United States: Government's Annual Certification Claims Under The FCA Take A Hit In Federal Court In California In A Case Involving Individual Liability

Last Updated: November 15 2013
Article by David F. Adler, Albert J. Rota, Henry Klehm III and Jayant W. Tambe

In a decision dated November 5, 2013, United States v. Reunion Mortgage, Inc., David Thayer and Kent Harvey, Case No. 13-02340 SBA (N.D. Ca.),1 a federal court rejected annual certification claims, a backbone of the Department of Justice's mortgage fraud practice in recent years, in a case involving individual liability. Annual certification claims, which have been asserted in virtually every major mortgage fraud case brought by the federal government since 2011,2 maintain that a mortgage lender violates the False Claims Act ("FCA") if it submits annual certifications attesting to its eligibility to participate in the Direct Endorsement Lender ("DEL") program of the Federal Housing Administration ("FHA") when it knows (as defined by the FCA3 that it is not in compliance with the program requirements. By contrast with loan-level certification claims for FCA liability, annual certification claims arguably permit the government to recover damages for all loans—not just those that defaulted—originated by a lender during each year in which it knowingly submitted a false certification of program compliance.4 The government's argument is that the lender would have been expelled from the DEL program had the U.S. Department of Housing and Urban Development ("HUD") known of its noncompliance with the applicable requirements. In addition, annual certification claims arguably enable the government to avoid establishing causation with respect to each individual defaulted loan.

In Reunion, the government sued Reunion Mortgage, Inc., a mortgage lender in Milpitas, California; Reunion's president, co-owner, and broker/officer David Thayer ("Thayer"); and its vice president, Kent Harvey, under the FCA and common law for fraudulently certifying 12 residential loans as qualifying for FHA mortgage insurance.5 According to the amended complaint, which was filed on July 19, 2013, Thayer submitted annual certifications to HUD attesting to Reunion's compliance with FHA guidelines during the period from 2007 through 2012 in which Reunion was approved for participation in the DEL program.6 Thayer's annual certifications allegedly stated that:

I know or am in the position to know, whether the operations of the above-named mortgagee [Reunion] conform to HUD-FHA regulations, handbooks, and policies. I certify that to the best of my knowledge, the above-named mortgagee conforms to all HUD-FHA regulations necessary to maintain its HUD-FHA approval, and that the above-named mortgagee is fully responsible for all actions of its employees including those of its HUD-FHA approved branch offices.7

The amended complaint further alleged that Reunion submitted 12 loan-level certifications to HUD attesting that the loans met the DEL program's requirements for underwriting but did not allege that Thayer personally signed any of those certifications.8 According to the government, the loans had not been properly underwritten and were ineligible for FHA insurance.9

Defendants moved to dismiss the FCA claims against Thayer on the ground that the government failed to allege that he personally submitted any of the allegedly false loan-level certifications.10

The government responded that Thayer's annual certifications that Reunion was in compliance with the DEL requirements were sufficient to render him individually liable for the improperly underwritten loans under the FCA.11

After noting that the government's FCA claims appeared to be predicated on the loan-level certifications alone, the court held that "[e]ven if Thayer's annual certifications were alleged as the basis of the FCA claims, [the government] has failed to show that such conduct is sufficient to render Thayer personally liable for the allegedly false certifications of the twelve mortgage loans in dispute."12The court found that "Thayer's annual certification was—not to obtain the FHA's endorsement as to each loan transaction at issue—but to prospectively maintain Reunion's DEL status with the FHA."13 Citing Mikes v. Strauss, 274 F.3d 687, 701-702 (2d Cir. 2001), for its holding distinguishing conditions of participation from conditions of payment, the court found that "[s]ince the FHA's payment of each insurance claim is alleged to have been dependent on the individualized certification, and not Thayer's annual certification, the Court finds that the specific conduct attributed to Thayer does not state a claim for implied false certification."14 Accordingly, the court held that the government "failed to state a claim under the FCA as to Thayer" because it "failed to allege any conduct that would render Thayer individually liable under the FCA."15

Although the court granted the government leave to further amend its complaint, its ruling—that Thayer's annual certification of Reunion's compliance with the DEL regulations did not render him liable for defaulted FHA-insured loans that were allegedly improperly underwritten—is a blow for the annual certification theory. The government argued that "Thayer himself falsely certified to HUD that Reunion employees complied with pertinent HUD-FHA regulations, handbooks, Mortgagee Letters, Title 1 Letters, and policies during the period the twelve mortgage loans were underwritten by Reunion, when they had not."16

The government maintained that "[t]his misconduct caused HUD FHA to insure the loans and to pay over $1.6 million in insurance claims on the twelve mortgage loans, once the loans defaulted."17 In rejecting that argument, the court limits the scope of the annual certification theory. In addition, the court's reasoning further undercuts the annual certification theory in its implicit finding that annual certifications relate only to conditions of participation and not also to conditions of payment. The annual certification theory is premised on the argument that a truthful annual certifications is both a prerequisite to participation in the DEL program and a condition of payment for claims submitted for FHA insurance. Whether other courts will agree with the California court remains to be seen.

Footnotes

1. Order Granting Defendants' Motion to Dismiss First Amended Complaint as to David Thayer with Partial Leave to Amend (not yet available in Westlaw).

2. The seriousness with which lenders view the government's annual certification theory is reflected in the express release of any potential claims based on this theory in the government's $35 billion servicing settlement with five banks in 2012.

3. The FCA defines "knowing" and "knowingly" to mean "actual knowledge," "deliberate ignorance of the truth or falsity of the information," or "reckless disregard of the truth or falsity of the information." 31 U.S.C. § 3729(b)(1).

4. The issue of how damages would be proved or calculated as to nondefaulted loans has yet to arise

5. See First Amended Complaint.

6. Id. at ¶¶ 49-40.

7. Id. at ¶ 50.

8. Id. at ¶¶ 52-58.

9. Id.

10. Defendants David Thayer and Reunion Mortgage, Inc.'s Notice of Motion, Motion and Supporting Memorandum of Points & Authorities in Support of FRCP 12(b)(6) Motion to Dismiss. See also Defendants' Reply Brief in Support of FRCP 12(b)(6) Motion to Dismiss.

11. United States' Opposition to Motion to Dismiss ("Government's Br."). 

12. Decision at 10.

13. Id. at 10-11.

14. Id. at 11.

15. Id.

16. Government's Br. at 2.

17. Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jayant W. Tambe
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions