FYI: 6th Cir Rules in Favor of Bank in Action Involving Alleged Ponzi Scheme of Depositor

The U.S. Court of Appeals for the Sixth Circuit recently affirmed the
dismissal of various claims against several banks arising out of the
banks' alleged roles in a purported Ponzi scheme, holding that the lower
courts applied the appropriate statute of limitations period to find that
many of the claims were time-barred. A copy of the opinion is attached.

Between 1998 and 2000, James Carpenter allegedly carried out an alleged
Ponzi scheme wherein numerous investors were sold purportedly fraudulent
debentures in various sham companies. His daughter, a teller at Unizan
Bank, N.A. ("Unizan Bank") also allegedly played a role in purported
fraud. Several of those investors brought a class-action lawsuit against
Carpenter in 2000, which settled out of court. In the settlement, the
investors agreed to release the Carpenters from any further liability.

In several different lawsuits brought in different courts, some of the
plaintiffs who settled with the Carpenters sued various banks used by the
Carpenters in connection with the alleged Ponzi scheme. These plaintiffs
alleged that the banks violated the Ohio Uniform Commercial Code's ("UCC")
"properly payable rule" by issuing payment from their checking accounts
for checks they wrote to Carpenter's alleged sham companies, and for
depositing payment into accounts created for these same companies.

The lower courts dismissed the bulk of the claims as time-barred and for
failure to state a claim. A claim against Unizan Bank which alleged
conspiracy to commit fraud and aiding and abetting fraud was allowed to
proceed. However, the lower court in that matter granted Unizan Bank's
motion for summary judgment on the conspiracy claim because the plaintiff
had released the Carpenters from liability in the settlement. A jury
trial was held on the aiding and abetting fraud claim, which resulted in a
verdict for Unizan Bank. The plaintiffs appealed.

The Sixth Circuit first addressed the plaintiffs' argument that the
various UCC claims were not time-barred because those claims were actually
claims of conversion, and therefore that the statute of limitations should
not have begun until "the wrongdoer is discovered." ORC s. 2305.09. The
Court rejected this argument because the plaintiffs did not plead their
claims as claims of conversion. Further, the Court noted this even if
they had pled their claims as conversion, the conversion claim would be
barred because the UCC provides that actions for conversion may not be
brought by issuers of checks. ORC. s. 1303.60.

Consequently, the Court applied the UCC's three-year statute of
limitations period to hold that the plaintiffs had until 2003, at the
latest, to file their UCC claims. Because the various plaintiffs missed
that deadline, Court held that their actions were time-barred.

Next, the Court examined the plaintiffs' arguments that the lower court
erred in applying the Ohio blue sky law limitations period, rather than
the common law fraud limitations period. As you may recall, the Ohio blue
sky provides a two-year statute of limitations period for securities fraud
claims, whereas the common law fraud limitations period runs for four
years. ORC ss. 1707.43(B); 2305.09(C).

The Court concluded that the "Ohio law applies the blue sky limitations
period to all claims of fraud arising out of the sale of a security, not
just those alleging violation of Ohio's blue sky law." Therefore, the
Court held that the lower court applied the correct limitations period to
these claims.

In addition, the Court considered one plaintiff's argument that once the
lower court declined to grant him class certification, it no longer had
subject matter jurisdiction over his claims. This argument too was
rejected by the Court, which noted that extensive case law provides that
"denial of class certification does not divest federal courts of
jurisdiction."

Finally, the Court considered the allegations of one plaintiff that sought
to hold Unizan Bank liable for the actions of its employee under the
doctrine of respondeat superior. However, the Court explained that
"[u]nder Ohio law, a settlement with a release of the servant will
exonerate the master." Therefore, the Court held that the release of the
Carpenters in connection with the settlement agreement extinguished this
cause of action.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

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FYI: S.D. Ohio Rules in Favor of Rating Agencies in MBS Action by Ohio Pension Funds

The U.S. District Court for the Southern District of Ohio recent ruled
against various Ohio pension funds and in favor of a group of rating
agencies, as to multiple alleged violations of the Ohio Securities Act and
alleged negligent misrepresentation. A copy of the opinion is attached.

Five state investment funds for the State of Ohio (the "Ohio Funds")
brought suit against various rating agencies (the "Rating Agencies") for
losses allegedly arising from the Ohio Funds' purchase of residential and
commercial mortgage-backed securities. Specifically, the Ohio Funds
claimed that the high credit ratings assigned by the Rating Agencies to
the securities were false, negligently assigned, and based on flawed
methodologies. The Ohio Funds further claimed to have relied on the
credit ratings in making their purchases and as a result, lost $457
million in purportedly "safe" investments.

The Rating Agencies moved to dismiss, claiming that their ratings were
predictive opinions and, absent specific allegations of fraudulent intent
or of a duty to the Ohio Funds, the Agencies could not be held liable for
alleged negligence in their methodologies.

The causes of action considered by the Court included the claim that the
Rating Agencies violated ORC s. 1707.41 of the Ohio Securities Act both by
offering materials that contained the "unfounded and unjustified AAA
ratings," and by failing to monitor and/or periodically update the
ratings. The Ohio Funds also asserted a claim under ORC s. 1707.43, which
extends secondary liability to anyone who "participated in or aided the
seller in any way" in making an unlawful sale of securities. Finally, the
Court also considered the Rating Agencies allegations of negligent
misrepresentation, and whether the Rating Agencies might owe the Ohio
Funds "a duty to act with reasonable care in preparing, assigning,
maintaining, and disseminating the AAA credit ratings assigned to each of
the securities" that the Ohio Funds purchased.

The Rating Agencies sought dismissal of the Ohio Securities Act
allegations on various bases, including immunity under the First
Amendment, preemption of Ohio law by the Credit Rating Agency Reform Act
of 2006, and statute of limitations grounds.

In considering these arguments, the Court noted that the relevant
statutory provision requires that an entity that "offers any security for
sale, or receives the profits accruing from such sale, is liable, to any
person that purchased the security relying on the [information] for the
loss or damage sustained by the relying person by reason of the falsity of
any material statement contained therein or for the omission of material
facts." Because liability under this provision required that the Rating
Agencies "receive the profits accruing from such sale," as opposed to
"work performed in preparation for a securities offering" as alleged by
the Ohio Funds, the Court ruled that the Ohio Funds' "has no merit."

The Court also examined the Ohio Funds' claims under Section 1707.43 of
the Ohio Securities Act, and concluded that it "fare[d] no better."
Specifically, the Court noted, in order to establish a, ORC s. 1707
violation, the Ohio Funds would have to "establish a predicate violation
by the seller and then show that the Rating Agencies are liable as ones
who "participated in or aided the seller in any way in making such sale."
However, in dismissing the second cause of action, the Court ruled that
the complaint "wholly fails to plead a predicate violation" and thus, the
"Rating Agencies thus cannot be held liable" under ORC s. 1707.43.

Finally, the Court also considered the Ohio Funds' claims that the Rating
Agencies "had a duty to act with reasonable care in assigning their credit
ratings and that they breached their duty by failing to manage and
disclose conflicts of interest, [by] using faulty models in determining
their ratings, and [by] failing to adequately monitor ratings." In
analyzing this question, the Court first considered whether New York or
Ohio law should apply.

Analyzing New York law, the Court noted that "a majority of courts have
held that [New York law] preempts common law claims relating to securities
transactions, if the claim does not require proof of intent." Further,
these decisions have generally given the New York Attorney General
"exclusive authority to prosecute such claims" no private right of action
is allowed," the Court ruled. In addition, "a claim of negligent
misrepresentation relating to a securities transaction is among the types
of claims preempted" because it does not require proof of intent." This
alone, the Court held, "would cause the Ohio Funds' claim of negligent
misrepresentation to fail under New York law."

Looking to Ohio law, the Court noted that in order to sustain a negligent
misrepresentation claim, the Ohio Funds would have to establish, inter
alia, that the Rating Agencies owed a duty to the Ohio Funds, and the
credit ratings were "actionable misrepresentations."

Specifically, "liability for negligent misrepresentation is limited to a
loss suffered "by the person or one of a limited group of persons for
whose benefit and guidance [the defendant] intends to supply the
information," rather than "the extensive, faceless, and indeterminable
investing public-at-large." Moreover, "liability may be imposed for
negligent misrepresentation only if the disseminator of the information
intends to supply it to a specific person or to a limited group of
people."

However, in this matter, the Court held that the Ohio Funds "fail[ed] to
allege a special relationship [with] the Rating Agencies," or that "the
parties had any direct communication," or even that "the Rating Agencies
knew or foresaw that the Ohio Funds in particular would be relying on
their ratings." In addition, the pleadings suggested both "a widespread
availability of the securities and a widespread reliance on the ratings,"
rather than anything that could "support an inference that ratings were
communicated only to the Ohio Funds or only to pension funds" and thus,
the Rating Agencies did not owe a particular duty to the Ohio Funds.

Similarly, the Court noted, another crucial element of a negligent
misrepresentation claim is that the "misrepresentation generally must
relate to an existing or pre-existing fact" predictions about the future
and statements of opinion are generally not actionable." Acknowledging
the Rating Agencies' arguments that their ratings were "predictive
opinions," and that this was "a point the Ohio Funds [did] not seriously
dispute," the Court went on to note that opinions are actionable only
where the author "does not believe the opinion and the opinion is not
factually well-grounded."

However, the Court noted, the complaint here failed to "allege that the
Rating Agencies did not believe their ratings," even though the Ohio Funds
alleged that "some employees believed that the ratings agencies could have
used methods that better would have informed their opinions." That Rating
Agency executives conceded, in hindsight, "that the models and data that
the rating agencies were using were deficient" does not make the rating
"false or misleading" and thus "Defendants are not liable under the
securities laws when their opinions, or those they reported, were honestly
held when formed but simply turn out later to be inaccurate."

The Court also considered the Ohio Funds' argument that "the ratings
agencies produced high ratings aimed at keeping business." Noting that
"the complaint stops short of alleging expressly that the leadership of
[the Rating Agencies] believed that their companies ratings were false or
were unsupported by models that generally captured the quality of the
securities being rated," the Court then ruled that "a complaint must
provide further factual enhancement to avoid dismissal under Rule
12(b)(6)."

For these reasons, the Court granted the Rating Agencies' motion to
dismiss.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

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FYI: Ill App Ct Holds Offer of Full Tender Prior to Motion for Class Cert Moots Putative Class Action

The Illinois Appellate Court for the First District recently held that a
class action was moot, because the defendants offered the plaintiffs the
full amount of the damages they sought prior to the plaintiffs' filing for
class certification.

A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/Sept
ember/1103482.pdf

Former hourly employees of McDonalds franchises filed a class action
lawsuit against the owner-operators of those franchises, alleging various
violations of the Illinois Minimum Wage Law and Illinois Minimum Wage
Payment and Collection Act. Before the plaintiffs sought to certify
their class, the defendants offered to pay the plaintiffs the damages they
sought, plus interest. The plaintiffs rejected the offer.

The defendants moved to dismiss the action on the grounds that it was
moot. Plaintiffs filed a motion for class certification. The circuit
court held that the action was moot, and plaintiffs appealed.

The Court began its analysis by examining recent developments in Illinois
case law concerning class actions. It noted that until recently, the
general rule in Illinois provided that where the defendant offers the full
relief requested prior to the certification of the class, the action must
be dismissed as moot. See Akinyemi v. JP Morgan Chase Bank, N.A., 391
Ill. App. 3d 334, 339 (2009). In addition, an exception to that rule
provided that the plaintiff may proceed with a class action despite full
tender, where "(1) the defendants did not become aware of the class action
after the tender and (2) the plaintiff pursued his or her class action
with 'reasonable diligence.'" Id. at 340.

However, the Illinois Supreme Court recently held that a plaintiff who did
not seek certification of her class action claim prior to a tender of full
relief could not proceed with the action, regardless of whether the
plaintiff exercised "reasonable diligence." Barber v. American Airlines,
Inc., 241 Ill. 2d 450 (2011). Thus, the Illinois Supreme Court explicitly
overruled the exceptions.

Neither party disputed that the offer of tender was made prior to the
plaintiffs' motion for class certification. Consequently, the Appellate
Court held that the plaintiffs' cause of action was moot.

The plaintiffs sought to avoid this result by arguing that the tender
amounts were not specific and were not actually given to them. The
Appellate Court disagreed, noting that Illinois case law defines "tender"
as an unconditional offer to pay, and further that plaintiffs are not
permitted to continue a controversy simply by refusing the offer.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

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FYI: Cal App Ct Says Notice of Assignment of DOT Can Be Recorded on Same Day as Notice of Sale, MERS Can Foreclose

The Court of Appeals of California, Second Appellate District, recently
held that: (1) a foreclosure sale in which the notice of an assignment of
a deed of trust was recorded on the same date as the notice of trustee's
sale did not violate Cal. Civil Code Section 2932.5, which requires that
an assignment of a mortgage be recorded before the exercise of the power
of sale, because Section 2932.5 applies only to mortgages, and not deeds
of trust; and (2) MERS had the right to foreclose.

A copy of the opinion is available online at:
http://www.courtinfo.ca.gov/opinions/documents/B226494.PDF

The plaintiff borrower obtained a loan secured by a deed of trust against
her home. The deed of trust identified Mortgage Electronic Registration
Systems, Inc. ("MERS") as the nominal beneficiary. The loan and deed of
trust were eventually sold to HSBC Bank USA, N.A. ("HSBC").

Following the borrower's default, a new trustee was substituted. The new
trustee initiated foreclosure proceedings and executed a foreclosure sale
of the plaintiff's residence. Notice of the assignment of the deed of
trust appeared only in the substitution of trustee, which was recorded on
the same date as the notice of trustee's sale.

Plaintiff filed suit, seeking to set aside the trustee's sale for an
alleged violation of California Civil Code Section 2932.5, which requires
the assignee of a mortgagee to record an assignment before exercising a
power to sell real property. HSBC demurred. The trial court sustained
the demurrer without leave to amend, and plaintiff appealed.

The Appellate Court began by examining the text of Section 2932.5, which
provides: "Where a power to sell real property is given to a mortgagee.
the power is part of the security and vests in any person who by
assignment becomes entitled to payment of the money secured by the
instrument.[t]he power of sale may be exercised by the assignee if the
assignment is duly acknowledged and recorded."

However, the Court noted, it "has been established since 1908 that this
statutory requirement that an assignment. must be recorded in order for
the assignee to exercise the power of sale applies only to a mortgage and
not to a deed of trust."

In fact, the Court noted, in Stockwell v. Barnum (1908) 7 Cal. App. 413, a
prior appellate court "distinguished a trust deed from a mortgage" on the
basis that "a mortgage creates only a lien, with title to the real
property remaining in the borrower/mortgagee, whereas a deed of trust
passes title to the trustee with the power to transfer marketable title to
a purchaser." Moreover, this holding "has never been reversed or modified
in any reported California decision in the more than 100 years" and thus,
"[t]he rule that section 2932.5 does not apply to deeds of trust is part
of the law of real property in California." In fact, the Court noted,
"[a]fter 1908, only the federal courts have addressed the question whether
section 2932.5 applies to deeds of trust. [and every] federal district
court to consider the question has followed [this ruling]."

The Court also noted that MERS also had the right to initiate foreclosure
on behalf of HSBC "irrespective of the recording of a substitution of
trustee." Specifically, "Section 2924(a)(1) states that a 'trustee,
mortgagee, or beneficiary, or any of their authorized agents,' may
initiate the foreclosure process." Because "MERS was both the nominal
beneficiary and agent (nominee) of the original lender and also of HSBC,
which held the note at the time of the foreclosure sale of plaintiff's
residence, MERS had the statutory right to initiate foreclosure on behalf
of HSBC pursuant to Section 2924," the Court held.

Moreover, "MERS also had the right to initiate foreclosure on behalf of
HSBC pursuant to the express language of the deed of trust," which granted
MERS the right "the right to initiate foreclosure and instruct the trustee
to exercise the power of sale as nominee (i.e., agent) of the original
lender and its successors and assigns." Since HSBC "was the assignee of
the original lender," both "HSBC Bank and MERS, [as] its nominal
beneficiary and agent, were entitled to invoke the power of sale in the
deed of trust," the Court ruled, and affirmed the lower court's judgment.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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