I. INTRODUCTION

I am Timothy A. Lambirth, an attorney licensed to practice in California, Maryland and the District of Columbia. My offices are in Los Angeles, California where I am a partner with Ivanjack & Lambirth, a law firm which represents primarily financial institutions.

I am counsel for Great Western Bank ("GWB"), now known as Washington Mutual in the case entitled Auerbach v. Great Western Bank, Los Angeles Superior Court Case No. SC 034865. That matter was tried before a jury in July, 1997 which returned a verdict against GWB imposing an award of compensatory damages in the amount of $207,155.00 and punitive damages in the amount of $2.6 million.
II. THE CASE

The case was a lender liability defense matter wherein GWB was sued by Ernest Auerbach and Lisa Auerbach (the "Auerbachs") for fraud and breach of the covenant of good faith and fair dealing. The case concerned the parties' rights and obligations flowing from a Pre-Workout Agreement ("PWA"), which GWB had insisted the parties enter into before having any discussions concerning the possibility of a modification of the Auerbachs' loan with GWB.

GWB like many other banks in California in the 1980's, was concerned about meritless lender liability claims. It was particularly concerned about claims made by its borrowers arising out of discussions concerning possible loan modifications. Consequently, GWB like other banks, developed a PWA.

The purpose of the PWA was to provide a shield to GWB protecting it from typical lender liability claims. The PWA provided that borrowers, here the Auerbachs, were not to rely on any oral representations, that there would be no agreement until one was reduced to writing and signed by all the parties, and that no conversations could be used as evidence in any subsequent lawsuit.

In this case, the Auerbachs were wealthy and sophisticated real estate developers residing in Santa Monica, California. The Auerbachs had a net worth of approximately $70 million as of the early 1980's.

In the late 1980's, GWB acquired a commercial building located in San Diego as a result of foreclosing on a previous loan. The Auerbachs desired to purchase that property from GWB.

Thus, on or about April 28, 1988, the Auerbachs purchased the property from GWB and at that time borrowed $2,000,000.00 from GWB to facilitate the purchase. The Auerbachs executed a Promissory Note in the amount of $2,000,000.00 whereby they were initially only responsible for making interest payments. Five (5) years later, pursuant to the terms of the Note, the payments were to be adjusted to amortize the loan so that the principal would start being paid back. In conjunction with the execution of the Note, the Auerbachs also executed and delivered to GWB a Trust Deed which secured the Note on the Property. Lastly, as a part of that transaction, the Auerbachs and GWB entered into a Non-Recourse Agreement that provided the Auerbachs would have no personal liability in the event they defaulted under the terms of the Note.

For four or five years thereafter, the Auerbachs were happy. The rents the Auerbachs were receiving from the Property were more than sufficient to enable them to make the payments on the Note and pocket a handsome profit. However, the real estate market in California declined in the early 1990's. Furthermore, the favorable lease the Auerbachs had with their sole tenant expired and the Auerbachs were unable to renegotiate it on favorable terms.

In late 1992 and early 1993, the Auerbachs approached GWB and expressed a desire to renegotiate the terms of the Note. Before discussions could take place concerning a possible renegotiation, the parties entered into the PWA "Pre-workout Agreement" ("PWA"). The PWA stated that the Auerbachs "desire to discuss the possibility of modifying the Loan Documents" and GWB "is willing to enter into negotiations to discuss with Borrower the possibility of modifying the Loan Documents." The Auerbachs and GWB agreed to "commence negotiations concerning the possible modification of the obligations" and to "discuss various courses of action that the parties hereto believe might be in their mutual interest." Virtually every paragraph of the PWA made it clear that nothing said or done by GWB or either party during the discussions would obligate GWB to agree to modify the Note nor could it be used against GWB in any subsequent Lender Liability Claim.

GWB had requested the parties enter into the PWA so that it would be protected from lender liability and other meritless claims. GWB wanted some comfort that it could consider any requests the Auerbachs might make to modify their loan, without worrying about being sued.

Between approximately February 1993 and the filing of the Complaint in 1995, the Auerbachs made proposals to modify the Promissory Note. Under these proposals, the Auerbachs asked that GWB write off from $750,000.00 to $1.2 million from the $2 million loan. Because the Auerbachs failed to offer any new consideration for such a drastic reduction in principal, or any good reason for GWB to accept the offer, GWB rejected the Auerbachs' proposals. GWB did offer to reduce the Auerbachs' loan balance from $2 million to $1.6 million, a $400,000.00 discount.
III. THE LAWSUIT

The Auerbachs then filed their lawsuit in 1995, claiming that GWB (1) breached the PWA because it rejected their proposals that GWB reduce the Note; (2) was required to accept a discounted payoff on a Deed in Lieu of Foreclosure; and (3) was obligated to agree to a transfer of title to a shell corporation before foreclosing to protect the Auerbachs' credit rating. The Auerbachs were claiming that GWB's loan workout representative failed to disclose his alleged personal philosophy not to agree to any loan modification proposals if the loan payments were current. They claimed they would not have continued to make their monthly payments if they had known his alleged philosophy. Thus, they would have let the property go into foreclosure and not have incurred losses from the negative cash flow on the property.
IV. THE JURY

The Auerbachs were represented by competent counsel and the matter was tried in July, 1995 before a jury for approximately ten days in Malibu, California. The jury was predominantly caucasian. Almost all of the jurors were college graduates and many had graduate and advanced degrees. Virtually all the jurors were professionals. I would have thought that the jury would have been defense oriented or otherwise conservative. However, after hearing all of the evidence, the jury returned a verdict finding that GWB had defrauded the Auerbachs by not disclosing that the Bank's loan officer had a philosophy that he would not even consider modifying a loan if the borrowers were current i.e., regularly making their monthly payments.

The Auerbachs had argued, and the jury found, that the Auerbachs would not have continued making their loan payments had they known that the Bank would not consider a modification of their loan if they were not in default. The jury made this finding despite the fact that the Auerbachs were legally obligated to make their loan payments under the terms of the Note and that the Bank would foreclose upon the its trust deed if they failed to do so.

The Auerbachs had repeatedly stated orally, as well as in numerous writings, that they did not want to have the "stigma" of having a foreclosure on their record and did not want such a blemish on their impeccable credit rating. In the Auerbachs' long history as real estate developers in Santa Monica, spanning approximately 40 to 50 years, they had never lost one property through foreclosure.

GWB contended that the Auerbachs continued to make their payments because they wanted to avoid the foreclosure and the damage to their credit rating and reputation. That was the reason the Auerbachs continued to pay and not because of any alleged hidden philosophy on the part of the bank officer.

The jury found that the Auerbachs had been financially injured in the amount of $207,155.00. That sum was deemed to be their actual economic loss as a result of continuing to make monthly payments on the property while it had a negative cash flow.
V. PUNITIVE DAMAGE AWARD

In California, the punitive damage phase of a trial occurs after the jury makes a specific finding that by "clear and convincing evidence," there has been fraud or some other ground for punitive damages to be awarded. Having found GWB to have engaged in fraud by clear and convincing evidence, the jury next considered the issue as to how much, if any, punitive damages should be imposed against GWB.

At the punitive damage phase of the trial, the Auerbachs' counsel immediately placed a large poster board blow-up in front of the jury which reflected GWB's net worth of $2.6 billion. He argued that punitive damages should bear some reasonable relationship to the amount of the defendants' net worth. He started by saying that ten percent of $2.6 billion was $260 million. He gratuitously indicated that that would be too much in the way of punitive damages to award in this case. He next told the jury that one percent of $2.6 billion would be $26 million and that .1% would be $2.6 million.

The jury went on to find that punitive damages should be awarded in the amount of $2.6 million against GWB for its failure to disclose the alleged philosophy of its loan officer that he would not consider a modification of the Auerbachs' loan while the loan was being paid current. There were no claims by the Auerbachs of physical or emotional injury. Their sole claim was that it had cost them money to continue to make payments to the Bank (which they had previously agreed to do under the terms of their Promissory Note) and that they would have stopped making the monthly payments and let the property go into foreclosure had they known the Bank would not negotiate a modification of their loan.
VI. COMMENTARY

Often when insurance companies are involved in cases, evidence of insurance is inadmissible because it is deemed to be too prejudicial to be disclosed to the trier of fact. Unless the insurance company itself is actually a party to a case, the fact that one of the defendants has insurance cannot be disclosed.

Unlike insurance companies, when banks are involved in litigation, everyone knows that a bank is party. From the very beginning of a lender liability defense case, during jury selection, all the way through final argument, plaintiff's counsel, hammer home, over and over to the jurors about "the bank," "the big, bank," "the bureaucrats at the bank," etc., etc.

It has been my experience that virtually every juror brings with them to their jury experience personal and ill feelings towards large financial institutions. Everyone has experienced some type of frustration or another when dealing with their bank. They have all heard horror stories. Many have received dunning or other letters notifying them that they are late in their payments. Some jurors may have been sued by banks or other financial institutions, yet be too embarrassed to disclose the fact when being questioned during the jury selection process.

To make matters worse, recently in California there has been a flurry of radio and other media advertising which I would classify as "big bank bashing." These ads are catchy and quite humorous. Their underlying theme is that banks are too big, uncaring and do not give customers the personal attention and service which they would like to receive. Interestingly, these "big bash banking" advertisements are run by the smaller banks. The problem is that these advertisements feed upon and foster the subconscious belief held by many people that large financial institutions have been treating them poorly for years. Many people feel frustrated and powerless when dealing with large financial institutions. Sitting on a jury temporarily gives them the opportunity to yield some of their own power and vent some of frustration.

It is extremely difficult to level the playing field when you are defending a bank accused of fraud before a jury. I spent years and years working on trial techniques in an effort to get the jurors to place the banks on equal footing with the individuals suing them.

What I find most interesting about the punitive damage award in the Auerbach case, is that it truly bears no reasonable relationship to the amount of the compensatory financial damages. The jury found that the Auerbachs had been financially injured in the amount of $207,155.00. The punitive damages were merely plucked out of the air because they constituted .1% of GWB's net worth. Obviously, I did everything I could to try to limit the amount of punitive damages awarded, but it is disconcerting, indeed, that the jury simply took a simple mathematical formula, suggested by the Auerbachs' counsel, to determine that $2.6 million be awarded as punitive damages.

Organized crime would have been treated better than GWB. Had organized crime engaged in fraud resulting in financial injury and someone brought suit against them, claiming a RICO (Racketeer Influenced Corrupt Organizations Act) violation, all organized crime would have been responsible for would be treble damages. In short, had the organized crime been found to have caused $200,000.00 in financial injury as a result of fraud, under RICO, the maximum organized crime could be found liable for would be $600,000.00 or treble the amount of the actual damages.

Unfortunately, GWB was not a racketeer but merely a financial institution which made a $2 million loan to a multi-millionaire who wanted to renegotiate his obligation. While GWB employed the use of a PWA in an effort to shield its liability, the Auerbachs's counsel used the PWA as a sword to create new liability to GWB by alleging it did not negotiate in good faith nor disclose all material facts concerning the decision making process for modifying loans.

In the grand scheme of lender liability actions and financial fraud, what GWB allegedly engaged in, was minuscule. It allegedly failed to disclose the philosophy that one of its loan officers would not consider a modification so long as loan payments were current. For that one instance a jury imposed $2.6 million in punitive damages. There was no evidence shown, nor suggestion made, that any other customer of GWB had ever been damaged in a similar situation.

I strongly suggest that The Fairness and Punitive Damage Awards Act be enacted.

The jury in the Auerbach case, by imposing $2.6 million in punitive damages, is not just punishing GWB. It is also punishing other borrowers and customers of GWB, now Washington Mutual, who, unlike Mr. and Mrs. Auerbach, are not multi-millionaires, and may have suffered personal hardship, the loss of a loved one, a medical emergency or the loss of a job and want to renegotiate a loan. Those borrowers who now come to Washington Mutual in a good faith effort to reduce the amount of their obligation because they can no longer afford to make the payments (unlike the Auerbachs) are the ones who will now suffer, since Washington Mutual would be loathe to even discuss a loan modification for fear of being sued and having a huge punitive damage award made against it.