Chris Lazarini Reviews Whether Privity Exists Between Officers of the United States

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

Bass, Berry & Sims attorney Chris Lazarini reviewed a case questioning whether privity exists between officers of the United States if, in the earlier litigation, the representative of the government had authority to represent its interests in a final adjudication of the controversy.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. 

First Mortgage Corp. vs. USA, No. 2019-1978 (Fed. Cir., 6/12/20)

For claim preclusion, privity exists between officers of the United States if, in the earlier litigation, the representative of the Government had authority to represent its interests in a final adjudication of the controversy.

Plaintiff (FMC) is an issuer and servicer of Government-guaranteed home mortgages and was a long-time participant in Ginnie Mae’s mortgage-backed securities (“MBS”) program. FMC entered into Guaranty Agreements with Ginnie Mae where it agreed to follow Ginnie Mae’s servicing guidelines. Under the Agreements, FMC would be in default if Ginnie Mae determined FMC had misused the cash flow from pooled mortgages it serviced or submitted false information to Ginnie Mae. If a default occurred, Ginnie Mae could, in its sole discretion, terminate FMC or negotiate with FMC over corrective actions. Following an early 2015 compliance review, Ginnie Mae deemed FMC in default, citing numerous instances where borrower payments had been mishandled and false information had been submitted to Ginnie Mae. FMC undertook to respond to the issues, while simultaneously addressing an SEC investigation into the same conduct.

In June 2015, Ginnie Mae terminated FMC from its MBS program. In May 2016, the SEC filed a civil enforcement action against FMC, alleging FMC had improperly profited from its actions. Without admitting or denying the allegations, FMC settled the SEC action, agreeing to disgorge the profits and pay civil penalties. Further, FMC agreed it would not take actions or make public statements denying the allegations or creating the impression they were not without factual basis. The SEC agreement stated it did not affect FMC’s right to take legal or factual positions in proceedings where the SEC was not a party. The district court entered FMC’s Consent Agreement with the SEC as the Final Judgment in the SEC action.

In February 2018, FMC sued the United States, claiming it had fully complied with its obligations under the Guaranty Agreements and alleging it was wrongfully terminated from the MBS program. The Court of Federal Claims dismissed the complaint, finding the breach of contract claims were precluded by res judicata, because they were a collateral attack on the Final Judgment in the SEC action. The Federal Court affirms the dismissal. First, the Court finds the SEC and Ginnie Mae are in privity for purposes of claim preclusion, because both are officers and representatives of the United States. It matters not, the Court states, whether the SEC had authority to represent Ginnie Mae’s interests in the prior proceeding; what matters is that the SEC was authorized to bind the United States to a final decision. Second, the Court finds FMC’s claims are a collateral attack on the Final Judgment, because FMC could have litigated the allegations that it breached the Guaranty Agreements and was in default of those Agreements in the SEC action. Choosing instead to enter into the Consent Agreement, the Court concludes, bars FMC from pursuing this action now.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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