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United States v. Dolphin Mortgage Corp.

January 22, 2009


The opinion of the court was delivered by: Judge Robert M. Dow, Jr.

Magistrate Judge Denlow


Plaintiff United States of America ("Plaintiff") filed suit against Defendant Dolphin Mortgage Corporation ("Dolphin" or "Defendant"), alleging that Dolphin committed fraud upon the United States Department of Housing and Urban Development ("HUD") and in so doing, violated the False Claims Act ("FCA"), as amended 31 U.S.C. § 3279, et seq. Before the Court are Plaintiff's Motion for Summary Judgment [77], Defendant's Response [86], and Plaintiff's Reply [94]. For the reasons set forth below, Plaintiff's Motion for Summary Judgment is granted in part and denied in part.

I. Estoppel

As a threshold matter, Plaintiff argues that Dolphin should be estopped from denying certain admissions made in two plea agreements arising out of the same operative facts at issue in this case. Collateral estoppel is permissible under the FCA. In fact, the FCA includes a specific provision precluding certain parties from contesting civil liability if there has been a criminal conviction or plea under the same operative facts. The preliminary issue before the Court is the scope of that statutory preclusion and its relation to general collateral estoppel principles.

The FCA provides that "[n]otwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730."

31 U.S.C. § 3731(d). Dolphin has neither been convicted nor pleaded guilty to any criminal charges related to the facts at issue in this case. Yet Plaintiff contends that Dolphin is estopped from denying the guilty pleas (and the admissions contained therein) of certain individuals on account of their relationships to Dolphin.

Tamira Smyth ("Tamira")*fn1 and Nicole Williams ("Williams") each pleaded guilty to one count of mail fraud in violation of 18 U.S.C. § 1341. Tamira had some form of employment relationship with Dolphin, although the parties dispute the extent and precise scope of that relationship. Williams' relationship with Dolphin is even less clear. Plaintiff describes Williams as "Mrs. Smyth's loan processor and co-conspirator" and as someone who "signed a number of fraudulent loan origination documents bearing Dolphin's name." In Williams' plea agreement she is described as Tamira's "personal assistant."

There can be no dispute that the mail fraud charges to which the two pleaded guilty are "criminal proceedings charging fraud or false statements" within the meaning of Section 3731(d). It also is clear -- and Defendant makes no argument to the contrary -- that the facts giving rise to the criminal pleas involved "the same transaction" as the one before this Court.

The remaining issues are: (i) whether Dolphin can be considered a "defendant" under the statute; and, if so, (ii) what the essential elements of the mail fraud offense are.

In this instance, the Court need not proceed beyond the first question. On its face, the statute is somewhat ambiguous as to the scope of "defendant." One possible reading is that "defendant" is limited to the actual defendant who was convicted or pleaded guilty in the underlying criminal trial. Under that reading, Tamira's and Williams' pleas only could be used against them, individually, in a later civil suit. The other possible reading is that the estopped "defendant" is the defendant in the subsequent civil suit -- regardless of whether he or she (or it) was the defendant in the criminal trial. Under that broader construction, Dolphin conceivably could be precluded from denying the essential elements of mail fraud.

In support of its argument, Plaintiff relies on United States v. Anchor Mortgage Corp., 503 F. Supp. 2d 959 (N.D. Ill. 2007), in which the court broadly construed the term "defendant." In so doing, the court reasoned that if Section 3731(d) did not extend estoppel principles beyond the criminal defendant in the underlying case, it would add nothing to general collateral estoppel rules. Id. at 959. This Court respectfully disagrees and adopts a different view.

To begin with, although the language of Section 3731 is not crystal clear, this Court believes that the better structural and textual reading of that language indicates that the estopped "defendant" is the party against whom the "final judgment rendered in favor of the United States" in the criminal proceeding. The use of the word "estop" further supports that reading. "Estop" means "to bar or prevent by estoppel," and "estoppel," in turn, is "the barring of a person, in a legal proceeding, from making allegations or denials which are contrary to either a previous statement or act by that person or a previous adjudication." WEBSTER'S NEW WORLD COLLEGE DICTIONARY 487 (4th ed. 2007) (emphasis added).

Moreover, even if the term were susceptible to two plausible readings, the legislative history of Section 3731(d) indicates that the purpose of adding subsection (d) was not to expand general collateral estoppel rules to cover other defendants, but rather to permit nolo contendere pleas in criminal fraud cases to have preclusive effect in later civil litigation. See Senate Report 99-345, at 13676 (1986) ("Section 3 of the bill amends section 3731 of title 31 by adding a new subsection (d) providing that a nolo contendere plea in a criminal fraud case shall have estoppel effect in a subsequent civil action. Without this amendment, the well-settled rule that a nolo plea would have no collateral estoppel effect in related civil proceedings would apply.") The Senate Report specifically stated that "given the high priority which should be afforded to the effective prosecution of procurement fraud cases, an exception [to the general rule making nolo pleas inadmissible] should be made for False Claims Act cases. Moreover, even when the criminal prosecutor wants to pursue his case fully and gain a guilty verdict, the court could still accept a nolo plea over the Government's objection, thus requiring the Civil Division to relitigate the issue. The Committee believes that this would be an unacceptable result; individuals who cheat the Government should not be able to hide behind a nolo plea."

Id. The House Report similarly remarked that "[a]nother new provision to the False Claims Act incorporated in H.R. 4827 provides that a nolo contendere plea in a criminal prosecution would estop a defendant from denying liability in a civil suit involving the same transaction. The Committee determined that it was unfair to the Government to allow defendants who are cheating the Government by making false claims to enter a plea of nolo contendere in a criminal case and then force the Government to litigate the same issue for civil purposes." House Report 99-660, at 26 (1986).

Based on the foregoing discussion of the statutory text and legislative history, the Court concludes that the term "defendant" in Section 3731(d) is limited to the defendant in the underlying criminal trial. Because Dolphin itself was not convicted of any fraudulent activity, it is not a "defendant" for purposes of 3731(d) and therefore is not estopped under Section 3731(d) from denying the essential elements of the plea agreements.

II. Background

HUD, through the Federal Housing Administration ("FHA"), is authorized pursuant to Section 203(b) of the National Housing Act, as amended 12 U.S.C. § 1709(b), to insure lenders against loss on mortgage loans made to buyers of single family housing. Pl. SOF ¶ 1. Under the program's direct endorsement provisions, the lender makes a determination that the property and the borrower are eligible for mortgage insurance according to HUD's requirements. Id. Thereafter, the lender causes the loan to be closed and submits the prescribed paperwork to HUD for insurance endorsement. Id. Once the mortgage loan is insured, if the homeowner defaults on the loan and the lender forecloses, the lender may submit a claim under which HUD will pay the balance of the loan, related interest and other costs, and assume ownership and possession of the property. Id. at ¶ 2. HUD then incurs additional expenses for the management, maintenance, rehabilitation, and marketing of the property until it is resold. Id.

There are several steps in the creation of a HUD-insured mortgage loan. It begins with a loan originator/loan officer who has the borrower fill out and sign a loan application, sign a credit authorization, sign a borrower's authorization form, submit verification, and determine the type of loan product the borrower wants. Def. SOF ¶ 10. The loan originator/loan officer then presents the documents to the loan processor. Id. The loan processor reviews all of the documents obtained by the loan originator, including mortgage, rent, and bank information, and orders the verification of that information. Id. at ¶ 11. The loan processor also obtains all documentation and obtains pre-approval from a lender along with all federal and state signed disclosures. Id. The processor then submits the package to the underwriter. Id. Underwriting is a process through which loan documentation is examined and verified to permit the lender to determine whether it wishes to undertake the risk. Id. at ¶ 9. In the underwriting process, the lender reviews credit scores, debt-to-income ratios, verification of employment, deposits, bank statements, and other documents. Id. The underwriting was not performed by Dolphin. Id. at ¶ 21.

Dolphin was approved by HUD to be a "loan correspondent mortgagee," permitting it to originate HUD-insured mortgage loans for sale or transfer to another qualifying mortgagee, known as a "sponsor mortgagee." Pl. SOF ¶ 3. Dolphin was the "loan correspondent mortgagee" for the seven loans at issue in this case. Id.

In the fall of 1996, Dolphin interviewed a woman whom they knew as Tamira Russo to work as a loan originator/loan officer on an independent contractor basis. Def. SOF ¶ 1; Pl. SOF ¶ 4. During the interview, Dolphin learned that Tamira previously had worked as a loan originator at another mortgage brokerage. Def. SOF ¶ 3. Tamira provided a drivers' license to Dolphin. Id. at ¶ 2. Dolphin did not register Tamira as a loan originator or run a background check on her, nor were they required to do so at the time. Def. SOF ¶ 2; Pl. SOF. ¶ 5. However, as of the time that she applied for the job with Dolphin, Tamira had been arrested eight times for various offenses, including issuance of bad checks, fraud and deceptive practices. Pl. SOF ¶ 6.

Dolphin entered into an independent contractor agreement with Tamira, pursuant to which she was authorized by Dolphin to originate mortgage loans, including HUD insured loans. Def. SOF ¶ 4; Pl. SOF ¶ 8. At the initial interview, Dolphin advised Tamira that, as a matter of company policy, she was authorized to originate, but not to process, HUD loans. Def. SOF ¶ 8. Dolphin trained loan officers in the origination of loans through an internal training course. Id. at ¶ 23. Dolphin did not train its loan officers on HUD handbook provisions, but the Illinois Association of Mortgage Brokers offered a training course on the HUD handbook. Id. Dolphin loan officers attended that course. Id. It was Dolphin corporate policy that only loan originators could originate HUD loans and that any loan processing took place at the corporate office and by processors. Id. at ¶ 5.

For the performance of her duties, Dolphin provided Tamira with the ability to obtain business cards. Def. SOF ¶ 6. She also was allowed access to computer software permitting her to manipulate and enter electronic data into documents that HUD requires lenders to submit as a precondition to mortgage insurance. Pl. SOF ¶ 12. Dolphin provided Tamira with copies of the documents necessary to originate a HUD-insured loan, some of which had "Dolphin Mortgage" preprinted on the form. Id. at ¶ 13-14. She also was able to print blank copies of those documents from Dolphin's computer system. Id. at ¶ 13. Several of the documents for HUD-insured loans to which Tamira had access, including verifications of employment, verifications of deposit, Addenda to the Uniform Residential Loan Application and verifications of rent, had the name "Dolphin Mortgage" preprinted on them. Id. at ¶ 14. As a condition of participation in HUD insured loans, Dolphin was required to file with HUD a list of persons authorized to sign the Addendum to the Uniform Residential Loan Application and Lender Certification ("AURLALC"). Def. SOF ¶ 28. Tamira's name was not on the list of authorized signatories. Id.

Generally, after a loan closed, the title company sent Dolphin its loan origination fees in the form of a check. Pl. SOF ¶ 15. Dolphin then would deposit the check in its bank account and pay the loan officer a commission from the fees. Id. Dolphin claims that it has no record of receiving its portion of the loan origination fees from the loans at issue in this case. Def. Resp. SOF ¶ 15. However, Plaintiff has attached HUD-1 settlement statements for the loans at issue stating that Dolphin received origination and broker fees. Pl. SOF ¶ 60. Tamira stated she received her share of the origination fees for the seven loans at issue. Id.

While a loan officer at Dolphin, Tamira originated the seven loans at issue in this case. Pl. SOF ¶ 18. Tamira pleaded guilty to one count of mail fraud, 18 U.S.C. § 1341, in connection with her role in the "flipping" scheme. Id. at ¶ 16. Nicole Williams also pleaded guilty to one count of violating 18 U.S.C. § 1341. Id. at ¶ 17.

The transactions giving rise to this lawsuit were accomplished through back-to-back closings of property in reverse order -- that is, the second transaction in the chain of title closed first. Pl. SOF ΒΆ 19. For the loans in question, a "first purchaser" agreed to acquire property he did not own yet through a cash transaction. Id. Tamira or another individual then would recruit a "second purchaser" who, through Tamira's assistance, applied for and received a HUD-insured home mortgage loan. Id. The sales contract would reflect that the "second purchaser" was buying the property from the "first purchaser" although the "first purchaser" did not own the property at that point. Id. The "second purchaser" "purchased" the property from the "first purchaser" at an inflated price despite the fact that the "first purchaser" did not actually own the property. Id. Another individual then would provide the "first purchaser" with funds from the HUD-insured home mortgage loan and the "first purchaser" would use those funds immediately to purchase the property in a cash ...

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