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HSA Residential Mortgage Services of Texas v. State Bank of Long Island

September 28, 2006

HSA RESIDENTIAL MORTGAGE SERVICES OF TEXAS, PLAINTIFF,
v.
STATE BANK OF LONG ISLAND, DEFENDANT.



The opinion of the court was delivered by: Seybert, District Judge

AMENDED MEMORANDUM AND ORDER*fn1

INTRODUCTION

Pending before the Court is Defendant's motion for a judgment as a matter of law or in the alternative for a new trial. For the reasons below, this Court DENIES both Defendant's motions for a judgment as a matter of law and a new trial.

BACKGROUND

On January 9, 2006, a jury trial began in this complex mortgage fraud matter. Three weeks later, the jury rendered a verdict in favor of Plaintiff, HSA Residential Mortgage Services of Texas ("Plaintiff"). The jury found that the Defendant, State Bank of Long Island ("Defendant"), had aided and abetted a fraud committed by Island Mortgage Network, Inc. ("Island Mortgage"). State Bank was the bank at which Island Mortgage kept over forty accounts for its mortgage fraud scheme. Through these accounts, Island Mortgage had defrauded a number of mortgage warehouse lenders, including Plaintiff, out of millions of dollars. The jury awarded Plaintiff $43,856,746.03 - the amount of Plaintiff's outof-pocket losses.

On February 10, 2006, Defendant moved for judgment as a matter of law or in the alternative for a new trial. Defendant argues the following: Plaintiff did not prove by clear and convincing evidence that (a) Plaintiff justifiably relied on four of Island Mortgage's misrepresentations when it wired monies to Action Abstract, one of Island Mortgage's affiliate companies ("Action Abstract"); (b) Defendant actually knew of Island Mortgage's fraudulent scheme; and (c) Defendant substantially assisted Island Mortgage in perpetrating a fraud. Defendant also challenges the amount of the damages award.

STANDARD OF REVIEW

Federal Rule of Civil Procedure 50 provides that a party can move for judgment as a matter of law at any time prior to the submission of the case to the jury and argue that "there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue." Fed. R. Civ. P. 50. The Court may reserve decision on the motion and submit the case to the jury, thus requiring the movant to renew its request after judgment. "In ruling on a renewed motion, the court may: (1) if a verdict was returned: (A) allow the judgment to stand, (B) order a new trial, or (C) direct entry of judgment as a matter of law; or (2) if no verdict was returned; (A) order a new trial, or (B) direct entry of judgment as a matter of law." Fed. R. Civ. P. 50.

On a motion for judgment as a matter of law, "the court must review all of the evidence in the record, cf., e.g., Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538, drawing all reasonable inferences in favor of the nonmoving party, but making no credibility determinations or weighing any evidence, e.g., Lytle v. Household Mfg., Inc., 494 U.S. 545, 554-555, 110 S.Ct. 1331, 108 L.Ed. 2d 504." Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 135, 120 S.Ct. 2097, 2102 (2000).

To succeed on a motion for a judgment as a matter of law, the evidence introduced at trial must be "such that, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable [persons] could have reached." This is Me, Inc. v. Taylor, 157 F.3d 139, 142 (2d Cir. 1998) (alteration in original and internal quotation marks omitted). A movant meets this extremely high burden when "there is such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded" jurors could not have come to the conclusion and rendered the verdict as was rendered. Diesel v. Town of Lewisboro, 232 F.3d 92, 103 (2d Cir. 2000) (internal quotation marks omitted).

DISCUSSION

At trial, Plaintiff had to prove by clear and convincing evidence that Defendant aided and abetted the fraud Island Mortgage perpetrated on Plaintiff. Under New York law, Plaintiff had to prove that (1) Island Mortgage defrauded Plaintiff, (2) Defendant actually knew of the fraud, (3)and Defendant substantially assisted in advancing the fraud. See Allied Ir. Banks, P.L.C. v. Bank of Am., 03-CV-3748, 2006 U.S. Dist. LEXIS 4270, at *32 (S.D.N.Y. Feb. 2, 2006.) Defendant essentially argues that Plaintiff did not prove any of these elements.

I. AMPLE EVIDENCE SUPPORTS A JURY FINDING THAT PLAINTIFF JUSTIFIABLY RELIED ON ISLAND MORTGAGE'S FRAUDULENT STATEMENTS

Defendant first argues that Plaintiff did not adduce evidence that it justifiably relied on Island Mortgage's misrepresentations. Plaintiff, as a sophisticated mortgage warehouse lender, should have inquired when faced with certain red flags. If Plaintiff had inquired when suspicious circumstances arose, then it would have discovered the falsity of Island Mortgage's representations and then would not have entered into the many transactions that it did with Island Mortgage. Plaintiff cannot now take advantage of its own failure to inquire when it should have.

A. Island Mortgage's "Ready To Close" Representations

At the outset, the Court would like to address the case of Crigger v. Fahnestock and Co., Inc., 443 F.3d 230 (2d Cir. 2006). Defendant contends that the Court erred in its instruction to the jury. As support, Defendant cites Crigger. Specifically, Defendant argues that Crigger required the Court to additionally charge the jury that a sophisticated plaintiff must inquire before proceeding when faced with red flags. (Def.'s Letter 2.)

This Court disagrees. The Second Circuit reviews jury instructions "de novo" to determine whether the instructions either misled or inadequately informed the jury about the correct legal standard or controlling law. Crigger, 443 F.3d at 235. "A new trial is required if, considering the instruction as a whole, the cited errors were not harmless, but in fact prejudiced the objecting party." Id.

The Second Circuit explained that "reliance entails a duty to investigate the legitimacy of an investment opportunity where plaintiff was placed on guard or practically faced with the facts." Id. at 234 (internal quotation marks and citations omitted). The Crigger court found that the district court did not "mislead the jury" when it instructed the jury regarding plaintiff's duty to inquire. Id. at 236. At the Crigger trial, the evidence indicated that the investment opportunity at issue was fraudulent and that the plaintiffs were "investors of reasonable means and prudence . . . [who] had a legal duty at least to inquire further---just as the district court charged." Id.

This, however, does not mean that this Court erred because it did not instruct the jury about Plaintiff's duty to inquire. First, such duty is only triggered when a "plaintiff is placed on guard or practically ...


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