MELINDA HARMON, District Judge.
Pending before the Court in the above referenced cause for declaratory and injunctive relief is Plaintiffs Allied Home Mortgage Corporation ("Corp.") and James C. Hodge's ("Hodge's") motion for a temporary restraining order and expedited preliminary injunction (instrument # 2),
Plaintiffs' instant suit seeks a declaration that HUD's suspension of Allied Home Mortgage Corporation's origination and underwriting approval and suspension of Hodge from participation in any FHA-insured lending was arbitrary and capricious and effected without due process of law in violation of the Fifth Amendment. They request permanent injunctive relief in the setting aside or invalidation of the suspensions.
Corp. is a Texas corporation with its principal place of business in Houston, Texas. Hodge is its Chief Executive Officer ("CEO") and a citizen of Texas.
Federal Rule of Civil Procedure 52(a) requires a court reviewing an application for preliminary injunctive relief to "set forth the findings of fact and conclusions of law which constitute the grounds of the action."
When reviewing an administrative agency's action under the Administrative Procedure Act ("APA"),
Under the stringent standard for obtaining the extraordinary remedy of a preliminary injunction, the plaintiff must establish "(1) a substantial likelihood of success on the merits, (2) a substantial threat of irreparable injury if the injunction is not issued, (3) that the threatened injury if the injunction is denied outweighs any harm that will result if the injunction is granted, and (4) the grant of an injunction will not disserve the public interest." Janvey v. Alguire, 647 F.3d 585, 595 (5th Cir.2011), citing Byrum v. Landreth, 566 F.3d 442, 445 (5th Cir.2009). The plaintiff must carry its burden of persuasion on all four prongs. Canal Authority of State of Fla. v. Callaway, 489 F.2d 567, 576 (5th Cir.1974). "The purpose of a preliminary injunction is always to prevent irreparable injury so as to preserve the court's ability to render a meaningful decision [after a trial] on the merits." Callaway, 489 F.2d at 576; DSC Communications Corp. v. DGI Technologies, Inc., 898 F.Supp. 1183, 1187 (N.D.Tex.1995).
For the first element, the plaintiff's evidence need not prove that plaintiff is entitled to a summary judgment; plaintiff needs only to present a prima facie case, but not demonstrate that he is certain to win. Id. at 595-96, citing id., and Charles Alan Wright, Arthur Miller, Mary Kay Kane, 11 Federal Practice and Procedure § 2948.3 (2d ed. 1995). "[I]t will ordinarily be enough that the plaintiff has raised questions going to the merits so serious, substantial, difficult and doubtful, as to make them a fair ground for litigation and thus for more deliberate investigation." Sebastian v. Texas Dep't of Corrections, 541 F.Supp. 970, 975 (S.D.Tex. 1982). To evaluate the likelihood of success on the merits the court considers the "`standards provided by the substantive law.'" Janvey, 647 F.3d at 596, citing Roho, Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir.1990).
Regarding the second prong, a threat of irreparable harm, the injury at issue must be actual and imminent, not speculative or remote. Watson v. Federal Emergency Management Agency, 437 F.Supp.2d 638, 648 (S.D.Tex.2006). Under Fifth Circuit law, an injury is irreparable if there is no remedy at law, such as monetary damages. Janvey, 647 F.3d at 600;
The government has intervened in a qui tam fraud action filed in the Southern District of New York, Case No. 11-cv-05443, in which it filed an expanded complaint-in-intervention and sues, inter alia, Allied Home Mortgage Capital Corporation ("Capital") and Corp. as Capital's successor in interest. The suspensions of Corp. and its CEO, Hodge in this action, occurred contemporaneously with the filing of the government's complaint (# 2, Exhibit 3) on November 1, 2011. The current suspensions are dependent on "the outcome of the United States' lawsuit," as stated in the November 1, 2011 Letter (# 2, Ex. 1).
Plaintiffs here argue that the gravamen of the conclusory, "unacceptably vague" allegations, unsupported by facts, in the New York suit is against Capital, not Corp., and that none of the facts in that complaint concern Corp.'s conduct. Corp. is sued solely as "the successor to, and a mere continuation of" Capital, and most of the allegations concern actions by Capital between 2000 and 2010. Plaintiffs insist that HUD's suspension of Corp.'s authority to originate and underwrite loans will put Corp. out of business, and that no amount of damages will be sufficient to resurrect Corp. as a viable business. FHA-insured mortgage loans constitute 70% of Corp.'s business. Furthermore Corp. has built relationships with other companies that are dependent upon Corp.'s ability to continue originating FHA loans. All of Corp.'s financing for mortgage loans (from warehouse financing lines of credit) will be terminated. Thus not only will Corp. be unable to originate FHA-insured mortgage loans, but also unable to originate any kind of mortgage loans. Without correspondent purchase agreements Corp. will not be able to market any loans it might make. Its inability to participate in the market during its suspension will cause potential investors and potential business partners to ally with other competitor companies in the same, scarce marketplace. Moreover nearly all of its 723 employees in its 152 active branches across the country will lose their jobs. Hodge will lose his job, esteem in the industry, and the company he has built over the past twenty years.
Plaintiffs further maintain that the threatened injury to them outweighs any potential harm to the government. The
A preliminary injunction is in the public interest here: it would prevent the demise of Corp., great professional harm to Hodge, hundreds of jobs from being lost, allow homebuyers to purchase their homes, and prevent investors from suffering losses on their investments. Plaintiffs also claim the public has an interest in the restrained use of government power, not allowing it to act without cause and without due process.
Plaintiffs contend that HUD's notices of the administrative actions it is taking against Corp. are unacceptably vague, lacking in any informative detail, and illogical. The first violation alleged in the Notice of Administrative Action served on Corp. on November 1, 2011 (Ex. 1 at 6 to # 2) is that "Allied" originated loans from branch offices that were not FHA-approved. The Notice fails to identify the branch offices or how many or when loans were submitted from these branches. Allied's purported second violation was "submitt[ing] loans to HUD for FHA mortgage insurance that contained false representations about where the loans were originated," but fails to state how many such loans were submitted, which loans, and from which branches the loans are claimed to have been originated and from which branches they actually originated. Notice as 6. As Corp.'s third violation the Notices alleges that "Allied failed to pay the operating expenses for some of its approved branch offices," but again the branch offices are not named. Id. The fourth charged violation is that "Allied utilized inadequate and unqualified staff for its reviews," again without any identifying details. The Notice asserts that Allied falsely certified that it implemented a proper quality control plan. Although the period is identified, the Notice fails to indicate in what manner the quality control plan was inadequate.
Plaintiffs claim that HUD's actions were capricious, that it abused its discretion, and that United States Constitution for several reasons arbitrary and it violated the First, the government improperly conflated Corp. and Capital, treating two distinct corporate entities as one for purposes of liability, in both the Notices and in the New York case, which charges acts of Capital over two years old that were already resolved during a HUD audit, with Capital paying the fines. Second, Defendants served Plaintiffs with Notice of violations simultaneously with suspending them. Third, HUD abused its discretion in failing to provide essential concrete details of alleged violations, but only conclusory allegations raising an unsubstantiated specter of wrongdoing. Fourth HUD violated the Constitution by exercising its regulatory power of suspension against Plaintiffs in essence to obtain an effective temporary restraining order and preliminary injunction that threatens Plaintiffs' business without giving Plaintiffs proper notice and opportunity to be heard, and without obtaining a court order.
The government charges Hodge, CEO of both Capital and Corp., with concealed misconduct for over a decade that poses a risk to the mortgage market and the public insurance fund. The government contends that the two Allied entities, Capital and Corp., share the same ownership structure, the same headquarters, nearly all the same senior managers, and the same quality control employees, and pose the same risk to the public. Moreover the two companies offer no response to the substance of the allegations in the New York complaint. Moreover, they suggest that based on the information available in New York, Hodge's contention that the banks have frozen his accounts, preventing branch managers from withdrawing earned loan commissions, is false.
The government further maintains that Plaintiffs cannot show a likelihood of success on the merits because they cannot show that HUD's actions were arbitrary and capricious as HUD has adequate evidence of a history of serious violations of HUD requirements by Plaintiffs. Plaintiffs also cannot show irreparable harm because Corp. can still engage in conventional lending. Furthermore in a November 3, 2011, Hodge informed employees that he had established a new relationship with an investor willing to purchase Corp.'s loans that would "allow us to get back in business." In addition, any harm occasioned by the filing of the New York complaint will continue through the litigation regardless of the outcome of the suspensions. The balance of equities here weighs against Plaintiffs who have come to court with unclean hands while seeking equitable relief, Hodge's and his companies' concealment of wrongdoing have caused more than $834 million in insurance claims to be paid by HUD, with the government facing a wave of defaults that might amount to another $363 million. Plaintiffs' suggestion that they will post a bond of $1000 if the Court issues an injunction trivializes this harm. Finally, the suspensions are critical to protecting the health of the public insurance fund
The government details the requirements and procedure for obtaining and maintaining approval of participation in HUD's mortgage insurance program (# 30 at 3-7), which the Court incorporates herein as there is no dispute about them. Capital participated in the loan correspondent program and was allowed to originate FHA loans out of HUD-approved branches and then send them to HUD-approved direct endorsement lenders, such as Corp., or underwriting approval prior to loan closing and securing an insurance endorsement from HUD, until the program was discontinued by the end of 2010. Reiterating with a supporting Declaration from Jennifer Lake, ¶ 6(e) that Capital and Corp. have the same headquarters, ownership structure, management and quality control, the government states that in late 2010 nearly all of Capital's branches were closed and immediately reopened as branches of Corp. Lake Decl., # 31 at ¶ 6.
The government also charges that Capital submitted false information to HUD when it submitted loan packages for mortgage insurance and concealed the fact that the loans were originated from branches that were not approved by FHA. Decl. of Nancy A. Murray, # 28.
For purposes of this case and the preliminary injunction, the focus must be on Corp. and Hodge as its CEO, separate and distinguished from Capital and Hodge as its CEO. While most of the government's documentary submissions and allegations conflate the two corporate entities, little of the material clearly names or separately identifies Corp. The tie between the two entities is the Asset Purchase Agreement (the "Agreement") of May 1, 2010 between Capital and Corp., Plaintiffs' Ex. 11 filed under seal, and the alleged identical ownership structure, the headquarters, nearly all the senior managers, and quality control employees.
The Court concludes that HUD erred in acting contrary to the law in Texas as that law applies to Corp. as an alleged successor in interest to Capital based on Corp.'s acquisition of some of the assets of Capital and on the theory that Corp. is a mere "continuation" of Capital.
Capital and Corp. are both Texas corporations. The Asset Purchase Agreement states in paragraph 12.09:
Moreover, paragraph 2.02 of the Agreement, titled "
Texas law does not generally recognize successor liability for subsequent purchases of corporate assets. Norfolk Southern Ry. Co. v. Trinity Industries, Inc., No. 3-07-CV-1905-F, 2009 WL 362437, *4 (N.D.Tex.2009), citing McKee v. Am. Transfer & Storage, 946 F.Supp. 485, 487 (N.D.Tex.1996), citing Article 5.10(B) of the Texas Business Corporation Act, effective Sept. 1, 1993. There is no successor in interest when the acquiring corporation did not expressly agree to assume the liabilities of the party to the agreement because "`successor'" has a specialized meaning "`beyond simple acquisition.'" Sitaram v. Aetna U.S. Healthcare of N. Tex., Inc., 152 S.W.3d 817, 828 (Tex.App.-Texarkana 2004). See also C.M. Asfahl Agency v. Tensor, Inc., 135 S.W.3d 768 (Tex.App.-Houston [1st Dist.] 2004) (finding no successor liability because there was no express assumption by the successor to acquire the liability of the predecessor); Ford, Bacon & Davis, LLC v. Travelers Ins. Co., Civ. A. No. H-08-2911, 2010 WL 1417900, *5-6 (S.D.Tex. Apr. 7, 2010), citing Lockheed Martin Corp. v. Gordon, 16 S.W.3d 127, 134-35 & n. 6 (Tex.App.-Houston [1st Dist.2000, pet. denied]) (The only two circumstances in which a successor business that acquires the assets of another business also acquires its liabilities or debts are (1) the successor expressly agrees to assume liability or (2) the acquisition results from a fraudulent conveyance to escape liability for the debts or liabilities of the predecessor.). While the government may have vaguely implied there was a fraudulent conveyance of Capital's assets to Corp. to escape Capital's liability, it did not produce evidence of such.
Furthermore the Texas legislature has refused to recognize the theory that a successor corporation is a mere continuation of its predecessor as an exception to the traditional rule that a successor corporation does not assume the liabilities of a predecessor. Motor Components, LLC v. Devon Energy Corp., 338 S.W.3d 198, 204-05 (Tex.App.-Houston [14th Dist.] 2011) (citing Act of May 4, 1979, 66th Leg., R.S., ch. 194, § 1, 1979 Tex. Gen. Laws. 422, 422-23) (amended 1987, 1991, 1993, and 1997, recodified 2002) (current version at Tex. Bus. Orgs.Code Ann. § 10.254 (West 2009)), citing Patin v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 649 (5th Cir. 2002) (applying Florida law). Section 10.254 provides,
The Fourteenth Court of Appeals in Motor Components, 338 S.W.3d at 205, further cited inter alia the following cases and their holdings: Mudgett v. Paxson Machine Co., 709 S.W.2d 755, 758 (Tex.App.-Corpus Christi 1986, writ ref'd n.r.e.) ("Certainly if the de facto merger doctrine is contrary to the public policy of our state, so must be the mere continuation doctrine."); McKee v. American Transfer &
"Under the APA," a court may set aside agency actions found to be "arbitrary and capricious" because they are "not in accordance with law." 5 U.S.C. § 706(2)(A). Plaintiffs are correct that HUD's suspension of Corp. and Hodge as its CEO, based on a successor corporation/continuation doctrine and an improper conflation of the two entities, transferring Capital's alleged liability for misconduct to Corp., is contrary to Texas law. In purchasing most of Capital's assets and expressly indicating that it was not purchasing any liabilities, Corp. and Hodge were acting legally under Texas law. The purchase of Capital's branches by Corp. began around September-October 2010, before which Corp, had no branches. The government has not produced evidence demonstrating that Corp. has violated the law since it acquired most of Capital's assets. Indeed it acknowledged at the hearing that the history of Corp. since its acquisition of assets of Capital is short and that evidence about it thus far is limited. Nevertheless Corp.'s figures in HUD's Credit Watch or Neighborhood Watch performance numbers (Plaintiffs' Exhibit # 23) reflect it is better than average in comparison to other FHA-insured mortgage lenders across the country. Moreover the vague and conclusory nature of the allegations in the Notices, which Corp. and Hodge argue deprive them of adequate notice and due process, in the qui tam complaint, and in the government's Declarations serves to obfuscate which corporation is responsible for what violations.
Therefore the Court finds that Plaintiffs have met the requirements for a preliminary injunction enjoining the suspensions of Corp. and of Hodge in his capacity as CEO of Corp. Plaintiffs have made a prima facie case of a likelihood of success on the merits of their suspension based on a continuation theory and the Asset Purchase Agreement under Texas law for reasons indicated above, and the absence of evidence of wrongdoing by Corp. since that acquisition. They have also submitted substantial evidence that the suspensions actually and imminently threaten the very existence of Corp.'s business and Hodge's professional position in the mortgage industry, thus making money damages, only after the New York litigation is ultimately resolved, inadequate to satisfy the irreparable injury prong. In the wake of HUD's suspensions, Plaintiffs have also been suspended by Ginnie Mae, Fanny Mae and the State of Maine. Their warehouse lines of credit have dried up. The potential destruction of Plaintiffs' business outweighs any harm that would be suffered by the government before the issues can be litigated in the New York qui tam action. The substantial loss to HUD of over $800 million in taxpayer funds was allegedly caused by the conduct of Capital years ago. As noted there are plenty of broad-sweeping accusations against, but no evidence of wrongdoing by, Corp. since its acquisition of Capital's assets. The issuance of a preliminary injunction, on the other hand, would serve the public interests in preserving Corp.'s business, over 700 jobs for its employees, the opportunity for those low income clients who were approved for mortgages to close on their homes, and the opportunity for others to borrow and purchase homes. The government will still have an opportunity to prove its allegations and Plaintiffs to receive due process and defend themselves in the New York qui tam suit.
Finally, Federal Rule of Civil Procedure 65(c) provides
The Fifth Circuit has held that courts in this Circuit have the discretion to issue injunctions without security. EOG Resources, Inc. v. Beach, 54 Fed.Appx. 592, No. 02-60415, 2002 WL 31730385, *1 n. 2 (5th Cir. Nov. 26, 2002), citing Corrigan Dispatch Co. v. Casa Guzman, S.A., 569 F.2d 300, 303 (5th Cir.1978) (per curiam); Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 628 & n. 18 (5th Cir.1996) (the court in its discretion "`may elect to require no security at all'"), quoting Corrigan, 569 F.2d at 303.
Accordingly, the Court
ORDERS that Plaintiffs' motion for preliminary injunctive relief is GRANTED and HUD is hereby ENJOINED from enforcing its suspensions of Plaintiffs. The Court further finds that no bond is necessary here. Should the government uncover evidence of fraud by Corp. and Hodge as its CEO, it may apply to lift the injunction.
