absence of risk shifting alone would dictate that the Rent–A–Center payments are not deductible as ‘insurance premiums.’ ") (internal citation omitted).
Defendants failed to address any of these considerations. Instead, they argue that, because MAC is undeniably a captive within the meaning of the Insurance Law and has been licensed by DFS as such, Moody's appropriately deducts the payments made to MAC per Tax Law Section 208(9) and MAC is not a combinable captive per the DFS. Defendants also appear to argue that they are justified in relying on the DFS's consistent determination that MAC is a captive and, therefore, could not have acted "knowingly."
Defendants' Reliance on DFS
Defendants claim, for example, that the DFS "has repeatedly evaluated, among other things, ‘whether [MAC] will be able to meet its policy obligations,’ ‘the amount and liquidity of [MAC's] assets relative to the risks' it insures and the ‘overall soundness' of its operating plan." Defs. Mem. at 15 (citing Ins. L. § 7003(c)(2) ). Defendants further claim that the DFS would not continue to renew MAC's license if the DFS considered MAC as a CCIC and/or MAC did not provide bona fide insurance. Additionally, in response to the allegation that the restructuring was a sham, they similarly argue that the DFS "blessed" or approved the same. Thus, defendants argue that the DFS's approval of MAC's status as a captive definitively negates an FCA violation—both with respect to establishing a false or fraudulent claim, as well as the scienter element. Concerning the latter, defendants claim that a clear and plain reading of the statutes "permit Moody's to deduct premiums paid to MAC and otherwise to treat MAC as an insurance company in tax filings." Defs. Mem. at 20. However, as demonstrated below, these arguments collapse entirely upon close examination of the relevant Insurance Law statutes regarding captives. See Ins. L. §§ 7002 –12.
Defendants first argue, albeit incorrectly, that the allegations of MAC's inability to pay out claims are "irrelevant"—but then go on to state that such a factor is actually considered by the DFS in approving MAC's captive license. Such argument necessarily demonstrates the relevancy of adequate capitalization in determining MAC's appropriate status.
To be sure, Insurance Law Section 7009 requires a captive to receive prior approval from the superintendent to make loans to its parents or affiliates, and specifically prohibits loans in the amount of the minimum capital and surplus required to be maintained by Section 7004. See also, supra, n. 13.
Defendants also confusingly argue that, "[e]ven if the Court were to disagree with Moody's interpretation of the relevant statutes, the Complaint still should be dismissed because, at the very least, Moody's interpretation was not plainly unreasonable." Defs. Mem. at 20. Defendants go on to cite U.S. ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir.1999) for the proposition that the scienter element cannot be satisfied where there are reasonable differences in interpreting a disputed legal question. However, irrespective of the fact that defendants then state that no disputed legal question exists, the Court finds that, even if there is a disputed legal question, the reasonableness of defendants' interpretation of the same is not necessarily an issue that is appropriately resolved upon a motion to dismiss.
An insurance company may qualify as a captive based on the type of insurance it intends to provide and which risks it intends to insure (the parent's or affiliates'). Ins. L. § 7003(a). Insurance Law Section 7003(c)(1) sets forth what must be included in its application: "a certified copy of its charter and bylaws, a financial statement certified by two principal officers; [and] a plan of operation, which shall include an actuarial report prepared by a qualified independent actuary." Subdivision (c)(2) sets forth the factors that the superintendent shall consider in evaluating a captive's plan of operation:
(2) In evaluating the plan of operation, the superintendent shall consider the following factors:
(A) the amount and liquidity of its assets relative to the risks to be assumed;
(B) the adequacy of the expertise, experience, and character of the person or persons who will manage it;
(C) the overall soundness of the plan and the projections contained therein;
(D) the adequacy of the loss prevention programs of its parent, member organizations, or industrial insureds as applicable; and
(E) such other factors deemed relevant by the superintendent in ascertaining whether the proposed captive insurance company will be able to meet its policy obligations.
Thus, in submitting to the Court that the DFS "has repeatedly evaluated" MAC's ability to meet policy obligations, the liquidity of its assets, and the "overall soundness" of its operating plan, the Court finds such statement to be misleading, as it ignores the fact that the language quoted from the statute are merely factors to be considered by the DFS in a company's initial application. Accordingly, the DFS has not "repeatedly evaluated" those characteristics of MAC (or lack thereof)-but only did so once, in its initial application in 2002.
Once a license is received, the sole provision regarding renewal states that "the superintendent may issue a renewal license for successive one year terms expiring on June thirtieth." Ins. L. § 7003(e). None of the provisions contemplate whether any substantive review or approval is needed in order to issue a renewal license.
Though Insurance Law Section 7008 lists reasons why a captive's license may be suspended or revoked, none of them state that a captive's license may be revoked or suspended for being a CCIC and/or for not providing bona fide insurance. Moreover, if any of the conditions enumerated in subdivision (a) actually occur, suspension or revocation is not automatic. See Ins. L. § 7008(b) ("If the superintendent finds, upon examination, hearing, or other investigation, that any captive insurance company has committed any of the acts specified in subsection (a) of this section, the license to do a captive business may be suspended or revoked.") (emphasis added).
Insurance Law Section 7008(a) reads as follows:
The license of a captive insurance company to do a captive insurance business in this state may be suspended or revoked by the superintendent for any of the following reasons: (1) insolvency or impairment of required capital or surplus to policyholders; (2) refusal or failure to submit an annual report, as required by section seven thousand six of this article, or any other report or statement required by law or by lawful order of the superintendent; (3) failure to comply with the provisions of its own charter or bylaws; (4) failure to submit to examination or any legal obligation relative thereto, as required by section seven thousand seven of this article; (5) refusal or failure to pay the cost of examination as required by section seven thousand seven of this article; (6) refusal or failure to pay the taxes as required by section seven thousand twelve of this article and section fifteen hundred two-b of the tax law; (7) removal of home office or records from this state; (8) use of practices that, although not otherwise specifically prohibited by law, nevertheless render its operation detrimental or its condition unsound with respect to the public or to its policyholders; or (9) failure to otherwise comply with laws of this state.
Though Insurance Law Section 7008(b) states that a license may be revoked "upon examination, hearing, or other investigation," it notably omits the possibility of revocation upon the superintendent's mere review of one of the reports captives submit on an annual basis as required by Insurance Law Section 7006.
While a licensed captive is subject to examinations at least once every five years (or at any time the superintendent deems necessary) (Ins.L. § 7007 ), the only guidance provided about what occurs during such an examination is that it shall be conducted in accordance with Insurance Law Sections 310 –12. Yet, these statutes also fail to demonstrate that any further review is made concerning the factors initially considered, nor further inquiry into a captive's tax treatment and whether it provides bona fide insurance.
Captives must also file various annual reports pursuant to Insurance Law Section 7006. However, none of the requirements state that such a report must demonstrate to the DFS that the captive has continually complied with any of the initial requirements and/or meet the criteria that the DFS examined in a captive's initial application for a license. See id.
Indeed, once the license is received, the only aspect of a captive that is still subject to DFS review and approval are any "proposed amendments or revisions to the charter and bylaws." Ins. L. § 7003(d). Thus, as it concerns defendants' claim that the DFS "blessed" MAC's restructuring, the laws do not require that the restructuring be "approved." Notably, the relevant provision with respect to changes to a captive's operation only mandates that a statement regarding "any amendment to the plan of operation" be included with one of its annual reports. See Ins. L. § 7006(a) ; compare id., with id. § 7003(d).
Though the statutes indicate various levels of oversight by the DFS in a number of various reports and examinations, they do nothing more than to show that the DFS's review of captives is limited to its compliance with Insurance Law Article 70—and not with Tax Law Sections 1502–b or 2(11) and/or whether the captive provides bona fide insurance. This is the ultimate and fatal flaw in defendants' argument: that the DFS does not examine, nor determine, a captive's tax treatment. Only one provision speaks to this issue, and it simply states that licensed captives shall pay franchise taxes in accordance with Tax Law Section 1502–b. See Ins. L. § 7012. Naturally, one then looks to Tax Law Section 1502–b, which specifically states that a captive that is not a combinable captive will pay taxes in accordance with that statute. Defendants do not point to any other relevant statute which might infer that the DFS should be responsible for determining an entity's tax status and advising such taxpayer how to pay its taxes.Indeed, the problem with defendants' argument is made evident by certain unopposed allegations—to wit, that defendants admittedly treated MAC as an OCCIC for the 2009 tax year, yet there is no claim that they did so because the DFS deemed MAC to be considered as such. Clearly, it is not within the DFS's purview to make such a determination, and it is the taxpayer's responsibility to prepare appropriate and accurate tax returns (or, for FCA purposes, a "record or statement material to an obligation to pay or transmit money" (State Fin. L. § 189(1)(g) )) to be submitted to the government. Any argument to the contrary would be promoting an inappropriate and unduly burdensome responsibility on the part of the DFS to determine the tax liability of every captive it regulates. A clear and plain reading of the statutes does not support placing such heavy reliance on the DFS in approving MAC's initial license, as well as continuing to renew its license and/or approve of its restructuring. The argument that these statutes hold otherwise completely ignores Tax Law Sections 1502–b and 2(11), as well as the fact that a company can still be licensed as a captive but also be a CCIC, as the two terms are not mutually exclusive.
Government Knowledge Defense
Defendants further argue that they are justified in relying on the State's determination, via the DFS, that MAC is a captive and, therefore, could not have acted "knowingly." Such reliance is misplaced and unreasonable. In appearing to assert a "government knowledge defense," relator points out in his opposition papers that such an argument may be relevant to the idea that a false claim was not knowingly submitted. The premise applies in a situation where it is alleged that the government had full knowledge of the underlying facts of the claim and approved the same. Pl. Mem. at 15. However, "any overlapping knowledge" of the facts of the claim does not "automatically exonerate[ ]" "the defendant's knowledge of the falsity of its claim." U.S. ex rel. Kreindler & Kreindler v. United Techs. Corp., 985 F.2d 1148, 1156 (2d Cir.1993). To the extent that defendants argue they had no intent to deceive, it is irrelevant because that is not "what constitutes the offense," rather, it is the "knowing presentation of a claim that is either ‘fraudulent’ or simply ‘false.’ " U.S. ex rel. Hagood v. Sonoma Cty. Water Agency, 929 F.2d 1416, 1421 (9th Cir.1991).
Additionally, even if the Court were to accept the premise that what the DFS officials knew was, indeed, relevant to whether defendant did or did not submit false claims with the requisite intent, relator argues that defendants' motion papers do not provide any evidence that they fully disclosed everything—i.e., that the DFS knew of the various and arbitrary intellectual property valuations and/or the fact that some of MAC's insurance policies were not actually paying policies. In response, defendants' reply papers argue that, to the extent relator's opposition claims that defendants failed to disclose the "sham" nature of MAC and/or failed to fully inform the DFS of all material facts when it issued MAC's captive license, such claim was not alleged in the complaint. Assuming, arguendo, that the DFS was fully informed and knew of MAC's true nature as alleged by relator, and the DFS still "blessed" or approved of MAC's status as a captive insurance company: (1) the Court reiterates that such approval has no bearing on tax consequences—indeed, there is a distinct and obvious difference between making misrepresentations to the DFS versus submitting a false claim to tax authorities; and (2) as relator correctly points out, it does not matter if the government was fully informed and knew of such falsities—the issue is whether defendants knowingly submitted false claims. See Hagood, 929 F.2d at 1421. It is irrelevant whether relator alleged that information was withheld from the DFS, as it would not negate defendants' failure to show the absence of the "knowing" presentation of a claim that was false or fraudulent.
In this regard, the Court would agree with defendants that, to the extent it could be considered as a separate claim, any theory of liability premised upon defendants' failure to fully inform the DFS is not alleged in the complaint as an FCA violation and would, in any event, not likely be actionable because a state license to operate as a captive insurance company could hardly be deemed "property" as the term is used in the FCA. The Court assumes that relator made those allegations to demonstrate the conspiracy claim against Marsh. As it concerns any government knowledge defense, an argument could be inferred to claim that defendants relied on the DFS, and the DFS relied on Marsh and the information that it provided on MAC in any annual report, opinion, or statement. However, as the Court found above based upon a review of the statutes, it does not appear that such materials have any impact on license renewals and/or restructuring approvals.
Based upon the foregoing, the Court finds that the complaint sufficiently alleges a reverse false claim. Therefore, that branch of defendants' motion to dismiss for failure to state a cause of action is denied to the extent set forth above.
CPLR Rule 3211(a)(1): Settlement Agreements with the State and City
The complaint acknowledges that the relevant State and City tax authorities audited defendants and entered into certain settlements as a result. Relator alleges that he assisted the authorities by providing information related to the audit and resultant settlements. Defendants argue that these settlement agreements constitute a complete bar to relator's claims for the years covered by the agreements—specifically, all years prior to 2010. They principally rely upon release language in two of the documents submitted in support of defendants' motion: a closing agreement between defendants and the New York State Department of Taxation and Finance (DTF) for tax years 2004 through 2010 (Walker Aff. Ex. F (hereinafter "DTF Agreement")); and a closing agreement between defendants and the City of New York Department of Finance (DOF) for tax years 2008 through 2010 (id. Ex. G (hereinafter "DOF Agreement")). Defendants also submitted DOF consent and waiver forms, signed by defendants, stating that defendants agreed to the "deficiency and/or overpayments including interest and/or penalties for the tax period(s) as set forth [therein] pursuant to the Administrative Code" and that such amounts were correct. Id. Ex. H (2005–07 tax years); id. Ex. I (2001–04 tax years) (collectively, "DOF Waivers"). With respect to the State, defendants submitted a letter accompanying a form entitled "Consent to Field Audit Adjustment," which seemingly closed an audit for the 2001–03 tax years. Id. Ex. J (hereinafter "DTF Consent") (DOF Waivers and DTF Consent hereinafter collectively referred to as the "consent forms")). Though defendants acknowledge that the consent forms do not contain the specific release language found in the DTF and DOF Agreements, they argue that the existence of the prior agreements (i.e., the consent forms) undermine relator's claims. Furthermore, defendants claim that relator is bound by the agreements as an agent of the governmental entities because relator is suing on their behalf.
At oral argument defendants conceded that tax years after 2010 are not at issue, as it concerns these agreements. See Tr. 19:12–14; 22:19.
"To succeed on a motion to dismiss pursuant to CPLR [Rule] 3211(a)(1), the documentary evidence submitted that forms the basis of a defense must resolve all factual issues and definitively dispose of the plaintiff's claims." W2007 Monday 230 Park Mezz II, LLC v. Landesbank Baden–Wuerttemberg, 38 Misc.3d 1209(A), 2013 N.Y. Slip Op. 50031(U), at *3 (Sup.Ct., N.Y. County 2013) (Sherwood, J.) (citing 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 151–52 (2002) ). Not every piece of evidence in the form of a document is properly deemed "documentary evidence." The appellate courts have noted this distinction, finding that legislative history and supporting cases make it clear that "judicial records, as well as documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are ‘essentially undeniable,’ would qualify as ‘documentary evidence’ in the proper case." Fontanetta v. Doe, 73 AD3d 78, 84–85 (2d Dep't 2010) ; Amsterdam Hosp. Grp., LLC v. Marshall–Alan Assocs., Inc., 120 AD3d 431, 432 (1st Dep't 2014). Assuming, arguendo, that defendants' exhibits properly qualify as such, dismissal "may be appropriately granted only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." Goshen v. Mut. Life Ins. Co. of NY, 98 N.Y.2d 314, 326 (2002) ; Leon v. Martinez, 84 N.Y.2d 83, 88 (1994) ("Under CPLR 3211(a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law.").
Initially, the Court points to the existence of a relevant FCA provision on this very topic. Subdivision 9 of Finance Law Section 190, entitled "Certain actions barred," reads:
The court shall dismiss a qui tam action under this article if ... the state or local government has reached a binding settlement or other agreement with the person who violated section one hundred eighty-nine of this article resolving the matter and such agreement has been approved in writing by the attorney general, or by the applicable local government attorney.
Fin. L. § 190(9)(a)(ii). None of the defendants' exhibits appear to have been approved in writing by the attorney general. The Court acknowledges that two of them, the DTF and DOF Agreements, were actually signed by a government representative—the Commissioners, as heads of the DTF and the DOF, or their representatives. However, this type of signatory is not the equivalent of the "applicable local government attorney[s]," as required by the statute. See id.
Assuming that a settlement or agreement that comports with Finance Law Section 190(9)(a) is not the sole and exclusive means for barring an action, the Court still finds that defendants' documents do not bar relator's claims. First, the consent forms could hardly be considered a "settlement agreement," as they are only signed by one side (a representative of defendants), wherein defendants consent to pay certain taxes, interest, and/or penalties. See DOF Waivers (stating that defendants agree "that the General Corporation Tax deficiency and/or overpayments including interest and/or penalties for the tax period(s) as set forth below pursuant to the Administrative Code are correct"); DTF Consent (stating that defendants consent to the "assessment and collection of the amount due"). There is no release language, they are not binding, and the consent forms do not prohibit and/or close off any additional or further governmental action. See DOF Waivers ("This consent and waiver and any check or payment tendered on account thereof shall not be binding on the City of New York...."); DTF Consent ("[T]he signing of this consent does not preclude the State from issuing additional billing notices as the result of any pending or future Federal audit change or any subsequent State audit of other issues."). If anything, the DOF Waivers may be considered binding if they were "confirmed and a Consent Determination in accordance therewith [was] issued to the taxpayer." See DOF Waivers (emphasis removed). However, no such "Consent Determination" was submitted to the Court.
It appears as though the exhibit was not provided in full, as the first page of Exhibit I indicates that it is page 17 of 69, and nowhere has it been explained where this document came from. See Walker Aff. Ex. I.
More importantly, however, is that the consent forms do not state the specific entities covered; and neither do the DTF and DOF Agreements, the latter of which defendants heavily rely upon because they contain release language. The Court finds that the scope of the entities covered under the agreements is dispositive in concluding that none of the exhibits bar relator's claims.
With the exception of the DTF Agreement; though that is not dispositive, as discussed infra.
The Court notes that, even though the DTF Agreement contains release language, it also does not prohibit the State from taking further action. See Walker Aff. Ex. F, ¶ 10 ("[N]othing in this Agreement shall preclude the [DTF] from investigating and pursuing additional tax, interest and penalty due with respect to," inter alia, "an ‘abusive tax avoidance transaction.’ ").
"The meaning and coverage of a release ‘necessarily depends, as in the case of contracts generally, upon the controversy being settled and upon the purpose for which the release was actually given.’ " Long v. O'Neill, 2013 WL 6702182, 2013 N.Y. Slip Op. 33854(U) (Sup.Ct., N.Y. County 2013) (Mendez, J.) (quoting Cahill v.. Regan, 5 N.Y.2d 292, 299 (1959) ), aff'd, 126 AD3d 404 (1st Dep't 2015). A release, if valid, could completely bar "an action on a claim which is the subject of the release." Glob. Precast, Inc. v. Stonewall Constr. Corp., 78 AD3d 432, 432 (1st Dep't 2010) (emphasis added). Here, the subject of the exhibits submitted specifically name Moody's and all the affiliates that are required to file combined returns with it. See DTF Agreement (naming "[Moody's] and Combined Affiliates"); DOF Agreement ("[Moody's] & Combined Companies"); DOF Waivers ("[Moody's] and Affiliates Included in the Combined Report"). However, MAC is not a combined affiliate for tax purposes and was not required to file a combined return with its parent (see Tax L. § 1515(f), as amended by L.1997, ch. 389, pt. A, § 150), except for the 2009 tax year when defendants treated MAC as an OCCIC. Indeed, Exhibit A to the DTF Agreement, entitled "List of Combined Affiliates by Tax Year," lists MAC as one of the entities included as a subject of the Agreement, but only for that same 2009 tax year. Thus, if relator's claims are barred at all, it is only with respect to the 2009 tax year for which it is undisputed that MAC was treated appropriately. However, all other years are not barred. See, e.g., Long, 126 AD3d at 407 ("the settlement agreement's inclusion of extensive lists of the entities who the release covered ... indicated that the parties ‘intended to leave no loose ends' "). To be sure, MAC is the only entity that is separately referred to in the seventh paragraph of the DTF Agreement. There is no other evidence before the Court to infer otherwise.
The DTF Consent only names Moody's, but presumably includes any other related entities that are required to file with Moody's.
Thus, knowing that MAC is a separate entity for tax purposes, and not subject to combined reporting, except in 2009, it cannot be said that these agreements conclusively establish that MAC was intended to be included and subject to any release in order to bar relator's claims. See Cahill, 5 N.Y.2d at 299 ("Certainly, a release may not be read to cover matters which the parties did not desire or intend to dispose of."). By the same token, it cannot be said that "the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." Leon, 84 N.Y.2d at 88.
CPLR Rule 3211(a)(7): Failure to State Retaliation Claim
Finance Law Section 191 provides a cause of action for former employees, like relator, to seek relief in the event she or he is retaliated against for "blowing the whistle" on unlawful activity. The provision states:
Any current or former employee, contractor, or agent of any private or public employer who is discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of employment, or otherwise harmed or penalized by an employer, or a prospective employer, because of lawful acts done by the employee, contractor, agent, or associated others in furtherance of an action brought under this article or other efforts to stop one or more violations of this article, shall be entitled to all relief necessary to make the employee, contractor or agent whole.
Id. § 191(1). The statute goes on to define "lawful act," which includes, but is not limited to:
obtaining or transmitting to the state, a local government, a qui tam plaintiff, or private counsel solely employed to investigate, potentially file, or file a cause of action under this article, documents, data, correspondence, electronic mail, or any other information, even though such act may violate a contract, employment term, or duty owed to the employer or contractor, so long as the possession and transmission of such documents are for the sole purpose of furthering efforts to stop one or more violations of this article.
The Court notes that this provision differs "from its federal analogue in that the state statute defines protected ‘lawful acts' to include providing documents to government authorities and providing documents to private counsel that has been retained for the purpose of investigating or filing a claim." Forkell v. Lott Assisted Living Corp., No. 10 CIV. 5765 NRB, 2012 WL 1901199, at *13 n. 9 (S.D.NY May 21, 2012). However, it is similar in mostly all other respects, and "courts interpret [FCA] provisions by closely tracking judicial interpretation of its federal counterpart." Landfield v. Tamares Real Estate Holdings, Inc., 2012 WL 3135052, 2002 N.Y. Slip Op. 30168(U) at *6 (Sup.Ct., N.Y. County July 23, 2012) (Madden, J.), aff'd, 112 AD3d 487 (1st Dep't 2013).
In order to state a prima facie claim of retaliation, relator must allege that "(i) he was engaged in conduct protected under the FCA; (ii) the employer had knowledge of this conduct; and (iii) the employer retaliated against the employee because of this conduct." Harrington v. Aggregate Indus. Ne. Region, Inc., 668 F.3d 25, 31 (1st Cir.2012) ; see Landfield, 112 AD3d at 487–88 ; U.S. ex rel. Smith v. Yale Univ., 415 F.Supp.2d 58, 102 (D.Conn.2006).
Protected Activity
"Although the types of activities covered are broad, ‘the employee's purpose must not be detached from the [FCA] in order for the employee to receive the FCA's whistle blower protections.’ " Garcia v. Aspira of NY, Inc., No. 07 CIV. 5600 PKC, 2011 WL 1458155, at *4 (S.D.NY Apr. 13, 2011) (quoting Luckev v. Baxter Healthcare Corp., 2 F.Supp.2d 1034, 1051 (N.D.Ill.1998) ). Specifically, it must be shown that exposing or deterring fraud upon the government was the relator's purpose into his or her investigation, inquiries, or complaints. See Grant v. Abbott House, No. 14–CV–8703 (NSR), 2016 WL 796864, at *7–8 (S.D.NY Feb. 22, 2016) (quoting Moor–Jankowski v. Bd. of Trs. of N.Y. Univ., No. 96 CIV. 5997(JFK), 1998 WL 474084, at *10 (S.D.NY Aug. 10, 1998) ; Smith, 415 F.Supp.2d at 103 ; Garcia, 2011 WL 1458155, at *4.
The allegations supporting an employee's speech and/or conduct need not amount to an actual FCA violation. See Schweizer, 677 F.3d at 1238 (to fall within the FCA retaliation provision, "an employee does not have to alert his employer to the prospect of a False Claims Act suit"). Nor does it require "the plaintiff to have developed a winning qui tam action before he is retaliated against." U.S. ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 739 (D.C.Cir.1998). But it does require a relator to have a "good faith basis or objectively reasonable basis for believing that the defendants were committing fraud." Krause, 2015 WL 4645210, at *8 (emphasis removed). Indeed, it is sufficient if a relator is "investigating matters that ‘reasonably could lead’ to a viable [FCA] case." U.S. ex rel. Mooney v. Americare, Inc., No. 06–CV–1806 (FB)(PK), 2016 WL 1212775, at *2 (E.D.NY Mar. 28, 2016) (quoting Yesudian, 153 F.3d at 740 ).
"Courts have held that it is not enough that an employee merely investigates his employer's non-compliance with federal regulations." Faldetta v. Lockheed Martin Corp., No. 98 CIV. 2614(RCC), 2000 WL 1682759, at *12 (S.D.NY Nov. 9, 2000). Complaints regarding those sorts of regulatory violations and/or "[m]erely grumbling to the employer about job dissatisfaction ... [also do] not constitute protected activity." Yesudian, 153 F.3d at 743 ; see U.S. ex rel. Owens v. First Kuwaiti Gen. Trading & Contracting Co., 612 F.3d 724, 735–36 (4th Cir.2010) (holding that complaints of mistakes made on construction project sites do not constitute protected activity); Johnson v. Univ. of Rochester Med. Ctr., 686 F.Supp.2d 259, 269 (W.D.NY 2010) ("[T]he plaintiffs' complaints appear to have been primarily motivated by frustration with [others] who were ignoring their responsibilities ... and moral objections to falsifying patient paperwork, rather than by a desire to expose or investigate Medicare/Medicaid fraud."). The paramount consideration is whether the employee is asserting actual fraud. Smith, 415 F.Supp.2d at 106 (discussing U.S. ex rel. Hopper v. Anton, 91 F.3d 1261 (9th Cir.1996) and Robertson v. Bell Helicopter Textron, Inc., 32 F.3d 948 (5th Cir.1994), where "even though the plaintiffs [in Hopper and Robertson ] had done some investigations and made some internal complaints, they made no allegations of actual fraud"). Actual fraud, fraudulent claims, and assertions of illegal activity and unlawfulness may demonstrate such protected activity in the proper case. See Robertson, 32 F.3d at 951.
Defendants' Knowledge of the Protected Activity
"All that Defendant must have known is that Relator was engaged in protected activity—that is, investigation or other activity concerning potentially false or fraudulent claims that reasonably could lead to a FCA case." Smith, 415 F.Supp.2d at 105. "[L]ike the plaintiff, the defendant need not know, or be advised, that such claims would violate the False Claims Act itself." Yesudian, 153 F.3d at 742.
Where internal reporting is the basis for the protected activity, courts have focused on examining the scope of a plaintiff's typical employment obligations and job duties. For if an employee never alleges "potentially fraudulent activity, his employer ha[s] no way of knowing that his concerns were any different than those typically raised as part of his job." Smith, 415 F.Supp.2d at 106 (discussing Robertson, 32 F.3d at 952 ). Thus, a plaintiff needs to have done "something more" in order to make his or her internal complaints distinguishable "from the reporting expected as part of [his or] her job." Yesudian, 153 F.3d at 743 (discussing U.S. ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514, 1523 (10th Cir.1996) ). This can be demonstrated in a number of ways—however, similar to the determination of whether the activity is protected in the first place, allegations of fraud, fraudulent claims, unlawful and/or illegal activity may be determinative on this issue because "if an employee wants to impute knowledge to the employer for purposes of the second prong of the analysis, he must specifically tell the employer that he is concerned about possible fraud." Smith, 415 F.Supp.2d at 105. Indeed, "the kind of knowledge the defendant must have mirrors the kind of activity in which the plaintiff must be engaged." Yesudian, 153 F.3d at 742 ; see also Yesudian, 153 F.3d at 743 ("Merely grumbling to the employer about job dissatisfaction or regulatory violations does not satisfy the [knowledge] requirement"). Thus, the type of activity that would put an employer on notice necessarily has to allude to fraud, fraudulent claims, unlawfulness, and/or illegal conduct, as stated supra.See Robertson, 32 F.3d at 951 ; but see Williams, 389 F.3d at 1262 (declining to adopt the proposition that "an employee whose job responsibilities coincide with statutorily protected activity must incant [such] talismanic words to satisfy the notice element").
This Court finds that the question of whether a plaintiff's internal complaints fall outside the scope of his or her normal job responsibilities is a factor more appropriately analyzed under the employer's knowledge (i.e., notice) prong, instead of the first "protected activity" element. See, e.g., U.S. ex rel. Williams v. Martin–Baker Aircraft Co., 389 F.3d 1251, 1260 (D.C.Cir.2004) (noting that the employer's argument that plaintiff-relator failed to engage in protected activity because the actions alleged did not go beyond his normal job requirements "conflate[d] Yesudian's first two requirements—that the employee engage in ‘protected activity’ and that the employer have notice—we read [the employer's] brief as raising only the latter"); but see Landfield, 112 AD3d at 488 (appears to have conflated the two requirements in holding that, because plaintiff's activity was part of his typical job responsibilities, he failed to engage in protected activity). It is conceivable that a plaintiff's activity would ordinarily be protected (e.g., specifically grounded in fraud, illegality, etc.), but the claim otherwise fails, as a whole, if the speech fell within the plaintiff's job duties and therefore could not have put the employer on notice of such protected speech. Therefore, the Court finds the more accurate and precise analysis in Williams, and other cases (see e.g., Smith, 415 F.Supp.2d at 106 ) as persuasive. But see the court's decision in Landfield, 112 AD3d at 488, which implicitly does not account for such possibility.
In some cases, the "something more" required to set protected activity apart from typical job duties is not about what an employee says or does, but to whom—e.g., speaking to upper management, going "outside the usual chain of command," in-house or outside legal counsel, or even the government. Williams, 389 F.3d at 1261 ("[W]hen an employee acts outside his normal job responsibilities or alerts a party outside the usual chain of command, such action may suffice to notify the employer that the employee is engaging in protected activity."). Additionally, courts have also found that protected activity and an employer's knowledge of the same may be shown through a plaintiff's allegations of his or her observations, investigations, and/or confrontations with the employer—particularly with respect to employer reactions to protected activity. See, e.g., Yesudian, 153 F.3d at 744 ; Mikes v. Strauss, 889 F.Supp. 746, 753 (S.D.NY 1995), abrogated on other grounds by Universal Health Servs., Inc. v. United States, ––– U.S. ––––, 2016 WL 3317565 (June 16, 2016) ; Garcia, 2011 WL 1458155, at *4.
Retaliation Because of the Protected Activity
The third and final prong of a prima facie case for retaliation requires relator to allege that he suffered an adverse action "because of" the protected activity. See Smith, 415 F.Supp.2d at 106 ; State Fin. L. § 191(1). Specifically, relator must allege that a causal connection exists between the protected activity and his termination, "i.e., that a retaliatory motive played a part in the adverse employment action." Kessler v. Westchester Cty. Dep't. of Soc. Servs., 461 F.3d 199, 206 (2d Cir.2006) (quoting Cifra v. Gen. Elec. Co., 252 F.3d 205, 216 (2d Cir.2001) ); see Forkell, 2012 WL 1901199, at *11 (citing Kessler, 461 F.3d at 205–06 ); Krause, 2015 WL 4645210, at *9 (same). Or, in other words, that "the retaliation was motivated, at least in part, by the employee's engaging in [that] protected activity." Williams, 389 F.3d at 1260 (quoting Yesudian, 153 F.3d at 736 ); see also Smith, 415 F.Supp.2d at 107 (requiring that the complaint state "facts which can be reasonably found to raise an inference that [the] FCA conduct was a precipitating factor in bringing about the adverse consequences").
The types of adverse actions are set forth in Finance Law Section 191(1), which include, but are not limited to, e.g., being "discharged ... or in any other manner discriminated against in the terms and conditions of employment, or otherwise harmed or penalized by an employer." Whether relator suffered an adverse action is not at issue here, as his termination clearly meets the statutory definition. However, defendants have not challenged the other adverse action alleged in the complaint. For purposes of this decision, the Court assumes that the negative mid-year performance review falls within the statute as an "employment decision sufficiently adverse to deter plaintiff from engaging in protected activities." McAllan v. Von Essen, 517 F.Supp.2d 672, 685–86 (S.D.NY 2007).
Importantly, this element is inexplicably intertwined and overlaps with the second element (discussed supra ), which is the defendants' knowledge of the protected activity. See Schweizer, 677 F.3d at 1237–38. "The [second element] often referred to as a ‘notice’ requirement, recognizes that an employer cannot ‘possess the retaliatory intent necessary to establish a violation of [the anti-retaliation provision]’ unless it is ‘aware that the employee is investigating fraud.’ " Id. at 1238 (quoting Williams, 389 F.3d at 1260–61 ). "If defendants were not afforded such notice, then, a fortiori, their actions could not constitute retaliation." Ramseyer, 90 F.3d at 1522 ; see Robertson, 32 F.3d at 952 ("Without such knowledge, [defendant] could not possess the retaliatory intent necessary to establish a violation of the whistleblower provision of the False Claims Act."). Interactions, reactions, and other types of allegations may demonstrate an employer's motive and retaliatory intent, just as much as it shows the employer's knowledge of the protected activity. See, e.g., Schweizer, 677 F.3d at 1239–40 (analyzing notice and causation together); Mikes, 889 F.Supp. at 752–54 (same); Yesudian, 153 F.3d at 743–44 ; Garcia, 2011 WL 1458155, at *4.
Indeed, the United States Circuit Court for the District of Columbia has repeatedly evaluated the Federal FCA language as requiring "two basic elements: (1) acts by the employee ‘in furtherance of’ a suit under [the anti-retaliation provision]—acts a/k/a ‘protected activity’; and (2) retaliation by the employer against the employee ‘because of’ those acts." Schweizer, 677 F.3d at 1237–38 (citing Yesudian, 153 F.3d at 736 ); see Williams, 389 F.3d at 1260. This second causation element is then further divided into (a) the "notice" requirement and (b) the "because of" requirement—i.e., that the adverse action was at least motivated in part by the protected activity. See Schweizer, 677 F.3d at 1237–38 (citing Yesudian, 153 F.3d at 736 ); Williams, 389 F.3d at 1260. This Court is unaware of any Second Circuit decision that delves into this type of analysis, but notes that most District Courts in this jurisdiction have analyzed a prima facie case as requiring the three elements set forth supra in this decision and order. See, e.g., Americare, 2016 WL 1212775, at *2 ; U.S. ex rel. Smith v. N.Y. Presbyterian Hosp., No. 06 CIV 4056 NRB, 2007 WL 2142312, at *13 (S.D.NY July 18, 2007) ; Mikes, 889 F.Supp. at 752.
Additionally, courts have found that a causal connection can be established by allegations showing a close temporal proximity between the protected activity and the adverse action. See Garcia, 2011 WL 1458155, at *5 ; McAllan, 517 F.Supp.2d at 685–86 ; see, e.g., Liburd, No. 07 CIV. 11316(HB), 2009 WL 900739, at *11 (S.D.NY Apr. 3, 2009), aff'd, 372 F. App'x 137 (2d Cir.2010) ; Kessler, 461 F.3d at 210 (finding sufficient proof as to causation where adverse actions "followed closely on the heels of [plaintiff's] protected activity").
Analysis of Relator's Prima Facie Case
Internal Complaints
Approximately three months into his employment with Moody's as a treasury manager, relator received an assignment by Mr. Charles to prepare a cost-benefit analysis of MAC. Relator alleges that he communicated with other employees and reviewed documents regarding MAC and came to the conclusion that MAC's operations were unlawful in that it lacked economic substance and its sole purpose was tax evasion.
Prior to receiving a negative mid-year performance review on July 27, 2011, relator alleges that he e-mailed Mr. Charles and Ms. Merkel a few weeks before, on or about June 17th, and on July 26th, stating that MAC is purely tax driven and had a "wrong-way risk profile." But because investigating MAC was part of his assignment, and there is no indication that Mr. Charles and Ms. Merkel would have had reason to know that these statements concerned unlawful or fraudulent activity, it is unlikely that these allegations constitute the type of protected activity under the FCA and/or show that defendants had notice of the same. But see Williams, 389 F.3d at 1262 (declining to adopt the "view that an employee whose job responsibilities coincide with statutorily protected activity must incant talismanic words to satisfy the notice element").
However, "[a]n initial investigation may well further an action under the [FCA], even though the employee does not know it at the time of the investigation." Yesudian, 153 F.3d at 741. While it is questionable that those allegations insinuate illegal activity, relator then complained to Ms. Merkel and Mr. Charles that the restructuring was likely illegal; and further alleges that he told Ms. Merkel, Mr. Charles, and Mr. Li that MAC was unlawful and its sole purpose was tax avoidance. These are not allegations of mere regulatory violations, but of actual illegal activity. Cf. Robertson, 32 F.3d at 951 ("[Plaintiff] admitted that he never used the terms ‘illegal,’ ‘unlawful,’ or ‘qui tam action’ in characterizing his concerns about [employer's alleged unlawful activity]."). Additionally, during the conference call on September 14, 2011, relator alleges that he demanded to know how some of MAC's insurance policies constituted bona fide insurance for use within a captive structure. In doing so, he alluded to the fact that the law requires that MAC provide "bona fide insurance" and that none of these policies were, in fact, bona fide, in contravention to the law. See Mikes, 889 F.Supp. at 753 ("Although these discussions stop short of a specific accusation of fraud, they clearly imply that defendant's activities were unlawful."). Additionally, during a subsequent conference call, relator alleges that, in discussing how further scrutiny by tax officials would lead the government to conclude that MAC was designed solely for tax avoidance purposes, he then asked how to remedy the situation. Such "lawful act" taken to help stop an FCA violation is specifically protected under Finance Law Section 191(2).
These allegations in the complaint, concerning relator's observations, investigations, and confrontations, demonstrate his protected conduct and defendants' awareness of the same. See, e.g ., Mikes, 889 F.Supp. at 752–54 ; Garcia, 2011 WL 1458155, at *4. In response to his complaints in August of 2011, relator alleges that Ms. Merkel advised to "not put anything in writing" and Mr. Charles and Mr. Li told him to "keep his views on MAC silent, and warned him of serious consequences if he did not." Similar factual allegations have sufficiently met this requirement. E.g., Yesudian, 153 F.3d at 744 (the alleged statement to plaintiff that "if you do this kind of stuff, you're not going to be in this department" provided "direct evidence that [defendant] was aware of [plaintiff's] protected activities"); Schweizer, 677 F.3d at 1239–40 (company would "destroy" plaintiff if she did not comply with supervisor's instructions to stop investigating); see, e.g., Garcia, 2011 WL 1458155, at *5. Relator also alleges he told Ms. Merkel that he intended to report that MAC was a tax-evasion scheme, and claimed Mr. Charles knew of the same intent. In response, relator alleges that Ms. Merkel said he would get "in trouble" and Mr. Charles was allegedly so upset that he refused to speak with him. These alleged responses demonstrate both the protected activity and defendants' awareness of it. See Mikes, 889 F.Supp. at 753 (defendant's alleged enraged reaction provided evidence of the notice element); Garcia, 2011 WL 1458155, at *4 ("[F]or purposes of this motion to dismiss, plaintiff's observations and his confrontations with defendant establish that he has engaged in protected conduct.").
The fact that relator's assignment was to prepare an analysis on MAC does not necessarily negate the Court's conclusion that relator adequately alleged the elements of retaliation. See generally, Williams, 389 F.3d at 1262 (noting the possibility that an employee's job duties may overlap with statutorily protected activity). The key is whether defendants were put on notice of relator's complaints of unlawful and fraudulent practices—thus, some courts have distinguished any overlap by looking at whether, e.g., relator went outside the chain of command. See id. Here, the Court cannot say with certainty that relator's actions fall squarely within his job responsibilities and nothing more. Though he reported to Mr. Charles, the complaint alleges that he spoke to Ms. Merkel and representatives of Marsh; therefore, it is unknown, at this juncture, whether speaking to these people and voicing his concerns would have fallen within his typical job duties. See, e.g ., Americare, 2016 WL 1212775, at *2 (where court found a "factual dispute about whether [plaintiff's job] duty included detecting and reporting fraudulent activity"). Furthermore, he also alerted HR of his concerns, which clearly cannot be said to fall within the chain of command. Moreover, he was terminated for insubordination, and some courts have concluded that such a reason for discharge precisely demonstrates the point in support of relator's claim—that he went outside the chain of command. See Schweizer, 677 F.3d at 1240. Given the open questions of fact, the Court cannot, upon a motion to dismiss, conclusively resolve these discrepancies at this time. U.S. ex rel. Gagne v. City of Worcester, 565 F.3d 40, 45 (1st Cir.2009) ("[W]here, although some questions remain unanswered, the complaint as a whole is sufficiently particular to pass muster under the FCA.") (quoting U.S. ex rel. Rost v. Pfizer, Inc., 507 F.3d 720, 732 (1st Cir.2007) ); Sprint, 26 NY3d at 113 (finding dismissal of the complaint premature, as "there are factual issues that must be fleshed out in further proceedings").
Finally, the Court finds that relator sufficiently alleged the last prong of the analysis—that he was terminated because of his protected activity—as the allegations infer a retaliatory motive. Specifically, the Court points to relator's allegations that Mr. Charles and Mr. Li told him to keep silent and warned him of "serious consequences"; Mr. Charles' alleged refusal to speak with him; and Ms. Merkel's advice to refrain from putting anything in writing and warning that relator would get "in trouble" for using the words he did to describe MAC and its practices (e.g., unlawful)—all of which foreshadow the retaliatory motive behind his termination. In addition to those allegations, being terminated for insubordination alludes to the idea that relator's discharge was causally linked to his protected activity. See Schweizer, 677 F.3d at 1240 ; see, e.g., Americare, 2016 WL 1212775. Furthermore, causation is also inferred from the temporal proximity between the protected activity and his discharge. After he began to report the illegal and fraudulent nature of MAC to HR and his supervisors, it was only approximately three months later that he was terminated. Americare, 2016 WL 1212775, at *2 (three months demonstrated causal link); see also Williams, 389 F.3d at 1262. The Court finds that the closeness between the alleged protected activity and the adverse employment action is one that, at least "[a]t the motion to dismiss stage," "is a sufficient basis to permit the [retaliation] claim to go forward." Garcia, 2011 WL 1458155, at *5.
Communications with the OAG
The complaint alleges that relator had several meetings with the OAG and provided it numerous internal documents regarding MAC. Relator further alleges that the documents and information exchanged with the OAG could have been used as leverage and may have resulted in a better settlement for the tax authorities as a result of their audit of defendants.
The Court is certain that such activity is protected under Finance Law Section 191(2), which defines "lawful acts" to include, e.g., the transmission of information to the State. It is also protected under case law discussed above, as the nature of relator's allegation is that he went outside the company, and well beyond his normal job responsibilities, so far as to "alert[ ] the government—the victim of any FCA violation." Williams, 389 F.3d at 1261. However, relator has not alleged that defendants' knew of such activity. Even under the most liberal of pleading standards, merely stating "upon information and belief" that defendants knew of his communications with the OAG at the time of his termination is insufficient. See U.S. ex rel. Karvelas v. Melrose–Wakefield Hosp., 360 F.3d 220, 240 (1st Cir.2004) ("Simply parroting the language of a statutory cause of action, without providing some factual support, is not sufficient to state a claim."); see also Smith, 415 F.Supp.2d at 107. "Without such knowledge, [defendants] could not possess the retaliatory intent necessary to establish a violation of the FCA" on this basis. Robertson, 32 F.3d at 952. Therefore, the Court finds that the complaint insufficiently states a retaliation claim premised upon relator's protected activity with the OAG.
Defendants' argument that, inter alia, relator's retaliation claim must fail because Moody's did not violate the FCA is entirely baseless (perhaps even frivolous), as it is well-settled that a viable retaliation claim is not dependent upon whether an employer actually violated the law. See Sasaki, 2012 WL 220219, at *12 ("[A] relator need not prevail on his or her FCA claim in order to recover for retaliation under [the FCA]."). To be sure, "the protected conduct element of such a claim does not require the plaintiff to have developed a winning qui tam action before he is retaliated against." Yesudian, 153 F.3d at 739. All that is required is that relator has a "good faith basis or objectively reasonable basis for believing that the defendants were committing fraud." Krause, 2015 WL 4645210, at *8 (emphasis removed). The Court has considered defendants' remaining arguments and find them to be completely unsupported and without merit.
CONCLUSION
For the foregoing reasons, defendants' motion to dismiss is denied. However, the Court limits relator's reverse false claim to exclude the 2009 tax year, and those portions alleging foreign tax arbitrage involving defendant QM. Additionally, relator's retaliation claim is limited to exclude that part of his protected activity that is premised upon communications with the OAG. Any other relief requested and not specifically addressed herein is denied. It is further ordered that defendants shall answer the complaint within forty-five (45) days after service of this order with notice of entry.
This constitutes the decision and order of this Court.