Oklahoma City, Oklahoma -- Sanford C. Coats, United States Attorney for the Western District of Oklahoma, announced today that JOHN V. RICH and LaWANDA J. RICH, from Tyler, Texas, and EDWIN L. GAGE and ELAINE R. GAGE, from Muskogee, Oklahoma, paid $1,750,000 to settle claims of equity skimming on a project insured by the United States Department of Housing and Urban Development ("HUD").
"HUD insured this project and expected the defendants would abide by their promises that they would use the assets and income from the project appropriately," said U.S. Attorney Coats. "Attempts to hide behind various corporate forms to evade responsibility will not shield the responsible individuals from liability for misuse of HUD program funds. Rather, as these are the public's tax dollars at issue, we will work hard to pursue cases to safeguard the integrity of federal programs."
Regulatory Background
Pursuant to the National Housing Act (the "Act"), HUD insures mortgages to facilitate the construction and rehabilitation of nursing homes, intermediate care facilities, and assisted living facilities. Regulatory agreements are an essential component of the federal financing scheme for projects under the Act. As part of the agreement, HUD agrees not to pursue personal liability for repayment of a mortgage in return for an agreement from mortgagors to operate the project in accordance with the regulatory agreements, which restrict the use of project income and assets. Equity skimming occurs when any part of the rent, assets, proceeds, income, or other funds derived from the project covered by the mortgage are used for any purpose other than to meet actual or necessary expenses of the project.
Background of Litigation
On Sept. 13, 2010, the United States filed a civil Complaint on behalf of the HUD styled United States v. John V. Rich, LaWanda J. Rich, Edwin L. Gage, Elaine R. Gage, Virginia L. Moore, and David E. Forgy, CIV-10-990-M (W.D. Okla.). In this suit, the United States sought recovery of assets and income of the Center that was used in violation of the terms and conditions of the HUD regulatory agreements.
In February 1997, HUD had insured a mortgage on a nursing home in Bethany, Oklahoma, called Heartland Health Care Center of Bethany (the "Center"), which required a HUD regulatory agreement. At the time of the mortgage, the six individual defendants were the owners of the parent company and the officers/directors of the management company that owned the property holding company. After the project experienced financial trouble, the mortgage went into default and HUD foreclosed on the loan. Further, the ownership and management entities declared bankruptcy.
An audit by HUD's Office of Inspector General reported that project revenue was used in violation of the HUD regulatory agreement, the books and records did not support the Center’s expenditures, and the Center officials could not supply documents to support millions of dollars in project revenue.
In 2007, David E. Forgy, an executive for the Center, was indicted by a federal grand jury on charges including equity skimming in United States v. David E. Forgy, Case No. 07-CR-74-M (W.D. Okla.). In September 2007, Forgy pled guilty to one count of making a false claim and one count of misprision of a felony related to the civil defendant’s misuse of Center income and assets. In May of 2008, he was sentenced to serve 12 months and one day in prison, followed by three years of supervised release.
Resolution
In order to resolve the claims by the United States, the defendants agreed to a settlement that calls for the Riches and Gages to pay $1,750,000 to the United States. In reaching this settlement, the defendants did not admit liability, and the government did not make any concession regarding the legitimacy of the claims. The agreement allows the parties to avoid the delay, expense, inconvenience, and uncertainty involved in litigating the case.
This case was conducted by auditors and agents of the United States Department of Housing and Urban Development Office of Inspector General and was prosecuted by Assistant United States Attorneys Scott Maule and Tom Majors.
Source: U.S. Department of Justice, Office of the United States Attorneys
