United States v. Robert S. Luce

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 16-4093

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

ROBERT S. LUCE,

Defendant-Appellant.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 1:11-cv-05158 — John J. Tharp, Jr., Judge.

____________________

ARGUED MAY 30, 2017 — DECIDED OCTOBER 23, 2017

____________________

Before WOOD, Chief Judge, and RIPPLE and ROVNER, Circuit

Judges.

RIPPLE, Circuit Judge. The Fair Housing Act (“FHA”) was

enacted in order to increase home ownership. In service of

this goal, the Department of Housing and Urban Develop-

ment (“HUD”), which is statutorily tasked with implement-

ing the FHA, offers insurance to certain mortgage lenders in

order to decrease the risk borne by private industry and thus

encourage lending. HUD maintains the viability of this

2 No. 16-4093

scheme through a number of measures. One such measure

prohibits individuals with criminal records from owning, or

being employed by, a mortgage company.

The United States brought this action against Robert Luce

under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq.,

and the Financial Institutions Reform, Recovery, and Enforce-

ment Act (“FIRREA”), 12 U.S.C. § 1833a. It alleged that

Mr. Luce had defrauded the Government by falsely asserting

that he had no criminal history so that his company could par-

ticipate in the FHA’s insurance program. The district court

1

granted summary judgment in favor of the Government.

Mr. Luce now submits that his false certifications were not

material and that lingering issues of material fact preclude

summary judgment. Furthermore, Mr. Luce urges that the Su-

preme Court’s decision in Universal Health Services, Inc. v.

United States ex rel. Escobar, 136 S. Ct. 1989 (2016) (“Escobar”),

requires that we depart from our traditional “but-for” FCA

causation standard. Although we conclude that Mr. Luce’s

first two submissions are not persuasive, we believe that there

is merit to Mr. Luce’s view on causation. Escobar did not over-

rule explicitly our circuit precedent, which requires “but-for”

rather than proximate causation. Nonetheless, it does provide

significant guidance and deserves our respectful and careful

consideration, especially when all other circuits to address the

issue have chosen a path different from our own.

Accepting Escobar as a catalyst, we have reviewed the prin-

ciples of common-law fraud, the FCA’s statutory language,

and the rationale of our sister circuits; we now join those

1The district court had jurisdiction pursuant to 31 U.S.C. § 3732 and 28

U.S.C. § 1345. Our jurisdiction is premised on 28 U.S.C. § 1291.

No. 16-4093 3

courts in holding that proximate cause is the appropriate test.

Accordingly, the judgment of the district court as to causation

is reversed, and the case is remanded to afford the parties an

opportunity to address the merits under the proximate cause

standard.

I

BACKGROUND

A.

One of the objectives of the FHA is to insure participating

lenders against losses incurred in the home mortgage market.

To qualify for FHA insurance, a loan must be made and held

by an approved mortgagee. One type of covered lender, or

mortgagee, is a “loan correspondent.” “A loan correspondent

is an entity that has as its principal activity the origination of

2

mortgages for sale or transfer to other mortgagees.” Loan

correspondents may apply for mortgage insurance, but can-

3

not “hold, purchase, or service insured mortgages.” Rather,

they are tasked primarily with soliciting the mortgagor and

verifying employment information, earnings, and assets. In

short, a loan correspondent “originate[s] and verif[ies] the in-

4

itial information on an FHA loan.”

2 Gov’t’s Br. 5 (emphasis added) (citing 24 C.F.R. § 202.8(a)(2)(2009)). We

recognize that some loan correspondents have more expansive roles (e.g.,

direct endorsement authority), but we do not outline those responsibilities

because they are not implicated by this appeal.

3 Id. (citing 24 C.F.R. § 202.8(a)(2)(2009)).

4 R.92-3 at 4 (Geary Dep. 27).

4 No. 16-4093

In order to maintain the integrity of the insurance scheme,

mortgagees are required to submit a Yearly Verification Re-

port (“V-form”) as part of an annual recertification procedure.

During the relevant period, the V-forms read as follows:

I certify that none of the principals, owners, of-

ficers, directors, and/or employees of the above

named mortgagee are currently involved in a pro-

ceeding and/or investigation that could result, or has

resulted in a criminal conviction, debarment, lim-

ited denial of participation, suspension, or civil

money penalty by a federal, state, or local gov-

ernment.[5]

The annual submission of this verification is required for con-

tinued program participation. Mortgagees are additionally

required to file a 92900-A form with each loan; that form con-

6

tains a similar criminal history verification.

5 R.88-7 at 36 (emphasis added) (capitalization removed).

6 The 92900-A forms contained the following certification:

[T]he undersigned lender makes the following Certifica-

tions to induce … the Department of Housing and Urban

Development-Federal Housing Commissioner to issue a

firm commitment for mortgage insurance or a Mortgage

Insurance Certificate under the National Housing Act ….

G. To the best of my knowledge and belief, I and my firm

and its principals: … are not presently indicted or other-

wise criminally or civilly charged by a governmental en-

tity (Federal, State or local) with commission of any of the

offenses enumerated in paragraph G(2) of this certifica-

tion ….

No. 16-4093 5

B.

Mr. Luce is an attorney who has been employed at various

times by the Securities and Exchange Commission and a se-

ries of Chicago law firms. Most recently, he was president and

owner of his own mortgage company, MDR. Although he

owned MDR, he “was not involved in the day-to-day opera-

tion of MDR”; rather, he “performed only high-level corpo-

7

rate work on behalf of” the firm.

MDR was a loan correspondent and therefore could origi-

nate loans by sending loan applications to a HUD-approved,

direct-endorsement mortgagee for underwriting approval

prior to closing. The process proceeded roughly as follows:

18. MDR loan officers would first talk to po-

tential borrowers to find out what kind of rate

they wanted and to learn about the property

they wanted to finance. Once the potential bor-

rower decided on the type of mortgage they

[sic] wanted, the loan officer would let them

[sic] know the rate which MDR would get daily

from lenders. The loan officer would then set up

an appointment with the borrower, get their

w2s, pay stubs, home insurance, lender state-

ment and the necessary documents to process

the loan. The loan officer would then complete

a loan application … and when the packet was

R.87 (Gov’t’s Rule 56.1 Statement of Material Fact) at 8–9 (alteration in

original) (internal quotation marks omitted). Paragraph (G)(2) includes

the offense of making false statements. Id. at 9.

7 R.92-10 at 2 (Luce Aff.).

6 No. 16-4093

complete, the loan officer would give it to the

loan processing department at MDR.

19. The processing department would re-

view the package to make sure all the right doc-

uments were in it to send to the lender. … Once

the loan applications and other documents …

were complete, and the loan file was approved

by MDR’s processing department, the loan ap-

plication would be sent to a lender for under-

writing.

20. After the loan package was sent to the

lender, MDR would get approval from the un-

derwriter. If the lender needed more infor-

mation, the package would be sent back to the

processing department at MDR to gather the in-

formation from the loan officer.[8]

For its involvement, MDR received a nominal processing fee

of $450 and a commission.

In April 2005, Mr. Luce was indicted in an unrelated matter

for wire fraud, mail fraud, making false statements, and ob-

struction of justice. Following his indictment, Mr. Luce in-

formed James Passi, his son-in-law and MDR Vice President,

of the criminal charges. Nonetheless, MDR continued to state

on its V-forms and 92900-A forms that its officers were not

currently subject to criminal proceedings. Mr. Luce signed the

V-forms; his subordinates signed the 92900-A forms.

Almost three years after Mr. Luce’s indictment, in early

February 2008, Passi provided information related to the

8 R.87 at 5–6 (internal citations omitted); R.99 at 9–10.

No. 16-4093 7

pending criminal charges to HUD’s Office of Inspector Gen-

eral. A brief investigation ensued, and, on February 25, 2008,

9

the investigator issued a Referral for Suspension/Debarment.

In July 2008, Mr. Luce pleaded guilty to obstruction of jus-

tice in the separate criminal proceeding. On or about August

8, 2008, Mr. Luce amended his V-forms to reflect the criminal

indictment. Thereafter, Mr. Luce was debarred, and MDR

went out of business. During the period between Mr. Luce’s

April 2005 indictment and the August 2008 V-form amend-

ments, MDR originated 2,500 loans. Approximately 250 of

those loans are now in default; 95% of the defaulted loans

were refinances of existing loans previously insured by the

FHA.

C.

The United States brought suit against Mr. Luce in July

2011, seeking treble damages and civil penalties under the

FCA and the FIRREA. Counts one and two of the complaint

alleged violations of the FCA by either submitting false claims

or “using a false record or statement to get a false claim

10

paid.” Count three of the complaint alleged that Mr. Luce

was subject to civil penalties under the FIRREA because he

9 A debarment sanction is imposed for criminal or serious HUD program

violations; the sanction excludes an individual, organization and its affili-

ates from conducting business with any federal agency. See Debarments,

HUD.GOV, https://www.hud.gov/program_offices/enforcement/debar-

ments (last visited Oct. 2, 2017).

10 R.1 at 9–10 (capitalization removed).

8 No. 16-4093

had “unlawfully, willfully and knowingly made, used, or

caused to be made or used, false and fraudulent records, state-

ments, or certifications to HUD” in violation of 18 U.S.C.

§ 1006, one of the predicate offenses identified in the FIRREA,

11

12 U.S.C. § 1833a. At bottom, the complaint alleged that

Mr. Luce personally lied on the V-forms and that his subordi-

12

nates lied on the 92900-A forms in order to participate fraud-

ulently in the HUD insurance scheme.

Both parties eventually moved for summary judgment on

liability, and, on September 30, 2015, the district court ruled

on those motions, finding Mr. Luce liable for the false certifi-

cations on the 2006, 2007, and 2008 V-forms. In so doing, it

noted that “[t]he FCA provides liability for any person who

‘(A) knowingly presents … a false or fraudulent claim for pay-

ment or approval; [or] (B) knowingly makes, uses, or causes

to be made or used, a false record or statement material to a

13

false or fraudulent claim.’” The court held that there was no

question as to Mr. Luce’s liability for the false certifications on

the relevant V-forms because he had signed those documents

while aware of his pending criminal charges. The district

court also held that the false certifications on the V-forms

were material as a matter of law “[b]ecause the certification

on the V-forms constituted fraud in fulfilling a prerequisite to

14

receiving government funds.”

11 Id. at 11.

12 The 92900-A forms are not at issue in this appeal. See infra note 20.

13 R.113 at 8 (third alteration in original) (quoting 31 U.S.C. § 3729(a)(1)).

14 Id. at 21.

No. 16-4093 9

Finally, the court noted that FIRREA liability requires “a

false statement made by ‘an officer, agent or employee of or

connected in any capacity with’ HUD, with intent to defraud

15

or deceive HUD.” The court had no trouble determining

that, because he had signed the V-forms while aware of his

criminal status, “Luce knowingly made false statements on

16

the V-forms with the intent to deceive HUD.” Accordingly,

“[b]ecause no reasonable jury could find for Luce on the

FIRREA claims relating to the V-forms in 2006, 2007 and

2008,” the district court also granted summary judgment “to

the government on the FIRREA claims for the V-forms from

17

2006–2008.”

The district court declined to impose liability for the

92900-A forms because “the government’s evidence [wa]s far

too thin to command a conclusion that Luce knew about the

18

requirement to file forms 92900-A.” Rather, the court con-

cluded that “[w]hether Luce had actual knowledge or was

recklessly or deliberately indifferent to the existence of the

92900-A forms is a credibility determination for a jury that

precludes a finding of summary judgment for either party on

19

the 92900-A forms.” The district court also held that issues

of fact precluded summary judgment on the FIRREA claim

related to the 92900-A forms.

15 Id. at 22 (quoting 18 U.S.C. § 1006).

16 Id. at 23.

17 Id.

18 Id. at 11.

19 Id. at 12.

10 No. 16-4093

Following its entry of summary judgment in favor of the

Government on the FCA and FIRREA claims related to the

V-forms, the court held a status hearing. During that hearing,

the parties discussed the necessity of a trial:

MR. SHAPIRO: I believe we’re going to trial,

Judge. We tried to work some stuff out but it

hasn’t been worked out yet. I will continue to

try and work it out with the government short

of it, but I think the government would like to

set a trial date today.

THE COURT: Okay. And so we’re only talk-

ing now about the 2005 claims based on the

92-900A [sic] forms, correct?

MS. NORTH [for the Government]: Your

Honor, actually we’re not. We’ll go to trial and

not pursue the 2005 claims and go forward on dam-

ages and penalties for what has been decided on sum-

mary judgment.[20]

20 R.156-1 at 2 (emphasis added). Contrary to the Government’s present

stance, see Gov’t’s Br. 10 n.4, it expressly abandoned any FCA claims based

on the 92900-A forms in these representations to the district court. After

the status hearing, all parties proceeded on the basis that liability on all

claims had been settled and the only issue before the court was damages.

Indeed, in its supplemental briefing on Universal Health Services, Inc. v.

United States ex rel. Escobar, 136 S. Ct. 1989 (2016), see infra at 12, the Gov-

ernment stated: “The court’s opinion and ruling as to liability in its prior

decisions is consistent with the holding in Escobar.” R.136 at 1 (emphasis

added).

No. 16-4093 11

After further discussion, the court expressed some doubt

that there was a factual dispute concerning damages. It there-

fore decided to allow the Government to submit a summary

judgment motion directed to the issue of damages to deter-

mine if there was a genuine issue of material fact with respect

21

to “the dollar figures” before it empaneled a jury.

In its motion for summary judgment on damages, the Gov-

ernment argued that it was entitled to “FCA damages of

$111,195,477 because that amount is equal to three times

HUD’s net loss on the 237 loans that Luce’s MDR Mortgage

22

Corporation originated between the relevant dates.”

Mr. Luce opposed summary judgment on various grounds,

including that the Government was required to establish “the

foreseeability of the damages it claims” and that “[a] reason-

able jury could conclude that it was not foreseeable … that he

Moreover, following the court’s disposition of the Government’s mo-

tion for summary judgment on damages, the court entered a final judg-

ment. See R.143; see also infra at 13. Had there been any lingering claims for

the court’s consideration, it could not have issued a final judgment as to

any claims unless it “expressly determine[d] that there [wa]s no just reason

for delay.” Fed. R. Civ. P. 54(b). The district court made no such finding.

Instead, both it—and the parties—proceeded in a manner consistent with

the fact that the district court definitively had decided all outstanding

claims before it.

The Government’s present position is particularly untenable given its

jurisdictional statement. In it, the Government stated that the district

court’s November 23, 2016 order was a final judgment on the merits

providing grounds for this court’s appellate jurisdiction. See Gov’t’s Br. 2.

21 R.156-1 at 5.

22 R.123 at 1.

12 No. 16-4093

would be responsible for future borrower defaults on 237

23

loans because of his misrepresentations on the V forms.”

Before the district court had the opportunity to rule on the

Government’s motion for summary judgment on damages,

the Supreme Court issued its opinion in Escobar, which di-

rectly addressed the question of materiality in FCA cases. The

district court therefore ordered additional briefing on “the

24

Court’s ruling as to liability.” In response, Mr. Luce con-

tended that his V-form certifications were not material under

Escobar. He further argued that Escobar’s instruction to apply

common-law fraud principles required the application of

proximate, rather than but-for, causation.

On November 23, 2016, the district court addressed both

Escobar and the Government’s motion for summary judgment

on the question of damages. The court, this time applying the

heightened materiality standard articulated in Escobar, again

found material Mr. Luce’s false certifications. The district

court also rejected Mr. Luce’s argument that Escobar impliedly

overruled our precedent applying but-for causation and in-

stead required proximate causation in FCA cases. It accord-

ingly found that Mr. Luce’s false V-form certifications were

the but-for cause of the loss and awarded $10,357,497.69 in

25

damages. “Because Luce would be unable to pay any

23 R.128 at 4, 6 (emphasis removed).

24 R.132 (Minute Entry).

25 The district court calculated that number as follows:

The loss for the 226 refinanced loans is the difference be-

tween the amount the FHA guaranteed on the original

No. 16-4093 13

amount (on top of the damages and penalty imposed under

the FCA), the Court assesse[d] a penalty of zero on the

26

FIRREA violations.” A final judgment was entered on No-

27

vember 23, 2016.

II

DISCUSSION

We review the district court’s grant of summary judgment

de novo. Cent. States, Se. & Sw. Areas Pension Fund v. Fulkerson,

238 F.3d 891, 894 (7th Cir. 2001). Summary judgment is appro-

priate when, construing the record in the light most favorable

to the nonmoving party, Canen v. Chapman, 847 F.3d 407, 412

(7th Cir. 2017), there is no genuine issue as to any material fact

and the moving party is entitled to judgment as a matter of

law, Blasius v. Angel Auto., Inc., 839 F.3d 639, 644 (7th Cir.

2016). However, we are “not required to draw every conceiv-

able inference from the record” in favor of the nonmoving

party, but “only those inferences that are reasonable.”

Schwartz v. State Farm Mut. Auto. Ins. Co., 174 F.3d 875, 878 (7th

loans and the amount guaranteed upon MDR’s refinanc-

ing of those loans. For the 11 new loans, the damages are

the government’s net losses. … The total loss amount for

the 237 loans is $3,452,499.23. Trebling the damages, as

required per the FCA, Luce is liable for $10,357,497.69 in

damages.

R.142 at 8–9 (internal citations omitted). The court also imposed a penalty

of $16,500 for the FCA violations. See id. at 12.

26 Id. at 11.

27 See R.143.

14 No. 16-4093

Cir. 1999) (quoting Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d

232, 236 (7th Cir. 1991)).

A.

We turn first to Mr. Luce’s contention that his false V-form

certifications were not material under Escobar.

1.

In Escobar, a young woman died after she received mental

health treatment by unlicensed and unsupervised caregivers

at a clinic operated by one of Universal Health Services’ sub-

sidiaries. When submitting reimbursement claims to Medi-

caid, however, the clinic had used payment codes that corre-

sponded to services provided by licensed professionals. The

deceased’s parents later sued Universal Health Services un-

der an “implied false certification theory of liability,” Escobar,

136 S. Ct. at 1997; specifically, the Escobars claimed that the

clinic “misrepresented its compliance with mental health fa-

cility requirements that are so central to the provision of men-

tal health counseling that the Medicaid program would not

have paid the[] claims had it known of these violations,” id. at

2004.

The district court dismissed the complaint on the ground

that none of the regulations that the clinic allegedly violated

was a condition of payment. The First Circuit reversed in part

and remanded. It reasoned that, “[t]o determine whether a

claim is ‘false or fraudulent’ based on such implicit commu-

nications, … it ‘asks simply whether the defendant, in submit-

ting a claim for reimbursement, knowingly misrepresented

No. 16-4093 15

compliance with a material precondition of payment.’” Id. at

1998 (quoting United States ex rel. Escobar v. Universal Health

Servs., 780 F.3d 504, 512 (1st Cir. 2015)). According to the First

Circuit, “the regulations themselves ‘constitute[d] dispositive

evidence of materiality,’ because they identified adequate su-

pervision as an ‘express and absolute’ condition of payment

and ‘repeated[ly] reference[d]’ supervision.” Id. (alterations in

original) (quoting United States ex rel. Escobar, 780 F.3d at 514)).

The Supreme Court vacated and remanded. Initially, it

agreed with the First Circuit that a plaintiff could recover un-

der the FCA on the basis of an “implied false certification”:

“liability can attach when the defendant submits a claim for

payment that makes specific representations about the goods

or services provided, but knowingly fails to disclose the de-

fendant’s noncompliance with a statutory, regulatory, or con-

tractual requirement.” Id. at 1995. The Court observed that

Congress had not defined “false” or “fraudulent” for purpose

of the FCA. Nevertheless, the Court continued, “[i]t is a set-

tled principle of interpretation that, absent other indication,

Congress intends to incorporate the well-settled meaning of

the common-law terms it uses.” Id. at 1999 (quoting Sekhar v.

United States, 133 S. Ct. 2720, 2724 (2013)) (alteration in origi-

nal). “Because common-law fraud has long encompassed cer-

tain misrepresentations by omission, ‘false or fraudulent

claims’ include more than just claims containing express

falsehoods.” Id.

Turning to the type of omission that could trigger liability,

the Court rejected Universal Health Services’ argument that

the nondisclosure had to involve program requirements that

were “expressly designated as conditions of payment.” Id. at

1996. “What matters is not the label the Government attaches

16 No. 16-4093

to a requirement, but whether the defendant knowingly vio-

lated a requirement that the defendant knows is material to the

Government’s payment decision.” Id. (emphasis added). The

Court explained that the “term ‘material’ means having a nat-

ural tendency to influence, or be capable of influencing, the

payment or receipt of money or property” and had “common-

law antecedents.” Id. at 2002 (quoting Neder v. United States,

527 U.S. 1, 16 (1999)). Regardless of its origin, however,

“[u]nder any understanding of the concept, materiality

‘look[s] to the effect on the likely or actual behavior of the re-

cipient of the alleged misrepresentation.’” Id. at 2002 (quoting

26 Richard A. Lord, Williston on Contracts § 69:12 (4th ed.

2003)) (second alteration in original).

Given this “demanding” standard, id. at 2003, the Court

concluded that the label attached to a payment requirement

“is relevant to but not dispositive of the materiality inquiry,”

id. at 2001. Instead, the Court explained that proof of materi-

ality includes, but is not limited to, “evidence that the defend-

ant knows that the Government consistently refuses to pay

claims in the mine run of cases based on noncompliance with

the particular statutory, regulatory, or contractual require-

ment.” Id. at 2003. However,

if the Government pays a particular claim in full

despite its actual knowledge that certain re-

quirements were violated, that is very strong

evidence that those requirements are not mate-

rial. Or, if the Government regularly pays a par-

ticular type of claim in full despite actual

knowledge that certain requirements were vio-

lated, and has signaled no change in position,

No. 16-4093 17

that is strong evidence that the requirements are

not material.

Id. at 2003–04. Because the Court’s interpretation of the statu-

tory requirements differed from that applied by the First Cir-

cuit, it vacated the First Circuit’s decision and remanded for

further proceedings.

2.

With this understanding of Escobar, we consider whether

Mr. Luce’s misrepresentations on the V-forms meet the mate-

riality standard.

Here, 24 C.F.R. § 202.5(j)(2) affirmatively prohibits program

participation by loan correspondents who have had a principal

“indicted for, or … convicted of, an offense” bearing on the

loan correspondent’s integrity. To enforce this prohibition,

HUD requires an annual certification of compliance with this

requirement so that the loan originator can continue its busi-

ness relationship with the Government. The certification on

the V-form concerns an “eligibility requirement” that flatly

prohibits the Government from doing business with individ-

uals who have a criminal record.

HUD’s action upon learning of Mr. Luce’s indictment and

false certifications confirms the centrality of this requirement:

It instituted debarment proceedings to end Mr. Luce’s partic-

ipation in the program. It did not simply refuse payment in

one instance, but terminated its relationship with the loan

18 No. 16-4093

28

originator so that no future payments could be made. At bot-

tom, the false V-form certifications simply were not “minor or

insubstantial” violations. Id. at 2003. Rather, they were lies

that addressed a foundational part of the Government’s mort-

gage insurance regime, which was designed to avoid the sys-

temic risk posed by unscrupulous loan originators. Mr. Luce,

as an attorney with significant experience with the Securities

and Exchange Commission, certainly understood this reality,

further suggesting a finding of materiality. See id. at 2002–03

(explaining that subjective knowledge of the importance at-

tached to the representation by the recipient may serve as the

foundation of materiality).

3.

Mr. Luce attempts to attack this conclusion by contending

that the district court disregarded “evidence that would allow

28 Indeed, the Court made this point in rejecting Universal Health Ser-

vices’ argument that liability should be premised only when a condition

of payment is at issue:

And forcing the Government to expressly designate a

provision as a condition of payment would create further

arbitrariness. Under Universal Health’s view, misrepre-

senting compliance with a requirement that the Govern-

ment expressly identified as a condition of payment could

expose a defendant to liability. Yet, under this theory,

misrepresenting compliance with a condition of eligibil-

ity to even participate in a federal program when submit-

ting a claim would not.

Escobar, 136 S. Ct. at 2002.

No. 16-4093 19

a reasonable jury to conclude that the V-Forms were not ma-

29

terial,” including:

(1) the Government’s approval of insurance on

new loans originated by MDR after learning of

the V-Forms and Mr. Luce’s pending charges;

(2) allowing MDR to continue operating as a

loan correspondent for two years (2005 and

2006) when no V-Forms were on file; (3) the fact

that the V-Forms were not considered when

making the decision to insure any specific loan;

and (4) HUD’s decision to stop regulating loan

correspondents entirely.[30]

We cannot agree.

First, the Government’s actions following its discovery of

his fraud support, rather than undercut, a finding of materi-

ality. Although new loans were issued, the Government also

29 Appellant’s Br. 15. Mr. Luce also continues to argue that he did not

knowingly make a false statement. According to Mr. Luce, the district

court “improperly [found] scienter proven as a matter of law by making

credibility determinations about Mr. Luce’s testimony.” Id. at 16. Specifi-

cally, he makes a linguistic argument that, because the V-form certifica-

tions only speak to “a proceeding … that could result … in a criminal con-

viction,” R.88-7 at 36, and he believed himself to be innocent, he did not

knowingly make a false statement. Reply Br. 22–24. We cannot accept this

submission. The V-forms ask whether Mr. Luce could be convicted, not

whether he should or would be convicted. Furthermore, even if Mr. Luce

subjectively believed himself to be innocent, the FCA’s knowledge re-

quirement is met by “deliberate ignorance” or “reckless disregard” of the

truth. 31 U.S.C. § 3729 (b)(1)(ii)–(iii). Both are present here.

30 Appellant’s Br. 15.

20 No. 16-4093

began debarment proceedings, culminating in actual debar-

ment. There was no prolonged period of acquiescence.

Second, Mr. Luce’s contention that HUD allowed MDR to

operate without V-forms for two years is simply not sup-

ported by the evidence. Although the V-form for 2006 could

not be located, the Government submitted undisputed evi-

dence that, had MDR failed to submit the V-form, HUD

31

would have terminated MDR’s FHA-approval.

31 See R.100-1 at 17 (Second Declaration of Julie Shaffer, Director of HUD’s

Philadelphia Home Ownership Center). Mr. Luce also maintains that the

Government failed to establish that he signed and submitted a 2006

V-form. See Appellant’s Br. 16. We disagree. “The standard for summary

judgment is well established: with the court drawing all inferences in the

light most favorable to the non-moving party, the moving party must dis-

charge its burden of showing that there are no genuine issues of material

fact and that he is entitled to judgment as a matter of law.” Spierer v.

Rossman, 798 F.3d 502, 507 (7th Cir. 2015). Thereafter, “[i]f the moving

party has properly supported his motion, the burden shifts to the non-

moving party to come forward with specific facts showing that there is a

genuine issue for trial.” Id.

Here, the Government moved for summary judgment, arguing that

Mr. Luce filed a 2006 V-form. The Government could not locate the form,

so it introduced (1) evidence that MDR had paid an associated registration

fee in 2006, in addition to (2) the declaration of Director Shaffer, who

stated that the 2006 form must have been received “because HUD would

have terminated MDR’s FHA-approval had it not submitted the V-form.”

R.100-1 at 17. This shifted the burden of production to Mr. Luce.

In support of his burden, Mr. Luce submits that (1) the Government

has failed to locate the actual V-form, (2) a Government witness did not

recall seeing a V-form in 2006, and (3) Passi was in charge of day-to-day

operations at MDR during the relevant time period, so he may have signed

the form. See Reply Br. 24. Addressing these arguments in order, the first

does not sufficiently counter the Government’s production of payment

No. 16-4093 21

Third, Mr. Luce’s argument that the certification was not

tied to any particular loan misses the mark; the V-form certifi-

cation was a threshold eligibility requirement that, by exten-

sion, was tied to every loan. That is to say, without the V-form,

he could not have originated a single mortgage.

Finally, the contention that HUD stopped regulating loan

correspondents in 2010 is simply inaccurate. Rather, the 2010

amendments required that loan correspondents seek a spon-

sorship relationship with approved mortgagees, who in turn

records and the affidavit of Director Schaffer; rather, it simply states the

Government has failed to meet its burden, which is insufficient. See Szy-

manski v. Rite-Way Lawn Maint. Co., 231 F.3d 360, 364 (7th Cir. 2000) (“[A]

party will be successful in opposing summary judgment only when they

present definite, competent evidence to rebut the motion.” (quoting Smith

v. Severn, 129 F.3d 419, 427 (7th Cir. 1997)) (alteration in original)). As to

the second argument, the fact that a Government witness did not recall

seeing the form is tangential to the actual question—whether the form, in

fact, was submitted.

Finally, as to the possibility that someone else signed the form, this

argument is countered by the submission of the 2003, 2004, 2007, and 2008

forms, which all carried Mr. Luce’s signature. We have emphasized that a

party “cannot thwart summary judgment by asking a court to make infer-

ences based on flights of fancy.” Kodish v. Oakbrook Terrace Fire Prot. Dist.,

604 F.3d 490, 508 (7th Cir. 2010). It is difficult to see how Mr. Luce’s argu-

ment that Passi may have signed the 2006 V-form is anything other than a

“flight[] of fancy” given that all of the other V-forms in the record con-

tained Mr. Luce’s signature and given that Mr. Luce refused to testify that

he did not sign a 2006 V-form. Notably, Passi (the very individual

Mr. Luce contends committed fraud by signing the 2006 V-form) volun-

tarily alerted the authorities to MDR’s fraud. The district court accord-

ingly was correct in granting summary judgment as to the 2006 V-form.

22 No. 16-4093

32

assume responsibility for the loan correspondents. This

structural shift in no way suggests that the actions of loan cor-

respondents are not material; if anything, it demonstrates that

their actions are of sufficient import that further supervision

by an intermediary is required.

The district court did not err in finding that Mr. Luce’s

false certification on the V-form was material as a matter of

law.

B.

Having approved the district court’s finding of materiality

under Escobar, we now turn to the issue at the heart of this

appeal: whether Escobar requires that we depart from our tra-

ditional causation test for FCA cases. Twenty-five years ago,

our court created a conflict among the circuits by holding in

32 Federal Housing Administration: Continuation of FHA Reform;

Strengthening Risk Management Through Responsible FHA-Approved

Lenders, 75 Fed. Reg. 20,717 (Apr. 20, 2010) (to be codified at 24 C.F.R. pt.

202). In particular, the Government explained that,

Loan correspondents will no longer be approved partici-

pants in FHA programs. Loan correspondents, however,

will continue to have the opportunity to participate in

FHA programs as third-party originators (TPOs) through

sponsorship by FHA-approved mortgagees, as is cur-

rently the case, or through application to be approved as

an FHA-approved mortgagee. In eliminating FHA’s ap-

proval of loan correspondents, FHA-approved mortga-

gees assume full responsibility to ensure that a sponsored

loan correspondent adheres to FHA’s loan origination

and processing requirements.

Id. at 20,718.

No. 16-4093 23

United States v. First National Bank of Cicero, 957 F.2d 1362 (7th

Cir. 1992) (“Cicero”), that the FCA requires a “but-for” causa-

tion test rather than a proximate causation test. In Cicero, a

bank forwarded a guaranteed loan application to the Small

Business Administration (“SBA”); the application contained

many falsehoods. When the loan was not repaid, the bank

sought, and received, reimbursement on the guarantee from

the SBA. The United States later sought to recover the pay-

ment of the guarantee. Its action was predicated on, among

other bases, the FCA. It argued that, if the bank had not sub-

mitted the original loan guarantee application to the SBA, the

money never would have been disbursed and the Govern-

ment would not have incurred its loss. In short, the Govern-

ment’s loss did not have to be attributed directly to the bank’s

false statement.

In Cicero, the court focused on the language of the statute.

The FCA allows the Government to recover “3 times the

amount of damages which the Government sustains because of

the act of that person.” 31 U.S.C. § 3729(a)(1) (emphasis added).

The court emphasized that the statute permits recovery of

damages that arise “because of” a fraud, not damages “‘occa-

sioned by the cause of the falsity of the claim.’” Cicero, 957

F.2d at 1374 (quoting United States v. Hibbs, 568 F.2d 347, 354

(3d Cir. 1977) (Meanor, J., dissenting)). In its view, this lan-

guage justified a broad “but for” causality standard for the

question of causation. Id. We held that, even if the Govern-

ment’s loss was not caused directly by the false application

for a guaranteed loan, the FCA claim was valid because the

claim for reimbursement would not have been made if the

bank had not transmitted, at an earlier date, the false loan ap-

plication.

24 No. 16-4093

Importantly, the opinion in Cicero expressly acknowl-

edged, and disagreed with, the Third Circuit’s earlier con-

trary holding in United States v. Hibbs, 568 F.2d 347 (3d Cir.

1977). That case held that “a causal connection must be shown

between loss and fraudulent conduct and that a broad ‘but

33

for’ test is not in compliance with the statute.” Id. at 349. In

arriving at that conclusion, the Third Circuit also had focused

on the statutory language, but had reached an entirely differ-

ent result. It reasoned that

33 United States v. Hibbs, 568 F.2d 347 (3d Cir. 1977), involved “a real estate

broker who submitted certifications to the Federal Housing Administra-

tion misrepresenting the condition of certain residential properties.” Id. at

349. Specifically, “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 [HUD] regulations,” despite

the fact that “there were deficiencies.” Id. Relying on the false certifica-

tions, the agency “then insured mortgages on the homes and was later

required to pay the mortgages when defaults occurred.” Id.

Hibbs lost in the district court, but nonetheless won reversal on ap-

peal. In reversing, the Third Circuit held that “a causal connection must

be shown between loss and fraudulent conduct.” Id. The court therefore

held that the “damages were sustained by the United States because of

defaults by the mortgagors and to some extent were increased by the un-

expected diminution of property value caused by [a] lead paint injunc-

tion,” but emphasized that “[n]either of those events was caused by or

related to the false certifications.” Id. at 351. At bottom, the court was con-

vinced that “precisely the same loss would have been suffered by the gov-

ernment had the certifications been accurate and truthful.” Id.

No. 16-4093 25

[t]he statutory limitation, “by reason of”[34] the

commission of the unlawful act, compels con-

sideration of the element of causation. That re-

quirement should be liberally construed so as to

provide the government restitution from those

whose fraud has caused loss. It should not,

however, be disregarded completely so as to

eliminate the relationship between the unlawful

act and the injury ultimately sustained.

Id. at 351. The court additionally was concerned with the in-

equitable result that naturally would flow from a different

rule of causation:

To further illustrate the extreme to which the

government’s argument would lead—if the

mortgagors had defaulted because their houses

had been destroyed by a flood or some other un-

insured catastrophe, the government's theory

would nevertheless hold Hibbs liable because

he failed to call its attention to defects in the

plumbing.

Id. In the twenty-five years since we handed down our opin-

ion in Cicero, two additional circuits have adopted proximate

causation. No circuit has endorsed our view.

34 We have noted that “[a] 1982 amendment to the statute replaced the

words ‘by reason of the doing or committing’ with the word ‘because.’”

United States v. First Nat'l Bank of Cicero, 957 F.2d 1362, 1373 n.11 (7th Cir.

1992). We have declined to give this change in language any substantive

effect, instead “assum[ing] that the Act’s meaning as to the causation re-

quirement was unchanged by the 1982 amendment.” Id.

26 No. 16-4093

With this background in mind, Mr. Luce submits that the

“but-for” test employed by the district court to establish cau-

sation, although consonant with this circuit’s precedent in

Cicero, is based on an erroneous interpretation of the FCA. He

argues that we ought to adopt the proximate cause test

adopted by the other circuits that have faced the question. Re-

alizing that stare decisis concerns present a barrier to such a

course, he submits that “[t]he Supreme Court’s decision in Es-

cobar declared the necessity of applying common-law fraud

35

requirements in FCA cases.” Mr. Luce contends that “[c]om-

mon-law fraud claims do not use ‘but for’ causation when

evaluating a defendant’s liability; rather, it is necessary for a

36

plaintiff to prove ‘proximate’ causation.” He accordingly

concludes that our but-for test “is no longer viable following

Escobar’s imperative to apply common-law fraud principles in

37

FCA cases.”

We begin our causation analysis where Mr. Luce’s argu-

ment ends and find it unnecessary to say whether Escobar,

standing alone, would warrant our revisiting this issue. Noth-

ing in that opinion directly addresses the question of FCA

causation or the circuit split; rather, that opinion clearly fo-

cuses on the implied certification theory of liability and re-

quires that courts undertake a rigorous materiality inquiry.

See Escobar, 136 S. Ct. at 1995, 1996, 1999–2004. It does not ad-

dress causation.

35 Appellant’s Br. 17.

36 Id.

37 Id. at 19.

No. 16-4093 27

Nonetheless, Escobar does give us pause. The Court explic-

itly said that, “absent other indication, Congress intends to in-

corporate the well-settled meaning of the common-law terms

it uses” and that “the term ‘fraudulent’ is a paradigmatic ex-

ample of a statutory term that incorporates the common-law

38

meaning of fraud.” Id. at 1999 (internal citations omitted).

These two statements, read together, require a careful reeval-

uation of our FCA precedent with particular focus on the

common-law understanding of fraud, the FCA’s language,

and our sister circuits’ understanding of causation.

Generally, under the common law, “[a] fraudulent misrep-

resentation is a legal cause of a pecuniary loss resulting from

action or inaction in reliance upon it if, but only if, the loss

might reasonably be expected to result from the reliance.” Re-

statement (Second) of Torts § 548A (Am. Law. Inst. 1977).

Nonetheless, “[n]ot all losses that in fact result from the reli-

ance are … legally caused by the representation.” Id. cmt. A.

Instead, “the misrepresentation is a legal cause only of those

pecuniary losses that are within the foreseeable risk of harm

that it creates.” Id. We similarly have explained, while analyz-

ing the common law of negligence, that

[p]roximate cause encompasses both cause in

fact and legal cause. To establish cause in fact,

the plaintiff must show the defendant’s “con-

duct was a material element and a substantial

38 See also Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1305 (2017)

(“We assume Congress ‘is familiar with the common-law rule and does

not mean to displace it sub silentio’ in federal causes of action.” (quoting

Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1390

(2014)).

28 No. 16-4093

factor in bringing about the injury.” Legal cause

on the other hand, “is essentially a question of

foresee-ability,” and we must determine

“whether the injury is of a type that a reasonable

person would see as a likely result of his or her

conduct.”

Blood v. VH-1 Music First, 668 F.3d 543, 546 (7th Cir. 2012) (in-

ternal citations omitted).

The statutory language of the FCA does not suggest that

Congress sought to depart from the established common-law

understanding of causation in fraud cases. The FCA simply

allows the Government to recover “damages which the Gov-

ernment sustains because of the act of that person.” 31 U.S.C.

§ 3729(a)(1) (emphasis added). Although the phrase “because

39

of” clearly requires causation, nothing in the FCA contains

39 We note that the Supreme Court has interpreted the phrase “because

of” as requiring but-for causation in other circumstances. For example, in

Gross v. FBL Financial Services, Inc., 557 U.S. 167 (2009), the Court held that

the ordinary meaning of the ADEA’s requirement that an

employer took adverse action “because of” age is that age

was the “reason” that the employer decided to act. To es-

tablish a disparate-treatment claim under the plain lan-

guage of the ADEA, therefore, a plaintiff must prove that

age was the “but-for” cause of the employer’s adverse de-

cision.

Id. at 176 (internal citation omitted). Nonetheless, these cases do not in-

form our analysis because they do not involve statutory codifications of

common-law concepts; rather, they involve statutory protections enacted

to protect interests not implicated by the common law.

No. 16-4093 29

any indication of an intent to depart from the common-law

40

understanding of causation in fraud cases.

We further note that proximate causation comports with

the FCA’s statutory purpose. The proximate causation stand-

ard “separates the wheat from the chaff, allowing FCA claims

to proceed against parties who can fairly be said to have

caused a claim to be presented to the government, while win-

nowing out those claims with only attenuated links between

40The only possible authority indicating congressional displeasure with

proximate causation is from a 1986 Senate Report, which reads as follows:

When the Government changes its position, and commits

its financial resources based upon a material false state-

ment, it should be able to recover the resulting losses, but,

under some court interpretations, it may not. For in-

stance, in United States v. Hibbs, 568 F.2d 347 (3rd Cir.

1977), the FHA agreed to insure a mortgage based upon a

representation, which was false, that the residence was

habitable and in compliance with the housing code. The

Government will not issue insurance to a non-code-con-

forming house. However, the court ruled that the default

on the mortgage occurred because the borrower lost his

job, and therefore could not meet his monthly pay-

ments—that the default was not related to the false state-

ment. While the court may have been technically correct, the

Committee believes that this position is unsound public policy.

The act should cover representations which cause the

Government to change its position and pledge its full

faith and credit, including the risk of insurable loss, based

upon another, but material false statement.

S. Rep. No. 99-345, at 20 (1986) (emphasis added). As an initial matter, we

are not convinced that the above is a direct criticism of proximate cause.

Nevertheless, even if it were, Congress did nothing to amend the statute’s

language to suggest that it intended to depart from the common law. It

accordingly does nothing to alter meaningfully our conclusion.

30 No. 16-4093

the defendants’ specific actions and the presentation of the

false claim.” United States ex rel. Sikkenga v. Regence Bluecross

Blueshield of Utah, 472 F.3d 702, 714 (10th Cir. 2006).

Given these considerations, it is not surprising that the

clear weight of authority among our sister circuits supports

the view that “but for” does not fulfill adequately the causa-

tion requirement of the statute. Following Hibbs, the Fifth Cir-

cuit expressly adopted the Third Circuit’s analysis, noting

that

the Third Circuit’s reasoning was based upon

the phrase in § 231 that anyone violating the Act

shall pay to the United States “double the

amount of damages which the United States

may have sustained by reason of the doing or com-

mitting such act.” … The Third Circuit held that

the default which occurred in that case had not

been related to the false statements regarding

the conditions of certain residential property.

…

This court finds no error in the decision[] in

Hibbs …. The language of the statute clearly re-

quires that before the United States may recover

double damages, it must demonstrate the ele-

ment of causation between the false statements

and the loss.

No. 16-4093 31

41

United States v. Miller, 645 F.2d 473, 475–76 (5th Cir. 1981).

Similarly, despite our intervening decision in Cicero, the D.C.

Circuit adopted the rule articulated in Hibbs and Miller, and

saw little reason to elaborate further on the explanation of the

other circuits:

PRC further points to several circuits that

have concluded that the Act does not contem-

plate liability for all damages that would not

have arisen “but for” the false statement. See

United States v. Miller, 645 F.2d 473, 475–76 (5th

41 In United States v. Miller, 645 F.2d 473 (5th Cir. 1981), a number of real-

estate companies, construction companies, and mortgage companies were

accused of filing inaccurate mortgage applications. In particular, “[e]ach

application filed on behalf of the purchasers of homes contained materi-

ally false statements as to the credit worthiness and net worth of [the]

home buyers, the amount of down payment which each home buyer

would make and their past and present debts.” Id. at 474. The district court

dismissed the complaint, and the Government appealed.

In reversing the district court’s dismissal, the Fifth Circuit held that “it

is clear that [the complaint] does present a set of facts which could entitle

the United States to relief.” Id. at 476. In particular, the court noted that

“[f]alse statements regarding residential property may not reasonably be

a cause for subsequent defaults of mortgagors, as was the case in Hibbs.”

Id. “Nonetheless,” the court continued, “false statements regarding the

ability of purchasers to afford housing could very well be the major factor

for subsequent defaults.” Id. Accordingly, the appellate court concluded

that “the district court erred in dismissing the complaint against the de-

velopers since the government has clearly alleged the necessary causation

factor.” Id.; see also United States ex rel. Main v. Oakland City Univ., 426 F.3d

914, 917 (7th Cir. 2005) (holding that false certification denying that ad-

missions recruiters received fees contingent on enrolling students caused

Government loss even though a phase two application from a student is

also necessary before Government funds are paid).

32 No. 16-4093

Cir. 1981); United States v. Hibbs, 568 F.2d 347,

351 (3d Cir. 1977). Surely, we agree.

United States ex rel. Schwedt v. Planning Research Corp., 59 F.3d

196, 200 (D.C. Cir. 1995). Finally, more recently, the Tenth Cir-

cuit expressly approved of the Third Circuit’s reasoning in

Hibbs, noting that the “proximate causation standard strikes

the proper analytical balance and comports with the rule re-

quiring strict construction of punitive civil statutes.” Sikkenga,

42

472 F.3d at 715 n.17. At bottom, in contrast to Cicero’s but-for

causation test, each of these four circuits has adopted the com-

mon-law understanding of foreseeable, or proximate, causa-

tion with respect to the imposition of liability and damages

under the FCA. None of these decisions can live in peace with

Cicero.

In the years since, an increasing number of our sister cir-

cuits have adopted expressly proximate causation as a rule

more compatible with the statute’s language and purpose.

The Supreme Court, as well, has provided new guidance on

42 In United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472

F.3d 702 (10th Cir. 2006), the Tenth Circuit was not assessing the relation-

ship between an alleged misrepresentation and loss—as we are here and

as the Third and Fifth Circuits did in Hibbs and Miller, respectively. In-

stead, the Tenth Circuit was assessing whether Regence, the Medicare car-

rier for Utah, had caused a Medicare provider, ARUP, to present a false or

fraudulent claim for purposes of 31 U.S.C. § 3729(a)(1). See id. at 730. It is

in this context that the Tenth Circuit determined that proximate causation

was appropriate. The fact that the Tenth Circuit (like the Supreme Court

in Escobar) invoked common-law principles of causation and also explic-

itly approved of the Third Circuit’s analysis in Hibbs, supports the view

that proximate cause is the appropriate standard for the determination of

loss as well.

No. 16-4093 33

how we ought to interpret congressional enactments dealing

with fraud: Absent other direction from Congress, we should

assume that Congress did not stray far from the established

common law. Most importantly, our own reading of the stat-

utory language now convinces us that the course charted by

our sister circuits is the correct reading of the statutory text.

We accordingly overrule Cicero and adopt the proximate

cause standard for FCA cases. 43

C.

There remains the issue of whether, under the proximate

cause standard that we have enunciated today, the Govern-

ment can establish that Mr. Luce’s falsehood was the proxi-

mate cause of the Government’s harm. Our examination of

the proceedings in the district court convinces us that this is-

sue was not adequately developed by the parties. The proper

course, therefore, is to remand this action to allow the district

court to evaluate the evidence according to the new prevail-

44

ing standard of proximate causation.

43 Because this opinion overrules circuit precedent, we have circulated it

to all judges in active service in accordance with Circuit Rule 40(e). No

judge favored rehearing en banc.

44 In addition to Mr. Luce’s proximate cause argument, he also submits

that the amount of his damages should be reduced because “the district

court erred in awarding damages for loans approved for insurance after

February 25, 2008, the date on which the Government indisputably had

full knowledge of Mr. Luce’s pending charges and the representations on

the V-Forms.” Appellant’s Br. 16. He submits that he “is entitled to judg-

ment with respect to 73 of the loans that form the basis for the Govern-

ment’s claims that were endorsed for insurance after February 25, 2008,”

34 No. 16-4093

Conclusion

We reverse the district court’s judgment with respect to

causation and remand the case for further proceedings in con-

formity with this opinion. Mr. Luce shall recover the costs of

this appeal.

REVERSED in part and REMANDED

which represents, after trebling, $1,992,686.34. Id. at 46. Because Mr. Luce’s

argument, at bottom, concerns the damages for which he is responsible,

we believe that this argument is best directed to the district court as part

of its consideration of which, if any, losses were proximately caused by

Mr. Luce’s misrepresentations.