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False Claims Act Statistics, News & Analysis

A Rebel Claim Without a Cause? Michigan Federal Court Analyzes False Claims Act Causation of Damages Standard

In the recent decision in United States v. Quicken Loans Inc., the district court found the government adequately pleaded that Quicken Loan Inc. (“Quicken”) submitted false claims and made false statements material to false claims for insurance payouts from the Federal Housing Administration (“FHA”) for defaulted FHA-insured loans that Quicken had not properly underwritten. No. 16-CV-14050, 2017 WL 930039 (E.D. Mich. Mar. 9, 2017). As a result, the Court denied most of Quicken’s motion to dismiss except for one theory of liability and certain untimely claims.

Wait, don’t go! We at the LLB know this fact pattern is not the most unique (we’ve covered it here and here). But the court’s opinion dives into many relevant issues for FCA defendants; so many, in fact, that we can’t do justice to them all in one post: knowledge and Safeco, materiality under Escobar, Rule 9(b), and others. For this post, we will tread into less familiar waters: the court’s analysis of the rarely-discussed topic of causation of damages under the FCA.

To set the stage, the government alleged that Quicken represented to the FHA that certain mortgages had been properly underwritten and found eligible for FHA insurance when, in fact, they were not. Quicken allegedly permitted employees to request inflated values from appraisers, seek improper management exceptions to underwriting requirements, miscalculate the income of lenders, manipulate data entered into the underwriting system, and ignore red flags from that system. The government alleged that Quicken’s scheme caused the government to pay insurance claims on defaulted FHA-insured mortgages.

After ruling that the government adequately pleaded knowledge and materiality for all but the manipulation of data theory, the court reached the issue of causation of damages. The court explained that the FCA imposes two types of civil liability—civil penalties and actual damages—and that to recover actual damages, the government has to show the defendant’s conduct caused the government’s damages, while causation is not required for penalties. Id. at *19.

There is not a uniform standard for causation of damages, however. The court noted that the Seventh Circuit requires only that the government show that it would not have insured the loan “but for” the false claim or false statement. United States v. First Nat’l Bank of Cicero, 957 F.2d 1362, 1374 (7th Cir. 1992). By contrast, the Third, Fifth, Sixth, and D.C. Circuits, and the district court here, apply a “proximate cause” standard, which requires showing that “specific misrepresentations made to” the government “were the direct and proximate cause of” the government’s damages. See, e.g., United States ex rel. Fago v. M & T Mortg. Corp., 518 F. Supp. 2d 108, 122 (D.D.C. 2007).

The court further noted that the definition of proximate cause itself varies between courts. It explained that some courts have suggested that a FCA defendant should only be liable for losses that result “because of” the specific misstatement in the claim. Id. at 20. Quicken argued that under this standard, the government must allege that the loan default actually was caused by the specific misstatement, and not some other circumstance. For example, if the government alleged Quicken misrepresented a borrower’s monthly income, the government would then have to show that the default was caused by the borrower’s lack of monthly income and not another cause such as poor health, divorce, or another factor unrelated to the misstatement of the borrower’s income.

Ultimately, the court rejected Quicken’s argument and found that “foreseeability,” not “because of,” is the appropriate proximate cause standard under the FCA. Applying the “foreseeability” standard, the court held that the complaint’s allegations must “support an inference that it was reasonably foreseeable that the false claim would result in a default of the mortgage loan.” Id. at 21. Under the foreseeability test, the court found that the government plausibly pleaded that Quicken’s alleged actions were the proximate cause of the defaults because Quicken’s misstatements implicated the borrower’s ability to repay the loans, such that the borrower’s ultimate default was a reasonably foreseeable outcome. The court also emphasized that proximate cause was most appropriately resolved by a jury.

As the court acknowledged, the “foreseeability” proximate-cause standard is not favored by all courts. Indeed, some judges have criticized such a standard because it adopts a traditional principle of tort law, which is focused on compensatory damages, in the context of a punitive statute like the FCA. See United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 734 (10th Cir. 2006) (Hartz, J., concurring and dissenting in part). The practical result of the court’s adoption of the “foreseeability” standard for FCA cases is that it may allow the FCA’s punitive treble damages against defendants even where the connection between the alleged specific false statement or false claim and the government’s actual damages is very attenuated.



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Author

Daniel T. Wallmuth

Daniel T. Wallmuth Associate