United States District Court, Eastern District of New York
November 15, 1999
RONNIE WEIL ET AL., PLAINTIFFS,
THE LONG ISLAND SAVINGS BANK, FSB ET AL., DEFENDANTS.
The opinion of the court was delivered by: Platt, District Judge.
MEMORANDUM AND ORDER
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
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
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
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
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
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.
(1) Violation of 18 U.S.C. § 1962(c) against Astoria,
LISB, Conway, the Law Firm and Law Firm Defendants,
and the Director Defendants: these defendants
conducted an enterprise in fact consisting of LISB
and the Law Firm, which functioned as a continuing
unit for the common purpose of conducting LISB's
mortgage business. The pattern of activity
consisted in part of a scheme to defraud plaintiffs
fraud in violation of 18 U.S.C. § 1341, to wit
(specifically listed) mailings containing the
affirmative misrepresentations regarding the legal
fees described above, and wire fraud in violation
of 18 U.S.C. § 1343, to wit (generally stated)
telephone calls between the defendants and
plaintiffs concerning the transactions. Conway
allegedly conceived and directed the enterprise,
LISB was a member of the enterprise and made
material misrepresentations, the Law Firm and Law
Firm Defendants actively participated in carrying
out the fraud, and the Director Defendants
controlled LISB and either knew and acquiesced in
the fraud or consciously avoided knowledge thereof.
(Id. ¶¶ 66-71.)
(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. ¶¶
(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
(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. ¶¶
(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.
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
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 claim.
Sunrise Indus. Joint Venture v. Ditric Optics, Inc.,
873 F. Supp. 765, 769 (E.D.N.Y. 1995).
B. RICO Claims
The Bank and Director Defendants make eight arguments for the
dismissal of the RICO claims: (1) failure to state a claim for
mail and wire fraud because no material misrepresentation, no
scienter, and no facts supporting a scheme to defraud are
alleged; (2) plaintiffs did not suffer injury "by reason" of the
alleged RICO violations; (3) statute of limitations; (4) failure
to plead fraud with particularity; (5) Count I should be
dismissed because there is no association-in-fact alleged between
the Bank and Law Firm; (6) Counts I and II should be dismissed
because there is no allegation that these defendants participated
in the enterprise's operation or management; (7) Count IV should
be dismissed because no underlying facts are alleged to the
effect that these defendants acquired or maintained an interest
in the Law Firm and no injury by reason of such acquisition has
been alleged; and (8) the RICO conspiracy count should be
dismissed because there are no underlying RICO violations and
because these defendants did not enter into any agreement or
commit the overt acts necessary for liability.
The Second Circuit has held that:
To state a claim for damages under RICO a plaintiff
has two pleading burdens. . . . First, the plaintiff
must assert that the defendant has violated
18 U.S.C. § 1962 (1988), the substantive RICO statute.
Specifically, it must be alleged: (1) that the
defendant (2) through the commission of two or more
acts (3) constituting a "pattern" (4) of
"racketeering activity" (5) directly or indirectly
invests in, or maintains an interest in, or
participates in (6) an "enterprise" (7) the
activities of which affect interstate or "foreign
commerce." The plaintiff's second "pleading burden"
is to allege that he was "injured in his business or
property by reason of a violation of section 1962."
Town of West Hartford v. Operation Rescue, 915 F.2d 92, 100 (2d
Cir. 1990) (citing 18 U.S.C. § 1962(a)-(c) (1976); Moss v.
Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983)).
As to the second burden, proximate cause is also an element of
the civil RICO claim:
Because a plaintiff must show injury `by the conduct
constituting the violation' of RICO, the injury must
be caused by a pattern of racketeering activity
violating section 1962 or by individual RICO
predicate acts. Moreover, the RICO pattern or acts
must proximately cause plaintiff's injury. By itself,
factual causation (e.g., `cause-in-fact' or `but for'
causation) is not sufficient. . . . For our purposes,
the RICO pattern or acts proximately cause a
plaintiff's injury if they are a substantial factor
in the sequence of responsible causation, and if the
injury is reasonably foreseeable or anticipated as a
Hecht v. Commerce Clearing House, 897 F.2d 21
, 23 (2d Cir.
1990) (citations omitted).
These defendants raise numerous arguments as to why the RICO
claims fail as a matter of law,*fn3 but plaintiffs have
complied with the requirements stated here: as to the Bank and
Director Defendants, it is alleged that they conducted the
affairs of an enterprise engaged in interstate commerce through a
pattern of racketeering activity. (See Second Am'd Compl. ¶
67.) Plaintiffs allege that the enterprise was an association in
fact consisting of LISB and the Law Firm which functioned for the
purpose of facilitating LISB's mortgage business, (see id. ¶
68), that a pattern of racketeering activity consisted in part of
a scheme to defraud by means of affirmative representations that
the legal fees were genuine and not excessive. (Id. ¶ 69.)
There were two or more acts which consisted of mailings
(seventeen mailings are listed), in violation of the mail fraud
statutes, of various documents in connection with the mortgage
loans which contained enumeration of the legal fees. (Id.)
Plaintiffs allege that the Director Defendants were employed by
the enterprise, and that LISB was associated with the enterprise.
(Id. ¶ 68.) Further, the plaintiffs allege that they were
injured by the excessive legal fees, which they would have been
unwilling to pay had they known that the excessive fees were
being used in part to fund the payments to Conway and his family.
(See e.g. id. ¶ 74.) Thus the claims are sufficient and
defendants' Motion as to these claims should be denied.
C. TILA Claims
These defendants argue that the TILA claims fail because: (1)
they were made after the expiration of the one-year statute of
limitations; (2) 15 U.S.C. § 1649 precludes the claims as
discussed below; and (3) plaintiffs do not allege any specific
violation of the statute or any facts to support such violation.
1. Failure to State a Claim
TILA requires that creditors within the meaning of the act
disclose to consumers, inter alia, "the finance charge, not
itemized, using that term." 15 U.S.C. § 1638(a)(3) (1998). The
term "finance charge" is defined as "the sum of all charges,
payable directly or indirectly by the persons to whom the credit
is extended, and imposed directly or indirectly by the creditor
as an incident to the extension of credit," 15 U.S.C. § 1605(a)
Defendants argue that because they disclosed exactly what the
plaintiffs were required to pay, there was no actionable failure
to disclose. Plaintiffs argue that a liberal reading of the
statute precludes inaccurate disclosure, under language in N.C.
Freed Co., Inc. v. Bd. of Governors of Fed. Reserve Sys.,
473 F.2d 1210, 1214, cert. denied, 414 U.S. 827, 94 S.Ct. 48, 38
L.Ed.2d 61 (1973), which stated that:
The avowed purpose of the Consumer Credit Protection
Act, enacted in 1968 after eight years of
Congressional consideration, was to `assure a
meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the
various credit terms available to him and avoid the
uninformed use of credit.' The Act is remedial in
nature, designed to remedy what Congressional
hearings revealed to be unscrupulous and predatory
creditor practices throughout the nation. Since the
statute is remedial in nature, its terms must be
construed in liberal fashion if the underlying
Congressional purpose is to be effectuated.
Id. at 1214.
Plaintiffs allege that:
LISB violated its obligation accurately to disclose
the finance charge associated with its extensions of
mortgage loans to plaintiffs and the members of the
class. Specifically, LISB falsely or incorrectly
represented the amount it required plaintiffs to pay
constituted bona fide
legal fees for legal services actually performed by
the Law Firm for LISB in connection with the mortgage
loan transaction when, in fact, portion of such
payments were used, directly or indirectly, to fund
bribes, kickbacks, and unearned fees to Conway and
(Second Am'd Compl. ¶ 105.) In light of this allegation, and in
light of the pronouncement in Freed, supra, plaintiffs have
stated a claim under TILA and defendants' Motion as to this claim
and on this ground should be denied.
2. 15 U.S.C. § 1649
This section provides that:
For any consumer credit transaction . . . subject to
this subchapter, and that is consummated before
September 30, 1995, a creditor or any assignee of a
creditor shall have no civil, administrative, or
criminal liability under this subchapter for, and a
consumer shall have no extended rescission rights
under section 1635(f) of this title with respect to
(3) any disclosure relating to the finance charge
imposed with respect to the transaction if the amount
or percentage actually disclosed —
(A) may be treated as accurate for purposes of this
subchapter if the amount disclosed as the finance
charge does not vary from the actual finance charge
by more than $200. . . .
(C) is greater than the amount or percentage
required to be disclosed under this subchapter.
15 U.S.C. § 1649(a) (1998). Defendants argue that because
plaintiffs do not allege that they were charged more than the
amount disclosed by the Bank, their claim fails. Plaintiffs again
argue that TILA is a remedial statute and should be read to
include disclosures which, though not greater or less than the
amount actually charged, misstated the cost of the services
provided. For these arguments and the reasons stated in Freed,
supra, this statute should not bar the TILA claim. Freed, 473
F.2d at 1214.
3. Statute of Limitations
TILA provides for a one-year statute of limitations, measured
from the date of the occurrence of the violation, for claims
thereunder. 15 U.S.C. § 1640(e) (1997). Equitable tolling
principles have been held to apply to TILA. Kerby v. Mortgage
Funding Corp., 992 F. Supp. 787, 797 (D.Md. 1998). Plaintiffs
argue that this period is equitably tolled because of the
self-concealing nature of the fraudulent scheme, and that the
claim relates back to the original pleading under Fed.R.Civ.P.
15(c)(2). In this case, the statute of limitations should be
equitably tolled because the facts of the kickback scheme were
not available to them before March 3, 1994, when the results of
the Office of Thrift Supervision's investigation and order were
made known in the press. See n. 2 supra; (Second Am'd Compl.
D. Fraud Claims
These defendants argue that these claims fail because: (1) they
are not pled with the particularity required by Rule 9(b) of the
Federal Rules of Civil Procedure; (2) the facts alleged do not
give rise to fraud; and (3) they are barred by the statute of
limitations because the fraud could have been discovered at the
time the fees were disclosed.
Rule 9(b) provides that "[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be
stated with particularity. Malice, intent, knowledge, and other
condition of mind of a person may be averred generally."
FED.R.CIV.P. 9(b). Moreover, "[i]n an action to recover damages
for fraud, the plaintiff must prove a misrepresentation or a
material omission of fact which was false and known to be false
by defendant, made for the purpose of inducing the other party to
rely upon it, justifiable reliance of the other party on the
misrepresentation or material omission, and injury." Lama
Holding Co. v. Smith Barney Inc. 88 N.Y.2d 413, 421,
646 N.Y.S.2d 76, 668 N.E.2d 1370 (N.Y. 1996). "[T]he New York statute
of limitations for fraud is six years from the date of
commission, or two years from the date the plaintiff discovered,
or should have discovered, the fraud, whichever is longer." Long
Island Lighting Co. v. Imo Indus. Inc., 6 F.3d 876, 887 (2d Cir.
1993) (citing N.Y.CIV.PRAC.LAW & R. 213(8) (McKinney 1990)).
For the reasons stated in n. 2 supra that there was no way to
discover that the fees were overstated, and because the fees were
disclosed after the plaintiffs chose to borrow from LISB, they
were not able to avoid overpayment by "shopping around." (See
Pls.' Mem. in Opp. at 17.) As to Rule 9(b), the facts alleged in
the Complaint and discussed in section B., supra, are
sufficient to delineate a particularized claim of fraud. The
statute of limitations argument is again met by the circumstances
of the fraud's discovery with the Office of Thrift Supervision's
public disclosure on March 3, 1994. Accordingly defendants'
Motion on these grounds should be denied.
E. Breach of Duty
These defendants argue that this claim fails because: (1) there
exists no fiduciary relationship between a bank and its borrowers
and no facts alleged show any other special relationship; and (2)
they are in part time-barred by the three-year statute of
Under New York law, the legal relationship between a borrower
and a bank is a contractual one and does not give rise to a
fiduciary relationship. Bank Leumi Trust Co. v. Block 3102
Corp., 180 A.D.2d 588, 580 N.Y.S.2d 299, 301 (N.Y.App. Div. 199
2); Trustco Bank, Nat. Ass'n v. Cannon Bldg. of Troy
Assocs., 246 A.D.2d 797, 668 N.Y.S.2d 251, 253 (N.Y.App. Div. 199
8). However, "[i]n unusual circumstances, a fiduciary
relationship may arise even between a bank and a customer if
there is either a confidence reposed which invests the person
trusted with an advantage in treating with the person so
confiding, or an assumption of control and responsibility."
Pinky Originals, Inc. v. Bank of India, No. 94 Civ. 3568, 1996
WL 603969, *25 (S.D.N.Y. Oct.21, 1996).
It has been held that "a fiduciary relation exists between two
persons when one of them is under a duty to act for or to give
advice for the benefit of another upon matters within the scope
of the relation. The existence of a fiduciary relationship cannot
be determined by recourse to rigid formulas; rather, New York
courts typically focus on whether one person has reposed trust or
confidence in another who thereby gains a resulting superiority
or influence over the first." Scott v. Dime Sav. Bank of New
York, FSB, 886 F. Supp. 1073, 1077, aff'd 101 F.3d 107 (2d Cir.
1996) (citing Mandelblatt v. Devon Stores, Inc., 132 A.D.2d 162,
521 N.Y.S.2d 672, 676 (N.Y.App. Div. 1987) & Litton Indus.,
Inc. v. Lehman Bros. Kuhn Loeb Inc., 767 F. Supp. 1220, 1231
This claim fails to overcome the rule that there exists no
fiduciary relationship between the borrower and bank. The
plaintiffs are a class of normal mortgage consumers, none of whom
alleges any extraordinary facts regarding their transactions save
the excessive fees. Thus the relationships between LISB and each
plaintiff did not rise to the level of fiduciary relationship and
defendants' Motion as to this claim should be granted.
F. N.Y.GEN.BUS.LAW CLAIMS
These defendants argue chiefly that this claim fails because:
(1) the Banks' actions were not misleading; and (2) most of the
claims were made outside of the six-year statute of limitations.
New York law prohibits the use of deceptive acts or practices
in the conduct of any business, trade or commerce or in the
furnishing of any service. N.Y.GEN.BUS. LAW § 349 (1988). "To
state a claim under
this section, a plaintiff must allege that (1) defendant has
engaged in an act or practice that is deceptive or misleading in
a material way, and (2) plaintiff has been injured by reason
thereof. The first element requires a showing that a reasonable
consumer would have been misled by the defendant's conduct."
S.Q.K.F.C., Inc. v. Bell Atlantic Tricon Leasing Corp.,
84 F.3d 629, 636 (2d Cir. 1996). Further, injury must be to the public
interest generally. Int'l Sport Divers Ass'n v. Marine Midland
Bank, N.A., 25 F. Supp.2d 101, 115 (W.D.N.Y. 1998). The statute
of limitations for claims under this section is six years, or two
years after the time a plaintiff discovered, or should have
discovered, the fraud. Dornberger v. Metropolitan Life Ins.
Co., 961 F. Supp. 506, 549 (S.D.N.Y. 1997).
As to the sufficiency of the claim, plaintiffs allege the facts
described in the background section above, and assert that:
LISB, Conway, the Law Firm, the Law Firm Defendants
and the Director Defendants engaged in materially
deceptive acts and practices aimed at consumers and
the public. . . . [which] included misrepresenting
the ostensible legal fees that LISB required
plaintiffs and the members of the class to pay to the
Law Firm, and concealing the true nature of those
(Second Am'd Compl. ¶¶ 128, 129.) These allegations are
sufficient to state a claim because they allege that a class of
consumers was injured by fraudulently excessive fees charged so
that in part they could be used to line the pockets of the Bank's
CEO and his family.*fn4 As to the statute of limitations,
plaintiffs allege that the scheme was not revealed until March 3,
1994, whereupon the suit was brought. See n. 3 supra; (Second
Am'd Compl. ¶ 65). This allegation preserves the claim as against
LISB and the Director Defendants.
G. Negligent Supervision
These defendants argue that this claim fails because plaintiffs
allege no underlying facts to support it, and because it is
barred by the three-year statute of limitations.
"[A]n employer may be required to answer in damages for the
tort of an employee against a third party when the employer has
either hired or retained the employee with knowledge of the
employee's propensity for the sort of behavior which caused the
injured party's harm." Ross v. Mitsui Fudosan, Inc.,
2 F. Supp.2d 522, 532 (S.D.N.Y. 1998) (citing Kirkman v. Astoria
Gen. Hosp., 204 A.D.2d 401, 403, 611 N.Y.S.2d 615 (N.Y.App. Div. 199
4)). Moreover, the statute of limitations for a claim of
negligent supervision is three years. N.Y.C.P.L.R. § 214
As to the sufficiency of the claim, plaintiffs allege the
hornbook elements of the tort, (see Second Am'd Compl. ¶¶
132-138), and predicate the claim on the facts described in the
background section above. Accordingly the claim survives for the
purposes of this Motion. As to the statute of limitations, the
claim survives for the reasons described in Section H below.
H.N.Y. Debtor and Creditor Law Claims
These defendants argue that this claim fails because plaintiffs
identify no specific fraudulent conveyance made, and because
it is time-barred by the applicable statute of limitations.
New York Law provides that "[e]very conveyance made and every
obligation incurred without fair consideration when the person
making the conveyance or entering into the obligation intends or
believes that he will incur debts beyond his ability to pay as
they mature, is fraudulent as to both present and future
creditors." N.Y. DEBT & CRED. LAW § 275 (McKinney 1990). "Section
275 is a constructive fraud provision which comes into play when
a person making a conveyance without fair consideration intends
or believes that he or she will incur debts beyond his or her
ability to pay them as they mature, and thus said conveyance
becomes fraudulent as to both present and future creditors."
Shelly v. Doe, 249 A.D.2d 756, 671 N.Y.S.2d 803, 806
(N.Y.App. Div. 1998).
"Because direct proof of actual intent is rare, creditors may
rely on `badges of fraud' to establish an inference of fraudulent
intent. Factors that are considered `badges of fraud' are (1) a
close relationship between the parties to the transaction, (2) a
secret and hasty transfer not in the usual course of business,
(3) inadequacy of consideration, (4) the transferor's knowledge
of the creditor's claim and his or her inability to pay it, (5)
the use of dummies or fictitious parties, and (6) retention of
control of the property by the transferor after the conveyance."
This claim is inapposite as a matter of common sense: the
statute's purpose is to protect creditors and not debtors, as
plaintiffs are here. The situation described in Shelly, supra,
does not apply here: by the facts alleged in the Second Amended
Complaint, LISB was not making fraudulent transfers under the
threat of impending bankruptcy in order to avoid future
creditors. Accordingly this claim should be dismissed.
In sum, plaintiffs have stated claims as against the Bank and
Director Defendants on which relief may be granted in all those
claims listed save the Debtor and Creditor Law claim (Section H,
supra) and the Breach of Duty claim (Section E, supra), the
Bank and Director Defendants' Motion should be denied, except as
to these two claims.
Because under New York law the borrower-bank relationship does
not give rise to a fiduciary duty, the breach of duty claim
should be dismissed and defendants' Motion as to this claim
should be granted. Because plaintiffs do not allege circumstances
under which New York Debtor and Creditor Law could apply in this
case, the claim should be dismissed and defendants' Motion as to
this claim should be granted.
II. Denise Whalen and Dolores Conway
Defendants Denise Whalen ("Whalen") and Dolores Conway
("Mrs.Conway") move to dismiss pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure, all claims against them
asserted in the Second Amended Complaint.
The Second Amended Complaint naming Whalen and Mrs. Conway as
defendants was filed on January 8, 1999. Neither Whalen nor
Conway was named in any previous Complaint. It should be noted
that in 1998 plaintiffs obtained a Report issued by the law firm
of Simpson, Thacher & Bartlett outlining Conway's activities and
detailing payments made to Mrs. Conway and Whalen. All other
relevant facts are stated above.
Whalen and Mrs. Conway argue three points in favor of their
motion to dismiss: (1) the claims against them are time-barred;
(2) plaintiffs fail to state a RESPA claim against them;*fn5 and
(3) plaintiffs fail to state a claim against them under New
York Debtor and Creditor Law §§ 275 and 276.*fn6
A. Statute of Limitations Defenses
Whalen and Mrs. Conway argue that plaintiffs' claims accrued at
the time plaintiffs paid the excessive legal fees used to fund
the kickbacks and that these claims are now time-barred by the
applicable statutes of limitations. Plaintiffs agree that the
fraud occurred at the time the excessive legal fees were paid,
but contend that their claims did not accrue until March 3, 1994,
when plaintiffs learned of the OTS order banning Conway from the
banking industry, and consequently of the fraud.
1. RICO Claims
As stated in footnote 3, the statute of limitations for a civil
RICO claim is four years, see Agency Holding Corp. et al. v.
Malley-Duff & Assoc., Inc. 483 U.S. 143, 156, 107 S.Ct. 2759, 97
L.Ed.2d 121 (1987), and begins running when the plaintiff
discovers, or should have discovered, the injury. Bankers Trust
Co., 859 F.2d at 1102. A defrauded party must have either
inquiry notice or actual notice of the injury "such that a
`reasonable investor of ordinary intelligence would have
discovered the existence of the fraud.'" In re: Merrill Lynch
Ltd. Partnerships Litig., 154 F.3d 56, 60 (2d Cir. 1998) (citing
Dodds v. Cigna Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993)).
Therefore, a RICO claim ripens when the plaintiff's injury and
the subsequent damages resulting therefrom become clear and
concrete. See id. at 59. However, the statute of limitations on
a civil RICO claim tolls if the "plaintiff pleads, with
particularity the following three elements: (1) wrongful
concealment by the defendant, (2) which prevented the plaintiff's
discovery of the claim within the limitations period and (3) due
diligence in pursuing discovery of the claim." Butala v.
Agashiwala, 916 F. Supp. 314, 319 (S.D.N.Y. 1996). The statute
may also toll for claims against co-conspirators who did not
actively participate in the RICO enterprise where the plaintiff
did not remain ignorant of his claim through fault or want of
diligence. See Jerry Kubecka v. Avellino, 898 F. Supp. 963, 971
Plaintiffs' RICO claims as against Whalen are time barred. The
fraud in question is alleged to have occurred when the mortgagers
paid excessive legal fees at closing. Accordingly, the
plaintiffs' claims would have ripened at the time of these
closings, the last of which occurred in November 1992.
Plaintiffs' RICO claims would be time-barred if the fraud was not
concealed by the defendants.
However, a fraud of this nature is inherently self-concealing,
so the statute of limitations should have been tolled until March
3, 1994 when the OTS was filed and plaintiffs learned of their
claims. Here the plaintiff's Complaint against Whalen was not
filed until January 8, 1999 and accordingly does not meet the
four year statute of limitations requirement. Moreover, the
Kubecka exception does not apply to Whalen because plaintiffs
would have discovered her alleged involvement in this scheme when
investigating the rest of the Law Firm stockholders.
2. Debtor and Creditor Law Claim
N.Y. Debt. & Cred. Law § 276 has a six year statute of
limitations. See Barristers Abstract Corp. v. Caulfield,
203 A.D.2d 406, 610 N.Y.S.2d 555, 556 (N.Y.App. Div. 1994). While
these claims against Mrs. Conway are not time-barred because they
were not discovered until August 1998 following the disclosure of
the Simpson, Thacher Report, plaintiffs fail to state a claim
under this statute as discussed in
Section (I)(H), and thus the claim should be dismissed.
B. Relation Back
Defendants argue that plaintiffs' claims against Whalen and
Mrs. Conway do not relate back to the date of the original
pleading within the meaning of Rule 15(c) of the Federal Rules of
Civil Procedure. Rule 15(c) provides in relevant part, that
relation back will be allowed when:
[T]he amendment changes the party or the naming of
the party against who a claim is asserted if . . .
within the period provided by Rule 4(m) for service
of the summons and complaint, the party to be brought
in by amendment (A) has received such notice of the
institution of the action that the party will not be
prejudiced in maintaining a defense on the merits,
and (B) knew or should have known that, but for a
mistake concerning the identify of the proper party,
the action would have been brought against the party.
FED.R.CIV.P. 15(c)(3). The Supreme Court has concluded that:
Relation back is dependent upon four factors, all of
which must be satisfied: (1) the basic claim must
have arisen out of the conduct set forth in the
original pleading; (2) the party to be brought in
must have received such notice that it will not be
prejudiced in maintaining its defense; (3) the party
must or should have been known that, but for a
mistake concerning identity, the action would have
been brought against it; and (4) the second and third
requirements must have been fulfilled within the
prescribed limitations period.
Schiavone v. Fortune, 477 U.S. 21, 29-30, 106 S.Ct. 2379, 91
L.Ed.2d 18 (1986). Rule 15(c)(3) may also apply to cases where
plaintiffs wish to add a defendant. See Hood v. City of New
York, 739 F. Supp. 196, 198 (S.D.N.Y. 1990). However, the "Second
Circuit has held that Rule 15(c) does not permit `an amended
complaint adding new defendants to relate back if the newly-added
defendants were not named originally because the plaintiff did
not know their identities.'" Lettis v. U.S. Postal Serv.,
973 F. Supp. 352, 361 (E.D.N.Y. 1997) (citing Barrow v. Wethersfield
Police Dep't., 66 F.3d 466, 470 (2d Cir. 1995), modified,
74 F.3d 1366 (1996)).
Plaintiffs' time barred claims against Whalen and Mrs. Conway
do not relate back to the original Complaint. It is true that the
claims do arise out of the conduct alleged in that Complaint, and
because Whalen and Mrs. Conway share a close relationship with
Conway and the Law Firm, it is also plausible that Whalen and
Conway received adequate notice of this suit. However, it is
unlikely that Whalen and Conway would have known that the suit
would later name them, or that, but for mistaken identity, the
suit would have been brought against them. Furthermore, it is
improbable that Whalen and Conway would have made this assumption
within the statutory period when plaintiffs had gone through such
great lengths to name specific parties. It is similarly doubtful
that plaintiffs were ignorant of Whalen and Conway's identities.
See Lettis, 973 F. Supp. at 361. Accordingly, plaintiffs' time
barred claims should not be allowed to relate back to the
original Complaint and should be dismissed.
In sum, Whalen and Mrs. Conway's motions to dismiss are granted
since plaintiffs claims are untimely and do not relate back to
the original Complaint within the meaning of Rule 15(c)(3).
III. James Conway and the Law Firm Defendants
A. RICO and Common Law Fraud Claims
Defendants contend that RICO and common law fraud claims must
be dismissed as against these defendants because (1) Conway and
the Law Firm defendants did not have a duty to disclose to
plaintiffs the facts relating to the Bank's legal fees and (2)
the alleged misrepresentations
were not material. (Mem. in Supp. at 5).*fn7 As to disclosure,
this argument is without merit due to a statutory duty to
disclose. For this reason, and for the reasons elaborated upon
supra, plaintiffs have stated sufficient claims as per RICO and
common law fraud against Conway and the Law Firm Defendants.
B. RESPA Claim
In the Second Amended Complaint, plaintiffs allege the
The legal services ostensibly rendered by the Law
Firm in connection with the mortgage loans that LISB
extended to plaintiffs and the members of the class
constituted "real estate settlement services"
involving federally related mortgage loans within the
meaning of RESPA. . . . As a condition of the
extension of mortgages to the plaintiffs and members
of the class, LISB required plaintiffs and the class
to pay the fees of the Law Firm for rendering the
real estate settlement services. . . . By paying a
portion of those fees to Conway and his Family as
bribes, kickbacks or unearned fees, the Law Firm and
the Law Firm Defendants violated 12 U.S.C. § 2607(a)
and (b). By accepting or paying a portion of those
fees as bribes, kickbacks and unearned fees, or by
directing such bribes, kickbacks and unearned fees to
others, Conway violated 12 U.S.C. § 2607(a) and (b).
(Second Am'd Compl. ¶¶ 108-111.) As is applicable here, RESPA
(a) No person shall give and no person shall accept
any fee, kickback, or thing of value pursuant to any
agreement or understanding, oral or otherwise, that
business incident to or a part of a real estate
settlement service involving a federally related
mortgage loan shall be referred to any person.
(b) No person shall give and no person shall accept
any portion, split or percentage of any charge made
or received for the rendering of a real estate
settlement service in connection with a transaction
involving a federally related mortgage loan or other
than for services actually performed.
RESPA, 12 U.S.C. § 2607(a) & (b) (1989).
It has been noted that "[t]o the extent the thing of value is
in excess of the reasonable value of the goods provided or
services performed, the excess is not for services actually
rendered and may be considered a kickback or referral fee
proscribed by RESPA." Sicinski v. Reliance Funding Corp., 82
F.R.D. 730, 732 (S.D.N.Y. 1979) (citations omitted). As such,
plaintiffs have stated a claim under RESPA.
C. N.Y.GEN.BUS.LAW Claims
For the reasons stated supra in Section (I)(F), plaintiffs
have stated a viable claim under N.Y.Gen.Bus.Law § 349 as against
Conway and the Law Firm Defendants.
D.N.Y. DEBT. AND CRED. LAW Claims
As stated supra in Section (I)(H), plaintiffs have failed to
state a claim under N.Y. Debtor and Creditor Law §§ 275 and 276
and thus the claim should be dismissed against Conway and the Law
To conclude, since plaintiffs have stated claims as against the
Bank and Director Defendants on which relief may be granted in
all those claims listed save the Debtor and Creditor Law claim
and the breach of duty claim, the Bank and Director Defendants'
Motion should be denied, except as to these two claims. Whalen
and Mrs. Conway's Motion to dismiss is granted since plaintiffs
claims are untimely and do not relate back to the original
within the meaning of Rule 15(c)(3). As to Conway and the Law
Firm defendants, their Motion to dismiss as to the RICO and
common law fraud claims, RESPA, and N.Y.Gen.Bus.Law are denied.
Their Motion to dismiss as to the N.Y. Debt. and Cred. Law claim