Case 1:14-cv-01047-RMC Document 128-1 Filed 05/23/18 Page 1 of 12

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

)
UNITED STATES OF AMERICA, et al., )
ex rel. LAURENCE SCHNEIDER, ) Case No. 1:14-cv-01047-RMC
)
Plaintiff-Relator, ) Judge Rosemary M. Collyer
)
v. )
)
J.P. MORGAN CHASE BANK, N.A., )
et al., )
)
Defendants. )
)

DEFENDANTS’ [PROPOSED] SURREPLY IN OPPOSITION TO

RELATOR’S MOTION FOR LEAVE TO FILE THIRD AMENDED COMPLAINT
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TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 1

ARGUMENT .................................................................................................................................. 1

I. SCHNEIDER’S CLAIM THAT CHASE FAILED TO SERVICE LOANS IN

ACCORDANCE WITH FEDERAL LAW FAILS AS A MATTER OF LAW................. 1

II. SCHNEIDER’S CLAIM THAT CHASE FAILED TO SERVICE LOANS IN

ACCORDANCE WITH HAMP RULES FAILS AS A MATTER OF LAW.................... 2

A. The Proposed Complaint Fails To Allege Materiality. ........................................... 3

B. The Proposed Complaint Fails To Allege Falsity. .................................................. 5

C. The Proposed Complaint Fails To Allege Scienter................................................. 7

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INTRODUCTION

Relator Laurence Schneider’s reply brief in support of his three-page motion for leave to

amend confirms that leave should be denied as futile. According to Schneider’s reply, the

“overriding allegation” of his proposed complaint is not that Chase failed to solicit RCV1

borrowers to apply for HAMP loan modifications, but rather that Chase failed “to service RCV1

loans in accordance with federal law and the HAMP.” Reply Br. at 4 (Dkt. 127). Even if that

were true, it would not save Schneider’s claims. Neither Schneider’s proposed complaint nor his

reply identifies any “federal law” that Chase allegedly violated. Schneider’s allegation that

Chase did not comply with HAMP servicing requirements likewise fails to state a claim under

the False Claims Act (“FCA”).

ARGUMENT

I. SCHNEIDER’S CLAIM THAT CHASE FAILED TO SERVICE LOANS IN

ACCORDANCE WITH FEDERAL LAW FAILS AS A MATTER OF LAW.

According to Schneider’s reply, the first of his two “overriding” allegations is that Chase

failed to “service RCV1 loans in accordance with federal law.” Reply Br. at 4. Because

Schneider fails to identify with particularity a federal law that Chase violated—let alone to

describe how Chase violated these unidentified laws or how such laws are connected to

HAMP—he does not state a claim.

An FCA claim cannot succeed where the relator “does not identify applicable regulations

. . . that [the defendant] violated.” U.S. ex rel. Barko v. Halliburton Co., 241 F. Supp. 3d 37, 60

(D.D.C. 2017), aff’d 709 F. App’x 23 (D.C. Cir. 2017); Opp. at 30 (Dkt. 126) (collecting cases).

Consistent with that precedent, this Court held that Schneider’s prior complaint did not state a

claim because it failed to allege any “false representation of compliance with an applicable

federal statute [or] regulation.” Dkt. 118 at 18.

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As Chase demonstrated in its opposition to Schneider’s motion for leave to amend, the

proposed complaint suffers from exactly the same flaws. It wholly fails to plead (i) which

statutes and regulations Chase allegedly violated, (ii) how Chase violated them, or (iii) how the

violations related to the HAMP program. See Opp. at 29-34.

Schneider’s reply makes no attempt to address these fatal defects. Nowhere does

Schneider mention a single federal law that Chase allegedly violated, explain how Chase violated

those unspecified federal laws, or otherwise address Chase’s arguments. As a result, Schneider’s

claim that Chase violated “federal law” cannot satisfy the basic pleading requirements of Rule 8,

much less the heightened pleading standard applicable under Rule 9(b).

II. SCHNEIDER’S CLAIM THAT CHASE FAILED TO SERVICE LOANS IN

ACCORDANCE WITH HAMP RULES FAILS AS A MATTER OF LAW.

The second “overriding” allegation highlighted in Schneider’s reply is that Chase failed

“to service RCV1 loans in accordance with . . . HAMP” rules. Reply Br. at 4. However, apart

from the HAMP solicitation requirements discussed in Chase’s opposition, neither Schneider’s

proposed complaint nor his reply identifies any specific HAMP servicing requirements that

Chase violated or explains how Chase supposedly violated those requirements. Because

Schneider “does not identify which material contractual requirements [Chase] was not

complying with,” his vague allegations of unspecified servicing violations fail to state a claim.1

1
Although the proposed complaint alleges that Chase failed to comply with certain record-
keeping rules under HAMP and failed to assign a “single point of contact” to potentially HAMP-
eligible RCV1 borrowers, TAC ¶¶ 67, 76-81, those provisions are mere procedural adjuncts to
the HAMP solicitation requirement. Because Schneider has not adequately alleged that Chase’s
non-solicitation of RCV1 borrowers for HAMP loan modifications was material to the
government or rendered Chase’s certifications of compliance false, see infra pp. 3-7, he likewise
necessarily fails to allege that Chase’s purported non-compliance with procedural rules designed
to facilitate HAMP loan modifications was material or rendered its certifications false.

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Barko, 241 F. Supp. 3d at 60. Schneider’s claims are also defective for the following additional

reasons.

A. The Proposed Complaint Fails To Allege Materiality.

Schneider’s reply does not dispute that the government has continued, for several years,

to make HAMP incentive payments to Chase after learning of the allegations that Schneider now

repeats in his proposed complaint. Nor does he allege that the government took any other action

against Chase after learning of his allegations in 2013. Under Universal Health Services, Inc. v.

U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016), and its progeny, those facts demonstrate that

Schneider has failed as a matter of law to plead the “materiality” element of an FCA cause of

action. See Opp. at 11-16 (collecting cases).

Relying on scant out-of-circuit authority, Schneider strains to distinguish between “actual

knowledge” of wrongdoing by the government and “‘mere awareness of allegations’”—the latter

of which, according to Schneider, is insufficient to negate materiality. Reply Br. at 5 (quoting

Escobar v. Universal Health Servs., Inc., 842 F. 3d 103, 109 (1st Cir. 2016)). But this distinction

has been found to be of little significance in the main of post-Escobar jurisprudence. See, e.g.,

U.S. ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645, 667-68 (5th Cir. 2017) (materiality

lacking where government made reimbursement decision with full knowledge of relator’s

“allegations”); United States v. Comstor Corp., 2018 WL 1567620, at *19 (D.D.C. Mar. 31,

2018) (dismissing complaint on materiality where “the government was fully informed for years

about the relator’s allegations regarding the defendants’ purported role in the fraudulent scheme”

but did not take action against defendants). The government’s continuation of payments to

Chase, notwithstanding its undisputed knowledge of Schneider’s allegations, is fatal to his claim.

Schneider also attempts to draw a distinction between what the Treasury Department’s

compliance agent (MHA-C) knew and what the Department of Justice (“DOJ”) knew. But such

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a distinction is irrelevant for at least two reasons. First, Schneider never alleges that MHA-C

was unaware of Chase’s conduct, just that Chase itself did not inform MHA-C about its practices

with respect to RCV1 loans. See TAC ¶ 136.

Second, myriad cases treat the United States as a unitary executive and consider the

knowledge of DOJ in evaluating materiality. See, e.g., U.S. ex rel. Petratos v. Genentech, Inc.,

855 F.3d 481, 490 (3d Cir. 2017) (dismissing on materiality where, in the “six years” since the

relator disclosed evidence of the defendants’ “misinformation” to the government, “the

Department of Justice has taken no action against [the defendants] and declined to intervene in

this suit”); Comstor, 2018 WL 1567620 at *19 (“The requirement of demonstrating materiality

would seem especially crucial here where the government declined to intervene after almost five

years of investigation, and has also declined to intervene in similar cases brought by this

relator.”); U.S. ex rel. Cressman v. Solid Waste Servs., Inc., 2018 WL 1693349, at *6 (E.D. Pa.

Apr. 6, 2018) (“As in Petratos, the Department of Justice’s declination to intervene or take any

action against Defendant supports the conclusion that it does not consider the regulatory

violation or failure to disclose asserted by Plaintiff to be ‘material’. . . .”). The DOJ’s U.S.

Attorneys’ Manual explains that, after receiving a relator’s complaint and statement of evidence,

DOJ “will contact the agency involved . . . to determine if the allegations are known to them and

to obtain an assessment of the material evidence furnished by the relator.”2

Here, DOJ’s first assessment of Schneider’s allegations began in the spring of 2013 and

ended in early 2014, followed by another evaluation of Schneider’s allegations beginning in the

fall of 2014 and ending in the summer of 2015. See Dkt. 24, 96. Pursuant to DOJ’s own

2
U.S. Attorneys’ Criminal Resource Manual, § 932, available at https://www.justice.gov/usam
/criminal-resource-manual-932-provisions-handling-qui-tam-suits-filed-under-false-claims-act.

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manual, Treasury would have provided “an assessment of the material evidence furnished” by

Schneider during those investigations and discussed the allegations with DOJ. See U.S.

Attorneys’ Criminal Resource Manual, § 932. Based on information provided by the Treasury

Department, the United States twice declined to intervene. Accordingly, there is no basis to

draw an artificial line between DOJ and the Treasury Department for purposes of the FCA’s

materiality inquiry.

Schneider’s assertion that materiality is properly pled merely because his allegations go

to the “very essence of the bargain” is equally unavailing. See Reply Br. at 7. Even assuming

that the government’s failure to act is not independently dispositive of the materiality question,

Schneider misapprehends the fundamental purpose of the HAMP program. As this Court

recognized in its prior order, the “essence” of HAMP is to promote modifications of eligible

first-lien mortgages to avoid foreclosure. See Dkt. 118 at 2; id. (HAMP incentivizes “banks to

modify first-lien mortgages so that homeowners could lower their mortgage payments.”

(emphasis added)); id. at 5 (“HAMP is a federally-funded foreclosure relief program.”). And, as

to the actual HAMP “bargain,” Schneider’s reply never argues (1) that Chase received any

incentive payments for loans that were not modified or that did not qualify for modification,

(2) that a substantial number of RCV1 borrowers (who face no risk of foreclosure regardless of

whether they make any payments whatsoever) would have qualified for or wanted HAMP loan

modifications, or (3) that Chase did not ultimately release the liens of first-lien RCV1 borrowers.

See Opp. at 8, 20-21, 28. Consequently, any alleged failure to solicit RCV1 borrowers was

immaterial, not essential, to the government’s bargain with Chase under the HAMP program.

B. The Proposed Complaint Fails To Allege Falsity.

Schneider’s falsity argument is premised upon a misunderstanding. According to

Schneider, Chase “does not get to determine what constitutes materiality.” Reply Br. at 9.

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While Schneider is of course correct that Chase does not get to determine what constitutes

materiality as that term is used in the FCA (Escobar does that), Chase does get to determine what

materiality means for purposes of its contractual obligation to report “material” instances of non-

compliance in its annual MHA compliance certifications.

The MHA Handbook requires Chase to disclose only those “instances of noncompliance

that [it] believes have a material effect on its ability to comply with MHA program

requirements.” MHA Handbook at 45 (emphasis added). The Handbook, moreover, required

Chase to disclose the “factors” that it relies on in determining materiality. See id. Consistent

with that obligation, Chase disclosed a list of “subjective factors” it considered in making its

annual certifications, including whether any non-compliance “[r]esulted in substantial injury to a

significant number of borrowers” or “[s]ubstantially interfere[d] with the goals and objectives of

the overall program.” Dkt. 105-6 at 2 (Karwhite Decl. Ex. 2 at 2). Accordingly, to plead that

Chase’s annual certifications were false, Schneider must allege that Chase certified compliance

even though it “believe[d]” that its violations of program requirements had a “material” effect on

its ability to comply with MHA programs. He has plainly failed to do so. See Opp. at 18-22.

Schneider argues that material non-compliance is established merely because “RCV1

contained approximately 400,000 delinquent loans” and, he asserts, Chase was required under

HAMP to “contact all delinquent borrowers to determine whether they would be eligible for loan

modifications.” Reply Br. at 10 (emphasis added). But that assertion is belied by the plain terms

of the MHA Handbook. HAMP rules do not require servicers to solicit “all” delinquent

borrowers. Rather, the MHA Handbook states only that servicers should solicit potentially

eligible borrowers, and confirms that non-first-lien loans are ineligible for HAMP modification.

See Opp. at 25 (citing MHA Handbook at 57, 66). Schneider, moreover, nowhere disputes that

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(1) most of the loans in RCV1 were second liens, unsecured deficiencies or otherwise exempt

from HAMP’s solicitation requirement, or (2) Chase ultimately released the vast majority of the

first-lien loans in RCV1, thereby removing entirely the risk of foreclosure on those properties.

See Opp. at 20. Under these circumstances, Schneider has failed to plead that any non-

solicitation of RCV1 borrowers had a material impact on MHA program goals or objectives—

and thus has failed to plead that Chase’s certifications of material compliance were false.

C. The Proposed Complaint Fails To Allege Scienter.

Schneider all but concedes that he failed to allege that Chase violated a HAMP

requirement that it knew was material to the government’s payment decision, instead arguing that

he need not do so. See Reply Br. at 11. That argument is mistaken.

The Supreme Court and D.C. Circuit have recognized that scienter under the FCA

requires that the “defendant knowingly violated a requirement that the defendant knows is

material to the Government’s payment decision.” Escobar, 136 S. Ct. at 1996 (emphasis added);

see also United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1271 (D.C. Cir. 2010)

(“SAIC”). Although Schneider argues that this requirement does not apply at the motion to

dismiss stage, that argument makes no sense given that Escobar itself was decided on the

pleadings. See 136 S. Ct. at 1998, 2001-02 (explaining that the “scienter requirement[]” is

“rigorous” and applying that “rigorous” requirement at the pleadings stage). Unsurprisingly,

courts in this District likewise enforce the FCA’s scienter requirement at the pleadings stage.

See, e.g., Comstor, 2018 WL 1567620 at *22 (holding that “the relator misconstrues the

applicable standard” because even though “scienter may be ‘averred generally’ . . . that does not

obviate pleading the underlying facts with particularity”).

While effectively conceding that he failed to allege that Chase violated an MHA program

term that it knew was material, Schneider points to Chase documents that he claims demonstrate

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knowledge of falsity. For example, he cites a Chase document stating: “‘Given systemic

constraints within Recovery One, charged-off loans cannot currently be serviced in the manner

prescribed by [law].’” Reply Br. at 12 (alteration in original). But Schneider’s bracketed

alteration of the document is misleading. The document actually states that “charged-off loans

cannot currently be serviced in the manner prescribed by Reg-X,” see TAC ¶ 190—a regulation

that had recently been amended as a result of the Dodd-Frank Act, see 12 C.F.R. § 1024. As the

document indicates, moreover, Chase determined to “release liens on Reg-X eligible loans,” see

TAC ¶ 190, and thereby ensure that it would not violate the newly-amended version of the

regulation. See Opp. at 31. Accordingly, the document does nothing to show that Chase

knowingly failed to comply with mortgage servicing law, let alone with the distinct requirements

imposed under HAMP.

Schneider is also mistaken in asserting that the MHA Handbook unambiguously rejects

Chase’s interpretation of HAMP’s solicitation requirements. See Reply Br. at 12-13. In its

opposition, Chase identified two sets of MHA Handbook provisions that it reasonably construed

to provide that it need not report any non-solicitation of RCV1 loans in its annual compliance

certifications: (1) the provisions stating that only loans with intact first liens are eligible for

HAMP and (2) the provision stating that non-compliance with HAMP requirements should be

reported only if the servicer “believes” that the non-compliance is “material.” Opp. at 23-25 &

n.10. As Chase explained in its opposition, it reasonably relied on these provisions to conclude

that any non-solicitation of HAMP loans need not be reported because the non-solicitation either

did not violate MHA requirements or, at a minimum, did not have a material impact on MHA

program goals. Schneider thus fails adequately to plead that Chase’s annual certifications of

compliance were knowingly false.

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Respectfully submitted,

May 23, 2018 /s/ Robert D. Wick

Robert D. Wick (D.C. Bar No. 440817)
Christian J. Pistilli (D.C. Bar No. 496157)
Ivano M. Ventresca (D.C. Bar No. 1045769)
COVINGTON & BURLING LLP
One CityCenter
850 Tenth Street NW
Washington, DC 20001
Tel: (202) 662-6000
Fax: (202) 662-6291

Attorneys for Defendants

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CERTIFICATE OF SERVICE

I hereby certify that on May 23, 2018, a true and correct copy of the foregoing surreply

was served electronically on all registered counsel of record via ECF and is available for viewing

and downloading from the ECF system.

/s/ Robert D. Wick

Robert D. Wick
COVINGTON & BURLING LLP
One CityCenter
850 Tenth Street NW
Washington, DC 20001
Tel: (202) 662-6000
Fax: (202) 662-6291
Email: rwick@cov.com

Attorney for Defendants