United States v. Quicken Loans Inc.

• Decision Date: 09 March 2017
• Docket Number: Case No. 16–cv–14050
• Citation: 239 F.Supp.3d 1014
• Parties: UNITED STATES of America, Plaintiff, v. QUICKEN LOANS INC., Defendant.
• Court: U.S. District Court — Eastern District of Michigan

239 F.Supp.3d 1014

UNITED STATES of America, Plaintiff,
v.
QUICKEN LOANS INC., Defendant.

Case No. 16–cv–14050

United States District Court, E.D. Michigan, Southern Division.

Signed March 9, 2017

239 F.Supp.3d 1019

Brian Hudak, U.S. Attorney's Office, Christopher R. Reimer, Samuel Buffone, John W. Black, U.S. Department of Justice Civil Fraud Section, Washington, DC, Daniel H. Fruchter, U.S. Department of Justice, Madison, WI, Peter A. Caplan, United States Attorney's Office, Detroit, MI, for Plaintiff.

Jeffrey B. Morganroth, Morganroth & Morganroth, Birmingham, MI, Thomas M. Hefferon, Sabrina M. Rose–Smith, William Kyle Tayman, Goodwin Proctor LLP, Washington, DC, for Defendant.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT QUICKEN LOANS INC.'S MOTION TO DISMISS (Dkt. 15)

MARK A. GOLDSMITH, United States District Judge

In this case, the Government alleges that Defendant Quicken Loans Inc. underwrote, approved, and endorsed certain mortgage loans for Federal Housing Administration ("FHA") insurance between September 1, 2007 and December 31, 2011, and that those loans allegedly violated FHA underwriting requirements. The Government further alleges that, by falsely certifying compliance with those requirements and submitting claims for payment when those loans defaulted, Quicken violated the False Claims Act, 31 U.S.C. § 3729 et seq. The Government also asserts federal common-law claims against Quicken for breach of fiduciary duty and negligence.

This matter is before the Court on Quicken's motion to dismiss (Dkt. 15). The issues were briefed, and a hearing was held on February 13, 2017. For the reasons explained fully below, the Court grants the motion in part and denies it in part.

I. BACKGROUND

The FHA is an entity within the United States Department of Housing and Urban Development ("HUD"), which insures mortgages and administers several mortgage default insurance programs. Quicken Loans Inc. v. United States , 152 F.Supp.3d 938, 942 (E.D. Mich. 2015). As a mortgage insurer, the FHA agrees to protect mortgage lenders against the risk of loss caused by borrowers' non-payment, as authorized by the National Housing Act of 1934, 12 U.S.C. § 1701 et seq. Quicken Loans , 152 F.Supp.3d at 942.

One of the programs through which FHA insures home mortgages is the Direct Endorsement Lender ("DEL") program. In the DEL program, FHA authorizes certain lenders to evaluate the credit risk of potential borrowers, underwrite mortgage loans, and certify those loans for FHA mortgage insurance without prior HUD review or approval. Id. (citing 12 U.S.C. § 1715z–21 ). "In underwriting the mortgage loan, the lender must determine whether the borrower and the mortgage loan meet HUD's requirements for FHA insurance and whether ‘the proposed mortgage is eligible for insurance under the applicable program regulations.’ " Id. at 942–943 (quoting 24 C.F.R. § 203.5(a) ). Once a loan is endorsed by HUD or the DEL lender, it is insured by the FHA. Compl. ¶ 92 (Dkt. 1). If there is a mortgage default, the holder of the mortgage note (whether the original lender or a later transferee) submits an insurance claim to HUD for any loss from the default via an electronic claim system and, in compliance with applicable rules, receives payment from the United States Treasury after the claim is approved. Id. ¶¶ 93–95.

A lender may underwrite an FHA–insured loan in one of two ways: (i) the

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underwriter may "manually underwrite" the loan, by making the credit decision whether to approve the borrower, in accordance with HUD underwriting rules; or (ii) the lender may use a HUD–approved Automated Underwriting System ("AUS"), which is a software system that makes the credit recommendation whether to approve the borrower. Id. ¶ 60.

Beginning in July 2008, HUD required DEL lenders to electronically process eligible loan requests through an AUS. Id. ¶ 62. The AUS connects to a proprietary HUD algorithm known as Technology Open to Approved Lenders ("TOTAL"). Id. Using the data that the lender inputs into the AUS, the TOTAL algorithm makes a credit determination and provides either an "Accept/Approve" decision, which approves the loan subject to certain conditions, or a "Refer" decision, which refers the loan back to the lender for manual underwriting. Id. A loan receiving a TOTAL "Accept/Approve" decision is only eligible for FHA's insurance endorsement if the data entered into the AUS is true, complete, properly documented, and accurate. Id. ¶ 65.

For each individual mortgage loan approved for FHA insurance, the lender must make a "loan-level" certification that the individual mortgage "complies with HUD rules and is ‘eligible for HUD mortgage insurance under the DEL program.’ " Id. ¶ 87 (quoting Form HUD–92900–A). By certifying the mortgage for FHA insurance, the mortgage lender agrees to indemnify HUD for claims paid out to the lender in certain circumstances. 24 C.F.R. § 203.255(g)(1). However, the certifications are different depending on whether the loan was manually underwritten or the lender used an AUS. Compl. ¶ 88.

For a loan that required manual underwriting, the lender must certify that the underwriter "personally reviewed the appraisal report (if applicable), credit application, and all associated documents and has used due diligence in underwriting the mortgage." Id. For a loan approved through the use of an AUS, HUD requires the lender to certify to the "integrity of the data" it entered, id. ¶ 88, which, according to the complaint, "HUD defines as data that is true, complete, and accurate," id. ¶ 64. (citing FHA TOTAL Mortgage Scorecard User Guide, ch. 2, (Dec. 2004 ed.) (Dkt. 16–6)).

As a DEL, Quicken was authorized by HUD to make loans in accordance with FHA's underwriting guidelines and program requirements and submit those loans to FHA for insurance. Compl. ¶¶ 3, 38–39, 49–68. Many of Quicken's mortgage loans were approved by HUD's TOTAL algorithm. See, e.g. , id. ¶¶ 125–126, 139–142, 149–150, 173–174, 200.

In April 2012, the Department of Justice and the HUD Office of Inspector General began investigating Quicken under the False Claims Act. Quicken Loans , 152 F.Supp.3d at 943. The scope of the investigation encompassed approximately 246,000 FHA loans that Quicken had originated from mid–2007 through December 31, 2011. Id. After the parties were unable to reach a settlement, Quicken filed suit against the Government in this district, id. at 944, which suit this Court ultimately dismissed, id. at 955.

The Government originally filed this action in the United States District Court for the District of Columbia less than one week after Quicken had filed its suit. Id. The Government's case was eventually transferred to this district, see United States v. Quicken Loans Inc. , 217 F.Supp.3d 272, 2016 WL 6838186 (D.D.C. Nov. 18, 2016) ; Quicken's motion to dismiss followed.

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II. STANDARD OF DECISION

In evaluating a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), "[c]ourts must construe the complaint in the light most favorable to plaintiff, accept all well-pled factual allegations as true, and determine whether the complaint states a plausible claim for relief." Albrecht v. Treon , 617 F.3d 890, 893 (6th Cir. 2010). To survive a motion to dismiss, a complaint must plead specific factual allegations, and not just legal conclusions, in support of each claim. Ashcroft v. Iqbal , 556 U.S. 662, 678–679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A complaint will be dismissed unless it states a "plausible claim for relief." Id. at 679, 129 S.Ct. 1937.

III. ANALYSIS

The Court will first address Quicken's arguments in its motion to dismiss concerning the claims under the False Claims Act before addressing its arguments concerning the federal common-law claims.

A. False Claims Act Claims

The Government asserts two claims under the False Claims Act—a "presentment" claim under 31 U.S.C. § 3729(a)(1)(A) and 31 U.S.C. § 3729(a)(1) (2006), and a "false statement" claim under 31 U.S.C. § 3729(a)(1)(B). See, e.g. , United States ex rel. Winkler v. BAE Sys., Inc. , 957 F.Supp.2d 856, 864 (E.D. Mich. 2013) (using colloquial references of "presentment" and "false statement" to distinguish claims).¹

To state a presentment claim under the Act, the Government must sufficiently plead that (i) Quicken presented, or caused to be presented, a claim for payment or approval; (ii) the claim was false or fraudulent; and (iii) Quicken's acts were undertaken "knowingly," meaning with actual knowledge of the information, or with deliberate ignorance or reckless disregard for the truth or falsity of the claim. United States ex rel. Prather v. Brookdale Senior Living Cmtys., Inc. , 838 F.3d 750, 761 (6th Cir. 2016). To state a false-statement claim

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under the Act, the Government must sufficiently plead similar elements: (i) Quicken made a false statement or created a false record; (ii) Quicken did so...