Opinion
No. 1:04-cv-0562-JDT-WTL.
January 13, 2005
ENTRY ON MOTIONS TO INTERVENE (DOCKET NOS. 46, 47) AND MOTION TO STRIKE SUPPLEMENTAL MEMORANDUM (DOCKET NO. 133)
This Entry is a matter of public record and may be made available to the public on the court's web site, but it is not intended for commercial publication either electronically or in paper form. Although the ruling or rulings in this Entry will govern the case presently before this court, this court does not consider the discussion in this Entry to be sufficiently novel or instructive to justify commercial publication or the subsequent citation of it in other proceedings.
This action comes before the court on the motion of proposed Intervenors Triage Realty Investment, Inc., ("Triage"), Jamie K. Goetz ("Goetz"), and Tonya S. [Blythe] Harvey ("Harvey") to strike the "supplemental memorandum" filed by Defendants NovaStar Home Mortgage, Inc., and Courtenay Stocker (collectively "NovaStar"). In addition, the court will now rule on the motions to intervene as plaintiffs filed by Triage, Goetz, Harvey, and Mona Orkoulas ("Orkoulas").
I. BACKGROUND
Plaintiffs Decatur Ventures, LLC and Trent D. Decatur (collectively "Plaintiffs") brought this action against Defendants Stapleton Ventures, Inc., and Michael W. Stapleton, an unlicensed real-estate broker, (collectively "SVI"), et al., alleging substantive and conspiratorial violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; breach of contract; fraud; and several related causes of action. Essentially, Plaintiffs claim that they were fraudulently induced into making investment purchases of residential real estate properties.
The amended complaint alleges that, beginning in May 2003, SVI entered into an agreement with Plaintiffs whereby the former would locate "under-valued homes" for Plaintiffs to purchase. Plaintiffs were to take out the mortgage loans on the properties after they had been appraised and the appraisals delivered to NovaStar. SVI planned to rehabilitate the properties through equity funds, locate tenants willing to rent the properties, and manage the properties. Plaintiffs were to make the mortgage payments, with SVI reimbursing those payments along with a percentage of the profits derived from the rent. Plaintiffs eventually purchased and closed on four properties in the Indianapolis area. Soon after those properties were purchased, SVI slightly altered its investment strategy to one whereby Plaintiffs would receive $3,000 for each under-valued property purchased, SVI would continue to manage and repair the properties out of funds withheld from rent payments, and after twelve months Plaintiffs could decide to keep or sell the properties. Around the same time, SVI entered into power-of-attorney agreements with potential sellers, thereby enabling it to negotiate higher selling prices on the allegedly "under-valued" homes. This turn of events was unknown to Plaintiffs, who then purchased four additional properties at SVI's "negotiated" prices. NovaStar continued to order and receive the appraisals of the properties and to act as Plaintiffs' mortgage broker. At all times, SVI indicated that it would cover Plaintiffs' risk of loss while it managed the properties.
Unfortunately, the investment did not pay off for Plaintiffs. The amended complaint alleges that each purchased property was appraised at an amount far greater than its true market value, and that SVI failed to maintain or improve the properties in accordance with the parties' agreement. As a result, SVI failed to make any payments or reimbursements to Plaintiffs, leaving them, much to their pecuniary harm, to satisfy the mortgage payments on all eight properties from their own pockets.
Triage, Goetz, Harvey, and Orkoulas (collectively "Intervenors") claim to have been victimized by the same business scheme as that alleged in Plaintiffs' amended complaint, and now move to intervene as Plaintiffs. Triage, Goetz, and Harvey learned of SVI through a mutual acquaintance, who informed them that SVI could help in their efforts to locate, acquire, and manage residential real estate for investment purposes. SVI encouraged Triage, Goetz, and Harvey to purchase low-end, under-valued residential properties and thereafter offer them as "rent-to-buy" tenant opportunities or lease them as Section 8 properties under the Federal Fair Housing Act. SVI represented that such properties could be acquired with one-hundred percent financing, and that Triage, Goetz, and Harvey would receive a check at closing for the difference between the appraised value of each property purchased and the purchase price for each respective property. SVI was to secure a mortgage broker (here, NovaStar), which would in turn secure the necessary appraisals. For its services, SVI indicated that it would require consulting and managing fees, representing work done to locate tenants, improve the properties, and manage the properties for one year. Similarly, SVI encouraged Ms. Orkoulas to purchase under-valued residential properties for investment purposes. SVI told Orkoulas that for each property she purchased, it would advance her $5,000, pay the down payments, and pay the closing costs on each transaction. After the properties had been purchased, SVI was to provide management services, including the procurement of tenants and the rehabilitation of each property. SVI then planned to "flip" the properties for immediate resale by Orkoulas to third parties.
It should be noted that the Intervenors make allegations against many of the Defendants named in Plaintiffs' amended complaint, but not all. Specifically, the Intervenors name as Defendants only SVI, Stapleton, NovaStar, Courtenay Stocker, Lisa F. Phillips, and Kimberly Daniel.
Based on SVI's representations, Triage, Goetz, Harvey, and Orkoulas all purchased various residential properties in the Indianapolis area. Unbeknownst to at least Triage, Goetz, and Harvey, SVI executed power-of-attorney agreements with potential sellers, thereby enabling it to negotiate inflated purchase prices for the properties between itself (acting for the sellers) and the investor-buyers. In each transaction, NovaStar secured the necessary appraisals and acted as the Intervenors' mortgage broker. Unfortunately, as with the original Plaintiffs, the investment strategy went south in a relatively short period of time. Each "investment" property was appraised at an amount (representing the purchase price) far in excess of its true market value, and SVI failed to adhere to the terms of the parties' agreements. For example, at least with respect to Orkoulas' situation, several of the properties purchased were not rehabilitated, were not capable of being "flipped" to independent third parties, and were rented to tenants unable to meet the monthly rental requirements. As a result, the Intervenors were left with worthless investments that could not be disposed of in the marketplace, and were also faced with enormous liabilities resulting from loan agreements entered into for the purpose of acquiring the properties.
Defendants NovaStar, Stocker, Stow, and Miller oppose the Intervenors' request to intervene as plaintiffs. After the Intervenors replied to the Defendants' motions in opposition, NovaStar and Stocker submitted a "Supplemental Memorandum in Opposition to Petition for Intervention" (Docket No. 132). Three of the Intervenors, Triage, Goetz, and Harvey, move to strike that supplemental memorandum, which they characterize as an impermissible surreply. The court now turns to the motions to intervene and the motion to strike, and finds as follows:
II. DISCUSSION
A. Motion to Strike Supplemental Memorandum
Local Rule 7.1(a) provides that "[u]nless the Court otherwise directs, as respects all other motions, the adverse party shall have fifteen (15) days after service thereof in which to serve and file a response thereto and the moving party shall have seven (7) days after service of such response in which to serve and file a reply thereto" (emphasis added). The Rule makes no mention of a surreply or supplemental memoranda, because such briefs are rarely necessary. See McDonald v. Schnecker, 18 F.3d 491, 496 (7th Cir. 1994). In this case, NovaStar and Stocker filed their supplemental memorandum without first requesting leave to do so from this court. "Seeking permission is not a mere technicality to be overlooked or indulged by the Court." Miami Valley Contractors, Inc., v. Town of Sunman, Ind., 960 F. Supp. 1366, 1371 (S.D. Ind. 1997). Undoubtedly, therefore, this court could properly exclude the unauthorized submission. Id.
NovaStar and Stocker argue that its supplemental memorandum became necessary once they uncovered evidence that the Intervenors failed to name as defendants in their proposed complaints three of the five appraisers involved with the allegedly fraudulent appraisals. The unnamed appraisers, according to NovaStar and Stocker, are necessary parties to the underlying case if the Intervenors are allowed to intervene as plaintiffs, and thus undermine the rationale for allowing intervention. The court assumes that NovaStar and Stocker truthfully represent that they failed to appreciate as much until certain potential witnesses were interviewed on December 15, 2004. Therefore, out of an abundance of leniency, the court will allow the supplemental memorandum and deny the motion to strike filed by Triage, Goetz, and Harvey. Both NovaStar and Stocker are on notice not to repeat the practice of submitting supplemental briefs without prior permission. In the future, similar lenity on the court's part will likely be in short supply.
However, even if NovaStar and Stocker are correct in their assessment of the need for additional parties to be added to the Intervenors' proposed complaints, that fact alone does not require the court to deny intervention in this case. Rather, as the Proposed Intervenors point out, the Defendants may move pursuant to Federal Rule of Procedure 19(b) to dismiss the Intervenors' claims for failure to join indispensable parties if intervention is allowed. As will be explained more fully below, the test for permissive intervention is not as stringent as that required for permissive joinder under Federal Rule of Civil Procedure 20(a), and the Intervenors' failure to name all possible defendants is not fatal to their motions to intervene.
B. Permissive Intervention
The Intervenors move for leave to intervene in this action pursuant to Federal Rule of Civil Procedure 24(b). Rule 24(b) governs "permissive intervention," providing in relevant part:
Intervenors have not moved to intervene as "of right" under Federal Rule of Civil Procedure 24(a).
Upon timely application anyone may be permitted to intervene in an action: . . . (2) when an applicant's claim or defense and the main action have a question of law or fact in common. . . . In exercising its discretion the court shall consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties.
In the Seventh Circuit, district courts have "broad discretion" to permit or deny intervention. Griffith v. Univ. Hosp., L.L.C., 249 F.3d 658, 662 (7th Cir. 2001). The Intervenors argue that their proposed complaints are founded basically upon the same allegedly fraudulent investment scheme as that described in the Plaintiffs' amended complaint. Each of the Intervenors claim to have purchased properties for investment purposes based at least in part on certain misrepresentations and fraudulent acts made or committed by SVI, Stapleton, and the remaining Defendants. The Defendants oppose the motions to intervene on the grounds that common questions of fact or law are not present, and further that they would suffer unfair prejudice if intervention is allowed. The court disagrees.
As noted above, only Defendants NovaStar, Stocker, Stow, and Miller oppose the requests to intervene. For ease of discussion, these parties collectively will be referred to as "Defendants" throughout the remainder of this Entry. In addition, the Defendants have not raised any jurisdictional challenges to the proposed intervention. Because neither side has briefed the jurisdictional issues, nor challenged that jurisdiction is improper, the court presently declines to address the issue.
As indicated by Rule 24(b), the court must first determine if the Intervenors' claims and the main action have a question of fact or law in common. Initially, the court notes that both sides' persistent reliance on cases interpreting Rule 20(a), the rule governing permissive joinder of plaintiffs, is misplaced. According to one prominent treatise:
[I]t appears that the intervenor-by-permission does not even have to be a person who would have been a proper party at the beginning of the suit, since of the two tests for permissive joinder of parties, a common question of law or fact and some right to relief arising from the same transaction, only the first is stated as a limitation on intervention.
7C Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure § 1911 (3d ed. 2004). Therefore, while the two inquiries bear some similarity, Defendants' continued argument that the Intervenors' claims do not involve the "same transaction" as that alleged in the Plaintiffs' amended complaint is not dispositive. Along the same lines, the Intervenors' continued assertion that their claims do involve the same transaction is superfluous.
Turning to the task at hand, the court finds that the Intervenors' claims and the main action do have a question of fact or law in common. Notably, Rule 24(b) does not require that all questions of fact or law raised by the dispute be common. The Intervenors premise their claims on the same alleged scheme. The fact that Defendants made slightly different arrangements with the Intervenors is of no import, considering the overall framework of the scheme and the procedures utilized. Specifically, the Intervenors allege a common pattern of fraudulent behavior stemming from the centralized decision-making of SVI, Stapleton, and NovaStar. As a part of this pattern, SVI described investment plans whereby the Intervenors would purchase under-valued homes, which would then either be rented, offered as a rent-to-buy option, or "flipped" for resale. SVI was to manage and improve the properties in a manner that would enable the Intervenors to make a return on their investments. NovaStar was at the heart of the scheme, allegedly ordering each of the necessary appraisals (which turned out to be over-valuations of the properties, much to the detriment of the Intervenors). Furthermore, in many of the transactions SVI reportedly had power-of-attorney agreements with potential sellers that, unbeknownst to the Intervenors, allowed it to "negotiate" higher purchase prices for the investment properties. In sum, the structure, strategy, and fraudulent character of the Defendants' scheme is the same as that alleged in the main action, and the purported roles of each Defendant remain consistently described throughout the claims levied by the Intervenors and Plaintiffs. Defendants' reliance on Nat'l Am. Corp. v. Fed. Republic of Nigeria, 425 F. Supp. 1365 (S.D.N.Y. 1977), is misplaced. In that case, the court denied permissive intervention primarily because the proposed intervenors' contracts with the defendant contained differing choice-of-law provisions, greatly complicating resolution of their claims by raising collateral and extrinsic legal issues. Nat'l Am. Corp., 425 F. Supp. at 1372. Such a concern, which goes more to delay, is absent from the instant case. The court concludes, therefore, that a common question of law or fact is presented.
Even if intervention were denied, evidence of these very similar transactions might well be admissible at trial for one of the permissible purposes under FRE 404(b).
Furthermore, the court finds that intervention will not unduly delay nor prejudice the adjudication of the rights of the original parties. By intervening, the Intervenors can protect themselves from being excluded from an action in which they can inexpensively litigate their claims. See Wright and Miller, supra, § 80. From the face of the Intervenors' proposed complaints it becomes clear that the evidence presented will substantially overlap with that presented by Plaintiffs in the main action. Of course, whenever new parties are added, the action will likely take additional time. However, the Intervenors filed their motions so quickly on the heels of the main action that their addition should not cause any prejudicial delay. As in any case before the court, should matters become so complex that one side becomes prejudiced, the court may exercise its discretion to structure the litigation in a manner that will restore fairness to the proceedings. See Fed.R.Civ.P. 1; Wright Miller, supra, § 1913. Thus, the court holds that intervention will not cause any undue delay or prejudice.
III. CONCLUSION
For the foregoing reasons, the court hereby GRANTS the Intervenors' motions to intervene as plaintiffs (Docket Nos. 46, 47). The Intervenors' claims and the main action have a question of fact or law in common, the proposed intervention was timely requested, and intervention will not unduly delay or prejudice the adjudication of the rights of the original parties. Furthermore, the court DENIES the motion to strike (Docket No. 133) filed by Triage, Goetz, and Harvey.
ALL OF WHICH IS ORDERED.