United States of America et al v. Wells Fargo Bank, National Association Inc et al, No. 2:2012cv03624 - Document 87 (C.D. Cal. 2014)
Court Description: ORDER GRANTING JOINT MOTION TO DISMISS PLAINTIFFS FIRST AMENDED COMPLAINT 72 and the claim is dismissed for lack of subject matter jurisdiction. Because amendment would be futile, the First Amended Complaint is dismissed with prejudice. In addition, the Motion to Dismiss 70 is vacated as moot by Judge Dean D. Pregerson. ( MD JS-6. Case Terminated ) . (lc). Modified on 7/15/2014 .(lc).
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United States of America et al v. Wells Fargo Bank, National Association Inc et al Doc. 87 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 UNITED STATES OF AMERICA ex rel BRIAN HASTINGS, 12 Plaintiff, 13 v. 14 15 16 17 18 WELLS FARGO BANK, NATIONAL ASSOCIATION (INC.), individually as s/b/m with WELLS FARGO HOME MORTGAGE, INC.; COUNTRYWIDE HOME LOANS, INC.; COUNTRYWIDE HOME LOANS SERVICING, LP n/k/a BAC HOME LOANS SERVICING, LP; et al., 19 20 Defendants. ____________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 12-03624 DDP (SSx) ORDER GRANTING JOINT MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT [DOCKET NUMBER 72] 21 Before the court is Defendants’ Joint Motion to Dismiss 22 Plaintiff Brian Hastings’ First Amended Complaint. (Dkt. No. 72.) 23 The motion is fully briefed. Having considered the parties’ 24 submissions and heard oral argument, the court adopts the following 25 order. 26 I. 27 28 Background Plaintiff-relator Brian Hastings (“Plaintiff”) is a real estate agent who seeks to bring this action on behalf of the United Dockets.Justia.com 1 States for alleged violations of the False Claims Act, 31 U.S.C. §§ 2 3729 et seq. Defendants are lending institutions that have been 3 approved by the Federal Housing Administration (“FHA”). Plaintiff’s 4 First Amended Complaint (“FAC”) alleges that Defendants have made 5 false claims to the government in relation to federal mortgage 6 insurance policies issued pursuant to the National Housing Act 7 (“NHA”), 12 U.S.C. § 1709(a). The United States has declined to 8 intervene to prosecute the claim. (Dkt. No. 18.) 9 The FHA, part of the Department of Housing and Urban 10 Development (“HUD”), is authorized to provide mortgage insurance 11 for single-family home loans to help low and moderate income 12 families purchase a home. See 12 U.S.C. § 1709(a). The FHA does 13 this by providing mortgage insurance on single-family home mortgage 14 loans originated by FHA-approved lenders under prescribed terms. 15 Id. To obtain an insurance certificate, an FHA-approved lender must 16 certify that the mortgage is compliant with applicable statutes and 17 HUD regulations. See 12 U.S.C. § 1715Z-21(e); 24 CFR § 203.5(a)- 18 (c). Once an insurance certificate is issued, if a borrower 19 subsequently defaults on its payment obligation under the mortgage, 20 the FHA-approved lender may submit a claim for insurance benefits 21 to HUD. 22 A. 23 Plaintiff’s First Amended Complaint Plaintiff’s FAC alleges that Defendants have submitted claims 24 for insurance benefits to HUD based on false certifications of 25 compliance with a provision of the NHA that, during the relevant 26 period, mandated that borrowers made at least a 3 percent down 27 payment on the property before a mortgage may be issued. See 12 28 2 1 U.S.C. § 1709(b)(9) (“[T]he mortgagor shall have paid on account of 2 the property ... at least 3 per centum”).1 3 Under HUD’s rules and regulations, the required 3 percent down 4 payment may be made through the use of a gift from certain 5 designated sources, including charitable organizations. See HUD 6 Handbook 4155.1, Revision 4, Change 1, Paragraph 2-10(C) (“HUD 7 Handbook 4155.1”). Importantly for this action, however, “[n]o 8 repayment of the gift may be expected or implied.” Id. 9 HUD has had a policy that “[m]ortgage lenders are responsible for Since 2000, 10 assuring that the gift to the home buyer from the charitable 11 organization meets the instructions described in HUD Handbook 12 4155.1, Rev. 4, Change 1 (e.g. no repayment implied, etc.).” HUD 13 Mortgagee Letter 00-8 (Mar. 3, 2000) at 4-5 (FAC Ex. C). 14 Specifically, the lender must document the transfer of the funds 15 from the donor to the borrower, including placing a gift letter 16 signed by the donor and borrower in the loan file submitted to FHA 17 specifying the dollar amount and stating that no repayment is 18 required. See HUD Handbook 4155.1. 19 The gravamen of Plaintiff’s FAC is that Defendants have 20 falsely certified compliance with the 3 percent down payment 21 requirement by endorsing loans made possible through down payment 22 assistance gift programs (“DAPs”) which Plaintiff alleges 23 circumvented the 3 percent requirement. (See FAC ¶¶ 63-84.) Under 24 the DAP model, which was pioneered by a non-profit charity 25 organization called the Nehemiah Corporation of America 26 27 28 1 In 2008, the requirement was modified to 3.5 percent. See Housing and Economy Recovery Act of 2008, Public Law 110-289 Section 2113 (July 30, 2008). 3 1 (“Nehemiah”), the charity provides the borrower with funds to pay 2 the down payment. After the loan closes, the lender then pays the 3 charity a service fee or contribution that is equivalent to or 4 exceeds the amount given to the borrower by the charity. Plaintiff 5 alleges that, under these programs, the sales price of the home is 6 increased to account for the contribution the seller makes to the 7 charity to reimburse the charity’s gift to the borrower. The 8 borrower thus ultimately ends up paying the down payment over the 9 course of the mortgage, making the charity’s contribution to the 10 borrower a “false gift.” (See, e.g., FAC ¶¶ 65-66, 75, 85.) 11 Plaintiff contends that this “sales price manipulation” renders 12 fraudulent the gift letters submitted by Defendants to obtain 13 insurance from FHA for the loans it has endorsed. (Id.) 14 Plaintiff makes various allegations to show that Defendants 15 were aware that sellers increased prices to finance DAPs. Plaintiff 16 alleges that the Nehemiah Program was explicitly presented to 17 mortgage lenders and real estate agents as designed to ensure that 18 the seller can “net the same amount” of money as it would have 19 received had the seller sold the home to an FHA-financed buyer who 20 did not need down payment assistance by shifting the cost of 21 participation in the program to the buyer through a higher sales 22 price. (Id. ¶¶ 65, 73.) Nehemiah’s “Standard Program Guidelines” 23 from July 2000 explicitly contemplated how the program can be used 24 to “assist [the real estate agent] in obtaining a full price offer 25 on the home that can offset the costs of participating.” (Id. ¶ 26 68.) Plaintiff also cites the internal underwriting guidelines of 27 various Defendants which he contends show that they were aware that 28 Nehemiah-style programs do not provide true gifts for which 4 1 repayment is not required. (See id. ¶¶ 119-187.) Plaintiff points, 2 for example, to a Suntrust underwriting guidance document dated 3 August 29, 2005 noting that Nehemiah-style “seller funded non- 4 profit down payment assistance programs” “should not be confused 5 with other non-profit housing agencies that provide true gifts or 6 secondary financing to eligible borrowers.” (See id. ¶ 121 and Ex. 7 K1.) Additionally, Plaintiff included as exhibits to his FAC a set 8 of real estate postings from August 1999 with comments from brokers 9 appearing to indicate that a higher sales price would apply in the 10 case of funding from a DAP. (See FAC Ex. U). The listings were 11 culled from a Multiple Listing Service (“MLS”), a mass database of 12 mortgage listings used by brokers. (FAC ¶ 10, 279.) 13 In relation to these allegations, Plaintiff asserts that 14 Defendants engaged in, inter alia, the following fraudulent 15 conduct: 16 • Defendants knowingly presented fraudulently obtained mortgage insurance certificates and fraudulent claims to HUD to claim and secure cash mortgage insurance benefits for noncompliant mortgages. (Id. ¶¶ 104-17.) • Defendants knowingly presented fraudulent claims that violated HUD’s regulation requiring compliance with the Federal Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., which provides that all finance charges levied directly or indirectly on the buyer must be disclosed to the buyer. (Id. ¶¶ 298-302.) • Defendants prohibited gifts from Nehemiah-type programs with conventional loans while allowing their use with FHA loans, which amounted to “misrepresentative advertising” in violation of HUD Handbook 4060.1, Paragraph 2-17. (Id. ¶¶ 328-30.) • Defendants knowingly violated HUD regulations, 24 CFR § 203.5(c) and HUD Handbook 4000.4, Paragraph 2-5, which require an FHA-approved lender to exercise the same level of care in originating an FHA-insured loan as it would in originating a loan in which the lender would be entirely dependent on property as security to protect its investment. (Id. ¶¶ 30, 120-22, 411.) 17 18 19 20 21 22 23 24 25 26 27 28 5 1 • 3 Defendants knowingly violated HUD’s requirement of compliance with state consumer protection laws, including Cal. Bus. & Prof. Code §§ 17537 et seq., by falsely using the term “gift” in representations to the public despite expecting repayment of that “gift.” (Id. ¶¶ 306-30.) 4 Plaintiff attached as appendices to his FAC lists of 2 5 foreclosure conveyance claims to HUD for dozens of mortgages 6 originated in 2007 and 2008 utilizing Nehemiah or Nehemiah-like 7 DAPs where the borrower ultimately defaulted. (FAC Apps. B & C.) 8 Plaintiff contends that these are representative of 35,201 9 fraudulent claims for insurance benefits by Defendants since May 10 20, 2009. (See FAC ¶ 364.) The contention that these claims are 11 false appears to rest on the assumption that any mortgage 12 originated with a Nehemiah-style DAP involved a “false gift” which 13 the buyer was required to repay through higher mortgage payments, 14 and thus the lender’s certification of compliance with HUD 15 regulations, including the Handbook 4155.1's prohibition on gifts 16 that must be repaid, was fraudulent. 17 Based on the above allegations, Plaintiff’s qui tam action 18 asserts sixteen False Claims Act claims, each against all 19 Defendants, on behalf of the United States. (Id. ¶¶ 383-438.) He 20 alleges approximate damages of $7.48 billion plus civil penalties. 21 (Id. ¶¶ 365-74.) 22 23 24 B. Judicially Noticeable Facts Cited by Defendants The utility and legal status of Nehemiah and Nehemiah-like 25 programs have been the subject of considerable debate within the 26 government since at least 1997. Defendants have pointed to the 27 following judicially noticeable facts which are relevant to the 28 6 1 court’s analysis, particularly the jurisdictional inquiry that 2 decides this motion: 3 In December 1997, Nehemiah brought suit against HUD to obtain 4 a declaration that its DAP complied with HUD’s down payment rules 5 and that mortgages using its DAP were eligible for FHA insurance. 6 See Nehemiah Progressive Hous. Dev. Corp. v. Coumo, No. 97-2311 7 (E.D. Cal.); (Brown Decl. Exs. 9 to 16.). Nehemiah complained that 8 after initially granting Nehemiah conditional approval, HUD then 9 indicated that the program was not compliant with HUD regulations. 10 (See Brown Decl. Ex. 9 ¶¶ 20-33.) HUD and Nehemiah settled the suit 11 on April 6, 1998. The settlement stated: 12 13 14 HUD has determined that plaintiff’s down payment assistance program (“DAP”) is not in conflict with HUD’s regulations and administrative requirements. Plaintiff may operate that DAP throughout the United States, in accordance with the approval set forth herein and with HUD’s existing regulations, handbook, mortgage letters and other governing documents... 15 (Id. Ex. 17 at 1-2.) 16 However, HUD was apparently internally conflicted about the 17 DAPs. On September 14, 1999, HUD published for public comment a 18 proposed regulation that would have changed the down payment 19 requirements for FHA loans so as to prohibit the use of DAPs. See 20 64 Fed. Reg. 49956 (Sept. 14, 1999). HUD explained in proposing the 21 regulation that DAPs caused concern in part because when a borrower 22 uses a DAP, “the sales price is often increased so that the 23 seller's net proceeds are not diminished,” which results in 24 increased risk to the FHA through potentially higher rates of 25 default on insured loans. Id. 26 On March 31, 2000, HUD’s Office of the Inspector General (“HUD 27 OIG”) issued a public audit on DAPs. It found that: 28 7 1 The programs do not meet the intent of FHA requirements in that the assistance is not a true gift to the home buyer, and because the nonprofit is reimbursed for the assistance by the seller or builder. ... In addition, some sellers increased the house prices to cover fees paid to the nonprofit organizations, which results in higher loan amounts and less equity for the home buyer, and increases the risk to the FHA insurance fund. 2 3 4 5 (Brown Decl. Ex. 18 at 7.) HUG OIG nevertheless acknowledged that 6 HUD had allowed the programs to operate and recommended that HUD 7 implement the then-still-pending proposed regulation. (Id. at 29, 8 36.) 9 In 2001, notwithstanding HUD OIG’s recommendation, HUD 10 withdrew the proposed regulation after comments leaned decidedly 11 against the rule’s adoption. See 66 Fed. Reg. 2851 (Jan. 12, 2001) 12 (noting that only 21 of 1,871 comments favored the rule). 13 On September 25, 2002, HUD OIG issued a second audit report 14 concerning the DAPs. (Brown Dec. Ex. 19.) The report noted a high 15 default rate among DAP assisted loans and reiterated its advice 16 that HUD adopt a rule largely prohibiting the use of DAPs. (Id. at 17 8-10.) 18 In November 2005, the Government Accountability Office (“GAO”) 19 issued a report evaluating DAPs. (Brown Dec. Ex. 25.) The report 20 noted: 21 22 23 24 [P]roperty sellers often raised the sales price of their properties in order to recover the contribution to the sellerfunded nonprofit that provided the down payment assistance. In these cases, homebuyers may have mortgages that were higher than the true market value price of the house and would have acquired no equity through the transaction. 25 (Id. at 19-20.) The GAO also noted that “[m]arketing materials from 26 seller-funded nonprofits often emphasize that property sellers 27 28 8 1 using these down payment assistance programs earn a higher net 2 profit than property sellers who do not.” (Id. at 14.) 3 In May 2007, HUD proposed, for the second time, a regulation 4 that would have prevented the use of DAPs in FHA-insured mortgages. 5 See 72 Fed. Reg. 27048 (May 11, 2007). In explaining the need for 6 the regulation, HUD stated that its “primary concern with these 7 transactions is that the sales price is often increased to ensure 8 that the seller's net proceeds are not diminished, and such 9 increase in sales price is often to the detriment of the borrower 10 and FHA.” Id. 11 Despite opposition from members of Congress, HUD adopted the 12 proposed regulation in October 2007. See 72 Fed. Reg. 56002 (Oct. 13 1, 2007). However, within several months, two district courts 14 enjoined HUD from enforcing it. See Penobscot Indian Nation v. HUD, 15 539 F. Supp. 2d 40, 47 (D.D.C. 2008); Nehemiah Corp. of Am. v. 16 Jackson, 546 F. Supp. 2d 830, 848-49 (E.D. Cal. 2008); see also 73 17 Fed. Reg. 80297 (Dec. 19, 2008) (formally vacating the enjoined 18 regulation). 19 On July 30, 2009, Congress enacted the Housing and Economic 20 Recovery Act (“HERA”), Pub. L. No. 110-289, 122 Stat. 2654. Section 21 2113 of HERA effectively barred DAPs by prohibiting a seller from 22 reimbursing “directly or indirectly” any third party contributing 23 to a borrower’s down payment. 12 U.S.C. 1709(b)(9)(C). This 24 restriction applies to mortgages for which the mortgagee has issued 25 credit approval for the borrower on or after October 1, 2008. Id. 26 /// 27 /// 28 /// 9 1 C. Procedural History 2 This is the second FCA claim Plaintiff has filed in relation 3 to mortgages originated with DAP gifts. In an action initiated on 4 June 15, 2007, Plaintiff filed three complaints against 12 mortgage 5 lenders (including some of the defendants in the present case) with 6 allegations similar to those in the instant action. See United 7 States ex rel. Hastings v. Countrywide Home Loans, Inc., No. 07- 8 3897-JFW-PLA (C.D. Cal.) (Dkt. Nos. 1, 6, 23) (“2007 Action”). 9 As in the present case, the 2007 Action alleged that the lenders 10 submitted false claims to the government on loans where the 11 borrower’s down payments came from DAPs. As here, Plaintiff alleged 12 that the defendants had falsely certified that the loans were 13 compliant with the requirement that the borrower provide a 3 14 percent cash down payment as then required by 12 U.S.C. § 15 1709(b)(9) and HUD Handbook 4155.1's prohibition on down payment 16 assistance gifts where repayment of the gift is expected or 17 implied. (See 2007 Action, SAC ¶¶ 25, 27, 32, 35.) However, whereas 18 the instant case alleges an implied requirement that borrowers 19 repay the gift through a higher sales price, the earlier case 20 focused only on the seller who was allegedly contractually 21 obligated to reimburse the charity for the gift. (See id. ¶ 32.) 22 After the government declined to intervene, Plaintiff voluntarily 23 dismissed the action without prejudice under Federal Rule of Civil 24 Procedure Rule 41(a)(1)(A)(i) in June 2009. (Id. Dkt. No. 47.) 25 26 27 28 II. Legal Standard Defendants moved to dismiss Plaintiff’s FAC under both Federal Rule of Civil Procedure 12(b)(1) (lack of subject matter 10 1 jurisdiction) and Rule 12(b)(6) (failure to state a claim upon 2 which relief may be granted). 3 A. 4 Rule 12(b)(1) A Rule 12(b)(1) dismissal is appropriate when the amended 5 complaint or extrinsic evidence fails to establish the court’s 6 subject matter jurisdiction over the action. Roberts v. Corrothers, 7 812 F.2d 1173, 1177 (9th Cir. 1987). A plaintiff always bears the 8 burden of establishing subject matter jurisdiction, and the court 9 presumes a lack of jurisdiction until Plaintiff proves otherwise. 10 Stock W. Inc. v. Confederated Tribes of the Colville Reservation, 11 873 F.2d 1221, 1225 (9th Cir. 1989). 12 A Rule 12(b)(1) motion may challenge a complaint’s allegations 13 on their face or by pointing to evidence outside of the complaint. 14 Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 15 2004); Thornhill Publ’g Co., Inc. v. General Tel. & Elec. Corp., 16 594 F.2d 730, 733 (9th Cir. 1979). In a factual challenge, once the 17 moving party has presented evidence tending to show a lack of 18 subject matter jurisdiction, the burden shifts to “the party 19 opposing the motion [to] furnish affidavits or other evidence 20 necessary to satisfy its burden of establishing subject matter 21 jurisdiction.” 22 Plaintiff cannot establish the jurisdiction it seeks to invoke, the 23 court must dismiss the case under Rule 12(b)(1). 24 B. Safe Air, 373 F.3d at 1309 (citations omitted). If Rule 12(b)(6) 25 A complaint will survive a motion to dismiss under Rule 26 12(b)(6) when it contains “sufficient factual matter, accepted as 27 true, to state a claim to relief that is plausible on its face.” 28 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. 11 1 Corp. v. Twombly, 550 U.S. 544, 570 (2007)). When considering a 2 Rule 12(b)(6) motion, a court must “accept as true all allegations 3 of material fact and must construe those facts in the light most 4 favorable the plaintiff.” Resnick v. Hayes, 213 F.3d 443, 447 (9th 5 Cir. 2000). 6 factual allegations,” it must offer “more than an unadorned, the- 7 defendant-unlawfully-harmed-me accusation.” 8 678. 9 statement of a legal conclusion “are not entitled to the assumption Although a complaint need not include “detailed Iqbal, 556 U.S. at Conclusory allegations or allegations that are no more than a 10 of truth.” Id. at 679. 11 offers “labels and conclusions,” a “formulaic recitation of the 12 elements,” or “naked assertions” will not be sufficient to state a 13 claim upon which relief can be granted. 14 internal quotation marks omitted). In other words, a pleading that merely Id. at 678 (citations and 15 16 III. Discussion 17 A. 18 The False Claims Act’s Jurisdictional Bar Federal courts have no power to consider claims for which they 19 lack subject matter jurisdiction. Bender v. Williamsport Area Sch. 20 Dist., 475 U.S. 534, 541 (1986). Accordingly, before considering 21 Defendants’ argument that Plaintiff has failed to state a claim 22 upon which relief may be granted, the court must first consider 23 Defendants’ contention that the court lacks subject matter 24 jurisdiction over Plaintiff’s claims. 25 The False Claims Act deprives a district court of jurisdiction 26 over any qui tam action that is based upon allegations or 27 transactions already disclosed in certain public fora, unless the 28 12 1 relator is the original source of the information underlying the 2 action. Specifically, 31 U.S.C. § 3730(e)(4)(A) states: 3 7 No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. 8 In analyzing whether a claim is barred under this provision, a 4 5 6 9 court must conduct a two-tiered inquiry. First, the court must 10 determine whether there has been a prior “public disclosure” of the 11 “allegations or transactions” upon which the qui tam suit is based. 12 A-1 Ambulance Serv., Inc. v. California, 202 F.3d 1238, 1243 (9th 13 Cir. 2000). Second, if there has been a qualifying public 14 disclosure, the court must inquire whether the relator is the 15 “original source of the information” contained in the disclosure. 16 Id. The qui tam relator bears the burden of establishing subject 17 matter jurisdiction by a preponderance of the evidence. See United 18 States v. Alcan Elec. & Eng'g, Inc., 197 F.3d 1014, 1018 (9th Cir. 19 1999). 20 21 22 1. Public Disclosure 23 “The ‘public disclosure’ standard is met if there were either 24 (1) public allegations of fraud ‘substantially similar’ to the one 25 described in the FCA complaint, or (2) enough information publicly 26 disclosed regarding fraudulent transactions so that the government 27 is on notice to either investigate further or to make a decision to 28 proceed with its own claim. It is not necessary for the public 13 1 disclosures to have specifically named a defendant, to have 2 provided explanatory details, or to have alleged overcharging, 3 false-invoicing, false certification, or any other specific fraud.” 4 Amphastar Pharm. Inc. v. Aventis Pharma SA, 2012 WL 5512466 at *6 5 (C.D. Cal. Nov. 14, 2012) (citing Alcan Elec., 197 F.3d at 1018 6 (9th Cir. 1999)); see also A-1 Ambulance, 202 F.3d at 1245. 7 Defendants contend that this court lacks jurisdiction of the 8 instant claims because numerous public disclosures discussing the 9 DAPs and the increases to sales prices associated with them 10 occurred prior to the filing of the instant complaint. (Motion at 11 17.) Indeed, as discussed above, Defendants point to numerous 12 public documents long before this action was filed in 2012 13 discussing the DAPs and their legal status under the National 14 Housing Act and HUD/FHA rules, including discussion of the practice 15 of sellers passing on the cost of financing DAP “gifts” through 16 higher sales prices. 17 For example, as to disclosures from administrative agencies, 18 as noted above, HUD OIG’s March 2000 report found that “some 19 sellers have raised the sales prices of properties to cover the 20 cost of the down payment assistance programs causing buyers to 21 finance higher loan amounts.” (Brown Decl. Ex. 18 at 1 (“HUD OIG 22 Report”).) Likewise, as noted above, the Government Accounting 23 Office’s 2005 report on DAPs found that homes with seller-funded 24 assistance tend to have higher sales prices. (Id. Ex. 25 at 19-20.) 25 Defendants point to similar public references to increased sales 26 prices associated with DAPs made in (i) other federal reports (see 27 id. Exs. 23 at 16; 24 at 36; 25 at 19-20); (ii) at Congressional 28 hearings (see id. Exs. 22 at 33; 27 at 12-13, 14, 28, 29; 29); 14 1 (iii) in Federal Register notices such as 72 Fed. Reg. 27048 (May 2 11, 2007) and 72 Fed. Reg. 56002 (Oct. 1, 2007); and (iv) in 3 judicial opinions, see Penobscot Indian Nation v. HUD, 539 F. Supp. 4 2d 40, 44-45 (D.D.C. 2008); Nehemiah Corp. of Am. v. Jackson, 546 5 F. Supp. 2d 830, 841 (E.D. Cal. 2008). 6 Defendants also point to articles in the news media. At least 7 one of the articles cited by Defendants squarely considered the 8 impact of DAPs on sales prices at a stage early in the development 9 of DAPs. A February 27, 1999 article in the Washington Post stated, 10 11 12 The Nehemiah program works only with the cooperation of sellers, who pay a 4 percent fee to the nonprofit group. The fee covers administrative costs and a 3 percent gift to the buyer that the buyer uses for a down payment. Like other seller-assisted sales, the costs are usually shifted to the buyer via an increased price on the house. 13 14 15 (Brown Decl. Ex. 8 at 2.) Plaintiff contends that these disclosures were not sufficient 16 under 31 U.S.C. § 3730(e)(4)(A) on several grounds, each of which 17 the court finds unconvincing. First, Plaintiff contends that the 18 public disclosures are insufficient because they do not refer to 19 the DAPs as “fraudulent” or mention the “sales price manipulation 20 scheme.” (Opposition at 36-37.) However, such explicit reference to 21 fraud is not required for a disclosure to qualify under the 22 statute. Rather, as noted above, all that is required is that the 23 disclosures “contain[] enough information to enable the government 24 to pursue an investigation.” Alcan Elec., 197 F.3d at 1019. As 25 discussed above, documents from HUD, GAO, the press, and 26 congressional hearings specifically considered DAPs in reference to 27 their impact on sale prices well before this action was filed. 28 These disclosures gave the government adequate notice to pursue 15 1 potential FCA claims against Defendants under the theory advanced 2 by Plaintiff in this action. 3 Second, Plaintiff contends that the prior disclosures are not 4 sufficient because they did not accuse any particular Defendant in 5 the present case of engaging in the alleged fraud. (Opp. at 38.) 6 This argument fails because, as noted above, it is “not necessary 7 for the public disclosures to have specifically named a defendant,” 8 so long as the disclosures provided the government with sufficient 9 notice of the alleged wrongdoing to enable it to investigate. 10 Amphastar, 2012 WL 5512466 at *6. The disclosures did so here. 11 Plaintiff contends that there are too many FHA lenders in the 12 marketplace for the earlier disclosures to have enabled the 13 government to investigate the conduct of Defendants in the instant 14 action. (Opp. at 37-38.) However, Plaintiff concedes in his FAC 15 that Defendants “dominate the FHA lending marketplace with the 16 majority market share.” (FAC ¶ 270.) Defendants thus would have 17 been obvious targets of investigations of potential claims had the 18 government been inclined to pursue such investigations. (See Reply 19 at 5-6.) 20 Third, Plaintiff contends that the government reports, 21 inquiries, and actions cited by Defendants are insufficient because 22 they were motivated by and focused on high default rates, rather 23 than “sales price manipulation.” (Opp. at 37.) However, the focus 24 of a document containing a disclosure is not relevant, so long as 25 the disclosure contains sufficient information to enable the 26 government to investigate the alleged fraud, which was plainly the 27 case here. See Amphastar, 2012 WL 5512466 at *6. 28 16 1 In short, the contention that DAPs resulted in higher prices 2 for consumers was part of a robust public debate well before 3 Plaintiff’s FAC was filed. These disclosures were sufficient to put 4 the government on notice of the conduct of Defendants that 5 Plaintiff alleges violated HUD regulations under his inflated sales 6 price theory. 7 2. 8 9 Original Source Once the court finds that the allegations underlying the fraud have been publicly disclosed, it only has subject matter 10 jurisdiction over the claim if the relator is an “original source 11 of the information.” 31 U.S.C. § 3730(e)(4)(A). To be considered an 12 original source, the relator must show that “(1) he has direct and 13 independent knowledge of the information on which his allegation is 14 based; (2) he has voluntarily provided the information to the 15 Government before filing his qui tam action; and (3) he had a hand 16 in the public disclosure of allegations that are a part of the 17 suit.” 18 Aircraft Co., 162 F.3d 1027, 1033 (9th Cir. 1998)). 19 Meyer, 565 F.3d at 1201 (quoting United States v. Hughes A relator has “direct and independent knowledge” for purposes 20 of § 3730(e)(4) where he “discovered the information underlying his 21 allegations of wrongdoing through his own labor.” United States ex 22 rel. Devlin v. State of Cal., 84 F.3d 358, 360 (9th Cir. 1996) 23 (footnote omitted). The relator must have “firsthand” knowledge of 24 the alleged fraud. Id. 25 In Wang ex rel. United States v. FMC Corp., the Ninth Circuit 26 held that an engineer-relator who had been called in to study a 27 problem with a product had “direct and independent” knowledge of 28 the problem because “he saw [it] with his own eyes” and his 17 1 knowledge was “unmediated by anything but [his] own labor.” 975 2 F.2d 1412, 1417 (9th Cir. 1992). Similarly, the court held in 3 United States ex rel. Barajas v. Northrop Corp. that an employee of 4 a government subcontractor who brought a qui tam action alleging 5 falsified testing had “direct and independent knowledge” of the 6 allegations because “he acquired [his knowledge] during the course 7 of his employment [by the subcontractor].” 5 F.3d 407, 411 (9th 8 Cir. 1993), cert. denied, 511 U.S. 1033 (1994). 9 By contrast, in Devlin, in the case of a qui tam action 10 brought by individuals who were informed by a state Department of 11 Social Services employee that the department had defrauded the 12 United States government by inflating client statistics to qualify 13 for increased federal funding, the court held that “the relators' 14 knowledge was not direct and independent because they did not 15 discover firsthand the information underlying their allegations of 16 fraud.” 84 F.3d at 361. The court explained that relators “did not 17 see the fraud with their own eyes or obtain their knowledge of it 18 through their own labor unmediated by anything else, but derived it 19 secondhand from [an employee of the alleged department-perpetrator 20 of fraud], who had firsthand knowledge of the alleged fraud as a 21 result of his employment at [the department].” Id. 22 supplemented the information he obtained from the insider by 23 confirming with the parties for whom the perpetrator had 24 purportedly done work that the work was not in fact performed. Id. 25 But the court explained the relator “did not make a genuinely 26 valuable contribution to the exposure of the alleged fraud” because 27 “federal investigators would have done precisely the same thing 28 18 The relator had 1 once the information provided by [the insider] had been made 2 public.” Id. 3 In the instant case, Plaintiff’s contention that he is an 4 original source is unsuccessful. With respect to the FAC, the facts 5 alleged fall well short of establishing original source status 6 because, among other things, the allegations lack dates (or even 7 rough time periods) for any alleged communications with the 8 government regarding allegations of fraud.2 (See FAC ¶¶ 76-79.) 9 Plaintiff has alleged more specific facts in his Opposition and has 10 submitted with the Opposition various unauthenticated exhibits. As 11 Defendants point out, neither assertions made in motions nor 12 unauthenticated exhibits are admissible factual evidence under 13 Local Rule 7-6 and Federal Rule of Evidence 901. Moreover, even if 14 Plaintiff’s contentions were offered in the form of admissible 15 evidence, they would not suffice to establish that Plaintiff is an 16 original source. 17 Plaintiff asserts that he learned of the Nehemiah program 18 operating in the resale home market on March 6, 1997 when he 19 received marketing materials from Nehemiah regarding the program, 20 which were apparently faxed throughout the Sacramento Realtor Board 21 2 22 23 24 25 26 27 28 Plaintiff alleges in the FAC that he criticized Nehemiahlike programs in a patent application he filed on April 20, 1999. (Id. ¶ 77-78.) However, in opposing Defendants’ Joint Motion to Dismiss, Plaintiff appears to abandon this basis for establishing his original source status. In any case, a patent application submitted to the Patent and Trademark Office, which has no authority the FHA loan program, does not constitute an adequate disclosure to the government in this case. See United States v. Bank of Farmington, 166 F.3d 853, 866 (7th Cir. 1999) (explaining that notice to the “United States Attorney, the FBI, or other suitable law enforcement office of the information which is the basis for the action, or by informing the agency or official responsible for the particular claim in question” would constitute adequate disclosure). 19 1 Area. (Opp. at 29-30, 31) Plaintiff then sent a letter to HUD on 2 March 10, 1997 in which he outlined his criticisms of the program 3 and enclosed the marketing materials. (Id.; Opp. Ex. 7.) He 4 contends that this establishes him as the original source of the 5 information on which his allegations are based. (Opp. at 31.) 6 Plaintiff’s contentions fail for multiple reasons. First, 7 Plaintiff did not “discover firsthand the information underlying 8 [his] allegations of fraud.” Devlin, 84 F.3d at 361. The only 9 factual information Plaintiff purports to have “discovered” was the 10 overall structure of the Nehemiah program as described by Nehemiah 11 itself in marketing materials it apparently sent to Plaintiff’s 12 office (as well as numerous other realtors in the area), which 13 Plaintiff purportedly then forwarded to HUD. Even if the 14 information included sufficiently detailed information to 15 constitute alleged acts of fraud, Plaintiff’s knowledge of the 16 Nehemiah program was secondhand and therefore not “direct.” See 17 Devlin, 84 F.3d at 362; U.S. ex rel. Casady v. Am. Int'l Grp., 18 Inc., 2013 WL 1702777 (S.D. Cal. Apr. 19, 2013) (relator may not 19 rely on information from third-party insider from the mortgage 20 industry to qualify as an original source of information); United 21 States ex rel. Barth v. Ridgedale Elec., Inc., 44 F.3d 699, 703 22 (8th Cir. 1995) (“[A] person who obtains secondhand information 23 from an individual who has direct knowledge of the alleged fraud 24 does not himself possess direct knowledge and therefore is not an 25 original source under the [FCA].”). 26 Second, it appears likely from Plaintiff's own exhibits that 27 the government was already well aware of the information Plaintiff 28 related to it. Plaintiff points to an email he purportedly sent to 20 1 HUD on March 20, 1997 alleging that seller funded DAPs resulting in 2 increased total transactions costs would violate HUD regulations. 3 (Opp. Ex. 8.) However, that letter refers to an earlier (undated) 4 letter sent by HUD to Nehemiah, which indicates that HUD had 5 previously been in communication with Nehemiah regarding the 6 contours of its DAP and expresses HUD’s concerns regarding the 7 program’s compliance with HUD rules. (See id. Ex. 5 (Letter from 8 HUD official to Nehemiah president commenting on “recent revisions” 9 to the program).) As HUD was apparently already closely monitoring 10 the Nehemiah program, Plaintiff seems to have related to the 11 government little if any factual information of which it was not 12 already aware or would have inevitably have learned. Plaintiff’s 13 relaying of the information thus could not have made “a genuinely 14 valuable contribution to the exposure of the alleged fraud.” 15 Devlin, 84 F.3d at 361. 16 The fact that, in addition to forwarding to HUD Nehemiah’s 17 solicitation materials, Plaintiff also offered his view to HUD that 18 Nehemiah program violated HUD standards does not alter this 19 conclusion. (See Opp. at 42.) Identifying the legal consequences of 20 information already in the public domain does not constitute 21 discovery of fraud. See In re Natural Gas Royalties, 562 F.3d 1032, 22 1045 (10th Cir. 2009) (“A relator's ability to recognize the legal 23 consequences of a publicly disclosed fraudulent transaction does 24 not alter the fact that the material elements of the violation 25 already have been publicly disclosed.”); United States v. Alcan 26 Elec. & Eng'g, Inc., 197 F.3d 1014, 1020 (9th Cir. 1999) (holding 27 that relator did not have “direct” knowledge because “his 28 investigation merely added a legal name to describe the alleged 21 1 circle of facts”); United States ex rel. Kreindler & Kreindler v. 2 United Technologies Corp., 985 F.2d 1148, 1159 (2d Cir. 1993) 3 (neither "collateral research and investigations" nor "background 4 knowledge that enabled him to understand the significance of the 5 information acquired" were sufficient to establish relator’s direct 6 and independent knowledge of the allegedly fraudulent claims), 7 cert. denied, 508 U.S. 973 (1993); Wang, 975 F.2d at 1418 (“[W]here 8 the public knows of information proving an allegation, it 9 necessarily knows of the allegation itself.”); Wood ex rel. U.S. v. 10 Applied Research Assocs. Inc., 2008 WL 2566728 at *3 (S.D.N.Y. 11 2008) (“[A relator’s] personal hypothesis about what should be 12 concluded from publicly disclosed information does not qualify [the 13 relator] as an original source of information in order to sustain 14 an individual FCA claim on behalf of the government”).3 15 Third, Plaintiff's observations to HUD in 1997 about the 16 likely consequences of the Nehemiah program does not constitute 17 direct and independent knowledge because it was excessively 18 speculative. Plaintiff’s communications to HUD in 1997 only 19 described the Nehemiah program in general and the possibility that 20 the program would result in fraudulent claims; they did not include 21 any factual allegations of fraudulent claims. (See Opp. Exs. 5, 8, 22 11.) Indeed, as the Nehemiah program was apparently in its infancy 23 in 1997, Plaintiff likely could not have had knowledge of any 24 actual false claims to the government until years later. (See FAC 25 3 26 27 28 As Defendants note, Hastings heavy reliance on U.S. ex rel. Fine v. Chevron, USA, Inc., 39 F.3d 957 (9th Cir. 1994) is misplaced because that opinion was vacated after the Ninth Circuit, sitting en banc, held that the relator was not an original source. See U.S. ex rel. Fine v. Chevron, U.S.A., Inc., 72 F.3d 740, 742 (9th Cir. 1995). 22 1 App’x A (listing mortgages originated in 2007 and 2008).) 2 “[B]ecause the purpose of the FCA is to encourage individuals with 3 true ‘knowledge’ of alleged wrongdoing to come forward and provide 4 such information to the Government, the purposes of the Act would 5 not be served by allowing a relator to maintain a qui tam suit 6 based on pure speculation or conjecture.” United States ex rel. 7 Aflatooni v. Kitsap Physicians Servs., 163 F.3d 516, 525–26 (9th 8 Cir. 1998). 9 Finally, to the extent that Plaintiff asserts that his 10 original source status derives from his submission of documents to 11 the government shortly before filing his Complaint in the instant 12 action (see Opp. at 41), this argument too is unsuccessful. Among 13 other exhibits, the FAC included records Plaintiff asserts he 14 obtained from a Multiple Listing Service, to which he had access as 15 a real estate agent in the employ of a real estate broker. (Id.) As 16 noted above, these records include a set of real estate postings 17 from August 1999 with comments marked “confidential,” apparently 18 from brokers, appearing to indicate that a higher sales price would 19 apply in the case of funding from Nehemiah or a Nehemiah-like 20 program. (See FAC Ex. U). Plaintiff has also submitted as 21 appendices to his FAC lists of mortgages issued by Defendants that 22 were originated with Nehemiah assistance that have open liabilities 23 or foreclosure conveyance claims originated in 2007 and 2008, 24 apparently also obtained from the Multiple Listing Service 25 (although the origin is not specified). (See FAC Apps. A-C.) 26 Additionally, Plaintiff submitted corporate underwriting guidelines 27 issued by the Defendants which he contends demonstrate that 28 Defendants had knowledge that the gifts provided in DAPs were 23 1 false. (See FAC Exs. K1-K9.) Plaintiff asserts that he disclosed 2 some or all of the materials included with his FAC in a 3 communication delivered to office of HUD Inspector General David 4 Montoya on March 1, 2012; he filed his Complaint in the instant 5 action on April 26, 2012. (See Opp. Ex. 10; Dkt. No. 1.) 6 There are at least two reasons why these records do not 7 suffice to establish Plaintiff’s original source status. First, 8 Plaintiff’s knowledge obtained from sources such as a Multiple 9 Listing Service or like databases that are accessible to the public 10 or large numbers of real estate agents cannot be described as 11 firsthand. To hold otherwise “would mean that anyone – an insider 12 or an outsider – who conducts an investigation and learns of 13 alleged fraud from whatever sources [could] maintain a qui tam 14 action.” U.S. ex rel. Hansen v. Cargill, Inc., 107 F. Supp. 2d 15 1172, 1185 (N.D. Cal. 2000), aff’d, 26 F. App’x 736, 737 (9th Cir. 16 2002). Second, the various reports cited by Defendants documenting 17 government concern regarding increased sales prices associated with 18 Nehemiah and Nehemiah-like DAPs, starting with the HUD OIG’s March 19 31, 2000 report, (Brown Decl. Ex. at 7), demonstrate that the 20 government had sufficient information to investigate the claims 21 asserted here long before Plaintiff submitted the materials 22 included in his FAC to HUD in March 2012. 23 For these reasons, the court finds that Plaintiff has not 24 demonstrated that he is an “original source” of the many qualifying 25 public disclosures that preceded his filing of the instant action. 26 Accordingly, the court must dismiss this qui tam action for lack of 27 subject matter jurisdiction. 28 24 1 The court does not reach and states no opinion with respect to 2 Defendant’s additional arguments in support of their Joint Motion 3 to Dismiss. 4 5 6 IV. Conclusion For the reasons stated herein, Defendant’s Motion is GRANTED 7 and the claim is dismissed for lack of subject matter jurisdiction. 8 Because amendment would be futile, the First Amended Complaint is 9 dismissed with prejudice. 10 In addition, the Motion to Dismiss (DOCKET NUMBER 70) is vacated as moot. 11 12 IT IS SO ORDERED. 13 Dated: July 15, 2014 14 DEAN D. PREGERSON 15 United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28 25
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