The U.S. Court of Appeals for the D.C. Circuit recently held that a prior settlement and release between the United States and several loan servicers did not bar the United States from asserting the same claims where there were material violations of HUD or FHA requirements. In doing so, the Court narrowly construed the release to include only those claims based on filing a false annual certification.
A copy of the opinion is available at: Link to Opinion
Asserting allegations under the False Claims Act, 31 U.S.C. § 3729, and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), 12 U.S.C. § 1833a, the United States, forty-nine states, and the District of Columbia sued several loan servicers, including Appellant, in the U.S. District Court for the District of Columbia. The allegations arose from the loan servicers’ supposed misconduct in issuing home mortgage loans insured by the Federal Housing Administration (FHA). Subsequently, the parties settled the lawsuit.
Pursuant to the settlement, Appellant paid roughly $5 billion dollars for the release of claims – including those under FIRREA, the False Claims Act, and the Program Fraud Civil Remedies Act, 31 U.S.C. § 3801 – “where the sole basis for such claim or claims is that [Appellant] submitted to HUD-FHA… a false or fraudulent annual certification” that it had complied with all regulations necessary to maintain FHA approval. Slip op. at p. 2. Reiterating the meaning of this “sole basis” language, the release provided:
“For avoidance of doubt, this Paragraph means that the United States is barred from asserting that a false annual certification renders [Appellant] liable… for loans endorsed by [Appellant] for FHA insurance during the period of time applicable to the annual certification without regard to whether any such loans contain material violations of HUD-FHA requirements, or that a false individual loan certification… renders [Appellant] liable under the False Claims Act for any individual loan that does not contain a material violation of HUD-FHA requirements.”
Slip op. at p. 3. In the consent judgment, the D.C. federal court retained exclusive jurisdiction to enforce its terms to resolve “any dispute arising out of matters” within the scope of the release.
Thereafter, the United States filed suit against Appellant in the U.S. District Court for the Southern District of New York, again alleging claims under the False Claims Act and FIRREA (NY Lawsuit). These claims also arose from alleged misconduct in issuing FHA-insured loans. In response, Appellant moved the D.C. federal court for an injunction, enforcing the consent judgment and barring all claims in the NY Lawsuit. The district court denied the motion.
On appeal, the U.S. Court of Appeals for the D.C. Circuit affirmed. Analyzing the language of the release between the United States and Appellant, the Court held that the settlement “expressly confines the release of claims to those for which liability is predicated on the specific conduct of filing a false annual certification.” Slip op. at p. 4. Moreover, the Court noted that the United States expressly preserved its right to pursue claims “for conduct with respect to the insurance of residential mortgage loans that violates any laws, regulations or other HUD-FHA requirements applicable to the insurance of residential mortgage loans by HUD.” Id. at p. 5.
Notably, the Court rejected Appellant’s argument that it was released from liability for company-wide conduct that was the subject of its annual certifications. See id. at p. 4. Rather, according to the Court, the settlement released “only the far narrower category of [Appellant’s] liability for all of the individual loans made pursuant to the false annual certification that did not themselves transgress any regulatory directives.” Id. at p. 6. Thus, if the same conduct that gave rise to a false certification also resulted in HUD or FHA violations, then the claim was not released.
Although Appellant pointed to a parenthetical in the release for support, the Court held that such language, in context, cannot sweep any further than the “sole basis” language that it describes. See Chickasaw Nation v. United States, 534 U.S. 84, 89 (2001).
Turning to the NY Lawsuit, the Court determined that, although the complaint came close to asserting released claims, counsel for the United States repeatedly conceded that, to comport with the terms of the release, there had to be material violations of HUD or FHA regulations with respect to individual loans.
Accordingly, the D.C. Circuit affirmed the district court’s denial of the Appellant’s motion to enforce the consent judgment.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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