Wednesday, February 13, 2013

Wells Fargo Strikes Out: Court Denies Motion to Enforce Consent Judgment to Stop SDNY False Claims Act Case

In November 2012, I wrote about the False Clams Act suit brought by the U.S Attorney for the Southern District of New York (SDNY) against Wells Fargo Bank, N.A. The SDNY case alleged that while participating in the Federal Housing Administration (FHA) Direct Endorsement Lender Program, Wells Fargo falsely certified thousands of loans to be eligible for FHA insurance and that as a result of Wells Fargo’s false certifications, the FHA paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted.  U.S. v. Wells Fargo Bank N.A.,12-cv-7527, U.S. District Court, Southern District of New York

In April 2012 Wells Fargo previously settled with the U.S. Department of Justice (DOJ) and 49 states who together had sued Wells Fargo and other banks in D.C. District Court alleging that these banks engaged in abusive foreclosure practices. In settling that matter, Wells Fargo paid $5 billion and obtained a broad written release as part of a Consent judgement. When the SDNY filed suit against Wells Fargo in November 2012, the Company moved to enforce the Consent Judgment and release contained therein to "preclude" the SDNY from bringing its False Claims Act suit against Wells Fargo.

Yesterday, the D.C. District Court denied Wells Fargo's motion in an opinion found here:
United States et al., v. Wells Fargo et al., Civ. No. 12-361 (D.C. 2/12/13). While it brushed aside the DOJ's arguments that the Court lacked jurisdiction or that the abstention doctrine barred any injunction sought by Wells Fargo, the Court found that by its very terms the release did not stop the SDNY suit. Essentially, the Court found that the Consent Judgement released False Claims Act and FIRREA claims where the "sole basis" for such 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. Annual certifications, the Court observed, dealt with Wells Fargo's "company wide compliance." The Consent Judgment release also covered false individual loan certifications by Wells Fargo for HUD mortgage insurance but only if the individual loan did not contain a material violation of HUD-FHA requirements.  In short, the release precluded the DOJ from seeking to bring False Claims Act claims against Wells Fargo for claims based solely on false or fraudulent annual certifications --for individual loans, however, that was another matter and the release did not cover this retail type fraud.

Having interpreted the scope of the release, the Court refused to preclude or enjoin the SDNY case but it left open the question of whether the release could still be applied to portions of the SDNY case, observing that it "leaves the interpretation of the SDNY Amended Complaint to the court that has jurisdiction over it."

A. Brian Albritton
February 13, 2013

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