In re National Mortg. Equity Corp. Mortg. Pool Certificates

Decision Date29 May 1986
Docket NumberNo. MDL 647 AWT.,MDL 647 AWT.
Citation636 F. Supp. 1138
CourtU.S. District Court — Central District of California
PartiesIn re NATIONAL MORTGAGE EQUITY CORPORATION MORTGAGE POOL CERTIFICATES SECURITIES LITIGATION.

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Alan D. Bersin, Jeffrey I. Weinberger, Anne H. Egerton, Michael E. Soloff, Susan E. Nash, Munger, Tolles & Olsen, Los Angeles, Cal., for Bank of America NT & SA.

Arthur J. Shartsis, Mary Jo Shartsis, Charles R. Rice, Tracy L. Salisbury, Shartsis, Friese & Ginsburg, San Francisco, Cal., for Riverhead Sav. Bank, First Federal Sav. & Loan Ass'n, Missouri Sav. Assn.

Joseph C. Lepanto, Mesirov, Gelman, Jaffe, Cramer & Jamieson, Philadelphia, Pa., for First Federal Sav. & Loan Assn.

Gideon H. Schiller, Portman, Bernhardt, Kessler & Black, St. Louis, Mo., for Missouri Sav. Assn.

Harvey Besunder, Cruser, Hills, Hills & Besunder, Riverhead, N.Y., for Riverhead Sav. Bank, F.S.B.

Charles C. Wehner, Rodney M. Perlman, Robert F. Hinton, Karen A. Rooney, Wehner & Perlman, Los Angeles, Cal., for Nat. Mort. Equity Corp., David Feldman.

John A. Donovan, James E. Lyons, Floran L. Fink, Skadden, Arps, Slate, Meagher & Flom, Los Angeles, Cal., for Lord, Bissell & Brook, Leslie W. Michael.

George H. Link, Gregg A. Farley, Brobeck, Phleger & Harrison, Los Angeles, Cal., William E. Trautman, Robert P. Varian, Brobeck, Phleger & Harrison, San Francisco, Cal., for Wells Fargo Bank, William Van Zile.

Alexander L. Brainerd, Richard A. Ardoin, Bronson, Bronson & McKinnon, San Francisco, Cal., for Mebac.

Charles Jarvis Murray, San Francisco, Cal., for West-Pac Corp., Kent B. Rogers.

Kurt W. Melchior, Mark Joseph Kenney, Severson, Werson, Berke & Melchior, San Francisco, Cal., for Lomas and Nettleton Co.

Martin H. Kresse, Robert J. Yorio, Barbara Cray, McKenna, Conner & Cuneo, San Francisco, Cal., for Umpqua Sav. & Loan Assn.

Randall L. Hite, Santa Ana, Cal., for Energy Resources, Inc., Marvin H. Weiss.

Floyd Anglin, Santa Ana, Cal., pro. per.

Styn & Garland, San Diego, Cal., for American Title Ins.

William V. McTaggart, Jr., Parker, Milliken, Clark, O'Hara & Samuelian, Los Angeles, Cal., for Glacier General Assur. Co.

Randall H. Gray, James Gray & McCafferty, Great Falls, Mont., for Andrea Bennett, Liquidator of Glacier General Assur. Co.

MEMORANDUM OPINION AND ORDER

TASHIMA, District Judge.

I. PROCEDURAL BACKGROUND

This multidistrict litigation involves allegations of massive fraud in connection with the sale of mortgage pool certificates to numerous savings banks and savings and loan associations ("Investor Institutions"). Before the Court are several defendants' motions to dismiss the complaints in four of these actions, as well as two plaintiffs' motions to dismiss certain counterclaims.1

The complaints under attack are those of Riverhead Savings Bank ("Riverhead"), Missouri Savings Association ("Missouri"), First Federal Savings and Loan Association ("First Federal"), and Bank of America ("B of A" or the "Bank").2 B of A's complaint differs significantly from the other three. It not only asserts claims which the Bank brings in its own right, but also claims which B of A purports to bring as the assignee of nineteen Investor Institutions that are alleged to be victims of the fraud.3

This opinion addresses only the motions to dismiss directed at B of A's complaint. The motions to dismiss the other three complaints, as well as the motions to dismiss certain counterclaims, will be addressed in a separate memorandum opinion to be filed shortly.

II. THE ALLEGED FACTS4
A. FORMATION AND MARKETING OF THE POOLS

Defendant David A. Feldman ("Feldman"), promoted, organized and managed defendant National Mortgage Equity Corporation ("NMEC").5 Beginning in 1981, NMEC organized pools of real estate loans secured by first or second deeds of trust on residential real property, located primarily in California and Texas. Riverhead, Missouri and First Federal allege that defendants Wells Fargo Bank ("Wells Fargo") and Advance Mortgage Corporation ("Advance")6 also played a role in promoting the formation of certain of the pools during 1981 and 1982. In connection with these mortgage pools, NMEC marketed "Mortgage Pass-Through Certificates" (the "Certificates") to various financial institutions, i.e., the Investor Institutions. Each Certificate represented an undivided interest in an individual pool. The Certificate holder was entitled to receive interest at a fixed "pass-through" rate, regardless of the rates paid by individual mortgagors. NMEC solicited buyers of Certificates, i.e., Investor Institutions, through various means, including, as alleged by B of A, through Private Placement Memoranda ("PPM"). The PPM were prepared by defendant law firm Lord, Bissell and Brook ("Lord Bissell"). Defendant Leslie W. Michael ("Michael"), is a partner in Lord Bissell and was also a part owner and officer of NMEC.

NMEC was responsible for the initial selection of loans to be included in the pools. B of A was to act as escrow agent for each pool. Advance was to act as servicer on the mortgages for at least some of the pools, and did so act until March, 1983, when it resigned and was replaced by NMEC. NMEC apparently at all times acted as servicer for all the loans in the pools that form the basis of B of A's complaint. A trustee was appointed for each pool. B of A was trustee for most of the pools, but with respect to four pools, Wells Fargo acted as trustee.7 In their respective roles as trustees, Wells Fargo and B of A were to review the documentation NMEC provided regarding each mortgage in order to determine whether it complied with all the applicable standards set out in the pooling and service agreements.

NMEC, Feldman, Lord Bissell and Michael made numerous representations to the Investor Institutions regarding the nature of the mortgages selected for the pools.8 Defendants represented that the underlying loans were made in arms-length transactions, the borrowers were capable of servicing their debts on the loans, the values of the residential properties involved were determined by independent appraisals, each loan was fully protected by mortgage insurance and that Glacier General Assurance Company ("Glacier") and Pacific American Insurance Company ("Pacific American"), the primary insurers, had the financial resources to cover any likely defaults and had also secured reinsurance.

B. THE FRAUD

The essence of the fraud allegations is that despite defendants' representations respecting the high standards used to select mortgages for the pools, defendants actually were engaged in a widespread series of sham mortgage transactions between various related entities that diverted the Investor Institutions' funds for defendants' personal benefit. Entities and individuals related to or controlled by NMEC, including Michael, Glacier, Energy Resources Financial Inc. ("Energy Resources"), Marvin Weiss ("Weiss"), West Pac Corporation ("West Pac"), and Kent B. Rogers ("Rogers")9 would obtain funds from NMEC. These entities or individuals would then use these funds to purchase properties through still other related entities. After obtaining a fraudulently inflated appraisal of the property, the related entities would arrange a "loan" between themselves, secured by a note and deed of trust on the overvalued property. The "loan" would then be transferred to NMEC's mortgage pools in exchange for cash the Investor Institutions had entrusted to NMEC.

B of A alleges that Glacier and Pacific American were an integral part of this scheme. It is alleged that these insurance companies were selected to insure the mortgages not because of their ability to provide adequate coverage but because they were related, through common principals, to one or more of the other participants in the scheme. It also is alleged that the insurance companies actively participated in the scheme by recycling properties on which borrowers had defaulted back into the NMEC pools.

This scheme began to unravel in late 1984 and early 1985. In October, 1984, the Seaman's Bank for Savings, one of the Investor Institutions for which B of A acted as trustee, advised the Bank of "certain irregularities in the processing and documentation" of the mortgages comprising Seaman's pool. B of A responded by conducting an investigation into NMEC pools. Through this investigation, the Bank learned not only of the NMEC-managed fraud, but also that its own employees had not, in the Bank's words, "adequately discharged the Bank's responsibilities" as escrow agent and trustee. As a result of its investigation, B of A filed an action in California state court against several of its own employees for their roles in the handling of the NMEC pools.

B of A's investigation also led it to conclude that as a result of the fraud, the Investor Institutions for which it had acted as trustee stood to lose all or most of their investments in the NMEC pools. The Bank, therefore, decided to "resolve its liability" to those Investor Institutions by repurchasing their Certificates or by replacing the mortgages in the pools represented by the Certificates. The Bank paid in cash and replacement collateral to the Investor Institutions a total of $133 million (which apparently was 100 percent of the funds invested in Certificates by them). It expects to realize $38 million on liquidation of the collateral and from the mortgage guarantee insurance claims assigned to it, leaving a net loss of $95 million from its resolving its liability to the Investor Institutions. In return, the Investor Institutions assigned to B of A any claims they might have against any of the defendants.10 B of A then filed this action, both for damages sustained in its own right and as assignee of the Investor Institutions' claims.

Unlike B of A, Wells Fargo chose not to pay off its beneficiaries. Th...

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