On July 8, 2008, the United States Court of Appeals for the D.C. Circuit issued an important opinion that may provide a shield to companies in federal False Claims Act cases. In United States ex rel. K & R Ltd. Partnership v. Massachusetts Housing Finance Agency, No. 07-7014, 2008 WL 2651088 (D.C. Cir. July 8, 2008), the D.C. Circuit affirmed a grant of summary judgment for the defendant on False Claims Act (FCA) allegations related to certain mortgage notes. The court found that the qui tam relator’s FCA allegations were based on ambiguous contract language in the mortgage notes and that Mass Housing (1) made an objectively reasonable interpretation of the contract language and (2) did not believe its claims to be false or fraudulent. The court noted that both parties had reasonable interpretations of the mortgage note language and that the court need not decide which party had the “correct” interpretation because the FCA requires defendants submit false claims “knowingly” by

(1) having actual knowledge;

(2) acting in deliberate ignorance; or

(3) acting in reckless disregard.

K & R, 2008 WL 2651088, at *3. Ultimately, the court held that relator K & R did not make the minimum showing of “reckless disregard” under 31 USC § 3729(b), for Mass Housing could not have acted in reckless disregard when it believed its interpretation of the mortgage note language was both made in good faith and objectively reasonable.

The K & R court relied on the non-FCA decision Safeco Insurance Co. of America v. Burr, 127 S. Ct. 2201 (2007) in its opinion. In Safeco, the United States Supreme Court held that under the Fair Credit Reporting Act (FCRA), the “reckless disregard” standard could not be satisfied when based on ambiguous contract language interpreted by defendants in a reasonable manner. The Safeco court stated the defendant’s “reading [of the statute] was not objectively unreasonable, and so falls well short of . . . violating the statute necessary for reckless liability.” Safeco, 127 S. Ct. at 2216.

The K & R case is extremely important because it extends the logic of Safeco into other areas where “reckless disregard” is a requirement to demonstrate a violation of a statute. For companies that operate in regulated environments or under strict, yet ambiguous, contract terms, K & R demonstrates that, where a company’s interpretation of a statute is made in good faith and is objectively reasonable, it should not be deemed to have acted in “reckless disregard” of the law. Importantly, the impact of this decision should apply not only in the civil False Claims Act, but also to criminal statutes, such as the federal Health Care Fraud statute, 18 U.S.C. § 1347, where “reckless indifference” or “reckless disregard” has been used as the standard for determining whether there has been criminal wrongdoing.

Summary of Case

The relator in K & R alleged that Mass Housing knowingly submitted excessive claims for payments to the U.S. Department of Housing and Urban Development (HUD). K & R, 2008 WL 2651088, at *1. Under § 236 of the National Housing Act, HUD subsidizes mortgage payments for low-income families to assist with housing. Id. In 1993, Mass Housing “used proceeds from new bonds to ‘refund’ mostly higher interest bonds it used to finance loans, including loans for which Mass Housing received interest reduction payments from HUD under § 236.” Id. While Mass Housing retained these savings from its debt service, it did not in turn pass those savings along to HUD by “reducing its claims for payments.” Id. The parties interpreted the somewhat awkward language in the mortgage notes differently. K & R argued that Mass Housing overbilled HUD because changes in its debt service altered the interest rate in the mortgage notes. Mass Housing agreed that it presented claims for payment to HUD but denied those claims were false or fraudulent. Specifically, Mass Housing argued it had a reasonable interpretation of the mortgage note language at issue.

The relator alleged that Mass Housing overbilled HUD on these mortgage loans starting in 1993, resulting in $28 million of overpayments made by HUD. Under the FCA, the overpayments could result in an astonishing $100 million liability due to civil fines, treble damages and attorneys’ fees. The court stated “the parties and the district court have spilt much ink in explaining the meaning of these notes, each parsing different language supporting its own ‘unambiguous’ interpretation.” Id. at *2. However, the court noted that based on the evidence, both parties’ interpretations are plausible. “We need not decide which has the better reading, however, because the FCA requires that defendants make false claims ‘knowingly’. . . .” Id. at *3. The court emphasized that the defendant’s reading of the notes was objectively reasonable and that “K & R never explains why Mass Housing’s interpretation of the mortgage notes is unreasonable, much less why its interpretation constituted reckless disregard.” Id. Importantly, the defendant received no warning or notice that its interpretation of the mortgage notes language was anything other than reasonable. The parties “simply disagree about how to interpret ambiguous contract language” and, therefore, there is no genuine issue regarding whether Mass Housing “knowingly” presented false claims to the federal government. Id. at *4.


  • Taken together, K & R and Safeco provide a defense for companies and individuals to argue, as a matter of law, that there has been no FCA violation where a defendant has demonstrated good faith judgment and an objectively reasonable interpretation of an ambiguous government contract, regulation or statute.
    • In particular, one should consider the health care industry, which is a frequent target of FCA cases: Are health care fraud statutes and regulations ambiguous? Here is what the 4th Circuit has said: “There can be no doubt but that the statutes . . . . of Medicare and Medicaid are among the most completely impenetrable texts within human experience . . . . Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase.” Rehabilitation Ass’n of Virginia, Inc. v. Kozlowski, 42 F.3d 1444, (4th Cir. 1994).
  • After the Safeco and K & R decisions, it seems likely that the same reasoning will be applied to reasonable interpretations of ambiguous contracts, statutes and regulations in a variety of areas — both under civil fraud statutes and other criminal statutes that use a “reckless disregard” or “reckless indifference” standard. In order to benefit from this defense, however, companies and individuals should make certain that the interpretation is reasonable and is made in good faith by obtaining, in advance, an opinion on the interpretation from in-house or outside counsel.