United States v. Allied Home Mortgage Corp.

Citation: Not availableDocket: 17-20720

Court: Court of Appeals for the Fifth Circuit; August 9, 2019; Federal Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Judgments and penalties totaling nearly $300 million were secured by the government after a five-week trial involving claims under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) against Jim C. Hodge and his companies, Allied Home Mortgage Corporation and Americus Mortgage Corporation. The appeal by the defendants contested the sufficiency of evidence, the admissibility of expert evidence, and the dismissal of a juror prior to the verdict. The Fifth Circuit Court, comprising Judges Barksdale, Southwick, and Haynes, affirmed the lower court's decision.

The factual background reveals that the Federal Housing Agency (FHA) insures lenders against losses on qualifying loans, primarily for first-time homebuyers. Hodge, as CEO, oversaw Allied Capital, a loan correspondent, and Allied Corporation, a lender. Allied Capital was required to obtain HUD approval for each loan origination branch and to submit loan files to HUD for FHA insurance endorsement, accompanied by Form 92900-A, which certifies loan eligibility and compliance with HUD guidelines. 

In 2011, a qui tam action was initiated by an Allied Capital branch manager, alleging fraudulent acquisition of FHA insurance for defaulted loans. The government intervened, leading to multiple liability theories being presented at trial. Although the jury initially delayed their verdict, they ultimately found Allied Corporation liable under the FCA for misrepresentations concerning adherence to FHA guidelines, awarding $85.6 million in damages. Hodge and Allied Capital were also found liable for misrepresenting loans from unregistered branches, resulting in $7.4 million in damages. Additionally, all defendants were deemed liable under FIRREA for false certifications regarding compliance with HUD’s quality control requirements.

The district court denied the defendants' motions for judgment as a matter of law and for a new trial, while granting the government's post-trial motion for treble damages and civil penalties. Total damages awarded were $23.1 million against Allied Capital and Hodge, $268.8 million against Allied Corporation, and FIRREA penalties of $2.2 million for each defendant. The analysis begins with the sufficiency of the evidence, followed by expert testimony admission and a juror's dismissal. A motion for judgment as a matter of law challenges the legal sufficiency of the evidence supporting a jury's verdict, with de novo review applied. The court examines whether liability under the False Claims Act (FCA) is established by proving a false statement or fraudulent conduct, made with scienter, that was material and caused government financial loss. 

The jury found Hodge and Allied Capital liable under the FCA, awarding $7.4 million for concealing loans from unregistered branches. The defendants contested the sufficiency of evidence for scienter, materiality, and causation. To prove scienter, the government must demonstrate that the defendants had actual knowledge of falsity, acted with deliberate ignorance, or displayed reckless disregard for the truth. Evidence indicated that Allied Capital, with Hodge's approval, concealed the involvement of unregistered branches from HUD, and Hodge misrepresented these issues during a state audit. Testimony from Allied's compliance chief suggested Hodge knowingly continued originating loans despite HUD's prohibitions.

Regarding materiality, the defendants argued insufficient evidence to prove the information about the originating branch was material. Materiality is defined as having the ability to influence the payment or receipt of money, requiring an evaluation of the potential impact on the behavior of the recipient of the misrepresentation.

False representations regarding the originating branch of a loan are under scrutiny to determine if they influenced HUD's decision to issue insurance. The defendants argue against the materiality of not listing the branch number, citing that underwriting certifications were more pertinent and that HUD was aware of unregistered branches when providing insurance. Despite this, testimony indicated that HUD would not insure loans from unregistered branches due to higher default rates associated with them. If HUD was aware and still insured these loans, it would complicate proving materiality, as established in Trinity Indus. Inc. However, evidence at trial indicated HUD's actions after discovering fraud supported materiality, as HUD required indemnification from the defendants and subsequently suspended them from the FHA program without delay.

Concerning causation, defendants contested the evidence linking their misidentification of the originating branch to specific borrower defaults, citing the need for a direct connection between false statements and defaults as seen in United States v. Miller. They suggested that only false statements affecting borrower creditworthiness should be considered for causation. While acknowledging the necessity of proximate cause, the court noted that this concept is flexible and focuses on foreseeability and the scope of risk associated with the conduct in question, allowing for broader interpretations of causation beyond strict factual connections.

Connecting false statements and defaults to specific loans through sampling and extrapolation is deemed infeasible. The government argues that HUD linked unregistered branches to increased default risks, supported by expert evidence showing those loans defaulted at higher rates. Consequently, the false statements misrepresented risks to HUD, leading to the insurance of more loans and greater losses than would have occurred otherwise. This establishes sufficient evidence for a jury to conclude that these false statements were a proximate cause of the losses. An aggregate view of the risks and impacts of the false statements clarifies the connection between misconduct and loss, indicating that while defendants may not have known which loans would default, a higher default percentage was foreseeable.

The defendants contested the evidence regarding scienter, materiality, and causation in relation to False Claims Act (FCA) claims against Allied Corporation based on reckless underwriting. The jury could infer scienter from testimony indicating Allied Corporation’s employees were aware of HUD guidelines, with experts identifying serious defects and management imposing unrealistic quotas on underwriters. The defendants’ challenges to expert evidence were found inadequate, allowing the jury to accept the testimony and other evidence.

Regarding materiality, the defendants’ brief presented a conclusory argument, which was insufficiently developed, leading to no further discussion. In terms of causation, the defendants asserted that no evidence linked reckless underwriting to defaults; however, the government’s expert testified about poorly underwritten loans resulting in claims, suggesting that false statements regarding purchaser affordability may have significantly contributed to defaults.

Hodge contested the jury's finding of liability under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) for false certifications and associated documents, arguing that he must have personally made false entries. However, Hodge waived this argument by requesting a jury instruction that included causing false certifications. A party cannot appeal errors induced by their own actions. Even if not waived, previous rulings established that causing false entries is sufficient for liability.

Three experts testified for the government during the trial, leading to a pre-trial hearing to assess the admissibility of their testimony under Daubert v. Merrell Dow Pharm. Inc. The defendants argued for reversal due to the district court's failure to adequately record and articulate its reasoning in denying their Daubert motions. They contended that the expert methodologies lacked reliability, constituting an abuse of discretion.

The defendants claimed the district court did not create a sufficient record for its Daubert inquiry, which is required to justify the admission of expert testimony. However, the court had been actively involved in examining the government experts' sampling methodologies and had addressed the defendants' Daubert motions. The court later clarified its reasoning when denying a motion for a new trial, which rendered a remand unnecessary.

The appellate review of expert testimony admission is for abuse of discretion, affirming unless the ruling was manifestly erroneous or affected substantial rights. Expert testimony must be both relevant and reliable, with reliability assessed based on factors such as testability, peer review, error rates, and community acceptance. The inquiry focuses on methodologies, not the conclusions they produce. The defendants filed four Daubert motions, challenging the reliability of the sampling methodology of Dr. Katherine Ensor and the re-underwriting methodology of Dr. Richard Payne, as well as questioning the admission of any expert testimony regarding damages. Dr. Ensor's role involved generating stratified random samples of loan files utilized by other experts.

At the Daubert hearing, the government contended that the defendants forfeited their challenges regarding sampling by agreeing to a sampling method during discovery. The timeline reveals that in November 2014, the defendants objected to the full loan file request and sought a 'random, statistically relevant sample size.' By December 2014, both parties aimed to agree on a sampling methodology to prevent unnecessary Daubert challenges. During a January 2015 hearing, although they had settled on the sampling mechanics, they disagreed on the sample size—specifically, the government proposed samples of 385 Claim Loans and 106 Non-Claim Loans, while the defendants suggested equal sample sizes of 200 for each category to facilitate analysis. The district court then mandated the defendants to produce loan files according to the government's sampling methodology.

On appeal, the defendants argued that Dr. Ensor did not account for various causes of loan defaults, a point deemed waived since it was not raised during the sampling negotiations. Waiver is characterized as the intentional relinquishment of a known right, and the defendants did not dispute the sampling methodology, only the sample sizes, as confirmed by their expert's testimony. The defendants preserved their challenge to the number of loans sampled but failed to demonstrate how this affected the reliability of the expert testimony, which typically relates to the weight of the opinion rather than admissibility.

Additionally, the government presented Dr. Richard Payne to testify on FCA claims regarding reckless underwriting by Allied Corporation. Dr. Payne conducted a re-underwriting review of 460 loans and determined that 240 were ineligible for FHA insurance due to deficiencies per HUD guidelines. The defendants claimed Dr. Payne's testimony was unreliable, alleging he did not apply HUD standards, yet they provided no evidence to support this claim. Dr. Payne’s report indicated that his team was directed to evaluate each loan against the applicable HUD Handbooks, countering the defendants' assertions.

Dr. Payne testified that the FHA guidelines, supplemented by HUD Handbooks and 'mortgagee letters,' are integral to determining loan eligibility for FHA insurance. He utilized these guidelines, along with the TOTAL Mortgage Scorecard, to evaluate a sample of loans, concluding that 240 were ineligible due to deficiencies relative to the underwriting standards. A detailed spreadsheet was presented, listing each ineligible loan alongside the relevant guidelines and descriptions of deficiencies. The defendants did not dispute Dr. Payne’s methodology or findings specifically but referenced HUD regulations as minimum standards. 

Regarding damages, the defendants claimed that the expert testimony was irrelevant and unreliable due to a purported failure to apply the correct causation standard but did not specify any challenged testimony or expert, leading the court to dismiss this argument as inadequate.

During jury deliberations, concerns arose about Juror No. 7, who expressed a fixed opinion and exhibited behavior that made other jurors feel threatened, including wearing ear plugs and making threats. The district court instructed the jury to continue deliberating, issuing an Allen charge after a request for a mistrial. However, a substantial majority of jurors reported that one juror would not engage and posed a potential threat, prompting the court to question the foreperson, who confirmed the juror's disruptive behavior and implied threats, leading to concerns about juror safety and stability.

The district court found credible evidence that a juror was not adhering to its Allen instruction regarding the duty to deliberate and decided to investigate further. During individual questioning, most jurors reported feeling threatened, with one juror describing discomfort due to another juror’s aggressive shouting and refusal to collaborate. Juror No. 7, when questioned, denied threatening anyone but admitted to wearing earplugs, and while he stated his decision was reasonable, he failed to acknowledge the necessity of considering opposing views. After questioning all jurors, the defendants requested a mistrial, which the court denied, citing that the issue was not just about a single holdout but about a juror's failure to follow instructions. The court found evidence that Juror No. 7 did not participate in deliberations and had threatened at least one juror following the court's directive. The court noted that other jurors described him as "scary" and "unstable," concluding he was not truthful regarding his deliberation compliance. The defendants argued that the court erred in denying the mistrial and discharging the juror, but the appellate review affirmed the district court's discretion in excusing Juror No. 7 for good cause, emphasizing that issues of candor and threatening behavior justify removal without infringing on the deliberative process. No new rules regarding juror dismissal were deemed necessary. The decision was affirmed.