United States District Court, N.D. Illinois
January 14, 2004.
NEW FREEDOM MORTGAGE CORPORATION, Plaintiff,
C & R MORTGAGE CORPORATION, EXECUTIVE LAND TITLE, INC., LAWYERS TITLE INSURANCE CORPORATION, JUDITH BARYS, LAWRENCE CALLERO, SHARONE HEARD, WILLIAM MORGAN, KATHLEEN NELLESSEN, and OLLIE SIMS, Defendants
The opinion of the court was delivered by: PAUL PLUNKETT, Senior District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff, New Freedom Mortgage Corporation ("New Freedom"), has sued
defendants for various violations of Illinois common law, violations of
the Illinois Consumer Fraud and Deceptive Business Practices Act, 815
ILCS 505/1, et seq. (Consumer Fraud Act), and violations of the
Racketeering Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. § 1961, et seq. This matter is before the Court on
defendants' Federal Rule of Civil Procedure (Rule) 12(b)(6) motions to
dismiss. For the reasons set forth below, the motions are granted in part
and denied in part.
New Freedom is a Utah corporation in the business of making residential
mortgage loans. (Compl. Count I ¶ 1.) Defendant C & R Mortgage
Corporation (C&R), an Illinois corporation, brokers New Freedom loans
pursuant to a written contract. (Id. ¶ 2.) Defendant
Executive Land Title, Inc. ("Executive"), an Illinois corporation, is a
title company in the business of, among other things, conducting closings
for real estate transactions. (Id. ¶ 3.) Defendant Lawyers
Title Insurance Corporation ("Lawyers Title") is a Virginia title
insurance company. In some real estate transactions where Lawyers Title
provides title insurance, Executive acts as Lawyers Title's closing
agent. (Id. ¶ 4.) Defendant Lawrence Callero is an Illinois
resident who at all relevant times has been president and secretary of
C&R. Callero is also a shareholder of C&R. In addition, at all
relevant times Callero has been a vice president and secretary of
Executive. Callero is also a shareholder of Executive. (Id.
¶ 6.) Defendant Judith Barys is an Illinois resident and at all
relevant times has been an employee of Executive. (Id. ¶ 5.)
Defendant Kathleen Nellessen is an Illinois resident and at all relevant
times has been a vice president of Executive. (Id. ¶ 9.)
Defendant Sharone Heard is an Illinois resident. (Id. ¶
7.) Defendant William Morgan is an Illinois resident. Morgan is a real
estate appraiser retained by C&R to prepare an appraisal report on a
property purchased by Heard and financed by New Freedom. (Id.
¶ 8.) Defendants Ollie Sims and Horace Herdle are Illinois residents.
(Id. ¶¶ 10, 11.) Defendant Conrad Utz is an Illinois
resident. At all relevant times, Utz did business under the names of CMR
and Umarc, Ltd. Utz was either a C&R employee or did work for
C&R as an independent contractor. (Id. ¶ 12.)
In early 2000, Heard, looking for an apartment to rent, responded to an
advertisement for an available apartment. When she arrived to inspect the
apartment, she was met by Herdle, who introduced himself as the owner of
the apartment building. (Id. ¶ 15.) Heard wanted to rent the
apartment and Herdle ran a credit check on Heard. Heard's credit was
extremely good, and Herdle asked if Heard wanted to use her good credit
to earn some money. Heard, unemployed, recently separated and caring for
four small children, said she was interested. Herdle introduced Heard to
Utz, knowing that Utz would pay him money for referring Heard to Utz so
that Utz could involve Heard in a scheme to defraud mortgage lenders.
(Id. ¶ 16.)
Meanwhile, Sims, who owned and lived in a single-family home located at
3336 Cumberland Trail in Olympia Fields, Illinois ("the Property")) Was
about to lose his home in a foreclosure proceeding. He and the other
defendants (with the exception of Lawyers Title) engaged in a scheme to
defraud New Freedom of $440,000 to prevent the loss of his home.
(Id. ¶ 17.)
Utz and C&R prepared loan application documents naming Heard as the
borrower and applied to New Freedom for a $440,000 loan. Utz, C&R and
Heard told New Freedom that the loan would be secured by a first mortgage
on the Property which, according to C&R and Heard, Heard intended to
purchase from Sims and move into as her primary residence. (Id.
A number of documents were produced in order to induce New Freedom to
approve and fund the loan, including a loan application, a borrower's
certification, an occupancy statement, a Housing
and Urban Development (HUD) settlement statement, a residential
appraisal report and a recertification of value report (together, the
closing documents) (Id. ¶ 19.)
The loan application, signed by Heard, represented that: (1) no loans
other than New Freedom's first mortgage loan were extended for the
purchase of the Property; (2) Heard would make a downpayment in excess of
$100,000 of her own, non-borrowed funds, to purchase the Property; and
(3) Heard intended to occupy the Property as her primary residence after
the closing. (Id. ¶ 20, 26; Ex. B.) By signing the loan
application, Heard certified that the information provided in the
application was true and correct. (Id. ¶ 26; Ex. B at 3.)
The borrower's certification, prepared by C&R and signed by Heard,
represented that: (1) the loan terms stated in the loan application were
true, accurate and complete; (2) Heard intended to occupy the Property;
and (3) Heard's purchase of the Property was an arm's-length transaction.
(Id. ¶¶ 21, 27, 28; Ex. C.)
The occupancy statement, prepared by C&R and signed by Heard,
represented that Heard intended to occupy the Property as her principal
residence. (Id. ¶¶ 22, 29, 30; Ex. D.) The HUD settlement
statement represented that: (1) New Freedom's first mortgage loan was the
only loan extended for Heard's purchase of the Property; and (2) Heard
was investing $119,416.85 of her own, non-borrowed funds to purchase the
Property. (Id. ¶ 23; Ex. E.) The HUD settlement statement
was prepared by Nellessen and Barys, both acting within the scope of
their employment with Executive. (Id. ¶ 31.) Barys signed
the document below language stating that the document is a true and
accurate account of the funds received and disbursed during the
settlement of the transaction, (Id; Ex. E.) Nellessen signed an
attachment to the settlement statement, representing that the settlement
statement is true and accurate, and that she caused the funds to be
disbursed in a manner consistent
with the settlement statement. (Id. ¶ 33; Ex. E.)
Heard and Sims also signed the attachment, each representing that the
settlement statement is "a true and accurate statement of all receipts
and disbursements made on my account or by me in this transaction." (Ex.
E at 4.)
The appraisal report, prepared by Morgan at C&R's request, assigned
a value of $550,000 to the Property based on three comparable sales, each
one having occurred more than one year prior to the date of the appraisal
report. The comparable sales were not current according to industry
guidelines, but the appraisal report explained "lack of recent closed
sales in this price range and small geographical real estate area
necessitated the use of the sales in this report." (Id. ¶
24; Ex. F at 4.) The recertification of value report, also prepared by
Morgan at C&R's request, contains the same comparable sales
information. (Id. ¶ 25; Ex G at 2.)
Relying on the representations made in these documents, New Freedom
approved and funded the Heard loan. (Id. ¶ 34.) On October
16, 2000, the transaction closed. Nellessen and Barys conducted the
closing on behalf of Executive at Executive's offices in Niles, Illinois.
New Freedom provided a $440,000 first mortgage loan; portions of these
funds were distributed to C&R, Executive, Lawyers Title, Heard,
Herdle and Utz. (Id. ¶ 35.) The funds were sent by wire
transfer from California. (Id. ¶ 45.)
Heard's first monthly loan payment to New Freedom was due on December
1, 2000. She never made that payment or any other payment to New Freedom
and she never intended to do so, a fact known by the other defendants
(with the exception of Lawyers Title). (Id. ¶ 38.) The
representations contained in the closing documents were false, and
defendants (with the exception
of Lawyers Title) knew them to be false. (Id. ¶ 36.)
In particular, Heard never occupied the Property and never intended to do
so. Sims continued the occupy the Property and did so until sometime in
2002. Heard's good credit was used to obtain the loan proceeds so that
Sims could forestall the loss of his home. (Id. ¶ 37.) In
addition, a second loan, a loan from Bank One in the amount of $100,000,
was used to finance Heard's purchase of the Property. Bank One's loan was
secured by a second mortgage on the Property. This second loan was
obtained by Heard and notarized by Nellessen. (Id. ¶ 37; Ex.
H at 6.) Heard did not invest her own, non-borrowed funds in the
Property. The difference between the funds needed to close and the
combined proceeds from the New Freedom and Bank One loans, an amount of
$1,301.97, was provided by Sims. (Id. ¶ 37.) Finally, sales
of comparable properties did take place within six months of the dates of
the appraisal report and the recertification report; Morgan intentionally
excluded those sales from his reports because they would show a decline
in the housing market. As a result, the value of the Property was
intentionally inflated. (Id.) The Property is worth
substantially less than $440,000. Between August 22, 2002 and April
3, 2003, the listed asking price for the Property dropped from $359,000
to $299,900. The Property still has not sold, (Id. ¶ 41.)
New Freedom also alleges the following additional facts with respect to
its RICO claims under Count IX. Prior to the events described above,
defendants engaged in a similar scheme to defraud another mortgage
company, Fremont Investment & Loan (Fremont). (Compl. Count IX ¶
46.) They accomplished this in the same manner as they defrauded New
Freedom. Defendants used Heard's good credit and falsely represented to
Fremont that Heard was purchasing property at 6544 South Hoyne in Chicago
to be used as her primary residence. (Id.) Defendants
represented that Heard was using her own, non-borrowed funds in the
transaction. (Id.) In fact, Heard never intended
to occupy the premises, never did so, and did not invest her own
money in the property. Heard ultimately defaulted on the mortgage loan.
On or about October 27, 2000, New Freedom sold the Heard loan to IMP AC
Funding Corporation (IMPAC) pursuant to an agreement (the Seller
Agreement). The Seller Agreement obligates New Freedom to repurchase the
loan, plus interest, from IMP AC because of defendants'
misrepresentations. (Id. Count I ¶¶ 39, 40.)
New Freedom has pursued a claim against Lawyers Title to recover its
losses. Lawyers Title has refused to pay the claim. Because of
defendants' fraud (with the exception of Lawyers Title), New Freedom has
suffered a loss of (A) $440,000 (plus interest) less the net amount
received as proceeds from the sale of the Property once the Property has
been sold and (B) attorneys' fees incurred in pursuing its claim against
New Freedom has filed a claim against C&R, Executive, Barys,
Callero, Heard, Herdle, Morgan, Nellessen, Sims and Utz for common law
fraud (Count I); a claim against C&R, Executive, Barys, Callero,
Morgan, Nellessen and Utz for violations of the Consumer Fraud Act (Count
II); a claim against Lawyers Title for breach of contract (Count III); a
claim against C&R for breach of contract (Count IV); a claim against
C&R for negligence (Count V); a claim against Executive for
negligence (Count VI); a claim against Morgan for negligence (Count VII);
a claim against Executive for breach of fiduciary duty (Count VIII); and
a claim against C&R, Executive, Barys, Callero, Heard, Herdle,
Morgan, Nellessen, and Utz for violations of RICO (Count IX). C&R,
Executive, Barys, Callero, Morgan and Nellessen have filed separate
motions to dismiss the claims asserted against them.
The Legal Standard
On a Rule 12(b)(6) motion to dismiss, the Court accepts as true all
well-pleaded factual allegations of the complaint, drawing all reasonable
inferences in plaintiff's favor. Forseth v. Village of Sussex,
199 F.3d 363, 368 (7th Cir. 2000). No claim will be dismissed unless "it
is clear that no relief could be granted under any set of facts that
could be proved consistent with the allegations." Hishon v. King
& Spalding, 467 U.S. 69, 73 (1984).
I. Count I Common Law Fraud
The elements of a common law fraud claim are:
(1) a false statement of material fact; (2) the
party making the statement knew or believed it to
be untrue; (3) the party to whom the statement was
made had a right to rely on the statement; (4) the
party to whom the statement was made did rely on
the statement; (5) the statement was made for the
purpose of inducing the other party to act; and
(6) the reliance by the person to whom the
statement was made led to that person's injury.
Truck Ins. Exchange v. Kafka, 911 F. Supp. 313, 315 (N.D.
Ill. 1995) (quoting Siegel v. Levy Org. Dev. Co.,
607 N.E.2d 194
, 198 (Ill. 1992)). Claims for common law fraud are subject to
Rule 9(b), which requires a plaintiff to state "with particularity" the
circumstances constituting the fraud. The Seventh Circuit has interpreted
this to mean that a plaintiff must plead the facts relating to the "who,
what, when, where, and how" of the fraud. DiLeo v. Ernst &
Young, 901 F.2d 624
, 627 (7th Cir. 1990).
A. Fraud Claim Against C&R
C&R argues that New Freedom has not pled a prima facie
case of fraud against it because all of the documents referred to by New
Freedom in its complaint were prepared by parties other than C&R. In
addition, C&R argues that New Freedom has. not alleged that C&R
made any statement which caused any of New Freedom's damages. C&R's
arguments are unavailing.
New Freedom alleges that certain of the closing documents involved in
the scheme were prepared either at the instigation of C&R or were in
fact prepared by C&R itself. (Compl. Count I ¶¶ 19, 24, 25, 21,
29.) These documents contained false statements of material fact which
C&R knew to be false. (Id. ¶¶ 36, 37.) C&R
participated in the fraud; its actions are sufficient to impose
liability, even if others signed the fraudulent closing documents.
See Beaver v. Union Nat'l Bank & Trust Co., 414 N.E.2d 1339,
1340 (Ill.App. Ct 1980) ("to be liable in an action for fraud a
defendant must have participated in the fraud or at least have had some
knowledge of it").
New Freedom also asserts that C&R may be liable for Utz's fraud
under an agency theory, arguing that Utz is either an employee or
independent contractor of C&R, and that in either case, C&R is
responsible for his fraudulent acts. C&R argues that New Freedom has
not identified with particularity any fraudulent statement or conduct
committed by Utz. We disagree with C&R.
New Freedom has alleged that Utz was involved in the preparation of the
closing documents which contained many material false representations.
(Compl. Count 1 ¶¶ 18, 19, 36, 37). Utz participated in the fraud in
the same manner as C&R. We found above that New Freedom's allegations
were sufficient to state a fraud claim against C&R; we make the same
finding with respect to Utz. As Utz's employer, C&R may be liable for
Utz's wilful acts. See Alms v. Baum, 796 N.E.2d 1123, 1127 (Ill.
App. Ct. 2003) (under respondent superior doctrine, an employer
liable for acts of employees, even if acts are wilful, malicious or
criminal). Even if Utz is an independent contractor working on behalf of
C&R, C&R can still be liable for his fraudulent acts. See
Lang v. Silva, 715 N.E.2d 708, 717-18 (Ill.App. Ct. 1999) (party
who employs independent contractor may be liable for independent
contractor's acts and omissions if party fails to use reasonable care in
hiring contractor or directs contractor to commit act). New Freedom also
argues that C&R is liable for the fraudulent misrepresentations of
Executive and Callero under an alter ego theory. For the reasons stated
in section I. E. of this Opinion (Fraud Claim Against Callero), that
basis for C&R's liability fails.
We find that New Freedom's allegations state a common law fraud claim
against C&R.*fn2 C&R's motion to dismiss Count I is denied.
B. Fraud Claim Against Executive
Executive seeks to dismiss the fraud claim on the basis that New
Freedom has not alleged with particularity that Executive made any false
statement. Executive also argues that the representations contained in
the HUD settlement statement signed by its employees relate only to the
receipt and disbursement of funds, and are not false statements. We
New Freedom seeks to hold Executive liable on the theory of
respondeat superior. Under this doctrine, Executive may be
liable for the negligent, wilful and even criminal acts of its employees,
Barys and Nellessen, when such acts are committed in the course of
employment and in furtherance Executive's business. Berthoud v.
Veselik, 2002 WL 1559594, at *5 (N.D. Ill. July 15, 2002)
(citing Deloney v. Board of Educ. of Thornton Township,
666 N.E.2d 792, 798 (Ill.App. Ct. 1996)). In signing the settlement
statement, Barys represented that the statement was a "true and accurate
account of the funds which were received. . . ." (Compl. Ex. E.) In
signing the settlement statement attachment, Nellessen represented that
the settlement statement was a "true and accurate account of this
transaction." (Id.) New Freedom alleges that the settlement
statement was not a true and accurate representation of the receipt of
funds. In the area of the document titled "amounts paid by or in behalf
of borrower", only the New Freedom loan in the amount of $440,000 is
listed; the second loan from Bank One is omitted. (Id.) In
addition, the settlement statement indicates that $119,416,85 is the
amount of cash due from Heard, but Heard did not contribute any of her
own money. (Compl. Count I ¶¶ 23, 37; Ex. E.) Sims' contribution of
funds is also omitted. (Compl. Count I ¶ 37.) Taking these
allegations as true, as we are required to do, the settlement statement
did not accurately reflect the loan transaction. See Mitchell v
Skubiak, 618 N.E.2d 1013, 1005 (Ill.App. Ct. 1993) (suppression of
material facts can form the basis of a fraud claim).
New Freedom alleges, with sufficient detail, that both Barys and
Nellessen knew the settlement statement contained false information arid
they each attested to its accuracy in the scope of their employment with
Executive and in furtherance of Executive's business. New Freedom has
stated a claim of common law fraud against Executive and Executive's
motion to dismiss Count I is denied.
C. Fraud Claim Against Barys
Barys moves to dismiss the fraud claim, arguing first that New Freedom
did not attribute any actions to her personally and therefore is not
personally liable when acting within the scope of her
employment, and second that New Freedom's complaint does not
contain the particularity required by Rule 9(b). Neither argument is
Barys's first theory, that she cannot be liable for fraud because, as
the complaint alleges, she was acting within the scope of her employment
when she signed the HUD settlement statement, is unconvincing because
"whoever participates in a fraudulent act is guilty of fraud."
Citizens Savings & Loan Ass'n v. Fischer, 214 N.E.2d 612,
616 (Ill.App. Ct. 1966). See also 19A Illinois Law &
Practice Fraud § 12 (West 1991). New Freedom alleges that
Barys knew about the misrepresentations in the HUD settlement statement
and yet still signed it, intending for New Freedom to advance the funds
so Sims could stave off foreclosure. (Compl. Count I ¶¶ 23, 31, 35,
37). By alleging that Barys signed the document herself with knowledge of
its fraudulent content, New Freedom has alleged that Barys was personally
involved in the fraud. The reference to her "acting within the scope of
her employment" does not vitiate Barys's personal liability; the
reference is useful to support New Freedom's fraud claim against
Executive. New Freedom's allegations are sufficient to hold Barys
personally liable for the fraud. See Beaver, 414 N.E.2d at 1340
("to be liable in an action for fraud a defendant must have participated
in the fraud or at least have had some knowledge of it").
Barys's second argument in support of her motion to dismiss is also
unconvincing. The complaint is replete with facts relating to the fraud
and Barys's involvement in it.*fn3 See DiLeo, 901 F.2d at 627
(one must state the who, what, when, where and how of a fraud). Barys's
motion to dismiss Count I is denied.
D. Fraud Claim Against Nellessen
Nellessen seeks to dismiss the fraud claim on the same basis asserted
by Barys, that New Freedom has not attributed any fraud to her
personally. For the same reasons stated above in the case of Barys, the
argument fails here. Nellessen knew the settlement statement contained
false representations and, in fact, notarized Bank One's mortgage on the
Property. New Freedom has alleged with sufficient detail Nellessen's
personal involvement in the fraud. Nellessen's motion to dismiss Count I
E. Fraud Claim Against Callero
In his motion to dismiss, Callero raises the same argument as Barys and
Nellessen. He argues that New Freedom has failed to allege that he was
personally involved in the making of any fraudulent statement and so
cannot be personally liable for common law fraud. We find that in
Callero's case the argument is successful.
New Freedom seeks to hold Callero liable for fraud under two theories:
(1) alter ego and (2) respondeat superior. With respect to the
first theory. New Freedom claims that Callero, C&R and Executive are
alter egos of one another, and that as a result, Callero is personally
liable for fraud perpetrated by C&R and Executive. As for the second
theory, New Freedom argues that under the doctrine of respondeat
superior, C&R is liable for Utz's fraud because Utz was working
as either an employee or independent contractor of C&R, and C&R
ratified his fraud. Because Callero is the alter ego of C&R, the
argument goes, any fraudulent acts committed by C&R (in this case,
through Utz) can be attributed to Callero.
"Piercing the corporate veil" is the usual remedy for finding an alter
ego liable. By piercing the corporate veil, one can disregard the
corporate, form (which usually shields shareholders, directors and
officers from personal responsibility for debts and obligations of the
corporation) and hold the real party to the transaction liable. Stap
v. Chicago Aces Tennis Team, Inc., 379 N.E.2d 1298, 1301 (Ill.App.
Ct. 1978). To pierce the corporate veil, New Freedom must plead: "(1)
such a unity of interest and ownership that the separate personalities of
the corporation and the individual no longer exist; and (2) the
circumstances are such that adherence to the fiction of a separate
corporate existence would sanction a fraud or promote injustice."
Essex Real Estate Group, Ltd. v. River Works, L.L.C., 2002 WL
1822913, at *3 (N.D.Ill. Aug. 7, 2002) (citing Sea-Land Servs. v.
Pepper Source, 941 F.2d 519, 520 (7th Cir. 1991)).
In determining whether there is a unity of interest, we consider: (1)
failure to maintain adequate corporate records or comply with corporate
formalities; (2) commingling of funds or assets or diversion of assets by
or to a shareholder; (3) undercapitalization; and (4) failure to maintain
an arm's length relationships among related entities. See Essex Real
Estate Group, Ltd. at *3. New Freedom's complaint does not suggest
that any of the four factors are present.
The complaint states that: (1) Callero is president and secretary of
C&R, in addition to being a shareholder; (2) Callero is a shareholder
of Executive, and that Executive's president, Marc Callero, is Callero's
brother; (3) C&R and Executive share offices; (4) Callero arranges
for Executive to conduct the closings of transactions that C&R has
brokered; and (5) "Callero, C&R and Executive are alter egos of one
another." (Compl. Count I ¶ 6.) These allegations are insufficient to
support an alter ego theory, especially given the fact that Rule 9(b)
applies. See Typographies
Plus, Inc. v. I.M. Estrada & Co., Inc., 2000 WL
1006572, at *3-4 (N.D. Ill. July 19, 2000) (when pleading alter ego
theory in context of common law fraud claim, Rule 9(b) applies).
In the Typographic case, the court found that allegations that
the individual "created [the corporation] as a mere shell used to further
a scheme to obtain deposits for equipment neither [the individual] nor
[the corporation] ever intend to actually deliver" and that the
individual "knowingly depletes the available cash of [the corporation]"
were not enough to satisfy the requirements of Rule 9(b) "even under the
liberal notice pleading requirements of [the] court." Id. at *4.
The conclusory statement that "Callero, C&R and Executive are alter
egos of one another" does not demonstrate a unity of interest even
outside the Rule 9(b) environment. See Essex Real Estate Group,
Ltd., 2002 WL 1822913, at *4-5 (discussing insufficiency of
conclusory allegations in numerous cases where Rule 9(b) does not apply).
In addition, New Freedom has failed to plead the second element of its
claim to pierce the corporate veil. It has not alleged how maintaining
the separate corporate entities of C&R and Executive will sanction a
fraud or promote an injustice. Piercing the corporate veil is appropriate
"when failure to do so would unfairly enrich one of the parties."
Typographies Plus, Inc., 2000 WL 1006572, at *5. New Freedom has
brought an action directly against both corporate entities; it has not
shown how Callero would be unjustly enriched or would be able to "avoid
any financial obligations he might have to [New Freedom]" as an officer
of C&R or a shareholder of Executive if he is not personally liable
under an alter ego theory. Id. Accordingly, New Freedom has
failed to state a claim of common law fraud against Callero based on an
alter ego theory.
Similarly, New Freedom cannot maintain an action for common law fraud
against Callero under the doctrine of respondeat superior. New
Freedom may be able to establish C&R's liability
for Utz's actions, but New Freedom cannot extend. that chain of
liability to Callero for the reasons stated above. Callero's motion to
dismiss Count I is granted.
II. Count II Consumer Fraud Act
To state a claim for a Consumer Fraud Act violation one must plead:
"(1) a deceptive act or practice; (2) intent on . . . defendant's part
that . . . plaintiff rely on the deception; and (3) that the deception
occurred in the course of conduct involving trade or commerce." Lynch
Ford, Inc. v. Ford Motor Co., Inc., 957 F. Supp. 142, 147-48 (N.D,
Ill. 1997) (internal citations omitted). The allegation must be pled with
the same particularity as required under common law fraud. See
Chaiken v. Fidelity & Guar. Life Ins. Co., 2003 U.S. Dist Lexis
7262, at *9 (N.D. Ill. May 1, 2003).
A. Claim Against C&R
C&R argues that the Consumer Fraud Act claim against it should be
dismissed because New Freedom, as a business and not a consumer, has riot
alleged a consumer nexus; that is, it has not shown how C&R's conduct
implicates consumer protection concerns, In addition, C&R asserts
that New Freedom has not pled the claim with particularity. We agree that
the claim should be dismissed because New Freedom has failed to allege a
If a business is not a consumer under the Consumer Fraud Act, then it
must allege conduct that involves trade practices directed to the market
generally or otherwise implicates consumer protection concerns. See
Skyline Int'l Dev. v. Citibank, 706 N.E.2d 942, 946 (Ill.App. Ct.
1998) (inquiry relevant when dispute involving two businesses that are
not consumers of each other's products). A consumer is one "who purchases
or contracts for the purchase of merchandise [or
services] not for resale in the ordinary course of his trade or
business. . . ." 815 ILCS 505/1(e) (West 1999). C&R argues that New
Freedom is not a consumer because it resold the Heard loan to IMPAC.
Because it is bringing its Consumer Fraud Act claim as a non-consumer,
continues C&R, New Freedom must allege a consumer nexus, which it has
not done. We agree.
New Freedom has an agreement with IMPAC, executed in September 1999,
through which IMPAC buys certain of New Freedom's mortgage loans. (Compl.
Ex. I.) The Heard loan closed on October 16, 2000 and was sold to IMPAC
on October 27, 2000. (Count II ¶¶ 35, 39.) Although the provisions of
the Consumer Fraud Act are meant to be liberally construed, see
Cuculich v. Thomson Consumer Elecs., Inc., 739 N.E.2d 934, 939-40
(Ill.App. Ct. 2000), the short time frame between New Freedom's funding
of the loan and its sale, coupled with the existence of the written
agreement between New Freedom and IMPAC, indicates that New Freedom
intended from the outset to sell the loan to IMPAC and that the loan's
resale was done in the ordinary course of New Freedom's business. This
conduct removes New Freedom from the Consumer Fraud Act's definition of
Because New Freedom is not a consumer under the Consumer Fraud Act, it
must allege a nexus between C&R's conduct and general consumer
protection concerns. See Lake County Grading Co. of Libertyville,
Inc. v. Advance Mechanical Contractors, Inc., 654 N.E.2d 1109, 1116
(Ill.App. Ct. 1995). The complaint fails to allege any public injury or
injury to consumers in general and we will not presume any consumer
injury, especially in the context of Rule 9(b).*fn4 See Nakajima All
Co., Ltd. v. SL Ventures Corp., 2001 WL 641415, at *4 (N.D. Ill.
June 4, 2001) (Consumer
Fraud Act claims based in fraud or mistake are subject, to Rule 9(b));
First Comics, Inc. v. World Color Press, Inc., 672 F. Supp. 1064, 1068
(N.D. Ill. 1987) (court will not presume consumer injury in non-consumer
cause of action). C&R's motion to dismiss Count II is granted.
B. Claim Against Executive
Executive argues that New Freedom cannot maintain its Consumer Fraud
Act claim against it because New Freedom lacks standing (it did not
purchase or contract for purchase any merchandise from Executive) and has
failed to satisfy Rule 9(b) pleading requirements. For the reasons stated
above (failure to allege a consumer nexus), the Consumer Fraud Act claim
against Executive is dismissed.
Executive is correct that New Freedom is not a consumer here because
New Freedom did not purchase from or contract for purchase with Executive
for any merchandise. However, the Consumer Fraud Act does not only
protect consumers; it also "protects business persons from fraud and
unfair competition." Mitsubishi Elec. Corp. v. IMS Tech. Inc.,
1997 WL 630187, at *10 (N.D. Ill. Sept. 30, 1997) (internal citation
omitted). One need not have purchased merchandise to bring a claim.
See Allergy Asthma Tech., Ltd. v. I Can Breathe, Inc.,
195 F. Supp.2d 1059, 1072 (N.D. Ill. 2002) (claimant need not be the one
deceived; it is enough that claimant suffered damages); Ashkanazy v.
I. Rokeach & Sons, Inc., 757 F. Supp. 1527, 1557 (N.D. Ill.
1991) (business competitor has standing to bring claim). "Any person who
suffers actual damage as a result of a violation of this Act committed by
any other person may bring an action against such person." 815 ILCS
505/10a (West 1999).
However, because New Freedom is not asserting a claim against Executive
as a consumer, it is subject to the same pleading standards we required
with respect to its claims against C&R New Freedom must
allege that the objectionable conduct involved trade practices addressed
to the market generally or otherwise implicates consumer protection
concerns. Empire Home Servs. Inc.
v. Carpet America, Inc., 653 N.E.2d 852, 854 (Ill.App.
Ct. 1995). New Freedom's complaint is inadequate in this regard, and we
will not presume consumer injury. Executive's motion to dismiss Count II
C. Claim Against Barys
Barys seeks to dismiss this claim against her for the same reasons she
seeks to dismiss the common law fraud claim: there is no allegation that
Barys personally made any false statements or knew the statements were
false. We disposed of those arguments under our common law fraud
discussion where we denied Barys's motion to dismiss that claim. However,
we grant Barys's motion to dismiss the Consumer Fraud Act claim for the
same reason we dismissed the claim against Executive failure to
allege consumer injury.
With respect to Barys, New Freedom is not a consumer of any merchandise
or services and so New Freedom must allege that Barys's conduct involves
trade practices addressed to the market generally or otherwise implicates
consumer protection concerns. See Skyline Int'l Dev., 706 N.E.2d
at 946. New Freedom has failed to do so. Accordingly, we grant Barys's
motion to dismiss.
D. Claim Against Nellessen
The same reasons that support the granting of Executive's and Barys's
motions to dismiss this claim apply to Nellessen's case as well. We will
not repeat them here. Nellessen's motion to dismiss the Consumer Fraud
Act claim is granted.
E. Claim Against Callero
New Freedom's Consumer Fraud Act claim against Callero is premised on
the same alter ego and respondeat superior theories advanced by
New Freedom to sustain its common law fraud claim
against Callero. The reasons for which we dismissed the common law
fraud claim apply equally here: New Freedom has not sufficiently alleged
an alter ego theory through which Callero can be personally liable for
the acts of C&R and Executive . . . Accordingly, any respondeat
superior theory through which Callero may be personally liable for
Utz's acts because of Utz's relationship with C&R also fails. Count
II against Callero is dismissed.
III. Count V Negligence Against C&R
New Freedom has asserted a claim of negligence against C&R.
Negligence claims for economic losses, that is, losses not accompanied by
either personal injury or property damage, are normally barred in
Illinois by the Moorman doctrine.*fn5 However, two exceptions
to the Moorman doctrine have been recognized: cases involving
fraud or intentional misrepresentation and cases involving negligent
misrepresentation. We are concerned here with the latter exception.
To state a claim for negligent misrepresentation in its
post-Moorman form under Illinois law, New Freedom must allege
that: (1) C&R is in the business of providing information for the
guidance of others in their business dealings; (2) C&R supplied
information that constitutes a misrepresentation; and (3) the information
was supplied for guidance in New Freedom's business dealings. Tolan
& Son, 719 N.E.2d at 296. C&R argues that it is not in the
business of providing information; any information provided to New
Freedom pursuant to New Freedom's relationship with C&R is actually
provided by the borrower herself. In support of its argument, C&R
refers to language in its agreement with New Freedom which specifically
states that C&R will "assist the borrowers in completing credit
applications." (Compl. Ex. A ¶ 4.1.) In any event, argues C&R,
any information that it does provide to New Freedom is incidental to its
product, the mortgage loan. Tolan & Son, 719 N.E.2d at 296
(defendant will not be found to be in the business of providing
information for the guidance of others in their business dealings
if information is ancillary to the product or service provided). These
arguments are not convincing.
This case falls into the group of "hybrid" cases where both information
and noninformational goods and services are provided by a defendant. "In
these cases, the inquiry is whether the information provided was an
important part of the product offered." Gerdes v. John Hancock Mutual
Life Ins. Co., 712 F. Supp. 692, 698 (N.D. Ill. 1989). We can imagine
that information about the borrower is as important to the sale of the
mortgage loan as the mortgage loan itself. This information, even if much
of it comes from the borrower, is not ancillary to the sale of the
Moreover, New Freedom has alleged that C&R is "in the business of
supplying information for the guidance of others." (Compl. Count V ¶
34.) It is reasonable to assume that, because C&R may be obligated to
repurchase the loan under certain circumstances, it seeks out all
relevant information about the borrower and the loan transaction and
passes this information on to New Freedom. In fact, C&R has an
affirmative obligation to notify New Freedom of any information "which
comes to [C&R's] attention which relates to [New Freedom's]
determination in respect to its underwriting decision, such as, but not
limited to, improper or inaccurate disclosure of information on the
credit application." (Ex. A ¶ 4.4.) Given all of the allegations in
the complaint, we can reasonably infer that C&R's role is not limited
to acting solely as an informational conduit between Heard and New
Freedom. See Zahorik v. Smith Barney, 664 F. Supp. 309, 314
(N.D. Ill. 1987) (one who acts solely as an informational conduit may
avoid liability). C&R's motion to dismiss Count V is denied.
VI. Count VI Negligence Against Executive
New Freedom asserts the same type of claim against Executive as it did
against C&R, negligent misrepresentation, and like C&R, Executive
relies on the Moorman doctrine in support of its motion to
dismiss. For the same reasons stated above, we find that New Freedom has
stated a claim for negligent misrepresentation against Executive through
the actions of Barys and Nellessen.
New Freedom has alleged that Executive is in the business of supplying
information for the guidance of others in their business dealings.
(Compl. Count VI ¶ 34.) That information includes details about
monies received and disbursed as part of a loan transaction. (Ex. E.) We
do not agree with Executive that it "only provides a service, that is,
closing real estate transactions" and that any information it supplies in
providing the service is ancillary to the sale of that service.
(Executive's Reply Mot. to Dismiss at 5.) The information a title,
company provides, information about the title to the property, is
critical to the transaction and cannot reasonably be separated from the
service it provides. See Gerdes, 712 F. Supp. at 698 (looking at
whether information supplied along with noninformational goods or
services "was central to the business transaction") (citing Rankow v.
First Chicago Corp., 870 F.2d 356 (7th Cir. 1989)). Without the
information provided by Executive through Barys and Nellessen, New
Freedom would not have funded the loan. (Compl. Count VI ¶ 32.) We
cannot say at this stage in the litigation that New Freedom cannot show
that Executive was not in the business of providing information for the
guidance of others in their business dealings. New Freedom's allegations
are sufficient to state a claim for negligent misrepresentation.
Executive's motion to dismiss Count VI is denied.
VII. Count VIII Breach of Fiduciary Duty Against
New Freedom asserts a claim of breach of fiduciary duty against
Executive arising from Executive's preparation of an inaccurate HUD
settlement statement and concealment of certain information about the
loan transaction. Executive argues that New Freedom's claim must fail
because New Freedom knew about the second mortgage loan from Bank One.
Executive's argument is unavailing.
To state a claim for breach of fiduciary duty under Illinois law, New
Freedom must allege: (1) the existence of a fiduciary duty; (2) breach of
that duty; and (3) damages as a result of the breach. See McLaughlin
v. Chicago Transit Authority, 243 F. Supp.2d 778, 779 (N.D. Ill.
2003). New Freedom has done just that. It has alleged that Executive
acted as its agent in closing the Heard loan and thus Executive owed a
fiduciary duty to New Freedom. (Compl. Count VIII ¶ 44.) New Freedom
has alleged that Executive breached its fiduciary duty by preparing and
providing a HUD settlement statement that was untruthful and by failing
to disclose important facts about the transaction. (Id. ¶¶
46, 47.) New Freedom has also alleged damages as a result of Executive's
breach of fiduciary duty. (Id. ¶ 49.)
Executive's basis for dismissing the claim is without merit. It argues
that, based on the loan closing instructions given to it by New Freedom
(attached to Executive's memorandum in support of its motion to dismiss
as exhibit A), a reference to "HUDS" indicates that there was more than
one loan involved in the Heard transaction. Executive urges us to draw
the inference that, based on the use of "HUDS" in its instructions, New
Freedom was aware of the existence of another loan.*fn6 As
a consequence, argues Executive, New Freedom's. claim for breach of
fiduciary duty must fail. Executive also argues that New Freedom's
allegation with respect to Heard's intention, or lack thereof, to occupy
the Property is conclusory and therefore inadequate.
We refuse to draw the inference from the use of the terms "HUDS" that
Executive proposes. New Freedom alleges that Executive breached its duty
by failing to document the Bank One loan on the HUD settlement statement.
Executive's exhibit. A does not contradict this allegation. At the most,
the reference to the plural "HUDS" creates an ambiguity. As New Freedom
argues, the single reference is subject to numerous interpretations
a typographical error, a reference to the settlement statement
and its attachment or some other abbreviation whose meaning is understood
by the parties. Ambiguities in a complaint are resolved in favor of a
plaintiff. Curtis v. Bembenek, 48 F.3d 281, 283 (7th Cir. 1995).
Even if the reference to HUDS provides some evidence that New Freedom
was aware of the Bank One loan, it does not mean that New Freedom can
prove no set of facts to supports it breach of fiduciary duty claim.
See Prince v. Rescorp Realty, 940 F.2d 1104, 1106 (7th Cir.
1991) ("a complaint should not be dismissed `unless it appears beyond
doubt that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief") (quoting Conley v.
Gibson, 355 U.S. 41, 45-46 (1957)). New Freedom's claim also rests
on Executive's failure to notify it that Heard did not intend to occupy
the Property, that Sims contributed a certain amount of money to the
transaction and that the transaction was undertaken in order to delay
foreclosure proceedings on Sims' home. (Compl. Count VIII ¶¶ 46, 47.)
These allegations are unaffected by New Freedom's knowledge, if any, of
the Bank One loan.
Executive also argues that New Freedom's allegation with respect to
Heard's intention to occupy the Property is conclusory and therefore
inadequate. New Freedom is not required to plead specific facts. "All
that Rule 8 requires is a short and plain statement showing the plaintiff
is entitled to relief, the purpose of which is to give the defendant
notice of the claims and the grounds they rest upon." Thompson v.
Illinois Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir.
2002). New Freedom's allegation on this point is sufficient.
New Freedom has satisfied the pleading requirements for stating a claim
for breach of fiduciary duty. Executive's motion to dismiss. Count VIII
IX. Count IX RICO
New Freedom has asserted RICO claims against defendants C&R,
Executive, Barys, Nellessen, Callero, Morgan, Heard, Herdle and Utz.
Specifically, New Freedom alleges that defendants' conduct violated
18 U.S.C. § 1962 (a) and (c). (Compl. Count IX ¶ 50.) A violation of
section 1962(a) requires the receipt of income from a pattern of
racketeering and the use of that income in the operation of an
enterprise. Morgan v. Bank of Waukegan, 804 F.2d 970, 972 (7th
Cir. 1986). A violation of section 1962(c) requires, conduct of an
enterprise through a pattern of racketeering activity. Id. at
973. A "crucial element" of a claim under either section is "the
existence of a pattern of racketeering activity." Id. "A pattern
of racketeering activity consists of at least two predicate acts . . .
committed within a ten-year period." Midwest Grinding Co., Inc. v.
Spitz, 976 F.2d 1016, 1019 (7th Cir. 1992).
New Freedom alleges that defendants engaged in two acts of wire fraud
the first during the Fremont loan transaction and the second
during New Freedom's loan transaction. Acts of wire fraud can constitute
the necessary predicate acts of a RICO violation. See
18 U.S.C. § 1961(1). But wire fraud is fraud, and each of New Freedom's
allegations of wire fraud must comply with the particularity requirement
of Rule 9(b). See Goren v. New Vision Int'l, Inc., 156 F.3d 721,
729 (7th Cir. 1998). Each defendant filing a motion to dismiss this count
argues that, among other things, New Freedom's RICO allegation does not
comply with Rule 9(b). We agree.
To satisfy the Rule 9(b) particularity requirement, "the complaint must
be specific with respect to the time, place, and content of the alleged
false representations, the method by which the misrepresentations were
communicated, and the identities of the parties to those
misrepresentations." Lachmund v. ADM Investor Servs., Inc.,
191 F.3d 777, 784 (7th Cir. 1999). When dealing with wire fraud, a "plaintiff
must specifically identify the fraudulent transactions by identifying the
specific times, places and contents of the alleged acts of [wire fraud],
the identify of the parties engaging in this fraud, and the consequences
of this fraud." Guest v. Balmes, 1989 WL 97839, at * 1-2 (N.D.
Ill July 11, 1989) (citing Haroco v. American Nat'l Bank & Trust
Co. of Chicago, 747 F.2d 384, 405 (7th Cir. 1984)). New Freedom has
satisfied this standard when describing the fraud which caused it to
extend a loan to Heard but the standard has not been satisfied with
respect to the fraud involving Fremont.
As to this latter act of fraud, New Freedom states "the defendants had
engaged in a scheme to defraud [Fremont] in the same manner as they
defrauded New Freedom as described above." (Compl. Count IX ¶ 46.)
The complaint identifies the address of the property involved and the
date of the closing, but is lacking in detail about the wire transfer
itself, specifically the amount of money
involved, where it originated and in what deceitful way the funds
were disbursed. The complaint also lacks detail about the specific
communications involved in the Fremont scheme (e.g., the amount of money
involved and the content of the appraisal reports) and the method of
their communication. In addition, there are no allegations pertaining to
the consequences suffered by Fremont as a result of the wire fraud;
saying simply that Heard "defaulted on the mortgage loan" does not
provide the relevant information. Given the Rule 9(b) requirements, we
will not accept New Freedom's general allegation that defendants engaged
in a fraud against Fremont "in the same manner" as previously described.
It may be a simple. matter of expanding the complaint, but we believe
Rule 9(b) demands it.
Because we find that New Freedom has not. alleged a pattern of
racketeering activity, which is a necessary element to each of New
Freedom's RICO claims, we do not reach any of the other reasons advanced
by defendants in support of their individual motions to dismiss. Count IX
of the complaint is dismissed with respect to all defendants.*fn7
For the reasons stated above, defendants' motions to dismiss are
granted in part and denied in part. Count I against Callero is dismissed.
Count II against C&R, Executive, Barys, Callero and Nellessen is
dismissed. Count IX against all defendants is dismissed. All dismissals
are without prejudice. New Freedom is hereby granted leave to. amend its
complaint within thirty days of the date hereof.