Henry v. Lehman Commercial Paper, Inc.

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-in-
Interest to the OFFICIAL JOINT
BORROWERS COMMITTEE,
Plaintiff-Appellant, No. 04-55396
and  D.C. No.
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
19232 IN RE: FIRST ALLIANCE MORTGAGE

In re: FIRST ALLIANCE MORTGAGE 
COMPANY, a California corporation,
Debtor,

KENNETH C. HENRY, Liquidating
Trust Trustee as Successor-in-
Interest to the OFFICIAL JOINT
BORROWERS COMMITTEE; FRANK
AIELLO; NICOLENA AIELLO; MICHAEL
AUSTIN; BARBARA AUSTIN; PAUL
CARABETTA; LENORE CARABETTA; No. 04-55920
GEORGE JEROLEMON; JOSEPHINE
JEROLEMON; WALTER BERRINGER;  D.C. Nos.
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.

 IN RE: FIRST ALLIANCE MORTGAGE 19233

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
others similarly situated,  CV-01-00971-DOC
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 19239
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, Hei-
mann & Bernstein, LLP, San Francisco, California; Kim E.
Levy, Lili R. Sabo, Milberg Weiss Bershad & Schulman LLP,
New York, New York, for the plaintiffs-appellees-cross-
appellants.

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 bank-
ruptcy and subsequent liquidation by well-publicized and jus-
tified allegations of fraudulent lending practices. The demise
of First Alliance has led to two separate actions against Leh-
man 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 bank-
ruptcy trustee appointed to liquidate First Alliance, seeks to
set aside payments Lehman received in the course of its
19240 IN RE: FIRST ALLIANCE MORTGAGE
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 pur-
poses 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 Leh-
man’s conduct pursuant to its relationship with First Alliance
did not warrant relief under the equitable principles of bank-
ruptcy law. See Austin v. Chisick (In re First Alliance Mort-
gage 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 rejec-
tion 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 dam-
ages.

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.
 IN RE: FIRST ALLIANCE MORTGAGE 19241
A. First Alliance Mortgage Company

First Alliance was a lender in the “subprime” mortgage sec-
tor. 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 mort-
gage industry has grown over the last decade, increasing
attention has focused on predatory lending abuses—the prac-
tice of making loans containing interest rates, fees or closing
costs that are higher than they should be in light of the bor-
rower’s credit and net income, or containing other exploit-
ative 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. BlackLet-
ter 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 Daven-
port, 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 con-
sumer 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.
19242 IN RE: FIRST ALLIANCE MORTGAGE
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 mort-
gage 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 stan-
dardized 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 offi-
cers 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 presenta-
tion 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 mis-
leading 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 offi-
cers were taught to deflect attention away from things that
consumers might normally look at, and the loan sales presen-
tation 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.
 IN RE: FIRST ALLIANCE MORTGAGE 19243
In the late 1990’s, First Alliance became subject to increas-
ing 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 Cali-
fornia Courts of Appeal held that First Alliance loan agree-
ments 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 pro-
cedures. The article implicated Wall Street investment bank-
ing 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 vol-
untary 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 pro-
ceedings. 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 Commit-
tee. The group of unsecured creditors represented by the
19244 IN RE: FIRST ALLIANCE MORTGAGE
Trustee consists mostly of the same consumer borrowers rep-
resented by the plaintiff class.

In September 2002, the district court also approved a settle-
ment in an action brought by the Federal Trade Commission
(“FTC”) against First Alliance for violations of federal lend-
ing laws. In exchange for the amount to be paid out to a
redress fund administered by the FTC, First Alliance was dis-
charged 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 institu-
tion 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
 IN RE: FIRST ALLIANCE MORTGAGE 19245
money to First Alliance, whereby the mortgage company was
able to convert a long-term revenue stream from the repay-
ment 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 busi-
ness 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 prac-
tices 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 transac-
tions 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 Alli-
ance. 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. Accord-
ing 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
19246 IN RE: FIRST ALLIANCE MORTGAGE
agreement required First Alliance to provide quarterly finan-
cial 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 dur-
ing 1999 and 2000, Lehman retained the Clayton Group, a
company that specialized in analyzing loans in order to deter-
mine 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 ware-
house credit line remained outstanding, secured by First Alli-
ance 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 con-
solidated 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
 IN RE: FIRST ALLIANCE MORTGAGE 19247
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 Alli-
ance’s mortgage business, Lehman did so knowing that First
Alliance loans were originated through deceptive sales proce-
dures, 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 unse-
cured creditors harmed by its fraudulent business practices.
The Trustee’s action also sought to recover about $400 mil-
lion 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 Bor-
rowers who make up the class of plaintiffs in the fraud action.
Both actions rest on the premise that Lehman’s financial rela-
tionship with First Alliance was a component of First Alli-
ance’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.
19248 IN RE: FIRST ALLIANCE MORTGAGE
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 settle-
ment 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 Borrow-
ers and to determine the percentage of that total for which
Lehman was responsible. The jury calculated the total dam-
ages 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 cal-
culation, 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 liabil-
ity. The apportionment of damages was made pursuant to the
“judgment reduction” clause or “Bar Order” in the previously-
approved settlement agreement between the plaintiffs2 and
2
The group of plaintiffs who were party to the settlement agreement
included the Federal Trade Commission, several states’ attorneys general,
 IN RE: FIRST ALLIANCE MORTGAGE 19249
First Alliance, which extinguished all non-settling defendants’
rights to indemnity or contribution from First Alliance (dis-
cussed 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 Bor-
rowers also appeal the court’s summary judgment order on
their UCL and punitive damages claims.

The Trustee’s equitable subordination and fraudulent trans-
fer claims were tried to the bench, and the district court
denied those claims. The court made findings of fact that ech-
oed 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 acquisi-
tion 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 conclu-
sions may be briefly summarized as follows. Sufficient evi-
dence supported the allegation that First Alliance committed
fraud on a class-wide basis through a common course of con-
duct, so class treatment of the Borrowers’ claims against Leh-
man 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 plain-
tiffs certified by the court represented by Michael and Barbara Austin and
others.
19250 IN RE: FIRST ALLIANCE MORTGAGE
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 equita-
ble remedies available under that statute were not appropriate
here. The district court properly concluded that punitive dam-
ages 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 pay-
ments 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 calcula-
tion 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 appor-
tioned 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 pro-
ceedings.

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
 IN RE: FIRST ALLIANCE MORTGAGE 19251
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 mis-
representations made to borrowers to support class treatment
in federal court and a class-wide finding of fraud under Cali-
fornia law are matters of law; whether such similar misrepre-
sentations 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 misrepresenta-
tions 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 misrepre-
sentations 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
19252 IN RE: FIRST ALLIANCE MORTGAGE
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 reli-
ance by the persons to whom they were addressed,” a “fraud
perpetrated on numerous persons by the use of similar misrep-
resentations 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 dif-
ferent standards in identifying the degree of factual common-
ality 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’ posi-
tions”); 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.
3
For example, the Second and Third Circuits have highlighted the
importance of uniformity among misrepresentations made to class mem-
bers 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 gen-
eralized 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 presenta-
tions).
 IN RE: FIRST ALLIANCE MORTGAGE 19253
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 princi-
pally through oral misrepresentations, unless those representa-
tions 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 pur-
chasers. . . . The exact wording of the oral misrepre-
sentations, 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 bro-
kers 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 Borrow-
ers’ allegations of First Alliance’s fraud fit comfortably
within the standard for class treatment.
19254 IN RE: FIRST ALLIANCE MORTGAGE
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. Slet-
ten, 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 credi-
bility determinations, the weighing of the evidence, and the
drawing of legitimate inferences from the facts are jury func-
tions, 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 Alli-
ance 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 mis-
lead 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 memo-
rized and strict adherence to a specific method of hiding infor-
mation 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 pay-
 IN RE: FIRST ALLIANCE MORTGAGE 19255
ment,” and then to immediately redirect the borrower’s atten-
tion 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 contra-
dicted those oral statements. The argument is that the plain-
tiffs 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 induc-
ing borrowers to sign documents without really understanding
the terms. As the district court found, “First Alliance borrow-
ers 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 induc-
ing 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 misrepre-
sentations 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
19256 IN RE: FIRST ALLIANCE MORTGAGE
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 fac-
tual grounds, arguing that the jury was not properly instructed
on the elements of aiding and abetting liability under Califor-
nia 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, Leh-
man “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 Alli-
ance. 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 mat-
ter of law. That motion argued that the Borrowers failed to
prove substantial assistance. Again, we conclude that the dis-
trict court properly determined the law and that sufficient evi-
dence 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
 IN RE: FIRST ALLIANCE MORTGAGE 19257
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 Cali-
fornia 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 Col-
ony 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 encour-
agement 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 spe-
cific primary wrong the defendant substantially assisted.” 26
19258 IN RE: FIRST ALLIANCE MORTGAGE
Cal. Rptr. 3d at 406.4 We apply this standard to the Borrow-
ers’ 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 evi-
dence was insufficient to establish Lehman’s actual knowl-
edge 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 evi-
4
We 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 Fidu-
ciaries 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.
5
Though 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.
 IN RE: FIRST ALLIANCE MORTGAGE 19259
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 orig-
ination 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 “ac-
tual knowledge” prong, see Forrett, 112 F.3d at 419, and we
likewise conclude that the jury’s finding that Lehman substan-
tially 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 “substan-
tial 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 sub-
stantial 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
19260 IN RE: FIRST ALLIANCE MORTGAGE
actually knew those transactions were assisting the customer
in committing a specific tort. Knowledge is the crucial ele-
ment.” 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 busi-
ness, knowing that its financial difficulties stemmed directly
and indirectly from litigation over its dubious lending prac-
tices. That was enough to conclude that Lehman was provid-
ing the requisite substantial assistance. Lehman admits that it
knowingly provided “significant assistance” to First Alli-
ance’s business, but distinguishes that from providing sub-
stantial 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 Leh-
man substantially assisted First Alliance in its fraud.

C. California Unfair Competition Law

In addition to their claim of common law aiding and abet-
ting 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 person-
ally 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).
 IN RE: FIRST ALLIANCE MORTGAGE 19261
[8] Section 17200 creates a cause of action for an “unlaw-
ful, 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 quo-
tation 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 pur-
suant 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 participa-
tion” 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 Leh-
man’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 profes-
sional capacity as the owner of the company whose practices were found
19262 IN RE: FIRST ALLIANCE MORTGAGE
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 dam-
ages 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 dis-
cussed the available equitable remedies under the UCL, which
“allows any consumer to combat unfair competition by seek-
ing 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 reme-

to 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 state-
ments,” 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.
 IN RE: FIRST ALLIANCE MORTGAGE 19263
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 manipu-
late market prices of electricity. Plaintiff sought “disgorge-
ment 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 defen-
dant’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 “dam-
ages, not restitution”).
19264 IN RE: FIRST ALLIANCE MORTGAGE
[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 dis-
gorge Lehman’s “ill-gotten gains,” asserting that Lehman
unlawfully acquired money and property directly and indi-
rectly 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 owner-
ship interest. Theoretically,7 the money in which the borrow-
ers 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 bond-
holders to whom Lehman sold the mortgage-backed securi-
ties. 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. Per-
haps many class members would not have agreed to any mort-
gage 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 “ill-
gotten.”

[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
7
As the Borrowers did not actually claim an ownership interest in funds
in Lehman’s possession, nor explain the basis of their purported owner-
ship interest in those funds, their equitable claim under the UCL is left
largely to the court’s speculation.
 IN RE: FIRST ALLIANCE MORTGAGE 19265
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 Sup-
ply, 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 threat-
ened 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. Indy-
mac 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 there-
fore affirmed.

D. Punitive Damages

The district court dispensed with the Borrowers’ attempt to
recover punitive damages from Lehman by granting Leh-
man’s motion for summary judgment on the issue. The Bor-
rowers 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 appropri-
ate where a plaintiff establishes by clear and convincing evi-
dence that the defendant is guilty of (1) fraud, (2) oppression
or (3) malice. Cal. Civ. Code § 3294(a). According to the def-
initions provided in section 3294(c), a plaintiff may not
recover punitive damages unless the defendant acted with
19266 IN RE: FIRST ALLIANCE MORTGAGE
intent or engaged in “despicable conduct.”8 “The adjective
‘despicable’ connotes conduct that is so vile, base, contempt-
ible, 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 “de-
spicable” 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 Leh-
man’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 puni-
tive damages appropriate under the heightened clear and con-
8
Section 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 car-
ried 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 per-
son 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 per-
son of property or legal rights or otherwise causing injury.
CAL. CIV. CODE § 3294(c).
 IN RE: FIRST ALLIANCE MORTGAGE 19267
vincing evidence standard. See, e.g., Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 254-55 (1986) (noting that in rul-
ing 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 pre-
sented . . . 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 non-
moving 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 sup-
port 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 dil-
9
Due diligence, a concept most often employed in the context of securi-
ties 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 Leh-
man 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 Leh-
man’s standard due diligence undertaken in providing financial services to
a mortgage lender.
19268 IN RE: FIRST ALLIANCE MORTGAGE
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 Leh-
man 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. Consider-
ing 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. Merino-
Balderrama, 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 rul-
ings are considered harmless errors, the “cumulative error”
doctrine requires the court to determine whether the cumula-
tive 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.
 IN RE: FIRST ALLIANCE MORTGAGE 19269
The first evidentiary ruling Lehman contests is the admis-
sion 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 Pro-
cedure 26(a)(1)(A), and not identified in supplemental disclo-
sures until after the official close of discovery10 (though still
more than 60 days before trial began). Rule 26(a)(1)(A) pro-
vides 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 dis-
coverable 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 dis-
puted 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 wit-
nesses ultimately called to testify at trial, it is of little conse-
quence. 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 sug-
gest that Lehman was significantly hampered in its ability to
10
This was not the actual close of discovery, as even Lehman subpoe-
naed a third party witness more than two months into trial, seeking docu-
ments pertaining to a 1987 lawsuit against First Alliance.
19270 IN RE: FIRST ALLIANCE MORTGAGE
prepare for trial or to examine these witnesses. We affirm the
district court’s ruling allowing testimony of witnesses not ini-
tially disclosed in discovery.

Lehman’s other evidentiary objection is equally unavailing.
Prior to trial, the Borrowers obtained an order excluding evi-
dence 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 work-
ing 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 dis-
agreed with Lehman that the reference to the settlement hav-
ing 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 settle-
ment was fully taken into account, albeit in a different man-
ner. 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 Leh-
man, 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 Alli-
ance. The jury was ultimately instructed to apportion Leh-
man’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
 IN RE: FIRST ALLIANCE MORTGAGE 19271
Lehman is itself a source of contention in this appeal, which
we address below. For the purposes of evaluating any prejudi-
cial 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 suffi-
ciently 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 evi-
dence, 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 “out-
of-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: out-
of-pocket and benefit-of-the-bargain. The out-of-
pocket measure restores a plaintiff to the financial
position he enjoyed prior to the fraudulent transac-
tion, awarding the difference in actual value between
what the plaintiff gave and what he received. The
19272 IN RE: FIRST ALLIANCE MORTGAGE
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 pur-
chase, 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 Com-
munications, 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 mort-
gage 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-of-
pocket 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
 IN RE: FIRST ALLIANCE MORTGAGE 19273
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 sub-
mission 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 Borrow-
ers 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” dam-
ages 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 dam-
ages 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 bot-
tom line provided by any particular damages expert, but the
19274 IN RE: FIRST ALLIANCE MORTGAGE
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”). Hav-
ing 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 instruc-
tions.

[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 remit-
tur 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 court-
approved 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 poten-
tial non-settling defendants) from seeking indemnification and
contribution from First Alliance. Because Lehman’s rights
were materially affected, Lehman could have objected to the
11
As 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.
 IN RE: FIRST ALLIANCE MORTGAGE 19275
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 settle-
ment 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 Leh-
man 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’
19276 IN RE: FIRST ALLIANCE MORTGAGE
argument here is entirely without merit.12 In Kaypro, this
court concluded under federal common law that a partial pre-
trial settlement in a securities case, pursuant to which non-
settling 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 wrong-
doer, the equitable goal of limiting liability to relative culpa-
bility, and the policy goal of encouraging settlement. Id. Such
a scheme also comports with the equitable purpose of contri-
bution, 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 dis-
trict 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
12
The 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 deci-
sion 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 deci-
sion was based in part on the court’s interpretation of equitable indemnifi-
cation 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 stan-
dard.
 IN RE: FIRST ALLIANCE MORTGAGE 19277
against non-settling defendants is limited to their proportion-
ate share of liability “in accordance with Kaypro.” Kaypro
outlined a permissible proportionate liability methodology
under Rule 23. The structure it prescribes for apportioning lia-
bility 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 cor-
rectly, recognizing that in exchange for the Bar Order, Leh-
man did not challenge the good faith basis of the settlement.
Now the class of Borrowers wants to take back the consider-
ation 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 Califor-
nia 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, how-
ever, 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
13
Whether 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 cor-
rect one.
19278 IN RE: FIRST ALLIANCE MORTGAGE
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 liabili-
ty.” Id. at 238. The Borrowers argue that Baird is not control-
ling 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 Cali-
fornia have consistently relied on Baird to hold that an inten-
tional 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 inten-
tional 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 applica-
tion 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 underly-
ing 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
 IN RE: FIRST ALLIANCE MORTGAGE 19279
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 dam-
ages because it provided financial services to First Alliance.
The Borrowers’ efforts to characterize Lehman as the “lone
intentional tortfeasor” are unavailing. We reject the Borrow-
ers’ 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 possibil-
ity 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 hold-
ing the Borrowers to the bargain which they made in the set-
tlement.

H. Equitable subordination

[23] Both the Borrowers and the Trustee sought to subordi-
nate Lehman’s secured claims to $77 million in outstanding
19280 IN RE: FIRST ALLIANCE MORTGAGE
loan repayments to those of the unsecured creditors in the
First Alliance bankruptcy. Under Section 510(c) of the Bank-
ruptcy Code, a court may, based upon equitable consider-
ations, 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 con-
siderations generally requires three findings: “(1) that the
claimant engaged in some type of inequitable conduct, (2) that
the misconduct injured creditors or conferred unfair advan-
tage 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).
 IN RE: FIRST ALLIANCE MORTGAGE 19281
The Trustee based his claim to equitable relief on the the-
ory that by aiding and abetting First Alliance’s fraud, Leh-
man’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 “inequi-
table” 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 inequita-
ble conduct under the test for equitable subordination of bank-
ruptcy claims. This we cannot do.

No authority supports the Trustee’s claim that indepen-
dently 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 sim-
ply 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) (outlin-
ing the elements of equitable subordination claims and aiding
and abetting fraud claims, respectively; defining neither sim-
ply as “fraud”).

[25] We agree with the district court that Lehman’s activi-
ties 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
14
Most 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 subor-
dination. But satisfying a pleading requirement is not the same as compel-
ling a result as a matter of law.
19282 IN RE: FIRST ALLIANCE MORTGAGE
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 subor-
dination of bankruptcy claims.

Basing its ruling on the lack of inequitable conduct, the dis-
trict 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 asser-
tion 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 Bank-
ruptcy Code and sought to avoid as “fraudulent transfers”
about $400 million in payments First Alliance made to Leh-
man under the Master Repurchase Agreement (“MRA”).15
15
The MRA governed the revolving credit and securitization relation-
ship between First Alliance and Lehman described earlier. See supra, sec-
tion I.B.
 IN RE: FIRST ALLIANCE MORTGAGE 19283
Bankruptcy Code section 548 allows a trustee to avoid any
transfer of an interest of the debtor in property or any obliga-
tion 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 credi-
tors 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 Proce-
dure (Enforcement of Judgment), 4th ed. § 445l.

The purpose of fraudulent transfer law is “to protect credi-
tors 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. Enti-
ties), 211 B.R. 704, 717 (S.D. Cal. 1997). In Pioneer, the
court faced a scenario not unlike this one, in which a corpora-
tion’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 credi-
tors because it does not put assets otherwise available in a
bankruptcy distribution out of their reach. 211 B.R. at 717;
19284 IN RE: FIRST ALLIANCE MORTGAGE
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 specifi-
cally adopt the finding of the district court that “[r]epayments
of fully secured obligations—where a transfer results in a dol-
lar for dollar reduction in the debtor’s liability—do not hin-
der, 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 Leh-
man 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 bor-
rowers) 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 “obliga-
tion 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 sin-
gle 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 Debt-
or’s creditors. His intent in generating funds, may not be the
same as in spending the funds.” Barber v. Union Nat’l Bank
 IN RE: FIRST ALLIANCE MORTGAGE 19285
(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 rele-
vant 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 partici-
pating 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 rela-
tionship 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 Leh-
man 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
19286 IN RE: FIRST ALLIANCE MORTGAGE
growth of subprime lending over the past decade has
prompted efforts by state and federal legislators to create stan-
dards that encourage legitimate subprime lending while curb-
ing 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 bank-
ruptcy 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 equi-
table 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.