How should a court evaluate the FCA’s materiality requirement when the government’s ability to deny claims is constrained? According to a recent decision from the Eleventh Circuit, the court should “broadly” consider the government’s “pattern of behavior as a whole,” and may find evidence of materiality in administrative actions that might not support materiality in other cases.
The case, U.S. ex rel. Donnell v. Mortgage Investors Corporation, was brought by two mortgage brokers who specialized in originating mortgage loans guaranteed by the United States Department of Veterans Affairs (VA). Under the program at issue, VA regulations limited the fees and costs lenders could collect from veterans and required lenders seeking VA guarantees to certify compliance with the fee-and-cost restrictions. The relators alleged that the defendant, Mortgage Investors Corporation (MIC), defrauded the VA by charging veterans prohibited fees and falsely certifying they had not done so.
After originating loans and obtaining VA guarantees, MIC typically sold its loans on the secondary market to holders in due course. This introduced an “important wrinkle,” the appeals court noted, because the VA is statutorily required to honor its guarantee when borrowers default on loans possessed by holders in due course.
District Court Grants Summary Judgment
The United States District Court for the Northern District of Georgia granted summary judgment for MIC based on the Supreme Court’s decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar. There the Supreme Court held that materiality turns on “whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” And it held that if the government pays a particular claim or regularly pays a particular type of claim despite actual knowledge that certain requirements were violated, that is “strong evidence” the requirement is not material.
Relying on this reasoning, the district court found that charging prohibited fees was not material to the VA’s issuance of the loan guarantee because VA audits uncovered that MIC was charging prohibited costs, yet the VA took no more action against the company than requiring it to refund prohibited fees found during audits and continued to issue and honor guarantees on MIC-originated loans. Summarizing the evidence, the district court concluded that “the VA seemed to regard the rampant noncompliance” “as an administrative error subject to facile correction, as evidenced by its altogether laissez faire attitude in dealing with the problem.”
Eleventh Circuit Reverses as to Materiality
On appeal to the Eleventh Circuit, however, the appeals court reversed, finding there was sufficient evidence of materiality to require the issue to proceed to trial. In critical part, the appeals court held that “the significance of continued payment may vary depending on the circumstances.” Here, the court reasoned, the VA’s continued payment carried little weight because the VA was required to honor guaranteed loans for holders in due course, regardless of any fraud by the originating lender. In other words, “there was a reason for the VA’s continued payment of the [loans] other than violations of fee regulations being immaterial.” Yet the court did not stop there.
The court reasoned that because it could not evaluate whether MIC’s violations affected the government’s payment decision, it would look to the VA’s administrative actions for direct evidence of materiality: “because the [statute] precludes us from focusing narrowly on the VA’s payment decision, we must broaden our view to consider the VA’s pattern of behavior as a whole.” Breaking with the district court’s analysis, the Eleventh Circuit found that materiality was supported because it took “some enforcement actions,” even if it “did not take the strongest possible action against MIC.” Specifically, the court held that the following administrative actions could support a finding of materiality:
- The VA released a circular reminding lenders of the fee regulations and warning of the consequences of noncompliance, which included removal from the program, fines, and other civil and criminal penalties as applicable.
- The VA implemented more frequent and rigorous audits.
- The VA consistently required lenders to refund any improperly charged fees they discovered.
The court rejected MIC’s argument that these actions were insufficient evidence of materiality because “the VA could have pursued more severe remedies such as recoupment, debarment, or suspension from the [loan] program.” Having “divorce[d] [its] analysis from a strict focus on the government’s payment decision,” the court held that materiality could be found in the VA’s taking “a number of actions to address noncompliance with fee regulations.”
The Eleventh Circuit made clear that it was taking a broader view of materiality only because the statutory regime prohibited the VA from refusing to honor guaranteed loans. It remains to be seen whether courts in other cases will endorse the view that materiality can be supported—as opposed to rebutted—where the government takes only lesser administrative actions against the defendant after learning of the alleged misconduct.
For more information about the FCA’s materiality requirement, contact the author or download Bass, Berry & Sims’ Healthcare Fraud & Abuse Review.