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NEW FREEDOM MORTGAGE CORP. v. C & R MORTGAGE CORP.

January 14, 2004.

NEW FREEDOM MORTGAGE CORPORATION, Plaintiff,
v.
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. Page 2

I. Facts*fn1

  The Parties

  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 Construction Company Page 3 and Umarc, Ltd. Utz was either a C&R employee or did work for C&R as an independent contractor. (Id. ¶ 12.)

  The Loan

  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. ¶ 18.)

  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 Page 4 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 Page 5 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.)

  The Scheme

  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 Page 6 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 Page 7 to occupy the premises, never did so, and did not invest her own money in the property. Heard ultimately defaulted on the mortgage loan. (Id.)

  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 Lawyers Title.

  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. Page 8

  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).

  Discussion

 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 ...

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