Fraudulent lending practices

In law, a class action or a representative action is a procedural device used in litigation to determine the rights of and remedies, if any, for large numbers of people whose cases involve common questions of law and/or fact.

Federal class actions

In the United States federal courts, class actions are governed by Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332 (d).

Class action lawsuits may be brought in federal court if the claim arises under federal law, or if the claim falls under 28 USCA § 1332 (d). Under § 1332 (d) (2) the federal district courts have original jurisdiction over any civil action where the amount in controversy exceeds $5,000,000 and either 1. any member of a class of plaintiffs is a citizen of a State different from any defendant; 2. any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or 3. any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state. Nationwide plaintiff classes are possible, but such suits must have a commonality of issues across state lines. This may be difficult if the civil law in the various states have significant differences. Large class actions brought in federal court frequently are consolidated for pre-trial purposes through the device of multidistrict litigation (MDL). It is also possible to bring class action lawsuits under state law, and in some cases the court may extend its jurisdiction to all the members of the class, including out of state (or even internationally) as the key element is the jurisdiction that the court has over the defendant.

State class actions

Since 1938, many states have adopted rules similar to the Fed. R. Civ. P. However, some states like California have homegrown civil procedure codes which less closely mirror the federal rules. As a result, there are entire treatises dedicated to the topic. Some states, such as Virginia, do not provide for any class actions, while others, such as New York, limit the types of claims that may be brought as class actions.

United States 9th Circuit Court of Appeals Reports

IN RE FIRST ALLIANCE MORTGAGE CO., 04-55396 (9th Cir. 12-8-2006) In re: FIRST ALLIANCE MORTGAGE COMPANY, a California corporation, Debtor, KENNETH C. HENRY, Liquidating Trust Trustee as Successor-in-Interest to the OFFICIAL JOINT BORROWERS COMMITTEE, Plaintiff-Appellant, and FRANK AIELLO, Plaintiff v. LEHMAN COMMERCIAL PAPER, INC., a New York corporation; LEHMAN BROTHERS, INC., a Delaware corporation, Defendants-Appellees. In re: FIRST ALLIANCE MORTGAGE COMPANY, a California corporation, Debtor, KENNETH C. HENRY, Liquidating Trust Trustee as Successor-in-Interest to the OFFICIAL JOINT BORROWERS COMMITTEE; FRANK AIELLO; NICOLENA AIELLO; MICHAEL AUSTIN; BARBARA AUSTIN; PAUL CARABETTA; LENORE CARABETTA; GEORGE JEROLEMON; JOSEPHINE JEROLEMON; WALTER BERRINGER; HARRIET BERRINGER, individually and on behalf of all others similarly situated; OFFICIAL JOINT BORROWERS COMMITTEE, Plaintiffs-Appellees, v. LEHMAN COMMERCIAL PAPER, INC., a New York corporation; LEHMAN BROTHERS, INC., a Delaware
corporation, Defendants-Appellants. In re: FIRST ALLIANCE MORTGAGE COMPANY, a California corporation, Debtor, MICHAEL AUSTIN; BARBARA AUSTIN; GEORGE JEROLEMON, WALTER BERRINGER, HARRIET BERRINGER; individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. LEHMAN COMMERCIAL PAPER, INC., a New York corporation; LEHMAN BROTHERS, INC., a Delaware corporation, Defendants-Appellees. Nos. 04-55396, 04-55920, 04-55942. United States Court of Appeals, Ninth Circuit. Argued and Submitted October 19, 2005 ? Pasadena, California. Filed December 8, 2006.

Appeal from the United States District Court for the Central District of California David O. Carter, District Judge, Presiding. D.C. No. CV-01-00971-DOC, D.C. Nos. CV-01-00971-DOC, CV-01-01111-DOC, D.C. Nos. CV-01-00971-DOC, CV-01-01111-DOC.

Larry W. Gabriel (argued), Pachulski, Stang, Ziehl, Young,
Jones & Weintraub P.C., Los Angeles, California, for the
appellant.

Richard F. Scruggs (argued), Sidney A. Backstrom, The
Scruggs Law Firm, P.A. Oxford, Mississippi; Elizabeth J.
Cabraser (argued), Hector D. Geribon, Lieff, Cabraser,
Heimann & Bernstein, LLP, San Francisco, California; Kim E.
Levy, Lili R. Sabo, Milberg Weiss Bershad & Schulman LLP,
New York, New York, for the
plaintiffs-appellees-cross-appellants.

Helen L. Duncan (argued), Robert W. Fischer, Jr., Joseph H.
Park, Dinh Ha, Fulbright & Jaworski L.L.P., Los Angeles,
California; Marcy Hogan Greer, Fulbright & Jaworski L.L.P.,
Austin, Texas, for the
defendants-appellants-cross-appellees.

Before: HARRY PREGERSON, RICHARD R. CLIFTON, and JAY S.
BYBEE, Circuit Judges.

Opinion by Judge Clifton.

OPINION

CLIFTON, Circuit Judge:

First Alliance Mortgage Company was driven into bankruptcy
and subsequent liquidation by well-publicized and justified
allegations of fraudulent lending practices. The demise of
First Alliance has led to two separate actions against
Lehman Brothers, Inc. and its subsidiary Lehman Commercial
Paper, Inc. (collectively referred to as “Lehman”) growing
out of Lehman`s activity as a lender to First Alliance and
as the underwriter of First Alliance`s securitized debt.
One is a class action on behalf of First Alliance`s
borrowers seeking to impose liability for aiding and
abetting the fraudulent scheme engaged in by First
Alliance. The other, brought by the bankruptcy trustee
appointed to liquidate First Alliance, seeks to set aside
payments Lehman received in the course of its financing
relationship with First Alliance and to subordinate
Lehman`s secured claims in the First Alliance bankruptcy in
favor of the claims of First Alliance`s unsecured creditors.
(This group of unsecured creditors is essentially the same
as the group of borrowers asserting their claims of fraud
against First Alliance, as is explained in more detail
below. See infra at 19243.) These two separate actions were
handled together by the same district court and have been
consolidated for purposes of this appeal.

After a trial, a jury found Lehman liable under California
tort law to the class of borrowers for aiding and abetting
fraud, and the district court entered judgment accordingly.
As to the trustee`s action, the district judge concluded
that Lehman`s conduct pursuant to its relationship with
First Alliance did not warrant relief under the equitable
principles of bankruptcy law. See Austin v. Chisick (In re
First Alliance Mortgage Co.), 298 B.R. 652 (C.D. Cal. 2003)
(setting forth the district court`s findings of fact and
conclusions of law). We now affirm these holdings, as we do
the district court`s rejection of several other claims
related to these actions. We reverse the district court`s
denial of remittur or new trial as to the jury`s damages
calculation, however, and we remand for further proceedings
based on the proper theory of fraud damages.

I. BACKGROUND

In order to explicate the relationships among First
Alliance and the parties to this case — the Austin
Class Plaintiffs (“Borrowers”), Liquidating Trustee Kenneth
Henry (“Trustee”), and Lehman — and the context out
of which their claims arise, we begin with a brief
background of the factual and procedural history of the
disputes now before us.

A. First Alliance Mortgage Company

First Alliance was a lender in the “subprime” mortgage
sector. Subprime lending is a relatively new and rapidly
growing segment of the mortgage market which generally
consists of borrowers who, for a variety of reasons, might
otherwise be denied credit. A typical borrower in the
subprime mortgage market is “house-rich” but “cash-poor,”
having built up equity in his home but in little else, and
has a lower net income than the average borrower. Subprime
lenders generally charge somewhat higher interest rates to
account for the increased risk associated with these loans.
As the subprime home mortgage industry has grown over the
last decade, increasing attention has focused on predatory
lending abuses — the practice of making loans
containing interest rates, fees or closing costs that are
higher than they should be in light of the borrower`s
credit and net income, or containing other exploitative
terms that the borrower does not comprehend. [fn1] See
Debra Pogrund Stark, Unmasking the Predatory Loan in
Sheep`s Clothing: A Legislative Proposal, 21 Harv.
BlackLetter L. J. 129, 130 (2005) (noting the “unresolved
and heated debate between consumer advocates and lenders
over how to curb the activities of predatory mortgage
brokers and lenders without adversely affecting the robust
legitimate sub-prime market”).

As the district court explained in highly detailed findings
of fact (298 B.R. at 655-65) upon which this summary is
based, First Alliance originated, sold and serviced
residential mortgage loans in the subprime market through a
network of retail branches located throughout the country,
utilizing a marketing methodology designed to target
individuals who had built up substantial equity in their
homes, many of whom were senior citizens. Through
telemarketing efforts, First Alliance employees would set
up appointments for what they described as in-house
appraisals with targeted prospective borrowers. Following
the appraisals, loan officers would employ a standardized
sales presentation to persuade borrowers to take out loans
with high interest rates and hidden high origination fees
or “points” and other “junk” fees, of which the borrowers
were largely unaware. The key to the fraud was that loan
officers would point to the “amount financed” and represent
it as the “loan amount,” disregarding other charges that
increased the total amount borne by the borrowers.

First Alliance trained its loan officers to follow a manual
and script known as the “Track,” which was to be memorized
verbatim by sales personnel and executed as taught. The
Track manual did not instruct loan officers to offer a
specific lie to borrowers, but the elaborate and detailed
sales presentation prescribed by the manual was
unquestionably designed to obfuscate points, fees, interest
rate, and the true principal amount of the loan. First
Alliance`s loan officers were taught to present the state
and federal disclosure documents in a misleading manner,
and the presentation was so well performed that at least
some borrowers had no idea they were being charged points
and other fees and costs averaging 11 percent above the
amount they thought they had agreed to. Loan officers were
taught to deflect attention away from things that consumers
might normally look at, and the loan sales presentation was
conducted in such a way as to lead a consumer to disregard
the high annual percentage rate (“APR”) when it was
ultimately disclosed on the federally-required Truth in
Lending Statement.

In the late 1990`s, First Alliance became subject to
increasing scrutiny including allegations that the
borrowers` loans were fraudulently induced and that First
Alliance deceived borrowers into paying large loan
origination fees of which they were unaware. In 1998 the
United States Department of Justice and the attorneys
general for seven states initiated a joint investigation
into First Alliance`s lending practices. A lawsuit making
similar claims was filed in December 1998 by AARP (American
Association of Retired Persons). Two California Courts of
Appeal held that First Alliance loan agreements containing
arbitration clauses were unenforceable because they had been
entered into based on the fraudulent practices of loan
officers. See 298 B.R. at 658-59 (chronicling First
Alliance`s lengthy litigation history).

In March 2000, the New York Times published a front-page
article highly critical of First Alliance`s loan
origination procedures. The article implicated Wall Street
investment banking firms, concentrating on Lehman`s role in
funding First Alliance. Days later, the ABC News program ”
20/20″ aired a companion segment which focused further
negative attention on First Alliance. Later that month
First Alliance filed a voluntary petition under Chapter 11
of the Bankruptcy Code, 11 U.S.C. §§
101-1330, because of the costs associated with the growing
number of lawsuits against it and the negative national
publicity it was facing.

In June of 2000, the U.S. Trustee appointed a Borrowers
Committee pursuant to an order of the bankruptcy court, in
accordance with Section 1102(a)(1) of the Bankruptcy Code.
The Committee was appointed to represent the interests of
individual consumer borrowers who had claims against First
Alliance and against Lehman in the adversary bankruptcy
proceedings. In September 2002, the district court entered
an order confirming a liquidation plan for the company and
appointed Kenneth Henry as the Liquidating Trustee of the
First Alliance estate and successor in interest to the
Committee. The group of unsecured creditors represented by
the Trustee consists mostly of the same consumer borrowers
represented by the plaintiff class.

In September 2002, the district court also approved a
settlement in an action brought by the Federal Trade
Commission (“FTC”) against First Alliance for violations of
federal lending laws. In exchange for the amount to be paid
out to a redress fund administered by the FTC, First
Alliance was discharged of further liability, such that the
settlement had the effect of ending all litigation against
First Alliance. Lehman was not a party to that settlement,
but as will be discussed below, infra at 19273-79, the
terms of the settlement affected the amount of damages for
which Lehman was held liable to the Borrower class.

B. Lehman`s Relationship with First Alliance

First Alliance`s business model was to originate mortgages
to consumer borrowers and then pledge them to a secondary
lender such as an investment bank or other financial
institution in return for a loan under a revolving line of
credit. As First Alliance generated mortgages, it would
draw down on that line of credit to fund the mortgages until
it had funded approximately $100 million in loans. When its
loan volume reached that point, First Alliance would issue
bonds or notes to public investors that were secured by the
repayment stream from the mortgage loans. The
securitization process would be underwritten by the
investment bank, and First Alliance would simultaneously
repay the credit line with part of the proceeds from the
sales of the bonds and notes. When First Alliance repaid
its credit line, the investment bank released its lien.

Under this revolving credit system, the secondary lender
provided both the credit facility, which First Alliance
used to fund the consumer mortgage loans, and underwriting
services for First Alliance`s public equity asset-backed
securitizations. The securitization process made possible a
constant flow of money to First Alliance, whereby the
mortgage company was able to convert a long-term revenue
stream from the repayment of the mortgage loans to current
income and to capital with which to fund more loans.
Meanwhile, the secondary lender profited from interest and
fees as the credit line was repaid as well as from fees
earned for underwriting the securitizations.

Throughout the 1990`s, First Alliance was financed by a
number of warehouse lenders, including other large
financial firms similar to Lehman. Lehman was interested in
obtaining some or all of that business. In contemplation of
doing business with First Alliance, Lehman conducted an
inquiry into the company in 1995. Lehman`s investigation
revealed that First Alliance had been accused of fraudulent
lending practices since at least 1994 and was the subject
of more litigation than any other non-bankrupt firm in the
sector. Internal reports contained unfavorable descriptions
of First Alliance`s business practices, including
references to unethical practices and a disturbing record
of loans generated to senior citizens. Nevertheless, in
1996 Lehman agreed to extend First Alliance a $25 million
warehouse line of credit. During 1996 and 1997, Lehman
co-managed four asset-backed securitization transactions
for First Alliance.

The mounting scrutiny and litigation against First Alliance
caused alarm among some of its other lenders. By the end of
1998, First Alliance`s other main lenders had withdrawn all
funding, due in part to the potential liability facing
First Alliance. When these other lenders withdrew
financing, Lehman stepped forward to provide a $150 million
credit line and became First Alliance`s sole source of
warehouse funding and underwriting.

The Lehman credit facility was renewed in 1999. According
to the terms of their agreement, Lehman made secured loans
to First Alliance by advancing 95 percent of the value of
the mortgages First Alliance pledged as collateral. The
agreement required First Alliance to provide quarterly
financial statements, as well as to provide certification
that it was in compliance with the terms and conditions of
the agreement during the relevant period. First Alliance
kept Lehman informed of its pending litigation, and from
time to time during 1999 and 2000, Lehman retained the
Clayton Group, a company that specialized in analyzing
loans in order to deter-mine compliance with regulations, to
examine loans generated by First Alliance.

Between 1998 and 2000, First Alliance borrowed roughly $500
million from Lehman pursuant to its warehouse line of
credit. When First Alliance declared bankruptcy in 2000,
approximately $77 million borrowed from Lehman`s ware-house
credit line remained outstanding, secured by First Alliance
mortgages. During the course of the bankruptcy proceedings,
Lehman was paid this principal amount plus interest
— payments the Trustee claims on appeal were made in
error.

C. The Consolidated Actions

Two separate but largely overlapping actions that were
consolidated by the district court are the subject of this
appeal: a tort action brought by a class of First Alliance
Borrowers and a bankruptcy action brought by the
liquidating Trustee of the First Alliance estate.

The district court certified a class consisting of all
persons who had obtained First Alliance mortgage loans from
May 1, 1996, through March 31, 2000, which were used as
collateral for First Alliance`s warehouse credit line with
Lehman or were securitized in transactions underwritten by
Lehman. The Borrowers obtained class certification on the
basis that First Alliance had allegedly engaged in a
uniform and systematic fraud against those who made up the
class, and that Lehman was liable to them for aiding and
abetting this fraud under California tort law and under
California`s Unfair Competition Law (“UCL”), Cal. Bus. &
Prof. Code § 17200. The basis of Lehman`s liability
under the tort and UCL claims was that when Lehman agreed
to provide the financing for First Alliance`s mortgage
business, Lehman did so knowing that First Alliance loans
were originated through deceptive sales procedures, and
that without Lehman`s financing, First Alliance would not
have been able to continue to fund its fraudulently
obtained loans.

The Trustee`s action sought to subordinate, for purposes of
bankruptcy distribution and based upon equitable
principles, Lehman`s $77 million secured claim to the
liquidated assets of the estate to the claims of First
Alliance`s general unsecured creditors harmed by its
fraudulent business practices. The Trustee`s action also
sought to recover about $400 million that had previously
been paid to Lehman pursuant to the financing agreement,
which was characterized as part of First Alliance`s fraud
on its consumer borrowers.

The district court consolidated the adversary bankruptcy
proceeding against Lehman with the proposed class action.
The remedies sought by the Trustee and the legal theories
upon which they are based are somewhat distinct from those
aspects of the Borrowers` fraud claim, but the two actions
against Lehman overlap in important ways. The parties in
interest represented by the Trustee in the bankruptcy action
include over 4,000 individual consumer borrowers allegedly
defrauded by First Alliance — a group that includes
the Borrowers who make up the class of plaintiffs in the
fraud action. Both actions rest on the premise that
Lehman`s financial relationship with First Alliance was a
component of First Alliance`s fraudulent scheme. The same
fraudulent enterprise that the Borrowers claim tainted
Lehman`s secondary lending to First Alliance is what both
the Borrowers and the Trustee claim compels subordination
of Lehman`s bankruptcy claims and rescission of payments
made to Lehman pursuant to the financing agreement.

The Borrowers` aiding and abetting claims against Lehman
were tried to a jury. As reported in its special verdict
form, the jury found that First Alliance had systematically
committed fraud on the class of Borrowers using a
standardized sales presentation, and that Lehman was liable
under California law for aiding and abetting First Alliance
in a fraudulent lending scheme. Applying the terms of the
previously approved settlement between First Alliance and
the FTC (discussed in more detail below, see infra section
II.G at 19274-79), the court asked the jury to calculate
the total damages for the Borrowers and to determine the
percentage of that total for which Lehman was responsible.
The jury calculated the total damages award to be
$50,913,928 and determined that Lehman was responsible for
10 percent of that amount. Accordingly, the court entered a
judgment against Lehman for $5,091,392.80. This damages
award did not include punitive damages or damages under the
UCL, as the district court had granted Lehman`s motions for
summary judgment on those claims prior to the jury trial.

Lehman appeals the judgment on several grounds. Lehman
argues that the Borrowers did not prove systematic fraud on
a class-wide basis, and further that the jury was
improperly instructed on the elements of aiding and
abetting fraud, which Lehman claims requires a finding of
specific intent. Lehman also takes issue with two
evidentiary rulings made during trial, which Lehman insists
caused prejudice and necessitate a new trial. In addition,
Lehman challenges the damages calculation, arguing that it
was based on an improper theory of damages and that the
jury was erroneously instructed.

The Borrowers cross-appeal, finding fault with the court`s
apportionment of damages based on the percentage of
liability. The apportionment of damages was made pursuant
to the “judgment reduction” clause or “Bar Order” in the
previously-approved settlement agreement between the
plaintiffs [fn2] and First Alliance, which extinguished all
non-settling defendants` rights to indemnity or contribution
from First Alliance (discussed fully below, see infra
section II.G at 19274-79). The Borrowers claim that this
settlement agreement did not apply to their aiding and
abetting action against Lehman. The Borrowers also appeal
the court`s summary judgment order on their UCL and
punitive damages claims.

The Trustee`s equitable subordination and fraudulent
transfer claims were tried to the bench, and the district
court denied those claims. The court made findings of fact
that echoed the jury`s determination that Lehman`s conduct
amounted to aiding and abetting fraud, but it concluded
that equitable subordination and fraudulent transfer
rescission were not appropriate remedies. 298 B.R. at
665-70. Regarding the Trustee`s claim for equitable
subordination, the court found that Lehman`s conduct did
not deplete or otherwise adversely impact First Alliance`s
assets, was not related to the acquisition or assertion of
its secured claim against the First Alliance estate, and
did not amount to gross or egregious misconduct that shocks
the conscience of the court. Likewise, the court found that
First Alliance`s payments to Lehman were not fraudulent
transfers under California law and the Bankruptcy Code. Id.
The Trustee appeals both of these holdings.

We consider these issues in turn below, and our conclusions
may be briefly summarized as follows. Sufficient evidence
supported the allegation that First Alliance committed
fraud on a class-wide basis through a common course of
conduct, so class treatment of the Borrowers` claims
against Lehman was proper. Aiding and abetting fraud under
California law requires a finding of “actual knowledge” and
“substantial assistance.” There was sufficient evidence of
such knowledge and assistance to support the jury`s verdict
against Lehman. The district court properly denied relief
on Borrowers` claims against Lehman under California`s UCL,
because the equitable remedies available under that statute
were not appropriate here. The district court properly
concluded that punitive damages against Lehman were not
warranted because the record did not support a finding of
intent or otherwise “despicable” conduct on the part of
Lehman required to justify such an award. No erroneous
evidentiary rulings prejudiced Lehman such that a new trial
is needed. Equitable subordination of Lehman`s claims to
the First Alliance bankruptcy proceedings was not an
appropriate remedy, nor was setting aside payments made to
Lehman as fraudulent transfers warranted. We therefore
affirm all of the district court`s orders with respect to
these issues on appeal.

We agree with Lehman, however, that the damages calculation
by the jury was based in part on an incorrect “benefit of
the bargain” theory of damages and must be set aside to
allow for a proper calculation of “out of pocket” damages
apportioned based on responsibility, according to the terms
of the settlement agreement. Therefore, the denial of
Lehman`s motion for remittur or a new trial to recalculate
damages was error. On that claim, we reverse and remand for
further proceedings.

II. DISCUSSION

A. Class Treatment

Lehman`s attack on the judgment begins with the predicate
finding that the Borrowers were victims of a class-wide
fraud perpetrated by First Alliance. According to Lehman,
it was error for the district court to certify the class of
borrowers in the first place and further error to deny
Lehman`s motions for judgment as a matter of law and for a
new trial on the grounds that the Borrowers failed to prove
fraud on a class-wide basis during trial. Lehman`s
contention that the Borrowers failed to prove fraud on a
class-wide basis raises questions of law and fact: what
degree of commonality must exist among the
misrepresentations made to borrowers to support class
treatment in federal court and a class-wide finding of
fraud under California law are matters of law; whether such
similar misrepresentations were in fact made by First
Alliance and justifiably relied upon by borrowers on a
class-wide basis are factual determinations. We address each
question in turn.

1. Degree of uniformity among misrepresentations: common
course of conduct standard

The required degree of uniformity among misrepresentations
in a class action for fraud is a question of law which we
review de novo. See Torres-Lopez v. May, 111 F.3d 633, 638
(9th Cir. 1997). Lehman argues that for the fraud claim to
have been properly tried on a class basis, the Borrowers
were required to demonstrate that First Alliance`s alleged
misrepresentations were conveyed to borrowers in a uniform
manner and that the uniform misrepresentations came
directly from the written, standardized sales pitch.
According to Lehman, the Borrowers` failure to make these
showings prior to class certification or during trial made
class treatment inappropriate in the first place and the
class-wide verdict erroneous as a matter of law. Lehman
essentially asks us to hold that in order for the jury
finding to stand, the misrepresentation at the heart of the
class-wide fraud finding must have been a direct quote from
the “Track,” repeated in a verbatim fashion to each member
of the class. This we decline to do, for such a degree of
commonality is not required.

The familiar federal rule for class certification requires
that “there are questions of law or fact common to the
class.” Fed.R.Civ.P. 23(a)(2). When the modern class action
rule was adopted, it was made clear that “common” did not
require complete congruence. The Advisory Committee on Rule
23 considered the function of the class action mechanism in
the context of a fraud case and explained that while a case
may be unsuited for class treatment “if there was material
variation in the representations made or in the kinds or
degrees of reliance by the persons to whom they were
addressed,” a “fraud perpetrated on numerous persons by the
use of similar misrepresentations may be an appealing
situation for a class action . . . .” Fed.R.Civ.P. 23,
Advisory Committee Notes to 1966 Amendments, Subdivision
(b)(3); see also 39 F.R.D. 69, 103 (1966). While some other
courts have adopted somewhat different standards in
identifying the degree of factual commonality required in
the misrepresentations to class members in order to hold a
defendant liable for class-wide fraud, [fn3] this court has
followed an approach that favors class treatment of fraud
claims stemming from a “common course of conduct.” See
Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir. 1975)
(“Confronted with a class of purchasers allegedly defrauded
over a period of time by similar misrepresentations, courts
have taken the common sense approach that the class is
united by a common interest in determining whether a
defendant`s course of conduct is in its broad outlines
actionable, which is not defeated by slight differences in
class members` positions”); see also Harris v. Palm Springs
Alpine Estates, Inc., 329 F.2d 909, 914 (9th Cir. 1964).

Class treatment has been permitted in fraud cases where, as
in this case, a standardized sales pitch is employed. In In
re American Continental Corp./Lincoln Savings & Loan
Securities Litigation, 140 F.R.D. 425 (D. Ariz. 1992), the
court correctly rejected a “talismanic rule that a class
action may not be maintained where a fraud is consummated
principally through oral misrepresentations, unless those
representations are all but identical,” observing that such
a strict standard overlooks the design and intent of Rule
23. Id. at 430. Lincoln Savings involved a scheme that
included, among other things, the sale of debentures to
individual investors who relied on oral representations of
bond salespersons who in turn had received from defendants
fraudulent information about the value of the bonds. The
Lincoln Savings court focused on the evidence of a
“centrally orchestrated strategy” in finding that the
“center of gravity of the fraud transcends the specific
details of oral communications.” Id. at 430-31. As the
court explained:

[T]he gravamen of the alleged fraud is not limited to the
specific misrepresentations made to bond purchasers. . . .
The exact wording of the oral misrepresentations,
therefore, is not the predominant issue. It is the
underlying scheme which demands attention. Each plaintiff
is similarly situated with respect to it, and it would
be folly to force each bond purchaser to prove the nucleus
of the alleged fraud again and again.

Id. at 431; see also Schaefer v. Overland Express Family of
Funds, 169 F.R.D. 124, 129 (S.D. Cal. 1996) (citing Lincoln
Savings for the proposition that representations made to
brokers or salesmen which are intended to be communicated
to investors are sufficient to warrant class standing, even
where the actual representations to individuals varied).
The Borrowers` allegations of First Alliance`s fraud fit
comfortably within the standard for class treatment.

2. The class-wide fraud finding is supported by the
evidence

Turning to the factual findings made by the jury, we review
a denial of a motion for judgment as a matter of law de
novo, Hangarter v. Provident Life & Accident Ins. Co., 373
F.3d 998, 1005 (9th Cir. 2004), and a district court`s
denial of a motion for new trial for abuse of discretion.
Navellier v. Sletten, 262 F.3d 923, 948 (9th Cir. 2001).
Even under the de novo standard, the court must “draw all
reasonable inferences in favor of the nonmoving party,
keeping in mind that credibility determinations, the
weighing of the evidence, and the drawing of legitimate
inferences from the facts are jury functions, not those of
a judge.” Hangarter, 373 F.3d at 1005 (internal quotation
marks and citations omitted). Judgment as a matter of law
should be granted only if the verdict is “against the great
weight of the evidence, or it is quite clear that the jury
has reached a seriously erroneous result.” Id. (internal
citations omitted). The jury concluded that First Alliance
had committed systemic fraud on a class-wide basis, and the
district judge did not find this conclusion to be
erroneous.

The evidence in this case supports the finding by the jury
that there was, in fact, a centrally-orchestrated scheme to
mislead borrowers through a standardized protocol the sales
agents were carefully trained to perform, which resulted in
a large class of borrowers entering into loan agreements
they would not have entered had they known the true terms.
We note in particular the standardized training program for
sales agents, which included a script that was required to
be memorized and strict adherence to a specific method of
hiding information and misleading borrowers, discussed in
the district court`s separate findings of fact at 298 B.R.
at 656-58. The record shows, for instance, that loan
officers were trained to misrepresent the monthly payment
on the loan to make it appear lower than the borrower`s
prior mortgage payment, and when asked about points, to
falsely state that “all fees and costs have already been
computed into your monthly payment,” and then to
immediately redirect the borrower`s attention to another
document. That First Alliance`s fraudulent system of
inducing borrowers to agree to unconscionable loan terms
did not consist of a specifically-worded false statement
repeated to each and every borrower of the plaintiff class,
traceable to a specific directive in the Track, does not
make First Alliance immune to class-wide accountability.
The class action mechanism would be impotent if a defendant
could escape much of his potential liability for fraud by
simply altering the wording or format of his
misrepresentations across the class of victims.

Lehman also attempts to undermine the class-wide fraud
determination by focusing on the reliance element, arguing
that the borrowers could not have justifiably relied upon
oral misrepresentations when they signed documents that
contradicted those oral statements. The argument is that
the plain-tiffs should have known better than to rely on
their loan officers` misrepresentations, because the fine
print in their loan documents told “a different story.” But
it was by design that the borrowers did not understand that
the loan documents told a different story. The whole scheme
was built on inducing borrowers to sign documents without
really understanding the terms. As the district court
found, “First Alliance borrowers justifiably relied on the
representations of the loan officers in light of their
experience and knowledge in entering into the loan
transaction.” 298 B.R. at 668. We find unpersuasive in this
case the defense that plaintiffs should not have relied on
statements that were made with the fraudulent intent of
inducing reliance.

While the legal standards for class treatment of a fraud
action in federal court are governed by federal law, the
merits of the Borrowers` fraud claim are grounded in state
law. Therefore, whether or not a borrower`s reliance on
misrepresentations was justified in this case depends on
California law. To that end, the California Supreme Court
has instructed that “a misrepresentation may be the basis
of fraud if it was a substantial factor in inducing
plaintiff to act and . . . it need not be the sole cause of
damage.” Vasquez v. Superior Court of San Joaquin County,
484 P.2d 964, 973 n. 9 (Cal. 1971). First Alliance`s
misrepresentations were at least a substantial factor in
inducing the plaintiffs to enter loan agreements. We
conclude that the district court`s treatment of the fraud
claims was both legally and factually sound. The denial of
Lehman`s motions for judgment as a matter of law and for
new trial was proper.

B. Aiding and Abetting Fraud under California Law

Regarding the substantive elements of aiding and abetting
fraud, Lehman again mounts an attack on both legal and
factual grounds, arguing that the jury was not properly
instructed on the elements of aiding and abetting liability
under California law and that Lehman`s actions did not meet
the correct standard for imposing such liability. The jury
was instructed that in order to be liable for aiding and
abetting fraud, Lehman “had to have known of First
Alliance`s fraudulent acts . . . [and] had knowledge that
its actions would assist First Alliance in the commission
of the fraud,” and further that Lehman did in fact provide
substantial assistance to First Alliance. Lehman claims
legal error in the district court`s refusal to instruct the
jury that specific intent, rather than mere knowledge, was
required. Lehman also claims legal error in the district
court`s denial of its motion for judgment as a matter of
law. That motion argued that the Borrowers failed to prove
substantial assistance. Again, we conclude that the district
court properly determined the law and that sufficient
evidence supported the verdict.

1. Actual knowledge standard for aiding and abetting under
California tort law

Where a party claims that the trial court misstated the
elements of a cause of action, the rejection of a proposed
jury instruction is reviewed de novo. See Ostad v. Oregon
Health Sciences Univ., 327 F.3d 876, 883 (9th Cir. 2003).
Although the California decisions on this subject may not
be entirely consistent, we agree with the district court
that aiding and abetting liability under California law, as
applied by the California state courts, requires a finding
of actual knowledge, not specific intent. See Vestar Dev.
II, LLC v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir.
2001) (instructing that “[w]hen interpreting state law . .
. a federal court must predict how the highest state court
would decide the issue” and that “where there is no
convincing evidence that the state supreme court would
decide differently, a federal court is obligated to follow
the decisions of the state`s intermediate appellate
courts”). Therefore, the jury was properly instructed.

The California Court of Appeal recently had occasion to
articulate the proper standard for imposing liability for
aiding and abetting a tort. In Casey v. U.S. Bank National
Assn., 26 Cal. Rptr. 3d 401, 405 (Cal.Ct.App. 2005), the
court acknowledged that “California has adopted the common
law rule” that “[l]iability may . . . be imposed on one who
aids and abets the commission of an intentional tort if the
person . . . knows the other`s conduct constitutes a breach
of a duty and gives substantial assistance or encouragement
to the other to so act.” (emphasis added) (quoting Fiol v.
Doellstedt, 58 Cal. Rptr. 2d 308, 312 (Cal.Ct.App. 1996));
see also River Colony Estates Gen. P`ship v. Bayview
Financial Trading Group, Inc., 287 F. Supp. 2d 1213, 1225
(S.D. Cal. 2003) (“A party can be liable for aiding and
abetting an intentional tort if . . . an individual is
aware that the other`s conduct constitutes a breach of duty
and provides substantial assistance or encouragement to the
other to so act.”); Lomita Land & Water Co. v. Robinson, 97
P. 10, 15 (Cal. 1908) (“The words `aid and abet` as thus
used have a well-understood meaning, and may fairly be
construed to imply an intentional participation with
knowledge of the object to be attained.”) (emphasis added).
The court in Casey specified that to satisfy the knowledge
prong, the defendant must have “actual knowledge of the
specific primary wrong the defendant substantially
assisted.” 26 Cal. Rptr. 3d at 406.[fn4] We apply this
standard to the Borrowers` claims.

2. Lehman`s actual knowledge of First Alliance`s fraud

The district court denied Lehman`s motion for judgment as a
matter of law, rejecting Lehman`s argument that the
evidence was insufficient to establish Lehman`s actual
knowledge of First Alliance`s fraud, an argument Lehman
pursues on appeal. As noted earlier, denial of judgment as
a matter of law is reviewed de novo, but the judgment should
be reversed only if the evidence, construed in the light
most favorable to the nonmoving party, permits only one
reasonable conclusion, and that conclusion is contrary to
that of the jury. Hangarter, 373 F.3d at 1005; see also
Forrett v. Richardson, 112 F.3d 416, 419 (9th Cir. 1997),
cert. denied, 523 U.S. 1049 (1998). While the evidence
supporting Lehman`s “actual knowledge” is not overwhelming,
deference must be accorded the jury`s factual findings at
this stage of review. It cannot be said that no reasonable
interpretation of the record would lead to a finding of
actual knowledge.

The jury found that Lehman had knowledge of First
Alliance`s alleged fraud and had a role in furthering the
fraud during the period between 1998 and 2000.[fn5] Among
other evidence in the record, the Borrowers highlighted the
facts that throughout its investigations into First
Alliance, Lehman received reports that detailed the
fraudulent practices in which First Alliance was engaged,
and that in one report, a Lehman officer noted his concern
that if First Alliance “does not change its business
practices, it will not survive scrutiny.” That same
evaluation recounted that First Alliance “does not have the
clear-cut defenses that the management believes” and that
“at the very least, this is a violation of the spirit of
the Truth in Lending Act.” It was not unreasonable for the
jury to rely upon these evaluations in concluding that
Lehman had actual knowledge of First Alliance`s fraudulent
loan origination procedures. Therefore, Lehman`s request
for judgment as a matter of law based on this claim must
fail.

3. Lehman`s substantial assistance of First Alliance`s
fraudulent lending scheme

Lehman also appeals the denial of its motion for judgment
as a matter of law on the ground that plaintiffs failed to
prove the second prong of the aiding and abetting test,
that Lehman substantially assisted First Alliance`s fraud.
We employ the same de novo standard of review to this
element of Lehman`s motion for judgment as a matter of law
as we did to the “actual knowledge” prong, see Forrett, 112
F.3d at 419, and we likewise conclude that the jury`s
finding that Lehman substantially assisted First Alliance`s
fraudulent lending practices should not be disturbed.

As was true of the “actual knowledge” prong of aiding and
abetting under California law, the definition of
“substantial assistance” under California law is not
entirely clear. See Casey, 26 Cal. Rptr. 3d at 405-406
(finding no California cases directly addressing the
question of what constitutes substantial assistance).
Against such a backdrop, we again follow Casey`s lead in
holding that ” `ordinary business transactions` a bank
performs for a customer can satisfy the substantial
assistance element of an aiding and abetting claim if the
bank actually knew those transactions were assisting the
customer in committing a specific tort. Knowledge is the
crucial element.” Casey, 26 Cal. Rptr. 3d at 406.

It appears that the jury found, as did the district court
(298 B.R. at 688), that Lehman satisfied all of First
Alliance`s financing needs and, after other investment
banks stopped doing business with First Alliance, kept
First Alliance in business, knowing that its financial
difficulties stemmed directly and indirectly from
litigation over its dubious lending practices. That was
enough to conclude that Lehman was providing the requisite
substantial assistance. Lehman admits that it knowingly
provided “significant assistance” to First Alliance`s
business, but distinguishes that from providing substantial
assistance to fraud. In a situation where a company`s whole
business is built like a house of cards on a fraudulent
enterprise, this is a distinction without a difference. The
jury was not precluded as a matter of law from finding that
Lehman substantially assisted First Alliance in its fraud.

C. California Unfair Competition Law

In addition to their claim of common law aiding and
abetting fraud, the Borrowers brought a companion claim
against Lehman under California`s UCL, Cal. Bus. & Prof.
Code § 17200. The district court granted summary
judgment in favor of Lehman on the ground that Lehman did
not person-ally participate in the fraud perpetrated by
First Alliance. The Borrowers appeal the court`s grant of
summary judgment on this claim, and we affirm, though on
different grounds. See In re Gulino, 779 F.2d 546, 552 (9th
Cir. 1985) (recognizing that the appellate court can affirm
the judgment below on any basis fairly supported by the
record). The court of appeals reviews a grant of summary
judgment de novo. United States v. City of Tacoma, 332 F.3d
574, 578 (9th Cir. 2003). We must determine whether the
district court correctly applied the relevant substantive
law. Roach v. Mail Handlers Benefit Plan, 298 F.3d 847, 849
(9th Cir. 2002).

Section 17200 creates a cause of action for an “unlawful,
unfair or fraudulent business act or practice.” Its
coverage has been described as “sweeping, embracing
anything that can properly be called a business practice
and at the same time is forbidden by law.” CelTech
Communs., Inc. v. L.A. Cellular Tel. Co., 83 Cal. Rptr. 2d
548, 560 (Cal. 1999) (internal quotation marks and
citations omitted). A practice may be “deemed unfair even
if not specifically proscribed by some other law.” Id. at
561. The statute prohibits wrongful business conduct in
whatever context such activity might occur. The standard is
intentionally broad and allows courts maximum discretion to
prohibit new schemes to defraud. Searle v. Wyndham Int`l,
Inc., 126 Cal Rptr. 2d 231, 235-36 (Cal.Ct.App. 2002).

The district court granted summary judgment in favor of
Lehman on the ground that “the key to extending liability
pursuant to an aiding and abetting theory under section
17200 is the degree to which the alleged aider and abettor
participated in and exerted control over the underlying
unfair act,” citing Emery v. Visa International Service
Association, 116 Cal. Rptr. 2d 25, 33, (Cal.Ct.App. 2002),
People v. Toomey, 203 Cal. Rptr. 642, 650-55 (Cal.Ct.App.
1984), and People v. Bestline Products, Inc., 132 Cal.
Rptr. 767, 792 (Cal.Ct.App. 1976). The district court read
these cases as narrowing the scope of permissible claims
predicated on aiding and abetting liability to those in
which a defendant had “personal participation” in and
“unbridled control” over the practices found to violate the
code. Applying this narrow interpretation, the court found
that no issue of triable fact could establish Lehman`s
liability under this section.

There is reason to think that the statute is broader than
the district court interpreted it to be [fn6] and that it
might indeed encompass the Borrowers` claims against
Lehman. The breadth of section 17200`s coverage need not be
delineated to decide this issue, however, as the remedies
available under the statute are narrowly limited and do not
include the type of damages the Borrowers seek.

Even if Lehman`s conduct fits within the type identified by
the UCL, the Borrowers are not eligible for the remedies
available under section 17200, which are limited to forms
of equitable relief. See In re Napster, Inc. Copyright
Litigation, 354 F. Supp. 2d 1113, 1126 (N.D. Cal. 2005)
(noting that an unfair competition action is equitable in
nature, and thus damages are not available to private
plaintiffs). We therefore affirm summary judgment against
the Borrowers on their claims under the UCL.

In Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th
1134, 1152 (2003), the California Supreme Court discussed
the available equitable remedies under the UCL, which
“allows any consumer to combat unfair competition by
seeking an injunction against unfair business practices.
Actual direct victims of unfair competition may obtain
restitution as well.” See also Madrid v. Perot Systems
Corp., 30 Cal. Rptr. 3d 210, 218 (Cal.Ct.App. 2005) (“the
UCL limits the remedies available for UCL violations to
restitution and injunctive relief”). In the context of the
UCL, “restitution” is meant to restore the status quo by
returning to the plaintiff funds in which he or she has an
ownership interest, and is so limited. Id. at 219;
Napster, 354 F. Supp. 2d at 1126; see also Korea Supply, 29
Cal. 4th at 1144-45. “[R]estitutionary awards encompass
quantifiable sums one person owes to another.” Cortez v.
Purolator Air Filtration Products Co., 96 Cal. Rptr. 2d
518, 529 (Cal. 2000).

In Madrid, 30 Cal. Rptr. 3d at 213-16, plaintiff brought a
class action suit on behalf of California electricity
customers against parties involved in restructuring the
state`s electricity market, who allegedly employed
fraudulent means to manipulate market prices of
electricity. Plaintiff sought “disgorgement of all
ill-gotten monies but did not allege the existence of any
ill-gotten monies other than the difference in electricity
rates in excess of what customers would have paid in the
absence of defendants` conduct.” Id. at 220 (internal
quotation marks omitted). The Madrid court rejected
plaintiff`s request that defendants be ordered to “simply
return to plaintiff exactly what was wrongfully taken, plus
any profits made,” explaining that “plaintiff relies on
general principles of the law of remedies, e.g., that
restitution in the broad sense focuses on the defendant`s
unjust enrichment, rather than the plaintiff`s loss.
Plaintiff`s generalization fails to acknowledge the
specific limitation applicable in the UCL context —
that restitution means the return of money to those persons
from whom it was taken or who had an ownership interest in
it.” Id. at 221. See also United States v. Sequel
Contractors, Inc., 402 F. Supp. 2d 1142, 1156 (C.D. Cal.
2005) (holding that plaintiff failed to state a claim for
relief under the UCL because it had not alleged any facts
supporting a finding that it had an ownership interest in
property or funds in the defendant`s possession, and
emphasizing that plaintiff sought “the same monetary relief
in its UCL claim that it seeks in its breach of contract
and negligence claims” which are “damages, not
restitution”).

Like the plaintiffs in Madrid and Sequel Contractors, the
Borrowers in this case cast their claim under section 17200
as one for equitable relief by asking the court to disgorge
Lehman`s “ill-gotten gains,” asserting that Lehman
unlawfully acquired money and property directly and
indirectly from the Borrowers and has been unjustly
enriched at their expense. They do not, however, specify the
amount of these “ill-gotten gains” to which they have an
actual owner-ship interest. Theoretically, [fn7] the money
in which the borrowers purport to have an ownership
interest is the money that flowed from First Alliance to
Lehman, in the form of bundled mortgage payments to repay
the capital line, and to the bond-holders to whom Lehman
sold the mortgage-backed securities. In order to draw the
necessary connection between the Borrowers` ownership
interest and these funds, however, the court would have to
assume that all of the money that flowed to Lehman pursuant
to its relationship with First Alliance was taken directly
from the Borrowers and should not have been. There is no
reason to believe, nor do the Borrowers argue, that all of
the money that went to First Alliance was improper. Rather,
the basis of the fraud claim against First Alliance, for
which Lehman is liable for aiding and abetting and upon
which the Borrowers` UCL claim is based, is that Borrowers
were defrauded because of hidden fees and interest rates.
Per-haps many class members would not have agreed to any
mortgage at all unless they had gotten the terms they
believed they had with First Alliance, but there is no
basis to conclude that every single dollar that ultimately
flowed to Lehman was “ill-gotten.”

The prayer for equitable relief which the Borrowers put
forth here is more akin to a claim for “nonrestitutionary
disgorgement,” which the California Supreme Court in Korea
Supply defined to include orders to compel the surrender of
all profits earned as a result of unfair business practice
regardless of whether those profits represent money taken
directly from persons who were victims of the unfair
practice. Korea Supply, 131 Cal. Rptr. 2d at 38. Holding
that such a remedy is not available under the UCL, the
Korea Supply court explained that the “overarching
legislative concern was to provide a streamlined procedure
for the prevention of ongoing or threatened acts of unfair
competition. Because of this objective, the remedies
provided are limited.” Id. at 43 (internal quotation marks
and citations omitted); see also Napster, 354 F. Supp. 2d
at 1126-27 (following Korea Supply); Tomlinson v. Indymac
Bank, F.S.B., 359 F. Supp. 2d 891, 893 (C.D. Cal. 2005);
National Rural Telecomms. Coop. v. Directv, Inc., 319 F.
Supp. 2d 1059, 1091 (C.D. Cal. 2003). The remedies provided
under the UCL do not include the monetary relief Borrowers
seek. The district court`s grant of summary judgment in
favor of Lehman on the Borrowers` section 17200 claims is
there-fore affirmed.

D. Punitive Damages

The district court dispensed with the Borrowers` attempt to
recover punitive damages from Lehman by granting Lehman`s
motion for summary judgment on the issue. The Borrowers
appeal the order, claiming that the court improperly
weighed the evidence, rather than viewing it in the light
most favorable to the plaintiffs. Upon de novo review,
viewing the evidence in the light most favorable to the
nonmoving party, we affirm.

Under California law, punitive damages are appropriate
where a plaintiff establishes by clear and convincing
evidence that the defendant is guilty of (1) fraud, (2)
oppression or (3) malice. Cal. Civ. Code § 3294(a).
According to the definitions provided in section 3294(c), a
plaintiff may not recover punitive damages unless the
defendant acted with intent or engaged in “despicable
conduct.” [fn8] “The adjective `despicable` connotes
conduct that is so vile, base, contemptible, miserable,
wretched or loathsome that it would be looked down upon and
despised by ordinary decent people.” Lackner v. North, 37
Cal. Rptr. 3d 863, 881 (Cal.Ct.App. 2006) (internal
quotation marks and citations omitted). While a defendant
may be liable for punitive damages based on “despicable”
conduct that merely involves a conscious disregard of the
rights and safety of others, rather than an affirmative
intent to injure, there are “few situations in which claims
for punitive damages are predicated on . . . conscious
disregard of the rights or safety of others and in which no
intentional torts are alleged.” Central Pathology Serv.
Med. Clinic, Inc. v. Superior Court, 10 Cal. Rptr. 2d 208,
214 (Cal. 1992).

The district court found that the Borrowers could not prove
any facts that could meet the burden of evidence that
Lehman`s conduct amounted to fraud, malice or oppression
under California punitive damages law, and we conclude that
the district court did not err in making this
determination. Some limited weighing of the evidence is a
natural component of determining whether a jury could have
reasonably found punitive damages appropriate under the
heightened clear and convincing evidence standard. See,
e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254-55
(1986) (noting that in ruling on a summary judgment motion,
the district court takes this heightened evidentiary
standard into consideration). Moreover, viewing evidence in
a light most favorable to a non-moving party does not
require a district court to view only evidence that is
favorable to the non-moving party. See id. at 254 (“There
is no genuine issue if the evidence presented . . . is of
insufficient caliber or quantity to allow a rational finder
of fact to find” for the nonmoving party); see also
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 587 (1986) (“Where the record taken as a
whole could not lead a rational trier of fact to find for
the non-moving party, there is no `genuine issue for trial`
“) (citation omitted) (emphasis added).

The Borrowers presented the court with evidence to support
their allegations that Lehman lent First Alliance the
financing it needed in order to continue its business,
knowing that the business involved fraud. It was up to the
court to determine as a matter of law whether this
evidence, if proved, could permit a finding of “despicable
conduct” that could sup-port an award of punitive damages
under the California Civil Code. Lehman`s actual knowledge
of First Alliance`s fraud was based on discoveries of
questionable lending practices on the part of First
Alliance, made during due diligence. [fn9] The diligence
effort was a routine analysis and investigation of First
Alliance undertaken to determine whether providing
financial services to the company made good business sense.
That Lehman came upon red flags which were seemingly
ignored was enough to establish actual knowledge under the
California aiding and abetting standard, but not the intent
to injure or despicable conduct that punitive damages
requires. Considering the evidence in light of the punitive
damages standard, the district court explained that the
evidence showed, at best, that Lehman made a series of poor
decisions in providing lending and underwriting services to
First Alliance. Those decisions ultimately resulted in
liability under the Borrowers` aiding and abetting claim.
They did not create a ground on which to award punitive
damages. We affirm summary judgment in favor of Lehman
against the Borrowers` claim for punitive damages.

E. Evidentiary Rulings

Lehman claims that during the course of trial, the district
court made erroneous evidentiary rulings that prejudiced
its rights and provide a basis for the court to set aside
the verdict and order a new trial. Evidentiary rulings at
trial are reviewed for abuse of discretion. See United
States v. Merino-Balderrama, 146 F.3d 758, 761 (9th Cir.
1998). Such rulings will be reversed only if the error more
likely than not affected the verdict. See United States v.
Pang, 362 F.3d 1187, 1192 (9th Cir. 2004); Miller v.
Fairchild Indus., Inc., 885 F.2d 498, 513 (9th Cir. 1989).
Even where individual evidentiary rulings are considered
harmless errors, the “cumulative error” doctrine requires
the court to determine whether the cumulative effect of
harmless errors was enough to prejudice a party`s
substantial rights. United States v. de Cruz, 82 F.3d 856,
868 (9th Cir. 1996). “While a defendant is entitled to a
fair trial, he is not entitled to a perfect trial, for there
are no perfect trials.” United States v. Payne, 944 F.2d
1458, 1477 (9th Cir. 1991) (internal quotation marks
omitted). We see no reversible error in the evidentiary
rulings at issue.

The first evidentiary ruling Lehman contests is the
admission of testimony at trial from “undisclosed”
witnesses. These witnesses included borrowers and First
Alliance loan officers who were not specifically identified
in the initial disclosures made by the Borrowers pursuant
to Federal Rule of Civil Procedure 26(a)(1)(A), and not
identified in supplemental disclosures until after the
official close of discovery [fn10] (though still more than
60 days before trial began). Rule 26(a)(1)(A) provides that
a party must, without awaiting a discovery request, provide
to other parties the name and, if known, the address and
telephone number of each individual likely to have
discoverable information that the disclosing party may use
to support its claims. The Borrowers argue that they
complied with pretrial disclosure Rule 26(a)(3) and
therefore the disputed witness testimony was properly
admitted. Rule 26(a)(3) provides that “[i]n addition to the
disclosures required by Rule 26(a)(1) and (2), a party must
provide to other parties and promptly file with the court
the following information regarding the evidence that it
may present at trial . . . the name and, if not previously
provided, the address and telephone number of each witness,
separately identifying those whom the party expects to
present.” These disclosures must be made at least 30 days
prior to trial.

Even if Lehman is correct that the Borrowers should have
specifically identified in the discovery disclosures the
witnesses ultimately called to testify at trial, it is of
little consequence. The complete witness list was provided
to Lehman with ample time remaining under Rule 26(a)(3).
Moreover, as the district court emphasized, Lehman had
knowledge of the identities of the potential witnesses in
its possession without disclosure from the Borrowers. Even
had it been error for the district court to admit these
witnesses, there is nothing to suggest that Lehman was
significantly hampered in its ability to prepare for trial
or to examine these witnesses. We affirm the district
court`s ruling allowing testimony of witnesses not
initially disclosed in discovery.

Lehman`s other evidentiary objection is equally unavailing.
Prior to trial, the Borrowers obtained an order excluding
evidence of First Alliance`s settlement with the FTC.
During trial, however, in the course of questioning First
Alliance Chairman Brian Chisick, counsel for the Borrowers
asked Chisick about the injunction preventing him from ever
working in the mortgage lending business again, which was
part of First Alliance`s settlement with the FTC. The
district court sustained Lehman`s objection to this
questioning, but disagreed with Lehman that the reference
to the settlement having been made, the door had opened to
introduce other evidence pertaining to the settlement,
namely the monetary award paid to borrowers by First
Alliance. Lehman argues it suffered prejudice as a result
of being denied the chance to “tell its side of the story”
that borrowers had already received a damages settlement
from First Alliance, to “counterbalance the impression that
Lehman was the sole source of restitution for Class
members.”

Denying the jury this information was not prejudicial
error, particularly in light of the fact that the damages
settlement was fully taken into account, albeit in a
different manner. In addition to the injunctive and
monetary components of First Alliance`s settlement with the
FTC, a Bar Order was established, which disposed of any
further liability on the part of First Alliance for these
claims. The Bar Order also limited the liability of other
non-settling defendants, including Lehman, to an amount
that could fairly be attributed to them alone, because
these defendants would be precluded from seeking any
contribution or indemnification from First Alliance. The
jury was ultimately instructed to apportion Lehman`s
liability according to its percentage of fault for the
total damages suffered by the Borrowers. Whether the Bar
Order was properly applied to limit the damages judgment
against Lehman is itself a source of contention in this
appeal, which we address below. For the purposes of
evaluating any prejudicial impact of excluding evidence of
the monetary settlement during the trial, we conclude that
any impression that Lehman was the sole source of
restitution for class members was sufficiently
counterbalanced by the application of the Bar Order. Thus
we find no error in the district court`s refusal to grant a
new trial based on prejudicial evidentiary rulings.

F. Erroneous Damages Calculation

Aside from the basis for the liability findings, Lehman
also takes issue with the damages verdict itself, and a
candid assessment of the jury`s calculations justifies
Lehman`s objection. Generally, a jury`s award of damages is
entitled to great deference, and should be upheld unless it
is “clearly not supported by the evidence” or “only based
on speculation or guesswork.” Los Angeles Memorial Coliseum
Comm`n v. National Football League, 791 F.2d 1356, 1360
(9th Cir. 1986) (citations omitted). This, however, appears
to be the rare case in which it is sufficiently certain
that the jury award was not based on proper consideration
of the evidence. Rather, the award was based on improperly
considered evidence, directly traceable to an error that
was cured too little, too late.

The proper measure of damages in fraud actions under
California law, as both parties at this point concede, is
“out-of-pocket” damages. These are based on what was paid
due to the fraud, as compared to what would have been paid
absent the fraud. As the California Court of Appeal
explained:

There are two measures of damages for fraud:
out-of-pocket and benefit-of-the-bargain. The
out-of-pocket measure restores a plaintiff to the
financial position he enjoyed prior to the fraudulent
transaction, awarding the difference in actual value
between what the plaintiff gave and what he received. The
benefit-of-the-bargain measure places a defrauded
plaintiff in the position he would have enjoyed had the
false representation been true, awarding him the
difference in value between what he actually received and
what he was fraudulently led to believe he would receive.
In fraud cases involving the purchase, sale or exchange
of property, the Legislature has expressly provided that
the out-of-pocket rather than the benefit-of-the-bargain
measure of damages should apply.

Fragale v. Faulkner, 1 Cal. Rptr. 3d 616, 621 (Cal.Ct.App.
2003) (citing Alliance Mortgage Co. v. Rothwell, 900 P.2d
601, 609 (Cal. 1995)) (internal quotation marks and
citations omitted). See also City Solutions, Inc. v. Clear
Channel Communications, Inc., 242 F. Supp. 2d 720, 726-32
(N.D. Cal. 2003), aff`d in part & rev`d in part, 365 F.3d
835 (9th Cir. 2004).

In this case, the out-of-pocket measure of the Borrowers`
damages meant the difference, if any, between the fees and
interest rates that First Alliance charged and those
another lender would have charged. If the jury found that a
number of plaintiffs would not have refinanced their
existing mortgage loans with any lender, absent the alleged
fraud, the relevant consideration was the points and fees
paid to First Alliance, as compared to plaintiffs`
situations under their existing mortgage loans.

The first set of instructions the jury received, prior to
the Borrowers` closing argument, included a damages
instruction that allowed plaintiffs to recover, “[i]n
addition to out-of-pocket loss[,] . . . any additional
damage arising from the transactions, including [but not
limited to] amounts actually and reasonably expended in
reliance on the fraud.” Such a measure of damages would
have entitled the Borrowers to recover the difference
between what they paid and what they thought they were
paying. The court later recognized, and both parties agreed,
that this instruction had been erroneous and that only
out-of-pocket damages are recoverable in this type of fraud
action. See City Solutions, 242 F. Supp. 2d at 726-32. As a
corrective measure, the court re-instructed the jury four
days later, after closing arguments and initial sub-mission
of the case to the jury. The court asked the jury to
“disregard the first reading of the instructions” since
there had been “a few agreed upon changes” and “without
highlighting what those [we]re” re-read all of the
instructions to the jury. The court did not specify which
instructions had been altered or corrected.

By the time the jury was re-instructed, the trial had
already been conducted by the Borrowers with an eye toward
proving damages on a benefit-of-the-bargain basis, to award
Borrowers the difference between what they paid and what
they thought they were paying. Borrowers offered expert
testimony as to how that total would be calculated,
suggesting a precise sum based on that theory: $85,906,994.
Lehman offered its own expert testimony on the applicable
“out-of-pocket” damages calculation, and the expert
identified $15,920,862 as the maximum appropriate sum.

Lehman argues — and the district court agreed
— that the jury simply averaged the figures provided
by the two damages experts. That they did this is beyond
doubt: their verdict represents the average of the two
figures to the dollar. The jury found that the amount of
loss was $50,913,928, or exactly half of the sum of the
figures provided by each party`s damages expert. As the
district court acknowledged, there is “no other plausible
explanation” for the amount calculated by the jury. Given
that one of the figures used in the averaging was based on
an incorrect damages calculation — the number
provided by Borrower`s expert witness premised on a
“benefit of the bargain” theory — this final award
cannot be said to be properly rooted in the evidence at
trial.

We recognize that the jury is not bound to accept the
bottom line provided by any particular damages expert, but
the jury is bound to follow the law. See Herron v. Southern
Pacific Co., 283 U.S. 91, 95 (1931) (“It is the duty of the
court to instruct the jury as to the law; and it is the
duty of the jury to follow the law, as it is laid down by
the court”). Having based the damages calculation in
substantial part on an improper theory of damages, which
the jury most certainly did, the jury did not follow the
law according to its instructions.

In denying Lehman`s motion for new trial or remittur, the
district court bent over backwards to find a potentially
valid basis in the record for the jury verdict, but that
rationale is obviously not tethered to the law or the facts
of the case. The court`s denial of Lehman`s motion for new
trial or remittur was an abuse of discretion. See Koon v.
United States, 518 U.S. 81, 100 (1996) (“A district court
by definition abuses its discretion when it makes an error
of law.”). The judgment must be reversed in part and
remanded for further proceedings on the proper calculation
of out-of-pocket damages.[fn11]

G. Application of FTC Settlement Bar Order

The Borrowers appeal the court`s apportionment of liability
in accordance with the Bar Order. The Bar Order, to which
we have already alluded, was a component of the
court-approved settlement agreement between First Alliance
and a national class of borrowers, several states`
attorneys general, the AARP, and the FTC. The settlement
agreement created an FTC-administered redress fund to
distribute proceeds from the First Alliance estate to First
Alliance borrowers and included an injunction barring
Lehman (and any other potential non-settling defendants)
from seeking indemnification and contribution from First
Alliance. Because Lehman`s rights were materially affected,
Lehman could have objected to the settlement, but it did not
do so because the parties agreed to limit Lehman`s
potential liability to its proportional share of
responsibility for the Class members` damages. The
settlement thus made indemnification or contribution from
First Alliance unnecessary.

The Bar Order specifically states that:

The amount of any verdict or judgment obtained against
any of the Non-Settling Defendants in any litigation
arising out of or relating to the business of [First
Alliance] shall be limited to the Non-Settling Defendants`
proportionate share of liability, i.e., their actual
percentage of liability for the amount of total damages
determined at trial, in accordance with [Franklin v.]
Kaypro [Corp., 884 F.2d 1222 (9th Cir. 1989)].

The district court enforced the Bar Order by instructing the
jury to determine the respective percentages of
responsibility as between First Alliance and Lehman. The
jury found Lehman to have been responsible for 10 percent
of the damages suffered by the Borrowers, and the court
entered judgment against Lehman for 10 percent of the total
damages found by the jury. The Borrowers filed a Rule 59(e)
motion to amend, seeking to overturn the district court`s
application of the Bar Order and hold Lehman liable for the
totality of the assessed damages. That motion was denied.
On appeal the Borrowers maintain that “this case concerns
an intentional tort for which only one party was accused,
tried and found liable: neither contribution nor indemnity
applies.” Therefore, Borrowers insist, application of the
Bar Order to reduce the damages judgment against Lehman was
error.

The Borrowers find fault with the court`s application of
the Bar Order in accordance with Franklin v. Kaypro Corp.,
884 F.2d 1222, 1231-32 (9th Cir. 1989), arguing that the
district court`s reliance on Kaypro was misplaced. The
Borrowers` argument here is entirely without merit.[fn12]
In Kaypro, this court concluded under federal common law
that a partial pre-trial settlement in a securities case,
pursuant to which non-settling defendants` rights to
contribution are satisfied and further contribution barred,
may be approved under Rule 23 if the liability of
non-settling defendants is limited to their actual
percentage of liability for the amount of total damages
determined at trial. Id. at 1231. The court explained that
this scheme satisfies the statutory goal of punishing each
wrong-doer, the equitable goal of limiting liability to
relative culpability, and the policy goal of encouraging
settlement. Id. Such a scheme also comports with the
equitable purpose of contribution, because the non-settling
defendants never pay more than they would if all parties
had gone to trial. Id.

The Borrowers attempt to distinguish this case from
Kaypro, which dealt directly with contribution rather than
indemnification. That attempt is misguided, because the
district court did not “apply” Kaypro as a legal precedent
to the facts of this dispute. Rather, the court looked to
Kaypro because the settlement agreement so dictated. Under
the explicit terms of the Bar Order, the amount of any
judgment against non-settling defendants is limited to
their proportion-ate share of liability “in accordance with
Kaypro.” Kaypro outlined a permissible proportionate
liability methodology under Rule 23. The structure it
prescribes for apportioning liability was adopted as a
contractual agreement by the parties to the settlement. It
was the Borrowers who bound themselves through the
settlement agreement to the apportionment scheme of Kaypro.
The district court evaluated the issue correctly,
recognizing that in exchange for the Bar Order, Lehman did
not challenge the good faith basis of the settlement. Now
the class of Borrowers wants to take back the consideration
tendered to Lehman in that compromise: the limitation of
liability to proportionate fault. The district court saw no
reason to do this. Neither do we.

The Borrowers also argue that the principles of
contribution and indemnity do not apply to intentional
torts under California law. It is true that, as a starting
rule, contribution and indemnity are generally not applied
to intentional tortfeasors who would shift responsibility
onto negligent tortfeasors. See, e.g., Allen v. Sundean,
186 Cal. Rptr. 863, 869 (Cal.Ct.App. 1982). Such a rule does
not get the Borrowers very far, how-ever, because the
present case does not fit into this framework for a number
of reasons. First, to the extent that aiding and abetting
is an “intentional tort,” it is only intentional in the
sense that the aider and abettor intends to take the
actions that aid and abet, not that the tortfeasor
specifically intends for his actions to result in the
fraudulent harm. [fn13] Second, Lehman is not seeking to
shift liability to a merely negligent tortfeasor, but
instead to another intentional tortfeasor, First Alliance,
which is indisputably the more culpable party.

As the district court concluded, California law does allow
for comparative equitable indemnification among joint
intentional tortfeasors. Baird v. Jones, 27 Cal. Rptr. 2d
232 (Cal.Ct.App. 1993). As the Baird court explained,
“there is little logic in prohibiting an intentional
tortfeasor from forcing another intentional tortfeasor to
bear his or her share of liability.” Id. at 238. The
Borrowers argue that Baird is not controlling because it
has never been explicitly adopted by the California Supreme
Court. While California`s highest court has not ruled on
the issue, federal district courts within California have
consistently relied on Baird to hold that an intentional
tortfeasor can seek indemnity from another intentional
tortfeasor. See City of Merced v. R.A. Fields, 997 F. Supp.
1326, 1337 (E. D. Cal. 1998); Don King Prods. v. Ferreira,
950 F. Supp. 286, 290 (E. D. Cal. 1996); Employers Ins. of
Wausau v. Musick, Peeler & Garrett, 948 F. Supp. 942, 945
(S.D. Cal. 1995). Baird and its progeny stand on solid
policy grounds as well. We do not have before us a
situation in which an innocent defendant assumes liability
for an intentional wrongdoer. Here, the primary and clearly
intentional wrongdoer (First Alliance) has indemnified the
secondary wrongdoer (Lehman) from any liability in excess
of its fault.

Nor can there be any doubt that Lehman and First Alliance
were joint tortfeasors for the purposes of Baird and
application of the Bar Order. The Borrowers rely on Nielson
v. Union Bank of California, 290 F. Supp. 2d 1101, 1135
(C.D. Cal. 2003), in which the court stated that aiders and
abettors are not held liable as joint tortfeasors for
committing the underlying tort. In that context, the court
was making the point that the aider and abettor can be held
liable without owing plaintiff the same duty as does the
primary violator, a rule vividly illustrated in the present
case. Moreover, “[j]oint tortfeasors may act in concert or
independently of one another,” and the focus of the inquiry
is on “the interrelated nature of the harm done.” Leko v.
Cornerstone Bldg. Inspection Serv., 103 Cal. Rptr. 2d 858,
863 (Cal.Ct.App. 2001) (citations omitted).

Here, Lehman is clearly being held liable for the same harm
for which the class plaintiffs have already obtained some
recovery through settlement: the damages claimed were the
higher refinancing costs charged by First Alliance, for
which First Alliance was liable because it misrepresented
the loan terms. Lehman is held liable for the same claimed
damages because it provided financial services to First
Alliance. The Borrowers` efforts to characterize Lehman as
the “lone intentional tortfeasor” are unavailing. We reject
the Borrowers` request that the court hold Lehman
responsible for 100 percent of the damages which the
Borrowers themselves went through great pains to prove were
caused by someone else.

The Borrowers` final theory upon which they hope to set
aside application of the Bar Order is that apportionment
under the settlement was an affirmative defense that Lehman
waived by not raising it in the pleadings. This argument is
frivolous. The Bar Order itself does not put such a
technical burden on non-settling defendants, and there was
no possibility for surprise on the part of the Borrowers
regarding this claim. Any argument to the contrary is
disingenuous, given that the Borrowers were a party to the
settlement and were specifically warned by the district
court (during discussion on the in limine order excluding
evidence of the settlement from trial) that any damages
award found against Lehman would be apportioned according
to the Bar Order. Without having to reach the merits of
Lehman`s responsive judicial estoppel claim, we conclude
that the district court was correct in holding the
Borrowers to the bargain which they made in the settlement.

H. Equitable subordination

Both the Borrowers and the Trustee sought to subordinate
Lehman`s secured claims to $77 million in outstanding loan
repayments to those of the unsecured creditors in the First
Alliance bankruptcy. Under Section 510(c) of the Bankruptcy
Code, a court may, based upon equitable considerations,
subordinate for purposes of distribution all or a part of a
claim or interest to all or part of another. 11 U.S.C.
§ 510(c). The district court`s decision to grant or
deny equitable relief is reviewed for abuse of discretion.
See Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d
1154, 1163 (9th Cir. 2001) (holding that when a district
court`s remedy takes the form of an equitable order, the
court reviews that order for an abuse of discretion).

The subordination of claims based on equitable
considerations generally requires three findings: “(1) that
the claimant engaged in some type of inequitable conduct,
(2) that the misconduct injured creditors or conferred
unfair advantage on the claimant, and (3) that
subordination would not be inconsistent with the Bankruptcy
Code.” Feder v. Lazar (In re Lazar), 83 F.3d 306, 309 (9th
Cir. 1996) (citing Benjamin v. Diamond (In re Mobile Steel
Co.), 563 F.2d 692, 699-700 (5th Cir. 1977)). Where
non-insider, non-fiduciary claims are involved, as is the
case here, the level of pleading and proof is elevated:
gross and egregious conduct will be required before a court
will equitably subordinate a claim. See In re Pacific
Express, Inc. 69 B.R. 112, 116 (B.A.P. 9th Cir. 1986) (“The
primary distinctions between subordinating the claims of
insiders versus those of non-insiders lie in the severity
of misconduct required to be shown, and the degree to which
the court will scrutinize the claimant`s actions toward the
debtor or its creditors. Where the claimant is a
non-insider, egregious conduct must be proven with
particularity.”) (citing Matter of Teltronics Servs., Inc.,
29 B.R. 139, 169 (Bkrtcy. E.D.N.Y. 1983)). Although
equitable subordination can apply to an ordinary creditor,
the circumstances are “few and far between.” ABF Capital
Mgmt. v. Kidder Peabody & Co., Inc. (In re Granite
Partners, L.P.), 210 B.R. 508, 515 (Bkrtcy. S.D.N.Y. 1997)
(collecting cases).

The Trustee based his claim to equitable relief on the
theory that by aiding and abetting First Alliance`s fraud,
Lehman`s actions increased the amount of creditors and
claims, thus depleting the pro rata share that each
creditor would have of the remaining assets. At first
blush, the Trustee`s argument has a certain allure, because
there is surely something “inequitable” in an abstract
sense about aiding and abetting fraud. Upon closer look,
the success of this argument requires us to treat the
standard for holding Lehman liable for aiding and abetting
First Alliance`s fraud (knowledge and substantial assistance
under California tort law) as a stand-in for inequitable
conduct under the test for equitable subordination of
bankruptcy claims. This we cannot do.

No authority supports the Trustee`s claim that
independently tortious conduct is “egregious” as a matter
of law. To be sure, courts in other cases have found
similar fact patterns to constitute inequitable conduct for
the purposes of Mobile Steel analysis. [fn14] But nothing
dictates that the court`s denial of equitable subordination
was an abuse of discretion. The Trustee insists that a
“fraud is a fraud, period,” but that is simply not the law,
neither in bankruptcy nor in tort. Cf. In re Mobile Steel,
563 F.2d at 699-700; Saunders v. Superior Court, 33 Cal.
Rptr. 2d 438, 446 (Cal.Ct.App. 1994) (outlining the elements
of equitable subordination claims and aiding and abetting
fraud claims, respectively; defining neither simply as
“fraud”).

We agree with the district court that Lehman`s activities
were not carried out in contemplation of the later-filed
First Alliance bankruptcy, and that Lehman`s conduct was
not a contributing factor to bringing about the bankruptcy
or determining the ordering of creditors to the bankruptcy
estate. Lehman did nothing to improve its status as a
creditor at the expense of any other creditor. 298 B.R. at
669. The district court properly found that Lehman`s
conduct did not amount to the kind of fraud meant to be
remedied by equitable subordination of bankruptcy claims.

Basing its ruling on the lack of inequitable conduct, the
district court did not need to reach the question of
whether the misconduct resulted in harm to other creditors
or conferred an unfair advantage on the claimant, nor do we
need to do so in order to resolve this appeal. Still, we
agree with the court`s limited findings that:

Lehman`s conduct did not deplete or otherwise adversely
impact First Alliance`s assets, nor was Lehman`s conduct
related to the acquisition or assertion of its secured
claim against the First Alliance estate. Instead, the
impact of Lehman`s conduct on First Alliance borrower
creditors is only tangentially related to the First
Alliance bankruptcy in that both Lehman and the borrowers
are creditors of the First Alliance estate.

298 B.R. at 668-669 (internal citations omitted). The
district court has discretion to balance the equities of a
case pursuant to the Bankruptcy Code, and its exercise of
that discretion was proper.

I. Fraudulent Conveyance

The Trustee also looked for relief elsewhere in the
Bankruptcy Code and sought to avoid as “fraudulent
transfers” about $400 million in payments First Alliance
made to Lehman under the Master Repurchase Agreement
(“MRA”). [fn15] Bankruptcy Code section 548 allows a
trustee to avoid any transfer of an interest of the debtor
in property or any obligation incurred by the debtor if the
debtor made such transfer or incurred such obligation with
actual intent to hinder, delay or defraud any creditor. 11
U.S.C. § 548(a)(1); see also Cal. Civ. Code §
3439.04(a) (incorporating the U.S. Bankruptcy Code). In
other words, a “fraudulent transfer” is a transfer of “some
property interest with the object or effect of preventing
creditors from reaching that interest to satisfy their
claims” or “an act which has the effect of improperly
placing assets beyond the reach of creditors.” 5 Collier on
Bankruptcy P548.04(1) at 548-4, 5 (15th ed. Revised 2002);
Witkin, 3 California Procedure (Enforcement of Judgment),
4th ed. § 445l.

The purpose of fraudulent transfer law is “to protect
creditors from last-minute diminutions in the pool of
assets in which they have interests.” Pioneer Liquidating
Corp. v. San Diego Trust & Sav. Bank (In re Consol. Pioneer
Mortg. Entities), 211 B.R. 704, 717 (S.D. Cal. 1997). In
Pioneer, the court faced a scenario not unlike this one, in
which a corporation`s liquidating trustee brought an
adversary proceeding against the depositary bank, seeking
to recover as fraudulent transfers the amount of advances
drawn against provisionally credited deposits to commercial
accounts that the bank extended to the debtor. Id. There,
the court had occasion to consider the purpose of this
portion of the Bankruptcy Code: “The original fraudulent
conveyance statute, in 13 Eliz. ch. 5 (1571), dealt with
debtors who transferred property to their relatives, while
the debtors themselves sought sanctuary from creditors. The
family enjoyed the value of the assets, which the debtor
might reclaim if his creditors stopped pursuing him.”
Pioneer, 211 B.R. at 710 n. 5 (citing Bonded Fin. Servs.,
Inc. v. European American Bank, 838 F.2d 890, 892 (7th Cir.
1988)). The Pioneer court held that payment to a fully
secured creditor does not hinder, delay or defraud
creditors because it does not put assets otherwise
available in a bankruptcy distribution out of their reach.
211 B.R. at 717; see also Melamed v. Lake County National
Bank, 727 F.2d 1399, 1402 (6th Cir. 1984).

As it did with the issue of equitable subordination, the
district court had discretion over the Trustee`s fraudulent
transfer claims, and this Court conducts limited review for
abuse of that discretion. See Grosz-Salomon, 237 F.3d at
1163. We find no such abuse occurred here, and we
specifically adopt the finding of the district court that
“[r]epayments of fully secured obligations — where a
transfer results in a dollar for dollar reduction in the
debtor`s liability — do not hinder, delay, or
defraud creditors because the transfers do not put assets
otherwise available in a bankruptcy distribution out of
their reach.” 298 B.R. at 665. The payments made to Lehman
under its agreement with First Alliance were simply not
fraudulent transfers within the meaning of the statute.

The Trustee`s argument focuses on First Alliance`s intent
to defraud the “borrower creditors,” which he asserts is
prima facie evidence of First Alliance`s actual intent to
defraud creditors by entering into the MRA with Lehman. In
the first place, even though the Trustee refers to them as
“borrower creditors,” the borrowers were not creditors at
the time of the MRA. Further, there was no defrauding of
creditors (or borrowers) by entering into the MRA, with
intent or otherwise. The district court found that First
Alliance perpetrated a fraud by making misrepresentations
in the sales pitch for the loans. The MRA had nothing to do
with those misrepresentations, and the Trustee`s efforts to
conceptually collapse the “obligation incurred” by First
Alliance into its fraudulent mortgage loans to borrowers is
unconvincing. It is not the case that “the Obligation`s two
components are just opposite sides of a single coin,” as
the Trustee urges. Rather, “[i]t is important to
distinguish between [debtor`s] intent while engaging in the
. . . scheme to provide funds for the Debtor`s operations
and his intent in using those funds so generated to pay the
Debtor`s creditors. His intent in generating funds, may not
be the same as in spending the funds.” Barber v. Union
Nat`l Bank (In re KZK Livestock, Inc.), 190 B.R. 626, 628
(Bkrtcy. C.D. Ill. 1996)

The Trustee is focusing on the wrong transactions. First
Alliance`s financing agreement with Lehman in and of itself
was not fraudulent, nor did it have any impact on the
assets available to satisfy bankruptcy claims. The
misrepresentations made to borrowers in the course of the
mortgage agreements — while constituting a fraudulent
scheme — are not the relevant fraudulent scheme for
the purposes of this bankruptcy law remedy. Through the
fraudulent conveyance mechanism, the Bankruptcy Code
contemplates a scheme to hide assets from creditors. Thus,
even though the district court found that Lehman
substantially assisted First Alliance in fraud, such a
finding is not the equivalent of colluding or otherwise
participating in a scheme to fraudulently transfer First
Alliance assets. Moreover, there is sufficient evidence in
the record to support the district court`s conclusion that
Lehman actively sought assurances from First Alliance that
it would remain financially viable while Lehman provided
financing. See 298 B.R. at 662.

The district court found that Lehman`s commercial
relationship with First Alliance constituted aiding and
abetting a fraud that led to a class of borrowers who paid
too much for their mortgages. Based on these findings, the
court held Lehman accountable in damages, a holding we
affirm. But if the court granted the equitable relief the
Trustee seeks, the effect would be essentially to undo the
entire financial relationship that ever existed between
Lehman and First Alliance, on top of making Lehman pay
damages for it in the first place. Such a result would
stretch the facts of this case and the relevant principles
of bankruptcy law too far.

III. CONCLUSION

The subprime lending industry was relatively young during
the time period in question in this case, and the immense
growth of subprime lending over the past decade has
prompted efforts by state and federal legislators to create
standards that encourage legitimate subprime lending while
curbing abusive, predatory practices. Standards for those
entities providing financial services to the industry by
securitizing subprime loans have been similarly undefined.
Out of this context the district court was asked to examine
the financial relationship between Lehman and First
Alliance, in relation to First Alliance`s lending
practices, and to apply tort and bankruptcy principles to
impose liability for that relationship. We believe the
court did so properly.

For the reasons discussed above, we affirm the holdings of
the district court imposing liability on Lehman for aiding
and abetting a class-wide fraud perpetrated by First
Alliance, and rejecting the Borrowers` claims for relief in
the form of equitable and punitive remedies, as well as the
Trustee`s claims for equitable relief under the Bankruptcy
Code. We vacate the damages verdict and remand for further
proceedings on the proper calculation of “out-of-pocket”
damages caused by First Alliance`s fraudulent lending
scheme, to be proportionately attributed to Lehman pursuant
to the terms of the Bar Order.

Each party shall bear its own costs.

AFFIRMED IN PART, VACATED IN PART, REMANDED.

[fn1] In 1994 Congress enacted the Home Ownership Equity
Preservation Act, 15 U.S.C. § 1639 (“HOEPA”), to
combat predatory lending. Some contend that the statute is
often and easily circumvented. See Tani Davenport, An
American Nightmare: Predatory Lending in the Subprime Home
Mortgage Industry, 36 Suffolk U. L. Rev. 531, 547-57 (2003)
(discussing state and federal initiatives to reduce
predatory lending and increase consumer awareness, but
noting the failure of these attempts). Many states have
imposed their own laws targeting abusive lending practices
on top of the federal regulation, seeking to create stronger
consumer protections than the federal law provides. Id.
Over the past few years the subject of subprime lending has
been the topic of several hearings held by the House
Committee on Financial Services` Subcommittee on Financial
Institutions and Consumer Credit and Subcommittee on
Housing and Community Opportunity. Id.

[fn2] The group of plaintiffs who were party to the
settlement agreement included the Federal Trade Commission,
several states` attorneys general, AARP, the Official Joint
Borrowers` Committee (to whom the liquidating trustee
Kenneth Henry is the successor in interest), and the class
of plaintiffs certified by the court represented by Michael
and Barbara Austin and others.

[fn3] For example, the Second and Third Circuits have
highlighted the importance of uniformity among
misrepresentations made to class members in order to
establish that element of fraud on a classwide basis. See
Moore v. PaineWebber, Inc., 306 F.3d 1247, 1255 (2d Cir.
2002) (“Only if class members received materially uniform
misrepresentations can generalized proof be used to
establish any element of the fraud.”); In re LifeUSA
Holding, Inc., 242 F.3d 136, 138-40 (3d Cir. 2001)
(vacating class certification on appeal where “the gravamen
of Plaintiffs` claims [was] that the Defendant`s sales
techniques and advertising constituted an allegedly
fraudulent scheme” but where the district court had found
that the annuity policies were not sold according to
uniform sales presentations).

[fn4] We note that as it has been applied, the actual
knowledge standard does require more than a vague suspicion
of wrongdoing. The Casey court itself rejected a trustee`s
“general allegation that the banks knew the DFJ Fiduciaries
were involved in `wrongful or illegal conduct` ” as a
“kitchen sink” allegation that did “not constitute
sufficient pleading that the banks had actual knowledge the
DFJ Fiduciaries were misappropriating funds from DFJ.” 26
Cal. Rptr. 3d at 412. Under Casey`s approach, Lehman must
have known more than that ” something fishy was going on.”
Id. at 409. As we explain below, sufficient evidence of
Lehman`s actual knowledge of the primary tort supports the
jury`s verdict.

[fn5] Though the district court held in favor of Lehman
following a bench trial on the fraudulent transfer and
equitable subordination claims, the court also specifically
found that Lehman “knew that First Alliance was engaged in
fraudulent practices designed to induce consumers to obtain
loans from First Alliance: (1) at the time they funded the
warehouse loan on December 30, 1998; (2) after they
extended the warehouse loan; and (3) during 1999 and early
2000.” 298 B.R. at 668.

[fn6] In Toomey, the issue was whether defendant would be
held liable in his personal capacity under section 17200 in
addition to liability in his professional capacity as the
owner of the company whose practices were found to violate
the code. The Toomey court specifically noted that
liability could be imposed “if the evidence establishes
defendant`s participation in the unlawful practices, either
directly [i.e., through personal participation] or by
aiding and abetting the principal.” 203 Cal. Rptr. at 651
(emphasis added). The Visa court made clear that a claim
under section 17200 cannot be predicated on vicarious
liability, but vicarious liability is not the theory of the
Borrowers` claim here. Furthermore, the Visa court found
that there was no aiding and abetting on the part of Visa
(a critical difference between that case and the one before
us), and that there had not even been any injury to the
plaintiff. 116 Cal. Rptr. 2d at 33. Bestline involved a
claim under section 17500 (which prohibits “untrue or
misleading statements,” see 132 Cal. Rptr. at 771 n. 1),
and did not address the minimum requirements for a claim of
unfair business practices under section 17200 based on
aiding and abetting fraud.

[fn7] As the Borrowers did not actually claim an ownership
interest in funds in Lehman`s possession, nor explain the
basis of their purported ownership interest in those funds,
their equitable claim under the UCL is left largely to the
court`s speculation.

[fn8] Section 3294(c) provides:

As used in this section, the following definitions shall
apply:

(1) “Malice” means conduct which is intended by the
defendant to cause injury to the plaintiff or despicable
conduct which is carried on by the defendant with a
willful and conscious disregard of the rights or safety of
others.

(2) “Oppression” means despicable conduct that subjects a
person to cruel and unjust hardship in conscious disregard
of that person`s rights.

(3) “Fraud” means an intentional misrepresentation,
deceit, or concealment of a material fact known to the
defendant with the intention on the part of the defendant
of thereby depriving a person of property or legal rights
or otherwise causing injury.

CAL. CIV. CODE § 3294(c).

[fn9] Due diligence, a concept most often employed in the
context of securities cases, is generally defined as: “the
diligence reasonably expected from, and ordinarily
exercised by a person who seeks to satisfy a legal
requirement.” Black`s Law Dictionary 468 (7th Ed. 1999). As
the district court found, Lehman`s corporate level due
diligence on First Alliance`s business practices involved
looking at whether First Alliance`s corporate structure and
business operations provided a sound basis upon which
Lehman could provide financial services to the company. In
re First Alliance Mortgage Co., 298 B.R. at 660. There was
no evidence that Lehman`s due diligence of First Alliance
in early 1999 was not in conformity with Lehman`s standard
due diligence undertaken in providing financial services to
a mortgage lender.

[fn10] This was not the actual close of discovery, as even
Lehman subpoenaed a third party witness more than two
months into trial, seeking documents pertaining to a 1987
lawsuit against First Alliance.

[fn11] As discussed below, under the Bar Order, the ultimate
judgment against Lehman should still represent only 10
percent of the new damages calculation. See infra at
19275-80.

[fn12] The standard of review for the district court`s
ruling on the Rule 59(e) motion is the subject of dispute
between the parties. Lehman contends that the apportionment
of liability was based upon the court`s finding that the
Bar Order governed the Borrowers` claims against Lehman and
as such is reviewed for clear error; the Borrowers argue
that the district court`s decision turned on issues of
California law related to equitable indemnity and therefore
is not entitled to deference. It is clear from the district
court`s order denying the Borrowers` motion to amend the
judgment that the decision was based in part on the court`s
interpretation of equitable indemnification under California
law. The standard of review of that order is less clear.
Some courts have held that such a motion is reviewed de
novo, not for an abuse of discretion, when it seeks
reconsideration of a question of law. See, e.g., Pioneer
Natural Resources USA, Inc. v. Paper, Allied, 328 F.3d 818,
820 (5th Cir. 2003); Perez v. Volvo Car Corp., 247 F.3d
303, 318-319 (1st Cir. 2001). We need not resolve this
question because the district court`s application of the
Bar Order was proper under either standard.

[fn13] Whether or not aiding and abetting is an “intentional
tort” has been a source of contention throughout this case,
first with regard to the jury instruction on the elements
of the tort (with the Borrowers arguing that aiding and
abetting does not require specific intent, and carrying the
day), and then later with regard to the application of the
FTC bar order (with the Borrowers changing course and
insisting that the tort is an independent intentional tort
such that indemnity and contribution cannot apply). The
district court`s approach to indemnity and contribution
here is consistent with its approach to the jury
instructions, and again, we think it is the correct one.

[fn14] Most analogous to the case before us is In re
Granite Partners, 210 B.R. at 515, in which the bankruptcy
court found that allegations of aiding and abetting fraud
satisfied the pleading requirement for equitable
subordination. But satisfying a pleading requirement is not
the same as compelling a result as a matter of law.

[fn15] The MRA governed the revolving credit and
securitization relationship between First Alliance and
Lehman described earlier. See supra, section I.B.