Regarding the 2nd Circuit’s curious dismissal of United States ex rel. O’Donnell v. Countrywide Home Loans

Regarding the 2nd Circuit’s curious dismissal of United States ex rel. O’Donnell v. Countrywide Home Loans

dated of original post: 5.28.16

The Second Circuit’s recent dismissal of a jury verdict against Bank of America for fraud is shameful on a few levels, but these comments are limited to a single point. United States ex rel. O’Donnell v. Countrywide Home Loans, Inc., 2016 U.S. App. LEXIS 9365 (2d Cir. May 23, 2016).

Judge Wesley brushes aside “decisions in which this Court and others recognized a fraud claim where the parties were engaged in a contractual relationship. Gov’t Br. 43–44.” Id at *18-19.

He continues: “These cases are distinguishable… in that none recognize a contract breach, by itself, to constitute fraud. Rather, in each, the defendants made affirmative fraudulent misrepresentations to their contractual counterparties in the course of performance or to feign performance under the contract. See, e.g., United States v. Naiman, 211 F.3d 40, 44, 49 (2d Cir. 2000) (submitting false certifications of compliance required by contracts with the government).” Ibid.

But the cases are not distinguishable. Here, “defendants [committed fraud], the jury necessarily found, by misrepresenting that the loans they were selling were ‘investment quality’ and that they knew of nothing that might cause investors to regard the mortgages as poor investments.” United States v. Countrywide Fin. Corp., 996 F. Supp. 2d 247, 248 (S.D.N.Y. 2014). “Countrywide… offer[ed] employees an incentive for rebutting earlier findings that loans were defective… In these and other ways, Countrywide incentivized employees to manipulate data to make loans appear more acceptable or trustworthy than they actually were.” United States v. Countrywide Fin. Corp., 961 F.Supp.2d 598, 604 (S.D.N.Y. 2013).

That is, to use Judge Wesley’s words, Countrywide “made affirmative fraudulent misrepresentations to their contractual counterparties in the course of performance or to feign performance under the contract.”

So in reality this case plainly cannot be distinguished from the cases cited by the government at pages 43-44 of its brief. And this case does not in fact involve breach of contract “by itself,” as Judge Wesley glibly contends.

Instead the defining feature of this case – and the feature that has caused widespread outrage and ridicule in reaction to this decision – is that Countrywide engaged in serial egregious affirmative misrepresentations and deliberate omissions that went far beyond making a contractual promise that it did not intend to perform.  It was precisely the repetitive and systematic nature of the gross misrepresentations that made it obvious to the jury that they were intentional.

Judge Wesley simply ignores these serial misrepresentations. The panel instead premises its entire decision on a straw-man argument that the case involves breach of contract “by itself.” Even worse, the panel uses this false straw-man to erase the considered decision of a jury and replace it with an outrageously unfair outcome that flies in the face of equity and morality.

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