In re First Alliance Mortg. Co.
| Decision Date | 08 December 2006 |
| Docket Number | No. 04-55396.,No. 04-55920.,No. 04-55942.,04-55396.,04-55920.,04-55942. |
| Citation | 471 F.3d 977 |
| Parties | In re FIRST ALLIANCE MORTGAGE COMPANY, a California corporation, Debtor, Kenneth C. Henry, Liquidating Trust Trustee as Successor-in-Interest to the Official Joint Borrowers Committee, Plaintiff-Appellant, and Frank Aiello, Plaintiff, v. Lehman Commercial Paper, Inc., a New York corporation; Lehman Brothers, Inc., a Delaware corporation, Defendants-Appellees. In re First Alliance Mortgage Company, a California corporation, Debtor, Kenneth C. Henry, Liquidating Trust Trustee as Successor-in-Interest to the Official Joint Borrowers Committee; Frank Aiello; Nicolena Aiello; Michael Austin; Barbara Austin; Paul Carabetta; Lenore Carabetta; George Jerolemon; Josephine Jerolemon; Walter Berringer; Harriet Berringer, individually and on behalf of all others similarly situated; Official Joint Borrowers Committee, Plaintiffs-Appellees, v. Lehman Commercial Paper, Inc., a New York corporation; Lehman Brothers, Inc., a Delaware corporation, Defendants-Appellants. In re First Alliance Mortgage Company, a California corporation, Debtor, Michael Austin; Barbara Austin; George Jerolemon, Walter Berringer, Harriet Berringer; individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. Lehman Commercial Paper, Inc., a New York corporation; Lehman Brothers, Inc., a Delaware corporation, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Larry W. Gabriel (argued), Pachulski, Stang, Ziehl, Young, Jones & Weintraub P.C., Los Angeles, CA, for the appellant.
Richard F. Scruggs (argued), Sidney A. Backstrom, The Scruggs Law Firm, P.A. Oxford, MS; Elizabeth J. Cabraser (argued), Hector D. Geribon, Lieff, Cabraser, Heimann & Bernstein, LLP, San Francisco, CA; Kim E. Levy, Lili R. Sabo, Milberg Weiss Bershad & Schulman LLP, New York, NY, for the plaintiffs-appellees-cross-appellants.
Helen L. Duncan (argued), Robert W. Fischer, Jr., Joseph H. Park, Dinh Ha, Fulbright & Jaworski L.L.P., Los Angeles, CA; Marcy Hogan Greer, Fulbright & Jaworski L.L.P., Austin, TX, for the defendants-appellants-cross-appellees.
Appeal from the United States District Court for the Central District of California; David O. Carter, District Judge, Presiding. D.C. Nos. CV-01-00971-DOC, CV-01-01111-DOC.
Before: HARRY PREGERSON, RICHARD R. CLIFTON, and JAY S. BYBEE, Circuit Judges.
First Alliance Mortgage Company was driven into bankruptcy and subsequent liquidation by well-publicized and justified allegations of fraudulent lending practices. The demise of First Alliance has led to two separate actions against Lehman Brothers, Inc. and its subsidiary Lehman Commercial Paper, Inc. (collectively referred to as "Lehman") growing out of Lehman's activity as a lender to First Alliance and as the underwriter of First Alliance's securitized debt. One is a class action on behalf of First Alliance's borrowers seeking to impose liability for aiding and abetting the fraudulent scheme engaged in by First Alliance. The other, brought by the bankruptcy trustee appointed to liquidate First Alliance, seeks to set aside payments Lehman received in the course of its financing relationship with First Alliance and to subordinate Lehman's secured claims in the First Alliance bankruptcy in favor of the claims of First Alliance's unsecured creditors. These two separate actions were handled together by the same district court and have been consolidated for purposes of this appeal.
After a trial, a jury found Lehman liable under California tort law to the class of borrowers for aiding and abetting fraud, and the district court entered judgment accordingly. As to the trustee's action, the district judge concluded that Lehman's conduct pursuant to its relationship with First Alliance did not warrant relief under the equitable principles of bankruptcy law. See Austin v. Chisick (In re First Alliance Mortgage Co.), 298 B.R. 652 (C.D.Cal.2003) (). We now affirm these holdings, as we do the district court's rejection of several other claims related to these actions. We reverse the district court's denial of remittitur or new trial as to the jury's damages calculation, however, and we remand for further proceedings based on the proper theory of fraud damages.
In order to explicate the relationships among First Alliance and the parties to this case — the Austin Class Plaintiffs ("Borrowers"), Liquidating Trustee Kenneth Henry ("Trustee"), and Lehman — and the context out of which their claims arise, we begin with a brief background of the factual and procedural history of the disputes now before us.
First Alliance was a lender in the "subprime" mortgage sector. Subprime lending is a relatively new and rapidly growing segment of the mortgage market which generally consists of borrowers who, for a variety of reasons, might otherwise be denied credit. A typical borrower in the subprime mortgage market is "house-rich" but "cash-poor," having built up equity in his home but in little else, and has a lower net income than the average borrower. Subprime lenders generally charge somewhat higher interest rates to account for the increased risk associated with these loans. As the subprime home mortgage industry has grown over the last decade, increasing attention has focused on predatory lending abuses — the practice of making loans containing interest rates, fees or closing costs that are higher than they should be in light of the borrower's credit and net income, or containing other exploitative terms that the borrower does not comprehend.1 See Debra Pogrund Stark, Unmasking the Predatory Loan in Sheep's Clothing: A Legislative Proposal, 21 Harv. BlackLetter L.J. 129, 130 (2005) ().
As the district court explained in highly detailed findings of fact (298 B.R. at 655-65) upon which this summary is based, First Alliance originated, sold and serviced residential mortgage loans in the subprime market through a network of retail branches located throughout the country, utilizing a marketing methodology designed to target individuals who had built up substantial equity in their homes, many of whom were senior citizens. Through telemarketing efforts, First Alliance employees would set up appointments for what they described as in-house appraisals with targeted prospective borrowers. Following the appraisals, loan officers would employ a standardized sales presentation to persuade borrowers to take out loans with high interest rates and hidden high origination fees or "points" and other "junk" fees, of which the borrowers were largely unaware. The key to the fraud was that loan officers would point to the "amount financed" and represent it as the "loan amount," disregarding other charges that increased the total amount borne by the borrowers.
First Alliance trained its loan officers to follow a manual and script known as the "Track," which was to be memorized verbatim by sales personnel and executed as taught. The Track manual did not instruct loan officers to offer a specific lie to borrowers, but the elaborate and detailed sales presentation prescribed by the manual was unquestionably designed to obfuscate points, fees, interest rate, and the true principal amount of the loan. First Alliance's loan officers were taught to present the state and federal disclosure documents in a misleading manner, and the presentation was so well performed that at least some borrowers had no idea they were being charged points and other fees and costs averaging 11 percent above the amount they thought they had agreed to. Loan officers were taught to deflect attention away from things that consumers might normally look at, and the loan sales presentation was conducted in such a way as to lead a consumer to disregard the high annual percentage rate ("APR") when it was ultimately disclosed on the federally-required Truth in Lending Statement.
In the late 1990's, First Alliance became subject to increasing scrutiny including allegations that the borrowers' loans were fraudulently induced and that First Alliance deceived borrowers into paying large loan origination fees of which they were unaware. In 1998 the United States Department of Justice and the attorneys general for seven states initiated a joint investigation into First Alliance's lending practices. A lawsuit making similar claims was filed in December 1998 by AARP (American Association of Retired Persons). Two California Courts of Appeal held that First Alliance loan agreements containing arbitration clauses were unenforceable because they had been entered into based on the fraudulent practices of loan officers. See 298 B.R. at 658-59(chronicling First Alliance's lengthy litigation history).
In March 2000, the New York Times published a front-page article highly critical of First Alliance's loan origination procedures. The article implicated Wall Street investment banking firms, concentrating on Lehman's role in funding First Alliance. Days later, the ABC News program "20/20" aired a companion segment which focused further negative attention on First Alliance. Later that month First Alliance filed a voluntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330, because of the costs associated with the growing...
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