Seventh Circuit Remand on “Proximate Cause” Issue Results in Summary Judgment for Defendant on FCA Claim

Two years ago, the Seventh Circuit reversed itself by abandoning its “but-for” causation test in FCA cases in favor of a “proximate cause” rule that had been adopted by all other circuits that had addressed the issue.  See United States v. Luce, 873 F.3d 999 (7th. Cir. 2017) (overruling United States v. First National Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992)).  The Seventh Circuit remanded the case to the district court with instructions to determine whether the government could establish that the defendant’s conduct proximately caused harm to the government.  In an opinion issued last week, the district court strictly applied the new standard and concluded the government could not show proximate cause.  United States v. Luce, 2019 U.S. Dist. LEXIS 114718 (N.D. Ill. July 10, 2019).

Luce was president of MDR Mortgage Corporation, which acted as a mortgage broker and loan correspondent for HUD and the FHA.  MDR was authorized to originate government-insured loans under certain conditions.  One such condition stemmed from a HUD regulation requiring that no officers of the company be indicted for or convicted of offenses reflecting adversely on the integrity, competency, and fitness necessary to participate as a lender or mortgagee in the federal programs.  Mortgagees were required to certify annually that none of their principals, owners, or officers, among others, was “ʻcurrently involved in a proceeding and/or investigation that could result, or has resulted in a criminal conviction, debarment, limited denial of participation, suspension, or civil monetary penalty by a federal, state or local government.’”  Id. at *3-4 (quoting federal Yearly Verification Report).  Despite having been indicted on charges of wire and mail fraud, making false statements, and obstruction of justice, Luce made several yearly certifications on behalf of MDR that he was not involved in any disqualifying proceeding or investigation.  After various loans that MDR had originated went into default and the government suffered losses on its guarantees, it brought claims against Luce under the FCA as well as under the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”).

In adopting the proximate cause standard in FCA cases in 2017, the Seventh Circuit  had referenced the common law of negligence and explained that proximate cause has two elements:  cause in fact and legal cause.  See Luce, 873 F.3d at 1012.  Cause in fact requires a showing that a “ʻdefendant’s conduct was a material element and substantial factor in bringing about the injury.’”  Id. (quoting Blood v. VH-1 Music First, 668 F.3d 543, 546 (7th Cir. 2012)).  Legal cause, however, “ʻis a question of foreseeability’” and “ʻwhether the injury is of a type that a reasonable person would see as a likely result of his or her conduct.’” Id. (quoting Blood, 668 F.3d at 546) (emphasis in original).

On remand before the district court, Luce argued that the government’s losses on defaulted loans were not reasonably foreseeable from Luce’s actions in allegedly falsifying certifications regarding the existence of disqualifying investigations.  2019 U.S. Dist. LEXIS 114718, at *24.  The district court agreed, explaining that proximate cause requires that “there [] be some nexus between the type or nature of the action and the type or nature of the loss.”  Id. at *27 (citing Martin v. Heinhold Commodities, Inc., 643 N.E.2d 734, 748 (Ill. 1994)).  The district court cited United States v. Hibbs, 568 F.2d 347 (3d Cir. 1977), the seminal Third Circuit case that introduced the proximate cause standard in FCA cases, to illustrate the reasons for declining to find proximate cause in the case before it.  Id. at *25-26.

In Hibbs, a real estate broker had submitted falsified certificates verifying that the condition of plumbing, electrical, and heating systems in six homes met the requirements for FHA-guaranteed mortgages.  The FHA insured the mortgages, and all six later defaulted.  The government sued Hibbs under the FCA, but the Third Circuit declined to find causation on grounds that but-for the false certifications, there would have been no mortgage and therefore no defaults.  Instead, the Court reasoned that the loans would have defaulted even if the certifications were truthful—therefore, according to the Third Circuit, Hibbs’s false certifications had not proximately caused the government’s losses.  Id. (citing 568 F.2d at 349-52).

The district court on remand in Luce court explained that, just as in Hibbs, there was no nexus between the alleged false statements and the loan defaults.  The loan defaults were not attributable to any malfeasance on the part of Luce or MDR and, so far as the record indicated, the loans in issue would have defaulted regardless of Luce’s allegedly false certifications that no disqualifying investigations existed.  Therefore, the court granted summary judgment for Luce on the FCA issue.  Id. at 27-30.

The decision on remand in Luce – applying the proximate cause standard to particular facts and, in the course of doing so, analogizing to the Third Circuit’s decision in Hibbs – confirms there is now little daylight among the circuits that have addressed the causation element in FCA cases.

A copy of the district court opinion in Luce can be found here.