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Wilson v. Parisi

February 7, 2006

ALMUS WILSON, MARILYN WILSON,CHARMAINE COOPER, MARCO YAGUAL, MARIA YAGUAL, NATALIE WILSON, AND RAYON MCLEAN PLAINTIFFS
v.
STEVE PARISI, ET AL. DEFENDANTS



The opinion of the court was delivered by: Thomas I. Vanaskie, Chief Judge Middle District of Pennsylvania

MEMORANDUM

This predatory lending practices action arising out of the sale of residential properties to new home buyers in the Pocono Mountain region of Pennsylvania is before this Court on motions to dismiss. Defendants -- consisting of real estate developers, mortgage brokers, appraisers, and mortgage lenders -- essentially challenge the viability of each of the claims asserted by the plaintiff purchasers under federal and state law. For the reasons that follow, the motions to dismiss will be granted in part and denied in part. This case will be allowed to proceed on the claims asserted under the Racketeering Influenced and Corrupt Organizations Act ("Racketeering Act" or "RICO"), 18 U.S.C. § 1961, et seq., against all Defendants, as well as the claims asserted against the real estate developer, mortgage broker and appraiser Defendants under the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL"), 73 P.S. §§ 201-1, et seq. Those claims asserted under the Home Ownership and Equity Protection Act, 15 U.S.C. § 1602, and under the Pennsylvania common law of negligent misrepresentation, however, will be dismissed with prejudice. Finally, claims asserted under the Real Estate Settlement and Procedures Act ("RESPA"), 12 U.S.C. §§ 2601, et seq., will be dismissed without prejudice, affording Plaintiffs leave to amend the deficiently presented causes of action.

BACKGROUND

Plaintiffs are purchasers of new homes in Monroe County, Pennsylvania. As described in the first paragraph of the 540-paragraph complaint:[see me for rest of insert]

This is an action on behalf of the Plaintiffs who purchased a new construction home, either by purchasing a lot and then entering into a construction loan, or by purchasing the house and lot as a unit, through real estate sales and new residential construction performed by Steve Parisi and Donald Kishbaugh and their affiliated companies, P&K Developers, P&K Developers, Inc., P&K Developers LLC, Eagle Valley Homes, Inc., Mobile Developing Company, Eagle Mountain Mortgage Company, Nations 1st Mortgage Co. LLC, Nations 1st Mortgage Company, Incorporated, and Nations 1st Mortgage Brokers Corp., and placed through the activities of Nations 1st Mortgage Co. and Bankers First Mortgage as mortgage brokers with New Century Corporation, Keystone Financial Mortgage, Irwin Mortgage Corporation DBA IFC Mortgage Corp., IndyMac Bank, F.S.B., Bank One, N.A., through the use of appraisers selected by the defendants Parisi and Kishbaugh and Nations First Mortgage and Bankers First Mortgage, namely, Lisa Marie's Appraisal Service, Inc., Lisa Marie Gibson, and Jenny Centrella with the agreed stated consent that the appraiser would provide sufficient appraisal value for the consummation of the land sales . . . by the Defendant Builders and Financiers and which mortgages were later purchased by Ocwen Federal Bank, Firstar Bank, N.A., Successor-in-interest to Firstar Bank Milwaukee, N.A., . . . Bank of America Mortgage, Irwin Mortgage Corporation, and West Coast Realty Services, Inc., wherein predatory lending activities were undertaken by the defendants in the procurement of the mortgages and in the placement of the mortgages with the various mortgage lenders and in the inflated analysis by which the Plaintiffs were qualified to procure mortgages in excess of the value that they would have been capable of procuring had a proper and diligent examination [been] made of their financial situation.

Plaintiffs aver that defendants Parisi, Kishbaugh and their affiliated companies*fn1 (the "PK Defendants"), engaged in false advertising directed toward unsophisticated, lower income, first time home buyers living in the New York City Metropolitan Area. (Complaint, ¶ 47.) Plaintiffs charge that they were induced to purchase residential properties by misleading representations that failed to disclose the true costs of home ownership, including the costs of real estate taxes and maintenance. They further assert that the PK Defendants conspired with appraisal companies to inflate the value of the purchased properties above true market value. The defendant lending institutions, according to Plaintiffs, "knew or should have known that the Pocono Region was rampant with instances of predatory lending and had excessive rates of foreclosure on sub-prime loans and that the mortgages placed by the Bank Defendants in this situation were of the same ilk as the prior mortgages which resulted in the foreclosure and review by public authorities of the lending and sales practices in the Pocono Region."

(Complaint, ¶ 73.) Plaintiffs claim that there were material misrepresentations as to such matters as the amount of real estate taxes that would be required; pre-payment penalties; the necessity for and cost of private mortgage insurance; and the value of separate legal representation in connection with the transaction. (Complaint, ¶¶ 78-92.) Plaintiffs claim that the originating lenders in their transactions failed to follow usual and customary underwriting guidelines and due diligence procedures, ignoring the creditworthiness of the purchasers. (Complaint, ¶ 117.) Nor did the initial lenders follow customary underwriting guidelines to determine whether the prospective mortgagors could afford the requisite monthly payments. (Complaint, ¶ 121.) Indeed, plaintiffs charge that the lending institutions deliberately ignored the fact that good faith estimates of monthly payments were premised upon tax assessments based upon the unimproved value of the property, thereby misleading the purchasers with respect to the amount necessary to satisfy real estate tax obligations. Plaintiffs allege that the initial lenders knew or should have known that they were procuring sub-prime loans for amounts in excess of the true value of the properties from persons who should not have been able to procure financing. (Complaint, ¶150.) The Complaint suggests that the originating lenders engaged in the transactions because they assumed little risk in light of the requirement that the borrowers obtain private mortgage insurance and the ability to re-sell the loans.

In this regard, Plaintiffs allege that, following the closings, the initial lenders purportedly sold the obligations "to Freddy Mac or Fanny Mae or some other pooled mortgage funds as part of a larger pool of loans, thereby receiving: (a) the original principal amount of the loan . . . ; an additional approximate 3% to 4% of the gross amount of the loan as a premium; and (c) [a percentage] of each monthly mortgage payment over the life of the loan as a result of their servicing agreement with the secondary mortgage holder." (Complaint, ¶ 134.) Plaintiffs further charge that the lenders knew they would transfer the loan prior to the obligation becoming non-performing. Plaintiffs claim that as evidence of the initial lending institutions' participation in a conspiracy to defraud purchasers, the lender Defendants failed to follow normal underwriting procedures; failed to confirm the source of deposit money; adopted HUD-1 settlement sheets that contained materially false information with respect to tax obligations; made improper payments to the mortgage broker controlled by the PK Defendants; failed to provide purchasers with a settlement sheet at the time of closing; and transferred or sold a mortgage after a purchaser complained of predatory lending practices without disclosing to the transferee the existence of the complaint. (Complaint, ¶¶ 157-63.)

Plaintiffs have also named as Defendants the financial institutions to which the original loans were transferred, including Ocwen Federal Bank, Firstar Bank, N.A., Irwin Mortgage Company, Bank of America, and West Coast Realty Services, Inc. Essentially the same allegations pertaining to knowing participation in the scheme to defraud that Plaintiffs advanced with respect to the originating lending institutions are made with respect to the secondary lenders.

The Complaint alleges in detail facts specific to each of the four sets of purchasers named as Plaintiffs in this action: Almus and Marilyn Wilson; Charmaine Cooper; Marco and Maria Yagual; and Natalie Wilson and Rayon McLean. (Complaint, ¶¶ 178-358.) Each purchaser was purportedly induced to enter into transactions for new homes based upon misrepresentations that inflated the property's value and underestimated the costs of home ownership. Each Plaintiff alleges post-closing disclosures that revealed the allegedly over-valued appraisals and understated home ownership costs. The purchasers aver that they were victims "of the Defendant's scheme to defraud and . . . pattern of racketeering activity and . . . conspiracy as contemplated and operated by the Defendants in the sale of homes to unsophisticated first time home owners who are members of minority groups, who are being solicited and sold from the targeted lower income territories within the New York metropolitan region through advertisements placed in the marketplace, and purchasers who were totally unfamiliar with the cost of purchase of a home, the cost of maintenance of a mortgage, or the costs associated with the maintenance of a home in a suburban environment. . . ." (Complaint, ¶¶ 219, 265, 301, and 358.)

The First Claim for relief asserted in the Complaint is against the PK Defendants. Plaintiffs allege that several of the PK Defendants -- P&K Developers, Eagle Home, Mobile Developing Company, Nations 1st Mortgage,*fn2 and Eagle Mortgage, with the creation of Eagle North, constituted an association-in-fact enterprise within the meaning of the Racketeering Act. (Complaint, ¶ 360.) Plaintiffs further aver that Parisi and Kishbaugh conducted the affairs of this enterprise through a pattern of racketeering activity, consisting of mail and wire fraud. (Complaint, ¶¶ 390-400.) Finally, plaintiffs aver that they have sustained injury as a result of the pattern of racketeering activity. (Complaint, ¶ 401.)

The Second Claim for relief is premised upon an alleged conspiracy by the lending institutions with the PK Defendants. Specifically, plaintiffs charge that the lender Defendants conspired with the PK Defendants to conduct the affairs of the alleged enterprise through a pattern of racketeering activity. Plaintiffs aver that the lending institutions had actual knowledge of and knowingly participated in the conspiracy. (Complaint, ¶ 413.)

The Third Claim for relief is asserted against the appraiser defendants. Like the Second Claim for Relief, the Third Claim is based upon an alleged conspiracy, in this instance being a conspiracy between the appraisers and the PK Defendants to violate 18 U.S.C. § 1962(c).

The Fifth Claim is asserted against all defendants for alleged violations of the UTPCPL.*fn3

Specifically, plaintiffs assert that defendants engaged in conduct covered by this anti-fraud statute. Although the paragraphs set within the Fifth Claim do not differentiate among Defendants, earlier averments do, and they are incorporated by reference in the Fifth Claim.

The Sixth Claim is apparently brought against all defendants for violations of the Truth in Lending Act and Regulation Z, 12 C.F.R. § 226.24(c). Essentially, plaintiffs assert that violations of these federal laws constitute per se violations of the UTPCPL.

The Seventh Claim for Relief is asserted against only the PK Defendants. Plaintiffs assert a "bait and switch" scheme. Specifically, plaintiffs claim that they were induced to visit the Pocono Mountain region by advertisements depicting a house along with representations of the necessary monthly payment to acquire the house, but then were switched to different home construction and/or financing packages that were significantly more costly. (Complaint, ¶ 502.) Plaintiffs claim that this conduct is actionable under the UTPCPL.

The Eighth Claim is asserted against all Defendants for alleged violations of the Home Ownership and Equity Protection Act. This legislation generally deals with consumer credit transactions secured by a principal dwelling other than a residential mortgage transaction. See 15 U.S.C. § 1602(aa)(1).

The Ninth Claim, asserted against all Defendants pursuant to the Real Estate Settlement and Procedures Act ("RESPA"), 12 U.S.C. § 2601, is based upon alleged unlawful payment of kickbacks to mortgage brokers. The Tenth Claim is also based upon RESPA, and is asserted against all Defendants. This claim is based upon the failure of initial lenders to notify Plaintiffs of the transfer of the mortgages to secondary lenders.

The Eleventh Claim seeks recovery for negligent misrepresentation. The Twelfth, and final, Claim for Relief is asserted against the PK Defendants under the UTPCPL for failure to disclose a second mortgage in favor of the PK Defendants on Plaintiffs' properties.

The Complaint asserts one prayer for relief, asking for an award of compensatory damages in excess of $1.5 billion dollars against all Defendants, jointly and severally; treble damages for sums paid by initial lenders to brokers as purported violations of RESPA, as set forth in the Ninth Claim for Relief; and damages against all Defendants, in an amount not to exceed $1,000 per Plaintiff, for the alleged violations of RESPA set forth in the Tenth Claim for relief. In addition, Plaintiffs seek counsel fees and costs of this litigation, injunctive relief, and punitive damages.

Ten separate motions to dismiss have been filed. With the exception of the appraiser Defendants, all moving parties have submitted memoranda of law in support of their positions.*fn4

Plaintiff has filed appropriate opposition briefs. Oral argument was held on August 2, 2005, and the motions for dismissal are ripe for decision.

DISCUSSION

A. Standard of Review

The Court's task on a motion to dismiss is to "determine whether, under any reasonable reading of the pleadings, the plaintiffs may be entitled to relief . . . ." Langford v. City of Atlantic City, 235 F.3d 845, 847 (3d Cir. 2000). In making this determination, all averments of fact, as well as all reasonable inferences to be drawn from the averments, are assumed to be true. Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). "The complaint will be deemed to have alleged sufficient facts if it adequately puts the defendants on notice of the essential elements of the plaintiffs' cause of action." Langford, 235 F.3d at 847. A cause of action asserted in a complaint may be dismissed only if it is clear that the plaintiffs could prove no set of facts entitling them to relief. Id. The inquiry is not whether plaintiffs will or are even likely to prevail ultimately, but "only whether they are entitled to offer evidence to support their claims." Id. Finally, leave to amend must be granted if a complaint is merely deficient in its allegations and there remains a possibility that the deficiencies can be cured. See, e.g., Shane v. Fauver, 213 F.3d 113, 116-17 (3d Cir. 2000). Each of the claims asserted in the Complaint will be assessed in the context of this narrow standard of review.

B. First Claim for Relief -- The Racketeering Act Claim Against the PK Defendants

The First Claim for Relief is asserted against the PK Defendants, and charges a violation of 18 U.S.C. § 1962(c), which provides:

It shall be 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 enterprises's affairs through a pattern of racketeering activity.

As explained in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985), a § 1962(c) claim involves "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Racketeering activity includes conduct proscribed by a number of specifically identified provisions of the federal crimes code, including mail and wire fraud under 18 U.S.C. §§ 1341, 1343. See 18 U.S.C. § 1961(1). A "pattern of racketeering activity" means "at least two acts of racketeering activity, . . . the last of which occurred within ten years . . . after the commission of a prior act of racketeering activity." 18 U.S.C. § 1961(5). 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." 18 U.S.C. § 1961(4). That is, "[a]n enterprise is a 'group of persons associated together for a common purpose of engaging in a course of conduct.'" Beard v. World Wide Mortgage Corp., 354 F. Supp. 2d 789, 803 (W.D. Tenn. 2005) (quoting United States v. Turkette, 452 U.S. 576, 583 (1981)).

The PK Defendants argue that the First Claim for Relief is fatally deficient because the same persons and entities named as Defendants are also claimed to comprise the "enterprise." Citing B.F. Hirsch v. Enright Refining Co., Inc., 751 F.2d 628 (3d Cir. 1984), and Metcalf v. PaineWebber, Inc., 886 F.Supp. 503 (W.D. Pa. 1995), aff'd, 79 F.3d 1138 (3d Cir. 1996) (table), the PK Defendants argue that the inclusion of named ...


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