A decision from a federal appeals means that Federal Housing Administration mortgagees will be hit with less in damages when they submit bad insurance claims to the Department of Housing and Urban Development.
A federal judge in Illinois previously ruled that Anchor Mortgage Corp. and its chief executive officer, John Munson, lied when applying for federal guarantees on 11 loans. The alleged lies violated the False Claims Act, which provides for substantial penalties.
Anchor allegedly submitted fake certificates that borrowers’ relatives had supplied down payment funds even though it knew the down payments didn’t come from the borrowers or their relatives.
In addition, the Chicago-based firm is accused of paying Casa Linda Realty for referring a client even though it represented to HUD that it had not paid anyone for referring clients.
A penalty of $5,500 per loan was imposed by the district court. In addition, total treble damages were calculated at around $2.7 million.
Anchor, which operated from January 1992 until June 2006 based on Munson’s LinkedIn profile, filed an appeal with the Seventh Circuit U.S. Court of Appeals.
Anchor argues that it did not have the necessary state of mind — either actual knowledge that material statements were false or a suspicion that they were false plus reckless disregard of their accuracy.
The district court determined that Anchor Branch Manager Alfredo Busano was aware of what was happening, and “corporations such as Anchor ‘know’ what their employees know.”
In the appeal, Anchor asks the court “to ignore the bogus-certificate frauds” because Munson didn’t know they were false.
But the appellate court determined in a March 21 decision that “Busano’s knowledge was Anchor’s knowledge.”
Munson also claims that he didn’t know the referral fees were improper because a controlled business arrangement was established to meet federal regulations that permit compensation to a joint venture where the mortgage broker has an interest.
But the appeals court affirmed the district court’s decision on the referral fees.
The more important issue that was appealed was how to calculate the treble damages.
The district judge took the amounts paid in FHA claims to lenders and tripled that amount. Proceeds that were received from a property sale were then subtracted from the trebled amount.
One loan was cited where the Department of the Treasury paid out $131,643 in FHA claims. Tripling that amount, treble damages came to $394,929. The underlying property sold for $68,200, leaving $326,729 in treble damages plus a $5,500 penalty.
The government’s treble calculations were made on a “gross trebling” basis.
But Anchor said that treble damages should have been calculated on the claim amount after subtracting the $68,200 in proceeds from the property’s sale. The “net trebling” method would have reduced treble damages to just $190,329 in the cited example.
The Department of Justice has exclusively relied on the United States v. Bornstein decision in its use of gross trebling.
The appeals court ruled in favor of Anchor.
It determined that the False Claims Act does not specify a gross or net approach and noted that the Clayton Act, which created the first treble-damages action in federal law, has long been understood to use net trebling.
In the decision, the appellate court reversed the trial court judgment to the extent it requires the gross trebling approach and ordered the recalculation of the award using the net trebling approach. On transactions where the real estate hasn’t been sold, the parties should propose how to determine the values.
“The United States’ loss is the amount paid on the guaranty less the value of the collateral, whether or not the agency has chosen to retain the collateral,” the decision stated. “The damages should not be manipulated through the agency’s choice about when (or if) to sell the property it receives in exchange for its payments.”
