FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: FIRST ALLIANCE MORTGAGE 

COMPANY, a California corporation,

Debtor,

KENNETH C. HENRY, Liquidating

Trust Trustee as Successor-inInterest to the OFFICIAL JOINT

BORROWERS COMMITTEE,

No. 04-55396 Plaintiff-Appellant,  D.C. No. and

CV-01-00971-DOC

FRANK AIELLO,

Plaintiff,

v.

LEHMAN COMMERCIAL PAPER, INC., a

New York corporation; LEHMAN

BROTHERS, INC., a Delaware

corporation,

Defendants-Appellees. 

19231
In re: FIRST ALLIANCE MORTGAGE 

COMPANY, a California corporation,

Debtor,

KENNETH C. HENRY, Liquidating

Trust Trustee as Successor-inInterest to the OFFICIAL JOINT

BORROWERS COMMITTEE; FRANK

AIELLO; NICOLENA AIELLO; MICHAEL

AUSTIN; BARBARA AUSTIN; PAUL

CARABETTA; LENORE CARABETTA; No. 04-55920

GEORGE JEROLEMON; JOSEPHINE D.C. Nos.  JEROLEMON; WALTER BERRINGER; CV-01-00971-DOC

HARRIET BERRINGER, individually CV-01-01111-DOC

and on behalf of all others

similarly situated; OFFICIAL JOINT

BORROWERS COMMITTEE,

Plaintiffs-Appellees,

v.

LEHMAN COMMERCIAL PAPER, INC., a

New York corporation; LEHMAN

BROTHERS, INC., a Delaware

corporation,

Defendants-Appellants. 

19232 IN RE: FIRST ALLIANCE MORTGAGE
In re: FIRST ALLIANCE MORTGAGE 

COMPANY, a California corporation,

Debtor,

MICHAEL AUSTIN; BARBARA AUSTIN;

GEORGE JEROLEMON, WALTER No. 04-55942

BERRINGER, HARRIET BERRINGER;

D.C. Nos. individually and on behalf of all  CV-01-00971-DOC others similarly situated, CV-01-01111-DOC Plaintiffs-Appellants,

OPINION

v.

LEHMAN COMMERCIAL PAPER, INC., a

New York corporation; LEHMAN

BROTHERS, INC., a Delaware

corporation,

Defendants-Appellees. 

Appeal from the United States District Court

for the Central District of California

David O. Carter, District Judge, Presiding

Argued and Submitted

October 19, 2005—Pasadena, California

Filed December 8, 2006

Before: Harry Pregerson, Richard R. Clifton, and

Jay S. Bybee, Circuit Judges.

Opinion by Judge Clifton

IN RE: FIRST ALLIANCE MORTGAGE 19233
COUNSEL

Larry W. Gabriel (argued), Pachulski, Stang, Ziehl, Young,

Jones & Weintraub P.C., Los Angeles, California, for the

appellant.

Richard F. Scruggs (argued), Sidney A. Backstrom, The

Scruggs Law Firm, P.A. Oxford, Mississippi; Elizabeth J.

Cabraser (argued), Hector D. Geribon, Lieff, Cabraser, Heimann & Bernstein, LLP, San Francisco, California; Kim E.

Levy, Lili R. Sabo, Milberg Weiss Bershad & Schulman LLP,

New York, New York, for the plaintiffs-appellees-crossappellants.

Helen L. Duncan (argued), Robert W. Fischer, Jr., Joseph H.

Park, Dinh Ha, Fulbright & Jaworski L.L.P., Los Angeles,

California; Marcy Hogan Greer, Fulbright & Jaworski L.L.P.,

Austin, Texas, for the defendants-appellants-cross-appellees.

OPINION

CLIFTON, Circuit Judge: 

First Alliance Mortgage Company was driven into bankruptcy and subsequent liquidation by well-publicized and justified allegations of fraudulent lending practices. The demise

of First Alliance has led to two separate actions against Lehman Brothers, Inc. and its subsidiary Lehman Commercial

Paper, Inc. (collectively referred to as “Lehman”) growing out

of Lehman’s activity as a lender to First Alliance and as the

underwriter of First Alliance’s securitized debt. One is a class

action on behalf of First Alliance’s borrowers seeking to

impose liability for aiding and abetting the fraudulent scheme

engaged in by First Alliance. The other, brought by the bankruptcy trustee appointed to liquidate First Alliance, seeks to

set aside payments Lehman received in the course of its

IN RE: FIRST ALLIANCE MORTGAGE 19239
financing relationship with First Alliance and to subordinate

Lehman’s secured claims in the First Alliance bankruptcy in

favor of the claims of First Alliance’s unsecured creditors.

(This group of unsecured creditors is essentially the same as

the group of borrowers asserting their claims of fraud against

First Alliance, as is explained in more detail below. See infra

at 19243.) These two separate actions were handled together

by the same district court and have been consolidated for purposes of this appeal. 

After a trial, a jury found Lehman liable under California

tort law to the class of borrowers for aiding and abetting

fraud, and the district court entered judgment accordingly. As

to the trustee’s action, the district judge concluded that Lehman’s conduct pursuant to its relationship with First Alliance

did not warrant relief under the equitable principles of bankruptcy law. See Austin v. Chisick (In re First Alliance Mortgage Co.), 298 B.R. 652 (C.D. Cal. 2003) (setting forth the

district court’s findings of fact and conclusions of law). We

now affirm these holdings, as we do the district court’s rejection of several other claims related to these actions. We

reverse the district court’s denial of remittur or new trial as to

the jury’s damages calculation, however, and we remand for

further proceedings based on the proper theory of fraud damages. 

I. BACKGROUND

In order to explicate the relationships among First Alliance

and the parties to this case—the Austin Class Plaintiffs

(“Borrowers”), Liquidating Trustee Kenneth Henry

(“Trustee”), and Lehman—and the context out of which their

claims arise, we begin with a brief background of the factual

and procedural history of the disputes now before us. 

19240 IN RE: FIRST ALLIANCE MORTGAGE
A. First Alliance Mortgage Company

First Alliance was a lender in the “subprime” mortgage sector. Subprime lending is a relatively new and rapidly growing

segment of the mortgage market which generally consists of

borrowers who, for a variety of reasons, might otherwise be

denied credit. A typical borrower in the subprime mortgage

market is “house-rich” but “cash-poor,” having built up equity

in his home but in little else, and has a lower net income than

the average borrower. Subprime lenders generally charge

somewhat higher interest rates to account for the increased

risk associated with these loans. As the subprime home mortgage industry has grown over the last decade, increasing

attention has focused on predatory lending abuses—the practice of making loans containing interest rates, fees or closing

costs that are higher than they should be in light of the borrower’s credit and net income, or containing other exploitative terms that the borrower does not comprehend.1

See

Debra Pogrund Stark, Unmasking the Predatory Loan in

Sheep’s Clothing: A Legislative Proposal, 21 Harv. BlackLetter L. J. 129, 130 (2005) (noting the “unresolved and heated

debate between consumer advocates and lenders over how to

curb the activities of predatory mortgage brokers and lenders

without adversely affecting the robust legitimate sub-prime

market”). 

1

In 1994 Congress enacted the Home Ownership Equity Preservation

Act, 15 U.S.C. § 1639 (“HOEPA”), to combat predatory lending. Some

contend that the statute is often and easily circumvented. See Tani Davenport, An American Nightmare: Predatory Lending in the Subprime Home

Mortgage Industry, 36 Suffolk U. L. Rev. 531, 547-57 (2003) (discussing

state and federal initiatives to reduce predatory lending and increase consumer awareness, but noting the failure of these attempts). Many states

have imposed their own laws targeting abusive lending practices on top of

the federal regulation, seeking to create stronger consumer protections

than the federal law provides. Id. Over the past few years the subject of

subprime lending has been the topic of several hearings held by the House

Committee on Financial Services’ Subcommittee on Financial Institutions

and Consumer Credit and Subcommittee on Housing and Community

Opportunity. Id. 

IN RE: FIRST ALLIANCE MORTGAGE 19241
As the district court explained in highly detailed findings of

fact (298 B.R. at 655-65) upon which this summary is based,

First Alliance originated, sold and serviced residential mortgage loans in the subprime market through a network of retail

branches located throughout the country, utilizing a marketing

methodology designed to target individuals who had built up

substantial equity in their homes, many of whom were senior

citizens. Through telemarketing efforts, First Alliance

employees would set up appointments for what they described

as in-house appraisals with targeted prospective borrowers.

Following the appraisals, loan officers would employ a standardized sales presentation to persuade borrowers to take out

loans with high interest rates and hidden high origination fees

or “points” and other “junk” fees, of which the borrowers

were largely unaware. The key to the fraud was that loan officers would point to the “amount financed” and represent it as

the “loan amount,” disregarding other charges that increased

the total amount borne by the borrowers. 

First Alliance trained its loan officers to follow a manual

and script known as the “Track,” which was to be memorized

verbatim by sales personnel and executed as taught. The

Track manual did not instruct loan officers to offer a specific

lie to borrowers, but the elaborate and detailed sales presentation prescribed by the manual was unquestionably designed to

obfuscate points, fees, interest rate, and the true principal

amount of the loan. First Alliance’s loan officers were taught

to present the state and federal disclosure documents in a misleading manner, and the presentation was so well performed

that at least some borrowers had no idea they were being

charged points and other fees and costs averaging 11 percent

above the amount they thought they had agreed to. Loan officers were taught to deflect attention away from things that

consumers might normally look at, and the loan sales presentation was conducted in such a way as to lead a consumer to

disregard the high annual percentage rate (“APR”) when it

was ultimately disclosed on the federally-required Truth in

Lending Statement. 

19242 IN RE: FIRST ALLIANCE MORTGAGE
In the late 1990’s, First Alliance became subject to increasing scrutiny including allegations that the borrowers’ loans

were fraudulently induced and that First Alliance deceived

borrowers into paying large loan origination fees of which

they were unaware. In 1998 the United States Department of

Justice and the attorneys general for seven states initiated a

joint investigation into First Alliance’s lending practices. A

lawsuit making similar claims was filed in December 1998 by

AARP (American Association of Retired Persons). Two California Courts of Appeal held that First Alliance loan agreements containing arbitration clauses were unenforceable

because they had been entered into based on the fraudulent

practices of loan officers. See 298 B.R. at 658-59 (chronicling

First Alliance’s lengthy litigation history). 

In March 2000, the New York Times published a front-page

article highly critical of First Alliance’s loan origination procedures. The article implicated Wall Street investment banking firms, concentrating on Lehman’s role in funding First

Alliance. Days later, the ABC News program “20/20” aired a

companion segment which focused further negative attention

on First Alliance. Later that month First Alliance filed a voluntary petition under Chapter 11 of the Bankruptcy Code, 11

U.S.C. §§ 101-1330, because of the costs associated with the

growing number of lawsuits against it and the negative

national publicity it was facing. 

In June of 2000, the U.S. Trustee appointed a Borrowers

Committee pursuant to an order of the bankruptcy court, in

accordance with Section 1102(a)(1) of the Bankruptcy Code.

The Committee was appointed to represent the interests of

individual consumer borrowers who had claims against First

Alliance and against Lehman in the adversary bankruptcy proceedings. In September 2002, the district court entered an

order confirming a liquidation plan for the company and

appointed Kenneth Henry as the Liquidating Trustee of the

First Alliance estate and successor in interest to the Committee. The group of unsecured creditors represented by the

IN RE: FIRST ALLIANCE MORTGAGE 19243
Trustee consists mostly of the same consumer borrowers represented by the plaintiff class. 

In September 2002, the district court also approved a settlement in an action brought by the Federal Trade Commission

(“FTC”) against First Alliance for violations of federal lending laws. In exchange for the amount to be paid out to a

redress fund administered by the FTC, First Alliance was discharged of further liability, such that the settlement had the

effect of ending all litigation against First Alliance. Lehman

was not a party to that settlement, but as will be discussed

below, infra at 19273-79, the terms of the settlement affected

the amount of damages for which Lehman was held liable to

the Borrower class. 

B. Lehman’s Relationship with First Alliance 

First Alliance’s business model was to originate mortgages

to consumer borrowers and then pledge them to a secondary

lender such as an investment bank or other financial institution in return for a loan under a revolving line of credit. As

First Alliance generated mortgages, it would draw down on

that line of credit to fund the mortgages until it had funded

approximately $100 million in loans. When its loan volume

reached that point, First Alliance would issue bonds or notes

to public investors that were secured by the repayment stream

from the mortgage loans. The securitization process would be

underwritten by the investment bank, and First Alliance

would simultaneously repay the credit line with part of the

proceeds from the sales of the bonds and notes. When First

Alliance repaid its credit line, the investment bank released its

lien. 

Under this revolving credit system, the secondary lender

provided both the credit facility, which First Alliance used to

fund the consumer mortgage loans, and underwriting services

for First Alliance’s public equity asset-backed securitizations.

The securitization process made possible a constant flow of

19244 IN RE: FIRST ALLIANCE MORTGAGE
money to First Alliance, whereby the mortgage company was

able to convert a long-term revenue stream from the repayment of the mortgage loans to current income and to capital

with which to fund more loans. Meanwhile, the secondary

lender profited from interest and fees as the credit line was

repaid as well as from fees earned for underwriting the

securitizations. 

Throughout the 1990’s, First Alliance was financed by a

number of warehouse lenders, including other large financial

firms similar to Lehman. Lehman was interested in obtaining

some or all of that business. In contemplation of doing business with First Alliance, Lehman conducted an inquiry into

the company in 1995. Lehman’s investigation revealed that

First Alliance had been accused of fraudulent lending practices since at least 1994 and was the subject of more litigation

than any other non-bankrupt firm in the sector. Internal

reports contained unfavorable descriptions of First Alliance’s

business practices, including references to unethical practices

and a disturbing record of loans generated to senior citizens.

Nevertheless, in 1996 Lehman agreed to extend First Alliance

a $25 million warehouse line of credit. During 1996 and 1997,

Lehman co-managed four asset-backed securitization transactions for First Alliance. 

The mounting scrutiny and litigation against First Alliance

caused alarm among some of its other lenders. By the end of

1998, First Alliance’s other main lenders had withdrawn all

funding, due in part to the potential liability facing First Alliance. When these other lenders withdrew financing, Lehman

stepped forward to provide a $150 million credit line and

became First Alliance’s sole source of warehouse funding and

underwriting. 

The Lehman credit facility was renewed in 1999. According to the terms of their agreement, Lehman made secured

loans to First Alliance by advancing 95 percent of the value

of the mortgages First Alliance pledged as collateral. The

IN RE: FIRST ALLIANCE MORTGAGE 19245
agreement required First Alliance to provide quarterly financial statements, as well as to provide certification that it was

in compliance with the terms and conditions of the agreement

during the relevant period. First Alliance kept Lehman

informed of its pending litigation, and from time to time during 1999 and 2000, Lehman retained the Clayton Group, a

company that specialized in analyzing loans in order to determine compliance with regulations, to examine loans generated

by First Alliance. 

Between 1998 and 2000, First Alliance borrowed roughly

$500 million from Lehman pursuant to its warehouse line of

credit. When First Alliance declared bankruptcy in 2000,

approximately $77 million borrowed from Lehman’s warehouse credit line remained outstanding, secured by First Alliance mortgages. During the course of the bankruptcy

proceedings, Lehman was paid this principal amount plus

interest — payments the Trustee claims on appeal were made

in error. 

C. The Consolidated Actions

Two separate but largely overlapping actions that were consolidated by the district court are the subject of this appeal: a

tort action brought by a class of First Alliance Borrowers and

a bankruptcy action brought by the liquidating Trustee of the

First Alliance estate. 

The district court certified a class consisting of all persons

who had obtained First Alliance mortgage loans from May 1,

1996, through March 31, 2000, which were used as collateral

for First Alliance’s warehouse credit line with Lehman or

were securitized in transactions underwritten by Lehman. The

Borrowers obtained class certification on the basis that First

Alliance had allegedly engaged in a uniform and systematic

fraud against those who made up the class, and that Lehman

was liable to them for aiding and abetting this fraud under

California tort law and under California’s Unfair Competition

19246 IN RE: FIRST ALLIANCE MORTGAGE
Law (“UCL”), Cal. Bus. & Prof. Code § 17200. The basis of

Lehman’s liability under the tort and UCL claims was that

when Lehman agreed to provide the financing for First Alliance’s mortgage business, Lehman did so knowing that First

Alliance loans were originated through deceptive sales procedures, and that without Lehman’s financing, First Alliance

would not have been able to continue to fund its fraudulently

obtained loans. 

The Trustee’s action sought to subordinate, for purposes of

bankruptcy distribution and based upon equitable principles,

Lehman’s $77 million secured claim to the liquidated assets

of the estate to the claims of First Alliance’s general unsecured creditors harmed by its fraudulent business practices.

The Trustee’s action also sought to recover about $400 million that had previously been paid to Lehman pursuant to the

financing agreement, which was characterized as part of First

Alliance’s fraud on its consumer borrowers. 

The district court consolidated the adversary bankruptcy

proceeding against Lehman with the proposed class action.

The remedies sought by the Trustee and the legal theories

upon which they are based are somewhat distinct from those

aspects of the Borrowers’ fraud claim, but the two actions

against Lehman overlap in important ways. The parties in

interest represented by the Trustee in the bankruptcy action

include over 4,000 individual consumer borrowers allegedly

defrauded by First Alliance—a group that includes the Borrowers who make up the class of plaintiffs in the fraud action.

Both actions rest on the premise that Lehman’s financial relationship with First Alliance was a component of First Alliance’s fraudulent scheme. The same fraudulent enterprise that

the Borrowers claim tainted Lehman’s secondary lending to

First Alliance is what both the Borrowers and the Trustee

claim compels subordination of Lehman’s bankruptcy claims

and rescission of payments made to Lehman pursuant to the

financing agreement. 

IN RE: FIRST ALLIANCE MORTGAGE 19247
The Borrowers’ aiding and abetting claims against Lehman

were tried to a jury. As reported in its special verdict form, the

jury found that First Alliance had systematically committed

fraud on the class of Borrowers using a standardized sales

presentation, and that Lehman was liable under California law

for aiding and abetting First Alliance in a fraudulent lending

scheme. Applying the terms of the previously approved settlement between First Alliance and the FTC (discussed in more

detail below, see infra section II.G at 19274-79), the court

asked the jury to calculate the total damages for the Borrowers and to determine the percentage of that total for which

Lehman was responsible. The jury calculated the total damages award to be $50,913,928 and determined that Lehman

was responsible for 10 percent of that amount. Accordingly,

the court entered a judgment against Lehman for

$5,091,392.80. This damages award did not include punitive

damages or damages under the UCL, as the district court had

granted Lehman’s motions for summary judgment on those

claims prior to the jury trial. 

Lehman appeals the judgment on several grounds. Lehman

argues that the Borrowers did not prove systematic fraud on

a class-wide basis, and further that the jury was improperly

instructed on the elements of aiding and abetting fraud, which

Lehman claims requires a finding of specific intent. Lehman

also takes issue with two evidentiary rulings made during

trial, which Lehman insists caused prejudice and necessitate

a new trial. In addition, Lehman challenges the damages calculation, arguing that it was based on an improper theory of

damages and that the jury was erroneously instructed. 

The Borrowers cross-appeal, finding fault with the court’s

apportionment of damages based on the percentage of liability. The apportionment of damages was made pursuant to the

“judgment reduction” clause or “Bar Order” in the previouslyapproved settlement agreement between the plaintiffs2

 and

2The group of plaintiffs who were party to the settlement agreement

included the Federal Trade Commission, several states’ attorneys general,

19248 IN RE: FIRST ALLIANCE MORTGAGE
First Alliance, which extinguished all non-settling defendants’

rights to indemnity or contribution from First Alliance (discussed fully below, see infra section II.G at 19274-79). The

Borrowers claim that this settlement agreement did not apply

to their aiding and abetting action against Lehman. The Borrowers also appeal the court’s summary judgment order on

their UCL and punitive damages claims. 

The Trustee’s equitable subordination and fraudulent transfer claims were tried to the bench, and the district court

denied those claims. The court made findings of fact that echoed the jury’s determination that Lehman’s conduct amounted

to aiding and abetting fraud, but it concluded that equitable

subordination and fraudulent transfer rescission were not

appropriate remedies. 298 B.R. at 665-70. Regarding the

Trustee’s claim for equitable subordination, the court found

that Lehman’s conduct did not deplete or otherwise adversely

impact First Alliance’s assets, was not related to the acquisition or assertion of its secured claim against the First Alliance

estate, and did not amount to gross or egregious misconduct

that shocks the conscience of the court. Likewise, the court

found that First Alliance’s payments to Lehman were not

fraudulent transfers under California law and the Bankruptcy

Code. Id. The Trustee appeals both of these holdings. 

We consider these issues in turn below, and our conclusions may be briefly summarized as follows. Sufficient evidence supported the allegation that First Alliance committed

fraud on a class-wide basis through a common course of conduct, so class treatment of the Borrowers’ claims against Lehman was proper. Aiding and abetting fraud under California

law requires a finding of “actual knowledge” and “substantial

AARP, the Official Joint Borrowers’ Committee (to whom the liquidating

trustee Kenneth Henry is the successor in interest), and the class of plaintiffs certified by the court represented by Michael and Barbara Austin and

others. 

IN RE: FIRST ALLIANCE MORTGAGE 19249
assistance.” There was sufficient evidence of such knowledge

and assistance to support the jury’s verdict against Lehman.

The district court properly denied relief on Borrowers’ claims

against Lehman under California’s UCL, because the equitable remedies available under that statute were not appropriate

here. The district court properly concluded that punitive damages against Lehman were not warranted because the record

did not support a finding of intent or otherwise “despicable”

conduct on the part of Lehman required to justify such an

award. No erroneous evidentiary rulings prejudiced Lehman

such that a new trial is needed. Equitable subordination of

Lehman’s claims to the First Alliance bankruptcy proceedings

was not an appropriate remedy, nor was setting aside payments made to Lehman as fraudulent transfers warranted. We

therefore affirm all of the district court’s orders with respect

to these issues on appeal. 

We agree with Lehman, however, that the damages calculation by the jury was based in part on an incorrect “benefit of

the bargain” theory of damages and must be set aside to allow

for a proper calculation of “out of pocket” damages apportioned based on responsibility, according to the terms of the

settlement agreement. Therefore, the denial of Lehman’s

motion for remittur or a new trial to recalculate damages was

error. On that claim, we reverse and remand for further proceedings. 

II. DISCUSSION

A. Class Treatment 

Lehman’s attack on the judgment begins with the predicate

finding that the Borrowers were victims of a class-wide fraud

perpetrated by First Alliance. According to Lehman, it was

error for the district court to certify the class of borrowers in

the first place and further error to deny Lehman’s motions for

judgment as a matter of law and for a new trial on the grounds

that the Borrowers failed to prove fraud on a class-wide basis

19250 IN RE: FIRST ALLIANCE MORTGAGE
during trial. Lehman’s contention that the Borrowers failed to

prove fraud on a class-wide basis raises questions of law and

fact: what degree of commonality must exist among the misrepresentations made to borrowers to support class treatment

in federal court and a class-wide finding of fraud under California law are matters of law; whether such similar misrepresentations were in fact made by First Alliance and justifiably

relied upon by borrowers on a class-wide basis are factual

determinations. We address each question in turn. 

1. Degree of uniformity among misrepresentations:

common course of conduct standard 

The required degree of uniformity among misrepresentations in a class action for fraud is a question of law which we

review de novo. See Torres-Lopez v. May, 111 F.3d 633, 638

(9th Cir. 1997). Lehman argues that for the fraud claim to

have been properly tried on a class basis, the Borrowers were

required to demonstrate that First Alliance’s alleged misrepresentations were conveyed to borrowers in a uniform manner

and that the uniform misrepresentations came directly from

the written, standardized sales pitch. According to Lehman,

the Borrowers’ failure to make these showings prior to class

certification or during trial made class treatment inappropriate

in the first place and the class-wide verdict erroneous as a

matter of law. Lehman essentially asks us to hold that in order

for the jury finding to stand, the misrepresentation at the heart

of the class-wide fraud finding must have been a direct quote

from the “Track,” repeated in a verbatim fashion to each

member of the class. This we decline to do, for such a degree

of commonality is not required. 

[1] The familiar federal rule for class certification requires

that “there are questions of law or fact common to the class.”

Fed. R. Civ. P. 23(a)(2). When the modern class action rule

was adopted, it was made clear that “common” did not require

complete congruence. The Advisory Committee on Rule 23

considered the function of the class action mechanism in the

IN RE: FIRST ALLIANCE MORTGAGE 19251
context of a fraud case and explained that while a case may

be unsuited for class treatment “if there was material variation

in the representations made or in the kinds or degrees of reliance by the persons to whom they were addressed,” a “fraud

perpetrated on numerous persons by the use of similar misrepresentations may be an appealing situation for a class action

. . . .” Fed. R. Civ. P. 23, Advisory Committee Notes to 1966

Amendments, Subdivision (b)(3); see also 39 F.R.D. 69, 103

(1966). While some other courts have adopted somewhat different standards in identifying the degree of factual commonality required in the misrepresentations to class members in

order to hold a defendant liable for class-wide fraud,3 this

court has followed an approach that favors class treatment of

fraud claims stemming from a “common course of conduct.”

See Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir. 1975)

(“Confronted with a class of purchasers allegedly defrauded

over a period of time by similar misrepresentations, courts

have taken the common sense approach that the class is united

by a common interest in determining whether a defendant’s

course of conduct is in its broad outlines actionable, which is

not defeated by slight differences in class members’ positions”); see also Harris v. Palm Springs Alpine Estates, Inc.,

329 F.2d 909, 914 (9th Cir. 1964). 

[2] Class treatment has been permitted in fraud cases

where, as in this case, a standardized sales pitch is employed.

3For example, the Second and Third Circuits have highlighted the

importance of uniformity among misrepresentations made to class members in order to establish that element of fraud on a class-wide basis. See

Moore v. PaineWebber, Inc., 306 F.3d 1247, 1255 (2d Cir. 2002) (“Only

if class members received materially uniform misrepresentations can generalized proof be used to establish any element of the fraud.”); In re

LifeUSA Holding, Inc., 242 F.3d 136, 138-40 (3d Cir. 2001) (vacating

class certification on appeal where “the gravamen of Plaintiffs’ claims

[was] that the Defendant’s sales techniques and advertising constituted an

allegedly fraudulent scheme” but where the district court had found that

the annuity policies were not sold according to uniform sales presentations). 

19252 IN RE: FIRST ALLIANCE MORTGAGE
In In re American Continental Corp./Lincoln Savings & Loan

Securities Litigation, 140 F.R.D. 425 (D. Ariz. 1992), the

court correctly rejected a “talismanic rule that a class action

may not be maintained where a fraud is consummated principally through oral misrepresentations, unless those representations are all but identical,” observing that such a strict

standard overlooks the design and intent of Rule 23. Id. at

430. Lincoln Savings involved a scheme that included, among

other things, the sale of debentures to individual investors

who relied on oral representations of bond salespersons who

in turn had received from defendants fraudulent information

about the value of the bonds. The Lincoln Savings court

focused on the evidence of a “centrally orchestrated strategy”

in finding that the “center of gravity of the fraud transcends

the specific details of oral communications.” Id. at 430-31. As

the court explained:

[T]he gravamen of the alleged fraud is not limited to

the specific misrepresentations made to bond purchasers. . . . The exact wording of the oral misrepresentations, therefore, is not the predominant issue. It

is the underlying scheme which demands attention.

Each plaintiff is similarly situated with respect to it,

and it would be folly to force each bond purchaser

to prove the nucleus of the alleged fraud again and

again. 

Id. at 431; see also Schaefer v. Overland Express Family of

Funds, 169 F.R.D. 124, 129 (S.D. Cal. 1996) (citing Lincoln

Savings for the proposition that representations made to brokers or salesmen which are intended to be communicated to

investors are sufficient to warrant class standing, even where

the actual representations to individuals varied). The Borrowers’ allegations of First Alliance’s fraud fit comfortably

within the standard for class treatment. 

IN RE: FIRST ALLIANCE MORTGAGE 19253
2. The class-wide fraud finding is supported by the

evidence 

Turning to the factual findings made by the jury, we review

a denial of a motion for judgment as a matter of law de novo,

Hangarter v. Provident Life & Accident Ins. Co., 373 F.3d

998, 1005 (9th Cir. 2004), and a district court’s denial of a

motion for new trial for abuse of discretion. Navellier v. Sletten, 262 F.3d 923, 948 (9th Cir. 2001). Even under the de

novo standard, the court must “draw all reasonable inferences

in favor of the nonmoving party, keeping in mind that credibility determinations, the weighing of the evidence, and the

drawing of legitimate inferences from the facts are jury functions, not those of a judge.” Hangarter, 373 F.3d at 1005

(internal quotation marks and citations omitted). Judgment as

a matter of law should be granted only if the verdict is

“against the great weight of the evidence, or it is quite clear

that the jury has reached a seriously erroneous result.” Id.

(internal citations omitted). The jury concluded that First Alliance had committed systemic fraud on a class-wide basis, and

the district judge did not find this conclusion to be erroneous.

The evidence in this case supports the finding by the jury

that there was, in fact, a centrally-orchestrated scheme to mislead borrowers through a standardized protocol the sales

agents were carefully trained to perform, which resulted in a

large class of borrowers entering into loan agreements they

would not have entered had they known the true terms. We

note in particular the standardized training program for sales

agents, which included a script that was required to be memorized and strict adherence to a specific method of hiding information and misleading borrowers, discussed in the district

court’s separate findings of fact at 298 B.R. at 656-58. The

record shows, for instance, that loan officers were trained to

misrepresent the monthly payment on the loan to make it

appear lower than the borrower’s prior mortgage payment,

and when asked about points, to falsely state that “all fees and

costs have already been computed into your monthly pay19254 IN RE: FIRST ALLIANCE MORTGAGE
ment,” and then to immediately redirect the borrower’s attention to another document. That First Alliance’s fraudulent

system of inducing borrowers to agree to unconscionable loan

terms did not consist of a specifically-worded false statement

repeated to each and every borrower of the plaintiff class,

traceable to a specific directive in the Track, does not make

First Alliance immune to class-wide accountability. The class

action mechanism would be impotent if a defendant could

escape much of his potential liability for fraud by simply

altering the wording or format of his misrepresentations

across the class of victims. 

Lehman also attempts to undermine the class-wide fraud

determination by focusing on the reliance element, arguing

that the borrowers could not have justifiably relied upon oral

misrepresentations when they signed documents that contradicted those oral statements. The argument is that the plaintiffs should have known better than to rely on their loan

officers’ misrepresentations, because the fine print in their

loan documents told “a different story.” But it was by design

that the borrowers did not understand that the loan documents

told a different story. The whole scheme was built on inducing borrowers to sign documents without really understanding

the terms. As the district court found, “First Alliance borrowers justifiably relied on the representations of the loan officers

in light of their experience and knowledge in entering into the

loan transaction.” 298 B.R. at 668. We find unpersuasive in

this case the defense that plaintiffs should not have relied on

statements that were made with the fraudulent intent of inducing reliance. 

[3] While the legal standards for class treatment of a fraud

action in federal court are governed by federal law, the merits

of the Borrowers’ fraud claim are grounded in state law.

Therefore, whether or not a borrower’s reliance on misrepresentations was justified in this case depends on California

law. To that end, the California Supreme Court has instructed

that “a misrepresentation may be the basis of fraud if it was

IN RE: FIRST ALLIANCE MORTGAGE 19255
a substantial factor in inducing plaintiff to act and . . . it need

not be the sole cause of damage.” Vasquez v. Superior Court

of San Joaquin County, 484 P.2d 964, 973 n.9 (Cal. 1971).

First Alliance’s misrepresentations were at least a substantial

factor in inducing the plaintiffs to enter loan agreements. We

conclude that the district court’s treatment of the fraud claims

was both legally and factually sound. The denial of Lehman’s

motions for judgment as a matter of law and for new trial was

proper. 

B. Aiding and Abetting Fraud under California Law 

Regarding the substantive elements of aiding and abetting

fraud, Lehman again mounts an attack on both legal and factual grounds, arguing that the jury was not properly instructed

on the elements of aiding and abetting liability under California law and that Lehman’s actions did not meet the correct

standard for imposing such liability. The jury was instructed

that in order to be liable for aiding and abetting fraud, Lehman “had to have known of First Alliance’s fraudulent acts

. . . [and] had knowledge that its actions would assist First

Alliance in the commission of the fraud,” and further that

Lehman did in fact provide substantial assistance to First Alliance. Lehman claims legal error in the district court’s refusal

to instruct the jury that specific intent, rather than mere

knowledge, was required. Lehman also claims legal error in

the district court’s denial of its motion for judgment as a matter of law. That motion argued that the Borrowers failed to

prove substantial assistance. Again, we conclude that the district court properly determined the law and that sufficient evidence supported the verdict.

1. Actual knowledge standard for aiding and abetting

under California tort law 

[4] Where a party claims that the trial court misstated the

elements of a cause of action, the rejection of a proposed jury

instruction is reviewed de novo. See Ostad v. Oregon Health

19256 IN RE: FIRST ALLIANCE MORTGAGE
Sciences Univ., 327 F.3d 876, 883 (9th Cir. 2003). Although

the California decisions on this subject may not be entirely

consistent, we agree with the district court that aiding and

abetting liability under California law, as applied by the California state courts, requires a finding of actual knowledge, not

specific intent. See Vestar Dev. II, LLC v. Gen. Dynamics

Corp., 249 F.3d 958, 960 (9th Cir. 2001) (instructing that

“[w]hen interpreting state law . . . a federal court must predict

how the highest state court would decide the issue” and that

“where there is no convincing evidence that the state supreme

court would decide differently, a federal court is obligated to

follow the decisions of the state’s intermediate appellate

courts”). Therefore, the jury was properly instructed. 

The California Court of Appeal recently had occasion to

articulate the proper standard for imposing liability for aiding

and abetting a tort. In Casey v. U.S. Bank National Assn., 26

Cal. Rptr. 3d 401, 405 (Cal. Ct. App. 2005), the court

acknowledged that “California has adopted the common law

rule” that “[l]iability may . . . be imposed on one who aids and

abets the commission of an intentional tort if the person . . .

knows the other’s conduct constitutes a breach of a duty and

gives substantial assistance or encouragement to the other to

so act.” (emphasis added) (quoting Fiol v. Doellstedt, 58 Cal.

Rptr. 2d 308, 312 (Cal. Ct. App. 1996)); see also River Colony Estates Gen. P’ship v. Bayview Financial Trading Group,

Inc., 287 F. Supp. 2d 1213, 1225 (S.D. Cal. 2003) (“A party

can be liable for aiding and abetting an intentional tort if . . .

an individual is aware that the other’s conduct constitutes a

breach of duty and provides substantial assistance or encouragement to the other to so act.”); Lomita Land & Water Co.

v. Robinson, 97 P. 10, 15 (Cal. 1908) (“The words ‘aid and

abet’ as thus used have a well-understood meaning, and may

fairly be construed to imply an intentional participation with

knowledge of the object to be attained.”) (emphasis added).

The court in Casey specified that to satisfy the knowledge

prong, the defendant must have “actual knowledge of the specific primary wrong the defendant substantially assisted.” 26

IN RE: FIRST ALLIANCE MORTGAGE 19257
Cal. Rptr. 3d at 406.4

 We apply this standard to the Borrowers’ claims. 

2. Lehman’s actual knowledge of First Alliance’s fraud 

The district court denied Lehman’s motion for judgment as

a matter of law, rejecting Lehman’s argument that the evidence was insufficient to establish Lehman’s actual knowledge of First Alliance’s fraud, an argument Lehman pursues

on appeal. As noted earlier, denial of judgment as a matter of

law is reviewed de novo, but the judgment should be reversed

only if the evidence, construed in the light most favorable to

the nonmoving party, permits only one reasonable conclusion,

and that conclusion is contrary to that of the jury. Hangarter,

373 F.3d at 1005; see also Forrett v. Richardson, 112 F.3d

416, 419 (9th Cir. 1997), cert. denied, 523 U.S. 1049 (1998).

While the evidence supporting Lehman’s “actual knowledge”

is not overwhelming, deference must be accorded the jury’s

factual findings at this stage of review. It cannot be said that

no reasonable interpretation of the record would lead to a

finding of actual knowledge. 

[5] The jury found that Lehman had knowledge of First

Alliance’s alleged fraud and had a role in furthering the fraud

during the period between 1998 and 2000.5 Among other evi4We note that as it has been applied, the actual knowledge standard does

require more than a vague suspicion of wrongdoing. The Casey court itself

rejected a trustee’s “general allegation that the banks knew the DFJ Fiduciaries were involved in ‘wrongful or illegal conduct’ ” as a “kitchen sink”

allegation that did “not constitute sufficient pleading that the banks had

actual knowledge the DFJ Fiduciaries were misappropriating funds from

DFJ.” 26 Cal. Rptr. 3d at 412. Under Casey’s approach, Lehman must

have known more than that “something fishy was going on.” Id. at 409.

As we explain below, sufficient evidence of Lehman’s actual knowledge

of the primary tort supports the jury’s verdict. 

5Though the district court held in favor of Lehman following a bench

trial on the fraudulent transfer and equitable subordination claims, the

court also specifically found that Lehman “knew that First Alliance was

engaged in fraudulent practices designed to induce consumers to obtain

loans from First Alliance: (1) at the time they funded the warehouse loan

on December 30, 1998; (2) after they extended the warehouse loan; and

(3) during 1999 and early 2000.” 298 B.R. at 668. 

19258 IN RE: FIRST ALLIANCE MORTGAGE
dence in the record, the Borrowers highlighted the facts that

throughout its investigations into First Alliance, Lehman

received reports that detailed the fraudulent practices in which

First Alliance was engaged, and that in one report, a Lehman

officer noted his concern that if First Alliance “does not

change its business practices, it will not survive scrutiny.”

That same evaluation recounted that First Alliance “does not

have the clear-cut defenses that the management believes”

and that “at the very least, this is a violation of the spirit of

the Truth in Lending Act.” It was not unreasonable for the

jury to rely upon these evaluations in concluding that Lehman

had actual knowledge of First Alliance’s fraudulent loan origination procedures. Therefore, Lehman’s request for judgment

as a matter of law based on this claim must fail.

3. Lehman’s substantial assistance of First Alliance’s

fraudulent lending scheme 

Lehman also appeals the denial of its motion for judgment

as a matter of law on the ground that plaintiffs failed to prove

the second prong of the aiding and abetting test, that Lehman

substantially assisted First Alliance’s fraud. We employ the

same de novo standard of review to this element of Lehman’s

motion for judgment as a matter of law as we did to the “actual knowledge” prong, see Forrett, 112 F.3d at 419, and we

likewise conclude that the jury’s finding that Lehman substantially assisted First Alliance’s fraudulent lending practices

should not be disturbed. 

[6] As was true of the “actual knowledge” prong of aiding

and abetting under California law, the definition of “substantial assistance” under California law is not entirely clear. See

Casey, 26 Cal. Rptr. 3d at 405-406 (finding no California

cases directly addressing the question of what constitutes substantial assistance). Against such a backdrop, we again follow

Casey’s lead in holding that “ ‘ordinary business transactions’

a bank performs for a customer can satisfy the substantial

assistance element of an aiding and abetting claim if the bank

IN RE: FIRST ALLIANCE MORTGAGE 19259
actually knew those transactions were assisting the customer

in committing a specific tort. Knowledge is the crucial element.” Casey, 26 Cal. Rptr. 3d at 406. 

[7] It appears that the jury found, as did the district court

(298 B.R. at 688), that Lehman satisfied all of First Alliance’s

financing needs and, after other investment banks stopped

doing business with First Alliance, kept First Alliance in business, knowing that its financial difficulties stemmed directly

and indirectly from litigation over its dubious lending practices. That was enough to conclude that Lehman was providing the requisite substantial assistance. Lehman admits that it

knowingly provided “significant assistance” to First Alliance’s business, but distinguishes that from providing substantial assistance to fraud. In a situation where a company’s

whole business is built like a house of cards on a fraudulent

enterprise, this is a distinction without a difference. The jury

was not precluded as a matter of law from finding that Lehman substantially assisted First Alliance in its fraud. 

C. California Unfair Competition Law 

In addition to their claim of common law aiding and abetting fraud, the Borrowers brought a companion claim against

Lehman under California’s UCL, Cal. Bus. & Prof. Code

§ 17200. The district court granted summary judgment in

favor of Lehman on the ground that Lehman did not personally participate in the fraud perpetrated by First Alliance. The

Borrowers appeal the court’s grant of summary judgment on

this claim, and we affirm, though on different grounds. See In

re Gulino, 779 F.2d 546, 552 (9th Cir. 1985) (recognizing that

the appellate court can affirm the judgment below on any

basis fairly supported by the record). The court of appeals

reviews a grant of summary judgment de novo. United States

v. City of Tacoma, 332 F.3d 574, 578 (9th Cir. 2003). We

must determine whether the district court correctly applied the

relevant substantive law. Roach v. Mail Handlers Benefit

Plan, 298 F.3d 847, 849 (9th Cir. 2002). 

19260 IN RE: FIRST ALLIANCE MORTGAGE
[8] Section 17200 creates a cause of action for an “unlawful, unfair or fraudulent business act or practice.” Its coverage

has been described as “sweeping, embracing anything that can

properly be called a business practice and at the same time is

forbidden by law.” Cel-Tech Communs., Inc. v. L.A. Cellular

Tel. Co., 83 Cal. Rptr. 2d 548, 560 (Cal. 1999) (internal quotation marks and citations omitted). A practice may be

“deemed unfair even if not specifically proscribed by some

other law.” Id. at 561. The statute prohibits wrongful business

conduct in whatever context such activity might occur. The

standard is intentionally broad and allows courts maximum

discretion to prohibit new schemes to defraud. Searle v.

Wyndham Int’l, Inc., 126 Cal Rptr. 2d 231, 235-36 (Cal. Ct.

App. 2002). 

The district court granted summary judgment in favor of

Lehman on the ground that “the key to extending liability pursuant to an aiding and abetting theory under section 17200 is

the degree to which the alleged aider and abettor participated

in and exerted control over the underlying unfair act,” citing

Emery v. Visa International Service Association, 116 Cal.

Rptr. 2d 25, 33, (Cal. Ct. App. 2002), People v. Toomey, 203

Cal. Rptr. 642, 650-55 (Cal. Ct. App. 1984), and People v.

Bestline Products, Inc., 132 Cal. Rptr. 767, 792 (Cal. Ct. App.

1976). The district court read these cases as narrowing the

scope of permissible claims predicated on aiding and abetting

liability to those in which a defendant had “personal participation” in and “unbridled control” over the practices found to

violate the code. Applying this narrow interpretation, the

court found that no issue of triable fact could establish Lehman’s liability under this section. 

There is reason to think that the statute is broader than the

district court interpreted it to be6 and that it might indeed

6

In Toomey, the issue was whether defendant would be held liable in his

personal capacity under section 17200 in addition to liability in his professional capacity as the owner of the company whose practices were found

IN RE: FIRST ALLIANCE MORTGAGE 19261
encompass the Borrowers’ claims against Lehman. The

breadth of section 17200’s coverage need not be delineated to

decide this issue, however, as the remedies available under

the statute are narrowly limited and do not include the type of

damages the Borrowers seek. 

[9] Even if Lehman’s conduct fits within the type identified

by the UCL, the Borrowers are not eligible for the remedies

available under section 17200, which are limited to forms of

equitable relief. See In re Napster, Inc. Copyright Litigation,

354 F. Supp. 2d 1113, 1126 (N.D. Cal. 2005) (noting that an

unfair competition action is equitable in nature, and thus damages are not available to private plaintiffs). We therefore

affirm summary judgment against the Borrowers on their

claims under the UCL. 

[10] In Korea Supply Co. v. Lockheed Martin Corp., 29

Cal. 4th 1134, 1152 (2003), the California Supreme Court discussed the available equitable remedies under the UCL, which

“allows any consumer to combat unfair competition by seeking an injunction against unfair business practices. Actual

direct victims of unfair competition may obtain restitution as

well.” See also Madrid v. Perot Systems Corp., 30 Cal. Rptr.

3d 210, 218 (Cal. Ct. App. 2005) (“the UCL limits the remeto violate the code. The Toomey court specifically noted that liability

could be imposed “if the evidence establishes defendant’s participation in

the unlawful practices, either directly [i.e., through personal participation]

or by aiding and abetting the principal.” 203 Cal. Rptr. at 651 (emphasis

added). The Visa court made clear that a claim under section 17200 cannot

be predicated on vicarious liability, but vicarious liability is not the theory

of the Borrowers’ claim here. Furthermore, the Visa court found that there

was no aiding and abetting on the part of Visa (a critical difference

between that case and the one before us), and that there had not even been

any injury to the plaintiff. 116 Cal. Rptr. 2d at 33. Bestline involved a

claim under section 17500 (which prohibits “untrue or misleading statements,” see 132 Cal. Rptr. at 771 n.1), and did not address the minimum

requirements for a claim of unfair business practices under section 17200

based on aiding and abetting fraud. 

19262 IN RE: FIRST ALLIANCE MORTGAGE
dies available for UCL violations to restitution and injunctive

relief”). In the context of the UCL, “restitution” is meant to

restore the status quo by returning to the plaintiff funds in

which he or she has an ownership interest, and is so limited.

Id. at 219; Napster, 354 F. Supp. 2d at 1126; see also Korea

Supply, 29 Cal. 4th at 1144-45. “[R]estitutionary awards

encompass quantifiable sums one person owes to another.”

Cortez v. Purolator Air Filtration Products Co., 96 Cal. Rptr.

2d 518, 529 (Cal. 2000). 

In Madrid, 30 Cal. Rptr. 3d at 213-16, plaintiff brought a

class action suit on behalf of California electricity customers

against parties involved in restructuring the state’s electricity

market, who allegedly employed fraudulent means to manipulate market prices of electricity. Plaintiff sought “disgorgement of all ill-gotten monies but did not allege the existence

of any ill-gotten monies other than the difference in electricity

rates in excess of what customers would have paid in the

absence of defendants’ conduct.” Id. at 220 (internal quotation

marks omitted). The Madrid court rejected plaintiff’s request

that defendants be ordered to “simply return to plaintiff

exactly what was wrongfully taken, plus any profits made,”

explaining that “plaintiff relies on general principles of the

law of remedies, e.g., that restitution in the broad sense

focuses on the defendant’s unjust enrichment, rather than the

plaintiff’s loss. Plaintiff’s generalization fails to acknowledge

the specific limitation applicable in the UCL context—that

restitution means the return of money to those persons from

whom it was taken or who had an ownership interest in it.”

Id. at 221. See also United States v. Sequel Contractors, Inc.,

402 F. Supp. 2d 1142, 1156 (C.D. Cal. 2005) (holding that

plaintiff failed to state a claim for relief under the UCL

because it had not alleged any facts supporting a finding that

it had an ownership interest in property or funds in the defendant’s possession, and emphasizing that plaintiff sought “the

same monetary relief in its UCL claim that it seeks in its

breach of contract and negligence claims” which are “damages, not restitution”). 

IN RE: FIRST ALLIANCE MORTGAGE 19263
[11] Like the plaintiffs in Madrid and Sequel Contractors,

the Borrowers in this case cast their claim under section

17200 as one for equitable relief by asking the court to disgorge Lehman’s “ill-gotten gains,” asserting that Lehman

unlawfully acquired money and property directly and indirectly from the Borrowers and has been unjustly enriched at

their expense. They do not, however, specify the amount of

these “ill-gotten gains” to which they have an actual ownership interest. Theoretically,7

 the money in which the borrowers purport to have an ownership interest is the money that

flowed from First Alliance to Lehman, in the form of bundled

mortgage payments to repay the capital line, and to the bondholders to whom Lehman sold the mortgage-backed securities. In order to draw the necessary connection between the

Borrowers’ ownership interest and these funds, however, the

court would have to assume that all of the money that flowed

to Lehman pursuant to its relationship with First Alliance was

taken directly from the Borrowers and should not have been.

There is no reason to believe, nor do the Borrowers argue,

that all of the money that went to First Alliance was improper.

Rather, the basis of the fraud claim against First Alliance, for

which Lehman is liable for aiding and abetting and upon

which the Borrowers’ UCL claim is based, is that Borrowers

were defrauded because of hidden fees and interest rates. Perhaps many class members would not have agreed to any mortgage at all unless they had gotten the terms they believed they

had with First Alliance, but there is no basis to conclude that

every single dollar that ultimately flowed to Lehman was “illgotten.” 

[12] The prayer for equitable relief which the Borrowers

put forth here is more akin to a claim for “nonrestitutionary

disgorgement,” which the California Supreme Court in Korea

7As the Borrowers did not actually claim an ownership interest in funds

in Lehman’s possession, nor explain the basis of their purported ownership interest in those funds, their equitable claim under the UCL is left

largely to the court’s speculation. 

19264 IN RE: FIRST ALLIANCE MORTGAGE
Supply defined to include orders to compel the surrender of all

profits earned as a result of unfair business practice regardless

of whether those profits represent money taken directly from

persons who were victims of the unfair practice. Korea Supply, 131 Cal. Rptr. 2d at 38. Holding that such a remedy is not

available under the UCL, the Korea Supply court explained

that the “overarching legislative concern was to provide a

streamlined procedure for the prevention of ongoing or threatened acts of unfair competition. Because of this objective, the

remedies provided are limited.” Id. at 43 (internal quotation

marks and citations omitted); see also Napster, 354 F. Supp.

2d at 1126-27 (following Korea Supply); Tomlinson v. Indymac Bank, F.S.B., 359 F. Supp. 2d 891, 893 (C.D. Cal. 2005);

National Rural Telecomms. Coop. v. Directv, Inc., 319 F.

Supp. 2d 1059, 1091 (C.D. Cal. 2003). The remedies provided

under the UCL do not include the monetary relief Borrowers

seek. The district court’s grant of summary judgment in favor

of Lehman on the Borrowers’ section 17200 claims is therefore affirmed.

D. Punitive Damages

The district court dispensed with the Borrowers’ attempt to

recover punitive damages from Lehman by granting Lehman’s motion for summary judgment on the issue. The Borrowers appeal the order, claiming that the court improperly

weighed the evidence, rather than viewing it in the light most

favorable to the plaintiffs. Upon de novo review, viewing the

evidence in the light most favorable to the nonmoving party,

we affirm. 

[13] Under California law, punitive damages are appropriate where a plaintiff establishes by clear and convincing evidence that the defendant is guilty of (1) fraud, (2) oppression

or (3) malice. Cal. Civ. Code § 3294(a). According to the definitions provided in section 3294(c), a plaintiff may not

recover punitive damages unless the defendant acted with

IN RE: FIRST ALLIANCE MORTGAGE 19265
intent or engaged in “despicable conduct.”

8

“The adjective

‘despicable’ connotes conduct that is so vile, base, contemptible, miserable, wretched or loathsome that it would be looked

down upon and despised by ordinary decent people.” Lackner

v. North, 37 Cal. Rptr. 3d 863, 881 (Cal. Ct. App. 2006)

(internal quotation marks and citations omitted). While a

defendant may be liable for punitive damages based on “despicable” conduct that merely involves a conscious disregard

of the rights and safety of others, rather than an affirmative

intent to injure, there are “few situations in which claims for

punitive damages are predicated on . . . conscious disregard

of the rights or safety of others and in which no intentional

torts are alleged.” Central Pathology Serv. Med. Clinic, Inc.

v. Superior Court, 10 Cal. Rptr. 2d 208, 214 (Cal. 1992). 

The district court found that the Borrowers could not prove

any facts that could meet the burden of evidence that Lehman’s conduct amounted to fraud, malice or oppression under

California punitive damages law, and we conclude that the

district court did not err in making this determination. Some

limited weighing of the evidence is a natural component of

determining whether a jury could have reasonably found punitive damages appropriate under the heightened clear and con8Section 3294(c) provides: 

As used in this section, the following definitions shall apply: 

(1) “Malice” means conduct which is intended by the defendant

to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard

of the rights or safety of others. 

(2) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that

person’s rights. 

(3) “Fraud” means an intentional misrepresentation, deceit, or

concealment of a material fact known to the defendant with the

intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury. 

CAL. CIV. CODE § 3294(c). 

19266 IN RE: FIRST ALLIANCE MORTGAGE
vincing evidence standard. See, e.g., Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 254-55 (1986) (noting that in ruling on a summary judgment motion, the district court takes

this heightened evidentiary standard into consideration).

Moreover, viewing evidence in a light most favorable to a

non-moving party does not require a district court to view

only evidence that is favorable to the non-moving party. See

id. at 254 (“There is no genuine issue if the evidence presented . . . is of insufficient caliber or quantity to allow a

rational finder of fact to find” for the nonmoving party); see

also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,

475 U.S. 574, 587 (1986) (“Where the record taken as a

whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial’ ”) (citation

omitted) (emphasis added). 

[14] The Borrowers presented the court with evidence to

support their allegations that Lehman lent First Alliance the

financing it needed in order to continue its business, knowing

that the business involved fraud. It was up to the court to

determine as a matter of law whether this evidence, if proved,

could permit a finding of “despicable conduct” that could support an award of punitive damages under the California Civil

Code. Lehman’s actual knowledge of First Alliance’s fraud

was based on discoveries of questionable lending practices on

the part of First Alliance, made during due diligence.9 The dil9Due diligence, a concept most often employed in the context of securities cases, is generally defined as: “the diligence reasonably expected

from, and ordinarily exercised by a person who seeks to satisfy a legal

requirement.” Black’s Law Dictionary 468 (7th Ed. 1999). As the district

court found, Lehman’s corporate-level due diligence on First Alliance’s

business practices involved looking at whether First Alliance’s corporate

structure and business operations provided a sound basis upon which Lehman could provide financial services to the company. In re First Alliance

Mortgage Co., 298 B.R. at 660. There was no evidence that Lehman’s due

diligence of First Alliance in early 1999 was not in conformity with Lehman’s standard due diligence undertaken in providing financial services to

a mortgage lender. 

IN RE: FIRST ALLIANCE MORTGAGE 19267
igence effort was a routine analysis and investigation of First

Alliance undertaken to determine whether providing financial

services to the company made good business sense. That Lehman came upon red flags which were seemingly ignored was

enough to establish actual knowledge under the California

aiding and abetting standard, but not the intent to injure or

despicable conduct that punitive damages requires. Considering the evidence in light of the punitive damages standard, the

district court explained that the evidence showed, at best, that

Lehman made a series of poor decisions in providing lending

and underwriting services to First Alliance. Those decisions

ultimately resulted in liability under the Borrowers’ aiding

and abetting claim. They did not create a ground on which to

award punitive damages. We affirm summary judgment in

favor of Lehman against the Borrowers’ claim for punitive

damages. 

E. Evidentiary Rulings

Lehman claims that during the course of trial, the district

court made erroneous evidentiary rulings that prejudiced its

rights and provide a basis for the court to set aside the verdict

and order a new trial. Evidentiary rulings at trial are reviewed

for abuse of discretion. See United States v. MerinoBalderrama, 146 F.3d 758, 761 (9th Cir. 1998). Such rulings

will be reversed only if the error more likely than not affected

the verdict. See United States v. Pang, 362 F.3d 1187, 1192

(9th Cir. 2004); Miller v. Fairchild Indus., Inc., 885 F.2d 498,

513 (9th Cir. 1989). Even where individual evidentiary rulings are considered harmless errors, the “cumulative error”

doctrine requires the court to determine whether the cumulative effect of harmless errors was enough to prejudice a

party’s substantial rights. United States v. de Cruz, 82 F.3d

856, 868 (9th Cir. 1996). “While a defendant is entitled to a

fair trial, he is not entitled to a perfect trial, for there are no

perfect trials.” United States v. Payne, 944 F.2d 1458, 1477

(9th Cir. 1991) (internal quotation marks omitted). We see no

reversible error in the evidentiary rulings at issue. 

19268 IN RE: FIRST ALLIANCE MORTGAGE
The first evidentiary ruling Lehman contests is the admission of testimony at trial from “undisclosed” witnesses. These

witnesses included borrowers and First Alliance loan officers

who were not specifically identified in the initial disclosures

made by the Borrowers pursuant to Federal Rule of Civil Procedure 26(a)(1)(A), and not identified in supplemental disclosures until after the official close of discovery10 (though still

more than 60 days before trial began). Rule 26(a)(1)(A) provides that a party must, without awaiting a discovery request,

provide to other parties the name and, if known, the address

and telephone number of each individual likely to have discoverable information that the disclosing party may use to

support its claims. The Borrowers argue that they complied

with pretrial disclosure Rule 26(a)(3) and therefore the disputed witness testimony was properly admitted. Rule 26(a)(3)

provides that “[i]n addition to the disclosures required by

Rule 26(a)(1) and (2), a party must provide to other parties

and promptly file with the court the following information

regarding the evidence that it may present at trial . . . the name

and, if not previously provided, the address and telephone

number of each witness, separately identifying those whom

the party expects to present.” These disclosures must be made

at least 30 days prior to trial. 

Even if Lehman is correct that the Borrowers should have

specifically identified in the discovery disclosures the witnesses ultimately called to testify at trial, it is of little consequence. The complete witness list was provided to Lehman

with ample time remaining under Rule 26(a)(3). Moreover, as

the district court emphasized, Lehman had knowledge of the

identities of the potential witnesses in its possession without

disclosure from the Borrowers. Even had it been error for the

district court to admit these witnesses, there is nothing to suggest that Lehman was significantly hampered in its ability to

10This was not the actual close of discovery, as even Lehman subpoenaed a third party witness more than two months into trial, seeking documents pertaining to a 1987 lawsuit against First Alliance. 

IN RE: FIRST ALLIANCE MORTGAGE 19269
prepare for trial or to examine these witnesses. We affirm the

district court’s ruling allowing testimony of witnesses not initially disclosed in discovery. 

Lehman’s other evidentiary objection is equally unavailing.

Prior to trial, the Borrowers obtained an order excluding evidence of First Alliance’s settlement with the FTC. During

trial, however, in the course of questioning First Alliance

Chairman Brian Chisick, counsel for the Borrowers asked

Chisick about the injunction preventing him from ever working in the mortgage lending business again, which was part of

First Alliance’s settlement with the FTC. The district court

sustained Lehman’s objection to this questioning, but disagreed with Lehman that the reference to the settlement having been made, the door had opened to introduce other

evidence pertaining to the settlement, namely the monetary

award paid to borrowers by First Alliance. Lehman argues it

suffered prejudice as a result of being denied the chance to

“tell its side of the story” that borrowers had already received

a damages settlement from First Alliance, to “counterbalance

the impression that Lehman was the sole source of restitution

for Class members.” 

[15] Denying the jury this information was not prejudicial

error, particularly in light of the fact that the damages settlement was fully taken into account, albeit in a different manner. In addition to the injunctive and monetary components of

First Alliance’s settlement with the FTC, a Bar Order was

established, which disposed of any further liability on the part

of First Alliance for these claims. The Bar Order also limited

the liability of other non-settling defendants, including Lehman, to an amount that could fairly be attributed to them

alone, because these defendants would be precluded from

seeking any contribution or indemnification from First Alliance. The jury was ultimately instructed to apportion Lehman’s liability according to its percentage of fault for the total

damages suffered by the Borrowers. Whether the Bar Order

was properly applied to limit the damages judgment against

19270 IN RE: FIRST ALLIANCE MORTGAGE
Lehman is itself a source of contention in this appeal, which

we address below. For the purposes of evaluating any prejudicial impact of excluding evidence of the monetary settlement

during the trial, we conclude that any impression that Lehman

was the sole source of restitution for class members was sufficiently counterbalanced by the application of the Bar Order.

Thus we find no error in the district court’s refusal to grant

a new trial based on prejudicial evidentiary rulings. 

F. Erroneous Damages Calculation 

Aside from the basis for the liability findings, Lehman also

takes issue with the damages verdict itself, and a candid

assessment of the jury’s calculations justifies Lehman’s

objection. Generally, a jury’s award of damages is entitled to

great deference, and should be upheld unless it is “clearly not

supported by the evidence” or “only based on speculation or

guesswork.” Los Angeles Memorial Coliseum Comm’n v.

National Football League, 791 F.2d 1356, 1360 (9th Cir.

1986) (citations omitted). This, however, appears to be the

rare case in which it is sufficiently certain that the jury award

was not based on proper consideration of the evidence.

Rather, the award was based on improperly considered evidence, directly traceable to an error that was cured too little,

too late. 

[16] The proper measure of damages in fraud actions under

California law, as both parties at this point concede, is “outof-pocket” damages. These are based on what was paid due

to the fraud, as compared to what would have been paid

absent the fraud. As the California Court of Appeal explained:

There are two measures of damages for fraud: outof-pocket and benefit-of-the-bargain. The out-ofpocket measure restores a plaintiff to the financial

position he enjoyed prior to the fraudulent transaction, awarding the difference in actual value between

what the plaintiff gave and what he received. The

IN RE: FIRST ALLIANCE MORTGAGE 19271
benefit-of-the-bargain measure places a defrauded

plaintiff in the position he would have enjoyed had

the false representation been true, awarding him the

difference in value between what he actually

received and what he was fraudulently led to believe

he would receive. In fraud cases involving the purchase, sale or exchange of property, the Legislature

has expressly provided that the out-of-pocket rather

than the benefit-of-the-bargain measure of damages

should apply. 

Fragale v. Faulkner, 1 Cal. Rptr. 3d 616, 621 (Cal. Ct. App.

2003) (citing Alliance Mortgage Co. v. Rothwell, 900 P.2d

601, 609 (Cal. 1995)) (internal quotation marks and citations

omitted). See also City Solutions, Inc. v. Clear Channel Communications, Inc., 242 F. Supp. 2d 720, 726-32 (N.D. Cal.

2003), aff’d in part & rev’d in part, 365 F.3d 835 (9th Cir.

2004). 

In this case, the out-of-pocket measure of the Borrowers’

damages meant the difference, if any, between the fees and

interest rates that First Alliance charged and those another

lender would have charged. If the jury found that a number of

plaintiffs would not have refinanced their existing mortgage

loans with any lender, absent the alleged fraud, the relevant

consideration was the points and fees paid to First Alliance,

as compared to plaintiffs’ situations under their existing mortgage loans. 

The first set of instructions the jury received, prior to the

Borrowers’ closing argument, included a damages instruction

that allowed plaintiffs to recover, “[i]n addition to out-ofpocket loss[,] . . . any additional damage arising from the

transactions, including [but not limited to] amounts actually

and reasonably expended in reliance on the fraud.” Such a

measure of damages would have entitled the Borrowers to

recover the difference between what they paid and what they

thought they were paying. The court later recognized, and

19272 IN RE: FIRST ALLIANCE MORTGAGE
both parties agreed, that this instruction had been erroneous

and that only out-of-pocket damages are recoverable in this

type of fraud action. See City Solutions, 242 F. Supp. 2d at

726-32. As a corrective measure, the court re-instructed the

jury four days later, after closing arguments and initial submission of the case to the jury. The court asked the jury to

“disregard the first reading of the instructions” since there had

been “a few agreed upon changes” and “without highlighting

what those [we]re” re-read all of the instructions to the jury.

The court did not specify which instructions had been altered

or corrected. 

By the time the jury was re-instructed, the trial had already

been conducted by the Borrowers with an eye toward proving

damages on a benefit-of-the-bargain basis, to award Borrowers the difference between what they paid and what they

thought they were paying. Borrowers offered expert testimony

as to how that total would be calculated, suggesting a precise

sum based on that theory: $85,906,994. Lehman offered its

own expert testimony on the applicable “out-of-pocket” damages calculation, and the expert identified $15,920,862 as the

maximum appropriate sum. 

[17] Lehman argues—and the district court agreed—that

the jury simply averaged the figures provided by the two damages experts. That they did this is beyond doubt: their verdict

represents the average of the two figures to the dollar. The

jury found that the amount of loss was $50,913,928, or

exactly half of the sum of the figures provided by each party’s

damages expert. As the district court acknowledged, there is

“no other plausible explanation” for the amount calculated by

the jury. Given that one of the figures used in the averaging

was based on an incorrect damages calculation—the number

provided by Borrower’s expert witness premised on a “benefit

of the bargain” theory—this final award cannot be said to be

properly rooted in the evidence at trial. 

We recognize that the jury is not bound to accept the bottom line provided by any particular damages expert, but the

IN RE: FIRST ALLIANCE MORTGAGE 19273
jury is bound to follow the law. See Herron v. Southern

Pacific Co., 283 U.S. 91, 95 (1931) (“It is the duty of the

court to instruct the jury as to the law; and it is the duty of the

jury to follow the law, as it is laid down by the court”). Having based the damages calculation in substantial part on an

improper theory of damages, which the jury most certainly

did, the jury did not follow the law according to its instructions. 

[18] In denying Lehman’s motion for new trial or remittur,

the district court bent over backwards to find a potentially

valid basis in the record for the jury verdict, but that rationale

is obviously not tethered to the law or the facts of the case.

The court’s denial of Lehman’s motion for new trial or remittur was an abuse of discretion. See Koon v. United States, 518

U.S. 81, 100 (1996) (“A district court by definition abuses its

discretion when it makes an error of law.”). The judgment

must be reversed in part and remanded for further proceedings

on the proper calculation of out-of-pocket damages.11

G. Application of FTC Settlement Bar Order

The Borrowers appeal the court’s apportionment of liability

in accordance with the Bar Order. The Bar Order, to which

we have already alluded, was a component of the courtapproved settlement agreement between First Alliance and a

national class of borrowers, several states’ attorneys general,

the AARP, and the FTC. The settlement agreement created an

FTC-administered redress fund to distribute proceeds from

the First Alliance estate to First Alliance borrowers and

included an injunction barring Lehman (and any other potential non-settling defendants) from seeking indemnification and

contribution from First Alliance. Because Lehman’s rights

were materially affected, Lehman could have objected to the

11As discussed below, under the Bar Order, the ultimate judgment

against Lehman should still represent only 10 percent of the new damages

calculation. See infra at 19275-80. 

19274 IN RE: FIRST ALLIANCE MORTGAGE
settlement, but it did not do so because the parties agreed to

limit Lehman’s potential liability to its proportional share of

responsibility for the Class members’ damages. The settlement thus made indemnification or contribution from First

Alliance unnecessary. 

The Bar Order specifically states that: 

The amount of any verdict or judgment obtained

against any of the Non-Settling Defendants in any

litigation arising out of or relating to the business of

[First Alliance] shall be limited to the Non-Settling

Defendants’ proportionate share of liability, i.e.,

their actual percentage of liability for the amount of

total damages determined at trial, in accordance with

[Franklin v.] Kaypro [Corp., 884 F.2d 1222 (9th Cir.

1989)]. 

The district court enforced the Bar Order by instructing the

jury to determine the respective percentages of responsibility

as between First Alliance and Lehman. The jury found Lehman to have been responsible for 10 percent of the damages

suffered by the Borrowers, and the court entered judgment

against Lehman for 10 percent of the total damages found by

the jury. The Borrowers filed a Rule 59(e) motion to amend,

seeking to overturn the district court’s application of the Bar

Order and hold Lehman liable for the totality of the assessed

damages. That motion was denied. On appeal the Borrowers

maintain that “this case concerns an intentional tort for which

only one party was accused, tried and found liable: neither

contribution nor indemnity applies.” Therefore, Borrowers

insist, application of the Bar Order to reduce the damages

judgment against Lehman was error. 

The Borrowers find fault with the court’s application of the

Bar Order in accordance with Franklin v. Kaypro Corp., 884

F.2d 1222, 1231-32 (9th Cir. 1989), arguing that the district

court’s reliance on Kaypro was misplaced. The Borrowers’

IN RE: FIRST ALLIANCE MORTGAGE 19275
argument here is entirely without merit.12 In Kaypro, this

court concluded under federal common law that a partial pretrial settlement in a securities case, pursuant to which nonsettling defendants’ rights to contribution are satisfied and

further contribution barred, may be approved under Rule 23

if the liability of non-settling defendants is limited to their

actual percentage of liability for the amount of total damages

determined at trial. Id. at 1231. The court explained that this

scheme satisfies the statutory goal of punishing each wrongdoer, the equitable goal of limiting liability to relative culpability, and the policy goal of encouraging settlement. Id. Such

a scheme also comports with the equitable purpose of contribution, because the non-settling defendants never pay more

than they would if all parties had gone to trial. Id.

[19] The Borrowers attempt to distinguish this case from

Kaypro, which dealt directly with contribution rather than

indemnification. That attempt is misguided, because the district court did not “apply” Kaypro as a legal precedent to the

facts of this dispute. Rather, the court looked to Kaypro

because the settlement agreement so dictated. Under the

explicit terms of the Bar Order, the amount of any judgment

12The standard of review for the district court’s ruling on the Rule 59(e)

motion is the subject of dispute between the parties. Lehman contends that

the apportionment of liability was based upon the court’s finding that the

Bar Order governed the Borrowers’ claims against Lehman and as such is

reviewed for clear error; the Borrowers argue that the district court’s decision turned on issues of California law related to equitable indemnity and

therefore is not entitled to deference. It is clear from the district court’s

order denying the Borrowers’ motion to amend the judgment that the decision was based in part on the court’s interpretation of equitable indemnification under California law. The standard of review of that order is less

clear. Some courts have held that such a motion is reviewed de novo, not

for an abuse of discretion, when it seeks reconsideration of a question of

law. See, e.g., Pioneer Natural Resources USA, Inc. v. Paper, Allied, 328

F.3d 818, 820 (5th Cir. 2003); Perez v. Volvo Car Corp., 247 F.3d 303,

318-319 (1st Cir. 2001). We need not resolve this question because the

district court’s application of the Bar Order was proper under either standard. 

19276 IN RE: FIRST ALLIANCE MORTGAGE
against non-settling defendants is limited to their proportionate share of liability “in accordance with Kaypro.” Kaypro

outlined a permissible proportionate liability methodology

under Rule 23. The structure it prescribes for apportioning liability was adopted as a contractual agreement by the parties

to the settlement. It was the Borrowers who bound themselves

through the settlement agreement to the apportionment

scheme of Kaypro. The district court evaluated the issue correctly, recognizing that in exchange for the Bar Order, Lehman did not challenge the good faith basis of the settlement.

Now the class of Borrowers wants to take back the consideration tendered to Lehman in that compromise: the limitation

of liability to proportionate fault. The district court saw no

reason to do this. Neither do we. 

The Borrowers also argue that the principles of contribution

and indemnity do not apply to intentional torts under California law. It is true that, as a starting rule, contribution and

indemnity are generally not applied to intentional tortfeasors

who would shift responsibility onto negligent tortfeasors. See,

e.g., Allen v. Sundean, 186 Cal. Rptr. 863, 869 (Cal. Ct. App.

1982). Such a rule does not get the Borrowers very far, however, because the present case does not fit into this framework

for a number of reasons. First, to the extent that aiding and

abetting is an “intentional tort,” it is only intentional in the

sense that the aider and abettor intends to take the actions that

aid and abet, not that the tortfeasor specifically intends for his

actions to result in the fraudulent harm.13 Second, Lehman is

13Whether or not aiding and abetting is an “intentional tort” has been a

source of contention throughout this case, first with regard to the jury

instruction on the elements of the tort (with the Borrowers arguing that

aiding and abetting does not require specific intent, and carrying the day),

and then later with regard to the application of the FTC bar order (with

the Borrowers changing course and insisting that the tort is an independent

intentional tort such that indemnity and contribution cannot apply). The

district court’s approach to indemnity and contribution here is consistent

with its approach to the jury instructions, and again, we think it is the correct one. 

IN RE: FIRST ALLIANCE MORTGAGE 19277
not seeking to shift liability to a merely negligent tortfeasor,

but instead to another intentional tortfeasor, First Alliance,

which is indisputably the more culpable party. 

[20] As the district court concluded, California law does

allow for comparative equitable indemnification among joint

intentional tortfeasors. Baird v. Jones, 27 Cal. Rptr. 2d 232

(Cal. Ct. App. 1993). As the Baird court explained, “there is

little logic in prohibiting an intentional tortfeasor from forcing

another intentional tortfeasor to bear his or her share of liability.” Id. at 238. The Borrowers argue that Baird is not controlling because it has never been explicitly adopted by the

California Supreme Court. While California’s highest court

has not ruled on the issue, federal district courts within California have consistently relied on Baird to hold that an intentional tortfeasor can seek indemnity from another intentional

tortfeasor. See City of Merced v. R.A. Fields, 997 F. Supp.

1326, 1337 (E. D. Cal. 1998); Don King Prods. v. Ferreira,

950 F. Supp. 286, 290 (E. D. Cal. 1996); Employers Ins. of

Wausau v. Musick, Peeler & Garrett, 948 F. Supp. 942, 945

(S.D. Cal. 1995). Baird and its progeny stand on solid policy

grounds as well. We do not have before us a situation in

which an innocent defendant assumes liability for an intentional wrongdoer. Here, the primary and clearly intentional

wrongdoer (First Alliance) has indemnified the secondary

wrongdoer (Lehman) from any liability in excess of its fault.

Nor can there be any doubt that Lehman and First Alliance

were joint tortfeasors for the purposes of Baird and application of the Bar Order. The Borrowers rely on Nielson v. Union

Bank of California, 290 F. Supp. 2d 1101, 1135 (C.D. Cal.

2003), in which the court stated that aiders and abettors are

not held liable as joint tortfeasors for committing the underlying tort. In that context, the court was making the point that

the aider and abettor can be held liable without owing plaintiff

the same duty as does the primary violator, a rule vividly

illustrated in the present case. Moreover, “[j]oint tortfeasors

may act in concert or independently of one another,” and the

19278 IN RE: FIRST ALLIANCE MORTGAGE
focus of the inquiry is on “the interrelated nature of the harm

done.” Leko v. Cornerstone Bldg. Inspection Serv., 103 Cal.

Rptr. 2d 858, 863 (Cal. Ct. App. 2001) (citations omitted).

[21] Here, Lehman is clearly being held liable for the same

harm for which the class plaintiffs have already obtained

some recovery through settlement: the damages claimed were

the higher refinancing costs charged by First Alliance, for

which First Alliance was liable because it misrepresented the

loan terms. Lehman is held liable for the same claimed damages because it provided financial services to First Alliance.

The Borrowers’ efforts to characterize Lehman as the “lone

intentional tortfeasor” are unavailing. We reject the Borrowers’ request that the court hold Lehman responsible for 100

percent of the damages which the Borrowers themselves went

through great pains to prove were caused by someone else.

[22] The Borrowers’ final theory upon which they hope to

set aside application of the Bar Order is that apportionment

under the settlement was an affirmative defense that Lehman

waived by not raising it in the pleadings. This argument is

frivolous. The Bar Order itself does not put such a technical

burden on non-settling defendants, and there was no possibility for surprise on the part of the Borrowers regarding this

claim. Any argument to the contrary is disingenuous, given

that the Borrowers were a party to the settlement and were

specifically warned by the district court (during discussion on

the in limine order excluding evidence of the settlement from

trial) that any damages award found against Lehman would be

apportioned according to the Bar Order. Without having to

reach the merits of Lehman’s responsive judicial estoppel

claim, we conclude that the district court was correct in holding the Borrowers to the bargain which they made in the settlement. 

H. Equitable subordination

[23] Both the Borrowers and the Trustee sought to subordinate Lehman’s secured claims to $77 million in outstanding

IN RE: FIRST ALLIANCE MORTGAGE 19279
loan repayments to those of the unsecured creditors in the

First Alliance bankruptcy. Under Section 510(c) of the Bankruptcy Code, a court may, based upon equitable considerations, subordinate for purposes of distribution all or a part of

a claim or interest to all or part of another. 11 U.S.C. § 510(c).

The district court’s decision to grant or deny equitable relief

is reviewed for abuse of discretion. See Grosz-Salomon v.

Paul Revere Life Ins. Co., 237 F.3d 1154, 1163 (9th Cir.

2001) (holding that when a district court’s remedy takes the

form of an equitable order, the court reviews that order for an

abuse of discretion). 

[24] The subordination of claims based on equitable considerations generally requires three findings: “(1) that the

claimant engaged in some type of inequitable conduct, (2) that

the misconduct injured creditors or conferred unfair advantage on the claimant, and (3) that subordination would not be

inconsistent with the Bankruptcy Code.” Feder v. Lazar (In re

Lazar), 83 F.3d 306, 309 (9th Cir. 1996) (citing Benjamin v.

Diamond (In re Mobile Steel Co.), 563 F.2d 692, 699-700 (5th

Cir. 1977)). Where non-insider, non-fiduciary claims are

involved, as is the case here, the level of pleading and proof

is elevated: gross and egregious conduct will be required

before a court will equitably subordinate a claim. See In re

Pacific Express, Inc. 69 B.R. 112, 116 (B.A.P. 9th Cir. 1986)

(“The primary distinctions between subordinating the claims

of insiders versus those of non-insiders lie in the severity of

misconduct required to be shown, and the degree to which the

court will scrutinize the claimant’s actions toward the debtor

or its creditors. Where the claimant is a non-insider, egregious

conduct must be proven with particularity.”) (citing Matter of

Teltronics Servs., Inc., 29 B.R. 139, 169 (Bkrtcy. E.D.N.Y.

1983)). Although equitable subordination can apply to an

ordinary creditor, the circumstances are “few and far

between.” ABF Capital Mgmt. v. Kidder Peabody & Co., Inc.

(In re Granite Partners, L.P.), 210 B.R. 508, 515 (Bkrtcy.

S.D.N.Y. 1997) (collecting cases).

19280 IN RE: FIRST ALLIANCE MORTGAGE
The Trustee based his claim to equitable relief on the theory that by aiding and abetting First Alliance’s fraud, Lehman’s actions increased the amount of creditors and claims,

thus depleting the pro rata share that each creditor would have

of the remaining assets. At first blush, the Trustee’s argument

has a certain allure, because there is surely something “inequitable” in an abstract sense about aiding and abetting fraud.

Upon closer look, the success of this argument requires us to

treat the standard for holding Lehman liable for aiding and

abetting First Alliance’s fraud (knowledge and substantial

assistance under California tort law) as a stand-in for inequitable conduct under the test for equitable subordination of bankruptcy claims. This we cannot do. 

No authority supports the Trustee’s claim that independently tortious conduct is “egregious” as a matter of law. To

be sure, courts in other cases have found similar fact patterns

to constitute inequitable conduct for the purposes of Mobile

Steel analysis.14 But nothing dictates that the court’s denial of

equitable subordination was an abuse of discretion. The

Trustee insists that a “fraud is a fraud, period,” but that is simply not the law, neither in bankruptcy nor in tort. Cf. In re

Mobile Steel, 563 F.2d at 699-700; Saunders v. Superior

Court, 33 Cal. Rptr. 2d 438, 446 (Cal. Ct. App. 1994) (outlining the elements of equitable subordination claims and aiding

and abetting fraud claims, respectively; defining neither simply as “fraud”). 

[25] We agree with the district court that Lehman’s activities were not carried out in contemplation of the later-filed

First Alliance bankruptcy, and that Lehman’s conduct was not

a contributing factor to bringing about the bankruptcy or

14Most analogous to the case before us is In re Granite Partners, 210

B.R. at 515, in which the bankruptcy court found that allegations of aiding

and abetting fraud satisfied the pleading requirement for equitable subordination. But satisfying a pleading requirement is not the same as compelling a result as a matter of law. 

IN RE: FIRST ALLIANCE MORTGAGE 19281
determining the ordering of creditors to the bankruptcy estate.

Lehman did nothing to improve its status as a creditor at the

expense of any other creditor. 298 B.R. at 669. The district

court properly found that Lehman’s conduct did not amount

to the kind of fraud meant to be remedied by equitable subordination of bankruptcy claims.

Basing its ruling on the lack of inequitable conduct, the district court did not need to reach the question of whether the

misconduct resulted in harm to other creditors or conferred an

unfair advantage on the claimant, nor do we need to do so in

order to resolve this appeal. Still, we agree with the court’s

limited findings that: 

Lehman’s conduct did not deplete or otherwise

adversely impact First Alliance’s assets, nor was

Lehman’s conduct related to the acquisition or assertion of its secured claim against the First Alliance

estate. Instead, the impact of Lehman’s conduct on

First Alliance borrower creditors is only tangentially

related to the First Alliance bankruptcy in that both

Lehman and the borrowers are creditors of the First

Alliance estate. 

298 B.R. at 668-669 (internal citations omitted). The district

court has discretion to balance the equities of a case pursuant

to the Bankruptcy Code, and its exercise of that discretion

was proper.

I. Fraudulent Conveyance 

The Trustee also looked for relief elsewhere in the Bankruptcy Code and sought to avoid as “fraudulent transfers”

about $400 million in payments First Alliance made to Lehman under the Master Repurchase Agreement (“MRA”).15

15The MRA governed the revolving credit and securitization relationship between First Alliance and Lehman described earlier. See supra, section I.B. 

19282 IN RE: FIRST ALLIANCE MORTGAGE
Bankruptcy Code section 548 allows a trustee to avoid any

transfer of an interest of the debtor in property or any obligation incurred by the debtor if the debtor made such transfer or

incurred such obligation with actual intent to hinder, delay or

defraud any creditor. 11 U.S.C. § 548(a)(1); see also Cal. Civ.

Code § 3439.04(a) (incorporating the U.S. Bankruptcy Code).

In other words, a “fraudulent transfer” is a transfer of “some

property interest with the object or effect of preventing creditors from reaching that interest to satisfy their claims” or “an

act which has the effect of improperly placing assets beyond

the reach of creditors.” 5 Collier on Bankruptcy P548.04(1) at

548-4, 5 (15th ed. Revised 2002); Witkin, 3 California Procedure (Enforcement of Judgment), 4th ed. § 445l. 

The purpose of fraudulent transfer law is “to protect creditors from last-minute diminutions in the pool of assets in

which they have interests.” Pioneer Liquidating Corp. v. San

Diego Trust & Sav. Bank (In re Consol. Pioneer Mortg. Entities), 211 B.R. 704, 717 (S.D. Cal. 1997). In Pioneer, the

court faced a scenario not unlike this one, in which a corporation’s liquidating trustee brought an adversary proceeding

against the depositary bank, seeking to recover as fraudulent

transfers the amount of advances drawn against provisionally

credited deposits to commercial accounts that the bank

extended to the debtor. Id. There, the court had occasion to

consider the purpose of this portion of the Bankruptcy Code:

“The original fraudulent conveyance statute, in 13 Eliz. ch. 5

(1571), dealt with debtors who transferred property to their

relatives, while the debtors themselves sought sanctuary from

creditors. The family enjoyed the value of the assets, which

the debtor might reclaim if his creditors stopped pursuing

him.” Pioneer, 211 B.R. at 710 n. 5 (citing Bonded Fin.

Servs., Inc. v. European American Bank, 838 F.2d 890, 892

(7th Cir. 1988)). The Pioneer court held that payment to a

fully secured creditor does not hinder, delay or defraud creditors because it does not put assets otherwise available in a

bankruptcy distribution out of their reach. 211 B.R. at 717;

IN RE: FIRST ALLIANCE MORTGAGE 19283
see also Melamed v. Lake County National Bank, 727 F.2d

1399, 1402 (6th Cir. 1984).

[26] As it did with the issue of equitable subordination, the

district court had discretion over the Trustee’s fraudulent

transfer claims, and this Court conducts limited review for

abuse of that discretion. See Grosz-Salomon, 237 F.3d at

1163. We find no such abuse occurred here, and we specifically adopt the finding of the district court that “[r]epayments

of fully secured obligations—where a transfer results in a dollar for dollar reduction in the debtor’s liability—do not hinder, delay, or defraud creditors because the transfers do not

put assets otherwise available in a bankruptcy distribution out

of their reach.” 298 B.R. at 665. The payments made to Lehman under its agreement with First Alliance were simply not

fraudulent transfers within the meaning of the statute. 

The Trustee’s argument focuses on First Alliance’s intent

to defraud the “borrower creditors,” which he asserts is prima

facie evidence of First Alliance’s actual intent to defraud

creditors by entering into the MRA with Lehman. In the first

place, even though the Trustee refers to them as “borrower

creditors,” the borrowers were not creditors at the time of the

MRA. Further, there was no defrauding of creditors (or borrowers) by entering into the MRA, with intent or otherwise.

The district court found that First Alliance perpetrated a fraud

by making misrepresentations in the sales pitch for the loans.

The MRA had nothing to do with those misrepresentations,

and the Trustee’s efforts to conceptually collapse the “obligation incurred” by First Alliance into its fraudulent mortgage

loans to borrowers is unconvincing. It is not the case that “the

Obligation’s two components are just opposite sides of a single coin,” as the Trustee urges. Rather, “[i]t is important to

distinguish between [debtor’s] intent while engaging in the

. . . scheme to provide funds for the Debtor’s operations and

his intent in using those funds so generated to pay the Debtor’s creditors. His intent in generating funds, may not be the

same as in spending the funds.” Barber v. Union Nat’l Bank

19284 IN RE: FIRST ALLIANCE MORTGAGE
(In re KZK Livestock, Inc.), 190 B.R. 626, 628 (Bkrtcy. C.D.

Ill. 1996)

The Trustee is focusing on the wrong transactions. First

Alliance’s financing agreement with Lehman in and of itself

was not fraudulent, nor did it have any impact on the assets

available to satisfy bankruptcy claims. The misrepresentations

made to borrowers in the course of the mortgage agreements

—while constituting a fraudulent scheme—are not the relevant fraudulent scheme for the purposes of this bankruptcy

law remedy. Through the fraudulent conveyance mechanism,

the Bankruptcy Code contemplates a scheme to hide assets

from creditors. Thus, even though the district court found that

Lehman substantially assisted First Alliance in fraud, such a

finding is not the equivalent of colluding or otherwise participating in a scheme to fraudulently transfer First Alliance

assets. Moreover, there is sufficient evidence in the record to

support the district court’s conclusion that Lehman actively

sought assurances from First Alliance that it would remain

financially viable while Lehman provided financing. See 298

B.R. at 662. 

The district court found that Lehman’s commercial relationship with First Alliance constituted aiding and abetting a

fraud that led to a class of borrowers who paid too much for

their mortgages. Based on these findings, the court held Lehman accountable in damages, a holding we affirm. But if the

court granted the equitable relief the Trustee seeks, the effect

would be essentially to undo the entire financial relationship

that ever existed between Lehman and First Alliance, on top

of making Lehman pay damages for it in the first place. Such

a result would stretch the facts of this case and the relevant

principles of bankruptcy law too far. 

III. CONCLUSION

The subprime lending industry was relatively young during

the time period in question in this case, and the immense

IN RE: FIRST ALLIANCE MORTGAGE 19285
growth of subprime lending over the past decade has

prompted efforts by state and federal legislators to create standards that encourage legitimate subprime lending while curbing abusive, predatory practices. Standards for those entities

providing financial services to the industry by securitizing

subprime loans have been similarly undefined. Out of this

context the district court was asked to examine the financial

relationship between Lehman and First Alliance, in relation to

First Alliance’s lending practices, and to apply tort and bankruptcy principles to impose liability for that relationship. We

believe the court did so properly. 

For the reasons discussed above, we affirm the holdings of

the district court imposing liability on Lehman for aiding and

abetting a class-wide fraud perpetrated by First Alliance, and

rejecting the Borrowers’ claims for relief in the form of equitable and punitive remedies, as well as the Trustee’s claims

for equitable relief under the Bankruptcy Code. We vacate the

damages verdict and remand for further proceedings on the

proper calculation of “out-of-pocket” damages caused by First

Alliance’s fraudulent lending scheme, to be proportionately

attributed to Lehman pursuant to the terms of the Bar Order.

Each party shall bear its own costs.

AFFIRMED IN PART, VACATED IN PART,

REMANDED.

19286 IN RE: FIRST ALLIANCE MORTGAGE