In the latest instance of courts interpreting the Supreme Court’s landmark False Claims Act ruling in Universal Health Services, Inc. v. Escobar, the Eleventh Circuit recently departed from the trend of giving great weight in the analysis of whether a violation was material to the fact that the government continued payment, finding that other efforts by the government to redress noncompliance may prevent judgment in a defendant’s favor.
As a prerequisite to obtain a Veteran’s Administration (VA) loan guaranty, lenders are required to certify compliance with various VA regulations, including limitations on the fees charged to veterans. In United States ex rel. Bibby v. Mortgage Investors Corporation, former mortgage brokers who specialized in originating VA mortgage loans brought suit against a mortgage lender under the False Claims Act, 31 U.S.C. § 3729 et seq., alleging that the defendant charged veterans unallowable fees and lied to the VA about it.
Relators notified the VA of the alleged fraud in 2006, and the VA’s own audit samples pointed out the potential noncompliance. As a result, between 2009 and 2011, the VA issued post-audit deficiency letters directing the defendant to review VA policies and make adjustments to its loan origination process to ensure future compliance. Between 2010 and 2011, the VA also implemented more frequent and rigorous audits focused on rooting out improper fees and charges. However, the VA did not revoke payment on guarantees of loans with purportedly fraudulent fees.
Citing the Supreme Court’s emphasis in Escobar that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material,” the United States District Court for the Northern District of Georgia granted the defendant summary judgment.
The Eleventh Circuit reversed. Despite agreeing that, under the standard promulgated by sister courts, the VA had knowledge of the purposed violations based on the deficiency letters, the Eleventh Circuit minimized the import of evidence of continued payment because the VA was obligated by law to pay the mortgage guarantees. The Eleventh Circuit “divorce[d] [its] analysis from a strict focus on the government’s payment decision,” emphasizing instead that “the significance of continued payment may vary depending on the circumstances.” In this case, because 38 U.S.C. § 3721 requires the VA to pay holders in due course (who in this case were assignees without involvement in the original charging of fees), the Eleventh Circuit concluded that continued payment should carry little weight in the analysis, and that the Court should consider the VA’s other actions, such as issuing a circular to lenders and implementing more frequent audits of this issue. Finding that there was sufficient evidence on the record to create a genuine dispute of fact with regard to materiality, the Eleventh Circuit reversed the summary judgment decision.
Defendants should pay attention to this relator-friendly ruling when assessing the likelihood of success on motions practice in the ever-changing world of Escobar — continued payment by the government may not always be a winning argument, depending on the facts of the case. The fact that the government submitted an amicus brief in support of the relators’ appeal is also noteworthy as an indication that the meaning of Escobar is far from settled.
Editorial Note: The Eleventh Circuit’s January 15, 2021 opinion was vacated and replaced on February 17, 2021 in order to address personal jurisdiction. The replaced opinion makes no substantive change to the foregoing holding on materiality.