Antitrust Law Daily Wrap Up, RICO—E.D. Va.: Homeowners lack standing to assert RICO claims against law firm over allegedly deceptive foreclosure documents and correspondence, (Jul 31, 2013)

By Tobias J. Gillett, J.D., LL.M.

Virginia homeowners lacked standing to assert RICO claims against a law firm that allegedly employed false and misleading loan documentation and correspondence to foreclose on them because the homeowners could not show that the law firm’s conduct caused their harm rather than their own defaults on their mortgages, the federal district court in Richmond, Virginia has ruled (Goodrow v. Friedman & MacFadyen, P.A., Jul. 26, 2013, Lauck, M.).

The law firm, Friedman & MacFadyen, P.A. (F & M), performs foreclosure proceedings on loans referred to them by loan servicers. According to the homeowners’ complaint, F & M would use a “lost note letter” to foreclose on properties, rather than obtaining proper documentation or the original note. F & M would create Substitution of Trustee documents that would falsely identify loan servicers as noteholders, and that would be signed by the signators in the trustee’s name rather than their own. F & M also sent letters to homeowners on whom it intended to foreclose that allegedly misrepresented that F & M “intended to file a lawsuit and that legal action was pending; the unavailability of Notes; who held the Note; the amount of debt and applicable fees; and whether the Substitute Trustee was properly appointed and had the right to foreclose.”

Following a sale, F & M would create a trustee’s deed to convey the property from the substitute trustee to the purchaser, and would then mail the allegedly faulty documents to the homeowners and the Commissioners of Accounts in the Circuit Courts of Virginia. The Commissioners of Accounts would then use the documents to approve the substitute trustee’s account of the sale.

F & M’s actions were allegedly facilitated by the Federal National Mortgage Association (Fannie Mae), Lender Processing Services, Inc., and the loan servicers. Fannie Mae allegedly provided incentives for F & M to engage in its unlawful conduct by paying F & M more to foreclose than to modify, by paying additional fees related to foreclosures, by imposing fees on loan servicers for unreasonable delay, and by creating competition among firms by retaining more than one of them. LPS also encouraged F & M’s conduct by evaluating firms solely on the speed of foreclosure, and halting referrals to firms with poor ratings, and also allegedly engaged in improper fee-splitting with F & M by charging fees for referrals. Finally, the loan servicers allegedly “enlisted” third parties like LPS and F & M because their deceptive tactics were more profitable.

In the six loans before the court, Fannie Mae purchased the mortgages but provided no sale documents to the homeowners. The homeowners made payments to their loan servicers until they ran into financial difficulties. F & M then began sending the allegedly misleading correspondence, beginning with a letter identifying the loan servicers as the current noteholders. The later unavailable note letters and notice of trustee’s sale letters contained subject lines implying that a lawsuit was imminent, even though F & M never intended to file a lawsuit. F & M signed those letters as the appointed trustee and substitute trustee, although the substitute trustee documents did not appoint F & M to those positions. The notice of trustee’s sale letter also included a substitution of trustee document identifying the loan servicer as the noteholder and appointing F & M as a substitute trustee. Later letters also improperly suggested pending legal action.

Four of the homeowners lost their homes in foreclosure sales, while another paid $111,800.30 to avoid foreclosure. Another did not state whether a scheduled foreclosure sale had occurred. Three of the homeowners alleged that F & M also filed false Foreclosure Accounting Statements with the Commissioners of Accounts.

The homeowners filed suit against F & M, an affiliated company, F & M Services, L.C., and an individual, asserting a variety of claims including a claim under the RICO Act. On December 27, 2012, the court granted the defendants’ motion to dismiss as to the RICO claim, but granted leave to amend it. On July 9, 2013, the court entered an order dismissing the RICO claim, this time with prejudice, although permitting other claims to proceed. The present opinion set forth the court’s rationale for its order.

The court explained that (1) a plaintiff asserting a RICO claim “must have detrimentally relied on the predicate acts of racketeering activity”; (2) “the predicate acts must be the proximate cause of the injury to the plaintiff”; and (3) “the plaintiff must suffer actual injury.” To state a RICO claim based on mail or wire fraud, the plaintiff must allege both that the plaintiff “detrimentally relied in some way on the fraudulent mailing or wire,” and that “the mailing or wire was a proximate cause of the alleged injury.” Proximate cause “requires some direct relation between the injury asserted and the injurious conduct alleged,” and cannot be “too remote, purely contingent, or indirect.”

Here, the court found the homeowners’ causation theory to be “too remote” and “indirect.” “Given the heightened pleading standard and the extraordinary nature of the RICO claim,” the homeowners’ theory could not withstand the defendants’ “challenge that the conduct directly responsible for [their] harm flows proximately from their default and not the defendants’ alleged fraud” in preparing and using allegedly fraudulent documents. “Even taking into account the collective nature of the correspondence and its plausible potential to materially mislead the least sophisticated consumer when conducting an FDCPA analysis, in the RICO context, the conduct directly causing the harm here is distinct from the conduct giving rise to the fraud,” according to the court. Since the homeowners’ defaults and failures to abide by the terms of their deeds of trust “plausibly resulted” in the harm they suffered, the court found they did not have standing to assert their RICO claims.

Although the court dismissed the homeowners’ RICO claims with prejudice, the court denied the defendants’ motion to dismiss as to certain claims under the Fair Debt Collection Procedures Act and as to a claim for breach of the fiduciary duty of impartiality.

The case is Civil Action No. 3:11cv20.

Attorneys: Dale Wood Pittman (The Law Office of Dale W. Pittman, P.C.) for John K. Goodrow. Andrew Biondi (Sands Anderson PC) for Friedman & MacFadyen, P.A.

Companies: Friedman & MacFadyen, P.A.; F & M Services, L.C.

Cases: RICO VirginiaNews