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Lester v. Percudani

March 21, 2008

EDDIE LESTER, ET AL., PLAINTIFFS
v.
GENE P. PERCUDANI, CHASE MANHATTAN MORTGAGE CORPORATION, CHAPEL CREEK HOMES, INC., RAINTREE HOMES, INC., CHAPEL CREEK MORTGAGE BANKER, INC., DOMINICK P. STRANIERI, AND WILLIAM SPANER, DEFENDANTS
PABLO ACRE, ET AL., PLAINTIFFS
v.
CHASE MANHATTAN MORTGAGE CORP., WILLIAM K. SPANER, DOMINICK P. STRANIERI, GENE PERCUDANI, CHAPEL CREEK HOMES, INC., RAINTREE HOMES, INC., HOMES BY VINTAGE, INC., Y-RENT, INC., AND CHAPEL CREEK MORTGAGE BANKER, INC., DEFENDANTS



The opinion of the court was delivered by: Judge Conner

MEMORANDUM

Plaintiffs bring the above-captioned cases*fn1 alleging that defendants perpetrated a pattern of racketeering and mail fraud that caused plaintiffs to purchase homes at inflated prices. Plaintiffs advance claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968; the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL"), 73 PA. STAT. ANN. §§ 201-1 to -9.3; and Pennsylvania common law. Defendants Gene Percudani and the corporate entities he controls (hereinafter "the Percudani defendants")*fn2 have filed a motion (Civil Action No. 3:01-CV-1182, Doc. 306; Civil Action No. 1:04-CV-0832, Doc. 107) seeking partial summary judgment on the RICO claim against them. Defendants William Spaner and Chase Manhattan Mortgage Corporation (hereinafter "the Chase defendants") have filed a separate motion (Civil Action No. 3:01-CV-1182, Doc. 360; Civil Action No. 1:04-CV-0832, Doc. 232)*fn3 for summary judgment on the RICO conspiracy claim to which they are subject. For the reasons that follow, both motions will be denied.*fn4

I. Statement of Facts*fn5

Plaintiffs contend that defendant real-estate developer Gene Percudani ("Percudani") orchestrated a scheme to overvalue residential real estate in the Pocono Mountains, located in Monroe County, Pennsylvania. He allegedly enticed plaintiffs into home purchases using fraudulent advertisements broadcast along the East Coast. When plaintiffs contacted Percudani, he arranged home sales utilizing appraisals performed by defendant Dominick Stranieri ("Stranieri") that valued the homes at inflated rates. Defendant Chase Manhattan Mortgage Corporation ("Chase") purportedly enabled the scheme by financing mortgages for many plaintiffs in noncompliance with lending standards applicable to residential mortgages. Chase then sold the mortgages on the secondary market, shifting the risk of default to remote purchasers, while frequently retaining contracts to service the loans. This scheme allegedly left plaintiffs with mortgages that eclipsed the market values of their properties, homes in which they owned negative equity, and monthly payments that they were simply unable to afford.

A. The Advertisements and Incentive Programs

Percudani and his former business partner, Gerard Powell ("Powell"),*fn6 created the alleged scheme to assist low- and moderate-income individuals in purchasing homes. Percudani, through defendants Y-Rent and Raintree Homes, marketed new residences located in the Pocono Mountains via television, radio, and direct mailings. (Doc. 387, Ex. A; Doc. 387, Ex. K at 43.) Many of these advertisements targeted the greater New York City metropolitan area, though they also appeared in various locales along the eastern seaboard. (Doc. 387, Ex. K at 43.) The advertisements informed recipients that they could purchase a home for "$1,000 DOWN [and] $685.00 PER MONTH." (Doc. 387, Ex. A.) They also represented that "From the moment you put your $1,000 down WE WILL PAY YOUR RENT AT YOUR CURRENT APARTMENT until the day you move into your new home!" and that "The Only Thing You Have To Lose Is Your Landlord!" (Id.) Plaintiffs responded by calling a toll-free telephone number, which directed them to either defendant Raintree Homes, Inc. ("Raintree") or defendant Chapel Creek Homes, Inc. ("Chapel Creek"), both of which either built or sold homes within Percudani's construction network. (Doc. 387, Ex. K at 62-64.) Percudani controlled both Raintree and Chapel Creek.*fn7 (Id. at 34, 62.)

Many homebuyers lacked the financial reserves necessary for a down payment, and Percudani and Powell worked with non-defendant Gerald Tegethoff ("Tegethoff"), an account executive for Chase,*fn8 to create a savings opportunity for buyers with tight budgets. (Doc. 387, Ex. L at 93; Doc. 387, Ex. N at 153, 158.) These discussions produced the Gold Key program and the Silver Key program (collectively the "Gold Key programs"). (Doc. 309 at 17a.) The Gold Key programs functioned as preliminary savings plans into which prospective homebuyers paid an initial $1,000 deposit*fn9 and subsequent monthly payments until they accumulated sufficient funds to cover a down payment. (Doc. 309 at 17a; Doc. 387, Ex. K at 164.)

During the savings period, the Percudani defendants offered buyers monetary incentives up to $700 in monthly rent for one year, with a maximum total incentive of $8,400. (See Doc. 387, Ex. K at 164; Doc. 387, Ex. L at 72; see also, e.g., Doc. 385, Exs. 2-5.) The Percudani defendants regularly supplied documentation regarding the rent-payment incentives to Chase as a component of plaintiffs' mortgage applications. (Doc. 387, Ex. K at 144-46.) Employees of the Percudani defendants explained the operation of the Gold Key programs to Chase underwriters on several occasions. (See, e.g., Doc. 387, Ex. M at 145; Doc. 387, Ex. P at 46-47, 49.)

Plaintiffs' expert report explains that purchase incentives programs are common in the real estate industry. The payment of rent, however, is prohibited by industry practice because it casts doubt on a buyer's ability to engage in the savings habits necessary to accumulate assets for a down payment and to meet monthly mortgage obligations. (See Doc. 387, Ex. D at 9; Doc. 388, Ex. VII; Doc. 388, Ex. X at 122; Doc. 388, Ex. XIV at 96-97.) According to plaintiffs' expert, Chase's lending guidelines as well as industry lending standards place limits on the amount of purchase incentives. These limits vary depending upon the value of the home and the amount of the buyer's down payment. A buyer who is capable of making a down payment of fifteen percent of the purchase price may receive incentives worth six percent of that price. (Doc. 387, Ex. D at 9; Doc. 388, Ex. XIV at 96-97.) A buyer who contributes a down payment in an amount between ten and fifteen percent*fn10 may receive incentives of up to three percent of the price. (Doc. 387, Ex. D at 9; Doc. 388, Ex. XIV at 96-97.) The value of a buyer's incentives directly affects the principal amount of the buyer's mortgage loan. If a seller wishes to provide purchase incentives in excess of applicable limits, that excess must be used to reduce the purchase price of the home and, in turn, to reduce the value of the loan the buyer will receive. (Doc. 388, Ex. VII.) Failure to adhere to these guidelines can result in a buyer incurring debt service which the buyer is ill-equipped to manage in light of his or her income level and credit history. (Doc. 387, Ex. D at 9, 12.)

In the cases sub judice, several months typically elapsed between the prospective homebuyers' enrollment in the Gold Key programs and closing. (Doc. 309 at 17a.) During this period, Raintree or Chapel Creek worked with the homebuyer to build and finance their homes. (Doc. 387, Ex. K at 107.) Defendant Chapel Creek Mortgage Banker, Inc. ("Mortgage Banker") also participated in the process by compiling the information necessary for mortgage applications, which it usually placed with Chase. (Doc. 364 ¶¶ 1, 12; Doc. 376 ¶¶ 1, 12.)

Chase underwriters managed by defendant William Spaner ("Spaner") processed many of plaintiffs' applications. Spaner forewarned the underwriters that plaintiffs' files would differ from those that the underwriters "would normally see." (Doc. 387, Ex. Q at 175.) Ordinarily, Chase would have immediately rejected loan applicants with credit scores like those of the plaintiffs; however, Spaner instructed Chase underwriters that plaintiffs' evolving credit would qualify them for the mortgages by the time of closing. (Id.) An underwriter supervised by Spaner candidly testified that Chase's handling of plaintiffs' loan applications was uncommon and that Chase simply did not process applications of borrowers who failed to meet threshold lending criteria. (Id.)

Plaintiffs allege that Chase effectively concealed their inability to repay their loans by formulating the Gold Key programs and by processing their applications using relaxed lending standards. They aver that these actions caused the loans to appear more stable than they actually were and enabled Chase to resell them on the secondary market. (Doc. 387, Ex. D at 1-2; Doc. 388, Ex. XIII at 157.) Plaintiffs' monthly payments under the loans exceeded the amounts suggested by Percudani's advertisements, often by several hundred dollars. (See generally Doc. 365.)

B. Overvalued Appraisals of Plaintiffs' Homes

Every sale required an appraisal of the home to value the property and determine the amount of the mortgage. (Doc. 387, Ex. D at 2.) Stranieri was retained to perform these appraisals for all but eight of plaintiffs' transactions. (Doc. 352-7 at 17-21; Doc. 364 ¶ 12; Doc. 376 ¶ 12; Doc. 387, Ex. C.) Prior to April 1997, Stranieri appeared on Chase's appraiser review list. (Doc. 388, Ex. XI at 103.) The review list is a compilation of appraisers who have been placed on probationary status as a result of poor performance, such as: (1) incorrectly valuing properties by more than fifteen percent, (2) omitting material information in an appraisal, or (3) committing other serious infractions. (Doc. 388, Ex. VIII.) Chase lending guidelines prohibit "listed" appraisers from valuing any property for which the proposed loan amount exceeds $500,000. In addition, valuations by an appraiser on Chase's review list must be independently verified by a second appraiser. (Id.) Placement on the review list is the most severe sanction that Chase imposes on appraisers whose performance is substandard. (Doc. 388, Ex. XI at 111.)

In April 1997, Chase removed Stranieri from its review list without adhering to established removal procedure, which requires independent verification of five consecutive appraisals.*fn11 (Doc. 352-7 at 17-21; Doc. 388, Ex. IV; Doc. 388, Ex. XI at 103-04.) The Chase official who removed Stranieri from the list testified that he did so because it was unclear why Stranieri was placed on review status . (Doc. 388, Ex. XI at 104.) Nevertheless, he testified that it is "most unusual" for an appraiser to appear on the list without cause. (Id. at 106.) Prior to removing Stranieri from the review list, he attempted to locate Stranieri's performance review file but was unable to find it. (Id. at 110-11.) He did not engage in any discussions with his colleagues at Chase prior to reinstating Stranieri to accepted appraiser status. (Id. at 105.)

After Stranieri's reinstatement, Mortgage Banker nominated him to appraise Percudani homes, and Stranieri subsequently did so for numerous transactions involving Chase financing. (Doc. 388, Ex. XI at 246.) Plaintiffs' expert has opined that Stranieri generated appraisals rife with error. (Doc. 388, Ex. D at 3.) His appraisals-as well as the few received from other appraisers-regularly exceeded the prevailing market value of similar, non-Percudani homes by between $10 and $80 per square foot. (Doc. 352-7 at 11-13, 17-20; see also Doc. 387, Ex. C.) An employee of Mortgage Banker testified that she informed Stranieri on several occasions that the Percudani defendants "needed" a home to appraise at a specified value. (Doc. 352-4 at 145.)*fn12 Stranieri appraised plaintiffs' homes by reference to other Percudani properties and to those in communities with higher selling prices. According to plaintiffs' expert, neither method is an appropriate means of property valuation. (Doc. 352-7 at 12; Doc. 387, Ex. D at 3; see also Doc. 388, Ex. V at 1.) The appraisals also failed to account for incentives under the Gold Key program and failed to indicate that Percudani had purchased and resold many of plaintiffs' properties within a twelve-month period. (Doc. 387, Ex. D at 3; see also Doc. 352-7 at 12; Doc 388, Ex. VII.) Chase guidelines and standard industry ...


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