The U.S. Court of Appeals for the Second Circuit recently revisited an issue that has challenged commercial litigators and courts alike since the earliest days of the common law: When does a simple breach of contract rise to the level of a viable claim for fraud? In United States ex rel. O’Donnell v. Countrywide Home Loans,1 the Second Circuit wrestled with this age-old conundrum against the contemporary backdrop of a scheme in which the defendants allegedly violated the Federal Institutions Reform, Recovery, and Enforcement Act of 19892 (FIRREA) by selling thousands of residential mortgage loans to two government-sponsored enterprises despite knowing that those loans did not conform to the terms of the controlling purchase agreements. After a jury found for the government on its FIRREA claims, the District Court imposed jaw-dropping penalties exceeding $1.27 billion upon the defendants.
Reversing and remanding with instructions to enter judgment in favor of the defendants, the Second Circuit’s decision in Countrywide garnered considerable media attention. It was praised by some as a much needed push-back against what some see as the government’s hyper-aggressive use of FIRREA to extract substantial settlements from financial institutions, and condemned by others as yet another roadblock impeding efforts to hold accountable those whose financial shenanigans helped trigger the Great Recession.3
