Qui Tam Action Takes the Profit Out of Fraud

Judgment In Favor of Qui Tam Plaintiff Insurer Can Be Enforced

In California an insurer can, on its own behalf and on behalf of itself and the state, bring a qui tam action. When the state does not join in the action the insurer may try the action alone. In People ex rel. Allstate Insurance Company v. Dahan, California Court of Appeal — Cal.Rptr.3d, 2016 WL 4917188 (9/15/2016), Allstate obtained a judgment against fraud perpetrators and tried to collect.

A private party who brings a qui tam action for insurance fraud under Insurance Code section 1871.7, where the district attorney and the Insurance Commissioner decline to intervene, is entitled to a portion of the proceeds of the action plus fees and costs.

The court was confronted with the novel question whether the judgment-debtor defendants in such an action have standing to challenge the trial court’s post-judgment order allocating the judgment amount between the prevailing plaintiffs, i.e., the private party and the State.

FACTUAL BACKGROUND

Allstate Insurance Company, et al. (Allstate), as private-party plaintiff or “relator,” brought a qui tam action on behalf of itself and the State of California (together plaintiffs), against defendants Daniel H. Dahan and his affiliated corporation, Progressive Diagnostic Imaging, Inc. (together defendants), pursuant to the California Insurance Frauds Prevention Act (§ 1871.7 (IFPA)). Neither the district attorney nor the Insurance Commissioner opted to take over the lawsuit.

The trial court entered judgment against defendants, finding that plaintiffs had proven 487 claims for violation of Penal Code section 550 by defendants, and awarding a total of $7,010,668.40, comprised of $5,788,516.78 in civil penalties and assessments, and $1,222,151.62 in attorney fees, costs, and expenses of investigation. (The qui tam judgment.)

Following entry of the qui tam judgment, Allstate began efforts to collect it. During its investigation, Allstate learned of a series of real estate transactions conducted by defendants designed to transfer away their assets. Allstate, on behalf of the State, filed an action to set aside the fraudulent transfers of real and personal property.

Defendants demurred to the operative complaint on the ground that Allstate lacked standing to proceed with the fraudulent transfer suit, in part because the judgment in the qui tam action was never allocated between Allstate and the People pursuant to section 1871.7, subdivision (g)(2)(A), with the result that Allstate had no stake in the qui tam judgment or authority to pursue collection of that judgment from defendants.

The trial court in the instant qui tam action granted Allstate’s allocation motion and entered judgment.

DISCUSSION

The Qui Tam Procedure

Anyone engaging in insurance fraud in violation of Penal Code sections 549, 550, or 551 is subject to penalties and assessments. (§ 1871.7, subd. (b).) Section 1871.7 provides for civil penalties of not less than $5,000 to $10,000 for each fraudulent claim presented to an insurance company, plus assessments of not more than three times the amount of each claim for compensation, and equitable relief.

Section 1871.7 authorizes “any interested persons, including an insurer” to bring a qui tam civil action “for the person and for the State of California” to recover penalties and equitable relief for fraudulent insurance claims. (Italics added.)

When the state declines to intervene, as in this case, the relator tries the action and is entitled by subdivision (g)(2)(A) of section 1871.7 to a “bounty” of between 40 and 50 percent of the proceeds of the action “for collecting the civil penalty and damages” along with “an amount for reasonable expenses that the court finds to have been necessarily incurred, plus reasonable attorney’s fees and costs,” which fees and costs are imposed against the defendant.

Defendants acknowledge that “this Appeal has no effect on that [qui tam] Judgment” and does not alter defendants’ obligation to pay the $7 million. Based on a plain reading of section 1871.7, subdivision (g)(2)(A), the bounty in cases in which the People do not intervene is for trying and collecting the judgment. When the words of a statute are clear and unambiguous, there is no need for statutory construction or resort to other indicia of legislative intent, such as legislative history.

The right to levy on the $7 million qui tam judgment was Allstate’s for the additional reason that the insurer was the direct victim of defendants’ insurance fraud. Unlike the federal False Claims Act (31 U.S.C. § 3730(d)), where the relators are people with knowledge of the fraud but not victims of that wrong, under California’s IFPA the direct victims of the fraud are the relator-insurers and their insureds.

Allstate, as the direct victim who prosecuted the action and prevailed without the People’s participation, necessarily had the right to collect the civil penalty and damages. To hold otherwise would be absurd given the California qui tam IFPA action is brought not merely on behalf of the People but “for the person and for the State of California” (§ 1871.7, subd. (e)(1), italics added), and where the qui tam judgment here, drafted by defendants, was written in favor of all plaintiffs, not just the People. Therefore, an allocation order is not a prerequisite to Allstate’s right to enforce the judgment; it neither “changed” nor “legitimized” Allstate’s legal right to collect the proceeds of the action from defendants, a right Allstate always had as relator.

As the allocation order is not a prerequisite to Allstate’s ability to levy on the qui tam judgment under section 1871.7, subdivision (g)(2)(A), and given defendants’ concession that the appeal has no effect on, and does not alter their obligation to pay the $7 million qui tam judgment, defendants are not aggrieved by the allocation order and have no standing to appeal from it.

In the absence of standing by defendants as appellants, the court had no jurisdiction to hear the appeal.

ZALMA OPINION

Allstate should be commended for expending the funds necessary to obtain a judgment against fraud perpetrators for itself and the state of California and for taking the steps necessary to collect that judgment. The defendants refuse to pay the judgment and Allstate has been forced to work through the court of appeal to even move to collect on the judgment and take the money from false transfers of assets made to avoid paying the judgment. The greatest deterrent to insurance fraud is taking the profits out of fraud and I can only hope that Allstate continues its efforts and actually collects the judgment.