UNITED STATES OF AMERICA et al v. CARRINGTON MORTGAGE SERVICES LLC
ORDER granting 48 Motion to Dismiss for Failure to State a Claim - Relator Michelle Calderon's state law claims are dismissed without prejudice, however, she has leave to file a Second Amended Complaint within 21 days of the date of this entry; her failure to do so will result in an entry dismissing the action in favor of defendant. SEE ORDER. Signed by Judge Richard L. Young on 1/10/2018. (JRB)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
UNITED STATES OF AMERICA,
CARRINGTON MORTGAGE SERVICES,
ORDER ON DEFENDANT’S MOTION TO DISMISS
In this action Relator Michelle Calderon (“Calderon”) contends that Defendant
Carrington Mortgage Services, LLC (“Carrington”), committed multiple counts of fraud
under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq., in connection with its
residential mortgage lending business. (Filing No. 40, Am. Compl. ¶ 5). The United
States of America (the “Government”), which would be a plaintiff in this qui tam action,
declined to intervene. (Filing No. 10). Pending before the court is Carrington’s motion
to dismiss the Amended Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal
Rules of Civil Procedure. (Filing No. 48).
For the reasons set forth below, Carringtons’s motion to dismiss is GRANTED.
I. Legal Standard
Under the Supreme Court’s directive in Bell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007), to survive Carrington’s motion to dismiss pursuant to Rule 12(b)(6), Calderon
must provide the grounds for her entitlement to relief with more than labels, conclusions
or a formulaic recitation of the elements of a cause of action. See id. at 555 (citing Papasan
v. Allain, 478 U.S. 265, 286 (1986)). The court assumes that all the allegations in the
Amended Complaint are true, but the “allegations must be enough to raise a right to relief
above the speculative level.” Id. See also Vesely v. Armslist, LLC, 762 F.3d 661, 664 (7th
Cir. 2014). The touchstone is whether the Amended Complaint gives Carrington “fair
notice of what the … claim is and the grounds upon which it rests.” Twombly, 550 U.S. at
555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Legal conclusions or conclusory
allegations are insufficient to state a claim for relief. See Lodholtz v. York Risk Servs. Grp.,
Inc., 778 F.3d 635, 639 (7th Cir. 2015); McCauley v. City of Chicago, 671 F.3d 611, 617
(7th Cir. 2011). The court may also consider documents attached to or referenced in the
Amended Complaint, as well as take judicial notice of publicly available documents, to
decide the motion. See Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013).
“[C]laims brought under the FCA are subject to the heightened pleading standard of
Rule 9(b) . . . .” United States ex rel. Hanna v. City of Chicago, 834 F.3d 775, 778-79 (7th
Cir. 2016) (quotations and citations omitted). Rule 9(b) states: “In alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or
mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be
alleged generally.” To claim fraud with particularity, Calderon must allege “the who, what,
when, where, and how: the first paragraph of any newspaper story.” Hanna, 834 F.3d at
779 (quotation and citation omitted). See also United States ex rel. Presser v. Acacia
Mental Health Clinic, LLC, 836 F.3d 770, 776 (7th Cir. 2016); United States v. LockheedMartin Corp., 328 F.3d 374, 376 (7th Cir. 2003).
A. The Parties
Carrington is a California company with its principal place of business in Santa
Ana, California. (Am. Compl. ¶ 11). Carrington operates various centers that provide
mortgage loan servicing. (Id.). Carrington has been authorized to approve residential
mortgage loans for government insurance and refinancing by the Federal Housing
Administration (“FHA”) between at least March 2013, and March 2015. (Id. ¶ 6).
Calderon is a former employee of Carrington who worked as a mortgage
underwriter in Carrington’s Fishers, Indiana, office. (Id. ¶ 10).
B. The Federal Endorsement Lender Program
The FHA, as part of the Department of Housing and Urban Development
(“HUD”), is the largest insurer of residential mortgage loans in the world. (Id. ¶ 12).
Pursuant to the National Housing Act of 1934, HUD offers various mortgage insurance
programs. (Id.). Through these programs, FHA insures approved lenders against losses
on mortgage loans made to buyers of single-family homes. (Id.). Under these mortgage
insurance programs, if a homeowner defaults on an FHA insured loan and the mortgage
holder forecloses on the property, HUD will pay the mortgage holder the balance of the
loan and assume ownership and possession of the property. (Id.). By protecting
mortgage holders against defaults on mortgages, FHA mortgage insurance encourages
lenders to make loans to millions of creditworthy Americans who might not qualify for
loans under conventional underwriting criteria. (Id.). FHA mortgage insurance also
makes mortgage loans valuable in the secondary markets because FHA loans are
expected to have met HUD underwriting requirements and because they are secured by
the full faith and credit of the United States. (Id.).
HUD’s Direct Endorsement Lender program is one of HUD’s mortgage insurance
programs. (Id. ¶ 14). Under this program, an approved lender is authorized to underwrite
mortgage loans, decide whether the borrower represents an acceptable credit risk for
HUD, and certify loans for FHA mortgage insurance without prior review or approval of
the loans by the FHA or HUD. (Id.). Direct Endorsement Lenders are private entities
such as banks and mortgage companies. (Id.).
HUD relies upon the experience and expertise of Direct Endorsement Lenders in
approving loans for FHA insurance. (Id. ¶ 16). HUD expects Direct Endorsement
Lenders to determine whether borrowers represent an acceptable credit risk for HUD.
(Id.). And, to qualify for FHA mortgage insurance, a mortgage must meet all of the
applicable HUD underwriting requirements, which relate to, among other things, the
adequacy of the borrower’s income and assets to meet his or her mortgage payments, and
the borrower’s credit history. (Id. ¶ 15). Therefore, Direct Endorsement Lenders are
obligated to act with the utmost good faith, honesty, fairness, undivided loyalty, and
fidelity in their dealings with HUD. (Id. ¶ 16). The duty of good faith requires all Direct
Endorsement Lenders to make full and fair disclosures to HUD of all material facts and
to take on the affirmative duty of employing reasonable care to avoid misleading HUD.
More specifically, Direct Endorsement Lenders are responsible for all aspects of
the mortgage application, the property analysis, and the underwriting of a mortgage loan.
(Id. ¶ 17). This requires Direct Endorsement Lenders to employ underwriters to
“evaluate [each] mortgagor’s credit characteristics, [the] adequacy and stability of [the
mortgagor’s] income to meet the periodic payments under the mortgage and all other
obligations, and the adequacy of the mortgagor’s available assets to close the transaction,
and render an underwriting decision in accordance with applicable regulations, policies
and procedures.” (Id. quoting 24 C.F.R. § 203.S(d)).
HUD also relies on Direct Endorsement Lenders to conduct due diligence on all
loans before approving them for FHA insurance and has set specific rules for such due
diligence. (Id. ¶¶ 19 & 20). The relevant regulations on due diligence provide that a
Direct Endorsement Lender must: (1) evaluate each borrower’s ability and willingness to
repay the mortgage debt (i.e., conduct a credit analysis), to limit the possibility of default
and collection difficulties, 24 C.F.R. § 203.5(d); and (2) examine the property offered as
security for the loan to determine if it provides sufficient collateral (i.e., conduct an
analysis of the specific property), 24 C.F.R. § 203.5(e)(3). (Id. ¶ 19). In doing such
analyses, the Direct Endorsement Lender must “exercise the same level of care which it
would exercise in obtaining and verifying information for a loan in which the mortgagee
would be entirely dependent upon the property as security to protect its investment.” (Id.
quoting 24 C.F.R. § 230.5(c)). Further, HUD requires Direct Endorsement Lenders to
comply with all governing HUD Handbooks and Mortgagee Letters, which set forth the
applicable minimum underwriting requirements. (Id. ¶ 20).
Carrington is a Direct Endorsement Lender. (Id. ¶¶ 6, 11).
To evaluate and, ultimately, extend loans, Carrington uses FHA’s underwriting
software, Technology Open to Approved Lenders (“TOTAL”) and its own HUDapproved automated underwriting system (“AUS”). (Id. ¶¶ 23-24). When using these
systems to underwrite a loan, Carrington enters various credit variables into the AUS,
such as the dollar amount of the borrower’s monthly income and available assets, then
uses TOTAL to evaluate the borrower’s overall credit and assign the loan a rating. (Id. ¶
24). The rating indicates the level of underwriting that must be performed on the loan.
(Id.). An “accept/approve” rating means that the loan may be underwritten with less
stringent documentation requirements and without an underwriter’s evaluation of the
borrower’s creditworthiness. (Id. ¶ 25). However, if TOTAL assigns a “refer” rating to
the loan, it must be manually underwritten and is subject to more stringent documentation
requirements. (Id.). Manual underwriting requires Carrington to analyze credit histories;
analyze debt obligations; calculate debt and income ratios, and compare those ratios to
the fixed ratios set by HUD rules; and consider any compensating factors permitting
deviations from the fixed ratios. (Id. ¶ 26). According to guidance provided to
Carrington by the FHA, it is not permitted to manipulate the information input into the
AUS/TOTAL system, rather, there must be a factual basis for each variable Carrington
enters into the system. (Id. ¶ 27).
At the end of this process, regardless of whether the TOTAL rating is
“accept/approve” or “refer,” Carrington provides loan-specific certification that the data
used by Carrington had “integrity” and that the loan is “eligible for HUD mortgage
insurance.” 1 (Id. ¶¶ 31, 36). According to the regulations, once FHA insures a loan
based on Carrington’s recommendation, a Mortgage Insurance Certificate issues, which
creates a “contract of insurance” between the lender and HUD that incorporates HUD’s
regulatory requirements and binds both parties “with the same force and to the same
extent as if a separate contract had been executed relating to the insured mortgage.” 24
C.F.R. § 203.257.
HUD also has authorized Carrington to approve pre-existing FHA loans for
refinancing. (Am. Compl. ¶ 29). In connection with the refinance process, Carrington,
among other things, must ensure that “[t]he borrower is current on the loan being
refinanced for the month due prior to the month in which he/she closes the refinancing,
and for the month in which he/she closes the refinancing.” (Id. ¶ 30 (quoting HUD
Handbook 4155.1.3A.1.h) (citing HUD Handbook 4155.1, REV-5, ¶¶ 1-10(E), 112(D)(6))). Carrington receives a fee for every loan for which it approves refinancing.
(Id. ¶ 29).
Carrington cited to Form HUD-92900-A to support this statement, which is referenced in the
Amended Complaint ¶¶ 31-32 and 36-37; however, it was not attached to the affidavit submitted
with Carrington’s brief as stated therein. To the extent necessary, the court will access the form
from the HUD website. https://www.hud.gov/sites/documents/92900-A.PDF (last visited Nov.
C. Allegations Under the FCA
Calderon alleges that between March 2013, and March 2015, Carrington
recklessly underwrote numerous FHA loans and falsely certified to HUD that the loans
were eligible for FHA insurance. (Id. ¶ 34). She asserts that Carrington also recklessly
approved numerous pre-existing FHA loans for refinancing and falsely certified to HUD
that the loans were eligible for such refinancing. (Id.). Calderon claims that “[a] handful
of examples of said loans are as follows: Jewih (file# 1403021634), Ferrari (file#
400502853), Gruen (file# 1401014232), Sanchez (file# 400504637), Walker (file#
400502708) and Beatneh (file# U13JT0190).” (Id.). Further, Calderon states,
Among the most common defects were Carrington’s failure to:
obtain the required financial documentation from the
borrowers (such as pay stubs, bank statements, and W-2s);
reconcile inconsistent information in the loan files (such as
where the income reflected on a borrower’s pay stubs was
inconsistent with the income reflected on the borrower’s W2s, where documents in the loan file reflected multiple social
security numbers for the same borrower, and where
documents in a loan file reflected multiple addresses for the
same borrower’s primary residence);
verify the borrowers’ employment and rental histories; and
in the case of refinances, confirm that the loans being
financed were current at the time of closing.
(Id.). Calderon further alleges that Carrington failed to conduct the required due
diligence on thousands of loans, and that the defects “were apparent from the face of the
documents in the loan files.” (Id. ¶ 38). She claims that examples of such loans include:
Jewih (file# 1403021634); Ferrari (file# 400502853); Gruen (file# 1401014232); Sanchez
(file# 400504637); Walker (file# 400502708); and Beatnah (file # U13JT0190). (Id.).
Calderon asserts that any reasonably diligent quality control person should have caught
these violations. (Id.). “Accordingly, Carrington knew, or should have known, that a
substantial number of the loans that it approved for government insurance and
refinancing contained unacceptable risk and did not qualify for such insurance or
refinancing.” (Id.). Calderon avers that the reckless underwriting and false individual
loan certifications were carried out by, through, or dictated by at least the following
employees: Jim Sims; Jeremy Milner; Leslie White; Scott Woodard; Raymond
Brousseau; Lisa Pratt; Cassandra Miller; Mike Lumpkin; Ryan Sears; George Mueller;
Rich Marfino; Bruce Rose; and Jeff Gillis. (Id. ¶ 35).
Moreover, with respect to loans underwritten using AUS/TOTAL, Calderon
alleges that Carrington entered data that lacked integrity on a daily basis. (Id. ¶39).
Specifically, many Carrington loan officers would resubmit loans to TOTAL multiple
times over a short period using hypothetical data points to determine which values would
generate an “accept/approve” rating. (Id. ¶¶ 39-41). Many of Carrington’s employees
would then share the qualifying data values with the potential borrowers. (Id.). Calderon
claims that the Carrington employees who carried out, or directed this practice included:
Jim Sims; Jeremy Milner; Leslie White; Scott Woodard; Raymond Brousseau; Lisa Pratt;
Cassandra Miller; Mike Lumpkin; Ryan Sears; George Mueller; Rich Marfino; Bruce
Rose; and Jeff Gillis. (Id. ¶¶ 39, 40 & 42).
Calderon states that as a result of Carrington’s continued reckless underwriting
and false individual loan certification practices, “HUD paid claims on thousands of loans
that Carrington knew, or should have known, did not meet the applicable HUD
underwriting guidelines and, therefore, were ineligible for government insurance or
refinancing. The Government has suffered substantial losses in connection with
Carrington’s claims, in excess of $200,000,000.” (Id. ¶ 35)
In Count I, Calderon alleges that Carrington presented or caused false claims to be
presented to HUD in violation of 31 U.S.C. § 3729(a)(1), and, as amended, 31 U.S.C. §
3729(a)(1)(A), and seeks treble damages and a civil penalty for each violation. (Id. ¶¶
In Count II, Calderon alleges that Carrington “knowingly, . . . or with reckless
disregard of the truth, made, used, or caused to be made or used, false records and/or
statements material to false or fraudulent claims in connection with numerous FHA
loans” in violation of 31 U.S.C. § 3729(a)(2), and, as amended, 31 U.S.C. §
3729(a)(1)(B), and seeks treble damages and a civil penalty for each violation. (Id. ¶¶
D. State Law Claims
Based on the same set of operative facts, Calderon also asserts a number of claims
under state law. In Count III, she alleges that Carrington breached a fiduciary duty it
owed to HUD. (Id. ¶¶ 54-62). In Counts IV & V, Calderon alleges that Carrington
recklessly breached its duty of care to HUD, and/or unreasonably breached its duty of
care to HUD, with respect to the falsely-made loans. (Id. ¶¶ 63-73). In Count VI,
Calderon alleges that Carrington was unjustly enriched by payment from HUD for claims
in connection with defaulted, falsely-obtained loans. (Id. ¶¶ 74-76). And, in Count VII,
Calderon alleges that HUD paid Carrington for claims in connection with defaulted,
falsely-obtained mortgages under a mistaken belief that the loans met the requisite
underwriting standards. (Id. ¶¶ 77-81).
A. The FCA Claims
The FCA proscribes the knowing submission of false or fraudulent claims to the
government for payment. See 31 U.S.C. § 3729(a)(1). To plead a claim under §
3729(a)(1), Calderon must state with sufficient particularity “(1) that the defendant made
a statement in order to receive money from the government; (2) that the statement was
false; and (3) that the defendant knew the statement was false.” United States ex rel.
Presser v. Acacia Mental Health, 836 F.3d 770, 777 (7th Cir. 2016) (quoting United
States ex rel. Yannacopoulos v. Gen’l Dynamics, 652 F.3d 818, 822 (7th Cir. 2011)). To
survive this motion to dismiss, Calderon’s “complaint must describe (not prove) a
particular false claim she knows or has reason to know (based on indicia of reliability)
that a defendant’s agent submitted for payment.” Abner v. Jewish Hosp. Healthcare
Servs., Inc., No. 4:05-cv-0106, 2008 WL 3853361, at *4 (S.D. Ind. Aug. 13, 2008) (citing
United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 506-09 (6th Cir.
Carrington asserts that Calderon failed to allege the elements of falsity, scienter, or
materiality to support her FCA claims. (Filing No. 49 at 18-37). The court addresses
each element in turn.
1. False Information
With respect to falsity, the Amended Complaint alleges three categories of
conduct, including reckless underwriting and false certification of loans for FHA
insurance and refinancing (Am. Compl. ¶¶ 6, 34, 35, 38); manipulation of data into the
AUS/TOTAL system and communicating results to borrowers (Id. ¶¶ 8, 27, 39-41); and
violation of the HUD self-reporting requirement (Id. ¶¶ 9, 38, 80).
a. False Certifications
Calderon alleges that Carrington failed to follow applicable HUD underwriting
guidelines that resulted in thousands of mortgage loans with unacceptable risk. (Id. ¶¶ 6,
34, 38). However, Calderon only identifies, generally, a small sample of such loans. (Id.
¶¶ 6, 34, 38). She also identifies several individuals whom she claims carried out or
dictated the regular performance of these fraudulent underwriting practices. (Id. ¶ 35).
Calderon further asserts in her brief that Carrington made over 27,000 claims for payment
between January 1, 2014, and May 1, 2017. 2 (Filing No. 53 at 2). But, she never
connects a single loan to a specific fraudulent underwriting practice performed by a
specific individual. Further, Calderon fails to connect an FHA-insured mortgage
obtained through a fraudulent practice to a claim for payment on a defaulted loan made
The Amended Complaint makes no mention of the 27,000 claims discussed by Calderon in her
response brief. Rather, the Amended Complaint merely states that Carrington caused the
government to suffer damages in excess of $200,000,000.00. Am. Compl. ¶ 35. Without some
allegation in the Amended Complaint of the number of loans made under the FHA program in
comparison to the number of claims made, there is no support for an inference that some of the
allegedly falsely-supported FHA loans were part of those that comprise the losses referenced in
the Amended Complaint.
by Carrington. Calderon argues that the details linking a particular loan to a particular
claim are within the exclusive knowledge of Carrington, therefore, the court should relax
the requirements of Rule 9(b). (Filing No. 53 at 2-6 (citing Singer v. Progressive Care,
SC, 202 F. Supp. 3d 815, 826 (N.D. Ill. 2016); Kennedy v. Aventis Pharmacy, Inc., 512 F.
Supp. 2d 1158 (N.D. Ill. 2007))). Although the Singer and Kennedy courts discuss this
relaxed standard, it was only in Kennedy, where the requisite information was in the files
of a non-party, that the court concluded that the relator had alleged enough facts to create
a reasonable inference that the fraudulent activity had resulted in a paid claim. See
Kennedy, 512 F. Supp. 2d at 1167. In Singer, the court rejected the relator’s attempt to
side-step the actual example requirement because the relator had worked for the
defendant and had access to the relevant files. Singer, 202 F. Supp. 3d at 826-27. In the
instant case, Calderon has failed to make the link between the allegedly fraudulent
underwriting practice to a specific person or a specific mortgage, nor did she allege facts
that create an inference that at least one of the 27,000 claims she found more likely than
not links back to a falsely-certified loan.
b. Manipulation of AUS/TOTAL Data
Calderon also alleges that underwriters manipulated data they fed into the
AUS/TOTAL calculator and shared that data with potential borrowers, which encouraged
the borrower to submit false information to get an “accept/approve” rating. (Am. Compl.
¶¶ 8, 39-40). Again, although Calderon names employees who supposedly employed this
practice, she fails to link any one of them to a specific mortgage or to one of the loans
obtained by any number of allegedly fraudulent ways to manipulate the AUS/TOTAL
system. Calderon makes the same Rule 9(b) relaxed standard argument with respect to
this allegation that she made for the fraudulent underwriting practices, but, for the
reasons stated above, even under the relaxed standard, Calderon has failed to allege
enough facts to raise an inference that there is a connection between a loan obtained
based on false information and a specific employee or any defaulted loan.
c. Self-Reporting Violations
For her third fraudulent practice, Calderon alleges that someone directed her not to
report a denial for a specific loan application (Id. ¶ 9); and, generally, that HUD made
payments to Carrington based on the mistaken belief that Carrington had reported all loan
denials as required. (Id. ¶ 80). However, Calderon again fails to provide a connection
between the allegedly wrongful practice and any specific loan or subsequent default of
that loan that would require the government to pay Carrington. Further, Calderon claims
that such a practice should be caught by quality control reviews, which Calderon admits
were performed by Carrington on all of its loans. (Id. ¶¶ 9, 38). But, Calderon never
points to any loan that Carrington determined to be fraudulent. Again, Calderon provides
no argument to rebut the inference that Carrington performed quality audits and
For the reasons stated above, Calderon has failed to adequately allege the false
information element of her claim under § 3729(a)(1) of the FCA.
2. Knowing or Should Have Known Requirement
Carrington also argues that Calderon’s allegations of scienter are too conclusory to
meet the requisite standard under Rule 9(b). (Filing No. 49 at 26-30). Using the
generally accepted definitions of the elements of fraud, knowledge may be averred
generally, but there must be a basis for believing that the relator could prove scienter.
See Mason v. Medline Indus., Inc., 731 F. Supp. 2d 730, 739 (N.D. Ill. 2010) (citing Fed.
R. Civ. P. 9(b); DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir. 1990)). Calderon
failed to address this argument in her response; therefore, the argument in her surreply is
waived. Cf. United States v. Foster, 652 F.3d 776, 778 n.5 (7th Cir. 2001) (stating that a
“reply brief is not the appropriate vehicle for presenting new arguments or legal theories
to the court”). The court agrees with Carrington that the allegations in the Amended
Complaint with respect to what Carrington knew or should have known are too vague to
satisfy the relaxed scienter requirement. In the Amended Complaint, Calderon makes
broad sweeping statements that “common defects” in hundreds and/or thousands of loans
violated HUD underwriting requirements, which made the loans obviously unacceptable
risks. (Am. Compl. 6, 32, 34, 37, 38). She never provides a connection between any one
defect that made any loan with that defect universally unacceptable and the default of that
loan such that Carrington would seek payment under the relevant insurance contract.
Further, the Amended Complaint all but admits that underwriting a loan is a discretionary
activity that can be subjective, even under HUD’s guidelines. (Filing No. 49 at 29-30
(citing Am. Compl. ¶¶ 16-19, 26; 24 C.F.R. § 203.5(d)). In such a circumstance, more
details seem to be necessary to support an inference that Carrington knowingly falsified
material data for hundreds or thousands of HUD insured loans that were later defaulted.
Specifically, such details might include what specific inaccuracies were perpetrated, how
they were universally unacceptable, and why, more likely than not, those decisions led to
default. Carrington’s motion to dismiss should also be granted for lack of specificity on
the knowledge requirement.
3. Materiality Requirement
Even if Calderon’s allegations regarding Carrington’s knowledge were sufficient
to create an inference of scienter, Calderon must also plead facts regarding the materiality
of any alleged failure to comply with HUD underwriting guidelines. Under the FCA, for
a misrepresentation about compliance with a statutory, regulatory, or contractual
requirement to be actionable, it must be “material to the Government’s payment decision
. . . .” Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 2002 (2016). “The
materiality standard is demanding” because “[t]he False Claims Act is not ‘an all-purpose
fraud statute,’ or a vehicle for punishing garden-variety breaches of contract or regulatory
violations.” Universal Health Servs., 136 S. Ct. at 2003 (citation omitted). Drawing
from statutory and common law definitions of materiality, the Universal Health Services
Court set out several factors to evaluate the requirement including: (1) whether the
government expressly identifies a provision as a condition of payment; (2) whether the
defendant knows that the government consistently refuses to pay claims in the “mine run
of cases based on noncompliance with the particular statutory, regulatory, or contractual
requirement” at issue; (3) whether the government pays claims in full despite actual
knowledge that certain requirements were violated; and (4) whether the government pays
claims in full despite actual knowledge that certain requirements were violated and has
signaled that it will not change its position. Id. The Court expressly rejected a
categorical approach to materiality:
A misrepresentation cannot be deemed material because the Government
designates compliance with a particular statutory, regulatory, or contractual
requirement as a condition of payment. Nor is it sufficient for a finding of
materiality that the Government would have the option to decline to pay if
it knew of the defendant’s noncompliance. Materiality, in addition, cannot
be found where noncompliance is minor or insubstantial.
Id. (citing United States ex rel. Marcus v. Hess, 317 U.S. 537, 543 (1943)).
Carrington contends that Calderon has insufficiently plead the materiality element
of an FCA claim because the Amended Complaint fails to identify specific loans that are
connected to particular false claims for payment as discussed in the prior sections of this
entry. (Filing No. 49 at 32). Carrington also alleges three other reasons that the
Amended Complaint fails to sufficiently plead the materiality requirement: (1) the
allegations of allegedly false statements amount to no more than contract or regulatory
violations; (2) there is no allegation that Carrington knew that certain underwriting
requirements were material to HUD’s decisions to make payments; and (3) there is no
alleged nexus between any specific loan default and any alleged violation of the FHA
underwriting requirements. (Filing No. 49 at 33-37). Like with the scienter requirement,
Calderon did not address Carrington’s argument regarding materiality in her response;
therefore, her arguments in surreply are waived. Cf. Foster, 652 F.3d at 778 n.5.
Under the strict standard enunciated in Universal Health Services, the court must
agree with Carrington that the Amended Complaint in this case is deficient with respect
to the materiality element. Rather than providing examples of regulatory and/or
guideline violations that HUD has considered material in other cases, the Amended
Complaint merely recites in a generalized manner that hundreds or thousands of loans
“contained at least one material violation of the applicable HUD underwriting
guidelines.” (See, e.g., Am. Compl. ¶ 38). There is no attempt to address or provide
facts from which an inference can be drawn that the “at least one” unidentified violation
was actually material to any decision made by HUD, much less a decision to pay
Carrington. The court recognizes that the very nature of the underwriting process may
make it difficult for Calderon to identify a single material violation; however, she must at
least try to make a connection between the allegedly fraudulent underwriting decisions
and HUD’s subsequent payment of funds to Carrington. Calderon’s FCA claims must be
dismissed for this reason as well.
B. State Law Claims
Carrington seeks dismissal of Calderon’s state law claims on three grounds: (1)
she lacks standing to assert the claims; (2) HUD’s contractual relationship with
Carrington precludes them; and (3) Calderon failed to plead specific facts to support the
claims sounding in fraud. (Filing No. 49 at 37). Citing no case law, Calderon argues that
dismissal of the state law claims is premature because the Government may involve itself
in this action in the future. (Filing No. 53 at 4). Again citing no case law, Calderon
further asserts that as a relator bringing claims on behalf of the Government, she should
be allowed to pursue any of its claims against Carrington. (Id.).
The FCA is a unique statute in that it grants a private citizen the right to bring
claims that belong to the Government. See 31 U.S.C. § 3730(b)(1) (“A person may bring
a civil action for a violation of section 3729 for the person and for the United States
Government. The action must be brought in the name of the Government. . . .”).
However, other than for actions of retaliation against a relator, see 31 U.S.C. § 3730(h), it
is clear that the proscribed conduct is for actions that harm the Government, not the
individual. See 31 U.S.C. § 3729 (stating that a person who engages in the listed
prohibited conduct with respect to Government funds “is liable to the United States
Government”). In the Amended Complaint, the state law claims allege harm to the
Government only; there is no allegation of harm to Calderon or property owned by her.
In other words, if Carrington engaged in the allegedly wrongful act, the harm it caused
would be to the Government, not to Calderon. Calderon has not pointed to any case in
which a relator is allowed to proceed with common law claims on behalf of the
Government. This court agrees with the cases cited by Carrington that conclude that a
relator lacks standing to assert common law claims on behalf of the Government. See,
e.g., United States v. Pekin Mem’l Hosp., No. 05-cv-1018, 2008 WL 2705443, at *5
(C.D. Ill. July 9, 2008) (dismissing common law claims without prejudice to allow the
Government to bring the claims later) (citing, inter alia, United States ex rel. Rockefeller
v. Westinghouse Elec. Co., 274 F. Supp. 2d 10, 14 (D.D.C. 2003)); United States ex rel.
Grant v. Rush-Presbyterian/St. Luke’s Med. Ctr., No. 99 C 06313, 2001 WL 40807, at *6
(N.D. Ill. Jan. 16, 2001) (concluding that an allegation of unjust enrichment must be
dismissed because the benefits at issue belonged to the Government) (citing United States
ex rel. Long v. SCS Bus. & Tech. Inst., 999 F. Supp. 78, 92 (D.D.C. 1998) (deciding that
relator cannot bring unjust enrichment claim on behalf of the government), rev’d on other
grounds, 173 F.3d 870 (D.C. Cir. 1999)); United States ex rel. Mayman v. Marietta
Corp., 894 F. Supp. 218, 225026 (D. Md. 1995) (deciding that relator cannot bring
breach of contract claim on behalf of the government). This is a logical conclusion
because it is only by statute that a relator may stand in the shoes of the Government under
the FCA and there is no similar relationship created under common law. For this reason,
Calderon’s state law claims on behalf of the Government should be dismissed without
For the reasons stated herein, the court GRANTS defendant Carrington Mortgage
Services, LLC’s, Motion to Dismiss (Filing No. 48). Relator Michelle Calderon’s state
law claims are dismissed without prejudice, however, she has leave to file a Second
Amended Complaint within 21 days of the date of this entry; her failure to do so will
result in an entry dismissing the action in favor of defendant.
SO ORDERED this 10th day of January 2018.
Distributed Electronically to Registered Counsel of Record.
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?