United States Court of Appeals
Fifth Circuit
F I L E D
April 1, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
Clerk
FOR THE FIFTH CIRCUIT
No. 00-60267
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
versus
SOUTHLAND MANAGEMENT CORP., ET AL.,
Defendants,
W. THAD McLAURIN, CHARLES C. TAYLOR, JR.,
and ARTHUR W. DOTY,
Defendants-Appellees.
_______________________________________________________
Appeal from the United States District Court for
the Southern District of Mississippi
_______________________________________________________
Before KING, Chief Judge, and REAVLEY, JOLLY, HIGGINBOTHAM, DAVIS,
JONES, SMITH, WIENER, BARKSDALE, EMILIO M. GARZA, DeMOSS,
BENAVIDES, STEWART, DENNIS and CLEMENT, Circuit Judges.
REAVLEY, Circuit Judge:
The United States seeks False Claims Act1 penalties from the owners of an
apartment project for falsely certifying that the property was decent, safe, and sanitary in
requesting supplemental rent payments funded under Section 8 of the United States
1
31 U.S.C. § 3729 (2003).
Housing Act.2 The district court granted summary judgment for the owners,3 and a panel
of this court remanded for trial.4 Those decisions addressed the materiality of the
allegedly false certifications and the issue whether the owners knowingly submitted false
claims. We do not reach those questions because we hold that, on this record, no false
claims were made. We therefore affirm the judgment for the owners.
BACKGROUND
The National Housing Act of 19345 was enacted to encourage private industry to
provide housing for low-income families.6 It authorizes the U.S. Department of Housing
and Urban Development (“HUD”) to guarantee private mortgage loans to construct new
housing and rehabilitate old structures for “families with incomes so low that they could
not otherwise decently house themselves.”7 Private property owners receiving the
nonrecourse mortgages must enter into a “regulatory agreement” with HUD which
specifies “rents, charges, and other 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 . . . .”8 In 1937, the United States Housing Act9 was enacted to provide housing
2
42 U.S.C. § 1437f(a) (Supp. 2003).
3
95 F. Supp. 2d 629 (S.D. Miss. 2000).
4
288 F.3d 665 (5th Cir.), vacated on reh’g en banc, 307 F.3d 352 (5th Cir. 2002).
5
Pub. L. No. 73-479, 48 Stat. 1246 (codified as amended in scattered sections of 12
U.S.C. §§ 1701-1750g (2001 & Supp. 2003).
6
12 U.S.C. § 1715l (2001).
7
12 U.S.C. §§ 1703, 1701t (2001).
8
12 U.S.C. § 1715l(d)(3) (2001).
9
Pub. L. No. 75-412, 50 Stat. 889 (codified as amended at 42 U.S.C. § 1437 et seq.
(2000 & Supp. 2003)).
2
by making payments directly to local housing authorities. Section 8 was added to this
Act in 1974 to authorize the making of “assistance payments” to encourage private
property owners to provide housing.10 The amount of these assistance payments (made
directly to the private property owners in the form of a subsidy) is determined by what
the tenants can afford to pay, and what the private property owner could otherwise expect
to charge under the prevailing market rates.11 To receive assistance payments the
property owner must enter into a housing assistance payment contract (“HAP
Contract”).12
In 1980, Defendants-Appellees W. Thad McLaurin, Charles C. Taylor Jr., and
Arthur W. Doty (“the Owners”) executed an agreement called the “Regulatory Agreement
for Insured Multi-Family Housing Projects (With Section 8 Housing Assistance Payment
Contracts)” (“the Regulatory Agreement”). Under this agreement, HUD promised to
guarantee the Owners’ obligation under the mortgage used to purchase an abandoned
apartment complex--the Jackson Apartments--and also to subsidize tenants’ rent
payments in accordance with a subsequently-executed HAP Contract. The Owners, in
turn, agreed to substantially rehabilitate the property and to keep it “in good repair and
condition.” The property was rehabilitated using the proceeds of a $2.4 million
nonrecourse mortgage loan guaranteed by the United States. The Owners invested
$190,000 of their own funds in the project.
Under the HAP Contract, the Owners agreed to “maintain the [property] . . . to
10
Pub. L. No. 93-383, 88 Stat. 662 (codified as amended at 42 U.S.C. § 1437(f)
(Supp. 2003)).
11
42 U.S.C. §§ 1437a(a)(1), 1437f(c) (Supp. 2003).
12
12 U.S.C. § 1437f(c) (2000 & Supp. 2002); 24 C.F.R. § 811.102 (2002).
3
provide Decent, Safe, and Sanitary housing.” The contract also required that the Owners
make monthly requests for housing assistance payments. In each request--called a “HAP
voucher”--the Owners were required to give the details of occupied apartments and the
supplemental rental payments due, and certify that “to the best of [their] knowledge and
belief (i) the dwelling units are in Decent, Safe, and Sanitary condition, [and] (ii) all other
facts and dates on which the request for funds is based are true and correct . . . .”
Both the Regulatory Agreement and the HAP Contract explained HUD’s remedies
if the Owners failed to comply with the contracts’ terms. The Regulatory Agreement
stated that upon violation of any of its parts HUD may give written notice of such
violation. If the Owners failed to take corrective action, HUD was authorized to declare a
default, and, among other things, to request that the mortgagee bank declare the Owners’
note due and foreclose on the property. The HAP Contract required that HUD inspect the
property at least once a year to see that the Owners were maintaining the units in decent,
safe, and sanitary condition. In the event that HUD notified the Owners in writing that
the property was not in decent, safe, and sanitary condition, and the Owners thereafter
failed to take corrective action within the time prescribed in the notice, HUD was
authorized to exercise any of its rights and remedies under the contract, including the
abatement of housing assistance payments.
From 1981 until 1997 the Owners submitted HAP vouchers in accordance with the
HAP Contract and HUD paid the vouchers. Up until 1993 the record does not indicate
that the property ever failed to pass HUD’s yearly inspections. But by 1993 the property
was deteriorating and had become the center of criminal activity. In August 1993 the
property received a “below average” rating during HUD’s yearly inspection. The report
stated that repair and maintenance in many areas was urgently needed, and noted that the
4
property, like many in its area, was experiencing a problem with illegal drug activity.
HUD’s letter advising the Owners of the results of this inspection requested that the
Owners respond in writing to the deficiencies noted and include a detailed explanation of
their planned corrective measures.
In August 1994 HUD undertook both a management review and a physical
inspection. The management received a “satisfactory” rating and the report stated that
“[m]anagement is to be commended for the steps taken and planned to provide a more
secure environment for the residents.” However, as a result of the physical inspection,
HUD gave the property a “below average” rating. The report stated that many of the
deficiencies noted in 1993 had not been corrected. Of the 18 units inspected, all but two
needed immediate repairs, although each unit was deemed passable under HUD’s
“Housing Quality Standards.”13 The report detailed numerous corrective actions required
and, for each, listed an estimated cost and time frame for correction. Several months later
HUD wrote, “It is understood that funds are not readily available for repairs,” but asked
that the Owners be mindful of the safety of tenants and workers and that “hazardous”
deficiencies be addressed as soon as possible.
After 1994, the Owners devoted all rental income and subsidies to mortgage
payments and property maintenance and repairs. They took no further distributions for
return on their investment in the property.
In 1995 the property was rated “below average” for the third time, and all of the
inspected units failed to meet HUD’s Housing Quality Standards. Again, corrective
13
As the district court noted, during the time period at issue, the Housing Quality
Standards to which HUD referred did not apply to the particular Section 8 program covering the
Owners’ property, but they were apparently used by HUD as a guideline for measuring the
condition of the property.
5
action was prescribed with an estimated cost and time frame for each. Many of the
deficiencies were the same as those in 1993 and 1994. The report warned that if the
property was not brought into compliance within 30 days further subsidy payments “may
be jeopardized.” HUD’s letter transmitting the report to the Owners warned them that
“[t]he Department does not allow management to continue at this level of performance.”14
In late 1996 HUD gave the property the lowest rating--“unsatisfactory.” The
report said there were “compelling reasons” for this rating, including the fact that every
inspected unit failed to comply with HUD’s Housing Quality Standards. The report again
cataloged the property’s deficiencies and, for each, listed the necessary corrective action
along with an estimated cost and time frame. The report also noted, however, that the
property staff were “very cooperative throughout the physical inspection.” The letter that
accompanied this report stated that the property could not continue to operate in its
present condition, and that failure to make corrections “could result in the denial of future
participation” in HUD-sponsored housing programs. However, in another letter HUD
wrote, among other things, “We look forward to working with you in an attempt to bring
this property back to satisfactory condition.”
HUD’s last inspection was in May 1997. For the second time HUD gave the
property an “unsatisfactory” rating. HUD again cataloged each of the property’s
deficiencies and advised the Owners that “[t]he Department does not allow management
14
In March 1996, the U.S. Attorney began forfeiture proceedings against the
property for its role in facilitating illegal drug activity. In a subsequent letter, the U.S. Attorney
threatened to bring claims against the Owners individually for violation of the civil False Claims
Act, citing the their allegedly “false” monthly certifications that the property was decent, safe, and
sanitary. However, he offered to nonsuit--and to bring no further claims--if the Owners agreed to
surrender the property to the government’s designee. The Owners immediately agreed to do this,
but the record does not explain why the U.S. Attorney took no further action--probably because
HUD could find no one else to take the property.
6
to continue at this level of performance.” In August 1997, the Owners wrote that they
were discontinuing mortgage payments due to lack of funds, and that the property was
being turned over to HUD. They offered to manage the property for no charge until
control could be transferred. The Owners managed the property without compensation
until after the property was auctioned in July 1998.
The United States initiated this proceeding on August 5, 1998. The United States
claims that the Owners violated the civil False Claims Act because 19 HAP vouchers they
submitted between July 1995 and January 1997 falsely certified that the property was
decent, safe, and sanitary.15 The United States argues that each certification constitutes a
“false claim for payment or approval . . . within the meaning of 31 U.S.C. § 3729(a)(1),”
and also a “false statement and/or record within the meaning of 31 U.S.C. § 3729(a)(2).”
The certifications had been used to secure $865,023 in housing subsides, and because the
United States claimed that the certifications were knowingly false when made, it sought
treble damages, for a total of about $2.5 million.
DISCUSSION
The civil False Claims Act, 31 U.S.C. § 3729, in relevant part states:
(a) Liability for certain acts.--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 . . . .
15
Southland Management Corp. managed the property and has since been dismissed
as a party.
7
....
As the preceding statutory text shows, and as the name of the Act suggests, the Act
is aimed at false claims. The statute defines a “claim” as “any request or demand,
whether under a contract or otherwise, for money or property”16 which is made to
someone--including the government itself--who will at least in part use government
money or property to pay it. Stated differently, it is a “request or demand” made in
connection with a “contract or otherwise,” the “contract or otherwise” allegedly
warranting the making of the claim. Thus, whether a claim is valid depends on the
contract, regulation, or statute that supposedly warrants it. It is only those claims for
money or property to which a defendant is not entitled that are “false” for purposes of the
False Claims Act. See Costner v. URS Consultants, Inc., 153 F.3d 667, 677 (8th Cir.
1998) (“[O]nly those actions by the claimant . . . [calculated to] caus[e] the United States
to pay out money it is not obligated to pay . . . are properly considered ‘claims’ within the
meaning of the FCA.”); United States ex rel. Wilkins v. N. Am. Constr. Corp., 173 F.
Supp. 2d 601, 626 (S.D. Tex. 2001) (collecting authorities for the proposition that a
“false claim” is a claim for more than one is due).
In this case unless the Owners submitted claims for money to which they were not
entitled no False Claims Act liability arises. Although § 3729(a)(2) prohibits the
submission of a false record or statement, it does so only when the submission of the
record or statement was done in an attempt to get a false claim paid. There is no liability
under this Act for a false statement unless it is used to get false claim paid.17
16
31 U.S.C. § 3729(c).
17
See Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 184 (3d Cir. 2001)
(stating that the FCA “was not intended to impose liability for every false statement made to the
government”).
8
When we apply this law to the HAP Contract and the course of conduct between
HUD and the Owners, we conclude upon this record that the Owners were entitled to the
housing assistance payments sought and, thus, they made no false claims.
The Contract
“Decent, safe, and sanitary” is a meaningful and useful description of homes and
apartment houses, but it is not precise or measurable. There will be wide difference of
opinion of what is, and what is not, decent, safe, or sanitary. Just look at the current
attire of people in our society to see the variations in notions of decency. Consider the
plight of an owner who could be subject to False Claims Act liability by certifying that
his 120 apartments are decent, safe, and sanitary when on any given day a United States
Attorney could decide to the contrary, and perhaps ultimately convince a jury to agree.
That owner would be forced to walk away from the property at an early sign of
deterioration. If no one else were willing to incur the risk of False Claims Act liability,
tenants would lose their housing. That state of affairs would be unacceptable to all
parties and wholly inconsistent with federal housing policy.
Furthermore, if enforcement of the condition of the property were left to False
Claims Act sanctions, consider the burden of the U.S. Attorney who must prove that the
owner has knowingly certified falsely. It would not suffice that government employees,
or even jurors, describe the property as less than decent. The burden would be to prove
the state of mind of the owner: that he knew he could not honestly describe the property
as “decent, safe, and sanitary.”
Fortunately for everyone, these problems are avoided by the terms of this contract
between the Owners and HUD where the mechanism is spelled out for controlling the
abatement of the payments, and the entitlement of the Owners, when the condition of the
9
property deteriorates.
Section 1.7 to the HAP contract, in relevant part, provides as follows:
c. Units Not Decent, Safe, and Sanitary. If the Government notifies the
Owner that he has failed to maintain a dwelling unit in Decent, Safe,
and Sanitary condition and the Owner fails to take corrective action
within the time prescribed in the notice, the Government may
exercise any of its rights under the contract, including the abatement
of housing assistance payments, even if the Family continues to
occupy that unit. If, however, the Family wishes to be rehoused in
another dwelling unit with section 8 assistance and the Government
does not have other section 8 funds for such purposes, the
Government may use the abated housing assistance payments for the
purpose of rehousing the Family in another dwelling unit. Where
this is done, the Owner shall be notified that he will be entitled to
resumption of housing assistance payments for the vacated units if
(1) the unit is restored to Decent, Safe, and Sanitary condition, (2)
the Family is willing to and does move back into the restored unit,
and (3) a deduction is made for the expenses incurred by the Family
for both moves.
d. Notification of Abatement. Any abatement of housing assistance
payments shall be effective as provided in written notification to the
Owner. The Government shall promptly notify the Family of any
such abatement.
Thus, according to the HAP Contract, if the property is not decent, safe, and
sanitary and HUD chooses to work with the Owners to remedy the property’s condition,
the Owners remain entitled to housing assistance payments until HUD provides written
notice, prescribes a time for corrective action, and notifies the Owners that they have
failed to take the necessary corrective action within the specified time period.18
The United States does not contend that an abatement of payment by HUD was
18
During this corrective action period, the HAP Contract clearly contemplates the
continued application for and receipt of housing assistance payments, with no modification to the
contractual requirement that the Owners certify in the monthly HAP voucher that the property is
decent, safe, and sanitary. In this respect, the HAP Contract is perhaps internally inconsistent, but
in view of its provisions, it is at least understandable how the Owners could have continued to use
the HAP voucher form with its contractually required certification that the property is decent,
safe, and sanitary.
10
ever exercised. The central position of the United States in this litigation has been that
the claims for housing assistance payments submitted by the Owners during the period
covered by the complaint, July 1995 through January 1997, were false claims, i.e., claims
for payments to which the Owners were not entitled, because during this period the
Owners were in breach of their obligation under the HAP Contract to provide decent,
safe, and sanitary housing. What this ignores is that the HAP Contract explicitly
addresses a breach of this nature and provides a specific remedy: when the Owners are
notified by HUD that they have failed to maintain the property in decent, safe, and
sanitary condition and that corrective action must be taken within the time specified in the
notice, the Owners continue to be entitled to receive housing assistance payments during
the corrective action period and until HUD notifies them in writing that they have failed
to take the necessary corrective action and that housing assistance payments will be
abated. During the corrective action period, then, claims for housing assistance payments
are not false claims because they are claims for money to which the Owners are entitled
(and which provide the wherewithal both to operate the property and to take the
necessary corrective actions).
Course of Conduct
The exchanges and conduct of the parties demonstrated that housing assistance
payments continued in an effort to keep the apartments habitable and to provide the
means to take the corrective action requested by HUD. During the period of time covered
by the complaint, July 1995 through January 1997, there was significant evidence that the
property was increasingly uninhabitable, and that HUD had concluded that the property
had fallen below the decent, safe, and sanitary standard. At the same time, HUD was
willing to work with the Owners to continue with their efforts to bring the property back
11
into compliance. Moreover, HUD seemed to recognize that the property’s
noncompliance was at least partially explained by a lack of funds and nearby criminal
activity. In 1995, perhaps recognizing the lack of funds for routine maintenance and
repairs, HUD asked the Owners to at least address “hazardous” deficiencies that
presented a danger to the safety of tenants and workers. In 1996, following the property’s
receipt of its lowest rating to date, HUD wrote that it was “look[ing] forward to working
with you in an attempt to bring this property back to satisfactory condition.”
The undisputed conduct and exchanges by and between the parties during this
entire period demonstrates, not only that the vouchers were promptly paid, but that all
parties regarded them as entitled to be paid.
CONCLUSION
We hold that under the HAP Contract and on this record the Owners were entitled
to receive the housing assistance payments that they sought during the corrective action
period at issue. Their claims therefore cannot be false under the False Claims Act as a
matter of law. The judgment of the district court is AFFIRMED.
12
EDITH H. JONES, with whom SMITH, BARKSDALE, DeMOSS and CLEMENT,
Circuit Judges, join in specially concurring:
I am delighted that the entire court has seen fit to
deliver the owners of the Jackson Square Apartments from further
exposure to False Claims Act liability. One may readily infer from
the majority holding that this is a case that should never have
been brought.
Nevertheless, I am uncomfortable with the majority’s
rationale that excludes the parties’ dealings from the False Claims
Act solely because of HUD’s contract provisions. This contract-
based theory was never presented to the district court, was not
ruled upon by it, and was never briefed to this court – until
counsel were ordered to submit letter briefs less than a week
before en banc oral argument. As a matter of prudence and judicial
restraint, and under this court’s authorities, we almost never
decide cases on issues or theories that were not litigated in the
trial court. United States v. Brace, 145 F.3d 247, 255-56 (5th
Cir. 1998) (en banc) (en banc court declines to consider en banc an
issue neither preserved in district court nor presented to
appellate panel: “. . . we review only those issues presented to
us; we do not craft new issues or search for them in the record. .
. . In short, it is not for us to decide which issues should be
presented, or to otherwise try the case for the parties.”) The
court’s majority evidently believe this is such an exceptional case
because their analysis affords a “narrower” basis for affirming the
summary judgment. To my mind, whether excluding an entire category
13
of HUD contracts and contractual dealings from the False Claims
Act1 is “narrower” than applying well-established defenses under
the Act to the facts before us is in the eye of the beholder. But
in addition, the broader ramifications of the court’s unprecedented
reasoning, which flows from standard contractual provisions of the
sort that probably exist throughout the vast breadth of federal
government contracting, are uncertain and have been utterly
unexplored.
In my view, the preferable “narrow” resolution of this
case is based on the issues raised and litigated in the district
court concerning whether the owners falsely certified as “decent,
safe and sanitary” a low-income apartment project in Jackson,
Mississippi in order to obtain HUD subsidies.2 I would affirm on
alternative grounds based on the particular facts of this case.
First, the defendants’ monthly certifications, included in their
vouchers seeking reimbursement, were not material to HUD’s decision
to continue making subsidy payments, and they therefore did not
constitute false statements “to get” a false claim paid. 31 U.S.C.
§ 3729(a)(2) (2000). Second, the defendants did not “knowingly”
submit false claims for reimbursement because the government
1
The parties’ contract is a HUD standard form for Section 8 projects. Further, as noted infra,
deposition testimony established that HUD practically never invoked contract remedies against
project owners, no matter how “troubled” their properties were. HUD apparently will be barred by
the court’s decision from pursuing FCA claims, at least for inarguable violations of the decent, safe
and sanitary standard, where such contracts exist.
2
The grant of en banc rehearing vacated the panel decision, so it is unnecessary to discuss that
opinion further.
14
determined the amount of funds available to maintain the project,
the defendants spent every penny of those funds on the project, and
the government knew the project’s essential condition. 31 U.S.C.
§ 3729(b) (2000). The government got exactly what it was willing
to pay for.
Judge Reavley’s opinion adequately states the facts.
The False Claims Act imposes liability on “[a]ny person
who knowingly presents, or causes to be presented, to an officer or
employee of the United States Government . . . a false or
fraudulent claim for payment or approval; [or] knowingly makes . .
. a false . . . statement to get a false or fraudulent claim paid
or approved by the Government.” 31 U.S.C. § 3729(a)(1) and (2)
(2000). The statute, which dates from the Civil War era with even
older antecedents, 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). The issues raised by the parties
in this en banc court are the same as those pressed by the owners
in the district court: whether their monthly certifications that
the project was decent, safe and sanitary were material to HUD’s
decision to keep subsidizing it; and whether the owners knowingly
filed false claims.
We review the district court’s grant of summary judgment
de novo, applying the same standard as the district court. Boston
Old Colony Ins. Co. v. Tiner Assocs., 288 F.3d 222, 227 (5th Cir.
15
2002). “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 material fact and that the moving party is entitled to
judgment as a matter of law.’” Turner v. Houma Mun. Fire & Police
Civ. Serv. Bd., 229 F.3d 478, 482 (5th Cir. 2000) (quoting Fed. R.
Civ. P. 56(c)).
A. The payment vouchers were not material to HUD’s decision
making.
Because the panel opinion has been vacated by the order
for rehearing en banc, there should no longer be any doubt that
materiality is an element of a civil False Claims Act case. Our
past precedent and every circuit that has addressed the issue have
so concluded.3 This conclusion is strengthened in a case involving
allegedly false certifications contained in official payment
vouchers, because, for FCA liability to arise, a false
certification must be a “false statement” made “to get” a false
claim paid. See 31 U.S.C. § 3729(a)(2) (2000). The express
connection of a false statement with “getting” a false claim paid
3
This court recently reaffirmed that the civil FCA “interdicts material misrepresentations made
to qualify for government privileges or services.” United States ex. rel. Thompson v. Columbia/HCA
Healthcare Corp, 125 F.3d 899, 902 (5th Cir. 1997) (emphasis added) (quoting United States ex. rel.
Weinberger v. Equifax, Inc., 557 F.2d 456, 461 (5th Cir. 1977)). Other circuits hold that materiality
is required in a civil FCA claim. See, e.g., United States ex. rel. Costner v. URS Consultants, Inc.,
____ F.3d ______, 2003 WL 173965 (8th Cir. Jan. 28, 2003); Harrison v. Westinghouse Savannah
River Company, 176 F.3d 776, 785, 788 (4th Cir. 1999); Luckey v. Baxter Healthcare Corp., 183
F.3d 730, 732 (7th Cir. 1999); United States v. TDC Mgmt. Corp., 24 F.3d 292, 298 (D.C. Cir.
1994). A recent district court decision, after conducting the most extensive survey to date of the
history, legislative background and caselaw interpret ing the FCA, concluded that materiality is an
element of a civil FCA claim. See United States ex rel. Wilkins v. N. Am. Constr. Corp., 173 F.
Supp. 2d 601, 618-30 (S.D. Tex. 2001).
16
is tantamount to requiring that the false statement be material to
the payment decision.
The government is willing to concede, as it did not
previously in this litigation, that materiality is an element of
its cause of action upon which it carries the burden of proof. The
government asserts, however, that whenever it conditions payment
for services rendered upon a certification of certain conditions by
the payee, a false certification constitutes a material false
statement as a matter of law and renders the entire claim
actionably false.4 This position is overbroad and unsupported by
relevant law.
The accepted definition of materiality for civil FCA
claims, as for other federal statutes, 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.” Kungys v. United States, 485 U.S. 759, 770, 108 S.
Ct. 1537, 1546 (1988). The Supreme Court adopted this “more
general formulation” of materiality, “because the judgment in
question [i.e. of materiality] does not lend itself to mechanical
resolution.” Id. at 771, 108 S. Ct. at 1546. Applying this test
of materiality, three Justices found Kungys’s misstatements of his
date and place of birth on his naturalization application not
material because those statements were neither relevant to
4
Indeed, while the government asserts that its suit is interchangeably brought under either
section 3729(a)(1) or (a)(2), proscribing, respectively, false claims and false statements, the
government deems the owners’ “claims” to be false only because of the false certifications.
17
citizenship qualifications nor, if correctly reported, would they
have led to other facts relevant to qualifications for citizenship.
Three other members of the Court applied an even stricter standard
of materiality. As Kungys demonstrates, the determination of
materiality is context-specific and sensitive to what the
government accomplishes by means of requiring disclosure of certain
information.
Pursuant to Kungys, many certifications made in order to
receive government payments may be material to the government’s
decision to pay, but such is not invariably the case. In Thompson,
this court reflected that reality when it stated that, to create
liability under the FCA, a false certification of compliance must
be a “prerequisite” to obtaining a government benefit. Thompson,
125 F.3d at 902. Where the facts demonstrate that an agency,
though formally requiring a certification, did not condition
payment on its veracity, and indeed, the responsible government
officials did not even see or review the certification in question,
then the certification is not material, and the certified statement
will not give rise to FCA liability. See, e.g., United States ex
rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996)
(certification of assurances that school district would comply with
applicable federal law not a “prerequisite,” under facts of that
case, to receipt of federal IDEA funds). Further, were a court to
hold that any kind of government certification required in
connection with federal government payment and reimbursement
18
vouchers is material as a matter of law, the government could erase
the crucial distinction between “punitive” FCA liability5 and
ordinary breaches of contract by the simple expedient of requiring
broad, boilerplate certifications.
The circumstances of this case demonstrate as a matter of
law that the owners’ monthly certifications on their HAP vouchers
that the project was “decent, safe and sanitary” were not material
to HUD’s decisions to continue paying subsidies.
First, although it is clear that HUD was aware of the
basic condition of the project, HUD never informed the owners that
their project failed to meet the decent, safe and sanitary
contractual standard. HUD did not utilize the contractual
procedure whereby HUD was required to inform the owners of their
noncompliance and to impose a suitable corrective action plan upon
them. Only if the owners failed to comply, after notice, could
HUD, as one of its possible remedies, contractually elect to
discontinue housing assistance payments. The fact that HUD never
invoked any remedy against the owners and continued making the
payments throughout the period covered by this lawsuit demonstrates
the immateriality of the owners’ monthly certifications to payment
of the vouchers.
Second, it was HUD’s “normal practice, in keeping with
5
Civil FCA actions for treble actions and penalties are “punitive.” Vermont Agency of Natural
Res. v. United States ex rel. Stephens, 529 U.S. 765, 784-85, 120 S. Ct. 1858 (2000); United States
ex rel. Garibaldi v. Orleans Parish Sch. Bd., 244 F.3d 486, 491 and n.5 (5th Cir. 2001), cert. denied,
534 U.S. 1078 (2002).
19
the parties’ respective rights and obligations under the HAP
contract, to allow owners to continue to receive subsidies while
the owners worked to correct deficiencies that HUD [had]
identified. Indeed, it is evident from the proof that HUD [made]
housing assistance payments with the expectation that the
owner/recipients [would] use those payments to bring their property
up to standard.” United States v. Southland Mgmt. Corp., 95 F.
Supp. 2d 629, 637-38 (S.D. Miss. 2000). The government
acknowledged in the district court that 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. HUD’s project manager Vicki Gross testified
that she never stopped payments, on any of the fifty-four projects
for which she was responsible, because of noncompliance with the
decent, safe and sanitary standard. Since HUD routinely made
Section 8 housing assistance payments to owners of property
irrespective of their compliance with the decent, safe and sanitary
standard, the owners’ certifications were not material to HUD’s
decision to pay.
Third, it is undisputed that all of the money received by
the owners in rent payments and HUD subsidies was applied to the
mortgage and/or the upkeep of the project from 1993 onward. Since
HUD policies governed both the amount of rent charged to the
20
tenants and the amount of monthly subsidies, HUD determined the
ultimate quality of the project. In this case – where there is no
evidence of the owners’ misapplication of funds or mismanagement –
if the project was not decent, safe and sanitary, HUD’s control of
the pursestrings led to that result. The owners were not required
to invest their capital in the project. Christopher Vill. Ltd.
P’ship, 190 F.3d at 316. Consequently, HUD’s funding actions
determined whether the owners’ certifications were material.
Fourth, the government points to no evidence supporting
its materiality position except the deposition of Quinton Lewis, a
HUD employee responsible for reviewing and approving the
defendants’ and hundreds of other payment vouchers each month.
Lewis, however, testified only that he would not have approved the
vouchers if the certifications had not been signed by the
defendants or their agents. Lewis also testified that he had not
read the certification in any depth and had never heard of the
phrase “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.” Southland Mgmt. Corp., 95 F.
Supp. 2d at 638-39. Instead, HUD’s policy decisions concerning the
project were made by Ms. Gross and her superiors based on direct
21
dealings with the owners and regular inspection reports.6
For all these reasons, the district court correctly
concluded that HUD’s decision to pay the owners’ monthly HAP
vouchers “was not linked to their certification as to the condition
of the apartments.” Southland Mgmt. Corp., 95 F. Supp. 2d at 637.
B. 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)
(2000). On the other hand, the statute’s definition of “knowingly”
excludes liability for innocent mistakes or negligence. United
States ex rel. Hochman v. Nackman, 145 F.3d 1069, 1074 (9th Cir.
1998); Hindo v. University of Health Sciences, 65 F.3d 608, 613-14
(7th Cir. 1995).7 The circuits have thus rejected the proposition
that claimants “knowingly” presented false claims where there were
6
If the evidence suggested that the approving government official took the truth or falsity of
the defendants’ certifications into account in deciding whether to pay the vouchers, this might be a
different case. See Thompson, 125 F.3d at 902-03 (in the context of Medicare certifications, 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,” and the court remanded this issue to the district court for further factual
development).
7
Knowing and knowingly defined. For purposes of [section 3729], the terms “knowing” and
“knowingly” mean that a person, with respect to information -
(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.
31 U.S.C. § 3729(b) (2000).
22
instances of “mere” contractual or regulatory noncompliance:
. . . [T]he 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.
United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013,
1019 (7th Cir. 1999). Innocently made faulty calculations or
flawed reasoning cannot give rise to liability. United States ex
rel. Wang v. FMC Corp., 975 F.2d 1412, 1420-21 (9th Cir. 1997).
Further, where disputed legal issues arise from vague provisions or
regulations, a contractor’s decision to take advantage of a
position can not result in his filing a “knowingly” false claim.
See United States ex rel. Siewick v. Jamieson Sci. & Eng’g, Inc.,
214 F.3d 1372, 1378 (D.C. Cir. 2000); Hagood v. Sonoma County Water
Agency, 81 F.3d 1465, 1478-79 (9th Cir. 1996).
Most of our sister circuits have held that under some
circumstances, the government’s knowledge of the falsity of a
statement or claim can defeat FCA liability on the ground that the
claimant did not act “knowingly”, because the claimant knew that
the government knew of the falsity of the statement and was willing
to pay anyway. “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.” United States ex rel. Durcholz v. FKW,
Inc., 189 F.3d 542, 545 (7th Cir. 1999). The inaptly-named
“government knowledge defense” captures the understanding that the
23
FCA reaches only the “knowing presentation of what is known to be
false.”8 Hagood, 81 F.3d at 1478 (citation and internal quotation
marks omitted). Where the government and a contractor have been
working together, albeit outside the written provisions of the
contract, to reach a common solution to a problem, no claim arises.
United States ex rel. Becker v. Westinghouse Savannah River Co.,
305 F.3d 284, 288-89 (4th Cir. 2002); Lamers, 168 F.3d at 1019-
1020; United States ex rel. Butler v. Hughes Helicopters, Inc., 71
F.3d 321, 326-27 (9th Cir. 1995). The government’s knowledge and
acquiescence in its contractor’s actions in many of these cases was
“highly relevant,” see United States ex rel. Hagood v. Sonoma
County Water Agency, 929 F.2d 1416, 1421 (9th Cir. 1991), to show
that the contractor did not submit payment claims in deliberate
ignorance or reckless disregard of their truth or falsity.9
The conclusion that these owners did not knowingly
present false claims fits easily within the established caselaw.
The district court’s opinion is persuasive:
On this issue, the evidence positively demonstrates
beyond reasonable question that at the time of
8
This defense is inaptly named because it is not a statutory defense to FCA liability but a
means by which the defendant can rebut the government’s assertion of the “knowing” presentation
of a false claim. Inevitably, the extent of the government’s knowledge is also bound up with whether
the claim itself was false. See Lamers, 168 F.3d at 1018.
9
Courts have qualified the importance of government knowledge by stating that it may not
always provide a conclusive defense to the claimant. No case has squarely interpreted this
qualification, nor need we do so. In principle, it would seem that the government’s knowledge of a
false claim would not be an effective defense if the person making the false statement did not know
that the government knew it was false; if the claimant was colluding with the government employee
to submit a false claim; or if the government’s knowledge came “too late in the process,” see
Durcholz, 189 F.3d at 544-45.
24
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,
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.
Southland Mgmt. Corp., 95 F. Supp. 2d at 639-40 (emphasis added).
HUD was aware that this project was deteriorating for
several years preceding its foreclosure. The types of problems
25
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 those inspection reports. The yearly inspection reports
also show that repairs were being made regularly, and HUD knew
this, as it also knew that its subsidies were insufficient to allay
the deterioration. The record reflects at most the give and take
between the owners and HUD over the priority of various repairs,
but it does not cast doubt on the owners’ investment of every penny
of subsidy in the project. As the district court noted, HUD’s
policy of approving continued subsidy payments notwithstanding the
project’s declining condition was based not on its ignorance of the
true condition but upon the imperative to provide housing for the
tenants while HUD supervised the use of the limited funds it
allocated to the project.
Further relevant to whether the owners knowingly
presented false claims are the facts that HUD never informed the
owners that their project was not decent, safe and sanitary and
never invoked the contractual remedies for noncompliance with that
standard. No regulatory or contractual definition of that standard
exists. The content of the standard is far from self-evident.
HUD, for its part, did not even place the project on its list of
troubled properties until nine months after the period for which
FCA damages are now sought. At oral argument to the en banc court,
the government’s attorney repeatedly failed to offer any coherent,
26
non-tautological definition of the standard. Where there are
legitimate grounds for disagreement over the scope of a contractual
or regulatory provision, and the claimant’s actions are in good
faith, the claimant cannot be said to have knowingly presented a
false claim. 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”) (citation omitted).
The government suggests that even if HUD knew something
about the project’s condition, the owners, who visited regularly,
knew more about their noncompliance with the decent, safe and
sanitary standard. This is wholly unpersuasive. The district
court correctly parried this 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 standard.10 Whatever HUD’s precise knowledge
about the property, the government deemed it sufficient to threaten
and then file this civil FCA case.
The civil False Claims Act is essential to policing the
integrity of the government’s dealings with those to whom it pays
money. At the same time, the punitive treble damages and penalties
afforded by civil FCA actions are not interchangeable with remedies
for ordinary breaches of contract. In this case, even if the
10
Indeed, the United States 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.
27
owners may have breached their contract to provide decent, safe and
sanitary housing for low-income tenants, they did not knowingly
present false statements to get false claims paid, and their
allegedly false certifications were, under the circumstances of
this case, not material to HUD’s ongoing decision to subsidize the
project.
For these reasons, the summary judgment for the owners
was proper.
28