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Ellis v. J.P. Morgan Chase & Co.

United States District Court, N.D. California

January 6, 2015

DIANA ELLIS, ET AL., Plaintiffs,
J.P. MORGAN CHASE & CO., ET AL., Defendants.



In July of 2012, named plaintiffs Diana Ellis, James Schillinger, and Ronald Lazar filed a Class Action Complaint against defendants J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, N.A., and Chase Home Finance LLC (collectively, "Chase" or "defendants"). (Dkt. No. 1.) Plaintiffs allege that Chase engaged in fraudulent practices by charging unnecessary fees in connection with defendants' home mortgage loan servicing businesses. By Order dated June 13, 2013, the Court granted in part and denied in part defendants' First Motion to Dismiss and provided plaintiffs leave to amend their complaint. (Dkt. No. 31 ("Order").) On May 27, 2014, the Court granted plaintiffs' unopposed Motion for Leave to Amend (Dkt. No. 96), and plaintiffs promptly filed their First Amended Complaint ("FAC") (Dkt. No. 97).

Now before the Court is defendants' motion to dismiss plaintiffs' Racketeer Influenced and Corrupt Organizations Act ("RICO") claims. Having carefully considered the papers submitted and the pleadings in this action, oral argument at the hearing held on September 30, 2014, relevant case law, and for the reasons set forth below, the Court hereby GRANTS defendants' motion without leave to amend.[1]


The facts alleged in plaintiffs' original complaint are well-known to the parties and are set forth in substantial detail in the Court's previous Order. For the sake of efficiency, the Court will not repeat them here. Rather, because the substance of the instant motion concerns the sufficiency of plaintiff's allegations vis-a-vis their civil RICO claims, the Court will briefly review the deficiencies it identified in plaintiffs' original complaint with respect to only those claims. The Court will then summarize plaintiffs' amended factual allegations, which represent their attempt to cure the identified deficiencies after discovery.

In dismissing plaintiffs' original RICO claims with leave to amend, the Court stated as follows:

[...] Plaintiffs have not sufficiently identified the structure of the enterprise, nor that Defendants have engaged in enterprise conduct distinct from their own affairs. Throughout the Complaint, Plaintiffs allege that the enterprise includes "subsidiaries, " "affiliated companies, " "intercompany divisions, " and third-party property preservation vendors and real estate brokers. (Compl. ¶¶ 2, 4, 9, 33, 46, 106.) Defendants "order[ed] default-related services from their subsidiaries and affiliated companies, who, in turn, obtain[ed] the services from third-party vendors." (Id. ¶ 40.) These vendors charged Defendants for services, but Defendants marked-up the fees in excess of any amounts actually paid. (Id.) Defendants "provided mortgage invoices, loan statements, payoff demands, or proofs of claims to borrowers" to "demand" payment of fees, but these documents "fraudulently concealed" the true nature of the fees, some of which were "never incurred" at all by Defendants. (Id. ¶¶ 93, 112, 114 & 143.) Defendants also falsely represented to borrowers in statements and other documents that the fees were "allowed by [their] Note and Security Instrument." (Id. ¶¶ 53 & 115.) Plaintiffs allege that the enterprise's common purpose was to "limit[ ] costs and maximiz[e] profits by fraudulently concealing assessments for unlawfully marked-up and/or unnecessary third party fees for default-related services on borrowers' accounts." (Id. ¶ 107.)
These allegations stand in contrast to those alleged in a related action, Bias, et al. v. Wells Fargo & Co., et al., Case No. 12-cv-00664-YGR. Here, Plaintiffs repeatedly state that subsidiaries, affiliated companies, and intercompany divisions are members of the enterprise. However, Plaintiffs fail to specifically identify these members or to provide any factual allegations to detail their involvement or make their involvement in the enterprise plausible. Plaintiffs vaguely allege that unidentified subsidiaries, affiliated companies, and/or intercompany divisions order default-related services from third-party vendors and brokers. No specific factual allegations explain how this occurs, and without this information, the Court cannot ascertain the structure of the alleged enterprise. Nor can the Court determine whether Defendants have engaged in conduct of the enterprise, as opposed to their own affairs.
In addition, the Court notes that the "common purpose" here is the same as that alleged against Wells Fargo in Bias -to limit costs and maximize profits by fraudulently concealing marked-up and/or unnecessary third party fees. However, an associated-in-fact enterprise must consist of "a group of persons associated together for a common purpose of engaging in a course of conduct." Odom, 486 F.3d at 552 (quoting Turkette ). Plaintiffs' Complaint lacks factual allegations that show that the unidentified enterprise members associated together with Defendants for that alleged common purpose. This is unlike in Bias, where plaintiffs alleged that Wells Fargo had associated with third party Premiere Asset Services for a common purpose.

Ellis v. J.P. Morgan Chase & Co., 950 F.Supp.2d 1062, 1089-90 (N.D. Cal. 2013).

In their FAC, plaintiffs have made adjustments to their original allegations. Notably, plaintiffs no longer appear to allege improper fee mark-ups as a basis for their RICO claims.[2] Instead, plaintiffs contend only that defendants have engaged in charging class members for unnecessary default-related services, such as property inspections.

With respect to the existence of a RICO association-in-fact enterprise, plaintiffs allege that the Chase entities, their "property preservation" vendors, and the real estate brokers "formed an enterprise and devised a scheme to defraud borrowers and obtain money from them by means of false pretenses." (FAC ¶ 44.) In particular, plaintiffs allege (i) J.P. Morgan Chase & Co., (ii) J.P. Morgan Chase Bank, N.A., (iii) Chase Home Finance LLC, including their directors, employees, and agents, along with (iv) "property preservation" vendors - including Safeguard Real Estate Properties, LLC d/b/a Safeguard Properties, LLC ("Safeguard"), Mortgage Contracting Services, LLC ("MCS"), and LPS Field Services, Inc. ("LPS") - and (iv) the real estate brokers who provide BPOs for Chase, "together conducted the affairs" of this enterprise. ( Id. ¶ 108.) Plaintiffs specifically allege the enterprise is an "ongoing, continuing group or unit of persons and entities associated together for the common purpose of routinely, and repeatedly, ordering, conducting, and assessing borrowers' accounts for unnecessary default-related services." ( Id. ¶ 109.) Although the members of the Chase enterprise participate in the enterprise, plaintiffs allege that they nonetheless "have an existence separate and distinct from the enterprise. The Chase Enterprise has a systematic linkage because there are contractual relationships, agreements, financial ties, and coordination of activities between defendants, the real estate brokers who perform BPOs, and the vendors that perform property inspections, including Safeguard, MCS, and LPS." ( Id. ¶ 110.)

The crux of plaintiffs' theory concerns the Chase executives' alleged decision to institute a programmed automatic loan management system that performs functions automatically in the event a loan falls into default. The enterprise allegedly operates according to policies and procedures developed and established by the Chase executives. ( Id. ¶ 111.) These executives "control and direct" the enterprise and use the other members of the enterprise to carry out Chase's fraudulent scheme. ( Id. ) On a nightly basis, Chase's automated loan management system reviews all loans and then orders inspections of the delinquent properties, without any human intervention. ( Id. ¶ 113.) Upon receiving the property inspection orders, third-party vendors conduct inspections of the delinquent properties and generate a report to upload to Chase's database. ( Id. ¶ 114.) After a property inspection is completed by the vendors, borrowers are assessed fees for the inspection. ( Id. ¶ 115.) Chase cryptically identifies these fees on borrowers' monthly statements as "Miscellaneous Fees" or "Corporate Advances." ( Id. )

In the pending Motion, defendants make only one argument: that plaintiffs have again failed to state a claim upon which relief can be granted for defendants' alleged RICO violations. Plaintiffs, naturally, ...

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