Antitrust Law Daily Wrap Up, RICO—NDIll: RICO Claims Fail Against JP Morgan Chase over Alleged Improper Mortgage Acquisition and Foreclosure, (Mar 11, 2013)

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

Illinois home owners did not adequately allege Racketeer Influenced and Corrupt Organizations (RICO) Act claims against JPMorgan Chase Bank, NA (“Chase”) and associated defendants over allegedly improper actions in acquiring their mortgage and foreclosing on their home because they did not sufficiently plead any predicate acts, a pattern of racketeering activity, or a RICO enterprise, the federal district court in Chicago has ruled (Drobny v. JP Morgan Chase Bank, NA, March 8, 2013, Dow, R.). In addition, federal and state law did not require a mortgage assignment, the home owners’ claim that the indorsement on their mortgage note was a “robo-signed forgery” was “speculative,” and aspects of the home owners’ claims were contradicted by a letter to their congresswoman attached to the complaint.

According to the home owners’ complaint, Chase acquired Washington Mutual Bank’s (WaMu) “banking assets” from the Federal Deposit Insurance Corporation (FDIC) in 2008. Chase and the FDIC allegedly failed to “properly transfer” WaMu’s mortgages, and Chase refused “many reasonable modifications,” in order to facilitate foreclosure lawsuits. Chase allegedly treated the WaMu mortgages differently from those originated at Chase to “avoid the cost of servicing those loans and making modifications.”

The home owners obtained a mortgage through WaMu in 2007, and filed a request to modify it in May 2009. When Chase claimed not to have received that application, the home owners filed a second application, which Chase also claimed not have received. The home owners’ complaint stated that when the home owners filed a third application on December 21, 2009 a Chase representative assured them that it would be modified, but Chase filed a foreclosure lawsuit instead.

In May 2010, Chase’s law firm, Codilis & Associates, PC, filed a foreclosure complaint against the home owners. The home owners alleged that this complaint was “false” because it did not record any assignment of the mortgage from WaMu to Chase, and because the indorsement on the mortgage note was a “robo-signed forgery.” The home owners claimed that Chase was not WaMu’s assignee because Chase had not received or recorded an assignment of the mortgage, and that Chase did not obtain assignments or recordings for millions of WaMu mortgages, leading to thousands of improper foreclosures. The complaint was later voluntarily dismissed, but in March 2012 Chase and Codilis filed a second foreclosure lawsuit, this time attaching an affidavit from an FDIC representative attesting that the FDIC sold the WaMu mortgages to Chase.

The home owners filed suit against Chase, Chase’s CEO, Codilis, Codilis’ managing director, the FDIC, and the FDIC representative who made out the affidavit, alleging violations of the RICO Act, among other claims. The present decision addressed motions to dismiss filed by the Chase and Codilis defendants.

The court initially noted that the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) applied to fraud allegations, including RICO claims based on mail and wire fraud. The court noted a split in authority regarding whether Rule 9(b) should apply to every element of such claims, or just the fraud elements of the claims. The court observed that the Seventh Circuit had applied Rule 8 to an element of such a claim in at least one case, so it chose to follow those courts only applying Rule 9(b) to the parts of the claim based on fraud.

Before addressing the elements of the home owners’ RICO claims, the court noted several significant defects with their complaint. Federal law permitted the FDIC to transfer WaMu’s mortgages to Chase without an assignment. State law did not have any assignment recording requirement, and Chase had “standing as the holder of the in-blank indorsed note” to foreclose on the mortgage.

Moreover, the home owners’ allegations that the indorsement on the note was a “robo-signed forgery” were “speculative.” The home owners based their claim that the indorsement was forged “on unidentified ‘reporting’ by unidentified people.” The home owners incorrectly claimed that the indorsement had to be forged because “only the FDIC could have made such a blank indorsement,” since “a note may be indorsed by its holder.” The home owners also stated that the indorsement was “unnecessary” and “undated,” and noted other court challenges to such indorsements. The court observed that these allegations were “speculative,” and that the home owners had to plead “actual facts,” not just “facts that may ‘plausibly’ be true.”

Finally, the home owners’ allegations regarding their loan modification request were apparently contradicted by the home owners’ letter to their congresswoman attached to their complaint. The home owners had claimed that a Chase representative had assured them that their loan would be modified following their December 21, 2009 application. However, the December 2, 2009 letter stated that their loan modification request had been denied. The court found the allegation that the home owners had submitted the December 21 application “with the same supporting documents that had previously been sent and expecting a different result” cast “considerable doubt” on the home owners’ claims.

Turning to the specifics of the home owners’ RICO claims, the court noted that the home owners had filed claims based on §§ 1962(a), 1962(b), and 1962(c). Section 1962(a) requires a showing that a defendant: “(1) received income from a pattern of racketeering activity; (2) used or invested that income in the operation of an enterprise; and (3) caused the injury complained of by the use or investment of racketeering income in an enterprise.” Section 1962(b) requires allegations that the defendants “acquire[d] or maintain[ed] any interest in or control” of an enterprise “through a pattern of racketeering activity.” Section 1962(c) requires a plaintiff to demonstrate “(1) the conduct (2) of an enterprise (3) through a pattern of racketeering activity.”

Predicate Acts. The court first concluded that the home owners had not shown the necessary predicate acts of mail or wire fraud. The court explained that “filing and prosecuting a complaint is not considered mail or wire fraud or a predicate act under RICO.” Even if the defendants “knew that the foreclosure complaints were false, they would have intended to deceive the Lake County court,” not the home owners. Deceiving “one person to receive something of value from another” did not constitute mail or wire fraud.

Moreover, the plaintiffs did not establish that they reasonably relied on the alleged fraud. The home owners had moved to dismiss the foreclosure action on the ground that Chase had not received a proper assignment of their loan, and thus they had not relied on the alleged fraud. In addition, the complaint demonstrated that Chase was the assignee of the mortgage, because the FDIC representative’s affidavit stated that Chase had acquired the WaMu loans, and a written instrument “trumps the allegations” in a complaint to which it is attached when it contradicts those allegations.

Finally, the complaint did not allege the fraud allegations with the particularity required by Rule 9(b). The home owners failed to allege “when the false documents were transmitted, who mailed or wired them, or why they believe that person had an intent to defraud.”

Pattern of Racketeering Activity. The court also concluded that the home owners had not alleged a pattern of racketeering activity. Despite “conclusory references to thousands of foreclosures,” the home owners only alleged Chase’s attempt to foreclose on their own property in any detail. Since the home owners were “the sole victims,” the defendants’ “purported scheme [did] not rise to the level of a pattern of racketeering activity.”

Enterprise. The home owners also did not sufficiently allege a RICO enterprise, in the court’s view. The home owners failed to “describe the organizational structure or hierarchy of the alleged RICO enterprise,” and did not “describe what role each of the six defendants played in the purported enterprise.” Without details regarding each defendant’s role in the alleged scheme, the home owners did not satisfy the pleading requirements of Rule 8.

The court granted the home owners leave to amend, as long as they could do so in compliance with Federal Rule of Civil Procedure 11, but noted that if they did not file an amended complaint within 21 days the federal claims would be dismissed with prejudice and the court would decline to exercise jurisdiction over the home owners’ state law claims.

The case is No. 12-CV-5392.

Attorneys: Glenn E. Heilizer for JPMorgan Chase Bank, NA.

Companies: JPMorgan Chase Bank, NA; Codilis & Associates, PC

Cases: RICO IllinoisNews