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Council v. Better Homes Depot

August 16, 2006

KIMBERLY COUNCIL AND LINDA COUNCIL, PLAINTIFFS
v.
BETTER HOMES DEPOT, INC., ET. AL., DEFENDANTS.



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

MEMORANDUM & ORDER

Plaintiffs Linda Council and Kimberly Council ("Councils" or "Plaintiffs") filed a complaint on December 22, 2004, pleading ten causes of action relating to their purchase of a home in 1999, including multiple acts of fraud, professional malpractice, and violation of the New York State Deceptive Practices Act under General Business Law § 349 ("GBL § 349"), the federal Equal Credit Opportunity Act ("ECOA") under 15 U.S.C. § 1691, the federal Truth in Lending Act ("TILA") as codified in 15 U.S.C. § 1601, and the federal Fair Housing Act ("FHA"). (See Compl. at 3-8.)

Some of the Defendants now move to dismiss pursuant to Rules 12(b)(1)*fn1 of the Federal Rules of Civil Procedure for the dismissal of Plaintiff's complaint and co-defendants' cross-claims against Better Homes Depot ("BHD"), Eric Fessler ("Fessler"), Madison Home Equities, Inc. ("MHE"), Nadine Malone ("Malone"), and Paul Yeager ("Yeager"). Defendant Steven Weinstock ("Weinstock") joins this motion.*fn2 These Defendants move for dismissal pursuant to the Rooker-Feldman doctrine, the doctrine of res judicata, and expired statute of limitiations. (Joint Mem. L. Supp. Mot. Dismiss ("Def. Mot.") at 1-2; Aff Supp. Def. Weinstock's Joinder Mot. Dismiss at 2-3.)*fn3

For the reasons set forth below, Movants' motion to dismiss is DENIED.

I. BACKGROUND

The facts as stated in the Complaint are deemed true for the purposes of this motion. See Atlantic Mut. Ins. Co. v. Balfour Maclaine Int'l Ltd., 968 F.2d 196, 198 (2d Cir. 1992). Plaintiffs are joint owners of residential real property located at 102 Etna Street, Brooklyn, New York. (Compl. ¶ 5.) The Councils' mortgage was originated by the lender MHE and insured by co-defendant United States Department of Housing and Urban Development ("HUD"). The mortgage was later assigned to Chase Mortgage Company West ("Chase"). (Id. at ¶ 23.)

In or around August 1998, Linda Council and her daughter, Kimberly Council, African-American prospective homebuyers, contacted BHD about becoming first-time homeowners. (Compl. at ¶¶ 34-35.) Linda Council spoke with a BHD broker who endeavored to convince her that she should purchase a property far more expensive than what she could in fact afford. (Id. at ¶¶ 37-38.)

The BHD broker persuaded the Councils to purchase a property located at 102 Etna Street, in Brooklyn, for $203,477. (Id. at ¶¶ 49, 76.) The sale price as represented to the Councils was based on a fraudulently inflated appraisal that MHE had commissioned. (Id. at ¶¶ 63-68.) BHD had purchased the house less than six months earlier at $131,000, and had illegally converted the property to a two-family home without permit or inspections. (Id. at ¶¶ 56-57, 65.)

BHD referred Plaintiffs to MHE, a lender that BHD routinely used to further BHD's lending scheme. (Id. at ¶ 45.) In the application for mortgage insurance submitted to HUD, BHD and MHE falsified Plaintiffs' income, claiming that the Councils earned more than they actually did. (Id. at ¶¶ 47-48.) Plaintiffs purchased 102 Etna Street through a mortgage loan originated by MHE and insured by HUD. (Id. at ¶ 76-78.) At the closing on January 18, 1999, attorney Steven Weinstock appeared and, in collusion with BHD and MHE, falsely stated that he represented Plaintiffs and that he had reviewed the closing documents. (Id. at ¶¶ 69-75.) After the closing, the note and mortgage originated by MHE was assigned to Chase. (Id. at ¶ 92.)

In August 2002, Chase brought a foreclosure action against Plaintiffs in Kings County Supreme Court; however, the Councils were not served the Summons and Complaint. (Aff. Pl. Kimberly Council Opp. Joint Mot. Dismiss ("Council Aff.") at ¶ 6.) When the Councils did not appear in court, the court issued a default Judgment of Foreclosure and Sale. After learning of the foreclosure by default, the Councils consulted with a bankruptcy lawyer and filed a bankruptcy petition, which stayed the state court foreclosure action and sale of the home. (Id. at ¶ 8.) The Councils filed the instant complaint on December 22, 2004.

HUD brought an earlier motion to dismiss under Fed. R. Civ. P. 12(b)(1) and 12(b)(6). HUD's motion was denied by the court on January 13, 2006. Defendant Chase was dismissed under a stipulation signed by all parties and ordered by the court on March 27, 2006. That stipulation ratified a settlement agreement signed by Chase and the Plaintiffs on August 25, 2005. (See Docket Entry No. 55.) Under the settlement agreement, Chase agreed to reinstate Council's mortgage upon payment of a lump sum of $5,000, representing a compromise by Chase of the actual arrearage owed under the Mortgage. (Id.)

II. STANDARD OF REVIEW

In reviewing a motion to dismiss for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1), the court must accept all material factual allegations in the complaint as true. See Atlantic Mut. Ins., 968 F.2d at 198. "Dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no sets 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 "a district 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.'" Aurecchoine v. Schoolman Transp. System, Inc., 426 F.2d 635, 638 (2d Cir. 2005) (internal citations omitted). 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).

III. DISCUSSION

Movants submit that the court lacks subject matter jurisdiction in this case. First, the Movants argue that the doctrine of res judicata bars Plaintiffs' claims against them because Chase previously obtained a judgment of foreclosure and sale against the Councils in state court in 2003. (Def. Mot. at 2.) Movants further contend that res judicata prevents Plaintiffs from attacking the validity of their loan because Linda Council ratified the loan in her confirmed Chapter 13 bankruptcy plan, and prevents Chase from asserting cross-claims against Madison. (Def. Mot. at 2.)

Next, Movants argue that the court does not have subject matter jurisdiction pursuant to the Rooker-Feldman doctrine. (Def. Mot. at 1-2.) Finally, Movants state that the alleged violations of the TILA, ECOA, the FHA, and GBL § 349 are time-barred by their respective statutes of limitation. (Def. Mot. at 2.) I consider each of these arguments in turn.

A. Preclusion

The Movants raise three grounds for dismissal on res judicata grounds. The Movants argue that the Plaintiffs are estopped from their claims because of a Judgment of Foreclosure and Sale issued by a New York state court against the plaintiffs, and Linda Council's Chapter 13 bankruptcy plan. The Movants further argue that Chase is foreclosed from making cross-motions because of the state Judgment. Although the term "res judicata" is often used broadly to refer to both claim preclusion and issue preclusion, they are distinct doctrines. I refer to claim preclusion as res judicata and issue preclusion as collateral estoppel. Where applicable, I consider the Movants' arguments under both res judicata and collateral estoppel.

Res judicata, or claim preclusion, precludes claims where "(1) the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffs or those in privity with them; [and] (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action." Monahan v. New York City Dep't of Corrections, 214 F.3d 275, 284 (2d. Cir. 2000).

Collateral estoppel, or issue preclusion, bars re-litigation of an issue of law or fact that was "raised, litigated, and actually decided by a judgment in a prior proceeding between the parties, if the determination of that issue was essential to the judgment, regardless of whether or not the two proceedings are based on the same claim." Nat'l Labor Relations Bd v. United Technologies Corp., 706 F.2d 1254, 1260 (2d Cir. 1983).

A federal court must apply the rules of preclusion of the state in which the prior judgment was rendered. See, e.g., Sullivan v. Gagnier, 225 F.3d 161, 166 (2d Cir. 2000); Kremer v. Chem. Constr. Corp., 456 U.S. 461, 481-82 (1982). 28 U.S.C. § 1738 requires federal courts to give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State from which the judgments emerged. New York has adopted a transactional test for res judicata issues, which defines a claim or cause of action as coterminous with the underlying factual transaction. Smith v. Russell Sage College, 54 N.Y.2d 185, 192-93 (N.Y. 1981). "A 'cause of action' may denote one of several separately stated claims in a pleading based on the same congeries of facts but related to different legal theories of recovery." Id. (quoting Reilly v. Reid,45 N.Y.2d -24, 29 (N.Y. 1978)).

1. State Judgment of Foreclosure and Sale

Movants argue that Plaintiffs "had the opportunity to interpose an answer in the foreclosure action, and to assert affirmative defenses and/or counterclaims and/or third-party claims sounding in fraud, conspiracy to commit fraud, and alleged violations of the TILA, the ECOA, and N.Y. GBL ยง 349." (Def. Mot. at 12.) The Movants argue that the relief the Councils seek is inconsistent with the state court's judgment. Although the Movants label this argument as res ...


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