Antitrust Law Daily Wrap Up, RICO—10th Cir.: Class certification upheld in real estate financing scheme case, (Dec 9, 2014)

By Linda O’Brien, J.D., LL.M.

In an action by real estate borrowers against a financial investor, related lending entities, and a law firm over an alleged conspiracy to defraud borrowers out of up-front payments for loan commitments without any intent or ability to ultimately fund the committed loan, the district court properly certified the plaintiff class, the U.S. Court of Appeals in Denver has decided (CGC Holding Company, LLC v. Broad and Cassel, December 8, 2014, Tymkovich, T.).

A group of real estate borrowers filed suit against financial investor Sandy Hutchens, his related business entities, and his attorneys for allegedly conspiring to create a fraudulent scheme to obtain non-refundable up-front fees in return for loan commitments the lenders never intended to fulfil in violation of the Racketeer Influenced and Corrupt Organization (RICO) Act. The district court certified a plaintiff class of individual and business borrowers who were issued loan commitments that were never funded and paid advance fees to the defendants without having been informed that Hutchens had a criminal history, including a fraud conviction. The defendants appealed.

Predominance. In certifying the class, the district court did not abuse its discretion by finding that common questions predominated over individualized issues. A defendant violates the RICO Act when he participates in the conduct of an enterprise through a pattern of racketeering activity, the court explained. In this case, the inference that arises from the plaintiffs’ evidence of payment for the loan commitment was sufficient to present a predominating question related to class member reliance. The fact that a class member paid a nonrefundable advance fee in exchange for the loan commitment was common to the entire class and constituted circumstantial proof of reliance on the misrepresentations and omissions regarding Hutchen’s criminal past and the defendant entities’ intent and ability to actually fund the promised loan.

Moreover, the superiority of a class action over other methods of adjudication was demonstrated, according to the appellate court. The court rejected the defendants’ argument that the existence of numerous individual actions against the lenders showed that a class action was unnecessary. It was sufficient that class treatment will achieve economies of time, effort, and expense, and promote uniformity of decision as to persons similarly situated, without sacrificing procedural fairness.

Proximate cause. The plaintiffs sufficiently pleaded proximate causation to survive a threshold standing challenge, according to the court. The plaintiffs’ allegations that the class members were the “direct targets” of the defendants’ fraudulent scheme was adequate to establish the requisite causal connection between the defendants’ actions and each class member’s financial loss. However, the plaintiffs conceded that they lacked standing to pursue claims against Hutchen’s attorneys. Thus, the district court decision to certify a class against only the defendant law firm was reversed and remanded for dismissal of those claims, the court concluded.

The case is No. 13-1255.

Attorneys: John F. Head (Head & Associates, P.C.) for CGC Holding Company, LLC, Crescent Sound Yacht Club, LLC, and Harlem Algonquin LLC, and James T. Medick. James D. Kilroy (Snell & Wilmer L.L.P.), Steven A. Klenda (Adroit Advocates, LLC), and John M. Palmeri (Gordon & Rees LLP) for Broad and Cassel and Sandy Hutchens.

Companies: CGC Holding Company, LLC; Crescent Sound Yacht Club, LLC; Harlem Algonquin LLC; Broad and Cassel

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