United States of America v. Allied Home Mortgage Corporation

Filing 142

MEMORANDUM AND ORDER. It is ordered that defendants Allied Capital, Hodge, and Stell's motion to dismiss be granted in part and denied in part. Defendants motion to dismiss is granted with respect to the governments claims 4 and 6, and these claims are dismissed without prejudice. The motion to dismiss is denied with respect to all other claims. (Signed by Magistrate Judge George C. Hanks, Jr) Parties notified. (rosaldana, 4)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
UNITED STATES OF AMERICA,

Plaintiff,
VS.
AMERICUS MORTGAGE
CORPORATION, et aI.,

§
§
§
§
§
§
§
§

CIVIL ACTION NO. 4: 12-cv-02676

Defendants.
MEMORANDUM AND ORDER
The United States of America has brought this action against two residential
mortgage lending companies and two executive officers of those companies, alleging
civil fraud in violation of the False Claims Act ("FCA"), 31 U.S.C. § 3729, and the
Financial Institutions Refoml, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12
U.S.C. § 1833a, and seeking indemnification under federal common law. The
Government alleges that Defendants Americus Mortgage Corporation ("Allied Capital"),
Allquest Home Mortgage Corporation ("Allied Corp"), I Jim C. Hodge, and Jeanne L.
Stell made numerous false statements in loan applications and other documents in a
scheme to procure home mortgage insurance from the United States Department of
Housing and Urban Development ("HUD") on loans they issued.

The Government

contends that this alleged fraud resulted in HUD paying out more than $260 million in

Defendant Americus Mortgage Corporation was formerly known as and is identified in
the Third Amended Complaint by its former name, Allied Home Mortgage Capital Corporation.
Defendant Allquest Home Mortgage Corporation is identified in the Third Amended Complaint
by its former name, Allied Home Mortgage Corporation.

insurance proceeds to cover loans that have defaulted, and that HUD will be faced with
more defaults in the future. Dkt. 100,

~

1.

The case has been transferred to this Court by consent of the parties, pursuant to
28 U.S.C. § 636(c).

Now pending before the Court is the Motion to Dismiss under

Federal Rule of Civil Proc:edure 12(b)(6) filed by Defendants Americus Mortgage
Corporation, Jim C. Hodge, and Jeanne L. Stell, Dkt. 107, and the responsive briefing.
Dkt. 108, 111, 119, 123, 124, 126, and 128.

After considering the pleadings, the

arguments of the parties, and applicable legal authorities, Defendants' Motion to Dismiss
is GRANTED in part and DENIED in part.
I.

Background 2
A. The FHA Mortgage Insurance Program
HUD insures lenders against losses on mortgage loans made to homebuyers. HUD

administers

this

mortgage

insurance

program

through

the

Federal

Housing

Administration ("FHA"). Under this program, if a homeowner fails to make payments on
an insured mortgage loan and the lender forecloses on the property, HUD pays the lender
the balance of the loan and assumes ownership and possession of the property.

2

The Court's factual background recites the facts as alleged in the Third Amended
Complaint, the Government's live pleading in this case. In reviewing a motion to dismiss made
under Federal Rule of Civil Procedure 12(b)(6), "[t]he complaint must be liberally construed in
favor of the plaintiff, and all facts pleaded in the complaint must be taken as true." Beanal v.
Freeport-McMoran, Inc., 197 F.3d 161, 164 (5th Cir. 1999); see also Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 554-55, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
2

Additionally, HUD incurs the expense of managing and marketing the foreclosed
property until it is resold. 3
A fundamental requirement of the HUD insurance program is that a loan
correspondent, i.e., a lender who originates mortgage loans and later sells them to other
lenders,4 must be approved by HUD to originate, purchase, hold, or sell HUD-insured
mortgages. HUD further insists that the loan correspondent obtain specific approval from
HUD for each branch offict:: from which the correspondent intends to originate HUDinsured loans. 5
To obtain HUD approval to originate loans from a specific branch office, the loan
correspondent must submit HUD Form 92001-B-a form containing basic information
about the branch, a general certification that the branch "meets all HUDIFHA
requirements," and a specific certification that the lender "will pay all operating costs of
the branch office .... ,,6 Further, loan correspondents must submit annual certifications
containing four representations:
I certity that none of the principals, owners, officers, directors, and/or
employees of the above-named lender is currently involved in a proceeding
and/or investigation that could result, or has resulted in a criminal
conviction, debarment, limited denial of participation, suspension, or civil
money penalty by a federal, state, or local government.
I certity that the above named lender has not been refused a license and has
not been sanctioned by any state(s) in which it originates and/or services
HUD-FHA insured loans.

3
4

5
6

Dkt. 100, Third Amended Complaint.
See 24 C.F.R. § 202.8(a)(2).
Dkt. 100 at ~ 35.
Id. at ~ 36.
3

I know, or am in the position to know, whether the operations of the above
named lender conform to HUD-FHA regulations, handbooks, and policies.
I certifY that to the best of my knowledge, the above named lender
conforms to all HUD-FHA regulations necessary to maintain its HUD-FHA
approval, and that the above lender is fully responsible for all actions of its
employees including those of its HUD-FHA approved branch offices.?
After submitting the

certifications,

the

loan correspondent

receives

an

identification number e'HUD ID") that permits the branch to originate HUD-insured
loans. As a means of monitoring lender default rates, HUD requires lenders to enter the
specific HUD ID for the originating branch in every loan file submitted to HUD. HUD
also requires loan correspondents to implement a quality-control program. As part of this
program, the lender must "( 1) conduct an on-site audit of all branch offices within ninety
days of opening and annually thereafter; (2) review 10% of all closed loan files to ensure
they were underwritten in accordance with HUD guidelines; and (3) review all early
payment defaults (i.e., those that default within the first six months)."g

B. Allied Capital and Allied Corp
Allied Capital was an approved FHA loan correspondent from September 26, 1991
to December 31, 2010. In this capacity, it had the authority to originate HUD-insured
mortgage loans for sale or transfer to other qualifying lenders. On January 23, 2012,
Allied Capital changed its name with the Secretary of State of Texas to "Americus
Mortgage Corporation.,,9

7
8
9

Id. at ~ 40.
Id. at ~ 42.
Id. at ~ 20.
4

In 2010 and 2011, Allied Capital sold its assets to Allied Corp and terminated
nearly all of its branches, only to then reopen them as branches of Allied Corp. On
January 10,2012, Allied Corp changed its name with the Secretary of State of Texas to
"Allied Corp Home Mortgage Corporation."
Defendant Jim Hodgt: is the founder, President, and Chief Executive Officer of
both Allied Capital and Allied Corp. 10
Defendant Jeanne Stell is the Executive Vice President and Director of
Compliance for both companies. She has held a senior management position since
approximately 2001, with th{: exception of a temporary absence between November 2007
and early 2010. 11

II.

Causes of Action Against Defendants
A. False Claims Act
In Claims 1 and 3 of the Third Amended Complaint, the Government asserts

causes of action against Allied Capital and Hodge under former § 3729(a)(2) and
§ 3729(a)(1)(B) (as amendf:d) of the FCA. The FCA is the Government's "primary
litigation tool" for recovering losses resulting from fraud. United States ex ref. Marcy v.

Rowan Cos., 520 F.3d 384, 388 (5th Cir. 2008). The FCA imposes civil penalties and
treble damages on any person who "knowingly makes, uses, or causes to be made or used,

10
II

Id. at,-r 23.
Id. at,-r 24.
5

a false record or statemenlt material to a false or fraudulent claim." 31 U.S.C. §
3729(a)(1)(B) (2009).12

B. Claim for "Indemnification"
In Claim 4 and 6, the Government asserts an "indemnification" claim against
Allied Capital and Hodge, seeking "indemnification" for insurance claims that it might be
required to payout as a result of Defendants' alleged false or fraudulent records,
statements, or certifications. The Government's Complaint does not allege the source of,
or elements of proof of, such a cause of action. 13 The existence of such a cause of action
under these facts appears to be a question of first impression.

C. Financial Institutions Reform, Recovery, and Enforcement Act
In Claims 7, 9-10,12--13,15-17, and 19, the Government asserts causes of action
against Hodge, Stell, and Allied Capital for violations of § 1006 and § 1014 of
FIRREA.14 Section 1006 makes it a crime for any person who is "connected in any

12

The terms "knowing" and "knowingly" as used in the FCA means that a person "(i) has
actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the
information; or (iii) acts in reckless disregard of the truth or falsity of the information." !d.
§ 3729(b)(l)(A)(i)-(iii).
Proof of "specific intent to defraud" is not required. Id. §
3729(b)(l)(B). The term "material" means "having a natural tendency to influence, or be capable
of influencing, the payment or receipt of money or property." Id. § 3729(b)(4); see also United
States ex reI. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458,470 (5th Cir. 2009). The term
"claim" means "any request or demand, whether under a contract or otherwise, for money or
property ... that ... is presented to an officer, employee, or agent of the V nited States .... " Id.
§ 3729(b)(2).
13
As courts have observed, "there is no clear nomenclature among state and federal courts
for the different types of indemnity, nor do courts seem to agree on what elements constitute
even identically-named types of indemnity." Collier v. Land & Sea Rest. Co., 972 F. Supp. 2d
870 n.l (W.O. Va. 2013).
14
Section 95l(a) of FIRREA provides that "[w]hoever violates any provision of law to
which this section is made applicable by subsection (c) of this section shall be subject to a civil
penalty in an amount assessed by the court in a civil action under this section." 12 V.S.C. §
6

capacity with [HUD]" to "mak[e] any false entry in any book, report or statement of or to
[HUD]" with the "intent to ... deceive any officer, auditor, examiner or agent ... of [a]
department or agency of the United States ... " 18 U.S.c. § 1006. Section 1014 prohibits
the submission of false records or making of false statements to the FHA. 18 U.S.C. §
10 14. Specifically, it makes: it a crime for any person to "knowingly mak[ e] any false
statement or report, or willfully overvalues any land, property or security, for the purpose
of influencing in any way the action of the [FHA] ... " Id.

III.

Factual Allegations against Defendants
Between January 1, 2001 and December 31, 2010, Allied Capital and Allied Corp

originated 112,324 home loans. Of those loans, 35,801 (approximately 32%) defaulted,
costing over $834 million in insurance claims to be paid by HUD.IS
The Government alleges that Allied Capital willfully violated the regulations that
provide protection to HUD's insurance fund and knowingly deceived HUD to further its
fraudulent schemes.

The Government contends that Allied Capital made fraudulent

representations to HUD-FHA in four separate types of documents: (1) loan application
packages to secure FHA insurance on individual loans; (2) branch certifications to obtain
approval to originate FHA loans from a new branch office; (3) annual certifications
required for lender participation in the FHA program; and (4) quality-control reports.

1833a(a). Section 951 (c) of FIRREA identifies the criminal violations to which FIRREA civil
penalties apply, including Sections 1006 and 1014. Id. §1833a(c).
15
Dkt. 100 at,-r 5.
7

A. Loan Application Packages
For over ten years, Allied Capital originated loans out of hundreds of branches that
it never disclosed to HUD.

The Government refers to

th~se

branches as "shadow

branches," because they operated without HUD's knowledge or approval, and were
therefore not authorized to originate HUD-insured loans. 16 In some jurisdictions, the
number of shadow branches exceeded the number of HUD-approved branches. 17 For
example, Allied Capital was authorized to operate 8 branches in North Carolina, but
Allied Capital actually opt:rated over 70 offices in North Carolina without HUD
approval. These shadow branches often operated in regions where HUD had previously
suspended Allied Capital's authorization to originate loans because of the region's high
mortgage default rate.

The Government estimates that these shadow branches are

responsible for $150 million in insurance claims paid by HUD.
Although HUD prohibited the origination of loans from unapproved offices, the
Government alleges that Allied Capital was nonetheless able to secure FHA insurance for
these loans by falsifYing the records it submitted to HUD.

18

At the instruction of Hodge,

Allied Capital's CEO, Allied Capital employees routinely entered the HUD ID numbers
of an approved branch into the loan documentation for loans originating from the shadow
branches. These loans were then submitted to HUD for approval, even though they
falsely stated that the loans originated from an approved branch office.

16

ld. ~ 51.

17

Id.
Id.
Id.

18
19

~~

52,61,64.
~~ 7,63-68.
~~ 7, 51, 60, 65.
8

19

HUD relied on

these false statements and endorsed the loans.

2o

The Government alleges that Allied

Corp continued these practices when it acquired nearly all Allied Capital's assets in
2010. 21
B. False Statements in Branch Certification Forms
The Government also alleges that Allied Capital, and later Allied Corp, lied to
obtain HUD approval for its authorized branches. 22 Each time Allied Capital sought
approval for a new branch office, it was required to submit HUD Form 92001-B to certify
the branch complied with HUD requirements. The form specified, among other things,
that Allied Capital would pay all operating costs for the branch office. However, the
Government alleges that Allied Capital and Allied Corp treated branches as independent
franchises, maintaining a corporate policy of requiring branch managers to assume
financial responsibility for their branches. Allied Capital required that branch managers
indemnify it from "liability of every kind" and made branch managers responsible for
payroll, insurance, legal judgments, and other office expenses.23 Responsibility for lease
agreements, in particular, was borne by branch managers. After Allied Corp acquired
Allied Capital's assets, it also adopted its branching practices. On behalf of Allied Corp,
Stell sent sublease agreements to almost every branch manager, requiring the managers to
become the responsible parties on the lease. When Allied Corp shut down in November

20
21

22
23

Id.
Id.
Id.
Id.

~~

7, 60, 65, 68.
~~ 66-68.
~~ 8, 70, 92-98.
~~ 8, 71, 78, 90.
9

2011, it was branch managers-not Hodge and Allied Corp-who were held liable for

the continuing lease obligations by landlords. 24
The Government alleges this violated HUD policy and that Allied Corp was aware
it was in violation of HUD policy-in 2001 it issued an "Examination!Audit Procedure
Guide," instructing branch managers to tell HUD auditors they were "not a franchise.,,25
The Guide directed branch managers to:
Select ONE PERSON, and one person ONLY in your office to interface
and converse with the examiner/auditor . . . . No one else in the office
should have any conversation with the examiner/auditor prior to, during or
after the examination/audit. The only corporate personnel who should
converse with the examiner/auditor . . . should be Jeanne Stell or Jim
Hodge ....
You, and any employee working in your branch, are W-2 employees of
Allied. Frequently, examiners/auditors view us as a franchise. WE ARE
NOT A FRANCHISE. Along those same lines, Allied pays all the bills
incurred by the branch. Both of these statements are true and that is the
only way those questions are to be answered, no deviations!26
The Government alleges that this directive failed to comply with the HUD Handbook and
certification form, which requires that a lender "fully cooperate with any investigations
brought by HUD [and] make all officers and employees available for interviews.,,27
The Government further alleges that it was Stell who directed Allied employees to
make these false certifications. 28 In 2009, after a HUD audit report found that Allied
Capital's branch leasing arrangements violated HUD regulations, Stell sent an email
stating:
24
25

26
27
28

Id.
Id.
Id.
Id.
Id.

~~

89,92-98.
at ~ 74.
(emphasis in original).
at ~ 75.
at ~ 88.
10

I had [another senior manager] sign the 'add a branch' form for years for
HUD as I knew this [HUD audit] would eventually happen. It required you
to swear the branches meet and will continue to meet HUD's regulations.
Jim [Hodge] has to be the biggest target personally for his disregard for the
regulations. Serves him right never listening and thinking he didn't have to
play by the rules. 29

c.

False Annual Certifications

The Government also alleges the Defendants submitted false annual certifications.
To maintain HUD-approved and Direct Endorsement Lender ("DEL") status, Allied
Capital and Allied Corp were required to submit annual certifications to HUD and to
implement a quality-control program.

HUD required this quality-control program

include: (I) conducting an on-site audit of all branch offices within 90 days of opening
and annually thereafter; (2) reviewing 10% of all closed loan files to ensure they were
underwritten in accordance with HUD guidelines; and (3) reviewing all early payment
defaults (i.e., those defaults within the first six months). 30

In her role as Chief

Compliance Officer, Stell signed the annual certification on behalf of Allied Capital in
2004,2006, and 2007. Hodg~~ signed the annual certification in 200S? These documents
certified that Allied Capital was not currently subject to state sanctions, did not employ
felons, and maintained the requisite quality-control program. The Government alleges
that each of these certification statements were false.
The Government alkges that Allied Capital branches were sanctioned by the
Rhode Island Department of Business Regulation, the South Carolina Department of
29

Id. at ~ 87-88.
Id. ~ 42. Review of early payments defaults
indicative of mortgage fraud. ld.
31
Id. at ~~ 128-129.
30

11

IS

important because the defaults are

Consumer Affairs, the State of Washington Department of Financial Institutions, the New
York State Banking Department, and the Arizona Department of Financial Institutionsnone of which were ever disclosed on the annual certification forms signed by Stell and
Hodge.

32

The Government also cites several instances in which Allied Capital and Allied

Corp concealed prior sanctions and convictions of employees that should have been
reported to HUD.33
The annual certifications also falsely certified that "the above named lender
conforms to all HUD-FHA regulations necessary to maintain its HUD-FHA approval,"
including the requisite quality-control program. 34

Instead, Allied Capital's quality-

control program was virtually non-existent: it had few quality-control staff and almost
never performed reviews.

Although Allied Capital operated between 400 and 650

branches from 2003 to early 2009, it employed only a few branch auditors.

These

auditors rarely conducted on-site branch office audits and wholly discontinued branch
audits by 2009.

Allied Capital also rarely reviewed its early payment defaults.

In

addition to a small handful of auditors to review these early payment defaults, 2-5
quality-control department members worked in St. Croix, in the U.S. Virgin Islands.
However, this staff in

st. Croix reportedly did not even know "what HUD was" or "what

a mortgage was. ,,35

32
33
34

35

Id. at~~ 118-127.
Id. at ~~ 117-132.
Id. ~~ 40, 42,100-101.
Id. ~ 103.
12

Similarly, the Complaint alleges that Allied Corp also failed to implement a
quality-control program.

Instead of hiring or training quality-control professionals,

Allied Corp directed its underwriting coordinators to conduct reviews. However, these
employees had no quality-control experience or training. In separate instances in 2009,
Hodge and Stell directed these Allied Corp employees to skip re-verification
requirements in the quality-control review process, including obtaining credit reports and
re-veritying employment, income, deposits, and alternate credit sources. Further, Allied
Corp's quality-control reviews were not performed within the required 90-day period
after loans were closed. 36 Finally, the Complaint alleges that Allied Corp failed to
supervise the actions of its loan correspondent, Allied Capital, when it allowed Allied
Capital employees to disregard a number of compliance requirements. Nevertheless, in
2003, 2006, 2007, 2008, and 2010, Hodge permitted the submission of annual
certifications veri tying Allied Corp's full compliance, and Stell personally submitted the
annual certification in 2003. 37
D. Falsified Quality Control Reports
The Government next alleges that Hodge and Stell instructed a member of Allied
Capital's and Allied Corp's quality-control department to prepare fraudulent qualitycontrol reports and submit them to HUD.38 In October 2008, HUD ordered Allied Capital
to provide up-to-date quality-control reports. 39 The Government alleges that Hodge,

36

37
38

39

ld. ~~ 107-112. See also 24 C.F.R. § 202.5(b).
ld. ~~ 133-134.
ld. ~ 108.
ld. ~ 106.
13

lacking adequate or qualified quality-control staff, instructed staff to instead fabricate the
reports.

In an effort to make the reports appear complete, employees indicated that

verifications of income, employment, and deposit in the loan files under review had been
conducted, when in fact no such work had been done. 4o The Government also alleges
that, beginning in 2008, Allied Corp submitted Quality Assurance Division reports to
HUD despite a non-compliant and incomplete review process.

IV.

41

Dismissal Under Rule 12(b)(6) and Rule 9(b)
A. The Rule 12(b)(6) Standard
Rule 12(b )(6) allows dismissal of a claim if a plaintiff fails "to state a claim upon

which relief can be granted." FED. R. CIY. P. 12(b)(6). A motion to dismiss under Rule
12(b)(6) is "viewed with disfavor and is rarely granted." United States ex ref. Tucker v.

Christus Health, No. 09-11819, 2012 U.S. Dist. LEXIS 151906,8-9 (S.D. Tex. Oct. 23,
2012) (Atlas, 1.) (qui tam case citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d
141, 147 (5th Cir. 2009».
Rule 12(b)(6) must be: read in conjunction with Rule 8(a), which requires "a short
and plain statement of the claim showing that the pleader is entitled to relief." FED. R.
CIY. P. 8(a)(2); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed.
2d 929 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868
(2009). To withstand a Rule: 12(b )(6) motion, a complaint must contain "enough facts to
state a claim to relief that is plausible on its face"-legal conclusions alone are

40
41

Id. ~ 108.
ld. at ~~ 110-112.
14

insufficient. Twombly, 550 U.S. at 570. The "pleading standard Rule 8 announces does
not require 'detailed factual allegations,' but it demands more than an unadorned, thedefendant-unlawfully-harmed-me accusation." United States ex rel. King v. Univ. of
Texas Health Science Center-Houston, 907 F. Supp. 2d 846, 849 (S.D. Tex. 2012)
(Rosenthal, J.) (qui tam caSt: quoting Iqbal, 556 U.S. at 678). The complaint must be
liberally construed in favor of the plaintiff, and when there are well-pleaded factual
allegations, courts should presume they are true, even if doubtful-only then may the
court determine whether they "plausibly give rise to entitlement to relief." United States
ex rel. Tucker, 2012 U. S. Dist. LEXIS 151906 at 8-9.
B. The Rule 9(b) Standard
Complaints filed under the False Claims Act must also meet the heightened
pleading standard of Federal Rule of Civil Procedure 9(b), which provides: "In alleging
fraud or mistake, a party must state with particularity the circumstances constituting fraud
or mistake." United States ex reI. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir.
2009) (citing FED. R. CIY. P. 9(b)). Rule 9(b) requires "that a plaintiff set forth the 'who,
what, when, where, and how' of the alleged fraud." United States ex rel. Steury v.
Cardinal Health, Inc., 625 F.3d 262, 266 (5th Cir. 2010). "Because the linchpin of an
FCA claim is a false claim, the time, place and contents of the false representations, as
well as the identity of the person making the misrepresentation and what that person
obtained thereby must be stated in a complaint alleging violation of the FCA in order to
satisfy Rule 9(b)." United States ex rel. Rajizadeh v. Continental Common, Inc., 553 F.3d
869, 873 (5th Cir. 2008) (internal quotations and citation omitted).
15

For FCA claims, Rule 9(b) must be applied in a "context-specific and flexible"
manner. United States ex ref. Grubbs, 565 F .3d at 190. "It is adequate to allege that a
false claim was knowingly presented regardless of its exact amount; the contents of the
bill are less significant because a complaint need not allege that the Government relied on
or was damaged by the false claim." Id. at 189. The complaint may "survive by alleging
particular details of a schem{: to submit false claims paired with reliable indicia that lead
to a strong inference that claims were actually submitted." Id. at 190.

IV.

Analysis
Defendants Allied Capital, Hodge, and Stell now move to dismiss the

Government's Third Amended Complaint. Defendants first argue that the Government
fails to state a valid claim for "indemnification." Defendants next urge four grounds on
which the Government's FI1{REA claims should be dismissed. The Court will address
these in tum.

A. Claim for "Indemnification"
In Claims 4 and 6, the Government seeks "indemnification.,,42 Specifically, the
Government pleads that Hodge and Allied Capital, "for the purpose of fraudulently
obtaining HUD mortgage insurance," made false statements and caused shadow branches
to originate some loans "that [are] currently in default, but for which no insurance claim
has been submitted to HUD." As a result, the Government alleges it "will pay future

42

Dkt.100,~~

189, 193, 197.
16

msurance claims, and incur future losses," and it pleads that it

lS

"entitled to

indemnification of [these] losses. ,,43
However, the Government's Complaint does not set out the law that entitles it to
such relief. During briefing and oral argument, the Government explained that it believes
that it has a right to such "indemnification" under the federal common law. 44 As courts
have observed, "[t]here is, of course, "no federal general common law." Erie R. Co. v.

Tompkins, 304 U.S. 64, 78 (1938). Nevertheless, federal courts have recognized their
authority, in some limited areas, to formulate what has become known as "federal
common law." Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640 (1981).
The United States Supreme Court has repeatedly held, however, that these areas are "few
and restricted," and fall into essentially two categories: those in which a federal rule of
decision is "necessary to protect uniquely federal interests and those in which Congress
has given the courts the power to develop substantive law." Id. (emphasis added and
internal quotations and citations omitted).

The authority to create a federal rule of

decision "necessary to protect uniquely federal interests" includes the authority to
formulate substantive rules of decision when "the rights and obligations of the United
States" are at issue. Id. at 641.
Here, the Government argues the Court should recognize a federal common law
claim for indemnity, contending this case is one where ""the rights and obligations of the
United States" are at issue. Id. at 641. The Government has not provided any binding

43
44

Id. at ~~ 188-191, 196--199 .
Dkt. 119, 129.
17

authority on what the elements or scope of such a right might be. Further, absent a
clearly stated need, courts should not fashion new remedies under federal common law
where carefully considered legislative schemes such as the FCA already exist. As courts
have noted, statutes such as the FCA consist of "a comprehensive legislative scheme
including an integrated system of procedures for enforcement." Nw. Airlines, Inc. v.

Transp. Workers Union of Am., AFL-CIO, 451 U.S. 77, 97 (1981); see also 31 U.S.C. §
3729 et seq. When Congress has enacted such a scheme, there is a strong presumption
against the courts' ability to supplement the statutorily provided remedies. Id.; see also

Walker v. Cadle Co., 51 F.3d 562,567 (5th Cir. 1995) (denying the right to contribution
because the court refused "to fashion a new remedy that might disturb [a] carefully
considered legislative scheme" and refused "to formulat[ e] remedies to enforce the
provisions" of a Congressional act).
The Court finds that, under the facts as alleged in the Complaint, recognition of a
federal common law "indemnity" claim-whatever its scope or elements may be-is not
necessary to protect any right, obligation or interest of the Government. For example, the
Government has not shown that it will not be able to either (1) recover on all claims it has
actually paid as of the date of trial, or (2) recover claims it pays after the trial of this case,
based on a favorable judgment in this case. Here, the Government seeks an amorphous
right to "indemnification" for insurance claims it has not yet had presented to it.
Contrary to the Government's arguments, in this case, merely expediting the
administration of the Government's future collection efforts and effecting a purely
hypothetical saving of future judicial resources are insufficient reasons to take the
18

extraordinary step of creating a right of "indemnification" out of whole cloth.
Accordingly, the Government's claims for "indemnification" (Claims 4 and 6) are
DISMISSED without prejudice. 45
B. FIRREA Claims
Defendants also seek dismissal the Government's claims for violations of § 1014
and § 1006 of FIRREA. Defendants argue that these claims should be dismissed because
(1) the Government exceeded its authorization from this Court to amend its Complaint by

bringing wholly new claims against Defendants; (2) the Government has brought claims
for violations of § 1014 based on conduct that occurred prior to the date the statute was
enacted; (3) the Defendants are not covered "persons" or entities under § 1006 of
FIRREA; (4) Hodge cannot be held liable under § 1014 because he did not personally
submit any false claims; (5) HUD acquiesced to the fraud "vitiat[ing] scienter or intent to
defraud" 46; and (6) the Government has failed to meet its burden to plead with
particularity under Rule 9(b). The Court will address each of these arguments in tum.

1. Leave to Amend
Federal Rule of Civil Procedure 15(a)(2) states, "The Court should freely give
leave when justice so requin:s." Consistent with this Rule, the Court previously dismissed
the Second Amended Complaint and did not place any restrictions on the Government's

In this opinion, the Court does not reach the issue of whether the Government may later
seek an equitable remedy to enforce a judgment, or whether the Government may bring
additional lawsuits against Defendants to recover any future damages.
46
Dkt. 108 at 11.
45

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leave to amend.

47

Defendants were allowed time to respond, and the additional claims-

which are grounded in the same underlying facts as the claims in the Second Amended
Complaint-do not constitute unfair surprise to Defendants. See Lyon v. Kohler Co.,
ClVA H-04-3533, 2006 WL 6549494 (S.D. Tex. May 25, 2006) (granting leave to amend
under Rule 15(a) in the absence of unfair surprise and bad faith).

Accordingly, the

Government did not abuse its leave to amend by alleging additional claims against
Defendants. The Defendants' Motion is DENIED on this point.
2. Liability under § 1014 of FIRREA

Next, Defendants argue that the Government's § 1014 claims are not "'legally
viable" and should be dismissed because these claims are based on statements made prior
to the statute's effective date of July 30, 2008. 48 On February 19,2014, the Court held a
hearing on the pending motions to dismiss. At the hearing, the Government stipulated
that it is only seeking to hold Defendants liable under § 1014 for representations made on
or after July 30, 2008. 49
3. Remaining Arguments

Defendants' remaining arguments are identical to those they previously asserted
with respect to the Second Amended Complaint. These arguments were each addressed in

47

Dkt. 95.
Dkt. 108 at 13-14.
49
Dkt. 129 at 49 . ("Your Honor, we will happily stipulate that § 1014 applies when it was
enacted, 2008 going forward.. We've stipulated that in our papers. There's no reason for this
Court to waste time on a Motion to Dismiss. We're stipulating it on the record. [Section] 1014
covers the period we all agree that it covers. ").
48

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detail in the Court's previous orders. 50 Defendants have not established any basis for the
Court to reconsider its previous rulings regarding these arguments. See FED. R. CIV. P.
59(e); In re Benjamin Moore & Co., 318 F.3d 626,629 (5th Cir. 2002).
The Court has already found that Allied Capital, Hodge, and Stell can be held
liable for violations of § 1006 as entities or individuals "connected in any capacity with"
HUD. 51 The Court has also held that the Complaint sufficiently alleges that Hodge is
personally liable under FIRREA for setting in motion the events that caused false entries
to be made. 52 Further, the Court has ruled that the "government knowledge defense"
does not vitiate Hodge and SteWs scienter. 53 Finally, the Court has held that the
Government's allegations-now even more elaborately pled in the Third Amended
Complaint-satisfied Rule 9(b)' s particularity requirement. 54 Accordingly, Defendants'
Motion to Dismiss based on these grounds is DENIED. See Dkt. 93, 94, 95.

50
51

52

53
54

Dkt.
Dkt.
Dkt.
Dkt.
Dkt.

93, 94, 95.
93 at 15, 17.; Dkt. 94 at 23-24.
93 at 15-16.
93 at 16.
93 at 16-18; Dkt. 94 at 24-26.
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CONCLUSION

Based on the foregoing, it is ORDERED that Defendants Allied Capital, Hodge,
and Stell's Motion to Dismiss be GRANTED in part and DENIED in part. Defendants'
Motion to Dismiss is GRANTED with respect to the Government's Claims 4 and 6, and
these claims are DISMISSED without prejudice. The Motion to Dismiss is DENIED
with respect to all other claims.
SIGNED at Houston, Texas on August 29,2014.

~Q:-JIa49t
GEORGE C. HANKS, JR.
UNITED STATES MAGISTRATE JUDGE

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