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Associated Mortgage Bankers, Inc. v. Carson

United States District Court, District of Columbia

September 20, 2017

BEN CARSON, et al., Defendants.



         Before the Court is defendants' motion to dismiss, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). For the reasons that follow, the Court grants the motion in part and denies the motion in part.


         This suit involves a disagreement about the import of an indemnification agreement (“the Indemnification Agreement”) between plaintiff and defendants. Plaintiff Associated Mortgage Bankers, Inc. (“AMB” or “plaintiff”) originates mortgage loans, including mortgages that were eligible for insurance under the Fair Housing Act (“FHA”) insurance program administered by defendant Department of Housing and Urban Development (“HUD”) and its Secretary, defendant Ben Carson[1] (collectively, “defendants”). (Compl. ¶ 2.) In 2012, in connection with a HUD audit of an individual mortgage loan (“the Loan”), AMB entered into the Indemnification Agreement with HUD.[2] (Id. ¶ 9.)

         Therein, AMB agreed to indemnify HUD for losses “which have been or may be incurred related” to the Loan in the event of default “up to five years from the loan's date of endorsement.” (Id. Ex. A ¶ 1.) Paragraph 1(a) provides that “[i]n the event of a valid claim for insurance on any of the mortgages covered by this Agreement, indemnification will be in accordance with paragraph (b), (c), (d), or (e), whichever applies.” (Id. Ex. A ¶ 1(a).) Paragraph 1(a) defines HUD's investment and explains that “[t]o the extent HUD recoups any losses . . . or there is any discount on the property . . . HUD will deduct the amount of the recoupment or discount from HUD's Investment.” (Id.)

         Paragraph 1(b) defines AMB's liability in the event HUD conveys the property to the mortgagee, AMB, and further adds that “[i]f HUD does not convey the property to the Mortgagee, indemnification shall be calculated in accordance with paragraphs (c) or (d) as appropriate.” (Id. Ex. A ¶ 1(b).)

         Paragraph 1(c) provides in relevant part:

Where a HUD/FHA insurance claim has been paid in full and the property has been sold by HUD to a third party, the amount of indemnification is HUD's Investment as defined in paragraph (a), minus the sales price of the property to be paid in accordance with the terms of an invoice or bill the Department sends to the Mortgagee [AMB].

(Id. Ex. A ¶ 1(c).) Paragraph 1(d) provides in relevant part: “In any other case . . . the mortgagee shall pay HUD the amount of HUD's Investment in accordance with the terms of an invoice or bill the Department sends to the Mortgagee.” (Id. Ex. A ¶ 1(d).)[3]

         Finally, paragraph 2 states: “Any material breach of the terms and conditions of this Indemnification Agreement shall constitute independent grounds for imposition of administrative sanctions by the Mortgagee Review Board against Mortgagee pursuant to 24 CFR Part 25.” (Id. Ex. A ¶ 2.) The Indemnification Agreement does not otherwise limit or define the remedies either party can pursue in the event of breach. (See id.)

         On September 19, 2013, HUD sold the note for the Loan for $360, 531.24-instead of selling the property/collateral for the Loan-through its Single Family Loan Sale (“SFLS”) program. (Id. ¶¶ 10, 25.) HUD designed the SFLS program to reduce HUD's timelines for carrying costs of properties and to limit HUD's losses. (Id. ¶ 11; id. Ex. C.) Loans sold in the SFLS pool often garner a lower sales value because of the program's structure. (Id. ¶¶ 11-12; id. Ex. C.) Indeed, HUD only obtained 66% of the Loan collateral's appraised value. (Id. ¶ 10.)[4]

         “In order to sell notes as part of a bulk sale, ” HUD executed a Participating Service Agreement (“PSA”) with the servicer of the loans, JPMorgan Chase Bank, N.A (“JPMorgan”), pursuant to HUD's statutory and regulatory authorizations. (Id. ¶ 14; id. Ex. C.) The PSA required JPMorgan to submit an SFLS Claim Submission Report “to HUD after which HUD would advise [Servicer] of those ‘Eligible Mortgage Loans' which [Servicer] could include in the pool and subsequently file a claim for insurance.” (Id. ¶ 14 (alteration in original); see also Id. Ex. C at 15-16.) The PSA defines “Eligible Mortgage Loans” as, inter alia, a mortgage loan that “is not subject to an Indemnification Agreement, or other settlement agreement setting forth specific obligations with respect to Mortgage Loan unless such obligations have been fully satisfied.” (Id. Ex. C. at 9.) HUD was responsible for screening the SFLS pool for ineligible mortgage loans subject to an indemnification agreement.[5] The Loan was listed on HUD's FHA system as a loan subject to an indemnification agreement, meaning it was not an “Eligible Mortgage Loan” for the bulk sale. (Id. ¶ 17; id. Ex. D.) Therefore, according to the terms of the PSA, HUD should not have allowed the Loan to be sold as part of the bulk sale.

         Almost a year after the sale, on July 28, 2014, AMB received notification that HUD sought $160, 448.62 from AMB as insurable losses due under the Indemnification Agreement. (Id. ¶ 27.) When AMB objected to the sale, HUD replied that HUD “believe[s] that this debt is both past due and legally enforceable” despite “acknowledg[ing] that the indemnified loan was erroneously included in a Single Family Loan Sale (SFLS) Program.” (Id. Ex. E.)

         AMB timely appealed to HUD's Office of Hearings and Appeals, and on December 17, 2014, the Administrative Judge (“AJ”) “issued a stay pending a final decision on AMB's appeal.” (Id. ¶ 30.) On December 16, 2016, the AJ issued a Decision and Order under its jurisdiction to determine if AMB's “debt is past due and legally enforceable pursuant to 24 C.F.R. §§ 17.61 et. seq. . . . in accordance with the procedures set forth in 24 C.F.R. §§ 17.69 and 17.73.” (Id. Ex. F at 1.) The AJ found that (1) the insurance claim was valid, (2) HUD did not breach the Indemnification Agreement by including the Loan in the SFLS Program bulk sale, (3) HUD did not act in contravention of its own internal guidance when it failed to abide by the terms of the PSA, and (4) the sale of the Loan through the SFLS Program did not violate the implied covenants of good faith and fair dealing in the Indemnification Agreement between AMB and HUD. (Id. Ex. F at 3-9.) Accordingly, the AJ vacated the stay and authorized the collection of the “outstanding obligation by means of administrative offset of any federal payment due.” (Id. Ex F at 9.)

         On January 12, 2017, AMB filed the instant complaint requesting that the Court (1) set aside the AJ's decision as arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with the law in violation of the Administrative Procedure Act (“APA”); (2) declare HUD to be in breach of the Indemnification Agreement; (3) enjoin HUD from issuing any administrative offset or referring the debt to Treasury for collection; (4) certify this matter as a class action with AMB representing a class of similarly-situated lenders; (5) issue a preliminary injunction restraining HUD and its agents from taking action against AMB or the proposed class; and (6) award AMB attorney's fees and expenses, as well as granting any other proper relief. AMB pleaded two substantive counts to support its requested relief: (1) violation of the APA, 5 U.S.C. § 706(2)(A), and (2) breach of the covenant of good faith and fair dealing. (Id. ¶¶ 47- 56.)

         On May 23, 2017, defendants moved to dismiss for lack of jurisdiction and for failure to state a claim. Defendants argue that the Court lacks jurisdiction to consider Count I, the APA claim, because HUD has sovereign immunity in cases “where the gravamen of the complaint is a breach of a contract.” (Defs.' Mot. to Dismiss at 1.) Alternatively, defendants maintain that even if this Court has jurisdiction, the APA claim lacks merit because the law provides an adequate alternative remedy through a separate action for breach of contract. (Id. at 1-2.) As to Count II, which alleges a breach of the covenant of good faith and fair dealing, defendants argue that the claim is “belied by the plain language of the indemnification agreement” and AMB is ...

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