Default Featured image

Borrower “Mass Action” Lawsuits Against Banks Dealt a Double Blow

Foreclosure Litigation and Mortgage & Lending Law by Peter N. Brewer, Esq.

On August 18, 2011, Attorney General Kamala Harris sued three infamous California law firms who had been signing up distressed homeowner clients for ~$5-10k fees to file frivolous lawsuits against lenders. Those law firms have been placed into receivership. The California State bar has seized the practices and attorney accounts of the attorney defendants:

The Law Offices of Kramer & Kaslow; Philip Kramer, Esq; Mitchell J. Stein & Associates; Mitchell Stein, Esq. (aka “the Doberman” or “Dobie”); Christopher Van Son, Esq.; Mesa Law Group Corp.; and Paul Petersen, Esq.

According to the Attorney General’s press release:

“…defendants preyed on desperate homeowners facing foreclosure by selling them participation as plaintiffs in mass joinder lawsuits against mortgage lenders. Defendants deceptively led homeowners to believe that by joining these lawsuits, they would stop pending foreclosures, reduce their loan balances or interest rates, obtain money damages, and even receive title to their homes free and clear of their existing mortgage. Defendants charged homeowners retainer fees of up to $10,000 to join as plaintiffs to a mass joinder lawsuit against their lender or loan servicer.”

What’s illegal about what these lawyers were doing?  According to the Complaint and Temporary Restraining Order:

  • False advertising, in violation of section 17500 of the Business and Professions Code;
  • Unfair, fraudulent and unlawful business practices, in violation of section 17200 of the Business and Professions Code;
  • Unlawful running and capping, in violation of section 6152, subdivision (a) of the Business and Professions Code (i.e., a lawyer unlawfully paying a non-lawyer to solicit or procure business);
  • Improper fee splitting (defendants unlawfully splitting legal fees with non-attorneys); and,
  • Failing to register with the Department of Justice as a telephonic seller.

On August 24, 2011, the California Courts of Appeal ruled in Countrywide (Bank of America)’s favor on one of these lawsuits (this one filed by Mitchell J. Stein).  Nearly 250 borrowers had sued Countrywide on the theory of fraudulent concealment, among others.  The ruling dealt only with the fraudulent concealment claim that bank defendants had failed to disclose to plaintiffs/borrowers that banks had “knowingly pooled their secretly risky loans into pools they sold above fair value, defrauding their investors.”

The Court had any number of legitimate grounds to determine that this cause of action was meritless but instead reasoned that while Countrywide had a duty not to commit intentional fraud, it did not have a duty to disclose any intent to defraud the borrowers.  Basically, you have a duty not to drive your car onto the sidewalk and harm pedestrians but you have no duty to warn the pedestrians you are about to do so.

 The Court went on to discuss that the element of causation was not satisfied—there was no nexus between the alleged fraud and the economic harm that borrowers suffered.  The reason was quite simple – while these borrowers suffered a loss in property values, so too did any number of homeowners in California who had no loans against their homes.

Author’s Comment – Perhaps most interesting to me as one who has defended a number of appraisers was the argument that Countrywide made, that the value of the properties and the appraisal values were for underwriting purposes only that the borrower had no reason to rely on.  For appraisers who are sued by lenders and the FDIC in the present climate, defending against these lender claims begs the question how much reliance is placed on the borrowers’ financial ability to repay the loan versus the actual appraised value of the property. [Bank of America v. Superior Ct of Los Angeles, Paul Ronald, et al. (August 24, 2011) Second Appellate District, Division

Ultimately, these borrower lawsuits against the banks will only gain some traction if there is a specific breach of contract or tort between the borrowers and the bank—not a generalized grievance for the economic decline and bad lending practices in general.

Latest Posts

Real Estate Contracts & Transactions

Out of Contract? Not So Fast…

by Adam Pedersen, Esq. on August 28, 2018

In the highly-competitive real estate market in California, agents are being more aggressive in enforcing contract terms. So before you tell your client that you are “out of contract”, you might want to be sure the contract is actually cancelled! [Read More]

Landlord & Tenant Law

What a Three-Day Notice to Pay Rent or Quit Really Means

by Brewer Firm Team on September 20, 2018

It is after Labor Day weekend and that means school supplies, summer vacation credit card bills, and preparing for the holidays. With all these added costs, the tenant may not have enough money to pay rent and the landlord serves [Read More]

Real Estate Contracts & Transactions

Can A Buyer Back Out of a Non-Contingent Offer?

by Simon Offord, Esq. on October 2, 2018

In my last article, we discussed liquidated damages in the context of a residential real estate purchase contract.  This article will examine whether a buyer may have a right to back out of a contract and receive their full deposit [Read More]