On Friday, a Houston federal court entered judgment totaling $295.5 million in an FCA and FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989) case, up from the jury’s verdict of $92.9 million. The case is United States v. Allied Home Mortgage Corporation, et al., 4:12-cv-02676-GCH (S.D. Tex.), and it centers around defaulted home mortgage loans insured through the U.S. Department of Housing and Urban Development (HUD). We here at LLB previously wrote about the jury’s verdict in this intervened qui tam (available here).
HUD, through the Federal Housing Administration (FHA), offers mortgage insurance programs that insure approved lenders against losses on defaulted home mortgage loans. As we have explained before, HUD and FHA impose strict underwriting and quality control requirements on participating lenders, and failure to comply with these requirements can give rise to FCA liability.
An Opinion and Order the Court issued on September 14, 2017 forecasted an even higher judgment amount of $298,498,325. That order awarded treble FCA damages totaling $278,948,325, near-max FCA penalties of $10,000 per violation totaling $12,950,000, and substantial FIRREA penalties totaling $6,600,000 against the defendants, which are two mortgage companies and their president/CEO (collectively referred to by the court as “Allied”). But, without explanation, the final judgment later proposed by the government, which the Court has now entered, shaved a few million dollars off of the amount to be owed by one of the Allied defendants. It is unclear whether the approximately $3 million haircut came off of the FCA damages amount, the FCA penalties amount, the FIRREA penalties amount, or if it was simply a mistake. Because the figures discussed in the Court’s September 14 Opinion and Order reflect the best detailed information available to us, we have provided those figures in the discussion below.
1. False Claims Act Damages ($278.9 million)
The FCA mandates trebling of damages sustained under the FCA. So, the enormous jump in this case from the $92.9 million in damages as found by the jury and the $278.9 million in treble damages as found in the Court’s Opinion is actually just business as usual to seasoned FCA practitioners. This mandatory ballooning of liability is, in our minds at LLB, one of the largest factors that makes the FCA, which is a civil statute, best characterized as a quasi-criminal statute.
But one of the building blocks of the Court's assessment here is worth noting: It rejected the defendants’ plea that only the Government’s net damages – the difference between the amount the United States paid on the HUD insurance claims minus any payment back to the United States as a result of those claims – should be trebled under the FCA. Citing United States ex rel. Longhi v. United States, 575 F.3d 458, 467 (5th Cir. 2009), the Court held that “well established” and “clear precedent” from the Fifth Circuit directs the damages awarded by the jury to be tripled before any subtractions to the award are made for compensatory payments previously received by the Government from any source. In other words, the District Court endorsed an award of damages based on the Government’s gross damages, which would ignore the benefit the Government received through repayment.
This is significant for at least two reasons: (1) It is to us at LLB, an aggressive reading of Longhi, and (2) if it correctly reads Fifth Circuit law, then the Fifth Circuit would be departing from the trend in other circuits that instead favor a so-called “benefit-of-the-bargain” measure of FCA damages. Under that measure, the FCA damages subject to trebling are the losses sustained by the Government after offsetting any value or compensation received by the Government. See, e.g., United States v. United Techs. Corp., 782 F.3d 718 (6th Cir. 2015) (endorsing a benefit-of-the-bargain measure of damages); U.S. v. Anchor Mortgage Corp., 711 F.3d 745 (7th Cir. 2013) (same); United States v. Science Applications Int'l Corp., 626 F.3d 1257 (D.C. Cir. 2010) (same); United States ex rel. Wall v. Circle C Construction, 868 F.3d 466 (6th Cir. 2017) (same, and also instructing the government to pay the defendant’s attorneys’ fees because of the government’s excessive damages theory).
From a review of the briefing, it appears there was some confusion behind this aspect of the Court’s award. The Government’s briefing did not even argue for a trebling of gross damages; rather, the Government appears to agree with defendants that net damages should be trebled. Instead, the Government argued that, factually, its requested damages amount reflected net (not gross) damages, and “it is these [net] amounts that the United States requests the Court to treble.” (Dkt. No. 517 at p. 2-3). Here is where the confusion comes in: The Court’s opinion awards the Government its requested [net] damages amount, while discussing that amount as if it represents gross damages. (Dkt. No. 541 at pp. 5-6).
For the FCA law nerds out there (like us), this one is worth watching for a possible appeal on the legal issue of where the Fifth Circuit stands on gross versus net damages under the FCA.
2. False Claims Act Penalties ($12,950,000)
In addition to the mandatory trebling of FCA damages, the FCA directed the Court to assess a per-violation civil penalty for each of the 1,295 FCA violations as found by the jury. The amount of the penalty is to be decided in a court’s discretion, within the range of $5,500 to $11,000 for each violation (which is the penalty range applicable to FCA violations that occurred prior to November 2, 2015).
Here, the Court determined that a $10,000 per-violation penalty – just short of the maximum allowable amount – was warranted based on the totality of circumstances, including the prolonged, consistent enterprise of fraudulent activity, considerable resulting damage to the United States, and unwillingness to accept responsibility.
3. FIRREA Penalties ($6,600,000)
Finally, separate from the FCA liability, FIRREA requires the Court to assess a civil penalty for each of the FIRREA violations. The amount of the penalty is in a court's discretion up to a general maximum of $1,100,000 per violation or a $5,500,000 cap for continuing violations.
Finding the Allied defendants’ conduct egregious and “instrumental in injuring the public to a degree that cannot be overstated,” but tempered somewhat by the Allied defendants’ current poor financial situation, the Court’s Opinion assessed total FIRREA civil penalties of $6,600,000, 33% less than the $9,900,000 total FIRREA civil penalty requested by the Government.
The Court’s decision illustrates how the FCA’s quasi-criminal statutory framework can cause a jury verdict to grow exponentially before entry of judgment, especially in cases such as this where a court imposes near-max FCA penalties in addition to other statutory penalties. We will keep an eye on this case for a possible appeal and report back with any significant developments.
Disclosure: V&E is among the counsel to a former Allied employee who was a defendant in this case and settled prior to trial.