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Contract Formation

COURT DENIES DISMISSAL OF PUTATIVE CLASS ACTION ALLEGING KICKBACKS ACCEPTED BY LENDER VIA ITS CAPTIVE REINSURER

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A breach of contract claim survived dismissal in a potential class action lawsuit by homeowners against a mortgage lender for alleged kickbacks obtained when the lender required the homeowners to pay for force-placed insurance (FPI) on mortgaged properties. The homeowners contended that the lender breached its contractual duty of good faith and fair dealing by funneling back to itself a portion of the premiums paid by the homeowners for the FPI by, among other things, providing reinsurance through its own captive insurance company. While the court held that the contract claim could proceed against the lender, the court dismissed other claims for unfair and deceptive trade practices, and for unjust enrichment. Montanez v. HSBC Mortgage Corp. (USA), Case No. 11-4074 (USDC E.D. Pa. July 18, 2012).

This post written by Michael Wolgin.

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CRIMINAL CONVICTIONS RELATING TO GEN RE-AIG FINITE REINSURANCE TRANSACTION VACATED BY COURT OF APPEAL

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The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”

The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.

With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”

This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).

This post written by Rollie Goss.

ALLEGED REINSURANCE-RELATED MORTGAGE KICKBACK CLASS ACTION SUIT DISMISSED BASED ON SUBSTITUTION OF FDIC AS RECEIVER FOR NOW-DEFUNCT LENDER

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On July 21, 2008 and August 20, 2008 we reported on the early stages of a class action lawsuit filed by mortgage loan borrowers against now-defunct Washington Mutual, Inc. (“WaMu”), for alleged violations of the Real Estate Settlement Procedures Act. The borrowers contended that WaMu collected illegal kickbacks from private mortgage insurance providers who had agreed to reinsure the borrowers’ mortgage insurance with WaMu’s captive reinsurer. After WaMu failed the court substituted as a party the FDIC in its capacity as receiver for WaMu. The court has now granted FDIC’s motion to dismiss the action. The court held that the relief sought by the borrowers, treble damages under RESPA, constitutes a penalty, which, under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, may not be awarded against the FDIC in its capacity as receiver. Alexander v. Washington Mutual, Inc., Case No. 07-4426 (USDC E.D. Pa. June 28, 2011).

This post written by Michael Wolgin.

NO COSTS AWARDED TO AIG AFTER APPELLATE VICTORY OVERTURNING $35 MILLION JURY VERDICT

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In a suit between AXA and AIG in which AIG prevailed over AXA’s claim that AIG fraudulently induced it to enter into two reinsurance facilities, a court has set aside AIG’s award of over $200,000 in litigation costs. AIG had prevailed in the case after the Second Circuit Court of Appeals reversed a $35 million jury verdict in favor of AXA, which awarded compensatory and punitive damages, on the grounds that the case was barred by the statute of limitations. The court reasoned that it would be “inequitable to award costs to AIG,” especially in light of the fact that “after a two-week trial, a jury of twelve citizens unanimously found that AIG had defrauded AXA to such a deplorable extent that the conduct merited an award of punitive damages.” AXA Versicherung AG v. New Hampshire Insurance Co., Case No. 05-10180 (USDC S.D.N.Y. March 9, 2011).

This post written by Michael Wolgin.