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United States of America v. Black Hills Tree Farm

March 17, 2011

UNITED STATES OF AMERICA,
PLAINTIFF,
v.
BLACK HILLS TREE FARM, A SOUTH DAKOTA GENERAL PARTNERSHIP;
JERRY G. ROSETH; LUETTA A. ROSETH; CARRIE M. ROSETH, N/K/A CARRIE M. LURZ; PAULETTE A. COMBS, N/K/A PAULETTE A. ROSETH; JOHN M. COMBS; WESTERN HILLS TREE FARM; DONALD R. BURNS; PHILIP MOTOR, INC., A SOUTH DAKOTA CORPORATION; DAKOTA AUTO SUPPLY, A SOUTH DAKOTA CORPORATION; AND BADGER TREE MOVERS, L.L.C., A COLORADO LIMITED LIABILITY COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Jeffrey L. VIKEN United States District Judge

ORDER DENYING MOTION TO DISMISS SECOND AMENDED COMPLAINT AS TO CERTAIN DEFENDANTS

INTRODUCTION

Plaintiff United States of America filed an amended complaint. (Docket 21). Defendants Western Hills Tree Farm ("WHTF"), Donald R. Burns, Philip Motor, Inc., and Dakota Auto Supply (collectively "WHTF defendants") filed a motion to dismiss the amended complaint under Fed. R. Civ. P. 12(c). (Docket 37). During the process of briefing this motion, WHTF defendants consented to plaintiff filing a second amended complaint. (Docket 49). Plaintiff's second amended complaint (Docket 51) was then filed. WHTF defendants' supplemental memorandum (Docket 53) asks the court to apply their earlier briefing to the second amended complaint. For the reasons stated below, the motion to dismiss is denied.

PLAINTIFF'S ALLEGATIONS

Under Fed. R. Civ. P. 8(a)(2), to state a claim for relief the complaint "must contain . . . (2) a short and plain statement of the claim showing that the pleader is entitled to relief . . . ." This is required in "order to give the defendant fair notice of what the . . . claim is and the grounds upon which it rests . . . ." Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks omitted). "[A] plaintiff's obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do . . . ." Id. (internal quotation marks omitted). Rule 12(c) provides that "[a]fter the pleadings are closed--but early enough not to delay trial--a party may move for judgment on the pleadings." Fed. R. Civ. P. 12(c). To analyze the motion to dismiss, plaintiff's factual allegations must be taken as true. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009);

Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009).*fn1 A court is "not bound to accept as true a legal conclusion couched as a factual allegation." Twombly, 550 U.S. at 555. See also Crooks v. Lynch, 557 F.3d 846, 848 (8th Cir. 2009) (the court must review a "motion to dismiss for failure to state a claim, accepting the facts alleged in the complaint as true and granting all reasonable inferences in favor of [the plaintiff], the nonmoving party."). "Factual allegations must be enough to raise a right to relief above the speculative level . . . ." Twombly, 550 U.S. at 555. "The pleadings must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action, on the ASSUMPTION THAT ALL THE allegations in the complaint are true (even if doubtful in fact) . . . ." Id. (emphasis in original). "[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely." Id. at 556.

"[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss." Iqbal, 129 S. Ct. at 1950.

In keeping with these principles a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide a framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.

Id.

"The plausibility standard requires a plaintiff to show at the pleading stage that success on the merits is more than a 'sheer possibility.' It is not however, a 'probability requirement.' " Braden, 588 F.3d at 594 (citing Iqbal, 129 S. Ct. at 1949) (citing Twombly, 550 U.S. at 570). "A complaint states a plausible claim for relief if its factual content . . . allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "[T]he complaint should be read as a whole, not parsed piece by piece to determine whether each allegation, in isolation, is plausible." Id.

Plausibility . . . does not imply that the district court should decide whose version to believe, or which version is more likely than not. Indeed, the Court expressly distanced itself from the latter approach in Iqbal, "the plausibility standard is not akin to a probability requirement." 129 S. Ct. at 1949 (quotation marks omitted). As we understand it, the Court is saying instead that the plaintiff must give enough details . . . to present a story that holds together. . . .[C]ould these things have happened, not did they happen.

Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010) (emphasis in original). "In assessing a motion [to dismiss] . . . , a court should . . . not dismiss [a] complaint 'unless it appears beyond doubt that the [United States] can prove no set of facts in support of [its] claim which would entitle [it] to relief.' " Holloway v. Lockhart, 792 F.2d 760, 761 (8th Cir. 1986) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

"It is well-established that an amended complaint supercedes an original complaint and renders the original complaint without legal effect." In re Atlas Van Lines, Inc., 209 F.3d 1064, 1067 (8th Cir. 2000). The second amended complaint contains eleven causes of action against all defendants. (Docket 51). The United States' brief acknowledges there are "two sets of defendants and two separate but related instances of fraud. . . ." (Docket 41, p. 2). The first set of defendants, those being the Black Hills Tree Farm ["BHTF"], John Combs, Jerry Roseth, Luetta Roseth, Carrie M. Lurz, Paulette Roseth, and Badger Tree Movers, LLC., are commonly referred to as the "Black Hills Tree Farm Defendants" ("BHTF defendants"). Id. The second set of defendants, those being Western Hills Tree Farm, Donald Burns, Philip Motor, Inc., and Dakota Auto Supply, are commonly referred to as the "Western Hills Tree Farm Defendants" ("WHTF defendants"). Id.

The separate, but related, claims are generally referred to as the "procurement fraud," that is, those causes of action relating to the procurement of crop insurance and collection of an indemnity payment, and the "disposition fraud," that is, those causes of action related to the disposition of trees after an indemnity payment has been made to BHTF defendants. Id. Only BHTF defendants are implicated in the procurement fraud counts. Id. Both BHTF defendants and WHTF defendants are implicated in the disposition fraud counts. Id.

For purposes of considering WHTF defendants' motion to dismiss under Rule 12(c), all factual allegations from plaintiff's second amended complaint are deemed to be true. Holloway, 792 F.2d at 761. For a sense of continuity, a recitation of the procurement fraud counts is necessary.*fn2

Those facts, drawn from plaintiff's second amended complaint, are as follows.

PROCUREMENT FRAUD FACTS

In November of 1997, Jerry Roseth entered into a lease arrangement with Joann Sanders (the "Sanders Lease") for forty acres of real estate in Caputa, Pennington County, South Dakota. (Docket 51, ¶ 15). This was a share-crop arrangement. Id. at ¶ 17. Basically, Ms. Sanders was to receive 22.5 percent of the income generated from the sale of trees, with Mr. Roseth receiving the remaining 77.5 percent. Id. at ¶¶ 18 and 19. Expenses would be allocated at these same percentages. Id. at ¶¶ 20-27. BHTF did not have a lease for this property and did not own any portion of the trees on the property. Id. at ¶¶ 29 and 30.

On October 15, 2001, BHTF defendants executed a United States Department of Agriculture form CCC-502B entitled "Farm Operating Plan for Payment Eligibility Review For a Joint Venture or General Partnership" ("USDA 502"). Id. at ¶ 31. BHTF defendants represented on the USDA 502 that the rental arrangement was for cash, even though the Sanders Lease was on a share-crop basis. Id. at ¶ 35.

On September 30, 2003, BHTF executed a multiple peril crop insurance application ("MPCI application") with Rural Community Insurance Service ("RCIS"), a private insurance company authorized to provide federal crop insurance. Id. at ¶ 50. With the MPCI application, BHTF submitted a plant inventory report ("PIV"), also known as an acreage report, for its 2004 crop year. Id. at ¶ 52.

In July of 2004, according to RCIS, a hail storm caused a 100 percent loss to BHTF's tree crop. Id. at ¶¶ 57 and 58. In processing its loss claim, BHTF certified that "[a]ll production with zero value will be destroyed as soon as practical. Any utilization of the zero valued inventory/stock that generates any revenue would be a violation of this certification." Id. at ¶ 59.

On October 22, 2004, BHTF was paid $900,759 for the total loss of the trees. Id. at ¶ 60. This payment included funds for the cost of tree removal, preparation for transport and loading onto trucks. Id.

RCIS submitted its reinsurance claim to the Federal Crop Insurance Corporation ("FCIC") and this agency of the United States paid the full amount of the claim. Id. at ¶ 61. Because this reinsurance (indemnity) was paid by the United States, any overpayment or recovery related to the claim becomes an obligation to the United States. Id. at ¶ 62.

Following payment of the tree loss claim to BHTF, a dispute arose with Ms. Sanders concerning her interest in the proceeds, and she filed a lawsuit in state court. Id. at ¶ 63. In that litigation, BHTF stated, under oath, the cost to destroy the trees was about $300,000. Id. at ¶ 67. BHTF submitted estimates ranging from $216,000 to $243,000 for this work. Id. at¶ 68. BHTF also stated, under oath, in that state court litigation that it was negotiating with RCIS to allow a third party to remove the trees, in lieu of destruction of them, with no payment to BHTF. Id. at ¶ 69. The state-court litigation settled when Mr. Roseth paid Ms. Sanders $153,750, representing about 17 percent of the RCIS payment received by BHTF. Id. at ¶ 70.

DISPOSITION FRAUD FACTS

RCIS eventually agreed to allow BHTF to sell the damaged trees at 50 cents per tree, so long as all revenues were paid to RCIS (and thus to FCIC). Id. at ¶¶ 71 and 72. RCIS advised BHTF that neither BHTF, nor any subsidiary company, nor its partners could benefit from the sale of the trees. Id. at ¶ 73.

In September of 2005, BHTF negotiated an agreement with Burns for the sale, at 50 cents per tree, of every tree Burns removed from the property. Id. at ¶ 74. That agreement had an effective date of "September 30, 2005, notwithstanding any subsequent date such agreement is memorialized in writing." (Docket 51-6, p. 1). The agreement further acknowledged that "[a]ny duty on the part of [BHTF] to remit such sums [50 cents per tree] pursuant to insurance settlement shall be the duty of [BHTF]." Id.

During that same time frame, BHTF agreed to sell Burns the tree farm equipment for $57,350. (Docket 51, ¶ 75; Docket 51-7, p. 1). That agreement also contained the same effective date language of "September 30, 2005, notwithstanding any subsequent date such agreement is memorialized in writing." (Docket 51-7, p. 1). Burns also retained BHTF and its partner, John Combs, to provide consulting services for all aspects of the operation of a tree farm. (Docket 51, ¶ 76). The consulting services were to be paid at 25 percent of the tree sales profits. Id.

BHTF, through its partners and subsidiaries, sold a significant number of the trees directly to customers at prices greatly exceeding 50 cents per tree. (Docket 51, ¶ 77). By way of representative transactions, the United States' second amended complaint describes with specificity two sales transactions.

The first transaction involved Wyoming Reclamation & Enterprises ("WRE") of Cheyenne, Wyoming. (Dockets 51, ¶ 78B and 51-13). On September 9, 2005, BHTF sold 78 trees to WRE at 50 cents per tree. Id. WRE paid BHTF $39 on October 18, 2005. Id. By a separate undated invoice, WHTF billed WRE for the same 78 trees. Id. The gross charges by WHTF were $5,317. (Docket 51-14). Deductions were $2,028 paid to Kenny G,*fn3 $546 paid to Badger Tree Moving, and $39 to BHTF, leaving a net invoice due to WHTF of $2,704. Id. WRE paid this net invoice to WHTF.

Id.

On September 17, 2005, BHTF sold 51 trees to Commercial Landscapers of Kansas City, Kansas. (Dockets 51, ¶ 78A and 51-10). Commercial Landscapers paid BHTF $25.50, at 50 cents per tree, by a check dated October 18, 2005. Id. By an undated invoice, WHTF billed Commercial Landscapers for the same 51 trees. (Dockets 51, ¶ 78A and 51-11). This WHTF invoice was for the gross sum of $4,705. (Docket 51-11). The invoice reflected deductions for Kenny G of $1,428, Badger Tree Moving of $357, and BHTF for $25.50. This left a net invoice payable to WHTF of $2,894.50. Id. Commercial Landscapers paid that sum to WHTF on November 7, 2005. (Docket 51-12).

The sale of 3,271 of these trees generated approximately $270,000. (Docket 51, ¶ 83). Attached to the second amended complaint is a detailed itemization of those tree sales. Id. See also Docket 51-9. It is alleged that BHTF submitted invoices to RCIS at 50 cents per tree to support BHTF's repayment obligation and did not submit invoices reflecting the true revenue generated. (Docket 51, ¶ 79). By a November 2006, certification, BHTF declared that all revenue generated from trees sold between September 9 and December 6 of 2005, was paid to RCIS. (Docket 51, ¶ 82). With that certification, BHTF repaid $5,905.50 to RCIS and the United States. Id.

The second amended complaint alleges that WHTF collected and retained proceeds from the sale of trees which it never owned and did not sell. (Docket 51, ¶ 78D). BHTF and WHTF are alleged to have "entered into an illicit accord to create false records in an effort to hide the true proceeds derived from sales of indemnified trees . . . ." Id. at ¶ 78E. It is alleged the September 30, 2005, agreement between BHTF and WHTF was intended to conceal that illicit accord. Id. at ¶¶ 78E and 78F. The government alleges that "WHTF acted knowingly when it participated in an overall scheme along with BHTF to hide from the United States the true value of trees for which an indemnity payment was received . . . [which] WHTF knew . . . would generate a repayment obligation by BHTF." Id. at ¶ 78G.

Defendant John Combs was paid for his consulting services relating to the disposition of the indemnified trees. Id. at ¶ 84. Burns used defendant Dakota Auto Supply's funds to pay WHTF employees and defendant Philip Motor, Inc.'s, money to pay defendant John Comb's consulting fees and BHTF for the sale of trees. Id. at ¶ 85.

The procurement fraud counts are:

Count 1 False Claims Act 31 U.S.C. § 3729(a)(1)(B); and Count 2 False Claims Act 31 U.S.C. § 3729(a)(3).

The disposition fraud counts are:

Count 3 False Claims Act 31 U.S.C. § 3729(a)(7);

Count 4 Civil Conspiracy;

Count 5 Common Law Fraud--Ownership of Crops [against BHTF ...


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