Today, the Second Circuit reversed Judge Rakoff’s $1.2 billion penalty against Bank of America/Countrywide for FIRREA violations (see our previous coverage here). The case involved allegations that BoA/Countrywide had sold faulty mortgages to Fannie Mae and Freddie Mac, originally brought as a qui tam suit under the False Claims Act in which the government intervened. The Second Circuit’s decision focused on whether the breach of a contractual promise, without further proof of fraudulent intent at the time of contracting, could sustain a claim for fraud. The Second Circuit held that it court not:
[A] contractual promise can only support a claim for fraud upon proof of fraudulent intent not to perform the promise at the time of contract execution. Absent such proof, a subsequent breach of that promise – even where willful and intentional – cannot in itself transform the promise into a fraud. Far from being an arcane limitation, the principle of contemporaneous intent is, like materiality, one without which the common law could not have conceived of “fraud” . . . . Applying these principles to a fraud claim based on the breach of a contractual promise, we conclude that the proper time for identifying fraudulent intent is contemporaneous with the making of the promise, not when a victim relies on the promise or is injured by it. Only if a contractual promise is made with no intent ever to perform it can the promise itself constitute a fraudulent misrepresentation.
In light of this holding, the Second Circuit found that the government failed to prove fraud on the part of BoA/Countrywide as required under the federal mail and wire fraud statutes:
The Government did not prove – in fact, did not attempt to prove – that at the time the contracts were executed Countrywide never intended to perform its promise of investment quality. Nor did it prove that Countrywide made any later misrepresentations – i.e., ones not contained in the contracts – as to which fraudulent intent could be found.
The case was remanded to Judge Rakoff to enter a judgment for the defendants.