In Luce, The Seventh Circuit Joins the Third, Fifth, Tenth, and D.C. Circuits in Adopting a Proximate Causation Requirement for FCA Claims
In United States v. Luce, the U.S. Court of Appeals for the Seventh Circuit recently held that a plaintiff suing under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., must demonstrate not merely that the government suffered a loss that it would not otherwise have suffered without the false claims (i.e., “but for” causation), but also that the government’s loss was the reasonably foreseeable result of the false claims (i.e., “proximate causation”). Although Luce does not herald a national sea change in FCA case law, the Seventh Circuit’s adoption of a proximate causation requirement in FCA cases is a departure from its own precedent. Indeed, Luce explicitly overruled the Seventh Circuit’s prior consideration of causation in United States v. First Nat’l Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992) (“Cicero”), but in doing so, joined a number of other circuits that have long required plaintiffs to demonstrate proximate causation.
Luce’s Factual Background
In order to participate in a federal Fair Housing Act (“FHA”) mortgage program, Robert Luce falsely certified on 2,500 mortgage applications submitted to the U.S. Department of Housing and Urban Development (“HUD”) and the FHA that he was not involved in an investigation that could result in a criminal conviction. In fact, Luce (an attorney) was indicted for wire fraud, making false statements, and obstruction of justice in 2005, and continued to represent in HUD forms that he signed in 2006, 2007, and 2008, that he was not the subject of an investigation that could result in a criminal conviction.
After the mortgagors defaulted on more than 200 of the mortgages that Luce’s company processed between 2006 and 2008 that resulted in HUD/FHA insurance payments, the United States sued Luce under the FCA, alleging that his false representations and omissions regarding his criminal history were both (1) material and (2) caused the government’s losses. The district court granted the government’s motion for summary judgment on the issue of liability under the FCA, and in a subsequent order, granted the government’s motion for treble damages under the FCA in an amount of $10.3 million. The district court held that Luce’s misstatements were both material under the standard articulated in Universal Healthcare Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), and also that they were the “but for” cause of the government’s losses, applying then applicable Seventh Circuit precedent at the time. In other words, the district court concluded that “but for Luce’s false statement[s] . . . [Luce’s company] would not have been in the position to originate any loans through the FHA program,” and this, the court held, “is sufficient under the FCA to permit the government to recover damages on the defaulted loans that [Luce’s company] certified.” United States v. Luce, 2016 WL 6892857, at *4 (N.D. Ill. Nov. 23, 2016).
The Seventh Circuit’s Opinion
Although the Seventh Circuit agreed that Luce’s misstatements were material, the court reversed the district court’s causation finding, overturned the Seventh Circuit’s twenty-five-year-old Cicero decision, and held that FCA plaintiffs must now show that the false statements were the proximate and not merely but for cause of the government’s losses.
Cicero, the older opinion that the Seventh Circuit overruled, had applied a “but for” causation requirement based upon the language of the FCA, which subjects a defendant to a potential penalty of “3 times the amount of damages which the Government sustains because of the act of that person.” 31 U.S.C. § 3729(a)(1). But even at that time, Cicero conflicted with an earlier Third Circuit decision that required a showing of proximate causation. See United States v. Hibbs, 568 F.2d 347 (3d Cir. 1977). The Fifth and D.C. Circuits subsequently joined the Third, and the Tenth Circuit cited Hibbs approvingly. In Hibbs, a case that like Luce involved false representations that the government alleged caused mortgage defaults, the Third Circuit held that a real estate broker’s false statements regarding the condition of properties did not cause the defaults that in turn required FHA’s payment of the defaulted mortgages that FHA had insured. (The Third Circuit, however, was interpreting a slightly different wording of the statute, which at the time required a showing that the government’s losses were “by reason of” the false statements, and not “because of” – a distinction the Seventh Circuit did not view as a meaningful difference in Cicero. See Luce, 873 F.3d at 1010 n.34.)
The Hibbs Court concluded that the false statements did not cause the loss in a proximate sense – i.e., in the sense that the loss was a foreseeable consequence of the false statements – because the losses were the result of mortgage defaults, and not the false statements themselves. Thus, even though FHA would not have insured the mortgages if it were aware of the false statements (i.e., “but for” causation), the false statements did not proximately cause the loss. As the Third Circuit explained: “To further illustrate the extreme to which the government’s argument would lead if the mortgagors had defaulted because their houses had been destroyed by a flood or some other uninsured catastrophe, the government’s theory would nevertheless hold Hibbs liable because he failed to call its attention to defects in the plumbing.” Hibbs, 568 F.2d at 351.
In Luce, the Seventh Circuit likewise adopted the proximate causation requirement, finding that requirement to be more consistent with the FCA’s statutory purpose, and concluding that Congress did not intend to depart from the common law’s approach, which is to require a showing of proximate causation. Indeed, the Seventh Circuit concluded that Escobar, although not directly addressing the issue of causation, gave the Luce Court some “pause” by virtue of language in Escobar stating that Congress generally intends to incorporate common law terms that it uses, and that “fraudulent” is a “paradigmatic example” of such a term that incorporates common law understandings of fraud. See Luce, 873 F.3d at 1011.
The Government’s Burden On Remand
On remand to the district court, the government will face the challenging task of showing why Luce’s misrepresentations are different from those in Hibbs. If misrepresentations about the quality of the properties were found not to have proximately caused the government’s losses in Hibbs, it is hard to imagine why misrepresentations about a criminal investigation – while certainly material, as the Seventh Circuit agreed – could have been the reasonably foreseeable cause of the mortgagors’ defaults.
As a general matter, a more challenging proximate causation requirement does not leave the government without a remedy, even in those instances where it will be unable to make this showing. For instance, the government may still pursue various criminal penalties based upon the false statements, from which it would recover restitution, forfeiture, and fines. What the government could lose, of course, is the substantial treble damages that are available under the FCA. And the loss of this award would certainly mean one less powerful arrow in the government’s quiver.