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United States v. Hodge

United States Court of Appeals, Fifth Circuit

August 8, 2019

UNITED STATES OF AMERICA, Plaintiff - Appellee
v.
JIM C. HODGE; ALLQUEST HOME MORTGAGE CORPORATION, formerly known as Allied Home Mortgage Corporation; AMERICUS MORTGAGE CORPORATION, formerly known as Allied Home Mortgage Capital Corporation, Defendants - Appellants

          Appeal from the United States District Court for the Southern District of Texas

          Before BARKSDALE, SOUTHWICK, and HAYNES, Circuit Judges.

          LESLIE H. SOUTHWICK, CIRCUIT JUDGE.

         After a five-week trial on False Claims Act and Financial Institutions Reform, Recovery and Enforcement Act claims, the government secured judgments and penalties that totaled nearly $300 million. On appeal, the defendants challenge the sufficiency of the evidence, the admissibility of the government's expert evidence, and the district court's dismissal of a juror shortly before the remaining jurors reached their verdict. We AFFIRM.

         FACTUAL AND PROCEDURAL BACKGROUND

         The Federal Housing Agency ("FHA") mortgage insurance program insures participating lenders against any losses on qualifying mortgage loans, which are primarily loans to first-time homebuyers.

         Jim Hodge was the owner and chief executive officer of defendants Allied Home Mortgage Capital Corporation[1] ("Allied Capital") and Allied Home Mortgage Corporation[2] ("Allied Corporation"). Both companies participated in the FHA insurance program but in different ways.

         Allied Capital was a loan correspondent, meaning it could originate loans but was not permitted to hold loans. 24 C.F.R. § 202.8(a). Instead, information it collected was forwarded to Allied Corporation, the lender or mortgagee responsible for underwriting and funding the loan. Id. § 202.7(a). As a loan correspondent, Allied Capital was required to obtain Department of Housing and Urban Development ("HUD") approval for each branch office where it originated loans.

         Participating lenders must submit a loan file to HUD to be endorsed for FHA insurance. Loan files submitted to HUD for endorsement are accompanied by Form 92900-A. That form requires the unique registration number for the originating branch as well as certification that the loan is eligible for insurance and compliant with HUD underwriting guidelines. Allied Corporation was a participant in HUD's "direct endorsement lender" program, which authorized it to determine eligibility on HUD's behalf by certifying that a given loan met FHA guidelines.

         In 2011, an Allied Capital branch manager filed a qui tam action under the False Claims Act ("FCA") alleging that the defendants had defrauded the government by fraudulently obtaining FHA insurance for loans that later defaulted. See 31 U.S.C. §§ 3729-33. The government exercised its right to intervene in the lawsuit. See id. § 3730(b)(2).

         Over the course of a five-week trial, the government advanced multiple theories of liability based on alleged violations of the FCA and the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA").

         The jury did not immediately return a verdict, which led to a sequence of events that culminated in the district court excusing one of the jurors. The day after the juror was excused, the jury returned a verdict finding Allied Corporation liable under the FCA for misrepresentations about its compliance with FHA underwriting guidelines. See 31 U.S.C. § 3729(a)(1)(A), (B). The jury awarded $85.6 million in damages. It likewise found Hodge and Allied Capital liable under the FCA for misrepresenting that loans actually originated by unregistered "shadow" branches were loans instead originated by registered branches. See id. § 3729(a)(1)(B). For that violation of the FCA, the jury awarded $7.4 million in damages. Finally, the jury also found all three defendants were liable under FIRREA for false certifications about their compliance with HUD's quality control requirements. See 12 U.S.C. § 1833a(a), (c)(1).

         The district court denied the defendants' motions for judgment as a matter of law and for a new trial. It also granted the government's post-trial motion for treble damages and civil penalties. It awarded treble damages and penalties under the FCA against Allied Capital and Hodge totaling $23.1 million, against Allied Corporation totaling $268.8 million, and FIRREA penalties of $2.2 million against each defendant.

         DISCUSSION

         We start with analysis of the sufficiency of the evidence, then discuss the admission of expert testimony, and finally address the dismissal of a juror.

         I. Sufficiency of the Evidence

         "A motion for judgment as a matter of law . . . in an action tried by jury is a challenge to the legal sufficiency of the evidence supporting the jury's verdict." Flowers v. S. Reg'l Physician Servs. Inc., 247 F.3d 229, 235 (5th Cir. 2001) (citations omitted); see also Fed. R. Civ. P. 50. Our review of the ruling on such a motion is de novo, using the same analysis as the district court that the motion should be granted if "there is no legally sufficient evidentiary basis for a reasonable jury to have found for that party with respect to that issue." Flowers, 247 F.3d at 235 (citation omitted). Granting the motion requires that the "facts and inferences point 'so strongly and overwhelmingly in the movant's favor that reasonable jurors could not reach a contrary conclusion.'" Id. (quoting Omnitech Int'l, Inc. v. Clorox Co., 11 F.3d 1316, 1322 (5th Cir. 1994)). "The district court's damages and penalty determinations are reviewed for an abuse of discretion." SEC v. Kahlon, 873 F.3d 500, 504 (5th Cir. 2017).

         "In determining whether liability attaches under the FCA, this court asks '(1) whether there was a false statement or fraudulent course of conduct; (2) made . . . with . . . scienter; (3) that was material; and (4) that caused the government to pay out money.'" United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645, 653-54 (5th Cir. 2017) (quoting Gonzalez v. Fresenius Med. Care N. Am., 689 F.3d 470, 475 (5th Cir. 2012)).

         A. False Claims Act - Unregistered Branches

         The jury found Hodge and Allied Capital liable under the False Claims Act and awarded $7.4 million in damages for concealing that unregistered branches had originated many of the loans being endorsed for FHA insurance.

         Hodge and Allied Capital argue there was insufficient evidence of scienter, materiality, and causation to support the jury's verdict.

         i. Scienter

         To prove scienter, the government must show "the [d]efendants had (1) actual knowledge of falsity, (2) acted with deliberate ignorance of the truth or falsity of the information provided, or (3) acted with reckless disregard of the truth or falsity of the information provided." United States ex rel. Longhi v. United States, 575 F.3d 458, 468 (5th Cir. 2009).

         The defendants argue there was no evidence that Hodge "or anyone at Allied Capital ever had any form of knowledge that these entries concerning the mere identity of a branch location were 'material to a false or fraudulent claim.'" The government, though, identifies evidence that Allied Capital, with Hodge's approval, hid the involvement of unregistered branches from HUD and that Hodge lied about them when the violations were discovered in a state audit. For example, Allied compliance chief Jeanne Stell Hammond testified that Hodge decided to continue originating loans from unregistered branches even after HUD notified them it was not permitted, and that Hodge did not want to register branches because of "the scrutiny by HUD."

         The jury could have relied on such evidence to find Hodge and Allied Capital acted with scienter.

         ii. Materiality

         The defendants argue there is insufficient evidence that the originating branch information was material. "[T]he term 'material' means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property," which requires us to evaluate "the effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Trinity Indus. Inc., 872 F.3d at 661 (emphasis omitted) (quoting Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989, 2002 (2016)).

         The gist of this inquiry is whether false representations about the originating branch for a loan induced HUD to issue insurance. The defendants rely on the fact that the form did not list the branch number as a matter certified to induce insurance; that underwriting certifications were more directly relevant; that HUD later eliminated the registration requirement; and that HUD knew about the unregistered branches when it issued insurance.

         Though the branch number was not listed as a matter certified to induce the insurance, there was testimony that the agency would not have insured loans originated by unregistered branches. The rationale for the rule was the agency's experience of higher default rates on loans from unregistered originators.

         The information would not likely have been material if it were true that HUD knew loans were originated by unregistered branches and insured them anyway because "continued payment by the federal government after it learns of the alleged fraud substantially increases the burden on the relator in establishing materiality." Trinity Indus. Inc., 872 F.3d at 663. The evidence at trial, though, showed the opposite. The government's "actions following its discovery of [the] fraud support, rather than undercut, a finding of materiality." United States v. Luce, 873 F.3d 999, 1008 (7th Cir. 2017).

         When HUD discovered a handful of loans originated from unregistered branches, it demanded the defendants agree to indemnify HUD in the event of claims "due to the seriousness of the violation." When the full extent of the conduct became apparent, HUD promptly acted to suspend and bar Hodge and Allied Capital from the FHA program entirely. "There was no prolonged period of acquiescence." Id. The defendants' assertion that the evidence showed HUD advised them ...


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