Bank of America avoids some liability for Countrywide's evil, destruction of America

Slowly but surely, the fallout from the meltdown in the financial and real estate sectors is showing up in the Courts of Appeal.  This next sentence is a bit tricky, so watch my hands carefully.  In Bank of America v. Superior Court (Ronald) (August 24, 2011), the Court of Appeal (Second Appellate District, Division Three) considered whether borrowers that obtained Countrywide-originated home loans could state fraudulent concealment claims against Countrywide because Countrywide sold investors (not the borrowers) pools of mortgages at inflated values, resulting in the destruction of the housing market and subsequent loss of home values across California.  That is a spectucular theory.  But the Court of Appeal didn't think so:

Due to the generalized decline in home values which affects all homeowners (borrowers of Countrywide, borrowers who dealt with other lenders, and homeowners who owned their homes free and clear), there is no nexus between Countrywide's alleged fraudulent concealment of its scheme to bilk investors and the diminution in value of the instant borrowers' properties.

Slip op., at 2.  The Court examined the inentional tort of fraudulent concealment, finding that, on the facts, the theory failed for several reasons:

"Although 'inferentially, everyone has a duty to refrain from committing intentionally tortious conduct against another' [citation], it does not follow that one who intends to commit a tort owes a duty to disclose that intention to his or her intended victim. The general duty is not to warn of the intent to commit wrongful acts, but to refrain from committing them. We are aware of no authority supporting the imposition of additional liability on an intentional tortfeasor for failing to disclose his or her tortious intent before committing a tort." (Id. at p. 338; accord Deteresa v. American Broadcasting Companies, Inc. (9 th Cir. 1997) 121 F.3d 460, 467-468 [even if audiotaping and videotaping were wrongful, defendant was not liable for failing to disclose its intention to commit those wrongful acts]; In re MRU Holdings Securities Litigation (S.D.N.Y. 2011) 769 F.Supp.2d 500, 515 [it is "'rather circular' to say that . . . Defendants 'committed fraud by concealing their intent to commit fraud'"].)

Slip op., at 11.  The Court then found defects in causation, explaining that essentially all homeowers suffered a loss in equity when the overall market declined, whether borrower with Countrywide or not.  Although the comment at the end about how the holding is limited in nature, focused solely on the viability of the claim as alleged, suggests that, deep down, the Justices might actually believe that Countrywide had a major hand in the real estate implosion in some meaningful way.  Of course, that's my fantastical speculation and not reflective of any actual insight or knowledge on my part.

Strong-ARM tactics dealt a stunning setback in Boschma v. Home Loan Center, Inc.

After the great real estate implosion, lenders have been very busy, attempting to justify a number of questionable practices and products.  One such loan product, the Option ARM, has been challenged in state and federal courts.  Option ARM loans are complex forms of adjustable rate loans that generally include several payments options during the early years of the loan.  One payment option includes the ability to make a "minimum" payment for several years.  However, many Option ARM loan minimum payments are insufficient to pay accruing interest after an initial "teaser" interest rate that is very low.  Once the "teaser" rate period expires, the unpaid interest is added onto the loan, increasing the principal balance owed on the loan (negative amortization).  Because of their complexity, clear disclosures to borrowers are essential.  In Boschma v. Home Loan Center, Inc. (August 10, 2011), the Court of Appeal (Fourth Appellate District, Division Three) held that a complaint alleging a lender's failure to disclose that negative amortization would definitely occur (instead describing that scenario as merely possible), was sufficient to state violations of the UCL and common law fraud.

The Court described the claims of the Second Amended Complaint:

The gravamen of plaintiffs' operative complaint is that defendant failed to disclose prior to plaintiffs entering into their Option ARMs: (1) "the loans were designed to cause negative amortization to occur"; (2) "the monthly payment amounts listed in the loan documents for the first two to five years of the loans were based entirely upon a low 'teaser' interest rate (though not disclosed as such by Defendants) which existed for only a single month and which was substantially lower than the actual interest rate that would be charged, such that these payment amounts would never be sufficient to pay the interest due each month"; and (3) "when [plaintiffs] followed the contractual payment schedule in the loan documents, negative amortization was certain to occur, resulting in a significant loss of equity in borrowers' homes, and making it much more difficult for borrowers to refinance the loans [because of the prepayment penalty included in the loan for paying off the loan within the first three years of the loan]; thus, as each month passed, the homeowners would actually owe more money than they did at the outset of the loan, with less time to repay it."

Slip op., at 13.  The Court began its analysis by explaining what was not at issue in the case at this time:

It is important to demarcate the boundaries of this dispute. The following is not at issue in this case: (1) should it be legal to offer Option ARMs to typical mortgage borrowers; and (2) should it be legal to utilize "teaser" ("discounted") interest rates (here 1.25 percent for the first month of a 30 year loan), which bear no relation to the actual cost of credit? Our only concern in this case is whether plaintiffs stated a cause of action under state law based on defendant‘s allegedly misleading, incomplete, and/or inaccurate disclosures in the Option ARM documents provided to plaintiffs.

Slip op., at 15.  The Court then observed that no California state court had addressed the exact issues presented in the case.  However, the Court noted that a number of federal courts had examined similar issues.

The Court began by addressing the Defendant's contention that strict compliance with TILA provided it with a safe harbor of sorts:

A string of cases (involving strikingly similar Option ARM forms/disclosures to those used in the instant case) have held that a borrower states a claim for a violation of TILA based on, among other disclosure deficiencies, the failure of the lender to clearly state that making payments pursuant to the TILDS payment schedule will result in negative amortization during the initial years of the loan.

Slip op., at 18.  The Court concluded that, since the allegations could support a cause of action for TILA violations, it would be nonsensical to dismiss the claims at this stage, based on a claim of compliance with TILA disclosure obligations.  Note:  There was no TILA claim asserted in this action, only UCL and fraudulent concealment claims.

Next, the Court considered the state law fradulent concealment claims.  The Court began its discussion by citing a number of federal cases that allowed state law claims to proceed along with TILA claims.  The Court then turned to the sufficiency of the fraud pleading.  The Court found that the failure to disclose the exceedingly low teaser rate adequately was a sufficient omission to suppor the fraudulent concealment claim: "The teaser rate creates an artificially low (compared to the actual cost of credit) initial payment schedule and guarantees that the actual applicable interest rate (after the first month of the loan) will exceed the interest rate used to calculate the payment schedule for the initial years of the loan."  Slip op., at 24.

Turning to the UCL, the Court found that the allegations were sufficient to support a UCL under all three prongs.  The "unfair" prong discussion was the most interesting of the three:

As noted above in our discussion of damages, it may be difficult for plaintiffs to prove they could not have avoided any of the harm of negative amortization — they could have simply paid more each month once they discovered their required payment was not sufficient to pay off the interest accruing on the loan. But plaintiffs may show they were unable to avoid some substantial negative amortization. And we see no countervailing value in defendant's practice of providing general, byzantine descriptions of Option ARMs, with no clear disclosures explaining that, with regard to plaintiffs' particular loans, negative amortization would certainly occur if payments were made according to the payment schedule. To the contrary, a compelling argument can be made that lenders should be discouraged from competing by offering misleading teaser rates and low scheduled initial payments (rather than competing with regard to low effective interest rates, low fees, and economically sustainable payment schedules). Finally, to the extent an "unfair" claim must be "tethered" to specific statutory or regulatory provisions, TILA and Regulation Z provide an adequate tether even though plaintiffs are not directly relying on federal law to make their claims.

Slip op., at 29.

Fun fact: the Court cited Kwikset when rejecting the Defendant's contention that the Plaintiffs did not adequately allege standing under the UCL.

Disclosure:  J. Mark Moore of Spiro Moss argued this matter before the Court of Appeal and contributed significantly to the briefing on appeal.

In the "Pitts" of despair, a "Terrible" attempt to pick off a class representative fails

I remember when what was probably the first Terrible Herbst gas station opened a mere block from my home in Las Vegas.  Refilled a lot of bike tires there.  But enough about my childhood.  Terrible Herbst isn't the friendly local gas station of my youth.  Now it's just another corporate slave to the whisperings of defense counsel skilled in the dark arts.  In Pitts v. Terrible Herbst, Inc. (August 9, 2011), the Ninth Circuit considered whether a rejected offer of judgment for the full amount of a putative class representative's individual claim moots a class action complaint where the offer precedes the filing of a motion for class certification.  The Ninth Circuit concluded that it did not.

Pitts filed a hybrid FLSA and Nevada labor law class action.  The defendant removed it to federal court.  With a discovery motion pending, Terrible made a Rule 68 offer of judgment in the amount of $900.  Pitts claimed $88.00 in damages but rejected the offer.  Terrible then sought to have the matter dismissed.  The Ninth Circuit rejected this attempt to impede consideration of the class certification question:

An inherently transitory claim will certainly repeat as to the class, either because “[t]he individual could nonetheless suffer repeated [harm]” or because “it is certain that other persons similarly situated” will have the same complaint. Gerstein, 420 U.S. at 110 n.11. In such cases, the named plaintiff’s claim is “capable of repetition, yet evading review,” id., and “the ‘relation back’ doctrine is properly invoked to preserve the merits of the case for judicial resolution,” McLaughlin, 500 U.S. at 52; see also Geraghty, 445 U.S. at 398; Sosna, 419 U.S. at 402 n.11.

Slip op., at 10453.  The Court then discussed the argument that the claims in this matter were not "inherrently" transitory:

We recognize that the canonical relation-back case—such as Gerstein or McLaughlin—involves an “inherently transitory” claim and, correspondingly, “a constantly changing putative class.” Wade v. Kirkland, 118 F.3d 667, 670 (9th Cir. 1997). But we see no reason to restrict application of the relation-back doctrine only to cases involving inherently transitory claims. Where, as here, a defendant seeks to “buy off” the small individual claims of the named plaintiffs, the analogous claims of the class—though not inherently transitory—become no less transitory than inherently transitory claims. Thus, although Pitts’s claims “are not ‘inherently transitory’ as a result of being time sensitive, they are ‘acutely susceptible to mootness’ in light of [the defendant’s] tactic of ‘picking off’ lead plaintiffs with a Rule 68 offer to avoid a class action.”

Slip op., at 10454.  Interestingly, the Court essentially found that the right to certify a class was an additional right not satisfied by the Rule 68 offer, and that right could not be extinguished unless certification were denied and all appellate efforts were exhausted.

Next, the Court ruled that it was error to find that Pitts failed to timely file a motion for class certification when the trial court refused to rule on a pending discovery motion to obtain evidence necessary for certification.

Other issues raised in the appeal were not addressed by the Court once it concluded that the trial court erred in its ruling regarding the timing of certification.

In NAACP of Camden County East v. Foulke Management Corp., New Jersey appellate court finds reasons to distinguish Concepcion

When you stamp down too hard, stuff leaks out the sides.  AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) was the boot.  Since then, we've been waiting to see what would leak out the sides.  There has been a good deal of discussion about the ramifications of Concepcion.  While Concepcion may make things harder for class actions, the severity of the opinion is also inspiring interesting challenges to arbitration agreements on many fronts.  In NAACP of Camden  County East v. Foulke Management Corp. (August 2, 2011), the Appellate Division of the New Jersey Superior Court concluded that convoluted and inconsistent arbitration provisions in an automobile purchase contract could not be enforced, reversing the trial court's order directing the matter to individual arbitration.

The opinion focused heavily on the concurring opinion of Justice Thomas for its conclusion that a confusing consumer contract provision related to arbitration would not be enforced:

Thus, in the aftermath of AT&T Mobility, state courts remain free to decline to enforce an arbitration provision by invoking traditional legal doctrines governing the formation of a contract and its interpretation. Applying such core principles of contract law here, we must decide whether there was mutual assent to the arbitration provisions in the dealership's contract documents. As part of that assessment, we must examine whether the terms of the provisions were stated with sufficient clarity and consistency to be reasonably understood by the consumer who is being charged with waiving her right to litigate a dispute in court.

Slip op., at 31.  The Court found ample evidence for the proposition that the consumer could not have reasonably understood the arbitration provisions.  The Court did take a moment to opine that the trial court was correct when it found that a class action waiver could not be invalidated on public policy grounds.  But the Court then found that the issue was irrelevant to the outcome, since the provisions were unenforcable on formation grounds.