The district court denied a motion to dismiss filed by defendants in a False Claims Act complaint alleging fraud on HUD mortgage insurance programs. In short, the government allege the defendants lied about their financial position in order to obtain the loan, on which they later defaulted, triggering HUD’s liability. The defendants argued the complaint failed to allege the role each defendant played in the alleged fraud, and therefore did not meet the particularity standard. While finding slight deficiencies in the pleading, including how the government grouped the defendants in some of the allegations, the court nonetheless found the complaint satisfied the particularity standard. The defendants also argued they could not be held individually liable for the false statements of other defendants, but the court held that in some circumstances, they can. If the government could show a defendant knew that a false statement had been submitted to the government to obtain a payment and if the defendant had a duty to inform the government of this misstatement, then the defendant could be held individually liable. According to the court, interpreting the FCA otherwise would attach liability only to an individual who made direct misrepresentations, while letting co-conspirators off the hook.
Defendants Surgical Development Partners LLC, SDP of Austin Enterprises LLC, G. Edward Alexander, John Prater, and Frank Sossi moved to dismiss the government’s False Claims Act complaint alleging fraud on a HUD mortgage insurance program. The defendants previously filed a successful motion to dismiss on particularity grounds, and the government filed its amended complaint.
Defendant Lakeway Regional Medical Center LLC operated a hospital in Lakeway, Texas, for which it procured mortgage insurance through HUD’s Section 242 Mortgage Insurance Program. LRMC intended for the hospital to be largely physician-owned, and for those physicians to work at, and refer patients to, the hospital in order to generate business. However, the passage of the Affordable Care Act caused some physicians to withdraw from the plan and LRMC then needed to fund the project through previously unused debt instruments called surplus cash notes. After opening the facility, LRMC began having financial difficulty and missed some mortgage payments. HUD was force to pay under the insurance policy and later filed this lawsuit.
The government’s primary complaints stem from the defendants’ alleged failure to disclose information related to these topics and various misunderstandings resulting from those purported failures. The government also alleged that the defendants violated the regulatory agreement they signed by making disallowed payments to investors, affiliates, and an unaffiliated construction company.
The defendants argued the amened complaint should be dismissed because it did not adequately resolve the issues in the original complaint. Second, they argued that the allegations related to material omissions and agency liability do not state a claim for relief. Finally, they argued the government did not adequately claim that each of the defendants’ alleged misrepresentations were material to the decision of whether to grant mortgage insurance to LRMC.
In arguing the government had not sufficiently amended its complaint, the defendants noted the government simply changed the word “defendants” in the complaint to a list of each individual defendants’ names. The defendants argued the government still grouped them together without explaining what role they each played in the alleged scheme, which they asserted fell far short of the particularity standard. While the amended complaint added new sections that summarize the specific acts and omissions giving rise to each defendant’s liability in this action, the defendants argued these sections still did not provide sufficient clarity.
For example, the defendants argued that when each individual defendant was named, the government merely repeated identical allegations against each, while interchanging their names.
The court agreed, finding that the amended complaint addressed who allegedly committed the fraud and when and where they did so, but did not address the questions of what they did and how the fraud was carried out. For example, the complaint alleged that three individuals supposedly “emphasized” a project’s strength or “highlighted” investor backing, but the court found this insufficient, as a defendant could not be expected to defend himself against such vague allegations. The court dismissed the related claims.
Nonetheless, the court found those vague references isolated, while the remainder of the complaint was more specific. For example, the section on Alexander included allegations that he signed a certification guaranteeing that certain information was true when he had reason to believe it wasn’t; failed to disclose investor withdrawals shortly before the close of the loan despite an obligation to do so; sent an email to colleagues acknowledging LRMC’s inability to meet the government equity requirement, but never disclosed such concerns to the government despite an obligation to do so; and agreed via email to borrow or kite funds from investors who had indicated a desire to withdraw until the closing date so that LRMC could meet its closing equity requirements, in violation of contractual obligations. The court found these and similar allegations satisfy the particularity standard.
Next, the defendants argued the government named the individual defendants and “others acting on LRMC’s behalf” in connection with certain claims. The defendants maintained these references were also too vague. The court agreed, again explaining that the phrase “and others acting on LRMC’s behalf” did not provide the individual defendants with sufficient notice to mount a defense. To the extent the phrase is merely informative of the presence of nonparty actors, the court took no action. However, to the extent the government wished to pursue claims based on any theory of liability subject to Rule 9(b), those claims referencing “others acting on LRMC’s behalf” are dismissed and the government must replead those claims with specificity.
Next, the defendants challenged the claim that the individual defendants are liable for their fellow defendants’ false statements. The amended complaint incorporated references to the individual defendants’ failure to correct or alert the government to the falsity of certain statements made by other defendants or nonparties. This raised the question of whether the failure to correct a material statement of another person can be the basis for action under the False Claims Act.
The court held that, at least in some circumstances, it can. Citing Escobar, the court explained that under an implied false certification theory, liability may attach when a defendant knowingly fails to disclose certain noncompliance, if the omission renders the defendant’s representations misleading. The court found that Escobar implied that an individual defendant could be responsible for failing to correct known misstatements of others if those misstatements make the defendant’s representations misleading.
The defendants argued that the Fifth Circuit has clarified that Universal did not impose liability absent a duty to speak, and would therefore not impose the obligation to correct another person’s false statements. However, for three reasons, the court believed that Harman did not preclude the “failure to correct misstatements of others” theory of liability.
First, the government agency in Harman did not request the information that the defendants failed to disclose and already knew that information via another source. Neither of those circumstances applied here. Second, the passage cited by the defendants specified that liability cannot attach under the False Claims Act unless “the defendant has an obligation to disclose.” In this case, the defendants did have such an obligation. In other words, if a certification requires someone to divulge certain known information, that person, by signing it, is not shielded from liability for failure to divulge that information.
Third, the court held that interpreting Harman to preclude the government’s theory of liability would be to give a free pass to every single individual except the one that makes a false statement. In other words, even if multiple executives knew a statement was false, and even if they sign a certification saying they believe their attestations are true, only the lone individual making the statement would be held liable, as long as the others did not verbally or physically approve that statement. The court found that outcome contradictory to the point of the False Claims Act.
Finally, the defendants argue the government failed to allege that the individual defendants’ alleged omissions were material to the government’s decision to provide mortgage insurance to LRMC. The court disagreed. For example, the government alleged that any new hospital relies on physician investment and that the omissions often directly related to the number and amount of such investments. The court agreed that the number of investors and the total money invested was material to the government’s decision to provide LRMC with mortgage insurance and that such was properly alleged in the amended complaint.
