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First Central Savings Bank v. Meridian Residential

March 4, 2011

FIRST CENTRAL SAVINGS BANK,
PLAINTIFF,
v.
MERIDIAN RESIDENTIAL CAPITAL D/B/A/ TRUMP FINANCIAL, DAVID BRECHER, MERIDIAN MORTGAGE SERVICES, INC., DBS SERVICING SOLUTIONS, INC., NH APPRAISAL ASSOCIATES, INC., DAVID S. FRANKEL, P.C., MDS APPRAISAL GROUP, LAW OFFICES OF SAM SHORE, JEFFREY E. MEHL, ESQ., TRUE VALUATIONS APPRAISERS, ADMOR APPRAISALS, ATRIUM APPRAISAL SERVICES, INC., THE ADDISON GROUP, OLD REPUBLIC NATIONAL TITLE INSURANCE CO., ANDREW KESLER, AND MAK APPRAISALS,
DEFENDANTS.



The opinion of the court was delivered by: Dora L. Irizarry, United States District Judge:

MEMORANDUM AND ORDER

On August 7, 2009, plaintiff First Central Savings Bank ("First Central") filed this civil RICO action against defendants Meridian Residentail Capital, LLC s/h/a "Meridian Residential Capital d/b/a Trump Financial" ("Meridian"), David Brecher, Meridian Services, Inc. s/h/a "Meridian Mortgage Services, Inc." ("MSI"), DBS Servicing Solutions, Inc. ("DBS") (collectively, Meridian, Brecher, MSI and DBS are the "Meridian Defendants"), NH Appraisal Associates, Inc. ("NH Appraisal"), MDS Appraisal Group ("MDS"), Atrium Appraisal Services, Inc. ("Atrium Appraisal"), True Valuations Appraisers ("True Valuations"), Admor Appraisals ("Admor"), the Addison Group, Andrew Kesler, MAK Appraisals ("MAK") (collectively, MDS, Atrium Appraisal, True Valuations, Admor Appraisals, the Addison Group, Kesler, and MAK are the "Appraisal Defendants"), Old Republic National Title Insurance Co. ("Old Republic"), David S. Frankel, P.C. ("Frankel"), Law Offices of Sam Shore ("Shore"), and Jeffrey E. Mehl, Esq. (collectively, Old Republic, Frankel, Shore and Mehl are the "Attorney Defendants").

The Meridian Defendants, Frankel, MDS, Shore, Mehl, Admor, move to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. NH Appraisal, True Valuations, Kesler, and MAK move to dismiss the complaint pursuant to Rule 12(c). For the reasons set forth below, the motions to dismiss are granted. However, in light of the fact that Plaintiff is granted leave to replead, the dismissal of the complaint is held in abeyance.

BACKGROUND

Plaintiff is a New York State chartered savings bank which was chartered in 1999. The Meridian Defendants are in the business of brokering and servicing mortgage loans. Plaintiff alleges that it entered into a Loan Origination and Marketing Agreement with the Meridian Defendants that sets forth procedures for the parties to follow when originating and closing certain loans. Plaintiff further alleges that, between 2003 and 2008, the Meridian Defendants originated over 225 mortgage loans that are now on First Central‟s books, and that approximately 40 of the 75 are in foreclosure, including 6 that have been sold after a judgment of foreclosure and 2 that are awaiting sale.

The complaint alleges that the Meridian Defendants submitted fraudulent information to First Central for the purpose of inducing Plaintiff to fund the loans. Plaintiff alleges that it was injured in three ways. First, Plaintiff alleges that the Meridian Defendants and Appraisal Defendants submitted fraudulently overstated appraisals which induced Plaintiff to issue or purchase loans that it otherwise would not have issued or purchased. (Compl. ¶¶ 52-55.) Second, Plaintiff alleges that the Meridian Defendants submitted loan applications that misrepresented borrowers‟ incomes, and that the Meridian Defendants and Attorney Defendants permitted mortgages to close with funding by Plaintiff despite the fact that the defendants had knowledge of facts that adversely affected Plaintiff‟s interests with respect to the loans. (Compl. ¶¶ 47-51, 58-62.) Third, Plaintiff alleges that the Meridian Defendants and the Attorney Defendants engaged in a separate scheme to close the mortgage loans with documentation containing terms that were materially different from those agreed to by First Central. (Compl. ¶¶ 56-57.) The loans had commitment letters issued by Plaintiff, and the letters contained adjustable interest rates with interest rate floors. Plaintiff argues that, upon information and belief, the Meridian Defendants and Attorney Defendants intentionally closed the loans without interest rate floors.

Plaintiff asserts a RICO claim pursuant to 18 U.S.C. § 1962(c) and a RICO conspiracy claim pursuant to 18 U.S.C. § 1962(d) against all defendants. Plaintiff also asserts various state law claims, including fraud, conspiracy to defraud, breach of fiduciary duty, and negligent misrepresentation.

STANDARD OF REVIEW

Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." The pleading standard under Rule 8 does not require "detailed factual allegations," Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), "but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). A complaint does not "suffice if it tenders "naked assertion[s]‟ devoid of "further factual enhancement.‟" Id. (quoting Twombly, 550 U.S. at 557). A plaintiff‟s obligation to provide the "grounds" of his "entitle[ment] to relief" requires more than labels and conclusions, and a formulaic recitation of a cause of action‟s elements will not do. Twombly, 550 U.S. at 555. On a Rule 12(b)(6) motion, the court must accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the nonmoving party. Taylor v. Vt. Dep't of Educ., 313 F.3d 768, 776 (2d Cir. 2002). The court may only consider the pleading itself, documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff‟s possession or that the plaintiff knew of when bringing suit, and matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995). "The same standard applicable to Fed. R. Civ. P. 12(b)(6) motions to dismiss applies to Fed. R. Civ. P. 12(c) motions for judgment on the pleadings." Bank of New York v. First Millennium, Inc., 607 F.3d 905, 922 (2d Cir. 2010).

DISCUSSION

The defendants make several arguments each in support of their motions to dismiss. In particular, the Meridian Defendants, Shore, Frankel, and Mehl argue that the complaint fails to allege a RICO injury. Shore, Frankel, Mehl, NH, Kesler, MAK, MDS, and Admore argue that the complaint fails to allege that they participated in the enterprise. Shore also argues that plaintiff has failed to allege fraud with particularity. MDS also argues that the court does not have personal jurisdiction over MDS pursuant to New York State law, and that venue is improper in the Eastern District of New York.

I.RICO STANDING

The Meridian Defendants, Shore, Frankel, and Mehl argue that First Central has failed to allege a RICO injury. Civil RICO allows "[a]ny person injured in his business or property by reason of a violation of Section 1962" to sue for treble damages and attorneys‟ fees. 18 U.S.C. 1964(c). "From this language, courts have extracted the conditions a plaintiff must meet to satisfy RICO‟s standing requirements: "(1) a violation of Section 1962; (2) injury to business or property; and (3) causation of the injury by the violation.‟" First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767 (2d Cir.1994) (quoting Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23 (2d Cir. 1990)). The Meridian Defendants, Shore, Frankel, and Mehl argue that Plaintiff has failed to properly allege injury and causation as to all three of the theories Plaintiff puts forth regarding its alleged injury.

A.ALLEGATIONS REGARDING INFLATED APPRAISALS

Plaintiff‟s first basis for injury is that that the Meridian Defendants and Appraisal Defendants prepared and submitted numerous fraudulent appraisals containing property values substantially above their actual values at the time the appraisals were prepared. Defendants argue that Plaintiff has not adequately alleged injury because not all of the loans have been foreclosed and thus the claims are not ripe as to all of the loans. Defendants further argue that Plaintiff has also failed to allege proximate cause because it has not provided facts to show that the loss was caused by the alleged overstated appraisals.

1.RIPENESS OF THE INJURY

"[A]s a general rule, a cause of action does not accrue under RICO until the amount of damages becomes clear and definite." First Nationwide, 27 F.3d at 768. For claims involving foreclosures of property, the losses a plaintiff would suffer as to loans that have not been "finally foreclosed" cannot yet be determined. Id. at 769. Therefore, plaintiff lacks standing with regard to the loans that have not been finally foreclosed.

Plaintiff, relying on First Nationwide, argues that the term "finally foreclosed" means that the property need not be sold to determine damages. Plaintiff therefore contends that it has suffered clear and definite losses with respect to eight loans, including two loans that have been foreclosed but have not resulted in a sale of the collateral.

However, the court in First Nationwide did not address the distinction between loans that were merely foreclosed but not sold and those that resulted in a sale. Nevertheless, First Nationwide‟s description of the determination of damages demonstrates that the actual loss becomes clear and definite only when the property is sold. The court in First Nationwide stated that "the amount of loss cannot be established until it is finally determined whether the collateral is insufficient to make the plaintiff whole, and if so, by how much." First Nationwide, 27 F.3d at 768. Only after "the lender has exhausted the bargained-for remedies available to it can the lender assert that it was damaged by the fraud, and then only to the extent of the deficiency." Id. Whether the collateral is insufficient to make the plaintiff whole, and the amount by which it falls short, can only be determined after a sale.

Therefore, plaintiff has standing only as to the six loans that have undergone foreclosure and resulted in a sale. The specific loans in question were made to borrowers Jones, who had two loans, Abeckaser, Baker, Rubenstein, and Green. Any claims involving loans that have not resulted in a sale are dismissed.

2.PROXIMATE CAUSE

For the loans that have resulted in a sale, in addition to showing that the loans were finally foreclosed, plaintiff must show that the alleged racketeering was both the proximate and "but-for" cause of its injuries. See First Nationwide, 27 F.3d at 769. Therefore, plaintiff must allege that "there was a direct relationship between the plaintiff‟s injury and the defendant‟s injurious conduct. This requires a showing not only that the defendant‟s alleged RICO violation was the but-for or ...


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