United States ex rel. O'Donnell v. Countrywide Home Loans, Inc.

• Citation: 822 F.3d 650
• Decision Date: 23 May 2016
• Docket Number: 15–499.,Docket Nos. 15–496
• Parties: UNITED STATES ex rel. Edward O'DONNELL, Plaintiff–Appellee, v. COUNTRYWIDE HOME LOANS, INC., Countrywide Bank, FSB, Bank of America, N.A., and Rebecca Mairone, Defendants–Appellants, Countrywide Financial Corp. and Bank of America Corp., Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

822 F.3d 650

UNITED STATES ex rel. Edward O'DONNELL, Plaintiff–Appellee

v. COUNTRYWIDE HOME LOANS, INC., Countrywide Bank, FSB, Bank of America, N.A., and Rebecca Mairone, Defendants–AppellantsCountrywide Financial Corp. and Bank of America Corp., Defendants.^*

Docket Nos. 15–496

15–499.

United States Court of Appeals, Second Circuit.

Argued: Dec. 16, 2015.

Decided: May 23, 2016.

Kannon K. Shanmugam, Williams & Connolly LLP, Washington, DC (Brendan V. Sullivan, Jr., Enu A. Mainigi, Craig D. Singer, Williams & Connolly LLP, Washington, DC; Richard M. Strassberg, William J. Harrington, Goodwin Procter LLP, New York, NY, on the brief), for Defendants–Appellants Countrywide Home Loans, Inc., Countrywide Bank, FSB, and Bank of America, N.A.

E. Joshua Rosenkranz, Orrick, Herrington & Sutcliffe LLP, New York, NY (Robert M. Loeb, Kelsi Brown Corkran, Orrick, Herrington & Sutcliffe LLP, Washington, DC; Marc L. Mukasey, Michael C. Hefter, Ryan M. Philp, Seth M. Cohen, Bracewell & Giuliani LLP, New York, NY, on the brief), for Defendant–Appellant Rebecca Mairone.

Pierre G. Armand, Assistant United States Attorney (Joseph N. Cordaro, Carina H. Schoenberger, Benjamin H. Torrance, Assistant United States Attorneys, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Plaintiff–Appellee.

Seth P. Waxman, Daniel Aguilar, Sina Kian, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, DC; Noah A. Levine, Alan E. Schoenfeld, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Amici Curiae The Clearing House Association, L.L.C., American Bankers Association, Financial Services Roundtable, and Chamber of Commerce of the United States of America.

Dennis M. Kelleher, Better Markets, Inc., Washington, DC, for Amicus Curiae Better Markets, Inc.

Before: RAGGI, WESLEY, and DRONEY, Circuit Judges.

WESLEY

, Circuit Judge:

When can a breach of contract also support a claim for fraud? This question—long an issue in common-law courts—comes before us in the context of a judgment in the United States District Court for the Southern District of New York (Rakoff, J. ), imposing civil penalties exceeding $1.2 billion on Defendants–Appellants Countrywide Home Loans, Inc.; Countrywide Bank, FSB; Bank of America, N.A. (collectively, “Countrywide”); and Rebecca Mairone (together with Countrywide, “Defendants”) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), 12 U.S.C. § 1833a

. As the necessary predicate for these penalties, the Government alleged that Defendants violated the federal mail and wire fraud statutes by selling poor-quality mortgages to government-sponsored entities. On appeal, Defendants argue that the evidence at trial shows at most an intentional breach of contract—i.e., that they sold mortgages that they knew were not of the quality promised in their contracts—and is insufficient as a matter of law to find fraud. We agree, concluding that the trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises. Accordingly, we reverse with instructions to enter judgment in favor of Defendants.

BACKGROUND

This case arises in the context of the post-financial-crisis restructuring of the Full Spectrum Lending Division (“FSL”) of Countrywide Home Loans. Prior to the events at issue in this case, FSL had been the subprime lending division of Countrywide; after the collapse of the subprime market in 2007, Countrywide undertook a transformation of FSL into a prime origination division with the goal of selling prime loans¹ to two government-sponsored enterprises (“GSEs”): the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The overall reorganization of FSL was referred to as “Central Fulfillment,” one component of which was a loan origination process² called the “High Speed Swim Lane” or “HSSL,” introduced in August 2007 and expanded in October 2007. Rebecca Mairone, the only named individual defendant, was the Chief Operating Officer of FSL during 2007 and 2008 and was responsible for overseeing FSL's reorganization, including the implementation of HSSL.

This case originated in February 2012 as a qui tam suit under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq.,

commenced by Edward O'Donnell, a former employee of Countrywide. Subsequently, the Government intervened, added claims under section 951 of FIRREA, 12 U.S.C. § 1833a —which imposes civil penalties for violations of the federal mail and wire fraud statutes that “affect[ ] a federally insured financial institution”—and named Countrywide Home Loans, Inc., Countrywide Financial Corp., Countrywide Bank, FSB, Bank of America Corp., Bank of America, N.A., and Mairone as defendants. As a result of a later motion to dismiss and amended complaint, the FCA claims, Bank of America Corp., and Countrywide Financial Corp. were removed from the case, leaving only FIRREA claims against the remaining defendants. It is on these claims and against these defendants that the case ultimately went to trial.

At trial, the Government presented the following evidence relevant to our consideration here.³ Pursuant to contracts with Fannie Mae, Countrywide as the seller of mortgages represented that, “as of the date [of] transfer,” the mortgages sold would be an “Acceptable Investment.” J.A. 5905, 5908, 5935, 5938.⁴ Similarly, Freddie Mac's selling guide⁵ contained a representation by the seller—again, Countrywide—that “all Mortgages sold to Freddie Mac have the characteristics of an investment quality mortgage.” J.A. 6368;⁶ see also J.A. 6366 (representing quality “[a]s of” the date the loans were delivered to Freddie Mac). The Government adduced no evidence and made no claim that Countrywide had fraudulent intent during the negotiation or execution of these contracts.

The Government's theory is that Countrywide sold loans under these purchase agreements to the GSEs, knowing that the loans were not investment quality and thus intending to defraud them. To support this argument, the Government presented extensive evidence of quality problems in the loans approved through the HSSL program. See J.A. 1839–41, 1848–49, 1863–66, 2220–25, 2228–30, 3313–20, 4437–44, 5650, 5988, 5998. The Government also identified three FSL officers (the “Key Individuals”) as to whom they alleged fraudulent intent: Mairone; Greg Lumsden, President of FSL; and Cliff Kitashima, Chief Credit Officer of FSL. J.A. 3516; see also J.A. 5220. To demonstrate the requisite intent, the Government presented evidence that the Key Individuals were informed of the poor quality of HSSL loans by FSL employees and internal quality control reports and nonetheless sold them to the GSEs. See J.A. 1890–900, 2237–43, 2250–53, 2255–62, 3416–18, 3364–70, 3486–91, 6063–66, 6716–22, 7002–05, 7019–22, 7178.⁷

With respect to the Key Individuals, the Government also presented evidence that at least Kitashima and Mairone knew of the investment-quality representations made in the contractual documents between Countrywide and the GSEs. See J.A. 3800–01, 4324. The Government presented no evidence that any of the Key Individuals were involved in the negotiation or execution of these contracts, nor did it present evidence that any of them communicated with either GSE regarding the loans sold; in fact, Defendants elicited testimony from GSE witnesses to the contrary. See J.A. 2764–65, 3041; see also J.A. 3800–01, 4304–05.⁸ The Government's case rested upon facts showing that the Key Individuals knew of the pre-existing contractual representations, knew that the loans originated through HSSL were not consistent with those representations, and nonetheless sold HSSL loans to the GSEs pursuant to those contracts. For example, in its closing argument, the Government summarized as follows:

And now that all the evidence has come in, this case still comes down to a few simple facts. First, the Hustle loans were bad. Second, the defendants knew the Hustle loans were bad. And third, the defendants passed the Hustle loans off as good loans anyway to cheat Fannie and Freddie out of money.

J.A. 5009; see also J.A. 5006–07, 5020, 5041, 5049, 5147–48, 5153.

After closing arguments, the jury was charged as to the elements of federal mail and wire fraud. In particular, the jury was instructed that it had to find a scheme to defraud, which was defined as “a plan or design to obtain money or property by means of one or more false or misleading statements of a material fact.” J.A. 5219. The District Court defined a false statement as “an outright lie” and a misleading statement as “true as far as it goes but creat[ing] a false impression by omitting information necessary to correct the false impression.” J.A. 5219. The jury was charged that the Government's theory was that “the defendants devised a scheme to induce [the GSEs] to purchase mortgage loans originated through [HSSL] by misrepresenting that the loans were of higher quality than they actually were,” and was further charged that “the fact that some of these alleged misrepresentations may have constituted breaches of the contracts ... is neither here nor there.” J.A. 5219–20. Second, the jury was charged that it needed to find that “the defendant you are considering participated at some point in the scheme knowingly and with a specific intent to defraud”—that is, “act[ed] consciously and deliberately ... [with] knowledge that that defendant was participating in a fraudulent scheme” and “purposely intended to deceive and harm [the GSEs] by seeking to sell them mortgage loans ... through false or misleading representations.” J.A. 5220. The jury was also charged that, as to Countrywide, it could only find fraudulent intent if “at least one of [the Key Individuals] participated in such a fraudulent scheme with such intent.” Id.

After deliberation, the jury returned a general verdict in favor of...