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A former mortgage company employee who sued the company for allegedly falsifying loans in order to get federal insurance endorsement did not meet all of the criteria in the False Claims Act, the 7th Circuit Court of Appeals ruled in affirming a lower court’s decision.
Michelle Calderon worked as a direct endorsement underwriter from 2013 to 2015 at Carrington Mortgage Services, which works with the U.S. Department of Housing and Urban Development to certify residential mortgage loans for insurance coverage from the Federal Housing Administration.
Calderon became concerned about what she saw on the job, including alleged “reckless and inappropriate” underwriting practices, so she sued Carrington under the False Claims Act, which allows a private party to sue for violations on behalf of the government.
Under the act, a plaintiff has to plead and ultimately prove four elements:
- that the defendant made a false statement;
- that the defendant knew the statement was false;
- that the false statement was material to the government’s payment decision;
- and that the false statement caused the government’s loss.
Calderon alleged Carrington falsely certified several loans as meeting HUD’s minimum underwriting guidelines.
She argued if HUD had known of the errors in her loan files, it wouldn’t have endorsed those loans for federal insurance.
Calderon provided a sample “re-underwrite” of 349 federally insured loans, all of which later defaulted. Her analysis identified flaws, including instances where Carrington overstated the borrower’s income.
Calderon also offered herself as an expert and intended to testify about the shortcomings in Carrington’s quality control department, but the U.S. District Court for the Southern District of Indiana, Indianapolis Division, excluded the bulk of her opinion.
Carrington then moved for summary judgment, arguing Calderon couldn’t meet her evidentiary burden on the available record.
The district court granted the motion, agreeing Calderon couldn’t prove either materiality or causation — the third and fourth elements, respectively, of what a plaintiff must prove under the False Claims Act.
Calderon’s appeal mostly focused on the district court’s grant of summary judgment, with the 7th Circuit looking closer at the materiality and causation elements.
The district court held Calderon fell short on the materiality element because she didn’t present evidence that would permit a reasonable factfinder to conclude HUD viewed the alleged underwriting deficiencies as important.
But the 7th Circuit ruled that when the inferences are drawn in Calderon’s favor, there is enough evidence to clear the summary judgment hurdle.
The 7th Circuit cited letters from HUD to Carrington that detailed material loan deficiencies the department identified during a post-endorsement technical review of nine Carrington loans.
“We do not doubt that Carrington might be able to convince a rational trier of fact that the defects in the reviewed loans are factually distinguishable from the material defects identified in HUD’s letters or are capable of correction,” the opinion says. “But that does not warrant summary judgment.”
The 7th Circuit also said it was concerned with the weight the district court gave to its belief that HUD knew about Carrington’s false certifications. The court noted the extent of HUD’s knowledge is “still up for grabs” and not suitable for summary judgment.
Turning to the causation element, the 7th Circuit ruled that without more evidence a jury could use to conclude Carrington’s alleged misrepresentations in each loan caused the subsequent defaults, the misrepresentations alone weren’t enough to get past summary judgment.
Calderon argued she should have been able to extrapolate causation from a generalized statistical analysis of Carrington’s federally insured loans, while Carrington argued she should have had to go through each of the 349 loans and show how alleged false statements caused the defaults.
But the 7th Circuit ruled Calderon didn’t meet her burden under either method.
In addressing the loan-by-loan analysis, for example, the 7th Circuit said Calderon “proffered no expert who could interpret the codes, explain common causes of defaults, or discuss the defaults in the reviewed loans.
“Nor has Calderon herself undertaken the kind of analysis of the loan servicing records that would permit her to opine to the jurors about the events that caused a ‘Curtailment of Income’ and whether those events were related to the initial false statement.”
Calderon also challenged the district court’s decision to exclude portions of her expert testimony.
Though the 7th Circuit said the district court put too much weight on where Calderon worked, it ruled the district court ultimately didn’t abuse its discretion.
Thus, Calderon did not satisfy all four elements of the False Claims Act.
Judge Diane Wood wrote the opinion.
The case is United States of America ex rel. Michelle Calderon v. Carrington Mortgage Services, LLC, 22-1553.
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