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Stout Street Funding LLC v. Otis Johnson A/K/A Otis Johnson- Davenport

June 1, 2012

STOUT STREET FUNDING LLC
v.
OTIS JOHNSON A/K/A OTIS JOHNSON- DAVENPORT, ET AL.



The opinion of the court was delivered by: Surrick, J.

MEMORANDUM

Presently before the Court are Defendant Title Resources Guaranty Company's Motion to Dismiss (ECF No. 28), Plaintiff Stout Street Funding LLC's Motion for Default Judgment (ECF No. 60), and Defendants Otis Johnson, Mabstract, LLC, and Mabstract Management, LLC's Petition to Set Aside Entry of Default and Seeking Leave to File Answer (ECF No. 64). For the following reasons, Title Resources Guaranty Company's Motion will be granted in part and denied in part, Stout Street Funding's Motion will be denied, and Otis Johnson, Mabstract, and Mabstract Management's Petition will be denied.

I. BACKGROUND

This lawsuit arises from an alleged fraudulent real estate transaction in which Plaintiff Stout Street Funding lost $480,000. Plaintiff brings this action against a number of individuals and entities involved in the transaction. Defendants include Otis Johnson, Mabstract, Mabstract Management, Dorian Mitchell, John Glenn, Jr., doing business as International Small Business Network ("ISBN"),*fn1 Shannen Kurz, Hassan Shaheed, International Construction Specialists, Michael and Karen Meehan, Title Resources Guaranty Company ("TRGC"), Ebert Estrada, Bank of America/Countrywide Mortgage, John and Darlene Weller, JP Morgan Chase and Company, AMJ Hoagie House, and K&R Marketing Solutions.*fn2 The allegations in the Complaint are as follows.*fn3

Plaintiff provides commercial loans to real estate investors. Glenn, as a principal of ISBN, submitted a loan application to Plaintiff for the purpose of purchasing a residential property located at 818 Waverly Road, Bryn Mawr, Pennsylvania. (Compl. ¶ 45 & Ex. 1, ECF No. 1.) On June 28, 2010, Plaintiff advised ISBN that it was willing to provide a $480,000 loan, subject to the receipt of certain documents, including a title insurance policy and a closing protection letter. (Id. at ¶¶ 52-53.)

Defendant Mabstract provides title insurance, conducts title searches, and offers closing services in connection with real estate transactions. Defendants Johnson and Mitchell each have a fifty percent interest in Mabstract. (Id. at ¶ 16.) Mabstract Management is an alter ego of Johnson and Mabstract. (Id. at ¶ 12.) Plaintiff alleges that Mabstract, while serving as an agent of TRGC, provided Plaintiff with a TRGC title commitment to issue an ALTA Loan Policy for the 818 Waverly Road transaction. (Id. at ¶ 54.) Mabstract also agreed to issue a closing protection letter on behalf of TRGC. (Compl. ¶ 57.)*fn4 On July 9, 2010, Mabstract provided Plaintiff with an escrow agreement. (Compl. ¶ 64 & Ex. 7.) On July 16, 2010, Plaintiff transmitted $480,000 into a Bank of America escrow account held by Mabstract. (Id. at ¶ 65.) The money in the escrow account was to be used exclusively for the 818 Waverly Road transaction and distributed in accordance with Plaintiff's instructions and the HUD-1 settlement statement. (Id. at ¶ 71.)

On July 19, 2010, Mabstract and Johnson conducted a closing of the real estate transaction. The HUD-1 settlement statement was signed by Shannen Kurz, a principal of ISBN; Michael and Karen Meehan, owners of the 818 Waverly Road property; and Johnson. (Id. at ¶ 78 & Ex. 11.) During the closing, or shortly thereafter, Mabstract misappropriated the escrow funds deposited by Plaintiff and used this money to pay off debts arising from previous transactions. (Id. at ¶ 83.) Specifically, Mabstract used the loan proceeds to pay $191,691.53 to Bank of America/Countrywide on account of a loan held by Ebert Estrada, $119,331.03 to JP Morgan Chase on account of a loan held by John and Darlene Weller, $24,000 to AMJ Hoagie Hut, and $14,400 to K&R Marketing. (Id. at ¶ 84.) Plaintiff alleges that the entire 818 Waverly Road transaction was fraudulent.

After providing this background to the transaction in the Complaint, Plaintiff discusses the relationship between Mabstract and TRGC. On April 8, 2010, TRGC and Mabstract entered into an Issuing Agency Contract, pursuant to which Mabstract would serve as a title insurance agent. (Id. at ¶ 96 & Ex. 13.) In relevant part, the Issuing Agency Contract provides that the "Principal appoints Agent as its agent solely for the purpose of issuing on Principal's forms, title insurance commitments, binders, guarantees, policies, and endorsements." (Id. at Ex. 13 at ¶ 1.) Notwithstanding any other provision, Mabstract's "authority under this Agreement is expressly limited to the issuance of Policies and the collection of premiums as set forth herein." (Id. at ¶ 2.) Mabstract was not authorized to "[r]eceive in the name of Principal any funds or things of value, including escrow and settlement funds, except premiums." (Id. at ¶ 2(I).) Under the "Duties of Agent" section of the Contract, Mabstract is instructed to "[k]eep all funds received by Agent from any source in connection with transactions in which Principal's title insurance is involved in a federally insured financial institution in escrow accounts." (Id. at ¶ 3(F).) Moreover, Plaintiff shall "[c]onduct or participate in any settlements or closings of title insurance transactions in which Policies of Principal are to be issued in an ethical manner." (Id. at ¶ 3(K).) The Issuing Agency Contract provides that Mabstract shall be liable to TRGC for expenses incurred by TRGC arising from the "handling of any escrow, sub-escrow or the closing of any transaction." (Id. at ¶ 6(A).)

TRGC discovered irregularities in real estate transactions involving Mabstract. (Compl. ¶ 109.) On July 12, 2010, TRGC terminated its Contract with Mabstract. (Id.) That day, representatives of TRGC went to Mabstract's offices to review its records and remove certain files. On July 14, TRGC filed a motion for a temporary restraining order and preliminary injunction against Johnson, Mitchell and Mabstract. Title Res. Guar. Co. v. Mabstract LLC, No. 10-3468 (E.D. Pa. filed July 14, 2010). On July 15, after a hearing, the Honorable Stewart Dalzell issued an order temporarily enjoining Defendants from "engaging or holding themselves out as engaging in any activity or business on behalf of TRGC." Id. at ECF No. 7.

On October 26, 2010, Plaintiff commenced the instant litigation. Plaintiff's Complaint alleges Fraud/Intentional Misrepresentation (Count I), Conspiracy (Count II), Conversion (Count III), Unjust Enrichment (Counts IV, XI, XIII), Breach of Fiduciary Duty (Count V), Negligence (Counts VI, VIII), Piercing of the Corporate Veil (Count VII), Enabler Liability (Count IX), Vicarious Liability/Respondeat Superior (Count X), Fraudulent Transfers (Count XII), Nominal Relief (Count XIV), and Breach of Contract (Count XV). On December 6, 2010, TRGC responded with a Motion to Dismiss. (Mot. Dismiss, ECF No. 28.) On January 21, 2011, Plaintiff filed a Motion for Default Judgment as to Defendants Johnson, Mabstract, Mabstract Management, Glenn, Kurz, Michael Meehan and AMJ Hoagie House. (Mot. Default, ECF No. 60.) On February 1, 2011, Johnson, Mabstract, and Mabstract Management filed a Petition to Set Aside Default. (Pet. Set Aside, ECF No. 64.)

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 8, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Federal Rule of Civil Procedure 12(b)(6) provides that a complaint may be dismissed for "failure to state a claim upon which relief can be granted." "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).A complaint that merely alleges entitlement to relief, without alleging facts that show entitlement, must be dismissed. See Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).This "'does not impose a probability requirement at the pleading stage,' but instead 'simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of' the necessary elements." Phillips v. Cnty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556).

Federal Rule of Civil Procedure 55(b)(2) authorizes the entry of a default judgment upon application to the court by a party. In determining whether to grant a default judgment, courts examine three factors: 1) prejudice to the plaintiff if default is denied; 2) whether the defendant appears to have a litigable defense; and 3) whether the defendant's delay is due to culpable conduct. Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000). "[T]he factual allegations of the complaint, except those relating to the amount of damages, will be taken as true." Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1149 (3d Cir. 1990) (citations omitted).

III. DISCUSSION

A. TRGC's Motion to Dismiss

Plaintiff brings four claims against TRGC. These claims include negligence (Count VIII), enabler liability (Count IX), vicarious liability ...


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