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referring to an order of the bankruptcy court ordering appointment of a Borrowers Committee
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CASE NO. SA CV 01-971 DOC
May 12, 2003
ORDER GRANTING LEHMAN'S MOTION FOR PARTIAL SUMMARY JUDGMENT RE PLAINTIFFS' CLAIM FOR PUNITIVE DAMAGES
Before the Court is Defendants Lehman Brothers, Inc. and Lehman Commercial Paper, Inc.'s (collectively Lehman) motion for partial summary judgment as to Plaintiffs' claim for punitive damages. After reviewing the moving, opposing, and replying papers, supplemental briefing, evidence presented at trial, and oral argument on three occasions, and for the reasons set forth below, the Court GRANTS Lehman's motion
I. BACKGROUND
First Alliance Mortgage Company of California, First Alliance Corporation of Delaware, First Alliance Mortgage Company of Minnesota, and First Alliance Portfolio Services of Nevada (collectively, First Alliance) began business as a mortgage lender in 1971. First Alliance's customers generally were borrowers who would have had difficulty obtaining loans from conventional sources because of poor credit ratings or insufficient credit histories. During the mid-1990s, this type of mortgage lending became known as "sub-prime" lending. The loans, many of which were refinancings by homeowners who had developed significant equity in their homes, typically were secured by the borrowers' first mortgages. As of 1999, First Alliance or affiliated entities were licensed to operate in eighteen states and the District of Columbia and serviced nearly $900 million in loans.
First Alliance's loan origination practices were based on finding homeowners with considerable equity in their homes through searching various databases and applying a formula to that data. First Alliance solicited business from potential customers through an intricate direct mail and telephone system. Once a potential customer showed interest in a First Alliance loan, the company would send out one of its own appraisers to both appraise the property and persuade the homeowner to set up an appointment with a First Alliance loan officer.
First Alliance recruited people with a history in sales to work as loan officers, and the company had a particular affinity for former car salespersons. First Alliance would then put its loan officer recruits through an intensive four-week "boot camp," where the recruits would learn the now infamous "Track." The Track was a detailed and comprehensive twelve step process created by First Alliance founder, president and principal owner Brian Chisick. The Track created a standardized sales method that all First Alliance loan officers were required to follow for taking borrowers through the loan origination process. The steps of the Track contained information on everything from how to make a borrower comfortable to how to deal with presenting federal disclosure forms.
Lehman began its relationship with First Alliance in 1995, when it sent two members of its corporate finance group to look at the company for purposes of deciding whether to extend a warehouse line of credit to First Alliance to finance its loan origination process. Despite one corporate finance member's considerable criticism of First Alliance, Lehman made available a $100 million warehouse line of credit. First Alliance never drew down on this line of credit, however. In late 1996, Lehman extended a $25 million warehouse line to backup First Alliance's primary warehouse line, which was provided by Prudential Securities, Inc. (Prudential). Lehman also co-managed with Prudential four securitizations from the fourth quarter of 1996 to the third quarter of 1997.
In the mid-to-late 1990s, First Alliance was hit with a number of lawsuit alleging that First Alliance's lending practices in general, and its loan origination procedures in particular, were in violation of state and federal laws. The original lawsuits were brought by individual borrowers in several state courts, but by the late 1990s governmental entities got involved as the public began to take notice of the explosion of the still largely unregulated sub-prime lending industry. Attorney Generals in several states sued First Alliance, as did the American Association of Retired Persons, better known as "AARP." The federal government became involved when the Federal Trade Commission (FTC) began an investigation into First Alliance's lending practices and decided to bring a lawsuit against the company.
In mid-December 1998, Prudential informed First Alliance that it had decided not to renew its warehouse line and that it would stop securitizing First Alliance loans. One alleged reason Prudential decided against renewing its agreement was the large amount of litigation building against First Alliance. As First Alliance's backup lender at that time, First Union, had decided earlier that year to not renew its backup warehouse line, First Alliance was placed in a position where it needed to find a new warehouse line quickly or face either shutting down operations or drastically changing its business. Lehman agreed to immediately provide a temporary warehouse line to First Alliance, which could be made permanent after due diligence was undertaken in early 1999.
In February 1999, Lehman sent a "deal team" to First Alliance to determine whether the warehouse line should be made permanent and whether Lehman should securitize loans generated by First Alliance. Lehman met with senior management of First Alliance, consulted with members of First Alliance's legal department concerning mounting litigation against the company, and conducted a "loan level review." In the loan level review, Lehman sent an assortment of First Alliance loan files to another entity, the Clayton Group, to determine, among other things, whether all federal and state disclosure forms were present and properly signed by borrowers in the loan files. Upon returning to Lehman's New York headquarters, the deal team recommended that Lehman's Commitment Committee approve the warehouse line and securitization services. Lehman, however, negotiated a provision in its agreement with First Alliance that would enable Lehman to conduct continuing due diligence and to terminate the warehouse line for certain "events of default."
In mid-March 2000, First Alliance's lending practices became the focus of national publicity when the New York Times and the television program "20/20" carried stories that exposed the company's allegedly deceptive practices and highlighted the number of lawsuits that had been filed against it. Also prominently featured in the New York Times article and "20/20" story was the role of Lehman in providing financial services to First Alliance. Eight days later, on March 23, 2000, First Alliance filed a voluntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101-1330, because of the cost associated with the lawsuits against it and the negative national publicity it was facing.
On September 16, 2002, this Court, which had withdrawn the reference from the bankruptcy court and combined all proceedings against First Alliance in one forum, approved a settlement agreement between First Alliance and a national class of borrowers, several states' attorneys' general, the AARP, and the FTC. Under the terms of the settlement agreement, an FTC administered redress fund was created to distribute to First Alliance borrowers at least $77 million in proceeds from the First Alliance estate, Brian Chisick, and other First Alliance principals. Checks averaging nearly $3,000.00 per borrower were sent out beginning in December 2002.
During the legal proceedings against First Alliance, a class of borrowers who received mortgage loans from First Alliance between the end of 1996 and March 23, 2000 (the date of the First Alliance bankruptcy) filed the present suit against Lehman for aiding and abetting First Alliance's allegedly fraudulent lending practices and other causes of action. The Court denied Lehman's motion to dismiss as to Plaintiffs' aiding and abetting fraud claim on January 20, 2002, and conditionally certified the class on August 12, 2002. Plaintiffs amended their First Amended Complaint to add punitive damages, filing a Second Amended Complaint (SAC) on August 22, 2002. The Court denied Lehman's motion to dismiss the SAC on October 29, 2002. Plaintiffs' class was certified by the Court's November 25, 2002 order.
Lehman moved for summary judgment as to Plaintiffs' claim under California Business Professions Code section 17200 claim, Plaintiffs' aiding and abetting claim as it relates to pre-1999 funding, and Plaintiffs' claim for punitive damages. On February 7, 2003, the Court granted Lehman's motions for summary judgment as to the section 17200 claim, as well as Plaintiffs' claim for aiding and abetting fraud prior to December 30, 1998 — the date on which Lehman became First Alliance's principal lender. The Court also issued a tentative order granting Lehman's motion for partial summary judgment as to Plaintiffs' claim for punitive damages. After oral argument on two occasions, both parties requested and stipulated that the Court reserve its order on punitive damages until after the underlying aiding and abetting fraud case had been presented to the jury. After allowing additional briefing and oral argument on the issue, the Court now finalizes its tentative order and grants Lehman's motion for partial summary judgment concerning Plaintiffs' claim for punitive damages.
II. LEGAL STANDARD
Summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
The Court must view the facts and draw inferences in the manner most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994 (1962). However, the existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; to defeat the motion, the non-moving party must affirmatively set forth facts showing there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510 (1986). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact for trial. Id. at 256, 106 S.Ct. at 2514. When the non-moving party bears the burden of proving the claim or defense, the moving party can meet its burden by pointing out the absence of evidence of a genuine issue of material fact from the non-moving party. Mustek v. Burke, 913 F.2d 1390, 1394 (9th Cir. 1990). The moving party need not disprove the other party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548, 2553-54 (1986).
When the moving party meets its burden, the "adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party." Fed.R.Civ.P. 56(e). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for [the opposing party]." Anderson, 477 U.S. at 252, 106 S.Ct. at 2512.
III. DISCUSSION
Lehman seeks partial summary judgment precluding Plaintiffs' request for punitive damages. Under California law, punitive damages are appropriate where the 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). Fraud, oppression or malice requires a showing of intent under section 3294. See Slottow v. American Cas. Co., 10 F.3d 1355, 1361 (9th Cir. 1993). According to the Ninth Circuit, punitive damages under section 3294 "are recoverable only where the defendant `act[ed] with the intent to vex, injure or annoy.'" Id. (quoting Neal v. Farmers Ins. Exch., 148 Cal.Rptr. 389, 396 (Cal. 1978)) (emphasis added).
The imposition of punitive damages is subject to the heightened standard of clear and convincing proof at trial. See The Pacific Group v. First State Ins. Co., 841 F. Supp. 922, 939 (N.D. Cal. 1993) rev'd on other grounds, 70 F.3d 524, 527 (9th Cir. 1995). Under a clear and convincing standard, the evidence must be "so strong to command the unhesitating asset of every reasonable mind." Shade Foods, Inc. v. Innovative Prods. Sales Mktg., 93 Cal.Rptr.2d 364, 394 (Cal.Ct.App. 2000) (quoting In re Angelia P., 171 Cal.Rptr. 637, 643 (Cal. 1981)). The Court must take this heightened standard into account when ruling on a motion for summary judgment See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254-55, 106 S.Ct. 2505, 2513 (1986) ("Thus, in ruling on a motion for summary judgment, the judge must view the evidence presented through the prism of the substantive evidentiary burden"). Consideration of the clear and convincing standard does not denigrate the role of the jury, as a court must consider all evidence and make all evidentiary inferences in a manner most favorable to the non-movant. Id.
Plaintiffs cite Hubka v. Paul Revere Life Ins. Co., 215 F. Supp.2d 1089, 1094 (S.D. Cal. 2002), for the proposition that to defeat a summary judgment claim on punitive damages, "a plaintiff must merely show there is evidence from which a reasonable juror could find that punitive damages are appropriate." 215 F. Supp.2d at 1094; Plaintiffs' Opp. at 6. Plaintiffs, however, fail to quote the entire standard as provided by the Hubka court, which stated: "[w]here, as here, the clear and convincing standard would apply at trial, to defeat a summary judgment motion, Plaintiff must produce evidence such that a reasonable juror could find punitive damages appropriate by clear and convincing evidence." 215 F. Supp.2d at 1094 (emphasis added).
Although Plaintiffs initially contested whether the clear and convincing standard applied to their request for punitive damages, Plaintiffs Supplemental Opposition appears to acknowledge the clear and convincing standard. (Plaintiffs' Supp. Opp. at 3.)
1. Fraud
California Civil Code section 3294 defines fraud as "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)(3). Plaintiffs first argue that Lehman is liable for First Alliance's alleged misrepresentations by virtue of its direct control over First Alliance. Second, Plaintiffs contend that Lehman is liable for its intentional deceitful concealment of First Alliance's lending practices.
In support of their control theory, Plaintiffs argue that Lehman had an ownership interest in First Alliance by virtue of warrants Lehman obtained for 1% of First Alliance outstanding common stock. (Levy Decl. Ex. 64.) Plaintiffs, however, provide no evidence that Lehman actually exercised the warrants, and thereby acquired an ownership interest in First Alliance.
Plaintiffs also argue that Lehman exercised control over First Alliance by establishing loan standards that required the writing of first lien loans, mandating geographic distribution of loans, and dictating minimum interest rates. (Park Decl. Exs. B and C; Levy Decl Exs. 79 and 80.) While Lehman disputes that it limited the types of mortgages First Alliance could originate, Lehman also argues that if the Court were to accept Plaintiffs' argument, all lenders who limit the types of mortgages they will buy from mortgage lenders and securitize would be subject to control liability. Finally, Plaintiffs argue that Lehman's actions in funding First Alliance were intentionally deceitful, and that Lehman practiced concealment by concealing facts of which it had exclusive knowledge.
Plaintiffs' arguments concerning Lehman's fraudulent misrepresentations, as well as Lehman's intentional deceit and concealment, both are predicated upon Lehman's duty to Plaintiffs to disclose its knowledge concerning the First Alliance lending practices. Plaintiffs contend that Lehman owed Plaintiffs a duty to speak under the test set forth in LiMandri v. Judkins, 60 Cal.Rptr.2d 539 (Cal Ct. App. 1997). According to the LiMandri court: "[t]here are "four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts." 60 Cal.Rptr.2d at 543 (quoting Heliotis v. Schuman, 226 Cal.Rptr. 509, 512 (Cal.Ct.App. 1986)).
Plaintiffs contend that Lehman's duty to speak arose from Lehman's exclusive knowledge of the facts, and Lehman's active concealment of those facts. The LiMandri court makes clear, however, that a failure to disclose does not become actionable fraud absent some relationship between the parties. Id. "As a matter of common sense, such a relationship can only come into being as the result of some sort of transaction between the parties." Id. Plaintiffs' relationship was with First Alliance, not Lehman. As Plaintiffs cannot establish the requisite relationship between themselves and Lehman, which came about due to some sort of transaction with Lehman, Plaintiffs' punitive damages claim cannot proceed based on the fraud prong of section 3294 under either a control or deceit and concealment theories.
2. Malice and Oppression
Lehman also argues that Plaintiffs' claim for punitive damages cannot proceed under the malice and oppression prongs of California Civil Code section 3294(c). "Malice" is defined as "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." Cal. Civ. Code § 3294(c)(1). "Oppression" is defined as "despicable conduct that subjects a person to cruel and unusual hardship in conscious disregard of that person's rights." Cal. Civ. Code § 3294(c)(2).
Plaintiffs contend that Lehman acted with malice and oppression by engaging in despicable conduct in conscious disregard of Plaintiffs' rights. See Gawara v. U.S. Brass Corp., 74 Cal.Rptr.2d 663, 674-75 (Cal.Ct.App. 1998) (citing Peterson v. Superior Court, 181 Cal.Rptr. 784, 790 (Cal 1982). "Despicable conduct" refers to circumstances that are base, vile or contemptible, demonstrating "the character of outrage frequently associated with crime." Taylor v. Superior Court, 157 Cal.Rptr. 693, 696 (Cal 1979); College Hospital, Inc. v. Superior Court, 34 Cal.Rptr.2d 898, 911 (Cal 1994). The "conscious disregard" portion of the standard requires that Lehman "was aware of the probable dangerous consequences of [its] conduct, and that it willfully and deliberately failed to avoid those consequences." Taylor, 157 Cal.Rptr. at 696. Punitive damages are proper under this standard "only when the tortious conduct rises to levels of extreme indifference to the plaintiffs' rights, a level which decent citizens should not have to tolerate." Tomaselli v. Transamerica Ins. Co., 31 Cal.Rptr.2d 433, 444 (Cal 1994) (quoting Flyer's Body Shop Profit Sharing Plan v. Ticor Title Ins. Co., 230 Cal.Rptr. 276, 278 (Cal. Ct App. 1986)).
According to Plaintiffs, Lehman was aware of the dangerous consequences that could result from doing business with First Alliance, but willfully and consciously disregarded that information. Plaintiffs argue that Lehman's relationship with First Alliance, when viewed cumulatively, constitutes despicable conduct. Plaintiffs' evidence shows that Lehman was aware since 1995 that a significant number of First Alliance borrowers were elderly persons, and some had undertaken multiple refinancings. (Levy Decl. Exs. 31, 45, 47, 60, 76, 77.) Lehman was also aware of the possibility that First Alliance was in violation of Truth in Lending Act (TILA) laws because First Alliance loan officers had at least two discussions with potential borrowers before presenting the borrower with an application. (Levy Decl. Ex. 76 at 003001; Levy Decl. Ex. 2 at 000015.) In addition, Lehman was aware that First Alliance had been the subject of substantial past litigation, some litigation during the class period, and that several governmental entities were investigating First Alliance. (Levy Decl. Ex. 76.) Plaintiffs contend that notwithstanding their knowledge of these facts, Lehman stepped in to fund First Alliance when Prudential declined renewal of the First Alliance warehouse line of credit.
Lehman argues that it cannot be liable for punitive damages because it relied on the advice of both in-house and outside counsel in conducting its due diligence of First Alliance, Under California law, "[e]xemplary damages are not recoverable against a defendant who acts in good faith and under the advice of counsel." Fox v. Aced, 49 Cal.2d 381, 385 (1957). As part of its due diligence, Lehman assigned Richard Yates to its evaluations team and included Steven Berkenfield, another attorney, in the decision-making process. Lehman also retained the Brown Wood law firm to opine on the status of the litigation pending against First Alliance in early 1999.
Plaintiffs attack Lehman's advice of counsel argument on several fronts. Plaintiffs contend that the attorneys assigned or retained to provide advice lacked litigation experience, and, thus, were not qualified to conducts proper inquiry. Plaintiffs also argue that the attorneys did not conduct a sufficiently extensive analysis of the claims against First Alliance. Specifically, Plaintiffs consider the attorneys' review inadequate, among other reasons, because they did not speak with First Alliance borrowers, did not confer with the various counsel bringing cases against First Alliance, and did not sufficiently review of the loan officers "track" manual.
It is undisputed that the legal opinion sought by Lehman, though unprecedented as a component of its due diligence, was directed almost exclusively to ensure that the mortgage backed securities issued by Lehman were adequately disclosed. (Trial Transcript, 4/11/03, Vol. I, p, 29-30, 34, 39.) In addition, Lehman was less concerned with the substantive allegations made against First Alliance, than whether the cases were being settled or otherwise resolved. While Lehman's focus may very well have been proper, the Court considers the inclusion of the attorneys in the process an additional, but minimal factor in determining the present motion.
The Court does not find it necessary to determine whether reliance on counsel as an affirmative defense precludes punitive damages in this case.
Much of Plaintiffs' argument concerns Lehman's due diligence of First Alliance in early 1999. On the one hand, Plaintiffs argue that information made available to Lehman during its extensive due diligence exposed First Alliance's fraudulent lending practices. On the other hand, Plaintiffs argue that Lehman's due diligence was inadequate because it failed to properly investigate whether the claims made in various lawsuits against First Alliance were indeed true. According to Plaintiffs, Lehman's knowledge of the existence of various court cases against First Alliance coupled with its failure to further investigate, constitutes despicable conduct:
"Despite this knowledge, the evidence shows that Lehman intentionally stuck its head in the sand, choosing to focus its due diligence of FAMCO on a mere review of FAMCO's loans for the presence of signed disclosure documents rather than determining whether or not FAMCO's loan origination procedures were proper and whether there [was] any validity to the abundance of similar allegations against the Company."
(Plaintiffs' Supp. Opp. at 18).
Due diligence in the normal sense is 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) (emphasis added). This concept is most often employed in the context of securities cases: "a failure to exercise due diligence may sometimes result in liability, as when a broker recommends a security without first investigating it properly." Id. In the present case, Lehman's due diligence was undertaken for the purpose of determining whether providing financial services to First Alliance made business sense. The legal requirement that Lehman exercised due diligence to fulfill, if any, was its obligation to the investors who purchased mortgage backed securities packaged by Lehman.
Plaintiffs contend that Lehman's review of the litigation against First Alliance was primarily concerned on a going-forward basis with whether Lehman might suffer adverse publicity or other reputational damage. (Levy Decl. Ex. 2 at 000014.; Levy Decl. Ex. 78.) It is undisputed, however, that Lehman was assured through its loan level review that First Alliance was in compliance with all federal truth in lending disclosure form requirements. The scope and focus of Lehman's due diligence cannot establish that Lehman's conduct was "vile" or "loathsome" by clear and convincing evidence. Lehman's "choice" to focus on whether the loans generated by First Alliance contained all federally required disclosure requirements — as all indications suggest that this was Lehman's standard practice — could not reasonably demonstrate by clear and convincing evidence an "intent to vex, injure or annoy." Slottow v. American Cas. Co., 10 F.3d at 1361.
Similarly, Plaintiffs argue that Lehman's claimed reliance in early 1999 on Francisco Nebot, First Alliance's new Chief Financial Officer, and Wendy Rianda, was unreasonable. (Trial Transcript, Day 25, Vol. I, 33.) Plaintiffs argue that the evidence shows neither Nebot nor Rianda made any difference at First Alliance. (Trial Transcript, Day 5, Vol. 1, 44; Day 5, Vol. II, 62.) Nonetheless, even if Plaintiffs could, with the benefit of hindsight, prove that Lehman's reliance was unreasonable, this would not be sufficient to carry Plaintiffs' burden of presenting clear and convincing evidence that Lehman's conduct was despicable.
On March 15, 2000, the ABC News program "20/20," in conjunction with an investigation by the New York Times, aired a segment on First Alliance's alleged fraudulent lending practices and Lehman's role in financing those practices. Plaintiffs contend that Lehman's failure to immediately terminate the warehouse lending line near the time of the "20/20" telecast as evidence that Lehman would not terminate its relationship with First Alliance no matter what it discovered. Plaintiffs argue that this reality demonstrates despicable conduct. Once again, however, even if Lehman could reasonably conclude from a television program and newspaper article that First Alliance was defrauding borrowers who obtained their loans prior to December 30, 1998, the uncontroverted evidence shows that Lehman exercised its sole discretion to delay, and ultimately cancel, its first-quarter 1999 securitization of First Alliance loans. (Trial Transcript, 4/11/03, Vol. I, 49-54.) Whether or not Lehman was engaged in an investigation of how to terminate the warehouse line without subjecting itself to liability from First Alliance in the eight days between the airing of the "20/20" segment and the First Alliance bankruptcy on March 23, 2000, failure to immediately terminate a legally binding contract after receiving adverse publicity does not constitute "base, vile or contemptible" conduct, demonstrating "the character of outrage frequently associated with crime." Taylor, 157 Cal.Rptr. at 696.
Plaintiffs cite to the recent California case Roma v. Ford Motor Co., 122 Cal.Rptr.2d 139 (Cal.Ct.App. 2002). However, rather than supporting Plaintiffs' argument for punitive damages, the Court views the Romo instructive as to why punitive damages are not appropriate in this case. In Romo, a family riding in a 1978 Ford Bronco was involved in an accident in 1993. 122 Cal.Rptr.2d at 145. In the accident, the Bronco rolled over several times, collapsing a steel portion of the vehicle's roof and dislodging a fiberglass portion. Id. The collapse of the steel portion killed the driver, while the fiberglass portion struck and killed two other passengers. Id. The remaining passengers were injured in the accident. Id.
The remaining members of the Romo family brought suit against Ford on products liability and negligence theories, as well as a prayer for punitive damages. Id. After a four-month trial, the jury returned a verdict of approximately $6 million in compensatory damages and $290 million in punitive damages. Id. at 146. The trial court then reduced the compensatory damages to approximately $5 million based on comparative fault and granted a motion for a new trial on the issue of punitive damages. Id. On appeal, the California Court of Appeals, viewing the evidence in the light most favorable to the verdict, vacated the trial court's order granting a new trial, affirming the jury's award of punitive damages. Id. at 162.
Ford argued that the plaintiffs had not presented sufficient evidence of malicious or despicable conduct. Id. at 158. The Romo court, however, found that the design and production of the vehicle itself constituted despicable conduct:
"we think it obvious that putting on the market a motor vehicle with a known propensity to roll over and, while giving the vehicle the appearance of sturdiness, consciously deciding not to provide adequate crush protection to properly belted passengers (in the words of a corporate memo introduced in evidence, `penalizing' passengers for wearing a seatbelt) constitutes despicable conduct. Such conduct could kill people."
In determining that the above conduct could be construed as despicable, the Romo court noted several factors, including: disagreement within the design team over whether to include a roll bar to reinforce the fiberglass roof, as Ford's competitor did; evidence that Ford's decision-makers disregarded established policies and safety guidelines by which it had determined that the roofs crush resistance needed to be higher; and evidence that Ford's post-production testing showed that the roof failed to meet Ford's own safety standards. Id. at 161.
The facial similarities between Romo and the present case provides this Court with a good basis for comparison. The differences between the cases, however, reaffirm why punitive damages are inappropriate against Lehman. There is 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. Plaintiffs contend that, because the warehouse line was extended on a temporary basis without any due diligence, Lehman's later due diligence was less meaningful. It is uncontroverted, however, that Lehman went beyond its normal due diligence in sending an expanded due diligence team to First Alliance to investigate internal concerns about the company. In addition, there is no evidence that persons within Lehman's deal team or on Lehman's Commitment Committee disagreed about the ultimate conclusion to do business with First Alliance, All members of the deal team voted in favor of finalizing the deal with First Alliance after the due diligence was concluded in early 1999.
The cases also present a contrast in the respective duties of Ford and Lehman in the conduct they undertook. Ford disregarded important safety information from its engineers that the design of the Bronco could, and probably would, kill people. Ford was responsible for designing vehicles that would, as much as possible, ensure the safety to its customers. Lehman had a duty to ensure that the mortgage loans it was securitizing were not procured by fraud so that investors could realize the promised return on their mortgage backed securities. That is to say, it was the investing community from which Lehman could reasonably expect litigation in the event the loans were indeed procured through fraud, because the assets constituting the basis for the securities would effectively be rendered worthless. While the result of the present case may potentially expand the duty of Lehman and other Wall Street firms to include the borrowers of the mortgage companies they provide financial services for, there is no evidence that such a possibility was on Lehman's radar in 1999 and early 2000.
Furthermore, the sub-prime lending industry, unlike automobile manufacturing, was a relatively young, unregulated industry during the time period in question in this case. With the ascension of the sub-prime lending industry, no longer was it as common for an individual to head to the neighborhood bank to obtain a mortgage loan. By the same token, no longer was it necessary to have "good" or "perfect" credit to own a home. The explosion of the sub-prime lending industry caught regulators largely off-guard. States and the federal government were, and still are, attempting to determine appropriate standards for sub-prime lenders themselves, much less standards for those providing financial services to the industry.
In addition to the lack of regulation in the area, there is no legal precedent by which Lehman could have expected liability from Plaintiffs. Plaintiffs have argued to the jury at trial that the present liability case against Lehman is one of first impression in the United States. The Court knows of no prior case where a secondary lender has been sued for aiding and abetting fraud. It is generally recognized in California and the Ninth Circuit that punitive damages are not proper in cases of first impression. See Waits v. Frito-Lay, 978 F.2d 1093, 1104 (9th Cir. 1992) ("[w]here an issue is one of first impression, or where a right has not been clearly established, punitive damages are generally unavailable") (citing Morgan Guar. Trust Co. v. American Sav. Loan Ass'n, 804 F.2d 1487, 1500 (9th Cir. 1986), cert. denied, 483 U.S. 929, 107 S.Ct. 3214 (1987); Bartling v. Glendale Adventist Med. Ctr., 229 Cal.Rptr. 360, 364 (Cal.Ct.App. 1986)).
Other jurisdictions also follow this general rule. See, e.g., Thomas v. Allstate Ins., 114 F.3d 483 (5th Cir. 1997) (applying Mississippi law against punitive damages in cases of first impression, as set forth in Harrison v. Allstate Ins. Co., 662 So.2d 1092, 1095 (Miss. 1995)); Flores v. Carnival Cruise Lines, 47 F.3d 1120, 1127 (11th Cir. 1995) ("[b]ecause this is a case of first impression, Carnival did not abrogate any established legal duty toward Flores, and therefore did not exhibit willful and wanton misconduct, which is the standard Flores must meet to recover punitive damages in admiralty law"); Newton v. United Companies Fin. Corp., 24 F. Supp.2d 444, 463 (E.D. Pa. 1998) (declining to award punitive damages to case of first impression involving violation of the Equal Credit Opportunity Act). The rationale behind not allowing punitive damages in cases of first impression — that the requisite intent or willfulness required to consciously disregard another's rights cannot be present if no right or duty has been recognized — applies in the present case. It would be difficult for Lehman to willfully or consciously disregard any rights owed to Plaintiffs because Lehman did not have any indication prior to this case that it, as a secondary lender, could violate Plaintiffs' rights.
The unique nature of this case as a matter of first impression, the lack of a direct relationship between Lehman and Plaintiffs, Lehman's attempted (though potentially flawed) due diligence, and the heightened standard under which courts must evaluate punitive damages claims, all add to the general caution with which the Court must consider the appropriateness of punitive damages in this case. Dyna-Med. Inc. v. Fair Employment Housing Comm., 241 Cal.Rptr. 67, 73 (Cal. 1987). Plaintiffs' claim for punitive damages is not supported in the record by direct evidence that Lehman acted with evil motive or extreme indifference. Had the underlying lending practices litigation against First Alliance ultimately gone to trial, punitive damages could very well have been appropriate in that case. In the present case, however, the evidence shows, at best, that Lehman made a series of poor decisions in providing lending and underwriting services to First Alliance. Those decisions may ultimately result in Lehman being found liable on Plaintiffs' aiding and abetting fraud claim. Nonetheless, based on the record, a reasonable juror could not award find, by clear and convincing evidence, grounds on which to award punitive damages.
III. CONCLUSION
Accordingly, for the reasons set forth above, Defendants Lehman Brothers, Inc. and Lehman Commercial Paper, Inc.'s motion for partial summary judgment as to Plaintiffs' claim for punitive damages is GRANTED.