RICO — Fraudulent Mortgage Assignment and Fraud on Court in Bringing Mortgage Action, Not Underlying Default on Mortgage, Caused Injury in Form of Attorney's Fees, Sustaining RICO Action

Slorp v. Lerner, Sampson & Rothfuss, 2014 U.S. App. LEXIS 18816 (6th Cir. Sept. 29, 2014):

This case relates to alleged misconduct in a separate state-court foreclosure action. The law firm of Lerner, Sampson & Rothfuss (LSR) filed that foreclosure action against Rick Slorp on behalf of its client, Bank of America. Because Countrywide had originated Slorp's mortgage, LSR attached to the complaint an assignment purporting to assign an interest in Slorp's mortgage to Bank of America. The state court awarded judgment to Bank of America. Slorp subsequently retained counsel who questioned the assignment's validity, and he sought to depose Shellie [*2]  Hill, the LSR employee who had executed the assignment on behalf of Mortgage Electronic Registration Systems, Inc. (MERS). Bank of America promptly dismissed the foreclosure action, and the state court vacated its judgment.

Slorp then filed this action against LSR, Hill, MERS, and Bank of America to recover the attorney's fees he expended in the foreclosure action. The gravamen of the complaint was that the defendants engaged in unfair, deceptive, and fraudulent debt-collection practices when they  [**2]  filed an illegitimate foreclosure action against Slorp. The defendants moved to dismiss the complaint, and as that motion was pending, Slorp sought leave to amend his complaint to add a civil claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68. The district court granted the motion to dismiss and denied the motion for leave to amend the complaint. We now affirm the dismissal of the original complaint but reverse the district court's denial of the motion for leave to amend the complaint. We remand the case to the district court with instructions to permit Slorp to amend his complaint to add a RICO claim.

  1. Case History

    I. LSR filed a separate foreclosure action on behalf of Bank of [*3]  America in the Franklin County Court of Common Pleas in July 2010. Bank of America attached to its complaint a promissory note dated December 14, 2007. The note named Countrywide Bank, FSB as the lender and Slorp as the borrower. Bank of America also attached a mortgage that secured the promissory note with Slorp's home. The poor printing quality renders the mortgage difficult to read, but it lists Countrywide Bank, FSB as the lender and MERS as the lender's nominee.

    Bank of America also attached a document, captioned "Assignment of Mortgage," which states that MERS "does hereby assign to BAC Home Loans Servicing, L.P. fka Countrywide Home Loans Servicing, L.P. . . . all of its interest in that certain mortgage from Rick A. Slorp . . . to Mortgage Electronic Registration Systems, Inc., as nominee for Countrywide Bank, FSB." The assignment was executed on behalf of MERS, "as nominee for Countrywide Bank, FSB, its successors and assigns," by Shellie Hill, who purported to be an assistant secretary and vice president of MERS. The assignment was dated July 9, 2010, and was prepared by LSR.

    After Slorp answered the foreclosure complaint, Bank of America moved for summary judgment. The court of common pleas granted that motion. Slorp moved for relief from the judgment in July 2011, and in February 2012 Slorp served Hill with a subpoena duces tecum, demanding that she "appear at an evidentiary hearing and bring documents demonstrating her relationship with [Bank of America] and its predecessors, documents demonstrating her appointment as Assistant Secretary and Vice president of Defendant MERS, and other documents related to the Assignment." One month later--on the day before Hill was scheduled to testify at the evidentiary hearing--Bank of America voluntarily dismissed the foreclosure action, and the state court vacated the judgment.

    On June 7, 2012, Slorp filed this action in the United States District Court for the Southern District of Ohio against LSR, Bank of America, Hill, and MERS. The four-count complaint alleged a violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692e; a violation of the Ohio Consumer Sales Practices Act (CSPA), Ohio Rev. Code §§ 1345.02 and 1345.03; falsification in violation of Ohio Rev. Code § 2921.13; and civil conspiracy to commit falsification. [*5]

    According to the complaint, Hill "falsely executed" the assignment because Countrywide Bank did not exist on July 9, 2010, and Hill was not an employee of MERS on that date. Hill acted at the behest of LSR and with Bank of America's knowledge, said Slorp, and her "false statement was made with the purpose to mislead the judge in the performance of her official function within the foreclosure action." Slorp alleged that "filing and maintaining the foreclosure action with the use of false statements and evidence constitute[d] a false, deceptive, and/or misleading practice in an attempt to collect a debt." Slorp sought actual damages of $8,934.44, treble damages of $26,803.32, statutory damages of $1,000, non-economic damages of $5,000, and fees and costs.

    Bank of America and MERS moved to dismiss Slorp's complaint, and LSR and Hill filed a separate motion to dismiss on the same day. After the parties finished briefing those motions, Slorp filed an amended complaint without first seeking the defendants' consent or the court's leave. The parties held a pretrial conference two days later, and Slorp pledged to file a motion for leave to amend within five days of that conference. Slorp then filed a motion [*6]  for leave to file a second amended complaint, together with his proposed second amended complaint. The proposed complaint expanded the factual allegations and added a fifth count alleging a violation of RICO, 18 U.S.C. § 1961. The defendants opposed Slorp's request for leave to amend.

    The district court denied Slorp's motion for leave and dismissed the complaint. The court held that Slorp lacked standing to challenge the validity of the assignment because he was not a party to the assignment. The district court also concluded that Slorp had not suffered damages attributable to the allegedly fraudulent assignment because his exposure to the foreclosure action resulted from his default on the promissory note rather than any of the defendants' conduct. The court then rejected each of Slorp's claims on the merits.

    Turning to Slorp's motion for leave to amend the complaint, the district court first noted that the proposed amended complaint "provides no new factual allegations that would alter the Court's analysis" of the merits of Slorp's claims. The court then denied the request for leave to amend because it held that the RICO claim in the proposed amended complaint was not viable. Slorp had not identified [*7]  any injury caused by the assignment, the court stated, and he therefore would not be able to obtain relief under RICO. Slorp timely appealed.

  2. We begin with standing.

    Article III of the United States Constitution limits the power of the federal judiciary to the adjudication of certain "Cases" and "Controversies." U.S. Const. art. III, § 2, cl. 1. From this textual limitation and "the separation-of-powers principles underlying that limitation," the federal courts have "deduced a set of requirements that together make up the 'irreducible constitutional minimum of standing.'" Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1386-88 (2014) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)). Three components comprise this "irreducible constitutional minimum": (1) the plaintiff must have suffered an "injury in fact," (2) that injury must be "fairly traceable" to the defendant's challenged conduct, and (3) it must be likely that the plaintiff's injury would be redressed by the requested relief. Lujan, 504 U.S. at 560-61. At its essence, Article III standing requires the plaintiff to have some personal and particularized stake in the dispute. See Raines v. Byrd, 521 U.S. 811, 818-19 (1997).

    To determine whether Slorp had Article III standing, we focus on whether Slorp sustained an injury that was traceable to the defendants' conduct--the first two of the three "core components." This "inquiry often turns on the nature and source of the [*8]  claim asserted." Raines, 521 U.S. at 818-19 (internal quotation marks omitted). And so it does here.

    The district court held that Slorp lacked standing because he sustained no injury as a result of the assignment. In its view the foreclosure action "was filed because of his default under the terms of the Note and Mortgage; not because of the creation of the allegedly 'false' Assignment." Although the foreclosure action caused Slorp to incur legal fees, the court stated, he incurred those fees because he defaulted, "not because of the Assignment." Thus the district court held that Slorp sustained no injury attributable to the allegedly fraudulent assignment.

    This analysis suffers from one key error: It mistakes the source of the injury alleged in Slorp's complaint. Slorp does not attribute his injuries to the false assignment of his mortgage; rather, he attributes his injuries to the improper foreclosure litigation. According to the complaint, Bank of America (through LSR) filed a foreclosure action against Slorp despite its lack of interest in the mortgage; the defendants misled the trial court by fraudulently misrepresenting Bank of America's interest in the suit; and Slorp incurred damages when he was compelled [*9]  to defend his interests. If Bank of America had no right to file the foreclosure action, it makes no difference whether Slorp previously had defaulted on his mortgage. Slorp's suit to recover damages caused by Bank of America's lawsuit satisfies each of the three components of Article III standing. That is all that is required for count one, which alleged a violation of the FDCPA--a federal statute. See Hollingsworth v. Perry, 133 S. Ct. 2652, 2667 (2013) (stating that "standing in federal court is a question of federal law, not state law"); see also Coyne v. Am. Tobacco Co., 183 F.3d 488, 495 (6th Cir. 1999). Slorp has established standing to seek relief under the FDCPA, and the district court erred when it held otherwise.

    ***

  3. RICO

    We turn to count five, which Slorp unsuccessfully sought to add to his complaint. Slorp requested leave to amend his complaint to allege a civil violation of RICO, 18 U.S.C. §§ 1962, 1964. The district court denied the motion for leave to amend upon concluding that amendment of the complaint would be futile. In the district court's view, Slorp "failed to adequately allege an injury resulting from the Assignment at issue here," and "[c]onsequently, Plaintiff has failed to [*29]  state a RICO claim upon which relief can be granted."

    The denial of a motion for leave to amend the complaint ordinarily is reviewed for abuse of discretion. Dubuc v. Green Oak Twp., 312 F.3d 736, 743 (6th Cir. 2002). When denial is on the basis of futility, however, the decision is reviewed de novo. Id.

    The germane provision of RICO makes it unlawful for a person employed by or associated with an enterprise that affects interstate commerce to conduct or participate in the conduct of the enterprise's affairs through a pattern of racketeering activity. 18 U.S.C. § 1962(c). The statute provides a civil remedy that allows an individual to recover treble damages for injuries to that person's business or property sustained by reason of the RICO violation. 18 U.S.C. § 1964(c).

    The defendants argue that amendment of the complaint would be futile for three independent reasons: (1) Slorp cannot recover RICO damages because his injuries are attributable to his own default rather than to the defendants' initiation of foreclosure proceedings; (2) Slorp's proposed amended complaint does not identify a pattern of racketeering activity because he does not allege a plausible scheme or artifice to defraud; and (3) Slorp does not allege sufficient facts to support the existence of an enterprise.  We take one at a time.

    1. In Slorp's proposed amended complaint he alleges numerous injuries sustained as a result of the defendants' RICO violations: Slorp had to defend himself against the improper foreclosure action, faces "potential multiple liability from others who may claim an interest in the mortgage or note," possesses a "cloud[ed]" title to his home because the fraudulent assignment continues to be recorded with the Franklin County Recorder, and had to deal with a wrongful foreclosure action. Most of these damages are speculative, uncertain, and undefined. Cf. Berg v. First State Ins. Co., 915 F.2d 460, 464 (9th Cir. 1990) (stating that loss of security and peace of mind are not recoverable injuries under RICO). Slorp faces no imminent threat of potential double liability because Bank of America voluntarily dismissed its state-court foreclosure action and has shown no intent to revisit that decision. Slorp also identifies no monetary costs associated with the clouded title. But the attorney's fees he paid in connection with the foreclosure action are real and quantifiable damages, and our analysis therefore focuses on whether those fees were injuries to Slorp's business or property incurred by reason of the defendants' alleged RICO violation.  [*31] See 18 U.S.C. § 1964(c).

      The first component of this inquiry concentrates on the term "business or property." In Jackson v. Sedgwick Claims Management Services, Inc., the en banc court held that a RICO victim cannot recover damages for personal injuries flowing from a RICO violation. 731 F.3d 556, 564-70 (6th Cir. 2013) (en banc). Whether damages caused by the victim's specific injury are recoverable under § 1964(c) depends on "the origin of the underlying injury." Id. at 565. While "personal injuries and pecuniary losses flowing from those personal injuries fail to confer relief under § 1964(c)," id. at 565-66, injuries to property and at least some pecuniary losses flowing from those property injuries do confer relief under § 1964(c).

      The question, then, is whether Slorp's complaint alleges personal injuries or injuries to property. According to the proposed RICO count, the defendants used various schemes to mislead both Slorp and the state court and thus attempted fraudulently to deprive Slorp of his home through an illegitimate foreclosure sale. Those schemes revolved around a fraudulent mortgage assignment and a related foreclosure action. Thus, if we look to "the origin of the underlying injury" to determine whether it relates to property, Slorp has alleged quintessential property injuries: The object of the alleged scheme to defraud was to obtain title to Slorp's home (i.e., real property) through foreclosure.

      Of course, the specific injury for which Slorp seeks to recover is not an injury to his home--he did not lose title as a result of the foreclosure action and therefore cannot obtain damages on that claim. Rather, his alleged injury was the attorney's fees he incurred in connection with that foreclosure action. Under Jackson, however, that is beside the point. Jackson held that the pecuniary losses flowing from those personal injuries were not recoverable because "an award of benefits under a workers' compensation system and any dispute over those benefits are inextricably intertwined with a personal injury giving rise to the benefits." 731 F.3d at 566. Thus it is the source of the injury that matters, and accordingly pecuniary losses flowing from a property injury are recoverable under § 1964(c) if they are similarly intertwined with that  [**22]  property injury. Cf. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985) (stating that a RICO plaintiff can recover only if "he has been injured in his business or property by the conduct constituting the violation"); Isaak v. Trumbull Sav. & Loan Co., 169 F.3d 390, 397 (6th Cir. 1999) (permitting RICO plaintiff to recover damages resulting from plaintiff's [*33]  purchase of an interest in a campground). Slorp suffered an injury to his home as a result of the defendants' alleged scheme: The defendants initiated foreclosure proceedings and obtained a judgment awarding them the right to take possession of Slorp's house. That direct property injury is not quantifiable because the state court ultimately vacated the judgment and permitted Slorp to retain his house, and unquantifiable injuries are not recoverable. See Trollinger v. Tyson Foods, Inc., 370 F.3d 602, 614 (6th Cir. 2004). But the attorney's fees he incurred were pecuniary losses intertwined with the property injury and therefore are recoverable under § 1964(c).

      This inquiry flows into the second component of § 1964(c) damages analysis, which asks whether the injuries were sustained "by reason of" the alleged RICO violation. The phrase "by reason of" incorporates a statutory-standing requirement into § 1964(c), prohibiting a private RICO plaintiff from recovering for derivative or passed-on injuries. See Id. at 613-14. This statutory-standing requirement is not at issue here because there is no dispute about whether Slorp is the proper party to assert these claims. But in Holmes v. Securities Investor Protection Corp., the Supreme Court held that the phrase "by reason of" also incorporates [*34]  a proximate-cause requirement into § 1964(c). 503 U.S. 258, 268 (1992). "[W]hile a RICO plaintiff and defendant may have a direct and not a derivative relationship, the causal link between the injury and the conduct may still be too weak to constitute proximate cause--because it is insubstantial, unforeseeable, speculative, or illogical, or because of intervening causes." Trollinger, 370 F.3d at 614.

      The defendants argue that "it was his mortgage default . . . which caused Slorp to have to defend the foreclosure action, not anything contained within the Assignment." But the factual premise of this argument contradicts the factual allegations in Slorp's complaint and overlooks our obligation to assume the veracity of those allegations. Slorp alleges that the assignment was fraudulent and that the defendants had no right to foreclose on his house. If the defendants were not authorized to initiate the foreclosure proceedings, Slorp's injuries were caused by their fraud rather than his own alleged default.

      According to the complaint, Hill was an authorized agent of neither MERS nor Countrywide, and she therefore lacked the authority to assign the mortgage to Bank of America. Assuming that to be true, as we must, Bank of America wrongfully initiated foreclosure [*35]  proceedings against Slorp, and his damages were proximately caused by the defendants' institution of fraudulent foreclosure proceedings that led Slorp to incur attorney's fees. The allegedly fraudulent assignment allowed the defendants to perpetrate and conceal the fraud by precluding the state court from ascertaining whether the defendants were the proper parties to initiate the foreclosure proceedings. On those facts it was the defendants' alleged misrepresentations rather than Slorp's default that led to his injuries. Had the proper mortgagee, whoever that is, elected to initiate its own foreclosure proceedings against Slorp, he would have faced double liability, and the defendants' fraudulent assignment would have led to the anomalous and unlawful result of two separate mortgagees--one real and one fraudulent--foreclosing on Slorp's house. The fact that the legitimate mortgagee has not initiated foreclosure proceedings only reinforces the conclusion that the defendants' allegedly fraudulent foreclosure led to Slorp's injuries.

      To be sure, Slorp's injuries will vanish if the defendants prove that Bank of America was the legitimate mortgagee. But this case came to the district court on a motion to dismiss, and in that posture the court was required to accept the veracity of Slorp's factual allegations. Slorp alleges injuries to his property that were proximately caused by the defendants' allegedly baseless initiation of foreclosure proceedings and the fraudulent assignment of his mortgage. He is thus entitled to recover damages for those injuries unless he fails to satisfy his evidentiary burden, either on summary judgment or at trial.

    2. A successful RICO plaintiff must establish that the defendants engaged in a "pattern of racketeering activity." 18 U.S.C. § 1962(c); see also In re ClassicStar Mare Lease Litig., 727 F.3d 473, 484 (6th Cir. 2013). LSR and Hill contend that Slorp has not identified a pattern of racketeering activity because he has not alleged a plausible scheme or artifice to defraud.

      To establish a pattern of racketeering activity, the plaintiff must allege at least two related acts of racketeering activity that amount to or pose a threat of continued criminal activity. Brown v. Cassens Transp. Co., 546 F.3d 347, 354 (6th Cir. 2008). The RICO statute enumerates dozens of crimes that constitute racketeering activity. See 18 U.S.C. § 1961(1). Among these crimes are mail fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343--the two predicate crimes that Slorp alleged in his proposed amended complaint. Mail and wire fraud consist of (1) a scheme or artifice to defraud; (2) use of the mails or interstate wire communications in furtherance of the scheme; and (3) intent to deprive a victim of money or property. United States v. Turner, 465 F.3d 667, 680 (6th Cir. 2006); United States v. Daniel, 329 F.3d 480, 485 (6th Cir. 2003). "A scheme to defraud is any plan or course of action by which someone intends to deprive another of money or property by means of false or fraudulent pretenses, representations, or promises." United States v. Faulkenberry, 614 F.3d 573, 581 (6th Cir. 2010) (internal quotation marks and alterations omitted).

      LSR first argues that Slorp's allegations are insufficient because he cannot show that he relied on the defendants' alleged misrepresentations. But "a plaintiff asserting a RICO claim predicated on mail fraud need not show, either as an element of its claim or as a prerequisite to establishing proximate causation, that it relied on the defendant's alleged misrepresentations." Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 661 (2008). LSR's first argument stumbles right out of the gate.

      LSR also contends that "Slorp must allege sufficient plausible facts to indicate that LSR and Ms. Hill made a material misrepresentation of fact to Slorp that was calculated or intended to deceive Slorp." Slorp has done just that. Slorp's complaint alleges that LSR and Hill filed a state-court complaint against him misrepresenting that his mortgage had [*38]  been assigned to Bank of America. He further alleges that LSR executed a fraudulent assignment and served it on Slorp in connection with the foreclosure action. According to Slorp, these material misrepresentations were intended to deceive both Slorp and the state court. Slorp therefore has alleged precisely what LSR demands of him.

    3. LSR also argues that Slorp has not alleged sufficient facts to support the existence of an enterprise. "The RICO statute makes it unlawful for 'any person . . . associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.'" In re ClassicStar, 727 F.3d at 490 (quoting 18 U.S.C. § 1962(c)) (alterations in original). An enterprise "includes any individual,  [**26]  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).

      An "association-in-fact enterprise" is "a group of persons associated together for a common purpose of engaging in a course of conduct." United States v. Turkette, 452 U.S. 576, 583 (1981). The association-in-fact enterprise must be separate and distinct from the pattern of racketeering activity in which it engages, but the enterprise could have [*39]  been formed solely for the purpose of engaging in the racketeering activity. Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783, 793-94 (6th Cir. 2012). The enterprise "must have at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose." Boyle v. United States, 556 U.S. 938, 946 (2009). The enterprise need not have a hierarchical structure or chain of command, members of the group need not have fixed roles, the group need not have a name, and the enterprise may engage in "spurts of activity punctuated by periods of quiescence." Id. at 948.

      Slorp has adequately alleged the existence of an enterprise that satisfies these basic criteria. He alleged that the defendants conspired to draft and execute a false assignment and to use the assignment in foreclosure proceedings to seize Slorp's property. He further alleged that the defendants used the mails and wires several times in furtherance of this scheme, and he alleged that the same defendants have engaged in similar malfeasance in other foreclosure proceedings, all with the aim of obtaining title to several properties that are not rightfully theirs. The alleged association-in-fact enterprise thus had a purpose and sufficient longevity, [*40]  and its members had lasting relationships with one another. The defendants may introduce evidence to rebut any of these allegations, including the existence of an enterprise that was separate and  [**27]  distinct from the racketeering activity, but the allegations in Slorp's complaint are sufficient to survive a motion to dismiss.

      Accordingly, the district court erred when it determined that amendment of Slorp's complaint to include a RICO count would be futile.

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