Thursday, April 10, 2008

Purchasers Assert RICO Injury from Overvaluation of Homes

This posting was written by William Zale, Editor of CCH RICO Business Disputes Guide.

In a civil RICO action, home purchasers’ evidence could support the conclusion that a real estate developer’s activities proximately caused the purchasers’ alleged injuries in connection with the mortgage financing of overvalued homes, the federal district court in Harrisburg, Pennsylvania has ruled. In addition, the purchasers’ evidence could be found to prove that a mortgage lender’s alleged conspiracy with the developer and his companies proximately caused the purchasers’ alleged injuries.

Predicate Mail and Wire Fraud

The homeowners’ evidence could establish that the developer committed predicate violations of the mail and wire fraud statutes upon which the RICO claims were based, according to the court. In order to prove a scheme or artifice to defraud, the purchasers presented evidence of a consistent disparity between their actual payments and the developer’s advertisements representing that homes could be purchased for $1,000 down and $635 monthly payments.

The developer’s corporate network brokered all of the purchasers’ mortgage transactions and allegedly sold homes in excess of market value by arranging for inflated appraisals. As a result, the purchasers received loans greater than otherwise permitted under the applicable guidelines of a mortgage lender, according to the court.


A finding of a RICO “enterprise” separate from the scheme to defraud could be based on evidence that the developer—through controlled corporations—purchased land, constructed homes, and sold finished products throughout the 1990’s, the court determined. One corporation operated as realtor for the homes produced by its sister corporations. Another acted as broker for home buyers’ mortgages, arranging appraisals and obtaining financing for many buyers.

Several of the developer’s entities engaged in business transactions incident to the construction of residential real estate but unrelated to the loan advertisements and alleged acts of mail and wire fraud. A reasonable jury could conclude that the mail and wire fraud scheme was organized within the developer’s corporate network to maximize the profit of a distinct business venture engaged in the development and sale of real estate.

Injury Causation

The participation by the developer’s corporations in each of the mortgages reinforced the developer’s ability to perpetrate the alleged mortgage scheme, the court found. The developer’s companies brokered the mortgages for all of the purchasers’ homes, placing the companies in a position to favor appraisers and lenders who would provide the valuations and financing necessary to maintain the momentum of the development enterprise.

One appraiser and one mortgage lender serviced a considerable majority of the transactions. Purchasers proffered sufficient evidence that they suffered similar harm even when the appraiser or the lender did not participate in a particular transaction. A reasonable jury could conclude that the developer and his companies engaged in a RICO enterprise and proximately caused injury with respect to all of the sales transactions, according to the court.

Mortgage Lender’s Role in Conspiracy

The jury could also find that the lender conspired to inflate property values by providing financing opportunities that ordinarily would have been inaccessible to the purchasers, the court determined. The lender’s underwriters testified that mortgage applications from individuals with the purchasers’ credit ratings were routinely rejected early in the lending process. Despite this standard practice, the lender processed the applications.

The lender used appraisals performed by an individual, who previously had been on the lender’s review list, to justify financing to purchasers. An official of the lender inexplicably removed the appraiser from the list without conferring with his colleagues who had authority to place appraisers on review status. A reasonable jury could infer that the lender improperly removed the appraiser from the list, facilitating his role in the conspiracy, the court observed.

The lender also enabled many purchases through “Gold Key” programs, in which the developers’ companies improperly fronted the purchasers’ rent payments. Even though the complaining purchasers numbered over 100, apportionment of damages among them would be relatively straightforward. Contrary to the lender’s contention, entities to which it sold the mortgage paper were not better suited than were the purchasers to vindicate the alleged wrongs, according to the court.

The March 21 decision in Lester v. Percudani will be reported at CCH RICO Business Disputes Guide ¶11,461.

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