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Bigsby v. Barclays Capital Real Estate, Inc.

United States District Court, S.D. New York

March 28, 2018

LAMAR BIGSBY, JR., KARLA FREELAND, MARIA BRANDT, KATHLEEN MURRY, and HERMAN GRIMES, on behalf of themselves and all others similarly situated, Plaintiffs,
v.
BARCLAYS CAPITAL REAL ESTATE, INC., doing business as HOMEQ SERVICING, Defendant.

          OPINION & ORDER

          JOHN G. KOELTL, DISTRICT JUDGE.

         Lamar Bigsby, Jr., and Karla Freeland first filed this putative class action against Barclays Capital Real Estate, Inc., in its capacity as successor to a mortgage-servicing company known as HomEq Servicing Corp., over four years ago. Dkt. No. 2; see Dkt. No. 22. Bigsby and Freeland alleged that Barclays and HomEq defrauded mortgagors in the assessment of foreclosure-related fees, giving rise to claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and related common law claims. Barclays previously filed a motion to dismiss the complaint by Bigsby and Freeland pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Court granted that motion in part, resulting in the dismissal of the RICO claims by Bigsby and Freeland. Bigsby v. Barclays Capital Real Estate, Inc., 170 F.Supp.3d 568, 572 (S.D.N.Y. 2016).

         Bigsby and Freeland, now joined by Maria Brandt, Kathleen Murry, and Herman Grimes (the "California plaintiffs, " and together with Bigsby and Freeland, the "plaintiffs"), then filed a Second Amended Complaint, with leave of the Court. Dkt. No. 104 (the "SAC"). The Second Amended Complaint renews the plaintiffs' civil RICO claims predicated on mail fraud and wire fraud, 18 U.S.C. §§ 1341, 1343, 1962, 1964, and common law claims of breach of contract, conversion, fraud, unjust enrichment, constructive trust, and accounting. The Second Amended Complaint also adds statutory claims under California's unfair competition law, Cal. Bus. & Prof. Code § 17200 (the "California UCL claims"), and the California Fair Debt Collection Practices Act, Cal. Civ. Code § 1788 et seg. (the "California fair debt collection claims").

         Presently before the Court is a second motion by Barclays to dismiss the plaintiffs' RICO claims, California UCL claims, California fair debt collection claims, common law claims of fraud, conversion, and unjust enrichment, and the California plaintiffs' breach of contract claims. The motion is granted in part and denied in part.

         I.

         In deciding a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). A court's function on a motion to dismiss is "not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). A court should not dismiss the complaint if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While a court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions." Id. When presented with a motion to dismiss pursuant to Rule 12(b)(6), a court may consider 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, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see also Bigsby, 170 F.Supp.3d at 572. A court may consider a document referenced in the complaint only if there is no dispute as to its authenticity and there are no "material disputed issues of fact regarding the relevance of the document." Nicosia v. Amazon, Inc., 834 F.3d 220, 231 (2d Cir. 2016).

         II.

         The Court accepts as true the following factual allegations from the Second Amended Complaint.

         The plaintiffs in this matter, Lamar Bigsby, Jr., Karla D. Freeland, Maria R. Brandt, Kathleen Murry, and Herman Grimes, were mortgagors. Bigsby was a resident of Georgia; Freeland was a resident of Massachusetts; and Brandt, Murry, and Grimes were residents of California. SAC ¶¶ 9-13.

         The plaintiffs have sued Barclays, a Delaware corporation with its principal place of business in New York, in its capacity as successor to HomEq. Barclays acquired HomEq, a mortgage-servicing company, in 2006. HomEq collected on home loans on behalf of mortgage-note holders, who were typically trustees and beneficiaries of securitized loans. SAC ¶¶ 2, 14, 17, 26. After acquiring HomEq, Barclays continued to operate HomEq using the same employees, guidelines, and business strategies. SAC ¶ 27. HomEq and Barclays serviced note holders' loans pursuant to a Pooling and Servicing Agreement (a "PSA"). SAC ¶¶ 16, 26, 122. Under a PSA, a note holder assigned to HomEq and Barclays certain ownership rights of the note, including the right to foreclose on delinquent mortgages. See SAC ¶¶ 28, 57, 59, 123.

         Each plaintiff obtained at least one mortgage serviced by HomEq and Barclays. SAC ¶¶ 48-49, 53, 148, 153, 206-08, 225-27, 243-45. All of the plaintiffs went into default on their mortgage obligations, and Barclays instituted foreclosure proceedings against them. This case deals with Barclays's conduct during those foreclosure proceedings.

         A.

         The claims and factual allegations in the Second Amended Complaint are organized around three allegedly fraudulent schemes perpetrated by Barclays in foreclosure proceedings - a "fraudulent foreclosure scheme, " a "fee shifting scheme, " and an "inflated fees scheme." The plaintiffs allege that these schemes caused them "to pay the illegal amounts sought by Barclays, and . . . incur[] legal and other expenses associated with the illegal activity." SAC ¶ 298.

         1.

         Bigsby, Freeland, Brandt, and Grimes allege that Barclays and others engaged in a "fraudulent foreclosure scheme." SAC ¶¶ 276-77.[1]

         The plaintiffs assert that this scheme involved Barclays and others identifying an entity as the assignee of the security instrument that bore the beneficial ownership interest in the mortgage note "at the time of the commencement of foreclosure, when the Deed of Trust or Mortgage [was] not assigned until after the [foreclosure] action was initiated." SAC ¶ 276. This scheme allegedly permitted Barclays to assert standing in foreclosure actions on behalf of its note-holder clients before those clients had in fact acquired standing through the recording of the assignment of the ownership interest in the note.

         2.

         The plaintiffs also allege that Barclays and others engaged in a fraudulent "fee shifting scheme." SAC ¶¶ 265-72.

         Barclays used an "outsourcing" model to hire counsel for all of the foreclosure and bankruptcy proceedings at issue in this case. SAC ¶¶ 28-30. Under this model, Barclays entered into a Master Servicing Agreement with a non-legal entity - often Fidelity National Foreclosure Solutions - which provided that Fidelity would serve as Barclays's representative in dealings with local foreclosure and bankruptcy counsel. SAC ¶¶ 2, 29-31, 33. Fidelity agreed to be "solely responsible . . . for local counsel's performance" in the bankruptcy and foreclosure actions. SAC ¶ 34. In exchange, the Master Servicing Agreement provided that Barclays would pay Fidelity a fee for each bankruptcy and foreclosure Fidelity arranged and monitored, as well as a continuing fee for each foreclosure (assessed every six months) so long as the mortgagor was "reasonably performing" on a payment plan. SAC ¶ 39. Fidelity also entered into retainer agreements with bankruptcy and foreclosure counsel, which provided that counsel would pay fees to Fidelity for each mortgage referred to counsel out of funds counsel received from the client. SAC ¶¶ 40-41.

         The loan documents for the plaintiffs' mortgages were standard forms issued by Fannie Mae and Freddie Mac. These forms permitted Barclays to assess various fees associated with foreclosure costs against mortgagors in default. See SAC ¶¶ 51, 150. Some of the foreclosure-related fees Barclays assessed against the plaintiffs that were listed as "attorney's fees" or "legal fees, " were ostensibly designed to pass only the cost of foreclosure and bankruptcy counsel onto defaulting mortgagors. SAC ¶¶ 43-44, 163, 172, 178, 191, 216-17, 233, 235, 253. The plaintiffs allege that Barclays surreptitiously used these "attorney's fees" or "legal fees" not just to pass onto mortgagors the cost of counsel but also to pass on the cost of hiring Fidelity to serve as an intermediary with counsel on Barclay's behalf. SAC ¶¶ 269-70.

         Bigsby and Freeland alleged RICO claims premised on a similar "fee shifting scheme" in their first amended complaint. Dkt. No. 22 ¶¶ 173-7 9. The Court dismissed those RICO claims on Barclays's prior motion to dismiss primarily because Bigsby and Freeland failed to allege claims of fraud and scienter. Bigsby, 170 F.Supp.3d at 573-74, 576-77, 578-79. The "fee shifting scheme" alleged in the operative Second Amended Complaint is exactly the same as the "fee shifting scheme" the Court dismissed previously with one addition: The plaintiffs now allege that Barclays and Fidelity entered into an indemnity agreement dated April 9, 2009, as part of the scheme. SAC ¶ 268; see SAC ¶¶ 33-47, 265-72. This agreement provided that Fidelity will hold Barclays harmless for "[a]ny allegations that the business model employed by [Fidelity] . . . constitutes an impermissible 'fee splitting' or 'referral fee' arrangement." SAC ¶ Ex. C; see SAC ¶ 268.

         3.

         Finally, the plaintiffs allege that Barclays and others engaged in a fraudulent "inflated fees scheme." SAC ¶¶ 273-75.

         The Master Servicing Agreement between Barclays and Fidelity contained a schedule of maximum fees that Fidelity was authorized to charge in the event of a bankruptcy. SAC ¶¶ 37-38, 273. Fidelity and foreclosure counsel also entered into retainer agreements that contained schedules for the foreclosure-related fees counsel was permitted to charge Barclays. SAC ¶¶ 40-41, 273. The plaintiffs allege that Fidelity and foreclosure counsel knowingly charged Barclays fees in excess of the maximum limits set by the Master Servicing Agreement and the retainer agreements, and that Barclays passed these inflated fees onto the defaulting mortgagors. SAC ¶ 274; see SAC ¶¶ 58, 64, 74, 80, 89, 93-94, 99-100, 133, 163, 169, 178-79, 183, 186, 191-92, 212-17, 237, 258. The plaintiffs allege that Barclays benefitted from this scheme "by not having to have a department of employees analyzing legal bills to make sure they were in conformity with the maximum allowable fees." SAC ¶ 275.

         B.

         The plaintiffs allege that they were victims of all three fraudulent schemes.

         In 2005, Bigsby obtained two mortgages, secured by his home in Stockbridge, Georgia, from Freemont Investment and Loan Co., with Mortgage Electronic Registration Systems ("MERS") serving as nominee. SAC ¶¶ 48-49. Bigsby went into default on his mortgages in or about the latter part of 2006. SAC ¶ 54. Barclays initiated foreclosure proceedings against Bigsby on November 8, 2006, on behalf of "U.S. Bank National Association, as Trustee." SAC ¶ 55. U.S. Bank National Association had not been assigned the note or Deed of Trust for Bigsby's property when the Bigsby foreclosure was initiated. SAC ¶ 57. The document assigning the Note and Security Deed for Bigsby's property from MERS to U.S. Bank National Association was prepared and executed on December 14, 2006. SAC ¶ 62. All of the correspondence between Barclays, foreclosure counsel, and Bigsby through October of 2009 related to the foreclosure listed MERS as Barclays's client and creditor on Bigsby's loan. SAC ¶¶ 86, 91, 96, 102, 106, 109-12, 115. Barclays first stated that U.S. Bank National Association was the creditor for Bigsby's loan on October 22, 2009. SAC ¶ 117. Barclays sold Bigsby's house in foreclosure to U.S. Bank National Association on May 4, 2010. SAC ¶ 132. Bigsby alleges that Barclays charged him fraudulent fees associated with foreclosure costs on multiple occasions between November 29, 2006, and October 22, 2009. SAC ¶¶ 56, 63, 71, 77, 88, 92, 97, 116, 127.

         In 2004, Freeland obtained a mortgage secured by her home in Plymouth, Massachusetts, from Aames Funding Corp. SAC ¶ 148. Freeland went into default on her mortgage in or about the first half of 2006. SAC ¶¶ 154, 158. Barclays initiated foreclosure proceedings against Freeland on July 14, 2006, on behalf of "Deutsche Bank National Trust Co[.3, as Trustee." SAC ¶ 158. Deutsche Bank National Trust Co. did not hold the note or mortgage to Freeland's property when the Freeland foreclosure was initiated. SAC ¶¶ 159, 174. On March 12, 2007, Barclays, through counsel, recorded an Assignment of Mortgage transferring the beneficial interest in Freeland's mortgage to Deutsche Bank National Trust Co. SAC ¶ 176. The assignment document was dated January 31, 2004, and listed a notarization date of February 6, 2004. Id. Freeland paid off all amounts due on her mortgage and related fees as of May 15, 2013. SAC ¶¶ 194-96. Freeland alleges that Barclays charged her fraudulent fees associated with foreclosure costs on multiple occasions between October 10, 2006, and January 21, 2009. SAC ¶¶ 163, 167, 169, 178-79, 182-83, 185-87, 191-92.

         In 2005, Brandt obtained a mortgage from First NLC Financial Services, with MERS serving as nominee. SAC ¶ 207. Brandt went into default on her mortgage at some point before October 2007. SAC ¶¶ 207, 210. Barclays initiated foreclosure proceedings against Brandt on October 16, 2007, naming "Quality Loan Service Corp." as the "original trustee, the duly appointed substituted trustee, or acting as agent for the trustee or beneficiary." SAC ¶ 210. Barclays knew that Quality Loan Service Corp. was not the "original trustee, the duly appointed substituted trustee, or acting as agent for the trustee or beneficiary" when the foreclosure began. Id. On February 7, 2008, Barclays filed an assignment of Deed of Trust transferring the interest in Brandt's mortgage to Deutsche Bank National Trust Co. SAC ¶ 212. The assignment document stated that it was signed by a Barclays employee on January 29, 2008, but it was "backdated to October 14, 2007." IxL Brandt's house was eventually sold by Quality Loan. SAC ¶ 213. Brandt alleges that she paid over $5, 000 in allegedly fraudulent fees associated with foreclosure costs as of October, 2016. SAC ¶¶ 216-19.

         In the 1990s, Murry obtained a mortgage serviced by HomEg. SAC ¶ 226. Murry was notified that she was in default on her mortgage on or about September 15, 2008, and at some point thereafter foreclosure proceedings were initiated against her. SAC ¶ 228. The Second Amended Complaint does not state which company initially owned Murry's mortgage note or on which company's behalf Barclays initiated the Murry foreclosure. Murry paid off her mortgage loan in full as of September 23, 2009, but Barclays charged her a fee associated with the foreclosure proceedings after that date. SAC ¶ 233. Murry alleges that Barclays charged her fraudulent fees associated with foreclosure costs on multiple occasions between December 23, 2008, and November 24, 2009. SAC ¶¶ 230-33, 235-37.

         In 2003, Grimes obtained a mortgage from New Century Mortgage Corporation, with Southland Title serving as trustee. SAC ¶ 244. Grimes defaulted on his mortgage in or around the summer of 2009. SAC ¶ 246. Barclays initiated foreclosure proceedings against Grimes on September 1, 2009, on behalf of "Old Republic, " which Barclays listed as "agent for the beneficiary." SAC ¶ 24 8; see SAC ¶ 244. When the Grimes foreclosure began, Old Republic did not have the authority to commence the foreclosure and New Century was not the holder of the Deed of Trust. SAC ¶ 248. Barclays executed an assignment of Deed of Trust from New Century to Deutsche Bank National Trust Co., and a Substitution of Trustee substituting Old Republic for Southland Title as trustee on September 2, 2009. SAC ¶ 249. Grimes paid his mortgage in full as of December 18, 2009, but Barclays continued to charge him fees associated with the foreclosure proceedings after that date. SAC ¶¶ 253-56. Grimes alleges that Barclays charged him fraudulent fees associated with foreclosure costs on multiple occasions between December 18, 2009, and February 22, 2010. SAC ¶¶ 253, 255-58.

         III.

         A.

         Barclays moves to dismiss the plaintiffs' RICO claims predicated ...


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