Fresno Lawyer – Randolf Krbechek

The trend in the courts has been to reduce the legal theories available to persons who suffered losses during the mortgage meltdown.  Traditional theories based on breach of contract, fraud, and promissory estoppel, remain viable causes of action.

Yet the more exotic theories seeking to impose liability have been narrowed and often eliminated.  Such is the case in Bank of America v. Superior Court (Paul Ronald) (August 25, 2011) 2011 DJDAR 12942.  In the Paul Ronald action, the plaintiff sought to hold Bank of America, as successor-in-interest to Countrywide Mortgage, liable for the general decline in property values triggered by Countrywide’s bad lending practices.  The court would have none of it.

According to the complaint, “Countrywide’s founder and CEO, Angelo Mozilo determined that Countrywide could not sustain its business ‘unless it used its size and large market share in California to systematically create false and inflated property appraisals throughout California.  Countrywide then used these false property valuations to induce Plaintiffs and other borrowers into ever-larger loans on increasingly risky terms.’

The complaint continued.  “Mozilo knew ‘these loans were unsustainable for Countrywide and the borrowers and to a certainty would result in a crash that would destroy the equity invested by Plaintiffs and other Countrywide borrowers.  Mozilo and others at Countrywide ‘hatched a plan to ‘pool’ the foregoing mortgages and sell the pools for inflated value.  Rapidly, these two intertwined schemes grew into a brazen plan to disregard underwriting standards and fraudulently inflate property values.’”

Unfortunately, those allegations describe the general problems that swept through the mortgage industry.  “This writ petition relates solely to plaintiffs’ cause of action for fraudulent concealment.”

The trial judge noted the scope of the issue presented to it.  On January 11, 2011, the matter came on for hearing.  At the outset, the trial court indicated, “the issues presented by the many plaintiffs in this case as against their current mortgage lender and/or loan servicer are part of a larger socioeconomic problem that confronts our society in California and all of the other states in this union, an issue of great concern to the U.S. Congress, state Legislature, and the bank regulators, given that in our banking system the banks are insured by the full faith and credit of the United States government for all intents and purposes, so the continued solvency of the banking industry as a whole is a matter of intense interest to the U.S. Congress as well as the central bank.”

That’s the real problem.  This is not a matter that should be dumped into a trail court.  Our entire justice system has shrugged its shoulders and refused to impose liability on anyone for the manipulations that developed into the mortgage crisis.  Shame on us.

It seems there are some 20 cases rolling around in Los Angeles and Orange Counties based on the same charging allegations.  As explained by the court of appeal, “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.”

Explained the court, “we conclude that 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.”

More specifically, “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.”

Further, the court noted that the complaint embraced a general decline in property values across the state.  “Irrespective of whether a homeowner obtained a loan from Countrywide, or obtained a loan through another lender, or whether a homeowner owned his or her home free and clear, all suffered a loss of home equity due to the generalized decline in home values.  That being the case, there is no nexus between the alleged fraudulent concealment by Countrywide and the economic harm which these plaintiffs/borrowers have suffered.”

The final holding – “We merely conclude plaintiffs failed to state a cause of action against Countrywide for fraudulent concealment of its alleged scheme to bilk investors by selling collateralized mortgage pools at an inflated value, the demise of which led to a generalized decline in California residential property values.”

This writer is as upset about the mortgage debacle, and the refusal of governmental authorities to take action, as anyone else.  But the right place for action is the Department of Justice, or the Securities and Exchange Commission, not a trial court.

Most commendable is the speed at which the court issued this decision.  The lawsuit was filed in March 2009.  The trial court issued its order dismissing the claim for fraudulent concealment on January 11, 2011.  This writ proceeding was resolved by decision entered on August 25, 2011.  Justice is not always delayed.

Bank of America v. Superior Court (Paul Ronald) (August 25, 2011) 2011 DJDAR 12942

Here is the clearest explanation I have found to date regarding the rise of trusts in English law.  Bear in mind that England was still a feudal system in the year 1350.  Also bear in mind that a court of law could not enforce a trust – such jurisdiction lay within the court of equity, which was still developing.

Profs. Maitland and Montague take the stage with the following concise statement of legal history.

“From the field of the common law the chancellor was slowly compelled to retreat … It seems possible that this nascent civil jurisdiction of the chancellor would have come to naught but for a curious episode in the history of our land law.

“In the second half of the fourteenth century many causes were conspiring to induce the landholders of England to convey their lands to friends, who, while becoming the legal owners of those lands, would, nevertheless, be bound by an honorable understanding as to the uses to which their ownership should be put. There were feudal burdens that could thus be evaded, ancient restrictions which could thus be loosened.”

There it is.  The wealthy landowners sought to avoid the feudal burdens owed to their lords.  The Chancellor, acting on behalf of the king, recognized these arrangements.

“The chancellor began to hold himself out as willing to enforce these honorable understandings, these ‘uses, trusts, or confidences,’ as they were called, to send to prison the trustee who would not keep faith.”

Add Maitland and Montague, “It is an exceedingly curious episode.  The whole nation seems to enter into one large conspiracy to evade its own laws, to evade laws which it has not the courage to reform.  The Chancellor, the Judges, and the Parliament seem all to be in the conspiracy.”

“And yet there is really no conspiracy: men are but living from hand to mouth, arguing from one case to the next case, and they do not see what is going to happen. Too late the king, the one person who had steadily been losing by the process, saw what had happened. Henry VIII put into the mouth of a reluctant Parliament a statute [the Statute of Uses, enacted in 1535[ which did its best – a clumsy best it was – to undo the work.”

“But past history was too strong even for that high and mighty prince.  The statute was a miserable failure.  A little trickery with words would circumvent it.  The chancellor, with the active connivance of the judges, was enabled to do what he had been doing in the past, to enforce the obligations known as trusts.”

How fascinating is this history to our current law of trusts.  The “traditional” trust arose during a 50-year period, as the wealthy sought to avoid the obligations of feudal society.  They employ an exceedingly flexible device, which accomplishes its purpose, but only because many learned people look away during this period.

So also it is with our current law of “living trusts.”  These estate planning trusts came to prominence during the last 50 years.  They suffer from an intellectually deficient legal platform; it makes little sense to contend that one person can simultaneously serve as trustor, trustee, and beneficiary.

Such trusts exist solely to transfer property at death, and solely to avoid the jurisdiction of the probate court.  And yet, with a collective nod, we in the legal profession have said, “Yes, this quasi-will should be valid, and we should honor it, notwithstanding its failure to comply with centuries of law relating to wills.”

The old is new again.

Maitland and Montague, A Sketch of English Legal History (G. P. Putnam’s Sons 1915)