The Seventh Circuit recently reversed a $2.7 million damages award against a mortgage company accused of lying in applications for federal loan guarantees. See United States v. Anchor Mortg. Corp., 2013 WL 1150213 (7th Cir. Mar. 21, 2013). The court found that the district court improperly calculated treble damages under the FCA, and joined a majority of appellate courts in concluding that damages should be calculated using a “net trebling” method, rather than a “gross trebling” method. The “net trebling” method would require a court to first calculate the government’s net damages (actual damages minus any offsets) before trebling under the FCA.
After a bench trial, the district court found that the defendants violated the FCA by lying in applications for federal guarantees on 11 loans. The FCA provides for treble damages, stating an award must be “3 times the amount of damages which the Government sustains because of the act of that person.” 31 U.S.C. § 3729(a)(1)(G). As a result, the district court added the amounts the United States paid to the lenders under the guarantees and trebled the total. It then subtracted any amounts the United States realized from selling the properties. So for example, the United States paid $131,643.05 on its guaranty of a particular loan. The district court trebled this amount to $394,929.15 and then subtracted the $68,200 – the value the United States realized by selling the collateral – resulting in $326,729.15 in damages.
The Seventh Circuit found the district court’s “gross trebling” calculation improper. Although the FCA does not specify a “gross trebling” or a “net trebling” approach, the Seventh Circuit explained that “net trebling” was the “norm” for damages calculations in other contexts and that the government had not shown why FCA cases should be treated any differently. Thus, the district court should have started with $131,643.05, subtracted $68,200, and trebled the net loss for a total of $190,329.15 in damages.
The Seventh Circuit explained that the United States’ loss is the amount paid on the guaranty less the value of the collateral. According to the court, the United States should not be able to manipulate a damages calculation by retaining the collateral it received in exchange for payments.
The nearly $140,000 disparity between the district court’s damages calculation and the Seventh Circuit’s damages calculation for a single claim demonstrates the importance of using a “net trebling” approach in FCA cases. The government will likely continue to argue for a “gross trebling” calculation in other jurisdictions. Thus, it will be important to highlight the Seventh Circuit’s decision – and other similar appellate court opinions – when litigating damages under the FCA.