Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 75-501).
Gibbons and Weis, Circuit Judges and H. Curtis Meanor, District Judge.*fn* Meanor, District Judge, dissenting.
Justice Holmes once commented that those who do business with government should turn square corners. This appeal is by one who disregarded that warning but now asks that the government be required to treat him squarely in an action under the False Claims Act. Though, such an argument might seem incongruous to some, Congress, we believe, intended to be fair in determining what damages the United States may recover under the Act. We conclude that a causal connection must be shown between loss and fraudulent conduct and that a broad "but for" test is not in compliance with the statute. We therefore vacate a judgment entered by a district court, a contre coeur.
Defendant Hibbs was a real estate broker who submitted certifications to the Federal Housing Administration misrepresenting the condition of certain residential properties. That agency then insured mortgages on the homes and was later required to pay the mortgages when defaults occurred. The government recovered a judgment in a bench trial for the amount of statutory forfeitures and double the amount of damages alleged. The defendant appeals from the assessment of damages, but does not contest the forfeiture awards.
The facts are not in dispute. In 1969 and 1970 Hibbs procured and filed certificates stating that the plumbing, electrical and heating systems of six houses in Philadelphia met the standards and conditions prescribed by Housing and Urban Development regulations. In fact, there were deficiencies which would have required a total of approximately $3,485 to repair. Being unaware of these facts, the FHA insured mortgages secured by the six houses. In time all six mortgagors defaulted and the FHA was required to pay $59,904.21 to honor its mortgage insurance commitment.*fn1
The district court found that the United States was entitled to a statutory forfeiture of $2,000 for each of the six properties. In addition, the government recovered double damages for its payments to the mortgagee covering such items as unpaid principal, taxes, insurance premiums, preservation and maintenance expense, attorney's fees and other foreclosure costs, amounting to $119,808.42, thus making the total judgment $131,808.42.
The district judge determined that the defaults were caused either by the mortgagors' changed financial circumstances or irresponsibility, and that there was no causal connection between the false certifications and the defaults.*fn2 Moreover, after the mortgages were insured, an injunction was issued against the use of lead-based paint in Philadelphia residences. See City-Wide Coalition Against Lead Paint v. Philadelphia Housing Authority, 356 F. Supp. 123 (E.D. Pa. 1973). This resulted in the houses becoming almost worthless on foreclosure and was an additional factor increasing the government's loss. The lead paint prohibition was in no way related to the certifications which the defendant had submitted. The district judge, feeling compelled by precedent, reached his result reluctantly and characterized it as "harsh indeed," United States v. Hibbs, 420 F. Supp. 1365, 1373 (E.D. Pa. 1976).
The False Claims Act was enacted during the Civil War and was aimed principally at stopping the massive frauds perpetrated by contractors supplying goods and services for the war effort. There is little help in the way of legislative history and there are few cases interpreting the statute's broad language. The Act is found in Rev.Stat. § 3490*fn3 and in pertinent part reads:
"Any person . . . who shall do or commit any of the acts prohibited . . . shall forfeit and pay to the United States the sum of two thousand dollars, and, in addition, double the amount of damages which the United States may have sustained by reason of the doing or committing such act . . . ."
The acts referred to are contained in Rev. Stat. § 5438, a lengthy section which provides in pertinent part:
"Every person who makes or causes to be made, or presents or causes to be presented, for payment or approval, to . . . the United States, any claim upon or against the Government . . . knowing such claim to be false, fictitious, or fraudulent, or who, for the purpose of obtaining or aiding to obtain the payment or approval of such claim, makes, uses, or causes to be made or used, any false . . . certificate . . . shall be . . . fined . . . ."*fn4
To recover damages here, the United States must show ...