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M&T Mortgage Corp. v. White

January 9, 2006

M&T MORTGAGE CORP., PLAINTIFF,
v.
LEO WHITE, CRIMINAL COURT OF THE CITY OF NEW YORK, NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY PARKING VIOLATIONS BUREAU, THE UNITED STATES OF AMERICA, PEOPLE OF THE STATE OF NEW YORK, CITY OF NEW YORK DEPARTMENT OF FINANCE, FAIRTAX, PATRICIA SYKES, DEFENDANTS.
LEO WHITE, THIRD PARTY PLAINTIFF,
v.
BETTER HOMES DEPOT, INC., ERIC FESSLER, INDIVIDUALLY AND IN HIS CAPACITY AS PRESIDENT OF BETTER HOMES DEPOT, INC., GLENN JOHN, MADISON HOME EQUITIES, INC., NADINE MALONE, INDIVIDUALLY AND IN HER CAPACITY AS PRESIDENT OF MADISON HOME EQUITIES, MICHAEL RINDENOW, PAULA C. YEAGER, NEAL H. SULTZER, ESQ., ACKERMAN, RAPHAN & SULTZER, PARAGON ABSTRACT, INC., GAIL S. ZUCKER, CLA, INC., CHRISTOPHER LIANO, ROBERT DOSCH, C. PETER DAVID, ESQ., AND THE UNITED STATES DEPT. OF HOUSING AND URBAN DEVELOPMENT THIRD PARTY DEFENDANTS.



The opinion of the court was delivered by: Garaufis, United States District Judge.

MEMORANDUM & ORDER

Third Party Plaintiff Leo White ("Third Party Plaintiff" or "White") seeks declaratory judgment under the Administrative Procedure Act ("APA"), 5 U.S.C. § 203, and the Declaratory Judgment Act, 28 U.S.C. § 2201, that Third Party Defendant the United States Department of Housing and Urban Development ("Third Party Defendant" or "HUD") has a legal obligation under the Fair Housing Act ("FHA"), 42 U.S.C. §§ 3601-3608, "affirmatively to further" fair housing by exercising due diligence in issuing mortgage insurance pursuant to the National Housing Act, 12 U.S.C. §§ 1708-1709. (Compl. ¶¶ 151-52.)

Third Party Defendant now moves to dismiss the complaint against it pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction, and Fed. R. Civ. P. 12(b)(6) for failure to state a claim. For the reasons set forth below, HUD's motion is DENIED.

I. BACKGROUND

The facts as stated in the Complaint are deemed true for the purposes of this motion. White is the owner of residential real property located at 164 Macon Street, Brooklyn, New York. (Compl. ¶ 4.) HUD insured White's mortgage of this property, which was originated by the lender Madison Home Equities, Inc. ("MHE"), and then assigned to M&T Mortgage Corporation ("M&T"). (Id. ¶ 1.) The underlying action is a mortgage foreclosure proceeding commenced by M&T against White. (Id.) White instituted the instant action against HUD for its role in an alleged conspiracy to defraud White and other minority, first-time homebuyers in a predatory lending scheme. (Id.)

A. Allegations of Wrongdoing by Private Third Party Defendants

In his Complaint, White makes the following allegations regarding private (not HUD) Third Party Defendants:

Third Party Defendants Better Homes Depot, Inc. ("BHD"), MHE, and BHD's and MHE's owners and operators are alleged to be the principal architects of a:

widespread conspiracy to commit fraud, in which they have enlisted the other private third party defendants as their co-conspirators in a common plan and agreement whereby they would target uninformed, inexperienced minorities embarking on the first-time purchase of a home and . . . would fraudulently induce them to buy property from BHD at grossly inflated prices, financed by [Fair Housing Act]-insured mortgages supplied by MHE. (Compl. ¶ 22.) In August 1998, White, then a 19 year-old African-American male who earned $24,000 per annum as a doorman, contacted BHD about becoming a first-time homeowner. (Id. ¶¶ 22-23, 35.) He spoke with a BHD broker who endeavored to convince White that he should purchase a property far more expensive than what White could in fact afford. (Id. ¶¶ 23-29.)

The BHD broker persuaded White to purchase a property located at 164 Macon Street, in the Bedford-Stuyvesant section of Brooklyn. (Id.) BHD falsely represented that the property was worth at least $299,000, and was a "legal four-family" home from which he could generate rental income. (Id. ¶¶ 44-48.) In fact, BHD had purchased 164 Macon Street six weeks earlier for $150,000. The value of the house, as represented to White, was based on a fraudulently inflated appraisal MHE had commissioned. Upon purchase, BHD had illegally converted the property to a four-family home without permit or inspections. As a result, the home could not be legally rented to others. (Id. ¶¶ 47-49.)

BHD referred White to MHE, a lender that BHD routinely used to further BHD's lending scheme. (Id. ¶¶ 9-10, 22, 31, 35-38.) In the application for mortgage insurance submitted to HUD, BHD and MHE falsified White's income, claiming that he eared more than he did. (Id. ¶¶ 10, 37, 54, 58, 60-70, 117-118, 120.) White purchased 164 Macon Street through a mortgage loan in the amount of $296,555, originated by MHE and insured by HUD. (Id. ¶ 53.) At the closing on March 6, 1999, an attorney appeared who, in collusion with BHD and MHE, falsely stated that he represented White, and that he had reviewed the closing documents. (Id. ¶¶ 51- 52.) At the closing, the note and mortgage originated by MHE was assigned to plaintiff M&T. (Id. ¶ 86.) M&T brought a foreclosure action against White in New York Supreme Court, which led to the instant action. (White Mem. Opp. Mot. Dismiss 21.)

B. Allegations of Wrongdoing by HUD

Pursuant to the National Housing Act ("NHA"), 12 U.S.C. §§ 1708-1709, the Secretary of HUD is authorized to insure mortgages to home buyers who wish to purchase houses but who cannot afford the interim financing to do so. HUD's regulations require that HUD, before accepting or rejecting a mortgage insurance application, review the application to ensure that the mortgage "amount does not exceed the maximum permissible for the area," that the package "include[s] a certified copy of the mortgage, a property appraisal, mortgage insurance application, and the mortgagee's underwriter certification," and that the "mortgage was not in default" when submitted for insurance. (See HUD Mem. Supp. Mot. Dismiss Ex. 2 ("Shaffer Decl.") ¶ 4 (quoting 24 C.F.R. § 203.255(c)(1)-(7))); see also 12 U.S.C. § 1709. Through the Direct Endorsement program, the NHA permits HUD to allow pre-approved lenders to perform appraisals, 12 U.S.C. § 1708(e)(3), and HUD's regulations permit Direct Endorsement lenders to "issue mortgages to be insured by HUD, and allow the sale transaction to close, without first submitting paperwork to HUD." (Shaffer Decl. ¶ 4, citing 24 C.F.R. §§ 203.3, 203.5(a).)

White obtained a loan from MHE issued as part of HUD's Direct Endorsement process. (Shaffer Decl. ¶¶ 2-3.) HUD approved MHE as a Direct Endorsement lender beginning in 1994. (Id.) Over a year before this transaction, HUD had sanctioned MHE "for abuse of the FHA loan program by allowing false documents to be submitted which enabled home buyers to borrow beyond their means." (Compl. ¶ 71.)

White alleges that HUD is aware that predatory brokers steer victims to predatory lenders, who inflate the purchaser's income and use inflated appraisals of property for the HUD mortgage insurance application. (Id. ¶ 100.) HUD has identified the area in which White's property is located "as the nation's number one 'hot zone' of the practice known as predatory lending." (Id. ¶ 99.) However, White maintains, HUD takes no steps to prevent predatory lending schemes, such as warning purchasers of the risks or signs of a predatory sale or loan, ensuring the inclusion of the mandatory "FHA rider" in the contract of sale setting forth the true appraised value of the home, or engaging in due diligence of mortgage insurance applications. (Id. ¶ 101, 103-6.)

In this lawsuit, White contends that HUD's "rubber-stamping" of his mortgage insurance application was a necessary element of a transaction that, had due diligence been exercised by HUD, would have been revealed as a predatory lending scheme targeting first-time minority homebuyers. (Id. ¶ 57.) White further claims that HUD's alleged failure to consider the racial impact of its actions in approving the mortgage insurance applications of minority, first-time homebuyers without meaningful review violates the Fair Housing Act's requirement that HUD act "affirmatively to further" fair housing. 42 U.S.C. § 3608(e)(5). White seeks declaratory judgment to this effect, which he alleges will assist his defense in the concomitant M&T foreclosure proceeding.

II. STANDARD OF REVIEW

In reviewing a motion to dismiss for failure to state a claim brought pursuant to Fed R. Civ. P. 12(b)(6), the court must accept all factual allegations in the complaint as true and draw all reasonable inferences from those allegations in the light most favorable to the plaintiff. See Albright v. Oliver, 510 U.S. 266, 268 (1994); Burnette v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999). In deciding such a motion, the court may take into account documents referenced in the complaint, as well as documents that are in the plaintiff's possession or that the plaintiff knew of and relied on in filing the suit. See Brass v. Am. Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993). The complaint may be dismissed only if "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Hoover v. Ronwin, 466 U.S. 558, 587 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). In deciding such a motion, the "issue is not whether a plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims." Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (internal quotations omitted).

Similar to a motion for failure to state a claim, when a court reviews a motion for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1), it accepts as true all material factual allegations in the complaint. Atlantic Mut. Ins. Co. v. Balfour Maclaine Intern. Ltd., 968 F.2d 196, 198 (2d Cir. 1992) (internal citations omitted). "Dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief." Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir. 2000). The plaintiff bears the burden of proving by a preponderance of the evidence that subject matter jurisdiction exists, and "adistrict court may properly dismiss a case for lack of subject matter jurisdiction under Rule 12(b)(1) if it 'lacks the statutory or constitutional power to adjudicate it.'" Aurecchione v. Schoolman Transp. System, Inc., 426 F.3d 635, 638 (2d Cir. 2005) (quoting Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)). In contrast to a 12(b)(6) motion for failure to state a claim, when deciding a 12(b)(1) motion for dismissal based on lack of subject matter jurisdiction, the court should not draw "argumentative inferences" in favor of the party asserting jurisdiction. See Atlantic Mut., 968 F.2d at 198 (internal citations omitted).

Where, as here, a motion to dismiss is made pursuant to both Rules 12(b)(1) and 12(b)(6), the jurisdictional motion must be considered first because if I dismiss the complaint for lack of subject matter jurisdiction, "the accompanying defenses and objections become moot and do not need to be determined." United States ex rel. Kreindler & Kreindler v. United Techs. Corp., 985 F.2d 1148, 1156 (2d Cir. 1993) (internal quotation and citation omitted); see also Magee v. Nassau County Med. Ctr., 27 F. Supp. 2d 154, 158 (E.D.N.Y. 1998) ("A court faced with a motion to dismiss pursuant to both Rules 12(b)(1) and 12(b)(6) must decide the jurisdictional question first because a disposition of a Rule 12(b)(6) motion is a decision on the merits and, therefore, an exercise of jurisdiction.").

III. DISCUSSION

A. Lack of Subject Matter Jurisdiction ...


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