FYI: 9th Cir Upholds Dismissal of False Claims Act Allegations Involving Loans Sold to GSEs

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a federal False Claims Act, 31 U.S.C. §§3729-3733 ("FCA"), lawsuit brought by private citizen plaintiffs against various mortgage lenders and servicers for supposedly making false certifications regarding loans sold to Fannie Mae and Freddie Mac.

In so ruling, the Court held that Fannie Mae and Freddie Mac were not federal instrumentalities for purposes of FCA, 31 U.S.C. § 3729(b)(2)(A)(i).

A copy of the opinion is available at:  Link to Opinion

The plaintiff private citizens brought suit under the FCA against various mortgage lenders and servicers alleging that the lenders and servicers supposedly certified mortgage loans purchased by Fannie Mae and Freddie Mac were free of certain home association liens and charges when in fact they were not. 

The plaintiffs alleged that the government sponsored enterprises (GSEs) were federal instrumentalities either under case law or due to the Federal Housing Finance Association's ("FHFA") conservatorship.  As such, the plaintiffs claimed that the allegedly false certifications were made to an "officer, employee, or agent" of the United States in violation of FCA, 31 U.S.C. § 729(b)(2)(A)(i).

The district court dismissed the action, holding that the GSEs were not federal instrumentalities for purposes of FCA, 31 U.S.C. § 3729(b)(2)(A)(i), because the entities are private, albeit sponsored or charted by the federal government.  The plaintiffs appealed.

The Ninth Circuit noted that a "claim" giving rise to liability under the FCA, 31 U.S.C. § 3729(b)(2)(A)(i), requires that a demand or request for payment be "presented to an officer, employee, or agent of the United States."  However, the Court found that the language of 12 U.S.C § 1716b and 12 U.S.C. §1452 illustrates that certain government sponsored entities are indeed private, and not federal instrumentalities. 

The plaintiffs argued that Rust v. Johnson, 597 F.2d 174 (1979), held that one of the GSEs was a federal instrumentality for state/city tax purposes.  However, the Court disagreed and explained that an entity found to be a federal instrumentality for one purpose does not mean the same entity is a federal instrumentality for another purpose. See Kuntz v. Lamar Corp., 385 F.3d 1177, 1185 (9th Cir. 2004), Lewis v. United States, 680 F.2d 1239, 1242-43 (9th Cir. 1982).  Accordingly, the Court distinguished Rust because it did not address the GSEs' status under the FCA.

The Ninth Circuit also disagreed with plaintiffs' argument that the FHFA conservatorship over the GSEs transformed them into federal instrumentalities.  The Court reasoned that the conservatorship gave the FHFA "all the rights, titles, powers and privileges" of the GSEs, not the other way around.

Further, the Court noted that Lebron v. National Railroad Passenger Corp., 513 U.S. 374, did not bolster plaintiffs' argument regarding the effect of the FHFA's conservatorship.  The Court explained that, unlike in Lebron, the conservatorship here did not represent the federal government's retention of permanent authority over the GSEs.

The Court did not opine on whether the plaintiffs could otherwise state a claim under False Claims Act, 31 U.S.C. § 3729(b)(2)(A)(ii), because the plaintiffs did not raise the argument at district level nor on appeal.  However, the Court noted that a properly pled claim under § 3729(b)(2)(A)(ii) could give rise to liability.

Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   INDIANA   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.