Thursday, August 25, 2011
Court of Appeal Rules:
Countrywide Not Liable for Depression in State Housing Prices
By KENNETH OFGANG, Staff Writer
Borrowers who claim that Countrywide Financial Corporation and founder Angelo Mozilo misled investors into buying pooled mortgages based on inflated property valuations cannot sue the lender on a fraudulent concealment theory, the Court of Appeal for this district ruled yesterday.
“We conclude the plaintiffs/borrowers cannot state a cause of action against Countrywide for fraudulent concealment of an alleged scheme to bilk investors by selling them pooled mortgages at inflated values, the demise of which scheme led to devastated home values across California,” Presiding Justice Joan Dempsey Klein wrote for Div. Three. “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.”
The court directed that the fraudulent concealment cause of action in the complaint brought by 248 borrowers be dismissed. The suit is proceeding before Los Angeles Superior Court Judge William Highberger on other theories, including negligent and intentional misrepresentation, invasion of privacy, and unfair competition.
Mozilo founded Countrywide in 1969 and built into the largest home lender in the United States before it ran into financial problems, culminating in its acquisition by Bank of America Corporation in 2008. Bank of America is a defendant in the action, along with Countrywide and other affiliates.
The plaintiffs contend that Mozilo used the company’s “size and large market share in California to systematically create false and inflated property appraisals throughout California,” used the inflated appraisals “to induce Plaintiffs and other borrowers into ever-larger loans on increasingly risky terms,” and “hatched a plan to ‘pool’ the foregoing mortgages and sell the pools for inflated value.”
What followed, the plaintiff claimed, was “a brazen plan to disregard underwriting standards and fraudulently inflate property values . . . in order to take business from legitimate mortgage providers” Countrywide’s fraudulent scheme “destroyed California home values county-by-county and then State-wide,” the plaintiffs alleged.
Highberger overruled a demurrer to that claim, but said the issue was not free from doubt and certified that immediate appellate review might expedite the litigation. The Court of Appeal issued an order to show cause, and concluded yesterday that the demurrer should be sustained without leave to amend.
The claim for fraudulent concealment fails, Klein explained, because “while Countrywide had a duty to refrain from committing fraud, it had no independent duty to disclose to its borrowers its alleged intent to defraud its investors by selling them mortgage pools at inflated values.”
The claim, the presiding justice continued, also fails because the universal decline in California property values—regardless of whether the owners did, or did not, obtain financing from Countrywide—cannot be attributed as a matter of law to Countrywide’s conduct.
Attorneys on appeal were Bryan Cave’s Douglas E. Winter, Robert E. Boone III, Keith D. Klein and John M. Thomas for the defendants and Mitchell J. Stein, Erikson M. Davis, Kenin M. Spivak, Theodore Maloney, and Michael S. Riley for the plaintiffs.
The case is Bank of America Corporation v. Superior Court (Ronald), 11 S.O.S. 4709.
Copyright 2011, Metropolitan News Company