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WILSON v. TOUSSIE

April 25, 2003

MAXINE WILSON, TERRY WILSON, ALFREDO SMITH, SHARON SMITH, AND JUAN QUINTANILLA, INDIVIDUALLY AND AS CLASS REPRESENTATIVES, PLAINTIFFS,
v.
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.

ORDER

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 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 the Complaint.

I. BACKGROUND

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.

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 York area.

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 Sellers.
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 Department of 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 applications." Id.

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 Current Lenders.
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) 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.

II. DISCUSSION.

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 ...


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