That is good news for investors, as these things go. But another, lesser-known case now winding its way through the courts may help others recover losses from lenders who dealt in risky mortgages and claimed that they had no duty to their customers.
The case involves 21 families on Long Island and a convicted swindler named Peter J. Dawson. Mr. Dawson, a self-described financial planner, stole roughly $8 million from his clients, among them elderly parishioners at his church in Uniondale, N.Y. He pleaded guilty in state court in December 2007 and is serving 5 to 15 years in prison.
What does this have to do with mortgage lenders? Home loans were central to Mr. Dawson’s theft. He persuaded people who had paid off all or much of their mortgages to take out new home loans and entrust him with the proceeds. He promised to pay off their new loans with income from investments. Instead, he absconded with their money. Many of his victims lost their life savings and now cannot afford to pay off the mortgages.
Tom Geist is one of Mr. Dawson’s victims. Mr. Geist and his wife, Joy, had paid down their mortgage to $131,000 on their East Meadow, N.Y., home. But on Mr. Dawson’s advice, they took out a new, $280,000 mortgage from IndyMac Bank in May 2003. Mr. Geist was 80 years old and living on Social Security and a small pension.
“I went to Dawson, trusting him, and this started the ball rolling,” Mr. Geist told me. “He left us with nothing. My daughter decided to move in with us and help us out because we couldn’t handle it.”
According to court documents, Mr. Dawson turned to a friend, Michael Laucella, at a mortgage broker called the Custom Capital Corporation, to secure the new mortgages for his clients. Mr. Laucella had served time in prison for state and federal securities and financial crimes before joining Custom Capital as a custodial employee, according to court filings.
In a deposition in the case, Mr. Laucella testified that he became a loan officer at Custom Capital even though, he said, the terms of his federal probation barred him from “opening any ‘new lines of credit.’ ” Mr. Laucella also said he remained at Custom Capital after the company received a letter in September 2005 from the New York State Banking Department directing the company to terminate him “immediately.”
A lawyer for Mr. Laucella and Custom Capital declined to comment.
Mr. Dawson also worked with Alfred Arena, a branch manager of the First National Bank of Long Island, according to court filings and interviews with Mr. Dawson’s former customers. It was at First National that Mr. Dawson kept accounts in which he deposited checks that his clients endorsed over to him. Mr. Dawson testified that Mr. Arena attended more than 50 client meetings at Mr. Dawson’s offices over the years. The Long Island bank also made home equity loans to victims of Mr. Dawson’s scheme. A lawyer for the bank and Mr. Arena did not return a phone call seeking comment.
Neither Mr. Laucella nor Mr. Arena has been accused of wrongdoing.
Contending that all the loans made to these clients were obviously improper and full of red flags, Jacob Zamansky, a lawyer who represents the families fleeced by Mr. Dawson, has sued various lenders involved with Mr. Dawson.
“At every turn, the banks placed their own interests ahead of the interests of their customers,” Mr. Zamansky said. “The banks were driven by their insatiable thirst for revenues and were recklessly indifferent to the devastating consequences these loans would have on the borrowers.”
Bank of America’s Countrywide Home Loans, as well as PHH Mortgage, Homecomings Financial and the other lenders, have argued that they should be dismissed from the case because Mr. Dawson caused the victims’ losses, not them.
But in a ruling issued a few weeks ago, Justice F. Dana Winslow of New York State Supreme Court in Nassau County said the banks’ actions should be examined.
A spokeswoman for Bank of America and a spokesman for Homecomings Financial both said that the case involves a theft by a financial adviser with no connection to them. Both said their institutions would vigorously defend against the lawsuit.
Yet Justice Winslow seems to have rejected the argument that the banks were wholly blameless.
“Significantly, the courts have held that banks do owe duties of care to their own customers,” he wrote, in deciding to keep the banks as defendants in the case. “Moreover, there is a public interest in ensuring the alleged duties relied upon are ‘performed with reasonable care’ — as evidenced by the recent flurry of consumer-oriented laws and amendments enacted in the wake of the ‘subprime mortgage meltdown.’ ”
UNTIL all the facts of the case are heard at trial, it is unclear whether the banks will be held liable for injury to Mr. Dawson’s victims.
But Lewis D. Lowenfels, an expert in securities law at the law firm of Tolins Lowenfels who is not involved in the case, said Justice Winslow’s ruling was significant. It appeared to counter the more restrictive approach taken by the United States Supreme Court in recent years on the issue of holding third parties liable, he said.
“This decision by a lower New York State court may open the door to actions against mortgage brokers, banks and related parties involved in the recent mortgage debacle,” Mr. Lowenfels said. “It will be interesting to see how the facts and the law unfold in this case, particularly in the face of recent U.S. Supreme Court cases embracing a more limited approach to liabilities in analogous areas.”
New York judges have been ahead of the curve before on financial wrongdoing. They were among the first to recognize the flaws in banks’ foreclosure practices, shifting away from a stance held over decades of automatically ruling in favor of lenders and against troubled borrowers. Perhaps the ruling by Justice Winslow is evidence of another such turn in the tide.
Article source: http://www.nytimes.com/2011/07/03/business/03gret.html?partner=rss&emc=rss