Harvard Exam Multistate Litigation (Bank of America)
Final Exam Multistate Litigation Away from the headlines of the Bank of America case that is being negotiated by the Attorney General of Iowa and his team, there is another case the facts of which are as follows. The Bismark Bank (“Bismark”) is a state chartered bank headquartered in the State of North Dakota. With the death of so many other lending institutions, it has emerged as a large bank having been formed through a series of acquisitions consummated by its current president, George Bailey. It is one of the largest employers in North Dakota, with its corporate offices as well as its mortgage financing, credit card, and telemarketing centers all located in North Dakota. Through Bailey’s leadership, Bismark also has acquired other financial institutions. As the real estate boom began to accelerate in 2004, Bailey acquired in a very leveraged buy out his “crown jewel,” Old Pacific Mortgage (“OPM”), a mortgage lending institution. OPM is the largest mortgage lending institution in the nation, and is based in California. Old Pacific Mortgage grew rapidly as a result of the efforts of its leader, Miranda Priestly, a scrappy businesswoman, who built OPM from a small, storefront lender centered in Queens and the Bronx to the nation’s leading lender to the underserved lower middle and poorer classes. The buy out by Bismark made Priestly a billionaire. She currently owns 49% of Bismark with an option to buy 2% upon the retirement of the 68 year old Bailey. Towards the end of 2006, two years after Bismark’s acquisition of OPM, AAG Pat Geary, the head of the three person Consumer Division in North Dakota, met with the North Dakota Commissioner of Banking who informed him of an uptick in complaints against Bismark since the acquisition of OPM. More and more customers were falling behind on their mortgages and going into foreclosure. Geary, an experienced trial lawyer, believes that that Bismark had been a good citizen but that OPM had injected an entirely different culture into the company. He is confident that Bismark is now engaged in practices that violate North Dakota’s banking law, including falsifying income statements on lending documents so that the consumers qualified for mortgages that they could not afford and requiring borrowers to pay penalties if they paid down their mortgages sooner than originally anticipated (“prepayment penalties”). For the period 2004–2008, there were 5,000 Bismark loans in North Dakota that involved falsified income states. Many of these loans occurred near North Dakota's many Native American reservations. Geary’s staff also discovered from talking to advocacy groups such as the Center for Responsible Lending that the falsified income statements - signed under oath and therefore raising possible criminal liability - were endemic to OPM’s nationwide practice. In January of 2010, Geary attended a conference with assistant attorneys general from California, Illinois, Massachusetts and Iowa where he learned that in California there were 50,000 affected Bismark/OPM loans, in Illinois there were 40,000, in Massachusetts there were 20,000 and in Iowa there were 5,000 that all dated from 2004 to 2008. Nationwide, Geary believes that there could be hundreds of thousands of such loans. Geary does not think that his Attorney General, Rusty Sabich, will take action. Sabich is new in the job having been appointed after his predecessor's resignation due to her inaction in the "Tipton" nursing home scandal. Geary hopes that his friend and colleague in Iowa, AAG Milo O’Shea, who was hired by the veteran AG of Iowa after an unsuccessful run for Congress, might be able to get a case filed. Geary and O'Shea believe that they could "bring the house down" if they could avoid a lengthy multistate. Frustrated with the slowness of working with other states, they are quietly considering resigning from their offices and taking the information with them to a California class action firm that would hire them to take advantage of the liberal private right of action in the North Dakota and Iowa UDAP statutes. Geary is particularly convinced that the information he has received demonstrates that there are numerous violations of North Dakota’s five–year–old predatory lending law, including failing to ensure loans were suitable for borrowers and requiring borrowers to pay prepayment penalties. He has begun staying late, copying the files of the 5000 North Dakota loans, and storing them in his hunting camp in rural Pierce County. In May 2010, Hamilton Burger, the head of the OPM investigation in California, ignored his small state colleagues and sent a packet of information about OPM’s practices to the chiefs of the consumer protection divisions of all fifty states. After a series of emails and conference calls, a multistate task force was formed. Burger copied his letter to Marty Bach, the General Counsel of Bismark. The Executive Committee consists of California (Burger), North Dakota (Geary), Iowa (O'Shea), Illinois (whose chief, Julie Jones, is an experienced multistate negotiator) and Massachusetts (whose chief, John Joyce, hates multistates with a passion preferring single state litigation.) The five AG consumer protection chiefs held a series of conference calls between the summer and the fall of 2010 to determine whether the activities of OPM violated laws in all five states, and whether to act collectively or on their own. The chiefs noted that of the five states, none, other than North Dakota, had a “suitability” requirement in its lending law. All four chiefs believed that there was a strong argument that OPM’s activities were “unfair” under each state’s UDAP law, and thus likely violated the UDAP laws of most states. They also are not too concerned with the "technicalities" of the law since they assume that litigation would put such pressure on Bismark stock that the company would settle. As soon as Bach received Burger’s correspondence in May of 2010, he understood that the allegations were serious and focused mostly on OPM's pre-buy out actions, Bach contacted both Bailey and Priestly, and, at Priestly’s suggestion, their long time outside litigator, Vincent Gambini. Gambini was no stranger to OPM’s legal troubles having represented OPM in two nasty shareholder lawsuits. Gambini has a reputation of taking tough positions in negotiations and being willing to try cases if he doesn’t get his way. A search on Westlaw reveals that other than Julie Jones of Illinois, none of the states’ attorneys on the Executive Committee has ever tried a multimillion dollar consumer case although John Joyce, of Massachusetts, has tried several large cases to verdict in front of liberal Commonwealth judges. Gambini and Bach met four times with Burger, Geary, Jones and O’Shea. from November, 2010 through March of 2011 to discuss the states’ concerns. (Joyce was on trial and was present for only two of the calls. He asked no questions and seemed distracted.) At the fourth meeting in March, Gambini and Bach told the states that they were willing to reform some practices, but that they believed that most states’ lending laws didn’t implicate any of OPM’s activities. They also indicated they were willing to pay about $10 million total to the states for restitution and investigative costs and attorneys’ fees (but no penalties), to distribute as they saw fit, and to sign a consent judgment that did not include a reference to any lending laws. They insisted that any consent decree had to “buy them peace,” i.e.,settle with all fifty states. They also said that they would "abide with the spirit" of any settlement made with Bank of America. The fifth and "final" negotiation session is scheduled for May 1, 2011. On April 12, 2011, the Attorney General of Mississippi, Alicia Florrick, announced that she had hired famed plaintiffs’ class action attorney Frank Galvin from Chicago to represent the state on a contingency fee basis in the Bismark matter. None of the states’ lawyers know Galvin personally, although they all had read the stories about his private jet and the millions he had made in the tobacco litigation. Galvin held a news conference in Jackson and was surrounded with Florrick, who is up for reelection in November of 2011, and by people who had lost their homes to foreclosure. The 5’ ft, 2" Galvin stood in front of the American flag and on top of boxes of what he claimed were leaked internal memoranda showing that OPM knew it was driving people out of their homes. He promised to file suit “in a few days.” Both the bankers and states thought this was just a publicity stunt until Florrick, who just became President of the National Association of Attorneys’ General (NAAG), announced that she was flying to testify before a U.S. Senate Banking sub-sub-sub-committee chaired by former Attorney General and now U.S. Senator Richard Blumenthal (D-Ct). She then stated that she was going to have “secret” meetings with Elizabeth Warren and Richard Cordray of the Consumer Financial Protection Bureau to demand that if the Bureau did not sue Bismark on July 1,that she would order Galvin be file suit "and never, never settle." She also stated that she was sending Galvin to attend the heretofore secret meeting of the multistate task force on May 1st “to make sure that a bunch of AAG’s from other states do not sell Mississippi down the river.” Florrick also stated that Iowa AG Tom Miller, who had received campaign support from Galvin in his 2010 reelection but had never retained him to represent Iowa, has assured her that Galvin was welcome at the meeting although he himself would be unable to attend due to the Bank of America matter and his commitment to speak at an Eagle Scout awards dinner in Dexter, Iowa. In anticipation of the final negotiating session, Bismark CEO Bailey called the North Dakota Attorney General Sabich, a fraternity brother at Kappa Sig at the University of North Dakota, to discuss North Dakota’s concerns about Bismark's lending activities. Bailey assured Sabich that he thought a reasonable settlement could be worked out. Bailey also alerted Sabich that if it could not be resolved then he would retire immediately "and then that horrible Priestly woman will take over and move the whole thing to California. She'll flip Bismark from a state charter to a federal charter and you know what that means!" Both Bailey and Sabich know full well that the North Dakota Bureau of Banking would lose fees from its largest state bank which would cut the Bureau’s budget by 45%. It would also devastate the economy of southern North Dakota and throw into doubt continuing state enforcement jurisdiction. At the end of the first quarter of 2011, Bismark announced that it had a $1.2 billion loss just for that quarter. Analysts blamed the loss on poor earnings resulting from delinquent loans to Bismark/OPM customers. An article in the Wall Street Journal quoted unnamed analysts as suggesting that Bismark would be better off if it divested OPM, especially since there were rumors that Blumenthal might hold hearings, subpoena Bailey and Priestley officials to discuss predatory lending practices and "forward the matter to the Criminal Division of the USDOJ.” Following the Citizens United decision, Priestly denied that she was having an affair with an unnamed philanthropist well known for contributing heavily to "tea bag" organizations and candidates (an article to that effect had appeared in both the National Enquirer and Vogue), but did admit that OPM had made independent election contributions request in the 2010 elections to support candidates who “believe in free enterprise and pursuit of the American Dream.” Citing Citizens United, she declined to say how much or to whom. Priestly angrily denied that there was any connection between her contributions and the AG investigation, Florrick. (Priestly called Florrick “Galvin's pet AG") The contributions "came from my heart" was all she said before talking about her impoverished childhood in the Bronx "where only rich people owned homes." In 2012, the new California Attorney General is considering a run for the U.S. Senate, the Illinois Attorney General is hoping for a judicial appointment from President Obama, who was her seatmate in the Illinois State Senate, and the North Dakota Attorney General is seeking election. The Iowa Attorney General has just been reelected and remains supremely popular. O’Shea remains interested in another run for Congress, Geary is considering joining a national class action firm, Burger is concerned that the State of California will change the pension rules in such as way as to make it necessary for him to retire before the end of the year and Jones has been elected Chair of the Greater Chicago Universalist-Unitarian Conference, a volunteer position that is taking more and more of her time. Joyce is anxious to land a coveted slot at Harvard Law School teaching trial advocacy. Florrick, the only remaining Democrat in Mississippi, is running behind in the polls and understands that former attorneys general are able to make a great deal of money lobbying for companies in trouble. Bailey, who has always loved ranching and "Bison" hockey, is tired of "the whole mess” and Priestley has secreted away much of her vast fortune although her corporate lawyers tell her that “nothing is safe from government in these troubled times if you do not fight back.” Galvin and Gambini both have a gambling addictions and Bach is chairing the Harvard Law School Capital Campaign that is anxious to pay down the mortgage on the Wasserstein Building. Assignment: Your answers to this Question account for two thirds of your grade. Please take the position of at least two of these named individuals – at least one on the government side and at least one on the non-government side – and develop a strategy for them that draws on what you have learned in this seminar and your own judgment. (Galvin should be considered “non-governmental”). In doing so, you should refer to everything you have learned in this seminar including but not limited to statutes, AG jurisdiction, structure, ethics, statutory powers, common law authority, relationship with the federal government, resources and political influences. There is no reason why you should or should not recommend serious negotiations - that is up to you - but if you do you might consider addressing as issues the following: 1. The maximum size of the restitution fund, and whether the states’ consumers could access it for refunds. 2. Whether there will be penalties paid to the states, and if so, the amount of the penalties. 3. Whether there will be investigative fees and attorneys’ fees paid to the states, and if so, how much. 4. Whether the consent decree will prohibit activities that violate the lending laws of (a) all 50 states; (b) North Dakota only; or (c) none of the states, i.e., no specific reference to this issue at all. 5. Whether Priestly will be a named defendant and be bound by any injunction. 6. Whether some of the government lawyers should be excluded from negotiations. 7. What kind of monitoring or enforcement would be created to assure compliance. 8. Whether referrals of the subject matter contained in the settlement would be made to other governmental agencies. There are many routes to follow. If "facts" not in the hypothetical - but are consistent with it - emerge in your answer, simply state them clearly. As you know, I am looking for your legal and ethical judgments as to what these individuals should do! Good luck out there!!