The Department of Justice this week publicized a $38.5 million False Claims Act settlement in a lawsuit that it fought to have dismissed, against the wishes of the whistleblower who alleged her former employer was improperly underwriting mortgages insured by the Federal Housing Administration.
The government, after declining to intervene, argued it didn’t have the resources to proceed with Gwen Thrower’s suit against Academy Mortgage Corporation. U.S. District Judge Edward M. Chen was not impressed with the argument, becoming the first judge in U.S. history to deny such a dismissal motion from the government and taking the government to task in a six-page ruling for presenting no evidence to support its claims.
The Ninth Circuit panel that heard the appeal, which presented an issue of first impression, also dealt the government a blow, allowing the case to proceed in an August 2020 ruling.
Fast forward two years, and a team from Reese Marketos that got hired on the then-5-year-old case in May 2021, secured the $38.5 million settlement on behalf of the government that never wanted the case to proceed.
Josh Russ, of Reese Marketos, credited the “bravery and tenacity” of Thrower as well as co-counsel — Alex Reese of Farella Braun & Martel and J. Nelson Thomas and Jonathan W. Ferris of Thomas & Solomon — for doing the hard work to keep the case alive in the face of government opposition.
“I think [the case] is remarkable for the proposition that Judge Chen … saw the government hadn’t put enough evidence forward to merit dismissal,” Russ told The Lawbook Thursday. “That it resulted in an almost $40 million recovery for taxpayers is something that bears notice — particularly as to what the government’s rights should be, and power should be, when it moves to dismiss these cases.”
This same issue — the government’s authority and discretion to have qui tam suits dismissed — is currently before the U.S. Supreme Court in a separate and unrelated lawsuit, Polansky v. Executive Health Resources, for which the high court heard oral arguments in earlier this month.
The head of the Justice Department’s civil division, Brian M. Boynton, issued a statement about the settlement Wednesday, saying lenders who cause the government to guarantee materially deficient loans, like Academy Mortgage was accused of doing, “put both homeowners and the public fisc at risk.”
“The settlement announced today is the result of the relator’s efforts to develop this case in litigation and complements the department’s actions to prevent abuse of government programs designed to foster home ownership,” he said.
The government did not respond to a request for comment Thursday.
Thrower filed this whistleblower lawsuit in California in April 2016, according to court records, alleging her former employer, Academy Mortgage — a participant in the Department of Housing and Urban Development’s Direct Endorsement program — violated the FCA by “causing the submission of false claims for Federal Housing Administration mortgage insurance by endorsing ineligible loans for FHA mortgage insurance.”
Another of Thrower’s attorneys, Pete Marketos, told The Lawbook Thursday that his firm staffed this case with a trial team two or three times larger than usual because of the “detective work” required to unravel what was a decade of allegedly fraudulent activity by Academy.
“The legal work necessary to force the defendant to turn over documents was enormous,” he said. “And then going through that much material to put the story together … it takes moving heaven and earth. We had lawyers that were able to press on the procedural side and file motions and get the court orders to force the documents to be turned over, and then the lawyers necessary to actually put the story together.”
On top of that, he said the case required time-consuming and complex financial and statistical analysis to develop the damages model.
“We invested millions in hard costs because when we place a bet, we see it all the way through,” he said. “The skills of the trial team were on display from start to finish here with Josh’s team, and that’s why they got this result.”
The government had argued in its July 2017 motion to dismiss that if the case proceeded, the same HUD employees, who are already being diverted from normal duties and deposed in similar FCA litigation, will be “further burdened by requests in this case.”
“Having already spent resources investigating Relator’s claims, reviewing the merits of the case as presented by relator, and monitoring the case after declination, the United States has the right to undertake a cost-benefit analysis and to conclude it is not in the public interest to spend further time and resources on relator’s litigation of this matter,” the government argued. “Accordingly, the additional burdens that litigation of this case would impose on the United States present a rational basis for the government to seek dismissal under§ 3730(c)(2)(A).”
Judge Chen issued a six-page order in June 2018, noting that Thrower’s evidence showed the government had performed “only a limited investigation” of the original complaint in this lawsuit and “appears not to have investigated the amended complaint at all.”
“Despite this, the government submitted no evidence in response to the court’s order [seeking evidence supporting the dismissal request],” he wrote. “Because the undisputed evidence shows that the government did not perform a full investigation of the amended complaint, its motion to dismiss is denied.”
During November 2019 oral arguments in the Ninth Circuit, Judge Kim McLane Wardlaw asked Melissa Patterson, who was arguing for the government, whether this was a case of first impression for any court in the country. Patterson said it was.
“There has never before been a district court order that refused to dismiss on the United States’ motion,” she said, noting that another court had since issued a similar ruling. “We’re being required … to divert our enforcement resources from the cases we want to go forward, from the cases we think are good and in the public interest, and divert those resources to a case we think should never have proceeded this far.”
Patterson accused the relators and the district court of “hijack[ing] the enforcement process” and forcing the federal government to “use its finite enforcement power on cases it thinks aren’t worth it,” which she said is tantamount to impinging the executive branch’s authority.
Judge Richard Linn chimed in at that point, saying the government hadn’t done any analysis on the value of the case to determine if it was a waste of resources. Patterson argued a “dollars-and-cents cost-benefit analysis” isn’t required before moving to dismiss.
That prompted Judge William A. Fletcher to jump in.
“I should have thought it would have been a better use of government resources to try and satisfy the district court instead of trying to come here and get us to reverse him on an interlocutory appeal,” he said. “We’re talking about the diversion of government resources. I think you probably made a mistake.”
Patterson replied immediately.
“Your honor, first, it’s our call how we use our government resources,” she said. “Second, this was an unprecedented district court decision.”
In an August 2020 opinion, the panel determined it didn’t have jurisdiction to hear the appeal because the government appealed too soon, holding Judge Chen’s denial of the motion wasn’t an immediately appealable collateral order.
The government had argued the suit should be dismissed because it didn’t have the resources to respond to the potentially burdensome discovery requests that the litigation would bring.
“We have previously acknowledged that the Government may legitimately consider the avoidance of litigation costs as a basis for moving to dismiss an FCA case,” the panel wrote. “But the mere fact that an erroneous denial of a § 3730(c)(2)(A) motion could lead to unnecessary government expenditures does not render the denial order immediately appealable. The Supreme Court has made clear that an interest in ‘abbreviating litigation troublesome to government employees’ is not important enough to justify a collateral order appeal.”
Academy is represented by Mitchel H. Kider, Jason W. McElroy, Joseph M. Katz and Jasmine Jean-Louis of Weiner Brodsky Kider and Thomas M. McInerney of Ogletree Deakins Nash Smoak & Stewart.
Thrower is also represented by Andrew Wirmani, Leslie Chaggaris, Tyler Bexley, Brett Rosenthal and Jamison Joiner of Reese Marketos.
The case number is 3:16-cv-2120.