McDonough v . First American Title 10-CV-106-SM 1/28/11 UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
Brian McDonough; Melanie McDonough; and Anne N . Posnack, Tr.; for themselves and on behalf of all others similarly situated, Plaintiffs
v. Case N o . 10-cv-106-SM Opinion N o . 2011 DNH 015 First American Title Insurance Company, Defendant
O R D E R
In a putative class action, removed from the New Hampshire
Superior Court, plaintiffs assert a federal claim under the
Racketeer Influenced and Corrupt Organizations Act (“RICO”)
(Count I ) , as well as state common law claims for breach of
contract and unjust enrichment. Plaintiffs are homeowners who
refinanced mortgages. They allege that First American Title
Insurance Company (“First American”), acting in concert with a
“network” of title agents who sold First American title
insurance, collected premiums at an “original rate,” rather than
a lower “reissue rate” to which they were entitled. Before the
court is defendant’s motion to dismiss the federal RICO claim for
failure to state a claim upon which relief can be granted.
Plaintiffs object. For the reasons given, defendant’s motion to
dismiss is granted. The Legal Standard
A motion to dismiss for “failure to state a claim upon which
relief can be granted,” F E D . R . C I V . P . 12(b)(6), requires the
court to conduct a limited inquiry, focusing not on “whether a
plaintiff will ultimately prevail but whether the claimant is
entitled to offer evidence to support the claims.” Scheuer v .
Rhodes, 416 U . S . 232, 236 (1974). That i s , the complaint “must
contain ‘enough facts to raise a reasonable expectation that
discovery will reveal evidence’ supporting the claims.” Fantini
v . Salem State Coll., 557 F.3d 2 2 , 26 (1st Cir. 2009) (quoting
Bell Atl. Corp. v . Twombly, 550 U . S . 544, 556 (2007)).
When considering a motion to dismiss under Rule 12(b)(6), a
trial court “assume[s] the truth of all well-plead facts and
give[s] the plaintiff[s] the benefit of all reasonable inferences
therefrom.” Vernet v . Serrano-Torres, 566 F.3d 254, 258 (1st
Cir. 2009) (quoting Ruiz v . Bally Total Fitness Holding Corp.,
496 F.3d 1 , 5 (1st Cir. 2007)). “To survive a motion to dismiss,
a complaint must contain sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its face.”
Sutliffe v . Epping Sch. Dist., 584 F.3d 314, 325 (1st Cir. 2009)
(quoting Ashcroft v . Iqbal, 129 S . C t . 1937, 1949 (2009)).
Finally, however, a Rule 12(b)(6) motion should be granted if
“the facts, evaluated in [a] plaintiff-friendly manner, [do not]
2 contain enough meat to support a reasonable expectation that an
actionable claim may exist.” Andrew Robinson Int’l, Inc. v .
Hartford Fire Ins. Co., 547 F.3d 4 8 , 51 (1st Cir. 2008)
(citations omitted).
Background
The relevant facts, drawn from the complaint and evaluated
in a plaintiff-friendly manner, are as follows.
Brian and Melanie McDonough (“the McDonoughs”), and Anne
Posnack, each refinanced home mortgages in 2008. The refinanced
mortgages were less than five years old. When they refinanced,
the McDonoughs, and Posnack each purchased lender’s title
insurance policies issued by First American. They were charged a
premium applicable to the original issuance of title insurance,
instead of a lower “reissue rate” that applied when “a borrower
refinances within FIVE years of a recorded first mortgage by an
institutional lender.” (Second Am. Decl. (document n o . 2 - 5 ) , at
16.) At all times relevant to this matter, both First American’s
original rate and its reissue rate were on file with the New
Hampshire Insurance Commissioner. Because they paid the original
rate, rather than the lower reissue rate for which they
qualified, the McDonoughs were overcharged by $234.20, and
3 Posnack was overcharged by $364.70. The named plaintiffs claim
to represent many others who are similarly situated.
First American sells title insurance through title agents.
Different title agents handled the transactions described in the
complaint: Monique D. Donovan Law Office, LLC (McDonough), and
Mazerolle & Frasca PA (Posnack). Title agents generally conduct
title searches, that yield information necessary to determine
whether a refinancing homeowner qualifies for First American’s
reissue rate. The title agents are paid commissions by First
American that generally consist of a percentage of the premiums
paid for the policies they sell.
First American’s title agents operate under “title agency
agreements with First American, pursuant to which they arrange,
sell, produce, issue and otherwise assist First American in
issuing title insurance policies.” (Second Am. Decl. ¶ 7 1 ) .
Each “agency agreement . . . states the conditions under which
the title agent is authorized to issue title insurance policies
on behalf of First American.” (Id. at ¶ 76.)
The title agents “are not employees of First American, but
rather they are licensed, nonexclusive agents who work with
different title insurance companies.” (Id. ¶ 72.) They are
4 “separate, independent entities who do not function as
subsidiaries or employees of First American.” (Id.)
“The title agents [conduct title searches and calculate
title-insurance premiums] subject to First American’s direction
and control.” (Id. ¶ 73.) That direction and control
“include[s] the use of standardized systems and procedures for
conducting title searches, for calculating, collecting and
processing payments for title searches and title insurance
policies, and for providing title insurance for lenders and
owners.” (Id. ¶ 75.) First American “has an agent selection
process and audit review program” (id. at ¶ 7 6 ) , “conducts
periodic audits of its title agents” ( i d . ) , and “performs on site
inspections of the title agents’ books and records on an annual
basis” ( i d . ) . First American also “issues the standardized
manuals to be followed by all of the Title Agents in connection
with the production of title insurance policies” (id. ¶ 7 7 ) ; it
“touts . . . [a] title closing production software system
specifically designed by First American for its title agents”
(id. ¶ 7 8 ) ; and it provides its title agents with onsite and
online training for that system ( i d . ) .
In their complaint, and throughout their pleadings,
plaintiffs refer to First American’s “network of title agents.”
5 (Id. ¶ 2.) They allege no facts, however, suggesting any
connection or communication between or among First American’s
title agents. Thus, the phrase “network of title agents” does
not supportably allege any concerted or coordinated activity
between or among those agents.
First American’s title agents also serve as closing or
settlement agents with respect to home purchases. In that role,
they prepare or review the HUD Settlement Statements presented to
homeowners at closing. Those statements list, among other
things, the premium charged and paid for title insurance. In
addition, First American’s title agents, acting as settlement
agents, collect and disburse premium payments to First American.
The following paragraph in the complaint neatly encapsulates
the essence of plaintiffs’ claims:
First American was able to accomplish its fraudulent scheme because of the dual role performed by the Title Agents, i.e., that of Settlement Agent as well as that of Title Agent. This has enabled First American to control the closing, have the fraudulent inflated charges inserted into the HUD Settlement Statements, and receive the misappropriated sums. Because the Title Agent and Settlement Agent were one and the same, the plaintiffs and class members were lulled into a false sense of security by the Title Agent/Settlement Agent that the correct amount was charged for title insurance. And there are no checks and balances in place - there was no helpful, or at least uninterested, entity conducting the closing, to review the paperwork and explain the charges (including
6 the title insurance charges) to the homeowner, and to potentially discover the fraudulent charge and point it out to the homeowner.
(Id. ¶ 83.)
Regarding the underlying mail and wire fraud allegations —
the criminal conduct allegedly engaged in by First American and
its title agents — plaintiffs allege that: (1) First American
and/or its title/settlement agents transmitted to mortgage
lenders, by mail or by wire, inflated title insurance premium
figures; (2) mortgage lenders sent plaintiffs Good Faith
Estimates of closing costs, by mail, that included the inflated
insurance premiums; (3) mortgage lenders transmitted, by wire,
loan proceeds used to pay the inflated insurance premiums; (4)
title/settlement agents transmitted to First American, by wire,
insurance premiums; and (5) title/settlement agents transmitted
to mortgage lenders, by mail or wire, title insurance policies.
Discussion
Plaintiffs’ civil RICO claim asserts that First American
used an enterprise, consisting of itself and its title agents, as
a vehicle to commit mail and wire fraud. First American moves to
dismiss plaintiffs’ RICO claim on grounds that plaintiffs have
failed to plead a valid “association-in-fact” RICO enterprise,
and that they have failed to allege a predicate act of mail or
7 wire fraud with the degree of particularity required by Rule 9(b)
of the Federal Rules of Civil Procedure.
A. RICO Legal Standards
Plaintiffs bring their RICO claim under 18 U.S.C. § 1962(c),
which provides:
It shall be unlawful for any person employed by or associated with any enterprise engaged i n , 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.
The statute’s purpose is two-fold: to protect “a legitimate
‘enterprise’ from those who would use unlawful acts to victimize
it” and to protect “the public from those who would unlawfully
use an ‘enterprise’ (whether legitimate or illegitimate) as a
‘vehicle’ through which unlawful . . . activity is committed.”
Cedric Kushner Promotions, Ltd. v . King, 533 U.S. 158, 164 (2001)
A valid claim under section 1962(c) “must allege each of the
four elements required by the statute: (1) conduct (2) of an
enterprise, (3) through a pattern (4) of racketeering activity.”
Soto-Negrón v . Taber Partners I , 339 F.3d 3 5 , 38 (1st Cir. 2003)
(quoting N . Bridge Assocs., Inc. v . Boldt, 274 F.3d 3 8 , 42 (1st
8 Cir. 2001), citing Sedima, S.P.R.L. v . Imrex Co., 473 U.S. 479,
496 (1985)). The statute defines “enterprise” as any “legal
entity,” such as an “individual, partnership, corporation,
association” and “any other union or group of individuals
associated in fact although not a legal entity.” 18 U.S.C. §1961
(4). “[T]he Supreme Court has admonished that RICO and the term
‘enterprise’ be construed expansively.” United States v . Cianci,
378 F.3d 7 1 , 78-79 (1st Cir. 2004) (citing Sedima, 473 U.S. at
497-98; Turkette, 452 U.S. at 586-87.)
B. Association-in-Fact Enterprise
In their complaint, plaintiffs generally characterize the
contractual relationships between First American and its various
title agents as creating a RICO association-in-fact enterprise.
But First American points out that the complaint does not
adequately plead facts showing First American to be sufficiently
distinct from the enterprise described in the complaint; does not
adequately allege the necessary structural features of a RICO
association-in-fact enterprise (specifically, First American’s
title agents are not alleged to have had any relationship with
each other); and does not allege a RICO enterprise independent of
the purported racketeering acts on which First American is said
to have engaged.
9 Defendant’s first “association-in-fact” challenge raises a
question not yet addressed by the court of appeals for this
circuit — whether a corporate RICO “person” can associate with
non-employee agents, such as the title agents described here, to
form a RICO enterprise. Though some district courts in other
circuits have answered that question in the affirmative (see
e.g.,Levine v . First American Title Ins. Co., N o . 09-842, 2010 WL
152133 (E.D. Pa. Jan. 1 4 , 2010); Conte v . Newsday, Inc., 703 F.
Supp. 2d 126, 136 n . 6 (E.D.N.Y. 2010)), there is reason to think
otherwise, and, indeed, district court decisions in this circuit
suggest a different result. See e.g., Mear v . Sun Life Assurance
Co. of Canada, N o . 06-12143-RWZ, 2008 WL 245217, at *9 (D. Mass.
Jan. 2 4 , 2008)(holding complaint that alleged defendant
corporation and its agents comprised RICO enterprise, failed to
state a claim “[b]ecause Sun Life, a corporation, can only act
through its employees, officers, subsidiaries and agents.”); see
also, Rodriquez v . Banco Central, 777 F. Supp. 1043, 1054 (D.P.R.
1991)(“[T]he distinction requirement is not satisfied by merely
naming a corporation and its employees, affiliates, and agents as
an association-in-fact”)(emphasis added). It is not necessary to
resolve the issue in this case, however, because First American’s
second point, regarding the structure of the alleged enterprise,
is correct. (The court likewise does not decide whether an
10 enterprise independent of the purported racketeering acts
allegedly engaged in has been adequately pled.)
In Boyle v . U.S., 129 S . C t . 2237 (2009), the Supreme Court
held that “an association-in-fact enterprise must have at least
three structural features: a purpose, relationships among those
associated with the enterprise, and longevity sufficient to
permit these associates to pursue the enterprise’s purpose.”
Boyle, 129 S . C t . at 2244 (emphasis added). See also Turkette,
452 U.S. at 583 (explaining that existence of a RICO enterprise
“is proved by evidence of an ongoing organization, formal or
informal, and by evidence that the various associates function as
a continuing unit”).
Explaining the structural attributes of an “association-in-
fact,” the Court stressed the importance of interrelationships
between or among the association’s parts:
[T]he term structure means “[t]he way in which parts are arranged or put together to form a whole” and “[t]he interrelation or arrangement of parts in a complex entity.” American Heritage Dictionary 1718(4th ed. 2000)).
...
The concept of “association” requires both interpersonal relationships and common interest.
129 S . C t . at 2244
11 The First Circuit’s pre-Boyle decisions are generally
consistent with Boyle’s “relationships” requirement. See e.g.,
United States v . Cianci, 378 F.3d 7 1 , 82 (1st Cir. 2004)(“those
associated in fact [must] ‘function as an ongoing unit’ and
constitute an ‘ongoing organization.’ ”. Id. (quoting United
States v . Patrick, 248 F.3d 1 1 , 19 (1st Cir. 2001)).
Here, plaintiffs complaint seems to allege a RICO
“enterprise” consisting of a “hub-and-spoke” structure, with
First American as the hub and the various agents at the ends of
the spokes. But the complaint does not allege facts supporting a
claim of any relationship between or among the title agents.
Plaintiffs say that the complaint nevertheless adequately alleges
that First American and its title agents were organized as a
“network” consisting of much more than a simple hub-and-spoke
conspiracy.
The First Circuit has yet to decide whether a hub-and-spoke
organization can qualify as an “enterprise” for RICO purposes.
The Third Circuit’s post-Boyle decision in In re Insurance
Brokerage Antitrust Litigation, 618 F. 3d 300 (3rd Cir. 2010),
however, persuasively addresses the point, as do pre-Boyle cases
from the District of Massachusetts, in which hub-and-spoke
12 structures have been held not to qualify as RICO “enterprises.”
See In re Pharm. Indus. Av. Whsle. Price Litig., 263 F. Supp. 2d
172, 182-83 (D. Mass. 2003); In re Lupron®, 295 F. Supp. 2d 148,
173-74 (D. Mass. 2003).
In In re Insurance Brokerage, the Third Circuit upheld the
dismissal of plaintiff’s RICO claim for failure to adequately
allege an “enterprise.” 618 F. 3d at 370. Plaintiffs’ complaint
alleged facts suggesting that the defendant insurance broker was
at the center of an association consisting of the broker as the
hub, and numerous insurers at the end of the spokes. The court
of appeals, applying the relatively new pleading requirements
described in Twombly, 550 U.S. at 556, held that plaintiffs had
not pled facts “plausibly implying the existence of an enterprise
with the structural attributes identified in Boyle.” 618 F. 3d at
370. The court found the complaint deficient in failing to plead
Boyle’s second structural attribute: “‘relationships among those
associated with the enterprise.’” Id. (quoting Boyle, 129 S . C t .
at 2244). Allegations that the broker had similar, but distinct
agreements with each insurer, and that each insurer knew the
identities of the broker’s other insurer-partners, did not
plausibly imply the existence of relationships between or among
the insurers. Id. at 369-70. In short, plaintiffs “failed to
plead any facts plausibly suggesting collaboration among the
13 insurers.” Id. at 374. . See also Conte, 2010 WL 1257887,
at *5 (holding that hub-and-spoke structure does not meet Boyle’s
second structural requirement).
In this case, plaintiffs heavily rely on Levine, 682 F.
Supp. 2d at 456, in urging a different outcome. While Levine is
factually quite similar, and involves the same defendant, First
American, First American appears not to have interposed a hub-
and-spoke defense in that case. In any event the opinion does
not address the absence of any plausible allegations of an
interrelationship between or among the title agents.
Not only is the Third Circuit’s reasoning in In re Insurance
Brokerage persuasive, but pre-Boyle decisions in the First
Circuit also support the dismissal of civil RICO claims that
allege only hub-and-spoke structures. In In re Pharmaceutical
Industry, for example, the court held that hub-and-spoke
structures are not RICO “enterprises.” 263 F. Supp. 2d at 182-
83. In that case, the plaintiffs “allege[d] twenty-one separate
‘AWP Enterprises,’ each consisting of a single defendant
pharmaceutical company and all the medical providers that
prescribe its drugs with a reported AWP.” 263 F. Supp. 2d at
182. The court characterized the alleged enterprise as “a hub-
and-spoke design, with an individual drug manufacturer at the
14 center dealing independently with each individual provider as the
spoke.” Id. at 183.
In ruling that such a structure does not comprise a RICO
enterprise, the court looked to the “analogous context” of anti-
trust, where “the Supreme Court has rejected a similar alleged
hub-and-spoke conspiracy which had a pattern of separate spokes
meeting at the common center without the rim of the wheel to
enclose the spokes.” Id. (citing Kotteakos v . United States, 328
U.S. 750, 769 (1946)). The court cautioned, as did the Supreme
Court in Kotteakos, “‘against confusing the common purpose of a
single enterprise with the several, though similar, purposes of
numerous separate enterprises of like character.’” Id. (quoting
Kotteakos, 328 U.S. at 769. See also In re Lupron®, 295 F. Supp.
2d at 173-74, & n.29 (holding that an alleged organization,
consisting of a pharmaceutical products company and all doctors
and other distinct providers of medical services who dispensed
the drug Lupron® to patients, did not comprise a RICO
association-in-fact enterprise).
The complaint here fails to allege a RICO “enterprise”
because the allegations plausibly suggest only a hub-and-spoke
structure, with no relationships between the title agents — no
connecting rim. As in In re Insurance Brokerage, plaintiffs
15 merely allege a series of distinct, albeit similar, contractual
relationships between First American and its independent title
agents. The complaint does not allege any relationship between
or among the title agents (the spokes). Finally, the complaint’s
general allegation that the title agents worked as a “network”
does not suffice. It is a mere conclusory allegation, and
cannot, without more, “plausibly suggest[...] collaboration among
the insurers.” In re Insurance Brokerage, 618 F. 3d at 374.
And, the allegation is belied by plaintiffs’ own detailed factual
allegations describing only individual relationships between
First American and its distinct title agents.
For these reasons, the court finds that the complaint fails
to plausibly allege “relationships among those associated”
(Boyle, 129 S . C t . at 2244), and so fails to state a civil RICO
claim.
Conclusion
Because the complaint does not allege a valid association-
in-fact RICO enterprise, First American is entitled to dismissal
of plaintiffs’ RICO claim. Accordingly, First American’s motion
to dismiss (document n o . 10) is granted. The Second Amended
Complaint is dismissed. Plaintiffs may file a third amended
complaint, within thirty (30) days of the date of this order,
16 limited to correcting the pleading deficiencies addressed, if it
can do so supportably and in good faith (see Fed. R. Civ. P.
11(b)).
SO ORDERED.
January 2 8 , 2011
cc: Edward K. O’Brien, Esq. Charles A . Newman, Esq. Elizabeth T . Ferrick, Esq. Hannah F. Preston, Esq. Andru H. Volinsky, Esq.