FCA Liability For Direct Endorsement Lenders

The Ninth Circuit case United States ex rel. Thrower v. Academy Mortgage Corp. provides mortgage lenders, servicers, and other entities submitting claims for payment to the federal government an important reminder of how private litigants create potential liability under the False Claims Act (FCA), even when the government shows little initiative to proceed (or, in this case, even moves to dismiss).

In 2016, Gwen Thrower sued her former employer, Academy Mortgage Corporation, alleging violations of the FCA related to Academy’s compliance with the Federal Housing Administration’s (FHA) Direct Endorsement Program. Thrower’s complaint alleges that Academy effectively created a sham underwriting process for its FHA-insured loans, allowing loans to be approved that did not comply with FHA rules. For example, the complaint alleges Academy implemented “tactics such as miscalculating or misrepresenting borrower’s income or debt obligations, ignoring clear warning signs of fraud, and hiding adverse documentation” to ensure loans qualified for FHA insurance. Thrower’s amended complaint further details how Academy’s fraudulent underwriting practices resulted in the company’s loans becoming seriously delinquent at “rates of 33% above the average of all other lenders.” The amended complaint ultimately alleges that due to this systemic underwriting fraud Academy allegedly submitted false claims for insurance for over $3 million worth of loans.

The government declined to intervene after determining there was insufficient evidence of systemic fraud. Thrower’s counsel, however, proceeded with the lawsuit on a contingency-fee basis. After Thrower filed an amended complaint, the government moved to dismiss. In an unusual turn of events, the district court denied the government’s motion to dismiss (as well as a motion to dismiss by Academy).

 In 2022, Thrower and Academy settled for $38.5 million. However, the settlement did not resolve Thrower’s claim to attorneys’ fees under the FCA. Thrower sought to double the fees her attorneys could collect with a 2.0 multiplier, citing the “extraordinary” victory of proceeding after the government sought to dismiss the case. The district court granted a multiplier of 1.75 instead and awarded $8,585,530.20 in attorneys’ fees. Academy appealed.

The district court credited Thrower’s counsel with achieving a “very rare” “if not the first of its kind” settlement. However, in overturning the multiplier, the Ninth Circuit held that the “exceptional result” and investigative work cited by the district court were already subsumed in the lodestar calculation. That is, the quality of representation and the complexity of the case should already be reflected in the number of billable hours expended by counsel. And, even if the enhancement were appropriate, the district court failed to justify the 1.75 multiplier it applied to the lodestar.

The Ninth Circuit recognized that fee enhancements for superior results can be justified in rare cases, as the Supreme Court outlined in Perdue v. Kenny A. ex rel. Winn: When the hourly rate fails to measure “the attorney’s true market value,” attorney performance includes “an extraordinary outlay of expenses and litigation is extremely protracted,” or “extraordinary circumstances” involve an “exceptional delay in the payment of fees” (559 U.S. 542, 554-56 (2010)). The majority walked through the three points and explained why they were not satisfied in the present case.

As for the investigative work undertaken by Thrower’s counsel in light of the government’s non-intervention, the majority reiterated that the lodestar calculations account for these efforts. And, in any event, the district court failed to explain the logic behind the multiplier: Even if the multiplier were appropriate, the district court must identify on the record some shortfall in the lodestar calculation that justifies the specific amount awarded.

Thrower and Academy reached a $38.5 million FCA settlement based on alleged systemic underwriting fraud despite the government’s attempt to have the case dismissed. Financial services companies should take note of the potentially significant risks associated with both private litigants and the FCA.

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