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United States District Court, Eastern District of New York

March 27, 2003


The opinion of the court was delivered by: I. Leo Glasser, Senior District Judge



This action stems from the plaintiffs' purchase of a property and the mortgage financing of that purchase. Plaintiffs contend that numerous parties. including the seller/broker, the mortgage lender, several of their officers and employees, and several attorneys, engaged in a predatory lending scheme, centered around inducing the plaintiffs to finance the purchase at an inflated price. Plaintiffs' claims against the moving defendants arise under the Truth-in-Lending Act ("TILA"). 15 U.S.C. § 1601 et. seq., the Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. § 1691 et. seq., the New York State Deceptive Practices Act, N.Y.G.B.L. § 349, and the common law of fraud, fraudulent concealment, fraudulent inducement, breach of fiduciary duty and malpractice. All defendants but three*fn1 now move to dismiss the First Amended Complaint (except for the TILA and ECOA claims), primarily for failure to state a claim and failure to plead fraud with particularity. For the reasons that follow, the motion is granted as to the breach of fiduciary duty claim against Defendant Silver, but otherwise denied.


In mid-December, 2000, Paulette and Joy Vaughn ("plaintiffs" when referred to collectively), an African-American mother and daughter, contacted the Foreclosure Network of New York, Inc. ("FNNY") about their interest in purchasing a home. They dealt with Joshua Smiling ("Smiling"), an officer and employee of FNNY, who arranged for Joy Vaughn to look at a property at 247 Cooper Street in Brooklyn (the "property"). On January 6, 2001, Ms. Vaughn met Smiling at the property and he showed her around it. The interior was dark, and they had to use flashlights to view it. Smiling told Ms. Vaughn that the house was "a good investment" and was being sold for less than its market price. When asked about needed renovations, Smiling told her that they would be completed prior to the sale. They did not discuss the purchase price. but Smiling told Ms. Vaughn that the monthly mortgage payment would be around $2,300.00 to $2400.00. He further told her that she could generate rental income from an apartment to be constructed within the property of around $1400.00 a month, and that he would find her a tenant. On the next day, Smiling again showed the property. this time to both plaintiffs. He repeated his statements that the house was a good investment and would be fully renovated and repaired, and that he would find them a tenant who would pay $1400.00 per month in rent. Again, the sales price was not discussed.

The next day, plaintiffs went to the offices of FNNY and met with Gary Lewis ("Lewis"). the company's president. They discussed their financial situation with Lewis, who told them that FNNY would find them a mortgage lender. He reiterated Smiling's promise that FNNY would find them a tenant who would pay $1400.00 per month in rent. Further, he discussed with them repairs and renovations to the property that FNNY was going to make.

Lewis asked the plaintiffs to come back in a short while, at which time he would provide an attorney for them and the contract of sale could be signed. He discouraged them from seeking another, independent lawyer and still did not discuss the purchase price. When they returned, they were introduced to Ann McGrane, Esq. ("McGrane"), who Smiling told them would act as their lawyer in the transaction. McGrane told plaintiffs that she would represent them, protect their interests, and make herself available by telephone for questions arising in the future. Plaintiffs told McGrane that they did not understand the contract of sale, and were unfamiliar with the process of buying and financing a home. McGrane repeated her assurances. She reviewed the contract and told plaintiffs to sign it, but offered no other advice. No fee for her services was discussed. After she told the plaintiffs that a government grant was available to reduce the amount they would have to borrow, and that "what you buy it for, you can sell it for," plaintiffs signed the contract.

Plaintiffs were then "steered" to a mortgage lender, Consumer Home Mortgage ("CHM"). On January 10, plaintiffs met with a Michael Parker ("Parker"). Though he was merely an officer and employee of the company, he told plaintiffs that he was its president (CHM's actual president and CFO was a Robert Standfast ("Standfast")). Plaintiffs expressed their concern about being able to obtain a mortgage, due to their low income, and were told by Parker that since he was the president, if he approved the loan they would certainly get it.

The Plaintiffs were approved for a loan of $287,700.00. Parker prepared and submitted an application for mortgage insurance to the Department of Housing and Urban Development's Federal Housing Administration unit (the "FHA"). Lewis and Parker then told plaintiffs that the purchase price for the property was $290,00.00. Shortly thereafter, CHM hired Charles Salva Appraisals, Inc. ("CSAI") to appraise the property. CSAI completed the appraisal but, according to plaintiffs, intentionally misstated or omitted material facts in order to inflate the purported value of the property up to the purchase price, although the property had been purchased two months earlier for $165,000.00.*fn2 The FHA later issued the requested mortgage insurance policy.

On February 9, 2001, plaintiffs and Smiling went for a final "walk through" of the property. Plaintiffs noted that the promised repairs and renovations had not been completed. Smiling told them that they would be completed within 10 days after the closing, and that a "repair agreement" would be made part of the transaction. The three then went to the offices of Kenneth Golden, Esq. ("Golden") to complete the transaction. At no time prior to the closing were the plaintiffs given any documentation regarding the loan, or a "Truth-in-Lending" statement.

Smiling, Lewis and Golden were present at the closing, as was a Martin Silver, Esq. ("Silver"), who plaintiffs were told was there to represent them. Relying upon Silver's representations that the documents were "standard," that there was "no problem" and that they should just "sign it here," the plaintiffs signed the papers put before them without knowing what they were signing. The deed was executed by Lewis, who, according to plaintiffs, was not the owner*fn3 and therefore lacked authority to convey the property. The closing was completed, and plaintiffs were given a collection of closing documents that did not include the contract of sale, a deed, or a copy of the appraisal. They did not receive the keys to the property.

On or about February 26, 2001 the plaintiffs met with Smiling and Lewis again to complain about the lack of repairs and their failure to receive a key. Lewis told them "if you don't take this house, you'll never get another house in New York." On March 10, 2001 a key was left for plaintiffs at the property.

Plaintiffs received a letter dated April 9, 2001, in which Golden advised them to sign a new mortgage note reflecting a new, slightly lower, rate of interest, an initial escrow account statement. first payment letter, payment coupons, a lending statement, a statement of mortgage closing, a settlement statement and owner's estoppel certificate.

The promised improvements to the property were never made to any significant extent. The mortgage was subsequently assigned to a company called ABN Amro Mortgage Group, Inc. Plaintiffs have made no payments on the mortgage loan.



The First Amended Complaint contains a claim against HUD for money damages. HUD's motion to dismiss this claim was never fully briefed; plaintiffs instead submitted a Second Amended Complaint, which differs in that it seeks only equitable relief against HUD. The other allegations as to HUD in the First Amended Complaint and HUD's motion to dismiss are therefore considered withdrawn. HUD has not moved with respect to the Second Amended complaint.

II. Fraud and deceptive practices

A. Generally

To sustain a claim of fraud, plaintiffs must establish as to each defendant that 1) the defendant made a materially false statement or omission of fact, 2) with knowledge of its falsity and 3) the intent to defraud, which 4) plaintiff reasonably relied on and 5) suffered damage thereby. Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323 (2d Cir. 1999). A claim of deceptive practices under NYGBL § 349 requires the plaintiff to show that 1) the defendant engaged in a practice that was deceptive, and 2) the plaintiff was thereby damaged. In essence. this claim is like one of fraud, but without the need for intent or reasonable reliance. Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 26, 623 N.Y.S.2d 529, 533 (1995). It is true that a claim under section 349, unlike one for fraud, requires that the deceptive practice have an impact on the public at large. Id., 85 N.Y.2d at 25, 623 N.Y.S.2d at 532. Since, however, that requirement is met here, see section II. C. below, the following discussion of the claims of fraud applies with equal force to the claims of deceptive practices.

B. CHM, Standfast, Parker & Ashley

The amended complaint alleges that CHM, through its agents Standfast, Parker and Michael Ashley ("Ashley"), participated in the predatory lending scheme by having Parker submit an application for FHA mortgage insurance that contained an appraisal they knew to be inflated. Parker is also alleged to have lied to plaintiffs when he told them that they could afford the mortgage payments when he knew that they could not.*fn4 Through these actions, Parker thus allegedly induced them to take out a loan that he knew was "well beyond" their financial means. These allegations are sufficiently pleaded as against Parker.

The allegations against Standfast and Ashley, on the other hand, rest on more tenuous grounds. Under New York law, corporate officers are liable for fraud committed by corporate employees only if they had knowledge of, or actively participated in, the fraud. Here, no specific actions or misrepresentations on Standfast's or Ashley's part are pleaded. Rather, their purported liability rests on their knowledge and encouragement of, or acquiescence in. Parker's fraudulent actions. As President and CEO of CHM, Standfast is alleged to have "directed and/or overseen" Parker's fraudulent acts, all of which Parker took `at the behest of' Standfast. Similarly, as an Officer and part owner of CHM,*fn5 Ashley is alleged to have "exerted significant influence in the activity of CHM." and "directed CHM to engage in a pattern of and practice of' fraud and fraudulent concealment." As with Standfast, Parker's actions allegedly took place "at the behest of" Ashley. Both are alleged to have "had knowledge of" the fraudulent scheme and one or more of its component acts.

Standfast and Ashley argue, with some justification, that these allegations are merely conclusory, and therefore fail to satisfy the requirements of Rule 9(b). There are three persuasive arguments, however, for finding these allegations sufficient.

First, Rule 9(b) expressly allows states of mind such as knowledge or intent to be "averred generally." This is not a "license to base claims of fraud on speculation and conclusory allegations," Shields v. Cititrust Bancorp, Inc., 25 F.3d 1124, 1228 (2d Cir. 1994) (quoting O'Brien v. Nat'l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1994)), but requires facts to be alleged which raise a strong inference of fraud. Id. This inference may be established by alleging facts which show that defendants had motive and opportunity to commit fraud. Id. Here, as officers and owners of CHM alleged to have been actively involved in the company's day-to-day operations, who stood to benefit financially from the transaction, and in the context of the complaint's other allegations, it is clear that Standfast and Ashley could be found to have had such motive and opportunity.

Second, the Rule's pleading requirements are relaxed when the allegations relate to matters peculiarly within defendants' knowledge or possession. See Tribune Co. v. Purcighotti, 869 F. Supp. 1076, 1088 (S.D.N.Y 1994), aff'd sub nom., Tribune Co. v. Abiola, 66 F.3d 12 (2d Cir. 1995). Indeed, it is difficult to imagine what specific facts plaintiffs could possibly possess as to Standfast and Ashley's knowledge and intent without having conducted discovery.

Finally, the acid test is whether the allegations satisfy the primary concern behind Rule 9(b), which is that defendants are put on notice of what they are accused of, so that they are reasonably able to respond and mount a defense. See Union Carbide Corp. v. Montell N.V., 944 F. Supp. 1119 (S.D.N.Y. 1996). Here, the highly specific pleading of the fraudulent scheme and the acts taken in furtherance of it, combined with allegations of knowledge or control, suffice to put defendants on such notice. The allegations against Standfast and Ashley are sufficiently pleaded to withstand a motion to dismiss.

C. FNNY, Lewis and Smiling

The allegedly fraudulent acts of Smiling and Lewis are clearly pleaded in the complaint. Smiling is alleged to have lied to plaintiffs about the value of the property, the rent they could obtain for the apartment*fn6 and FNNY's intention to complete certain repairs and remodeling and to find them a tenant. Lewis is alleged to have repeated those falsehoods, to have "steered" plaintiffs to use an attorney provided by FNNY and "their" mortgage company, CHM, and to have signed the deed and HUD-1 statement knowing he lacked authority to do so. Although these defendants try to distance themselves from the alleged scheme to obtain FHA mortgage insurance through the use of an inflated appraisal, it is worth noting that FNNY could not have hoped to profit from the sale unless plaintiffs were given a mortgage, and that no lender was likely to make such a loan without having mortgage insurance. These facts strongly tend to support the inference that these defendants had knowledge of the fraudulent scheme and participated in it intentionally. Taken together, this inference and the alleged misrepresentations described above state a claim for fraud.

These defendants argue. however, that the complaint fails to state a claim against them for deceptive practices under NYGBL § 349, since it does not allege that the deceptive practices were of a recurring nature and harmful to the public. This argument must fail, since the complaint does in fact allege that defendants' actions were part of an ongoing pattern of predatory practices committed against numerous consumers. Amend. Compl. ¶¶ 36, 151-52, 162-65. Moreover, the consumer-oriented conduct governed by NYGBL § 349 "does not require a repetition or pattern of deceptive behavior." Oswego Laborers, 85 N.Y.2d at 25, 623 N.Y.S.2d at 532.

In Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46, 735 N.Y.S.2d 479 (2001), the New York Court of Appeals decided a case very similar to this one. In Polonetsky, defendants (a company and its president) were in the business of purchasing. repairing and then reselling homes, the same business FNNY purports to conduct. The complaint in Polonetsky alleged that the defendant company ("Better Homes") showed buyers substandard properties at inflated prices. often representing the properties as foreclosures offered below' market value. 97 N.Y.2d at 51. If buyers observed that the structures were in disrepair, Better Homes would promise to perform the repairs before title closed. Often the repairs were done poorly, incompletely or without required permits. Id. Better Homes also falsely convinced prospective buyers that their interests were being protected, discouraging them from hiring their own attorneys and steering them to attorneys and mortgage bankers with whom it had ties. Id. Both of these acts of "steering," the court found, had the effect of "making it unlikely that an outside influence would caution or protect the prospective buyers before closing the sale." Id. at 54.

The complaint alleged that the company's president ("Fessler") "participated in the corporation's `operations on a day-to-day basis and [was] actively involved in its marketing and sales activities.'" Id. at 52. The court found these allegations sufficient to state a claim for fraud and deceptive practices against Fessler, stating that "we are unable to say that a jury could not infer his knowledge of or participation in the fraudulent scheme, given the degree of his personal activities and the nature and extent of the customers' dissatisfaction." Id. at 55.

Applying the principles enunciated in Polonetsky to this case, it is clear that plaintiffs have adequately pleaded their claims of fraud and deceptive practices against FNNY and Lewis.

D. CSAI and Salva

The allegedly inflated appraisal completed by Salva acting as CSAI is perhaps the centerpiece of the complaint. It supported the allegedly inflated price plaintiffs paid for the property, and made possible the acquisition of FHA mortgage insurance, without which the defendants could not have hoped to profit from their alleged scheme. Its creation, and the inclusion of it in the FHA application with knowledge that it was false, are the most clearly fraudulent acts alleged in the complaint. Absent the fraudulent nature of the appraisal. defendants' claim that plaintiffs got "just what they bargained for" would carry much more weight.

It is true. as defendants point out, that some of the complaint's allegations concerning the appraisal are belied by the document itself.*fn7 While the complaint avers that the appraisal fails to disclose that the property was sold less than two months earlier for a much lower price than plaintiffs were to pay, it in fact does include this information. While the complaint avers that the appraisal failed to make comparisons to similarly situated homes in the area and failed to mention that the property was located in front of a school, it in fact does make comparisons to other homes and mentions the school. The only support pleaded for the claim that the appraisal was inflated is the somewhat conclusory statement that "there can be no rational basis for the valuation placed on the property by CSAI." Amend. Compl. ¶ 93.

Nevertheless, the allegation that the appraisal was fraudulently inflated should be found sufficient. It is plaintiffs' argument that the supposedly comparable homes used to determine the property's value were in fact quite different in location from the property and from their stated locations in the appraisal itself. In any event, the allegation that the appraised value was falsely inflated is sufficient to put CSAI, Salva and the other defendants on notice of the claims asserted against them.

E. Golden and Silver

The fraud and deceptive practices claims against Golden and Silver stand on a different footing from those against the other defendants. Arguably, neither Golden nor Silver made any fraudulent misrepresentations. Nevertheless, the allegations against them state a claim of fraud based on an "aiding and abetting" theory. To establish liability for aiding and abetting a fraud, plaintiff must show that 1) the principal or a third party committed a fraud, 2) the defendant knew or should have known of the fraud and 3) defendant's conduct gave substantial assistance or encouragement to engage in the tortious conduct. Ifill v. West, 1999 U.S. Dist. LEXIS 21320, *37 (E.D.N.Y. 1999).

Here, plaintiffs have clearly pleaded each of these elements. Golden and Silver were allegedly a knowing and intentional part of the scheme to defraud plaintiffs, and gave substantial assistance by their participation in the closing, and by failing to bring up any irregularities or informing plaintiffs of their right to obtain an attorney of their choosing. As in Polonetsky, an inference may be drawn that the act of steering plaintiffs to Silver was intended to make it unlikely that any outside influence would caution or protect the prospective buyers; similarly, it may be inferred that Golden's silence as to any questionable aspects of the deal was necessary and intended to accomplish the same goal. Further, by directly sending plaintiffs documents to sign after the closing, Golden may well have violated Rule 7-104 of the New York Code of Professional Responsibility (prohibiting attorneys from directly contacting a party they know to be represented by counsel), while Silver, by accepting payment from FNNY, may well have violated DR 5-107 of the New York Code of Professional Responsibility (see section IV below). As with Standfast and Ashley, the allegations of guilty knowledge on their part are somewhat conclusory, but are sufficient in light of the language and purpose of Rule 9(b).

III. Fraudulent concealment/inducement

The Amended Complaint's second count sounds in both fraudulent concealment and fraudulent inducement. As to fraudulent inducement, in this case all of the fraudulent acts and omissions aimed at the plaintiffs were for the purpose and with the intent to induce them to enter into the contract of sale and execute the mortgage and note. The court therefore finds that although plaintiffs have adequately alleged fraudulent inducement (see also the discussion of the "merger clause" below), it does not provide an independent basis for relief.

The same is true for the claim of fraudulent concealment. While the Amended Complaint contains adequate allegations to support such a claim, these allegations are identical to those made with regard to defendants' fraudulent acts and, more particularly, omissions. that are pleaded in the first claim for relief. That claim also expressly pleads both fraudulent concealment and fraudulent inducement. Amend. Compl. ¶¶ 180-181.

For all of these reasons, the complaint's second claim for relief is dismissed as duplicative.

The Court must, however, address the FNNY defendants' argument that the claim of fraudulent inducement is barred by the "merger clause" in the contract of sale. As these defendants concede, that clause was the type of "general" merger clause held not to bar a fraud claim in Danaan Realty Corp. v. Harris, 5 N.Y.2d 317, 320, 184 N.Y.S.2d 599, 601 (1959). Though they claim that this failing is rectified by the rider to the contract, which puts the contracting party on notice that FNNY sells rehabilitated homes and makes certain representations as to the condition of the property, this rider makes no reference to an acknowledgment by the contracting party that it is not relying on any outside representations. The court therefore rejects the contention that a finding of fraudulent inducement is barred by the contract's merger clause.

IV. Malpractice and Breach of Fiduciary Duty — Silver

A claim of malpractice requires the plaintiff to show 1) the existence of an attorney-client relationship, 2) that the attorney was negligent. 3) that this negligence was the proximate cause of the injury sustained, and 4) actual damage. Tinter v. Rappaport, 677 N.Y.S.2d 325, 326 (App. Div. 1998). Further, if an attorney-client relationship exists, the attorney stands in a fiduciary relationship with the client. Graubard, Mollen, Dannett and Horowitz v. Moskovitz, 86 N.Y.2d 112, 118 (1995).

Here, such a relationship plainly existed between the plaintiffs and Silver; he told plaintiffs that he would represent them and protect their interests, and went on to act as their counsel during the transaction. The fact that he was paid by FNNY does not negate this relationship, but does raise the possibility that he acted in violation of DR 5-107 of the New York Code of Professional Responsibility, which forbids attorneys from accepting payment from anyone other than their client except with consent after full disclosure. He is alleged to have failed to apprise plaintiffs of the risks they faced and their legal rights and options, and to have made material misrepresentations of fact to them. Had the former been explained to them, and the misrepresentations not made, plaintiffs allege that they would not have closed the deal and suffered the loss that they did thereby. These allegations are sufficient to state a claim for malpractice and breach of fiduciary duty.

Under New York law, however, a claim of breach of fiduciary duty is to be dismissed as redundant when it arises from the same facts and alleges the same injuries as a claim for legal malpractice. Mackley v. Sullivan & Liapakis, P.C., 2001 U.S. Dist. Lexis 21723, *22 (S.D.N.Y.) (citing Tyborowski v. Cuddeback & Onorfry, 279 A.D.2d 763, 765, 718 N.Y.S.2d 489, 491 (3d Dept. 2001)). Since this is the case here, the claim for breach of fiduciary duty against Silver is dismissed.


For the reasons discussed above, the Amended Complaint's second claim for relief, based on fraudulent concealment and fraudulent inducement, is dismissed as duplicative. The claim for breach of fiduciary duty against Silver is dismissed on the same ground. Otherwise, the motions to dismiss are denied.


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