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Fraud Claims Against BofA Dismissed

February 21, 2012

A federal judge threw out an investor's lawsuit that claimed Bank of America's 2008 acquisition of home loan giant Countrywide Financial amounted to a fraud on creditors, the Daily Journal reports.

U.S. District Court Judge Mariana Pfaelzer dismissed with prejudice plaintiffs' claim of successor liability and fraudulent conveyance, ruling that Bank of America is not liable for judgments made against Countrywide.

She described plaintiff's argument that the deal was structured to defraud "maddeningly circular."

The decision saves BofA from having to make payments as investors chase Countrywide for billions of dollars for alleged fraud.

The dismissal could have an impact beyond the plaintiff Allstate Insurance Co. More than a dozen similar cases-a significant percentage of the Countrywide buyout litigation--are in Pfaelzer's court, and other courts could cite her ruling.

Plaintiffs lawyers also may have to review their settlement options.

Such a Deal!

September 2010

In March thousands of foreclosed mortgage holders began receiving relief checks for subprime loans originated by Calabasas-based Countrywide Financial Corp., acquired by Bank of America in July 2008. The money flows from an $8.68 billion settlement of the predatory lending class action brought against Countrywide by the attorneys general of seven states.

The settlement, brokered in October 2008 by California AG Jerry Brown and the office of the Illinois Attorney General, called for BofA to modify the loans of nearly 400,000 homeowners nationwide, suspend foreclosures for eligible borrowers, and eliminate certain fees. Borrowers who had been displaced due to foreclosure prior to the settlement were to receive direct payments for relocation. If all eligible California borrowers participate, their savings from loan modifications could total $3.5 billion (People v. Countrywide Fin. Corp., No. LC083076 (Los Angeles Super. Ct. judgment entered Oct. 20, 2008)).

When the settlement was signed it looked like a perfect deal - so good that 45 states and the District of Columbia eventually joined the agreement. "Tragically, California and the other states have had to step in because federal authorities shamelessly failed to even minimally regulate mortgage lending," Brown said as he announced the deal.

The settlement wasn't bad for BofA, either. Countrywide admitted no wrongdoing, and the AGs either dismissed pending lawsuits or dropped ongoing investigations.

But there was a problem: Nobody bothered to guarantee that investors in Countrywide's mortgage-backed securities - sold to investors in a variety of trusts - would go along with the deal. Those investors owned 88 percent of Countrywide's subprime mortgages.

Isaac M. Gradman, a securities litigator at Howard Rice Nemerovski Canady Falk & Rabkin in San Francisco, calls the failure to include investor cooperation in the pact "unsophisticated." Says Gradman, "It's easy to agree on a settlement when it involves other people's money." In an article he wrote, Gradman called the deal "one of the largest and potentially most ill-conceived legal settlements in history."

Michael Aguirre, a principal in San Diego's Aguirre, Morris & Severson, says, "Brown recognized the settlement would give him big, big press and he would not have to fight to the death in court." In 2008 Aguirre - then city attorney of San Diego - sued Countrywide separately and included fraud allegations. But Aguirre lost a reelection bid later that year, and the new city attorney - working with Brown - dropped the suit.

Brown rejects criticism of the settlement. "By requiring lenders to evaluate consumers for modifications, our office has effectively required Countrywide to consult with investors and bondholders," says Evan Westrup, a spokesman for Brown's office.

But David J. Grais, name partner in New York's Grais & Ellsworth who represents trust investors in a class action against Countrywide, contends that BofA neglected to seek approval from the buyers of its securitized mortgages. "I've never met an investor who was asked," Grais says.

The loan modifications specified in the settlement had the effect of reducing cash flow to investors through lower principal and interest payments. According to Grais's suit, this could depress the value of the plaintiffs' certificates by billions (Greenwich Fin. Serv. Distressed Mortgage Fund 3, LLC v. Countrywide Fin. Corp., No. 650474/2008 (N.Y. Sup. Ct. (N.Y. County) complaint filed Dec. 1, 2008)).

The class action seeks a declaratory judgment that, under agreements governing Countrywide's mortgage-backed trusts, BofA must repurchase every mortgage loan for which it cut the payments by at least the amount of the unpaid principal and accrued interest.

Grais stipulates in his pleadings that the plaintiffs have no beef with the settlement between the AGs and Countrywide, "nor do plaintiffs take any position about whether the cost of reducing payments on loans [other than those Countrywide sold to plaintiffs] may be passed to the trusts that purchased those loans." He simply wants the court to declare that "Countrywide must fulfill this contractual obligation" and buy back certain modified loans from the trust.

Rick Simon, spokesman for Bank of America Home Loans, declined to comment on the litigation. "The settlement came just months after Bank of America acquired Countrywide," he says. "The bank moved very quickly to come to a settlement, which has been a model for the federal government in announcing its affordable home program."

At the end of 2008 Countrywide removed the class action to federal court, but the case was remanded to the Supreme Court of New York (Greenwich Fin. Serv. Distressed Mortgage Fund 3, LLC v. Countrywide Fin. Corp., 654 F. Supp. 2d 192 (S.D.N.Y. 2009)). The thrift appealed the remand and also moved to dismiss the suit in state court - and that's when the case got really interesting.

Rather than wait for the courts to determine whether it had to buy back what may be $80 billion in toxic mortgages, BofA lobbied Congress to provide a safe harbor for lenders that agree to modify home loans or enter workouts with borrowers. In May 2009 President Obama signed the Helping Families Save Their Homes Act (P.L. 111-22).

Last October, Countrywide's lawyers argued that the act rendered ineffective contract provisions that Countrywide must get investor approval to modify loans. Howard Rice's Gradman says that if the defense argument succeeds, trust investors could challenge the safe harbor provision under the Fifth Amendment's takings clause.

"Now the government doesn't just have a dog in the fight," he says. "For constitutional reasons and also because of the government's interest in enforcing the sanctity of contracts, it's got a very big dog in it."

Meanwhile, the bank has other Countrywide-related litigation to worry about. At least three insurers that guaranteed Countrywide's mortgage-backed securities have asked New York's supreme court to hold BofA vicariously liable for its subsidiary's shoddy loan practices. "There are a lot of investors lying awake at night wondering whether Bank of America is liable," Grais says.

Even in states where claimants have begun to receive payments, the shine is now off the Countrywide settlement. "Modifying loans is taking longer than we expected, and we're getting complaints from homeowners," says Kristin Alexander, a spokeswoman for Washington's attorney general. "But we're still working with Bank of America."

The bank has an uphill battle. A record number of U.S. homeowners - more than 900,000 of them - dropped into foreclosure between January and March 2010. Nearly a quarter of those were in California. In June, BofA announced that it would extend its three-year loan modification program through 2012.

Pamela A. MacLean, a Bay Area freelance writer, has reported on state and federal courts for 25 years.

Reader Comments

Douglas Kelley - October 21, 2010
Investors are not the only ones who are in a pickle. After Countrywide modified our loan reducing the rate to 4% December 2008 with payments to begin March 2009, we were relieved that we would be able to handle the next 5 years of mortgage payments. We made payments on time. May 2009, we began to receive our mortgage statement from Bank of America as the new service provider. June 12, 2009, we received notice our loan would be transferred to Residential Credit Solutions (RCS). After making payments for 6 months on time at the new rate, RCS returned our payment on 8/10/2009 and shortly after sent a “Notice of Intent to Take Legal Action” dated 8/24/2009. We sought legal help from US Loan Auditors, but they were not taking quick enough action to stop the foreclosure process and we therefore terminated their service. In an effort to save our home, we attempted to work through the lender RCS for another loan modification, as we felt we had no other alternative. This did not work either as RCS kept asking for documentation already provided and continued the foreclosure process. When RCS provided NOS, we hired another attorney who tried to work with the lender. The lender provided us with an Affordable Home Modification Trial Period Plan and demanded we give up our right to notice. We complied with the plan, and in May of 2010 gave them a Cashiers Check for the June Payment. Within 10 days, RCS placed the home up on the Placer County Auction block to be sold June 14, 2010! We had no notice, but received word of the information from a friend. Not even my attorney knew. We have since hired an attorney who is familiar with the Jerry Brown Case that won the Stipulated Judgment and Injunction against Countrywide Financial. RCS claims they did not see “normal loan” documentation and concluded Country Wide incorrectly financed us and therefore we were delinquent despite the fact we made on time payments as agreed with Country Wide.
kim - October 28, 2010
Can someone, anyone, tell me how CHL continues to get away with this. No one goes to jail, no real money (in terms of what they make) have to be paid and all the top dogs sleep well at night while the little ones are worrying about their life and liberty. I just don't understand it. Someone please let me in on the secret.
Eduardo solis - November 8, 2013
Need help in California for home modification.

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