Friday, January 26, 2018

FYI: DC Cir Upholds Dismissal of False Claims Act Action Arising Out of 2012 Nat'l Mortgage Settlement

The U.S. Court of Appeals for the D.C. Circuit recently affirmed the dismissal of a federal False Claims Act lawsuit alleging a lender's violation of the 2012 National Mortgage Settlement and violation of the Home Affordable Modification Program through the lender's alleged false certifications of compliance.


A link to the opinion is available at:  Link to Opinion


The relator, an owner of a mortgage servicing company who purchased numerous loans from the lender, alleges to have discovered numerous violations of the 2012 National Mortgage Settlement ("Settlement") based upon the lender's handling of underwater loans by writing these loans off and failing to service them pursuant to the requirements in the Settlement.  Additionally, the relator alleged that the lender improperly claimed compliance with the Home Affordable Modification Program ("HAMP") administered by the Treasury Department. 


Both claims were asserted under the federal False Claims Act which allows for private citizens to bring qui tam claims premised upon a fraud which is "material to an obligation to pay or transmit money or property to the [federal] Government." 31 U.S.C. § 3729(a)(1)(G). 


In the case at hand, the federal government declined to intervene, and the relator's claim proceeded. 


As you may recall, the Settlement was negotiated between the federal government, the governments of 49 states, and a group of mortgage lenders including the defendant at hand.  The Settlement required that the defendant lender provide over $4 billion dollars in relief to borrower in either forgiveness or modifications of their indebtedness.  Additionally, the lender was required to comply with a comprehensive set of servicing standards.  Compliance with the Settlement was supervised and certified by a designated monitor. 


In the event of a violation of the provisions of the Settlement by the lender, the Settlement provided an opportunity for the lender to cure the violation after receipt of notice from the monitor.  Additionally, if after the opportunity to cure, the lender was still in violation of the terms of the Settlement, the government could bring suit against the lender to enforce the terms. The Settlement provided discretion to the district judge in providing relief for a violation by either "non-monetary equitable relief, including injunctive relief" or other non-monetary corrective action "or Civil Penalties," which the court "may award." 


As noted by the Court, the lender at issue had been certified in compliance with the terms of the Settlement by the designated monitor.  Moreover, the lender had granted roughly $250 million of consumer relief above and beyond that required under the Settlement. 


In short, the crux of the relator's suit was that the monitor certified the lender's compliance with the Settlement based upon false certifications provided by the lender.  Similarly, the relator claimed that the lender falsely certified compliance with the HAMP requirements.


The lower court determined that relator's claims arising under the Settlement failed because he had failed to exhaust the dispute resolution provisions of the Settlement.  Similarly, the lower court determined that the relator's HAMP based claims were insufficiently pled as he failed to sufficiently allege facts demonstrating that the certifications submitted by lender under that program were materially false; however, the district court's dismissal of the HAMP claim was without prejudice.


On appeal, the D.C. Circuit ultimately upheld the dismissal of both claims, but the Court disagreed that the relator was required to exhaust the dispute resolution provisions of the Settlement prior to proceeding with his complaint.


In disagreeing with the trial court as to the exhaustion of dispute resolution provisions in the Settlement, the DC Circuit explained that the relator simply lacked standing under the federal False Claims Act to assert any violations of the Settlement until the government elected not to intervene.  Because the realtor was otherwise not a party to the Settlement, the realtor could not have exhausted these provisions or otherwise attempt to enforce its terms. 


Nevertheless, the Court determined that dismissal of the federal False Claim Act counts under the Settlement were appropriate because, as acknowledged in the relator's complaint, the monitor was aware of all the lender's practices in its attempts to comply with the Settlement and the monitor nonetheless certified the lender's compliance contrary to the relator's arguments of non-compliance. 


Further cementing the failure to plead a claim, the Court noted that the relator failed to affirmatively allege or identify any otherwise ineligible loans that the lender improperly submitted for credit under the Settlement or identified any claims submitted the cumulative value of which exceeded the $250 million in excess relief provided by the lender.


Finally, the Court noted that even if the relator had properly alleged these facts, his claims would nevertheless fail because the terms of the Settlement merely provide for a "hypothetical monetary penalty" based upon a contingent outcome.  This the Court concluded could "hardly be described as an 'obligation' under the False Claims Act" and was supported by prior case law determining that "contingent exposure to penalties" does not qualify as an obligation under the federal False Claims Act.  Hoyte v. American National Red Cross, 518 F.3d 61, 67 (D.C. Cir. 2008); Simoneaux v. E.I. du Pont de Nemours & Co., 843 F.3d 1033, 1038 (5th Cir. 2016); U.S. ex rel. Petras v. Simparel, Inc., 857 F.3d 497, 505 (3d Cir. 2017).


As to the HAMP based claims, the DC Circuit agreed that the fatal flaw pointed out in the lower court was that the relator failed to allege with supporting facts that the "certifications were materially false."  Thus, the Court held, the dismissal of these claims without prejudice was appropriate.


Accordingly, the Court affirmed the lower court's dismissal of the relator's entire federal False Claims Act complaint. 





Ralph T. Wutscher
Maurice Wutscher LLP
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