CONCLUSION
For the foregoing reasons, HFN’s motion to dismiss is granted in part as to Count HI and
denied in part as to Counts I and II [doc. no. 9-1), AMB’s motion to dismiss is denied [26-1],
and Paragon’s motion to dismiss is granted in part as to Count III and the TILA damages claim
in Counts I and II, and denied in part as to the TILA rescission claim in Counts ] and II [28-1).
Defendants are given leave to file their answers up to and including fourteen days after the date

of this Memorandum Opinion and Order.

SO ORDERED ENTERED: Wh OL 07

HON. RONALD A. GU:
United States Judge

13


Publ’ns Serv., Inc., 411 U.S. 356, 363-68 (1973) (discussing purpose and history of TILA).
Congress was particularly concerned about the practice engaged in by many lenders of
advertising low credit rates to attract customers but then burying the cost of those lower credit
rates by increasing the price of goods sold. Mourning, 411 U.S. at 365. Here, the Murrys claim
that Defendants did just that by advertising low credit rates but then later recouped the cost of

those rates by falsely charging more for title insurance.

A. Accuracy of Finance Charge

To preclude lenders from engaging in the type of scheme alleged by the Plaintiffs, TILA
requires that before a creditor may enter a transaction with a consumer, he must disclose to the
consumer the method by which the creditor determines the principal balance on the loan, the
amount of the finance charge imposed on the loan, the applicable financing rates, and any other
charges which may be imposed in addition to the finance charge. 15 U.S.C. § 1637. In credit
transactions such as the one here, where a security interest is retained or acquired ina
consumer’s principal dwelling, each consumer whose ownership interest will be subject to the
security interest has until midnight of the third business day following his receipt of all necessary
disclosures, as required by TILA, to rescind the transaction. 12 C.F.R. § 226.23. This includes
an accurate statement of the finance charge. /d.; 12 C.F.R. § 226.32. If the creditor does not
fully comply with TILA, i.e., “[i]f the required notice or material disclosures are not delivered,
the right to rescind shall expire 3 years after consummation, upon transfer of all of the
consumer’s interest in the property, upon sale of the property, whichever occurs first.” See 12
C.F.R. § 226.23(a)(3).

The question thus becomes whether the Defendants have violated TILA by failing to

4


724 (1966)). Indeed, it is weil established that “‘in an action to set aside . . . a contract, all
parties who may be affected by the determination of the action are indispensable.” U.S. ex rel.
Hall y. Tribal Dev. Corp., 100 F.3d 476, 480 (7th Cir. 1996) (quoting Lomayaktewa v.
Hathaway, 520 F.2d 1324, 1325 (9th Cir. 1975)).

Any application of Rule 19 “turns on the facts of each case, and the court must employ
pragmatic considerations when making its determination.” Hashop v. Fed. Home Loan
Mortgage Corp., 171 F.R.D. 208, 211 (N.D. Ill. 1997). In determining whether a party is
necessary to the litigation under Rule 19, we must consider the alleged necessary party’s ability
to protect its interest without being joined to the current action. Jd. A party also should be
joined if, in its absence, it will be prejudiced or the already existing parties will be subjected to
multiple or inconsistent obligations. /d, Establishing only one of these criteria is necessary to
establish that the absent party should be joined if feasible. Jd In addition, the term “complete
relief” refers only to relief between persons already parties, and not as between a party and the
absent person whose joinder is sought.” Perrian v. O'Grady, 958 F.2d 192, 196 (7th Cir. 1992).

In this instance, HFN is the kind of party that should be retained for Rule 19 purposes. The
Murrys seek rescission of the mortgage loan that HFN is servicing~the loan upon which, prior to
the commencement of this action, it has collected payments and made adverse credit reports to
credit bureaus. (Second Am. Compl. $10.) In their complaint, the Murrys allege that HFN
claims a right to payment on account of this loan. (/d. § 29.) Based on the facts alleged, if the
original loan is rescinded, HFN will cease to have any interest in this loan. In the interest of
judicial economy, and in keeping with the purpose of Rule 19, the Court may address the rights
and interests of all the litigants regarding the loan at issue. Moreover, the Murrys may wish to

recover late fees or other penalties assessed and collected by HFN. HFN may wish to renew its

9


place that amount in the hands of Loan Arranger without having to list it in the finance charge.
(Id. 9 26.) In essence, the Murrys contend that Loan Arranger and AMB simply listed the
$1,145 as a charge for title insurance to lower the stated finance charge.

From the facts alleged here, it is unclear whether the amount paid to Clearwater Title was
for a bona fide title insurance policy or just a hidden broker’s fee intended for Loan Arranger.
Specifically, because Clearwater Title and Loan Arranger are under common ownership, if the
amount paid to Clearwater Title was not for a title insurance policy at all, it was a broker’s fee.
Tf proven true, these facts would show that Plaintiffs were not given complete disclosure of the
terms of their mortgage Joan and would be entitled to rescission under TILA. What’s more,
because the Murrys were never presented with a TILA disclosure statement that complied with
TILA, they would have up to three years to seek rescission and not three days, as the movants
suggest. See 12 C.F.R. § 226.23. As such, the Plaintiffs have presented a set of facts under

which relief could be granted for rescission under TILA as against all defendants.

B. Assignee Liability under TILA

“Any consumer who has the right to rescind a transaction under section 1635 of this title
may rescind the transaction as against any assignee of the obligation.” 15 U.S.C. § 1641(c).
TILA’s rescission provision effectively abrogates the holder in due course rule, making any
assignee subject to all claims or defenses that the consumer could assert against the creditor
unless the assignee demonstrates, by a preponderance of the evidence, “that a reasonable person
exercising ordinary due diligence, could not determine, based on the documentation required by
this subchapter, the itemization of the amount financed.” 15 U.S.C. § 1641(d){1); see also
Mount v. LaSalle Bank Lake View, 926 F. Supp. 759, 763-64 (N.D. Ill. 1996). If the debtor

6


disclose finance charges, as they are required to do under 15 U.S.C. § 1637. In order to answer
this question, the Court must first consider what constitutes a finance charge for purposes of
TILA,

TILA defines the term “finance charge” as “the sum of all charges, payable directly or
indirectly by the creditor as an incident to the extension of credit.” 15 U.S.C. § 1605(a). The
finance charge does not include fees and amounts imposed by third-party closing agents, such as
settlement agents, attorneys, and escrows and title companies “if the creditor does not require the
imposition of the charges or the services provided and does not retain the charges.” Id; see also
12 C.F.R. § 226.4(c)(7)(i). According to TILA, where the “extension of credit [is] secured by an
interest in real property . . . [fJees or premiums for title examination, title insurance, or similar
purposes” “shall not be included in the computation of the finance charge.” 15 U.S.C. § 1605(e).

TILA does, however, include broker fees, finder’s fees, or similar charges paid to a third party
for arranging or participating in a credit transaction, as items that must be included in the total
dollar amount of a finance charge. 15 U.S.C. § 1605(a).

All three movants argue that because TILA expressly excludes charges for title insurance
from the calculation of a finance charge, the Murrys have failed to state a claim under TILA.

The Court disagrees. In their complaint, the Murrys aver that Clearwater Title and the Loan
Arranger are companies owned and managed by the same individual. (Second Am. Compl. {ff 5-
8.) They contend that the TILA disclosure statement, tendered to Plaintiffs by AMB, fisted a
$1,145 charge for a second title insurance policy that was duplicative, excessive, and
unnecessary. (Jd. J] 25-27.) It is also alleged, on information and belief, that the policy was
actually issued by or reinsured with one of the major title companies. (id. § 24.) The Murrys
contend further that said amount was a hidden finance charge, the sole purpose of which was to

5


214 F.3d at 853. Thus, it is irrelevant that Chicago Title, a much larger title company, quotes a
base rate of $473.80 for the same coverage. (Second Am. Compl. J 22.)

The Murrys’ reliance on 15 U.S.C. § 1641(c) is misguided and does not save their
complaint against Paragon. Under TILA, Congress created a private enforcement scheme
whereby consumers could act as private attorneys general. Davis v. Werne, 673 F.2d 866, 869
(Sth Cir. 1982), An essential part of this plan was to allow those successful plaintiffs to recover
attorney’s fees and other expenses from both originating creditors and assignees, See Fairbanks
Capital Corp, v. Jenkins, 225 F. Supp. 2d 910, 916-17 (N.D. Ill. 2002). By doing so, Congress
ensured that consumers, who are in the best position to discover TILA violations, would have the
necessary economic incentive to pursue claims against their creditors. In construing a statute,
however, a court must read it as an integrated whole so as to give meaning to all its terms. Jd. at
916 (citing Jn Re McFarland, 84 F.3d 943, 946-47 (7th Cir. 1996)). Allowing a claim for
damages to proceed against Paragon here is simply inconsistent with this principle, thus its

motion to dismiss is granted.

(on HEN as a Necessary Party Under Rule 19

The purpose of Rule 19 is to “permit joinder of all materially interested parties to a single
lawsuit so as to protect interested parties and avoid waste of judicial resources.” Moore v.
Ashland Oil, Inc., 901 F.2d 1445, 1447 (7th Cir. 1990). “The general policy of Rule 19, as with
the Federal Rules of Civil Procedure in general, is ‘the impulse . . . toward entertaining the
broadest possible scope of action consistent with fairness to the parties; joinder of claims, parties
and remedies is strongly encouraged.’” Mayer Paving & Asphalt Co. v. Gen. Dynamics Corp.,
486 F.2d 763, 771 (7th Cir. 1973) (quoting United Mine Workers of Am. v. Gibbs, 383 U.S. 715,

8


Minuto Onder Form (06/97)
pee
3?

~ United States District Court, Northern District of Hlinois
Name of anignea Juaee | Ronald A. Guzman Satng Sede Onkr
CASE NUMBER 03 C 5811 DATE 7/6/2004
CASE WILLIE C. MURRY, et al vs. AMERICA’S MORTGAGE BANC, INC., et al
TITLE
[In the following box (a) indicate the party filing the motion, ¢.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:

(1) © Filed motion of [ use listing in “Motion” box above.]

(2) o Brief in support of motion due___.

@) Qo Answer brief to motion due__. Reply to answer briefdue__.

(4) oO Ruling/Hearingon___setfor__at

(5) QO Status hearingfheld/continued to] (set for/re-set for]on__setfor___at

(6) o Pretrial conference[held/continued to} [set for/re-set for]}on____—_esetfor__-—sat_—.
() D Trial{set for/re-set for]on__—at

(8) o [Bench/Jury trial] [Hearing] held/continued to__at

(9) im} This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OOFRCP4(m) OLocal Rule 41.1 COFRCP41(a\(1) C1 FRCP41(a)(2).

(10) MW [Other docket entry} ENTER AMENDED MEMORANDUM OPINION AND ORDER: For the
foregoing reasons, HFN’s motion to dismiss is granted in part as to Count III and denied in part as to
Counts I and II (doc. no. 9-1], AMB’s motion to dismiss is denied [26-1], and Paragon’s motion to
dismiss is granted in part as to Count III and the TILA damages claim in Counts I and I, and denied in
part as to the TILA rescission claim in Counts ] and II [28-1]. Defendants are given leave to file their
answers up to and including fourteen days after the date of this Memorandum Opinion and Order.

ab [For further detail sce order attached to the original minute order.]
No notices required, advised in open court.

No notices required.

Notices mailed by judge's staff.

Notified counsel by telephone.
a | Docketing to mail notices,
Mail AO 450 form.

synod Lawssia "SA

Copy to judge/magistrate judge. yy 3
urtroom : = TAC UO se ade eorioe
co deputy Ln3S Hd 8
initials —_
Ti Datddeinge mpsetted is
Une iene Office roading deputy iinke

Ae


they further allege that this insurance policy was either issued by or reinsured with one of the
major title companies. (Jd. J 24.) The alleged purpose of treating the Clearwater Title charge
was to disguise a finance charge. (Id. 125.) The Court therefore denies AMB, HFN, and

Paragon’s motions as to this ground.

B. Failure to State a Claim
In order to state a claim for a violation of the Illinois Consumer Fraud Act, one must

show that: (1) the defendant engaged in a deceptive act or practice, (2) the defendant intended
that the plaintiff rely on that deception, (3) the deception occurred in the course of conduct
involving trade or commerce, and (4) the act proximately caused damage to the plaintiff.
Jenkins v. Mercantile Mortgage Co., 231 F. Supp. 2d 737, 747 (N.D. Ill. 2002). Showing a
plaintiff's actual reliance is not an element of statutory consumer fraud under the Act, but a valid
claim must still show that the consumer fraud proximately caused her injury. Celex Group, Inc.
v. Executive Gallery, Inc., 877 F. Supp. 1114, 1128 (N.D. Ill. 1995). Omissions or concealment
of material facts in the conduct of trade or commerce constitutes consumer fraud. 815 ILL.
Comp. STAT. 505/2. A material fact exists where a buyer would have acted differently knowing
the information, or if it concerned the type of information upon which a buyer would be
expected to rely in making a decision whether to purchase. Mackinac v, Arcadia Nat'l Life Ins.
Co., 648 N.E.2d 237, 239 (Ill. App. Ct. 1995).

The sine gua non of an allegation of a violation of the Illinois Consumer Fraud Act,
however, is that the defendant actually participated in the scheme to defraud the plaintiff.
Jackson v. South Holland Dodge, Inc., 755 N.E.2d 462, 471 (Ill. 2001); see also Zekman v.
Direct Am. Marketers, Inc., 695 N.E.2d 853, 859 (Ill. 1998). Emphasizing the requirement of

il


objection in a motion for summary judgment, however, at this stage in the litigation, dismissal is

inappropriate. HFN’s motion to dismiss Count I is therefore denied without prejudice.

II. Count III: Illinois Consumer Fraud and Deceptive Practices Act
In Count III, the Murrys allege that HFN, AMB and Paragon violated the Illinois
Consumer Fraud and Deceptive Practices Act (“Illinois Consumer Fraud Act”), 815 ILL. COMP.

StTaT. 505/2. HFN is joined here as a Rule 19 necessary party.

A. Failure to Plead with Particularity
Defendants contend that Count III should be dismissed because it does not satisfy the

heightened pleading standard for fraud under Rule 9(b). A plaintiff must plead a violation of the
Illinois Consumer Fraud Act with the heightened specificity required by Rule 9(b). Gallagher
Corp. v. Mass. Mut. Life Ins. Co., 940 F. Supp. 176, 180 (N.D. Ill. 1996). Rule 9(b) requires that
“{iJn all averments of fraud or mistake the circumstances constituting the fraud or mistake shall
be stated with particularity.” Fep. R. Civ. P. 9(b). This is, in essence, the “who, what, when,
where, and how: the first paragraph of every newspaper story.” DiLeo v. Ernst & Young, 901
F.2d 624, 627 (7th Cir. 1990). At this stage, Rule 9(b) only requires that the plaintiff identify the
alleged misrepresentation, not actually prove that the statement was false. See Bankers Tr. Co.
v. Old Republic Ins, Co., 959 F.2d 677, 683 (7th Cir. 1992).

Plaintiffs’ Second Amended Complaint meets this standard — it alleges that AMB and
Loan Arranger, the who, through the TILA disclosure provided at the time the loan closed, the
when, where and how, did not treat the $1,145 charge by Clearwater Title as a finance charge,
the what of the fraud allegation. (Second Am. Compl. 14-20.) On information and belief,

10


wishes to maintain an action against an assignee for rescission, however, the TILA violation
must be “apparent on the face of the disclosure statement.” 15 U.S.C. § 1641(a). A violation is
apparent on the face of a disclosure statement where the disclosure “can be determined to be
incomplete or inaccurate from the face of the disclosure statement or other documents assigned”
or a disclosure “does not use the terms required” by TILA. /d. The Murrys do not allege that the
TILA disclosure here did not use the proper terms, thus we must examine whether a violation
could have been determined from the face of the disclosure statement.

An assignee reviewing a TILA statement has a duty to inspect the document for
irregularities solely on the face of the document. See Taylor v. Quality Hyundai, Inc., 150 F.3d
689, 694 (7th Cir. 1998). This is a reasonable person standard, which imposes no duty of inquiry
on the assignee. Jd. For example, if the terms of the document were manifestly illegal,
impossible, or conflicted with other terms, the assignee would have some grounds to believe that
there is a TILA violation. Yet even still, there is no duty to look beyond the four corners of the
document to ascertain compliance with TILA. See id; see also Balderos v. City Chevrolet, 214
F.3d 849, 853 (7th Cir. 2000) (holding that knowledge that is apparent only by virtue of special
knowledge is not apparent on the face of a document itself).

As pleaded here, the Murrys have failed to state a claim against Paragon upon which
telief may be granted. The Murrys allege that the TILA disclosure statements provided to them,
and in turn provided to Paragon, contain two charges for title insurance: a charge of $450 to
Lakeshore Title and a charge of $1,145 to Clearwater Title. (Second Am. Compl. 20.) This
information alone does not sufficiently indicate a TILA violation. See Taylor, 150 F.3d at 694,
Under TILA, Paragon had no duty to investigate the propriety of Clearwater Title’s price, let
alone whether or not it actually performed the services charged for. See id.; see also Balderos,

7


Flous. Auth, 892 F.2d 583, 586 (7th Cir. 1989), In considering a motion to dismiss, the court
must accept all well-pleaded allegations in the complaint as true and draw all reasonable
inferences in the plaintiff's favor. Gibson v. City of Chicago, 910 F.2d 1510, 1520-21 (7th Cir.
1990), Therefore, a complaint should not be dismissed “unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”
Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

HFN, AMB, and Paragon move to dismiss Plaintiffs’ complaint on three independent
grounds, Initially, Defendants aver that TILA, 15 U.S.C. § 1601 et seq., in conjunction with 12
C.F.R. § 226.4 (“Regulation Z”), do not mandate that charges in connection with title insurance
be included in the total dollar amount of a finance charge. As such, according to Defendants, the
Murrys’ request for rescission is barred by the three-day time limit imposed by TILA, and any
other claim is barred by the one-year statute of limitations. Secondly, Defendant HFN alleges
that it is not a necessary party to this litigation under Rule 19. Finally, Defendants aver that the
Murrys fail to state a claim for which relief can be granted under the Illinois Consumer Fraud

and Deceptive Practices Act.

L Counts I & JI; TILA Claims

Initially, the Court notes that TILA “must be liberally construed in favor of the
consumer.” Leathers v. Peoria Toyota-Volvo, 824 F. Supp. 155, 157 (N.D. Ill. 1993) (quotations
omitted). Congress enacted TILA to ensure a “meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various credit terms available to him and
avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair
credit billing and credit card practices.” 15 U.S.C. § 1601(a) (2004); see Mourning v. Family

3


assigned to Paragon. (Jd. J] 16,28.) The Murrys were directed to pay, and have been paying,
HEN, who has been servicing the loan for AMB. (/d. {{ 10, 29.) In consummating this
transaction, the Murrys signed or received a note, various disclosure forms, and a Truth in
Lending disclosure statement. (/d. 17.) That statement listed charges in connection with the
loan, among them charges for title insurance in the amount of $1,595--$450 to Lakeshore Title
Agency and $1,145 to Clearwater Title Co. (/d. Jf 18-20.)

The amount paid to Clearwater Title is the root from which this complaint arises, for the
Murrys allege that this payment was actually an “indirect broker fee,” being paid to Loan
Arranger, who owns Clearwater Title. (/d. {{] 26-27.) Loan Arranger and Clearwater Title
allegedly conspired to overcharge their customers under the guise of title insurance without
having to disclose the amount of the finance charge to consumers under the Truth in Lending Act
(“TILA”). 7d.) As a broker fee, Plaintiffs allege, the $1,145 should have been included in the
finance charge amount. (Jd. 27.) As a result of the exclusion of the Clearwater Title charge
from the disclosed finance charge, the disclosed finance charge on the Murrys’ transaction is
understated, and the amount financed is allegedly overstated by $1,145, an amount in excess of
0.5% of the total amount of credit extended. The Murrys are now before this Court, on behalf of
themselves and a putative class of similarly situated individuals, asking for rescission of the

mortgage loans pursuant to 15 U.S.C. § 1641, and statutory damages under 15 U.S.C. § 1635(g).

DISCUSSION
On a motion to dismiss, all well-pleaded factual allegations are presumed to be true.
Johnson v. Martin, 943 F.2d 15, 16 (7th Cir. 1991). “The purpose of a motion to dismiss is to
test the sufficiency of the complaint, not to decide the merits.” Triad Assocs., Inc. v. Chicago

2


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

WILLIE C. MURRY and
WYLODEAN MURRY,

are, ©

Plaintiffs,
03 C 5811
v
Judge Ronald A. Guzman

DOCKETED
JUL 0 9 2004

AMERICA’S MORTGAGE BANC, INC.;
THE LOAN ARRANGER, INC.;
CLEARWATER TITLE COMPANY;
PARAGON HOME LENDING, LLC;
HOMECOMINGS FINANCIAL
NETWORK, INC., MICHAEL ROBINS;
and JOHN DOES 1-5,

wee SS SS He we eS

Defendants.

AMENDED MEMORANDUM OPINION AND ORDER

Defendants Homecomings Financial Network (“HFN”), America’s Mortgage Banc, Inc.
(“AMB”), and Paragon Home Lending, LLC (“Paragon”) move to dismiss the Second Amended
Complaint pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6) for failure to state a
claim upon which relief can be granted. For the reasons set forth herein, the Court grants in part
and denies in part Paragon’s motion, grants in part and denies in part HFN’s motion, and denies

AMB’s motion.

BA ROUND
On some date before April 3, 2002, the Murrys hired The Loan Arranger, Inc. (“Loan
Arranger”) as their mortgage broker to find financing for them. (Second Am. Compl. { 14.)
Loan Arranger arranged for a mortgage loan with AMB in the principal amount of $74,000, to be

secured by their primary residence. (Id. 15.) On April 3, 2002, the loan was closed and



actual participation, the Illinois Supreme Court has held that the Illinois Consumer Fraud Act
does not even “provide a cause of action against those who knowingly receive the benefits from
the person committing a violation of the Act.” Jackson, 755 N.E.2d at 471.

Defendants contend the Murrys have failed to state a claim upon which relief can be
granted because the Murrys have not alleged each actually participated in the scheme. With
regard to AMB, the Murrys’ allegations sufficiently put it on notice of the fraud claims against
it. They allege that AMB’s providing them a TILA disclosure statement, in which the title
insurance charge to Clearwater was not labeled as a finance charge in order to put that sum of
money in the hands of the mortgage broker, constitutes an omission of material fact. They also
allege that AMB’s conduct caused them to pay unnecessary and duplicative title insurance
charges. With regard to HFN and Paragon, however, the Murrys fail to state a claim. The
Illinois Supreme Court’s rulings in Zedonan v, Direct American Marketers, Inc. and Jackson v.
South Holland Dodge, Inc. clearly hold that without actual participation, no one who stands
down the line in receiving the benefits of a fraudulent transaction can be held liable under the
Illinois Consumer Fraud Act. Id; 695 N.E.2d at 859, Hence, there is no set of facts under which
HEN, a loan servicer, or Paragon, an assignee, could be held liable for a mortgage broker or
lender’s fraudulent acts in violation of the Act. Accordingly, this Court denies AMB’s motion to

dismiss Count III and grants HFN and Paragon’s motion to dismiss Count III.

12