Manuel et al v. Gembala et al

Filing 64

ORDER granting 51 Motion for Leave to File Second Amended Complaint and denying without prejudice as premature 53 Amended Motion to Certify Class - Default previously entered against Custom Asset Solutions, LLC and Christopher Frisch is set aside. Counsel are directed to read Order in its entirety for critical information. Signed by Chief Judge Louise Wood Flanagan on 7/27/11. (Tripp, S.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
SOUTHERN DIVISION
No.7:1O-CV-4-FL
MICHAEL AND DOROTHY MANUEL,
Plaintiffs,

v.
JOSEPH A. GEMBALA, III, Esq.;
MICHAEL MALONE; CHRISTOPHER
FRISCH; JOSEPH A. GEMBALA, III &
ASSOCIATES, a Pennsylvania sole
proprietorship; and CUSTOM ASSET
SOLUTIONS, LLC, a New Jersey limited
liability company,

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ORDER

Defendants.

This matter comes before the court on plaintiffs' motion for leave to file second amended
complaint (DE # 51), which has been fully briefed. Also before the court is plaintiffs' amended
motion to certify class (DE # 53), which by previous order was held in abeyance pending decision
on the motion to amend. In this posture, the issues raised are ripe for review. For the reasons that
follow, plaintiffs' motion for leave to file second amended complaint is granted. Plaintiffs' amended
motion to certify class is denied without prejudice as premature.

BACKGROUND
Plaintiffs filed their original complaint on January 14, 2010, asserting a federal claim
pursuant to the Racketeer Influenced and Corrupt Organizations Act ("RICO") along with several
state law claims, all arising out of an alleged mortgage modification scam. The cast of defendants
included Joseph A. Gembala, individually, and Joseph A. Gembala III & Associates ("the Gembala

defendants"), Secure Property Solutions, LLC ("SPS"), National Mortgage Consultants Group, LLC
("NMCG"), and Custom Asset Solutions, LLC ("CAS"). On February 8, 2010, plaintiffs filed their
first amended complaint, adding two additional defendants: Michael Malone ("Malone") and
Christopher Frisch ("Frisch").
On February 26, 2010, the Gembala defendants moved to dismiss pursuant to Federal Rules
of Civil Procedure 12(b)(l) and 12(b)(6). On April 13,2010, plaintiffs moved to certify a class, to
which the Gembala defendants timely responded. As of this date, no other defendant had yet filed
responsive pleadings or otherwise appeared.
On July 2, 2010, the court directed plaintiff to file proof of service as to all defendants who
had not yet filed responsive pleadings. Plaintiffs thereafter filed proofofservice as to CAS, Malone,
and Frisch. Default was entered as to these defendants on July 28, 2010. On August 9, 2010,
Malone moved for leave to file answer, submitting proposed answer together with said motion. On
September 14, 2010, the court granted the motion and set aside entry of default as to Malone.
On September 30, 2010, the court issued an order addressing several matters. First, the court
dismissed SPS and NMCG from the action for plaintiffs' failure to achieve service. The court then
denied plaintiffs' motion to certify a class. Finally, the court granted the Gembala defendants'
motion to dismiss pursuant to Rule 12(b)(6), dismissing plaintiffs' claims without prejudice. With
the exception of Malone, therefore, all other defendants had either been dismissed or the subject of
entry of default.
On October 20, 2010, plaintiffs filed motion for leave to file their second amended
complaint, which names as defendants the Gembala defendants, Malone, Frisch, and CAS. On the
same day, plaintiffs also filed amended motion to certify class. In order dated February 2,2011, the

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court observed that several of the potentially revived defendants had not received notice of the
electronic filing, and ordered plaintiff to serve the motion to amend on all defendants named in the
proposed second amended complaint. The court also held in abeyance plaintiffs' motion to certify
pending resolution of the motion to amend. The Gembala defendants filed response in opposition
to plaintiffs' motion to amend on February 24,2011, to which plaintiffs timely replied.
DISCUSSION

A.

Motion for Leave to File Second Amended Complaint
A plaintiff may amend his complaint one time as a matter of course within twenty-one (21)

days after service of a responsive pleading or twenty-one (21) days after service of a motion under
Rule 12(b), whichever is earlier. Fed. R. Civ. P. 15(a). Otherwise, however, a plaintiff may amend
his complaint only by leave of the court or by written consent of the defendant, although leave to
amend "shall be freely given when justice so requires." Id. This liberal rule gives effect to the
federal policy in favor of resolving cases on their merits, rather than disposing of them on
technicalities. See Ostrzenski v. Seigel, 177 F.3d 245, 252-53 (4th Cir. 1999). Leave to amend
should be freely given in the absence of"undue delay, bad faith or dilatory motive on the part of the
movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice
to the opposing party by virtue of allowance of the amendment, or futility of the amendment."
Foman v. Davis, 371 U.S. 178, 182 (1962).
The second amended complaint asserts a federal claim pursuant to the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq, as well as various state law
claims based on the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et seq, Pennsylvania Unfair
Trade Practices and Consumer Protection Law, 73 P.S. § 201-1, et seq, North Carolina Unfair and
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Deceptive Trade Practices Act, N.C. Gen. Stat. § 75-1.1, et seq, New Jersey racketeering laws, N.J.S.
2C:41-1, et seq, North Carolina racketeering laws, N.C. Gen. Stat. § 75D-1, et seq, and common law
fraud. Plaintiffs invoke federal question jurisdiction pursuant to 28 U.S.C. § 1331 based on the
federal RICO claim, relying on supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) for the
related state law claims. The Gembala defendants oppose plaintiffs' motion to amend, arguing that
permitting plaintiffs to amend their complaint to resurrect their federal RICO claims would be futile. l
An amendment is futile where it would fail to withstand a motion to dismiss for failure to
state a claim pursuantto Federal Rule of Civil Procedure 12(b)(6). Perkins v. United States, 55 F.3d
910,917 (4th Cir. 1995). A motion to dismiss under Rule 12(b)(6) determines only whether a claim
is stated; "it does not resolve contests surrounding the facts, the merits ofa claim, or the applicability
of defenses." Republican Party v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). A claim is stated if
the complaint contains "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)). In evaluating whether a claim is stated, "[the] court accepts
all well-pled facts as true and construes these facts in the light most favorable to the plaintiff," but
does not consider "legal conclusions, elements of a cause of action, and bare assertions devoid of
further factual enhancement." Nemet Chevrolet. Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250,
255 (4th Cir. 2009).
The Gembala defendants make a relatively general objection to the proposed amendment,
asserting only that plaintiffs "have not pled each element of a valid RICO claim with the
combination of brevity required by Rule 8 and particularity required by Rule 9," while offering no

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The Gembala defendants make no argument as to the futility of plaintiffs' state law claims.

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substantive discussion as to the elements ofa RICO claim or why plaintiffs' pleading is insufficient.
The sufficiency of a civil RICO claim is judged in accordance with the notice pleading
requirement ofRule 8(a), requiring a "short and plain statement ofthe claim showing that the pleader
is entitled to relief." Fed.R.Civ.P. 8(a)(2). At the same time, however, "where RICO claims are
based on predicate acts of fraud, the heightened pleading standard set forth in Rule 9(b) of the
Federal Rules of Civil Procedure applies." Field v. GMAC, LLC, 660 F.Supp.2d 679,686 (D.Md.
2011) (citing Menasco, Inc. v. Wasserman, 886 F.2d 681,684 (4thCir. 1989)). Rule 9(b) requires
that "in alleging fraud or mistake, a party must state with particularity the circumstances constituting
fraud or mistake. Malice, intent, knowledge, and other conditions ofa person's mind may be alleged
generally." Fed.R.Civ.P.9(b). "A court should hesitate to dismiss a complaint under Rule 9(b) if
the court is satisfied (1) that the defendant has been made aware of the particular circumstances for
which she will have to prepare a defense at trial and (2) that [the] plaintiff has substantial
prediscovery evidence ofthose facts." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776,
784 (4th Cir. 1999).
Plaintiffs assert claims under RICO subsections (a)2, (C)3, and (d)4. 18 U.S.C. § 1962(a), (c),
(d). To state a claim for a RICO violation, the complaint must set forth facts which, ifproven, would
establish "(1) conduct (2) of an enterprise (3) through a pattern (4) ofracketeering activity." Morley

2 The elements of a subsection (a) RICO claim are: (I) a receipt of income from a pattern of racketeering
activity; and (2) use or investment of the income in an enterprise. 18 U.S.c. § I962(a); see also Busby v. Crown Supply,
Inc., 896 F.2d 833,837 (4th Cir. 1990).

3 The elements of a subsection (c) RICO claim are: (I) the conduct; (2) of an enterprise; (3) through a pattern
of racketeering activity. 18 U.S.C. § I962(c); see also Salinas v. U.S., 522 U.S. 52, 63 (1997).

4 Subsection (d) is aimed at conspiracies to violate subsections (a) through (c) of RICO. To allege a subsection
(d) claim, plaintiff must allege that "each defendant agreed that another co-conspirator would commit two or more acts
of racketeering." U.S. v. Pryba, 900 F.2d 748, 760 (4th Cir. 1990).

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v. Cohen, 888 F.2d 1006, 1009 (4th Cir. 1989). '''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). "Racketeering activity" includes, inter alia,
"any act which is indictable" under specifically enumerated criminal provisions, including those
relating to mail and wire fraud set forth in 18 U.S.C. §§ 1341, 1343. 18 U.S.C. § 1961(1). Finally,
a '''pattern of racketeering activity' requires at least two acts of racketeering activity, one of which
occurred after the effective date ofthis chapter and the last of which occurred within ten years ...
after the commission ofa prior act of racketeering activity." 18 U.S.C. § 1961(5).
Briefly, the second amended complaint alleges that the defendants conducted a fraudulent
mortgage modification scheme by agreement whereby defendants would solicit and accept advance
payments from struggling homeowners in exchange for a promise to negotiate with mortgage lenders
for reduced mortgage payments or lower interest rates. Plaintiffs allege that defendants, in fact,
knew they did not have the ability to achieve mortgage modifications, but intentionally
misrepresented themselves as having the ability to do so. In furtherance of the scheme, plaintiffs
allege that defendants committed several criminal acts, including mail fraud and wire fraud in
violationof18U.S.C. §§ 1341 and 1343. Plaintiffs allege that the money received was used in part
to further the scheme by paying for operating expenses, salaries, and advertising.
The Gembala defendants contend that plaintiffs have not sufficiently pleaded each element
of their RICO claim, and that therefore, amendment is futile. "Leave to amend, however, should
only be denied on the ground of futility when the proposed amendment is clearly insufficient or
frivolous on its face." Johnson v. Oroweat Foods, 785 F.2d 503, 510 (4th Cir. 1986). The Gembala
defendants offer, however, no specific reason why the proposed amendment is clearly insufficient

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or frivolous on its face, nor does the court readily discern any. The proposed amendment does not
clearly fail to state a claim to relief that is plausible on its face, therefore, in light of the liberal
standard embraced by Rule 15(a), which requires that leave to amend be "freely given," plaintiffs
shall be permitted to amend their complaint. 5
B.

Amended Motion to Certify
The court now has reason to revisit its previous decision to hold in abeyance plaintiffs'

amended motion to certify class (DE # 53). Federal Rule of Civil Procedure 23(c)(1) directs the
court to determine "at an early practicable time" whether to certify an action as a class action. At
the same time, however, judicial economy is often best served by ruling on preliminary dispositive
motions prior to considering class certification issues. See Wiesmuellerv. Kosobucki, 513 F.3d 784,
787 (7th Cir. 2008).
Here, with the filing of the second amended complaint, the wheels of this litigation have
begun to tum anew, and immediate consideration of issues bearing on certification would divert the
attention of the parties and the court from preliminary issues more appropriately addressed in
advance of decision on any motion to certify. The lay of the land has shifted since the amended
motion to certify was filed. In light ofthe unique procedural posture ofthe case, the court of its own
initiative now DENIES said motion as premature, without prejudice, and turns its attention to the
mechanics ofpositioning the case back on course against these defendants so that pleadings promptly
may be framed and/or any preliminary motions filed.

5 The grant of the motion, of course, does not prejudice a later motion to dismiss for failure to state a claim
pursuant to Rule l2(b)(6). Rather, the court now determines only that the amendment should be permitted where it is
not facially obvious that the proposed second amended complaint could not survive a motion to dismiss, and where
defendants offer no argument as to specific deficiencies that render the amendment futile.

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C.

Case Schedule
Where plaintiffs' motion for leave to file second amended complaint (DE # 51) is allowed,

the same shall come now into the record, and default, previously entered against CAS and Frisch,
necessarily must be set aside. Plaintiffs shall serve all defendants with the second amended
complaint and exhibits thereto, and file proofof service as required. Defendants shall have the time
permitted under the rules within which to respond to the second amended complaint. Preliminary
motions, if any, shall be filed on the same schedule. Should the case remain pending after decision
on any preliminary motion(s), the parties shall have twenty-one (21) days from date of entry of the
order to confer and propose pursuant to the rules another schedule for disposition of the case,
including with reference to discovery, dispositive motions, and anticipated motion to certify, where
the court's denial of the same is without prejudice. Reference then shall be made to the court's
initial order lodged at docket entry number 34 for such other and further requirements to be adhered
to in making joint report and plan to the court, which report and plan shall follow on the docket
within fourteen (14) days after the parties' conference. If either side then determines a conference
with the court may aid in address of scheduling matters, such request shall be memorialized on the
face of the report and plan. Ifthe parties cannot agree on a comprehensive case schedule, separate
reports, as noted, shall be made.

CONCLUSION
For the foregoing reasons:
1.

Plaintiffs' motion for leave to file second amended complaint (DE # 51) is
GRANTED, and the clerk is DIRECTED now to take separately into the record
plaintiffs' second amended complaint, as it appears at docket entry number 55,

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including all exhibits thereto;
2.

Default, previously entered against CAS and Frisch, is necessarily SET ASIDE;

3.

Plaintiffs shall serve all defendants with the second amended complaint and exhibits
thereto, and shall file proof of service as required;

4.

Defendants, absent any extension, shall have twenty-one (21) days from date of
service within which to respond to the second amended complaint, and any
preliminary motions ofthe type which reasonably may be made at this juncture ofthe
case shall be filed on the same schedule, with memorandum in accordance with the
local rules;

5.

Plaintiffs' amended motion to certify class (DE # 53), which by previous order was
held in abeyance pending resolution of plaintiffs' motion to amend, is DENIED
without prejudice as premature; and

6.

The parties are DIRECTED at a future stage described above to meet and confer
pursuant to Rule 26(f) and submit to the court joint report and plan in furtherance of
the dispatch of the case.

SO ORDERED, this the27th day of July, 2011.

o

ISE W. FLANAGAN
Chief United States District Judge

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