M & T Mortgage Corp. v. WhiteM & T Mortgage Corp. v. White
ORDER
This court has reviewed the unopposed Report and Recommendation (“R & R”) of Magistrate Judge Viktor V. Pohorelsky dated March 18, 2010. (Docket Entry #290, No. 04-CV-4775; Docket Entry # 313, No. 04-CV-5620.) Finding no clear error, the court adopts Judge Pohorelsky’s thorough and well-reasoned R & R pursuant to 28 U.S.C. § 636(b)(1). Accordingly, the Motion for Summary Judgment by Better Homes Depot, Inc. and Madison Home Equities, Inc. (Docket Entry # 279, No. 04-CV-4775; Docket Entry # 310, No. 04-CV-5620) and the Motion for Summary Judgment by Defendani/Third-Party Plaintiff Leo White and Plaintiffs Linda Council and Kimberly Council (Docket Entry # 282, No. 04-CV-4775; Docket Entry # 313, No. 04-CV-5620) are DENIED.
SO ORDERED.
REPORT AND RECOMMENDATION
The parties in the above-captioned cases have moved for summary judgment, and Judge Garaufís has referred the motions to me for a report and recommendation pursuant to 28 U.S.C. § 636(b)(1)(B). Both cases arise out of materially similar transactions, which consist of the plaintiffs’ 1 purchase of a dwelling from the defendant Better Homes Depot, Inc. (“Better Homes” or “BHD”) financed by a mortgage issued by the defendant Madison Home Equities, Inc. (“Madison” or “MHE”). The allegations sound primarily in fraud, conspiracy, deceptive trade practices, and federal housing discrimination in connection with those transactions. The Better Homes defendants have moved for summary judgment pursuant to Federal Rule of Civil Procedure 56 against the plaintiffs, Leo White, Linda Council, and Kimberly Council, while White and the Councils have cross-moved for partial summary judgment on many of their claims. For the reasons that follow, the undersigned finds that genuine issues of material fact remain, and respectfully recommends that both BHD motions be DENIED and that the White and Council motions be DENIED as well.
BACKGROUND
The facts on which the court relies will be drawn from the Local Civil Rule 56.1 Statements of Fact that the parties have filed, as well as from the exhibits attached to the parties’ moving papers, and from the pleadings, admissions, and prior discovery rulings that occurred. The transactions in question both occurred in 1999, when Leo White and the Councils separately purchased residential properties in Brooklyn, New York from Better Homes, with financing provided by Madison. At issue are the defendants’ alleged represen
At the time that White first approached Better Homes about purchasing a home, he was a 21 year-old African-American hotel doorman earning roughly $2,100 per month. He had not graduated high school. White was interested in purchasing a multi-family dwelling in the Bedford-Stuyvesant section of Brooklyn. To enable him to carry the mortgage that would be necessary, White wanted to have rent-paying tenants. Thus, he planned to live with his family on one floor, and collect rent from tenants on the other floors. Because White’s aunt had previously purchased a home from BHD financed by an MHE mortgage, she took White to BHD and MHE offices to begin inquiries about buying and financing a home. Over a period of approximately one month, White had numerous meetings with Better Homes and Madison agents, including Glen John and Charles Styles, and was shown an estimated 20 houses. Although he initially agreed to purchase a different property, White ultimately settled on the purchase of a house at 164 Macon Street.
The premises at 164 Macon Street, which were built around 1899, consisted of a basement and four floors. The apartments on the first and second floors each have one bedroom, while the third and fourth floor apartments each have two bedrooms. It appears that the property did not have a Certificate of Occupancy (“CO”) for use as a four-family dwelling at the time; White testified that the existing CO was for use as a three-family house. White testified, however, that BHD promised to perform any necessary repairs so that the property could be legally categorized as a four-family dwelling. White also testified that he was told by BHD and MHE agents — including John, Styles, Eric Fessler (the President of Better Homes), and Nadine Malone (the President of Madison Home Equities) — that he would be able to rent the three other units in the home, and realize approximately $3,600 per month in rental revenue. Never having purchased a home before, however, White did not independently verify that information. Nor did he obtain an independent engineering inspection or appraisal, or independently investigate the house’s market value or condition. White was not represented by an attorney when he signed the contract of sale, and does not remember speaking with or consulting anyone about its terms prior to signing. He did not object to any of the contract terms, and testified that he had read through and understood the document.
The MHE mortgage that White used to finance the purchase of 164 Macon Street was insured by the Federal Housing Administration (the “FHA”). The rental income he expected to realize was included on his mortgage application, subject to verification in the appraisal. At the behest of Madison, the residence was appraised by Robert Dosch, an employee of CLA Appraisals. His appraisal report contained the following provision: “The appraiser has based his or her appraisal report and valuation conclusion for an appraisal that is subject to satisfactory completion, repairs, or alterations on the assumption that completion of the improvements will be performed in a workmanlike manner.” The appraisal amount in his report essentially matched
White remained without counsel until the closing, when he was represented by C. Peter David, an attorney who had been recommended to him by BHD or MHE. Better Homes had informed White that David’s legal services were included as part of his down payment. WTiite stated that at the closing David told White that he had looked through the paperwork, and that everything was proper.
Prior to the closing, Better Homes performed a number of cosmetic repairs or renovations on White’s home, including installation of ceramic flooring and stoves, painting, carpeting, sheet-rocking, and fixing a leak, and White indicated his satisfaction with the work. Roughly one year after moving in, however, the roof began to leak. White also experienced leaks in some of the piping, and encountered other problems with the chimney and windows. Shortly thereafter, the boiler broke, costing White approximately $2,000. White did not ask Better Homes to make repairs. Ultimately, although White did not realize the level of rental income he had anticipated, he continuously had at least one paying tenant in the premises, and frequently more. 2 When he failed to make his mortgage payments, foreclosure proceedings were initiated and While filed a bankruptcy petition in 2003.
The Councils
The Councils, who are also African-American, learned of Better Homes after seeing signs on a house listing BHD as the seller, as well as from newspaper advertisements. Because the Councils were unable to remain in the apartment they occupied at the time, there was some urgency in finding a house or, at a minimum, another place to live. Although similarly inexperienced in real estate transactions, Linda Council and her daughter, Kimberly, had both earned college degrees and had done post-graduate work when they first came into contact with BHD and MHE. Linda worked for the United States Postal Service, and together with Kimberly, they were earning approximately $74,000 per year.
After contacting BHD by telephone, they were shown several properties by Mitch Lewis, a Better Homes agent. They ultimately became interested in a house at 102 Etna Street. The property was undergoing extensive repair and renovation, and the basement was being redone. Linda Council expressed to Lewis her interest in obtaining rental income from the basement unit, and both Linda and Kimberly testified that Lewis represented to them that they would be able to rent out the basement for up to $1,200 a month. While the house was undergoing renovation, Better Homes and Lewis “always made it clear that they would fix the house ... to [their] specifications and what had to be done to the house.” Linda Council said she was specifically told that the dwelling was a two-family house, that the basement would be fixed and thus able to be rented out. She was assured that “everything was going to be done that needed to be done, that the house would be up to HUD’s codes, everything would be in working condition.” Like White, however, the Councils did not have an independent engineering inspection or appraisal performed, nor did they indepen
In contrast to White, the Councils were represented by an attorney, Stephen Weinstock, prior to signing the contract of sale. Weinstock had been recommended by Better Homes, who, according to Linda Council, had agreed to pay Weinstock’s fees if the Councils retained him for the closing. Weinstock was not associated professionally with Better Homes or Madison at the time. He had previously been employed, however, by the firm that represented both Better Homes and Madison at the closing — Ackerman, Raphan & Sultzer — and Weinstock had previously represented MHE in other real estate transactions. Council was at first cautious that an attorney with offices in the same building as Better Homes would represent her, but was reassured by Weinstock that he worked independently of Better Homes, that the transaction was “backed” by HUD, and that he had her best interests at heart. In addition, Council recalls being told of the “package” deal afforded by Better Homes’ “legwork,” and that everything was set up and could be completed in the same building. Both Linda and Kimberly Council testified that Better Homes represented itself as a “one-stop” shop that would take care of everything, essentially a “package deal” for minorities and first-time home buyers. Weinstock assured her that he had read the contract of sale, and that he understood and approved of the terms. He said he would ensure that everything was legal, and he “reiterated numerous times that [the transaction] had to meet HUD’s approval.”
Madison was recommended to the Councils by Better Homes, and after executing the contract of sale, they met with MHE to provide financial information. 3 Linda Council asserted that they would be able to make the monthly mortgage payments, though she may have been under the impression that the rental income would help with the monthly payment as well. 4 The rental income was included on the application, subject to verification in the appraisal. Like White, the Councils’ home was appraised by Robert Dosch at the behest of Madison. The appraisal carried the same provision as the one Dosch provided in connection with White’s home: “The appraiser has based his or her appraisal report and valuation conclusion for an appraisal that is subject to satisfactory completion, repairs, or alterations on the assumption that completion of the improvements will be performed in a workmanlike manner.” His appraisal for the Councils’ home also essentially matched the purchase price, and the value was calculated on the basis that their home would hold legal occupancy status as a two-family dwelling. The estimated rental income listed in the appraisal was $900 per month.
At the closing, when Linda Council inquired whether signing the closing documents was in their best interests and whether their rights would be protected, she was given the same assurances she was given when the contract of sale was
Better Homes performed repairs and renovations at the Councils’ property both before and after the closing. The work included replacement of the flooring and sinks in accordance with specifications provided by the Councils, and other renovations involving the cabinets, ceiling, stove, and bathrooms. Linda Council testified that Weinstock had encouraged her prior to and at the closing to proceed with the transaction despite the renovations that remained to be done, and reassured her that BHD would complete the unfinished work. Better Homes also did some renovation work to the Councils’ basement, installing sheet rock, carpeting, and tiles, which was completed by May 1999 when Kimberly Council and her family moved into it. Roughly one year after moving in, the roof began to leak. Council contacted Better Homes, but the leak was not fixed until 2004.
Kimberly Council lived with her family in the basement for approximately three years, but was forced to move out because it became “unlivable.” The Councils testified that they were never able to rent out the basement to a paying tenant because it remained unfinished, did not function properly, was “falling apart,” and was uninhabitable. In addition, the basement was cited by the Buildings Department in a summons for an “illegal conversion” because the house was not a legal two-family home. 5 While Better Homes was at first somewhat responsive, eventually Council was told by someone at Better Homes (whom Council remembered as “Steve”) that she was the home owner and that the issues identified (specifically with respect to the leaking roof) were her responsibility. Eventually, foreclosure proceedings were initiated against the property, and the Councils sought bankruptcy protection in 2003.
Other Facts Relevant to the Transactions
The contracts of sale signed by White and the Councils state that their houses were being sold “as is”
6
— except that at
Purchaser acknowledges and represents that Purchaser is fully aware of the physical condition and state of repair of the Premises and of all other property included in this sale, based on Purchaser's own inspection and investigation thereof, and that Purchaser is entering into this contract based solely upon such inspection and investigation and not upon any information, data, statements or representations, written or oral, as to the physical condition, state of repair, use, cost of operation or any other matter related to the Premises or the other property included in the sale, given or made by Seller or its representatives, and shall accept the same "as is” in present condition and state of repair, subject to reasonable use, wear, tear, and natural deterioration, between the date hereof and the date of Closing (except as otherwise set forth in paragraph 16(f)) [sic] without any reduction in the purchase price or claim of any kind for any change in such condition b[y] reason thereof subsequent to the date of this contract. Purchaser and its authorized representatives shall have the right, at reasonable times and upon reasonable notice (by telephone or otherwise) to Seller, to inspect the Premises before Closing.
Although the nature of the relationship between BHD and MHE remains the subject of dispute, the contracts of sale contain the following disclosure provision: “It is hereby disclosed that there is a relationship between the seller and the lender.” The plaintiffs contend that the full extent of the relationship was not made known. MHE would frequently lend money (in the millions, cumulatively) to BHD so that BHD could purchase the properties for eventual re-sale; in turn, BHD would frequently refer home buyers to MHE for the mortgages necessary to purchase the homes. FHA insurance protected MHE in the event of the borrower’s default, and MHE often sold the mortgages it originated to another party. The buying institution would pay MHE fees in proportion to the principal, that is, a higher loan amount would generate higher fees when the mortgage was sold. The Riders to the contracts of sale make the sales “subject to the purchaser obtaining a mortgage commitment from Madison Home Equities, Inc., for a 25/30 year fixed or variable rate mortgage in the amount of ...”
8
The ab
Discovery Sanctions
As part of their argument in support of their motions for the summary judgment the plaintiffs seek to rely on sanctions imposed on some of the defendants for their spoliation of evidence. Specifically, I found that in the event of a trial, the jury should be given the following instruction:
The defendants Better Homes Depot, Inc. and Eric Fessler, have admitted that they failed to produce or intentionally destroyed documents concerning the sale or repair of various properties which they were obligated to retain and provide to the court in this litigation. You may presume that the documents destroyed or not produced would have been important to the plaintiffs in proving whether promised repairs had been made at all and the extent of the repairs. You may infer from these circumstances and the evidence presented that Better Homes Depot, Inc. and Eric Fessler made no or minimal repairs to some or all of these properties before they were sold by Better Homes Depot, Inc. and Eric Fessler notwithstanding any other evidence that another party may have produced regarding repairs.
Decision and Order, dated September 28, 2007, at 5 (Docket Nos. 171 (04-CV-4775); 199 (04-CV-5620)). In addition, I ordered that Better Homes and Eric Fessler should be
precluded from offering, at trial or in connection with any other proceeding in these actions, any documentary evidence concerning the sales of the properties identified on Schedule A of the Defendani/Third Party Plaintiffs First Set of Document Requests to Third-Party Defendant Better Homes Depot, Inc. with a Date of sale during the period from January 1, 1999 through May 80, 2000 (hereafter the “Limited Schedule A”) which are not contained in documents that they previously produced and which were covered by the plaintiffs’ discovery requests to them, including without limitation documents not previously produced concerning repairs, contractors hired, contracts made, work performed, applications filed, building permits obtained and expenses incurred, [and] whether or not Fessler has give[n] testimony about any such documents.
Id. 9
DISCUSSION
A. Legal Standards on Summary Judgment
Summary judgment will be granted if no genuine issue of material fact remains to
The burden of proving that no material issue of fact remains in dispute rests on the moving party.
Celotex Corp.,
Local Civil Rule 56 also directs litigants to file statements and counter-statements of material facts about which there is no dispute, and also requires that each factual statement be followed by a citation to admissible evidence, in accordance with Federal Rule 56(e). The court, in its discretion, may “overlook a party’s failure to comply with local rules, including Rule 56.1.”
Locke v. St. Augustine’s Episcopal Church,
B. Standing
As a threshold matter, Better Homes maintains that the bankruptcy filings deprive White and the Councils of standing to assert their claims against the Better Homes defendants, and that those claims must therefore be dismissed. In support, they argue that the plaintiffs did not list the instant suits in the schedule of assets filed in their respective bankruptcy
Filing under Chapter 13 changes the calculus when it comes to issues of standing in civil causes of action. “While Chapter 7 and Chapter 11 debtors lose standing to maintain civil suits — which must be brought and/or maintained by their bankruptcy trustees — it is clear that Chapter 13 debtors like plaintiff are
not
subject to this restriction.”
Murray v. Bd. of Educ. of City of New York,
Numerous other cases also stand for the proposition that Chapter 13 debtors are not deprived of standing to assert pre-petition causes of action.
See, e.g., Cable v. Ivy Tech,
Lastly, it seems unduly burdensome to require the plaintiffs to have listed the instant lawsuits as a property right in
C. Statute of Limitations and Equitable Tolling
Statute of limitations issues are raised with respect to the three statutory claims that White and the Councils have brought. For the deceptive practices claim under New York General Business Law Section 349(h), the statute of limitations is ordinarily three years, which begins to run when the injury occurs.
Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc.,
For the discrimination claims, both the Fair Housing Act (“FHA” 11 ) and the Equal Credit Opportunity Act (“ECOA”) set forth a two-year statute of limitations period. 15 U.S.C. § 1691e(f); 42 U.S.C. § 3613(a)(1)(A). The ECOA starts the clock on the “date of the occurrence of the violation,” while the FHA period begins to run on the “occurrence or the termination of an alleged discriminatory housing practice[.]” All three statutory claims in both cases were brought in 2004, beyond the limitation periods, if the dates of the transactions are used as the dates of injury or violation. Were the inquiry that simple, it would end there and those statutory claims would be dismissed.
However, there is an issue of when the limitations period actually began, which the plaintiffs raise by virtue of an equitable tolling argument. Generally speaking, equitable tolling allows plaintiffs to overcome an expired statute of limitations when they were “induced by fraud, misrepresentation, or deception to refrain from timely commencing an action.”
Gleason v. Spota,
The evidence adduced satisfies, for purposes of summary judgment, all three prongs. First, the nature of the scheme alleged by the plaintiffs is inherently self-concealing. Several courts in cases alleging similar schemes against these same defendants have so concluded.
See Laboy v. Better Homes Depot, Inc.,
No. 03-CV-4271,
Secondly, it seems from the facts that both cases were brought within the relevant statutory periods after they met with independent counsel and learned of the possibility of bringing this cause of action. White did not meet with Wagner until 2004, after his bankruptcy filing, and he testified that he did not realize the CLA appraisal was inflated until he had conferred with counsel in the instant case in 2004. Nor did he realize or believe he was defrauded until he met with his attorneys in this action. In an affidavit, Kimberly Council stated that she first met with Wagner, in the instant action, in the fall of 2004, and did not learn of this cause of action until that meeting.
See Council,
Thirdly, nothing indicates a lack of diligence on the part of the plaintiffs, even though there was apparently some level of dissatisfaction with the condition of the homes. Facts appear to be in dispute as to the plaintiffs’ ignorance of the claims. For example, Council testified that, despite what was in the signed contract of sale, she did not realize she was receiving a legal one-family dwelling until consulting with her attorneys. It is therefore still very much in dispute whether her ignorance of the cause of action was the result of the defendants’ success in employing
The plaintiffs have the burden of raising genuine issues of material fact as to equitable tolling, as they are the party seeking to invoke it.
See Boos v. Runyon,
D. Caveat Emptor
Lastly before turning to the substantive claims, the Better Homes defendants invoke the doctrine of
caveat emptor
as a defense to the causes of action that White and the Councils have asserted.
16
With regard to a seller’s duty to disclose facts about real property, the defendants cite the “settled law in New York that the seller of real property is under no duty to speak
when the parties deal at arms length.
The mere silence of the seller, without some act or conduct which deceived the purchaser, does not amount to a concealment that is actionable as a fraud.”
London v. Courduff,
Notably, other courts have found exceptions to the doctrine of
caveat emptor
when sellers “concealed facts or induced buyers to refrain from making independent inquiries into the terms of the real estate deal.”
Barkley,
Lastly, the essence of the claims is not that White or the Councils were sold a
lemon
of a dwelling or only that the houses contained material defects that the sellers failed to disclose. The deceptions alleged
E. The Individual Claims
The crux of the allegations is that BHD represented to the plaintiffs that they would be buying a four-family (White) and two-family (the Councils) dwelling, and that all repairs, renovations, and necessary improvements would be performed so that the homes would legally carry those classifications and the plaintiffs would be able to realize legal rental income to help make the mortgage payments. Because the appraisals were contingent on such work being performed and the purchase price essentially matched the appraisal price, the plaintiffs contend that they were defrauded into paying a higher purchase price than they would have otherwise paid, and that referring them to particular lawyers and using the same parties and appraisers in similar transactions allowed the defendants to execute and carry on this scheme. Because the mortgages were insured by the FHA, Madison could originate the loans and then sell them with little risk; MHE was thus largely insulated from the negative effects of the borrower’s default or inability to make payments. The defendants have moved for summary judgment on the discrimination claims under the FHA and the ECOA, and on the fraud, conspiracy, and deceptive practices claims, contending that the plaintiffs cannot establish a prima facie case for any of those causes of action. 17 The plaintiffs have cross-moved for summary judgment on the fraud claim, the deceptive business practices claims, and the conspiracy claim with respect to Eric Fessler, Better Homes Depot, Nadine Malone, Michael Ridenow (on the conspiracy claim only) and Madison Home Equities. Additionally, they have moved for summary judgment with respect to the ECOA claim against Malone and MHE.
1. Fraud, Deceptive Practices, and Conspiracy
a. Fraud
The elements of fraud under New York law are met by showing (1) a
Although couched as a motion for summary judgment, BHD’s first argument on the fraud claim attacks the sufficiency of the complaints for failing to comply with heightened pleading standards for alleging fraud. Therefore, the court will first address this argument even though it does not implicate a failure of proof at the summary judgment stage. Rule 9(b) states that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting the fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. Pro. 9(b). A complaint must “adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiffs contend the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements.”
McLaughlin v. Anderson,
Here, the defendants were given enough information to put them on adequate notice of the plaintiffs’ claims. The allegations in the complaint relate to specific representations made by a limited group of people over a relatively short period of time on a particular and definite subject matter. The defendants have been given sufficiently specific information with which they are able to mount a vigorous defense and counter the plaintiffs’ allegations and proof.
See Glickman v. Alexander & Alexander Servs., Inc.,
No. 93-CV-7594,
b. Material Misstatements or Omissions
There is ample evidence, in the contract of sale, the rider, the appraisal, and elsewhere, that Better Homes represented to White that he could legally rent out the four units in his home, or as he wished, live in one himself and rent out the other three. Likewise, because of the lack of a valid CO for use as a four-family dwelling, it appears in dispute whether White may legally rent those units. While the White house was constructed prior to the issuance of certificates of occupancy (beginning in 1968), it is also in dispute whether a certificate of occupancy was legally required for White’s dwelling. Under New York City’s Administrative Code, houses that require COs include not only those erected since 1968, but those that have been altered since 1968. See N.Y.C.A.C. § 26-222. Evidence regarding alterations since 1968 at both 164 Macon Street and 102 Etna Street would thus appear to be material and in dispute. While there is evidence regarding certain cosmetic repairs and renovations on both properties, it is not clear, at least to the court, whether that work constitutes alteration as that term is used in the Administrative Code. Certainly there is evidence that despite the contract’s terms, BHD made numerous representations to the Councils that 102 Etna Street was a two-family home. Council testified that in her dealings with Lewis and BHD, she had been “assured from day one that [she] would get a two-family house,” while the house was appraised as a two-family dwelling. There is also evidence that the basement was renovated in such a perfunctory manner so that the property cannot legally carry two-family occupancy status, even apart from the fact that it did not have a valid certificate of occupancy making it a two-family dwelling. Thus, the discrepancies and inconsistencies between what was promised and what was received in both cases, raise genuine issues of material fact regarding the need for certificates of occupancy, and the occupancy status more broadly.
With respect to occupancy status, the BHD defense appears to be that whether or not the premises is a legal four-family dwelling, White has been
using
and occupying the premises as a four-family dwelling, and has been deriving significant rental income from the other units in the home. White’s use of the home, however, does not mean that it is in fact and in law, a legal four-family dwelling, which is what BHD represented he would
The defendants’ valuation of the houses in the respective appraisals could also serve as a material misrepresentation of existing fact because of BHD’s purported knowledge of falsity with respect to the legal occupancy status, and BHD’s alleged false undertaking or agreement to perform the necessary repairs, renovations, or conversions.
See generally Simms v. Biondo,
The fraud claim could also be predicated upon BHD’s material misrepresentations as to whether the properties would be substantially repaired and renovated. It is not controversial that “a representation of the maker’s intention to do or not to do a particular thing is fraudulent if he does not have that intention.” Restatement (Second) of Torts § 530(1). Therefore, a promise by the defendant without the intention to actually perform
There is a strong basis to conclude that the defendants concealed from the plaintiffs the poor, dilapidated condition of both houses, and the extent of the repairs and renovations that were needed so that the houses would approximate the values ascribed to them in the appraisal. By using lenders, attorneys, and appraisers chosen or recommended by the defendants (even though BHD never represented that the plaintiffs were not free to use parties of their choosing), it is reasonable to see how the defendants were able to conceal the true condition of the houses and how that condition related to and informed the appraisal.
See, e.g., Phillips,
Knowledge of falsity could easily be inferred from using David and Weinstock to shepherd the plaintiffs through their respective closings without discovering that BHD’s representations or omissions were false and misleading. It can also be argued that in promising to White and the Councils that all necessary repairs and renovations would be performed, the defendants must have known that was false — if it is proved to be false — since they did not intend to undertake such repairs or intended to perform them in so roughshod a manner such that the promise could rise to the level of being materially false. BHD’s representations to Linda Council that the premises at 102 Etna Street was a two-family home are also belied by the terms of the contract stating it is actually a one-family dwelling. Similarly, knowledge that the houses did not have the requisite certificates of occupancy could be quite probative that BHD knew that the homes were not legal four-family and legal two-family dwellings. Using Weinstock and David to prod the plaintiffs to sign the necessary documents shows that they either (i) were not aware of the representations that the defendants made regarding the properties, and thus made no effort to make themselves informed and ensure that the contract of sale incorporated those promises, or (ii) were aware of BHD’s representations and consciously allowed them to be scrubbed from the face of the contract. Either way, it is arguable that the plaintiffs’ interests were not fully and robustly protected, and there is evidence that BHD and the other defendants facilitated such a failure. Both situations would show knowledge of falsity on the part of the defendants. In short, there is ample evidence with regard to this element of the fraud claim, but there is also much still in dispute, thus entitling no party to judgment as a matter of law.
d. Intent to Deceive
Intent to defraud can be generally shown by evidence of “guilty knowledge or willful ignorance.”
Hilton Hotels Corp.,
The plaintiffs also argue that evidence of BHD’s intent to defraud can be inferred from the sale of 50 different 2-4 family homes (containing rental units) between January 1999 and May 2000, wherein Better Homes was the seller, Madison was the lender, and the loans were insured by the FHA. They contend that the recurrence of similar parties and terms, 19 and the lack of construction, alteration, or repair Riders — perhaps contradicting Fessler’s deposition testimony that BHD would routinely spend thousands of dollars in making needed repairs to the houses prior to the sales — suggest a larger scheme to defraud. Additionally, the plaintiffs point to evidence of the deed alteration scheme in 96 other BHD sales, arguing that in conjunction with the prior admissions, preclusion, and inference instructions, this evidence shows, under Federal Rule of Evidence 404(b), 20 a pattern or “common scheme or plan” probative of the defendants’ intent to defraud.
Resort to evidence involving the deed alterations in the 96 other property transactions does seem to brush up against, and perhaps oversteps, the outer limits of Rule 404(b). For example, the deed alterations arguably show unscrupulous, unsavory practices on BHD’s part, but it is not abundantly clear how they relate to the fraud alleged in these cases.
21
Rather, the
e. Reasonable Reliance
Plaintiffs must demonstrate not only that they relied on the misstatements or misrepresentations, but that such reliance was both justifiable and reasonable.
See Hilton Hotels Corp.,
In another case against Better Homes and Madison, Judge Korman concluded that “[i]f a jury finds that defendants intentionally steered [the plaintiff] to a lawyer, convinced her to trust them and that lawyer, and consciously led her down a false path of trust so as to profit from her ignorance, that is sufficient to establish reasonable reliance.”
Phillips,
This conclusion is bolstered by the principles found in the court’s discussion of BHD’s
caveat emptor
defense. While ca
veat emptor
does place an obligation on buyers of real estate to investigate the property and its value that might appear to preclude reliance on the defendants’ misrepresentations, in the specific circumstances of this case,
caveat emptor
should not hold sway for the reasons provided in that discussion
supra.
And while the language of Paragraph 12 of the contract of sale would, if taken literally, appear to preclude the plaintiffs from establishing reliance, the circumstances surrounding the signing of the contracts and the attorneys’ roles and representations, raise genuine issues of material fact as to whether the plaintiffs fully understood the meaning of those terms and consented to them. For example, even though the Council contract (indicating that 102 Etna is a one-family house) contained standard merger language disclaiming prior representations, Weinstock’s disputed role in the allegedly fraudulent transaction calls into question whether that written representation supersedes the prior representation that it was a two-family house. Indeed, Linda Council testified that notwithstanding the terms of the contract, she was under the impression that her house was a two-family dwelling until alerted otherwise by the Buildings Department summons and her attorneys. Additionally, in the purchase of real estate, buyers ought to be able to justifiably rely on their counsel, and there is ample evidence that White and Council proceeded in at least partial reliance on their beliefs that “everything was okay” and “legitimate” and that their attorneys were protecting their best interests.
23
Likewise, despite the “as is” lan
f. Damages or Injury
The plaintiffs have submitted estimates of the repairs or renovations necessary in order to convert the homes to legal four-family and two-family dwellings, and what it would cost to obtain valid certificates of occupancy. There is also extensive deposition testimony on the myriad problems that have occurred with the houses (more so with the Council property), and the expenses the plaintiffs have incurred in trying to address and fix them. Lastly, triable issues of fact remain with respect to the valuation of the houses in the appraisal, and what they should have been appraised at based on the actual occupancy status, the need for repairs, and the availability of legal rental revenue. The true market value of the homes at the time they were sold appears to still be in dispute. Because the appraisals informed the sales price, which in turn dictated the amount of the mortgage, the amounts the plaintiffs have been paying — or in some instances, not paying — for the mortgages could reasonably be found to be greater than what they should have been.
See Banks,
g. Conspiracy and Aiding and Abetting
Given the nature of this case and these allegations, the plaintiffs’ claim that the defendants conspired to commit fraud should live or die with the underlying fraud claim. This is especially true because the fraud depended on the existence of an alleged conspiracy. In other words, the species of fraud alleged by the plaintiffs required, by nature, the participation and concert of many different entities, including Better Homes, Madison, and their principals, as well as the attorneys and appraiser. For the conspiracy claim to proceed, the plaintiffs must allege the elements of fraud — discussed
supra
— as well as (1) “a corrupt agreement between two or more persons; (2) an overt act in furtherance of the agreement; (3) the parties’ intentional participation in furtherance of the plan or purpose; and (4) the resulting damage or injury.”
777388 Ontario Ltd. v. Lencore Acoustics Corp.,
The plaintiffs have brought an additional fraud-related cause of action, charging that “the private defendants” aided and abetted the co-defendant principals in commission of the fraud. The court is unsure who exactly this claim is asserted against, as the identity and meaning of the “private defendants” is not clear. Regardless, the defendants put forward a perfunctory argument that because they should be entitled to judgment as a matter of law on the underlying fraud claim, the aiding and abetting claim must be dismissed as well. That would be the case if the fraud claim were dismissed on summary judgment, but as the court recommends allowing that claim to proceed, and since the plaintiffs have asserted the aiding and abetting claim as a separate cause of action, some discussion is necessary. This claim requires the plaintiffs to show “(1) the existence of the primary fraud, (2) the aider and abettor’s knowledge of the fraud, and (3) substantial assistance by the aider and abettor.”
Primavera Familienstifung v. Askin,
h. Deceptive Practices under N.Y. Gen. Bus. Law § 349
Deceptive conduct that does not rise to the level of actionable fraud may also form the basis of a claim under New York’s Deceptive Practices Act, which protects consumers from conduct that might not be fraudulent as a matter of law, and relaxes the heightened standards required for a fraud claim.
See
N.Y. Gen. Bus. Law § 349;
Diaz v. Paragon Motors of Woodside, Inc.,
211 (2d Cir.2003). In that vein, a Section 349 claim need not include proof of intent to deceive,
scienter,
or justifiable reliance.
See Petitt v. Celebrity Cruises,
A threshold question exists as to whether or not the practice complained of is consumer-oriented.
See Lava Trading Inc. v. Hartford Fire Ins. Co.,
The court is not willing to find as a matter of law that a purchase of a home and accompanying mortgage cannot be harmful to the public interest generally and therefore cannot be sufficiently “consumer-oriented” to comply with the statute. That position is not fully consistent with the case law.
See, e.g., Oswego Laborers’,
There is evidence in the record that the defendants represented themselves to the plaintiffs as a “package” service and as a “one-stop shop.” In a case involving essentially the same conduct as that alleged herein, brought by the City Department of Consumer Affairs against BHD and Fessler under New York City’s analogous but narrower consumer-protection statute, the Court of Appeals held that a “package of services ... offered in the context of a real-estate transaction” was sufficiently consumer-oriented.
Polonetsky,
not only sold property, but allegedly orchestrated a system of providing services under which prospective buyers were defrauded or misled every step along the way [and] promoted overpriced homes, promising, but often failing, to repair the properties. When buyers expressed concern about paying too much, Better Homes indicated falsely that FHA involvement with the transaction would guarantee buyer satisfaction. Further, defendants allegedly steered buyers to mortgage bankers and attorneys who had connections to Better Homes, making it unlikely that an outside influence would caution or protect the prospective buyers before closing the sale.
Id.
at 1278. The court was careful not to “insulate fraudulent conduct from the reach of the [Administrative] Code whenever the conduct occurs in connection with the sale ... of a house.”
25
See id.
In factually similar cases in this district, Judges Dearie, Glasser, and Korman have all concluded that such conduct was consumer-oriented for the purposes of Section 349 liability.
See Barkley,
The plaintiffs allege that misrepresentations (or omissions) were made with regard to the number of legal units in the dwellings, the defendants’ intentions or responsibility to make the necessary repairs to the properties, the accompanying appraisals, and the nature of the relationships between defendants. Briefly, because at heart a deceptive practices claim is a lesser species of consumer fraud, material issues of fact remain as to whether the plaintiffs have demonstrated a materially misleading or deceptive practice, and how they have been harmed as a result.
See Phillips,
2. Federal Discrimination Claims
The plaintiffs also bring federal discrimination claims under the Fair
Of course, the plaintiffs cannot show and do not allege that the defendants did not rent or sell housing or extend credit to them. Nor have they shown (a) how or why they were treated
differently
from other groups, since they have not alleged or shown how the defendants have treated other groups, or (b) the impact of the defendants’ practices or policies. There is an argument on this basis that they cannot make out a
prima facie
case under the ECOA or the FHA.
See, e.g., Masudi v. Ford Motor Credit Co.,
No. 07-CV-1082,
Firstly, as African-Americans, the plaintiffs are members of a protected class. Secondly, the evidence is clear that they applied to purchase a home and to borrow money. The evidence is less clear, at least with respect to Leo White, that he was
qualified
for the loan. It strikes the court as somewhat imprudent to extend nearly $300,000 in credit to a 21 year-old hotel bellman with little work experience, a monthly salary close to $2,000, no high school diploma, and roughly 3% down. Nevertheless, the court does not wish to substitute any judgment it has in lending practices for that of the defendants. Since White had held that job for two years, and thus had a regular income, in addition to whatever rental income he would be able to bring in, there are legitimate arguments both ways as to his qualification for the loan.
See generally Matthews,
With respect to the fourth element, merely allowing the plaintiffs to show evidence of intentional targeting or discrimination does not mean they have presented
Next, several of the individual defendants, Eric Fessler and Nadine Malone, have moved for summary judgment with respect to the claims against them. There is much deposition testimony on Fessler’s presence at meetings and the closing, and his participation in and knowledge of the alleged fraud and discrimination, though that appears much more true for Leo White than for the Councils. For the Council transaction, there is enough evidence to infer, if not establish directly, Fessler’s participation in the critical events, although Linda Council has less of a recollection of Fessler being present at the closing than does White. Council also testified that Nadine Malone was present at closing. Fessler in particular, testified that he may have been the only “employee” of Better Homes for W-2 purposes, and that he was the “Boss,” and maintained space at a BHD office in Ozone Park, Queens. According to Malone’s deposition testimony, Fessler also signed a guarantee assuming liability for BHD’s debts. White’s complaint, a verified pleading, makes allegations not upon information and belief, as to Malone’s presence at meetings with White and specific assurances she made to him. Thus as individuals and in their roles as President of Better Homes and Madison, respectively, there is evidence of Fessler’s and Malone’s participation in and knowledge of the fraud. Consequently, neither Fessler nor Malone should be entitled to judgment as a matter of law on the claims asserted directly against them as individuals.
Lastly, the court notes Judge Gershon’s recent finding that “disputed issues of material fact remain,” in denying summary judgment in the
Miller
case.
M & T Mortgage Corp. v. Miller,
No. 02-CV-5410,
CONCLUSION
Both sides seek to minimize the facts in dispute, but it is rather clear from the facts acknowledged and opposed that much remains in dispute, and that genuine issues of material fact remain. Even where a baseline fact is acknowledged by both parties — for example, that the plaintiffs were represented by counsel at closing — it is subject to diametrically opposed interpretations, as Weinstock’s and David’s loyalties are still very much in dispute, as is the role that the attorneys played at closing and in the larger mortgage and sale process. No party is entitled to judgment as a matter of law, and both sides should be entitled to present their theories of the case and ask the jury to make the legitimate, rational inferences that the claims might require and the evidence might warrant. In such circumstances, summary judgment is not an appropriate disposition of the matters at hand. For the foregoing reasons, the undersigned respectfully recommends that the defendants’ and third-party defendants’ motions for summary judgment be DENIED, and that the plaintiffs’ and third-party plaintiffs cross-motions for summary judgment be DENIED as well.
% ifc ijt # ‡
Dated: Brooklyn, New York
March 18, 2010
. The plaintiffs also allege a deed alteration scheme pertaining to 96 properties on “Schedule A,” wherein the deeds received did not actually reflect that BHD was a prior grantee and subsequent grantor of the property. Instead of the chain of title going from Smith to Better Homes, and then from Better Homes to Jones, Better Homes would be "whited out,” and the deed would purport to convey title directly from Smith to Jones, bypassing Better Homes. Accordingly, BHD would avoid its tax obligations on those two separate transactions, and the buyers would receive defective title. The defendants do not admit these allegations, but instead claim that
Notes
. Although White is actually a third-party plaintiff rather that the initiating plaintiff in his case, the court will refer to White and the Councils collectively as the plaintiffs, unless otherwise specified — especially since, for the purpose of the instant motions, the involvement of the plaintiff, M & T Bank, is minimal.
. In 2003, he was collecting approximately $3,000 in monthly rental income, while in 2006 he was collecting $2,400 per month from the three rental units.
. The loan applications that accompanied both White's and the Councils' mortgages contained false information that White and the Councils disclaim. For example, the Council application lists $25,000 in furniture and personal property, which Linda Council testified that she did not own and that she did not know was listed on the loan application form. Similarly, White’s application lists $50,000 worth of furniture and personal property.
. Council's deposition testimony on the rental income is not fully consistent, as she also testified that the rental would only provide a “cushion” if the mortgage proved too substantial for her income.
. Council testified to a litany of structural issues, not limited to the basement, including electrical problems with the outlets, infestation by rats and other vermin, major sewerage and drainage malfunctions, poor or "crumbling” piping, disintegration of the sheet-rock, plumbing issues, rotten window sills, a broken skylight, the frame of the stairs leading to basement, leaking bathtubs, the cabinets “falling off,” cracked tiles, the “break-down” of the boiler, water seepage, and brick instability. Council also testified that Better Homes had told her that the "boiler and the roof were new, were practically new. They were in excellent, mint condition.”
. Paragraph 12 contained the following language:
. The contracts elsewhere state that the seller will provide a valid CO [or proof that no CO was required] authorizing use as a four-family (White) and one-family (the Councils) dwelling.
. As an example of a baseline fact that is acknowledged, but capable of different meanings, the court notes that the quoted language is ambiguous. It is not clear whether the seller requires financing by an MHE mortgage and
only
an MHE mortgage, or whether the contract requires only that the buyer obtain
a
mortgage, and that this particular mortgage happened to originate with MHE. It does seem probative, however, that the date of the contract, the identity of the buyer, the address of the property, the purchase price, and the occupancy status is all written out by hand, while the "subject to” clause appears in printed form like the rest of the contract.
. The court has exercised its discretion to overlook technical shortcomings with Rule 56.1 compliance and to conduct such a review. For example, the portions of the deposition transcripts cited herein provide ample evidence that genuine issues of material fact remain, even if they were not cited in the parties’ Rule 56.1 statements or otherwise in the moving papers.
See also Holtz,
. The court also uses the acronym "FHA” to refer to the Federal Housing Administration, but context should make clear whether the reference is to the government agency or to the statute.
. For the New York deceptive practices claim, the court will apply the New York standard on equitable tolling, which is similar to its federal counterpart. Here, plaintiffs must establish that the defendant "wrongfully deceived or misled the plaintiff in order to conceal a cause of action,” and that the failure to initiate the suit in a timely fashion did not result from a lack of diligence.
See Council v. Better Homes Depot, Inc.,
No. 04-CV-5620,
. The court largely agrees with the defendants that the proof offered by the plaintiffs is frequently less than overwhelming, and not as probative as the plaintiffs assert. At times, the Rule 56 statements and moving papers make suspect evidentiary showings. But neither is it the "egregious failure of proof” that the defendants claim. For example, while the plaintiffs have not submitted affidavits, they are not required to.
See Celotex,
. Council also testified that she began to feel the mortgage was too high when the condition of the house started to deteriorate a year after moving in. Her dissatisfaction with the condition of the home and with the purchase price, however, does not necessarily signify that she learned of the instant causes of action at that time.
. While Judge Garaufis already denied the defendants’ statute of limitation challenges, that determination was at the Rule 12 stage and is not binding on summary judgment.
See Council,
. It is not clear from the defendants’ moving papers which specific causes of action should be dismissed on summary judgment on the basis of caveat emptor. As a state law doctrine, caveat emptor would appear to have little bearing, for example, on the federal discrimination claims under the FHA or the ECOA, since a party cannot sidestep its federal obligations by invoking state law. See U.S. Const, art. VI, § 2. Since this report recommends rejecting tire caveat emptor defense, the court does not address whether there is any distinction between state and federal claims in the application of that defense.
. The Council defendants have moved for summary judgment on a claim under the Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601
et seq.
The plaintiffs oppose that aspect of the defendants’ motion. The court has reviewed the Council complaint, however, and finds that no TILA claim alleging nondisclosure of certain terms was ever brought. Therefore, the court does not have occasion to consider the substance of the parties’ TILA arguments.
Cf. Phillips,
. It is somewhat regrettable that the plaintiffs' claims regarding the defendants' verbal representations are often not supported by citations to admissible evidence. For example, the plaintiffs repeatedly cite to the written Council appraisal to substantiate what they claim BHD verbally represented to them. However, in the context of this case, the relative paucity of evidence regarding BHD's verbal representations is not as egregious as the defendants suggest. Although the plaintiffs could have submitted affidavits attesting to the defendants' representations to induce the purchase and mortgage, neither Rule 56 nor the case law require affidavits.
See
Fed. R. Civ. Pro. 56(e) (requiring non-movant’s facts to be submitted by "affidavits
or as otherwise provided for in this rule
”) (court's emphasis);
.Of the 50 comparable transactions, CLA was the appraiser for 49, the Ackerman firm represented BHD and MHE in all 50, Paragon was the abstract company in 46, Zucker was the title closer in all 50, and the sales prices generally matched the appraisal prices. Of the 36 files that identify the buyers’ attorney, Weinstock or David appeared in 13 of them. Additionally, approximately 90% of the home buyers were minorities. Lastly, the appraisals also value the homes "subject to satisfactory completions, repairs, or alterations,” while the contracts of sale also state that the properties are being sold "as is,” without Riders detailing the work needed to be done.
. Under Rule 404(b), "Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge ...”
. The plaintiffs assert that the closing files for the Fusco (represented by David) and Allen/Saeed.(represented by Weinstock) transac
. Council later testified that she did not specifically recall whether Weinstock ever told her that $209,000 was a fair price for the house.
. Of course, the reliance should be on the misstatements themselves and not on the plaintiffs’ belief in the honesty and independence of their attorneys. Still, it appears that the misrepresentations herein extend to the reliance on David and Weinstock such that the two issues are inextricably bound, and in the context of this case and the overall
. The plaintiffs’ apparent inability, upon being deposed, to verbally articulate the legal bases and contours of their fraud claims does not signify that the claims they assert lack a basis in law and fact. It is, in part, for that very reason that they obtained counsel. Obtaining legal representation ensures that whatever grievances a plaintiff has can be articulated into an actionable claim. The plaintiffs' inelegance at their depositions in describing their claims and the damages they seek is not as probative as the defendants suggest, which is not to say that it is completely irrelevant to the plaintiffs’ ability to successfully prosecute those claims. It also tends to lend credence to the belief that they were unsophisticated parties who were easily misled. For the reasons stated, however, no party has made an adequate showing that he or she (or it) is entitled to summary judgment on the fraud claims.
. BHD appeared to almost concede in that case that their alleged conduct would have been actionable and “consumer-oriented” under the broader state statute underlying the plaintiffs’ claims here.
See Polonetsky,
. These include, but are not limited to the use of CLA as the appraiser, frequent use of Weinstock and David, the overall parity between the appraisal price and the purchase price, the clause in the appraisal making its valuation subject to the necessary repairs, and the lack of “construction or repair Riders’’ appended to the contracts. Overall, this does not establish that those 50 purchasers received the same representations as did White and the Councils regarding occupancy status, the promise of substantial repairs, or appraisal price. But in connection with the other evidence offered, there might be a legitimate inference that BHD used some of the same deceptive conduct with the 50 comparable purchasers; the documents themselves do not prove that such was the case. See supra note 19.
. The plaintiffs appear to lump together racial minorities broadly, though the plaintiffs in both cases are African-American. The court is unsure what proportion of the 47 minority buyers is African-American, the specific protected class to which the plaintiffs belong. Regardless, the defendants do not appear to have taken issue with the plaintiffs' calculation and inclusion of other racial minorities.
. White's complaint makes such allegations, though the court does not recollect such testimony in the respective depositions.