Seventh Circuit tosses $10M fine vs lawyer accused by feds of fraud, says case needs second look

By Scott Holland | Oct 25, 2017

The U.S. Seventh Circuit Court of Appeals has thrown out a $10 million fine levied against an attorney accused of defrauding the government.

Chief Judge Diane Wood and Circuit Judges Ken Ripple and Ilana Rovner heard arguments May 30 in the case involving Robert S. Luce and issued a decision Oct. 23. Ripple wrote the opinion reversing the ruling of Chicago federal Judge John J. Tharp Jr.

The federal government sued Luce — owner and president of mortgage company MDR — under the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act, alleging he concealed his criminal history so his company could participate in the Department of Housing and Urban Development’s Fair Housing Act insurance program.

After the appellate panel rejected Luce’s arguments that his false certifications weren’t material and that lingering issues of material fact precluded summary judgment, his appeal hung on the 2016 U.S. Supreme Court decision in Universal Health Services, Inc. v. United States ex rel. Escobar. He said that case required the judges to apply a new standard to False Claims Act analysis. Tharp refused to apply the Escobar standard in reaching his judgment.

Luce’s criminal history started with an April 2005 indictment for wire and mail fraud, making false statements and obstruction of justice. He pleaded guilty to obstruction in July 2008, after which he was disbarred and his company went out of business. Following the indictment, the company originated 2,500 loans, about 250 of which now are in default — 95 percent of those mortgages represented refinancing of a loan already insured by the FHA.

The government sued Luce in July 2011 seeking treble damages and civil penalties, saying he and his company knowingly supplied inaccurate forms to keep writing loans. Both parties moved for summary judgment, which Tharp issued Sept. 30, 2015. The government said it was entitled to $111 million — three times HUD’s net loss on 237 loans the company should not have been allowed to originate. The Escobar ruling was issued before Tharp on Nov. 23, 2016, ordered $10.4 million in fines against Luce for improperly signing forms indicating he had no criminal history.

“HUD requires an annual certification of compliance,” Ripple wrote, so “the loan originator can continue its business relationship with the government. The certification on the V-form concerns an ‘eligibility requirement’ that flatly prohibits the government from doing business with individuals who have a criminal record.”

Luce argued Tharp should not have used a “but-for” causation test, as Escobar and other lower courts established use of proximate cause and applying common-law fraud requirements. The appellate panel ultimately agreed, writing: “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 government sustains because of the act of that person.’”

The issue then became whether HUD was damaged because Luce signed off on forms without acknowledging his indictments. Ripple wrote that “issue was not adequately developed by the parties,” explaining the panel deemed it appropriate to remand the matter back to district court to evaluate the evidence under the new prevailing standard.

Luce also argued his damages should be reduced by $1.9 million because 73 of the loans were endorsed for FHA insurance after Feb. 25, 2008, the date the government “indisputably had full knowledge” of his pending charges. The panel said that question also is best directed to the district court as part of considering which losses were proximately cause by Luce’s misrepresentations.

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