February 1, 2017
by William H. Meyer
Martin Leigh PC
USFN Member (Kansas)
In a published, 38-page opinion, the U.S. Court of Appeals for the Tenth Circuit held that a first amended complaint filed by borrowers against Bank of America (Bank) and Urban Settlement Services (Servicer) stated a “facially plausible” claim under the Racketeer Influenced and Corrupt Organizations Act (RICO). The lawsuit was remanded by the Tenth Circuit back to the U.S. District Court for the District of Colorado for further proceedings after the lawsuit was initially dismissed by the district court [George v. Urban Settlement Services, __ F.3d __ (10th Cir. 2016)].
The underlying lawsuit alleges that Bank and Servicer violated RICO relating to Bank’s and Servicer’s administration of the borrowers’ Home Affordable Modification Program (HAMP) loan modification requests. RICO is significant in this context (and brings with it considerable leverage) because RICO enables plaintiff-borrowers to recover treble damages in addition to attorneys’ fees. At the risk of oversimplifying the RICO statute, RICO is a federalized fraud cause of action combining with it elements of conspiracy. Passed in 1970, RICO was crafted as a tool to fight organized crime and the Mafia. Since then, the scope of litigants subject to RICO’s reach has grown and efforts to curb RICO’s application to business litigation have been unsuccessful.
In the George lawsuit, the borrowers contended that Bank and Servicer violated RICO by forming an unlawful enterprise with the goal of wrongfully denying HAMP loan modifications to qualified applicants. The borrowers alleged that Bank and Servicer accomplished this by denying receipt of loan modification requests and by misleading borrowers regarding the status of loan modification requests. The borrowers claimed that they were damaged by this conduct because of allegedly bigger principal balances, lengthier loan terms, larger interest obligations, and late fees. The borrowers further maintained that they suffered damaged credit reports. (There is no mention in the George opinion of the considerable expense incurred by Bank as the result of the borrowers’ defaults and the organic damage done to a credit report by virtue of defaulting on a home mortgage loan in the first place.)
To raise a facially plausible RICO claim, the borrowers had to allege that there was more than one participant in the purportedly illegal enterprise. The Tenth Circuit ruled that the borrowers met this initial burden by pleading that Bank and Servicer were separate entities with a common purpose of limiting the number of successful HAMP loan modifications. This element of the Tenth Circuit’s ruling suggests that the exact same conduct would not have provided a basis for a RICO claim if Bank had serviced the loans in-house.
Next, the Tenth Circuit found that the borrowers sufficiently alleged that Servicer knowingly participated in Bank’s supposed scheme to limit the number of successful HAMP loan modifications. In making this determination, the Tenth Circuit rejected Servicer’s assertion that it was merely doing what loan servicers do in the normal course of the loan servicing business; and it had no choice as to the directions it followed when servicing a particular lender’s loans. However, such an argument may be successful later in the litigation and when based upon a more developed record. Given the procedural posture of this lawsuit (the motion to dismiss stage), all of the borrowers’ factual allegations were required to be taken as true by the trial court.
The Tenth Circuit then found that the borrowers sufficiently alleged that Bank and Servicer engaged in a pattern of racketeering activity. The borrowers asserted that Bank and Servicer made numerous false representations to the borrowers in that the defendants, purportedly, falsely stated the status of the HAMP loan modification applications; falsely represented that documents necessary for completing the HAMP process had not been received; and improperly allowed Servicer’s employees to use Bank titles and Bank addresses when communicating with the borrowers. In reaching its conclusion, the Tenth Circuit noted that the pleading rules at this preliminary stage of litigation are relaxed because the borrowers have not yet had the benefit of conducting discovery.
The lawsuit remains pending. There has not been a final decision of the applicability of RICO to Bank or Servicer. However, the Tenth Circuit’s opinion demonstrates how borrowers can use RICO in lender liability lawsuits and can avoid having such claims dismissed at an early phase of the litigation.
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