Defendants' Joint Reply in Support of Motion to Dismiss — Pietschner v. Kabbage

Record facts

UNITED STATES DISTRICT COURT · No. 4:21-cv-00110-SDJ · Doc. 91 · 2025-05-09 · Docket on CourtListener

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IN THE UNITED STATES DISTRICT COURT  
FOR THE EASTERN DISTRICT OF TEXAS  
SHERMAN DIVISION  
  
UNITED STATES OF AMERICA  
ex rel. PAUL PIETSCHNER,  
 
Plaintiff,  
 
v.  
 
KATHRYN PETRALIA;   
ROBERT FROHWEIN; and   
SPENCER ROBINSON,  
 
Defendants.  
 
 
 
 
Civil Action No.: 4:21-cv-110-SDJ  
  
 
DEFENDANTS’ REPLY IN SUPPORT OF THEIR JOINT MOTION TO DISMISS  
THE UNITED STATES’ COMPLAINT IN INTERVENTION  
  
 
 
 
 
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Table of Contents 
 
I. 
INTRODUCTION .............................................................................................................. 1 
II. 
ARGUMENT ...................................................................................................................... 2 
A. 
Venue and Personal Jurisdiction Are Both Improper ............................................. 2 
1. Venue Is Evaluated Based On The Government’s Complaint In Intervention . 2 
2. Venue Is Not Proper Based On The Allegations In The Government’s 
Complaint, And Personal Jurisdiction Therefore Is Lacking As Well ............. 4 
3. The Case Should Be Dismissed, Not Transferred ............................................ 7 
B. 
The Complaint Fails To Allege Falsity ................................................................... 7 
C. 
The Complaint Fails To Allege Materiality ............................................................ 9 
1. The Opposition Fails to Remedy The Complaint’s Failure to Plead Materiality 
With Respect to Kabbage’s Certifications ........................................................ 9 
2. The Opposition Misconstrues the Allegations With Respect to the $100K and 
SALT Errors.................................................................................................... 11 
D. 
The Complaint Fails To Allege A Conspiracy To Violate The FCA ................... 12 
E. 
The Complaint’s Allegations Based On Defendants’ Invocations Of Their Fifth 
Amendment Rights Must Be Ignored ................................................................... 13 
F. 
The Court Should Deny Leave to Amend ............................................................. 14 
III. 
CONCLUSION ................................................................................................................. 15 
 
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Table of Authorities 
 
Page(s) 
Federal Cases 
United States ex. rel. Dones v. Harlingen Med. Ctr., 
701 F. Supp. 3d 636 (S.D. Tex. 2023) .....................................................................................15 
In re Enron Corp. Sec., Derivative & “ERISA” Litig., 
490 F. Supp. 2d 784 (S.D. Tex. 2007) .....................................................................................14 
Galderma Laboratories, L.P. v. Teva Pharmaceuticals USA, Inc., 
290 F. Supp. 3d 599 (N.D. Tex. Nov. 17, 2017)........................................................................6 
H & B Equip. Co. v. Int’l Harvester Co., 
577 F.2d 239 (5th Cir. 1978) ...................................................................................................13 
Hagood v. Sonoma Cty. Water Agency, 
81 F.3d 1465 (9th Cir. 1996) .....................................................................................................7 
Happy Mfg. Co., Inc. v. S. Air & Hydraulics, Inc., 
572 F. Supp. 891 (N.D. Tex. 1982) ...........................................................................................7 
King v. Dogan, 
31 F.3d 344 (5th Cir. 1994) .......................................................................................................4 
United States ex rel. Lamers v. City of Green Bay, 
168 F.3d 1013 (7th Cir. 1999) ...................................................................................................8 
Laukus v. United States, 
691 F. Supp. 2d 119 (D.D.C. 2010) ...........................................................................................7 
Marshall v. Carter, 
No. 4:20-CV-993-SDJ, 2021 WL 4316620 (E.D. Tex. Sept. 23, 2021) ..................................14 
Myers v. Am. Dental Ass’n, 
695 F.2d 716 (3d Cir. 1982).......................................................................................................6 
Phillips v. Walker, 
No. 07-C-2394, 2009 WL 5166227 (N.D. Ill. Dec. 22, 2009) ...................................................3 
United States ex rel. Polukoff v. St. Mark’s Hosp., 
No. 3:12-cv-01277, 2016 WL 1449219 (M.D. Tenn. Apr. 13, 2016) .......................................3 
United States ex rel. Porter v. Magnolia Health Plan, Inc., 
810 F. App’x 237 (5th Cir. 2020) ............................................................................................10 
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Ramzan v. GDS Holdings Ltd., 
No. 4:18-CV-539-ALM-KPJ, 2019 WL 4748001 (E.D. Tex. Sept. 30, 2019) ..........................6 
United States v. Romans, 
823 F.3d 299 (5th Cir. 2016) .....................................................................................................5 
United States ex rel. Salomon v. Wolff, 
268 F. Supp. 3d 770 (D. Md. July 24, 2017) .............................................................................3 
Sampson Indus., Inc. v. Amega Indus., Inc., 
No. 3-98-CV-1440-P, 1998 WL 826907 (N.D. Tex. Nov. 18, 1998) ........................................6 
Seville v. Maersk Line, Ltd., 
53 F.4th 890 (5th Cir. 2022) ......................................................................................................7 
Tobien v. Nationwide General Insurance Co., 
133 F.4th 613 (6th Cir. 2025) ....................................................................................................6 
United Sates v. Planned Parenthood Gulf Coast. Inc., 
21 F. Supp. 3d 825 (S.D. Tex. 2014) .........................................................................................8 
Universal Health Servs., Inc. v. United States ex rel. Escobar, 
579 U.S. 176 (2016) .............................................................................................................9, 11 
United States ex rel. Willard v. Humana Health Plan of Tex. Inc., 
336 F.3d 375 (5th Cir. 2003) ...................................................................................................14 
Federal Statutes 
28 U.S.C. § 1391 ..............................................................................................................................5 
28 U.S.C. § 1406(a) .........................................................................................................................7 
31 U.S.C. § 3731(c) ..................................................................................................................... 3-4 
31 U.S.C. § 3732(a) .................................................................................................................2, 5, 6 
31 U.S.C. § 3733 ............................................................................................................................12 
Other Authorities 
14D Wright & Miller, Fed. Prac. & Proc. § 3826 ............................................................................6 
Fed. R. Civ. P. 15 ...........................................................................................................................14 
Fed. R. Evid. 201 ...........................................................................................................................10 
Merriam-Webster, available at https://www.merriam-
webster.com/dictionary/proceed ............................................................................................ 3-4 
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Table of Abbreviations 
Abbreviation 
Definition 
ECF No. 
AmEx 
American Express 
 
Form 2483 
SBA Form 2483 (Sept. 30, 2020), 
https://home.treasury.gov/system/files/136/Paycheck-Protection-
Program-Application-3-30-2020-v3.pdf 
 
Form 3507  
CARES Act Section 1102 Lender Agreement – Non-Bank and 
Non-Insured Depository Institution Lenders (Sept. 30, 2021), 
https://www.sba.gov/sites/default/files/2021-04/SBA-Form-3507-
PPP--Agreement-for-New-Lenders-Non-Bank-Non-Insured-
Depository-Institution-Lenders%20%28revised%204-9-21%29-
508.pdf 
 
Complaint 
The Complaint-in-Intervention filed by the United States on 
December 20, 2024 
40 
Defendants 
Kathryn Petralia, Robert Frohwein, Spencer Robinson 
 
DOJ 
Department of Justice 
 
EDTX 
Eastern District of Texas 
 
Frohwein 
Motion 
Defendant Frohwein’s Motion to Dismiss the United States’ 
Complaint-in-Intervention 
68 
GAO 
U.S. Government Accountability Office 
 
Government  
The United States  
 
Joint Motion 
Defendants’ Joint Motion to Dismiss the United States’ Complaint-
in-Intervention 
66 
Kabbage 
Kabbage, Inc. 
 
NDGA 
Northern District of Georgia 
 
OIG 
Office of Inspector General 
 
Opposition 
The Government’s Omnibus Opposition 
72 
Petralia 
Motion  
Defendant Petralia’s Motion to Dismiss the United States’ 
Complaint-in-Intervention 
65 
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Abbreviation 
Definition 
ECF No. 
PPP 
Paycheck Protection Program 
 
PPP FAQs 
Paycheck Protection Program Loans Frequently Asked Questions 
(Apr. 6, 2020), https://www.sba.gov/sites/default/files/2023-
03/Final%20PPP% 20FAQs.pdf 
 
Qui Tam 
Complaint 
The Qui Tam Complaint filed by Relator Paul Pietschner on 
February 5, 2021 
1 
Relator 
Relator Paul Pietschner 
 
Robinson 
Motion 
Defendant Robinson’s Motion to Dismiss the United States’ 
Complaint-in-Intervention 
67 
SBA 
Small Business Administration 
 
SBA OIG 
Report No. 
22-13 
SBA Inspector General, SBA’s Handling of Potentially Fraudulent 
Paycheck Protection Program Loans, Report No. 22-13 (May 26, 
2022), https://www.sba.gov/document/report-22-13-sbas-handling-
potentially-fraudulent-paycheck-protection-program-loans  
 
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I. 
INTRODUCTION 
 
The government’s Opposition underscores the infirmities of its case, which improperly 
seeks to shift the blame for the flawed implementation of the PPP from the SBA to the private-
sector lenders it enlisted as partners.  Not satisfied with blaming Kabbage, the Complaint and 
Opposition now seek to blame individual Kabbage executives.  But that effort fails many times 
over.   
First, unlike Kabbage, none of the individual defendants are subject to venue or jurisdiction 
in this district, which is a defect requiring dismissal, not merely transfer to the NDGA, as the 
government contends.  Second, the Complaint fails to allege any “false” claims—the sine qua non 
of FCA liability—and the Opposition ignores relevant case law establishing that mere errors are 
not actionable under the FCA, as well as dispositive language in the relevant SBA forms and 
guidance.  Third, the government has not satisfied the FCA’s “demanding” materiality 
requirement.  The government has not pled facts supporting a plausible inference that the alleged 
loan application errors and lender shortcomings were material to the government’s payment of 
PPP loans, and it cannot meet this high bar given the SBA’s acknowledgment that the PPP’s 
relaxed underwriting criteria and reliance on borrower certifications would inherently allow some 
unspecified number of fraudulent applications to be approved.  Fourth, the government’s 
conspiracy allegations fail twice over as the government does not allege any agreement among the 
three defendants sufficient to satisfy the pleading requirements of either Rule 8 or Rule 9(b), and 
its conspiracy claim would in any event be barred by the intra-corporate conspiracy doctrine.  
Finally, the government all but abandons its extensive reliance on the Defendants’ invocation of 
their Fifth Amendment rights during the government’s pre-filing investigation, such that the 
accompanying allegations—which permeate the Complaint—must be ignored.  For all of these 
reasons, the Complaint should be dismissed with prejudice.    
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Consistent with the Court’s Order Permitting Consolidated Briefing and Extending Page 
Limits and Deadlines, see ECF No. 64, this Reply sets forth Defendants’ joint arguments in 
response to the government’s Opposition that pertain to all Defendants.1  Defendants will 
separately file reply briefs regarding arguments that are Defendant-specific.   
II. 
ARGUMENT 
A. 
Venue and Personal Jurisdiction Are Both Improper 
1. 
Venue Is Evaluated Based On The Government’s Complaint In 
Intervention 
The Court should reject the government’s novel theory that venue over the Complaint-in-
Intervention it filed in December 2024 relates back to the separate Qui Tam Complaint filed by the 
relator in February 2021.  Opp. 15.  The FCA’s venue provision dictates where “[a]ny action under 
section 3730 may be brought.”  31 U.S.C. § 3732(a).  The government brought an action that 
names only Ms. Petralia, Mr. Frohwein, and Mr. Robinson as defendants.2  Compl. ¶¶ 1, 10-12.  
Thus, whether the government “may . . . br[ing]” this action in the EDTX under § 3732(a) turns 
on whether venue is proper as to the named defendants—not as to a defendant in the relator’s 
Complaint that was dismissed well before the government filed its Complaint and served the 
Defendants.  See ECF Nos. 30-31, 40.     
 
1 The government’s Omnibus Opposition to Defendants’ Motion to Dismiss violates the Court’s 
Order to consolidate briefing and extend page limits and deadlines.  See generally ECF No. 64.  
The Court ordered that the government “may file a response to [the Joint Motion]” and “a separate 
response to each individual Defendant’s motion to dismiss.”  Id. at 1.  Defendants have attempted 
to parse through the Omnibus Opposition, which does not differentiate amongst the Defendants, 
and reply consistent with the Court’s Order. 
2 While the government accuses Defendants of “ignor[ing] that Kabbage was a named defendant 
in this action when it was filed,” e.g., Opp. 15, the Complaint never itself invokes Kabbage’s 
contacts as a basis for venue, Compl. ¶ 7.  Instead, the Complaint alleges only that venue is proper 
in EDTX “because Defendants transacted business in this district.”  Id.  They do not and they did 
not. 
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The cases cited by the government for its “well-settled” legal theory that venue relates back 
to the relator’s Complaint, see Opp. 13, are inapposite, as they all arose outside the distinct context 
of the FCA.  The only case of which Defendants are aware that addresses the government’s self-
proclaimed “well-settled” argument regarding whether venue in an FCA action should be 
evaluated based on the government’s complaint-in-intervention or on the relator’s original 
complaint deemed it an “interesting question of first impression” that the court did not need to 
decide.  U.S. ex rel. Salomon v. Wolff, 268 F. Supp. 3d 770, 774 (D. Md. July 24, 2017).  Moreover, 
in at least one case where the government chose not to intervene, the court concluded that venue 
was not proper after it dismissed the sole defendant that had provided a basis for venue in that 
district.  See U.S. ex rel. Polukoff v. St. Mark’s Hosp., 2016 WL 1449219, at *4 (M.D. Tenn. Apr. 
13, 2016) (concluding that “venue is not proper in this District” where “[a]ll defendants other than 
[the dismissed defendant] reside elsewhere”).  The same is true here.   
Case law outside the FCA context strongly supports Defendants.  When a “plaintiff files 
an amended complaint adding additional parties or claims, venue rules must be satisfied for that 
complaint.”  Phillips v. Walker, 2009 WL 5166227, at *1 (N.D. Ill. Dec. 22, 2009) (rejecting as 
“weak” the argument that the court could not reconsider venue following the filing of an amended 
complaint) (emphasis in original).  These principles apply a fortiori in the context of an FCA 
action.  Under 31 U.S.C. § 3731(c), the government is authorized to intervene and “file its own 
complaint.”3  The government’s Complaint here—which both drops a defendant and adds new 
 
3 Section 3731(c) allows the government to “file its own complaint or amend the complaint of a 
person who has brought an action under 3730(b).”  As a result, when the government “proceeds 
with” an “action brought by a person under [§ 3730(b)],” that language must cover commencing 
an independent action.  Opp. 14 (citing 31 U.S.C. § 3730(d)(1)); see also “Proceed,” Merriam-
Webster, available at https://www.merriam-webster.com/dictionary/proceed (defining “proceed” 
 
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claims—is far closer to a standalone action than to an amended complaint.  While the government 
cites § 3731(c) for the proposition that the government’s Complaint “is deemed to relate back to 
the filing date of the Relator’s original complaint,” Opp. 13 n.9, that statutory provision provides 
that, “[f]or statute of limitations purposes, any such Government pleading shall relate back to the 
filing date of the complaint of the person who originally brought the action.”  31 U.S.C. § 3731(c) 
(emphasis added).  If anything, applying the expressio unius canon of statutory interpretation, this 
provision reinforces that the government’s Complaint should not be understood as an extension of 
the relator’s Complaint except for statute of limitations purposes.   
2. 
Venue Is Not Proper Based On The Allegations In The Government’s 
Complaint, And Personal Jurisdiction Therefore Is Lacking As Well 
 
The government cannot show that venue is proper.  The only basis the government alleges 
for venue is that Defendants transacted business in EDTX.  Compl. ¶ 7.  They did not.  See 
Frohwein Mot. 4; Petralia Mot. 9-10; Robinson Mot. 6-7.  Defendants do not transact business in 
EDTX now, and as the Complaint acknowledges, they did not transact business in EDTX when 
the Complaint was filed and served in December 2024 or even when the Qui Tam Complaint was 
filed in February 2021.  See Compl. ¶¶ 10-12 (Defendants left Kabbage in October 2020); see also 
id. ¶ 81 (KServicing, a “new entity,” serviced Kabbage’s former loans after the AmEx transaction 
in October 2020).  Thus, the government cannot establish venue based on either complaint. 
Contrary to the government’s assertion, venue is also not established on the basis that 
“act[s] proscribed by section 3729 occurred” in EDTX.  Opp. 16.  Indeed, none of the Defendants 
is alleged to have taken any act in EDTX.  Each lived in Georgia while working for a company 
 
as “to begin and carry on an action, process, or movement”) (last modified May 3, 2025).  
Regardless, it is likewise the case that a plaintiff filing an amended complaint “proceeds with” 
their prior action, but the amended pleading nevertheless “supersedes the original complaint,” King 
v. Dogan, 31 F.3d 344, 346 (5th Cir. 1994), and must therefore satisfy the venue requirements.   
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located in Georgia.  See Compl. ¶ 57.   Kabbage participated in a program run by the federal 
government in Washington, D.C.  Even accepting the government’s description of the facts in its 
Opposition, they in no way show that an “act proscribed by” the FCA occurred in EDTX.  The 
government maintains, for example, that “Kabbage originated PPP loans throughout the United 
States, including to PPP borrowers in the EDTX.”  Opp. 16.  But, at most, that shows Defendants 
worked for an online company that had customers in EDTX.4  The government’s approach would 
entirely overrun § 3732(a), leading to nationwide venue (and therefore nationwide personal 
jurisdiction) whenever an individual works for a company with customers nationwide.5    
 
The government next suggests that venue is proper because EDTX was purportedly home 
to “overt acts in furtherance of the conspiracy under § 3729(a)(1)(C).”  Opp. 17.  This theory fails 
twice over.  First, this is a civil action.  “Except as otherwise provided by law,” 28 U.S.C. § 1391(b) 
“govern[s] the venue of all civil actions brought in district courts of the United States.”  And 31 
U.S.C. § 3732(a) sets out a different avenue for bringing a case under the FCA.  28 U.S.C. § 
1391(a)(1).  There is no basis for importing an inapplicable common law rule governing venue for 
a criminal prosecution.  See, e.g., U.S. v. Romans, 823 F.3d 299, 310 (5th Cir. 2016) (evaluating 
venue for a conspiracy to possess with intent to distribute marijuana).  Second, even assuming the 
government could establish venue in an FCA action based on a single act in furtherance of the 
conspiracy, the government cannot mix and match the nationwide service of process provision in 
 
4 The government also argues that Defendants marketed Kabbage’s services nationwide.  See, e.g., 
id. (“[T]hese fraudulent loan transactions occurred because Kabbage, at the direction and under 
the control of Defendants, marketed Kabbage’s fraudulent PPP services nationwide, including in 
EDTX.”).  But the Complaint does not allege that Defendants marketed Kabbage’s services in 
EDTX, and even if they did, marketing is not an act proscribed by the FCA.   
5 The government identifies two paragraphs of the Complaint (317 and 327) that it claims identify 
“fraudulent loans to borrowers in Plano, TX.”  Opp. 16.  But paragraph 327 addresses loans to two 
“purported businesses” with the same Plano address.  Thus, the government’s own allegations fail 
to establish that these were actual borrowers in EDTX. 
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§ 3732(a) with its venue-by-conspiracy theory.  See, e.g., Ramzan v. GDS Holdings Ltd., 2019 WL 
4748001, at *6 (E.D. Tex. Sept. 30, 2019) (explaining that “[p]laintiffs cannot apply the service of 
process provision of Section 27 [of the Exchange Act] unless they first establish that venue is 
proper under the venue provision”).  Thus, establishing venue on the basis of a purported 
conspiracy would not support the exercise of personal jurisdiction over Defendants.  
 
Finally, the government attempts to shift the burden to Defendants to show that they did 
not transact business in the EDTX.  See Opp. 17.  As the treatise the government cites recognizes, 
“the weight of judicial authority appears to be that when the defendant has made a proper objection, 
the burden is on the plaintiff to establish that the chosen district is a proper venue.”  14D Wright 
& Miller, Fed. Prac. & Proc. § 3826.  This approach is followed by a majority of federal courts in 
the Fifth Circuit, see Galderma Laboratories, L.P. v. Teva Pharm. USA, Inc., 290 F. Supp. 3d 599, 
605 (N.D. Tex. 2017), and a majority of the Circuits overall, see Tobien v. Nationwide Gen. Ins. 
Co., 133 F.4th 613, 619 (6th Cir. 2025).  Just last month, the Sixth Circuit joined this Circuit 
majority and identified serious flaws in the reasoning of the 43-year-old Third Circuit case on 
which the government relies.  See Tobien, 133 F.4th at 620 (discussing Myers v. Am. Dental Ass’n, 
695 F.2d 716 (3d Cir. 1982)).  Thus, while Mr. Frohwein provided a declaration to support his 
venue argument, Defendants were under no obligation to do so in order to support their arguments 
for improper venue.  See Sampson Indus., Inc. v. Amega Indus., Inc., 1998 WL 826907, at *1 (N.D. 
Tex. Nov. 18, 1998) (explaining that there is “no case law in support of [plaintiff’s] contention 
that a motion to transfer venue must be supported by affidavit”).   
The government has conceded that the sole basis on which it asserts that the Court has 
personal jurisdiction over Defendants is through the FCA’s nationwide service of process 
provision.  Opp. 29.  Because that provision requires that the Court have proper venue, which is 
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lacking here, dismissal is required for both improper venue and lack of personal jurisdiction. 
3. 
The Case Should Be Dismissed, Not Transferred 
By default, cases where venue is improper should be dismissed.  They may be transferred 
only when “the interest of justice” so requires.  28 U.S.C. § 1406(a).  It is Plaintiff’s burden to 
show that transfer is in the interests of justice, and the government has not met that burden.  See 
Happy Mfg. Co., Inc. v. S. Air & Hydraulics, Inc., 572 F. Supp. 891, 894-95 (N.D. Tex. 1982).   
First, where, as here, an action is brought in the wrong district, the interests of justice 
support dismissal (not transfer) when “there are obvious substantive problems with the plaintiff’s 
claims.”  Laukus v. U.S., 691 F. Supp. 2d 119, 127 (D.D.C. 2010) aff’d, 442 F. App’x (D.C. Cir. 
2011).  The Complaint, although lengthy, has obvious substantive problems that demand dismissal, 
as further explained in Defendants’ Joint and Individual Motions under Rules 9(b) and 12(b)(6).  
Second, the interests of justice support dismissal when a plaintiff’s attorney could have 
reasonably foreseen that venue was improper.  Seville v. Maersk Line, Ltd., 53 F.4th 890, 896 (5th 
Cir. 2022).  Improper venue here was clearly foreseeable given the lack of connection between 
Defendants and EDTX.  Accordingly, this case should be dismissed, not transferred. 
B. 
The Complaint Fails To Allege Falsity  
The government’s arguments fail as to both its theories of falsity—i.e., that the Defendants 
made “factually false” claims in the form of loan applications containing “the SALT Error” and 
“the $100K Error,” Opp. 48, and that they made “legally false” claims via their certifications on 
the accompanying PPP forms, Opp. 49.    
As to the first, the government’s own choice of words—“errors”—is telling.  Indeed, the 
word appears more than 100 times in the Complaint.  See Compl. passim.  Under the FCA, 
however, “[b]ad math is no fraud.”  Hagood v. Sonoma Cnty. Water Agency, 81 F.3d 1465, 1478 
(9th Cir. 1996) (citations omitted).  “[T]he statutory phrase ‘known to be false’ does not mean 
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incorrect as a matter of proper accounting methods, it means a lie.”  Id.  In other words, “errors 
based simply on faulty calculations or flawed reasoning are not false under the FCA.”  U.S. ex rel. 
Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir. 1999).  And “[i]nnocently made faulty 
calculations . . . cannot give rise to liability.”  U.S. v. Planned Parenthood Gulf Coast, Inc., 21 F. 
Supp. 3d 825, 832 (S.D. Tex. 2014) (quoting U.S. v. Southland Mgmt. Corp., 326 F.3d 669, 682 
(5th Cir. 2003) (en banc) (Jones, J., concurring)).   
The government’s theory of “legal falsity” fares no better, as it ignores the actual text of 
the certifications it cites and the accompanying SBA guidance.  As to Form 3507, the government 
argues that “Kabbage certified that it would maintain compliance with applicable PPP 
requirements.”  Opp. 49.  That grossly overstates the certification, which states merely: “To the 
best of its knowledge, Lender certifies that it is in compliance and will maintain compliance with 
all applicable requirements of the” PPP.  See Form 3507 at 5 (emphasis added).  As to Form 2484, 
the government argues that “Kabbage and its Lender Partners falsely certified for each loan that 
they had complied with the lender obligations enumerated in paragraphs 3.b(i)-(iii) of the April 
15, 2020, Interim Final Rule, when, in fact, they had not.”  Opp. 49.  But the SBA’s accompanying 
guidance stated that “[l]enders are expected to perform a good faith review, in a reasonable time, 
of the borrower’s calculations and supporting documents concerning average monthly payroll 
cost” and “may rely on borrower representations, including with respect to amounts required to be 
excluded from payroll costs,” which is precisely what Kabbage did.  See PPP FAQs at Answer to 
Question No. 1 (emphasis added).  Defendants quoted that critical language prominently in their 
Joint Motion, see Joint Mot. 16, yet the government offered no response.  The government’s 
argument that Kabbage submitted false certifications it had “confirm[ed] receipt of information 
demonstrating that borrowers had employees . . . on or around February 15, 2020,” Opp. 51, plainly 
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ignores that Kabbage was allowed to—and instructed by the SBA to—rely on borrower 
certifications.  See Form 2483 at 2 (requiring the applicant to certify, e.g., that “[it] was in operation 
on February 15, 2020 and had employees for whom it paid salaries and payroll taxes . . .”). 
The government cannot satisfy its pleading burden by ignoring relevant case law and key 
language in the relevant certifications and SBA guidance.  It has failed to plead the required 
element of falsity, and its FCA claims should be dismissed on that basis.  
C. 
The Complaint Fails To Allege Materiality  
The government asserts that the Complaint satisfies the FCA’s materiality standard because 
it alleges that “Defendants, through their operational control of Kabbage, (1) fraudulently inflated 
the loan amounts of PPP loans . . . , and (2) failed to review PPP loans as required by SBA 
requirements[.]”  Opp. 74.  But the next eight pages of argument say virtually nothing about the 
second category of allegations—i.e., those related to Kabbage’s loan reviews and the adequacy of 
its fraud controls—focusing instead on the materiality of the SALT and $100K errors.  See id. 74-
82.  What little is said does not withstand scrutiny.   
1. 
The Opposition Fails to Remedy The Complaint’s Failure to Plead 
Materiality With Respect to Kabbage’s Certifications 
First, the government argues that the “false certifications” submitted by Kabbage were a 
“condition of payment of PPP processing fees and of PPP loan forgiveness and guaranty purchase 
payments by the SBA.”  Id. 76.  But the Supreme Court has squarely rejected the argument that 
“any statutory, regulatory, or contractual violation is material so long as the defendant knows that 
the [g]overnment would be entitled to refuse payment were it aware of the violation.”  Universal 
Health Servs., Inc. v. U.S. ex rel. Escobar, 579 U.S. 176, 195 (2016).   
Second, the government argues that Kabbage’s “fail[ure] to review loan applications such 
that obviously ineligible borrowers were approved by Kabbage” was material to the SBA’s 
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decision to pay PPP funds.  Opp. 75.  But the government admits that its allegations regarding the 
adequacy of Kabbage’s PPP loan review processes differ from its allegations regarding Kabbage’s 
loan calculation errors.  Indeed, whereas the Complaint alleges that the SBA stopped processing 
loans for forgiveness when it was informed of the SALT and $100K errors, it concedes that “the 
Government has not made a similar allegation related to Kabbage’s failure to review PPP loan 
applications in accordance with lender requirements[.]”  Id. at 78-79.  That is grounds for 
dismissal.  See, e.g., U.S. ex rel. Porter v. Magnolia Health Plan, Inc., 810 F. App’x 237, 241-42 
(5th Cir. 2020) (affirming dismissal of FCA complaint on materiality grounds where the 
government “took no action” after learning of allegations of fraud and instead continued to pay 
the defendant).  
Third, the government attempts to distract from the fact that the SBA acknowledged from 
the outset that, in relaxing underwriting criteria and directing lenders to rely on borrower 
certifications, there was an inherent “risk [that] fraudulent and ineligible applicants [would] 
receiv[e] PPP loans and loan forgiveness.”  SBA OIG Report No. 22-13 at 3.6  As discussed in 
Defendants’ Joint Motion, at most, the Complaint alleges that Defendants were on notice that 
Kabbage’s loan review processes were failing to catch some unspecified percentage of fraudulent 
PPP applications.  Joint Mot. 16-18.  But the failure to detect 100% of fraudulent PPP applications 
could not have been material to the SBA’s payment decision when it acknowledged that, even with 
 
6  The government attempts to brush aside the numerous authoritative reports (from congressional 
committees, the GAO, and the SBA’s own OIG) on the ground they “post-date the relevant time 
period,” Opp. 59, but their publication dates are irrelevant.  What is important here is that multiple 
government entities conducting a thorough and comprehensive review have recognized the SBA’s 
deliberate emphasis on speed over accuracy in the PPP.  Moreover, because the government 
provides no reason to question the accuracy and reliability of such findings, the Court should 
consider them here.  See Fed. R. Evid. 201(b)(2) (“The court may judicially notice a fact that is 
not subject to reasonable dispute because it . . . can be accurately and readily determined from 
sources whose accuracy cannot reasonably be questioned.”); see also Joint Mot. 4 n.2.    
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perfect adherence to PPP lender requirements, some unspecified percentage of fraudulent PPP 
applications would inevitably slip through the cracks.  The government mischaracterizes this 
argument as an attempt to “blame the victim”—a “government knowledge” defense that accuses 
the SBA of approving specific applications it knew were fraudulent.  Opp. 58-59.  But Defendants 
are not arguing that anyone—Defendants or SBA—knowingly approved (or submitted for 
approval) PPP applications that they specifically knew at the time were fraudulent.  Rather, 
Defendants argue that the SBA (and Defendants) understood that strict compliance with the PPP’s 
relaxed lender requirements would necessarily allow some unspecified number of fraudulent 
applications to be approved, but that was the risk the government accepted in designing a program 
that was primarily focused on getting funds into the hands of borrowers as quickly as possible.  
Thus, the government fails to meet the FCA’s “demanding” materiality standard.  See Escobar, 
579 U.S. at 194.   
2. 
The Opposition Misconstrues the Allegations With Respect to the 
$100K and SALT Errors 
The Opposition tries to treat the $100K and SALT errors as identical “calculation errors.” 
See, e.g., Opp. 74-75 (referring repeatedly to “loan calculation errors”).  But they are not the same, 
and the government has failed to plead materiality with particularity as to each error for different 
reasons.  See also Mr. Robinson’s Individual Reply, filed concurrently herewith.  
For the $100K error, Kabbage relied on borrower certifications that the borrowers did not 
have employees earning more than $100K.  To the extent a calculation comparing the number of 
employees to the requested loan amount would have indicated $100K errors, such a comparison 
was not required under the SBA’s rules or guidance, and could not have been material, because 
SBA received the same figures (i.e., payroll and headcount) and could have done the simple 
arithmetic itself. 
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For the SALT error, the government does not argue that the Complaint sufficiently pled 
that any individual Kabbage borrower was not entitled to the loan amount claimed (because the 
borrower’s health insurance and retirement costs likely exceeded state and local tax withholdings).  
Instead, the government argues that proving whether the borrower was entitled to the requested 
loan amount is an affirmative defense, and Defendants have the burden of proof.  See Opp. 69-70.    
Not so.  The PPP application form did not require Kabbage to certify the accuracy of the loan 
amount, or to itemize each component of the borrower’s claimed monthly payroll expenses.  
Supposed noncompliance with a requirement that did not exist cannot be material. 
D. 
The Complaint Fails To Allege A Conspiracy To Violate The FCA 
The government cannot overcome the fundamental defect in its conspiracy claim: the 
glaring failure to plead an agreement among the three Defendants.  At best, the Complaint alleges: 
“Beginning in or around March 1, 2020, and continuing until the AmEx transaction, completed on 
October 16, 2020, Defendants Frohwein, Petralia, and Robinson knowingly entered into an 
unlawful agreement among themselves, and others, to present and cause the presentment of false 
or fraudulent claims[.]”  Compl. ¶ 346.  The insufficiencies here are obvious.  When, exactly, did 
the three Defendants “enter” this agreement?  Despite months of pre-filing investigation under 31 
U.S.C. § 3733, the government cannot say.  Nor can it distinguish the existence of conspiracy from 
independent parallel actions—the very defect that resulted in the dismissal of the complaint in Bell 
Atlantic Corp. v. Twombly, where the Supreme Court held that “an allegation of parallel conduct 
and a bare assertion of conspiracy will not suffice.  Without more, parallel conduct does not suggest 
conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply 
facts adequate to show illegality.”  550 U.S. 544, 556-57 (2007).  As that is all the government 
alleges here, its claim fails under Rule 8.  It fails a fortiori under Rule 9(b), given the heightened 
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13 
pleading requirements that apply to FCA claims. 
Moreover, these defects cannot be cured by amendment in light of the prevailing view 
among the federal courts in Texas regarding the intra-corporate conspiracy doctrine, which the 
government acknowledges but urges this Court not to follow.  Opp. 96 n.28.  The government’s 
efforts to evade the doctrine are unpersuasive.  First, it argues the doctrine does not apply because 
the Fifth Circuit has expressly declined to apply the doctrine in criminal conspiracy cases, id. 31, 
96; but this is a civil case, so that distinction is irrelevant.  So too is the government’s alternative 
theory that an exception exists when corporate employees have “an independent stake” in 
achieving the object of the conspiracy.  Id. 97.  The government alleges no “independent” stakes 
here—indeed, any compensation or equity interests held by the defendants was entirely dependent 
on the success or failure of Kabbage.  This is insufficient even under the government’s own Fifth 
Circuit authority.  H & B Equip. Co. v. Int’l Harvester Co., 577 F.2d 239, 244 (5th Cir. 1978) (no 
exception applied because the benefit the employee stood to receive “would flow entirely from 
[his employer], and is indistinguishable from other forms of compensation, such as salary.”).   
E. 
The Complaint’s Allegations Based On Defendants’ Invocations Of Their 
Fifth Amendment Rights Must Be Ignored 
The government all but abandons its 46 allegations in the Complaint regarding the 
Defendants’ invocation of the Fifth Amendment, stating that it is “not at this time asking this Court 
to rule that any of the Defendants’ Fifth Amendment invocations warrants an adverse inference.”  
Opp. 103.  In the next breath, however, it asserts that “the fact that [Defendants] invoked their 
Fifth Amendment privilege during the Government’s investigation is [not] irrelevant at this 
pleading stage” and that “[n]othing prevents this Court from considering this potential [adverse] 
inference to evaluate the sufficiency” of the Complaint.  Id. at 104.  The government cites no 
authority for that proposition, which contradicts the government’s own concession that the 
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14 
determination of whether an adverse inference attaches to the invocation of the privilege “requires 
an evidentiary ruling.”  Id. at 103.  As explained in the Joint Motion, allegations of “silence” are 
not allegations of facts, see Joint Mot. 22, and the “invocation of the Fifth Amendment does not 
excuse [the government] from pleading with specificity.”  In re Enron Corp. Sec., Derivative & 
“ERISA” Litig., 490 F. Supp. 2d 784, 825 (S.D. Tex. 2007).  All allegations based on the 
Defendants’ invocation of their Fifth Amendment right in the Complaint must be ignored. 
F. 
The Court Should Deny Leave to Amend 
In its Opposition, the government makes a short, boilerplate request for the opportunity to 
replead its claims in the event the Court finds they are deficient.  See Opp. 105.  To start, such “a 
bare request in an opposition to a motion to dismiss—without any indication of the particular 
grounds on which the amendment is sought . . . —does not constitute a motion within the 
contemplation of Rule 15(a).”  U.S. ex rel. Willard v. Humana Health Plan of Tex. Inc., 336 F.3d 
375, 387 (5th Cir. 2003) (citation omitted).  Moreover, although “[t]he court should freely give 
leave [to amend] when justice so requires,” Fed. R. Civ. P. 15(a)(2), it is not required here, where 
the government’s request is both untimely and futile.  See Marshall v. Carter, 2021 WL 4316620, 
at *2 (E.D. Tex. Sept. 23, 2021) (citations omitted) (“Denial of leave to amend may be warranted 
for undue delay . . . or futility of a proposed amendment,” among other reasons).   
The government filed its Complaint after it had nearly four years after the Qui Tam 
Complaint was filed to investigate the relator’s claims using the broad array of discovery tools 
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15 
available to it and the full cooperation of Kabbage’s successor entity (KServicing).7  Despite the 
substantial evidence available to the government, the Complaint fails to meet the requirements of 
Rules 8(a) and 9(b), as set forth in greater detail in Defendants’ Joint and Individual Motions, and 
the Opposition does not even attempt to explain how an amendment could cure such deficiencies.  
The Court should therefore reject the government’s improper request for a second bite at the apple 
to replead its baseless allegations, as doing so would both be futile and reward the government for 
its undue delay.  See, e.g., U.S. ex. rel. Dones v. Harlingen Med. Ctr., 701 F. Supp. 3d 636, 656 
(S.D. Tex. 2023) (denying relator’s request for leave to amend because “[h]is factual allegations 
would remain identical . . . and [they] d[id] not present a claim upon which relief can be granted.”). 
III. 
CONCLUSION 
 
The Court should dismiss the government’s FCA claims with prejudice in their entirety. 
 
 
 
7 See Settlement Agreement between the DOJ, KServicing, and relator David Berteletti in 
connection with Case No. 1:20-cv-12114 (D. Mass 2020), ⁋ 13 (dated May 7, 2024), available at 
https://www.justice.gov/usao-ma/media/1351716/dl (“[KServicing] agree[s] to cooperate fully 
and truthfully with the [government’s] investigation of individuals and entities not released in this 
Agreement. . . .”); Settlement Agreement between the DOJ, KServicing, and relator Paul 
Peitschner in connection with Case No. 4:21-cv-00110 (E.D. Tex. 2020), ⁋ 14 (dated May 7, 2024), 
available at https://www.justice.gov/usao-ma/media/1351711/dl (same).  
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16 
Dated: May 9, 2025 
 
 
 
 
Respectfully submitted, 
 
/s/ Melissa R. Smith 
Melissa R. Smith 
Gillam & Smith LLP 
303 South Washington Ave. 
Marshall, TX 75670 
Telephone: (903) 934-8450 
Fax: (903) 934-9257 
melissa@gillamsmithlaw.com 
 
Anjan Sahni (pro hac vice) 
Wilmer Cutler Pickering Hale and Dorr LLP  
7 World Trade Center, 250 Greenwich Street  
New York, NY 10007  
Tel: (212) 230-8800 
Fax: (212) 230-8888 
anjan.sahni@wilmerhale.com 
 
Christopher E. Babbitt (pro hac vice) 
Michaela S. Wilkes Klein (pro hac vice) 
Wilmer Cutler Pickering Hale and Dorr LLP  
2100 Pennsylvania Avenue NW  
Washington, DC 20037  
Telephone: (202) 663-6000  
Fax: (202) 663-6363  
christopher.babbitt@wilmerhale.com 
michaela.wilkesklein@wilmerhale.com 
 
George P. Varghese (pro hac vice) 
Wilmer Cutler Pickering Hale and Dorr LLP 
60 State Street  
Boston, MA 02109 
Telephone: (617) 526-6000 
Fax: (617) 526-5000 
george.varghese@wilmerhale.com 
Counsel for Kathryn Petralia 
/s/ Nicholas M. Mathews 
Nicholas M. Mathews 
Alexander J. Chern 
McKool Smith, PC - Dallas 
300 Crescent Court, Suite 1500 
Dallas, TX 75201 
Telephone: (214) 978-4258  
Fax: (214) 978-4044 
Nmathews@mckoolsmith.com 
Achern@mckoolsmith.com 
 
Miranda Hooker (pro hac vice) 
Kate E. MacLeman (pro hac vice) 
Kara N. Czekai (pro hac vice) 
Goodwin Procter LLP 
100 Northern Avenue 
Boston, Massachusetts 02210 
Telephone: (617) 570-1000 
Fax: (617) 523-1231 
MHooker@goodwinlaw.com 
KMacLeman@goodwinlaw.com 
KCzekai@goodwinlaw.com 
Counsel for Robert Frohwein 
 
/s/ Henry W. Asbill 
Henry W. Asbill (pro hac vice) 
Christopher B. Mead (pro hac vice) 
Lisa H. Schertler (pro hac vice) 
Paola Pinto (pro hac vice) 
Schertler Onorato Mead & Sears  
555 13th Street NW Suite 500W 
Washington DC 20004 
Telephone: 202-628-4199 
Facsimile: 202-628-4177 
hasbill@schertlerlaw.com  
cmead@schertlerlaw.com 
lschertler@schertlerlaw.com 
ppinto@schertlerlaw.com 
Counsel for Spencer Robinson 
Case 4:21-cv-00110-SDJ     Document 91     Filed 05/09/25     Page 22 of 23 PageID #:  979

 
CERTIFICATE OF SERVICE 
I hereby certify that on May 9, 2025, I caused the foregoing to be filed electronically with 
the Clerk of the Court using the CM/ECF system, which will send notification of such filing to 
counsel of record.  
 
Dated: May 9, 2025  
 
 
 
Respectfully Submitted,  
 
/s/ Melissa R. Smith 
Melissa R. Smith 
 
 
Case 4:21-cv-00110-SDJ     Document 91     Filed 05/09/25     Page 23 of 23 PageID #:  980

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