Financial Services Law Developments: FYI: Ill App (3rd Dist) Upholds Dismissal of Qui Tam Action Against MERS

Saturday, May 6, 2017

FYI: Ill App (3rd Dist) Upholds Dismissal of Qui Tam Action Against MERS

The Appellate Court of Illinois, Third District, recently affirmed a trial court's dismissal of a qui tam action brought by a private attorney under the Illinois False Claims Act against Mortgage Electronic Registration Systems, Inc. ("MERS"), holding that the State can file a motion to dismiss at any time during the case even if the State declined to take over the action.

A copy of the opinion is available at: Link to Opinion

The plaintiff the State ex rel. by a private attorney (Relator), filed a qui tam action against MERS and unnamed defendants, including entities that originated and/or serviced home loans, alleging defendants violated section 740 ILCS 175/3(a)(1)(G) of the Illinois False Claims Act by knowingly making false statements in certain mortgage documents to avoid paying millions of dollars in mortgage assignment fees to the State's counties.

As you may recall, a qui tam action "is an action brought by an informer, under a statute which establishes a penalty for the commission or omission of a certain act, and provides that the same shall be recoverable in a civil action, part of the penalty to go to any person who will bring such action and the remainder to the state or some other institution." Black's Law Dictionary 1251 (6th ed. 1990).

The State, via the Attorney General, declined to take over the Relator's action. Subsequently, at the Relator's request, the trial court ordered the State to produce its investigative file concerning MERS's business practices for an in camera inspection. In response, the State filed a motion for a protective order, a motion to reconsider the order compelling the State to produce records, and a motion to dismiss.

The Relator filed a motion to disqualify the Attorney General alleging that potential defendant banks sponsored an award dinner in honor of the Attorney General. The Relator maintained that this created a conflict of interest that precluded the Attorney General from intervening in the case.

The trial court denied the Relator's motion, granted the motion to dismiss, and ruled that the State's remaining motions were moot. This appeal followed.

Initially, the Appellate Court observed that a motion to dismiss a qui tam action pursuant to section 4(c)(2)(A) of the Illinois False Claims Act (740 ILCS 175/4(c)(2)(A) ("IFCA") is similar to a motion to dismiss an action pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619) because the motion asserts an affirmative defense that defeats the claim. Thus, the Appellate Court reviews a dismissal pursuant to section 4(c)(2)(A) de novo.

The Appellate Court next noted that Section 3(a)(1)(G) of the IFCA creates liability for anyone who "knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the State, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State." 740 ILCS 175/3(a)(1)(G).

In addition, the IFCA authorizes private persons to file civil actions on the State's behalf for violations of section 3. 740 ILCS 175/4(b). The State then has 60 days from when the private person files the complaint to intervene and prosecute the action or to inform "the court that it declines to take over the action, in which case the person bringing the action shall have the right to conduct the action." 740 ILCS 175/4(b)(4)(A),(B).

Section 4 of the IFCA, in relevant part, gives the State the following options:

"(c) Rights of the parties to Qui Tam actions.

(1) If the State proceeds with the action, it shall have the primary responsibility for prosecuting the action, and shall not be bound by an act of the person bringing the action. Such person shall have the right to continue as a party to the action, subject to the limitations set forth in paragraph (2).

(2)(A) The State may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the State of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.

(3) If the State elects not to proceed with the action, the person who initiated the action shall have the right to conduct the action. If the State so requests, it shall be served with copies of all pleadings filed in the action and shall be supplied with copies of all deposition transcripts (at the State's expense). When a person proceeds with the action, the court, without limiting the status and rights of the person initiating the action, may nevertheless permit the State to intervene at a later date upon a showing of good cause."

740 ILCS 175/4(c).

The Relator argued that the State can only file a motion to dismiss under section 4(c) if it elects to proceed with the action. The Appellate Court disagreed.

The Appellate Court reasoned that the State is the real party in interest in qui tam actions and therefore qui tam plaintiffs, acting as the State's statutorily designated agents, may only proceed only with the Attorney General's consent. Scachitti v. UBS Financial Services, 215 Ill. 2d 484, 515 (2005). Further, qui tam plaintiffs are always subordinate to the Attorney General. Id.

Thus, "the Attorney General possesses the authority to control the qui tam action at every stage." Id. at 510-11. The Appellate Court concluded that the trial court did not err when it granted the State's motion to dismiss because "it is clear from section 4(c) and our supreme court's interpretation in Scachitti that the State can file a motion to dismiss at any time during the life of the action, even if the State has elected not to take over the action."

Finally, the Appellate Court rejected the Relator's argument that the trial court should have disqualified the Attorney General because of the alleged conflict of interest.

Specifically, the Court held, the Attorney General only has a conflict of interest in a case in two situations: (1) where the Attorney General is interested in the case as a private person; and (2) where the Attorney General is a party to the action. Environmental Protection Agency v. Pollution Control Board, 69 Ill. 2d 394, 400-01 (1977). The Court held that neither situation existed here, and that the trial court properly denied the Relator's motion to disqualify the Attorney General.

Accordingly, the Appellate Court affirmed the trial court's dismissal order.

Ralph T. Wutscher
Maurice Wutscher LLP
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The Editor's Bio

Ralph T. Wutscher
Maurice Wutscher LLP
20 N. Clark Street, 33rd Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
RWutscher@MauriceWutscher.com
https://www.MauriceWutscher.com/

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.