The American Lawyer has reported that two important rulings were handed down earlier this month in the United States District Court in Los Angeles denying motions to dismiss class actions against former mortgage behemoths Countrywide and New Century. The Countrywide ruling was handed down by district court judge Mariana Pfaelzer, while the ruling against New Century was authored district court judge Dean Pregerson.
In the latter, Judge Pregerson had previously dismissed the case without prejudice, providing lead plaintiffs’ firm Bernstein Litowitz Berger & Grossmann an opportunity to amend the complaint to establish better support for their allegations of scienter (guilty knowledge) and loss causation. On the second go-round, plaintiffs had the benefit of the New Century bankruptcy trustee’s report, which reads like a how-to manual on unsustainable growth and contained juicy details regarding the financial hijinks that had been going on at the mortgage giant (I especially like the section on Loan Quality starting at p. 109, which discusses the importance of loan quality to a lender, the fact that New Century recognized it had loan quality problems as early as 2004, and the fact that New Century “devoted little attention to improving loan quality until 2006 and did not focus specific attention until the final quarter of 2006, which was too late to prevent the consequences of longstanding loan quality problems in an adversely changing market.” Sounds kind of familiar, doesn’t it?).
Up to this point, not many early subprime class action cases have made it past the demurrer or motion to dismiss phase of the proceedings (see report by Gibson Dunn & Crutcher on early trends in subprime fraud litigation). However, as additional fodder emerges regarding the goings-on at some of the larger lenders and mortgage originators, from bankruptcy reports, lawsuits, or other independent reports (see, for example, this fascinating report on IndyMac Bank from the Center For Responsible Lending (CRL)), we can expect to see plaintiffs’ attorneys having more success in laying out specific factual allegations of negligence, fraud, concealment and other claims requiring scienter. Judging by some of the accounts of former employees from the CRL Report on IndyMac and others, there certainly was no shortage of mortgage fraud being perpetuated by many lenders as they strained for greater volume during height of the subprime boom; it’s only a matter of time before plaintiff’s attorneys learn how to dig up and incorporate these details into compelling class action complaints.