Galas v. Lending Company Incorporated et al

Filing 91

ORDER granting 41 Motion to Dismiss for Lack of Jurisdiction; finding as moot 42 Motion to Stay; granting in part and denying in part 45 Motion to Dismiss Counts/Claims. Signed by Judge David G Campbell on 1/25/2013.(NVO)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Margaret Galas, individually and on behalf
of those similarly situated,

No. CV-12-01265-PHX-DGC
ORDER

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Plaintiff,

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v.

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The Lending Company, Inc., et al.,

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Defendants.

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On November 6, 2012, Margaret Galas filed an amended class action complaint

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variously alleging eight causes of action against The Lending Company, Inc. (“TLC”)

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and its executives and their spouses, several Arizona non-profit organizations (“the

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charities”), Franklin American Mortgage Company (“FAMC”), and unidentified Investor

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Mortgagees.

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September 20, 2012. Docs. 41-42. On October 9, 2012, TLC and its executives filed a

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motion to dismiss all claims against the executives and counts three, six, and seven

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against TLC (Doc. 45), and on October 29, 2012, Family Housing Resources Inc.

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(“FHR”), one of the charities, filed a notice of joinder in TLC’s motion to dismiss

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(Doc. 66). All motions have been fully briefed. Docs. 46, 63, 71, 77, 78, 80, 88. For the

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reasons that follow, the Court will grant in part and deny in part TLC’s motion to dismiss,

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grant FAMC’s motion to dismiss, and deny as moot FAMC’s motion to stay.1

Doc. 35.

FAMC filed a motion to dismiss and a motion to stay on

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The request for oral argument is denied because the issues have been fully
briefed and oral argument will not aid the Court’s decision. See Fed. R. Civ. P. 78(b).

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I.

Background.
In order for a mortgage to qualify for Federal Housing Administration (“FHA”)

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insurance, the borrower must make a down payment of at least 3.5%.

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§ 1709(b)(9). To enable borrowers to satisfy that requirement without providing the full

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3.5%, TLC offered a “1% down” program.

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borrowers to provide a 1% down payment, after which they would receive a “gift” of the

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additional 2.5% from a charitable organization. Doc. 45 at 3.

Doc. 45 at 3.

12 U.S.C.

The program required

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In May 2010, Plaintiff Margaret Galas applied for and obtained an FHA insured

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mortgage loan from TLC in the amount of $132,554 through the 1% down program.

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Doc. 35 ¶ 116; Doc. 45 at 3. Galas provided 1% of the down payment and received a gift

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of the additional 2.5%, or a total of $3,375, from the charitable organization Family

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Housing Resources (“FHR”). Doc. 45 at 3.

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Galas claims that she was charged a higher interest rate than she would have been

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had she not participated in the 1% down program. That interest rate, she claims, was

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elevated so that the mortgage could be sold as a “premium” mortgage on the secondary

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market and the additional proceeds of that sale used to repay the 2.5% gift along with an

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“administrative fee.” Doc. 35 ¶ 4-5. Galas alleges that while she was promised a “gift,”

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she and other 1% down borrowers are actually paying for the gift through an increased

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interest rate, and that Defendants misrepresented the terms of the loan. Doc. 35 ¶ 119-25.

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Galas asserts eight causes of action against various Defendants related to the

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manner in which she received her loan. Doc. 35 at 28-43. The first two claims assert

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violations of portions of the Real Estate Settlement Procedures Act (“RESPA”). 12

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U.S.C. § 2607(a) & (b). Claims three and four allege conspiracy and enterprise liability

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violations of the Racketeer Influence and corrupt Organization Act (“RICO”). 18 U.S.C.

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§ 1962(c) & (d). The fifth claim alleges a violation of the Arizona Consumer Fraud Act.

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A.R.S. § 44-1522. The sixth and seventh claims allege common law claims of fraudulent

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misrepresentation and omission and breach of contract. The eighth cause of action seeks

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declaratory and injunctive relief.
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II.

Legal Standard.

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When analyzing a complaint for failure to state a claim to relief under Rule

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12(b)(6), the well-pled factual allegations are taken as true and construed in the light

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most favorable to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th

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Cir. 2009). Legal conclusions couched as factual allegations are not entitled to the

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assumption of truth, Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009), and they are insufficient

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to defeat a motion to dismiss for failure to state a claim, In re Cutera Sec. Litig., 610 F.3d

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1103, 1108 (9th Cir. 2010). To avoid a Rule 12(b)(6) dismissal, the complaint must

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plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp.

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v. Twombly, 550 U.S. 544, 570 (2007).

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III.

Analysis.

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A.

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TLC and its executives move to dismiss counts six (fraudulent misrepresentation

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or omission) and seven (breach of contract) against TLC and all counts against the

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company’s executives. Doc. 45 at 2. They argue that the RICO, fraud, and breach of

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contract claims are merely a recasting of the RESPA violations alleged in counts one and

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two (which they do not move to dismiss), and that the fraud claim has not been pled with

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sufficient particularity under Rule 9(b). They further argue that all claims against the

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executives must be dismissed because Galas has failed to identify actions by the

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executives that would warrant individual liability.

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TLC’s Motion.

Galas does not contest the dismissal of claim seven for breach of contract.

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Doc. 71 at 32.

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derivative of the RESPA violations and that the individual executives should be liable

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because they devised and implemented the loan program. Doc. 35 ¶ 173.

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She maintains, however, that the additional claims are not merely

Defendant TLC.

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Defendants assert that Plaintiff’s fraud-based claims in the third cause of action for

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RICO and the sixth cause of action for fraud do not satisfy the Rule 9(b) requirement that

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a plaintiff must “state with particularity the circumstances constituting fraud.” Fed. R.
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Civ. P. 9(b). Although the fifth cause of action – violation of the Arizona Consumer

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Fraud Act – is also asserted against TLC and is based on the same fraudulent acts, TLC

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expressly acknowledges that it does not move to dismiss that claim for lack of specificity.

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Doc. 88 at 6, n. 2. The Court will address whether Plaintiff’s factual allegations of fraud

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that underlie claims three and six are specific enough to satisfy Rule 9(b).

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A common law fraud claim in Arizona has nine elements: (1) a representation,

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(2) its falsity, (3) its materiality, (4) the speaker’s knowledge of its falsity or ignorance of

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its truth, (5) intent that it should be acted upon, (6) the hearer’s ignorance of its falsity,

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(7) his reliance on its truth, (8) his right to rely thereon, and (9) his consequent and

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proximate injury. Fridenmaker v. Valley Nat. Bank of Arizona, 534 P.2d 1064, 1067

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(1975). Galas alleges that TLC said she would receive a “gift” from a charity of 2.5% of

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the purchase price. She alleges that the cost of that gift was actually passed along to her

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through a higher interest rate. Doc. 35 ¶ 159. She alleges that TLC advertised the 1%

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down program, evidencing its intent that borrowers rely on its promise of securing a 2.5%

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gift for them, while it actually intended that the gift would be repaid through proceeds

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derived from increasing the interest rate and selling the premium loans on the secondary

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market. Doc. 35 ¶¶ 191, 193-96.

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These facts sufficiently identify the fraud allegedly committed by TLC. The Court

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will deny TLC’s motion to dismiss claims three and six for failure to comply with

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Rule 9(b). Galas also briefs the legal theories of fraud by concealment and omission, but

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the Court need not consider additional legal theories in support of the same claims.

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2.

Defendant Executives.

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Galas asserts five claims against TLC Executives (claims 1-3, 5-6). Defendants

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argue that Galas “does not assert any facts or legal theories under which these individuals

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could be held liable.” Doc. 45 at 4.

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"A corporate officer or director is, in general personally liable for all torts which

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he authorizes or directs or in which he participates, and notwithstanding that he acted as

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an agent of the corporation.” Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d
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1001, 1021 (9th Cir. 1985). Thus, where a plaintiff alleges that an officer authorized,

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directed, or participated in a corporation’s tort or statutory violation, he can be personally

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liable. See United States v. Reis, 366 Fed. Appx. 781, 782 (9th Cir. 2010) (finding

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personal liability where an officer was an actual participant in the acts giving rise to

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corporate liability under the Resource Conservation and Recovery Act); Dish Network,

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LLC v. Sonicview USA, Inc., No. 09-CV-1533, 2012 WL 1965279 *11 (S.D. Cal.),

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reconsideration denied, 2012 WL 4339047 (finding personal liability for corporate

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officers who were “guiding spirits” of corporations statutory violations).

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To adequately allege individual liability for TLC executives in the alleged RESPA

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violations, Galas need only satisfy the pleading requirements in Rule 8. Galas alleges

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that the executives devised the 1% down program and “approved and directed” the

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corporate actions that form the basis of the RESPA claims. Doc. 35 ¶¶ 156, 163, 173.

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Specifically, the complaint contains allegations that as CEO and Chairman Nickel

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conceived of the 1% down program and ran it on a daily basis. Doc. 35 ¶ 17. Reynolds

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and Johnson are alleged to have participated in running the loan program (Doc. 35 ¶¶ 19,

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21) and Reynolds is alleged to be responsible for selling the loans on the secondary

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market (Doc. 35 ¶¶ 21, 65). Galas also references an email from Reynolds to Nickel and

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Johnson informing them that TLC “fall[s] into the ‘or any party that financially benefits

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from the transactions’” category and suggesting that they should “consider getting rid of

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the gift program after all.” Doc. 35-6 at 2. Galas also references a letter to Reynolds

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from GMAC Bank informing him that GMAC would not participate in the program

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because they believed the charitable gift was ultimately paid by the lender, an improper

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source of funds. Doc. 35-5 at 2. These facts are sufficient to sustain a claim for personal

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liability against the named officers for their parts in the alleged RESPA violations.

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With respect to the fraud claims (claims 5-6) and the RICO claim that asserts an

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underlying predicate act of fraud, Plaintiff must satisfy the heightened pleading standard

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of Rule 9(b). The Court has already found that Plaintiff adequately pled a claim for fraud

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against TLC. Under Arizona law, corporate officers and directors are not personally
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liable for a corporation’s torts “merely by virtue of the office they hold,” Marlyn

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Nutraceuticals, Inc. v. Improvita Health Prods., 663 F. Supp. 2d 841, 846 (D. Ariz.

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2009), but they are personally liable when they either participated in the fraud or had

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knowledge of it that “amount[s] to acquiescence.” Bischofshausen, Vasbinder, & Luckie

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v. D.W. Jaquays Min. & Euip. Contractors Co., 700 P.2d 902, 908 (App. 1985).

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Galas has alleged that the Executive Defendants knew about and personally

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participated in the corporate conduct as noted above. The Court concludes that Galas has

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sufficiently alleged that the named officers either acquiesced or participated in the fraud.

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The Court will deny the motion to dismiss all claims against the corporate officers.
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RICO Claims.

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“Courts have rejected RICO claims when a plaintiff attempts to reformulate

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conduct as mail fraud when it would otherwise not be fraudulent in the absence of a

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statutory violation that is not defined as racketeering activity under RICO.” Johnson v.

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KB Home, 720 F. Supp. 2d 1109, 1116 (D. Ariz. 2010); Smith v. Jackson, 84 F.3d 1213,

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1217 (9th Cir. 1996) (rejecting a RICO claim when the predicate act consisted only of

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alleged violations of copyright laws). Defendants move to dismiss the RICO claims

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because the RICO allegations merely rehash the underlying RESPA claims. They argue

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that RESPA claims, like the underlying copyright violations in Smith, cannot qualify as a

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predicate act under RICO.

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Johnson distinguished Smith, holding that “while RESPA violations do not

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constitute racketeering activity, 18 U.S.C. § 1961(1), a person can engage in mail fraud

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based on fraudulent appraisals without the operation of RESPA.” Johnson, 720 F. Supp.

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2d at 1116. Galas has adequately alleged both statutory and common law fraud claims,

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and further alleges that the fraud was performed through mail and over wires. Galas need

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not rely on RESPA claims where she has alleged conduct that could establish mail fraud

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absent a RESPA violation. The Court will deny the motion to dismiss the RICO claims.

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B.

Notice of Joinder.

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Defendant FHR, one of the alleged gift-giving charities, filed a notice of joinder in
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TLC’s motion to dismiss with respect to claims three, six, and seven. Doc. 61. Galas

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opposed the joinder in responsive briefing because FHR filed an answer before filing the

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notice of joinder in the motion to dismiss. Doc. 77. Because the Court has rejected the

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motion to dismiss with respect to claims three and six and claim seven has been

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dismissed in its entirety, FHR’s joinder in the motion is moot.

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C.

FAMC’s Motion.

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FAMC purchases mortgages on secondary markets. Doc. 41 at 4. Galas alleges

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that an integral part of the fraudulent scheme was raising interest rates on the 1% down

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mortgages so that they could be resold on the secondary market as premium mortgages.

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Galas alleges that TLC sold these loans to numerous investors and entities, but she does

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not allege that FAMC purchased her mortgage. Because Galas does not allege that

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FAMC had any dealings directly with her, FAMC argues that there is no case or

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controversy between them and moves to dismiss all claims against it under Rule 12(b)(1).

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See Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1140 (9th Cir. 2003).

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Galas responds that she need not allege that FAMC was the entity that purchased

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her loan because she has alleged that FAMC is a co-conspirator with TLC and other

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defendants and the conspiracy proximately caused her loss. She argues that transferring

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standing to a co-conspirator is similar to transferring standing to a claim’s assignee, as

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authorized by the holding in Sprint Communications Co., L.P. v. APCC services, Inc.,

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554 U.S. 269, 274 (2008). Galas maintains that FAMC participated in the conspiracy by

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continuing to purchase the premium mortgages and enabling the conspiracy to continue

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even after receipt of a letter exposing the fraud from a whistleblower employee of TLC.

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Doc. 35 ¶¶ 98-103, 184, 208. Galas cites Oki Semiconductor Co. v. Wells Fargo Bank,

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N.A., 298 F.3d 768 (9th Cir. 2002), in which the Ninth Circuit acknowledged potential

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joint liability on the part of a defendant who was an alleged RICO co-conspirator that

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laundered proceeds of stolen semiconductors. Galas argues that the same type of co-

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conspirator liability should lie against FAMC in this case.

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The Court has found that Galas has adequately pled a RICO claim. FAMC’s
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alleged involvement in the conspiracy arose when it continued to purchase the premium

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mortgages despite knowledge of improprieties with the charitable gift and the interest

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rates.

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whistleblower’s letter. Doc. 35 ¶ 184. Galas does not allege, however, that that letter

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was received before her mortgage had been sold on the secondary market. Doc. 35

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¶¶ 96-111. Even if FAMC was a RICO co-conspirator after the receipt of the letter,

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Galas has not adequately alleged that it was part of the conspiracy when she suffered her

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loss. Galas has not alleged a causal relationship between any of FMAC’s actions and the

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harm she allegedly suffered by paying a higher interest rate. As a result, all claims

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against FMAC will be dismissed. FAMC’s motion to stay pending consideration of its

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motion to dismiss (Doc. 42) will be denied as moot.

Galas alleges that FAMC knew about the improprieties after it received a

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IT IS ORDERED:

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TLC’s motion to dismiss (Doc. 45) is granted in part and denied in part.
Claim seven for breach of contract is dismissed.

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2.

FAMC’s motion to dismiss (Doc. 41) is granted.

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3.

FAMC’s motion to stay (Doc. 42) is denied as moot.

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Dated this 25th day of January, 2013.

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