VanDenBroeck v. CommonPoint Mortgage Co.

• Decision Date: 16 March 2000
• Docket Number: V,REPRESENTATIVES-APPELLANT,No. 98-2266,DEFENDANTS-APPELLEES,98-2266
• Citation: 210 F.3d 696
• Parties: (6th Cir. 2000) SANDRA VANDENBROECK, AN INDIVIDUAL; EUGENE NICHOSON AND CAROL NICHOSON, HUSBAND AND WIFE; ABEL SOTO AND DENISE SOTO, HUSBAND AND WIFE, PLAINTIFFS AND CLASSCOMMONPOINT MORTGAGE COMPANY, FKA ANDERSON REALTY, INC., FKA ALLSTATE MORTGAGE & FINANCIAL CORPORATION, FKA AAA MORTGAGE & FINANCIAL CORPORATION, D/B/A COMMONPOINT MORTGAGE; MICHAEL ANDERSON, AN INDIVIDUAL, Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 696

210 F.3d 696 (6th Cir. 2000)

SANDRA VANDENBROECK, AN INDIVIDUAL; EUGENE NICHOSON AND CAROL NICHOSON, HUSBAND AND WIFE; ABEL SOTO AND DENISE SOTO, HUSBAND AND WIFE, PLAINTIFFS AND CLASS REPRESENTATIVES-APPELLANTS,

V.

COMMONPOINT MORTGAGE COMPANY, FKA ANDERSON REALTY, INC., FKA ALLSTATE MORTGAGE & FINANCIAL CORPORATION, FKA AAA MORTGAGE & FINANCIAL CORPORATION, D/B/A COMMONPOINT MORTGAGE; MICHAEL ANDERSON, AN INDIVIDUAL, DEFENDANTS-APPELLEES.

No. 98-2266

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: March 16, 2000

Decided and Filed: May 1, 2000

Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 97-00826--Gordon J. Quist, District Judge. [Copyrighted Material Omitted] John E. Anding (argued and briefed), Christopher G. Hastings (briefed), Drew, Cooper & Anding, Grand Rapids, Michigan, for Plaintiffs-Appellants.

John C. Englander (argued and briefed), James W. McGarry (briefed), Goodwin, Proctor & Hoar, Boston, Massachusetts, Thomas M. Hefferon (briefed), Goodwin, Proctor & Hoar, Washington, D.C., for Defendants-Appellees.

Before: Merritt, Nelson, and DAUGHTREY, Circuit Judges.

OPINION

Merritt, Circuit Judge.

This is a section 1962(c) RICO fraud case,¹ brought by borrowers who allege that the defendant lender, CommonPoint Mortgage Company, engaged in a pattern of racketeering activity consisting of mail and wire fraud. The gist of the case is that the lender's undisclosed fees were unreasonable. The appeal arises from the district court's decision to grant the lender's motion to dismiss with respect to the RICO claim and the several Truth in Lending Act claims of the plaintiffs. In addition, Judge Quist denied the plaintiffs' motion for leave to amend the complaint to include an additional Truth in Lending Act claim and to correct any deficiencies in the existing claims. Plaintiffs now appeal the court's decision to dismiss their RICO claim, and further appeal the district court's denial of their motion to amend the complaint to correct any deficiencies which the court found. Plaintiffs do not appeal the decision to dismiss the original Truth in Lending Act claims. The district court dismissed the RICO claim on the ground that the complaint failed to allege a proper RICO "enterprise" and did not reach the question of whether the complaint properly alleged fraud. We agree with the district court that the "enterprise" element of the RICO tort is defective, but we think this defect could be remedied by amendment. The fraud element is also defective, and we conclude that it cannot be remedied by amendment. Hence we affirm the judgment of the district court.

I. Allegations of Complaint

Plaintiffs, as representatives of their class, are several customers of CommonPoint Mortgage Company. CommonPoint Mortgage is a so-called "subprime" lender, which makes loans for people with poor credit who have difficulty obtaining them on their own and then sells the loans in the secondary market. CommonPoint routinely asked their customers to sign a "financial services agreement." That agreement provided that CommonPoint would do its best to obtain a loan, and if a loan was provided by a third party, CommonPoint would be entitled to a fee from the customer equal to a certain percentage of the principal of the loan. The allegation and general theory of plaintiffs' case is that the "financial services agreement" made CommonPoint the agent or fiduciary of a customer for the purpose of securing a loan from a third party, but that CommonPoint in fact made the loan itself rather than seeking a third party lender, and charged "unconscionable and hidden fees" in the process of doing so. Plaintiffs contend that some of CommonPoint's customers were charged front-end "discount fees," which were typically 2-5% of the loan amount in the instances in which they were charged. In the case of class representative VanDenBroeck, for instance, the discount fee was 5% of the loan amount on her $63,000 loan, or $3,150, which was similar to the origination fee charged. Plaintiffs allege that these so-called "discount fees" are supposed to insure lower interest rates, but that CommonPoint not only failed to actually lower the interest rates, it routinely inflated the interest rate even though a lower interest rate could have been obtained. The interest rates charged the class representatives in this case ranged from 13-16%. In response to this allegation, defendant argues that the "discount fees" were really only typical "points" or origination fees assessed as a normal byproduct of obtaining a loan, and were in no way fraudulent. After closing on the loans, CommonPoint routinely sold the loans to one of a number of secondary market lenders who paid CommonPoint a fee based upon the difference between CommonPoint's loan rate and the secondary lender's rate for the same loan. This was referred to as the "upsell" or "backend fee." Plaintiffs further allege that the interest rates ultimately received often exceeded the interest rates promised in the financial services agreement, and that defendant failed to inform plaintiffs that the loans were made at a higher rate than could have been obtained.

II. The "Enterprise"

Plaintiffs claimed that this scheme between CommonPoint and the secondary lenders with which it dealt constituted a RICO association-in-fact "enterprise" under 18 U.S.C. § 1962(c) (1999) (see footnote 1 for text of § 1962(c)). In order to prove a violation of that Act, the plaintiffs must show 1) that there were two or more predicate offenses; 2) that an "enterprise" existed; 3) that there was a nexus between the pattern of racketeering activity and the enterprise; and 4) that an injury to business or property occurred as a result of the above three factors. See Frank v. D'Ambrosi, 4 F.3d 1378, 1385 (6th Cir. 1993). In addition, the Supreme Court has held that in order to be held responsible under the Act, a defendant must have not only participated in the scheme, but must have also participated in the operation or management of the enterprise itself. See Reves v. Ernst & Young, 507 U.S. 170, 183 (1993); see also Stone v. Kirk, 8 F.3d 1079, 1091 (6th Cir. 1993). The district court dismissed plaintiff's RICO claim for failure to show the existence of an "enterprise" and failure to show that defendants exerted control over an "enterprise," and therefore declined to address the further allegation that plaintiffs had failed to adequately allege that defendants committed the predicate acts of federal mail and wire fraud.

The Supreme Court has defined an "enterprise" under the Act as 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). An association-in-fact enterprise can be proven by showing 1) that the associated persons formed an ongoing organization, formal or informal; 2) that they functioned as a continuing unit; and 3) that the organization was separate from the pattern of racketeering activity in which it engaged. See Frank v. D'Ambrosi, 4 F.3d 1378, 1386 (6th Cir. 1993).

The association-in-fact enterprise alleged to exist in this case includes CommonPoint and its relationship with the numerous secondary lenders to which it sells customers' loans. The district court correctly recognized that the elements outlined above have been interpreted to require a certain amount of organizational structure which eliminates simple conspiracies from the Act's reach. That is, simply conspiring to commit a fraud is not enough to trigger the Act if the parties are not organized in a fashion that would enable them to function as a racketeering organization for other purposes. Plaintiffs' brief agrees, noting that the "hallmark of a RICO enterprise is its ability to exist apart from the pattern of wrongdoing." Brief for Appellant at 13. All that is required is some minimal level of organizational structure between the entities involved.

The district court noted that four steps were undertaken in the current scheme. First, CommonPoint obtained the borrower. Second, a secondary lender determined an interest rate at which it would make a loan. Third, CommonPoint made a loan to the borrower at a different rate based on the secondary lender's proposed interest rate. Fourth, the loan was sold to the secondary lender and CommonPoint collected a "backend" fee. The parties have pointed out that there were dozens of secondary lenders purchasing the loans. There is no allegation that there were a discreet number of secondary lenders that were used, which means that this conspiracy could have transpired with any lender in the secondary lending market. The district court found that these facts do not show any type of mechanism by which this "group" (CommonPoint and the entire secondary lending market) conducted its affairs or made decisions.

Most cases interpreting the elements applicable to this statute require evidence of some sort of "chain of command" or other evidence of a hierarchy, even a highly limited one. Evidence of any such hierarchical structure is absent from this appeal. Although plaintiffs argue that CommonPoint's routine use of the "Approval Advice" form--which assured ultimate approval of a loan by a secondary lender before CommonPoint issued its own loan to the customer--was evidence of the enterprise, the use of those forms seems to indicate nothing more than that CommonPoint had a business relationship with the secondary lenders. It does not allege or show that they "function[ed] as a continuous unit." Turkette, 452 U.S. at 583. Due to the fact that the enterprise alleged to exist in this case is too unstable and fluid an entity to constitute a RICO enterprise, we must AFFIRM the district court's holding on this issue. In light of this holding, it is unnecessary for this court to further consider the plaintiffs' appeal based on their contention that the district...