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United States ex rel. Conner v. Mahajan

United States Court of Appeals, Seventh Circuit

December 5, 2017

United States of America ex rel. Kenneth J. Conner, Plaintiff-Appellant,
Amrish K. Mahajan, et al., Defendants-Appellees.

          Argued July 6, 2017

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 11-CV-4458 - Sharon Johnson Coleman, Judge.

          Before Posner, Kanne, and Sykes, Circuit Judges [*]

          PER CURIAM

         After losing his job at Mutual Bank, Kenneth Conner brought this qui tarn action claiming that the defendants, most of them directors or officers of the bank, had defrauded the government in violation of the False Claims Act, 31 U.S.C. §§ 3729-3733. The United States declined to take over the qui tarn action, which Conner eventually settled. But the Federal Deposit Insurance Corporation filed its own lawsuit against many of the same defendants. That case also settled, and Conner thinks he is entitled to a share of the settlement proceeds the FDIC received from the defendants. To that end Conner tried to intervene in the FDIC's case, and after being rebuffed he filed a motion in this action demanding part of the FDIC's recovery. The district court denied that request on the ground that, because Conner's attempt to intervene in the FDIC's case was rejected, he is barred by the doctrine of issue preclusion from litigating in this suit the question whether he has a cognizable interest in the settlement proceeds. Conner challenges that ruling in this appeal. We agree with the district court's bottom line but conclude that claim preclusion, rather than issue preclusion, explains this outcome.

         I. BACKGROUND

         The False Claims Act imposes civil liability on individuals who knowingly defraud the United States. Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989, 1995 (2016). The Act may be enforced either by the government or, under its qui tarn provision, by a private person acting as a "relator" on the government's behalf. 31 U.S.C. § 3730(b)(1); State Farm Fire & Cas. Co. v. United States ex rel. Rigsby, 137 S.Ct. 436, 440 (2016). When a private party brings a qui tarn suit, the complaint is sealed (and thus unknown to the defendant) but served on the government with a summary of all material evidence. 31 U.S.C. § 3730(b)(2); Kellogg Brown & Root Servs., Inc. v. United States ex rel. Carter, 135 S.Ct. 1970, 1973 (2015).

         Upon learning of a qui tarn action, the government has multiple options for action. One of those options is taking over the lawsuit, and, if the government does take control, the relator will receive 15% to 25% of any recovery. 31 U.S.C. § 3730(d)(1). The government also can decline to participate directly, and, if it chooses that option, the relator can continue prosecuting the case on the government's behalf. See 31 U.S.C. § 3730(b)(4)(B), (c)(3); Kellogg Brown & Root Sews., Inc., 135 S.Ct. at 1973; Stoner v. Santa Clara Cty. Office of Educ, 502 F.3d 1116, 1126-27 (9th Cir. 2007). A relator who successfully prosecutes a qui tarn action without government involvement will receive 25% to 30% of the recovery. 31 U.S.C. § 3730(d)(2). A third option available to the government is seeking recovery for fraud through an "alternate remedy, " including "any administrative proceeding to determine a civil money penalty." 31 U.S.C. § 3730(c)(5). When the government pursues an "alternate remedy, " the relator has the same rights in that proceeding as if the qui tarn action had continued, including the right to recover a percentage of any recovery. 31 U.S.C. § 3730(c)(5); United States v. Sprint Commc'ns, Inc., 855 F.3d 985, 990 (9th Cir. 2017); United States ex rel. Rille v. PricewaterhouseCoopers LLP, 803 F.3d 368, 373 (8th Cir. 2015).

         Conner worked at Mutual Bank (or its predecessor) from 2000 to 2007 and had transferred to the bank's headquarters in Harvey, Illinois, in 2005. At headquarters he reviewed appraisals for commercial real estate loans. In that role he noticed that Adams Value Corporation (a property appraisal company) had completed more than half of Mutual's appraisals. Conner concluded that Adams regularly had inflated values by 20% to 30%. He identified about 75 appraisals he thought were inflated, all but one of which Mutual Bank had accepted. In October 2007 Conner refused to approve an Adams appraisal that he deemed incomplete and significantly overvalued. The bank fired him a week later. Eventually he brought this qui tarn action under the False Claims Act. In addition to naming as defendants the directors and several officers of Mutual Bank, Conner sued Adams Value Corporation and its president.

         Mutual Bank failed less than two years after Conner was fired. In his lawsuit he alleged that the defendants had intentionally overvalued properties serving as collateral for commercial real estate loans. By doing so they understated loan-to-value ratios reported to the FDIC and thus benefitted from a lower risk category and commensurately lower FDIC insurance premiums. Conner added that most of the loans could not have been approved if the collateral was valued accurately. He estimated that the FDIC had lost approximately $656 million from Mutual Bank's demise, including $300 to $400 million resulting from "commercial real estate loans with deliberately faulty appraisals." But Conner's qui tarn action aimed only to recoup the deposit insurance premiums that should have been paid to the FDIC. In August 2012 the United States declined to take over the case (the reason is not disclosed in the record) but asked the district judge to require the government's written consent before allowing Conner to settle or dismiss the action.

         Conner then went forward in the qui tarn action by himself. But the FDIC, as receiver for the failed Mutual Bank, initiated its own action against many of the same defendants-though not against Adams or its president, Douglas Adams. See F.D.I.C. v. Mahajan, No. 11 C 7590, 2012 WL 3061852, at *1 (N.D. 111. July 26, 2012). The FDIC alleged that directors and officers of the bank had acted with gross negligence and breached their fiduciary duties. It asserted that in just four years Mutual Bank had nearly doubled its loan portfolio by giving a few overextended or nearly insolvent borrowers a dozen risky commercial loans to acquire or develop real estate. Then, as the bank grew, it neglected to hire or train enough staff to minimize the risk from those loans. The FDIC further alleged that the defendants had looted bank funds for personal bills (wedding expenses of one defendant and legal bills incurred by another's spouse in defending criminal charges), conducted a board meeting in Monte Carlo at the bank's expense, paid excessive amounts to contractors with personal connections to board members, and approved unlawful dividend payments. The FDIC also sued the bank's attorney and his law firm claiming malpractice, breach of fiduciary duty, and aiding and abetting breaches of fiduciary duty by the other defendants.

         More than three years after the FDIC brought its case, Conner moved in his qui tarn action to consolidate the FDIC's case with his. Conner argued that both lawsuits centered on the same transactions and occurrences because both involved bank directors overvaluing property and extending risky loans. The FDIC and many of the defendants in Conner's case opposed his motion. The FDIC disputed Conner's contention that the two cases overlapped factually, and it also noted that the defendants did not overlap entirely and that it had sued on behalf of the bank (as its receiver), not on behalf of the United States as Conner had done. The FDIC also disputed Conner's assertion that both suits focused on the same overarching fraud scheme, since just one of the loans underlying its suit was among those identified by Conner in his suit. And each case involved different legal issues, the FDIC contended, since Conner's suit alleged violations of the False Claims Act, while the FDIC's claims concerned breaches of prudent banking practices, corporate waste, and legal malpractice. Many of the defendants made similar arguments, and two of the qui tarn defendants added that consolidation would unduly prejudice them because they weren't defendants in the FDIC's case. Faced with this opposition, Conner withdrew his motion.

         That was in February 2015. A month later Conner settled with four defendants who agreed to pay a lump sum, mostly to the government, but with a percentage to Conner. In June 2015 Conner hired new counsel and tried to renege, but the affected defendants moved to enforce the agreement. The government gave its approval after modest revisions requiring the defendants to immediately pay Conner's attorneys' fees while leaving for future negotiation the percentage of the recovery to be shared with him by the government. The district court enforced the revised agreement.

         Conner, through his new counsel, then moved to intervene in the FDIC's case. By this point, according to Conner, the FDIC had informed him that it was settling with the defendants and, as relates to its lawsuit, would not give him a whistleblower award under the False Claims Act. Conner asserted that the Act entitled him to a share of the FDIC's recovery since, he contended, the FDIC's suit constituted a choice by the ...

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