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Eq Financial, Inc. v. Personal Financial Co.

March 23, 2006


The opinion of the court was delivered by: Magistrate Judge Mason


Michael T. Mason, United States Magistrate Judge

This matter is before the Court on defendant Personal Financial Company's ("PFC") motion to dismiss with prejudice Count VI and Count VII of EQ Financial Company's ("EQ") fourth amended complaint (the "Complaint"). For the reasons stated below, PFC's motion to dismiss is granted.


EQ operated as a lending institution and mortgage wholesaler from 1993 through 2000. (Compl. ¶ 3). During that time, EQ purchased and resold mortgages secured by residential real estate. (Id.). Once EQ loaned money pursuant to a mortgage, EQ would promptly sell that mortgage to a third party. (Id.). PFC is a finance company in the business of lending both secured and unsecured consumer loans. (Id. ¶ 4).

EQ filed its seven count Complaint against PFC alleging fraud, violations of the Illinois Consumer Fraud Act, fraudulent concealment, negligent misrepresentation, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). See 18 U.S.C. § 1962 et seq. Count VI of the Complaint alleges that PFC violated 18 U.S.C. § 1962(c), and Count VII alleges that PFC violated 18 U.S.C. § 1962(d).

EQ alleges that from 1995 through 1997, defendant PFC and non-parties Larry Beeman (a Branch Manager of PFC), David Guel ("Guel"), Honeywood Development Corporation ("Honeywood"), Dollars Express ("Dollars Express"), Grant Mortgage Services ("Grant Mortgage") and Steve Johnson ("Johnson") operated a loan ring (the "Loan Ring"). (Compl. ¶¶ 8-9). EQ alleges that the Loan Ring was a RICO enterprise that engaged in a pattern of racketeering activity and ultimately defrauded EQ of over $1,500,000. (Id. ¶¶ 10, 123). According to EQ, the Loan Ring had an identifiable structure with each member fulfilling a specific role to carry out and facilitate its purpose. (Id. ¶ 10).

EQ asserts that Guel controlled and operated real estate development companies Dollars Express and Honeywood. (Compl. ¶¶ 11-12). EQ claims that together Guel and Honeywood recruited individuals to invest in "near-worthless" residential real estate on the South and Southeast sides of Chicago as part of a "community redevelopment" project. (Id. ¶¶ 11-12, 15). According to EQ, Honeywood promised the investors that they would be "joint venture partners" and together Guel, Honeywood and the investors would renovate distressed properties. (Id. ¶ 13). Honeywood and Guel promised to pay the investors a certain amount of money per property at the time of acquiring the property. (Id.). Honeywood and Guel also promised to pay the investors $2,500 per property at the end of one year or upon the sale of the rehabilitated property. (Id.). In exchange for the investors' credit, Honeywood promised to handle all financing matters, make payments on the loans secured by the property and use the loan proceeds to renovate the property. (Id.). EQ alleges that the "community redevelopment" program was really a complex fraud designed to obtain loan proceeds and that few, if any, of the properties were ever rehabilitated. (Id. ¶ 14).

EQ alleges that the Loan Ring operated as follows: after Guel and Honeywood recruited investors and selected investment properties, John J. Hasler,*fn1 a real estate appraiser, prepared property appraisal reports in both the "as-is" condition of the properties and in the "rehabilitated" condition of the properties. (Compl. ¶ 17). Then, Guel and Dollars Express prepared and tendered sworn contractor's statements to Hasler identifying the items that needed to be repaired and the costs for repairing such items in order to get the properties to the "rehabilitated values." (Id. ¶ 18). Upon receipt of the appraisals performed by Hasler and the contractor's statements, PFC issued mortgage loans (the "PFC Loans") to the investors in an amount up to 75% of the "rehabilitated values" of the properties. (Id. ¶ 19).

While not entirely clear from the Complaint, apparently, between May through December of 1996, the Loan Ring brought new investors to EQ to obtain new loans on the same properties, and the PFC Loans were paid off. EQ alleges that in 1995 and 1996, a mortgage broker,*fn2 Grant Mortgage, presented EQ with loan packages (the "Loan Packages"). (Compl. ¶¶ 38-40, 49; Exhibit B). The Loan Packages contained loan applications, payoff letters from PFC stating the existing balance due on the PFC loans (the "Payoff Letters"),*fn3 property appraisal reports completed by Johnson, the investors' credit reports and submission sheets verifying the reasons for the loans. (Id. ¶¶ 40, 42). Based upon the information contained in the Loan Packages, EQ issued new loans on the properties (the "Subject Loans") from May through December of 1996. (Id. ¶¶ 38, 40, 45, 48-49).

EQ alleges that the Payoff Letters contained in the Loan Packages inflated the actual balance due on the existing PFC mortgage. (Compl. ¶¶ 33-35). Essentially, EQ asserts that the amount listed on each Payoff Letter was more than the amount required to clear PFC's lien on the properties because PFC: (1) did not properly disburse funds set aside for construction; (2) improperly disbursed loan proceeds; (3) improperly calculated and charged interest on the Subject Loans; (4) improperly disbursed funds to itself for interest payments on the Subject Loans; (5) improperly calculated the payoff amount as that of principal and interest plus undisbursed construction escrow funds; and (6) improperly increased the principal amount due on the Subject Loans. (Id. ¶¶ 27-30, 33-35). In addition, EQ alleges that PFC disbursed money to Honeywood for unknown or undocumented reasons; charged interest on improperly disbursed funds; and failed to disburse payments for construction work that did occur. (Id. ¶¶ 25, 27-28, 30, 33-35, 43-44). As a result, EQ alleges that it ended up paying more than it should have for the Subject Loans. (Id. ¶¶ 43, 48).

When EQ received the Loan Packages from Grant Mortgage, EQ claims that its employees reviewed the documents and relied on the Payoff Letters when determining whether to issue the Subject Loans. (Id. ¶ 47-48). EQ claims that it would have refused to issue the Subject Loans if the Payoff Letters honestly stated the actual amounts necessary to clear PFC's lien on the properties, the amounts improperly disbursed to Honeywood and Guel, and that the funds initially set aside for construction work were never completely disbursed. (Id. ¶¶ 43, 48).

After EQ issued the Subject Loans, it sold them to Green Tree under the terms of an agreement entered into by EQ and Green Tree on August 19, 1996. (Compl. ¶ 54). Honeywood and the investors subsequently defaulted on the Subject Loans in December of 1997. On February 26, 1998, Green Tree filed an arbitration proceeding against EQ alleging that EQ had acted in violation of an agreement between EQ and Green Tree when EQ sold the loans to Green Tree. (Id. ¶ 55). Green Tree also alleged that EQ was a participant in a fraudulent scheme. (Id.). On December 28, 2000, an arbitration award was entered finding that EQ had not been a participant in a fraudulent scheme but that EQ was liable to Green Tree under the terms of the agreement between the two parties in the amount of $4,108,919.98. (Id. ¶ 57). Thereafter, a judgment was entered by the United States District Court for the Northern District of Illinois in favor of Green Tree and against EQ in the amount of $4,269,470.40 plus post-judgment interest. (Id.). EQ alleges that as a result of its reliance on the Payoff Letters, EQ has suffered losses including: (1) the amount of the judgment; (2) attorneys' fees and costs for the arbitration; and (3) EQ has been forced out of business. (Compl. ¶ 59). EQ asserts that PFC is responsible for the resulting losses. (Id. ¶ 129).

This case originated in Circuit Court Cook County, case number 02 L 013543, in 2002. On December 22, 2004, EQ served PFC with the third amended complaint.*fn4 On January 14, 2005, PFC removed the case to the U.S. District Court for the Northern District of Illinois. Ten days later, PFC filed a motion to dismiss EQ's third amended complaint. On March 14, 2005, while PFC's motion to dismiss was still pending, EQ was granted leave to file the fourth amended complaint. The parties consented to the jurisdiction of a U.S. Magistrate Judge on May 19, 2005. On June 7, 2005, this Court denied PFC's Motion to Dismiss the Third Amended Complaint as moot. On June 29, 2005, PFC filed its Motion to Dismiss the Fourth Amended Complaint (the "Motion"). The next day, EQ filed a Motion to Strike Portions of the Motion to Dismiss the Fourth Amended Complaint. On July 18, 2005, we granted EQ's Motion to Strike Portions of the Motion to Dismiss as the motion to dismiss related to Counts I-V of the Complaint. Accordingly, the remaining issue before this court is whether to dismiss Counts VI and VII of the Complaint.


A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the sufficiency of the complaint for failure to state a claim upon which relief may be granted. General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). Dismissal is appropriate only if it appears beyond a doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Kennedy v. Nat'l Juvenile Det. Ass'n, 187 F.3d 690, 695 (7th Cir. 1999). In ruling on the motion, the court accepts as true all well pleaded facts alleged in the complaint, and it draws all reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977 (7th Cir. 1999).

Federal Rule of Civil Procedure 9(b) applies to fraud-based RICO claims. Goren v. New Vision Intern., Inc., 156 F.3d 721, 726 (7th Cir. 1998). To plead a fraud-based RICO claim with particularity a plaintiff must, at a minimum: 1) "describe the predicate acts [of fraud] with some specificity," 2) state the time, place, and content of the alleged fraudulent communications, 3) and notify each defendant of his or her role in the alleged scheme. Id. This heightened pleading requirement is designed "to force plaintiff to do more than the usual investigation before filing [the] complaint." Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999). Rule 9(b) "serves three main purposes: (1) protecting a defendant's reputation from harm; (2) minimizing 'strike suits' and 'fishing expeditions'; and (3) providing notice of the claim to the adverse party." Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994).

PFC argues that Count VI of the complaint should be dismissed with prejudice because the complaint does not allege: (1) the existence of a RICO enterprise; (2) that PFC managed or directed the RICO enterprise's affairs; or (3) a pattern of racketeering activity. PFC also argues that Count VII of the Complaint should be dismissed with prejudice because EQ has failed to establish a ...

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