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GUARANTY RESIDENTIAL LENDING v. INT'L MORTGAGE CENTER

January 21, 2004.

GUARANTY RESIDENTIAL LENDING, INC., Plaintiff,
v.
INTERNATIONAL MORTGAGE CENTER, INC., a/k/a HTFC Corporation, et al., Defendants



The opinion of the court was delivered by: WILLIAM HART, Senior District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Guaranty Residential Lending, Inc. alleges that it purchased six fraudulent mortgage loans (the "Subject Loans") on the secondary market and that the named defendants are responsible for the losses resulting from the Subject Loans. Plaintiff alleges a scheme in which residential properties located in Chicago, Illinois (the "Subject Properties") were purchased and then purportedly resold at inflated values, with the Subject Loans being based on the inflated values. As to at least four of the Subject Properties, the purported second purchasers and borrowers were already deceased at the time the Subject Loans were closed. When the Subject Loans defaulted, there was no mortgagee available for collection and the Subject Page 2 Properties were worth substantially less than the principal of the Subject Loans. Plaintiff alleges it lost more than $770,000 on the Subject Loans. Four corporations and six individuals are named as defendants. One count of plaintiff's Complaint is a federal claim for violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO")", 18 U.S.C. § 1961-68. All other counts contain state common law claims. The state law claims are supplemental to the federal RICO claim. See 28 U.S.C. § 1367. Plaintiff also asserts that there is diversity jurisdiction in that there is complete diversity of citizenship and the amount in controversy exceeds $75,000.*fn1

Two motions to dismiss are: pending.*fn2 One motion is brought by defendant Lawyers Title Insurance Corporation ("Lawyers Title") and the other motion is brought by defendants Nations Title Agency of Illinois ("Nations Title") and Janice Seeman, who allegedly was Nations Title's closing manager.*fn3 In Page 3 their briefs, the parties generally fail to recognize the interrelationships between the applicable law and pleading standards applicable to this case. While state law*fn4 provides the substantive law for the common law claims that are alleged, federal law establishes the pleading standard. Muzikowski v. Paramount Pictures Corp., 322 F.3d.918, 925-26 (7th Cir. 2003); Johnson v. Hondo, Inc., 125 F.3d 408, 417 (7th Cir. 1997); Lifton v. Board of Education of City of Chicago, 290 F. Supp.2d 940, 946 (N.D. Ill. 2003). Thus, Illinois law provides the elements of each particular common law claim, but federal law controls as to what must be alleged in the Complaint. Except as to those claims based on fraud, notice pleading is all that is required. See Fed.R.Civ.P. 8. here fraud is alleged, however, the circumstances must be alleged with particularity, though intent and knowledge may still be averred generally. See Fed. R. Civ. P. 9(b).

  The Complaint contains eight counts denominated as follows: I: fraud by all defendants; II: conspiracy to defraud by all defendants; III: negligent misrepresentation by all Page 4 defendants; IV: promissory estoppel*fn5 by all defendants; V: RICO violations (18 U.S.C. § 1962(a), (c), & (d)) by all defendants based on predicate acts of mail fraud (id. § 1341), wire fraud (id. § 1343), and bank fraud (id. § 1344); VI: breach of contract by defendant International Mortgage Center, Inc. ("IMC") only; VII: unjust enrichment by IMC only; and VIII: constructive trust against IMC only.

  On a Rule 12(b)(6) motion to dismiss, plaintiff's well-pleaded allegations of fact are taken as true and all reasonable inferences are drawn in plaintiff's favor. Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993); Dixon v. Page 291 F.3d 485, 486 (7th Cir. 2002); Stachon v. United Consumers Club, Inc., 229 F.3d 673, 675 (7th Cir. 2000). Ordinarily, a complaint need not set forth all relevant facts or recite the law; all that is required is a short and plain statement showing that the party is entitled to relief. Fed.R.Civ.P. 8(a)(2); Boim v. Quaranic Literacy Institute, 291 F.3d 1000, 1008 (7th Cir. 2002); Anderson v. Simon, 217 F.3d 472, 474 (7th Cir. 2000), cert. denied, 531 U.S. 1073 (2001); Scott v. City of Chicago, 195 F.3d 950, 951 (7th Cir. 1999). Ordinarily, a plaintiff in a suit in federal court need not plead facts; conclusions may be Page 5 pleaded as long as the defendant has at least minimal notice of the claim. Fed.R.Civ.P. 8(a)(2); Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002); Scott, 195 F.3d at 951; Albiero v. City of Kankakee. 122 F.3d 417, 419 (7th Cir. 1997); Jackson v. Marion County. 66 F.3d 151, 153-54 (7th Cir. 1995). However, to the extent fraud is alleged, it must be pleaded with particularity. See Fed.R.Civ.P. 9(b); Slaney v. The International Amateur Athletic Federation. 244 F.3d 580, 597 (7th Cir.), cert. denied, 534 U.S. 828 (2001); Shapo v. O'Shaughnessy, 246 F. Supp.2d 935, 955-56 (N.D. Ill. 2002). Additionally, even if not required to plead specific facts, a plaintiff can plead itself out of court by alleging facts showing there is no viable claim. See Slaney, 244 F.3d at 597; Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 669-70 & n.14 (7th Cir. 1998), cert. denied, 525 U.S. 1114 (1999); Jackson, 66 F.3d at 153-54.

  Ordinarily, as long as they are consistent with the allegations of the complaint, a plaintiff may assert additional facts in its response to a motion to dismiss. Brokaw v. Mercer County, 235 F.3d 1000, 1006 (7th Cir. 2000); Forseth v. Village of Sussex, 199 F.3d 363, 368 (7th Cir. 2000); Albiero, 122 F.3d at 419; Gutierrez v. Peters. 111 F.3d 1364, 1367 n.2 (7th Cir. 1997). However, Rule 9(b) requires that the necessary allegations be in the complaint itself. Kennedy v. Venrock Associates, 348 F.3d 584, 593 (7th Cir. 2003); Abrams v. Van Page 6 Kampen Funds, Inc., 2002 WL 1160171 *2 (N.D. Ill. May 30, 2002); Chicago District Council of Carpenters Welfare Fund v. Angulo, 169 F. Supp.2d 880, 886 (N.D. Ill. 2001); Implant Innovations, Inc. v. Nobelpharma AB, 1995 WL 562.092 *5 (N.D. Ill. Sept. 14, 1995). Additional allegations contained in the responsive brief, however, may indicate that plaintiff should be given the opportunity to amend the Complaint to comply with Rule 9(b). See Ziemba v. Cascade International, Inc., 256 F.3d 1194, 1213 (11th Cir. 2001); Angulo, 169 F. Supp.2d at 886; Implant Innovations, 1995 WL 562092 at *5. While additional allegations contained in a responsive brief are not considered to be incorporated in the complaint, documents that are referred to in the complaint and that are central to a claim that is made may be considered to be part of the complaint even if not actually attached to the complaint. Rosenblum v. Travelbyus.com Ltd., 299 F.3d 657, 661 (7th Cir. 2002); Duferco Steel Inc. v. M/V Kalisti, 121 F.3d 321, 324 n.3 (7th Cir. 1997); Venture, Associates Corp. v. Zenith, Data Systems Corp.. 987 F.2d 429, 431 (7th Cir. 1993). However, where a dispute exists as to whether a document provided by the moving party is authentic or complete, the document will not be considered on a motion to dismiss even if the document was referenced in the complaint and central to a claim. Divane v. Nextiraone, LLC, 2002 WL 31433504 *2 (N.D. Ill. Oct. 30, 2002). Where the document may properly be considered, though, the actual Page 7 document will override inconsistent descriptions of the document alleged in the body of the complaint. See Rosenblum, 299 F.3d at 661 (quoting 5 Wright & Miller, Federal Practice & Procedure: Civil 2d § 1327 at 766 (1990)); In re Wade. 969 F.2d 241, 249 (7th Cir. 1992); Beam v. IPCO Corp.. 838 F.2d 242, 244-45 (7th Cir. 1988).

  In the complaint itself, it, is unnecessary to specifically identify the legal basis for a claim as long as the facts alleged would support relief. Forseth, 199 F.3d at 368; Scott, 195 F.3d at 951; Albiero. 122 F.3d 419; Bartholet v. Reishauer A.G. (Zurich), 953 F.2d 1073, 1078 (7th Cir. 1992); Dodaro v. Village of Glendale Heights, 2003 WL 1720030 *8 (N.D. Ill. March 31, 2003). The plaintiff is not bound by legal characterizations of the claims contained in the complaint. Forseth, 199 F.3d at 368; Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 1039, 1041 (7th Cir. 1999). However, in response to a motion to dismiss that raises the issue, the plaintiff must identify a legal basis for a claim and make adequate legal arguments in support of it. Kirksey, 168 F.3d at 1041-42; Stransky v. Cummins Engine Co., 51 F.3d 1329, 1335 (7th Cir. 1995); Levin v. Childers, 101 F.3d 44, 46 (6th Cir. 1996); Gilmore v. Southwestern Bell Mobile Systems, L.L.C., 224 F. Supp.2d 1172, 1175 (N.D. Ill. 2002); Carpenter v. City of Northlake, 948 F. Supp. 759, 765 (N.D. Ill. 1996). Page 8

  Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be, averred generally." The circumstances of fraud generally include "the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Slaney, 244 F.3d at 599; General Electric Capital Corp. v. Lease Resolution Corp.. 128 F.3d 1074, 1CL78 (7th Cir. 1997). A complaint must outline the alleged misrepresentations and reasonably notify a defendant of the specifics of the alleged fraudulent activity, including the particular defendant's role. Lachmund v. ADM Investor Services, Inc., 191 F.3d 777, 782 (7th Cir. 1999); Goren v. New Vision International, Inc., 156 F.3d 721, 730 (7th Cir. 1998); Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016, 1020 (7th Cir. 1992); Ward Enterprises, Inc. v. Bang & Olufsen, 2003 WL 22859793 *1 (N.D. Ill. Dec. 2, 2003); Gilmore v. Southwestern Bell Mobile Systems, L.L.C., 210 F.R.D. 212, 224 (N.D. Ill. 2001). Fair notice is the most basic consideration. Vicom, Inc. v. Harbridge Merchant Services, Inc., 20 F.3d 771, 777-78 (7th Cir. 19941; In re Bridgestone/Firestone Inc. Tires Products Liability Litigation. 2002 WL 31689264 *8 (S.D. Ind. Nov. 20, 2002); Gilmore. 210 F.R.D. at 224. Page 9 Additionally, the requirements of Rule 9(b) may be relaxed where the plaintiff makes an adequate showing that necessary information is within the control of a defendant so that particularized pleading cannot be fully accomplished prior to receiving discovery. See Emery v. American General Finance, Inc., 134 F.3d 1321, 1323 (7th Cir.), cert. denied, 525 U.S. 818 (1998).

  By its language, the particularity requirement of Rule 9(b) is limited to the "circumstances constituting fraud." See Lachmund. 191 F.3d at 783; Hecht v. Commerce Clearing House, Inc. 897 F.2d 21, 26 n.4 (2d Cir. 1990); Hirata Corp. v. J.B. Oxford & Co., 193 F.R.D. 589, 596-97 (S.D. Ind. 2000). Thus an agency relationship establishing vicarious liability for fraud generally does not have to be pleaded with particularity. See Lachmund, 191 F.3d at 783; Hirata, 193 F.R.D. at 597. Where a conspiracy to commit fraud is alleged, the conspiracy itself generally need not be alleged with particularity. See Hecht, 897 F.2d at 26 n.4; Perlman v. Zell, 938 F. Supp. 1327, 1348-49 (N.D. 111. 1996), aff'd, 185 F.3d 850 (7th Cir. 1999). However, where the same circumstances establish both the fraud and an otherwise independent basis for liability, both must be alleged with particularity. For example, where there is no separate agency relationship relied on as a basis for fraud, only vicarious liability based on being a coconspirator, participation Page 10 in the conspiracy must be alleged with particularity. See Lachmund. 191 F.3d at 783.

  The following facts are assumed to be true for purposes of ruling on the pending motions to. dismiss. The Complaint describes the named defendants as follows. Defendant IMC, also known as HTFC Corp., *fn6 has its principal place of business in New York and is a licensed mortgage banker in Illinois. Defendant Aaron Wider is IMC's chief executive officer and sole shareholder. Defendant Century Mortgage & Funding, Inc. ("CMF") has its principal place of business in Illinois and is a subsidiary of or otherwise legally affiliated with IMC. CMF acted as the mortgage broker and original lender for each of the Subject Loans. Defendant Tommy Pililimis ("Pililimis") is an Illinois resident and was employed by IMC and CMF. Pililimis represented that he conducted face to face interviews with borrowers on the Subject Loans even. though those borrowers were already dead at the time the interviews purportedly occurred.

  Defendant Nations Title transacts business at a location in Illinois. Nations Title was the title company/closing agent on each of the Subject Loans when originated and funded by IMC/CMF. Nations Title prepared the documents of conveyance, Page 11 settled the transactions, collected payments from the buyers and sellers, and disbursed proceeds. It is alleged that Nations Title "is an approved local agent of Defendant Lawyers Title Insurance Corp. and holds itself out, as such." Compl. ¶¶ 8. Defendant Seeman was employed as a closing manager for Nations Title and acted as the settlement agent for each of the Subject Loan transactions. Seeman is a resident of Illinois and a certified notary public in Illinois. Nations Title and Seeman were involved in the closing of the Subject Loans when funded and originated by IMC/CMF. Nations Title and Seeman were not directly involved in the sale of the Subject Loans to plaintiff, but documents they prepared at the closings were provided to plaintiff at the time the Subject Loans were sold to plaintiff.

  Defendant Lawyers Title transacts business at a location in Illinois. Lawyers Title is in, the business of underwriting title insurance for approved local agents. Lawyers Title is the underwriter for the property title insurance for each of the Subject Loans. It is alleged that, although Lawyers Title "did not itself actively participate in the conspiracy to defraud Guaranty Residential, under principles of agency law, [Lawyers Title] is vicariously liable for acts of its agent, [Nations Title], which did actively participate in this conspiracy." Compl. ¶ 9. Page 12

  Defendants Steve Fobs, Jr., Stavros (or Steven) Bourmas, and Anthony Mitchell (the "Appraiser Defendants") were all certified residential real estate appraisers licensed by the State of Illinois. Each of these defendants provided an inflated appraisal for one or more Subject Properties. The appraisals were submitted to plaintiff at the, time the Subject Loans were sold to plaintiff.

  The Complaint specifically identifies the six Subject Loans, including the amounts of the loans, the underlying Subject Properties, the real or purported borrowers, the dates of the Loans, and the dates the Loans were resold. As to five of the Subject Properties, prior sales in which the prices increased substantially in a short time period are identified, including the sales dates, sales prices, and purported buyers and sellers.*fn7 As to the four purported borrowers., who were deceased prior to the closings, their dates of death are alleged and supported by copies of a death certificate or obituary.*fn8 As to one Subject Property (Saginaw), it is alleged that the false representation was that it was owner occupied. The fact that this property was Page 13 not actually owner occupied prevented plaintiff from reselling the loan on the secondary market.

  As to five*fn9 of the Subject Properties, the Appraiser Defendant's involvement is specifically alleged. The particular Appraiser Defendant who appraised each Subject Property is identified and deficiencies in the "appraisals are identified. The deficiencies generally involve failure to disclose or affirmatively misrepresenting the conditions of the Subject Properties and failing to note the recent sales of the Subject Properties at substantially lower prices.

  It is alleged that plaintiff and IMC had a Correspondent Loan Purchase Agreement ("CLP Agreement") dated March 22, 2002. Under the CLP Agreement, plaintiff and IMC had an ongoing business relationship in which plaintiff would purchase mortgage loans from IMC or its affiliates, including CMF. IMC made fraudulent representations to plaintiff when selling the Subject Loans in that IMC misrepresented that (a) the Subject Loans were secured by properties worth the market values reflected in the appraisals; (b) as to four of the Subject Loans, that the borrowers were then-living; and (c) that authentic signatures were on loan documents for the three deceased borrowers.*fn10 The Page 14 loan documents involving the deceased borrowers contain false statements that a CMF or IMC employee conducted a face-to-face interview with the borrower, Pililimis on two of the loans, Wider on one, and nondefendant CMF ...


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