banking financial services article -- aiding abetting fraudulent or predatory lending2 (july 2010)

8/8/2019 Banking Financial Services Article -- Aiding Abetting Fraudulent or Predatory Lending2 (July 2010)

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V N Y

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POLICY REPORT

r UAiding Abetng }.mdule or PredatoLendg-Where s the aw Three YearsAfte eH's abit Was Upheldy the Nih Crit? By frank Hich, Jr. and Tejas Patl

The Feder Arbto Act eedsa Du Process Pooo 9 Rhd A n Mhl Evon

E ONIOR

Bank Regulatin 2

Secuiies/ecio 20IBoke-Oele . ...

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.Aiding & Abetting Fraudulent or PredatoryLending-Where is the Law Three Years

After Lehman's Liabiity Was Upheldby the Ninth Circuit?

Frank Hirsch.Jr ad Tjas Patel

The Mortgage endng andSeritization Context to Aidng Abettig

The determinaion b he Nh Crcit haLehman Brothers, Ic cold be iable ude Caiforniaommon-aw rad for aiding and abeing he decp

ive moage praies of Fs Alliae MogageCo. {Fis Aliae-one of h arly casuais of hesubprime lending metdownwas a landark desonwith onsiderable press covrage. [ hindsigh howeverhe rig annOed in Dembe 2006 wa a harbiger of he morgage lending risiswhh had mancoribig ausesoe o whih was the rush o

veral egraio o he ire proess (of morgge

orgaio o uimae seuriizaio o he bledloas as seuiies) whih was aged in b he agesinvesme banks ad deposiory instiios i a seriesof deas mos n the seod hal of 2006 1

Ideed a major of he op 25 subpime lendrsresposible for nearl S1 rWo in oans origiaeda he mae's pea bewee 0052007 had ties omao ancial insioS or example MerrlLnch owned #4 Firs aki Corp ashingtonMal owned (# ong Beach Mortgag Cop;Lehman Brothers owned 11) BC Morgage I;Bears ears owned (#1 Encoe Cred Cop: IGowned ( 8 merian General Finane and Capalne owned 23 enPon Mortae Mos ofhese subprime ledes wen ou of usiess or declaredbanpc in a uik ollapse o he sbprime mar

ketplae n md-00 B epember 00 he olapseook down ehman Bhes itsef and a half dozen

Fak A Hich. s co-ad f t ln Bd FacalSvces Ltgat Gop ad dt n [ Raleig NCarlna fce H c f on d o nanace cmasTeja Pal an aa g ad eden e Alan

Vole 9 Ne 7 l I

of he larges ancia insiions i he conCounwide Bear eans achovia Merrl ncashngon Muual and IdMa Banorpo ama few of he lis o faled ban whih presenl numbn eess of O insiions

Mos of he larges nacal insos srvivd acqued Ban of America JPMorgaChase aCitiCorp} bu the ligaon fallo from he morgacrises came wih man of hose consolidao deaThe claim heories to eah upseam no he coeof he large deposiry and nvesment banks have befewbu oe of he mos oewor is he aidad abeing frd heoy espoused b he Re FAllan; deision

o what s he sae of he aidig ad abeing jurprdence now ha a oupe o ears have passed sin

the market metdow? ho s wing and who osg on he ang and abeng claim theor hisae are he balegods for he clam heor? h

end are evden i hese cases

his acle discsses the semia 006 decision R F Alnc ad the eplores a doen subsue decsions which have ved he caim heon various facual conet Calfoa and ew Yo

have been the domina ocaos of his ligation boher sae o w are alo mlited Ma o epoed ases ae in he ear sages and als hae ne occurred bu some obsevations ad coclsioar made at he end of his aicle

Henry v. Leman Commerial aper,In (In re Firt lliane)

The inh Cirs deo LlmwCmJaf p I (n t lla Mogag Cmade lear ha a waehose lender/secoary markloa puhaser ca be liabe for aiding and abein

Bnkg & Fiadal Sers Pal Rpf


4/10

prdtory lenin-t t der ommon fudprincp. ) I l, ass of Cforn orroerued Lema Bers, (Lema) on th bi ar Aiae Mot Comp;y (F n) hd

aeedy "ggd a uifom ad systmi frudaais h mrgge brwers. Te cass imd thtLhmn ws ib o thm for iin nd ein thifud undr Ciforni tort aw nd undr Ciforni'Unf Compton Law {L).4

Lehman's Rtiosp wt Fr Acrs ln' buin mod onid of orin

in mgage fundd y a rvovin hou ne ofrei5 Tu uriition pro Firt noud piody iu ond nd note to intorh urd y th pymnt trm from e

me lan> Th mony rid vi; e uri-on prcess woud be sed to repy ir ineaehou in of dit Thi wa a ommon pbun modl dri 205-7 th hiht of thmot rnnin nd ubprim boom mrkt

Tu h 19's F n acedb numr of dint rhou ndr8 1,hmn m eresed in doin bess ith rAace nd ypica f e bsiess mde c-dud a de dgece quiry.9 Lema's inionrvd tht Frs n hd bee ud of prd

tory lnin p in t et 14 nd hujt of signiant tiion0 uthrmor, ieraema rport onind favrabe dription ofrs lines b pri1 Dpit th rultof it inveo Lema rd to xtnd $25m wareuse ie of cred r ae!2 Indiion during 16 nd 17 hmn omndfou urtiton tnio for Fir in3 B8 h inr in rutiny nd io agas rAiace ud th ompny erhou ederro whdrW fn_14 A oth w_hou eders baked awa fom Fit lin, hmncreased F n lin of rdi mionnd bm th ompny se srce f waefd15

T Nt Ccut's Hldg

Te idin nd btig m int e rbed aeations a we Lema aeed provid h nnin for Fir in mort uinLema did s ith th nod h th onwee

Bnn & n Rp

rgaed throuh dptive ses produ ad athou Lehmans nancin, irt in oud hvebn une to orin th on or to aomplshhe frud6 h of pin br uit ain

hmn o hor: (1) d nd abetg udertion 20 of aras C nd (2) in adabe frud de Cafa tOr

Reardig th C im th Ninh Ciutrmd h til out ummry jde in orof Lema on th oun tht aiding nd abeilibty puunt to e UC rquires "perso par-tiipaon nd "unridd onto ovr h prtfound o ot th c. 17 ourt furthr nodth "eJve if hmn ondut t ithin th typidnted by h U he paini ca s] no ebe

fo rmd vi undr ion 12 h remitd to form of eqae 8 hu th oud not utiz h Cifoni C to ror dm fom hmn

Connin th in nd abeg f d mh our run muh ess favrabe f LemaPrevs t h tri eve e jur found tht Lemawas b for iin nd in frud n pphmn rued tht i wa l ror for th trilourt to rfu to src e ury a p ntntthr a mer kwedge ruird for ndn

of idin nd abe frud ema fer oneded ht h tr ourt dei hmn moonfo udmnt as mtt of l was md in ro21e Ni Cruit dred ih Lema Te NinthCiruit deemed a e il ourt ppr detemed th in ntrun th ury ad th uievdece upportd th juys vrdt

th hrt of e ttion was th reie proofof nod on bea f fndnt n odr b dr n in nd abefrud cim Uder ara ]iiiy mabe impod e ho id nd bt th mmon of n intnion tot if e peron k heers cdc ontiu rh of duy nd ivuti itn o noumnt o th oth too t In nyin h noed pon e ourtmade ear tht idin ad btn ab ruir adi of tu wede ot peic inten Theour nod tht th u wede sandrd rurmor thn upiion ofwndoi ad tht

le 29 July I


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t e fund abe, Lehman mut have kown moethan that "s/h shy was goig n."5 The coutfou that he was sucient evence f te juy cocue tat ehman had actua knwedg.6 I sup

po f irs ning, the cout ote that n cnductngit uines-due igence inestigaon f Fit AiancLehman ceived p that escbe the fauduent pactices i wch Fist iance was engged7Meve in one inte epot a ehman oicesated that if Fst ance "oes not change its usnes pactces it w nO uvive scutiny is wanough o show actua nwedg

Concening the sustantia aance png tecu fund tat suciet evence uppted theu's nding that Lehma aie an abette Fist

Aance's faud.29 In mang ti eeminaon tecu expaned that onay busess tasacions abank pefms f a custme can satis the susntiaassistance eement f an aiing a abetng caim fhe an actuay new thse taactins wee asitinghe cutme in cmmtting a specic tOt Knwedgei the cuca eement.0 he cut egzed thaLehman atised a f st Aance's nancn needand ept Fit Aiance n usness even a t ecameawa f iigaion ve [Fist Aiances] duus ning pactice"31 he cut fund that this wa enugf the juy to concu that ehman was pvingthe equisite substa a asitance. Lehmanatempeto ague that it meey povided ignicant asssncean tha s was dstinguhae fm utantia assistace.3) Unmoe y this agment the co saethat ]n situatin wee a whole cmpanys usinessis bu e a huse f cad o a fuue entepisethis is a disnctn withut a ieence.4

Subsequent Cases Involving Claims ofAiding and Abetting Predatory Lending

So f: te subsqunt cs invlving idn ndabetng cams

fwing lnc haent expcty he cetan defendants ae f aiding and aettng peaory endg; sea te caseagey nvve mtins to ismiss and/ mtns fummay udgmet A demnstae by e speccitigation sce beow wes have ouineyed suit against nt ony ther oa poe but assecnay maet an puchasers escow agens awm and the entities tat pacipate in the anpce The ayss is thefoe e anghe les

Voe 9 Ner Jl 2010

ofthe aiing a abetig Defeas busness pitiwith the aege fauent ene

Ca Wr t Patf Wa Sccfy Ab

t Wthtad a Mt t D r Mtf Smmary Jdgt

Defndan is th Lnloan Oigjnatr

In Ph H Sav nn Gp5. a feeDitct Cut in New Yok eie the motion to ms f a mage lene facing an aiding and aettifaud cm he factua cntext invved a fauuemortgge esue company Te panti eged thHome Sae Costing Cop (Hme Saves) epsene to he that the company wou sae he hufom foecosue y aowng he to obta an aa

an wie eaing te to he house6 At te cosia me aves epeseraive td the painti wn the pesence f a mnt Invesent and Loepeseratve emnt that se wud emain n ttiteY In fact the pain uwittingy sged a dcment tanfeing te t he hu.38 nance the ttansfe w mtgage a wee made by Fcmnt

emo he (#7 surime ende eveen an 27 was ued fo adg an abeig mSaes. eyig emonts mon to dmi plainis cm the cou ed hat a factnde cueasy fer fom Fremont's pesece a he closg ait status as mtgagee that havg hea he epesetatins by Home Saves a nwing ther fasity thFemont ha acua kowlege fHome Saver's scemt defaud the panti40 emnt agued that t cunt e hed iae since its agent meey Jt sienat the csing and theefe did nt uttly assin the faud.4 he cut weve dageed asate hat adng and abetng iabiit touches eeone who oes subsatia assis1nce i the fau-njut p:cint who k fay Frmo

cann

ot discaim iait n

thegund that t

stnancie nt te peman f the faud"

Simay i Mcls Dnz43, a paintught aiding and etting aims against th ende Agent Mtgage Cmpany Agent) and escow age New Cetuy Tte Cmpany NeCentuy. Te cut eie moios to diss taiing and aetting caims as to th Agent an NeCeuy.4 n his cmpant the paint aeged tat

B & rv r


6/10

ws deceved by defendnt Edwin Parada a morgge ber, ino ng nancaly budenome loanon his home. Regarng New Cent the courtheld that the dealed descripton in the plain's

compain of the compans inoement in the loanclosing ws scient o pled acal knowledge of thefaud46 Furthemoe te plaintis allegations thNew Centuy aced as escow gen draed closinginsrucions, nd instcted the plain to ign docmen were scient to demonstate ht it subsanalyassied in he ad7

Wih respect [ Argent s lende, the cour foundha i lent dirctly o the plainti wih the aid o EdwinParda a a broker and is close participaon was suf-cien to sas he knowledge prong o the aidng and

abetng caim48 In a Rule 2b6 moon to dismisscontex, the funding of the radlenly obined loansatsctorly established he substntl assistnce ele-ment of the claim9

efenan s a Scnay Mak La Puchar Entes ha puchae loan on he secondar market

may also ace biy claim for aing and abetngpredo lending. or example, in Pscena Udig MOTIgg50 borowes pursant to an opon austable rate mortgge (OA nd who wee unawre thttheir oan was subjec to negtie amortizaon broughtan aiding and abetting claim against EMC MorgageCopoation (EMC which prchased pcaged andsecried loan for ending Mogage (endng1s). EMC is now an aliate o MorganChase and

was cquired in Mah 28 when PMotganChaepuchased Bear Sterns the preious owner of EMC as wel as Encoe Cre By refsing to dismss the clamagaint EMC he cort agreed wth the pintis thaEMC might be iable for i invovement wih ending1s[.5 The cor epained:

By showing that EMC puchsed ending stsOA wih knowedge of endng ' TILA olaons, laini my e ale o eslish thtEMC gae Lening 1 t nancil incentie tocontinue to commt those violtions and thee-fore may be subjecd to abiliy for aiding andabettng olons of he UCL52

oan assignees may also face abit or aidingnd being pdory lenng even i hey weent

&

inolved n the nial lendng pocess he acts ofQuezd . fl [ are simlr to thoeof Pi In Quez the pani was the nmedrepresenative o a class of bowers who received

oan fom on Center of Caliornia (LCC).5 AferCC went out o business the plaintis loan wasassigned to EMC.55 imatel the plaint led suitaginst EMC arising out o the negave amo-ion ht occured pusuant o he OARM.6 DespiteEMCs argment tht i cod no e held iabe ndeCalornias UC snce it was merely n assgnee of heoan and no the orgina lender the cort disageed5The cot denied EMCs motion to dismiss statng htplains llegtions tht EMC w "acng n concert wih CC and wa promoting, makeing stringand seling the Opion ARM lon were scent o

sate a claim or aing nd Jbing raud puant tohe UCL

Another case invoing an ding nd ttingclim agns prchasr o Option ARM loans isVelq GMAC Jorte p.59 n thecase MAC Morgage Corportion (GMAC) pu-chased OARM lons originJted y Aegi holealeCorporaion (Aegis)0 Aegi was the #2 sbprimeender from 2-7 and was owned by CerbeusCapal Mangment he pintis brought claimagaint GMAC o lily prsant to CalorniasUC6 NoihtJndng the fact that he compadd no ue the phase aing and abeting the courconcded tha the plainis Jlegaons were suciento rvve a motion o dismiss.2 In mng t decisonhe court noted th the plintis alleged tht

Aegs and GMAC Mogge Corp woedtogethe n disribting sellng and ervicing heloans ha they iaed the scheme in order tomamize the loans they old o consmers ndt mxm p t M op

had ll knowledge of Aegss wrngl ac, Jnd actively prcpaed as n asignee and/obyer3

Dd Atg n h Tron(g . crow g, ttor, )

otential liability fo iding nd aetting pedatoryending is not imited to nncial enie that origi-

nte or prchase morgages Fo eXJmple in Mcesdiscussed a claim of ding and abeting against

lume 9 Number 7 July 010


7/10

an scrow agnt svived mion to dsmissCn Bhe64 is a cs implicang a nonnancia ntiy as a defndantan indivdal pepetaing fraud nCn te claims ose o of a scem to dfrud h

plaini n which she was o she was merlyenancing e motgage an wuld at al tmesain ti to r pope6 In fac, at te clingte painti signd a de convng hr propeyo defendant Betea Te plaini bought climso aud agains vaus efendans among wic

incdd clims agans a w m n aon an atitl closr7

Afe some peio of iscovey ll of ts defenda ed moions for smmar judgnTh curdenied o te mons nding ta he plaini's

evidnc ws scie t aise an ss of isputedmaa fa whr each f he dends was libo aidng an abeting faud69

As o te dfndnt law m Angelo Associas court fond that the ms eviw and ccaonof a s HDI Slement Satment and te inclu- son in the loan l of a fudu chec for$4000 satisd th substantil ssistanc ong and d a j to dcide abiy AddtionaU vidnc of a wirtappe conrsation of Ms DAnglo which includd discuions how to manfctre faudln

bance cheks was sucin suport a nng hath law m ad actul knoldg of wongdoing]

Turning o he dendant aorny Ggo Nanon,h cur ued a s repesenain o he lanti in he tansacn coule wih evience cnsisingo "statemens desribing Nann's ole n thtnsaction and s apearnce in the qustonabltnsactions involving the same goup of inivdulswas sucin to suppo ndng th e was libl foraiding and abtn.?2

cout ac the sae es wi respect Oth fndan tie close, Bay osen.e cort notdtht a u coud concld ta osen had nowlgof t fud based on he lantis evidnc indicatingt Ros was ese a four ohe susct ransac-tio3 In adtin, osen admtted hat e epadth d, t ttle and t scow agmntfor e tnscon?4 he co ld ta his cold beconsideed sbsana ssistnc o faud.?

Volm mb 7 Jly 0 0

Anoher illusave may juden cas jdn . Pu Fnn, LL76 n whic t NoheDistict of lifora dnid dfendn HSBC ationAssociaons (HSBC moon for smmay judn

n the case he plaini's aUgtions aose out of tnegativ amortization atributabl th paintoption ARM loan?7 Pal inancial was the originf th loan b venual sod he loan o Lumin Motgge Capta, Inc (uminnt)minent in poold e loan wit other adustble at mogages a mortgge backd scis tust for whic HSB was th trus.?Th plainti claimd tha HSBC wliale on a hey o aiing and abeing faud.7 Tcou ened SBCs moion o summa judgme an ecoed hat f t plaint co locae edenc sowing ta au nancia had n ageeme

with HSB fo HSB to tak a nancia ints in loans tn that vidnce could spor the plainticlam at HSB actd as n aidr nd bttor in aFinancil scm o origna loans basd on and lading disclosues Accdingl, h cxndd h m alowd f discovr and diHSBCs moton fo summay judgmn.

Ca Wr Panf Wa Una o W hada Moo o D or Wa Ohrw ef

oisaning he fegoing ases cor a nubbersamping evey cmplain aleging a claim

aidng and abeting pdato lning an aowe cass o pcd towad ti At a nmum tcomplaint ms age paricuar facs that dmonstboth the cual nowdg lemnt and the substatl assisanc mn of an aidng and btng claOtwis th caim for iding an abttng n

suv a moion to dismss o eample in ClhAlnc M! nkn .8 a l insuranc r vider was sccessl in is motion o disss he aidiand abeting u claims bog agans t he eec in New Jesey e ta te omlaint failestate a claim givn t t earl did not comply wte hightend pldng uirments of FdRP (b8

Simia in FOtz PN Fnnl ep84 t Nortrn Disrct of Califo dismiss caim fo aiding an abetnghe complaint allegta Defenants and each o hem knw of the coduc of he oth: nd that Dfndants new the Defndant tat originatd e loan n with [s

Bnkng & Financal vic Rpt


8/10

decepie and ulaw acts and pactces as allegedheein."5he omlaint fuhe aleged ha defetseach gave substatial asistane an eouragement toeach other .86The ort held that it ws impoile

to asetain w ay degee o atculai the preisecoduc beng alleged as to each defenant87The outdismissed the claims wih he folowig eplaatio:

W]laiti alegatios ae wholy colusor andfail to alege the spei grounds for commssoof any itenionl tort, let alone he actios othe pa of oe o moe invidual defendan wh esablsh kowledge of any ietioal totor which qua as substana assisaeVaguealegtios ad mere labes and coclusions, painti's ourteeth claim demostraes hee ae

insucen o wthsa a motion to ismiss8

ikewse n Brai M IdyMac Bak FSN theorhern Dst of Calora dismissed a caimaains Onewest an0 for aiding ad abettg audu-et lendig pacis The ptave Defendans wereOneest ak as the successo in inteest to the oigi-na lender, IdyMac Bank and Ameica ResdentiMogage Copoatio (Ameia)e oigna boer of the lon91 The comai aleged that Amercanesideia Motgage Copoatio had egged inruule lendng paces a ha newes akhad kowledge o he ud and substataly aistedi it.2 The isssa order was ased on the cout'sdeterao hat he alegions agans Onewes wee wholy concusory ad iled to explan how ihad


9/10

by depoory bans nd othr niuon beeneverey ure-precsely bcue of he dsrus ofbor movaon unr he prevous srucue. An,

he nus conolde gey sne 2000 Te

mjor pooy ans now domne and ar runng orgnon hnne on a more re/norba vrcl ngraon n rhe nus woccurre rapdly rom 005-07 h een mpaed byhe ollape o he prve lbel ecurizaon mren h fl of hree nvesmen n; owever o heexen vetl negon uves lo me ng nd btng fuue enng prces an eerclm o me By conra n 20-oe th me when he wreouse lende becme owne/eof ubprme an oer mortgge ogntoa ehe eeppoelendeefndan ould rge a

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banking financial services article -- aiding abetting fraudulent or predatory lending2 (july 2010)

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