Antitrust Law Daily Wrap Up, RICO—C.D. Cal.: Class action failed to plead RICO claims with particularity, (Apr 16, 2014)

By Peter Reap, J.D., LL.M.

Claims asserted by an individual as a putative class action against Countrywide Financial Corporation, Landsafe, Inc., and their affiliated entities for racketeering, conspiracy to violate the RICO statute, and fraud failed because, by vacillating between two alternative theories of fraud, the individual failed to plead with the requisite particularity, the federal district court in Los Angeles has determined (Waldrup v. Countrywide Financial Corporation, April 14, 2014, Snyder, C.). Those claims were dismissed without prejudice. However, the action adequately stated claims against the defendants for violation of California’s Unfair Competition Law (“UCL”) and for unjust enrichment.

Background. In 2004, Barbara Waldrup obtained a loan from Countrywide to purchase a home. She alleged that, as part of this loan transaction, Countrywide required her to procure an appraisal of the property being purchased. Countrywide directed Waldrup to get that appraisal from LandSafe, which charged her $400. Later, in 2007, Waldrup refinanced her home for a second time through Countrywide. Countrywide again required her to seek an appraisal from LandSafe. She paid $320 for this second appraisal.

Waldrup alleged that these two appraisals were worthless. Rather than supplying her with an accurate valuation of her property, LandSafe allegedly inflated the value of the property in order to ensure that the loans would be approved. Waldrup alleged that Countrywide “developed an affiliation” with LandSafe, which served as a captive appraiser that would deliver the inflated appraisals Countrywide needed to justify its loans. She asserted that LandSafe inflated the two appraisals it sold to her in 2004 and 2007 as part of this scheme to assist Countrywide in originating as many loans as possible.

Waldrup contended that the details of Countrywide’s scheme to procure inflated appraisals first came to light as the result of a whistleblower who was employed by LandSafe between 2004 and 2008. She asserted that the Countrywide scheme was not exposed until a Countrywide whistleblower’s complaint was first unsealed in May 2012.

The defendants filed a motion to dismiss that was before the court.

Statute of limitations. The defendants first argued that all of the claims were barred by the applicable statutes of limitations. The plaintiff’s last appraisal occurred in June 2007, nearly six and a half years before the complaint was filed. Similarly, the complaint’s class-action allegations were confined to consumers who obtained appraisals before December 31, 2008. According to the defendants, the claims had statutes of limitations that ranged between three and four years.

First, the plaintiff contended that, under the “discovery rule,” the various statutes of limitations did not begin to run until she discovered the alleged fraud at issue in this case. Second, she argued in the alternative that the statutes of limitations should be equitably tolled under the doctrine of fraudulent concealment. She contended that the defendants “concealed the true character, quality, and nature of their fraudulent appraisal scheme.”

The defendants argued that if, as the plaintiff alleged, these appraisals overstated the value of her home, the plaintiff could have discovered that her home was worth less than the appraisal indicated without any need to wait for the revelations of the May 2012 unsealing of the whistleblower complaint. This argument was unpersuasive, the court held. Although plaintiffs must act diligently to invoke the discovery rule or the doctrine of fraudulent concealment, diligence does not mean investigating any and all potential wrongdoing. Here, Waldrup alleged that she was not placed on inquiry notice of the alleged fraud until the unsealing of the whistleblower complaint in May 2012, the court noted.

Moreover, the Ninth Circuit has explained that, because it is inequitable to bar someone who has no idea he has been harmed from seeking redress, the statute of limitations has generally been tolled in such cases by the “discovery rule.” Accordingly, the court declined to find as a matter of law that Waldrup could not avail herself of either the discovery rule or the doctrine of fraudulent concealment.

Fraud claims. The plaintiff asserted claims for fraud, violation of RICO, and conspiracy to violate RICO. The RICO claims were explicitly predicated on allegations of mail and wire fraud.

Here, Waldrup did state her fraud claims with the requisite particularity, the court ruled. As to the element of misrepresentation, the plaintiff alleged in paragraph 124 of her complaint that defendants “concealed and suppressed material facts, namely, the fact they had created phony appraisals of real property in order to rapidly close real estate loans which were then sold to other investors.” This allegation, however, was susceptible of at least two distinct interpretations. On the one hand, paragraph 124 could be interpreted to allege that the defendants misrepresented that the appraisals were accurate. On the other hand, paragraph 124 could be read to allege that defendants misrepresented the value of plaintiff’s house.

This distinction was critical, because each of the two readings corresponded to a different theory of fraud, according to the court. This ambiguity was fatal to plaintiff’s complaint as currently pleaded because the plaintiff equivocated between these two theories of fraud, the court ruled.

By vacillating between these two alternative theories of fraud, Waldrup failed to identify the who, what, when, where, and how of the misconduct charged, the court decided. If the plaintiff intended to proceed on both theories, she must state as much and do so explicitly.

Unjust enrichment. Waldrup contended that the defendants charged her fees of $320 and $400 for her appraisals, and that her payment of these fees unjustly enriched defendants because the appraisal she received in exchange was worthless. The defendants’ arguments for dismissal of this claim were without merit, the court held.

UCL. First, the defendants contended that Waldrup could not state a claim under the UCL because the statute does not apply extraterritorially. Because both the parties and the conduct at issue were located outside California, defendants argued that the plaintiff could not state a claim under the UCL. The plaintiff responded that the alleged fraudulent appraisal scheme originated with Countrywide Financial and Countrywide Home Loans, which are both headquartered in Calabasas, California.

The defendants’ argument about the geographic scope of the UCL was premature, the court held. The plaintiff brought this case as a putative class action which, if certified, could potentially include class members from all 50 states. The court thus deferred consideration of defendants’ argument until class certification.

Second, the defendants argued that the plaintiff lacked standing to bring a claim under the UCL. A plaintiff must have suffered an injury in fact and have lost money or property as a result of such unfair competition to have standing to pursue either an individual or a representative claim under the California unfair competition law. Here, Waldrup alleged that she paid two appraisal fees of $400 and $320 dollars, and that the appraisals she received in exchange were worthless. Based on these direct allegations that she lost money or property, she had standing under the UCL.

Lastly, the defendants argued that Waldrup did not adequately allege unlawful, unfair, or fraudulent conduct sufficient to support a claim under the UCL. As discussed above, the plaintiff adequately alleged a claim for unjust enrichment. This claim for unjust enrichment, in turn, supplied a basis for a claim under the “unlawful” prong of the UCL. Thus, the court did not need to address whether plaintiff has sufficiently alleged a claim under the “unfair” or “fraudulent” prongs of the UCL.

The case is No. 2:13-cv-08833-CAS(CWx).

Attorneys: Daniel Alberstone (Baron and Budd PC) for Barbara Waldrup. Douglas A. Thompson (Bryan Cave LLP) for Countrywide Financial Corp., Countrywide Home Loans, Countrywide Bank, NA, Bank of America Corp. and Landsafe, Inc.

Companies: Countrywide Financial Corp.; Countrywide Home Loans; Countrywide Bank, NA; Bank of America Corp.; Landsafe, Inc.

Cases: RICO StateUnfairTradePractices CaliforniaNews