Bank Of America Can’t Escape Ponzi Aiding And Abetting Claims

by Tara Arick on October 9, 2012 · 0 comments

in Banking,Bankruptcy

~From LexisNexis® Mealey’s™ Daily Legal News.

A federal judge in California on Oct. 5 denied Bank of America NA’s (BOA) motion to dismiss a putative class action alleging that it aided and abetted a mortgage-related Ponzi scheme (Patricia Arreola, et al. v. Bank of America NA, et al., No. 11-6237, C.D. Calif.; 2012 U.S. Dist. LEXIS 144765).

U.S. Judge Dean D. Pregerson of the Central District of California made the ruling in the suit Patricia Arreola, Alfredo Parra, Lillian A. Ramirez, Javier A. Galindo, Pascual Chavez-Ramirez, Jose Renteria, Jesse Moreno, Maria Pliego, Rene Pliego and Jose Garcia filed, on behalf of themselves and all others similarly situated, against BOA.

The plaintiffs were all investors in nonparty Juan Rangel’s company, Financial Plus. According to the plaintiffs, certain of the plaintiffs also refinanced their homes with the assistance of Financial Plus, which arranged for “straw buyers” to purchase the homes then deposited loan proceeds into Financial Plus accounts. Rangel and his associates encouraged working-class, Spanish-speaking families to invest by fraudulently promising unrealistically high rates of return and offering to save the homes of victims who were behind on their mortgage payments but had equity in their homes, according to the plaintiffs.

Rangel was convicted of several crimes related to his Ponzi and mortgage fraud schemes, including bribery of a bank official. Dony Gonzalez, a BOA branch manager, pleaded guilty to receipt of bribes by a bank official in connection with Rangel’s scheme.

Bank’s Fiduciary Duty

According to the plaintiffs, Rangel conducted banking activities on behalf of Financial Plus and related entities at two BOA branches managed by Gonzalez. Gonzalez’s activities raised several internal red flags at BOA related to money laundering and fraudulent activities, yet BOA, including employees other than Gonzalez, continued to provide suspicious banking services to Rangel, including wiring large sums of money to Rangel’s personal accounts in Mexico, the plaintiffs alleged.

The plaintiffs brought causes of action against BOA for aiding and abetting breach of fiduciary duty, aiding and abetting fraud, aiding and abetting intentional misrepresentation and aiding and abetting negligent misrepresentation. The bank on Aug. 29, 2011, moved to dismiss.

BOA argued that the first cause of action should be dismissed because the plaintiffs have not alleged that BOA owed them a fiduciary duty. However, as BOA acknowledged, courts in the Central District of California have held that a plaintiff need not show that an aider and abettor independently owed a plaintiff a fiduciary duty, Judge Pregerson said, citing Neilson v. Union Bank of California NA (290 F. Supp. 2d 1101, 1137 [C.D. Calif. 2003]).

Rangel’s Fiduciary Duty

The judge went on to dismiss BOA’s argument that the plaintiffs have failed to plead facts sufficient to show that Rangel owed the plaintiffs a fiduciary duty, explaining that a fiduciary relationship may exist where one party voluntarily accepts the trust and confidence of another and enjoys a superior position of influence over the trusting party, pursuant to In re: Daisy Systems Corp. (97 F.3d 1177 [9th Cir. 1996]). Judge Pregerson said Rangel “specifically targeted vulnerable, distressed homeowners who were facing the loss of their homes.”

“In appealing to Plaintiffs’ fundamental need for shelter and preying on their fear of losing their largest asset, Rangel went far beyond a mere arms-length transaction, and assumed a fiduciary duty to plaintiffs,” Judge Pregerson said.

Bank’s Actual Knowledge

BOA further argued that the plaintiffs’ first claim must fail because Gonzalez’s actions cannot be imputed to the bank. While BOA is correct that knowledge acquired by an agent acting adversely to the principal is not attributable to the principal, the complaint adequately alleges that Gonzalez was acting in the bank’s interest, the judge said, citing Meyer v. Glenmoor Homes Inc. (246 Cal. App. 2d 242, 264 [1967]). The complaint alleged that Gonzalez was a high-level branch manager and that he committed wrongful acts while in the course of conducting official bank business, the judge said.

“Gonzalez knew, at the very least, that the falsified Verification of Deposit forms were being used in connection with fraudulent mortgage applications,” Judge Pregerson said. “Furthermore, the Complaint alleges that the bank itself, aside from Gonzalez’s actions, ignored multiple ‘red flags,’ choosing instead to enjoy the benefits of its financial relationship with Rangel and his business entities. Plaintiffs allege that the bank knew that Rangel’s business accounts involved the receipt of investor funds, knew of the multiple internal ‘red flags’ that Rangel’s banking activities triggered, and knew that Rangel was transferring money from investor-funded accounts to Rangel’s personal accounts in Mexico. A common-sense reading of these allegations, taken together, sufficiently establish, at this stage, that the bank had actual knowledge of Rangel’s fraud.”

Judge Pregerson went on to dismiss BOA’s argument that the plaintiffs’ claim for aiding and abetting negligent misrepresentation must be dismissed because aiding and abetting claims are limited to those based on intentional torts. The bank presented no authority to support its contention, and a court in the Central District of California has held, to the contrary, that “an aider and abettor could knowingly further a misrepresentation that was negligently made by another party,” he said, quoting In re: ZZZ Best Securities Litigation (No. 87-3574 [C.D. Calif. July 23, 1990]).

The judge also dismissed BOA’s argument that the plaintiffs have not alleged a fraud claim against Rangel with sufficient detail to satisfy Federal Rule of Civil Procedure 9(b), which requires that the alleged circumstances of the fraud give defendants sufficient notice of the misconduct at issue to allow defendants to defend against the charge, saying that the “court is satisfied that the Complaint provides Defendant with sufficient details to allow for an informed defense.”

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