When Government Walks in Industry’s Shoes, FCA May Not Apply (and Vice Versa)
In November, an Illinois federal judge blocked a former bank employee from collecting his claimed relator’s share of a potential settlement between the FDIC (acting as the bank’s receiver) and the bank’s former directors. In denying the relator’s share, the court affirmed the previous ruling of a magistrate judge holding the FDIC in this case did not constitute a “government” agency as contemplated by the False Claims Act. The court ruled that the FDIC, acting as receiver, had stepped into the legal shoes of the failed bank – in other words, the FDIC was wearing the hat of a corporate entity, not a government agency under the FCA.
In contrast, Franklin American Mortgage Company’s role as a direct endorsement lender in the Federal Housing Administration’s insurance program could have potentially exposed the company to FCA liability. Franklin American recently entered into a settlement with DOJ to resolve allegations that it violated the law by certifying unqualified mortgages for insurance on behalf of the U.S. Department of Housing and Urban Development (HUD). HUD insured hundreds of loans approved by Franklin American that were not eligible for an FHA mortgage (and that HUD would not otherwise have insured). HUD lost money when it paid insurance claims on these unqualified loans, and Franklin American will now pay $70 million to resolve any potential FCA claims.
The takeaway: while a relator may not have an FCA claim when a government agency acts as a corporate entity, a private mortgage lender acting on behalf of the government potentially would fall within the FCA’s purview.