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United States ex rel K & R Limited Partnership v. Massachusetts Housing Finance Agency

October 11, 2006

UNITED STATES OF AMERICA, EX REL. K & R LIMITED PARTNERSHIP, PLAINTIFF-RELATOR,
v.
MASSACHUSETTS HOUSING FINANCE AGENCY, DEFENDANT.



The opinion of the court was delivered by: Royce C. Lamberth, United States District Judge

MEMORANDUM OPINION

This matter comes before the Court on the Motion [74] for Summary Judgment by plaintiff-relator K&R Limited Partnership ("K & R") and the Motion [75] for Summary Judgment by defendant Massachusetts Housing Finance Agency ("MHFA"). Also before the Court are MHFA's Motion [90] to Strike the Affidavit of Robert Ercolini and K&R's Motion [93] to Strike Exhibit A to MHFA's Reply. Upon consideration of the motions, the oppositions thereto, the briefs in reply, the applicable law, and the entire record, the Court has concluded that both Motions to Strike will be denied, that K&R's Motion for Summary Judgment [74] will be denied, and that MHFA's Motion for Summary Judgment [75] will be granted. Accordingly, an appropriate order was issued on September 29, 2006, granting summary judgment in favor of defendant on all of plaintiff's claims, which are dismissed with prejudice, and entering judgment in favor of defendant. The Court's reasoning is set forth below.

I. FACTS

The federal Department of Housing and Urban Development ("HUD") conducts several programs to help provide affordable housing to lower income families, and among these is the non-insured "236 Program," so named because it was authorized by Section 236 of the National Housing Act. 12 U.S.C. § 1715z-1. Under the Program, the owner of a housing project offers some or all of the units in the project to lower income families at affordable rental rates. When certain requirements are met, these units then qualify for mortgage assistance from HUD. The project owner obtains a mortgage loan to finance the construction or rehabilitation of the project, secured by a mortgage on the property.

At the same time, HUD makes monthly payments to the mortgage lender, or mortgagee, to reduce the project owner's obligation. This debt service subsidy is called an "Interest Reduction Payment."*fn1 The amount of the HUD payment is equal to the difference between the monthly mortgage loan payment -- taking into account payments for principal, interest, and certain allowable fees -- and what the mortgagor's payment would be if the interest rate on the loan was 1 percent. 12 U.S.C. § 1715z-1(c).*fn2 In other words, the project owner obtains a mortgage loan on the open market but makes payments on it as if the interest rate was 1 percent, and HUD picks up the monthly difference. This mortgage assistance makes it possible for the project owner to offer units at rates that are affordable to lower income families, who are the ultimate and intended beneficiaries of the Program.

The Massachusetts Housing Finance Agency ("MHFA") has acted as a mortgage lender for dozens of projects that participate in the 236 Program. MHFA was established by the Massachusetts Legislature in 1966, and its purpose is to "raise funds from private investors in order to make low interest rate funds available for the acquisition, construction, adaptation and rehabilitation of housing designed to meet the needs of physically or mentally handicapped individuals and their families, insure residential or construction or permanent or rehabilitation loans for community based residences, and provide technical assistance to low income persons and families applying for residential loans and to sponsors of community based residences." Mass. Gen. Laws ch. 23A App § 1-2 (2000). K&R is a limited partnership organized under the laws of Massachusetts.

For each project, the owner of the project, HUD, and MHFA executed either an "Interest Reduction Contract" or an "Agreement for Interest Reduction Payments." These agreements are substantially similar and govern, among other things, the manner in which HUD will calculate its monthly interest payments. As will be seen below, these agreements do not establish a set interest rate, but rather refer the parties to the underlying mortgage agreement, which itself supplies the interest rate or method for calculating it. K&R's Amended Complaint refers to 66 different housing projects that participate in HUD's 236 Program or did participate in it as of February 1993, and which were built or substantially renovated under the Program. While construction or renovation was ongoing, MHFA provided interim financing for these projects, usually through the issuance of short-term, tax-exempt Bond Anticipation Notes ("BANs"). When construction or rehabilitation was complete and a project was certified for occupancy, MHFA provided long-term financing for the projects with funds raised through the issuance of tax-exempt bonds. It was only at this time, when permanent, long-term financing was put in place, that the project owner's loan was amortized, and it was at this time that HUD began making interest reduction payments.

For each loan made by MHFA to the owner of a project, the owner executed a mortgage note setting forth the terms of the loan, such as the loan amount, the interest rate, and the loan term. To secure the loan, each project owner executed a mortgage in favor of MHFA. In some instances MHFA also provided supplemental funding after the first mortgage loan was made.

Each month, MHFA submits to HUD a request for interest reduction payment for each of the 236 Program projects that it finances. Each request is submitted on an invoice called a "Form HUD-3111," titled "Mortgagee's Certification and Application for Interest Reduction Payments." When MHFA's representative signs the form, that representative "certifies to the best of his knowledge and belief" that, among other things, "each interest reduction payment included in this billing has been calculated in accordance with the provisions of the Interest Reduction Contract" and that "the amount of this billing is true and correct and has not been previously claimed or paid." See K&R's Mem. in Support of Motion for Summary Judgment [74], Ex. 2. In addition, MHFA submits supplemental material with each Form HUD-3111 to document the information provided on the Form.

MHFA financed most of its mortgage loans from the proceeds of bond issuances. Many of the 66 projects whose mortgages are at issue in this case were originally financed from the proceeds of bonds issued in the 1970s. In 1993, MHFA refunded these bonds -- that is, it bought them back and retired them -- using the proceeds of new bonds it had issued at substantially lower interest rates. MHFA thus was able to obtain substantial savings on the cost of its financing. The project owners continued to make the same payments to MHFA on their mortgages, MHFA continued to submit the same monthly requests for interest reduction payments to HUD, and HUD continued to make the same payments to MHFA.

On March 27, 1999 plaintiff-relator K&R Limited Partnership filed a complaint under seal pursuant to the qui tam provisions of the False Claims Act, 31 U.S.C. § 3730, et seq., ("FCA"), alleging that MHFA submitted false claims for payment to HUD each month beginning in April of 1993. K&R claimed that when MHFA issued the 1993 bonds -- with interest rates lower than those for the bonds originally used to finance the 66 projects under the 236 Program -- MHFA was required to lower the interest rates due under its mortgages, and thus the amount of interest reduction payment it could claim from HUD. According to K&R, MHFA's failure to lower the interest rates meant that they had not "been calculated in accordance with the provisions of the Interest Reduction Contract," as certified by the Form HUD-3111. MHFA thus submitted false claims for payment, claims which asserted that MHFA was entitled to substantially more in interest reduction payments than was actually the case.

The United States declined to exercise its right to intervene and the complaint was unsealed and served on MHFA.*fn3 On July 30, 2001, this Court denied MHFA's motion to dismiss for failure to state a claim. The parties have engaged in discovery, and both have moved for summary judgment. K&R moves for summary judgment on the first two prongs of FCA liability, that MHFA submitted claims and that these claims were false. K&R contends there are disputed fact issues on the remaining prong, MHFA's scienter. MHFA contends that it is entitled to summary judgment on the grounds that its claims were not false and, even if they were, were not submitted with the requisite knowledge or intent.

II. Motions to Strike

Also before the Court are two motions to strike exhibits submitted by the parties. MHFA moves to strike [90] an affidavit submitted by K&R with its brief opposing summary judgment, while K&R moves to strike [93] a demonstrative chart submitted with MHFA's reply brief in support of summary judgment.

Federal Rule of Civil Procedure 12(f) allows a court to strike all or part of a pleading for insufficiency, redundancy, immateriality, impertinence, or scandalousness. See Fed. R. Civ. P. 12(f).*fn4 A matter is immaterial or impertinent when not relevant to the resolution of the issue at hand. Judicial Watch, Inc. v. Dep't of Commerce, 224 F.R.D. 261, 263 (D.D.C. 2004). Material is "scandalous" if it "generally refers to any allegation that unnecessarily reflects on the moral character of an individual or states anything in repulsive language that detracts from the dignity of the court." 2 Moore's Federal Practice § 12.37[3], at 12-97 ("Moore's"). These motions are strongly disfavored, and the decision of whether to strike all or part of a pleading or attachment thereto rests within the sound discretion of the court. See Judicial Watch, 224 F.R.D. at 263 (collecting authorities).

A court may also strike all or part of an affidavit for failing to satisfy the requirements of Federal Rule of Civil Procedure 56(e), which states:

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein.

Fed. R. Civ. P. 56(e).

A. The Ercolini Affidavit

MHFA filed a Motion [90] to Strike the Affidavit of Robert Ercolini, submitted by K&R as an exhibit to its opposition brief. MHFA contends that the bulk of the affidavit: (1) contains impermissible opinion testimony from an individual who was not disclosed as an expert; (2) is not based on personal knowledge; and (3) relies largely on impermissible hearsay evidence. Prior to filing the motion, MHFA's counsel contacted K&R's counsel by email on June 6, 2006, stating that MHFA would move to strike the Ercolini affidavit if K&R did not respond within 24 hours. When K&R's counsel, whose reply brief in support of summary judgment was due on June 7, failed to respond within the allotted 24 hours, MHFA filed a motion to strike on the evening of June 7. While K&R counters the motion by arguing that Ercolini's affidavit is admissible because it is based on his personal knowledge acquired by investigating MHFA, K&R also argues that MHFA's motion should be denied because MHFA failed to comply with Local Civil Rule 7(m).

Local Civil Rule 7(m) requires that, "[b]efore filing any nondispositive motion in a civil action, counsel shall discuss the anticipated motion with opposing counsel, either in person or by telephone, in a good-faith effort to determine whether there is any opposition to the relief sought and, if there is opposition, to narrow the areas of disagreement." LCvR 7(m). The Rule also requires that a party "shall include in its motion a statement that the required discussion occurred, and a statement as to whether the motion is opposed." Id. A nondispositive motion that does not comply with the Local Rule will be denied. Alexander v. FBI, 186 F.R.D. 185, 187 (D.D.C. 1999). The purpose of the Rule is to facilitate the informal resolution of disputes without court intervention, or "at least to reduce or narrow the issues the Court will consider." United States ex rel. Pogue v. Diabetes Treatment Centers of America, 235 F.R.D. 521, 529 (D.D.C. June 2, 2006). Because the Rule seeks to promote actual resolution of nondispositive disputes, its focus is on substance, not form, and thus "[t]he obligation to confer may not be satisfied by perfunctory action, but requires a good faith effort to resolve the nondispositive disputes that occur in the course of litigation." Id.

MHFA failed to put forth such an effort. While the Local Rule would not require that MHFA wait in vain on an evasive party, it at least "contemplates that counsel will speak to each other." GFL Advantage Fund, Ltd. v. Colkitt, 216 F.R.D. 189,194 (D.D.C. 2003). No such conversation occurred, and MHFA made only the most cursory attempt to see that one did. Indeed, the language of MHFA's email suggests that MHFA had already assumed what the outcome of such a discussion would be and viewed a conference as unnecessary. Moreover, the email effectively gave K&R one business day to respond, even though the Ercolini Affidavit had been on the docket for a full month. Had MHFA's counsel taken real steps to confer with K&R's counsel, such as contacting K&R's counsel by telephone or within a reasonable period prior to filing the motion, the parties may have been able to resolve or at least narrow the issues that the motion presents. For instance, a simple phone call, even if made at the last minute, may have revealed what K&R conceded in its opposition to the motion to strike; that certain parts of the affidavit may indeed be inadmissible. Because MHFA merely genuflected to the letter of the Rule instead of trying in good faith to achieve its objectives, its motion to strike is denied.*fn5

B. Exhibit A to MHFA's Reply

K&R moves to strike Exhibit A to MHFA's reply brief in support of summary judgment. The exhibit is a 57-page table consisting of three columns, in which MHFA sets forth the 103 paragraphs from its Statement of Undisputed Material Facts in one column, K&R's response to each paragraph in the second column, and MHFA's "Comments" in the third. The "Comments" are cribbed from MHFA's reply and represent its argument as to why MHFA's account of the facts, when stacked up against K&R's, supports summary judgment for MHFA. K&R argues that this is an attempt to evade the local 25-page limit for reply briefs by loading additional argument into the exhibit. See LcvR 7(e).

As MHFA points out, for the most part Exhibit A does not present any information or argument that is not contained in MHFA's reply; it is simply the same argument from the reply presented in a different manner. The chart sets out the parties' factual contentions in order, and then lists points from MHFA's reply brief next to the applicable factual contentions. This is organizational work that the Court would otherwise have to take upon itself, and it does not appear to have been an attempt by MHFA to evade any of this Court's rules.

MHFA has combed through its chart and identified only five entries that arguably were not presented in its reply brief, and thus would be argued for the first time in the chart. K&R does not identify any concrete way in which it would be prejudiced by admission of the exhibit. The fact that the chart consists overwhelmingly -- or perhaps entirely -- of information and argument presented elsewhere in the parties' various submissions supports the notion that the chart was submitted in good faith as a demonstrative exhibit, not as part of a bad faith effort to evade and undermine the purpose of the Local Rules. A "motion to strike is considered an exceptional remedy and is generally disfavored," Larouche v. Dep't of the Treasury, 2000 U.S. Dist. LEXIS 5078 at *40 (D.D.C. Mar. 31, 2000)(citingMoore's at § 12.37[1]), and the proponent of such a motion must shoulder a "formidable burden." Judicial Watch, Inc. v. Dep't of Commerce, 224 F.R.D. 261, 264 (D.D.C. 2004). K&R has failed to meet that burden here, and its motion to strike is therefore denied.

II. Summary ...


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