On May 23, 2016, in U.S. v. Countrywide Home Loans, Inc., the U.S. Court of Appeals for the Second Circuit reversed the District Court for the South District of New York’s $1.2 billion judgment against Bank of America and its subsidiary, Countrywide Home Loans, Inc.., for alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), finding there was no proof of fraudulent intent at the time Countrywide contracts with Fannie Mae and Freddie Mac were executed.
In July 2014, the SDNY entered a judgment against BofA and Countrywide to pay penalties of over $1.2 billion for violating section 951 of FIRREA. In that case, the government alleged that Countrywide had defrauded Fannie Mae and Freddie Mac by originating what it knew to be poor quality mortgage loans and selling those loans to the GSEs while representing them as investment quality loans.
On appeal to the Second Circuit, the lenders contended that the evidence provided at trial by the government did not suffice as a matter of law to establish fraud. The Second Circuit concurred, finding that “a contractual promise can only support a claim for fraud upon proof of fraudulent intent not to perform the promise at the time of contract execution. Absent such proof, a subsequent breach of that promise—even where willful and intentional—cannot in itself transform the promise into a fraud.”
In addition, the Second Circuit noted that “the proper time for identifying fraudulent intent is contemporaneous with the making of the promise, not when a victim relies on the promise or is injured by it.” The court further held that “where allegedly fraudulent misrepresentations are promises made in a contract, a party claiming fraud must prove fraudulent intent at the time of contract execution; evidence of a subsequent, willful breach cannot sustain the claim.”
The Second Circuit found that the government had not provided any evidence or even made a claim that the lender had an intent to defraud during the negotiation or execution of the contracts with the GSEs, and therefore failed to establish section 951 violations.
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