Allied Home Mortgage Corporation et al v. Secretary of the United States Department of Housing and Urban Development et al
Filing
37
OPINION AND ORDER GRANTING PRELIMINARY INJUNCITON granting 15 MOTION for Preliminary Injunction. HUD is ENJOINED from enforcing its suspensions of Plaintiffs. The Court further finds that no bond is necessary. Should the govt uncover evidence of fraud by Corp. and Hodge as its CEO, it may apply to lift the injunction. (Signed by Judge Melinda Harmon) Parties notified.(htippen, )
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
ALLIED HOME MORTGAGE
§
CORPORATION and JAMES C. HODGE, §
§
Plaintiffs,
§
§
VS.
§
§
SHAUN DONOVAN, Secretary,
§
United States Department of
§
Housing and Urban Development, §
UNITED STATES DEPARTMENT OF
§
HOUSING AND URBAN DEVELOPMENT, §
§
Defendants.
§
CIVIL ACTION H-11-3864
OPINION AND ORDER GRANTING PRELIMINARY INJUNCTION
Pending before the Court in the above referenced cause for
declaratory
and
injunctive
relief
is
Plaintiffs
Allied
Home
Mortgage Corporation (“Corp.”) and James C. Hodge’s (“Hodge’s”)
motion for a temporary restraining order and expedited preliminary
injunction (instrument #2), seeking to enjoin the suspensions of
Corp.’s approval to originate and underwrite FHA-insured mortgage
loans and Hodge’s right to participate in any FHA-insured lending
by the Mortgagee Review Board (“the Board”) of the United States
Department
of
Housing
and
Urban
Development
(“HUD”
or
“the
government”), effective November 1, 2011 (Exs. 1 and 2).1
The
motion was first heard on November 3, 2011, with Assistant United
States Attorney from the Southern District of New York, Jaimie
1
The Board is authorized to issue such suspensions by 12
U.S.C. § 1708(3)(C) and (4)(B).
-1-
Nawaday, participating by telephone.
Because the Court concluded
that it needed additional information and evidence, the Court
converted the motion to one for a preliminary injunction and set an
evidentiary hearing, which took place on November 8, 2011, with
counsel for all parties participating in the courtroom.2
Plaintiffs’
instant
suit
seeks
a
declaration
that
HUD’s
suspension of Allied Home Mortgage Corporation’s origination and
underwriting approval and suspension of Hodge from participation in
any FHA-insured lending was arbitrary and capricious and effected
without due process of law in violation of the Fifth Amendment.
They request permanent injunctive relief in the setting aside or
invalidation of the suspensions.
Corp. is a Texas corporation with its principal place of
business in Houston, Texas.
Hodge is its Chief Executive Officer
(“CEO”) and a citizen of Texas.
Federal
Rule
of
Civil
Procedure
52(a)
requires
a
court
reviewing an application for preliminary injunctive relief to “set
forth the findings of fact and conclusions of law which constitute
the grounds of the action.”
Relevant Law
When reviewing an administrative agency’s action under the
2
At the hearing, the Court deferred reviewing Defendants’
expedited motion to transfer the venue (#12) of this case to New
York, where the earlier filed, related qui tam action is pending,
as the government has not yet served Corp. and Hodge in that
action.
-2-
Administrative Procedure Act (“APA”),3 the court may set aside that
ruling
“only
discretion,
if
not
it
in
is
arbitrary,
accordance
with
capricious,
law,
or
an
abuse
of
unsupported
by
substantial evidence on the record taken as a whole.”
Sun Towers,
Inc. v. Schweiker, 694 F.2d 1036, 1038 (5th Cir. 1983); 5 U.S.C. §
706 (“[T]he reviewing court [decides] all relevant questions of
law.”).
Therefore an agency’s determinations or questions of law
are reviewed de novo.
Marquez-Marquez v. Gonzales, 455 F.3d 548,
554 (5th Cir. 2006), citing
(5th Cir. 2004).
Alwan v. Ashcroft, 388 F.3d 507, 510
The standard of review is highly deferential to
the administrative agency, and a court should not substitute its
own judgment for that of the agency.
Citation Oil & Gas Corp. v.
U.S. Dept. of Interior, 2011 WL 5025486, *2 (5th Cir. 2011), citing
3
As noted earlier by this Court, the Administrative
Procedure Act (“APA”) provides for judicial review of a “final
agency action.” 5 U.S.C. § 704. An agency action is “final”
for purposes of the APA where the action represents the
“consummation of the agency’s decision making process.” Bennett
v. Spear, 520 U.S. 154, 178 (1997). Such finality allows an
agency to apply its expertise and to correct its errors, while
preventing courts from engaging in “piecemeal review which at the
least is inefficient and upon completion of the agency might
prove to have been unnecessary.” FTC v. Standard Oil Co., 448
U.S. 232,(HUD regulations under the APA 242 (1980).
Nevertheless, federal courts lack the authority to require
plaintiffs to exhaust administrative remedies before seeking
judicial review if the relevant statute or agency regulation does
not mandate exhaustion but rather makes it discretionary. Darby
v. Cisneros, 509 U.S. 137, 154 (1993); United States v. Menendez,
48 F.3d 1401, 1411 (5th Cir. 1995). Such is the situation here.
The National Housing Act of 1934, 12 U.S.C. § 1708; 24 C.F.R. §
25.8. Plaintiffs here chose not to appeal their suspensions by
the Board.
-3-
Tex. Clinical Labs., Inc. v. Sebelius, 612 F.3d 771, 775 (5th Cir.
2010).
An agency’s actions are arbitrary and capricious “if the
agency relied on factors which Congress had not intended it to
consider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter
to the evidence before the agency, or is so implausible that it
could not be ascribed to a difference in view or the product of
agency expertise.”
Tex. Oil & Gas Ass’n v. U.S. E.P.A., 161 F.3d
923, 933 (5th Cir. 1998), quoting Motor Vehicles Mfrs. Ass’n v.
State Farm Mut. Auto. Ins., 463 U.S. 29, 43 (1983).
An agency’s
action, findings and conclusions should also be set aside if they
are unsupported by substantial evidence.
5 U.S.C. § 706(2)(E).
“Substantial evidence is more than a scintilla, less than a
preponderance, and is such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion.”
Heckler, 707 F.2d 162, 164 (5th Cir. 1983).
Hames v.
Interpretations of
circuit law by the agency, however, are reviewed de novo. Williams
v. Admin. Rev. Bd.,. 376 F.3d 471, 476 (5th Cir. 2004).
Under the stringent standard for obtaining the extraordinary
remedy of a preliminary injunction, the plaintiff must establish
“(1) a substantial likelihood of success on the merits, (2) a
substantial threat of irreparable injury if the injunction is not
issued, (3) that the threatened injury if the injunction is denied
outweighs any harm that will result if the injunction is granted,
-4-
and (4) the grant of an injunction will not disserve the public
Janvey v. Alguire, 647 F.3d 585, 595 (5th Cir. 2011),
interest.”
citing Byrum v. Landreth, 566 F.3d 442, 445 (5th Cir. 2009).
The
plaintiff must carry its burden of persuasion on all four prongs.
Canal Authority of State of Fla. v. Callaway, 489 F.2d 567, 576 (5th
Cir. 1974).
“The purpose of a preliminary injunction is always to
prevent irreparable injury so as to preserve the court’s ability to
render a meaningful decision [after a trial] on the merits.”
Callaway,
489
F.2d
at
576;
DSC
Communications
Corp.
v.
I
DGI
Technologies, Inc., 898 F. Supp. 1183, 1187 (N.D. Tex. 1995).
For the first element, the plaintiff’s evidence need not prove
that plaintiff is entitled to a summary judgment; plaintiff needs
only to present a prima facie case, but not demonstrate that he is
certain to win.
Id. at 595-96, citing id., and Charles Alan
Wright, Arthur Miller, Mary Kay Kane, 11 Federal Practice and
Procedure § 2948.3 (2d ed. 1995).
“[I]t will ordinarily be enough
that the plaintiff has raised questions going to the merits so
serious, substantial, difficult and doubtful, as to make them a
fair
ground
for
investigation.”
litigation
and
thus
for
more
deliberate
Sebastian v. Texas Dep’t of Corrections, 541 F.
Supp. 970, 975 (S.D. Tex. 1982).
To evaluate the likelihood of
success on the merits the court considers the “‘standards provided
by the substantive law.’”
Janvey, 647 F.3d at 596, citing Roho,
Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir. 1990).
-5-
Regarding the second prong, a threat of irreparable harm, the
injury at issue must be actual and imminent, not speculative or
remote.
Watson v. Federal Emergency Management Agency, 437 F.
Supp. 2d 638, 648 (S.D. Tex. 2006). Under Fifth Circuit law, an
injury is irreparable if there is no remedy at law, such as
monetary
damages.
Janvey,
647
F.3d
at
600;
Enterprise
International, Inc. v. Corporacion Estatal Petrolera Equatoriana,
762 F.2d 464, 472-73 (5th Cir. 1985).
Even if money damages are
available, they may not be adequate. Janvey, 647 F.3d at 600.
Irreparable injury may be shown where a business “would suffer a
substantial loss of business and perhaps even bankruptcy” absent
injunctive relief.
Doran v. Salem Inn, Inc., 422 U.S. 922, 932
(1975)(“Certainly the latter type of injury sufficiently meets the
standards for granting interim relief, for otherwise a favorable
final judgment might well be useless.”). A recognized exception to
the general rule that damages cannot be compensable in monetary
relief is “where the potential economic loss is so great as to
threaten the existence of the movant’s business.”
Performance
Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d 1373, 1382 (6th
Cir. 1995); Vaqueria Tres Monjitas, Inc. v. Irizarry, 587 F.3d 464,
485 (1st Cir. 2009); Minard Run Oil Co. v. U.S. Forest Serv.,
F.3d
, Nos. 10-1265, et al., 2011 WL 4389220, *13 (3d Cir. Sept.
20, 2011).
See also Florida Businessmen v. City of Hollywood, 648
F.2d 956, 958 n.2 (5th Cir. 1981)(“A substantial loss of business
-6-
may amount to irreparable injury if the amount of lost profits is
difficult or impossible to calculate.”).
Plaintiffs’ Motion for Preliminary Injunction
The government has intervened in a qui tam fraud action filed
in the Southern District of New York, Case No. 11-cv-05443, in
which it filed an expanded complaint-in-intervention and sues,
inter alia, Allied Home Mortgage Capital Corporation (“Capital”)
and Corp. as Capital’s successor in interest.
The suspensions of
Corp. and its CEO, Hodge in this action, occurred contemporaneously
with the filing of the government’s complaint (#2, Exhibit 3) on
November 1, 2011.
The current suspensions are dependent on “the
outcome of the United States’ lawsuit,” as stated in the November
1, 2011 Letter (#2, Ex. 1).
Plaintiffs here argue that the gravamen of the conclusory,
“unacceptably vague” allegations, unsupported by facts, in the New
York suit is against Capital, not Corp., and that none of the facts
in that complaint concern Corp.’s conduct. Corp. is sued solely as
“the successor to, and a mere continuation of” Capital, and most of
the allegations concern actions by Capital between 2000 and 2010.
Plaintiffs insist that HUD’s suspension of Corp.’s authority to
originate and underwrite loans will put Corp. out of business, and
that no amount of damages will be sufficient to resurrect Corp. as
a viable business.
FHA-insured mortgage loans constitute 70% of
Corp.’s business.
Furthermore Corp has built relationships with
-7-
other companies that are dependent upon Corp.’s ability to continue
originating FHA loans. All of Corp.’s financing for mortgage loans
(from warehouse financing lines of credit) will be terminated.
Thus not only will Corp. be unable to originate FHA-insured
mortgage loans, but also unable to originate any kind of mortgage
loans. Without correspondent purchase agreements Corp. will not be
able
to
market
participate
in
any
loans
the
market
it
might
during
make.
its
Its
suspension
inability
will
to
cause
potential investors and potential business partners to ally with
other
competitor
companies
in
the
same,
scarce
marketplace.
Moreover nearly all of its 723 employees in its 152 active branches
across the country will lose their jobs.
Hodge will lose his job,
esteem in the industry, and the company he has built over the past
twenty years.
Plaintiffs further maintain that the threatened injury to them
outweighs any potential harm to the government.
The suspensions
will put Corp. out of business and bar Hodge from the mortgage
industry before any fact has been proven before any tribunal.
In
circular logic, the notice suspending Hodge was issued the same day
as the notice suspending Corp. for employing him as a suspended
person.
#2, Exhibits 1 and 2.
The Notice to Corp. fails to
identify any specific or immediate harm caused by Corp.
The
government’s New York complaint-in-intervention (#2, Exhibit 3)
charges Corp. solely as successor in interest to Capital, the
-8-
conduct described in the complaint took place years ago, there is
no immediate danger identified, and the government has not sought
a TRO against any defendant in that case, unlike in the instant
regulatory proceedings against Hodge and Corp.
A preliminary injunction is in the public interest here:
it
would prevent the demise of Corp., great professional harm to
Hodge, hundreds of jobs from being lost, allow homebuyers to
purchase their homes, and prevent investors from suffering losses
on their investments.
Plaintiffs also claim the public has an
interest in the restrained use of government power, not allowing it
to act without cause and without due process.
Plaintiffs contend that HUD’s notices of the administrative
actions it is taking against Corp. are unacceptably vague, lacking
in any informative detail, and illogical.
The first violation
alleged in the Notice of Administrative Action served on Corp. on
November 1, 2011 (Ex. 1 at 6 to #2) is that “Allied” originated
loans from branch offices that were not FHA-approved.
The Notice
fails to identify the branch offices or how many or when loans were
submitted from these branches. Allied’s purported second violation
was “submitt[ing] loans to HUD for FHA mortgage insurance that
contained
false
representations
about
where
the
loans
were
originated,” but fails to state how many such loans were submitted,
which loans, and from which branches the loans are claimed to have
been originated and from which branches they actually originated.
-9-
Notice as 6.
As Corp.’s third violation the Notices alleges that
“Allied failed to pay the operating expenses for some of its
approved branch offices,” but again the branch offices are not
named.
Id.
The fourth charged violation is that “Allied utilized
inadequate and unqualified staff for its reviews,” again without
any identifying details.
The Notice asserts that Allied falsely
certified that it implemented a proper quality control plan.
Although the period is identified, the Notice fails to indicate in
what manner the quality control plan was inadequate.
Plaintiffs
claim
that
HUD’s
actions
were
arbitrary
and
capricious, that it abused its discretion, and that it violated the
United
States
Constitution
for
several
reasons.
First,
the
government improperly conflated Corp. and Capital, treating two
distinct corporate entities as one for purposes of liability, in
both the Notices and in the New York case, which charges acts of
Capital over two years old that were already resolved during a HUD
audit, with Capital paying the fines.
Second, Defendants served
Plaintiffs with Notice of violations simultaneously with suspending
them.
Third, HUD abused its discretion in failing to provide
essential
conclusory
concrete
details
allegations
of
raising
alleged
an
violations,
unsubstantiated
but
only
specter
of
wrongdoing. Fourth HUD violated the Constitution by exercising its
regulatory power of suspension against Plaintiffs in essence to
obtain an effective temporary restraining order and preliminary
-10-
injunction that threatens Plaintiffs’ business without giving
Plaintiffs proper notice and opportunity to be heard, and without
obtaining a court order.
Government’s Opposition
The government charges Hodge, CEO of both Capital and Corp.,
with concealed misconduct for over a decade that poses a risk to
the mortgage market and the public insurance fund.
The government
contends that the two Allied entities, Capital and Corp., share the
same ownership structure, the same headquarters, nearly all the
same senior managers, and the same quality control employees, and
pose the same risk to the public. Moreover the two companies offer
no response to the substance of the allegations in the New York
complaint.
Moreover, they suggest that based on the information
available in New York, Hodge’s contention that the banks have
frozen his accounts, preventing branch managers from withdrawing
earned loan commissions, is false.4
The government further maintains that Plaintiffs cannot show
a likelihood of success on the merits because they cannot show that
HUD’s actions were arbitrary and capricious as HUD has adequate
evidence of a history of serious violations of HUD requirements by
Plaintiffs.
Plaintiffs also cannot show irreparable harm because
4
While Plaintiffs assert that Hodge’s access to his funds
has been denied and his branch managers cannot obtain previously
earned commissions, there was no evidence presented to support
his allegations.
-11-
Corp. can still engage in conventional lending.
Furthermore in a
November 3, 2011, Hodge informed employees that he had established
a new relationship with an investor willing to purchase Corp.’s
loans that would “allow us to get back in business.”
In addition,
any harm occasioned by the filing of the New York complaint will
continue through the litigation regardless of the outcome of the
suspensions.
The
balance
of
equities
here
weighs
against
Plaintiffs who have come to court with unclean hands while seeking
equitable relief,
Hodge’s and his companies’ concealment of
wrongdoing have caused more than $834 million in insurance claims
to be paid by HUD, with the government facing a wave of defaults
that might amount to another $363 million.
Plaintiffs’ suggestion
that they will post a bond of $1000 if the Court issues an
injunction trivializes this harm.
Finally, the suspensions are
critical to protecting the health of the public insurance fund
The government details the requirements and procedure for
obtaining
mortgage
and
maintaining
insurance
approval
program
(#30
of
at
participation
3-7),
which
in
HUD’s
the
Court
incorporates herein as there is no dispute about them.
Capital
participated in the loan correspondent program and was allowed to
originate FHA loans out of HUD-approved branches and then send them
to HUD-approved direct endorsement lenders, such as Corp., or
underwriting
approval
prior
to
loan
closing
and
securing
an
insurance endorsement from HUD, until the program was discontinued
-12-
by the end of 2010. Reiterating with a supporting Declaration from
Jennifer
Lake,
¶
6(e)
that
Capital
and
Corp.
have
the
same
headquarters, ownership structure, management and quality control,
the government states that in late 2010 nearly all of Capital’s
branches were closed and immediately reopened as branches of Corp.
Lake Decl., #31 at ¶6.5
It asserts that Hodge and his companies
5
According to her Declaration (#31),Lake, a Special Agent
for HUD’s Office of Inspector General (“OIG”), participated in
the ongoing investigation by the Civil Frauds Unit of the U.S.
Attorney’s Office for the Southern District of New York that
examined the mortgage practices of Capital, Corp. and Hodge. She
states that because numerous witnesses were concerned about
retaliatory action by Hodge while this investigation proceeds,
they are not identified in her Declaration. Based on her
personal participation in the investigation, review of documents,
sworn witness testimony, conversations with people and witness
interviews, she generally identifies, as HUD violations by
Capital, that Capital originated FHA loans out of branches that
were not disclosed or approved by HUD and submitted loan
applications to HUD from them with HUD ID numbers of other,
still-approved branches. She relates that all but a few of
Capital’s branches in late 2010-11 were closed and their HUD
approval terminated, but that they were reopened under the name
of Corp. and obtained new HUD IDs, and “the migration of branches
resulted in no substantive changes in corporate ownership
structure, management, loan origination practices, branch
operations and quality control.” Lake Decl. at ¶ 6(e). The
Court would point out that this allegation is the only one she
makes about Corp. Between 2001-2008 Capital in 2006 and 2008 was
found to be out of compliance with HUD’s requirements that as
lessee of the space occupied by each branch Allied pay all
operating expenses for each branch. It submitted false branch
certifications, failed to implement Quality Control reviews in
accordance with HUD criteria, and when it finally began reviews
of early payment defaults in late 2005 to early 2006, had only
two quality control staff in its corporate office for more than
five hundred branches. Lake also states that Capital kept 2-5
quality control employees, working for another Hodge-owned entity
called Allquest Mortgage Capital Corporation, later called
AllQuest Financial Services, which in exchange for nominal
services to Capital, collected millions of dollars in fees that
-13-
“repeatedly and egregiously violated HUD requirements for the last
decade.” #30 at 8. One ongoing violation was continuous operation
of “shadow branches,” i.e., branches not approved by HUD. Since at
least 2000, Capital allegedly has originated thousands of FHA loans
out of shadow branches by “marrying” an unapproved branch to an
approved branch and entering the HUD ID of the approved branch on
all the loans originated from the shadow branch.
The government
claims that Corp. appears to continue the practice today.
Lake
Decl. ¶6(a)-(e); Declaration of Aaron Horenstein, Financial Analyst
in the Office of General Counsel, HUD since June 2003, #29, ¶ 6-11.
Because they operate “under the radar,” i.e., are not disclosed to
HUD, shadow branches cannot be audited by HUD. Horenstein declares
that based on publicly available information, i.e., using the
Google
search
engine
Facebook,
he
“discovered
that
Allied
Corporation and Allied Capital are currently operating at least six
(6) unapproved branches in the Commonwealth of Massachusetts.”
#29, ¶¶ 8-42.
The government also charges that Capital submitted false
Capital later deducted as business expenses on annual financial
statements that Capital submitted to HUD. Moreover Capital
assigned a few untrained assistants to do quality control
reports, but when they were unable to complete them, Hodge
purportedly instructed the management to falsify them. Capital
also submitted falsified certifications in 2006 and 2007 stating
that it had not been sanctioned by any state regulators and that
it had not employed individuals convicted of crimes, when it had
been sanctioned in multiple states and employed many convicted
felons.
-14-
information to HUD when it submitted loan packages for mortgage
insurance and concealed the fact that the loans were originated
from branches that were not approved by FHA.
Decl. of Nancy A.
Murray, #28.6
Court’s Decision
For purposes of this case and the preliminary injunction, the
focus must be on Corp. and Hodge as its CEO, separate
and
distinguished from Capital and Hodge as its CEO. While most of the
6
Murray’s Declaration states that from 1994-2010 she was a
partner and of counsel at Patton Boggs, LLP in Washington D.C.
where she practiced administrative law with a concentration on
HUD matters. She has been employed as Director of the Mortgagee
Review Board since May 2010 and serves as its Secretary. On
October 31, 2011 she convened a special session of the Board
after she was “told” that the Southern District of New York had
evidence of the following fraudulent conduct by Allied
(apparently Capital): that it had originated loans from branch
offices that were not FHA-approved; that it had submitted false
information to HUD and concealed the fact that the loans
originated from unapproved branches; it failed to ensure that the
corporate entity paid the operating expenses of the FHA approved
branch offices; that it failed to implement a Quality Control
(“QC”) Plan in compliance with HUD/FHA requirements; that it
submitted false certifications, without implementing a QC Plan,
to HUD when it submitted annual recertification materials from
2006-2011; and that HUD’s Office of General Counsel had
sufficient evidence against Hodge to suspend him and proposed to
debar him from participation in all HUD programs. An employee
also informed here that Allied had been before the Board for past
violation, including violating HUD/FHA requirements for clear and
effective separation of two mortgage companies,” i.e., Capital
and Corp. In several different settlements with HUD monetary
penalties were imposed on Allied. In general Murray’s
Declaration does not distinguish Capital from Corp. Because
Murray states that she was “told” about all these purported
violations, the Declaration is hearsay. Like some of the others,
the sources of information are not identified and the Declarants
are not subject to cross examination.
-15-
government’s documentary submissions and allegations conflate the
two corporate entities, little of the material clearly names or
separately identifies Corp.
The tie between the two entities is
the Asset Purchase Agreement (the “Agreement”) of May 1, 2010
between Capital and Corp., Plaintiffs’ Ex. 11 filed under seal, and
the alleged identical ownership structure, the
headquarters,
nearly all the senior managers, and quality control employees.
The Court concludes that HUD erred in acting contrary to the
law in Texas as that law applies to Corp. as an alleged successor
in interest to Capital based on Corp.’s acquisition of some of the
assets
of
Capital
and
on
the
theory
that
Corp.
is
a
mere
“continuation” of Capital.
Capital and Corp. are both Texas corporations.
The Asset
Purchase Agreement states in paragraph 12.09:
Governing Law.
This Agreement shall be construed in
accordance with applicable Federal Law and the laws of
the State of Texas without reference to laws regarding
choice of law or forum.
The exclusive venue of any
action arising from this Agreement shall be Harris
County, Texas and each party waives any objection to
venue laid therein.
Moreover, paragraph 2.02 of the Agreement, titled Excluded Assets”
expressly includes in subsection (b), “any and all liabilities.”
Paragraph 2.03, styled “No Liabilities Acquired,” provides in
relevant part,
Unless expressly identified in Schedule 2.01 as a
Purchased Asset, Buyer shall assume no Liability
whatsoever of the Seller, whether or not arising from or
-16-
related to the Seller, the Business or any Purchased
Assets (the “Excluded Liabilities”), and the Seller shall
pay, perform and discharge as and when due each such
Excluded Liability. Without limiting the generality of
the foregoing, the Excluded Liabilities shall include,
and under no circumstances shall Buyer be deemed to
assume, any Liability of the Seller arising out of or
relating to . . .
(c) any actual or alleged tortious conduct of Seller or
any of its officers, employees or agents; . . .
(i) any Liability relating to the ownership. operation,
use or disposal of any Excluded Assets; . . .
(n) any Liability arising out of any business activity or
operations of the Seller after the Effective Time;
(o) any Liability under or arising by reason of this
Agreement,
or
incurred
in
connection
with
the
transactions contemplated by this Agreement . . .;
(p) any claims, chose in action, causes of action, rights
of recovery, rights of set-off, or grievances of any kind
of any third party . . . arising out of the conduct of
the Seller, the Business, any other business or
operations of the Seller, or the ownership of any
Purchased Assets prior to the Effective Time.
Texas law does not generally recognize successor liability for
subsequent purchases of corporate assets. Norfolk Southern Ry. Co.
v. Trinity Industries, Inc., No. 3-07-CV-1905-F, 2009 WL 362437, *4
(N.D. Tex. 2009), citing McKee v. Am. Transfer & Storage, 946 F.
Supp. 485, 487 (N.D. Tex. 1997), citing Article 5.10(B) of the
Texas Business Corporation Act , effective Sept. 1, 1993. There is
no successor in interest when the acquiring corporation did not
expressly agree to assume the liabilities of the party to the
agreement because “‘successor’” has a specialized meaning beyond
simple acquisition.’” Sitaram v. Aetna U.S. Healthcare of N. Tex.,
-17-
Inc., 152 S.W. 3d 817, 728 (Tex. App.--Texarkana 2004).
See also
C.M. Asfahl Agency v. Tensor, Inc., 135 S.W. 3d 768 (Tex. App.-Houston [1st Dist.] 2004)(finding no successor liability because
there was no express assumption by the successor to acquire the
liability
of
the
predecessor);
Ford,
Bacon
&
Davis,
LLC
v.
Travelers Ins. Co., Civ. A. No. H-08-2911, 2010 WL 1417900, *5-6
(S.D. Tex. Apr. 7, 2010), citing Lockheed Martin Corp. v. Gordon,
16 S.W.3d
127, 134 -35 & n.6 (Tex. App.--Houston [1st Dist. 2000,
pet. denied)(The only two circumstances in which a successor
business that acquires the assets of another business also acquires
its liabilities or debts are (1) the successor expressly agrees to
assume liability or (2) the acquisition results from a fraudulent
conveyance to escape liability for the debts or liabilities of the
predecessor.). While the government may have vaguely implied there
was a fraudulent conveyance of Capital’s assets to Corp. to escape
Capital’s liability, it did not produce evidence of such.
Furthermore the Texas legislature has refused to recognize the
theory that a successor corporation is a mere continuation of its
predecessor
successor
as
an
exception
corporation
does
to
not
the
traditional
assume
the
rule
that
liabilities
of
a
a
predecessor. Motor Components, LLC v. Devon Energy Corp., 338 S.W.
3d 198, 204-05 (Tex. App.--Houston [14th Dist.] 2011)(citing Act of
May 4, 1979, 66th Leg., R.S., ch. 194, § 1, 1979 Tex. Gen. Laws.
422,
422-23
(amended
1987,
1991,
-18-
1993,
and
1997,
recodified
2002)(current version at Tex. Bus. Orgs. Code Ann. § 10.254 (West
2009)), citing Patin v. Thoroughbred Power Boats, Inc., 294 F.3d
640, 649 (5th Cir. 2002)(applying Florida law).
Section 10.254
provides,
(a) A disposition of all or part of the property of a
domestic entity, regardless of whether the disposition
requires the approval of the entity’s owners or members,
is not a merger or conversion for any purpose.
(b) Except as otherwise expressly provided by another
statute, a person acquiring property described by this
section may not be held responsible or liable for a
liability or obligation of the transferring entity that
is not expressly assumed by the person.
The Fourteenth Court of Appeals in Motor Components, 338 S.W. 3d at
205, further cited
holdings:
inter alia
the following cases and their
Mudgett v. Paxson Machine Co., 709 S.W. 2d 755, 758
(Tex. App.--Corpus Christi 1986, writ ref’d n.r.e.)(“Certainly if
the de facto merger doctrine is contrary to the public policy of
our state, so must be the mere continuation doctrine.”); McKee v.
American Transfer & Storage, 946 F. Supp. 485, 487 (N.D. Tex.
1996)(“The
Texas
Business
&
Corporations
Act
eliminates
the
doctrine of implied successor liability.”).
“Under the APA, a court may set aside agency actions found
to
be
“arbitrary
and
accordance with law.”
capricious”
because
they
5 U.S.C. § 706(2)(A).
are
“not
in
Plaintiffs are
correct that HUD’s suspension of Corp. and Hodge as its CEO, based
on a successor corporation/continuation doctrine and an improper
conflation of the two entities, transferring Capital’s alleged
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liability for misconduct to Corp., is contrary to Texas law.
In
purchasing most of Capital’s assets and expressly indicating that
it was not purchasing any liabilities, Corp. and Hodge were acting
legally under Texas law.
The purchase of Capital’s branches by
Corp. began around September-October 2010, before which Corp, had
no
branches.
The
government
has
not
produced
evidence
demonstrating that Corp. has violated the law since it acquired
most of Capital’s assets.
Indeed it acknowledged at the hearing
that the history of Corp. since its acquisition of assets of
Capital is short and that evidence about it thus far is limited.
Nevertheless Corp.’s figures in HUD’s Credit Watch or Neighborhood
Watch performance numbers (Plaintiffs’ Exhibit #23) reflect it is
better than average in comparison to other FHA-insured mortgage
lenders across the country.
Moreover the vague and conclusory
nature of the allegations in the Notices, which Corp. and Hodge
argue deprive them of adequate notice and due process, in the qui
tam complaint, and in the government’s Declarations serves to
obfuscate which corporation is responsible for what violations.
Therefore
the
Court
finds
that
Plaintiffs
have
met
the
requirements for a preliminary injunction enjoining the suspensions
of Corp. and of Hodge in his capacity as CEO of Corp.
Plaintiffs
have made a prima facie case of a likelihood of success on the
merits of their suspension based on a continuation theory and the
Asset Purchase Agreement under Texas law for reasons indicated
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above, and the absence of evidence of wrongdoing by Corp. since
that acquisition.
They have also submitted substantial evidence
that the suspensions actually and imminently threaten the very
existence of Corp.’s business and Hodge’s professional position in
the mortgage industry, thus making money damages, only after the
New York litigation is ultimately resolved, inadequate
the irreparable injury prong.
to satisfy
In the wake of HUD’s suspensions,
Plaintiffs have also been suspended by Ginnie Mae, Fanny Mae and
the State of Maine. Their warehouse lines of credit have dried up.
The potential destruction of Plaintiffs’ business outweighs any
harm that would be suffered by the government before the issues can
be litigated in the New York qui tam action.
The substantial loss
to HUD of over $800 million in taxpayer funds was allegedly caused
by the conduct of Capital years ago.
As noted there are plenty of
broad-sweeping accusations against, but no evidence of wrongdoing
by, Corp. since its acquisition of Capital’s assets.
The issuance
of a preliminary injunction, on the other hand, would serve the
public interests in preserving Corp.’s business, over 700 jobs for
its employees, the opportunity for those low income clients who
were approved for mortgages to close on their homes, and the
opportunity
for
others
to
borrow
and
purchase
homes.
The
government will still have an opportunity to prove its allegations
and Plaintiffs to receive due process and defend themselves in the
New York qui tam suit.
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Finally, Federal Rule of Civil Procedure 65(c) provides
The court may issue a preliminary injunction . . .only if
the movant gives security in an amount that the court
considers proper to pay the costs and damages sustained
by any party found to have been wrongfully enjoined . .
. .
The Fifth Circuit has held that courts in this Circuit have the
discretion to issue injunctions without security.
EOG Resources,
Inc. v. Beach, 54 Fed. Appx. 592, No. 02-60415, 2002 WL 31730385,
*1 n.2 (5th Cir. Nov. 26, 2002), citing Corrigan Dispatch Co. v.
Casa Guzman, S.A., 569 F.2d 300, 303 (5th Cir. 1978)(per curiam);
Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 628 & n.18 (5th Cir.
1996)(the court in its discretion “‘may elect to require no
security at all’”), quoting Corrigan, 569 F.2d at 303.
Accordingly, the Court
ORDERS that Plaintiffs’ motion for preliminary injunctive
relief is GRANTED and HUD is hereby ENJOINED from enforcing its
suspensions of Plaintiffs. The Court further finds that no bond is
necessary here. Should the government uncover evidence of fraud by
Corp. and Hodge as its CEO, it may apply to lift the injunction.
SIGNED at Houston, Texas, this
15th
day of
November , 2011.
___________________________
MELINDA HARMON
UNITED STATES DISTRICT JUDGE
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