The U.S. Court of Appeals for the Federal Circuit recently dismissed a lawsuit brought by a mortgage lender against the Government National Mortgage Association ("Ginnie Mae") alleging that Ginnie Mae violated several guaranty agreements.
In so ruling, the Court held that the lender's breach of contract claims were barred by the doctrine of res judicata, due to a Consent Agreement and related judgment between the lender and the U.S. Securities and Exchange Commission ("SEC").
A copy of the opinion is available at: Link to Opinion
The plaintiff originated and serviced residential mortgages and issued mortgage-backed securities in Ginnie Mae's mortgage-backed securities (MBS) program. As part of the MBS program, the plaintiff lender and Ginnie Mae entered into many Guaranty Agreements.
Ginnie Mae's "Issuer Guide" was incorporated into the Guaranty Agreements. The Issuer Guide and Guaranty Agreements required, inter alia, that plaintiff establish a custodial account for principal and interest payments and also required that delinquency rates be kept below certain threshold levels.
In 2015, Ginnie Mae "undertook a compliance review" of plaintiff's portfolio and subsequently "served [plaintiff] with a Notice of Violation, stating that, during the compliance review, Ginnie Mae had 'observed numerous instances where borrower payments were not moved to Ginnie Mae custodial accounts within [forty eight] hours of receipt' and had found that [plaintiff] has 'submitted false reports to Ginnie Mae'" stating that mortgages were delinquent 90 days or more when plaintiff repurchased them pursuant to the Guaranty Agreements "when, in fact, the 'loans were not properly delinquent,' both in breach of the Guaranty Agreements."
Ginnie Mae did not immediately exercise its right under the Guaranty Agreements to terminate the plaintiff from further participation in the MBS program, but reserved the right to do so.
The plaintiff lender responded to the Notice of Violation and promised to comply with Ginnie Mae's requirements, but also noted that it was under investigation by the SEC for the same conduct.
Based on further investigation, Ginnie Mae terminated the plaintiff from the MBS program and extinguished "any redemption, equitable, legal or other right, title and interest of [plaintiff] in the mortgages pooled under each and every Guaranty Agreement."
In 2016, the SEC filed a civil enforcement action against the plaintiff and its corporate officers, alleging that they misled investors by representing to Ginnie Mae and investors "that certain mortgage loans in [plaintiff's] securities were delinquent when, in fact, such loans were current … [and] that [plaintiff] had violated the Guaranty Agreements by 'improperly exercise[ing]' its repurchase option on loans."
The plaintiff lender allegedly did this by delaying the transfer of borrower payments that cured defaults into the custodial account, "falsely pushing the borrower's account into delinquency and eligibility for repurchase." The plaintiff "then applied the delayed payments to bring the loan current and 'back into [its] inventory,' to be re-purchased at par, re-pooled, and re-sold as an MBS 'at market rates, which reflected a premium over par.'"
The SEC alleged that the plaintiff lender "accrued '$7.5 million in illicit profits as a result of the practice,' all while [it] was certifying to Ginnie Mae that [it] was in compliance with the Guaranty Agreements."
The SEC and the plaintiff lender entered into a Consent Agreement that, without admitting liability, provided for the entry of a final judgment against the plaintiff that required plaintiff to "pay $7.5 million in disgorgement, approximately $500,000 in prejudgment interest, and $3.75 million in civil penalties." The Agreement "provided that it did not 'affect [plaintiff's] right to take legal or factual positions in litigation or other legal proceedings in which the [SEC] is not a party." The trial court approved the Consent Agreement "as its final judgment."
The plaintiff lender "tried to bring … breach of contract claims against Ginnie Mae" in the trial court but the court "dismissed these claims under Rule 12(b)(1) of the Federal Rules of Civil Procedure, for lack of subject matter jurisdiction over contract claims against the United States."
Two years later, the plaintiff "filed its Complaint in the Court of Federal Claims, alleging that Ginnie Mae had 'breached all of [the] Guaranty Agreements' when it wrongfully terminated [plaintiff] from its MBS program."
The Government moved to dismiss the complaint, and the Court of Federal Claims dismissed the complaint, concluding that the "[G]overnment has shown that [plaintiff's] breach of contract claims … are precluded under the doctrine of res judicata, because [the] action is essentially a collateral attack on the [Final] Judgment entered by the [District Court] in the SEC Civil Enforcement Action.'"
The Court of Appeals for the Federal Circuit explained that "'[t]he doctrine of res judicata involves the related concepts of claim preclusion and issue preclusion.' … Claim preclusion 'foreclose[s] any litigation of matters that … should have been advanced in an earlier suit.'… 'A final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.'" "Generally, claim preclusion applies where: '(1) the parties are identical or in privity; (2) the first suit proceeded to a final judgment on the merits; and (3) the second claim is based on the same set of transactional facts as the first.'"
The plaintiff lender argued "that the Court of Federal Claims erred in dismissing its Complaint because 'the elements of claim preclusion have not been met.'" Specifically, the plaintiff lender argued that "the SEC and Ginnie Mae are not in privity," and that its complaint did not "arise from the same set of transactional facts for the purposes of defendant preclusion because [plaintiff's] 'claims are not a collateral attack on the [Final] Judgment.'"
The Court of Appeals rejected this argument, explaining that "[f]irst, the SEC and Ginnie Mae are in privity for the purposes of precluding [plaintiff's] breach of contract claims. 'There is privity between officers of the same government,' for the purposes of claim preclusion, if 'in the earlier litigation the representative of the United States had authority to represent its interests in a final adjudication of the issue in controversy.'"
The Court noted that, as it was "uncontested that the SEC and Ginnie Mae are both officers and representatives of the United States", the "SEC has the authority to represent the United States in civil enforcement actions," the SEC "has the authority to represent the United States in settlements resolving those civil enforcement actions", and therefore that the SEC "'represent[ed] the United States' on the 'issue in controversy'— whether [plaintiff] breached the Guaranty Agreements, precipitating Ginnie Mae's extinguishment and termination of [plaintiff's] rights[,]" the Court of Appeals concluded that "the Court of Federal Claims properly concluded that the SEC and Ginnie Mae are in privity for the purposes of claim preclusion."
Second, the Court of Appeals determined that the plaintiff lender's claims "constitute a collateral attack on the Final Judgment." This is because "[a] claim is a 'collateral attack' on a final judgment where 'successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action.'"
The Court noted that the plaintiff lender's complaint sought "to dispute the facts laid out in the SEC District Court Complaint and, thereby, 'impair rights established' by, if not 'nullify,' the Consent Agreement and Final Judgment." The Court also noted that a "defendant that could have been interposed cannot later be used to attach the judgment of the first action.'" Accordingly, the Court of Appeals held that the plaintiff lender's complaint "was a collateral attack on the Final Judgment."
The Court of Appeals rejected the plaintiff's remaining arguments as unpersuasive, and affirmed the judgment of the U.S. Court of Federal Claims.
Ralph T. Wutscher
Maurice Wutscher LLP
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