City of Milwaukee v. Universal Mortg. Corp.
| Decision Date | 19 August 1988 |
| Docket Number | No. 88-C-0075.,88-C-0075. |
| Citation | 692 F. Supp. 992 |
| Parties | CITY OF MILWAUKEE, Community Housing Preservation Corporation, and Neighborhood Improvement Development Corporation, Plaintiffs, v. UNIVERSAL MORTGAGE CORPORATION, a Wisconsin corporation; Grootemaat Corporation, a Wisconsin corporation; Marshall & Ilsley Corporation, a Wisconsin corporation; M & I Grootemaat Mortgage Corporation, a Wisconsin corporation; Fleet Mortgage Corporation, a Wisconsin corporation; James Lunz, individually and d/b/a Robert J. Lunz Company; Martin-Foster, Incorporated; Robert W. Hoag; Robert W. Hoag Company, Incorporated, a Wisconsin corporation; Robert A. Hoag; Gary Zirzow; Terry Gustafson; Les Simon; Preferred Real Estate Investment of Milwaukee, a Wisconsin corporation; Laurence Granof; Tom Frenkel; Mighty Company, Incorporated, a Wisconsin corporation; Randall Stein; Larry F. Buzzell; Richard E. Van Meter; and American Heritage Investments, Incorporated, a Wisconsin corporation, Defendants. |
| Court | U.S. District Court — Eastern District of Wisconsin |
Thomas J. Erickson, Milwaukee, Wis., for defendants Gary Zirzow & Terry Gustafson.
Thomas R. Schrimpg, Kluwin, Dunphy, Hinshaw & Culbertson, Milwaukee, Wis., for defendant Robert A. Hoag.
Grant Langley, Rudolph Conrad, Scott Thomas, Office of The City Atty., Robert H. Friebert, David P. Lowe, Friebert, Finerty & St. John, Milwaukee, Wis., for plaintiffs.
William R. Wherry, William J. Mulligan, William Sosnay, Mulcahy & Wherry, Milwaukee, Wis., for defendant Universal Mortg. Corp.
William R. Steinmetz, Allen N. Rieselbach, Steven P. Bogart, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Milwaukee, Wis., for defendant Grootemaat Corp.
William H. Levit, Jr., Michael Ash, Michael B. Apfeld, Godfrey & Kahn, Milwaukee, Wis., for defendants Marshall & Ilsley Corp., & M & I Grootemaat Mortg. Corp.
Thomas L. Shriner, Jr., Richard M. Esenberg, Michael G. McCarty, Foley & Lardner, Milwaukee, Wis., for defendant Fleet Mortg. Corp.
DECISION AND ORDER
The racketeering laws (RICO) of both the United States and the State of Wisconsin provide that "any person" injured by violations of RICO laws may sue and recover either triple (U.S.) or double (Wisconsin) damages. This broad language, however, has been tempered by the judicial belief that, in a philosophical sense, the consequences of an act go forward like ripples in a pond and extending liability for RICO violations to all ends of the pond would fill the courts with endless litigation. To that end, the courts have held RICO claims to certain causation requirements. For example, a party may recover for direct but not indirect injuries resulting from a RICO violation. In the same vein, the injuries incurred by a plaintiff must have been proximately caused by the RICO violation. Thus, even though the statutes say "any person" may recover multiple damages for injuries suffered, the injuries may not be so removed from the RICO violation that recovery would offend traditional principles of justice.
In the case at hand, defendants are accused of a RICO scheme to defraud the United States Department of Housing and Urban Development into approving home mortgage insurance on loans for the purchase of dilapidated houses in Milwaukee. Plaintiffs, the City of Milwaukee and two non-profit neighborhood organizations, claim that as a result of defendants' RICO scheme, the City's policy of neighborhood preservation has been damaged, real estate and loan investment values have been lowered, criminal activity has developed, and funds from other city projects have had to be diverted in order to repair the destruction left by the scheme.
Based on the decision below, which includes reliance on interpretations of the RICO provisions that this Court is obligated to follow, the Court finds that as a matter of law, the injuries alleged by plaintiffs are too indirect and remote from the alleged scheme to permit recovery.
Plaintiffs City of Milwaukee, Community Housing Preservation Corporation, and Neighborhood Improvement Development Corporation brought suit on January 6, 1988, in Milwaukee County Circuit Court, alleging violations of the Racketeer Influenced and Corrupt Organizations Act (federal RICO), 18 U.S.C. §§ 1961-68, and the Wisconsin Organized Crime Control Act (state RICO), Wis.Stats. §§ 946.80-87. Named as defendants were 11 corporations or businesses and 11 individuals. The defendants were characterized as either "mortgage lenders" or "sellers/brokers."
On January 22, 1988, the case was removed to the United States District Court for the Eastern District of Wisconsin pursuant to 28 U.S.C. §§ 1441-1446. The case eventually was assigned to this Court. By that time various motions had been filed by the defendants. The motions included: (1) a combined motion by five mortgage lenders—Universal Mortgage Corporation, Grootemaat Corporation, M & I Corporation, M & I Grootemaat Corporation, and Fleet Mortgage Corporation — to dismiss the case under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted; (2) a motion by defendants Robert A. Hoag, James Lunz, and Martin Foster, Inc., to dismiss the case on the basis of the reasons put forth by the five mortgage lenders; (3) a motion by defendants M & I Corporation and Grootemaat Corporation to dismiss on grounds other than those put forth in their previous motion to dismiss; (4) a motion by defendants Terry Gustafson and Gary Zirzow to dismiss the case for failure to state a claim upon which relief can be granted; (5) one-paragraph, pro se motions to dismiss by defendants Larry Buzzell, Les Simon, Richard E. Van Meter, American Heritage Investment, and Laurence Granof; and (6) various discovery-related motions.
At a status conference held July 19, 1988, plaintiffs informed the Court that they had not served defendants Tom Frenkel, Randall Stein and Mighty Co., Inc. Also at the status conference, the Court signed a protective order, which resolved the pending discovery disputes.
The Court now turns to the motions to dismiss. Since the Court resolves the case on the basis of the issues of the directness and causation of the injuries, the Court makes no ruling on any alternative grounds for dismissing the complaint.
For the purpose of evaluating a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief may be granted, the Court must accept as true all of the allegations of a well-pleaded complaint. First Interstate Bank of Nevada v. Chapman & Cutler, 837 F.2d 775, 776 (7th Cir.1988). The complaint will be dismissed on that basis only if the plaintiffs can prove no set of facts upon which relief may be granted. Id. The 52-page complaint at issue is certainly well-pleaded. The following RICO violation is alleged.
The National Housing Act of 1934, as amended, 12 U.S.C.A. § 1707, et seq., allows the United States Department of Housing and Urban Development ("HUD") to insure mortgage loans by private lending institutions on single-family homes for low and moderate income families. Responsibility for the processing of borrower applications for HUD-insured mortgages and determination of credit rests with the private lending institutions that participate in the program. On each application for HUD mortgage insurance, the mortgage lender makes certain certifications to HUD on the financial status of the borrower. These certifications serve to induce HUD to issue a firm commitment for mortgage insurance.
When a homeowner obligated on a HUD-insured mortgage defaults under the mortgage loan agreement by failing to make monthly mortgage payments, the mortgage lender makes an insurance claim and HUD pays off the balance of the mortgage loan to the mortgage lender. HUD then succeeds to the mortgagee interest and obtains legal title to the property through foreclosure actions or through the homeowner's conveyance of a deed in lieu of foreclosure. HUD's ability to pay mortgage insurance claims is insured by the United States. HUD's insurance payments are made from a pool of federal funds composed of insurance premiums paid by mortgagors nationwide.
During the period from 1982 through 1985, the defendants engaged in a scheme to defraud HUD. The seller/brokers purchased properties at distress-value prices, performed little or no repairs or improvement, and then sold the properties at prices above the fair market value to buyers who could not afford them. The seller/brokers effected the sales by arranging with the mortgage lenders to make mortgage loans to the buyers even though the buyers were poor credit risks. The seller/brokers arranged the financing for the buyers by preparing loan applications and submitting them to the mortgage lenders, who had been authorized by HUD to approve loans for HUD mortgage insurance. The applications contained false statements about the financial status of the buyer so that the buyer would qualify for the HUD insurance. The seller/brokers and mortgage lenders knew this information was false. The seller/brokers also procured real estate appraisals that contained inflated values for the properties.
As part of the scheme, the mortgage lenders intentionally failed to follow accepted practices of prudent lending institutions in appraisal, approval, and closing of the HUD-insured loans. The mortgage lenders believed there was no risk to them in approving the loans. Moreover, whether the purchaser defaulted or not, the mortgage lenders still earned considerable immediate income in each transaction in the form of prepaid interest and closing costs paid either by the purchaser or by others on behalf of the purchasers. The seller/brokers would realize huge profits on the sales prices.
The scheme involved the use of the United States mails and interstate telephone lines, in violation of 18 U.S.C. §§ 1341 and 1343, and the use of forged or fraudulent...
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