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August 22, 2014 False Claims Act Legal News

California District Court Reviews Public Disclosure Bar in Light of False Claims Allegations by Realtor

The federal False Claims Act contains several provisions that essentially work to bar plaintiffs with certain types of actions from filing a whistleblower claim. One of these bars is known as the “public disclosure bar,” and it prevents a whistleblower from filing a claim involving allegations of fraud against the government if those allegations are already part of public knowledge, unless the person qualifies as an original source. More specifically, claimants may face a dismissal if their false claims allegations involve facts that are (i) substantially similar to facts alleged in an already-filed complaint, or, (ii) enough information about the claim has already been exposed, so as to put the government on notice that the possible fraud is occurring.

In today’s case, a realtor unfortunately faced a dismissal of his whistleblower lawsuit; however, the court’s analysis of the claims may help to serve as a reminder to all potential plaintiffs to speak with a whistleblower attorney immediately upon obtaining information relating to possible fraud against the government.

Facts of U.S. ex rel Hastings v. Wells Fargo Bank

The facts of the Hastings case involve allegations of fraudulent certification of compliance with mortgage lending laws, and involved a realtor who believed loans were being sent through for approval despite falling short of applicable FHA requirements. The FHA is authorized under federal law to provide mortgage insurance to eligible low- to moderate-income families wishing to purchase a home. In exchange for providing this risk security for lenders, the FHA requires lenders to certify specific eligibility components in applicants for loans, and failure to certify creditworthiness can result in a finding of fraudulent false claims to a federal government entity (i.e., the Department of Housing and Urban Development).

According to the petition, the whistleblower is a current real estate agent alleging that the defendants – including Wells Fargo, Countrywide Home Loans, and BAC Home Loan Servicing – failed to comply with the FHA requirement that all borrowers forward a three percent down payment by allowing borrowers to accept “gifts” from organizations for the down payment amount. More specifically, the plaintiff alleges that certain borrowers were receiving the three percent down payment amount from groups like the Nehemiah Corporation of America, which advances down payment amounts to borrowers.

However, in practice, lenders would then forward a “service fee” to  the group advancing the down payment amount that either met or exceeded the amount of the loan, as well as inflated the sales price to include the lender’s contribution back to the organization as part of the loan amount. In essence, borrowers never actually made a down payment and ultimately paid the entire down payment amount amortized over the course of the mortgage.

Court’s Issue With Plaintiff’s Allegations

The court did not necessarily disagree that the plaintiff’s allegations amount to a false claim. The issue with which the court grappled, however, had to do with the fact that these down payment “gifts” have been a source of debate for several years, often discussed in prior public documents, court cases, and articles published by the news media. The court further concluded that the relator was not an original source of the information in the complaint, and the case could therefore not continue.

The court began its analysis by discussing the two-prong analytical test to determine the public disclosure bar should apply to prevent a relator from moving forward. First, the court must consider whether the information upon which plaintiff has relied to advance his claim is available in the “public fora” and, if it does, the court must then determine if the plaintiff actually relied on the public information to form his complaint – or, alternatively, whether the plaintiff gathered his facts another way (e.g., through an employment experience).

As far as the first prong, the defendants pointed to several public investigations performed by the Department of Housing and Urban Development’s Office of Inspector General and the resulting discussions of the problems with these down payment gifts in light of federal law. The plaintiff disagreed with the defendant’s assertions, claiming that the public investigations were looking at the problem as a whole, and did not specifically address whether false claims were involved. However, the court found this unconvincing, citing the fact that the government would have been well on notice of the alleged fraud, even if the term “fraud” was not specifically used in the investigative documents.

Second, the court considered whether the plaintiff derived his information from an alternative source aside from the public documents discussing these problematic down payment gifts. The court again found the relator’s argument, that he was made aware of the Nehemiah Corporation through a fax received in 1997 that was sent to the entire Sacramento realtor’s association – after which he immediately contact HUD with his concerns – unconvincing. The court ultimately concluded that the relator received this information “second hand,” and he was not the direct source of the information leading to alleged fraud. As well, at the time of plaintiff’s call to HUD, the government was already well aware of the issue. Lastly, the court described plaintiff’s 1997 communication with HUD as “speculative” of possible problems, and did not specifically allege actual instances of fraud.

Contact a Whistleblower Attorney Right Away

If you are concerned about possible fraudulent activity, don’t delay! If another whistleblower happens to file a claim before you, you may be barred from continuing in your allegations under the above-described public disclosure bar. To avoid this result, contact Berger Montague today!