Bismark Bank is a state chartered bank headquartered in the State of North Dakota. It is now the nation’s largest bank, having been formed through a series of acquisitions consummated by its current president, George Bailey. It is one of the largest employers in North Dakota, with its mortgage financing, credit card, and telemarketing centers all located in North Dakota.

Through Bailey’s leadership, Bismark also has acquired other financial institutions. As the real estate boom began to accelerate in 2007, Bailey acquired his “crown jewel,” Old Pacific Mortgage (OPM), a mortgage lending institution. OPM is the largest mortgage lending institution in the nation, and is based in California.

OPM grew rapidly as a result of the efforts of its leader, Miranda Priestly. Priestly is a scrappy businesswoman, who built OPM from a small, storefront lender centered in East Los Angeles, California, to become the nation’s leading lender to the underserved, lower middle class, and poorer classes. Priestly’s parents ran a small supermarket in Bakersfield, California, and could not afford their own home. Priestly believes home ownership should be the dream of every American, and she vowed to ensure that OPM would service worthy borrowers that other lenders would not touch. In the beginning, she made sure that everyone she hired similarly believed in the mission of OPM.

As OPM grew larger, Priestly was not as involved in the day-to-day management of the company. Instead, she resorted to instructing her top lieutenants to stay true to the mission, but to make sure the company was extremely profitable as well, so that it could continue to accomplish its goals— servicing borrowers in the lower middle class and poorer communities in all 50 States. She also told her top lieutenants to ensure that all of their subordinates understood and carried out the mission with an eye on the bottom line.

Towards the end of 2011, the North Dakota Commissioner of Banking noticed an increase in complaints against OPM. More and more customers were falling behind on their mortgages and going into foreclosure. After a lengthy investigation, the Commissioner discovered that OPM was engaged in a number of practices that appeared to violate North Dakota’s banking law, including falsifying income statements on lending documents so that the consumers qualified for mortgages that they could not afford; and requiring borrowers to pay penalties if they paid down their mortgages sooner than originally anticipated (prepayment penalties). For the period 2004-14, there were 2,000 loans in North Dakota that involved falsified income statements. The Commissioner met with the Chief of the North Dakota Attorney General’s Consumer Division, Rusty Sabich, in June 2016 to discuss the problems with OPM.

After reviewing the data, loan documents, and borrower statements collected by the North Dakota Banking Department, Sabich determined that there appeared to be numerous violations of North Dakota’s five-year-old predatory lending law, including failing to ensure loans were suitable for borrowers and requiring borrowers to pay prepayment penalties. Sabich also thought these practices violated the State’s 50-year-old unfair and deceptive practices (UDAP) law.

Sabich also discovered that the falsified income statements were endemic to OPM’s nationwide practice. The Commissioner reported that her banking regulator counterparts told her that from 2004-14, in California there were 50,000 affected loans; in Illinois there were 26,000 affected loans; in New Hampshire there were 5,000; and in Mississippi there were 7,000. Nationwide, there were over 100,000 such loans.

In October 2016, Sabich sent a packet of information about OPM’s practices to the chiefs of the consumer protection divisions of various Attorney General offices, including California (Polly Biegler and Claude Dancer, who are the co-heads of the division), Illinois (Ann Talbot), and New Hampshire (Dani Kaffee). After a series of emails and conference calls with other States, a multistate task force was formed. The Executive Committee originally consisted of North Dakota, Illinois, and New Hampshire. California was not part of the Executive Committee, but was included in the discussions because it had initiated its own separate investigation.

The Executive Committee then held a series of conference calls in 2017 to determine whether the activities of OPM violated laws in all four States, and whether to act collectively or on their own. The chiefs noted that of the four States, none other than North Dakota had a “suitability” requirement in its lending law. California has a predatory loan law, but it is pretty toothless. But all four States believed that there was a decent argument that OPM’s activities were “unfair” under each State’s UDAP law, and thus likely violated the UDAP laws of most States.

After sending out a civil investigative demand (CID), Sabich followed up with a call to Bismark’s Vice President and General Counsel, Marty Bach, to discuss the States’ concerns with OPM’s practices. After listening to Sabich, Bach said that he understood the States had concerns, that he would look into it further, and that he would get back to Sabich.

Realizing that the allegations were serious, Bach then contacted Priestly and Bailey, and, at Priestly’s suggestion, they decided to ask OPM’s top outside litigator, Vinny Gambini, to represent OPM and Bismark in this matter. Gambini was no stranger to OPM’s legal troubles, having represented OPM in a prior SEC action (in which they defeated the government in a preliminary injunction hearing) and in two nasty shareholder lawsuits. Gambini had a reputation of taking tough positions in negotiations and being willing to actually try cases if the other side doesn’t cave. Meanwhile, a search on Westlaw reveals that other than Ann Talbot, of Illinois, none of the States’ attorneys on the Executive Committee, has ever tried a major consumer case.

After spending many months negotiating a confidentiality order on the CID, OPM’s inside and outside counsel had numerous conference calls in 2018 with North Dakota, Illinois, and New Hampshire. They were occasionally joined by California, which was proceeding with its separate investigation.

In early 2019, the bankers told the States that they were willing to reform some practices, but that they did not believe that most States’ lending laws covered any of OPM’s activities. They also indicated they were willing to pay about $100 million total to the States for restitution and investigative costs and attorneys’ fees (but no penalties), to distribute as the States saw fit, and to sign a weak consent judgment that did not include a reference to any lending laws, but that any consent decree had to “buy them peace,” i.e., settle with all 50 States.

The Executive Committee in turn demanded in summer 2019 that Bismark and OPM sign a consent decree containing the following provisions:

1. A fund of $1.5 billion to provide consumers in all 50 States with restitution for the loans that are in default;

2. $100 million in penalties;

3. $50 million in investigative costs and attorneys’ fees;

4. Strong injunctive relief, with an outside monitor paid for by the defendants, and with reporting requirements, and which prohibits the companies from violating States’ lending laws, specifically including North Dakota’s law; and

5. Priestly be named as a defendant and be bound personally by the injunctive provisions of the settlement.

Bismark and OPM were stunned by this demand, and said that they would need some time to figure out how best, if at all, to respond to this demand, which they called a “nonstarter.” After some back-and-forth, the parties agreed to set up one last meeting. All principals were asked to attend. This meeting is scheduled for November 4, 2019.

Shortly before the final negotiating session was held, Mississippi announced that it had just hired famed plaintiffs’ class action attorney, Frankie Galvin, to represent the State on a contingency fee basis in this matter. None of the States’ lawyers knew Galvin personally, although they all had read the stories about the private jet and the millions of dollars of attorneys’ fees received in the tobacco litigation, and they loathed what this represented. Galvin held a news conference surrounded by people who had lost their homes and a dozen bankers’ boxes of what he claimed were leaked internal memoranda showing that OPM knew it was driving people out of their homes, and Galvin promised to file suit “in a few days.” Both the bankers and the States thought this was just a publicity stunt. In any event, Mississippi’s Attorney General, who is the current President of the National Association of Attorneys’ General, insisted that Galvin be permitted to participate in the final negotiating session, and the bankers and the States reluctantly agreed.

Meanwhile, the States knew from prior experience that settlements were often paid for, at least in part, by insurance. Their requests for copies of the insurance policies, both general and Directors & Officers (D&O) insurance, had gone unheeded so far. Indeed, they didn’t even know how much, if any, insurance was available to cover any settlement. Thus, the States now insisted that an insurance representative “with authority” also attend the final negotiating session. Bismark grudgingly admitted that there might be “some” insurance coverage, and said that Amanda Bonner, from Mammoth Insurance Company, would attend the final negotiating session.

A year ago, California and nine other States not on the Executive Committee in this matter announced that they had reached a settlement of predatory lending practices against American Dream Mortgage Company (American Dream). The American Dream settlement resulted in a $200 million restitution fund, $25 million in penalties, and $5 million in attorneys’ fees and investigative costs paid to 10 states. There was no mention of predatory lending law violations in the American Dream settlement—American Dream only agreed in general terms not to engage in unfair and deceptive practices in the future— and no company executive was named in the settlement. Suffice it to say, there is plenty of room to disagree about whether the activities of American Dream were better or worse than the alleged activities of OPM

Just before the final negotiating session, an article appeared in the Bismark Free Press stating that Bismark was considering flipping its charter so that it would no longer be a state-chartered bank, and instead would become a federal bank. The article, which was based on “unnamed sources,” went on to say that if that happened, the North Dakota Bureau of Banking would lose fees from the largest bank in the State, which would cut the Bureau’s budget by 10%. Asked to comment on this story, the North Dakota Commissioner of Banking said that result would be “disastrous” for North Dakota.

At the end of the last quarter, Bismark announced that it had a $1.2 billion loss for the quarter. Analysts blamed the loss on poor earnings resulting from delinquent loans to OPM customers. An article in the Wall Street Journal quoted unnamed analysts as suggesting that Bismark would be better off if it divested OPM, especially because there were rumors that Congress might hold hearings and subpoena Bismark and OPM officials to discuss predatory lending practices and its effects on lower middle class and poor customers.

Following recent Supreme Court decisions, notably Citizens United, Priestly created a Super PAC with other lenders and announced that it would be making independent election contributions to support candidates who “believe in free enterprise and less government regulation.” Its first contribution was $400,000 in independent contributions to defeat the Nevada Attorney General in her re-election race. The Las Vegas Review Journal reported that the Nevada Attorney General had previously brought an enforcement action against OPM that had resulted in a $500,000 penalty. Priestly coyly denied that there was any connection between the enforcement action and the campaign contribution. The Attorneys General in California and Mississippi are up for election next year.

The issues to be decided at the November 4 negotiations are:

1. The maximum size of the restitution fund, and whether all 50 States’ consumers could access it for refunds.

2. Whether there will be penalties paid to the States, and if so, the amount of the penalties.

3. Whether there will be attorneys’ fees and investigative fees paid to the States, and if so, how much.

4. Whether the consent decree will enjoin activities that violate the lending laws of (a) all 50 States; (b) North Dakota only; or (c) none of the States, i.e., no specific reference to this issue at all.

5. Whether Priestly will be personally named as a defendant and be bound by any injunction or other specific relief.

Parties to the negotiations on November 4 will be the consumer heads from North Dakota, Illinois, New Hampshire, and California, and Galvin on behalf of Mississippi, and the heads of Bismark and OPM, their inside and outside counsel, and their insurance counsel.

Each individual negotiator will be given additional, private, instructions. He or she can keep these additional instructions secret, or disclose them to people on their side of the negotiation, or the other side of the negotiation, if he or she thinks it would be helpful. Each negotiator may add facts that logically flow from the common fact background and from his or her individual facts; no negotiator may add facts that do not logically flow from the given facts.

Each side should meet separately before the negotiations on November 4 to plan strategy, but the two opposing sides may not meet prior to November 4. The two people assigned to California should also meet separately to plan their strategy vis-à-vis the other participants. Additionally, you may only meet with members of your side in your section. Needless to say, the goal of each team is to negotiate the best deal possible, and the goal of each individual is to craft that deal in the light most favorable to his or her particular objectives.

Good luck and enjoy.