Wednesday, April 23, 2014

FYI: 9th Cir Upholds Rejection of California False Claims Act Allegations Against MERS

Monday, September 24, 2012

The U.S. Court of Appeals for the Ninth Circuit recently rejected a lawsuit brought under the California False Claims Act alleging that MERS and its member entities made false representations by naming MERS as a beneficiary to avoid paying recording fees.  The Ninth Circuit's decision was based on its holding that the substance of the plaintiff's allegations was already in the public domain, such that the lower court did not have jurisdiction over the matter under the CFCA.   
 
 
The plaintiff, a realtor, filed a lawsuit against MERS and various of its members (the "defendants"), on behalf of the Counties of California.  He alleged that the MERS system was fraudulent in that it was designed to deprive California Counties of recording fees, purportedly in violation of the California False Claims Act ("CFCA").
 
MERS removed the matter to federal court, asserting diversity jurisdiction.  The plaintiff filed a motion to remand the matter to state court, on the grounds that the State of California was a real party in interest, thus defeating diversity jurisdiction. The lower court denied the plaintiff's motion. 
 
The defendants filed motions to dismiss the plaintiff's complaint, arguing that his claims were substantially similar to information already in the public domain, and accordingly were barred by the CFCA.  The lower court agreed, and ruled in favor of the defendants.  The plaintiff appealed. 
 
On appeal, the plaintiff challenged the lower court's decision to deny his motion to remand, as well as the lower court's CFCA ruling. The Ninth Circuit considered each matter in turn. 
 
The Ninth Circuit had little difficulty in determining that the lower court did not err in denying the borrower's motion to remand.  It held that the plaintiff's pleadings did not disclose any grounds for treating California as a real party in interest, and further noted that if if the plaintiff's suit was successful, "the State would not realize any benefit as a result."
 
Next, the Court considered the plaintiff's CFCA claim.  As you may recall, the CFCA is a "whistleblower" statute that allows individuals to sue on behalf of the State or Counties.  However, the CFCA provides that "no court shall have jurisdiction" over such claims where the action is "based upon the public disclosure" of the substance of the allegations.  Cal Gov't Code Sec. 12652(d)(3)(A).  Thus, where prior public disclosures adequately put the government on notice of allegations brought under the CFCA, the suit is barred. 
 
With that standard in place, the Ninth Circuit affirmed the lower court's rejection of the plaintiff's CFCA claim.  Because "substantially similar information to [the plaintiff's] allegations already existed in the public domain at the time he filed suit," the Court held that "the district court properly dismissed the action as jurisdictionally barred." 
 
The plaintiff attempted to avoid this result by arguing that he was the original source of the allegations in the complaint, and that prior to his lawsuit, no one had adequately alerted the government of MERS' behavior.  The Ninth Circuit disagreed, observing that the plaintiff's alleged discovery of fraud on the part of MERS postdated numerous public disclosures describing the MERS system.  Therefore, the Ninth Circuit observed that it was "temporally impossible" for the plaintiff to have been the original source of the allegations. 
 
Accordingly, the Ninth Circuit affirmed the judgment of the lower court. 



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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