U.S. v. Southland Management Corp.

Decision Date11 April 2002
Docket NumberNo. 00-60267.,00-60267.
Citation288 F.3d 665
PartiesUNITED STATES of America, Plaintiff-Appellant, v. SOUTHLAND MANAGEMENT CORPORATION; et al., Defendants, W. Thad McLaurin; Charles C. Taylor, Jr.; Arthur W. Doty, Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

John S. Koppel (argued), Douglas N. Letter, U.S. Dept. of Justice, Civ. Div., Appellate Staff, Washington, DC, for Plaintiff-Appellant.

Alan W. Perry (argued), Roland M. Slover, Forman, Perry, Watkins, Krutz & Tardy, Jackson, MS, for Defendants-Appellees.

Appeal from the United States District Court for the Southern District of Mississippi.

Before KING, Chief Judge, and REAVLEY and JONES, Circuit Judges.

KING, Chief Judge:

Plaintiff-Appellant the United States of America ("the Government") brought the instant action against Defendants-Appellees W. Thad McLaurin, Charles C. Taylor, Jr., and Arthur W. Doty ("the Defendants") under the civil False Claims Act ("the FCA"). The Government alleges that the Defendants, as owners of the Jackson Apartments in Jackson, Mississippi, repeatedly certified falsely to the Department of Housing and Urban Development ("HUD") that these apartments complied with the "decent, safe, and sanitary" standard established in the Defendants' contract with HUD. The district court granted summary judgment to the Defendants, finding that, under the undisputed material facts of the case, the Government could not establish the materiality element of a cause of action under the civil FCA: namely, that the false claims in question "had a natural tendency to influence" or were "capable of influencing" the decision of the governmental body to which they were addressed. The district court also found that, because HUD remitted funds to the Defendants knowing that their certifications were false, the Defendants could not have "knowingly" submitted false claims to HUD. The Government now appeals the district court's summary judgment, alleging that materiality is not a required element of a cause of action under the civil FCA and that genuine issues of material fact exist regarding whether the Defendants "knowingly" submitted false claims.

We hold that, under the law of this circuit, materiality is a required element of a cause of action under the civil FCA. However, we find that summary judgment was nonetheless inappropriate in the instant case because this court's precedents also dictate that the Defendants' false certifications of compliance with the "decent, safe, and sanitary" standard were material as a matter of law. Using the definition of materiality employed by the Supreme Court in Kungys v. United States, 485 U.S. 759, 108 S.Ct. 1537, 99 L.Ed.2d 839 (1988), which is the definition employed by the district court, we find that the Defendants' certifications had a "natural tendency to influence, or were capable of influencing" HUD's decision whether to honor their claims because receipt of these certifications was a prerequisite to HUD's remittance of funds. We also hold, in accordance with the conclusion of our sister circuits, that government payment of a false claim with knowledge of its falsity does not provide an automatic defense to liability under the FCA. Finally, we agree with the Government that there are genuine issues of material fact regarding whether the Defendants "knowingly" submitted false claims to HUD in the instant case. Accordingly, we REVERSE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

Beginning in 1980, the Defendants participated in a federally-funded program to provide housing to low-income individuals at the Jackson Apartments ("the Complex") under the oversight of HUD. During subsequent years, conditions at the Complex deteriorated. While HUD attempted to work with the Defendants over a period of approximately two years to remedy these problems, these informal remedial efforts met with increasing resistance and ultimately proved unsuccessful in improving the habitability of the Complex. In 1997 the Defendants stopped making payments on the building's mortgage debt, and HUD foreclosed on the Complex. The Government subsequently sued the Defendants, alleging that during a nineteen month period (beginning after the two-year remedial efforts had substantially deteriorated, but prior to HUD's ultimate foreclosure) the Defendants violated 31 U.S.C. § 3729(a) by falsely certifying on nineteen separate occasions that the Complex was in "decent, safe, and sanitary" condition. An explanation of HUD's low-income housing program provides a context for the relevant facts.

A. HUD's Housing Program
1. The National Housing Act and Regulatory Agreements

In enacting the National Housing Act, Pub.L. No. 73-479, 48 Stat. 1246 (1934) (codified as amended at 12 U.S.C. §§ 1701-1750g (2001)) (the "NHA"), Congress sought to increase the supply of low-income housing by creating a program that provides mortgage credit to the private sector. Under this program, HUD insures a housing project owner's mortgage so that the owner may provide low-rent housing "to assist families with incomes so low that they could not otherwise decently house themselves." 12 U.S.C. §§ 1701t, 1703 (2001). In an effort to encourage private investment, the NHA and HUD regulations also "allow[] owners to borrow money at reduced interest rates, reduce[] a borrower's equity requirements, permit[] owners to sign non-recourse notes, and, prior to the 1986 tax code changes, grant[] owners and investors generous tax benefits." Christopher Vill., Ltd. P'ship v. Retsinas, 190 F.3d 310, 312 (5th Cir.1999).1

In exchange for these benefits, the property owner and HUD execute a regulatory agreement that "give[s] HUD extensive regulatory authority over the operation and maintenance of the property." Id.; see also 12 U.S.C. § 1715l(d)(3) (requiring the owners to be "regulated or supervised ... under a regulatory agreement or otherwise, as to rents, charges, and methods of operation, in such form and in such manner as in the opinion of the Secretary [of HUD] will effectuate the purposes of this section"). The owner has many responsibilities under the regulatory agreement. For example, the regulatory agreement in the instant case requires the Defendants to "maintain the mortgaged premises, accommodations and the grounds and equipment appurtenant thereto, in good repair and condition."

2. Section 8 and "HAPs"

In 1937, Congress enacted the United States Housing Act, Pub.L. No. 75-412, 50 Stat. 889 (1937) (codified as amended at 42 U.S.C. §§ 1437 et seq. (1994 & Supp. 2001)) (the "USHA"), "to address the shortage of housing affordable to low-income families" and "to remedy the unsafe housing conditions and the acute shortage of decent and safe dwellings for low-income families." 42 U.S.C. § 1437(1) (Supp.2001). In 1974 Congress amended the USHA by adding Section 8 (codified as amended at 42 U.S.C. § 1437f (Supp. 2001)), which created a federal program to provide rental assistance for tenants of privately-owned housing.2 Id. § 1437f(a); Christopher Vill., 190 F.3d at 313. Generally, under this rent subsidy program, a low-income tenant will make rental payments based upon the tenant's income and ability to pay. See 42 U.S.C. § 1437a(a)(1) (1994 & Supp.2001). HUD then pays the property owner an amount calculated to make up the difference between the tenant's contribution and the "contract rent" agreed upon by HUD and the owner. See id. § 1437f(c)(3). These monthly payments to the owner are known as housing assistance payments, or "HAPs."

Pursuant to Section 8 and as required by the regulations governing the substantial rehabilitation program, see 24 C.F.R. § 881.501 (2001), HUD enters into Housing Assistance Payment contracts ("HAP contracts") with private owners. These contracts require the owners to agree to maintain "decent, safe and sanitary" housing in order to receive HAP payments from the government. Once such a contract is established, the owner submits to HUD a monthly Application for Housing Assistance Payments, also known as a "HAP voucher." See 24 C.F.R. § 881.501(c) (2001). Part of this application requires the owner to sign an "Owner's Certification," certifying, inter alia, that the subject property is "decent, safe, and sanitary."3 The government remits the monthly HAPs only if the owner has signed this certification. The HAP vouchers submitted by the owner also indicate, immediately above the signature line, that HUD has the right to "prosecute false claims/statements" and to seek civil penalties pursuant to § 3729 of the civil False Claims Act.

If a property does not meet the required specifications, HUD's usual practice is to require the owner to submit a detailed plan indicating how the owner will remedy the defects and to allow the owner a limited time period to fix the problems pursuant to this plan. However, under the HAP contract, if the owner fails to cooperate with HUD and correct the violations within the prescribed time, HUD may exercise any of its rights or remedies under the HAP contract, including abatement of the HAPs.

B. The Facts of the Present Suit

The Defendants were general partners of Jackson Apartments, Ltd. (the "Partnership"), a limited partnership created for the purpose of purchasing the Complex. In 1980, HUD advertised for bid proposals for properties to participate in its Section 8 "substantial rehabilitation" program. The Partnership purchased the Complex and submitted a proposal to HUD, which HUD selected. The Partnership then renovated the Complex, and the Complex opened to low-income tenants in 1981.

To fund the renovation of the Complex, the Defendants expended approximately $190,000 of their own funds, and the Partnership executed a $2.4 million note secured by a HUD-insured non-recourse mortgage. To enjoy the benefits of the low-interest,...

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