Hager & Hearne brought a California False Claims Act suit against MERS, Bank of America, Citimortgage, GMAC, J.P. Morgan Chase Bank and Wells Fargo Bank for failing to pay recording fees on real property transactions.  The California False Claims Act (Cal. Gov. Code 12650) is a type of Qui Tam statute.  Qui Tam was a common law writ where a private individual who brings, or assists a prosecution to recover money owed to the state can receive all or part of any penalty imposed.  The name is an abbreviation of the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning "he who sues in this matter for the king as well as for himself."

The king created Qui tam actions in 13th Century England as a way to enforce his laws.  Qui Tam was recognized in the colonial United States, and the first U.S. Congress used it as a way to enforce the laws when the new federal government had few law enforcement officers.

Federal and state Qui Tam suits have provided a buffer against government corruption in the United States for more than two centuries.  An argument supporting Qui Tam is that it encourages a private individual to investigate frauds that the state may lack sufficient expertise, or resources to uncover.  Another is that the postmodern state often presents the problem of "regulatory capture" and other sorts of government corruption where officers of the state choose not to investigate frauds on the state because they are perpetrated by politically favored groups that often provide campaign contributions and other resources to the party, or parties in power.  Qui Tam allows a private individual to sue on behalf of a state so mired in corruption that it is unwilling to prosecute even obvious frauds.

It is notable that the federal Qui Tam statute called the False Claims Act expressly excludes alleged violations of the Internal Revenue Code.  The Internal Revenue Code provides a separate whistleblower statute, but that statute does not allow the claimant to pursue the litigation.  Under a traditional approach to Qui Tam, the plaintiff or relator may pursue the claims without the permission or participation of the relevant government agency.

Three years into the mortgage debacle there have been no meaningful criminal prosecutions of bank executives, mortgage brokers, real estate agents, or others for fraud, misrepresentation, violation of criminal statutes involving FDIC insured banks and countless other criminal violations.  The only prosecutions brought by attorneys general and district attorneys have been ones approved by the banks.  Only cases where an individual or group defrauded the bank in a way the bank did not approve of has the government prosecuted.  For example, no mortgage broker has been prosecuted for instructing a borrower to lie about income on a stated income loan.  No broker has been prosecuted for filling in false borrower income information.  Yet, making a misrepresentation on a mortgage application originated by an FDIC insured bank is a felony.  The lack of prosecutions has caused serious moral confusion.  I've spoken with dozens of mortgage brokers who are convinced that lying about the borrower's income on a mortgage application is perfectly legal.  They've said to me, "If it's against the law, then how is it that everyone does it and not a single person gets in trouble?"  The state's involvement is that all of the real estate agents and mortgage brokers who assisted borrowers in these frauds were paid tens of thousands of dollars in commissions for each transaction and that money eventually came from taxpayers because the commissions where paid out of the loan proceeds.  The taxpayers paid broker and agent commissions that were generated directly because of broker and agent fraud -- the transactions couldn't have closed and the commissions wouldn't have been paid without the active fraud of the brokers and agents seeking to close the deals.

This is the purpose of Qui Tam.  To seek repayment to the state of money deprived from it through fraud.

MERS and the New Property Title Crisis

Hager & Hearne's theory is that by creating the Mortgage Electronic Registration System, the major commercial banks sought to accomplish two nefarious purposes: (1) to evade the requirement to properly file and record documents evidencing changes in title and ownership of the mortgage and note, and (2) to evade paying legally required filing fees to the state's counties.

In an effort to facilitate the rapid transfer of mortgages and notes from one party to the next, a handful of major US banks rolled back centuries of property law that had been designed to safeguard the security of title to real property.  The recently uncovered document fraud banks and their law firms have perpetrated on the courts to foreclose on properties the banks couldn't prove they had any right to has risked the integrity of the entire US residential property title system.  Recently several title companies refused to insure properties that were foreclosed on by the group of banks that used falsified documents to foreclose.

The problem is pervasive because new buyers of foreclosures now face legal challenges from the previous owners who may have been wrongfully foreclosed upon, often by a bank that had no right to bring the action and no right to auction the house.  Title insurers will have to pay to defend these suits and ultimately to pay off the new buyer's damages if he is forced to return the property.

Where It Goes from Here

It is difficult to predict how the Hager & Hearne False Claims Act suit will fare.  Because of rampant government corruption, Hager & Hearne probably will find themselves up against not only the banks and MERS, but also against the Governor of California, the California Legislature, the Office of the Comptroller of the Currency, FDIC, the US Treasury Department, the US Justice Department and many other powerful agencies that do not want any bank or or banker to pay a penny in damages, or to unleash what any person could see should be a flood of criminal indictments.  The firm was, however, clever in its efforts to secure money for California counties.

The State of California has tried to siphon money from California counties to balance the state budget and the counties are desperate for funds.  The same banks that are defendants in the Hager & Hearne suit are ones who fail to pay property taxes on abandoned homes, who fail to foreclose on homes where they own the mortgage, who let foreclosed homes rot and decompose in neighborhoods throughout California without timely selling the properties in an effort to keep "shadow inventory" off the market to illegally fix prices.

These pressures could drive a wedge between California counties and the California and federal government resulting in a powerful ally for Hager & Hearne.  If this suit is successful, MERS will likely be destroyed and the largest US banks that formed MERS will be subject to liability for unpaid recording fees in all fifty states.  Although the federal government may then seek to use taxpayer money to insulate the banks from financial responsibility, voter anger and outrage may make that politically impossible.

Read Hager & Hearne's False Claims Act complaint in the California Superior Court.