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

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

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Aiding & Abettng }'r.mdulent or Predatory
Lending-Where is the Law Three Years
After LelulHUl's Liability Was Upheld
by the Ninth Circuit? . . . . . . . . . . . . . . . . . . . . 1
By frank A. Hirsch, Jr. and Tejas Patel
The Federal Arbitmtoll Act Needs
a Duc Process Protocol . . . . . . . . . . . . . . . . . . . 9
By Richard A. Bales and Michelle Eviston
Bank Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Securities/Section 20IBroker-Oealer .. . ......... 27
Futu resleri va ti ves/Swa ps/Com modi ti es . . .. 28
Court � �. . . . . . . . . . . . . . . . . 31 �
®. V0|I6lS b|UWEl
lw & Business
Hanl:ing o linancial Services
Pol¡cy Report
Ro�rt V Hae
&m Francisco, C
Director. Newsletters
Beverly F Sabin
Managing Editor
Matthlw Isler
Marketing Director
Anncmlric Cocchia
Editorial Advisory Board
Bownun Brown. Partner
S & &"''1
Arnold G. DlnidSOI, Pmidcm
DnirisflI ASl(i nltS, In.
R«k vifk, MD
Charles E. Dropkin, Parmer
IJJ/"" Rust U.
NtwYo,k. NY
Wler A. Efon, Prfessor
Tt American U'JillCfSif),
HhillglDII Collee rif Luv
Washillom, DC
Melanie L. Fein, Attorney &
Financial Services COlIult:lll
Cr// f1 VA
Cui Fdscnfeld, Prfesor
Fhm Uniwnily Shool of Lw
Nn}'r, N
Dougas E. Haris,
General Counsel
I,oktT« FU'''1 £xrhlll�, LLC
BmknTe Clel,;ng C",.,pauy, LLe
Jmty City, NJ
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Pl/sbury Will/lim LLP
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Ciligroup Balik Rt"lJlalfry Qfce
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Iiams & Co,molly
Wts/rilgroll. DC
CharlM K. Whilehead,
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COllell Lw School
Richard M Whiling,
General Counsel
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Washi�lon, DC
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Aiding ö Abetting Fraudulent or Predatory
Lending-Where is the Law Three Years
After Lehman's Liability Was Upheld
by the Ninth Circuit?
By Frank A. Hirsch.Jr. and Tejas Patel
The Mortgage Lending and
Securitization Context
to Aiding & Abetting
The determination by the Ninth Circuit that
Lehman Brothers, Inc. could be liable under California
common-law fraud for aiding and abetting the decep­
tive mongage practices of First Alliance Mortgage
Co. {First Alliance}--one of the early casuahics of the
subprime lending meltdown-was a landmark decision
with considerable press coverage. [n hindsight, however.
the ruling annOLllced in December 2006 was a harbin­
ger of the mortgage lending crisis-which had many
comributing causes-one of which was the rush to
vertical imegratioll of rhe emire process (of mortgage
origination to ultimate securitization of the bundled
loans as securities) which was engaged in by the largest
investment banks and depository institutions in a series
of deals mostly in the second half of 2006. 1
Indeed, a majority of the top 25 subprime lenders
responsible for nearly S 1 triWon in loans originated
at the market's peak between 2005-2007 had ties to
major fnancial insrtutiollS.2 For example, Merrill
Lynch owned (#4) First FrankJin Corp., Washington
Mutual owned (#5) Long Beach Mortgage Corp.;
Lehman Brothers owned (# 11) BNC Mortgage, Inc.;
Bears Stearns owned (#17) Encore Credit Corp.: AIG
owned (# 18) American General Finance; and Capital
One owned (#23) GrecnPoinr Mortgage. Most of
these subprime lenders went out of business or declared
bankruptcy in a quick collapse of the subprime mar­
ketplace in mid-2007. By September 200S, the collapse
took down Lehman Brothers itself, and a half dozen
Frank A. Hirsch. Jr. is co-head of the Alston & Bird Financial
Services Litigation Grou
and is resident in [he Raleigh. North
Carolina office. His practice focuses on defense of financial
services companics.Tejas Patel is an associate in te group and is
resident in the Atlanta ofice.
Volume 29 • Number 7 • July 20 I 0
of the largest fnancial institutions in the country­
Countrywide, Bear Stearns, Wachovia, Merrill Lynch,
Washington Mutual and IndyMac Bancorp-to name
a few of the list of failed banks which presently number
in excess of I SO institutions.
Most of the largest fnancial insttutions survived
:md acquired {Bank of America, JPMorganChase and
CitiCorp} but the litigation fallout from the mortgage
crises came with many of those consolidation deals.
The claim theories to reach upstream into the coff eTS
of the large depository and investment banks have been
few-but one of the most noteworthy is the aiding
and abetting fraud theory espoused by the hI Re First
Alliana; decision.
So, what is the state of the aiding and abetting juris­
prudence now that a couple of years have passed since
the market meltdown? Who is winning and who is
losing on the aiding and abetting claim theory? Which
states are the battlegrounds for the claim theory? What
trends are evident in these cases?
This atticle discusses the seminal 2006 decision of
/1 Re First Allianct and then explores a dozen subse­
quent decisions which have vetted the claim theory
in various factual contextS. California and New York
have been the dominant locations of this litigation, but
other state ton bws are also implinted. Many of the
reponed cases are in the early stages and trials have not
yet occurred, but some observations and conclusions
are made at the end of this anicle.
Henry v. Lehman Commercial Paper,
Inc. (In re First Alliance)
The Ninth Circuit's decision in HaIry 1. Llmwl
CmJlneniaf paper Inc (In re First Alliance Mortgage Co . .
made clear that a warehouse lender/secondary market
loan purchaser can be liable for aiding and abetting
Bnking & Finandal Serves Pali Repfl • I
predatory lending-at least under common-law fraud
principles. ) In Llm, a class of California borrowers
sued Lehman Brothers, Inc. (Lehman) on the basis that
First Alliance Mortgage Comp;my (First Allance) had
allegedly "engaged in a uniform and systematic fraud"
against (he mortgage borrowers. The class claimed that
Lehman was liable to them for aiding and abening this
fraud under California tort law and under California's
Unfair Competition Law {UCL).4
Lehman's Relationship with First Alliance
First Alliance's business model consisted of originat­
ing mortgages funded by a revolving warehouse line of
credit. 5 Through J securitization process, First Alliance
would periodically issue bonds and notes to investors
that were secured by the repayment stream from the
mortgage loansJ> The money raised vi; the securitza­
tion process would be used to repay First Alliance's
warehouse line of credit.1 This was a common place
business model during 2005-07 at the height of the
mortgage refnancing and subprime boom market.
Throughout the 1990's, First Alliance was financed
by a number of diff erent w;rehouse lenders.8 In 1995,
Lehman became interested in doing business with First
Alliance and, as was typical of the business model, con­
ducted a due diligence inquiry.9 Lehman's investigation
revealed that First Aliance had been accused of preda­
tory lending practices since at least 1994 and was the
subject of signifcant litigation. 10 Furthermore, internal
lehman reports contained unfavorable descriptions of
First Alliance's business practices.11 Despite the results
of its investigation. Lehman agreed to extend a $25
million warehouse line of credit to First Alliance.!2 In
addition, during 1996 and 1997 Lehman co-managed
four securitization transactions for First Alliance.13 By
1998, the increase in scrutiny and litigation against First
Alliance caused the company's other warehouse lenders
ro withdr;W all funrlinr_14 At a time when othlr warf_
house lenders backed away from First Alliance, Lehman
increased First Alliance's line of credit to S 150 million
and became the company's sole source of warehouse
The Ninth Circuit's Holding
The aiding and abetting claims against lelmun were
based on allegations that when Lehman agreed to pro­
vide the fnancing for First Alliance's mortgage business.
Lehman did so with the knowledge that the loans were
2 • Bonkng & Fnoncol Serves Pli Report
originated through deceptive sales procedures, and that
without Lehman's fnancing, First Alliance would have
been unable to origlnate the loans or to accomplish
the fraud.16 The class of plaintff s brought suit against
Lehman on two theories: (1) aiding and abetting under
section 17200 of California's UCL; and (2) aiding and
abetting fraud under California tOrt law.
Regarding the UCL claim, the Ninth Circuit
afrmed the trial court's summary judgent in favor
of Lehman on the grounds that aiding and abetting
liability pursuant to the UCL requires "personal par­
ticipaton" and "unbridled control" over the practices
found to violate the code. 17 The court further noted
that ",eJven if Lehman's conduct fts within the type
identifed by the UCL, the Iplaintiff class is] not eligible
for remedies available under section 17200, which are
limited to forms of equitable rlief"18 Thus, the class
could not utilize the California UCL to recover dam­
ages from lehman.
Concerning the aiding and abetting f . md claim,
the court's ruling was much less favorable for Lehman.
Previously at the trial level, the jury found that Lehman
was liable for aiding and abening fraud.19 On appeal,
Lehman argued that it was legal error for the trial
court to refuse to instruct the jury that specifc intent,
rather than mere knowledge, was required for a fnding
of aiding and abetting fraud.z lehman further con­
tended that the trial court's denial of Lehman's moton
for judgment as a matter of law was made in erroL21
The Ninth Circuit disagreed with Lehman. The Ninth
Circuit determined that the trial court properly deter­
mined the law in instructing the jury and that sufcient
evidence supported the jury's verdict.22
At the heart of the litigation was the requisite proof
of knowledge on behalf of a Defendant in order to
become dirctly liabll IInder an aiding and abetting
fraud claim. Under California law, "p]iability may
be imposed on one who aids and abets the commis­
sion of an intentional tort if the person .. knows the
other's conduct constitutes a breach of a duty and gives
substamial assistance or encouragement to the other to
so act."23 In analyzing the knowledge prong, the court
made clear that aiding and abetting liability "requires a
fnding of actual knowledge, not specifc intenr."24 The
court noted that the actual knowledge standard requires
more than a vague suspicion of wrngdoing, and that
Volume 29 • Number 7 • July 20 I 0
to be found liable, Lehman must have known more
than that "some/hitlg fshy was going on." 25 The court
found that there was sufcient evidence for the jury ro
conclude that Lehman had actual knowledge.26 In sup­
pon of irs fnding, the court noted that in conducting
itS business-due diligence investigation of Firt Alliance,
Lehman received report that described the fraudu­
lent practices in which First Alliance was engaged.27
Moreover, in one internal report. a Lehman oficer
stated that if First Alliance "does not change its busi­
ness practices, it will nO[ survive scrutiny."2 This was
enough to show actual knowledge.
Concerning the substantial assistance prong, the
coun found that sufcient evidence supported the
jury's finding that Lehman aided and abetted First
Alliance's fraud.29 In making this determination, the
coun explained that "ordinary business transactions a
bank performs for a customer can satisf the subslntial
assistance element of an aiding and abetting claim if
rhe bank actually knew those tram-actions were assisting
rhe customer in committing a specifc tOrt. Knowledge
is the crucial element."30 The court recognized that
"Lehman satisfed all of First Alliance's fnancing needs
and ... kept First Alliance in business" even as it became
aware of ""litigation over [First Alliance's] dubious lend­
ing practices."31 The court found that this was enough
for the jury to conclude that Lehman was providing
the requisite substant ial assistance.32 Lehman attempted
to argue that it metely provided "signifcant assistance,"
and that tllis was distinguishable from substantial assis­
tance.3) Unmoved by this argument, the court stated
that [i]n a situation where a whole company's business
is buih like a house of cards on a fraudulent enterprise,
this is a distinction without a diff erence."34
Subsequent Cases Involving Claims of
Aiding and Abetting Predatory Lending
So f:r, the subsequent c . ses involving :iding :nd
abettng claims following II re First Alliance have
not explicitly held certain defendants liable for aid­
ing and abetting predatory lending; instead, the cases
largely involve motions to dismiss and/or motions for
summary judgment. As demonstrated by the specifc
litigation discllssed below, borrowers have routinely
fled suit against not only their loan provider, but also
secondary market loan purchasers, escrow agents, law
frms, and other entities that part i cipate in the loan
process. The analysis is therefore divided along the lines
Volume 29 • Number 7 • July 2010
of the aiding and abetting Defendant's business position
with the aUeged fraudulent lender.
Cases Where the Plaintiff Was Successfully Able
to Withstand a Motion to Dismiss or Motion
for Summary Judgment
Defendant is the LenderlLoan Origjnator
In Phifer I. Home Savers Conslliling Glrp35 . . a federal
District Court in New York denied the motion to dis­
miss of a mongage lender facing an aiding and abetting
fraud claim. The factual context involved a fraudulent
mortgage rescue company. The plaintiff aeged that
Home Savers Consulting Corp. (Home Savers) repre­
sented to her that the company would save her house
from foreclosure by allowing her to obtain an aff ordable
loan while retaining ritle to her house.36 At the closing,
a Home Savers represenrarive told the plaintiff, while
in the presence of a Fremont Investent and Loan
represenrative (Fremont), that she would remain on the
titleY In fact, the plaintiA" ullwittingly signed a docu­
ment transferring title to her housc.38To fnance the title
transfer, two mortgage loam were made by Frcmont.)9
fremont, the (#7) subprime lender ben.veen 2005
and 2007, was sued for aiding and abeuiIlg Home
Savers. In denying fremont's motion to dismiss rhe
plaintiff's claim, the court held that a factfinder could
easily infer from Fremont's presence at the closing and
its status as mortgagee that, having heard the represen­
tations by Home Savers and knowing their falsity. that
Fremont had actual knowledge of Home Saver's scheme
to defraud the plaintiff.40 Fremont argued that it could
not be held liable since its agent merely SJt silently
at the closing and therefore did not '·substJntiJly assist"
in the fraud.41 The court. however. disagreed, and
stated that "aiding and abetting liability touches every­
one who ofers substantial assist.1nce in the fraud-not
just those p:lrticip:nts who spc:k falsely Frccmont
cannot disclaim liability on the ground that it was the
financier, not the spokesman, of the fraud."42
Similarly, in Marcelos � Domingllez43, a plaintiff
brought aiding and Jbetting claims against both the
lender, Argent Mortgage Company (Argent) and an
escrow agent, New Century Title Company (New
Century). The court denied motions to dismiss the
aiding and abetting claims as to both Argent and New
Cemury. 4. In his complaint, the plaintiff alleged that he
Banking & Financial Services P Reprt· J
was deceived by defendant Edwin Parada, a mortgage
broker, into taking OUI a fnancially burdensome loan
on his home.45 Regarding New Century, the court
held that the detailed description in the plaintiff's
complaint of the company's involvement in the loan
closing was sufcient to plead actual knowledge of the
fraud.46 Furthermore, the plaintiff's allegations that
New Century acted as escrow agent, drafted closing
instructions, and instructed the plaintiff to sign docu­
ments were sufcient to demonstrate that it substantally
assisted in the fraud.47
With respect [ Argent as lender, the court found
that it lent directly to the plaintif with the aid of Edwin
Parada as a broker. and its close participation was suf­
fcient to satisf the knowledge prong of the aiding and
abetting claim.48 In a Rule 12(b)(6) motion to dismiss
context, the funding of the fraudulently obtained loan
satisfactorily established the substantial assistance ele­
ment of the claim.49
Defendant is a Secondary Market Loan Purchaser
Entities that purchase loans on the secondary market
may also face l iability claims for aiding and abetting
predatory lending. For example, in Plascencia v. Ulditg
lsI MOTIgage50, borrowers pursuant to an option acust­
able rate mortgage (OARM) and who were unaware that
their loan was subject to negative amortization brought
an aiding and abetting claim against EMC Mortgage
Corporation (EMC), which purchased, packaged, and
securitized loans for lending 1st Mongage (Lending
1st). EMC is now an afiliate of JPMorganChase and
was acquired in March 2008 when JPMotganChase
purchased Bear Stearns, the previous owner of EMC as
well as Encore Credit. By refusing to dismiss the claim
against EMC, the court agreed with the plaintiff s that
EMC might be Liable for it involvement with Lending
1s[.51 The court explained:
By showing that EMC purchased Lending 1st's
OARs with knowledge of Lending 1st's TILA
violations, Plaintifs may be able to establish that
EMC gave Lending 1 st a fnancial incentive to
continue to commit those violations, and there­
fore may be subjected to liability for aiding and
abetting violations of the UCL.52
Loan assignees may also face Liabilty for aiding
and abetting predatory lending, even if they weren't
4 • Banking & Finaoia/ Seres Plic Report
involved in the initial lending process. The facts of
Quezada v Lan Or. Ofeal., [IC 53 are similar to those
of Plascelcia. In Quezada, the plaintif was the named
representative of a class of borrowers who received
loans from loan Center of California (LCC).54 After
lCC went out of business, the plaintiff's loan was
assigned to EMC.55 Ultimately, the plaintiff fled suit
against EMC arising out of the negative amortiza­
tion that occurred pursuant to her OARM.56 Despite
EMC's argument that it could not be held liable under
California's UCl since it was merely an assignee of the
loan and not the original lender. the court disagreed.57
The court denied EMC's motion to dismiss, stating that
plaintif's allegations that EMC was "acting in concert"
with LCC and was "promoting, marketing, distribming
and selling the Option ARM loans" were sufficient to
state a claim for aiding and Jbcning fraud pursuant to
the UCL.58
Another case involving an aiding and abetting
claim against a purchaser of Option A.RM loans is
Velazquez I GMAC AJortgige Corporaliol.59 In the
case, GMAC Mortgage Corporation (GMAC) pur­
chased OARM loans originJted by Aegis Wholesale
Corporation (Aegis).60 Aegi� was the (#25) subprime
lender from 2005-07 and was owned by Cerberus
Capital Management. The pbintifs brought a claim
against GMAC for liabiliry pursuant to California's
UCL.61 NonithstJnding the fact that rhe compiaim
did not use the phrase "aiding and abetting," the court
concluded that the plaintifs' Jilegations were sufcient
to survive a motion to dismiss.62 In making its decision,
the court noted that the plaintifi s alleged that:
Aegis and GMAC Mortgage Corp. worked
togethet in distributing, selling, and servicing rhe
loans, that they initiated the scheme in order to
maximize the loans they sold to consumers and
to maximize profts, that GMAC MortgJge Corp.
had full knowledge of Aegis's wrongful acts,
Jnd actively participated as an assignee and/or
The Defendant is a Party Assisting in the Transaction
(e.g .. escrow agent, attorney, etc.)
Potential liability for aiding and abetting predatory
lending is not limited to financial entities that origi­
nate or purchase mortgages. For eXJmple. in Marceills,
discussed spr, a claim of aiding and abetting against
Vlume 29 • Number 7 • July 2010
an escrow agent survived a mmion to dismiss. Cain v.
Bethea,64 is a case implicating a non-financial entity
as a defendant-an individual perpetrating fraud. In
Cain, the claims arose out of a scheme to defraud the
plaintiff in which she was told that she was merely
refnancing her mortgage and would at all times
retain title to her propeny.6 : In fact, at the clming
the plaintiff signed a deed conveying her property
to defendant Bethea.66 The plaintiff brought claims
for fraud against various defendants, among which
included claims against a law frm, an attorney and a
title closer.67
After some period of discovery. all of these defen­
dants filed motions for summary judgrnent.68 The court
denied a of the motions, fnding that the plaintiff's
evidence was sufcielll to raise an issue of disputed
material fact whether each of rhe defendants was liable
for aiding and abetting fraud.6 9
As to the defendant law frm, D'Angelo & Associates,
the court found that the firm's review and certifcation
of a false H UD-I Settlement Statement and the inclu­
sion in the loan fle of a fraudulelll check for $24,000
satisfed the substantial assistance prong and emitled
a jury to decide liability.7o AdditionaUy, evidence of
a wiretapped conversation of Ms. D'Angelo which
included discussions 011 how to manufacture fraudulent
balance checks was sufcient (0 support a finding that
the law frm had actual knowledge of wrongdoing.? ]
Turning to the defendant anorney, Gregory Nanton,
the court ruled that his representation of the plaintiff
in the transaction coupled with evidence consisting
of "statements ... describing Nanton's role in the
transaction and his appearance in other questionable
transactions involving the same group of individuals"
was sufcient to support a finding that he was liable for
aiding and abettin
. ?
The court reached the sallie resuit with respect CO
the defendant tide closer, Barry Rosen.The court noted
that a jury could conclude that Rosen had knowledge
of the fraud based on the plaintiff's evidence indicating
that Rosell was present at four other suspect transac­
tions.?3 In addition, Rosen admitted that he prepared
the deed, the title report, and the escrow agreement
for the transaction.?4 The court held thal this could be
considered subsranriai assistance to fraud.?:
Volume 29 • Number 7 • July 20 I 0
Another illustrative SUlllmary judgenr case is
jordan v. Paul Financial, LLC,7 6 in which the Northern
District of California denied defendant HSBC National
Associaton's (HSBC) motion for summary judgnent.
In the case, the plaintiff's aUegations arose out of the
negative amortization attributable c the plaintif's
option ARM loan.?7 Paul Financial was the originator
of the loan, but eventually sold the loan to Luminent
Mortgage Capital, Inc (Luminent). Luminent in turn
pooled the loan with other adjustable rate mortgages in
a "mortgage backed securites trust," for which HSBC
was the trustee.?8 The plaintif claimed thal HSBC was
liable on a theory of aiding and abetting fraud.79 The
court denied HSBC's motion for summary judgment
and recognized that if the plaintif could locate evi­
dence showing that Paul Financial had an agreement
with HSBC for HSBC to take a fnancial interest in the
loans, then that evidence could support the plaintiff's
claim that HSBC acted as an aider and abettor in Paul
Financial's scheme to originate loans based on false
and misleading disclosures,so Accordingly, the court
extended the tme allowed for discovery and denied
HSBC's motion for summary judgmenl.�l
Cases Where the Plaintiff Was Unable to Withstand
a Motion to Dismiss or Was Otherwise Unsuccessful
Notwithstanding the foregoing cases, courtS are not
rubber-stamping every complaint alleging a claim of
aiding and abetting predatory lending and aUowing
the cases to proceed toward trial. At a minimum, the
complaint must aUege particular facts that demonstrate
both the actual knowledge element and the substan­
tial assistance element of an aiding and abetting claim.
Otherwise, the claim for aiding and abetting \i not
surive a motion to dismiss. For example, in Coelho v.
Alliance Mortgt!c Banking Cor.,82 a title insurance pro­
vider was sLccessful in its motion to dismiss the aiding
and abetting frud claims brought against it. The federal
court in New Jersey held that the complaint failed [0
state a claim given that it "dearly (did] not comply with
the heightened pleading requirements of Fed.R.Civ.
P 9(b)",83
Similarly, in FOftaleza v. PNC Financial Services
Croup,84 the Northern District of California dismissed
a claim for aiding and abetting. The complaint alleged
that "Defendants, and each of them, knew of the con­
duct of the other:' and that "Defendants knew that
the Defendant that originated the loan in with [sic]
Bnking & Financial Services P Reprt· 5
deceptive and unlawfll acts and practices as alleged
herein."85The complaint further alleged that defendants
each "gave substantial assistance and encouragement to
each other .... "86The court held that it was impossible
to ascertain with any degree of particularity the precise
conduct being alleged as to each defendant.87The court
dismissed the claims with the following explanation:
W]laintiff' allegations are wholly conclusory and
fail to allege the specifc grounds for commission
of any intentional tort, let alone the actions on
the part of one or more individual defendants
which establish knowledge of any intentional tort
or which qualif as "substantal assistance."Vague
allegations and mere labels and conclusions, a
plaintif's rourteenth claim demonstrates here. are
insufcient to withstand a motion to dismiss.8
Likewise, in Bril/aill M Il1dyMac Balk, FS[N, the
Northern District of Caljfornia dismissed a claim
against Onewest Bank90 for aiding and abetting fraudu­
lent lending pracrin:s. The putative Defendants were
One West Bank as the successor in interest to the origi­
nal lender, IndyMac Bank. and American Residential
Mortgage Corporation (American)-the original bro­
ker of the loon.91 The complaint alleged that American
Residential Mortgage Corporation had engaged in
fraudulent lending practices and that Onewest Bank
had knowledge or the fud and substantially assisted
in it.92 The dismissal order was based on the court's
determination that the alleg:ions against Onewest
were wholly conc1usory and failed to explain how it
had <my knowledge of Amcrican's alleged fraud, or how
Onewest subsuntially assisted in the fraud.93
Another disl1\is�al order of note arose in the context
of a deni3.1 to amend the pleadings under ER.C.P Rule
[5 ill order ro add J claim for aiding and abetting. In
Uwgha" I! C<lt1SUJHI Home Mo.tgage Company, bu.94,
the Easter District of New York denied the Plaintifs'
motion ro ;end their complaint to add a claim for
aiding and abetting fraud. The court's reasoning was
that such an amendment would be futile, because the
plaintifs had failed to establish that they had �lIff ered
any actual damages.95
A claim against a subsequent loall purchaser was also
denied ill the procedural context or a motion under
ER.CP. Rule 65 ror foreclosure injunctive relief by the
6 • Banking & financial Serw:e Pl Report
Northern District of California. In Cilela/ v. American
Home Mortgage
, the plaintif sought to enjoin de fen­
dam American Home Mortgage (AHM) from selling
the plaintif's house. AHM was the purchaser of a loan
originated by American Brokers Conduit ("ABC")
which allegedly advertised its loans in a misleading
fashion.97 Plaintf contended that AHM was Liable on
a theory of aiding and abetting ABC's improper lending
practices.98 Because the plaintif had nO[ demonstrated
a sufcient likelihood of success on the merits, the
court denied the plaintif's motion for a preliminary
injunction.99 The court based its decision upon the
grounds that the plaintif failed to allege any facts that
established that AHM provided any assistance to, or
encouragement of, ABC's false advertising.
Observations and Conclusions
The aiding and abetting picture is still an evolving
landscape, but some observations and a few conclusions
are in order.
First, the timing and historical context in which the
claims arc made is worth nO[ing. The claims which went
to trial in In Re First Allialc concerned actions taken in
the nascent subprime market of private securitizations
back in 1998-2000. The trial occurred in 2005 3nd the
Ninth Circuit's opinion was issued at the cnd of 2006.
Al of this occurred well before the subprime market
meltdown of early 2007 and the mortgagclbanking
near collapse in September 2008. A lot has transpired
since 1998-200 in terms of awareness of fraudulent/
deceptive practices in the mortgage business and the
importance of due diligence concerning mortgage
underwriting/origination practices by wholesale loan
brokers. If a subsequent case involving the underlying
events of 2005-07 goes to tTial, the II the factual circum­
stances will Likely be even stronger for plaintiff s.
Second, the m:llner in which the mort
e lendin
market has changed after the December 2006 In Re
Llmwl holding will also impact future developments
in the claim theory. The subprime loan market domi­
nated by so-called ··monoLine" lenders reliant upon
wholesale lines of credit for (unding arc for the most
part gone and maybe dead forever. The well-publicized
bankruptcies of Ameriquest Mortgage Co. (#2); New
Century Financial (#3), and Freemont Investment (#7)
are examples. The heavy dependence upon whole­
sale brokers to originate loans which are purchased
Volume 29 • Number 7 • July 20 I 0
by depository banks and other institutions has been
severely curtailed-precisely because of the distrust of
broker motivations under the previous structure. And,
the industry has consolidated greatly since 2000. The
major depository banks now dominate and are run­
ning origination channeh on a more retail/in-store
basis. The vertical integration in rhe industry which
occurred rapidly from 2005-07, has been impacted by
the collapse of the private label securitization mJrker
and the fall of three investment banks; however, to the
extent vettical integtation survives, it also mJkes Jid­
ing and abetting fraudulent lending practices an eJsier
claim to make. By contrast, in 200--before the times
when the warehouse lenders became owners/afliates
of subprime and other mortgage originators-at least
the deep-pocket-lender-defendant could argue that
it was dist<nt, unaware Jnd had no reason to know
of the alleged fraud. When rhe distribution channel
for mortgages becomes vertically integrated with one
huge institution at the top of the chain, rhe aiding and
abetting test for actual knowledge/substantial assistance
becomes easier.
Third, the risk of class actions milizing the aiding
and abetting claim theory is moderated by the genesis
of the claim success in the fraud context. If UDAP
claims become successful then class aggregation is more
likely. Fraud claims have sustained the Jiding and Jbet­
tng theory-but these claims arc not subject to class
aggregation because the Rule 23 class certifcation test
cannot be satisfed (too many individualized issues such
as reJsonable reliance to meet the predominance of
common issues element).
Fourth, the Ninth Circuit rejected the California
UDAP class claim based on a higher standard test of
actual intent, and no major court has certifed an ;iding
;nd abetting VDAP class citing/distinguishing In Re
First A /limlc.
Fifth, Plaintiff s luvc found it easier to hold the claims
against direct lenders or warehouse lenders than against
secondary market securitizers where the financial
entity-defendam was not integrated with the mortgage
originations channel.
Sixth, the loan underwriting battles between large
mortgage originators and securitintion purchasers will
impact rhe ultimate outcome of aiding and abetting
Volume 29 • Number 7 • Jul 20 I 0
claims against certain players-e.g., Countrywide
repurchase litigation and MiiA, MGTe PMI cover­
age disputes-these cases will uncover the facts of who
knew what Jnd when about fraudulent underwriting/
appraisal/marketing practices.
Seventh, the legal war concerning the aiding and
abetting claim front is far from over. Expect to see
governmental agencies like the FfC, FDIc' oce, ;lIld
others jump in to further defne the terrain where a
lender/originator/securitizer h crossed the line into the
realm of substantial assistance with actual knowledge.
Finally, there remains the unwritten chapter on
crirnal liability. Aiding and abetting is a tried and true
claim dleory in the criminal context.
1. Sa "Industr Trend: The Veroul lmegrl(ion S(r.II(g. J1oflgag(
&,,blg (Feb. 20CI). pp. 58-6S.Jeff rey M. L(vin(
2 A r(ported by th( Cemer for Publie Integrity Rearch-
3v.1ilable � t u�.pubicimrg'iry.or lillvrigtliols Itototlic_,,,l'liow.,1
3 471 F3d 977 (9th Cir. 20).
4. Id. Jt 987.
5. Sa id. ;u 986
6. Sa id.
7. Sa id
8 Sa id.
9. Sa id.
10 Sa id.
11. Sa id.
12 Sa id.
13 Sa id
14. Su id
15 Sa id. 411 987.
16. Sa id.
17. Sa id. "t 996
18 Id.
19. Sa id. �t983.
20. Sa id �t 993.
21 5 ii
22 f
23 fd
24. Ii.
25. Ii .. nA.
26. Ii. at 994.
Bonking & Financial Serves Poli Report· 7
27. Su ;d.
28 Set id.
29. Id. al 995.
30 l.
31. Id.
32 /d.
33. Id
34. /d.
35 No 06 CV 384IUG), 2007 WL 295605 (E.D.N.V. Jm 30,
36 Su Pi" 2007 WL 295605 at *1.
37. Se( id. 3t "2.
38. Se( id.
39. Sa id
40. /d. al"4, n.1
41 . Su id. a! "5.
42 1
43 No. C 08-00056WHA. 2008 U.S. Dis! LEXIS 91155 (N.D. C31.
July 18. 2008)
44. M<1(("" 2008 U.S. Dis! LEXIS 91155, *25-31.
45. Su ;d. 3t "4.
46. M. at "26.
47. l
48. {d. at "29
49. {d. at *30.
50 S83 FSupp.2d 1090 (N.D. Cal Sept. 30, 2008).
51 Su Pld5felllia, 583 FSupp.2d al 1098.
52 l
53. No. Cw. 08-177 ws KJM. 2008 US Dis!. LEXIS 96479 (ED.
CJi. Nov. 24. 2008)
54. S�( Quezada. 2008 USDis! LEXIS 96479. *5
55. See id.
56 5u id. at *4-5.
57. Sa id. at "15
58 iJ. 3t "14-15
59 605 E5upp.2d 10"9 (CD. Cal. DIc. 22, 20(8).
60. Sa lkl''' :qua. 605 ESup.2d at 1053
61. See id.
62 J at 1068.
63. Set id
8 • Bankng & Finandl Semces Pli Rerl
6. No 0 C 3946(G). 2007 W 2859681 (.DN.YAug. 17,207.
65. Su Cai". 2007 WL 2859681. *1.
66 Su iJ. at "2-3.
67. Su id. at "4.
68. Su id. at "6
69. Suid. at *22-29.
70. M. 3t *22.
71 Id. �1 24.
72. Id. at 26.
73. M. at 29
74. Sec id.
75. l.
76 2009 USDist LEXIS 56701 (ND. C31.July 1, 2(09).
7 Su id. at "3
78. Su id. at "3, 10.
79. Sf( id. at '47
80. Sa id, at "48
81 !.
82 No. 06-2039 (SRC). 2007 WL 1412289 (DNJ- May 10.
83 C"dlw, 2007 WL 1412289. *3.
84. No. C 09-2004 PJH. 2009 WL 2246212 (N.D. Cal. July 27.
85. FOraln". 2009 WL 2246212. "12.
86 M.
87 Id
88. Id.
89. 2009 Us. Dist. LEXIS 84863 (N.D. C31. Sept. 16. 20(9).
90. OIK"�Ct Bank is t renamed entty for wh3t w formerly
IndyMac Bank aer te FDIC to k IndyMac Oler inJuly 2008.
91 Said at "1-2.
92. Su id. at *9.
93. Sf( id. at "10.
94 470 ESupp.2d 248 (E.DN.YAug 17. 2007).
95 Vauglldll. "70 ESupp.2d at 273
96 209 U.s. Dm. LEX IS (N.D. C31 Aug. 21. 209).
9 S . ;,1. at � I I .
98 S id. 3t "12
99. ld. 3t "1 3
10. S id. Jt ·12.
Volume 29 • Number 7 • July 2010

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