The U.S. Court of Appeals for the Sixth Circuit recently affirmed a district court's dismissal of a qui tam action alleging that a bank violated the federal False Claims Act when it certified that it had engaged in loss mitigation and sought FHA insurance payments on defaulted loans, holding that because the factual basis of the claim was publicly disclosed before suit was filed, only the government could pursue the action in its own name.
A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/16a0064p-06.pdf
The defendant bank participated in the Federal Housing Administration's mortgage insurance program, which "encourages banks to lend money to high-risk borrowers … [and] covers losses caused by a borrower who defaults on a loan." The program requires that the bank take "loss mitigation measures, such as attempting to arrange a face-to-face meeting with the defaulting borrower, before foreclosing."
A non-profit organization sued, alleging that the bank did not engage in loss-mitigation while misrepresenting that it had, supposedly resulting the in the wrongful foreclosure of 22,000 homes and the collection of $2.3 billion in federal insurance benefits. The plaintiff used three foreclosures as examples, arguing that they showed a pattern.
The district court ruled that, although the plaintiff stated two claims under the federal False Claims Act, because the claims were based "on information that had already been publicly disclosed," the plaintiff could not sue in a qui tam capacity.
On appeal, the Sixth Circuit explained that under § 3730(e)(4) of the federal False Claims Act, "[a] claimant may establish eligibility to bring a qui tam lawsuit on two grounds: (1) that the factual premise of its claim was not publicly disclosed before it filed the lawsuit, or (2) even if it was, that the claimant was the original source of the information."
The Court further explained that subsection 3730(e)(4)(A) provides that something has been previously publicly disclosed "if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed … (i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) from the news media." In addition, subsection 3730(e)(4)(b) defines "original source" as someone "who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions."
The Sixth Circuit concluded that, because the alleged false claims had been publicly disclosed and the plaintiff was not an "original source," the district court correctly ruled that the plaintiff could not sue qui tam.
The Court reasoned that "[a]t least two sources publicly disclosed the first allegation" that the defendant bank "failed to take required loss mitigation measures before foreclosing."
First, in 2011, the bank entered into a consent decree with the federal government, which required it to engage in reasonable and good faith loss mitigation measures to prevent foreclosure on delinquent loans. Second, also in 2011, three federal agencies reviewed foreclosure practices and pointed out that a number of banks, including the plaintiff, had failed to take reasonable loss mitigation measures.
The Court also found that the plaintiff's second allegation that the bank "committed fraud when it made false certifications about whether it had engaged in loss mitigation" had also been publicly disclosed. The Court noted that, under its holding in U.S. ex rel. Gilligan v. Medtronic, Inc., if the disclosure "puts the government on notice of the 'possibility of fraud' surrounding the … transaction, the prior disclosure is sufficient." "The consent order did just that" because it required the bank to create a program to ensure its default affidavits complied with applicable laws, which was enough "to put the government on notice of the possibility of fraud."
The Sixth Circuit then turned to address whether the plaintiff was an "original source" with knowledge that "materially adds to" the public disclosure", explaining that "[m]ateriality in this setting requires the claimant to show it had information '[o]f such a nature that knowledge of the item would affect a person's decision-making,' is 'significant,' or is 'essential.'"
Because the three examples relied upon by the plaintiff did not "materially add to the thousands of prior problematic foreclosures already disclosed" the Court concluded that plaintiff was not an "original source."
The Sixth Circuit rejected the plaintiff's argument that there was no public disclosure by either the consent decree or administrative foreclosure practices review of the particular federally-insured mortgages at issue in the case because the publicly disclosed problematic mortgages of all types encompassed plaintiff's more narrow category and, under the case law, "additional details are insufficient to avoid our broad construction of the public disclosure bar, which precludes individuals who base any part of their allegations on publicly disclosed information from bringing a later qui tam action."
The Sixth Circuit also rejected the plaintiff's argument that "no public disclosures [involving] lying to a government agency about failing to follow loss mitigation requirements … were ever made" because although this did not arise to fraud, formally speaking, "it certainly presented enough facts to create an inference of wrongdoing … [and that is] all that's required."
Accordingly, the district court's dismissal of the lawsuit was affirmed.
Ralph T. Wutscher
Maurice Wutscher LLP
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