Opinion
Civil Action No. 00-2688 Section "N"
September 6, 2001
ORDER AND REASONS
Before the Court are defendant EquiCredit Corporation of America's (1) Motion for Reconsideration and (2) Motion to Dismiss. For the following reasons, the defendant's Motion for Reconsideration is DENIED, and its Motion to Dismiss is GRANTED IN PART and DENIED IN PART.
BACKGROUND
In July 2000, plaintiff Joseph Ladd noticed a "non-recoverable corporate advance charge" of $2,150.25 on his mortgage account, which was administered by defendant EquiCredit Corporation of America ("EquiCredit"). The mortgage statement did not specify the source of this charge. On August 28, 2000, Ladd's attorney wrote to EquiCredit claiming the charge was fraudulent. EquiCredit's general counsel responded that the charges were for inspections of Ladd's property, property insurance, and late fees, and that the charges were authorized under Ladd's mortgage agreement. Ladd claimed that the alleged property inspections were not performed, that the insurance was not obtained, and that the late fees were not incurred. On September 11, 2000, he filed the instant suit as a putative class action, contending that EquiCredit committed civil RICO violations by billing himself and others for services that were never provided.
EquiCredit filed a motion for summary judgment in January 2001, claiming that Ladd's cause of action under RICO must fail because it had not committed any fraudulent acts. EquiCredit explained that its general counsel's original justification for the corporate advance charges was erroneous, and that the $2,150.25 charge was actually for (1) $1,940.25 in attorney's fees incurred during a mistakenly initiated foreclosure proceeding, (2) a $110.00 charge for a property inspection/appraisal conducted in March 1999, and (3) a $100.00 charge for ten drive-by property inspections. Because the charges were allegedly authorized under Ladd's mortgage agreement, EquiCredit claimed it was entitled to summary judgment on the ground that it performed no fraudulent acts. However, since EquiCredit provided nothing in support of its explanation except the affidavit of its general counsel, the Court continued the hearing on the motion for summary judgment until EquiCredit submitted documentary evidence that verified its position.
On May 21, 2001 the Court denied the defendant's summary judgment motion because of a discrepancy between the disputed charges and EquiCredit's explanation for those charges. Specifically, the Court expressed its concern that EquiCredit incurred expenses of $2,250.25 in attorney's fees, appraisal costs, and property inspections, yet only charged Ladd $2,150.25 for these services. In addition, the Court pointed out that the defendant credited Ladd's account for the disputed charges with three separate credits of $2,120.55, $30.00, and $.26, and none of those credits correspond to the cost of any of the alleged services. In light of EquiCredit's withdrawal of its first explanation and the discrepancies in its second explanation, the Court found that an issue of fact existed as to whether EquiCredit's justification for the disputed corporate advance charges was accurate. EquiCredit now asks the Court to reconsider its previous order on the grounds that the Court incorrectly calculated the credits and charges. EquiCredit also moves the Court to dismiss several counts of Ladd's complaint.
1. EquiCredit's Motion for Reconsideration
In its Motion for Reconsideration, EquiCredit submits that, although it incurred $2,040.25 in attorneys' costs and fees, it only charged Ladd $1,940.25. This is EquiCredit's latest attempt to explain why it incurred $2,250.00 in attorney's fees, appraisal costs and property inspections yet only charged Ladd $2,150.00 for these services. However, EquiCredit has not offered any reason why it allegedly gave Ladd that discount. In light of the absence of evidence on this point, the Court is not satisfied that EquiCredit's explanation for the alleged charges is adequate. In addition, EquiCredit's newest explanation fails to address why Ladd was credited yet another amount — $2,150.81.
In its previous Order and Reasons, the Court erroneously stated that Ladd was credited $2,176.56. See Rec. Doc. No. 74 at 3, n. 1.
EquiCredit argues that the minor differences in these amounts are immaterial and should not operate as a bar to summary judgment. However, when the central issue is whether the charges on Ladd's mortgage statement are for legitimate services that were actually performed, any discrepancy is material. Because the Court cannot determine from the evidence at hand whether EquiCredit is guilty of sloppy bookkeeping or of fraud, it will not modify its earlier order denying summary judgment.
Before considering EquiCredit's Motion to Dismiss, the Court finds it necessary to address an argument raised by the plaintiff in his opposition to EquiCredit's Motion for Reconsideration. Ladd argues that, in denying EquiCredit's original Motion for Summary Judgment, "the Court could have relied on the additional ground, that plaintiffs mortgage documents require written notice to the plaintiff before any inspection is performed, stating the cause therefore," and that "EquiCredit defrauded the plaintiff by concealing the charges for `drive-by inspections,' disguising them as `corporate advances,' so that plaintiff could not know to challenge for lack of notice." Rec. Doc. No. 81 at 2. This theory of liability is different from Ladd's original claim that "No inspections of the property have been made by EquiCredit, which is required by the terms of the mortgage to obtain Mr. Ladd's permission before entering his property." Rec. Doc. No. 1 at ¶ 5. In light of EquiCredit's failure to adequately explain the basis for the disputed charges, Ladd's original theory of liability — that he was charged for inspections that were never performed-remains viable. In addition, his claim that physical, on-site inspections of the property were performed without notice may have merit. However, the Court rejects Ladd's allegation that he was defrauded because drive-by inspections were performed without notice. Ladd's mortgage agreement provides that the "Lender may make or cause to be made reasonable entries upon and inspections of Property, provided that the Lender shall give Borrower notice prior to any such inspection specifying reasonable cause therefore related to Lender's interest in the Property." Rec. Doc. No. 23, Ex. 1, Mortgage at ¶ 7. Because drive-by inspections do not require entry upon Ladd's property, this provision does not apply to such inspections.
The Court will also clarify an issue relating to Ladd's claim that EquiCredit was not entitled to charge him for the drive-by inspections. Ladd cites an Order and Reasons entered by this Court on December 5, 2000, which noted that "Paragraph 7 [of Ladd's mortgage] makes no mention of charging Ladd for property inspections, and the Court has not found any provision authorizing such charges. However, Ladd only submitted the first two pages of his four page mortgage to the Court." Rec. Doc. No. 10 at 2, n. 1. This footnote was not a ruling, as Ladd argues, that "there is no provision in the mortgage authorizing EquiCredit to charge Mr. Ladd for drive-by inspections." Rec. Doc. No. 42 at 11. In fact, Ladd's promissory note gives EquiCredit the right to charge him for its costs and expenses in enforcing the note, and the drive-by inspections — if they actually occurred — were ordered to insure that, after defaulting on his mortgage, Ladd did not abandon the property or allow it to deteriorate. See Rec. Doc. No. 23, Ex. 1, Note at ¶ 6(d).
2. EquiCredit's Motion to Dismiss
EquiCredit has also filed a Motion to Dismiss. Ladd argues that this motion is untimely. However, the motion is authorized by Federal Rule of Civil Procedure 12(h) because it presents a defense of failure to state a claim upon which relief can be granted and because it questions the Court's subject matter jurisdiction. In addition, the Motion to Dismiss addresses claims in Ladd's Second Amended Complaint, which the defendant has not yet answered. In its latest motion, EquiCredit challenges (1) Ladd's RICO claims in both his individual and representative capacity, and (2) Ladd's state law breach of contract claims in his individual and representative capacity. For the reasons that follow, the Court denies the motion with respect to Ladd's individual RICO claim, but grants the motion to dismiss the RICO class claim. In addition, as will be explained below, the Court lacks subject matter jurisdiction over Ladd's state law breach of contract claim, but the Court must defer its determination on whether to exercise supplemental jurisdiction over that claim because the parties have not addressed whether jurisdiction exists over Ladd's newly-raised state law fraud claim.
a. RICO
RICO provides that "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor. . . ." (emphasis added). In Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), the Supreme Court "explicitly confirmed that the "by reason of language in RICO requires a causal connection between the predicate mail or wire fraud and a plaintiffs injury that includes `but for' and "proximate causation." Summit Properties, Inc. v. Hoechst Celanese Corp., 214 F.3d 556, 558 (5th Cir. 2000). The Fifth Circuit has further explained that reliance on the predicate act of fraud is a necessary component of proximate causation. Id. at 562.
Ladd submits that his claim involves fraud by omission and that the reliance requirement is inapplicable. The Court is uncomfortable with this characterization. Ladd has consistently complained that the services behind the disputed corporate advance charges were never performed, and this is a misrepresentation claim. In other words, EquiCredit allegedly misrepresented that the corporate advances were for legitimate services when nothing was actually performed. As the case has progressed, Ladd has expanded his fraud allegation to include the omission of failing to disclose the substance of the corporate advance charges. Now, he accuses EquiCredit of intentionally omitting an explanation for the charges so that he could not challenge the services as unauthorized, but he does not necessarily contend that all of the services were not performed. However, despite his modified argument, Ladd has not abandoned his original claim for fraudulent misrepresentation. Accordingly, the Court cannot characterize Ladd's claim as purely fraud by omission.
Even if Ladd were only alleging omissions, the Court is not persuaded by his argument that there is no reliance requirement for RICO cases in which fraud by omission is alleged. Ladd cites Bustamante v. First Fed. Sav. Loan Ass'n., 619 F.2d 360 (5th Cir. 1980), for the proposition that proximate cause is shown by an objective standard in an omissions case. However, Bustamante considered the definition of materiality under the Truth-in-Lending Act and not reliance under RICO. Accordingly,Bustamante does not carve an exception to the Fifth Circuit's reliance requirement in RICO cases. See, e.g. Young v. Ray Brandt Dodge, Inc., 176 F.R.D. 230 (E.D.La. 1997) (Feldman, J.) (denying class certification of a RICO case because recovery by each plaintiff required a showing of individual reliance on material omissions or misrepresentations). In addition, Ladd cannot reconcile his reliance exception with the Supreme Court's decision in Holmes and the Fifth Circuit's opinion in Summit. The Supreme Court in Holmes held that RICO requires a causal connection between the predicate mail fraud and the plaintiffs injury. 503 U.S. at 265-68. In Summit the Fifth Circuit characterized the causation requirement as an "additional hurdle" that a civil RICO plaintiff must face. 214 F.3d at 559 (quoting Pelletier v. Zweifel, 921 F.2d 1465, 1498-99 (11th Cir. 1991)). To accept Ladd's argument that reliance is unnecessary in RICO omissions cases would effectively waive the causation requirement imposed by the Supreme Court.
Hedging his bets on the omissions argument, Ladd also asserts that he has in fact relied on EquiCredit's omissions/misrepresentations by paying "unauthorized, undisclosed charges." Rec. Doc. No. 85 at 11. EquiCredit, however, claims that Ladd's mortgage account was so far in arrears that all of his payments went to his principal and interest and not the corporate advance charges. The question in a motion to dismiss, however, is whether Ladd has properly pled reliance in his complaint. In his original complaint, Ladd alleges that "[n]o authorized services were performed by EquiCredit in return for the charges called `corporate advances,' which were added to Mr. Ladd's loan balance, and which were deducted from his monthly payments." Compl. at ¶ 6. Accepting all well-pleaded facts as true and viewing the facts in the light most favorable to the plaintiffs, Campbell v. City of San Antonio, 43 F.3d 973, 975 (5th Cir. 1995), the Court finds that Ladd has pled reliance with respect to his individual RICO claim. Accordingly, EquiCredit's Motion to Dismiss Ladd's RICO claim brought in his individual capacity is denied.
EquiCredit next urges the Court to dismiss the RICO claim Ladd has brought in his representative capacity. In recent years, such claims have fallen into disfavor with the Fifth Circuit. In Bolin v. Sears Roebuck Co., 231 F.3d 970, 978 (5th Cir. 2000), for example, the Fifth Circuit held that "the individual findings of reliance necessary to establish RICO liability and damages preclude . . . certification under RICO" because the "individualized determinations . . . would defeat the predomination requirement of Rule 23(b)(3)." More recently, in Patterson v. Mobil Oil Corp., 241 F.3d 417 (5th Cir. 2001), the Fifth Circuit vacated a RICO class certification due to reliance problems. ThePatterson court explained that:
Claims for money damages in which individual reliance is an element are poor candidates for class treatment, at best. We have made that plain. We recently held that "a fraud class action cannot be certified when individual reliance will be an issue." [Castano v. Am. Tobacco Co., 84 F.3d 734, 745 (5th Cir. 1996).] Recently, in Bolin v. Sears, Roebuck Co., we applied that rule to civil RICO claims. We do so again, concluding that the district court erred as a matter of law in certifying this class because the predominance requirement could not be met.Id. at 419.
Attempting to justify a RICO class action, Ladd reurges his theory that reliance is not necessary in a RICO fraud case based on omissions. The Court has already rejected this argument with respect to Ladd's individual RICO claim as lacking authority. To accept this position in the class action context would pose an even greater conflict with Supreme Court and Fifth Circuit jurisprudence. Ladd is now asking the Court to presume that each putative class member was injured by EquiCredit's alleged fraud, when such a presumption would contravene the holdings inHolmes and Summit that each plaintiff must establish a causal connection between the fraud and the injury. Accordingly, the Court cannot accept Ladd's argument that reliance is not required.
In an apparent concession to Holmes and Summit, Ladd argues that "if reliance must be shown, it can be shown (and was adequately alleged, in ¶¶ 6 and 7 of the Complaint) by payment of unauthorized, undisclosed charges contained in standardized, mailed monthly loan statements." Ladd's Mem. Opp. at 15. Ladd further argues that "[t]his does not require any individual inquiry, but only an examination of defendant's computerized records of loan payments." Id. To the contrary, the determination of reliance by the class members will be highly individualized. A dispute already exists as to whether Ladd himself has relied on EquiCredit's alleged misrepresentations/omissions by paying the corporate advance charges. Similar disputes will likely arise for every putative class member, who, like Ladd, must prove reliance on EquiCredit's alleged fraud by making individual showings that they actually paid the contested amounts. Simply put, the individualized determinations of reliance "would defeat the economies ordinarily associated with the class action device." Summit, 241 F.3d at 419. Accordingly, the Court grants EquiCredit's Motion to Dismiss Ladd's RICO claim in his representative capacity.
In addition to the problems associated with the reliance requirement, individual proof of fraud would be required for each putative class member. Even in Ladd's case, complicated issues of fact exist as to the source of the disputed corporate advance charges.
b. State Law Breach of Contract
In addition to his RICO claim, Ladd has asserted a claim for state law breach of contract in his Second Amended Class Action Complaint. See Rec. Doc. No. 79, ¶¶ 2-3. EquiCredit argues that the Court lacks diversity jurisdiction over that claim because the requisite amount in controversy does not exist.
Ladd first argues that the amount in controversy exceeds $75,000.00 because "the mortgage note that is the subject of this controversy is secured by the plaintiffs home, upon which EquiCredit seeks to foreclose, and which is valued in excess of $75,000.00." Rec. Doc. No. 85 at 15. This is the first time Ladd has raised such a claim before this Court. Neither his original, first or second amended complaints mention anything about recovering damages for the foreclosure of his home. He has not suggested any credible reason that the $2,150.25 in disputed corporate advance charges, which he may not have even paid, will result in foreclosure. Nor has he provided a hint as to what his home is worth. Accordingly, the Court rejects Ladd's contention that the value of his home is in controversy.
Disregarding the foreclosure argument, Ladd alleges that the requisite amount in controversy will be met because his attorney's fees will exceed $75,000. However, "Louisiana allows attorneys' fees only when a contract or statute specifically provides for them," NASCO, Inc. v. Calcasieu Television and Radio. Inc., 894 F.2d 696, 701 (5th Cir. 1990) (citingQuealy v. Paine, Webber, Jackson, and Curtis, Inc., 475 So.2d 756 (La. 1985); Huddleston v. Bossier Bank and Trust Co., 475 So.2d 1082 (La. 1985), and Ladd has neither cited a provision of his mortgage that authorizes attorney's fees nor directed the Court to a statute granting such recovery. Accordingly, the Court does not find that attorney's fees may be added to the amount in controversy. See 14B CHARLES ALAN WRIGHT, ARTHUR R. MILLER EDWARD H. COOPER, FEDERAL PRACTICE AND PROCEDURE: JURISDICTION 3D § 3712 at 274 (3d ed. 1998) (stating that the "law is now quite settled . . . that the amount expended for attorney's fees are a part of the matter in controversy for subject matter jurisdiction purposes when they are provided for by contract or by state statute).
Even if he were entitled to fees, the Court does not find that the requisite amount in controversy would be reached for Ladd's individual breach of contract claim. His damages for breach of contract are $2,150.25. To reach the jurisdictional threshold, his attorney's fees would have to exceed $72,000.00. Only a reasonable attorney's fee may be included in the jurisdictional amount, see id., and a $72,000.00 fee for a claim worth less than $3,000.00 is clearly unreasonable. Accordingly, the Court does not find that the requisite amount in controversy exists for the state law breach of contract claim brought by Ladd in his individual capacity.
Nor does the requisite amount exist for the claim brought in Ladd's representative capacity. In the absence of a statute authorizing recovery of attorney's fees, Ladd would not be entitled to attribute the class' fees to himself as the representative plaintiff. See In re: Abbott Laboratories, 51 F.3d 524 (5th Cir. 1995); Johnson v. Cytec Indus., Inc., 1999 WL 212753 (E.D.La. Apr. 13, 1999) (Vance, J.).
Since the Court lacks subject matter jurisdiction over Ladd's individual and class action breach of contract claims, it must decide whether to exercise supplemental jurisdiction over them under 28 U.S.C. § 1367. However, as will be explained below, this determination will be influenced in part by whether the Court has jurisdiction over Ladd's newly-raised state law fraud claim.
c. State Law Fraud
In his Opposition to Ladd's Motion to Dismiss, Ladd mentions a state law fraud claim for the first time: "EquiCredit focuses its argument on plaintiffs breach of contract claim, but plaintiffs Complaint clearly states a claim for fraud as well." Rec. Doc. No. 85 at 15. The Court strongly disapproves of Ladd's target-shifting tactics, especially since he has not once mentioned state law fraud in his original, first amended or second amended complaints. However, the law does not require technical forms of pleading, and the Court is unable to dismiss the newly-announced fraud claim unless the defendant can show that Ladd "can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45 (1957). See, also Doss v. S. Cent, Bell Tel. Co., 834 F.2d 421, 424 (5th Cir. 1987) (holding that "[w]hen presented with a Rule 12(b)(6) motion to dismiss, the district court must `examine the complaint to determine if the allegations provide for relief on any possible theory.'" (citing SC CHARLES ALAN WRIGHT ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL § 1357 (1969)).
Although the Court is unable to dismiss Ladd's fraud claims at this time, it is not suggesting that Ladd has successfully stated individual or class claims for state law fraud or that the Court has jurisdiction over such claims. In particular, the Court questions whether the requisite amount in controversy exists to establish diversity jurisdiction in light of the small amount of damages and of the fact that, under Louisiana law, "attorney's fees usually are not allowed in civil actions in the absence of a statute or contract." F.D.I.C. v. Barton, 233 F.3d 859, 865 (5th Cir. 2000) (citing Smith v. Atkins, 48 So.2d 101, 103 (La. 1950)). Accordingly, the Court orders additional briefing on the issue of whether federal jurisdiction exists over Ladd's state law fraud claims. The Court defers its decision on whether to exercise supplemental jurisdiction over Ladd's state law breach of contract claims until it resolves this jurisdictional question.
CONCLUSION
For the reasons given above, it is ordered that:
(1) EquiCredit's Motion for Reconsideration of its Summary Judgment Motion is DENIED;
(2) EquiCredit's Motion to Dismiss Ladd's RICO claim in his individual capacity is DENIED; and
(3) EquiCredit's Motion to Dismiss Ladd's RICO claim in his representative capacity is GRANTED.
Furthermore, the Court finds that diversity jurisdiction does not exist over Ladd's state law breach of contract claim. However, the Court will defer its decision whether to exercise supplemental jurisdiction over that claim until the parties address the question of whether federal jurisdiction exists over Ladd's state law fraud claim. IT IS ORDERED that both parties file their briefs addressing this question no later than Wednesday, September 12, 2001.