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Civil RICO Charges Against Mortgage Servicer and Insurers Upheld

Real estate transactions can be extremely difficult for the typical borrower to understand. We have all sat at the settlement table and have not completely understood all of the myriad number of payments and charges. But, when a mortgage company and insurers acting together (in this case, the defendants) engage in fraudulent conduct in connection with the cost of that insurance, these defendants can be sued under RICO.

In the above case, the district court judge found the borrowers had adequately pleaded facts which showed (1) the defendants had the requisite intent to defraud; and (2) the defendants knowingly participated in the scheme as they had the motive for committing fraud and the opportunity to do so. This decision provides an excellent blueprint for analyzing a RICO claim consisting of predicate acts of mail and wire fraud, and is an example of what kind of civil fraud case the courts will sustain as racketeering charges, i.e., those with associational activity and criminal-like behavior such as kickbacks, collusion, and concealment. For a pdf view of the case file, please click here.

In this case, the plaintiffs alleged that the defendant, GMACM—the fifth largest residential loan servicer in the United States—had an agreement with the insurers whereby GMACM would purchase lender-placed insurance for the loans it serviced from the insurers, who would then provide GMACM with kickbacks. Despite receiving these kickbacks, GMACM would still bill the plaintiffs for the full cost of the insurance it had originally paid to the insurers, rather than billing them for the post-kickback cost that GMACM had effectively paid. The plaintiffs further alleged that the insurer defendants directly participated in the racketeering enterprise by “(paying) kickbacks to GMACM, (disguising) those kickbacks by funneling them through an affiliate, and (preparing) and (issuing) fraudulent and extortionate mailings.”

In essence, the court found that the RICO allegations met the heightened pleading standard established by Rule 9(b). Id., at 12. The plaintiffs alleged the required particularity, i.e., they set forth specific details about the “who, what, when, where, and how of the alleged fraudulent scheme.” As a result, the plaintiffs sufficiently alleged facts that gave rise to a strong inference of fraudulent intent, and adequately established that defendants had the requisite intent to deceive or defraud. Id. at 14.

As a result, accepting the plaintiffs’ well-pleaded allegations as true, the court concluded that they have adequately established that defendants had the requisite intent to deceive or defraud. Id. at 16. Accordingly, the plaintiffs sufficiently pleaded this element of the mail fraud violation with the particularity required under Rule 9(b), and the civil RICO claim was sustained. Id.