Antitrust Law Daily Wrap Up, RICO—NDOhio: RICO Claims Fail Against Mortgage Company over Alleged Title Insurance Referral Scheme, (Apr 4, 2013)

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

A provider of title insurance for mortgage loans failed to state Racketeer Influenced and Corrupt Organizations Act (RICO) claims against mortgage loan company Fifth Third Financial and related corporate entities over Fifth Third’s alleged scheme to refer settlement work only to settlement agents that agreed to refer title insurance business to a Fifth Third subsidiary, in violation of the Real Estate Settlement Procedures Act of 1974 (RESPA), the federal district court in Youngstown, Ohio has ruled (Empire Title Services, Inc. v. Fifth Third Mortgage Co., March 29, 2013, Pearson, B.).

Empire Title Services, Inc. conducts closings of mortgage loans and issues title insurance on those mortgages, previously including transactions funded by Fifth Third Bank. Fifth Third Financial (FTF), FTB’s parent company, allegedly engaged in a scheme in violation of the RESPA under which loan officers from Fifth Third Mortgage, another FTF subsidiary, only referred settlement work to settlement agents who agreed to refer all title insurance premium generating business to another FTF company, Vista Settlement Services, LLC, that competed with Empire for title insurance business. Settlement agents issued title policies, title commitments, and policy endorsements, among other services.

Empire alleged that it suffered damages, including loss of income that it would have earned from closing mortgage loans for FTM, because it refused to participate in the scheme. Empire filed a putative class action against Fifth Third alleging that Fifth Third violated and conspired to violate the RICO Act.

RESPA Violations

Fifth Third initially argued that Empire could not bring its RICO claims because they were based on RESPA violations. Fifth Third contended that Empire could not recover under the RESPA and that RESPA violations were not recognized RICO predicate acts. Fifth Third cited Ayres v. General Motors Corp., 234 F.3d 5141 (11th Cir. 2000), in which the Eleventh Circuit dismissed mail and wire fraud RICO claims because they were solely based on National Traffic and Motor Vehicle Safety Act (NTMVSA) violations.

The court concluded that the RESPA violations here could constitute mail and wire fraud predicate acts. The court observed that Ayres relied on the NTMVSA’s lack of a private right of action and limited civil penalties. In contract, RESPA expressly provided a private right of action and permitted treble damages. Although Expire was not "among the class of persons for whom the private right of action was created," the determining factors were "the existence of the private right of action and the available penalties," regardless of the identity of the plaintiff.

Association-in-Fact Enterprise

The court rejected Fifth Third’s contention that Empire had not sufficiently alleged an association-in-fact enterprise. Empire had alleged that FTF, FTM, FTM’s loan officers, and the cooperating settlement agents constituted a RICO enterprise. The court noted that Empire had sufficiently described the relationships between the settlement agents and Fifth Third, and found that Empire plausibly alleged that the participants functioned as a unit. Although Empire did not identify the cooperating settlement agents, Federal Rule of Civil Procedure 9(b)’s heightened pleading requirements "[did] not apply to the association-in-fact allegations." Moreover, the alleged enterprise could function as a continuing unit even if its membership was "in flux."

Proximate Cause

Holmes principles. Fifth Third next contended that Empire had not alleged facts that established proximate cause linking its injury to Fifth Third’s alleged violations. The court explained that the Supreme Court in Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), had held that proximate cause in a RICO case required "a direct relation between the injury asserted and the injurious conduct alleged." The Holmes court listed several reasons for requiring direct injury, including the difficulty of ascertaining damages, the difficulty of "apportioning damages among plaintiffs removed at different levels of injury," and the likelihood that more directly injured victims would vindicate the law without resort to more remotely injured plaintiffs.

Here, Fifth Third argued that, in the absence of a contract between Empire and Fifth Third regarding referrals, Empire merely had an expectancy interest in servicing future transactions, an interest "not sufficiently concrete to support a RICO claim." The court rejected this contention, concluding that, at the motion to dismiss stage, Empire’s allegations that Fifth Third stole its business opportunity were sufficient, and "alleged injury and damages potentially recoverable pursuant to RICO."

Moreover, the court determined that Empire had shown that its injury was directly caused by Fifth Third’s asserted fraud. Empire had alleged that Fifth Third had contacted it and told it "that if it did not refer title insurance business to Vista, Fifth Third would stop referring settlement business to Empire." Empire was not attempting to recover in a manner contingent upon the injury of more direct victims, but instead alleged "that it was directly harmed by Fifth Third’s misconduct."

Fifth Third argued that the loan borrowers "broke the causal chain." The court disagreed, noting that Empire had alleged that the lender or mortgage broker normally selected the settlement agent, depriving the borrowers of discretion that would "break the causal chain." The court also rejected Fifth Third’s contention that, if the borrowers lacked discretion to choose a settlement agent, they also could not have relied on the Fifth Third’s allegedly deceptive loan documents as necessary to assert a mail or wire fraud RICO claim. Empire sufficiently alleged "that the borrowers relied upon the documents to be legal and legitimate, and that had the borrowers suspected that Vista was allegedly being used to facilitate the payment of illegal referral fees and kickbacks at their expense, they would have refused to conduct business with Vista."

The court also found that, at the present stage, apportionment of damages among the victims would not present insurmountable difficulties. Apportionment would not require asking every borrower whether he or she would have chosen a different settlement agent; rather, the inquiry "appear[ed] to be contained within a modest sphere of Fifth Third associates."

The court rejected Fifth Third’s argument that the presence of the allegedly injured borrowers meant that permitting Empire to recover would result in duplicative recoveries. As previously determined, Empire had alleged that it was directly injured by Fifth Third’s conduct, and no legal authority required dismissal simply because the case contained two directly injured victims.

Whether the RICO Violations Directly Caused Empire’s Injury

18 U.S.C. § 1962(a). The court proceeded to address Fifth Third’s argument that the alleged RICO violations did not cause Empire to lose business. In its first two counts, Empire alleged that Fifth Third violated 18 U.S.C. § 1962(a), which prohibits a RICO person from investing income derived from a pattern of racketeering activity into enterprises affecting interstate or foreign commerce. Empire contended that Fifth Third had caused Empire to lose business by investing alleged racketeering proceeds into Vista.

The court concluded that, even if this harm would satisfy Section 1962(a), Empire had not alleged facts that would support it. Empire had alleged "that Vista was created and use only to facilitate Fifth Third’s allegedly unlawful scheme," and did not compete in the market outside that scheme. Therefore, Empire had not alleged a separate injury from those caused by the predicate acts, and the court dismissed the Section 1962(a) claims.

18 U.S.C. § 1962(c). In its third and fourth counts, Empire alleged that Fifth Third violated 18 U.S.C. § 1962(c), which prohibits "conduct[ing] or participat[ing], directly or indirectly, in the conduct of [an] enterprise’s affairs through a pattern of racketeering activity." Empire alleged that Fifth Third had committed predicate acts of mail fraud, wire fraud, and interstate transport of fraudulently obtained money.

Empire alleged that Fifth Third committed mail and wire fraud by issuing allegedly deceptive settlement documents and faxed and emailed loan documents. The court found that Empire had sufficiently pleaded that Fifth Third’s scheme was the proximate cause of its injuries. The court rejected Fifth Third’s contention that Empire had to plead that the predicate acts themselves caused its injury, finding no legal authority that supported such a requirement.

However, Empire failed to adequately allege a direct link between the interstate transport predicate act and its alleged injuries. Empire’s allegations that Vista was engaged in interstate commerce and transferred money neither "support[ed] the legal conclusions Empire assert[ed] nor [did] they explain a direct relation between the alleged acts and its injury." Therefore, the court dismissed Empire’s claims related to interstate transport of money.

18 U.S.C. § 1962(d). Having concluded that Empire had failed to state a claim under Section 1962(a), the court also rejected Empire’s claim that Fifth Third had "conspired to use or invest income derived from a pattern of racketeering activity" in violation of 18 U.S.C. § 1962(d).

Rule 9(b)

Finally, the court addressed Fifth Third’s argument that Empire had not alleged its fraud-based RICO claims with the particularity required by Federal Rule of Civil Procedure 9(b). The court found that Empire sufficiently alleged how a form Fifth Third sent to borrowers was misleading. Moreover, Empire’s collective references to the defendants in its complaint, rather than identifying particular corporate defendants, did not defeat its claims. Although relevant to the sufficiency of the complaint, specific references were "not, standing alone, necessary," particularly where the defendants were related corporate entities.

However, the only transaction in the complaint for which Empire provided specific details involved Fifth Third representatives handing the forms to the borrowers at closing. Although Empire attempted to satisfy the mailing requirement by alleging that Fifth Third had sent other documents through the mail that caused the documents to be handed to the borrowers, Empire failed to allege what documents those were, or "the time, place, content, and parties to those supposed communications." Therefore, Empire’s claims did not satisfy Rule 9(b), and the court dismissed its complaint.

The case is No. 1:10cv2208.

Attorneys: Cyril V. Smith, III (Zuckerman Spaeder) for Empire Title Services, Inc. Brett A. Wall (Baker & Hostetler) for Fifth Third Mortgage Co.

Companies: Empire Title Services, Inc.; Fifth Third Mortgage Co.

Cases: RICO OhioNews