1

RECOMMENDED FOR FULL-

Pursuant to Sixth Circ

ELECTRONIC CITATION: 2000 F

File Name: 00a0

UNITED STATES COU

FOR THE SIXTH 

____________

SANDRA VANDENBROECK, anindividual; EUGENENICHOSON and CAROLNICHOSON, husband and wife;

ABEL SOTO and DENISE

SOTO, husband and wife,

Plaintiffs and Class

Representatives-Appellants,

v.

COMMONPOINT MORTGAGECOMPANY, fka AndersonRealty, Inc., fka AllstateMortgage & FinancialCorporation, fka AAAMortgage & FinancialCorporation, d/b/aCommonPoint Mortgage;MICHAEL ANDERSON, anindividual,

Defendants-Appellees.

Appeal from the United St

for the Western District of Mic

No. 97-00826—Gordon J. Q
2 VanDenBroeck, et al. v. CommonPoint

Mortgage Co., et al.

No. 98-2266

1Section 1962(c) of the Racketeer Influenced and Corrupt

Organizations Act provides that “[i]t shall be unlawful for any personemployed by or associated with any enterprise . . . to conduct . . . suchenterprise’s affairs through a pattern of racketeering activity . . . .” 18U.S.C. § 1962(c) (1999) (emphasis added).

Argued: March 16, 2000 

Decided and Filed: May 1, 2000

Before: MERRITT, NELSON, and DAUGHTREY,Circuit

Judges.

_________________

COUNSEL

ARGUED: John E. Anding, DREW, COOPER & ANDING,Grand Rapids, Michigan, for Appellants. John C. Englander,GOODWIN, PROCTOR & HOAR, Boston, Massachusetts,for Appellees. ON BRIEF: John E. Anding, Christopher G.Hastings, DREW, COOPER & ANDING, Grand Rapids,Michigan, for Appellants. John C. Englander, James W.McGarry, GOODWIN, PROCTOR & HOAR, Boston,Massachusetts, Thomas M. Hefferon, GOODWIN,PROCTOR & HOAR, Washington, D.C., for Appellees.

_________________

OPINION

_________________

MERRITT, Circuit Judge. This is a section 1962(c) RICO

fraud case,1 brought by borrowers who allege that the

defendant lender, CommonPoint Mortgage Company,engaged in a pattern of racketeering activity consisting of mailand wire fraud. The gist of the case is that the lender’sundisclosed fees were unreasonable. The appeal arises fromthe district court’s decision to grant the lender’s motion to

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particularity” which would show reliance on the alleged misreprescases intent can be inferred from definitions of “loan discount” and indicate that intent cannot be inferrhave been some confusion about th“discount,” but such confusion dLikewise, reliance cannot be infeentering into the transaction becaua loan, and there is no showing thmarket rate. In light of the facquestionable credit, could not get land had to turn to a “subprime” lethe proposition that they expected 

Although the district court decli

may affirm the district court’s opiSee Brown v. Tidwell, 169 F.3d 33find that plaintiffs have failed to pwith sufficient specificity, having any evidence showing an intentioreliance thereon. We therefore holto adequately allege or proffer evidof mail fraud and wire fraud whiRICO claim. Accordingly, we AFdistrict court on this ground.
10 VanDenBroeck, et al. v. CommonPoint

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No. 98-2266

within a fiduciary relationship as well as in othercircumstances. See, e.g., Kenty v. Bank One, Columbus, N.A.,92 F.3d 384 (6th Cir. 1996) (applying the elements of fraudto the RICO claim of a car buyer against the bank whofinanced his car purchase).

Plaintiffs allege that CommonPoint made a material

misrepresentation to its customers when it charged a “loandiscount” without providing a corresponding decrease in theirinterest rate. They rely upon the glossary of terms whichdefendants provided to their customers. That glossary definesa “discounted loan” to mean that “[w]hen the note rate on aloan is less than the market rate, the lender requires additionalpoints to raise the yield on the loan to the market rate.” J.A.at 238. In addition, plaintiffs argue that a HUD pamphlet forbuyers defines a “loan discount” as a “one time chargeimposed by the lender or broker to lower the rate at which thelender or broker would otherwise offer the loan to you.” J.A.at 259. 

In response, defendants argue that the “loan discount”--

which was charged directly beneath the designated loanorigination fee on the standard form loan agreementCommonPoint employed--is simply a form of points like anorigination fee assessed to cover the administrative costs ofthe loan. For proof of this, they offer the same twodocuments which plaintiffs brought to the attention of thecourt. First, they argue that the glossary used byCommonPoint also included a definition of a “discount point”which was an “[a]mount payable to the lending institution bythe borrower or seller to increase the lender’s effective yield.One point is equal to one percent of the loan amount.” J.A.at 238. In addition, they argue that the same HUD pamphletrelied on by plaintiffs points out that the term “loan discount”is often also called “points” or “discount points.” J.A. at 259.

It seems doubtful that the use of the language “loan

discount” was a misrepresentation under these circumstances,but it is clear that plaintiffs have failed to allege facts “with

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dismiss with respect to the RICO cin Lending Act claims of the plaiQuist denied the plaintiffs’ motiocomplaint to include an additional Tand to correct any deficiencies Plaintiffs now appeal the court’s RICO claim, and further appeal ththeir motion to amend the codeficiencies which the court foundthe decision to dismiss the originclaims. The district court dismissground that the complaint failed “enterprise” and did not reach thcomplaint properly alleged fraud. court that the “enterprise” elemdefective, but we think this defeamendment. The fraud element conclude that it cannot be remediwe affirm the judgment of the dist

I. Allegations of C

Plaintiffs, as representatives o

customers of CommonPoint CommonPoint Mortgage is a so-which makes loans for people wdifficulty obtaining them on their oin the secondary market. Commoncustomers to sign a “financial seagreement provided that Commonobtain a loan, and if a loan was pCommonPoint would be entitled tequal to a certain percentage of the allegation and general theory of “financial services agreement” mador fiduciary of a customer for the pfrom a third party, but that Commloan itself rather than seeking a charged “unconscionable and hidd
4 VanDenBroeck, et al. v. CommonPoint

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No. 98-2266

doing so. Plaintiffs contend that some of CommonPoint’scustomers were charged front-end “discount fees,” whichwere typically 2-5% of the loan amount in the instances inwhich they were charged. In the case of class representativeVanDenBroeck, for instance, the discount fee was 5% of theloan amount on her $63,000 loan, or $3,150, which wassimilar to the origination fee charged. Plaintiffs allege thatthese so-called “discount fees” are supposed to insure lowerinterest rates, but that CommonPoint not only failed toactually lower the interest rates, it routinely inflated theinterest rate even though a lower interest rate could have beenobtained. The interest rates charged the class representativesin this case ranged from 13-16%. In response to thisallegation, defendant argues that the “discount fees” werereally only typical “points” or origination fees assessed as anormal byproduct of obtaining a loan, and were in no wayfraudulent. After closing on the loans, CommonPointroutinely sold the loans to one of a number of secondarymarket lenders who paid CommonPoint a fee based upon thedifference between CommonPoint’s loan rate and thesecondary lender’s rate for the same loan. This was referredto as the “upsell” or “backend fee.” Plaintiffs further allegethat the interest rates ultimately received often exceeded theinterest rates promised in the financial services agreement,and that defendant failed to inform plaintiffs that the loanswere made at a higher rate than could have been obtained.

II. The “Enterprise”

Plaintiffs claimed that this scheme between CommonPoint

and the secondary lenders with which it dealt constituted aRICO association-in-fact “enterprise” under 18 U.S.C.§ 1962(c) (1999) (see footnote 1 for text of § 1962(c)). Inorder to prove a violation of that Act, the plaintiffs must show1) that there were two or more predicate offenses; 2) that an“enterprise” existed; 3) that there was a nexus between thepattern of racketeering activity and the enterprise; and 4) thatan injury to business or property occurred as a result of theabove three factors. See Frank v. D’Ambrosi, 4 F.3d 1378,

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fraud claim to determine whetheelements of fraud with sufficient spto proceed.

IV. Sufficiency of Alleg

According to Rule 9(b) of th

Procedure, in a complaint alleging constituting fraud . . . shall be stateAdvocacy Organization for PatienClub Insurance Assoc., 176 F.3d 3this case, plaintiffs argue that maithe predicate acts which form the Mail fraud and wire fraud are provartifice to defraud combined witelectronic communication for the scheme. 

We have defined a scheme to def

consisting in deception intentionanother to part with property or to and which accomplishes the desigOne, Columbus, N.A., 92 F.3d 38(quoting Bender v. Southland Corp(6th Cir. 1984)). In other wordcognizable claim for fraud, the CommonPoint Mortgage made a mof fact that was calculated or intenreasonable prudence and comprehethat plaintiffs in fact reliemisrepresentation. See id. at 390. 

Plaintiff argues that due to the ag

of the relationship between Commowherein CommonPoint was to act the purpose of securing a loan--pburden of proving intent and relianmisrepresentation of fact. That arcases make clear that the element
8 VanDenBroeck, et al. v. CommonPoint

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that the corporation itself constituted the enterprise, plaintiffsexpressed concern that some Circuits have held that a soleshareholder of a corporation cannot be considered sufficientlydistinct from the corporation itself to justify a holding that hewas “conspiring” with the corporation. According to this wayof conceptualizing the sole shareholder’s status under RICO,a sole shareholder is equivalent to the corporation he ownsand therefore he cannot conspire with himself. Mr. Andersonis the sole shareholder, President, and Treasurer ofCommonPoint Mortgage. 

This concern is misplaced. In Fleischhauer v. Feltner, 879

F.2d 1290 (6th Cir. 1989), we adopted the holding of UnitedStates v. Feldman, 853 F.2d 648 (9th Cir. 1988). In Feldman,the Ninth Circuit held that a sole shareholder was sufficientlydistinct from his corporation by virtue of both the legal shieldwhich the corporate form provides as well as the existence ofemployees and activities apart from the sole shareholder. Thecourt concluded that a RICO ‘person’ can be the soleshareholder in a corporate ‘enterprise’ which forms the basisof a RICO action. See Feldman, 853 F.3d at 656. That courtfurther concluded that a defendant who is the sole shareholderin each of several corporations associated-in-fact could alsoform the basis for a RICO action. See Feldman, 853 F.3d at656. 

We adopted the second holding of the Feldman case, which

necessarily included the first holding. See Fleischhauer, 879F.2d at 1297 (“[T]he fact that Feltner owned 100% of thecorporations’ shares does not vitiate the fact that thesecorporations were separate legal entities.”) The district courtdid not err because it was not presented with this theory ofenterprise liability, but we do conclude that amendmentwould not be futile in this case, based on the fact thatplaintiffs could allege that CommonPoint Mortgage alone wasthe enterprise which was engaged in a pattern of racketeeringactivity. Given that plaintiffs perhaps should now be allowedto amend on the enterprise element if they otherwise have aplausible case, we will address the merits of the underlying

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1385 (6th Cir. 1993). In addition, tthat in order to be held responsible must have not only participated in also participated in the operatioenterprise itself. See Reves v. Ern183 (1993); see also Stone v. KirCir. 1993). The district court diclaim for failure to show the existefailure to show that defendants “enterprise,” and therefore declinallegation that plaintiffs had failed defendants committed the predicawire fraud.

 The Supreme Court has defined 

Act as a “group of persons associapurpose of engaging in a course of Turkette, 452 U.S. 576, 583 (198enterprise can be proven by showpersons formed an ongoing organi2) that they functioned as a continorganization was separate from thactivity in which it engaged. See F1378, 1386 (6th Cir. 1993). 

The association-in-fact enterpri

case includes CommonPoint and numerous secondary lenders to wloans. The district court correelements outlined above have beecertain amount of organizational ssimple conspiracies from the Actconspiring to commit a fraud is noif the parties are not organized in a them to function as a racketeerinpurposes. Plaintiffs’ brief agrees, na RICO enterprise is its ability to eof wrongdoing.” Brief for App
6 VanDenBroeck, et al. v. CommonPoint

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No. 98-2266

required is some minimal level of organizational structurebetween the entities involved. 

The district court noted that four steps were undertaken in

the current scheme. First, CommonPoint obtained theborrower. Second, a secondary lender determined an interestrate at which it would make a loan. Third, CommonPointmade a loan to the borrower at a different rate based on thesecondary lender’s proposed interest rate. Fourth, the loanwas sold to the secondary lender and CommonPoint collecteda “backend” fee. The parties have pointed out that there weredozens of secondary lenders purchasing the loans. There isno allegation that there were a discreet number of secondarylenders that were used, which means that this conspiracycould have transpired with any lender in the secondarylending market. The district court found that these facts donot show any type of mechanism by which this “group”(CommonPoint and the entire secondary lending market)conducted its affairs or made decisions. 

Most cases interpreting the elements applicable to this

statute require evidence of some sort of “chain of command”or other evidence of a hierarchy, even a highly limited one.Evidence of any such hierarchical structure is absent from thisappeal. Although plaintiffs argue that CommonPoint’sroutine use of the “Approval Advice” form--which assuredultimate approval of a loan by a secondary lender beforeCommonPoint issued its own loan to the customer--wasevidence of the enterprise, the use of those forms seems toindicate nothing more than that CommonPoint had a businessrelationship with the secondary lenders. It does not allege orshow that they “function[ed] as a continuous unit.” Turkette,452 U.S. at 583. Due to the fact that the enterprise alleged toexist in this case is too unstable and fluid an entity toconstitute a RICO enterprise, we must AFFIRM the districtcourt’s holding on this issue. In light of this holding, it isunnecessary for this court to further consider the plaintiffs’appeal based on their contention that the district court erredin determining that CommonPoint did not exert sufficient

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control over the alleged enterprise v. Ernst & Young, 507 U.S. 170 (1

III. The Motion t

Plaintiffs also challenge the dist

motion to amend the complaint. Dis reviewed for abuse of discretion

F.2d 560, 565 (6th Cir. 1992). Wheto dismiss had been pending fplaintiffs moved the district courtheir complaint to add an additioclaim, and also to allow them to cuwhich the district court found durinmotion to dismiss. The court heprejudice would bar such amendDavis standard and the precedent ov. Davis, 371 U.S. 178 (1962). that futility, one of the articulated Frestriction of the freely given righwould in this case be grounds to district court stressed that it was fuor prejudice, which was the basis fto amend.

Although the district court wa

alternative enterprise theory, wamendment of this complaint worather that plaintiffs could have aallege a cognizable RICO enterpricorporation alone can serve as an RICO, and pleading the RICO claeliminate the burden of proving lending market was part of the enU.S.C. § 1961(4) (1999) (defininindividual, partnership, corporationentity, and any union or group of inalthough not a legal entity.”) In inquiry concerning why the plaint