16-705
United States, ex rel. Hayes v. Allstate Insurance Company

                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER

Rulings by summary order do not have precedential effect. Citation to a summary order filed on or
after January 1, 2007 is permitted and is governed by Federal Rule of Appellate Procedure 32.1
and this court’s Local Rule 32.1.1. When citing a summary order in a document filed with this
court, a party must cite either the Federal Appendix or an electronic database (with the notation
“summary order”). A party citing a summary order must serve a copy of it on any party not
represented by counsel.

    At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, at 40 Foley Square, in the City of New York, on
the 4th day of April, two thousand seventeen.

Present: ROBERT A. KATZMANN,
                     Chief Judge,
         ROSEMARY S. POOLER,
         GERARD E. LYNCH,
                     Circuit Judges.
________________________________________________

UNITED STATES OF AMERICA, ex rel.
J. MICHAEL HAYES,

                      Plaintiff-Appellant,

              v.                                                          No. 16-705

ALLSTATE INSURANCE COMPANY, DAIMLER CHRYSLER
INSURANCE COMPANY, ERIE INSURANCE COMPANY OF
NEW YORK, ERIE INSURANCE EXCHANGE, INC., ERIE
INDEMNITY COMPANY, FARMERS INSURANCE EXCHANGE,
TRUCK INSURANCE EXCHANGE, FIRE INSURANCE
EXCHANGE, FOREMOST INSURANCE GROUP, GEICO,
INSURANCE, GMAC INSURANCE, KEMPER INDEPENDENCE
INSURANCE COMPANY, LIBERTY MUTUAL INSURANCE
COMPANY, LIBERTY MUTUAL GROUP, LIBERTY MUTUAL
HOLDING COMPANY, INC., METROPOLITAN GROUP
PROPERTY AND CASUALTY INSURANCE COMPANY,
METROPOLITAN PROPERTY AND CASUALTY INSURANCE
COMPANY, NATIONWIDE GENERAL INSURANCE COMPANY,
NATIONWIDE FINANCIAL SERVICES INCORPORATED,

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NATIONWIDE MUTUAL INSURANCE COMPANY, NEW YORK
CENTRAL MUTUAL FIRE INSURANCE COMPANY,
PREFERRED MUTUAL INSURANCE COMPANY,
PROGRESSIVE INSURANCE COMPANY, THE PROGRESSIVE
CORPORATION, INC., REPUBLIC - FRANKLIN INSURANCE
COMPANY, UTICA MUTUAL INSURANCE COMPANY,
GRAPHICS ARTS MUTUAL INSURANCE COMPANY, UTICA
NATIONAL INSURANCE COMPANY OF TEXAS, UTICA
NATIONAL INSURANCE COMPANY OF OHIO, UTICA
NATIONAL ASSURANCE COMPANY, UTICA LLOYD’S OF
TEXAS, UTICA SPECIALTY RISK INSURANCE COMPANY,
FOUNDERS INSURANCE COMPANY, FOUNDERS INSURANCE
COMPANY OF MICHIGAN, UTICA NATIONAL INSURANCE
GROUP, STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY, HARTFORD FINANCIAL SERVICES GROUP, INC.,
TRAVELERS INSURANCE GROUP HOLDING, INC.,
TRAVELERS PROPERTY CASUALTY CORPORATION, THE
TRAVELERS COMPANIES, INC., ZURICH NORTH AMERICA,
FEDEX CORPORATION, FEDEX EXPRESS, FEDEX GROUND,
FEDEX FREIGHT, FEDEX OFFICE, FEDEX CUSTOM CRITICAL,
FEDEX TRADE NETWORKS, FEDEX SUPPLY CHAIN
SOLUTIONS, FEDEX SERVICES, J.B. HUNT TRANSPORT
SERVICES, INCORPORATED, U-HAUL INTERNATIONAL, THE
ERIE INSURANCE COMPANY,

                 Defendants-Appellees,

ALLSTATE CORPORATION, CASTLEPOINT NATIONAL
INSURANCE COMPANY, SPECIALTY UNDERWRITERS
ALLIANCE, INC., TOWER GROUP COMPANIES, MAIDEN
HOLDING LTD, KEMPER CORPORATION, MEDICAL
LIABILITY MUTUAL INSURANCE COMPANY, NATIONWIDE
CORPORATION, NEW YORK STATE INSURANCE
RECIPROCAL, THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, PRUDENTIAL FINANCIAL, INC., HEARTLAND
EXPRESS, INCORPORATED, NATIONWIDE, FARMERS
INSURANCE GROUP COMPANIES, FARMERS UNDERWRITERS
ASSOCIATION, AIG, BERKSHIRE HATHAWAY INC.,
NATIONWIDE MUTUAL INSURANCE INTERCOMPANY POOL,
NATIONWIDE, ZURICH FINANCIAL SERVICES AG, ZURICH
INSURANCE GROUP AG,

                  Defendants.
________________________________________________




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For:   Plaintiff-Appellant United States ex rel.
       J. Michael Hayes:
                                                       J. MICHAEL HAYES (Peter M. Jasen,
                                                       Buffalo, NY, on the brief).

For:   Defendants-Appellees FedEx Corporation,
       Federal Express Corporation, FedEx Ground
       Package System Inc., FedEx Freight
       Corporation, FedEx Office and Print Services,
       Inc., FedEx Custom Critical, Inc., FedEx
       Trade Networks, Inc., FedEx Supply Chain
       Systems, Inc., and FedEx Corporate Services,
       Inc.:
                                                       JOHN W. CAMPBELL, Federal Express
                                                       Corporation, Memphis, TN.

For:   Defendants-Appellees Farmers Insurance
       Exchange, Truck Insurance Exchange, Fire
       Insurance Exchange, and Foremost Property
       and Casualty Insurance Company:
                                                       DAVID L. YOHAI (Lori L. Pines and
                                                       John P. Mastando III, on the brief),
                                                       Weil, Gotshal & Manges LLP, New
                                                       York, NY.

For:   Defendants-Appellees Travelers Insurance
       Group Holding, Inc., Travelers Property
       Casualty Corporation, and The Travelers
       Companies, Inc.:
                                                       Bryce L. Friedman, Simpson
                                                       Thatcher & Bartlett LLP, New York,
                                                       NY; Deborah L. Stein, Simpson
                                                       Thatcher & Bartlett LLP, Los
                                                       Angeles, CA.

For:   Defendant-Appellee Hartford Financial
       Services Group, Inc.:
                                                       Jonathan M. Freiman, Wiggin and
                                                       Dana LLP, New Haven, CT.

For:   Defendants-Appellees J.B. Hunt Transport
       Services Inc., Founders Insurance Company,
       Founders Insurance Company of Michigan,
       Graphic Arts Mutual Insurance Company,
       Republic-Franklin Insurance Company, Utica
       Mutual Insurance Company, Utica National


                                                   3
       Insurance Company of Texas, Utica National
       Insurance Company of Ohio, Utica National
       Assurance Company, Utica Lloyd’s of Texas,
       Utica Specialty Risk Insurance Company,
       and Utica National Insurance Group:
                                                    Sharon Angelino, Goldberg Segalla
                                                    LLP, Buffalo, NY.

For:   Defendants-Appellants Erie Insurance
       Company of New York, Erie Insurance
       Exchange, Inc., Erie Indemnity Company,
       and The Erie Insurance Company:
                                                    Heath J. Szymczak, Bond,
                                                    Schoeneck & King, PLLC, Buffalo,
                                                    NY.
For:   Defendants-Appellees Allstate Insurance
       Company, Allstate Indemnity Company,
       Kemper Independence Insurance Company,
       Metropolitan Group Property and Casualty
       Insurance Company, Metropolitan Property
       and Casualty Insurance Company, and
       Defendants Kemper Corporation and The
       Allstate Corporation:
                                                    Steven M. Levy and Alan S. Gilbert,
                                                    Dentons US LLP, Chicago IL; Sean
                                                    C. Cenawood, Dentons US LLP,
                                                    New York, NY; Sharon Angelino,
                                                    Goldberg Segalla LLP, Buffalo, NY.

For:   Defendant-Appellee Preferred Mutual
       Insurance Company:
                                                    Suzanne O. Galbato, Bond,
                                                    Schoeneck & King, PLLC, Syracuse,
                                                    NY.

For:   Defendants-Appellees Progressive Insurance
       Company and The Progressive Corporation,
       Inc.:
                                                    Terrance M. Connors, Connors LLP,
                                                    Buffalo, NY; Michael K. Loucks,
                                                    Skadden, Arps, Slate, Meagher &
                                                    Flom LLP, Boston, MA.

For:   Defendant-Appellee State Farm Mutual
       Automobile Insurance Company:



                                              4
                                                   Douglas W. Baruch and Anayansi
                                                   Rodriquez Carbo, Fried, Frank,
                                                   Harris, Shriver & Jacobson LLP,
                                                   Washington, D.C.; Dan David
                                                   Kohane, Hurwitz & Fine, P.C.,
                                                   Buffalo, NY.

For:   Defendant-Appellee Zurich North America:
                                                   Michael J. Willett, Gibson, McAskill
                                                   & Crosby, LLP, Buffalo, NY.

For:   Defendants-Appellees Nationwide General
       Insurance Company, Nationwide Financial
       Services Incorporated, and Nationwide
       Mutual Insurance Company:
                                                   Stephen Sozio, Jones Day,
                                                   Cleveland, OH; Matthew Corcoran,
                                                   Jones Day, Columbus, OH; Mark C.
                                                   Davis, Lippes Mathias Wexler
                                                   Friedman LLP, Buffalo, NY.

For:   Defendant-Appellee New York Central
       Mutual Fire Insurance Company:
                                                   Eric Dranoff, Saretsky Katz &
                                                   Dranoff, LLP, New York, NY.

For:   Defendant-Appellee CorePointe Insurance
       Company f/k/a Daimler Chrysler Insurance
       Company:
                                                   Susan L. Swatski, Hill Wallack LLP,
                                                   Princeton, NJ.

For:   Defendant-Appellee Geico, Insurance:
                                                   Barry I. Levy, Cheryl F. Korman,
                                                   Brian L. Bank, Rivkin Radler LLP,
                                                   Uniondale, NY.

For:   Defendants-Appellees Liberty Mutual
       Insurance Company, Liberty Mutual Group,
       and Liberty Mutual Holding Company, Inc.:
                                                   Kevin J. Fee and Amy C. Gross,
                                                   Duane Morris LLP, New York, NY:
                                                   Dennis R. McCoy, Barclay Damon,
                                                   LLP, Buffalo, NY.




                                              5
For:     Defendant-Appellee U-Haul International:
                                                                         Kevin M. Hogan, Phillips Lytle LLP,
                                                                         Buffalo, NY.
________________________________________________

         Appeal from the United States District Court for the Western District of New York

(Skretny, J.).

         ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,

and DECREED that the order of the district court is AFFIRMED.

         Plaintiff-Appellant J. Michael Hayes, relator in this qui tam action, appeals from the

February 8, 2016 order and February 9, 2016 judgment of the United States District Court of the

Western District of New York (Skretny, J.) adopting the Report and Recommendation of the

magistrate judge and dismissing Hayes’s Amended Complaint with prejudice as to Hayes as a

sanction pursuant to Federal Rule of Civil Procedure 11. We assume the parties’ familiarity with

the underlying facts, the procedural history of the case, and the issues on appeal.1

         Relator Hayes is an attorney. In this qui tam action, Hayes sued over sixty companies,

primarily, but not exclusively, liability insurance companies, alleging that they have been

systematically noncompliant with certain statutory obligations to reimburse Medicare. Hayes

alleged that, through his law practice, he acquired “personal knowledge from conversations with

defense counsel, insurance carrier representatives[,] and other attorneys[] of the Defendant

insurance companies’ company-wide and nationwide failure to notify Medicare of liability case

resolutions . . . .” App. 150-51.

         After the government declined to intervene and the complaint was unsealed, Hayes filed a

motion for expedited discovery. In that motion, Hayes admitted that certain defendants might not

have participated in the scheme alleged in the complaint and acknowledged that such defendants

1
 We address a challenge to the district court’s subject matter jurisdiction, mounted by several of the defendants, in
an opinion filed simultaneously with this order.

                                                          6
should be dismissed. After receiving this motion, the magistrate judge called a conference and

observed that “repeatedly throughout the amended complaint, the allegation [wa]s that Mr.

Hayes ha[d] personal knowledge of this nationwide scheme involving every single defendant.” S.

App. 21. The magistrate judge further noted that Hayes’s motion for expedited discovery

“admit[s] . . . that it’s possible that some defendants weren’t involved.” S. App. 22. Due to this

inconsistency, the magistrate judge ordered Hayes to show cause as to why he had not violated

Federal Rule of Civil Procedure 11 and held several subsequent conferences to discuss the issue.

       In the written Report and Recommendation on the Rule 11 violation issued on October

16, 2014, the magistrate judge returned to the allegations in Hayes’s complaint, noting that:

               One of those allegations, repeated throughout the Amended
               Complaint, was that the Relator “has personal knowledge that this
               scheme [to defraud Medicare] was . . . employed generally and
               throughout the industry nationally, by all the Defendants herein.”
               . . . However, the Relator’s subsequent submissions demonstrate
               beyond question that he did not know whether all defendants had
               participated in the alleged scheme . . . . Relator’s claim of personal
               knowledge that all defendants defrauded Medicare, and that they
               did so whenever they settled claims involving Medicare
               beneficiaries, fits the definition of subjective bad faith, because he
               knew that he had no such knowledge as to all defendants or all
               settlements.

S. App. 111-13 (alterations in original). As a result, the magistrate judge recommended that

Hayes’s complaint against all defendants be dismissed with prejudice as to Hayes, but without

prejudice as to the United States.

       Hayes and the defendants submitted objections to the Report and Recommendation, but

the district court adopted the magistrate judge’s recommendation. The district court observed

that “Hayes steadfastly adhered to his disproven allegations that he had personal knowledge that

all defendants were engaged in a nationwide scheme to defraud the United States by failing to




                                                 7
reimburse Medicare” when “[his] own submissions and statements before the court demonstrate

that he does not possess such personal knowledge.” S. App. 132. Hayes now appeals.

        Federal Rule of Civil Procedure 11(b)(3) provides that “[b]y presenting to the court a

pleading, . . . an attorney . . . certifies that to the best of [his] knowledge, information, and belief,

. . . the factual contentions have evidentiary support.” A court may, sua sponte, “order an

attorney . . . to show cause why conduct specifically described in the order has not violated Rule

11(b).” Fed R. Civ. P. 11(c)(3). “If, after notice and a reasonable opportunity to respond, the

court determines that Rule 11(b) has been violated, the court may impose an appropriate

sanction.” Fed. R. Civ. P. 11(c)(1). A district court must make a finding of bad faith before

issuing sanctions sua sponte. See Muhammad v. Walmart Stores E., L.P., 732 F.3d 104, 108 (2d

Cir. 2013) (per curiam) (citing In re Pennie & Edmonds LLP, 323 F.3d 86, 91 (2d Cir. 2003)).

Similarly, the district court must make a finding of “willfulness, bad faith, or fault” before

dismissing a complaint as a sanction. West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779

(2d Cir. 1999).

        Hayes now concedes that his claim to have personal knowledge of the involvement of

“all” the defendants in the alleged scheme was “incorrect,” but contends that this error was not

the result of bad faith and thus did not merit the sanction of dismissal. Br. at 22, 24. Whether a

litigant “acted . . . in bad faith [is a] question[] of fact, and we review the [d]istrict [c]ourt’s

determination[]” on that question “for clear error.” Agiwal v. Mid Island Mortg. Corp., 555 F.3d

298, 302 (2d Cir. 2009) (per curiam). Ordinarily, we review a district court’s imposition of Rule

11 sanctions for abuse of discretion. See Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy &

Sauce Factory, Ltd., 682 F.3d 170, 175 (2d Cir. 2012). “We must bear in mind, however, that

when the district court is accuser, fact finder and sentencing judge all in one, our review is more



                                                    8
exacting than under the ordinary abuse-of-discretion standard.” ATSI Commc’ns, Inc. v. Shaar

Fund, Ltd., 579 F.3d 143, 150 (2d Cir. 2009) (citation and internal quotation marks omitted).

       The magistrate judge concluded, and the district court adopted the conclusion, that

Hayes’s “claim of personal knowledge that all defendants defrauded Medicare . . . fits the

definition of subjective bad faith[] because he knew that he had no such knowledge as to all

defendants.” S. App. 112-13, 132. Hayes’s primary argument to the contrary, that he was

confused by “corporate complexities,” Br. at 25, is different from the explanations for his

behavior that he offered to the magistrate judge below. Even if we were to credit Hayes’s

explanation, confusion about corporate complexities would not justify falsely purporting to have

personal knowledge as to more than sixty defendants’ involvement in wrongdoing. Cf. DiRose v.

PK Mgmt. Corp., 691 F.2d 628, 632 (2d Cir. 1982). In light of the foregoing, the finding of bad

faith made by the magistrate judge and district court is not clearly erroneous, even under our

“more exacting” standard of review. Shaar Fund, 579 F.3d at 150.

       Hayes also argues that he should have been granted leave to amend his complaint. “The

court should freely give leave [to amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2).

However, leave to amend may be denied based on bad faith. See Loreley Fin. (Jersey) No. 3 Ltd.

v. Wells Fargo Sec., LLC, 797 F.3d 160, 190 (2d Cir. 2015). “We review the district court’s

denial of leave to amend the complaint for abuse of discretion.” Id. at 169. The magistrate judge

concluded Hayes “should not now be allowed to simply walk away from his earlier

misrepresentations,” and the district court adopted this conclusion. S. App. 118, 132. And insofar

as Hayes concedes that some of the defendants may not be proper parties to the case, his

proposed Second Amended Complaint does not solve that problem; in fact, the proposed Second




                                                9
Amended Complaint would add 38 new defendants. The district court’s denial of leave to amend

for bad faith based on the foregoing does not constitute an abuse of discretion.

         We have considered all of Hayes’s remaining arguments and find them without merit. For

the reasons given here, as well as those given in the opinion on the district court’s subject matter

jurisdiction issued simultaneously with this order, we AFFIRM the judgment of the district

court.

                                                      FOR THE COURT:
                                                      Catherine O’Hagan Wolfe, Clerk




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