On August 8, 2019, the Court of Appeals for the Fifth Circuit affirmed an award of nearly $300 million issued by the Southern District of Texas on September 14, 2017 after a jury found Allied (a.k.a Americus Mortgage Corporation) liable under the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). After a five-week trial, the jury found Allied and its former CEO liable under the FCA for fraudulently obtaining insurance from the Federal Housing Administration (“FHA”) for loans that later defaulted. The jury also found defendants liable under FIRREA as a result of false certifications and quality control documents signed by the defendants. FIRREA provides for civil penalties in the event that one or more of fourteen underlying criminal predicates are violated by a preponderance of the evidence, and here the jury found that defendants violated 18 U.S.C. § 1006 (false statements to the FHA) and 18 U.S.C. § 1014 (false statements on loan applications). The court imposed $268,757,929 in FCA damages and penalties against Allied, and an additional $2.2 million in FIRREA penalties against Allied Capital, Allied Corporation, and Jim Hodges, respectively.
In affirming the district court’s award, the Court of Appeals for the Fifth Circuit weighed in on a couple issues of importance for FCA and FIRREA practitioners. First, the court examined the lower court’s application of the proximate causation standard under the FCA. Defendants argued that proximate cause required the plaintiff to establish that a specific false statement was the reason for a specific loan default. The Fifth Circuit, however, rejected the defendants’ argument for a strict nexus, and required only that it be foreseeable that the false statements could have led to an increased risk of default to the FHA. Finding “more than enough evidence” to support the jury’s determination, the Court of Appeals upheld the jury’s finding that the United States had established proximate causation.
Second, the Court of Appeals found that any challenge by defendants to the relevance or reliability of the plaintiff expert’s loan sampling methodology had been waived by defendants when they agreed to aspects of the sampling methodology during discovery. This is a cautionary point for defendants who may (understandably) agree to a plaintiff’s request for sampling of loan files during discovery because of the benefits it presents in cost and efficiency. Sampling can often save both sides millions of dollars in costs during litigation that result from the collection, review, and/or rebuttal of hundreds of thousands of voluminous loan files that may be at issue in any given case. Defendants should be very careful, however, to preserve all arguments as to the methodology and reliability of the sampling process, as well as plaintiff’s attempts to extrapolate results to the broader population of loans.
Finally, as an interesting side issue, the Court of Appeals examined the district court’s dismissal of a juror during deliberations. On the second day of deliberations, one juror was reported to be wearing ear plugs to avoid engaging in any further discussion with the other jurors, and told them “when the Government has it in for you, they will find a way to get you.” The jury then reported to the court that it was deadlocked. After the district court gave the jury an Allen charge requiring it to continue deliberating, the juror in question maintained his refusal to participate and even was accused by other jurors of making threats to their physical safety. After this conduct was reported to the district court, and after the judge questioned all of the jurors individually, the juror in question was discharged. The defense then moved for a mistrial, however that motion was denied, and deliberations continued. On appeal, the Fifth Circuit found that the district court was justified in discharging the juror for reasons that did not implicate the deliberative process, such as a failure to follow the court’s instructions, and that denial of the defendants’ motion for a mistrial was not in error.
Derek Adams, a former Trial Attorney with the Department of Justice, Civil Fraud Section, is a partner in the firm’s Litigation and Government Investigations practice group. Derek has extensive experience with False Claims Act and FIRREA matters, and can be reached at email@example.com or (202) 466-8960 if you have any questions.
 The award was issued against Americus Mortgage Corporation (f.k.a. Allied Home Mortgage Capital Corporation), Allquest Home Mortgage Corporation (formerly known as Allied Home Mortgage Corporation), and Jim Hodge, CEO of Allied.