Vaughn v. Consumer Home Mortg., Inc.

• Decision Date: 18 November 2003
• Docket Number: No. 01-CV-7937 (ILG).,01-CV-7937 (ILG).
• Citation: 293 F.Supp.2d 206
• Parties: Paulette VAUGHN and Joy Vaughn, Plaintiffs, v. CONSUMER HOME MORTGAGE, INC. et al., Defendants. Dana Y. Banks and David B. Mounsey, Plaintiffs, v. Consumer Home Mortgage, Inc. et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

293 F.Supp.2d 206

Paulette VAUGHN and Joy Vaughn, Plaintiffs, v. CONSUMER HOME MORTGAGE, INC. et al., Defendants.

Dana Y. Banks and David B. Mounsey, Plaintiffs, v. Consumer Home Mortgage, Inc. et al., Defendants.

No. 01-CV-7937 (ILG).

United States District Court, E.D. New York.

November 18, 2003.

Hugh A. Zuber, Jacob, Medinger & Finnegan, New York City, Richard Wagner, Esq., Brooklyn Legal Services Corp. "A", Brooklyn, NY, for Plaintiffs.

George G. Coffinas, Coffinas & Coffinas, New York City, Joseph M. Pastore, III, Brown Raysman Millstein Felder and Steiner, LLP, Hartfford, CT, Pamela E. Woodside, Brown Raysman Millstein Felder and Steiner, LLP, New York City, Robert Mauer, Garden City, NY, Maura Bleichert Lee, Peterson & Ross, Maura Bleichert Lee, Boundas, Skarzynski, Walsh & Black, LLC, New York City, Nicholas P. Chrysanthem, McManus, Collura & Richter, P.C., New York City, Carolyn Lisa Miller, United States Attorney's Office, Eastern District of New York, Philip J. Miller, United States Attorney's Office Civil Division, Eastern District of New York, Brooklyn, NY, for Defendants.

Ann McGrane, North Hills, NY, Pro se.

MEMORANDUM & ORDER

GLASSER, District Judge.

This action is based upon the purchase and financing of residential real property by Plaintiffs in two related cases. Plaintiffs contend that numerous parties, including the seller/broker, the mortgage lender, several of their officers and employees, and several attorneys, engaged in a predatory lending scheme that induced the Plaintiffs to purchase these residences at inflated prices. Plaintiffs have also sued the Secretary of the United States Department of Housing and Urban Development ("HUD") for abuse of discretion and failure to discharge duties under certain provisions of the National Housing Act, 12 U.S.C. §§ 1708, 1709, by failing and refusing to: (a) exercise due diligence in the issuance of federally-insured mortgages; and (b) warn prospective purchasers/borrowers of a known and substantial risk to them of the dangers of falling prey to predatory selling and lending schemes. Plaintiffs seek a declaratory judgment that the failure by HUD to exercise due diligence in the issuance of Fair Housing Administration ("FHA") mortgage insurance constitutes an abuse of discretion. Plaintiffs also seek a mandatory injunction under the Fair Housing Act, 42 U.S.C. §§ 3601 et seq., to compel the HUD Secretary to issue such orders and directions as are necessary to compel those subordinates charged with administering the FHA mortgage insurance program to exercise reasonable care and due diligence that will prevent or substantially reduce the risk of issuing mortgage insurance policies for home sales financed at fraudulently inflated amounts.

Defendant Mel Martinez, Secretary of HUD, now moves this Court to dismiss Plaintiffs' complaints for lack of subject matter jurisdiction pursuant to Fed. R.Civ.P. 12(b)(1) and for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6).

FACTUAL BACKGROUND

Plaintiffs Paulette Vaughn and Joy Vaughn ("Vaughn Plaintiffs") are the joint purchasers of residential real property located at 247 Cooper Street in Brooklyn, New York. Dana Y. Banks and David. B. Mounsey ("Banks Plaintiffs") are the joint purchasers of residential real property located at 415 Pennsylvania Avenue in Brooklyn, New York. The Vaughn Plaintiffs and Banks Plaintiffs (collectively, "Plaintiffs") purchased their respective properties through Defendant Foreclosure Network of New York, Inc. ("FNNY"), a real estate brokerage firm. Plaintiffs allege that FNNY employees regularly made false representations with the intent to deceive them into believing that the properties were worth more than their actual value, that Plaintiffs would be able to earn rental income, and that FNNY would renovate and repair the properties before the transfer of title. Plaintiffs claim that FNNY failed to tell them at the outset the purchase price of the properties, and instead fixed the price based on an analysis of the maximum amount Plaintiffs could afford to pay.

FNNY steered Plaintiffs toward allegedly complicit attorneys who advised them to sign sale contracts without giving any meaningful counsel. According to Plaintiffs, FNNY also steered them toward Consumer Home Mortgage ("CHM"), a lender that it consistently used to further the predatory lending schemes, without informing Plaintiffs that they could choose another lender. CHM, in turn, submitted applications for mortgage insurance to HUD on Plaintiff's behalf.

Pursuant to 12 U.S.C. § 1709, through the Federal Housing Administration ("FHA"), the Secretary of HUD is authorized to insure mortgages and administer rehabilitation loans to home-buyers who wish to purchase houses in need of repair or modernization but who cannot afford the interim financing necessary to do either. CHM submitted Plaintiffs' mortgage insurance applications to HUD with the knowledge that Plaintiffs could not afford the monthly mortgage payments. These applications included fraudulent appraisal reports designed so that HUD would approve the loans based upon the inflated sales prices.

Plaintiffs allege that Defendants recovered a substantial amount of money by selling sub-standard properties at prices well above their actual value. Known as flip-selling, perpetrators of this type of scheme intentionally target low- to moderate-income racial minorities who are first-time home buyers. Plaintiffs allege that flip-selling and predatory lending occur regularly in the area in which Plaintiffs bought properties, making it what is known as a "hot zone."

Plaintiffs contend that HUD should have provided appropriate warnings to buyers because it had actual knowledge that the targeted area was a hot zone and that the victims were low- to moderate-income racial minorities who were first-time home buyers. The Plaintiffs further allege that the process HUD uses to evaluate applications for mortgage insurance omits to exercise any precaution or diligence even though FHA insurance is an essential part of the flip-selling scheme. Finally, although HUD requires that all applications for FHA-mortgaged properties contain a rider requiring the seller to provide the purchaser with a statement by FHA setting forth the appraised value, HUD failed to ensure that this statement was included in this and most other instances. Plaintiffs assert that HUD knows of measures that would prevent or deter Defendants and those like them from successfully engaging in flip-selling and predatory lending, but has failed or refused to adopt them.

By Memorandum and Order dated March 27, 2003, this Court denied motions to dismiss made by most of the other Defendants.¹ Pursuant to Fed.R.Civ.P. 68, several Defendants offered and Plaintiffs accepted an offer of judgment in the amount of $500,000. Judgment has been fully paid by the settling Defendants.

DISCUSSION

Subject matter jurisdiction

In a motion to dismiss for lack of subject matter jurisdiction pursuant to Fed. R.Civ.P. 12(b)(1), the Court must assess the legal sufficiency of the complaint. See LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir.1991). All well-pleaded material facts will be accepted as true and all reasonable inferences will be drawn in the light most favorable to Plaintiffs. Id.; Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). Only if it appears beyond doubt that Plaintiffs can prove no set of facts in support of their claim will a motion to dismiss be granted. Yusuf v. Vassar Coll., 35 F.3d 709, 713 (2d Cir.1994) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).

HUD asserts that this Court does not have subject matter jurisdiction over the declaratory judgment claim because the Declaratory Judgment Act, 28 U.S.C. §§ 2201-02, does not create subject matter jurisdiction. Nevertheless, Plaintiffs maintain that there is federal question jurisdiction pursuant to 28 U.S.C. § 1331 over the declaratory and injunctive claims. Specifically, they maintain, the federal question arises under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701-706, which allows "[a] person suffering legal wrong because of agency action" to seek "judicial review thereof." § 702. Courts have held that "[j]urisdiction over APA challenges to federal agency action is vested in district courts unless a preclusion of review statute . . . specifically bars judicial review in the district court." Robbins v. Reagan, 780 F.2d 37, 42 (D.C.Cir.1985) (distinguishing Califano v. Sanders, 430 U.S. 99, 97 S.Ct. 980, 51 L.Ed.2d 192 (1977), which held that APA review was specifically precluded by the Social Security Act). Nothing in the National Housing Act or Fair Housing Act specifically precludes judicial review of actions by HUD, therefore, subject matter jurisdiction is properly vested in this Court.²

Failure to state a claim upon which relief can be granted

When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court must take all allegations in the complaint as true and draw all reasonable inferences in favor of Plaintiffs. Ortiz v. Cornetta, 867 F.2d 146, 149 (2d Cir.1989). The Court's consideration of a motion to dismiss pursuant to 12(b)(6) is limited to the factual allegations in the complaint, documents incorporated by reference into the complaint, matters of which judicial notice may be taken, and documents either in Plaintiffs' possession or of which Plaintiffs had knowledge and relied on in bringing suit. Brass v. Am. Film Tech., Inc., 987 F.2d 142, 150 (2d Cir.1993). A complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley, 355 U.S. at 45-46, 78 S.Ct. 99; see also Easton v. Sundram, 947 F.2d 1011, 1014-15 (2d Cir.1991), cert. denied, 504 U.S. 911, 112 S.Ct. 1943, 118 L.Ed.2d 548 (1992).

To obtain judicial...