U.S. ex rel. Oberg v. Kentucky Higher Ed. Student Loan Corp., No. 10-2320

Decided: June 18, 2012

The Fourth Circuit Court of Appeals held that four corporate entities created by four states, were not “state agencies,” and were therefore subject to suit under the False Claims Act (“FCA”) for allegedly defrauding the U.S. Department of Education.

Dr. Oberg asserts that the appellees knowingly made fraudulent claims to the U.S. Department of Education by inflating their loan portfolios eligible for Special Allowance Payments (“SAP”).  The case was dismissed by the district court agreeing with the appellees that the entities were not “state agencies” and therefore not eligible for suit under the FCA.  According to the Supreme Court in Vermont Agency of Nat. Resources v. U.S. ex rel. Stevens, state agencies are not eligible for suit under the False Claims Act because the definition of a person eligible for suit does not include the sovereign.  529 U.S. 765 (2000).  However, the presumption regarding corporations is the opposite; in Cook County v. U.S. ex rel. Chandler, the Supreme Court held that a municipal corporation was eligible for suit.  528 U.S. 119 (2003).  The Fourth Circuit articulated the appropriate inquiry is “whether appellees are truly subject to sufficient state control to render them a part of the state, and not a “person” for FCA purposes.”

The Fourth Circuit adopted the reasoning of the 9th and 5th circuits in concluding that the arm-of-the-state analysis used in the Eleventh Amendment context is the legal framework for this inquiry.  The Fourth Circuit articulated four non-exclusive factors for the arm-of-the-state analysis to draw the line between “a State-created entity functioning independently of the State from a State-created entity functioning as an arm of the State or its alter ego.”  The case was remanded for determination using the arm-of-the-state framework to determine whether it was eligible for suit under the FCA.

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