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BANKS v. CONSUMER HOME MORTGAGE

March 27, 2003

DANA Y. BANKS AND DAVID B. MOUNSEY, PLAINTIFFS
v.
CONSUMER HOME MORTGAGE, INC., MICHAEL ASHLEY, INDIVIDUALLY AND AS PRINCIPAL OWNER OF CHM, ROBERT STANDFAST, INDIVIDUALLY AND AS PRESIDENT OF CHM, MICHAEL PARKER, INDIVIDUALLY AND AS AN OFFICER/EMPLOYEE OF CHM, OPTION-TO-BUY LTD. (OTB), MINDY S. ASHLEY, INDIVIDUALLY AND AS PRESIDENT OF OTB, SUZANNE SCHIAVETTA, INDIVIDUALLY AND AS SECRETARY OF OTB, STEPHEN WEINTRAUB, ESQ., THE FORECLOSURE NETWORK OF NEW YORK (FNNY), GARY LEWIS, INDIVIDUALLY AND AS PRESIDENT OF FNNY, JOSHUA SMILING, JASON J. ASHLEY, ESQ., ANTON SARLO, ROY ANGEVINE, KENNETH GOLDEN, ESQ., JOSEPH OBENAUER AND UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, DEFENDANT. MEMORANDUM AND ORDER



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

MEMORANDUM AND ORDER

This action is based upon the purchase and financing of residential real property by Plaintiffs. Plaintiffs claim that numerous parties, including the seller, the finance company, real estate brokers, an appraiser, an inspector, a contractor and the attorneys involved in closing the deal conspired to defraud Plaintiffs in a predatory lending scheme that allegedly induced Plaintiffs to purchase the property at an inflated price. Plaintiffs' claims sound in the federal Truth-in-Lending Act ("TILA"), the Equal Credit Opportunity Act ("ECOA"), the New York Deceptive Practices Act, see N.Y. Gen. Bus. § 349, and common law fraud and breach of fiduciary duty.

Most defendants now move to dismiss the First Amended Verified Complaint (the "Complaint"),*fn1 primarily for failure to state a claim for fraud or under Section 349 and for failure to plead fraud with particularity. For the reasons stated below, these motions are denied.

BACKGROUND

According to the Complaint, plaintiffs Dana Y. Banks and David B. Mounsey are longtime friends who were in the market to purchase jointly a multi-family house, and heard of the Foreclosure Network of New York, Inc. ("FNNY"), a real estate brokerage with access to moderate priced homes. On February 24, 2000, Banks and Mounsey went to the offices of ENNY and there met its salesperson, Joshua Smiling. Smiling showed plaintiffs a 3-family house at 415 Pennsylvania Avenue in Brooklyn, New York. Smiling told plaintiffs that he was very familiar with the property, that the house need significant "cosmetic" repairs, that he knew precisely what needed to be done, and that the purchase loan would also finance the repairs.

A Sales Price Is Determined

During the following week, Smiling and plaintiffs discussed the house further. Smiling described to plaintiffs his commitment as a fellow African-American to helping them fulfill the American dream of home ownership by finding the right house at the right price. This race-based pitch was allegedly part of a planned method of operation engaged in by FNNY and its employees and management.

On or around March 2 or 3, 2000, plaintiffs met again at FNNY's offices with its president Gary Lewis. An extensive interview was conducted that covered plaintiffs' income, finances and debts. No sales price was given at this meeting, pursuant to a practice where FNNY (and other defendants, according to plaintiffs' allegations) do not provide sales quotes based on the fair-market value of the property or an asking price set by the sellers, but instead based on an analysis of the maximum amount buyers can afford to borrow.

On or about March 3, 2000, plaintiffs met with Lewis again at FNNY's offices and brought with them various financial data and information that Lewis had requested. Plaintiffs also met Michael Parker at this meeting, who Lewis introduced as a "sales representative" for Consumer Home Mortgage, Inc. ("CHM"). Prior to the meeting, Defendants*fn2 had determined that plaintiffs could raise about $12,000 in cash and could be convinced to borrow up to $275,000 for purchase and repair of the property. Lewis and Smiling told plaintiffs that the fair market value of the property "as is" was $214,000, and that plaintiffs would need to borrow and put into escrow another $67,000 for repairs. In fact, on January 20, 2000, defendant Option-To-Buy, Ltd. ("OTB") had purchased the property in the identical condition for only $115,000 from RF Properties, Inc. Mindy Ashley is alleged to be the president of OTB, and her husband Michael S. Ashley is alleged to be a principal of CHM, and to control both OTB and FNNY. Plaintiffs allege that Smiling and Lewis knowingly concealed the existence of the relationship between OTB and the Ashley family in order to conceal the family relationship of the sellers to defendant Jason J. Ashley, Esq., whom FNNY and CHM provided to plaintiffs as their attorney at the closing.

The Property is Appraised and Inspected

Exclusive of certain costs, Lewis and Smiling told plaintiffs that the total purchase price (including repairs) was approximately $288,000. Lewis and Smiling told plaintiffs that this was a fair, reasonable and affordable price. Lewis and Smiling told plaintiffs that their $12,000 cash payment would be credited as a down payment. However, no one told plaintiffs that in fact $7,500 of the down payment would be used without their knowledge or consent for closing costs.

Prior to the sale to plaintiffs, Lewis and Smiling, as well as Michael S. Ashley and Mindy Ashley, and in collusion with the appraiser Joseph Obenauer and the inspector Anthony Sarlo, arranged for the preparation of an appraisal inspection report. Smiling, Lewis and Sarlo all vouched that both Obenauer and Sarlo were entirely independent of the seller OTB, the broker FNNY and the lender CHM, that both Obenauer and Sarlo had special expertise in their respective areas, and that both Obenauer and Sarlo's evaluations were particularly reliable and honest as they were performed on behalf of HUD. Parker, Lewis, and Smiling also told plaintiffs that they did not need to hire their own engineer, inspector or appraiser because Obenauer and Sarlo would handle those tasks more cheaply.

Obenauer prepared an appraisal. The appraisal stated that the fair market value of the house as of March 9, 2000, was $258,000. However, an addendum to the appraisal stated that the fair market value was only $143,000, apparently without explanation. The appraisal also noted that the terms of the most recent sale (on January 20, 2000, to OTB) were not available, that no structural defects or evidence of water damage existed, and that a variety of other types of defects such as exposed wiring, leaky plumbing, broken windows, and inadequate water pressure, did not exist. The appraisal did not note the existence of Thomas Jefferson High School, a densely populated school with an extremely high crime rate, across the street from the property, or reference what effect the school would have on the fair market value of the property.*fn3 Plaintiffs allege that these statements and omissions were false and misleading, and that their purpose was to deceive both plaintiffs and HUD as to the "as is" and "as repaired" fair market value of the property. On March 18, 2000, plaintiffs were shown a copy of the appraisal and asked to sign, but were not given a copy of it. Plaintiffs did note that the appraisal stated that the range of purported comparable sales was between $258,00 and $273,000, and that it also stated that it could not report on the January 20, 2000 sale of the property except that the broker had listed it for $230,990.

Sarlo prepared a summary of estimated repair costs which plaintiffs allege intentionally ignored and omitted serious existing structural and other defects that would have cost an additional $75,000 to $100,000 to repair. Had plaintiffs known of these repairs, it would not only have caused them to abandon the deal, but it would also have rendered the property ineligible for the FHA mortgage insurance provided by HUD and a 203k rehabilitation loan.*fn4

Parker and Lewis told plaintiffs that in order to be eligible for financing they had to use CHM as the lender even though plaintiff Mounsey told Parker, Lewis, and Smiling that as a veteran he was approved for a mortgage by the Veterans Administration. Parker, Lewis and Smiling also told plaintiffs that they would need to place the repair loan proceeds in escrow with CHM, and that CHM would exercise exclusive control over hiring a contractor for repairs.

The Closing on the Property

Plaintiffs were also told (by unnamed defendants) that counsel would be provided to represent them at closing. Jason J. Ashley was thus assigned, but he never disclosed to plaintiffs that he was the cousin of Mindy Ashley. OTB's president, or that her husband Michael Ashley was a principal in CHM and controlled FNNY. Plaintiffs never met or spoke with Jason J. Ashley until the closing on March 24, 2000, although he is listed as counsel for plaintiffs on a rider to the backdated contract of sale. Steven Weintraub, Esq., who was the attorney for OTB and Mindy Ashley, allegedly intentionally backdated the contract of sale and, with the cooperation of Jason J. Ashley, was able to get plaintiffs to sign the back-dated contract. Weintraub was also aware of the family relationship between Jason J. Ashley and Mindy Ashley, but allegedly remained silent about this alleged conflict in furtherance of the overall scheme. After the closing, plaintiffs repeatedly tried to contact Jason J. Ashley to obtain a final set of closing documents and to direct him to compel the contractor hired to conduct the repairs of the property (co-defendant Roy Angevine) and CHM to complete the repairs. Jason J. Ashley has never returned their calls or responded otherwise and has never delivered a final closing set of closing documents to plaintiffs. Jason J. Ashley did not respond to the complaint filed in this action, and a default judgment already has been entered against him.

At the closing on March 24, 2000, Suzanne Schiavetta, the Secretary of OTB (Compl. ¶ 10), attended on behalf of OTB and initialed various parts of the contract of sale. Plaintiffs allege that Schiavetta knowingly participated at the closing to conceal the familial relationship between Mindy and Jason J. Ashley.

Plaintiffs allege that the defendants, including Weintraub and Kenneth Golden, Esq. (attorney for CHM) did not provide advance copies of any closing documents and instead handed them to plaintiffs at the closing for execution without allowing any time for review. Jason J. Ashley then assured plaintiffs that the closing documents were in order and instructed plaintiffs to execute them.

In addition to the contract of sale, plaintiffs also executed a loan application, a borrowers' certificate for HUD and VA, a contractor agreement to hire Angevine to conduct repairs, Sarlo's specification of repairs and narrative scope of work (the "scope of work"), a pre-signed, uncompleted draw request authorizing the release of funds prior to the commencement of any repair or rehabilitation, and other uncompleted draw requests. Although the total cost of repairs in the inspection reports was listed at about $51,000, plaintiffs were induced to borrow $67,220 as a "Repair Escrow" that was paid to CHM. CHM has never provided an accounting for these funds. Sarlo and Angevine subsequently signed draw requests that certified that all work had been satisfactorily completed, although in fact none of the work listed in Sarlo's scope of work was commenced before closing, and very little work had been done by April 13, 2000, when plaintiffs were induced to execute a form releasing $59,000 to Angevine. A substantial amount of the work listed in the scope of work has never been completed.

A rider was annexed to the contract of sale that stated that the Federal Housing Commissioner had appraised the fair market value of the subject premises as not less than $258,000. However, the Federal Housing Commissioner had not issued, approved or even seen such an appraisal by the time of closing.*fn5

STANDARD FOR MOTIONS TO DISMISS

When deciding a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the court must take all allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). A complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." FD Property Holding, Inc. v. US Traffic Corp., 206 F. Supp.2d 362, 369 (E.D.N.Y. 2002) (internal quotation marks omitted). However, the Court may consider matters of public record, such as court decisions, statutes, and documents such as briefs filed with courts and other public bodies. See, e.g., Papasan v. Allain, 478 U.S. 265, 268 n. 1 (1986) ("Although this case comes to us on a motion to ...


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