Kellogg, Harry v. Hobson, Natalie et al

Brief in Support of 19 Motion to Dismiss

W.D. Wis.January 9, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WISCONSIN HARRY BURTON KELLOGG III, Plaintiff, v. Case No. 16-cv-453-jdp NATALIE HOBSON, and DEVAL, Defendants and Third-Party Plaintiffs v. JULIAN CASTRO, SECRETARY, and UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Third-Party Defendants. THIRD-PARTY DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 12(b)(1) Third-Party Defendants United States Department of Housing and Urban Development (“HUD”) and Julián Castro, Secretary of Housing and Urban Development (in his official capacity) (“Secretary”), by their attorneys, John W. Vaudreuil, United States Attorney for the Western District of Wisconsin, and Assistant United States Attorney Barbara L. Oswald, submit this memorandum of law in support of their motion to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1). Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 1 of 13 2 INTRODUCTION Defendants and Third-Party Plaintiffs Deval LLC (“Deval”) and Natalie Hobson (“Hobson”) filed a complaint stating an indemnification claim against the Secretary (in his official capacity) and HUD.1 Am. Third-Party Compl. (“Am. Compl.”), ECF No. 12. The third-party complaint seeks a declaratory order and judgment of liability that HUD is legally required to indemnify Deval and Hobson for all costs and reasonable attorney’s fees they have already incurred as well as for future costs and reasonable attorney’s fees and all ultimate fraud damages that Deval and Hobson may incur in the underlying fraud action which has been brought against them by Harry Barton Kellogg III (“Kellogg”). Id. The claimed requirement to indemnify is based on language in a 2016 Compromise Settlement and Release agreement (“Settlement Agreement”) executed by Deval and HUD settling and compromising certain claims and appeals 1 The third-party plaintiffs seem to have named the Secretary as a defendant in addition to HUD perhaps due to uncertainty as to the appropriate government defendant. The Secretary, however, (even in his official capacity) was not a party to Deval’s national loan servicing contract with HUD out of which the asserted indemnification obligation being sued on arose. Therefore, the Secretary should not be a named party in this case for lack of privity of contract. For purposes of its Motion to Dismiss, however, the government is seeking dismissal of the case against both government defendants solely on the procedural grounds that the court does not have subject-matter jurisdiction over this type of federal procurement contract dispute. Therefore, for the sake of simplifying these proceedings, the government will rely on this ground for dismissal of the case against both government defendants rather than seek dismissal against the Secretary separately on the ground of lack of privity of contract. In light of the above, hereinafter the government will use “HUD” as the sole nomenclature for both captioned government parties. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 2 of 13 3 arising from a National Loan Servicing Support Services Contract No. C-DEN-02528 (“Loan Servicing Contract”) between Deval and HUD.2 Id. Deval’s and Hobson’s third-party complaint should be dismissed pursuant to Fed. R. Civ. P. 12(b)(1) because federal law explicitly denies federal district courts subject-matter jurisdiction over any civil actions or claims arising from or founded upon a federal procurement contract such as the Loan Servicing Contract involved in this case. ALLEGATIONS IN THE THIRD-PARTY COMPLAINT Deval and Hobson allege HUD awarded the Loan Servicing Contract to Deval, which contract called for Deval to perform professional loan servicing support services for a wide range of HUD-insured and HUD-held first, second and subordinate mortgage loans including subordinate mortgage loans under HUD’s “Section 235 Recapture of Subsidy Program.”3 Am. Compl. ¶ 8, ECF No. 12. That program provided monthly assistance payments funded by HUD to help low income borrowers afford homeownership, and required HUD to recapture all or a portion of those 2 Hobson’s indemnification action against HUD is also technically subject to dismissal for lack of privity of contract – Hobson not being a party to either the Loan Servicing Contract or the Settlement Agreement with HUD. But, again, HUD is seeking dismissal of the claims of both third-party plaintiffs solely on the basis of lack of subject matter jurisdiction in this Court. 3 The Loan Servicing Contract ran from late 2011 through late 2014. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 3 of 13 4 assistance payments when the mortgage was terminated through sale of the property.4 Id., ¶ 9. Deval and Hobson further allege that on January 6, 2016, Deval and HUD entered into the Settlement Agreement wherein the parties agreed to settle and compromise certain claims and/or appeals of Deval arising from the Loan Servicing Contract. Id., ¶ 10; Am. Compl., Ex. B, ECF No. 12-2. The Settlement Agreement required HUD to fulfill its obligations under the Loan Servicing Contract and “resolve any and all outstanding matters promptly if, as, and when they arise. Id., ¶ 11. These matters include, but are not limited to . . . lawsuits . . . .” Id., ¶ 11. Deval and Hobson allege that the intent of the Settlement Agreement was to eliminate any requirements, obligations, current and future liabilities, duties and costs Deval may incur relating to the Loan Servicing Contract, other than those specifically set out in the Loan Servicing Contract. Id., ¶ 12. In June 2106, plaintiff Kellogg sued the third-party plaintiffs in this Court for alleged fraud by Deval and Hobson in servicing his HUD-held Second Mortgage for Repayment of Section 235 Assistance. Id., ¶¶ 13, 14, 15, 16. As part of their obligations under the Loan Servicing Contract, Deval and Hobson calculated Kellogg’s recapture amount due upon his planned sale of the encumbered home using HUD-dictated 4 The actual name of the Section 235 program was the “Recapture of Section 235 Assistance Payments Program.” This program was terminated by Congress in 1987 but HUD still holds secondary mortgage loans for recapture of much earlier-provided assistance payments. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 4 of 13 5 calculation methods. Kellogg alleges that in that process Deval employee Hobson defrauded him. Id., ¶ 17, 18, 19. In October 2016, Deval notified HUD of Kellogg’s lawsuit and requested the HUD take action to resolve the suit and/or remove Deval and Hobson from the suit. HUD declined to do so. Id., ¶¶ 20, 21. Deval and Hobson basically seek: (1) a declaration that the “resolve lawsuits” language in the Settlement Agreement constituted an indemnification clause which included (a) a duty on HUD to protect Deval from any monetary damages it may incur in the underlying Kellogg fraud suit, and (b) a duty to pay for the defense of Deval in the Kellogg suit; and (2) a present order that HUD pay Deval’s already incurred costs to defend the Kellogg suit. Id., p. 5. ARGUMENT I. DEVAL AND HOBSON HAVE THE BURDEN OF ESTABLISHING SUBJECT MATTER JURISDICTION IN THIS CASE Federal courts are courts of limited jurisdiction, possessing only that power authorized by the Constitution and federal statute. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994). A court begins with the presumption that a cause lies outside that limited jurisdiction. Id. In rendering a decision on a motion to dismiss for lack of subject matter jurisdiction, a court must presume all undisputed factual allegations to be true and construe all reasonable inferences in favor of the plaintiff.5 5 If this motion is denied and the case proceeds, HUD will deny all allegations with which it disagrees. In particular, HUD will deny the allegation that the “resolve lawsuits” language in the Settlement Agreement constituted an indemnification clause of any kind and HUD will deny that the intent of the Settlement Agreement was as alleged in the Complaint. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 5 of 13 6 Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188, 191 (7th Cir. 1993). Nonetheless, the burden of establishing subject matter jurisdiction rests upon the party asserting it. Kokkonen, 511 U.S. at 377. See also Muscarello v. Ogle Bd. Of Com’rs, 610 F.3d 416, 425 (7th Cir. 2010) (“It is well established that the burden of establishing proper subject matter jurisdiction rests on the party asserting it…”). II. THE COURT LACKS SUBJECT MATTER JURISDICTION IN THIS CASE BECAUSE THE CONTRACT DISPUTES ACT, TOGETHER WITH THE TUCKER ACT, GRANT EXCLUSIVE JURISDICTION TO THE UNITED STATES COURT OF FEDERAL CLAIMS Deval and Hobson allege that this Court has subject matter jurisdiction over their action under 28 U.S.C. 1331 “because Deval’s claims relate to a contract between Deval and HUD, and contracts to which the government is a party are governed by federal law.” Am. Compl. ¶ 6, ECF No. 12. Deval’s and Hobson’s reliance on 28 U.S.C. § 1331 is misplaced. 28 U.S.C. § 1331 is a general jurisdictional statute that is preempted in this case by the exclusive jurisdiction granted to the Court of Federal Claims by the Contract Disputes Act and the Tucker Act. Also, to the extent that Deval and Hobson may be relying upon an allegation of supplemental jurisdiction under 28 U.S.C. § 1367, no such jurisdiction exists in this case.6 A. The Contract Disputes Act and the Tucker Act Deny District Courts Subject-Matter Jurisdiction Over any Civil Action or Claim Arising Under or Founded Upon a Federal Procurement Contract 6 In alleging that venue is appropriate, Deval and Hobson refer to their Complaint as an “ancillary” third-party complaint. Am. Compl., ¶ 7, ECF No. 12. In light of this language, it is possible that Deval and Hobson are alleging that the Court has ancillary (now supplemental) jurisdiction in this case. For completeness, HUD addresses the issue in § II.B below. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 6 of 13 7 It is well-established that a precisely drawn, detailed jurisdictional statute preempts more general jurisdictional statutes. Evers v. Astrue, 536 F.3d 651, 657 (7th Cir. 2008) (citing Newell Oper. Co. v. Int’l U.A.W., 532 F.3d 583, 587 (7th Cir. 2003)). The Contract Disputes Act and the “parallel provisions of the Tucker Act, 28 U.S.C. §§ 1346(a), 1491” are such precisely drawn, detailed jurisdictional statutes. Id. Therefore, jurisdiction of Deval’s and Hobson’s claims against the United States would be with the United States Court of Federal Claims, not this Court. 1. Contract Disputes Act Coverage and Procedures The Contract Disputes Act (“CDA”), 41 U.S.C. §§ 7101-7109, applies to “any express contract made by an executive agency for the procurement of services.” 41 U.S.C. § 7102(a)(2). The Loan Servicing Contract between HUD and Deval is such a contract. The Complaint alleges the Loan Servicing Contract was a contract by which HUD procured from Deval “professional loan servicing support services for a wide range of HUD-insured and HUD-held first, second and subordinate mortgage loans.” Am. Compl. ¶ 8, ECF No. 12. Further, the Loan Servicing Contract itself incorporates a provision of the Federal Acquisition Regulation (“FAR”) (48 C.F.R. Section 52.212-4 Contract Terms and Conditions - Commercial Items) stating “[t]his contract is subject to [the CDA].”7 Declaration of Christopher Stuart, Jan. 5, 2017, ¶ 5, Ex. 1, p. 11. Thus, 7 The FAR is set out at 48 C.F.R. Part 52. The FAR contains all the rules governing the contracting process as well as all the forms and clauses used in federal procurement contracts. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 7 of 13 8 there can be no dispute that the Loan Servicing Contract that forms the basis for the third-party complaint in this case is a contract that is subject to the CDA. The CDA provides explicit steps that must be followed for resolution of claims related to a contract by a federal procurement contractor against the United States. Under the CDA, all claims by a contractor against the government relating to a contract shall be submitted to the contracting officer for a decision. 41 U.S.C. § 7103(a)(1) (emphasis added). See also Evers, 536 F.3d at 657. Furthermore, until a final decision has been rendered by the contacting officer, a plaintiff has not exhausted their administrative remedies, and there is no judicial review by the courts. Tri-Central, Inc., v. United States, 230 Ct. Cl. 842, 845 (1982).8 The CDA provides for two methods of review of a contracting officer’s decision: a contractor may appeal the decision to the agency’s board of contract appeals or bring a claim in the Court of Federal Claims. 41 U.S.C. § 7104(a) and (b); Evers, 536 F.3d at 657. The statute does not provide for review in federal district court. Id. “When the [CDA] applies, it provides the exclusive mechanism for dispute resolution; the [CDA] was not designed to serve as an alternative administrative remedy, available at the contractor’s option.” Id. (citations omitted). 2. The Tucker Act grants exclusive jurisdiction to the Court of Federal Claims of any civil action or claim arising under, or founded upon, a federal procurement contract 8 For even the Court of Federal Claims to exercise jurisdiction over a CDA, the contractor must have first presented a qualifying written claim for monetary payment to the contracting officer. 41 U.S.C. § 7103; Kellogg Brown & Root Services Inc., v. the United States, 115 Fed. Cl. 168 (Mar. 7, 2014). Deval and Hobson do not allege that they submitted a claim to the HUD contracting officer under the CDA for the monetary payment sought in this complaint. Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 8 of 13 9 The specific grant of exclusive jurisdiction to the Court of Federal Claims over CDA-covered disputes is found in the Tucker Act at 28 U.S.C. §§ 1491(a)(2) and 1346(a)(2). In relevant part, § 1491(a)(2) states that “[t]he Court of Federal Claims shall have jurisdiction to render judgment upon any claim by or against, or dispute with, a contractor arising under … the [CDA]… on which a decision of the contracting officer has been issued under section 6 of that Act.” (Emphasis added) Further, that part of the Tucker Act found in 28 U.S.C. 1346(a)(2) (sometimes called “the Little Tucker Act”) specifically denies jurisdiction to a district court over CDA disputes, stating in relevant part, “the district court shall not have jurisdiction of any civil action or claim founded upon any express . . . contract with the United States . . . which are subject to [the CDA].” (Emphasis added). 3. The CDA and the Tucker Act apply to both the Loan Servicing Contract and the Settlement Agreement Whether a claim is “related to” a federal procurement contract for purposes of CDA coverage depends on the source of the rights upon which the claim is based and upon the type of relief sought. Evers, 536 F.3d at 658. In making that determination, the court is not bound by the plaintiff’s characterization or labeling of claims. Id. Rather, the court must examine the facts alleged in the complaint to determine the source of the plaintiff’s rights and the type of relief requested. Id. In this case, Deval and Hobson explicitly allege that “Deval’s claims relate to a contract between Deval and HUD….” Am. Compl., ¶ 6, ECF No. 12. The “contract” Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 9 of 13 10 referred to in the Complaint is the Loan Servicing Contract between Deval and HUD. Id., ¶ 8. As discussed in Section II.A.1 above, that contract is subject to the CDA. Also, even though Deval’s and Hobson’s indemnification claim is based on language in the Settlement Agreement, the CDA still applies because the Settlement Agreement was signed by the HUD contracting officer, and its very purpose was to settle and compromise claims which Deval had previously submitted to the HUD contracting officer as well as appeals of the denial of such claims Deval had filed with the Civilian Board of Contract Appeals – all “arising from [the Loan Servicing Contract]” Id., ¶ 10 (emphasis added). The Settlement Agreement requires HUD to fulfill its obligations under the Loan Servicing Contract, in order to eliminate any “requirements, obligations, current and future liabilities, duties, and costs Deval may otherwise incur relating to [the Loan Servicing Contract].” Id., ¶¶ 11-12 (emphasis added). Deval and Hobson assert they are entitled to indemnification and/or contribution under the terms of the Settlement Agreement to resolve any and all outstanding lawsuits “arising out of or relating to in any way to any requirements, obligations, current and future liabilities, and or duties under [the Loan Servicing Contract].” Id., ¶ 23. The CDA applies to actions to enforce settlement agreements signed by the contracting officer which resolve procurement contract claims previously submitted to the contracting officer. In dealing with another settlement agreement signed by a contracting officer, the Court of Federal Claims in Sarang Corp. v. United States, 76 Fed. Cl. 560, 569 (2007), cited FAR § 33.202 as authorizing contracting officers to enter into Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 10 of 13 11 settlement agreements as part of their authority to “decide or resolve” all claims.9 The court found “the Settlement Agreement was a CDA mechanism for resolving [claims previously submitted to the contracting officer].” Id. The settlement agreement was “sufficiently related” to the underlying procurement contract for the CDA to apply to the settlement enforcement action in that case. Id. In sum, the Complaint establishes that the Loan Servicing Contract and the accompanying Settlement Agreement are the source of the rights upon which Deval’s and Hobson’s claims are based and on which they rely for the types of relief they seek. See Evers, 536 F.3d at 658. Therefore, Deval’s and Hobson’s indemnification suit arises under, and is founded on, the Loan Servicing Contract and the accompanying Settlement Agreement. The CDA and the Tucker Act grant exclusive jurisdiction over such a suit to the Court of Federal Claims (once the required administrative claim has been made). 4. 28 U.S.C. § 1331 is not the applicable jurisdictional statute for federal procurement contract suits Because the CDA and the parallel provisions of the Tucker Act grant exclusive jurisdiction over federal procurement contract disputes to the Court of Federal Claims, 28 U.S.C. § 1331, cited by Deval and Hobson, does not confer jurisdiction on this Court in this case. 9 In relevant part, FAR § 33.202 states “[the CDA] establishes procedures and requirements for asserting and resolving claims subject to the [CDA].” Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 11 of 13 12 In rejecting jurisdiction under 28 U.S.C. § 1331 for a dispute under the CDA, the court in Texas Health Choice, L.C., v. Office of Personnel Management, 400 F.3d 895 (Fed. Cir. 2005), stated “[w]e have acknowledged that ‘the Tucker Act, in conjunction with the CDA, purports to make the Court of Federal Claims the exclusive trial court for hearing disputes over government contracts that fall under the CDA’ . . . there is no other alternative such as the district courts.” Id. at 899 (quotation cite omitted). See also, Lockheed Martin Corp. v. Defense Contract Audit Agency, 397 F. Supp. 2d 659, 664 (D. Md. 2005) (finding that the CDA and the Tucker Act preempts 28 U.S.C. § 1331 jurisdiction). “The purpose for centralizing the resolution of government contract disputes in the Court of Federal Claims, rather than in district court, is to ensure national uniformity in government contract law.” Texas Health Choice, L.C, at 899 (citing Katz v. Cisneros, 16 F.3d 1204, 1210 (Fed. Cir. 1994)). B. This Court Does Not Have Supplemental Jurisdiction Under 28 U.S.C. § 1367 To the extent that Deval and Hobson may argue that this Court has ancillary (supplemental) jurisdiction under 28 U.S.C. § 1367 based on a "common nucleus of operative facts" with Kellogg’s independent federal claim against them, such argument would be without merit. A party cannot use § 1367 to override the exclusive jurisdiction granted to the Court of Federal Claims by the Tucker Act. Pershing Div. of Donaldson, Lufkin & Jenrette Securities Corp. v. United States, 22 F.3d 741, 743 (7th Cir. 1994) (quotation citation omitted). See also U.S. Marine, Inc. v. United States, 478 Fed. Appx. 106, 110 (5th Cir. 2012) (unpublished) (contract claim “is under the jurisdiction of Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 12 of 13 13 the Court of Federal Claims to the exclusion of any other court under any other jurisdictional statute, including § 1367.”); Dia Nav. Co. v. Pomeroy, 34 F.3d 1255, 1267 (3d Cir. 1994) (rejecting an argument that the Tucker Act’s explicit grant of jurisdiction to the Court of Federal Claims is overridden by 28 U.S.C. § 1367). CONCLUSION Deval and Hobson have failed to establish that this court has subject matter jurisdiction over this case. Their Amended Third-Party Complaint must be dismissed under Fed. R. Civ. P. 12(b)(1). Dated this 9th day of January, 2017. Respectfully submitted, JOHN W. VAUDREUIL United States Attorney By: Barbara L. Oswald BARBARAL. OSWALD Assistant United States Attorney 222 West Washington Ave., Suite 700 Madison, Wisconsin 53703 Telephone: (608) 264-5158 Facsimile: (608) 264-5724 TTY: (608) 264-5006 barbara.oswald@usdoj.gov Of Counsel: KENNETH ROLAND, Attorney Advisor HUD Office of Counsel 1670 Broadway Denver CO 80202-4801 Phone: (303) 672-5377 Fax: (303) 672-5027 Case: 3:16-cv-00453-jdp Document #: 20 Filed: 01/09/17 Page 13 of 13