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DELEON v. BENEFICIAL CONST. CO.

February 26, 1999

JULIO DELEON AND NORMA DELEON, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
BENEFICIAL CONSTRUCTION COMPANY; GEORGE DATRO; DOLPHIN MORTGAGE CORPORATION; AND GEORGE ZACHARY, DEFENDANTS.



The opinion of the court was delivered by: Moran, Senior District Judge.

  MEMORANDUM AND ORDER

Plaintiffs Julio and Norma DeLeon (the DeLeons) originally filed this ten-count class action litigation on January 3, 1997, naming as defendants Beneficial Construction Company, George Zachary, Guaranty Bank, S.S.B., Guaranty Home Equity Corporation, doing business as GB Home Equity, Dolphin Mortgage Corporation and George Datro. Early in 1998 defendants Dolphin, Datro and Zachary moved to dismiss several of the claims and this court granted those motions in part, giving plaintiffs leave to amend the complaint. See DeLeon v. Beneficial Construction Co., 998 F. Supp. 859 (N.D.Ill. 1998). On February 26, 1998, the DeLeons filed a six-count amended complaint in which plaintiffs claim the following:*fn1 In count I, plaintiffs allege that Datro and Dolphin Mortgage violated RESPA, 12 U.S.C. § 2607(b), and HUD Regulation X, 24 C.F.R. § 3500.14(c), by receiving payment for mortgage-related settlement services when in fact the parties performed no such services.*fn2 In count II, plaintiffs allege that Beneficial Construction breached its contract with the DeLeons by failing to complete the construction on the DeLeons' home and by performing grossly defective work on the portion that was completed.*fn3 In count III, plaintiffs allege that Beneficial Construction and Zachary violated the Illinois Consumer Fraud Act by obtaining applications for the financing of home improvements in a fraudulent manner.*fn4 In count IV, plaintiffs allege that Dolphin Mortgage and Datro breached their fiduciary duty to provide mortgage brokering services to plaintiffs.*fn5 In count V, plaintiffs allege that Beneficial Construction violated the Truth in Lending Act and Regulation Z by failing to provide plaintiffs with the regulation's required disclosures.*fn6 In count VI, plaintiffs allege that Beneficial Construction and Zachary violated section 2 of the Illinois Consumer Fraud Act, 8125 ILCS 505/2, by concealing the annual percentage rate involved in plaintiffs' transactions, by telling plaintiffs that they would pay no interest, when that was not the case, and by including coercive and unconscionable credit provisions in the construction contract.*fn7

On April 30, 1998, Beneficial Construction filed for bankruptcy under Chapter 7 in the United States Bankruptcy Court for the Northern District of Illinois. See In re Beneficial Construction Co., 98 B 13459 (1998) (J. Sonderby). On November 4, 1998, the bankruptcy court closed Beneficial's case on the grounds that there were no assets to distribute and discharged the trustee.

Defendants have moved to dismiss the amended complaint in its entirety.*fn8 For the reasons stated below, we grant defendants' motion to dismiss counts III, V, VI and deny with respect to counts I, II, IV.

BACKGROUND

In deciding a motion to dismiss we accept the plaintiffs' well-plead allegations 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). We have previously set forth the facts of this case in our earlier opinion and for convenience will simply restate them here:

    On April 16, 1996, Mr. And Mrs. DeLeon (the
  "DeLeons") hired Beneficial Construction Company
  ("Beneficial Construction") to do some work on their
  home in Chicago, Illinois. Specifically, Beneficial
  Construction 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 George Zachary, the
  president of Beneficial Construction, 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 Construction referred plaintiffs to a
  mortgage broker, George Datro ("Datro") who worked
  for Dolphin Mortgage Company ("Dolphin"). According
  to the plaintiffs, this was not the first time that
  Zachary had referred his construction clients to
  Dolphin in order to assist them with [financing
  Beneficial's construction projects]. 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
  ("Guaranty Bank") and GB Home Equity Corporation
  d/b/a GB Home Equity ("GB Home Equity"), with whom he
  either had some sort of standing referral agreement
  or whom he had preselected as a lender. . . .
  [P]laintiffs 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
  also were defrauded out of the 8% commission they
  paid to Dolphin Mortgage.
    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
  Construction.
    After the financing was completed, Beneficial
  Construction started work on the DeLeons' home on
  June 11, 1996. They continued to work until July 19,
  1996 when it rained heavily in the Chicago area and
  the DeLeon's basement flooded, causing extensive
  damage to the basement interior. Shortly after the
  flooding, Beneficial Construction stopped working on
  the DeLeons' 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 Construction. 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.

ANALYSIS

A. Real Estate Settlement Procedures Act

In count I plaintiffs allege that Datro and Dolphin Mortgage violated RESPA, 12 U.S.C. § 2607, and HUD Regulation X, 24 C.F.R. § 3500.14(c), by receiving payment for mortgage-related settlement services without performing any such service. Section 2607 prohibits two separate types of conduct, kickbacks and fee-splitting, providing:

(a) Business referrals

    No person shall give and no person shall accept any
  fee, kickback, or thing of value pursuant to any
  agreement or understanding, oral or otherwise, that
  business incident to or a part of a real estate
  settlement service involving a federally related
  mortgage loan shall be referred to any person.

(b) Splitting charges

    No person shall give and no person shall accept any
  portion, split, or percentage of any charge made or
  received for the rendering of a real estate
  settlement service in connection with a transaction
  involving a federally related mortgage loan other
  than for services actually performed.

Plaintiffs' complaint does not state under which provision, (a) or (b), they proceed, nor do the federal pleading standards require them to. See Goren v. New Vision Intern., Inc., 156 F.3d 721 (7th Cir. 1998) (noting that a plaintiff in federal court does not need to point out the exact statute or subsection under which he is entitled to relief, as long as relief is possible under any set of facts that can be established as consistent with the allegations in the complaint); Abdoh v. City of Chicago, 930 F. Supp. 311, 312 (N.D.Ill. 1996) ...


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