Fifth Third Bank May Hold Attorney Personally Liable for Fraud
Fifth Third Mortgage Co. beat an appeal by an attorney found personally liable for his role in a mortgage fraud scheme.
Ira Kaufman participated in numerous fraudulent closings as a seller’s attorney and owned the title company that was used for several closings, the Seventh Circuit said.
The mortgage company, part of Fifth Third Bancorp, filed seven claims of fraud against Kaufman, alleging he knew that straw buyers has been used, and had made false representations in loan applications.
Kaufman argued the district court erred in finding him personally liable for aiding the fraud in his capacity as owner of Traditional Title Co., LLC, because the Illinois Limited Liability Company Act shields individuals for liability for wrongs committed in their capacity as members of an LLC.
But he was sued in his individual capacity, the appeals court said. The LLC law doesn’t shield him here because he was found liable for his individual acts, the Seventh Circuit said Aug. 9, 2019. He participated individually in the closings as counsel for the seller, the appeals court said. He also personally directed Traditional Title’s employees to conceal the fraud from the bank, it said.
“In these dual roles, he participated in the fraud for his own personal gain,” the court said. “The judgment against Kaufman wasn’t derived solely from Traditional Title’s liability, based on his membership in the LLC.”
Nor is he shielded by being the attorney for the seller, the appeals court said.
Kaufman argued that under Illinois law, there can’t be a conspiracy between an agent and his principal.
But Kaufman waived that argument by failing to raise it in the district court, the appeals court said. And, in any event, there is no legal authority supporting his contention that a lawyer can’t aid a client’s fraud.
Askounis & Darcy P.C. represented Fifth Third Mortgage Co. Strange & Associates represented Kaufman.
Judge William J. Bauer wrote the opinion, joined by Judges Diane P. Wood and Amy J. St. Eve.
The case is Fifth Third Mortgage Co. v. Kaufman, 7th Cir., No. 18-03295, 8/9/19.
State’s Mortgage Fraud Task Force unravels
$7.7 million scheme to defraud lender
Key players cited in ring that led to unprecedented
foreclosure rate in 27-unit building on Chicago’s South Side
CHICAGO –Officials from the Illinois Department of Financial and Professional Regulation’s (IDFPR) Mortgage Fraud Task Force (MFTF) today announced a series of disciplinary actions, including $769,000 in fines, against 16 licensees—including a title company, 7 mortgage companies, 6 loan originators, and 2 appraisers—plus three unlicensed companies and a number of straw buyers, all of which were involved in an alleged $7.7 million scheme to defraud lenders in a rehabbed 27-unit condominium building located at 4725 S. Michigan Avenue and other properties on Chicago’s South Side. All 27 apartments at 4725 S. Michigan are in foreclosure.
“This is the first time that we have seen a case in which all of the building’s units are in foreclosure,” said Brent E. Adams, IDFPR Secretary. “We believe this case will serve as a dramatic example of the damaging ripple effect that mortgage fraud has on communities by lowering the property values of neighboring homeowners.”
The type of fraud scheme alleged by IDFPR, which puts entire neighborhoods at risk and can net millions of dollars for the perpetrators, involves complicated financial transactions that can be successfully unraveled partially as a result of the 2004 consolidation of all three state agencies with responsibility for overseeing portions of real estate transactions: from listing a property to transferring the property to a new owner. Illinois is one of the few states in the nation that has the capability to conduct investigations into alleged mortgage fraud within one state agency.
Tipped off by a confidential informant, MFTF investigators late last year began to unravel the alleged fraud that resulted in every unit owner in the building being unable or unwilling to keep up their mortgage payments. The alleged scheme involved title agents, mortgage brokers, loan originators, appraisers, unlicensed real estate brokers and straw-buyers who were induced or compensated to participate in the origination of loans using knowingly false information on loan applications.
According to IDFPR’s investigation, most if not all of the units were alleged to have been sold to straw buyers, beginning in late 2006 and continuing through October 2007, at artificially inflated prices based on fraudulent appraisals. The buyers would allegedly sign loan documents stating that the address was going to be their primary residence when, in fact, they had no intention of ever living there.
At least one of the alleged straw buyers purchased five units claiming that each unit was her primary residence. Often times, the sellers would allegedly ask the buyers to risk their good credit for generous cash kickbacks or on the promise that a bevy of renters will cover the cost of the mortgage. In the end, the buyers failed to make payments, defaulted on their loans and the lenders began the foreclosure process.
According to the informant, Schaumburg-based Traditional Title Company LLC was the alleged ring leader in the fraud and, two of its principals, Ira Kaufman and Elbert Reniva, both of Chicago, were “outwardly committing fraud” by recruiting investors, mortgage brokers, appraisers and straw buyers. Traditional Title’s title insurance license was revoked by IDFPR’s Division of Financial Institutions and the company was fined $24,000. Traditional Title is contesting IDFPR’s revocation.
In its revocation order, IDFPR said that Traditional Title demonstrated “untrustworthiness” in transacting the business of guaranteeing titles. It alleged that the condo development’s seller hired Kaufman as the attorney of record for 19 transactions in which alleged straw buyers signed purchase agreements for properties they could not reasonably afford.
Many of the alleged straw buyers reported inflated incomes from working as employees of E&H Distributors, Inc. IDFPR could not confirm employment and found no evidence that the company was doing business. Some of the alleged straw buyers purchased multiple properties as their primary residence.
In addition to Tradition Title, the MFTF’s investigation also cited and fined several other licensed companies and individuals.
IDFPR’s Division of Banking revoked, fined and/or disciplined the licenses of:
- AM Mortgage Corp., Lincolnwood (Revoked license; $100,000 fine)
- Atlas Preferred LLC, Chicago (Revoked license; $100,000 fine)
- Exclusive Bancorp, Inc, Lincolnwood (Revoked license; hiring unlicensed loan originator Arfeen S. Ahmed; $100,000 fine)
- KRK Financial Services, Inc. (dba KRK Mortgage Bancorp, Inc.), Chicago (Revoked license; $100,000 fine)
- Elite Financial Investments, Inc., Oak Brook (90-day suspended license; $25,000 fine)
- Two other mortgage companies: C.D.K. USA Mortgage in Chicago and Country Mortgage Services, Inc. in Arlington Heights; each were operating on previously revoked licenses. They also were fined $100,000 each.
- Theodore Cardenas of Schaumburg (Revoked license; $20,000 fine)
- John Karapournos of Skokie (Revoked license; $20,000 fine)
- Razzak Khader of Morton Grove (Revoked license; $20,000 fine)
- Zarak Khan of Chicago (Revoked license; $20,000 fine)
- Sara Mian of Niles (Revoked license; $20,000 fine)
- Jeff Townsend of Glendale Heights (Revoked license; $20,000 fine)
- Arfeen S. Ahmed (Cease and desist unlicensed loan origination)
IDFPR’s Division of Professional Regulation also filed formal complaints against the following licensed professionals:
Real Estate Appraisers (complaints seeking revocation, suspension or other disciplinary action)
According to investigators, Muzaffar and Powell allegedly inflated the value of the properties by $50,000-$75,000, failed to select appropriate comparable sales, and failed to accurately reflect certain information necessary for a valid appraisal.
In addition, ENH Services LLC, Zeal Management LLC, and Eliot Higueros were all charged with unlicensed practice as real estate brokers for accepting commissions on the sale of condos at 4725 South Michigan. In multiple instances, ENH and Zeal are alleged to have received commissions of more than $20,000 on the sale of single units.
Due to the nature of the investigation—including possible evidence of criminal fraud—IDFPR has referred this case to the Federal Bureau of Investigation for further review.
The Mortgage Fraud Task Force (MFTF)—which consists of representatives from the Illinois Divisions of Financial Institutions, Banking, and Professional Regulation—was formed four years ago to ensure that businesses and individuals involved in real estate transactions comply with the strict standards of conduct established by state laws. Since its inception, the MFTF has taken disciplinary action against more than 100 persons and entities and assessed fines of almost $2 million and conducted a regulatory sweep of more than 150 mortgage companies.
#DidYouKnow The former chairman of Taylor, Bean & Whitaker (“TBW”), Lee Farkas, was convicted by a jury of bank fraud for misappropriating almost $3 billion from Colonial Bank to, among other things, cover TBW’s operating expenses. Both TBW and Colonial Bank collapsed. #bankers
— LawsInTexas (@lawsintexasusa) August 10, 2019
Texas 5th Circuit Opinion(s) versus 7th Circuit
“…Fifth Circuit and the Texas Supreme Court clarifying that attorneys have qualified immunity from the attacks of litigants like the Burkes. See, Troice v. Proskauer Rose, L.L.P., 816 F.3d 341 (5th Cir. 2016); Cantey Hanger, L.L.P. v. Byrd, 467 S.W.3d 477 (Tex. 2015). ”
“Yesterday the Fifth Circuit issued another opinion on attorney immunity. In Troice v. Greenberg Traurig, LLP, the Fifth Circuit took head on the issue of whether supposed criminal conduct on the part of an attorney is an exception to attorney immunity. Specifically, the court examined with an attorney who had performed legal services on behalf of a client engaged in a Ponzi scheme could also be subjected to liability from third parties who were the victims of the scheme. The Fifth Circuit concluded, that work performed by an attorney, that involves the provision of legal services, is protected by immunity (whether classified by others as wrongful, fraudulent or criminal). See, Troice v. Greenberg Traugig, L.L.P., 2019 WL 1648932 (5th Cir., April 17, 2019). Identical to Troice, Attorney Defendants herein are immune from liability to third parties such as the Burkes in connection with legal services that Attorney Defendants provided to Deutsche Bank and Ocwen. “
Citation from Burkes’ Second Response to Second Motion to Dismiss, Sept 30, 2019
Second, Kilpatrick claims that because it was Omnicell’s attorney, the attorney immunity doctrine shields it from liability. “Under Ohio law, attorneys enjoy immunity from liability to third persons arising from acts performed in good faith on behalf of, and with knowledge of, their clients. There is no immunity, however, where attorneys act maliciously.” Vector Research, Inc. v. Howard & Howard Attorneys P.C., 76 F.3d 692, 700 (6th Cir. 1996) (citing Scholler v. Scholler, 10 Ohio St.3d 98, 462 N.E. 2d 158, 163 (1984). Under, Fed. R. Civ. P. 9 (b), “malice may be averred generally,” because malice is “difficult to demonstrate at the pleading stage of litigation.” Vector Research, Inc., 76 F.3d at 700 (citations omitted). In Vector, the Sixth Circuit held that the plaintiffs’ allegations that the “attorney defendants acted maliciously,” “shared the malicious motives of their client,” and “improperly handled personal and confidential information” were sufficient to defeat an attorney immunity challenge on a preliminary motion to dismiss. Id. Similarly, in LeRoy, the Supreme Court of Ohio affirmed reversal of the granting of the defendant attorneys’ motion to dismiss on immunity grounds, concluding that the plaintiffs’ “allegations of collusion and conflict of interest fall within the ambit of malice based on the sum total of the underlying facts alleged” and could be pleaded generally. LeRoy v. Allen, Yurasek & Merklin, 872 N.E. 2d 254, 260 (Ohio 2007) . Here, the Complaint is replete with allegations that Omnicell and Kilpatrick “embarked on a scheme” to “mislead and deceive” MV Circuit. Thus, because the Defendants have sufficiently alleged malice, the Court finds that, at this stage of the litigation, it is inappropriate to apply the attorney immunity doctrine to shield Kilpatrick from liability from MV Circuit’s fraud claim. MV Circuit Design, Inc. v. Omnicell, Inc., CASE NO. 1:14 CV 2028, at *14-15 (N.D. Ohio Mar. 24, 2015).
Texas 5th Circuit Makes an Erie Guess (which it has a habit of getting wrong) Again and Refuses to Certify to the Texas Supreme Court
Certification of issues to the Supreme Court of Texas
The Supreme Court of Texas has the discretion to accept certification of determinative questions of Texas law having no controlling Supreme Court precedent. TEX. R. APP. P. 58.1. In deciding whether to certify issues, we consider whether there are sufficient sources of state law to allow us to make a principled rather than conjectural conclusion; the degree to which considerations of comity [such as the likelihood of the issues recurrence] are relevant; and practical limitations of the certification process such as significant delay and possible inability to frame the issue so as to produce a helpful response from the relevant state appellate court. Florida. ex rel. Shevin v. Exxon Corp., 526 F.2d 266, 275 (5th Cir. 1976). Certification, though, is not a panacea for resolution of those complex or difficult state law questions which have not been answered by the highest court of the state. Transcontinental Gas Pipeline Corp. v. Trans. Ins. Co., 958 F.2d 622, 623 (5th Cir. 1992).
The Texas Supreme Court has not directly answered the issues that confront us, and this case involves an area of Texas law that appears to be somewhat in flux. Kelly v. Nichamoff, 868 F.3d 371, 377 (5th Cir. 2017).
Nonetheless, the substantial treatment of the issues by the Texas courts of appeals and the “cogent and sound arguments” presented by counsel give sufficient guidance about what the Supreme Court of Texas would hold. Compass Bank v. King, Griffin & Adamson P.C., 388 F.3d 504, 505 (5th Cir. 2004).
Accordingly, we DENY the motion for certification.