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Saleh v. Merchant

United States District Court, N.D. Illinois, Eastern Division

January 4, 2018

NABIL SALEH, as Trustee of the Nabil Saleh M.D. LTD Pension Plan, Plaintiff,
HASAN MERCHANT, et al., Defendants. MUSKEGAN HOTELS LLC, M.D. 1 LLC, GLOBAL DEVELOPMENT, INC., MD GLOBAL LLC and MICHAEL I. MERCHANT, as Administrator of the Estate of Hasan G. Merchant Cross-Plaintiffs,


          John J. Tharp, Jr., United States District Judge

         This is a case about hotels that, as it turns out, were not such lovely places.[1] After they were sued by disgruntled underlying investors in hotel properties that they had purchased, cross-plaintiffs Muskegan Hotels, LLC, M.D.1 LLC, Global Development, Inc., MD Global LLC, and Michael I. Merchant, as administrator of the Estate of Hasan G. Merchant, filed a cross-complaint against several financial institutions, appraisal companies, law firms, and individuals, [2]alleging that cross-defendants used fraudulent appraisals to induce them to purchase hotel properties at inflated prices that the properties could not support. According to cross-plaintiffs, principals of the now-defunct National Republic Bank of Chicago worked with other cross-defendants to devise and participate in a widespread scheme to defraud hotel purchasers and, after National Republic Bank went into receivership, the Federal Deposit Insurance Corporation (FDIC). The cross-complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962, as well as Illinois state law claims for fraud, tortious interference with contract, negligence, breach of fiduciary duty, quantum meruit, and equitable subordination. Seven cross-defendants now move to dismiss.

         I. BACKGROUND[3]

         A. General Allegations

         In 2003, the United States Comptroller of the Currency and National Bank Examiner determined that National Republic Bank of Chicago (“NRB”) had an excessive outstanding balance of loans to the hotel and motel industry. Second Amended Cross-Complaint (SACC) ¶ 16. As a result, the Treasury Department and NRB's directors, CEO Hiren Patel and President Edward Fitzgerald, entered into a consent decree designed to decrease NRB's balance of hotel/motel loans. Id. The consent decree required Hiren Patel and Fitzgerald to make capital injections into the bank out of their own pockets if the bank did not meet certain reduction targets. Id. ¶¶ 17-18.

         Starting in 2003, NRB hired William Daddono and his companies (the Advanced Appraisal cross-defendants) to perform appraisals of foreclosed hotel and motel properties in NRB's possession. According to the complaint, Daddono's appraisal reports grossly overvalued the properties to match a pre-arranged target valuation set by Hiren Patel and Fitzgerald. Id. ¶¶ 21-22, 42. NRB in turn used the appraisals to sell its foreclosed properties and write loan packages to the purchasers. When many purchasers were inevitably unable to repay the inflated loans, NRB (and its successors, as discussed below) would file foreclosure actions and make other endeavors to collect delinquent payments.

         To arrive at inflated property values, Daddono employed several questionable methodologies, including using underlying data from properties that were not comparable to the subject properties, underestimating operating expenses (including marketing, utility maintenance, and insurance expenses as well as franchise fees), overestimating income potential, omitting key costs and required capital expenditures, and improperly adjusting sales comparisons. Id. ¶ 25. A typical Daddono appraisal inflated the value of the property by 100%. Id. ¶ 39. Hiren Patel and Fitzgerald would then meet prospective purchasers of a hotel property, tell them that Daddono's appraisal was “good, ” and instruct the purchaser to sign documents purchasing the property using loans from NRB. Id. ¶¶ 28-30.

         NRB eventually failed, and in October 2014, it was liquidated by the FDIC. Non-party TPG Capital purchased and accepted assignments of NRB's non-performing loans, which had a face value of $600 million. The State Bank of Texas purchased and accepted assignments of NRB's performing loans, with a face value of $300 million. Id. ¶¶ 36-37. According to the complaint, Hiren Patel and Fitzgerald planned to continue defrauding hotel purchasers through the assignment of loans to State Bank of Texas and various TPG Capital entities. Id. ¶¶ 43-44. From 2006 to 2017, Hiren Patel and Fitzgerald “had contacts and communications” with TPG Capital entities and officers and with Chandrakant Patel of the State Bank of Texas “to arrange continuation of the fraud scheme and profit-sharing among members” and “to arrange the transfer of illegal profits and revenue after [NRB] failed.” Id. From 2014 to 2017, State Bank of Texas executed security agreements with lenders pledging the acquired NRB accounts as collateral, but failed to disclose to the lenders that the NRB loans were obtained by fraud. Id. ¶ 77. State Bank of Texas and the TPG Capital entities also filed numerous collection lawsuits based on the fraudulent loans, and State Bank of Texas transmitted false account statements and payment demands as part of its collection efforts. Id. ¶¶ 81, 89, 91, 92. State Bank of Texas, TPG Capital, and TPG's servicer, Capital Crossing, used Daddono's fraudulent appraisals in their collection efforts, arranged new and modified loan packages based on the fraudulent appraisals, seized commercial properties based on a borrower's failure to repay the fraudulently inflated loans, and supervised the successful underwriting of commercial loans based on the false appraisals. Id. ¶ 92. State Bank of Texas, TPG Capital, and Capital Crossing also failed to report the false appraisal scheme to U.S. Treasury Department regulators, and maintained an off-the-books fund from which illegal payments to Daddono were made. Id. ¶ 103.

         Two law firms, Wolin and Rosen and SmithAmundsen, were hired to assist with the scheme. Wolin and Rosen and SmithAmundsen sent demand letters to entities who had taken out loans from NRB based on Daddono's fraudulent appraisals. They also filed thousands of collection lawsuits in order to secure payment on the fraudulent loans. Id. ¶¶ 104-110.

         B. Cross-Plaintiff Specific Allegations

         Although the complaint alleges that fraud by the cross-defendants was pervasive, the allegations focus on three particular transactions. In 2006, Hiren Patel and NRB sent Muskegan Hotels and Hasan Merchant a fraudulently inflated appraisal of a hotel property in Benton Harbor, Michigan that listed the property's value at $2.34 million. In reality, the property was worth only $1.1 million. Id. ¶¶ 62-63. Muskegan Hotels and Merchant relied on the false appraisal in purchasing the Benton Harbor property for $2 million. Id. ¶ 63. Similarly, the complaint alleges that in 2007, Hiren Patel NRB presented Muskegan Hotels LLC and Hasan Merchant with fraudulent appraisals performed by Daddono of hotel properties at 3380 and 3450 Hoyt Street in Muskegon, Michigan. Id. ¶ 55. The appraisals noted that the 3380 Hoyt property was worth $1.45 million, and the 3450 Hoyt property was worth $11 million. In reality, the 3380 Hoyt property was worth $800, 000 and the 3450 Hoyt property was worth $500, 000. Muskegan Hotels and Merchant relied on the fraudulent appraisals to purchase the properties for $1, 417, 500 and $1, 067, 500, respectively. Id. ¶¶ 52-58. Merchant and Muskegan Hotels discovered the fraud when Vimeshkumar N. Patel, a former friend of Hiren Patel, revealed that NRB had been under government pressure for years to rid itself of non-performing hotel loans and that NRB had been making secret payments to customers to hide foreclosed hotels from regulators. Id. ¶ 71.

         C. Procedural History

         In 2010, Nabil Saleh, an investor in the hotel properties purchased by cross-plaintiffs, filed suit against Hasan Merchant and fifteen other defendants, including Muskegan Hotels LLC, M.D. 1 LLC, MD Global LLC, Global Development LLC, and NRB, alleging a scheme to defraud investors in the hotel properties. See Dkt. 1-4. Most of the defendants named by Saleh- including every current cross-plaintiff-filed cross-claims against NRB alleging fraud, tortious interference with contract, unjust enrichment, and quantum meruit claims. See Dkt. 1-6. In late 2014, NRB failed and the FDIC took NRB into receivership. The FDIC removed the case to federal court pursuant to 12 U.S.C. § 1819(b)(2), after which the current cross-plaintiffs filed a new cross-complaint alleging three claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962, in addition to their Illinois state law claims. See Dkt. 14. The case was then stayed for several months while cross-plaintiffs pursued their claims through the FDIC's administrative process, which resulted in a denial of all claims. See Dkt. 26-27. In May 2017, cross-plaintiffs filed a Second Amended Cross-Complaint, the subject of the instant motions to dismiss, alleging quantum meruit claims against all counter-defendants, RICO, fraud, and tortious interference with contract claims against all counter-defendants except the FDIC, negligence and breach of fiduciary duty claims against Hiren Patel and Edward Fitzgerald, and an equitable subordination claim against the FDIC. See Dkt. 127. With the exception of Daddono (who is presently incarcerated, a prisoner of his own device[4]) and the Advanced Appraisal entities (who have not yet appeared), each cross-defendant now moves to dismiss the claims against them.[5]


         A. Statute of Limitations

         As a preliminary matter, several cross-defendants argue that all of cross-plaintiffs' claims are time-barred, citing to a representation made by Hasan Merchant in an affidavit earlier in this litigation noting that Merchant learned that his properties were improperly appraised from a subsequent appraisal dated April 28, 2009, almost six years before Merchant filed the initial cross-complaint in this case (on March 24, 2015). See Declaration of Hasan Merchant ¶ 31, Dkt. 117-11. Because the statute of limitations is an affirmative defense, however, the court may only dismiss a claim at the pleadings stage on statute of limitations grounds if “the allegations of the complaint itself set forth everything necessary” to conclude that the claim is time-barred. Chicago Bldg. Design, P.C. v. Mongolian House, Inc., 770 F.3d 610, 613-14 (7th Cir. 2014). If Merchant knew of the fraudulent appraisal in April 2009, the statute of limitations might indeed pose a problem, but the affidavit referenced by cross-defendants merely notes that the appraisal at issue-which was not conducted concomitant to a transaction cross-plaintiffs were involved in, but instead concerned a subsequent transaction involving the same properties-was dated April 28, 2009; it does not indicate that Merchant, or any other cross-plaintiff, received or would have had any reason to receive the appraisal on that day. Because it is not clear at what point Merchant learned of the fraudulent April 2009 appraisal, the court cannot conclude, at this stage, that cross-plaintiffs' claims are “indisputably time-barred.” Small v. Chao, 398 F.3d 894, 898 (7th Cir. 2005).

         Wolin and Rosen also argues that Illinois' six-year statute of repose for claims arising out of an act or omission in the performance of legal services, 735 ILCS 5/13-214.3(c), bars cross-plaintiffs' claims against it. In Wolin and Rosen's view, because the allegedly fraudulent appraisals were conducted over six years before cross-plaintiffs filed their first complaint, cross-plaintiffs' claims against it should be dismissed. The problem with this argument is that cross-plaintiffs' claims are based not only on the initial appraisals, but also on subsequent-and undated-enforcement and collection actions allegedly taken by Wolin and Rosen. Once more, the court cannot conclude from the pleadings that cross-plaintiffs' claims against Wolin and Rosen are indisputably time-barred.

         B. RICO Claims

         Cross-plaintiffs assert that each cross defendant (except the FDIC) violated the RICO statute in three ways. They first allege that the defendants violated 18 U.S.C. § 1962(c), which makes it “unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(c). Cross-plaintiffs also contend that the cross defendants reinvested funds obtained by the enterprise into the enterprise, in violation of 18 U.S.C. § 1962(a). They also charge that all of the cross defendants conspired together to pursue the alleged scheme, violating 18 U.S.C. § 1962(d). A violation of 18 U.S.C. § 1962(d) is contingent on an agreement to “participate in an endeavor which, if completed, would satisfy all of the elements of a substantive violation of the substantive [RICO] statute.” Goren v. New Vision Int'l, Inc., 156 F.3d 721, 732 (7th Cir. 1998).

         To state a RICO claim, a plaintiff must (among other things) identify an “enterprise.” United Food and Comm. Workers Unions and Employers Midwest Health Benefits Fund v. Walgreen Co., 719 F.3d 849, 853 (7th Cir. 2013). An “enterprise” includes “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity, ” and is broadly defined. Id. (citing Boyle v. United States, 553 U.S. 938, 944 (2009)). The type of enterprise alleged by cross-plaintiffs, an “association-in-fact, ” does not “require any structural features beyond ‘a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purposes.'” Bible v. United Student Aid Funds, 799 F.3d 633, 655 (7th Cir. 2015) (quoting Boyle, 556 U.S. at 946). “Despite the expansive nature of this definition, it is not limitless.” Walgreen, 719 F.3d at 853. And critically, § 1962(c) also requires plaintiffs to identify a “person” that is distinct from the RICO enterprise, and that “person” must have “conducted or participated in the enterprise's affairs, not just its own affairs.” Id. at 854. Where, as here, the plaintiffs allege that the RICO enterprise was an association-in-fact among various businesses and individuals, it is not enough to ...

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