United States v. Robert S. Luce , 873 F.3d 999 ( 2017 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-4093
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
ROBERT S. LUCE,
Defendant-Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:11-cv-05158 — John J. Tharp, Jr., Judge.
____________________
ARGUED MAY 30, 2017 — DECIDED OCTOBER 23, 2017
____________________
Before WOOD, Chief Judge, and RIPPLE and ROVNER, Circuit
Judges.
RIPPLE, Circuit Judge. The Fair Housing Act (“FHA”) was
enacted in order to increase home ownership. In service of
this goal, the Department of Housing and Urban Develop-
ment (“HUD”), which is statutorily tasked with implement-
ing the FHA, offers insurance to certain mortgage lenders in
order to decrease the risk borne by private industry and thus
encourage lending. HUD maintains the viability of this
2 No. 16-4093
scheme through a number of measures. One such measure
prohibits individuals with criminal records from owning, or
being employed by, a mortgage company.
The United States brought this action against Robert Luce
under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq.,
and the Financial Institutions Reform, Recovery, and Enforce-
ment Act (“FIRREA”), 12 U.S.C. § 1833a. It alleged that
Mr. Luce had defrauded the Government by falsely asserting
that he had no criminal history so that his company could par-
ticipate in the FHA’s insurance program. The district court
1
granted summary judgment in favor of the Government.
Mr. Luce now submits that his false certifications were not
material and that lingering issues of material fact preclude
summary judgment. Furthermore, Mr. Luce urges that the Su-
preme Court’s decision in Universal Health Services, Inc. v.
United States ex rel. Escobar, 136 S. Ct. 1989 (2016) (“Escobar”),
requires that we depart from our traditional “but-for” FCA
causation standard. Although we conclude that Mr. Luce’s
first two submissions are not persuasive, we believe that there
is merit to Mr. Luce’s view on causation. Escobar did not over-
rule explicitly our circuit precedent, which requires “but-for”
rather than proximate causation. Nonetheless, it does provide
significant guidance and deserves our respectful and careful
consideration, especially when all other circuits to address the
issue have chosen a path different from our own.
Accepting Escobar as a catalyst, we have reviewed the prin-
ciples of common-law fraud, the FCA’s statutory language,
and the rationale of our sister circuits; we now join those
1The district court had jurisdiction pursuant to 31 U.S.C. § 3732 and 28
U.S.C. § 1345. Our jurisdiction is premised on 28 U.S.C. § 1291.
No. 16-4093 3
courts in holding that proximate cause is the appropriate test.
Accordingly, the judgment of the district court as to causation
is reversed, and the case is remanded to afford the parties an
opportunity to address the merits under the proximate cause
standard.
I
BACKGROUND
A.
One of the objectives of the FHA is to insure participating
lenders against losses incurred in the home mortgage market.
To qualify for FHA insurance, a loan must be made and held
by an approved mortgagee. One type of covered lender, or
mortgagee, is a “loan correspondent.” “A loan correspondent
is an entity that has as its principal activity the origination of
2
mortgages for sale or transfer to other mortgagees.” Loan
correspondents may apply for mortgage insurance, but can-
3
not “hold, purchase, or service insured mortgages.” Rather,
they are tasked primarily with soliciting the mortgagor and
verifying employment information, earnings, and assets. In
short, a loan correspondent “originate[s] and verif[ies] the in-
4
itial information on an FHA loan.”
2 Gov’t’s Br. 5 (emphasis added) (citing 24 C.F.R. § 202.8(a)(2)(2009)). We
recognize that some loan correspondents have more expansive roles (e.g.,
direct endorsement authority), but we do not outline those responsibilities
because they are not implicated by this appeal.
3 Id. (citing 24 C.F.R. § 202.8(a)(2)(2009)).
4 R.92-3 at 4 (Geary Dep. 27).
4 No. 16-4093
In order to maintain the integrity of the insurance scheme,
mortgagees are required to submit a Yearly Verification Re-
port (“V-form”) as part of an annual recertification procedure.
During the relevant period, the V-forms read as follows:
I certify that none of the principals, owners, of-
ficers, directors, and/or employees of the above
named mortgagee are currently involved in a pro-
ceeding and/or investigation that could result, or has
resulted in a criminal conviction, debarment, lim-
ited denial of participation, suspension, or civil
money penalty by a federal, state, or local gov-
ernment.[5]
The annual submission of this verification is required for con-
tinued program participation. Mortgagees are additionally
required to file a 92900-A form with each loan; that form con-
6
tains a similar criminal history verification.
5 R.88-7 at 36 (emphasis added) (capitalization removed).
6 The 92900-A forms contained the following certification:
[T]he undersigned lender makes the following Certifica-
tions to induce … the Department of Housing and Urban
Development-Federal Housing Commissioner to issue a
firm commitment for mortgage insurance or a Mortgage
Insurance Certificate under the National Housing Act ….
G. To the best of my knowledge and belief, I and my firm
and its principals: … are not presently indicted or other-
wise criminally or civilly charged by a governmental en-
tity (Federal, State or local) with commission of any of the
offenses enumerated in paragraph G(2) of this certifica-
tion ….
No. 16-4093 5
B.
Mr. Luce is an attorney who has been employed at various
times by the Securities and Exchange Commission and a se-
ries of Chicago law firms. Most recently, he was president and
owner of his own mortgage company, MDR. Although he
owned MDR, he “was not involved in the day-to-day opera-
tion of MDR”; rather, he “performed only high-level corpo-
7
rate work on behalf of” the firm.
MDR was a loan correspondent and therefore could origi-
nate loans by sending loan applications to a HUD-approved,
direct-endorsement mortgagee for underwriting approval
prior to closing. The process proceeded roughly as follows:
18. MDR loan officers would first talk to po-
tential borrowers to find out what kind of rate
they wanted and to learn about the property
they wanted to finance. Once the potential bor-
rower decided on the type of mortgage they
[sic] wanted, the loan officer would let them
[sic] know the rate which MDR would get daily
from lenders. The loan officer would then set up
an appointment with the borrower, get their
w2s, pay stubs, home insurance, lender state-
ment and the necessary documents to process
the loan. The loan officer would then complete
a loan application … and when the packet was
R.87 (Gov’t’s Rule 56.1 Statement of Material Fact) at 8–9 (alteration in
original) (internal quotation marks omitted). Paragraph (G)(2) includes
the offense of making false statements. Id. at 9.
7 R.92-10 at 2 (Luce Aff.).
6 No. 16-4093
complete, the loan officer would give it to the
loan processing department at MDR.
19. The processing department would re-
view the package to make sure all the right doc-
uments were in it to send to the lender. … Once
the loan applications and other documents …
were complete, and the loan file was approved
by MDR’s processing department, the loan ap-
plication would be sent to a lender for under-
writing.
20. After the loan package was sent to the
lender, MDR would get approval from the un-
derwriter. If the lender needed more infor-
mation, the package would be sent back to the
processing department at MDR to gather the in-
formation from the loan officer.[8]
For its involvement, MDR received a nominal processing fee
of $450 and a commission.
In April 2005, Mr. Luce was indicted in an unrelated matter
for wire fraud, mail fraud, making false statements, and ob-
struction of justice. Following his indictment, Mr. Luce in-
formed James Passi, his son-in-law and MDR Vice President,
of the criminal charges. Nonetheless, MDR continued to state
on its V-forms and 92900-A forms that its officers were not
currently subject to criminal proceedings. Mr. Luce signed the
V-forms; his subordinates signed the 92900-A forms.
Almost three years after Mr. Luce’s indictment, in early
February 2008, Passi provided information related to the
8 R.87 at 5–6 (internal citations omitted); R.99 at 9–10.
No. 16-4093 7
pending criminal charges to HUD’s Office of Inspector Gen-
eral. A brief investigation ensued, and, on February 25, 2008,
9
the investigator issued a Referral for Suspension/Debarment.
In July 2008, Mr. Luce pleaded guilty to obstruction of jus-
tice in the separate criminal proceeding. On or about August
8, 2008, Mr. Luce amended his V-forms to reflect the criminal
indictment. Thereafter, Mr. Luce was debarred, and MDR
went out of business. During the period between Mr. Luce’s
April 2005 indictment and the August 2008 V-form amend-
ments, MDR originated 2,500 loans. Approximately 250 of
those loans are now in default; 95% of the defaulted loans
were refinances of existing loans previously insured by the
FHA.
C.
The United States brought suit against Mr. Luce in July
2011, seeking treble damages and civil penalties under the
FCA and the FIRREA. Counts one and two of the complaint
alleged violations of the FCA by either submitting false claims
or “using a false record or statement to get a false claim
10
paid.” Count three of the complaint alleged that Mr. Luce
was subject to civil penalties under the FIRREA because he
9 A debarment sanction is imposed for criminal or serious HUD program
violations; the sanction excludes an individual, organization and its affili-
ates from conducting business with any federal agency. See Debarments,
HUD.GOV, https://www.hud.gov/program_offices/enforcement/debar-
ments (last visited Oct. 2, 2017).
10 R.1 at 9–10 (capitalization removed).
8 No. 16-4093
had “unlawfully, willfully and knowingly made, used, or
caused to be made or used, false and fraudulent records, state-
ments, or certifications to HUD” in violation of 18 U.S.C.
§ 1006, one of the predicate offenses identified in the FIRREA,
11
12 U.S.C. § 1833a. At bottom, the complaint alleged that
Mr. Luce personally lied on the V-forms and that his subordi-
12
nates lied on the 92900-A forms in order to participate fraud-
ulently in the HUD insurance scheme.
Both parties eventually moved for summary judgment on
liability, and, on September 30, 2015, the district court ruled
on those motions, finding Mr. Luce liable for the false certifi-
cations on the 2006, 2007, and 2008 V-forms. In so doing, it
noted that “[t]he FCA provides liability for any person who
‘(A) knowingly presents … a false or fraudulent claim for pay-
ment or approval; [or] (B) knowingly makes, uses, or causes
to be made or used, a false record or statement material to a
13
false or fraudulent claim.’” The court held that there was no
question as to Mr. Luce’s liability for the false certifications on
the relevant V-forms because he had signed those documents
while aware of his pending criminal charges. The district
court also held that the false certifications on the V-forms
were material as a matter of law “[b]ecause the certification
on the V-forms constituted fraud in fulfilling a prerequisite to
14
receiving government funds.”
11 Id. at 11.
12 The 92900-A forms are not at issue in this appeal. See infra note 20.
13 R.113 at 8 (third alteration in original) (quoting 31 U.S.C. § 3729(a)(1)).
14 Id. at 21.
No. 16-4093 9
Finally, the court noted that FIRREA liability requires “a
false statement made by ‘an officer, agent or employee of or
connected in any capacity with’ HUD, with intent to defraud
15
or deceive HUD.” The court had no trouble determining
that, because he had signed the V-forms while aware of his
criminal status, “Luce knowingly made false statements on
16
the V-forms with the intent to deceive HUD.” Accordingly,
“[b]ecause no reasonable jury could find for Luce on the
FIRREA claims relating to the V-forms in 2006, 2007 and
2008,” the district court also granted summary judgment “to
the government on the FIRREA claims for the V-forms from
17
2006–2008.”
The district court declined to impose liability for the
92900-A forms because “the government’s evidence [wa]s far
too thin to command a conclusion that Luce knew about the
18
requirement to file forms 92900-A.” Rather, the court con-
cluded that “[w]hether Luce had actual knowledge or was
recklessly or deliberately indifferent to the existence of the
92900-A forms is a credibility determination for a jury that
precludes a finding of summary judgment for either party on
19
the 92900-A forms.” The district court also held that issues
of fact precluded summary judgment on the FIRREA claim
related to the 92900-A forms.
15 Id. at 22 (quoting 18 U.S.C. § 1006).
16 Id. at 23.
17 Id.18 Id. at 11.
19 Id. at 12.
10 No. 16-4093
Following its entry of summary judgment in favor of the
Government on the FCA and FIRREA claims related to the
V-forms, the court held a status hearing. During that hearing,
the parties discussed the necessity of a trial:
MR. SHAPIRO: I believe we’re going to trial,
Judge. We tried to work some stuff out but it
hasn’t been worked out yet. I will continue to
try and work it out with the government short
of it, but I think the government would like to
set a trial date today.
THE COURT: Okay. And so we’re only talk-
ing now about the 2005 claims based on the
92-900A [sic] forms, correct?
MS. NORTH [for the Government]: Your
Honor, actually we’re not. We’ll go to trial and
not pursue the 2005 claims and go forward on dam-
ages and penalties for what has been decided on sum-
mary judgment.[20]
20 R.156-1 at 2 (emphasis added). Contrary to the Government’s present
stance, see Gov’t’s Br. 10 n.4, it expressly abandoned any FCA claims based
on the 92900-A forms in these representations to the district court. After
the status hearing, all parties proceeded on the basis that liability on all
claims had been settled and the only issue before the court was damages.
Indeed, in its supplemental briefing on Universal Health Services, Inc. v.
United States ex rel. Escobar, 136 S. Ct. 1989 (2016), see infra at 12, the Gov-
ernment stated: “The court’s opinion and ruling as to liability in its prior
decisions is consistent with the holding in Escobar.” R.136 at 1 (emphasis
added).
No. 16-4093 11
After further discussion, the court expressed some doubt
that there was a factual dispute concerning damages. It there-
fore decided to allow the Government to submit a summary
judgment motion directed to the issue of damages to deter-
mine if there was a genuine issue of material fact with respect
21
to “the dollar figures” before it empaneled a jury.
In its motion for summary judgment on damages, the Gov-
ernment argued that it was entitled to “FCA damages of
$111,195,477 because that amount is equal to three times
HUD’s net loss on the 237 loans that Luce’s MDR Mortgage
22
Corporation originated between the relevant dates.”
Mr. Luce opposed summary judgment on various grounds,
including that the Government was required to establish “the
foreseeability of the damages it claims” and that “[a] reason-
able jury could conclude that it was not foreseeable … that he
Moreover, following the court’s disposition of the Government’s mo-
tion for summary judgment on damages, the court entered a final judg-
ment. See R.143; see also infra at 13. Had there been any lingering claims for
the court’s consideration, it could not have issued a final judgment as to
any claims unless it “expressly determine[d] that there [wa]s no just reason
for delay.” Fed. R. Civ. P. 54(b). The district court made no such finding.
Instead, both it—and the parties—proceeded in a manner consistent with
the fact that the district court definitively had decided all outstanding
claims before it.
The Government’s present position is particularly untenable given its
jurisdictional statement. In it, the Government stated that the district
court’s November 23, 2016 order was a final judgment on the merits
providing grounds for this court’s appellate jurisdiction. See Gov’t’s Br. 2.
21 R.156-1 at 5.
22 R.123 at 1.
12 No. 16-4093
would be responsible for future borrower defaults on 237
23
loans because of his misrepresentations on the V forms.”
Before the district court had the opportunity to rule on the
Government’s motion for summary judgment on damages,
the Supreme Court issued its opinion in Escobar, which di-
rectly addressed the question of materiality in FCA cases. The
district court therefore ordered additional briefing on “the
24
Court’s ruling as to liability.” In response, Mr. Luce con-
tended that his V-form certifications were not material under
Escobar. He further argued that Escobar’s instruction to apply
common-law fraud principles required the application of
proximate, rather than but-for, causation.
On November 23, 2016, the district court addressed both
Escobar and the Government’s motion for summary judgment
on the question of damages. The court, this time applying the
heightened materiality standard articulated in Escobar, again
found material Mr. Luce’s false certifications. The district
court also rejected Mr. Luce’s argument that Escobar impliedly
overruled our precedent applying but-for causation and in-
stead required proximate causation in FCA cases. It accord-
ingly found that Mr. Luce’s false V-form certifications were
the but-for cause of the loss and awarded $10,357,497.69 in
25
damages. “Because Luce would be unable to pay any
23 R.128 at 4, 6 (emphasis removed).
24 R.132 (Minute Entry).
25 The district court calculated that number as follows:
The loss for the 226 refinanced loans is the difference be-
tween the amount the FHA guaranteed on the original
No. 16-4093 13
amount (on top of the damages and penalty imposed under
the FCA), the Court assesse[d] a penalty of zero on the
26
FIRREA violations.” A final judgment was entered on No-
27
vember 23, 2016.
II
DISCUSSION
We review the district court’s grant of summary judgment
de novo. Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson,
238 F.3d 891, 894 (7th Cir. 2001). Summary judgment is appro-
priate when, construing the record in the light most favorable
to the nonmoving party, Canen v. Chapman, 847 F.3d 407, 412
(7th Cir. 2017), there is no genuine issue as to any material fact
and the moving party is entitled to judgment as a matter of
law, Blasius v. Angel Auto., Inc., 839 F.3d 639, 644 (7th Cir.
2016). However, we are “not required to draw every conceiv-
able inference from the record” in favor of the nonmoving
party, but “only those inferences that are reasonable.”
Schwartz v. State Farm Mut. Auto. Ins. Co., 174 F.3d 875, 878 (7th
loans and the amount guaranteed upon MDR’s refinanc-
ing of those loans. For the 11 new loans, the damages are
the government’s net losses. … The total loss amount for
the 237 loans is $3,452,499.23. Trebling the damages, as
required per the FCA, Luce is liable for $10,357,497.69 in
damages.
R.142 at 8–9 (internal citations omitted). The court also imposed a penalty
of $16,500 for the FCA violations. See id. at 12.
26 Id. at 11.
27 See R.143.
14 No. 16-4093
Cir. 1999) (quoting Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d
232, 236 (7th Cir. 1991)).
A.
We turn first to Mr. Luce’s contention that his false V-form
certifications were not material under Escobar.
1.
In Escobar, a young woman died after she received mental
health treatment by unlicensed and unsupervised caregivers
at a clinic operated by one of Universal Health Services’ sub-
sidiaries. When submitting reimbursement claims to Medi-
caid, however, the clinic had used payment codes that corre-
sponded to services provided by licensed professionals. The
deceased’s parents later sued Universal Health Services un-
der an “implied false certification theory of liability,” Escobar,
136 S. Ct. at 1997; specifically, the Escobars claimed that the
clinic “misrepresented its compliance with mental health fa-
cility requirements that are so central to the provision of men-
tal health counseling that the Medicaid program would not
have paid the[] claims had it known of these violations,” id. at
2004.
The district court dismissed the complaint on the ground
that none of the regulations that the clinic allegedly violated
was a condition of payment. The First Circuit reversed in part
and remanded. It reasoned that, “[t]o determine whether a
claim is ‘false or fraudulent’ based on such implicit commu-
nications, … it ‘asks simply whether the defendant, in submit-
ting a claim for reimbursement, knowingly misrepresented
No. 16-4093 15
compliance with a material precondition of payment.’” Id. at
1998 (quoting United States ex rel. Escobar v. Universal Health
Servs., 780 F.3d 504, 512 (1st Cir. 2015)). According to the First
Circuit, “the regulations themselves ‘constitute[d] dispositive
evidence of materiality,’ because they identified adequate su-
pervision as an ‘express and absolute’ condition of payment
and ‘repeated[ly] reference[d]’ supervision.” Id. (alterations in
original) (quoting United States ex rel. Escobar, 780 F.3d at 514)).
The Supreme Court vacated and remanded. Initially, it
agreed with the First Circuit that a plaintiff could recover un-
der the FCA on the basis of an “implied false certification”:
“liability can attach when the defendant submits a claim for
payment that makes specific representations about the goods
or services provided, but knowingly fails to disclose the de-
fendant’s noncompliance with a statutory, regulatory, or con-
tractual requirement.” Id. at 1995. The Court observed that
Congress had not defined “false” or “fraudulent” for purpose
of the FCA. Nevertheless, the Court continued, “[i]t is a set-
tled principle of interpretation that, absent other indication,
Congress intends to incorporate the well-settled meaning of
the common-law terms it uses.” Id. at 1999 (quoting Sekhar v.
United States, 133 S. Ct. 2720, 2724 (2013)) (alteration in origi-
nal). “Because common-law fraud has long encompassed cer-
tain misrepresentations by omission, ‘false or fraudulent
claims’ include more than just claims containing express
falsehoods.” Id.Turning to the type of omission that could trigger liability,
the Court rejected Universal Health Services’ argument that
the nondisclosure had to involve program requirements that
were “expressly designated as conditions of payment.” Id. at
1996. “What matters is not the label the Government attaches
16 No. 16-4093
to a requirement, but whether the defendant knowingly vio-
lated a requirement that the defendant knows is material to the
Government’s payment decision.” Id. (emphasis added). The
Court explained that the “term ‘material’ means having a nat-
ural tendency to influence, or be capable of influencing, the
payment or receipt of money or property” and had “common-
law antecedents.” Id. at 2002 (quoting Neder v. United States,
527 U.S. 1, 16 (1999)). Regardless of its origin, however,
“[u]nder any understanding of the concept, materiality
‘look[s] to the effect on the likely or actual behavior of the re-
cipient of the alleged misrepresentation.’” Id. at 2002 (quoting
26 Richard A. Lord, Williston on Contracts § 69:12 (4th ed.
2003)) (second alteration in original).
Given this “demanding” standard, id. at 2003, the Court
concluded that the label attached to a payment requirement
“is relevant to but not dispositive of the materiality inquiry,”
id. at 2001. Instead, the Court explained that proof of materi-
ality includes, but is not limited to, “evidence that the defend-
ant knows that the Government consistently refuses to pay
claims in the mine run of cases based on noncompliance with
the particular statutory, regulatory, or contractual require-
ment.” Id. at 2003. However,
if the Government pays a particular claim in full
despite its actual knowledge that certain re-
quirements were violated, that is very strong
evidence that those requirements are not mate-
rial. Or, if the Government regularly pays a par-
ticular type of claim in full despite actual
knowledge that certain requirements were vio-
lated, and has signaled no change in position,
No. 16-4093 17
that is strong evidence that the requirements are
not material.
Id. at 2003–04. Because the Court’s interpretation of the statu-
tory requirements differed from that applied by the First Cir-
cuit, it vacated the First Circuit’s decision and remanded for
further proceedings.
2.
With this understanding of Escobar, we consider whether
Mr. Luce’s misrepresentations on the V-forms meet the mate-
riality standard.
Here, 24 C.F.R. § 202.5(j)(2) affirmatively prohibits program
participation by loan correspondents who have had a principal
“indicted for, or … convicted of, an offense” bearing on the
loan correspondent’s integrity. To enforce this prohibition,
HUD requires an annual certification of compliance with this
requirement so that the loan originator can continue its busi-
ness relationship with the Government. The certification on
the V-form concerns an “eligibility requirement” that flatly
prohibits the Government from doing business with individ-
uals who have a criminal record.
HUD’s action upon learning of Mr. Luce’s indictment and
false certifications confirms the centrality of this requirement:
It instituted debarment proceedings to end Mr. Luce’s partic-
ipation in the program. It did not simply refuse payment in
one instance, but terminated its relationship with the loan
18 No. 16-4093
28
originator so that no future payments could be made. At bot-
tom, the false V-form certifications simply were not “minor or
insubstantial” violations. Id. at 2003. Rather, they were lies
that addressed a foundational part of the Government’s mort-
gage insurance regime, which was designed to avoid the sys-
temic risk posed by unscrupulous loan originators. Mr. Luce,
as an attorney with significant experience with the Securities
and Exchange Commission, certainly understood this reality,
further suggesting a finding of materiality. See id. at 2002–03
(explaining that subjective knowledge of the importance at-
tached to the representation by the recipient may serve as the
foundation of materiality).
3.
Mr. Luce attempts to attack this conclusion by contending
that the district court disregarded “evidence that would allow
28 Indeed, the Court made this point in rejecting Universal Health Ser-
vices’ argument that liability should be premised only when a condition
of payment is at issue:
And forcing the Government to expressly designate a
provision as a condition of payment would create further
arbitrariness. Under Universal Health’s view, misrepre-
senting compliance with a requirement that the Govern-
ment expressly identified as a condition of payment could
expose a defendant to liability. Yet, under this theory,
misrepresenting compliance with a condition of eligibil-
ity to even participate in a federal program when submit-
ting a claim would not.
Escobar, 136 S. Ct. at 2002.
No. 16-4093 19
a reasonable jury to conclude that the V-Forms were not ma-
29
terial,” including:
(1) the Government’s approval of insurance on
new loans originated by MDR after learning of
the V-Forms and Mr. Luce’s pending charges;
(2) allowing MDR to continue operating as a
loan correspondent for two years (2005 and
2006) when no V-Forms were on file; (3) the fact
that the V-Forms were not considered when
making the decision to insure any specific loan;
and (4) HUD’s decision to stop regulating loan
correspondents entirely.[30]
We cannot agree.
First, the Government’s actions following its discovery of
his fraud support, rather than undercut, a finding of materi-
ality. Although new loans were issued, the Government also
29 Appellant’s Br. 15. Mr. Luce also continues to argue that he did not
knowingly make a false statement. According to Mr. Luce, the district
court “improperly [found] scienter proven as a matter of law by making
credibility determinations about Mr. Luce’s testimony.” Id. at 16. Specifi-
cally, he makes a linguistic argument that, because the V-form certifica-
tions only speak to “a proceeding … that could result … in a criminal con-
viction,” R.88-7 at 36, and he believed himself to be innocent, he did not
knowingly make a false statement. Reply Br. 22–24. We cannot accept this
submission. The V-forms ask whether Mr. Luce could be convicted, not
whether he should or would be convicted. Furthermore, even if Mr. Luce
subjectively believed himself to be innocent, the FCA’s knowledge re-
quirement is met by “deliberate ignorance” or “reckless disregard” of the
truth. 31 U.S.C. § 3729 (b)(1)(ii)–(iii). Both are present here.
30 Appellant’s Br. 15.
20 No. 16-4093
began debarment proceedings, culminating in actual debar-
ment. There was no prolonged period of acquiescence.
Second, Mr. Luce’s contention that HUD allowed MDR to
operate without V-forms for two years is simply not sup-
ported by the evidence. Although the V-form for 2006 could
not be located, the Government submitted undisputed evi-
dence that, had MDR failed to submit the V-form, HUD
31
would have terminated MDR’s FHA-approval.
31 See R.100-1 at 17 (Second Declaration of Julie Shaffer, Director of HUD’s
Philadelphia Home Ownership Center). Mr. Luce also maintains that the
Government failed to establish that he signed and submitted a 2006
V-form. See Appellant’s Br. 16. We disagree. “The standard for summary
judgment is well established: with the court drawing all inferences in the
light most favorable to the non-moving party, the moving party must dis-
charge its burden of showing that there are no genuine issues of material
fact and that he is entitled to judgment as a matter of law.” Spierer v.
Rossman, 798 F.3d 502, 507 (7th Cir. 2015). Thereafter, “[i]f the moving
party has properly supported his motion, the burden shifts to the non-
moving party to come forward with specific facts showing that there is a
genuine issue for trial.” Id.Here, the Government moved for summary judgment, arguing that
Mr. Luce filed a 2006 V-form. The Government could not locate the form,
so it introduced (1) evidence that MDR had paid an associated registration
fee in 2006, in addition to (2) the declaration of Director Shaffer, who
stated that the 2006 form must have been received “because HUD would
have terminated MDR’s FHA-approval had it not submitted the V-form.”
R.100-1 at 17. This shifted the burden of production to Mr. Luce.
In support of his burden, Mr. Luce submits that (1) the Government
has failed to locate the actual V-form, (2) a Government witness did not
recall seeing a V-form in 2006, and (3) Passi was in charge of day-to-day
operations at MDR during the relevant time period, so he may have signed
the form. See Reply Br. 24. Addressing these arguments in order, the first
does not sufficiently counter the Government’s production of payment
No. 16-4093 21
Third, Mr. Luce’s argument that the certification was not
tied to any particular loan misses the mark; the V-form certifi-
cation was a threshold eligibility requirement that, by exten-
sion, was tied to every loan. That is to say, without the V-form,
he could not have originated a single mortgage.
Finally, the contention that HUD stopped regulating loan
correspondents in 2010 is simply inaccurate. Rather, the 2010
amendments required that loan correspondents seek a spon-
sorship relationship with approved mortgagees, who in turn
records and the affidavit of Director Schaffer; rather, it simply states the
Government has failed to meet its burden, which is insufficient. See Szy-
manski v. Rite-Way Lawn Maint. Co., 231 F.3d 360, 364 (7th Cir. 2000) (“[A]
party will be successful in opposing summary judgment only when they
present definite, competent evidence to rebut the motion.” (quoting Smith
v. Severn, 129 F.3d 419, 427 (7th Cir. 1997)) (alteration in original)). As to
the second argument, the fact that a Government witness did not recall
seeing the form is tangential to the actual question—whether the form, in
fact, was submitted.
Finally, as to the possibility that someone else signed the form, this
argument is countered by the submission of the 2003, 2004, 2007, and 2008
forms, which all carried Mr. Luce’s signature. We have emphasized that a
party “cannot thwart summary judgment by asking a court to make infer-
ences based on flights of fancy.” Kodish v. Oakbrook Terrace Fire Prot. Dist.,
604 F.3d 490, 508 (7th Cir. 2010). It is difficult to see how Mr. Luce’s argu-
ment that Passi may have signed the 2006 V-form is anything other than a
“flight[] of fancy” given that all of the other V-forms in the record con-
tained Mr. Luce’s signature and given that Mr. Luce refused to testify that
he did not sign a 2006 V-form. Notably, Passi (the very individual
Mr. Luce contends committed fraud by signing the 2006 V-form) volun-
tarily alerted the authorities to MDR’s fraud. The district court accord-
ingly was correct in granting summary judgment as to the 2006 V-form.
22 No. 16-4093
32
assume responsibility for the loan correspondents. This
structural shift in no way suggests that the actions of loan cor-
respondents are not material; if anything, it demonstrates that
their actions are of sufficient import that further supervision
by an intermediary is required.
The district court did not err in finding that Mr. Luce’s
false certification on the V-form was material as a matter of
law.
B.
Having approved the district court’s finding of materiality
under Escobar, we now turn to the issue at the heart of this
appeal: whether Escobar requires that we depart from our tra-
ditional causation test for FCA cases. Twenty-five years ago,
our court created a conflict among the circuits by holding in
32 Federal Housing Administration: Continuation of FHA Reform;
Strengthening Risk Management Through Responsible FHA-Approved
Lenders, 75 Fed. Reg. 20,717 (Apr. 20, 2010) (to be codified at 24 C.F.R. pt.
202). In particular, the Government explained that,
Loan correspondents will no longer be approved partici-
pants in FHA programs. Loan correspondents, however,
will continue to have the opportunity to participate in
FHA programs as third-party originators (TPOs) through
sponsorship by FHA-approved mortgagees, as is cur-
rently the case, or through application to be approved as
an FHA-approved mortgagee. In eliminating FHA’s ap-
proval of loan correspondents, FHA-approved mortga-
gees assume full responsibility to ensure that a sponsored
loan correspondent adheres to FHA’s loan origination
and processing requirements.
Id. at 20,718.
No. 16-4093 23
United States v. First National Bank of Cicero, 957 F.2d 1362 (7th
Cir. 1992) (“Cicero”), that the FCA requires a “but-for” causa-
tion test rather than a proximate causation test. In Cicero, a
bank forwarded a guaranteed loan application to the Small
Business Administration (“SBA”); the application contained
many falsehoods. When the loan was not repaid, the bank
sought, and received, reimbursement on the guarantee from
the SBA. The United States later sought to recover the pay-
ment of the guarantee. Its action was predicated on, among
other bases, the FCA. It argued that, if the bank had not sub-
mitted the original loan guarantee application to the SBA, the
money never would have been disbursed and the Govern-
ment would not have incurred its loss. In short, the Govern-
ment’s loss did not have to be attributed directly to the bank’s
false statement.
In Cicero, the court focused on the language of the statute.
The FCA allows the Government to recover “3 times the
amount of damages which the Government sustains because of
the act of that person.” 31 U.S.C. § 3729(a)(1) (emphasis added).
The court emphasized that the statute permits recovery of
damages that arise “because of” a fraud, not damages “‘occa-
sioned by the cause of the falsity of the claim.’” Cicero, 957
F.2d at 1374 (quoting United States v. Hibbs, 568 F.2d 347, 354
(3d Cir. 1977) (Meanor, J., dissenting)). In its view, this lan-
guage justified a broad “but for” causality standard for the
question of causation. Id. We held that, even if the Govern-
ment’s loss was not caused directly by the false application
for a guaranteed loan, the FCA claim was valid because the
claim for reimbursement would not have been made if the
bank had not transmitted, at an earlier date, the false loan ap-
plication.
24 No. 16-4093
Importantly, the opinion in Cicero expressly acknowl-
edged, and disagreed with, the Third Circuit’s earlier con-
trary holding in United States v. Hibbs, 568 F.2d 347 (3d Cir.
1977). That case held that “a causal connection must be shown
between loss and fraudulent conduct and that a broad ‘but
33
for’ test is not in compliance with the statute.” Id. at 349. In
arriving at that conclusion, the Third Circuit also had focused
on the statutory language, but had reached an entirely differ-
ent result. It reasoned that
33 United States v. Hibbs, 568 F.2d 347 (3d Cir. 1977), involved “a real estate
broker who submitted certifications to the Federal Housing Administra-
tion misrepresenting the condition of certain residential properties.” Id. at
349. Specifically, “Hibbs procured and filed certificates stating that the
plumbing, electrical and heating systems of six houses in Philadelphia met
the standards and conditions prescribed by [HUD] regulations,” despite
the fact that “there were deficiencies.” Id. Relying on the false certifica-
tions, the agency “then insured mortgages on the homes and was later
required to pay the mortgages when defaults occurred.” Id.Hibbs lost in the district court, but nonetheless won reversal on ap-
peal. In reversing, the Third Circuit held that “a causal connection must
be shown between loss and fraudulent conduct.” Id. The court therefore
held that the “damages were sustained by the United States because of
defaults by the mortgagors and to some extent were increased by the un-
expected diminution of property value caused by [a] lead paint injunc-
tion,” but emphasized that “[n]either of those events was caused by or
related to the false certifications.” Id. at 351. At bottom, the court was con-
vinced that “precisely the same loss would have been suffered by the gov-
ernment had the certifications been accurate and truthful.” Id.No. 16-4093 25
[t]he statutory limitation, “by reason of”[34] the
commission of the unlawful act, compels con-
sideration of the element of causation. That re-
quirement should be liberally construed so as to
provide the government restitution from those
whose fraud has caused loss. It should not,
however, be disregarded completely so as to
eliminate the relationship between the unlawful
act and the injury ultimately sustained.
Id. at 351. The court additionally was concerned with the in-
equitable result that naturally would flow from a different
rule of causation:
To further illustrate the extreme to which the
government’s argument would lead—if the
mortgagors had defaulted because their houses
had been destroyed by a flood or some other un-
insured catastrophe, the government's theory
would nevertheless hold Hibbs liable because
he failed to call its attention to defects in the
plumbing.
Id. In the twenty-five years since we handed down our opin-
ion in Cicero, two additional circuits have adopted proximate
causation. No circuit has endorsed our view.
34 We have noted that “[a] 1982 amendment to the statute replaced the
words ‘by reason of the doing or committing’ with the word ‘because.’”
United States v. First Nat'l Bank of Cicero, 957 F.2d 1362, 1373 n.11 (7th Cir.
1992). We have declined to give this change in language any substantive
effect, instead “assum[ing] that the Act’s meaning as to the causation re-
quirement was unchanged by the 1982 amendment.” Id.26 No. 16-4093
With this background in mind, Mr. Luce submits that the
“but-for” test employed by the district court to establish cau-
sation, although consonant with this circuit’s precedent in
Cicero, is based on an erroneous interpretation of the FCA. He
argues that we ought to adopt the proximate cause test
adopted by the other circuits that have faced the question. Re-
alizing that stare decisis concerns present a barrier to such a
course, he submits that “[t]he Supreme Court’s decision in Es-
cobar declared the necessity of applying common-law fraud
35
requirements in FCA cases.” Mr. Luce contends that “[c]om-
mon-law fraud claims do not use ‘but for’ causation when
evaluating a defendant’s liability; rather, it is necessary for a
36
plaintiff to prove ‘proximate’ causation.” He accordingly
concludes that our but-for test “is no longer viable following
Escobar’s imperative to apply common-law fraud principles in
37
FCA cases.”
We begin our causation analysis where Mr. Luce’s argu-
ment ends and find it unnecessary to say whether Escobar,
standing alone, would warrant our revisiting this issue. Noth-
ing in that opinion directly addresses the question of FCA
causation or the circuit split; rather, that opinion clearly fo-
cuses on the implied certification theory of liability and re-
quires that courts undertake a rigorous materiality inquiry.
See Escobar, 136 S. Ct. at 1995, 1996, 1999–2004. It does not ad-
dress causation.
35 Appellant’s Br. 17.
36 Id.
37 Id. at 19.
No. 16-4093 27
Nonetheless, Escobar does give us pause. The Court explic-
itly said that, “absent other indication, Congress intends to in-
corporate the well-settled meaning of the common-law terms
it uses” and that “the term ‘fraudulent’ is a paradigmatic ex-
ample of a statutory term that incorporates the common-law
38
meaning of fraud.” Id. at 1999 (internal citations omitted).
These two statements, read together, require a careful reeval-
uation of our FCA precedent with particular focus on the
common-law understanding of fraud, the FCA’s language,
and our sister circuits’ understanding of causation.
Generally, under the common law, “[a] fraudulent misrep-
resentation is a legal cause of a pecuniary loss resulting from
action or inaction in reliance upon it if, but only if, the loss
might reasonably be expected to result from the reliance.” Re-
statement (Second) of Torts § 548A (Am. Law. Inst. 1977).
Nonetheless, “[n]ot all losses that in fact result from the reli-
ance are … legally caused by the representation.” Id. cmt. A.
Instead, “the misrepresentation is a legal cause only of those
pecuniary losses that are within the foreseeable risk of harm
that it creates.” Id. We similarly have explained, while analyz-
ing the common law of negligence, that
[p]roximate cause encompasses both cause in
fact and legal cause. To establish cause in fact,
the plaintiff must show the defendant’s “con-
duct was a material element and a substantial
38 See also Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1305 (2017)
(“We assume Congress ‘is familiar with the common-law rule and does
not mean to displace it sub silentio’ in federal causes of action.” (quoting
Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1390
(2014)).
28 No. 16-4093
factor in bringing about the injury.” Legal cause
on the other hand, “is essentially a question of
foresee-ability,” and we must determine
“whether the injury is of a type that a reasonable
person would see as a likely result of his or her
conduct.”
Blood v. VH-1 Music First, 668 F.3d 543, 546 (7th Cir. 2012) (in-
ternal citations omitted).
The statutory language of the FCA does not suggest that
Congress sought to depart from the established common-law
understanding of causation in fraud cases. The FCA simply
allows the Government to recover “damages which the Gov-
ernment sustains because of the act of that person.” 31 U.S.C.
§ 3729(a)(1) (emphasis added). Although the phrase “because
39
of” clearly requires causation, nothing in the FCA contains
39 We note that the Supreme Court has interpreted the phrase “because
of” as requiring but-for causation in other circumstances. For example, in
Gross v. FBL Financial Services, Inc., 557 U.S. 167 (2009), the Court held that
the ordinary meaning of the ADEA’s requirement that an
employer took adverse action “because of” age is that age
was the “reason” that the employer decided to act. To es-
tablish a disparate-treatment claim under the plain lan-
guage of the ADEA, therefore, a plaintiff must prove that
age was the “but-for” cause of the employer’s adverse de-
cision.
Id. at 176 (internal citation omitted). Nonetheless, these cases do not in-
form our analysis because they do not involve statutory codifications of
common-law concepts; rather, they involve statutory protections enacted
to protect interests not implicated by the common law.
No. 16-4093 29
any indication of an intent to depart from the common-law
40
understanding of causation in fraud cases.
We further note that proximate causation comports with
the FCA’s statutory purpose. The proximate causation stand-
ard “separates the wheat from the chaff, allowing FCA claims
to proceed against parties who can fairly be said to have
caused a claim to be presented to the government, while win-
nowing out those claims with only attenuated links between
40The only possible authority indicating congressional displeasure with
proximate causation is from a 1986 Senate Report, which reads as follows:
When the Government changes its position, and commits
its financial resources based upon a material false state-
ment, it should be able to recover the resulting losses, but,
under some court interpretations, it may not. For in-
stance, in United States v. Hibbs, 568 F.2d 347 (3rd Cir.
1977), the FHA agreed to insure a mortgage based upon a
representation, which was false, that the residence was
habitable and in compliance with the housing code. The
Government will not issue insurance to a non-code-con-
forming house. However, the court ruled that the default
on the mortgage occurred because the borrower lost his
job, and therefore could not meet his monthly pay-
ments—that the default was not related to the false state-
ment. While the court may have been technically correct, the
Committee believes that this position is unsound public policy.
The act should cover representations which cause the
Government to change its position and pledge its full
faith and credit, including the risk of insurable loss, based
upon another, but material false statement.
S. Rep. No. 99-345, at 20 (1986) (emphasis added). As an initial matter, we
are not convinced that the above is a direct criticism of proximate cause.
Nevertheless, even if it were, Congress did nothing to amend the statute’s
language to suggest that it intended to depart from the common law. It
accordingly does nothing to alter meaningfully our conclusion.
30 No. 16-4093
the defendants’ specific actions and the presentation of the
false claim.” United States ex rel. Sikkenga v. Regence Bluecross
Blueshield of Utah, 472 F.3d 702, 714 (10th Cir. 2006).
Given these considerations, it is not surprising that the
clear weight of authority among our sister circuits supports
the view that “but for” does not fulfill adequately the causa-
tion requirement of the statute. Following Hibbs, the Fifth Cir-
cuit expressly adopted the Third Circuit’s analysis, noting
that
the Third Circuit’s reasoning was based upon
the phrase in § 231 that anyone violating the Act
shall pay to the United States “double the
amount of damages which the United States
may have sustained by reason of the doing or com-
mitting such act.” … The Third Circuit held that
the default which occurred in that case had not
been related to the false statements regarding
the conditions of certain residential property.
…
This court finds no error in the decision[] in
Hibbs …. The language of the statute clearly re-
quires that before the United States may recover
double damages, it must demonstrate the ele-
ment of causation between the false statements
and the loss.
No. 16-4093 31
41
United States v. Miller, 645 F.2d 473, 475–76 (5th Cir. 1981).
Similarly, despite our intervening decision in Cicero, the D.C.
Circuit adopted the rule articulated in Hibbs and Miller, and
saw little reason to elaborate further on the explanation of the
other circuits:
PRC further points to several circuits that
have concluded that the Act does not contem-
plate liability for all damages that would not
have arisen “but for” the false statement. See
United States v. Miller, 645 F.2d 473, 475–76 (5th
41 In United States v. Miller, 645 F.2d 473 (5th Cir. 1981), a number of real-
estate companies, construction companies, and mortgage companies were
accused of filing inaccurate mortgage applications. In particular, “[e]ach
application filed on behalf of the purchasers of homes contained materi-
ally false statements as to the credit worthiness and net worth of [the]
home buyers, the amount of down payment which each home buyer
would make and their past and present debts.” Id. at 474. The district court
dismissed the complaint, and the Government appealed.
In reversing the district court’s dismissal, the Fifth Circuit held that “it
is clear that [the complaint] does present a set of facts which could entitle
the United States to relief.” Id. at 476. In particular, the court noted that
“[f]alse statements regarding residential property may not reasonably be
a cause for subsequent defaults of mortgagors, as was the case in Hibbs.”
Id. “Nonetheless,” the court continued, “false statements regarding the
ability of purchasers to afford housing could very well be the major factor
for subsequent defaults.” Id. Accordingly, the appellate court concluded
that “the district court erred in dismissing the complaint against the de-
velopers since the government has clearly alleged the necessary causation
factor.” Id.; see also United States ex rel. Main v. Oakland City Univ., 426 F.3d
914, 917 (7th Cir. 2005) (holding that false certification denying that ad-
missions recruiters received fees contingent on enrolling students caused
Government loss even though a phase two application from a student is
also necessary before Government funds are paid).
32 No. 16-4093
Cir. 1981); United States v. Hibbs, 568 F.2d 347,
351 (3d Cir. 1977). Surely, we agree.
United States ex rel. Schwedt v. Planning Research Corp., 59 F.3d
196, 200 (D.C. Cir. 1995). Finally, more recently, the Tenth Cir-
cuit expressly approved of the Third Circuit’s reasoning in
Hibbs, noting that the “proximate causation standard strikes
the proper analytical balance and comports with the rule re-
quiring strict construction of punitive civil statutes.” Sikkenga,
42
472 F.3d at 715 n.17. At bottom, in contrast to Cicero’s but-for
causation test, each of these four circuits has adopted the com-
mon-law understanding of foreseeable, or proximate, causa-
tion with respect to the imposition of liability and damages
under the FCA. None of these decisions can live in peace with
Cicero.
In the years since, an increasing number of our sister cir-
cuits have adopted expressly proximate causation as a rule
more compatible with the statute’s language and purpose.
The Supreme Court, as well, has provided new guidance on
42 In United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472
F.3d 702 (10th Cir. 2006), the Tenth Circuit was not assessing the relation-
ship between an alleged misrepresentation and loss—as we are here and
as the Third and Fifth Circuits did in Hibbs and Miller, respectively. In-
stead, the Tenth Circuit was assessing whether Regence, the Medicare car-
rier for Utah, had caused a Medicare provider, ARUP, to present a false or
fraudulent claim for purposes of 31 U.S.C. § 3729(a)(1). See id. at 730. It is
in this context that the Tenth Circuit determined that proximate causation
was appropriate. The fact that the Tenth Circuit (like the Supreme Court
in Escobar) invoked common-law principles of causation and also explic-
itly approved of the Third Circuit’s analysis in Hibbs, supports the view
that proximate cause is the appropriate standard for the determination of
loss as well.
No. 16-4093 33
how we ought to interpret congressional enactments dealing
with fraud: Absent other direction from Congress, we should
assume that Congress did not stray far from the established
common law. Most importantly, our own reading of the stat-
utory language now convinces us that the course charted by
our sister circuits is the correct reading of the statutory text.
We accordingly overrule Cicero and adopt the proximate
cause standard for FCA cases. 43
C.
There remains the issue of whether, under the proximate
cause standard that we have enunciated today, the Govern-
ment can establish that Mr. Luce’s falsehood was the proxi-
mate cause of the Government’s harm. Our examination of
the proceedings in the district court convinces us that this is-
sue was not adequately developed by the parties. The proper
course, therefore, is to remand this action to allow the district
court to evaluate the evidence according to the new prevail-
44
ing standard of proximate causation.
43 Because this opinion overrules circuit precedent, we have circulated it
to all judges in active service in accordance with Circuit Rule 40(e). No
judge favored rehearing en banc.
44 In addition to Mr. Luce’s proximate cause argument, he also submits
that the amount of his damages should be reduced because “the district
court erred in awarding damages for loans approved for insurance after
February 25, 2008, the date on which the Government indisputably had
full knowledge of Mr. Luce’s pending charges and the representations on
the V-Forms.” Appellant’s Br. 16. He submits that he “is entitled to judg-
ment with respect to 73 of the loans that form the basis for the Govern-
ment’s claims that were endorsed for insurance after February 25, 2008,”
34 No. 16-4093
Conclusion
We reverse the district court’s judgment with respect to
causation and remand the case for further proceedings in con-
formity with this opinion. Mr. Luce shall recover the costs of
this appeal.
REVERSED in part and REMANDED
which represents, after trebling, $1,992,686.34. Id. at 46. Because Mr. Luce’s
argument, at bottom, concerns the damages for which he is responsible,
we believe that this argument is best directed to the district court as part
of its consideration of which, if any, losses were proximately caused by
Mr. Luce’s misrepresentations.