April 13, 2021

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Eleventh Circuit Broadens Materiality Analysis for Some Cases | Bass, Berry & Sims PLC

How should a court assess the FCA’s materiality requirements when the government’s ability to reject claims is constrained? According to a recent decision by the Eleventh Circle, the court should “generally” consider the “pattern of behavior of the government as a whole” and possibly find indications of materiality in administrative measures that may not support materiality in other cases.

background

The case, US ex rel. Donnell v Mortgage Investors Corporationwas brought in by two mortgage brokers who specialize in providing mortgage loans guaranteed by the United States Department of Veterans Affairs (VA). As part of the program in question, VA regulations limited the fees and costs that lenders could collect from veterans, and required lenders to obtain VA guarantees to certify compliance with the fee and cost restrictions. Rapporteurs alleged that the defendant, Mortgage Investors Corporation (MIC), defrauded the VA by charging veterans for prohibited fees and falsely confirming that they had not done so.

After issuing loans and receiving VA guarantees, MIC usually sold its loans to holders in the secondary market in due course. This created an “important wrinkle,” the appeals court found, as the VA is required by law to honor its guarantee if borrowers default on loans from holders in due course.

District court issues a summary judgment

The United States District Court for the Northern District of Georgia has issued a summary judgment for MIC based on the Supreme Court’s decision in Universal Health Services, Inc. against US ex rel. Escobar. There the Supreme Court ruled that materiality depends on “whether the defendant knowingly violated a requirement that the defendant knows is essential to the government’s payment decision”. And it found that if the government pays a particular claim or regularly pays a certain type of claim when it is actually known that certain requirements have been violated, that is “strong evidence” that the requirement is not material.

Relying on these arguments, the District Court found that VA’s charging of prohibited fees for issuing the loan guarantee was not material, as VA audits found that MIC charges prohibited costs, but VA did not take any further action against the company Taken as a refund request for Prohibited Fees identified during audits that continued to issue and meet guarantees on MIC-origin loans. In summary, the District Court concluded that “the VA appeared to be viewing the widespread non-compliance” “as an administrative error subject to simple correction, as evidenced by its generally laissez-faire attitude in dealing with the problem.”

Eleventh circuit reverses in terms of materiality

However, on appeal to the Eleventh Circuit, the appeals court reversed and found that there was enough evidence of materiality to require the matter to be heard. In a critical part, the appeals court ruled that “the importance of continued payment may vary depending on the circumstances.” Here, the court said, continued VA payment was of little consequence as the VA was required to comply with guaranteed loans to holders in due course regardless of fraud by the original lender. In other words, “There was a reason the VA kept paying the VA [loans] apart from the fact that violations of fee regulations are insignificant. “But the court didn’t stop there.

The court found that since it was unable to determine whether MIC’s violations affected the government’s payment decision, it would examine the VA’s administrative actions for direct evidence of materiality: “Because the [statute] To avoid being able to focus closely on the VA’s payment decision, we need to broaden our perspective to take into account the VA’s behavioral pattern as a whole. “Contrary to the District Court’s analysis, the Eleventh Circle found that materiality was supported because it took“ some enforcement measures ”even if it“ did not take the best possible measures against MIC ”. In particular, the court ruled that the following administrative measures could support a determination of materiality:

  • The VA issued a circular reminding lenders of the fee policy and warning of the consequences of non-compliance. These included removal from the program, fines and other civil and criminal penalties, if applicable.
  • The VA conducted more frequent and stricter audits.
  • The VA consistently urged lenders to reimburse any improperly calculated fees they found.

The court rejected MIC’s argument that these measures did not provide sufficient evidence of materiality because “the VA could have pursued more stringent remedial action such as reparation, write-off or suspension from the VA [loan] Program. “Have divorce[d] [its] Analysis from a strict focus on the government’s payment decision, “the court ruled that materiality is that the VA is taking” a number of measures to combat fee non-compliance “.

Implications

The Eleventh Circle made it clear that it only considered materiality more generally because the statutory regulation forbade the VA to refuse to adhere to guaranteed loans. It remains to be seen whether courts in other cases support the view that materiality can be supported – as opposed to refuted – if the government takes less administrative action against the accused after learning of the alleged wrongdoing.