Federal Judge in Missouri Denies Motion to Dismiss False Claims Act Case

A federal judge in the U.S. District Court for the Western District of Missouri recently denied a residential mortgage lender’s motion to dismiss a False Claims Act case, finding that the federal government sufficiently alleged that the company had knowingly submitted false or fraudulent claims for payment or approval, and false statements material to a false or fraudulent claim.

The government alleged that the lender’s employees routinely forged the signatures of FHA Direct Endorsement underwriters and approved unqualified, temporary workers to endorse Home Equity Conversion Mortgages (HECMs) for FHA insurance. The government argued that its complaint—which described these purported violations of HUD’s rules and regulations—contained enough information to show that the lender falsely certified its compliance with HUD’s requirements in its annual certifications and on loan-level certifications on HECMs it endorsed during the relevant time period, resulting in false claims for payment.

The lender argued that the government’s False Claims Act claims should be dismissed under Federal Rules of Civil Procedure 12(b)(6) and 9(b) because the government’s complaint failed to allege falsity, materiality, causation, and scienter. The lender claimed that the government failed to adequately allege: (1) that the lender used unqualified DE Underwriters; (2) that its DE Underwriters failed to use due diligence; and (3) any actionable false certifications. The lender cited the government’s admission that it did not pursue available administrative actions as evidence of the immateriality of these alleged violations. Further, the lender claimed that the government’s complaint failed to show how its alleged use of unqualified underwriters caused inflated appraisals not to be detected during the underwriting process, or how inflated appraisals were the foreseeable outcome of the alleged misconduct. Finally, the lender claimed that the certifications were not false, or alternatively, that the lender’s interpretation of HUD’s rules, regulations, and guidance was reasonable.

The government contended that it sufficiently alleged the “who, what, where, when, and how” of its False Claims Act claim. The court agreed with the government, holding that the government’s allegations as to falsity, materiality, causation, and scienter, were sufficient to survive dismissal.

The court also denied the lender’s motion to dismiss the government’s claims under §§ 1006 and 1014 of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The lender argued again that the government failed to plead fraudulent intent and that the alleged false statements were material. However, the court held that the government’s allegations of “knowing, voluntary conduct” and falsified signatures and other misrepresentations were satisfactory to plead fraud for its FIRREA claims. The court also opined that while materiality was not a requisite of §§ 1006 and 1014, the government had pled materiality “more than sufficiently.”

Finally, the court ruled that the government sufficiently alleged the government’s final two claims that: (1) the lender had breached a contract with FHA by failing to provide the protections from risk of loss that it had agreed to provide; and (2) the lender breached its fiduciary duty owed to the FHA.

For the reasons stated above, the court denied the lender’s motion to dismiss. The case is United States of America v. James B. Nutter & Co., no. 4:20-cv-00874 (W.D. Mo.).