Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 1 of 55 EXHIBIT A

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1 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 1 of 55 EXHIBIT A

2 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 2 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 1 of 40 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA UNITED STATES OF AMERICA, et al., ex rel. LAURENCE SCHNEIDER, v. Plaintiff-Relator, J.P. MORGAN CHASE BANK, N.A., et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) Case. No. 1:14-cv RMC RELATOR S MEMORANDUM IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS RELATOR S SECOND AMENDED COMPLAINT

3 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 3 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 2 of 40 TABLE OF CONTENTS INTRODUCTION...1 A. Defendant Chase s Fraud...2 B. Defendant Chase s Argument Consent Judgment HAMP...8 STANDARD OF REVIEW ARGUMENT...11 I. CHASE HAS IDENTIFIED NO PROCEDURAL BARRIERS THAT BAR SCHNEIDER S FALSE CLAIMS ALLEGATIONS A. The SPA Signed by Chase Makes the Consent Judgment Subject To the FCA...11 B. Schneider s Allegations that Chase Violated the Consent Judgment are not a Collateral Attack on the Monitor s Determination...13 II. SCHNEIDER S CLAIMS THAT CHASE FALSELY CERTIFIED COMPLIANCE WITH THE CONSENT JUDGMENT ARE MERITORIOUS...13 A. Crediting for a Loan Modification Under the Consent Judgment Depends On a Determination of Whether the Loan Qualifies for a Modification...13 B. The Consent Judgment Only Gives Chase Discretion to Give Consumer Relief to Borrowers Who Qualify for Credit...19 C. Chase s Violations of the Servicing Standards Created a Contractual Obligation to Pay Penalties, Which Chase Avoided by Making False Claims of Compliance to the Monitor...22 D. Schneider s Allegations that Chase Took Credit for Loans that Did Not Qualify for Credit and/or Were Owned by Others and that It Violated the Consent Judgment s Anti-Bright Requirements Constitute Valid FCA Claims...26 i

4 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 4 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 3 of 40 III. THE SAC ALLEGES THAT CHASE MADE BOTH MATERIAL AND KNOWING VIOLATING OF THE HAMP...28 A. Chase s Violations of the HAMP were Material...28 B. The SAC Alleges Facts that Demonstrate That Chase Knowingly Violated the MHA and the Consent Judgment CONCLUSION...33 CERTIFICATE OF SERVICE...34 ii

5 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 5 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 4 of 40 Cases TABLE OF AUTHORITIES American Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190 F.3d 729 (6th Cir.1999)... 23, 25 Ashcroft v. Iqbal, 556 U.S. 662 (2009) Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) United States ex rel. Boise v. Cephalon, Inc., 2015 WL (E.D. PA July 21, 2015)... 25, 26 United States ex rel. Booker v. Pfizer, Inc. No , 2010 WL (D. Mass. Mar. 26, 2014) United States ex rel. Burlbaw v. Orenduff, 548 F.3d 931 (10th Cir. 2006) Firestone v. Firestone, 76 F.3d 1205 (D.C. Cir. 1996) Hoyte v. Am. Nat l Red Cross, 439 F. Supp. 2d 38 (D.D.C. 2006) In re Interbank Funding Corp. Sec. Litig., 668 F. Supp. 2d 44 (D.D.C. 2009) United States ex rel. Landis v. Trailwind Sports Corp., 51 F. Supp.3d 9 (D.D.C. 2014) Leftwich v. Gallaudet Univ., 878 F. Supp. 2d 81 (D.D.C. 2012)... 10, 28 United States ex rel. Longhi v. Lithium Power Tech., Inc, 575 F.3d 458 (5th Cir. 2009) United States ex rel. Loughren v. Unum Group, 613 F. 3d 300 (1st. Cir. 2010)...29 iii

6 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 6 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 5 of 40 Ruscher v. Omnicare Inc., 2014 WL (S.D. Tex. Sept. 5, 2014) Scheuer v. Rhodes, 416 U.S. 232 (1974) United States ex rel. Taylor v. Gabelli, 345 F.Supp.2d 340 (S.D.N.Y.2004) United States ex rel. Wall v. Circle C Const., L.L.C., 697 F.3d 345 (6th Cir. 2012)... 7, 12 United States ex rel. Williams v. Martin-Baker Aircraft, 389 F.3d 1251 (D.C. Cir. 2004) United States v. Bank of America, 922 F. Supp. 2d 1 (D.D.C. 2013) United States v. Bank of America, 78 F.Supp. 3d 520 (D.D.C. 2015)... 8, 23 United States v. Bourseau, 531 F.3d 1159 (9th Cir. 2008) United States v. Neifert-White Co. 390 U.S. 228 (1968) United States v. Q Int l Courier, Inc., 131 F.3d 770 (8th Cir.1997) Statutes 31 U.S.C. 3729(a)(1)(A) U.S.C. 3729(a)(1)(B) U.S.C. 3729(a)(1)(G)... 1, U.S.C. 3729(a)(7) U.S.C. 3729(b)(1) U.S.C. 3729(b)(3)... 23, U.S.C. 3729(b)(4) iv

7 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 7 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 6 of U.S.C Legislative Material 155 CONG. REC. S S. REP Rules Fed. R. Civ. P. 12(b)(6) Fed. R. Civ. P. 15(a) v

8 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 8 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 7 of 40 INTRODUCTION Plaintiff/Relator Laurence Schneider ( Relator ) filed this action to recover damages and civil penalties under the False Claims Act ( FCA ) on behalf of the United States and himself, based on violations of the National Mortgage Settlement Agreement ( NMSA ) entered into by the United States and Defendants, J.P. Morgan Chase Bank, National Association, J.P. Morgan Chase & Company and Chase Home Finance LLC (collectively Chase or Defendant or Company ). Under the NMSA, Chase was required to meet certain loan servicing standards and consumer relief provisions. When Chase failed to meet those conditions, it was required to make certain payments to the United States and was also subject to penalties. In order to avoid these payments and penalties, Chase filed false reports and certifications with the Court appointed Monitor of the NMSA. These false certifications are actionable reverse false claims under 31 U.S.C. 3729(a)(1)(G), which prohibits the submission of a [knowingly] false record or statement material to an obligation to pay or transmit money or property to the Government, or [that] knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government. Id. This action also seeks to recover damages and civil penalties on behalf of the United States and on behalf of the Relator based on violations of the Amended and Restated Commitment to Purchase Financial Instrument and Servicer Participation Agreement ( Commitment or SPA ) entered into between the United States and Chase. Under the Commitment, Chase was required to meet servicing standards specified in the Home Affordable Modification Program ( HAMP ) and provide loan modifications to its borrowers. Chase was paid various amounts for each loan modification by the Government. Chase also received additional incentive payments based on its performance. Payments were conditioned upon 1

9 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 9 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 8 of 40 Chase certifying that it was in compliance with the HAMP servicing standards. Chase falsely certified that it was in compliance with those standards and created false records to support each certification. These false certifications and records are actionable under 31 U.S.C. 3729(a)(1)(A) & (B), which prohibit knowingly submitting a false or fraudulent claim for payment or approval or the use of a false record or statement material to a false or fraudulent claim. Id. A. Defendant Chase s Fraud Defendant Chase s fraud arises out of its response to efforts by the United States and the States (the States ) 1 to remedy the misconduct of Chase and other financial institutions whose actions significantly contributed to the consumer housing crisis. SAC 3. Defendant s misconduct resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members and other homeowners rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds. SAC 4. In March 2012, after a lengthy investigation, the U.S. Department of Justice and the States filed a complaint against Chase and the other banks responsible for the fraudulent and unfair mortgage practices. Specifically, the Government alleged that Chase, as well as other financial institutions, engaged in improper practices related to mortgage origination, mortgage 1 States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming; the Commonwealths of Kentucky, Massachusetts, Pennsylvania and Virginia, and the District of Columbia. 2

10 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 10 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 9 of 40 servicing, and foreclosures, including, but not limited to, irresponsible and inadequate oversight of the banks quality control standards. SAC 5. In April 2012, this Court approved a settlement between the Federal Government, the States, the Defendant and four other banks, which resulted in the NMSA. The operative document of this agreement was the Consent Judgment ( Consent Judgment or CJ ). See United States v. Bank of America, Corp., 1:12-cv RMC, Dkt 10 (April 4, 2012). Included in the Consent Judgment are Consumer Relief provisions, which require Chase to provide over $4 billion in consumer relief to their borrowers. This relief was to be in the form of, among other things, loan modification, forgiveness, and refinancing. Chase received credits towards its Consumer Relief obligations by forgiving or modifying loans it maintained as a result of complying with the procedures and requirements contained in Exhibits D and D-1 of the Consent Judgment. SAC 7. The Consent Judgment also contains Servicing Standards in Exhibit A that were intended to be used as a basis for granting Consumer Relief. The Servicing Standards were tested through various established Metrics and were designed to improve upon the lack of quality control and communication with borrowers. Chase s compliance was overseen by an independent Monitor. SAC 8. The Servicing Standards and Consumer Relief requirements of the NMSA were based on a series of Treasury Directives that were themselves designed as part of the Making Home Affordable (MHA) program. The MHA program was a critical part of the Government's broad strategy to help homeowners avoid foreclosure, stabilize the country's housing market, and improve the nation's economy by setting uniform and industry wide default servicing protocols, policies and procedures for the distribution of federal, and proprietary loan modification 3

11 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 11 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 10 of 40 programs. SAC 9. Both the Servicing Standards and Consumer Relief requirements are subject to and interpreted by the terms and provisions of Servicer Participation Agreement [ SPA ] with the Department of Treasury. (Attached as Exhibit 1) See CJ, Ex. A IX A. 1.; Ex. D 11. Relator discovered during the course of investigating Chase s servicing practices that Chase maintains a large set of loans outside of its primary System of Records ( SOR ), which is known as the Recovery One population ( RCV1 or RCV1 SOR ). SAC 16. RCV1 was described to the Monitor by Chase as an application for loans that had been charged off but still part of its main SOR. Id. However, once loans had been charged off by Chase, the accuracy and integrity of the information pertaining to the borrowers accounts whose loans became part of the RCV1 population was, and continues to be, fatally and irreparably flawed. The loans in the RCV1 were not serviced according to the requirements of Federal law, the Consent Judgment, the MHA programs, or any of the other consent orders or settlements reached by Chase with any government agency prior to the NMSA. Id. Chase instituted a practice of sending unsolicited debt-forgiveness letters to intentionally pre-selected borrowers of valueless loans. SAC 17. This practice did not meet the Servicing Standards set out in the Consent Judgment to establish eligibility for credits toward its Consumer Relief obligations. It also violated the Anti-Blight procedures set out in the Servicing Standards for forgiving and releasing first liens. Chase sought to take credit for valueless charged-off and third-party owned loans instead of applying the Consumer Relief procedures under the NMSA and MHA loan modification programs to properly vetted borrowers who could have applied for and benefitted from the relief and modification programs the borrowers that were originally intended by the Government to receive the benefit of the Government s bargain with Chase. Id. 4

12 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 12 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 11 of 40 The purpose of this scheme was to quickly satisfy the Defendant s Consumer Relief obligations as cheaply as possible, without actually providing the relief that Chase promised in exchange for the settlement that Chase reached with the Federal Government and the States. For example, Chase converted a pool of approximately $3 billion in 2 nd liens, whose lifetime collectability was only $4.2 million into credits equal to $397 million dollars. SAC 214. In a single move, Chase planned to increase its rate of return on these defaulted loans by nearly 100 times. Id. Since the requirement to provide $4 billion in consumer relief was intended in part as a punishment for Chase s past fraudulent and unfair mortgage practices, this result which could only be accomplished by violating servicing and crediting provisions of the Consent Judgment was obviously not the intent of that settlement. In addition, Chase applied for and received MHA incentive payments without complying with the MHA mandatory requirements. SAC 39. In short, Chase decreased its liabilities, increased its revenues, avoided its obligations, and provided little to no relief to consumers. The Servicing Standards and the Consumer Relief Requirements of the Consent Judgment are set forth in Exhibits A and D of that document. As indicated, the Consent Judgment is governed by the underlying SPA of the MHA program, which required mandatory compliance with the Treasury Directives under the MHA Handbook ( Handbook ). Chase is required to demonstrate compliance with the Handbook s guidelines in the form of periodic certifications to the government. Chase ignored the requirements of Exhibits A and D of the Consent Judgment, especially with respect to the RCV1 population of loans. Therefore, Chase has been unable to service with any accuracy the charged-off loans it owns and to segregate 5

13 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 13 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 12 of 40 those loans that it no longer owns. As such, any certifications of compliance with the Consent Judgment or the SPA are false claims. That Chase violated the terms of the Consent Judgment and the HAMP was confirmed by two independent investigations by the U.S. Trustee Program ( USTP ) and the Office of the Comptroller of the Currency ( OCC ). On March 3, 2015 the Department of Justice announced that the USTP had entered into a $50 million settlement agreement with JP Morgan Chase. As part of the settlement, Chase acknowledged that it filed over 50,000 false payment change notices ( PCN ) in bankruptcy courts around the country. SAC 167. On June 16, 2015, the OCC filed a document in bankruptcy court titled CONSENT ORDER AMENDING THE 2011 CONSENT ORDER and 2013 AMENDMENT TO THE 2011 CONSENT ORDER regarding Chase. SAC 169. The original consent order was issued after the OCC identified certain deficiencies and unsafe or unsound practices in residential mortgage servicing and in the Bank s initiation and handling of foreclosure proceedings. As part of the original OCC consent order, Chase agreed to take specific actions to correct its servicing deficiencies. The OCC s amended consent order details the many ways in which Chase violated these commitments. Id. On August 31, 2015, the Monitor of the NMSA published a report titled Office of Mortgage Settlement Oversight Bankruptcy Filings Review for JP Morgan Chase. SAC 168. The Monitor stated that he conducted a separate investigation and confirmed the USTP s findings that Chase had violated the NMSA s bankruptcy related servicing requirements. The Monitor explained that: [t]he USTP s review identified issues that were covered by the NMS standards but not covered by the quarterly NMS metrics testing detailed in Exhibit E of the Settling Servicers individual Consent Judgments. Id. When compared with the total number of 6

14 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 14 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 13 of 40 loans in bankruptcy Chase reported to the Monitor, 105,000, 2 the 50,000 false claims found by the USTP represent a defect rate of almost 50 percent. Thus, the Monitor confirmed that his methodology used to test Chase s compliance with the Consent Judgment s servicing requirements was seriously flawed and unable to detect serious violations by Chase. B. Defendant Chase s Argument A large part of Chase s argument depends on mischaracterizations of Schneider s allegations or the drawing of unwarranted conclusions from those allegations. Chase also focuses on a comparison between Schneider s First Amended Complaint and the SAC to make assertions that are also not warranted. Where necessary, this memorandum draws the Court s attention back to what is alleged instead of Chase s characterizations of those allegations. 1. Consent Judgment Chase has two principal arguments why Schneider s false claims allegations regarding the Consent Judgment should be dismissed: (1) violations of the servicing standards of the Consent Judgment are committed to the Monitor to enforce in the form of an alternative dispute resolution procedure, and (2) crediting under the Consent Judgment is not dependent on following the loan modification procedures set out in the Servicing Standards. The first argument fails because it is a form of a primary jurisdiction argument that has been largely rejected by the courts in FCA actions. See United States ex rel. Wall v. Circle C Const., L.L.C., 697 F.3d 345, 353 (6th Cir. 2012). Even if Chase s alternative dispute procedure argument were accepted, it would only apply to violations of Servicing Standards that are covered by testing 2 See Final Report-Template-Servicing-Performance-Data-1 (2).xlsx, (hereinafter Final Report Servicing Performance Data ). This document can be found at /reports/final-progress-report/. This document is referenced in SAC

15 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 15 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 14 of 40 metrics. This Court has already determined that suits to enforce Servicing Standards not measured by a Metric and suits to enforce other obligations under the Consent Judgment are allowed. United States v. Bank of America, 78 F. Supp. 3d 520, 531 (D.D.C. 2015). The second argument fails because Exhibit D of the Consent Judgment dealing with crediting explicitly states that it is governed by the SPA which deals with servicing under the MHA. Chase also argues that it has absolute discretion to determine the loans that it can take for credit under the Consent Judgment. This argument ignores the fact the Exhibit D sets out specific guidelines for taking credits under the Consent Judgment that permit crediting only when certain conditions exist. Because Chase failed to seek the information from the borrowers which it admits to determine if those condition were met, all of its certifications regarding crediting were false. Chase claims that Schneider asserts that Chase fell approximately $50 million short of satisfying its consumer relief obligation. Chase Mem. at 6. Even with Chase s references to the SAC, it is difficult to determine the source of this claim. Schneider did not make that assertion. Schneider does allege that all of Chase s credit claims are false, because it never attempted to determine if the loans qualified for credit. 2. HAMP Chase asserts that Schneider alleges that the HAMP requires perfect compliance with the HAMP servicing requirements. Schneider did not make that allegation, but his allegations do suggest that Chase failed to meet the servicing requirements by any reasonable measure. Chase asserts that Schneider did not allege its servicing violations were material because the size of the RCV1 population was small. This assertion is obviously false as Schneider alleged that the 8

16 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 16 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 15 of 40 number of RCV1 loans exceeded 500,000. SAC 228. Moreover, as explained below, this represents 74 percent of the loans that Chase claimed could have been considered for HAMP or Consent Judgment loan modifications. Further, the Threshold Error Rate of 5 to 10 percent for servicing Metrics suggests an appropriate standard for materiality under the Consent Judgment. See CJ Ex. E-1. Thus, by any measure, the number of loans in RCV1 makes Chase s false claims of compliance material to the Government s or the Monitor s decision to accept those certifications. Chase claims that Schneider acknowledges that the Government was aware of RCV1. Whether or not the Government was aware of RCV1 is not relevant; what is relevant is the extent of Chase s disclosure and whether it gave full notice of the size of RCV1 and the servicing practices associated with its charged-off loans. Chase underreported to the Monitor the number of second liens that were delinquent by over 180 days in RCV1 by a factor of 25. SAC There is no reason to believe that Chase was any more honest with the Treasury s compliance agent of the MHA, the MHA-C. Chase points out that the HAMP does not apply to charged-off loans if the servicer has released the borrower from liability for the debt and has provided a copy of such release to the borrower. Handbook at 64. However, Chase only began its practice of releasing liens and notifying borrowers in late SAC 208. Therefore that practice would have had no impact on certifications of compliance with the MHA prior to that time. Chase argues that Schneider s HAMP claims are limited to first liens. However, the complaint specifically alleges violations of the MHA and the SPA, which include requirements for modifying second liens. See SAC 2, 16, 17, 18, 19, 183. The requirements for providing 9

17 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 17 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 16 of 40 second lien modifications under the MHA are set out in Chapter V of the Handbook, Second Lien Modification Program (2MP) Handbook The first sentence of that chapter states: Id This Chapter provides guidance on the Second Lien Modification Program (2MP), which is designed to work in tandem with HAMP. Together, HAMP and 2MP create a comprehensive solution to help borrowers achieve greater affordability by lowering payments on both first lien and second lien mortgage loans. Therefore, any reference in the SAC to violations of the HAMP regarding second liens must be taken to refer to violations of the Second Lien Modification Program of the MHA as well. STANDARD OF REVIEW Federal Rule of Civil Procedure 12(b)(6), permits a defendant to file a motion to dismiss to test the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true. Leftwich v. Gallaudet Univ., 878 F. Supp. 2d 81, 89, 90 (D.D.C. 2012) (citing In re Interbank Funding Corp. Sec. Litig., 668 F. Supp. 2d 44, (D.D.C. 2009) ((citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). Ambiguities must be resolved in favor of Plaintiff, giving him the benefit of every reasonable inference drawn from the well-pleaded facts and allegations in the complaint. Id. at 90. To survive a Rule 12(b)(6) motion, the complaint must plead sufficient facts that taken as true provide plausible grounds that discovery will reveal evidence to support Plaintiff s allegations. Id. citing Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). A claim has facial plausibility when Plaintiff pleads factual content that allows the court to draw the reasonable inference that Defendant is liable for the alleged misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp., 550 U.S. at 570). 10

18 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 18 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 17 of 40 Also, because the SAC alleges violations of the False Claims Act, it must meet the requirements of Rule 9(b), which include allegations of the time, place and content of the false misrepresentation, the fact misrepresented and what was retained or given up as a consequence of the fraud and name the individuals involved in the fraud. United States ex rel. Williams v. Martin-Baker Aircraft, 389 F.3d 1251, 1256 (D.C. Cir. 2004). Chase does not suggest in its motion that Schneider s allegations are not plausible or that he has failed to meet particularity requirements of Rule 9(b). Since Chase s legal arguments are not a sufficient basis to dismiss the SAC, the motion to dismiss must be denied. ARGUMENT I. CHASE HAS IDENTIFIED NO PROCEDURAL BARRIERS THAT BAR SCHNEIDER S FALSE CLAIMS ALLEGATIONS A. The SPA Signed by Chase Makes the Consent Judgment Subject to the FCA. Chase argues that the Consent Judgment contains an alternative dispute mechanism that precludes enforcement of its provisions under the FCA. This argument ignores that the Consent Judgment and the HAMP are subject to the SPA, which Chase signed with Department of the Treasury. Ex. A IX A. 1.; Ex. D 11. That document specifically provides that any violations of the SPA are subject to the FCA. It states: Servicer acknowledges that the provision of false or misleading information to Fannie Mae or Freddie Mac in connection with any of the Programs or pursuant to the Agreement may constitute a violation of: (a) Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (b) the civil False Claims Act (3 I U.S.C ). Amended and Restated Commitment To Purchase Financial Instrument and Servicer Participation Agreement at B-4, Ex. 1 11

19 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 19 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 18 of 40 Based on this agreement there should be no question that any false claims made by Chase in connection with compliance with either the Consent Judgment or the HAMP are subject to the FCA. Moreover, the alternative dispute mechanism that Chase identifies is limited to disputes that the Monitor raises based on his evaluation of Chase s known practices. It does not deal with false claims and fraud of which the Monitor was unaware. It is important to remember that the objective of Congress in enacting the False Claims Act was broadly to protect the funds and property of the Government from fraudulent claims, regardless of the particular form, or function, of the government instrumentality upon which such claims were made... This remedial statute reaches beyond claims' which might be legally enforced, to all fraudulent attempts to cause the Government to pay out sums of money. United States v. Neifert-White Co. 390 U.S. 228, 233 (1968)(citation omitted). Chase s alternative dispute argument is similar to the argument that, when faced with an FCA action, the court should defer to an agency s primary jurisdiction. Most courts that have confronted a primary jurisdiction argument have rejected it. See Wall, 697 F.3d at 353. This is particularly true where the gravamen of the Complaint is that defendants defrauded the Government by falsely certifying compliance with governing administrative regulations. United States ex rel. Taylor v. Gabelli, 345 F.Supp.2d 340, 353 (S.D.N.Y.2004) (citation omitted). Thus, even if the Consent Judgment through the SPA did not provide for FCA enforcement, this action would still be proper. Finally, Chase s argument regarding judicial estoppel is untenable. Chase Mem. at Schneider is not arguing inconsistent positions. He sought transfer of his action to this Court because he believed that the Consent Judgment so required. He did not argue that the Consent Judgment prevented his FCA action and required its dismissal. To the contrary, the Consent 12

20 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 20 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 19 of 40 Judgment specifically provides for FCA actions. As such, Chase s argument regarding the reasons for Schneider s transfer motion is irrelevant. B. Schneider s Allegations that Chase violated the Consent Judgment are not a Collateral Attack on the Monitor s Determinations Chase s argument that Schneider s FCA claims represent a collateral attack on the Monitor s determinations is a variant of its alternative dispute argument, and is similar to a primary jurisdiction argument. It should be rejected for the same reasons. II. SCHNEIDER S CLAIMS THAT CHASE FALSELY CERTIFIED COMPLIANCE WITH THE CONSENT JUDGMENT ARE MERITORIOUS A. Crediting for a Loan Modification Under the Consent Judgment Depends on a Determination of Whether the Loan Qualifies for a Modification. The servicing standards set out in Exhibit A of the Consent Judgment provide specific rules for loan modifications. These requirements are similar to, and based on, the MHA. The crediting requirements set out in the consumer relief provisions of Exhibit D are dependent on the servicer following the loan modification rules of Exhibit A. There are numerous textual statements that make this clear. Perhaps the best example is the similar language under the headings Applicable Requirements at the end of both exhibits A and D of the Consent Judgment. Exhibit A states: The servicing standards and any modifications or other actions taken in accordance with the servicing standards are expressly subject to, and shall be interpreted in accordance with, (a) applicable federal, state and local laws, rules and regulations, including, but not limited to, any requirements of the federal banking regulators, (b) the terms of the applicable mortgage loan documents, (c) Section 201 of the Helping Families Save Their Homes Act of 2009, and (d) the terms and provisions of the Servicer Participation Agreement with the Department of Treasury.... CJ, Ex. A XI.A.1 at A-41. (emphasis added) 13

21 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 21 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 20 of 40 Exhibit D states: The provision of consumer relief by the Servicer in accordance with this Agreement in connection with any residential mortgage loan is expressly subject to, and shall be interpreted in accordance with, as applicable, the terms and provisions of the Servicer Participation Agreement with the U.S. Department of Treasury.... CJ, Ex. D 11 at D-12 (emphasis added). The terms and provisions of the SPA are the links that specifically tie the provisions for consumer relief to the servicing requirements. Specifically, Chase agreed in that document to be bound by the terms of the MHA which sets out the servicing standards for giving consumer relief through modification of first and second liens. See SPA, at A-1 and A-2. Ex 1. All of the requirements in the SPA deal with the proper steps for obtaining information from the borrowers to determine if their loans qualify for modifications. Exhibit A of the Consent Judgment regarding servicing for first lien modification merely repeats the requirements of the HAMP. Therefore, consumer relief given under Exhibit D (crediting) necessarily depends on servicing. HAMP Procedures require: Before a servicer may modify a first lien under the HAMP, the servicer must determine if the loan meets certain criteria. Handbook To accomplish this determination each servicer must have clear and comprehensive internal written policies for identification and solicitation of borrowers who are potential Handbook 69. Servicers must proactively solicit for HAMP any borrower whose loan passes a pre-screening and all attempts at contact must be documented in the servicing file. Handbook Each borrower that is potentially eligible for a HAMP modification must be assigned a relationship manager to serve as the borrower s single point of contact. Handbook

22 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 22 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 21 of 40 Before a servicer may evaluate a borrower for a loan modification it most receive certain documents from the borrower, including a Request for Mortgage Assistance ( RMA ), tax information, evidence of income and a Dodd-Frank Certification. Handbook 81. The information contained in this RMA is necessary for the servicer to determine whether a borrower is eligible for a loan modification. Id. The procedures for obtaining that information are set out in servicing standards at IV.D. Loss Mitigation Communication with borrowers is based on the HAMP requirements. CJ Ex. A at A Paragraph 1 of subpart D states: Servicer shall commence outreach efforts to communicate loss mitigation options for first lien mortgage loans to all potentially eligible delinquent borrowers (other than those in bankruptcy) beginning on timelines that are in accordance with HAMP borrower solicitation guidelines set forth in the MHA Handbook version 3.2, Chapter II, Section 2.2, regardless of whether the borrower is eligible for a HAMP modification.... Servicer shall conduct affirmative outreach efforts to inform delinquent second lien borrowers (other than those in bankruptcy) about the availability of payment reduction options.... (Section 2.2 appears at 69 of the current version of the Handbook) CJ Ex. A. at A-23. The examples of language from Exhibit D that Chase argues prove that consumer relief and crediting do not depend on servicing demonstrate exactly the opposite. Chase Mem. at 20. The first two, related to crediting for first and second liens, are instructive. Chase quotes the following from crediting requirements for first-lien modification: Servicer will receive credit... for first-lien mortgage loan modifications made in accordance with the guidelines set forth in this Section 1. C.J. Ex. D 1. (emphasis added) The referenced guidelines state in part: b. First liens on occupied 1 Properties with an unpaid principal balance ( UPB ) prior to capitalization at or below the highest GSE conforming loan limit cap as of January 1, 2010 shall constitute at least 85% of the eligible credits for first liens (the Applicable Limits ). 15

23 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 23 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 22 of 40 c. Eligible borrowers must be at least 30 days delinquent or otherwise qualify as being at imminent risk of default due to borrower s financial situation. d. Eligible borrowers pre-modification loan-to-value ratio ( LTV ) is greater than 100%. e. Post-modification payment should target a debt-to-income ratio ( DTI )2 of 31% (or an affordability measurement consistent with HAMP guidelines) and a modified LTV3 of no greater than 120%, provided that eligible borrowers receive a modification that meets the following terms: i. Payment of principal and interest must be reduced by at least 10%. ii. Where LTV exceeds 120% at a DTI of 31%, principal shall be reduced to a LTV of 120%, subject to a minimum DTI of 25% (which minimum may be waived by Servicer at Servicer s sole discretion), provided that for investor-owned loans, the LTV and DTI need not be reduced to a level that would convert the modification to net present value ( NPV ) negative. 1 Servicer may rely on a borrower s statement, at the time of the modification evaluation, that a Property is occupied or that the borrower intends to rent or reoccupy the property. CJ, Ex. D 1. Obviously, all of these guidelines require the servicer to obtain information from the borrower to determine in the first instance whether a loan is eligible for modification. This can only be done as required by the HAMP by contacting the borrower to determine if a loan meets the requirements set out in the guidelines. Chase paraphrases the requirement for second lien crediting as follows: A write-down of a second lien mortgage will be creditable where the writedown complies with the guidelines set forth in Exhibit D and the accompanying Table 1. Id. Ex. D 2(a)-(b) (emphasis added). The complete cited provisions state as follows: a. Servicer is required to adhere to these guidelines in order to receive credit under Table 1, Section 2. 16

24 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 24 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 23 of 40 b. A write-down of a second lien mortgage will be creditable where such writedown facilitates either (a) a first lien modification that involves an occupied Property for which the borrower is 30 days delinquent or otherwise at imminent risk of default due to the borrower s financial situation; or (b) a second lien modification that involves an occupied Property with a second lien which is at least 30 days delinquent or otherwise at imminent risk of default due to the borrower s financial situation. CJ Ex. D 2(a)-(b). Again, this provision requires obtaining information from the borrower that would allow it to determine whether the Property is occupied and whether a write down of the 2nd lien would facilitate a modification of a 1st lien. Clearly, the crediting provisions of the Consent Judgment do not exist in isolation. They require information from the borrower through procedures set out in the MHA Handbook and the servicing standards of Exhibit A. Finally, proof that servicing is required before crediting may be obtained is contained in the introduction of Exhibit D. It states: For the avoidance of doubt, subject to the Consumer Relief Requirements described below, Servicer shall receive credit for consumer relief activities with respect to loans insured or guaranteed by the U.S. Department of Housing and Urban Development, U.S. Department of Veterans Affairs, or the U.S. Department of Agriculture in accordance with the terms and conditions herein, provided that nothing herein shall be deemed to in any way relieve Servicer of the obligation to comply with the requirements of the U.S. Department of Housing and Urban Development, U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture with respect to the servicing of such loans. CJ, Ex D at D1 (emphasis added). For the avoidance of doubt, the foregoing is an explicit statement that loans not directly covered by the MHA require servicing before the servicer can obtain credits for loan modifications. It would be highly unlikely that the Consent Judgment would require non-mha loans to be serviced before they would be eligible for credits while not requiring servicing of 17

25 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 25 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 24 of 40 loans covered by the MHA. Thus, this provision reinforces the position that Chase must follow the servicing requirements of the MHA and Exhibit A before it can claim credits for loan modification. Based on the allegations in the SAC, Chase did not do this prior to claiming credits under the Consent Judgment, and is thus liable under the FCA for its false certifications of compliance. Chase argues that the plain language of Exhibit D supports its argument that crediting does not depend on servicing. Chase can only make its plain language argument by ignoring a large part of the guidelines. Even the word guidelines suggests that one must look at the guidelines to determine if there are any requirements for giving the consumer credit. As demonstrated, there are numerous requirements that the SAC alleges Chase failed to follow. Chase also makes the incredible argument: Schneider s reading of the consumer relief provisions also would have the bizarre effect of discouraging servicers from providing relief to the very consumers who are most deserving of such relief those whose loans were poorly serviced. Chase Mem. at 21. This is exactly the point. If Chase does not service the loan, how does it know that it qualifies for consumer credit? As alleged in the SAC, Chase took credit for loans where the borrower no longer occupied the property. SAC 217. Many second liens that Chase sought to take credit for were no longer valid because foreclosure of the first lien had wiped out the second. SAC 218. Chase also sought to take credit for forgiving second liens where the first lien was current, which was also prohibited by the Consent Judgment. SAC All of these actions took place because Chase did not receive any information from the borrowers that would allow it to determine if its loan modifications qualified for credit. Finally, Schneider does not suggest in the SAC that any violation of the servicing standards would disqualify a servicer from receiving consumer relief credit. Chase Mem. at

26 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 26 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 25 of 40 He does argue that Chase s servicing was so defective that it would prevent the proper determination of whether the loans for which Chase sought to take credit actually qualified for that credit. SAC 99. The fact that the Monitor filed reports with the Court that Chase qualified for the credits does not mean that Chase did not file false claims with the Monitor. As noted in the SAC, since Schneider s original complaint was filed, the USTP and Office of the Comptroller of the Currency OCC, in separate actions, found serious servicing violations by Chase that implicate the Servicing Standards of Exhibit A. SAC In response the USTP filings, the Monitor stated only that [t]he USTP s review identified issues that were covered by the NMS standards but not covered by the quarterly NMS metrics testing detailed in Exhibit E of the Settling Servicers individual Consent Judgments. SAC 168. Essentially, the Monitor admitted that the procedures set up to oversee Chase s compliance with the Consent Judgment were inadequate to the task, and that Chase could commit massive violations of the Consent Judgment without his knowledge. B. The Consent Judgment Only Gives Chase Discretion to Give Consumer Relief to Borrowers Who Qualify for Credit. Chase argues that it has discretion to select the borrowers who will receive consumer relief. Chase Mem. at 23. This is true to the extent that Chase first determines that the borrowers qualified for consumer relief. As explained above, this determination requires information from borrowers, which Chase did not obtain before it modified the loans and took credit for those modifications. Chase claims that the other four servicers who entered into the consent judgment failed to obtain information from the borrower before granting loan modifications and taking credits. If true, this is an extraordinary admission that calls into question the purpose of the HAMP and 19

27 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 27 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 26 of 40 Consent Judgment to get consumer relief to those borrowers who qualify and need it most not to help the banks bottom lines. Again, Chase argues that there is no application process necessary to obtain consumer relief and that there is nothing in Exhibit D of the Consent Judgment that requires such a process. And again, Exhibit D clearly states that consumer relief and crediting is governed by the SPA. CJ, Ex. D 11 at D-12. The SPA requires that Chase follow the procedures outlined in the HAMP, which requires an application process before granting consumer relief. Chase can point to no language that exempts it from the HAMP requirements in giving consumer relief; therefore, this argument must be rejected. Chase argues that [t]he Monitor, the Monitoring Committee, and the governmental parties to the NMS have known all along that Chase was using its own discretionary criteria to select the borrowers to whom it provided the Consumer Relief. Chase Mem. at 24 (emphasis in original). To support this proposition it cites pages from the Monitor s Interim Report dealing with Non-Creditable Requirements. The quoted passage is contained in a paragraph describing interviews the Monitor conducted to assess compliance with the Non-Creditable Requirements. The Monitor states: The focus of this interview process was an inquiry into the processes and procedures that Servicer utilized to (i) select the borrowers to whom it provided the Consumer Relief for which it now seeks and will in the future seek credit pursuant to the Judgment and (ii) ensure that it is complying with the Non- Creditable Requirements. Monitor s Interim Consumer Relief Report Regarding Defendant J.P. Morgan Chase Bank, N.A, 1:12-cv RMC, Doc. 106 at 31 (emphasis added). Since the Monitor inquired into processes and procedures... [to] ensure that [Chase] is complying with the Non-Creditable Requirements, obviously the Monitor 20

28 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 28 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 27 of 40 did not believe that Chase has complete discretion to grant Consumer Relief as it saw fit. This conclusion is confirmed by the Monitor s description of the testing to determine whether loans qualified for crediting: Approach to Testing Loans. On a quarterly basis, for each of the loans in the samples drawn from the four Testing Populations, the IRG conducted an independent review to determine whether the loan was eligible for credit and the amount of credit reported by Servicer was calculated correctly. The IRG executed this review pursuant to and in accordance with the Testing Definition Templates and related test plans for each of the four Testing Populations by accessing from Servicer s System of Record the various data inputs required to undertake the eligibility determination and credit calculation for each loan. Additionally, the IRG captured and saved in its Work Papers available screenshots from the SOR evidencing the relevant data. For each loan in a sample, the IRG determined whether it was eligible for credit based upon the assembled data for that loan, again following the appropriate Testing Definition Template and related test plans. If a loan was determined to be ineligible for credit, the IRG would conclude that Servicer should receive no credit for that loan. For each loan it determined to be eligible for credit, the IRG would recalculate the credit amount. Id. at 17 (emphasis added). This paragraph also demonstrates a lack of complete discretion in the taking of credits. The IRG represented to the Monitor that it was testing individual loans to determine whether they were eligible for credits by looking at assembled data for each loan. This paragraph does not describe the source of that data, but some form of inquiry would have been necessary to come from the borrower to determine eligibility. If, as Chase argues now, there was no application process, this paragraph suggests that there was a fraud on the Monitor, because without some information gathering process, there would have been no way for the IRG to validly test crediting compliance. 21

29 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 29 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 28 of 40 C. Chase s Violations of the Servicing Standards Created a Contractual Obligation to Pay Penalties, Which Chase Avoided by Making False Claims of Compliance to the Monitor Chase argues that Schneider s servicing claims... fail because any servicing-related penalties that Chase theoretically might owe to the government are too uncertain and contingent to constitute an obligation to pay money to the government within the meaning of 31 U.S.C. 3729(a)(1)(G). Chase Mem. at 26 (emphasis added). The servicing penalties at issue are those set out in CJ, Ex. E J(3)(b), which provides for civil penalties of not more than $1 million per uncured potential violation and up to $5 million under certain circumstances. penalty. Chase argues that a number of steps would have to occur before it could be assessed a the Monitor would have to find that Chase committed a Potential Violation of a servicing metric; Chase would have to fail to cure the Potential Violation; the dispute resolution procedures set forth in the NMS would have to be followed without success; a party to the NMS or the Monitoring Committee would have to exercise its discretion to bring an Enforcement Action; and the Court would have to exercise its discretion to award a penalty. Chase Mem. at 27. This argument ignores that all of these steps would never occur because of Chase s false claims of compliance with its obligations under the Consent Judgment and the Monitor s failure to detect the violations of the servicing requirements. Essentially, Chase argues that an 22

30 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 30 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 29 of 40 actionable reverse false claim cannot exist if it is contingent on getting caught. This is absurd, and in part, an interpretation that the 2009 amendments to the FCA were intended to correct. 3 Chase relies heavily on Hoyte v. Am. Nat l Red Cross, 439 F. Supp. 2d 38 (D.D.C. 2006), aff d, 518 F.3d 61 (D.C. Cir. 2008), which in turn relies on cases such as United States ex rel. American Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190 F.3d 729, 736 (6th Cir.1999) (hereinafter ATMI) ( a reverse false claim action cannot proceed without proof that the defendant made a false record or statement at a time that the defendant owed to the government an obligation sufficiently certain to give rise to an action of debt at common law ) and United States v. Q Int l Courier, Inc., 131 F.3d 770, 774 (8th Cir.1997) ( A potential penalty, on its own, does not create a common-law debt. A debt, and thus an obligation under the meaning of the False Claims Act, must be for a fixed sum that is immediately due. ). See Hoyte, 439 F. Supp. 43. Subsequent to those cases, Congress passed the Fraud Enforcement and Recovery Act of 2009 ( FERA ), which was signed by the President on May 20, As noted in the Senate Report to the FERA: [T]his legislation addresses current confusion among courts that have developed conflicting definitions of the term obligation in Section 3729(a)(7). [specifically referencing ATMI] The term obligation is now defined under new Section 3729(b)(3) and includes fixed and contingent duties owed to the Government including fixed liquidated obligations such as judgments, and fixed, unliquidated obligations such as tariffs on imported goods. It is also noteworthy to restate that while the new definition of obligation expressly includes contingent, non-fixed obligations, the Committee supports the position of the Department of Justice that current section 3729(a)(7) speaks of an obligation, not a fixed obligation. By including contingent obligations such as, 3 Chase s argument at II.B. of its Memorandum only addresses Schneider s allegations regarding Chase s servicing violations. It does not apply to Schneider s allegations of crediting violations. Moreover, the argument at II.B.2. regarding the definition of obligation under the FCA is further limited to violations of those servicing metrics tested by the Monitor that involve an uncured potential violation and where the Consent Judgment sets out procedures for imposing penalties. It does not address untested serving metrics for which there are no procedures set out in the Consent Judgment to impose penalties. See Bank of Am.., 78 F.Supp. 3d at

31 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 31 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 30 of 40 implied contractual, quasi-contractual, grantor-grantee, licensor-licensee, feebased, or similar relationship, this new section reflects the Committee s view, held since the passage of the 1986 Amendments, that an obligation arises across the spectrum of possibilities from the fixed amount debt obligation where all particulars are defined to the instance where there is a relationship between the Government and a person that results in a duty to pay the Government money, whether or not the amount owed is yet fixed. S. REP (2009) at 14 (footnotes omitted). Prior to the 2009 amendments the term obligation was not defined. It is now defined in 3729(b)(3) as: an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment U.S.C. 3729(b)(3). Chase points out that the original language of the 2009 amendments contained the word contingent, and argues that this amendment excludes from the scope of the statute Schneider s servicing claims. The original language defined obligation as: a fixed duty, or a contingent duty arising from an express or implied contractual, quasi-contractual, grantor-grantee, licensor-licensee, statutory, fee-based, or similar relationship, and the retention of overpayment. S. REP (2009) at 23 (emphasis added). In the context of the complete definition of obligation, it is difficult to discern a difference in meaning between the words an established duty, whether or not fixed and a fixed duty, or a contingent duty. Senator Kyl, however, expressed the view that his amendment would preclud[e] the possibility that conduct that makes a defendant liable for a penalty or fine could become actionable under this law before that fine is actually established or assessed. 155 CONG. REC. S4543. Senator Kyl described this as a technical amendment, id., but his interpretation is directly at odds with the Senate Report and the enacted language. 24

32 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 32 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 31 of 40 Regardless of the strictures that Senator Kyl attempted to put on the definition of the term obligation, recent decisions have had no difficultly in applying it broadly in the context of government contracts. As noted, this Court has already determined that the Consent Judgment must be construed according to the principles of contract interpretation. United States v. Bank of Am., 922 F. Supp. 2d 1, *6 (D.D.C. 2013). Even under the pre-fera language of the FCA, the court in United States ex rel. Landis v. Trailwind Sports Corp., 51 F. Supp.3d 9 (D.D.C. 2014), held a breach of Postal Service sponsorship agreements that prohibited bike riders doping imposed an obligation to reimburse the government for money previously awarded under the contract when the bikers did use prohibited drugs. The court reasoned that the Postal Service clearly could have sought restitution repayment of the sponsorship fees as a remedy. Consequently, under both agreements the defendants owed the government an obligation sufficiently certain to give rise to an action of debt at common law. Id. at 58 (quoting ATMI, 190 F. 3d at 736). More directly on point is the decision in United States ex rel. Boise v. Cephalon, Inc., 2015 WL (E.D. PA July 21, 2015), which held that a violation of a corporate integrity agreement (CIA) with the federal government could be a basis for a reverse false claim under the 2009 amendments. See also Ruscher v. Omnicare Inc., No. 4:08-CV-3396, 2014 WL (S.D. Tex. Sept. 5, 2014), contra United States ex rel. Booker v. Pfizer, Inc. No , 2010 WL (D. Mass. Mar. 26, 2014). As quoted by the Cephalon court, the CIA provided that: as a contractual remedy, Cephalon and the OIG hereby agree that failure to comply with certain obligations as set forth in this CIA may lead to the imposition of... monetary penalties. The OIG may exercise its contractual right to demand payment of the penalties by demand letter after finding that Cephalon has failed to comply with any of the obligations described in Section X.A and after determining that Stipulated Penalties are appropriate. 25

33 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 33 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 32 of 40 Id. at 1. (docket cites omitted). The CIA in Cephalon is directly analogous to the Consent Judgment in that they were implemented to correct past fraudulent practices and provide for penalties that the government may impose in the event that the offending party failed to correct its behavior. The fact that the penalties were contingent on the government s discretion not to impose those penalties did not change the nature of the obligation. The Cephalon court further noted that the CIA was far less contingent than the contractual relationship in Landis: Unlike in Landis, where the District Court considered whether the government could have sought restitution repayment of the sponsorship fees as a remedy here Cephalon and the government have already negotiated and contracted for the remedies that arise upon a breach of the CIA. Id. at *6. Similarly, Chase and the government have already negotiated and contracted for the remedies that arise upon a breach of the Consent Judgment. Therefore, there should be no question that a violation of the Consent Judgment by Chase calls forth an obligation to pay contractual damages. D. Schneider s Allegations that Chase Took Credit for Loans that Did Not Qualify for Credit and/or Were Owned by Others and that It Violated the Consent Judgment s Anti-Blight Requirements Constitute Valid FCA Claims. Chase gives summary treatment to Schneider s allegations that it took credit for loans that did not qualify and that it also took credit for loans that it had sold to others. See SAC These claims are important because they set out the process by which Chase took credit for loans that did not qualify. They also explain how Schneider can identify loans that Chase took credit for under the Consent Judgment. These allegations also describe why these loans would not qualify for that credit. As such, they provide the factual allegations necessary to demonstrate that Chase s subsequent certifications of compliance were false. 26

34 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 34 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 33 of 40 Chase is similarly dismissive of Schneider s Anti-Blight allegations, which allege that Chase has an internal program known as the Alternative Foreclosure Program ( AFP ). Under the AFP, Chase forgoes foreclosing on first lien loans that are secured by properties located in blighted neighborhoods and where the underlying property has little or no value. These loans are least likely to be repaid, and represent the highest reputational risk and servicing costs to Chase. SAC 286. Under Chase s AFP, thousands of mortgage loans have been, and continue to be, quietly released, with no notice to any interested parties, no documentation or correspondence with homeowners or others, and no outside indication of any type to alert interested parties of this action. SCA 288. Chase applied the AFP to valueless RCV1first mortgage loans. SAC 292. The Anti-Blight provisions of the Consent Judgment state: 1. Servicer shall develop and implement policies and procedures to ensure that Real Estate Owned by the Servicer ( REO ) properties do not become blighted; 2. Servicer shall develop and implement policies and procedures to enhance participation and coordination with state and local land bank programs, neighborhood stabilization programs, nonprofit redevelopment programs, and other anti-blight programs, including those that facilitate discount sale or donation of low-value REO properties so that they can be demolished or salvaged for productive use; 3. As indicated in I.A.18, Servicer shall (a) inform borrower that if the borrower continues to occupy the property, he or she has responsibility to maintain the property, and an obligation to continue to pay taxes owed, until a sale or other title transfer action occurs; and (b) request that if the borrower wishes to abandon the property, he or she contact Servicer to discuss alternatives to foreclosure under which borrower can surrender the property to Servicer in exchange for compensation; and 4. When the Servicer makes a determination not to pursue foreclosure action on a property with respect to a first lien mortgage loan, Servicer shall: a. Notify the borrower of Servicer s decision to release the lien and not pursue foreclosure, and inform borrower about his or her right to 27

35 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 35 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 34 of 40 occupy the property until a sale or other title transfer action occurs; and b. Notify local authorities, such as tax authorities, courts, or code enforcement departments, when Servicer decides to release the lien and not pursue foreclosure. CJ, Ex. A at A-40., SAC 295. Schneider alleges that Chase ignored these requirements and quietly released loans in blighted communities, with no notice to any interested parties, and no documentation or correspondence with homeowners or others. SAC 287. Since the Anti-Blight requirements are part of the Servicing Standards, all certifications of compliance with those standards were false. III. THE SAC ALLEGES THAT CHASE MADE BOTH MATERIAL AND KNOWING VIOLATIONS OF THE HAMP A. Chase s Violations of the HAMP were Material. By introducing a sealed document that was not identified in the SAC, Chase argues that Schneider has failed to adequately allege materiality. Chase argues that Schneider must allege that Chase s purported violation of HAMP s solicitation requirements was material within the meaning of these subjective factors [identified in the sealed document] in order to allege that Chase s certifications were false for purposes of his FCA claim. Chase Mem. at In the context of a motion to dismiss, this argument cannot be taken seriously. A defendant may only test the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true. Leftwich, 878 F. Supp. 2d at 89, 90. In any case, Schneider has identified many factors demonstrating that Chase s fraud is material. Under the FCA the term material means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 31 U.S.C. 3729(b)(4). The natural tendency test for materiality focuses on the potential effect of the false statement 28

36 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 36 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 35 of 40 when it is made rather than on the false statement s actual effect after it is discovered. United States v. Bourseau, 531 F.3d 1159, 1171 (9th Cir. 2008) (citation omitted). See also United States ex rel. Loughren v. Unum Group, 613 F. 3d 300, 309 (1st Cir. 2010); United States ex rel. Longhi v. Lithium Power Tech., Inc, 575 F.3d 458, 470 (5th Cir. 2009). First, Chase argues that Schneider did not allege Chase s failure to solicit RCV1 borrowers impacted a substantial number of borrowers. To the contrary, Schneider alleges that there were 160,309 RCV1 loans that were assigned to collection agencies, SAC 225, and that the total number of loans in RCV1 exceeded 500,000. SAC 228. This number is significant when compared with Chase s total active loan portfolio, reported by the Monitor to be approximately 7.25 million. Based on this number, the alleged minimum RCV1 population represents 7 percent of Chase s total loans. See Final Report Servicing-Performance-Data, supra, n 2, at 7. However, when compared to the total loans that were potentially eligible for loan modifications under the HAMP and the Consent Judgment (delinquent over 30 days), the RCV1 population is much more significant. The number of potentially eligible loans for first or second loan modification was 678,000. Id. The alleged RCV1 population represents 74 percent of the loans that could have been considered for HAMP or Consent Judgment loan modifications. The 160,000 loans that were assigned to collection agencies, represents 24 percent of the total potentially eligible loans. As previously noted, the total number of loans in bankruptcy Chase reported to the Monitor was approximately 105,000. Therefore, the 50,000 false claims found by the USTP represent a defect rate of almost 50 percent. The Threshold Error Rate under the Consent Judgment is 5 to 10 percent. See CJ Ex. E-1. If Chase exceeds this rate for any Metric set out in Exhibit E-1, it creates a Potential Violation of the Consent Judgment. See E.1., CJ Ex. E at E-11. The Threshold Error Rate suggests an appropriate level 29

37 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 37 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 36 of 40 to determine materiality. Thus, by any measure the number of loans in RCV1 makes Chase s false claims of compliance material to the Government s or the Monitor s decision to accept those certifications. Moreover, Chase s argument raise questions of fact, which must be resolved not on the pleadings, but on the evidence. Second, contrary to Chase s assertion, Schneider did not allege that most of RCV1 was composed of second mortgages. The paragraph of the SAC that Chase cites merely states: Chase s policies and procedures regarding loan charge-offs included both first and second lien mortgages. SAC 177. Chase also argues that since it released and forgave a large number of loans in RCV1 and that such loans would not be eligible for the HAMP, the material number of borrowers that could have been qualified was also reduced. In making this argument, Chase ignores that the HAMP went into to effect in 2009 and that it only began its loan forgiveness program in Thus, the loan forgiveness program that began in 2012 had no impact during the early years of the HAMP. Third, Chase asserts in an argument that has nothing to do with the question of materiality that Schneider did not allege that the Treasury compliance agent, MHA-C, had no knowledge about the existence of RCV-1. Whether or not the MHA-C was aware of RCV1 is not relevant; what is relevant is the extent of Chase s disclosure and whether it gave full notice of the size of RCV1 and the servicing practices associated with its charged-off loans. As pointed out above, Chase underreported to the Monitor the number of second liens delinquent by over 180 days in RCV1 by a factor of 25. SAC There is no reason to believe that Chase was any more honest with the MHA-C. Again, this is ultimately an evidentiary question. Finally, if there is any doubt that Chase s false certification regarding the HAMP and the Consent Judgment were material, one needs to look no further than the findings of the USTP in 30

38 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 38 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 37 of 40 assessing a $50 million penalty against Chase for violating the servicing requirements related to bankruptcies and the findings of the OCC regarding the servicing requirements related to communications with borrowers. SAC These findings confirm Schneider s allegations that Chase violated the servicing requirements of the HAMP and Consent Judgment, and that those violations were material. B. The SAC Alleges Facts Demonstrating That Chase Knowingly Violated the MHA and the Consent Judgment. Chase makes an argument in its discussion of Schneider s HAMP allegation that Schneider failed to allege the necessary elements of scienter. Chase Mem. at This argument appears to apply to both the Consent Judgment and HAMP claims. First, when alleging fraud, Fed. R. Civ. P. (9)(b) specifically allows allegations of knowledge to be made generally. The SAC does this. Moreover, as discussed below, the SAC alleges facts demonstrating knowledge under FCA. Beyond that, Chase argues that there could be no knowing false claim if Chase believed that its violations were not material. As demonstrated above, Chase s failure to meet the loan modification requirements for the RCV1 population of loan was obviously material. Under the FCA the terms knowing and knowingly: (A) mean that a person, with respect to information (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information; and (B) require no proof of specific intent to defraud. 31 U.S.C. 3729(b)(1). Under this standard of scienter, the discussion of Chase s failure to meet the loan modification requirements related to RCV1 at SAC demonstrates that those 31

39 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 39 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 38 of 40 violations occurred with at least deliberate ignorance or reckless disregard of the fact RCV1 was required to be serviced under the HAMP and Consent Judgment. Chase also argues that since the SAC acknowledged that it disclosed the existence of RCV1 to the Monitor, there could be no knowing fraud regarding RCV1. The SAC alleges only that RCV1 was described to the Monitor by Chase as an application for loans that had been charged off but still part of its main SOR. SAC 16. However, the SAC also alleges that the disclosure was woefully incomplete. For example, Chase claimed to the Monitor that there were over 3,517 2 nd liens that were delinquent for over 180 days. SAC 184. At the same time, internal Chase documents showed that there were over 88,000 such loans. SAC 185. Moreover, there is nothing in the SAC suggesting that Chase disclosed that it was not servicing RCV1 loans as required by the HAMP. There is an indication in the form of the Dunn Decl. (Doc.105-2, Chase Mem. at 9) that there was some discussion between the Monitor and Chase regarding the requirement to service RVC1 loans in January 2014, long after Schneider s initial complaint was filed in May 2013, and after all of Chase s certifications of compliance with the Consent Judgment were filed and after Chase learned of Schneider s allegations. But disclosure of fraud after the fact does not absolve the fraud. The government knowledge inference arises only when the Government knows all relevant facts prior to presentment of a false claim. See United States ex rel. Burlbaw v. Orenduff, 548 F.3d 931, (10th Cir. 2006). Discovery will have to be taken to resolve the issue of whether Chase fully disclosed its violations of the Consent Judgment and the HAMP prior to the submissions of its various certifications. The issue cannot be resolved at the motion to dismiss stage by documents outside the four corners of the complaint. 32

40 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 40 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 39 of 40 CONCLUSION For the forgoing reasons, Schneider respectfully requests that Chase s motion to dismiss be denied. Schneider further requests that if the Court finds the SAC is in anyway deficient, that he be allowed to amend his complaint as provided for by Fed. R. Civ. P. 15(a). Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C. Cir. 1996)( A dismissal with prejudice is warranted only when a trial court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency. )(citations and internal quotation marks omitted). Dated: December 16, 2015 Respectfully submitted, /s/ Joseph A. Black Joseph A. Black (D.C. Bar No ) Daniel E. Cohen (D.C. Bar No ) THE CULLEN LAW FIRM, PLLC th Street, NW, Suite 300 Washington, D.C Tel. (202) Fax. (202) Roberto L. Di Marco Jennifer Martin Foster WALKER & DI MARCO, P.C. 350 Main Street First Floor Malden, MA Tel. (781) Fax. (781) Admitted Pro Hac Vice 33

41 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 41 of 55 Case 1:14-cv RMC Document 110 Filed 12/16/15 Page 40 of 40 CERTIFICATE OF SERVICE I hereby certify that on December 16, 2015 a true and accurate copy of the foregoing Relator s Memorandum in Opposition to Defendants Motion to Dismiss Relator s Second Amended Complaint was served electronically on all registered counsel via ECF. I also certify that a true and correct copy of the foregoing was sent via to the State Plaintiffs. /s/ Joseph A. Black Joseph A. Black 34

42 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 42 of 55 Case 1:14-cv RMC Document Filed 12/16/15 Page 1 of 38 EXHIBIT 1

43 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 43 of 55 1 Case 1:14-cv RMC Document Filed 12/16/15 Page 2 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

44 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 44 of 55 2 Case 1:14-cv RMC Document Filed 12/16/15 Page 3 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

45 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 45 of 55 3 Case 1:14-cv RMC Document Filed 12/16/15 Page 4 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

46 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 46 of 55 4 Case 1:14-cv RMC Document Filed 12/16/15 Page 5 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

47 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 47 of 55 5 Case 1:14-cv RMC Document Filed 12/16/15 Page 6 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

48 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 48 of 55 6 Case 1:14-cv RMC Document Filed 12/16/15 Page 7 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

49 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 49 of 55 7 Case 1:14-cv RMC Document Filed 12/16/15 Page 8 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

50 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 50 of 55 8 Case 1:14-cv RMC Document Filed 12/16/15 Page 9 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

51 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 51 of 55 9 Case 1:14-cv RMC Document Filed 12/16/15 Page 10 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

52 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 52 of Case 1:14-cv RMC Document Filed 12/16/15 Page 11 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

53 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 53 of Case 1:14-cv RMC Document Filed 12/16/15 Page 12 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss

54 Case 1:15-cv LTS-JCF Document Filed 06/17/16 Page 54 of Case 1:14-cv RMC Document Filed 12/16/15 Page 13 of 38 Exhibit 1 Mem. in Opp. to Dft. Motion to Dismiss