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United States v. Luce

United States Court of Appeals, Seventh Circuit

October 23, 2017

United States of America, Plaintiff-Appellee,
Robert S. Luce, Defendant-Appellant.

          Argued May 30, 2017

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:11-cv-05158 - John J. Tharp, Jr., Judge.

          Before Wood, Chief Judge, and Ripple and Rovner, Circuit Judges.


         The Fair Housing Act ("FHA") was enacted in order to increase home ownership. In service of this goal, the Department of Housing and Urban Development ("HUD"), which is statutorily tasked with implementing the FHA, offers insurance to certain mortgage lenders in order to decrease the risk borne by private industry and thus encourage lending. HUD maintains the viability of this scheme through a number of measures. One such measure prohibits individuals with criminal records from owning, or being employed by, a mortgage company.

         The United States brought this action against Robert Luce under the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq., and the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), 12 U.S.C. § 1833a. It alleged that Mr. Luce had defrauded the Government by falsely asserting that he had no criminal history so that his company could participate in the FHA's insurance program. The district court granted summary judgment in favor of the Government.[1]

         Mr. Luce now submits that his false certifications were not material and that lingering issues of material fact preclude summary judgment. Furthermore, Mr. Luce urges that the Supreme Court's decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016) ("Escobar"), requires that we depart from our traditional "but-for" FCA causation standard. Although we conclude that Mr. Luce's first two submissions are not persuasive, we believe that there is merit to Mr. Luce's view on causation. Escobar did not overrule explicitly our circuit precedent, which requires "but-for" rather than proximate causation. Nonetheless, it does provide significant guidance and deserves our respectful and careful consideration, especially when all other circuits to address the issue have chosen a path different from our own.

         Accepting Escobar as a catalyst, we have reviewed the principles of common-law fraud, the FCA's statutory language, and the rationale of our sister circuits; we now join those courts in holding that proximate cause is the appropriate test. Accordingly, the judgment of the district court as to causation is reversed, and the case is remanded to afford the parties an opportunity to address the merits under the proximate cause standard.




         One of the objectives of the FHA is to insure participating lenders against losses incurred in the home mortgage market. To qualify for FHA insurance, a loan must be made and held by an approved mortgagee. One type of covered lender, or mortgagee, is a "loan correspondent." "A loan correspondent is an entity that has as its principal activity the origination of mortgages for sale or transfer to other mortgagees."[2] Loan correspondents may apply for mortgage insurance, but cannot "hold, purchase, or service insured mortgages."[3] Rather, they are tasked primarily with soliciting the mortgagor and verifying employment information, earnings, and assets. In short, a loan correspondent "originate[s] and verif[ies] the initial information on an FHA loan."[4]

         In order to maintain the integrity of the insurance scheme, mortgagees are required to submit a Yearly Verification Report ("V-form") as part of an annual recertification procedure. During the relevant period, the V-forms read as follows:

I certify that none of the principals, owners, officers, directors, and/or employees of the above named mortgagee are currently 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 money penalty by a federal, state, or local government.[5]

         The annual submission of this verification is required for continued program participation. Mortgagees are additionally required to file a 92900-A form with each loan; that form contains a similar criminal history verification.[6]


         Mr. Luce is an attorney who has been employed at various times by the Securities and Exchange Commission and a series of Chicago law firms. Most recently, he was president and owner of his own mortgage company, MDR. Although he owned MDR, he "was not involved in the day-to-day operation of MDR"; rather, he "performed only high-level corporate work on behalf of" the firm.[7]

         MDR was a loan correspondent and therefore could originate loans by sending loan applications to a HUD-approved, direct-endorsement mortgagee for underwriting approval prior to closing. The process proceeded roughly as follows:

18. MDR loan officers would first talk to potential borrowers to find out what kind of rate they wanted and to learn about the property they wanted to finance. Once the potential borrower decided on the type of mortgage they [sic] wanted, the loan officer would let them [sic] know the rate which MDR would get daily from lenders. The loan officer would then set up an appointment with the borrower, get their w2s, pay stubs, home insurance, lender statement and the necessary documents to process the loan. The loan officer would then complete a loan application ... and when the packet was complete, the loan officer would give it to the loan processing department at MDR.
19. The processing department would review the package to make sure all the right documents were in it to send to the lender. ... Once the loan applications and other documents ... were complete, and the loan file was approved by MDR's processing department, the loan application would be sent to a lender for underwriting.
20. After the loan package was sent to the lender, MDR would get approval from the underwriter. If the lender needed more information, the package would be sent back to the processing department at MDR to gather the information from the loan officer.[8]

         For its involvement, MDR received a nominal processing fee of $450 and a commission.

         In April 2005, Mr. Luce was indicted in an unrelated matter for wire fraud, mail fraud, making false statements, and obstruction of justice. Following his indictment, Mr. Luce informed James Passi, his son-in-law and MDR Vice President, of the criminal charges. Nonetheless, MDR continued to state on its V-forms and 92900-A forms that its officers were not currently subject to criminal proceedings. Mr. Luce signed the V-forms; his subordinates signed the 92900-A forms.

         Almost three years after Mr. Luce's indictment, in early February 2008, Passi provided information related to the pending criminal charges to HUD's Office of Inspector General. A brief investigation ensued, and, on February 25, 2008, the investigator issued a Referral for Suspension/Debarment.[9]

         In July 2008, Mr. Luce pleaded guilty to obstruction of justice in the separate criminal proceeding. On or about August 8, 2008, Mr. Luce amended his V-forms to reflect the criminal indictment. Thereafter, Mr. Luce was debarred, and MDR went out of business. During the period between Mr. Luce's April 2005 indictment and the August 2008 V-form amendments, MDR originated 2, 500 loans. Approximately 250 of those loans are now in default; 95% of the defaulted loans were refinances of existing loans previously insured by the FHA.


         The United States brought suit against Mr. Luce in July 2011, seeking treble damages and civil penalties under the FCA and the FIRREA. Counts one and two of the complaint alleged violations of the FCA by either submitting false claims or "using a false record or statement to get a false claim paid."[10] Count three of the complaint alleged that Mr. Luce was subject to civil penalties under the FIRREA because he had "unlawfully, willfully and knowingly made, used, or caused to be made or used, false and fraudulent records, statements, or certifications to HUD" in violation of 18 U.S.C. § 1006, one of the predicate offenses identified in the FIRREA, 12 U.S.C. § 1833a.[11] At bottom, the complaint alleged that Mr. Luce personally lied on the V-forms and that his subordinates lied on the 92900-A forms[12] in order to participate fraudulently in the HUD insurance scheme.

         Both parties eventually moved for summary judgment on liability, and, on September 30, 2015, the district court ruled on those motions, finding Mr. Luce liable for the false certifications on the 2006, 2007, and 2008 V-forms. In so doing, it noted that "[t]he FCA provides liability for any person who '(A) knowingly presents ... a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.'"[13] The court held that there was no question as to Mr. Luce's liability for the false certifications on the relevant V-forms because he had signed those documents while aware of his pending criminal charges. The district court also held that the false certifications on the V-forms were material as a matter of law "[b]ecause the certification on the V-forms constituted fraud in fulfilling a prerequisite to receiving government funds."[14]

         Finally, the court noted that FIRREA liability requires "a false statement made by 'an officer, agent or employee of or connected in any capacity with' HUD, with intent to defraud or deceive HUD.[15] The court had no trouble determining that, because he had signed the V-forms while aware of his criminal status, "Luce knowingly made false statements on the V-forms with the intent to deceive HUD.[16] Accordingly, "[b]ecause no reasonable jury could find for Luce on the FIRREA claims relating to the V-forms in 2006, 2007 and 2008, " the district court also granted summary judgment "to the government on the FIRREA claims for the V-forms from 2006-2008."[17]

         The district court declined to impose liability for the 92900-A forms because "the government's evidence [wa]s far too thin to command a conclusion that Luce knew about the requirement to file forms 92900-A."[18] Rather, the court concluded that "[w]hether Luce had actual knowledge or was recklessly or deliberately indifferent to the existence of the 92900-A forms is a credibility determination for a jury that precludes a finding of summary judgment for either party on the 92900-A forms."[19] The district court also held that issues of fact precluded summary judgment on the FIRREA claim related to the 92900-A forms.

         Following its entry of summary judgment in favor of the Government on the FCA and FIRREA claims related to the V-forms, the court held a status hearing. During that hearing, the parties discussed the necessity of a trial:

MR. SHAPIRO: I believe we're going to trial, Judge. We tried to work some stuff out but it hasn't been worked out yet. I will continue to try and work it out with the government short of it, but I think the government would like to set a trial date today.
THE COURT: Okay. And so we're only talking now about the 2005 claims based on the 92-900A [sic] forms, correct?
MS. NORTH [for the Government]: Your Honor, actually we're not. We'll go to trial and not pursue the 2005 claims and go forward on damages and penalties for what has been decided on summary judgment., [20]

         After further discussion, the court expressed some doubt that there was a factual dispute concerning damages. It therefore decided to allow the Government to submit a summary judgment motion directed to the issue of damages to determine if there was a genuine issue of material fact with respect to "the dollar figures"[21] before it empaneled a jury.

         In its motion for summary judgment on damages, the Government argued that it was entitled to "FCA damages of $111, 195, 477 because that amount is equal to three times HUD's net loss on the 237 loans that Luce's MDR Mortgage Corporation originated between the relevant dates."[22] Mr. Luce opposed summary judgment on various grounds, including that the Government was required to establish "the foreseeability of the damages it claims" and that "[a] reasonable jury could conclude that it was not foreseeable ... that he would be responsible for future borrower defaults on 237 loans because of his misrepresentations on the V forms."[23]

         Before the district court had the opportunity to rule on the Government's motion for summary judgment on damages, the Supreme Court issued its opinion in Escobar, which directly addressed the question of materiality in FCA cases. The district court therefore ordered additional briefing on "the Court's ruling as to liability."[24] In response, Mr. Luce contended that his V-form certifications were not material under Escobar. He further argued that Escobar's instruction to apply common-law fraud principles required the application of proximate, rather than but-for, causation.

         On November 23, 2016, the district court addressed both Escobar and the Government's motion for summary judgment on the question of damages. The court, this time applying the heightened materiality standard articulated in Escobar, again found material Mr. Luce's false certifications. The district court also rejected Mr. Luce's argument that Escobar impliedly overruled our precedent applying but-for causation and instead required proximate causation in FCA cases. It accordingly found that Mr. Luce's false V-form certifications were the but-for cause of the loss and awarded $10, 357, 497.69 in damages.[25] "Because Luce would be unable to pay any amount (on top of the damages and penalty imposed under the FCA), the Court assesse[d] a penalty of zero on the FIRREA violations."[26] A final judgment was entered on November 23, 2016.[27]



         We review the district court's grant of summary judgment de novo. Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson, 238 F.3d 891, 894 (7th Cir. 2001). Summary judgment is appropriate when, construing the record in the light most favorable to the nonmoving party, Canen v. Chapman, 847 F.3d 407, 412 (7th Cir. 2017), there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law, Blasius v. Angel Auto., Inc., 839 F.3d 639, 644 (7th Cir. 2016). However, we are "not required to draw every conceivable inference from the record" in favor of the nonmoving party, but "only those inferences that are reasonable." Schwartz v. State Farm Mut. Auto. Ins. Co., 174 F.3d 875, 878 (7th Cir. 1999) (quoting Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991)).


         We turn first to Mr. Luce's contention that his false V-form certifications were not material under Escobar.


         In Escobar, a young woman died after she received mental health treatment by unlicensed and unsupervised caregivers at a clinic operated by one of Universal Health Services' subsidiaries. When submitting reimbursement claims to Medicaid, however, the clinic had used payment codes that corresponded to services provided by licensed professionals. The deceased's parents later sued Universal Health Services under an "implied false certification theory of liability, " Escobar, 136 S.Ct. at 1997; specifically, the Escobars claimed that the clinic "misrepresented its compliance with mental health facility requirements that are so central to the provision of mental health counseling that the Medicaid program would not have paid the[] claims had it known of these violations, " id. at 2004.

         The district court dismissed the complaint on the ground that none of the regulations that the clinic allegedly violated was a condition of payment. The First Circuit reversed in part and remanded. It reasoned that, "[t]o determine whether a claim is 'false or fraudulent' based on such implicit communications, ... it 'asks simply whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment.'" Id. at 1998 (quoting United States ex rel. Escobar v. Universal Health Servs., 780 F.3d 504, 512 (1st Cir. 2015)). According to the First Circuit, "the regulations themselves 'constitute[d] dispositive evidence of materiality/ because they identified adequate supervision as an 'express and absolute' condition of payment and 'repeated[ly] reference[d]' supervision." Id. (alterations in original) (quoting United States ex rel. Escobar, 780 F.3d at 514)).

         The Supreme Court vacated and remanded. Initially, it agreed with the First Circuit that a plaintiff could recover under the FCA on the basis of an "implied false certification": "liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant's noncompliance with a statutory, regulatory, or contractual requirement." Id. at 1995. The Court observed that Congress had not defined "false" or "fraudulent" for purpose of the FCA. Nevertheless, the Court continued, "[i]t is a settled principle of interpretation that, absent other indication, Congress intends to incorporate the well-settled meaning of the common-law terms it uses." Id. at 1999 (quoting Sekhar v. United States,133 S.Ct. 2720, 2724 (2013)) (alteration in original). "Because ...

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