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Delaware Motel Associates, Inc. v. Capital Crossing Servicing Co. LLC

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

January 23, 2018

DELAWARE MOTEL ASSOCIATES, INC., INDEPENDENT MANAGEMENT ASSOCIATES, INC., TURKEY FOOT LAKE ROAD LAND HOLDINGS, LLC, C. PATEL CO. LLC, CHAMPAKBHAI N. PATEL, and JASHVANTI C. PATEL, Plaintiffs,
v.
CAPITAL CROSSING SERVICING COMPANY LLC, CAPITAL CROSSING HOLDINGS LLC, ADVANCED APPRAISAL GROUP, INC., ADVANCED APPRAISAL CONSULTANTS, INC., ADVANCED APPRAISAL CONSULTANTS, LLC, WILLIAM DADDONO, WOLIN & ROSEN, LTD., SMITHAMUNDSEN LLC, THE STATE BANK OF TEXAS, CHANDRAKANT PATEL, HIREN PATEL, EDWARD FITZGERALD, PHOENIX NPL, LLC, PHOENIX REO, LLC, TARRANT CAPITAL ADVISORS, INC., TPG GLOBAL, LLC, TPG CAPITAL L.P., TPG GROUP HOLDINGS SBS ADVISORS, INC., TPG SPECIALITY LENDING, INC., TPG OPPORTUNITIES PARTNERS, L.P., NICHOLAS LAZARES, RICHARD WAYNE, DAVID BONDERMAN, and JAMES G. COULTER, Defendants.

          MEMORANDUM OPINION AND ORDER

          MATTHEW F. KENNELLY, DISTRICT JUDGE

         Plaintiffs Delaware Motel Associates, Inc., Independence Management Associates, Inc., C. Patel Co. LLC, Turkey Foot Lake Road Land Holdings, LLC, Champbakbhai Patel, and Jashvanti Patel allege that they were victims of a fraudulent loan scheme. Plaintiffs say they entered into loan agreements in order to acquire certain hotel and motel properties. Those agreements were fraudulent, they allege, because they were based on false and inflated appraisals of the property values, which resulted in inflated principal amounts for the loans. According to plaintiffs, the National Republic Bank of Chicago (NRB) generated the fraudulent loans as part of a criminal racketeering enterprise. Plaintiffs allege that William Daddono knowingly provided false and inflated appraisals of commercial real estate properties, and NRB used the inflated proposals to issue loans with inflated principal amounts. NRB eventually failed in 2014, at which point other entities purchased the allegedly fraudulent loans. According to plaintiffs, the acquiring entities knew that the loans they purchased were based on false and inflated appraisals but continued to enforce them anyway.

         Plaintiffs assert that a number of participants in the alleged loan scheme are operating an illegal racketeering enterprise. They have sued Daddono and his appraisal companies, Advanced Appraisal Group, Inc., Advanced Appraisal Consultants, Inc. and Advanced Appraisal Consultants, LLC (collectively, the Advanced Appraisal entities); the former director and president of NRB, Edward Fitzgerald, and the bank's former chief executive officer and chairman of the board, Hiren Patel; the law firms whose attorneys allegedly prepared the fraudulent loan documents, Wolin & Rosen and SmithAmundsen LLC; as well as the entities who were allegedly involved in acquiring and enforcing the loans after NRB's failure, the State Bank of Texas (SBT); TPG Capital, L.P., TPG Global, LLC, TPG Group Holdings (SDS) Advisors, Inc., TPG Opportunities Partners, TPG Specialty Lending, Inc., TPG Opportunities Partners, L.P. (collectively, the TPG defendants); Capital Crossing Servicing Company, LLC, Capital Crossing Holdings LLC, Phoenix Asset Optimization LLC, Phoenix Asset Management, LLC, Phoenix, NPL, LLC, Phoenix REO, LLC, and Tarrant Capital Advisors, Inc. (collectively, the Capital Crossing defendants). In addition to those entities, plaintiffs have sued David Bonderman and James Coulter, the alleged operators of TPG Capital, L.P.; Chandrakant Patel, SBT's chief executive officer; and Nicholas Lazares and Richard Wayne, the alleged former managing directors of Lehman Brothers Holdings Inc.

         In plaintiffs' first amended complaint, they asserted claims against all defendants under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(a), (c), (d), alleging predicate acts of racketeering including mail and wire fraud, bank fraud, extortion, and money laundering. Plaintiffs also asserted various claims under Illinois law based on their allegations of fraud. After limited discovery revealed that plaintiffs had misidentified the role that Lazares and Wayne played in the alleged scheme and could not otherwise support the claims asserted against them, the Court granted Lazares and Wayne's motion for summary judgment on all counts. See Delaware Motel Assocs. v. Capital Crossing Servicing Co. (Summary Judgment Ruling), No. 17 C 1715, 2017 WL 4512709, at *1 (N.D. Ill. Oct. 10, 2017). Prior to granting that motion, the Court also granted a motion to dismiss the claims asserted against all defendants except for Hiren Patel, Fitzgerald, SmithAmundsen, Daddono, and the Advanced Appraisal entities.[1] See Delaware Motel Assocs. v. Capital Crossing Servicing Co. (MTD Ruling), No. 17 C 1715, 2017 WL 4224618, at *1 (N.D. Ill. Sept. 22, 2017). In its ruling, the Court concluded that plaintiffs failed to allege that defendants were operating a RICO enterprise or that they had engaged in the predicate racketeering activity. The Court also determined that plaintiffs failed to plead their state-law claims with the requisite particularity and provided no basis for the Court to exercise personal jurisdiction over Bonderman and Coulter. For purposes of this opinion, the Court assumes familiarity with the alleged background facts recited in those prior rulings.

         Plaintiffs now seek leave to amend their complaint again. In the proposed complaint, plaintiffs no longer allege that defendants were engaged in the RICO predicate acts of extortion or money laundering. Instead, they assert that certain defendants violated RICO by defrauding financial institutions-namely, Lehman Brothers Bank and its parent Lehman Brothers Holdings Inc.-and collecting unlawful debt. In addition, though plaintiffs have dropped their claims for tortious interference, the proposed complaint includes a new claim for violation of the Illinois Uniform Fraudulent Transfer Act (IUFTA), 740 ILCS 160/5, and plaintiffs continue to assert claims under Illinois law for fraud, violation of the Illinois Consumer Fraud and Deceptive Practices Act (ICFA), 815 ILCS 505/2, unjust enrichment, and quantum meruit. The proposed complaint contains slightly more detail about certain loans and properties pertaining to the alleged loan scheme, but the allegations regarding the fraudulent lending aspect of the alleged scheme are largely the same as those included in the first amended complaint. The proposed complaint also contains new allegations concerning an aspect of the scheme that plaintiffs say they only recently discovered. According to those new allegations, Lazares and Wayne helped their former employees to steal assets from Lehman Brothers and use the stolen assets to create and fund certain of the Capital Crossing entities.

         The Capital Crossing and TPG defendants, Wolin & Rosen, SmithAmundsen, and Hiren Patel have filed responses opposing plaintiffs' motion for leave to file another amended complaint. They contend that the proposed complaint fails to cure the pleading defects identified in the Court's prior rulings and that the newly asserted claims are legally untenable. Thus the proposed complaint would not survive a motion dismiss, they argue, and amendment would be futile. For the reasons stated below, the Court agrees that amendment would be futile and denies plaintiff's motion for leave to file an amended complaint with respect to claims asserted against the Capital Crossing and TPG defendants, the SBT defendants, Wolin & Rosen, SmithAmundsen, and Lazares and Wayne. In addition, for reasons discussed below, the Court is also skeptical that the proposed complaint would survive motions to dismiss by Hiren Patel, Fitzgerald, Daddono, and the Advanced Appraisal defendants. But plaintiffs have not had the opportunity to respond to arguments supporting dismissal of claims against those defendants. The Court therefore orders plaintiffs to show cause why the claims in the proposed complaint asserted against Hiren Patel, Fitzgerald, Daddono, and the Advanced Appraisal defendants could withstand a motion under Federal Rule of Civil Procedure 12(b)(6).

         Discussion

         Plaintiffs wish to file a second amended complaint. Federal Rule of Civil Procedure 15(a) allows a party to amend its pleading once as a matter of course but prohibits subsequent amendments unless the party obtains the consent of the opposing party or the court's leave. A "court should freely give leave when justice so requires." Fed.R.Civ.P. 15(a)(2). "Nevertheless, a district court should deny a motion for leave to amend if the proposed amendment is futile, as when, for example, the amended pleading would not survive a motion to dismiss." Weston v. Illinois Dep't of Human Servs., 433 Fed.Appx. 480, 482 (7th Cir. 2011). Other examples of futile amendments include those that "restat[e] the same facts using different language, reassert[] claims previously determined, or fail[] to state a valid theory of liability." Garcia v. City of Chicago, Ill., 24 F.3d 966, 970 (7th Cir. 1994) (internal citations omitted). To determine whether a proposed amended complaint would survive a motion to dismiss, a court assumes the truth of all well-pleaded allegations in the proposed complaint and draws all reasonable inferences in plaintiffs' favor. See St. John v. Cach, LLC, 822 F.3d 388, 389 (7th Cir. 2016).

         In the proposed complaint, each of the claims plaintiffs assert under federal law is based on an alleged violation of the RICO Act. That Act 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 or collection of unlawful debt." 18 U.S.C. § 1962(c). To state a claim for a violation of section 1962(c), therefore, a plaintiff ordinarily must allege four elements: "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Goren v. New Vision Int'l, Inc., 156 F.3d 721, 727 (7th Cir. 1998). A plaintiff alleging collection of unlawful debt, however, need not otherwise allege a pattern of racketeering activity. See H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 232 (1989).

         All of the claims in the proposed complaint, including those asserted under state law, are based on allegations of fraud. When alleging fraud, a party must state the circumstances constituting the fraud with particularity. Fed.R.Civ.P. 9(b). That is, the complaint "must provide the who, what, when, where, and how" of the alleged fraud. Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir. 2007) (internal quotation marks omitted). The level of detail required may vary based on a case's facts, but a plaintiff who lacks certain specific details must at least "use some alternative means of injecting precision and some measure of substantiation into their allegations of fraud." Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 442 (7th Cir. 2011) (quoting 2 James Wm. Moore, Moore's Federal Practice § 9.03[1][b], at 9-18 (3d ed. 2010)). In addition, where a plaintiff's allegations of fraud are based on information and belief, the plaintiff must provide the basis for his suspicions, and the basis provided "must make the allegations plausible." Id. at 443 (emphasis in original).

         A. Wolin & Rosen and SmithAmundsen

         In the proposed amended complaint, plaintiffs assert four claims against Wolin & Rosen and SmithAmundsen: a substantive RICO claim for collection of unlawful debts and a RICO conspiracy claim for aiding and abetting a conspiracy to collect unlawful debts, as well as state-law claims for unjust enrichment and quantum meruit. The RICO Act defines "unlawful debt" as debt related to illegal gambling activity or debt "which is unenforceable under State or Federal law in whole or in part as to principal or interest because of the laws relating to usury" and "which was incurred in connection with . . .the business of lending money or a thing of value at a rate usurious under State or Federal law, where the usurious rate is at least twice the enforceable rate." 18 U.S.C. § 1961(6). In the proposed complaint, plaintiffs do not list the interest rates charged for any of the loans at issue in this case; nor do they allege that any of those rates exceeded the applicable usury rate. Rather, plaintiffs argue that the loans' principal amounts were so inflated by the allegedly fraudulent appraisals that the effective interest rates on the loans are excessive. According to plaintiffs, when one considers the purportedly correct principal amount-i.e., the amount plaintiffs say would have been supported by a proper appraisal-the charged interest rates on the loan exceed one thousand percent.

         Setting aside the question of whether a mortgage loan containing an allegedly inflated principal amount could constitute an "unlawful debt" under the RICO Act, the Court concludes that the proposed complaint fails to state a RICO claim against Wolin & Rosen and SmithAmundsen for the same reason the first amended complaint failed to do so. Namely, plaintiffs do not adequately allege that the law firms conducted the affairs of an enterprise or agreed to do so. Plaintiffs allege generally that attorneys at Wolin & Rosen and SmithAmundsen prepared loan documents containing inflated principal amounts for NRB. But "simply performing services for an enterprise, even with knowledge of the enterprise's illicit nature, is not enough to subject an individual to RICO liability under § 1962(c); instead, the individual must have participated in the operation and management of the enterprise itself." Goren, 165 F.3d at 728. Plaintiffs do not plausibly allege that either law firm "exercised (or agreed to exercise . . .) at least some measure of control over" the other participants in the alleged scheme. Bachman v. Bear, Stearns & Co., 178 F.3d 930, 932 (7th Cir. 1999). Rather, the allegations support the conclusion that the attorneys at those firms were merely "hirelings" of the alleged enterprise. Id.; see also Saleh v. Muskegan Hotels LLC, No. 14-CV-09186, 2018 WL 287748, at *8 (N.D. Ill. Jan. 4, 2018) (concluding, in lawsuit parallel to this one, that Wolin & Rosen's and SmithAmundsen's alleged preparation of loan documents with knowledge that loans were based on false appraisals did not show that firms "were anything more than hirelings").[2]

         Plaintiffs assert in conclusory fashion that one of the attorneys for Wolin & Rosen "operated and managed the enterprise in a significant manner by deciding the final inflated loan amounts" with Fitzgerald. 2d Am. Compl. ¶ 171. But plaintiffs do not provide the basis for this suspicion or otherwise explain why this allegation is plausible. Pirelli, 631 F.3d at 443. Indeed, other allegations in the complaint undermine the plausibility of plaintiff's assertion that an attorney decided the final amount of a loan. Elsewhere in the complaint, for example, plaintiffs allege that it was Hiren Patel and Fitzgerald who selected the targeted loan amounts and asked Daddono to issue appraisals to support those amounts. But more importantly, the thrust of plaintiffs' allegations is that defendants used Daddono's inflated appraisals to induce plaintiffs and others to accept inflated loans. To allow an attorney to decide on a final loan amount different from the one supported by Daddono's appraisal would seem to undermine the effectiveness of the scheme. In order to state a claim for relief, a complaint must "present a story that holds together." Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010). The most that plaintiffs have plausibly alleged is that the law firms and certain of the other defendants "had a commercial relationship, not that they had joined together to create a distinct entity for [illicit] purposes." United Food & Commercial Workers Unions & Employers Midwest Health Benefits Fund v. Walgreen Co. (Walgreen), 719 F.3d 849, 855 ...


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