Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-01265/USCOURTS-azd-2_12-cv-01265-0/pdf.json

Nature of Suit Code: 480
Nature of Suit: Consumer Credit
Cause of Action: 28:2201 Declaratory Judgment

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Margaret Galas, individually and on behalf 

of those similarly situated, 

Plaintiff, 

v. 

The Lending Company, Inc., et al., 

Defendants.

No. CV-12-01265-PHX-DGC

ORDER 

 On November 6, 2012, Margaret Galas filed an amended class action complaint 

variously alleging eight causes of action against The Lending Company, Inc. (“TLC”) 

and its executives and their spouses, several Arizona non-profit organizations (“the 

charities”), Franklin American Mortgage Company (“FAMC”), and unidentified Investor 

Mortgagees. Doc. 35. FAMC filed a motion to dismiss and a motion to stay on 

September 20, 2012. Docs. 41-42. On October 9, 2012, TLC and its executives filed a 

motion to dismiss all claims against the executives and counts three, six, and seven 

against TLC (Doc. 45), and on October 29, 2012, Family Housing Resources Inc. 

(“FHR”), one of the charities, filed a notice of joinder in TLC’s motion to dismiss 

(Doc. 66). All motions have been fully briefed. Docs. 46, 63, 71, 77, 78, 80, 88. For the 

reasons that follow, the Court will grant in part and deny in part TLC’s motion to dismiss, 

grant FAMC’s motion to dismiss, and deny as moot FAMC’s motion to stay.1

 

1

 The request for oral argument is denied because the issues have been fully briefed and oral argument will not aid the Court’s decision. See Fed. R. Civ. P. 78(b). 

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I. Background. 

 In order for a mortgage to qualify for Federal Housing Administration (“FHA”) 

insurance, the borrower must make a down payment of at least 3.5%. 12 U.S.C. 

§ 1709(b)(9). To enable borrowers to satisfy that requirement without providing the full 

3.5%, TLC offered a “1% down” program. Doc. 45 at 3. The program required 

borrowers to provide a 1% down payment, after which they would receive a “gift” of the 

additional 2.5% from a charitable organization. Doc. 45 at 3. 

 In May 2010, Plaintiff Margaret Galas applied for and obtained an FHA insured 

mortgage loan from TLC in the amount of $132,554 through the 1% down program. 

Doc. 35 ¶ 116; Doc. 45 at 3. Galas provided 1% of the down payment and received a gift 

of the additional 2.5%, or a total of $3,375, from the charitable organization Family 

Housing Resources (“FHR”). Doc. 45 at 3. 

 Galas claims that she was charged a higher interest rate than she would have been 

had she not participated in the 1% down program. That interest rate, she claims, was 

elevated so that the mortgage could be sold as a “premium” mortgage on the secondary 

market and the additional proceeds of that sale used to repay the 2.5% gift along with an 

“administrative fee.” Doc. 35 ¶ 4-5. Galas alleges that while she was promised a “gift,” 

she and other 1% down borrowers are actually paying for the gift through an increased 

interest rate, and that Defendants misrepresented the terms of the loan. Doc. 35 ¶ 119-25. 

 Galas asserts eight causes of action against various Defendants related to the 

manner in which she received her loan. Doc. 35 at 28-43. The first two claims assert 

violations of portions of the Real Estate Settlement Procedures Act (“RESPA”). 12 

U.S.C. § 2607(a) & (b). Claims three and four allege conspiracy and enterprise liability 

violations of the Racketeer Influence and corrupt Organization Act (“RICO”). 18 U.S.C. 

§ 1962(c) & (d). The fifth claim alleges a violation of the Arizona Consumer Fraud Act. 

A.R.S. § 44-1522. The sixth and seventh claims allege common law claims of fraudulent 

misrepresentation and omission and breach of contract. The eighth cause of action seeks 

declaratory and injunctive relief. 

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II. Legal Standard. 

 When analyzing a complaint for failure to state a claim to relief under Rule 

12(b)(6), the well-pled factual allegations are taken as true and construed in the light 

most favorable to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th 

Cir. 2009). Legal conclusions couched as factual allegations are not entitled to the 

assumption of truth, Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009), and they are insufficient 

to defeat a motion to dismiss for failure to state a claim, In re Cutera Sec. Litig., 610 F.3d 

1103, 1108 (9th Cir. 2010). To avoid a Rule 12(b)(6) dismissal, the complaint must 

plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. 

v. Twombly, 550 U.S. 544, 570 (2007). 

III. Analysis. 

 A. TLC’s Motion. 

TLC and its executives move to dismiss counts six (fraudulent misrepresentation 

or omission) and seven (breach of contract) against TLC and all counts against the 

company’s executives. Doc. 45 at 2. They argue that the RICO, fraud, and breach of 

contract claims are merely a recasting of the RESPA violations alleged in counts one and 

two (which they do not move to dismiss), and that the fraud claim has not been pled with 

sufficient particularity under Rule 9(b). They further argue that all claims against the 

executives must be dismissed because Galas has failed to identify actions by the 

executives that would warrant individual liability. 

 Galas does not contest the dismissal of claim seven for breach of contract. 

Doc. 71 at 32. She maintains, however, that the additional claims are not merely 

derivative of the RESPA violations and that the individual executives should be liable 

because they devised and implemented the loan program. Doc. 35 ¶ 173. 

 1. Defendant TLC. 

Defendants assert that Plaintiff’s fraud-based claims in the third cause of action for 

RICO and the sixth cause of action for fraud do not satisfy the Rule 9(b) requirement that 

a plaintiff must “state with particularity the circumstances constituting fraud.” Fed. R. 

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Civ. P. 9(b). Although the fifth cause of action – violation of the Arizona Consumer 

Fraud Act – is also asserted against TLC and is based on the same fraudulent acts, TLC 

expressly acknowledges that it does not move to dismiss that claim for lack of specificity. 

Doc. 88 at 6, n. 2. The Court will address whether Plaintiff’s factual allegations of fraud 

that underlie claims three and six are specific enough to satisfy Rule 9(b). 

 A common law fraud claim in Arizona has nine elements: (1) a representation, 

(2) its falsity, (3) its materiality, (4) the speaker’s knowledge of its falsity or ignorance of 

its truth, (5) intent that it should be acted upon, (6) the hearer’s ignorance of its falsity, 

(7) his reliance on its truth, (8) his right to rely thereon, and (9) his consequent and 

proximate injury. Fridenmaker v. Valley Nat. Bank of Arizona, 534 P.2d 1064, 1067 

(1975). Galas alleges that TLC said she would receive a “gift” from a charity of 2.5% of 

the purchase price. She alleges that the cost of that gift was actually passed along to her 

through a higher interest rate. Doc. 35 ¶ 159. She alleges that TLC advertised the 1% 

down program, evidencing its intent that borrowers rely on its promise of securing a 2.5% 

gift for them, while it actually intended that the gift would be repaid through proceeds 

derived from increasing the interest rate and selling the premium loans on the secondary 

market. Doc. 35 ¶¶ 191, 193-96. 

 These facts sufficiently identify the fraud allegedly committed by TLC. The Court 

will deny TLC’s motion to dismiss claims three and six for failure to comply with 

Rule 9(b). Galas also briefs the legal theories of fraud by concealment and omission, but 

the Court need not consider additional legal theories in support of the same claims. 

 2. Defendant Executives. 

Galas asserts five claims against TLC Executives (claims 1-3, 5-6). Defendants 

argue that Galas “does not assert any facts or legal theories under which these individuals 

could be held liable.” Doc. 45 at 4. 

 "A corporate officer or director is, in general personally liable for all torts which 

he authorizes or directs or in which he participates, and notwithstanding that he acted as 

an agent of the corporation.” Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 

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1001, 1021 (9th Cir. 1985). Thus, where a plaintiff alleges that an officer authorized, 

directed, or participated in a corporation’s tort or statutory violation, he can be personally 

liable. See United States v. Reis, 366 Fed. Appx. 781, 782 (9th Cir. 2010) (finding 

personal liability where an officer was an actual participant in the acts giving rise to 

corporate liability under the Resource Conservation and Recovery Act); Dish Network, 

LLC v. Sonicview USA, Inc., No. 09-CV-1533, 2012 WL 1965279 *11 (S.D. Cal.), 

reconsideration denied, 2012 WL 4339047 (finding personal liability for corporate 

officers who were “guiding spirits” of corporations statutory violations). 

 To adequately allege individual liability for TLC executives in the alleged RESPA 

violations, Galas need only satisfy the pleading requirements in Rule 8. Galas alleges 

that the executives devised the 1% down program and “approved and directed” the 

corporate actions that form the basis of the RESPA claims. Doc. 35 ¶¶ 156, 163, 173. 

Specifically, the complaint contains allegations that as CEO and Chairman Nickel 

conceived of the 1% down program and ran it on a daily basis. Doc. 35 ¶ 17. Reynolds 

and Johnson are alleged to have participated in running the loan program (Doc. 35 ¶¶ 19, 

21) and Reynolds is alleged to be responsible for selling the loans on the secondary 

market (Doc. 35 ¶¶ 21, 65). Galas also references an email from Reynolds to Nickel and 

Johnson informing them that TLC “fall[s] into the ‘or any party that financially benefits 

from the transactions’” category and suggesting that they should “consider getting rid of 

the gift program after all.” Doc. 35-6 at 2. Galas also references a letter to Reynolds 

from GMAC Bank informing him that GMAC would not participate in the program 

because they believed the charitable gift was ultimately paid by the lender, an improper 

source of funds. Doc. 35-5 at 2. These facts are sufficient to sustain a claim for personal 

liability against the named officers for their parts in the alleged RESPA violations. 

 With respect to the fraud claims (claims 5-6) and the RICO claim that asserts an 

underlying predicate act of fraud, Plaintiff must satisfy the heightened pleading standard 

of Rule 9(b). The Court has already found that Plaintiff adequately pled a claim for fraud 

against TLC. Under Arizona law, corporate officers and directors are not personally 

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liable for a corporation’s torts “merely by virtue of the office they hold,” Marlyn 

Nutraceuticals, Inc. v. Improvita Health Prods., 663 F. Supp. 2d 841, 846 (D. Ariz. 

2009), but they are personally liable when they either participated in the fraud or had 

knowledge of it that “amount[s] to acquiescence.” Bischofshausen, Vasbinder, & Luckie 

v. D.W. Jaquays Min. & Euip. Contractors Co., 700 P.2d 902, 908 (App. 1985). 

 Galas has alleged that the Executive Defendants knew about and personally 

participated in the corporate conduct as noted above. The Court concludes that Galas has 

sufficiently alleged that the named officers either acquiesced or participated in the fraud. 

The Court will deny the motion to dismiss all claims against the corporate officers. 

 3. RICO Claims. 

“Courts have rejected RICO claims when a plaintiff attempts to reformulate 

conduct as mail fraud when it would otherwise not be fraudulent in the absence of a 

statutory violation that is not defined as racketeering activity under RICO.” Johnson v. 

KB Home, 720 F. Supp. 2d 1109, 1116 (D. Ariz. 2010); Smith v. Jackson, 84 F.3d 1213, 

1217 (9th Cir. 1996) (rejecting a RICO claim when the predicate act consisted only of 

alleged violations of copyright laws). Defendants move to dismiss the RICO claims 

because the RICO allegations merely rehash the underlying RESPA claims. They argue 

that RESPA claims, like the underlying copyright violations in Smith, cannot qualify as a 

predicate act under RICO. 

Johnson distinguished Smith, holding that “while RESPA violations do not 

constitute racketeering activity, 18 U.S.C. § 1961(1), a person can engage in mail fraud 

based on fraudulent appraisals without the operation of RESPA.” Johnson, 720 F. Supp. 

2d at 1116. Galas has adequately alleged both statutory and common law fraud claims, 

and further alleges that the fraud was performed through mail and over wires. Galas need 

not rely on RESPA claims where she has alleged conduct that could establish mail fraud 

absent a RESPA violation. The Court will deny the motion to dismiss the RICO claims. 

B. Notice of Joinder. 

Defendant FHR, one of the alleged gift-giving charities, filed a notice of joinder in 

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TLC’s motion to dismiss with respect to claims three, six, and seven. Doc. 61. Galas 

opposed the joinder in responsive briefing because FHR filed an answer before filing the 

notice of joinder in the motion to dismiss. Doc. 77. Because the Court has rejected the 

motion to dismiss with respect to claims three and six and claim seven has been 

dismissed in its entirety, FHR’s joinder in the motion is moot. 

 C. FAMC’s Motion. 

FAMC purchases mortgages on secondary markets. Doc. 41 at 4. Galas alleges 

that an integral part of the fraudulent scheme was raising interest rates on the 1% down 

mortgages so that they could be resold on the secondary market as premium mortgages. 

Galas alleges that TLC sold these loans to numerous investors and entities, but she does 

not allege that FAMC purchased her mortgage. Because Galas does not allege that 

FAMC had any dealings directly with her, FAMC argues that there is no case or 

controversy between them and moves to dismiss all claims against it under Rule 12(b)(1). 

See Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1140 (9th Cir. 2003). 

 Galas responds that she need not allege that FAMC was the entity that purchased 

her loan because she has alleged that FAMC is a co-conspirator with TLC and other 

defendants and the conspiracy proximately caused her loss. She argues that transferring 

standing to a co-conspirator is similar to transferring standing to a claim’s assignee, as 

authorized by the holding in Sprint Communications Co., L.P. v. APCC services, Inc., 

554 U.S. 269, 274 (2008). Galas maintains that FAMC participated in the conspiracy by 

continuing to purchase the premium mortgages and enabling the conspiracy to continue 

even after receipt of a letter exposing the fraud from a whistleblower employee of TLC. 

Doc. 35 ¶¶ 98-103, 184, 208. Galas cites Oki Semiconductor Co. v. Wells Fargo Bank, 

N.A., 298 F.3d 768 (9th Cir. 2002), in which the Ninth Circuit acknowledged potential 

joint liability on the part of a defendant who was an alleged RICO co-conspirator that 

laundered proceeds of stolen semiconductors. Galas argues that the same type of coconspirator liability should lie against FAMC in this case. 

 The Court has found that Galas has adequately pled a RICO claim. FAMC’s 

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alleged involvement in the conspiracy arose when it continued to purchase the premium 

mortgages despite knowledge of improprieties with the charitable gift and the interest 

rates. Galas alleges that FAMC knew about the improprieties after it received a 

whistleblower’s letter. Doc. 35 ¶ 184. Galas does not allege, however, that that letter 

was received before her mortgage had been sold on the secondary market. Doc. 35 

¶¶ 96-111. Even if FAMC was a RICO co-conspirator after the receipt of the letter, 

Galas has not adequately alleged that it was part of the conspiracy when she suffered her 

loss. Galas has not alleged a causal relationship between any of FMAC’s actions and the 

harm she allegedly suffered by paying a higher interest rate. As a result, all claims 

against FMAC will be dismissed. FAMC’s motion to stay pending consideration of its 

motion to dismiss (Doc. 42) will be denied as moot. 

 IT IS ORDERED: 

1. TLC’s motion to dismiss (Doc. 45) is granted in part and denied in part. 

Claim seven for breach of contract is dismissed. 

 2. FAMC’s motion to dismiss (Doc. 41) is granted.

 3. FAMC’s motion to stay (Doc. 42) is denied as moot. 

 Dated this 25th day of January, 2013. 

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