Seventh Circuit rules proof of causation is required to recover in FCA actions.

False Claims Act
Calderon v. Carrington Mortgage Services LLC
Date: June 14, 2023

Issue: Whether relators must show proof that false statements were the proximate cause of any eventual default to recover under the False Claims Act (FCA).

‌Case Summary:  In a 3-0 decision, a Seventh Circuit panel ruled an FCA relator alleging false certifications for FHA insurance coverage must prove the false statement caused or increased the risk of a subsequent default.

Relator Michelle Calderon alleged Carrington Mortgage Services made false statements to the U.S. Department of Housing and Urban Development (HUD). According to Calderon, Carrington’s statements misrepresented borrowers’ risk levels when submitting applications to have loans covered by federal mortgage insurance. Federal mortgage insurance from the Federal Housing Administration (FHA) allows those considered too risky to apply for traditional mortgage by covering the losses for lenders if the borrower defaulted on the loan. Calderon claimed Carrington provided false information or omitted certain information, which would have made HUD consider these loans too risky or ineligible for federal mortgage insurance. Calderon sued alleging Carrington violated the FCA.

The district court granted summary judgment for Carrington. The court determined Calderon could not prove the alleged misrepresentations caused a monetary loss. The court emphasized a plaintiff must show actual and proximate cause to recover under the FCA. The court explained Calderon must show Carrington’s statements “played some role in causing or increasing the risk of subsequent default.” Calderon appealed the district court’s decision.

On appeal, the Seventh Circuit affirmed. Calderon attempted to show Carrington’s statements caused a default by presenting statistical analysis and loan-by-loan analysis. However, the court determined this information did not show a causal link to default. According to the panel, Carrington’s false certification to HUD “must not only be material, they also must cause a foreseeable harm: a type that a reasonable person would see as a likely result of his or her conduct.” The panel explained to show proximate causation, Calderon needed to put forward evidence suggesting the false certifications in the reviewed loans were the foreseeable cause of the later defaults. The panel relied on the Fight Circuit’s reasoning in United States v. Miller, and the Third Circuit’s reasoning in United States v. Hibbs, which made explicit statements about the need to prove what caused the defaults to recover.

Calderon argued she should be allowed to extrapolate causation from a generalized statistical analysis of Carrington’s federally insured loans. Carrington contended Calderon had to proceed loan by loan through the 349 loans and show how each allegedly false statement caused each loan’s default. The panel did not resolve which method was appropriate. The panel found Calderon did not meet her burden under either method.

Bottom Line: The decision clarifies the high bar for relators to prove proximate causation in FCA suits. FCA relators must develop evidence concerning the reason for default on loans for which they assert their claims.

Documents: Opinion