U.S. v. Bank of Farmington

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Before CUMMINGS, KANNE and DIANE P. WOOD; CUMMINGS; DIANE P. WOOD
• Citation: U.S. v. Bank of Farmington, 166 F.3d 853 (7th Cir. 1999)
• Decision Date: 20 January 1999
• Docket Number: No. 98-2040,98-2040
• Parties: UNITED STATES of America and Eunice Mathews, Plaintiffs-Appellants, v. BANK OF FARMINGTON, Defendant-Appellee.

Page 853

166 F.3d 853

UNITED STATES of America and Eunice Mathews, Plaintiffs-Appellants, v. BANK OF FARMINGTON, Defendant-Appellee.

No. 98-2040.

United States Court of Appeals Seventh Circuit.

Argued Oct. 30, 1998.

Decided Jan. 20, 1999.

Daniel G. O'Day (argued), Peoria, IL, for Eunice Mathews.

K. Tate Chambers, Office of U.S. Attorney, Daniel G. O'Day (argued), Peoria, IL, for U.S.

Stephen A. Kouri (argued), Vonachen, Lawless, Trager & Slevin, Peoria, IL, for Bank of Farmington.

Before CUMMINGS, KANNE and DIANE P. WOOD, Circuit Judges.

CUMMINGS, Circuit Judge.

Eunice Mathews sued the Bank of Farmington [Illinois] (the "Bank") as a relator under the qui tam provision of the False Claims Act, 31 U.S.C. § 3729 et seq., in connection with an allegedly false claim the Bank made upon the former federal Farmers' Home Administration ("FmHA"). ¹ Under the qui tam provisions of the False Claims Act, a private citizen can recover treble damages in a civil action brought on behalf of the government against a party that has allegedly made a false claim for payment against the United States. Id. § 3730(b). Mathews filed a qui tam lawsuit, alleging that she was the "original source" of the information about the Bank's misrepresentation to the FmHA, and seeking damages of more than $100,000. As the statute requires, the action was stayed and sealed while the government was notified of the information. The government declined to proceed with the action. ² Mathews decided to proceed with the action on the government's behalf.

The district court then granted the Bank's motion to dismiss her lawsuit with prejudice under the section of the Act establishing a jurisdictional bar where a claim is "based upon the public disclosure of allegations or transactions in a ... civil ... hearing ..., unless the ... person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A). The court held that Mathews' qui tam claim was "based upon" information which was "publicly disclosed" and that she was not an "original source" of the information. The interpretation and application of the language of § 3730(e)(4) are the main questions in her present appeal. We affirm, but for somewhat different reasons than those given by the court below.

I. Factual Background

Eunice Mathews personally guaranteed the extension of a $100,000 line of credit from the Bank of Farmington to her son Lester in 1981, thereby guaranteeing all of Lester's then existing and future debts to the Bank. In 1987 and 1988, the Bank loaned Lester more than $290,000. All the loans were connected with Lester's farming business. The Bank sought and obtained an FmHA guaranty for these loans, but, in violation of federal regulations, did not disclose in its application for the FmHA guaranty the existence of Mathews' guaranty as collateral backing the new loans. Lester subsequently defaulted on the loans. The Bank submitted two loss reports to the FmHA in March 1993, neither of which disclosed the existence of Eunice Mathews' guaranty. The FmHA paid out on these claims. The nondisclosure of the Mathews guaranty is the alleged violation of the False Claims Act upon which she bases her qui tam claim. See 31 U.S.C. § 3729(1).

In June 1993, the Bank sued Mathews in Illinois state court to enforce her guaranty. She lost the suit on the instrument and lost her appeals, although the Bank settled for $100,000, waiving interest and attorney's fees. In those proceedings, Mathews' counsel, reviewing documents produced by the Bank in discovery, noticed that the existence of her guaranty had not been disclosed to the FmHA on the Bank's applications to the agency. Under Illinois court rules, such discovery material is not filed in the public court file but is provided to opposing counsel. Her attorney attempted to use the Bank's nondisclosure as a defense to the guaranty in the state trial. This effort failed, since no misconduct, illegality or crimes of the Bank against the government could affect Mathews' own liability to the Bank under the guaranty.

The facts which constitute the basis of Mathews' qui tam claim emerged in the state trial proceedings as follows. During discovery for those proceedings, as discussed, the Bank's misrepresentation to the FmHA came to the attention of Mathews' attorney when he received the Bank's FmHA claims in discovery. In December 1993, a loan officer at the Bank, Mr. Rich Kimbrell, told Mathews' attorney that the Mathews guaranty had not been disclosed on the FmHA application, but that it was in Lester's file at the Bank and would have been reviewed periodically by the FmHA.

Mathews' attorney then subpoenaed Mr. Victor Rhea, the FmHA employee principally responsible for the agency guaranty of Lester's loans, for a deposition. Before the deposition, Rhea called Bank President Kent Kowal to inquire as to the reason for this subpoena. Kowal told Rhea that the Bank had sued Mathews on her guaranty. This explanation alerted Rhea to the existence of the Mathews guaranty. Rhea stated in an affidavit in the qui tam case that this conversation was the first that he had heard of her guaranty. Since he should have been told about it from the beginning, this would have been an interesting conversation to have in detail, but the record in this case has no further information on its contents. Kowal provided an affidavit that confirms Rhea's report. That is to say, the first time the FmHA heard of the Mathews guaranty was from the Bank itself, although this communication was instigated by Mathews' subpoena. Kowal also stated in his affidavit that he believes that he "advised" the FmHA about the Mathews guaranty during one of the previous conversations they had in regard to Lester's loans, although he said that he did not recall a specific conversation with anyone in particular from the FmHA.

In the state court litigation that followed, the Bank's failure to disclose and the other facts described above became matters of publicly filed documentation and the subject of many court hearings. The Bank and the FmHA conducted separate negotiations about the Mathews guaranty. It appears from the record that the Bank paid FmHA some or all of the loss settlements that the Bank had received from FmHA in connection with Lester's default. There is some dispute about precisely how much, but that is immaterial here.

In 1997, Mathews filed her qui tam claim in federal court, seeking $111,440.68 in damages. The question is whether, on these facts, a court has jurisdiction over this claim.

II. Discussion

A. Introduction

The False Claims Act was a Civil War statute, passed in 1863, originally to enable the federal government to punish and deter the fraudulent claims of war profiteers. It provided criminal and civil penalties for presenting a false claim for payment against the United States. See S.Rep. No. 99-345, at 8 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5273. From the very first, the statute included a qui tam provision. The term comes from the Latin expression, qui tam pro domino rege quam pro se ipso in hac parte sequitur ("Who brings the action for the King as well as for himself"). A qui tam lawsuit is brought by a private party or "relator" who alleges fraud upon the government. If the claim is proven, the relator receives a percentage of the recovery ranging under the current statute, from 10% to 30%. See 31 U.S.C. § 3730(d). The relator serves as a sort of private attorney general. The qui tam provision is based upon the idea " 'that one of the least expensive and most effective means of preventing frauds upon the Treasury is to make the perpetrators of them liable to actions by private persons acting ... under the strong stimulus of personal ill will or the hope of gain.' " United States ex rel. Marcus v. Hess, 317 U.S. 537, 541, n. 5, 63 S.Ct. 379, 383, 87 L.Ed. 443 (internal citations omitted).

The statute has been amended twice, once in 1943 and more recently in 1986. The original 1863 Act allowed anyone to bring a qui tam action and receive 50% of the amount recovered. S.Rep. No. 99-345, at 10. This broad provision led to abuse and in 1943, following Marcus, where the Supreme Court held that a relator could bring a qui tam action based entirely upon information contained in an indictment to which he had contributed nothing, Congress amended the statute to preclude actions " 'based on evidence or information the government had when the action was brought.' " See United States ex rel. Stinson v. Prudential Ins. Co., 944 F.2d 1149, 1153 (3d Cir.1991) (quoting 31 U.S.C. § 3730(b)(4) (1982) (superseded)). This led to claims being barred even in cases where the qui tam plaintiff supplied the information to the government before filing the claim. See United States ex rel. Wisconsin v. Dean, 729 F.2d 1100, 1106 (7th Cir.1984).

In 1986, Congress amended the Act again "to encourage any individual knowing of Government fraud to bring that information forward." S.Rep. No. 99-345, at 2 U.S.Code Cong. & Admin.News 1986, pp. 5266-5267. The effect of these amendments on the whole is to broaden the qui tam provisions. Congress wanted to reward private individuals who take significant personal risks to bring wrongdoing to light, to break conspiracies of silence among employees of malfeasors, and to encourage whistleblowing and disclosure of fraud. See id. at 14. The legislative history shows that the 1986 amendments also, however, " 'sought to resolve the tension between ... encouraging people to come forward with information and ... preventing parasitic lawsuits.' " Cooper v. Blue Cross and Blue Shield of Florida, Inc., 19 F.3d 562, 565 (11th Cir.1994) (internal citations omitted). The provision the meaning of which is at issue in this case, § 3730(e)(4), establishes a "jurisdictional" bar against certain actions:

(e) Certain actions barred--

. . . . .

(4)(A) No court shall have jurisdiction over an action under this section based...