United States v. Wells Fargo Bank, N.A., No. 12 Civ. 7527(JMF).

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtJESSE M. FURMAN
Citation972 F.Supp.2d 593
PartiesUNITED STATES of America, Plaintiff, v. WELLS FARGO BANK, N.A., Defendant.
Docket NumberNo. 12 Civ. 7527(JMF).
Decision Date24 September 2013

972 F.Supp.2d 593

UNITED STATES of America, Plaintiff,
v.
WELLS FARGO BANK, N.A., Defendant.

No. 12 Civ. 7527(JMF).

United States District Court,
S.D. New York.

Sept. 24, 2013.


[972 F.Supp.2d 598]


Jeffrey Stuart Oestericher, Rebecca Sol Tinio, Sarah Jean North, U.S. Attorney's Office, New York, NY, for Plaintiff.

Amy Pritchard Williams, K & L Gates LLP, Charlotte, NC, Jennifer M. Wollenberg, Douglas W. Baruch, Fried, Frank, Harris, Shriver & Jacobson LLP, Washington, DC, William Farnham Johnson, Fried, Frank, Harris, Shriver & Jacobson, New York, NY, Michael J. Missal, K & L Gates LLP, Washington, DC, for Defendant.


OPINION AND ORDER

JESSE M. FURMAN, District Judge:

The United States brings this civil fraud action against Defendant Wells Fargo

[972 F.Supp.2d 599]

Bank, N.A. (“Wells Fargo” or the “Bank”), alleging that the Bank engaged in misconduct in originating and underwriting government-insured home mortgage loans. The Government seeks damages and civil penalties, likely to total hundreds of millions of dollars, under the False Claims Act (the “FCA”), 31 U.S.C. §§ 3729 et seq.; the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), 12 U.S.C. § 1833a; and New York common law. Wells Fargo moves to dismiss the Amended Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, arguing that: (1) the Government released the claims at issue pursuant to a consent judgment entered by the United States District Court for the District of Columbia in a previous lawsuit; (2) many of the Government's FCA and common law claims are time barred; (3) the Amended Complaint fails to satisfy the pleading requirements of Rule 9(b); and (4) the Amended Complaint fails to state a claim upon which relief can be granted.1

For the most part, Wells Fargo's arguments are unavailing. As an initial matter, the consent judgment does not bar any of the Government's claims. Furthermore, the claims are pleaded with sufficient particularity to satisfy Rule 9(b). In addition, the federal statutory claims are sufficient to allege a plausible basis for relief under Rule 12(b)(6). And, on the current record, there is no basis to dismiss any of the statutory claims as untimely. Therefore, all of the Government's federal statutory claims may proceed. Many of the Government's common law claims, however, must be, and are, dismissed. In particular, any tort claims that arose before June 25, 2009, are time barred. Additionally, the Government's mistake of fact and unjust enrichment claims are dismissed in their entirety: Those arising before 2004 are untimely, and those arising thereafter are barred because the United States Department of Housing and Urban Development was aware of Wells Fargo's misconduct at the time. Accordingly, as explained in more detail below, Wells Fargo's motion is DENIED as to the Government's federal statutory claims and GRANTED in part and DENIED in part with respect to the Government's common law claims.2

BACKGROUND

Unless otherwise stated, the following facts are taken from the Amended Complaint (Docket No. 22) and are assumed, for purposes of this opinion, to be true. See LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir.2009).

A. The Direct Endorsement Lender Program

The United States Department of Housing and Urban Development (“HUD”),

[972 F.Supp.2d 600]

through the Federal Housing Administration (“FHA”), insures approved lenders against losses on certain home mortgage loans. (Am. Compl. ¶ 13). If a homeowner whose mortgage is FHA-insured defaults, HUD will pay the lender the balance of the loan as well as assume ownership of and manage any foreclosed property. ( Id. ¶ 14). By protecting lenders against mortgage defaults, FHA insurance encourages lenders to make home loans to creditworthy borrowers to whom the lenders might not otherwise offer a mortgage. ( Id.).

One program through which FHA insures home mortgages is the Direct Endorsement Lender program. ( Id. ¶ 15). Direct Endorsement Lenders (“lenders”) are authorized 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.). In doing so, these lenders are required to comply with regulations—including those found in HUD Handbooks and Mortgagee Letters—governing, among other things, the origination and underwriting of individual loans; the hiring, training, and compensation of underwriters; the monitoring and reporting of the quality of loans originated; and the submission of FHA claims for defaulted loans. ( Id. ¶¶ 17–30, 37–43). Each lender is required to make an annual certification of compliance with the program's requirements. ( Id. ¶ 37).

The claims at issue in this case arise from Wells Fargo's participation in the Direct Endorsement Lender program.

1. Issuance of Individual Mortgages

HUD requires Direct Endorsement Lenders to conduct due diligence before issuing FHA-insured mortgages. ( Id. ¶¶ 19–20). In particular, when issuing a loan, an underwriter must “determin[e] a borrower's ability and willingness to repay a mortgage debt,” and examine any “property offered as security for the loan to determine if it provides sufficient collateral.” ( Id. ¶ 19 (citing 24 C.F.R. §§ 203.5(d), (e)(3))). HUD provides specific requirements for how underwriters are to evaluate a borrower's credit risk and appraise mortgaged property. (Am. Compl. ¶¶ 21–23). These requirements specify, for example, the documents an underwriter must obtain from a potential borrower, the information the underwriter must request from the borrower, and the factors a lender is to consider in determining whether to issue a mortgage. ( Id.). In making loan decisions, a Direct Endorsement Lender is required by law to “ ‘exercise the same level of care which it would exercise in obtaining and verifying information for a loan’ ” that was not FHA-insured—that is, a loan where the lender was “ ‘entirely dependent on the property as security to protect its investment.’ ” ( Id. ¶ 19 (quoting 24 C.F.R. § 203.5(c))).

After each loan is issued, the lender must make several certifications regarding its compliance with HUD regulations. For example, if the loan was underwritten using an FHA-approved automated underwriting system, the lender must certify to “the integrity of the data” inputted into the system “to determine the quality of the loan,” and it must certify “that a Direct Endorsement Underwriter reviewed the appraisal (if applicable).” (Am. Compl. ¶ 38 (internal quotation marks and brackets omitted)). If the loan was manually underwritten, 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. (internal quotation marks and brackets omitted)). In all cases, the underwriter must certify that he or she

[972 F.Supp.2d 601]

has “personally reviewed the mortgage loan documents, closing statements, application for insurance endorsement, and all accompanying documents.” ( Id.). The underwriter must also “make all certifications required for th[e] mortgage as set forth in HUD Handbook 4000.4.” ( Id. ¶ 39 (internal quotation marks omitted)). And the lender must certify that the mortgage “complies with HUD rules and is eligible for HUD mortgage insurance under the Direct Endorsement program.” ( Id. ¶ 38 (internal quotation marks omitted)).

If HUD discovers that a loan endorsed for FHA insurance is, in fact, ineligible to be insured, “HUD seeks indemnification from the Direct Endorsement Lender that certified the loan via an indemnification agreement whereby the lender agrees to indemnify HUD should claims for FHA insurance be submitted on that loan.” ( Id. ¶ 40).

2. Quality Control and Reporting

In order to participate in the Direct Endorsement Lender program, lenders must implement a quality control system that is independent of the lender's loan origination and servicing departments. ( Id. ¶ 24). HUD's quality control requirements mandate that, among other things, lenders review a random sample of loans each month to ensure they were underwritten in accordance with HUD requirements, and that they review all early payment defaults—that is, loans that default within the first six payments. HUD Handbook 4060.1 REV–2, ¶ 7–6. ( See also Am. Compl. ¶ 24).

HUD provides a rating system by which lenders may evaluate the loans they review. ( Id. ¶ 26). Loans with only minor or no violations of HUD's origination and servicing guidelines are rated low risk; those with violations, but none that is “material to creditworthiness, collateral security or insurability of the loan,” are considered acceptable; mortgages with “significant unresolved questions or missing documentation” are labeled a “moderate risk to the mortgagee and FHA”; and mortgages that contain “material violations of FHA or mortgagee requirements ... represent an unacceptable level of risk” and are labeled “material risk” loans. HUD Handbook 4060.1 REV–2, ¶ 7–4. ( See also Am. Compl. ¶ 26). Lenders are required to report to FHA in writing any “material risk” mortgages they identify. HUD Handbook 4060.1 REV–2, ¶ 7–4. HUD also requires that lenders report any “ ‘[s]erious deficiencies, patterns of non-compliance, or fraud’ ” they discover “within 60 days.” (Am. Compl. ¶ 28 (quoting HUD Handbook 4060.1 REV–1, CHG–1, ¶ 6–13)). In addition to reporting these violations to HUD, quality control review findings must also be reported to lenders' “ ‘senior management,’ ” which is required to “ ‘take prompt action to deal appropriately’ ” with the problems. ( Id. ¶ 30 (quoting HUD Handbook 4060.1 REV–2, ¶ 7–3(I))).

During the time period relevant to this case, Wells Fargo maintained a quality control program. ( Id. ¶¶ 31–36). Through this program, the Bank conducted “monthly reviews of a random sample of loans...

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81 practice notes
  • Weslowski v. Zugibe, Case No. 12–CV–8755 (KMK).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 31, 2014
    ...to the FCA in 2010 applies to Plaintiff's FCA claim, which Plaintiff brought in 2012. Cf. United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 610–11 (S.D.N.Y.2013) (concluding, in the context of an FCA claim brought under § 3730(b), that “[t]he applicable statute of limitations gove......
  • Weslowski v. Zugibe, Case No. 12–CV–8755 KMK.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 31, 2014
    ...to the FCA in 2010 applies to Plaintiff's FCA claim, which Plaintiff brought in 2012. Cf. United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 610–11 (S.D.N.Y.2013) (concluding, in the context of an FCA claim brought under § 3730(b), that “[t]he applicable statute of limitations gove......
  • United States ex rel. Bilotta v. Novartis Pharm. Corp., No. 11 Civ. 0071PGG.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • September 30, 2014
    ...notice to the adverse party and enable him to prepare a responsive pleading.’ ” Id. (quoting United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 616 (S.D.N.Y.2013) ). This “is a fact-specific inquiry.” Id.B. False Claims Act1. Federal False Claims Act “The FCA facilitates restitutio......
  • United States v. Ghavami, No. 10 Cr. 1217KMW.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • May 15, 2014
    ...institution have explicitly cited and agreed with this Court's holding in Ghavami. See United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 630 (S.D.N.Y.2013) (Furman, J.) (“Courts have repeatedly held that in order to allege such an effect [on a financial institution], the Governmen......
  • Request a trial to view additional results
80 cases
  • Weslowski v. Zugibe, Case No. 12–CV–8755 (KMK).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 31, 2014
    ...to the FCA in 2010 applies to Plaintiff's FCA claim, which Plaintiff brought in 2012. Cf. United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 610–11 (S.D.N.Y.2013) (concluding, in the context of an FCA claim brought under § 3730(b), that “[t]he applicable statute of limitations gove......
  • Weslowski v. Zugibe, Case No. 12–CV–8755 KMK.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 31, 2014
    ...to the FCA in 2010 applies to Plaintiff's FCA claim, which Plaintiff brought in 2012. Cf. United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 610–11 (S.D.N.Y.2013) (concluding, in the context of an FCA claim brought under § 3730(b), that “[t]he applicable statute of limitations gove......
  • United States ex rel. Bilotta v. Novartis Pharm. Corp., No. 11 Civ. 0071PGG.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • September 30, 2014
    ...notice to the adverse party and enable him to prepare a responsive pleading.’ ” Id. (quoting United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 616 (S.D.N.Y.2013) ). This “is a fact-specific inquiry.” Id.B. False Claims Act1. Federal False Claims Act “The FCA facilitates restitutio......
  • United States v. Ghavami, No. 10 Cr. 1217KMW.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • May 15, 2014
    ...institution have explicitly cited and agreed with this Court's holding in Ghavami. See United States v. Wells Fargo Bank, N.A., 972 F.Supp.2d 593, 630 (S.D.N.Y.2013) (Furman, J.) (“Courts have repeatedly held that in order to allege such an effect [on a financial institution], the Governmen......
  • Request a trial to view additional results
1 books & journal articles
  • FINANCIAL INSTITUTIONS FRAUD
    • United States
    • American Criminal Law Review Nbr. 58-3, July 2021
    • July 1, 2021
    ...208. See United States v. Wells Fargo, 972 F. Supp. 2d 593, 629–30 (S.D.N.Y. 2013) (“Wells Fargo’s proffered interpretation is unsupported by the text of the statute, which does not exempt from the relevant affected f‌inancial institutions those that perpetrate fraud affecting themselves.”)......

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