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WEIL v. LONG ISLAND SAV. BANK

November 15, 1999

RONNIE WEIL ET AL., PLAINTIFFS,
v.
THE LONG ISLAND SAVINGS BANK, FSB ET AL., DEFENDANTS.



The opinion of the court was delivered by: Platt, District Judge.

  MEMORANDUM AND ORDER

MOTIONS

Defendants in this action move for dismissal of the Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.

BACKGROUND

This is a class action*fn1 brought pursuant to the RICO Act (18 U.S.C. § 1964 et seq.), the Truth in Lending Act (15 U.S.C. § 1640) ("TILA"); the Real Estate Settlement Procedures Act, 12 U.S.C. § 2614 ("RESPA"); and State law claims for fraud, breach of duty, deceptive acts and practices, negligent supervision, and violations of New York Debtor and Creditor law.

Plaintiffs assert that customers who obtained mortgage loans from a Long Island Bank between the years 1983 and 1992 were unwittingly made to pay inflated legal fees in connection with their mortgages. These fees allegedly financed an illegal arrangement between the bank's CEO and his former law firm whereby the law firm performed all of the bank's mortgage work, in return for which preferment the CEO and his family took payments from the law firm totaling over eleven million dollars.

Plaintiffs Ronnie Weil et al. ("plaintiffs") are consumers who obtained residential mortgage loans from defendant Long Island Savings Bank ("LISB") during the period from January 1, 1983 through December 31, 1992. Defendants in the action are as follows:

  A. "The Bank Defendants": LISB was a federally
    chartered mutual savings bank under the United
    States laws which maintained offices in Queens, and
    Nassau and Suffolk counties. Astoria Financial
    Corp. is a Delaware corporation engaged in the
    business of financial services and is the holding
    company of Astoria Federal Savings and Loan
    Association, a federally chartered thrift
    institution (both Astorias collectively "Astoria").
    On September 30, 1998 Astoria acquired LISB by
    merger and thereafter allegedly succeeded to the
    liabilities of LISB.
  B. "The Conway Defendants": James J. Conway, Jr.
    ("Conway") was LISB's chairman and CEO from 1980 to
    1992, and is a resident of Nassau County. Conway
    was also allegedly stockholder, director, and
    member of Conway & Ryan P.C. (the "Law Firm"),
    described below. Dolores G. Conway is Conway's wife
    and is a resident of Nassau County ("Mrs.Conway").
    Susan Conway Petrelli ("Petrelli") is the daughter
    of Conway and Mrs. Conway, is an attorney, a
    resident of Westchester County, New York, and a
    member of the Law Firm. Denise Whalen ("Whalen") is
    the daughter-in-law of the Conways, is an attorney,
    a resident of Nassau County, and a member of the
    Law Firm. James J. Conway III ("Conway III") is the
    Conways' son, was at various times an employee of
    Conway and Ryan P.C., and is a resident of Nassau
    County.
  C. "The Law Firm Defendants": Conway & Ryan P.C.,
    later known as Power, Meehan & Petrelli, P.C. and
    still later known as Power, Meehan, & Power
    (collectively "the Law Firm") was a New York
    professional services corporation with a principal
    place of business in Nassau County. James J. Power
    and Pierce Power are brothers, attorneys, and
    members and officers of the Law Firm. Robert F.
    Meehan ("Meehan") is an attorney and member of the
    Law Firm.
  D. "The Director Defendants": the Second Amended
    Complaint lists seventeen individuals alleged to
    have been LISB directors at relevant times during
    the period complained

    of, to be named below as necessary.

The Second Amended Complaint alleges the following. After receipt and approval of a customer's loan application, LISB sent the customer the following: a commitment which included a requirement that the customer pay "the fees of our attorneys and their disbursements, if any;" a Truth-in-Lending Disclosure Statement which disclosed finance charges and incorporated by reference the good faith estimate of settlement costs; a "Good Faith Estimate of Settlement Costs, which stated that the fees payable to the Law Firm represented the cost of the legal services provided by the Law Firm; and a bill from the Law Firm for its `professional services.'" (Second Am'd Compl. ¶ 54.)

Plaintiffs allege that these representations:

  [W]ere false, and [LISB] failed to disclose material
  facts relating to legal fees its customers were
  required to pay. Those fees did not reflect the
  actual cost of any legal services provided to [LISB]
  and, in fact, exceeded the value of such services.
  Moreover, a portion of those fees was paid, directly
  or indirectly, to Conway and his Family pursuant to
  an unlawful scheme. . . .

(Second Am'd Compl. ¶ 56.) Plaintiffs allege that the scheme defrauded them and used the proceeds "to fund bribes, kickbacks and unearned fees to Conway and his Family." (Id. ¶ 57.)

The scheme allegedly ran as follows. Conway, who held a 65% interest in the Law Firm before becoming CEO of LISB, sought to avoid the pay cut which resulted from his move to LISB. (Id. ¶ 59.) In order to do so, Conway:

  [Caused the Law Firm] to pay him an annual salary,
  even though he performed no services. . . . In
  addition, he caused the Law Firm to employ, and to
  remit a portion of its profits to [Petrelli and
  Whelan] even though at various times they provided
  minimal or no services for the Law Firm. Conway also
  caused the Law Firm to hire [Conway III] as a
  paralegal at an annual salary of $144,000, even
  though he rarely came into the office or performed
  any work.
    The quid pro quo for this arrangement was an
  agreement by Conway to make the Law Firm the
  exclusive law firm for [LISB] in connection with
  residential mortgage loans during [the period
  complained of]. [LISB], in turn, required plaintiffs.
  . . . to pay [its] legal fees in connection with
  those transactions. In this way, plaintiffs . . .
  funded the payments received by Conway and his Family
  from the Law Firm pursuant to this arrangement.
    In all, Conway and his Family received more than
  $11 million from the Law Firm during the [period
  complained of]. . . . In addition, Conway continued
  to utilize the Law Firm's American Express credit
  card while he was Chairman and Chief Executive
  Officer of [LISB].

(Id. ¶¶ 59-61.) Plaintiffs further allege that the director defendants "knew or should have known about the unlawful scheme" based on disclosures Conway made to the Office of Thrift Supervision ("OTS"). (Id. ¶ 63.) They allege that following his investigation by the OTS in 1992 and 1993, Conway was banned for life from the banking business in March 1994, and was required to pay $1.3 million to LISB. (Id. ¶ 64.)

The Second Amended Complaint includes twelve counts as follows.

  (2) Violation of 18 U.S.C. § 1962(c) against Astoria,
    LISB, Conway and the Law Firm Defendants, with the
    Law Firm as the enterprise and the pattern of
    activity described in (1). (Id. ¶¶ 75-81.)
  (3) Violation of 18 U.S.C. § 1962(c) against Conway,
    the Law Firm, and the Law Firm Defendants, with
    LISB as the enterprise and the pattern of activity
    described supra, as well as commercial bribing
    and bribe receiving in violation of New York law.
    (Id. ¶¶ 82-88.)
  (4) Violation of 18 U.S.C. § 1962(b) against Astoria,
    LISB, Conway, and the Law Firm Defendants in that
    they acquired or maintained an interest in or
    control of the RICO enterprise consisting of the
    Law Firm, which engaged in the pattern of activity
    described in (1). (Id. ¶¶ 89-95.)
  (5) Violation of 18 U.S.C. § 1962(d) against Astoria,
    LISB, Conway, the Law Firm, the Law Firm Defendants
    and the Director Defendants in that they conspired
    to violate the RICO statute. (Id. ¶¶ 96-100.)
  (6) Violation of the Truth in Lending Act, 15 U.S.C.
    ¶ 1601 et seq. ("TILA") against Astoria and LISB:
    as "creditors" within the meaning of TILA, it is
    alleged that these defendants failed to make the
    requisite accurate disclosures regarding the amount
    of any finance charge associated with the mortgage
    loans, of which the legal fees constitute a
    portion. This failure injured plaintiffs "in that
    they have been induced to pay money to the Law Firm
    under the fraudulent pretense that the payments
    were for legal services rendered to LISB" when in
    fact the payments were used to make payments to
    Conway and his family. (Id. ¶¶ 101-106.)
  (7) Violation of the Real Estate Settlement
    Procedures Act, 12 U.S.C. ¶ 2601 et seq.
    ("RESPA") against Conway, the Law Firm, the Law
    Firm Defendants, Mrs. Conway, and Conway III: the
    legal fees were "real estate settlement services"
    within the meaning of RESPA and the Law Firm and
    Law Firm Defendants violated RESPA by paying
    "bribes, kickbacks, and unearned fees" from the
    legal fees, and the Conways violated RESPA by
    accepting the fees. (Id. ¶¶ 107-113.) The parties
    filed a notice of dismissal, signed on April 21,
    1999, dismissing Count VII asserted against Denise
    Whalen, Dolores Conway and James J. Conway III.
  (8) Common Law Fraud against Astoria, LISB, Conway,
    the Law Firm, Law Firm Defendants, and Director
    Defendants: LISB (knowingly or with reckless
    disregard for falsity) directed false statements to
    plaintiffs representing that the legal fees were
    for services actually rendered to LISB in
    connection with the loans, with the intention that
    plaintiffs would believe the statements and rely on
    them; plaintiffs relied on the

    misrepresentations but not have done so had they
    known of the actual use for the fees. (Id. ¶¶
    114-121.) The parties filed a notice of dismissal,
    signed on April 21, 1999, dismissing Count VIII as
    against Denise Whalen.
  (9) Breach of Duty against Astoria and LISB: these
    defendants were in a position of control and
    responsibility in the mortgage transactions and
    thus had a duty to ensure that the legal fees were
    bona fide and reasonable; the plaintiffs reposed
    trust and confidence in these defendants which also
    gave rise to such a duty. The fees were at least
    partially unreasonable and fraudulent and LISB knew
    or should have known of this fact, and thus
    breached its duty to plaintiffs. (Id. ¶¶
    122-126.)
  (10) Violation of N.Y.Gen.Bus.Law § 349 against
    Astoria, LISB, Conway, the Law Firm, the Law Firm
    Defendants, and the Director Defendants: these
    defendants "engaged in materially deceptive acts
    and practices aimed at consumers and the public,"
    including wilfully misrepresenting the nature of
    the legal fees; plaintiffs relied on such
    misrepresentations and thus paid fees which they
    would not otherwise have paid. (Id. ¶¶ 127-131.)
    The parties filed a notice of dismissal, signed on
    April 21, 1999, dismissing Count X as against
    Denise Whalen.
  (11) Negligent Supervision against Astoria, LISB and
    the Director Defendants: these defendants had a
    duty to use reasonable care in the management of
    LISB and the supervision of Conway, which duty they
    breached by negligently allowing the reasonably
    foreseeable scheme to proceed as it did. (Id. ¶¶
    132-138.)
  (12) Violation of New York Debtor and Creditor Law
    against all defendants: "defendants have made
    conveyances or incurred obligations without fair
    consideration when they intended . . . they would
    incur debts beyond their ability to pay as they
    mature, within the meaning of New York Debtor and
    Creditor Law § 275." (Id. ¶¶ 139-142.) The
    parties filed a notice of dismissal, signed on
    April 21, 1999, dismissing Count XII asserted
    against Denise Whalen, James J. Conway III, Bruce
    M. Barnet, Troy J. Baydala, Clarence M. Buxton,
    Edwin M. Canuso, Richard F. Chapdelaine, John J.
    Conefry, Jr., Brian J. Conway, Robert J. Conway,
    Frederick DeMatteis, George R. Irvin, Lawrence W.
    Peters, Robert S. Swanson, Jr., James B. Tormey,
    William E. Viklund, Leo J. Waters, Seth H. Waugh
    and Donald D. Wenk.

DISCUSSION

Several groups of defendants move for dismissal: (i) the Bank Defendants and the Director Defendants; (ii) Mrs. Conway and Whalen (iii) Conway and the Law Firm Defendants; and (iv) Conway III.*fn2 Each group's Motion is discussed separately below.

I. The Bank and Director Defendants

A. Rule 12(b)(6)

In deciding a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a court must accept all allegations in the complaint as true and draw all inferences in favor of the non-moving party. Wynn v. Uhler, 941 F. Supp. 28, 29 (N.D.N.Y. 1996). A court should not dismiss a complaint unless it appears beyond doubt that plaintiff can prove no set of facts in support of his ...


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