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James Gondeck and Peter G. O'malley v. A Clear Title and Escrow Exchange

October 22, 2012

JAMES GONDECK AND PETER G. O'MALLEY, PLAINTIFFS,
v.
A CLEAR TITLE AND ESCROW EXCHANGE, LLC, STEPHEN J. CORMIER, JUSTYNA MICHALOWSKA, FIDELITY NATIONAL TITLE GROUP (D/B/A CHICAGO TITLE INSURANCE COMPANY AND TICOR TITLE), CHICAGO TITLE INSURANCE COMPANY, TICOR TITLE INSURANCE COMPANY, SRV ASSOCIATES, LLC, THE LUX GROUP, LLC, SRV HOLDINGS & ASSOCIATES, LLC, MAREK R.V. HARRISON, AND MICHAEL SPIES, DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiffs James Gondeck and Peter G. O'Malley allege in their second amended complaint that they were the victims of a fraudulent real estate scheme involving the misappropriation of funds they deposited into an escrow account that Defendant A Clear Title and Escrow Exchange, LLC maintained at Fifth Third Bank. Doc. 68. (Fifth Third recently was dismissed as a defendant. Doc. 140.) Plaintiffs claim that Defendant Justyna Michalowska, a Managing Member of A Clear Title, and Defendant Michael Spies, a Home Loan Manager in the Retail Mortgage Department for Bank of America, took part in the alleged scheme and bear responsibility for Plaintiffs' losses. Spies and Michalowska have separately moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss the claims against them. Docs. 104, 117. Michalowska's motion is denied, and Spies's motion is granted in part and denied in part.

Background

The second amended complaint's well-pleaded factual allegations, though not its legal conclusions, are assumed to be true on a Rule 12(b)(6) motion. See Munson v. Gaetz, 673 F.3d 630, 632 (7th Cir. 2012); Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 763 (7th Cir. 2010). In evaluating a motion to dismiss, the court must consider "the complaint itself, documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice." Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012). The court also must consider additional facts set forth in the plaintiff's opposition brief or supported by attachments to the brief, so long as those facts "are consistent with the pleadings." Ibid. The following sets forth the facts as favorably to Plaintiffs as permitted by the second amended complaint and the other materials that may be considered on a Rule 12(b)(6) motion.

Spies, A Clear Title, and Defendants Stephen Cormier and Marek Harrison promoted a Real Estate Funding Program ("REFP") to many individuals, including Plaintiffs. Doc. 68 at ¶¶ 3-4. The potential participants were told that they could secure funding for a real estate project by depositing 10% of the necessary funds into an escrow account; those funds would then be used to secure a letter of credit or a bank guarantee for the project. Id. at ¶ 5; Doc. 68-1. The potential participants were promised that their funds would be returned within 15-20 business days. Doc. 68 at ¶ 6.

In July 2010, Spies recommended the REFP to Gondeck as a way for him to obtain funding to purchase property in Illinois and to build a home on the property. Doc. 68 at ¶¶ 30-31, 38, 50. Gondeck and A Clear Title then entered into an Escrow Release and a Sole Escrow Agreement, which provided that he would transfer $250,000 to the escrow account and that the funds would be returned after 21 days. Doc. 68 at ¶¶ 54-57; Docs. 68-3, 68-4. On numerous occasions, including in a letter dated November 15, 2010, A Clear Title represented to Gondeck that his money remained in the escrow account. Doc. 68 at ¶ 73; Doc. 68-8.

Spies marketed the REFP to O'Malley as an investment opportunity. Doc. 68 at ¶ 40. Spies, Cormier, and Harrison told O'Malley that if he deposited $250,000 into an escrow account to be used for real estate financing, he would be paid a $100,000 fee. Id. at ¶¶ 42, 45, 50, 75-76. On November 3, 2010, O'Malley agreed to transfer $250,000 to A Clear Title's escrow account, and Defendant SRV & Associates agreed that the funds plus $100,000 would be returned to O'Malley by November 15. Id. at ¶ 78; Doc. 68-9. O'Malley wired the money the next day. Doc. 68 at ¶ 88. On February 7, 2011, A Clear Title confirmed in writing that the funds were still in the escrow account and would be released within ten business days. Id. at ¶ 89; Doc. 68-11.

Spies repeatedly told Gondeck and O'Malley that the escrow deposit funds were going to be used only for proof of funds and would not be at risk. Doc. 68 at ¶ 52. Throughout 2010 and 2011, Spies, Harrison, and Cormier told Plaintiffs that there had been delays in completing the funding process but that it would be done soon. Id. at ¶¶ 14, 91-96. Spies, Harrison, and Cormier also provided Plaintiffs with false and fictitious statements, along with false and/or forged documents, representing that they were engaged in ongoing negotiations with banks and other investors. Id. at ¶¶ 92, 96. Eventually Plaintiffs had enough and demanded, to no avail, the return of their money. Id. at ¶¶ 97-98. Plaintiffs now believe that Spies, Cormier, and Harrison absconded with their funds. Id. at ¶¶ 13, 100-02.

At noted above, Michalowska was a Managing Member of A Clear Title. Id. at ¶ 5. At all relevant times, Michalowska was aware of the above-referenced scheme and the misappropriation of escrow funds from the accounts at Fifth Third. Id. at ¶ 17. At all relevant times, Michalowska was aware that Cormier, A Clear Title's other Managing Member, was making false statements to Plaintiffs and misappropriating Plaintiffs' funds. Id. at ¶¶ 4, 119. Plaintiffs allege that "[b]y failing to take any action to prevent the false statements and misappropriation of funds, Michalowska knowingly and substantially assisted the fraud." Ibid. Michalowska also knew that A Clear Title was breaching its fiduciary duties to Plaintiffs. Id. at ¶ 178. Plaintiffs allege that Michalowska, as a Managing Member of A Clear Title, "owed Plaintiffs a fiduciary duty to prevent any misappropriation" and that, "[b]y failing to take any action to prevent misappropriation, [she] breached her fiduciary duties to Plaintiffs." Ibid.

Discussion

The second amended complaint purports to state claims against Michalowska for common law fraud, breach of fiduciary duty, and negligence, and claims against Spies for conspiracy, common law fraud, intentional infliction of emotional distress, unjust enrichment, breach of contract, fraudulent misrepresentation, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and the federal securities laws. With respect to the state law claims, the parties do not explicitly address choice of law, but their briefs focus on Illinois law, so that is the law the court will apply. See McFarland v. Gen. Am. Life Ins. Co., 149 F.3d 583, 586 (7th Cir. 1998).

I. Claims Against Michalowska

A. Negligence (Count XVI)

Michalowska's only ground for dismissing the negligence claim appears to be that the second amended complaint does not satisfy the heightened pleading standards of Rule 9(b). Doc. 118 at 2-3. The argument is meritless, as Rule 9(b) applies only to claims based on "fraud or mistake," and not to negligence claims, which are governed by Rule 8(a). See Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 839 n.10 ("[plaintiff's] negligent misrepresentation ...


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