JESSE M. FURMAN, District Judge:
The United States brings this civil fraud action against Defendant Wells Fargo
For the most part, Wells Fargo's arguments are unavailing. As an initial matter, the consent judgment does not bar any of the Government's claims. Furthermore, the claims are pleaded with sufficient particularity to satisfy Rule 9(b). In addition, the federal statutory claims are sufficient to allege a plausible basis for relief under Rule 12(b)(6). And, on the current record, there is no basis to dismiss any of the statutory claims as untimely. Therefore, all of the Government's federal statutory claims may proceed. Many of the Government's common law claims, however, must be, and are, dismissed. In particular, any tort claims that arose before June 25, 2009, are time barred. Additionally, the Government's mistake of fact and unjust enrichment claims are dismissed in their entirety: Those arising before 2004 are untimely, and those arising thereafter are barred because the United States Department of Housing and Urban Development was aware of Wells Fargo's misconduct at the time. Accordingly, as explained in more detail below, Wells Fargo's motion is DENIED as to the Government's federal statutory claims and GRANTED in part and DENIED in part with respect to the Government's common law claims.
Unless otherwise stated, the following facts are taken from the Amended Complaint (Docket No. 22) and are assumed, for purposes of this opinion, to be true. See LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir.2009).
The United States Department of Housing and Urban Development ("HUD"),
One program through which FHA insures home mortgages is the Direct Endorsement Lender program. (Id. ¶ 15). Direct Endorsement Lenders ("lenders") are authorized to evaluate the credit risk of potential borrowers, underwrite mortgage loans, and certify those loans for FHA mortgage insurance "without prior HUD review or approval." (Id.). In doing so, these lenders are required to comply with regulations — including those found in HUD Handbooks and Mortgagee Letters — governing, among other things, the origination and underwriting of individual loans; the hiring, training, and compensation of underwriters; the monitoring and reporting of the quality of loans originated; and the submission of FHA claims for defaulted loans. (Id. ¶¶ 17-30, 37-43). Each lender is required to make an annual certification of compliance with the program's requirements. (Id. ¶ 37).
The claims at issue in this case arise from Wells Fargo's participation in the Direct Endorsement Lender program.
HUD requires Direct Endorsement Lenders to conduct due diligence before issuing FHA-insured mortgages. (Id. ¶¶ 19-20). In particular, when issuing a loan, an underwriter must "determin[e] a borrower's ability and willingness to repay a mortgage debt," and examine any "property offered as security for the loan to determine if it provides sufficient collateral." (Id. ¶ 19 (citing 24 C.F.R. §§ 203.5(d), (e)(3))). HUD provides specific requirements for how underwriters are to evaluate a borrower's credit risk and appraise mortgaged property. (Am. Compl. ¶¶ 21-23). These requirements specify, for example, the documents an underwriter must obtain from a potential borrower, the information the underwriter must request from the borrower, and the factors a lender is to consider in determining whether to issue a mortgage. (Id.). In making loan decisions, a Direct Endorsement Lender is required by law to "`exercise the same level of care which it would exercise in obtaining and verifying information for a loan'" that was not FHA-insured — that is, a loan where the lender was "`entirely dependent on the property as security to protect its investment.'" (Id. ¶ 19 (quoting 24 C.F.R. § 203.5(c))).
After each loan is issued, the lender must make several certifications regarding its compliance with HUD regulations. For example, if the loan was underwritten using an FHA-approved automated underwriting system, the lender must certify to "the integrity of the data" inputted into the system "to determine the quality of the loan," and it must certify "that a Direct Endorsement Underwriter reviewed the appraisal (if applicable)." (Am. Compl. ¶ 38 (internal quotation marks and brackets omitted)). If the loan was manually underwritten, the lender must certify that "the underwriter personally reviewed the appraisal report (if applicable), credit application, and all associated documents and has used due diligence in underwriting the mortgage." (Id. (internal quotation marks and brackets omitted)). In all cases, the underwriter must certify that he or she
If HUD discovers that a loan endorsed for FHA insurance is, in fact, ineligible to be insured, "HUD seeks indemnification from the Direct Endorsement Lender that certified the loan via an indemnification agreement whereby the lender agrees to indemnify HUD should claims for FHA insurance be submitted on that loan." (Id. ¶ 40).
In order to participate in the Direct Endorsement Lender program, lenders must implement a quality control system that is independent of the lender's loan origination and servicing departments. (Id. ¶ 24). HUD's quality control requirements mandate that, among other things, lenders review a random sample of loans each month to ensure they were underwritten in accordance with HUD requirements, and that they review all early payment defaults — that is, loans that default within the first six payments. HUD Handbook 4060.1 REV-2, ¶ 7-6. (See also Am. Compl. ¶ 24).
HUD provides a rating system by which lenders may evaluate the loans they review. (Id. ¶ 26). Loans with only minor or no violations of HUD's origination and servicing guidelines are rated low risk; those with violations, but none that is "material to creditworthiness, collateral security or insurability of the loan," are considered acceptable; mortgages with "significant unresolved questions or missing documentation" are labeled a "moderate risk to the mortgagee and FHA"; and mortgages that contain "material violations of FHA or mortgagee requirements... represent an unacceptable level of risk" and are labeled "material risk" loans. HUD Handbook 4060.1 REV-2, ¶ 7-4. (See also Am. Compl. ¶ 26). Lenders are required to report to FHA in writing any "material risk" mortgages they identify. HUD Handbook 4060.1 REV-2, ¶ 7-4. HUD also requires that lenders report any "`[s]erious deficiencies, patterns of non-compliance, or fraud'" they discover "within 60 days." (Am. Compl. ¶ 28 (quoting HUD Handbook 4060.1 REV-1, CHG-1, ¶ 6-13)). In addition to reporting these violations to HUD, quality control review findings must also be reported to lenders' "`senior management,'" which is required to "`take prompt action to deal appropriately'" with the problems. (Id. ¶ 30 (quoting HUD Handbook 4060.1 REV-2, ¶ 7-3(I))).
During the time period relevant to this case, Wells Fargo maintained a quality control program. (Id. ¶¶ 31-36). Through this program, the Bank conducted "monthly reviews of a random sample of loans originated ... within the prior 60 days," as well as "at least some portion of its [early payment defaults]." (Id. ¶ 31). In reviewing its loans, Wells Fargo largely adopted the rating system provided by the HUD Handbook. (Id. ¶ 32). Although not identical to that provided in the Handbook, Wells Fargo's definition of "material risk" loans "mirrored HUD's in substance, and made clear that a loan with that rating contained unacceptable risk and was ineligible for FHA insurance." (Id.). The findings of Wells Fargo's quality control
The Government alleges that between May 2001 and October 2005, "Wells Fargo engaged in a regular practice of reckless origination and underwriting of its [FHA-insured] loans and falsely certified to HUD that tens of thousands of those loans were eligible for FHA insurance." (Id. ¶ 44). In particular, the Government alleges that beginning in 2000, Wells Fargo significantly increased its origination of FHA-insured mortgages. (Id. ¶ 46). To do so, the Bank relied on inadequately trained employees (id. ¶¶ 46, 86); impermissibly paid its underwriters a bonus based on the number of loans they approved (id. ¶ 47); "applied heavy pressure on loan officers and underwriters to originate, approve, and close loans" (id. ¶ 48); "required underwriters to make decisions on loans on extremely short turnaround times" (id.); and "employed lax and inconsistent underwriting standards and controls" (id.).
As a result, "the quality of the bank's [FHA-insured home mortgage] loans dropped precipitously." (Id. ¶ 50). Underwriters were certifying as eligible for FHA insurance loans they knew or should have known were not so eligible. (Id. ¶ 140). Between May 2001 and January 2003, an average of 32.9% — that is, nearly a third — of the randomly sampled loans the Bank reviewed every month evidenced material violations of HUD regulations. (Id. ¶ 54).
Wells Fargo's Quality Assurance department reported these findings to the Bank's senior management. (Id. ¶ 50). The department warned the Bank's management that "heavy volume, pressure to approve loans and meet acceptable turn[around] times[,] along with inexperienced staff are key contributing factors overall to the issues leading to material findings." (Id. ¶ 85). Yet the Bank did almost nothing. (Id. ¶¶ 55, 85). It did not change its focus on high volume loan origination or its tactics for generating such volume; it did not prepare a written action plan to address the loans with material violations; it did little to no follow-up on these loans; it did not report the loans to HUD; and it did not document any corrective action that was taken. (Id. ¶¶ 55, 84-86). Despite knowing that a substantial portion — in some months, nearly half — of its loans issued between 2001 and 2005 evidenced material violations of HUD regulations, Wells Fargo nevertheless "certified its entire portfolio of retail FHA loans for insurance, and thereby falsely certified that thousands of retail FHA loans were eligible for insurance when they were not." (Id. ¶ 140; see id. ¶¶ 54, 84, 89).
Wells Fargo sold some of these FHA-insured loans to third parties "knowing" that those third parties would submit claims to HUD if the loans defaulted. (Id. ¶¶ 82, 117). But "for the vast majority of its retail FHA loans originated in this period," the Bank "remained the holder of record," and thus "was paid on claims for FHA insurance when those loans defaulted." (Id. ¶ 82; see id. ¶ 117).
HUD requires — and throughout the time period relevant to this lawsuit, required — Direct Endorsement Lenders to report to the agency any loans the lenders identify as materially violating FHA regulations. (Id. ¶ 121).
Of the 6,320 loans Wells Fargo failed to report, 1,443 defaulted. (Id. ¶ 135). Although a small fraction of these loans were sold to third parties, Wells Fargo was the holder of record for, and submitted claims for FHA insurance on, 97% of them. (Id.). The Government provides, as exhibits to its Amended Complaint, lists of the 6,320 "material risk" loans it alleges Wells Fargo failed to report; the 1,406 loans that defaulted and for which Wells Fargo submitted a claim for FHA insurance; and the 37 defaulted loans for which third parties submitted claims for FHA insurance. (Id. Exs. A-C).
The Government alleges that, as a result of Wells Fargo's reckless origination and underwriting, as well as the Bank's failure to report to HUD loans it identified as materially violating FHA regulations, Wells Fargo submitted claims for FHA insurance on thousands of defaulted mortgage loans that Wells Fargo knew, or should have known, were ineligible for such insurance. (E.g., id. ¶¶ 140, 147, 152, 159). The Government seeks treble its damages and civil penalties pursuant to the FCA, civil penalties under FIRREA, and compensatory damages for its common law claims. (Id. ¶¶ 144, 149, 156, 162, 167, 183, 190, 196, 199, 204, a-g). The specific amount of damages is to be determined at trial, but would presumably total hundreds of millions of dollars. (See id. ¶¶ 3, 5, 83, 119, 137).
Wells Fargo moves to dismiss the Amended Complaint on four grounds. First, it contends that the Government released the claims at issue here pursuant to a consent judgment entered in the United States District Court for the District of Columbia in a previous lawsuit. Second, the Bank asserts that many of the Government's FCA and common law claims are time barred. Third, Wells Fargo argues that the Amended Complaint fails to satisfy the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. And fourth, it contends that the Amended Complaint fails to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). The Court will address each argument in turn.
Wells Fargo argues first that the Government released the claims at issue here pursuant to a consent judgment entered on April 4, 2012, in the United States District Court for the District of Columbia. In that case, the Department of Justice ("DOJ"), forty-nine state attorneys general, and the attorney general for the District of Columbia sued several banks including Wells Fargo, alleging misconduct related to, among other things, the origination and servicing of FHA-insured mortgage loans. See United States v. Bank of America Corp., No. 12-361(RMC). As part of a settlement agreement, the Government and Wells Fargo agreed to the entry of a consent judgment, under which the United States released Wells Fargo from any civil claims under FIRREA or the FCA "where the sole basis for such claim or claims is that [Wells Fargo] ... submitted to HUD-FHA ... a false or fraudulent annual certification that the mortgagee had conformed to all HUD-FHA regulations necessary to maintain its HUD-FHA approval." (Baruch Decl. Ex. D, at F-17 (internal quotation marks and alteration omitted)).
When the Government filed the present lawsuit, Wells Fargo sought an order from the D.C. District Court enjoining this suit as prohibited by the terms of the release. That Court denied Wells Fargo's motion and rendered an interpretation of the consent judgment, see United States v. Bank of America, 922 F.Supp.2d 1 (D.D.C.2013), an interpretation the parties agree is binding in this case. (See Oral Arg. Tr. 3, 10, Apr. 17, 2013 (Docket No. 36)). The consent judgment, that Court held, is "clear and unambiguous." Bank of America, 922 F.Supp.2d at 10. "[W]ith regard to liability based on false certifications," the United States released:
Id. at 9. The Court clarified that while the Government released Wells Fargo from claims based solely on the annual certifications themselves, it did not release claims based on the underlying conduct that is the subject of such certifications. See id. Having so construed the consent decree, the D.C. Court left it to this Court to interpret the Amended Complaint in this case and to decide whether the Government's claims here are barred by the consent judgment.
Given the D.C. Court's construction of the consent decree, this Court easily concludes that the release does not bar the
Next, Wells Fargo contends that many of the Government's FCA and state common law claims are untimely. The Bank is correct with respect to many of the Government's common law claims, but there is no basis — at this stage of the case — to dismiss the Government's FCA claims as time barred. As relevant here, FCA claims may be brought within three years of the date that DOJ learned of the relevant facts underlying the claims, so long as they are brought within ten years of the date of the violation. Furthermore, the Wartime Suspension of Limitations Act (the "WSLA"), 18 U.S.C. § 3287, which was amended in 2008, tolled the statute of limitations for any claims that were still live at the time of the amendment. The Government alleges that DOJ did not learn of the facts at issue here until 2011. Assuming this allegation to be true — as the Court must — all of the Government's FCA claims were live as of 2008, were tolled by the WSLA at that point, and thus are timely now.
By contrast, the Government's common law tort claims are subject to a three year statute of limitations, and its quasi-contract claims are subject to a six year statute of limitations. The parties entered a tolling agreement that permits the Government to bring in this action any claims that were timely as of June 25, 2012. There is no other basis, however, to find that the statutes of limitations with respect to these common law claims was tolled. Accordingly, only those tort claims arising on or after June 25, 2009, and those quasi-contract claims arising on or after June 25, 2006, are timely.
The Court will begin its analysis with the FCA claims. Title 31, United States Code, Section 3731(b) provides that a claim under the FCA "may not be brought":
Citing Section 3731(b)(1), Wells Fargo argues that any FCA claims that accrued prior to June 25, 2006 — that is, six years before the parties' tolling agreement — are
With respect to its first argument, the Government contends that the Attorney General, or his designee within DOJ, is "the official of the United States charged with responsibility to act" on FCA claims. (Gov't Mem. 40-42). The Amended Complaint alleges that DOJ was unaware of "the facts material to its claims against Wells Fargo" until "2011, the year in which the United States Attorney's Office for the Southern District of New York ... commenced its investigation." (Am. Compl. ¶ 118). Therefore, the Government argues, pursuant to Section 3731(b)(2), its FCA claims were timely so long as they were brought within three years of the time the investigation began and within ten years of the parties' tolling agreement. (Gov't Mem. 40).
Wells Fargo, however, insists that the HUD Inspector General — who conducted an audit of Wells Fargo's FHA mortgage loan origination practices in July of 2004 (Baruch Decl. Ex. F) — "certainly" has responsibility to act in the face of mortgage fraud. (Wells Fargo Mem. 15 (Docket No. 27)). Therefore, Wells Fargo argues, the Government was required to bring its FCA claims by July 2007 — three years after the Inspector General became aware of Wells Fargo's purported misconduct — or six years after the claims arose, whichever is later. (Wells Fargo Mem. 13).
Section 3731(b)(2) was adapted from Title 28, United States Code, Section 2416(c), which provides that the statute of limitations generally applicable to claims brought by the United States shall exclude any time during which "facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances." 28 U.S.C. § 2416(c); see 132 Cong. Rec. 20,536 (1986) (statement of Sen. Charles Grassley) (stating that the FCA tolling provision "is adopted directly" from 28 U.S.C. § 2416(c)). Because the FCA has its own statute of limitations, it is not subject to the statute of limitations generally applicable to Government claims or the provisions, including Section 2416, tolling that statute of limitations. See 28 U.S.C. § 2415 (stating that the statute of limitations provided therein applies to claims of the United States "except as otherwise provided by Congress"). Therefore, Congress amended the FCA to provide for similar tolling. See, e.g., False Claims Act Amendments: Hearings Before the Subcomm. on Admin. Law and Governmental Relations of the H. Comm.
Courts have repeatedly held that Section 2416(c) applies to officials other than those at DOJ. See, e.g., United States v. Bollinger Shipyards, Inc., No. 12-920, 2013 WL 393037, at *14 (E.D.La. Jan. 30, 2013); United States ex rel. Wilkins v. North Am. Constr. Corp., No. Civ. A. 95-5614, 2001 WL 34109383, at *4 (S.D.Tex. Sept. 26, 2001); United States v. Stella Perez, 956 F.Supp. 1046, 1058 (D.P.R.1997). It does not necessarily follow, however, that Section 3731(b)(2), the FCA tolling provision, applies as broadly. Section 2416(c), after all, extends to all government claims (unless otherwise specified by Congress), including claims that may be brought by agencies other than DOJ. See Bollinger Shipyards, 2013 WL 393037, at *13 (collecting cases). By contrast, the only official authorized to bring an FCA claim is the Attorney General (or his designee within DOJ). See 31 U.S.C. § 3730; 28 C.F.R. § 0.45(d); see also Martin J. Simko Constr., Inc. v. United States, 852 F.2d 540, 547 (Fed.Cir.1988) ("[T]he Attorney General is specifically authorized to administer [FCA] claims for the government. No other agency is empowered to act under the statute."); United States ex rel. Barajas v. Northrop Corp., 65 F.Supp.2d 1097, 1102 (C.D.Cal. 1999) (similar); Ohio Hosp. Ass'n v. Shalala, 978 F.Supp. 735, 739 (N.D.Ohio 1997) (similar); Jana, Inc. v. United States, 34 Fed.Cl. 447, 451 n. 6 (Fed.Cl.1995) (similar).
Indeed, although other agencies are permitted to settle certain claims, they are expressly prohibited from compromising fraud claims. See 31 U.S.C. § 3711(b)(1). Furthermore, while Section 2416(c) provides for tolling until "an official ... charged with the responsibility to act" is apprised of the material facts, 28 U.S.C. § 2416(c) (emphasis added), Section 3731(b)(2) applies where "the official of the United States charged with responsibility to act" is reasonably unaware of the relevant facts, 31 U.S.C. § 3731(b)(2) (emphasis added). On its face, then, Section 3731(b)(2) contemplates only one relevant official. The law is clear that that official is the Attorney General.
The majority of other courts that have considered this issue have reached the same conclusion. See, e.g., United States v. Carell, 681 F.Supp.2d 874, 881 (M.D.Tenn.2009); United States v. Tech Refrigeration, 143 F.Supp.2d 1006, 1009 (N.D.Ill.2001); Jana, Inc. v. United States, 34 Fed.Cl. 447, 451 n. 6 (1995); United States v. Incorporated Vill. of Island Park, 791 F.Supp. 354, 363 (E.D.N.Y.1992) ("Island Park"). For the contrary proposition, Wells Fargo cites United States ex rel. Kreindler & Kreindler v. United Techs. Corp., 777 F.Supp. 195 (N.D.N.Y. 1991), in which the district court held that
In sum, both the statutory text and the weight of authority support the conclusion that the only government "official ... charged with responsibility to act" under the FCA is the Attorney General (or his designee within DOJ). It follows that the Government's FCA claims are timely so long as they are: (1) filed within either six years of the underlying violation or three years of the date DOJ knew or reasonably should have known of the facts material to the claim, whichever is later; and (2) filed no later than ten years from the date on which the underlying violation was committed. The Government alleges that DOJ was unaware of the material facts underlying this action until 2011. Given the purported widespread dissemination of the 2004 HUD audit of Wells Fargo and its subsequent report to Congress, Wells Fargo contends that the facts underlying this action "`reasonably should have been known' to the Justice Department" in 2004, even if DOJ did not have actual knowledge. (Wells Fargo Mem. 15-16 (quoting 31 U.S.C. § 3731(b)(2))). But the extent of the audit's dissemination and, thus, the question of whether DOJ knew or should have known of its findings is a question of fact that is not properly resolved at this stage. See, e.g., United States v. BNP Paribas SA, 884 F.Supp.2d 589, 600 (S.D.Tex.2012) (holding that where the complaint alleges some basis for tolling, whether the material facts were known or should have been known by the responsible officials is a question of fact). Therefore, for purposes of this motion, the
As noted above, the parties entered a tolling agreement that permits the Government to bring any claims that were timely as of June 25, 2012. (Wells Fargo Mem. 13 n. 11) On the current record, then, any claims based on FCA violations arising after June 25, 2002 would appear to be timely. By contrast, any claims based on violations before that date would seem to be untimely, unless there was some basis to toll the statute of limitations.
That brings the Court to the WSLA. To the extent relevant here, the WSLA suspends the statute of limitations for offenses involving fraud against the United States when the country is at war or Congress has enacted a specific authorization for the use of the Armed Forces. See 18 U.S.C. § 3287. The Government argues that even if some of its FCA claims arose prior to June 25, 2002, they are nevertheless timely because the WSLA tolled the statute of limitations for claims that were live as of October 14, 2008, the date upon which the WSLA was amended to make clear that the Act applied to congressional authorizations for the use of force. (See Gov't Mem. 46-48). The Court agrees. Because, as explained above, there is no reason at this stage to believe that the Attorney General knew or should have known of the facts at issue here until 2011, pursuant to Section 3731(b)(2), any claims that arose within ten years of October 14, 2008 — that is, all of the Government's claims — were presumably live as of that date and thus tolled by WSLA.
Prior to 2008, the WSLA provided as follows:
18 U.S.C. § 3287 (2006). On October 14, 2008, Congress amended the Act, expanding its application to cover periods "[w]hen the United States is at war or Congress
In light of the 2008 amendment, there is no dispute that the WSLA is now in effect as to offenses "involving fraud or attempted fraud against the United States or any agency thereof." After all, on September 18, 2001, Congress authorized the use of military force "against those responsible for" for the September 11, 2001 terrorist attacks, see Authorization for Use of Military Force, Pub. L. No. 107-40, 115 Stat. 224 (2001); and on October 16, 2002, Congress authorized the use of military force in Iraq, see Authorization for Use of Military Force Against Iraq Resolution of 2002, Pub. L. No. 107-243, 116 Stat. 1498. Additionally, there has been neither a Presidential proclamation, with notice to Congress, nor a congressional resolution suspending hostilities. Nevertheless, Wells Fargo argues that the WSLA should not be applied to the Government's claims in this case for four reasons: (1) because the 2008 amendment may not be "retroactive[]"; (2) because the claims do not "involv[e] fraud" within the meaning of the WSLA; (3) because the WSLA applies only to criminal offenses, not civil claims; and (4) because the Act does not extend to claims that are unrelated to wartime contracting. (See Reply 8-9 (Docket No. 31); Oral Arg. Tr. 17-24). These arguments are unpersuasive.
First, Wells Fargo suggests that "it is by no means clear" that the 2008 amendment "can be applied retroactively." (Reply 9). "[W]here, as here," however, a "new rule" does not "alter[] substantive rights," but rather "announces a period of limitations, the conduct to which it refers is the plaintiff's conduct relating to the filing of the claim and not the defendant's conduct giving rise to the claim." Walsche v. First Investors Corp., 981 F.2d 649, 654 (2d Cir.1992). Therefore, "applying a new or amended statute of limitations to ... a cause of action filed after its enactment, but arising out of events that predate its enactment, generally is not a retroactive application of the statute." Vernon v. Cassadaga Valley Cent. Sch. Dist., 49 F.3d 886, 889 (2d Cir.1995). The applicable statute of limitations governing a lawsuit is thus that which is in effect at the time the lawsuit is filed. See id.
As Wells Fargo conceded at oral argument (Oral Arg. Tr. 15), the 2008 WSLA amendment therefore applies to any claims for which the statute of limitations had not yet run at the time of its passage. See BNP Paribas SA, 884 F.Supp.2d at 607-8; see also United States v. Kozeny, 541 F.3d 166, 172 (2d Cir.2008) ("[A] district court can suspend the running of a statute of limitations ... only if the limitations period has not yet expired." (internal quotation marks and brackets omitted)). Here, the earliest fraudulent conduct alleged by the
Second, Wells Fargo argues that the offenses alleged by the Government do not "involve[e] fraud or attempted fraud against the United States" within the meaning of the WSLA. (Reply 9; Oral Arg. Tr. 19-20). Although its plain text suggests that the Act applies to all frauds, the Supreme Court has held otherwise. See Bridges v. United States, 346 U.S. 209, 73 S.Ct. 1055, 97 L.Ed. 1557 (1953). Under Bridges, the WSLA only applies to offenses: (1) of "a pecuniary nature or of a nature concerning property," id. at 216, 73 S.Ct. 1055; (2) "in which defrauding or attempting to defraud the United States is an essential ingredient of the offense charged," id. at 221, 73 S.Ct. 1055 (internal emphasis omitted). The fraud at issue here — the submission to HUD of false claims for payment — is certainly of a pecuniary nature. Wells Fargo, however, argues that "defrauding or attempting to defraud the United States" is not an "essential ingredient" of some of the Government's FCA claims — in particular, those based on allegations that Wells Fargo encouraged the reckless origination of loans without regard to HUD regulations, knowing that such conduct would lead to the submission of loans to FHA that did not qualify for FHA insurance. (Oral Arg. Tr. 19-20).
This argument is foreclosed by the Supreme Court's decision in United States v. Grainger, 346 U.S. 235, 73 S.Ct. 1069, 97 L.Ed. 1575 (1953), which held that an FCA violation constitutes fraud within the meaning of the WSLA. Id. at 243, 73 S.Ct. 1069. In arguing otherwise, Wells Fargo contends that the mens rea requirement for FCA claims is now broader than it was when Grainger was decided. (Oral Arg. Tr. 19-20). At the time Grainger was decided, the FCA prohibited only those claims that were submitted "`knowing such claim to be false, fictitious, or fraudulent.'" Grainger, 346 U.S. at 241, 73 S.Ct. 1069 (quoting 18 U.S.C. § 287 (1952)) (emphasis added). Such claims, the Grainger
Citing this change, Wells Fargo argues that false statements made in reckless disregard of the truth do not constitute "fraud against the United States" as defined by Bridges. (Reply 9). But the Bank does not cite — and the Court has not found — any authority that would support drawing a distinction between false statements made in reckless disregard for the truth and false statements made with actual knowledge of their falsity. Grainger itself did not make any such distinction. See Grainger, 346 U.S. at 242-43, 73 S.Ct. 1069 (holding that the "making of claims upon the Government for payments induced by knowingly false representations.... involv[es] the element of deceit that is the earmark of fraud" without specifying a particular definition of knowingly). And courts have repeatedly defined fraud to include not only false representations made with "knowledge of the falsity," but also those made with "a reckless disregard for the truth." Conn. Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987); see, e.g., Cohen v. S.A.C. Trading Corp., 711 F.3d 353, 359 (2d Cir.2013); Caputo v. Pfizer, Inc., 267 F.3d 181, 191 (2d Cir. 2001); see also Grainger, 346 U.S. at 244, 73 S.Ct. 1069 ("The combination of either falsity, fiction or fraud with the claim is enough."). Notably, Wells Fargo itself states that the claims against it "sound in fraud." (Wells Fargo Mem. 17). The Government's FCA claims thus constitute fraud within the meaning of the WSLA.
Third, Wells Fargo contends that the WSLA applies only to criminal offenses. (Reply 8-9). As originally promulgated, the WSLA did indeed apply only to crimes. Specifically, it suspended the statutes of limitations for any "offenses involving the defrauding or attempts to defraud the United States ... now indictable under any existing statutes." Dugan & McNamara, Inc. v. United States, 127 F.Supp. 801, 802 (Ct.Cl.1955) (internal quotation marks omitted) (emphasis added); see Halliburton, 710 F.3d at 179. In 1944, however, the "indictable under any existing statutes" language was removed. See Halliburton, 710 F.3d at 179. As currently enacted, then, the statute applies to "any offense ... involving fraud or attempted fraud against the United States." 18 U.S.C. § 3287 (emphasis added). As the Fourth Circuit recently held, this change indicates that Congress intended to broaden the statute's application to civil, as well as criminal, offenses. See Halliburton, 710 F.3d at 179-80; see also United States v. Wiesner, 216 F.2d 739, 741 (2d Cir.1954) (holding in the context of a different statute that "any offense which by act of Congress is prohibited in the interest of the public policy of the United States, although not ... punishable by criminal prosecution, but only by suit for penalty, is ... an offense against the United States" (internal quotation marks omitted)). With the exception of a 1952 Northern District of Alabama case, all courts that have considered the issue have agreed with the Fourth Circuit and concluded that the WSLA now applies to civil claims. See, e.g., Halliburton, 710 F.3d at 180 (collecting
Finally, Wells Fargo suggests that, even if the WSLA applies in the civil context to claims of the sort at issue here, it should not apply "to matters involving domestic mortgage loan practices, having nothing to do with wartime contracting." (Reply 9). At oral argument, the Bank went even further, suggesting that the actual text of the WSLA might limit the statute to offenses related to the war. (Oral Arg. Tr. 22-23). Not so. By its plain terms, the WSLA applies to three kinds of offenses: (1) fraud against the United States; (2) offenses related to "any real or personal property of the United States"; and (3) offenses "committed in connection with ... any contract, subcontract, or purchase order which is connected with or related to the prosecution of the war or directly connected with or related to the authorized use of the Armed Forces, or with any disposition of termination inventory by any war contractor or Government agency." 18 U.S.C. § 3287. Wells Fargo suggests that the phrase "which is connected with or related to the prosecution of the war" limits not just the third category of offenses to which WSLA applies, but also the two preceding categories. (Oral Arg. Tr. 23). Such an interpretation, however, would violate "the grammatical rule of the last antecedent," Barnhart v. Thomas, 540 U.S. 20, 26, 124 S.Ct. 376, 157 L.Ed.2d 333 (2003) (internal quotation marks omitted), pursuant to which "a limiting clause or phrase ... should ordinarily be read as modifying only the noun or phrase that it immediately follows," Decker v. Nw. Envtl. Def. Ctr., ___ U.S. ___, 133 S.Ct. 1326, 1343, 185 L.Ed.2d 447 (2013) (internal quotation marks omitted).
There is no basis to disregard that rule here. Among other things, applying the WSLA to all frauds against the United States, including those unrelated to the war, accords with the purpose of the Act. The WSLA serves not only to allow the Government to combat fraud related to wartime procurement programs, but also "to give the government sufficient time to investigate and prosecute pecuniary frauds" of any kind "committed while the nation [is] distracted by the demands of war." Prosperi, 573 F.Supp.2d at 449; see United States v. Smith, 342 U.S. 225, 228, 72 S.Ct. 260, 96 L.Ed. 252 (1952) (explaining that one purpose of WSLA "is that offenses occurring prior to the termination of hostilities shall not be allowed legally to be forgotten in the rush of the war activities"). Courts, including the Supreme Court in Grainger, have routinely applied the WSLA to fraud having nothing to do directly with the prosecution of war or the military. See, e.g., Grainger, 346 U.S. at 237-38, 73 S.Ct. 1069; Stryker Corp., 2013 WL 2666346, at *15; BNP Paribas SA, 884 F.Supp.2d at 593. In short, "it makes no difference that the fraud in this case [was] ... unrelated to the Iraqi or Afghani conflicts. In the few cases since Grainger in which the government has successfully invoked the Suspension Act, the absence of a connection between the fraud and wartime procurement has played no part." Prosperi, 573 F.Supp.2d at 442.
In sum, the WSLA applies to the FCA claims in this case. Accordingly, any claims that were live as of October 14, 2008, when the WSLA was amended to apply to congressional authorizations for the use of military force, are timely. Given the Court's holding above that the Government
By contrast, many of the Government's common law claims are time barred. The Government alleges tort claims (breach of fiduciary duty, negligence, and gross negligence) as well as quasi-contract claims (unjust enrichment and mistake of fact). As the Government concedes, the WSLA does not apply to these claims (nor, of course, do the statute of limitations provisions of the FCA). (See Oral Arg. Tr. 33). Instead, the statute of limitations for the Government's tort claims is three years, and the statute of limitations for its quasi-contract claims is six years. See 28 U.S.C. § 2415. Thus, any of the Government's breach of fiduciary duty, gross negligence, or negligence claims that arose prior to June 25, 2009 (three years before the tolling agreement) and any of its unjust enrichment or mistake of fact claims that arose prior to June 25, 2006 (six years before the tolling agreement) would appear to be time barred.
In arguing otherwise, the Government relies on Title 28, United States Code, Section 2416(c), which, as noted above, exempts from the statute of limitations for claims brought by the Government "all periods during which ... facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances." (Gov't Mem. 64-65 n. 34). Based on this provision, the Government contends, the common law claims are timely "for the same reasons set forth with respect to the FCA claims." (Id.).
This argument does not survive scrutiny. As explained above, while the only relevant government official for purposes of the FCA's tolling provision is the Attorney General, any number of officials may constitute "an official of the United States charged with the responsibility to act" within the meaning of Section 2416(c). As relevant here, the HUD Inspector General is plainly one such official. See, e.g., 5 U.S.C. app. 3 § 4 (charging "each Inspector General" with, among other things, "preventing and detecting fraud and abuse" and aiding in the "identification and prosecution of participants in such fraud and abuse"); Island Park, 791 F.Supp. at 372 ("As a general proposition, the responsible official would be the official who is also responsible for the activity out of which the action arose." (internal quotation marks omitted)).
Additionally, the 2004 audit report produced by the HUD Inspector General is plainly sufficient to demonstrate that the relevant facts underlying this action were known to him by 2004.
(Id.). In other, words, the audit discovered precisely the sort of misconduct alleged in this lawsuit. At a minimum, therefore, the HUD Inspector General was privy to "sufficient critical facts to cause a reasonable person to investigate" the possibility of bringing common law claims. United States ex rel. Frascella v. Oracle Corp., 751 F.Supp.2d 842, 852 (E.D.Va.2010) (internal quotation marks omitted).
In short, Section 2416(c) provides no support for the Government's arguments with respect to the timeliness of its common law claims. Accordingly, any and all of its tort claims that arose prior to June 25, 2009, and any and all of its quasi-contract claims that arose prior to June 25, 2006, are untimely and dismissed.
Next, Wells Fargo argues that the Government's fraud claims should be dismissed for failure to satisfy the requirements of Rule 9(b).
Generally, to satisfy Rule 9(b), a complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements
Applying these standards here, the allegations in the Amended Complaint are sufficient to satisfy Rule 9(b). The Government in this case alleges that Wells Fargo engaged in two schemes involving thousands of false or fraudulent claims over a period of almost ten years: (1) "Wells Fargo's reckless underwriting and certification of loans for FHA insurance from May 2001 through October 2005"; and (2) "the bank's knowing failure to report to HUD as required FHA loans with material underwriting violations from 2002 through 2010." (Gov't Mem. 19; see Am. Compl. ¶¶ 45, 82, 147, 170). In these circumstances, it would be impractical, if not impossible, to require that the Government plead the details of each and every false claim.
Instead, the Government may plead each scheme "with particularity, and provide[] examples of specific false claims submitted to the government pursuant to that scheme." Bledsoe, 501 F.3d at 510; see also, e.g., United States v. Rogan, 517 F.3d 449, 453 (7th Cir.2008) (rejecting the argument that "the district judge had to address each of the 1,812 claim forms" at issue and holding that "[s]tatistical analysis should suffice"); Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 920 F.Supp.2d 475, 512 (S.D.N.Y.2013) (holding that the plaintiff could use statistical sampling to prove liability). Such examples, however, "will support more generalized allegations of fraud only to the extent that [they] are representative samples of the broader class of claims." Bledsoe, 501 F.3d at 510. If the examples are sufficiently representative, "the defendant will, in all likelihood, be able to infer with reasonable accuracy the precise claims at issue by examining the ... representative samples, thereby striking an appropriate balance between affording the defendant the protections that Rule 9(b) was intended to provide and allowing [plaintiffs] to pursue complex and far-reaching fraudulent schemes without being subjected to onerous pleading requirements." Id. at 511.
The Government's allegations satisfy these standards. With respect to the reckless origination scheme, the Government specifically alleges the practices by which Wells Fargo sought to increase its loan originations without regard to whether the practices or the loans themselves complied with HUD regulations (Am. Compl. ¶¶ 44-49, 85-86); the resulting increase in loans that evidenced material violations of these regulations (id. ¶¶ 50, 52-54, 84, 87-89); Wells Fargo's decision
These examples, drawn from throughout the time period the Government alleges the reckless origination scheme occurred, appear sufficient "in all material respects, including general time frame, substantive content, and relation to the allegedly fraudulent scheme, ... such that a materially similar set of claims could have been produced with a reasonable probability by a random draw from the total pool of all claims." Bledsoe, 501 F.3d at 511. Combined with the allegations setting forth in detail the reckless origination scheme, they are, therefore, sufficient to satisfy Rule 9(b). See, e.g., State Farm, 589 F.Supp.2d at 237-38 (holding that a complaint that described in detail the fraudulent scheme alleged and provided examples of "many specific claims that plaintiff allege[d] were fraudulent" satisfied rule 9(b)); Carey v. Berisford Metals Corp., 90 Civ. 1045(JMC), 1991 WL 44843, at *5 (S.D.N.Y. Mar. 28, 1991) (holding that where a fraudulent scheme is pleaded with sufficient particularity to "give [the defendant] fair notice of the claim asserted," the pleading of "a few examples" of the allegedly false or fraudulent claims submitted as a result of that scheme is sufficient); see also Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.1999) ("A court should hesitate to dismiss a complaint under Rule 9(b) if the court is satisfied (1) that the defendant has been made aware of the particular circumstances for which [it] will have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery evidence of those facts.").
The allegations regarding the second scheme — the Bank's alleged failure between 2002 and 2010 to report loans with material underwriting violations to HUD — even more clearly satisfy Rule 9(b). The Government has pleaded with particularity HUD's quality control and self-reporting requirements (Am. Compl. ¶¶ 24-30);
Wells Fargo's counterarguments are unavailing. First, Wells Fargo suggests that in order to meet the requirements of Rule 9(b), the Government must identify, among other things, each loan for which a false or fraudulent claim for payment was allegedly submitted, the relevant material violation of HUD-FHA requirements contained in the loan, and the Wells Fargo staff member who submitted or certified the loan. (Wells Fargo Mem. 21-22; Reply 11). But, as explained above, given the breadth and length of the schemes alleged in the Amended Complaint, the Government need not plead the details of every false or fraudulent claim Wells Fargo allegedly submitted. Instead, it need only plead the schemes with particularity and provide representative examples of claims submitted as a result. It has done so. The contention that the Government must identify the particular employee responsible for submitting or certifying each loan is also incorrect. Where a plaintiff "has alleged that [a] corporation has committed... fraudulent acts, it is the identity of the corporation, not the identity of the natural person, that the [plaintiff] must necessarily plead with particularity." Bledsoe, 501 F.3d at 506; see United States v. Huron Consulting Grp., Inc., 09 Civ. 1800(JSR), 2011 WL 253259, at *2 & n. 3 (S.D.N.Y. Jan. 24, 2011) (citing Bledsoe and denying a motion to dismiss a complaint, even though the plaintiff did not plead the identity of specific employees of the defendant corporation).
Next, citing Black's Law Dictionary, the Bank contends that the reckless underwriting and origination scheme cannot be considered a "scheme" at all, because a scheme is an "artful plot," intentionally planned, and cannot be undertaken recklessly. (Reply 10). This argument is little more than sophistry. The Government does allege that Wells Fargo intentionally increased its volume of loan origination, in part through conduct that violated HUD regulations, recklessly disregarding the consequences — a substantial quantity of loans that contained material violations of HUD regulations and therefore were ineligible for FHA insurance. (Am. Compl.
United States ex rel. Cericola v. Fed. Nat'l Mortg. Assoc., 529 F.Supp.2d 1139 (C.D.Cal.2007), which Wells Fargo cites in support of its arguments (Wells Fargo Mem. 23-24), does not call for a different result. In that case, the plaintiff-relator alleged that the Federal National Mortgage Association ("Fannie Mae") submitted thousands of claims for HUD insurance to the Government, knowing that the loans for which the claims were submitted were ineligible for such insurance. See id. at 1143. The only examples of allegedly false claims provided in the complaint, however, were for loans for which the plaintiff explicitly stated that she was not seeking recovery. See id. at 1143-44. The complaint provided no examples of false claims for which the plaintiff sought recovery. See id. at 1144. The complaint at issue in Cericola, then, alleged a fraudulent scheme, but it did not provide any specific examples of false claims submitted as a result of that scheme. That is not the case here.
For similar reasons, United States v. Countrywide Fin. Corp., 961 F.Supp.2d 598, 2013 WL 4437232 (S.D.N.Y. Aug. 16, 2013), is also inapposite. In that case, the Government brought FCA claims against Bank of America alleging that the bank had engaged in fraud and made false representations in connection with the sale of loans to Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Government's complaint alleged with sufficient particularity a fraudulent scheme as well as seven representative examples of loans that were defective as a result of that scheme. See id. at 606, at *6. The problem, however, was that Bank of America had not issued the loans the Government alleged were fraudulent. See id. at 609, at *9. Instead, it had acquired the company that issued the loans. See id. There were no allegations that the fraudulent scheme continued after the acquisition, and the Government failed to plead the details of any allegedly fraudulent loans submitted after the acquisition. See id. Accordingly, the Court held that the Government's amended complaint "include[d] no particular and reliable indicia that might permit an inference that loans tainted" by the allegedly fraudulent scheme "were sold to Fannie Mae and
Thus, with respect to both the reckless origination and the failure to self-report schemes, the Amended Complaint alleges the circumstances constituting fraud with sufficient particularity to satisfy Rule 9(b). Wells Fargo, however, contends that even if the Government has sufficiently alleged the fraud itself, it has failed to allege scienter with the requisite particularity. (Wells Fargo Mem. 22). Under Rule 9(b), "plaintiffs must allege facts that give rise to a strong inference of fraudulent intent." Acito v. IMCERA Grp., Inc. 47 F.3d 47, 52 (2d Cir.1995). This inference "may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id. Here, the Government has done both. The Government alleges that Wells Fargo submitted claims to HUD for insurance on defaulted loans it knew contained material violations of HUD requirements, and withheld information about these violations in order to gain payment from HUD and avoid having to indemnify the agency. (Am. Compl. ¶¶ 152-154, 160). In addition, the Government alleges that Wells Fargo's practices aimed at increasing its loan origination evidenced at the very least recklessness and possibly conscious misbehavior. (Id. ¶¶ 140-42, 147). These allegations are sufficient to "give rise to a strong inference of fraudulent intent."
Finally, Wells Fargo argues that most of the Government's claims should be dismissed, pursuant to Rule 12(b)(6), for failure to state a claim upon which relief can be granted. (Wells Fargo Mem. 24, 35, 46). First, the Bank argues that the Government's FCA claims fail because none of the regulations with which the Government alleges Wells Fargo falsely certified compliance are, according to Wells Fargo, conditions of receiving payment on FHA insurance claims. Furthermore, Wells Fargo contends that even if the Government has adequately alleged that the Bank submitted false or fraudulent claims, it has not sufficiently pleaded that such claims caused the Government's damages in the form of FHA insurance payments on defaulted loans. As explained below, the Court rejects both of these arguments. The Government has sufficiently pleaded that Wells Fargo falsely certified compliance with FHA regulations upon which
Next, Wells Fargo contends that most of the Government's FIRREA claims should be dismissed because the statute does not prohibit the kind of misconduct the Government alleges. In particular, Wells Fargo argues that Title 18, United States Code, Section 1005, upon which the Government bases one of its FIRREA claims, prohibits only fraud committed by bank insiders, not that committed by a bank itself. And Title 12, United States Code, Section 1833a(c)(2), which prohibits certain false statements and fraud that "affect[] a federally insured financial institution," the Bank contends, cannot be applied to the conduct alleged here because the statute does not contemplate liability where the affected financial institution and the institution alleged to have perpetuated the fraud are the same entity. Both of these arguments fail. For the reasons articulated below, a plain reading of the text of FIRREA makes clear that the provisions the Government alleges Wells Fargo has violated do indeed prohibit the alleged misconduct.
Finally, Wells Fargo argues that the Government's common law claims fail as a matter of law. The Government's breach of fiduciary duty claim, the Bank contends, must fail because there was no fiduciary duty between Wells Fargo and HUD. But whether such a duty existed is a question of fact. Therefore, the breach of fiduciary duty claim cannot be dismissed at this stage of the litigation. By contrast, the Government's quasi-contract claims, for unjust enrichment and mistake of fact, are dismissed, because the HUD Inspector General was aware of the facts underlying the claims at issue when HUD paid the relevant FHA insurance claims.
To survive a Rule 12(b)(6) motion, a plaintiff must generally plead sufficient facts "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible "when the plaintiff pleads 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "The plausibility standard is not akin to a probability requirement, but it" does require "more than a sheer possibility that a defendant has acted unlawfully." Id. (internal quotation marks omitted). A complaint that offers only "labels and conclusions" or "a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. If the plaintiff has not "nudged [his or her] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Id. at 570, 127 S.Ct. 1955. The Government's FCA, FIRREA, and common law tort claims satisfy these standards. Its common law quasi-contract claims do not.
Wells Fargo argues, first, that the Government has failed to state an FCA claim because none of the false or fraudulent claims alleged in the Amended Complaint is cognizable under the FCA, and because the Government has not sufficiently alleged that any false or fraudulent claim caused the Government's loss. Neither argument is availing.
As relevant here, the FCA imposes liability upon any person who "knowingly presents, or causes to be presented, a false or fraudulent claim" to the Government or "knowingly makes, uses, or causes to be made or used, a false record or statement material" to such a claim. 31 U.S.C. § 3729(a)(1) (2006); 31 U.S.C. § 3729(a)(1)(A); id., § 3729(a)(1)(B).
More specifically, two theories of FCA liability are relevant here: false certifications and fraudulent inducement. Under the former — which is the principal focus of the parties in their briefing — there are three kinds of false certifications that can lead to liability under the Act. The most straightforward is a certification that is factually false, "which involves an incorrect description of goods or services provided or a request for reimbursement for goods or services never provided." Mikes, 274 F.3d at 697. In addition, however, the FCA also prohibits certifications that are legally false — that is, false representations of compliance with a federal statute, regulation, or contractual term. See id. at 696. Legally false certifications may, in turn, be express, or they may be implied by submission of the claim itself. See id. at 698-99 (explaining that "[a]n expressly false claim is, as the term suggests, a claim that falsely certifies compliance with a particular statute, regulation or contractual term," whereas "[a]n implied false certification claim is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment"). A legally false claim — express or implicit — is only actionable under the FCA "where a party certifies compliance with a statute or regulation as a condition to governmental payment." Mikes, 274 F.3d at 697.
The second theory of liability — fraudulent inducement — stems from United States ex rel. Marcus v. Hess, 317 U.S. 537, 542-43, 63 S.Ct. 379, 87 L.Ed. 443 (1943), in which the Supreme Court considered whether otherwise valid claims submitted pursuant to contracts defendants obtained through impermissible collusive bidding were fraudulent within the meaning of the FCA. The Court held that because the contracts were "induced by the [defendants'] frauds," claims for payment based on those contracts were also fraudulent. Id. at 542-43, 63 S.Ct. 379. "The government's money," the Court explained, "would never have been" paid to the defendants "had its agents known the bids were collusive." Id. at 543, 63 S.Ct. 379. In other words, the defendants' "fraud did not spend itself with the execution of the contract.... The initial fraudulent action and every step thereafter taken, pressed ever to the ultimate goal — payment of government money to persons who had caused it to be defrauded." Id. at 543-44, 63 S.Ct. 379. Based on this reasoning, courts have repeatedly held that the "use of fraudulent information to induce the Government to provide a loan guarantee" or other contract "constitutes a false claim under the FCA." United States v. Eghbal, 548 F.3d 1281, 1283 (9th Cir. 2008); see, e.g., United States ex rel. Longhi v. Lithium Power Techs., 575 F.3d 458, 467-68 (5th Cir.2009); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 787 (4th Cir.1999); United States v. Veneziale, 268 F.2d 504, 505 (3d Cir.1959); see also United States ex rel. Feldman v. Van Gorp, 697 F.3d 78, 91 (2d Cir.2012) (explaining the fraudulent inducement theory of FCA liability); S.Rep. No. 99-345, at 9 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5274 ("[E]ach and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim."). Indeed, in Eghbal, the Ninth Circuit held that where HUD is fraudulently induced to insure a mortgage that does not qualify for HUD insurance, otherwise valid claims submitted on that loan when it defaults constitute false claims under the FCA. See 548 F.3d at 1282-83.
The Government has adequately alleged liability under both theories. Turning first to the reckless underwriting
Alternatively, the reckless underwriting and origination claim may also be understood as a legally false certification claim.
Wells Fargo's arguments to the contrary are premised on a misunderstanding of the Government's claim. In the Bank's view, the Government's claim is that implied in the individual loan applications are certifications of company-wide compliance with the quality control and self-reporting requirements for participation in the Direct Endorsement Lender program. (See Wells Fargo Mem. 25-29). Even if false, the Bank contends, such implied certifications cannot be the basis for FCA liability
The Government's second set of allegations — that Wells Fargo knowingly failed to report to HUD as required FHA loans with material underwriting violations — state a claim based on the implied legal certification theory of FCA liability. After all, implicit in the submission of a claim for payment on a defaulted loan is a certification that the loan complies with the core eligibility requirements of HUD insurance. See Feldman, 808 F.Supp.2d at 652 (explaining that implicit in the submission of a claim for payment is "compliance with certain core, specific legal requirements"). By definition, material violations are violations of HUD requirements, "which, if the government knew they were not being followed, might cause it to actually refuse payment." Conner, 543 F.3d at 1220. Wells Fargo rated as containing "material" risks those loans that "contain[ed] significant deviations from the specific loan program parameters under which [they were] originated, making the loan ineligible for sale to [an] investor or resulting in potential repurchase or indemnification." (Am. Compl. ¶ 32; see also id. ¶ 33). HUD defines "Material Risk" loans as those that contain "`material violations of FHA or mortgagee requirements and represent an unacceptable level of risk.'" (Am. Compl. ¶ 27 (quoting HUD Handbook 4060.1 REV-2, ¶ 7-4(D))). That the absence of material violations was an explicit condition of payment is made clear by regulation and by statute. Such loans must be reported to HUD, see, e.g., HUD Handbook 4060.1 REV-2, ¶ 7-4, and the agency may seek indemnification, see, e.g., 12 U.S.C. § 1715a-21(c)(1) — that is, HUD may refuse to pay claims — on defaulted loans that materially violate the agency's requirements.
Wells Fargo's second argument with respect to the FCA claims — that the Government has not sufficiently alleged that any false or fraudulent claim caused the Government's loss — is even more easily rejected. Courts disagree about the proper standard governing causation in FCA cases. While the Seventh Circuit has held
At this stage, this Court need not determine which standard should govern here, because the Government has sufficiently alleged causation under either test. The Government alleges that Wells Fargo's false statements that it complied with HUD regulations induced the Government to insure loans it otherwise would not insure — that is, that HUD would not have guaranteed the loan but for the Bank's misstatements. (See Am. Compl. ¶¶ 147, 153). The Government has also satisfied the more stringent causation requirements of the Third and Fifth Circuits. The regulations the Government argues Wells Fargo violated are those meant to ensure that borrowers are able to afford their homes; failure to uphold these regulations "could very well be the major factor for subsequent defaults," and thus satisfy the requirement that "the defaults were related to the false statements in the application." Miller, 645 F.2d at 476 (holding that the causation requirement was satisfied where the Government alleged that an application for FHA insurance contained false statements about, for example, the creditworthiness, net worth or debts of borrowers).
The Court turns next to Wells Fargo's arguments about the Government's FIRREA claims. Congress enacted FIRREA in response to the savings and loan crisis of the 1980s. See Bank of New York Mellon, 941 F.Supp.2d at 453-55. Among other things, FIRREA enhanced civil and criminal penalties for bank fraud. See, e.g., FIRREA, Pub. L. No. 101-73, §§ 951, 961 (1989). Particularly relevant here, the Act imposes civil penalties for the violation of certain specified criminal statutes. See 12 U.S.C. § 1833a(c). The Government alleges that Wells Fargo violated five of these predicate statutes. It claims that the Bank violated Title 18, United States Code, Section 1005, which prohibits, in relevant part, profiting from an act of a financial institution with the intent to defraud the Government; Sections 1001, 1341, and 1343, which prohibit making false statements to the government or committing mail or wire fraud, for which FIRREA imposes civil liability if such statement or fraud affects a federally insured financial institution; and Section 1014, which prohibits "knowingly mak[ing] any false statement or report ... for the purpose of influencing in any way the action of the Federal Housing Administration." See id. § 1833a(c)(1)-(2) (imposing civil penalties for violation of these criminal statutes). Wells Fargo argues that all but the last claim are insufficient under Rule 12(b)(6). (Wells Fargo Mem. 35-45).
First, the Government claims that Wells Fargo violated the fourth paragraph of Title 18, United States Code, Section 1005. Section 1005 provides in full as follows:
18 U.S.C. § 1005 (emphasis added).
Notably, only the first paragraph of the Section expressly limits liability to officers, directors, agents, or employees — that is, insiders — of a bank. Nevertheless, some — although not all — courts to consider the question have extended that limitation to paragraphs two and three of the Section. See, e.g., United States v. Barel, 939 F.2d 26, 39 (3d Cir.1991); United States v. Ortiz, 906 F.Supp. 140, 144-46 & n. 2 (E.D.N.Y.1995); United States v. Edwards, 566 F.Supp. 1219, 1220 (D.Conn. 1983). But see United States v. Edick, 432 F.2d 350, 352-53 (4th Cir.1970) (declining to extend the limitation of paragraph one to paragraph three). Wells Fargo argues that the same limitation should be read into paragraph four, and therefore the Bank itself cannot be held liable for violating Section 1005. (Wells Fargo Mem. 36). Only a few courts have addressed the issue of whether liability under paragraph four of Section 1005 is limited to bank insiders, and those courts are divided on the issue. Compare United States v. Van Brocklin, 115 F.3d 587, 597 (8th Cir.1997) (holding that paragraph four is not limited to bank insiders), and United States v. Christensen, 344 F.Supp.2d 1294, 1296-97 (D.Utah 2004) (same), with United States v. Rubin/Chambers, Dunhill Ins. Servs., 798 F.Supp.2d 517, 528 (S.D.N.Y.2011) ("Rubin") (extending the limitation of paragraph one to paragraph four).
This Court agrees with the Government that paragraph four of Section 1005 is not limited to bank insiders. It nearly goes without saying that, "when [a] statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its
The fourth paragraph of Section 1005, however, was enacted nearly fifty years later, in 1989, as part of FIRREA. See Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Pub. L. No. 101-73, § 961(d)(3), 103 Stat. 183, 499 (1989). In adding paragraph four to the Section, Congress gave no indication that the word "whoever" should be limited to bank insiders. Moreover, Congress used the word "whoever" in several other provisions of FIRREA, and there is no dispute that, in those provisions at least, the word is not limited to bank insiders. See, e.g., 18 U.S.C. §§ 1007, 1344; see also 1 U.S.C. § 1 (defining the word "whoever," when used in the United States Code, to "include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals"); United States v. A & P Trucking Co., 358 U.S. 121, 123 n. 2, 79 S.Ct. 203, 3 L.Ed.2d 165 (1958) (explaining that the word "`whoever' is to be liberally interpreted"). Finally, Congress made clear elsewhere in FIRREA that it knew how to limit liability to bank insiders when it wanted to do so. See, e.g., 18 U.S.C. § 1510 ("Whoever, being an officer of a financial institution, with the intent to obstruct a judicial proceeding, directly or indirectly notifies any other person about the existence or contents of a subpoena for records of that financial institution, or information that has been furnished to the grand jury in response to that subpoena, shall be fined under this title or imprisoned not more than 5 years, or both." (emphasis added)).
In declining to interpret paragraph four by its terms, the Rubin Court relied in part on the legislative history of FIRREA, citing a statement in the Committee Report that "one of the `primary purposes of [FIRREA was to] ... enhance the regulatory enforcement powers of the depository institution regulatory agencies to protect against fraud, waste and insider abuse.'" 798 F.Supp.2d at 526-27 (quoting H.R. Rep. 101-54(I), at 307-08 (1989)) (emphasis in original). As the Rubin Court itself acknowledged, however, this legislative history is ambiguous at best. See id. at 527 (acknowledging that paragraph four "might just as easily have been designed to address fraud and waste, more generally, as to address the more limited field of illicit bank transactions conducted by bank
In light of this ambiguity, whatever the merits of limiting paragraphs two and three of Section 1005 to bank insiders (a question this Court need not decide), there is no basis to deviate from the plain language of paragraph four by limiting it in a similar manner. That is, paragraph four plainly does not present the "rare" or "exceptional" case in which "literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters" or "thwart the obvious purpose of the statute." Griffin, 458 U.S. at 571, 102 S.Ct. 3245 (emphasis added) (internal quotation marks omitted). Accordingly, the question is not whether "importing into Paragraph Four the scope restriction that [some courts] found to exist in Paragraphs Two and Three is ... unreasonable," Rubin, 798 F.Supp.2d at 527, but rather whether it is required by the text of the statute. It is not. Thus, the Court holds that the fourth paragraph of Section 1005 is not limited to bank insiders. Instead, any person or entity that, "with intent to defraud" the Government or a financial institution, "participates or shares in or receives" funds derived from an act of a financial institution, may be convicted under that paragraph. See Van Brocklin, 115 F.3d at 596-97. It follows that the United States may proceed with its FIRREA claim based on Section 1005.
Next, Wells Fargo seeks to dismiss the Government's FIRREA claims to the extent they are predicated on violations of Title 18, United States Code, Sections 1001, 1341, or 1343, statutes prohibiting false statements to the Government and mail and wire fraud. FIRREA imposes civil liability on "whoever" violates these provisions, where such conduct "affect[s] a federally insured financial institution." 12 U.S.C. § 1833a(c)(2). Wells Fargo argues that the Government's claims under these provisions fail because the only financial institution the Government has alleged was affected is Wells Fargo itself. (Wells Fargo Mem. 38-39). Such self-affecting misconduct, Wells Fargo contends, is not contemplated by the statute. (Id. at 39).
Since oral argument in this case, two other courts in this District have considered, and rejected, precisely the same argument. See Bank of New York Mellon, 941 F.Supp.2d at 456-58; Countrywide
Wells Fargo correctly notes that in each of the cases addressing Section 961(1), the affected financial institution — although a participant in the alleged fraud — was not the defendant. (The financial institutions had generally either pleaded guilty or entered into civil settlements). That distinction, however, does not alter the analysis. The question considered by the courts in these cases was whether a financial institution, through its own misconduct, can affect itself within the meaning of FIRREA. Courts have repeatedly held that it can. There is no reason to deviate from that interpretation here. See Desert Palace, Inc. v. Costa, 539 U.S. 90, 101, 123 S.Ct. 2148, 156 L.Ed.2d 84 (2003) (explaining that where the same term is used in two different provisions of the same statute, it is "logical to assume that the [same] term ... would carry the same meaning with respect to both provisions"). This Court therefore joins the two other courts to have considered the issue in holding that an institution that participates in a fraud may also be affected by it within the meaning of Title 12, United States Code, Section 1833a(c)(2). See Bank of New York Mellon, 941 F.Supp.2d at 456-58; Countrywide Fin. Corp., 961 F.Supp.2d at 606, 2013 WL 4437232, at *5.
As Wells Fargo concedes (see Oral Arg. Tr. 80-81), Courts have repeatedly held that in order to allege such an effect, the Government need not allege actual harm, but only facts that would demonstrate that the bank suffered an increased risk of loss due to its conduct. See, e.g., United States v. Serpico, 320 F.3d 691, 694-95 (7th Cir.2003); United States v. Mullins, 613 F.3d 1273, 1278-79 (10th Cir. 2010); Bank of New York Mellon, 941 F.Supp.2d at 457-59; Ghavami, 2012 WL 2878126, at *5.
Finally, Wells Fargo argues that the Government's breach of fiduciary duty, unjust enrichment, and mistake of fact claims are insufficient under Rule 12(b)(6).
Applying these standards here, there is no basis to dismiss the Government's claims. To be sure, the Government's allegation that the "Direct Endorsement Lender program empowered Wells Fargo to obligate HUD to insure mortgages it issued" (Am. Compl. ¶ 176), is, as the Bank points out (Wells Fargo Mem. 48), somewhat overstated. After all, a lender submits to HUD applications for insurance to be reviewed and approved by the agency. See 24 C.F.R. § 203.255. Upon receipt of an application for insurance, HUD reviews the application to determine, among other things, that the mortgage is executed on the correct form; that all of the requisite documents were submitted; and that the lender made all the necessary certifications. See 24 C.F.R. § 203.255(c). Only once this pre-endorsement review is complete does HUD certify a mortgage for insurance.
Nevertheless, under the Direct Endorsement program, HUD "does not review applications for mortgage insurance before the mortgage is executed." 24 C.F.R. § 203.5(a). Nor does it ensure that the borrower meets the requirements for the
The Government's unjust enrichment and mistake of fact claims are a different story. Under New York law, "the voluntary payment doctrine precludes a party from recovering voluntary payments `made with full knowledge of the facts' if the party's ignorance of its contractual rights and obligations resulted from a `lack of diligence.'" United States ex rel. Feldman v. City of New York, 808 F.Supp.2d 641, 657 (S.D.N.Y.2011) (quoting Spagnola v. Chubb Corp., 574 F.3d 64, 72 (2d Cir.2009)). As discussed above, HUD was on notice of the facts underlying the Government's claims here no later than 2004, when its Inspector General issued an audit report of Wells Fargo detailing the same kind of misconduct as that alleged in this lawsuit.
For the reasons stated above, there is no basis to dismiss any of the Government's federal statutory claims. Wells Fargo's motion to dismiss is therefore DENIED as to these claims. Any tort claims arising before June 25, 2009, however, are untimely and therefore dismissed. In addition, the Government's mistake of fact and unjust enrichment claims are dismissed in their entirety. Wells Fargo's motion is therefore GRANTED as to these claims.
The Clerk of Court is directed to terminate the motion (Docket No. 26). In addition, the Clerk of Court is directed to terminate Wells Fargo's previous motion to dismiss (Docket No. 14) as moot.
SO ORDERED.
(Baruch Decl Ex. D, at F-17, F-18).
Wells Fargo's final argument is less than clear. The argument appears to be that the Government's allegations with respect to FHA claims for loans that have not yet defaulted are not ripe. But "under general principles of tort law, a cause of action accrues when conduct that invades the rights of another has caused injury. When the injury occurs, the injured party has the right to bring suit for all of the damages, past, present and future, caused by the defendant's acts." Davis v. Blige, 505 F.3d 90, 103 (2d Cir.2007) (brackets and internal quotation marks omitted); see also Sea Tow Servs. Int'l, Inc. v. Pontin, 472 F.Supp.2d 349, 357 (E.D.N.Y.2007) ("Under New York law, ... a breach of contract case is ripe immediately upon the alleged breach, even where damages remain uncertain.") (internal brackets and quotation marks omitted). The injury alleged by the Government does not rest upon "nebulous future events ... contingent in nature." In re Drexel Burnham Lambert Grp. Inc., 995 F.2d 1138, 1146 (2d Cir. 1993). Instead, the Government alleges (and Wells Fargo disputes) that, between 2001 and 2010, the Bank submitted false claims to HUD in violation of several common law principles. This is a concrete dispute fit for judicial review. See id. The fact that the Government's damages "have not yet been fixed does not negate the very real rights and liabilities associated with [its] underlying claims." Greenlight Reinsurance, Ltd. v. Appalachian Underwriters, Inc., 958 F.Supp.2d 507, 520, No. 12 Civ. 8544(JPO), 2013 WL 3835341, at *9 (S.D.N.Y. July 25, 2013).