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Wallace v. Midwest Financial & Mortgage Services, Inc.

United States District Court, E.D. Kentucky, Northern Division, Covington

November 19, 2014



DAVID L. BUNNING, District Judge.

Defendants David Schlueter, Bryan Bates, Midwest Financial & Mortgage Services, Inc. (Midwest), and MortgageIT Inc. move for summary judgment on Plaintiff Harold Wallace's remaining Racketeering Influenced Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(c)-(d), 1964(c), and state civil conspiracy claims.[1] In support of their motions, defendants all raise essentially the same argument: there is no evidence that they participated in, or agreed to, a fraudulent appraisal or illegal kickback scheme. For the reasons stated below, the Court will grant summary judgment for Defendants Bates, Midwest, and MortgageIT, and grant and deny in part summary judgment for Defendant Schlueter.


This lawsuit stems from Plaintiff Harold Wallace refinancing his home mortgage loan. Wallace obtained his refinancing loan through the assistance of Defendant Midwest, a nowdissolved Kentucky brokerage firm that was owned by Defendants David Schlueter and Bryan Bates; and Defendant MortgageIT, a New York mortgage lender.

Wallace purchased his Florence, Kentucky home for $272, 000 in October 2004. (Doc. # 150, Ex. P). He financed that purchase by taking out a $217, 852 loan from Washington Mutual. (Doc. # 163, Ex. 9). Less than two years later, Wallace took out a second mortgage on his home for $164, 500. (Doc. # 163, Ex. 10). Wallace then decided that he wanted to renovate his basement. (Doc. # 149, Ex. A). To pay for the $42, 500 renovation, he elected to refinance his mortgage loans so that he would receive a cashpayout. Id. Wallace owed approximately $380, 000 on his mortgage at the time, so he needed a $422, 500 loan to obtain the required funds. Id.

In his attempt to acquire a loan, Wallace contacted Shane Soard, a former loan officer at Midwest and a one-time party to this lawsuit. Id. On July 31, 2006, Soard returned Wallace's call and arranged to meet him at Wallace's home that evening. Id. At the meeting, Soard asked Wallace to complete a loan application. Id. After Wallace submitted the loan application, Midwest arranged for Accupraise to conduct an appraisal of Wallace's home. (Doc. # 146, Ex. 8). Accupraise is a now-extinct appraisal company that was based in Cleveland, Ohio and was owned by Andrew Brock; both Accupraise and Brock are former defendants in this action. Wallace's appraisal is at the crux of this lawsuit.

The record reflects that Accupraise never sent an appraiser to Wallace's home. (Doc. # 150, Ex. E). However, Accupraise submitted an appraisal that valued Wallace's home at $500, 000, which Wallace contends was $125, 000 more than the home was worth. (Doc. # 149, Ex. F); (Doc. # 163, Ex. 1). Quinton W. Durham, a former employee at Accupraise, declares that his signature on the appraisal is a forgery. (Doc. # 150, Ex. E). According to sworn statements from Durham and another Accupraise employee, Devin Demaske, this was routine practice at Accupraise. (Doc. # 150, Exs. B, E).

After receiving the appraisal, Soard called Wallace to tell him that his house had appraised at nearly twice what he had paid for it less than two years earlier. Id. Shortly thereafter, Soard and Wallace agreed to terms on a $425, 000 loan. Id.; (Doc. 106, Ex. N). Midwest then submitted Wallace's loan application and appraisal to Defendant MortgageIT, a New York mortgage lender. (Doc. # 149, Ex. G). Based on the appraisal, as well as Wallace's income and credit history, MortgageIT approved the loan. (Doc. # 149, Ex. H).

On August 18, 2006, the parties closed on the loan at Wallace's home. (Doc. # 149, Ex. C). In attendance were Wallace, Soard, and a title agent. Id. During the closing, the title agent reviewed each loan document with Wallace, including the Note, Mortgage, HUD-1 Settlement Statement, and the Truth in Lending Disclosure. Wallace signed each document. (Doc. #85, Ex. D; Doc. #106, Ex. N; Doc. #163, Ex. 3). In addition, Wallace received written notice that he had three days to rescind the loan. (Doc. #149, Ex. B).

Wallace's loan is referred to as an option adjustable-rate mortgage ("option ARM"). Wallace contends that Soard pushed him towards this complex loan; Soard proclaims that Wallace requested it. (Doc. # 150, Exs. A, L). Although Wallace states that he did not understand the loan, he admits that he reviewed the payment schedule at the closing and was aware that the payments would substantially increase over time. (Doc. # 149, Ex. B). The loan resulted in MortgageIT paying Midwest a yield spread premium of $14, 734.75.[2] (Doc. # 106, Ex. N). This large premium was directly related to Wallace choosing a highrate loan, and combined with other fees, resulted in MortgageIT paying Midwest a total compensation of 4.197% of the loan. Id.

After Wallace paid off his two previous loans and the loan settlement charges, Midwest sent Wallace a $42, 046.72 "cash out" check. (Doc. # 106, Ex. N). Wallace used that money to renovate his basement by putting in a library, theater room with surround sound, and full bathroom. (Doc. # 149, Ex. B). In November 2006, Wallace decided that he wanted a pool table and big-screen TV for his basement. (Doc. # 149, Ex. A). He planned to pay for these items by taking out another mortgage, using what he believed was unused equity in his home. Id. Wallace alleges that he first learned of Accupraise's inflated appraisal during the process of trying to acquire another loan.

On May 23, 2007, Wallace filed this action against Midwest, Schlueter, Bates, and MortgageIT, in addition to other defendants that have since been dismissed. Wallace alleges that Schlueter and Bates, acting through Midwest, knowingly secured a fraudulent appraisal from Brock so that they could entice Wallace to enter into a high-rate mortgage. Id. at 5. He contends that Schlueter and Bates then conspired with MortgageIT to obtain illegal kickbacks in the form of yield spread premiums. Id. at 4.

Wallace asserted nine claims against eight defendants in his Second Amended Complaint. (Doc. # 132). Since then, this Court granted partial summary judgment for the defendants (Doc. # 176), the parties entered a settlement agreement (Doc. # 218), and there was an appeal, Wallace v. First Financial & Mortgage Services, Inc., 714 F.3d 414 (6th Cir. 2013). The Sixth Circuit reversed this Court's decision granting summary judgment on the RICO claims against Schlueter, Bates, and MortgageIT, and the state conspiracy claims against Schlueter, Bates, and Midwest, finding that Wallace had raised a question of fact as to causation on those claims. Id. at 416. The Sixth Circuit affirmed this Court's decision granting summary judgment on the state conspiracy claim against MortgageIT, finding no evidence in the record that MortgageIT conspired to commit an unlawful act. Id. at 423.

As a result of that procedural history, three claims and four defendants now remain: (1) a § 1962(c) RICO claim against Schlueter and Bates; (2) a § 1962(d) RICO conspiracy claim against Schlueter, Bates, and MortgageIT; and (3) a Kentucky civil conspiracy claim against Schlueter, Bates, and Midwest. On remand, this Court ordered the parties to file supplemental briefs on the remaining RICO claims. (Docs. # 242, 243, 244, 248, 249, 250). This matter is now ripe for the Court's review.


1. Standard of Review

Summary judgment is appropriate when there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). On a summary judgment motion, a court construes the evidence and draws all reasonable inferences in the favor of the nonmoving party. Ireland v. Tunis, 113 F.3d 1435, 1440 (6th Cir. 1997). The moving party has the initial burden of demonstrating that there is no genuine dispute of material fact. Leary v. Daeschner, 349 F.3d 888, 897 (6th Cir. 2003). The moving party can meet this burden by showing that the nonmoving party has failed to produce evidence that creates "a genuine dispute for the jury." Id.; Fed R. Civ. P. 56(e). The nonmoving party can defeat a properly supported summary judgment motion by pointing to specific facts upon which "a reasonable jury could return a verdict" in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

2. Section 1962(c) RICO Claim

RICO provides a private right of action for "[a]ny person injured in his business or property by reason of a violation of" one of the statute's prohibited activities listed in 18 U.S.C. § 1962. 18 U.S.C. § 1964(c). Section 1962(c) makes the following unlawful:

for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

To establish a § 1962(c) violation, a plaintiff must prove four elements: "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985). Further, a plaintiff must demonstrate that the predicate acts "not only [were] a but for' cause of his injury, but [were] the proximate cause as well." Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992).

Wallace contends that Schlueter and Bates violated § 1962(c) by acting through Midwest to procure fraudulent appraisals from Accupraise, with the purpose of luring mortgage borrowers into taking out larger than necessary loans. The Sixth Circuit held that there is a genuine issue of fact as to whether the alleged appraisal scheme proximately caused Wallace's injury and remanded for this Court to decide the remaining elements. Wallace, 714 F.3d at 419. For the reasons stated below, the Court ...

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