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Associated Mortgage Bankers, Inc. v. Carson

United States District Court, District of Columbia

January 4, 2019

ASSOCIATED MORTGAGE BANKERS, INC., Plaintiff,
v.
BEN CARSON, et al., Defendants.

          MEMORANDUM OPINION

          ELLEN S. HUVELLE, United States District Judge

         Defendants have filed a partial motion to dismiss plaintiff's amended complaint, or, in the alternative, to remand to the administrative agency. For the reasons set forth below, the Court grants the motion to remand in part and grants the motion to dismiss in part. The Court also enters judgment on plaintiff's behalf on its Appointments Clause claim (Count III). As a remedy, the Court vacates the December 16, 2016 decision and order by the U.S. Department of Housing and Urban Development (“HUD”) Administrative Judge and remands to HUD for a new hearing before a different official appointed in accordance with the Appointments Clause of the U.S. Constitution. The Court dismisses plaintiff's two remaining claims (Counts I and II) as moot.

         BACKGROUND

         I. FACTUAL BACKGROUND

         Plaintiff Associated Mortgage Bankers, Inc. (“AMB”) is a New York company that originates mortgage loans. (Am. Compl. ¶¶ 1-2, ECF No. 34.) Some of those mortgages are eligible to be insured by defendant HUD's Federal Housing Administration (“FHA”) insurance program. (Id. ¶ 2.) The FHA insures mortgage loans made by FHA-approved lenders for single family and multifamily homes. (Id. ¶¶ 10-11.)

         One of the FHA-insured loans originated by AMB (the “Loan”) became the subject of a HUD audit, which resulted in AMB and HUD entering into an Indemnification Agreement on December 10, 2012. (Id. ¶ 69.) HUD's audit had identified AMB lending practices that did not comply with FHA standards, thereby increasing the risk that the Loan would default; the Indemnification Agreement was signed to address this increased risk to HUD. (Decision of Administrative Judge at 2, Ex. 11 to Am. Compl., ECF No. 34-11.) Under the terms of the Indemnification Agreement, AMB “agree[d] to indemnify HUD for losses which have been or may be incurred related to the FHA Case Number 374-5838647 [the ‘Loan'].” (Indemnification Agreement ¶ 1, Ex. 3 to Am. Compl., ECF No. 34-3.)

         As part of its Single Family Loan Sales (“SFLS”) program, HUD sold the note for the Loan for $360, 531.24 in September 2013. (Am. Compl. ¶¶ 77, 92, 190.) AMB asserts that this only constituted 66% of the value of the collateral associated with the Loan. (Id. ¶ 128.) AMB represents that the property underlying the Loan was valued at somewhere between $530, 100 and $550, 000 at the time of the note's sale. (Id. ¶¶ 79-80.)

         SFLS is the name for a HUD program that, at an earlier time, was titled Accelerated Claim Disposition (“ACD”). (Id. ¶¶ 22-23.)[1] The program originated in February 2002, when HUD issued a “Notice of FHA Accelerated Claims Disposition Demonstration” (the “February 2002 Notice”). (Id. ¶ 24 (citing 67 Fed. Reg. 5, 418 (Feb. 5, 2002)).) The February 2002 Notice requested comments regarding a proposed program under which “HUD would pay accelerated claims on certain defaulted FHA-insured mortgages.” (Am. Compl. ¶¶ 24-25 (quoting 67 Fed. Reg. at 5, 418).)

         After a comment period, HUD published a final “Notice of FHA Accelerated Claims Disposition Demonstration” in October 2002, formally establishing the program (the “October 2002 Notice”). (Am. Compl. ¶ 26 (citing 67 Fed. Reg. 66, 038 (Oct. 29, 2002)).) The October 2002 Notice specified that the program would be limited in duration and geographic scope. 67 Fed. Reg. at 66, 040. It further stated that “[o]nly certain defaulted FHA-insured loans are eligible for the accelerated claim payment process.” Id. Among the restrictions on eligible loans was the requirement that “[t]o the knowledge of the participating mortgagee, the mortgage loan is not subject to an Indemnification Agreement as of the provisional claim approval date.” Id. at 66, 041.

         In June 2006, HUD publicly contemplated making the ACD program permanent. (Am. Compl. ¶¶ 35-36.) It published an Advance Notice of Proposed Rulemaking, seeking comments before proceeding to issue a proposed rule that would establish the program's permanence. (Id. (citing 71 Fed. Reg. 32, 392 (June 5, 2006)).) This proposed rulemaking was withdrawn in March 2007, and HUD has not initiated a new rulemaking process regarding the ACD program since that time. (Am. Compl. ¶¶ 44-45.) However, HUD has continued the program. HUD asserts in its motion-without any citation in support-that “HUD's decision to withdraw the June 2006 [Advance Notice of Proposed Rulemaking] reflects the agency's decision to continue the ACD Demonstration while retaining the flexibility to modify the procedures used.” (HUD Memo. in Support of Mot. to Dismiss or Remand (“HUD Mot.”) at 21, ECF No. 46-1.)

         When HUD sold the note for the Loan in 2013 as part of the SFLS program, it did so in a bulk sale of over two thousand notes. (Am. Compl. ¶¶ 83-84.) JPMorgan Chase Bank, N.A. (“JP Morgan”), the loan servicer, had entered into a Participating Servicer Agreement (“PSA”) with HUD in connection with this bulk sale. (Id. ¶¶ 104-05.) The PSA provided that HUD would pay JP Morgan's insurance claims for “Eligible Mortgage Loan[s].” (Id. ¶ 106.) Part of the definition of an “Eligible Mortgage Loan” in the PSA was that “the Mortgage Loan is not subject to an Indemnification Agreement.” (Id. ¶ 107; PSA at 9, Ex. 6 to Am. Compl., ECF No. 34-6.)

         JP Morgan made an insurance claim on the Loan in August 2013 in the amount of $520, 979.86. (Am. Compl. ¶ 114.) HUD paid this claim to JP Morgan on August 10, 2013, having “failed to screen out the Loan as ineligible for an insurance claim [under the terms of the PSA] due to the presence of the Indemnification Agreement.” (Id. ¶¶ 116-17.)

         On July 28, 2014, HUD sent AMB a demand notice seeking to recoup the $160, 448.62 difference between the amount HUD paid in the insurance claim and what it received in the sale of the note for the Loan. (Id. ¶ 145.) On October 13, 2014, HUD issued a notice indicating its intent to collect the amount via an administrative offset. (Id. ¶ 147.)[2] AMB disputed the debt. In response, HUD sent a December 8, 2014 letter in which it “acknowledge[d] that the indemnified loan was erroneously included” in the SFLS program, but asserted that “this event did not impact on the legal enforceability of the Indemnification Agreement.” (Dec. 2014 Letter, Ex. 10 to Am. Compl., ECF No. 34-10.)

         HUD regulations provide that “[a] debtor who receives notice of intent to offset . . . has the right to a review of the case” by an Administrative Judge (“AJ”) of the HUD Office of Appeals “and to present evidence that all or part of the debt is not past due or not legally enforceable.” 24 C.F.R. §17.69(a). In accordance with this regulation, AMB filed an appeal with HUD's Office of Appeals regarding the administrative offset sought by HUD. (Am. Compl. ¶ 167.)

         Before HUD AJ Vanessa L. Hall, AMB argued that it was not obligated to pay the alleged debt because 1) the mortgage insurance claim paid was not valid; 2) HUD breached the Indemnification Agreement by negligently including the Loan in the SFLS program; 3) HUD acted in contravention of its internal guidance; and 4) HUD violated the Indemnification Agreement's implied covenant of good faith and fair dealing. On December 16, 2016, the AJ issued a decision rejecting each of AMB's arguments and concluding that the debt was legally enforceable against AMB. (Decision of AJ at 3-9.)

         II. PROCEDURAL HISTORY

         On January 12, 2017, AMB filed suit against HUD and its Secretary (collectively referred to herein as “HUD”). AMB's initial complaint brought two claims: 1) an arbitrary-and-capricious challenge under the Administrative Procedure Act (“APA”) to the AJ's decision, and 2) a claim that HUD breached the Indemnification Agreement's implied covenant of good faith and fair dealing. (Compl. ¶¶ 47-56, ECF No. 1.) HUD filed a motion to dismiss, which was granted with respect to the implied covenant claim based on a lack of subject matter jurisdiction. Associated Mortg. Bankers, Inc. v. Carson,279 ...


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