1RECOMMENDED FOR FULL-TEXT PUBLICATIONPursuant to Sixth Circuit Rule 206ELECTRONIC CITATION: 2000 FED App. 0153P (6th Cir.)File Name: 00a0153p.06UNITED STATES COURT OF APPEALSFOR THE SIXTH CIRCUIT_________________SANDRAVANDENBROECK, anindividual; EUGENENICHOSONand CAROLNICHOSON, husband and wife;ABELSOTOand DENISESOTO, husband and wife,Plaintiffs and ClassRepresentatives-Appellants,v.COMMONPOINTMORTGAGECOMPANY, fka AndersonRealty, Inc., fka AllstateMortgage & FinancialCorporation, fka AAAMortgage & FinancialCorporation, d/b/aCommonPoint Mortgage;MICHAELANDERSON, anindividual,Defendants-Appellees.;>1No. 98-2266Appeal from the United States District Courtfor the Western District of Michigan at Grand Rapids.No. 97-00826—Gordon J. Quist, District Judge.2VanDenBroeck, et al. v. CommonPointMortgage Co., et al.No. 98-22661Section 1962(c) of the Racketeer Influenced and CorruptOrganizations Act provides that “[i]t shall be unlawful for any personemployed by or associated with anyenterprise. . . to conduct . . . suchenterprise’s affairs through a pattern of racketeering activity . . . .” 18U.S.C. § 1962(c) (1999) (emphasis added).Argued: March 16, 2000Decided and Filed: May 1, 2000Before: MERRITT, NELSON, and DAUGHTREY,CircuitJudges._________________COUNSELARGUED: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) RICOfraud case,1brought by borrowers who allege that thedefendant 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 toNo. 98-2266VanDenBroeck, et al. v.CommonPoint Mortgage Co., et al.11particularity” which would show either intent to defraud orreliance on the alleged misrepresentation. While in somecases intent can be inferred from the facts, the differingdefinitions of “loan discount” and “discount point” clearlyindicate that intent cannot be inferred in this case. There mayhave been some confusion about the meaning of “points” and“discount,” but such confusion does not amount to fraud.Likewise, reliance cannot be inferred from the mere act ofentering into the transaction because plaintiffs simply wanteda loan, and there is no showing that they expected a belowmarket rate. In light of the fact that the borrowers hadquestionable credit, could not get loans from regular lenders,and had to turn to a “subprime” lender, there is no basis forthe proposition that they expected a below-market rate.Although the district court declined to reach this issue, wemay affirm the district court’s opinion on different grounds.See Brown v. Tidwell, 169 F.3d 330, 332 (6th Cir. 1999). Wefind that plaintiffs have failed to plead the elements of fraudwith sufficient specificity, having failed to allege or profferany evidence showing an intentional misrepresentation andreliance thereon. We therefore hold that plaintiffs have failedto adequately allege or proffer evidence of the predicate actsof mail fraud and wire fraud which form the basis of theirRICO claim. Accordingly, we AFFIRM the decision of thedistrict court on this ground.10VanDenBroeck, et al. v. CommonPointMortgage Co., et al.No. 98-2266within 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 materialmisrepresentation 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 “loandiscount” was a misrepresentation under these circumstances,but it is clear that plaintiffs have failed to allege facts “withNo. 98-2266VanDenBroeck, et al. v.CommonPoint Mortgage Co., et al.3dismiss with respect to the RICO claim and the several Truthin Lending Act claims of the plaintiffs. In addition, JudgeQuist denied the plaintiffs’ motion for leave to amend thecomplaint to include an additional Truth in Lending Act claimand to correct any deficiencies in the existing claims.Plaintiffs now appeal the court’s decision to dismiss theirRICO claim, and further appeal the district court’s denial oftheir motion to amend the complaint to correct anydeficiencies which the court found. Plaintiffs do not appealthe decision to dismiss the original Truth in Lending Actclaims. The district court dismissed the RICO claim on theground that the complaint failed to allege a proper RICO“enterprise” and did not reach the question of whether thecomplaint properly alleged fraud. We agree with the districtcourt that the “enterprise” element of the RICO tort isdefective, but we think this defect could be remedied byamendment. The fraud element is also defective, and weconclude that it cannot be remedied by amendment. Hencewe affirm the judgment of the district court.I. Allegations of ComplaintPlaintiffs, as representatives of their class, are severalcustomers of CommonPoint Mortgage Company.CommonPoint Mortgage is a so-called “subprime” lender,which makes loans for people with poor credit who havedifficulty obtaining them on their own and then sells the loansin the secondary market. CommonPoint routinely asked theircustomers to sign a “financial services agreement.” Thatagreement provided that CommonPoint would do its best toobtain a loan, and if a loan was provided by a third party,CommonPoint would be entitled to a fee from the customerequal to a certain percentage of the principal of the loan. Theallegation and general theory of plaintiffs’ case is that the“financial services agreement” made CommonPoint the agentor fiduciary of a customer for the purpose of securing a loanfrom a third party, but that CommonPoint in fact made theloan itself rather than seeking a third party lender, andcharged “unconscionable and hidden fees” in the process of4VanDenBroeck, et al. v. CommonPointMortgage Co., et al.No. 98-2266doing 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 CommonPointand 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,No. 98-2266VanDenBroeck, et al. v.CommonPoint Mortgage Co., et al.9fraud claim to determine whether plaintiff has alleged theelements of fraud with sufficient specificity to allow this caseto proceed.IV. Sufficiency of Allegations of FraudAccording to Rule 9(b) of the Federal Rules of CivilProcedure, in a complaint alleging fraud “the circumstancesconstituting fraud . . . shall be stated with particularity.”SeeAdvocacy Organization for Patients and Providers v. AutoClub Insurance Assoc., 176 F.3d 315, 322 (6th Cir. 1999). Inthis case, plaintiffs argue that mail fraud and wire fraud arethe predicate acts which form the basis of their RICO claim.Mail fraud and wire fraud are proven by showing a scheme orartifice to defraud combined with either a mailing or anelectronic communication for the purpose of executing thescheme.We have defined a scheme to defraud as “‘intentional fraud,consisting in deception intentionally practiced to induceanother to part with property or to surrender some legal right,and which accomplishes the designed end.’”Kenty v. BankOne, Columbus, N.A.,92 F.3d 384, 389-90 (6th Cir. 1996)(quotingBender v. Southland Corp., 749 F.2d 1205, 1215-16(6th Cir. 1984)). In other words, in order to present acognizable claim for fraud, the plaintiffs must show thatCommonPoint Mortgage made a material misrepresentationof fact that was calculated or intended to deceive persons ofreasonable prudence and comprehension, and must also showthat plaintiffs in fact relied upon that materialmisrepresentation.See id.at 390.Plaintiff argues that due to the agency or “fiduciary” natureof the relationship between CommonPoint and its customers--wherein CommonPoint was to act as the customers’ agent forthe purpose of securing a loan--plaintiff is relieved of theburden of proving intent and reliance and must only prove amisrepresentation of fact. That argument is meritless. Ourcases make clear that the elements of fraud must be proven8VanDenBroeck, et al. v. CommonPointMortgage Co., et al.No. 98-2266that 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. InFleischhauer v. Feltner, 879F.2d 1290 (6th Cir. 1989), we adopted the holding ofUnitedStates v. Feldman, 853 F.2d 648 (9th Cir. 1988). InFeldman,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 theFeldmancase, whichnecessarily 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 underlyingNo. 98-2266VanDenBroeck, et al. v.CommonPoint Mortgage Co., et al.51385 (6th Cir. 1993). In addition, the Supreme Court has heldthat in order to be held responsible under the Act, a defendantmust have not only participated in the scheme, but must havealso participated in the operation or management of theenterprise itself.See Reves v. Ernst & Young, 507 U.S. 170,183 (1993);see also Stone v. Kirk, 8 F.3d 1079, 1091 (6thCir. 1993). The district court dismissed plaintiff’s RICOclaim for failure to show the existence of an “enterprise” andfailure to show that defendants exerted control over an“enterprise,” and therefore declined to address the furtherallegation that plaintiffs had failed to adequately allege thatdefendants committed the predicate acts of federal mail andwire fraud.The Supreme Court has defined an “enterprise” under theAct as a “group of persons associated together for a commonpurpose of engaging in a course of conduct.”United States v.Turkette, 452 U.S. 576, 583 (1981). An association-in-factenterprise can be proven by showing 1) that the associatedpersons formed an ongoing organization, formal or informal;2) that they functioned as a continuing unit; and 3) that theorganization was separate from the pattern of racketeeringactivity in which it engaged.See Frank v. D’Ambrosi, 4 F.3d1378, 1386 (6th Cir. 1993).The association-in-fact enterprise alleged to exist in thiscase includes CommonPoint and its relationship with thenumerous secondary lenders to which it sells customers’loans. The district court correctly recognized that theelements outlined above have been interpreted to require acertain amount of organizational structure which eliminatessimple conspiracies from the Act’s reach. That is, simplyconspiring to commit a fraud is not enough to trigger the Actif the parties are not organized in a fashion that would enablethem to function as a racketeering organization for otherpurposes. Plaintiffs’ brief agrees, noting that the “hallmark ofa RICO enterprise is its ability to exist apart from the patternof wrongdoing.” Brief for Appellant at 13. All that is6VanDenBroeck, et al. v. CommonPointMortgage Co., et al.No. 98-2266required is some minimal level of organizational structurebetween the entities involved.The district court noted that four steps were undertaken inthe 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 thisstatute 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 sufficientNo. 98-2266VanDenBroeck, et al. v.CommonPoint Mortgage Co., et al.7control over the alleged enterprise under the holding ofRevesv. Ernst & Young, 507 U.S. 170 (1993).III. The Motion to AmendPlaintiffs also challenge the district court’s denial of theirmotion to amend the complaint. Denial of a motion to amendis reviewed for abuse of discretion.See Vild v. Visconsi, 956F.2d 560, 565 (6th Cir. 1992). When CommonPoint’s motionto dismiss had been pending for about seven months,plaintiffs moved the district court to allow them to amendtheir complaint to add an additional Truth in Lending Actclaim, and also to allow them to cure any defects in pleadingwhich the district court found during its review of the pendingmotion to dismiss. The court held that neither delay norprejudice would bar such amendment under theFoman v.Davisstandard and the precedent of this Circuit.See Fomanv. Davis,371 U.S. 178 (1962). However, the court foundthat futility, one of the articulatedFoman v. Davisgrounds forrestriction of the freely given right to amend the complaint,would in this case be grounds to deny amendment. Thedistrict court stressed that it was futility, and not undue delayor prejudice, which was the basis for its denial of the motionto amend.Although the district court was not presented with analternative enterprise theory, we do not believe thatamendment of this complaint would have been futile, butrather that plaintiffs could have amended this complaint toallege a cognizable RICO enterprise. It is elementary that acorporation alone can serve as an enterprise for purposes ofRICO, and pleading the RICO claim in this manner wouldeliminate the burden of proving that the entire secondarylending market was part of the enterprise at issue.See18U.S.C. § 1961(4) (1999) (defining an “enterprise” as “anyindividual, partnership, corporation, association, or other legalentity, and any union or group of individuals associated in factalthough not a legal entity.”) In response to this panel’sinquiry concerning why the plaintiffs did not simply allege