In a decision with potentially far-reaching implications, the Fifth Circuit has ruled the submission of payment vouchers does not constitute the submission of false claims when the defendant was contractually entitled to continue receiving payments from the government unless and until the government invoked its breach remedies. United States v. Southland Management Corp., 326 F.3d 669 (5th Cir. 2003) (en banc).

The case involved a housing assistance agreement with the Department of Housing and Urban Development (HUD) under which HUD guaranteed the mortgage used to purchase an abandoned apartment complex, and subsidized the tenants' rent payments, in exchange for the owner's agreement to rehabilitate the property and to keep it "in good repair and condition." Under the contract, which was entered into in 1980, the owner was entitled to make monthly requests for housing assistance payments from HUD. Such requests were required to be accompanied by a certification that the apartments were "in Decent, Safe, and Sanitary condition." 326 F.3d at 672.

By 1993, the condition of the property was deteriorating and HUD worked with the owner in an attempt to rectify the problems. Under the contract, if HUD chooses to work with the owner to remedy the conditions, the owner is entitled to continue to receive housing assistance payments until HUD sends written notification that the required corrective action has not been taken. Such a notification was never sent. Rather, as negotiations between HUD and the owner dragged out for years, the government attempted to resolve matters by bringing a false claims action. The government's theory was that each monthly request for a housing assistance payment constituted a false claim because each request certified that the housing units were decent, safe, and sanitary, when they, in fact, were not.

The concurring opinion would have rejected the government's theory on the well-settled principles that (1) a false certification of compliance must be a prerequisite to a government payment in order to constitute a False Claims Act violation; and (2) that the defendant must "knowingly" submit a claim that is false or fraudulent. The majority, however, decided the case on a different, and very novel, theory. According to the majority, the government contended that the monthly requests for housing assistance payments were false claims because they were claims for payments to which the owner was not entitled. Noting that under the contract the owner was entitled to receive the housing assistance payments during the period HUD was working with the owner to correct the problems, the court concluded the requests for housing assistance payments were not false claims because they were requests for money to which the owner was entitled.

The court's rationale could have far-reaching implications for government contractors and health care providers. The majority appears to be saying that if there is a dispute resolution procedure in place, either by contract, statute, or regulation, and there is an ongoing dispute between the government and the contractor or provider, the procedure must be completed before the government can pursue a remedy under the False Claims Act. To put it another way, the Fifth Circuit appears to be telling the government that it must exhaust its administrative or contractual remedies before it can pursue a false claims remedy. This is, indeed, a novel proposition.