Bates v. Mortgage Electronic Registration

Under the California False Claims Act, the “public disclosure” exception will bar a claim if the party’s allegations are substantially similar to information already in the public domain. To be an “original source,” the party must show that it was his information that provided the basis or catalyst for the investigation, hearing, audit, or report that led to the public disclosure.

Filing suit under the California False Claims Act (“CFCA”), Bates, on behalf of the Counties of the State of California, alleged that various banks were falsely naming Mortgage Electronic Registration System, Inc. (“MERS”) as a beneficiary in mortgage documents to avoid paying recording fees. Under this alleged relationship, when interests in loans were transferred, instead of the mortgage being assigned, the identity of the secured party was tracked by the MERS System, ultimately depriving the Counties of recording-fee revenues. After MERS removed the action to district court based on diversity jurisdiction, Bates filed a motion to remand, contending that the State of California was a real party in interest and destroyed diversity. The district court denied the motion, finding that the State was only a nominal party and that the suit only sought to recover recording fees, which were payable to and usable by only the Counties. In addition, Bates failed to show that he was suing on behalf of California. The district court dismissed the claims on the ground that the CFCA’s “public disclosure” exception jurisdictionally barred the claims because Bates’s allegations were “substantially similar to information already in the public domain.” Bates could not have been an “original source” leading to the public disclosure of the fraudulent acts, because he alleged that he became aware of these actions long after the information was already public. The Court agreed with the district court’s determination that Bates failed to show that California was anything more than a nominal party. Also, the Court agreed that Bates could not be an “original source” because his allegations revealed substantially similar information already available to the public, thus barring his claim by the CFCA. The Court did not need to analyze the 12(b)(6) motion. AFFIRMED.