Sellers Who Made False Claims To Obtain Federal Mortgage Insurance Are Liable For Triple Damages

December 29, 2008 | Bulletin No. 905849.1

In United States of America v. Eghbal, (--- F.3d ---, (Cal.), Dec. 5, 2008), the United States Court of Appeals considered an appeal from property sellers who had fraudulently obtained mortgage insurance from the Department of Housing and Urban Development (“HUD”), by signing statements that the buyers had made down payments on the property, when in fact, they, the sellers, had made the down payments.

The court ruled that since HUD would not have insured the mortgages without the false declarations from the sellers that the buyers had made the down payments, and would therefore not have had to pay for claims when the buyers defaulted on their mortgages, the sellers were liable for triple the amount of damages to HUD under the False Claims Act (“FCA”).

Facts

Throughout the 1990s, Morteza Eghbal and Marilyn Sylvia Trujillo engaged in a scheme in which they bought foreclosed properties from HUD and resold them to buyers at a profit with mortgages insured by HUD. As a condition of insuring the mortgages, HUD required Eghbal and Trujillo to sign documents attesting that the buyers made the entire down payment, without assistance from Eghbal and Trujillo. In fact, Eghbal and Trujillo, not the buyers, made the down payments, but they nonetheless fraudulently signed the statements to obtain the HUD mortgage insurance and allow the sales to proceed.

Eghbal and Trujillo sold more than 200 properties, 62 of which defaulted on their mortgages. Of those, the government sought triple restitution from Eghbal and Trujillo for 27 mortgages, for which HUD paid approximately $2.8 million in mortgage insurance claims. The district court found Eghbal and Trujillo liable for triple the $2.8 million, or $8.4 million, minus $2.7 million for the amount received from the sale of the properties, for a net liability of $5.7 million. Eghbal and Trujillo, while admitting to fraudulently signing documents attesting that the buyers paid the down payments, appealed the damage amount on the grounds that they sought only to induce HUD to insure the mortgage, but were not parties to the actual claims presented to HUD.

Decision

At issue, the court said, is the standard of causation the government must demonstrate to establish liability under the FCA. In United States v. Hibbs, 568 F.2d 352 (3d Cir. 1977), the court ruled in a similar instance that “the false information furnished to the government bore upon the likelihood of the applicants meeting mortgage payments, and thus the misrepresentation had a causal connection with the subsequent defaults.”

Here, the court said, the false statements from Eghbal and Trujillo bore directly upon the likelihood that the buyers would be unable to make their mortgage payments, and thus the misrepresentation had a causal connection to the subsequent defaults and claim payments by HUD. Eghbal’s and Trujillo’s assertions that they only sought to secure the mortgages, and not cause HUD to pay the claims, are therefore irrelevant for the purposes of FCA, the court said. Since FCA provides for damages of “three times the amount of damages which the Government sustains,” the district court’s award was correct, the court added.

The court then dismissed the claim that the award violated the Eighth Amendment ban on excessive fines because “a systematic and ongoing scheme like Eghbal’s and Trujillo’s undermines the integrity of the programs and erodes the public’s confidence in the Government’s ability to manage and fund such programs.” The trial court’s judgment was affirmed.


Questions

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Karina Terakura | 916.321.4500