Earlier this week, the Supreme Court of the United States declined to review an appellate court ruling that two mortgage companies defrauded a federal mortgage insurance program, leaving them owing nearly $300 million in damages to the United States government.
In August 2019, the United States Court of Appeals for the Fifth Circuit in United States v. Hodge affirmed the lower court’s ruling that Jim Hodge, owner and chief executive officer of Allied Home Mortgage Capital Corporation (“Allied Capital”) and Allied Home Mortgage Corporation (“Allied Corporation”), along with his entities, were liable for nearly $300 million in penalties for violating the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Both Allied entities participated in Federal Housing Administration (“FHA”) programs but in different ways, one as a loan originator (Allied Capital) and the other as a mortgagee responsible for underwriting and funding loans (Allied Corporation). At trial before the lower court, the government put forth a number of theories based on alleged violations of the FCA and FIRREA, and the jury ultimately found that (1) Allied Corporate was liable under the FCA for misrepresenting its compliance with FHA underwriting; (2) Hodge and Allied Capital were liable under the FCA for misrepresenting that loans originated by unregistered “shadow” branches were legitimate; and (3) all three defendants were liable under FIRREA for false certifications about their compliance with various government quality control requirements. The Fifth Circuit then affirmed the Government’s position that proximate cause is required – the “common-law concept focused on the scope of risk and foreseeability.”
In their petition for writ of certiorari in Hodge v. United States, Hodge and the Allied entities (“Petitioners”) questioned the causation standard relied on by the Court, asking whether the causation element standard under the FCA is proximate cause (requiring that the harm was foreseeable and that the false statement or conduct was a substantial factor in causing the harm), or is standard “but for” causation based solely on foreseeability. Petitioners argued that the appeals court stated it applied the proximate cause standard but actually used the simple “but for” causation standard. In so doing, Petitioners argued that the Fifth Circuit improperly “eliminated the proximate cause requirement that the conduct at issue in FCA cases be a substantial factor in causing the harm to the government for liability to be imposed,” as well as caused a split among the circuits. Petitioners implored the court to address the causation question they claimed divided the Fifth Circuit from the Third, Seventh, Tenth, and District of Columbia circuits. The Supreme Court declined to hear the case, leaving Petitioners owing a hefty sum to the United States government along with an apparent split among the circuits on the issue of the proper standard of causation under the FCA.