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United States v. Luce

United States District Court, N.D. Illinois, Eastern Division

November 23, 2016

ROBERT S. LUCE Defendant.


          John J. Tharp, Jr., United States District Judge

         The United States of America brought suit against Robert S. Luce, alleging violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729, et seq. and the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), 12 U.S.C. § 1833a, for statements made in relation to loan applications submitted to the U.S. Department of Housing and Urban Development (“HUD”) and the Federal Housing Administration (“FHA”). The statements were made on 92900-A forms submitted by MDR Mortgage Corporation (“MDR”) (the company Luce founded and presided over) and on MDR's annual verification forms, “V-forms.” This Court previously ruled on both parties' partial motions for summary judgment on liability, granting summary judgment to the government as to Luce's liability under the FCA and FIRREA for the false certifications on the V-forms for 2006, 2007, and 2008 and denying the motions for summary judgment with respect to the 92900-A forms. See Mem. Op., ECF No. 113. The government now moves for summary judgment on damages and penalties for defaulted loans insured during 2006-2008 (during which time Luce had false V-form certifications on file). Mot. Summ. J., ECF No. 122. For the following reasons, the motion is granted.


         This Court's Opinion granting summary judgment on liability discussed the factual background of this case in detail. See Mem. Op. 1-8. To briefly summarize, Luce is an attorney who founded a mortgage company, MDR, that served as a loan correspondent for HUD from 1993 through 2008. The majority of loans MDR processed were already insured by the FHA and were being refinanced into lower rate loans, although approximately 5% of MDR's business involved originating new FHA-insured loans. In order for MDR to be certified as a HUD/FHA approved loan correspondent, HUD required mortgagees to sign an annual verification form stating:

I certify that none of the principals, owners, officers, directors and/or employees of the [loan correspondent] are currently involved in a proceeding and/or investigation that could result, or has resulted in a criminal conviction, debarment, limited denial of participation, suspension, or civil monetary penalty by a federal state or local government.

Mem. Op. 5.

         In April 2005, Luce was indicted for wire fraud, mail fraud, making false statements, and obstruction of justice in connection with SEC violations that were unrelated to the operation of MDR. Nonetheless, Luce signed V-forms for MDR in 2006, [1] 2007, and 2008. Based on these false certifications, a prerequisite to MDR's participation in the HUD/FHA loan certification program, the Court found Luce liable under the FCA and FIRREA for damages associated with loans MDR insured from 2006 through August 7, 2008, the date Luce filed an amended V-form explaining the charges against him. See id. 12-22. This opinion addresses the government's resulting claim for damages.

         Before discussing damages, however, it is necessary to return again to the question of the materiality of Luce's false V-form certifications. This Court's opinion on liability was released before the Supreme Court's decision in Universal Healthcare Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016). The parties submitted briefing on whether that decision or the Seventh Circuit's subsequent decision in United States v. Sanford-Brown Ltd. et al., 840 F.3d 445 (7th Cir. 2016), should alter this Court's determination of liability. After consideration of those decisions, the Court reaffirms its finding of liability. The Supreme Court reiterated in Escobar that “[t]he term ‘material' means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property, ” which is the standard this Court used in its decision. Escobar, 136 S.Ct. at 2002; see Order, Dkt. 118 at 1-2. Furthermore, this Court's decision was not based merely on whether the verification form was “labeled a condition of payment, ” but also considered the “likely or actual behavior of the recipient” - namely, that HUD did in fact debar Luce upon determining his certifications were false. See Escobar, 136 S.Ct. at 2001-2003; Order, Dkt. 118 at 2. Compare Sanford-Brown, 840 F.3d at 445 (“Here, Nelson has offered no evidence that the government's decision to pay SBC would likely or actually have been different had it known of SBC's alleged noncompliance with Title IV regulations. On the contrary, as previously noted, the subsidizing agency and other federal agencies in this case “have already examined SBC multiple times over and concluded that neither administrative penalties nor termination was warranted.”). Given that the certification was required on both the V-forms and the individual loan forms, a reasonable person would “attach importance” to it. See Escobar, 136 S.Ct. at 2002-2003. In addition, as an attorney who had formerly worked at the SEC, Luce himself had reason to know the government attaches importance to criminal history in determining its course of action. See id. (explaining that materiality may be based on either objective or subjective knowledge of the importance attached to the representation by the recipient).[2]

         That is particularly so because the criminal history certification was a condition of program participation. Luce relies on Escobar's holding that the classification of a program requirement as a condition of payment is not dispositive of the question of materiality. It is true enough that Escobar eschewed dispositively assessing materiality on the basis of whether a program requirement is expressly labeled as a condition of payment, but Luce fails to acknowledge the substantive distinction between a certification of compliance with requirements governing the terms of program participation-even if such compliance is expressly designated as a condition of payment-and a regulation like 24 C.F.R. § 202.5(j)(2), which affirmatively prohibits program participation by mortgagees who have a principal “indicted for, or convicted of, an offense” bearing on the mortgagee's integrity. That is not a condition of payment premised on whether the participant has performed in the prescribed manner; it is a condition of basic eligibility that, if not satisfied, bars program participation altogether. As such, the certification required on the V-Form cannot be considered-objectively or subjectively-to be immaterial. Whatever label one attaches to its required criminal history certification, there is no basis in logic or the evidence of record to support the view that HUD would have extended the FHA loans had it known of Luce's criminal history. Certainly Luce failed to adduce evidence to support any such conclusion.[3]

         Luce also argues that Escobar requires a showing of proximate causation to sustain an FCA claim, but nothing in Escobar or Sanford-Brown discussed causation, much less overturned the longstanding Seventh Circuit rule that FCA violations require only a showing of “but for” causation. See U.S. ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir. 2005) (“If a false statement is integral to a causal chain leading to payment, it is irrelevant how the federal bureaucracy has apportioned the statements among layers of paperwork.”); United States v. First National Bank of Cicero, 957 F.2d 1362, 1374 (7th Cir. 1992) (“a demonstration that the government would not have guaranteed the loan “but for” the false statement is sufficient to establish the causal relationship between the false claim and the government's damages necessary to permit recovery under the False Claims Act”).[4] Materiality and causation are different factors; the former considers the importance of a statement, and its likely effect; the latter the question of whether a harm experienced by the recipient of a material misstatement is appropriately attributed to that material misstatement. That Escobar clarified the criteria by which materiality is measured implies nothing at all about the appropriate standard of causation. In any event, it is not for this Court to determine whether Seventh Circuit precedent has been impliedly overruled by the Supreme Court. See Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029 (7th Cir. 2004) (“In a hierarchical system, decisions of a superior court are authoritative on inferior courts. Just as the court of appeals must follow decisions of the Supreme Court whether or not we agree with them, . . . so district judges must follow the decisions of this court whether or not they agree.”) (internal citations omitted); A Woman's Choice-E. Side Women's Clinic v. Newman, 305 F.3d 684, 687 (7th Cir. 2002) (“only an express overruling relieves an inferior court of the duty to follow decisions on the books”).


         The government has moved for summary judgment on the amount of damages and penalties resulting from Luce's FCA and FIRREA violations. The government has identified 237 loans (11 new loans and 226 refinanced loans) that MDR processed between January 2006 and August 2008 that have since defaulted and have resulted in HUD/FHA paying insurance claims. To prevail on a summary judgment motion, the movant must demonstrate that there is no genuine dispute as to any material fact and that he is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). The “party opposing the motion for summary judgment must ‘submit evidentiary materials that set forth specific facts showing that there is a genuine issue for trial.'” Hakim v. Accenture U.S. Pension Plan, 718 F.3d 675, 681 (7th Cir. 2013) (citing Siegel v. Shell Oil Co., 612 F.3d 932, 937 (7th Cir. 2010) (citations omitted)).

         I. False Claims Act

         The FCA provides liability for any person who “(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1). A violator is liable for a civil penalty ranging from $5, 500 to $11, 000 per claim, “plus 3 times the amount of damages which the Government sustains.” United States v. King-Vassel, 728 F.3d 707, 711 (7th Cir. 2013) (quoting 31 U.S.C. ยง ...

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