United States District Court, E.D. New York
April 25, 2003
Maxine WILSON, Terry Wilson, Alfredo Smith, Sharon Smith, and Juan Quintanilla, Individually and as Class Representatives, Plaintiffs,
Isaac TOUSSIE, Robert Toussie, Toussie Family Homes, David Park Estates, Inc., Easy Home Program Corporation, Fobert Corp., Marconi Realty Ltd., Rod Staten Corporation, Smith-Haven Mortgage Corporation, Fleet Mortgage Corporation, Washington Mutual Home Loans, Mutual of North America, Star Bank, N.A., Firstar Corporation, PMCC Mortgage Corporation, Mortgage Catalog Store, Inc., HSBC Bank USA, First West Mortgage Bankers, Ltd., Community Home Mortgage Corporation, Flagstar Bancorp, Inc., Chase Manhattan Mortgage Corporation, Defendants.
The opinion of the court was delivered by: DENIS HURLEY, District Judge.
Plaintiffs have made a renewed motion to amend the complaint.
For the reasons discussed infra, the Court denies the motion as
futile. As more fully discussed herein, the Court concludes that
claims against certain of the defendants cannot be rehabilitated.
However, revised pleading may cure some of the defects identified
as to other defendants. As a result, leave to
[260 F. Supp.2d 532]
renew this motion shall be subject to the restrictions of this
Order. In the Discussion portion of this Order, the Court
addresses each of the parties' proffered arguments. The purpose
of this discussion is to provide guidance to the parties as to
what issues should be addressed in any renewed motion to amend
A. Procedural Background.
Plaintiffs commenced this action on July 10, 2001, by filing
the original complaint. The original, twelve-count, putative
class action complaint alleged violations of
42 U.S.C. § 1981, 1982, 1985(3), 1986, 3604(a), 3604(b), 3604(d) and
3605, as well as state law violations of § 296 of the New
York Executive Law, § 349 of the New York General Business
Law, Title 8 of the Administrative Code of the City of New York,
and common law breaches of contract, express warranty, and
implied warranty of habitability and workmanlike construction. On
November 20, 2001, Defendant First West Mortgage Bankers Ltd.
served its answer upon Plaintiffs.
On January 10, 2002, Plaintiffs submitted a proposed first
amended complaint ("First Amended Complaint"). Plaintiffs
originally contended that this First Amended Complaint effected
an amendment as of right, see Fed.R.Civ.P. 15(a). However, since
an answer had been served and filed, Plaintiffs, at the Court's
direction, resubmitted this First Amended Complaint as part of a
motion for leave to amend the complaint. See id.
Plaintiffs' First Amended Complaint spanned 573 pages and
contained 4555 numbered paragraphs. The First Amended Complaint
contemplated the joinder of approximately 400 individual named
plaintiffs and the addition of 55 new defendants. (Four of the
defendants named in the original complaint were also to be
dropped from the suit.) The 72 total Defendants in the First
Amended Complaint were classified as (1) Seller Defendants, (2)
Lender Defendants, (3) Builder Defendants, (4) Appraiser
Defendants, (5) Abstract Company Defendants, (6) Lawyer
Defendants and (7) Current Lender Defendants. The Lenders were
Mortgage banks that made residential real estate loans to the
purchasers of homes sold by the Seller Defendants.*fn1 As defined by
that First Amended Complaint, the Current Lenders are
Corporations providing residential loans in the New York
metropolitan area who acquired and hold loans made by the Lender
Defendants to purchasers of homes sold by the Seller Defendants.*fn2
The Current Lenders were solely named as defendants in one cause
of action, alleging that they had been unjustly enriched.
[260 F. Supp.2d 533]
On September 6, 2002, the Court issued a written order denying
leave to amend the complaint. In that Order, the Court noted
various joinder problems endemic to the First Amended Complaint.
Plaintiffs filed a timely motion for reconsideration and
reargument. On January 6, 2003, the Court heard oral argument
from counsel regarding Plaintiffs' motion for reconsideration and
reargument. At the conclusion of the oral argument, the Court
granted reconsideration but ultimately decided to abide by the
conclusions of the September 6, 2002, Order.
At that January 6, 2002, oral argument, Plaintiffs expressed a
desire to submit a proposed Second Amended Complaint. The Court
granted leave to submit that Second Amended Complaint in the form
of a renewed motion for leave to amend the complaint.
B. Allegations of the Second Amended Complaint.
The Second Amended Complaint names thirty-two Plaintiffs. These
Plaintiffs are named individually as well as in their capacity as
representatives of a putative class. All of the Plaintiffs are
identified as either "black" or "hispanic" and reside in the New
The Second Amended Complaint also names Isaac Toussie, Robert
Toussie and their various real estate businesses,*fn3 referred to as
the Seller Defendants ("Sellers"); PMCC Mortgage Corp. ("PMCC")
and Smith-Haven Mortgage Corp. ("Smith-Haven"), referred to as
the Lender Defendants ("Lenders"); and thirty-four current
holders of mortgage notes,*fn4 referred to as the Current Lender
Defendants ("Current Lenders"). With regard to the Sellers,
Plaintiffs allege the following:
In residential subdivisions that they create and
build, the Sellers have implemented a policy by which
they covertly steer minority buyers to purchase
defective homes in predominantly minority
neighborhoods and away from predominantly white
neighborhoods. Furthermore, Sellers lure these
inexperienced and low income inner city minority
buyers into purchasing homes that they cannot afford
and that: (i) are intentionally overpriced and
over-appraised. . .; (ii) have mortgage and/or
property tax payments that are dramatically higher
than represented and expected. . .; (iii) are
defectively built; (iv) lack the amenities promised
by Sellers; and (v) are located in different towns
and in worse neighborhoods than represented by
Second Amended Complaint ¶ 78. The Second Amended Complaint
also alleges that the Sellers prepared false loan applications
and other documents for submission to the United States
[260 F. Supp.2d 534]
Housing and Urban Development ("HUD"). Id. ¶¶ 99, 100.
Plaintiffs intermittently refer to the overall scheme described
above as a "conspiracy." See, e.g., id. ¶ 107.
The Second Amended Complaint also alleges that: "The
Seller[s] . . . arrange class members' mortgages with the
Lender[s]. . . . The Sellers refer class members to
Lender[s]. . ., which are cooperating financial agencies
and that the Sellers are affiliated with by common control,
contract or business relationship." Id. ¶ 108.
With regard to the Lenders, Plaintiffs allege that they
"knowingly participate[d] in this criminal conspiracy in
order to, among other things, generate income through
points and fees." Id. Plaintiffs also allege that
the Lenders "submit[ted] class members' loan applications to
HUD," "[d]espite knowing of the false contents of the
With respect to certain of the Current Lenders, the Second
Amended Complaint alleges:
The Lender[s] . . . serve[d] as agents and mortgage
brokers on behalf of other, principal banks which
hold the mortgage[s] after closing, including Current
Lenders Fleet [Mortgage Corp.], Chase [Manhattan
Mortgage Corp.], Citimortgage, Firstar [Corp.],
Countrywide [Lending], Norwest [Mortgage], PHH
Mortgage, ABN AMRO [Bank], Waterfield Mortgage
Company and American Brokers Conduit. Prior to
closing, the Lender[s] . . . have already arranged to
sell the note and mortgage to these Current Lenders.
In fact, [P]laintiffs [we]re told at closing to make
their first monthly [mortgage] payments to these
Id. ¶ 109.
With regard to all Current Lenders, the Second Amended
Complaint alleges that "[t]he Current Lender[s] . . . each
acquired and hold one or more of the class members' loans, having
acquired the loan either at closing or in the secondary market."
Id. ¶ 130.
The notes held by the Current Lender[s] . . . are
grossly over-inflated due to the practices described
above. Consequently, the debt owed by class members
to Current Lender[s] . . . is much greater than if
class members' homes had been accurately appraised,
providing the Current Lenders with an unfair
benefit. . . . In addition, . . . class members are
also forced to pay interest at a higher rate than
if the homes had been accurately appraised. . . .
[and a]s the current holders of the notes, the
Current Lender[s] . . . benefit[ed] from these
excess interest payments.
Id. ¶ 131-132. The Second Amended Complaint also alleges that
the Current Lenders refused to voluntarily restructure or
refinance Plaintiffs' loans. See id. ¶ 134-138.
As more fully set out in the Second Amended Complaint,
Plaintiffs allege the following causes of action against only the
Sellers: (1) Claim I violation of the Federal Fair
Housing Act, 42 U.S.C. § 3601, et seq.; (2) Claim II
violation of the Civil Rights Act of 1866, 42 U.S.C. § 1981;
(3) Claim III violation of 42 U.S.C. § 1982; (4)
Claim VIII violation of the New York Human Rights Law,
N.Y. Exec. Law § 296; (5) Claim IX violation of New
York General Business Law § 349; (6) Claim X
violation of Title 8 of the Administrative Code of the City of
New York; (7) Claim XI breach of contract; (8) Claim XII
breach of express warranty and (9) Claim XIII
breach of implied warranty of habitability. Against both the
Sellers and the Lenders, Plaintiffs allege: (1) Claim IV
violation of 42 U.S.C. § 1985(3) and 42 U.S.C. § 1986;
(2) Claim V violation of the Equal Credit Opportunity Act
("ECOA"), 15 U.S.C. § 1691; (3)
[260 F. Supp.2d 535]
Claim VI violation of the Racketeer Influenced and
Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) and
(4) Claim VII RICO conspiracy, under
18 U.S.C. § 1962(d). With regard to the Current Lenders, Plaintiffs
only allege, in Claim XIV, unjust enrichment.
Based upon those causes of action, Plaintiffs pray for
declaratory judgment, a permanent injunction barring any
continuation of the allegedly discriminatory conduct,
compensatory damages, punitive damages, treble damages, costs, a
temporary injunction barring the Current Lenders from foreclosing
on properties purchased by class members, declaratory judgment
that class members' mortgages are null and void and, finally,
that the Court "enter a permanent injunction providing for
equitable reformation of the class members' mortgages, and
directing that the Current Lender[s] . . . take all affirmative
steps necessary to refinance [P]laintiffs' mortgages based on
their income and the accurate market value of their homes," id.
at p. 44.
A. Fed.R.Civ.P. 15(a).
Rule 15(a) provides that leave to amend a pleading "shall be
freely given when justice so requires." Fed.R.Civ.P. 15(a).
However, " `[w]here it appears that granting leave to amend is
unlikely to be productive, . . . it is not an abuse of discretion
to deny leave to amend.'" Liuceute v. International Business
Machines Corp., 310 F.3d 243, 258 (2d Cir. 2002) (quoting Ruffolo
v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993) (per
curiam)). "One appropriate basis for" evaluating the
"productivity" of a proposed amendment lies in the relative
futility of accepting the proposed amended complaint. Id. One
proper standard for the evaluating futility is whether the
complaint can satisfy the pleading requirements of Fed.R.Civ.P.
9(b), if applicable. See In re Boesky Securities Litigation,
882 F. Supp. 1371, 1384 (S.D.N.Y. 1995). The Court may also evaluate
futility by determining whether the proposed amended complaint
"would withstand a motion to dismiss pursuant to [Fed.R.Civ.P.]
12(b)(6)." Dougherty v. North Hempstead Bd. of Zoning Appeals,
282 F.3d 83, 88 (2d Cir. 2002). Under the Rule 12(b)(6) standard
of futility, as applied by the Second Circuit, the Court should
grant leave to amend the complaint "`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.'" Ricciuti v. N.Y.C.
Transit Authority, 941 F.2d 119, 123 (2d Cir. 1991) (quoting
Coley v. Gibson, 355 U.S. 41, 4546, 78 S.Ct. 99, 2 L.Ed.2d 80
(1957)). The Court applies both futility standards herein.
B. The Sellers.
The parties do not provide briefing on whether the claims
against the Sellers are futile in any manner. Therefore, the
Court does not reach the issue of whether the claims asserted
against the Sellers would withstand a Rule 12(b)(6) motion or
contain sufficient particularity under Rule 9(b).
C. The Lenders.
1. Class Certification.
Defendant PMCC Mortgage Company, one of the two Lenders,
submitted a brief in opposition to Plaintiffs' motion for leave
to amend. In that memorandum, PMCC Mortgage Company first argues
that the Second Amended Complaint fails to allege sufficient
facts for class certification under Fed. Civ. R. 23. This
argument is improper in the context of the Court's current
Rule 15(a) inquiry. See In re Blech Sec. Litig., 928 F. Supp. 1279,
1296 (S.D.N.Y. 1996) (holding that any questions regarding
[260 F. Supp.2d 536]
the sufficiency of class allegations are "more appropriately
considered in the context of a motion for class
certification. . . ."). As such, the Court does not reach
the merits of the argument.
2. Fed R. Civ. P. 9(b) Particularity and Specificity.
PMCC Mortgage Company's brief next advances the argument that
amendment would be futile as to the Lenders because Plaintiffs'
have failed to plead RICO violations based upon mail fraud
Claim VI with sufficient particularity. The
requirements of Fed.R.Civ.P. 9(b) apply to RICO claims asserting
mail fraud.*fn5 Moore v. Paine-Webber, Inc., 189 F.3d 165, 172 (2d
Cir. 1999). Moreover, failure to comply with the requirements of
Rule 9(b) can support a showing of futility. See In re Boesky,
882 F. Supp. at 1384.
In the context of a RICO claim, the Second Circuit has held
that "Rule 9(b) calls for the complaint to `specify the
statements it claims were false or misleading, give particulars
as to the respect in which plaintiffs contend the statements were
fraudulent, state when and where the statements were made, and
identify those responsible for the statements.'" Moore, 189 F.3d
at 172 (quoting McLaughlin v. Anderson, 962 F.2d 187, 191 (2d
Cir. 1992)). The complaint must also "identify the purpose of the
mailing within the defendant's fraudulent scheme," McLaughlin,
962 F.2d at 191, and "allege facts that give rise to a strong
inference of fraudulent intent," San Leandro Emergency Med. Group
Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812 (2d
PMCC contends that the Second Amended Complaint, as drafted,
fails to provide sufficient particularity as to its fraudulent
conduct. PMCC contrasts this required specific, individual
conduct with the general conduct that is broadly attributed to
all Lenders by the Second Amended Complaint. "[W]here multiple
defendants are asked to respond to allegations of fraud, the
complaint should inform each defendant of the nature of his
alleged participation in the fraud." Di Vittorio v. Equidyne
Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
With regard to PMCC, the Second Amended Complaint fails to
satisfy Rule 9(b)'s specificity requirements.
Paragraphs 106 and 107 allege participation by "the Lender
Defendants" in the asserted scheme. Specifically, Paragraph 106
alleges that "[t]he Lenders actively participate[d] in th[e]
practice of issuing fraudulent letters," while Paragraph 107
alleges "[t]he Lenders knowingly participate[d] in this criminal
conspiracy in order to, among other things, generate income
through points and fees." However, these paragraphs fail to
allege specific conduct on the part of PMCC. Paragraph 109
similarly alleges that the Lenders "serve[d] as agents and
mortgage brokers on behalf of other, principal banks. . .," but
alleges no individual actionable conduct.*fn6 Paragraph
[260 F. Supp.2d 537]
110 similarly fails to allege specific facts with regard to PMCC.
Moreover, according to the allegations of the Second Amended
Complaint, when fraud did occur, it did not always occur in the
same form. See id. ¶ 94 ("Although a majority of plaintiffs
are [Fair Housing Administration ("FHA") ] loan recipients, the
fraudulent scheme also snares some low income buyers who did not
receive FHA loans.").
Paragraphs 111 and 112 of the Second Amended Complaint refer to
statements made by a former officer of PMCC. Despite the fact
that these statements contained richer details and descriptions
than those found in the balance of the Second Amended Complaint,
paragraphs 111 and 112 still fail to identify which applications
were fraudulent and how they were fraudulent. To the contrary,
the facts alleged in these paragraphs indicate that fraud
occurred in only a certain amount of the loan applications. See
Second Amended Complaint ¶ 111 (stating that 50% of the
"second jobs" listed on loan applications "were outright
fabrications"). As a result, rather than providing greater
specificity regarding the RICO claims, Paragraphs 111 and 112
only serve to further muddy the waters.
"Rule 9(b) is not satisfied by a complaint in which `defendants
are clumped together in vague allegations.'" Dietrich v. Bauer,
76 F. Supp.2d 312, 330 (S.D.N.Y. 1999) (quoting In re Blech,
928 F. Supp. at 1294). Moreover, in civil RICO actions, "the concerns
that dictate that fraud be pleaded with particularity exist with
even greater urgency. . . ." Plount v. American Home Assur. Co.,
668 F. Supp. 204, 206 (S.D.N.Y. 1987). In light of the forgoing,
under Rule 9(b), Plaintiffs are required to indicate which loans
contained fraudulent statements, the extent which each of the
individual Lenders participated, and the character of the
Lenders' involvement in each fraud. The general allegations of
the RICO claim, as framed by the Second Amended Complaint, fails
to meet the requirements of Rule 9(b).
The actual elements of the RICO violation are alleged in Claim
VI. Despite this cursory mention, these elements also suffer from
a lack of particularity. As stated before, Plaintiffs, pursuant
to the requirements of Rule 9(b), must " specify the
statements it claims were false or misleading,  give
particulars as to the respect in which plaintiffs contend the
statements were fraudulent,  state when and where the
statements were made, and  identify those responsible for the
statements." Moore, 189 F.3d at 172 (quotation omitted). The
Second Amended Complaint contains general allusions to each of
these elements but, as alleged, Plaintiffs have failed to provide
the appropriate specificity. Such general allusions regarding the
elements also fail to satisfy the Rule 9(b) standard. See Bologna
v. Allstate Ins. Co., 138 F. Supp.2d 310, 321-322 (E.D.N.Y.
The Court does not see any reason, however, why Plaintiffs
would be unable to plead these additional facts. To the contrary,
the voluminous First Amended Complaint and Exhibit 1 to the
Second Amended Complaint indicate that Plaintiffs actually can
allege facts with greater particularity than those contained in
the Second Amended Complaint. Therefore a Third Amended
Complaint, curing the deficiencies noted in this Order, could
conceivably pass muster under the Rule 9(b) standard. Moreover,
the Court is aware that "[d]espite the generally rigid
requirement that fraud be pleaded with particularity, allegations
may be based on information and belief when facts are peculiarly
within the opposing party's knowledge." Wexner v. First Manhattan
Co., 902 F.2d 169, 172 (2d Cir. 1990). However, based upon the
proffered materials, the Court
[260 F. Supp.2d 538]
cannot, at this time, ascertain whether this exception applies to
any portions of the RICO claims against the Lenders.
3. Over-Broad and Inconsistent.
PMCC also contends that Plaintiffs' RICO claims are over-broad
and inconsistent. See PMCC Memorandum at 10. The substance of
PMCC's argument on this point is unclear. In relevant part, PMCC
The factual allegations of the complaint charge that
the named Lender Defendants were just two of the many
lenders to which Seller Defendants referred
prospective purchasers (see ¶ 97) [sic] the only
allegations in the entire complaint concerning the
number of times that the two named Lender Defendants
were involved, is that they were "repeatedly" used by
the Sellers, meaning more than once. . . . The
claim[, contained in ¶ 173,] that "the Lender
Defendants" were involved in every loan and therefore
every part of the racketeering conspiracy, is not
supported by the factual allegations of the
complaint, is in fact directly contradicted by the
factual allegations (¶ 97), and is therefore over
broad and fails to state a claim upon which relief
may be granted against the Lender Defendants.
It is true that "[a] RICO claim, replete with the ruinous
threat of treble damages, can not be assembled by cobbling
together plainly inconsistent allegations of fraud." McLaughlin,
962 F.2d at 191. Nevertheless, to the extent that PMCC argues
that the allegations in the Second Amended Complaint are so
internally inconsistent that the RICO claims are legally
insufficient or frivolous on their face, the Court does not
agree. The mere fact that Plaintiffs, in the context of a
putative class action complaint, refer to defendants collectively
in one portion of the complaint and then refer to them
specifically in other areas of the complaint does not create any
inconsistency or overbreadth that would render the proposed
4. Pleading the Elements of the RICO Claims.
PMCC further argues that Plaintiffs failed "to allege [(1)] a
racketeering `enterprise' involving PMCC, [(2)] intent to join
the defined enterprise or to join the conspiracy. . . . [and
(3)] racketeering `injury.'" PMCC Memorandum at 14, 15. The Court
first considers the "enterprise" argument.
The statute defines an "enterprise" as including a "group of
individuals associated in fact." 18 U.S.C. § 1961(4). In
United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524,
69 L.Ed.2d 246 (1981), the Supreme Court ruled that the enterprise
requirement is satisfied by alleging a "group of persons
associated together for a common purpose of engaging in a course
of conduct." Id. "The enterprise need not necessarily have a
continuity extending beyond the performance of the pattern of
racketeering acts alleged, or a structural hierarchy, so long as
it is in fact an enterprise as defined in the statute" and the
Second Circuit has "repeatedly found a sufficient enterprise
where the complaint alleges a group without centralized hierarchy
formed for the sole purpose of carrying out a pattern of
racketeering acts." Pavlov v. Bank of New York Co., Inc., 25
Fed.Appx. 70, 71-72 (2nd Cir. 2002). Paragraph 171 of the Second
Amended Complaint alleges "an association-in-fact `enterprise'
within the meaning of 18 U.S.C. § 1961(4)." Second Amended
Complaint ¶ 171. The Second Amended Complaint further
bolsters this statement by the factual allegations contained in
paragraphs 178 and 179. Despite PMCC's arguments
[260 F. Supp.2d 539]
to the contrary, these allegations are sufficient in the context
of the instant motion.
PMCC also argues that, based upon the alleged enterprise, "it
is clear that PMCC was an `outsider' not involved in the
`operation and management' of the enterprise." PMCC's Memorandum
at 14 (emphasis added). PMCC also argues that the Second Amended
Complaint "fails to establish that PMCC performed any cognizable
racketeering `conduct' and `participa[tion]' in the form of
`directing its affairs.'" Id. at 15 (quoting United States v.
Viola, 35 F.3d 37, 41 (2d Cir. 1994)) (alteration in original)
(emphasis added). These arguments, as presented, concern issues
of fact. Such arguments are inappropriate in the context of the
instant Rule 15(a) motion. As such, the Court does not reach the
merits of those arguments.
Finally, PMCC argues that Plaintiffs have failed to allege a
racketeering "injury." This representation is patently incorrect.
See Second Amended Complaint ¶ 180 ("Plaintiffs have been
injured in their property as a result of the pattern of
racketeering activity described herein. . . .").
5. Other Alleged Pleading Insufficiencies.
PMCC argues that none of the Claims can succeed because the
named Plaintiffs actually participated in the alleged frauds.
Defendant Fleet Mortgage Corporation and its successor in
interest Washington Mutual Bank, F.A. present a similar argument.
See Fleet Mortgage Corporation Memorandum at 7. The Court
understands this argument to suggest that either Plaintiffs'
"unclean hands," see Precision Instrument Mfg. Co. v. Automotive
Maintenance Mach. Co., 324 U.S. 806, 814, 65 S.Ct. 993,
89 L.Ed. 1381 (1945), or in pan delicto status, see Perma Life Mufflers,
Inc. v. Int'l Parts Corp., 392 U.S. 134, 140, 88 S.Ct. 1981,
20 L.Ed.2d 982 (1968), could provide an absolute defense to a civil
RICO claim. While intriguing, in the context of the instant
motion, the argument proves ultimately unavailing.
As an initial matter, it is unclear whether either doctrine may
properly be applied to civil RICO claims. To the court's
knowledge, the Second Circuit has not ruled on this discrete
issue, although other Circuits have provided limited discussion.
The First Circuit, in Roma Const. Co. v. aRusso, 96 F.3d 566 (1st
Cir. 1996), opined that the doctrine does not apply but
ultimately concluded that the plaintiffs did not have "unclean
hands." 96 F.3d at 571-573. The Eleventh and Seventh Circuits
have opined that such a doctrine may apply in civil RICO actions.
Sikes v. Teleline, Inc., 281 F.3d 1350, 1366 n. 41 (11th Cir.
2002) (discussing the "curious nature" of a gambler bringing a
RICO claim against a bookie but merely "positing the possibility
that the plaintiffs may be barred from bringing such a claim by
the `unclean hands' doctrine."); Laborers' Intern. Union of North
America v. Caruso, 197 F.3d 1195, 1197-1198 (7th Cir. 1999)
(evaluating "unclean hands" argument in the context of summary
judgment). The Third Circuit has applied the doctrine in the
context of whether an injunction, after trial, can be denied.
Northeast Women's Center Inc. v. McMonagle, 868 F.2d 1342,
1354-1355 (3d Cir. 1989). These cases do little to guide the
Court's inquiry into whether the doctrines of "unclean hands" or
in pari delicto may apply in the instant context.
Ultimately, however, PMCC's argument does not persuade the
Court to blaze a new jurisprudential path at this juncture. As
stated earlier, in the context of the instant Rule 15(a) motion,
the Court evaluates the claims of the Second Amended Complaint
for futility. Futility may be evaluated under the Rule 12(b)(6)
standard. Under the 12(b)(6) standard, the
[260 F. Supp.2d 540]
Court must accept the allegations of the Second Amended Complaint
as true, drawing all inferences in Plaintiffs' favor. On the face
of the Second Amended Complaint, there is some indication that
certain clients were aware of the underlying fraud. See, e.g.,
Second Amended Complaint ¶¶ 99, 103, 104, 105. However, there
are also allegations that indicate that Plaintiffs were not aware
of the various fraudulent documents produced in connection with
the alleged conspiracy. See, e.g., id. ¶¶ 101, 102. Therefore,
applying that 12(b)(6) standard to the instant case, the Court
cannot conclude, at this point in the litigation, that the
actions of any portion of the named Plaintiffs or asserted class
warrant application of either the "unclean hands" doctrine or in
PMCC next argues that Plaintiffs have failed to state a claim
because "[t]he general rule in New York is that statements as to
[the] value of real estate are not actionable as fraud." PMCC
Memorandum at 17. PMCC cites several cases for this proposition.
See, e.g., Simms v. Biondo, 816 F. Supp. 814, 819-820 (E.D.N.Y.
1993). The Court has read these cases and finds them
unpersuasive. The general rule, as PMCC admits, is subject to
certain exceptions. PMCC Memorandum at 17. One of these
exceptions is whether the misstatement of value was made in
conjunction with a larger scheme or conspiracy to defraud. See
Simms, 816 F. Supp. at 820 ("Buyers have produced no evidence
showing any scheme of deception by the Sellers . . . designed to
trick the Buyers about the value of [the property]."). These
exceptions are established based upon the particular facts of the
case. See id. As stated earlier, the circumstances of the
individual allegedly fraudulent acts are unclear from the face of
the Second Amended Complaint. Therefore, assuming that PMCC's
argument is legally correct, the Court, applying the
Rule 12(b)(6) standard, cannot evaluate the applicability of either
the general rule or the noted exceptions at this stage of the
PMCC's final argument concerns whether Plaintiffs can state a
claim under the ECOA where loans were alleged to be granted on
the basis of race rather than denied. See PMCC Memorandum at 19.
Under the ECOA, "[i]t shall be unlawful for any creditor to
discriminate against any applicant, with respect to any aspect of
a credit transaction . . . on the basis of race, color,
religion, national origin, sex or marital status, or age
(provided the applicant has the capacity to contract)."
18 U.S.C. § 1691(a). This language supports the interpretation that the
grant of loans in a predatory manner is actionable under the
However, PMCC points the Court to the following language:
For purposes of this subsection, the term "adverse
action" means a denial or revocation of credit, a
change in the terms of an existing credit
arrangement, or a refusal to grant credit in
substantially the amount or on substantially the
terms requested. Such term does not include a refusal
to extend additional credit under an existing credit
arrangement where the applicant is delinquent or
otherwise in default, or where such additional credit
would exceed a previously established credit limit.
15 U.S.C. § 1691(d)(6).
Viewed in isolation, this language suggests that only certain
narrow transactions may be considered under the ECOA. However,
The Court interprets this language in light of the entire
statute. Yerdon v. Henry, 91 F.3d 370, 376 (2d Cir. 1996) ("the
interpretation of a statute requires consideration of the
language of the relevant provision in conjunction with the entire
statute"). The subsection referred to in the above quoted
language deals with the circumstances in which a credit
[260 F. Supp.2d 541]
against whom adverse action is taken shall be entitled to a
statement of reasons for such action from the creditor."
15 U.S.C. § 1691(d)(2) (emphasis added). Therefore, the language
contained in Section 1691(d)(6) does not alter the expansive
language contained in § 1691(a). "By the plain language of
the provision, [ECOA] protection is not limited to those
applicants who were rejected." Hargraves v. Capital City Mortg.
Corp., 140 F. Supp.2d 7, 22 (D.D.C. 2000). As such, this specific
portion of the Second Amended Complaint would withstand a
Rule 12(b)(6) motion.
D. Current Lenders.
Plaintiffs allege that the Current Lenders were unjustly
enriched by purchasing Plaintiffs' mortgage notes on the
secondary market. By way of background, in the Court's September
6, 2002, Order, leave to amend was denied on the basis that these
Current Lenders were improperly joined under Fed R. Civ. P. 20.
At the reconsideration hearing held on January 6, 2003, the Court
expressed doubt that Plaintiffs could state a valid claim against
the Current Lenders and directed Plaintiffs, in connection with
any renewed motion to amend the complaint, to provide briefing on
this issue. After reading the briefing provided by the parties on
the issue, the Court concludes that Plaintiffs cannot articulate
a claim for unjust enrichment that could withstand a
Rule 12(b)(6) motion to dismiss.
1. Unjust Enrichment and the Holders in Due Course Doctrine.
Unjust enrichment derives from the equitable principle "that a
person shall not be allowed to enrich himself unjustly at the
expense of another. . . ." Miller v. Schloss, 218 N.Y. 400, 407,
113 N.E. 337 (1916). The courts apply this principle to create
"an obligation. . ., in the absence of any agreement, when and
because the acts of the parties or others have placed in the
possession of one person money, or its equivalent, under such
circumstances that in equity and good conscience [s]he ought not
to retain it." Id. "A conclusion that one has been unjustly
enriched is essentially a legal inference drawn from the
circumstances surrounding  the transfer of property and 
the relationship of the parties." Sharp v. Kosmalski, 40 N.Y.2d 119,
123, 386 N.Y.S.2d 72, 351 N.E.2d 721 (1976). The Court may
reach this legal conclusion "through the application of
principles of equity." Id. However, the Court does not reach this
If the Current Lenders are properly considered holders in due
course of the mortgage notes, no equitable claim may be asserted
against them. See Marine Midland Bank-New York v. Graybar Elec.
Co., Inc., 41 N.Y.2d 703, 710, 395 N.Y.S.2d 403, 363 N.E.2d 1139
(1977); see also New York Uniform Commerical Code ("N.Y.U.C.C.")
§ 3-306(a) (McKinney 2001) (holder in due course is free of
The holder in due course doctrine . . . has as its
objective encouraging and facilitating the ready
transaction of negotiable instruments, central to our
credit economy; people can rely on the fact that
negotiable instruments in the hands of good-faith
purchasers will be paid according to their tenor and
intent and not paid otherwise. Holder in due course
status advances that objective by providing that
persons in that category take free of virtually all
claims and defenses.
Hartford Acc. & Indem. Co. v. American Exp. Co., 74 N.Y.2d 153,
158-159, 544 N.Y.S.2d 573, 542 N.E.2d 1090 (1989) (citation
A holder in due course is defined as a(1) holder (2) of a
negotiable instrument (3) who took it for value, (4) in good
faith, and (5) without notice that it is overdue or has
[260 F. Supp.2d 542]
been dishonored or of any defense against or claim to it on the
part of another. N.Y. U.C.C. 3-302 (McKinney 2001).
"Satisfaction of these requirements is all that is necessary for
a payee to obtain the special protections of a holder in due
course." Hartford Acc. & Indem., 74 N.Y.2d at 159,
544 N.Y.S.2d 573, 542 N.E.2d 1090.
The UCC defines a "holder" as "a person who is in possession
of . . . an instrument. . ., issued or indorsed to him or to his
order or to bearer or in blank." N.Y. UCC § 1-201(20)
(McKinney 2001). There is no dispute that the Current Lenders are
holders of Plaintiffs' mortgage notes. Conversely, substantial
dispute exists as to whether these mortgage notes constitute
A negotiable instrument "must . . . be signed by the maker or
drawer; . . . contain an unconditional promise or order to pay a
sum certain in money and no other promise, order, obligation or
power given by the maker or drawer except as authorized by this
Article; . . . be payable on demand or at a definite time;
and . . . be payable to order or to bearer." Id.
§ 3-104(1). "A writing which complies with the
requirements of this section is. . . . a "note" if it is a
promise other than a certificate of deposit." Id.
Plaintiffs refer the Court to series of cases for the
proposition that, under New York law, "a note given in connection
with a mortgage generally is not a negotiable instrument." P
& K Marble, Inc. v. LaPaglia, 147 A.D.2d 804, 537 N.Y.S.2d 682,
683 (3d Dep't 1989); United States v. Bowman Poultry Farms,
Inc., No. 92-CV-80S, 1994 WL 577524, at *7 n. 1 (W.D.N.Y. Sept.
30, 1992); see also Felin Assoc. Inc. v. Rogers, 38 A.D.2d 6,
326 N.Y.S.2d 413, 415 (1st Dep't 1971). Despite the strong language
of these cases, there are certainly cases that have found a
mortgage note to be negotiable. See, e.g., Slutsky v. Blooming
Grove Inn, Inc., 147 A.D.2d 208, 542 N.Y.S.2d 721, 723 (2d Dep't
1989) ("The note secured by the mortgage is a negotiable
instrument. . . ."); In re AppOline.com, Inc., 285 B.R. 805,
817-818 (Bkrtcy.E.D.N.Y. 2002). In fact, as stated in
AppOline.com, the core inquiry comprises an examination of
whether a note contains an unconditional promise to pay a sum
certain or an impermissible promise. 285 B.R. at 818; see also P
& K Marble, 537 N.Y.S.2d at 683. Application of this
AppOline.com analysis differentiates Plaintiffs' cited cases from
the circumstances at hand. In fact, examination of the relevant
mortgage notes renders Plaintiffs' cases wholly unpersuasive.
By way of example, the P & K Marble court, applying the
required analysis, held that the note at question in that case,
where the note and mortgage were a single document, "contain[ed]
numerous promises, such as to keep the mortgaged property
insured, which are not authorized by UCC article 3." 537 N.Y.S.2d
at 683. In the instant case, all of the mortgage notes, as
alleged, are separate and distinct from the actual mortgages.
Moreover, Current Lender Chase Manhattan Mortgage Corp. has
submitted, under seal, the mortgage notes of six named Plaintiffs
from the Second Amended Complaint (there are thirty-two total
Plaintiffs), including Maxine and Terry Wilson. See Chase
Manhattan Mortgage Corp. Exhibit D. (The Court may consider this
submission in connection with a Rule 12(b)(6) inquiry because the
Second Amended Complaint references and relies upon the notes.
See Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42,
47-48 (2d Cir. 1991).)
The Court has closely examined this submission. The mere fact
that these mortgage notes refer to the corresponding mortgages
does not invalidate its status as a negotiable instrument. See
U.C.C. § 3-105
[260 F. Supp.2d 543]
("A promise or order otherwise unconditional is not made
conditional by the fact that the instrument. . . . states that
it is secured, whether by mortgage, reservation of title or other
wise. . . ."). In all other respects, the proffered mortgage
notes meet the requirements of a negotiable instrument. They were
signed, contain an unconditional promise to pay a sum certain in
money, and contain no other promise, order, obligation or power.
See N.Y. U.C.C. § 3-104(1).
The submission contains the notes for six of the thirty-two
Plaintiffs in the Second Amended Complaint. The Second Amended
Complaint alleges that the Lenders, in drafting these mortgage
notes, "followed the underwriting requirements set forth by these
Current Lenders, had open lines of credit from these Current
Lenders and were not required to submit the loan applications for
pre-approval to these Current lenders." Second Amended Complaint
¶ 109. This language suggests typicality and commonality
amongst all of the mortgage notes. It is also notable that, after
Chase Manhattan Mortgage Corp. submitted these representative
mortgage notes, Plaintiffs' have not come forward to argue that
these notes are not typical or representative of all of the notes
at issue.*fn7 Therefore, based upon the submissions of the parties,
the Court has no reason to doubt that these proffered negotiable
instruments are representative of all of the mortgage notes.
Continuing through the analysis of holder in due course status,
the Court considers whether the Current Lenders took the
instruments for value, Plaintiffs allege that the "notes held by
the Current Lender[s] . . . are grossly over-inflated due to the
practices described above." Id. ¶ 131. According to the
Second Amended Complaint, the loans were inflated at the time
they were formed and then purchased for value, either at closing
or on the secondary market. Id. ¶¶ 114-116, 124-127, 130.
There is no allegation that the mortgage notes themselves were
acquired for less than their fair market value, based upon the
value of the underlying promise to pay. Therefore, the Court
concludes that, based upon the allegations of the Second Amended
Complaint, the notes were purchased for value.
With regard to good faith, the question, under New York Law is
not whether the Current Lenders "[sh]ould have known, or would
have inquired concerning the alleged" malfeasance by the Sellers
and Lenders, "but rather, the inquiry is what [the Current
Lenders] . . . actually knew." Chemical Bank of Rochester v.
Haskell, 51 N.Y.2d 85. 92, 432 N.Y.S.2d 478, 411 N.E.2d 1339
(1980). "If [the Current Lenders] did not have actual knowledge
of some fact which would prevent a commercially honest individual
from taking up the instruments, then its good faith was
sufficiently shown." In the Second Amended Complaint, there is no
allegation that the Current Lenders had actual knowledge of any
facts that would violate the above quoted standard.*fn8
Finally, the Court must consider whether the Current lenders
possessed notice that the mortgage notes were overdue,
dishonored, or subject to any defense against or claim.
Plaintiffs allege that,
[260 F. Supp.2d 544]
with regard to those Current Lenders that arranged for assignment
of mortgage notes prior to or at the closing on Plaintiffs'
homes, a "fair inference" may be drawn that they had knowledge of
the fraud and malfeasance attributed to the Sellers and Lenders.
See Plaintiffs' Reply Brief 8-9. To support this proposition,
Plaintiffs rely upon Associates Home Equity Serv., Inc. v. Troup,
343 N.J. Super. 254, 270, 778 A.2d 529 (2001). Assuming arguendo
that Troup presents a valid statement of the law, the case does
not aid the Court's analysis.
"Notice" under the holder in due course provision, N.Y. U.C.C.
§ 3-302(1), means "actual knowledge." Chemical Bank, 51
N.Y.2d at 92, 432 N.Y.S.2d 478, 411 N.E.2d 1339; see also Indyk
v. Habib Bank Ltd., 694 F.2d 54, 57 (2d Cir. 1982) ("Under New
York law notice of defenses means actual, subjective knowledge of
defenses."). Plaintiffs have failed to plead actual knowledge in
the Second Amended Complaint. Not once, in the memoranda
regarding the instant motion, do Plaintiffs argue that they can
allege actual knowledge. Instead, Plaintiffs rely upon the
argument that the alleged circumstances can create an inference
"that . . . some of the Current Lenders participated in imposing
the terms of at least some of the over-inflated loans."
Plaintiffs' Reply Memorandum at 9. However, even giving this
argument full persuasive credit, it still fails to articulate any
allegation that the Current Lenders had actual knowledge of any
claims or fraud. Cf. D.H. Cattle Holdings Co. v. Kuntz,
165 A.D.2d 568, 568 N.Y.S.2d 229, 230-231 (3d Dep't 1991) ("[I]t is
clear that a holder is under no duty to investigate the status of
a contract underlying a note even when there exists suspicious
circumstances which might induce a prudent banker to do so.").
2. Necessary Parties Under Fed R. Civ. P. 19(a).
Plaintiffs also argue that "the Current Lenders must be joined
because, without their presence, complete relief cannot be
afforded among those already parties." Plaintiffs' Reply
Memorandum at 10. In support of this argument Plaintiffs rely
heavily upon State of New York v. Harris Home Design, No. 88 CIV.
4086, 1989 WL 88690 (S.D.N.Y. Aug. 2, 1989) (Kram, J.). Id. The
Court declined to adopt this rationale in its January 6, 2003,
decision. In the context of the instant motion, Plaintiffs have
advanced no persuasive reasons to alter this decision. As such,
the Court incorporates that decision into this Order. However,
for the purpose of clarity, the Court will synopsize its
The Court declines to embrace Plaintiffs' argument that
Rule 19(a) allows the joinder of a claim against a defendant whether
or not it can state a valid claim. As ably stated in Defendant
Fleet Mortgage Corporation's Memorandum: "There is simply nothing
in Rule 19 itself a joinder rule to suggest that
it can serve as a basis for relief against a party as to which no
substantive claim has been asserted." Fleet Mortgage
Corporation's Memorandum at 8. Moreover, to the extent that Judge
Kram's decision in Harris Home suggests otherwise, the Court
declines to adopt that decision's rationale.*fn9 In short, the Court
concludes that Plaintiffs cannot, via Rule 19(a), join the
Current Lenders where there is no underlying claim.
[260 F. Supp.2d 545]
For the foregoing reasons, Plaintiffs' motion for leave to
amend the complaint is DENIED. With regard to the Lenders, this
dismissal is without prejudice to file a renewed motion for leave
to amend the complaint. See Luce v. Edelstein, 802 F.2d 49, 56
(2nd Cir. 1986) ("Complaints dismissed under Rule 9(b) [for
insufficient particularity] are `almost always' dismissed with
leave to amend.") (quoting 2A J. Moore & J. Lucas, Moore's
Federal Practice, ¶ 9.03 at 9-34 (2nd ed. 1986)). The
requirement for a pre-motion conference is WAIVED for the renewed
motion for leave to amend the complaint. Any such renewed motion
shall (1) be served and filed within thirty days of this Order
(2) include a copy of the proposed Third Amended Complaint and
(3) include a memorandum, not to exceed twenty pages, discussing
how the concerns detailed in this order have been addressed.
Plaintiffs may not renew their motion with respect to the
Current Lenders. As discussed in Section II.B. supra, Plaintiffs
have not provided the Court with any indication that they could
ever articulate a valid claim against the Current Lenders. As
such, any further motions for leave to amend as to the Current
Lenders would be futile. See Ruffolo v. Oppenheimer & Co.,
987 F.2d 129, 131 (2d Cir. 1993) (district court is within its
discretion to deny leave to amend where amendments would not
serve any purpose); Health-Clem Corp. v. Baker, 915 F.2d 805, 810
(2d Cir. 1990) ("where . . . there is no merit in the proposed
amendments, leave to amend should be denied").