United States v. Anchor Mortgage Corp. ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 10-3122, 10-3342 & 10-3423
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
A NCHOR M ORTGAGE C ORPORATION and
JOHN M UNSON,
Defendants-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 C 210—Matthew F. Kennelly, Judge.
A RGUED O CTOBER 31, 2012—D ECIDED M ARCH 21, 2013
Before E ASTERBROOK, Chief Judge, and W ILLIAMS and
S YKES, Circuit Judges.
E ASTERBROOK, Chief Judge. After a bench trial, a district
judge found that Anchor Mortgage Corporation and
its CEO John Munson lied when applying for federal
guarantees of 11 loans. 2010 U.S. Dist. L EXIS 81298 (N.D.
Ill. Aug. 11, 2010). The False Claims Act provides sub-
stantial penalties for fraud in dealing with the United
2 Nos. 10-3122, 10-3342 & 10-3423
States and its agencies. 31 U.S.C. §3729(a)(1). The district
court imposed a penalty of $5,500 per loan, plus treble
damages of about $2.7 million.
Defendants’ lead argument on appeal is that they
did not have the necessary state of mind—either actual
knowledge that material statements were false, or a
suspicion that they were false plus reckless disregard
of their accuracy. See 31 U.S.C. §3729(b)(1)(A). The
district court inferred knowledge, and that finding
stands unless clearly erroneous. Fed. R. Civ. P. 52(a)(6);
Anderson v. Bessemer City, 470 U.S. 564 (1985).
Anchor submitted two kinds of false statements: first,
bogus certificates that relatives had supplied the down
payments that the borrowers purported to have made,
when it knew that neither the borrowers nor any of their
relatives had made down payments (falsity meant that
the borrowers and their families had no equity in the
properties, with correspondingly little reason to repay
the loans; borrowers who could not afford down pay-
ments also were less likely to have the means to re-
pay); second, Anchor represented that it had not paid
anyone for referring clients to it, but in fact it paid at
least one referrer (Casa Linda Realty).
Appellants ask us to ignore the bogus-certificate
frauds on the ground that CEO Munson did not know
about their falsity. But the district judge found that
Alfredo Busano, head of one of Anchor’s branch offices,
knew what was going on. Corporations such as Anchor
“know” what their employees know, when the em-
ployees acquire knowledge within the scope of their
Nos. 10-3122, 10-3342 & 10-3423 3
employment and are in a position to do something about
that knowledge. See, e.g., Prime Eagle Group Ltd. v. Steel
Dynamics, Inc., 614 F.3d 375 (7th Cir. 2010). Busano ac-
quired this knowledge as part of his duties at Anchor,
and he could have rejected any loan application that
had false information about the down payment. Instead
he certified to the federal agency that the information
was true. Busano’s knowledge was Anchor’s knowledge.
As for the referral fees: Munson says that he thought
them proper because federal regulations permit com-
pensation of a joint venture in which a mortgage
broker has an interest. Munson testified that he thought
that such a “controlled business arrangement” (the reg-
ulatory term at the time) had been established. But
Munson conceded that the final paperwork was not
signed and that the payments were made to Casa Linda
Realty, not the separate entity that Anchor and Casa
Linda had discussed creating. Since Munson knew that
no “controlled business arrangement” was in existence,
the district court did not commit a clear error in
finding that Munson knew that the statements to the
federal agency were false.
This brings us to damages. One question is whether
the district judge should have awarded double damages
under §3729(a)(2) rather than treble damages under
§3729(a)(1). The statute requires treble damages unless
“the person committing the violation . . . furnished
officials of the United States responsible for investigating
false claims violations with all information known to
such person about the violation within 30 days after
4 Nos. 10-3122, 10-3342 & 10-3423
the date on which the defendant first obtained the in-
formation” (§3729(a)(2)(A)). Munson reported some
false claims that Anchor had submitted, and he
contends that this calls for double damages.
Yet the statute does not cap damages for every viola-
tion just because any violation has been reported. Sub-
paragraph (A) refers to “the violation”; each must be
assessed separately. That’s an implication of the definite
article (“the”) and the inescapable consequence of the
temporal reference. Double damages are permissible
when the defendant tells the truth “within 30 days
after the date on which the defendant first obtained the
information”. Coming clean 29 days after submitting
one false claim does not mitigate the penalty for other
false claims that had been submitted months earlier.
The United States gave Munson and Anchor credit for
self-reporting: it did not seek any penalty for the frauds
he reported. The 11 claims on which the district court
awarded treble damages were among Anchor’s false
claims that Munson never reported or attempted to
correct. The agency discovered the falsity after a large
fraction of Anchor’s clients defaulted and an investiga-
tion turned up problems. Munson did not furnish
“all information” about any of these 11 claims, so the
district court was required to treble rather than double
the damages.
But treble what? The hanging paragraph at the end of
§3729(a)(1) says that the award must be “3 times the
amount of damages which the Government sustains
because of the act of that person.” The district judge
Nos. 10-3122, 10-3342 & 10-3423 5
added the amounts the United States had paid to lenders
under the guarantees and trebled this total. Then he
subtracted any amounts that had been realized, by the
date of trial, from selling the properties that secured the
loans. For example, the Treasury paid $131,643.05 on its
guaranty of a particular loan. Three times that is
$394,929.15. The real estate mortgaged as security for
that loan sold for $68,200. The judge subtracted the
sale price from the trebled guaranty; the result of
$326,729.15 represented treble damages. To this the
judge added the $5,500 penalty, for a total of $332,229.15.
The process was repeated for the other parcels.
Defendants propose a different approach. Like the
district judge, they start with $131,643.05, but they im-
mediately subtract the $68,200 that the United States
realized from the collateral. The net loss is $63,443.05.
Treble that, and the result is $190,329.15. Add $5,500 for
a total of $195,829.15. Repeat for the other parcels. We
call defendants’ preferred approach the “net trebling”
method, and the district court’s (which the United States
endorses) the “gross trebling” method.
Section 3729(a) calls for trebling “the amount of damages
which the Government sustains”. That’s an unfortunate
expression, because “damages” usually represents the
amount a court awards as compensation. That makes
§3729(a) circular. The word for loss usually is “injury” or
“damage”—or just “loss.” The United States has not
argued that the use of “damages” rather than “damage”
or “injury” or “loss” has any significance, however. So
we must decide whether to use net loss or gross loss.
6 Nos. 10-3122, 10-3342 & 10-3423
The United States maintains that Anchor and Munson
have not preserved this question for appellate resolution.
We conclude that they have. Their lawyer raised the
subject in arguments to the district judge at the close of
the evidence (pages 337–38 of the trial transcript).
Counsel asked the judge to use net trebling, though he
did not cite a case. A legal point is not forfeited by omis-
sion of the best authority. See, e.g., Elder v. Holloway,
510 U.S. 510 (1994). As we discuss below, defendants
needed to track down a footnote in a 1976 opinion to
find their best authority. Eventually they did this, and
Elder holds that we can consider the decision’s import.
The False Claims Act does not specify either a gross
or a net trebling approach. Neither does it signal a de-
parture from the norm—and the norm is net trebling.
The Clayton Act, which created the first treble-damages
action in federal law, 15 U.S.C. §15, has long been under-
stood to use net trebling. The court finds the monopoly
overcharge—the difference between the product’s actual
price and the price that would have prevailed in com-
petition—and trebles that difference. See, e.g., Illinois
Brick Co. v. Illinois, 431 U.S. 720 (1977). A gross trebling
approach, parallel to the one the district court used in
this suit, would be to treble the monopolist’s price,
then subtract the price that would have prevailed in
competition. If there is a reason why the courts should
use net trebling in antitrust suits and gross trebling in
False Claims Act cases, it can’t be found in §3729—nor
does the United States articulate one.
Basing damages on net loss is the norm in civil litiga-
tion. If goods delivered under a contract are not as prom-
Nos. 10-3122, 10-3342 & 10-3423 7
ised, damages are the difference between the contract
price and the value of what arrives. If the buyer has no
use for them, they must be sold in the market in order
to establish that value. If instead the seller fails to
deliver, the buyer must cover in the market; damages
are the difference between the contract price and the
price of cover. If a football team fires its coach before
the contract’s term ends, damages are the difference
between the promised salary and what the coach makes
in some other job (or what the coach could have made,
had he sought suitable work). Mitigation of damages
is almost universal.
With neither statutory language nor any policy
favoring gross trebling under §3729(a), the Department of
Justice has relied exclusively on one decision: United
States v. Bornstein, 423 U.S. 303 (1976). The Court held in
Bornstein that third-party payments are subtracted after
doubling, rather than before. (At the time, doubling
rather than trebling was standard under §3729.) The
United States had contracted with Model Engineering
for radio kits, each of which was to contain tubes that
met military specifications. Model purchased the tubes
from United National Labs, which represented that
they were mil-spec parts. But United Labs shipped tubes
that it knew did not comply with the specifications.
Model incorporated them into the kits. When the
United States discovered the fraud, it sued United Labs
and two of its officers. Model was not liable under the
False Claims Act, but it was liable for simple breach of
contract, and it paid the United States an amount per tube
that Model thought would prevent loss to the United
8 Nos. 10-3122, 10-3342 & 10-3423
States. The question in Bornstein was whether the money
the United States received from Model would be sub-
tracted before doubling the price that United Labs had
charged for the fraudulently labeled tubes. The Court
held that Model’s payments should not inure to United
Labs’ benefit and wrapped up: “the Government’s
actual damages are to be doubled before any subtrac-
tions are made for compensatory payments previously
received by the Government from any source.” 423 U.S.
at 316.
Although the Department of Justice maintains that this
language specifies a gross trebling approach, we do not
read it so. Instead it sounds like a conclusion that “dam-
ages” depend on the acts of the person committing the
fraud. Any doubt is resolved by footnote 13, which is
attached to the word “source” in the language quoted
above: “The Government’s actual damages are equal to
the difference between the market value of the tubes
it received and retained and the market value that the
tubes would have had if they had been of the specified
quality. C. McCormick, Law of Damages §42, p. 137 (1935).”
Thus if mil-spec tubes were worth $40 apiece, but the
tubes United Labs furnished were worth only $25, then
the “actual damages” per tube were $15. That’s what
should have been doubled. Footnote 13 in Bornstein
unambiguously uses the contract measure of loss, sup-
porting a net trebling approach.
The brief for the United States contends that note 13 is
dictum. Maybe so. The question presented was whether
third-party payments should be subtracted before dou-
Nos. 10-3122, 10-3342 & 10-3423 9
bling, not whether the market price should be subtracted
from the contract price before doubling. But a court of
appeals should not ignore pertinent statements by the
Supreme Court. Footnote 13 was not an offhand remark.
Having rejected the court of appeals’ approach in
Bornstein, the Court told it how to do the job right on
remand. The footnote uses the common law’s established
approach to determining damages; it is not as if some
law clerk were off on a lark and the Justices missed
the error.
Appellate decisions since Bornstein generally use a net
trebling approach. See, e.g., United States ex rel. Feldman
v. Gorp, 697 F.3d 78, 87–88 (2d Cir. 2012); United States v.
United Technologies Corp., 626 F.3d 313, 321–22 (6th Cir.
2010); United States v. Science Applications International
Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010); Commercial
Contractors, Inc. v. United States, 154 F.3d 1357, 1372 (Fed.
Cir. 1998). Feldman holds that the United States got no
value at all from a fraudulently obtained research grant,
so there was nothing to subtract, but that does not
detract from the fact that the court adopted a net ap-
proach. On the gross trebling side is United States v.
Eghbal, 548 F.3d 1281, 1285 (9th Cir. 2008), a case much
like this one in which the court refused to subtract
(before trebling) the value of collateral the United States
seized and sold. Eghbal relies on Bornstein but does not
mention note 13; we do not find it persuasive.
The district judge must recalculate the award using
the net trebling approach. If any of the real estate
remains unsold, the parties should address how its
10 Nos. 10-3122, 10-3342 & 10-3423
value is to be determined. The district court assumed that
real estate in a lender’s or guarantor’s inventory has
no value at all, so there is nothing to subtract in either a
gross or a net approach. That cannot be right. Courts
routinely determine the value of real property that is
off the market—valuation for estate-tax purposes is one
example, and valuation in condemnation proceedings
is another. The United States’ loss is the amount paid
on the guaranty less the value of the collateral, whether
or not the agency has chosen to retain the collateral.
The damages should not be manipulated through the
agency’s choice about when (or if) to sell the property
it receives in exchange for its payments.
The judgment is affirmed to the extent it finds Anchor
and Munson liable, but it is reversed to the extent
it adopts the gross trebling approach. The case is
remanded with instructions to recalculate the award
under the net trebling approach.
3-21-13