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Federal Deposit Insurance Corp. v. Masarsky

United States District Court, N.D. Illinois

August 27, 2013

Federal Deposit Insurance Corporation, as Receiver for Colonial Bank, Plaintiff,
v.
Boris Masarsky and Linda M. Surges, Defendants

Page 916

For Federal Deposit Insurance Corporation, as Receiver for Colonial Bank, Plaintiff: Richard J Landau, LEAD ATTORNEY, RJ Landau Partners PLLC, Ann Arbor, MI; Jeffrey Thomas Karek, Michele A. Casey, McGinnis Wutscher Beiramee LLP, Chicago, IL; John Edward Pietras, McGinnis Tessitore Wutscher LLP, Chicago, IL; Kevin Michael Hudspeth, McGinnis Wutscher LLP, Chicago, IL.

For Boris Masarsky, an individual, Defendant: Paige Moray Neel, LEAD ATTORNEY, Timothy Robert Herman, Clausen Miller P.C., Chicago, IL.

For Linda M. Surges, an individual, Defendant: Tige Christopher Johnson, LEAD ATTORNEY, Johnson Law LLC, Chicago, IL.

OPINION

Page 917

MEMORANDUM OPINION AND ORDER

Ruben Castillo, Chief United States District Judge.

Plaintiff Federal Deposit Insurance Corporation (the " FDIC" ), as Receiver for Colonial Bank (" Colonial" ), brings this action against Boris Masarsky and Linda M. Surges (collectively, " Defendants" ) asserting breach of contract, negligent misrepresentation, and negligence. The FDIC's action arises out of real estate appraisals of a residential property located in Northbrook, Illinois (the " Property" ) that Defendants conducted and that allegedly contained misrepresentations, used inappropriate comparable sales, and did not comply with the Uniform Standards of Professional Appraisal Practice (" USPAP" ). Presently before the Court are

Page 918

Defendants' separate motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, Defendants' motions to dismiss are granted in part and denied in part.

RELEVANT FACTS

Colonial was a state chartered bank with its principal place of business in Montgomery, Alabama. (R. 1, Compl. ¶ 1.) Colonial was closed by the Alabama State Banking Department on August 14, 2009, and the FDIC was appointed as its Receiver pursuant to 12 U.S.C. § 1821. ( Id. ¶ 2.) The FDIC alleges that, as Receiver, it is obligated to recover losses incurred by Colonial. ( Id. ¶ 3.) The FDIC alleges that Masarsky and Surges were, at all times pertinent to the issues at hand, licensed in Illinois as Certified Residential Real Estate Appraisers. ( Id. ¶ ¶ 4-5.) In or around January 2007, Defendants entered into separate contracts with Investment Mortgage Group (the " Broker" ) to prepare written appraisals for the Property (the " Appraisals" ). ( Id. ¶ 9.) Defendants knew that their Appraisals would be used for mortgage lending purposes. ( Id. ) Surges appraised the value of the Property at $1, 275 million while Masarsky valued it at $1.3 million. ( Id. ¶ ¶ 10-11.) Certain appraiser's certifications expressly providing various guarantees were attached to each Appraisal. ( Id. ¶ 14.) These certifications include, inter alia :

2. I performed a complete visual inspection of the interior and exterior areas of the subject property. I reported the condition of improvements in factual, specific terms. I identified and reported the physical deficiencies that could affect the livability, soundness, or structural integrity of the property.
3. I performed this appraisal in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice . . . .
* * *
7. I selected and used comparable sales that are locationally, physically, and functionally the most similar to the subject property.
* * *
15. I have not knowingly withheld any significant information from this appraisal report and, to the best of my knowledge, all statements and information in this report are true and accurate.
* * *
23. The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves one or more of these parties.
* * *
25. Any intentional or negligent misrepresentation(s) contained in this appraisal report may result in civil liability.

( Id. ) Defendants' Appraisals were submitted to Taylor, Bean & Whitaker Mortgage Corp. (" TBW" ), a mortgage lending firm, for the purpose of facilitating a mortgage refinance loan for Alex B. Bulmash. ( Id. ¶ 12.) On or about June 25, 2007, in reliance of Defendants' Appraisals, TBW used its line of credit at Colonial to fund the loan, which was secured by the Property. ( Id. ¶ ¶ 13, 17.) The FDIC alleges that in doing so, TBW assigned and transferred to Colonial any and all claims against Defendants in connection with the loan and with Defendants' Appraisals of the Property. ( Id. )

Bulmash defaulted on the loan, and the FDIC alleges that it subsequently discovered

Page 919

that Defendants' Appraisals omitted material information regarding the completion of the Property and used inappropriate properties as comparable sales. ( Id. ¶ ¶ 18-19.) The FDIC claims that these misrepresentations resulted in an inflated appraised value for the Property and a loan that was severely under-secured. ( Id. ¶ ¶ 18-19.) The FDIC further alleges that TBW would not have funded the loan if it had known the true market value of the Property. ( Id. ¶ 20.)

PROCEDURAL HISTORY

The FDIC, as Receiver for Colonial, filed its three-count complaint with this Court on August 10, 2012. (R. 1, Compl.) In Count I, the FDIC alleges that Defendants materially breached their contracts with the Broker to provide appraisals for the Property when they: (1) failed to accurately appraise the value of the Property; (2) misrepresented that the construction of the Property was complete; and (3) failed to complete the Appraisals in conformity with the USPAP. ( Id. ¶ 26.) The FDIC contends that it suffered damages, including a severely under-secured mortgage loan of which only a fraction may be recovered through foreclosure, as a direct and proximate result of Defendants' material breaches. ( Id. ¶ 28.) In Count II, the FDIC alleges that Defendants negligently misrepresented the value of the Property, their compliance with the USPAP, and the Property's material characteristics and comparables. ( Id. ¶ 31-32.) The FDIC contends that it suffered damages, including a severely under-secured mortgage loan of which only a fraction may be recovered through foreclosure, as a direct and proximate result of Defendants' negligent misrepresentations. ( Id. ¶ 34.) In Count III, the FDIC alleges that Defendants acted negligently in their preparation of Appraisals that contained misrepresentations, failures, and deficiencies in material breach of their duty to TBW to act in accordance with the law and " with custom, practices and standards of conduct of an appraiser prevailing in the industry." ( Id. ¶ ¶ 37-38.) The FDIC contends that it suffered damages, including a severely under-secured mortgage loan of which only a fraction may be recovered through foreclosure, as a direct and proximate result of Defendants' negligence. ( Id. ¶ 39.) On all counts, the FDIC requests damages, attorney's fees, and costs and expenses. ( Id. at 9.)

On October 24, 2012, Masarsky moved to dismiss the FDIC's complaint pursuant to Rule 12(b)(6). (R. 12, Masarsky's Mot.) In response to Count I, Masarsky argues that false representations in an appraisal do not constitute a breach of contract. (R. 14, Masarsky's Mem. at 3.) Masarsky also argues that the FDIC is not a third party beneficiary of the alleged contract between Masarsky and the Broker and thus has no standing to bring a breach of contract claim. ( Id. at 4.) As to Count II, Masarsky contends that the Appraisal is an opinion, rather than a statement of fact, and is therefore not actionable under a theory of negligent misrepresentation. ( Id. at 5.) Further, Masarsky asserts that Counts II and III must be dismissed because he did not owe a duty of care to the FDIC. ( Id. at 6.) Alternatively, he argues that Counts II and III must be dismissed because damages for economic losses cannot be recovered in tort pursuant to the economic loss doctrine set forth in Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 435 N.E.2d 443, 61 Ill.Dec. 746 (Ill. 1982). ( Id. ) Finally, Masarsky argues that even if the Court declines to dismiss the complaint, the FDIC's request for attorney's fees lacks a statutory or contractual basis and must therefore be dismissed with prejudice. ( Id. at 7.)

Page 920

On November 21, 2012, the FDIC filed its response to Masarsky's motion to dismiss. (R. 17, Pl.'s Resp. Masarsky.) The FDIC argues that it has standing to bring its breach of contract claim because certification 23, which is attached to Masarsky's Appraisal, provides for reliance by certain third parties, and Colonial was an intended third party beneficiary. ( Id. at 4-7.) The FDIC contends that Masarsky's argument " that an appraiser cannot be held to account for his negligent misrepresentations . . . has been roundly criticized and universally rejected" in Illinois. ( Id. at 9.) Additionally, the FDIC contends that the statements in Masarsky's Appraisal are representations of fact, not opinions, and are thus actionable as negligent misrepresentations. ( Id. at 10.) The FDIC also argues that a negligent misrepresentation action against appraisers falls within the information provider exception to the Moorman economic loss doctrine. ( Id. ) The FDIC argues that certification 23 and certification 3 demonstrate the duty to communicate accurate information Masarsky owed to foreseeable third parties such as Colonial. ( Id. at 11-13.) The FDIC argues that its negligence claim is not barred by the Moorman doctrine because it stems from ...


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