In our previous blog on the Bibby case, we discussed the importance of the seal in False Claims Act (FCA) litigation. In our second installment of teaching moments from the Bibby case, we now will cover the “materiality” element of a False Claims Act claim.
But what exactly is “materiality” and why is it important to a whistleblower claim under the False Claims Act? Glad you asked – the Atlanta whistleblower attorneys at Bracker & Marcus LLC are always happy to explain it for you!
Review of the False Claims Act and the Materiality Element
First, let’s review what the False Claims Act is and the elements you need to prove in a False Claims Act claim.
The False Claims Act imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” paid by the government. 31 U.S.C. § 3729(a)(1)(A) & (B).
The basic elements of a False Claims Act claim are: (1) a false statement or fraudulent course of conduct that was (2) knowingly made or carried out (called “scienter” in legalese), (3) that was material, and (4) caused the government to pay out money or not collect money due to it.
Since the 2016 Supreme Court case of United Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), materiality has become one of the most litigated elements of an FCA claim.
The False Claims Act itself defines “material” as something that has a “natural tendency to influence or be capable of influencing” the government’s decision to pay a claim (31 U.S.C. § 3729(a)(4)). Escobar held that a false certification is material only if (1) “a reasonable man would attach importance to [it]” or (2) “the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter ‘in determining his choice of action,’ even though a reasonable person would not.” Escobar, 136 S. Ct. at 2002-03.
The Supreme Court made clear that no one factor can determine whether the false certification is material. Instead, courts should consider all of the facts to determine “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Id. at 2002.
Bibby and Materiality: Another Good Whistleblower Ruling
Escobar spawned many defense-side arguments but one has been particularly bad for whistleblowers. The argument goes: if the government was notified of the potential fraud and kept paying for the goods or services at issue, the fraud could not have been possibly material to the government’s decision to pay. Whistleblower attorneys have long been rallying against this approach and the Eleventh Circuit’s recent reversal in the Bibby case adds yet another favorable case to the whistleblower column.
In 2019, even though Bibby escaped dismissal after the relators’ seal breach years before, the District Court granted the defendants’ summary judgment motion and dismissed the case anyway because “no reasonable jury could find MIC’s alleged fraud was material.”
Relators appealed and the Eleventh Circuit reversed the District Court’s decision as to one of the two remaining defendants. By way of review, the relators were two brokers who originated loans for veterans under a Department of Veterans Affairs (VA) program. They filed a False Claims Act complaint against a myriad of defendants for routinely violating VA regulations by bundling prohibited fees into mortgage contracts along with permissible add-ons.
Most of the defendants had settled out of the case by the time the District Court ruled on summary judgment in 2019, leaving only Mortgage Investors Corp. (MIC) and its president, Bill Edwards. Although the Eleventh Circuit upheld defendant Edwards’ dismissal, it reversed the dismissal of defendant MIC because, as Eleventh Circuit Judge Charles Wilson wrote, “genuine issues of material fact remain as to whether MIC’s alleged false certifications were material.”
As explained in the opinion and other filings, the relators spent several years originating VA loans for veterans, particularly Interest Rate Reduction Refinance Loans (IRRRLs), which allow veterans to obtain VA-backed home mortgage loans at more favorable rates. Relators learned that “many lenders often charged veterans fees that were prohibited by VA regulations, while falsely certifying to the VA that they were charging only permissible fees” and thus “these lenders allegedly induced the VA to insure the IRRRLs, thereby reducing the lenders’ risk of loss in the event a borrower defaults.”
Judge Wilson found that the fact that the lenders can then sell the loans on the “secondary market” was an “important wrinkle” in this case because the VA “is required by statute and regulation to honor the guaranties corresponding to those loans.” The VA “must turn to the originating lender to seek a remedy for that lender’s fraud or material misrepresentation – it cannot simply refuse to honor the guaranties” in those cases where there is a problem with the loan, Judge Wilson explained.
Relators had alleged that MIC charged veterans “impermissible closing fees and attempted to cover its tracks by ‘bundling’ the unallowable charges with allowable charges, listing them together as one line-item” on loan forms. Judge Wilson noted that one example of this practice was when “MIC would collect prohibited attorney fees from veterans and bundle those fees with allowable title examination and title insurance fees, so that the attorney fees were concealed.”
By doing so, and by falsely certifying its compliance with VA regulations, MIC induced the VA to guaranty IRRRLs and to ultimately honor those guaranties when borrowers defaulted,” explained Judge Wilson. Judge Wilson noted that, in late 2011, “MIC began to distribute assets to its shareholders – in large part to Edwards, MIC’s majority shareholder and chairman of its Board of Directors.” “This trend escalated in 2012 and 2013. During that two-year period, MIC allegedly transferred a whopping $242,006,838 to Edwards and MSP (Edwards’ wholly-owned entity), leaving MIC insolvent.” MIC then shut down entirely.
In dismissing the case in 2019, District Court Judge Amy Totenberg held that the relators failed to prove materiality because they “have not pointed to any evidence that the VA regarded the disputed practices as material (i.e. central as opposed to collateral) such that noncompliance would have a palpable and concrete effect on the VA’s decision to honor the loan guarantees as concerns MIC.” Judge Wilson reversed that portion of Judge Totenberg’s order, explaining that the VA’s continuing backing of MIC’s IRRRLs did not mean MIC’s violations were not sufficiently material for purposes of the False Claims Act.
Instead, Judge Wilson explained that “the materiality test is holistic, with no single element – including the government’s knowledge and its enforcement action – being dispositive.” By doing so, Judge Wilson reminded everyone that the government continuing to pay does not mean that relators haven’t met the materiality standard. “To be sure, the materiality standard is ‘demanding,’ and courts may dismiss FCA cases at summary judgment where relators fail to create a genuine issue of material fact on that element,” Judge Wilson continued.
In this particular case, however, Judge Wilson found there was no strong evidence that the VA considered MIC’s actions as immaterial and “even if we viewed the VA’s continued issuance of guaranties as ‘strong evidence’ of immateriality, that evidence is not unrebutted.” Furthermore, a “factfinder would still have to weigh that factor against others, including, as relevant here, the fee and charges requirement being a condition to payment and essential to the IRRRL program.”
Thus, because “there is sufficient evidence to support a finding of materiality, we must leave that determination to the factfinder” Judge Wilson concluded, he reversed the district court’s grant of summary judgment.
As previously explained, defense lawyers have been (in many cases successfully) trying to portray the “government kept paying” factor of Escobar as requiring the dismissal of whistleblower claims for failure to prove materiality. Relators’ counsel has long been fighting against this single-factor approach to Escobar and the Bibby decision gives us yet another arrow in their quivers.
That said, the Eleventh Circuit did focus on the “important wrinkle” in the facts of the case as part of its materiality ruling so defense counsel will undoubtedly try to limit Bibby to its facts. Time will tell which perspective will prevail.
In the meantime, however, whistleblower lawyers can rejoice in a decision that demonstrated that courts are equipped to delve into the details of why the government continued to pay fraudulent actors to determine whether the fraudulent activity was material to the government’s decision to pay.
As always, if you spot fraud and think it may be time to blow the whistle, get a complimentary evaluation from a government fraud attorney as soon as possible.