11th Circuit Stretches Escobar Standard to Revive $284 Million FCA Suit
Earlier this month Judge Charles Wilson, writing on behalf of the Eleventh Circuit, reversed a decision by the Northern District of Georgia granting summary judgment to defendant mortgage lender over allegations the lender violated the False Claims Act (FCA).
Beginning in 2006, Relators in this case notified the VA and brought a qui tam suit alleging that various lenders bundled unallowable fees with allowable fees, charged veterans for both and listed the fees together on HUD-1 forms. As alleged, by falsely certifying their compliance with program-mandated fee regulations, the lenders induced the VA to guaranty and ultimately honor nearly 3,000 Interest Rate Reduced Refinance Loans when borrowers ultimately defaulted. The defendant lender stopped lending activity in 2013.
Relators alleged the lender cost the VA more than $284 million in default payments. Relators claim against the lender centers around the question of the materiality of the allegedly impermissible fees and whether the fees themselves are material to the claim. It was undisputed that the VA was aware of the violations alleged, but the VA continued to guarantee loans, and make payments to the holders of those loans when they defaulted.
To resolve this issue, the lender brought a motion for summary judgment, alleging Relators failed to present evidence creating a genuine issue of material fact regarding the materiality of the lender’s alleged misconduct. The District Court relied heavily on the Supreme Court’s decision in United Health Services v. Escobar, holding that if the Government pays a claim in full despite having actual knowledge that certain requirements of that claim were violated, that is strong evidence that those requirements are not material. The lender’s motion was granted when the court, citing Escobar, found lender’s conduct to be immaterial to the VA’s decision to pay on loans once they defaulted, as evidenced by the VA continuing to make payments, despite being aware of lender’s alleged conduct. Relators appealed to the Eleventh Circuit.
The Court of Appeals reversed in part and remanded in part the lower court’s grant of the motion for summary judgment. In contrast to the lower court’s reliance on the VA’s payment decisions and the Supreme Court’s Escobar decision, the Eleventh Circuit found that the VA’s continued claims payments was not “strong evidence” of immateriality, and instead should be considered along with other, non-payment factors of the materiality analysis, with no one factor being dispositive. Specifically, the court noted that the lender failed to identify a specific claim that was paid with knowledge of the violation, instead of knowledge of violations by the company in general. The court also looked to other conduct by the VA, not related to the payment decision, including audits and deficiency letters directed to the lender, to support that other efforts should be considered in determining whether the Government considers a violation to be material. The court ultimately made its decision based on the summary judgment standard, finding that the Relators had indeed raised a genuine issue of material fact and the materiality decision should be made by the factfinder.
The case is Donnelly et al. v. Mortgage Investors Corp. et al., case number 19-12736 (11th Cir. 2021).
