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M&T Mortgage Corp. v. Miller

August 17, 2007


The opinion of the court was delivered by: Go, United States Magistrate Judge


In this action removed from state court, third-party plaintiffs Cedric and Elizabeth Miller (collectively the "Millers" or "plaintiffs") assert claims for fraud, conspiracy to commit fraud and violations of the New York Deceptive Practices Act, N.Y. Gen. Bus. Law § 349.*fn1 The Millers move for sanctions against third-party defendants Better Homes Depot, Inc. ("Better Homes") and Eric Fessler ("Fessler") (collectively the "Better Homes defendants") for their purported spoliation of evidence. Specifically, plaintiffs seek an order precluding the Better Homes defendants from opposing the Millers' central factual allegations and directing that those factual allegations should "be taken to be established for the purposes of the action" pursuant to Rule 37(b) of the Federal Rules of Civil Procedure.


In their Third-Party Complaint, the Millers allege that the Better Homes defendants engaged in a pattern and practice of fraudulently inducing first-time, low-income, minority home buyers to purchase houses at inflated prices. Among the factual misrepresentations alleged to have been employed by these defendants are that: 1) the prospective buyer would be able to rent one or more legal units in the property; 2) Better Homes was offering the property to the purchaser at fair or market price; and 3) Better Homes would undertake necessary repairs to the property prior to closing.

Specifically, the Millers allege that in December 1998, they contacted Better Homes to discuss the possibility of buying a house. See Answer and Amended Third Party Complaint ("Am. Compl.") (ct. doc. 38) at ¶ 35. The Millers expressed their concern to Glenn John, a Better Homes broker, that they could not afford to purchase a home. Id. at ¶ 36. To induce the Millers to buy a property at 1230 Troy Avenue, Brooklyn, New York, John told them that the purchase price was fair and reasonable, there was a rental unit on the property that would generate at least $1,200 per month, and all repairs would be completed before they moved in. Id. at ¶¶ 58, 60, 62. Although the Millers purchased the house for $219,000 on March 30, 1999, the current owner had purchased the house for $135,000 only six weeks earlier. Id. at ¶¶ 61, 98. In furtherance of the fraud, Better Homes obtained a fraudulent appraisal from third-party defendant CLA, Inc. valuing the property at the exact sale price of $219,000. Id. at ¶¶ 83-90.

In reality, the property was not a legal two-family dwelling with a legal rental unit. Id. at ¶¶ 59-60. Better Homes renovated the property by converting the two above-ground stories of the building into a single, duplex, residential unit and installing a separate residential unit in the previously unfinished basement. See Millers' Mem. in Support at 4 (ct. doc. 191-2). However, Better Homes neither filed the requisite applications and plans nor obtained the necessary permits or inspection sign-offs from the New York City Department of Buildings. See id. Although John told the Millers that extensive repairs would be completed before they moved in, Better Homes never made those repairs. Am. Compl. at ¶¶ 58, 71.

On or about June 29, 1999, Jules Polonetsky, Commissioner of the New York City Department of Consumer Affairs (the "DCA") commenced an enforcement action in the Supreme Court of the State of New York, New York County, against the Better Homes defendants for deceptive trade practices in the sale of residences. See Complaint, Polonetsky v. Better Homes Depot, Inc., Index No. 402602/99 ("Polonetsky Action") at ¶ 8 (attached as Exh. A to Millers' Reply Mem.) (ct. doc. 210-4). On or about August 10, 2000, the Polonetsky plaintiffs served the Better Homes defendants with a subpoena requiring the production of documents, including:

20. For each real estate transaction in which BHD acted as seller or as agent, documents disclosing the extent, scope, and specific nature of renovations or repairs of the subject property performed or paid for by BHD, the cost of materials, and the number of hours of labor expended on such repairs or renovations; if the repairs or renovations were performed by contractor(s), the name(s) and address(es) of the contractor(s) who performed the work; whether work performed by BHD or contractor, documents indicating whether such work was done by licensed contractor; all bills or invoices submitted to BHD relating to the work; and the amount paid by BHD for the work; any appraisals, inspection reports, engineer reports, or other expert opinion regarding the value or condition of the property; and all permits obtained from local authorities authorizing such work.

Millers' Reply Mem., Exh. B (ct. doc. 210-5). The Polonetsky Action was eventually settled in June 2003.

The Millers filed their initial Third-Party Complaint on October 2, 2002 and served the Better Homes defendants with their First Set of Interrogatories and Document Requests on November 6, 2003. Among their discovery requests were:

Interrogatory No. 17 and Document Request No. 20: List of addresses of properties which were available for sale by and/or through Better Homes or were being shown by Better Homes for sale during the period January 1, 1998 to December 31, 1999. For each property state and provide copies of all documents related to: . . .

B. Where Better Homes was the owner of the property and/or a contract vendee, state:

2. The amount paid by Better Homes for the house;

3. The name and address of the appraiser, if any, retained by or on behalf of Better Homes prior to its purchase and/or contract of purchase;

4. The name and address of engineers, architects and/or home inspectors, whom/which visited and/or inspected the property prior to Better Homes' purchase or contract of purchase; . . . .

7. For any repairs, renovation, or other work performed by or on behalf of Better Homes to the property prior to its sale provide:

a. reports and/or notes prepared;

b. A description of the work performed;

c. The name and address of the person(s) or entities that performed the work;

d. The cost of such work;

e. The form of payment for the work and copy of such payment;

f. The date payment(s) were provided. Millers' Mem. in Reply, Exh. J at 10-11 (ct. doc. 210-13). The discovery requests were the focus of the Millers' motion to compel,*fn2 which was discussed at a conference held on March 16, 2004.

On February 2, 2005, this Court ordered Better Homes' former counsel, Borchert, Genovesi, LaSpina & Landicino ("Borchert, Genovesi"), to produce files concerning 36 properties sold by Better Homes that had been held by the firm in closed files with respect to the Polonetsky Action. See ct. doc. 112. Borchert, Genovesi withheld some of the documents in those files related to some of the properties, which the firm described in a privilege log, including "Profit/Expense Sheets," "Construction Cost Sheets" and "Closing Statements." See Millers' Mem. in Support, Exh. J (ct. doc. 191-13).

The Millers served Better Homes with a Second Set of Document Requests dated May 20, 2005 demanding that Better Homes produce documents relating to all its transactions between January 1, 1998 and May 31, 2001 which were listed in an attached schedule. Among those requests were:

4. Copies of the complete file maintained by BHD for each of the properties listed on Schedule A annexed hereto, where BHD was the seller and where the FHA insured loan was originated by ...

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