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Loften v. Diolosa

July 31, 2008


The opinion of the court was delivered by: (judge Vanaskie)


This predatory lending practice action arises out of the sale of real estate to a new home buyer in the Pocono Mountain region of Pennsylvania. Pending before this Court are motions to dismiss. Defendants -- consisting of real estate developers, a mortgage broker, appraisers, and a mortgage lender -- essentially challenge the viability of each claim asserted by the plaintiff purchaser under federal and state law. For the reasons that follow, the motions to dismiss will be granted in part and denied in part. Specifically, this case will be allowed to proceed on the claims asserted under the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., against all Defendants, as well as the claim of breach of fiduciary duty against the real estate developer and mortgage broker asserted in the Eighth Claim for relief and the claim of unjust enrichment against all Defendants presented in the Ninth Claim for relief. Claims asserted under the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL"), 73 P.S. § 201-1, et seq.; the Truth in Lending Act ("TILA"), 15 U.S.C. § 1664, et seq. and its implementing Regulation Z, 12 C.F.R. § 226.24, et seq.; the Real Estate Settlement and Procedures Act ("RESPA"), 12 U.S.C. § 2601, et seq.; and the Pennsylvania common law on fraud will be dismissed without prejudice, affording Plaintiff leave to amend the deficiently presented causes of action.*fn1


Plaintiff Jimmie E. Loften avers that as a result of Defendants' "conspiracy and fraudulent acts," Plaintiff "purchased a house for approximately 50% to 100% in excess of its actual value; he was obligated to pay a note and mortgage based upon the inflated valuation of the home and not the true value," and Defendants all profited from this allegedly fraudulent endeavor. (Am. Compl., ¶ 100.) Plaintiff avers that Defendants Francine and Joe Diolosa and their affiliated companies*fn2 engaged in false advertising directed toward unsophisticated, lower income, first time home buyers living in the New York Metropolitan Area. (Id. at ¶¶ 21-23.) Plaintiff claims that there were material misrepresentations as to the amount in real estate taxes that would be required, pre-payment penalties, the market value of the home, and the benefit of legal representation in connection with the transaction. (Id. at ¶¶ 36, 37, 63, 65.) Plaintiff avers that the Diolosa Defendants conspired with Defendant appraisers Robert and Jean Innamorati to inflate the value of the property being acquired. (Id. at ¶ 75.) Plaintiff avers that the Diolosa Defendants procured Defendant Fremont Mortgage & Loan Company ("Fremont") to provide the financing necessary for the transaction. (Id. at ¶¶ 44-46.) Plaintiff asserts that Fremont, as a knowing participant in the conspiracy, failed to follow its customary underwriting guidelines and due diligence procedures (id. at ¶ 125), and that Fremont "fraudulently completed a 'Request for Verification of Employment' form" necessary for the mortgage. (Id. at ¶ 116.) Plaintiff claims that Fremont "knew or should have known that it was procuring a sub-prime loan from inflated values from a person who may not have been able to procure the mortgage." (Id. at ¶ 106.) Plaintiff further avers, "upon information and belief," that Fremont was aware of the predatory lending practices in the Pocono region, but "[r]ather than forego the profitability of sub-prime lending . . . Fremont . . . agreed to provide funding." (Id. at ¶¶ 120, 121.)

Plaintiff avers "upon information and belief" that Fremont "intended to hold the loan for a short period of time and then intended to sell or 'flip' the loan to Freddie Mac or Fannie Mae or some other pooled mortgage fund" in order to receive (1) "the original principal amount of the loan without having to wait for each amortized payment;" (2) "an additional approximate 3% to 4% of the gross amount of the loan as premium;" and (3) a percentage of "each monthly mortgage payment over the life of the loan as a result of their servicing agreement with a secondary mortgage holder." (Id. at ¶ 96.) Four months after the closing, Fremont transferred servicing rights of the mortgage to another mortgage company, Saxon Mortgage.*fn3 (Id. at ¶ 97.)

The First Claim for relief asserted in the Amended Complaint is against Defendants Diolosa and Builders. It alleges that Francine Diolosa, Joe Diolosa, Builders, MOC, Lenders Financial, Robert Innamorati, and Jean Innamorati comprised an association-in-fact enterprise within the meaning of RICO. (Id. at ¶ 175.) Plaintiff avers that Francine and Joe Diolosa, both solely and jointly, conducted the affairs of the enterprise through a pattern of racketeering activity consisting of mail and wire fraud. (Id. at ¶¶ 179-188.) Plaintiff avers that he has been injured as a result of this pattern of racketeering activity in that he has purchased a home at a price substantially below its fair market value, with a mortgage he cannot afford. He also asserts that he has sustained "emotional and psychological damages," and that his credit worthiness has been destroyed. (Id. at ¶¶ 189, 190.)

The Second Claim for relief is premised upon an alleged conspiracy between Defendants MOC and Lenders Financial with Defendants Diolosa. It alleges that Defendants MOC and Lenders Financial knowingly participated in and facilitated the alleged conspiracy through a number of overt acts, including mail and wire fraud, from which they received substantial remuneration. (Id. at ¶¶ 195-208.)

The Third Claim for relief asserts that Defendant Fremont conspired with Defendants Diolosa, Builders, MOC, and Lenders Financial in violation of 18 U.S.C. § 1962(c). Plaintiff avers that Fremont knowingly participated in the conspiracy and performed overt acts in furtherance of the alleged conspiracy, the object of which was "to bring each of the prospective home purchasers, including the instant Plaintiff, to the point of settlement for which the Defendants Diolosa, Mortgage, Lenders Financial and Defendant Fremont would receive substantial remuneration." (Id. at ¶¶ 209-223.)

The Fourth Claim for relief essentially mirrors the Third Claim, asserting similar RICO conspiracy allegations against appraiser Defendants Innamorati. (Id. at ¶¶ 225-239.)

The Fifth Claim for relief is asserted against all Defendants for alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL), 73 P.S. § 201-1, et seq. Plaintiff avers that all Defendants "acted in concert with each other to execute the fraudulent scheme and deceptive conduct" covered by this anti-fraud statute. (Id. at ¶ 241.) Allegedly, this conduct included misrepresentations about the value and financing of the home as well as Plaintiff's ability to repay the mortgage. (Id. at ¶¶ 243-286.) Although the paragraphs set within the Fifth Claim do not differentiate among Defendants, earlier averments that do differentiate are incorporated by reference in the Fifth Claim.

The Sixth Claim for relief is brought against all Defendants for violations of the Truth in Lending Act ("TILA") and Regulation Z, 12 C.F.R. § 226.24(c). Essentially, Plaintiff asserts that violations of these federal laws constitute per se violations of the UTPCPL. Again, the averments presented under this claim for relief do not identity the spection actions attributable to particular Defendants, but generally alleges that all Defendants have violated these federal laws.

The Seventh Claim for relief, asserted against all Defendants, is brought under the Real Estate Settlement and Procedures Act ("RESPA"), 12 U.S.C. § 2601, et seq. Plaintiff avers payments of unearned fees and kickbacks, failure to provide notice of the transfer of Plaintiff's mortgage, and failure to provide proper settlement forms at closing, all in violation of RESPA. (Id. at ¶¶ 302-309.) Once again, the Amended Complaint does not delineate the actions that each Defendant supposedly took in violation of this federal law.

The Eighth, Ninth, and Tenth Claims assert violations of Pennsylvania common law. Plaintiff brings the Eighth Claim against Defendants MOC and Lenders Financial alleging a breach of fiduciary duty for failure to act in Plaintiff's best interests. The Ninth Claim asserts an unjust enrichment claim against all Defendants. (Id. at ¶¶ 320-325.) The Tenth Claim alleges common law fraud as to all Defendants. The allegations of fraud set forth in the Tenth Claim do not differentiate among Defendants, though earlier averments that do are incorporated by reference in the Tenth Claim. (Id. at ¶¶ 326-331.)

The Complaint asserts one prayer for relief, asking for an award of compensatory damages in excess of $500,000 dollars against all Defendants, jointly and severally; treble damages for sums paid by the initial lender to the brokers, allegedly in violation of RESPA; and damages against all Defendants, in an amount not to exceed $1,000 per Plaintiff, for the alleged violations of RESPA. In addition, Plaintiff seeks attorneys' and experts' fees, injunctive and equitable relief, and punitive damages.

The original Complaint was filed on June 15, 2005, (Dkt. Entry 1), and motions to dismiss were filed by Defendants. (Dkt. Entries 11, 12, 16, 26, 51.) While motions were pending, Plaintiff's original Counsel withdrew (Dkt. Entry 54), and this Court stayed litigation by Order dated September 29, 2006. (Dkt. Entry 55.) Plaintiff's current Counsel entered the proceedings on August 27, 2007, (Dkt. Entry 57) and the Order staying litigation was vacated on October 10, 2007. (Dkt. Entry 59.) Oral argument on the first round of motions to dismiss was heard on November 28, 2007. During oral argument, Counsel for Plaintiff expressed a desire to file an amended complaint, which could be done as a matter of right pursuant to FED. R. CIV. P. 15(a). Plaintiff filed the Amended Complaint on January 14, 2008, (Dkt. Entry 64), setting off a new round of motions to dismiss by Defendants. Three separate motions to dismiss have been filed. (Dkt. Entries 65, 66, and 71.) With the exception of Defendants Diolosa, Builders, Lenders Financial, and MOC, all moving parties have submitted memoranda of law in support of their positions.*fn4 Plaintiff has filed appropriate opposition briefs. The motions for dismissal are ripe for decision.


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 doing so, all factual allegations and all reasonable inferences drawn therefrom are assumed to be true. Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996).

Dismissal of a complaint is appropriate only if, accepting as true all facts alleged, Plaintiff has not plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007) (abrogating "no set of facts" language found in Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). As a result of Twombly, Plaintiffs must now nudge their claims "across the line from conceivable to plausible." Id. To state a claim consistent with the language of FED. R. CIV. P. 8(a)(2), which requires only a "short and plain statement of the claim showing that the pleader is entitled to relief," a complaint must contain factual allegations enough "to raise a right to relief above a speculative level." Id. Each of the claims asserted in the Complaint will be assessed in the context of this standard of review.

B. First through Fourth Claims for Relief -- The RICO Claims Against All Defendants

The First Claim is brought under RICO against Defendants Diolosa and Builders. The Second Claim is brought against Defendants Lenders Financial and MOC, alleging these Defendants conspired with the Diolosas to violate the RICO Act. In the Third Claim for relief, Plaintiff claims lender Defendant Fremont conspired with Defendants Diolosa, Builders, MOC, and Lenders Financial to violate 18 U.S.C. § 1962(c). The Fourth Claim is brought against Defendants Robert and Jean Innamorati, appraisers who purportedly conspired with Defendants Diolosa, Builders, MOC, and Lenders Financial to violate 18 U.S.C. § 1962(c).

To state a claim for relief under 18 U.S.C. § 1962(c), a plaintiff must allege facts showing "(1) conduct (2) of an enterprise (3) through a pattern of (4) racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985). A RICO conspiracy claim requires additional averments showing a plausible conspiracy to conduct the affairs of an enterprise through a pattern of racketeering activity. See e.g., Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166 (3d Cir. 1989), overruled on other grounds, Beck v. Prupis, 529 U.S. 494 (2000). Defendants' motions present the question of whether the averments of the Amended Complaint show a plausible ability to meet each of these elements of the RICO and RICO conspiracy claims.

Defendants Diolosa, Builders, MOC, and Lenders Financial argue that the Amended Complaint fails to sufficiently plead an enterprise and a pattern of racketeering activity, the elements necessary to establish a claim under 18 U.S.C. § 1962. Relying on Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1191 (3d Cir. 1993), Defendants argue that because the underlying claim is deficient, the RICO conspiracy claim asserted against them, accordingly, fails. Arguments of Defendants Innamorati essentially mirror those of Defendants Diolosa, Builders, MOC, and Lenders Financial. Defendant Fremont argues that Plaintiff's averments against Fremont are too "vague" and ...

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