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DE LEON v. BENEFICIAL CONSTR. CO.

January 15, 1998

JULIO DE LEON and NORMA DE LEON, on behalf of themselves and all others similarly situated, Plaintiffs,
v.
BENEFICIAL CONSTRUCTION COMPANY; GEORGE ZACHARY; GUARANTY BANK, S.S.B.; GUARANTY HOME EQUITY CORPORATION, d/b/a/ GB HOME EQUITY; DOLPHIN MORTGAGE CORPORATION; and GEORGE DATRO, Defendants.



The opinion of the court was delivered by: MORAN

 This is a class action lawsuit brought by plaintiffs Julio and Norma DeLeon (the DeLeons) on behalf of themselves and all others similarly situated. Plaintiffs brought the suit against the named defendants alleging violations of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2607, and accompanying regulations, 24 C.F.R. § 3500.14(c), the Illinois Consumer Fraud Act (ICFA), 815 ILCS 505/2 et seq., and the Truth in Lending Act (TILA), 15 U.S.C. § 1635, in addition to breach of contract and breach of fiduciary duty, all resulting from their purchase of substantial home improvements and the financing thereof via a second mortgage.

 The action consists of ten counts. In Count I, plaintiffs allege that defendants Guaranty Bank (Guaranty Bank), GB Home Equity (GB Home Equity), Dolphin Mortgage (Dolphin) and George Datro (Datro) violated RESPA, 12 U.S.C. § 2607 and 24 C.F.R. § 3500, by collecting referral fees in connection with real estate settlements. In Count II, plaintiffs allege that all defendants violated Section 2 of ICFA, 815 ILCS 505/2 et seq., by engaging in the unfair and deceptive act of creating a scheme designed to generate unlawful referral fees and kickbacks in violation of federal law. In Count III, plaintiffs allege that defendant Beneficial Construction Company (Beneficial) breached the construction contract it had with plaintiffs. In Count IV, plaintiffs allege that Beneficial and George Zachary (Zachary) violated Section 2 of ICFA, 815 ILCS 505/2 et seq., by arranging the financing for the construction project on plaintiffs' home and by taking payment on the construction project without completing the job. In Count V, plaintiffs allege that Dolphin and Datro breached the fiduciary duties they owed to plaintiffs after being hired to assist in financing the improvements to plaintiffs' home. In Count VI, plaintiffs allege that defendants Guaranty Bank and GB Home Equity violated the Truth in Lending Act, 15 U.S.C. § 1635, by failing to make federally-mandated disclosures prior to having plaintiffs sign a consumer credit contract. In Count VII, plaintiffs allege that defendants Guaranty Bank and GB Home Equity violated the same section of TILA by not allowing plaintiffs to rescind their consumer credit contract with the defendants. In Count VIII, plaintiffs allege that defendant Beneficial violated the same section of TILA by failing to provide plaintiff with federally-mandated disclosures. In Count IX, plaintiffs allege that defendants Beneficial, Zachary, Guaranty Bank and GB Home Equity violated ICFA, 815 ILCS 505/2 et seq., and the Illinois Retail Installment Sales Act (RISA), 815 ILCS 405/1 et seq., by engaging in the unfair and deceptive act of attempting to collect a delinquent fee on a retail installment contract formed in violation of Illinois law. In Count X, plaintiffs allege that defendants violated ICFA, 815 ILCS 505/2 et seq., by failing to disclose and/or misrepresenting the interest rate on plaintiffs' contract, by stating that plaintiffs would pay no interest on the loan, when, in fact, that was not the case, and by including in plaintiffs' contract unconscionable credit provisions in violation of Illinois law.

 In the motions presently before the court defendants Zachary, Datro and Dolphin have each individually submitted a motion to dismiss all claims against them. In addition, plaintiffs have indicated they wish to voluntarily dismiss Count II. Finally, it should be noted that plaintiffs have informed the court that they will move to voluntarily dismiss Guaranty Bank, although they have not yet done so.

 We grant plaintiffs' motion to dismiss Count II. In addition, this memorandum addresses each of the instant motions to dismiss, specifying, when appropriate, to which defendant our holdings apply. We conclude that Dolphin's motion to dismiss is denied in its entirety, Datro's motion to dismiss is granted in part and denied in part, and Zachary's motion to dismiss is granted in its entirety.

 BACKGROUND

 In considering a motion to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim, we accept all well-pled factual allegations in the complaint as true and draw all reasonable inferences from these facts in favor of the plaintiff. Travel All Over the World, Inc. V. The Kingdom of Saudi Arabia, 73 F.3d 1423, 1429 (7th Cir. 1996). Read in this light, the facts in this case are as follows:

 On April 16, 1996, the DeLeons hired Beneficial to do some work on their home in Chicago, Illinois. Specifically, Beneficial agreed to level the basement floor, create a basement apartment, install central air-conditioning and make improvements to the kitchen for a contract price of $ 22,000. The DeLeons gave a $ 1,000 down payment check to Zachary, the president of Beneficial, and signed a document titled "Agreement Between Owner and Contractor," which provided that the remaining $ 21,000 cost would be financed.

 In order to arrange the financing for the project, Beneficial referred plaintiffs to a mortgage broker, George Datro, who worked for Dolphin Mortgage. According to the plaintiffs, this was not the first time that Zachary had referred his construction clients to Dolphin in order to assist them in the financing for construction projects performed by Beneficial. Datro was hired to help the DeLeons find favorable financing and it was agreed he would be paid a commission amounting to approximately 8% of the loan sought by the DeLeons. Plaintiffs allege, however, that Datro never shopped the market for the best mortgage terms. Instead, he referred the DeLeons to two banks, Guaranty Bank and GB Home Equity, with whom he either had some sort of standing referral agreement or whom he had pre-selected as a lender (as discussed later in this order, plaintiffs contradict themselves on this point). In any event, plaintiffs claim that as a result of Datro's fraudulent acts, not only did they not receive the most favorable mortgage terms available to them but they were defrauded out of the 8% commission they paid to Dolphin.

 On May 29, 1996, Guaranty Bank and GB Home Equity loaned approximately $ 44,000 to the DeLeons, $ 3,520 of which was disbursed for the purpose of paying Dolphin's commission. The promissory note and the accompanying disclosure forms list both Guaranty Bank and GB Home Equity as the lender. Guaranty Bank and GB Home Equity issued four checks for $ 10,500 each, two of which were made out jointly to the DeLeons and Beneficial Construction as co-payee. Plaintiffs gave these checks to Beneficial.

 After the financing was completed, Beneficial started work on the De Leons' home on June 11, 1996. They continued to work until July 19, 1996, when it rained heavily in the Chicago area and the DeLeon basement flooded, causing extensive damage to the basement interior. Shortly after the flooding, Beneficial stopped working on the DeLeon home and abandoned the project before it was completed. Plaintiffs then discovered that much of the work that had been performed was defective and that the materials used were of inferior quality and did not meet industry standards. Guaranty Bank and GB Home Equity informed plaintiffs that the mortgage loan would have to be repaid notwithstanding the defects in the so-called improvements performed by Beneficial. Accordingly, the DeLeons brought the instant action and have asked to be certified as a class under Federal Rule of Civil Procedure 23. The class certification issue has yet to be decided.

 DISCUSSION

 I. A Preliminary Distinction: Rule 12(b)(6) Motion to Dismiss vs. Rule 56(c) Motion for Summary Judgment

 As detailed above, defendants Zachary, Datro and Dolphin have each filed a motion to dismiss whichever of the plaintiffs' claims apply to them, on the grounds that in each instance plaintiff has failed to state a claim for which relief may be granted. See Fed.R.Civ.P. 12(b)(6). Attached to both Datro's and Dolphin's motions, as well as plaintiffs' response to Zachary's motion, are documentary exhibits containing matters not included in plaintiffs' complaint or the exhibits attached thereto. Rule 12(b) provides that whenever a party enters a motion to dismiss for failure to state a claim upon which relief can be granted that includes matters outside the pleadings, the court must either exclude from consideration the extraneous materials presented or treat the motion as one for summary judgment. Fed.R.Civ.P. 12(b); see also Carter v. Stanton, 405 U.S. 669, 671, 31 L. Ed. 2d 569, 92 S. Ct. 1232 (1972); Edward Gray Corp. v. National Union Fire Ins. Co., 94 F.3d 363, 366-67 (7th Cir. 1996). The decision on which course to choose in this matter is entirely within the court's discretion.

 We will continue to treat the various motions to dismiss as such. Accordingly, for purposes of ruling on the present motion we explicitly exclude from our consideration all exhibits attached to the briefs on this matter that were not part of the plaintiff's complaint. *fn1"

 II. Standard of Review

 In order to have a claim dismissed under Rule 12(b)(6) the moving party must meet a high standard. The purpose of a motion to dismiss is to test the sufficiency of a complaint, not its merits. Triad Ass'n Inc. V. Chicago Housing Authority, 892 F.2d 583, 586 (7th Cir. 1989), cert denied, 498 U.S. 845, 112 L. Ed. 2d 97, 111 S. Ct. 129 (1990). A complaint should not be dismissed for failure to state a claim "unless it appears beyond a reasonable doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In order to withstand a motion to dismiss a complaint must allege facts which sufficiently set forth the essential elements of the cause of action. Gray v. County of Dane, 854 ...


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