Did the Eleventh Circuit Just Find a Narrow "Wrinkle" in Escobar or Create a Gaping Hole?

The Eleventh Circuit recently held that despite Escobar's command to focus on the government's "payment decision," the relevance of continued payment may "vary depending on the circumstances." In United States ex. rel. Bibby v. Mortgage Investors Corp., No. 19-12736, 2021 WL 137739 (11th Cir. Jan. 15, 2021), the court held that because the Department of Veterans Affairs (VA) was statutorily required to guarantee certain loans, the materiality of lenders' fraudulent certifications could not depend on whether the VA continued to pay loan holders. Instead, the court "cast [its] materiality inquiry more broadly to consider the full array of tools" available to the VA to detect and punish fraud. Id. at *7. And the court ultimately concluded that because the VA issued warnings and conducted audits, there were genuine materiality issues for trial.

In Bibby, mortgage brokers who specialize in VA home loans filed a qui tam action alleging that lenders were charging fees prohibited by VA regulations but expressly certifying that they charged only permissible fees. Specifically, the relators alleged that lenders were "bundling" together title examination and insurance fees (which are allowed) with attorney fees (which are not) as a single line-item when filing required mortgage forms. The district court granted summary judgment for the lender defendants on materiality grounds.

The Eleventh Circuit reversed, holding that genuine issues of material fact precluded summary judgment. There was no dispute that the VA was actually aware of the lenders' noncompliance with fee requirements, and so the key materiality question was how the "VA . . . react[ed]" to that knowledge. Id. at *6. Although the court acknowledged that "the government action relevant to the materiality inquiry is typically the payment decision," it concluded that "the VA's continued payment merits little weight because the payments were required by law." Id. at *7. Under the VA loan guarantee program, a lender certifies to the VA that it has complied with certain requirements, including that it has not charged impermissible fees. The VA then issues a guaranty to the lender, which sells the guaranty to a holder on the secondary market. By statute, the VA must honor the guaranties owned by holders in due course. That is, the VA must pay defaulted loans, regardless of any fraud by the original lender.

Based on this "important wrinkle," id. at *2, the Eleventh Circuit looked beyond the VA's payment for defaulted loans. It did not, however, confine its inquiry to other decisions that bear directly on payment, such as whether "the VA agreed to guaranty a particular loan despite actual knowledge." Id. at *7-8. It therefore did not treat as dispositive the fact that the VA continued to issue loan guaranties to the defendants despite its knowledge that they charged impermissible fees on a certain percentage of their loans. Id. at *7. The court also declined to focus on the fact that the VA never sought to suspend noncompliant lenders from the program. Instead, having "divorced [its] analysis from a strict focus on the government's payment decision," the court "s[aw] no reason to limit [its] view only to the VA's issuance of guaranties," id. at *8, or to its failure to disqualify lenders. The court therefore looked at "the VA's behavior holistically," and found evidence of materiality in the VA's release of a publication reminding lenders of the applicable fee regulations and its implementation of more frequent audits. Id. The court ultimately concluded that whether these actions supported a finding of materiality was a question for the fact finder.

Bibby's impact will be interesting to watch. Although the Eleventh Circuit framed the case as a narrow, context-specific departure from materiality's "typical[]" focus on the government's payment decision, id. at *7, its willingness to rely on remedial measures unrelated to payment or program participation may have a broader impact. The VA was required to continue paying loan holders, but it could have declined to issue additional loan guaranties to the defendants, disqualified them from participation in the program, or imposed administrative penalties. The fact that it did none of these things despite its actual knowledge of noncompliance with fee requirements suggests that the noncompliance was not material to payment. Moreover, other circuits have specifically rejected (albeit in different contexts) the Eleventh Circuit's view that remedial measures like warning letters or audits are evidence of materiality. For example, in United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 34­–­35 (1st Cir. 2017), the First Circuit found that such measures were strong evidence of immateriality, noting that they "show[ed] that [the government] was paying attention," which made its failure to take action to stop payment even more telling.

The Eleventh Circuit appears to view its "wrinkle" as applicable only in atypical cases where the law mandates government payment. Relators and the government will undoubtedly try to stretch it beyond that narrow context. We at Qui Notes will be watching closely to see whether they are successful.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.