United States v. Americus Mortg. Corp., CIVIL ACTION NO. 4:12-cv-02676

CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
Docket NumberCIVIL ACTION NO. 4:12-cv-02676
Decision Date29 August 2014


CIVIL ACTION NO. 4:12-cv-02676


August 29, 2014


The United States of America has brought this action against two residential mortgage lending companies and two executive officers of those companies, alleging civil fraud in violation of the False Claims Act ("FCA"), 31 U.S.C. § 3729, and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1833a, and seeking indemnification under federal common law. The Government alleges that Defendants Americus Mortgage Corporation ("Allied Capital"), Allquest Home Mortgage Corporation ("Allied Corp"),1 Jim C. Hodge, and Jeanne L. Stell made numerous false statements in loan applications and other documents in a scheme to procure home mortgage insurance from the United States Department of Housing and Urban Development ("HUD") on loans they issued. The Government contends that this alleged fraud resulted in HUD paying out more than $260 million in

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insurance proceeds to cover loans that have defaulted, and that HUD will be faced with more defaults in the future. Dkt. 100, ¶ 1.

The case has been transferred to this Court by consent of the parties, pursuant to 28 U.S.C. § 636(c). Pending before the Court is the Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6) filed by Allied Corp, Dkt. 109, and the responsive briefing. Dkt. 110, 119, 124, 126, and 128. After considering the pleadings, the arguments of the parties, and applicable legal authorities, Defendant's Motion to Dismiss is GRANTED in part and DENIED in part.

I. Background2

A. The FHA Mortgage Insurance Program

HUD insures lenders against losses on mortgage loans made to homebuyers. HUD administers this mortgage insurance program through the Federal Housing Administration ("FHA"). Under this program, if a homeowner fails to make payments on an insured mortgage loan and the lender forecloses on the property, HUD pays the lender the balance of the loan and assumes ownership and possession of the property. Additionally, HUD incurs the expense of managing and marketing the foreclosed property until it is resold.3

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A fundamental requirement of the HUD insurance program is that a loan correspondent, i.e., a lender who originates mortgage loans and later sells them to other lenders,4 must be approved by HUD to originate, purchase, hold, or sell HUD-insured mortgages. HUD further insists that the loan correspondent obtain specific approval from HUD for each branch office from which the correspondent intends to originate HUD-insured loans.5

To obtain HUD approval to originate loans from a specific branch office, the loan correspondent must submit HUD Form 92001-B—a form containing basic information about the branch, a general certification that the branch "meets all HUD/FHA requirements," and a specific certification that the lender "will pay all operating costs of the branch office . . . ."6 Further, loan correspondents must submit annual certifications containing four representations:

I certify that none of the principals, owners, officers, directors, and/or employees of the above-named lender is currently involved in a proceeding and/or investigation that could result, or has resulted in a criminal conviction, debarment, limited denial of participation, suspension, or civil money penalty by a federal, state, or local government.

I certify that the above named lender has not been refused a license and has not been sanctioned by any state(s) in which it originates and/or services HUD-FHA insured loans.

I know, or am in the position to know, whether the operations of the above named lender conform to HUD-FHA regulations, handbooks, and policies.

I certify that to the best of my knowledge, the above named lender conforms to all HUD-FHA regulations necessary to maintain its HUD-FHA

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approval, and that the above lender is fully responsible for all actions of its employees including those of its HUD-FHA approved branch offices.7

After submitting the certifications, the loan correspondent receives an identification number ("HUD ID") that permits the branch to originate HUD-insured loans. As a means of monitoring lender default rates, HUD requires lenders to enter the specific HUD ID for the originating branch in every loan file submitted to HUD. HUD also requires loan correspondents to implement a quality-control program. As part of this program, the lender must "(1) conduct an on-site audit of all branch offices within ninety days of opening and annually thereafter; (2) review 10% of all closed loan files to ensure they were underwritten in accordance with HUD guidelines; and (3) review all early payment defaults (i.e., those that default within the first six months)."8

B. Allied Capital and Allied Corp

Allied Capital was an approved FHA loan correspondent from September 26, 1991 to December 31, 2010. In this capacity, it had the authority to originate HUD-insured mortgage loans for sale or transfer to other qualifying lenders. On January 23, 2012, Allied Capital changed its name with the Secretary of State of Texas to "Americus Mortgage Corporation."9

In 2010 and 2011, Allied Capital sold its assets to Allied Corp and terminated nearly all of its branches, only to then reopen them as branches of Allied Corp. On

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January 10, 2012, Allied Corp changed its name with the Secretary of State of Texas to "Allied Corp Home Mortgage Corporation."

Defendant Jim Hodge is the founder, President, and Chief Executive Officer of both Allied Capital and Allied Corp.10

Defendant Jeanne Stell is the Executive Vice President and Director of Compliance for both companies. She has held a senior management position since approximately 2001, with the exception of a temporary absence between November 2007 and early 2010.11

II. Causes of Action Against Defendants

A. False Claims Act

In Claims 2 and Claim 20 of the Third Amended Complaint, the Government asserts causes of action against Allied Corp under former § 3729(a)(2) and § 3729(a)(1)(B) (as amended) of the FCA. In Claim 21, the Government asserts causes of action against Allied Corp under 31 U.S.C. § 3729(a)(1) (2006) and § 3729(a)(1)(A) of the FCA. The FCA is the Government's "primary litigation tool" for recovering losses resulting from fraud. United States ex rel. Marcy v. Rowan Cos., 520 F.3d 384, 388 (5th Cir. 2008). The FCA imposes civil penalties and treble damages on any person who "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1)(B) (2009).12

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B. Claim for "Indemnification"

In Claim 5, the Government asserts an "indemnification" claim against Allied Corp, seeking "indemnification" for insurance claims that it might be required to pay out as a result of Defendants' alleged false or fraudulent records, statements, or certifications. The Government's Complaint does not allege the source of, or elements of proof of, such a cause of action.13 The existence of such a cause of action under these facts appears to be a question of first impression.

C. Financial Institutions Reform, Recovery, and Enforcement Act

In Claims 8, 11, 14, and 18, the Government asserts causes of action under § 1006 and § 1014 of FIRREA against Allied Corp.14

Section 1006 makes it a crime for any person who is "connected in any capacity with [HUD]" to "mak[e] any false entry in any book, report or statement of or to [HUD]"

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with the "intent to . . . deceive any officer, auditor, examiner or agent . . . of [a] department or agency of the United States . . ." 18 U.S.C. § 1006.

Section 1014 prohibits the submission of false records or making of false statements to the FHA. 18 U.S.C. § 1014. Specifically, it makes it a crime for any person to "knowingly mak[e] any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of the [FHA] . . ." Id.

III. Factual Allegations against Defendants

Between January 1, 2001 and December 31, 2010, Allied Capital and Allied Corp, originated 112,324 home loans. Of those loans, 35,801 (approximately 32%) defaulted, costing over $834 million in insurance claims to be paid by HUD.15

The Government alleges that Allied Capital willfully violated the regulations that provide protection to HUD's insurance fund and knowingly deceived HUD to further its fraudulent schemes. The Government contends that Allied Capital made fraudulent representations to HUD-FHA in four separate types of documents: (1) loan application packages to secure FHA insurance on individual loans; (2) branch certifications to obtain approval to originate FHA loans from a new branch office; (3) annual certifications required for lender participation in the FHA program; and (4) quality-control reports.

A. Loan Application Packages

For over ten years, Allied Capital originated loans out of hundreds of branches that it never disclosed to HUD. The Government refers to these branches as "shadow

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branches," because they operated...

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