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State ex rel. Moore v. Cardinal Financial Co., L.P.

United States District Court, D. Maryland

March 28, 2017

UNITED STATES OF AMERICA ex rel. Charles E. Moore,


          Catherine C. Blake United States District Judge

         Charles E. Moore, a former mortgage broker, originally brought this claim against Cardinal Financial Company, L.P. (“Cardinal”) and others as a qui tam relator on behalf of the United States under the federal False Claims Act. Moore's former attorney, Jason Rheinstein, claims to have obtained all rights, title, and interest in the lawsuit and has continued to prosecute this qui tam action as a “successor in interest.”[1] Seven of the ten named defendants have filed motions to dismiss, while three have not filed responsive pleadings. For the reasons explained below, the defendants' motions to dismiss will be granted.

         I. BACKGROUND

         The federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq., generally makes liable to the United States “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the government. Id. § 3729(a). Private persons may act as relators and bring a civil action on behalf of the United States. Id. § 3730(b). The relator must first file suit under seal, giving the U.S. government time to investigate the claim and choose to either intervene in the action or allow the relator to proceed on his own. Id. The action is then unsealed and notice is provided to the defendant. If the action is successful, the relator receives a percentage of any proceeds. Id. § 3730(d).

         This FCA case centers on an alleged scheme in which ten named defendants, acting in concert, fraudulently procured mortgage insurance from the Federal Housing Administration (“FHA”) in 27 separate mortgage transactions (“subject transactions”). The loans in the subject transactions were originated between July 2009 and November 2010, and the fraudulent scheme allegedly could cost the government $2.6 million. (Am. Compl. ¶¶ 3, 8, ECF No. 21).

         A. FHA Mortgage Insurance

         FHA mortgage insurance protects commercial lenders against defaults on mortgage payments and thus encourages these lenders to make loans to borrowers who might not meet conventional underwriting requirements. (Am. Compl. ¶¶ 15, 35). At the same time, FHA only accepts a fixed level of risk, and a mortgage must meet certain requirements in order to qualify for mortgage insurance. These requirements relate to, inter alia, the borrower's income and creditworthiness and the valuation of the property subject to the mortgage. (Id. ¶¶ 15, 36).

         In order to expand the number of homeowners (and lenders) that the FHA insurance program can benefit, the program is implemented through the Direct Endorsement Lender (“DEL”) Program. (Id. ¶ 16). Under this program, the federal government “does not itself conduct a detailed review of applications for mortgage insurance before an FHA-insured mortgage closes.” (Id. ¶ 37). Instead, government-approved commercial lenders - known as direct endorsement lenders (“DELs”) - are tasked with determining if a potential borrower qualifies for FHA insurance. If so, the DEL closes the loan with the borrower and submits documents to the government certifying that the mortgage qualifies for FHA insurance. FHA then endorses the loan based on the DEL's certification. Accordingly, DELs obligate the government without independent government review. (Id. ¶¶ 37-39).

         If a borrower defaults on an FHA-insured mortgage, the holder of the mortgage - which could be the DEL or a third party - may submit a claim to the government for the costs associated with the defaulted mortgage, and the government covers those costs. (Id. ¶ 40).

         B. Alleged Fraudulent Scheme

         The relator -- and now Rheinstein, acting as a purported successor-in-interest - claim the defendants exploited the FHA insurance program by arranging sales of residential properties in Baltimore City, Maryland, to straw purchasers at inflated prices and fraudulently obtaining FHA mortgage insurance in connection with these sales. (Am. Compl. ¶¶ 50-75).

         The alleged scheme had three elements. First, certain defendants owned residential properties in Baltimore City. (Id. ¶¶ 53-55). These defendants, acting in concert with others, recruited and paid straw purchasers to act as named borrowers for FHA-insured mortgages that were originated by DELs. (Id. ¶¶ 55, 62). These straw purchasers should not have qualified for FHA mortgage insurance, partly because they had neither the capability nor the intention of repaying their mortgage loans. However, they qualified because defendants provided the DELs with “false information and phony documents” on behalf of the straw purchasers. (Id. ¶¶ 57-61). With mortgage insurance in hand, the straw purchasers qualified for substantial loans, which they used to purchase the properties at inflated prices. (Id. ¶ 53). The straw purchasers soon defaulted on their mortgage payments, and the properties entered foreclosure proceedings. But because the government had agreed to insure these mortgages, all losses associated with foreclosure proceedings were borne by the federal government. (Id. ¶¶ 64-72).

         The ten defendants allegedly played different roles in this fraudulent scheme. Three entities - E&W Realty, LLC (“EWR”), National Homes, LLC (“National Homes”), and KMJ Realty, LLC (“KMJ”) - owned and sold all but one of the properties at issue here. These three entities were allegedly under the sole ownership and control of a fourth defendant, Kathryn Jewell; collectively, these four defendants are referred to as “the Jewell defendants.” (Id. ¶¶ 26- 29). Defendant Boomerang Properties, LLC (“Boomerang”) was the seller in one of the suspected fraudulent transactions. (Id. ¶ 32). Defendant Robert S. Svehlak is allegedly one of two individuals who owns and controls a real estate and lending enterprise comprised of Boomerang and several other companies. (Id. ¶ 33). Defendants Ronald Miles and Jonathan Lee Miles both worked for Transatlantic Mortgage, LLC - a now-defunct company that allegedly served as the broker or originator for all the subject transactions. (Id. ¶¶ 30-31). Cardinal Financial Company, L.P. (“Cardinal”) served as a DEL and as the original mortgage lender for loans in the subject transactions. (Id. ¶ 24). Most subject transactions originated by Cardinal were then assigned to defendant Wells Fargo Bank, N.A. (“Wells Fargo”). (Id. ¶ 25).

         The amended complaint details how this scheme operated with respect to one particular transaction involving the sale of a property located at 2138 Hollins Street in Baltimore, which the amended complaint refers to Case No. 19 of the 27 subject transactions. Moore formerly owned this property but conveyed it to Boomerang, a defendant here, in 2009. (Id. ¶ 78 n.7). Boomerang then allegedly sold this property to a straw purchaser for $122, 000. (Id. ¶ 93). The proof that this transaction was fraudulent, according to the amended complaint, centers on a form known as a HUD-1 settlement statement.[2] This statement must be prepared at the closing of every real estate sale transaction involving an FHA-insured mortgage, and it must itemize all charges imposed on the buyer and seller in connection with the transaction. “For any given legitimate transaction, ” the relator stresses, “there can only be one version of a HUD-1 settlement statement because there can only be one true and accurate accounting of the funds which are received and paid out in connection with that specific real estate transaction.” (Id. ¶¶ 95-97). The HUD-1 settlement statement is one of the documents that a DEL must submit to the federal government in order to attain final approval for the FHA-mortgage insurance. (Id. ¶ 97).

         With respect to the sale of the Hollins Street property, and perhaps others, the amended complaint claims two versions of the HUD-1 settlement statement were produced “in order to deceive HUD about the true disposition of the mortgage loan proceeds that financed the transaction.” (Id. ¶ 98). With respect to the Hollins Street property, the “accurate” version of the form allegedly reveals that Boomerang gave $68, 740 of the sale proceeds to defendant EWR. (Id. ¶ 100). Especially because the property only sold for $122, 000, the relator claims this is far too high for a brokerage fee and that the $68, 740 payment instead reflects the fact that EWR had identified and recruited a straw purchaser pursuant to the alleged scheme. (Id. ¶ 107). The second version of the form, also attached to the complaint, simply omits this $68, 740 payment. The existence of the two forms - only one of which contains an “exorbitant” consulting fee paid to EWR - “would have made it blatantly obvious to anyone that the transaction was not legitimate, ” according to the amended complaint. (Id. ¶ 112). The amended complaint further claims that Cardinal received both versions of the form and chose to submit to the government only the version omitting the $68, 740 payment. (Id. ¶ 111).[3] According to the amended complaint, the mortgage transaction for the Hollins Street property closed on April 29, 2010. Roughly two weeks later - on or about May 10, 2010 - Cardinal submitted the final paperwork (including the “false” HUD-1 settlement statement) to the federal government and then assigned its security interest in the property to Wells Fargo. (Id. ¶¶ 146, 155). After the straw purchaser defaulted, Wells Fargo initiated foreclosure proceedings in October 2011, and subsequently made a claim on the FHA insurance in or around September 2014, and the federal government indemnified Wells Fargo for any losses in or about September 2014. (Id. ¶¶ 157-60).

         The amended complaint alleges the remaining 26 mortgage transactions “followed the same pattern” as the sale of the Hollins Street property, but provides less detail. (Id. ¶¶ 162-89).

         The present litigation concerns various alleged violations of the FCA. The amended complaint claims various defendants violated § 31 U.S.C. 3729(a)(1)(A), which provides for liability for any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval”; § 3729(a)(1)(B), which provides for liability for any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim”; § 3729(a)(1)(G), which provides for liability for any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government”; and § 3729(a)(1)(C), which imposes liability on any person who conspires to commit a violation of the FCA. (Id. ¶¶ 210-97).

         C. Procedural History

         The court will briefly summarize related litigation in state court before detailing the procedural history of the present qui tam lawsuit.

         The current qui tam litigation has its origin in a prior state court proceeding, Imagine Capital, Inc. v. Charles E. Moore et al., Case No. 24-C-09-003634 (Balt. City Cir. Ct.) (“Confessed Judgment Action”). That dispute centered on a construction loan provided by Imagine Capital - which is owned by Robert Svehlak, a defendant here - to Moore. After Moore defaulted on his loan repayments, a confessed judgment was entered against him in state court in June 2009. (Pl.'s Resp. in Opp'n to Mot. to Vacate, Confessed Judgment Case, Am. Complaint Ex. 7, ECF No. 21-8, 2-3). In light of his debt to Imagine Capital, Moore agreed to convey a property he owned - the 2138 Hollins Street property - to Boomerang, a company owned and controlled by Svehlak, on September 23, 2009. (Id. 3-4; Def.'s Mot. to Vacate, Confessed Judgment Case, Boomerang Mot. to Dismiss, Ex. A, ECF No. 29-4, 7-8). But the two sides then disagreed as to whether the conveyance of the 2138 Hollins Street property fully satisfied Moore's debt. (Pl's Resp. in Opp'n to Mot. to Vacate, Confessed Judgment Case 4; Defendant's Mot. to Vacate, Confessed Judgment Case 8-9). In light of that disagreement, Moore attempted to vacate the confessed judgment against him, and Rheinstein served as his counsel. (See Defendant's Mot. to Vacate, Confessed Judgment Case). Moore and Rheinstein first became aware of the alleged fraudulent scheme at issue in the current qui tam lawsuit in the fall of 2011 in the context of this Confessed Judgment Action in state court. In particular, they claim that Svehlak submitted a “suspicious exhibit” in the Confessed Judgment Action that tipped them off to the fact that Boomerang and others were engaged in mortgage fraud. (Am. Compl. ¶ 23).

         Moore, as relator, filed the current qui tam lawsuit on June 20, 2012, with Rheinstein once again serving as counsel. (Compl., ECF No. 1).[4] On February 20, 2013, however, Moore and his wife filed a joint voluntary petition for bankruptcy under Chapter 7 of the United States Bankruptcy Code. (Am. Compl. ¶ 23 n.2). As of February 20, 2013, then, it is alleged that all rights, title, and interest previously held by the relator in this qui tam lawsuit passed to the estate, and separate counsel (not Rheinstein) was appointed trustee. (Id.). While the trustee held the rights to the qui tam lawsuit, the federal government noticed its decision not to intervene in the lawsuit on November 10, 2014. (First Intervention Decision, ECF No. 15). On November 17, 2014, the court ordered that the complaint be unsealed and served upon the defendant, although it did not specify a time for doing so. (First Order Unsealing Compl., ECF No. 16). On March 17, 2015, Rheinstein - who was no longer counsel in this qui tam action but who claimed he was executing the wishes of the trustee, who now held the rights to the lawsuit - moved to extend the time for service through September 12, 2015. (First Mot. to Extend, ECF No. 17, ¶¶ 15-19). The motion to extend was granted on March 18, 2015. (Order Granting First Extension, ECF No. 18).

         After Mr. Rheinstein helped to secure that first extension on behalf of the trustee, all rights, title, and interest in the present qui tam lawsuit purportedly were transferred from the trustee to him on June 15, 2015. (Am. Compl. ¶ 23 n.2; Second Rheinstein Affidavit, Ex. 3, Notice of Assignment, ECF No. 39-5). Rheinstein had asserted a claim against Moore (and his wife) in the bankruptcy proceedings, and the transfer of rights in the qui tam case was meant to partially settle his claim. For that reason, Rheinstein now purports to continue the qui tam litigation “as the successor in interest to the Relator and the Estate.” (Am. Compl. ¶ 23 n.2). On September 12, 2015, Rheinstein - now as successor-in-interest - requested another extension, this time up to and including December 12, 2015. (Second Mot. to Extend, ECF No. 19), which was granted, (Order Granting Second Extension, ECF No. 20). Rheinstein did not serve the defendants by that date. Instead, he filed an amended complaint on December 12, 2015 - the same day service of the original complaint was due. (Am. Compl.). The next day - after the deadline for service - he filed a “Motion to File Amended Complaint In Camera and Maintain Records Under Seal.” (Mot. to File Am. Compl., ECF No. 22). In that motion, Rheinstein asked the court to enter an order 1) permitting the amended complaint to be filed and docketed in camera and remain under seal, and 2) providing that the defendants “shall not be served until the Government has noticed its intervention decision.” (Id. 4). That motion was granted on December 15, 2015. (Order Granting Mot. to File Am. Compl., ECF No. 23).

         Meanwhile, the U.S. government had filed criminal proceedings against three individuals - Kevin C. Campbell, Jonathan Miles, and Alberic Okou Agodio - “in connection with the scheme that resulted in the fraudulent mortgage transactions at issue” in the qui tam litigation. The government filed a case against Campbell on November 29, 2012 - about five months after the relator had filed his original qui tam complaint. The government then filed cases against Miles and Agodio on July 2, 2014, and February 18, 2015, respectively. (Am. Compl. ¶ 190). The government entered three separate plea deals with these defendants on November 15, 2012, June 26, 2014, and June 29, 2015. (Am. Compl. ¶¶ 192, 199, 204 & Exs. 18, 19, 20, ECF Nos. 21-18, 21-19, 21-20). These plea deals were entered after Moore filed the original complaint but before Rheinstein filed the amended complaint in December 2015.

         On February 16, 2016, the government declined to intervene with respect to the amended complaint. (Second Intervention Decision, ECF No. 26). Rheinstein then served the defendants with the amended complaint in the ensuing months.[5] Defendants Boomerang, Svehlak, Wells Fargo, Cardinal, Ronald Miles, Jonathan Miles, and Kathryn Jewell filed motions to dismiss on a variety of grounds. The remaining defendants - E&W Realty, KMJ Realty, and National Homes - have not filed responsive pleadings. Rheinstein has filed responses to most of the motions to dismiss, and the parties also have disputed other procedural matters related to these filings.

         In particular, Boomerang and Svehlak filed a motion to dismiss or, in the alternative, for summary judgment on May 2, 2016. (Boomerang Mot. to Dismiss, ECF No. 29). An initial response was filed on June 1, 2016, (Resp. in Opp'n to Boomerang Mot. to Dismiss, ECF No. 41), and an amended response was filed on June 3, 2016, (Amended Resp. in Opp'n to Boomerang Mot. to Dismiss, ECF No. 45). Boomerang and Svehlak replied on June 21, 2016. (Reply, Boomerang Mot. to Dismiss, ECF No. 52).

         Wells Fargo filed a motion to dismiss on July 15, 2016. (Wells Fargo Mot. to Dismiss, ECF No. 54). Rheinstein filed a response on September 26, 2016, (Resp. in Opp'n to Wells Fargo Mot. to Dismiss, ECF No. 109), and Wells Fargo replied on October 21, 2016. (Reply, Wells Fargo Mot. to Dismiss, ECF No. 115).

         Cardinal filed a motion to dismiss on July 15, 2016. (Cardinal Mot. to Dismiss, ECF No. 56). A response was filed on September 16, 2016 (Resp. in Opp'n, Cardinal Mot. to Dismiss, ECF No. 93), and then a corrected response was filed on September 25, 2016, (Amended Resp. in Opp'n, Cardinal Mot. to Dismiss, ECF No. 102). Cardinal moved to strike the amended response on September 27, 2016, (Cardinal Mot. to Strike, ECF No. 107), which Rheinstein opposed, (Resp. in Opp'n, Mot. to Strike, ECF No. 108). Cardinal then filed a reply on its motion to dismiss on October 11, 2016. (Reply, Cardinal Mot. to Dismiss, ECF No. 112).

         Ronald Miles filed a motion to dismiss on September 8, 2016. (Ronald Miles Mot. to Dismiss, ECF No. 79), and a response was filed on October 17, 2016, (Resp. in Opp'n, Ronald Miles Mot. to Dismiss, ECF No. 114). Jonathan Lee Miles filed a motion to dismiss on December 15, 2016, (Jonathan Lee Miles Mot. to Dismiss, ECF No. 123), and a response was ...

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