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Judge Rules for Allied in Lawsuit Against HUD

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A federal judge has granted Allied Home Mortgage Corp.’s motion for a preliminary injunction preventing its suspension as an approved Federal Housing Administration mortgagee. Allied successfully argued that the mortgagee that caused FHA losses was separate from the current operating entity and that its suspension would have consequences that can’t be reversed.

The Houston-based company was suspended by the Department of Housing and Urban Development on Nov. 1. HUD cited $834 million in claims paid on Allied originations and another $363 million in pending claims that could wind up being paid.

Also at issue is Allied’s handling of branch expenses.

In addition, a lawsuit was filed against Allied in U.S. District Court for the Southern District of New York by the Department of Justice.

Allied suspended new originations later that week and was unable to pay employees because of a frozen operating account.

Allied sued HUD and HUD Secretary Shaun Donovan in U.S. District Court for the Southern District of Texas on Nov. 2. The company, which claims to be the “the nation’s largest privately held mortgage banker and broker,” warned in its lawsuit that its suspension as an FHA mortgagee “will force this company to close and would render unemployed nearly all of the 723 current employees.”

In a ruling Tuesday, U.S. District Judge Melinda Harmon granted Allied’s request for a preliminary injunction.

The decision said that the plaintiffs’ claim that the suspension is dependent on the federal lawsuit that was filed in Manhattan. But the New York case is against Allied Home Mortgage Capital Corp., while the company that was suspended by HUD was Allied Home Mortgage Corp.

The judge wrote that the preliminary injunction is related only to Allied Home Mortgage Corp. and its chief executive officer, James C. Hodge.

The judge concluded that HUD was wrong and acted contrary to the law in Texas by considering Allied Home Mortgage Corp. “a mere continuation of” Allied Home Mortgage Capital Corp. just because it acquired assets.

The judge highlighted an asset purchase agreement between the two entities that specifically stated no liabilities were being acquired and noted that Texas law doesn’t generally recognize successor liability for subsequent purchases of corporate assets.

“Furthermore the Texas legislature has refused to recognize the theory that a successor corporation is a mere continuation of its predecessor as an exception to the traditional rule that a successor corporation does not assume the liabilities of a predecessor,” the decision stated.

The judge wrote that the asset sale with well within Texas law.

“As noted there are plenty of broad-sweeping accusations against, but no evidence of wrongdoing by [Allied Home Mortgage Corp.] since its acquisition of [Allied Home Mortgage Capital Corp.’s] assets,” the decision states. “The issuance of a preliminary injunction, on the other hand, would serve the public interests in preserving [Allied Home Mortgage Corp.’s] business, over 700 jobs for its employees, the opportunity for those low income clients who were approved for mortgages to close on their homes, and the opportunity for others to borrow and purchase homes.

“The government will still have an opportunity to prove its allegations and plaintiffs to receive due process and defend themselves in the New York qui tam suit.”

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