United States Ex Rel. Schneider v. JPMorgan Chase Bank, National Ass'n

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 13, 2017 Decided December 22, 2017
No. 17-7003
UNITED STATES OF AMERICA, EX REL. LAURENCE SCHNEIDER,
ET AL.,
AND
LAURENCE SCHNEIDER,
APPELLANT
v.
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, ET AL.,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:14-cv-01047)
Joseph A. Black argued the cause for appellant. With him
on the briefs were Daniel E. Cohen and Robert L. Di Marco.
Adam C. Jed, Attorney, U.S. Department of Justice, argued
the cause as amicus curiae United States supporting neither
party. With him on the brief was Michael S. Raab, Attorney. R.
Craig Lawrence, Assistant U.S. Attorney, entered an
appearance.
2
Robert D. Wick argued the cause and filed the brief for
appellees. Michael M. Maya entered an appearance.
Before: TATEL and KAVANAUGH, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.
SILBERMAN, Senior Circuit Judge: Appellant Laurence
Schneider – also called a Relator – brought a qui tam suit under
the False Claims Act against JPMorgan Chase, alleging that
Chase falsely claimed compliance with a Settlement it, and a
number of other large banks, reached with the United States and
state governments. The Settlement – and it is a massive one,
costing Chase alone $1.1 billion of cash and over $4.2 billion of
in-kind aid to consumers – resolved claims against the banks for
alleged malfeasance in the origination and servicing of
residential mortgages that were thought to contribute to the
housing crash and subsequent financial crisis of 2008. It also
contained detailed dispute resolution procedures and designated
a Monitor to certify compliance with its terms. The district
court approved the Settlement in 2012. Subsequently, the
Monitor did certify that Chase had complied with the
Settlement.
Appellant also alleged that Chase falsely claimed
compliance with the Home Affordable Modification Program
(“HAMP”) administered by the Treasury Department.
Schneider challenges the district court’s dismissal of his
claims under the Settlement. The court concluded that he was
required to exhaust his contentions pursuant to the procedures of
the Settlement. He also disputes the district court’s dismissal of
3
his HAMP claims, even though it was without prejudice; the
district court thought his claim was defective because he did not
allege that Chase committed material violations of the rules of
the program, as would be necessary to make Chase’s
certification of compliance false.
We disagree with the district court’s exhaustion conclusion,
but we affirm its dismissal of the claims regarding the
Settlement on a related basis. And we agree with the court’s
analysis of Appellant’s HAMP claim.
I.
The National Mortgage Settlement – which was negotiated
in 2012 between a group of mortgage lenders and the federal
government, the governments of forty-nine states, and the
District of Columbia – released the lenders from liability for
their past use of inappropriate practices with respect to the
origination, servicing, and foreclosure of residential mortgages.
In exchange for the release, the lenders agreed to provide
billions of dollars of consumer relief and agreed to a set of
standards to govern their future behavior.
The consumer relief consisted of forgiveness or
modification of certain troubled loans – governed by guidelines
in the Settlement1 – for which the lender would receive “credits”
1
Exhibit D provides detailed instructions for the type of relief that
would be provided to different types of consumers, including specific
sets of rules and relief rates for first and second lien mortgage
modifications, transitional funds for homeowners engaged in a short
sale or deed-in-lieu of foreclosure, short sales to provide “a dignified
exit from a Property,” Exhibit D § 4(a), deficiency waivers,
4
toward its obligations. (As we noted, Chase, alone, assumed
responsibility to provide over $4 billion of such relief.) The
Settlement designated a Monitor and charged him with working
with the lenders to develop a work plan, make preliminary
findings, and reach a final determination as to whether the
obligations had been satisfied.
The servicing standards consisted of over 300 rules that
governed the manner in which a lender would service its
residential mortgages. Included were such business practices as
providing written acknowledgment of receipt of loan
documentation, describing the loan modification process and
applicable deadlines, notifying the borrower of any application
deficiencies within 5 business days, and reaching a disposition
of an application within 30 days of receipt of a complete
submission. See United States, et al., v. Bank of America, et al.,
78 F. Supp. 3d 520, 524-25 (D.D.C. 2015). The Settlement
authorized the Monitor to determine whether Chase complied
with those standards – and he did so. He utilized “Metric”
testing: given the immense task of supervising the application
of hundreds of standards to the many thousands of loans in
question, the Settlement directed the Monitor to implement and
perform statistical analyses to ensure that the banks – including
Chase – had complied with particular rules within a certain
statistical margin of error.
In the event that the Monitor were to discover an error, the
Settlement contained detailed guidance directing that banks be
notified and provided an opportunity to take corrective and
remedial actions. So long as the banks cured any such violation,
forbearance for unemployed borrowers, and anti-blight activities.
5
the Settlement precluded any party from suing under its terms.
See id. at 528-31.
Relator, through companies he owns, purchased thousands
of mortgage loans from Chase both before and after the housing
crash. While servicing those loans, he discovered what he
believes to be several violations of the Settlement.2 These
alleged mistakes involve a group of written-off loans, known by
Chase as the “Recovery One population.” In an administrative
practice that began well before the financial crisis, Chase would
transfer loans which it considered uncollectible from its main
system of records into Recovery One. These loans were written
off as an accounting loss – typically because the loan was
“under water,” which is to say that the amount owed exceeded
the value of the mortgaged property. Schneider alleges even
though loans were written off and presumably ignored, they still
should have been serviced. It is undisputed, however, that
“Chase disclosed the existence of [Recovery One] to the
Monitor.” Second Amended Complaint ¶ 184, JA 71. And
although Relator alleges that Chase did not disclose the full
2
Relator claims that Chase “forgave” numerous loans which it
had previously sold to him. When reviewing the grant of a motion to
dismiss, we, of course, must accept any well-pled allegations as true.
However, the case before us does not involve any claims that Relator
or his companies have in their individual capacities vis-à-vis Chase.
Instead, we here consider Relator's qui tam claims on behalf of the
governmental parties to the Settlement. To the extent that Chase sent
notices to some mortgagors purporting to forgive loans actually owned
by Relator, there is no factual assertion that Chase actually claimed
credit from the Monitor for doing so – or that, in the event Chase did
claim and receive some credit in error, that such credit exceeded the
approximately $250 million buffer by which Chase overpaid its
obligations.
6
number of loans held in Recovery One, see id., he never alleges
that Chase hid from the Monitor its position that those loans –
regardless of their number – need not be serviced in accordance
with the Settlement’s standards.
Relator also asserts that he discovered evidence that Chase
improperly claimed credit under its consumer relief obligations.
But in his Final Consumer Relief Report, the Monitor stated that
Chase had granted roughly $250 million of consumer relief
above and beyond its requirement, for an overall total of $4.463
billion. Appellant does not assert that any such claims exceeded
the $250 million cushion.
These allegations formed the basis of Appellant’s qui tam
suit. After the federal government declined to intervene on its
own behalf – as is its prerogative under the False Claims Act,
see 31 U.S.C. § 3730(b)(4) – Relator filed a First, and then a
Second, Amended Complaint in the district court below.
The nub of Appellant’s suit, regarding the Settlement, is
that the Monitor’s decision that Chase had complied was
incorrect because Chase falsely certified that it had complied.
Appellant alleges that damages are due to the United States and
various state governments based on potential penalties for lender
violations set forth in the Settlement – damages out of which,
under the False Claims Act, he is entitled to a share. Similarly,
Appellant asserted that Chase falsely claimed to have complied
with HAMP’s requirements, and hopes to claim a share of the
government’s damages for those violations as well.
The district court granted Chase’s motion to dismiss on both
sets of claims. It agreed with Chase’s argument that Appellant
could not bring Settlement-based claims without first exhausting
the Settlement’s dispute resolution procedures, holding that
7
“Relator, who acts on behalf of the United States, is . . . bound
to [the Settlement’s] terms in any complaint of noncompliance.”
Since the exhaustion issue is dispositive of the Settlement-
related claims, the district court did not address Chase’s
alternative argument that Relator’s suit constituted an improper
collateral attack on a judgment committed to the Monitor’s
discretion by the Settlement.
The district court then also dismissed the HAMP claims
because the Appellant did not sufficiently allege material
noncompliance in the complaint. Although it dismissed the
Settlement-related claims with prejudice (Relator had already
filed two amended complaints), the district court chose to
dismiss the HAMP claims without prejudice – thus allowing
Relator to amend his claim to allege material noncompliance
with HAMP if he is able to do so.
Relator here appeals these judgments of the district court.
We, of course, review its dismissal of his claims de novo.
II.
We agree with Appellant – and with the United States
government, which filed an amicus brief – that the district
court’s determination that he was obliged to exhaust his claims
under the Settlement’s dispute resolution procedures was
misconceived. Although he purported to represent the United
States under the False Claims Act once he filed suit, he had no
standing at all before he filed suit. He thus could hardly have
exhausted the Settlement's dispute resolution procedures; by the
time he had standing to do so, it was already too late. Chase
contends that he could have asked the government to exhaust,
but that is just another way of claiming that Appellant has no
right to independently file a false claim suit.
8
That brings us to Chase’s alternative argument that
Appellant’s suit is nothing more than a collateral attack on the
Monitor’s determination. Chase goes so far as to argue that the
Settlement’s dispute settlement procedures are the exclusive
means to challenge any bank’s behavior regarding compliance
– and that would preclude any false claims suit based on the
Settlement. Although the government takes no position on the
merits, its position on exhaustion necessarily assumes that a
false claim suit may be brought independent of the Settlement.
Conceptually, according to the government, a false claim suit is
different – it has a broader reach – than an action to enforce a
contract. Naturally, Appellant makes the same conceptual
argument. We need not decide that issue, however, because if
any act could form the basis of a false claim suit, it certainly is
not presented by this case.
That is so because Appellant ultimately only challenges the
Monitor’s legal determination that Chase complied with the
Settlement. Although Schneider’s original complaint included
a number of allegedly false statements by Chase to the Monitor
– which might have been problematic – his amended complaint
dropped all of those claims. So even assuming that false or
deceptive statements could serve as the basis of a False Claims
Act suit outside the scope of contract dispute procedures, such
allegations are not before us.
In that regard, Appellant’s claim that Chase violated the
consumer relief provisions of the Settlement is largely
predicated on the notion that the banks were obliged to conduct
an application process in order to determine who was entitled to
receive consumer relief, whereas Chase made that decision
unilaterally. But the Settlement does not require any application
process in its otherwise-detailed guidelines for granting
consumer relief. Indeed, such a reading would place all of
9
Chase’s fellow lenders in noncompliance with the Settlement,
since none of the other parties used the type of application
process that Relator suggests was necessary. Be that as it may,
the decisive point is that the Monitor was aware of the practices
and concluded that Chase was in compliance. And to the extent
that Relator vaguely alleges that Chase sought credit for loans
that otherwise did not qualify for relief under the Settlement, the
complaint nowhere identifies any ineligible loan Chase
submitted for credit, alleges that the Monitor was unaware of
any such loan’s disqualifying characteristics, or claims that the
cumulative value of any such loans exceeded the $250 million
buffer we discussed above.
Although our conclusion is sufficient to affirm the district
judge’s dismissal of the Settlement-related claims, we should
also note that Appellant’s claims that Chase violated the
servicing standards has an additional fatal flaw. The False
Claims Act requires a fraud claim that is “material to an
obligation to pay or transmit money or property to the
Government,” 31 U.S.C. § 3729(a)(1)(G) (emphasis added); see
also id. § 3729(b)(3) (defining an “obligation” as “an established
duty, whether or not fixed, arising from an express or implied
contractual . . . or similar relationship”).
Yet Chase’s potential exposure to penalties for
noncompliance with the Settlement’s servicing standards is
nothing more than a contingent possibility. As Chase notes, the
Settlement contains a series of steps before Chase could be
penalized for violating the servicing standards, including the
Monitor’s citation, failure to cure, failure of informal dispute
resolution, and the filing of a suit in the district court. And even
once a suit has been filed, Exhibit E of the Settlement places
enforcement within the discretion of the district judge.
According to the terms of the Settlement, the “relief available in
10
such an action will be” either “non-monetary equitable relief,
including injunctive relief . . . or other non-monetary corrective
action,” or “Civil Penalties,” which the Court “may award.”
Exhibit E § J.3 (emphasis added). Any hypothetical monetary
penalty arising from this highly contingent outcome can hardly
be described as an “obligation” under the False Claims Act.
Indeed, we have previously held that contingent exposure
to penalties which may or may not ultimately materialize does
not qualify as an “obligation” under the statute. See Hoyte v.
American National Red Cross, 518 F.3d 61, 67 (D.C. Cir. 2008)
(“[A]n unassessed potential penalty for regulatory
noncompliance does not constitute an obligation that gives rise
to a viable FCA claim.”). And we agree with our sister circuits
that Congress confirmed our Hoyte holding when it revisited the
False Claims Act in 2009 and modified its language to require
that an obligation be “established.” See Simoneaux v. E.I.
duPont de Nemours & Co., 843 F.3d 1033, 1038 (5th Cir. 2016)
(stating that the statutory change “confirmed the accepted
holding that contingent penalties are not obligations under the
FCA”); United States ex rel. Petras v. Simparel, Inc., 857 F.3d
497, 505 (3d Cir. 2017). Actually, this uncertain-penalty
problem may also apply to the consumer relief claims, but Chase
did not make that argument before us, so we do not consider it.3
III.
Turning to Appellant’s HAMP claims, he argues that the
district court failed to draw available inferences from ambiguous
3
The penalties for failure to meet the consumer relief
requirements are somewhat less contingent than those of the servicing
standards.
11
sections of his Second Amended Complaint. Further, he
contends that Chase did not argue before the district court, as it
does before us, that the Settlement released Chase from liability
for HAMP violations through February 2012 – and Chase,
therefore, does waive that argument for purposes of this case.
Relator is, of course, correct that at this stage of litigation,
ambiguities must be resolved in his favor. But we cannot ignore
a fatal gap in his complaint. We agree with the district judge
that the Relator “fails to state a claim that Defendant falsely
certified HAMP compliance because he does not allege, with
factual allegations in support, that the certifications were
materially false.” We, therefore, have no need to consider the
waiver issue. We defer to her decision, however, not to dismiss
Relator’s HAMP claims with prejudice. To the extent he is able
to amend those claims to plausibly allege material violations of
Chase’s HAMP obligations, he may do so.
For the above reasons, we affirm the dismissal of both
claims, and remand the HAMP claims to the district court for
proceedings consistent with this opinion.
So ordered.