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Bank of America Asks for Removal of $1.27 Billion Penalty, Questions Judge’s Impartiality

dsnews.com | April 26, 2015

Bank of America has requested an appeals court to dismiss a $1.27 billion court-imposed penalty against the bank over mortgage fraud and has also asked that the judge who imposed the penalty be removed from the case.

The Charlotte, North Carolina-based megabank asked the 2nd U.S. Circuit Court of Appeals for the removal of Judge Jed Rakoff of the U.S. District Court of the Southern District of New York from the case if it is remanded based on alleged partial public statements he made while the case was pending, and in particular while the penalty phase was ongoing.

"In particular, he criticized the Justice Department for failing to pursue bank executives more aggressively for their roles in the crisis," the bank said in the filing. "In a widely publicized article, the district judge questioned why the Justice Department had not brought prosecutions against bank executives using a theory of 'willful blindness' or 'conscious disregard.'"

The filing also said Rakoff made "numerous" speeches on this theme, "with particular emphasis on the Justice Department’s non-prosecution of Countrywide’s chief executive officer, Angelo Mozilo."

A clerk for Rakoff said the judge had no comment when contacted by DS News.

The U.S. Department of Justice sued Bank of America in August 2013, accusing the bank's Countrywide division of misrepresenting the mortgage-backed securities it sold to Fannie Mae and Freddie Mac in the years leading up to the financial crisis through a program known as the High Speed Swim Lane (HSSL, commonly known as "Hustle"). The government said the program emphasized speed over quality of the loans sold, and staff members were rewarded according to sales volume. In October 2013, a jury found Countrywide liable for selling toxic MBS to Fannie Mae and Freddie Mac under the Hustle program.

Bank of America was ordered to pay a $1.27 billion civil penalty in July 2014 as a result of its alleged role in the Hustle case. The bank has been fighting to overturn that verdict since, claiming that the Hustle program ended prior to its July 2008 acquisition of Countrywide. Rakoff rejected a motion by the bank to have the verdict reversed in early February. He also rejected the bank's motion for a new trial at that time.

In December, it was announced that former Countrywide executive Edward O'Donnell will collect $57 million for his role in filing a whistle-blower lawsuit against Bank of America in the Hustle case. Former Countrywide executive Rebecca Marione was ordered to pay $1 million for her alleged role in the Hustle case and is appealing that decision.

Bank of America argues in the filing with the 2nd Circuit Court that the Hustle case should have never been brought to trial because the bank should not have been held liable under the provision of a law enacted following a scandal in the 1980s, and furthermore, the misrepresentations in the case may equate to breach of contract–but breach of contract does not equal fraud.

"Curiously, the action was brought under a provision of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which was enacted in the wake of the 1980s savings-and-loan crisis to protect federally insured financial institutions from misconduct by others," the bank wrote in the filing. "To the best of our knowledge, that provision had never previously been used to extract penalties from a bank, much less from a bank sued only as a successor in interest to alleged wrongdoing. This case never should have gone to trial. By its terms, the applicable provision of FIRREA does not permit liability against banks on the theory that they engaged in fraud “affecting” themselves. What is more, the alleged misrepresentations in this case consisted exclusively of breaches of contractual representations that, under well-established principles, could not give rise to claims for fraud."

Bank of America concluded the filing by asking the court to either reverse the judgment in the Hustle case or vacate the judgment and remand the case based on the claim that "the trial itself was riddled with errors at both the liability and penalty phases."

 

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