Antitrust Law Daily Wrap Up, RICO—10th Cir.: Mortgage lender, servicer could have violated RICO through loan modification fraud, (Aug 16, 2016)

By E. Darius Sturmer, J.D.

A putative class of homeowners sufficiently alleged that Bank of America (BofA) and one of its contracted mortgage servicers violated the Racketeer Influenced and Corrupt Organizations (RICO) Act through their fraudulent implementation and administration of a federally-mandated loan modification program aimed at keeping delinquent borrowers at risk of foreclosure in their homes, the U.S. Court of Appeals in Denver has ruled. Dismissal of the homeowners’ lawsuit was therefore reversed and remanded to the federal district court in Denver (George v. Urban Settlement Services, August 15, 2016, Moritz, N).

BofA had been required to participate in the Home Affordable Modification Program (HAMP) as a condition of receiving Troubled Asset Relief Program (TARP) funds from the government following the economic downturn of 2007-08. Instead of complying with the program’s guidelines, however, the lender allegedly schemed with various other distinct entities, including co-defendant Urban Settlement Services, to wrongfully deny HAMP loan modifications to qualified homeowners.

RICO enterprise. The plaintiffs in the action—four homeowners who held BofA mortgages that had been foreclosed upon after their requested HAMP modifications were denied—could establish the existence of a RICO enterprise that was distinct from merely a relationship between BofA and its agents, the appellate court decided. Rejecting the lower court’s finding that Urban and its employees amounted only to BofA’s agents, who had done nothing more than follow the lender’s instructions, the appellate court noted that BofA and Urban were separate legal entities that were alleged to have joined together with several other entities to form and conduct the affairs of an association-in-fact enterprise.

The complaint clearly described how BofA had acted to conduct the enterprise’s affairs rather than simply its own. Its contracting with Urban did not render Urban a subsidiary, the appellate court added, as the companies remained separate legal entities in distinct lines of business. The homeowners had alleged that each company performed distinct roles within the enterprise while acting in concert to further the enterprise’s goal of denying HAMP applications and suggested that the relationship between BofA and Urban enhanced the ability to thrive and avoid detection, the court noted.

Urban’s participation. Urban’s argument that it had been an outsider merely providing its regular services to BofA, rather than a participant in the conduct of a RICO enterprise, was rejected. The district court’s characterization as Urban as an "outside contractor having no official position" in the enterprise was a mistake compounded by its subsequent conclusion that the company had merely provided its regular services by performing tasks BofA assigned and by carrying out BofA’s directions, in the appellate court’s view.

The borrowers contended that Urban’s role in the enterprise was that of a lower-rung participant knowing carrying out BofA’s orders. Under the operation or management test elucidated in Reves v. Ernst & Young, 507 U.S. 170 (1993), even lower-rung participants in an enterprise could be held liable under RICO if they had some part in operating or managing the enterprise’s affairs. In this case, the appellate court observed, the borrowers offered specifics in their complaint regarding Urban’s actions to further the enterprise’s goals, including its creation of internal systems for receiving and processing borrower documents, communicating with borrowers, and dispersing received documents over multiple databases to make it appear that borrowers had failed to provide the requested materials. Further, the borrowers asserted that Urban decided whether to steer borrowers toward HAMP or other loan modification programs, determined which applications to deny to meet BofA’s quotas and timeframes, created and implemented methods for closing files in a manner that could be justified it audited, and delegated tasks to Urban employees to meet BofA’s production targets for denying applications. Taken together, "these allegations plausibly assert[ed] that Urban [had] played some part in directing the enterprises affairs, regardless of whether [BofA] directed some or all of Urban’s activities," according to the court.

Pattern of racketeering activity. Finally, the appellate court independently determined that the complaining borrowers’ allegations could amount to a pattern of racketeering activity actionable under RICO. The claims—that BofA and Urban had committed several acts of mail and wire fraud while conducting the affairs of their enterprise between 2009 and 2013—satisfied the pleading requirements of Federal Rule of Civil Procedure 9(b). While not all of the allegations contained the requisite specifics to apprise BofA and Urban of the time, place, and contents of the purportedly false misrepresentations made by BofA and Urban employees, others did identify BofA employees by name, specified the dates when those employees made allegedly false statements, identified the actions the borrowers took in reliance on those misrepresentations, detailed the injuries they suffered as a result, and explained how those misrepresentations furthered the enterprise’s ultimate goal of denying HAMP applications, the appellate court reasoned.

While specific accusations against Urban were sparse, taken as a whole they sufficiently apprised Urban of its alleged role in the overall scheme to defraud borrowers and of its involvement in the alleged predicate acts of mail and wire fraud, the court concluded.

The case is No. 14-1427.

Attorneys: Kevin K. Green (Hagens Berman Sobol Shapiro, LLP) for Richard George, Steven Leavitt, Sandra Leavitt, and Darrell Dalton. Keith Levenberg and James W. McGarry (Goodwin Procter LLP) and Peter Korneffel (Bryan Cave, LLP) for Bank of America, N.A. Martin C. Bryce (Ballard Spahr, LLP) for Urban Settlement Services.

Companies: Bank of America, N.A.; Urban Settlement Services

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