United States Ex Rel. O'Donnell v. Countrywide Home Loans, Inc.
822 F.3d 650
2d Cir.2016Background
- Countrywide (and Rebecca Mairone) sold mortgages to Fannie Mae and Freddie Mac after reorganizing its Full Spectrum Lending division and introducing the High Speed Swim Lane (HSSL) origination process.
- Contracts between Countrywide and the GSEs contained present-tense "as of" warranties that delivered loans would be "investment quality" at the time of transfer/delivery.
- The Government (successor to a qui tam FCA action) alleged Countrywide knowingly sold poor-quality HSSL loans in breach of those contractual warranties and prosecuted under the mail and wire fraud statutes as predicates to FIRREA civil penalties.
- At trial the Government presented evidence of loan-quality problems and internal warnings to key Countrywide officers but presented no evidence that Countrywide lacked intent to perform those contractual warranties at the time the contracts were executed.
- The jury returned a verdict for the Government and the District Court imposed >$1.2 billion in FIRREA penalties; the Second Circuit reviews whether the evidence sufficed to prove mail/wire fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fraudulent intent to induce GSEs can be inferred from post-contractual knowing sale of nonconforming loans | Government: contractual quality warranties were misrepresentations made (or reiterated) at each sale, and knowledge of defects shows fraudulent intent to induce purchases | Defendants: evidence shows only intentional breach after contracting; common law requires fraudulent intent at the time the promise was made | Held: Fraud requires contemporaneous intent not to perform; post-contract breach alone cannot sustain mail/wire fraud conviction |
| Whether the Government proved a scheme to defraud independent of the contracts (i.e., noncontractual misrepresentations) | Government: alleged misrepresentations occurred continuously at point of sale and performance | Government presented no evidence of separate, post-execution affirmative misrepresentations outside the contracts | Held: No legally sufficient evidence of noncontractual false statements; the contracts make the representations at execution, so Government failed to show requisite scienter |
Key Cases Cited
- Neder v. United States, 527 U.S. 1 (Sup. Ct. 1999) (incorporates common-law materiality into federal fraud statutes)
- Durland v. United States, 161 U.S. 306 (Sup. Ct. 1896) (statute reaches promises as to the future but does not displace common-law fraud principles)
- Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (Sup. Ct. 2008) (mailing incidental to a scheme satisfies the mailing element)
- Schmuck v. United States, 489 U.S. 705 (Sup. Ct. 1989) (scheme to defraud focus and mailing element explanation)
- Thyssen, Inc. v. S.S. Fortune Star, 777 F.2d 57 (2d Cir. 1985) (intent not to perform when made is essential to treat contractual deviation as fraud)
- United States v. D'Amato, 39 F.3d 1249 (2d Cir. 1994) (breach of contract alone does not establish mail fraud)
- Corley v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990 (7th Cir. 2004) (fraud requires deception at time promise is made; later breach insufficient)
- United States v. Binday, 804 F.3d 558 (2d Cir. 2015) (elements of mail/wire fraud summarized)