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Cullen v. Steinberg

June 22, 2010


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


I. Introduction

This action arises out of a loan made by defendants Ronald Steinberg, Richard Steinberg and David Steinberg to Wholistic Change, LLC, a corporation which had been formed for the purpose of obtaining the loan. Plaintiff Margaret Cullen was the President of Wholistic Change, LLC and conveyed to the corporation residential property at 653 Jacey Drive, Fort Lee, New Jersey that was used to secure the loan. Jason Steinberg (sued as Jayson Steinberg) is an attorney who represented lenders Ronald, Richard and David Steinberg in the loan transaction. Plaintiff claims a loss in the amount of the loan proceeds she alleges she never received and seeks treble damages based on claims of fraud, legal malpractice and usury.

The parties consented to my exercising plenary jurisdiction over this matter pursuant to 28 U.S.C. § 636(c), and the matter was tried before me, without a jury, on January 11 and 12, 2010. Based on the testimony and other evidence offered at trial and the parties' pre- and post-trial submissions, I make the following findings of fact and conclusions of law.

II. Findings of Fact

A. The Parties

1. At the time the action was commenced, plaintiff was a citizen of New Jersey. Plaintiff is the president of Wholistic Change, LLC, a corporation formed in New Jersey for the purpose of obtaining a loan from Ronald, Richard and David Steinberg.

2. Ronald Steinberg, Richard Steinberg and Jason Steinberg are citizens of New York; David Steinberg is a citizen of Florida. Ronald and Jason Steinberg are brothers, Richard Steinberg is their father and David Steinberg is their uncle. Ronald and Richard Steinberg are in the business of making loans secured by mortgages on real property to borrowers who are unable to obtain financing from conventional lenders. David Steinberg also sometimes contributes money to these loans. Jason Steinberg is an attorney licensed to practice in New York and handles the real estate aspect of the business, including representing Ronald, Richard and David Steinberg in loan transactions.

3. As of March 16, 2007, Wholistic Change, LLC was the owner of residential property conveyed to it by plaintiff (DX*fn1 12). On March 16, 2007, Ronald, Richard and David Steinberg, represented by Jason Steinberg, made a loan to Wholistic Change, LLC secured by this property.

B. Events Leading up to the March 16, 2007 Closing

4. In 2004, plaintiff received $1.9 million in compensation for her husband's murder in the 9/11 attacks on the World Trade Center. She invested some of the money in real estate, buying residential property at 653 Jacey Drive in Fort Lee, New Jersey in 2004, and at 1400 Outlook Avenue in the Bronx in 2006.

5. Plaintiff had an attorney for the financing and purchase of the New Jersey property and for the purchase of the Bronx property, which plaintiff bought without financing.

6. Plaintiff lived at the 653 Jacey Drive property from 2004 to January 2006, and again starting in late March 2007. In the interim she lived at 1400 Outlook Avenue in the Bronx.

7. At a party in December 2006, plaintiff met Maximo (Max) Almonte, who had gone to grammar school with her. Almonte initially told plaintiff he was a stock broker; plaintiff learned in May 2007 that he was actually a felon who had been convicted of real estate fraud. Almonte moved in with plaintiff at 653 Jacey Drive two days after meeting her at the party.

8. In late December 2006 or early January 2007, Almonte introduced plaintiff to Robert (Bob) Kotch, who, plaintiff later learned, had been convicted of mortgage fraud and had met Almonte while they were both in prison. Almonte took plaintiff to Kotch's office in Manhattan's Wall Street area to discuss plaintiff's involvement in a potential real estate business in which Kotch and plaintiff would buy foreclosed homes and resell them for a profit. Kotch represented to plaintiff that if she invested $100,000, she would be able to earn an additional $90,000 in a short amount of time. Plaintiff orally agreed to this transaction during their meeting. She told Kotch she did not have the cash but that she owned the 653 Jacey Drive property and that it was not subject to any mortgage. Kotch told plaintiff that he could arrange a $100,000 loan for her, secured by that property.

9. At some point before March 2007, plaintiff and Kotch had another meeting at which Kotch confirmed their plans to buy and sell foreclosed homes.

10. Plaintiff, possibly through Kotch, Almonte or a mortgage broker named Steve Gold, applied to Wachovia Bank and possibly to other conventional lenders for a loan backed by the 653 Jacey Drive property, but was unable to obtain a loan from these sources.

11. Kotch and/or Almonte had Gold, who operates under various company names, including "Be Approved," arrange a loan to plaintiff from Ronald, Richard and David Steinberg, purportedly to enable plaintiff to invest in the proposed business with Kotch.

12. Gold had brought the Steinbergs a few loan transactions previously and had known Ronald Steinberg for about a year. Ronald Steinberg had known Kotch since January 2007, when Gold introduced them, and the Steinbergs had loaned money to Kotch's companies four times. None of these loans had been paid off as of January 11, 2010. The Steinbergs did not know Kotch was a felon until receiving the complaint in this action.

13. Gold had told Ronald Steinberg that plaintiff needed money quickly but had not been able to obtain a conventional loan, and that she wanted to borrow the money through a corporation called Wholistic Change, LLC, secured by the property at 653 Jacey Drive. Gold also told Ronald Steinberg he would be paid back within six months.

14. Ronald Steinberg attempted to inspect the 653 Jacey Drive property a few days after speaking with Gold, but could not gain access to the property because it was located within a gated community.

15. Based on his view of the exterior of the community within which the 653 Jacey Drive property was located and a statement by Gold that plaintiff had paid $470,000 for the property, Ronald Steinberg agreed to lend Wholistic Change, LLC $275,000. Ronald Steinberg then contacted Jason Steinberg to set up a closing for the loan.

16. On or about March 13, 2007, Gold spoke with Jason Steinberg. He told Jason Steinberg that plaintiff wanted to take out the loan in order to go into business with Kotch, clean up her credit, and get some cash. Gold told Jason Steinberg that 653 Jacey Drive was an investment property.

17. Gold also ordered a title report on the property and sent it to Jason Steinberg. The title report identifies the prospective mortgagor as plaintiff, not Wholistic Change, LLC (DX 3).

18. Jason Steinberg scheduled the closing for March 16, 2007.

19. Neither plaintiff nor Wholistic Change, LLC filed any formal loan application with the Steinbergs.

20. On or around March 13, 2007, at the request of Jason Steinberg, plaintiff signed a letter on behalf of Wholistic Change, LLC, authorizing the disbursement of $104,000 from the loan proceeds to "Private Lenders" (DX 5), the company Kotch purportedly was going to use to buy and sell foreclosed homes in partnership with plaintiff. It is Jason Steinberg's practice to get written authorization from the borrower before a loan closing if any of the loan proceeds will be disbursed directly to third parties.

21. On or around March 13, 2007, plaintiff signed an agreement with Ellissa Liebowitz of Be Approved which stated that plaintiff agreed to pay Be Approved, the broker, three percent of the total loan amount (DX 6).

22. Both Jason and Ronald Steinberg understood the loan was being made to a corporation rather than an individual.

C. Background on Defendants' Lending Business

23. Ronald and Richard Steinberg, sometimes with contributions from David Steinberg, are in the business of making secured loans to borrowers who have been turned down by conventional lenders because of bad credit, bad payment history and/or lack of a demonstrable income. The Steinbergs' loans are typically one-year loans at 15% interest and three points, secured by real property. The Steinbergs do not require a formal application, make a credit inquiry or do a background check on borrowers. Rather, they look at the collateral and are willing to lend as long as the property's value exceeds the amount of the loan and they can get the first mortgage on the property. The Steinbergs find borrowers through repeat business and word of mouth. They lend primarily to corporations -- usually builders, bodegas, restaurants and other commercial entities -- but they understand they can make up to five loans to individuals each year without a special license. The Steinbergs claim to lend to individuals only when the property securing the loan is a primary residence, not an investment property. In 2006 and 2007, they made about 40 loans, for a total of around $4 to $5 million, per year.

24. Jason Steinberg regularly represents lenders in loan closings, including his brother, father and uncle as well as conventional lenders like large banks. When he does closings for the Steinbergs, Jason Steinberg prepares the promissory note and mortgage document, makes sure judgments are cleared from the title in advance, gets authorization from the borrower for the broker's payment and any disbursements to third parties, schedules the closing, prepares a closing statement and cuts the checks at the closing. Ronald Steinberg either wires funds for the loan to Jason Steinberg or writes him a check before the closing. Jason Steinberg typically does not meet the borrower prior to the closing.

25. With respect to the Steinbergs' refinance loans, borrowers typically do not have an ...

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