Source: http://www.scribd.com/doc/46807843/Lender-Liability-Law-Report-HUD
Timestamp: 2014-03-15 08:11:34
Document Index: 384607529

Matched Legal Cases: ['§3729', '§ 3729', '§3729', '§ 3729', '§ 3729', '§3729', '§ 3729', '§ 203', '§ 4', '§ 3729']

P. 1Lender Liability Law Report - HUDLender Liability Law Report - HUDRatings: (0)|Views: 348|Likes: 1Published by 00aaMore info: categoriesBusiness/Law, FinancePublished by: 00aa on Jan 13, 2011Copyright:Attribution Non-commercialAvailability:Read on Scribd mobile: iPhone, iPad and Android.download as PDF, TXT or read online from ScribdFlag for inappropriate content|Add to collectionSee MoreSee lesshttp://www.scribd.com/doc/46807843/Lender-Liability-Law-Report-HUD11/25/2012pdftextoriginal 
L ENDER
L IABILITY
EPORT Vol. 22, No. 6/June 2008Edited by Helen Davis Chaitman, Esq.
District of Columbia Federal CourtGrants Mortgagee Summary Judgmenton Claim that It Conspired to Violatethe False Claims Act by SubmittingForged Documents to HUD butDeclines to Dismiss Other Claims
he United States District Court for the District of Columbia granted a mortgage lender’s motion forsummary judgment as to claims against the lender forconspiracy to violate the False Claims Act and for actu-al damages thereunder, but denied the lender summary judgment as to all other claims against it arising outof its submission of forged documents to HUD.
United States of America, ex rel. Fago v. M&T Mortgage Corp.
,Civ. Action No. 03-1406 (D.D.C. Oct. 2, 2007). Thecourt reasoned that a lender cannot conspire with itself or its employees and therefore granted summary judg-ment under the “intra-enterprise conspiracy doctrine.”The court also found that the plaintiff failed to proveany proximately caused damage resulting from allegedforgeries on documents by the lender’s employees andgranted the lender summary judgment as to the claim fordamages under the False Claims Act. However, the courtrefused to dismiss claims for statutory fines.
. M&T Mortgage Corp. (“M&T”) engaged inthe home mortgage lending business as a subsidiary of M&T Bank. Ann Fago began work in M&T’s post-clos-ing department in July 2001. The post-closing depart-ment would receive mortgage loan binders and, as partof Fago’s duties, she and others would review the bind-ers to make sure they were complete so that they couldbe sent to the United States Department of Housing andUrban Development (“HUD”) to be insured by the gov-ernment.HUD required that mortgage loan binders be submit-ted within sixty days of closing or there would be a morecumbersome administrative process to go through to ob-tain the HUD insurance. Because of increased volumein applications in 2002, and to avoid problems with the60-day rule, Fago and others in the post-closing depart-ment began forging signatures on unsigned documentscontained in the mortgage loan binders that they receivedprior to their submission to HUD. A total of 53 mort-gage loan binders submitted to HUD contained forgedsignatures.
. The United States sued M&T at the re-quest of Fago alleging violations of the False ClaimsAct (“FCA”) in that (i) M&T knowingly presented falseclaims to the government in violation of 31 U.S.C. §3729(a)(1), (ii) it knowingly made or used false recordsor statements so that the government would pay falseclaims in violation of 31 U.S.C. § 3729(a)(2), and (iii)it engaged in a conspiracy to defraud the governmentby having false claims paid in violation of 31 U.S.C. §3729(a)(3). The government further sought a declaratory judgment that M&T’s forgery of documents violated 31U.S.C. § 3729(a)(2) and injunctive relief.On December 30, 2005, M&T filed a motion for sum-mary judgment as to 15 of the loan files. Thereafter, onApril 11, 2006, the court struck four of the declarationssubmitted by M&T on the ground that the witnesses hadnot been disclosed as required by Fed. R. Civ. P. 26(a)(1).See
United States ex rel. Fago v. M&T Mortgage Corp
.,2006 WL 949899 (D.D.C. Apr. 11, 2006). That same day,M&T filed a supplemental motion for summary judgmentas to the other 38 loan files. Once again, the government
Also in This Issue: 
Maryland Appellate Court Holds that LenderCannot Validly Effectuate a Waiver of theBorrower’s Right to Prepay His MortgageLoan Without Penalty ....................5
North Carolina Court Dismisses Claims ofMember of Limited Liability Company AgainstLender for Lack of Standing...............6
Need more information on specific topics?Call: 800-572-2797E-mail: info.pratt@aspratt.com
Lender Liability Law Report June 2008 2
filed a motion to strike declarations and supplementalinterrogatory responses that M&T relied upon in supportof its summary judgment motion.
. The government argued thatthree of the declarations submitted by M&T in supportof its summary judgment motion should be stricken be-cause the witnesses had not been identified in discovery.M&T argued that the witnesses were rebuttal witnessesand that there is no obligation to disclose the identity of rebuttal witnesses. Moreover, it asserted that it producedthe documents underlying the declarations prior to theclose of discovery.The court struck the declarations pursuant to Fed.R. Civ. P. 37(c)(1), finding that the identity of rebuttalwitnesses must be disclosed pursuant to Fed. R. Civ. P.26(a)(1) which requires disclosure of “any individuals‘likely to have discoverable information that the disclos-ing party may use to support its claims or defenses, unlesssolely for impeachment.’” Moreover, the court found thenon-disclosure not to be harmless, therefore requiring thedeclarations to be struck under Rule 37(c)(1) because thedeclarations went to the issue of whether the signatureson documents were forged, which was a central issue inthe case. The government had not been afforded an op-portunity to depose the witnesses or otherwise challengetheir declarations.The government further argued that the declarationof a handwriting expert submitted by M&T should bestricken because the declaration was re-submitted afteran Order previously had been entered striking it. Thecourt agreed, noting that although discovery had beenreopened as to 38 of the loans, it was not reopened forall purposes. Because the expert’s declaration did notrelate to the 38 loans, it was found to have been improp-erly submitted and was stricken. The court reasoned thatplaintiff had a right to rely upon the court’s prior Order.Finally, the court struck amended answers to interroga-tories, ruling that M&T was not entitled to amend itsanswers after the close of discovery.
.M&T argued that the government failed to state a claimfor knowingly presenting a false or fraudulent claim forpayment or approval under 31 U.S.C. § 3729(a)(1), or forknowingly making, using or causing to be made or used afalse record or statement to get a false or fraudulent claimpaid or approved by the government under 31 U.S.C. §3729(a)(2) because she did not allege that M&T’s actualclaims for reimbursement, as opposed to the applicationsto HUD for insurance, were false or fraudulent.The court found that a claim had been made out be-cause the loans actually defaulted. The court noted that“a lending institution’s application for credit insuranceunder [an] FHA program is not a ‘claim’ as that termis used in the False Claims Act.”
United States v. Mc- Ninch
, 356 U.S. 595 (1958). Moreover, “[i]t is generallyaccepted that the false application for a guaranteed loan… establishes only an ‘inchoate’ violation … that doesnot ripen into a claim actionable under the statute untila later event of legal consequences between the lenderand the government.” See, e.g.,
United States v. Ekelman& Assoc., Inc.
, 532 F.2d 545, 552 (6th Cir. 1976);
Unit-ed States v. Ettrick Wood Products, Inc.
, 683 F. Supp.1262, 1263-64 (W.D. Wisc. 1988);
United States v. VanOosterhout , 96 F.3d 1491, 1494 (D.C. Cir. 1996). How-ever, because the loans defaulted, the court reasoned thatplaintiff’s “inchoate” claims ripened into actual claimswhen M&T sought payment from HUD.
. Plaintiff allegedthat M&T engaged in a conspiracy to defraud the gov-ernment by having false or fraudulent claims paid in vio-lation of 31 U.S.C. § 3729(a)(3). M&T argued that the“intra-corporate conspiracy doctrine” barred the claimbecause under that doctrine “a corporation cannot con-spire with its employees, and its employees, when act-ing in the scope of their employment, cannot conspireamong themselves.”
, 2005 WL 3276190at *3 (D.D.C. Sept. 30, 2005);
McAndrew v. Lockheed Martin Corp.
, 206 F.3d 1031, 1036-37 (11th Cir. 2000).The court granted M&T’s motion for summary judgmentas to the conspiracy claim because plaintiff only allegedthat M&T conspired with its employees.
ateriaLity
. Tostate a claim under the FCA, a plaintiff must allege andprove that the alleged false statements were material.See
United States v. TDC Mgmt. Corp.
, 24 F.3d 292, 298(D.C. Cir. 1994);
Tyger Constr. Co. v. United States
, 28Fed. Cl. 35, 55 (1993). For a false statement to be mate-rial it must have “a natural tendency to influence agen-cy action or is capable of influencing agency action.”
United States ex rel. Berge v. Bd. of Trs. of the Univ. of Alabama
, 104 F.3d 1453, 1460 (4th Cir. 1997);
Hays v. Hoffman
, 325 F.3d 982, 992 (8th Cir. 2003).M&T argued that HUD guidelines spell out what theagency considers to be material when insuring a loan.It asserted that Appendix 17 to the
Direct Endorsement Program Handbook 4000.4
sets forth 11 specific docu-ments in the loan binder that HUD considers in insuring
Phillips Nizer LLP,New York, NY
June 2008 Lender Liability Law Report 
a loan, which according to M&T is an exclusive list. Be-cause many of the documents containing alleged forgedsignatures were not on the list, M&T argued that any fal-sities regarding such documents could not be material.The court rejected M&T’s argument because HUD isauthorized “to determine if there is any information in-dicating that any certification or required document isfalse, misleading, or constitutes fraud or misrepresenta-tion on the party of any party.” 24 C.F.R. § 203.255(c).Hence, the court found that HUD is specifically au-thorized to consider “any information” in determiningwhether a loan application is misleading, false or fraudu-lent. Indeed, nothing in the regulation precludes HUDfrom considering any particular document in determin-ing whether a loan application is false.
HUD Handbook 4000.4
§ 4-7 specifically states that“[t]he pre-endorsement review is confined to those itemsspecified in this paragraph. No further review is re-quired or authorized prior to endorsement unless HUDhas reason to suspect fraud in the origination process.”Moreover, Appendix 17, on which M&T relied, is only a“checklist” to assist those seeking endorsement to sub-mit all the required information; it is not an official regu-lation, and there is no suggestion in Appendix 17 that itis meant to be an exclusive list or that HUD is precludedfrom considering other information. M&T’s own expertwitness testified that HUD sometimes “looked at moredocuments than what are required under the regulationsand its own handbook guidance,” and that HUD wouldhave found certain documents not in Appendix 17 to havebeen critical to HUD’s decision to endorse a loan.The court found summary judgment to be inappropri-ate on the issue of materiality because “a genuine issueof material fact remains regarding whether the allegedlyforged signatures and false certifications were ‘capableof influencing’ or had a ‘natural tendency to influence’… HUD’s decision to endorse the loans or later seek in-demnification.”
ausation
. M&T argued that it was entitled to sum-mary judgment because the plaintiff could not prove acausal link between the forged signatures and damagesuffered by the government. The court noted, however,that “the submitter of a ‘false claim’ or ‘statement’ isliable for a civil penalty, regardless of whether the sub-mission of the claim actually causes the government anydamages.” See
United States ex rel. Schwedt v. Plan-ning Research Corp.
, 59 F.3d 196, 199 (D.C. Cir. 1995).The second form of liability for violation of the FCA “isfor damages actually caused the Government because of the submission of the false claim” and, as to this liabil-ity, a plaintiff must prove that the defendant “caused theGovernment to pay claims ‘because of’ the alleged falsestatements.”
Id .; 31 U.S.C. § 3729(a).The court found many facts going to causation to bedisputed, but upon close analysis found the disputed factsnot to be material “when considered through the lens of the controlling causation standard in this Circuit.” Un-der the causation standard adopted in the Federal Circuit,“the submitter of a false claim should be liable only forthose damages that arise because of the falsity of theclaim, i.e., only for those damages that would not havecome about if the defendant’s misrepresentations hadbeen true. See, e.g.,
United States ex rel. Schwedt , 59F.3d at 200. This standard has been adopted by the Thirdand Fifth Circuits. See, e.g.,
United States v. Miller , 645F.2d 473, 475-76 (5th Cir. 1981);
,568 F.2d 347, 351 (3d Cir. 1977). But cf.
United Statesv. First Nat’l Bank of Cicero
, 957 F.2d 1362, 1374 (7thCir. 1992).The court concluded that plaintiff was required toshow that “the specific misrepresentations made toHUD in this case were the direct and proximate cause of HUD’s losses and not merely the “but for” cause of thoselosses.” See
United States v. Spicer , 57 F.3d 1152, 1157(D.C. Cir. 1995).Plaintiff argued that a genuine issue of material factexisted regarding causation because, had M&T told HUDthe truth (i.e., that not all signatures on documents in theloan binders were genuine), HUD would have rejectedthe entire application. The court found this argumentmistakenly construed the Schwedt and Spicer cases toapply a less restrictive “but for” causation test whereasthe government must go beyond a “but for” analysis andprove that the false statements were the proximate causeof the actual damages sustained by the government.The court found that the government failed to presentany evidence that the presence of non-genuine signatureson documents was in any way related to the actual reasonthat borrowers defaulted. Hence, the court found thatM&T was entitled to summary judgment as to plaintiff’sclaims for actual damages to the government relating tosubmission of the 51 loan binders at issue. The courtfound, however, that plaintiff nevertheless was entitled
The court concluded that plaintiff was required to show that “the specificmisrepresentations made to HUD inthis case were the direct and proximatecause of HUD’s losses and not merelythe “but for” cause of those losses.”
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