Commercial Borrowers’ Civil RICO Suit For Inflated Appraisals and Loans Bounced by IL Fed Court

 

Delaware Motel Associates v. Capital Crossing Servicing Company, LLC, 2017 WL 4224618 examines the pleading requisites for civil RICO claims and the razor-thin difference between unjust enrichment and quantum meruit claims in a hotel development loan dispute.

The plaintiff real estate investors sued a lender and its appraisal firm for civil RICO violations.  The plaintiffs alleged the appraiser and lender plotted to issue fraudulent loans based on inflated property values over a multi-year span.  The Northern District of Illinois granted Defendants’ motion to dismiss the claims under Rule 12(b)(6).

Reasons:

To state a cognizable RICO claim, a plaintiff must plead (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. To satisfy the enterprise element – item (2) – the plaintiff has to allege “a group of persons acting together for a common purpose or course of conduct.” Here, the plaintiffs’ complaint was devoid of specific allegations that defendants worked together to advance a common objective and lacked any facts showing defendants’ common purpose.

The plaintiffs also failed to adequately allege defendants engaged in racketeering activity. Quintessential RICO conduct includes mail and wire fraud, bank fraud, extortion and money laundering. 18 U.S.C. § 1961(1). Because of their inherently fraudulent make-up, these predicate acts must be pled with acute specificity under Rule 9(b).

To satisfy Rule 9(b)’s heightened pleading standard, the civil RICO plaintiff must allege the time, place, and content of the alleged fraud.  While Federal pleading rules sometimes allow fraud to be pled “on information and belief,” the plaintiff still must supply “some firsthand information to provide grounds to corroborate their suspicions.”  The Court found the plaintiff’s mail, wire and bank fraud allegations sparse since they didn’t identify a specific fraudulent loan or inflated land appraisal.

The Court also dispatched with the plaintiffs’ intentional interference with prospective economic advantage claim.  This requires a plaintiff to allege: (1) he had a reasonable expectancy of a valid business relationship; (2) the defendant knew about the expectancy; (3) the defendant intentionally interfered with the expectancy and prevented it from ripening into a valid business relationship; and (4) the intentional interference injured the plaintiff.

In their Complaint, plaintiffs failed to allege any defendant who knew of plaintiff’s reasonable expectancy of a valid business relationship who purposefully tampered with the expectancy.

Rejecting plaintiffs’ unjust enrichment and quantum meruit claims, the court again focused on plaintiffs’ pleading deficits.  The plaintiffs failed to allege the critical unjust enrichment element that plaintiff conferred a benefit on defendants which they unfairly kept.  The plaintiffs similarly failed to plead quantum meruit as the Complaint was missing allegations that plaintiff performed a service that benefitted defendants.

Useful Bullet-Points

– This case provides a useful pleadings primer for civil RICO cases and emphasizes the paramount importance of factual specificity in fraud-based claims.  To allege a RICO enterprise, the plaintiff must allege concerted actions by a group of people to pursue a common goal.

– A viable racketeering claim sounding in mail or wire fraud requires specific factual allegations.  Otherwise, the RICO claim can be subject to Rule 12(b)(6) dismissal.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.