Posted by Jonathan Cohn and Brian Morrissey
On May 12, a federal district court dismissed what the New York Times had described as an “innovative” qui tam suit against U.S. Bank, N.A., alleging that the lender had submitted over $2.3 billion in false claims for FHA insurance payments. United States v. U.S. Bank, N.A., No. 3:13-cv-704 (N.D. Oh. May 12, 2015). In an unusual step, the suit was brought by a legal aid group, Advocates for Basic Legal Equality, Inc. (“ABLE”), rather than by an individual relator.
ABLE alleged that U.S. Bank initiated foreclosures on over 22,000 FHA-insured mortgage loans without complying with HUD loss-mitigation regulations, which generally require lenders to attempt to mitigate losses before foreclosure, such as by seeking a meeting with the borrower and by evaluating certain foreclosure alternatives. ABLE further alleged that U.S. Bank falsely certified its compliance with these regulations in annual certifications to FHA and in its requests for FHA insurance benefits.
DOJ declined to intervene, but submitted a statement of interest supporting several of ABLE’s arguments. U.S. Bank moved to dismiss ABLE’s complaint on multiple grounds.
In its opinion, the district court ruled that ABLE sufficiently pled that U.S. Bank had falsely certified compliance with HUD and FHA loss-mitigation requirements. However, the court dismissed the complaint under the public disclosure bar, 31 U.S.C. § 3730(e)(4)(A), holding that ABLE’s allegations were based on public disclosures and that ABLE was not an original source.
First, the court held that ABLE’s allegations were based on public disclosures because “the specific issue” of whether lenders had “complied with HUD’s loss mitigation requirement[s]” had been “litigated nationwide,” including in cases involving U.S. Bank. U.S. Bank (slip op. at 14). The court further observed that allegations of such non-compliance involving U.S. Bank were made public through a 2011 Consent Order issued by the Office of the Comptroller of the Currency, a 2011 Federal Reserve report, and a 2011 settlement between HUD and the bank. Id. at 15–16. ABLE protested that these disclosures merely described “‘generalized problems found throughout the industry in foreclosure processes,'” and did not specifically address U.S. Bank’s claims for FHA insurance. Id. at 16. But the court rejected that distinction, holding that the “primary focus” of ABLE’s complaint involved “alleged failure[s]” in “loss mitigation,” which were plainly described in these prior public documents. Id. Given that the Government was aware of these public allegations of the bank’s deficiencies in the loss-mitigation process, the court held that “the Government could infer” that allegedly false claims for FHA insurance payments would have followed. Id. at 17.
Second, the court held that ABLE failed to establish itself as an original source. ABLE’s complaint alleged that it had consulted with “many people” whose mortgages had been foreclosed by U.S. Bank, and had become “‘uniquely aware’ of three examples” of U.S. Bank’s alleged FCA violations through these contacts. Id. The court held that such knowledge is “neither direct nor independent” and is “not the model” of a “whistleblowing insider contemplated by the FCA.” Id. The court emphasized that ABLE could not qualify as an original sourced based on this information it derived from others. Id. at 18 (citing United States ex rel. Fine v. Advanced Sciences, Inc., 99 F.3d 1000, 1006–07 (10th Cir. 1996) (A relator’s knowing “must not be derivative of information of others, even if those others may qualify as original sources.”)).
As the court concluded, “[t]he complaint merely strings together information ABLE could have gleaned from news reports, government publications, court filings, publicly available documents, and conversations with individuals who participated in the events at issue. ABLE does not become an original source of information by putting its own spin on prior public disclosures.” Id.
The court’s decision underscores that it is difficult—if not impossible in many cases—for an entity other than an individual to qualify as an original source under the FCA’s public disclosure bar. As the court explained, regardless of whether the borrowers discussed in ABLE’s complaint could have qualified as original sources in their own right, an association seeking to represent their interests could not.
A copy of the Court’s decision can be downloaded here.