United States District Court, D. Maryland
UNITED STATES OF AMERICA ex rel. Charles E. Moore,
CARDINAL FINANCIAL CO., L.P., et al.
Catherine C. Blake United States District Judge
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.” 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.
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.
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).
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).
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).
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).
Alleged Fraudulent Scheme
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.
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.
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).
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. 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.
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). 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).
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).
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).
court will briefly summarize related litigation in state
court before detailing the procedural history of the present
qui tam lawsuit.
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. ¶
as relator, filed the current qui tam lawsuit on
June 20, 2012, with Rheinstein once again serving as counsel.
(Compl., ECF No. 1). 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).
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).
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.
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. 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.
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).
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
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).
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 ...