The D.C. Circuit of the United States Court of Appeals has ruled in a recent qui tam case involving claims for subsidy payments to the federal government, U.S. v. Massachusetts Housing Finance Agency, __ F.3d ___ (D.C. Cir. 2008). Under the National Housing Act (NHA), the federal government subsidized mortgage payments of owners of low-income rental housing. As a lender under the NHA program, the qui tam defendant, MassHousing, submitted claims for subsidy payments to the federal government for interest payment amount not paid by the owner under the NHA program. To finance its operations, MassHousing issued tax-exempt bonds and used the proceeds to finance loans under the NHA program. In submitting its claims to the federal government, MassHousing certified that the subsidy payment requested reflected the owner’s interest rate of its permanent loans established by the mortgage notes.

In 1993, MassHousing issued new bonds and used the proceeds to retire its higher interest bonds used to finance loans under the NHA program. As a result of the issuance of new bonds, MassHousing witnessed substantial savings. K&R Limited Partnership, the qui tam plaintiff, argued that such savings should have been passed onto the federal government because pursuant to the terms of the NHA program, “the 1993 bond refund was a loan refund that lowered MassHousing’s ‘net interest costs,’ requiring MassHousing to reduce the mortgage payments.” MassHousing, interpreting the mortgage notes, however, argued that the 1993 was not a loan refund which would have triggered a recalculation of the mortgage payments.

Asked to determine MassHousing’s liability under the False Claims Act (FCA), the D.C. Circuit addressed the “knowingly” requirement of False Claims liability. Applying the FCA’s definition of “knowingly,” which constituted (1) having actual knowledge, (2) acting in deliberate ignorance or (3) acting in reckless disregard, the court found that the plaintiff failed to demonstrate why MassHousing’s interpretation of the mortgage notes was unreasonable such that it would constitute “reckless disregard” and failed to present evidence “that might have warned [MassHousing] away from the view it took.” More specifically, the court reasoned that, “MassHousing’s failure to obtain a legal opinion or prior HUD approval cannot support a finding of recklessness without evidence of anything that might have given it reasons to do so.” Thus, the court concluded that disagreement over the interpretation of ambiguous contract language without evidence of the unreasonableness of the interpretation is not sufficient to demonstrate that a contractor “knowingly presented a false claim” to the federal government.

In rendering its decision in MassHousing, the D.C. Circuit has, in effect, provided a much-needed shield for contractors against FCA liability by requiring plaintiffs to submit proof of a contractor’s knowing violation of the FCA beyond mere disagreement over reasonable interpretations of contract terms. Thus, after MassHousing, a contractor’s exposure to potential FCA liability is lessened, particularly in situations where two reasonable courses of action and/or interpretations exist and where, upon a good faith basis, a contractor selects one reasonable course of action over another.