Associated Mortg. Bankers Inc. v. United States

• Decision Date: 31 March 2021
• Docket Number: No. 20-354 C,20-354 C
• Parties: ASSOCIATED MORTGAGE BANKERS INC., Plaintiff, v. THE UNITED STATES, Defendant.
• Court: U.S. Claims Court

ASSOCIATED MORTGAGE BANKERS INC., Plaintiff,
v.
THE UNITED STATES, Defendant.

No. 20-354 C

United States Court of Federal Claims

March 31, 2021

David Monro Souders, Weiner, Brodsky & Kider, P.C., of Washington, D.C., for plaintiff.

Sheryl Lynn Floyd, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, Department of Justice, with whom were, Kenneth M. Dintzer, Deputy Director, Robert E. Kirschman, Jr., Director, and Ethan Davis, Acting Assistant Attorney General, all of Washington, D.C., for defendant.

OPINION AND ORDER

SOMERS, Judge.

This case is brought by Associated Mortgage Bankers Inc. ("Plaintiff" or "AMB"), on behalf of itself and a putative class, against the United States, the U.S. Department of Housing and Urban Development ("HUD"), and former HUD Secretary Ben Carson "in his official capacity" for breach of contract and breach of the covenant of good faith and fair dealing. ECF No. 1 at 1 ("Compl."). Specifically, Plaintiff contends that HUD breached an indemnification agreement with Plaintiff (and agreements with other similarly situated lenders) and is thus barred from enforcing its terms against Plaintiff. The complaint seeks "restitution, disgorgement, declaratory, and injunctive relief" against the named defendants. Id. at 2.

Before the Court are the government's separate motions to dismiss pursuant to Rules 12(b)(1) and 12(b)(6) of the Rules of the United States Court of Federal Claims ("RCFC"). The motions have been briefed, and the Court held oral argument on February 23, 2021. As explained below, the Court finds that this case is based on substantially the same operative facts as those in an earlier-filed action that was pending in the United States District Court for the District of Columbia at the time Plaintiff filed its complaint in this Court. Accordingly, pursuant

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to 28 U.S.C. § 1500, the government's motion to dismiss for lack of subject-matter jurisdiction is GRANTED.

BACKGROUND AND PROCEDURAL HISTORY

A. HUD Mortgage Insurance and Asset Sales

Congress created the Federal Housing Authority ("FHA") in 1934, which later became part of HUD's Office of Housing. Compl. ¶ 8. FHA "provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories." Id. ¶ 9. According to HUD's website, "FHA mortgage insurance provides lenders with protection against losses if a property owner defaults on their mortgage. The lenders bear less risk because FHA will pay a claim to the lender for the unpaid principal balance of a defaulted mortgage." Id. ¶ 10 (quoting The Federal Housing Administration (FHA), HUD.gov, https://www.hud.gov/program_offices/housing/fhahistory). "The account from which FHA pays insurance claims is known as the Mutual Mortgage Insurance Fund (the 'MMI Fund')." Id. ¶ 11.

If a loan covered by FHA mortgage insurance defaults, the mortgage holder or servicer generally will either foreclose on the property or obtain a deed-in-lieu of foreclosure. Id. ¶ 12. The mortgage holder or servicer will then usually make an insurance claim to FHA for their losses and convey title to the property to HUD in return. Id. ¶ 13. "HUD will then generally dispose of any collateral it receives in exchange for paying an insurance claim from the MMI Fund in order to recoup the losses due to paying the insurance claim." Id. ¶ 14. FHA can also accept assignment of the mortgage in exchange for an insurance payout. See 12 U.S.C. § 1710(a)(1)(A).

"In 2002, HUD began exploring a new demonstration program, known as Accelerated Claim Disposition ('ACD'), to dispose of collateral it received after paying insurance claims." Compl. ¶ 15. Since then, "HUD has operated a number of programs that entail the bulk sale of notes" to private-sector bidders "and it has identified such programs by a number of names over time," including, as most relevant here, the Single Family Loan Sales ("SFLS") program. Id. ¶ 16.

In October 2002, following notice and comment rulemaking, "HUD published a final 'Notice of FHA Accelerated Claims Disposition Demonstration' which formally established the [ACD] demonstration program" (id. ¶ 17), after which HUD would "assess its success and determine whether to implement the ACD process, on a permanent basis, throughout the country." 67 Fed. Reg. 66,038 (Oct. 29, 2002). "With respect to which loans qualified for the ACD demonstration program, the October 2002 Notice added a requirement that '[t]o the knowledge of the participating mortgagee, the mortgage loan is not subject to an Indemnification Agreement as of the provisional claim approval date.'" Compl. ¶ 18 (quoting 67 Fed. Reg. 66,041 (Oct. 29, 2002)). In other words, if a loan was subject to an indemnification agreement, it could not be part of the ACD demonstration program. HUD conducted four sales under the ACD demonstration program from 2002 to 2005. Id. ¶ 19.

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In June 2006, HUD published an advance notice of proposed rulemaking to make the ACD program "a permanent part of HUD's single family mortgage insurance programs." Id. ¶¶ 20-23 (quoting 71 Fed. Reg. 32,392 (June 5, 2006)). The notice also provided that "upon codification" of the ACD program, the regulations "governing the assignment of mortgages to HUD," as well as those governing "the disposition of HUD-acquired single family property," would be amended to reflect the program's new requirements, policies, and procedures. Id. ¶ 23 (quoting 71 Fed. Reg. 32,392 (June 5, 2006)). However, "[i]n March 2007, the proposed rulemaking was withdrawn" and "HUD did not amend the regulations . . . to reflect the impacts or changes as a result of the ACD demonstration program." Id. ¶¶ 24-25. Nevertheless, HUD conducted subsequent bulk sales similar to those completed during the ACD demonstration program but which "were not subject to notice and comment procedures." Id. ¶ 32. Relevant to the instant case is sale number "SFLS 2013-2," which included the mortgage loan originated by Plaintiff discussed below. Id. ¶ 49.

The Office of Inspector General at HUD released a report, in July 2017, "finding that HUD was required to conduct notice and comment rulemaking to implement the SFLS/[Distressed Asset Stabilization] program, but had failed to do so." Id. ¶ 26. In response, HUD stated that the bulk note sales were "guided by a series of well documented procedures used both internally by staff and externally by stakeholders." Id. ¶¶ 27 (quoting HUD OIG Report No. 2017-KC-0006 at 10-11).

B. The Springer Loan, Indemnification Agreement, and 2013 Sale

Plaintiff is an FHA-approved lender that "originates mortgage loans, including mortgages that are and were eligible for insurance under the [FHA] insurance program administered by HUD." Id. ¶ 2. Relevant here, Plaintiff "originated a $505,000 FHA loan . . . secured by a mortgage on a property in Brooklyn, New York" ("Springer loan"). ECF No. 8 at 8 ("Def.'s 12(b)(1) Mot. to Dismiss"). The Springer loan "closed and was endorsed for FHA insurance in October 2010. In December 2010, the owner and servicer of the mortgage, J.P. Morgan Chase Bank, N.A. (Chase), reported a delinquency and, in November 2011, the borrower defaulted." Id. (citations omitted).

"In 2012, HUD's Quality Assurance Division determined that AMB had engaged in 'non-compliant lending activities' when it originated the Springer loan, thereby exposing HUD to an unacceptable level of risk. HUD sent a letter to AMB directing it to sign an indemnification agreement, which AMB signed in December 2012." Id. (citations omitted); see also Compl. ¶ 38. The agreement "obligates AMB to indemnify HUD for all monetary losses suffered on an FHA-insured loan." ECF No. 9 at 5 ("Pl.'s Resp. to 12(b)(1)"). In pertinent part, the Indemnification Agreement provides:

All HUD requirements for servicing and payment of mortgage insurance premiums will be observed with respect to such mortgages. In the event of a valid claim for insurance on any of the mortgages covered by this Agreement, indemnification will be in accordance with paragraph (b), (c), (d), or (e), whichever applies. HUD's Investment includes, but is not limited to: the full amount of the insurance claim actually paid, . . . prorated losses from and

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expenses associated with the sale of a note, . . . and any other expenses HUD may incur in connection with its claim disposition programs regarding FHA insured mortgages. To the extent HUD recoups any losses (e.g.[,] receipts for the sale of the property) or there is any discount on the property (e.g., an Officer Next Door discount), HUD will deduct the amount of the recoupment or discount from HUD's Investment.

Compl. ¶ 39 (quoting Ex. 3 at 1). Simply put, if HUD suffered a shortfall between what it paid out on the insurance claim on the defaulted mortgage and what it recovered in selling the note, Plaintiff was generally responsible under the Indemnification Agreement for making HUD whole.

In 2013, the mortgage's servicer, Chase, "sought to file an FHA insurance claim on the defaulted Springer loan by assigning the defaulted loan to HUD, one of several methods for an insurer to submit an insurance claim to HUD." Def.'s 12(b)(1) Mot. to Dismiss at 8. Under the SFLS program, HUD bundles defaulted notes that are assigned to HUD into pools and sells them at an auction to the highest aggregate bidder. Id. In order to participate in the program, "Chase entered into a Participating Servicer Agreement with HUD, which provided that loans subject to an indemnification agreement were ineligible for inclusion with the loans that are bundled and sold under HUD's [SFLS] program." Id. at 8-9; see also Compl. ¶¶ 64-67. Nevertheless, "Chase included the Springer loan in the pool of notes sold under that program in June 2013." Id. at 9. HUD's sale of the note on the Springer loan recovered $360,531.24. Compl. ¶ 88.

In August 2013, "Chase submitted an FHA insurance claim for $520,979.86 that included the unpaid principal balance on the Springer loan." Def.'s...