United States v. Southland Management Corp.

Revised May 22, 2002
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 00-60267
_____________________
UNITED STATES OF AMERICA
Plaintiff - Appellant
v.
SOUTHLAND MANAGEMENT CORPORATION; ET AL
Defendants
W. THAD MCLAURIN; CHARLES C. TAYLOR, JR; ARTHUR W. DOTY
Defendants - Appellees
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Mississippi
_________________________________________________________________
April 11, 2002
Before KING, Chief Judge, and REAVLEY and JONES, Circuit Judges.
KING, Chief Judge:
Plaintiff-Appellant the United States of America (“the
Government”) brought the instant action against Defendants-
Appellees W. Thad McLaurin, Charles C. Taylor, Jr., and Arthur W.
Doty (“the Defendants”) under the civil False Claims Act (“the
FCA”). The Government alleges that the Defendants, as owners of
the Jackson Apartments in Jackson, Mississippi, repeatedly
certified falsely to the Department of Housing and Urban
Development (“HUD”) that these apartments complied with the
“decent, safe, and sanitary” standard established in the
Defendants’ contract with HUD. The district court granted
summary judgment to the Defendants, finding that, under the
undisputed material facts of the case, the Government could not
establish the materiality element of a cause of action under the
civil FCA: namely, that the false claims in question “had a
natural tendency to influence” or were “capable of influencing”
the decision of the governmental body to which they were
addressed. The district court also found that, because HUD
remitted funds to the Defendants knowing that their
certifications were false, the Defendants could not have
“knowingly” submitted false claims to HUD. The Government now
appeals the district court’s summary judgment, alleging that
materiality is not a required element of a cause of action under
the civil FCA and that genuine issues of material fact exist
regarding whether the Defendants “knowingly” submitted false
claims.
We hold that, under the law of this circuit, materiality is
a required element of a cause of action under the civil FCA.
However, we find that summary judgment was nonetheless
inappropriate in the instant case because this court’s precedents
2
also dictate that the Defendants’ false certifications of
compliance with the “decent, safe, and sanitary” standard were
material as a matter of law. Using the definition of materiality
employed by the Supreme Court in Kungys v. United States, 485
U.S. 759 (1988), which is the definition employed by the district
court, we find that the Defendants’ certifications had a “natural
tendency to influence, or were capable of influencing” HUD’s
decision whether to honor their claims because receipt of these
certifications was a prerequisite to HUD’s remittance of funds.
We also hold, in accordance with the conclusion of our sister
circuits, that government payment of a false claim with knowledge
of its falsity does not provide an automatic defense to liability
under the FCA. Finally, we agree with the Government that there
are genuine issues of material fact regarding whether the
Defendants “knowingly” submitted false claims to HUD in the
instant case. Accordingly, we REVERSE the judgment of the
district court and REMAND the case for further proceedings
consistent with this opinion.
I. FACTUAL AND PROCEDURAL BACKGROUND
Beginning in 1980, the Defendants participated in a
federally-funded program to provide housing to low-income
individuals at the Jackson Apartments (“the Complex”) under the
oversight of HUD. During subsequent years, conditions at the
Complex deteriorated. While HUD attempted to work with the
3
Defendants over a period of approximately two years to remedy
these problems, these informal remedial efforts met with
increasing resistence and ultimately proved unsuccessful in
improving the habitability of the Complex. In 1997 the
Defendants stopped making payments on the building’s mortgage
debt, and HUD foreclosed on the Complex. The Government
subsequently sued the Defendants, alleging that during a nineteen
month period (beginning after the two-year remedial efforts had
substantially deteriorated, but prior to HUD’s ultimate
foreclosure) the Defendants violated 31 U.S.C. § 3729(a) by
falsely certifying on nineteen separate occasions that the
Complex was in “decent, safe, and sanitary” condition. An
explanation of HUD’s low-income housing program provides a
context for the relevant facts.
A. HUD’s Housing Program
1. The National Housing Act and Regulatory Agreements
In enacting the National Housing Act, Pub. L. No. 73-479, 48
Stat. 1246 (1934) (codified as amended at 12 U.S.C. §§ 1701-1750g
(2001)) (the “NHA”), Congress sought to increase the supply of
low-income housing by creating a program that provides mortgage
credit to the private sector. Under this program, HUD insures a
housing project owner’s mortgage so that the owner may provide
low-rent housing “to assist families with incomes so low that
they could not otherwise decently house themselves.” 12 U.S.C.
4
§§ 1701t, 1703 (2001). In an effort to encourage private
investment, the NHA and HUD regulations also “allow[] owners to
borrow money at reduced interest rates, reduce[] a borrower’s
equity requirements, permit[] owners to sign non-recourse notes,
and, prior to the 1986 tax code changes, grant[] owners and
investors generous tax benefits.” Christopher Vill., Ltd. P’ship
v. Retsinas, 190 F.3d 310, 312 (5th Cir. 1999).1
1
Because of the significant tax benefits involved, this
program became a popular source of “tax shelters” for individual
investors in the early 1980s. Frequently such tax shelters were
structured as limited partnerships, as in the instant case.
Typically, individuals formed a limited partnership, made a
minimal initial capital contribution, and obtained a non-recourse
mortgage guaranteed by the federal government to cover the bulk
of the costs of building or rehabilitating a property. While the
limited partners were liable only to the extent of their initial
capital investment, the partnership was a “pass through” entity
for tax purposes – i.e., the partnership allocated gains or
losses to individual partners, who reported such items on their
individual tax returns. Because the tax laws allowed the
partnership to depreciate the building (or the improvements to an
existing property) on an accelerated timetable, these projects
tended to accrue large “losses” in their early years. The
individual members of the partnership used these “passed through”
losses to offset individual income, thereby “purchasing” more
than one dollar of tax savings with each dollar of capital they
contributed. At the same time, the excess cash flows generated
by the project during its early years were paid out to the
partnership rather than preserved for the support of the project.
When the accelerated depreciation period was over and the
shelter had (in the vernacular) “burned out,” if the partnership
defaulted on the mortgage (because of inadequate cash flow or any
other reason), HUD (as guarantor) was compelled to institute
proceedings to foreclose on the property. This default did not
put the investors’ personal assets at risk, as the mortgage was
non-recourse debt. See generally Arthur R. Hessel, Heard from
HUD, 6 SUM J. Affordable Housing & Community Dev. L. 268, 270
(1997) (describing the tax incentives for private investors to
participate in construction and rehabilitation of low-income
housing); Daryl S. Alterwitz, Low Income Housing Under the New
Conservatism: Trickle Down or Dry Up?, 26 Santa Clara L. Rev.
5In exchange for these benefits, the property owner and HUD
execute a regulatory agreement that “give[s] HUD extensive
regulatory authority over the operation and maintenance of the
property.” Id.; see also 12 U.S.C. § 1715l(d)(3) (requiring the
owners to be “regulated or supervised . . . under a regulatory
agreement or otherwise, as to rents, charges, and methods of
operation, in such form and in such manner as in the opinion of
the Secretary [of HUD] will effectuate the purposes of this
section”). The owner has many responsibilities under the
regulatory agreement. For example, the regulatory agreement in
the instant case requires the Defendants to “maintain the
mortgaged premises, accommodations and the grounds and equipment
appurtenant thereto, in good repair and condition.”
2. Section 8 and “HAPs”
In 1937, Congress enacted the United States Housing Act,
Pub. L. No. 75-412, 50 Stat. 889 (1937) (codified as amended at
42 U.S.C. §§ 1437 et seq. (1994 & Supp. 2001)) (the “USHA”), “to
address the shortage of housing affordable to low-income
461, 461 & nn. 5, 6, 23 & 93-96 (1986) (same).
Such tax shelters were particularly financially advantageous
prior to the Tax Reform Act of 1986, which restricted the extent
to which investors could use deductions and credits derived from
tax shelters to offset earned income. These reforms also
repealed some of the specific tax incentives applicable to low-
income housing projects. See generally Janet Stearns, The Low-
Income Housing Tax Credit: A Poor Solution to the Housing Crisis,
6 Yale L. & Pol’y Rev. 203, 208-10 (1988) (describing the effects
of the Tax Reform Act of 1986).
6
families” and “to remedy the unsafe housing conditions and the
acute shortage of decent and safe dwellings for low-income
families.” 42 U.S.C. § 1437(1) (Supp. 2001). In 1974 Congress
amended the USHA by adding Section 8 (codified as amended at 42
U.S.C. § 1437f (Supp. 2001)), which created a federal program to
provide rental assistance for tenants of privately-owned
housing.2 Id. § 1437f(a); Christopher Vill., 190 F.3d at 313.
Generally, under this rent subsidy program, a low-income tenant
will make rental payments based upon the tenant’s income and
ability to pay. See 42 U.S.C. § 1437a(a)(1) (1994 & Supp. 2001).
2
There are many Section 8 programs. See, e.g., 24 C.F.R.
§§ 880.101-880.612a (2001) (new construction); id. §§ 881.101-
881.601 (substantial rehabilitation); id. §§ 882.101-882.810
(moderate rehabilitation); id. §§ 883.101-883.701 (state housing
agencies). Each program has its own specific rules and
eligibility requirements. In the present suit, we are concerned
with the Section 8 program involving substantial rehabilitation.
See id. §§ 881.101-881.601. Section 881.201 defines “substantial
rehabilitation” as:
(a) The improvement of a property to decent, safe and
sanitary condition in accordance with the standards of
this part from a condition below those standards.
Substantial rehabilitation may vary in degree from
gutting and extensive reconstruction to the cure of
substantial accumulation of deferred maintenance.
Cosmetic improvements alone do not qualify as
substantial rehabilitation under this definition.
(b) Substantial rehabilitation may also include
renovation, alteration or remodeling for the conversion
or adaptation of structurally sound property to the
design and condition required for use under this part
or the repair or replacement of major building systems
or components in danger of failure.
Id. § 881.201.
7
HUD then pays the property owner an amount calculated to make up
the difference between the tenant’s contribution and the
“contract rent” agreed upon by HUD and the owner. See id.
§ 1437f(c)(3). These monthly payments to the owner are known as
housing assistance payments, or “HAPs.”
Pursuant to Section 8 and as required by the regulations
governing the substantial rehabilitation program, see 24 C.F.R. §
881.501 (2001), HUD enters into Housing Assistance Payment
contracts (“HAP contracts”) with private owners. These contracts
require the owners to agree to maintain “decent, safe and
sanitary” housing in order to receive HAP payments from the
government. Once such a contract is established, the owner
submits to HUD a monthly Application for Housing Assistance
Payments, also known as a “HAP voucher.” See 24 C.F.R.
§ 881.501(c) (2001). Part of this application requires the owner
to sign an “Owner’s Certification,” certifying, inter alia, that
the subject property is “decent, safe, and sanitary.”3 The
3
The HAP vouchers require that the owners of the
federally-subsidized properties provide information regarding the
number of total units, the number of vacant units, the contract
rent amount, the amount of rent paid by the tenants, and the
amount of payment requested by the owners. There are also other
certifications that the property owners must make, including that
the information provided in the HAP voucher is true and correct;
that the “tenant’s elig[ibility] and ass[istance] was computed in
accordance with HUD’s reg[ulations], procedures, and the
Contract”; that “required inspections are complete”; and that the
owners “have not and will not receive any money or other
consideration from tenant or other source for Units beyond that
authorized by HUD[.]”
8
government remits the monthly HAPs only if the owner has signed
this certification. The HAP vouchers submitted by the owner also
indicate, immediately above the signature line, that HUD has the
right to “prosecute false claims/statements” and to seek civil
penalties pursuant to § 3729 of the civil False Claims Act.
If a property does not meet the required specifications,
HUD’s usual practice is to require the owner to submit a detailed
plan indicating how the owner will remedy the defects and to
allow the owner a limited time period to fix the problems
pursuant to this plan. However, under the HAP contract, if the
owner fails to cooperate with HUD and correct the violations
within the prescribed time, HUD may exercise any of its rights or
remedies under the HAP contract, including abatement of the HAPs.
B. The Facts of the Present Suit
The Defendants were general partners of Jackson Apartments,
Ltd. (the “Partnership”), a limited partnership created for the
purpose of purchasing the Complex. In 1980, HUD advertised for
bid proposals for properties to participate in its Section 8
“substantial rehabilitation” program. The Partnership purchased
the Complex and submitted a proposal to HUD, which HUD selected.
The Partnership then renovated the Complex, and the Complex
opened to low-income tenants in 1981.
To fund the renovation of the Complex, the Defendants
expended approximately $190,000 of their own funds, and the
Partnership executed a $2.4 million note secured by a HUD-insured
9
non-recourse mortgage. To enjoy the benefits of the low-
interest, non-recourse mortgage, the Partnership entered into a
regulatory agreement with HUD. The Partnership and HUD also
executed a HAP contract so that the Partnership could receive
HAPs. During the time period between the opening of the Complex
and HUD’s foreclosure in 1997, the Defendants withdrew $1,109,213
in surplus cash from the project while simultaneously accruing
significant tax benefits from the tax credits and accelerated
depreciation schedule applicable to the property.
Shortly after the inception of the project, in December
1983, the Partnership contracted with Southland Management
Company (“Southland”) to manage the Complex. During the time
period relevant to this litigation (i.e., July 1995 to January
1997) Southland submitted, on behalf of the Partnership, the
monthly HAP vouchers to HUD. As noted above, each of these HAP
vouchers contained a certification that the property was in
decent, safe, and sanitary condition. An employee of Southland,
as an agent of the Partnership, would sign the monthly
certification.
Beginning at least as early as August 1993, physical
inspections conducted by HUD revealed many maintenance problems
and structural defects at the Complex. The physical inspection
reports contained in the record demonstrate that the Complex
suffered from, inter alia, roach and rodent infestation,
deteriorated siding, drainage problems, doors and windows that
10
would not close or lacked functioning locks, inadequate
maintenance of fire extinguishers, inoperable smoke alarms,
rusted medicine cabinets, and leaking faucets and toilets.4
These deficiencies were reflected in the overall ratings of
“below average” or “unsatisfactory” given to the Complex from
August 31, 1993 to November 12, 1996. Furthermore, a December
20, 1996 HUD Management Review Report rated the complex as
“unsatisfactory,” the lowest rating provided for in the
management review and physical inspection reports.5
4
While the dissent downplays the severity of these
problems, the record provides ample evidence that conditions at
the Complex were deplorable. One resident attested that she would
catch ten or more rats in her apartment every day and that the
rats would crawl in her baby’s crib, chew the nipples off the
baby’s bottles, and drink the baby’s milk. Another resident
indicated that roaches were so prevalent in her home that they
had infested her bed. She would kill roaches inadvertently while
she was sleeping by rolling over in her sleep. A third resident
stated that, in addition to problems with roaches and mice, her
apartment had non-functional plumbing, holes in the walls, doors
with no doorknobs, and windows that could not be locked.
Crime at the Complex was alarmingly high as well. Drug
related crimes were particularly prevalent. In 1995 alone, the
Jackson Police Department received 43 calls reporting narcotics
violations at the Complex and the police made arrests at the
Complex on at least 17 different occasions for narcotics
violations. Non-drug-related crimes were also common at the
Complex. In one two-year interval during the time period
relevant to this litigation, the Jackson Police Department’s
records indicate 57 cases of aggravated or simple assault, 12
auto burglaries, 26 house burglaries, 9 auto thefts, 1 armed
robbery, 17 cases of vandalism, 1 murder, 14 larcenies, and 2
rapes at the Complex.
5
The record contains reports from inspections conducted
by the Defendants’ mortgage company giving the Complex
“satisfactory” ratings during the relevant time period. However,
as John Maertz, the Government’s expert witness, indicated in his
report, mortgage company inspections tend to be far shorter and
11
The Defendants received prompt written notice of each of
these unsatisfactory inspection reports. As per its standard
practice, HUD attempted to give the Defendants a limited
opportunity to cure the defects rather than immediately abating
the HAP payments. After each inspection, HUD informed the
Defendants that they were required to “submit a written response
to deficiencies noted” in the inspection report, explaining “in
detail” the corrective measures planned, underway, or completed.
While Defendants timely provided such a detailed response in
1993, in subsequent years the cooperative remedial process began
to break down, and the Defendants’ responses to HUD’s
notifications became increasingly less timely and more cursory.6
less thorough than the inspections conducted on behalf of HUD.
Consistent with this assessment, the mortgage company’s
inspector, Joseph Toler, voluntarily characterized his own
inspection as “cursory” in his deposition, indicating that he did
not look at every building in the Complex and that, for the
buildings he did examine, he “would be like walking in the door
and looking around . . . and saying, well, this isn’t too bad”
and then leaving.
6
For example, on August 7, 1995, HUD sent to the
Defendants a July 11, 1995 physical inspection report and
requested a “detailed” written response. The Defendants
responded on September 6, 1995, in a brief letter that touched on
only a few of the reported deficiencies. On September 11, 1995,
HUD wrote to the Defendants, informing them that their letter of
September 6 failed to provide the “detailed plan of action” that
HUD requested in its August 7 letter. HUD again requested a
detailed response, this time within fifteen days. On October 17,
1995, still not having received any response from the Defendants,
HUD wrote a third request for a detailed plan, giving the
Defendants another fifteen days to respond. In reply, HUD
received from the Defendants a rather indignant letter stating in
two short paragraphs which deficiencies noted in the inspection
report had been corrected.
12
Despite the significant health and safety problems at the
Complex and the inadequacy of the Defendants’ recalcitrant repair
and improvement efforts, the Defendants continued to submit their
monthly HAP vouchers certifying that the property was in “decent,
safe, and sanitary condition,” and HUD continued to disburse HAPs
to the Defendants. On August 5, 1997, however, the Defendants
informed HUD that they would make no more payments on the
mortgage. HUD consequently foreclosed, and the Complex was sold
in late July 1998. On August 5, 1998, the Government filed the
instant action under § 3729(a) of the civil False Claims Act,
alleging that the Defendants made false claims each month
regarding the physical condition of the Complex when they
submitted HAP vouchers for payment. The Government’s lawsuit
seeks recovery only for false claims made between July 1995 (when
HUD’s cooperative remedial efforts began to encounter substantial
resistance from the Defendants) and January 1997.7
Specifically, the Government argues that during this time
period the Defendants submitted nineteen HAP vouchers falsely
certifying that the Complex was decent, safe, and sanitary. The
Government contends that each of these voucher submissions
7
We note that the Government does not seek to recover for
any false claims made during the time period when the Defendants
complied in good faith with HUD’s informal remedial efforts.
13
constitutes a false claim8 under the Act and that the
certifications therein indicating that the property was in
decent, safe, and sanitary condition were false statements made
to secure HUD’s payment of the HAP vouchers. The Government
seeks civil penalties of $10,000 for each certification that was
filed, plus treble damages of $2,595,069.9
On September 7, 1999, the Defendants moved for summary
judgment, arguing that: (1) the HAP certifications were not
material to HUD’s decision to pay the subsidies and therefore
could not form the basis of a “false claim”; (2) the Defendants
did not “knowingly” submit false claims because the Defendants
knew that HUD was fully aware of the condition of the Complex
during the relevant time period; and (3) the “decent, safe, and
sanitary” language is too ambiguous to support a finding of
liability under the False Claims Act. The district court granted
the Defendants’ motion for summary judgment, agreeing with their
first two arguments.
The Government timely appeals the district court’s summary
judgment in favor of the Defendants. The Government asserts two
8
The civil False Claims Act defines a “claim” as “any
request or demand, whether under a contract or otherwise, for
money or property . . . [where] the United States Government
provides any portion of the money or property.” 31 U.S.C.
§ 3729(c) (Supp. 2001).
9
The Government reaches this figure by trebling $865,023
— the amount that HUD claims to have disbursed to the Defendants
during the time period covered by its complaint.
14
primary claims of error: (1) that the materiality of the
falsehood to HUD’s decision is not relevant in determining
whether the Defendants violated 31 U.S.C. § 3729(a); and (2) that
genuine issues of material fact exist regarding whether the
Defendants “knowingly” submitted the false claims. We address
each of these claims in turn.
II. STANDARD OF REVIEW
We review the district court’s grant of summary judgment de
novo, applying the same standard as the district court. See
Rivers v. Cent. & S.W. Corp., 186 F.3d 681, 683 (5th Cir. 1999).
“Summary judgment is proper only ‘if the pleadings, depositions,
answers to interrogatories and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law.’” Turner v. Houma Mun. Fire &
Police Civil Serv. Bd., 229 F.3d 478, 482 (5th Cir. 2000)
(quoting FED. R. CIV. P. 56(c)).
“Courts of Appeals consider the evidence in the light most
favorable to the nonmovant, yet the nonmovant may not rely on
mere allegations in the pleadings; rather, the nonmovant must
respond to the motion for summary judgment by setting forth
particular facts indicating that there is a genuine issue for
trial.” Spivey v. Robertson, 197 F.3d 772, 774-75 (5th Cir.
1999) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
15
248-49 (1986)). After the nonmovant has been given an
opportunity to raise a genuine factual issue, if no reasonable
factfinder could find for the nonmovant, summary judgment is
appropriate. See FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986).
III. IS “MATERIALITY” AN ELEMENT OF A CAUSE OF ACTION UNDER THE
CIVIL FALSE CLAIMS ACT?
The civil False Claims Act imposes liability on any person
who knowingly submits, or causes the submission of, a false or
fraudulent claim for money to the government. The current Act
originated in the 1863 False Claims Act, which provided both
civil and criminal sanctions for “false, fictitious, or
fraudulent” claims submitted to the United States Government.
See Act of Mar. 2, 1863, ch. 67, 12 Stat. 696; see also S. REP.
NO. 99-345, at 8 (1986), reprinted in 1986 U.S.C.C.A.N. 5266,
5273. In 1874, the civil and criminal provisions were severed,
the civil penalties being codified in one portion of the United
States Code and the criminal provisions in another. See U.S.
REV. STAT. tit. 36, § 3490 (1875) (civil); id. tit. 70, § 5438
(criminal).
Congress recodified the civil False Claims Act in 1982. See
H.R. REP. NO. 651 (1982), reprinted in 1982 U.S.C.C.A.N. 1895,
1895. In this 1982 recodification, Congress eliminated the word
“fictitious” and retained the prohibition on “false or fraudulent
16
claim[s].” See 31 U.S.C. § 3729 (1982).10 Congress also
significantly revised the civil FCA in 1986, clarifying that a
showing of specific intent to defraud is not required for
liability under the Act. See 31 U.S.C. § 3729(b) (Supp. 2001).11
In its current form, the Act provides, in pertinent part:
Any person who–
(1) knowingly presents, or causes to be presented, to
an officer or employee of the United States Government
or a member of the Armed Forces of the United States a
false or fraudulent claim for payment or approval; [or]
(2) knowingly makes, uses, or causes to be made or
used, a false record or statement to get a false or
fraudulent claim paid or approved by the Government
. . . .
is liable to the United States Government for a civil
penalty of not less than $5,000 and not more than
$10,000, plus 3 times the amount of damages which the
Government sustains because of the act of that
person[.]
10
The minor textual changes that accompanied this
recodification were designed only to “eliminate unnecessary
words” and provide “consistency,” rather than to enact any
substantive change. See H.R. REP. NO. 97-651, at 142 (1982),
reprinted in 1982 U.S.C.C.A.N. 1895, 1896.
11
The 1986 amendments also: (1) clarified that the
government need establish the elements of a cause of action under
the Act only by a preponderance of the evidence; (2) lengthened
the statute of limitations under the Act beyond six years in
cases where the government fails to detect the false claims at
the time they are submitted; (3) increased the penalties under
the Act from $2000 per claim to between $5000 and $10,000 per
claim; (4) increased the Act’s damages provision, authorizing
courts to award the government treble damages; and (5) expanded
the role of (and the rewards available to) qui tam relators under
the Act. See generally John T. Boese, Civil False Claims and Qui
Tam Actions § 104 (2d ed. 2000 & Supp. 2001) (describing the
impact of the 1986 amendments).
17
31 U.S.C. § 3729(a) (Supp. 2001). For the Defendants to be
liable under § 3729(a)(1), courts agree that the Government must
demonstrate that: (1) the Defendants made a claim against HUD;
(2) the claim was false or fraudulent; and (3) the Defendants
knew the claim was false or fraudulent. See, e.g., United States
v. Basin Elec. Power Coop., 248 F.3d 781, 803 (8th Cir. 2001);
United States ex rel. Oliver v. The Parsons Co., 195 F.3d 457,
461 (9th Cir. 1999); United States v. Burns, 162 F.3d 840, 850
(5th Cir. 1998). Similarly, to recover against the Defendants
under § 3729(a)(2), the Government must show that (1) the
Defendants made a record or statement in order to get HUD to pay
money; (2) the record or statement was false or fraudulent; and
(3) the Defendants knew it was false or fraudulent. See, e.g.,
United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013,
1018 (7th Cir. 1999).
Although the statute contains no express reference to
materiality, many courts, including this court, have found that
there is a fourth, “materiality” element required to maintain a
cause of action under the Act. See United States ex rel.
Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th
Cir. 1997) (“[T]he FCA ‘interdicts material misrepresentations
made to qualify for government privileges or services.’”)
(quoting United States ex rel. Weinberger v. Equifax, Inc., 557
F.2d 456, 461 (5th Cir. 1977)); see also Luckey v. Baxter Health
18
Care Corp., 183 F.3d 730, 732 (7th Cir. 1999); United States ex
rel. Berge v. Bd. of Trs. of the Univ. of Ala., 104 F.3d 1453,
1459 (4th Cir. 1997); United States v. Intervest Corp., 67 F.
Supp. 2d 637, 646 (S.D. Miss. 1999). But see United States ex
rel. Cantekin v. Univ. of Pittsburgh, 192 F.3d 402, 415 (3d Cir.
1999) (noting in dicta that “perhaps” there is no materiality
requirement under the FCA); United States ex rel. Roby v. The
Boeing Co., 184 F.R.D. 107, 112 (S.D. Ohio 1998) (finding that
materiality is not a required element of proof in actions under
the FCA). In examining statutes similar to the civil FCA, the
Supreme Court has defined “material” as “ha[ving] a natural
tendency to influence, or [being] capable of influencing, the
decision of the decisionmaking body to which it was addressed.”
United States v. Wells, 519 U.S. 482, 489 (1997) (alterations in
original) (internal quotations omitted) (quoting Kungys v. United
States, 485 U.S. 759, 770 (1988)). A number of courts finding a
materiality element in the civil FCA have interpreted the Supreme
Court’s definition in Kungys to require “outcome materiality” –
i.e., that a falsehood or misrepresentation must affect the
government’s ultimate decision whether to remit funds to the
claimant in order to be “material.” These courts have
interpreted the civil FCA similarly to require “outcome
materiality.” See, e.g., Berge, 104 F.3d at 1459-60; Intervest,
67 F. Supp. 2d at 646-48; cf. Luckey, 183 F.3d at 732-33 (not
19
specifically referencing Kungys, but suggesting that an omission
must be “material to the United States’ buying decision” to
support liability under the Act) (emphasis added). In contrast,
at least one court has suggested a slightly different, “claim
materiality” requirement – i.e., that a falsehood or
misrepresentation must be material to the defendant’s claim of
right in order to be considered “material” for the purposes of
the FCA. See United States ex rel. Wilkins v. North American
Constr. Corp., 173 F. Supp. 2d 601, 630 (S.D. Tex. 2001).12
12
While the dissent disputes this characterization of
Wilkins, the Wilkins opinion contains ample evidence indicating
that court’s intent to espouse a “claim materiality” requirement.
Initially, the court in Wilkins repeatedly characterizes the
FCA’s materiality element to require that a false submission bear
on the claimant’s entitlement to payment. See, e.g., 173 F.
Supp. 2d at 622 (characterizing Weinberger to suggest a
requirement that “the misrepresentation made had to bear on, or
be material to, the entitlement to payment”); id. at 623 (“A
statement or action in or related to a claim makes the claim
itself false only if it bears on, or is material to, the person’s
entitlement to the money or property claimed.”); id. at 624(“[T]he FCA implicitly requires statements or conduct that are
material to the person’s entitlement to the money or property
claimed before liability can arise.”); id. at 630 (“Liability for
both a ‘false claim’ and a ‘fraudulent claim’ implicitly requires
a showing that what makes the claim either false or fraudulent is
material to the asserted claim of entitlement to receive money or
property from the government.”); id. at 635 (faulting the
government for failing to demonstrate “how the alleged ‘padding’
of waste costs was material to the defendants’ entitlement to be
paid by the government on the contract”) (emphasis added). In
its extended discussion of the materiality issue, the Wilkins
court never suggests that a false submission must have actually
affected the government’s ultimate decision to remit funds in
order to be “material.”
Moreover, interpreting the Wilkins opinion to espouse an
“outcome materiality” requirement would be inconsistent with the
underlying rationale of that opinion. The Wilkins court
determined that – despite the absence of any statutory reference
20
While this court has indicated that the Act contains a
materiality element, we have not yet clarified the exact nature
of this requirement.13
to materiality – the civil FCA contains an implicit materiality
requirement. This determination was based on the court’s
conclusion that materiality is inherent in the concept of a
“false claim.” Id. at 623-24. According to the Wilkins court, a
false claim is distinguishable from a false statement because the
former requires that the “claim itself must be false or
fraudulent.” Id. at 623. The defining characteristic of a
“false claim” is that the claimant is not actually entitled to
the money or property claimed. Thus, the Wilkins court concluded
that a false or misleading statement renders a claim “false” only
if that falsehood implicates the claimant’s entitlement or right
to the benefit in question. Id. at 624. The actual impact of
the falsehood on the government’s subsequent decisionmaking
process did not play any role in the Wilkins court’s analysis.
Indeed, the Wilkins court specifically rejected the suggestion
(made by the government in that case) that the FCA’s implicit
materiality requirement should turn on whether the government
would have approved the claim in question but for the alleged
falsehood. Id. at 636. The fact that the government would not
have ultimately approved the contract in question but for the
alleged false statements was not dispositive to the Wilkins
court.
13
The dissent suggests that this court is bound by the
Supreme Court’s decision in Kungys to find that the FCA’s
implicit materiality requirement must be an “outcome materiality”
requirement. While we emphasize that we need not decide the
exact nature of the FCA’s materiality requirement in the instant
case, we note that Kungys is not dispositive on this issue. In
Kungys, the Court considered the meaning of the term “material”
in the context of the Immigration and Nationality Act, which
provides for the denaturalization of citizens whose citizenship
orders and certificates of naturalization were illegally procured
or were procured by concealment of a material fact or by willful
misrepresentation. See 8 U.S.C. § 1451 (1994). To discern
Congress’s intended meaning of the word “material,” the Court
looked to the common law definition of the word, reasoning that
“‘[w]here Congress uses terms that have accumulated settled
meaning under either equity or the common law, a court must
infer, unless the statute otherwise dictates, that Congress means
to incorporate the established meaning of these terms.’” Kungys,
485 U.S. at 770 (quoting NLRB v. Amax Coal Co., 453 U.S. 322, 329
21
The district court concluded that the civil False Claims Act
contains an outcome materiality requirement. United States v.
Southland Mgmt. Corp., 95 F. Supp. 2d 629, 637 (S.D. Miss. 2000).
The district court then determined that “undisputed evidence”
demonstrated that the Defendants’ certifications in the HAP
vouchers, if false, were not material to HUD’s decision to
disburse HAPs to the Defendants. The court thus granted summary
judgment in favor of the Defendants on this ground. See id. at
643.14
On appeal, the Government contends that the civil False
Claims Act does not contain the type of “outcome materiality”
element espoused by the district court, requiring a plaintiff to
(1981)). Based on its review of the common law, the Court
determined that “a concealment or misrepresentation is material
if it ‘has a natural tendency to influence, or was capable of
influencing, the decision of’ the decisionmaking body to which it
was addressed.” Id. at 770 (quoting Weinstock v. United States,
231 F.2d 699, 701 (D.C. Cir. 1956)). However, the reasoning
espoused by the Court in Kungys is inapplicable to the instant
case. The word “material” does not appear in the civil FCA – the
materiality requirement that courts have imposed upon the Act is
entirely implicit. Accordingly, unlike the Court in Kungys, we
cannot draw conclusions about the nature of the materiality
requirement that is implicit in the Act by relying on Congress’s
presumed invocation of the common law meaning of the word
“material.”
14
Specifically, the district court found that, given the
physical inspection reports, HUD was aware of the condition of
the Complex during the relevant time period and “would have
approved payment on the vouchers regardless of the condition of
the property.” Southland Mgmt. Corp., 95 F. Supp. 2d at 633.
The district court concluded that, for these reasons, “it follows
that defendants’ certifications were not ‘material’ to HUD’s
decision to continue housing assistance payments to defendants
pursuant to their HAP vouchers.” Id.22
demonstrate that the misstatement influenced the government’s
(i.e., HUD’s) ultimate decision whether to remit funds to a
defendant. The Government argues that the Supreme Court’s recent
decisions in Wells and Neder v. United States, 527 U.S. 1 (1999),
counsel against the existence of such a materiality
requirement.15 Instead, the Government maintains that proving a
“false claim” under the Act requires the Government to
demonstrate only that the alleged falsehood was relevant to the
Defendants’ claim of right or entitlement.16
We need not decide today what the nature of the FCA’s
materiality requirement might be. We find that, even under the
stricter “outcome materiality” definition applied to the civil
FCA by the district court and the courts in Berge and Luckey (as
opposed to the “claim materiality” definition urged by the
Government and adopted by the court in Wilkins), the Defendants’
signed certifications in the HAP vouchers were material to HUD’s
decision to disburse HAPs to the Defendants. If false, these
15
While we do not reach this issue today, we note that if
a future panel of this court is faced squarely with the question
whether materiality is an element of the civil FCA, this court
will need to assess whether and to what extent Wells and Neder
might undermine our precedents interpreting the civil FCA to
contain an implicit materiality requirement.
16
We note that this argument mirrors the analysis of the
Wilkins court. While the Wilkins court calls this implicit
requirement a “materiality” element and the Government does not,
it appears that the “claim materiality” element espoused by the
court in Wilkins is the same requirement advocated by the
Government in the instant case.
23
certifications render the HAP vouchers “false claims” as a matter
of law under the law of this circuit.
It is undisputed that the Defendants’ legal entitlement to
HAP payments is dependant upon the condition of the Complex. The
HAP contract contains a covenant requiring the Defendants to
maintain the property as decent, safe, and sanitary housing,
under penalty of loss of their HAP payments. Moreover, the HAP
contract specifically requires the Defendants to certify their
compliance with this standard in each monthly HAP voucher.
The Defendants concede that they would not have received the
monthly HAP payments if they had not signed these certifications.
Indeed, the record contains uncontroverted testimony indicating
that HUD will not remit funds to a claimant if the claimant’s HAP
voucher does not contain a signed certification that the property
is in decent, safe, and sanitary condition. Thus, the
certification of the property’s condition was unquestionably
“material” in the sense that it had the potential to influence
HUD’s ultimate decision whether to remit funds to the Defendant.
Both this court and the Ninth Circuit have recognized that,
when the government conditions payment of a claim upon a
claimant’s certification of compliance with a statutory or
regulatory condition, a claimant submits a false claim as a
matter of law when he or she falsely certifies compliance with
that condition. In Thompson, this court considered the question
whether a claim for services rendered in violation of the
24
Medicare anti-kickback statutes necessarily constitutes a false
claim. While we noted that a claim is not necessarily “false”
simply because it involves a statutory violation, we indicated
that a claim is necessarily false when it involves a knowingly
false certification of compliance with a statute or regulation
and that certification is a prerequisite to payment of the
asserted claim. See Thompson, 125 F.3d at 902 (“[W]here the
government has conditioned payment of a claim upon a claimant’s
certification of compliance with, for example, a statute or
regulation, a claimant submits a false or fraudulent claim when
he or she falsely certifies compliance with that statute or
regulation.”); see also United States ex rel. Hopper v. Anton, 91
F.3d 1261, 1266 (9th Cir. 1996) (recognizing that, while not all
breaches of contract or regulatory violations automatically give
rise to liability under the FCA, “the false certification of
compliance . . . creates liability when certification is a
prerequisite to obtaining a government benefit”) (emphasis in
original). We ultimately remanded Thompson to the district court
because we were unable to determine from the record whether the
certifications of compliance at issue in that case were actually
prerequisites to the defendant’s entitlement to the funds
claimed. Thompson, 125 F.3d at 902-03. However, our disposition
of this claim clearly indicates that if a certification of
compliance with a statute or regulation is a prerequisite to the
defendant’s legal entitlement to funds, the certification is a
25
material misrepresentation and renders the claim false as a
matter of law. Accord Weinberger, 557 F.2d at 461 (concluding
that a claim for services allegedly rendered in violation of the
Anti-Pinkerton Act could not have involved a “material
misrepresentation” because the government did not require
claimants to make any express representations as to their
compliance with the Anti-Pinkerton Act).
Thompson governs our disposition of the instant case. We
recognize today that when the government has conditioned payment
of a claim upon a claimant’s certification of compliance with a
provision of a contract entered into pursuant to a regulation, a
claimant submits a false claim as a matter of law when he or she
falsely certifies compliance with that provision. In the instant
case, the government has conditioned HAP payments upon an owner’s
certification of compliance with the “decent, safe, and sanitary”
standard established in the HAP contract mandated by 24 C.F.R.
§ 881.501.17 Accordingly, if the Defendants falsely certified
17
In discussing HUD employee Quentin Lewis’s deposition
testimony, the dissent apparently contends that a false
certification of statutory or regulatory compliance cannot be a
“prerequisite” to receipt of government funds under Thompson
unless the person who processed the certifications took into
account the truth or falsity of the certified statements in
determining whether to remit funds. However, the fact that the
particular bureaucrat charged with confirming whether a claimant
has complied with a certification requirement has no independent
knowledge of the truth or falsity of the certified statements
does not alter the fact that the certification is a prerequisite
to receipt of funds, especially when it is undisputed that funds
would not have been paid to the claimant in the absence of the
certification. Thompson clearly dictates that a certified
26
their compliance with this standard, they submitted a false
claim.18
statement of statutory or regulatory compliance is material when
the certification is a prerequisite to receipt of government
funds. Thompson, 125 F.3d at 902. The materiality of the
certified statement is not dependent upon how large a role the
truth or falsity of the certification plays in the government’s
ultimate decision whether to remit payment.
18
The dissent maintains that Thompson is not dispositive
in the instant case because the certification requirement at
issue here has only a “formalistic connection with the payment
decision.” The dissent appears to suggest that a certification
requirement cannot be a “true” prerequisite to payment unless the
truth or falsity of that certification was the actual, “but-for”
cause of the government’s ultimate determination whether to remit
funds on the claim. We find this suggestion problematic for a
number of reasons. Initially, we are bound by our precedent in
Thompson, which concludes that “false certifications of
compliance create liability under the FCA when certification is a
prerequisite to obtaining a government benefit” without
suggesting any “but-for causation” caveat as advocated by the
dissent.
Secondly, this interpretation appears inconsistent with the
“outcome materiality” requirement espoused by the dissent.
Kungys defines a material misrepresentation as a
misrepresentation that “has a natural tendency to influence or
was capable of influencing the decision of” the governmental
entity to which the statement was addressed. This definition
does not suggest that the misrepresentation must have actually
influenced the relevant governmental entity to be deemed
“material.” Indeed, as three members of the Court in Kungys
pointed out, a materiality requirement is not the equivalent of a
but-for causation requirement:
We do not agree with petitioner’s contention
that [the Immigration and Nationality Act’s
language sanctioning individuals whose
naturalization was “procured by” concealment of
a “material” fact] requires the Government to
establish that naturalization would not have
been granted if the misrepresentations or
concealments had not occurred. If such a “but
for” causation requirement existed in [the
“procured by” language] it is most unlikely that
a materiality requirement would have been added
27
We recognize, as did the Ninth Circuit in Upton, that not
all statutory, regulatory, or contractual violations necessarily
give rise to liability under the FCA. However, once a claimant
has made a certification of compliance with a statutory or
regulatory provision or a provision of a contract mandated by
statute or regulation, the claimant is subject to liability under
the Act for submitting a false claim if that certification of
compliance is known by the claimant to be false.
The Defendants nonetheless contend that their certification
could not have constituted a “false claim” because the government
had knowledge of the falsity of the certification when it
as well – requiring, in addition to distortion
of a decision, a natural tendency to distort the
decision. Moreover, the difficulty of
establishing “but for” causality . . . many
years after the fact, is so great that we cannot
conceive that Congress intended such a burden to
be met before a material misrepresentation could
be sanctioned.
485 U.S. at 776-77 (opinion of Scalia, J., joined by Rehnquist,
C.J., and Brennan, J.). This analysis suggests that
“materiality” and “but-for causation” are distinct (and, indeed,
inconsistent) requirements.
Finally, as the above passage indicates, there are problems
of proof that arise when the government is required to
demonstrate that a claimant’s misrepresentation actually
motivated its decision to approve a claim. Imposing such an
evidentiary burden risks excessively constraining the
government’s ability to sanction claimants who make false
representations to the government. As we share Justice Scalia’s
concerns in this regard, we reject the dissent’s suggestion that
“but-for causation” is the appropriate test of materiality in the
instant case.
28
remitted payment.19 While we acknowledge that government
knowledge of the falsity of a claim might, under limited
circumstances, be a defense to an action under the FCA, see infra
Part IV, we find it difficult to comprehend how the government’s
awareness that a claimant’s submission was false would in any way
19
The dissent points to four cases from other circuits
that, according to the dissent, “reject[] civil FCA liability
where defendant contractors arguably submitted ‘false’
certifications, but were engaged in cooperative or supervised
undertakings with the government that rendered the certifications
irrelevant to the ongoing payment decisions.” See infra n.8 and
accompanying text. Of these four cases, only United States ex
rel. Lamers v. City of Green Bay, 168 F.3d 1013 (7th Cir. 1999),
involves a certification of statutory or regulatory compliance
akin to the certification requirement at issue in the instant
case. Lamers was a qui tam case where the Seventh Circuit
considered a private relator’s claim that the City of Green Bay
had, on numerous occasions, falsely certified (and falsely
represented in informal correspondence) that its transit system
complied with federal regulations. While the court’s rejection
of the relator’s FCA claim was based largely on its determination
that it was unclear whether the city’s certifications were
actually false, the court also took note of the evidence that the
City was cooperating with federal authorities in an attempt to
bring their transit system into full compliance with federal
regulations and reasoned that FCA liability would be
inappropriate under these circumstances. See id. at 1019-20.
Initially, we note that it is unclear from Lamers whether
the Seventh Circuit refused to impose liability because the
government’s knowledge undermined the falsity of the claim or
because the Seventh Circuit accepted that government knowledge
was a viable defense to FCA liability under the circumstances of
that case. Moreover, as discussed infra at Part IV, the
rationale provided by the Seventh Circuit for its refusal to
impose FCA liability in Lamers is specific to qui tam cases and
is far less compelling in the context of an FCA claim brought by
the government. Accordingly, we are not persuaded that the
reasoning of Lamers obligates us to depart from Thompson’s clear
holding that “false certifications of compliance create liability
under the FCA when certification is a prerequisite to obtaining a
government benefit.” Thompson, 125 F.3d at 902 (adopting the
reasoning of Anton, 91 F.3d at 1266).
29
affect the truth or falsity of the claim. A lie does not become
the truth simply because the person hearing it knows that it is a
lie.
The premise underlying this argument reveals the true nature
of the Defendants’ position. In arguing that a claimant’s
submission is not truly “false” if the government knows it to be
untrue, the Defendants are actually arguing that when the
government remits payment on a claim knowing that a certification
contained therein is false, the government waives its right to
pursue a cause of action under the civil FCA. We find this
position untenable for a number of reasons.
Initially, we note that the falsity of a claim is determined
at the time of submission. If a claimant has submitted a claim
(i.e., a request or demand for money or property) to the
government and the claimant knows that he or she is not actually
entitled to the funds or property in question, the claimant has
asserted a false claim. Fortuities in the government’s
subsequent decisionmaking process have no effect on the objective
truth or falsity of the claimant’s asserted entitlement, and
should thus have no effect on the claimant’s potential liability
under the Act. Cf. United States v. Krizek, 111 F.3d 934, 939-40
(D.C. Cir. 1997) (finding that the question of what constitutes a
claim under the False Claims Act “turns[] not on how the
government chooses to process the claim, but on how many times
the defendants made a ‘request or demand’” because the “gravamen
30
of these cases is that the focus is on the conduct of the
defendant”). This reading of the Act is consistent with this
court’s analysis of analogous provisions in the criminal False
Claims Act and related statutes. See United States v. Milton,
602 F.2d 231, 233 (9th Cir. 1979) (holding, in the context of the
criminal False Claims Act, that “[t]o prove Falsity, the
government only had to prove that the statement was known to be
untrue at the time [the defendant] made it”) (emphasis added);
see also United States v. Leahy, 82 F.3d 624, 633 n.11 (5th Cir.
1996) (holding that the defendant contractor violated 18 U.S.C. §
286 – a companion statute to the criminal FCA – because his
claims were false when submitted, even though the false claims
were ultimately irrelevant to the total amount paid by the
government to the contractor).
In addition, the Defendants’ position is problematic because
they are effectively invoking estoppel against the government.20
20
The dissent contends that this is a mischaracterization
of the Defendants’ position. According to the dissent, the
Defendants are arguing “not that the government is estopped from
holding them liable on [a false claims] theory, but that they are
not liable as a matter of law.” While this may be true with
respect to the Defendants’ invocation of government knowledge as
a defense, the Defendants’ contention that a claim cannot be
false if the government was aware of the circumstances rendering
it untrue is equivalent to an estoppel argument. As noted above,
as a matter of pure logic, the fact that the government is aware
that a claimant’s submission is false upon receipt of that
submission does not make the statement any less false.
Accordingly, what the Defendants must be contending is that once
the government accepts and remits payment on a claim knowing that
claim to be false, the government cannot argue that the claim was
false in a court of law.
31
The Defendants contend that because the government’s remission of
payment represents that the government entity has evaluated all
the relevant information and (presumably) determined that a claim
is valid, the government should be estopped from arguing that the
claim is invalid in a subsequent judicial proceeding. The
premise underlying this argument is contrary to our longstanding
presumption that estoppel against the government is
impermissible. See, e.g., Federal Crop Ins. Corp. v. Merrill,
332 U.S. 380, 382, 386 (1947) (holding that a farmer who obtained
federal insurance based on improper advice by an agent of the
Federal Crop Insurance Corporation that his entire crop qualified
for insurance could not recover for the loss of his crop because
the government could not be estopped from denying the claim by
the agent’s erroneous statements); see also Office of Pers. Mgmt.
v. Richmond, 496 U.S. 414, 419-20 (1990) (recognizing that
“equitable estoppel will not lie against the Government as it
lies against private litigants” and acknowledging Merrill as “the
leading case in [the Court’s] modern line of estoppel
decisions”).21
21
The Supreme Court has mentioned the possibility that
some type of “affirmative misconduct” by a government official
might give rise to estoppel against the government. See, e.g.,
Richmond, 496 U.S. at 421; see also Linkous v. United States, 142
F.3d 271, 277 (5th Cir. 1998) (“In order to establish estoppel
against the government, a party must prove affirmative misconduct
by the government in addition to the four traditional elements of
the doctrine.”). However, the Court has never invoked this
exception and there is no suggestion of such “affirmative
misconduct” in the instant case.
32
We decline to depart from this longstanding presumption in
the instant case. Initially, we observe that even the
traditional, more lenient requirements to invoke estoppel against
a private party are not present in this case. The four
traditional requirements are: “(1) that the party to be estopped
was aware of the facts and (2) intended his act or omission to be
acted upon; (3) that the party asserting estoppel did not have
knowledge of the facts[] and (4) reasonably relied on the conduct
of the other to his injury.” Linkous, 142 F.3d at 278 (citing
United States v. Bloom, 112 F.3d 200, 205 (5th Cir. 1997))
(alterations in original). The Defendants’ estoppel-type
argument fails because they cannot satisfy the third requirement.
The Defendants had knowledge of the relevant facts (i.e., the
condition of the Complex and the falsity of the certification
that the Complex was in decent, safe, and sanitary condition).
Thus, the traditional requirements for invoking estoppel are not
met.
Moreover, even if all four traditional requirements for
private-party estoppel were satisfied, estoppel against the
government would still be inappropriate under the circumstances
of this case. The Court in Richmond expressly held that
“judicial use of the equitable doctrine of estoppel cannot grant
[a claimant] a money remedy that Congress has not authorized.”
496 U.S. at 426-27 (noting further that “not a single case has
upheld an estoppel claim against the Government for the payment
33
of money”). The Court’s asserted rationale for this holding was
to prevent fraud against the government via collusion between
government officials and private claimants and, more generally,
to ensure that public funds are spent “according to the letter of
the difficult judgments reached by Congress as to the common good
and not according to the individual favor of Government agents or
the individual pleas of litigants.” Id. at 428. We find this
logic to be equally applicable in situations like the present
case, where the Government seeks to recover funds spent contrary
to the will of Congress, as in situations like Richmond, where
the government sought to prevent payment of a claim that would
have been paid in derogation of the will of Congress. Cf. United
States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d
1416, 1422 (9th Cir. 1991) (noting in dicta that a defendant’s
“‘inability to retain money that it should never have received in
the first place’ is not the kind of detrimental reliance that
justifies estoppel against the government”) (quoting Heckler v.
Cmty. Health Servs., 467 U.S. 51, 61 (1984)). While we
acknowledge that the treble damage provision of the civil FCA
produces a harsher result than mere recovery of the expended
funds, we note that these damages and other remedies are
authorized by Congress. In addition, the fact that the
unavailability of estoppel permits the government to recover
treble damages does not justify departure from the longstanding
and widely-accepted principle disfavoring government estoppel.
34
See Merrill, 332 U.S. at 386 (recognizing that “not even the
temptations of a hard case” will provide a basis for ordering
recovery of funds that would be expended contrary to law).22
Finally, from a practical perspective, we note that
acceptance of the Defendants’ position in this litigation would
place HUD in an extremely difficult position. The argument that
payment by the government of a false claim with knowledge of its
falsity forecloses any future false claims action assumes that,
upon receiving a HAP voucher for a property that is not decent,
safe, and sanitary, HUD must either immediately cease HAP
payments (which, in most cases, would effectively put the
claimant out of business and the tenants on the street) or
forfeit the right to pursue a false claims action against the
claimant in the future. Put differently, if HUD elects to work
with the claimant to improve the condition of the property rather
than to cut off payments immediately, HUD waives the government’s
right to pursue a cause of action under the FCA. Such an
“election of remedies” requirement is not contemplated by the
22
We note that the instant case is not a particularly
“hard case” from an equitable perspective. The Defendants were
well aware of their contractual and regulatory obligation to
maintain the Complex in decent, safe, and sanitary condition.
Similarly, at the time that they signed the HAP contract, the
Defendants were aware that they would be obliged to make a
monthly certification of their compliance with the “decent, safe,
and sanitary” standard, and that a false certification of
compliance with this standard would subject them to treble
damages under the civil FCA or prosecution under the criminal
FCA.
35
statutory, regulatory, or contractual regime governing this
Section 8 program. The Government’s rights under the regulatory
contract and under the False Claims Act are not mutually
exclusive.
The Defendants suggest that if there is no de facto
“election of remedies” requirement, the Government can use the
threat of FCA liability “as an in terrorem device . . . to force
the Partners and other owners . . . to invest their own money to
make up the shortfall in funds for maintenance.” Relying on
Christopher Village, the Defendants argue that an owner is not
required “to absorb or subsidize operating and maintenance
deficiencies” if HUD has not established rental rates adequate to
cover a property’s expenses. 190 F.3d at 316. However, the
question of whether HUD properly considered the Defendants’
requests for rent increases is not presented in this case. Our
task is to determine whether HUD’s choice to continue remitting
HAP payments to an owner whose property is not in decent, safe,
and sanitary condition precludes the government from pursuing a
false claims action based on the owner’s false certification that
the property was, in fact, decent, safe, and sanitary. We find
no basis for such a preclusion. To the extent that the multiple
remedial paths available to the government under this regulatory
and contractual regime have the effect of pressuring owners to
take steps (such as investing in preventive maintenance or
retaining what is likely to be an adequate reserve during the
36
early years of a project) to ensure they can provide decent,
safe, and sanitary housing throughout the duration of a project’s
existence, such an incentive structure is clearly contemplated by
the statutory and regulatory regime governing the Section 8
program and by the contract that the Defendants willingly signed.
It is clear that the position taken by both the Defendants
and the dissent is motivated by an underlying concern that the
Government has somehow treated the Defendants “unfairly” by
pursuing an action under the FCA after HUD initially chose to
work with the Defendants cooperatively to remedy the problems at
the Complex. We cannot similarly conclude that the Defendants
have been ill-used. As noted above, the fact that HUD, upon
discovering maintenance and safety problems at the Complex, chose
to provide the Defendants with an opportunity to cure the defects
rather than immediately cutting off the Defendants’ HAP payments
in no way implicates the Government’s ability to maintain a cause
of action under the FCA. Further, even if it would be
problematic for the Government to pursue a civil FCA action
against an owner for false claims made while the owner was making
a good faith attempt to work with HUD and remedy the problems at
a project, this was not the situation in the instant case. The
Government did not initiate any action under the FCA until well
after the informal cooperative process had broken down and the
Defendants had, in fact, indicated their intent to abandon the
project entirely. Moreover, we emphasize that the Government has
37
not attempted to hold the Defendants liable for false claims made
while the Defendants were participating in good faith in the
cooperative remedial process. The instant action is based only
on claims made during the time period after the Defendants
effectively ceased cooperating with the requirements of HUD’s
informal remedial process. Under these circumstances, we cannot
conclude that the government has acted deceptively in pursuing
its contractual remedies by initiating a false claims action.
In light of the above analysis, we conclude that the
district court erred in granting summary judgment to the
Defendants on the ground that they did not, as a matter of law,
submit a “false claim.” Maintaining a property in decent, safe,
and sanitary condition is a prerequisite to the Defendants’
entitlement to HUD funds in the instant case. Accordingly, a
false certification of compliance with the decent, safe, and
sanitary standard is material and renders the claim false as a
matter of law.
Because there is a genuine issue of material fact regarding
whether the submission was indeed false (i.e., whether the
property was actually in decent, safe, and sanitary condition
during the time period in question), we cannot hold as a matter
of law that the Defendants submitted a false claim. However, in
the same vein, the substantial evidence in the record indicating
that the property was unsafe and unsanitary during the time
38
period in question — suggesting that the claim was indeed false —
certainly precludes summary judgment in favor of the Defendants
on these grounds.
IV. DID THE DEFENDANTS “KNOWINGLY” SUBMIT A FALSE CLAIM?
We turn now to the mens rea element of a cause of action
under the Act, i.e., the requirement that a defendant must
“knowingly” submit false or fraudulent claims, or false or
fraudulent statements in support of those claims, to the
government. See 31 U.S.C. § 3729(a)(1) & (a)(2) (Supp. 2001).
The Defendants maintain that a claimant cannot have the requisite
mens rea to be held liable under the Act if the claimant knows
that the government is aware of the falsity of the information
submitted. The district court agreed, concluding that “[b]ased
on the undisputed evidence, and specifically the record of HUD’s
knowledge . . . together with the proof of communications between
HUD and defendants concerning the problems at the apartments,
there could be no reasonable finding that defendants acted
knowingly.” Southland Mgmt. Corp., 95 F. Supp. 2d at 641(emphasis omitted).
We disagree with the district court’s conclusion. While we
agree that, in certain situations, evidence that the defendant
knew that the government was aware of the falsity of a claim when
it was submitted may be relevant in determining whether the
defendant knowingly submitted a false claim, we hold that such
knowledge on the part of the defendant is not an automatic
39
defense to liability. We further conclude that the district
court erred in finding, as a matter of law, that HUD’s knowledge
of the condition of the Complex negated the Defendants’ mens rea
in this case.
The mens rea required for a person to be held liable under
the civil False Claims Act has always been the submission of a
claim “knowing” it to be false. See 31 U.S.C. § 3729(1) (1983).
Under the Act, a person acts “knowingly” if he or she “(1) has
actual knowledge of the information; (2) acts in deliberate
ignorance of the truth or falsity of the information; or (3) acts
in reckless disregard of the truth or falsity of the information,
and no proof of specific intent to defraud is required.” Id.§ 3729(b). The text of the Act as it appears today (i.e.,
subsequent to the 1986 amendments) contains no indication that
government knowledge of the falsity of a submission might bear on
the defendant’s mens rea. Moreover, there is nothing in the
legislative or statutory history of the Act suggesting that
Congress intended to preclude the government from pursuing an
action under the civil FCA when the government was aware of the
facts and circumstances rendering a claim false at the time of
submission.23 The Defendants nonetheless contend that such
23
Prior to the 1982 Amendments, the text of the Act did
indicate that private plaintiffs could not pursue qui tam actions
under the Act if the government was aware of the information
forming the basis of the complaint. See 31 U.S.C. § 232(C)
(1976). While the early versions of this provision (i.e., prior
to the 1982 recodification) did not indicate whether it applied
40
government knowledge is an absolute bar to liability under the
Act.
We find it difficult to justify the proposition that an
individual who submits a false claim to the government with
knowledge of its falsity should necessarily be excused from
liability under the Act merely because the government was also
aware that the claim was false when it was submitted. Several of
our sister circuits have recognized that, while evidence that the
government was aware of the facts and circumstances rendering a
claim false at the time of submission may be relevant to a
defendant’s state of mind in submitting a false claim, such
knowledge does not provide an automatic bar to suit. See, e.g.,
United States ex rel. Kreindler & Kreindler v. United
Technologies Corp., 985 F.2d 1148, 1156-57 (2d Cir. 1993);
Hagood, 929 F.2d at 1421. These courts explain that, while
government knowledge may, in some circumstances, provide evidence
that a defendant did not submit a claim with actual knowledge of
its falsity or in deliberate ignorance or reckless disregard for
to actions brought by the government, the provision was contained
within a section of the statute specifically addressing the
procedural requirements for qui tam actions. See generally 31
U.S.C. § 232 (1976) (entitled “Procedure for private claims”).
This jurisdictional bar was subsequently eliminated in the 1986
amendments. For the purposes of the instant case, we note that
this prohibition was never applicable to actions initiated by the
government. See 31 U.S.C. § 3730(b)(4) (1982) (“Unless the
Government proceeds with the action, the court shall dismiss an
action brought by the person on discovering the action is based
on information the Government had when the action was brought.”)
(emphasis added).
41
the truth, see Kreindler & Kreindler, 985 F.2d at 1156; Hagood,
929 F.2d at 1421, a defendant alleged to have violated the civil
False Claims Act “is not automatically exonerated by any
overlapping knowledge by government officials,” Kreindler &
Kreindler, 985 F.2d at 1156.
We agree with the Kreindler and Hagood courts that a
defendant’s knowledge that the government is aware of the falsity
of a claim can, under certain circumstances, be relevant to mens
rea. However, in the context of a claim brought by the
government (as opposed to a qui tam action), the circumstances in
which such knowledge is relevant are quite limited. In the
context of government-initiated FCA actions, we would permit a
“government knowledge defense” primarily in the rare situation
where the falsity of a claim is unclear and the evidence suggests
that the defendant actually believed his claim was not false
because the government approved and paid the claim with full
knowledge of the relevant facts.
In contending that a “government knowledge” defense should
apply in the instant case, the Defendants rely on qui tam cases
such as Lamers and Wang v. FMC Corp., 975 F.2d 1412 (9th Cir.
1992). The courts in these qui tam cases have acknowledged that
there are potential problems with allowing private relators to
bring qui tam actions while the government is in the process of
trying to work informally with a defendant to achieve compliance
with particular statutory or regulatory provisions. See, e.g.,
42
Lamers, 168 F.3d at 1020 (“Lamers, it seems, wants to use the FCA
to preempt the FTA’s discretionary decision not to pursue
regulatory penalties against the City.”). While these might be
valid concerns in the qui tam context, we find these potential
problems far less compelling in the context of an FCA action
brought by the federal government, particularly when the action
is brought after any informal negotiation process has proved
unsuccessful, as in the instant case. Thus, the qui tam cases
cited by the Defendants and the dissent do not provide a
compelling reason why the Defendants should be excused from
liability based on a “government knowledge defense” under the
circumstances of this case.24
With these principles in mind, we now turn to the question
whether the district court properly granted summary judgment in
favor of the Defendants on the mens rea issue. As noted, the
district court held that because of HUD’s knowledge and the
24
We emphasize that we need not, and do not, address
today the availability of a “government knowledge” defense in qui
tam actions. Qui tam actions are governed by substantively
different rules than government-initiated FCA actions in many
respects. Government knowledge of the facts and circumstances
underlying a claim has historically played a different role in
qui tam actions than in FCA actions brought by the government.
See supra note 23. Indeed, under certain circumstances relators
are still jurisdictionally barred from bringing qui tam actions
under the FCA if the government had knowledge of the facts and
circumstances that form the basis of the relator’s claim. See 31
U.S.C. § 3730(e). In light of these distinctions, it is
appropriate for this court in the instant case to confine our
discussion of the availability of a “government knowledge
defense” to government-initiated FCA actions.
43
communications between the parties, “there could be no reasonable
finding that defendants acted knowingly.” Southland Mgmt. Corp.,
95 F. Supp. 2d at 641. Although the record makes clear that HUD
had a fair amount of information regarding the condition of the
Complex, the record also indicates that the Defendants, as the
ones who monitored the property and entered the units, had actual
knowledge that the Complex was not in decent, safe, and sanitary
condition. Moreover, there is evidence in the record suggesting
that it was clear to the Defendants that the certifications in
their HAP vouchers were false.
After our review of the record, we conclude that a
factfinder could determine on this record that the Defendants
knowingly submitted false claims to the government. Thus, there
is a genuine issue of material fact regarding the Defendants’
knowledge, and the district court erred in granting summary
judgment in favor of the Defendants on this issue.
V. Is the Phrase “Decent, Safe, and Sanitary” Sufficiently
Concrete to Support a Finding of Liability Under the Act?
The Defendants contend that an allegedly false certification
that a property is in “decent, safe, and sanitary” condition
cannot provide the basis for civil False Claims Act liability.
Noting that the phrase “decent, safe, and sanitary” is not
defined in the HAP contract, they argue that any evaluation of a
property pursuant to this standard is inherently subjective.
According to the Defendants, because a jury cannot determine
44
whether a certification of compliance with the “decent, safe, and
sanitary” standard is objectively “true” or “false,” such a
certification cannot support a false claims action under the FCA.
The Government responds that the “decent, safe, and
sanitary” standard is meaningful and susceptible to objective
analysis. The Government points to the 1995 version of 24 C.F.R.
§ 881.201 stating that “[h]ousing continues to be decent, safe
and sanitary if it is maintained in a condition substantially the
same as at the time of acceptance,” 24 C.F.R. § 881.201 (1995),
arguing that this language gives the standard substance.25
Moreover, the Government claims that the published Housing
Quality Standards (“HQS”) that HUD inspectors employ during
annual physical inspections also clarify the correct
interpretation of the phrase.
The district court did not rule on this issue, but did
suggest that the Defendants’ position had “arguable merit.” See
Southland Mgmt. Corp., 95 F. Supp. 2d at 635 n.7. The court
correctly noted that, during the time period in question, the
Housing Quality Standards on which the Government relies were not
expressly referenced in the regulations governing the Substantial
Rehabilitation Section 8 Program, and no other HUD regulations
25
The Defendants contend that this regulatory guidance is
insufficient to give meaning to the phrase “decent, safe, and
sanitary” because there is no implication that housing is decent,
safe, and sanitary only if it is maintained in this manner. We
agree that this language suggests an affirmative defense rather
than an exclusive definition of “decent, safe and sanitary.”
45
then applicable to the Substantial Rehabilitation Program defined
the phrase “decent, safe, and sanitary.” While the district
court indicated that the standard appeared to be subjective, the
court also recognized that “there are cases in which property
would not qualify as ‘decent, safe and sanitary’ under any
conceivable definition of those terms.” Id. at 635 n.7.
As this issue was not the basis of the district court’s
summary judgment in favor of the Defendants, we assume that the
Defendants raise this argument on appeal in order to invite this
court to affirm the district court’s judgment on these alternate
grounds.26 We decline this invitation.
The question presented by the Defendants is one of first
impression for this court: Whether a certification that a
property is in “decent, safe, and sanitary” condition is
sufficiently concrete that a jury could determine if the
certification is true or false? While the normal procedure where
the lower court has not considered a pertinent issue is to remand
the case, considerations of judicial economy can dictate
otherwise in circumstances such as these, where the issue is a
purely legal question subject to plenary review by this court.
26
We note that we have the ability to affirm on these
alternate grounds. See Manning v. Warden, La. State
Penitentiary, 786 F.2d 710, 711 (5th Cir. 1986) (affirming on
other grounds); see also Bickford v. Int’l Speedway Corp., 654
F.2d 1028, 1031 (5th Cir. 1981) (stating that “reversal is
inappropriate if the ruling of the district court can be affirmed
on any grounds”).
46
See Mitchell v. Forsyth, 472 U.S. 511, 530 (1985); see also
Hudson United Bank v. LiTenda Mortgage Corp., 142 F.3d 151, 159
(3d Cir. 1998). Accordingly, we can appropriately reach this
question despite the fact that the district court’s summary
judgment was not based on this issue.
In contending that the phrase “decent, safe, and sanitary”
is too subjective to support FCA liability, the Defendants rely
on a number of cases holding that this phrase is too indefinite
to create any legally cognizable rights for the tenants of
programs funded under the housing statutes. See, e.g., Perry v.
Hous. Auth. of Charleston, 664 F.2d 1210, 1217 (4th Cir. 1981).
This court has recently indicated support for this proposition as
well. See Banks v. Dallas Hous. Auth., 271 F.3d 605, 610 (5th
Cir. 2001). However, these decisions are inapposite. As the
Government correctly points out, none of these cases is an FCA
case, and the question whether language is too indefinite to
create a legally cognizable statutory right is entirely separate
from whether that language can form the basis of a “false claim”
action under the FCA.27
We find that the phrase “decent, safe, and sanitary,” as
applied in the context of assessing housing conditions, has a
27
One particularly relevant distinguishing feature between
these two inquiries is that while courts do not consider
regulatory guidance in determining whether statutory language
creates a legally cognizable right, see Banks, 271 F.3d at 610
n.4, it is appropriate to consider regulatory clarification in
the instant case.
47
commonsense “core of meaning” such that it is capable, without
additional definition, of being understood by a factfinder called
upon to evaluate whether a certification of compliance with this
standard is objectively true or false. Certainly, different
members of the general public might provide different specific
definitions of this term or might emphasize different factors in
assessing whether housing is “decent, safe, and sanitary.”
However, the fact that each individual’s exact definition of the
meaning of this phrase might differ does not undermine the
proposition that the general meaning of the concept is commonly
understood. As we have noted in another, quite different
context, despite the fact that certain words or phrases might
“strike distinct chords in individual jurors,” they can
nevertheless have a “plain meaning of sufficient content that the
discretion left to the jury” is “no more than that inherent in
the jury system itself.” Milton v. Procunier, 744 F.2d 1091,
1096 (5th Cir. 1984) (holding that the Texas capital sentencing
scheme is permissibly applied when the sentencing jury evaluates
the terms “deliberately,” “probability,” “criminal acts of
violence,” and “continuing threat to society” without any
specific definitions); see also James v. Collins, 987 F.2d 1116,
1120 (5th Cir. 1993) (same). We find that the phrase “decent,
safe, and sanitary” has a widely accepted ordinary meaning in the
context of housing quality assessments that enables a jury to
evaluate whether a property meets this standard, even if the
48
applicable regulations provide no further elaboration on the
meaning of the term.
Our conclusion that the concept of “decent, safe, and
sanitary” housing has a commonly-understood ordinary meaning is
bolstered by the history of the parties’ interactions pursuant to
the HAP contract. Initially, we note that the HAP contract
signed by the Defendants contains a covenant requiring the owner
to agree to maintain the facilities “so as to provide Decent,
Safe, and Sanitary housing.” The Defendants willingly agreed to
this covenant without indicating any uncertainty about the
meaning of the standard. Similarly, more than one hundred times
during the course of the project’s history, the Defendants
certified under penalty of fine or imprisonment that the Complex
was in decent, safe, and sanitary condition. The record contains
no indication that the Defendants even once inquired as to the
meaning of this term prior to signing these certifications. The
Defendants’ repeated certifications in the HAP vouchers, combined
with the complete lack of prior dispute about the meaning of the
standard, provide strong indication that the Defendants and HUD
had a mutual, common understanding of the meaning of the phrase
“decent, safe and sanitary.”
It is also significant that the “decent, safe, and sanitary”
language has been part of the statutory scheme governing public
housing since the inception of the current federal housing
program in the 1930s. During the almost seventy years since the
49
program’s enactment, there are no reported cases challenging this
terminology on the ground that it provides inadequate notice of
the standard governing public housing conditions.28 This notable
lack of legal debate further supports our conclusion that the
concept of “decent, safe, and sanitary” housing has a
sufficiently concrete, commonsense meaning that is neither
inherently subjective nor impermissibly vague. A factfinder in a
civil action is perfectly capable of applying this standard and
determining whether a certification that housing is in “decent,
safe, and sanitary” condition has been falsely made.
The Defendants also appear to argue that, even if the phrase
“decent, safe, and sanitary” has an objective and ascertainable
meaning, they still cannot be held liable for a false claim based
on this provision. They point to a number of decisions from
other circuits suggesting that errors attributable to differences
in the interpretation of disputed legal questions cannot form the
basis of a false claims action under the FCA. See, e.g., Lamers,
168 F.3d at 1018; Hagood, 81 F.3d at 1478-79. Relying on these
authorities, the Defendants suggest that they cannot be held
28
Indeed, there are cases that successfully apply this
standard to determine whether owners are in compliance with their
contractual obligations regarding the condition of housing
projects. These cases do not elaborate on the meaning of the
phrase “decent, safe, and sanitary” or suggest in any way that
the standard lacks a concrete meaning. See, e.g., Marshall v.
Cuomo, 192 F.3d 473, 479-80 (4th Cir. 1999) (determining that a
corporation was appropriately debarred from further participation
in Section 8 programs because its properties were not maintained
in “decent, safe, and sanitary” condition).
50
liable under the Act if their submission was grounded in a
legitimate dispute about the correct legal interpretation of the
phrase “decent, safe, and sanitary.”
The Defendants’ briefs do not indicate the exact nature of
their disagreement about the meaning of the standard. However,
in the portions of their testimony contained in the record, two
of the Defendants offer alternate definitions of the phrase
“decent, safe, and sanitary” that would purportedly render their
certifications correct. Defendant Doty initially grants in his
testimony that the term “decent, safe, and sanitary” should be
evaluated based on common and ordinary understanding of the
terms. Doty then suggests that under this common understanding,
the term “decent, safe, and sanitary” housing refers to housing
that “where you walk in, you wouldn’t fall in through the floor.”
Defendant McLaurin similarly suggests that “decent, safe, and
sanitary” housing is housing that “[keeps] the weather out” and
“[does not] have things falling on you.”
Even if this testimony does indicate that the Defendants
were operating pursuant to a bona fide dispute about the meaning
of the “decent, safe, and sanitary” standard, we note that the
Defendants can still be held liable under the FCA for submitting
false claims if their interpretation of the disputed regulatory
or contractual language was unreasonable. A number of courts
have recognized that, while a legitimate dispute regarding the
meaning of a regulatory or statutory provision might preclude FCA
51
liability, the government can nonetheless prove the falsity of a
claim by establishing the unreasonableness of the defendant’s
interpretation of the regulation or contractual provision. See,
e.g., Commercial Contractors, Inc. v. United States, 154 F.3d
1357 (Fed. Cir. 1998); United States v. Krizek, 859 F. Supp. 5,
11-12 (D.D.C. 1994), aff’d, 111 F.3d 934 (D.C. Cir. 1997).
This issue was not addressed by the district court and is
not sufficiently developed in this record or in the briefs for us
to express any view upon it other than to set out the applicable
law. We leave it to the district court on remand.
In sum, we decline to uphold the district court’s summary
judgment on the alternate grounds suggested by the Defendants.
VI. CONCLUSION
For the foregoing reasons, the district court’s grant of
summary judgment in favor of the Defendants is REVERSED and the
case is REMANDED for further proceedings consistent with this
opinion. Costs shall be borne by the Defendants.
52
EDITH H. JONES, dissenting:
This is a complex case legally but not factually. The
legal difficulties, and my disagreements with the panel majority,
will be stated shortly. Factually, the case concerns the
government’s effort to inflict severe penalties on HUD-subsidized
low-income apartment owners because there were (1) roaches (in
the deep South, no less), (2) broken doors and windows (caused
partly by tenants), and (3) crime (in a high-crime, crack-dealing
neighborhood). HUD knew of this property’s problems for years
before it foreclosed, but HUD’s policy, confirmed by the evidence
in this case, was to work with the owners to seek remedies
gradually. There is no evidence of concealment or wrongdoing by
the property owners. The property owners never collected a dime
in profit after fiscal year 1993 and spent all of their HUD
subsidies trying to keep up with the maintenance and mortgage
payments. In short, HUD was complicit in any mismanagement that
allowed the property to deteriorate.
According to the majority opinion, however, the owners
may be liable under the False Claims Act despite the vagueness of
the contractual standard and the government’s ongoing knowledge
of the condition of the apartments. Moreover, the majority hold
that a false claim exists as a matter of law if the defendants’
53
certifications of compliance with the regulatory standard were
false – irrespective of the government’s knowledge of
noncompliance and its failure to rely on the certifications.
Given the facts of this case, the majority’s conclusion
constitute a significant and unnecessary extension of the FCA.
The statute was originally passed to prevent “all types of fraud”
against the United States government that might result in
financial loss. United States v. Neifert-White Co., 390 U.S.
228, 232, 88 S.Ct. 959, 961 (1968). But “[s]ince the Act is
restitutionary and aimed at retrieving ill-begotten funds, it
would be anomalous to find liability when the alleged
noncompliance would not have influenced the government’s decision
to pay.” United States ex rel. Mikes v. Straus, 274 F.3d 687,
697 (2d Cir. 2001).
By imposing materiality as a matter of law based solely
on a formalistic certification, and by constricting the defense
of government knowledge of the contractor’s actions, the majority
threatens to transform the FCA into a weapon against mere
breaches of contract. The majority of courts recognize, however,
that
. . . the FCA is not an appropriate vehicle for
policing technical compliance with administrative
regulations. The FCA is a fraud prevention statute;
violations of [agency] regulations are not fraud unless
the violator knowingly lies to the government about
them.
54
United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013,
1019 (7th Cir. 1999). The costs of government contracts are
already inflated by complex rules unknown to private business
transactions. This opinion will generate additional costly
premiums to offset the increased risk posed by its expansion of
FCA liability. Indeed, the fear of having to defend an FCA claim
for non-material misstatements or problems known by the
government will discourage many businesses from bidding for
government contracts.
I respectfully dissent.
I. The payment vouchers were not material to HUD’s decision
making.
The majority hold that when certification of statutory
or regulatory compliance is an express prerequisite to receiving
a benefit from the government, a false certification is material
and renders the claim false as a matter or law. I disagree with
this excessively broad conclusion and with the majority’s
dalliance, in dicta, with an “outcome materiality”/”claim
materiality” dichotomy advocated by the government. I would hold
that no genuine issue of fact exists concerning the materiality
of these defendants’ monthly certifications to HAP that the
apartments were decent, safe and sanitary.
No ambiguity exists in this court’s recent
reaffirmation that the civil FCA “interdicts material
55
misrepresentations made to qualify for government privileges or
services.” United States ex. rel. Thompson v. Columbia/HCA
Health Care Corp., 125 F.3d 899, 902 (5th Cir. 1997) (quoting
United States ex. rel. Weinberger v. Equifax, Inc., 557 F.2d 456,
461 (5th Cir. 1977)). Weinberger’s 25-year-old requirement of
materiality is just as straightforward as is Thompson’s
holding.29 Moreover, other circuits have continued to state that
materiality is required in a civil FCA claim. See, e.g., Luckey
v. Baxter Health Care Corp., 183 F.3d 730, 732 (7th Cir. 1999);
Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 785,
788 (4th Cir. 1999). A recent district court decision, after
conducting the most extensive survey to date of the history,
legislative background and caselaw interpreting the FCA,
concluded that materiality remains an element of a civil FCA
claim. See United States ex rel. Wilkins v. North Am. Const.
Corp., 173 F.Supp.2d 601, 618-30 (S.D. Tex. 2001).30
29
This court said in Weinberger that to prove liability -- that is,
“to establish that Equifax committed fraud in this manner,” 557 F.2d at 461
(emphasis added) -- “Weinberger first must demonstrate that the government was
misled by Equifax's application for the reporting business.” Id. (emphasis
added).
30
The only circuit court language contrary to a materiality rule
exists in the Third Circuit’s passing observation that “perhaps Neder argues
against a materiality requirement.” United States ex. rel. Cantekin v.
University of Pittsburgh, 192 F.3d 402, 415 (3d Cir. 1999), cert. denied, 121
S.Ct. 192 (2000).
In two cases, the Supreme Court, ruling on whether materiality was
an element under certain federal criminal false statement statutes, discussed
the concept of materiality in ways that may ultimately be held relevant to the
civil FCA. See Neder v. United States, 527 U.S. 1, 20-25, 119 S.Ct. 1827,
1839-41 (1999); United States v. Wells, 519 U.S. 482, 489-99, 117 S.Ct. 921,
56
According to the majority opinion, however, the precise
definition of materiality remains open to question in this court
based on a government theory never before accepted by a federal
court.31 The majority’s mischievous dicta demand a brief
response. The majority suggest that “materiality” has two
plausible meanings. The accepted definition at common law and in
false statement statutes similar to the civil FCA equates
materiality with “ha[ving] a natural tendency to influence, or
[being] capable of influencing, the decision of the
decisionmaking body to which it was addressed.” United States v.
Wells, 519 U.S. 482, 489, 117 S.Ct. 921, 926 (1997) (brackets in
original) (internal quotation marks omitted) (quoting Kungys v.
United States, 485 U.S. 759, 770, 108 S.Ct. 1537, 1546 (1988)).
The district court relied on this definition, which the
government and the majority dub “outcome materiality.” This
understanding of materiality is implicit in Thompson and explicit
in Weinberger. The government and the majority discern another
FCA-specific phenomenon known as “claim materiality,” whereby a
926-931 (1997). A footnote in Neder is particularly provocative on this
score. 527 U.S. at 24 n.7, 119 S.Ct. at 1840 n.7. Further, federal case law
under the criminal FCA holds that there is no materiality requirement for a
violation. See, e.g., United States v. Upton, 91 F.3d 677, 685 (5th Cir.
1996). Until the Supreme Court instructs otherwise, however, materiality
remains an element of civil FCA claims.
31
In my view, Wilkins, supra, is misinterpreted by the majority, and
no other court authority exists for the “claim materiality” theory. While
Wilkins’s historical discussion of the materiality requirement is exhaustive,
the opinion nowhere mentions, much less adopts, a “claim materiality”
standard. And as a district court opinion, Wilkins does not bind this court.
57
falsehood that “bears upon” the claimant’s entitlement to receive
money or property is material – irrespective of the statement’s
capability of influencing, or actual influence on, the
government’s decision. The government’s briefing, like the
majority opinion, offers no legislative history, logic, caselaw
or grammatical argument in support of “claim materiality.” The
government’s definition waters down materiality to a subjective
or self-fulfilling concept: a representation becomes “claim
material” if the government says so, since the government defines
the representations made when filing a claim. No showing of
government reliance or that the false statement had the
capability of influencing the government’s decision is necessary.
The government’s advocacy of claim materiality flies in
the face of the Supreme Court’s seminal case on the definition of
materiality. In Kungys, the Court imported into a statute
revoking citizenship the definition of materiality, quoted above,
that had been uniformly adopted by lower federal courts in
criminal false statement prosecutions. Kungys, 485 U.S. at 769-
70, 108 S.Ct. at 1546. As to revocations of citizenship, the
Court noted that
Neither the evident objective sought to be achieved by
the materiality requirement, nor the gravity of the
consequences that follow from its being met, is so
different as to justify adoption of a different
standard. “Where Congress uses terms that have
accumulated settled meaning under either equity or the
common law, a court must infer, unless the statute
58
otherwise dictates, that Congress means to incorporate
the established meaning of these terms.”
Kungys, id. (citations omitted). Later, the Court restates the
materiality test as asking “whether the misrepresentation or
concealment was predictably capable of affecting, i.e., had a
natural tendency to affect, the official decision [to grant
citizenship].” Kungys, 485 U.S. at 773, 108 S.Ct. at 1547. In
sum, the government’s proffered test of “claim materiality” is
ingenious but wrong. There is even less reason for courts to
adopt a variant standard of materiality in the context of the
punitive civil FCA32 than there might have been in regard to
immigration violations. Fortunately, the majority’s discussion,
as dicta, cannot detract from the force of our prior cases.
After toying with the concept of claim materiality, the
majority conclude that the owners’ signed certifications on the
HAP vouchers were material as a matter of law. In other words,
when the appellees certified the Jackson Square apartments as,
inter alia, decent, safe and sanitary each month on their voucher
for HUD reimbursement, their certifications, if false, constitute
false claims because the certifications are prerequisites to
payment under the pertinent Section 8 program. See Thompson, 125
32
Civil FCA actions for treble damages and penalties are “punitive.”
Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765,
784-85 (2000); United States ex rel. Garibaldi v. Orleans Parish School Board,
244 F.3d 486, 491 & n.5 (5th Cir. 2001).
59
F.3d at 902. I find this conclusion insupportable on several
counts.
First, even the government acknowledges that “if there
is a traditional ‘materiality’ requirement, the district court
erred in granting summary judgment on this point.” Traditional
materiality is a mixed question of law and fact. The government
grudgingly understands, if the majority does not, that the facts
must be considered.
Second, I am troubled by the superficiality of equating
false certifications with materiality as a matter of law. In
Thompson, this court stated that to create liability under the
FCA, a false certification of compliance must be a “prerequisite”
to obtaining a government benefit.33 Unlike the majority, I
33
In Thompson, the district court dismissed the plaintiff relator’s
complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6). 125
F.3d at 900. This court reversed as to some but not all of the plaintiff’s
allegations. Id. at 904. After concluding that a claimant submits a false
claim under the FCA by falsely certifying compliance with a statute or
regulation when the Government has conditioned payment of a claim upon such a
certification of compliance, id. at 902, this court applied this standard to
the allegations at issue in the case before it:
Thompson alleged that, as a condition of their participation in the
Medicare program, defendants were required to certify in annual cost
reports that the services identified therein were provided in
compliance with the laws and regulations regarding the provision of
healthcare services. He further alleged that defendants falsely
certified that the services identified in their annual cost reports
were provided in compliance with such laws and regulations. Thus,
Thompson fairly alleged that the government's payment of Medicare
claims is conditioned upon certification of compliance with the laws
and regulations regarding the provision of healthcare services . . .
, and that defendants submitted false claims by falsely certifying
that the services identified in their annual cost reports were
rendered in compliance with such laws and regulations.
Id. Instead of simply holding that the defendants’ Rule 12(b)(6) motion
60
interpret this language as requiring more than a formalistic
connection to the payment decision.34 I would agree that in many
instances, certifications required by the government along with
payment vouchers should be presumed to be material to the
government’s decision to pay a contractor. But what if the facts
show that the certifications were not actually a “prerequisite”
to the payment and had no tendency to influence the
decisionmaker? None of the previous cases that analyzed the
connection between FCA civil liability and false certifications
involved facts like those before us.35 On the other hand, courts
in several cases have rejected civil FCA liability where
should have been denied, this court then noted that the parties disputed
whether “the certifications of compliance contained in annual cost reports are
. . . a prerequisite to payment of Medicare claims.” Id. The defendants in
Thompson argued that the certifications were not a prerequisite to payment
because "Medicare claims are submitted for payment shortly after services have
been rendered and well before annual cost reports are filed." Id. The
plaintiff argued "that such certifications are indeed a prerequisite to
payment because the retention of any payment received prior to the submission
of an annual cost report is conditioned on the certification of compliance
contained therein." Id. Because this court was “unable to determine from the
record before us whether, or to what extent, payment for services identified
in defendants' annual cost reports was conditioned on defendants'
certifications of compliance,” this court elected to “deny defendants'
12(b)(6) motions as they relate to this issue and remand to the district court
for further factual development . . . [to] determine whether the government’s
payment of defendants’ Medicare claims was conditioned on defendants’
certifications of compliance in their annual cost reports.” Id. at 902-03
(emphasis added). If the mere certifications had sufficed to establish
liability, this remand would have been unnecessary.
34
The Ninth Circuit requires a causal link between the false
certification and the agency’s decision to pay. United States ex rel. Hopper
v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996).
35
See, e.g., United States ex rel. Siewick v. Jamieson Sci. and
Eng’g, 214 F.3d 1372 (D.C. Cir. 2000); United States ex rel. Mikes v. Straus,
274 F.3d 687 (2d Cir. 2001); Harrison v. Westinghouse Savannah River Co., 176
F.3d 776 (4th Cir. 1999); United States ex rel. Hopper v. Anton, 91 F.3d 1261(9th Cir. 1996).
61
defendant contractors arguably submitted “false” certifications
but were engaged in cooperative or supervised undertakings with
the government that rendered the certifications irrelevant to
ongoing payment decisions.36 Similarly, Kungys rejected the
lower court’s attempt to formulate a distinct standard of
materiality for immigration cases, in part because “the judgment
in question does not lend itself to mechanical resolution.” 485
U.S. at 771, 108 S.Ct. at 1546. There are probably thousands, if
not tens of thousands, of government certification requirements
in connection with payment and reimbursement vouchers of every
sort. We paint with entirely too broad a brush to generalize
that
. . . once a claimant has made a certification of
compliance with a statutory or regulatory provision or
a provision of a contract mandated by statute or
regulation, the claimant is subject to liability under
the Act for submitting a false claim if that
certification of compliance is known by the claimant to
be false.
Majority Opinion at 2607. (emphasis in original) Even more
disturbing, the majority’s rule seems to jeopardize its
recognition that “not all statutory, regulatory or contractual
36
See United States ex rel. Durcholz v. F.K.W., Inc., 189 F.3d 542,
545 (7th Cir. 1999); Wang ex rel. United States v. FMC Corp., 975 F.2d 1412(9th Cir. 1992); United States ex rel. Butler v. Hughes Helicopters, Inc., 71
F.3d 321 (9th Cir. 1995); United States ex rel. Lamers v. City of Green Bay,
168 F.3d 1013 (7th Cir. 1999).
62
violations necessarily give rise to FCA liability.”37 The
government need only incorporate boiler-plate “certifications of
compliance” with “all” statutes and regulations to put in play
punitive FCA sanctions for most government contractors or
beneficiaries.
Third, based on the facts well articulated by the
district court, I agree with its conclusion that the appellees’
certifications of compliance with the decent, safe and sanitary
standard on their monthly HUD vouchers were in no way a
“prerequisite” to receiving reimbursement and did not in fact
influence the agency’s decision to pay. The majority has wisely
refused to rely on the only factual evidence supporting the
government’s materiality position, the deposition of Quentin
Lewis. Lewis, a HUD employee responsible for reviewing and
approving the defendants’ and hundreds of other payment vouchers,
testified only that he would not have approved the vouchers if
the certifications had not been signed by the defendants or their
agent. Lewis also testified that he had not read the
certification in any depth and had never heard of the phrase
37
The majority emphasizes the uncompromising nature of its rule by
adding in a footnote, “The materiality of the certified statement is not
dependent upon how large a role the truth or falsity of the certification
plays in the government’s ultimate decision whether to remit payment.”
Majority Opinion at ___, n.18. Suppose a government contractor mis-certified
his payment address for reasons having nothing to do with the contract. He
could be subjected to FCA liability under the majority’s theory. The
majority’s reasoning has done away with materiality, at least in certification
cases, while purporting to apply it!
63
“decent, safe and sanitary” until the date of his deposition. As
the district court observed, “there is nothing in the record to
show that Lewis, or anyone else with HUD, took into account the
actual substance of the certifications in deciding whether to
approve the vouchers.” 95 F.Supp.2d at 638-39 (emphasis added).
If Lewis had testified that he or some other governmental
official took the truth or falsity of the defendants’
certifications into account in deciding whether to approve the
vouchers, it would be a different matter. Thus, without the
majority’s helpful declaration of materiality as a matter of law,
the government has no evidence to support its position.
In contrast, the district court found, “amply
supported” by “undisputed evidence,” that HUD’s decision to pay
appellees’ HAP vouchers “was not linked to their certification as
to the condition of the apartments.” United States v. Southland
Mgmt. Corp., Inc., 95 F.Supp.2d 629, 637 (S.D. Miss. 2000). The
court’s assessment of the undisputed evidence is worth quoting at
length:
It is clear from the evidence that HUD, in accordance
with the terms of its standard HAP contract, may elect
to discontinue housing assistance payments if an owner,
after notice by HUD that the property is not “decent,
safe, and sanitary,” fails to implement a corrective
action plan acceptable to HUD. However, it is equally
clear not only that that discontinuance of payments is
not required but also that even when HUD considers that
a property is not ‘decent, safe, and sanitary,’ it is
HUD’s normal practice, in keeping with the parties’
respective rights and obligations under the HAP
64
contract, to allow owners to continue to receive
subsidies while working to correct deficiencies that
HUD has identified. Indeed, it is evident from the
proof that HUD makes housing assistance payments with
the expectation that the owner/recipients will use
those payments to bring their property up to standard.
Further, as the Government points out in its own
submission, in view of the practical realities of
Section 8 housing programs, HUD often elects to
continue payments for a particular property despite
knowledge that the property, contrary to the owners’
HAP voucher certification, does not meet HUD’s “decent,
safe, and sanitary” standard since the alternative –
discontinuance of payments – may work to the detriment
of tenants. The point, of course, is that because the
evidence reflects that HUD, as a matter of policy and
practice, admittedly routinely makes Section 8 housing
assistance payments to owners of Section 8 property
irrespective of whether the property is in a “decent,
safe, and sanitary” condition, then the owners’
certification as to the condition of the property would
not be “material” to HUD’s decision to pay.
. . .
On this issue, the evidence positively
demonstrates beyond reasonable question that at the
time of defendants’ submission of the challenged
vouchers and HUD’s approval of those vouchers, HUD,
based on its own annual inspections of the property,
knew full well of the very conditions of the property
which it now claims made the property not “decent,
safe, and sanitary.” HUD, through its contract
inspector, Management Solutions of America, Inc.,
conducted annual inspections of the Jackson Apartments
for each of the years defendants’ HAP Contract was in
effect; and for each of the years from August 1993 to
May 1997, based on conditions found to exist at the
property by HUD’s inspector, the apartments received
“below average” or “unsatisfactory” physical inspection
reports from HUD. HUD’s inspector furnished to HUD’s
project manager responsible for the apartments a copy
of his inspection report in which he detailed his
specific findings and indicated repairs which needed to
be made in order that the property would satisfy HUD’s
minimum housing quality standards. Vicki Gross, the
project manager for the time period at issue, in turn,
65
furnished the inspection report to her superiors who,
in turn, forwarded the inspection reports to defendants
or their managing agent, and advised defendants and/or
their agent of those repairs which were required to be
made and requested that defendants and/or their agent
inform HUD of the actions that would be taken, along
with a timetable, to correct the deficiencies which HUD
had identified. At her deposition, Vicki Gross, who
testified as HUD’s representative, explained that
properties receiving “below average” and
“unsatisfactory” physical condition ratings in
inspection reports are not “decent, safe, and
sanitary.” And indeed, the conditions upon which the
Government makes its affirmative allegation that the
Jackson Apartments were not in a “decent, safe, and
sanitary” condition are those same specific
deficiencies which HUD’s inspector identified and which
led him to assign the apartments the “below average”
and “unsatisfactory” ratings. From this evidence,
there can be no question but that HUD was fully aware
of the conditions of the apartments, and specifically,
of those deficiencies which it asserts made the
apartments not “decent, safe, and sanitary.” And yet
HUD, which was aware that defendants continued to
submit HAP vouchers and receive payments throughout
this time, allowed those payments to continue. HUD’s
knowledge of the true conditions utterly belies HUD’s
contention that the certifications were material,
confirms HUD’s policy and practice of allowing housing
assistance payments on properties that it knows are not
decent, safe and sanitary, and dooms its claim against
defendants.
95 F.Supp.2d at 637-40 (footnotes omitted) (second and third
emphases added). HUD followed its usual procedures, paid the
subsidies year after year, acquiesced in the owners’ plowing the
entire rent subsidy into the property, and now claims to be
defrauded! As a sister court of appeals put it, this claim is
“absurd.” Lamers, 168 F.3d at 1020. Simply, there can be no
66
finding of materiality, much less materiality as a matter of law,
on this record.
II. The defendants did not “knowingly” present false claims for
payment.
A defendant may be liable for a civil false claim by
“knowingly” presenting such a claim, 31 U.S.C. § 3729(a)(1), but
specific intent to defraud is not required, 31 U.S.C. § 3729(b).
The question here is whether the government’s knowledge of the
falsity of a statement in a claim can defeat FCA liability for
that statement on the ground that the claimant did not act
“knowingly.” The majority hold that government knowledge need
not defeat a civil FCA claim, but that government knowledge may
be relevant to whether a defendant had the mens rea required by
the statute.38 Applying this standard, the majority conclude
that there is an issue of material fact as to whether these
defendants had the requisite mens rea.
The majority and I differ over the scope of the
government knowledge defense rather than its existence. Citing
no authority, the majority arbitrarily cabins this defense,
38
As a matter of pure logic, the government’s knowledge affects not
only the question whether the defendant “knowingly” presented a false claim,
but also the question whether the claim was false. The Seventh Circuit may
have captured the relationship when it observed that one cannot meaningfully
discuss falsity without implicating the knowledge requirement. Lamers, 168
F.3d at 1018. The court went on to hold that government knowledge precluded
an actionable false claim.
67
excluding from the Act’s coverage in a claim brought by the
government (as opposed to a qui tam action)
primarily . . . the rare situation where the falsity of
a claim is unclear and the evidence suggests that the
defendant actually believed his claim was not false
because the government approved and paid the claim with
full knowledge of the relevant facts.
Majority Opinion at 2613. (emphasis in original) As I read the
cases, however, the impact of government knowledge is (a) fact-
specific, (b) not susceptible to a tidy formula, and (c) based on
the understanding that the FCA reaches only the “knowing
presentation of what is known to be false.” United States ex
rel. Hagood v. Sonoma County Water Agency, 81 F.3d 1465, 1478
(9th Cir. 1996) (citation and internal quotation marks omitted).
There is no statutory or caselaw basis for distinguishing, as the
majority do, between government-initiated and qui tam FCA cases.
And there is no basis for limiting the defense as the majority
has done. The majority’s reticence cannot be squared with
caselaw. It is plain that government knowledge can defeat an FCA
claim at the summary judgment stage. Id. at 1477-79. From my
perspective, only two possibilities would seem to justify
imposing liability in the face of government knowledge that a
claim is false: either the person making the statement did not
know that the government knew it was false, or the person making
the statement was colluding with a government employee who also
knew the claim was false. In these situations, the claimant
68
would be “knowingly” submitting a false claim. Here, however,
the defendants knew that the government knew the true condition
of their property. Compare United States ex rel. Durcholz v.
F.K.W., Inc., 189 F.3d 542, 545 (7th Cir. 1999) (“If the
government knows and approves of the particulars of a claim for
payment before that claim is presented, the presenter cannot be
said to have knowingly presented a fraudulent or false claim. In
such a case, the government’s knowledge effectively negates the
fraud or falsity required by the FCA.”).
Contrary to the majority’s finding of a material fact
issue on whether the defendants acted “knowingly”, there is no
doubt that the government was aware that this apartment house was
deteriorating for several years preceding its foreclosure. HUD
inspectors repeatedly rated the property as “below average” or
“unsatisfactory.” HUD’s inspector found the management employees
cooperative, however, and the record reflects that when the
management was advised to make certain improvements and repairs,
it often did so to the extent money was available. The types of
problems now emphasized by the government as creating substandard
living conditions were not hidden defects – photographs of the
property taken by the mortgagee inspectors are in the record, and
HUD reviewed the mortgagee inspections. Nevertheless, HUD
continued to subsidize the operation of these apartments.
Evidence of foot-dragging by the apartment management may exist,
69
but that is not the same as concealment. The yearly inspection
reports show that repairs were being made regularly, and HUD knew
this, as it also knew that its rent subsidies were insufficient
to allay the deterioration.
In finding a fact issue as to government knowledge, the
majority reason that HUD knew something about the apartments’
condition, but that the owners knew more. This is unpersuasive.
The district court correctly parried the government’s similar
contention by pointing out that HUD now relies on exactly the
deficiencies stated in its annual inspection reports to condemn
the owners’ certifications of compliance with the “decent, safe
and sanitary” standard.39 HUD may not have known as much about
the property, but because its knowledge was sufficient to
undergird this civil FCA case -- and it still subsidized the
apartments for years -- summary judgment should be affirmed. The
owners did not knowingly submit false claims.
III. Are the owners’ defenses based on estoppel against the
government?
The majority opinion sets up, only to pommel, what it
describes as the owners’ “effective” contention that the
government has waived or is estopped to rely on remedies under
the civil FCA. Not only does estoppel not lie against the
39
Indeed, the U.S. Attorney threatened in March 1996 to sue the
owners for FCA penalties based on their false certifications, but HUD
subsidies continued until the property was foreclosed in July 1998. And after
that, HUD had the owners manage the apartments for another three months.
70
government, according to the majority, but the government’s
enforcement alternatives would be seriously constrained by
disallowing its opportunity to recover treble damages and
penalties against the owners.
Unfortunately, this discussion rests on a complete
mischaracterization of the owners’ position. While the owners
vigorously dispute that the elements of a civil FCA claim lie
against them and the impact of the government’s acquiescence and
knowledge of the apartments’ condition, nowhere do they assert a
waiver or estoppel argument. The majority’s position is
untenable.40
Even if relevant, however, the majority’s estoppel
argument proves too much. In this case, the government is suing
the owners on a theory of wrongful conduct in excess of mere
breach of contract, and the owners are arguing, not that the
government is estopped from holding them liable on this theory,
but that they are not liable as a matter of law. In other words,
the owners do not raise estoppel as a defense to the government’s
cause of action; they contend that in light of the government’s
40
In a dubious rhetorical flourish, the majority also mischaractize
the appellees’ position as suggesting that the government’s awareness that a
claimant’s submission was false might affect the truth or falsity of the
claim. The majority tartly add: “A lie does not become the truth simply
because the person hearing it knows that it is a lie.” The majority confuse
the vernacular “truth” or “falsity” of a claim with an actionable FCA false
claim, whose components also include materiality and “knowing” falsehood.
While the owners do not concede the vernacular falsity of their vouchers, they
have disputed the existence of actionable civil FCA claims.
71
knowledge and its course of dealing, the government has failed to
establish the necessary elements of that cause of action, namely,
the “knowing” submission of “material” “false claims.” The
owners’ position is thus entirely distinguishable from the cases
cited in the majority opinion. All but one of those cases deal
with private persons who invoked estoppel in an attempt to
recover money from the government.41 In the other case, the
issue (equally distinguishable from the issue in this case) was
whether the government was estopped from enforcing a contract by
collecting on a debt. The court held, not that estoppel was
unavailable, but merely that the debtor had not met his burden to
offer sufficient proof of equitable estoppel to withstand summary
judgment. See United States v. Bloom, 112 F.3d 200, 205-06 (5th
Cir. 1997).
Certainly, in a conventional fraud action initiated by
the government against a private party, it would make no sense to
conclude that estoppel considerations require a court to
41
See Office of Pers. Mgmt. v. Richmond, 496 U.S. 414, 426, 110
S.Ct. 2472 (1990) (denying recovery of disability benefit funds by retiree who
received erroneous information from federal agency that led him to lose six
months of benefits) (“judicial use of the equitable doctrine of estoppel
cannot grant respondent a money remedy that Congress has not authorized”);
Fed. Crop. Ins. Corp. v. Merrill, 332 U.S. 380, 382, 386 (1947) (denying
recovery by farmers of funds from federal crop insurance program where farmers
bought insurance after Government falsely assured them that their entire crop
was insurable); Linkous v. United States, 142 F.3d 271, 277 (5th Cir. 1998)
(rejecting plaintiff’s argument, in Federal Tort Claims Act action, that
United States should be equitably estopped from denying doctor’s status as
United States employee where doctor was in fact an independent contractor;
dismissing FTCA action for lack of subject matter jurisdiction on ground that
FTCA’s waiver of sovereign immunity extends only to suits for acts committed
by Government employees within scope of their employment).
72
disregard the government’s knowledge or conduct in considering
whether the government had actually been defrauded. But that
seems to be what the majority is asserting in this case. The
majority’s reasoning reinforces the theme permeating the opinion
that government knowledge and repeated approval of a private
person’s requests for reimbursement, unaccompanied by any illegal
collusion, does not bar the United States from pursuing treble
damages and penalties for facts of which the government was
perfectly aware when the government approved the requests.
Even if the majority’s broad estoppel rationale should
apply to cases in which the government seeks money against
private persons, this rationale should not apply to a civil FCA
action, which involves the possibility of treble damages
liability. Thus, this case is not merely one in which “the
government seeks to recover funds spent contrary to the will of
Congress.” Majority Opinion at __ (emphasis in original).
Instead, the government in this case seeks punitive damages from
private persons in excess of any recovery of its funds. The
majority concede that government knowledge is relevant to and may
defeat the defendant’s “knowing” presentation of a false claim.
It is inconsistent also to assert, as the estoppel argument does,
that government knowledge cannot in some circumstances deprive
the government of a civil FCA remedy.
73
Finally, the majority assert that making government
knowledge a bar to FCA liability would put HUD to an election of
remedies that nothing in the Section 8 subsidized housing regime
– statute, regulations, or contract – necessitates. This
argument simply begs the antecedent question whether a civil FCA
cause of action, and thus the basis for an FCA remedy, exists in
the first place when the government knew of the owners’ alleged
false claims. This argument also fails to address the owners’
contention that the majority’s reading of the FCA essentially
condones government threats of FCA liability to force investors
in federally subsidized housing projects to contribute their own
money to make up shortfalls in maintenance funds. Compare
Christopher Village Limited Partnership v. Retsinas, 190 F.3d
310, 316 (5th Cir. 1999).42
The majority repeatedly engage in appellate factfinding
by asserting, without any foundation in the record, that the
Government sought a civil FCA remedy only after the “cooperative
process” between HUD and the owners had “broken down”. It is
true that the owners eventually ceased making mortgage payments,
42
Cf. John T. Boese, Civil False Claims and Qui Tam Actions, §
2.03[F][3] (“Government Knowledge of False Claims Act Allegations”), at 2-108
- 2-109 (2nd ed. 2001 Supp.) (“[T]he strongest case for government knowledge
precluding liability is one where an agency insists on continued performance
while independent investigators believe this continued performance involves
continued false claims, so that the contractor seems forced to choose between
further False Claims Act liability [and] breach of contract. . . .
[P]rosecution should not be permitted where a contractor is not free to
terminate a contract or otherwise cease making false claims.”).
74
but HUD continued to use their management services for several
months after it had foreclosed. HUD must not have considered the
owners’ services as reprehensible then as it does now. Moreover,
the owners indisputably applied all of their HUD subsidies and
tenant rents to service and maintain the apartments and the
associated mortgage after fiscal year 1993. The government has
never asserted any dishonest conduct by the owners. Apparently,
HUD’s subsidies were too low to cover the project’s costs. Only
by using their imagination -- wholly outside the record -- can
the majority attribute deceptive conduct to these owners or
victimization to a government agency that was either under-funded
or unwilling to support the project properly. I do not suggest
that these circumstances justify estoppel against the government.
They do, however, counsel extreme care in applying the powerful
punitive weapon of civil FCA liability.
III. What is “decent, safe and sanitary” housing?
While refusing to rule on the dispositive issue, not
decided by the district court, whether the governing HUD
regulations are so imprecise concerning “decent, safe and
sanitary housing” that they cannot provide the basis for an FCA
claim,43 the majority here offers at least a ray of hope to the
43
There is no applicable regulatory definition of decent, safe and
sanitary housing. The government has cited a regulation pertaining to a
different HUD program, see Southland Mgmt. Corp., 95 F.Supp.2d at 635 n.7
(citing, inter alia, 24 C.F.R. § 886.113), cited in Majority Opinion at __,
but the majority opinion correctly recognizes its inutility.
75
owners. The majority posits that while this housing standard is
subject to differing interpretations, the owners escape civil FCA
violations if their interpretation of the standard was not
unreasonable. Further, the majority do not preclude the
possibility of a grant of summary judgment on this issue on
remand.
My difference with the majority opinion is narrow. In
assessing the meaning of the “decent, safe and sanitary”
standard, I would not focus on the number of times the owners
certified the apartments as, and HUD paid their vouchers for,
“decent, safe and sanitary” housing; such evidence is
tautological. Instead, the inspection records and HUD’s failure
ever to inform the owners that they violated the “decent, safe
and sanitary” standard seem far more probative. HUD’s periodic
housing inspection reports rated the apartments as merely “below
average” rather than “unsatisfactory” throughout the period
covered by this suit until November 1996. Further, the
mortgagee’s reports found the apartments “satisfactory” until
April 1997, given the high-crime neighborhood in which they were
located and “the lack of funds.” HUD did not place the
apartments on its list of “troubled” properties until November
1997. If the crux of this issue is whether the appellees’
interpretation of the standard is reasonable, how can a fact
issue exist when HUD never told the owners during the period for
76
which HUD now sues that the apartments violated the standard?
While I concede that wholly unreasonable and self-serving
interpretations of regulatory or contract provisions might run
afoul of the civil FCA, private parties should not be exposed to
liability when the minimum standard consists of adjectives whose
meaning is fairly debatable. Lamers, 168 F.3d at 1018(“imprecise statements or differences in interpretation growing
out of a disputed legal question are . . . not false under the
FCA”) (citing Hagood, 81 F.3d at 1477-78).
IV. Conclusion.
For the reasons stated above, I would affirm the
summary judgment granted by the district court. The majority
decision is unfortunate for the owners, although I believe they
have a compelling case to present at trial. It is even more
unfortunate for future government contractors or beneficiaries
who must reckon with the threat of punitive sanctions for breach
of vague provisions in complex regulatory schemes; for non-
material certifications of compliance; and for “false claims” the
government knowingly (and non-collusively) paid.
I respectfully DISSENT.
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