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United States v. McNinch

U.S.
May 26, 1958
356 U.S. 595 (1958)

Summary

holding that the Federal Housing Administration is covered by the FCA because “[t]he FHA is an unincorporated agency in the Executive Department created by the President pursuant to congressional authorization. Its head, the Federal Housing Commissioner, is appointed by the President with the Senate's consent, and the powers of the agency are vested in him. The agency is responsible for the administration of a number of federal housing programs and operates with funds originally appropriated by Congress. In short, the FHA is about as much a part of the Government as any agency can be.”

Summary of this case from United States ex rel. Shupe v. Cisco Sys., Inc.

Opinion

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT.

No. 146.

Argued April 1, 1958. Decided May 26, 1958.

1. A claim against the Commodity Credit Corporation is a claim "against the Government of the United States, or any department or officer thereof" within the meaning of the civil provisions of the False Claims Act. Rainwater v. United States, ante, p. 590. Pp. 595-596.

2. The Federal Housing Administration, an unincorporated agency in the Executive Department created by the President pursuant to congressional authority to administer a number of federal housing programs and operating with funds originally appropriated by Congress, is a part of the "Government of the United States" within the meaning of the civil provisions of the False Claims Act. Pp. 596-598.

3. A lending institution's application to the Federal Housing Administration for credit insurance is not a "claim" as that term is used in the False Claims Act. Pp. 598-600.

242 F.2d 359, affirmed in part, reversed in part, and cause remanded.

Assistant Attorney General Doub argued the cause for the United States. With him on the brief were Solicitor General Rankin and Samuel D. Slade.

A. C. Epps and Edwin P. Gardner argued the cause for respondents. On the briefs were Mr. Epps and Charles W. Laughlin for Cato Bros., Inc., et al., and Mr. Gardner and Edward W. Mullins for McNinch et al., respondents.


This case was argued with Rainwater v. United States, ante, p. 590, also decided today. It involves three separate actions by the Government to recover damages and forfeitures under the False Claims Act. These actions — which will be referred to, after the principal defendant in each instance, as Cato, Toepleman and McNinch — were initially brought in different Federal District Courts but on appeal were disposed of by the Court of Appeals in a single opinion. 242 F.2d 359.

R. S. §§ 3490, 5438 (1878), which are set out in note 1, Rainwater v. United States, ante, p. 590.

In Cato the suit was filed in the Eastern District of Virginia. The defendants were Cato Brothers, Inc., a Virginia corporation, and Wilfred Cato, William Cato and Magie Stone, all directors and officers of the corporation. Toepleman was brought in the Eastern District of North Carolina. Named as defendants were Frederick Toepleman and Garland Greenway, as individuals and partners. After trial, the District Court exonerated Greenway and he is no longer involved. In McNinch the action was instituted in the Eastern District of South Carolina. The defendants were Howard McNinch, Rosalie McNinch and Garis Zeigler.

In Cato and Toepleman the District Court found the defendants had submitted false claims for crop support loans to the Commodity Credit Corporation, and entered judgment in favor of the Government for the forfeitures provided by the False Claims Act. The Court of Appeals reversed on the ground that a false claim against Commodity was not a claim "against the Government of the United States, or any department or officer thereof" within the meaning of that Act. The sole question before us, so far as these two actions are concerned, is whether the Court of Appeals erred in so deciding. For the reasons set forth in Rainwater we hold that it did.

McNinch raises different questions concerning alleged false claims against the Federal Housing Administration. By statute the FHA is authorized to insure qualified banks and other private lending institutions against a substantial portion of any losses sustained by them in lending money for the repair or alteration of homes. After a lending institution has been approved by the FHA that agency promises to insure, upon payment of a specified premium, any home improvement loan made by the institution. A borrower desiring to obtain an insured loan applies directly to the private lender, which has final authority to decide whether the loan should be made. If a loan is granted, the lender reports the details to the FHA which automatically insures the loan as soon as the required premium is paid.

In general see 48 Stat. 1246, as amended, 12 U.S.C. § 1701 et seq.; 24 C.F.R. § 200.2-200.3, 201.1-201.16.

The Government's complaint in McNinch charged the defendants with causing a qualified bank to present a number of false applications for credit insurance to the FHA. The defendants moved to dismiss the complaint, asserting that it failed to state a cause of action. The District Court granted the motion, holding that an application for credit insurance was not a "claim" within the meaning of the False Claims Act. The Court of Appeals affirmed on that same basis as well as on the alternative ground that a false claim against the FHA was not a claim "against the Government of the United States, or any department or officer thereof."

In somewhat greater detail the complaint made the following assertions: The defendants Howard and Rosalie McNinch were officers of an unincorporated home construction business and the defendant Zeigler was one of their salesmen. The defendants presented several applications for FHA-insured loans to a qualified bank. The loans were sought on behalf of homeowners for the purpose of financing residential repairs and improvements which the business had contracted to make. The applications contained statements misrepresenting the financial eligibility of the homeowners and were accompanied by fictitious credit reports. The bank, relying on this false information, granted the loans which in turn were routinely insured by the FHA.

1. In our judgment the Court of Appeals quite plainly erred in holding that the FHA was not part of the "Government of the United States" for purposes of the False Claims Act. The FHA is an unincorporated agency in the Executive Department created by the President pursuant to congressional authorization. Its head, the Federal Housing Commissioner, is appointed by the President with the Senate's consent, and the powers of the agency are vested in him. The agency is responsible for the administration of a number of federal housing programs and operates with funds originally appropriated by Congress. In short, the FHA is about as much a part of the Government as any agency can be.

2. Although the problem is not easy, we believe the courts below were correct in holding that a lending institution's application for credit insurance under the FHA program is not a "claim" as that term is used in the False Claims Act. We acknowledge the force in the Government's argument that literally such an application could be regarded as a claim, in the sense that the applicant asserts a right or privilege to draw upon the Government's credit. But it must be kept in mind, as we explained in Rainwater, that in determining the meaning of the words "claim against the Government" we are actually construing the provisions of a criminal statute. Such provisions must be carefully restricted, not only to their literal terms but to the evident purpose of Congress in using those terms, particularly where they are broad and susceptible to numerous definitions. See United States ex rel. Marcus v. Hess, 317 U.S. 537, 542; United States v. Wiltberger, 5 Wheat. 76, 95-96.

See note 8, Rainwater v. United States, ante, p. 592, and the text at that point.

In normal usage or understanding an application for credit insurance would hardly be thought of as a "claim against the Government." As the Court of Appeals for the Third Circuit said in this same context, "the conception of a claim against the government normally connotes a demand for money or for some transfer of public property." United States v. Tieger, 234 F.2d 589, 591. In agreeing to insure a home improvement loan the FHA disburses no funds nor does it otherwise suffer immediate financial detriment. It simply contracts, for a premium, to reimburse the lending institution in the event of future default, if any.

Since there has been no default here, we need express no view as to whether a lending institution's demand for reimbursement on a defaulted loan originally procured by a fraudulent application would be a "claim" covered by the False Claims Act.

The False Claims Act was originally adopted following a series of sensational congressional investigations into the sale of provisions and munitions to the War Department. Testimony before the Congress painted a sordid picture of how the United States had been billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war. Congress wanted to stop this plundering of the public treasury. At the same time it is equally clear that the False Claims Act was not designed to reach every kind of fraud practiced on the Government. From the language of that Act, read as a whole in the light of normal usage, and the available legislative history we are led to the conclusion that an application for credit insurance does not fairly come within the scope that Congress intended the Act to have. This question has now been considered by the Courts of Appeals for the Third, Fourth, and Fifth Circuits, as well as by District Courts in those circuits, and all have reached the same conclusion.

See, e. g., H.R. Rep. No. 2, Part 2, 37th Cong., 2d Sess.

Cong. Globe, 37th Cong., 3d Sess. 952-958.

The manager of the bill in the Senate stated its objective as follows: "I will simply say to the Senate that this bill has been prepared at the urgent solicitation of the officers who are connected with the Page 600 administration of the War Department and Treasury Department. The country, as we know, has been full of complaints respecting the frauds and corruptions practiced in obtaining pay from the Government during the present war; and it is said, and earnestly urged upon our attention, that further legislation is pressingly necessary to prevent this great evil; and I suppose there can be no doubt that these complaints are, in the main, well founded. From the attention I have been able to give the subject, I am satisfied that more stringent provisions are required for the purpose of punishing and preventing these frauds; and with a view to apply a more speedy and vigorous remedy in cases of this kind the present bill has been prepared." (Emphasis added.) Cong. Globe, 37th Cong., 3d Sess. 952. Apparently there were no committee reports nor any record of the proceedings in the House.

See United States v. Tieger, 234 F.2d 589, cert. denied, 352 U.S. 941; United States v. Cochran, 235 F.2d 131, cert. denied, 352 U.S. 941. Although offered in a somewhat different context the statement of the Court in United States v. Cohn, 270 U.S. 339, 345-346, also has relevancy here: "While the word `claim' may sometimes be used in the broad juridical sense of `a demand of some matter as of right made by one person upon another, to do or to forbear to do some act or thing as a matter of duty,' Prigg v. Pennsylvania, 16 Pet. 539, 615, it is clear, in the light of the entire context, that in the present statute, the provision relating to the payment or approval of a `claim upon or against' the Government relates solely to the payment or approval of a claim for money or property to which a right is asserted against the Government, based upon the Government's own liability to the claimant."

The judgment of the Court of Appeals is affirmed in McNinch and reversed in Cato and Toepleman and the cause is remanded for further proceedings not inconsistent with this opinion.

It is so ordered.


I agree with the Court as respects the false claims made against the Commodity Credit Corporation. I disagree as to the claims against the Federal Housing Administration. The allegations are that McNinch and others, having contracted to make alterations and improvements in various homes, presented to a South Carolina bank several fraudulent loan applications. The applications were accompanied by fictitious credit reports and misrepresented the financial eligibility of the homeowners. These loan applications were made with the intent that they be accepted by the Federal Housing Administration for insurance. These are the allegations, which for present purposes we must assume are correct.

The Federal Housing Commissioner is empowered to insure qualified lending institutions against losses sustained as a result of loans made by them for the purpose of financing alterations, repairs, and improvements upon or in connection with real property, 48 Stat. 1246, as amended, 12 U.S.C. § 1703 (a). Under the Regulations (24 C.F.R. § 200.2-200.3) a lending institution is first approved by FHA to grant loans eligible for insurance and is given a contract of insurance under which the FHA in general agrees to indemnify the insured against losses sustained by it up to an aggregate amount equal to 10% of the total sums advanced by the institution in eligible loans and reported to FHA for insurance. A borrower desiring to obtain a loan makes application to the lending institution, either directly or through contractors, on an FHA form which provides for the disclosure of certain information, 24 C.F.R. § 200.3 (a). Within 31 days after the loan is made, the lending institution must report the details of the loan transaction to the FHA on an agency form provided for that purpose, 24 C.F.R. § 200.3 (c). After the details of the transaction have been reported to it, FHA computes the insurance premium which will be due and payable by the lending institution, records the transaction, and acknowledges the loan for insurance Ibid.

The South Carolina bank had been approved by FHA as a lending institution. The bank approved the requested loans and applied to FHA for insurance. FHA insured the loans. Thereupon the proceeds of the loans were deposited to the accounts of these respondents in the South Carolina bank.

The statute, R. S. §§ 3490, 5438, 31 U.S.C. § 231, covers anyone who fraudulently "makes or causes to be made, or presents or causes to be presented, for payment or approval . . . any claim" against the United States. No claim has been tendered against the United States for "payment." But a claim has been presented for "approval" in the meaning of the Act. For the United States has been induced by fraudulent representations to insure these loans. One who has the endorsement of the United States on his paper has acquired property of substantial value. It is a property right of value because it represents a claim against the United States. It is of course contingent until a default occurs. But when fraudulent, it represents an effort to "cheat the United States" ( United States ex rel. Marcus v. Hess, 317 U.S. 537, 544) to the extent that the United States underwrites the losses on the loans. The fact that precise damages are not shown is not fatal, as Rex Trailer Co. v. United States, 350 U.S. 148, 153, holds.

This cheating of the United States is as real, as substantial, and as damaging as those specific abuses against which the managers of this legislation railed when it was before the Congress. We do not have to stretch the law to include this type of "claim," as this form of insurance is a well-recognized property interest. See Fidelity Deposit Co. v. Arenz, 290 U.S. 66. The obtaining of credit risk insurance from the Government by fraudulent means is a form of plundering as flagrant as the presentation for "payment or approval" of any other type of claim against the Treasury. As Judge Rives said in his dissent in United States v. Cochran, 235 F.2d 131, 135, "Inducing the Government to pledge its credit by a false and fraudulent claim" is as much within the Act as "inducing it to part with its money or property."

Cong. Globe, 37th Cong., 3d Sess. 952 (1863); and see H.R. Rep. No. 2, 37th Cong., 2d Sess.


Summaries of

United States v. McNinch

U.S.
May 26, 1958
356 U.S. 595 (1958)

holding that the Federal Housing Administration is covered by the FCA because “[t]he FHA is an unincorporated agency in the Executive Department created by the President pursuant to congressional authorization. Its head, the Federal Housing Commissioner, is appointed by the President with the Senate's consent, and the powers of the agency are vested in him. The agency is responsible for the administration of a number of federal housing programs and operates with funds originally appropriated by Congress. In short, the FHA is about as much a part of the Government as any agency can be.”

Summary of this case from United States ex rel. Shupe v. Cisco Sys., Inc.

overturning the Fourth Circuit's decision that the Federal Housing Administration was not covered by the same provisions of the False Claims Act

Summary of this case from Primate Protection League v. Tulane Ed. Fund

In McNinch, the Government brought suit for damages and forfeitures under the False Claims Act, in its present form, against persons who had filed fraudulent applications for home-modernization loans with a private bank which was regularly insured by the Federal Housing Administration against losses on such loans.

Summary of this case from United States v. Neifert-White Co.

In United States v. McNinch, 356 U.S. 595 (1958), the leading Supreme Court case on the issue, the Court held that an application for credit insurance from a federal agency was not a "claim" within the meaning of the False Claims Act.

Summary of this case from United States v. Van Oosterhout

In McNinch the Court held that a lending institution's mere application for credit insurance, even if fraudulent, did not amount to a "claim" as that term is used in the FCA.

Summary of this case from U.S. v. Rivera

In McNinch the lack of immediacy was noted in the context of an application for mortgage insurance, the submission of which could occur several years prior to the occurrence of any liquidated claims for the disbursement of government funds, if, indeed, any claim for disbursement ever arose at all.

Summary of this case from U.S. v. Rivera

In McNinch, the Supreme Court indicated that a "claim" under the FCA is a "demand for money" that induces the government to disburse funds or to "otherwise suffer immediate financial detriment."

Summary of this case from U.S. v. Rivera

In McNinch, the Supreme Court held that an application for credit insurance, requesting the Federal Housing Administration to insure certain bank loans, was not a "claim for payment or approval" within the meaning of the statute.

Summary of this case from U.S. v. American Heart Research Foundation, Inc.

In United States v. McNinch, 356 U.S. 595, 599, 78 S.Ct. 950, 2 L.Ed.2d 1001 (1958), it was held that a claim against the Government "normally" connotes a demand for money or a transfer of public property, and does not for purposes of the False Claims Act include an application for credit insurance by the Federal Housing Administration. Such an application "does not fairly come within the scope that Congress intended the Act to have."

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In McNinch, the Supreme Court discussed the question of whether the transaction there in issue involved an assertion of right against the Government. McNinch at pages 598-599, 78 S. Ct. 950.

Summary of this case from United States v. Neifert-White Company

In United States v. McNinch, 356 U.S. 595, 598, 78 S.Ct. 950, 952, 2 L.Ed.2d 1001, it was said that the False Claims Act is actually "a criminal statute" and its provisions "must be carefully restricted, not only to their literal terms but to the evident purpose of Congress in using those terms, particularly where they are broad and susceptible to numerous definitions."

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In McNinch, a companion case, the Supreme Court held that the Federal Housing Administration (the "FHA") should be considered to be the United States Government under the FCA.

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noting that it is "clear that the False Claims Act was not designed to reach every kind of fraud practiced on the Government"

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characterizing a claim under the False Claims Act as a "demand for money or for some transfer of public property," which causes the Government to disburse funds or "otherwise suffer immediate financial detriment"

Summary of this case from U.S. v. City of Houston

In McNinch, the government sought to impose the Act's statutory penalty upon persons in the home-improvement business who had caused lending institutions to file false applications for loan insurance (or loan guarantees) with the Federal Housing Administration (FHA). There had been no default on any of the loans and no demand for payment by the FHA on the guarantees.

Summary of this case from U.S. v. Ettrick Wood Products, Inc.

In United States v. McNinch, 356 U.S. 595, 78 S.Ct. 950, 2 L.Ed.2d 1001 (1958) the Supreme Court found the above quoted 1926 definition still relevant in determining what is a claim within the meaning of the False Claims Act.

Summary of this case from United States v. Neifert-White Co.

In United States v. McNinch, 356 U.S. 595, 78 S.Ct. 950, 2 L.Ed.2d 1001 (1958), the Supreme Court held that the mere submission of a false application to a credit institution which, in turn, procured F.H.A. insurance of the loan did not constitute a false claim against the government.

Summary of this case from United States v. Greenberg

addressing an application for credit insurance and recognizing that the FCA “was not designed to reach every kind of fraud practiced upon the [g]overnment”

Summary of this case from State ex rel. King v. Behavioral Home Care, Inc.
Case details for

United States v. McNinch

Case Details

Full title:UNITED STATES v . McNINCH, DOING BUSINESS AS HOME COMFORT CO., ET AL

Court:U.S.

Date published: May 26, 1958

Citations

356 U.S. 595 (1958)
78 S. Ct. 950

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