Antitrust Law Daily Wrap Up, RICO—EDVa: Home Owners Fail to Plead RICO Enterprise, Predicate Acts Against Debt Collection Law Firm over Alleged Foreclosure Fraud, (Dec 28, 2012)

By Tobias J. Gillett, J.D., LLM.

Virginia home owners did not adequately plead RICO claims against a debt collection law firm, an affiliated limited liability company, and one of the law firm’s attorneys over alleged fraud in foreclosure proceedings concerning their properties, the federal district court in Richmond, Virginia has ruled. The home owners failed to properly allege an enterprise for RICO purposes or to plead the predicate acts of mail and wire fraud with sufficient particularity (Goodrow v. Friedman & MacFadyen, P.A., December 27, 2012, Lauck, M.).

The law firm, Friedman & MacFadyen, P.A., performs foreclosure proceedings on loans referred to them by loan servicers. According to the home owners’ complaints, the law firm would employ a false “lost note affidavit” rather than locating the actual owner of notes referred to them. The firm would then execute a Substitution of Trustee document appointing the law firm or the limited liability company F & M Services, L.C., a company that did not operate independently of the law firm, as substitute trustee, and falsely identifying the loan servicers as the noteholders.

Allegedly, other individuals would sign the name of one of the law firm’s attorneys to notarized documents, rendering the documents a nullity under Virginia law. Among other alleged violations, the law firm would also send out mailings, e-mails, and foreclosure notices that contained misrepresentations. After foreclosure sales, the law firm would create Trustee Deeds that would convey the properties to the purchasers.

The home owners asserted that the defendants’ conduct violated the RICO Act. The present opinion addressed two cases consolidated for pretrial management and mediation.

RICO Standing

The court listed the elements of a RICO claim as “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity,” and observed that a plaintiff must also “show that (5) [they were] injured in [their] business or property (6) by reason of the RICO violation.” The court found that the home owners had adequately alleged both that they detrimentally relied on the predicate acts of wire and mail fraud and that the acts directly resulted in injury from losing their homes or money paid to prevent foreclosure.

Moreover, the court presumed that the home owners had alleged proximate cause, even though they did not use the phrase “proximate cause” and despite the fact that their losses may have ultimately resulted from their failure to pay their loans rather than from the alleged fraud. Noting that the defendants did not directly challenge the home owners’ claims of actual injury, the court chose to presume that the home owners had standing to bring their RICO claims.

RICO Enterprise

However, the court found that the home owners’ allegations that the defendants and the loan servicers had “engaged in a mortgage lending enterprise” were insufficient to establish an enterprise for RICO purposes. Although the plaintiffs had alleged that the defendants and the loan servicers had acted “with the common purpose of conducting the foreclosures as quickly and cost-effectively as possible,” the court found that the home owners had failed to allege that the loan servicers had engaged in a plan to deceive the home owners, or even that they had known the defendants had used false documents.

RICO Predicate Acts

The court also concluded that the home owners had failed to allege the predicate acts of wire and mail fraud with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). The court observed that the home owners had not provided the exact dates, numbers, or specific contents of the communications the defendants had allegedly sent to them. Moreover, the home owners did not show where in the communications the defendants had made the alleged misrepresentations.

Therefore, the court dismissed the home owners’ RICO claims, but granted them leave to amend their complaint. The court similarly dismissed breach of fiduciary duty claims with leave to amend.

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

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.

Cases: RICO VirginiaNews