Government's Annual Certification Claims Under the FCA Take a Hit in Federal Court in California in a Case Involving Individual Liability
In a decision dated November 5, 2013, United States v. Reunion Mortgage, Inc., David Thayer and Kent Harvey, Case No. 13-02340 SBA (N.D. Ca.), a federal court rejected annual certification claims, a backbone of the Department of Justice's mortgage fraud practice in recent years, in a case involving individual liability. Annual certification claims, which have been asserted in virtually every major mortgage fraud case brought by the federal government since 2011, maintain that a mortgage lender violates the False Claims Act ("FCA") if it submits annual certifications attesting to its eligibility to participate in the Direct Endorsement Lender ("DEL") program of the Federal Housing Administration ("FHA") when it knows (as defined by the FCA ) that it is not in compliance with the program requirements. By contrast with loan-level certification claims for FCA liability, annual certification claims arguably permit the government to recover damages for all loans—not just those that defaulted—originated by a lender during each year in which it knowingly submitted a false certification of program compliance. The government's argument is that the lender would have been expelled from the DEL program had the U.S. Department of Housing and Urban Development ("HUD") known of its noncompliance with the applicable requirements. In addition, annual certification claims arguably enable the government to avoid establishing causation with respect to each individual defaulted loan.
In Reunion, the government sued Reunion Mortgage, Inc., a mortgage lender in Milpitas, California; Reunion's president, co-owner, and broker/officer David Thayer ("Thayer"); and its vice president, Kent Harvey, under the FCA and common law for fraudulently certifying 12 residential loans as qualifying for FHA mortgage insurance. According to the amended complaint, which was filed on July 19, 2013, Thayer submitted annual certifications to HUD attesting to Reunion's compliance with FHA guidelines during the period from 2007 through 2012 in which Reunion was approved for participation in the DEL program. Thayer's annual certifications allegedly stated that:
I know or am in the position to know, whether the operations of the above-named mortgagee [Reunion] conform to HUD-FHA regulations, handbooks, and policies. I certify that to the best of my knowledge, the above-named mortgagee conforms to all HUD-FHA regulations necessary to maintain its HUD-FHA approval, and that the above-named mortgagee is fully responsible for all actions of its employees including those of its HUD-FHA approved branch offices.
The amended complaint further alleged that Reunion submitted 12 loan-level certifications to HUD attesting that the loans met the DEL program's requirements for underwriting but did not allege that Thayer personally signed any of those certifications. According to the government, the loans had not been properly underwritten and were ineligible for FHA insurance.
Defendants moved to dismiss the FCA claims against Thayer on the ground that the government failed to allege that he personally submitted any of the allegedly false loan-level certifications. The government responded that Thayer's annual certifications that Reunion was in compliance with the DEL requirements were sufficient to render him individually liable for the improperly underwritten loans under the FCA.
After noting that the government's FCA claims appeared to be predicated on the loan-level certifications alone, the court held that "[e]ven if Thayer's annual certifications were alleged as the basis of the FCA claims, [the government] has failed to show that such conduct is sufficient to render Thayer personally liable for the allegedly false certifications of the twelve mortgage loans in dispute." The court found that "Thayer's annual certification was—not to obtain the FHA's endorsement as to each loan transaction at issue—but to prospectively maintain Reunion's DEL status with the FHA." Citing Mikes v. Strauss, 274 F.3d 687, 701-702 (2d Cir. 2001), for its holding distinguishing conditions of participation from conditions of payment, the court found that "[s]ince the FHA's payment of each insurance claim is alleged to have been dependent on the individualized certification, and not Thayer's annual certification, the Court finds that the specific conduct attributed to Thayer does not state a claim for implied false certification." Accordingly, the court held that the government "failed to state a claim under the FCA as to Thayer" because it "failed to allege any conduct that would render Thayer individually liable under the FCA."
Although the court granted the government leave to further amend its complaint, its ruling—that Thayer's annual certification of Reunion's compliance with the DEL regulations did not render him liable for defaulted FHA-insured loans that were allegedly improperly underwritten—is a blow for the annual certification theory. The government argued that "Thayer himself falsely certified to HUD that Reunion employees complied with pertinent HUD-FHA regulations, handbooks, Mortgagee Letters, Title 1 Letters, and policies during the period the twelve mortgage loans were underwritten by Reunion, when they had not." The government maintained that "[t]his misconduct caused HUD FHA to insure the loans and to pay over $1.6 million in insurance claims on the twelve mortgage loans, once the loans defaulted." In rejecting that argument, the court limits the scope of the annual certification theory. In addition, the court's reasoning further undercuts the annual certification theory in its implicit finding that annual certifications relate only to conditions of participation and not also to conditions of payment. The annual certification theory is premised on the argument that a truthful annual certifications is both a prerequisite to participation in the DEL program and a condition of payment for claims submitted for FHA insurance. Whether other courts will agree with the California court remains to be seen.
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 Order Granting Defendants' Motion to Dismiss First Amended Complaint as to David Thayer with Partial Leave to Amend (not yet available in Westlaw).
 The seriousness with which lenders view the government's annual certification theory is reflected in the express release of any potential claims based on this theory in the government's $35 billion servicing settlement with five banks in 2012.
 The FCA defines "knowing" and "knowingly" to mean "actual knowledge," "deliberate ignorance of the truth or falsity of the information," or "reckless disregard of the truth or falsity of the information." 31 U.S.C. § 3729(b)(1).
 The issue of how damages would be proved or calculated as to nondefaulted loans has yet to arise
 Id. at ¶¶ 49-40.
 Id. at ¶ 50.
 Id. at ¶¶ 52-58.
 Defendants David Thayer and Reunion Mortgage, Inc.'s Notice of Motion, Motion and Supporting Memorandum of Points & Authorities in Support of FRCP 12(b)(6) Motion to Dismiss. See also Defendants' Reply Brief in Support of FRCP 12(b)(6) Motion to Dismiss.
 Decision at 10.
 Id. at 10-11.
 Id. at 11.
 Government's Br. at 2.