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Walsh Securities, Inc. v. Cristo Property Management

January 20, 2006

WALSH SECURITIES, INC., PLAINTIFF,
v.
CRISTO PROPERTY MANAGEMENT, LTD., A/K/A G.J.L. LIMITED, DEK HOMES OF NEW JERSEY, INC., OAKWOOD PROPERTIES INC., NATIONAL HOME FUNDING, INC., CAPITAL ASSETS PROPERTY MANAGEMENT & INVESTMENT CO., INC., CAPITAL ASSETS PROPERTY MANAGEMENT, L.L.C., WILLIAM J. KANE, GARY GRIESER, ROBERT SKOWRENSKI, II, RICHARD CALANNI, RICHARD DIBENEDETTO, JAMES: R. BROWN, THOMAS BRODO, RONALD J. PIERSON, STANLEY YACKER, ESQ., MICHAEL ALFIERI, ESQ., RICHARD PEPSNY, ESQ., ANTHONY M. CICALESE, ESQ., LAWRENCE M. CUZZI, ANTHONY D'APOLITO, DAP CONSULTING, INC., COMMONWEALTH LAND TITLE INSURANCE COMPANY, NATIONS TITLE INSURANCE OF NEW YORK INC., FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, COASTAL TITLE AGENCY, AND STEWART TITLE GUARANTY COMPANY, IRENE DIFEO, DONNA PEPSNY, WEICHERT REALTORS, AND VECCHIO REALTY, INC. D/B/A MURPHY REALTY BETTER HOMES AND GARDENS, DEFENDANTS.



The opinion of the court was delivered by: Bassler, Senior District Judge

OPINION

The defendants Stewart Title Guaranty Company ("Stewart Title") and Weichert Realtors ("Weichert") move to dismiss the complaint of Walsh Securities, Inc. ("Walsh Securities") on the ground that the applicable statute of limitations has run. The Court heard oral argument on January 12, 2006 regarding the dismissal of the complaint.

INTRODUCTION

Walsh Securities brought this action alleging that in early 1996 numerous co-conspirators engaged in racketeering activity inducing Walsh Securities to purchase about two hundred twenty mortgage loans at fraudulently inflated prices. For background see Walsh Sec., Inc. v. Christo Prop. Mgmt., 7 F. Supp. 2d 523 (D.N.J. 1998). Because of the fraud of individuals, including the collaboration of appraisers with inflated appraisals and fraudulent transmittal of deeds by closing attorneys to themselves and certain other defendants, when Walsh Securities, a wholesale mortgage banker, began to foreclose mortgages with delinquent loans, it was unable to recoup the full amounts of the outstanding mortgage loans.

There are thirty-four named defendants. Defendants Commonwealth Land Title Insurance Company ("Commonwealth Land Title"), Nations Title Insurance of New York, Inc. ("Nations Title"), Fidelity National Title Insurance Company ("Fidelity National Title"), and Stewart Title collectively are referred to in the Third Amended Complaint as the "Title Insurance Defendants." (See 3d Amend. Compl. ¶¶ 33, 34).*fn1

JURISDICTION

With allegations that defendants other than Stewart Title and Weichert violated the Racketeer Influenced and Corrupt Organizations ("RICO") Act, the Court has jurisdiction according to 18 U.S.C. § 1964(c) and 28 U.S.C. § 1331.

BACKGROUND

Stewart Title issued title insurance and closing service protection letters on some properties financed by Walsh Securities to protect it from losses. In conjunction with real property transactions involving National Home Funding ("NHF") and Cristo Property Management, Inc. ("Cristo Property"), borrowers of mortgage loans from Walsh Securities obtained title insurance from the Title Insurance Defendants, including Stewart Title. In exchange, they provided Walsh Securities with closing service protection letters covering the conduct of the Closing Attorneys, who were specifically approved by the Title Insurance Defendants. (See 3d Amend. Compl. ¶ 94).

Walsh Securities brought this action in July 1997, alleging it suffered losses as a result of fraudulent real estate transactions perpetrated through racketeering activity which became the subject of a criminal investigation by the United States Attorney's Office. The investigation resulted in numerous convictions,*fn2 including that of a former Weichert employee, Donna Pepsny.

In its complaint and amended complaints, Walsh Securities alleges that it was induced to purchase these mortgage loans from NHF based on fraudulent misrepresentations contained in the mortgage loan applications, including appraisals of the properties at issue. (3d Amend. Compl. ¶ 38). The proceeds from Walsh Securities' mortgage loans would, among other things, be distributed among the RICO defendants as their illicit profits. (3d Amend. Compl. ¶ 38).

In a typical transaction, Walsh Securities alleges that defendant William Kane ("Kane"), through his company, Cristo Property, purchased a house in a low income neighborhood for a low price. (3d Amend. Compl. ¶ 64(a)). Cristo Property, or one or more of the other RICO defendants, including Donna Pepsny, acting as a Weichert real estate agent, then located a willing buyer. (3d Amend. Compl. ¶ 64(b)). The property was then appraised by licensed appraisers (hired by NHF and Cristo -Property) at an inflated value. (3d Amend. Compl. ¶¶ 64 (c)(d)).

Thereafter, a mortgage loan application for the buyer was prepared by NHF or Cristo Property and submitted to Walsh Securities for financing. (3d Amend. Compl. ¶ 64(e)). The mortgage loan applications, in addition to inflated appraisals, contained false information: leases indicating that the property would be income-producing; statements that the buyer made a down payment; statements that the seller, Cristo Property, had provided a second mortgage on the property; and representations that the buyer would own the entire property. (3d Amend. Compl. ¶¶ 64(e)(1)-(8)). These false statements were designed to satisfy the loan underwriting criteria and thereby induce Walsh Securities into approving the loan. (3d Amend. Compl. ¶ 64(e)(8)).

On the day of the closing, the closing attorney would collect and transmit the proceeds of the mortgage loan, knowing that the preconditions to the loan had not been met and were false. (3d Amend. Compl. ¶ 64(g)). The closing attorney also would record the various deeds associated with the transactions. (3d Amend. Compl. ¶ 64(h)). Once the transaction was complete, however, the buyer would transfer sixty percent of the ownership in the property to defendant Capital Assets Property Management, L.L.C. ("Capital Assets") without notifying Walsh Securities. (3d Amend. Compl. ¶ 64(i)). This type of reconveyance is a default on the terms of Walsh Securities mortgage loans and Walsh Securities would not have financed the mortgage loan had it known of the plan to reconvey the buyer's interest in the property. (3d Amend. Compl. ¶ 64(i)).

Capital Assets would then pool rental income from several properties to meet the mortgage obligations on the property. (3d Amend. Compl. ¶ 64(j)). However, given the nature of the fraud, Capital Assets would soon become delinquent in paying its mortgage obligation unless it continued to obtain mortgage loans to defraud Walsh Securities. (3d Amend. Compl. ¶ 64(m)).

With respect to these fraudulently obtained mortgage loans, the Title Insurance Defendants, including Stewart Title, issued to Walsh Securities, as the mortgage lender, closing service protection letters, which required the Title Insurance Defendants to reimburse Walsh Securities for losses arising out of the fraudulent actions of the title companies' approved Defendant closing attorneys. (3d Amend. Compl. ¶¶ 93, 94). Walsh Securities alleges that two of the closing attorneys, Stanley Yacker and Anthony Cicalese, were selected by Kane and NHF and specifically were approved to handle closings by the Title Insurance Defendants. (3d Amend. Compl. ¶ 22).

This same pattern of fraud, with slight variations, occurred over two hundred twenty times. (3d Amend. Compl. ¶ 66). Walsh Securities remains liable for a substantial portion of the value of these mortgage loans fraudulently obtained by the RICO defendants. (3d Amend. Compl. ¶ 40). It will not be able to recover through foreclosures the full amounts that have been lent on the properties because of the fraudulently inflated appraisals of the real properties that secure the mortgage loans; many of the properties are not of value equal to or greater than the amount of the mortgage loans and the fraudulent sales contracts. (3d Amend. Compl. ¶ 40). In addition, it is alleged that this fraud perpetrated against Walsh Securities has injured the business reputation of Walsh Securities and caused Walsh Securities to lose a substantial amount of business and profits, including the cancellation of an impending sale of Walsh Securities to a third party. (3d Amend. Compl. ¶ 40).

On July 17, 1997, Walsh Securities filed its initial complaint in this action, followed by an amended complaint on November 7, 1997. On January 16, 1998, several defendants, who were targets of the criminal investigation by the United States Attorneys Office for the District of New Jersey ("U.S. Attorneys Office"), moved for a stay of the civil proceedings pending the outcome of the criminal investigation. These defendants argued that they could not fully participate in civil discovery and, at the same time, protect their Fifth Amendment rights.

The Court heard oral argument on the motion on March 30, 1998, entertained an in camera submission by the U.S. Attorneys Office, and entered an order on April 28, 1998, inter alia, staying all interrogatory and deposition discovery in the action until November 1, 1998. The order did not stay the action ...


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