Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—1st Cir.: Claims failed to show connection between mortgage scheme, borrower’s loss, (Oct 16, 2013)

By Edward L. Puzzo, J.D.

Massachusetts Consumer Protection Act claims brought against a mortgage broker in connection with a fraudulent mortgage scheme could not be maintained without a showing of a causal connection between the alleged deception and the loss sustained, the U.S. Court of Appeals in Boston has ruled (Smith v. Dorchester Real Estate, October 15, 2013, Howard, J.).

Certain mortgage lenders, mortgage brokers, real estate brokers, and closing agents were accused of developing an illicit scheme to contract to purchase two residential real estate properties, then assign the purchase rights to a straw man for a significantly higher price, who would become indebted under a “stated income” loan that did not require income verification (informally known as a “liar loan”). This scheme would enable participants to pay themselves various fees and commissions.

Robert Smith, an unwitting participant in the fraudulent scheme as a straw buyer, brought a variety of claims against the scheme participants, including claims against mortgage broker New England Merchants Corporation (NEMCO), lender Union Capital, and real estate broker Century 21 Dorchester Real Estate, alleging injury by deceptive practices in violation of the Massachusetts Consumer Protections Act, Chapter 93A.

Claims against mortgage broker. The district court found that NEMCO branch manager Rachel Noyes—in league with the other scheme participants—made numerous false statements regarding Smith’s creditworthiness on loan applications, and falsely claimed she had gathered the information in a face-to-face interview with Smith. The district court found that Noyes’ conduct constituted a willing and knowing violation Chapter 93A and doubled the jury award against NEMCO.

The appellate court held that one of the district court’ s key findings, that Noyes had completed both loan applications, was clearly erroneous, because she was a loan originator for only one of the transactions. Hence any inconsistencies between the two applications were irrelevant. The appellate court also disputed the lower court’s finding that Noyes was in league with any of the other scheme participants, or that she knew or should have known that Smith’s financial information was false.

The remaining issue was Noyes’ false representation that she had interviewed Smith in person in preparing the loan application. Smith speculated that, by misrepresenting how she acquired his financial information, she had lent false legitimacy to the loan application.

When the alleged basis for Chapter 93A liability is misrepresentation, the appellate court stated, a causal connection between the deception and the loss must be proven. Here, the lender’s representative had testified that the decision to make the loan to Smith had been based on his apparent creditworthiness and employment, not any statement from Noyes. Thus, the causal connection between the deception and the loss was not proven, and the judgment against NEMCO must be vacated, the appellate court ruled.

Claims against lender and real estate broker. The district court had dismissed Smith’s Chapter 93A claims against lender Union Capital and real estate broker Century 21 Dorchester Real Estate because neither defendant had been properly served with a demand letter. Plaintiff Smith appealed this ruling.

Smith had sent a demand letter to Union Capital by certified mail without specifying the company’s registered agent as recipient. The spouse of the registered agent, who was in jail at the time, accepted the certified letter. The district court found that this was not proper service on a domestic corporation under the Massachusetts Rules of Civil Procedure.

The appellate court stated that Chapter 93A requires that a written demand, describing the deceptive act relied upon and the injury suffered, be mailed or delivered to the prospective respondent. There was no requirement that service must be made in conformance with Massachusetts’ service of process rules. Smith was not required to designate the registered agent as the recipient instead of the corporation. Thus Smith had met the demand letter requirement with regard to Union Capital, the appellate court ruled, and vacated the lower court’s dismissal.

On the other hand, Smith’s demand letter to Century 21 did not meet the requirements for demand letters under Chapter 93A because those letters had been addressed to individuals who formerly worked at Century 21, not to the company itself, which would have been the proper respondent. Thus, the lower court’s dismissal of Smith’s Chapter 93A claims against Century 21 were not vacated.

The case is Civil Action Nos. 11-2349, 11-2378 and 11-2389.

Attorneys: Jeffrey S. Baker (Baker & Associates, P.C.) for Robert Smith. Thomas K. McCraw, Jr. (LeClairRyan) for Century 21 Dorchester Real Estate, Inc. Michael J. Markoff for New England Merchants Corporation.

Companies: Dorchester Real Estate, Inc.; New England Merchants Corporation; Union Capital Mortgage Business Trust

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