Swarey v. Desert Capital Reit, Inc.
| Decision Date | 20 September 2012 |
| Docket Number | Civil Action No. DKC 11-3615 |
| Parties | ISRAEL SWAREY, et al. v. DESERT CAPITAL REIT, INC., et al. |
| Court | U.S. District Court — District of Maryland |
Numerous motions are pending and ready for review in this civil RICO case, including: a motion to strike Defendant Kerry Stephenson's affirmative defenses filed by Plaintiffs Israel Swarey and Linda Swarey (ECF No. 35); motions to dismiss Plaintiffs' complaint filed by Defendants Todd Parriott and Phillip Parriott (ECF Nos. 38, 40); a motion to set aside the clerk's entries of default filed by Defendants Nick Andrews and N. Andrews, LLC (ECF No. 43); and motions to withdraw as counsel filed by the attorney for Defendants Todd and Phillip Parriott (ECF Nos. 52, 53). The issues have been fully briefed, and the court now rules, no hearing being deemed necessary. Local Rule 105.6. For the reasons that follow, the motion to set aside the defaults entered against Defendants Nick Andrews and N. Andrews, LLC, will be granted; the motion to strike Defendant Stephenson's affirmative defenses will be denied as moot; the motions for leave to withdraw as counsel will be granted; themotions to dismiss will be granted in part and denied in part; and the case will be remanded to state court.
Plaintiffs purport to be the victims of several real estate investment scams designed and executed by Defendants. Viewing the allegations in the complaint (ECF No. 2) in the light most favorable to Plaintiffs, the schemes occurred as follows.
While attending a financial planning seminar on "how to invest in real estate tax sales to support a fixed income" (id. ¶ 124), Mr. Swarey was solicited by a company called Strategic Wealth Management to participate in certain investment projects.1 Strategic Wealth Management and its affiliates ultimately introduced Mr. Swarey to two subsets of Defendants who together conspired to defraud the Swareys of their life savings. One subset of Defendants consists of Todd Parriott, Phillip Parriott, Kerry Stephenson, and Desert Capital REIT, Inc. (collectively, "the Desert Capital Defendants"), who induced the Swareys to invest substantial sums of money in sham investment vehicles. The other subset of Defendants consists of individuals and entities associated with First Universal Lending LLC: Sean Zausner, David Zausner, David Feingold, Nick Andrewsand N. Andrews, LLC (collectively, "the FUL Defendants").2 The FUL Defendants allegedly induced the Swareys' procurement of a $2 million loan that funded the Plaintiffs' participation in the investment opportunities presented by the Desert Capital Defendants.
The Desert Capital Defendants executed three distinct fraudulent schemes through which they received money from the Swareys via undercapitalized shell companies. In March 2008, the Desert Capital Defendants collectively induced Mr. Swarey to enter into an agreement that created Pebble Creek JV, LLC ("Pebble Creek"), a sham entity that was never adequately capitalized and had only one member: R&D Properties, LLC, a company owned and managed by Defendant Stephenson. The operating agreement for Pebble Creek stated that the purpose of the venture was to develop, construct, and sell 47 lots of property located in Nevada for profit ("the Pebble Creek Project"). Defendant Stephenson requested that Mr. Swarey wire $440,000 to fund his participation in the Pebble Creek Project. Stephenson represented that these funds would be used to purchase property in which Mr. Swarey would acquire an ownership interest. The Desert Capital Defendants collectively represented to Mr. Swarey that homes would be built on thepurchased lots within six months and that he would receive payments as the homes were sold, amounting to a 20% rate of return on his original investment. On March 31, 2008, Mr. Swarey wired the funds from his Bank of America checking account in Maryland to Pebble Creek. At some point thereafter, Stephenson and Todd Parriott represented to Mr. Swarey that the 47 lots in Las Vegas had been acquired with his $440,000 investment and also arranged for Mr. Swarey to speak with a builder about the "fake project." (Id. ¶ 83). Todd Parriott also personally assured Mr. Swarey that he had never lost any money for his investors in the past. Despite these representations, no lots were ever purchased with Mr. Swarey's investment of $440,000; no homes were built; Mr. Swarey never received any interest payments from the Pebble Creek Project; and Mr. Swarey did not recover his initial investment.
In the second alleged scheme, the Desert Capital Defendants convinced Mr. Swarey to enter into another venture, Ann Road Industrial 007, LLC. Per the terms of the entity's operating agreement, the purpose of the venture was to (1) acquire a specific plot of land located on Ann Road and (2) enter into a joint venture with a shell company of the Desert Capital Defendants to develop and sell the property for a profit ("the Ann Road Project"). The Desert Capital Defendants collectively informed Mr. Swarey that he would receive a full return of hisinvestment within six months, as well as a 20% rate of return on the principal amount. On June 5 and June 12, 2008, Mr. Swarey wired a combined sum of $1,150,000 from his Bank of America account in Maryland to Ann Road Industrial 007, LLC. As with the Pebble Creek Project, no property was acquired with Mr. Swarey's investment. Instead, from 2008 through 2009, the Desert Capital Defendants, and Todd Parriott in particular, gave conflicting information in response to Mr. Swarey's inquiries about the status of the Ann Road Project and the use of his funds.
In the third alleged scheme, Mr. Swarey invested approximately $2 million in "the Mid-Bar Property Project" in June of 2008. Todd Parriott and Desert Capital REIT, Inc. ("Desert Capital"), represented to Mr. Swarey that his investment would be used to purchase certain land that would be developed into a high-rise condominium building. Todd Parriott and Desert Capital also promised Mr. Swarey that he would receive a return of no less than 20% on top of his principal investment and a first deed of trust in the land as security for his investment if the project failed. Despite these assurances, Mr. Swarey was "nowhere close to a senior creditor to the project." (Id. ¶ 57). Rather, the Mid-Bar Property "carried a $31,500,000.00 first mortgage arranged by the Desert Capital Defendants." (Id. ¶ 58). Specifically, Desert Capitalconcealed its role as a lender for the project by listing one of the Desert Capital Defendants' alter egos on the security instrument. By deliberately arranging for the Mid-Bar Property Project to remain under-funded, the Desert Capital Defendants ultimately were able to foreclose on the property, "acquiring the land at a vastly discounted value and laundering away any lost equity." (Id. ¶¶ 58-60). The Desert Capital Defendants then transferred ownership of the Mid-Bar Property to MidBlue, LLC, an entity that had a single officer: Consolidated Mortgage, LLC, which is the purported alter ego of Todd and Phillip Parriott. Although Mr. Swarey repeatedly sought information about how the funds he invested in the Mid-Bar Property Project were used throughout 2008 and 2009, all communications from Todd Parriott ended in the fall of 2009.
Mr. Swarey obtained some of the funds for his participation in the three alleged schemes by procuring a $2 million loan on May 22, 2008. Defendant Andrews, on behalf of the FUL Defendants, contacted Mr. Swarey, "[s]eemingly out of the blue," and offered to "undertake" the loan for the funds Plaintiffs needed to participate in the Desert Capital Defendants' investment projects. (Id. ¶¶ 128-29). When Mr. Swarey expressed reluctance about pursuing the loan, the FUL Defendants began threatening and harassing Plaintiffs. The FUL Defendants ultimately effected the loan by sending a notary to Plaintiffs'hotel room the night before Mrs. Swarey was scheduled to undergo surgery at a Baltimore hospital. The notary procured Mrs. Swarey's signature on a power of attorney form in favor of Mr. Swarey, even though, "[d]ue to her condition [renal cell carcinoma] and her treatments, Mrs. Swarey was not legally competent to execute any legally binding documents." (Id. ¶ 142). The notary then arranged for Mr. Swarey to sign the closing documents.
Upon receiving copies of the loan documents in September 2008, Plaintiffs learned that the loan application was "vastly different" from that which had been discussed over the telephone with Mr. Andrews and included incorrect statements regarding Plaintiffs' income and net worth. (Id. ¶ 148). "Andrews represented to Mr. Swarey that he was applying for a conventional, fixed rate loan based on the Swareys' true financial data . . . [but] Andrews and the FUL Defendants applied the Swareys for a subprime loan with an adjustable-rate that the Swareys had no hope of repaying based on their fixed income." (Id. ¶ 155).
On May 18, 2011, Plaintiffs filed a 21-count complaint in the Circuit Court for St. Mary's County, Maryland. As against the FUL Defendants, Plaintiffs assert causes of action for: (1) mortgage fraud; (2) intentional infliction of emotionaldistress; (3) violations of Md. Code Ann., Comm. Law § 12-127, and (4) elder abuse. (Id. ¶¶ 145-88). As against the Desert Capital Defendants, Plaintiffs assert causes of action for: (1) unjust enrichment, or, alternatively, breach of contract, for the Pebble Creek and Ann Road Projects; (2) unjust enrichment for the Mid-Bar Property Project; (3) fraud; (4) conversion; (5) embezzlement; (6) violations of the Maryland Consumer Protection Act; and (7) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). (Id. ¶¶ 145-325). As against all defendants, Plaintiffs allege counts for conspiracy to commit fraud and common law indemnity. Plaintiffs seek actual and statutory damages in...
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