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11th Cir. Reverses Trial Court, Allows False Claims Act Action to Proceed Against Lender and Executive

VA loanThe U.S. Court of Appeals for the Eleventh Circuit recently concluded that summary judgment was improper on a group of relators’ False Claims Act claim because genuine issues of material fact remained as to whether a lender’s alleged false certifications were material.

The Eleventh Circuit agreed with the trial court that the relators’ claim was not barred by previous public disclosure. The Court also held that the trial court had personal jurisdiction over the lender’s majority shareholder and chairman of its board of directors.  Finally, the Court held that the relators lacked Article III standing on the fraudulent transfer claim because the False Claim Act does not assign the right to relators to bring additional causes of action related to the FCA claim.

A copy of the opinion in Bibby v. Mortgage Investors Corp. is available at:  Link to Opinion.

The relators in this case were mortgage brokers. For years, they specialized in originating United States Department of Veterans Affairs (VA) mortgage loans, particularly Interest Rate Reduction Refinance Loans (IRRRL).

As background, once a lender has approved an IRRRL, it gives closing instructions to the attorney or title company handling the closing for the lender. The lender or its agent then prepares a HUD-1 statement, listing all the closing costs and fees. The HUD-1 requires lenders to break out the costs they incurred and the amounts they are collecting for various charges and fees, such as title search and title examination. Before closing, the lender is to review the HUD-1 for accuracy. Then, after the lender’s agent closes the loan, the lender sends the HUD-1 to the VA along with a certification that it has not imposed impermissible fees on the veteran borrower. Only upon this certification does the VA issue a guaranty to the lender.

The relators here learned through their work with IRRRLs that lenders supposedly often charged veterans fees that were prohibited by VA regulations, while allegedly falsely certifying to the VA that they were charging only permissible fees. In doing so, these lenders allegedly induced the VA to insure the IRRRLs, thereby reducing the lenders’ risk of loss in the event a borrower defaults.

The relators filed a qui tam action against the lender here under the False Claims Act, seeking to recover the money the VA had paid when borrowers defaulted on the lender’s originated loans. The relators then amended the complaint, adding a state law fraudulent transfer claim against the lender’s majority shareholder and chairman of its board of directors, as well as a corporate veil-piercing theory of liability, which made the executive a defendant to the FCA claim.

The trial court granted the executive’s motion to dismiss the fraudulent transfer claim based on lack of standing and granted the lender’s motion for summary judgment on the FCA claim. The relators timely appealed. In conditional cross-appeals, the executive argued that the trial court lacked personal jurisdiction over him, while the lender argued that if the Eleventh Circuit were to reverse the trial court’s ruling on materiality, the FCA claim was nonetheless barred by previous public disclosure.

The Eleventh Circuit first addressed the trial court’s grant of summary judgment on the relators’ FCA claim.

To prevail on their FCA claim, the Court determined that the relators must have proved: “(1) a false statement or fraudulent course of conduct, (2) made with scienter, (3) that was material, (4) causing the government to pay out money or forfeit moneys due.” Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1045 (11th Cir. 2015).

While no single factor is dispositive, the Eleventh Circuit noted that some factors relevant to the materiality analysis include: (1) whether the requirement is a condition of the government’s payment, (2) whether the misrepresentations went to the essence of the bargain with the government, and (3) to the extent the government had actual knowledge of the misrepresentations, the effect on the government’s behavior. Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003 n. 5, 2004 (2016).

On the first factor, the Eleventh Circuit agreed with the trial court’s conclusion that the lender’s certification that it charged only permissible fees was a condition of the government’s payment on IRRRL guaranties. The Court observed that the relevant VA regulation clearly designates that requirement a condition to payment: “no loan shall be guaranteed or insured unless the lender certifies . . . that it has not imposed and will not impose any [impermissible] charges or fees . . ..” 38 C.F.R. § 36.4313(a).

Regarding the second materiality factor, the Eleventh Circuit held that the certification requirement’s centrality within the regulatory scheme also pointed toward materiality. The court concluded that the requirement promoted the IRRRL program’s central purpose, and a reasonable factfinder could have found that it was essential to the bargain between the VA and the lender. Therefore, both the requirement’s designation as a condition of payment and its centrality to the government program favored materiality in the Court’s view.

Third, the Eleventh Circuit found that the VA did have actual knowledge of the lender’s noncompliance through investigatory audits. Additionally, the Court noted that, although the VA never issued a guaranty with knowledge that improper fees were collected on that loan, it did issue loan guaranties related to a “particular type of claim,” despite its knowledge of audit findings that the lender imposed impermissible fees on a certain percentage of its loans.

The trial court determined that the VA’s reaction to the lender’s noncompliance weighed against materiality. However, the Eleventh Circuit held that, even if it viewed the VA’s continued issuance of guaranties as strong evidence of immateriality, that evidence was not unrebutted. Escobar, 136 S. Ct. at 2004. The Court reasoned that a factfinder would still have to weigh that factor against others, including, as relevant here, the certification requirement being a condition to payment and essential to the IRRRL program.

Thus, because there was sufficient evidence to support a finding of materiality, the Eleventh Circuit reversed the trial court’s grant of summary judgment.

Because the Eleventh Circuit reversed the trial court’s grant of summary judgment on the issue of materiality, it next addressed the lender’s conditional cross-appeal arguing that the relators’ FCA claim was barred by previous public disclosure. An FCA action cannot be based on allegations that are already publicly disclosed. 31 U.S.C. § 3730 (2006).

Here, the lender argued that the relators’ allegations had already been publicly disclosed in a 2002 South Carolina consumer protection case, Cox v. Mortgage Investors Corp. d/b/a Amerigroup Mortgage Corp., in which a HUD-1 was filed on the docket, first in state court and later in federal court. Case No. 2:02-cv-3883- DCN (D.S.C. Nov. 15, 2002). In that case, one of the same relators from the present case admitted in a deposition that the Cox HUD-1 appeared to reflect impermissible fee bundling.

The Eleventh Circuit framed the public disclosure inquiry as a three-part test: “(1) have the allegations made by the plaintiff been publicly disclosed; (2) if so, is the disclosed information the basis of the plaintiff’s suit; (3) if yes, is the plaintiff an ‘original source’ of that information?” Cooper v. Blue Cross & Blue Shield of Fla., Inc., 19 F.3d 562, 565 n.4 (11th Cir. 1994) (per curiam).

Under that formula, “one generally must present a submitted statement or claim (X) and the true set of facts (Y), which shows that X is untrue. These two things together allow the conclusion (Z) that fraud has occurred.” United States ex rel. Saldivar v. Fresenius Med. Care Holdings, Inc., 841 F.3d 927, 935 (11th Cir. 2016) (citing Springfield, 14 F.3d at 654).

The Eleventh Circuit held that the Cox HUD-1 was not an “allegation” under the Springfield test because it only set forth the (X) variable. Id. at 654. The Court found that the information on the face of the Cox HUD-1 alone did not disclose that the lender concealed impermissible fees; only the relator’s later deposition did that. To be an allegation of fraud, the Court concluded that the Cox HUD-1 would also have had to reveal the true set of facts (Y): that the lender collected impermissible fees and bundled those fees on the same line-item as permissible fees.

Therefore, the Eleventh Circuit affirmed the trial court’s finding on the lender’s conditional cross-appeal that the relators’ FCA claim was not barred by previous public disclosure.

Third, the Eleventh Circuit discussed the executive’s conditional cross-appeal challenging personal jurisdiction. The Court held that the executive’s criticism of veil piercing as a basis for personal jurisdiction ran up against circuit precedent. Meier ex rel. Meier v. Sun Int’l Hotels, Ltd., 288 F.3d 1264, 1272 (11th Cir. 2002); see also Stubbs v. Wyndham Nassau Resort & Crystal Palace Casino, 447 F.3d 1357, 1361 (11th Cir. 2006). Regardless of whether the actors are two companies, or a company and an individual, the Court interpreted the rule from Meier to state that, where the apparent forum contacts of one actor are really the forum contacts of another, it is consistent with due process to impute those contacts for personal jurisdiction purposes. 288 F.3d at 1272.

Under Meier, the Eleventh Circuit concluded that the relators could establish that the trial court had personal jurisdiction over the executive by sufficiently pleading that it could pierce the lender’s corporate veil and impute the lender’s forum contacts to the executive.

The Eleventh Circuit observed that the fourth amended complaint included allegations that the executive unilaterally controlled the lender, ignored corporate formalities, and commingled his personal assets with corporate assets. Based on these allegations, the Court concluded that the relators established a prima facie case that the lender was the executive’s alter ego, so that the lender’s suit-related forum contacts were really the executive’s.

As a result, the Eleventh Circuit affirmed the trial court’s ruling that the executive was subject to personal jurisdiction in Georgia.

Finally, the Eleventh Circuit turned to the second issue the relators appealed: whether the trial court correctly held that the relators lacked Article III standing to pursue a state law claim against the executive under Georgia’s Uniform Voidable Transfers Act (UVTA).

A plaintiff must satisfy three requirements to establish Article III standing: (1) “injury in fact,” (2) a causal connection between the injury and the conduct complained of, and (3) likelihood of redress by a favorable decision. See Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992).

In Vt. Agency of Nat. Res. v. United States ex rel. Stevens, the Supreme Court of the United States explained that a relator does not have standing to pursue a qui tam action based on her own injury in fact. 529 U.S. 765, 772-73 (2000). Only as an assignee does the relator have standing to pursue the qui tam action. Id. at 773.

However, the Eleventh Circuit determined that the assignment to relators is partial rather than total because the FCA only assigns the narrow right to “bring a civil action for a violation of section 3729 for the person and for the United States Government.” 31 U.S.C. § 3730(b)(1). Thus, the Court held that the FCA does not assign relators the right to pursue additional claims that arise from, or are related to, the qui tam action.

As a result, the Eleventh Circuit affirmed the trial court’s holding that the relators lacked Article III standing to assert a fraudulent transfer claim against the executive under Georgia’s UTVA.

Accordingly, the Eleventh Circuit affirmed in part and reversed in part the trial court’s judgment and remanded back to the trial court for further proceedings consistent with its ruling.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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