U.S. v. Ekelman & Associates, Inc.

• Decision Date: 12 March 1976
• Docket Number: Nos. 75-1123,75-1124,s. 75-1123
• Citation: 532 F.2d 545
• Parties: UNITED STATES of America, Plaintiff-Appellant and Cross-Appellee, v. EKELMAN & ASSOCIATES, INC., et al., Defendants-Appellees, and Ekelman & Associates, Inc., et al., Cross-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 545

532 F.2d 545

35 A.L.R.Fed. 794

UNITED STATES of America, Plaintiff-Appellant and Cross-Appellee, v. EKELMAN & ASSOCIATES, INC., et al., Defendants-Appellees and Ekelman & Associates, Inc., et al., Cross-Appellants.

Nos. 75-1123, 75-1124.

United States Court of Appeals Sixth Circuit.

Argued Dec. 15, 1975.

Decided March 12, 1976.

Ralph B. Guy, Jr., U. S. Atty., Fred M. Mester, Asst. U. S. Atty., Detroit, Mich., Alexander Younger, Dept. of Justice, Fraud Section-Civ. Div., Washington, D. C., William Kanter, David M. Cohen, Appellate Section, Civ. Div., Dept. of Justice, Washington, D. C., for plaintiff-appellant.

Bernard J. Fieger, Fieger, Golden & Cousens, Southfield, Mich., Morris Weller, Weller, Summer & Summer, Detroit, Mich., Sidney E. Pollick, Bonk, Pollick & Wartell, Southfield, Mich., N. C. Deday LaRene, Detroit, Mich., for defendants-appellees.

Before PHILLIPS, Chief Judge, MILLER, Circuit Judge, and MARKEY, Chief Judge. ^*

WILLIAM E. MILLER, Circuit Judge.

The United States instituted this action in district court against the defendants seeking double damages and forfeitures under the False Claims Act, 31 U.S.C. § 231 et seq. Generally, the complaint alleges that the defendants had fraudulently procured the guarantee by the Veterans Administration ("VA") of a number of loans made to veterans pursuant to Title III of the Servicemen's Readjustment Assistance Act of 1944, as amended, 38 U.S.C. § 1810 et seq., as well as the insurance by the Federal Housing Administration ("FHA") of another loan pursuant to the National Housing Act, as amended, 12 U.S.C. § 1707 et seq. Allegedly, the loans went into default causing the VA and FHA to expend funds in fulfilling the obligations which they had undertaken with respect to the loans.

The case was tried to the court without a jury, and at the close of the government's evidence as to liability, the defendants moved to dismiss. The court, treating the motion as in the nature of a motion for a directed verdict, sustained it in part and denied it in part. As to a large number of the 32 counts of the complaint, the court, in a 91-page opinion, concluded that the government had established a prima facie case against some or all of the defendants. The court also held that the six-year statute of limitations prescribed by the False Claims Act, 31 U.S.C. § 235, did not begin to run until the mortgage holder presented a claim to the government and, consequently, that the action was not barred.

Defendant Franklin Mortgage Corporation ("Franklin") then presented its evidence in support of the claim of nonliability. The government submitted evidence as to damages. Ekelman & Associates, Inc., Bernard Ekelman, Irwin Saul Ekelman ("Ekelman defendants"), Charles Fields, and Donald S. Hutchison presented no evidence.

At the conclusion of all of the evidence, the court, in a 38-page opinion, adopted the findings and conclusions of its first opinion as to the Ekelman defendants and Fields and Hutchison but concluded that the evidence was not sufficient to establish the liability of Franklin under the False Claims Act or on a common law theory of fraud and deceit. On the issue of damages, the court held that the amount of actual damages sustained by the government was the amount paid upon default to the mortgage holder by the government plus reasonable expenses and maintenance and repair costs incurred by the government in preserving the mortgaged property less credits due the defendants, such as funds realized upon ultimate disposition of the property, rental income derived from the property, and any amount recovered from the veteran-mortgagor by the government. The court concluded that the amount of actual damage should then be doubled and added to the statutory forfeiture amount and, consequently, that any credits due the defendant should be deducted before, and not after, any doubling of damages. Money damages were awarded to the government against the Ekelman defendants, Fields, and Hutchison. ¹ The government was denied any recovery from Franklin.

The government, in No. 75-1123, has appealed from the portions of the district court's judgment absolving Franklin of liability and holding that the credits due defendants should be deducted before, and not after, any doubling of damages. The Ekelman defendants and Fields, in No. 75-1124, have appealed from portions of the district court's judgment: (1) holding them liable under the False Claims Act, (2) including maintenance and repair costs in the measure of damages, and (3) holding that the action was not barred by the six-year statute of limitations.

I. No. 75-1123

The government argues that the district court erred in absolving Franklin of liability under the False Claims Act and on a common law theory of fraud and deceit because the evidence demonstrates that Franklin recklessly failed to make any effort to determine the accuracy of information it received from the Ekelman defendants and Fields, Hutchison, and others and submitted to the government under the VA and FHA loan guarantee and insurance programs.

In a case under the False Claims Act, the "gravamen" of the action is "intentional fraud and misrepresentation" which the government is required to establish by "clear, unequivocal, and convincing evidence." United States v. Ueber, 299 F.2d 310, 314 (6th Cir. 1962). Some courts have held that a specific intent to defraud the government is a necessary requisite to liability under the Act. Other courts, on the other hand, require only the knowing submission of a false claim. See United States v. Cooperative Grain and Supply Co., 476 F.2d 47, 56 (8th Cir. 1973) (cases cited). The Act itself provides:

Any person . . . who shall make or cause to be made, or present or cause to be presented, for payment or approval . . . any claim . . . knowing such claim to be false, fictitious, or fraudulent . . .. 31 U.S.C. § 231 (emphasis added).

Franklin argues that the statutory term "knowing" requires actual knowledge of falsity and not reckless disregard of the truth.

In Ueber, supra, the defendant-appellant argued that the district court had erroneously assumed that it was sufficient for liability under the Act if it was proved that the defendant should have known the falsity of the representations. In rejecting defendant-appellant's argument, this Court stated at page 314:

His conclusions of law demonstrate that, as a matter of law, he was holding it necessary that proof of defendants' actual knowledge was necessary (emphasis added).

Thus, the law of this Circuit requires a showing of actual knowledge to establish liability under the False Claims Act. This appears to be the preponderant view. See, e. g., United States v. Aerodex, Inc., 469 F.2d 1003 (5th Cir. 1972); United States v. Mead, 426 F.2d 118 (9th Cir. 1970); Eastern School v. United States, 381 F.2d 421, 180 Ct.Cl. 676 (1967). But see United States v. Cooperative Grain and Supply Co., 476 F.2d 47 (8th Cir. 1973).

The district court found as a fact that there was no actual knowledge on the part of Franklin that any information submitted by it to the government was false or fraudulent. As we hold that the district court's finding on this point is not clearly erroneous, the government has not established liability on the part of Franklin under the False Claims Act.

The government, however, insists that Franklin had a duty under the statute establishing the VA loan guarantee program to verify the accuracy of the information which passed through its hands from the veterans and the defendant real estate brokers (Ekelman defendants, Fields and Hutchison) to the VA and FHA and that breach of this duty is sufficient to establish Franklin's liability under the False Claims Act.

The district court found that Franklin was a "non-supervised" lender as opposed to a "supervised" lender. Supervised lenders are banks, savings and loan associations, insurance companies, and similar organizations subject to the supervision of a federal or state agency. The supervised lender may make loans which are automatically guaranteed without the prior approval of the VA. Non-supervised lenders, on the other hand, must submit a detailed package to the VA, which the VA reviews before agreeing to guarantee the loan. ² The government asserts that a non- supervised lender, such as Franklin, should be held liable under the False Claims Act for failing to verify information, subsequently determined to be false, which it certified was "true to the best of (its) knowledge and belief." We agree with the Fifth Circuit's rejection of this position in United States v. DeWitt, 265 F.2d 393, cert. denied, 361 U.S. 866, 80 S.Ct. 121, 4 L.Ed.2d 105 (1959). In DeWitt, a real estate dealer falsely represented to Mortgage Investment Company, a non-supervised lender, that veterans-mortgagors intended to occupy the mortgaged homes in question. In affirming the granting of summary judgment for the lender, the court stated at page 400:

As it is admitted that Lender did nothing but make the loans on what it thought was a valid transaction and had no knowledge, actual or constructive, that the veteran no longer intended to occupy the house as his home, the Lender's action was not within the False Claims Act. Neither this Act nor the Acts of Congress providing for loan guaranties were intended under circumstances such as these to impose on such lenders the burdens which the contrary result would bring about. See also 38 U.S.C.A. § 694k.

Cf. Mount Vernon Cooperative Bank v. Gleason, 367 F.2d 289 (1st Cir. 1966) (bank a supervised lender). The imposition of such burdens on non-supervised lenders, such as Franklin, could well induce them to terminate their participation in the VA and FHA guaranty programs to the detriment of veterans and other persons for whose benefit the programs were intended.

As to the government's contention that Franklin recklessly failed to verify the information submitted to...