Group One Development, Inc et al v. Bank of Lake Mills et al

Filing 19

MEMORANDUM OPINION AND ORDER granting 8 MOTION to Dismiss , granting 7 MOTION to Dismiss 1 Complaint (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)

United States District Court
Southern District of Texas

ENTERED
July 07, 2017

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

GROUP ONE DEVELOPMENT, INC;
GERARDO DIAZ-BLANCO; and
GERARDO DIAZ,

§
§
§
§
§
§
§
§
§
§
§
§

Plaintiffs,
v.

BANK OF LAKE MILLS and FORA
FINANCIAL, LLC,
Defendants.

David J. Bradley, Clerk

CIVIL ACTION NO. H-17-0375

MEMORANDUM OPINION AND ORDER

Pending before the court are Fora Financial, LLC's

("Fora")

Motion to Dismiss (Docket Entry No. 7) and Defendant Bank of Lake
Mill's

("BLM") Motion to Dismiss

(Docket Entry No.

8).

For the

reasons stated below, the motions will be granted.
I.

Factual and Procedural Background

In September of 2016 plaintiffs Group One Development,
("Group One"),
loan

from

Gerardo Diaz-Blanco,

BLM. 1

dealt

exclusively with Fora,

and Fora eventually serviced the

loan.

Plaintiffs

Jonathan Gafni,

that

the

and Gerardo Diaz obtained a
Plaintiffs

allege

During

Inc.

loan

process

a

Fora

representative,

induced them to go forward with the loan by assuring them that the
loan was "uncollateralized" and "unsecured" and that Fora had "no

1

Except as noted, alleged facts are taken from Plaintiffs'
Original Complaint ("Plaintiffs' Complaint"), Docket Entry No. 1.

right to any of

[Plaintiffs']

relied on Gafni' s

states

Plaintiffs

statements even though the Business Loan and

Security Agreement
loan

personal belongings." 2

that

("the Agreement")
borrowers

containing the terms of the

grant

a

security

interest

in

"Collateral" as defined in the Agreement.
Group One eventually obtained a loan of $159,400.00.
was guaranteed by Diaz-Blanco and Diaz.

The loan

The Agreement contains a

Payment Schedule that calls for 214 payments of $897.09 to be made
each "Business Day" followed by a final payment of $896.74, for a
total repayment of $192,874.00.

That amount would include interest

in the amount of $33,474.00, or approximately twenty-one percent of
the principal. 3

Plaintiffs allege

that

the

terms of

the

loan

result in "an annual interest rate of more than 35.00%." 4
Plaintiffs allege that Defendants have violated Texas lending
and usury laws and that Gafni fraudulently induced Plaintiffs to
enter into the Agreement.
violated the
U.S.C.

2

§§

Fair Debt

1692,

Plaintiffs also allege that Defendants
Collection Practices Act

et seq.,

( "FDCPA") ,

15

the Racketeer Influenced and Corrupt

Plaintiffs' Complaint, Docket Entry No. 1, p. 4

~

11.

3

Business Loan and Security Agreement Supplement, Docket Entry
No. 1-1, p. 4.
4

Plaintiffs' Complaint, Docket Entry No. 1, p. 4 ~ 10.
Plaintiffs do not explain how they calculated the alleged annual
rate.
But because the outcome is unaffected by the use of
Plaintiffs' rate, the court will assume without deciding that
Plaintiffs' calculations are accurate.
-2-

Organizations Act ("RICO"), 18 U.S.C.
Credit Service Organization Act
393.

§§

1961, et seq., and Texas's

("CSOA"),

TEX. FIN. CoDE,

Plaintiffs seek damages and injunctive relief.

Chapter

Defendants

move for dismissal under Federal Rule of Civil Procedure 12(b) (6)
on the basis of Plaintiffs'

failure to state a claim upon which

relief can be granted. 5
II.

Legal Standard

In a motion to dismiss under Rule 12(b) (6),

the court must

"'accep[t] all well-pleaded facts as true and vie[w] those facts in
the light most favorable to the plaintiff.'"

Bowlby v. City of

Aberdeen, Mississippi, 681 F.3d 215, 219 (5th Cir. 2012)
omitted).

Legal conclusions,

assumption of truth."
(2009).

however,

Ashcroft v.

(citation

"are not entitled to the

Iqbal,

129 S.

Ct.

1937, 1950

"[A] plaintiff's obligation to provide the grounds of his

entitlement to relief requires more than labels and conclusions,
and a formulaic recitation of the elements of a cause of action
will not do."
1964-65

(2007)

Bell Atlantic Corp. v. Twombly,
(internal

quotation

marks

127 S.

ami t ted) .

Ct.

1955,

"Factual

allegations must be enough to raise a right to relief above the
speculative level[.]"

Id. at 1965.

5

Although Defendants move separately for dismissal, the
arguments in Fora's Motion to Dismiss (Docket Entry No. 7) address
all of Plaintiffs' claims and apply equally to either defendant.
The court will therefore focus on the arguments in Fora's motion.
-3-

Dismissal

under

Rule

12(b) (6)

plaintiff's legal theory is incorrect:

is

appropriate

when

a

"When a complaint raises an

arguable question of law which the district court ultimately finds
is

correctly

resolved

against

the

plaintiff,

Rule 12(b) (6) grounds is appropriate.
109

S.

Ct.

1827,

1833

(1989).

II

" [W] hen

dismissal

on

Neitzke v. Williams,
the

allegations

in a

complaint, however true, could not raise a claim of entitlement to
relief, this basic deficiency should . .

be exposed at the point

of minimum expenditure of time and money by the parties and the
court."

Twombly,

127

S.

Ct.

at

1966

(citation

and

internal

quotation marks omitted)
III.
A.

Analysis

Texas Lending and Usury Claims

Plaintiffs allege that Defendants charged an interest rate in
excess of the rate permitted by the Texas Finance Code.

Defendants

argue that the Agreement clearly states that it will be governed by
applicable federal law and, to the extent not preempted by federal
law,

by Wisconsin

law. 6

Instead of

responding

to Defendants'

argument, Plaintiffs argue that venue is proper in Texas. 7

6

Fora's Motion to Dismiss, Docket Entry No.
Motion to Dismiss, Docket Entry No. 8, pp. 1-3.
7

7,

p.

Based

9; ELM's

Plaintiffs' Response to Both Defendants' Rule 12(b) (6)
Motions to Dismiss and Brief in Support Thereof ("Response") ,
Docket Entry No. 17, pp. 4-5 ~ 11.
-4-

on the plain language of the Agreement 8 the court concludes that it
is

governed by Wisconsin

law and,

as

applicable,

federal

law

governing institutions insured by the Federal Deposit Insurance
Corporation.
The viability of Plaintiffs' usury claims therefore depends on
whether the interest rate is usurious under Wisconsin law.
relevant statute,

which sets out maximum interest rates allowed

under various circumstances,

states that it "shall not apply to

loans to corporations or limited liability companies."
§

The

Wis. Stat.

The statute also states that it "does not apply to

138.05(5).

any loan or forbearance in the amount of $150,000 or more made
after May 26, 1978 unless secured by an encumbrance on a one- to
four-family

dwelling

which

the

principal place of residence."

borrower

Id. at

§

uses

as

his

or

her

138.05(7).

Fora argues that the loan was made to a corporation,

Group

One, and therefore is not subject to a maximum interest rate under

Wisconsin law.

Diaz-Blanco and Diaz argue that they,

borrowers and that
§

the

138.05(5) exception. 9

loan therefore does not

fall

too,

are

under the

Plaintiffs cite the fact that in several

places they signed individually as "borrowers."

The court finds

Agreement, Docket Entry No. 1-1, p. 11 , 37 ("CONSEQUENTLY,
THIS AGREEMENT WILL BE GOVERNED BY FEDERAL LAW APPLICABLE TO AN
FDICINSURED INSTITUTION AND TO THE EXTENT NOT PREEMPTED BY FEDERAL
LAW, THE LAWS OF THE STATE OF WISCONSIN WITHOUT REGARD TO CONFLICT
OF LAW RULES. The legality, enforceability and interpretation of
this Agreement and the amounts contracted for, charged and reserved
under this Agreement will be governed by such laws.")
8

9

Plaintiffs' Response, Docket Entry No. 17, p.5 , 12.
-5-

Fora's Reply persuasive:

(1) elsewhere in the Agreement Group One

alone is identified as the borrower;

(2)

the loan proceeds were

paid to Group One, not to the individual plaintiffs; and (3) the
individual plaintiffs also signed the Agreement as guarantors, a
step that would be redundant if they were already responsible for
repayment

borrowers. 10

as

plaintiffs were borrowers,

Moreover,

even

if

the

they offer no argument

individual
for why the

exception in§ 138.05(7) does not apply based on the loan amount of
'

more than $150,000.

The court therefore concludes that Plaintiffs'

lending and usury claims fail as a matter of law.
B.

Fraudulent Inducement

Plaintiffs claim that were fraudulently induced into obtaining
the loan by Gafni.

The elements of fraud under Texas law are:

(1) that a material representation was made; (2) the
representation was false; (3) when the representation was
made, the speaker knew it was false or made it recklessly
without any knowledge of the truth and as a positive
assertion; (4) the speaker made the representation with
the intent that the other party should act upon it; (5)
the party acted in reliance on the representation; and
(6) the party thereby suffered injury."
Langlois v. Wells Fargo Bank National Association,
421,

427

Valencia,

(5th Cir.
Inc.,

elements of

a

2014)

(citing Aguaplex,

297 S.W.3d 768,
fraud

claim is

774
that

(Tex.
the

Inc.

581 F. App'x
v.

Rancho La

2009)).

"One of the

plaintiff

actually and

justifiably relied on the misrepresentation to suffer injury."

1

°Fora's Reply to Plaintiffs'
Dismiss, Docket Entry No. 18, p. 3.
-6-

Response

to

Its

Motion

DRC

to

Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854,
858 (Tex. App. -Houston [14th Dist.] 2003)
original)

(citations

representation

that

omitted) .
is

(en bane)

"[R]eliance

directly

contradicted

(emphasis in

upon
by

the

an

oral

express,

unambiguous terms of a written agreement between the parties is not
justified as a matter of law."

Id.

Plaintiffs allege that they relied to their detriment upon the
assurances of Fora representative John Gafni that the loan would be
"unsecured" and "uncollateralized" in deciding to obtain the loan.
Defendants argue that Plaintiffs' reliance was not justified as a
matter of

law because Gafni' s

oral representation was directly

contradicted by the terms of the Agreement.

The court agrees.

Paragraph 10 of the Agreement, titled "SECURITY INTEREST" (emphasis
in original),

unambiguously states that Group One grants BLM a

"continuing security interest in and to any and all 'Collateral'"
as defined in the Agreement . 11

Because any reliance on Gafni's

alleged statements was unjustified as a matter of law, Plaintiffs'
allegations cannot support a claim for fraudulent inducement.
C.

FDCPA Claims

Plaintiffs allege that they are "consumers" and that defendant
Fora is a "debt collector" as defined by the FDCPA.

Fora argues,

however, that the debt at issue is not a "debt" as defined by the

11

Docket Entry No. 1-1, p. 6.
-7-

statute . 12

The FDCPA defines "debt" as "any obligation or alleged

obligation of a consumer to pay money arising out of a transaction
in which the money, property, insurance, or services which are the
subject of the transaction are primarily for personal, family, or
household purposes .
not

allege

that

II

the

15 U.S.C.

transaction

§

at

1692a(5).
issue

personal, family, or household purposes.

was

Plaintiffs do
primarily

for

And the Agreement states

that "Borrower certifies that the Loan proceeds will be used for
business purposes only and will not be used for personal, family or
household purposes. " 13

The

court

therefore

concludes

that

the

obligation is not a "debt" under the FDCPA, that the cited FDCPA
provisions

do

not

apply,

and

that

Plaintiffs'

FDCPA

claims

therefore fail as a matter of law.
D.

RICO Claims

Plaintiffs

allege

that

Defendants

violated

the

RICO Act.

Specifically, Plaintiffs allege that Defendants:
(a) made extortionate extensions of credit to the
Plaintiffs in violation of 18 U.S.C. § 892, by making
loans to the Plaintiffs that were not enforceable in
Texas and that were at a rate of interest in excess of
300% per annum.
(b) knowingly engaged in a monetary transaction in
criminally derived property of a value greater than
$10,000 and derived from specified unlawful activity in
violation of 18 U.S.C. § 1957(a).

12

Fora's Motion to Dismiss, Docket Entry No. 7, pp. 14-15.

13

Docket Entry No. 1-1, p. 5

~

-8-

4 (emphasis in original).

Plaintiffs' Complaint, Docket Entry No. 1, p. 12

~

44.

Plaintiffs

bringing a RICO claim must allege "1) a person who engages in 2) a
pattern of racketeering activity, 3) connected to the acquisition,
establishment,

conduct,

or control of an enterprise."

Houston Independent School District,
Civil

Action No.

Jan. 17, 2017).

H-16-401,

2017

F.

WL

Supp.

175814,

at

Smith v.

3d
*5

(S.D.

Tex.

"To establish a 'pattern of racketeering activity'

a plaintiff must show 'at least two predicate acts of racketeering
that are

related and amount

criminal activity. '"

Id.

to or pose a

threat of

continued

(citing Tel-Phonic Servs. , Inc. v. TBS

International, Inc., 975 F.2d 1134, 1139-40 (5th Cir. 1992)).
Fora

argues

supported

by

that

the

Plaintiffs'

alleged

first
An

facts.

predicate

extension

act

of

is

credit

not
is

extortionate if "it is the understanding of the creditor and the
debtor at the time it is made that delay in making repayment or
failure to make repayment could result in the use of violence or
other criminal means to cause harm to the person, reputation, or
property of any person."

18

u.s.c.

§

891(6).

Plaintiffs do not

allege that either they or the Defendants understood at the time
the loan was made that Defendants might use violence or criminal
means to harm Plaintiffs if they delayed making or failed to make
repayment.

Moreover, even if Plaintiffs' first alleged predicate

act were supported by factual allegations,

Plaintiffs allege no

factual

transaction

basis

for

the

claim

that

-9-

the

involved

"criminally derived property."
allege sufficient facts
necessary

to

Because Plaintiffs have failed to

to support a

establish

a

pattern

finding of predicate acts
of

racketeering

activity,

Plaintiffs' RICO claims fail as a matter of law.

E.

Credit Service Organization Act Claims

Plaintiffs
Plaintiffs

allege

allege

several

that

violations

Defendants

are

of

Texas's

"Credit

CSOA.

Services

Fora argues that it does

Organizations" as defined in the CSOA.

not qualify as a "credit services organization" because the alleged
activities do not involve an "extension of consumer credit. " 14
court

agrees.

The

statute

defines

an

"extension of

The

consumer

credit" as "the right to defer payment of debt offered or granted
primarily for personal, family, or household purposes or to incur
the debt and defer its payment."

TEx. FIN. CoDE§ 393.001(4).

For

the reasons stated above, the court concludes that the loan was not
primarily for personal, family, or household purposes.

Plaintiffs

have failed to allege facts sufficient to support a finding that
either defendant qualifies as a credit services organization under
the statute.

Plaintiffs' CSOA claims therefore fail as a matter of

law.

14

Fora's Motion to Dismiss, Docket Entry No. 7, pp. 15-16.
-10-

F.

Request for Injunctive Relief

Plaintiffs

also

seek

injunctive

relief.

A

preliminary

injunction may be granted only if the movant shows a substantial
likelihood of success on the merits.

See Affiliated Professional

Home Health Care Agency v. Shalala,
1999).

164 F.3d 282,

285

(5th Cir.

Because Plaintiffs' substantive claims will be dismissed,

Plaintiffs are not entitled to injunctive relief.

G.

Leave to Amend

Plaintiffs

seek

leave

to

amend

if

faced

with

dismissal.

Rule 15(a) provides that leave to amend should be "freely give[n]
. when justice so requires."

FED. R. Crv. P. 15(a) (2).

A court

may deny leave to amend, however, if the amendment would be futile.
Foman v.

Davis,

83 S.

Ct.

227,

230

(1962);

accord Schiller v.

Physicians Resource Group Inc., 342 F.3d 563, 566 (5th Cir. 2003);
Rosenzweig v.

Azurix Corp.,

332 F. 3d 854,

864

(5th Cir.

2003).

Plaintiffs have not indicated how they would amend their Complaint,
identified

any

additional

facts,

amendments with their request.

or

included

any

proposed

The court therefore concludes that

amendment would be futile.
IV.

Conclusions and Order

For the reasons stated above,
matter of law.
Dismiss

Plaintiffs'

claims fail as a

Defendant Fora Financial, LLC's ("Fora") Motion to

(Docket Entry No.

7)

and Defendant Bank of Lake Mill's
-11-

( "BLM")

Motion

to

Dismiss

(Docket

Entry No.

8)

are

therefore

GRANTED and this action will be dismissed with prejudice.
SIGNED at Houston, Texas, on this 7th day of July, 2017.

SIM LAKE
UNITED STATES DISTRICT JUDGE

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