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On January 8, the U.S. Court of Appeals for the 4th Circuit affirmed a federal jury’s unanimous verdict clearing a Pennsylvania-based student loan servicing agency (defendant) accused of improper billing practices under the False Claims Act (FCA). As previously covered by InfoBytes, the plaintiff—a former Department of Education employee whistleblower—filed a qui tam suit in 2007, seeking treble damages and forfeitures under the FCA. The plaintiff alleged that multiple state-run student loan financing agencies overcharged the U.S. government through fraudulent claims to the Federal Family Education Loan Program in order to unlawfully obtain 9.5 percent special allowance interest payments. Over the course of several appeals, the case proceeded to trial against the student loan servicing agency after the 4th Circuit held that the entity was “an independent political subdivision, not an arm of the commonwealth,” and “therefore a ‘person’ subject to liability under the False Claims Act.” The plaintiff appealed the jury’s verdict, arguing the court erred by excluding evidence at trial and failed to give the jury several of his proposed instructions.
On appeal, the 4th Circuit disagreed with the plaintiff, finding that the court correctly excluded the state audit, which determined the student loan servicer “failed its mission” with lavish spending on unnecessary expenses. The appeal court noted the audit was irrelevant to the only issue in the case: “Did [the servicer] commit fraud and file a false claim?” The appeals court also rejected the plaintiff’s jury instruction arguments, concluding that the court’s instructions substantially covered the substance of the plaintiff’s proposal and “sufficiently explained that the jury had to consider whether [the servicer’s] claims were ‘false or fraudulent.’”
On May 31, the U.S. Court of Appeals for the 4th Circuit affirmed sanctions against three attorneys for challenging the authenticity of a loan document for two years without revealing they had obtained a copy of the document from their client before filing the original complaint. The action results from a now closed case in which a consumer alleged he received loans at predatory interest rates (annual interest rate of about 139 percent) from a tribal lender and sought to impose liability on the non-lenders, including a credit union, which processed the debit transactions under the loan agreement. In response to a motion to dismiss, the attorneys for the consumer challenged the authenticity of the loan agreement provided by the credit union. After years of litigation, the credit union discovered the consumer had provided his attorneys with the loan agreement prior to the original complaint filing and moved for sanctions against the attorneys. The attorneys argued that they had no affirmative duty to disclose documents before the opening of discovery.
The lower court disagreed, determining that each attorney had “acted in bad faith and vexatiously and violated their duty of candor by hiding a relevant and potentially dispositive document from the Court in connection with a long-running dispute over arbitrability.” In February 2017, the lower court ordered two attorneys and their respective law firms jointly liable for $150,000 in attorneys’ fees and a third associate attorney jointly liable for $100,000. Upon appeal, the 4th Circuit held that the lower court did not abuse its discretion in awarding the compensatory sanctions, stating “without losing the forest for the trees, we conclude that the district court reasonably described sanctioned counsels’ conduct as evincing a multi-year crusade to suppress the truth to gain a tactical litigation advantage.”
On January 5, the Supreme Court dismissed a servicemember’s petition for a writ of certiorari after receiving a Stipulation of Dismissal from both parties who agreed to settle the dispute. As previously covered by InfoBytes, the servicemember filed the petition after the U.S. Court of Appeals for the Fourth Circuit affirmed the lower court’s decision that the servicemember was not entitled to the protections against non-judicial foreclosures under the Servicemembers Civil Relief Act (SCRA). The lower court concluded that because the servicemember “incurred his mortgage obligation during his service in the Navy, the obligation was not subject to SCRA protection” even through the servicemember, after a discharge period, later re-enlisted with the Army.
In an opinion handed down on July 17, the U.S. Court of Appeals for the Fourth Circuit ruled that the Servicemembers Civil Relief Act (SCRA) does not apply to a mortgage loan obligation incurred during a borrower’s military service, even if the obligation was incurred during an earlier, distinct period of military service. At issue was the SCRA’s requirement that lenders obtain a court order before foreclosing on or selling property owned by a current or recent servicemember if the mortgage obligation “originated before the period of the servicemember’s military service.”
The case concerned a borrower who had financed the purchase of a house while serving in the Navy. After his discharge from the Navy, he defaulted on his mortgage loan. The borrower then enlisted in the Army, and shortly thereafter, the bank sold the borrower’s house—without prior court approval—at a foreclosure sale. The borrower signed a move-out agreement and addendum that affirmatively waived “any rights and protections provided by [SCRA] with respect to” the deed and foreclosure sale.
More than five years after the foreclosure sale, the borrower filed a lawsuit against the bank, alleging that the foreclosure sale was invalid under SCRA. The district court granted summary judgment for the bank, ruling that “[b]ecause it is undisputed that [the borrower’s] mortgage originated while he was in the military, that obligation does not qualify under [SCRA].” Specifically, the district court reasoned that the SCRA is “designed to ensure that servicemembers do not suffer financial or other disadvantages as a result of entering the service . . . by shielding servicemembers whose income changes as a result of their being called to active duty, and who therefore can no longer keep up with obligations negotiated on the basis of prior levels of income.” “Such a change in income and lifestyle,” the district court explained, “was not a factor in [the borrower’s] case, as the mortgage at issue here originated while he was already in the service.”
The Fourth Circuit adopted the district court’s reasoning in a 2-1 decision. In dissent, Judge King contended that the majority’s ruling was contrary to the SCRA’s plain, unambiguous language. Judge King further reasoned that, even if the SCRA’s language was ambiguous, the borrower would still prevail because the SCRA must be liberally construed to protect servicemembers.
Of note, because of its ruling, the district court did not address the bank’s alternative argument that the borrower had waived his rights under the SCRA by executing the addendum to his move-out agreement.
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