U.S. ex rel. K & R Ltd. Part. v. Mass. Hous. Fin.

• Decision Date: 11 October 2006
• Docket Number: Civil Action No. 99-1343 (RCL).
• Citation: 456 F.Supp.2d 46
• Parties: UNITED STATES of America, ex rel. K & R LIMITED PARTNERSHIP, Plaintiff-Relator, v. MASSACHUSETTS HOUSING FINANCE AGENCY, Defendant.
• Court: U.S. District Court — District of Columbia

Page 46

456 F.Supp.2d 46

UNITED STATES of America, ex rel. K & R LIMITED PARTNERSHIP, Plaintiff-Relator, v. MASSACHUSETTS HOUSING FINANCE AGENCY, Defendant.

Civil Action No. 99-1343 (RCL).

United States District Court, District of Columbia.

October 11, 2006.

COPYRIGHT MATERIAL OMITTED

Carl A.S. Coan, Jr., Carl A.S. Coan, III, Coan & Lyons, Washington, DC, for Plaintiff-Relator.

Michael J. Tuteur, Lawrence M. Kraus, Foley & Lardner, LLP, Boston, MA, Stuart Michael Gerson, Epstein, Becker & Green, P.C., for Defendant.

MEMORANDUM OPINION

LAMBERTH, District Judge.

This matter comes before the Court on the Motion [74] for Summary Judgment by plaintiff-relator K & R Limited Partnership ("K & R") and the Motion [75] for Summary Judgment by defendant Massachusetts Housing Finance Agency ("MHFA"). Also before the Court are MHFA's Motion [90] to Strike the Affidavit of Robert Ercolini and K & R's Motion [93] to Strike Exhibit A to MHFA's Reply. Upon consideration of the motions, the oppositions thereto, the briefs in reply, the applicable law, and the entire record, the Court has concluded that both Motions to Strike will be denied, that K & R's Motion for Summary Judgment [74] will be denied, and that MHFA's Motion for Summary Judgment [75] will be granted. Accordingly, an appropriate order was issued on September 29, 2006, granting summary judgment in favor of defendant on all of plaintiff's claims, which are dismissed with prejudice, and entering judgment in favor of defendant. The Court's reasoning is set forth below.

I. FACTS

The federal Department of Housing and Urban Development ("HUD") conducts several programs to help provide affordable housing to lower income families, and among these is the non-insured "236 Program," so named because it was authorized by Section 236 of the National Housing Act. 12 U.S.C. § 1715z-1. Under the Program, the owner of a housing project offers some or all of the units in the project to lower income families at affordable rental rates. When certain requirements are met, these units then qualify for mortgage assistance from HUD. The project owner obtains a mortgage loan to finance the construction or rehabilitation of the project secured by a mortgage on the property.

At the same time, HUD makes monthly payments to the mortgage lender, or mortgagee, to reduce the project owner's obligation. This debt service subsidy is called an "Interest Reduction Payment"¹ The amount of the HUD payment is equal to the difference between the monthly mortgage loan payment—taking into account payments for principal, interest, and certain allowable fees—and what the mortgagor's payment would be if the interest rate on the loan was 1 percent. 12 U.S.C. § 1715z-1(c).² In other words, the project owner obtains a mortgage loan on the open market but makes payments on it as if the interest rate was 1 percent, and HUD picks up the monthly difference. This mortgage assistance makes it possible for the project owner to offer units at rates that are affordable to lower income families, who are the ultimate and intended beneficiaries of the Program.

The Massachusetts Housing Finance Agency ("MHFA") has acted as a mortgage lender for .dozens of projects that participate in the 236 Program. MHFA was established by the Massachusetts Legislature in 1966, and its purpose is to "raise funds from private investors in order to make low interest rate funds available for the acquisition, construction, adaptation and rehabilitation of housing designed to meet the needs of physically or mentally handicapped individuals and their families, insure residential or construction or permanent or rehabilitation loans for community based residences, and provide technical assistance to low income persons and families applying for residential loans and to sponsors of community based residences." Mass. Gen. Laws ch. 23A App § 1-2 (2000). K & R is a limited partnership organized under the laws of Massachusetts.

For each project, the owner of the project, HUD, and MHFA executed either an "Interest Reduction Contract" or an "Agreement for Interest Reduction Payments." These agreements are substantially similar and govern, among other things, the manner in which HUD will calculate its monthly interest payments. As will be seen below, these agreements do not establish a set interest rate, but rather refer the parties to the underlying mortgage agreement, which itself supplies the interest rate or method for calculating it. K & R's Amended Complaint refers to 66 different housing projects that participate in HUD's 236 Program or did participate in it as of February 1993, and which were built or substantially renovated under the Program. While construction or renovation was ongoing, MHFA provided interim financing for these projects, usually through the issuance of short-term, tax-exempt Bond Anticipation Notes ("BANs"). When construction or rehabilitation was complete and a project was certified for occupancy, MHFA provided long-term financing for the projects with funds raised through the issuance of taxexempt bonds. It was only at this time, when permanent, long-term financing was put in place, that the project owner's loan was amortized, and it was at this time that HUD began making interest reduction payments.

For each loan made by MHFA to the owner of a project, the owner executed a mortgage note setting forth the terms of the loan, such as the loan amount, the interest rate, and the loan term. To secure the loan, each project owner executed a mortgage in favor of MHFA. In some instances MHFA also provided supplemental funding after the first mortgage loan was made.

Each month, MHFA submits to HUD a request for interest reduction payment for each of the 236 Program projects that it finances. Each request is submitted on an invoice called a "Form HUD-3111," titled "Mortgagee's Certification and Application for Interest Reduction Payments." When MHFA's representative signs the form, that representative "certifies to the best of his knowledge and belief' that, among other things, "each interest reduction payment included in this billing has been calculated in accordance with the provisions of the Interest Reduction Contract" and that "the amount of this billing is true and correct and has not been previously claimed or paid." See K & R's Mem. in Support of Motion for Summary Judgment [74], Ex. 2. In addition, MHFA submits supplemental material with each Form HUD-3111 to document the information provided on the Form.

MHFA financed most of its mortgage loans from the proceeds of bond issuances. Many of the 66 projects whose mortgages are at issue in this case were originally financed from the proceeds of bonds issued in the 1970s. In 1993, MHFA refunded these bonds—that is, it bought them back and retired them—using the proceeds of new bonds it had issued at substantially lower interest rates. MHFA thus was able to obtain substantial savings on the cost of its financing. The project owners continued to make the same payments to MHFA on their mortgages, MHFA continued to submit the same monthly requests for interest reduction payments to HUD, and HUD continued to make the same payments to MHFA.

On March 27, 1999 plaintiff-relator K & R Limited Partnership filed a complaint under seal pursuant to the qui tam provisions of the False Claims Act, 31 U.S.C. § 3730, et seq., ("FCA"), alleging that MHFA submitted false claims for payment to HUD each month beginning in April of 1993. K & R claimed that when MHFA issued the 1993 bonds—with interest rates lower than those for the bonds originally used to finance the 66 projects under the 236 Program—MHFA was required to lower the interest rates due under its mortgages, and thus the amount of interest reduction payment it could claim from HUD. According to K & R, MHFA's failure to lower the interest rates meant that they had not "been calculated in accordance with the provisions of the Interest Reduction Contract," as certified by the Form HUD-3111. MHFA thus submitted false claims for payment, claims which asserted that MHFA was entitled to substantially more in interest reduction payments than was actually the case.

The United States declined to exercise its right to intervene and the complaint was unsealed and served on MHFA.³ On July 30, 2001, this Court denied MHFA's motion to dismiss for failure to state a claim. The parties have engaged in discovery, and both have moved for summary judgment. K & R moves for summary judgment on the first two prongs of FCA liability, that MHFA submitted claims and that these claims were false. K & R contends there are disputed fact issues on the remaining prong, MHFA's scienter. MHFA contends that it is entitled to summary judgment on the grounds that its claims were not false and, even if they were, were not submitted with the requisite knowledge or intent.

II. Motions to Strike

Also before the Court are two motions to strike exhibits submitted by the parties. MHFA moves to strike [90] an affidavit submitted by K & R with its brief opposing summary judgment, while K & R moves to strike [93] a demonstrative chart submitted with MHFA's reply brief in support of summary judgment.

Federal Rule of Civil Procedure 12(f) allows a court to strike all or part of a pleading for insufficiency, redundancy, immateriality, impertinence, or scandalousness. See Fed.R.Civ.P. 12(f).⁴ A matter is immaterial or impertinent when not relevant to the resolution of the issue at hand. Judicial Watch, Inc. v. U.S. Dep't of Commerce, 224 F.R.D. 261, 263 (D.D.C.2004). Material is "scandalous" if it "generally refers to any allegation that unnecessarily reflects on the moral character of an individual or states anything in repulsive language that detracts from the dignity of the court." 2 Moore's Federal Practice § 12.37[3], at 12-97 ("Moore's"). These motions are strongly disfavored, and the decision of whether to strike all or part of a pleading or attachment...