UNITED STATES OF AMERICA ex rel. PETER D. GRUBEA v. ROSICKI, ROSICKI & ASSOCIATES, P.C., et al.

Filing 180

OPINION AND ORDER re: (135 in 1:12-cv-07199-JSR) MOTION to Dismiss filed by Reo America Abstract, Inc., Attorney OutSourcing Support Services, Inc., (137 in 1:12-cv-07199-JSR) MOTION to Dismiss filed by McCabe, Weis berg & Conway, P.C., (123 in 1:12-cv-07199-JSR) JOINT MOTION to Dismiss on behalf of the Servicer Defendants filed by Ditech Financial LLC, Cenlar FSB, PHH Mortgage Corporation, U.S. Bank, N.A., Suntrust Mortgage, Inc., Nations tar Mortgage LLC, Flagstar Bank, FSB, Metlife Bank, N.A., Green Tree Credit, (56 in 1:13-cv-01467-JSR) MOTION to Dismiss filed by J.P. Morgan Chase Bank, N.A., J.P. Morgan Chase & Co., Bank of America, N.A., (132 in 1:12-cv-0 7199-JSR) MOTION to Dismiss filed by Paramount Land, Inc., Rosicki, Rosicki & Associates, P.C., Enterprise Process Service, Inc., Threshold Land Inc. For the reasons set forth above, the Court grants the motions of the Service rs Defendants and dismisses with prejudice both Relator's Second Amended Complaint in the Second Suit in its entirety and Relator's Third Amended Complaint in the First Suit as to the Servicer Defendants. The court also grants the motions o f the McCabe Defendants in part and dismisses Relator's Third Amended Complaint in the First Suit as to the McCabe Defendants, but without prejudice to Relator filing a Fourth Amended Complaint including certain additional allegations detailed b y Relator in his answering papers, provided that such amended pleadings are filed by no later than July 11, 2018. Finally, the Court denies the motion of the Rosicki Defendants. The Clerk of Court is hereby instructed to close docket entry numbers 123, 132, 135, and 137 in the First Suit and number 56 in the Second Suit. (Amended Pleadings due by 7/11/2018.) (Signed by Judge Jed S. Rakoff on 6/23/2018) (mro)

UNITED STATES DISTRICT COURT
SOU~HERN DISTRICT OF NEW YORK

------------------------------------x
UNITED STATES OF AMERICA ex rel.
PETER D. GRUBEA,

12-cv-7199 (JSR)

Plaintiff,
-vROSICKI, ROSICKI & ASSOCIATES,
P.C., PARAMOUNT LAND, INC.,
THRESHOLD LAND INC., ENTERPRISE
PROCESS SERVICE, INC., MCCABE,
WEISBERG, & CONWAY, P.C., ATTORNEY
OUTSOURCING SUPPORT SERVICES, INC.,
REO AMERICA ABSTRACT, INC., CENLAR
FSB, CITIGROUP, INC., CITIBANK,
N.A., CITIMORTGAGE, INC., DITECH
FINANCIAL LLC, EVERHOME MORTGAGE
COMPANY, EVERBANK FSB, FLAGSTAR
BANK, FSB, GREEN TREE CREDIT, JAMES
B. NUTTER & CO., METLIFE BANK,
N.A., NATIONSTAR MORTGAGE LLC,
ONEWEST BANK FSB, PHH MORTGAGE
CORPORATION, PNC BANK, FSB,
SUNTRUST MORTGAGE, INC., U.S.
BANK, N.A., and WELLS FARGO & CO.,

USDCSDNY
DOCUMENT
ELECTR01'.1CALLY FILED
DOC#:
DATE FILED:_(~

J0
)\ (
,_
f

\

'

Defendants.

------------------------------------x
UNITED STATES OF AMERICA,
Plaintiff-Intervenor,

-vROSICKI, ROSICKI & ASSOCIATES,
P.C., ENTERPRISE PROCESS SERVICE,
INC., PARAMOUNT LAND, INC.,
Defendants.

------------------------------------x
UNITED STATES OF AMERICA ex rel.
PETER D. GRUBEA,

13-cv-1467

Plaintiff,

1

(JSR)

-vBANK OF AMERICA CORPORATION, BANK
OF AMERICA, N.A., J.P. MORGAN CHASE
& CO., and JPMORGAN CHASE BANK,
N .A.,

OPINION AND ORDER

Defendants.

------------------------------------x
JED S. RAKOFF, U.S.D.J.
On September 24,

2012,

Peter D.

Grubea

("Relator")

filed a

"qui tam" action on behalf of the United States of America
"Government")

against Rosicki,

Enterprise Process Service,
Inc.

( " Paramount" ) ,

(collectively,
servicers
28,

the

Rosicki

Inc.

("Enterprise") ,

Threshold

"Rosicki

Associates

&

Land,

and

("Rosicki"),

Paramount Land,
("Threshold")

Inc.

Defendants")

(the

various

mortgage

(the "First Suit"). See Complaint, Dkt. 25. On February

2013,

Grubea

filed

a

First

Amended

Complaint

additional defendants McCabe, Weisberg & Conway,
Attorney Outsourcing Support Services,

Inc.

Abstract,

the

Inc.

("REO")

(collectively,

naming

P.C.

as

("McCabe"),

( "AOSS") , REO America
"McCabe

Defendants"),

and certain additional mortgage services. See Dkt. 27.
On March 5,
servicers:
Mortgage

HSBC

No.

Grubea

Bank USA,

13

"HSBC")

Civ.

liability and

the

filed

N .A.,

(USA) ,

Corporation

(collectively,
22,

2013,

HSBC
HSBC

suit

against

Finance Corporation,

HSBC

Mortgage

Inc.

(the "Second Suit").

1467.
Court

Thereafter,
entered

2

four mortgage

in

See Complaint,

2014,

judgment

in

Services,

HSBC
the

Dkt.

admitted

amount

of

to
$10

million.

See Stipulation and Order of Settlement and Dismissal,

Dkt. 151-1.
On June 27, 2014, Grubea filed a Second Amended Complaint in
the First Suit adding still more servicers as defendants. See Dkt.
28. On July 8, 2014, Grubea filed a First Amended Complaint in the
Second Suit naming Bank of America Corporation, Bank of America,
N.A.

(collectively,

"Bank of America"),

Co, and JPMorgan Chase Bank, N.A.

and J.P.

Morgan Chase

&

(collectively, "JPMorgan Chase")

as defendants. See Dkt. 23, No. 13 Civ. 1467.
All of this remained under seal while the Government undertook
its

own

However,
Judge,

inquiry

in

order

to

in January of 2018,

see

Dkt.

19;

Dkt.

20,

determine

whether

to

intervene.

both suits were reassigned to this
No.

13 Civ.

1467,

and the Court

required the Government to make its election without further delay.
On February 13, 2018, the Government elected to intervene in part
and

to

decline

intervention

in

part

in

the

First

Suit,

see

Government's Notice of Election to Intervene in Part and Decline
Intervention in Part, Dkt. 33, and to decline any intervention in
the Second Suit, see Notice of Election to Decline Intervention,
Dkt. 31, No. 13 Civ. 1467.
Accordingly, on March 27, 2018, the Government filed a threecount complaint against the Rosicki Defendants 1 for violations of

The Government did not sue Paramount's predecessor-in-interest
Threshold. Accordingly, for simplicity, when this Opinion and
1

3

the

False

("CII"),

Claims

Dkt.

22.

the

("FCA") .

On April

Amended Complaint
Defendants,

Act

("TAC")
McCabe

3,

See

Complaint-in-Intervention

Relator filed a

five-count Third

in the First Suit against the Rosi cki
Defendants,

and

all

of

the

Servicer

Defendants 2 except for JPMorgan Chase and Bank of America, see Dkt.
29, and a five-count Second Amended Complaint ("SAC") in the Second
Suit against the remaining Servicer Defendants, JPMorgan Chase and
Bank of America, see Dkt. 28, No 13. Civ. 1467.
The Servicer Defendants,

the Rosicki Defendants, McCabe,

the McCabe Affiliates 3 now move

to dismiss

the

three

and

operative

complaints. See Dkts. 123, 132, 135, and 137; Dkt. 56, No. 13 Civ.
1467;

Memorandum of Law in Support of the Servicer Defendants'

Motion

to

Dismiss

the

Complaint

("Servicer

Mem."),

Dkt.

124;

Memorandum of Law in Support of the Rosicki Defendants' Motion to
Dismiss

("Rosicki Mem."),

Dkt.

134; Memorandum of Law in Support

Order refers to the Rosicki Defendants, it means to include
Threshold when it is referring to Relator's claims and to exclude
Threshold when it is referring to the Government's claims.
The "Servicer Defendants" are Bank of America; Cenlar FSB;
Citigroup
Inc.,
Citibank,
N.A.,
and
CitiMortgage,
Inc.
(collectively, "Cit i ") ; Di tech Financial LLC; Ever Home Mortgage
Company and Ever Bank FSB (col lecti vel y, "EverBank") ; Flags tar
Bank, FSB ("Flagstar"); Green Tree Credit; James B. Nutter & Co.;
JPMorgan Chase; MetLife Bank, N.A.; Nationstar Mortgage LLC;
OneWest Bank FSB ("One West"); PHH Mortgage Corporation ("PHH"),
PNC Bank, FSB ("PNC"); SunTrust Mortgage, Inc.; U.S. Bank N.A.;
and Wells Fargo & Co ("Wells Fargo").

2

3

The "McCabe Affiliates" are REO and AOSS.
4

of Motion to
McCabe,

Dismiss the Third Amended Complaint by Defendant,

Weisberg

Memorandum

of

& Conway,

Law

in

P.C.

Support

of

("McCabe
Attorney

Mem."),

Dkt.

Outsourcing

138;

Support

Services, Inc.'s and REO America Abstract, Inc.'s Motion to Dismiss
Third Amended Complaint ("AOSS Mem."), Dkt. 136; Reply Memorandum
of Law in Further Support of the Servicer Defendants'
Dismiss

the

Complaint

("Servicer

Reply"),

Dkt.

Motion to

158;

Reply

Memorandum of Law in Further Support of the Rosicki Defendants'
Motion to Dismiss ("Rosicki Reply"), Dkt. 157; Reply in Support of
Motion to Dismiss the Third Amended Complaint by Defendant, McCabe,

&

Weisberg
Memorandum

Conway,
of

Law

P.C.
in

("McCabe

Support

of

Reply"),

Attorney

Dkt.

163;

Outsourcing

Reply
Support

Services, Inc.'s and REO America Abstract, Inc.'s Motion to Dismiss
Third Amended Complaint ("AOSS Reply"), Dkt. 162. 4
Grubea and the Government

oppose.

See Memorandum of

Law of

Plaintiff-Intervenor United States of America in Opposition to the
Rosicki

Defendants'

Motion to Dismiss

("Gov' t

Mem. "),

Dkt.

149;

Memorandum of Law in Opposition to Defendants' Motions to Dismiss
("Relator

Mem."),

Dkt.

Plaintiff-Intervenor

150;

United

Sur-Reply
States

of

Memorandum
America

of
in

Law

of

Further

Additionally, the Court is in receipt of supplemental papers from
six Servicer Defendants - OneWest, Flagstar, Wells Fargo, Citi,
Bank of America, and JPMorgan Chase - in support of their motions
to dismiss.
4

5

Opposition to the Rosicki Defendants'
Reply"),

Dkt.

167;

Relator's

Motion to Dismiss

Sur-Reply

("Gov' t

("Relator Reply"),

Dkt.

168.
Following
argument

on

("Tr."),

Dkt.

this

May

extensive

25,

176.

2018.

Now,

briefing,

See

the

Transcript

Court

dated

heard

May

after careful consideration,

oral

25,

2018

the Court

hereby dismisses with prejudice the claims against the Servicer
Defendants;

dismisses

the claims against McCabe and the McCabe

Affiliates without prejudice to Relator amending his complaint to
detail

further specific examples of McCabe and

its Affiliates'

allegedly fraudulent conduct; and otherwise denies the motions (in
particular,

denying

the

motion

to

dismiss

of

the

Rosicki

Defendants).
The

pertinent

allegations,

as

set

forth

in

the

operative

bankruptcy

attorney

complaints,s are as follows:
Grube a

is

an

experienced

consumer

residing in Erie County, New York. See TAC

~

18. Rosicki is a New

York professional corporation specializing in mortgage law, with
offices in Plainview, Batavia, and Fishkill, New York.

Id.

~

19.

Threshold is a New York business corporation, incorporated on May
30, 2003, and dissolved on July 11, 2011, with its principal office

s The allegations in Relator's complaints in the two suits are
substantially the same. This Opinion and Order cites to the TAC in
the First Suit except as needed to refer to information contained
only in the SAC in the Second Suit.
6

in Plainview, New York.

Id.

~

21.

Paramount is the successor-in-

interest to Threshold and a New York business corporation,
its

principal

office

in

Plainview,

New

York.

~~

Id.

with

20-21.

Enterprise is a New York business corporation, with its principal
~

office in Plainview, New York. Id.

22.

McCabe is a New York professional corporation with locations
in New York and Pennsylvania.
corporation

with

Pennsylvania. Id.

its
~

~

Id.

AOSS is a

23.

principal

office

in

Philadelphia,

24. REO is a Pennsylvania corporation with its

principal office in Philadelphia, Pennsylvania. Id.
Cenlar FSB

Pennsylvania

( "Cenlar")

is a

federal

~

25.

savings bank,

principal office in Trenton, New Jersey. Id.

~

with its

26. Citigroup, Inc.

is a Delaware corporation, with its principal office in New York;
Citibank,
Inc.

is

N.A.
a

is a

New York

subsidiary of Citigroup;
corporation

(collectively, "Citi").
Florida corporation,
Florida

and

Id.

~

and

a

subsidiary

office

in Troy,

Citigroup

with its principal office in Jacksonville,

EverBank

("Flagstar")

of

27. EverHome Mortgage Company is a

FSB

is

a

federal

savings

principal office in Jacksonville, Florida. Id.
FSB

and CitiMortgage,

is a

federal

Michigan.

Id.

savings bank,
~

29.

~

bank,

with

its

28. Flagstar Bank,

with its principal

Green Tree Credit

("Green

Tree") is a Delaware limited liability company, with its principal
off ice in St.

Paul,

Minnesota.

Id.

~

30.

James B.

Nutter

&

Co.

("Nutter") is a Missouri corporation, with its principal office in

7

Kansas City, Missouri. Id.
a

national

banking

Morristown,

New

("Na tionstar")
principal

31. MetLife Bank, N.A.

association,

Jersey.

Id.

with

i

its

32.

("MetLife") is

principal

Nationstar

office

Mortgage

in
LLC

is a Delaware limited liability company, with its

office

("OneWest")

err

in

Dallas,

Texas.

Id.

33.

err

OneWest

Bank FSB

is a federal savings bank, with its principal office

in Pasadena, California. Id. i 34. PHH Mortgage Corporation ("PHH")
is a New Jersey business corporation, with its principal office in
Mount Laurel,
federal

New Jersey.

savings bank,

i

Id.

with

35.

PNC Bank,

its principal

Pennsylvania. Id. i

3 6. SunTrust Mortgage,

Virginia

corporation,

business

Richmond, Virginia. Id. i
national

banking

with

off ice
Inc.

its

with

its

Minneapolis, Minnesota. Id. i 38. Wells Fargo
is

a

Delaware

F~ancisco,

Bank

corporation,

California. Id. i
of

America

with

its

("PNC")

("SunTrust") is a
office

in

("U.S. Bank") is a

principal
&

is a

in Pittsburgh,

principal

37. U.S. Bank, N.A.,

association,

FSB

Co.

principal

office

in

("Wells Fargo")
office

in

San

39.

Corporation

is

a

Delaware

corporation

headquartered in Charlotte, North Carolina; Bank of America, N.A.
is a national banking association and subsidiary of Bank of America
Corporation, with a principal place of business in Charlotte, North
Carolina.

See SAC i

20.

J.P.

Morgan Chase

&

Co.

is a

Delaware

corporation headquartered in New York, New York, and JPMorgan Chase
Bank, N.A. is a national banking association with a principal place

8

of business in Columbus,

Ohio

(collectively,

"JPMorgan Chase") .

Id. 'JI 22.
The Federal Housing Administration ("FHA")
the

United States

("HUD")
loans,

of

Housing and Urban

Development

that insures approved lenders against losses on mortgage
including losses incurred in foreclosure proceedings. See

TAC 'JI'JI 1,
Mae")

Department

is a division of

5.

The Federal National Mortgage Association

and the

Federal Home Loan Mortgage Corporation

("Fannie
("Freddie

Mac") are government-sponsored enterprises ("GSEs"), chartered by
Congress

to

help

lenders

originate

single-family mortgages

by

purchasing and guaranteeing mortgage loans and by issuing mortgage
debt securities,

id.

'JI'JI 44,

72.

Since 2008,

the GSEs have been

under U.S. Government conservatorship. CII 'JI'JI 13-14. Between 2008
and 2012, the GSEs received nearly $200 billion in federal funding.
See TAC 'JI 1. During that time, the GSEs paid quarterly dividends
to the U.S. Treasury equal to 10% of the total amount of federal
funds

received.

Thereafter,

quarterly amounts

equal

to

the

GSEs

paid

their

net

worth

the

U.S.

less

a

Treasury

$3

billion

In the ordinary course of conducting their affairs,

FHA and

capital reserve. See id. 'JI'JI 50, 76.

the

GSEs

pay

financial

institutions

called

"servicers"

to

"service" mortgages they own or insure by, for example, collecting
payments

from

prosecuting

borrowers,

foreclosures.

pursuing
Id.

'JI

9

4.

loans,

and

contracts

with

delinquent
In

their

servicers,

the GSEs and FHA agree to reimburse various costs and

expenses related to foreclosure actions. The servicers,

in turn,

typically contract with law firms to prosecute these actions. Id.
~

6. The GSEs and FHA agree to pay these attorneys a flat fee for

their legal work. Separately, the GSEs and FHA reimburse so-called
"default-related legal expenses," which typically include title
searches,
Id.

service of process, and publication and posting costs.

Any overhead related to these activities,

however,

must be

included in legal fees and not as expenses.
FHA and the GSEs permit reimbursement only of those defaultrelated legal expenses that are actual, reasonable, and necessary.
The FHA,

for example,

requires

that

its

servicers certify that

"with the submission of each loan for insurance or request
insurance benefits,
requirements
["HUD"],

the applicant has and wi 11

comply with the

of the Secretary of Housing and Urban

which

include,

but

are

not

limited

for

Development

to

HUD's

regulations, FHA handbooks, mortgagee letters, and Title I letters
and policies."
approval,

a

Id.

~

98

servicer must

(quotations
submit

an

omitted).
annual

To maintain

cert if ica ti on

FHA
that

states, inter alia, "I know or am in the position to know, whether
the operations of the above named mortgagee to conform to HUD-FHA
regulations, handbook, and policies," and certifies to conformance
with the same.

Id.

~

99.

Among other things,

HUD and the FHA

require servicers to have in place a quality control plan, see id.

10

':ll':ll 101-103,

104,

to review all claims for insurance benefits,

id.

':!I

and to ensure that unallowable foreclosure processing fees

are not included in insurance claims, id. ':!I 105.
Servicers must further ensure that their "contractors" and
"agents" complied with certain specific FHA requirements.
106

(quoting

requirement

HUD

that,

Handbook

4060.1,

7-3).

Among

these

Id.
is

':!I

the

in the event a borrower defaults on an FHA-

insured mortgage and the servicer prosecutes a foreclosure on the
mortgage,

"fees and costs that

exceed reasonable and customary

fees for the area" are not to be submitted for reimbursement. Id.
':!I

110. Also unallowable are costs "not necessarily incurred or

required because of dilatory service," and costs that are "overhead
items such as postage,

telephone,

or duplicating or collection

services,

all of which should be included in the attorney's or

trustee's

fees."

Id.

HUD

rules

expressly

prohibit

banks

listing any unallowable costs on any application for
benefits as either fees or costs.

Id.

':!I 111.

from

insurance

HUD rules further

require banks to "promptly reimburse HUD for any amount overpaid
[by

HUD]

because

of

incorrect,

unsupported

or

inappropriate

information" provided by the servicers or their agents. Id. ':!I 112
(quoting HUD Handbook 4330.4, 1-28).
Fannie
competent,

Mae

likewise

diligent

requires

its

servicers

to

retain

legal counsel and to "make every effort to

reduce default-related foreclosure expenses." Id.

11

':!I

62

(quoting

Fannie Mae Servicing Guide £5-07
things,

(Dec.

13,

2017)).

Among other

Fannie Mae servicers "must attempt to minimize the costs

incurred from vendors utilized by law firms - such as auctioneers,
process

servers,

title

companies,

posting

companies,

and

newspapers or other publications - by ensuring that all costs are
actual, reasonable, and necessary." Id.; see also id.

64 ("Fannie

<JI

Mae will reimburse the servicer [for out-of-pocket costs that it
pays to third-party vendors of the courts], as long as the costs
are

actual,

reasonable

and

necessary").

Further,

Fannie

Mae

servicers and law firms must "regularly examine the pricing offered
by alternative vendors and negotiate for the best value from the
vendor and other qualified service providers."

Id.

62.

<JI

Where

attorneys have an economic interest in other companies involved in
the

foreclosure

process,

Fannie

requires

Mae

that

such

relationships be disclosed and that "any fees or expenses for such
services"

not

"exceed

the

customary

and

comparable services in" the jurisdiction.
Fannie Mae Servicing Guide, Part VIII,
Fannie

Mae

further

prohibits

§

reasonable
Id.

<JI

63

fees

for

(quoting the

106.03 (Mar. 14, 2012)).

reimbursement

unnecessary or costs that are not reasonable,

of

costs

see id.

that
<JI<JI

are

65-66,

and requires that servicers monitor fees and expenses and reimburse
Fannie Mae for "any unreasonable or excessive fees or costs," id.
'JI 63;

id.

<JI

71.

12

Freddie
discussed.

Mac

imposes

For example,

requirements

akin

those

to

Freddie Mac requires that

just

its servicers

submit annual eligibility certifications attesting to compliance
with Freddie Mac requirements, id.
that

servicers

effecti ve,

manage

expeditious,

the

<JI

88, including the requirement

foreclosure

process

"in

and efficient manner," id.

<JI

a

89,

cost"create

and implement a quality control program" to ensure the same,
<JI

90,

and impose "policies and procedures reasonably designed to

ensure

that

firms

compliance with

handling

[]

Freddie Mac

Default

entities

not

limited

the

to,

in
and

firm

relies

upon

to

and relationship

provide

third-party

support functions performed on the Servicer's behalf,
but

are

93. Freddie Mac also requires that servicers

<JI

require law firms to "disclose the identity of,
any

Matters

tl1e applicable provisions of the Guide,

applicable law," id.

with

id.

title

searches,

title

publication, and process services." Id.

<JI

including,

insurance,

posting,

92. Servicers must also

require firms to disclose whether they have "a process to select
and regularly review costs and performance of vendors of related
sources

to

ensure

Freddie Mac permits

competitive

reimbursement

"reasonable and comparable
area

where

the

pr icing

property

is

to

and

only of

those

high

quality."

those costs

that

customarily charged

located."

Id.

<JI

94;

see

Id.
are

in the

a 1 so

id.

("Servicers must ensure that attorney fees and costs incurred are
reasonable and comparable to those charged in the area where the

13

property

is

located.")

(quoting

Freddie

Mac

Single-Family

Seller/Servicer Guide Bulletin Number 2013-6 (Apr. 15, 2013)).
Against
Green

this background,

Tree,

SunTrust,

Nutter,

U.S.

Cenlar,

MetLife,

Bank,

Ci ti,

Nationstar,

Wells Fargo,

Everbank,
OneWest,

Bank of America,

Flagstar,
PHH,

PNC,

and JPMorgan

Chase overcharged Fannie Mae, Freddie Mac, and the FHA hundreds of
millions

of

servicers

dollars.

See

submitted

expenses without

TAC

claims

1-3,

<JI<JI

for

11.

Specifically,

reimbursement

of

these

foreclosure

regard to how unnecessary or unreasonable the

expenses were.
Rosicki and McCabe are law firms.
service of process,

To handle title searches,

and the arrangement of publication of legal

notices, Rosicki created Threshold, Paramount, and Enterprise and
McCabe

created

AOSS

and

REO.

Id.

<JI<JI

114,

139.

122,

These

affiliates, it is alleged, were designed to generate invoices for
unnecessary

services

and

charge

excessive

rates.

affiliates passed these costs on to the law firms,

See

id.

The

the law firms

passed them on to the servicers, and, upon information and belief,
the servicers passed them on to the Government. Id.
Rosicki,
process
process,
to

serve

for

affiliate.
however,
process.

approximately

example,
See

controls

CII

54.

<JI

Enterprise
Rather

than

a

service-of-

actually

serve

Enterprise allegedly hired third-party vendors
Id.

$15-25

<JI

for

70.

These

each

vendors

individual

14

charged
served.

Enterprise
Id.

<JI

71.

Enterprise then generated invoices for service of process charging
between $75 and $125. Id. i 72. These invoices exceeded competitive
market

rates.

Rosicki,

i

Id.

which

73.

charged

Enterprise

them

to

the

charged

these

Servicers.

amounts

Enterprise

to

also

regularly billed for unnecessary expenses including service upon
the New York State Department of Taxation and Finance despite the
absence of any tax lien; service upon judgment debtors with names
similar to the foreclosure defendant even though the relevant names
were irreconcilable; ineffective and worthless service upon "John
Doen defendants; and services that were part of law firm overhead

expenses such as court filings. See TAC i

124. Similarly, Rosicki

used Paramount to conduct title searches. Rather than do the work
itself,

however,

Paramount

engaged

third-party

abstractors

at

market rates to provide title documents and marked up their bills
substantially (e.g.

to $495 where market rates were between $100

and $250) before submitting them to Rosicki and the Servicers. See
id. i

131; CII i i 79-82.
McCabe also used affiliates - AOSS and REO - to conduct title

searches and serve process. See TAC i i 139-40. AOSS and REO billed
McCabe

and ultimately the

FHA and the GSEs

at

excessive

rates

including at more than $450 for title searches despite market rates
between

sioo

and $250, and for personal service at more than $200

despite market rates of approximately $20 to $40. Id.

~

141. Like

Paramount and Enterprise, AOSS and REO often contracted with other

15

entities to conduct the actual work and marked up the bills before
seeking

reimbursement

Servicers.
entities

Although
directly,

from

McCabe
McCabe

McCabe
could

chose

and
have

thereafter
contracted

instead

to

from
with

contract

the
these

with

its

affiliates in order to mark up the bills and generate profits. Id.
<JI

145.
Upon

information

and

belief,

the

Servicer

Defendants

submitted these false claims to the GSEs and FHA in order to save
resources

that

compliance,
prices.

they

quality

Id.

<JI

11.

pay unreasonable

in

the

control,

otherwise
and

have

efforts

had
to

to

expend

negotiate

on

better

If the Servicers had monitored and refused LO
and unnecessary fees,

Rosicki's affiliates,
mentioned

would

Relator posits,

McCabe's affiliates,

complaints

would

have

neither

or the other vendors

been

able

to

continue

billing for unnecessary and unreasonable foreclosure expenses. Id.
<JI

118. The Servicers Defendants perpetuated this scheme over many

years by falsely certifying to the GSEs and to the FHA that their
claims were accurate and that they were in compliance with their
contractual commitments to monitor foreclosure costs.

Id.

<JI

120.

To this day, upon information and belief, the Servicer Defendants
have improperly retained the overpayments. Id.

<JI<JI

3, 12. And they

have done so despite contractual obligations to refund the GSEs
and FHA and despite red flags including knowledge that the Justice
Department was investigating the overpayments.

16

Id.

<JI

486.

The operative complaints include over sixty specific examples
of foreclosure actions
firms

charged

in which Rosicki,

unreasonable

Servicer Defendants,

or

McCabe,

unnecessary

and other law

expenses,

upon information and belief,

which

the

submitted for

reimbursement to FHA, Fannie Mae, and Freddie Mac. See id.

~~

474;

Rosicki

SAC

163-332;

~~

CII

87-123.

~~

In

one

instance,

170-

foreclosed on a property on Lake Street in Angola, New York. Id.
~

87.

Rosicki

process

on

contracted with Enterprise

the

Enterprise,

two

named

however,

did

foreclosure
not

serve

to

effect

service

defendants.

the

~

Id.

process;

of
88.

instead

it

contracted with a third-party to do so. Id. The third-party process
server charged $20 for one of the named defendants,
other,
then

and $33.50 for four Doe defendants.
charged

Rosicki

$50

for

attempted

Id.

~

service

$10 for the

89.
on

Enterprise
each

named

defendant, $125 for service on each named defendant, and $300 for
~

the four Doe defendants. Id.

90. Thus, while service of process

actually cost $63.50, Fannie Mae ultimately paid $650. Id.
90.

Rosicki

search
itself,

for

also
the

contracted with

Lake

Paramount

Street

engaged

Paramount

property.
a

to

Rather

third-party

~~

perform a
than

do

vendor.

89-

title

the

work

Thereafter,

Paramount submitted a bill for $275, the maximum amount allowed by
Fannie Mae, as well as a $35 document retrieval fee.
In

another

instance,

Flagstar

foreclosed

on

Id.
a

~

91.

Fannie Mae

mortgage secured by a property on East 45th Street in Brooklyn, New

17

York. See TAC

~

proceedings. Id.

206. Flagstar engaged Rosicki to handle the legal
~

207. Rosicki contracted with Enterprise to bill

for service of process.

Id.

~

208.

Enterprise invoiced Rosicki

approximately $125 per defendant for each of the defendants at the
property,

well above market rates of $20-$40 per person,

upon information and belief,

which,

Enterprise itself paid to a third-

party process server who actually performed the work.

Id.

Similarly,

related to

Paramount billed $495

for

title searches

209.

~

that property, well above the market rate of between $100 and $250,
which, upon information and belief, is what Paramount paid to the
third-party company that actually conducted the title search. Id.
~

211.

Grubea discovered defendants' fraudulent scheme in the course
of

his

bankruptcy

foreclosure-related
costs. Id.

~

practice

when

he

proofs-of-claims

noticed
presenting

a

pattern

of

unreasonable

489. Frequently, when he challenged servicers on these

costs

in his

their

agents,

clients'
the

law

bankruptcy proceedings,
firms,

reduced

the

the servicers or

claim

amounts.

Id.

Thereafter, Grubea conducted additional market research, id., and
obtained direct and independent knowledge of the schemes through
communications with lawyers from foreclosure law firms, id.

~

490,

including a partner at Steven J. Baum, P.C., formerly the largest
foreclosure firm in New York,

lawyers at Rosicki, and lawyers at

other firms around the country that use affiliate vendors,

18

id.

~

491.

Among

other

Defendants

paid

things,
these

Grubea

learned

inf lated

and

that

the

unnecessary

Servicer

foreclosure

expenses without making any real effort to obtain the best value
or to exercise quality control over fees and costs.

Id.

':II

4 92.

Prior to Grubea's disclosures to the Government, see id. ':II 493, no
one had previously identified these mass overbillings, id. ':II 494.
In connection with these allegations,

Relator asserts that

the McCabe Defendants and the Servicer Defendants submitted false
claims to
U.S.C.

§

Fannie Mae,

3729 (a) (1) (A)

Fannie Mae,
3729 (a)

(1)

Freddie Mac,

31

("False Claims"), made false statements to

Freddie Mac,

(B)

and FHA in violation of

and

FHA in violation

of

31

U.S.C.

§

("False Statements"), and submitted false claims to

Fannie Mae and Freddie Mac,

which caused Fannie Mae and Freddie

Mac to pay the United States less than what the United States would
have otherwise been entitled to receive in violation of 31 U.S.C.
§

3729(a)

(1) (G)

("Reverse False Claims"). See TAC ':!I':!I 495-502, 511-

513; SAC ':!I':II 353-360, 364-366. Relator also asserts that the McCabe
Defendants

conspired

to

submit

false

claims

and

make

false

statements to Fannie Mae, Freddie Mac, and FHA in violation of 31
U.S.C.

§

503-507,

3729(a) (1) (C)

("False Claims Conspiracy"),

see TAC

<JI<JI

and that the Servicer Defendants used or caused to be

made false records or statements material to an obligation to pay
or transmit money to the United States or knowingly concealed,
avoided,

or decreased an obligation to pay or transmit money to

19

the

United

States

in

violation

of

("Reverse False Claims"), see id.

~~

31

U.S.C.

3729(a) (1) (G)

§

508-510; SAC

~~

361-363.

The Government, intervening in part, asserts that the Rosicki
Defendants submitted:
of 31 U.S.C.

(1) false claims to Fannie Mae in violation

3729(a) (1) (A)

§

("False Claims"),

to Fannie Mae in violation of 31 U.S.C.
Statements"),

and

(3)

false

§

(2) false statements

3729 (a) (1) (B)

claims to Fannie Mae,

Fannie Mae to pay the United States

less

("False

which caused

than what

the United

States would have otherwise been entitled to receive in violation
of 31 U.S.C.
12 8-14 6.

§

3729(a) (1) (G)

Rel a tor

also

("Reverse False Claims"). See CII

asserts

False

Claims,

False

~~

Statements,

Reverse False Claims, and False Claims Conspiracy counts against
the Rosicki Defendants with respect to Freddie Mac and FHA.
As mentioned, defendants move, pursuant to Rule 12(b) (6) and
Rule

9 (b),

Rule

12 (b) (6)

state

a

to dismiss
motion,

claim to

Atlantic Corp.

v.

the above-mentioned claims.

To survive a

a complaint must contain "enough facts to

relief
Twombly,

that

is

plausible

550 U.S.

544,

570

on

its

face."

Bell

(2007). A claim is

plausible if it is supported by "factual content that allows the
court to draw the reasonable inference that the defendant is liable
for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). In analyzing a complaint, the court "accept[s] all factual
allegations as true and draw[s] all reasonable inferences in favor

20

of the plaintiff." Trs. of Upstate N.Y. Eng' rs Pension Fund v. Ivy
Asset Mgmt., 843 F.3d 561, 566 (2d Cir. 2016).
As

the

FCA is an antifraud statute,

satisfy Rule 9 (b)

FCA claims must

also

of the Federal Rules of Civil Procedure.

See

U.S. ex rel. Ladas v. Exelis, Inc., 824 F.3d 16, 26 (2d Cir. 2017).
Rule 9 (b)

requires a plaintiff to "state with particularity the

circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b).
"[T]he adequacy of particularized allegations under Rule 9(b)
case- and context-specific." U.S.
Response, 865 F.3d 71, 81

ex rel.

(2d Cir. 2017)

.6

Chorches v.

Am.

is

Med.

"Ultimately, whether a

complaint satisfies Rule 9(b) depends upon the nature of the case,
the complexity or simplicity of the transaction or occurrence, the
relationship of

the parties

and the

determination of

how much

circumstantial detail is necessary to give notice to the adverse
party and enable him to prepare a
States v. TEVA Pharms. USA,

Inc.,

responsive pleading." United

13-cv-3702, 2016 WL 750720, at

* 15 ( S . D. N • Y • Feb . 2 2 , 2016) .
I.

THE SERVICER DEFENDANTS

The
because,

Servicer

Defendants

inter alia,

argue

that

Grubea's

claims

fail

the operative complaints do not adequately

allege scienter. See Servicer Mem. at 26-28, 31-32.

Unless otherwise indicated, in quoting cases all internal
quotation marks, alterations, footnotes, and citations are here
omitted.
6

21

To state a False Claims or False Statements claim under the
FCA, Grubea must plausibly allege,

inter alia,

that the Servicer

Defendants "knowingly" presented or caused to be presented false
or fraudulent claims. 31 U.S.C.
Claims claim under the FCA,
alia,

that

the

Servicer

§

3729(a). To state a Reverse False

Grubea must plausibly allege,
Defendants

"knowingly"

inter

concealed

or

"knowingly" and improperly avoided or decreased an obligation to
reimburse the Government. Id.
The

FCA defines

recklessly. See id.
that

is

"highly

§

§

3729 (a) (1) (G).

"knowingly"

to

include

a

person who

acts

3729 (b) (1) (A). Recklessness entails conduct

unreasonable

and

which

represents

an

extreme

departure from the standards of ordinary care." Chill v. Gen. Elec.
Co.,

101 F.3d 263,

615, at 5 (1980)

269

(2d Cir.

1996). See also S. Rep. No.

96-

(recklessness ''encompass [es] the person who seeks

payment from the Government without regard to his eligibility and
with indifference to its requirements") .
The

FCA's

scienter

requirement

is

"rigorous,"

Universal

Health Servs., Inc. v. United States ("Escobar"), 136 S. Ct. 1989,
2002

(2016), because,

"under Rule 9 (b),

the proponent of an FCA

claim must allege facts that give rise to a strong inference of
fraudulent intent," United States ex rel. Tessler v. City of New
York, 14-cv-6455, 2016 WL 7335654, at *5 (S.D.N.Y. Dec. 16, 2016),
aff'd,

712 F. App'x 27

Prop.

Analysts

(2d Cir. 2017); see also O'Brien v. Nat'l

Partners,

936

F.2d

22

674,

676

(2d

Cir.

1991).

Conclusory allegations that defendants "'knew or were reckless in
not knowing'
Shields v.

. do not satisfy the requirements of Rule 9(b) ."

Citytrust Bancorp,

Inc.,

25 F.3d 1124,

1129

(2d Cir.

1994).
Here Grubea alleges "upon information and belief" that the
Servicer

Defendants:

"failed to

'make

every effort'

to

reduce

default-related legal expenses" as required by Fannie Mae, TAC i
149; "did not exercise quality control over foreclosure expenses,"
id.

i

151;

and "submitted false claims without undertaking any

process to assess whether foreclosure expenses were reasonable or
necessary," id. i

153. 7 But when at oral argument on the instant

motions, the Court inquired into the "information" that supported
these "beliefs," Grubea's counsel specified only that Grubea had
had conversations with people at various law firms. See Tr. at 41
(Buchdahl)

("the information primarily is that our Relator heard

and saw directly evidence of

inflated charges of these various

foreclosure expenses" and had conversations with "people at the
law firms involved in these foreclosures"). Although counsel also
alleged at

oral

argument

that

Grubea

had

raised

the

issue

of

inf lated charges with more than one Servicer Defendant, his counsel

7

See also id. i 157 ("Relator repeatedly brought the illegal and
excessive nature of affiliates' fees to the attention of various
Bank Defendants, as well as to their agents, and the Rosicki Firm.
Yet, upon information and belief, the Bank Defendants have taken
no action."). Relator has not pointed to any specific information
underlying this allegation, as discussed further herein.
23

failed to name even one or to provide the particulars of any such
conversation. See id. at 43. Moreover, these alleged conversations
seem to have resulted in nothing more than foreclosure
being

lowered

in

certain

bankruptcy

cases

involving

charges
Grubea's

clients. Id. at 42 ("[w]hen he brought it to their attention, often
they simply said, OK, we'll mark that back down").
In other words,

rather

than basing his

complaints

particularized information about the Servicer Defendants,

on any
Grubea

asks the Court to infer their knowledge or recklessness from sixtyodd examples of excessive charges billed by Rosicki, McCabe, and
other law firms in various foreclosure actions around the country. 8
According to Grubea these examples are "illustrative of the manner
in which" the Servicer Defendants "engaged in wrongdoing." TAC i
169. Grubea,

however,

says nothing about how these examples were

8

According to Grubea, his complaints here give rise to a strong
inference of recklessness because they allege (1) an express duty
on the part of the Servicer Defendants to monitor law firm
foreclosure costs; (2) a number of "red flags" that put the
Servicer Defendants on notice that various law firms were inflating
expenses and submitting false claims for reimbursement; and (3)
specific examples of a "nationwide pattern" of fraudulent claims.
See Relator Mem. at 33. But the relevant question is not whether
the Servicer Defendants had a duty to monitor foreclosure costs
(the Court assumes, they did), or whether they were "on notice"
that various law firms were inflating expenses (which they may
have been); the relevant question is whether and to what extent
each Servicer Defendant did or did not monitor foreclosure costs.
On this point, Grubea confesses ignorance. See Relator Mem. at 43
(explaining that whether the Servicers monitored foreclosure costs
is "peculiarly within [their] knowledge"); id. (explaining that
"[e]ither the Servicer Defendants monitored foreclosure expenses
properly or they did not").
24

compiled

(whether

they

represent

5%

of

foreclosure

charges

submitted by the various individual Servicer Defendants,
foreclosure

charges,

or

. 5%

of

foreclosure

charges).

50% of

Nor

does

Grubea have any information about whether the Servicer Defendants
actually passed on these charges to the Government,

and if they

did, whether they did so recklessly. He knows nothing about what
compliance systems the Servicers did or did not have

in place.

Indeed, he alleges nothing in particular about any of the Servicer
Defendants except that they serviced the mortgages mentioned in
the complaints.
In this

regard,

it is

relevant

that

the mere fact

of the

charged amounts themselves do not support a strong inference of
gross negligence on the part of the Servicers.
facially believable -

after all,

The amounts are

for the scheme alleged against

the law firm defendants to work, it was necessary that the charges
be below various absolute cut-offs established by the GSEs and
FHA. It is also relevant that the various law firms had a fiduciary
duty to honestly represent their costs,
submitted to FHA,

as regards charges

that the Servicers were on the hook for one-

third of the bill no matter what.
15 ( C) ( 2)

and,

See HUD Handbook 4330.4,

2-

("HUD wi 11 cal cu late the two-thirds allowance based on

the amounts

entered on the

claim

form.").

Accordingly,

in the

absence of particularized pleadings that would permit the Court to
infer that these sixty examples are,

25

in fact,

representative of

the tens of thousands of mortgages defendants service each year,
or

facts

regarding

Defendants'

actual

servicing

practices,

Relator's allegations are based on little more than conjecture. At
best, they support an inference that the servicers were negligent.9
Relator's pleadings also fail

to satisfy Rule 9(b)

because

Relator's basis for alleging that the Servicers recklessly passed
on fraudulent claims to the Government is merely that the law firms
were generating fraudulent

claims "for years and years with no

changes," "one of the servicers

[HSBC]

that was alleged to have

participated in this conduct admitted exactly what the allegations
were," and "the most plausible allegation is that nothing happened
to

interrupt

the

flow

of

improper

charges."

complaint fails to satisfy Rule 9(b),

however,

Tr.

at

43-44.

A

where it alleges

"nothing at al 1" with respect to how each individual defendant

9 In its answering papers, the Government includes a Statement of
Interest in accordance with 28 U.S.C. § 517, addressing arguments
made by the Servicer Defendants regarding Relator's complaints.
See Gov' t Mem. at 29-35. Among the arguments addressed by the
Government is Defendants' contention that "their alleged failure
to satisfy their obligations under the Fannie Mae, Freddie Mac,
and HUD servicing guides and implement an adequate quality control
program cannot form the basis for FCA liability." Id. at 32. While
the Court agrees with the Government that widespread quality
control failures of the sort alleged by Relator can give rise to
FCA liability (in particular where the defendant has affirmatively
acknowledged its obligation to conduct quality control as a funding
condition), the Court nonetheless finds Relator's claims deficient
because of Relator's
failure
to plead factual
allegations
supporting a strong inference that the Servicer Defendants, in
fact, failed to conduct quality control or otherwise recklessly
disregarded their contractual obligations to Fannie Mae, Freddie
Mac, and FHA.
26

"did or did not perform" its obligations, "except to make the bare
assert ion that the results

in and of themselves show" that the

defendants "must not have done so." U.S.

ex rel.

Pervez v. Beth

Israel Med. Ctr., 736 F. Supp. 2d 804, 813 (S.D.N.Y. 2010). While
Rule 9(b) permits scienter to be demonstrated by inference, it is
not

a

"license

to

base

claims

of

conclusory allegations." Wexner v.

fraud

on

speculation

First Manhattan Co.,

and

902 F.2d

169, 172 (2d Cir. 1990) . 10 Accordingly, the motions of the Servicer
Defendants

to

dismiss

Relator's

complaints

are

granted.

And

because Relator has had ample opportunity to plead every possible
factual basis for scienter, and was not able, even at oral argument,
to provide more than is discussed above,
prejudice.

the dismissal is with

11

II. THE MCCABE DEFENDANTS

The McCabe Defendants move to dismiss Relator's complaint on
the

grounds

that,

inter

alia,

it

fails

to

plead

fraud

with

Relator has similarly failed to state a claim for Reverse False
Claims. As regards these counts, Relator argues only that they
succeed for the "same reasons" as Relator's False Claims and False
Statements counts succeed. See Relator Mem. at 63. As discussed,
the False Claims and False Statements counts fai 1. The Reverse
False Claims allegations are al so concl usory. See, e.g., TAC 'JI
479-483; id. 'JI 483 (" [n]one of the [Servicer] Defendants, upon
information and belief, complied with [their] obligation [to
return retained over payments]").
10

Accordingly, the Court does not reach numerous other defenses
raised by the Servicer Defendants regarding the adequacy of
Relator's complaints or raised by the supplemental briefing
submitted by six Servicers.
11

27

particularity as required by Rule 9 (b).
AOSS Mem.

See McCabe Mem.

at 23;

at 8-9; McCabe Reply at 1-2. Among other things,

the

McCabe Defendants argue that the three examples of fraud by those
defendants alleged by Relator in his complaint are conclusory and
do not give rise to a strong inference of fraud. See AOSS Mem. at
8-9; McCabe Mem. at 6-8.
To

satisfy Rule

statements

that

9 (b) ,

the

identify the speaker,

a

complaint

plaintiff

must

contends

were

" ( 1)

specify

fraudulent,

the
(2)

(3) state where and when the statements were

made, and (4) explain why the statements were fraudulent." Ladas,
824

F.3d at 25.

To state an FCA claim with particularity,

the

operative complaints must set forth particularized allegations of
fact regarding both the fraudulent "scheme" and the submission of
false claims.

See,

e.g.,

U.S.

ex rel.

Kester v. Novartis Pharm.

Corp., 23 F. Supp. 3d 242, 255 (S.D.N.Y. 2014).
Here,

out

of

the

dozens

of

examples

of

fraudulent

claims

included by Relator in his complaint, only three examples relate
to McCabe and its affiliates.

The first

involves a Freddie Mac

mortgage on a property in Penfield, New York (the "Katsura Court
property").

Relator

alleges

that

Flagstar

retained

McCabe

to

handle the foreclosure on the Katsura Court property and that,
upon

information

conduct

a

and belief,

McCabe

retained

title search and serve process.

Relator further alleges that,

REO

and AOSS

See TAC ']['][

to

302-310.

upon information and belief, AOSS

28

invoiced McCabe for service of process at an amount "above market
rates," id. ! 305, and REO charged McCabe $450 for title work, at
an amount "well above market rates," which were between $100 and
$250, id. '307.
The second example involves a Freddie Mac mortgage secured by
a property located on Columbia Street in Hamburg,
"Columbia Street property").

Id. !

New York

(the

325. Relator alleges that PNC

retained McCabe to handle the foreclosure on the Columbia Street
property,

and that,

upon information and belief, McCabe retained

AOSS and REO to serve process and conduct a title search. See id.

!! 325-333.

Relator

further

alleges

that,

upon

information and

belief, AOSS invoiced McCabe for service of process at "an amount
above market

rates,"

id.

!

328,

and that,

upon information and

belief, REO billed $450, an amount "well above market rates," id.
'

330.
The third example involves an FHA insured mortgage secured by

a property on O'Brien Avenue in the Bronx, New York (the "O'Brien
Avenue property"). Relator alleges that Flagstar retained McCabe
to

handle

the

foreclosure

on

O'Brien

Avenue,

and

that,

upon

information and belief, McCabe retained AOSS to serve process. See
id. ! ! 400-06. Relator further alleges that, upon information and
belief, AOSS invoiced McCabe for service of process at "an amount
above market rates." Id. !

403. No mention is made of whether REO

was involved in this foreclosure.

29

These three foreclosures,

even taken together,

do not give

rise to a strong inference of fraud. The allegations regarding the
O'Brien Avenue

property,

for

example,

are

entirely conclusory.

Relator states merely that AOSS invoiced McCabe at above-market
rates. Relator nowhere specifies the amount AOSS charged (i.e. the
fraudulent statement). In fact, in its moving papers McCabe argues
that AOSS was not even hired to conduct service of process on this
property.

According

to

McCabe,

a

third-party

vendor,

Servium,

served process and charged $520. See McCabe Mem. at 7-8.
As regards the Columbia Street and Katsura Court properties,
Relator

similarly

fails

instead merely asserts
above market

to

specify what

AOSS

charged.

Relator

that AOSS billed McCabe an amount

rates." Again,

"wel 1

in its moving papers McCabe argues

that AOSS was not retained to work on these foreclosures at all.
Id.

at 6-7. And,

amount

REO

properties

as regards REO,

billed
($450),

McCabe

to

although Relator specifies the

perform

Relator does

not

title

allege

searches
that

this work to a third-party for a lower price
respect
case).

12

the

complaint

alleges

these

REO outsourced

(as is alleged with

to work performed by AOSS and other affiliates
Accordingly,

on

a

total

in this
of

two

The reason this outsourcing is significant is because, as
mentioned previously, the relevant rules bar law firms from
claiming as default-related legal expenses the costs of overseeing
service of process or conducting title searches. See Fannie Mae
Servicing Guide, E-5-04 (April 12, 201 7)
(legal fees include
ordering title reports and reviewing them, "(e]xecuting all steps
12

30

fraudulent

statements

involving

McCabe:

REO's

$450

charge

to

conduct a title search on the Columbia Street property and REO's
$450 charge to do the same for the Katsura Court property. These

amounts,

al though potentially inflated,

are

facially plausible,

and Relator makes no allegation that REO outsourced the work to a
third party for a substantially lower rate. Accordingly,

in the

absence of further specific pleadings, these allegations are not
sufficient to state a claim under the FCA.13
In

his

deficiencies
examples.

answering
by

papers,

Relator

supplementing

Specifically,

his

Relator

offers

complaint

proposes

examples already included in Re la tor's

to

to
with

251-59.

Among other things,

these

additional

incorporate

complaint

two

in the Second

Suit (to which the McCabe Defendants are not a party)
187-95,

cure

See SAC

<Jl<Jl

these examples specify the

necessary to obtain service of process .
including review of
process server affidavits
and referral and tracking of
published notices"); id.
(stating that Fannie Mae will "not
reimburse the servicer for legal fees and expenses .
. that are
properly allocated to the law firm's overhead expenses"); HUD
Handbook 4330.4, 2-15(8) (noting that "overhead items" are not
reimbursable). Accordingly, taking the factual allegations in the
complaints as true, see, e.g., TAC <JI<JI 127, 143, mark-ups by the
affiliates of third-party bills are presumptively improper.
3 McCabe argues that Relator's claims also fail because Relator
does not plead the basis for his market rate calculations, see
McCabe Mem. at 23, but McCabe cites no case law for this
proposition and the Court is not of the view that such additional
detail is required at the pleading stage. (Relator, of course, may
be subject to Rule 11 sanctions if it turns out he has no factual
basis for pleading that, for example, market rates for title
searches in Hamburg, New York are between $100 and $250.)
1

31

actual amounts billed by AOSS. See, e.g., id.
AOSS

invoiced

McCabe

approximately

$133

'TI

for

192 (alleging that
service

defendant at a property in Beacon, New York); id.
$133 was well above market

on

each

(alleging that

rates of between $20 and $40);

id.

(alleging that AOSS hired a third party process service vendor to
serve each defendant at the Beacon property and paid that vendor
market rates). These examples also specify that REO hired a third
party vendor to conduct title searches at market rates of between
$100 and $250 and marked up those invoices to $445 before passing
them on to McCabe. Id.
Relator

further

'TI

190.

points

to

an

affidavit

that

includes

additional examples of fraudulent conduct including one example in
which AOSS billed $836

for personal service on two defendants,

three attempts at service, and mailings, all of which should have
cost less than $150. Relator Mem. at 10 n.5 (citing Declaration of
Kaleigh Erin Wood dated May 7,
2-3,

5-6,

Dkt.

2018

("Wood Deel.")

'TI'TI

8-23, Exs.

152) . According to Rel a tor,

McCabe chose not to

contract directly with the process server -

who charged $30 for

personal service - but to route service through AOSS so that AOSS
could aggressively mark up the bill before seeking reimbursement.
Wood Deel.

'TI'TI

6-7. 14

14
Additionally,
Relater
explains
that
he
could
describe
conversations
with
individual
process
servers
who
signed
certificates of service on behalf of AOSS for McCabe foreclosures.
These process servers told him that they signed the certificates

32

These examples are precisely the sort of specific allegations
that

are

lacking

in

the

Third Amended

Complaint

but

that

are

necessary to state a claim for fraud under the FCA. Accordingly,
the

Court

dismisses

Defendants'

Relator's

complaint

as

against

the

McCabe

without prejudice to Relator further amending it to

incorporate these allegations, provided such amended pleadings are
filed no later than July 11, 2018.15
III. THE ROSICKI DEFENDANTS

The Rosicki
(A)

fail

Defendants argue that the operative complaints

to state False Claims and False Statements claims;

fail to state Reverse False Claims claims; and (C)
False Claims Conspiracy claims.

Further,

(B)

fail to state

they argue that

(D)

the

FCA does not cover any claims submitted to Fannie Mae and Freddie
Mac because these entities are not part of the U.S. Government in
the

relevant

sense.

Below,

the

Court

considers

each

of

these

arguments in turn.
A. False Claims and False Statements

as if they worked for AOSS, but that they were actually independent
process servers who charged market rates to AOSS. See Relator Mem.
at 10-11 n.5.
If Relator does so amend, and the McCabe Defendants then wish
to renew their motion to dismiss on any of the grounds they
previously asserted (including those not reached in this Opinion),
they should call chambers, jointly with Relator, by no later than
July 18, 2018, to arrange a briefing schedule.
is

33

According to the Rosicki Defendants, the operative complaints
fail

to

adequately

allege

falsity

and

materiality

and

the

Government's complaint fails to satisfy Rule 9(b).
(1)

Falsity

The FCA recognizes two types of false claims: factually false
claims and legally false claims. See U.S. ex rel. Wood v. Allergan,
Inc.,

246

F.

Supp.

'factually false'

3d

772,

783

(S.D.N.Y.

2017).

"A

claim

is

where the party submitting the claim supplies

'an incorrect description of the goods and services provided or a
request for reimbursement for goods and services never provided.'"
Kester,

23 F.

Supp.

3d at 260-61

(quoting Mikes v.

Straus,

274

F.3d 687, 697 (2d Cir. 2001), abrogated by Universal Health Servs.,
Inc. v. United States, 136 S. Ct. 1989 (2016)). A claim is legally
false

either

where

it

"involves

a

defendant's

express

representation of compliance" with a "federal statute, regulation,
or contractual provision" when "it is actually not compliant," New
York ex rel. Kurana v. Spherion Corp., No.

15 Civ. 6605, 2016 WL

6652735,

or where "a defendant

makes

at *14

(S.D.N.Y. Nov.

representations

violations of statutory,
. render[ing] the

in

10,

2016),

submitting

regulatory,

a

claim

but

omits

its

or contractual requirements

. representations misleading." Escobar,

136 S. Ct. at 1999.
Both the Government and Relator here contend that the claims
submitted by the Rosicki Defendants are, inter alia, legally false

34

because

they

constitute

misleading

"half-truths"

that

are

actionable under Escobar. 16 Half-truths are "representations that
state the truth only so far as it goes, while omitting critical
qualifying

information."

136

S.

Ct.

at

2000.

For

example,

in

Escobar, the Court held that a defendant who submitted claims for
payment
specific

to Medicaid using payment
counseling

services"

had

codes

that

"corresponded to

"represented

that

it

had

provided individual therapy, family therapy, preventive medication
counseling, and other types of treatment" as defined by Medicaid.
The Court reasoned that anyone:
informed that a social worker at a Massachusetts mental health
clinic provided a teenage patient with individual counseling
services would probably - but wrongly - conclude that the
clinic had
complied with
core Massachusetts
Medicaid
requirements (1) that a counselor "treating children [is]
required to have specialized training and experience in
children's services," 130 Code Mass. Regs. § 429.422, and
also (2) that, at a minimum, the social worker possesses the
prescribed qualifications for the job, § 429.424(C). By using
16

Relator and the Government also contend that the claims are
legally false under Mikes. See Gov't Mem. at 10-11. Mikes holds
that a claim may be legally false even where a defendant does not
make a representation in submitting the claim but (1) "the
submission of the claim itself
impliedly constitutes a
certification of compliance," United States v. Visiting Nurse
Serv. of N.Y., No. 14 Civ. 5739, 2017 WL 5515860, at *6 (S.D.N.Y.
Sept. 26, 2017), and (2) defendants' noncompliance relates to a
"material payment requirement," Mikes, 274 F. 3d 687; see also Wood,
246 F. Supp. 3d at 816 (concluding that Mikes remains controlling
law in the Second Circuit on the issue of implied false
certification without an affirmative representation). Relator
contends that "[m]any" of the claims submitted by defendants are
also factually false because they were "submitted for more than
the services actually cost." Relator Mem. at 16. Because, as
discussed further herein, the Court finds that the claims are
legally false under Escobar, it need not reach these questions.
35

payment and other codes that conveyed this information
without disclosing [] many violations of basic staff and
licensing
requirements
for
mental
health
facilities,
[defendants'] claims constituted misrepresentations.
Escobar, 136 S. Ct. at 2000-01.
The complaints in this case state a claim under Escobar. The
servicers

obtained

submitting

claims

reimbursements

for

payment

that

from

the

relied

on

Government
the

by

half-truths

represented by the Rosicki Defendants. When submitting claims to
HUD, the servicers used Form 27011, which requires each mortgagee
to itemize foreclosure costs in Box 307 to obtain reimbursement.
See TAC
-

~

108. The HUD Handbook explains that "unallowable costs"

which expressly include "fees and costs that exceed reasonable

and customary fees in the area" and "costs that are not necessarily
incurred"

cannot

be

included

submitting claims to Freddie Mac,
which

requires

categories,

expense

codes

in

the

box.

Id.

~

110.

When

the servicers used Form 104SF,

corresponding

to

various

expense

such as process server fees and title work.

Freddie

Mac's rules require that expenses in these categories be actual,
reasonable, and necessary. See TAC

~

94. When submitting claims to

Fannie Mae, the servicers submit Form 571, which requires them to
itemize foreclosure costs and expenses by type. Fannie Mae bars
servicers from itemizing costs that are not "actual,

reasonable,

and necessary" and requires "[b]oth the servicer and the law firm"

36

to "make every effort to reduce default-related legal expenses."
Fannie Guide E-5-07; TAC
The

complaints

~~

allege

62, 64-65.1 7
that

Rosicki

improperly passed

off

foreclosure expenses submitted by their affiliates as the actual
and reasonable costs of the services performed,
enormous mark-ups applied by the affiliates.

thereby masking

See TAC

~~

136-37.

These were classic half-truths: true "so far as it goes," in that
Rosicki was in fact billed by its affiliates for these amounts,
but materially misleading because the charges were part of a scheme
to bilk the Servicers and the Government.
receiving the
wrongly -

requests

here,

Fannie Mae

As

in Escobar,

"would probably -

upon
but

conclude" that the expenses were the actual expenses

incurred by the Rosicki

Defendants,

rather than the product of

fraudulent mark-ups. Accordingly, the complaints allege falsity.
(2)

Materiality

Next, defendants argue that the operative complaints fail to
allege that the purported false statements were "material" to the

17 Rosicki argues that, while the servicers ultimately submitted
Form 571 to Fannie Mae, the form contains "no billing codes or
other, similar affirmative representations." Rosicki Reply at 9.
It "simply lists different types of expenses with blank spaces for
the claimant to enter dollar amounts," and so it is "exactly what
the Supreme Court described as a claim that 'merely request [s]
payment." Id. (citing Escobar, 136 S. Ct. at 2001). But the
allegations here are not that Rosicki did not actually perform
service of process or conduct title searches. The allegations are
that these services did not cost what Rosicki said they cost.
Rosicki' s representation about the "cost" was at best a halftruth, and in certain circumstances factually false.
37

Government's decision to pay the relevant claims. See Rosicki Mem.
at 26-33. Specifically, Rosicki argues that the complaints do not
allege anything tending to suggest that the FHA,

Fannie Mae,

or

Freddie Mac would not have paid the claims if they knew of the
false statements. See id. at 27.18
It

is well established that a

actionable only if it

false claim or statement is

is "material" to the false or fraudulent

claim for payment. 31 U.S.C.

3729 (a) (1) (B). For purposes of the

§

FCA, a statement is material only if it has a "natural tendency to
influence, or be capable of influencing, the payment or receipt of
money

or

property."

31

U.S.C.

3729(b) (4).

§

The

materiality

requirement is "rigorous" and "demanding," and can be satisfied
only by allegations that include particularized facts.

Escobar,

136 S. Ct. at 1996, 2003, 2004 n.6.
In assessing materiality, courts look to "the effect on the
likely

or

actual

behavior

of

misrepresentation." Grabcheski

the
v.

Am.

recipient
Int'l

of

Grp.,

the
Inc.,

alleged
687

F.

18 Additionally, Rosicki argues, despite access to Fannie Mae, the
Government never alleges that Rosicki lied to Fannie Mae about its
excessive fees or that Fannie Mae was unaware of them. See Rosicki
Mem.
at
30.
According to Rosicki,
given the Government's
investigation, the substantial publicity around Relator's efforts
to raise awareness of Rosicki's practices, and Rosicki's suit
against Relator for defamation in 2012, Fannie Mae had plenty of
opportunity since this case was filed to conduct an audit. Id. at
32-33. Yet Fannie Mae terminated its relationship with Ros icki
only after the Government's decision to intervene earlier this
year. Id. at 33.
38

App'x

84,

87

(2d

Cir.

201 7)

(summary

order).

In

implied

certification cases, among the factors courts consider are whether
the

relevant

rule

was

a

condition

defendant's misrepresentation went
bargain," and how the Government

of

payment,

whether

the

to the "very essence of the
reacted to similar misconduct

when it had "actual knowledge" of it. Escobar, 136 S. Ct. at 200304, n.5.
Under the plain meaning of the rules here, expenses that are
substantially inf lated by law firm affiliates and accordingly are
multiple times higher than market
See,
89,

e.g.,
101

United States v.

(D.D.C.

2017)

significantly higher

are not

DynCorp Int'l,

LLC,

reimbursable.

253 F.

Supp.

3d

(holding that "a claim for costs that are
than

requirement").

Rosicki' s

claims

is

itself

rates,

reasonable
argument

irrelevant

as

satisfies

that
they

it

the materiality

never

caused

submitted

the

claims

to

the
be

submitted and the necessity and reasonableness of the expenses was
central to the entities' decisions to pay the claims.
Rosicki's further argument that the GSEs and the FHA knew of
the fraudulent conduct at issue is pure speculation. Although these
various

entities

specific cases,

knew

of

the

amounts

Ros icki

was

charging

in

there is no evidence that they knew that those

costs were fraudulently inflated nor is there evidence that they
continued to pay the costs once they had "actual knowledge" that
the

costs

were

inflated.

See

Escobar,

39

8 42

F. 3d at

112

("mere

awareness of allegations concerning [a defendant's misconduct]

is

different from knowledge of actual [misconduct]"). Moreover, these
unsubstantiated assertions about what Fannie Mae, Freddie Mac, and
FHA must

have

known

relate

to

facts

beyond

the

scope

of

the

complaints and cannot be resolved at the pleading stage.
Under
allege

the natural

that

"a

tendency test,

the

complaints need only

reasonable man would attach

importance

to

[the

misrepresented information] in determining his choice of action in
the transaction." Escobar,
implausible

that

FHA or

136 S.

the

Ct.

GSEs

at 2002.

As it is highly

would willingly pay

inflated

expenses, and defendants point to no evidence that FHA or the GSEs
paid

any

inf lated

claims

having

expenses,

the

actual

knowledge

complaints

here

that

they

contained
allege

adequately

materiality.
(3)

Particularity
Rosicki

also

particularity.

argues

that

See Rosicki Mem.

the

Government's

at 17-19.

complaint

Specifically,

lacks

Rosicki

argues that Rosicki "did not itself submit any claims" to Fannie
Mae,

Freddie Mae, or FHA nor does the "Government's complaint

identify with particularity even a

[]

single allegedly false claim

submitted by a servicer." Id. According to Rosicki, the Government
has failed to specify the identities of the servicers in each of
their six examples. See id. at 20

(noting that the Government is

"in a far better position than the Rosicki defendants to provide

40

the details of any allegedly false claims the servicers may have
submitted to Fannie Mae").
As previously mentioned,

to satisfy Rule

9 (b)

a complaint

must "(1) specify the statements that the plaintiff contends were
fraudulent,

(2) identify the speaker,

statements were made,
fraudulent." Ladas,
particularity,

and

( 4)

explain why the

824 F.3d at 25.

the

(3) state where and when the

operative

statements were

To state an FCA claim with

complaints

must

forth

set

particularized allegations of fact regarding both the fraudulent
"scheme" and the submission of false claims. See, e.g., Kester, 23
F. Supp. 3d at 255.
Each of the properties at issue in the Government's complaint
is identified by a unique Fannie Mae loan number and the street
and

town

where

information,

the

the

property

Rosicki

is

located.

Defendants

Equipped

should

easily

with
be

this

able

to

identify the specific servicers they used in each of these cases.
Moreover,

the Government's complaint specifies the amounts that

the Rosicki Defendants overcharged mortgage servicers and that the
mortgage

servicers

passed

reimbursement. See CII
Contrary
Government's

to

the

complaint

~~

on

these

claims

to

Fannie

Mae

for

87-123.

Rosicki's

Defendants'

also alleges

that

the

contention,
specific

the

inflated

expenses detailed in the Complaint were submitted to Fannie Mae
using a Cash Disbursement Request,

41

Form 5 71,

and were paid by

Fannie Mae.

See CII

<JI

86

(alleging that the "following examples

represent a small fraction of the many Fannie Mae loans for which,
in

connection

with

foreclosure

proceedings,

Enterprise

and/or

Paramount submitted invoices for inflated expenses to Rosicki, and
for

which

Rosicki,

in

turn,

expenses to the Servicers,
those

inf lated expenses

submitted bills

for

the

which the Servicers paid.

were

then

submitted to

inflated

Claims for

Fannie Mae

for

states

with

reimbursement, and were paid by Fannie Mae.").
Accordingly,

the

Government's

complaint

sufficient particularity that the claims submitted by the Rosicki
Defendants,

which were identified by loan number,

were actually

submitted to Fannie Mae as required by Rule 9(b).
B. Reverse False Claims

Under the FCA, liability attaches to an entity that "knowingly
makes,

uses,

or causes

to be made or used,

a

false

record or

statement material to an obligation to pay or transmit money or
property to the Government, or knowingly conceals or knowingly and
improperly avoids or decreases an obligation to pay or transmit
money or property to the Government." 31 U.S.C.

§

3729(a) (1) (G).

The term "obligation" is defined as "an established duty, whether
or not

fixed,

arising

grantor-grantee,

from an express

or

implied contractual,

or licensor-licensee relationship,

from a

fee-

based or similar relationship, from statute or regulation, or from
the retention of an overpayment." 31 U.S.C.

42

§

3729(b) (3). The FCA

does not require that the obligation to pay or transmit money to
the

Government

provision

be

applies

the

defendant's

whenever

a

obligation

defendant

rather,
decreased

has

the
"an

obligation" to pay the Government. U.S. ex rel. Landis v. Tailwind
Sports Corp., 51 F. Supp. 3d 9, 60
A "duty to pay," however,
before

liability

can

arise."

Migliorini Int' 1, LLC,

(D.D.C. 2014).

"must be
U.S.

ex

formally

rel.

878 F.3d 1224, 1231

'established'

Barrick

v.

Parker-

(10th Cir. 2017). "In

other words, there is no liability for obligations to pay that are
merely potential or contingent." Id.; see also U.S. ex rel. Taylor
v. Gabelli, 345 F. Supp. 2d 313, 338 n.141 (S.D.N.Y. 2004)
false

claims

"depend [],

in part,

obligation to pay the Government -

on

the

nature

of

(reverse

defendants'

a contingent, speculative, or

potential obligation is not actionable") .
Grubea and the Government contend that Rosicki is liable for
submitting so-called reverse false claims because, by fraudulently
causing

Fannie

Mae

and

Freddie

Mac

to

reimburse

hundreds

of

thousands of dollars in inflated foreclosure expenses, defendants
caused a reduction in the amount of money Fannie Mae and Freddie
Mac paid the Treasury pursuant to the terms of the Third Amendment
to the Senior Preferred Stock Purchase Agreement

("SPA")

between

the GSEs and the Treasury. See Dkt. 133-6.
The Rosicki Defendants argue that although liability for a
reverse

false

claim may attach where,

43

as here,

the defendants'

conduct "cause[s]
federal
808,

a

third party to impair its obligation to the

government,"

817

(5th

Cir.

United States
2011),

the

v.

Caremark,

Inc.,

Third Amendment's

634

terms

F. 3d

qualify

Fannie Mae's "obligation" to make quarterly dividend payments . 1 9
Specifically,
right

to

the Third Amendment

receive

dividends

only

provides
"when,

as

that
and

Treasury has
if

declared

a
by

[Fannie Mae's] Board of Directors, in its sole discretion." SPA at
3,

Dkt.

133-6

discretion

(emphasis

as

to

added).

whether

to

Because

make

a

Fannie Mae's

dividend

Board has

payment,

Rosicki

argues, Fannie Mae did not have an "obligation" within the meaning
of

the

FCA.

company's
Business

Rosicki

cites

the

contractual

promise

Administration

was

declaration of

dividends,"

Third
to

Circuit's

pay

dividends

"contingent
and was

not

holding
to

the
the

on

that

an "obligation"

a

Small

Board's
for

FCA

purposes because it was "dependent on a future discretionary act."
U.S.

ex rel.

Petras v.

Simparel,

Inc.,

857 F.3d 497,

505-06

(3d

Cir. 2017).
But it is undisputed that for each quarter during which the
Third Amendment has been in effect and for which the prescribed
dividend amount

has

exceeded

zero,

Fannie Mae has

remitted the

required quarterly dividend payment to Treasury. And, even in the

Defendants make the identical argument as regards Freddie Mac.
See Rosicki Mem. at 36, n.4.
19

44

event that Fannie Mae's Board of Directors were to elect not to
declare a dividend for a given quarter - something that has never
occurred in more than five years Government would not disappear.

the payment obligation to the

Section 2 (b)

of the

Fannie Mae

Senior Preferred Stock Certificates provides that to the extent
dividends on the Senior Preferred Stock are not paid, the dividends
"shall accrue and shall be added to the Liquidation Preference
[retained by the Government] pursuant to Section 8, whether or not
there are funds legally available for the payment of such dividends
and whether or not dividends are declared." See Gov't Mem. at 26;
see also Perry Capital LLC v.
Cir.

2017)

Mnuchin,

864

F.3d 591,

602

("[T]he Third Amendment requires Fannie .

(D.C.
to pay

however

quarterly to Treasury a dividend equal to [its] net worth
much or little that might be").
Thus

this case is markedly different

from Petras,

where a

one-time dividend payment requirement could have been triggered by
a board's declaration or by a liquidation of the company, neither
of which materialized. See 857 F.2d at 506. Indeed,
the

relator

did

not

dividends or had an
Fannie

Mae's

dividend

even

that

"the

Board declared

inclination to do so."

obligation

payments

allege

to

pursuant

the
to

Id.

Government
the

Third

in that case,

did

at

n.50.

the

Here,

materialize

Amendment

were

made

routinely in accordance with the specific schedule set forth in
the Third Amendment. And even if Fannie Mae had declined to make

45

one

or

more

remained

of

its

intact.

dividend

payments,

Accordingly,

the

the

payment

Government

and

obligation

Relator

have

adequately alleged an obligation by Fannie Mae to pay funds to the
United States beginning in 2013.
The Rosicki Defendants also argue that the complaints do not
plead a reasonably close nexus between their conduct and any funds
owed to the Government. See Rosicki Mem. at 37-38. As Rosicki puts
it, because the theory of liability here would cover a contractor
who fraudulently overcharged Fannie Mae for lawn maintenance (i.e.
such

a

fraudulent

payment

would

also

"decrease

the

amount

of

dividend payments" that Fannie Mae could make to the Government),
the theory of reverse false claims liability is too broad. Id.
But, quite aside from the fact that this case does not involve
lawn mowers, Rosicki offers no support for this purported "nexus"
requirement.

The

fraudulent

billing

activities

of

the

Rosicki

Defendants were conducted on behalf of Fannie Mae as part of Fannie
Mae's

role

in

the

housing

market.

The

FHFA

exercises

broad

authority over Fannie Mae's operations. Treasury is obligated to
fund any operational shortfalls Fannie Mae might incur. See TAC
55,

82.

~~

Relator plausibly alleges that Rosicki was aware of the

bailout of Fannie Mae and Freddie Mac, its biggest clients (indeed,
it seems highly implausible that Rosicki was not).
Rosicki's

fraud

had

the

predictable

effect

of

Accordingly,

depriving

the

Government of money it was owed and is sufficiently connected to

46

Fannie Mae's payment obligations to the Government to state a claim
under the FCA. See U.S. ex rel. Hunt v. Merck-Medco Managed Care,
L.L.C.,

336 F.

Supp.

2d 430,

444

(E.D.

Pa.

2004)

(holding that

"[i]f Medea's actions had the predictable consequence of depriving
the Government of money it was owed,
failing

to

provision)

act)

within

the

ambit"

of

then Medco was acting
the

reverse

false

(or

claim

.20

C. False Claims Conspiracy

20

Rosicki also cites a recent case in which a court in the Eastern
District of New York held that loan requests to Federal Reserve
Banks ( FRBs) were not "claims" within the meaning of the FCA
because the Government's "financial connection" with the FRBs did
not "extend to funding or reimbursing" FRBs. See U.S. ex rel. Kraus
v. Wells Fargo & Co., No. 11 Civ. 5457, 2018 WL 2172662, at *9
(E.D.N.Y. May 10, 2018). While the Court disagrees with Kraus,
even if this decision were correct, it would not affect the
analysis here, because here the Government did have a financial
connection with the GSEs that, during the relevant period, extended
to
funding
their
operations,
including
their
foreclosure
operations. Moreover, Kraus runs contrary to at least one prior
federal court decision. See United States ex rel. Pasto v. Megabyte
Bus. Sys., No. 3:98 Civ. 693, 2000 U.S. Dist. LEXIS 23099, at *8
(E.D. Va. Apr. 18, 2000) ("Since the Federal Reserve Banks return
all earnings in excess of operating and other expenses to the U.S.
Treasury, fraudulent claims reduce the excess earnings, causing
the Treasury to forfeit money to which it would otherwise be
entitled, and triggering liability under the False Claims Act.").
In any event, Kraus appears to this Court to be erroneous.
Although, as a legal matter the Federal Reserve Banks are federal
instrumentalities,
not
federal
agencies,
they are properly
conceived of as part of the federal Government under the FCA.
Although their funding is not appropriated by Congress, they are
themselves the federal Government's money-issuing authority, and
accordingly are funded by the sovereign public as much as any other
federal agency.

47

To state a conspiracy claim,

Relater must allege that "(1)

the defendant conspired with one or more persons to get a false or
fraudulent claim allowed or paid by the United States and (2) one
or more conspirators performed any act to effect the object of the
conspiracy." United States ex rel. Wood v. Allergan, Inc., 246 F.
Supp. 3d 772, 825 (S.D.N.Y. 2017).
The Rosicki Defendants argue that Relator's conspiracy claim
is barred by the intra-corporate conspiracy doctrine. See Rosicki
Mem. at 39. But, Relater does not plead common ownership among the
Rosicki Defendants or that Paramount,

Threshold,

and Enterprise

are wholly-owned subsidiaries of Rosicki. Instead, Relater alleges
that Rosicki and/or Rosicki's principals have an interest in and
control over Paramount, Threshold, and Enterprise. See TAC

~~

122,

139. If the doctrine even applies in this context (a separate issue
disputed by the parties), plainly the relevant entities would have
to "have a complete unity of interest" and "be viewed as that of
a single enterprise," Copperweld Corp. v.
U.S.

752,

771

(1984)

467

The Court cannot resolve that question of

fact on a motion to dismiss.
Re la tor states a

Indep. Tube Corp.,

claim for

Accordingly,

the Court

finds

that

False Claims Conspiracy against the

Rosicki Defendants.
D. False Claims Act Liability, Generally

Rosicki

argues

that

the

operative

dismissed as regards reimbursement

48

complaints

should

be

requests submitted to Fannie

Mae

or

Freddie

Mac.

Such

requests,

Rosicki

contends,

are

not

"claims" within the meaning of the FCA, see, e.g., Rosicki Mem. at
11-16,

because,

unlike the FHA or the Treasury Department,

the

GSEs are not Government entities - they are independent for-profit
companies that happened to

receive additional

capital

from the

Government during an emergency bailout. Id. at 15.
Additionally, Rosicki argues, the operative complaints cannot
state "economic loss" to the taxpayer resulting from defendants'
alleged misconduct because the taxpayers'

investment in the GSEs

have generated enormous returns. Thus, were the Court to sustain
the complaints in the case, Rosicki explains,

it would mean that

"whenever a private entity receives a bailout from the Government,
the False Claims Act applies to all claims submitted to that entity
- just as if the bailout had transformed it into a federal agency."
Id. at 16.
Under current law, 21 in order to qualify as a "claim" under
the

FCA,

defendants'

"request

or

demand

for

money

or

property" must be "presented to an officer, employee, or agent of
the United States" or "a contractor, grantee or other recipient"

The FCA was strengthened on May 20, 2009 by the Fraud Enforcement
and Recovery Act ("FERA") to "help protect Americans from future
frauds that exploit the economic assistance programs intended to
restore and rebuild our economy." S. Rep. No. 111-10 at 1-2 (2009).
The amendment did not have retroactive effect. See Pub. L. No.
111-21, § 4(f) (1), 123 Stat. 1617, 1625 (2009); United States v.
Countrywide Fin. Corp., 961 F. Supp. 2d 598, 609 (S.D.N.Y. 2013).

21

49

of

federal

funds.

requests made to

31

U.S.C.

3729 (b) (2) (A).

§

In

the

case

of

contractors, grantees, and other recipients of

federal funds, the FCA applies only (1) "if the money or property
is to be spent or used on the Government's behalf or to advance a
Government

program or

interest"

and

(2)

the

Government

either

"provides or has provided any portion of the money or property
requested or demanded" or "will reimburse such contractor, grantee
or other recipient for any portion of the money or property which
is requested or demanded." Id.
Because the Treasury provided $200 billion to the GSEs
stabilize the housing market following the mortgage crisis,

to
the

GSEs are "other recipients" of federal funds within the meaning of
§

3729. With respect to prong one -

advancement of a Government

interest - the Government's interest here was in keeping the GSEs
afloat and ensuring that their mortgage operations could continue.
Indeed, the GSEs were not simply recipients of bailout funds, they
were placed under Government

conservatorship.

The

Recovery Act

created the Federal Housing Finance Authority ("FHFA") and charged
it with "oversee[ing]
"ensur [ ing]

the prudential operations" of the GSEs and

that" they "operate []

in a

safe and sound manner,"

"consistent with the public interest." 12 U.S.C.

§

4513(a) (1). The

Act furthered authorized FHFA to "take such action as may be

(i)

necessary to put the" GSEs "in a sound and solvent condition; and
(ii)

appropriate

to

carry

on

the

50

business

of

the"

GSEs

and

"preserve

and

conserve

[its]

assets

and

property."

Id.

at

§

4617 (b) (2) (D). Although defendants challenge the notion that money
spent on foreclosure furthered the Government's interest in the
GSEs,

plainly the ability of the GSEs

their

non-performing

operations

loans

and necessary

to

is

a

to efficiently liquidate

critical

component

keep mortgage

rates

of

their

In

fact,

low.

defendants concede that federal funds were used "primarily to cover
losses from single-family mortgages," somehow ignoring the fact
that "losses" on mortgages include the costs of foreclosure.

See

Rosicki Mem. at 15.
With respect to prong two -

provision of federal dollars to

a portion of the money demanded and not earmarked, accordingly,

the funds here are substantial

it is not necessary to show that

the funds were provided specifically to pay defendants'

claims.

Rather, the FCA applies as long as any portion of the claim is or
will be funded by U.S. money. See U.S. ex rel. Marcus v. Hess, 317
U.S.

537,

funds']

544

(1943)

(the FCA "does not make the extent of

[the

safeguard dependent upon the bookkeeping devices used for

their distribution");

United States ex rel.

Yesudian v.

Howard

Univ., 153 F.3d 731, 738-39 (D.C. Cir. 1998).
Because the GSEs are in Government conservatorship they can
draw each quarter from Treasury their "deficiency amount" the

"amount,

if any,

the

by which

[Fannie Mae or Freddie Mac] exceed

51

total

i.e.,

liabilities of

. total assets" -

up to a

specified

limit.

See

SPA

at

2,

4

2.2.

§

Thus,

every

dollar

subtracted from the bottom line of the GSEs by fraud is potentially
passed along to the Government
worsens a

net

Government

is

shortf al 1.

to the extent

In the event of a

contractually

obligated

to

it

net

cover

results

in or

shortfall,
the

the

shortfall.

Indeed, the Government did so to the tune of billions of dollars.
Al though defendants also argue

that,

unless

the

funds

are

traceable directly to Government disbursements there is a slippery
slope towards liability for anyone who benefits from federal aid,
previous courts have rejected this argument. The D.C. Circuit, for
example,

posited

in

a

similar

context

that

"[i]t

may

not

be

appropriate" to impose FCA liability if (1) "the grantee's federal
funds are an insubstantial percentage of its total budget,"
"there

is

actually

little
came

from

likelihood
a

federal

that

any

grant,"

of
or

a
(3)

defendant's
"there

is

( 2)

money
little

continuing contact between the grantee and the government once the
grant is made." Yesudian,

153 F.3d at 738. But the bailout funds

in this case are vastly larger than the annual revenues of the
GSEs.

Accordingly,

during the period when the GSEs were losing

money, the claims were virtually guaranteed to be paid with federal
funds.

Beginning in 2013,

once the GSEs began to earn profits,

each GSE was obligated to pay Treasury its net worth each quarter
less a small capital buffer, such that any request for payment on
a

false

claim

after

2013

decreased

52

the

amount

that

Treasury

received from the GSEs dollar-for-dollar. Accordingly, adopting a
definition of "claim" that would include the GSEs would not expand
the

FCA

beyond

Congress'

intent,

rather

it

would

allow

the

Government to prosecute fraud on behalf of a taxpayer-supported
entity that is in federal conservatorship - precisely what Congress
had in mind when it amended the statute.22
Defendants

separately

argue

that

the

complaints

fail

to

overcome an additional requirement under the FCA that the alleged
false claims "cause economic loss to the government." See Servicer
Mem.

at 36

(quoting Garg v.

Covanta Holding Corp.,

478 F. App'x

736, 741 (3d Cir. 2012). According to defendants, the Government's
deal with the GSEs generated enormous returns,
estimate to be "$87 billion more than

[the]

which defendants

Treasury invested."

Id. But defendants are wrong on the facts and on the law. The $87
billion

figure

Treasury's

does

principal

not

represent

investment

has

a

profit,
been

as

repaid.

none

of

the

Rather

the

dividends that Treasury has received are equivalent to interest
payments owed to the taxpayers for putting their capital at risk.
It is inapposite to whether the false claims in this case caused

22 See, e.g., 155 Cong. Rec. H5686-01, 2009 WL 1373400 (statement
of Rep. Scott) (FERA "is a bill crafted to combat the financial
fraud that contributed to causing, and worsening, our Nation's
mortgage crisis"); 155 Cong. Rec. S1679-01, 2009 WL 275706 (Sen.
Leahy) (recommending passage of FERA "in order to protect from
fraud the Federal assistance and relief funds expended in response
to our current economic crisis").
53

an

economic

shareholder

loss
of

to

the

the

Government

GSEs,

the

that,

as

Treasury

the

may

supermajori ty

ultimately

earn

substantial returns on its investment. It would still be the case
that

every dollar extracted from the GSEs by fraud would be a

dollar less in return to the Government.
Accordingly,

because

the

claims

paid for

reimbursement

foreclosure expenses were monies "spent or used

[]

Government

the

provided

program
a

demanded,"

or

"portion
the

interest"

of

and

money

finds

Court

the

that

because

or

property

the

of

to advance a
Government

requested

operative

or

complaints

adequately allege "claims" within the meaning of the FCA as regards
Fannie Mae and Freddie Mac.
IV. CONCLUSION
For the reasons set forth above, the Court grants the motions
of

the

Servicers

Relator's

Defendants

Second Amended

and

dismisses

Complaint

in

the

with prejudice
Second

Suit

in

both
its

entirety and Relator's Third Amended Complaint in the First Suit
as to the Servicer Defendants. The.court also grants the motions
of the McCabe Defendants

in part and dismisses Relator's Third

Amended Complaint in the First Suit as to the McCabe Defendants,
but without prejudice to Relator filing a Fourth Amended Complaint
including certain additional allegations detailed by Relator in
his

answering papers,

provided that

54

such amended pleadings are

filed by no later than July 11,

2018.

Finally,

the Court denies

the motion of the Rosicki Defendants.
The Clerk of Court is hereby instructed to close docket entry
numbers 123, 132, 135, and 137 in the First Suit and number 56 in
the Second Suit.

~RA~U.S.D.J.

SO ORDERED.
Dated:

New York, NY
June$, 2018

55